Foreign Investor Misconduct in International Investment Law [1st ed.] 9783030548544, 9783030548551

Table of contents :
Front Matter ....Pages i-xvii
Introduction (Anna Kozyakova)....Pages 1-7
Theoretical Background in Connection with the Study of Foreign Investor Misconduct in International Investment Law (Anna Kozyakova)....Pages 9-43
The Explicit and Implicit (Inherent) Potential of International Investment Law to Address Foreign Investor Misconduct (Anna Kozyakova)....Pages 45-99
Categorisation and Illustration of Experience: Case Law on Foreign Investor Misconduct in International Investment Law (Anna Kozyakova)....Pages 101-166
Analysis of Some Key Events to Date: Their Meaning and Significance (Anna Kozyakova)....Pages 167-198
Unlocking the Transformation of International Investment Law (Anna Kozyakova)....Pages 199-236
Conclusion (Anna Kozyakova)....Pages 237-239
Main Thesis Elaborated and Suggested in This Study (Anna Kozyakova)....Pages 241-242
Back Matter ....Pages 243-266

Citation preview

EYIEL Monographs Studies in European and International Economic Law 11

Anna Kozyakova

Foreign Investor Misconduct in International Investment Law

European Yearbook of International Economic Law EYIEL Monographs - Studies in European and International Economic Law Volume 11

Series Editors Marc Bungenberg, Saarbrücken, Germany Christoph Herrmann, Passau, Germany Markus Krajewski, Erlangen, Germany Jörg Philipp Terhechte, Lüneburg, Germany Andreas R. Ziegler, Lausanne, Switzerland

EYIEL Monographs is a subseries of the European Yearbook of International Economic Law (EYIEL). It contains scholarly works in the fields of European and international economic law, in particular WTO law, international investment law, international monetary law, law of regional economic integration, external trade law of the EU and EU internal market law. The series does not include edited volumes. EYIEL Monographs are peer-reviewed by the series editors and external reviewers.

More information about this subseries at http://www.springer.com/series/15744

Anna Kozyakova

Foreign Investor Misconduct in International Investment Law

Anna Kozyakova University of Göttingen Göttingen, Germany

ISSN 2364-8392 ISSN 2364-8406 (electronic) European Yearbook of International Economic Law ISSN 2524-6658 ISSN 2524-6666 (electronic) EYIEL Monographs - Studies in European and International Economic Law ISBN 978-3-030-54854-4 ISBN 978-3-030-54855-1 (eBook) https://doi.org/10.1007/978-3-030-54855-1 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

To my beloved parents, Svetlana and Mikhail

Preface/Acknowledgments

This book is largely based on my PhD thesis regarding Foreign Investor Misconduct in International Investment Law which I defended at the Institute of International and European Law at the Georg-August-University Göttingen on 26 February 2020, the day that marked the end of my time as a PhD student. Although the PhD itself is done, I still need to thank many people, both friends and colleagues, who inspired and assisted me with invaluably helpful and thoughtprovoking comments, support, care, love and motivation to keep on moving towards my goal. I tried to make a list of all the individuals who were a part of my “PhD journey”, but I must admit, it seemed in the end to be a fraught process. By naming names, I risked mentioning some while omitting the others, as such it seems wiser to simply say that I am deeply grateful to each and every one of you. I hope those of you who have been a part of this wonderfully supportive group will nevertheless feel personally named and sincerely thanked from the bottom of my heart. Having said the above, I cannot go without singling out one or two people in particular. Throughout all the stages of my study, I received wisdom and thoughtful input from my supervisor, Professor Peter-Tobias Stoll at the University of Göttingen. During our conversations, he gave me deep insights into the complexity of scientific analysis which helped me to better conceptualise and then crystallise my thoughts and ideas. In particular, I appreciate that he let me develop my thesis at my own speed and in my own way but was nevertheless always there with useful hints at the critical moments, never tiring out in giving his time and energy to provide me with suggestions and options regarding possible ways forward. Special thanks are due to Dietrich and Inge Rauschning. They provided me with enormous care and invaluable support throughout the entirety of my “PhD journey”. This book is but one of the numerous tangible outcomes arising from the continuous engagement of Professor Dietrich Rauschning to establish and build up cooperation between the Georg-August-University of Göttingen and the Immanuel Kant Baltic Federal University of Kaliningrad, where I studied law. During my time as a PhD student, I was fortunate to be a part of the Institute of International and European Law at the University of Göttingen. This gave me vii

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Preface/Acknowledgments

access to not only inspirational talks and common projects but also informal gatherings with wonderful colleagues that provided both experience and bonds that will stay in my heart and mind. My deep appreciation also has to be expressed for the library team and their ceaseless professionalism, assistance, understanding and friendly manner. Special thanks also have to be given to the DAAD (German Academic Exchange Service) for their generous financial support throughout the writing of this thesis and for which I remain very grateful. In one of the early doctoral seminars organised by Professor Stoll, I claimed that success in a PhD project stems from finding an appropriate balance between fruitful spontaneity and hard discipline. The first brings inspiration, while the latter results in actual text for the book, and for being so instrumental in helping me with the discipline aspect I am very thankful to Alexander Burbach. Last but definitely not least, I would like to express my deep gratitude to my family in Kaliningrad and Aurora. Thank you for always believing in me and for being there for me in all the challenging moments of my “PhD journey”. Sommerberg, Germany 26 June 2020

Anna Kozyakova

Contents

1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

Theoretical Background in Connection with the Study of Foreign Investor Misconduct in International Investment Law . . . . . . . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 The Emergence of Modern International Investment Law . . . . . . 2.2.1 The Foundation of Modern International Investment Law and Its Distinguishable Features . . . . . . . . . . . . . . . . . . . 2.2.1.1 Historical Roots . . . . . . . . . . . . . . . . . . . . . . . 2.2.1.2 Comparison to FCN Treaties . . . . . . . . . . . . . . 2.2.1.3 Distinguishable Features of Current IIAs . . . . . 2.2.2 The Process of Intellectual Elaboration on Current International Investment Law . . . . . . . . . . . . . . . . . . . . . 2.2.3 The Processes of Creating Legally Binding Norms of International Investment Law . . . . . . . . . . . . . . . . . . . . . 2.3 The Practice of International Investment Law . . . . . . . . . . . . . . . 2.3.1 Case Law: Its Value and an Appropriate Mechanism to Refer to Earlier Decisions . . . . . . . . . . . . . . . . . . . . . . 2.3.2 Applicable Law in Treaty-Based Investment Arbitration . . 2.3.2.1 Specification of Treaty-Based International Investment Arbitration in View of the Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.2.2 Application of International and National Law in Conjunction with the Applicable IIA . . . . . . 2.4 Systemic Approach to the Practice of International Investment Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Ways to Implement Changes Into Current International Investment Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.1 Development of International Investment Law . . . . . . . . . 2.5.2 Transformation of International Investment Law . . . . . . . 2.6 Interim Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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The Explicit and Implicit (Inherent) Potential of International Investment Law to Address Foreign Investor Misconduct . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 ‘Legal Consequences of Individuals’ Misconduct’: Meaning and Scope of the Notion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 An Understanding of the Term ‘Legal Consequences’ . . . . 3.2.2 Notion of ‘Individuals’ Misconduct’ . . . . . . . . . . . . . . . . . 3.3 Individuals’ Misconduct from the Perspective of General International Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 The Placement of Individuals Within General International Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Existence of Direct Obligations by Individuals . . . . . . . . . . 3.3.3 Legal Consequences for Non-Fulfilment of Requirements Determined by Individuals’ Conduct . . . . . . . . . . . . . . . . . 3.3.4 Abusive and Fraudulent Actions by Individuals in Acquiring a Legal Status, Procedural or Material Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.4.1 Good Faith in International Law . . . . . . . . . . . . 3.3.4.2 Distinction Between Satisfaction of a Criterion Not in Good Faith and an Abuse in the Realisation of Claimed Rights . . . . . . . . . . . . . . 3.3.4.3 Application of the Good Faith Principle to Individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.5 Case Law Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Negative Legal Consequences of Foreign Investor Misconduct Under International Investment Law . . . . . . . . . . . . . . . . . . . . . . 3.4.1 Position of Foreign Investors as Intended by the Drafters of IIAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 Examination of the Legal Provisions of International Investment Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2.1 Material Provisions . . . . . . . . . . . . . . . . . . . . . 3.4.2.2 Procedural Provisions . . . . . . . . . . . . . . . . . . . . 3.5 Specific Requirements Set for International Investment Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1 Overview of Requirements on the Application of International Investment Protection . . . . . . . . . . . . . . . . 3.5.2 Requirements on Investment . . . . . . . . . . . . . . . . . . . . . . . 3.5.2.1 Broad Asset-Based Definition . . . . . . . . . . . . . . 3.5.2.2 Specific Elaboration on the Definition of ‘Investment’ . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.2.2.1 Own or Control . . . . . . . . . . . . . . . . 3.5.2.2.2 Invest . . . . . . . . . . . . . . . . . . . . . . . 3.5.2.2.3 Contribution to Development . . . . . . 3.5.2.2.4 The Requirement of Legality . . . . . .

45 45 47 47 49 51 51 53 54

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3.5.2.2.5

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Legal and Factual Connection to a Foreign National or Entity . . . . . . . . 3.5.3 Requirements on Foreign Investors . . . . . . . . . . . . . . . . . . 3.5.3.1 General Considerations on the Notion of ‘Investors’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.3.2 Nationality Requirements . . . . . . . . . . . . . . . . . 3.5.3.2.1 Nationality of Individual Investors . . . 3.5.3.2.2 Nationality of Legal Entities . . . . . . . 3.5.3.3 Requirement of a Link to Foreign Investment . . . 3.5.3.4 Beyond Formal Requirements on Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.4 Requirements on the Procedural Capacity of Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.4.1 The Requirement and Scope of the Party’s Consent to Arbitration . . . . . . . . . . . . . . . . . . . 3.5.4.2 The Significance of the Procedural Rules . . . . . . Further Mechanisms to Restrict the Application of IIAs Based on Investors’ Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6.1 Denial of Benefits Clause . . . . . . . . . . . . . . . . . . . . . . . . . 3.6.2 Application of Good Faith: The Issue of Admissibility . . . . Interim Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Categorisation and Illustration of Experience: Case Law on Foreign Investor Misconduct in International Investment Law . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Pioneering Cases: Setting the Trend of According Foreign Investor Misconduct Legal Significance . . . . . . . . . . . . . . . . . . . . 4.2.1 Timeframe of the Pioneering Cases . . . . . . . . . . . . . . . . . . 4.2.2 Selection of the Pioneering Case Law on Foreign Investor Misconduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.2.1 Salini v. Morocco (31 July 2001): Insertion of the Notion of ‘Illegality’ into the Field of International Investment Law . . . . . . . . . . . . . . 4.2.2.2 Tokios Tokelès v. Ukraine (29 April 2004): Ownership and Control by Nationals of the Host State and Domestic Origin of the Invested Capital Was Not Seen as Voiding the Tribunal’s Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.2.3 Inceysa v. El Salvador (2 August 2006): Foreign Investor Misconduct as a Matter of ratione voluntatis . . . . . . . . . . . . . . . . . . . . . 4.2.2.4 World Duty Free Company Limited v. The Republic of Kenya (4 October 2006): Corruption in International Investment Law . . . .

79 81 81 83 83 85 86 87 89 89 91 94 94 97 98 101 101 103 103 103

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4.2.2.5

4.2.3 4.2.4

Fraport v. Philippines (16 August 2007): Clarification on the Illegality Requirement, the Element of Time . . . . . . . . . . . . . . . . . . . . . 4.2.2.6 Plama Consortium v. Bulgaria (8 February 2005 Decision on Jurisdiction; 27 August 2008 Award on Merits): Suggestion on the Inherent Requirement of Legality in IIAs’ Definitions of Investment . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.2.7 Phoenix Action v. The Czech Republic (15 April 2009): Good Faith as a Requirement for a Protected Investment . . . . . . . . . . . . . . . . 4.2.2.8 Cementownia v. Republic of Turkey (17 September 2009): Initiation of International Arbitration in Bad Faith . . . . . . 4.2.2.9 Mobil Corporation v. Bolivarian Republic of Venezuela (10 June 2010): Abuse of Process and Nationality Planning . . . . . . . . . . . . . . . . . 4.2.2.10 Gustav F W Hamester v. Ghana (18 June 2010): Further Limitation on the Scope of Illegality Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.2.11 Mr. Saba Fakes v. Republic of Turkey (14 July 2010): Alternative Standpoint on the Role of the Principle of Good Faith and Illegality of Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . General Observations on the Pioneering Cases . . . . . . . . . . Categorisation of Foreign Investor Misconduct as Alleged in the Pioneering Cases . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.4.1 Violation of Host State Law . . . . . . . . . . . . . . . 4.2.4.1.1 General Characteristic of the Category . . . . . . . . . . . . . . . . . . . . . 4.2.4.1.2 Trends Set in the Category by the Pioneering Cases . . . . . . . . . . . . . . . 4.2.4.2 Abuse of the System of International Investment Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.4.2.1 General Characteristics of the Category . . . . . . . . . . . . . . . . . . . . . 4.2.4.2.2 Scope of Actions Forming the Category of Abuse of the System . . . 4.2.4.2.3 A Precise Look at Nationality Planning . . . . . . . . . . . . . . . . . . . . . 4.2.4.2.4 The Range of Negative Legal Consequences of Abuse . . . . . . . . . . 4.2.4.3 Non-satisfaction of Further Requirements Imposed on Foreign Investment . . . . . . . . . . . .

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4.2.4.3.1

4.3

4.4

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General Characteristics of the Category . . . . . . . . . . . . . . . . . . . . . 4.2.4.3.2 Achievements in the Category by the Pioneering Cases . . . . . . . . . . Subsequent Development in the Categories of Case Law Addressing Foreign Investors Misconduct . . . . . . . . . . . . . . . . . . 4.3.1 Violation of Host State Law . . . . . . . . . . . . . . . . . . . . . . . 4.3.1.1 General Overview of Subsequent Developments . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1.2 Specific Issues . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1.2.1 Possible Justification of Illegality: The Principle of Estoppel . . . . . . . . . 4.3.1.2.2 The Specific Case of Corruption . . . . 4.3.1.2.3 Illegality in the Course of Investment Activities . . . . . . . . . . . . . . . . . . . . 4.3.2 Abuse of the System of International Investment Law . . . . 4.3.2.1 General Overview of Developments . . . . . . . . . 4.3.2.2 Specific Issues . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2.2.1 Developments in Case Law on Nationality Planning . . . . . . . . . . . . 4.3.2.2.2 Abuse of Process Between the Principle of Good Faith and Jurisdictional Objection ratione temporis . . . . . . . . . . . . . . . . . . . . . 4.3.2.2.3 Further Developments in View of Jurisdiction v. Admissibility as a Consequence of Abuse . . . . . . . . . . . 4.3.3 Requirements on Investment . . . . . . . . . . . . . . . . . . . . . . . 4.3.4 Concluding Observations . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding Categories: Cases Which Stretch and Challenge the Potential of the System of International Investment Law . . . . . . . . 4.4.1 Direct Positive Obligations on Foreign Investors . . . . . . . . 4.4.2 Operation of Foreign Investment and Human Rights . . . . . 4.4.3 Operation of Foreign Investment and Environmental Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interim Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Analysis of Some Key Events to Date: Their Meaning and Significance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Analysis of the Experience of International Investment Law in Dealing with Foreign Investor Misconduct . . . . . . . . . . . . . . . 5.2.1 Outcomes of the Landmark Cases Dealing with Foreign Investor Misconduct . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1.1 Possible Outcomes of Investment Cases . . . . . .

138 139 142 142 142 145 145 146 149 151 151 152 152

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5.2.1.2

5.3

5.4

Systemic Vision of the Diverse Outcomes and Their Significance . . . . . . . . . . . . . . . . . . 5.2.1.2.1 Rejection of a Tribunal’s Jurisdiction . . . . . . . . . . . . . . . . . . 5.2.1.2.2 Admissibility of Claims . . . . . . . . . 5.2.1.2.3 Elimination of Substantive Protection . . . . . . . . . . . . . . . . . . . 5.2.1.2.4 Reduction of Damages . . . . . . . . . . 5.2.1.2.5 Comparative View on the Possible Responses to Foreign Investor Misconduct . . . . . . . . . . . . . . . . . . 5.2.2 Appreciation of the Possible Outcomes in View of the Rule of Law and Efficiency . . . . . . . . . . . . . . . . . . . . . . 5.2.2.1 The Rule of Law in Outcomes Generated by Foreign Investor Misconduct . . . . . . . . . . . 5.2.2.1.1 Legal Clarity . . . . . . . . . . . . . . . . . 5.2.2.1.2 Consistency . . . . . . . . . . . . . . . . . . 5.2.2.1.3 Legitimacy . . . . . . . . . . . . . . . . . . 5.2.2.2 Efficiency and Effectiveness of International Investment Law Responses to Foreign Investor Misconduct . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.3 Applicable Law in Dealing with Foreign Investor Misconduct: Stories of Success and Failure . . . . . . . . . . . 5.2.3.1 Application of International Law . . . . . . . . . . . 5.2.3.1.1 International Investment Agreements . . . . . . . . . . . . . . . . . . 5.2.3.1.2 Stand-Alone Rules of International Law . . . . . . . . . . . . . . . . . . . . . . . 5.2.3.1.3 General Principle of Good Faith . . . 5.2.3.2 National Law . . . . . . . . . . . . . . . . . . . . . . . . . The Role of Involved Actors . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.1 Contracting States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.2 Respondent States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.3 Arbitral Tribunals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.4 Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discovered Process in the Gradual Development of the Approaches to Foreign Investor Misconduct . . . . . . . . . . . . . . . . 5.4.1 The Process of Clarifying and Pushing the Limits of Legal Constructions . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 The Process of Exhaustion of the Inserted Explicit and Inherent Potential . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.3 Gradual Demise of Issues Which Were Fully Settled . . . . 5.4.4 Transformation of the General Principle of Good Faith into the Specific Doctrines . . . . . . . . . . . . . . . . . . . . . . .

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5.4.5

5.5

5.6 6

Transformation Within the Original Balance Between the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 Responses to Foreign Investor Misconduct in Light of the Crisis in the Field: Crisis Management of International Investment Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 Interim Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

Unlocking the Transformation of International Investment Law . . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Goals for the Transformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.1 Subsequent Illegality of Foreign Investors’ Operation . . . . . 6.2.2 Non-Compliance with Well-Established Standards of International Law: Harm to the Environment, Infringement of Human Rights and Labour Standards . . . . 6.2.3 More Balanced Outcome of Substantiated Foreign Investor Misconduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Steps to Be Taken in Implementation . . . . . . . . . . . . . . . . . . . . . . 6.3.1 Changes Within the System of International Investment Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1.1 Modification of Wording . . . . . . . . . . . . . . . . . 6.3.1.2 Umbrella Clause to Lift Foreign Investors’ Obligation to Comply with National Law at the International Level . . . . . . . . . . . . . . . . . 6.3.1.3 Direct Treaty Obligations on Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.2 Stand-Alone Sources of International Law . . . . . . . . . . . . . 6.3.3 ‘Soft Law’ Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.4 Concluding Observations . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 A Look Into the Current Practice: Transformation Towards More Responsible Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.1 Aspects of International Law Reform in Connection with the Approach to Foreign Investor Misconduct . . . . . . . . . . 6.4.1.1 The Procedural Component . . . . . . . . . . . . . . . . 6.4.1.2 The Component of Sustainability . . . . . . . . . . . 6.4.2 State Practice in Reforming International Investment Law . . . 6.4.2.1 Policy Considerations . . . . . . . . . . . . . . . . . . . . 6.4.2.1.1 Draft Pan-African Investment Code . . . . . . . . . . . . . . . . . . . . . . . . 6.4.2.1.2 The Initiative of the Indian Government . . . . . . . . . . . . . . . . . . 6.4.2.1.3 The EU Reform of International Investment Law . . . . . . . . . . . . . . . . 6.4.2.1.4 Other Draft Models . . . . . . . . . . . . .

199 199 200 202

203 207 208 209 209

210 213 215 216 218 219 219 219 220 222 223 224 225 226 227

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Contents

6.4.2.1.5 Concluding Remarks . . . . . . . . . . . Overview of Recently Concluded IIAs . . . . . . . 6.4.2.2.1 Modification in Wording . . . . . . . . 6.4.2.2.2 Imposition of Direct Obligations . . . 6.4.2.2.3 Interplay with Soft-Law . . . . . . . . . 6.4.3 Possible Fragmentation of International Investment Law . Interim Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.2.2

6.5

. . . . . . .

228 229 229 231 234 234 236

7

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

8

Main Thesis Elaborated and Suggested in This Study . . . . . . . . . . . . 241

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

Abbreviations

BIT FIPA ICCPR ICJ Rep ICJ ICSID Convention ICSID IFA IIA ILC ILM NAFTA PCA PCIJ UN UNCITRAL UNCTAD UNTS VCLT WTO

Bilateral investment treaty Foreign Investment Promotion and Protection Agreement International Covenant on Civil and Political Rights Reports for Judgements, Advisory Opinions of the International Court of Justice International Court of Justice Convention for Settlement of Investment Disputes between States and Nationals of Other States International Centre for Settlement of Investment Disputes Investment Facilitation Agreement International Investment Agreement International Law Commission International Legal Materials North American Free Trade Agreement Permanent Court of Arbitration Permanent Court of International Justice United Nations United Nations Commission on International Trade Law United Nations Conference on Trade and Development United Nations Treaty Series Vienna Convention on the Law of Treaties World Trade Organization

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Chapter 1

Introduction

Rêver c’est le bonheur, attendre c’est la vie—V. Hugo

The purpose of this monograph is to address the issue of foreign investor misconduct in modern international investment law.1 The emphasis of this study is on the approach that international investment law, as it currently operates, has recently developed with foreign investor misconduct in mind. The term ‘misconduct’ is not a legal notion per se, but is used to describe a phenomenon associated with certain behavioural conduct. This term is convenient since it allows the introduction and description of the phenomenon without needing to define concrete types of conduct such as ‘abuse of process’, ‘violation of national law’, ‘corruption’, ‘investment contrary to international norms and standards,’ and so forth. The term ‘misconduct’ is used within the system of international investment law to embrace various kinds of conduct on the part of foreign investors that are deemed as unacceptable—which may range from being illegal through to being against public policy or in some other way inappropriate and that trigger legal consequences. There is no systematic approach to this issue within international investment law, indeed, it rarely ever even articulates what it considers unacceptable investor conduct. This monograph, then, sets out to answer the following questions: What are the types of investors’ conduct that are legally unacceptable? What are the available mechanisms to deal with unacceptable investor conduct and what are the legal consequences thereof? The behaviour of foreign investors was not traditionally the focus of international investment law. A simple glance at the outlines of standard international investment law textbooks suffices to conclude that the primary emphasis of the field has thus far been on international standards of protection of foreign investments and thus, the

1 For the purposes of this text anything dating from the late 1960s will be considered as ‘modern’ for reasons that will be elaborated upon in Chap. 2.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Kozyakova, Foreign Investor Misconduct in International Investment Law, European Yearbook of International Economic Law 11, https://doi.org/10.1007/978-3-030-54855-1_1

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1 Introduction

international obligations of host States.2 International investment law is a set of rules agreed on between two or more sovereign States, and foreign investors are not parties to those arrangements—which means, among other things, that investors play no direct part in their negotiation. Foreign investors are not even directly protected by international investment agreements (IIAs) as these are primarily designed to protect invested assets, i.e. foreign investments.3 This does not leave foreign investors in a totally exposed position as IIAs indirectly protect them as nationals of other contracting States who “own and control” foreign investments. This construction makes one think of the concept of property developed in Roman law, according to which property was understood “as an extension of the person possessing it”.4 A focus on foreign investment explains why similar to this study subject matter has entered the academic discussion partly under the label ‘illegal investment’.5 However, given that foreign investors are the active agents in the field who actually make and manage foreign investments, such investments can only be characterised as ‘illegal’ in the context of the actions undertaken by foreign investors.6 This consideration justifies why this study focuses on the conduct of foreign investors rather than on the characteristics of investments. It is self-evident that in many parts of the world investment activity is carried out under complicated political and economic circumstances. Thus, without being overly sceptical, one may reliably predict that at some point a significant number of foreign investment ventures, being often complex and long-running undertakings, can expect to have legal issues arise. Indeed, having legal issues of some sort arise is so prevalent that T. Wälde for example, in his dissenting opinion on Thunderbird v. Mexico, shared his experience by stating the following: “Having worked in investment negotiations in developing and transition countries for over 30 years, I have rarely encountered a deal that was not surrounded by corruption gossip”.7 Similarly, there are often loud voices, both within and external to host States, that accuse foreign investors of violating national laws and operating businesses contrary to fundamental human rights or breaching labour and environmental standards.8 The

2

See, for instance, Dolzer and Schreuer (2012). See the typical formulations in IIAs: ‘intending to create favourable conditions for investments by investors’; ‘promote investments’; ‘protect investments’ etc. See, for instance: Model German BIT (2008), https://investmentpolicyhub.unctad.org/Download/TreatyFile/2865. 4 Nadakavukaren Schefer (2016), p. 5. 5 Kalicki et al. (2016), p. 128; Diel-Gligor and Hennecke (2015), p. 567; Schill (2012), https:// papers.ssrn.com/sol3/papers.cfm?abstract_id¼1979734; Moloo and Khachaturian (2011), p. 1476; Kriebaum (2010), p. 308. 6 Kriebaum (2010), p. 333. 7 International Thunderbird Gaming Corporation v. The United Mexican States, UNCITRAL, Separate Opinion by Thomas Wälde, 1 December 2005, para. 115. 8 United Nations Economic and Social Council, Human Rights Principles and Responsibilities for Transnational Corporations and Other Business Enterprises, Introduction, U.N. Doc. E/CN.4/ Sub.2/2002/XX/Add.1, E/CN.4/Sub.2/2002/WG.2/WP.1/Add.1; Borges (2017), p. 6; Hillemanns (2003), p. 1067. 3

1 Introduction

3

reality of the situation was summed up by Andrew Newcombe who noted that there are “myriad ways and circumstances”9 for possible misconduct on the part of foreign investors. If such accusations are proven as facts, the question arises of how should the system react and how does it currently respond under the existing normative constructions? In its 2001 Salini case, the ICSID tribunal in prominently stated that “illegal” investments are not protected by IIAs.10 From this point forward, this straightforward ruling formed a foundation that was reaffirmed by a number of other tribunals.11 In turn, States willingly accepted such a compelling position as a powerful defence in international investor-state arbitration. Consequently, there is now a significant body of case law that deals with various aspects of foreign investor misconduct. Case law is what emerges from practical experiences in the field of international investment law. It illustrates how the normative constructions have been applied and revealing unresolved and controversial issues that remain. It is for good reason that case law may be considered as a key driving force of international investment law’s development. The existence of sufficient practice is also an essential precondition for the systematisation of law,12 which means that “the existing materials (produced by legislature, courts and others) are described in order to make them easier for readers to understand, and also to make their outcomes more predictable.”13 Being able to contribute to this process of systematisation is a significant aim of this study and, hence, arbitral practice regarding foreign investor misconduct is an important element upon which this study is built. This research’s descriptive systematisation will be followed by an analysis of the experience collected thus far in dealing with foreign investor misconduct. This, in turn, leads to several questions being raised, such as: Is there an established trend of not granting protection to ‘illegal’ investments? What divergencies have been found in case law? What role have arbitrators, contracting States and parties to disputes played in setting that trend? With the establishment of this trend, have the original idea of international investment agreements and the original meaning of the normative construction been developed, changed and transformed? If so, how? What potential to deal with challenges has been demonstrated by the system in dealing with foreign investor misconduct: Does international investment law as a ‘living system’, limit the interpretation and connection with general international law? How has the position of foreign investors changed by virtue of that development?

9

Newcombe (2011), p. 190. Salini Costruttori SPA & Italstrade SPA v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July 2001, para. 45. 11 See presentation of cases in the Chap. 4. 12 See, as an example: Report of the International Law Commission, 57th session (2005), Supplement No. 10 (A/60/10), 112, para. 231. 13 Smith (2012), p. 16. 10

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1 Introduction

An understanding of the status quo and the process and dynamics of its development will provide a sound basis to consider whether international investment law is sufficiently evolved to tackle the various types of foreign investor misconduct that can be evidenced around the globe. Taking this a step further, one may ask what improvements could be made to facilitate better future functionality in the field? The aims of this study identified thus far—to understand the current approach to foreign investor misconduct, to consider the process of how this approach has been developed over time as well as its significance, and to suggest a vision for desired modifications to improve the system—encompass the present, the future and the ongoing process of progressive development. In order to successfully chart a course, one needs to know both the starting point and the destination. This holds true also for charting a course to develop international investment law as many required future tasks cannot be addressed without a solid understanding of the origins of the current situation. Furthermore, any consideration of the developments in normative constructions requires an understanding of their original meaning at the time of the establishment of modern international investment law. Thus, laying bare the aims and original composition of international investment law at the time of its emergence serves an essential fundament for the realisation of the goals of this study and are consequently included in its scope. Considering the purpose of the research at hand, it seems reasonable to follow one of two plausible paths. First, centres on the perspective of international investment law as such, and second, on that of general international law. With regard to the first path, international investment law is currently going through a rather controversial period. On the one hand, it is demonstrating rapid and constant growth and changes that are producing an ‘increase in maturity’;14 on the other hand, it is seen by some as experiencing a ‘legitimacy crisis’.15 Various points of criticism have been raised against the system of international investment law, such as the current treaty-based system of foreign investment protection being regarded as biased, unbalanced, disproportionate, and not sufficiently transparent. In particular in this regard, the bias and lack of balance are closely connected to the position of foreign investors as the absolute beneficiaries of the system. Unbalanced in this sense means that States are unlimitedly obliged to protect foreign investors in their territory and need to accept investors’ ‘one-sided’ right to commence international arbitration at will. The biased aspect comes into play because of the growing trend that arbitral tribunals decide in favour of private investors without sufficiently respecting the sovereign rights of host States to regulate such investors. Despite this criticism, it does not seem that international investment law is likely to experience a period of decline or growing irrelevance. The overall goal to protect foreign investments using an international law mechanism, including the possibility for investors

Ortino (2013), p. 152 (the author refers to “heightened level of maturity” of international investment law); See also: Kurtz (2012), p. 686. 15 See, for example: Cosmas (2014), p. 2; Van Harten et al. (2010), https://www.osgoode.yorku.ca/ public-statement-international-investment-regime-31-august-2010/. 14

1 Introduction

5

to directly sue to protect their interests, remains current and thus far no sufficiently strong alternatives to the existing model have been suggested by States, non-governmental organisations or academia. On the contrary, Christoph Schreuer concluded his analysis on the question of ‘Do we need investment arbitration?’ by stating the following: “In sum, at present, there is no substitute for investment arbitration. Despite its undeniable weaknesses, it is currently the only functioning system for the orderly settlement of the numerous disputes arising from foreign investments”.16 Furthermore, a movement commenced by the EU in the realisation of its competence gained under Articles 206 and 207 of the Treaty on the Functioning of the European Union (the Lisbon Treaty) is focused on the modernisation and reform of the current system rather than its termination and complete replacement. Interestingly, while the international investment instruments recently concluded by the EU contain a number of new features, they nevertheless preserve the core elements that form the current system of international investment law.17 In this time of reform and crisis, it seems particularly relevant to comprehend what has occurred with the field of international investment law to date and use that as a backdrop to check the obstacles that prevent it from functioning more effectively. From this perspective, the present research may be seen as a study of crisis management in international investment law as data gathered includes investigation and understanding of how the system functions, a consideration of the difficulties encountered while functioning in the real world and suggestions for improvement. The scope of such crisis management does not, as indicated by the title, try to be impossibly comprehensive but is limited to the most sensitive issue—the aspect of foreign investor misconduct. The numerous accusations against foreign investors by States and the reaction to these allegations by arbitral tribunals, who apply the normative constructions of modern international investment law, highlights one of the most difficult aspects of international investment law—trying to strike a balance between host States and foreign investors. The second possible perspective that could have been taken considering the purpose of the research at hand is that international investment law is a sub-field of International Law that deals with international standards of treatment and protection of foreign investments. Treatment and protection of foreign investments directly correspond to a broader issue within international law—namely the treatment of foreigners and the responsibility of States for injuries to aliens committed on their territory. This question has been around since the international law’s conception and is still often discussed and debated.18 The ‘fathers of international law’, Franciscus de Vittoria and Hugo Grotius, accorded attention to the issue of aliens’ status and their treatment in the sixteenth and seventeenth centuries respectively. Emer de Vattel is considered to be ‘the first modern scholar to address the status of foreigners

16

Shreuer (2017), http://www.transnational-dispute-management.com. See examples and more details in the Chap. 6 below. 18 See: Jessup (1968), p. 94; Oppenheim (1905), p. 341. 17

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1 Introduction

in detail’,19 and in his work ‘Les Droits des Gens’, he pleaded for the fundamental rights of all people20 and application of national standards of treatment for accepted foreigners.21 Those rights were to be granted by the municipal law of States. Starting in the eighteenth century, States began concluding international, albeit mostly bilateral, agreements that addressed the treatment of foreigners and their property. Such agreements typically manifested as treaties of friendship, navigation and commerce (FNC) and, in a way, modern IIAs are an evolved version of these. Over the centuries, international law has also collected substantial practice in claims for injuries to foreigners. However, contrary to current international investment law, those claims were mostly deliberated in an inter-state modus. Injured individuals were considered merely as an object of protection, the ‘ultimate beneficiary of the law’,22 without any active role at the international level. Under such a construction, individuals’ misconduct was purely a matter of national law. Thus, international law does not have a useful history of dealing with the issue of individuals’ misconduct for the purposes of this research. For a long time, there has been a reluctance on the part of States “to think of citizens of a State in connection with an international legal order”.23 Even quite recently, former President of the International Court of Justice Dame Rosalyn Higgins began her article published in 2001 with the following observation: “It is still the case that most international courts and quasi-judicial bodies can deal only with ‘States’”.24 This observation stands in stark contrast to the evolutionary shift witnessed in modern international investment law. Indeed, international investment law markedly stands out by providing an individual with direct access to an international dispute settlement mechanism, which is both something of a first in international law and remarkable for its scope of application. This shift away from the traditional state-based approach has also placed individual investor’s conduct under a spotlight. In inter-state disputes, misconduct by individuals was not accorded any meaningful legal significance.25 The capacity of foreign investors to commence international arbitration and directly claim damages made the conduct of such individuals directly relevant and elevated it to the status of being a key element in the arbitration process. Thus, the attempts of international investment law to directly deal with individuals’ misconduct serves as important ground-breaking and rare material for international law as a whole. The

19

See: Newcombe and Paradell (2009), p. 4. See: Vattel (1863a), Livre II, Chapitre I, para. 16, p. 604. Emer de Vattel argued: “Quel serait le bonheur du genre humain, si ces aimables préceptes de la nature étaient partout observés !” The idea of natural rights of all humans is also reflected in the whole book. 21 Vattel (1863b), Livre II, Chapitre VIII, paras. 100–101, pp. 80–81. 22 Roth (1949), p. 21. 23 Roth (1949), p. 21. 24 Higgins (2001), p. 547. 25 See case law examples presented in Chap. 2. 20

1 Introduction

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systematisation of these events could be useful in resolving more general and persistent issues such as the legal status of individuals under international law. To further develop and substantiate the ideas briefly delineated above, this monograph has been divided into the following chapters: Chapter 2 examines the origins and emergence of international investment law as well as relevant aspects of its practice and the mechanisms for its further development. Chapter 3 presents the explicit and implicit (inherent) potential of current international investment law to deal with the issue of foreign investor misconduct. Chapter 4 presents and systematises case law on foreign investor misconduct. Chapter 5 provides an analysis of the developments that have occurred, suggests a vision on their meaning and significance. Chapter 6 considers possible and desirable changes for the system of international investment law in order to achieve more efficient and better-balanced outcomes of cases dealing with allegations on foreign investor misconduct within the framework of international investment law.

Chapter 2

Theoretical Background in Connection with the Study of Foreign Investor Misconduct in International Investment Law

2.1

Introduction

This Chapter, as can be determined from its title, provides the pertinent historical background and conceptual considerations of those aspects of international investment law practice which are relevant for this study. In a narrow sense, this chapter clearly depicts how the system of international investment law addresses the matter of foreign investor misconduct, i.e. one of the pivotal aims for this study. Nevertheless, the preliminary historical examination of this chapter provides a more than useful starting point. The idea behind such a seemingly broad opening is that one can hardly expect to fully comprehend the current developments and trends in international investment law without having a reasonable understanding of its origins and conceptual characteristics. This present research is not the first to argue that the ways the various fields of law are developing could well be explained by the circumstances and ideas around their emergence. It is also argued here that at the time of emergence the greatest potential for development is perceived even if not immediately realised as the realisation process happens over time with practice. Thus, any assessments and analysis of case law on foreign investor misconduct would be incomplete without the necessary historical background on the one hand, and elaborated standards to be set as a benchmark for any assessments and analysis, on the other hand. Given the above, this chapter should be regarded as providing the theoretical framework for the present study.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Kozyakova, Foreign Investor Misconduct in International Investment Law, European Yearbook of International Economic Law 11, https://doi.org/10.1007/978-3-030-54855-1_2

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2 Theoretical Background in Connection with the Study of Foreign Investor. . .

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2.2

The Emergence of Modern International Investment Law

International investment law did not suddenly blink into existence, rather it emerged from a process that can be distinguished the following elements. The first of these elements is the foundation upon which modern international investment law is built. This foundation was laid by the experience gained in regulating the treatment and protection of foreigners and their property abroad over a period of centuries and has been pivotal in shaping the currently operating system of international investment law.1 An understanding of this foundation both illustrates the connection between modern international investment law and general international law while also clearly demonstrating the specificity of the field and its evolutionary features. The second element involves the process of intellectual elaboration that is required for a new system to emerge. The American scholar and jurist Philip C Jessup once said: “international law responds to new developments in science and technology and political and social conditions, but law necessarily follows rather than precedes the factual conditions which make new developments in the law necessary”.2 Thus, the emergence of a new subfield of international law requires the realisation that there has been a ‘new development’ which is then followed by a period of intellectual elaboration on the normative constructions to create an effective response. This task is primarily carried out by inter-governmental and non-governmental institutions supported by academia. The third and final element is that there is a process of forming legally binding norms in which States play the leading role. The chosen by States focus in formulating the norms determine how the field of law functions and what responses it gives to the arising disputes.

2.2.1

The Foundation of Modern International Investment Law and Its Distinguishable Features

2.2.1.1

Historical Roots

Modern international investment law is a subfield of international law that is designed to protect foreign investments. This protection is provided by both substantive and procedural guarantees stipulated in international, normally bilateral, investment agreements. With regard to the substantive guarantees, modern international investment agreements (IIAs) combine a guarantee to protect against illegal expropriation and discriminatory treatment of foreign investments as well as the positive obligation of States to provide foreign investments with agreed international standards of protection. Most IIAs refer to such standards of protection as fair and 1 2

See: Hobe (2015), p. 8. Jessup (1957), p. 3.

2.2 The Emergence of Modern International Investment Law

11

equitable treatment, full protection and security, national treatment, or mostfavoured national treatment. In terms of procedural guarantees, the majority of IIAs currently in force make provision for direct investor-state international arbitration. International investment law as a separate subfield of international law and it is regarded as a distinct academic discipline. Nevertheless, this subfield has emerged as a result of past experiences involving international law. The exact starting point is still debated, with authors such as A. Newcombe and L. Paradell claiming “the uniqueness of the current IIA network is a product of a historical evolution going as far back as the Middle Ages”,3 whereas K. Miles sees its origins coming later in “the expansion of European trade and investment activity from the seventeenth to early twentieth centuries”.4 Irrespective of this most would agree with K. Nadakavukaren Schefer who observes that “centuries of development have gone into investment law”.5 While it is interesting material, an account of the entire history and innumerable connections between current international investment law and its various past manifestations would carry us too far from the task hand. It seems, however, useful to provide an outline the key foundational elements of modern international investment law, i.e. the developments it is based on, to better identify its continuity as well as distinguishable features compared to the former treaty-based models.

2.2.1.2

Comparison to FCN Treaties

The various treaties of friendship, commerce and navigation (FCN) concluded by the USA with other countries from 17786 are frequently regarded as the closest predecessors of current IIAs.7 Those treaties covered a broad range of issues which ranged from, as their name suggests, diplomatic relationships, commerce and navigation, through to the protection of individual rights. Over the course of almost two centuries of FCN practice, the major substantive standards of international protection of foreign property abroad evolved which are applied in modern IIAs today. Examples of this can be found in the fact that FCN treaties referred to standards involving most-favoured national treatment,8 national

3

Newcombe and Paradell (2009), p. 2. Miles (2013), p. 19. 5 Nadakavukaren Schefer (2016), p. 4. 6 Treaty of Amity and Commerce between the United States and France, 6 February 1778, http:// avalon.law.yale.edu/18th_century/fr1788-1.asp. See also: Coyle (2013), p. 307. 7 See: Salacuse (2015), p. 93; Kate Miles (2013), p. 24; Brown (2013a), p. 4; Dolzer and Schreuer (2012), p. 6. 8 See: Article 7, Treaty of Peace, Friendship, Navigation and Commerce between the United States and Venezuela, 31 May 1836, http://avalon.law.yale.edu/19th_century/venez_001.asp; Article VI, Treaty of Commerce and Navigation between the United States and Belgium, 10 November 1845, http://avalon.law.yale.edu/19th_century/bel001.asp; Article XIX, Treaty of Commerce and 4

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2 Theoretical Background in Connection with the Study of Foreign Investor. . .

treatment,9 protection and security,10 fair and equitable treatment,11 and a guarantee of compensation in case of nationalisation.12 Of course, not all of the standards dealt with in FCN treaties were meant to be applied to foreign investments, in fact, the term “investment” only appeared in the treaties after World War II. From the post-war period onward FCN treaties started to include a rather comprehensive set of substantive rules for the protection of “investment of capital by nationals and companies of the other Party”.13 These rules are in substance rather similar to those employed by modern IIAs. Hence, with regard to the

Navigation between the United States and the Ottoman Empire; 25 February 1862, http://avalon. law.yale.edu/19th_century/ot1862.asp. 9 See: Article 9, Treaty on Amity and Commerce between the United States and the Netherlands, 6 September 1782, https://founders.archives.gov/documents/Adams/06-13-02-0162-0011-0002; Article I, Treaty of Commerce and Navigation between the United States and Belgium, 10 November 1845, http://avalon.law.yale.edu/19th_century/bel001.asp. However, more extensive reference to the principle of national treatment is noticeable in the inter-war period. See: Wilson (1949), p. 265. 10 See: Article I, Treaty of Commerce and Navigation between the United States and Belgium, 10 November 1845, http://avalon.law.yale.edu/19th_century/bel001.asp; Article I, Treaty of Friendship, Commerce and Consular Rights between the United States and Germany, 8 December 1923, https://usa.usembassy.de/etexts/friendtreaty0139.htm; Article V, Treaty of Friendship, Commerce and Navigation between the United States of America and the Republic of China, 4 November 1946, https://www.loc.gov/law/help/us-treaties/bevans/b-cn-ust000006-0761.pdf; Article VIII, Treaty of Friendship, Commerce and Navigation between the United States of America and Ireland, 21 January 1950, https://www.dfa.ie/media/dfa/alldfawebsitemedia/treatyseries/ uploads/documents/treaties/docs/195007.pdf. 11 Arguably the first treaty that refers to this standard: Article XVIII, Treaty of Friendship, Commerce and Navigation between the United States of America and Italy, 2 February 1948, https://1. next.westlaw.com/Document/Iea676a109c6811dca17de88fefedfab7/View/FullText.html? transitionType¼UniqueDocItem&contextData¼(sc.Search)&userEnteredCitation¼63+Stat. +2255#sk¼10.QfE7MH; Article XIV, Treaty of Friendship, Commerce and Navigation between the United States of America and Ireland, 21 January 1950, https://www.dfa.ie/media/dfa/ alldfawebsitemedia/treatyseries/uploads/documents/treaties/docs/195007.pdf. Before the reference was to ‘reasonable and humane treatment’, see: Article VI, Treaty of Friendship, Commerce and Navigation between the United States of America and the Republic of China, 4 November 1946, https://www.loc.gov/law/help/us-treaties/bevans/b-cn-ust000006-0761.pdf. 12 Provisions on expropriations began to appear in post-WWII treaties. See, for instance, Article VI, Treaty of Friendship, Commerce and Navigation between the United States of America and the Republic of China, 4 November 1946, https://www.loc.gov/law/help/us-treaties/bevans/b-cnust000006-0761.pdf; Article V (2), Treaty of Friendship, Commerce and Navigation between the United States of America and Italy, 2 February 1948, https://1.next.westlaw.com/Document/ Iea676a109c6811dca17de88fefedfab7/View/FullText.html?transitionType¼UniqueDocItem& contextData¼(sc.Search)&userEnteredCitation¼63+Stat.+2255#sk¼10.QfE7MH, Article VIII, Treaty of Friendship, Commerce and Navigation between the United States of America and Ireland, 21 January 1950, https://www.dfa.ie/media/dfa/alldfawebsitemedia/treatyseries/uploads/docu ments/treaties/docs/195007.pdf. 13 Article V, Treaty of Friendship, Commerce and Navigation between the United States of America and Ireland, 21 January 1950, https://www.dfa.ie/media/dfa/alldfawebsitemedia/treatyseries/ uploads/documents/treaties/docs/195007.pdf.

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substantive protection aspects, FCN treaties have indeed proven to be an important basis for modern IIAs. However, despite their usefulness as a springboard for modern IIAs, FCN treaties did not provide direct access of individuals to international adjudication, in fact, the earliest of these treaties did not include any dispute settlement provisions at all. Dispute settlement clauses started to appear in the post-war treaties but these initially only referred to diplomatic means of settling disputes and, in cases where this was not successful, there was provision for a submission to be made to the International Court of Justice.14 This double structure—the preliminary requirement of an internal dispute settlement mechanism among the parties to the dispute, and afterwards the possibility to refer to a third institution—has become standard in the dispute settlement provisions of modern IIAs. The literature also observes that the drafting pattern of IIAs’ dispute settlement clauses dates back to the post-1945 FCN treaties,15 even though it must certainly be kept in mind that the content of modern dispute settlement clauses has now been substantially transformed.

2.2.1.3

Distinguishable Features of Current IIAs

As can be seen, the drafters of FCN treaties did not foresee any need for a direct mechanism for individuals’ claims at the international level. One may then ask the question, is direct access to international adjudication for individuals a unique feature of current international investment law or has there been previous a previous manifestation of this as well? The answer is that this issue was a prominent focal point in academic discussions after World War I and granting direct international procedural capacity to individuals began to intensify only from this time onwards.16 In 1920, direct access of individuals to international adjudication was a subject of discussion in the committee appointed by the League of Nations to prepare a draft Statute of the Permanent Court of International Justice (PCIJ).17 However, in the end, the Statute of the PCIJ did not make any such provision for individuals. Nevertheless, a number of other international agreements dating from this time began to grant such direct procedural capacity to individuals. For instance, under Article 147 of the German-Polish Upper Silesian Convention of 192218 individuals were given the possibility to directly submit individual or collective petitions to the 14 See: Article XXVIII, Treaty of Friendship, Commerce and Navigation between the United States of America and the Republic of China, 4 November 1946, https://www.loc.gov/law/help/ustreaties/bevans/b-cn-ust000006-0761.pdf; Art. XXIII Treaty of Friendship, Commerce and Navigation between the United States of America and Ireland, 21 January 1950, https://www.dfa.ie/ media/dfa/alldfawebsitemedia/treatyseries/uploads/documents/treaties/docs/195007.pdf. 15 For instance, United Nations Conference on Trade and Development, Dispute Settlement: StateState, UNCTAD/ITE/IIT/2003/1, 25. 16 For instance: Marshall Brown (1924), p. 535; Borchard (1930), p. 359; Séfériadès (1935), p. 46. 17 See: O’Connell and Vanderzee (2015), p. 54; Korowicz (1956), p. 543. 18 RGBL 1922 II, S. 237, 301–302.

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2 Theoretical Background in Connection with the Study of Foreign Investor. . .

Council of the League of Nations. Similarly, Article V of the General Claims Convention between the USA and Mexico, dating from 1923,19 made provision for direct individual claims. Thus, the procedural component of modern IIAs had its beginning following World War I with this gradually spreading acceptance of individuals as procedural actors at the international level. Despite the fact that these early twentieth century claim commissions had limited scopes in term of their subject matter and individual claims were still lodged via the home State, this embryonic practice became a foundation to build upon. Let us now consider distinguishable features of modern international investment law. From the outset, it is important to keep in mind that even given some of their similarities to FCN treaties, modern IIAs are not a mere continuation of old practice,20 although some authors consider them as a replacement for agreements drafted FCN practice21 and their introduction is even seen to be one of the reasons “that led to the termination of the FCN treaty program”.22 What makes modern international investment agreements stand out from FCNs? There are at least two major elements that distinguish them. Here, there are two key aspects to note: Firstly, the currently operating treaty-based regime is tailored exclusively to the protection of foreign investments, a limitation that will be outlined in the next section. Secondly, and arguably the more significant aspect for the present research, the current international regime for investment protection provides a direct avenue for dispute resolutions between an individual investor and a host State. The procedural capacity of individuals is entirely independent of their home State in terms of both commencement of the proceedings and receipt of compensation (that is individuals and not their home States are awarded compensation). These two key aspects constitute the specificity of modern international investment law compared to previous treatybased models of international protection of foreigners and their property. These two aspects, somewhat like international investment law itself, did not suddenly blink into existence but have emerged from experience gained over time and form part of the heritage that helps us to better understand modern practice in international investment law.23

19

Available online at: http://legal.un.org/riaa/cases/vol_IV/7-320.pdf. Dolzer and Schreuer (2012), p. 6. 21 For instance, Salacuse (1990), p. 657; Salacuse (1985), pp. 991–992; Parra (2012), p. 198. 22 Coyle (2013), p. 309. 23 Investment tribunals refer to the historical evolution of modern international investment law as a means for interpretation and better understanding of the current provisions of IIAs. See, for example, Pope & Talbot Inc. v. The Government of Canada, UNCITRAL, Award of Merits of Phase 2, 10 April 2001, paras. 110–111. 20

2.2 The Emergence of Modern International Investment Law

2.2.2

15

The Process of Intellectual Elaboration on Current International Investment Law

When, how and why did legal scholars and leading international institutions become focused on the idea of an international legal mechanism dealing exclusively with the international protection and treatment of foreign investments? A brief examination of the developments that occurred throughout the twentieth century serves to sufficiently answer this question. The twentieth century was a tumultuous period full of events that made the protection of foreign property abroad one of the critical questions for international law to consider.24 After World War I, the international community was actively concentrating on the “Responsibility of States for Damages Done in Their Territory to the Person or Property of Foreigners”. This issue, along those of nationality and territorial waters, was selected by the League of Nations in 1927 as the most “desirable” subjects for codification.25 Harvard Law School became the principal organising body to conduct research and prepare a draft convention26 with the stated aim of “bringing the law into conformity with modern demands”.27 At the same time, the Private Property Committee operating within the framework of the International Law Association was dealing with the question of the expropriation of the private property of both nationals and foreigners, a task later reduced to focus on the private property of foreigners only.28 Both undertakings were noteworthy as they went beyond the scope of thencurrent international investment law. For Harvard Law School, the codification focused more on the general rules and principles of State responsibility for injuries

24 Including peace treaties, which attempted to regulate the issue of compensation for expropriation of private property; see Art. 16 of the Brest-Litovsk Peace Treaty of the 3rd of March 1918 and Art. 18 of the German-Russian Peace Treaty of the 27th of August 1918. The issue was at the centre of a number of diplomatic incidents and international arbitrations. See Report of the Protection of Private Property Committee, in: International Law Association Report of the Thirty-Fourth Conference hold in Vienna in 1926 (1927), 227, 235–247. 25 See GA Res. of the League of Nations (22 September 1924), Official Journal, Special Supplement, No. 21, p. 10; GA Res. of the League of Nations (27 September 1927), Official Journal, Special Supplement, No. 53, p. 9. 26 See Draft Convention on Responsibility of States for Damages Done in Their Territory to the Person or Property of Foreigners, prepared in anticipation of the first conference on the codification of international law in The Hague in 1930, 23 American Journal of International Law (1929), Special Supplement, 133, 133–139. 27 Introductory Comment to the Draft Convention on Responsibility of States for damages done in their territory to the person or property of foreigners, 23 American Journal of International Law (1929), Special Supplement, 140, 140. 28 See: Report of the Protection of Private Property Committee, Statement by Dr. Sieveking, in International Law Association Report of the Thirty-Sixth Conference hold in New York in 1930 (1931), 301, 353; Draft Convention Relating to the Legal Status in the Territory of the Contracting States of the Property of their Respective Nationals, in International Law Association Report of the Thirty-Seventh Conference hold in Oxford in 1932 (1933), 59, 59–64.

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2 Theoretical Background in Connection with the Study of Foreign Investor. . .

to aliens29 whilst the work of the Private Property Committee was aimed at a broader material scope of application, namely the regulation of ‘private property’ rather than simply ‘investments’. The latter also included discussions on diverse issues such as taxation and the prohibition of business activity that creates a monopoly.30 Additionally, both projects may be seen as intellectual milestones for later and more specific discussions on international investment law. One example in this regard is that the Private Property Committee undertook considerable work on expropriation, including the rules of compensation. The draft convention that came out, as a result, included, among other provisions, regulations on “full and complete indemnity at the time” expropriation took place.31 Moreover, this draft provided for the direct procedural capacity of nationals to bring their case to the Mixed Arbitral Tribunal against each of the High Contracting States.32 Modern international investment law has now embraced similar features, although they are in an evolved and amended form when compared to their original manifestation. The discussions that took place before World War II revealed that there was a growing desire and awareness of the need to adopt a comprehensive approach to the protection of foreign property. However, the events of 1939 interrupted the process and no binding instruments were concluded directly as a result of the abovehighlighted elaborations. Yet, one could see a continuation thereof later in the course of the twentieth century. After World War II, the transnational flow of private capital increased substantially. This made the question of how to provide international protection for foreign property of fundamental importance. At the time everybody understood that the flow of private capital was an essential precondition for post-war reconstruction and development, however, the lack of sufficient rules would have severely limited any foreign investment from taking place.33 In part, this conviction stemmed from the painful experience of many investors who fell victim to the large-scale expropriations that took place as a result of the Russian and Mexican Revolutions of

29 See: Draft Convention on Responsibility of States for damages done in their territory to the person or property of foreigners (Commentary), 23 American Journal of International Law (1929), Special Supplement, 140–218. 30 Articles 1, 4 of the Draft Convention Relating to the Legal Status in the Territory of the Contracting States of the Property of their Respective Nationals, in International Law Association Report of the Thirty-Seventh Conference hold in Oxford in 1932 (1933), 59, 60, 61. 31 Article 3 of the Draft Convention Relating to the Legal Status in the Territory of the Contracting States of the Property of Their Respective Nationals, in International Law Association Report of the Thirty-Seventh Conference hold in Oxford in 1932 (1933), 59, 61. 32 Article 6 of the Draft Convention Relating to the Legal Status in the Territory of the Contracting States of the Property of Their Respective Nationals, in International Law Association Report of the Thirty-Seventh Conference hold in Oxford in 1932 (1933), 59, 62. “Cases may be brought before the Tribunal either by one of the H.C.P. or directly by their nationals”. 33 See, Report of the Protection of Private Property Committee, Statement by Dr. Aranyi, in International Law Association Report of the Thirty-Fourth Conference hold in Vienna in 1926 (1927), 227, 259–260.

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1917.34 These two events were seminal in breaching the trust that States, in matters of private property’s treatment, would follow the ‘civilised’ approach expected from members of the international community.35 The awareness of the need to protect foreign investments has grown constantly since the second half the 1940s. In 1947 and 1948, protection of foreign investments was discussed during negotiations on the establishment of the International Trade Organization and Articles 11 and 12 of the Havana Charter for the International Trade Organization delineated the start of the emerging path that modern international investment law would take.36 However, those provisions, even if they had come into force, would only have served as a roadmap and facilitated goal setting. For instance, Article 12 (1) (d) of the Havana Charter, which has never become a binding treaty, recognised that: the interests of Members whose nationals are in a position to provide capital for international investment and of Members who desire to obtain the use of such capital to promote their economic development or reconstruction may be promoted if such Members enter into bilateral or multilateral agreements relating to the opportunities and security for investment which the Members are prepared to offer and any limitations which they are prepared to accept.37

The wording in both Articles 11 and 12 manifested the tension and differing interests between so-called “capital-importing” and “capital-exporting” States, a conflict that has remained largely at the core of international investment law.38 Thus, from 1947 onwards one can identify the trend of international investment law concentrating on the issue of protecting foreign investments. However, it seems that this trend could be largely explained by failure to conclude any broader comprehensive treaty, on the one hand, and the ever-more pressing need to have international guarantees for foreign investments at least, a need that became even more acute with the advent of decolonisation.39 The efforts that followed concentrated on shaping and framing patterns that could be put forward for signing and ratification. The first set of substantial and procedural provisions that focused exclusively on the protection of foreign investments was suggested by the International Chamber of Commerce (ICC) in 1949. The draft document was called the “Code of Fair and Equitable Treatment for Foreign Investments”40 and was comprised of many standards of protection, such as national 34

See Roth (1949), pp. 176–177. See also: Leiter (2017), p. 2. Roth (1949), pp. 178–179. 36 Havana Charter for an International Trade Organization, UN Doc E/CONF.2/78, Sales No 1948.II.D.4, 24 March 1948. 37 Havana Charter for an International Trade Organization, UN Doc E/CONF.2/78, Sales No 1948. II.D.4, 24 March 1948. 38 Newcombe and Paradell (2009), p. 43. 39 See: White (2017), p. 235; Odumosu (2007), pp. 254–255. 40 International Code of Fair Treatment for Foreign Investment, 129 Brochure of the International Chamber of Commerce (1949); reprinted in UNCTAD International Investment Instruments: A Compendium, UNCTAD/DTCI/30 (Vol.III), 1 June 1996, 273–278. 35

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2 Theoretical Background in Connection with the Study of Foreign Investor. . .

treatment, most-favoured-nation (MFN) clause, free transfer of funds, and compensation for expropriation. Article 13 of the draft referred to the resolution of disputes between the High Contracting States by the International Court of Arbitration, however, further details on the “composition and workings of the International Court of Arbitration” were left to be “worked out by the negotiating governments”.41 The embryonic procedural element of the draft code demonstrates, on the one hand, a reluctance to suggest a direct investor-state dispute settlement mechanism and, on the other hand, a lack of intellectual elaboration on the procedural details. The procedural aspects of international protection of foreign investments have become a focal point for discussion within the International Law Association. The Committee on Nationalization and Foreign Property42 set up a working party on the juridical aspects43 which resulted in the draft Statutes of the Arbitral Tribunal for Foreign Investment that, contrary to the draft Code of the ICC, envisaged granting a direct procedural capacity of individuals44 and made suggestions regarding the composition of the Arbitral Tribunal and various other procedural aspects.45 Another important landmark along international investment law’s evolutionary journey was a private initiative that resulted in the 1959 Draft Convention on Investments Abroad (Abs-Shawcross Draft Convention).46 The draft, which contained only ten articles, entailed comprehensive material protection for “the property of nationals” and also foresaw a direct procedural right of “a national of one of the Parties” to commence a proceeding against a sovereign State before the Arbitral Tribunal.47 Thus, it was arguably the Abs-Shawcross Convention that for the first time combined the comprehensive substantive and procedural guarantees of 41 See: Article 14, International Code of Fair Treatment for Foreign Investment, 129 Brochure of the International Chamber of Commerce (1949); reprinted in UNCTAD International Investment Instruments: A Compendium, UNCTAD/DTCI/30 (Vol.III), 1 June 1996, 273–278. 42 The committee did outstanding work in specific and detailed questions of nationalisation, such as the amount of indemnity and respect for vested rights and premature termination of concession contracts. The committee also sent out a “monster questionnaire” to be answered by the states. See: Report of the International Committee on Nationalization, in International Law Association Report of the Forty-Eighth Conference hold in New York in 1958 (1959), 130, 205. 43 Report of the Working Party of the International Committee on Nationalization on Judicial Aspects of Nationalization and Foreign Property, in International Law Association Report of the Forty-Ninth Conference hold in Hamburg in 1960 (1961), 175, 175–224. Draft Statutes of the Arbitral Tribunal for Foreign Investment, in International Law Association Report of the FortyNinth Conference hold in Hamburg in 1960 (1961), 225, 225–234. The Draft Statute contained 37 Articles. 44 Article 3 of the Draft Statutes of the Arbitral Tribunal for Foreign Investment, in International Law Association Report of the Forty-Ninth Conference hold in Hamburg in 1960 (1961), 225, 225. 45 See: Articles 4–27 of the Draft Statutes of the Arbitral Tribunal for Foreign Investments, in International Law Association Report of the Forty-Ninth Conference hold in Hamburg in 1960 (1961), 225, 225–231. 46 Abs-Shawcross Draft Convention on Investments Abroad, reprinted in UNCTAD International Investment Instruments: A Compendium, UNCTAD/DITE/2(Vol.V), 30 May 2000, 301–303. [Abs-Shawcross Draft Convention]. 47 See Article VII of the Abs-Shawcross Draft Convention.

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foreign investments into one text. A notably peculiar detail was that the draft referred to “the property of the nationals”48 and “nationals”49 instead of ‘investments’ and ‘foreign investor. However, the term ‘property’ may be legitimately read in a narrower sense where it means, indeed, foreign investments. Interestingly, the preamble of the draft refers to “a restatement of principles of conduct relating to foreign investments” whilst Article IX (a) defines “nationals” only as “companies”, thus not including persons acting in a private capacity. Hence, one can deduce from this that private property in a broader sense was not meant to be covered by the draft. On the one hand, none of the abovementioned efforts undertaken shortly before or after World War II are entirely representative of modern international investment law. On the other hand, the intellectual elaborations that took place during that period on aspects that still play a role in current international law are an important element for a better understanding of modern international investment agreements. We could observe that by the mid-1960s, the international community came up with intellectual elaborations on all of the key aspects of the soon-to-be-born international law standards of protection (as inspired by FCN treaties), expropriation, and procedural side of investments’ protection.

2.2.3

The Processes of Creating Legally Binding Norms of International Investment Law

The driving question to address in this section is when the features elaborated by the idea to provide a particular level of international protection for foreign investments become binding in nature. A starting point for the ‘era of modern investment treaties’ is often seen in the conclusion of the first bilateral investment agreement (BIT) between Germany and Pakistan in 1959. However, this treaty is better described as a “re-assessment”50 of already existent substantive guarantees with an exclusive emphasis on the protection of foreign investment. The Germany-Pakistan BIT did not contain an investor-state dispute resolution clause and referred to state-to-state dispute settlement.51 The literature reports that the first agreement to mark “the true beginning of the modern BIT practice”52 was the BIT between Italy and Chad entered into in 1969. According to Professor Andrew Newcombe and Dr Lluis Paradell, this represents the starting point “because it combines substantive investment promotion and protection obligations with binding investor-state arbitration to

48

See Article I of the Abs-Shawcross Draft Convention. See Article II, III, VII of the Abs-Shawcross Draft Convention. 50 Kishoiyian (1993), p. 331. 51 See Article 11, Treaty for the Promotion of Investments between Germany and Pakistan, 25 November 1959, 457 U.N.T.S. 24. 52 Newcombe and Paradell (2009), p. 45. 49

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address alleged breaches of those obligations.”53 In other words, was the first to embrace in a legally binding instrument the two features that serve to typify the current system of international investment protection. However, the present author’s examination of other agreements from this period has found that the 1968 BIT between the Netherlands and Indonesia also contained an acceptance of ISCID jurisdiction and, thus, a binding investor-state arbitration clause.54 Determination of the very first treaty is unnecessary for the set purpose as it is sufficient to observe that the first treaties which represented both particular features of international investment law in the form of a binding international agreement appeared in the second half of the 1960s. One could see a connection between the appearance of a direct investor-state arbitration clause in the treaties, the establishment of the International Centre for Settlement of Investment Disputes(ICSID) in 1965 and the Washington Convention on the International Settlement of Investment Disputes entering into force in 1966.55 Apparently, ICSID’s “urgent task” to spread information on its availability as a new dispute settlement mechanism bore significant and plentiful fruit.56 Prior to the advent of this important procedural component, States were probably reluctant to include direct investor-state arbitration clauses in treaties given the absence of a specific mechanism to deal with the claims that would inevitably arise. Some further reasons and explanations for such clauses becoming so widespread over such a short period of time can be found in a recent book by Taylor St John entitled “The Rise of Investor-State Arbitration”.57 Having, in general, determined that the first treaties combining international standards of foreign investments’ protection with an investor-state arbitration clause were first concluded in the late 1960s, the question is whether this should be considered as a point of emergence of modern international investment law. That would probably be a too-hasty conclusion as it should be borne in mind that the concluded treaties were bilateral and the conclusion of a handful of such treaties hardly provide concrete evidence of the emergence of a subfield of international law. Indeed, without further expansion of this practice, the conclusion of a few such

53

Newcombe and Paradell (2009), p. 45. See Article 11, Agreement on Economic Cooperation between the Netherlands and Indonesia, 7 July 1968, http://investmentpolicyhub.unctad.org/Download/TreatyFile/3329. 55 Convention on the settlement of investment disputes between States and nationals of other States, 17 October 1966, 575 UNTS 159. [ICSID Convention]. 56 International Centre for the Settlement of Investment Disputes, First Annual Report 1966/1967, p. 4, http://documents.worldbank.org/curated/en/819581468765564873/pdf/34726.pdf. Further support for the argument could be read in: John (2018), pp. 183–184. 57 The author of this monograph, for example, suggests a vision that “the international officials who had shepherded the Convention into existence then began to elicit consent from states, using the same strategies of agenda setting and brokering. Officials within the ICSID Secretariat now had a strategic interest in eliciting advance consent, to ensure their organization survived.” See: St John (2018), p. 183. 54

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agreements would have remained of minimal importance.58 Thus, the expansion of the use of such treaties was an essential element in the emergence of modern international investment law, even though for the first two decades after their emergence this process was rather slow and sporadic. By the mid-1980s, around 150 BITs had been concluded that incorporated a direct investor-state arbitration clause,59 but by the second half of the 1980s the number had swelled to 370.60 Since the beginning of the 1990s, there have been several subsequent waves in which there was a flurry of activity in concluding international investment agreements.61 Each of those waves was motivated by different political and economic circumstances, such as the dissolution of the Soviet Union, the liberalisation of markets in Latin American countries, and so forth. A comprehensive account of this development, as previously noted, lies outside of the scope of this monograph. Nevertheless, even a casual consideration of the numbers reveals that from the late 1980s the proliferation of BITs has been remarkable and the current number of such international investment agreements now in force is approximately 3000.62 The question of how many international treaties are needed to consider the subfield of international investment law as having emerged is akin to trying to determine how many trees are needed to form a forest. A more useful measure to determine the emergence of international investment law seems to be the commencement of its practice. Here again, the beginning was rather slow with the first treatybased investment arbitration award being rendered in 1990.63 The literature helps us to establish that over the course of the 1990s, treaty-based international investment arbitration did, however, become a relatively commonplace occurrence.64 There was an explosion in case law in the period of 2000 to 2010;65 however, this case law was considered a part of the practice of the already emerged subfield of international investment law, which by this time was an established distinct academic discipline. Such an increase in case law serves as a good dividing point between the process of emergence of modern international investment law and the beginning of its shaping and framing through practical application. This dividing point seems to be even more appropriate as the initial approach to foreign investor misconduct will be dealt with in Part II of this monograph and the development of case law will be dealt with in Part III. To conclude and summarise the findings of this section then, while

See, for instance, how the first BIT was reported in a student book on international investment law: Seidl-Hohenveldern (1965), p. 252. 59 Salacuse (2013), p. 342. 60 Parra (2012), p. 198. 61 See: Parra (2012), p. 199, 234. 62 UNCTAD World Investment Report 2017: Investment and the Digital Economy, http:// worldinvestmentreport.unctad.org/world-investment-report-2017/#key-messages. 63 Asian Agricultural Products LTD. (AAPL) v. Republic of Sri Lanka, ISCID Case No. ARB/87/3, Final Award, June 27, 1990, para. 18. 64 Parra (2012), pp. 208–209. 65 Parra (2012), pp. 235–236. 58

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intellectual elaboration of modern international investment law specifically addressing the protection of foreign investments began in the late 1940s and intensified in the 1960s, the actual period in which modern international investment law emerged as its own entity ran from the mid-1970s through to the mid-1990s. As seen from the foregoing, this view is founded on the real-world developments within international law concerning the regulation, treatment and protection of foreign investors and their property during this period. Proceeding to the next step, discussions from the period of international investment law’s normative emergence will be examined in the following section and are useful to better understand the first modern IIAs.

2.3

The Practice of International Investment Law

From our contemporary perspective, a reliance to protect foreign investments under the now voluminous number of IIAs is common practice. However, back in the 1980s and the early 1990s whether such agreements would proliferate was shrouded in uncertainty connected with a number of issues that were yet to be clarified. The dynamics of that period is vividly depicted in descriptions by people who either observed or were directly involved in the process of either negotiating IIAs or resolving the first disputes under those legal instruments. For instance, Jan Paulsson stated in the Berthold Goldman Lecture on Historic Arbitration Stories that he considers “the Pyramids case”66 in Paris in 2012 as pivotal because this case provided “a decision without which investor-state arbitration would very likely not exist, in my opinion”.67 That and similar records reveal that even though international investment law had obtained a foundation from various developments in international law, the system was becoming rather unprecedented in nature and, to a significant extent, novel to both practitioners and actors in the field. Aspects that have now crystallised and were seminal in the realisation of international investment law becoming a legitimate subfield of international law required a massive amount of initial nurturing and deserve to be consciously appreciated. One of these aspects is at the core of this study—the approach to foreign investor misconduct. This section of the monograph, however, will examine the practice of international investment law to identify aspects related to this study’s investigation of the approach to foreign investor misconduct. First, as previously indicated, this study is to a large extent based on an analysis of case law as this is regarded as the source that has the best potential to identify the current approach to foreign investor misconduct in international investment law. It seems therefore appropriate to consider the role and value of case law within the field of international investment law and to

66 Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt, ICSID Case No. ARB/84/3, Decision on Jurisdiction, 14 April 1988. 67 Paulsson (2014), p. 14.

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determine aspects of case law that contributed to further development of international investment law. Furthermore, it is important to consider the relationship between modern IIAs and general international law on the one hand, as well as IIAs and national law on the other. This is necessary to identify possible sources of law to qualify foreign investor behaviour as misconduct that may trigger legal consequences within the existing framework of international investment arbitration—that is, whether or not it is possible to classify foreign investor behaviour as misconduct under the current construction of IIAs but based on sources of law that are formally outside IIAs, i.e. separate international treaties, customs, general principles of law, or national law of the host State.

2.3.1

Case Law: Its Value and an Appropriate Mechanism to Refer to Earlier Decisions

An arbitral award only binds the parties to the dispute68 and is either directly enforceable if rendered under the ICSID Convention69 or needs to be recognised by a competent court if the New York Convention applies.70 Whilst awards are not a source of law, arbitral tribunals have developed rather persistent practice to rely on earlier lines of reasoning adopted by other arbitral tribunals. Such practice has brought the question of the value of earlier awards to the attention of legal academia.71 Some tribunals are also aware of this question and have, at times, elaborated the value of and their reasons for referencing earlier decisions. One example of this can be found in the following approach, which was initially adopted by the Saipem tribunal, but has now become widely cited: The Tribunal considers that it is not bound by previous decisions. At the same time, it is of the opinion that it must pay due consideration to earlier decisions of international tribunals. It believes that, subject to compelling contrary grounds, it has a duty to adopt solutions established in a series of consistent cases. It also believes that, subject to the specifics of a given treaty and of the circumstances of the actual /case, it has a duty to seek to contribute to the harmonious development of investment law and thereby to meet the legitimate

68 Article 53 (1), ICSID Convention; Article 34 (2), UNCITRAL Arbitration Rules of 2013, https:// www.uncitral.org/pdf/english/texts/arbitration/arb-rules-2013/UNCITRAL-Arbitration-Rules2013-e.pdf; Article 1136 (1) of the North American Free Trade Agreement, 17 December 1992, 32 ILM (1993) 289, 605 [NAFTA]. 69 Article 54 (1) of the ICSID Convention. 70 Article III, IV of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 6 October 1958, 330 UNTS 38. 71 See: Yusuf and Yusuf (2016), p. 73; Bungenberg and Titi (2015), p. 1508; Schill (2009), pp. 288–289.

