Investor – State Arbitration and Human Rights 9789004339002

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Introduction For many years, international investment law and international human rights law developed along distinct, separate paths. International investment treaties (referred to as “bits” or “investment treaties”) generally do not contain any provisions related to states’ international obligations to respect, protect and fulfil human rights. However, there is a growing interest in the analysis of intersections between these two fields of international law. The present book falls within the broad scope of the debate concerning the relationship between human rights and international investment law. It is intended to contribute to the analysis of the modalities within which human rights principles and standards may influence the conduct and outcome of investor – state arbitration based on bits (referred to as “investor – state arbitration,” “bit arbitration” or the “isds mechanism”). Human rights can have an impact on two aspects of international investment law: (i) the negotiation, drafting and creation of new treaties, as well as the amendment of existing treaties, and (ii) the resolution of existing disputes and disputes which may arise in the future on the basis of existing bits. The first aspect is subject to debate by virtue of the transfer of competence to conclude investment treaties from the eu Member States to the European Commission, as a result of the Treaty of Lisbon.1 However, the development of this framework is still too limited to allow for systemic conclusions. Therefore, this book focuses on the second aspect. It analyses the current state of the art – i.e. arbitral proceedings based on bits as they were drafted and which still remain binding.2 1 Following the entry into force of the Treaty of Lisbon, foreign direct investment is included in the list of matters within the common commercial policy, which falls within the exclusive competence of the European Union. See: art. 207 of the Treaty on the Functioning of the European Union and Regulation (eu) No. 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries (oj L 351, 20.12.2012, pp. 40–46). 2 Although it must be agreed that the treaty-making activities of states would be the most effective tool to implement human rights into international investment law: “The focus of discussion here is on the response of international investment tribunals to the challenges of human rights concerns rather than on proposals for new bilateral investment treaty (bit) language (though the latter certainly are the most effective means of reforming the system, if such reform is needed).” See: David Schneiderman, “On Suffering and Societal Constitutionalism: At the Border of International Investment Arbitration and Human Rights,” in: Tsvi Kahana, Anat Scolnicov, “Boundaries of State, Boundaries of Rights Human Rights, Private

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004339002_002

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Currently, there is a global web of investment treaties consisting of more than 3,000 bits.3 According to one statistical analysis, 147 states have signed bits containing an investor – state arbitration mechanism (or free trade agreements with an investment chapter, which are considered as “bits” for the purposes of this book). They involve all categories of states: high-, low- and middle- income.4 This shows that the practical significance of international investment law is global. Even if, in bits currently being negotiated, the parties decide to explicitly mention human rights concerns, this will not impact on existing treaties which will continue to bind their contracting states. In addition, even if states decide to terminate bits with immediate effect, the majority of “old” bits will produce effects for a determined period through so-called “survival” (or “zombie”) clauses.5 Moreover, the unilateral denunciation of bits may be possible only during certain periods of time.6 Therefore, the present analysis may impact on

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Actors, and Positive Obligations,” (Cambridge University Press 2016), available at: https:// ssrn.com/abstract=2710233 [accessed on 2 February 2017], p. 2. He then adds: “How well does investment law respond to claims articulated in non-investment terms, such as human rights? My conclusion is: not so well.” As of the end of 2014, it is reported that 3,271 bits were in force (including 2,926 bits and 345 “other iias”). See: unctad, “World Investment Report 2015” (United Nations 2015), p. 106, available at: http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf [accessed on 2 February 2017]. Zoe Phillips Williams, “Risky Business or Risky Politics: What Explains Investor-State Disputes?” (2014) 5:3 Investment Treaty News, available at: http://www.iisd.org/sites/default/ files/publications/iisd_itn_august_2014_en.pdf [accessed on 2 February 2017], p. 3 [Williams]. One example of such a clause is art. xiv of the Poland – Canada bit, which states as follows: “This agreement shall remain in force for a period of ten years. Thereafter this Agreement shall remain in force for an indefinite period unless either Contracting Party notifies in writing the other Contracting Party of its intention to terminate it. The notice of termination of this Agreement shall become effective one year after it has been received by the other Contracting Party. In respect of investments made prior to the date when the notice of termination of this Agreement becomes effective, the provisions of Articles i to xiii of this Agreement shall remain in force for a period of twenty years” [author’s emphasis]. The potential (in)effectiveness of such clauses is much more complex from the legal perspective if the contracting states decide to terminate a bit by mutual agreement. From the perspective of public international law, states are free to decide to do so, but the question remains as to whether investors could possibly still effectively initiate claims seeking to protect their “acquired” rights. For example art. 14 of the Bolivia – Netherlands bit states that, after an initial period of 10 years of being in force: “Unless notice of termination bas been given by either Contracting Party at least six months before the date of the expiry of its validity, the present Agreement shall be extended tacitly for periods of ten years, each Contracting Party reserving the right

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decisions to be taken by arbitral tribunals operating under the “old” bits for many years to come. In order to fully understand the background of the research undertaken in this book, one must be aware of the existing criticism of international investment law. The disregard of human rights within this branch of law and the related isds mechanism undermines their legitimacy in the eyes of public opinion. Moreover, as many bits allow foreign investors to compel host states to engage in binding arbitration, host states may “find it difficult to strengthen domestic social and environmental standards, including those related to human rights” without triggering bit claims.7 All of this contributes to growing public dissatisfaction with the system of international investment law. The Transatlantic Trade and Investment Partnership (referred to as the “ttip”) negotiated between the European Union and the United States represents a recent example in this context. The ttip is a free trade agreement with an investment chapter, therefore it is classified as a bit for the purposes of this book. The isds mechanism included in the draft ttip has given rise to criticism by numerous civil society groups. One can read for example that: “isds mechanisms give investors exclusive rights to sue states when democratic decisions – made by public institutions in the public interest – are considered to have negative impacts on their anticipated profits.”8 Other critical voices are that bit arbitration “is a tool for big business to make governments pay when they regulate,” that “corporate super-rights are an instrument to rein in democracy,” “the investor-state arbitration system is fundamentally flawed” and “the risks of being sued by big business are ever growing for governments.”9 The massive critique of the ttip is also partly

to terminate the Agreement upon notice of at least six months before the date of expiry of the current period of validity.” 7 Protect, Respect and Remedy: a Framework for Business and Human Rights: Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, (2008) un Doc A/HRC/8/5, para. 34. 8 “People, environment and democracy before profit and corporate rights,” Joint statement of European Civil Society groups working against the ttip threat (May 2014), available at: http://justinvestment.org/2014/05/people-environment-and-democracy-before-profit-and -corporate-rights/ [accessed on 2 February 2017]. 9 Corporate Europe Observatory, “Still not loving isds: 10 reasons to oppose investors’ super-rights in eu trade deals,” available at: http://corporateeurope.org/international-trade/ 2014/04/still-not-loving-isds-10-reasons-oppose-investors-super-rights-eu-trade [accessed on 2 February 2017].

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founded in a lack of transparency concerning the negotiation of this treaty, perceived as amounting to “secrecy.”10 Another example can be seen when one looks at a conference marking the 20th anniversary of the North American Free Trade Agreement (referred to as the “nafta”). Although the nafta is not a typical bit, being a free trade agreement signed between three states, its investment chapter contains provisions that are typical for bits concluded by the United States and Canada with other states. The celebrations of the anniversary, which took place on 28–31 January 2014, were accompanied by demonstrations led by numerous civil society organizations. They claimed that the nafta had caused “a rise in inequality, impoverishment of the vast majority of the population, loss of employment, job insecurity, environmental degradation, deterioration of social cohesion and increased violence” and led to “demand the supremacy of human rights over corporate privileges” by the society.11 Others consider the nafta to be “a powerful tool corporations can and will use to blackmail states out of implementing more socially and environmentally responsible policies.”12 The above examples shed light on the public understanding of the entire international investment law regime. Although these examples relate specifically to the ttip and the nafta, the criticism concerns the mechanism of investor – state arbitration which is present throughout the global net of bits. Many outsiders consider that “investment specialists tend to find investments more important than policy space and human rights” and even that the investor – state arbitration mechanism “is best understood as a transfer of sovereignty.”13 The isds mechanism is sometimes described as being used “by large multinational companies to sue governments acting in the public 10

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Olivier De Schutter, Kaitlin Y. Cordes, “Trading away human rights,” available at: http:// www.project-syndicate.org/commentary/olivier-de-schutter-and-kaitlin-y--cordes -demand-that-the-trans-pacific-partnership-s-terms-be-subject-to-a-human-rights -impact-assessment [accessed on 2 February 2017]. Network for Justice in Global Investment, “Joint Declaration: TriNational Multisectoral Forum – 20 YEARS OF NAFTA: ENOUGH FREE TRADE! NO TO THE TTP! (México d.f., 28–31 January 2014),” available at: http://justinvestment.org/2014/02/trinational -­multisectoral-forum-20-years-of-nafta-enough-free-trade-no-to-the-ttp-mexico-d-f-28-3 1-january-2014-joint-declaration/ [accessed on 2 February 2017]. Manuel Perez-Rocha, Stuart Trew, “nafta at 20: A Model for Corporate Rule,” http://fpif .org/nafta-20-model-corporate-rule/ [accessed on 2 February 2017]. Ante Wessels, “Investment tribunals over supreme courts,” available at: https://www .vrijschrift.org/serendipity/index.php?/archives/154-Investment-tribunals-above -supreme-courts.html [accessed on 2 February 2017]. His views can be considered as an example of the outsiders’ perception.

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i­nterest,” whilst arbitral tribunals are described as “unaccountable” and “not likely to assess issues of national interest when making decisions.”14 According to others, “decisions in these closed-door tribunals are made by three investment lawyers working on a for-profit basis with no obligation to balance the public interest with the profit-making interest of corporations.”15 Others consider that arbitral tribunals hearing disputes based on bits are “secretive panels of elite lawyers” with “the power to overrule the decisions of governments” which “rule on each case behind closed doors” and that the whole isds mechanism means that “countries that try to introduce laws protecting the environment or improve public health are increasingly facing legal challenges from big business fearful that its profits will be harmed.”16 The International Centre for Settlement of Investment Disputes (referred to as the “icsid”) is sometimes described as “a house for investor-state arbitration, the most powerful form of international adjudication in the world,” although it is at the same time recognized that “icsid is more transparent than the other houses for investor-state arbitration.”17 According to critical voices, it gives foreign investors “the right to circumvent domestic courts and challenge decisions of states for international investment tribunals if decisions may lead to lower profits than expected. These isds tribunals can review all decisions of the state, all decisions of governments, legislators and courts, including supreme courts and human rights courts. For-profit arbitrators decide the isds cases and can award unlimited damages. Multinationals can challenge reform of copyright and patent law, challenge privacy measures, challenge environmental and health policies.”18

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Oliver Wright, Nigel Morris, “British sovereignty ‘at risk’ from eu-us trade deal: uk in danger of surrendering judicial independence to multinational corporations, warn activists,” available at: http://www.independent.co.uk/news/uk/politics/british-sovereignty-at-risk-from -euus-trade-deal-uk-in-danger-of-surrendering-judicial-independence-to-multinational -corporations-warn-activists-9057318.html [accessed on 2 February 2017]. Thomas Mc Donagh, “Getting Action: Strangling Democracy. How the tpp Extends the Tentacles of Corporate Power,” available at: http://democracyctr.org/news/getting-action -strangling-democracy/ [accessed on 2 February 2017]. Clare Speak, “Court in a Trap,” available at: http://justinvestment.org/2014/01/court-in-a -trap/ [accessed on 2 February 2017]. Gus Van Harten, “Harper Moves to Give Up More Canadian Sovereignty,” available at: http://thetyee.ca/Opinion/2013/11/12/Harper-Gives-Up-Sovereignty/ [accessed on 2 February 2017]. Ante Wessels, “Investor-to-state dispute settlement is a rigged system,” available at: http:// acta.ffii.org/?p=2112 [accessed on 2 February 2017].

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One unctad publication highlights that “while almost all countries are parties to one or several international investment agreements (iias), many are dissatisfied with the current regime. Concerns relate mostly to the development dimension of iias, the balance of rights and obligations of investors and States, investor – State dispute settlement mechanism, and the systemic complexity of the iia regime.”19 Criticism of international investment law in its current shape is not expressed solely by civil society and non-governmental organizations. By way of example, one can refer to a public statement issued by a group of recognized academics, including van Harten, Muchlinski, Sornarajah, Koskenniemi and Choudhury.20 They shared the concern “for the harm done to the public welfare by the international investment regime, as currently structured, especially its hampering of the ability of governments to act for their people in response to the concerns of human development and environmental sustainability.”21 They recognized that “awards issued by international arbitrators against states have in numerous cases incorporated overly expansive interpretations of language in investment treaties. These interpretations have prioritized the protection of the property and economic interests of transnational corporations over the right to regulate of states and the right to self-determination of peoples. […] This has constituted a major reorientation of the balance between investor protection and public regulation in international law.”22 Steps undertaken by members of the Parliamentary Assembly of the ­Council of Europe (referred to as the “pa”) can serve as yet another example. They r­ esulted in two resolutions being adopted by the pa. In the first resolution the pa “stresses that isds has serious implications for human rights, the rule of law, democracy and national sovereignty, which the proposed Investment Court System (ics) is intended to address […].”23 In the second resolution, the pa described the new isds mechanism included in the Canada – eu Comprehensive Economic

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unctad, “iia Issues Note, Reform of the iia Regime: Four Paths of Action and a way Forward” (2014), available at: http://unctad.org/en/PublicationsLibrary/webdiaepcb2014d6 _en.pdf [accessed on 2 February 2017], p. 1 [unctad – Reform]. Public statement on the international investment regime dated on 31 August 2010, available at: http://www.osgoode.yorku.ca/public-statement-international-investment-regime -31-august-2010/ [accessed on 2 February 2017]. Ibid. Ibid. Resolution 2151 (2017) of the Parliamentary Assembly of the Council of Europe (27 January 2017), “Human rights compatibility of investor–State arbitration in international investment protection agreements,” para. 1.