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2 Theoretical Background in Connection with the Study of Foreign Investor. . . expectations of the community of States and investors towards certainty of the rule of law.72 (Emphasis added).73

Some other tribunals have used different wording, claiming that previous awards “merit careful consideration”74 which requires them to “explain why we have or have not followed the approach adopted by other tribunals”,75 however, the meaning is clearly comparable. Other examples of this have seen tribunals extolling the need for “the sound administration of justice, and the need to ensure the coherence and well-being of the system”,76 as well as contributing to “the harmonious development of investment law”77 or “the development of a common legal opinion or jurisprudence constante, to resolve some difficult legal issues discussed in many cases”.78 These quotes all highlight a base desire to provide a measure of consistency that ensures the legitimacy of international investment arbitration and its outcomes. Case law is therefore seen as a tool to de facto connect legally independent arbitration proceedings convened under different IIAs within a system that endeavours to combat fragmentation and avoid major divergences in the practical realisation of international investment agreements that are de jure independent, yet similar in structure and content. As such, given the absence of a permanent arbitration court or appeal mechanism, arbitral tribunals self-regulating their own consistency in making awards seems to be the only viable means to avoid, or at least minimise, damaging sporadic development in this aspect of international investment law. Thus, the motivation of these tribunals is both understandable and desirable.

72

SAIPEM S.p.A. v. The People’s Republic of Bangladesh, ICSID Case No. ARB/05/07, Decision on Jurisdiction and Recommendation on Provisional Measures, 21 March 2007, para. 67. The passage is further referred to in: Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. The Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Award, 27 August 2009, para. 145; Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Jurisdiction, 2 June 2010, para. 100; Saba Fakes v. Republic of Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010, para. 96; Quiborax S.A. et al. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Decision on Jurisdiction, September 27, 2012, para. 46; Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 116. 73 The emphasis is always that of the author. 74 AES Corporation v. Argentine Republic, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, paras. 30–35; Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC B.V. v. Republic of Paraguay, ICSID Case No. ARB/07/9, Decision on Jurisdiction, 29 May 2009, para. 58. 75 Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC B.V. v. Republic of Paraguay, ICSID Case No. ARB/07/9, Decision on Jurisdiction, 29 May 2009, para. 58. 76 Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC B.V. v. Republic of Paraguay, ICSID Case No. ARB/07/9, Decision on Jurisdiction, 29 May 2009, para. 58. 77 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability, 14 December 2012, para. 221; see also: Planet Mining Pty Ltd v. Republic of Indonesia, ICSID Case No. ARB/12/14 and 12/40, Decision on Jurisdiction, 24 February 2014, para. 85. 78 AES Corporation v. Argentine Republic, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, para. 33.

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However, the seemingly positive and legitimate aim of maintaining consistency entails a danger, namely that a desire to adhere to the precedence of previous awards becomes so strong that it negatively impacts the sovereign and independent adjudication of arbitral tribunals.79 This issue has also not escaped the notice of some arbitral tribunals which actively address this risk in their awards. For example, the AES Corporation tribunal stated: Each tribunal remains sovereign and may retain, as it is confirmed by ICSID practice, a different solution for resolving the same problem; but decisions on jurisdiction dealing with the same or very similar issues may at least indicate some lines of reasoning of real interest; this Tribunal may consider them in order to compare its own position with those already adopted by its predecessors and, if it shares the views already expressed by one or more of these tribunals on a specific point of law, it is free to adopt the same solution.80

Perhaps even more strongly worded was the ADC tribunal’s reference to “cautious reliance” on previous awards: The Parties to the present case have also debated the relevance of international case law relating to expropriation. It is true that arbitral awards do not constitute binding precedent. It is also true that a number of cases are fact-driven and that the findings in those cases cannot be transposed in and of themselves to other cases. It is further true that a number of cases are based on treaties that differ from the present BIT in certain respects. However, cautious reliance on certain principles developed in a number of those cases, as persuasive authority, may advance the body of law, which in turn may serve predictability in the interest of both investors and host States.81

The overarching aim of preserving the sovereign and independent adjudication process of the cases before them has been variously expressed by numerous other tribunals. For example, in the words of the Fraport tribunal, “other awards or decisions are no more than illustrative of the implications of a standard from a treaty wording”.82 Similarly, the SGS v. Republic of the Philippines tribunal stated: “although different tribunals constituted under the ICSID system should in general seek to act consistently with each other, in the end it must be for each tribunal to

For a better understanding of the possible danger one must first turn to the practical mechanism of how cross-references to the previous cases in international investment arbitration come about. First, parties to a dispute, namely their legal representatives, bring before an arbitral tribunal an issue to be decided upon. Since the arbitrators are generally bound by the submissions of the parties, they are unlikely to raise any novel aspects at their own discretion. Having been presented the issue to be decided upon, the tribunal may start searching for similar issues which have been already decided by other tribunals. At this point it is decisive whether the tribunal will refrain from making its own adjudication in favour of the rulings drawn from the found examples or whether it will simply compare the logic and elaborations after a careful check of the similarities and distinctions of the cases. 80 AES Corporation v. Argentine Republic, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, para. 30. 81 ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2016, para. 293. 82 Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines [I], ICSID Case No. ARB/03/25, Dissenting Opinion of Mr. Bernardo M. Cremades, 16 August 2007, para. 7.5. 79

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exercise its competence in accordance with the applicable law”.83 From that perspective, a reference to earlier decisions should not substitute or replace the process of interpretation under the Vienna Convention on the Law of the Treaties84 as well as the complex cognitive process of application of the law to the specific facts of the case at hand. Thus, adherence to consistency should be tempered by the need to preserve the independence and specificity of the case when making an adjudication. A look at the practice shows that some tribunals stand out as good examples of combining both aims: preservation of a certain degree of consistency and adherence to case-specific adjudication.85 However, others illustrate an inclination to an overadherence to previous decisions. For instance, some tribunals refer to earlier decisions without giving much consideration of the relevant text of the applicable BIT or the context from which the quoted passage of the previous decision was originally derived.86 Some tribunals even stress the absence of relevant case law as the only motivation to decide the case on the “first impression”.87 References to earlier decisions from the perspective of the first authority to consider might endanger independent adjudication. It seems much more appropriate to refer to case law in terms of comparison of independently gained results with what has been stated previously on a similar issue. In fact, a tendency to substitute the process of elaboration on a case with a reference to a previous case that dealt with a similar matter may be particularly appealing in the field of international investment law for practical reasons. One of the key drivers in this regard is the fact that arbitrators in international investment arbitration receive very little substantive support compared to members of other permanent judicial bodies, such as the ICJ or the WTO Appellate Body, an issue that been cited elsewhere in the literature.88 Furthermore, support for institutionalised arbitrations from the ICSID or the ICC Secretariat is limited to being of an administrative nature. Hence, a combination of time pressure and the absence of sufficient intellectual support is likely, at least to some extent, to contribute to tribunals opting for a less than ideal reference to previous decisions without giving due consideration 83

SGS v. Republic of the Philippines, ICSID ARB/02/6, Decision on Jurisdiction, 29 January 2004, para. 97. 84 Vienna Convention on the Law of Treaties, 23 May 1969, 1155 UNTS 331. [VCLT]. 85 See, for example: Pope & Talbot Inc. v. Government of Canada, UNCITRAL, Award on the Merits of Phase 2, 10 April 2001, para. 108; Canfor Corporation v. United States of America, Tembec Inc. et al. v. United States of America and Terminal Forest Products Ltd. v. United States of America, UNCITRAL, Joint Order of the Costs of Arbitration and for the Termination of Certain Arbitral Proceedings, 19 July 2007, para. 139. 86 For example, Ronald S. Lauder v. The Czech Rebuplic, UNCITRAL, Final Award, 3 September 2001, para. 200, 295. Compare with CME Czech Republic v. The Czech Republic, UNCITRAL, Partial Award, 13 September 2001, para. 40. See also: Mytilineos Holdings SA v. The State Union of Serbia & Montenegro and Republic of Serbia, UNCITRAL, Partial Award on Jurisdiction, 8 September 2006, paras. 148, 149. 87 Saluka Investments B.V. v. the Czech Republic, Decision on Jurisdiction over the Czech Republic’s Counterclaim, UNCITRAL, 7 May 2004, para. 37. 88 See, for example: Markert (2011), p. 63.

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to how well the specific elements of the previously decided case apply to the case at hand. It should also be noted here that parties to disputes also have a tendency to rely on previous awards “more or less as if they were precedents”89 and substitute direct argument concerning the case at hand with references to existing case law. This may both heighten the inclination of and provide additional incentive for some tribunals to persist with relying on previously decided awards without such awards being fully substantiated by the specifics of the case at hand. To summarise this situation then one can conclude that tribunals taking due note of previous awards is a positive practice, however, having an appropriate mechanism to regulate how and when this is done is of crucial importance. When tribunals reference earlier cases it should ideally mean that previously convened tribunals confronted a strikingly similar question and, after the present tribunal has interpreted the relevant provisions of the IIAs in both the current and previous disputes, understand how they applied to the facts of their respective cases, they then compare their own findings with the conclusions of previous tribunals. Such an active consistency check may result in a continuation of the trend—if a legitimate analogy can be drawn between previous elaborations and the case at hand—or discontinuation of it should there be a distinction in the “substantive features”90 of the case or justification to accept an alternative reading or line of argument. Thus, a reference to earlier decisions should mean that tribunals follow the outcome of previous elaborations in the belief that “in essence the conclusions and reasons of those decisions are correct”91 and in full confidence that the ‘substantial features’ of the case at hand and the cases referred to allow for such a comparison. Without such checks and balances the trend of referring to previous case law without sufficient substantial elaboration on the case at hand or on the aspects of the case previously elaborated will eventually come to represent an existential threat to the arbitration dynamic and risk hindering further developments in international investment law. In terms of determining and developing an appropriate mechanism that facilitates reference to previous case law, it seems that legal academia could have a role to play. By way of example, academic studies could be undertaken of particular issues in international investment law that have been made manifest by and developed in case law: The first step here would require the identification of pioneering cases and their specific features, with these cases being seen as trend-setting or landmark cases. The

For example, the AES Tribunal stated: “The argument made by the Claimant on the basis of these decisions, treated more or less as if they were precedents, tends to say that Argentina’s objections to the jurisdiction of this Tribunal are moot if not even useless since these tribunals have already determined the answer to be given to identical or similar objections to jurisdiction.” AES Corporation v. The Argentine Republic, ICSID Case No. ARB/02/17, Decision on Jurisdiction, April 26, 2005, para. 18. 90 AES Corporation v. Argentine Republic, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, para. 33. 91 Enron Creditors Recovery Corporation (formerly Enron Corporation) and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Decision on Jurisdiction, 14 January 2004, para. 40. 89

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second step then needs an examination of how these issues proliferate, diversify and develop. This allows answers to key questions such as: Is the referencing trend around these issues accompanied by the preservation of independent adjudication of any case at hand? Is there any inappropriateness evident in the trend to rely on previous cases? Have there been any significant further developments that impact on the pioneering cases and their import? Third, are there any alternatives that could be used to shape the trend of referencing previous cases? The final key question academic study could help answer pertains to whether or not there is a certain divergence in the considered case law. Addressing these tasks would be prudent preventative ‘crisis management’ in this area of international investment law, as mentioned in the introduction to this study. Therefore, for the purposes of this monograph, it seems that the soundest approach to the body of case law on foreign investor misconduct is in accordance with the logic suggested above: first, to determine and to describe the specificity of the trend-setting case law (the element of origins). Second, to trace the growth and development of the trend set in those cases as well as any inappropriateness in the cross-references to the trend-setting case law (the element of trends). Lastly, to examine the differences in the various tribunals’ approaches to foreign investor misconduct. Are there divergences in case law? Are those divergences a result of different interpretations of similar provisions or differences in the facts and law? Are those divergences justified in view of a consistency check? (the element of divergences and alternatives). Furthermore, this research will also give the required amount of attention to the issue of any outstanding practice. All of these tasks will be addressed in Chap. 4 of this monograph.

2.3.2

Applicable Law in Treaty-Based Investment Arbitration

The matter of foreign investor misconduct within investor-state international investment arbitration may only be considered under the body of law applicable to the dispute and not under any potentially relevant body of law. Thus, an understanding of the legal sources applicable in treaty-based international investment arbitration92 allows us to identify those that may open the door to allegations of foreign investor misconduct raised in treaty-based international investment arbitration.

92 The term ‘treaty-based’ is meant to add a contrast to contract-based international arbitration. Treaty-based international investment arbitration is based on consent to arbitration given in an international investment agreement. This study is generally focus on treaty-based rather than contract-based international investment arbitration.

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Specification of Treaty-Based International Investment Arbitration in View of the Choice of Law

Treaty-based international investment arbitration, as is typical for arbitration in contrast to litigation, entails a component of the choice of law, i.e. the parties to the dispute may determine which law applies to their dispute. Such a choice of law is reflected in the relevant procedural provisions, such as Article 42 of the ICSID, Article 35 of the 2013 UNCITRAL Rules, and Article 21 of the 2017 ICC Rules of Arbitration,93 all of which have comparable content and address two possible scenarios. The first refers to a situation in which the parties to a dispute have agreed upon the applicable law and, as a result, the arbitral tribunal involved must adhere to such a choice. If a tribunal disregards the parties’ choice of law, any award rendered could subsequently be annulled or set aside due to the tribunal exceeding its power.94 The second situation referred to by the articles cited above is where the parties to a dispute have not agreed upon the applicable law. In such cases, default provisions empower an arbitral tribunal to determine the law to be applied. In this regard the above-mentioned procedural rules differ in so far as the second sentence of Article 42 (1) of the ICSID Convention limits a tribunal by stating that it “shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable”, whereas the other rules provide for more open-ended discretion and state that “the arbitral tribunal shall apply the law which it determines to be appropriate”.95 The second sentence of Article 42 (1) of the ICSID Convention, at least at first glance, could be read as prioritising national law over international law.96 Yet this provision could only be correctly interpreted by understanding that it was never intended to apply exclusively to treaty-based international investment arbitration, but rather to allow for other types of arbitration as well.97 The drafting history demonstrates that the wording of this provision was not meant to establish a hierarchy involving national

93

International Court of Arbitration, Arbitration Rules, 1 March 2017, https://cdn.iccwbo.org/ content/uploads/sites/3/2017/01/ICC-2017-Arbitration-and-2014-Mediation-Rules-english-ver sion.pdf.pdf [2017 ICC Rules of Arbitration]. 94 In the framework of the ICSID Convention, Article 52 (1) (b) names a manifest excess of power by an arbitral tribunal as one of the grounds upon which a rendered ICSID award might be annulled. See: Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Decision on the Annulment Proceeding, 5 February 2002, para. 22. 95 See, for example, Article 35, 2013 UNCITRAL Rules and Article 21, 2017 ICC Rules of Arbitration. 96 See also Reisman and Arsanjani (2016), p. 4. 97 See Paper Prepared by the General Counsel and Transmitted to the Members of the Committee of the Whole, SID/63-2 (February 18, 1963), in Convention on the Settlement of Investment Disputes between States and Nationals of Other States: Documents Concerning the Origin of the Formulation of the Convention, Volume II, Part 1 (1968), 71, 77–79; Summary Record of Proceedings, Geneva Consultative Meetings of Legal Experts, Z9 (June 1, 1964), in Convention on the Settlement of Investment Disputes between States and Nationals of Other States: Documents Concerning the Origin of the Formulation of the Convention, Volume II, Part 1 (1968), 367, 420.

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or international law. At the time of its drafting, it was clear that prioritising either national or international law would depend upon the type of dispute,98 namely, in contract-based arbitration reliance on national law would hold primacy as compared to treaty-based arbitration in which international law was seen as being the predominant source.99 Also of note here is the fact that mentioning the “law of the Contracting State party to the dispute” was simply designed to contribute to consistency in applying relevant national law as opposed to the law of a host State or any other national law, such as that of a home State or another third State.100 The fact that none of the abovementioned procedural rules were drafted exclusively for treaty-based international arbitration101 also explains why these rules do not fully reflect the specifications of this type of arbitration. Indeed, contrary to contract-based investment arbitration, treaty-based international investment arbitration is not based on an arbitration clause previously negotiated by the parties to a potential dispute in which they could have agreed upon the applicable law. Instead, treaty-based international investment arbitration operates based on an irrevocable offer to arbitrate a future dispute that a host State provides foreign investors within an international investment agreement concluded between two contracting States, and to which foreign investors are not a party. Thus, foreign investors normally have no opportunity to directly express their preference for the applicable law or influence any agreements concluded thereupon by the States which are parties to the IIAs. The

98 See Summary Record of Proceedings, Geneva Consultative Meetings of Legal Experts, Z9 (June 1, 1964), in Convention on the Settlement of Investment Disputes between States and Nationals of Other States: Documents Concerning the Origin of the Formulation of the Convention, Volume II, Part 1 (1968), 367, 419. 99 Summary Record of Proceedings, Geneva Consultative Meetings of Legal Experts, Z9 (June 1, 1964), in Convention on the Settlement of Investment Disputes between States and Nationals of Other States: Documents Concerning the Origin of the Formulation of the Convention, Volume II, Part 1 (1968), 419, 420. 100 See discussion on the matter: Summary Record of Proceedings, Addis Ababa Consultative Meetings of Legal Experts, Z7 (April 30, 1964), in Convention on the Settlement of Investment Disputes between States and Nationals of Other States: Documents Concerning the Origin of the Formulation of the Convention, Volume II, Part 1 (1968), 236, 267; Summary Record of Proceedings, Santiago Consultative Meetings of Legal Experts, Z 8 (June 12, 1964), in Convention on the Settlement of Investment Disputes between States and Nationals of Other States: Documents Concerning the Origin of the Formulation of the Convention, Volume II, Part 1 (1968), 298, 330; Summary Record of Proceedings, Bangkok Consultative Meetings of Legal Experts, Z 10 (July 20, 1964), in Convention on the Settlement of Investment Disputes between States and Nationals of Other States: Documents Concerning the Origin of the Formulation of the Convention, Volume II, Part 1 (1968), 458, 506; Chairman’s Report on the Regional Consultative Meetings of Legal Experts, Z 11 (July 9, 1964), in Convention on the Settlement of Investment Disputes between States and Nationals of Other States: Documents Concerning the Origin of the Formulation of the Convention, Volume II, Part 1 (1968), 557, 570. 101 The ICC and UNCITRAL Rules were primarily drafted as procedural rules for commercial arbitration. Furthermore, the ICSID Rules were initially drafted to serve in various types of international arbitration—treaty-based, contract-based as well as arbitration commenced under the arbitration clause stipulated in the national legislation of a host state.

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AAPL v. Sri Lanka tribunal, being the very first tribunal established under an international investment treaty, pointed this out by saying: the Parties in dispute have had no opportunity to exercise their right to choose in advance the applicable law determining the rules governing the various aspects of their eventual disputes. In more concrete terms, the prior choice-of-law referred to in the first part of Article 42 of the ICSID Convention could hardly be envisaged in the context of an arbitration case directly instituted in implementation of an international obligation undertaken between two Contracting States in favour of their respective nationals investing within the territory of the other State.102

Thus, the specification of treaty-based international arbitration makes parties to a dispute having an explicit choice of law prior to the commencement of a proceeding almost non-existent. However, the act of commencing treaty-based arbitration means a foreign investor is making a choice to opt for the established investor-state international arbitration system instead of pursuing other alternatives, such as litigation under national law, contract-based arbitration or seeking diplomatic protection. This voluntary choice by the investor predetermines the subject matter of the dispute,103 that is to say, a tribunal established under the relevant international investment agreement is thus “placed in a public international law context and not a national or regional context”.104 The main concern of such arbitration is a matter of State responsibility under the international standards of foreign investment’s treatment as they are stipulated in the applicable IIAs which, to a large extent, seems to set the applicable law for the proceedings.105 Thus, in a treaty-based international investment agreement, it appears that the relevant IIA could hardly be anything else but the primary source applicable to the dispute.106 This aspect cannot be eliminated even if the parties to the dispute exercise their right to choose the applicable law after the commencement of the dispute.107 This position is supported by arbitral practice

102

Asian Agricultural Products Ltd. v. Republic of Sri Lanka, ICSID Case No. ARB/87/3, Final Award, 27 June 1990, para. 19. [AAPL v. Sri Lanka]. 103 See, for example: Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Decision on the Annulment Proceeding, December 8, 2000, paras. 29–36. 104 Electrabel S.A. v. The Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012, para. 4.112. 105 See also: de Brabandere (2015), pp 125–126. 106 See, for example: LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, para. 98; MCI Power Group L.C. and New Turbine, Inc. v. The Republic of Ecuador, ICSID Case No. ARB/03/6, Award, 31 July 2007, para. 217; Alps Finance and Trade AG v. The Slovak Republic, UNCITRAL, Award, 5 March 2011, paras. 195, 198, 199; Ulysseas v. The Republic of Ecuador, UNCITRAL, Final Award, 12 June 2012, para. 111; Vestey Group Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/06/4, Award, 15 April 2016, paras 116–118. 107 See, as an example: AGIP S.p.A. v. People’s Republic of the Congo, ICSID Case No. ARB/77/1, Award, 30 November 1979, para. 80–83.

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which seems to be consistent in viewing the IIA as lex specialis in treaty-based international investment arbitration.108

2.3.2.2

Application of International and National Law in Conjunction with the Applicable IIA

Despite the foregoing, application of the relevant IIA as a primary source of law does not mean that the IIA applies as an exclusive source of law in treaty-based investment arbitration. Indeed, “the Bilateral Investment Treaty is not a self-contained closed legal system but has to be envisaged within a wider juridical context”.109 Thus, determining the applicable law in treaty-based international investment arbitration also involves considering what other sources of law may apply in conjunction with the relevant IIA and how far the sitting tribunals’ discretion to determine such sources extends in this regard. In the context of the current study, the above issue relates to whether foreign investor alleged misconduct could be considered from the perspective of legal sources outside of the IIA, for instance, standalone international treaties other sources of either international law or national law. The answer seems to depend on several variables. First, on whether the arbitration clause in the relevant IIA contains an indication of the law to be applied. Given that foreign investors are not parties to the IIA, “it is generally accepted that the consent expressed by the States in their investment treaty is stipulated for the benefit of their respective nationals”.110 Arbitral tribunals, therefore, consider provisions of the IIA that point to the choice of applicable law as a choice made by the parties to the dispute.111 Thus, under such circumstances, an arbitral tribunal does not seem to possess any discretion apart from that to apply and interpret the relevant norms. Consequently, the application of any legal sources external to the IIA would then have to stem from the wording of the relevant provision of that IIA. Should such a

108

Here it should be pointed out that cases in which international law was regarded as having a ‘supplementary’ nature were all contract-based and not treaty-based. (for instance, Klöckner Industrie-Anlagen GmbH et al. v. United Republic of Cameroon and Société Camerounaise des Engrais, ICSID Case No. ARB/81/2, Decision on Annulment, 3 May 1985, para. 69; Amco Asia Corporation and others v. Republic of Indonesia, ICSID Case No. ARB/81/1, Decision on Annulment, 16 May 1986, para. 20–22). 109 AAPL v. Sri Lanka, supra note 102, para. 21. Similarly: Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentina Republic, ICSID Case No. ARB/07/26, Award, 8 December 2016, para. 1200: “The BIT cannot be interpreted and applied in a vacuum”. 110 De Brabandere (2015), p. 125. 111 Antoine Goetz et consorts c. République du Burundi, CIRDI ARB/95/3, Sentence, 10 février 1999, para. 94; Fedax N.V. v. The Republic of Venezuela, ICSID Case No. ARB/96/3, Award, 9 March 1999, para. 30; Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Award, 6 February 2007, para. 76; Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/99/6, Award, 12 April 2002, paras. 86, 87. See also: Schreuer (2012), pp. 575–576.

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provision refer to international and national law, an arbitral tribunal would then be free to take both legal sources into account. In cases where an arbitration clause only refers to the relevant IIA and the applicable rules of international law,112 a tribunal is necessarily bound to this choice. In the absence of any indication in the arbitration clause of the law to be applied, the outcome depends on the method an arbitral tribunal uses to characterise the abovementioned specification of treaty-based international investment arbitration. In addressing this situation there seem to be two established alternatives. The first, which is referred to as the “implicit choice of law”, was supported by the majority of the tribunal in AAPL v. Sri Lanka, the first-ever treaty-based international investment arbitration proceeding.113 The method is based on viewing choice of law in the sense of the first sentence of the applicable procedural rules in parties’ behaviour upon the commencement of the proceeding. Thus, having observed that the claimant to the dispute has referred to the provisions of the UK/Sri Lanka BIT, a reference which was not objected to by the respondent, the tribunal in AAPL v. Sri Lanka concluded that the parties “acted in a manner that demonstrates their mutual agreement to consider the provisions of the Sri Lanka/UK Bilateral Investment Treaty as being the primary source of the applicable rules”.114 The outcome thereof is that the applicable IIA applies as the primary source for the dispute and the sitting arbitral tribunal is bound by the wording and nature of this IIA for the application of any further sources of law and it possesses no further discretion to determine the legal sources to be applied. Such a method has, however, been criticised in the literature. For example, Professor Schreuer’s Commentary to Article 42 of the ICSID states that “in AAPL v. Sri Lanka, a different result concerning the applicable law would have been reached under the residual rule of Article 42 (1), second sentence. The assumption of an agreement in favour of the BIT and of international law in general effectively blocked the application of the Sri Lanka law”.115 An alternative method to this is based on viewing the specification of treaty-based international investment arbitration as the absence of any choice of law, which gives an arbitral tribunal authority to exercise discretion in determining the law to be applied. However, there are two ways arbitral tribunals may approach their exercise of such discretion. Some tribunals engage in determining the applicable law without placing any preliminary significance on the fact that the proceeding has already been commenced under the IIA.116 The problem arises here that in doing so may lead to 112

See, for example, Article 1151 NAFTA; Article 26 (6) Energy Charter Treaty, 16 April 1998, 2080 UNTS 100 [ECT]. 113 One of the arbitrators disagreed with the method of determining the applicable law as applied by the majority. See: AAPL v. Sri Lanka, Dissenting Opinion of Samuel K. B. Asante, 15 June 1990, “The Applicable Law”. 114 AAPL v. Sri Lanka, para. 20. 115 Schreuer (2012), p. 574. 116 See, for example: M.C.I. Power Group L.C. and New Turbine, Inc. v. Republic of Ecuador, ICSID Case No. ARB/03/6, Award, 31 July 2007, para. 217; Duke Energy International Peru Investments No. 1 Ltd. v. Republic of Peru, ICSID Case No. ARB/03/28, Award, 18 August 2008,

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complications when considering the national law to be applied as the primary source of law. This has been made manifest in cases in which a tribunal needed to address the respondent’s argument on the exclusive application of a host State law in treatybased international investment arbitration.117 Acceptance of such an argument would result in the paradox of eliminating the primary application of a legal source upon which the whole proceeding was originally commenced. It seems that attempting serious engagement in such a discussion is barely possible and ultimately only serves to make a tribunal’s position less persuasive and straightforward. The approach in the most recent cases seems to avoid entering a legal cul-de-sac by proclaiming “undisputed application”118 of the relevant IIA as the primary source of law merely based on the parties’ reliance thereupon, i.e. without any need for further determination. This means that a tribunal’s discretion only extends “with respect to matters not covered by the BIT”.119 Such an approach appears to integrate the logic expressed by the AAPL v. Sri Lanka tribunal and avoids restrictions in a tribunal’s authority to determine applicable law under the default rule. In terms of impact on the outcome of an arbitral proceeding, this method allows for a flexible determination of the applicable law at different levels120 and based on the nature of the issues raised by parties to the dispute. For instance, the Burlington v. Ecuador tribunal considered that the IIA applies as the primary source of law to the main claim,121 whereas the national law of Ecuador applies as the primary source of law in the matter of the respondent’s counterclaims.122 Here, however, one should bear in mind the distinction between the applicable law and jurisdiction, which are two separate matters.123 A tribunal’s discretion to consider the law to be applied to the various issues raised by the parties is only legitimate within its jurisdiction. Thus, whether a tribunal may consider contract-based claims or the respondent’s counterclaims, and so forth, are issues pertaining to the tribunal’s jurisdiction. However,

paras. 193–197; Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v. The Republic of Estonia, ICSID Case No. ARB/99/2, Award, 25 June 2001, para. 350. 117 For example, CME v. Czech Republic, UNCITRAL, Final Award, 14 March 2003, para. 398, 399; M.C.I. Power Group L.C. and New Turbine, Inc. v. Republic of Ecuador, ICSID Case No. ARB/03/6, Award, 31 July 2007, para. 215. 118 For example, Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability, 14 December 2012, para. 178. 119 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability, 14 December 2012, para. 177. 120 National and international law are considered as different levels of law in investment arbitration practice. See, for example, AES Corporation v. The Argentine Republic, ICSID Case No. ARB/02/ 17, Decision on Jurisdiction, 26 April 2005, para. 92. 121 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability, 14 December 2012, paras. 177–179. 122 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Ecuador’s Counterclaims, 7 February 2017, paras. 72–74. 123 See, CMS Gas Transmission Company v. The Republic of Argentine, ICSID Case No. ARB/01/8, Decision of the Tribunal on Objections to Jurisdiction, 17 July 2003, para. 88; Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction, 3 August 2004, para. 31.

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should such jurisdiction exist, then the choice of the applicable law would occur in accordance with the possibilities presented above. Consequently, in treaty-based international investment arbitration there are systematic options for an arbitral tribunal to consider and apply issues of a foreign investor misconduct in accordance with various legal sources external to the IIA, such as investment contracts, national laws or other sources of international law. The actual course pursued by a tribunal will depend upon the specific features of the case before it. To provide a succinct summary, Table 2.1 displays the possibilities presented above.

2.4

Systemic Approach to the Practice of International Investment Law

It seems also important to reflect on whether, as such, all the various and heterogeneous IIAs still in force that play or have played such a crucial role in current international investment law could be considered systemically. Such a consideration seems essential in view of the stated aims of this study: could one legitimately regard them in a systematic way or should they be considered in a merely illustrative manner. International investment law as it stands is currently comprised of 2363 bilateral investment agreements and 309 treaties with provisions on international investment protection in force.124 The majority of these treaties are legally disconnected bilateral instruments, i.e. binding only upon two contracting States. There are a few regional and sectoral agreements involving more than two contracting partners, but their existence does not change the overwhelmingly bilateral composition of this sub-field of international law. It is an interesting point of note in this regard that several attempts to conclude multilateral investment agreements have been attempted but failed.125 The main reason for this, as reported in the literature, has been crucial differences in the perspectives between so-called capital-exporting and capital-importing countries.126 Today, however, due to changes in economic and political constellations, the flow of foreign capital around the globe has become so fluid and interwoven between markets127 that it can no longer be perceived in the clear-cut dimension of capital-importing and capital-exporting countries, a fact that may help to eliminate what were major sticking points to concluding truly multilateral international investment agreements. However, given the way international

124

The numbers are taken from the UNCTAD website: http://investmentpolicyhub.unctad.org/IIA. See: Shill (2009), pp. 31–40, 49–60. 126 Dolzer and Stevens (1995), p. 2; Shill (2009), p. 39; Newcombe and Paradell (2009), p. 43. See also: GA Res. 3201 (S-VI), UN Doc A/RES/S-6/3201, 1 May 1974. 127 See: Lester (2015), p. 215. 125

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2 Theoretical Background in Connection with the Study of Foreign Investor. . .

Table 2.1 Commencement of the Proceeding under the Relevant IIA Commencement of the Proceeding Under the Relevant IIA OPTION 1: An arbitration clause of the releOPTION 2: An arbitration clause of the relevant IIA contains an indication of the law to be vant IIA does not contain an indication of the applied. law to be applied.

RESULT: Choice of law is deemed to have been exercised. The first option of the relevant procedural rules applies. The tribunal has no further discretion to determine the applicable law. Application of sources of law external to the IIA seems to be justified only if supported by the wording of the relevant provision(s) of the applicable IIA.

Two systematic methods to consider the situation:

First method: Parties’ behaviour in the dispute is an indication of an implicit choice of law in favour of the applicable IIA and relevant international law. RESULT: IIA applies supplementary rules, the application of which follows from the wording and the nature of the IIA. No further discretion seems to be given to the arbitral tribunal. Application of a stand-alone source of law that does not follow directly from the wording and nature of the relevant IIA seems implausible. Second method: Commencement of the proceeding under the IIA is not as such a realisation of a choice of law. Thus, an arbitral tribunal may independently engage in determining the applicable law under the default rule. RESULT: The IIA still applies as the primary source of law (various argumentations are possible). Nevertheless, such a method allows for more flexibility in determining the relevant sources of law for the further issue raised within the tribunal’s jurisdiction and not covered by the IIA. Under such a method, application of a stand-alone source of law, such as national law, other sources of international law (or other international conventions) or an investment contract seems more likely to happen.

investment law is currently structured and functions, there is no legitimate reason to believe that such agreements will be concluded anytime soon. Thus, current international investment law is and will probably remain, at least in the nearest future, of a heterogeneous nature. In view of the planned investigation the

2.4 Systemic Approach to the Practice of International Investment Law

37

issue is whether and to what extent the question of how international investment law approaches foreign investor misbehaviour may be answered in a systematic way. At its core, the question goes into the specifics of the academic perception of the current ‘spaghetti bowl’ of international investment agreements. Do the IIAs form a single, collective body of international investment law or are they just individual agreements with no discernible coherence? The heterogeneous nature of international investment law has already, in many instances, become the subject of scientific discussion. Arguably, a contribution by Professor Stephan Schill deals with the matter in the most comprehensive way. In the study “Multilateralization of International Investment Law” he supports the argument that notwithstanding the bilateral nature of international investment law, “BITs in their entirety function analogously to a truly multilateral system as they establish rather uniform general principles that order the relations between foreign investors and host States in a relatively uniform manner independently of the sources and targets of specific transborder investment flow”.128 Other authors have also pointed out the striking similarities among the host of IIAs in force and view the sub-field of international investment law in a systematic way.129 Such a view signifies what we may call a macro-perspective on international investment law and from this viewpoint, the separate elements, such as the multitude of legally independent IIAs, are seen in a generalised way based on their similarities. This allows for generalisations as to common origins, structure, composition, standards of protection, as well as aims and function of these IIAs. Academic contributions such as “Principles of International Investment Law” by Professor Rudolf Dolzer and Professor Christoph Schreuer130 or “Standards of Investment Protection” by Professor August Reinisch131 are examples of an academic view of this field from a macroperspective. There is also, however, a micro-perspective, which focuses on the differences in composition and wording of different IIAs. These differences, if seriously taken into account by an adjudicating authority (arbitral tribunals), may lead to significantly different outcomes for similar or even comparable legal issues.132 Moreover, given the more than 50 years of experience that has been gathered since the introduction of modern types of IIAs in the field, one can speak about their different generational change. Recent agreements concluded since 2010 and hence after the boom of practical experience in the field, have become more complex compared to the very

128

Shill (2009), pp. 15–16. See: Lester (2015), p. 215. 130 Dolzer and Schreuer (2012). 131 Reinisch (2008). 132 Arbitral tribunals do point out the importance of the different wording in IIAs. Examples will be provided in further parts of this monograph. 129

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2 Theoretical Background in Connection with the Study of Foreign Investor. . .

first ones concluded back in the 1960s.133 More recently concluded IIAs often contain provisions on social and environmental responsibility, on the conflict between the obligation to protect foreign investments and other obligations under international law.134 Furthermore, there are also some of the first examples of the integration of provisions on foreign investor obligations starting to be included in agreements’ texts. All these factors signal that the diversification of the approaches as to how to protect foreign investments may soon become much more apparent in the field of international investment law. This is a factor which could also influence academic research in the field as currently, most typical academic contributions from the micro-perspective are elaborations on model international investment agreements of particular States.135 The scientific approach to most of the issues in the field remains to a large extent a combination of the macro and micro-perspectives. Given the ‘spaghetti bowl’ of independent treaties, it is indeed not feasible to ascertain a single outcome that truly represents the whole mix. Most, if not all, of the elements to be scientifically observed can only indicate a trend, however, the further one digs into the details the greater the divergences and exceptions become apparent. These divergences and exceptions represent some of the diverse possibilities that can and do exist within the inherently flexible system. However, to make a part speak for the whole one should identify the variables that explain and justify differences in an outcome. Examples of such variables may include the precise wording of an IIA’s provisions, which consequently influence the degree of protection granted to foreign investments, the scope of a treaty’s coverage and an arbitral tribunal’s jurisdiction, and so forth. In identifying the variables, one will nevertheless observe common or frequent scenarios, stand-alone approaches, as well as emerging trends.136 Thus, presenting a generalised view of how international investment law approaches the matter of foreign investor misconduct seems possible by observing and explaining the general features discernible in the mass of IIAs and treaties, then identifying the relevant variables that explain and justify the result of the matter.

133

The more comprehensive nature of recent IIAs is well demonstrated if only by the sheer number of Articles. For instance, the first BIT concluded between Germany and Pakistan entailed only 14 Articles. In contrast, the Model Canadian BIT of 2004 entails 52 Articles. 134 See examples in the Chap. 6. 135 See, for example, Brown (2013a). 136 One may find helpful to consider the following analogy: “You can see a lot of trees, but you need to stand far enough back to be able to perceive they form a forest”.

2.5 Ways to Implement Changes Into Current International Investment Law

2.5

39

Ways to Implement Changes Into Current International Investment Law

One of the tasks for the undertaken study is to check current international investment law from the perspective of the sufficiency and effectivity of available mechanisms to address the issue of foreign investor misconduct. Fulfilment of this task presupposes any suggestions of required and desirable changes to how the current system functions. To that end, it is useful to consider the ways those changes may be implemented within the current framework of international investment law. It seems that one could distinguish between two processes—one that involves development and the other that involves transformation.

2.5.1

Development of International Investment Law

Development is a process of shaping and framing of once emerged legal constrictions. In the field of international investment law, the key role for shaping and framing is played by arbitral tribunals whose function in this capacity is particularly prominent bearing in mind terse and standard-based character of the majority of IIAs.137 Indeed, typical IIAs not only fail to provide a comprehensive picture as to how the matter of protection of foreign investments shall be regulated in-depth but also entail several vague terms that needed to be interpreted and elaborated on to be effectively applied. By way of illustration, the precise scopes and meanings of ‘fair and equitable treatment’ as well as ‘full protection of security’ have become contextualised through the process of development of international investment law by arbitral tribunals.138 The interpretive clarification of such terms serves as an example for the role tribunals play in the development of this field of law. Alongside interpretation, another way to develop legal constructions is the establishment of new dogmatic possibilities (options/avenues) which broaden the scope of issues that can be raised and considered within the field. An example of a new dogmatic possibility established by arbitral tribunals is their reliance on the general principles of good faith while considering allegations in foreign investor misconduct.139 The subject matter of this monograph, misconduct of foreign investors, is by and large also a matter still in development within international investment law. By dealing with legal arguments based on alleged foreign investor misconduct, arbitral tribunals have developed— stretched and framed—the scope of issues that were originally foreseen as needing to be dealt with within international investment arbitration. Thus, the following chapter on case law involving foreign investor misconduct

137

See also: Ortino (2013), pp. 154, 157. See: Jacob and Schill (2015), pp. 706–712, 724, 729; Lorz (2015), pp. 775–780. 139 See examples of cases in the Chap. 4. 138

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2 Theoretical Background in Connection with the Study of Foreign Investor. . .

will provide some indication as to the current extent of this development and what changes in the normative constructions have occurred due to this process, i.e. how investor misconduct are framed, shaped and contextualised by the practice on the matter. As mentioned above Philip C Jessup said essentially law tends to be reactive rather than proactive to changes in the world, but law does not need to be completely unprepared for any change or growing problem areas. From a scientific point of view, it is also important to foresee (determine) possibilities for further positive development. Here one needs to bear in mind that arbitral tribunals can only shape and frame the existent constructions within certain limits, namely, the potential of the system to allow such change because it is either explicitly provided for or is inherent to emerged legal constructions.140 Further to this, some authors claim that the potential of the system is changed by the act of emergence itself because “once a legal system is put in place – no matter how coincidental its structure may be - this system will, to a large extent, determine the outcome of the future descriptions”.141 Based on that, arbitral tribunals may well discover and make full use of as yet unrealised potential, without necessarily transforming or modifying the system. Thus, the system’s potential sets the limits for the developmental process, however, notwithstanding the idea of law as a ‘living instrument’, it still seems inappropriate for arbitrators as an adjudicating authority to adapt fundamental matters that may only be modified with the consent of their creators, i.e. contracting States. One such fundamental matter seems to be the position of foreign investors within the system which then influences how the system may respond to a proved allegation in foreign investor misconduct cases. Given the above, this means the development of how international investment law addresses the matter of foreign investor illegal behaviour is possible to the extent which is entailed in the inherent potential of legal contractions that comprise current international investment law. Case law can thus be regarded as a manifestation of the realisation of existing potential within the system. In analysing the development that has happened by virtue of case law one should only confirm that this development does not transform or modify the initial consent of the contracting States. Furthermore, tribunals need to be mindful of the fact that should existent legal constrictions not entail the potential to regulate and solve particular issues, inserting legal tools into the system to address this gap is beyond the scope of development. This is because development essentially remains the process of application and interpretation of existing legal constructions by arbitrators, hence anything that transforms the initial consent of the contracting States can only be employed after a renegotiation with these States.

140

Investigation of the potential of the system to address issue of foreign investor misconduct will be dealt with in this chapter. 141 Smith (2012), p. 17.

2.5 Ways to Implement Changes Into Current International Investment Law

2.5.2

41

Transformation of International Investment Law

In the context of this paper, transformation is limited primarily by the system’s ability to be modified based on the developmental experience it has gathered over time. As such, current international investment law is, in a way, a product of the transformation in the field of international law in general, as was briefly touched upon above. A prerequisite for transformation is an emerged motivation to equip the legal system with new tools to adequately deal with challenges which are either new or have arisen out of practice. As such, the emergence of new norms of international law is only restricted if they infringe on the norms of jus cogens.142 Such conflict rarely ever occurs in the field of international protection of foreign investments, meaning that States, in general, possess almost unlimited power to regulate foreign investments. Yet they should be clear about what they want. Here, one can reflect on the words of Professor Jessup who stated that “international law responds to new developments in science and technology and political and social conditions, but law necessarily follows rather than precedes the factual conditions which make new developments in the law necessary”.143 Thus while suggesting changes to the system, the question is what rationale would motivate contracting States to transform existent constructions in international investment law with a view to foreign investor misconduct. The second consideration in this regard is what the suggested changes will actually change in terms of outcomes compared to the outcomes that result based on the current composition of the field. Detailed technicalities pertaining to the formalised process of how to create legally binding norms under international law, as well issues of potential conflict between newly emerged and old provisions,144 lay outside of the scope of this study. The process of transformation makes the system able to more efficiently face the challenges that were not previously foreseen and for which no legal mechanism was put in place at the time of the creation of the relevant legal constructions. As a concluding point to this section, there seem to be two paths to follow in order to change the field of international investment law—further development and/or transformation of the once emerged international investment law. Development centres on shaping and framing of existence legal constructions, whereas transformation involves inserting a new mechanism into the system. It appears that resorting to transformation presupposes that the limits of existing potential have been reached without yielding the needed remedies, thus shifting the focus onto new aspects and dimensions. As such, in view of the subsequent parts of this monograph, one needs to pay attention to whether the inserted potential has been realised and whether 142

Article 53, VCLT. Jessup (1957), p. 3. 144 This is particularly relevant for the field of international investment law, bearing in mind that the majority of IIAs entail so-called “grandfather” clauses, which stretch an IIA’s protection beyond the period of termination of that treaty. The conflict may be intensified in view of the MFN provision. 143

2 Theoretical Background in Connection with the Study of Foreign Investor. . .

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further transformation of the approach towards foreign investor misconduct is required. Among other tasks, this monograph will set about investigating the question of whether the current approach of international investment law to foreign investor misconduct can be further developed by arbitrators or if contracting States need to take the existent legal constrictions and evolve them into a form better suited to modern-day challenges.

2.6

Interim Conclusion

This Chapter presents the theoretical background of the study on foreign investor misconduct. On the one hand, it sets the scene and provides the necessary background information, on the other, it provides elaboration and detail of the tasks set for the present study as well as moulding expectations concerning the results. Having determined what are the relevant legal sources to be considered, what shall be taken into account by approaching, systemising and analysing of these sources and what can reasonably be expected as a possible outcome, special attention will be paid to the point of emergence of current international investment law as an overall framework for the investigations in the field. The key pieces of information that have been conveyed in this Chapter can be summarised in the following: 1. The emergence of international investment law has been a process, one stemming from the experience gathered in international law over decades but which, on occasion, included periods when an urgent need for rapid development existed, such as in the post-War II and decolonisation era. The normative constrictions of current international investment law can be seen as having emerged from a period extending from the mid-1970s to approximately the mid-1990s and we now find ourselves in a period of active practice that commenced in the late-1990s. 2. The point of emergence of international investment law as a legal subfield is a key reference point for estimating and explaining how the system now functions. It seems that the potential for further shaping and framing, that is without transforming the initially emerged legal constructions, is provided at the point of emergence and could be realised in the cause of the practice, but not fundamentally modified without the consent of contracting States. 3. Case law is an indication of how the initial potential of the system has been realised. Several elements need to be kept in mind when approaching the body of case law on foreign investor misconduct: (a) Consistency and set trends (b) Divergencies and the legitimacy thereof (c) Further possibilities for development using case law and whether the already undertaken developments do not exceed the limits for tribunals’ power to shape and frame emerging legal constructions.

2.6 Interim Conclusion

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4. The results gained by this research’s examination of the relevant case law in international investment law can be seen as having application in systemic law, i.e. as relevant to the system of international investment law as a whole. 5. It is possible to move beyond the confines of a relevant IIA to address the issue of foreign investor misconduct as remedies may seek to apply national law, other stand-alone international conventions as well as general international law. There are methodological possibilities that exist for the application of all of the above referred to sources of law in treaty-based international investment law. Thus, the relevant IIAs are not the only source of law to determine an outcome on a matter of foreign investor misconduct. Based on the results logic presented in this chapter, it seems legitimate to divide the present study on foreign investor misconduct into four steps with each being dealt with in a separate chapter: Chapter 3—presentation of the explicit and implicit potential of the normative constructions of international investment law to deal with foreign investor misconduct; Chapter 4—an investigation into whether and to what extent such potential has been realised in case law; Chapter 5—what is the significance of the already undertaken developments and which issues have been resolved as a result; Chapter 6—what appear to be the needed but as yet unrealised modifications to the system that could provide efficacious solutions to foreign investor miscon.

Chapter 3

The Explicit and Implicit (Inherent) Potential of International Investment Law to Address Foreign Investor Misconduct

3.1

Introduction

One of the core aims of this study is to demonstrate and analyse the developments undergone by international investment law when addressing foreign investor misconduct. As suggested in the previous chapter, from the outset international investment law has had great inherent potential1 for further development, including an ability to deal with foreign investor misconduct. Unlocking this potential has been realised over decades of practice, however, the potential of any system will always have predetermined limits. For international investment law, many of these limits were set by the initial impulses and perceptions of the drafters as well as the historical context at the time of the field’s emergence2 and this has determined not only explicit capacities but also implicit (inherent) ones. Under explicit capacities, we should understand legal provisions which were directly intended to regulate a particular matter, for instance, the matter of foreign investor misconduct. Under implicit (inherent) abilities of the system we should expect to find such legal constructions which were not directly intended to regulate a matter yet, but could be so interpreted and read within the broader context of applicable law and composition of the legal system. It is in this category of abilities that we find the application

Potential is defined as the “latent qualities and abilities that may be developed and lead to future success and usefulness”. Such a definition is provided by the Oxford Dictionaries online, see: https://en.oxforddictionaries.com/definition/potential. In view of the potential of international investment law one should thus read latent systemic and interpretational options that the system may demonstrate over time to tackle challenges, such as a confrontation with allegations of foreign investor misconduct. 2 It is argued that the motivation of the drafters was determined by the needs of the time. Thus, the established field emerged from the historical context which has become crystallised in normative constructions. 1

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Kozyakova, Foreign Investor Misconduct in International Investment Law, European Yearbook of International Economic Law 11, https://doi.org/10.1007/978-3-030-54855-1_3

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3 The Explicit and Implicit (Inherent) Potential of International Investment Law. . .

of general rules and principles of law belongs to the inherent ability of the system, for example, the principle of good faith. Differentiation between explicit and implicit abilities may seem a purely theoretical matter, however, in the later stage of this study drawing such a distinction allows better comprehension of how international investment law has developed to address foreign investor misconduct. This chapter serves to answer the question as to how international investment law was initially designed to deal with foreign investor misconduct. To deal signifies legal evaluation and legal consequences that the field of international investment law accords to foreign investor misconduct. The results to be gained from this chapter will serve as a point of reference to observe, trace and measure the subsequent developments that have occurred through case law regarding foreign investor misconduct. An examination of how the system of international investment law was originally intended to deal with foreign investor misconduct requires understanding the initial motivation for contracting States at the point of emergence of current international investment law. However, there are at least two circumstances that stand in the way of that end. First, the heterogeneous nature of current international investment law explains the absence of a centralised negotiation process. Second, one is hardpressed to find travaux préparatoires to concluded bilateral international investment agreements that date from the years around the emergence of modern international investment law.3 However, a viable work-around for this issue exists in that it is possible to largely ascertain the intentions of the parties by studying the general circumstances of the time, i.e. events and discussions that led to the emergence of a bilateral system of international investment law.4 This translates to the intellectual elaboration on current international investment law presented in the previous chapter, as well as the first concluded BITs and the drafts discussed at that time, viewed from the perspective of foreign investors, constitute the available materials to understand the motivations and initial intentions of the creators of international investment law. Furthermore, it is essential to bear in mind that current international investment law, as described in Chap. 2, has emerged from the collective experience gathered from general international law over time. Moreover, international investment law was never intended to exist as an autonomous legal regime, thus the practice of general international law with regard to the legal consequences of individuals’5

3 A difficult access to travaux préparatoires for IIAs is mentioned in the literature. See, for instance: Millls (2014), pp. 461–462. There is also an opinion that the BITs were not really negotiated but concluded on the basis of a Model text. 4 The relevant events were outlined in Chap. 2. See above. The method of reading the original intent behind legal norms by the tone of the time, i.e. surrounding circumstances and relevant statements of writers and judges, is also suggested by Wright (1945), p. 262. 5 Foreign investors are either physical or legal entities. However, both types could be considered under the notion of ‘individuals’, in contrast to other actors of international law, such as states, governmental and non-governmental organisations as well as groups of people. Thus, generalisation to a matter of the legal regulation of individuals’ misconduct seems to be appropriate here.

3.2 ‘Legal Consequences of Individuals’ Misconduct’: Meaning and Scope of the. . .

47

misconduct needs to be seen as a framework in which the relevant specificity of international investment law was integrated at the time of the field’s emergence. Thus, one needs to establish whether general international law at the relevant period of time provided for a general or default rule as to how to address individuals’ misconduct at the international level.6 Moreover, it also seems important to elaborate on the scope and meaning of the legal consequences for individuals’ misconduct as such. The above results in the following roadmap to arrive at the comprehensive conclusion on the issue set for Chap. 2. First, to reflect on the meaning and scope of the notion of legal consequences of individuals’ misconduct. Second, to investigate whether international law has formed any relevant practice to address individuals’ misconduct at the international level. The third and final stage is to answer whether international investment law at the outset was equipped with any explicit rules to be applied to address foreign investor misconduct and what has been the implicit (inherent) potential of the field to address this matter.

3.2 3.2.1

‘Legal Consequences of Individuals’ Misconduct’: Meaning and Scope of the Notion An Understanding of the Term ‘Legal Consequences’

The meaning of legal consequences is best explained by defining the two words ‘legal’ and ‘consequences’ individually. ‘Legal’ refers to something that is “established, required or permitted by law”7 while ‘consequences’ are “a result that follows as an effect of something that came before”.8 In conjunction and as used throughout this paper, ‘legal consequences’ means a result, which is established, required or permitted by law, that follows as an effect of something that came before. Applying this definition more specifically to the legal consequence of individuals’ behaviour one gets a result, which is established, required or permitted by law, that follows as an effect of individuals’ actions or omissions. There seem to be two essential elements that combine to result in legal consequences for individuals’ behaviour: an element of result, i.e. an active reaction9 to conduct

6

Should general international law come up with established experience as to how to deal with individuals’ (including foreign investors’) misconduct, such rules may apply in the absence of any further specific rules of international investment law. The mechanism thereof is described by Yasuaki (2017), p. 245. 7 Garner (2009), p. 1029. 8 Garner (2009), p. 369. 9 ‘Reaction’ is a synonym for ‘result’, see in the Thesaurus Dictionary online, http://www.thesaurus. com/browse/result.

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3 The Explicit and Implicit (Inherent) Potential of International Investment Law. . .

(actions or omissions) of a legal actor; and an element of legal regulation, i.e. the law has established, requires or permits the said reaction to the conduct. The reaction of the law to the conduct of legal actors may come in various forms, however, one can broadly divide them into one of two categories, namely being either positive or negative.10 A positive legal reaction is triggered when law foresees benefits or additional legal protection as a reaction to the conduct of individuals. As a matter of illustration, the satisfaction of the criteria set by law criteria for being an international investor is an example of conduct that triggers a positive legal reaction in the form of additional protection under international law. A negative legal reaction may occur in the form of restriction, limitations, elimination and loss of otherwise granted rights, legal status or procedural capacity and/or imposition of sanctions. In fact, through a negative reaction of law to the behaviour of individuals the line between acceptable and unacceptable conduct, i.e. misconduct, is established. The focus of this monograph lies in the further examination of negative legal reactions to foreign investor actions and omissions within the field of international investment law. The second element of legal consequences is legal regulation, i.e. the requirement that a legal reaction needs to be established, required or permitted by law. In this regard, one may observe that the act of regulation, as follows from the above definition, maybe both explicit and inherent. The terms ‘establish’ and ‘require’ indicate directly mentioning a legal reaction to individual behaviour, whereas the term ‘permit’ signifies a reaction that may follow from the general composition of the field of law as well as the application of general principles of law. Negative legal consequences are broader in scope than merely a matter of legal responsibility and an imposition of sanctions for illegal acts/omissions. Indeed, the law may also negatively react to actions and/or omissions of individuals by rescinding, restricting or eliminating otherwise granted rights, guarantees, or legal status in terms of both material and procedural law. Thus, any discussion of the negative legal consequences of foreign investor misconduct is broader in scope than the matter of foreign investors’ responsibility. Further to this, there seems to be a connection between the form of legal regulation (be it explicit or implicit) and the type of reaction that follows. For example, the imposition of sanctions or incurring another form of legal responsibility to compensate for the harm caused may only occur as a result of an explicit legal provision. If this were not the case it would conflict with the well-established rule of no sanctions without the law. Nevertheless, restrictions or the elimination of otherwise granted protection, both material and procedural, may simply follow on from a non-satisfaction of the criterion set by law. Such a form of legal reaction is thus inherently permitted by the imposition of the criterion to obtain the desired right or legal status and does not require additional elucidation or authorisation. Additionally, a negative legal reaction may also be caused by the application of generally

10 This terminology (‘negative response’ or ‘reaction’) is also used in literature. See, for instance: Yasuaki (2017), p. 244.

3.2 ‘Legal Consequences of Individuals’ Misconduct’: Meaning and Scope of the. . .

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applicable rules of law, for example, the principle of good faith or the maxim that no one can profit from their own wrongdoings. The application of such principles allows the triggering of negative legal consequences for abusive, dishonest and/or fraudulent actions and omissions that occurred to obtain the desired right, legal status, or procedural capacity. To briefly conclude this section then, the term ‘legal consequences of individuals’ conduct’ encompasses a broad range of possible types of reactions by the law to actions and/or omissions of individuals and goes beyond the matter of legal responsibility. In its turn, the imposition of negative legal consequences serves to draws a line between acceptable and unacceptable conduct within a given field of law.

3.2.2

Notion of ‘Individuals’ Misconduct’

This study examines the legal consequences of foreign investor misconduct in international investment law. This raises the question of what ‘misconduct’ actually is. The Oxford Dictionary defines the term of misconduct as “unacceptable or improper behaviour”.11 However, this definition is problematic in a legal context as ‘improper or unacceptable behaviour’ does not constitute a legal, normative category. The translation of the above terms into a legal category requires clarification of what improper and unacceptable mean from the law’s standpoint. As follows from its meaning, the term ‘improper’ contains the idea of being not in accord with a standard of some sort.12 Thus, from the legal point of view, improper behaviour consists of actions or omissions not in accordance with the law, i.e. conduct in violation of the law and/or in breach of contractual obligations. Such illegal behaviour may carry legal responsibilities and result in the imposition of legal sanctions. It appears that legal responsibility caused by the actions/omission of individuals is the highest form of negative legal consequences. However, as seen from the foregoing, legal responsibility is not the only negative legal consequence that can arise because of individuals’ conduct. Continuing along this same vein, it follows that the term ‘unacceptable’ applies to other possible forms of negative legal consequences for individuals’ behaviour that is distinct from any legal responsibilities incurred for illegal actions/omissions. From a legal point of view, the definition of ‘unacceptable’ encompasses the broad notion of the express or implicit disagreement of the law with the conduct of individuals.13 The consequences of such disagreement may become manifest in the form of

11 See the definition of ‘misconduct’ as provided by, for instance, the Oxford Living Dictionaries, https://en.oxforddictionaries.com/definition/misconduct. 12 See the definition of ‘improper’ as provided by the Merriam-Webster Dictionary, https://www. merriam-webster.com/dictionary/improper. 13 See the definition of ‘unacceptable’ as provided by the Merriam-Webster Dictionary, https:// www.merriam-webster.com/dictionary/unaccepted.

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elimination or restriction of otherwise granted rights, legal status or procedural capacity. As discussed above, any non-fulfilment of the criteria set by the law to achieve the desired material or procedural right or legal status may incur one or more of these negative legal consequences. Thus, it is not only actions/omissions that may be considered as illegal per se that may trigger negative legal consequences and be included in the scope of what can be labelled as misconduct. An illustrative example here is the requirement to obtain approval of an investment project by host State. Failure to obtain such approval is not a violation of the relevant BIT (it is neither prohibited by law nor required as a legal obligation), but an act that may under some IIAs be set as a condition to secure international protection for foreign investments. In case such approval by local authorities was not obtained by foreign investors (omission), it provides a legal basis to eliminate the international protection otherwise granted to foreign investments. Nevertheless, the elimination of such protection is not a matter of legal responsibility per se, but rather an issue that falls within the scope of the application of the legal norms. Another category of actions that may result in negative legal consequences comprises actions committed in violation of general legal principles, such as the principle of good faith or other doctrines rooted in the principle of good faith.14 It is well-established that all rights may only be exercised under a general obligation to act in accordance with good faith.15 This inevitably leads to the fact that dishonest, fraudulent or abusive actions/omissions committed in order to be granted a right or procedural status are by themselves grounds for the elimination of any thus obtained right or legal status. Furthermore, such dishonest, fraudulent or abusive actions/ omissions can be considered as being on a par with the non-fulfilment of the requirements set to obtain the desired right or legal status. Thus, in approaching the notion of misconduct in more detail, one needs to bear in mind that its scope is broader than merely illegal actions and omission. In this broad sense, misconduct encompasses all manner of actions and omissions that trigger negative legal consequences within a field of law. The term ‘misconduct’, as applied in this monograph, should be understood to include the following patterns of behaviour: – The non-fulfilment or violation of direct obligations required by law. This category may cause the issue of legal responsibility, subject to the direct legal provision thereof.

14 Estoppel, clean hands, the maxim that no one can benefit from their own wrongdoings are in their essential roots grounded on the general principle of good faith. See, for instance: Kolb (2017), p. 83. 15 See: Separate Opinion of Judge Lauterpacht, Certain Norwegian Loans (France v. Norway), Judgment, ICJ Reports 1957, 9, 34, 52; Nuclear Tests (Australia v. France), Judgment, ICJ Reports 1974, 253, 268, para. 46; Case Concerning the Land and Maritime Boundary between Cameroon and Nigeria (Cameroon v. Nigeria), Preliminary Objections Judgement, ICJ Reports 1998, 275, 296, para. 38.

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– The non-satisfaction of the criterion set by law. This category of omissions may result in the elimination or restriction of otherwise granted protection and procedural capacity. – Dishonest, fraudulent or abusive actions committed in order to be granted legal status, procedural and material rights. This category may be equated to the non-satisfaction of the criterion set for the achievement of such legal status, procedural and material rights and results in the elimination of the thus obtained rights. Such a broad application of the term ‘misconduct’ conforms with the settled but still insufficiently explained16 academic practice of considering the requirements for foreign investments, such as being in accordance with host State law and refraining from nationality shopping, as part of the topic of ‘illegal investments’ and foreign investor misconduct.17 The above-suggested range of possible negative legal consequences potentially triggered by various kinds of misconduct serve as additional guiding factors when considering whether general international law and more specifically, international investment law, trigger any negative legal consequences for individuals’ actions and omissions and thus whether individual misconduct plays any role in those legal systems or remains immaterial for the outcome.

3.3 3.3.1

Individuals’ Misconduct from the Perspective of General International Law The Placement of Individuals Within General International Law

Matters concerning individuals’ in this context involve issues such as citizenship, diplomatic protection, interstate trade, minimum standards of treatment, or alien treatment and have figured prominently within international law since its outset. Nevertheless, individuals’ interests have been viewed as part of the international law agenda only through the intermediary of their home States. Norms of international law were understood as being interstate in nature that did not give rise to either direct individual rights or obligations.18 Furthermore, States represented individuals’

There is no sufficiently profound elaboration on the terms ‘misconduct’ or ‘illegal investments’ in international investment law. This monograph constitutes one of the very first attempts to give the notion a theoretical basis. 17 See, for instance: Newcombe (2011), p. 190. 18 See: Mavrommatis Palestine Concessions, PCIJ Series A, No. 2 (1924) 12; Jurisdiction of the Court of Danzig (Pecuniary Claims of Danzig Railway Officials Who Have Passed into the Polish Service, against the Polish Railways Administration), Advisory Opinion, PCIJ Series B, No. 15 (1928) 17. 16

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injury at the international level where such injuries were viewed as equal to their own.19 Thus, individuals’ interests could be and were the subject of international disputes, even though such claims at the international level were always addressed by home States. Thus, States and individuals have not traditionally been accorded the same status under international law. Individuals in their private capacity20 may engage in crimes that affect the common interest of the international community or the interest of foreign States. For example, Marek St. Korowicz cites “piracy, carriage of contraband, breach of blockade, abuse of neutral rights and duties, damaging of submarine cables, slave trade, white slavery, espionage, various acts of illegitimate warfare, etc”.21 Even so, international law does not directly deal with such matters but rather redirects such issues in two ways. First, international law recognises the general application of host State law to foreigners on their territory.22 Second, under international law, States are obliged to prevent acts of private persons in their territory which affect the interests of other States.23 Thus, individuals’ misconduct at the international level is seen as a matter for national law or where States are seen to act as a proxy on behalf of individuals’ whose misconduct has had international repercussions. From the traditional perspective, the core issue of international law disputes is whether actions which allegedly affected foreign individuals were in accordance with or in violation of international rules and standards. As explained by ICJ Judge Alvarez in his Dissenting Opinion in the Anglo-Iranian Oil Co. case “the only objections which can be raised to such a claim are those which are based upon international law or which result from the nature of the right which the claimant [State] relied on”.24 Indeed, the matter of injuries to foreign individuals is regulated by the rules on the international responsibility of States for internationally wrongful acts. These rules, as codified in the Articles on Responsibility of States for Internationally Wrongful Acts, do not consider individual misconduct as a legally relevant matter that may, for example, form a basis to preclude the wrongfulness of otherwise illegal behaviour or eliminate a home State’s right to exercise diplomatic protection for its nationals allegedly involved in misconduct.25 Thus, any objection based on a violation committed by individuals is all but impossible to accept and treat as legally relevant at the international level. 19

Panevezys-Saldutiskis Railway, PCIJ Series A/B No. 76 (1939) 16. International law differentiates between individuals as State organs and representatives of States (heads of State, diplomats) and individuals as private persons. See: Yasuaki (2017), p. 263. 21 Korowicz (1956), p. 545. 22 See: Beckett (1925), p. 45. 23 Korowicz (1956), p. 545. 24 Dissenting Opinion of Judge Alvarez, Anglo-Iranian Oil Co. (United Kingdom v. Iran), Judgment, ICJ Reports 1952, 93, 124, 129. 25 See: ILC Articles on Responsibility of States for Internationally Wrongful Acts, Yearbook of the International Law Commission (2001), Vol. II (2), 31. See also: Sixth Report on Diplomatic Protection, UN Doc. A/CN.4/546, 11 August 2004, in: Yearbook of the International Law Commission (2005), Vol. II, 1. 20

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3.3.2

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Existence of Direct Obligations by Individuals

Negative legal consequences for the non-fulfilment of direct obligations largely presupposes the existence of direct obligations for individuals under international law, a matter that has always been a sensitive issue in the field.26 As such, international law has never seen any obstacles in according individuals direct legal obligations or establishing direct legal responsibility for the non-fulfilment thereof.27 Nevertheless, international law’s classical approach has been that States are viewed as the leading, dominant actors at the international level and the only full legal subjects in the field. States, fearful of losing their exclusive dominance in this regard, have for centuries been reluctant to accord any direct status at the international level to individuals, being instead content to keep them as objects rather than subjects. As mentioned in Chap. 2, after centuries of intransigence this issue has undergone considerable transformation in the twentieth and early twenty-first centuries. An illustrative example of this can be seen in the context of international criminal law where the Rome Statute foresees the direct legal responsibility of individuals at the international level.28 On the one hand, one could argue that this represents a rather insignificant and isolated exception. However, on the other hand, the fact there are further discussions and movement in that direction in other fields of international law, including international investment law, represents a noteworthy crack in the hitherto absolute dominance of States.29 The developments in this regard in connection with international investment law will be discussed further on in this monograph, however, from the position of classical international law, individuals still do not have direct obligations and thus cannot be held responsible or be subject to any direct negative legal consequences at the international level for their actions or omissions.

26 An outline of scholars supporting the idea of international personality of individuals is provided by: Korowicz (1956), p. 534. 27 See: Korowicz (1956), p. 561. “It is a well-established principle of international law that States may, by common agreement, recognise the international responsibility of individuals not only in their duties and responsibilities, but also in their capacity for international procedural actions. The fact that the right of individuals to proceed before international bodies is almost non-existent today in international law practice does not exclude the creation of this right at any moment by agreement of States”; See also: Higgins (2009a), pp. 73, 75, 76; Wright (1945), p. 262; Peters (2016), p. 60. 28 Article 25 (1), Article 27, Rome Statute of the International Criminal Court, 17 July 1998, 2187 UNTS 90, 105. 29 Dolzer and Schreuer (2012), p. 26.

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3.3.3

3 The Explicit and Implicit (Inherent) Potential of International Investment Law. . .

Legal Consequences for Non-Fulfilment of Requirements Determined by Individuals’ Conduct

The scope of the application of international law rules which address matters of individuals’ concerns indirectly sets requirements on individuals’ conduct. For example, customary rules on diplomatic protection require exhaustion of local remedies by an allegedly injured national. Another well-established criterion of international law that impacts on individuals is their nationality. Most international law rules which address matters of individuals’ interest function on a reciprocal basis and cover only the nationals of the contracting States and where these States, with just a few recognised exceptions, may protect only their own nationals.30 International law has dealt extensively with both these matters. This has contributed to both case law and doctrine being elaborated on, for example, to clearly establish an effective link between a national and a home State, limits and exceptions to a rule on local remedies, the scope of the rule,31 and so forth. The results of such elaborations were further codified by the Draft Articles on Diplomatic Protection adopted by the International Law Commission in 2006. The rules on nationality and the exhaustion of local remedies demonstrate that these criteria are not mere formalities, but require active, sufficient and honest (free from abuse and fraud) actions on the part of individuals,32 a pattern of behaviour that is not always adhered to and where misconduct can creep in. This misconduct can be potentially relevant at the international level if, for example, individuals formally acquire nationality by fraud or corruption or local remedies are not entirely exhausted. Thus, one can conclude that international law sets criteria on individuals’ conduct and requires certain actions and omissions on the part of individuals as a prerequisite for inclusion in some capacity in legally relevant matters at the international level. As such, individuals’ conduct in satisfying the set requirements has a direct bearing on their home State’s ability to make an international claim on these individuals’ behalf. Any established misconduct that results in the non-satisfaction of criteria set by the law results in a loss of States’ standing to protect their nationals.33 The negative legal consequences of misconduct only impact indirectly on the individuals involved, namely through the intermediary of the home State. The legal reason for this is once again an absence of any direct rights and obligations of individuals under traditional international law.

30

Amerasinghe (2008), p. 91; McDougal et al. (1974), p. 908. See Article 15, ILC Draft Articles on Diplomatic Protection, Yearbook on the International Law Commission (2006), Vol. II (2), 26; Brownlie (2008), p. 402. 32 Amerasinghe (2008), p. 93. 33 Theoretically an individual involved does not even lose the right to be protected by their own state, given their complete and sufficient satisfaction of the said requirements. The home state could resubmit a claim following, for example, the complete exhaustion of local remedies by the individuals involved. 31

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Thus, individuals need to possess direct procedural or material rights under international law to be directly affected by the non-satisfaction of criteria set by law. Essentially, one cannot lose rights or a legal status which one does not actually have.

3.3.4

Abusive and Fraudulent Actions by Individuals in Acquiring a Legal Status, Procedural or Material Rights

3.3.4.1

Good Faith in International Law

International law has dealt extensively with individuals who have engaged in abusive and fraudulent actions. This has led to the development of tools and mechanisms to accord a negative legal reaction to such actions and omissions that were committed with a lack of good faith.34 The principle of good faith manifests itself in international law in many ways35 and plays a role in a variety of areas.36 One of the most prominent manifestations of this principle is in international treaty law where it has a key role in the interpretation37 and negotiation38 of international treaties as well as in the performance of treaty obligations.39 It also plays a role in the satisfaction of innumerable requirements set by law that must be met in good faith.40 In this context, however, the principle of good faith has little normative independence. As stated by the ICJ the principle of good faith “is not in itself a source of obligation where none would otherwise exist”.41 Thus, the principle is read into legal norms to make their scope

34

Cheng (1953), p. 105; O’Connor (1991), pp. 81–102; Higgins (2009), pp. 389–390; Schill and Bray (2015), p. 89; Kolb (2017), p. 255. See also: North Sea Continental Shelf Cases (Federal Republic of Germany v. Denmark, Federal Republic of Germany v. The Netherlands), Judgment, ICJ Reports 1969, 3, 47, para. 85. 35 A profound systematisation of the ways the principle of good faith appears in international law can be found in: Kolb (2017), pp. 3–13. 36 Kolb (2017), pp. 62, 67, 73, 119, 183, 195, 206, 218, 240. 37 Article 31 (1), VCLT. 38 Fisheries Jurisdiction Case (United Kingdom of Great Britain and Northern Ireland v. Iceland), Judgment, ICJ Reports 1974, 3, 34, para. 78. 39 The North Atlantic Coast Fisheries Case (Great Britain v. United States), Arbitral Award, 7 September 1910, Reports of International Arbitral Awards, Vol. XI, 167, 188; Nuclear Tests (Australia v. France), Judgement, I.C.J. Reports 1974, 253, 268, para. 46. See also: Cheng (1953), pp. 114–115. 40 Requirements satisfied but in violation of the principle of good faith would not be considered as satisfied. See Amerasinghe (2008), p. 93. 41 Case Concerning Border and Transborder Armed Actions (Nicaragua v. Honduras), Jurisdiction and Admissibility, Judgement, ICJ Reports 1988, 69, 105, para. 94; Case Concerning the Land and

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and meaning both clearer and more comprehensive.42 Nevertheless, even when being used in such a capacity good faith does not form an independent legal basis for legal responsibility or other negative legal consequences. The second manifestation of good faith in international law is that it must be adhered to in the rightful exercise of rights (both material and procedural).43 Such an application of the good faith principle is based on the theory of the abuse of rights and of procedure, which has penetrated many areas of international law.44 In a nutshell, it ensures that no actor at the international level can try to exercise more rights than it legally possesses. Further to this, the purpose to which the realisation of the right is pursuant should correspond to the intended aim for which the right was given.45 Another aspect thereof is that the claimed rights need to be real, i.e. honestly possessed and obtained free of any abusive actions. In this sense, the principle of good faith serves to protect from the inappropriate effect of reliance on claimed rights “in some ways that the legal order disapproves [of]”.46 It is still unclear whether the principle of good faith, when used in its capacity to guard against any abuse of claimed rights, represents an independent legal basis for legal responsibility or other negative legal consequences.47 The matter is also difficult to further elaborate on without reference to case law, a task which will be done later in this monograph. At this point, however, it seems appropriate to draw a distinction between a violation of the good faith principle in the satisfaction of the criteria set by law and an abuse in the realisation of claimed rights.

3.3.4.2

Distinction Between Satisfaction of a Criterion Not in Good Faith and an Abuse in the Realisation of Claimed Rights

Good faith’s role in the satisfaction of a criterion set by law is perhaps best thought of as an inherent precondition for the satisfaction of the set criterion. Thus, the principle of good faith is read into criterion without being explicitly mentioned. For example, the possession of a particular nationality presupposes the absence of any fraud or manipulations in obtaining it.48 Should a nationality be acquired in bad

Maritime Boundary between Cameroon and Nigeria (Cameroon v. Nigeria), Preliminary Objections, Judgement, ICJ. Reports 1998, 275, 297, para. 39. 42 For instance, the notion of “fair and equitable treatment” is clarified by the reliance on the principle of good faith; an obligation to cooperate and negotiate under international law can be viewed in light of the principle. Nevertheless, the reliance on the principle of good faith does not form a separate legal obligation. 43 Cheng (1953), pp. 121–123. 44 Cheng (1953), p. 121; Kolb (2017), p. 218. 45 Kolb (2017), p. 135. 46 Kolb (2017), pp. 133, 134, 136. 47 A noteworthy presentation of the academic discussion on the point can be found in Kolb (2017), pp. 134–135. 48 Amerasinghe (2008), p. 93: “Fraudulently acquired nationality will not be recognised”.

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faith, the nationality criterion would be deemed to be non-fulfilled ab initio, which would have the effect of preclusion of standing for any claims for which the relevant nationality is a set requirement. The principle of good faith may also play a role in the acceptance of pieces of evidence that the said requirement is or is not met.49 As such, it is only the non-satisfaction of the set criterion that would be a direct cause for any relevant negative legal consequences under such a scenario and where the principle of good faith played a supporting role. Contrary to this, an abuse of claimed rights seems to be an additional ground which is not necessarily covered by the scope of the legal norms that address the legal criteria to establish material and procedural rights. Thus, the abuse of claimed rights focuses more on the means of obtainment and probable intention rather than the objective existence of a particular element such as a relevant nationality. Used in this capacity, good faith may serve as a stand-alone reason for the application of negative legal consequences.

3.3.4.3

Application of the Good Faith Principle to Individuals

The principle of good faith is a general principle of law that applies equally to all subjects regulated by international law. Thus, there is no differentiation of the application of the general principle of good faith to States, international organisations or other subjects of international law. However, this does not directly address the question of whether individuals are bound to the principle of good faith and leads us back to the above-discussed status of individuals under international law. Assuming the established criterion for applying good faith persists, if individuals are afforded the status of subjects of law at the international level, the principle of good faith would apply to them to the same extent as it does to States. As previously mentioned, the traditional perspective of international law is that individuals hold neither direct rights nor obligations under international law. Nevertheless, individuals’ conduct in the realisation of requirements set by law has an impact on a State’s ability to intercede on behalf of an injured individual. This means that, for example, abuses in obtaining a nationality or illicit attempts to claim the exhaustion of local remedies would preclude a home State’s right to exercise diplomatic protection on behalf of its injured individual. This is, in a fashion, a variation of the above-described non-satisfaction of the criteria set by law and imposed on individuals’ conduct under international law and in that same vein, the principle of good faith is presupposed to have been upheld in the realisation of those criteria. Nevertheless, individuals that are not subjects of law at the international level and cannot then be subjected to the good faith principle as it applies to the realisation of their rights and/or obligations. Similarly, individuals’ conduct under

49

Brownlie (2008), p. 410. See also: Reisman and Skinner (2014), p. 7; Dissenting Opinion of Judge Schwebel, Military and Paramilitary Activities in and Against Nicaragua (Nicaragua v. United States of America), ICJ Reports 1986, 259, 277, para. 27.

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this traditional approach cannot result in individuals being held culpable of an abuse of process or rights under international law. In conclusion, the above passages have demonstrated that the matter of a negative legal reaction by international law to individuals’ misconduct is a systemic question which predominantly depends on the status of individuals before the law, i.e. are they subjects or objects of legal relationships. This status is then the key determinant in deciding whether or not they can have direct legal obligations or requirements as set by law imposed upon them. Under the traditional approach to international investment law, individuals were not treated as subjects of a legal relationship and any negative legal reactions to their behaviour were triggered indirectly by the non-satisfaction or inappropriate satisfaction of requirements set by international law. The most frequent requirements set by international law for home State intervention used to be nationality and exhaustion of local remedies. The non-satisfaction of these criteria, or satisfaction of these criteria in bad faith, precluded home States’ from interceding on an injured individual’s behalf at the international level. Outside of this particular arrangement, general international law has not extensively dealt with individuals’ misconduct as will be demonstrated by case law examples cited below.

3.3.5

Case Law Examples

To illustrate the foregoing two high-profile examples exist in the Diallo and LaGrand cases. In the Diallo case, Guinea initiated proceedings against the Democratic Republic of Congo (DRC) in which Guinea was exercising diplomatic protection on behalf of its citizen Mr Diallo and his companies, whose rights were allegedly violated by the DRC. As a preliminary objection, the DRC inter alia argued that Mr Diallo was engaged in illegal activity and thus, based on the doctrine of ‘clean hands’, the claims of Guinea to protect its citizen’s interests should be deemed inadmissible.50 By claiming this the DRC argued that a State is entitled to exercise diplomatic protection only on behalf of individuals with ‘clean hands’,51 however, in its ruling the ICJ judgement did not touch upon this argument.52 Apparently, the Court did not consider this argument to be pertinent and it was satisfied by the oral statements provided by Guinea that ‘the Congo itself recognises that clean hands are not a condition of the admissibility of complaints, which, after 50 Affaire Ahmadou Sadio Diallo (République de Guinée c. République Démocratique du Congo), Exceptions Préliminaires Présentées par la République Démocratique du Congo, Volume I (1er Octobre 2002), p. 99, para. 2.99, https://www.icj-cij.org/files/case-related/103/13500.pdf. 51 Affaire Ahmadou Sadio Diallo (République de Guinée c. République Démocratique du Congo), Exceptions Préliminaires Présentées par la République Démocratique du Congo, Volume I (1er Octobre 2002), p. 100, para. 2.100, https://www.icj-cij.org/files/case-related/103/13500.pdf. 52 See: Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo), Preliminary Objections, Judgement, ICJ Reports 2007, I.C.J. Reports 2007, 582.

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some vicissitudes, the International Law Commission was unanimous in firmly recognising in 2005’.53 The above quote from the judgement refers to the discussions in the International Law Commission on the applicability of the clean hands doctrine, in particular, when it is being applied in cases of diplomatic protection.54 The DRC supported the conclusion of the Special Rapporteur that individuals having ‘clean hands’ does not form a precondition for a State’s right to exercise diplomatic protection on behalf of a national.55 In general, one could observe that the conclusion reached by the Special Rapporteur should be seen more as an indication of the absence of sufficient practice to support the application of the clean hands doctrine in cases of diplomatic protection, rather than a result of a profound legal analysis of the matter.56 In LaGrand, the LaGrand (both German nationals) brothers committed robbery and murder in the USA and were accused of violating consular notification rights granted to foreign nationals under an international convention. Interestingly, the criminal offence committed by the individuals involved was not even presented by the United States as a possible reason to void the standing of Germany to protect the individuals’ rights under the Vienna Convention on Consular Relations.57 Instead, the United States argued that Germany imposed on the USA standards which it does not apply in its own practice.58 This case is not strictly speaking an appropriate example since there was no connection between individual misconduct and an alleged breach of international law by the USA.59 However, the case and the arguments pleaded demonstrate the position of individuals as objects of protection under international law. As have been seen, international law does not provide for an established default rule on dealing with individuals’ misconduct. Nevertheless, specific sub-fields of international law, such as international investment law, may have dealt differently with that issue, which again depends on whether foreign investors were assigned a different status compared to that traditionally assigned under international law. Thus, the next step involves examining the role of individuals and the potential of the

53

Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo), Verbatim Record, 28 November 2006 at 10 am, p. 46, para. 18, https://www.icj-cij.org/ files/case-related/103/103-20061128-ORA-01-00-BI.pdf. 54 See: Report of the International Law Commission to the Fifty-Seventh Session, UN. Doc. A/60/ 10 (2005), p. 112, para. 231. 55 Report of the International Law Commission to the Fifty-Seventh Session, UN. Doc. A/60/10 (2005), p. 112, para. 230. 56 See: Wendel (2007), p. 159. 57 See: Report of the International Law Commission to the Fifty-Seventh Session, UN. Doc. A/60/ 10 (2005), p. 111, para. 229. 58 LaGrand (Germany v. United States), Counter-Memorial by the United States (27 March 2000), p. 25, paras. 92–94, https://www.icj-cij.org/files/case-related/104/8554.pdf; LaGrand (Germany v. United States), Verbatim Record, 14 November 2000 at 10 am, p. 47, paras. 3.43–3.53, https:// www.icj-cij.org/files/case-related/104/104-20001114-ORA-01-00-BI.pdf. 59 Amerasinghe (2008), p. 220.

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system of international investment law to directly respond to foreign investor misconduct.

3.4 3.4.1

Negative Legal Consequences of Foreign Investor Misconduct Under International Investment Law Position of Foreign Investors as Intended by the Drafters of IIAs

The question that needs addressing in this section is whether, at the time of its emergence, the drafters of international investment law intended to make individuals, i.e. foreign investors, subjects of law at the international level and thus deliberately grant them legal personality under international law. More precisely, this section will examine whether one can speak of a premeditated move in the field of international law to change the position of individuals away from the one they were assigned by the more traditional approach discussed above. Thus, here we need to determine the initial motivation and rationale of these drafters when they were laying the foundations of current international investment law. As is often the case, ascertaining the initial intentions of legal drafters can be a difficult task so many years after the fact. However, one positive factor in this regard is that international law regularly gives considerable prominence to the motivation of drafters in the interpretation of international treaties.60 The Vienna Convention on the Law of Treaties provides that the terms of international treaties need to be understood “in light of [their] object and purpose”61 and that the “preparatory work of the treaty and the circumstances of its conclusion”62 are deemed to be a supplementary source of understanding for treaty interpretation. In a similar vein, arbitral tribunals also refer to a relevant IIAs’ object and purpose as a benchmark for interpretations.63 It can be said that understanding the motivation behind something goes a long way to explaining the results that are now evident. In the absence of a driving motivation to elaborate and develop new elements, such as a new approach to dealing with the legal consequences of individuals’ behaviour, it is difficult to explain the sudden advent of meaningful and well-thought-out advances in this regard given how long and how rigidly established practice in international law has been adhered to. Thus, an understanding of the drafters’ motivation is important in comprehending the legal constructions in modern international investment law

60

See: Villiger (2009), p. 427; Corten and Klein (2006), p.1309. Article 31, VCLT. 62 Article 32, VCLT. 63 See: Continental Casualty Company v. The Argentine Republic, ICSID Case No. ARB/03/9, Decision on Jurisdiction, 22 February 2006, para. 80; Tokios Tokelès v. Ukraine, Case No. ARB/02/ 18, Decision on Jurisdiction, 29 April 2004, para. 77. 61

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(and their potential) as well as their subsequent development. As previously outlined in Chap. 2, the drafts discussed, the first concluded BITs and the overall historical context are seen as useful in completing the task set here. From the 1940s–1960s, when current international investment law was crystallising, the field of international law was undergoing a “transitory period”64 towards the gradual acceptance of the international personality of individuals.65 Literature and judicial statements of the time indicated a contrast between “new international law”66 when compared to the previously dominant traditional approach to the position of individuals, as has been dealt with already in this text. However, the acceptance of individuals as subjects of law at the international level was not a purely altruistic move by States. Arguably it was not even a wellelaborated decision but rather one dictated by the pressing needs of the moment. The American political scientist Quincy Wright, in the middle of the twentieth century, observed that the willingness to accept individuals as subjects of international law is always connected to a lack of a stable balance of power, a weakened economy and other turbulence of this kind.67 Today, however, individuals are starting to be more directly present at the international level by virtue of legal instruments concluded in fields such as human rights, international criminal law and international investment law, but the sources of motivation differ to those cited by Quincy Wright.68 International investment law was emerging in a situation in which the protection of foreign capital due to various political circumstances was a high priority on the international agenda. Among the most prominent of these circumstances were issues involving decolonisation and the lack of economic development in various parts of the world on the one hand, and investors in developed countries searching for new markets on the other hand. As such, the need for enhanced investor protection was an idea that sprang from what was at the time referred to as the ‘developed world’. Developing countries were pushing other ideas, such as sovereignty over natural resources, “the right to development” and a global redistribution of resources, that were reflected in the New Economic Order issued by the UN General Assembly.69 As seen in Chap. 2, the conflict of interest between the developed and the developing did not result in any serious attempts to balance the positions with regard to legal constructions. Instead, developing countries concentrated on their activities, whereas developed countries kept on working on the text of international investment

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Korowicz (1956), p. 537. See: Wright (1945), p. 265; Korowicz (1956), p. 537. 66 Dissenting Opinion of Judge Alvarez Anglo-Iranian Oil Co. (United Kingdom v. Iran), ICJ Reports 1952, 124, 130. 67 Wright (1945), pp. 257, 264. 68 The meaning of ‘motivation’ as defined in the Cambridge Dictionary Online, https://dictionary. cambridge.org/dictionary/english/motivation. 69 See, for instance: Gilman (2015), http://humanityjournal.org/wp-content/uploads/2015/03/HUM6.1-final-text-GILMAN.pdf. 65

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agreements and pushing for their conclusion.70 In the end, as described in this chapter, the high demand for economic input on the one hand and a desire to provide strong legal protection for private investors on the other resulted in the creation of a network of bilateral international investment agreements. Another contributing factor to this may be found in that a bespoke bilateral deal seemed to offer developing countries a quicker solution and better choice than looking to and waiting for a multi-lateral arrangement.71 This bilateral nature of current international investment law has become one of the few features, which stand for the interests of developing countries. Perhaps unsurprisingly though, despite being a one-to-one negotiation the content of BITs was predominantly dictated by the ‘developed world’.72 Under such circumstances, the normative legal constructions of international investment law, as is almost universally reported, were drafted in a fashion that was rather one-sided, i.e. legally unbalanced. However, this lack of legal balance in international investment law that emerged at the time has to be seen in a broader context. Indeed, the overall balance in a deal between the developed and developing world seems not to lie solely in legally balanced provisions (truly addressing the interests of both parties) but has to take into account the broader political and economic benefits (for the developing countries) when weighed against the seeming dominance of strong legal protection for foreign investors (in the interest of developed countries). Thus, developing States acquiesced because they were sufficiently motivated to attract foreign capital,73 and developed countries’ capital flowed as they attained the goal of creating an investment environment with a stable and enforceable legal framework. The idea to grant foreign investors a direct procedural capacity at the international level formed an important element in the overall motivation to provide the most comprehensive protection possible for private investors. In pushing this idea, the

A short overview of the events leading to the actual conclusion of the first BITs is outlined in Chap. 2. 71 It could be said that developing countries viewed the conclusion of a bilateral agreement as a sort of exclusive privilege, which placed them in a better position compared to other developing countries, for example. In a contract, the conclusion of a multilateral investment agreement, as was suggested at that time, would not have provided them with such exclusivity. See: Salacuse (1990), p. 661. 72 Dictating comprises elaboration of the content, creation of model drafts to be used for negotiations, and lack of much individualisation in the concluded BITs. See also: Salacuse (1990), p. 662. Moreover, literature reports on the evidence of capital-importing countries coordinating their views and positions. See, John (2018), p. 207. 73 Increasing their attractiveness to foreign investors was probably one of the key motivations for developing countries to enter into bilateral investment agreements. There is no proven direct connection between the conclusion of IIAs and an increase in investment flow. However, States wishing to liberalise their markets oftentimes engage in concluding a large number of bilateral investment agreements. 70

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pivotal element use to be the depolarisation of disputes74 and this, alongside Quincy’s vision to grant foreign investors direct procedural capacity, was to a large extent political. Indeed, the numerous examples of political tension escalating into military adventurism to protect assets and investment in foreign territory have demonstrated the highly dangerous nature of such situations.75 Traditional forms of diplomatic protection were threatening the preservation of peace and security which was so highly prioritised in the aftermath of World War II. Thus, providing direct procedural capacity to foreign investors may be seen as an interstate arrangement, without the clearly identifiable intention to directly place individuals as subjects of law at the international level. This may explain the absence of both well-thought-out considerations of the legal consequences of such a move and any in-depth discussions on the legal position of foreign investors at the time of the emergence of international investment law. Indeed, the idea of providing direct procedural capacity for foreign investors was elaborated to the extent that individuals should be allowed to sue at the international level to strengthen the level of legal protection accorded to them and to avoid any further political escalations on matters concerning the treatment of foreign investments abroad. The procedural elements involved in this process were “borrowed” from international commercial arbitration, which may be explained as a quick-fix solution that did not require much elaboration. Consequently, the absence of a clear intention to consider the legal position of foreign investors also left the matter of legal consequences for foreign investor misconduct off the agenda.76 As such, in the above-described constellation, it should have fallen to developing countries as the host States to consider the possible dangers of foreign investment projects being undertaken in their territories and suggest the creation of legal mechanisms to address issues that would inevitably arise. However, this matter was not seriously addressed in the suggested drafts and relevant discussions or the text of the first BITs. Thus, we can conclude that the issue of how to deal with foreign investor misconduct did not occupy a prominent place in the minds of those whose vision of the future resulted in the establishment of current international investment law. Consequently, it is unlikely that any specific legal constructions that were intended to directly address this matter will be found. This does not mean that research in this 74

Republic of Ecuador v. United States of America, PCA Case No. 2012-5, Expect Opinion with Respect to Jurisdiction of Professor W. Michael Reisman, 24 April 2012, para. 24; Roberts (2014) 1, 1, 21. 75 Here, one may reflect on the reaction of the world community to, for example, the large-scale nationalisation of enterprises and assets in the Russian Socialist Federated Soviet Republic following the Revolution in 1917 and in Mexico in 1917 following the Agrarian Reform; furthermore, the nationalisation of the Anglo-Iranian Oil Company in 1951 by Iran and the nationalisation of the Universal Suez Maritime Canal by Egypt in 1956. 76 To understand the mindset of the period one can read the records of discussions that occurred in different forums at the time of the emergence of international investment law. See, for example: Report of the Working Party of the International Committee on Nationalization on Judicial Aspects of Nationalization and Foreign Property, in International Law Association Report of the FortyNinth Conference hold in Hamburg in 1960 (1961), 175, 184–185.

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area must proceed blindly into a void as the legal provisions that emerged, their nature and content, can be analysed in-depth and enable profound conclusions to be made.

3.4.2

Examination of the Legal Provisions of International Investment Law

3.4.2.1

Material Provisions

Analysis of the very first BIT, which was concluded between Germany and Pakistan and signed in 1959, reveals little difference between this treaty and, for example, FCN treaties still concluded at the time or other typical international instruments dating from the same period. The Preamble of the Germany-Pakistan BIT provides for a desire to “intensify economic co-operation among the two States” and an intention “to create favourable conditions for investments by nationals and companies of either State on the territory of [the] other States”. Additionally, the articles of the first BIT were formulated in a typical manner as mutual interstate obligations: “Neither Party shall subject to discriminatory treatment ”77 or “Either Party shall in respect of all investments guarantee ”.78 Foreign investors appear in the wording as objects for protection, rather than as active participants in the legal relationship regulated by the treaty. As pointed out above, this treaty also did not contain any investor-state arbitration clauses and granted exclusive procedural capacity to the two States to settle any disputes arising with regard to the treaty.79 This formulation that created interstate obligations and addressed foreign investors as objects of protection would prove to remain typical for later BITs as well. Even recently concluded treaties have a similarly patterned structure, for example, the model US BIT of 2012 provides for a desire “to promote greater economic cooperation” between the Contracting States80 and use such terms as “Each Party shall accord to investors of the other Party ”81 and “Neither Party may ”.82 This is borne out in the literature which routinely refers to foreign investors as “the principal beneficiaries of the investment protection agreement, but they are not a contracting party to the agreement”.83 77 Article 2, Treaty for Promotion and Protection of Investments (with Protocol and notes) between Pakistan and Federal Republic of Germany, 25 November 1959, 457 UNTS 24. [Germany-Pakistan BIT 1959]. 78 Article 4, Germany-Pakistan BIT 1959. 79 Article 11, Germany-Pakistan BIT 1959. 80 The preamble of the 2012 US Model Bilateral Investment Treaty, https://ustr.gov/sites/default/ files/BIT%20text%20for%20ACIEP%20Meeting.pdf. [2012 US Model BIT]. 81 Articles 3, 4, 5, 2012 US Model BIT. 82 Article 6, 8, 2012 US Model BIT. 83 De Brabandere (2014), p. 58.

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By way of contrast, even a casual consideration of international human rights instruments reveals that they are more direct towards individuals, even with regard to rights and guarantees which are not considered to form a part of the natural rights of individuals. For example, the International Covenant on Civil and Political Rights provides that “everyone shall be free to leave any country, including his own”,84 “all persons shall be equal before the courts”,85 and so forth. If desiring to transpose this into international investment law, alternative formulations may have been, for example, ‘on the territory of another Contracting State foreign investors shall be treated ’, ‘foreign investors are accorded ’. In this way, the obligations would remain interstate but would be more straightforwardly directed towards foreign investors rather than exclusively towards the contracting States. One clear benefit produced here is that such formulations could be more easily seen as ‘direct’ and not ‘derivative’ in nature.86 In a similar vein, the current IIAs in force do not create direct obligations for foreign investors, rather the substantive provisions only provide for broad guarantees to international investments. Here, it could be pointed out that some authors prefer to view the substantive provisions of international investment law as granting international rights to foreign investors.87 The lack of obligations for investors is common for the current system of international investment law and it supports the traditional vision of guarantees normally agreed upon by sovereign States in connection with foreign investments. Another way is to refer to the material provisions in BITs is as “standards of investment protection”.88 As to creating direct obligations for foreign investors, so far there have only been some attempts to integrate these into the frameworks of various BITs where the most serious such attempt can probably be seen in the preparation of the model Indian BIT.89 Even so, the formulation creating direct obligations for foreign investors was included in the approved draft in a more limited scope than initially discussed.90 Thus, an initial review suggests that in the absence of determined motivation international investment law could not evolve the traditional approach to the legal position of individuals, at least with regard to material guarantees. Largely in line with the above-described traditional approach of international law, the material provisions of BITs remain predominantly interstate in nature and continue to address foreign investors as objects of protection. This seems to indicate that the drafters of

84 Article 12, International Covenant on Civil and Political Rights, 16 December 1966, 999 UNTS 171. [ICCPR]. 85 Article 14, ICCPR. 86 The terms ‘direct’ and ‘derivative’ are used in the literature to consider the nature of international investment law. See de Brabandere (2014), p. 60. 87 See, for example, de Brabandere (2014), p. 57. 88 Schreuer (2008), p. 4. 89 See: Law Commission of India, Analysis of the 2015 Draft Model Indian Bilateral Investment Treaty, August 2015, pp. 25–36, http://lawcommissionofindia.nic.in/reports/Report260.pdf. 90 See: Shetty and Weeramantry (2016), p. 191.

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BITs still do not find it desirable or foresee the need to create direct obligations for foreign investors in such agreements.

3.4.2.2

Procedural Provisions

The great evolutionary leap made by international investment law was to grant a direct procedural capacity to individuals, i.e. foreign investors, at the international level. Indeed, as indicated in the third chapter, this change should more precisely be seen as an extension of the practice to conclude treaties that contain direct investorarbitration clauses as well as subsequent active reliance on this procedural option by foreign investors. Almost all IIAs concluded after 1968 contain a direct investorstate arbitration clause, which provides the possibility for foreign investors to sue a sovereign State on the international level. The relevant parts of such clauses are typically worded in the following manner: (1) Disputes concerning investments between a Contracting State and an investor of the other Contracting State should as far as possible be settled amicably between the parties to the dispute. . (2) If the dispute cannot be settled within six months of the date on which it was raised by one of the parties to the dispute, it shall, at the request of the investor of the other Contracting State, be submitted to arbitration. .91 The exact phrasing may differ to a greater or lesser degree from one IIA to another, nevertheless, the text above demonstrates that investor-state arbitration clauses92 grant a direct right to investors to commence international adjudication of a dispute independent of intercession by their home State. This legal context differs substantively when compared to traditional diplomatic protection. Additionally, and in contrast to the above-discussed formulations of the material provisions, foreign investors are referred to as ‘one of the parties’ to the dispute. To put it succinctly, the inclusion of a direct right to initiate arbitration on an alleged violation of guarantees stipulated in an IIAs without approval from either the home or host State makes foreign investors a subject of the legal relationship in matters of international dispute settlement. Consequently, the direct procedural capacity of foreign investors represents a direct right granted to individuals at the international level.93

91

Article 10, German Model BIT (2008), reprinted in: Dolzen and Schreuer (2012), p. 367. See, for example, Article 7, France Model BIT (2006), https://www.italaw.com/documents/ ModelTreatyFrance2006.pdf; Article IX of the 2007 Colombian Model BIT, https://www.italaw. com/documents/inv_model_bit_colombia.pdf; Article 27,Canadian Model BIT (2004), https:// www.italaw.com/documents/Canadian2004-FIPA-modelen.pdf; Article 9, Indian Model BIT (2003), https://www.italaw.com/sites/default/files/archive/ita1026.pdf. 93 In quite a recent analysis conducted by Professor Eric de Brabandere, he concluded that: “In the essence, the right of foreign investors to initiate arbitral proceeding is clearly a right of the investors, and it would be wrong to assert that the foreign investor is exercising a right to arbitrate on behalf of 92

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What can be discerned from the above is that the existence of a direct international right is an important element when it comes to the legal consequences for individuals’ misconduct at the international level. Indeed, the exercise of a right could be eliminated or restricted based on an individual’s conduct, such as the non-fulfilment of set requirements or reliance on the granted right in violation of the good faith principle. Moreover, the fact that individual investors may be directly involved in arbitration seeking the enforcement of the standards of investment protection agreed between the contracting States to protect without the intermediary of their home State has implications for the material provisions of IIAs as well. As already discussed, being able to make use of the norms of international law is usually subject to meeting a relevant set of requirements. Under the traditional scenario involving foreign investors, it is the home State that loses its procedural capacity to act on behalf of the allegedly affected individual in cases where this individual does not meet the requirements provided by international law. In cases where direct access has been granted to individuals to international adjudication, the non-satisfaction of requirements to avail themselves of international standards of protection would have a direct bearing on foreign investors. Even so, such constellations do not entail the question of legal responsibility but are covered by the scope of legal consequences of individuals’ misconduct, as previously elaborated. Thus, the inherent potential of the international investment law system to react to foreign investor misconduct lies in the requirements which are determined in both the material and procedural guarantees as well as the existence of foreign investors having direct procedural capacity. The latter feature represents the most significant and ground-breaking distinction between current international investment law and traditional international law. This conclusion necessitates a more detailed examination of the requirements determined by the material and procedural international standards of investment protection and where the focus needs to be on the requirements that presuppose actions or omissions on the part of foreign investors.

3.5 3.5.1

Specific Requirements Set for International Investment Protection Overview of Requirements on the Application of International Investment Protection

A requirement is defined as something that “is compulsory; a necessary condition”.94 Law in general, and international law in particular, sets conditions upon its the home State. The obligations in the treaties are interstate obligations, but they create rights for foreign investors”. See: de Brabandere (2014), p. 63. 94 See in the Oxford Dictionaries Online, https://en.oxforddictionaries.com/definition/requirement.

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application. Such conditions are normally dealt with under the notion of the scope of the application where the scope of legal provisions concerns such areas as personal, material, temporal requirements that need to be met for an effective application of the said legal rules. International investment law, as previously observed, only provides a specific set of regulations that is limited in its coverage. The precise scope of the application of international investment law will be examined further. To start with, States, as a rule, are free to admit or not admit foreigners, including foreign investors, into their territory. Admission provides the freedom to enter but comes with a cost as it imposes restrictions, limitations and conditions. Theoretically, only the norms of a jus cogens nature may restrict the sovereign freedom to provide any regulations in that regard. For example, a norm restricting the entrance of foreign investments owned or controlled by members of a particular race would probably conflict with a peremptory principle of racial non-discrimination. Under Article 53 of the Vienna Convention on the Law of Treaties, as well as under customary international law,95 such a norm would be considered void. Beyond such circumstances, States may regulate the issues of foreigners’ admission on their territory according to their individual sovereign needs and interests. Nothing compared to the right of asylum for foreign capital or inherent freedom of the international transfer of financial resources exists in international law. Depending on the prevalent political mindset and economic situation, national investment policies may be liberal, welcoming and provide open access for foreign investments, or such policies may be restrictive, prohibiting the entry of foreign capital, limiting market access for a particular sector or setting conditions for entry and establishment of enterprises having foreign origins. Rules on admission are not necessarily based on reciprocity and States could and, in practice do, impose asymmetrical conditions for foreign investments. An example may be seen in the old US BITs, many of which contain a regulation pertaining to the guaranteed treatment of foreign investments that “reserves [to the Contracting States] the right to introduce exceptions relating to one of the sectors or matters listed in the Annex of [the] treaty”.96 The annexes to such treaties normally list exceptions and their clarifications which differ for each of the contracting States.97 Admission is a pivotal element for the application of international investment law as international regulation of foreign investments only covers accepted investments. These accepted investments are accorded at least the customary minimum standard of treatment. Normally IIAs do not cover the pre-admission protection of foreign investments and the pre-admission stage is left entirely to the discretion of the contracting States where it is regulated by their national law. This approach is 95

On the customary nature of Article 53 of the VCLT see: Linderfalk (2011), p. 362. Article II (3) (a), Bilateral Investment Treaty between the United States of America and the Democratic Republic of Congo (1984), http://investmentpolicyhub.unctad.org/Download/ TreatyFile/828 [US-Congo BIT 1984]; see also: Article II (3) (a), Bilateral Investment Treaty between the United States of America and the Arab Republic of Egypt (1986), http:// investmentpolicyhub.unctad.org/Download/TreatyFile/1123. 97 See the Annex of the US-Congo BIT 1984. 96

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important to understand the requirement placed on investments to be ‘in accordance with host State law’, which will be addressed later in this study. Although having said that, some States, such as the USA and Canada, do place pre-admission and the establishment of foreign investments within the scope of their model BITs. Such an extension of the scope of IIAs’ application also appears in the wording of the relevant agreements. For example, the Canadian Model Foreign Investment Promotion and Protection Agreement (FIPA) defines a foreign investor as “a national or enterprise that seeks to make, is making or has made an investment”.98 Thus, the overall coverage of IIAs encompasses international guarantees provided to investments and investors included in the scope of the treaty application. Logically, investments and investors not included in the scope of application do not enjoy the protection granted under international law.99 Similarly, the non-fulfilment of requirements or bad faith in meeting the requirements set on the application of the IIA would result in the non-application of the treaty-based standards of foreign investment protection. The scope of any IIA’s application is based on two main notions. The first notion concerns foreign investments (ratione materiae). International investment law is much more specific than international protection of all types of property100 as investments are granted protection but not individuals’ belongings. The second notion involves investors (ratione personae) as only investors rather than all foreign nationals in a host State’s territory are accorded the agreed standards of treatment. Furthermore, BITs’ coverage extends only to investments made after the relevant treaty entered into force (ratione temporis). Granting procedural capacity to foreign investors also only occurs within the scope of the agreement of the contracting States and is of a contractual nature (ratione voluntatis). Only upon satisfaction of the set conditions does the protection granted in the IIA become effective and available. In view of the legal consequences that may arise from foreign investor misconduct, the criterion imposed upon accepted investment by foreign investors plays a key role. The main question is thus whether there are any criteria set upon the investments and investors in view of their possible illegality or inappropriateness.

98 Article 1, Canadian Model FIPA, Canadian Model FIPA, reprinted in: C. Brown (ed) (2013), pp. 62, 69. 99 See also: Salacuse (2015), p. 176. 100 See also: Dolzer and Schreuer (2012), p. 60. See also: Sprankling (2014), p. 491.

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3.5.2

Requirements on Investment

3.5.2.1

Broad Asset-Based Definition

Current international investment law is known for adopting a rather broad definition of what it considers an investment.101 The majority of IIAs, both bilateral and multilateral,102 contain a definition that includes ‘every kind of asset’ or ‘all assets’. The definition is usually followed by a non-exclusive list of examples such as movable and immovable property, shares, bonds, claims to money, and so forth. Such a definition is object-based as it is plainly focused on what is invested (‘assets’) rather than on investment-related activity (“a rather complex operation, composed of various interrelated transactions”103). This approach is clearly related to the aboveidentified motivation of the drafters to provide for the most comprehensive protection for foreign capital and to “ensure that the protection of the agreement is not limited to foreign direct investment but can also protect indirect investment by way of shareholdings or debt interest in a company and, in addition, any risk-bearing activity undertaken by the investor which can be diminished in economic values by reasons of State intervention in the enjoyment and functioning of that activity”.104 As such, the definition of what constitutes a foreign investment in IIAs is necessarily far from specific. Nevertheless, a careful reading reveals that the definition of investment associates an invested ‘asset’ with a required activity and some IIAs even determine that the asset must be ‘owned or control by an investor of another Contracting State’. This requires the existence of a certain legal and factual connection between a foreign investment and a national or a company from another contracting State. Often IIAs use their definition of investment to prescribe that an investment needs to be ‘in accordance with laws and regulations of another Contracting State’. Furthermore, one can find examples of more elaborate and qualified definitions, such as the US-Chile FTA which defines investments as “every asset that an investor owns and controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or assumption of

101

For example, Salacuse (2015), p. 177. Also indicated by case law: CMS Gas Transmission Company v. The Republic of Argentine, ICSID Case No. ARB/01/8, Decision on Jurisdiction, 17 July 2003, para. 63; Lanco International Inc. v. The Argentine Republic, ICSID Case No. ARB/97/6, Preliminary Decision on Jurisdiction, 8 December 1998, para. 10; Fedax N.V. v. The Republic of Venezuela, ICSID Case No. ARB/96/3, Decision of the Tribunal on Objections to Jurisdiction, 11 July 1997, paras. 34, 35. 102 For example, Article 1(6) ECT. 103 Ceskoslovenska Obchodni Banka, A.S. v. The Slovak Republic, ICSID Case No. ARB/97/4, Decision of the Tribunal on Objections to Jurisdiction, 24 May 1999, para. 72. 104 Schlemmer (2008), p. 56.

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risk”.105 Such a definition more clearly demonstrates a connection to the economic aspects of investment. The Austrian Model BIT of 2008 provides that “investments are understood to have specific characteristics such as the commitment of capital or other resources, or the expectation of gain or profit, or the assumption of risk”.106 These more qualified definitions could be seen as a reaction to the elaboration on criteria of what constitutes an investment made in the Salini tribunal in 2001 and a response to other broad development witnessed across the board in international investment law over time. Generally, those IIAs concluded in the years just after international investment law emerged were more limited in scope by their wording, however, even among these early IIAs one can find examples that broke the mould of the time. For example, the Ukraine—Denmark BIT of 1992 defines investment as “any kind of asset connected with economic activities acquired for the purpose of establishing lasting economic relationships. . .”.107 This definition thus explicitly links the notion of investment with the requirement of a “lasting economic relationship”.108 The USA—Congo BIT of 1990 requires that claims to money and claims to performance be of “economic value and associated with an investment”.109 A similar example, but one that goes even further, are the limitations on claims to money that are imposed by NAFTA.110 Nevertheless, these few examples of exceptions to the standard of the time are exactly that, a few examples that should be considered as exceptional.111 The terms ‘own’, ‘control’, ‘invest’, ‘connected with economic activities’, be ‘in accordance with law’, and so forth are repeatedly used because they carry with them meaning and consequences. Based on customary international law rules of treaty interpretation reflected in the Vienna Convention on the Law of Treaties, these terms ought to be interpreted “in good faith, in accordance with the original meaning to be given to the terms in their context, and in light of its objects and purpose”.112 These 105

Article 10.27, Free Trade Agreement between the Government of the United States of America and the Government of the Republic of Chile (2004), https://ustr.gov/sites/default/files/uploads/ agreements/fta/chile/asset_upload_file1_4004.pdf. 106 Article 1, Austrian Model BIT (2008), reprinted in: Brown (ed) (2013), pp. 20, 22. 107 Article 1 (1), Agreement Concerning the Promotion and Reciprocal Protection of Investments concluded between the Kingdom of Denmark and the Ukraine (1992), http://investmentpolicyhub. unctad.org/Download/TreatyFile/1034. 108 See: Fedax N.V. v. The Republic of Venezuela, ICSID Case No. ARB/96/3, Decision of the Tribunal on Objections to Jurisdiction, 11 July 1997, para. 34. 109 Article 1 (iii), Treaty between the Government of the United States of America and the Government of the People’s Republic of the Congo Concerning the Reciprocal Encouragement and Protection of Investment (1990), http://investmentpolicyhub.unctad.org/Download/TreatyFile/ 820. 110 See: Article 1139 NAFTA. 111 Fedax N.V. v. The Republic of Venezuela, supra note 276, para. 34. 112 Article 31 (1) VCLT. The rules of treaty interpretation as stipulated in the VCLT are followed by arbitral tribunals; see, for example: Romak S.A. v. Republic of Uzbekistan, UNCITRAL, PCA Case No. AA280, Award, 26 November 2009, para. 169; Parkerings – Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections,

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terms are all connected in some fashion to actions/omissions to make it possible (implicit potential) to consider foreign investors’ conduct and appropriately deal with improper and illegal conduct. Further to this, some examples will be provided as to how the above terms may be used in the adjudication of investor-state disputes. It should be noted at this point that a restatement of case law on the attitude towards foreign investors’ conduct will be provided in Chap. 4. The elaboration below should be read more as demonstrating in an illustrative way the potential of these terms to play a role in matters concerning foreign investor misconduct.

3.5.2.2 3.5.2.2.1

Specific Elaboration on the Definition of ‘Investment’ Own or Control

The terms ‘own’ and ‘control’ have as standard and broad definitions “to have a good legal title, to hold as property”;113 and “to order, limit, or rule something, or someone’s actions or behaviour” respectively.114 Whereas the term ‘own’ may be seen as somewhat passive, simply requiring the existence of a legal title, the term ‘control’ is more connected with activity on the part of foreign investors. Thus, the terms, as defined above, encompass the legal and factual connection between an invested asset and a person or a company acting in the capacity of a foreign investor. The phrase ‘owned or controlled’ is normally followed by the possessive preposition “by” and a reference to a foreign investor: “owned or controlled by an investor of another Contracting State”. The terms ‘own’ and ‘control’ in IIAs are connected by the preposition ‘or’, which requires only one form of connection between an investment and a foreign investor. The illegality of ownership and deficiency of control may be an issue that could lead to the disqualification of an investment. Arbitral practice has already dealt with many cases involving falsification of documents and the lack of proper ownership certificates. For example, in Cementownia “Nowa Huta” S.A. v. Republic of Turkey the respondent successfully contested the ownership of an alleged investment due to “the Claimant’s inability to produce the original share certificates”.115 The tribunal in Standard Chartered Bank v. Tanzania took into consideration the fact that the claimant did not actively control its investment,116 which led to its conclusion that: 1 June 2012, para. 275; Kilic Insaat Ithalat Ihracat Sanayi ve Ticaret Anonim Sirketi v. Turkmenistan, ICSID Case No. ARB/10/1, Award, 2 July 2013, paras. 5.2.3–5.2.6. 113 Bryan (2009), p. 996. 114 Cambridge Dictionary, https://dictionary.cambridge.org/dictionary/english/control. 115 Cementownia “Nowa Huta” S.A. v. Republic of Turkey, ICSID Case No. ARB(AF)/06/2, Award, 17 September 2009, para. 109. 116 Standard Chartered Bank v. The United Republic of Tanzania, ICSID Case No. ARB/10/12, Award, 2 November 2012, paras. 231–232. [Standard Chartered Bank v. The United Republic of Tanzania].

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Some activity of investing is needed, which implicates the claimant’s control over the Investment or an action of transferring something of value (money, know-how, contracts, or expertise) from one treaty-country to the other.117

In its analysis, the tribunal also referred to the requirement of possession, expressed by the phrase an “investment by the investors”, which is used in the preamble as well as in the substantive provisions of the relevant UK-Tanzania BIT.118 To provide a better understanding of this case, the relevant key facts can be summarised as follows: a claimant in the case was a shareholder in a company registered in a third country that had taken over a syndicated loan made to another company in the territory of the host State.119 The case, therefore, dealt with the indirect chain of ownership and its sufficiency to constitute a protected investment. There are also other approaches to the concept of ‘control’ which do not stress the necessity of activity. In this regard, it is a common position in case law to consider that having a “majority shareholding and ownership” in a company is sufficient to assume control over it.120 By way of conclusion to this section then, the reference to ownership and control may allow for the examination of the legality and reality of both the legal and factual connection between an invested object and a national or a company of another contracting State. This may then, in turn, open an avenue for addressing foreign investors’ conduct and misconduct, although at this point, the realisation of such potential remains solely in the hands of arbitrators.

3.5.2.2.2

Invest

‘To invest’ in its broadest sense refers to “the placing of capital or laying out of money in a way intended to secure income and profit from its employment”.121 Arbitrator Mitrović in Mytilineos v. Serbia and Montenegro argued that by using the term ‘invest’ in the BIT “the Contracting Parties wished to guarantee only for those assets that are genuinely invested in the territory”.122 Following the same line of reasoning, the tribunal in Caratube v. Kazakhstan stated that by using the word

117

Standard Chartered Bank v. The United Republic of Tanzania, para. 230. Standard Chartered Bank v. The United Republic of Tanzania, paras. 214–232. 119 Standard Chartered Bank v. The United Republic of Tanzania, para. 196. 120 Continental Casualty Company v. The Argentine Republic, ICSID Case No. ARB/03/9, Decision on Jurisdiction, 22 February 2006, para. 81; Camuzzi International S.A. v. The Republic of Argentina, ICSID Case No. ARB/03/2, Decision on Objections to Jurisdiction, 11 May 2005, para. 33; Autopista Concessionada de Venezuela, C.A. v. Bolivian Republic of Venezuela, ICSID Case No. ARB/00/5, Decision on Jurisdiction, 27 September 2001, para. 121. 121 Bryan (2009), p. 741. 122 Mytilineos Holdings SA v. Serbia, UNCITRAL, Dissenting Opinion from the Arbitral Award on Jurisdiction of Professor Dr. Dobrosav Mitrović, 6 September 2006, para. 7.2. 118

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‘invest’ in the BIT, the “existence of a contribution over a period of time”123 is required. Similarly to ‘own or control’ the verb ‘invest’ is mostly followed by the possessive preposition ‘by’, which emphasises a required connection between a contribution of money or other resources and an investor from another contracting State. In connection with the act of investing one could readily identify various potentially critical issues associated with foreign investors’ conduct, for example, the origin of the invested capital or the actual amount of investment. For example, is protection merited under an IIA for investments made by recourse to financial or other resources of the home State or another third State not a party to the IIA, or is protection extended for a transaction for a nominal price? Due to the lack of precise regulations in IIAs, these questions are also left to the discretion of arbitral tribunals. A survey of arbitral practice allows us to identify two contrasting approaches taken by tribunals dealing with such issues. The first approach adheres strictly to the formal requirements and reads the definition of investment as not allowing the imposition of otherwise absent criteria, such as ‘origin of capital’ requirements.124 For example, in Arif v. Moldova the tribunal concluded: Whether investments are made from imported capital, from profits made locally, from payments received locally or from loans raised locally makes no difference to the degree of protection enjoyed.125

The second approach attempts to integrate the referred to points into the analysis. The tribunal in F-W Oil Interests stated that the existence of a protected investment should not be analysed, “in a narrow technical way, but rather in the context of the intention animating the BIT and in light of its terms”,126 which is a line of reasoning that has been followed by a number of other tribunals. When it comes to the issue of nominal price, the tribunal in Caratube v. Kazakhstan, for example, pointed out the following: Indeed, payment of only a nominal price and lack of any other contribution by the purported investor must be seen as an indication that the investment was not an economic

123

Caratube International Oil Company LLP v. Kazakhstan, ICSID Case No. ARB/08/12, Award, 5 June 2012, para. 360. 124 Mobil Corporation, Venezuela Holdings, B.V., Mobil Cerro Negro Holding, Ltd., Mobil Venezolana de Petroleos Holdings, Inc., Mobil Cerro Negro, Ltd., and Mobil Venezolana de Petroleos v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Jurisdiction, 10 June 2010, para. 198; CME Czech Republic B.V. v. Czech Republic, UNTITRAL, Partial Award, 13 September 2001, para. 418; Tokios Tokelès v. Ukraine, Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004, para. 77; Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000, para. 126. 125 Mr. Franck Charles Arif v. Republic Moldova, ICSID Case No. ARB/11/23, Award, 8 April 2013, para. 383. 126 F-W Oil Interests, Inc. v. The Republic of Trinidad & Tobago, ICSID Case No. ARB/01/14, Award, 3 March 2006, para. 240.

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arrangement, is not covered by the term ‘investment’ as used in the BIT, and thus is an arrangement not protected by the BIT.127

On the other hand, the tribunal in Société Générale also dealt with the payment of a nominal price but did not consider it to be of a deceitful nature: The purchase of property for a nominal price is a normal kind of transaction the world over when there are other interests and risks entailed in the business.128

However seemingly inconsistent these two approaches appear, both tribunals do stress the importance of ‘other interests’ and ‘other contributions’ that need to be taken into account in addition to the payment of a nominal price and in so doing they extend the boundaries of the broadly accepted definition of investment. The examples provided above demonstrate that even in absence of any precisely elaborated legal tools to fully address the issues of foreign investor misconduct, a thoughtful reference to the requirements set for the application of IIAs allows tribunals to tap into the inherent potential of the existing legal system to deal with many of the matters that come before them.

3.5.2.2.3

Contribution to Development

Initially, one of the main reasons to encourage foreign investments, at least from the perspective of the predominantly capital-importing States, was the investments’ contribution to development. Investments are also viewed as a means to build a long-lasting legal and factual relationship with a host State and those aims are often expressed in the preambles of international investment treaties.129 Thus, it would be logical to expect international protection only to extend to those investments that indeed contribute in some fashion to the development of the host State. In view of the understanding of the term ‘development’, it should be pointed out that at the time international investment law emerged, the word was largely synonymous with economic advancement. Nowadays, however, concerns about human rights, labour

127

Caratube International Oil Company LLP v. The Republic of Kazakhstan, ICSID Case No. ARB/08/12, Award, 5 June 2012, para. 435. 128 Société Générale v. Dominican Republic, UNCITRAL, LCIA Case No. UN 7927, Award on Preliminary Objections to Jurisdiction, 19 September 2008, para. 36. 129 See, for example: Preamble, Accord entre le Gouvernement de la République Française et le Gouvernement de la République Dominicaine sur l’Encouragement et la Protection Réciproques des Investissements, 14 January 1999, https://investmentpolicyhub.unctad.org/Download/ TreatyFile/1043; Preamble; Treaty between Federal Republic of Germany and Sierra Leone concerning the Encouragement and Reciprocal Protection of Investments, 8 April 1965, https:// investmentpolicyhub.unctad.org/Download/TreatyFile/1411; Preamble, Treaty between the Federal Republic of Germany and the Republic of Singapore Concerning the Promotion and Reciprocal Protection of Investments, 3 October 1973, https://investmentpolicyhub.unctad.org/Download/ TreatyFile/3599; Preamble, Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China, 15 Mai 1986, https://investmentpolicyhub.unctad.org/Download/TreatyFile/793.

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standards, sustainability and environmental protection are all aspects that have found a place in the meaning of the word ‘development’.130 Indeed, in view of the inherent potential of a treaty to evolve and thus address challenges as they arise, the insertion of such aspects into existing terms and understanding ensures the ability of the system to appropriately adapt over time. Whilst this may be considered as a general truth, specific questions may still arise, such as was a requirement for a developmental contribution from investments inserted into IIAs? In general, IIAs do not refer to a developmental contribution of some sort for a host State in their definitions of foreign investments. A few examples, such as the above-mentioned Denmark—Ukraine BIT, define investments as “any kind of asset connected with economic activities acquired for the purpose of establishing a lasting economic relationship. . .”.131 However, such examples are very exceptional within current international investment law and even this specific formulation does not directly refer to any contribution to development. Could a requirement to contribute to development in the host State be read into the existent definition of investment? This is an especially relevant question considering the ubiquitous mentioning of investments in the preambles of IIAs. The major problem reading any additional requirements into the definition of ‘investment’, including those of a contribution to development, is the already broadly defined notion of investment provided in the vast majority of IIAs as well as the object and purpose of IIAs “to provide broad protection to investors and their investments in the territory of either party”.132 The preamble of an international treaty is seen as a general framework and as such does not suffice to justify quite specific additional legal requirements, obligations, and so forth.133 In this vein, having no definition of ‘investment’ at all would probably leave the most space for creativity and application of economic narratives in this area. A good example is the amorphous use of the term ‘investment’ as applied in Article 25 of the ICSID Convention where the drafters of the Convention deliberately left the definition of ‘investment’ unaddressed. Later this resulted in the extensive and still ongoing discussion in case law. The most prominent elaboration on ‘investment’ as required by Article 25 of the ICSID Convention was provided by the Salini case where the tribunal suggested a “contribution to the economic development” of the host State as a necessary element of the notion of ‘investment’.134 Here, however, one needs to be clear that the discussion 130

See, for example, Bunn (2012), pp. 2, 13, 83, 174. Article 1(1), Agreement between the Government of Ukraine and the Government of the Kingdom of Denmark concerning the Promotion and Reciprocal Protection of Investments, 23 October 1992, https://investmentpolicyhub.unctad.org/Download/TreatyFile/1034. 132 Tokios Tokelès v. Ukraine, Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004, para. 77. 133 Société Générale in respect of DR Energy Holdings Limited and Empresa Distribuidora de Electricidad del Este, S.A. v. The Dominican Republic, LCIA Case No. UN 7927, Award on Preliminary Objections to Jurisdiction, 19 September 2008, paras. 31, 32. 134 Salini Costruttori S.P.A. and Italstrade S.P.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, 31 July 2001, para. 52. 131

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does not involve the definition of investment as provided in IIAs. The jurisdiction of the ICSID opens a second layer of jurisdictional requirements to be satisfied. Thus, the disputed criterion concerning ‘economic contribution’ as discussed in case law only refers to the undefined notion of ‘investment’ as stipulated in Article 25 of the ICSID Convention. Under the traditional definition incorporated into IIAs, a requirement to contribute to a host State’s development cannot readily be made to play a relevant role. Should States want to modify the standard understanding of ‘investment’, it would be possible to base the application of international investment protection upon the satisfaction of a requirement to contribute to a host State’s development. This is an interesting possibility that will be addressed in greater detail in Chap. 6 of this monograph.

3.5.2.2.4

The Requirement of Legality

The ‘in accordance with host State law’ clause appears in IIAs in two capacities. First, this reference is made in IIA provisions which contain a definition of investment. A typical example of this can be found in the Colombia Model BIT of 2007 which includes the following: Investment means every kind of economic assets that have been invested by investors of a Contracting Party in the territory of the other Contracting Parties in accordance with the law of the latter .135

This variation of the clause is viewed as a legal requirement imposed on an asset for it to fall under the protection of the IIA. The Salini tribunal elaborated on a similar clause in the Italy—Morocco BIT where it noted that such a clause: . . .seeks to prevent the Bilateral Treaty from protecting investments that should not be protected, particularly because they would be illegal136

The second capacity in which the ‘in accordance with host State law’ clause appears is in provisions which generally define the scope and coverage of IIAs’ applications. The German Model BIT of 2008 provides the following in Article 2 “Promotion and Protection of Investment”:

135

Article 1 (2.1), Colombia Model BIT (2007), https://www.italaw.com/documents/inv_model_ bit_colombia.pdf; See also: Article 1 (2), Agreement Between the Government of the Federal Democratic Republic of Ethiopia and the Government of the Russian Federation on the Promotion and Reciprocal Protection of Investments, 10 February 2000, https://investmentpolicyhub.unctad. org/Download/TreatyFile/1173; Article 1 (2), Agreement between the Kingdom of Spain and the Republic of Albania of the Promotion and Reciprocal Protection of Investments, 6 June 2003, https://investmentpolicyhub.unctad.org/Download/TreatyFile/32. 136 Salini Costruttori S.P.A. and Italstrade S.P.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, 31 July 2001, para. 46.

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3 The Explicit and Implicit (Inherent) Potential of International Investment Law. . . Each Contracting Party shall in its territory promote as far as possible investments by investors of other Contracting States and admit such investments in accordance with its legislation.137

In this variation, the ‘in accordance with host State law’ clause is associated with the admission of foreign investors and is seen as a limitation of the scope of the treaty’s application.138 As discussed above, States may set requirements on the admission of foreign capital into their territory and thus conformity with host State law is the set requirement for the application of guarantees provided in IIAs. The object and purpose of provisions containing such a clause is understood to “deny the Treaty’s benefits to investments that transgress the host State’s laws at the time the investment was made”.139 A similar understanding of the clause is also provided by other arbitral tribunals and the majority of academic assessments that have been conducted.140 However, the actual placement of the clause within an agreement does not seem to play any crucial role in the outcome.141 Both uses may be seen to eliminate the protection otherwise granted to foreign investments in any cases involving an established nonconformity with host State law.142 Of all the above-mentioned textual possibilities of IIAs relevant for matters of foreign investors misconduct, ‘in accordance with host State law’ seems to have the greatest potential. Nevertheless, irrespective of its form and placement, the clause lacks specification as to its precise scope and function.143 For example, it is unclear how an arbitral tribunal should establish that a violation of a host State law has occurred? The question also arises as to whether such clauses refer to the application of national law in its entirety or only, for example, to national rules and regulations regarding foreign investments? Also unclear is whether these clauses cover all the violations of host State law at any time of investment activity? The simple wording of the clause does not allow one to answer these questions. However, one can take into account that from the above-mentioned micro-perspective on international investment law, there is also a difference in the formulation of such clauses. For example, some IIAs refer to “accordance with legislation”,144 137

Article 2, German Model BIT (2008), https://www.italaw.com/sites/default/files/archive/ ita1025.pdf. 138 Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplun v. Plurinational State of Bolivia, ICSID Case No. ARB/06/02, Decision on Jurisdiction, 27 September 2012, para. 255. 139 SGS Société Générale de Surveillance S.A. v. The Republic of Paraguay, ICSID Case No. ARB/07/29, Decision of Jurisdiction, 12 February 2010, para. 123. 140 Polkinghorne et al. (2001), p. 1. 141 Dolzer and Schreuer (2012), p. 93. 142 See examples of cases law in the chapter below. 143 See also: Hepburn (2014), pp. 532–533. 144 For example, Article 2 (1), Agreement between the Government of the Republic of France and the Government of the United Mexican States on the Reciprocal Promotion and Protection of Investments, 12 November 1998, https://investmentpolicyhub.unctad.org/Download/TreatyFile/ 1253.

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others also in “accordance with laws”145 or compliance with “laws and regulations”146 of the host State. As discussed in Chap. 2, these differences may play a role in tribunals’ findings and should, in general, be taken into account. Thus, the wording of the majority of IIAs provides considerable latitude for the adjudicating tribunal to apply its discretion. Such a superficial mentioning of legal requirements raises doubts about the initial intent of the drafters, a concern shared by Professor Douglas who convincingly argues that: “It must be extremely doubtful that the Contracting States sought to regulate the multifarious issues arising out of the plea of illegality by this simple reference to their own laws in this context.”147 Professor Douglas also suggests the following understanding of the clause: “The reference to the host State’s laws is a relatively standard provision defining the types of assets that may qualify as an investment under the treaty is surely nothing more and nothing less than the recognition of the lex situs rule for the acquisition of the tangible and intangible property rights listed in the provision. The foreign national must have acquired an asset that is recognised by the host State’s laws in a manner that is effective under such laws.”148 All in all, the criticism was directed against the reading of the clause as “opening the door to jurisdictional challenges based upon pleas of illegality relating to underlying investment”.149 The later presentation of case law in Chap. 4 will amply demonstrate the method employed by arbitral tribunals in approaching the scope and meaning of the clause as well as the role of the clause in addressing issues arising out of foreign investor misconduct.

3.5.2.2.5

Legal and Factual Connection to a Foreign National or Entity

As mentioned above, most definitions of ‘investment’ envisaged the asset to be ‘invested’, ‘owned’, ‘made’, or ‘controlled’ by foreign investors. This presupposes 145

For example, Article 1 (1), Agreement between the Government of the Republic of Croatia and the Government of the Argentine Republic of the Promotion and Reciprocal Protection of Investments, 2 December 1994, https://investmentpolicyhub.unctad.org/Download/TreatyFile/81; Article 1 (1), Agreement between the Government of the Republic of Finland and the Government of the Republic of Argentine on the Promotion and Reciprocal Protection of Investments, https:// investmentpolicyhub.unctad.org/Download/TreatyFile/90. 146 For example, Article 2 (1), Treaty between the Federal Republic of Germany and the Islamic Republic of Afghanistan concerning the Encouragement and Reciprocal Protection of Investments, 20 April 2005, https://investmentpolicyhub.unctad.org/Download/TreatyFile/1; Article 1(2), Agreement between the Kingdom of Spain and the Republic of Albania on the Promotion and Reciprocal Protection of Investments, 5 June 2003, https://investmentpolicyhub.unctad.org/Down load/TreatyFile/32; Article 2 (1), Agreement between the Republic of Croatia and the Kingdom of Spain on the Promotion and Reciprocal Protection of Investments, 21 July 1997, https:// investmentpolicyhub.unctad.org/Download/TreatyFile/889. 147 Douglas (2014), p. 172. 148 Douglas (2014), p. 173. 149 Douglas (2014), p. 172.

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the existence of a legal and factual link between an asset and a foreign national or a company of the contracting State. A national or company of the contracting party needs to have established a legal and factual connection to the invested asset. Such a connection is imposed by the requirements on investments to be ‘made’, ‘owned’, or ‘invested’ by150 a foreign investor of another contracting State. The general meaning of ‘by’ as elaborated on by the Tokios Tokelės tribunal encompasses “indicating agency, means, or cause”.151 Thus, an investment needs to be ‘caused’ by a national or company of another contracting State. In other words, there should be a connection between the money or other valuable asset invested in a host State and a person or company of a contracting State. The degree of causality seems to be differentiated by the precise wording of the relevant IIA. In this respect, the terms as discussed in the requirements on foreign investments, such as ‘own’, ‘control’, ‘invest’, or ‘make’, seem to be decisive. The necessity to establish such a connection opens up the option to consider the sufficiency and reality of a link between an asset and a national or company of another contracting party. Various forms of abuse in view of this connection are possible, for example, the factual ownership of a company which is in reality controlled by a different entity not included in the scope of a treaty’s application; the establishment of a ‘mailbox’ company or misrepresentation whereby an investment is made by one entity whose sole purpose is to mask the involvement of another entity wishing to remain incognito. Large-scale international transactions are at times the subjects of rumours, accusations or even investigations because of suspicion involving the above scenarios. Indeed, in some factual constellations it is not quite clear who has made, owns, or controls an investment. Sources of literature report on a famous acquisition of large oil company X in the following circumstances: the assets of the company were acquired by an unknown and “mysterious”152 company Y, which won the auction. Company Y sold the acquired shares three days after the auction took place to stateowned company Z but with a twist, the money for this transaction was transferred from a foreign oil concern.153 This led to the justified assumption that the stateowned company Z was simply using company Y as a proxy and transferring the assets to foreign ownership.154 The obvious question here is, who or what legally speaking is the acquiring entity? Thinking of this and similar situations in the context of IIAs leads to the idea that the rhetorical question above is not always easily answered based on the relatively

150

For example, Article 1, China Model BIT, reprinted in: Brown (ed) (2013), p. 147. Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004, para. 75. 152 Mayr, http://www.spiegel.de/international/spiegel/russia-the-kremlin-s-oligarchs-a-334916. html. 153 Gloger (2015), p. 66. 154 See: Gurin, https://jamestown.org/program/the-heart-of-yukos-is-nationalized/. 151

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unelaborate definition in the majority of IIAs, especially those concluded in the period just after the emergence of international investment law. One possibility to address issues of such obscurity and complexity would be the use of more elaborate legal provisions, however, this has yet to materialise. This means that the question of how arbitral tribunals can coherently approach these submissions remains difficult to answer based on the existing wording of the treaties as such. All that can be concretely concluded at this point is that as things stand, the required link between an invested asset and foreign investors opens up possibilities for foreign investor misconduct and will continue to result in a large number of associated accusations. As seen from the above, the majority of IIAs contain a broad and unqualified definition of what constitutes foreign investments. However, a careful reading of the definition of investments as well as other relevant provisions of IIAs, for example on the scope of the application, allows us to again identify the inherent potential of the system to effectively address at least some irregularities and illegality in investment activity. The potential of the system includes the ability to deal with issues surrounding the legality of ownership and who or what actually have control over investments, whether these investments contribute to host State development, and the existence of investment activity. The greatest potential to be effective in dealing with foreign investor misconduct should be expected, as previously stated, ‘in accordance with host State law’ clauses. However, solely using the wording of IIAs as a basis does not allow one to create a comprehensive picture of the requirements for foreign investments that need to be fulfilled in order to be protected. The realisation of this potential, be it deliberately or unintentionally, has been left to arbitral tribunals for elaboration. The manner in which arbitral tribunals have dealt with this challenge will be seen in Chap. 4 of this monograph.

3.5.3

Requirements on Foreign Investors

3.5.3.1

General Considerations on the Notion of ‘Investors’

As seen above, international investment law guarantees international protection for investments that are ‘owned’, ‘controlled’, ‘made’, or ‘invested’ by a national or a company of another contracting party. The definition of ‘investors’ mirrors this logic by stating that a foreign investor is: (i) any natural person possessing the citizenship of one Contracting Party who is not also a citizen of the other Contracting Party; or

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(ii) any enterprise , incorporated or duly constituted in accordance with applicable law of one Contracting State who owns or controls an investment made in the territory of the other Contracting Party.155 The reference to ‘any natural person’ could hardly be more precise. However, the reference to ‘any enterprise’ or similar references in other treaties156 may entail a need for further elaboration. Some treaties provide for a more qualified list of corporate entities that are included or excluded by the term ‘corporate investor’. For example, the Italy-Kazakhstan BIT of 1994 provides that: The term ‘legal person’, in reference to either Contracting Party, shall be construed to mean any entity having its head office in the territory of one of the Contracting Parties and recognised by it, such as public institutions, corporations, partnerships, foundations and associations, regardless of whether their liability is limited or otherwise.157

Hence, foreign investors appear in the system as natural or juridical persons of another contracting State that own investments in a host State. International investment law does not provide for the general protection of the individual’s property rights as such individuals and legal entities are only protected in their connection to an investment. However, foreign investors are certainly active actors in the field and their actions/omissions may be deemed as illegal, inappropriate or in violation of the principle of good faith. The inappropriateness and illegality of a foreign investment, as discussed above, may also only occur because of foreign investors’ conduct. In making an investment a foreign investor may disregard and violate the law and regulations of a host State, act contrary to international labour, environmental or human rights standards, or simply fail to fulfil the requirements imposed on foreign investments under the relevant treaty. For example, foreign investors could engage in the falsification of documents required for a bidding process, commit fraud or be involved in corruption of some sort to obtain a desired outcome in the home State. Even so, international investment law does not directly address foreign investors’ behaviour. The requirements that are imposed on foreign investors are rather technical—centred on having the nationality of the other contracting State and having the required legal and factual relationship to the investment. The following sections will consider whether these requirements—nationality and connection to an investment—provide any potential that could play a role in dealing with allegations of foreign investor misconduct.

155

Article 1 (h), Agreement between the Government of Canada and the Government of the Republic of Costa Rica for the Promotion and Protection of Investments, http:// investmentpolicyhub.unctad.org/Download/TreatyFile/601. 156 IIAs also refer to ‘any entity’; ‘any legal person’. 157 Article 1 (4), Agreement between the Government of the Italian Republic and the Government of the Republic of Kazakhstan on the Promotion and Protection of Investments, http:// investmentpolicyhub.unctad.org/Download/TreatyFile/1683.

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83

Nationality Requirements

As previously stated, the protection offered by international investment law is not universal and is based on reciprocity among contracting parties of an international investment agreement. Nationality is thus a decisive requirement for being able to legitimately avail oneself of the guarantees stipulated in an IIA. As mentioned above, a nationality requirement is a standard proviso in the field of international law. Over time international law has dealt extensively with the effective identification of the nationality of individuals as well as legal entities158 as these issues play a major role in exercising diplomatic protection.159 By the time IIAs emerged, international law practice had shown the importance of having a meaningful definition of ‘investor’.160 This explains the nuanced and detailed regulations on the issues of nationality for both nationals and corporate entities. Frequently, the text of IIAs refers to national law as the source to determine the nationality of natural and juridical persons.161 However, even in the absence of such a reference, international law accords national law of the relevant State a leading role in the determination of the nationality of individuals and legal entities.162

3.5.3.2.1

Nationality of Individual Investors

The nationality of individuals is governed by the national laws of their home States. However, one may also consider a number of transnational issues that have a bearing on individuals’ nationality. Examples here would include dual nationality or permanent residence in a State other than the State of nationality. These issues used to pose difficulties in early international law practice.163 Some IIAs contain rules on critical aspects of nationality, such as the protection of individual investors with dual

158

See, for example, the well-known passage of the Barcelona Traction, Light and Power Company: Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain), Judgment, ICJ Reports 1970, 3, 42, para. 70. 159 Yasuaki (2017), p. 334. 160 Fillers (2014), https://eujournal.org/index.php/esj/article/viewFile/4750/4539. 161 Article 1 (b), Agreement between the Government of Canada and the Government of the Republic of Argentina for the Promotion and Protection of Investment, 5 November 1991, http:// investmentpolicyhub.unctad.org/Download/TreatyFile/77; Article 1 (3) (a), Treaty between the Federal Republic of Germany and Antigua and Barbuda concerning Encouragement and Reciprocal Protection of Investments, 5 November 1998, http://investmentpolicyhub.unctad.org/Download/ TreatyFile/68; Article 1 (2) (a), Accord entre le Gouvernement du Royaume du Maroc et le Gouvernement de la Republique Italienne Relatif a la Promotion et la Protection Reciproques des Investissements, 18 July 1990, https://www.italaw.com/sites/default/files/laws/italaw6157_0.pdf. 162 Yasuaki (2017), p. 328. 163 Crawford (2012), pp. 513–520.

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nationality, especially the nationality of another contracting State,164 or on the necessity as well as the sufficiency of permanent residence at the time of making an investment.165 In the absence of precise rules, arbitral tribunals may engage in the determination of the scope of IIAs’ definition of foreign investors.166 Individuals bear the burden of proof in the demonstration of their nationality167 but, in general, a certificate of nationality serves this end and is considered by arbitral tribunals as prima facie evidence to determine nationality.168 Nevertheless, arbitral tribunals do not necessarily blindly accept the given proof as watertight evidence and may engage in a determination of critical issues if raised by the respondent. Whatever the specific details and circumstances may involve, the overarching tenet to be adhered to is that “the acquisition of nationality must not be inconsistent with international law”.169 Thus, engaging in fraud or corruption to obtain a required nationality disqualifies an individual from protection under international investment law. Should the facts of the case reveal prior illegal action committed by individuals to obtain the required nationality, an arbitral tribunal would have the competence to accord them negative legal consequences in the form of the non-application of protection that would otherwise be granted by international investment agreements. Thus, nationality requirements imposed on individuals under international investment law entail the inherent potential to accord negative legal consequences to illegal actions to obtain a desired nationality. Apart from this, the criterion to obtain a nationality can be rather technical and varied in nature and, as such, it suffices to say that the criterion is satisfied upon fulfilment of the specific requirements set under the national law of the particular home State in question.

164

See, for example, Article 1 (e), Agreement between the Government of the Republic of Croatia and the Government of Canada for the Promotion and Protection of Investments, 3 February 1997, http://investmentpolicyhub.unctad.org/Download/TreatyFile/604. 165 Examples providing for necessity of permanent residence: Article 1 (2), Agreement between Bosnia and Herzegovina and the Swiss Confederation on the Promotion and Reciprocal Protection of Investments, 5 September 2003, http://investmentpolicyhub.unctad.org/Download/TreatyFile/ 496. Examples illustrating sufficiency of permanent residence, see: Article 1 (c), Agreement between the Government of Australia and the Government of the Argentine Republic on the Promotion and Protection of Investments, 23 August 1995, http://investmentpolicyhub.unctad. org/Download/TreatyFile/72; Article 1 (7), ECT. 166 See, Waguih Elie George Siag and Clorinda Vecchi v. The Arab Republic of Egypt, ICSID Case No. ARB/05/15, Decision on Jurisdiction, 11 April 2007, para. 49, 147, 198; Ioan Micula, Viorel Micula, S.C. European Food S.A., S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20, Decision on Jurisdiction and Admissibility, 24 September 2008, para. 98. 167 Hussein Nuaman Soufraki v. The United Arab Emirates, ICSID Case No. ARB/02/7, Award, 7 July 2004, para. 58. 168 Hussein Nuaman Soufraki v. The United Arab Emirates, ICSID Case No. ARB/02/7, Award, 7 July 2004, para. 63. 169 Ioan Micula, Viorel Micula, S.C. European Food S.A., S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20, Decision on Jurisdiction and Admissibility, 24 September 2008, 86.

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Nationality of Legal Entities

The determination of corporate nationality, especially given the “globalisation of economic activities carried out by huge companies”170 is often a more complicated issue that establishing the nationality of individuals. IIAs seems to address this complex problem by providing detailed rules171 on the nationality of legal entities. For international investment law, determining the nationality of corporate entities means establishing a link between such an entity and a particular State. There seem to be two preferred methods to determine the nationality of legal entities: one based on the place of incorporation and the other by determining an entity’s seat, as explained below.172 On the face of it, most IIAs use the terms “incorporated”, “organised”,173 or “legally constituted”174 to set the criterion that the entity must have been incorporated under the national laws of a relevant home State. Other IIAs though stipulate that such entities must “have their seat”,175 that is to say, their main place of business activities, in the home State. Some IIAs even set both incorporation and seat criteria when making a determination regarding corporate nationality.176 There are also examples of variations on these specific requirements to prove a link between an entity and one of the contracting States of the treaty, such as the Austria—Kazakhstan BIT that in addition to incorporation, requires the existence of “substantive business”177 in the territory of the contracting party. The Switzerland—Czech and Slovak Republic BIT of 1990 set both incorporation and seat criteria as well as evidence of “real economic activities”178 in the territory of the contracting State. As such, criteria for the determination of corporate nationality remain a matter of the involved State’s discretion. As was rightly observed by Lucy F. Reed and 170

Yasuaki (2017), p. 348. Detailed stands for not merely requiring a relevant nationality, but also providing rules on determination of the required nationality. 172 Muchlinski (2012), pp. 802–803. 173 Article 1, The Austrian Model BIT (2008), reprinted in: Brown (2013a), p. 22. 174 Article 1 (b), Treaty between the United States of America and the Republic of Kazakhstan concerning the Encouragement and Reciprocal Protection of Investment, 19 May 1992, https:// www.italaw.com/sites/default/files/laws/italaw6168%284%29.pdf. 175 Article 1 (1.1), Colombian Model BIT (2009), reprinted in: Brown (ed) (2013a), p. 199; Article 1 (4), Agreement between the Government of the Italian Republic and the Government of the Republic of Kazakhstan on the Promotion and Protection of Investments, 22 September 1994, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1683. 176 “. . . constituted or otherwise organized according to the law of the Contracting Party and having their seat. . .”. For instance, Article 1 (1.1), Columbian Model BIT (2009). 177 Article 1 (1) (b), Agreement for the Promotion and Reciprocal Protection of Investments between the Government of the Republic of Austria and the Government of Kazakhstan, 12 January 2010, http://investmentpolicyhub.unctad.org/Download/TreatyFile/3143. 178 Article 1 (1), Agreement between the Czech and Slovak Federal Republic and the Swiss Confederation on the Promotion and Reciprocal Protection of Investments, https://www.italaw. com/sites/default/files/laws/italaw6231.pdf. 171

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Jonathan E. David: “The starting point of any inquiry into the status of an individual claimant as a protected investor is the language of the international investment agreement(s) at the issue in a particular case”.179 The choice of requirement when determining corporate nationality plays a role in the scope of actions or omissions of foreign investors to be either accepted or excluded from the application of IIAs. Indeed, the criterion of incorporation seems to be more technical and requires the factual fulfilment of legal procedures and requirements for the creation of a legal entity under the national laws of contracting States. Additionally, satisfying a seat criterion may be understood as requiring an “effective centre of administration of the business operations”,180 which unsurprisingly opens up more possibilities for discussions regarding investors’ conduct. The same applies to the more specific requirements on corporate nationality mentioned above, more specifically, those requirements may play a role in dealing with and possibly excluding ‘mailbox’ companies from the scope of a treaty’s application.181 Thus, the establishment of a ‘mailbox’ company or the absence of significant real business activity may be actions undertaken by foreign investors that can be dealt with under a number of international investment treaties.