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and Trade Agreement (referred to as the “ceta”) as “a new judicial system that allows investors to sue governments in arbitration courts for profits they might not make due to laws passed to protect the citizen – including protecting the environment, public health and rights at work.”24 The wording of the resolutions was not as strong as in some documents produced within the pa on this issue. For example, it contained statements such as the following: “[…] the same investor powers proposed for ics [Investment Court System as proposed in ceta – author’s note] have been used in its predecessor isds to undermine the public good – including undermining laws to protect the environment, public health and rights at work – when laws potentially reduce the profit of investors. Therefore, the ics would subjugate democracy, human rights and the rule of law on the false pretext of investor protection. ics represents a fundamental shift away from democracy in favour of transnational corporate power and should not be included in any transatlantic trade agreement, including ceta and ttip.”25 The current public perception of international investment law may be described by the following statement: “International investment agreements (iias) were designed to protect private actors from the risks inherent in investing in foreign states. However, critics argue that the tables have turned; due to the increasing and expansive use of investor-state arbitration, what was once risky business for investors has become “risky politics” for states.”26 In fact, dissatisfaction with bits led some states to leave the system altogether, by denouncing bits and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (referred to as the “icsid Convention”). Bolivia serves as a good example of this. Its new Constitution imposed a prohibition on referring disputes to any jurisdiction other than the national courts and imposed an obligation on the government to denunciate any bits which predated the Constitution and were contrary to the new Constitution. Accordingly, Bolivia denounced all bits to which it was a party.27 24 Resolution 2152 (2017) of the Parliamentary Assembly of the Council of Europe (27 January 2017), “‘New generation’ trade agreements and their implications for social rights, public health and sustainable development,” para. 5. 25 Report of the Committee on Social Affairs, Health and Sustainable Development of the Parliamentary Assembly of the Council of Europe (25 January 2017), doc. No. 14255, “Human rights compatibility of investor–State arbitration in international investment protection agreements,” para. 13. 26 Williams, supra note 4, p. 3. 27 Aldo Orellana López, “Bolivia denounces its Bilateral Investment Treaties and attempts to put an end to the Power of Corporations to sue the country in International Tribunals,”

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An ongoing debate exists over reform of the current investor – state arbitration system and how to guarantee a proper balance between the rights of states and the rights of investors.28 Various proposals are presented in order to change the system. The most visible examples are related to ideas of creating a wholly new, alternative system of investment protection, presented by various actors.29 The need for reform is proclaimed not only by academics, but also by some practitioners. For example Kahale said, during a conference held on 28 March 2014, that the system “is seriously flawed” and “it needs a complete overhaul,” even though he confirmed that this will not happen soon.30 He added that “there is a very large segment of the international

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pp. 5–7, available at: http://justinvestment.org/wp-content/uploads/2014/07/Bolivia -denounces-its-Bilateral-Investment-Treaties-and-attempts-to-put-an-end-to-the-Power -of-Corporations-to-sue-the-country-in-International-Tribunals1.pdf [accessed on 2 February 2017]. “Today’s questions are not about whether to reform international investment policymaking but how to do so.” See: unctad – Reform, supra note 19, p. 3. For example, in the context of ceta the contracting parties moved from the classical isds mechanism to the idea of permanent investment tribunals and “will work expeditiously towards the creation of the Multilateral Investment Court.” See: Joint Interpretative Instrument on the Comprehensive Economic and Trade Agreement (ceta) between Canada and the European Union and its Member States, Brussels (27 October 2016), doc No. 13541/16. See also for example: Working Group on Investment of the Americas, “A Call for the Building of an Alternative Legal Framework to the International Investment Treaties. Favoring the Public Interest while doing away with Transnational Corporate Impunity,” available at: http://justinvestment.org/wp-content/uploads/2014/05/A-Call -for-the-Building-of-an-Alternative-Legal-Framework-to-the-International-Investment -Treaties-May-2014.pdf [accessed on 2 February 2017] where on p. 3 it is expressly recognized: “The negative impacts from such agreements on human rights and on the environment are universally recognized not only by civil society but also by parliaments and governments.” Transcript from the Eight Annual Juris Investment Treaty Arbitration Conference held on 28 March 2014 in Washington, d.c. – keynote speech of George Kahale iii, p. 3, available at: http://www.curtis.com/siteFiles/Publications/8TH%20Annual%20Juris%20Investment %20Treaty%20Arbitration%20Conf.%20-%20March%2028%202014.pdf [accessed on 2 February 2017]. George Kahale iii is a partner in the international law firm Curtis MalletPrevost Colt & Mosle and has acted as lead counsel in several large international arbitration cases. This author’s discussions with one of the partners of the law firm, held in October 2013, revealed that the law firm’s approach to the isds mechanism is to represent only states, never investors. This leads to a specialization in arguments which can be presented by host states faced with investors’ claims and allows the firm to avoid any conflicts of interests.

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community, including States, international law scholars, and even students trying to make heads or tails out of these decisions, that believe otherwise. And if that’s the case, as it undoubtedly is, it calls into question the legitimacy of the entire system.”31 In the final part of his speech, Kahale concluded that he does not have a solution to the problems, but underlined that “the first step in solving a problem is always becoming aware of its existence.”32 Regardless of the outcome of the debate regarding possible reforms and the actions to be undertaken by states in this regard, any implications will materialize only over time. Meanwhile, however, the investor – state arbitration may continue to heavily influence the human rights of entire populations. It suffices to realize that this can sometimes involve hundreds of millions or even billions of us dollars in compensation. If a state, especially not wealthy one, is obliged to pay such an amount, this must have a negative consequence on its human rights policies and its ability to undertake measures aiming to meet its obligation to fulfil human rights. All of the above explains the topic of this book. Its main aim is to discuss and define the role of human rights in the course of investor – state arbitrations based on bits. As indicated above, the scope of the book is limited to the current state of development of international investment law and it does not extend to analyzing the role of human rights in negotiations of future bits. The book analyzes all stages of arbitral proceedings based on bits currently in force, namely: jurisdiction, admissibility, merits, compensation and costs. It focuses on the possible impact of human rights on each of the stages of the proceedings. The book can be important for both, academia and practice. From the academic perspective, it has potential to influence development of the theory of international law. It may impact on the understanding of both fields of international law: human rights and investment law. In this sense, the book can also play a role in academic discussion concerning the “defragmentation” of international law. In terms of practical importance, the book may help to ensure coherence between human rights and international investment law and, c­ onsequently, coherence between the actions undertaken by states in different fields of their  activity. The result of the analysis has the potential to improve the

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a­ ppropriate application of bits and international law in pending and future investment cases.33 This work can help to overcome tensions which may result from the fact that the practice of investment arbitration and human rights operates in “parallel universes.” The first is the universe of human rights, where people know about human rights and understand them. The second universe is the investment arbitral world, where human rights are terra incognita – especially to those practitioners who “rule the realm” and have background from (the potentially third universe of) commercial arbitration.34 The analysis presented in the book has potential to enable both universes to come closer to each other. From the perspective of human rights, if the answers to the questions asked below are affirmative, such conclusions could diminish one of the main weaknesses of human rights, namely their (un)enforceability. In such a situation, human rights could be present, at least to a certain degree, in a system which has developed not only a legally binding, but also an enforceable dispute resolution system.35 33

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Edward Guntrip commented: “Investment law jurisprudence has failed to fully explore the relationship between international investment law and international human rights law. […] The issue of how investment tribunals should resolve conflicts between principles sourced from international human rights and international investment is complex. As conflicts will continue to arise, investment tribunals will need to proactively address the relationship of the international investment law regime with other regimes in public international law, including the international human rights law regime, to clarify the manner in which they inter-relate. Methodologies or criteria that can guide the decision makers require further exploration.” See: Edward Guntrip, “International Human Rights Law, Investment Arbitration and Proportionality Analysis: Panacea or Pandora’s Box?” available at: http://www.ejiltalk.org/international-human-rights-law-investment -arbitration-and-proportionality-analysis-panacea-or-pandoras-box/ [accessed on 2 February 2017]. Although investment arbitrations are governed by rules of procedure adopted for commercial arbitration (bits adopted commercial arbitration “procedural model” for dispute settlement), important differences exist between investment and commercial arbitrations, which are not always properly identified. For sociological observations on the differences between human rights lawyers and investment lawyers see: Moshe Hirsch, “Investment tribunals and human rights treaties: a sociological perspective,” in: Freya Baetens, “Investment Law within International Law. Integrationist Perspectives” (Cambridge University Press 2013), pp. 92–94. As Todd Weiler noted, “[…] there is good reason to seek the potential points of convergence between iil law and international human rights law, even if no particular effort is currently being made by States to add ‘teeth’ to most multilateral human rights instruments.” See: Todd Weiler, “The Interpretation of International Investment Law” (Martinus

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What is more, the book may contribute to discussion of the legitimacy of international investment law from the perspective of public opinion. If there is a place for human rights arguments in such discourse, and they would be properly taken into account in practice, this could overturn the trend of states such as Ecuador, Bolivia and Venezuela, which have already begun to denunciate international investment agreements.36 It is understood to be a response to the bias towards investors’ interests and the simultaneous failure to contemplate the interests of local communities. Given the aims of this book, the main questions are as follows: 1. 2. 3.

Is there a place for human rights arguments in investor – state arbitration? Is the jurisdiction of tribunals in investment arbitration broad enough to include arguments concerning human rights? If the answer to the previous question is affirmative, is that possibility open for both parties to a dispute, or is it open solely for a host state to justify a breach of an investment treaty? If the answer to the first question is affirmative, what influence can human rights have on the outcome of investment disputes: a. can human rights prevail over provisions of investment treaties (a question of conflict of norms)? b. can human rights influence the interpretation of standards of protection guaranteed by investment treaties? c. can human rights justify a reduction of the compensation due when an arbitral tribunal determines that a host state has breached provisions of an investment treaty? d. can human rights impact on the determination of costs of the proceedings?

There are two more questions which are a direct consequence of the questions presented above. Although, for the purposes of the book they may appear as

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Nijhoff Publishers 2013), p. 180. Stephan W. Schill also noted for example: “Certainly, international investment treaties create a powerful remedy for foreign investors by providing access to investor–State arbitration in order to enforce treaty obligations, whereas many other international legal regimes lack comparably potent enforcement mechanisms.” See: Stephan W. Schill, “Cross-Regime Harmonization through Proportionality Analysis: The Case of International Investment Law, the Law of State Immunity and Human Rights,” (2012) 27:1 icsid Review – Foreign Investment Law Journal, p. 88. Leonie Timmers, “The protection against expropriations in Venezuela: a right to property in theory?” in: Freya Baetens, “Investment Law within International Law. Integrationist Perspectives” (Cambridge University Press 2013), p. 143.

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“subsidiary,” they are strictly related to the research necessary to answer the “main” questions: 4.

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Is it justified to consider international human rights and international investment law as constituting totally separate fields of law, bearing in mind the modern stage of development of international law and the ongoing process of its “defragmentation”? What are the relations between both of the fields at a general, systemic level? Certain elements, such as the prohibition of discrimination or the protection of property, are present in both fields. Can they be the subject of an analogous interpretation?

Already the main aim of this book justifies the first of the posed questions, i.e. whether there is a place for human rights arguments in investor – state arbitration. This question focuses on the jurisdiction of the arbitral tribunals as the essential issue which must be resolved before the case can proceed to its merits. The aims of the book make it necessary to consider the possibilities for respondents (host states) to invoke their international human rights obligations to justify alleged breaches of bits. However, in this author’s view, it cannot be ignored that investors themselves also enjoy human rights. This is undoubted true regarding natural persons (individuals). With respect to legal entities, this author follows the approach developed under the European Convention on Human Rights (Convention for the Protection of Human Rights and Fundamental Freedoms, referred to as the “echr”) and the jurisprudence of the European Court of Human Rights (referred to as the “ECtHR”), which guarantees legal persons the protection of such human rights which are not related to the personality of a human being. This explains the rationale behind the second question, i.e. whether human rights arguments can be presented by both parties to a dispute. This issue is frequently overlooked in discussions concerning the interrelations between international investment law and human rights. The third question is a logical consequence of the previous ones. When analyzing the potential influence of human rights on the outcome of investor – state arbitrations, one must consider all of the possibilities: (i) conflict of norms, (ii) interpretation of the provisions of bits (both considered as an element of the merits stage), (iii) compensation, and (iv) costs. Together with jurisdiction and admissibility, which are considered as falling within the first and second questions, these possibilities cover all of the typical stages of arbitral proceedings.

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Furthermore, the analysis conducted for the purposes of the above questions also makes it possible to answer the two “subsidiary” questions. This author considers them as “subsidiary” due to the main purposes of this book and given that its structure follows the procedural stages of bit arbitrations. The book starts with Chapter 1 – “Model Situations When Human Rights are Relevant for Investor – State Arbitration.” This chapter lays down the foundations for the subsequent analysis. Chapter 1 proposes the identification of three model situations as a methodological tool that should facilitate the analysis carried out in subsequent chapters. The model situations are based on existing case law. The substantive legal analysis is conducted in Chapters 2–4. As indicated above, the adopted structure follows the typical stages of the arbitral proceedings. Chapter 2 refers to the issues of jurisdiction and admissibility. Chapter 3 analyzes merits, whilst Chapter 4 focuses on compensation and costs. These chapters analyze the legal possibilities of how to introduce human rights considerations into arbitral proceedings based on bits. The analysis is conducted from the perspectives of both host states and investors, which guarantees the coherence of the research. A few further clarifications of the scope of the book must be made prior to commencing the analysis. To begin with, the book does not focus on the issue of amicus curiae submissions. This author recognizes the importance of this tool and the related possibility for human rights arguments to be raised by actors other than the investor and the host state involved in a particular dispute. However, the complexity of this issue requires a profound analysis which by itself could constitute the topic of a separate book. In addition, although amicus curiae submissions may have had an actual influence on the reasoning of tribunals, to date tribunals have tended not to pay significant attention to such submissions in the justifications of their awards.37 The book also does not engage in the discussion concerning the human rights obligations of transnational corporations (referred to as “tncs”). It is based on the traditional understanding that tncs are not subjects of 37

“[…] their arguments seem, so far, to have played only a minor role within the legal reasoning of the arbitral awards.” See: Stephanie Barbara Leinhardt, “Some Thoughts on Foreign Investors Responsibilities to Respect Human Rights,” (2013) 10:1 Transnational Dispute Management, p. 10 [Leinhardt]. For an analysis of amicus curiae submissions in investment disputes invoking human rights issues see: Sarah Schadendorf, “Human Rights Arguments in Amicus Curiae Submissions: Analysis of icsid and nafta InvestorState Arbitrations,” (2013) 10:1 Transnational Dispute Management.

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international­law and that it is states which are bound by human rights obligations imposed by international law. This does not exclude the possibility that tncs may be obliged to respect human rights via national legislation, which could result in the effective application of a horizontal effect of human rights. Conversely, even though at the international level tncs continue to have no specific human rights obligations, they have certain responsibilities. However, these responsibilities are understood to be moral, as opposed to legal, in nature.38 Therefore, it is states alone that remain obliged to respect, protect and fulfil human rights from the perspective of international legal obligations. Moreover, the book does not refer to stabilization clauses and their potential effect on human rights.39 Stabilization clauses are understood as provisions included in private contracts between investors and host states that address changes in the host state’s law during the lifetime of an investment.40 By their very nature, they are included in investment contracts concluded between particular investors and host states. Accordingly, they do not form part of bits, understood as public international law treaties. Although this topic is certainly worthy of the wider attention it has begun to receive, the characteristics of stabilization clauses justifies the decision to place them beyond the scope of the present work.

38 39

40

See for example: Leinhardt, ibid, pp. 3–4. For example: “In the human rights context, […] stabilization clauses may override the international human rights law duty to regulate as part of the duty to protect.” See: Howard Mann, “International Investment Agreements, Business and Human Rights: Key Issues and Opportunities” (International Institute for Sustainable Development 2008), available at: http://www.iisd.org/pdf/2008/iia_business_human_rights.pdf [accessed on 2 February 2017], p. 8. Andrea Shemberg, “Investment Agreement and Human Rights: The Effects of Stabilization Clauses” (Corporate Social Responsibility Initiative Working Paper No. 42 2008), p. 4.

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chapter 1

Model Situations When Human Rights are Relevant for Investor – State Arbitration 1

Identification of Model Situations

As already observed, the wording of bits generally does not contain any provisions concerning human rights. Typically, bits are silent as to any obligations imposed on investors, requiring them to comply with international human rights standards. They do not expressly allow states to regulate (to adopt normative acts) pursuant to their international human rights obligations so as to respect, protect and fulfil human rights. This is the basic reason why it is rare for parties to investor – state arbitrations to make human rights arguments during their disputes. It has been observed that in a number of cases host states did not argue “obvious human rights arguments,” which is also “[…] due to fear of acknowledging obligations for themselves in other settings.”1 This may be another reason explaining a certain reluctance to human rights arguments. This author submits that there are intersections between international investment law and human rights. On the one hand, bits can result in constraining­the ability of host states to regulate the activity of foreign investors in compliance with states’ international obligations to respect, protect and fulfil the human rights of individuals within their territory and subject to their jurisdiction. Furthermore, bits can result in constraining the ability of the host states themselves to undertake actions, other than of a regulatory nature, in pursuit of their human rights obligations – if and to the extent that these actions are at the same time somehow related to the situation of foreign investors. In addition, investors themselves enjoy certain human rights. It is this author’s submission that investors may invoke their human rights in the course of the arbitral proceedings. Investors may be either natural or legal persons. It cannot be questioned that investors being natural persons have human rights. Some doubts may appear as to whether legal persons also enjoy human 1 Sarah Schadendorf, “Human Rights Arguments in Amicus Curiae Submissions: Analysis of icsid and nafta Investor-State Arbitrations,” (2013) 10:1 Transnational Dispute Management, p. 2 [Schadendorf]. She adds that “[a]nother reason might be that many human rights violations by the investor occur in complicity with the host state.”

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004339002_003

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rights. Under the echr, legal persons enjoy the protection of those human rights which are not related to the personality of a human being. Therefore, they enjoy for example the right to property, the right to the due process and freedom of speech. This author is aware that this approach is not generally recognized in all human rights systems. However, the approach developed under the echr is the one to be followed for the purposes of this book. The existence of the intersections between the two fields explains why human rights arguments have been present in some arbitral proceedings based on bits. These cases can be divided as follows: (i) cases which involve invocations by host states (acting as respondents in the arbitral proceedings) of the general notion of human rights, (ii) cases which concern invocations by the host states of particular human rights, such as the right to water, (iii) cases which concern invocations by investors of their human rights, and finally (iv) cases in which arbitral tribunals in their decisions referred to the jurisprudence of human rights bodies or to human rights examples – even if these issues had been pleaded by neither of the parties. Before proceeding to the analysis, the author wishes to stress that, as a general rule, the activities of investors have a positive impact on the realization of human rights.2 Typically, investments are not in opposition to the human rights obligations of host states. On the contrary, a “well-managed investment has the potential to promote and protect human rights.”3 Examples presented 2 James D. Fry, “International Human Rights Law in Investment Arbitration: Evidence of International Law’s Unity,” (2007) 18 Duke Journal of Comparative & International Law, p. 106 [Fry]: “This increase in investments in turn should accelerate development, which helps improve human rights for the local population. Moreover, as human rights are observed in a host state, especially rights dealing with education, work conditions and health services, work force productivity likely will improve, thus making investor promotion of human rights a sound business strategy. Raising this point is not to endorse a type of human rights protection through human rights violation, but is merely to highlight the oft forgotten human rights advantages that can flow from foreign direct investment in developing countries. While some commentators point out that there is little evidence to show that bits stimulate fdi, one must not neglect the possibility that international investment law and human rights effectively can complement each other.” 3 Economic, Social and Cultural Rights, Human rights, trade and investment. Report of the High Commissioner for Human Rights, E/CN.4/Sub.2/2003/9, 2 July 2003, p. 2 [Human rights, trade and investment]. Indeed, investments can have many “faces,” as it was stated in para. 5 on p. 8: “Investment can be made in a range of sectors, including primary industry, manufacturing and services, and can take many forms, such as capital, bonds, shares and stocks, personal and real property, business concessions, technology and intellectual property rights such as patents, copyright or trademarks. While investors can be both individuals as well as business enterprises, transnational corporations (tncs) are the principal actors in foreign

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in this chapter, illustrating alleged violations of human rights of local peoples or the human rights obligations of host states committed by investors, occur exceptionally. They remain in accordance with the saying that “the exception proves the rule.” Despite that, such situations cannot be ignored and international investment law should be capable of facing and reacting to them, if necessary. The aim of this chapter is to propose a methodological tool which will be used in the analysis contained in subsequent chapters. It is essential to identify “model situations” which can be relevant in the course of the investor – state arbitral proceedings before one can answer the questions posed in the introduction. The identification of such “model scenarios” is crucial for the clarity of the analysis. The proposed model situations should be considered from three perspectives, namely: (i) classification of factual situations, (ii) legal classification from the perspective of actors involved in arbitral proceedings, (iii) legal classification from the perspective of host states’ international obligations to respect, protect and fulfil human rights. The first model situation (referred to as the “First Model Situation”) is that an investor who presents a claim based on a bit has not been involved in any human­rights violations in the territory of a host state during any moment of its activities. Despite the fact that no violations of human rights have been committed by the investor, the state undertakes measures which aim at the full realization of human rights. At the same time, the undertaken measures are alleged by the investor to be in breach of a bit. Therefore, the First Model Situation is related to states’ international ­obligation to fulfil human rights. This is understood as the obligation to investment, the majority of which are based in developed countries. Foreign investment can be short term or long term, it might set up new industries and entities, it might be a merger or acquisition with an existing enterprise, or it could simply be a share holding. Investment can introduce tangible assets and technology to set up new factories, production systems or services. This in turn can create employment, transfer technology and know-how, stimulate local research and innovation, and improve opportunities for income distribution while at the same time promote trade and prospects of growth and further global integration.” See also for example: Deodatus Mfugale, “Over 34,000 to benefit from Sh500m water, health project,” available at: http://www.thecitizen.co.tz/News/Over-34-000-to-benefit-from-Sh500m-water --health-project/-/1840392/1887612/-/139ny8gz/-/index.html [accessed on 2 February 2017].

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“take legislative, administrative, judicial and practical measures necessary to ensure that the rights in question are implemented to the greatest extent possible.”4 In other words, it is a positive obligation to be undertaken by states, which requires them to “take positive action to facilitate the enjoyment of human­ rights.”5 A special emphasis in this context is placed on the concept of prevention.6 In the context of investor – state disputes, the First Model Situation will be especially important with respect to the adoption of new laws by host states. On the one hand, “[i]ntroducing new regulations to promote human rights is an important aspect of States’ duty to fulfil human rights. As economic, social and political conditions change, it is appropriate that in response States might introduce appropriate regulations strengthening protection for human rights.”7 On the other hand, however, the same new regulations can be alleged to violate standards of protection included in bits.8 In the First Model Situation a host state which faces a bit claim invokes its international human rights obligations in an attempt to justify measures which are alleged to be in breach of the bit in question. The second model situation (referred to as the “Second Model Situation”) is that an investor who presents a claim based on a bit has been involved in human rights violations in the territory of a host state.9 4 Manfred Nowak, “Introduction to the International Human Rights Regime” (Brill 2003), p. 49 [Nowak]. 5 Dinah Shelton, Ariel Gould, “Positive and negative obligations,” in: Dinah Shelton, “The Oxford Handbook of International Human Rights” (Oxford University Press 2013), p. 566 [Shelton, Gould]. 6 Nowak, supra note 4, p. 49; Henry J. Steiner, Philip Alston, Ryan Goodman, “International Human Rights in Context. Law, Politics, Morals” (Oxford University Press 2008), pp. 1089–1092. 7 Human rights, trade and investment, supra note 3, p. 20. Of course, new laws and regulations which relate to human rights concerns of states may be adopted directly under the “label” of human rights, but also through the wording of environmental, labor, health and safety etc. 8 Ursula Kriebaum, “Privatizing Human Rights. The Interface Between International Investment Protection and Human Rights,” in: August Reinisch, Ursula Kriebaum, “The Law of ­International Relations – Liber Amicorum Hanspeter Neuhold” (Eleven International Publishing 2007), p. 177 [Kriebaum, Privatizing…]: “The investor may use bit provisions to challenge human rights-inspired regulations that interfere with its investment.” 9 Christoph Schreuer, Ursula Kriebaum, “From Individual to Community Interest in International Investment Law,” in: Ulrich Fastenrath, Rudolf Geiger, Daniel-Erasmus Khan, Andresa Paulus, Sabine von Schorlemer, Christoph Vedder, “From Bilateralism to Community Interest: Essays in Honour of Judge Bruno Simma” (Oxford University Press, 2011), p. 1089: “Yet another scenario sees the investor as a potential or actual perpetrator of human rights violations in

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Factual backgrounds classified as the Second Model Situation may also refer to scenarios when the investor violates human rights in compliance with the host state, or at least when the host state is fully aware of such violations from the very first moment on which they occur. In other words, they include scenarios where the state “can be a co-perpetrator in a violation of the human rights of the host State’s population or simply a passive bystander that tolerates human rights abuses by an investor and does not interfere with the investor’s rights under investment treaties.”10 These scenarios may even include gross human rights violations committed, for example, by paramilitary forces or even the host state’s military. Certain sub-scenarios are possible within the Second Model Situation. In the first sub-scenario the investor making the investment had been involved in the human rights violations at least at the moment of making the investment, or even before the investment was made. In the second sub-scenario, at the moment of making the investment no violation of human rights had been committed by the investor. However, later on – when the investment was already established in the territory of the host state – the investor started to violate human rights. This division is important from the perspective of analyzing the admissibility of claims in bit arbitration (see Chapter 2 Section 2). The Second Model Situation can be considered from the viewpoint of states’ obligation to protect human rights. This is a positive obligation, which requires states to exercise due diligence to prevent violations of human rights by private persons.11 In the Second Model Situation, states are internationally obliged to 10

11

the host State. In a situation of his kind, the host state would be under an obligation to intervene and safeguard the local population’s human rights.” Ursula Kriebaum, “Foreign Investments & Human Rights – The Actors and Their Different Roles,” (2013) 10:1 Transnational Dispute Management, p. 2 [Kriebaum – Foreign Investments…]. Shelton, Gould, supra note 5, p. 566: “The obligation to protect is a positive obligation, requiring states to protect individuals and groups against human rights abuses by others.” Also Nowak, supra note 4, p. 50: “The obligation to protect human rights also requires positive action […] as it aims to avoid human rights violations by third parties.” Also McCorquodale and Simons: “This general international legal responsibility of states is linked to obligations under international human rights law. International human rights law requires a state to take measures – such as by legislation and administrative practices – to control, regulate, investigate and prosecute actions by non-state actors that violate the human rights of those within the territory of that state. These actions by non-state actors do not have to be attributed to the state, rather this responsibility is part of the state’s obligation to exercise due diligence to protect the human rights of all persons

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undertake measures “to stop human rights abuses of an investor and to ensure the respect for human rights. An investor’s human rights abuse triggers a duty to protect on the part of the host State. But at the same time, measures thus taken by the host State may be an interference with the investor’s rights protected under investment treaties.”12 It must be also noted that the Second Model Situation can be considered from two viewpoints: (i) violations of international human rights, and (ii) violations of local laws which implement internationally recognized human rights into the domestic legal order. In the Second Model Situation, as with the First Model Situation, a host state which faces a bit claim invokes its international human rights obligations in an attempt to justify measures which are alleged to be in breach of the bit in question. The third model situation (referred to as the “Third Model Situation”) is that an investor himself is the victim of human rights violations committed by the host state wherein the investment is located. The Third Model Situation can relate equally to investors who are natural persons (individuals) and investors who are legal persons (companies). In this context, this author follows the approach developed under the echr and the jurisprudence of the ECtHR, which guarantees legal persons the protection of those human rights which are not related to the personality of a human being. Therefore, the Third Model Situation is related to states’ international obligation to respect human rights.13 Contrary to the obligation to protect and to fulfil, the obligation to respect is a positive obligation. It requires states to “refrain from inferring with or curtailing the enjoyment of human rights.”14 In the analyzed context, it refers to such human rights of investors as the right to property (and claims concerning expropriations under bits), due process (and

in a state’s territory. Hence, states have been found to be in breach of their obligations of due diligence in relation to activities of corporations within their territory, because the acts or omissions by the state enabled the corporation to act as it did.” See: Robert McCorquodale, Penelope Simons, “Responsibility Beyond Borders: State Responsibility for Extraterritorial Violations by Corporations of International Human Rights Law,” (2007) 70:4 Modern Law Review, p. 618. 12 Kriebaum – Foreign Investments…, supra note 10, p. 2. 13 Nowak, supra note 4, p. 49: “The obligation to respect human rights refers to the obligation to refrain from state intervention, provided the latter is not admissible under any relevant legal limitations and reservations clauses […]. Unjustified interventions are considered violations of the human right in question.” 14 Shelton, Gould, supra note 5, p. 566.

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Model Situations When Human Rights are Relevant

claims concerning the denial of justice under bits), arbitrary detentions (and claims concerning the Fair and Equitable Treatment and Full Protection and Security under bits) etc. In the Third Model Situation an investor invokes his own human rights. This can be done by way of: (i) bringing independent (separate) claims, presented together with claims regarding the breach of a bit, or (ii) presenting additional, human rights arguments in order to support the claims based on the bit. The three model situations can be summarized in the following chart: MODEL SITUATIONS

FIRST MODEL SITUATION

SECOND MODEL SITUATION

THIRD MODEL SITUATION

An investor who presents a claim based on a bit has not been involved in any human rights violations in the territory of the host state during any moment of its activities.

An investor who presents a claim based on a bit has been involved in human rights violations in the territory of the host state.

An investor is a victim of human rights violations committed by the host state where the investment is located.

The respondent (host state defending a bit claim) invokes its international human rights obligations in an attempt to justify measures which are alleged to be in breach of the bit.

The claimant (investor who presents a claim based on a bit) invokes his own human rights.