3.5.3.3

Requirement of a Link to Foreign Investment

The second part of the definition of ‘investors’ in some IIAs182 refers to the connection between a national or a legal entity and an invested asset.183 The required connection, most frequently created by a reference to ‘owned’ and ‘controlled’, determines the scope of actions deemed essential for an investor to qualify for protection under an international investment treaty. The same requirement, as discussed above, is provided for in the definition of ‘investment’ and to that end, relevance may be determined through further precision, such as ‘direct’ or ‘indirect’ ownership or control. For example, the S.D. Myers tribunal took the mentioning of

179

Reed and Davis (2015), p. 619. Alps Finance v. Slovakia, UNCITRAL, Award, 5 March 2011, para. 217. 181 See: Alps Finance v. Slovakia, UNCITRAL, Award, 5 March 2011, paras. 226, 227. 182 Examples of IIAs that do not include the mentioning of the required connection: Article 1 (1), Agreement between the Republic of Slovenia and the Swiss Confederation on the Promotion and Reciprocal Protection of Investments, 9 November 1995, http://investmentpolicyhub.unctad.org/ Download/TreatyFile/2271; Article 1 (b), Agreement on Encouragement and Reciprocal Protection of Investments between the Republic of Kazakhstan and the Kingdom of the Netherlands, 27 November 2002, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1784. 183 Examples of IIAs that provide for a required connection between a national or a company and an investment: Article 1 (h), Agreement between the Government of Canada and the Government of the Republic of Costa Rica for the Promotion and Protection of Investments, 18 March 1998, http:// investmentpolicyhub.unctad.org/Download/TreatyFile/601. 180

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‘indirect’ ownership or control into account184 in dealing with arguments on the lack of a required connection between an enterprise and an investment.185 The tribunal noted that it: does not accept that an otherwise meritorious claim should fail solely by reason of the corporate structure adopted by a claimant in order to organise the way in which it conducts its business affairs.186

Some IIAs provide for a link between a foreign investor and an investment which is expressed in terms other than ‘owned’ and ‘controlled’. The meaning of those terms has already been discussed above. Following the same logic as previously discussed, arbitral tribunals may refer to those requirements to engage in an examination of the existence of a legitimate link between an investment and a foreign investor. Thus, the required connection between a national or entity of another contracting State and an investment in the territory of a host State creates possibilities to engage in various considerations on the investors’ actual activity as well as the option to impose negative legal consequences for conduct that is not in accord with the relevant IIA.

3.5.3.4

Beyond Formal Requirements on Foreign Investors

The requirements imposed on foreign investors as seen above are rather formal and related to a status rather than investment activities and the presupposed qualification of investors. The existence of a valid certificate of nationality is, as such, sufficient to meet ratione personae coverage of international investment agreements for individuals. The same could be said in view of ownership when providing evidence regarding the incorporation and seat of a company. Thus, being deemed as a bona fide foreign investors requires a demonstration of qualifications and/or investment activities only to a limited extent if at all. The imposition of formal criteria comes with a risk that they can be superficially satisfied without actually fulfilling the intended qualifications that such criteria were originally designed to set. By way of illustration one may consider the well-known story of Cinderella. Distraught after the disappearance of the beautiful maiden from the ball, the prince proclaimed that any lady who could put on the mysterious girl’s glass slipper will be his wife. In trying ‘to fit into the shoe’ one of Cinderella’s stepsisters cut off her toe and another cut off part of her heel.187 However, does simply having the right shoe size suffice to marry the Prince? Indeed, the glass

184

S.D. Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award, 13 November 2000, para. 229. 185 S.D. Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award, 13 November 2000, para. 227. 186 S.D. Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award, 13 November 2000, para. 229. 187 See: Grimm (1955), pp. 96–97.

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slipper is used as a ‘formal tool’ to help in the initial recognition of the missing maiden but to successfully conclude a marriage contract with the prince the one who could put on the slipper must also possess the beauty and qualities of the lady at the ball. Similarly, both nationality and a link to the invested asset need to be real and not merely contrived. Just ‘stepping into an investor’s shoe’ may not be sufficient to meet the ratione personae scope of IIAs. The relevant question in that regard is whether and to what extent the adjudication authority could look beyond the formal requirements on foreign investors, which in turn, presupposes an emphasis of substance over form. There are two ways to approach the issue. The first way is to strictly follow the literal requirements of the definitions in IIAs. In the words of the Saluka Tribunal: The Tribunal cannot in effect impose upon the parties a definition of “investor” other than that which they themselves agreed. The agreed definition required only that the claimantinvestor should be constituted under the laws of (in the present case) the Netherlands, and it is not open to the Tribunal to add other requirements which the parties could themselves have added but which they omitted to add.188

This approach has entered academia under the label of the “literal” approach.189 Indeed, while the consent of contracting States should be respected and accorded legal significance, considering the history of the emergence of international investment law as well as the initial motivation of the drafters, one can hardly believe that the definitions of IIAs should be viewed as so well-considered that they provide answers to the gamut of complex issues coming before tribunals. Moreover, from the preambles common to modern IIAs it does not follow that contracting States did not indeed mean the reality of investment activities. In fact, in light of IIAs’ aims, such as the intensification of economic co-operation,190 stimulation of private business initiatives,191 and increasing the prosperity in both contracting States,192 it is difficult to believe that contracting States intended to grant broad international protection to investments without actual investment activity, for example, a mailbox companies. This consideration allows us to see the matter from a different perspective that was highlighted in ConocoPhillips v. Venezuela:

188

Saluka Investments B.V. v. Czech Republic, UNCITRAL, Partial Award, 17 March 2006, para. 241. 189 Fillers (2014), pp. 50, 51, https://eujournal.org/index.php/esj/article/viewFile/4750/4539. 190 Preamble, German Model BIT (2008), https://www.italaw.com/sites/default/files/archive/ ita1025.pdf. 191 Preamble, German Model BIT (2008), https://www.italaw.com/sites/default/files/archive/ ita1025.pdf. 192 Preamble, UK Model BIT (2005), https://investmentpolicyhub.unctad.org/Download/ TreatyFile/2847.

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The principal reason that tribunals have given for not treating compliance with formal or technical requirements as being sufficient is to avoid the misuse of power conferred by law.193

Thus, a reference to the good faith principle would allow one to effectively deal with situations in which protection is claimed by an investor who “purports to be an investor when it [knows] this is not the case”.194 Thus, the whole range of misconduct entered into to meet the requirements to be a foreign investor may trigger legal consequences in the form of the non-application of protection under IIAs.

3.5.4

Requirements on the Procedural Capacity of Foreign Investors

3.5.4.1

The Requirement and Scope of the Party’s Consent to Arbitration

Direct procedural capacity for foreign investors is granted to them upon satisfaction of the jurisdictional requirements imposed. These jurisdictional requirements are based on the consent of contracting States as expressed in the arbitration clause provided in their IIA (ratione voluntatis) and are essential conditions for “eligibility for an investor to benefit from the protection offered under the BIT”.195 The majority of current IIAs foresee tribunal jurisdiction extending to disputes concerning an “investment” that has arisen between an “investor” and a contracting State which failed to reach an amicable settlement during a set period. A typical investor-state arbitration clause reads as follows: (1) Disputes concerning investments between a Contracting State and an investor of the other Contracting State should be settled amicably between the parties to the dispute. (2) If the dispute cannot be settled within six months of the date on which it was raised by one of the parties to the dispute, it shall, at the request of the investor of

193

ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and Merits, 3 September 2013, para. 275. 194 Cementownia “Nowa Huta” S.A. v. Republic of Turkey, ICSID Case No. ARB (AF)/06/2, Award, 17 September 2009, para. 159. See also: Mobil Corporation, Venezuela Holdings, B.V., Mobil Cerro Negro Holding, Ltd., Mobil Venezolana de Petróleos Holding, Inc., Mobil Cerro Negro, Ltd., and Mobil Venezolana de Petróleos v. Bolivian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Jurisdiction, 10 June 2010, para. 191, Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections, 1 June 2012, para. 2.43. Aguas del Tunari, S.A. v. Republic of Bolivia, ICSID Case No. ARB/02/3, Declaration of José Luis Alberro-Semerena, 22 October 2005, para. 34. 195 Abaclat and Others v. Argentine Republic; ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011, para. 286.

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the other Contracting State, be submitted to arbitration. The two Contracting States hereby declare that they unreservedly and bindingly consent to the dispute being submitted to one of the following dispute settlement mechanisms of the investors’ choosing: 196 The first thing to note here is that the procedural capacity of foreign investors is subject to formal requirements such as trying to reach an amicable settlement of the dispute and the expiration of the so-called ‘cooling-off period’, which is usually six months. Current international investment law has avoided adopting the requirement of the exhaustion of local remedies, which is a prerequisite in the field of diplomatic protection.197 Some IIAs, however, do include a requirement to submit a dispute to a competent tribunal of the host State (a contracting party on whose territory an investment was made)198 and foresee a period of eighteen months to this end.199 Importantly, this requirement neither requires the full exhaustion of local remedies nor serves as a fork-in-the-road provision, granting a choice to follow either a domestic or international option of dispute adjudication.200 Irrespective of the outcome of domestic proceedings, foreign investors preserve their right to seek international arbitration after the expiration of the eighteen-month period prescribed by the IIAs.201 Non-satisfaction of the formal requirements leads to the inadmissibility of the dispute, even though foreign investors do not in principle lose their procedural right and could resubmit the dispute upon satisfaction of the requirements.202

196

Article 10, German Model BIT (2008), https://www.italaw.com/sites/default/files/archive/ ita1025.pdf. 197 In the absence of a precise requirement in international investment agreements, foreign investors do not need to exhaust the local remedies of a host state. See: Article 26, ICSID Convention; AES Corporation v. The Argentine Republic, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, para. 69; Generation Ukraine, Inc v. Ukraine, Award, 16 September 2003, para. 13.4. 198 For examples of such a requirement see: Article 10 (2), Vertrag zwischen der Bundesrepublik Deutschland und der Argentinischen Republik über die Förderung und den gegenseitigen Schutz von Kapitalanlagen, 9 April 1991, https://www.bgbl.de/xaver/bgbl/start.xav?start¼%2F%2F*%5B %40attr_id%3D%27bgbl293s1244.pdf%27%5D#__bgbl__%2F%2F*%5B%40attr_id%3D% 27bgbl293s1244.pdf%27%5D__1592986300554. 199 Article 10 (3) (a), Vertrag zwischen der Bundesrepublik Deutschland und der Argentinischen Republik über die Förderung und den gegenseitigen Schutz von Kapitalanlagen, 9 April 1991, https://www.bgbl.de/xaver/bgbl/start.xav?start¼%2F%2F*%5B%40attr_id%3D% 27bgbl293s1244.pdf%27%5D#__bgbl__%2F%2F*%5B%40attr_id%3D%27bgbl293s1244.pdf% 27%5D__1592986300554. 200 Dolzer and Schreuer (2012), p. 267. 201 For a detailed elaboration on the significance of the requirement mentioned see Emilio Agustin Maffezini v. The Kingdom of Spain, ICSID Case. No. ARB/97/7, Decision on Objections to Jurisdiction, 25 January 2000, paras. 23–26. 202 See: Abaclat and Others v. Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011, para. 247. The tribunal elaborates on the distinction between jurisdiction of an arbitral tribunal and admissibility of claims.

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The second point of note is a reference to ‘investment’ and ‘investor’ which highlight the above-mentioned requirements imposed on protected items and protected persons. With such a reference, the material requirements for the scope of treaty coverage are equally imposed as procedural requirements for the jurisdiction of arbitral tribunals. This transformation thus allows arbitral tribunals to adjudicate upon the conditions imposed by a treaty on foreign investments and foreign investors. Such an adjudication comprises an interpretation of the definitions discussed above, adopting a stance to take accept a literal or broader reading of treaty provisions as well as the application of the law to the facts of a case which, inter alia, includes a decision on a possible accusation of foreign investors’ misconduct. Any proven lack of satisfaction regarding the imposed requirements may result in a tribunal lacking jurisdiction to decide upon the dispute at hand. A rejection of a tribunal’s jurisdiction on that basis would mean a loss of the foreign investors’ direct right under international law. What this then equates to is that any non-satisfaction of the above-mentioned requirements on foreign investments and investors may trigger a negative legal consequence in the form of the elimination of an otherwise granted right. A typical clause would also include a list of dispute settlement institutions which may include some or all of the following: the International Centre for Settlement of Investment Disputes (ICSID), the International Arbitration Court of the International Chamber of Commerce (ICC), the London Court of International Arbitration, the Arbitration Institute of the Stockholm Chamber of Commerce, the Permanent Court of Arbitration and Regulations on Procedure: the Convention on the Settlement of Investment Disputes between States and Nationals of Other States; the United Nations Commission on International Trade Law (UNCITRAL), the Dispute Resolution Rules of the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), the Dispute Resolution Rules of the Arbitration Institute of the Stockholm Chamber of Commerce. It is thus up to foreign investors to commence arbitration proceedings and when doing so opt for any of the suggested institutions and procedural rules. The questions that naturally arise here are, does the application of the procedural rules matter for the resolution of issues concerning foreign investor misconduct and do arbitration rules provide for any additional requirements on foreign investors’ conduct?

3.5.4.2

The Significance of the Procedural Rules

As seen above, investor-state disputes may be governed by various procedural rules, including ad hoc rules employed for a particular case at hand. As a claimant, a foreign investor has a choice regarding which set of rules agreed upon by the contracting parties to IIAs apply. The majority of cases are settled under the ICSID Convention with the UNCITRAL Arbitration Rules being second most

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frequently applied in investor-state arbitration.203 For comparative purposes, the ICSID Convention is specifically tailored to the settlement of investment disputes,204 whereas the UNCITRAL Rules, as well as many of the other possibly applicable rules, such as the ICC or the LCIA Arbitration Rules, are applied for both investorstate and commercial arbitration and were initially designed to govern commercial arbitration. These rules provide for the appropriate regulation of an arbitral procedure, yet do not specifically address any matters related to foreign investment and foreign investors. The possibility of non-specific rules to directly contribute to a resolution of issues arising out of foreign investors’ illegality is low. The ICSID Convention, however, in addition to the applicable IIA, may play a role in dealing with issues of foreign investor misconduct. The ICSID Centre also serves as an independent institution which provides for the administration of investor-state dispute settlement. Arbitral tribunals view access to ICSID as an independent right,205 the realisation of which is thus subject to the principle of good faith and occurs in accordance with its purpose. The Preamble of the ICSID Convention refers directly to foreign investment and views “economic development” as one of the main benefits derived from encouraging and protecting this type of activity.206 Article 25 of the ICSID Convention establishes requirements for the jurisdiction of the Centre. These requirements are considered as second-tier requirements after those arising out of the applicable IIA, as discussed above.207 Arbitral tribunals are consistent in viewing the criteria imposed in IIAs and those of the ICSID Convention as cumulatively required for the establishment of tribunal jurisdiction.208 Article 25 of the ICSID Convention also requires the satisfaction of a number of conditions, such as ratione materiae (a “legal dispute arising out of an investment”209); ratione personae (a dispute between a contracting State and a national or a company of another contracting State); ratione voluntatis (consent for the settlement of a dispute by applying facilities and rules under the ICSID Convention); and ratione temporis. In view of these additional requirements on foreign investors’

203 See: Dolzer and Schreuer (2012), p. 241; Hobér (2015), https://elibrary.law.psu.edu/cgi/ viewcontent.cgi?article¼1030&context¼arbitrationlawreview. 204 Also mentioned: Dolzer and Schreuer (2012), p. 238. 205 Banro American Resources Inc. and Société Aurifѐre du Kivu et du Maniema, SARL v. Democratic Republic of the Congo, ICSID Case No. ARB/98/7, Award, September 1, 2000, para. 5 of Section II. 206 ICSID Convention, Preamble. 207 Salini Costruttori S.P.A. and Italstrade S.P.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, 31 July 2001, para. 44, Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability, 14 January 2010, para. 45. 208 Malicorp Limited v. The Arab Republic of Egypt, ICSID Case No. ARB/08/18, Award, 7 February 2011, paras. 101–102. 209 Article 25 (1), ICSID Convention.

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conduct, conditions imposed by the ICSID Convention on nationality and investment also seem to be of relevance. Regarding nationality, Article 25 proceeds from the basis of the existence of nationality of one of the contracting States and the absence of nationality of the host State for a respondent to a dispute.210 Nevertheless, the Convention does not provide any specific regulations on how to determine nationality with regard to individuals or legal entities. Thus, the added value of this article is only in the exclusion of nationals possessing the nationality of the host State involved. Thus, should the relevant IIA not make allowance for such a limitation, it may still be imposed under the application of the ICSID Convention. Outside of these arrangements, there are no specific regulations on requirements imposed on foreign investors. As just discussed, the ICSID Convention does not define the concept of ‘investment’. This open-ended approach has raised much discussion on the characteristics that an object should possess in order to be classed under the undefined term ‘investment’ in Article 25 of the ICSID Convention. As is well known, the Salini tribunal suggested reading into the definition the requirement to contribute to the development of a host State, although such a criterion is rarely referred to in some IIAs. Thus, if one were to adhere to the position of the Salini tribunal a number of possibilities arise, in addition to those given by the applicable IIA, to consider investment activity not as static (‘any kind of asset’), but as dynamic, i.e. including an examination of foreign investors’ conduct that contributed, or not, to the development of a host State. Further to this, the Phoenix Tribunal read into Article 25 of the ICSID Convention the requirement that an investment is made in good faith. Satisfied with the proof of bad faith conduct on the part of the foreign investors, the tribunal consequently deemed it had no jurisdiction in the dispute. The tribunal in Aguas del Tunari referred to Article 41 (2) of the ICSID Arbitration Rules as authorising it to engage in a consideration of alleged fraud and manipulation with a corporation on the part of a number of foreign investors. However, having found insufficient proof to sustain the allegations, the tribunal pointed to its “duty to protect the integrity of ICSID jurisdiction”,211 yet reject the argument. These examples are indicative that the application of the ICSID Convention as well as ICSID Arbitration Rules may directly contribute to and influence the outcome of issues related to foreign investor misconduct, a subject dealt with in more detail in Chap. 4.

210

Article 25 (2), ICSID Convention. Aguas del Tunari, S.A. v. Republic of Bolivia, ICSID Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction, 21 October 2005, para. 331.

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3.6 3.6.1

Further Mechanisms to Restrict the Application of IIAs Based on Investors’ Conduct Denial of Benefits Clause

As discussed above, modern IIAs contain almost no direct mechanisms to restrict or limit the application of the treaty based on foreign investor misconduct. One example of such rare instances is a so-called denial of benefits clause. Such clauses directly allow for the exclusion of guarantees otherwise provided by the treaty because of the agreed-upon undesirable circumstances.212 For example, Article 17 of the Energy Charter Treaty States that: Each Contracting Party reserves the right to deny the advantages of this Part to: (1) a legal entity if citizens or nationals of a third State own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organised; or (2) an Investment, if the denying Contracting Party establishes that such Investment is an Investment of an Investor of a third State which or as to which the denying Contracting Party: (a) does not maintain a diplomatic relationship; or (b) adopts or maintains measures that: (i) prohibit transactions with Investors of that State; or (ii) would be violated or circumvented if the benefits of this Part were accorded to Investors of that State or to their investments.

A denial of benefits clause is not a typical provision found within international investment agreements, although such clauses are frequent in IIAs concluded by the USA213 and Canadian Model IIAs also contain a denial of benefits clause.214 In fact, denial of benefits clauses were being applied as early as in the post-war USA Friendship, Commerce and Navigation Treaties. For example, the US-Italy FCN contained the following provision: Each High Contracting Party reserves the right to deny any of the rights and privileges accorded by this Treaty to any corporation or association created or organised under the laws and regulations of the other High Contracting Party in the ownership or direction of which nationals of any third country or countries have directly or indirectly a controlling interest.215

212

Dolzer and Schreuer (2012), p. 55. Gastrell and Le Cannu (2015), p. 80. 214 Lévesque and Newcombe (2013a), p. 101. 215 Article XXIV (5), Treaty, protocol, and additional protocol between the United States of America and Italy respecting friendship, commerce and navigation, 2 February 1948, T.I.A.S. No. 1965 (U.S. Treaty), 63 Stat 2255 (U.S. Treaty). 213

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That and similar provisions216 were inserted as a tool to set limitations on the commitments undertaken by the contracting parties.217 The primary purpose of the denial of benefits clause in the FCN treaties was to regulate the direct or indirect control of protected entities through legal or physical entities of a non-contracting party to the treaty. However, States remained free to exercise the right to deny the treaty’s benefits in circumstances of their choice. In the realm of international investment law, these undesirable circumstances may be a lack of economic connection to the State whose nationality a foreign investor is claiming to get the IIA’s protection, ownership or control of investment by nationals and companies of a third State, a lack of substantial economic activity or a violation of national law in the course of investment activity, and so forth. Benefits of the treaty may also be denied for purely political reasons, such as a significant deterioration in the diplomatic relationship between contracting States or the imposition of economic sanctions.218 These circumstances are, however, unrelated to foreign investors’ conduct. Circumstances triggering the denial of a treaty’s benefits are thus similar to the abovementioned requirements on foreign investment and foreign investors. However, in contrast to this, any effective application of a denial of benefits clause would lead to negative legal consequences in the form of the elimination of material protection granted to foreign investments under an IIA. Thus, this legal tool functions on merits rather than at the level of tribunal jurisdiction and the elimination of the procedural rights of foreign investors, as is the case with the non-fulfilment of requirements imposed on foreign investments and foreign investors. As such, a denial of benefits clause may be seen as introducing the possibility to impose negative legal consequences on foreign investors’ misconduct. As pointed out in the literature: “denial of benefits clauses allow States to limit investors’ use of corporate structuring as a means of ‘treaty shopping’, thereby counterbalancing the effect of the broad definition of ‘investment’ and ‘investor’ that are contained in most treaties”.219 However, as can be seen in the above examples, denial of benefits clauses do not contain any concrete regulations for their application. This leads to questions such as when and in which form could such a clause be referred to by a State? Could the clause be relied upon as a defence on merits after the commencement of an arbitration proceeding? Does it apply retroactively or only prospectively? Regarding this latter question, the very first case to deal with the matter, Plama v. Bulgaria,

216

See, for example, Article XXVI (5), Treaty of Friendship, Commerce and Navigation Between the United States of America and the Republic of China, 4 November 1946, https://www.loc.gov/ law/help/us-treaties/bevans/b-cn-ust000006-0761.pdf. 217 Wilson (1949), p. 266. 218 See, for example, Article 12 (a), Treaty between the Government of the United States of America and the Government of the Republic of Bolivia Concerning the Encouragement and Reciprocal Protection of Investment, 17 April 1998, https://investmentpolicyhub.unctad.org/Download/ TreatyFile/463. 219 Gastrell and Le Cannu (2015), pp. 81–82.

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found that retrospective application of the clause is not allowed,220 a position supported by several other tribunals which shared this conclusion.221 However, there are nevertheless different approaches to this matter, most recently expressed by the tribunals in Pac Rim v. El Salvador222 and Rurelec & GAI v. Bolivia. Their argument is that: [i]t would be odd for a State to examine whether the requirements of [the denial of benefit clause] had been fulfilled in relation to an investor with whom it had no dispute whatsoever. In that case, the notification of the denial of benefits would – per se- be seen as an unfriendly and groundless act, contrary to the promotion of foreign investments. On the other side, the fulfilment of the aforementioned requirements is not static and can be changed from one day to the next, which means that it is not only when a dispute arises that the respondent State will be able to assess whether such requirements are met and decide whether it will deny the benefits of the treaty in respect of that particular dispute.223

Additionally, the wording leaves uncertainties in terms of the scope and meaning of the undefined terms used in IIAs, such as, for example, ‘substantive business activities’.224 Addressing these uncertainties is left to the discretion of arbitral tribunals and a sound presentation of the practice of arbitral tribunals in this regard is made in an article by Lindsay Gastrell and Paul-Jean Le Cannu.225 As presented by these two authors and as is quite typical for the field of international investment law, arbitral tribunals follow different approaches.226 Thus, even as a direct legal

220

Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005, para. 162. [Plama v Bulgaria]. 221 See, Yukos Universal Limited (Isle of Man) v. The Russian Federation, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, paras. 457–458 [Yukos v. Russian Federation]; Liman Caspian Oil BV and NCL Dutch Investment BV v. Republic of Kazakhstan, ICSID Case No. ARB/07/14, Award, 22 June 2010, para. 227 [Liman v. Kazakhstan]; Anatolie Stati, Gabriel Stati, Ascom Group SA and Terra Raf Trans Trading Ltd v. Kazakhstan, SCC Case No. V 116/2010, Award, 19 December 2013, para. 745 [Ascom v. Kazakhstan]. 222 See: Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on Respondent’s Jurisdictional Objections, 1 June 2012, para. 4.83–4.91; Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia, UNCITRAL, PCA Case No. 2011 – 17, Award, 31 January 2014, paras. 376–384. 223 Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia, supra note 222, para. 379. 224 For example, the Amto v. Ukraine tribunal stated: “substantial means of substance, and not merely of form. It does not mean large, and the materiality not the magnitude of the business activity is the decisive question”, Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005, Final Award, 26 March 2008, para. 69. 225 Gastrell and Le Cannu (2015), p. 84. 226 Tribunals in Plama v Bulgaria, paras. 155–165; Yukos v. Russian Federation, paras. 457–458; Liman v. Kazakhstan, para. 227; Ascom v. Kazakhstan, para. 745; Khan Resources Inc., Khan Resources B.V., and Cauc Holding Company Ltd. v. The Government of Mongolia, UNCITRAL, Decision on Jurisdiction, 25 July 2012, 25 July 2012, paras. 411–413, concluded that denial of benefits clause could only be applied prospectively, and Respondent State is required to notify foreign investor prior to commencement of arbitration. Tribunals in Empresa Eléctrica del Ecuador, Inc. v. Republic of Ecuador, ICSID Case No. ARB/05/9, Award, 2 June 2009, para. 71;

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mechanism for the rejection of a treaty’s application, a denial of benefits clause with an unelaborated character does not seem to have a significant role to play in dealing with foreign investor misconduct.

3.6.2

Application of Good Faith: The Issue of Admissibility

The general principle of good faith and its various factettes has already been considered in the overview of issues dealt with by general international law when dealing with individuals’ misconduct. In a similar vein, the principle of good faith also applies in the field of international investment law. To begin with, the principle of good faith should be understood to implicitly apply to the requirements imposed on foreign investments and investors. In such a capacity, the principle of good faith is a tool that allows the effective and just interpretation of international treaties and is “not a source of obligation per se”.227 Bad faith exercised in the fulfilment of imposed requirements results in their non-satisfaction and in turn results in the withdrawal of either protection for investments and investors or in a loss of procedural capacity for foreign investors. This has knock-on consequences in terms of a lack of a treaty’s coverage and the absence of tribunals’ jurisdiction to adjudicate in cases which arise from such an investment or that are brought by a bad faith investor. In such scenarios, it becomes clear that the principle of good faith has indirect relevance to the outcome and imposition of legal consequences on foreign investor misconduct. The second point of note is the direct procedural right of foreign investors to commence international arbitration needs to be fulfilled in accordance with the principle of good faith. A lack of good faith on the part of foreign investors who commence investment arbitration will void a tribunal’s jurisdiction even if all the other formally imposed requirements have been met. As explained by the Phoenix Tribunal: The principle of good faith requires parties “to deal honestly and fairly with each other, to respect their motives and purpose truthfully, and to refrain from taking unfair advantage” Nobody shall abuse the rights granted by the treaties, and more generally, every rule of law includes an implied clause that it should not be abused.228

A third and final point is that a reference to the principle of good faith may render claims inadmissible. The question of admissibility concerns the appropriateness of a

Ulysseas, Inc. v. The Republic of Ecuador, UNCITRAL, Interim Award, 12 June 2012, para. 172–174, agreed on retrospective application of the clause. 227 Voon et al. (2015), p. 70. 228 Phoenix Action, Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 107.

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tribunal hearing the claims before it.229 For example, foreign investors engaging in unfair behaviour to try to invoke procedural guarantees of international investment agreements for disputes which were not intended to be covered by the contracting parties may be raised and accepted as a basis for the inadmissibility of a claim.230 The above again demonstrates the huge potential of the general principle of good faith to influence adjudication on issues involving foreign investor misconduct.

3.7

Interim Conclusion

The above serves the purpose of demonstrating the explicit and inherent potential of current international investment law to address issues related to foreign investor misconduct. The major findings can be summarised as follows: First, when international investment law first emerged, the issue of how to deal with foreign investors misconduct was not high on the drafters’ agenda. The focus was simply not on creating direct legal mechanisms to address the immensely complex issues potentially arising from foreign investment conduct. Rather, the main emphasis fell to providing extensive legal guarantees to foreign investors, including the direct right of foreign investors to commence international dispute arbitration against a sovereign State. Consequently, the system that emerged is poorly equipped with tools that can be directly employed to regulate foreign investors’ conduct and such investors do not have direct obligations, there are no provisions on their liability and the requirements on their behaviour are still only embryonic in form with IIAs providing only broad protection of foreign investments and, indirectly, investors. Nevertheless, this absence of precise regulations concerning foreign investor misconduct does not mean that the system per se is unable to tackle the challenges arising from such misconduct to some extent. The above elaboration has revealed that some mechanisms already exist that allow the system of international investment law to address allegations of foreign investor misconduct and impose negative legal consequences for such breaches. This chapter has also demonstrated that the system is highly likely to be able to deal with inappropriate conduct on the part of foreign investors by referring to the requirements imposed by a meaningful application of the relevant IIA, especially those requirements placed on protected

229

Hochtief AG v. The Argentine Republic, ICSID Case No. ARB/07/03, Decision on Jurisdiction, 24 October 2011, para. 90; Abaclat and Others v. The Argentine Republic, ICSID Case No. ARB/07/5, Dissenting Opinion of Georges Abi-Saab, 28 October 2011, para. 18; Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/98/2, Dissenting Opinion of Keith Highet, 8 May 2000, para. 58. 230 Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplun v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Decision on Jurisdiction, 27 September 2012, para. 298; Vanessa Ventures Ltd v. Bolivian Republic of Venezuela, ICSID Case No. ARB(AF)/04/6, Award, 16 January 2013, para. 113.

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investments and investors. Requirements imposed on the procedural eligibility of foreign investors also have a highly significant role to play in this regard and as such are equally relevant. Moreover, there seems to be vast, but as yet not fully exploited, potential inherent in the general principle of good faith. What this translates to is that international investment law already possesses inherent capacities to deal with a wide variety of issues arising from foreign investor misconduct for actors willing to more fully explore the options before them. However, due to the rather unelaborated nature of the provisions in the majority of IIAs, it is difficult to predict what the adjudicative authorities will read into this potential and how they will interpret and apply the options and possibilities they discover. Thus, the evolving body of case law becomes the only source to benchmark how the above-mentioned inherent potential is being realised in practice, subject illustratively dealt with in some depth in Chap. 4.

Chapter 4

Categorisation and Illustration of Experience: Case Law on Foreign Investor Misconduct in International Investment Law

4.1

Introduction

Dealing with foreign investor misconduct has become a challenge for the system of international investment law, and in this context, the word challenge should be understood as a factually problematic situation that was not provided for at the time of the system’s establishment and which as yet has no appropriate routine response.1 Given that either the drafters intentionally avoided addressing the matter because the envisaged system was to purely provide extensive protection for foreign investors, or, due to the lack of foresight resulting from limited experience, they overlooked the gamut of problems that arise from foreign investor misconduct. This is not to say that the problem has been totally ignored as practice in international investment law has seen numerous cases in which respondents (host States) have presented allegations of foreign investor misconduct. Contrary to the dismissive approach of the ICJ in the Diallo case,2 international investment tribunals have taken allegations of foreign investor misconduct seriously and accorded them legal significance. In and of itself this is an interesting emerging trend to address allegations of individuals’ misconduct at the international level which deserves special mention and attention. To that end, the very first landmark cases in this respect seem to be the most informative and suitable to demonstrate this aspect of international investment law’s evolutionary process. By according legal significance to allegations of foreign investor misconduct, international investment tribunals have built up a voluminous quantity of case law on the subject. This case law is at the core of this chapter, which aims to illustrate and

For the definition of a ‘challenge’ see the English Oxford Living Dictionary, https://en. oxforddictionaries.com/definition/challenge. 2 See Sect. 3.3.5. 1

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Kozyakova, Foreign Investor Misconduct in International Investment Law, European Yearbook of International Economic Law 11, https://doi.org/10.1007/978-3-030-54855-1_4

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categorise how international investment law has been addressing foreign investor misconduct. Illustration presupposes the giving of examples,3 and in this respect, emphasis shall be placed on the factual backgrounds, arguments presented, as well as the legal reasoning and qualification of issues into legal categories by arbitral tribunals. Cases in which arbitral tribunals accorded foreign investor misconduct with negative legal consequences are not the only ones of importance to understand the law’s evolution. Cases in which allegations of foreign investor misconduct were raised but dismissed are also important given the legal argumentation, i.e. precise grounds for dismissal.4 Furthermore, categorisation requires dividing this wealth of case law by type, i.e. a “group of things that have similar features”.5 Thus, the outcome of this analysis should yield a reasonably comprehensive picture of how international investment tribunals have dealt with allegations of foreign investor misconduct. This picture of the legal landscape depicting international investment law’s response to misconduct will itself be further analysed in Chap. 5. In terms of comprehensiveness, one needs to bear in mind that currently many hundreds of cases addressing allegations of foreign investor misconduct exist and a detailed examination of all of them is impractical or even impracticable. Rather the aim of the present research is to present a selection of significant cases which provide a well-rounded sample of developments in case law and that allow the overall trend to be discerned involving foreign investor misconduct. This goal is achievable by adhering to a roadmap that comprises three broad stages. First, there will be a consideration of the very first, so-called ‘pioneering’ cases, which have over time proven to be seminal in shaping practice when addressing allegations of foreign investor misconduct. These cases are then described, analysed to identify key elements and subsequently categorised. Since these cases have played such a key role in establishing the trend, they can consequently be deemed to contain the most substantial considerations on the allegations of foreign investor misconduct, and thus they will be dealt with in some detail. The road map’s second stage is an examination and analysis of the further developments that have resulted from the categorised cases. This approach allows the discernment of the direction subsequent developments took and make clear any diversification of the overall trend that was initiated by the pioneering cases. The third and final stage will present outstanding cases that use the system’s latent potential to challenge and stretch the current boundaries of how international investment law tackles allegations of misconduct (as discussed in Chap. 3) and thus possibly pushing international investment law further along its evolutionary journey by providing new perspectives and prospects for the future. For the definition of an ‘illustration’ see the English Oxford Living Dictionary, https://dictionary. cambridge.org/dictionary/english/illustration. 4 A similar idea is shared in: Smuth and Polášek (2009), p. 278. 5 For the definition of a ‘category’ see the Cambridge Dictionary Online, https://dictionary.cam bridge.org/ru/%D1%81%D0%BB%D0%BE%D0%B2%D0%B0%D1%80%D1%8C/%D0%B0% D0%BD%D0%B3%D0%BB%D0%B8%D0%B9%D1%81%D0%BA%D0%B8%D0%B9/cate gory?q¼category+. 3

4.2 Pioneering Cases: Setting the Trend of According Foreign Investor. . .

4.2

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Pioneering Cases: Setting the Trend of According Foreign Investor Misconduct Legal Significance

4.2.1

Timeframe of the Pioneering Cases

Chapter 2 identified that the first treaty-based investment arbitration Directly involving an individual actor occurred in 1990. The volume of case law started to increase exponentially at the start of the 2000s. The early cases, as also reported in the literature, were quite modest with respect to jurisdictional objections raised by respondent States.6 This is quite understandable considering that actors in the field needed time to comprehend the functionality and available mechanisms of the newly emerged field of international investment law. Indeed, allegations of foreign investor misconduct and related objections are not the most straightforward and readily anticipated issues in international investment arbitration. Thus, the period from 2000 to 2010 may be seen as the first active decade yielding cases involving treaty-based international investment law arbitration. Thus, the pioneering cases on foreign investors’ misconduct sought for the present research were thought likely to be found in this period and hence the search for such cases was focused in this decade. Cases from 2010 onwards will necessarily be considered to examine the subsequent developments in case law with the most outstanding cases being presented separately in more detail.

4.2.2

Selection of the Pioneering Case Law on Foreign Investor Misconduct

4.2.2.1

Salini v. Morocco (31 July 2001): Insertion of the Notion of ‘Illegality’ into the Field of International Investment Law

The Salini award came to prominence in international investment law due to its interpretation of requirements on ‘investment’ under Article 25 of the ICSID Convention.7 In addition to this, the case was one of the first to indicate the legality requirement for foreign investments. Two Italian companies, Salini Construttor S.p.A and Italstade S.p.A (jointly referred to as the ‘Claimant’) won an international tender and entered into a construction contract with a State entity for the construction of highways. The work was completed but the parties had unresolved misunderstandings on the matter of the final account. The claimant filed a request for ICSID Arbitration against the Kingdom of Morocco while the respondent filed various jurisdictional objections. 6

Lalive (2003), pp. 381–382. See also: Dugan et al. (2008), p. 149. Salini Costruttori S.P.A. and Italstrade S.P.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/ 4, Decision on Jurisdiction, 31 July 2001, para. 52. [Salini v. Morocco]. 7

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One of the objections raised related to the notion of ‘covered investment’ and thus concerned the meaning and significance of the “in accordance with laws and regulations of the host State” clause, as stipulated in Article 1 of the Morocco – Italy BIT of 1990.8 The Kingdom of Morocco did not allege any illegal or inappropriate actions or omissions on the side of the Italian companies as such but rather referred to the “in accordance with host State law” clause to substantiate its position that ‘investment’ should be defined under the national law of a host State.9 Hence, it argued that the contract from which the dispute arose is classed under the national law of Morocco as a contract for services and not as an investment contract and thus meant there was no investment covered by the relevant BIT. The Italian companies objected that the clause refers to the “means of realizing the investment and not its definition”.10 The tribunal interpreted the “in accordance with host State law” clause as follows: this provision refers to the validity of the investment and not to its definition. More specifically, it seeks to prevent the Bilateral Treaty from protecting investments that should not be protected, particularly because they would be illegal.11

The Salini tribunal was arguably the first to insert the notion of ‘illegal investment’ into the field of international investment law. The way the tribunal did so is harshly criticised by Professor Douglas in his article “The Plea of Illegality in Investment Treaty Arbitration” where he points out that the Salini tribunal neither profoundly elaborated on the above-quoted finding nor cited any authority.12 Furthermore, he observed that “this interpretation was then adopted, without any further analysis, in a series of awards such that it now holds a virtual monopoly over the interpretative space granted to tribunals”.13 Indeed, having not been confronted with the actual allegations of foreign investor misconduct (as seen, the statement on ‘illegal’ investment was not raised by the facts of the case since no violation of Moroccan law at any time was alleged by the respondent14), the tribunal either did not profoundly contemplate or even realise the range of difficulties associated with the possible foreign investors’ misconduct, for example, the scope of the illegality indicated or its timing. Such a broad approach to the vision of the legality requirements has become a matter of precession and limitation in later

8

Salini v. Morocco, paras. 37. Salini v. Morocco, para. 38. Respondent’s submission that ‘investment’ shall be defined under national law of the host State has been quite typical in the realm of international investment law (see, for instance, Gustav F W Hamester GmbH & Co KG v. Republic of Ghana, ICSID Case No. ARB/07/24, Award, 18 June 2010, para. 81). With the establishment of consistent disapproval of such an argument, the position has almost disappeared from the field of international investment law. 10 Salini v. Morocco, para. 38. 11 Salini v. Morocco, para. 46. 12 Douglas (2014), p. 172. 13 Douglas (2014), p. 172. 14 See Salini v. Morocco, para. 46. 9

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awards on the matter,15 which will be addressed below. Nevertheless, it seems that the Salini award established or at least significantly contributed to the establishment of the idea that the ‘in accordance with host State law’ clause inserted into the definition of ‘investment’ imposes upon foreign investments a legal under host State national law requirement.16 In cases of non-compliance with national law, investments and possibly anything possessing the economic characteristics thereof, are not deemed to be ‘covered investments’ under IIAs. In terms of possible foreign investors’ misconduct, Salini serves to highlight the category of actions or omissions that violate host State national law.

4.2.2.2

Tokios Tokelès v. Ukraine (29 April 2004): Ownership and Control by Nationals of the Host State and Domestic Origin of the Invested Capital Was Not Seen as Voiding the Tribunal’s Jurisdiction

The Claimant, Tokios Tokalès, is a company incorporated under the laws of Lithuania. The company invested in the creation of a wholly-owned publishing and advertising subsidiary, Taki spravy, pursuant to the laws of Ukraine. Following a publication which presented one of Ukraine’s political opposition leaders in a positive light, the company faced a series of investigations and measures affecting normal company operations.17 In the ICSID arbitration that was commenced, Tokios Tokelès alleged that the measures violated international standards for foreign investment protection as stipulated in the Ukraine-Lithuania BIT.18 The respondent raised several jurisdictional objections which concerned the appropriateness of international protection for the said investor and its investment. First, the respondent denied the existence of a proper foreign investor, i.e. it raised jurisdiction objections ratione personae, a position it claimed was substantiated by the fact that Taki spravy was in fact 99% owned by Ukrainian nationals and the allegation that the purported investor was not engaged in substantial economic activities in Ukrainian territory.19 Insisting that Taki spravy was predominantly owned by Ukrainian nationals, the respondent urged the tribunal to pierce the corporate veil20 and apply the control test for the determination of corporate nationality. Under this test, corporate nationality

15

A solid elaboration on the legality requirement can be read, for example, in: Mr. Saba Fakes v. Republic of Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010, paras. 115–124. 16 See cases presented below. 17 Tokios Tokelès v. Ukraine, ICSID Case ARB/02/18, Decision on Jurisdiction, 29 April 2004, para. 3. [Tokios Tokelès v. Ukraine]. 18 Tokios Tokelès v. Ukraine, para. 3. 19 Tokios Tokelès v. Ukraine, para. 21. 20 Tokios Tokelès v. Ukraine, para. 22.

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should be determined by the nationality of its controlling shareholders.21 The respondent also argued that granting the investor international protection in such a situation would result in “allowing Ukrainian nationals to pursue international protection against their own government”.22 Upon the application of the control test, the tribunal stuck closely to the wording of the treaty as an indication of the will of the contracting States. As was pointed out by the tribunal, the wording of the BITs could well limit the protection granted to foreign investors,23 however, any such limitations must directly follow from the wording of the treaty. In the absence thereof, the tribunal shall be bound to apply the wording of the international investment agreements in its original meaning, as required by the Vienna Convention of the Laws of Treaties.24 Article 1 (2) (b) of the relevant Ukraine – Lithuanian BIT requires a qualified investor to be a “legal entity established in the territory of the Republic of Lithuania in conformity with its laws and regulations”.25 According to the tribunal, the original meaning of this wording presupposes the factual existence of a company which is registered under the national laws of a contracting State26 and given its straight-forward nature, no further restrictions could be read into the text.27 With regard to the alleged lack of ‘substantial business activity’, the tribunal pointed out that the relevant Ukraine-Lithuania BIT does not contain a denial of benefits clause and considered this to be the deliberate intention of the contracting States.28 In the tribunal’s view, the requirement to be an ‘established entity’ under the laws of the host State does not presuppose the demonstration of ‘substantial business activity’. Furthermore, the tribunal considered whether the “equitable doctrine of veil piercing” should “override the terms of the agreement between the Contracting Parties”29 and thus preclude the tribunal’s jurisdiction. In general, the tribunal did not oppose the possible applicability of the doctrine in international investment law,30 however, as was demonstrated by the ICJ in Barcelona Traction, reliance on this mechanism presupposes a serious allegation of abusive behaviour (fraud or malfeasance by virtue of purported nationality) which was not claimed by the

21

Tokios Tokelès v. Ukraine, para. 30. Tokios Tokelès v. Ukraine, para. 30. 23 Tokios Tokelès v. Ukraine, para. 30. 24 Tokios Tokelès v. Ukraine, para. 32. 25 Agreement between the Government of the Republic of Lithuania and the Government of Ukraine for the promotion and reciprocal protection of investments, 8 February 1994, http:// investmentpolicyhub.unctad.org/Download/TreatyFile/5033. 26 Tokios Tokelès v. Ukraine, para. 28. 27 Tokios Tokelès v. Ukraine, para. 32. 28 Tokios Tokelès v. Ukraine, paras. 33–36. 29 Tokios Tokelès v. Ukraine, para. 53. 30 Tokios Tokelès v. Ukraine, para. 56. 22

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respondent in the case at hand.31 Thus, the tribunal did not view an abuse had occurred despite the fact that a corporate foreign investor was in fact predominantly owned by nationals of the host State. In particular, it took into account that the company in question had been established six years prior to the Lithuania-Ukraine BIT entering into force and thus was not created “for the purpose of gaining access to ICSID arbitration”.32 An additional issue was raised when the respondent attacked the existence of the covered investment (jurisdiction ratione materiae) based on the two following assumptions: first, that the capital invested in the establishment of the said investment was not of foreign origin33 and second, that the investment was made in violation of Ukrainian national law.34 Regarding the capital’s origin, the tribunal did not find this requirement to be created by either the relevant BIT or by Article 25 of the ICSID Convention.35 The Tokios Tokelès tribunal prominently concluded that the foreign origin of invested capital is not an inherent characteristic of ‘foreign investment’.36 With regard to the alleged illegality of the investment under the national law of Ukraine, the tribunal generally shared the view of the Salini tribunal.37 Under Tokios Tokelès, any established illegality of an investment under host State law would be an obstacle for the tribunal’s jurisdiction.38 Nevertheless, the added value of Tokios Tokelès is the idea that an examination of any relevant illegality needs to be made in light of the object and the purpose of the BIT, which was seen by the tribunal to be “broad protection for investors and their investments”.39 Based on this rationale, minor inappropriateness under the national law of host States could not be seen as eliminating the international protection granted for foreign investments.40 The illegality alleged by the respondent (mistakes in some registration documents, and so forth.), even if proven, was deemed by the tribunal as insufficient to substantiate the objection raised to its jurisdiction.41 It is important to note that the tribunal’s position was subject to harsh criticism by the president of the tribunal in a dissenting opinion. Professor Weil generally

31

Tokios Tokelès v. Ukraine, para. 55. Tokios Tokelès v. Ukraine, para. 56. 33 Tokios Tokelès v. Ukraine, para. 72. 34 Tokios Tokelès v. Ukraine, para. 83. 35 Tokios Tokelès v. Ukraine, para. 80. 36 Tokios Tokelès v. Ukraine, para. 82. 37 Tokios Tokelès v. Ukraine, para. 84. 38 Tokios Tokelès v. Ukraine, para. 85. 39 Tokios Tokelès v. Ukraine, para. 85. 40 Tokios Tokelès v. Ukraine, para. 86. 41 Tokios Tokelès v. Ukraine, para. 86. 32

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disagreed with the entire “philosophy” of the award42 and, in his opinion, the majority of the tribunal did not sufficiently take into account the jurisdictional requirement of the ICSID Convention.43 In view of the object and purpose of the ICSID Convention, the tribunal should have reached the conclusion that “the ICSID mechanism and remedy are not meant for, and are not to be constructed as, allowing – and even less encouraging – nationals of a State party to the ICSID Convention to use a foreign corporation, whether pre-existent or created for that purpose, as a means of evading the jurisdiction of their domestic courts and the application of their national law”.44 This conclusion, according to Professor Weil, should have been reached by objective reliance on the object and purpose of the ICSID Convention to “preserve the integrity” of the system and not to by any means sanction a claimant’s conduct.45 Moreover, in the view of Professor Weil, the origin of the capital is “relevant, and even decisive”.46 To conclude, Tokios Tokelès v. Ukraine has become a landmark case in elaborating whether a company formally organised under the laws of one contracting State to a BIT but owned and controlled by nationals of another contracting State (host State) could be seen as a foreign investor, and whether an investment established by means of capital generated largely within the host State could still be seen as a foreign investment. The tribunal opted to adhere to the formal requirements as stipulated in the BIT and did not consider that the facts of the case constituted valid grounds to eliminate the international protection for the foreign investments under consideration. The award rendered by the majority may thus be viewed as a manifestation of the will of the contracting States and a literal reading of the BIT’s requirements on foreign investors and foreign investment.

4.2.2.3

Inceysa v. El Salvador (2 August 2006): Foreign Investor Misconduct as a Matter of ratione voluntatis

The claimant, Inceysa Vallisoletana S.L. (“Inceysa”), a company incorporated under the laws of the Kingdom of Spain, filed a request for ICSID arbitration alleging a “contractual breach and expropriation on the part of El Salvador”.47 In its turn, the Republic of El Salvador as the respondent accused Inceysa of committing fraud and argued for the elimination of protection otherwise granted under the El Salvador –

42 Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18, Dissenting Opinion of the Chairman Professor Prosper Weil, 29 April 2004, para. 1. [Tokios Tokelès, Dissenting Opinion Chairman P. Weil]. 43 Tokios Tokelès, Dissenting Opinion Chairman P. Weil, para. 14. 44 Tokios Tokelès v. Ukraine, Dissenting Opinion Chairman P. Weil, para. 30. 45 Tokios Tokelès, Dissenting Opinion Chairman P. Weil, para. 25. 46 Tokios Tokelès v. Ukraine, Dissenting Opinion Chairman P. Weil, para. 20. 47 Inceysa Villasoletana S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26, Award, 2 August 2006, para. 3. [Inceysa v. El Salvador].

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Spain BIT. More precisely, the respondent requested that the tribunal should not exercise its jurisdiction or should alternatively declare the claims inadmissible.48 The facts of the case dealt with the alleged fraud committed by Inceysa as a participant in the public tender process to supply mechanical inspection services for vehicles in El Salvador. In connection with this, the respondent provided evidence of various instances of frauds committed by the claimant, such as the presentation of false financial statements, the submission of false information on strategic partners and on prior experience as well as the company presenting forged documents to meet the criterion for the bidding process and become the successful candidate. The respondent submitted that only by engaging in such fraudulent activity did the claimant secure the tender offered by the Salvadoran government ministry.49 The El Salvador – Spain BIT does not contain an ‘in accordance with host State law’ clause in its definition of investment. Instead, a reference to the conformity with host State law is provided in the article addressing ‘protection and admission’ of foreign investments.50 In such a constellation, as presented by the respondent, the legality requirement is included in the consent to jurisdiction and not in the existence of the ‘covered’ investment. The respondent focused on the position that the consent to arbitration given by the contracting States also encompasses investments made in accordance with the law and consequently excludes investments made illegally,51 meaning that El Salvador did not object per se to the existence of the investment (ratione personae) or the foreign investor (ratione materiae). The tribunal characterised the argument raised as an objection on jurisdiction ratione voluntatis52 and deemed that “El Salvador gave its consent to the jurisdiction of the Centre, presupposing good-faith behaviour on the part of future investors”.53 As held by the tribunal, the protection of investments made in concert with fraud would run contrary to the general principle of good faith, which is also a part of Salvadoran law.54 The tribunal referred to the principle of good faith as “a supreme principle, which governs legal relations in all of their aspects and content”55 and also saw its duty to prevent the proliferation of transactions which arise from fraud. In its words: “allowing Inceysa to benefit from an investment made clearly in violation of the rule of the bid in which it originated would be a serious failure that this Tribunal is obliged to render”.56

48

Inceysa v. El Salvador, para. 62. Inceysa v. El Salvador, paras. 53–61. 50 Article 2, Agreement between the Kingdom of Spain and the Republic of Lithuania for the promotion and reciprocal protection of investments, 14 February 1995, https://www.italaw.com/ sites/default/files/laws/italaw6098.pdf. 51 Inceysa v. El Salvador, para. 141. 52 Inceysa v. El Salvador, para. 144. 53 Inceysa v. El Salvador, para. 238. 54 Inceysa v. El Salvador, para. 243. 55 Inceysa v. El Salvador, para. 231. 56 Inceysa v. El Salvador, para. 244. 49

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Furthermore, the tribunal considered that the inclusion of the ‘in accordance with host State law’ clause into BITs is a clear manifestation of international public policy57 as “a series of fundamental principles that constitute the very essence of the State, and its essential function is to preserve the values of the international legal system against actions contrary to it”,58 where international public policy is viewed as a “meta-positive provision that prohibits attributing effects to an act done illegally”.59 The logic of the Inceysa ruling, as detailed below, inspired the Plama tribunal to refer directly to the general principles of the law to read the legality requirement into the definition of ‘investment’ even in the absence of any reference thereto in the text of the relevant treaty.60 In addition, the tribunal saw a violation of the principle that no one can benefit from their own wrongdoing61 as well as unlawful enrichment.62 It concluded that “Inceysa tried to enrich itself, signing an administrative contract with MARN, which, without any doubt, would produce considerable profit for it”. In conclusion, the tribunal stated that the investment by Inceysa had been proven to be made in an illegal manner and thus “it is not included within the scope of consent expressed by Spain and the Republic of El Salvador in the BIT and, consequently, the disputes arising from it are not subject to the jurisdiction of the Centre”.63 The proven foreign investor misconduct was taken into account by the tribunal in its decision to require the claimant bear the full costs of arbitration, including the ICSID administrative fee,64 however, the tribunal did not order the claimant to pay the legal fees of the respondent.65 In terms of the discovery and development of the inherent potential of international investment law to deal with foreign investor misconduct, the Inceya tribunal directly referred to the principle of good faith as an “autonomous or direct source of international law”66 and demonstrated that this principle is a useful tool to open up options to other tribunals.67 Furthermore, the tribunal represents a demonstration of

57

Inceysa v. El Salvador, para. 246. Inceysa v. El Salvador, para. 245. 59 Inceysa v. El Salvador, para. 248. 60 Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 141. 61 Inceysa v. El Salvador, paras. 240–244. 62 Inceysa v. El Salvador, paras. 253–257. 63 Inceysa v. El Salvador, para. 257. 64 Inceysa v. El Salvador, para. 338. 65 This distinguishes the Inceysa tribunal from the Plama tribunal, which will be presented below. The Plama tribunal also ordered the investor to bear the Respondent’s legal fees. 66 Inceysa v. El Salvador, para. 226. 67 See the reference to Inceysa by the Plama Tribunal, Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 141; by Phoenix Tribunal, Phoenix Action Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 111. 58

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legal reasoning upon which allegations of foreign investor misconduct may be dealt with as a matter of consent of the contracting States (ratione voluntatis).

4.2.2.4

World Duty Free Company Limited v. The Republic of Kenya (4 October 2006): Corruption in International Investment Law

The World Duty Free Company Limited v. The Republic of Kenya case arose out of an investment contract. Thus, on the one hand, the case does not belong to the current presentation of the key treaty-based international investment cases, but on the other hand, the case is frequently referred to by treaty-based international investment tribunals68 and thus has had a considerable impact on the development of treaty-based international arbitration cases. Arguably, the case was the first instance in which a tribunal confronted a proven allegation of corruption on the part of a foreign investor and has been instrumental in setting the trend of according legal consequences for such misconduct. To begin with, a short overview of this contract-based international arbitration seems to be well justified. The claimant, World Duty Free Company Limited, commenced ICSID arbitration alleging the expropriation of its investment used to construct, maintain and operate duty-free complexes in Nairobi and Mombasa International Airports. The agreement for the construction and operation of the duty-free shops was signed by the claimant in 1989 with a privately-owned company named “House of Perfume”.69 In 1995 the 1989 contract was followed by a contract identical in its context, which was signed by the claimant and the Kenya Airports Authorities which was acting on behalf of the Kenyan government.70 Until 1992 the claimant’s investment operation ran smoothly, however, from 1992 onward the claimant described a series of judicial, administrative and financial actions were taken against the claimant’s investment.71 The ICSID contract-based arbitration was initiated in the year 2000. At the outset of the proceeding, the claimant explained that it was urged to ‘donate’ to the Kenyan president an amount of US$2 million, an allegation provided by the claimant to support its position on the maltreatment by Kenya’s government.72 The allegation was disregarded by the arbitral tribunal until the legal submission of the respondent in March 2003,73 a few of months after the president

68

For example, Phoenix Tribunal, Phoenix Action Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 102, FN 70; Metal-Tech Ltd. v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 242. 69 World Duty Free Company Limited v. The Republic of Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006, para. 62. [World Duty Free v. Kenya]. 70 World Duty Free v. Kenya, para. 65. 71 World Duty Free v. Kenya, paras. 68–73. 72 World Duty Free v. Kenya, para. 66. 73 World Duty Free v. Kenya, para. 182.

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at the centre of the allegation, Daniel arap Moi, left office.74 Three years after the commencement of the arbitration the respondent submitted that the investment contract had been obtained through the payment of a bribe to the then-president75 and consequently the said agreement should be deemed void and unenforceable.76 Only following this legal submission by the respondent did the tribunal pose the question of whether the ‘donation’ constituted a bribe and what the legal consequences thereof should be to “the validity and enforceability” of the investment contract.77 This demonstrates the tribunal’s reluctance to involve itself in a consideration of corruption on its own initiative. On the legal classification of the ‘donation’, the claimant argued that the payment was a part of the local “cultural practices when people are able to pull whatever resources they have, ‘in particular’ to finance community projects”.78 The tribunal considered that the facts as described by the claimant sufficiently substantiated that the payment was used to secure the investment contract. Thus, according to the tribunal, the payment “must be regarded as a bribe made in order to obtain the conclusion of the 1989 Agreement”.79 In outlining the legal consequences of the proven bribe, the tribunal referred to Kenyan and English law as the law applicable to the investment agreement80 as well as to international public policy.81 With a reference to national judicial decisions,82 international conventions, legal documents prohibiting corruption,83 and international arbitral awards (especially awards rendered by the International Chamber of Commerce),84 the tribunal concluded that “bribery is contrary to the international public policy of most, if not all States”. Therefore, the tribunal stated that “claims based on contracts of corruption or on contracts obtained by corruption cannot be upheld by this Arbitral Tribunal”.85 The same conclusion was confirmed under both English and Kenyan law.86 Interestingly, in arriving at the said conclusion, the tribunal considered a possible justification of the claimant’s conduct, such as the actual existence of the described local custom in Kenya that could legitimate the

74 The President of Kenya Daniel arap Moi left office on 30 December 2002, see: https://en. wikipedia.org/wiki/Daniel_arap_Moi. 75 World Duty Free v. Kenya, para. 105. 76 See: World Duty Free v. Kenya, paras. 106–108. 77 World Duty Free v. Kenya, para. 129. 78 World Duty Free v. Kenya, para. 133. 79 World Duty Free v. Kenya, para. 136. 80 World Duty Free v. Kenya, paras. 158–182. 81 World Duty Free v. Kenya, paras. 138–157. 82 World Duty Free v. Kenya, para. 147. 83 World Duty Free v. Kenya, paras. 143–146. 84 World Duty Free v. Kenya, paras. 148–156. 85 World Duty Free v. Kenya, para. 157. 86 World Duty Free v. Kenya, para. 179.

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conduct in question87 as well as the illegality of the Kenyan president’s conduct (so-called double illegality, illegal conduct on both sides).88 However, none of those grounds could have been legally taken into account to reverse the invalidity and non-enforceability of the contract.89 Another key point raised here with the issue of double illegality, the tribunal stated that “the bribe was not procured by coercion or oppression or force by the Kenyan President nor by ‘undue influence’; and as regards any investment, there was at the material time no ‘hostage factor’ because there was then no investment or other commitment in Kenya by Mr Ali90 or his principal. Prior to paying the bribe, Mr Ali retained a free choice whether to invest in Kenya and whether to conclude the Agreement; but Mr Ali chose, freely, to pay the bribe.”91 The tribunal thus concluded that the claimant is not “legally entitled to maintain any of its pleaded claims in this proceeding as a matter of ordre public international and public policy under the contract’s applicable law”.92 Given the fact that neither party to the dispute could be regarded as unblemished by what had transpired, the proven misconduct by the claimant did not have any impact on the allocation of costs and expenses and each party was held equally responsible to bear the costs of the case.93 This case opens something of a Pandora’s box for the issue of corruption in the field of international investment, especially given that corruption is a serious allegation to be made. In a number of awards prior to the Duty Free case the issue of bribery had been raised but in each instance it was dismissed due to a lack of evidence.94 Duty Free v. Kenya is unique in this regard since the claimant admitted to and provided the necessary proof of bribery. Notwithstanding that the Duty Free tribunal was constituted under an investment contract rather than an IIA, its legal analysis has significantly contributed to the development of treaty-based investment arbitration by the insertion of the hitherto new element of corruption as a form of misconduct which needs to be combated.

87

World Duty Free v. Kenya, para. 172. World Duty Free v. Kenya, paras. 169, 180. 89 World Duty Free v. Kenya, paras. 170, 173, 178. 90 Mr. Ali and his wife are the shareholder of the World Duty Free (Claimant). See: World Duty Free v. Kenya, para. 64. 91 World Duty Free v. Kenya, para. 178. 92 World Duty Free v. Kenya, para. 188. 93 World Duty Free v. Kenya, paras. 190, 191. 94 See, for example: Wena Hotels Limited v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000, paras. 111–117; Tanzania Electric Supply Co. v. Independent Power Tanzania Ltd, ICSID Case ARB/98/8, Final Award, 12 July 2001, paras. 41–49, 52. 88

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Fraport v. Philippines (16 August 2007): Clarification on the Illegality Requirement, the Element of Time

The claimant, Fraport AG Frankfurt Services Worldwide, made an investment in the Philippine company PIATCO (Philippine International Air Terminal Co. Inc.) which led to the direct and indirect ownership of more than 60% of the latter,95 which subsequently received concession rights for the construction and operation of a new international terminal at Manila airport.96 The case arose based on the Germany – Philippines BIT of 1997 with the claimant alleging various violations in the treatment of the investment, including the indirect expropriation of its investment and unfair and inequitable treatment. For its part, the Republic of the Philippines as the respondent, raised jurisdictional objections and submitted that the investment was made “in violation of the laws of the Philippines, in particular foreign ownership and control legislation known as the Anti-Dummy Law”.97 Furthermore, the respondent also submitted that the claimant was guilty of committing fraud and being involved in corruption.98 As occurred in the World Duty case, the tribunal did not initially pay much attention to the allegations of corruption and fraud, preferring to focus on what it saw as the core issue in the case at hand, namely the legality of the investment under Philippine law. Turning to the details, the respondent argued that the claimant’s investment violated the above-mentioned Anti-Dummy Law’s (ADL) restrictions imposed on foreign nationals taking part in certain commercial and corporate activities, for example, the management, operation, administration and control of Philippine public utilities.99 As was revealed in the arbitration, Fraport had entered into a secret shareholder agreement with another major shareholder in PIATCO possessing Philippine nationality. This agreement guaranteed Fraport “a casting and controlling vote” in questions of its “expertise and competence”.100 The essence of the matter before the tribunal then was whether the investment was in accordance with Philippine law. As a matter of legal position, neither the parties nor the arbitral tribunal consented that the Germany-Philippines BIT imposed a legality requirement as a part of ratione materiae jurisdiction.101 Even so, the parties had divergent views on the meaning and coverage of the legality requirement stipulated in the BIT. The respondent submitted that the ‘in accordance with host State law’ clause equates to the statement “the duty to comply with the host State’s law is an ongoing one which must be

95 Fraport AG Frankfurt Airport Services Worldwide v. The Republic of the Philippines, ICSID Case No. ARB/03/25, Award, 16 August 2007, para. 2. [Fraport v. Philippines]. 96 Fraport v. Philippines, para 2. 97 Fraport v. Philippines, para. 4. 98 Fraport v. Philippines, para. 5. 99 For more details: Fraport v. Philippines, para. 309. 100 Fraport v. Philippines, para. 398. 101 Fraport v. Philippines, para. 334.

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respected throughout the period in which the investment is made”.102 The claimant argued that compliance with the host State law “must be assessed at the time of the investment”.103 Thus, the positions differ with respect to the relevant law at the time of the alleged illegality. This matter of timing was not as such relevant to the factual constellation of the case as illegality over the course of the subsequent operation of the investment was not claimed. The dispute concerned the legality at the time of the establishment of the investment,104 however, the tribunal found it important to point out obiter dictum that “if, at the time of the initiation of the investment, there has been compliance with the law of the host state, allegations by the host State of violations of its law in the course of the investment, as a justification for State actions with respect to the investment, might be a defence to claimed substantive violations of the BIT, but could not deprive a tribunal acting under the authority of the BIT of its jurisdiction”.105 By stating this, the tribunal differentiated illegality at the commencement of investment (as a valid limitation of ratione materiae jurisdictional requirements) and illegality over the course of further investment activity (potentially as a valid defence on the merits). Additionally, the tribunal considered that by deliberately entering into the secret arrangement Fraport “knowingly and intentionally circumvented the ADL”.106 In the view of the tribunal, such conduct could not be ignored for the purpose of determining the investment’s legality.107 Over the course of its elaboration, the tribunal agreed that the legality requirement may be read in a “more liberal way”,108 for example, the complication of the legal provision of the host State law or the insufficiency of violation may be considered prior to any rejection of the tribunal’s jurisdiction.109 Nevertheless, a foreign investor must at all times act in good faith.110 In the case at hand, the tribunal deemed that the conduct of the foreign investors was “egregious” and evidently not in good faith.111 The tribunal rejected its jurisdiction over this “unusual arbitration”,112 yet it did not consider the foreign investors’ conduct as relevant on the level of allocation of costs. Contrary to the awards considered above, in dealing with the matter of foreign investor misconduct, the Fraport tribunal required each party to bear its own costs and expenses. The Fraport award significantly contributed to international investment law’s elaboration on the scope and subject matter of the legality requirement. Further to

102

Fraport v. Philippines, para. 286. Fraport v. Philippines, para. 298. 104 Fraport v. Philippines, para. 345. 105 Fraport v. Philippines, para. 345. 106 Fraport v. Philippines, para. 401. 107 Fraport v. Philippines, para. 398. 108 Fraport v. Philippines, para. 396. 109 Fraport v. Philippines, para. 396. 110 Fraport v. Philippines, para. 396. 111 Fraport v. Philippines, paras. 397–398. 112 Fraport v. Philippines, para. 405. 103

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this, the tribunal decision stands out with its refinement of classifying good or bad faith conduct of foreign investors and a clear insertion into the field of international investment law of a dividing line that the presumption of protection in favour of investors generally does not apply in cases involving intentional bad faith conduct.

4.2.2.6

Plama Consortium v. Bulgaria (8 February 2005 Decision on Jurisdiction; 27 August 2008 Award on Merits): Suggestion on the Inherent Requirement of Legality in IIAs’ Definitions of Investment

The claimant in this case was Plama Consortium Limited, a Cypriot company that bought shares in Nova Plama AD, a Bulgarian company which owned an oil refinery in Bulgaria. The ICSID case arose due to, as alleged by the claimant, “numerous grave problems for Nova Plama [because the Bulgarian government] refused or unreasonably delayed the adoption of adequate corrective measures”.113 The respondent made jurisdictional objections, including on the matter of misrepresentation where it was submitted that during negotiations for the acquisition of Nova Plama, the claimant indicated that the transaction would be undertaken in co-operation with “two large commercial entities”.114 However, in the end these two companies “had decided not to be investors”115 and as alleged by the respondent, this was intentionally concealed by the claimant.116 Furthermore, the respondent submitted that the compulsory authorisation of the transaction by the Privatisation Authority is a requirement imposed by the national law of Bulgaria and argued that had it known the two companies had withdrawn authorisation would not have been given.117 The respondent's argument that followed was that since any authorisation obtained by virtue of misrepresentation shall be deemed null and void, any subsequent investment made violated Bulgarian law.118 Interestingly, the jurisdictional objection based on the allegation that the claimant “materially misrepresented or willfully failed to disclose the Claimant’s true ownership to the Bulgarian authorities”119 was raised only in the oral hearing, nine months after the commencement of the proceedings.120 The tribunal dismissed these objections to jurisdiction as “belatedly” filed but without criticising the conduct as

113

Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005, para. 21. [Plama v. Bulgaria, Jurisdiction]. 114 Plama v. Bulgaria, Jurisdiction, para. 228; Plama Consortium Limited v. Republic of Bulgaria, Award, 27 August 2008, para. 100. [Plama v. Bulgaria, Award]. 115 Plama v. Bulgaria, Jurisdiction, para. 228. 116 Plama v. Bulgaria, Award, para. 100. 117 Plama v. Bulgaria, Jurisdiction, para. 228. 118 Plama v. Bulgaria, Jurisdiction, para. 228. 119 Plama v. Bulgaria, Jurisdiction, para. 126. 120 Plama v. Bulgaria, Jurisdiction, para.129.

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such.121 This example shows that jurisdictional objections, including on the matter of foreign investor misconduct, need to be filed by the respondent within the given period of time. Article 41 of the ICSID Procedural Rules provides that such objections must be filed “as soon as possible” and in any event no later than the filing of a counter-memorial. However, Part 2 of Article 41 of the ICSID Procedural Rules empowers the tribunal to “on its own initiative consider, at any stage of the proceedings, whether the dispute or any ancillary claim before it is within the jurisdiction of the Centre and within its own competence”. This right was exercised by the Plama tribunal, which, even though it dismissed jurisdictional objections, reserved the matter of misrepresentation as a “serious charge”122 for the merits stage to be addressed as a question of the admissibility of the claims.123 The tribunal approached these allegations of misrepresentation in two steps— first, regarding the fact that it agreed with the respondent’s position that the claimant had “deliberately misrepresented [the transaction] to the Bulgarian authorities”.124 Second, the question arose about the legal consequences of such misrepresentation. In contrast to most IIAs, the Energy Charter Treaty, which served as a legal basis for the claim, does not entail an ‘in accordance with the host State law’ clause. Regarding this, the tribunal pointed out: This does not mean, however, that the protections provided for by the ECT cover all kinds of investments, including those contrary to domestic or international law.125

By stating this the tribunal read into the definition of ‘investment’ an inherent requirement of legality, notwithstanding a lack of any specific mention thereof in the relevant normative provision. This is a noteworthy contribution by the Plama tribunal which has since been referred to in other cases.126 It is not quite clear from the tribunal’s reasoning whether the claimant’s investment does not merit ECT protection as illegal under the legislation specific to Bulgaria (namely, Article 5.1 of the Privatisation Act, which requires approval from the Privatisation Authority) or as violating the principle of good faith, which is “not only part of Bulgarian law but also international law”.127 The Plama tribunal stressed that the protection of an investment made by virtue of deceitful conduct would contradict the principle that no one can benefit from their own wrongdoing (nemo auditur propriam turpitudinem allegans). Moreover, the tribunal considered that the enforcement of a contract which was obtained by fraud or other violations would run contrary to

121

Plama v. Bulgaria, Jurisdiction, para. 129. Plama v. Bulgaria, Award, para. 97. 123 Plama v. Bulgaria, Jurisdiction, para. 229. 124 Plama v. Bulgaria, Award, para. 129. 125 Plama v. Bulgaria, Award, para. 138. 126 For example: Phoenix Action Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 101. 127 Plama v. Bulgaria, Award, para. 144. 122

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international public policy.128 The tribunal justified the applicability of the standalone principle of good faith and international public policy with reference to earlier decisions in Inceysa and World Duty Free.129 It is also noteworthy how the tribunal defined the scope of good faith when it stated: The principle of good faith encompasses, inter alia, the obligation for the investor to provide the host State with relevant and material information concerning the investor and the investment. This obligation is particularly important when the information is necessary for obtaining the State’s approval of the investment.130

On the one hand, one can intuitively follow the tribunal’s position that wrongdoing should not be protected. But the question has to be asked as to whether the tribunal’s reasoning is profoundly based in both the composition of international investment law, as created by the drafters, and in the understanding of good faith under current international law? More specifically, what legal ground can one cite for the direct application of the principle of good faith as a general principle of international law to individuals who are not direct subjects thereof? Moreover, is the principle of good faith indeed understood to create such a specific obligation to inform any party of a particular subject matter? It seems that such specifications should be matters of contractual agreements between the involved actors. Irrespective of all of this, the Plama tribunal succeeded in moving the frontiers of normative constructions which form current international investment law by suggesting the incorporation of legality requirements into the notion of ‘investment’, notwithstanding the lack of any specific mention thereof in relevant agreements. In terms of real-world change, the Plama tribunal laid the groundwork for qualifying misrepresentation, i.e. any deliberate actions/or omissions designed to hide the true identity of a foreign investor are unacceptable and in bad faith. Apparently, the decision was not adopted without hesitation, which became apparent in the award by the tribunal’s move to fully consider the merits of the case (to demonstrate that the “Claimant’s claims on the merits would have failed”131 anyway), notwithstanding its finding on the inadmissibility of the claims. Nevertheless, from the outset the tribunal took a very dim view of the claimant’s conduct132 and sanctioned it by allocating to the claimant all the fees and expenses of the tribunal, ICSID Secretariat, as well as “the reasonable amount of legal fees and other costs incurred by Respondent”.133 This practice of an arbitral tribunal punishing the misconduct of foreign investors by means of allocating costs is an important element for the analysis below.