The purpose of the following sections of this chapter is to provide illustrations of the First, Second and Third Model Situations. The examples will prove: (i) the validity of the proposed methodological tool, and (ii) that discussion concerning the intersections between human rights and international investment law is relevant in practice. The examples are not indented to be an exhaustive list of case law or possible situations falling within the respective Model Situations. In no way is it intended to create an exhaustive list of potential factual situations which may give rise to future investor – state arbitrations in which human rights arguments may become relevant.15 Instead, the following sections should be 15

Such a comprehensive list, albeit limited to references to echr and ECtHR’s judgments, can be found in a recent publication: José E. Alvarez, “The Use (and Misuse) of European

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treated merely as illustrations, proving that reality can give rise to uncountable scenarios which may occur in the future. Human rights have been and may be potentially even more important in investment disputes. There is no reason to regard attempts to present human rights arguments during arbitral proceedings based on bits as anything extraordinary or shocking. Moreover, the examples presented below demonstrate that the issue of interrelations between international investment law and human rights concerns a wide range of human rights. The analysis is limited to documents which are publicly available. Although there exists a tendency towards transparency in bit arbitrations, confidentiality remains the general rule governing them.16 There may be more relevant

16

Human Rights Law in Investor-State Dispute Settlement,” in: Franco Ferrari, “The Impact of eu Law on International Commercial Arbitration” (Juris, Forthcoming), available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2875089 [Alvarez, accessed on 2 February 2017]. The confidentiality of arbitral proceedings based on bits is a consequence of the fact that the whole mechanism of dispute settlement adopted in bits is based on the model of international commercial arbitration. The latter operates in secrecy. This cannot be surprising, as in commercial arbitration both parties to a dispute are private entities and there is, consequently, no “public” element. The situation is different in the context of bit arbitrations. Here, the sole fact that one of the parties is a sovereign state introduces a “public” element to the dispute. Against such a background, confidentiality in bit arbitrations is controversial. Public access to arbitral awards and even submissions filed in the course of the proceedings typically depends on the procedure. As a general principle, the consent of both parties is required to allow public access. This approach can be seen, for example, in art. 48(5) of the icsid Convention. However, some bits provide for greater transparency. For example, Annex 1137.4 nafta allows Canada and the United States to make arbitral awards public even without the consent of the other party to the arbitral proceedings (granting the same competence for investors). Additionally, it is worth noting that contracting states to the nafta adopted a policy of making submissions publicly available. A similar policy of making submissions and arbitral proceedings publicly available can be noticed in the provisions of the Canadian New Model fipa and in the us New Model bit. See for example: J. Anthony VanDuzer, “Enhancing the Procedural Legitimacy of Investor – State Arbitration through Transparency and Amicus Curiae Participation,” (2007) 52:4 McGill Law Journal, p. 707. It is important to note in this context that there is a global trend visible towards greater transparency in investor – state arbitrations. It can be seen in the example of the uncitral Rules on Transparency in Treaty-based Investor-State Arbitration, adopted by the United Nations Commission on International Trade Law at its forty-sixth session (Vienna, 8–26 July 2013) and applicable to investment treaties concluded on or after 1 April 2014. Moreover, on 10 December 2014, the United Nations General Assembly adopted the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration.

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cases which are not, however, publicly available. It must also be noted that various consultations conducted by this author with international arbitration practitioners prove that situations certainly existed where the parties to the proceedings presented arguments concerning human rights. Subsequently, however, neither these arguments nor the following discussion during the oral phase of the proceedings was reflected in the text of the arbitral award. With respect to such situations, although the arbitral award itself may have been released to the public, the submissions of the parties and the transcripts of the oral phrase remain confidential. The present chapter does not comprehensively analyze the issue of amicus curiae submissions presented in the course of arbitral proceedings. Examples existed where amicus curiae submissions presented in the course of bit arbitrations raised human rights arguments relevant for the disputes.17 In some situations they were accepted by respective tribunals. However, “[t]he general attitude towards arguments brought forward by amici curiae seems to be rather dismissive and limited to the respondents’ statements. Human rights arguments provided by amici, sometimes detailed and well-founded, were not observably employed by the tribunals in support of their findings and sometimes even explicitly ignored.”18 For that reason, amicus curiae submissions are not analyzed in details in this book, although occasional reference is made to them. It must be noted, however, that this in no way suggests that human rights arguments presented in amicus curiae submissions had no influence on tribunals’ decisions or the decision-making processes. It is entirely possible that such an influence was present, even if it was not explicitly mentioned in the text of the arbitral awards. 2

First Model Situation – Host States Invoking Human Rights in the Absence of Violations Having been Committed by Investors

i Invocations of the General Notion of Human Rights The first examples of the First Model Situation concern some of the cases initiated against Argentina in connection with the financial crisis faced in 2001–2002. Measures undertaken by Argentina in response to the financial crisis gave rise to the highest number of investment cases ever initiated against 17

See for example: Methanex v. the us, upc v. Canada, Suez et al. v. Argentina, Biwater Gauff v. Tanzania, Glamis Gold v. the us, Pac Rim v. El Salvador, Bernhard v. Zimbabwe, Aguas del Tunari v. Bolivia, Piero Foresti et al. v. South Africa. 18 Schadendorf, supra note 1, p. 23.

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a single state. The factual background of these cases dates back to the early 1990s. At that time, Argentina privatized several of its major government-run industries, such as the gas and water systems.19 A “cornerstone” of the Argentinean economy was its currency system, known as “convertibility.” It kept the value of local currency – the austral, subsequently replaced by the peso – equal to that of the US dollar.20 It was allowed to use both currencies interchangeably for any economic activity.21 This was the reason why millions of people took loans in the us dollars, even though their income was in the local currency.22 In 2001–2002 Argentina suffered a severe financial crisis. The Argentinean peso lost 40% of its value in just one day. The crisis meant that “by late 2002, over half the Argentine population was living below the poverty line.”23 During the crisis “income per person in dollar terms has shrunk from around $7,000 to just $3,500” (which was mainly caused by a decrease of the exchange rate between the peso and the us dollar).24 The unemployment rate reached a level of around 25%.25 The poverty level could have increased even up to 54.3% in the urban population.26 The economic chaos in Argentina spread to the political sphere. In December 2001 riots took place, which resulted in fatalities. The whole situation led the president to resign and resulted in the collapse of the government. A “tragicomic spectacle of a succession of five presidents taking office over a mere ten days” followed.27 19

Steven Smith, Kevin Rubino, “United States: Investors Beware: Enron and Sempra Annulment Decisions Bolster the State Necessity Defense While Sowing New Uncertainty Regarding the Finality of icsid Arbitral Awards,” http://www.mondaq.com/unitedstates/ article.asp?articleid=107480 [accessed on 2 February 2017] [Smith, Rubino]. 20 At the value of 1000 australs = 1 peso = 1 dollar. See: Convertibility Law – la Ley N° 23.928, Ley de Convertibilidad. 21 It led to the “dollarization” of Argentinean economy. Contracts – especially medium and long term ones such as rents, loans or supply contracts – were expressed in us dollars, not in pesos. See: Continental Casualty v. Argentina, icsid Case No. ARB/03/9, award (5 September 2008), para. 105 [Continental v. Argentina]. 22 Paul Blustein, “And the Money Kept Rolling In (And Out): Wall Street, the imf, and the Bankrupting of Argentina” (PublicAffairs 2005), p. xix [Blustein]. 23 William W. Burke-White, “The Argentine Financial Crisis: State Liability Under bits and the Legitimacy of the icsid System” (University of Pennsylvania, Institute for Law & Economics Research Paper 2008), available at ssrn: http://ssrn.com/abstract=1088837 [­accessed on 2 February 2017], p. 3. 24 Blustein, supra note 22, p. 2. 25 Special report: “Argentina’s collapse. A decline without parallel,” in: The Economist, 28 February 2002, http://www.economist.com/node/1010911 [accessed on 2 February 2017]. 26 Continental v. Argentina, supra note 21, para. 108. 27 Blustein, supra note 22, p. 1. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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In response to the financial crisis and its severe consequences, Argentina adopted a number of measures. They included: (i) termination of the “convertibility” system;28 (ii) “pesification” of all financial obligations;29 (iii) a prohibition on money transfers abroad and restrictions on bank account withdrawals to no more than USD 250 a week (“corralito”);30 (iv) an alteration of the terms of licenses to operate in previously privatized sectors.31 All of these measures resulted in a diminishing value of investments undertaken before the crisis. In consequence, many investors decided to seek legal protection. Apart from initiating proceedings before national courts in Argentina and abroad, many investors decided to seek protection guaranteed under bits. Assessments of the crisis itself and the consequences thereof remain controversial. There exist various opinions and views as to how severe the financial crisis was and what potential consequences it could have had – for Argentina as a state and for its citizens – had Argentina not reacted in the way it did. Various arbitral tribunals, assisted by different expert opinions, assessed the situation differently. However, for the purposes of the present book there is no need to engage in an analysis of the severity of the crisis, nor to decide which assessment is most appropriate. In this context, it suffices to note that the arbitral tribunal in LG&E v. Argentina observed that the crisis was so grave that it threatened the collapse of the Argentinian state and that Argentina had to react to restore civil order.32 A similar assessment of facts was undertaken in 28

29

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6 January 2002, “the Emergency Law” – Law No. 25,561, the Public Emergency and Foreign Exchange System Reform Law – la Ley N° 25.561, Ley de Emergencia Pública y de Reforma del Régimen Cambiario – it terminated the situation whereby the peso was “pegged” to the u.s. dollar. This measure resulted in the devaluation of the peso, which from the “pegged” value of $1 reached the value of $0.26 on 28 June 2002 See: Blustein, supra note 22, p. 242. The Emergency Law and Presidential Decree No. 214 forced the conversion of all obligations in foreign currency into peso, the abolition of all clauses calling for tariff a­ djustments based on other foreign currencies, and the elimination of all indexing mechanisms. See: LG&E v. Argentina, icsid Case No. arb 02/1, decision on liability (3 October 2006), paras. 64–67 [LG&E v. Argentina]. Decree of Ministry of economy, dated on 1 December 2001 (Decree No. 1570/01), which was considered to be a response to a “steadily increasing outflow of money from banks” which culminated in “the final three days of November [2001], when thousands of depositors queued up to pull $3.6 billion out of their accounts – about 6 percent of total deposits.” See: Blustein, supra note 22, p. xx. Smith, Rubino, supra note 19. LG&E v. Argentina, supra note 29, para. 231: “Extremely severe crises in the economic, political and social sectors reached their apex and converged in December 2001, threatening total collapse of the Government and the Argentine State.” See also para 238: “Certainly, Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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Continental v. Argentina, where the arbitral tribunal agreed that, if Argentina had not undertaken certain measures, its situation might have degenerated into one that called for the suspension of constitutional guarantees and fundamental liberties.33 If one assesses the financial crisis faced by Argentina in 2001 and 2002 in the manner adopted in the awards mentioned above, the measures undertaken by the state in response to the crisis can be considered from the perspective of its obligation to protect and respect human rights. However, in LG&E v. Argentina the respondent state did not invoke human rights arguments in its favor.34 In Continental v. Argentina the respondent’s reliance on human rights appears to be very limited. The respondent relied on case law of the ECtHR when arguing in favor of applying the so-called “non-precluded measures clause,” which precludes the wrongfulness of adopted measures under international law. In this context, the respondent relied on human rights arguments when interpreting the scope of discretion and margin of appreciation available to the state.35

33

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the conditions in Argentina in December 2001 called for immediate, decisive action to restore civil order and stop the economic decline. To conclude that such a severe economic crisis could not constitute an essential security interest is to diminish the havoc that the economy can wreak on the lives of an entire population and the ability of the Government to lead. When a State’s economic foundation is under siege, the severity of the problem can equal that of any military invasion.” Continental v. Argentina, supra note 21, para. 180. The Tribunal added: “It is impossible to deny, in the Tribunal’s view, that a crisis that brought about the sudden and chaotic abandonment of the cardinal tenet of the country’s economic life, such as the fixed convertibility rate which had been steadfastly recommended and supported for more than a decade by the imf and the international community; the near-collapse of the domestic economy; the soaring inflation; the leap in unemployment; the social hardships bringing down more than half of the population below the poverty line; the immediate threats to the health of young children, the sick and the most vulnerable members of the population, the widespread unrest and disorders; the real risk of insurrection and extreme political disturbances, the abrupt resignations of successive Presidents and the collapse of the Government, together with a partial breakdown of the political institutions and an extended vacuum of power; the resort to emergency legislation granting extraordinary legislative powers to the executive branch, that all of this, taken together, does not qualify as a situation where the maintenance of public order and the protection of essential security interest of Argentina as a state and as a country was vitally at stake.” At least, no such arguments are mentioned in the texts of the publicly available arbitral awards, which does not necessarily mean that no such arguments were invoked in the written submissions or during the oral pleadings. Continental v. Argentina, supra note 21, para. 181.

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­Significantly, the tribunal agreed to apply the non-precluded measures provision with respect to some of the claims.36 It can be understood that one of the reasons why Argentina failed to invoke human rights arguments was that such attempts undertaken in the course of previous proceedings were unsuccessful. Argentina invoked human rights arguments in other arbitrations concerning the same financial crisis – Azurix v. Argentina and cms Gas v. Argentina.37 However, these attempts proved to be unsuccessful. The tribunals hearing these cases did not assess the facts and the gravity of the crisis in a similar way to how they were assessed by the tribunals in LG&E v. Argentina and Continental v. Argentina. In consequence, they did not consider that the financial crisis had an impact on human rights and, therefore, they did not consider it necessary to evaluate the argument related to human rights. However, these tribunals did not deny the possible impact of human rights on investor – state arbitrations per se. Their approach was fact-driven. In Azurix v. Argentina, the respondent state “also raised the issue of the compatibility of the bit with human rights treaties.”38 It argued that there was a conflict between the investment treaty at hand and human rights treaties, and that the conflict should be resolved in favor of the human rights treaties.39 Neither the written submissions nor transcripts from the oral pleadings are publicly available, which makes it impossible to determine the exact scope and complexity of human rights arguments invoked by Argentina. However, from the text of the award it appears that Argentina failed to properly develop 36 37

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Ibid, para. 304. Azurix v. Argentina, icsid Case No. ARB/01/12, award (14 July 2006) [Azurix v. Argentina], cms Gas Transmission v. Argentina, icsid Case No. ARB/01/8, award (12 May 2005) [cms v. Argentina]. Azurix v. Argentina, ibid, para. 261: “The Respondent has also raised the issue of the compatibility of the bit with human rights treaties. The matter has not been fully argued and the Tribunal fails to understand the incompatibility in the specifics of the instant case. The services to consumers continued to be provided without interruption by aba during five months after the termination notice and through the new provincial utility after the transfer of service.” Ibid, para. 254: “The Respondent also raises the issue of a conflict between the bit and human rights treaties that protect consumers’ rights. According to Argentina’s expert, a conflict between a bit and human rights treaties must be resolved in favor of human rights because the consumers’ public interest must prevail over the private interest of service provider. On this point, the Claimant argues that the user’s rights were duly protected by the provisions made in the Concession Agreement and the Province fails to prove how said rights were affected by the termination.”