128

Plama v. Bulgaria, Award, para. 143. The case concerned allegations of corruption. The tribunal considered corruption to be in violation of international public policy. 130 Plama v. Bulgaria, Award, para. 144. 131 Plama v. Bulgaria, Award, para. 147. 132 Plama v. Bulgaria, Award, para. 321. The tribunal stated that the “Claimant was guilty of fraudulent misrepresentation in obtaining its investment in Bulgaria”. 133 Plama v. Bulgaria, Award, para. 322. 129

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Phoenix Action v. The Czech Republic (15 April 2009): Good Faith as a Requirement for a Protected Investment

The claimant, Phoenix Action, is an Israeli company owned by Mr Beňo. In December 2002 the claimant purchased shares in two companies incorporated under Czech Republic law and active in the import and export of ferroalloys.134 This transaction has a questionable background as it was revealed during the arbitration that one of the companies purchased was owned by Mr Beňo’s wife and the other by various members of Mr Beňo’s family.135 Moreover, Mr Beňo himself used to be an executive officer of one of the companies purchased. At the time of the share transfer, the companies were involved in national litigation with both a private actor and the Czech fiscal authority136 and due to criminal investigations against him, Mr Beňo fled the Czech Republic and went to Israel where he founded another company which in turn became the claimant in the case.137 To summarise the facts then, the claimant transferred shares from an affiliated Czech company to the new Israeli company and shortly after commenced ICSID arbitration. The question arose of whether such (mis)conduct on the part of the claimant eliminates the international protection otherwise granted to his foreign investments. The factual constellation presented above was defined by the respondent as “one of the most egregious cases of ‘treaty-shopping’ that the investment arbitration community has seen in recent history. The purported investor, Phoenix, acquired the Benet Companies for the precise purpose of bringing their pre-existing and purely domestic disputes before an international judicial body”.138 In terms of legal argumentation, the respondent pleaded that the tribunal must “look beyond the shell of the corporate claimant” and apply the general principle of law which “applies to all bilateral investment treaties and the rights derived therefrom”.139 Furthermore, it claimed that the tribunal does not have jurisdiction ratione temporis over claims that arose prior to acquisition.140 Additionally, the Czech Republic questioned the existence of an investment as provided for in Article 25 of the ICSID Convention and elaborated upon by the Salini tribunal and in both Articles 1 and 7 of the relevant Czech-Israeli BIT.141 Finally, in the alternative, the respondent submitted the inadmissibility of the claims due to the inappropriateness of the 134

Phoenix Action Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, paras. 22, 25. [Phoenix v. The Czech Republic]. 135 Phoenix v. The Czech Republic, para. 27. 136 Phoenix v. The Czech Republic, para. 28. 137 Phoenix v. The Czech Republic, para. 32. 138 Phoenix Action Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Respondent’s Memorial on Jurisdiction, 25 July 2007, para. 3. 139 Phoenix v. The Czech Republic, para. 13. 140 Phoenix Action Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Respondent’s Memorial on Jurisdiction, 25 July 2007, para. 60. 141 Phoenix Action Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Respondent’s Memorial on Jurisdiction, 25 July 2007, para. 89.

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circumstances presented above.142 Thus, the alleged misconduct was presented by the respondent in several objections: the existence of an investor (application of the general principle of good faith requires looking beyond mere corporate structure), the existence of investment (non-satisfaction of requirements of Article 25 as elaborated by Salini; in addition to the Salini criteria, the respondent pointed out the absence of real economic activity,143 ratione temporis (a pre-existing dispute is not covered, issues which gave rise to the dispute arose prior to the acquisition of shares). This is probably the most extended legal elaboration presented for arbitration and which, in turn, caused the tribunal to consider all the known jurisdictional requirements in sequence (ratione personae, ratione voluntatis, ratione temporis and ratione materiae) before discussing whether the alleged misconduct influenced the existence of any of these requirements. This long and multi-staged process led to the award becoming one of the most systematic analyses of the qualification of conduct into legal categories. On ratione personae: the tribunal did not apply the general principle of good faith and did not look beyond formal criteria stipulated in the BIT.144 Further, contrary to Inceysa, the Phoenix tribunal considered that ratione voluntatis is met by the consent given in the BIT and the fact that the claimant brought the case.145 On ratione temporis, the tribunal clarified its position that it does not have jurisdiction over claims that arose prior to the purchase of the shares.146 The facts as perceived by the Phoenix tribunal raised the most concern in view of the existence of jurisdiction ratione materiae and the existence of an investment under the terms of the relevant BIT as well as Article 25 of the ICSID Convention, the so-called “double-barrelled test”.147 At first, the tribunal suggested reading both definitions in accordance with the principle of good faith as well as in compliance with their object and purpose, as required by the Vienna Convention on the Law of Treaties. By integrating the purpose into the notion of ‘investment’, the tribunal distinguished between so-called ‘looks-like’ investments (“an economic operation which is objectively an investment”148) and ‘real’ investments (“an economic operation, which by nature is or looks like an investment, is indeed an investment deserving international protection”149). Further, the tribunal elaborated that “investments made in violation of the laws of the host State or investments not made in good faith, obtained for example through misrepresentation, concealment or

142

Phoenix v. The Czech Republic, para. 40. See Phoenix v. The Czech Republic, para. 39. 144 Phoenix v. The Czech Republic, para. 65. 145 Phoenix v. The Czech Republic, para. 66. 146 Phoenix v. The Czech Republic, paras. 67–71. 147 Phoenix v. The Czech Republic, para. 74. The double-barrelled test requires separate and independent examination of the existence of ‘investment’ under the applicable BIT as well as under Article 25 of the ICSID Convention. 148 Phoenix v. The Czech Republic, para. 79. 149 Phoenix v. The Czech Republic, para. 79. 143

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corruption, or amounting to an abuse of the international ICSID arbitration system”150 cannot be protected. This passage inserted a ‘bona fide’ aspect for an investment in the field of international investment law. The tribunal also viewed good faith as an additional and independent requirement that has a bearing on the notion of ‘investment’ in order to “benefit from the international protection of the ICSID”.151 Having established a well-elaborated legal basis for analysis, the tribunal proceeded to view the facts in light of relevant law. In doing so it did not contest that the acquisition of a struggling local company152 and at a low price153 constitutes a prima facie investment,154 even deeming that the fact the companies purchased did not generate profit “cannot disqualify an economic operation as an investment”.155 The tribunal drew a dividing line between the intention to take part in economic activities and “good faith efforts to do so”.156 Analysis of “the whole series of factors surrounding the alleged investment of Phoenix”,157 namely, the timing of the acquisition and claim, the substance of the transaction and the nature of the operation158 all led the tribunal to conclude that “the unique goal of the ‘investment’ was to transform a pre-existing domestic dispute into an international dispute”.159 Such conduct was adjudged by the tribunal as not in good faith and as an abuse of rights.160 Furthermore, the tribunal stressed its duty not to grant protection to investments made by such an “abusive manipulation of the system of international investment protection under the ICSID Convention and the BITs”.161 Thus, Phoenix’s investment was not deemed to be a ‘protected investment’ and the tribunal concluded it lacked jurisdiction over the matter. In line with previously discussed awards, the tribunal penalised the misconduct by making all ICSID costs as well as the respondent’s legal fees and expenses payable by the claimant. The Phoenix case was the first in a series of cases that established a rudimentary pattern of how the abuse of process and acquisition of shares to obtain international protection for foreign investments are handled. This pattern of post-Phoenix developments in such cases will be examined in greater detail later in this paper. The Phoenix case became prominent through its extensive analysis and elaboration on legality requirements as well as the bona fide features of what constitutes a 150

Phoenix v. The Czech Republic, para. 100. Phoenix v. The Czech Republic, para. 114. 152 Phoenix v. The Czech Republic, para. 127. 153 Phoenix v. The Czech Republic, para. 119. 154 Phoenix v. The Czech Republic, paras. 119, 123. 155 Phoenix v. The Czech Republic, para. 113. 156 Phoenix v. The Czech Republic, para. 133. 157 Phoenix v. The Czech Republic, para. 135. 158 Phoenix v. The Czech Republic, paras. 135–144. 159 Phoenix v. The Czech Republic, para. 142. 160 Phoenix v. The Czech Republic, paras. 142–143. 161 Phoenix v. The Czech Republic, para. 144. 151

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‘protected investment’. It could also be considered as the most frequently referred to and cited case on foreign investor misconduct, thus explaining the rather detailed presentation of the case above.

4.2.2.8

Cementownia v. Republic of Turkey (17 September 2009): Initiation of International Arbitration in Bad Faith

In this case the claimant, the Polish company Cementownia “Nowa Huta”, commenced international ICSID arbitration against the Republic of Turkey regarding the alleged expropriation of its investment in two companies, CEAS and Kepez, both incorporated under the laws of Turkey. Cementownia became a foreign investor by virtue of its acquisition of shares in the said Turkish companies. However, during the arbitration some irregularities surrounding the transfer of shares gradually emerged.162 As a matter of fact, in order to initiate the proceeding the claimant only submitted a copy of the share purchase certificate and following a request by the respondent to submit the original was unable to do so even with the tribunal granting several deadline extensions in the proceedings.163 Being unable to produce the original shares certificate, the claimant requested that the tribunal dismiss the claims without prejudice. A similar request was also made by the respondent, yet on different grounds, namely, absence of the tribunal’s jurisdiction due to fraud and abuse of process committed by the claimant. Thus, the tribunal found itself in a tricky situation in which “both Parties have requested the Arbitral Tribunal to dismiss the claim”.164 The question thus arose as to whether the claimant could withdraw an already submitted claim, especially in light of the allegations of its own misconduct. These circumstances undoubtedly played a role in the respondent’s decision to insist upon an analysis of all the available materials to dismiss the claim with prejudice.165 The matter of dismissing a claim with or without prejudice has profound legal significance because as argued by the respondent and accepted by the tribunal, a dismissal without prejudice would allow the claimant “the opportunity to submit a new request before another tribunal and start the whole process all over again”.166 Based on that consideration and taking into account that the respondent “has both adduced extensive evidence and made submissions on different bases as to why the Tribunal is without jurisdiction”,167 the tribunal opted for a comprehensive analysis of the facts and evidence submitted rather than a cursory dismissal of the case without prejudice.

Cementownia “Nova Huta” S.A. v. Republic of Turkey, ICSID Case No. ARB(AF)/06/2, Award, 17 September 2009, paras. 15–16. [Cementownia v. Turkey]. 163 Cementownia v. Turkey, paras. 34–68. 164 Cementownia v. Turkey, para. 109. 165 Cementownia v. Turkey, para. 109. 166 Cementownia v. Turkey, para. 109. 167 Cementownia v. Turkey, para. 109. 162

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The tribunal was concerned by the following circumstances: the blatant inability to produce the original share purchase certificate; the details of the transaction, especially the intention and motivation behind the share transfer as well as the claimant’s conduct in connection with the arbitration proceeding, i.e. the initiation of a manifestly ill-founded claim and provocation of delays in the proceedings, which resulted in needlessly inflated costs. To begin with, based on the evidence submitted, the tribunal concluded that it “could prove either [the Claimant’s] shareholding in CEAS and Kepez at the relevant time or that is was an investor”.168 This statement from the Cementownia tribunal indicates that the initial focus was on ratione personae to establish jurisdiction. Indeed, the respondent argued Cementownia was not actually an investor. The tribunal, however, stated that “had Cementownia actually proven that it legally acquired shares of CEAS and Kepez, there would still be the question of whether this was treaty shopping of the wrong kind, in the words of Phoenix Action”.169 However, the question whether Cementownia was actually an investor, was not further elaborated. Following on from this the tribunal discussed the procedural aspects of the claimant’s conduct. It stated that “parties to an arbitration proceeding must conduct themselves in good faith”.170 In the tribunal’s view, the procedural misconduct evident in the case stems from the initiation of a manifestly ill-founded case,171 which in legal terms is an attempted abuse of arbitration.172 Thus, the Cementownia tribunal added another type of possible foreign investor misconduct—intentional, bad faith abuse of arbitration, which may involve actions such as filing a fraudulent claim. Whilst the tribunal expressly condemned such conduct,173 it rejected the respondent’s claim to compensation for moral damages, although noting that nothing in the relevant legal instruments prevented the tribunal from doing so. Moreover, it stated that “symbolic compensation for moral damages may indeed [serve to punish the] abuse of process. However, in the case at hand, the Arbitral Tribunal deems it more appropriate to sanction the Claimant with respect to the allocation of costs”.174 The tribunal concluded that the claimant must bear all the expenses and legal fees of the respondent and formally declared the claim fraudulent and made in bad faith.175 To conclude then, the Cementownia award can be viewed as a landmark case due to a number of novel aspects that the tribunal elaborated on. For example, the question of whether a claimant may request the dismissal of a claim if any misconduct is alleged by the respondent. Furthermore, the case serves as a template for

168

Cementownia v. Turkey, para. 149. Cementownia v. Turkey, para. 156. 170 Cementownia v. Turkey, para. 153. 171 Cementownia v. Turkey, para. 156. 172 Cementownia v. Turkey, para. 159. 173 Cementownia v. Turkey, para. 162. 174 Cementownia v. Turkey, para. 171. 175 Cementownia v. Turkey, para. 163. 169

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dealing with a new type of foreign investor misconduct—intentional and bad faith initiation of an international claim, in this particular case this became manifest when the claimant purported to be a foreign investor when it knew this was not the case. This conduct, as elaborated upon by the Cementownia tribunal, is in bad faith and an abuse of process. The case has become the first instance in which a tribunal, in addition to the rejection of its jurisdiction and making the fees and legal expenses of the respondent payable by the claimant, clearly and expressly condemned the conduct of the foreign investor. The issue of awarding compensation for moral damages to a host State was also a new prospect that entered into arbitration practice for the first time in this case, again demonstrating the ongoing development of international investment law and revealing that novel facets, aspects and issues that may suddenly materialise can be accommodated and processed by the system.

4.2.2.9

Mobil Corporation v. Bolivarian Republic of Venezuela (10 June 2010): Abuse of Process and Nationality Planning

The claimants in this case are the Mobil Corporation (incorporated in the US) together with its various subsidiaries (incorporated in different jurisdictions, including one company incorporated in the Netherlands). From 1996 the claimants were investing in the exploration for and production of oil in Venezuela. At the end of 2006, the parent company restructured its investment so that a company incorporated under the laws of the Netherlands became an indirect owner of Mobil’s investment in Venezuela.176 During 2005 and 2006 the investment became subject to tax rate increase before being nationalised by the government of Venezuela in 2007. The ICSID case was filed on the basis of the Dutch-Venezuelan BIT. The respondent raised a jurisdictional objection, alleging that the case constitutes “the abuse of the corporate form and blatant treaty-shopping”,177 alleging that the Dutch subsidiary of the Mobil Corporation is a mere “corporation of convenience”178 and that the restructuring happened for the sole purpose of getting access to the ICSID tribunal. In view of the respondent’s allegation, the tribunal first clarified the applicable law. There were no doubts that the principle of good faith applies in international investment arbitration and could serve as valid grounds to eliminate the tribunal’s

176

For more detailed information see Mobil Corporation, Venezuela Holdings, B. V., Mobil Cerro Negro Holding, Ltd., Mobil Venezolana de Petróleos Holdings, Inc., Mobil Cerro Negro, Ltd., and Mobil Venezolana de Petróleos, Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Jurisdiction, 10 June 2010, para. 187. [Mobil v. Venezuela]. 177 Mobil Corporation, Venezuela Holdings, B. V., Mobil Cerro Negro Holding, Ltd., Mobil Venezolana de Petróleos Holdings, Inc., Mobil Cerro Negro, Ltd., and Mobil Venezolana de Petróleos, Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Respondent’s Memorial on Jurisdiction, 15 January 2009, para. 127. 178 Mobil v. Venezuela, para. 27.

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jurisdiction.179 Moreover, in searching for the criterion to determine “whether or not the conduct of an investor does constitute ‘an abuse of the convention purpose’, ‘an abuse of legal personality’, an ‘abuse of corporate form’ or even an ‘abuse of the system of international investment protection’”,180 the tribunal provided a summary of earlier awards.181 Based on these, the tribunal pointed out that previous tribunals “use different criteria to determine in each case whether or not there has been abuse of right”.182 However, the common feature of all the reviewed cases seems to be a motivation to “give effect to the object and purpose of the ICSID Convention and to preserve its integrity”.183 On that basis, the tribunal started its analysis of the facts of the case. Of particular importance was the date of the company’s establishment—27 October 2005—as well as the date of the share acquisition: 21 February 2006.184 Moreover, the tribunal confirmed the reality of economic activity of the company having acquired the shares.185 In addition to this, the tribunal was concerned with the determination of the date on which the dispute arose, to which it concluded that starting in June 2005 there was a pending dispute on the matter of the tax rate increase.186 However, given that nationalisation occurred in 2007, the tribunal drew a line between corporate restructuring in view of a pre-existing dispute, which amounts to an abuse of the ICSID system, and restructuring to protect an investment which is, in the words of the Mobil tribunal, “a perfectly legitimate goal as far as it concerns future disputes”.187 Even on the assumption that access to the ICSID tribunal was one of the claimant’s motives for the restructuring, the simple fact there was a share transfer does not in and of itself substantiate an allegation of an abuse of process.188 All the facts together, and especially the date of the emergence of the dispute, need to be taken into account. Based on this differentiation, the tribunal concluded that it has jurisdiction to adjudicate the facts occurring after the transfer of shares and has no jurisdiction with respect to the dispute occurring prior to the corporate restructuring.189 The Mobil award is noteworthy because it elaborates on the relevant criterion for adjudication on abuse of rights and abuse of the ICSID system. The Mobil tribunal continued a series of awards on abuse of process, which were partly discussed above, and added the criterion of the timing of the dispute’s emergence as a relevant and

179

Mobil v. Venezuela, paras. 169–175. Mobil v. Venezuela, para. 176. 181 Mobil v. Venezuela, paras. 178–182. 182 Mobil v. Venezuela, para. 184. 183 Mobil v. Venezuela, para. 184. 184 Mobil v. Venezuela, para. 186. 185 Mobil v. Venezuela, para. 198. 186 Mobil v. Venezuela, para. 202. 187 Mobil v. Venezuela, paras. 204, 205. 188 Mobil v. Venezuela, paras. 190–191. 189 Mobil v. Venezuela, para. 206. 180

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crucial indicator that an abuse had taken place. In light of Mobil, corporate restructuring as such, even if undertaken with one eye on gaining access to the ICSID tribunal or the existence of a BIT, is not automatically a violation of the good faith principle or an abuse of the system. The Mobil tribunal differentiated between prospective and retrospective corporate restructuring, where only the latter matters in terms of eliminating a tribunal’s jurisdiction. However, the question which the Mobil case left open is how to apply the elaborated differentiation in situations in which the dispute has not yet emerged but may be foreseen. The answer was provided by subsequent tribunals and will be discussed below.

4.2.2.10

Gustav F W Hamester v. Ghana (18 June 2010): Further Limitation on the Scope of Illegality Requirements

The claimant here is Gustav F W Hamester, a company incorporated under the laws of the Federal Republic of Germany. The company took over a joint-venture agreement (JVA) concluded earlier by its legal predecessor, another German company. The joint venture was concluded with the Ghana Cocoa Board (Cocobod) which sought “to rehabilitate an old cocoa-processing factory” in Ghana.190 To this end, Wamco, a company incorporated under the laws of Ghana, was established and became the owner of the old factory’s assets. Under the JVA, the claimant was responsible for providing funds, technology and expertise for the success of the undertaking.191 Over time the parties had a series of misunderstandings on various points, described in the award,192 which ultimately resulted in the termination of the agreement. Claiming a violation of the various standards of protection provided under the BIT193 and contractual obligations under the JVA, Gustav F W Hamester initiated an ICSID arbitration proceeding. The respondent, the Republic of Ghana, filed objections to the tribunal’s jurisdiction, stating inter alia that “there was no ‘investment’ in accordance with Ghanaian law under Article 10 of the BIT”.194 To substantiate this position, the respondent stated that the JVA was fraudulently obtained by the claimant and that the fraud continued throughout the life of the joint venture,195 with one cited example being the claimant’s presentation of inflated invoices for machinery purported required for the modernisation process. Thus it was alleged, “the very core of Hamester’s so-called investment activities in Ghana was thus planned and executed fraudulently”.196 In fact, as was pointed out

190

Gustav F W Hamester GmbH & Co KG v. Republic of Ghana, ICSID Case No. ARB/07/24, Award, 18 June 2010, para. 23. [Gustav Hamester v. Ghana]. 191 Gustav Hamester v. Ghana, para. 23. 192 Gustav Hamester v. Ghana, paras. 29–59. 193 Gustav Hamester v. Ghana, para. 69. 194 Gustav Hamester v. Ghana, para. 81. 195 Gustav Hamester v. Ghana, para. 81. 196 Gustav Hamester v. Ghana, para. 130.

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by the claimant, “the word ‘fraud’ or a derivative or synonym for it was used over 100 times in the pleadings”.197 Among various situations alleged as fraud, the respondent argued that the claimant “ruthlessly and fraudulently oppressed” Cocobod during the performance of the JVA.198 The alleged oppression was illustrated by various instances, such as an “artificially low price” paid for Wamco’s production,199 a “myriad of other unlawful means of extracting profit from Wamco and running the company solely in [its] own interest”.200 In essence such a scenario, if proven, would be the quintessential conflict dealt with by international investment law in the classical constellation of capital-exporting and capital-importing States. A foreign investor from a capital-exporting State may take advantage of its economic dominance and treat the resources, traditions and established practices of partners from capital-importing States in an oppressive manner. Gustav F W Hamester v. Ghana posed for the tribunal the challenge of adjudicating on a somewhat delicate matter. To do so, the tribunal began with making the distinction between the illegality “of the creation of the investment” and the illegality “during the life of the investment”, as was undertaken by the above-mentioned Fraport tribunal.201 The tribunal in this case pointed out that illegality in the course of investment activities “does not bear upon the scope of the application of the BIT (and hence the tribunal’s jurisdiction) – albeit that it may well be relevant in the context of the substantive merits of a claim brought under the BIT”.202 The said differentiation had a direct impact on the set of alleged facts in that only those facts which, if proven, could substantiate the illegality of the investment’s establishment were deemed relevant for the matter of jurisdiction:203 “if the JVA was obtained on the basis of fraud, it is an illegal investment that does not benefit from the protection of the ICSID/BIT mechanism. However, the question whether the fraudulent behaviour has been committed during the performance of the joint-venture is a different issue that has to be taken into account when judging the merits of the dispute”.204 Thus, the only relevant factual allegation concerned the presentation of false invoices and not the alleged overall ‘oppression’ by the claimant.205 The respondent argued that the presentation of inflated invoices was a part “of an overall scheme of deceit orchestrated by the Claimant in the initiation of its investment”.206 Nevertheless, the tribunal remained unsatisfied that

197

Gustav Hamester v. Ghana, para. 97. Gustav Hamester v. Ghana, para. 98. 199 Gustav Hamester v. Ghana, para. 99. 200 Gustav Hamester v. Ghana, para. 99. 201 Gustav Hamester v. Ghana, paras. 127, 128. 202 Gustav Hamester v. Ghana, para. 127. 203 Gustav Hamester v. Ghana, para. 129. 204 Gustav Hamester v. Ghana, para. 129. 205 Gustav Hamester v. Ghana, paras. 130–131. 206 Gustav Hamester v. Ghana, para. 136. 198

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the evidence supplied was sufficient to prove the accusation.207 Importantly, it pointed out that “there is no proof that the alleged fraud was decisive in securing the JVA”208 and in doing so it seems that the Gustav F W Hamester tribunal inserted a novel clarifying element into the elaboration of the illegality of investments— relevance thereof to the establishment of the investment. In other words, the question has to be posed whether the investment was indeed initiated by means of fraud or other misconduct rather than focusing exclusively on whether any deceitful conduct may have taken place at the relevant period of time.209 Consequently, the tribunal stated that “Hamester’s practices might not be in line with what could be called ‘l’éthique des affaires’, but in the Tribunal’s view, they did not amount, in the circumstances of the case, to a fraud that would affect the Tribunal’s jurisdiction. The Tribunal sees the over-statement of invoices as an issue upon the balance of equities between the two parties, rather than the existence itself of a contract or the investment”.210 However, the tribunal did not have a chance to demonstrate how this issue would be “taken into consideration by the Tribunal when discussing the merits”211 since the case was dismissed on the matter of attribution and in addressing the issue of costs, no ruling was made.212 In summary then, Gustav F W Hamester v. Ghana revealed how the distinction first made in the Fraport case operates in practice. The tribunal not only fully accepted the elaboration by the Fraport tribunal but also inserted further relevant qualifications, such as a direct link between the alleged misconduct and the initiation of the investment. Unfortunately for the development of international investment law, the tribunal did not have the chance to demonstrate how foreign investor misconduct may matter in the merits stage, however, like all good stories, a sequel is inevitable and this issue was further addressed by subsequent tribunals.213

4.2.2.11

Mr. Saba Fakes v. Republic of Turkey (14 July 2010): Alternative Standpoint on the Role of the Principle of Good Faith and Illegality of Investment

The case Mr Saba Fakes v. Republic of Turkey arose under the auspices of the Netherlands-Turkey BIT. The claimant submitted to the tribunal an alleged violation

207

Gustav Hamester v. Ghana, para. 132. Gustav Hamester v. Ghana, para. 135. 209 See Gustav Hamester v. Ghana, para. 137. 210 Gustav Hamester v. Ghana, para. 138. 211 Gustav Hamester v. Ghana, para. 138. 212 Gustav Hamester v. Ghana, para. 361. 213 See, for example, Yukos Universal Limited (Isle of Man) v. The Russian Federation, PCA Case No. AA 227, Final Award, 18 July 2014, paras. 1594–1637 (on contributory fault). For further details see below. 208

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of fair and equitable treatment as well as the expropriation of its investment.214 The claimant is Mr Saba Fakes, a dual Dutch-Jordanian national215 who allegedly purchased shares in Telsim Mobil Telekomminikayson Hizmetleri A.S. (“Telsim”), a leading Turkish telecommunications company initially owned by the Uzan family, which at the time of the transaction was subject to a number of criminal investigations. The respondent, the Republic of Turkey, opposed the case proceeding and pointed out the reality (“the Claimant did not provide sufficient evidence of his ownership”216), timing (the acquisition became ‘effective’ on the day on which the disputed measures took place217), legality (the acquisition of shares happened in violation of Turkish law218) and intent (“Mr Fakes is simply acting as a ‘dummy’ shareholder, bringing this claim on behalf of the Uzans”219) of the purported acquisition of shares. As such, the factual background is somewhat comparable to both Phoenix and Cementownia. In this regard, the Saba Fakes case serves as a good example that not only the alleged circumstances as such but their legal qualification and proof, in particular in the respondent’s submission, have a direct bearing on the outcome of the case. For example, in the present case and contrary to Cementownia, the respondent did not claim that the transaction was fraudulent.220 It was mentioned in the objections that there was no ‘investment’ within the meaning of the relevant BIT and in the respondent’s view, “the Claimant holds, at best, an assigned claim belonging to third parties, namely the Uzan family”.221 In the alternative, the respondent claimed the illegality of the purported investment under the laws and regulations of the Republic of Turkey.222 These submissions set the framework which determined how the Saba Fakes tribunal approached the facts. Given the existence of the investment, the Saba Fakes tribunal stands out with its elaborations, which are different from those of the earlier tribunals presented above. For example, unlike in Phoenix, the Saba Fakes tribunal stated that “the principle of good faith and legality cannot be incorporated into the definition of Article 25 (1) of the ICSID Convention without doing violence to the language of the ICSID Convention: an investment might be ‘legal’ or ‘illegal’, made in ‘good faith’ or not, it

214

Mr. Saba Fakes v. Republic of Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010, para. 3. [Saba Fakes v. Turkey]. 215 The effectivity of the Dutch nationality was objected to by the Respondent, see Saba Fakes, supra note 214, paras. 51, 54–81. Yet the tribunal accepted the existence of its jurisdiction ratione personae. Further elaboration on the matter is irrelevant for the present research. 216 Saba Fakes v. Turkey, para. 45. 217 Saba Fakes v. Turkey, para. 46. 218 Saba Fakes v. Turkey, para. 45. 219 Mr. Saba Fakes v. Republic of Turkey, ICSID Case No. ARB/07/20, Respondent’s Preliminary Jurisdictional Objections, 24 June 2008, para. 15. 220 Saba Fakes v. Turkey, para. 130. 221 Saba Fakes v. Turkey, para. 51. 222 Saba Fakes v. Turkey, para. 51.

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nonetheless remains an investment”.223 Furthermore, the tribunal did not agree with the Inceysa and Plama rulings that the principle of good faith is an inherent and stand-alone component of the notion of ‘investment’. In this regard, the Saba Fakes tribunal pointed out that “a treaty should be interpreted and applied in good faith, this is a general requirement under treaty law, from which an additional criterion of ‘good faith’ for the definition of investments, which was not contemplated by the text of the ICSID Convention, cannot be derived”.224 The same logic was repeated in light of the legality requirement and again, in contrast to the Plama tribunal, the Saba Fakes tribunal viewed that only an express provision of the relevant BIT may insert the requirement of legality imposed on foreign investments.225 In addition to this, even if the BIT entails an ‘in accordance with host State law’ clause, the tribunal stressed the importance of examining “whether all or only certain laws and regulations are covered by this provision, and whether there exists a threshold below which a violation would not be considered as relevant for the purpose of the BIT’s application”.226 In answering this question, the tribunal concluded that the legality requirement in the BIT “concerns the question of the compliance with the host State’s national laws governing the admission of investment in the host State”.227 It further stated that “it would run counter to the object and purpose of investment protection treaties to deny substantive protection to those investments that would violate national laws that are unrelated to the very nature of investment regulation”.228 In the context of the application of the law to the facts as submitted by the parties, the tribunal stated that the illegality alleged by the respondent under Turkish legislation on the encouragement of foreign investment, “if demonstrated, might be covered by the legality requirement” of the BIT.229 Nevertheless, the allegations of the breach of laws and regulations of the telecommunication sector and competition law, even if proven, “would not trigger the application of the legality requirement” of the BIT.230 This finding is quite significant in its precision, especially when compared to the vagueness of the earlier Salini statement. On the notion of ‘investment’, the tribunal decided in favour of an “objective definition of an investment, this definition is comprised of three criteria, namely (i) contribution (ii) duration, and (iii) an element of risk”.231 On the matter of adjudication, the tribunal had trouble believing that the purported transaction was a real purchase of shares with the intention to give factual effect to the legal agreement based on the evidence submitted. Thus, it stated that the

223

Saba Fakes v. Turkey, para. 112. Saba Fakes v. Turkey, para. 113. 225 Saba Fakes v. Turkey, para. 114. 226 Saba Fakes v. Turkey, para. 116. 227 Saba Fakes v. Turkey, para.119. 228 Saba Fakes v. Turkey, para. 119. 229 Saba Fakes v. Turkey, para. 120. 230 Saba Fakes v. Turkey, para. 120. 231 Saba Fakes v. Turkey, para. 121. 224

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transaction was an “arrangement” on paper between Mr Fakes and members of the Uzan family.232 This conclusion was based on the claimant’s own admission that the purpose of the transaction “was to use the name of the legal owner of Telsim’s shares as “bait” to attract potential buyers of those shares who would be hesitant to deal with Mr Uzan in view of the pending lawsuits against him and his family members”.233 However, to accord such a conclusion legal significance, the tribunal did not base its findings on either good faith or international public policy, it simply concluded that such an arrangement “does not meet the requirement of a contribution, nor the requirement of risk, since no rights were actually transferred to the Claimant”.234 The case is remarkable because of its precise and sharp elaboration on the significance of the principle of good faith and legality requirements. The vision of the tribunal is to a large extent different to previously discussed elaborations in earlier awards as the Saba Fakes tribunal preferred to remain on the objective criterion of the investment and view the facts in light of the established criterion. Even so, in terms of results, the tribunal acted similarly to those in Phoenix, Inceysa and Cementownia in rejecting its jurisdiction and allocating the fees and costs in favour of the respondent. It stated that “a party pursuing a claim which is clearly outside of the scope of the Centre’s jurisdiction should not be encouraged and should bear the risk of paying the full costs of such frivolous proceedings”.235 Thus, the case contributes to the diversity of approaches and demonstrates another possibility for legal analysis of alleged inappropriateness of foreign investors’ conduct.

4.2.3

General Observations on the Pioneering Cases

The foregoing has presented a selection of pioneering cases from 2000 to 2010 which dealt with issues of foreign investor misconduct. Subsequent tribunals have referred to these cases the most in matters of allegations of foreign investor misconduct. For example, as observed by the respondent in Bear Creek Corporation, the Phoenix Action v. Czech Republic case was cited “at least by seven other investment tribunals”,236 although in reality, the number may well exceed that estimation. The first active decade of its practice saw international investment law confront various allegations of foreign investor misconduct: misrepresentation, changes of nationality in order to get protection from an IIA, fraudulent initiation of international arbitration, violation of national law of the host State, corruption, control of foreign

232

Saba Fakes v. Turkey, para. 147. Saba Fakes v. Turkey, para. 137. 234 Saba Fakes v. Turkey, para. 147. 235 Saba Fakes v. Turkey, para. 154. 236 Bear Creek Mining Corporation v. Republic of Peru, ICSID Case No. ARB/14/21, Respondent Rejoinder on the Merits and Reply on Jurisdiction, 13 April 2016, para. 367. 233

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investment by nationals of the host State, domestic origins of invested capital, and lack of true investment activity. Some of these allegations have resulted in the application of negative legal consequences in the form of the elimination of a tribunal’s jurisdiction, inadmissibility of claims, and allocation of costs to a ‘guilty’ investor. The legal implications of foreign investors’ illegality as a defence on the merits were at least theoretically perceived, but no practice emerged in this regard over the course of the first decade. It could be well substantiated that in dealing with foreign investor misconduct, the tribunals in these landmark cases did not always provide profound legal reasoning and considerations on the nature, composition and function of international investment law. Indeed, in quite a number of the cited cases some aspects could lead to one easily agreeing with Professor Douglas’s criticism cited above. However, as a common feature, there is an observably strong intuitive desire on the part of arbitrators to combat and sanction foreign investors’ misconduct. This is especially true when it involves grave instances of corruption and fraud. In following intuitive desire, the tribunals in the above cases sought appropriate legal avenues and in doing so revealed further potential within the system to accord legal significance to foreign investors’ misconduct. The landmark cases have set the foundations of a clearly identifiable trend in which foreign investor misconduct may have a significant bearing on the outcome of international investment arbitration and may result in negative legal consequences. Further development of this trend will be examined in greater detail below as the categorisation of the evolving case law seems to be helpful, if not required, to follow and understand the subsequent developments in the field in connection with foreign investor misconduct.

4.2.4

Categorisation of Foreign Investor Misconduct as Alleged in the Pioneering Cases

As defined in the Oxford Dictionary, a category is “a class or division of people or things regarded as having particular shared characteristics”.237 Categorisation could occur based on all manner of shared similarities, with the chosen ground for categorisation determining the scope of the categories thus formed. For example, one may categorise investors’ misconduct based on outcomes, namely, misconduct that if proven triggers negative legal consequences in one category and misconduct that remains irrelevant for the existence of the tribunal’s jurisdiction and the material protection of foreign investments into another. Even more specifically, one could create a category encompassing misconduct that matters for the elimination of the tribunal’s jurisdiction and thus rendering the claims inadmissible, with a second category consisting of misconduct that restricts the application of the material

237 For the definition of a ‘category’ see the English Oxford Dictionaries, https://en. oxforddictionaries.com/definition/category.

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protection provided by IIAs and the third category of misconduct that influences the allocation of fees and expenses. Categories could be created based on legal objections, using jurisdictional objections based on ratione materiae, ratione personae, ratione temporis, or ratione voluntatis; or objections on the admissibility of claims or objections on the merits. In short, cases in international investment law can be categorised in a myriad of ways using all manner of criteria. However, for the present research the author has decided to use the following categories: • Violation of host State law (including the special case of corruption) • Abuse of the system of international investment law • Non-fulfilment of the requirements imposed upon foreign investment The general characteristics of each category as well as a comprehensive summary of the trends and tendencies set by the landmark cases will be provided below as the subsequent developments in each of the categories is examined.

4.2.4.1 4.2.4.1.1

Violation of Host State Law General Characteristic of the Category

If a person holds a key to a door, it does not necessarily mean that [s]he is permitted to open it. What is important is the way the person came into possession of the key. The same is true in the context of international investment protection of foreign investments. Holding an investment does not automatically convey eligibility for international investment protection, what is crucial is the way the investment came to be. Investments obtained through a serious violation of the national law of a host State, for example, involvement in corruption or investing into illegal businesses, are not protected under IIAs. An “in accordance with host State law” clause is largely regarded as serving the purpose of eliminating international protection of ‘illegal’ investments. This clause does not as such elevate national law to the international level, rather it restricts the scope of a treaty’s coverage to investments made in accordance with the national law of a host State. This is an objective requirement in that either the investment is made per host State law or in violation of it. This is a relatively straight-forward matter and very little adjudication discretion is allowed or required. Nevertheless, tribunals need to establish the facts of any violation of host State law and it is an important issue in how tribunals approach this task. Moreover, the scope of the relevant violation and its timing is important. In the absence of clear normative constructions, this has primarily been left to arbitral tribunals for crystallisation and elaboration. The landmark cases have already done much in this regard and the trends set by their tribunals will be summarised below.

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Trends Set in the Category by the Pioneering Cases

The pioneering cases from Salini onwards have read ‘in accordance with host State law’ as a legality requirement imposed upon covered investments. There has been some criticism of this, discussed above, yet the understanding that an ‘in accordance with host State law’ clause may eliminate the protection of investments made in violation of the national law of the host State seems to have become a wellestablished trend. The practice of the first decade confronted the need to qualify and elaborate on the scope of the legality requirement. Not every violation of host State law is sufficient to impose negative legal consequences upon foreign investors. Fraport established a differentiation between illegality during the establishment of a foreign investment and illegality in the course of investment activity with the former having impact in terms of tribunals’ jurisdiction, while the latter was relevant for the merits. Even so, among the pioneering cases there were no examples of dealing with foreign investor illegality on the merits. Further to this, Hamester drew attention to the fact that the scope of the legality requirement only covers violations which are directly relevant for the establishment of an investment as there should be a link between alleged and proven illegality and an investment’s establishment. Thus, only those violations of host State law which occur during the establishment of foreign investment and only those which are material for the initiation of foreign investment in a host State may trigger, if proven, negative legal consequences. Additionally, in terms of the relevant scope, the landmark cases seem to establish a focus on compliance with “fundamental principles of the host State’s law”238 and where minor violations could not serve as grounds for the elimination of a tribunal’s jurisdiction, as demonstrated by Tokios Tokelės. The rationale behind the qualifications of the legality requirement seems to lie in preserving the balance within the system: on the one hand, illegal investments should not be protected by international investment law; but on the other hand, States should not use the pretext of illegality to avoid their obligations under international law. Indeed, the cases presented above concerned serious charges of unfair and inequitable treatment involving foreign investments as well as indirect expropriation. It is indeed a legitimate and necessary goal to preserve the right balance in assessing tribunals’ jurisdiction over such claims. Thus, the ‘in accordance with host State law’ clause in its qualified scope (only violations at the time the investment is established, only those which relate to the establishment of foreign investment and which are not minor) is well-recognised as being able to competently address issues of illegal investment. There has also been a trend of reading the legality requirement into the definition of investment as an inherent component thereof. According to this trend, which began with the Plama tribunal, even in the absence of an express ‘in accordance with

238

Desert Line Projects LLC v. The Republic of Yemen, ICSID Case No. ARB/05/17, Award, 6 February 2008, para. 104.

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host State law’ clause in an IIA, investments initiated in violation of the national law of a host State and in bad faith may be addressed by a tribunal. The legal basis of this can be found in international public policy and the general principle of good faith. The above trends initiated by the considered landmark cases will be used as points of reference in the analysis of the subsequent developments.

4.2.4.2 4.2.4.2.1

Abuse of the System of International Investment Law General Characteristics of the Category

As was demonstrated by the pioneering cases, there may be many instances in which foreign investors are alleged to act abusively, which means in essence “to use something for the wrong purpose in a way that is harmful or morally wrong”.239 Black’s Law Dictionary defines abuse as “to depart from legal or reasonable use in dealing with a person or thing; to misuse”.240 From the legal point of view, abusive conduct seems distinct from illegal conduct as the latter is “not allowed by law”.241 Thus, illegal conduct entails a violation of a legal regulation, which is not always necessarily true of abuse. Hence, illegality is a more statutory-based characteristic of conduct, which leaves a tribunal less margin of appreciation compared to that which it enjoys in cases of abusive conduct. Abuse is perhaps first and foremost a matter of assessment as it involves interacting with the international investment law system via a vast range of possible actions which are not in accordance with the system’s intended purpose. The subsequent crystallisation of determining which actions fall into the category of abuse is a still-evolving process being driven by practice.

4.2.4.2.2

Scope of Actions Forming the Category of Abuse of the System

The pioneering cases’ tribunals confronted allegations of abusive foreign investors’ conduct. An abuse was established to have occurred in an inappropriate change of nationality (Phoenix, Mobil) as well as in the initiation of an international investment claim, pretending to be a foreign investor when this was not the case (Cementownia). The latter was is a less difficult case and is easily adjudicated on by reference to the principle of good faith and the doctrine that one may not exercise more rights than one possesses. The outcome from Cementownia was unflinchingly reaffirmed in Europe Cement v. Turkey when confronted by a similar factual constellation, the tribunal stated that:

See the definition of an ‘abuse’ as provided in the Cambridge Dictionary Online, http://dictio nary.cambridge.org/fr/dictionnaire/anglais/abuse. 240 Garner ed. (2014), p. 12. 241 See the definition of ‘illegal’ as provided in the Cambridge Dictionary Online, http://dictionary. cambridge.org/fr/dictionnaire/anglais/illegal. 239

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The Claimant asserted jurisdiction on the basis of a claim to ownership of shares, which the uncontradicted evidence before the Tribunal suggests was false. Such a claim cannot be said to have been made in good faith. If, as in Phoenix, a claim that is based on the purchase of an investment solely for the purpose of commencing litigation is an abuse of the process, then surely for a claim based on the false assertion of ownership if an investment is equally an abuse of process.242

Needless to say that this research’s account of key case law is not exhaustive and there have been numerous examples not dealt with here in which respondents claimed that the initiation of a parallel proceeding (for instance under different IIAs, or in domestic and international forums) should be deemed as an abuse. However, the tribunals as a general have not shared that qualification.243 Indeed, respondents have asserted, albeit without success, that an abuse of process occurred in certain claimant conduct during proceedings, for example, the absence of a legitimate interest in the initiation of the proceeding,244 “abusive and disruptive litigation techniques”,245 and so forth. In Bayindir v. Pakistan, the respondent argued there had been an abuse of process due to the claimant’s late abandonment of initially raised contractual claims while maintaining its treaty-based claims which resulted in “useless work”.246 The tribunal, however, did not consider that such conduct qualifies as an abuse of process.247

4.2.4.2.3

A Precise Look at Nationality Planning

Changing nationality seems to be a more complex subcategory within the abuse of the system of international investment law. Nationality, as previously discussed, is one of the key requirements for the application of international investment protection. Thus, it is not surprising that the manipulation of nationality and attempts to

242

Europe Cement Investment & Trade S.A. v. Republic of Turkey, ICSID Case No. ARB(AF)/07/2, Award, 13 August 2009, para. 175. 243 See, for example, Ronald S. Lauder v. The Czech Republic, UNCITRAL, Final Award, 3 September 2001, para. 174; Waste Management Inc. v. United Mexican States [II], ICSID Case No. ARB (AF)/00/3, Decision on Mexico’s Preliminary Objection concerning the Previous Proceedings, 26 June 2002, para. 48; CME Czech Republic B.V. v. The Czech Republic, UNCITRAL, Partial Award, 13 September 2001, para. 396–397. 244 See: Chevron Corporation (U.S.A.) and Texaco Petroleum Corporation (U.S.A.) v. The Republic of Ecuador, UNCITRAL, PCA Case No. 34877, Partial Award on the Merits, 30 March 2010, para. 354. 245 Canfor Corporation v. The United States of America and Tembec et al. v. The United States of America and Terminal Forest Production Ltd. v. The United States of America, NAFTA, Order of the Consolidation Tribunal, 7 September 2005, para. 137. 246 Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. The Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Decision on Jurisdiction, 14 November 2005, para. 171. For more details on the matter see also paras. 169–172. 247 Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. The Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Decision on Jurisdiction, 14 November 2005, para. 173.

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obtain a particular nationality linked to the international protection of foreign investments have been claimed by respondent States as alleged misconduct. Two actions in light of changes in corporate nationality became apparent in the field of international investment law: the transfer of shares from a national company incorporated in a host State to a foreign company incorporated in one of the contracting States to an IIA (factual background of Phoenix) and the transfer of shares from one foreign company, incorporated in a State with no relevant IIA, to another foreign company, incorporated in a State with a relevant IIA (factual background of Mobil). This distinction in facts does not seem to play a role in the outcome of tribunals’ adjudication. Indeed, it is not the change of nationality of any kind per se that is decisive, the critical factor is whether the nationality change results in the creation of an artificial international jurisdiction over a dispute otherwise not covered by the relevant IIA. The general trend in addressing a change of nationality is that tribunals view any manipulative element in foreign investors’ conduct as qualifying as an abuse of the system of international investment law or what may also be referred to as ‘abuse of process’, ‘abuse of right’, ‘treaty shopping’. Such qualification serves “as defence to what may otherwise be a valid claim”.248 Of course, the pivotal factor here is in the determination of what is a ‘manipulative element’. Here again, such determinations seem to be guided largely by tribunals overarching goal of wanting to preserve a healthy balance within the system. As such, restructuring of investment (change of its nationality) is an accepted practice in international investment law, although it is crucial, as demonstrated by Mobil, that nationality planning is prospective, i.e. initiated prior to the emergence of the dispute. The landmark cases set the trend that such a transfer does not violate the principle of good faith and thus does not prejudice either the existence of a tribunal’s jurisdiction or the admissibility of claims.249 As seen in Phoenix, deceitful motives, absence of real intention to become a foreign investor, the sole motivation to get access to an international investment tribunal, and the suspicious timing of the relevant transaction (shortly prior to the initiation of the dispute) are all factors that matter in terms of qualification of nationality planning as an abuse. Nevertheless, the application of these criteria may pose further problems in practice and how tribunals address these problems in subsequent case law will be examined below.

248

Chevron Corporation (U.S.A.) and Texaco Petroleum Corporation (U.S.A.) v. The Republic of Ecuador, UNCITRAL, PCA Case No. 34877, Interim Award, 1 December 2008, para. 137. 249 In addition to the cases presented as pioneering cases above, see also: Autopista Concesionada de Venezuela, C.A. v. Bolivian Republic of Venezuela, ICSID Case No. ARB/00/5, Decision on Jurisdiction, 27 September 2001, para. 126; Aguas del Turnari, S.A. v. Republic of Bolivia, ICSID Case No. ARB/02/3, Decision on Respondent’s Objection to Jurisdiction, 21 October 2005, para. 330.

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The Range of Negative Legal Consequences of Abuse

The respondent’s assertion that an abusive change of nationality has occurred faces a correspondingly high burden of proof.250 This is in line with the early position of the PCIJ that “an abuse cannot be presumed by the Court”.251 Even so, any abuse of the system of international investment law established by a tribunal is outcomedeterminative and results in the imposition of negative legal consequences. Abuse, as a matter of established practice, imposes the allocation of costs on the party which committed the misconduct (on the claimant). As a primary consequence, Phoenix and Mobil both accorded the established abuse a negative legal consequence in the form of the elimination of the tribunal’s jurisdiction. However, such an approach has not been unanimously embraced within the field. Some tribunals have deemed that an abuse is a “ground for disqualifying”252 the proceedings and in so doing point to the admissibility of the claims rather than to the tribunal’s jurisdiction. As the Chevron tribunal noted in 2008, “there does not appear to be complete agreement between the Parties’ submissions nor among other authorities in this context on whether [abuse of process] should, as a general rule, be considered issues of jurisdiction, admissibility, or the merits”.253 Thus, uncertainty as to the exact nature of the legal consequences associated with an abuse of process is another element which shall be analysed under the rubric ‘subsequent development’ in case law.

4.2.4.3

4.2.4.3.1

Non-satisfaction of Further Requirements Imposed on Foreign Investment General Characteristics of the Category

Since international investment law in its current form does not impose direct obligations on foreign investors, requirements on investment and investors are among the few available avenues to deal with allegations of foreign investment misconduct. The negative legal consequences that arise upon non-satisfaction of these requirements are quite varied in nature and severity, especially given that

250

See, for example, Chevron Corporation (U.S.A.) and Texaco Petroleum Corporation (U.S.A.) v. The Republic of Ecuador, UNCITRAL, PCA Case No. 34877, Interim Award, 1 December 2008, para. 30; Jan de Nul N.V. Dredging International N.V. v. Arab Republic of Egypt, ICSID Case No. ARB/04/13, Award, 6 November 2008, para. 281. 251 Case of the Free Zones of Upper Savoy and the District of Gex, PCIJ Series A/B, No. 46 (1932), p. 167. See also the earlier decision: Case Concerning Certain German Interests in Polish Upper Silesia, PCIJ Series A. No. 7 (1926), p. 30 (“misuse [of right] cannot be presumed”). 252 Waste Management Inc. v. United Mexican States [II], ICSID Case No. ARB (AF)/00/3, Decision on Mexico’s Preliminary Objection concerning the Previous Proceedings, 26 June 2002, para. 50. 253 Chevron Corporation (U.S.A.) and Texaco Petroleum Corporation (U.S.A.) v. The Republic of Ecuador, UNCITRAL, PCA Case No. 34877, Interim Award, 1 December 2008, para. 137.

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running afoul of the national law of a host State and abuse of nationality are considered as parts thereof. Indeed, both these latter two aspects may be considered as a non-satisfaction of requirements imposed upon foreign investment (a requirement of legality) and upon foreign investors (a requirement of a foreign nationality). However, since these two aspects are discussed separately, the category of non-satisfaction will be defined as encompassing requirements other than nationality (already discussed as an abuse) and legality under national law (covered by the category of violation of host State law). As seen in Chap. 3, for investments to be protected they may be subject to various requirements such as limits placed on the origin of the capital, invested amount, contributions to the development of the host State, and so forth. Nevertheless, as also observed previously, current IIAs generally do not directly impose such requirements. As the word investment is widely accepted as having a broad and somewhat subjective meaning, all manner of assets may be covered by the term. The required link of an invested item to foreign nationals or companies is generally established by “ownership” and/or “control” with only a few exceptions, as discussed in Chap. 3, does the text of the initial IIAs entail further qualifications. Conversely, the term ‘investment’ as such may be seen as indirectly imposing requirements which are an integral part of its original meaning, a so-called ‘objective’ approach to the notion of investment.254 This logic was applied in Salini, yet still in connection to the amorphously defined term ‘investment’ in Article 25 of the ICSID Convention. While the Salini requirements apply as a ‘double-barrelled test’ to establish ICSID jurisdiction,255 it is recognised that these criteria do not apply for the definition of ‘investment’ in IIAs.256 The core question within this category remains whether tribunals can or should employ their unused potential and engage in an extensive interpretation of the relevant terms (‘investment’, ‘ownership’, ‘control’) or remain strictly bound by directly given unspecified and broad definitions. Further to this, a second connected question is whether tribunals should accord legal significance to the exceptional qualifications that do nevertheless occasionally occur in IIAs.

4.2.4.3.2

Achievements in the Category by the Pioneering Cases

As may have been expected, the landmark cases reveal that respondent States often allege insufficiency of business activities,257 a lack of contribution to the

254

See: Lim et al. (2018), p. 211. See, for example, Alps Finance and Trade AG v. The Slovak Republic, UNCITRAL, Award, 5 March 2011, para. 240. 256 See: White Industries Australia Limited v. The Republic of India, Final Award, 30 November 2011, para. 7.4.9. 257 Phoenix v. The Czech Republic, paras. 126, 140. 255

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development of the host State,258 ownership or control issues related to the claiming party by either nationals of the host State or nationals of third States,259 ineffective (or even fictional) control,260 the domestic origin of invested capital,261 or an insufficiency of invested capital262 as grounds for the imposition of negative legal consequences. These allegations, in essence, belong to the material characteristics of the investment in question and as such do not contain an element of bad faith conduct or a violation of national law. This seems to be the decisive point which distinguishes this category of cases from cases involving a violation of host State law or an abuse of the system of international investment law. Indeed, both of the latter two categories— the establishment of investment contrary to the national law of a host State and abuse of nationality—inherently involve the general principle of good faith. This seems to be the core point which makes it so difficult for tribunals to justify an extensive reading of the terms applied in IIAs. No general principle of good faith or international public policy serves here as a standard for measurement of conduct, as international treaties either foresee the necessity of the requirements or they do not. In line with the above elaboration, the tribunals in the pioneering cases were generally reluctant to read any further criteria into the wording of their respective relevant IIA in the absence of any express mentioning of such criteria. As pointed out by the Autopista tribunal, “economic criteria often better reflect reality than legal ones”.263 However, what remains essential is the realisation of the discretion of contracting States and the chosen criteria “to subordinate their consent to ICSID arbitration”.264 Thus, in the words of judgement from Autopista, “the Tribunal must respect the parties’ autonomy”265 and, consequently, disregard any additionally imposed requirements not supported by the wording. As was elaborated upon by the Tokios Tokelés tribunal, it is up to contracting States to determine the scope of the protection offered under IIAs as tribunals do not see themselves being in a position 258

Phoenix v. The Czech Republic, para. 39. Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 407. 260 Yaung Chi Oo Trading Pte. Ltd. v. Government of the Union of Myanmar, ASEAN I.D. Case No. ARB/01/1, Award, 31 March 2003, para. 51. See also: Autopista Concesionada de Venezuela, C.A. v. Bolivian Republic of Venezuela, ICSID Case No. ARB/00/5, Decision on Jurisdiction, 27 September 2001, para. 122. 261 Tokios Tokelès v. Ukraine, para. 77; Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 422. 262 See, for example, SGS Société Général de Surveillance S.A. v. Islamic Republic of Pakistan, Case No. ARB/01/13, Decision on Jurisdiction, 6 August 2003, para. 136. 263 Autopista Concesionada de Venezuela, C.A. v. Bolivian Republic of Venezuela, ICSID Case No. ARB/00/5, Decision on Jurisdiction, 27 September 2001, para. 119. 264 Autopista Concesionada de Venezuela, C.A. v. Bolivian Republic of Venezuela, ICSID Case No. ARB/00/5, Decision on Jurisdiction, 27 September 2001, para. 119. 265 Autopista Concesionada de Venezuela, C.A. v. Bolivian Republic of Venezuela, ICSID Case No. ARB/00/5, Decision on Jurisdiction, 27 September 2001, para. 120. 259

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to broaden this scope by reading further requirements into a text or by extensively interpreting applied terms.266 A tribunal following any other course would incur the disdain of the contracting States and find itself in legally murky waters. Furthermore, in view of the specified requirements integrated into the wording of typical IIAs, tribunals have not been particularly strict in their interpretations. For example, when discussing the satisfaction requirement of ‘substantial’ activity as imposed by the relevant BIT in Amto v. Ukraine, the tribunal concluded that mere existence of investment activities and a modest number of permanent staff suffice for that end.267 One could also identify a general tendency that shows tribunals were not willing to limit the scope of treaty coverage to only large-scale or economically profitable investments.268 This approach is in line with the originally conceived role of international investment law, to protect all foreign investments from political risks. Even so, a serious and bona fide intention to engage in investment activity was seen as a precondition.269 Thus far, the most detailed requirements that have been read into the definition of ‘investment’ are drawn from the Salini award and have been further accepted, in part or in whole, by subsequent tribunals.270 These conditions are that a significant capital contribution was made, for a certain duration and there was the assumption of risk and contribution to the development of a host State.271 It is important to bear in mind that these requirements were read into the all-but undefined term ‘investment’ as used in Article 25 of the ICSID Convention. However, even in view of these requirements, tribunals seem to be generous when it comes to adjudication upon their satisfaction.272 One can find many instances in which non-satisfaction of the criteria were alleged by the respondent States, however, there has arguably only been one case, MHS v. Malaysia, in which the tribunal imposed negative legal consequences in the form of declining to exercise its jurisdiction upon the

266

See also: Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 427. 267 Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005, Final Award, 26 March 2008, para. 69. 268 See Phoenix v. The Czech Republic, para. 133. 269 Phoenix v. The Czech Republic, para. 133. 270 See: Joy Mining Machinery v. Arab Republic Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction, 6 August 2004, para. 53; Malicorp Limited v. The Arab Republic of Egypt, ICSID Case No. ARB/08/18, Award, 7 February 2011, para. 109; Toto Construzioni Generali S.p.A. v. The Republic of Lebanon, ICSID Case No. ARB/07/12, Decision on Jurisdiction, 11 September 2009, para. 81. Yet these conditions were not always shared by subsequent tribunals, for instance: Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Award, 8 November 2010, para. 311. Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case ARB/05/22, Award, 24 July 2008, para. 312 (no need to apply the Salini test strictly “rote or overly strict”). 271 Salini v. Morocco, para. 52. 272 Abaclat and others v. The Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011, paras. 364–366.

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non-satisfaction of the requirements read into the definition of foreign investment.273 In this regard, one could also name a rather exceptional UNCITRAL case which also referred to the Salini criterion.274 The tribunal in Romak v. Uzbekistan took the standpoint that the “term investment has a meaning in itself that cannot be ignored”.275 In the end, relying on the inherent characteristics of the ‘term’ investment, which were seen as similar to those elaborated by Salini, the Romak tribunal declined to exercise its jurisdiction.276 Thus, notwithstanding the observed creativity of respondent States in trying to push arbitral tribunals to limit the scope of international protection of particularly qualified investments, the pioneering case tribunals remained cautious and reluctant on the matter. The sections below will examine whether the trends that emerged and the observed direction that practice initially took has remained and developed further or if practice has followed a different path in more recent cases.

4.3

Subsequent Development in the Categories of Case Law Addressing Foreign Investors Misconduct

Examination of the subsequent phase of developments in case law addressing foreign investor misconduct encompasses the timeframe from 2010 onwards. Such an examination aims to analyse the continuation of the trends that emerged in the pioneering cases and are summarised above and then examine their further development along with any diversification that has occurred. These two aims will be pursued using the selected categories of cases established in the early years of practice. A third aim is to identify and present outstanding cases which open new, previously unseen dimensions in the field.

4.3.1

Violation of Host State Law

4.3.1.1

General Overview of Subsequent Developments

By way of a general observation, allegations of investments’ illegality have remained frequent jurisdictional objections raised in international investment 273

Malaysian Historical Salvors SDN, BHD v. The Government of Malaysia, ICSID Case No. ARB/05/10, Award on Jurisdiction, 17 May 2007, para. 148. 274 Romak S.A. v. The Republic of Uzbekistan, PCA Case No. AA280, Award, 26 November 2009, paras. 198, 207. 275 Romak S.A. v. The Republic of Uzbekistan, PCA Case No. AA280, Award, 26 November 2009, para. 180. 276 Romak S.A. v. The Republic of Uzbekistan, PCA Case No. AA280, Award, 26 November 2009, para. 242.

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arbitration over the last decade or so.277 As was observed by the claimant in MetalTech v. Uzbekistan, investment tribunals may even be criticised for their “overreadiness [. . .] to accept illegality defences”.278 The voluminous amount of practice from this period is well suited to the purpose of checking adherence to the initial trends set in the pioneering cases as well as to determine if any divergences and further developments can be observed. To begin with, the trend of a temporal limitation of the scope of the legality requirement, which was established in both Fraport and Hamester and which suggests differentiating between the illegality of an investment’s establishment and subsequent illegality in the course of performance of investment activities, has been reconfirmed and accepted by subsequent tribunals.279 Only violations of the national law of the host State that occurred at the initiation of foreign investments are covered by the legality requirement as expressed in the ‘in accordance with host State law’ clause. Such violations, if established, may eliminate the tribunal’s jurisdiction and meaning the subsequent illegality has no influence on the tribunal’s jurisdiction and may only play a role in the merits of the case. How subsequent illegality may impact on the merits has been demonstrated by practice and this will be specifically addressed below. Furthermore, four important qualifications may be observed in the context of coverage of the requirement on legality upon an investment’s initiation. First, the tribunal plays a key role in preventing ‘illegality laundering’, in which claimants assert they are not bound by the said requirement while having acquired an investment after its illegal establishment.280 Tribunals have not accepted this argument, even when the claimant may not have been directly involved in committing the illegality.281 Second, important qualifications were made with regard to the understanding of the timing of the establishment of an investment. It has been well recognised that the establishment of an investment may entail various transactions over time. In order to meet the requirement of legality, every step of the

277

Also observed in the literature. See: Kreindler (2013), p. 375. Metal-Tech Ltd. v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 234. 279 Teinver S.A., Transportes de Cercanias S.A. and Autobuses Urbanos del Sur S.A. v. The Argentine Republic, ICSID Case No. ARB/09/1, Decision on Jurisdiction, 21 December 2012, para. 257; ECE Projektmanagement International GmbH, Kommanditgesellschaft Panta Achtundsechzigste Grundstücksgesellschaft mbH & Co. v. The Czech Republic, UNCITRAL, PCA Case No. 2010-5, Award, 19 September 2013, para. 3.168; Khan Resources Inc., Khan Resources B.V., CAUC Holding Company Ltd. v. The Government of Mongolia, UNCITRAL, PCA Case No. 2011-09, Decision on Jurisdiction, 25 July 2012, para. 384, Bernhard Friedrich Arnd Rüdiger von Pezold et al. v. Republic of Zimbabwe, ICSID Case No. ARB/10/15, Award, 28 July 2015, para. 420. 280 Alasdair Ross Anderson et al. v. Republic of Costa Rica, ICSID Case No. ARB(AF)/07/3, Award, 19 May 2010, para. 56. 281 Alasdair Ross Anderson et al. v. Republic of Costa Rica, ICSID Case No. ARB(AF)/07/3, Award, 19 May 2010, para. 55. 278

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establishment process up to and including “the last in a series of transactions leading to the investment”,282 needs to conform with host State law. Third, in the scope of relevant violations of the national law of a host State, tribunals have also been consistent in restricting the relevant scope to ‘significant’ violations of the national law of a host State. For example, the tribunal in Energoalians v. Moldova observed that only significant and intentional violations of applicable host State law are relevant in terms of jurisdictional objections.283 Although unsurprisingly, the question of what constitutes ‘significant violations’ opens the door to some room for judicial discretion and analysis. This notwithstanding, there is a certainty that such grave violations as corruption, fraud, forbidden activities (drug production, for example) or violation of legally imposed requirements (such as obtaining governmental approval) are covered by the scope of the legality requirements.284 However, in the words of the tribunal in Hochtief AG v. Argentina, “not every technical infraction of a State’s regulations associated with an investment will operate so as to deprive that investment of the protection of a Treaty”.285 Naturally, some infractions will fall into what some will consider as a grey area, meaning some margin of tribunal appreciation remains at the discretion of investment tribunals. Some divergences in practice do remain though, for example, with regard to the substantive scope of the relevant national law, i.e. whether in line with Saba Fakes where the legality requirement encompasses only those regulations which govern the admission of foreign investments or if substantive scope includes the whole range of ‘significant’ regulations of a host State.286 The fourth observable qualification regards what has been read into the requirement of legality, and here practice has demonstrated a diversity in approaches. For example, in Stati and Ascom v. Kazakhstan it was pointed out that in the absence of express legality requirements, the tribunal does not see from where such a requirement can be derived.287 However, other tribunals proceeded in the footsteps of the pioneering cases, that a legality requirement may be presumed as set even in the

282

Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award, 14 July 2014, para. 1369. 283 Energoalians TOB v. Republic of Moldova, UNCITRAL, ad hoc, Award, 23 October 2013, para. 261. 284 Hochtief AG v. The Republic of Argentina, ICSID Case No. ARB/07/31, Decision on Liability, 29 December 2014, para. 199; Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Republic of Albania, ICSID Case No. ARB/11/24, Award, 30 March 2015, para. 372. 285 Hochtief AG v. The Republic of Argentina, ICSID Case No. ARB/07/31, Decision on Liability, 29 December 2014, para. 199. 286 See the arguments on this matter: Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award, 14 July 2014, para. 1320. 287 Anatolie Stati, Gabriel Stati, Ascom Group SA and Terra Raf Trans Trading Ltd v. Republic of Kazakhstan, SCC Case No. V 116/2010, 19 December 2013, para. 812. See also: Liman Caspian Oil BV and NCL Dutch Investment BV v. Republic of Kazakhstan, ICSID Case No. ARB/07/14, Excerpts of Award, 22 June 2010, para. 187.

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absence of a clear reference thereto.288 The justification for this is considered to be in the principle of international law upon which legality is a precondition for the availability of international remedies.289

4.3.1.2 4.3.1.2.1

Specific Issues Possible Justification of Illegality: The Principle of Estoppel

Subsequent practice seems to provide more elaboration on the matter of possible justification in view of legality requirements such as can be found in the principle of estoppel. The Fraport tribunal already pointed out that “a government [may] be estopped from raising violations of its own law as a jurisdictional defence when it knowingly overlooked them and endorsed an investment which was not in compliance with its law”.290 Practice seems to further develop this idea of the so-called ‘legitimate presumption’ of material legality of agreements and concessions which were directly concluded by the governmental authorities.291 Respondent States are seen as precluded from alleging illegality of contracts directly accepted and signed by their own governmental authorities. One cannot, however, include instances of corruption and fraud here. As stated by Kardassopoulos v. Georgia, “a host State cannot avoid jurisdiction under the BIT by invoking its own failure to comply with its domestic law”.292 Moreover, respondent States are seen as precluded from arguing illegality which may have arisen as a result of their own illegal or inappropriate actions.293 This, for example, includes the factual issue of ultra vires actions on the part of host State authorities. The tribunal in Paushok v. Mongolia considered that even when accepting that the national bank involved in this case had exceeded its

288

Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines [II], ICSID Case No. ARB/11/12, Award, 10 December 2014, para. 332. 289 Ampal-American Israel Corp., EGI-FUND (08-10) Investors LLC, EGI-Series Investments LLC, BSS-EMG Investors LLC, and Mr. David Fischer v. Arab Republic of Egypt, ICSID Case No. ARB/12/11, Decision on Jurisdiction, 1 February 2016, para. 301; Khan Resources Inc., Khan Resources B.V., CAUC Holding Company Ltd. v. The Government of Mongolia, UNCITRAL, PCA Case No. 2011-09, Decision on Jurisdiction, 25 July 2012, para. 383–384. 290 Fraport v. Philippines, para. 346. 291 See the development in case law: Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award, 20 May 1992, para. 82; Ioannis Kardassopoulos v. The Republic of Georgia, ICSID Case No. ARB/05/18, Decision on Jurisdiction, 6 July 2007, paras. 191, 192; Sergei Paushok, CJSC Golden East Company, CJSC Vostokneftegaz Company v. The Government of Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011, para. 606. 292 Ioannis Kardassopoulos v. The Republic of Georgia, ICSID Case No. ARB/05/18, Decision on Jurisdiction, 6 July 2007, para. 182. 293 See Hochtief AG v. The Republic of Argentina, ICSID Case No. ARB/07/31, Decision on Liability, 29 December 2014, para. 199; Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Republic of Albania, ICSID Case No. ARB/11/24, Award, 30 March 2015, para. 372.

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power to enter into an agreement with a foreign investor, this fact is not covered by the legality requirement of the BIT.294 These examples point to an important feature of the illegality objection, namely that what is decisive is not the fact of a violation of host State law has occurred as such, but that there was misconduct on the part of foreign investors, a matter which cannot be tolerated—irrespective of whether or not a violation could be readily addressed by means provided under the relevant IIA.295

4.3.1.2.2

The Specific Case of Corruption

Corruption has been unanimously recognised as a grave violation which needs to be accorded negative legal significance within international investment law and no other violation of the law can be considered as comparable in gravity.296 Corruption is seen as particularly harmful for economic development, especially in developing countries,297 hence, foreign investors engaging in corruption runs contrary to the core idea of international investment law of contributing to economic development. Proven corruption eliminates the existence of investment ab initio;298 it is also a recognised duty of a tribunal to “take the most serious view of allegations of State corruption”.299 However, the practical application of this straightforward understanding has revealed difficulties of various kinds. The most notable of these problems is that international law is still struggling with a comprehensive and universally accepted definition of corruption.300 As such, this issue of providing an adequate definition is not crucial in the field of international investment law since the negative legal consequences of proven corruption are imposed under the national law of the host State. Thus, national rather than

294

Sergei Paushok, CJSC Golden East Company, CJSC Vostokneftegaz Company v. The Government of Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011, para. 606. 295 Sergei Paushok, CJSC Golden East Company, CJSC Vostokneftegaz Company v. The Government of Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011, para. 607. 296 ECE Projektmanagement International GmbH and Kommanditgesellschaft PANTA Achtundsechzigste Grundstücksgesellschaft mbH & Co v. Czech Republic, PCA Case No. 20105, Award, 19 September 2013, para. 3.170. 297 F – W Oil Interests, Inc. v. The Republic of Trinidad and Tobago, ICSID Case No. ARB/01/14, Award, 3 March 2006, para. 211. 298 Mamidoil Jetoil Greek Petroleum Products Societe Anonyme S.A. v. Republic of Albania, ICSID Case No. ARB/11/24, Award, 30 March 2015, para. 372, 378. 299 F – W Oil Interests, Inc. v. The Republic of Trinidad and Tobago, ICSID Case No. ARB/01/14, Award, 3 March 2006, para. 211. 300 The OECD Anti-Bribery Convention only provides a definition of ‘bribery’. See: Article 1 (1), Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, http://www.oecd.org/daf/anti-bribery/ConvCombatBribery_ENG.pdf. The United Nations Convention Against Corruption equally does not entail a definition of ‘corruption’. See: Article 2, United Nations Convention Against Corruption, 31 October 2003, 2349 UNTS 41. The problem is recognised and discussed in the literature; see, for example: Rose et al. (2019), p. 4; Banifatemi (2015), p. 16; Meshel (2013), p. 267; Llamzon (2014), pp. 19–22.

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international law applies when qualifying this type of conduct. This does not make cases involving corruption straight-forward though as investment tribunals are then confronted with the interpretation and application of the national law of the host State, which often serves to add complications.301 A vital issue in connection with corruption in international investment law is being able to make a differentiation between a case of bribery on the one hand, and the traditional ways of doing business in certain countries or a legally tolerated donations and contributions to political campaigns.302 As a matter of fact, in some developing countries and those in a transitional period of development corruption may, unfortunately, be commonplace occurrence and a standard part of business transactions both large and small. It may be true, as alleged by the claimant in the Duty Free case, that a foreign investor must either accept the rules and pay or risk anything from the economic viability of the investment leave through to having to abandon the country with no guarantee of recouping the investment. This choice may not become obvious until well along in the investment process after important and perhaps irreversible steps have been taken. This, of course, raises the question of whether foreign investors could be expected to break this practice, to be stronger than the entrenched corruption endemic in some States? Indeed, corruption is a systemic ‘illness’ with deep roots in history and mentality. Certainly, one could hope that if no one supported corrupt practices, the problem would simply vanish, however, reality is more complex than that. The law as it stands has little, if any, appropriate response to the above considerations. Corruption, if proven, results in the elimination of a tribunal’s jurisdiction, a blanket consequence which arguably does not allow tribunals to take into account all the nuances of any given situation. One of these important nuances, for example, is corresponding illegality on the part of the host State, a so-called double illegality of bribery. Indeed, in contrast to other types of foreign investor misconduct, officials of the host State may also commit a crime by accepting a bribe and under the current practice of international investment arbitration, the issue of double illegality is not sufficiently developed within the system, i.e. it is discussed, but has not yet been accorded legal significance.303 The only legal cause established so far regarding double illegality is an exception to the otherwise established rule that the claimant bears all the costs as a consequence of its misconduct. In cases involving corruption,

301

On this issue, see: Llamzon (2014), pp. 227–228. See also: Metal-Tech Ltd. v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 281 (a question on the sources of authoritative interpretation of national law). 302 See, for example, Wena Hotels Limited v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000, para. 111 (“the delicate problem remains for an arbitral tribunal to determine precisely where the line should be drawn between legal and illegal contracts; between illegal bribery and legal ‘commissions’”); Methanex Corporation v. United States of America, UNCITRAL, Final Award on Jurisdiction and Merits, 3 August 2005, Part III, Ch. B., paras. 34–46. See also: Llamzon (2014), pp. 28–33. 303 See, for example, the discussion on the matter in World Duty Free v. Kenya, paras. 113–115, 178–185.