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these arguments. It was commented that “Argentina appears to have made a half-hearted effort to argue this.”40 One may suppose that Argentina did not explain in detail the nature of its human rights obligations and, more importantly, the alleged conflict between human rights and investment law. It is unclear whether the alleged conflict between the human rights treaties and the investment treaty concerned the obligation to respect human rights, i.e. the state’s obligation to protect its people from the collapse of the state and the related suspension of their human rights, or rather the obligation to protect human rights, i.e. the obligation to react to the actions of the investor. Putting aside these assumptions, what is certain is that the tribunal concluded that “the matter has not been fully argued” and that the tribunal “fails to understand the incompatibility in the specifics of the instant case.”41 Moreover, the English version of the award does not reflect all of the nuances of the tribunal’s opinion on this issue, which are present in the Spanish version. A more precise translation of the tribunal’s decision issued in the Spanish language could be that “the matter has been hardly argued.”42 This would suggest that in fact very little effort was put on this issue by Argentina. Despite the above, in another context the tribunal in Azurix v. Argentina did refer to human rights. Although the tribunal rejected Argentina’s defense based on human rights, the tribunal referred to the jurisprudence of the E ­ CtHR. One of the issues to be decided by the tribunal concerned the claim of expropriation. In this context, the tribunal referred to the balancing (proportionality) test developed by the ECtHR, according to which a measure adopted by a state must be appropriate for achieving its aim. The tribunal in Azurix v. Argentina acknowledged that it “sought guidance” in the case law of the ECtHR, “in particular, in the case of James and Others.”43 The tribunal affirmed that the jurisprudence of the ECtHR provided “useful guidance in examining whether regulatory actions would be expropriatory and give rise to compensation.”44 In cms Gas v. Argentina, the respondent’s line of argument was that the financial crisis compromised basic human rights guaranteed by the Constitution.45 40 Fry, supra note 2, p. 100. 41 Azurix v. Argentina, supra note 37, para. 261. 42 Ibid, “La Demandada ha planteado también la cuestión de la compatibilidad del tbi con los tratados de derechos humanos. Este asunto ha sido apenas debatido por las partes, y el Tribunal no logra comprender la incompatibilidad invocada en las circunstancias del caso de autos.” 43 James et al. v. United Kingdom, application no. 8793/79, judgment (12 February 1986) [James v. the UK]. 44 Azurix v. Argentina, supra note 37, paras. 311–312. 45 cms v. Argentina, supra note 37, para. 114: “In respect of the legal regime of treaties in Argentina, the Respondent argues that while treaties override the law they are not above

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Having argued that the applicable law should be its domestic law, Argentina continued to submit that bits are not above its Constitution and that they must be read and applied in accordance with the Constitution.46 As a result of the hierarchy of norms understood in that way, the argument was made that the basic human rights treaties took priority over the investment treaty.47 The tribunal did not deny the legal validity of these arguments. It agreed that, at least theoretically, there exists the possibility for a collision between international treaties and the Constitution of Argentina. The tribunal added, however, that in its opinion such collision was unlikely to happen in practice.48 The tribunal concluded that, in this particular dispute, no conflict existed between the bit, on the one hand, and either the Constitution of Argentina or “fundamental human rights” on the other hand.49 The tribunal did not specify whether it was referring to fundamental human rights guaranteed at a constitutional or an international level. However, from the text of the award, it seems that Argentina made no reference to the international nature of its obligation to respect, protect and fulfil human rights. Argentina’s line of reasoning appears to be based on the hierarchy of norms as established in its domestic legal order and as defined in its Constitution, rather than on any international obligations undertaken by it and a possible conflict of norms of the same, international standing. From the text of the award it seems that the arguments could have been presented by Argentina with more focus on the international nature of Argentina’s human rights obligations. In edf v. Argentina the respondent state argued that observance of the applicable bit should not preclude observance of international ius cogens norms. The state argued that it undertook measures which were alleged to be in ­violation of the bit “in order to guarantee the free enjoyment of certain basic human rights ‘such as, inter alia, the right to life, health, personal

46 47 48 49

the Constitution and must accord with constitutional public law. Only some basic treaties on human rights have been recognized by a 1994 constitutional amendment as having constitutional standing and, therefore, in the Respondent’s view, stand above ordinary treaties such as investment treaties. It is further argued that, as the economic and social crisis that affected the country compromised basic human rights, no investment treaty could prevail as it would be in violation of such constitutionally recognized rights.” Ibid, paras. 112–113. Ibid, para. 114. Ibid, para. 120. Ibid, para. 121: “In this case, the Tribunal does not find any such collision. First because the Constitution carefully protects the right to property, just as the treaties on human rights do, and secondly because there is no question of affecting fundamental human rights when considering the issues disputed by the parties.”

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­integrity, education, the rights of children and political rights’ which were ‘directly threatened by the socio-economic institutional collapse suffered by the Argentine Republic, where tens of people lost their lives, the right to health, to personal integrity, to work and safety.’”50 The respondent then clarified that its argument was that obligations under bits do not undermine a state’s obligations under human rights treaties, and for that reason bits are to be “construed and interpreted consistently with international canons aimed at fostering respect for human rights.”51 From the text of the award, it seems that this clarification was made in the course of the proceedings, whilst initially the argument was that the human rights of a ius cogens nature are capable of abrogating or suspending the rights guaranteed in bits.52 Relying on an expert opinion of Pinto, the respondent argued that “measures enacted to safeguard the free enjoyment of human rights should never result in international responsibility.”53 The tribunal does not describe this argument in more detail. It makes reference to a specific paragraph from a submission filed by the respondent in the course of the proceedings (respondent’s rejoinder). Significantly, the other party to the proceedings did not question that ­human rights of a ius cogens nature are generally applicable in arbitral proceedings based on bits. The claimant’s argument was that the respondent was “unable to demonstrate that any such norm is at issue in this case.”54 Thus, the disagreement between the parties related not to the general applicability of human rights norms, but to their specific application to the dispute at hand and to their scope.55 The claimant relied on art. 53 of the Vienna Convention 50 51 52

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edf International, saur International and León Participaciones Argentinas v. Argentina, icsid Case No. ARB/03/23, award (11 June 2012), paras. 191, 192. Ibid, para. 192. Ibid, para. 193: “Respondent argues Claimants’ rights under investment treaties should not be deemed absolute to the detriment of the Argentine population’s entitlement to universal human rights enshrined in international instruments such as the 1948 u.n. Universal Declaration of Human Rights, the 1966 u.n. International Covenant on Civil and Political Rights, the 1989 u.n. Convention on the Rights of the Child, and the 1969 ­American Convention on Human Rights. See Respondent’s Rejoinder at paragraphs 205, 209. Respondent posits these latter multilateral pacts proscribe the abrogation or suspension in any situation of those rights contained thereunder; hence, the non-derogable nature of such rights is said to be conclusive evidence that they are tantamount to jus cogens. See Respondent’s Counter Memorial at paragraph 246; Respondent’s Rejoinder at paragraphs 209–210.” Ibid, para. 194. Ibid, para. 191. Ibid, para. 910.

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on the Law of Treaties (referred to as the “vclt”) to conclude that very few norms are internationally recognized as norms of a ius cogens nature and that “obligations do not elevate to jus cogens status just because the instruments Respondent cites, such as the American Convention on Human Rights, considers such duties to be non-derogable.”56 When faced with these issues, the tribunal in edf v. Argentina observed that “[i]t is common ground that the Tribunal should be sensitive to international jus cogens norms, including basic principles of human rights.”57 The tribunal expressly recognized that it “does not call into question the potential significance or relevance of human rights in connection with international ­investment law.”58 Despite that, based on the fact of this particular dispute, the tribunal did not consider it justified to preclude the wrongfulness of the host state’s action based on human rights arguments. The tribunal decided that, even if certain measures were indeed necessary at the very moment of the financial crisis, they should be temporary and provisional.59 It concluded that “no evidence persuades the Tribunal that Respondent’s failure to re-negotiate tariffs in a timely fashion, so as to re-establish the economic equilibrium to which Claimants were entitled under the Concession Agreement’s Currency Clause, was necessary to guarantee human rights.”60 As can be seen from the above description, Argentina invoked human rights arguments in the course of the proceedings in Azurix v. Argentina, cms Gas v. Argentina and edf v. Argentina cases. Such arguments were not rejected by the tribunals due to their legal “invalidity.” Rather, in Azurix v. Argentina and cms Gas v. Argentina they were rejected because they were not sufficiently developed and explained by the respondent. Also in edf v. Argentina the tribunal did not deny that there is a place for human rights in the course of the arbitral proceedings based on bits. Its decision not to apply such rights in the particular case was grounded in an assessment of the facts. In all three of the aforementioned cases, the decisions were highly fact driven.­Had the tribunals assessed the factual backgrounds of the disputes differently, they may well have arrived at different conclusions. Argentina also relied on human rights arguments in Siemens v. Argentina.61­ As in the Azurix case, Argentina argued the incompatibility between the 56 57 58 59 60 61

Ibid, para. 195. Ibid, para. 909. Ibid, para. 912. Ibid, paras. 912–913. Ibid, para. 914. Siemens v. Argentina, icsid Case No. ARB/02/8, award (6 February 2007), para. 253.

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­applicable bit and international human rights treaties.62 Also in this case, the argument was not presented in detail, which led the tribunal to observe that “[t]his argument has not been developed by Argentina. The Tribunal considers that, without the benefit of further elaboration and substantiation by the parties, it is not an argument that, prima facie, bears any relationship to the merits of this case.”63 Euram Bank v. Slovakia represents yet another example where the general notion of human rights was invoked by respondent states.64 The dispute was based on an intra-eu (Austria – the Slovakia bit). The respondent argued that, following its accession to the eu, the bit was no longer applicable by virtue of the principle stated in Article 59 of the vclt.65 One of the prerequisites for the application of this vclt provision is a determination that a later treaty relates to the same subject-matter as a previous one. The respondent relied on the Charter of Fundamental Rights of the European Union and the jurisprudence of the ECtHR to support its argument that the treaties establishing the eu and the applicable bit “relate to the same subject matter,” given that eu law “provides for equivalent protection to that found in the bit: expropriation, fair and equitable treatment, full protection and security, and free movement of capital.”66 It added that eu law introduces limitations on the eu member states’ right to expropriate since they are “obliged to respect fundamental human rights when

62 63

64 65 66

Ibid, paras. 75, 312. Ibid, para. 79. In this case the respondent also relied on specific invocations of human rights which would fit neatly into the subsequent section of this chapter. Argentina referred to the ECtHR’s jurisprudence again against a factual background involving allegations of expropriation. It also argued that, given the public purpose of the measures, any possible compensation should not be based on an assessment of the fair market value of the investment. The tribunal dismissed these arguments and rejected the analogies to the ECtHR’s case law, considering that “Article i of the First Protocol to the European Convention on Human Rights permits a margin of appreciation not found in customary international law or the Treaty.” The tribunal added that the arguments on the standard of compensation had also not been properly developed: “Argentina has pleaded that, when a State expropriates for social or economic reasons, fair market value does not apply because otherwise this would limit the sovereignty of a country to introduce reforms in particular of poor countries. Argentina has not developed this argument, nor justified on what basis Argentina would be considered a poor country, nor specified the reforms it sought to carry out at the time.” See: ibid, paras. 241, 346, 354. European American Investment Bank (euram) v. Slovakia, uncitral, award on jurisdiction (22 October 2012) [Euram v. Slovakia]. Ibid, para. 56. Ibid, para. 86.

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implementing eu law and eu law has a broad scope of application.”67 It also argued that the protection against expropriation is equivalent in eu law and in the bit “because of the adoption of the Charter of Fundamental Rights of the eu which formalized the attitude of the eu towards fundamental human rights and in particular the provisions of the European Convention on Human Rights (“echr”) and the jurisprudence of the ECtHR.”68 The tribunal disagreed and ruled that the treaties did not have the same subject matter and, therefore, the bit remained applicable.69 The tribunal added that, even in the event that it had arrived at a different conclusion, the remaining prerequisites for the application of art. 59 of the vclt had not been fulfilled.70 It observed that the protection against expropriation guaranteed in eu law and in the bit were not incompatible but should, rather, be viewed as cumulative.71 However, in reaching this conclusion, the tribunal did not explicitly refer to the human rights aspect of the submissions made by the respondent. The tribunal referred to human rights when discussing a separate aspect of the case, namely when analyzing whether a judgment of the respondent state’s Constitutional Court had res iudicata effect. In this context, the tribunal looked at the human right to property and the relevant ECtHR’s judgments, which were relied upon in the analyzed judgment of the Constitutional Court.72 The tribunal concluded that this judgment did not have res iudicata effect regarding the claimant’s allegations on violations of the bit because it was based on different applicable law.73

67 68 69 70 71 72

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Ibid, para. 91. Ibid, para. 223. Ibid, paras. 178, 185. Ibid, para. 186. Ibid, 228, 231. Ibid, paras. 396, 399. In para. 401 the tribunal quoted a passage from Sporrong and Lönnroth v. Sweden, applications nos. 7151/75 and 7152/75, judgment (23 September 1982). In para. 405 it referred to: Mellacher et al. v. Austria, applications nos. 10522/83, 11011/84 and 11070/84, judgment (19 December 1989) [Mellacher v. Austria] and to Velosa Baretto v. Portugal, application no. 18072/91, judgment (21 November 1995). Euram v. Slovakia, supra note 64, para. 406. In para. 395 the tribunal noted, however, that the judgment was “relevant.” The tribunal later ruled that it lacked jurisdiction because the investor’s conduct constituted a waiver of its right to arbitrate. This conclusion was based on parallel proceedings conducted before local courts, in which the investor based its claims on the echr, bit and domestic law. See: European American Investment Bank (euram) v. Slovakia, uncitral, second award on jurisdiction (4 June 2014), paras. 34, 173, 238, 264.

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ii Invocations of Specific Human Rights The Suez and Vivendi v. Argentina and awg v. Argentina cases are also related to the financial crisis in Argentina in 2001–2002.74 These cases were conducted in parallel, before a tribunal composed of the same arbitrators, and were based on the same facts. The dispute which led to these arbitral proceedings concerned the privatization of water distribution and sewage (“waste water”) treatment in the city of Buenos Aires.75 Also in these cases, neither the written submissions nor the transcripts of oral pleadings are publicly available and, consequently, a detailed analysis of the parties’ arguments is not possible. However, one commentator who had seen the pleading commented that the Suez and Vivendi v. Argentina case is particularly interesting because “in legal filings […] Argentina has made human rights a major part of its defense.”76 Apart from the arguments related generally to human rights, in these cases Argentina pleaded the importance of the human right to water, which was relevant in the context of the facts. Therefore, Suez and Vivendi v. Argentina and awg v. Argentina open the list of cases which concern references made by states to particular human rights, not being merely limited to the general notion of human rights and the related obligations of states. In its awards rendered in the Suez and Vivendi v. Argentina and awg v. Argentina cases, the tribunal acknowledged that the respondent argued for an interpretation of provisions of the investment treaty within the context of the financial crisis and the human right to water. The respondent state claimed that “it adopted the measures in order to safeguard the human right to water of the inhabitants of the country.” This, in turn, should result in “a broader margin of discretion in the present cases than in cases involving other commodities and services.”77

74

75 76

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Suez, Sociedad General de Aguas de Barcelona and Vivendi Universal v. Argentina, icsid Case No. ARB/03/19, decision on liability (30 July 2010) [Suez v. Argentina], awg Group v. Argentina, uncitral, award (30 July 2010) [awg v. Argentina]. A very similar decision, based on comparable investments and analogous disputes, may be seen in Suez, Sociedad General de Aguas de Barcelona and InterAguas Servicios Integrales del Agua v. Argentina, icsid Case No. ARB/03/17 (30 July 2010). Requests for arbitration in both cases were received by the icsid on the same day and were “submitted by agreement of the parties to one same Tribunal.” See: Suez v. Argentina, para. 1 footnote 1, and para. 7. Suez v. Argentina, ibid, para. 28, awg v. Argentina, ibid, para. 26. Luke Eric Peterson, “Human Rights and Bilateral Investment Treaties. Mapping the role of human rights law within investor-state arbitration” (Rights & Democracy 2009), p. 27 [Peterson]. Suez v. Argentina, supra note 74, para. 252, awg v. Argentina, supra note 74, para. 252.

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From the text of the awards, it emerges that the claimants also failed to question the relevance of the human right to water during the dispute. The claimants focused rather on arguing the proper application of the right to water to the facts of the case, which would have supported their position. The investors claimed that “Argentina’s decision to privatize the Buenos Aires water service and to promote the creation of aasa [acronym for Aguas Argentinas s.a., a local subsidiary through which the investment was made – author’s note] was precisely to make that right more effective for larger numbers of Argentine inhabitants as the service was expanded through aasa’s efforts.”78 They further argued that it was the Argentinian government’s actions during the crisis, as opposed to the investors’ actions, that placed Argentina’s population’s right to water at risk.79 Although the tribunal did not find any inconsistency between the human rights and investment obligations of the state, it did not provide any explanation as to how it arrived at this conclusion. The only part of the award during which the tribunal’s analysis considered human rights arguments concerned the third condition of the defense of necessity under customary international law.80 The tribunal observed that the state was internationally obliged to respect both, human rights treaties and bits. It did not find any inconsistency or contradictions between the two regimes.81 78 79

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Suez v. Argentina, ibid, para. 255, awg v. Argentina, ibid, para. 255. It may be noted that five non-governmental organizations filed an amicus curiae submission. See: Suez v. Argentina, supra note 74, para. 256, awg v. Argentina, supra note 74, para. 256. A copy of the amicus curiae submission is available at: http://www.ciel.org/ Publications/SUEZ_Amicus_English_4Apr07.pdf [accessed on 2 February 2017]. Suez v. Argentina, supra note 74, para. 262, awg v. Argentina, supra note 74, para. 262. The current status of the state of necessity under international law is expressed in art. 25 of the International Law Commission’s Articles on State Responsibility. If the state of necessity defense finds application in a particular case, it precludes the wrongfulness of a state’s act. It does not annul or terminate the obligation in question, but provides “a justification or excuse for non-performance while the circumstance in question subsists.” There are four conditions which must be fulfilled cumulatively if a defense based on the state of necessity is to be successful: (i) the adopted measures must be the only way for the state to safeguard an essential interest against a grave and imminent peril, (ii) the act undertaken by a state cannot seriously impair an essential interest of the state or states towards which the obligation exists, or of the international community as a whole, (iii) the state of necessity cannot be successfully invoked if the international obligation in question, i.e. the one which can generate potential international liability of the state, excludes such a possibility, (iv) the state must not contribute to the situation of necessity. Suez v. Argentina, supra note 74, para. 262, awg v. Argentina, supra note 74, para. 262. “Argentina and the amicus curiae submissions received by the Tribunal suggest that

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The issue of the human right to water appears to be a “favorite topic” in academic discussion concerning the relationship between human rights and investment law.82 Many commentators argue that the water and sanitation sector is one of the most visible examples of possible tensions between the two fields.83 The importance of this issue may be illustrated by the fact that there have been “at least a dozen” investor – state arbitrations based on investment treaties concerning this sector.84 If one could speak about a “typical” situation concerning the human right to water in the context of investor-state arbitrations, it would be related to a privatization of water systems and subsequent increases in water prices. Such increases mainly affect the poorest people in the area where the controversial investment is located. This can result in a situation whereby water expenses ­Argentina’s human rights obligations to assure its population the right to water somehow trumps its obligations under the bits and that the existence of the human right to water also implicitly gives Argentina the authority to take actions in disregard of its bit obligations. The Tribunal does not find a basis for such a conclusion either in the bits or international law. Argentina is subject to both international obligations, i.e. human rights and treaty obligation, and must respect both of them equally. Under the circumstances of these cases, Argentina’s human rights obligations and its investment treaty obligations are not inconsistent, contradictory, or mutually exclusive. Thus, as discussed above, Argentina could have respected both types of obligations. Viewing each treaty as a whole, the Tribunal does not find that any of them excluded the defense of necessity.” 82 Fry, supra note 2, p. 94: “The relationship between the right to water and investment arbitration would appear to be a favorite topic of commentators who make normative arguments for why investment arbitral tribunals ought to take into consideration the human rights obligations of states.” 83 For example Peterson, supra note 76, p. 26: “One of the most visible circumstances where a government’s human rights obligations to those living within its territory may come into the frame of investment treaty arbitrations is in relation to foreign investments in the water and sanitation sector.” 84 Ibid. The importance of the right to water is a consequence of the fact that it is indispensable for life. In this context see: Francesco Costamagna, Francesco Sindico, “The linkage between international economic law and access to water and water scarcity” (International Environmental Law Research Centre 2007), available at: http://www.ielrc.org/ activities/workshop_0704/content/d0710.pdf [accessed on 2 February 2017], p. 1: “Water cannot be replaced and water is crucial for human and animal life on the earth. These two simple statements clearly highlight the importance of water for the international community and its unique nature among other natural resources” [emphasis as in original]. Similarly Stephen E. ­Draper, “Limits to Water Privatization” (2008) 134:6 Journal of Water Resources ­Planning and Management, p. 493: “Next to the air we breathe, water is the most critical element to human survival and progress.”

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become a very significant element of family budgets, or even where people cannot afford to pay water bills anymore. This in turn could result in reduced access to water. Such a situation was illustrated in the Aguas del Tunari v. Bolivia case. The water sector was privatized and a concession was granted to the investor. Among other provisions, the concession granted the investor an “exclusive use” of water resources in the area covered by the concession. The privatization process led to increases in water prices. Furthermore, the provisions of the concession led to public fears that the investor had been granted a potential legal title to impose fees for the use of private wells which did not exist prior to the privatization.85 The situation resulted in violent protests on the streets of Cochabamba, the third largest city in Bolivia, which became known as the “water wars.”86 The facts underlying the dispute in the Aguas del Tunari v. Bolivia case could have given rise to strong human rights arguments on behalf of the respondent. However, after the decision on jurisdiction was issued, the case was settled.87 It is believed that the investor dropped the case for a symbolic payment of 2 bolivianos – approximately 0.3 u.s. dollar – due to “continued international citizen pressure.”88 Apparently “it was the first time that a major corporation

85

86

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Maria McFarland, Sánchez – Morreno, Tracy Higgins, “No recourse: transnational corporations and the protection of economic, social and cultural rights in Bolivia,” (2003–2004) 27 Fordham International Law Journal, pp. 1766–1767. The initial tariff increase in Cochabamba was agreed to be 35% on average. However, some sources indicate that water bills charges increased by 43% and even in excess of 200% for some consumers. See: ibid, p. 1763. According to other sources, the valuation of the exact numbers regarding the increase of water price is unclear and it varies between 10% and 400%. See: Reynaud Neil Daniels, “Right of Access to Water in South Africa” (Bepress Legal Series Working Paper 2006), available at: http://law.bepress.com/expresso/ eps/1364 [accessed on 2 February 2017], p. 37. See also: Kriebaum, Privatizing…, supra note 8, p. 169.The situation in Cochabamba was so grave that the term “water wars” was used. Its importance may be also underlined by the fact that it was used as background in the movie “Even the Rain” (“También la Lluvia,” 2010). “Settlement agreed by the parties and proceeding discontinued at the request of the Respondent (Order taking note of the discontinuance pursuant to icsid Arbitration Rule 44 issued by the Tribunal on March 28, 2006).” See: https://icsid.worldbank.org/en/Pages/ cases/casedetail.aspx?CaseNo=ARB/02/3 [accessed on 2 February 2017]. The Democracy Center, “Bechtel vs Bolivia: Details of the Case and the Campaign,” available at: http://democracyctr.org/bolivia/investigations/bolivia-investigations-the-water -revolt/bechtel-vs-bolivia-details-of-the-case-and-the-campaign/ [accessed on 2 February 2017].

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had ever dropped an international investment case as a direct result of global public pressure.”89 Also in Impregilo v. Argentina the host state invoked the human right to water as a defense to the claim initiated by the investor.90 Faced with the allegation of expropriation, Argentina argued that the measures were within the regulatory powers of the state and “were particularly important in order to guarantee its inhabitants the human right to water.”91 The respondent further argued that “the obligations assumed by the Argentine Republic as regards investments do not prevail over the obligations assumed in treaties on human rights. Therefore, the obligations arising from the bit must not be construed separately but in accordance with the rules on protection of human rights. Treaties on human rights providing for the human right to water must be especially taken into account in this case.”92 This author had the opportunity to discuss the interrelationship between human rights and international investment law with one of the leading academics involved in Impregilo v. Argentina. He confirmed that both parties indeed argued that the human right to water was relevant to the dispute and that this issue was the subject of some lively discussion during the oral phase of the proceedings. Given the above it is surprising that, in the text of its analysis in the award, the tribunal did not address the issues of human rights at all. However, for reasons other than human rights, the tribunal dismissed the expropriation claim.93 This may be explained by the fact that the tribunal adopted a pragmatic approach and did not enter into analysis of issues which became irrelevant for the decision on dismissing the claim for expropriation.94 Urbaser v. Argentina concerned facts related to those underlying Impregilo v. Argentina.95 In this case, Argentina invoked arguments concerning the human 89 90 91 92 93 94

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James Shultz, “The Cochabamba Water Revolt and Its Aftermath,” in: James Schultz, Melissa Draper, “Dignity and Defiance” (University of California Press 2009), p. 32. Impregilo v. Argentina, icsid Case No. ARB/07/17, award (21 June 2011). Ibid, para. 228. Ibid, para. 230. Ibid, para. 283. Some tribunals adopt alternative approach and analyze all of the issues pleaded by the parties, even if ultimately deciding to decline jurisdiction or to dismiss the claim because of one of the issues raised. See for example: st-ad v. Bulgaria, uncitral, pca Case No. 2011-06, award on jurisdiction (18 July 2013), para. 257 [st-ad v. Bulgaria], Plama v. Bulgaria, icsid Case No. ARB/03/24, award (27 August 2008), para. 147. Urbaser et al. v. Argentina, icsid Case No. ARB/07/26, award (8 December 2016). The tribunal made it clear in para. 101 that “it will avoid, when possible, comparing the Parties’

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right to water in three contexts: the Fair and Equitable Treatment (referred to as the “FET”) standard, the state of necessity and a counter-claim.96 With reference to the human rights aspect of the fet standard, the tribunal confirmed that the host state’s obligation “to guarantee the continuation of the basic water supply to millions of Argentines” is a “universal basic human right” and, as such, it is relevant when interpreting the investors’ legitimate expectations.97 With respect to the state of necessity defense, the investors did not oppose the relevance of the human right to water, but disagreed with the respondent’s suggested interpretation of that right. The investors argued that the host state’s human rights obligations do not “operate as an obstacle to the fulfilment of its obligations towards the Claimants.”98 The tribunal considered that this argument was “too short” and commented that the investors’ position “does not resolve the conflict between the obligation to guarantee the Concessionaire’s right under the Concession and the access of the poor and vulnerable population to water when this cannot be ensured otherwise than by failing to comply with the host State’s obligations toward the Concessionaire.”99 It concluded that the investors “must have been aware that they were indirectly bound by the fundamental right to water” of the local population.100 The tribunal’s detailed analysis in Urbaser v. Argentina can be considered as ground-breaking with respect to the third issue, namely counter-claiming. In its counter-claim, Argentina argued that the investor’s non-performance of concession obligations “did not only affect mere contractual provisions, but basic human rights, as well as the health and the environment of thousands of persons, most of which lived in extreme poverty.”101 Argentina’s arguments referred to the human right to water, the Universal Declaration of Human Rights (referred to as the “udhr”), the International Covenant on Economic, Social and Cultural Rights 1966 (referred to as the “icescr”) and the un Committee on Economic, Social and Cultural Rights (referred to as the “cescr”) General positions in the instant case to the findings of the Impregilo Tribunal. The Impregilo case does involve both agba and the Concession. This Tribunal, however, is called to reach its own and independent judgment. The facts, evidence, and legal arguments brought before the Impregilo Tribunal were not the same as those submitted here.” 96 Ibid, paras. 602, 648–650, 702, 706, 1115, 1156–1164. 97 Ibid, para. 624. 98 Ibid, paras. 691, 693, 694. 99 Ibid, para. 720. 100 Ibid, para. 721. 101 Ibid, para. 1156.