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tribunals have declined to apply the rules of imposing costs, as a means of demonstrating that both parties are guilty of gross misconduct.304 Other than that, tribunals seem to possess little discretion with regard to taking a more flexible approach in according legal consequences in instances of proven corruption. If corruption upon initiation of investment is proven, tribunals lack jurisdiction over the claims raised, alternatively, the non-accordance of legal consequences in case of proven corruption may result in an annulment or setting aside of an award.305 Being able to adopt a more in-depth and flexible approach to the legal consequences of corruption is thus a matter of normative constructions. In theory, such an idea is not new as legal academia has already voiced this view and extensively discussed for some time.306 For respondents, it is also difficult to substantiate an allegation of corruption on the part of foreign investors as the burden of proof requirements are high. There have been numerous instances in which corruption has been alleged and discussed, however, arguably only in one treaty-based case after World Duty Free v. Kenya307 was a tribunal satisfied with the existence of corruption on the part of the foreign investor. Metal-Tech v. Uzbekistan in 2013 established that the investment was made by virtue of bribery. The literature also reports on the so far unpublished case Spentex v. Uzbekistan, which deals with bribery over the course of a tender process.308 In Metal-Tech, and similar to World Duty Free, the claimant admitted making the payments to the ‘consultants’, yet disagreed on their qualification as a bribe.309 Numerous allegations of corruption in other cases have failed because the proof requirements could not be sufficiently met. The surreal example of World Duty Free v. Kenya, in which the claimant himself delivered the necessary proof of his conduct, has unsurprisingly made subsequent claimants reticent about referring to instances of corruption as a demonstration of an unfriendly environment in a host State. This is regrettable since the openness of foreign investors, as was seen in Duty Free, could have played a significant role in international efforts to combat and monitor corruption worldwide. A more flexible approach to instances of proven corruption, such as those discussed above, may be

304

See World Duty Free v. Kenya, paras. 190, 191; Metal-Tech Ltd. v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 422. 305 Kendra and Coleman (2018), http://arbitrationblog.kluwerarbitration.com/2018/12/04/how-fardo-tribunals-have-a-duty-to-investigate-corruption-the-kenyan-high-court-has-its-word/. 306 See, for example, Elgueta (2016), http://arbitrationblog.kluwerarbitration.com/2016/01/20/thelegal-consequences-of-corruption-in-international-arbitration-towards-a-more-flexible-approach/. 307 Corruption was also established in Niko Resources v. Bangladesh (Niko Resources Ltd. v. People’s Republic of Bangladesh Petroleum Exploration & Production Company Limited, Bangladesh Oil Gas and Mineral Corporation, ICSID Case No. ARB/10/11 and ICSID Case ARB 10/18, Decision on Jurisdiction, 19 August 2013). Yet, the case is a contract-based investment arbitration. 308 Tanzi (2018), p. 201. 309 Metal-Tech Ltd. v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, paras. 246, 271.

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seen as one of the main preconditions to winning over investors to assist in this struggle against corruption.

4.3.1.2.3

Illegality in the Course of Investment Activities

The pioneering cases have elaborated that only illegality at the time of an investment’s initiation matters in terms of the existence of a tribunal’s jurisdiction; subsequent illegality may be a matter for the merits, i.e. as grounds to eliminate otherwise granted substantive protection under an IIA. Nevertheless, for a long time no case has demonstrated how subsequent illegality may indeed be taken into account in the substance of the case. All the remarks made on that point to date have been merely obiter dictum, i.e. general statements with no reference to an actual situation. As has already been observed, when facing a factual situation to which a previously made obiter dictum statement was applicable tribunals are confronted with the need to provide sufficient further elaboration. As such, subsequent illegality is a matter to be dealt with under national law where the local courts of host States may impose negative legal consequences on subsequent misconduct by foreign investors and the measures imposed may be weighed against the satisfaction of the due process of law.310 Even so, international investment law does not seem to grant any protection against the lawful imposition of sanctions due to foreign investors’ illegal actions.311 Thus, any subsequent illegality may appear to be a valid justification for host State actions, for example, if a host State halts the production of illegal drugs and such behaviour is implemented within the due process of law, it would not be considered as expropriation. This then leads to the question of how may the subsequent illegality of foreign investors’ activity be placed within the current system of international investment law? In this regard, one needs to remember that as discussed in previous chapters, international law in general has never meaningfully dealt with the matter of the legal significance of individuals’ misconduct. Thus, international investment tribunals, by suggesting that foreign investors’ illegality be considered on the merits are exploring terra nova. The tribunal in Yukos v. the Russian Federation has probably become the body that has ventured the furthest in this regard. The Yukos v. the Russian Federation case concerns the allegedly indirect expropriation Yukos’ assets. The respondent in the Yukos case raised jurisdiction objections and argued that Yukos came to the tribunal with ‘unclean hands’ since the company allegedly violated tax legislation in the Russian Federation and was

310

Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award, 14 July 2014, para. 1355. [Yukos v. The Russian Federation, Final Award]. 311 International Thunderbird Gambling Corporation v. The United Mexican States, UNCITRAL, Award, 26 January 2006, para. 183.

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involved in other criminal and illegal activities.312 The tribunal, due to the lack of evidence provided, postponed the resolution of the issue until the merits phase of the arbitration.313 As was later found by the tribunal, the alleged misconduct occurred after the establishment of the investment314 and thus raised the issue of negative legal consequences for this subsequent illegality on the part of a foreign investor. The main question in imposing a negative legal consequence upon subsequent illegality of a foreign investment’s operation is whether there exists a valid legal ground to do so. The respondent in Yukos relied on the doctrine of ‘unclean hands’, arguing that a foreign investor so tainted may suffer various legal consequences ranging from the inadmissibility of its claims to the rejection of otherwise substantive protection under the relevant IIA.315 However, the tribunal did not find a reference to the doctrine in the wording of the ECT and it refused to view the doctrine as a general principle of international law.316 It must be noted here that the tribunal’s refusal to recognise the doctrine of ‘unclean hands’ was not made in a particularly elaborated way as it only referred to the insufficiency of the doctrine’s recognition by courts and tribunals,317 whereas the establishment of a general principle of law would require an analysis showing its use in a significant number of domestic legal systems from various jurisdictions. As such, the Yukos tribunal did not find it legally appropriate to either render the claims inadmissible or reject the otherwise granted international protection for foreign investments because of the allegedly illegal conduct of the foreign investors over the course of subsequent operations of a legally established investment.318 However, the tribunal did take into account the submitted illegality when considering the matter of reparation, relying on the doctrine of contributory fault which may limit the scope of a State’s responsibility in view of illegal or otherwise inappropriate conduct of a party injured by an internationally wrongful act.319 In the theory of general international law, application of this doctrine is subject to the following three requirements: first, a proven internationally wrongful act by a State; second, culpable conduct on the part of the injured party; and third, a causal link between the culpable conduct and the injury resulting from the internationally wrongful act.320 The causal link could be established by demonstrating a “material

312

Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, paras. 19, 20. 313 Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, paras. 436, 509. 314 Yukos v. The Russian Federation, Final Award, para. 1370. 315 Yukos v. The Russian Federation, Final Award, para. 1273. 316 Yukos v. The Russian Federation, Final Award, para. 1363. 317 Yukos v. The Russian Federation, Final Award, para. 1369. 318 Yukos v. The Russian Federation, Final Award, paras. 1364, 1365, 1373. 319 Article 39 ILC Articles on Responsibility of States for Internationally Wrongful Acts; Ripinsky and Williams (2008), pp. 315–318. 320 See: Sadowski (2015), https://www.ogel.org/article.asp?key¼3573.

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and significant” contribution of a foreign investor's culpable conduct to the prejudice suffered as a result of an internationally wrongful act of a State.321 The Yukos tribunal did not unequivocally establish that such a link exists and the award is criticised for “its inconsistency with the requirement that the blameable conduct of the injured party should contribute to the injury”.322 The main reason for this probably lies in the predominantly political nature of the dispute, namely, the basic motivation for the proven indirect expropriation of Yukos’ investment was the company’s owners political activity rather than the alleged tax delicts. The tribunal justified its decision by a reference to “its wide discretion”323 in the matter and hence decided in the end to apply the doctrine of contributory fault and reduce the amount of damages awarded to the claimant to 25% of what was sought. While paying due respect to valid criticism of the Yukos tribunal for only partial adherence to the criterion needed to apply the doctrine of contributory fault, one could view the award as a tentative step into terra nova by bringing the issue of subsequent illegality into the current system of international investment law. As was demonstrated by Yukos, the matter of dispensing legal consequences for subsequent illegality arising from foreign investors’ conduct is far more complicated than suggested obiter dictum by previous tribunals. International investment law in its current form, combined with the fact that general international law has not sufficiently dealt with this issue, means that a profound and well-settled solution in this regard is yet to materialise.

4.3.2

Abuse of the System of International Investment Law

4.3.2.1

General Overview of Developments

First and foremost, allegations involving abuses of the system of international law are a persistent source of disputes in the field of international investment arbitration. As discussed above, in view of the diverse range of allegations that may qualify as an abuse of process, the principal issue that remains is specifying what actions or omissions indeed fall under this category and are accorded negative legal consequences. In terms of factual constellations, several observations may be made. First, the initiation of an international proceeding based on non-existent or false ownership certificates for an investment does not seem to have been repeated by any claimant after the decisive manner the tribunals in Cementownia and Europe Cement dealt with such attempts.

321

Yukos v. The Russian Federation, Final Award, para. 1633. Sadowski (2015), https://www.ogel.org/article.asp?key¼3573. 323 Yukos v. The Russian Federation, Final Award, para. 1637. 322

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Second, the matter of claimants entering into parallel proceedings has been consistently claimed by respondents as an abuse. In general, tribunals adhere to the position elaborated in the pioneering cases that the doctrine of the abuse of rights does not cover such instances.324 In this regard though, the Ampal-American Israel Corporation tribunal added a valuable qualification when it distinguished between the initiation of multiple proceedings where the jurisdiction of each tribunal/or court is not clearly established, and the subsequent pursuit of claims on substance before multiple tribunals. The latter was considered by this tribunal as behaviour that has “crystallise[d] in the abuse of process”.325 Indeed, over the course of the second decade of practice considered by this research, both tribunals and respondents seem to consistently identify the initiation of parallel proceedings as a pivotal element in determining allegations of an abuse of process. The core danger here lies in the risk of a so-called ‘double recovery’ for one and the same violation committed by a host State which would run contrary to the general principle of law,326 although one of a tribunal’s key tasks is to make sure that double recovery is avoided.327 Third, nationality planning remained the most complaint in cases involving allegations of an abuse of the system of international investment law and further developments in this category will be discussed in the following section.

4.3.2.2 4.3.2.2.1

Specific Issues Developments in Case Law on Nationality Planning

As seen above, the landmark cases began addressing the problem of nationality planning by making a differentiation between acceptable prospective nationality planning and unacceptable retrospective change of nationality in view of the ongoing dispute. This distinction could be seen as inevitably meaning that a tribunal will have to confront the question of how to determine when an ongoing dispute started. Interestingly, neither in the factual background of Phoenix nor in Mobil did this question play a role and thus there have already been instances where abstract (not directly related to facts) statements are often too general for the purpose of making an adjudication on the actual factual background. Thus, such general statements will

324

See: Sanum Investments Limited v. The Government of the Lao People’s Democratic Republic, PAC Case No. 2013-13, Award on Jurisdiction, 13 December 2013, para. 367; Ampal-American Israel Corporation and others v. Arab Republic of Egypt, ICSID Case No. ARB/12/11, Decision on Jurisdiction, 1 February 2016, para. 328. 325 Ampal-American Israel Corporation and others v. Arab Republic of Egypt, ICSID Case No. ARB/12/11, Decision on Jurisdiction, 1 February 2016, paras. 331–339. 326 Unjust enrichment, which would be at the core of the ‘double recovery’, is recognised to be an expression of a general principle of international law. See: Binder (2018), p. 278. 327 Venezuela Holding, B.V. Mobil Cerro Negro Holding, Ltd., Mobil Venezolana de Petroleos Holdings, Inc., Mobil Cerro Negro, Ltd. and Mobil Venezolana de Petroleos, Inc. v. The Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award, 9 October 2014, para. 381.

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require further elaboration to ensure they can have genuine meaning and impact in cases where they are presented. For example, consider the following situation: In country A there is an active political party which does not yet have a majority in the parliament but is increasingly popular. This party openly promotes a certain reform which would obviously harm a business in country A operated by foreign investor Y from country B. As a result of fresh elections, the political party secures a majority in the parliament and foreign investor Y transfers ownership of the shares in company X, incorporated in country A, to country C. The transfer of shares amounts to some US$500 million and occurred within two and a half weeks of the election results becoming public. Countries A and B do not have a BIT in force, whereas there is a BIT between countries A and C. Two months later the mentioned reform was put in place, gravely affecting the business of Y and led him to commence an international investment arbitration under the A-C BIT. Was the change of nationality prospective or retrospective under these circumstances? Would the result be different if the transfer of ownership of the shares occurred shortly prior to the elections? In 2013 the Pac Rim v. El Salvador tribunal determined that if a change of nationality occurs at a time when the claimant party could foresee a dispute, such a change of nationality is an abuse of process, rendering any retrospective claims inadmissible.328 The foreseeability of a dispute has gradually become a key indicator for a change of nationality to be deemed as abusive.329 Nevertheless, the critical issue remains how to determine foreseeability. At what point is the dispute foreseeable and at what point in time could the dispute be considered as having arisen? In this respect, the Pac Rim tribunal clarified that foreseeability can only be excluded if a transfer took place “before the occurrence of any event or measures giving rise to a later dispute”.330 That same year, the Tidewater tribunal pointed out that a dispute is foreseeable when it “was within the reasonable contemplation of [the Claimant]”.331 In 2015, the tribunal in Philip Morris v. Australia supported the Tidewater tribunal’s position in indicating that a dispute is foreseeable when there is a reasonable prospect that a measure which may cause the initiation of a treaty claim will occur. Thus, in the hypothetical case presented above, one could argue that the ‘root of the dispute’ was already known to the investor at the time of restructuring. Thus, the facts of the case, also taking into account such an extraordinarily swift transfer of ownership of the shares, allows the presumption that the restructuring was

328

Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections, 1 June 2012, para. 2.100. 329 Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, 17 December 2015, para. 554. 330 Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, 17 December 2015, para. 2.47. 331 Tidewater Inc., Tidewater Investment SRL, Tidewater Caribe, C.A., Twenty Grand Offshore, L. L.C., Point Marine, L.L.C., Twenty Grand Marine Service, L.L.C., Zapata Gulf Marine Operations, L.L.C. v. The Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Decision on Jurisdiction, 8 February 2013, para. 148.

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not prospective planning but driven by the fear of the adverse impact on X’s business operations and the desire to obtain A-C BIT protection. Thus, the transfer should be viewed as having happened because of a foreseeable dispute and can thus be legitimately qualified as an abuse of process.

4.3.2.2.2

Abuse of Process Between the Principle of Good Faith and Jurisdictional Objection ratione temporis

The Phoenix case put prominently emphasis on the significance of the good faith principle in approaching allegations of abuse of process while the Mobil tribunal addressed the allegations of an abuse of process by giving weight to the element of time. Over the course of time, subsequent developments with this issue saw the time element gradually come to prevail. As seen from above, it became crucial to determine the critical date of the emergence of the dispute in relation to the date of the share transfer and whether at that point the dispute was already foreseeable. Indeed, “it is not uncommon that divergencies or disagreements develop over a period of time before they finally ‘crystallise’ in an actual measure affecting the investor’s treaty rights”.332 Thus, even though subsequent tribunals when dealing with allegations of abuse recognise the importance of addressing “unacceptable manipulations by a claimant acting in bad faith”,333 it is also considered important that “the abuse is subject to an objective test”.334 As quite recently stated by the Philip Morris tribunal, “abuse does not imply a showing of bad faith”,335 thus one can observe a gradual marginalisation of the relevance of the principle of good faith by the objective criteria of the timing and foreseeability of a dispute. The connection to a temporal element makes a plea of abuse related to jurisdictional objection ratione temporis. Indeed, any relevant corporate restructuring in the context of pre-existing disputes (as in Phoenix) may be dealt with by a ratione temporis objection, whereas such restructuring in respect of foreseeable disputes may be addressed by reference to the doctrine of an abuse of rights.336 The rationale behind a ratione temporis objection, as highlighted by Gremcitel v. Peru, is the principle of the non-retroactivity of treaties.337 An objection on an abuse of the

332

Renée Rose Levy and Gremcitel S.A. v. Republic of Peru, ICSID Case No. ARB/11/17, Award, 15 January 2015, para. 149. 333 Lao Holdings N.V. v. Lao People’s Democratic Republic, ICSID Case No. ARB(AF)/12/6, Decision on Jurisdiction, 21 February 2014, para. 70. 334 Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, 17 December 2015, para. 539. 335 Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, 17 December 2015, para. 539. 336 See also Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, 17 December 2015, para. 539. 337 Renée Rose Levy and Gremcitel S.A. v. Republic of Peru, ICSID Case No. ARB/11/17, Award, 15 January 2015, para. 147.

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system of international investment law, as seen above, leads to the elimination of claims, a purpose and outcome for which the system of international protection of foreign investments was not created.

4.3.2.2.3

Further Developments in View of Jurisdiction v. Admissibility as a Consequence of Abuse

The pioneering cases have created a measure of uncertainty, or at least led to a somewhat fractured approach by tribunals regarding the negative legal consequences to be imposed upon parties abusing the system of international investment law. Some tribunals view the matter as hindering their jurisdiction,338 others see it as a matter for the admissibility of claims.339 A more detailed analysis to comprehend this observation will be undertaken in Chap. 5.

4.3.3

Requirements on Investment

As already elucidated, the pioneering cases have demonstrated tribunals’ reluctance to read any additional requirements into foreign investment in the absence of any precise mentioning thereof in the text of relevant IIAs. Even in cases where international investment agreements do provide for some qualified requirements to be imposed on foreign investment, tribunals have proven themselves to be restrained in their interpretations. Arguably, such an approach was one of the grounds which led contracting States to react by adopting modifications into their international investment agreements. Indeed, around 2010 one can observe a wave of renewals of IIAs concluded earlier which can be understood as a reaction to what had been witnessed in recent practice. New treaties concluded from 2010 onwards entail unprecedented levels of detailed specifications on investment.340 Furthermore, even though cases dealing with issues pertaining to a denial of benefits clause were few in number, such clauses began to be more frequently inserted into IIAs. For its part, evolving case law has also responded to the developments in international treaties. This response has seen a subsequent development in tribunals paying more careful attention to the qualified requirements on covered investments if any were inserted into the wording of the IIAs. Moreover, the reading of these newly imposed requirements has become both quite narrow in interpretation and more

338

Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, 17 December 2015, para. 536. 339 Abaclat and Others v. The Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011, para. 658. 340 Lim et al. (2018`), p. 216.

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considered. Even when approaching standard terminology such as ‘invested’ or ‘made’, one can observe a trend of more sovereign adjudication. Quite recently the tribunal in X and Y v. The Republic of Cyprus indirectly differentiated between ‘holding’ and ‘making’ an investment as the tribunal was not satisfied by the mere presence of assets within the territory of a host State.341 The aim “of being invested” was viewed as a precondition for the existence of a protected investment.342 Notwithstanding this increase in tribunals’ self-confidence, the generally recognised and shared motivation they have to adhere to and respect the will of the contracting States has been constantly manifested and maintained.343

4.3.4

Concluding Observations

As elaborated in Chap. 2, this overview of the practice of international investment law serves the purpose of identifying established trends and determining possible divergences in adjudications by arbitral tribunals. It goes without saying that the predictability of the results of legal procedure is a high-end aim and an indication of the rule of law. A summary of the results is presented in the form of Table 4.1.

4.4

4.4.1

Outstanding Categories: Cases Which Stretch and Challenge the Potential of the System of International Investment Law Direct Positive Obligations on Foreign Investors

One of the obvious factors driving a ground-breaking outcome resulting from international investment arbitration is if such a proceeding occurs under the auspices of an international investment agreement which stands out from other agreements. Having discussed this earlier, international investment agreements may be seen as rather identical, nevertheless, over time agreements may evolve to include new

341

X and Y v. The Republic of Cyprus, SCC No. V 2014/169, Final Award, 21 February 2017, para. 198. 342 X and Y v. The Republic of Cyprus, SCC No. V 2014/169, Final Award, 21 February 2017, para. 199. 343 For example, Saluka Investments B.V. v. The Czech Republic, UNCITRAL, Decision on Jurisdiction over the Czech Republic’s Counterclaim, 7 May 2004, para. 38–39; Renta 4 SVSA et al. v. The Russian Federation, SCC No. 24/2007, Award on Preliminary Objections, 20 March 2009, para. 59.

4.4 Outstanding Categories: Cases Which Stretch and Challenge the Potential of the. . .

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Table 4.1 Expected responses to foreign investor misconduct (Mis)conduct: actions/ omissions Initiation of an investment in substantial violation of a host State law

Expected response by the system of international investment law Rejection of tribunals’ jurisdiction.

Violation of a host State law over the course of investment operations

No implications for tribunals’ jurisdiction, possibly an implication on merits (foreign investors’ illegality as a justification of host State conduct; reduction of damages due). Rejection of tribunals’ jurisdiction. Rejection of tribunals’ jurisdiction.

Initiation of an investment through fraud Change of nationality in view of a dispute No insertion of foreign capital

Still covered by the wording of the broad asset-based definition of an ‘investment’.

Modest or no real business operation, only ownership of an investment

Still covered by the wording of the broad asset-based definition of an ‘investment’.

Possible divergencies In general, the position seems to be unanimous. The following divergencies are still possible: negative legal consequences only in cases involving a violation of host State law on the admission of a foreign investment; negative legal consequences are only imposed if the relevant IIA entails an ‘in accordance with host State law’ clause (i.e. no inherent requirement on legality). No implication over the course of international investment arbitration. The matter of subsequent illegality is a matter of national law and national adjudication. Seems to be a unanimous approach. Possibly negative legal consequence in the form of the inadmissibility of claims. Tribunals seem to be unanimous in searching for a normative requirement on foreign capital. If there is no specific requirement in the relevant IIA, then no negative legal consequences may be imposed. Possible emphasis on the precise wording of the IIAs: ‘to make’, ‘to operate an investment’. Broad interpretation also in view of the purpose of investment protection.

specific features which have a bearing on case outcomes based on such specific agreements. Al-Warraq v. Indonesia is an UNCITRAL arbitration commenced under the Agreement on Promotion, Protection and Guarantee of Investments Among Member States of the Organization of the Islamic Conference (‘OIC Agreement’).344 Unlike most IIAs, Article 9 of the OIC reads as follows: 344

Agreement on Promotion, Protection and Guarantee on Investments Among Member States of the Organization of the Islamic Conference, 5 June 1981, https://investmentpolicyhub.unctad.org/ Download/TreatyFile/2399.

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The investor shall be bound by the laws and regulation in force in the host State and shall refrain from all acts that may disturb public order or morals or that may be prejudicial to the public interest. He is also to refrain from exercising respective practices and from trying to achieve gains through unlawful means.

A provision using such wording, which may be legitimately read as imposing direct obligations on foreign investors, is an exceptional example in the field of international investment law and one should not be surprised to see remarkable outcomes from cases based upon such an agreement. The claimant in the arbitration, Mr Al-Warraq, is a shareholder in a company which offers the development and execution of turnaround strategies for financially distressed banks.345 Starting in early 2000 the company invested in the acquisition of shares of a distressed Indonesian bank called Bank Century.346 However, the subsequent realisation of the claimant’s investment plan faced difficulties was unsuccessful347 and by 2008 the bank in question became insolvent.348 The same year, the government of Indonesia decided to bail out Bank Century.349 Shortly after this decision, the Indonesian press published allegations that some of the bailout funds were being siphoned off to finance the presidential election campaign,350 which caused rioting. Against this backdrop, a special investigative committee was established351 with the claimant and other individuals being subject to criminal investigations concerning their alleged involvement in the irregularities surrounding Bank Century.352 A guilty verdict was rendered against one of these individuals,353 however, the submitted facts raised doubts about whether the investigations were conducted in accordance with recognised international standards.354 As presented by the claimant, largely as a result of the long-lasting criminal investigations and fines imposed upon it, Bank Century collapsed.355 Another relevant event impacting this case was the 2008 global credit crisis, which also had to be taken into account as a possible cause, or at the very least, a significant contributing factor to the bank’s insolvency.356 The claimant filed for international 345

Hesham Talaat M. Al-Warraq v. The Republic of Indonesia, UNCITRAL, Final Award, 15 December 2014, para. 73. [Al-Warraq v. Indonesia]. 346 Al-Warraq v. Indonesia, para. 74. 347 Al-Warraq v. Indonesia, paras. 88–98. 348 Al-Warraq v. Indonesia, para. 459. 349 Al-Warraq v. Indonesia, paras. 99, 108. 350 Al-Warraq v. Indonesia, para. 99. 351 Al-Warraq v. Indonesia, para. 99. 352 Al-Warraq v. Indonesia, para. 106. 353 Al-Warraq v. Indonesia, para. 107. 354 The tribunal decided on that matter that “failure to comply with the most basic elements of justice when conducting a criminal proceeding against an investor amounts to a breach of the investment treaty”. The tribunal therefore found a violation of the FET standard. See Al-Warraq v. Indonesia, para. 621. 355 Al-Warraq v. Indonesia, para. 177. 356 Al-Warraq v. Indonesia, para. 523.

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arbitration alleging unlawful expropriation (Article 10 of the OIC), violation of fair and equitable treatment (referred to through the MFN clause in Article 8 of the OIC) and the violation of the guarantee of protection and security (Article 2 of the OIC). Interestingly, when referring to Article 10 of the OIC, the claimant read into the provision a guarantee of fundamental human rights, such as those stipulated in Article 14 of the ICCPR when referring to the term ‘basic rights’ as used in Article 10 of the OIC.357 However, the arbitral tribunal did not share such an extensive reading of Article 10,358 instead pointing out that the mentioning of ‘basic rights’ in Article 10 refers to “basic property rights” rather than general human rights.359 The respondent raised jurisdiction objections and conducted a defence on the merits. Putting these details aside for the moment, what is most interesting are the counterclaims raised by the respondent. As a substantial basis for the counterclaims, the Republic of Indonesia referred to Article 9 of the OIC360 and argued that the provision imposes material obligations on foreign investors, a violation of which shall be accorded negative consequences.361 Procedurally, the respondent argued that the arbitration clause as stipulated in Article 17 of the OIC accords “each party” access to arbitration.362 Furthermore, the relevant UNCITRAL procedural rules permit counterclaims in Article 21.3.363 The respondent claimed US$300 million364 arguing that the claimant’s actions or omissions caused Bank Century’s insolvency and creating the need for the bailout.365 The tribunal commenced its analysis by first determining its jurisdiction before examining the allegations raised by the claimant. Among the various violations alleged by the claimant, the tribunal found a breach of the FET standard.366 Having established a breach of FET, the tribunal turned its attention to an analysis of Article 9 of the OIC where it determined that the provision indeed provides for material obligations on foreign investors to respect the national law of the host State and “prevents the investor from taking any actions that would disrupt the public interest”.367 The tribunal essentially considered this to mean that the provision functions similarly to an ‘umbrella clause’ and lifts the claims under national law to an international level.368 After considering the testimonies of experts,369 the tribunal

357

See Al-Warraq v. Indonesia, para. 178. Al-Warraq v. Indonesia, para. 522. 359 Al-Warraq v. Indonesia, para. 521. 360 Al-Warraq v. Indonesia, paras. 438–440. 361 Al-Warraq v. Indonesia, para. 439. 362 Al-Warraq v. Indonesia, para. 444. 363 Al-Warraq v. Indonesia, para. 446. 364 Al-Warraq v. Indonesia, para. 460. 365 Al-Warraq v. Indonesia, para. 459–474. 366 Al-Warraq v. Indonesia, para. 621. 367 Al-Warraq v. Indonesia, para. 632. 368 Al-Warraq v. Indonesia, para. 663. 369 Al-Warraq v. Indonesia, paras. 634–644. 358

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found that the claimant acted both in violation of the laws and regulations of Indonesia and contrary to the public interest.370 However, the sure-footed progress the tribunal had made thus far became bogged down with the identification of the legal consequences of all that had preceded. The tribunal pointed out that the claims were to be deemed as inadmissible,371 a stance legally substantiated with reference to the doctrine of ‘clean hands’.372 This approach is questionable given the existence of a specific normative provision, namely Article 9 of the OIC. irrespective of this, the tribunal concluded that the claimant is “prevented from pursuing his claims” for FET, notwithstanding that the tribunal already found a violation of this guarantee by the respondent.373 By stating this, the tribunal suggested that any subsequent illegality on the part of foreign investors is accorded negative legal consequence in the form of the elimination of the substantive protection otherwise granted by the relevant international investment agreement. On the matter of counterclaims, the tribunal agreed that they could be brought by the respondent against the claimant, a finding that was held independently of Article 9 of the OIC374 as the tribunal only referred to the provision to strengthen its argument rather than serve as its basis.375 Thus, the outcome and the argumentation on the counterclaims may also be exemplary for cases based on other, less specific IIAs. When turning to address the counterclaims the tribunal found them unsubstantiated for several reasons: first, the personal liability of the claimant was not clearly identifiable;376 second, the initial losses based on the investor’s misconduct were suffered by Bank Century not the respondent. Subrogation is, as such, possible but was not legally explained by the respondent.377 Third, some of the losses claimed resulted due to violations of separate agreements which entailed reference to independent dispute resolution mechanisms.378 The literature has already reported on the significance and progressive nature of the Al-Warraq v. Indonesia award and its perceived impact on international investment law.379 Indeed, notwithstanding that some of the tribunal’s decisions could be seen as questionable—for example, the reference to ‘clean hands’ when determining the legal consequences for the breach of Article 9 of the OIC as well as the complete elimination of treaty protection on substance after finding a violation of FET—the award stands out as it elaborates upon on the legal consequence of foreign investors’

370

Al-Warraq v. Indonesia., para. 645. Al-Warraq v. Indonesia, para. 646. 372 Al-Warraq v. Indonesia, para. 646. 373 Al-Warraq v. Indonesia, para. 648. 374 See Al-Warraq v. Indonesia, paras. 664, 666. 375 Al-Warraq v. Indonesia, para. 667. 376 Al-Warraq v. Indonesia, para. 669. 377 Al-Warraq v. Indonesia, para. 670. 378 Al-Warraq v. Indonesia, para. 671. 379 Rivas and Choi (2015), http://arbitrationblog.kluwerarbitration.com/2015/10/14/three-recentdecisions-further-shaping-investment-treaty-case-law-on-counterclaims-part-ii/. 371

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misconduct and develops this aspect within international investment law more fully than it had previously been.

4.4.2

Operation of Foreign Investment and Human Rights

A progressive approach and thinking outside the paradigm on the part of respondents is another source which may lead to outstanding outcomes in international investment arbitration cases. As frequently observed above, tribunals are put in a position where they have to respond to the allegations of respondent States rather than initiate their own investigations with regard to foreign investor misconduct. A good example of such a respondent providing a progressive approach may be seen in Urbaser v. Argentina, a case that contrary to the abovementioned Al-Warraq v. Indonesia, was initiated on the basis of a typical BIT between Spain and Argentina. It is also noteworthy that the facts of the Urbaser case, almost identical in constellation to Al-Warraq, were already subject to another international investment arbitration initiated a couple of months earlier by Impregilo, an Italian shareholder of the involved Argentinian company AGBA.380 The Urbaser tribunal took five years longer than to reach an outcome than the Impregilo tribunal in the parallel case. In this long-running proceeding, the Republic of Argentina decided to change tactics for its defence. Seven years after the commencement of the Urbaser v. Argentina arbitration, the respondent filed counterclaims against the foreign investor,381 an event that probably comprises the most recent development in this particular aspect of arbitration. The claimant in the case, a Spanish company and a shareholder in the Argentinian company AGBA, won a 30-year concession contract for water and sewage services under which the company was obliged to invest an agreed-upon sum of money in the development of the water and sewage services in a region within Argentina.382 However, as is typical in international investment disputes, the realisation of this concession faced difficulties. One of the main obstacles was the economic crisis in Argentina and at the outset, the investor failed to provide the agreed-upon sum of money and the concession contract was terminated383 and the rights from the contract were transferred to the Argentinian company. The claimant filed an ICSID claim alleging a breach of FET and the indirect expropriation of its investment. In a later stage of the proceeding, the respondent filed counterclaims alleging

380

Impregilo S.p.A. v. Republic of Argentina, ICSID Case No. ARB/07/17, Award, 21 June 2011, para. 14. 381 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, Award, 8 December 2016, para. 1111. [Urbaser v. The Argentine Republic]. 382 Urbaser v. The Argentine Republic, para. 15. 383 Urbaser v. The Argentine Republic, para. 856.

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that the claimant, by its failure to provide the agreed-upon sum of money for the development of the water and sewage services breached not only the contractual arrangements but also the basic human rights of the population to have access to clean water and sanitation.384 In other words, the Republic of Argentina suggested imposing upon the foreign investment an obligation to respect and guarantee the human rights of its population. Such a constellation has never arisen before in the field of international investment arbitration. The tribunal addressed the counterclaims in three steps: first, their admissibility given their extremely late submission; second, its jurisdiction to hear the respondent’s counterclaims; and third, whether the counterclaims could be legally substantiated.385 Regarding the late submission of the counterclaims the tribunal shared the claimants’ surprise about the lateness of the submission but, unlike the claimant, did not see in this any basis to reject the counterclaims since the requirements of Article 40 of the ICSID Arbitration Rules were satisfied.386 Furthermore, pertaining to jurisdiction, the tribunal had little concern about the existence of the respondent’s right to raise such counterclaims.387 The most challenging issue became the establishment of the connection required by Article 46 of the ICSID Convention between the main claim and the counterclaims.388 The tribunal found that a factual link would suffice, such as that both the claims and counterclaims were raised on the basis of the same investment and in view of the same concession.389 In this, the tribunal can be seen to either basically override or simply disregard the requirement of a legal connection between the counterclaims and the initial claims, as was elaborated upon in the Saluka case.390 The most interesting aspect here is that the tribunal did not limit the possible counterclaims to only those which directly arise out of the international investment regime. This move on the part of the tribunal is seen in academia as indirectly opening the floodgates to more and more varied counterclaims.391 By accepting the counterclaims on the alleged violation of human rights, the Urbaser tribunal provided an example of viewing these two issues as not mutually exclusive in one proceeding., The Urbaser tribunal has become the first in the history of international investment law to accept its jurisdiction to hear a host State’s counterclaims on alleged violations of international standards of human rights by a foreign investor.

384

Urbaser v. The Argentine Republic, para. 36. On counterclaims see: Urbaser v. The Argentine Republic, paras. 1143–1221. 386 Urbaser v. The Argentine Republic, para. 1150. 387 Urbaser v. The Argentine Republic, paras. 1146–1147. 388 Urbaser v. The Argentine Republic, para. 1135. 389 Urbaser v. The Argentine Republic, para. 1151. 390 See: Saluka Investments B. V. v. The Czech Republic, UNCITRAL, Decision on Jurisdiction over the Czech Republic’s Counterclaim, 7 May 2004, para. 76. 391 Guntip (2017), https://www.ejiltalk.org/urbaser-v-argentina-the-origins-of-a-host-state-humanrights-counterclaim-in-icsid-arbitration/. 385

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Perhaps unsurprisingly, difficulties then arose with the legal substantiation aspect as the tribunal could not find any legal basis which would impose human rights obligations upon the investor. This was predictable given both the current constitution of international investment law as well as the state of things in general international law. Nevertheless, the tribunal took a step into the unknown and found that private actors, such as foreign investors, may hold responsibility for violations of human rights and stated that “it can no longer be admitted that companies operating internationally are immune from becoming subjects of international law”.392 However, assigning such a novel status and responsibility could obviously be neither imposed nor implemented in the absence of “international law obligations attached to the non-State individuals”.393 Indeed, as elaborated by the tribunal, to substantiate an argument that a foreign investor was obliged to provide the population with access to clean water, such obligation needs to be derived either under the BIT (by lifting the contractual obligations to the international level), under another international treaty in force between the contracting parties to the BIT,394 or in the alternative, there must exist a general principle of international law that does so.395 In the case at hand, whereas it is true that the foreign investors were contractually obliged to provide a region with clean water, this obligation, being contractual in nature, has no relation to international human rights law.396 While the award has already received considerable attention for its counterclaims on human rights,397 it can also be distinguished for some of its other characteristics. In particular, compared to previous ICSID cases, Urbaser v. Argentina is remarkable for a more balanced approach to the interpretation and differentiation of standards of foreign investments’ protection under international law. Furthermore, the manner in which the tribunal elaborated upon a requirement of a direct connection between losses for a foreign investor and a violation of international law on the part of a host State deserves particular consideration. The case has contributed to progress in the search for a justified balance between the positions of foreign investors and host States and thus will likely continue to play a role in the future development of international investment law.

392

Urbaser v. The Argentine Republic, para. 1195. Urbaser v. The Argentine Republic, para. 1195. 394 Urbaser v. The Argentine Republic, para. 1207. 395 Urbaser v. The Argentine Republic, para. 1207. 396 Urbaser v. The Argentine Republic, para. 1210. 397 Kube and Petersmann (2018), p. 236. 393

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Operation of Foreign Investment and Environmental Protection

Perenco v. Ecuador and Burlington v. Ecuador were two parallel proceedings separately filed against the Republic of Ecuador by the US firm Burlington and Perenco, a company incorporated under the laws of the Commonwealth of the Bahamas. Both companies were partners in a consortium which, with governmental authorisation from the Republic of Ecuador, was exploring for oil in the republic’s territory.398 The investment operation was confronted with opposition from local indigenous communities399 and as a result, the Republic of Ecuador intervened with a range of measures affecting the claimants’ investment. Both companies filed independent ICSID claims alleging violations of international standards for investment protection as stipulated in the relevant BITs as well as violations of investment contracts.400 In both parallel proceedings, Burlington v. Ecuador and Perenco v. Ecuador, the Republic of Ecuador submitted counterclaims pursuant to Article 40 of the ICSID Rules of Procedure for Arbitration Proceedings401 on the environmental harm and infrastructural damages allegedly caused by the claimants’ investment. As the analysis of these cases proceeds it is important to bear in mind that both parties had consented in a special agreement that both tribunals should have jurisdiction to decide upon any counterclaims arising from the investment and its activities.402 Thus, the tribunals’ jurisdiction was not questioned and the tribunal in each case was only concerned with the merits of the case. The counterclaims were raised under the law of Ecuador and not any international obligations held by the foreign investors. The tribunals’ elaboration is impressive in terms of extensive elaboration of the issues of liability for environmental damages under the law of the Republic of Ecuador. However, from an international investment law perspective, the awards are less informative since the most critical issue of whether the tribunals may decide on the counterclaims raised by the respondent State was predetermined by the agreement of the parties. Even so, the subject matter of environmental damage occurring as a result of investment activities is perhaps currently even more topical for international investment law than it is many other areas of human activity. If the issue were to be determined under the BIT and the applicable international law (as opposed to the national law of the host State), the result would most likely be similar to that in Urbaser. However, this was not the case and the Burlington tribunal 398 Burlington Resources v. The Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims, 7 February 2017, paras. 45, 64. [Burlington Resources v. The Republic of Ecuador]. 399 Burlington Resources v. The Republic of Ecuador, para. 26. 400 Perenco Ecuador Limited v. The Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaims, 11 August 2015, para. 4. 401 ICSID Rules of Procedure for Arbitration Proceedings (Arbitration Rules), in effect since 10 April 2006, http://icsidfiles.worldbank.org/icsid/icsid/staticfiles/basicdoc/partf.htm. 402 Burlington Resources v. The Republic of Ecuador, para. 60.

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awarded around US$42 million to the respondent, making Burlington v. Ecuador a rare example of a State successfully filing counterclaims and getting material compensation from a foreign investor.403 Following on from this, it will be interesting to see the outcome in Perenco v. Ecuador where a final decision is still pending. The advent of an international investment tribunal dealing with matters of substantial environmental harm as a result of investment activity may pose the question of how to deal with such matters in a more general manner, namely, in the absence of a specific agreement between the parties. As noted earlier in this text, one of the possible reasons why current international investment law lacks normative regulations in matters of foreign investor misconduct is the absence of such cases at the international level. The creators of the international investment law system were not focused on the issue of foreign investor misconduct and thus no relevant regulations were even conceived let alone implemented. Once contracting States realise the potential danger of environmental harm from foreign investors’ operations, especially if an investment is related to inherently harmful activities, it would not be difficult to insert the necessary normative tools to allow the resolution of these (counter)claims in the field of international investment law. The question which remains to be answered is whether international investment tribunals are appropriate forums to address this or whether such issues may be more effectively dealt with at the national level.

4.5

Interim Conclusion

This chapter has demonstrated that international investment law has dealt sufficiently enough with allegations of foreign investor misconduct for there to have been noticeable developments and refinements to the system that allow it to better address such issues. It should be pointed out that in describing the selected cases the author has tried to provide some general background for each case as well as trace the logical steps made by the various tribunals. While the accounts could have been done more succinctly, a superficial approach lacking profoundly elaborated references and conclusions seems an endemic problem of the field. Thus, the relatively extensive summaries were well-considered and deliberately opted for. The ever-growing body of case law, even as it currently stands, is a matter of history and serves as evidence of ongoing developments within the field of international investment law. The accounts presented above raises numerous questions, more than can be answered within the scope of this study, and many more than would be wise to even attempt to answer. Indeed, first, one could study each of the categories of foreign investor misconduct404 presented above separately and

403

Burlington Resources v. The Republic of Ecuador, para. 1075. Such studies have already been partially conducted. See, for example: on corruption: Llamzon (2014); on the abuse of process: Baumgartner (2016).

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in-depth: illegality under national law; abuses of the system; non-fulfilment of the requirements upon investment, or even the emerging category of illegality under international law (environmental harm, compliance with human rights, possibly also compliance with international labour standards), all of which are evident in the landmark cases. Second, one could study the respondents’ right to bring counterclaims in more detail before moving on to general issues, such as the possible grounds for eliminating negative legal consequences for foreign investor misconduct. In this regard issues and aspects based on estoppel, illegality on the part of a host State or bad faith on the part of a host State could also be further elaborated upon. Special attention may be directed toward collecting evidence of alleged misconduct as well as the matter of how tribunals refer to and apply the national law of the host State, which serves as a touchstone for the establishment of illegality. This study deliberately focuses on a more general examination of foreign investor misconduct and its legal significance within the system in order to filter the otherwise overwhelming mass of available data into a more meaningful and useful form. To that end the study of case law has revealed that the misconduct of foreign investors is largely alleged and accorded legal significance, how this is done is predetermined by the normative composition of the system. We have observed an intuitive desire on the part of arbitral tribunals to take the misconduct of foreign investors, especially that of a serious nature, into account and impose at times grave legal consequences upon it. Nevertheless, it is also remarkable that in following this intuitive desire, tribunals have gone to great lengths to respect to the will of contracting States as expressed in their IIAs. Areas for criticism are readily identified, but in some respects, the system learns more from the mistakes it makes than by the things it does well. What this may translate to is that the true motor of change is a profound examination of the developments, including the seemingly problematic, and to then attempt to comprehend what they mean for the here and now as well as their implications for the future. This is the task set for the subsequent chapter, and in approaching it required an appreciation that by dealing with the vast array of allegations against foreign investors’ misconduct, international investment tribunals are confronted by both the opportunity and challenge of confronting new dimensions not only within the field of international protection of foreign property but also within general international investment law. Complicating all of this further is the fact that they have been doing so with few normative guidelines, thus, the case law presented above deserves considerable appreciation.

Chapter 5

Analysis of Some Key Events to Date: Their Meaning and Significance

5.1

Introduction

The selected cases detailed in the previous chapter highlight some of the key issues international investment law arbitral tribunals face when dealing with allegations of foreign investor misconduct and are noteworthy because of the facts of each case and their outcomes which have developmentally added to case law. One of the main underlying ideas of this study is that how tribunals approach and resolve the various issues they confront serves an important basis for the development of legal constructions and thus their further improvement. The present author does not of course claim any novelty of this approach, indeed, from the very first codification of legal rules the application of the law in actual cases has been viewed and used as a pivotal element driving further development of the law.1 Such real-world applications of law do not, however, automatically transform into further improvements as this requires an in-depth analysis which allows drafters and practitioners to comprehend what has transpired and, based upon that understanding, form a vision of further improvements that could be implemented to improve the system.2 One needs to bear in mind that what constitutes a desired improvement will vary depending on the individual vision of future goals. For example, a goal to make the response to foreign investor misconduct more balanced requires different changes when compared with what is required to pursue any attempt to make foreign investors more responsible for upholding, or even promoting, environmental, labour and human rights standards in host States. Irrespective of the individual vision though, any suggested improvements require the clearest possible understanding of what needs to be achieved and how the system will function after the suggested improvement is implemented. The

1 2

Honore (1993), p. 36. See also: Smits (2012), pp. 114–116.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Kozyakova, Foreign Investor Misconduct in International Investment Law, European Yearbook of International Economic Law 11, https://doi.org/10.1007/978-3-030-54855-1_5

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determination of that which needs to be improved in international investment law lies in the hands of the contracting States. The subsequent and concluding Chap. 6 will consider the aims for the improvements of the international investment law with a view to addressing foreign investor misconduct. Before dealing with the aims though, this current chapter will analyse the import of some of the key events witnessed in international investment law when dealing with foreign investor misconduct. Analysis of each of these events requires a thorough examination “in order to understand its nature and to determine its essential features”.3 The events themselves consist of examples of international investment tribunals’ adjudication upon claims being submitted by respondent States on alleged foreign investor misconduct that present several vital elements needing analysis: • The element of an outcome: What is the significance of the responses that were elaborated upon and proposed by international investment tribunals when addressing foreign investor misconduct? Do those responses positively contribute to the preservation of a healthy balance within the system? Is the outcome legitimate and based upon the rule of law? • The element of applicable law: What legal sources were successfully applied to impose negative legal consequences for foreign investor misconduct? How did the tribunals deal with the national law of host States? Did the ebb and flow of proceedings indicate any interrelation between international investment law and the relevant domestic legal system? • The element of involved actors: What was the role of the actors involved in the circumstances of each case? Were the various actors, especially the investment tribunals, acting with the framework of their mandate? Was the conduct of the involved actors legitimate and in accordance with the best practice of legal adjudication in accordance with the rule of law? • The element of the discovered processes: The way a particularly constituted system develops is not an entirely sporadic process, it is subject to guiding mechanisms that may be observed and comprehended. There is a high probability that the observed processes will repeat in the future if no evolutionary changes of the system take place. Thus, an understanding of the established processes may help to predict how the system will develop further and how such development may be impacted by any changes to be implemented. In addition to the above and as previously indicated, this study envisages making a contribution by way of preventative crisis management in the field of international investment law. The idea behind this is that a crisis is a manifestation of a problem caused by visible or invisible pre-existing obstacles which prevent the system from fully addressing the challenges posed by modern-day issues. An attempt to identify those obstacles and harmonise the functionality of current international investment

3 For the definition of ‘analysis’ see the Merriam-Webster dictionary online: https://www.merriamwebster.com/dictionary/analysis.

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law with the goals and needs of the modern era will positively contribute to crisis management in the field and help prevent the still-developing system from stumbling up an evolutionary dead end.

5.2

Analysis of the Experience of International Investment Law in Dealing with Foreign Investor Misconduct

5.2.1

Outcomes of the Landmark Cases Dealing with Foreign Investor Misconduct

5.2.1.1

Possible Outcomes of Investment Cases

Foreign investor misconduct may cause various consequent outcomes in the case in which such misconduct was alleged, proven and taken into account by the arbitral tribunal, these outcomes may include the: • • • •

rejection of the tribunals’ jurisdiction inadmissibility of the claims elimination of substantive protection (as seen in Al-Warraq) reduction of damages otherwise due (as in Yukos)

Additionally, misconduct by foreign investors that determine the outcome of the case generally also results in the costs and fees of the case being payable by the foreign investor.4 These outcomes are not randomly implemented or dependent upon the mood of the tribunal. The cases presented in Chap. 4 provide more than just a glimpse of a systemic vision, one which will be presented below.

5.2.1.2 5.2.1.2.1

Systemic Vision of the Diverse Outcomes and Their Significance Rejection of a Tribunal’s Jurisdiction

A rejection of a tribunals’ jurisdiction occurs when the established misconduct eliminates any of the imposed jurisdictional requirements. In such a case, foreign investor misconduct becomes the single insurmountable obstacle that prevents a tribunal from seeing how the requirements for jurisdiction can be met. As we have discussed above, IIAs impose various requirements on tribunals’ jurisdiction, such

4 There is divergency in that rule. Some tribunals allocate the entire costs and fees, including the cost of legal representation, while others only the administrative fees, to the foreign investor (Claimant), who was proved to have been involved in misconduct. More detailed examples were provided in Chap. 3 above.

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as ratione materiae, ratione personae, ratione temporis and ratione voluntatis. Arbitral tribunals not only have the competence to determine their own jurisdiction, but a duty to do so.5 Both the exercise of jurisdiction when it does not exist and the rejection of jurisdiction without legitimate grounds may be grounds for post-award remedies (annulment and setting aside of the award).6 As has been seen in the presentation of cases above, the requirement of ratione materiae is viewed as being unfulfilled when an investment is not made in accordance with national law. The ‘in accordance with host State law’ clause is interpreted as limiting the scope of the IIA’s coverage to only investments made in conformity with the national law of the host State. Any inappropriate change of nationality may influence the existence of ratione personae. Ratione voluntatis is seen as unfulfilled when a foreign investors’ conduct is either illegal or in a breach of the principle of good faith. Indeed, the majority of tribunals viewed the illegality of an investment’s establishment as the non-satisfaction of the ratione materiae criterion, although there have been instances when it was framed as non-satisfaction of the ratione voluntatis criterion. This diversification of approaches could be considered as still falling within the reasonable boundaries of tribunals’ discretion and as acceptable outcomes given the varied specifics of the legal argumentation presented in each case. The rejection of jurisdiction is, as such, not a sanction for foreign investors’ misconduct, but is rather a technical response arising when a tribunal checks that the imposed jurisdictional requirements, as set by contracting States, have been met.7 Investment tribunals, in general, agreed that criteria such as the origin of the capital that was not directly imposed by the contracting States, may not be taken into account when deciding on jurisdiction over claims, even if those criteria may appear meaningful and legitimate.8 An exception to this logic was accorded to unwritten criteria, which may legitimately be read into the will of the contracting States. Such criteria are legality according to relevant national law and respect for the general principle of good faith at the time of an investment’s establishment.9 Any conduct in violation of the general principle of good faith gives tribunals the discretion to either read the principle of good faith into formally imposed criterion, i.e. presuppose that the formal satisfaction of the jurisdictional criterion may only occur in a good faith, or the tribunal may view a breach of good faith by a foreign investor as independent grounds to render the claims inadmissible. This leads to the consideration of the second possible outcome of cases addressing foreign investor misconduct—the inadmissibility of claims.

5 Article 41 (1) ICSID Convention; Malicorp Limited v. The Arab Republic of Egypt, ICSID Case No. ARB/08/18, Award, 7 February 2011, para. 98. 6 Dolzer and Schreuer (2012), pp. 304–305. 7 Newcombe (2011), p. 192. 8 See the discussion on the Tokios Tokalés v. Ukraine presented above. 9 See the presentation of the Plama v. Bulgaria award above.

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Admissibility of Claims

Drawing a distinction between jurisdiction and admissibility seems to still be largely an unsolved issue in international investment law.10 Nevertheless, some tribunals have quite persuasively explained their particular rationale when deciding upon the difference, as was the case when the Micula v. Romania tribunal pointed out: An objection to jurisdiction goes to the ability of a tribunal to hear a case while an objection to admissibility aims at the claim itself and presupposes that the tribunal has jurisdiction. If a tribunal finds a claim inadmissible, it must dismiss the claim without going into its merits even though it has jurisdiction.11

Rendering the claims inadmissible is not a clear-cut exercise for the arbitral tribunals.12 The question of admissibility does not concern the satisfaction of formally imposed jurisdictional criterion, but rather the appropriateness of a tribunal hearing the claims advanced.13 Rendering claims inadmissible is a decision a tribunal can make based largely on its own discretion and cannot be subject to revision,14 however, practice thus far has demonstrated that tribunals are somewhat reluctant to extensively use this discretion, possibly because its boundaries are not overly clear. The inadmissibility of claims has been applied more as an alternative to the rejection of the jurisdiction, especially in cases in which foreign investors acted in breach of the principle of good faith.15 Arguably the most frequent factor associated with a tribunal ruling the claims before it as inadmissible is when the case deals with an abuse of process. This may arise because a tribunal in such a situation faces a dilemma: either overlook the formal satisfaction of the jurisdictional requirements or simply consider the attempt to invoke the IIAs protection for a dispute which the contracting States never intended it to cover as a matter rendering the claims inadmissible. On the one hand, the rejection of jurisdiction and finding the claims inadmissible may seem to be six of one and half a dozen of the other, i.e. the raised claims could not proceed on the merits. But on the other hand, apart from the above-mentioned legal distinction that a decision on jurisdiction may be subject to revision whereas a

10 The classic vision on the distinction between jurisdiction and admissibility in Fitzmaurice (1986), p. 438. See also: Paulsson (2005), p. 603; Waibel (2015), p. 1218. 11 Ioan Micula, Viorel Micula, S.C. European Food S.A., S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20, Decision on Jurisdiction and Admissibility, 24 September 2008, para. 63. 12 Newcombe (2011), p. 196. 13 See: Waste Management, Inc. v. Mexico, ICSID Case No. ARB (AF)/98/2, Dissenting Opinion of Keith Highet, 8 May 2000, para 58; Hochtief AG v. Argentina, ICSID Case No. ARB/07/31, Decision on Jurisdiction, 24 October 2011, para. 90; Abaclat and Others v. Argentina (formally Giovanna a Beccara and Others v. Argentina), ICSID Case No. ARB/07/5, Dissenting Opinion of Georges Abi-Saab, 28 October 2011, para. 18. 14 Paulsson (2005), p. 617. 15 See the presentation of the Plama v. Bulgaria above.

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decision on admissibility is final,16 there is an important educational effect per se. By rendering claims inadmissible, arbitral tribunals are sending “a very strong message”17 that foreign investor’s misconduct cannot be tolerated and shall be accorded negative legal consequences. Certainly, the inadmissibility of claims is not a punishment nor sanction in the traditional sense, however, it seems to connote greater condemnation than the formal rejection of the tribunals’ jurisdiction.

5.2.1.2.3

Elimination of Substantive Protection

The elimination of substantive protection has arguably thus far only been applied in Al-Warraq v. Indonesia.18 As presented above, the tribunal read Article 9 of the OIC Agreement as imposing a positive legal obligation on foreign investors to act in accordance with national law, public order and the morals of the host State. This provision imposes an obligation on foreign investors under international law to obey the national laws of the host State. The question arises though, does this imposed obligation function as an exclusive prerequisite for an application of the substantive protection granted for foreign investors under an IIA? Indeed, when examining the details of Al-Warraq v. Indonesia one can note that on the one hand, the tribunal found that the Republic of Indonesia breached the standard of fair and equitable treatment by not providing the procedural guarantees for a criminal investigation, to wit: “the Claimant was not properly notified of the criminal charges against him, he was tried and convinced in absentia and the sentence was not properly notified to the Claimant. The Claimant was not able to appoint legal counsel and was not able to appeal his sentence”.19 On the other hand, the tribunal found that the claimant “failed to uphold the Indonesian laws and regulations. The Tribunal further considers that the Claimant’s actions, whether criminal or not, caused a liquidity issue to Bank Century, and his actions have been prejudicial to the public interest, in this case the Indonesian financial sector.”20 Both the obligations of the respondent and the claimant were imposed by the relevant international treaty, namely, Article 8 and Article 9 of the OIC respectively. However, instead of dealing with those issues separately and considering the appropriate sanctions for each of the established breaches of the treaty, the tribunal concluded that: “the Claimant having breached the local laws and put the public interest at risk, has deprived himself of the protection afforded by the OIC Agreement”.21 Thus, the claimant’s misconduct in breach of Indonesian Company law,22

16

For further elaboration on this see: Newcombe (2011), p. 193. Newcombe (2011), p. 199. 18 The case was extensively presented above. 19 Al-Warraq v. Indonesia, para. 621. 20 Al-Warraq v. Indonesia, para. 645. 21 Al-Warraq v. Indonesia, para. 645. 22 Al-Warraq v. Indonesia, para. 643. 17

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without being to any extent causal to the respondent’s misconduct, precluded the wrongfulness of the respondent’s actions in not providing procedural guarantees in the criminal investigations in accordance with international standards. Having, on the one hand, said that the Claimant is “prevented” from otherwise granted substantive protection under the OIC,23 the tribunal, on the other hand, framed its conclusion as inadmissibility of claims by virtue of the application of the principle of “clean hands”.24 This seems to indicate that the tribunal decided to mix the preclusion of substantive protection with the inadmissibly of claims, which on the surface appear to be poles apart. As discussed above, a response resulting in the inadmissibility of claims means that the tribunal considers that the claimant’s conduct makes international adjudication on the matter inappropriate, i.e. thus adjudicating would undermine the fairness of international arbitration to provide services for appropriate and justified needs. Whereas the elimination of substantive protection for foreign investors is meant to function more as preclusionary mechanism for the wrongfulness of what would otherwise be a breach of international obligations by a host State and thus allow the host State to avoid responsibility.25 The tribunal’s approach in Al-Warraq v. Indonesia also raises some other questions. Was the decision not to adjudicate the matter based upon the foreign investor’s substantive misconduct in relation to investment activity an appropriate response in the case? If practice in international investment law keeps developing in that same vein, host States will be provided with a loophole to avoid their international responsibility by virtue of foreign investor misconduct, even though neither factual nor legal connections exist between the respondent’s and the claimant’s misconduct. The question now is, how can international investment arbitration adequately dealt with a breach of international obligations by foreign investors but still respect and uphold national or even international law (not yet seen in the IIAs, but theoretically possible)? It seems that matters of foreign investors’ substantive misconduct in relation to their investment operation is appropriately considered from a substantive protection perspective and thus dealt with on the merits. As such, a substantive protection response granted by a relevant IIA would have significant potential to accord the conduct of both parties an appropriate place in dispute proceedings. Responses the result in the elimination of jurisdiction and the inadmissibility of claims are too harsh as they simply circumvent the whole procedure and create a winner (usually the respondent) takes it all situation. More balance could be achieved by adjudicating on the misconduct of each party separately. A good option, especially for the factually and connected misconduct of both foreign investors and host States, is available in 23

Al-Warraq v. Indonesia, para. 648. Al-Warraq v. Indonesia, para. 647. 25 Legal significance of the elimination of substantive protection otherwise granted to foreign investors can be seen by analogy to the circumstances precluding wrongfulness as stipulated in the ILC’s Articles on Responsibility of States for Internationally Wrongful Acts. See: ILC Draft Articles on Responsibility of States for Internationally Wrongful Acts, with commentary, Yearbook of the International Law Commission (2001), Vol. II, 71–72. 24

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the form of counterclaims, which are largely accepted in the field of international investment law.26 However, counterclaims such as a “State’s original claim against the claimant arising out of the subject matter of the dispute”27 should be distinguished from a defence on the merits as “State responses to particular allegations or claims”.28

5.2.1.2.4

Reduction of Damages

The reduction of damages as a consequence of foreign investors’ misconduct was the chosen path in the Yukos awards where the tribunal relied on the doctrine of the contributory fault. As such, this doctrine presupposes an established contribution by a foreign investor to a breach by the host State,29 thus making the response by reducing, or even eliminating, the damages awarded due to the illegalities by both parties a good option. If one considers the constellation present in Al-Warraq, the reduction or even elimination of damages would at first glance seem to be a more balanced and legitimate response in view of both the respondents’ and the claimant’s misconduct, however, it would be difficult to substantiate that the claimant, through financial manipulation, sufficiently contributed to the respondent not providing the procedural guarantees for the criminal investigations. This moves one of the already identified problems of international investment law dealing with foreign investors’ misconduct to centre stage—the lack of elaborated doctrinal approaches. The Yukos tribunal tried to borrow such an approach from general international law, however, in the light of the findings presented in Chap. 2, general international law has not dealt with matters similar to those now arising in international investment law. In Al-Warraq a reduction of damages outcome could have been achieved by an independent adjudication first on the misconduct of respondent and then on the misconduct of the claimant or vice versa. The damages awarded to the foreign investor from a breach of the FET could have been reduced by the sum awarded to the respondent for the claimant’s breach of Article 9. Such an offset would have had the twin benefit of avoiding any need to make a determination of contributory fault. In Yukos, however, this solution would not work since the claimant’s misconduct does not constitute a violation of the relevant investment treaty as the ECT does not entail a rule similar to Article 9 of the OIC. Another issue facing international investment law is that it lacks a meaningful number of cases that can be drawn on to help calculate damages arising from foreign investor misconduct. This is not intended as a reference to mathematical calculations, but rather an elaboration on the international rules governing or perhaps even

26 For more detailed elaboration on counterclaims in International Investment law see: Hoffmann (2016), p. 519. 27 Sabahi (2011), p. 178. 28 Sabahi (2011), p. 178. 29 See: Kantor (2016), p. 534.

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benchmarking compensation paid to a State for the illegal conduct of individuals. All the existing rules for compensation of damage incurred under international law address the compensation due to illegal actions on the part of States. The pressing need to establish a legal standard to set compensation for damage incurred cannot be overestimated. In this regard, one has simply to remember the difficult time when international investment law was internally torn over the rules and standards to apply when awarding compensation for breaches of international standards of investment protection, such as expropriation, unfair and inequitable treatment, and so forth.30 Could those rules and standards be applied by analogy to foreign investor misconduct? Doing so could avoid the repetition of difficult situations, such as when the Yukos tribunal seemed to recognise the difficulty of using “its wide discretion” to justify the decision to reduce by 25% the awarded compensation to the foreign investor due to the latter’s misconduct.31 While further elaboration is clearly required, the reduction of damages seems to be a largely appropriate response to address matters of foreign investor misconduct. On the one hand, such a response has educational value in discouraging repeated episodes of misconduct in the future, while on the other hand it accords the misconduct of both the respondent and the claimant legal significance and thus preserves the balance and fairness of the system.

5.2.1.2.5

Comparative View on the Possible Responses to Foreign Investor Misconduct

From what can be discerned from the above, possible responses to foreign investor misconduct can differ according to the various involved specifics, such as the degree of tribunals’ discretion, on the responses’ meaning/and function, as well as the legal consequences and outcomes that result. Table 5.1 provides a comparative view of the key differences.

5.2.2

Appreciation of the Possible Outcomes in View of the Rule of Law and Efficiency

It is a recognised and desirable aim for any legal system and its judicial proceedings to produce beneficial outcomes in accordance with the rule of law. The field of international investment law is no exception in that regards. Chapter 4 provided

30 For a detailed presentation on the issue of compensation of damages in the field of international investment law see Ripinsky and Williams (2008) and Sabahi (2011). As an example, that the issue of compensation for damage arising from breaches of international standards of investment protection still raise some concerns and discussions see: Rather (2017), pp. 51–52. 31 Yukos v. The Russian Federation, Final Award, para. 1637.

A high degree of discretion. The criterion on the inadmissibility of claims is not clear. By rendering the claims inadmissible the tribunal exercises its adjudication power.

Application of such response presupposes that foreign investors possess positive obligations under the relevant investment treaty. For the majority of the IIAs this is not yet the case. Without such a rule it is extremely difficult for a tribunal to eliminate the substantive protection granted to foreign investors on the merits. Needs to be substantiated and justified by the applicable legal rule. The amount and calculation remain subject to the tribunals’ discretion.

Inadmissibility of claims

Rejection of substantive protection

Meaning: To educate foreign investors and to discourage a repetition of misconduct in the future. Function: (i) To reconstitute fairness; (ii) to sanction foreign investors.

Meaning/function Meaning: Neutral. Not as a sanction or condemnation, but merely a rejection on formal criterion. Function: (i) To avoid any excess of the tribunal’s jurisdiction; (ii) to pay due respect to the scope of application as determined by the contracting States; (iii) to make sure that the jurisdictional criteria are fulfilled. Meaning: Disapproval, critical and condemnatory Function: (i) To protect the international adjudication system from serving inappropriate means; (ii) to discourage misconduct; (iii) to send ‘a very strong message’. Meaning: Strong condemnation, punishment Function: (i) To sanction foreign investor; (ii) to discourage future misconduct; (iii) to promote compliance.

The case is fully elaborated on merits. The amount of damages due is reduced in line with the gravity of the foreign investors’ illegality.

The foreign investor is prevented from the enjoyment of otherwise granted substantive protection under the relevant IIAs.

The claims are dismissed without elaboration on the substance. The decision is not subject to revision.

Consequence/outcome The claims are dismissed without elaboration on the substance. The decision on jurisdiction may be reviewed. Foreign investor theoretically can resubmit the claims upon satisfaction of the failed criterion. Although questions of how to restore the legality remain.

5

Reduction of damages

Degree of the tribunal’s discretion Little degree of tribunal discretion. Jurisdiction either exists (satisfaction of all the formally imposed criterion) or it does not (when any of the imposed criteria is not met).

Response Rejection of jurisdiction

Table 5.1 Key differences between possible responses to foreign investor misconduct

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empirical examples of how the system deals with foreign investor misconduct and the preceding sections have analysed the resultant outcomes. The question to be answered now is whether the current approach to foreign investor misconduct is adequately efficient and in accordance with the rule of law?

5.2.2.1

5.2.2.1.1

The Rule of Law in Outcomes Generated by Foreign Investor Misconduct Legal Clarity

The legal clarity of outcomes generated by foreign investor misconduct takes into account components such as foreseeability and predictability.32 In this context, foreseeability means “to reasonably anticipate the potential results of an action, such as the damage or injury that may happen if one is negligent or breaches a contract”33 while predictability refers to outcomes “occurring in the way expected”,34 with the rationale behind both premises being to guarantee legal security.35 As was seen in Chap. 3, the current legal constructions of international investment law could hardly be described as ensuring legal certainty due to the lack of clear regulations addressing the various matters associated with foreign investor misconduct. However, notwithstanding this fact, arbitral tribunals have managed to insert some degree of predictability and foreseeability through their widespread consistency in practice. One of the most notable achievements in this regard has been the legal outcome of cases dealing with proved instances of investments made in breach of the national law of a host State and the use of the general principle of good faith. The tribunals have been consistent in viewing the illegal establishment of an investment as grounds for the rejection of jurisdiction to decide the case. This approach has become so well established that claimants have all but stopped even attempting to argue to the contrary.36 Certainly, one can come back to the criticism of reading ‘in accordance with host State law’ clause as a legality requirement, however, this is not the first occurrence of such in international law practice to

32

See: Stoll (2018), p. 281. For the definition of “foreseeability” see the Wex Legal Dictionary, https://www.law.cornell.edu/ wex/foreseeability. 34 For the definition of “predictability” see the Oxford Dictionaries, https://en.oxforddictionaries. com/definition/predictability. 35 See: Stoll (2018), p. 281. 36 At the outset of practice the claimants provided a large number of counter-arguments suggesting that the ‘in accordance with host State law’ does not necessarily result in the elimination of tribunals’ jurisdiction. Furthermore, the defence was limited to the level of the substantiation and burden of proof. There were examples when the claimant, following the submission on an investment’s illegality by the respondent, tried to request a dismissal of the claims. See the presentation of cases on investments’ illegality as presented in Chap. 4 above. 33

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allegedly transform an initially inserted meaning by virtue of interpretation and a practical application of the law to the facts.37 The added value of such a transformation comes in the form of increased predictability and foreseeability regarding the outcome and should be viewed as a positive. Outcomes of cases dealing with allegedly inappropriate nationality planning are less predictable and foreseeable when compared to those involving the illegal establishment of an investment.38 Nevertheless, the observed efforts described above to clarify and crystallise where the dividing line is between acceptable and unacceptable nationality planning moves the system towards the desired end goal of enhanced legal clarity. Far less settled is the issue of foreign investor misconduct in connection with an investment’s operation. The outcomes in such cases are neither predictable nor foreseeable, primarily because practice has only recently started to confront this issue and the current generation of IIAs are not sufficiently equipped with the appropriate legal tools to accord legal significance to subsequent illegality on the part of foreign investors’ operations. The passage of more time and further elaboration on what constitutes an appropriate and balanced approach is needed, as was the case with the qualification of the scope of the legality requirement, or the crucial characteristics of inappropriate changes of nationality. Taking this into account, the best approach available at the moment is to be less critical of the thus far limited progress made and be more constructive and creative in finding solutions that push international investment law’s evolutionary development forward.

5.2.2.1.2

Consistency

Consistency of the law is another component of the rule of law which requires legal rules and that outcomes derived from their practical application be stable and coherent.39 In view of its predominantly bilateral nature, international investment law is consigned to be inherently inconsistent by its circa 3000 independently drafted and bespoke international investment agreements that are applied without a permanent and centralised adjudication authority and no institutions authorised analyse case law and establish guidelines for needed or desired improvements. This somewhat unfettered nature of international investment law was addressed in the first (preparatory) chapter of the present research. Given this foundation, which at times has bordered on being fluid, international investment law constantly faces the danger of producing inconsistent results, particularly with challenging matters such as foreign investor misconduct. Nevertheless, the practice seen in Chap. 4 demonstrates that with a concerted effort over time increasing order can be brought to a system with an overabundance of (chaotic) potential. As seen above, how international

37

Kolb (2006), pp. 103–122; Bjorge (2014), p. 188. Jagusch et al. (2016), p. 190. 39 Stoll (2018), p. 282. 38

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investment law has dealt with foreign investor misconduct has already advanced to the point that it allows a systemic presentation and categorisation of case law. It can be observed that tribunals, in dealing with allegations in foreign investors’ misconduct, have pursued the goal of consistency quite seriously. The wellestablished practice of cross-references to previous cases and paying careful attention to established trends, even these are in their infancy, are worthy of praise. The employment of cross-references serves to both build upon the impetus previous decisions give to developments in a certain direction while also allowing further and often more nuanced elaborations of issues previously dealt as these are addressed in the light of new circumstances. It also seems important for there to be an intellectual assessment after the fact of the logic and argumentation of previous tribunals to decide whether to conform with or reject the previous findings. This does not mean, however, that tribunals engaged in such a critique on partly unelaborated references can do so without a profound substantiation on the specific matters currently before them. However, given the way international investment law is structured, tribunals paying no attention to previous decisions on a similar, or at least largely comparable, matter would be extremely harmful and inevitably cause systemic erosion of consistency in terms of legal outcomes concerning foreign investor misconduct.

5.2.2.1.3

Legitimacy

The general discussion on the legitimacy of international investment arbitration as a system allowing adjudication of claims raised by individuals against States is ongoing.40 This discussion has included the fact that international investment tribunals have inherited an additional function, one most probably not intended at the outset, to adjudicate upon allegations in foreign investors’ misconduct. We have even observed that counterclaims by the host States against foreign investor have been accepted and considered on the merits. Do these and similar developments in international investment law this raise more issues in terms of legitimacy? Arbitral tribunals dealing with allegations on foreign investors’ misconduct are required to adjudicate on matters pertaining to the national law of host States. Since international investment tribunals are not the experts in such law, their only solution is to rely on experts’ opinions and testimonies. A deeper examination of the matter allows one to appreciate that on such issues a tribunal needs to find the balance between the submissions of the respondent, as a sovereign State which has enacted its own legislation, and a private investor. Thus far, tribunals seem to have adopted a position that “applying the law, including municipal law, as opposed to established facts” requires tribunals “to form its own opinion on the meaning of the law”.41 The

40

See: Hobér (2015), https://elibrary.law.psu.edu/cgi/viewcontent.cgi?article¼1030& context¼arbitrationlawreview; Stoll (2018), p. 283. 41 Metal-Tech LTD. v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 287. See also: Inceysa v. El Salvador, para. 209.

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preserved right to have and act upon its own opinion in some instances has gone as far as rejecting the res judicata character of Supreme Court decisions.42 In doing this, tribunals have essentially tried to avoid either the respondent’s (State) or the claimant’ (foreign investor) position becoming hegemonic, although this has frequently proven to be a difficult task. Especially in cases such as Al-Warraq v. Indonesia, which was decided on the basis of the IIA imposing an international obligation on foreign investors to act in accordance with the national law and morals of the host State. In such a case, the tribunals are invited to adjudicate on the issues of substantial illegality under the national law committed over the course of the investment’s operation. Another aspect to consider regarding legitimacy is the absence of clear guidelines and rules on accepting expert opinion and testimony. Compared to duly established courts at the municipal level, international investment tribunals are equipped with little-to-no normative support to ensure the appropriateness and honesty of the statements of experts invited to testify by the parties to a dispute. There are no mechanisms to ensure that the opinions of experts are not biased or were not previously discussed and skewed by one of the parties. These considerations unsurprisingly help sustain the concerns about the legitimacy of tribunals’ adjudication upon foreign investor misconduct.