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Comment 15.102 The investors disputed the jurisdiction of the tribunal in regard to the counterclaim and its merits. The wording of the jurisdiction clause in Argentina-Spain bit was vital for the tribunal’s conclusion that it had jurisdiction to hear the counterclaim.103 The tribunal then observed that the jurisdiction clause covers claims which are “not limited to rights directly based on the application (or interpretation) of the bit.”104 Next, the tribunal declined the argument that “companies operating internationally are immune from becoming subjects of international law.”105 This led to the conclusion that generally such companies can be subjects not only of rights, but also of obligations, including in the field of human rights.106 Having analyzed the udhr, the International Covenant on Civil and Political Rights 1966 (referred to as the “iccpr”) and the cescr General Comment 15,107 the tribunal concluded that “the human right for everyone’s dignity and its right for adequate housing and living conditions are complemented by an obligation on all parts, public and private parties, not to engage in activity aimed at destroying such rights.”108 The tribunal continued its analysis of human rights by looking at the status of the human right to water and sanitation. It observed that it “is recognized today as part of human rights and that this right has as its corresponding obligation the duty of States to provide all persons living under their jurisdiction with safe and clean drinking water and sewage services.”109 However, within the specific scope of the international human right to water the tribunal concluded that this right entails obligations on states, but not on non-state actors.110 Having referred to the cescr General Comment 15, the tribunal concluded that any obligations related to the human right to water are imposed on the investors under domestic, not international law, even if such legislation is implemented by the states in realization of their international obligations. It observed that the conclusion would be different with respect to “obligation to abstain, like a prohibition to commit acts violating human rights.”111 The tribunal paid much attention to interpret the ­human 102 Ibid, paras. 1156–1164. 103 Ibid, para. 1187. The applicable clause was framed in a broad manner and referred to “disputes arising between a Party and an investor of the other Party in connection with investments within the meaning of this Agreement.” 104 Ibid, para. 1191. 105 Ibid, para. 1195. 106 Ibid, paras. 1194–1195. 107 Ibid, paras. 1196–1198. 108 Ibid, para. 1199. 109 Ibid, para. 1205. 110 Ibid, para. 1208. 111 Ibid, paras. 1209–1210. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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right to water as guaranteed in international human rights law.112 It then dismissed the counter-claim on merits because the respondent’s “compliance with its primary responsibility to ensure the area’s population’s right to water was not a governmental primary focus and can therefore not be retained as a corresponding obligation on behalf of the” investors.113 Urbaser v. Argentina proves that tribunals in investor – state arbitration are capable of performing detailed analysis of human rights aspects of the cases submitted to them. If sufficient attention is paid, they can properly analyze and decide upon human rights issues relevant for the investment dispute before them. In addition, although the tribunal did not expressly refer to the concept of obligations to respect, protect and fulfil, its interpretation and human rights instruments relied upon are in line with this concept. The case of Saur v. Argentina also relates to the human right to water.114 The host state argued that bits do not replace other international treaties. It added that the norms included in bits are to be interpreted in accordance with the obligations undertaken by states in human rights treaties, and in particular with respect to the human right to water. The respondent argued that a measure which is adopted with the purpose of “guaranteeing fundamental human rights,” such as the right to water, cannot be considered to be unjust or expropriatory, but as exercise of the police and regulatory powers of the state.115 The claimant argued that the invocation of human rights by the host state was simply a “vain attempt” presented ex post to justify measures that breached the bit. It also added that the motivation behind the measures cannot justify violations of, or limit on, the guarantees included in bits.116 In its decision, the tribunal expressly recognized that “human rights in general, and the right to water in particular” constitute one of the sources which the tribunal should take into consideration to resolve the dispute. This was because: (i) these rights are integrated in the Argentinean legal system at a constitutional level, and (ii) they form part of the general principles of international law. The tribunal added that, from the perspective of the state, access to drinkable water constitutes “a public service of a basic need. From the perspective of a citizen it constitutes a fundamental right. Therefore, the legal system can and should reserve to public authorities legitimate role of planning, supervision, police, sanctioning, intervening and even rescission, in protection of 112 Ibid, para. 1211. 113 Ibid, para. 1219. 114 saur International v. Argentina, icsid Case No. ARB/04/4, decision on jurisdiction and liability (6 June 2012) [saur v. Argentina]. In this dispute Argentina appointed as an arbitrator Tomuschat, who specializes in human rights. 115 Ibid, para. 328. 116 Ibid, para. 329. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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public interest.”117 Having said this, the tribunal ruled that the aforementioned prerogatives of the public authorities were compatible with the protection guaranteed in the applicable bit. According to the tribunal, the fundamental right to water and the investor’s right to protection offered in the bit operate on different levels. The company which has the water concession is dependent upon the public authority, which enjoys the prerogatives of the sovereign. However, the use of such prerogatives is not “absolute” and should be done in a way which is compatible with the bit.118 The tribunal indicated that it is precisely its task to “balance these two principles” when assessing the merits of the claims.119 Despite claiming this, and having heard arguments on this issue by both of the parties, the tribunal did not address the issue of human rights, at least explicitly, in its analysis of the substantive provisions of bits.120 Examples of investor – state arbitrations in which host states invoked specific human rights are not limited solely to the human right to water. Explicit references to the jurisprudence of the ECtHR were made in the Rompetrol v. Romania case.121 The case related to an alleged violation of the bit by criminal proceedings brought against the investor’s representatives. The respondent stated that the allegation should be considered as related to a denial of justice, which in turn requires the exhaustion of local remedies. As one commentator noted, in this context “apparently both parties focused on the relevance of the echr concerning the measures taken vis-à-vis the individuals rather than a potential violation of Claimant’s rights under the Convention.”122 Although a detailed analysis of the parties’ submission is not possible, as they are not publicly available, the following observation made by the tribunal should be noted: “The Tribunal finds this to be the convenient place to address also the relevance to the proceedings before it of the echr, and in that context of the jurisprudence of the European Court of Human Rights (“ECtHR”) under the Convention. This was a subject to which a great deal of attention was paid in the written and oral pleadings of both Parties, specifically in relation to the European Court’s Judgments on the interception of communications (several 117 118 119 120

Ibid, para. 330. Ibid, para. 331. Ibid, para. 332. Stephanie Barbara Leinhardt, “Some Thoughts on Foreign Investors Responsibilities to Respect Human Rights,” (2013) 10:1 Transnational Dispute Management, p. 9 [Leinhardt]. 121 Rompetrol Group v. Romania, icsid Case No. ARB/06/3, award (6 May 2013) [Rompetrol v. Romania]. 122 Ursula Kriebaum, “Case Comment: The Rompetrol Group N.V. v. Romania,” (2014) 15 the Journal of World Investment & Trade, pp. 1026–1027 [Kriebaum – Case Comment…].

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of which were decisions against Romania itself), but also in the more general context of the fair trial provisions of the echr, on which the Court’s jurisprudence is very extensive indeed.”123 It should be noted that the respondent even presented “legal expert evidence,” provided by Kühne. As described by the tribunal in the final award, the expert explained the impact of the judgments of the ECtHR on domestic laws and described the jurisprudence of the ECtHR on the right to a fair trial.124 When the expert was cross-examined during the hearings, this part of the hearings covered “various ECtHR cases, notably those on interception of communication, the sequestration or confiscation of evidence and fair trial rights, and the nature of Romania’s obligations under the echr for its system of domestic law.”125 The tribunal observed that the parties to the dispute were “in basic agreement that the provisions of the echr are not directly applicable as such to the substantive dispute between trg as the Claimant and Romania as the Respondent in this arbitration (although there was some suggestion that the echr ought to be taken into account as relevant material for the interpretation of the bit, under the rule in Article 31(3)(c) of the Vienna Convention on the Law of Treaties).”126 It continued to summarize that the respondent invoked the ECtHR jurisprudence to argue that, if its domestic legal system meets the requirements under the echr, the application of domestic laws cannot lead to a violation of the bit. The claimant, in turn, argued that the applicable bit constitutes lex specialis.127 In the course of the proceedings, this division became less clear. The claimant started to invoke the jurisprudence of the ECtHR in its favor: “In reality, however, the competing submissions of the Parties turned out to be less straightforward than that: the Claimant, for example, invoked 123 Rompetrol v. Romania, supra note 121, para. 168. 124 Ibid, para. 106.b.: “He explained that, while ECtHR jurisprudence is directly effective in Romania, until there is a decision by the Strasbourg Court, the domestic courts are entitled to decide the matter as they see fit, and there is no retroactivity of ECtHR judgments. He pointed to the very extensive nature of the Strasbourg jurisprudence on the right to a fair trial, which covered 60% of the cases heard to 2009, in 62% of which the claimant had been successful.” 125 Ibid. 126 Ibid, para. 169. 127 Ibid, “the Respondent argued that the echr was designed to set the bench-mark standard for the protection of the individual, so that it was “plainly obvious” that any system or practice that met the echr standard would a fortiori satisfy the requirements of the bit for the treatment of investments; the Claimant argued, in contrast, that the bit represented lex specialis, both in time and in substance, so that an echr standard was of no more than incidental or secondary interest.”

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judgments of the ECtHR in support of its submissions as to the illegality of the interception of Mr. Patriciu’s and rrc’s communications, as to the effect of bad faith on prosecution, as to the difference between the status of a prosecutor and that of a court, and as to the place of local remedies; whereas the Respondent, in addition to claiming that certain aspects of Romanian internal law offer a higher standard of protection than does the echr, also advanced the proposition mentioned above in its reverse form, i.e. that if the Claimant was unable to establish a breach of the echr standard, there ‘certainly’ could not be a breach of the bit standard.”128 When addressing the relevance of human rights to the dispute, the tribunal started from the “elementary proposition that it is not called upon to decide any issue under the echr, whether the issue in question lies in the past or is still open. Its function is solely to decide, as between trg and Romania, “­ legal dispute[s] arising directly out of an investment” and to do so in accordance with “such rules of law as may be agreed by the parties,” which in the present case means essentially the bit, in application of the appropriate rules for its interpretation”.129 The tribunal underlined that the individuals whose human rights were affected were entitled to file a complaint before the ECtHR. Remedies under the echr will continue to be available and will not be affected in any way by the arbitral award rendered in the proceedings.130 The tribunal concluded its considerations concerning the relevance of human rights in the following way: “i. The Tribunal is not competent to decide issues as to the application of the echr within Romania, either to natural persons or to corporate entities; ii. The governing law for the issues which do fall to the Tribunal to decide is the bit, and notably its requirements for fair and equitable treatment and non-impairment of, and full protection and security for, the investments of investors of one Party in the territory of the other Party; iii. The category of materials for the assessment in particular of fair and equitable treatment is not a closed one, and may include, in appropriate circumstances, the consideration of common standards under other international regimes (including those in the area of human rights), if and to the extent that they throw useful light on the content of fair and equitable treatment in particular sets of factual circumstances; the examination is however very specific to the particular circumstances, and defies definition by any general rule; […].”131 Therefore, the tribunal in Rompetrol v. Romania denied the echr the status of applicable law. It declined the possibility of deciding a separate, potential 128 129 130 131

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claim presented on the grounds of the echr. This was commented on as being a “restrictive approach concerning the applicability of human rights law in investment cases.”132 Kriebaum observed that the fact that the ECtHR would be competent to hear a claim cannot by itself preclude the possibility of raising such a claim in the course of bit proceedings. Moreover, international human rights could form part of the law applicable to this dispute.133 Regardless of the above, it must be clearly pointed out that the tribunal in Rompetrol v. Romania­did not deny the possible influence of human rights on the interpretation of standards of protection included in bits. Thus, it confirmed that there is a place for human rights in bit arbitrations. This was confirmed in the course of the very same proceedings, when the tribunal was faced with a motion to disqualify (remove) one of the claimant’s counsels from the proceedings due to his past professional relationship with one of the arbitrators. When analyzing its authority to interfere with a party’s freedom to choose their legal representation, the tribunal referred to, among others, art. 6 of the echr and art. 14 of the iccpr and underlined the importance of “a litigant’s basic rights in pursuing or defending legal proceedings,” which includes the right to choose counsel.134 Another example is the Azurix v. Argentina case, referred to above in the context of respondent states invoking the general notion of human rights. 132 Kriebaum, Case Comment…, supra note 122, p. 1030. Alvarez commented that “The Rompetrol tribunal ducked most of these issues” [i.e. human rights arguments presented by the parties]. See: Alvarez, supra note 15, p. 12. 133 Ibid, p. 1031: “Both the Netherlands and Romania are a party to the European Convention on Human Rights. The jurisdiction clause in the Netherlands–Romania bit does not limit the Tribunal’s jurisdiction to breaches of its standards but refers to “solving disputes with respect to investments” in general. This would also cover a dispute arising out of a violation of the echr if only the investor is the victim of the violation. Therefore, the general refusal to decide “any issue under the echr whether the issue in question lies in the past or is still open” (para. 170) could have been less categorical. The Tribunal saw “its function [as] solely to decide, as between trg and Romania, [legal dispute[s] arising directly out of an investment] and to do so in accordance with [such rules of law as may be agreed by the parties.] In the present case this means essentially the bit, in application of the appropriate rules for its interpretation” (para. 170, emphasis as in original). Since Article 42(1) of the icsid Convention refers to “such rules of international law as may be applicable,” this would include the echr if a violation of the Convention is directly related to the legal dispute arising out of the investment given the fact that it is ratified by the Netherlands and Romania. The fact that the European Court of Human Rights is competent to interpret the Convention does not exclude other organs from finding a violation of the Convention.” 134 Rompetrol Group v. Romania, icsid Case No. ARB/06/3, decision on the participation of a counsel (14 January 2010), para. 20 and footnote 7. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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­ rgentina filed a request for annulment of the award rendered, in accordance A with the requirements established in the icsid Convention.135 One of the arguments presented by Argentina in justification of its request for annulment related to the principle established under article 1 of Protocol 1 to the echr in the jurisprudence of the ECtHR, according to which “whenever a shareholder’s interests are harmed by any measure directed at the company, it is up to the latter to take appropriate action.”136 With respect to reliance on the jurisprudence of the ECtHR, the annulment committee observed that “[a]s the extent of the protections afforded by an investment protection treaty depends in each case on the specific terms of the treaty in question, the Committee regards comparisons with differently worded treaties as of limited utility, especially treaties outside the field of investment protection.”137 It confirmed the approach of the ECtHR to the claims brought by shareholders, as relied upon by the respondent, but it did not find it relevant for its decision because “such an approach does not inform the situation where a law or treaty might confer certain rights directly on a shareholder which would be violated by an injury to the company, or answer the question whether the shareholder could have standing to bring a claim in that event.”138 This conclusion is in line with the possibility that shareholders themselves can be considered as “investors” and therefore may have their own standing, for the purposes of claims based on bits. It can be concluded that the annulment committee in Azurix v. Argentina did not deny the possible relevance of the jurisprudence of human rights bodies for bit disputes. It clarified that, first of all, proper attention must be paid to the wording of the applicable bit. Any such reliance on the jurisprudence of 135 Azurix v. Argentina, icsid Case No. ARB/01/12, decision on the application for annulment (1 September 2009), para. 1 [Azurix v. Argentina Annulment]. 136 Ibid, para. 61(i). Similar arguments were made in Enron v. Argentina case. See: Enron and Ponderosa Assets v. Argentina, icsid Case No. ARB/01/3, decision on the application on annulment (30 July 2010), para. 85(h) and footnote 43. The annulment committee dismissed this argument, but did not comment on the relevance of Argentina’s human rights arguments. 137 Azurix v. Argentina Annulment, supra note 135, para. 128. 138 Ibid. The annulment committee also noted that the ECtHR “has held that (subject to possible exceptions) a shareholder in a company does not have standing to bring a claim for a violation of the company’s right’s under Article 1 of Protocol No. 1 to the European Convention on Human Rights, and that the mere fact that there has been a violation of the company’s right’s under Article 1 of Protocol No. 1, does not of itself mean that there has been a violation of the shareholder’s rights under that provision.” In the accompanying footnote it made reference to numerous cases of the ECtHR in support of this conclusion.