5.2.2.2

Efficiency and Effectiveness of International Investment Law Responses to Foreign Investor Misconduct

Arguably every legal and judicial system pursues efficient and effective outcomes to the issues it was enacted to deal with,43 exceptions to this broad truth can only be seen when such systems are corrupt, a topic that falls outside the scope of the present study. Regarding efficient outcomes, the basic tenet of satisfactorily resolving a dispute by way of a final decision rendered under the due process of law appears to be both relevant and desirable. Leaving aside the issue of finality44 and due process of law45 for the time being and focusing on the element of satisfaction, it seems that determining the level of satisfaction with an outcome, at least on the part of the parties, may be derived from the initial expectations of those parties to the dispute. The claimants, as foreign investors, are motivated to be awarded compensation for 42

See: Inceysa v. El Salvador, para. 209. Blum (2008), p. 323. 44 Arbitral awards are generally final with a very few available mechanisms for revision. See: Balaš (2008), p. 1136. 45 Arbitration Rules and Institutions guarantee the preservation of a due process of law in investment arbitration. A lot has been done in creating appropriate rules for the conduct of arbitrators. See, for example: UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, http:// www.uncitral.org/pdf/english/texts/arbitration/rules-on-transparency/Rules-on-Transparency-E. pdf. 43

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damages suffered as the result of the allegedly illegal conduct of host States and to obtain an international award condemning a violation of international standards for investment protection. The respondents have a dual motivation as host States, first as a contracting State to the IIA, they are motivated by what drove the agreement’s conclusion in the first place, often domestic economic development or the like.46 Thus, respondents are inter alia willing to provide a good standard of international protection for foreign investors and to guarantee these investors access to international adjudication. However, the status of the respondent unavoidably leads to the dual nature of their motivation. As a party to a dispute, States have an interest in the preservation of their international reputation, the reduction or elimination of the damages due, as well as the preservation of the balance and justice of the arbitration system. As such, sovereign States being accused of breaches of international standards regarding foreign investments’ protection makes them ‘feel’ uncomfortable, especially when knowing that the investor did not act in accordance with the initial expectations and requirements stipulated (such as the commitment of a certain amount of capital, legal operation of the investment, and so forth) or even became involved in grave misconduct (such as corruption or fraud). This constellation is arguably the best-fit explanation for the above-observed developments in the field when dealing with foreign investor misconduct. Indeed, how should such respondents act in the situation described above? Unsurprisingly, they tend to go on the attack, accusing foreign investors of misconduct and raising arguments to support that allegation. That is exactly what can be observed as repeatedly happened and it puts tribunals in a position where they need to balance the claimants’ and respondents’ interests to arrive at an outcome which is both sound and satisfactory. Maintaining and delivering on this sense of equilibrium is important for legitimacy as without it either respondents or claimants as a whole will lose faith in the system.47 Returning to the possible outcomes of cases dealing with foreign investor misconduct results in a shortlist of: the rejection of jurisdiction, the rendering the claims inadmissible, the elimination of substantive protection, and the reduction or elimination of damages. Which of those responses allows for the most satisfactory result from the involved parties’ perspectives? The results may be summarised as shown in Table 5.2. The rejection of jurisdiction and the inadmissibility of claims appears to be the least balanced outcomes in terms of providing at least some satisfaction for both parties to a dispute. The reduction or elimination of damages, which results from an independent adjudication on the alleged misconduct by the respondent and the alleged misconduct of the claimant, seems to better preserve an equilibrium between the parties. The conclusion could be additionally supported by an examination of the post-award developments in cases in which the jurisdiction was rejected, especially if unsatisfied claimants searched for other forums and means to present their claims,

46 47

Such motivation is usually expressed in the Preamble to the relevant IIAs. Clark (2005), p. 227.

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Table 5.2 Preservation of the claimant’s and the respondent’s interest in the possible outcomes of cases dealing with foreign investor misconduct Outcome Rejection of jurisdiction Inadmissibility of claims

Elimination of substantive protection

Reduction/ elimination of damages

Preservation of the claimant’s interest Gets neither compensation nor a declaratory statement on the respondent’s breach of the relevant IIA. Gets neither compensation nor a declaratory statement on the respondent’s breach of the relevant IIA. Additionally, this response is somewhat condemnatory of the claimant. Gets neither compensation nor a declaratory statement on the respondent’s breach of the relevant IIA. Additionally, this response contains a sanctioning aspect.

Allows claimants to pursue the claims on the merits and get an award declaring a breach by the respondent as well as compensation due.

Preservation of the respondent’s interest Gets full satisfaction of its interest as a party to a dispute. Gets full satisfaction of its interest as a party to a dispute.

It may be proclaimed that the respondent failed to act in accordance with international protection standards for foreign investments. However, the elimination of substantive protection as a response to the foreign investor’s illegality does not give rise either to a declaration of the respondent’s breach nor to compensation for damages. Allows respondents to raise concerns about foreign investor’s misconduct and to reduce or eliminate the amount of damages due. Filing counterclaims makes it possible to get damages from a foreign investor.

which at times has been done successfully.48 Moreover, the public perspective of cases in which the jurisdiction was rejected may provide the false impression that the respondent State won the case. However, as seen above, the rejection of jurisdiction is simply decided upon by the satisfaction of formal criteria. Thus, in terms of the efficiency of outcome in cases addressing foreign investor misconduct some considerations and subsequent improvements may be well desirable.

48 See, for example the developments in Word Duty Free v. Kenya. The company brought another claim and obtained an award of compensation. The High Court of Kenya in Nairobi set the award aside due to a violation of public policy. See: The post in Investment Arbitration Reporter by Charlotin (2018), https://www.iareporter.com/articles/analysis-kenyan-high-court-finds-that-anarbitral-award-secured-by-world-duty-free-against-kenyan-airport-authority-must-be-set-aside-onpublic-policy-grounds-due-to-earlier-findings-of-icsid-tribuna/. The point here is that the disputes rejected on jurisdiction do not resolve the underlying conflict and invite escalating judicial proceedings.

5.2 Analysis of the Experience of International Investment Law in Dealing with. . .

5.2.3

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Applicable Law in Dealing with Foreign Investor Misconduct: Stories of Success and Failure

As seen in the presentation of case law host States, as the respondents in the arbitral proceedings, allege various types of foreign investor misconduct to be relevant for the outcome of the international investment arbitration: violation of its own national law, fraud, corruption, absence of real investment activity, manipulation with nationality to get access to the international tribunal, breach of human rights standards and harm to the environment. At some point, all of those allegations require arbitral tribunals to answer the question of whether foreign investors are bound by any legal provisions either forbidding such conduct or imposing positive legal obligations of a particular manner of conduct on foreign investors. Thus, allegations of foreign investor misconduct are inevitably intertwined with the question of what is the applicable law. Anticipating the importance of the question, it was dealt with in both Chaps. 2 and 3, where the former chapter dealt with the applicable law generally and the latter more specifically investigated the sources of law that may be relevant for dealing with foreign investor misconduct. At this point, it is appropriate to approach the matter from the perspective of what has actually already happened in settled cases: what sources of law were indeed applied by arbitral tribunals adjudicating upon alleged foreign investor misconduct? What sources of law were deemed to be irrelevant for the outcomes of international investment arbitration?

5.2.3.1 5.2.3.1.1

Application of International Law International Investment Agreements

In Chap. 3 there was an in-depth discussion of the regulation of foreign investor conduct by international investment agreements. The later presented examples of case law were in line with the conclusion drawn in Chap. 3: the predominant majority of international investment agreements do not impose direct obligations on foreign investors and may only determine the outcome of a case dealing with alleged foreign investor misconduct by way of the imposed requirements to protect investments and investors.49 Conversely, however, tribunals have been consistent in viewing no doctrinal obstacles for IIAs to impose direct obligations on foreign investors should contracting States expressly wish to do so. Thus, IIAs may directly impose obligations on foreign investors to act in accordance with international standards in labour and environmental law or to comply with the national law of the host State for example.50 This has already been seen in the 49

Diel-Gligor and Hennecke (2015), p. 569. Literature also address the issue of direct obligations of Investors. See, for instance: Nowrot (2015), p. 1161. 50

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OIC Agreement,51 which was interpreted as directly imposing such obligations and then appropriately applied by the Al-Warraq v. Indonesia tribunal. At their current stage of development however, the majority of IIAs still do not impose any direct positive or negative obligations on foreign investors.

5.2.3.1.2

Stand-Alone Rules of International Law

Arbitral tribunals share the understanding that IIAs, as international agreements, do not need to be interpreted and applied in isolation.52 This means that any other rules of international law that are in force between the parties may be applicable to resolve the dispute under the relevant IIA. This stipulation originates from Article 31 (3) (c) of the Vienna Convention on the Law of the Treaties. Other rules of international law may include conventions as well as general principles of international law or even customary international law, if relevant. Moreover, the other sources of international law do not need to be specifically referred to or otherwise mentioned by the relevant IIA. Thus, if there are stand-alone rules of international law in force between the parties which govern the issues raised in the investment case at hand, those rules may apply in addition and in conjunction to the relevant IIA.53 Therefore, the lack of legal obligations imposed on foreign investors’ by an IIA may be compensated for by any other stand-alone rules of international law in force for the parties. However, for those rules to be relevant to the outcome of international investment arbitration dealing with foreign investor misconduct they need to create specific obligations on foreign investors to either act or refrain from doing so in a certain way.

5.2.3.1.3

General Principle of Good Faith

As such, the general principle of good faith is a well-established source of international law.54 However, does it directly apply to individuals, more specifically here, foreign investors? Interestingly, the case law presented above does not reveal any

51

The OIC Agreement is not the only IIAs which provided for direct obligations of foreign investors. See for example: Article 19 of the Community Investment Code of the Economic Community of the Great Lakes Countries, 31 January 1982, https://investmentpolicyhub.unctad. org/Download/TreatyFile/2400; Articles 17, 19 of the Charter on a Regime of Multinational Industrial Enterprises in the Preferential Trade Area for Eastern and Southern African States, 23 November 1990, https://heinonline.org/HOL/Page?collection¼journals&handle¼hein. journals/intlm30&id¼711&men_tab¼srchresults; Article 11, 13 of the Investment Agreement for the COMESA Common Investment Area, 23 May 2007, https://investmentpolicyhub.unctad.org/ Download/TreatyFile/3092. 52 See, Urbaser v. The Argentine Republic, para. 1200. 53 See: Urbaser v. The Argentine Republic, para. 1202. 54 Nuclear Tests (Australia v. France), Judgment, ICJ Reports 1974, 457, 473, para. 49.

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hesitation on the part of tribunals as to whether the general principle of good faith applies to private actors, foreign investors or only to States. Indeed, arbitral tribunals have repeatedly referred to the general principle of good faith as applicable to individuals,55 a rationale that has thus far remained uncriticised in literature. It seems that international investment law practice has taken a path where the general principles of international law, such as that of good faith, have direct applicability to private actors such as foreign investors. Furthermore, the present research has already discussed whether the principle of good faith may create a stand-alone independent obligation or is simply applied to assist with the interpretation of other normative rules. Turning once again to practice, it can be seen that arbitral tribunals do not hesitate to rely upon the general principle of good faith to create an independent obligation for foreign investors to act in accord with the intentions of the contracting States when they created the relevant IIA.56 For example, in the absence of an explicit legality requirement which is usually imposed by the ‘in accordance with host Stata law’ clause, tribunals have referred to the general principle of good faith to impose one.57 In addition, the principle of good faith with regard to nationality planning was referred to by a number of the pioneering cases as providing a legal basis for the elimination of the relevant tribunal’s jurisdiction and the inadmissibility of claims.58 The rationale behind this was that the contracting States did not intend to stretch the protection provided by the IIAs to cover such situations. Thus, in international investment law practice, the general principle of good faith has been often, if not rather routinely, applied as an independent source that imposes a legal obligation on foreign investors.

5.2.3.2

National Law

To determine the outcome of international investment arbitration under an IIA, national law, including any contractual requirements under an investment contract, need to be lifted to the level of the IIA. If this is not done, neither the requirements under national law nor those arising from a contract could not be regarded as a source of obligations to be imposed upon foreign investors under international law.59 Case law revealed two options to lift obligations under national law to the level of the relevant IIA. First, the ‘in accordance with host State law’ clause is read as imposing a legality requirement on an investment’s establishment under national law. In this case, allegations of a breach of national law at the time of investment’s

55

See, for example, Phoenix v. The Czech Republic, para. 106; Inceysa v. El Salvador, para. 230. More on the principle of good faith as “a guarantor of the expectations” held by the contracting parties to the treaty see: Bjorge (2014), p. 191. 57 Plama v. Bulgaria, Award, para. 144. 58 Mobil v. Venezuela, paras. 175–177. 59 See, Urbaser v. The Argentine Republic, para. 1207. 56

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establishment become relevant in the realm of international investment law and may, if substantiated, determine the outcome of the case. The second option involves an IIA lifting the obligations under national law or those resulting from an investment contract to the level of the IIA and thus to international law. Such obligations may concern compliance with national law and/or contractual obligations through the entirety of an investment’s operations. It seems that the Urbaser tribunal was willing to find Argentina’s counterclaims as substantiated if the relevant BIT entailed a clause which lifted the contractual obligations to provide water and sewage services to the international level of the BIT.60 Thus, should States desire to impose an obligation of compliance under national and/or contractual law, they need to express this in the wording of the IIAs. The practice of international investment law, as seen above, has little infrequently dealt with the application of such provisions, since these remain oddities in the field.

5.3

The Role of Involved Actors

Respondent States and international arbitral tribunals are clearly identifiable as the main sources driving developments surrounding the issue of foreign investor misconduct in international investment law. The contracting parties are clearly important actors in this regard since they are the one which created the rules to be applied and may change those rules any time in the future. The role of foreign investors in the matter of misconduct is rather passive, especially now that practice seems to be well-settled with regard to illegality at the time of an investment’s establishment. However, this is proving to be a fluid situation where the role and function of these actors in international investment law are changing, a subject that will be considered in more detail below.

5.3.1

Contracting States

Contracting States to IIAs are in a position to determine the rules of the game. There are almost no obstacles for such States to regulate issues of foreign investor misconduct as they see fit. However, when IIAs were first being devised and employed, contracting States did not pay much attention to providing clear rules on foreign investor misconduct. Current developments in IIA provisions, or should one say the lack thereof, seems to demonstrate that contracting States are still not sufficiently motivated to seriously address the issue of foreign investor misconduct. Certainly, there are some discussions on the subject and modern IIAs have addressed

60

Urbaser v. The Argentine Republic, para. 1207.

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this issue to a rather limited extent,61 however, there is evidence of a seriously wellthought-out and comprehensive approach based upon a clear vision of expectations regarding foreign investors and their role. Indeed, the States’ approach towards foreign investor misconduct is still being fashioned by the traditional vision of their position: as objects of protection rather than as equal partners in matters of economic development in the host State. In this context, one has to bear in mind the simple truth that legal constructions follow the determined visions of the desired outcome, not vice versa. This may mean that contracting States are comfortable with the current situation as the approach of arbitral tribunals towards foreign investor misconduct has developed into being favourable to a respondent State’s desired outcome given the absence of clear normative regulations on the matter. One must inevitably ask, why would States change something that functions in their favour? This question may lead to theoretical reflection over what is better, a specific rule or a standardsetting obligation,62 or perhaps no obligation at all? An illustrative contribution to such reflection could include pointing out the developments that occurred in the provided definition of ‘investment’ in IIAs on the one hand, and to the developments in the absence of a meaningful definition of ‘investment’ in the ICSID Convention on the other hand. The first scenario required tribunals to be cautious if trying to read into the provided definition any additional criterion, whereas the amorphous definition of ‘investment’ in the ICSID Convention gave rise to tribunals’ having unfettered discretion in this area and resulted in the so-called Salini test. Irrespective of the surrounding detail, contacting States have the exclusive capacity to determine the direction of further developments or even to pursue an evolutionary leap when it comes to how international investment law deals with foreign investor misconduct. Whether they will actually exercise this capacity may simply be a matter of time and political determination.

5.3.2

Respondent States

The cited position of a respondent State draws interest and attention to foreign investors’ conduct. Literature has already observed that assertions of the illegality of foreign investor misconduct have become a powerful defence for States in international investment arbitration.63 The creativity of respondent States in submitting their arguments on foreign investor misconduct under different circumstances have already been noted to include a diverse array of objections to tribunals’

61

The more detailed elaboration and examples will follow in Chap. 6. Literature observes that international agreements in general and IIAs in particular are often comprised of open-ended obligations rather than precise and clear rules. See: Raustiala (2005), p. 611; Blum (2008), p. 350. 63 De Brabandere (2012), p. 609; Douglas (2014), p. 172; Kalicki et al. (2016), p. 128. 62

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jurisdiction; allegations involving human rights or environmental obligations and various breaches of the good faith principle. Respondent States alleging misconduct know they bear a significant burden of proof,64 an understanding that is shared by sitting tribunals.65 However, issue of the burden and standard of proof should not be confused with the above-mentioned tribunals’ independent adjudication on the foreign investor misconduct, even if this occurs under the auspices of the national law of the host State. The provision of a convincing and sound position on the part of the respondent is a prerequisite for its allegations to be taken into consideration and adjudicated upon by an arbitral tribunal.66 General concerns and unsubstantiated allegations, even those of serious misconduct, are not treated seriously by arbitral tribunals, i.e. they are left without legal course. Normally, once allegations are submitted, tribunals engage in an independent process of adjudication, however, allegations of foreign investor misconduct raised but then abandoned by a respondent would normally not lead to an arbitral tribunal making any findings upon them.67 Thus, respondents may well be seen as a key driving force in international investment law developments concerning the issue of foreign investor misconduct. One could, with reasonable confidence, conclude that the issue of foreign investor misconduct is gaining traction in international investment arbitration due to efforts in collecting and presenting legal and factual elements by respondent States.

5.3.3

Arbitral Tribunals

Arbitral tribunals are the actors who decide on the host States (Respondents) allegations of foreign investor misconduct. When confronted with the absence of clear rules and a lack of profound evidence, a tribunal may find itself “left in a situation which it has found to be extremely unsatisfactory”.68 This is particularly true in situations where grave misconduct on the part of a foreign investor was 64

Wena Hotels LTD. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000, para. 77 and 117. 65 African Holding Company of America, Inc. and Société Africaine de Construction au Congo S.A.R.L. v. Democratic Republic of the Congo, ICSID Case No. ARB/05/21, Decision on Jurisdiction and Admissibility, 29 July 2008 [French] para. 55, 56; EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award, 8 October 2009, para. 221; Chevron Corporation (U.S.A.) and Texaco Petroleum Corporation (U.S.A.) v. Republic of Ecuador [I], PCA Case No. AA 277, Interim Award, 1 December 2008, para. 143; Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Award, 27 August 2009, para. 143. 66 Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/19, Award, 18 November 2014, para. 142. 67 F – W Oil Interests, Inc. v. The Republic of Trinidad and Tobago, ICSID Case No. ARB/01/14, Award, 3 March 2006, para. 211. 68 F – W Oil Interests, Inc. v. The Republic of Trinidad and Tobago, ICSID Case No. ARB/01/14, Award, 3 March 2006, para. 53.

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alleged but not sufficiently substantiated. The question arises here, is there any obligation to preserve fairness or to combat misconduct? In this regard, the position of international investment tribunals is particularly vulnerable when compared to national courts. Indeed, arbitral tribunals possess no competence to lawfully require evidence to be produced or even to hear evidence under oath.69 As to the function of arbitral tribunals, they engage in independent adjudication of the submitted facts and are bound by the provisions of any relevant IIA and other applicable sources of law. In connection with foreign investor misconduct, that means determining whether the allegations are substantiated and whether the proven misconduct triggers any legal consequences in view of the applicable law. Arbitral tribunals are also acutely aware of their own role, as evidenced by the statement of the tribunal in F – W Oil Interests which observed that “it is not part of the function of a Tribunal such as this to pass moral judgements on the behaviour of one or another Party, or indeed both parties, but simply to decide on the validity of the claims brought, and on their legal consequences”.70 Arbitral tribunals interpret the law and sometimes have been faced with provisions whose initial meaning was not readily clear.71 For example, the prominent ‘in accordance with host State law’ clause which needs to be interpreted by tribunals in conjunction with the principle of good faith and the intention of the contracting States, however, at times it is not always easy to establish their real intention.72 In view of the observed practice, could one be concerned with the question of whether the system has developed within the given, and in a way predetermined, boundaries of its inherent and explicit potential to address the matter? The same question could be asked because of the often-expressed concerns and discussions on judicial law-making in international law,73 namely, whether or not an arbitral tribunal has exceeded its discretion initially given by the contracting States? The author of this present study deems that tribunals have remained acceptably within the limits of the explicit and inherent potential of the system as described in Chap. 3. Nevertheless, they are actively engaged in a search for and exercise of solutions drawn from the inherent potential of the system. This is a pattern of behaviour probably driven by the motivation to not disregard the concerns of the legitimacy of investors’ extensive

Those were cited as “problems inherent in investment arbitration” in: F – W Oil Interests, Inc. v. The Republic of Trinidad and Tobago, ICSID Case No. ARB/01/14, Award, 3 March 2006, para. 210. 70 F – W Oil Interests, Inc. v. The Republic of Trinidad and Tobago, ICSID Case No. ARB/01/14, Award, 3 March 2006, para. 211. 71 The difficulty in getting the initial and true meaning of consent given by the contracting States in formulating norms of international law has also been observed in the literature. See, for example: Ulf Linderfalk, On the Interpretation of treaties: The Modern International Law as Expressed in 1969 Vienna Convention on the Law of Treaties (2007), 43. 72 Venzke (2012), p. 23. 73 See: Ginsburg (2005), https://www.law.berkeley.edu/files/spring05_Ginsburg.pdf; see also: Bjorge (2014), p. 79. 69

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protection and concerns regarding legality. Thus, the arbitral tribunals can be considered as having operated within the admittedly unclear but flexible boundaries given by the system and as elaborated upon in Chap. 3.

5.3.4

Foreign Investors

From the emergence of international investment law and as discussed in Chap. 2, foreign investors and their investments were viewed as requiring broad material and procedural protection. That is the primary reason why the normative constructions of IIAs do not extensively regulate the matter of foreign investor misconduct. Investors and their investments have been regarded more as an object rather than a subject of the legal relationship, a vision that has extended to the direct procedural capacity of foreign investors.74 The position presented above was one of the contracting States which conclude IIAs in favour of foreign investors. However, from the position of a respondent State in international investment arbitration, the role of such investors was sourced from a different location. Foreign investors have appeared as an equal party in a dispute, who claim high damages and can make allegations against host States’ violations of standards pertaining to international investment. Respondent States were thus put in a defensive position and have commonly adopted the strategy of blaming other investor’s conduct as the reason the dispute has been brought before arbitration. However, in presenting their arguments on alleged foreign investor misconduct, States are indirectly expressing their vision of the expectations they have towards foreign investors. At first, such expectations concerned the legality of an investments’ establishment but with the passage of time, other aspects of investors’ conduct have gained prominence. The most recent cases indicate host States’ attention has fallen to investors’ compliance with human rights and environmental standards. The gradual transformation of the foreign investors’ role from an object to a subject of a legal relationship is noticeable.75 Having analysed international investment law practice, it is difficult to disagree with the fact that foreign investors are expected to act in a particular way and that any misconduct may be accorded a variety of negative legal consequences.

Direct access to international adjudications has been viewed more in terms of investors’ ‘emancipation’ from their home States. On that: Reinisch (2015), p. 260. 75 This transformation has also been observed in the literature, see: Miles (2013), pp. 370–371. There are also critical visions on States’ lack of political will to equip international law with tools addressing the nature of international corporations under international law. See, for example: Bhuta (2012), p. 75. 74

5.4 Discovered Process in the Gradual Development of the Approaches to Foreign. . .

5.4

191

Discovered Process in the Gradual Development of the Approaches to Foreign Investor Misconduct

A look back over the entire developmental process undergone thus far of international investment law may, in light of addressing foreign investor misconduct, allow us to identify various processes that have occurred within the field, some of which will be touched upon below.

5.4.1

The Process of Clarifying and Pushing the Limits of Legal Constructions

A very general behavioural mechanism, and one arguably applicable to all systems created by human beings, is that of pushing and clarifying the limits. The limits of a newly emerged system are seldom clear, indeed, newly emerged and novel mechanisms become familiar only with use. Thus, problems associated with uncertainty combine with the motivation to get the most out of what is new to stimulate the clarifying process and push the limits. It is also a frequent occurrence that once the obvious needs for which a system was initially designed are covered, the involved actors are motivated to discover what other benefits can be gained from their labours. The process of clarifying the limits of a legal system requires vast amounts of energy to establish and elaborate upon legal positions and interpretations of the given normative constructions.76 Nevertheless, undertaking this process with international investment law has ensured gradual development within the field. The pioneering cases were actively testing and clarifying the few inserted mechanisms, elaborating on their significance and meaning and well as searching for available options inherent to the system. Once the limits were clarified, or that they were at least still operating within acceptable boundaries, one can observe that tribunals found it easier to apply the now relatively well-settled understandings. The surety that tribunals gained from having a secure ‘workspace’ to operate in allowed them to then venture further into new aspects of facts and law, which in turn gave rise to further developments. Gradually this developmental process went as far as accepting counterclaims raised by host States against foreign investors and arguments on foreign investors’ not acting in accordance with international human rights and environmental standards. In light of the described process, it is not by chance that the presented landmark cases all occurred in the second decade of practice with no such cases evident in the very early years of practice.

76 The efforts could be perceived by careful reading of the pioneering cases, which were confronted with the challenging issues of allegations of foreign investor misconduct for the first time.

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Analysis of Some Key Events to Date: Their Meaning and Significance

The Process of Exhaustion of the Inserted Explicit and Inherent Potential

The process of utilising both the system’s inherent potential and that which is being freshly created by ongoing developments is indispensably connected to the process described above of clarifying and pushing the limits of legal constructions. Inevitably, pushing the boundaries will at some point come to an end as a result of the given legal constructions reaching the limits of their capacities. For international treaties, such as IIAs, this endpoint is determined by the scope of the contracting parties initial consensus given at the time of the systems’ emergence.77 Already, the PCIJ has clarified the importance of the State consent,78 especially given that the consensus of the contracting parties when addressing foreign investor misconduct was not clearly expressed in any legal provisions, the scope of this consensus needs to be presumed as legitimately having limits.79 In presupposing the consent of the contracting States, tribunals read the ‘in accordance of host State law clause’ as imposing a legality requirement on the establishment of foreign investments, while other tribunals presuppose that the contracting States consented to protect only those investments made in good faith and in conformity with the law. As such, as seen from the above, the implicit requirement of legality has been inserted by practice even with the absence of clear provisions. This is at least in part because tribunals could not have presupposed the contracting States had consensus to lift obligations under an investment contract of national law to the international level or to impose negative legal consequences upon subsequent illegality in investment activity. This would create unnecessary and unduly restrictive limits on the system’s potential as well as tribunal authority. This would have translated to the fact that allegations of such misconduct could have been raised yet could not have been accorded legal significance within the current field of international investment law. Thus, the field has reached the limits in this regard, as is evidenced by the latest cases addressing allegations of foreign investor misconduct.

5.4.3

Gradual Demise of Issues Which Were Fully Settled

Another process which was observed is that clearly established and well-settled standards in approaching aspects of foreign investor misconduct combined with coherence in the application its remedies has had the effect of the gradual remission of such behaviour. As an example of this, one can recall earlier cases filed by 77

Bjorge (2014), pp. 76–77. Free Zones of Upper Savoy and the District of Gex, PCIJ Series A/B, No 46 (1932), p. 166. 79 See: Dispute regarding Navigation and Related Rights (Costa Rica v. Nicaragua), Judgment, ICJ Reports 2009, 213, 242, paras. 63, 64; Pulp Mills on the River Uruguay (Argentina v. Uruguay), Judgment, ICJ Report 2010, 14, 83, para. 204. 78

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claimants who could not provide original ownership certificates for an investment, an occurrence no tribunal has recently had to deal with as claimants have learned the futility of doing so. This demonstrates the benefits of the intuitive desire to test and clarify the limits of the system in that once the system has a clear, effective and standardised response issues are either readily dealt with or no longer arise at all. A less extreme example would be the less clear discussions on the significance of the ‘in accordance with host State law’ clause in current case law. In the pioneering cases, both claimants and respondents argued over the meaning of the clause and provided arguments supporting their positions. Elaboration on the issue by tribunals meant they were more willing to dismiss claimants claims following well-supported allegations by respondents on the illegal establishment of an investment or instances of corruption.80 However, in the current stage development, the issue of subsequent illegality occurring during investment activity remains largely unresolved, thus one could confidently predict that more cases involving this matter will arise.

5.4.4

Transformation of the General Principle of Good Faith into the Specific Doctrines

When tribunals first began dealing with allegations of foreign investor misconduct, they frequently relied on the principle of good faith. However, with the development of practice this reliance on the principle lessened and was replaced by references to the more specific rules and doctrines newly established by tribunals, with the most obvious example being evident in cases of nationality planning. In very early cases, tribunals decided on the issue by relying on the principle of good faith, but in Phoenix, the tribunal went a step further and created a requirement that investments be made in good faith.81 Nevertheless, subsequent practice has gradually produced a shift away from referring to good faith82 as tribunals began to employ the ‘doctrine of abuse’. There were even examples in which tribunals clearly distinguished between the principle of good faith and the ‘doctrine of abuse’,83 a view that is in line with others’ observations made in the field of international investment law. Direct references to the principle of good faith did not tribunal’s finding appear either particularly convincing or sound and thus required the creation of a more specific rule or doctrine based thereon. Nevertheless, one needs to acknowledge the role of the principle of good faith as sort of wildcard, a versatile tool able to fill a gap

80

See the presentation of cases provided in the Chap. 4 above. Phoenix v. The Czech Republic, paras. 114, 135. 82 See a summary of the development as presented in Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, 17 December 2015, paras. 404–410. 83 Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, 17 December 2015, para. 539. 81

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that could be inserted into the system and create a valid point of departure in ascertaining the initial position of the contracting States.

5.4.5

Transformation Within the Original Balance Between the Parties

As has been discussed above, the initial balance in the system of international investment law concerned not the foreign investor–host State relationship, but rather the relationship between the contracting States of the IIAs. The contracting States, in most cases one being from the global north and the other from the global south, basically established agreements that promoted their sovereign interests. The more developed countries were motivated to secure a market for their private investors and the less developed countries were interested in the expected inflow of foreign capital and technology needed to help develop a sound economic and social base following their newly obtained independence. Although against this backdrop two others things must also be noted, namely that the ‘balance’ of most early IIAs resulted in one-sided legal constructions that favoured foreign investors and, in the broader context, the overall goal of creating a prolific web of bilateral IIAs was to contribute to the preservation of peace and security. Time has, however, revealed that foreign investments are not just a flow of capital and technology. Sometimes there may also be far less contribution than exploitation born of the desire to make a quick profit by drawing on the natural resources, cheap labour and more relaxed legal standards in the host State; moreover, foreign investments may also be associated with criminal or otherwise inappropriate activities, such as when foreign investors operate in a host State but do not pay taxes or create illegal schemes. Thus, the expectations regarding investors contributing to development were understandably frustrated by such instances. In addition, international investment law generally has moved more towards the protection of human rights, environment and the recognition of minority rights in recent times.84 Thus, the acceptance of quick and unsustainable profitmaking has become more difficult for investors as it is now less tolerated by both individual host States and the international community as a whole. Thus, the practice of foreign direct investments required changes in the balance initially settled upon by the parties.85 This change is complicated within one-sided legal constructions which do not provide host States with any guarantees concerning foreign investor misconduct.

84

Scholtz (2014), p. 141; Paulus (2012), p. 100; Muchlinski (2011), pp. 223, 243. See also: Report of the Special Representative on the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, Promotion and Protection of All Human Rights, Civil, Political, Economic, Social and Cultural Rights, Including the Right to Development: Protect, Respect and Remedy: A Framework for Business and Human Rights, UN Doc A/HRC/8/5, 7 April 2008, 5, para. 12. 85

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Nevertheless, the practice of international investment arbitration in accepting allegations in foreign investors’ misconduct and according them legal significance has compensated, in a fashion, for the lack of balance in the existent legal composition of the field. Thus, the developments in practice and the direction this has gone in reflects the system’s response to foreign investor misconduct in the light of modern-day changes to the standards, circumstances and motivations of the involved actors.

5.5

Responses to Foreign Investor Misconduct in Light of the Crisis in the Field: Crisis Management of International Investment Law

Many voices in legal academia consider current international investment law to be in a State of crisis, one of legitimacy, efficiency and trust.86 Without wishing to wax lyrical about the advent of crises, they can be considered in various ways, both positive and negative. The author of this study considers one possible way to view a crisis is as a manifestation of an unforeseen, or a known but ignored problem, which now hinders further systemic development to meet or stay synchronised with the needs of the time and the resultant outcry is largely a call for renewal. Indeed, within the ordinary meaning of the term ‘crisis’ there is an element that connotes “important changes”.87 Certainly, developmental problems and obstacles may well exist in various aspects of international investment law, this present study, however, is only concerned with an attempt to deal with those pertaining to foreign investor misconduct. As has been discussed above, the system of international investment law from its emergence was poorly equipped in terms of legal tools, but it was endowed with a relative abundance of potential to deal with foreign investor misconduct. Employing this inherent potential to stretch the available normative constructions, the system initially had to deal with the allegations in foreign investors’ misconduct in something of a legal void but has now developed its internal mechanisms to the point where practice in this area is moderately well-established. Indeed, one of the outcomes of extensively and repeatedly having to deal with foreign investor misconduct has become a gradual acceptance of the matter as being part of the system of international investment law. As things now stand, it cannot be reasonably argued that foreign investors misconduct has no relevance to the level of protection granted to foreign investors under IIAs. On the contrary, tribunals’ broadly coherent approach to this indicate a motivation to identify and develop even more appropriate mechanisms to accord foreign investor misconduct legal significance. Consider for a 86

Krishan (2011), p. 109; Van Harten (2007), pp. 153–158; Waibel et al. (2010). For the definition of a ‘crisis’ see the English Oxford Living Dictionary, https://en. oxforddictionaries.com/definition/crisis. 87

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moment the Yukos award and the tribunal’s reliance to the doctrine of the contributory fault. The case demonstrates, one the one hand, why international investment law needs better mechanisms for dealing with foreign investor misconduct, on the other hand, it is an example of a tribunal finding more options than those arising directly out of IIAs. Moreover, the gradual recognition by adjudicating authorities of the legal significance of individuals’ misconduct at the international level seems to be a general trend for the field of international law. Even human rights institutions have been known to lower the almost sacrosanct protection granted by Human Rights Instruments in cases involving misconduct on the part of individual claimants.88 Once the issue is an accepted aspect within the picture of international standards for investments’ protection, it is beyond difficult to ignore the need for its further developments, which is the inherent feature of dispute resolution.89 However, the system as it was initially constructed could not have been provided with more mechanisms without exceeding the initially given consent of the contracting States. As discussed above, both the explicit and inherent potential have been extensively used over the course of almost two decades of practice and now are near, if not actually at, their limit. Thus, development has stalled in issues addressing new challenges and aspects of foreign investor misconduct, such as subsequent illegality and investment activity breaching international human rights or labour standards. Case law demonstrates that the system is struggling to find a way forward to adequately respond to those issues as tribunals’ at times cannot find an appropriate legal basis for substantiation (Urbaser), apply a doctrine which is a poor fit for the case at hand (Yukos) or simply produce unsatisfactory and one-sided outcomes (Al-Warraq) where foreign investors lose their right to raise claims and the alleged misconduct of host States remains unsubstantiated on the merits. In the long run, such imbalances may harm the system of international investment law as the inherent and so far continuous process of gradual development grinds to a halt tempting the involved actors to search for alternative ways to satisfy their expectations of fairness and balance.90 However, without the normative efforts of the contracting States further development and improvement does not seem to be possible. Indeed, the Urbaser tribunal seemed to clearly indicate that there are limits and boundaries in the search for new means to combat foreign investor misconduct. This realisation requires change and renewal to allow the system to make the next evolutionary leap which is needed to yield more satisfactory and balanced outcomes. The above could be viewed as an example of the application of the crisis management theory in the light of addressing issues concerning foreign investor 88

See examples provided by Bjorge (2014), p. 78. The author refers to the Judgment of the Grand Chamber of the European Court of Human Rights in Mangouras v. Spain, decided in 2010 by way of example. In this case, environmental damage caused by the individual claimant was used to reason on the lowering of protection granted by Article 5 of the European Convention on Human Rights. 89 Ginsburg (2005), https://www.law.berkeley.edu/files/spring05_Ginsburg.pdf. 90 See the elaboration on effectiveness in International Law in: Tacsan (1992), pp. 51–53.

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misconduct. This theory requires identifying and then addressing the problems that hinder the further development of the law, either as a whole or with regard to only particular aspects. As a general basis, the suggestions for this crisis management operate on the following premises: First, activity in the field of law results in gaining knowledge. International investment law has been very active. Thus, the activity of international investment law has resulted in increased knowledge. and Second, knowledge will reveal the challenges and difficulties a system is facing in the course of its activity. Actors involved with international investment law have such knowledge. Thus, the knowledge of these actors allows them to discern the challenges and difficulties that the system is facing.

5.6

Interim Conclusion

Developments in international investment law practice when dealing with allegations in foreign investors’ misconduct have a number of implications on the role, expectations and legal position of foreign investors. As a result of these developments foreign investors can no longer be seen as simply objects of absolute protection, but rather must now be considered as more of an equal partner in arbitration and legal subjects that are required to conduct themselves in a certain way. These developments occurred in a legal environment with few normative guidelines and by means of much recourse to the inherent potential the system was imbued with at its inception. However, as the analysis indicated above, arbitral tribunals have remained within the scope of their interpretive discretion and competence. This outcome may be a support of the field going through the crisis of legitimacy. However, the current State of affairs on the matter of addressing allegations of foreign investor misconduct seems to set the limit from which any further substantive development will depend upon the will and determination of the contracting States. This is because only these States can truly evolve the field to allow the normative recognition of the novel role of foreign investors resulting from the elaborations of investment tribunals. Lacking any new input from these key actors, further active development in the field is likely to stagnate. In a broader sense, the manner in which international investment law has addressed foreign investment misconduct has resulted in the hitherto rare instances of the regulation of individuals’ conduct at an international law level. The observed mechanisms and outcomes are thus valuable material from the standpoint of general international law and the approach of investment tribunals to accord legal significance to individuals’ misconduct seems to be in line with current developments in other sub-fields of international law. This observation may serve as additional

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motivation for States to take a step towards normative recognition for the innovation and improvisation of arbitral tribunals that has thus far been remarkably effective. The subsequent and final chapter will discuss a possible scenario for the transformation of selected aspects of international investment law so it retains its relevance and significance going forward.

Chapter 6

Unlocking the Transformation of International Investment Law

6.1

Introduction

The ambition to transform a legal system must include the consideration of at least three major components: first, a vision of the desired changes, namely, what is their purpose; secondly, a sound justification of those changes which includes why all the desired changes need to take place and whether those changes are legitimate.1 Thirdly, the steps in the implementation of the changes, such as concrete suggestions, drafts, formulations, need to be elucidated. A meaningful elaboration on these three components is seen by the present author to be the best guarantee to produce a workable roadmap for the sustainable transformation of international investment law with regard to investor misconduct. Chapters 2 and 3 explained the origins of the international investment law system and provided the necessary background regarding the system’s composition. Chapter 4 presented the developments the system underwent in dealing with allegations of foreign investor misconduct while Chap. 5 provided an analytical examination of these developments. As a result, clear insight has been provided that the system of international investment law has significantly developed in connection with addressing the issue of foreign investor misconduct. A significant number of individual issues were elaborated upon and a rather consistent, systemic response to foreign investors illegality has been developed by arbitral tribunals over the course of recent practice. This observation does not mean that there have not been problems in international investment law when addressing foreign investor misconduct, nor that the tribunals’ approaches have been universally consistent. What is meant, however, is that in extensively dealing with allegations of foreign investor

1 Generally, on the legitimacy of international law-making: Tomuschat (2017), p. 319; Kumm (2004), p. 918.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Kozyakova, Foreign Investor Misconduct in International Investment Law, European Yearbook of International Economic Law 11, https://doi.org/10.1007/978-3-030-54855-1_6

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misconduct, international investment tribunals have settled into a certain pattern, an approach which they seem to consider as best practice, which is re-applied in similar factual situations. A critique to this pattern could and perhaps should be raised, but in the present study, a decision has been made to replace critique with an attempt to understand the reasons behind the observed flaws and to search for a way to gradually improve practice. As considered in the previous chapter, the normative constructions of international investment law have reached the developmental limits imposed by the system’s implicit and inherent potential. Plato once said that “necessity is the mother of invention”, hence, the exhaustion of the system’s potential is a sign that the time for transformation has arrived. Indeed, recent case law indicates that the further developments now required involve a transformation of the given normative constructions to tackle the new challenges arising in the field. The challenge at hand then may be viewed as fundamentally arising from the new role of foreign investors: going from an object of absolute protection to subjects of legal relationship and whose behaviour can and should no longer be disregarded. This transformed role raises concern about the behaviour of foreign investors in relation to their investment activity as much as it raises questions concerning the outcomes of investment activities. These have now expanded to include issues such as sustainable development in host States vs. environmental and social harm, particularly those caused by large scale activities of transnational companies still primarily motivated by profit. Other questions that come to mind here are whether foreign investors misconduct should create liability under international law and is international investment arbitration an appropriate forum to decide upon that issue? If yes, then the question is how to transform the existent system to be effective in view of the identified challenges? The scope of the current chapter is not to cover the gamut of matters regarding the transformation of international investment law to better deal with foreign investors illegality. The present author simply seeks to reflect on some of the key problem areas and share a vision of the past, present and future that comes from a fresh set of eyes examining the matter. This chapter will present in more detail the steps needed to arrive at the goals for the considered transformation as well as an analysis of the current behaviour and rationale of contracting States to ascertain if any of the suggested steps are being implemented, even if in an embryonic form, within practice.

6.2

Goals for the Transformation

The desired goals for the transformation of international investment law could be determined, for example, upon the political advantages or economic benefits that could be gained. However, a driving concern is to make sure that the desired

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outcome has longevity,2 i.e. is it well-suited to further developments to meet future needs and that does not prove harmful the system in a long run. There is a reasonable argument to be made regarding sustainability to simply go with the flow of natural development and address the challenges and difficulties uncovered as they arise over the course of the system’s operation. The rationale here is that the system itself will highlight what needs transforming and practitioners should simply carefully observe the way it currently functions and the difficulties it is facing, an approach that practice seems to generally follow. For example, the discussions about the course investment reform within the European Union should follow has also largely focused on what has occurred thus far in case law, where attempts were made to identify the critical issues, and then find ways to optimise practice and normatively solve the problems that arose.3 Turning this approach to the more specific issue of dealing with foreign investors misconduct requires having a meaningful overview of the obstacles and problems the system faces with misconduct. To a large extent, this was done in the previous chapter and as observed there, apart from some outstanding examples, current IIAs4 are not well-suited to address the misconduct of foreign investors’ in connection with investment activity. In addition, current international investment law faces difficulties to address host States’ allegations and concerns on foreign investors’ lack of compliance with issues involving international human rights standards, environmental harm and disregard for international labour standards. Moreover, the outcomes of cases dealing with foreign investor misconduct are predominantly rather unbalanced since any substantiated allegations of misconduct by foreign investors result in the elimination of a tribunal’s jurisdiction or the substantive protection granted by an IIA in the majority of cases. Rarely can one observe a tribunal going through a balancing and weighing exercise of foreign investors misconduct against the alleged misconduct of the host State. Should improvements in relation to those identified difficulties be set as a goal for the transformation of international investment law? The subsequent sections will consider a number of these potential goals separately.

2

Generally, on the idea of sustainable law-making in international law: Lévesque and Newcombe (2013a), p. 34; Bonanomi (2015), p. 187; Boyle and Chinkin (2007), p. 24; Pronto (2008), p. 609. 3 Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and Committee of the Regions – Towards a comprehensive European international investment policy (2010), https://eurlex.europa.eu/legal content/EN/ TXT/?uri¼CELEX:52011AE1184. See also: Griebel (2015), p. 316; Benedict (2009), p. 448. 4 Throughout this monograph it has frequently referred to international investment agreements (IIAs), which comprise both bilateral investment agreements (BIT), multilateral/regional investment agreements, as well as investment chapters in free trade agreements. When a particular treaty is meant it will be referred to more specifically, for example, the Italian-Morocco BIT or ECT (Energy Treaty Charter), etc.

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Subsequent Illegality of Foreign Investors’ Operation

International investment law is rather comfortable and consistent in rejecting tribunals’ jurisdiction when dealing with the establishment of investment done in violation of host State law. Any subsequent illegality, that is to say, a violation of host State law over the later course of an investment’s activity does not have a similar effect. Some of the early case tribunals suggested that subsequent illegality may play a role in determining the merits;5 however, the case law that followed demonstrates that there were difficulties in broadly making application of this suggestion. Problematic questions arose, such as what is the legal basis for any negative legal consequences imposed upon foreign investors for subsequent illegality? What legal consequences shall be thus accorded? Moreover, a strong counterargument in addressing subsequent illegality in the field of international investment law is that foreign investors are subject to domestic jurisdiction and the matter could be dealt with in the system of national adjudication. For example, the Yukos tribunal stated: There is no compelling reason to deny altogether the right to invoke the ECT to any investor who has breached the law of the host State in the cause of its investment. If the investor acts illegally, the host State can request it to correct its behavior and impose upon it sanctions available under domestic law, as the Russian Federation indeed purports to have done by reassessing taxes and imposing fines. However, if the investor believes these sanctions to be unjustified (as Claimant do in the present case), it must have the possibility of challenging their validity in accordance with the applicable investment treaty. It would undermine the purpose and object of the ECT to deny the investor the right to make its case before an arbitral tribunal based on the same alleged violations the existence of which the investor seeks to dispute on the merits.6

Thus, the question is whether any subsequent illegality on the part of foreign investors conduct should be addressed at all by international investment arbitration? First, let us legally clarify the difference between illegality at the time of an investment’s establishment and subsequent illegality. The illegal establishment of an investment is understood as eliminating the protection of foreign investment as such. A sound explanation of this is provided by the following: In imposing obligations on States to treat investors in a fair and transparent fashion, investment treaties seek to encourage legal and bona fide investments. An investor who has obtained an investment in the host State only by acting in bad faith or in violation of the laws of the host State, has brought itself within the scope of application of the ECT through wrongful acts. Such an investor should not be allowed to benefit from the Treaty.7

In contrast, subsequent illegality does not eliminate the protection of the covered investment and hence cannot eliminate tribunals’ jurisdiction, indeed, if it plays any role at all it is only in tribunals’ dealing with the merits. This probably was the notion

5

For example, Fraport v. Philippines, paras. 395, 345. Yukos v. The Russian Federation, Final Award, para. 1355. 7 Yukos v. The Russian Federation, Final Award, para. 1352. 6

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that weighed heavily on the rationales of the tribunals in the early landmark cases that dealt with this. Indeed, any subsequent illegality on the part of a foreign investor may relate to a breach of the international investment protection claimed by it. In other words, the actions claimed to be a violation of the international investment regime could be justified, or at least partly justified, by the foreign investors’ conduct. Hence, subsequent illegality is not a magic bullet that automatically eliminates either tribunals’ jurisdiction or the material protection granted to foreign investments, it could though be one of the factors taken into account to comprehensively decide on the submitted merits. This is the first viable option that allows subsequent illegality to be relevant in international investment arbitration. Even if it is not directly connected to alleged illegality on the part of host States, it may be desirable for tribunals to add any subsequent illegality on the part of foreign investors’ into the mix of factors when weighing all the issues arising in one proceeding. The same logic also applies for the umbrella clauses typical in IIAs, where these have the function of lifting contractual claims to the level of claims arising out of international investment treaties.8 Thus, the present author concurs that it is desirable to consider any subsequent illegality on the part of foreign investors’ within the investment arbitration proceeding. Thus far, in the system as it currently operates, any subsequent illegality on the part of foreign investors’ is excluded from the scope of IIAs since the requirement on foreign investors’ compliance with national law has not been lifted to the level of the international law. The current generation of IIAs generally do not provide for any direct obligations to be imposed on foreign investors. Neither the general principle of good faith nor any other general principle of international law allows the presupposition of an unwritten requirement on any subsequent legality on the part of foreign investors’ in their investment operations. This would go beyond the consent initially given by the contracting States. Thus, the goal to include subsequent illegality within the framework on international investment arbitration requires active steps to be taken in modifying the current normative constructions. Without those steps, the issue will continue to plague the system as it will remain to a large extent without legal significance.

6.2.2

Non-Compliance with Well-Established Standards of International Law: Harm to the Environment, Infringement of Human Rights and Labour Standards

Corporate entities have changed since the time modern international investment law first emerged, indeed, in the law’s early years from 1950–1970 there were only the Investor-state dispute settlement: A sequel – UNCTAD Series on Issues in International Investment Agreements II (2013), p. 120, para. 2, https://unctad.org/en/PublicationsLibrary/diaeia2013d2_en. pdfm. 8

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first inklings that private companies were evolving into large, transnational players with considerable economic and political influence.9 The rise of such corporate entities has been so meteoric that their global presence is now simply a part of the landscape for the vast majority of people.10 However, despite such entities now being commonplace, their existence necessarily stimulates considerations on their legal personality and social responsibilities.11 Those discussions are of primary importance for the field of international investment law. Indeed, at the outset of international investment law, the idea that developed countries would be provided with broad standards of international protection for their foreign investors won as the key priority for the emergent international investment law.12 Nevertheless, voices in the background to integrate social responsibility for foreign investors into the system, principally advocated by less developed countries, have been getting louder and more widespread. With time and the benefit of hindsight, however, one may legitimately pose a question on the provision of international guarantees and protection for host States, their nationals, indigenous groups (original inhabitants of regions threatened by foreign investments, in the Amazon for example) as well as the environment, all of which can suffer real harm from foreign investment activities. As a matter of fact, foreign investors may seize the opportunity to profit from relaxed legal standards in some host States, unfortunately, however, being driven by quick profit often results in less concern for sustainability and the environmental impacts of their operations. This behaviour unsurprisingly can have a cascading effect that ranges from significant environmental to infringements of human rights or labour standards in host States. The following passage, published in The New Yorker by American writer and investigative journalist Patrick Radden Keefe, is a well-suited to convey the tensions that arise due to conflicts of interest between host States, its citizens and foreign investors: For centuries, the rain forest [in Ecuador] was inhabited only by indigenous tribes. But, in 1967, American drillers working for Texaco discovered that two miles beneath the jungle floor lay abundant reserves of crude oil. For twenty-three years, a consortium of companies, led by Texaco, drilled wells throughout the Ecuadoran Amazon. Initially, the jungle was so impenetrable that the consortium had to fly in equipment by helicopter. But laborers hacked paths with machetes, and, eventually, Texaco paved roads and built an airport. Today, Lago Agrio feels squalid. The buildings look thrown together, as if no one had believed that the boom might last. Stray dogs prowl the dusty streets, and a slender oil pipeline snakes alongside each major road, elevated on stilts, waist high, like an endless bannister. .

9

Jessup (1948), pp. 20–21; Ackermann (1973), pp. 88–98. See the analysis by Kicsi and Buta (2013), p. 141. 11 Acconci (2018), p. 293; Dumberry (2013), p. 187; Muchlinski (2011), p. 231. 12 Similarly, see: Sauvant (2011), p. 186. 10

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Since 1993, a group of Ecuadorans had been pursuing an apparently fruitless legal struggle to hold Texaco responsible for environmental destruction in the Oriente. During the decades when Texaco operated there, the lawsuit maintained, it dumped eighteen billion gallons of toxic waste. When the company ceased operations in Ecuador, in 1992, it allegedly left behind hundreds of open pits full of malignant black sludge. The harm done by Texaco, the plaintiffs contended, could be measured in cancer deaths, miscarriages, birth defects, dead livestock, sick fish, and the near-extinction of several tribes; Texaco’s legacy in the region amounted to a “rain-forest Chernobyl.”.13 It is not uncommon to find that the activities of foreign investors have sparked protests and opposition in host States around the globe.14 In some instances, host States have responded by expropriating foreign investments or by imposing other measures not in conformity with international standards of investment protection. In their turn, foreign investors have filed international investment claims and demanded huge sums in compensation.15 Nevertheless, foreign investors’ conduct often remains outside of the equation, which only serves to make expansive international investment protection appear even more one-sided and unfair. Recent case law seems to have started addressing these conflicts of interest in which host States raised counterclaims against foreign investors alleging environmental harm caused by their activity or violations of human rights. However, as has been demonstrated by the Urbaser tribunal, the current State of international investment law, even when used in conjunction with general international law, remains poorly equipped with appropriate mechanisms to address such counterclaims on their substance. The current issue tribunals have with counterclaims is that they can be accepted, but not substantiated on the merits.16 Similar to the discussion on finding an appropriate approach towards subsequent illegality on the part of foreign investors’, one could argue that harm caused by foreign investors’ conduct could be dealt with by the judiciary of the host State. However, the issue of the enforceability of such judgements remains highly problematic.17 As can be observed in the literature, solving the said issues under national 13

Keefe (2012b), https://www.newyorker.com/magazine/2012/01/09/reversal-of-fortune-patrickradden-keefe. 14 See, for example the factual background: Occidental Petroleum Corporation, Occidental Exploration and Production Company v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award, 5 October 2012, para. 181, 186; Quiborax S.A., Non Metallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award, 16 September 2015, para. 22, 23, 26; Chevron Corporation and Texaco Petroleum Company v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009 – 23, Submission of Amici, Fundación Pachamama, The International Institute for Sustainable Development (IISD), 5 November 2010, para. 4.4. 15 See, for example: Quiborax S.A., Non Metallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award, 16 September 2015, para. 626. 16 See the presentation of Urbaser v. The Republic of Argentina award above. 17 A very good explanation on problems arising out of settlement in the host State courts is presented by Keefe (2012a), https://www.newyorker.com/news/news-desk/why-chevron-will-settle-inecuador.

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law “often seems detrimental rather than helpful”18 and that “weakness in the content, implementation and enforcement of laws may allow the politically and economically powerful parties to dominate the situation”.19 Indeed, when trying to fully grasp the scope of this issue one needs to bear in mind that the annual revenue of some of the foreign investors implicated in such behaviour may greatly exceed the annual budget of an involved host State.20 Furthermore, it is also a matter of fact that often the national laws of host States simply lack the precise regulations needed regarding environmental, human rights or labour standards, making it even more difficult to substantiate claims under national law. As if all of this were not problematic enough, the judicial systems in some host States may also be prone to corruption and bias, which was initially a serious concern in allowing foreign investors to directly access international adjudication. What this translates to, putting aside this initial concern for the moment, is that having an even partly dysfunctional judicial system only exacerbates efforts to address subsequent illegality at the national level. Given this situation, international investment law seems that it could be a suitable option to overcome the identified flaws regarding adjudication under national law. Huge transnational corporations are acutely aware of their global public image and as such, any international adjudication of their conduct on the merits may have a strong educational and motivational effect.21 In any event, this would have a much greater impact and yield better outcomes when compared to the current situation where host State counterclaims are accepted but fail on the merits. It is important here to be constantly aware that the matters at stake—the environment, basic human rights and upholding labour standards—are high-profile priorities internationally.22 The potential harm, especially environmental, may result in long-lasting and transboundary damage and thus needs to be taken seriously.23 In conclusion then, accepting host States’ allegations regarding environmental, human rights and labour issues is a good starting point but the further development of international investment law to go beyond this and be able to apply effective remedies seems to be a desirable goal.

18

Kalimo and Staal (2015), p. 366. Kalimo and Staal (2015), p. 366. 20 Patrick Radden Keefe provided the following figures: “Chevron, which operates in more than a hundred countries, is America’s third-largest corporation. Its annual revenue, which often tops two hundred billion dollars, is nearly four times as much as Ecuador’s economic output”. See: Keefe, (2012b), https://www.newyorker.com/magazine/2012/01/09/reversal-of-fortune-patrick-raddenkeefe. 21 See: Vinuales (2012), pp. 83, 92, 100; Dolzer and Schreuer (2012), pp. 26–27. 22 Faruque (2018), p. 296; Karamanian (2016), p. 369; Chaulk (2015), p. 268. 23 Those aspects of environmental harm were already the subject of international adjudication: Pulp Mills on the River Uruguay (Argentina v. Uruguay), Judgment, ICJ Reports 2010, 14, 73, para. 205; Trail Smelter, Decision of the Arbitral Tribunal (USA v. Canada), 33 American Journal of International Law (1939) 1, 182, 183. 19

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The achievement of this goal cannot be accomplished outside the implementation of novel normative constructions which provide for direct obligations on foreign investors to comply with the environmental, human rights and labour standards. In doing so, this would finally and satisfactorily solve the hitherto persistent matter of legal responsibility for foreign investors.

6.2.3

More Balanced Outcome of Substantiated Foreign Investor Misconduct

The preservation of balance is an important goal for international investment law, however, all the current outcomes of cases dealing with foreign investor misconduct could not be characterised as being sufficiently balanced. Thus far, dealing with foreign investor misconduct has operated in a rather one-sided manner with foreign investor misconduct being seen as either a basis to reject jurisdiction, make claims inadmissible or eliminate the substantive protection otherwise granted by an IIA, or alternatively, proven allegations of foreign investor misconduct are left without any legal consequences. Scant leeway remains for tribunals to engage in a weighing and balancing exercise. This ‘all or nothing’ scenario follows on from the normative constructions currently in place in international investment law and tribunals’ desire to observe the correct approach of not creating requirements or obligations not supported by the wording and composition of IIAs. It seems that more balance in approaching foreign investor misconduct may be achieved by mutually exclusive adjudications on the alleged misconduct of foreign investors on the one hand and the misconduct of host States on the other.24 In doing so, both the claims of foreign investors’ and the counterclaims of host States arising from the same investment could be resolved on the merits. Following these independent adjudications, the damages awarded to each party can be offset to determine if a net amount of compensation is payable by one party.25 This solution does not concern those instances when foreign investor misconduct eliminates a tribunal’s jurisdiction, that is when the misconduct makes investment void ab initio. As such, the range of issues falling within the jurisdiction of arbitral tribunals should be kept within reasonable limits.26 After all, leaving foreign investors’ allegations of breaches of international standards of investment protection for occurrences such as expropriation or violations of fair and equitable treatment, without legal 24 This could be achieved by raising host States’ allegations of foreign investor misconduct by virtue of counterclaims. This idea is also supported in the literature, for example: Bubrowki (2013), p. 214. 25 For more details see: Sabahi (2011), p. 178. 26 Professor Zachary Douglas used to argue that “a plea of illegality relating to the conduct of the putative investor never goes to the tribunals’ jurisdiction”, see: Douglas (2014), p. 185. Even so, the practice to treat the legality of an investments’ establishment as a jurisdiction issues seems to be so well-established that it makes almost no sense to redirect the way tribunals are dealing with the matter. This would harm the sustainability of practice in the field.

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substantiation on the merits would not positively contribute to meeting the initial aim of international investment law. In the future, it also seems a realistic hope that host States will commence international investment arbitration on their own initiative. Current arbitration clauses point out the right of ‘either party’ to commence international investment arbitration, which not only poses no obstacle to host States taking the initiative, it actually explicitly supports the notion thereof.27 Such a perspective requires further elaboration on the standard of compensation of damages for substantiated misconduct by foreign investors—which is necessarily a subject for a separate study. The attainment of more balance is only indirectly a normative problem, since balance is also linked to the tribunals’ approach to the outcomes of allegations in foreign investors’ misconduct. However, this approach as analysed in Chap. 5 is based on the given normative constructions, which were not at all designed to tackle the challenge of foreign investors misconduct. Thus, any change to the normative constructions may legitimately be expected to cause changes in how tribunals’ address the matter. By way of conclusion then, the following goals may be set for the further transformation of international investment law: • to equip international investment law with the legal tools it needs to take into account subsequent illegality in foreign investment operations as well as the overall impacts of investments, both under national law, and most importantly, under established international standards for environmental protection, human rights and labour standards; • to turn the practice of dealing with allegations of foreign investor misconduct in a more balanced direction, allowing the resolution of the corresponding claims of foreign investors and host States arising out one and the same investment on the merits.

6.3

Steps to Be Taken in Implementation

To realise the goals established above requires normative changes within the system of international investment law. Over the course of approximately 20 years of practice, tribunals have reached the implicit and inherent limits of the current system. Arbitral tribunals now find themselves bound by the existing normative constrictions of the law as it stands and cannot seem to find a sound means of pushing international investment law’s development further to address the issue of foreign investor

27

On the host State’s right to initiate claims and counterclaims in international investment arbitration see: Urbaser v. The Republic of Argentina, paras. 1143, 1144. See also: Tamada (2015), p. 105.

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misconduct. Given the normative nature of these constraints, to a large extent, the changes needed must be driven by the contracting States.28 The aim of this study is not to provide an extensive and detailed elaboration of the steps that need to be undertaken, an ambition more suited to an independent study or series of studies. Thus, the following should be viewed more as a reasonable outline, providing food for thought and inspiration, but not as extensive and detailed roadmap. It seems important, however, to determine and suggest a general vision on the dimensions and direction to go when making changes so they may lead to the desired outcome. A little more specifically here, it seems that changes in at least three areas need to be considered if planning to productively develop current international investment law: first, the area of normative constructions; second, the stand-alone sources of general international law that are employed and third, with regard to ‘soft law’.

6.3.1

Changes Within the System of International Investment Law

6.3.1.1

Modification of Wording

The wording of IIA provisions is one of the key elements that determine the outcomes of investment cases dealing with foreign investor misconduct. One can agree or disagree with the established interpretations, however, it is difficult to argue that tribunals do not give due regard to the exact phrasing chosen by the contracting States. For example, the verbs ‘made’ and ‘invested’ as they frequently appear in the ‘in accordance with host State law’ clauses were viewed as limiting the requirement of legality only with respect to the establishment of foreign investments. Both the absence of such a clause or any divergence in wording was accorded due consideration.29 This was evidenced when the Metal-Tech tribunal was confronted with an ‘in accordance with host State law’ clause, which instead of the commonly used verbs ‘made’ or ‘invested’ contained the verb ‘implemented’. The respondent State argued that the term covers any subsequent illegality arising from an investment’s operation.30 The tribunal actively engaged in the interpretation of this term, however, found it synonymous to the word ‘made’.31 This example serves as an 28 The contracting States of the IIAs are certainly generally recognised as the main generators of rules for international investment law as well as their transformation. For example, see Miles (2013), p. 388. 29 The detailed examples were provided in Chap. 4. See, for example, the presentation of the Plama v. Bulgaria case above. 30 See: Metal-Tech LTD. v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 167. 31 Metal-Tech LTD. v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, paras. 186–193.

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illustration that any change or modification in the wording of the prominent ‘in accordance with the host State law’ clause could bring changes in its interpretation and hence application. The requirement of subsequent compliance under the national law of host States could be inserted by reference into the terms ‘operated’ or ‘performed’,32 which would result in ‘investments made/invested and operated/performed in accordance with the law of one of the Contracting States’. However, such a clause operating in accordance with current arbitration practice would probably read as being a jurisdictional requirement. Thus, prior to any changes in the wording, one needs to be certain whether the requirement of subsequent legality under national law will serve as a jurisdiction requirement.33 As has been pointed out above, the extension of a jurisdiction requirement would lead to an increase of one-sided, unbalanced outcomes in cases dealing with allegations of foreign investor misconduct. It also runs contrary to the logic of preventing any consideration of an alleged violation of a host State arising from the subsequent misconduct of a foreign investors. It would be a more satisfactory solution to insert a requirement dealing with subsequent illegality as a matter to be dealt with in the merits of the case. This seems to be achievable by a clause similar to the umbrella clauses existent in the majority of IIAs or by the imposition of a direct obligation on foreign investors under international law.

6.3.1.2

Umbrella Clause to Lift Foreign Investors’ Obligation to Comply with National Law at the International Level

Much has already been said about the importance of the issue of applicable law in dealing with alleged foreign investor misconduct. Indeed, there is a huge difference between foreign investors’ conduct that appears to be inappropriate, unjustified or harmful and the types of foreign investor misconduct that may be accorded negative legal consequences within international investment arbitration. The latter is only possible if the type of conduct is either forbidden as a requirement under the scope of the treaty’s coverage or is directly prohibited under the applicable law.34 Thus, international investment arbitration being able to sustain more allegations of foreign investors misconduct arising from their investment activities requires an extension of the applicable law. A significant and repeated concern of host States seems to be the matter of compliance with their national laws.35 Moreover, alleged violations by host States are often directly connected with the allegations about foreign investors not acting in compliance with national law, i.e. a response or a reaction to the foreign investors’

32 See: Metal-Tech LTD. v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 193. 33 Consider the discussion on this point above. 34 See: Kriebaum (2010), p. 333. 35 Moloo and Khachaturian (2011), p. 1500.

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inappropriate conduct. Foreign investors are subject to the application of the national laws of host States, yet as thing currently stand in international investment law, compliance with national law only plays a role at the time of investment’s establishment. Any subsequent illegality under national law is excluded from the scope of IIAs. As such, nothing prevents the introduction of the concept that an applicable IIA provides for the compliance of subsequent investment activities with the national law of the host State.36 To this end, an “observance of undertakings clause”,37 or simply an ‘umbrella clause’, seems to be a readily employed and appropriate legal tool. An ‘umbrella clause’ is an instrument “that guarantees the observance of obligations” and “bring the contractual and other commitments under the treaty’s protective umbrella”.38 Thus, such clauses, which are commonly used to guarantee compliance by host States, may allow the obligations of foreign investors under national law and their contractual obligations to be transposed to the international level so that adjudication upon compliance with those obligations would be covered by the mandate of international investment tribunals. A possible formulation of such an umbrella clause may read as follows: Foreign investors from one Contracting Party in operating their investments in the territory of the other Contracting Party shall observe the requirements of the law of the Contracting Party in which territory an investment is operated as well as any contractual obligations it may have entered into with regard to the investment. The insertion of an ‘umbrella clause’ would only be effective if the national law of the host State is clearly articulated with regard to foreign investors’ obligations. This seems to be understood by the States as well as recent practice reveals that the national law of host States have increasingly started to yield more careful elaborations on investors’ obligations. For example, the Memorandum on the Objects of the Promotion and Protection of Investment Bill proclaims that “the Bill seeks to achieve a balance between the rights and obligations of all investors in South Africa”.39 Article 20 paragraph 4 of the 2005 (in effect from 2006) Vietnamese Law on Investment States that investors must “[fulfil] obligations in accordance with law on insurance, on labour; to respect the honour and dignity of employees and the customs of Vietnam”.40 Other specific examples have also been reported in the literature.41

36

Metal-Tech LTD. v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 193. 37 Dolzer and Schreuer (2012), p. 166. 38 Dolzer and Schreuer (2012), p. 166. 39 Minister of Trade and Industry of the Republic of South Africa, Memorandum of the Objects of the Promotion and Protection of Investment Bill, Government Gazette No. 39009, 22 July 2015, Art. 1.1. 40 National Assembly of the Socialist Republic of Vietnam, Law on Investment, https://www.wto. org/english/thewto_e/acc_e/vnm_e/wtaccvnm43_leg_4.pdf. 41 Nowrot (2015), p. 1170.

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Investment contracts also present an opportunity to provide a precise set of requirements and rules applicable to foreign investors.42 It seems that obligations under an investment contract allow for avoiding many of the flaws that may exist in national legislation and to provide suitable and tailor-made solutions for particular investment projects including, for example, a due diligence obligation or the undertaking of environmental impact assessments. Certainly, it would be too much to expect that every foreign investor would be accorded individual attention to profoundly elaborate specific obligations for each investment project. However, such attention could be given for huge projects with the potential to inflict considerable harm. Ultimately, by according careful consideration to accepting huge investment projects in particularly sensitive areas, host States demonstrate their real concerns in matters of environment, human rights and labour standards.43 The literature has observed that investment contracts are evolving into being more socially responsible and sustainable.44 By way of a little detail in this regard, investment contracts concluded in recent years have imposed on foreign investors such obligations as “community engagement, human rights audits, responsibility for the use of security personnel, and providing access to effective non-judicial grievance mechanisms for affected individuals and communities”.45 Nevertheless, to be applicable in international investment arbitration, contractual obligations need to be lifted to the level of IIAs, as is the case with obligations under national law. The inclusion of a suitably worded ‘umbrella clause’ would prove to be a more than adequate tool to achieve this. As seen with the Urbaser tribunal, allowing the obligations of foreign investors under an investment contract to flow into an international investment agreement would allow host States to bring substantiated concerns on human rights, environment and labour standards within the treaty-based claims lodged under an IIA.46 The prerequisite for this is the existence of such an obligation, either under national law or under the relevant investment contract. Agreed upon contractual obligations to guarantee rights and the public interest of the host State’s population, including indigenous groups, would be beneficial in avoiding a dogmatic approach to whether foreign investors, as private actors, are bound by positive obligations arising out of human rights issues. In fact, by virtue of umbrella clauses, such obligations would only in substance be similar to the obligations in the field of human rights, labour or environmental protection that States currently have under international law. In their 42 Generally, on the role of state-investors contracts in international investment arbitration see: Voss (2011), p. 187. 43 Both literature and case law already pointed out to the importance of a host State’s own conduct in trying to ensure and claim compliance by foreign investors. See: Usoskin (2015), p. 347; Swembalt v. Latvia, UNCITRAL, 23 October 2000, Decision of the Court of Arbitration, para. 34. Those ideas could be developed further to the extent that the host State should demonstrate their serious concerns at the stage of foreign investors’ acceptance. 44 See: Nowrot (2015), p. 1171. 45 Nowrot (2015), pp. 1171–1172. 46 See, Urbaser v. The Republic of Argentina, paras. 1206, 1207.

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nature, these obligations would remain contractual in nature and agreed upon by the foreign investor and host State, however, they would be lifted to the international level.

6.3.1.3

Direct Treaty Obligations on Foreign Investors

As discussed above, nothing stands in the way of directly placing obligations on foreign investors under the provisions of IIAs.47 As seen earlier in current arbitral practice, the Al-Warraq-tribunal read Article 9 of the OIC Agreement as imposing a direct obligation on the foreign investor. Interestingly, the agreement was signed at virtually the same time modern international investment law emerged in the year 1981. Even though it dates back so far, it nevertheless entails a provision with the following wording: “the investor shall be bound by any laws and regulations in force in the host State and shall refrain from all acts that may disturb public order and morals or that may be prejudice to the public interest. He also to refrain from exercising restrictive practices and from trying to achieve gains through unlawful means”. This provision imposes both a positive obligation (‘to be bound’) and negative (‘to refrain from’) obligations on foreign investors. Interestingly, the quoted provision is placed within Chap. 2 of the OIC Agreement which is devoted to “general provisions regarding promotion, protection and guarantee of the capitals and investments and the rules governing them in the territory of the contracting parties”. Thus, legality under national law throughout the life of an investment is stipulated as a general standard in the relationship between a host State and a foreign investor. This probably explains the Al-Warraq-tribunals’ decision to fully eliminate the substantive protection of the OIC Agreement granted to foreign investors due to the investors’ misconduct stemming from the investment’s operation.48 However, as already highlighted, such a reading creates an unbalanced outcome which eliminates host State liability caused by any subsequent misconduct by a foreign investor in connection to an investment’s operation. To avoid such outcomes, one recommendation would be to consider inserting provisions on direct obligations of foreign investors into the OIC chapter dealing with the obligations of involved actors—both foreign investors and contracting States. This seems likely to ensure the consideration of allegations of both the host State’s and foreign investors misconduct on the merits of the disputed case. Further to this, when considering imposing direct obligations upon foreign investors, one needs to contemplate the scope as well as the level of precision required. As to the scope, inserted obligations may require compliance with national law, international standards applicable to foreign investors and contractual obligations. As seen above, the scope may also include areas such as public morals or the

47 48

See, for example, Urbasser v. The Republic of Argentina, para. 1210. See the extensive elaboration on the case as provided in Chap. 4.

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established customs of the host State. With regard to the level of precision, there are basically two principal paths to follow: First, to express the obligation in general terms, for example, foreign investors in operating their investments shall comply with laws and regulations of the host State or foreign investors in operating their investments shall act in accordance with international labour and environmental standards as in force between the Contracting Parties/or as applicable to foreign investors. Second, to express the imposed obligations using greater detail, for example, foreign investors are required to provide all relevant information on the investment project and conduct the necessary environmental impact assessment or foreign investors in their investment activities shall contribute to human capital formation and economic development in the host State. These recommendations of specific requirements are merely illustrative in serving to provide the contrast with the examples of general obligations indicated above. Indeed, current arbitral practice in the matter of addressing foreign investor misconduct is already awash with general obligations, which at some point required specification and determination of the exact scope. Indeed, would ‘laws and regulations of the host State’ as a substantive obligation on the merits be read as encompassing also minor violations?49 An answer to this question must be left to arbitral tribunals, however, more specific obligations do not pose such questions as they are more precise in terms of conveying the initial consent of the contracting States. As it stands and given all that has transpired in the field of international investment law when addressing foreign investor misconduct, the contracting States seem to be in a position to freely elaborate more precise and specific requirements to avoid the overly broad and general wording present in so many of the agreements that date back to the time when IIAs first emerged. This certainly would require a meaningful consideration of the scope and precise phrasing used to impose the obligations. One the one hand, they need to be specific enough to achieve the desired result, but on the other hand, they must still allow for further development over time or risk robbing the system of its potential which has thus far proven so beneficial. A workable compromise may be found in the combination of both specific and general obligations. For example, a more specific option of the general obligation referred to above could be presented as foreign investors in operating their investments shall act in accordance with international labour and environmental standards may be the following: foreign investors in operating their investments shall act in accordance with the core international labour standards as stipulated in the 1998 ILO Declaration on Fundamental Principles and Rights at Work and the environmental standards as in force between the Contracting Parties. Furthermore, to avoid the dilemma of a contemporaneous vs. evolving50 scope of the ‘standards as in force 49

Consider the same concern in view of jurisdictional requirement of legality as discussed in Chap. 4. 50 Contemporaneous scope would include those standards as applicable between the contracting parties at the time of the treaty conclusion, whereas evolutionary scope would also include standards that emerged after the conclusion of the treaty. For more details, see: Eirik Bjorge, The Evolutionary Interpretation of Treaties (2014), 123.

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between the Contracting Parties’ States could include a relevant and precise clause: standards as in force between the Contracting Parties at the time of the treaty’s conclusion or standards as in force between the Contracting Parties at the time of the dispute. All these aspects need to be considered by contracting States when renegotiating their current IIAs if they wish to transform and develop them into a tool more suited to meet the challenges of the modern era.

6.3.2

Stand-Alone Sources of International Law

The question of assigning social responsibility and liability to individual actors, especially multinational corporations, is still in the process of further consideration under international law.51 This consideration at some point in the future may result in the creation of more legally binding norms obliging individual actors engaging in activities that fall under the auspices of international law. The issue thus remains as to whether the development of general international law, for example, the conclusion of specific conventions imposing obligations on corporate entities would have a direct impact on the outcomes of international investment arbitrations? This could be a particularly useful option to explore in light of the fact a large number of IIAs concluded in the early years of international investment law are still active and these entail few, if any, provisions regulating foreign investors’ conduct. On the one hand, international investment law does not operate in clinical isolation as it is not a self-contained regime. On the other hand, though, could stand-alone sources of general international law be directly applicable without being explicitly referred to in a relevant IIA? In other words, in a case where an IIA provides for ‘compliance with international labour standards’, this would serve as a direct reference to the relevant stand-alone sources of international law and thus makes such sources and standards applicable in international investment arbitration. A specific example that could arise from such a formulation would be to legitimately allow the ILO Instruments to be considered by international investment tribunals. However, what if such a reference is not inserted into an IIA? Article 31 (3) (c) of the VCLT requires “any relevant rules of international law applicable in the relations between the parties” to be considered for the sake of the treaty interpretation. What this translates to is that a process of interpretation presupposes the existence of a legal provision to be interpreted, meaning that the interpretation of the above-referred provision imposing ‘compliance with international labour standards’ would require taking into account the relevant rules of international law in force for the contracting States. However, Article 31 (3) (c) does not determine the general scope of applicable law, thus a stipulation of the choice of law provisions in IIAs that seek to follow this path seems to be the most viable option to resolve this. As discussed in Chap. 2, IIAs normally determine the law to be

51

See: Vinuales (2015), p. 1715; Dupuy and Vinuales (2015), pp. 1762–1765; Miles (2013), p. 352.

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applied to the resolution of the dispute. If the scope of the applicable law is determined to include relevant norms of international law, then stand-alone norms of international law may be applied in international investment arbitration. For example, Article 26 (6) of the Energy Chapter Treaty provides that an arbitral tribunal “shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law”.52 However, if the scope of applicable law is determined restrictively, i.e. limited only to the relevant international investment agreement, a reference to specific stand-alone rules of international law seems difficult to justify in the absence of any specific reference thereto.53 Thus, the development of stand-alone norms of international law may directly contribute to the outcomes of international investment arbitration cases dealing with foreign investor misconduct. When stand-alone norms are either directly referred to in the relevant IIA or are covered by the scope of applicable law and provide for direct obligations on individuals actors relevant in the context of international investors’ activity, those norms may be outcome-determiners in international investment arbitration.

6.3.3

‘Soft Law’ Mechanisms

The discussion highlights some of the various possibilities available for States to transform ‘hard law’ to make foreign investors more responsible players in the field whilst simultaneously placing more balanced and reciprocal rights and obligations on the active players. Unfortunately, it must be noted that there is currently a lack of political will to pursue such a path and this represents a seemingly insurmountable obstacle to implementing these changes. The literature, as well as State practice, suggests an alternative route is being explored that involves the use of non-binding legal instruments, i.e. ‘soft law’ (voluntary standards of conduct).54 As has been mentioned earlier, efforts to establish standards and codes of conduct for international corporations have been ongoing since the early 1970s. Since then, several important developments in this regard have taken place: the OECD Guidelines for Multinational Enterprises (adopted in 1976 updated in 2011),55 the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy

Those formulations are quite typical in the field of international investment law. Similar logic: Vinuales (2015), p. 1723. 54 Kalimo and Staal (2015), p. 380; Vinuales (2012), p. 391; Kirton and Trebilcock (2004), p. 5. 55 OECD Declaration on International Investment and Multinational Enterprises (2011), http:// www.oecd.org/daf/inv/investment policy/oecddeclarationoninternationalinvestmentand multinationalenterprises.htm. 52 53

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(adopted in 1977 and last amended in 2017),56 UN Global Compact,57 Resolution of the UN Human Rights Council on the Guiding Principles on Business and Human Rights: Foundations and Implementations,58 the Principles for Responsible Investment.59 The aim of the present research is neither to recount the development of these rules on the social responsibilities of international corporations nor to elaborate on any of the above instruments. The aim is to consider the role these or other ‘soft law’ instruments may play in international investment arbitration. ‘Soft law’ may in some respects be better suited to provide more specific elaborations on the desirable conduct of corporate entities in conformity with international law than ‘hard law’. Moreover, many transnational corporations are already self-regulating in an attempt to positively contribute to their public image and are involved in the elaboration and promotion of ‘soft law’ rules. This creates a situation where corporations are more invested in adhering to such ‘soft law’ because they are the co-creators of such rules, rather than chafing under the impositions created by ‘hard law’.60 Furthermore, the introduction of ‘soft law’ may, especially if such enjoys a measure of success, be a source of inspiration and motivation for contracting States to create legally-binding norms. Nevertheless, the question here is not one of the general function and significance of the ‘soft law’ mechanisms, but on the legal role that ‘soft law’ may play in international investment arbitration. In short, can a ‘soft law’ instrument in any way influence the outcome of cases dealing with allegations in foreign investors’ misconduct? As ‘soft law’ is non-binding it may not directly be applicable as a source of rights and obligations, however, it seems to be a sound reference point to find the so-called legitimate expectations of the parties. In view of elaborations on alleged breaches of FET standards by host States, references to legitimate expectations have already played a prominent role in arbitral practice.61 Similarly, ‘soft law’ rules on the desirable conduct of transnational corporations may be referenced to create a clear picture of the legitimate expectations of host States. This is especially, but not

56

Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (2017), https://www.ilo.org/wcmsp5/groups/public/%2D%2D-ed_emp/%2D%2D-emp_ent/-multi/ documents/publication/wcms_094386.pdf. 57 For more detailed information and materials on the UN Global Compact visit: https://www. unglobalcompact.org/. 58 Guiding Principles on Business and Human Rights, https://www.ohchr.org/documents/publica tions/GuidingprinciplesBusinesshr_eN.pdf. 59 For more information visit: https://www.unpri.org/. 60 See: Kalimo and Staal (2015), p. 380. 61 See: El Paso Energy International Company v. The Republic of Argentina, ICSID Case No. ARB/03/15, Award, 31 October 2011, para. 348; LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. The Republic of Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, para. 130; Saluka Investments B.V. v. Czech Republic, UNCITRAL, Partial Award, 17 March 2006, para. 302.

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exclusively, the case when corporations involved in the dispute have directly taken part in the elaborations of those rules. An additional point of consideration to complete the analogy with FET standards is that one needs to think about a more general obligation for foreign investors, which may be interpreted as encompassing the legitimate expectations. For example, a general obligation for foreign investors to ‘respect international standards and principles for conducting sustainable businesses’ may serve that end. In interpreting such a provision, an arbitral tribunal may consider the legitimate expectation of the host States based on existing ‘soft law’ instruments to be relevant in forming the scope of the said general obligation, especially when the ‘soft law’ was directly promoted and supported by the corporation involved in the dispute. Thus, ‘soft law’ may serve as a point of reference to help adjudicate upon foreign investors’ conduct, and this would be done in addition to any applicable direct obligation imposed on foreign investors’ conduct by a relevant IIA.

6.3.4

Concluding Observations

The above discussion points out various possibilities of further developing international investment law to achieve the previously indicated aims. No obvious legal obstacles stand in the way of such development as the only visible hindrances arising from the absence of clear political will required to turn international investment law from a mere protective regime to one encompassing more social responsibilities and having a better balance of rights and obligations for both host States and foreign investors. Any decision to do so will certainly impact the sensitive matter of the legal responsibility of individuals under international law. The changes suggested above are somewhat dictated by the times and if they were to be implemented, many of the international legal responsibilities of foreign investors would no longer be left in limbo and hence so problematic for tribunals to deal with. It is up to States to decide whether to allow international investment law to develop further to be better equipped to deal with foreign investor misconduct. The normative implementation of such a decision may have diverse manifestations and still need further elaboration in some cases but the bilateral composition of international investment law is more than suitable for individualised models to be successfully implemented. The final section of this monograph will turn its focus to current practice in the field to analyse whether there is already any emerging evidence of progress in the direction discussed above.

6.4 A Look Into the Current Practice: Transformation Towards More Responsible. . .

6.4

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A Look Into the Current Practice: Transformation Towards More Responsible Investments

International investment law is currently going through an active period of reform with intellectual elaborations involving academia,62 international organisations and governments63 on how foreign investments’ protection will look in the future as well as the detailed re-negotiation and conclusion of novel international investment agreements.64 The question posed here in this regard is whether current practice in international investment law reflects the transformation of expectations upon foreign investors and “shifts in paradigms”65 observed and anticipated previously in this study? More precisely, the question is whether the already implemented and suggested future changes adequately envisage the normative recognition of upgrading the status of foreign investors from objects of protection to active and equally positioned actors in the field, who are expected to act in a certain way? A final question is whether the normative composition of international investment agreements is changing to allow more effective and balanced adjudication in cases of alleged foreign investor misconduct compared to the current practice presented in Chap. 4?

6.4.1

Aspects of International Law Reform in Connection with the Approach to Foreign Investor Misconduct

6.4.1.1

The Procedural Component

The ongoing reform of international investment law may be summed up by classifying them as happening in two major dimensions: first, a procedural dimension to ‘cure’ flaws in international investment arbitration and second, the dimension of sustainability to better integrate human rights, environmental, labour, anti-corruption and other social standards within the field of international investment law.66 The 62

See for example: Puig and Shaffer (2018), p. 366; Wolfgang (2018), p. 240; Wolfgang (2017), p. 51; Muchlinski (2016), p. 61. 63 See: UNCTAD, UNCTAD’s Reform Package for the International Investment Regime (2018), https://investmentpolicy.unctad.org/publications/1190/unctad-s-reform-package-for-the-interna tional-investment-regime-2018-edition-; UNCTAD World Investment Report 2015: Reforming International Investment Governance, https://unctad.org/en/PublicationsLibrary/wir2015_en.pdf. Governmental initiatives will be discussed in detail below. 64 The list of most recently concluded IIAs can be found at: https://investmentpolicy.unctad.org/ international-investment-agreements. 65 The expression is inspired by the book from Hindelang and Krajewkski (2016). 66 See: Puig and Shaffer (2018), p. 368; Final Report of the Committee on the International Law on Foreign Investments, in International Law Association Report of the Seventy-Third Conference hold in Rio de Janeiro in 2008 (2008), 752, 777.

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procedural component, which inter alia includes the EU-posited idea of creating a multilateral investment court,67 is predominantly focused upon the role of arbitral tribunals and arbitrators, transparency, consistency of arbitral awards and the availability of an effective appeal mechanism.68 As such, implementation of the aspects mentioned in this paragraph is not directly connected to the legal status of and expectations imposed upon foreign investors and thus would have little to no impact on the way allegations in foreign investors misconduct are being dealt with in the system of international investment law. Some procedural modifications, for example, normatively regulated involvement of amici curiae,69 have already demonstrated their potential to contribute to the further development of practice regarding foreign investor misconduct.70 Nevertheless, for the purpose of answering the question posed above on the procedural aspect, including the suggestion of the creation of a multilateral investment court, could be answered without additional detailed elaboration.

6.4.1.2

The Component of Sustainability

The component of sustainability is more directly linked to the role of and expectations imposed upon foreign investors. As mentioned previously, foreign investors are the most active players in the field and their conduct can have directly attributable effects when it comes to adherence to human rights, labour, environmental and other recognised standards over the course of investment activities. However, the widely recognised goal of encouraging more sustainable investments does not per se mean more internationally enforceable responsibilities being placed on foreign investors. Indeed, one should be clear that two independent aspects must combine to achieve better sustainability when it comes to international investment. First, the content of the standards of behaviour must be compatible with the idea of sustainability, i.e. a precise list of actions and omissions applicable to corporate entities. Second, there

67

See: EU General Secretariat of the Council, Negotiation directives for a Convention establishing a multilateral court for the settlement of investment disputes, 12981/17, http://data.consilium.europa. eu/doc/document/ST-12981-2017-ADD-1-DCL-1/en/pdf. [EU Negotiation Directive]. 68 See: EU Negotiation Directive, paras. 10, 11, 13; See also: Langford and Roberts (2019), at: https://www.ejiltalk.org/uncitral-and-isds-reforms-hastening slowly/?fbclid¼IwAR3by_ OTsgfyiriP2R1vFeHFMeMSOd6ijvCuxZmNfCAfw4Sikt5F2GlI70w; Schwebel (2016), http:// isdsblog.com/wp-content/uploads/sites/2/2016/05/THEPROPOSALSOFTHEEUROPEAN COMMISSION.pdf. 69 A number of regulations on the ‘non-disputing party’ have been implemented in the last decade into various procedural rules, regulating international investment arbitration. See, for example: Article 4, UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration (come into effect on 1 April 2014), http://www.uncitral.org/pdf/english/texts/arbitration/rules-on transpar ency/Rules-on-Transparency E.pdf; Article 41 (3), ICSID Additional Facility Arbitration Rules (as amended April 10, 2006), http://icsidfiles.worldbank.org/icsid/icsid/staticfiles/facility/ partDchap07.htm#a41. 70 For example, see: Schliemann (2013), p. 385; Sacerdoti (2016), p. 36.

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needs to be a sufficiency of mechanisms and tools available for the implementation and enforceability of those standards. As such, international law has made good progress in the elaboration of standards and principles of conduct of multinational enterprises.71 There have also been a number of worthwhile initiatives undertaken by foreign investors,72 however, analysis of the reports, guidelines, recommendations and codes of conduct on sustainable investments presented from those initiatives support the vision that they do not impose any direct international legal obligations on foreign investors. At best, following this path in pursuit of feasible legal options is possible, although not recommended, a view reinforced by the fact the matter remains politically sensitive.73 A better alternative to achieve the desired goal is by pursuing the strengthening of inter-state obligations to ensure foreign investors’ compliance with the well-established international standards of behaviour as well as an obligation to integrate those standards into their national law.74 Moreover, some of these elaborated standards are promoted as ‘soft law’, a more co-operative and gentle approach that has as yet untapped potential to contribute to how international investment law approaches foreign investor misconduct, as discussed above. Amongst the various initiatives which focus on better balancing the rights and obligations of foreign investors, one can single out UNCTAD “Investment Policy Framework for Sustainable Development”. It recommends that negotiators of soon to be concluded IIAs: [c]onsider including obligations for investors to comply with national laws of the host country. In additional, and parallel to the debate at the level of national policies, corporate responsibility initiatives, standards and guidelines for the behaviour of international investors increasingly shape the investment policy landscape. Such standards could serve as an indirect way to add the sustainable development dimension to the international investment policy landscape, although there are concerns among developing countries that they may also act as barriers to investment and trade.75

71

See: OECD Guidelines for Multinational Enterprises (2011 edition), http://www.oecd.org/daf/ inv/mne/48004323.pdf; UNCTAD, Corporate Social Responsibility in Global Value Chains, UNCTAD/DIAE/ED/2012/3; Guiding Principles on Business and Human Rights, https://www. ohchr.org/documents/publications/GuidingprinciplesBusinesshr_eN.pdf; UN Guiding Principles on Business and Human Rights (2011), https://www.ohchr.org/documents/publications/ GuidingprinciplesBusinesshr_eN.pdf. 72 See, for example: Finance UNEP Initiative, United Nations Global Compact, Principles for Responsible Investment, https://www.unpri.org/. 73 As observed in literature: “At this time, it is safe to affirm that the inclusion of direct obligations on the conduct of foreign investor has not gained real recognition in investment treaty practice”. See: Mbengue and Schacherer (2018), p. 559. 74 See, for example: OECD Guidelines for Multinational Enterprises (2011 edition), http://www. oecd.org/daf/inv/mne/48004323.pdf, Concepts and Principles, para. 11. 75 UNCTAD, ‘Investment Policy Framework for Sustainable Development’, https://unctad.org/en/ PublicationsLibrary/diaepcb2015d5_en.pdf, p. 19.

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The imposition of direct international obligations upon foreign investors also played a prominent role in the Model IIA suggested by the International Institute for Sustainable Development in 2005.76 To summarise the foregoing, the goal of increasing international investment sustainability is broadly shared and recognised by various involved actors. However, serious concerns and questions remain regarding issues of implementation and enforceability. A number of possible options and avenues have been suggested to address these concerns, although it is unclear which of those options states will opt for because of the politics involved. It can be observed that most initiatives continue to pursue the realisation of the sustainability goal by suggesting the introduction of inter-states obligations to ensure foreign investors’ compliance with internationally recognised human right, environmental and social standards, which also include an obligation to implement the required changes at the national level. The component of sustainability, as such, is connected to the role of and expectations imposed upon foreign investors. The impact that the realisation of this aim would have on the current practice of addressing allegations on foreign investors’ misconduct depends upon the mechanism chosen to do so. Potentially, any of the means of implementation outlined above would to some extent alter current practice. Nevertheless, meaningful progression of practice in international investment law will arguably only occur with the imposition of direct obligations upon foreign investors, an option with both pros and cons that were discussed above. An examination of the actual practice of States would reveal more on how the idea of sustainability is currently being implemented in recently negotiated and concluded IIAs.

6.4.2

State Practice in Reforming International Investment Law

At this point, one needs to recall the macro- and micro-perspective on international investment law dealt with in Chap. 2. By way of reminder, the macro-perspective focuses on general tendencies and trends in the bilaterally composed field of international investment law, whereas the micro-perspective focuses on precise, country-based specificities. With these perspectives in mind, a comprehensive presentation of State practice of even selected countries would be unwieldy and largely exceed the scope of this study.77 In the following, the reader should thus

76 Part 3 (Obligations and Duties of Investments and Investors), Model International Agreement on Investment for Sustainable Development, https://www.iisd.org/pdf/2005/investment_model_int_ agreement.pdf. 77 Some recently concluded book-length academic studies focus on policy of particular States or regions. For example, Adeleke (2017).

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expect a condensed and exemplary presentation of the most outstanding and significant practice which typify a certain tendency or trend.

6.4.2.1

Policy Considerations

A reconsideration of the prevalent attitude towards the international protection of foreign investors can be seen as a worldwide trend. A large number of States are active in the termination and re-negotiation of their existent international investment agreements. Some of them, South Africa for example, are currently actively exploring alternate means to apply equal standards of protection for domestic and foreign investors under national law.78 This consideration of alternative mechanisms for investment protection also appears to be a trend for several Latin America States.79 An interesting move was undertaken by the Australian government in this regard when it listed investors’ obligations on the official governmental website under the rubric “investor obligations”. The post summarises all the core obligations of foreign investors and requires “all entities operating in Australia” to “keep themselves up to date with any changes to their obligations that may occur”.80 The Australian government at this point does not differentiate between domestic and foreign investors and seems to prefer employing national law as the preferred mechanism for regulating both domestic and foreign investments. The country, however, does not seem to be currently active in concluding any IIAs with its most recent being in 2005.81 Detailed below are some noteworthy results of attempts to remould the balance between host States obligations and the expectations placed on foreign investors’ conduct within the system of international investment law.

78

Minister of Trade and Industry of the Republic of South Africa, Memorandum of the Objects of the Promotion and Protection of Investment Bill, Government Gazette No. 39009, 22 July 2015, Art. 1.1. 79 This fact does not per se means that Latin American States stopped the practice of concluding IIAs. Brazil, which for a long-time refrained from concluding IIAs, is currently quite active in negotiating and concluding international agreements on investment’s protection. In contrast, for example, Bolivia and Ecuador have been quite determined in terminating their IIAs. Additionally, Latin American States are reconsidering their attitude towards investor-state international arbitration. For a more detailed presentation of tendencies in Latin America see: Luque Macias (2016), p. 297. See also: Moreira (2018), http://arbitrationblog.kluwerarbitration.com/2018/09/13/coopera tion-and-facilitation-investment-agreements-in-brazil-the-path-for-host-state-development/. 80 See: https://firb.gov.au/resources/investor-obligations/. 81 The list of currently effective IIAs concluded by Australia is available at: https:// investmentpolicyhubold.unctad.org/IIA/CountryBits/11#iiaInnerMenu.

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Draft Pan-African Investment Code

The Draft Pan-African Investment Code was launched under the auspices of the African Union in 2008 and, as has been reported in the literature, is “the first continental-wide investment instruments”82 which probably represents the most outstanding and highly progressive result of a long process of reforming international investment protection on the African continent. The Pan-African Investment Code was released in 2016 and contains a chapter on investors obligations. The chapter entails six detailed articles providing for the direct obligations imposed upon foreign investors and are formulated in the imperative, stating what investors ‘shall’ and ‘shall not’ do. The imposed obligations include, inter alia, compliance with “national and internationally accepted standards for corporate governance”83 and where corporate social responsibility and anti-bribery obligations are specifically referred to.84 Moreover, the same chapter imposes “socio-political obligations”, such as “non-interference in internal political affairs” and “respect for socio-cultural values”85 before providing a specific obligation on foreign investors “not to exploit or use natural resources to the detriment of the rights and interests of the host State” and to “respect the rights of local populations, and avoid land grabbing practice vis-à-vis local communities”.86 In addition to the extensive list of material obligations, the code directly points to the right of host States to initiate counterclaims against foreign investors.87 In line with the results of the present study, the draft of the code speaks of the ‘material relevance’ of the alleged breached by foreign investors concerning the issues raised in view of any alleged State’s breach of the established standards for investment protection and possible “mitigating or off-setting effects” thereof.88 In arbitral practice, this would lead towards more balanced adjudications in a case involving allegations of misconduct by foreign investors. Nevertheless, the question of what standards to use for compensation when a breach by foreign investors’ is proven remains critical but not yet sufficiently elaborated upon by either academia or current practice. Legal academia has been widely positive of this progressive step taken in Africa, labelling it as a “clearly innovative”89 approach towards international investment protection, even when presented in the Draft Pan-African Investment Code of 2016. Time will tell whether this draft will translate into legally binding IIAs and whether

82

Mbengue and Schacherer (2018), p. 547. Article 19, Pan-African Investment Code, https://au.int/sites/default/files/documents/32844-docdraft_pan-african_investment_code_december_2016_en.pdf. [Pan-African Investment Code]. 84 Articles 21, 22, Pan-African Investment Code. 85 Article 20, Pan-African Investment Code. 86 Article 23, Pan-African Investment Code. 87 Article 43, Pan-African Investment Code. 88 Article 43, Pan-African Investment Code. 89 Mbengue and Schacherer (2018), p. 568. 83

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or not this approach will inspire other States and regions to also move forward in this regard. Future legal practice under IIAs concluded on the basis of the draft discussed above will in all likelihood have great potential to provide practice considerable progressive momentum when arbitral tribunals address allegations of foreign investor misconduct.

6.4.2.1.2

The Initiative of the Indian Government

An initiative of the Indian government to re-examine its expectations on foreign investors’ also holds a prominent position in legal academia’s discussions.90 The Indian government demonstrated its willingness to engage in “rebalancing rights and obligations of Host State and investors”.91 The draft Model BIT suggested in March 2015 entailed a number of provisions that impose direct obligations on foreign investors, including their compliance with national law as well as more specific and detailed obligations regarding “[compliance with] labour, health and environmental laws; [assistance] in human capital formation and capacity building; and [behaviour] in accordance with internationally accepted standards applicable to foreign investors”.92 Following an intensive internal consideration of the draft, the revised version of the Model Indian BIT (December 2015)93 has become more modest in content of the to be imposed obligations on foreign investors.94 At any rate, the revised draft of the Model Indian BIT still contains a chapter on investors obligations which is comprised of two articles. Article 11 prescribes ‘hard law’ obligations on foreign investors, including the obligation to comply with “all laws, regulations, administrative guidelines and policies” of the host State at all the stages of the investment’s operations, namely during “establishment, acquisition, management, operation and disposition of investments” while additionally imposing an anticorruption obligation on foreign investors. Article 12 changes the focus and details the ‘soft law’ obligations of foreign investors and their investments. The first IIAs concluded on the basis of the Indian Model BIT 2015 presented above have been already signed.95 While the literature reports that further

90 For example: Rai (2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id¼3053410; Choukroune (2016), p. 160; Shetty and Weeramantry (2016), p. 191. 91 Law Commission of India, Analysis of the 2015 Draft Model Indian Bilateral Investment Treaty, August 2015, p. 25, para. 4.1.1, http://lawcommissionofindia.nic.in/reports/Report260.pdf. 92 Law Commission of India, Analysis of the 2015 Draft Model Indian Bilateral Investment Treaty, August 2015, p. 26, para. 4.1.3, http://lawcommissionofindia.nic.in/reports/Report260.pdf. 93 Model Text for the Indian Bilateral Investment Treaty, https://investmentpolicyhub.unctad.org/ Download/TreatyFile/3560. 94 See the reflection thereupon in the literature: Hanessian and Duggal (2017), p. 225; Coleman and Gupta (2017), http://oxia.ouplaw.com/page/India-BIT; Shetty and Weeramantry (2016), p. 191. 95 See: Treaty between the Republic of Belarus and the Republic of Indian on Investments (24 September 2018), https://investmentpolicyhub.unctad.org/Download/TreatyFile/5724. The text of the signed IIA is identical to the above presented Indian Model BIT of December 2015.

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negotiations are currently taking place,96 the subsequent section will only discuss the already concluded drafts in more details.

6.4.2.1.3

The EU Reform of International Investment Law

In Europe, reform of international law within the EU appears to be one of the key developmental projects being undertaken in connection with international investment law. The project emerged from the Treaty of Lisbon entering into force as it sufficiently extended the EU’s competence in “common commercial policy” to include the area of foreign direct investments.97 Hence, the competence to conclude IIAs was transplanted from EU Member States to the EU itself, which in the long run will lead to the re-negotiation of all existent IIAs applicable between EU Member State on the one hand, and all IIAs between EU Member States and third countries on the other hand.98 The realisation of this ambition required the EU to elaborate and develop its own policy, i.e. the scope, goals and normative composition of legal instruments devoted to the protection of foreign investments,99 which in itself was a prime opportunity to re-consider with hindsight all that had transpired over recent decades in the field of international investment law. The EU policy also has the aim to “promote investments that support sustainable development, respect for human rights and high labour and environmental standards”.100 However, a major component of the EU approach seems to be more focused on the establishment of a multilateral investment court101 and better delineation of the scope of the existent standards of investment protection based on international investment law’s past successes and failures. The observed changes in the EU’s investment policy do not seem to entail much potential to evolve the extant practice on attitudes towards foreign investors misconduct to a more advanced or nuanced stage. For example, the EU-Canada Comprehensive Economic and Trade Agreement (CETA) does not impose any direct obligations on foreign investors nor contain provisions lifting the requirement of compliance with national laws to the international level. More in line with traditional IIAs, Article 8.1 of CETA sets the requirement on investments’ compliance with ‘host State law’ as a prerequisite to be considered as a ‘covered investment’, namely, it requires covered investments to be “made in accordance with the applicable law at 96

Thacker and Dwivedi (2017), http://www.taxsutra.com/experts/column?sid¼759. For more details see, for example: Stoll et al. (2017), p. 63. 98 In more details: Stoll et al. (2017), p. 70. 99 Griebel (2015), p. 313. See also: Titi (2015), p. 651. 100 At: http://ec.europa.eu/trade/policy/accessing-markets/investment/. 101 See: European Commission, A new system for resolving disputes between foreign investors and States in a fair and effective way’ (2017), http://trade.ec.europa.eu/doclib/docs/2017/september/ tradoc_156042.pdf; Council of the European Union, ‘Negotiating directives for a Convention establishing a multilateral court for the settlement of investment disputes’ (1 March 2018), http:// data.consilium.europa.eu/doc/document/ST-12981-2017-ADD-1-DCL-1/en/pdf. 97

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the time the investment is made”.102 However, when compared with traditional ‘in accordance with host State law’ clauses, two specificities of CETA can be mentioned: First, the replacement of the reference to the legislation of the receiving contracting State to ‘the applicable law’, and second, in line with the elaborations in case law, the implicit specification that the legality requirement only encompasses the time of the investments’ establishment. Further to this, Article 8.16 of CETA, in line with an established tradition of Canadian IIAs, entails a denial of benefits clause which thus allows protection to be voided for investments and investors under the circumstances defined in the clause. Even so, this provision does set the misconduct of foreign investor as a basis to deny such benefits. While Article 8.17 of CETA reserves a host State’s right to require foreign investors to provide information about their investments, this provision is not formulated as a direct obligation on foreign investors but rather as a limitation of host States’ substantive obligations on foreign investors treatment. All in all, the mentioned normative provisions could not be qualified as substantially transformative to the established approach regarding the obligations of foreign investors. Some noticeable changes have occurred in the definitions and these will be considered in greater detail below. Given these only relatively minor variations, EU investment agreements will not provide anything novel to what has already been established by case law when addressing the challenges of dealing with allegations of foreign investor misconduct. To summarise this section then, it can simply be said that the EU’s investment policy does prioritise the transformation of the normative construction of international investment law to make foreign investors more responsible actors in the field.

6.4.2.1.4

Other Draft Models

Also worth mentioning is an early effort on the part of the Norwegian government to rebalance international investment law and send “a clear signal that there has been a shift in expectations of investors conduct”.103 Their model BIT was released in 2007 and still does not impose any direct obligations on foreign investors, however, Article 32 thereof provides for an inter-state obligation “to encourage investors to conduct their investments in compliance with the OECD Guidelines for Multinational Enterprises and to participate in the United Nations Global Compact”.104 While this is something of a step in the right direction, this and similar provisions in other IIAs keep direct obligations on investor behaviour at the inter-state level.

Article 8.1. definition of a ‘covered investment’, (b), The Comprehensive and Economic Trade Agreement, 30 October 2016, http://ec.europa.eu/trade/policy/in-focus/ceta/ceta-chapter-by-chap ter/. 103 Miles (2013), p. 367. 104 Norway 2007 Draft Model BIT, https://www.italaw.com/sites/default/files/archive/ita1031.pdf. 102

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Another interesting example of change slowly being introduced is the 2018 Draft Dutch Model BIT.105 Although this again does not impose direct obligations on foreign investors its provision on ‘sustainable development’, as stipulated in its Article 6, is formulated as an inter-states commitment whereby “[e]ach Contracting Party shall ensure that its investment law and policies provide for and encourage high levels of environmental and labour protection and shall strive to continue to improve those laws and policies and their underlying levels of protection”.106 The subsequent Article 7 declares “the importance of each Contracting Party to encourage investors operating within its territory or subject to its jurisdiction to voluntarily incorporate into their internal policies”107 the internationally recognised standards and principles of corporate social responsibility, which were supported and implemented by each contracting party. From the perspective of a change in attitude towards foreign investors misconduct, Article 23 provides more game-changing regulations under the heading ‘Behaviour of the Investor’ where it states that: “[w]ithout prejudice to national administrative or criminal law procedures, a Tribunal may, in deciding on the amount of compensation, take into account non-compliance by the investor with the commitments under the UN Guiding Principles on Businesses and Human Rights, and the OECD Guidelines for Multinational Enterprises”.108 The provision is placed in Section 5, which regulates the settlement of investor-state disputes, and while Article 23 does not impose any material obligations upon foreign investors, it seems to be an inventive attempt to redirect current arbitral practice into taking a more balanced approach when delivering outcomes.

6.4.2.1.5

Concluding Remarks

From the presentation above, one can perceive that it is the tendency for ‘capitalimporting’ States rather than ‘capital-exporting’ States to press for reforms of international investment law to create more responsibilities for foreign investors. This may be seen as a revanche for their failure to have the system better reflect their interests when modern international investment law was first emerging. At any rate, this can be taken as an indication that the political and economic imbalances present at the time of the emergence of modern international investment law are no longer the prevalent drivers they once were. As such, this is probably one of the main reasons for international investment law undergoing the intensely active period of worldwide reform that we are currently witnessing.

105

Dutch 2018 Draft Model BIT, https://www.internetconsultatie.nl/investeringsakkoorden. [Dutch 2018 Draft Model BIT]. 106 Article 6.2, Dutch 2018 Draft Model BIT. 107 Article 7, Dutch 2018 Draft Model BIT. A similar provision can be read in the other modern IIAs, for instance, the Brazil Model BIT. 108 Dutch 2018 Draft Model BIT, Article 23.

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In the section below, IIAs currently being negotiating or recently concluded will be examined to see how much of the above-discussed policies and perspectives have sufficiently coalesced to now be considered as normative provisions.

6.4.2.2

Overview of Recently Concluded IIAs

The consideration of recently concluded IIAs below does not attempt to include an extensive selection of all the relevant IIAs, nor even all the trends or tendencies regarding their nuanced and ongoing evolution for that matter. With this in mind, the observed developments present below have been divided into the following categories: first, developments concerning modifications in wording, second, impositions of direct obligations on foreign investors and third, references to soft-law standards.

6.4.2.2.1

Modification in Wording

Preambles The role of preambles in law was pointed out earlier in this study, it suffices here to note that preambles are indicatively important to discern the intentions of the drafters and the goals sought for any concluded IIA. One can observe a widening of the focus of those preambles of recently concluded IIAs away from just the traditional goal to “intensify economic co-operation between Member States” and a desire to “create favourable conditions for investments prosperity” and “stimulate private business initiatives”.109 More recent treaties are showing a distinct trend to include ‘sustainable development’ as well as ‘regulatory and policy space’ of the contracting States. For example, the latest Japan-Jordan IIA stipulates that investment protection “can be achieved without [compromising] health, safety and environmental measures of general application”.110 The EU—Singapore Investment Agreement also highlights the regulatory space of each State and stresses the importance of committing to “the principles of sustainable development and transparency”.111 These two brief examples illustrate the widening of interests in international investment protection and the imposition of greater balance in the field.

109

See, for example: Agreement between the Federal Republic of Germany and the People’s Republic of Bangladesh concerning the Promotion and Protection of Investments, 06 May 1981, https://investmentpolicyhubold.unctad.org/Download/TreatyFile/264. 110 Agreement between Japan and the Hashemite Kingdom of Jordan for the Protection and Promotion of Investment, 27 November 2018, https://www.mofa.go.jp/files/000428964.pdf. 111 Investment Protection Agreement between the European Union and its Member States, on the one part and the Republic of Singapore, of the other part, 19 October 2018, https:// investmentpolicyhubold.unctad.org/Download/TreatyFile/5714.

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Definitions As discussed previously, more clarified requirements imposed upon covered investments and investors is one way to further develop international investment law to better deal with allegations of foreign investor misconduct. Recently concluded IIAs have some noticeable changes in that regard, for example, Article 8.1 of CETA defines an ‘investment’ as: [e]very kind of asset that an investor owns or control, directly or indirectly, that has 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 of profit, or the assumption of risk.112

This definition is followed by the open-ended list of assets, commonly found in the older generation of IIAs, thus it seems that the EU’s approach to investment has incorporated the so-called Salini criterion. Similar definitions are also found in Article 1.2 (h) of the EU-Vietnam113 and Article 1.2. (1) of the EU—Singapore Investment Protection Agreements (IPA).114 As is the case with CETA, none of those agreements impose a direct obligation on foreign investors, however, the EU-Vietnam Investment Protection Agreement clarifies the notions of ‘ownership’ and ‘control’ as the required link connecting a foreign investment and a foreign investor. Ownership according to the wording of Article 1.2 (c) (i) the EU-Vietnam IPA requires possession of “more than 50 per cent of the equity interest”; control over investment under Article 1.2 (c) (ii) of the EU-Vietnam IPA presupposes “the power to name a majority of its directors or otherwise to legally direct its actions”.115 Article 1.6 (b) of the India-Belarus BIT requires “substantial business activity” for a legal entity to meet the definition of an ‘investor’. As a guideline for further adjudication upon this criterion, the India-Belarus provision further clarifies that “the concept of substantial business activity shall require an overall examination of all the circumstances on a case-by-case basis”.116 These clarifications have arisen as a response to contracting States reflecting on developments in case law and have been implemented to allow arbitral tribunals to take into account more factors connected to investment activities. More specifically,

112

Article 8.1, The Comprehensive and Economic Trade Agreement, 30 October 2016, http://ec. europa.eu/trade/policy/in-focus/ceta/ceta-chapter-by-chapter/. 113 Investment Protection Agreement between the European Union and the Socialist Republic of Vietnam, currently in the signing process, http://trade.ec.europa.eu/doclib/press/index.cfm? id¼1437. [EU-Vietnam IPA]. 114 Investment Protection Agreement between the European Union and the Republic of Singapore, 19 October 2018, http://trade.ec.europa.eu/doclib/press/index.cfm?id¼961. [EU – Singapore IPA]. It could be briefly mentioned that integration of Salini criterion into the definition of ‘investment’ also occur in another non- EU IIAs. See, for instance Article 1.4. Treaty between the Republic of Belarus and the Republic of Indian on Investments, 24 September 2018, https:// investmentpolicyhubold.unctad.org/Download/TreatyFile/5724. [India—Belarus IIA]. 115 EU-Vietnam IPA. 116 Article 1.6. (c), India—Belarus IIA.

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the integration of the Salini criterion in the definition of ‘investment’ allows arbitral tribunals to adjudicate whether an investment’s operation by foreign investors satisfies the required characteristics, if not, the jurisdiction of the tribunal cannot be established. Moreover, the step to directly integrate the Salini criterion into the wording of an investment agreement unites the criterion elaborated by case law on ‘investment’ under Article 25 of the ICSID and those imposed by the investment agreement. It may simplify adjudication and allow a wider scope of allegations on foreign investors’ misconduct to be raised and accorded legal significance.

6.4.2.2.2

Imposition of Direct Obligations

Some recent IIAs have already concluded on the basis of the Indian Model BIT, which provides for the imposition of direct obligations on foreign investors, for example, the investment treaty between the Republic of Belarus and the Republic of India signed in 2018 is identical to the Draft of the Indian Model BIT of December 2015, which was discussed previously.117 Thus, the Belarus-Indian treaty entails a chapter on investors’ obligations. This chapter includes elements similar to the Draft of the Indian Model BIT’s Article 11 regulating investors’ compliance with law and Article 12 on corporate social responsibility. Compared to traditional IIAs, the compliance with national law is extended to all phases of investment activities, such as “the establishment, acquisition, management, operation and disposition of investments”.118 This wording does not pose the time limitations typical for current practice in the field and that limit matters of illegality to just an investment’s establishment. Furthermore, Article 11 (ii) introduces obligations not to engage in anything that may be deemed as corruption. In view of the discussion above on the observed difficulties in adjudicating allegations of corruption in international investment arbitration, the chosen formulation of the Indian Model BIT deserves a particular mention: Investors and their investments shall not, either prior to or after the establishment of an investment, offer, promise, or give any undue pecuniary advantage, gratification or gift whatsoever, whether directly or indirectly, to a public servant or official of a Party as an inducement or reward for doing or forbearing to do any official act or obtain or maintain other improper advantage not shall be complicit in inciting, aiding, or conspiring to commit such acts.119

In the absence of an established definition of corruption in international law, this precise wording seems to facilitate the adjudicating of the facts that support the allegations of corruption. In addition to all of this, Article 11 (iii) requires compliance with the tax legislation of the host State and an obligation to ensure “timely payment of [the] 117

See: India—Belarus IIA. Article 11 (i), India—Belarus IIA. 119 Article 11 (ii), India—Belarus IIA. 118

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tax liabilities” while Article 11 (iv) imposes an obligation to provide the host State with any required information on investment. Article 11 (iv) is formulated as a positive obligation of foreign investors’, namely “an investor shall provide with such information as the Parties may require ”. Interestingly, the majority of obligations imposed are done so for both investors and their investments, usually being formulated as “investors and their investments shall ”. The next article in the Belarus-India agreement, Article 12, states that: Investors and their enterprises operating within its territory of each Party shall endeavour to voluntarily incorporate internationally recognized standards of corporate social responsibility in their practices and internal policies, such as statements of principle that have been endorsed or are supposed by the Parties. These principles may address issues such as labour, the environment, human rights, community relations and anti-corruption.120

It is difficult to anticipate how this provision will be interpreted and applied in practice and what legal consequences will ensue for investors who are not following the request for ‘voluntary’ compliance with standards of corporate social responsibility. As such, the obligations imposed on foreign investors and their investments as provided in this treaty seems to be relevant for the merits. Indeed, the treaty seems to carefully distinguish between the obligations of foreign investors and their investments from jurisdictional requirements imposed upon foreign investors’ conduct. In that vein, an arbitration clause, as stipulated in Article 13 (3) of the treaty states that: An investor may not submit to arbitration under this Chapter if the investment has been made through fraudulent misrepresentation, concealment, corruption, money laundering or conduct amounting to the abuse of process or similar illegal mechanisms.121

Interestingly, the provision cited above does not include a requirement on compliance with host State law that could eliminate the standing of foreign investors. However, the definition of ‘investment’ as provided in Article 1.4 of the Belarus—India IIA122 does contain an ‘in accordance with host State’ clause, which, in view of established arbitral practice, is seen as a jurisdictional requirement. This issue raises questions and it seems advisable that the drafters of the Model BIT should have clarified this point: Is general compliance with host State law at the time of an investment’s establishment a matter for the merits or of jurisdiction? If further clarification from the contracting States is not forthcoming, this matter will need clarification by arbitral tribunals and may lead to conflicting interpretations. However, the strategy of the Indian draft to provide for substantive obligations on foreign investors relevant for the merits of a case and to separately cite grounds that eliminate tribunals’ jurisdiction is felicitous. It will be particularly interesting to observe the developments stemming from the EU’s stated desire to “continue to work with India towards comprehensive and

120

Article 12, India—Belarus IIA. Article 13 (3), India—Belarus IIA. 122 The provision is identical to Article 1.4 of the Model Indian BIT. 121

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233

balanced agreements on trade and investment”.123 Will the Indian approach influence and possibly complement the EU’s approach as discussed above? The developments observed in the Republic of India are not the only evidence of attempts to mould the normative constructions of international investment law to function in a more balanced and responsible manner. Recently concluded IIAs by Brazil contain innovative regulations that take international investment law involving that country in a more balanced and responsible direction by imposing direct foreign investors’ obligations to comply with host State law at all stages of investment activity,124 anti-corruption obligations125 as well as provisions on the social responsibilities of foreign investors.126 Literature reports that the newly concluded Nigeria-Morocco IIA “imposes a wide range of obligations [on] investors relating, for example, to the protection of human rights and the environment and [with] respect to corporate social responsibility standards”.127 However, current practice reveals that the imposition of direct obligations on foreign investors remains the exception rather than the rule in international investment law. There are also examples where there has been an imposition of obligations on contracting States to engender more responsible investments. For example, the Norwegian Draft BIT provides an inter-state obligation “to encourage investors to conduct their investment activities in compliance with the OECD Guidelines for Multinational Enterprises and to participate in the United Nation Global Compact”.128 Similar inter-state obligations have also been incorporated, for instance, into the Canada-Columbia FTA,129 as well as other IIAs.130 The conduct of foreign investors is also regulated in Article 72 of the UK—CARIFORUM States Economic

European Commission, ‘EU Shapes Its Ambitious Strategy on India’ (press release, 20 November 2018), http://europa.eu/rapid/press-release_IP-18-6481_en.htm. 124 Article 14 (a), Cooperation and Investment Facilitation Agreement Between the Federative Republic of Brazil and the Co-operative Republic of Guyana (13 December 2019), https:// investmentpolicyhub.unctad.org/Download/TreatyFile/5763n/ [Brazil – Guyana IFA]; Article 14 (a), Corporation and Facilitation Investment Agreement between the Federative Republic of Brazil and the Republic of Suriname (2 May 2018), https://investmentpolicyhub.unctad.org/Down load/TreatyFile/5715 [Brazil—Suriname IFA]. 125 Article 14 (b), Brazil—Guyana IFA; Article 14 (b), Brazil—Suriname IFA. 126 Article 14 Agreement between the Federative Republic of Brazil and the Federal Democratic Republic of Ethiopia on Investment Cooperation and Facilitation, 11 April 2018, https:// investmentpolicyhub.unctad.org/Download/TreatyFile/5717; Article 15, Brazil—Guyana IFA; Article 15, Brazil—Suriname IFA. 127 Papaefstratiou et al. (2018), http://arbitrationblog.kluwerarbitration.com/2018/08/17/ africanisation-rule-making-international-investment-arbitration/. 128 Article 31, Draft Model BIT of the Kingdom of Norway (2015), https://www.regjeringen.no/ contentassets/e47326b61f424d4c9c3d470896492623/draft-model-agreement-english.pdf. 129 Article 816, Free Trade Agreement between the Republic of Columbia and Canada, 21 November 2008, https://international.gc.ca/trade-commerce/trade-agreements-accordscommerciaux/agr-acc/colombia-colombie/fta-ale/08.aspx?lang¼eng. 130 See: Agreement between the Argentina Republic and Japan on the Promotion and Protection of Investment, 1 December 2018, https://investmentpolicyhub.unctad.org/Download/TreatyFile/5799. 123

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Partnership Agreement signed in March 2019. The provision under the heading of ‘Behaviour of Investors’ provides for a list of required actions and omissions on the part of foreign investors and for an inter-state obligation to adopts “measures as may be necessary, inter alia, through domestic legislation”131 to ensure foreign investors’ compliance.

6.4.2.2.3

Interplay with Soft-Law

Some IIAs points to the soft-law instruments and either require or invite investors to comply or, alternatively, impose on the contracting States an obligation to ensure foreign investors compliance. These normative constructions pose a question on the transformation of soft-law into hard law, namely, does the imposition of a direct obligation on foreign investors to comply with standards and codes of conduct transform the nature of those documents and lift them to the level of a binding treaty? The answer to this question certainly depends on the precise formulation. For example, a formulation that States “investors and their enterprises operating within the territory of each Party shall endeavor to voluntary incorporate internationally recognized standards of corporate social responsibility in their practice and internal policies”132 does not seem on a par with “investors and their investment shall endeavour to comply with the following voluntary principles and standards for a responsible business conduct”,133 followed by the list of actions and omissions. It would be very interesting to observe how arbitral tribunals will approach these formulations and what legal consequences will follow for foreign investors non-fulfilment of the ‘endeavour’ to comply with the well-established standards and principles of social corporate responsibility.

6.4.3

Possible Fragmentation of International Investment Law

The term ‘fragmentation’ in international investment law is closely associated with the broader discussion on the fragmentation of international law, where both the discussion and the process are ongoing.134 Generally, the phrase ‘fragmentation of

131

Article 72, Economic Partnership Agreement between CARIFORUM States, of the one part, and the United Kingdom of Great Britain and Northern Ireland, of the other part, 22 March 2019, https:// investmentpolicyhubold.unctad.org/Download/TreatyFile/5822. 132 Article 12, Belarus—India IIA. 133 Article 15, Brazil—Guyana IFA. 134 See: Report of the Study Group of the International Law Commission to the Fifty-Eighth Session, Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law, UN Doc. A/CN.4/L.682, 13 April 2006.

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law’ refers to multi-dimensional developments going in different directions within one field or area of law. The opposite of fragmentation is cohesion.135 Thus far, even though international investment law has various risks factors allowing fragmentation—its bilateral nature, legally independent arbitral tribunals adjudicating upon each case, the absence of a centralised institution overseeing systematisation and analysis of practice, no doctrine of precedents—practice in the field generally, and more specifically when addressing foreign investor misconduct, can be characterised as remarkably coherent. One key factor for this seems to be the similarities in wording and systematic reproduction of the initially emerged IIAs around the globe.136 The said similarities were, as discussed in Chap. 2, inserted due to the common rationale underlying the legal constructions comprising current international investment law and the drafters suffering from a lack of contrary experience at the time. Nevertheless, observation of the ongoing developments in the renegotiations of IIAs and those newly concluded indicates that States’ adopting a modified approach towards foreign investors’ and how to deal with their misconduct may become a divisive moment in international investment law’s history. Indeed, the reaction of States and other actors to the still-emerging challenges of addressing foreign investor misconduct has itself become somewhat fragmented. Some approach the matter progressively and are ready to impose direct international obligations on foreign investors using their IIAs,137 others persist with the traditional approach of international investment law as predominantly relying on the ultimately and normatively one-sided protection of foreign investors.138 Thus, further developments within the field of international investment law should not be expected to be as coherent as they were in the law’s early period. As such, a degree of fragmentation within international investment law should probably be an expected phenomenon within a bilateral system that has sufficiently matured to legitimately pose questions on its further development, especially bearing in mind that the field is attempting to address a growing legitimately crisis. It is also more than understandable that States may have different stances in response to the challenges that have been crystallised via practice. What is vitally important is that

135

See: Webb (2013), pp. 4–6. As already referred to above, an argument of sort of ‘multilateralisation’ of bilateral international investment law was developed and elaborated by Schill (2009). The analysis undertaken here of arbitral practice with the focus on foreign investor misconduct may equally serve as an additional argument thereof. 137 See the examples provided above. 138 See the most recently signed IIAs, which retain largely traditional versions of international standards for foreign investors’ protection, for example: Agreement between the Government of the Republic of Kazakhstan and the Government of the Republic of Singapore on the Promotion and Mutual Protection of Investments, 21 November 2018, https://investmentpolicyhub.unctad.org/ Download/TreatyFile/5700; Accord Rélatif à la Promotion et la Protection Réciproques des Investissements entre Le Governement de la République du Mali et le Governement des Emirates Unis, 6 March 2018, https://investmentpolicyhub.unctad.org/Download/TreatyFile/5770. 136

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the States earnestly consider these challenges and devise well-considered responses. However, predicting the future is at best a fraught task and a thankless one unless the picture painted is a rosy, as such it is best to stop here to let the outcomes unfold as they will before scientifically analysing them at some future point.

6.5

Interim Conclusion

Following the analysis of the achievements and the failures of current practice when dealing with allegations of foreign investor misconduct in Chap. 5, this chapter has presented some realisable goals to develop, transform and progress international investment law with respect to the misconduct of foreign investors. It was argued that based upon the analysis of what has transpired in the field it would be both advisable and desirable for the system to insert legal mechanisms that will allow adjudication upon the legality of all investment activities rather than only that which occurs during the establishment of investments, as is currently the case. In addition, practice regarding foreign investor misconduct needs to adopt a more balanced approach to allow tribunals to weigh and consider both the claims of foreign investors and the counterclaims of host States arising from alleged foreign investors misconduct. Further to this, chapter has elaborated on possible means to achieve the set goals. A wide range of options—from soft law mechanisms to the insertion of direct legal obligations upon foreign investors under international law—are feasible and as such have been explicitly suggested. Each of the options unlocks different potential to contribute to further development or transformation of current practice in dealing with foreign investor misconduct. However, there are two check-boxes that must be ticked here: The first involves the existence of legal possibilities that allow development and the second check-box require a political choice to be made to opt for one of the available legal possibilities. The current pause in development we are witnessing is caused by the latter and can only be overcome by the contracting States themselves. The option that bears the greatest potential to transform current practice the most is the imposition of directly enforceable legal obligations on foreign investors. However, the implementation of this option remains a matter of policy choice by the contracting States. A consideration of current practice reveals a certain degree of reluctance to pursue this option as only a few progressive IIAs have included such direct obligations. Nevertheless, several other options still remain which have the potential to achieve at least moderate progress with regard to dealing with allegations of foreign investor misconduct. Thus, notwithstanding some understandable hesitation in making determined steps to elevate the matter of foreign investor misconduct to a new, normative level, it is certain that a change concerning adjudication on foreign investor misconduct is inevitable and time will reveal both the detail and efficaciousness of that change. With this perspective in mind, the following section considers the task that remains for this.

Chapter 7

Conclusion

It is difficult to conclude and move beyond a piece that has accompanied its author for quite a considerable period of time. The present author found her mind recalling the words of Pablo Picasso who once stated that “to finish it means to be through with it, to kill it, to rid it of its soul, to give it its final blow, the coup de grace for the painter as well as for the picture”. Nonetheless, one must inevitably bring to a close this investigation on normative regulations and the legal significance of foreign investor misconduct within the field of international investment law. The study undertaken has spanned the time from the emergence of the field to its most recent developments. The core element of the study has been the analysis of case law, i.e. how arbitral tribunals have developed practice in the matter of addressing host States’ allegations of foreign investor misconduct. The study revealed that international investment law has dealt extensively and matured considerably regarding this issue. In dealing with foreign investor misconduct arbitral tribunals have relied upon and substantially utilised both the explicit and inherent potential of the system’s legal constructions and flexibility that was initially provided by the drafters. Nevertheless, dealing with the various forms of foreign investor misconduct in an ever-changing modern world has become an increasingly problematic challenge for the field and its actors. Despite these difficulties and growing complexities, arbitral practice as described in chapter four can be characterised as largely coherent and significantly contributed to carrying international investment arbitration this far, but coherence of course can only do so much. It was claimed that extensive practice supported by a general willingness of arbitral tribunals to engage in elaborations on alleged foreign investor misconduct, rather than simply placing this aspect outside of the scope of arbitration, has opened the door to a new international role for foreign investors and the expectations imposed on them. This has occurred at a time when the whole field of international law has begun to embrace more sustainable and responsible development, including

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Kozyakova, Foreign Investor Misconduct in International Investment Law, European Yearbook of International Economic Law 11, https://doi.org/10.1007/978-3-030-54855-1_7

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in the realms of social corporate responsibility to preserve the environment and respect for human rights as well as social and labour standards. This period of change has eroded the intransigent view that foreign investors could only be considered as objects of protection, now there is increasing awareness of the need to include them as equal parties in the investor-state relationship, assigning them direct international obligations and making them bear negative legal consequences for breaching these obligations. Such a transformation poses a legitimate question for the efficaciousness and sufficiency of existent legal constructions to cope with the changed reality of foreign investors position. It has been argued that one of the main reasons for the crisis within the field of international investment law is the insufficiency and inappropriateness of existent legal constructions to allow the field to effectively tackle the newly arising challenges and expectations of the involved actors. Thus, the present research has recommended that a path out of the crisis is the identification and subsequent elimination of obstacles that prevent international investment law from continuing its evolutionary development. With respect to the legal significance of foreign investor misconduct, an obstacle was identified in the exhaustion of inserted potential of the field to further adequately respond to the modern challenges arising from this matter. Indeed, as revealed in this study, the majority of current IIAs are at best modestly equipped with legal tools to accord either alleged or proven foreign investor misconduct an appropriate legal response. The outcomes of current cases are not adequately efficient, satisfactory and balanced. To solve the problem and to allow the field the opportunity for further sustainable development in the future requires normative transformation. Such transformation may only be successfully undertaken after profound and wellconsidered elaboration on the overall motivation for following this path and the anticipated results of making such changes. In this respect, only States are in a position to meaningfully overhaul the normative framework as arbitral tribunals have seemingly already reached the limits of what they can legitimately do with the system’s potential regarding foreign investor misconduct. The developments currently occurring within the field demonstrate that some States are willing to engage in such a transformative process and to make foreign investors, as required by the needs of the day, more responsible actors in the field. Others States have proven reticent, clinging to the traditional and now largely outdated vision of international investment law—to almost exclusively provide broad and comprehensive protection only to foreign investors. As the plethora of various actors examine and analyse what has transpired over time in international investment law, their diverse range of responses may give rise to greater fragmentation in the future, however, this represents less risk than that posed by inaction. Conversely, one could argue that fragmentation is of little concern in a field of law that is predominantly bilateral in nature and which may actually thrive on a process of independent choices and diverse scenarios that promote further development. It seems important to realise that questions on future developments, and possibly even a more profound transformation within the field of international

7 Conclusion

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investment law, have arisen from the passage of time and the wealth of experience gained by the interactions of the multitude of actors involved. The extent and nature of these developments or transformation will likewise only be revealed with the passage of time and will, in all likelihood, be as diverse and individual as the actors involved. The primary danger lies in actors not being sufficiently aware of the choices to be made and the long-term consequences that will flow from such choices.

Chapter 8

Main Thesis Elaborated and Suggested in This Study

1. Prior to the currently operational system of international investment law, which began to normatively emerge in the second half of the twentieth century, the field of international law generally had not dealt extensively with matters of individuals’ misconduct. 2. Normative constructions in the emergent field of international investment law were only very modestly equipped to regulate foreign investor misconduct. However, since the field was not designed as a complete and self-contained regime, it has inherent potential that could be realised to better govern the matter. Nevertheless, confronting allegations of foreign investor misconduct has remained challenging to legitimately deal with in the field. 3. Throughout two decades of practice, the field of international investment law has developed a relatively coherent and somewhat adequate, but certainly not ideal, response when addressing allegations of foreign investor misconduct. Arbitral tribunals have demonstrated a willingness to engage in elaborations on the matter and to rely upon a few areas of explicit and inherent potential within the system to address the issue and to accord foreign investor misconduct appropriate legal significance. 4. The developments in case law that occurred within international investment law have altered the expectations placed upon foreign investors and consequently their perceived role within the system. Even so, recent allegations of foreign investor misconduct relating to internationally recognised human rights as well as environmental and labour standards, cannot be dealt with in an adequately efficient manner under the constraints of the given normative constructions formed from the traditional approach to the role of foreign investors in international law. Hence, the system needs to make an evolutionary leap forward to be able to yield more efficient and appropriate adjudications on claims on foreign investors misconduct. 5. States, as the creators of the IIAs, are left with a stark choice. Either, adhere to the traditional view and concepts, although that seems ever-increasingly to have © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Kozyakova, Foreign Investor Misconduct in International Investment Law, European Yearbook of International Economic Law 11, https://doi.org/10.1007/978-3-030-54855-1_8

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exhausted its potential to remain relevant, or choose to transform international investment law in a manner that ensures the necessary responsibilities are placed on the new types of investors and investments that fill the system in the modern era. The latter option is argued here to be the only viable path offering meaningful crisis management. 6. Recent practice demonstrates that there is a huge amount of activity in the field on the part of both tribunals and contracting States. Some examples are emerging now of States starting to impose direct legal obligations upon foreign investors in recently concluded IIAs. However, to a large extent States remain reticent to undertake wholesale reform of the normative framework to impose greater responsibility on foreign investors to address the growing concerns about such investors’ misconduct.

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Venezuela Holding, B.V. Mobil Cerro Negro Holding, Ltd., Mobil Venezolana de Petroleos Holdings, Inc., Mobil Cerro Negro, Ltd. and Mobil Venezolana de Petroleos, Inc. v. The Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award, 9 October 2014 Vestey Group Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/06/4, Award, 15 April 2016 Waguih Elie George Siag and Clorinda Vecchi v. The Arab Republic of Egypt, ICSID Case No. ARB/05/15, Decision on Jurisdiction, 11 April 2007 Waste Management Inc. v. United Mexican States [II], ICSID Case No. ARB (AF)/00/3, Decision on Mexico’s Preliminary Objection concerning the Previous Proceedings, 26 June 2002 Wena Hotels Limited v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000 Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Decision on the Annulment Proceeding, 5 February 2002 White Industries Australia Limited v. The Republic of India, Final Award, 30 November 2011 World Duty Free Company Limited v. The Republic of Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006 X and Y v. The Republic of Cyprus, SCC No. V 2014/169, Final Award, 21 February 2017 Yaung Chi Oo Trading Pte. Ltd. v. Government of the Union of Myanmar, ASEAN I.D. Case No. ARB/01/1, Award, 31 March 2003 Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009 Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award, 14 July 2014

Table of Legislation International Conventions Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, 17 December 1997, 37 ILM 1 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 6 October 1958, 330 UNTS 38 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 18 March 1965, 575 UNTS 159 Energy Charter Treaty, 16 April 1998, 2080 UNTS 100 International Covenant on Civil and Political Rights, 16 December 1966, 999 UNTS 171 North American Free Trade Agreement, 17 December 1992, 32 ILM 289 Rome Statute of the International Criminal Court, 17 July 1998, 2187 UNTS 90 United Nations Convention Against Corruption, 31 October 2003, 2349 UNTS 41 Vienna Convention on the Law of Treaties, 23 May 1969, 1155 UNTS 331

Procedural Rules ICSID Additional Facility Arbitration Rules of 10 April 2006, http://icsidfiles.worldbank.org/icsid/ icsid/staticfiles/facility/partD-chap07.htm#a41

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251

ICSID Rules of Procedure for Arbitration Proceedings (Arbitration Rules) of 2006, http://icsidfiles. worldbank.org/icsid/icsid/staticfiles/basicdoc/partf.htm International Court of Arbitration, Arbitration Rules of 2017, https://cdn.iccwbo.org/content/ uploads/sites/3/2017/01/ICC-2017-Arbitration-and-2014-Mediation-Rules-english-version.pdf. pdf UNCITRAL Arbitration Rules of 2013, https://www.uncitral.org/pdf/english/texts/arbitration/arbrules-2013/UNCITRAL-Arbitration-Rules-2013-e.pdf UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration of 1 April 2014, http://www.uncitral.org/pdf/english/texts/arbitration/rules-on-transparency/Rules-on-Transpar ency-E.pdf

Bilateral Investment Agreements (Listed in Chronological Order) Treaty for Promotion and Protection of Investments between Pakistan and the Federal Republic of Germany, 25 November 1959 Treaty between the Federal Republic of Germany and Sierra Leone concerning the Encouragement and Reciprocal Protection of Investments, 8 April 1965 Agreement on Economic Cooperation between the Netherlands and Indonesia, 7 July 1968 Treaty between the Federal Republic of Germany and the Republic of Singapore Concerning the Promotion and Reciprocal Protection of Investments, 3 October 1973 Agreement between the Federal Republic of Germany and the People’s Republic of Bangladesh concerning the Promotion and Protection of Investments, 6 May 1981 Agreement on Promotion, Protection and Guarantee on Investments Among Member States of the Organization of the Islamic Conference, 5 June 1981 Bilateral Investment Treaty between the United States of America and the Democratic Republic of Congo, 3 August 1984 Bilateral Investment Treaty between the United States of America and the Arab Republic of Egypt, 11 March 1986 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China, 15 Mai 1986 Accord entre le Gouvernement du Royaume du Maroc et le Gouvernement de la République Italienne Relatif à la Promotion et la Protection Réciproques des Investissements, 18 July 1990 Agreement between the Czech and Slovak Federal Republic and the Swiss Confederation on the Promotion and Reciprocal Protection of Investments, 5 October 1990 Treaty between the Government of the United States of America and the Government of the People’s Republic of the Congo Concerning the Reciprocal Encouragement and Protection of Investment, 12 February 1990 Vertrag zwischen der Bundesrepublik Deutschland und der Argentinischen Republik über die Förderung und den gegenseitigen Schutz von Kapitalanlagen, 9 April 1991 Agreement between the Government of Canada and the Government of the Republic of Argentina for the Promotion and Protection of Investment, 5 November 1991 Treaty between the United States of America and the Republic of Kazakhstan concerning the Encouragement and Reciprocal Protection of Investment, 19 May 1992 Agreement between the Government of Ukraine and the Government of the Kingdom of Denmark concerning the Promotion and Reciprocal Protection of Investments, 23 October 1992 Agreement between the Government of the Kingdom of Denmark and the Government of the Republic of Argentina concerning the Promotion and Reciprocal Protection of Investments, 6 November 1992

252

References

Agreement between the Government of the Republic of Finland and the Government of the Republic of Argentine on the Promotion and Reciprocal Protection of Investments, 5 November 1993 Agreement between the Government of the Republic of Lithuania and the Government of Ukraine for the promotion and reciprocal protection of investments, 8 February 1994 Agreement between the Government of the Italian Republic and the Government of the Republic of Kazakhstan on the Promotion and Protection of Investments, 22 September 1994 Agreement between the Government of the Republic of Croatia and the Government of the Argentine Republic of the Promotion and Reciprocal Protection of Investments, 2 December 1994 Agreement between the Kingdom of Spain and the Republic of Lithuania for the promotion and reciprocal protection of investments, 14 February 1995 Agreement between the Government of Australia and the Government of the Argentine Republic on the Promotion and Protection of Investments, 23 August 1995 Agreement between the Republic of Slovenia and the Swiss Confederation on the Promotion and Reciprocal Protection of Investments, 9 November 1995 Agreement between the Republic of Croatia and the Kingdom of Spain on the Promotion and Reciprocal Protection of Investments, 21 July 1997 Agreement between the Government of the Republic of Croatia and the Government of Canada for the Promotion and Protection of Investments, 3 February 1997 Agreement between the Government of Canada and the Government of the Republic of Costa Rica for the Promotion and Protection of Investments, 18 March 1998 Treaty between the Government of the United States of America and the Government of the Republic of Bolivia Concerning the Encouragement and Reciprocal Protection of Investment, 17 April 1998 Treaty between the Federal Republic of Germany and Antigua and Barbuda concerning Encouragement and Reciprocal Protection of Investments, 5 November 1998 Agreement between the Government of the Republic of France and the Government of the United Mexican States on the Reciprocal Promotion and Protection of Investments, 12 November 1998 Accord entre le Gouvernement de la République Française et le Gouvernement de la République Dominicaine sur l’Encouragement et la Protection Réciproques des Investissements, 14 January 1999 Agreement Between the Government of the Federal Democratic Republic of Ethiopia and the Government of the Russian Federation on the Promotion and Reciprocal Protection of Investments, 10 February 2000 Agreement on Encouragement and Reciprocal Protection of Investments between the Republic of Kazakhstan and the Kingdom of the Netherlands, 27 November 2002 Agreement between the Kingdom of Spain and the Republic of Albania on the Promotion and Reciprocal Protection of Investments, 5 June 2003 Agreement between the Kingdom of Spain and the Republic of Albania of the Promotion and Reciprocal Protection of Investments, 6 June 2003 Free Trade Agreement between the Government of the United States of America and the Government of the Republic of Chile, 17 June 2003 Agreement between Bosnia and Herzegovina and the Swiss Confederation on the Promotion and Reciprocal Protection of Investments, 5 September 2003 Treaty between the Federal Republic of Germany and the Islamic Republic of Afghanistan concerning the Encouragement and Reciprocal Protection of Investments, 20 April 2005 Free Trade Agreement between the Republic of Columbia and Canada, 21 November 2008 Agreement for the Promotion and Reciprocal Protection of Investments between the Government of the Republic of Austria and the Government of Kazakhstan, 12 January 2010 Comprehensive and Economic Trade Agreement between the EU and Canada, 30 October 2016 Accord Rélatif à la Promotion et la Protection Réciproques des Investissements entre Le Gouvernement de la République du Mali et le Gouvernement des Emirates Unis, 6 Mars 2018

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253

Agreement between the Federative Republic of Brazil and the Federal Democratic Republic of Ethiopia on Investment Cooperation and Facilitation, 11 April 2018 Corporation and Facilitation Investment Agreement between the Federative Republic of Brazil and the Republic of Suriname, 2 May 2018 Investment Protection Agreement Between the European Union and the Socialist Republic of Viet Nam (currently in the signing process), draft of August 2018 Treaty between the Republic of Belarus and the Republic of Indian on Investments, 24 September 2018 Investment Protection Agreement Between the European Union and the Republic of Singapore, 19 October 2018 Agreement between the Government of the Republic of Kazakhstan and the Government of the Republic of Singapore on the Promotion and Mutual Protection of Investments, 21 November 2018 Agreement between Japan and the Hashemite Kingdom of Jordan for the Protection and Promotion of Investment, 27 November 2018 Agreement between the Argentina Republic and Japan on the Promotion and Protection of Investment, 1 December 2018 Cooperation and Investment Facilitation Agreement Between the Federative Republic of Brazil and the Co-operative Republic of Guyana, 13 December 2018 Economic Partnership Agreement between CARIFORUM States, of the one part, and the United Kingdom of Great Britain and Northern Ireland, of the other part, 22 March 2019

Historical Treaties and Historical Drafts Conventions Abs-Shawcross Draft Convention on Investments Abroad, April 1959 Havana Charter for an International Trade Organization, 24 March 1948 Treaty of Amity and Commerce between the United States and France, 6 February 1778 Treaty of Commerce and Navigation between the United States and Belgium, 10 November 1845 Treaty of Commerce and Navigation between the United States and the Ottoman Empire, 25 February 1862 Treaty of Friendship, Commerce and Consular Rights between the United States and Germany, 8 December 1923 Treaty of Friendship, Commerce and Navigation between the United States of America and Ireland, 21 January 1950 Treaty of Friendship, Commerce and Navigation between the United States of America and Italy, 2 February 1948 Treaty of Friendship, Commerce and Navigation between the United States of America and the Republic of China, 4 November 1944 Treaty of Friendship, Commerce and Navigation between the United States of America and the Republic of China, 4 November 1946 Treaty of Peace, Friendship, Navigation and Commerce between the United States and Venezuela, 31 May 1836 Treaty on Amity and Commerce between the United States and the Netherlands, 6 September 1782

254

References

Historical Documents Commentary to the Draft Convention on Responsibility of States for damages done in their territory to the person or property of foreigners, 23 American Journal of International Law (1929), Special Supplement, 140 – 218 Draft Convention on Responsibility of States for Damages Done in Their Territory to the Person or Property of Foreigners, prepared in anticipation of the first conference on the codification of international law in The Hague in 1930, 23 American Journal of International Law (1929), Special Supplement, 133 – 135 Draft Convention Relating to the Legal Status in the Territory of the Contracting States of the Property of their Respective Nationals, in International Law Association Report of the ThirtySeventh Conference held in Oxford in 1932, (The Eastern Press, 1933), 59-62 Draft Statutes of the Arbitral Tribunal for Foreign Investment, in International Law Association Report of the Forty-Ninth Conference held in Hamburg in 1960 (Aberystwyth, 1961), 225-234 GA Res. of the League of Nations on Progressive Codification of International Law (22 September 1924), Official Journal, Special Supplement, No. 21, p. 10 International Centre for the Settlement of Investment Disputes, First Annual Report 1966/1967, http://documents.worldbank.org/curated/en/819581468765564873/pdf/34726.pdf International Code of Fair Treatment for Foreign Investment, 129 Brochure of the International Chamber of Commerce (Lecraw Press, 1949); reprinted in UNCTAD International Investment Instruments: A Compendium, UNCTAD/DTCI/30(Vol.III), 1 June 1996, 273-278 Report of the International Committee on Nationalization, in International Law Association Report of the Forty-Eighth Conference held in New York in 1958 (Aberystwyth, 1959), 130 – 183 Report of the Protection of Private Property Committee, in: International Law Association Report of the Thirty-Fourth Conference held in Vienna in 1926 (Sweet & Maxwell, 1927), 227 – 276 Report of the Protection of Private Property Committee, in International Law Association Report of the Thirty-Sixth Conference held in New York in 1930 (Sweet & Maxwell, 1931), 301 – 362 Report of the Study Group of the International Law Commission to the Fifty-Eighth Session, Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law, UN Doc. A/CN.4/L.682, 13 April 2006 Report of the Working Party of the International Committee on Nationalization on Judicial Aspects of Nationalization and Foreign Property, in International Law Association Report of the FortyNinth Conference held in Hamburg in 1960 (Aberystwyth, 1961), 175 – 224

Model Bilateral Investment Treaties Austrian Model BIT (2008) Canadian Model BIT (2004) Canadian Model FIPA China Model BIT Colombian Model BIT (2009) Dutch Draft Model BIT (2018) France Model BIT (2006) German Model BIT (2008) Indian Draft Model BIT (2003) Indian Model BIT (2015) Norway Model BIT (2007) Norway Model BIT (2015) Pan-African Investment Code (2016) US Model BIT (2012)

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255

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