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human rights bodies when interpreting the applicable bit must take into consideration any differences in the wording of the treaties subject to comparison. Mondev v the us is another case in which the respondent invoked human rights arguments.139 In its rejoinder on competence and liability, the respondent referred to art. 6(1) of the echr and the judgment of the ECtHR in Ashingdane v. the UK as “support for the proposition that international law does not forbid immunity.”140 Although this is the only reference to human rights in publicly available written submissions, a transcript from the hearings shows that human rights arguments were lively debated during the oral phase of the arbitral proceedings. For example Crawford, a member of the tribunal, asked the claimant about the application in the case of the margin of appreciation concept. He noted that “in the Pope & Talbot case, the Tribunal on several occasions referred to a margin of appreciation in terms of the conduct of the host state, and the term “margin of appreciation” has obviously been used in other contexts in, for example, human rights.”141 The same member of the tribunal also referred to human rights jurisprudence when asking questions about the continuous violation of international law.142 During the hearings, the claimant expressly referred to the human rights arguments raised by the respondent in connection with the immunity of states. This included reliance

139 Mondev International v. United States, icsid Case No. ARB(AF)/99/2, award (11 October 2002) [Mondev v. the us]. 140 Mondev International v. United States, icsid Case No. ARB(AF)/99/2, rejoinder on competence and liability of respondent United States of America (1 October 2001), pp. 19–20. The reference was made to: Ashingdane v. United Kingdom, application no. 8225/78, judgment 28 May 1985, paras. 55–57. This argument was further developed in the oral phase of the proceedings. See: Mondev International v. United States, icsid Case No. ARB(AF)/99/2, transcript of hearing on competence and liability, volume iv, 23 May 2002, pp. 759–763, 776. 141 Mondev International v. United States, icsid Case No. ARB(AF)/99/2, transcript of hearing on competence and liability, volume i, 20 May 2002, p. 241. 142 Ibid, p. 274: “[o]n the other hand, the human rights courts have held that in the case of a disappearance, here the disappearance, the situation of disappearance continues until after the critical date is a continuing wrongful act.” Mondev International v. United States, icsid Case No. ARB(AF)/99/2, transcript of hearing on competence and liability, volume iii, 22 May 2002, pp. 694–695: “Could you say something about the – what I call the margin of appreciation problem? Some of the earlier cases – I can’t remember which one it is now, actually expressly uses the phrase “margin of appreciation.” It’s a term which has been used very much by the human rights courts and has been controversial when used by them, but is there any room for margin of appreciation argument in the application of the 1105 standard or is that an unnecessary intrusion from another body of law?”

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on human rights jurisprudence confirming the claimant’s position.143 Finally, the same member of the tribunal asked for human rights jurisprudence concerning forms of expropriation.144 As it can be seen, arguments based on human rights were discussed in detail during the hearings in the Mondev v the us case. In its decision on the allegation of retrospective application of “judicial lawmaking,” the tribunal observed that “[t]he European Court of Human Rights has given some guidance on this question under Article 7 of the European Convention in the context of criminal proceedings, where the effect of a new judicial decision is to impose a criminal liability which did not, or arguably did not, exist when the crime was committed. If there is any analogy at all, it is much fainter in civil cases. Assuming, for the sake of argument, that standards of this kind might be applicable under Article 1105(1), in the Tribunal’s view there was no contravention of any such standards in the present case.”145 The tribunal was also faced with an allegation that if a state party to a bit confers to one of its authorities immunity from suit in respect of a ­measure 143 Mondev International v. United States, icsid Case No. ARB(AF)/99/2, transcript of hearing on competence and liability, volume ii, 21 May 2002, pp. 307–309 [Mondev v. the us – Transcript ii]. The claimant questioned also relevance of the case law relied upon by the respondent. See: Mondev International v. United States, icsid Case No. ARB(AF)/99/2, transcript of hearing on competence and liability, volume v, 24 May 2002, p. 906. 144 Mondev v. the us – Transcript ii, ibid, pp. 408–409: “PROFESSOR CRAWFORD: There have been some decisions of the European Court of Human Rights involving various forms of—MR. WATTS: I was going to mention that. You’re one paragraph ahead of me. PROFESSOR CRAWFORD: It’s just the analogy to disappearance is a slightly awkward – MR. WATTS: Of course. And so I was going on to say even more directly in point is a case decided by the European Court of Human Rights, Papamikolopolos v. Greece. There, as the International Law Commission explains, and I quote, “A seizure of property not involving formal expropriation occurred some eight years before Greece recognized the court’s competence.” The court held that there was a continuing breach of the right to peaceful enjoyment of property under Article 1 or Protocol i to the convention, which continued after the protocol had come into force. And that’s from paragraph 9 of the commentary on the same article.” 145 Mondev v the us, supra note 139, para. 138. In the footnotes the tribunal referred to the following ECtHR’s judgments: s.w. v. United Kingdom, application no. 20166/92, judgment (22 November 1995), paras. 34–36; c.r. v. United Kingdom, application no. 20190/92 (22 November 1995), paras. 32–34; Streletz, Kessler and Krenz v. Germany, applications nos. 34044/96, 35532/97 and 44801/98, judgment (22 March 2001), para. 50, Carbonara and Ventura v. Italy, application no. 24638/94, judgment (30 May 2000), paras. 64–69; Agoudimos and Cefallonian Sky Shipping v. Greece, application no. 38703/97, judgment (28 June 2001), paras. 29–30.

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a­ ffecting an investment, this by itself constitutes a breach of the Full ­Protection and Security (referred to as the “fps”) and the fet standards.146 In this context, the tribunal observed inter alia that, in a series of decisions, the ECtHR “has held that the conferral of immunity in ways recognized in international practice does not involve a denial of access to a court, contrary to Article 6(1) of the European Convention of Human Rights.”147 Addressing the issue of statutory immunities of state agencies before their own courts, the tribunal added that in a number of cases the ECtHR “has held that special governmental immunities from suit raise questions of consistency with Article 6(1) of the European Convention on Human Rights, because they effectively exclude access to the courts in the determination of civil rights.”148 Concluding the above considerations, the tribunal in Mondev v. the us decided that ECtHR judgments “emanate from a different region, and are not concerned, as Article 1105(1) of the nafta is concerned, specifically with investment protection. At most, they provide guidance by analogy as to the possible scope of the nafta’s guarantee of ‘treatment in accordance with international law, including fair and equitable treatment and full protection and security.’”149 In this sense, the tribunal confirmed that human rights may indeed inform the understanding and interpretation of the fet and fps standards. When one looks into the interrelationship between international investment law and human rights, a reference to Glamis Gold v. the us case should be made.150 The factual background of this case can serve as a good example of a First Model Situation. Although the respondent did not present human rights arguments, it made reference to international instruments “recognizing the importance of preserving and protecting areas of cultural importance.”151 The dispute concerned a foreign investment in mining claims and mill sites.

146 Mondev v the us, supra note 139, para. 140. 147 Ibid, para. 141. The tribunal referred to the ECtHR’s judgments issued in Al-Adsani v. United Kingdom, application no. 35763/97, judgment (21 November 2001), McElhinney v. Ireland, application no. 31253/96, judgment (21 November 2001), Fogarty v. United Kingdom, application no. 37112/97, judgment (21 November 2001). 148 Ibid, para. 143. Subsequently, the tribunal quoted a passage from the ECtHR’s judgment issued in Fogarty v. United Kingdom and in footnote 80 referred to a number of other ECtHR cases. 149 Ibid, para. 144. 150 Glamis Gold v. United States, Ad hoc – uncitral Arbitration Rules, award (14 May 2009) [Glamis v. the us]. 151 Glamis Gold v. United States, Ad hoc – uncitral Arbitration Rules, counter-memorial of respondent (19 September 2006), pp. 33–35.

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The activities undertaken by the investor allegedly affected the indigenous peoples’ rights of the Quechan Indian Nation (referred to as the “Tribe”) by virtue of their proximity to the sacred lands of the indigenous peoples.152 The Tribe submitted an amicus curiae brief in the course of the proceedings.153 In this submission, the Tribe explained that the proximity of the investment to their sacred sites would impair its rights of access and use of these sites, as well as its cultural, spiritual and religious practices.154 It underlined the human rights dimension of its rights, emerging from such human rights as religious freedom, cultural heritage, land rights and self-determination. It added that it had the right to its sacred sites.155 Although the us, as a party to the proceedings, did not invoke human rights arguments, the tribunal acknowledged that the case had gained the attention of human rights activists and civil society. It affirmed that “the decision in this proceeding has been awaited by private and public entities concerned with environmental regulation, the interests of indigenous peoples, and the tension sometimes seen between private rights in property and the need of the State to regulate the use of property.”156 Having noted the above, the tribunal in Glamis Gold v. the us declared that it intended to avoid “controversial issues” insofar as they were unnecessary to 152 Glamis v. the us, supra note 150, para 10: “Federal public lands on which Glamis possesses mining rights is near to – but not a part of – designated Native American lands and areas of special cultural concern added to the attention given to the mining project.” 153 Accepted by the Arbitral Tribunal on 19 September 2005. See: Glamis Gold v. United States, Ad hoc—uncitral Arbitration Rules, decision on application and submission by Quechan Indian Nation (19 September 2005). There were two more amicus curiae submissions in this case, filed by the National Mining Association and by Friends of the Earth. 154 Non-party supplemental submission, Glamis Gold v. United States, submission of the Quechan Indian Nation (16 October 2006), available at: http://www.state.gov/documents/ organization/75016.pdf [Non-party supplemental submission, accessed on 2 February 2017], p. 1 A Quechan Tribal Historian compared the significance of the area to Jerusalem or Mecca. See: Glamis v. the us, supra note 150, para. 111. 155 Non-party supplemental submission, ibid, p. 1. See also art. 12(1) of the United Nations Declaration on the Rights of Indigenous Peoples: “Indigenous peoples have the right to manifest, practise, develop and teach their spiritual and religious traditions, customs and ceremonies; the right to maintain, protect, and have access in privacy to their religious and cultural sites […].” The Tribe argued moreover that the protection of its sacred sites was required for the exercise of the freedom of religion and culture, as provided in art. 18 of the udhr, arts. 18 and 27 of the iccpr, art. 5 of the ilo Convention 169 concerning Indigenous and Tribal Peoples in Independent Countries, art. 11 of the of the un Declaration on the Rights of Indigenous Peoples, art. 6 of the un Declaration on the Elimination of All Forms of Intolerance and of Discrimination Based on Religion or Belief. 156 Glamis v. the us, supra note 150, para. 8. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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decide the case at hand and issue the award.157 When deciding the merits of the case, the tribunal dismissed the claims.158 Consequently, the tribunal did not consider it necessary to analyze the human rights arguments presented by the Tribe in its amicus curiae brief. By dismissing the claim, the tribunal issued an award in line with the Tribe’s position. This pragmatic approach adopted by the tribunal in Glamis Gold v. the us was commented upon by Karamanian in the following way: “Rather to open the Pandora’s box […] the tribunal cautiously promoted the objectives of human rights in its holding without mentioning the norms in the rationale.”159 Similarly Kulick observed that the tribunal’s approach “appears to indirectly honor human rights and other public interest considerations as outlined in the Quechan Non-Party Submission.”160 Another example is the Bernhard v. Zimbabwe case, in which the respondent relied on human rights when faced with allegations of expropriation.161 Firstly, it invoked two of the ECtHR’s judgments considering the right to property as guaranteed in art. 1 of Protocol 1 to the echr “in support of its position that the Tribunal should give it a wide margin of appreciation as to its determination of what was required by way of land reform in the public interest and how the land reform was carried out.”162 Secondly, it referred to the ECtHR’s case law to support its position that due process (as an element of lawful expropriation) had been observed.163 The tribunal disagreed with these arguments. In its opinion, “due caution should be exercised in importing concepts from other legal regimes (in this 157 Ibid, “The Tribunal is not required to decide many of the most controversial issues raised in this proceeding. The Tribunal observes that a few awards have made statements not required by the case before it. The Tribunal does not agree with this tendency.” 158 Glamis v. the us, supra note 150, paras. 536, 830, 835–836. 159 Susan L. Karamanian, “Human Rights Dimensions of Investment Law,” in: Erika De Wet and Jure Vidmar, “Hierarchy in International Law: The Place of Human Rights” (Oxford University Press 2012), p. 263. Levine commented on this approach in the following way: “[…] despite the attempts of the Quechan people to bring the interaction of investment treaty protections and indigenous peoples’ rights to attention of the tribunal, the tribunal declined to rule on such issues in circumstances in which it could dispose of the case on other grounds.” See: Judith Levine, “The interaction of international investment arbitration and the rights of indigenous peoples,” in: Freya Baetens, “Investment Law within International Law. Integrationist Perspectives” (Cambridge University Press 2013), p. 118. 160 Andreas Kulick, “Global Public Interest in International Investment Law” (Cambridge University Press 2012), p. 304. 161 Bernhard von Pezold v. Zimbabwe, icsid Case No. ARB/10/15, award (28 July 2015). 162 Ibid, para. 453. The respondent relied in particular on the ECtHR’s judgment in Jahn et al. v. Germany, applications nos. 46720/99, 72203/01 and 72552/01, judgment (30 June 2005), para. 91. 163 Ibid, para. 486, referring to James v the uk case (supra note 43). Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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case European human rights law) without a solid basis for doing so. Balancing competing (and non-absolute) human rights and the need to grant States a margin of appreciation when making those balancing decisions is well established in human rights law, but the Tribunal is not aware that the concept has found much support in international investment law.”164 Thus, the tribunal decided that the “the margin of appreciation doctrine has not achieved customary status” and declined to apply this doctrine.165 The tribunal also rejected the respondent’s arguments on the echr’s case law regarding due process, although in this context the decision was fact-driven. In the tribunal’s view, the facts of the case differed from those underlying the ECtHR’s judgments under consideration.166 iii Human Rights Referred to by Arbitral Tribunals In the cases described above, the parties invoked human rights arguments. However, examples also exist of cases in which the tribunals themselves looked at human rights in order to inform their understanding of certain legal concepts which they were to apply. In such cases, due to the confidentiality of the proceedings, there is no accessible evidence that the parties resorted to human rights based arguments. However, the texts of the awards are silent as regards the existence of any such submissions. Strictly speaking, this approach of the tribunals to refer to human rights of their own initiative can be adopted in all three Model Situations. However, for the clarity of analysis, this author decided to include them in the part related to the First Model Situation. This is because the scope of the issues analyzed in the cases discussed below fits most closely to this Model Situation. The Tecmed v. Mexico case concerned a dispute involving a landfill of hazardous industrial waste, located in one of Mexico’s municipalities.167 Authorization had been granted in 1994 for the landfill to operate for an indefinite period of time, and one year later the investor was awarded the right to operate the landfill. However, in 1998 the investor was requested to close the landfill. When assessing expropriation claims, the tribunal referred to judgments of the ECtHR and of the Inter-American Court of Human Rights (referred to 164 Ibid, para. 465. 165 Ibid, para. 466. 166 Ibid, para. 500: “These steps did not constitute a “constraint” on due process, but rather its total elimination.” 167 Técnicas Medioambientales Tecmed v. Mexico, icsid Case No. ARB(AF)/00/2, award (29 May 2003).

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as the “IACtHR”).168 After establishing that bits also protect foreign investors against regulatory expropriations, the tribunal made reference to the proportionality test as applied under the ECtHR. It examined whether actions or measures taken by the state “are proportional to the public interest presumably protected thereby and to the protection legally granted to investments, taking into account that the significance of such impact has a key role upon deciding the proportionality.”169 Relying on two judgments of the ECtHR, the tribunal observed that “[t]here must be a reasonable relationship of proportionality between the charge or weight imposed to the foreign investor and the aim sought to be realized by any expropriatory measure.”170 The tribunal went further to quote relevant passages from the ECtHR’s judgment in the James v. the UK case – the same judgment as was referred to by the tribunal in Azurix v. Argentina.171 Tecmed v. Mexico case illustrates that tribunals may refer to international human rights and to human rights jurisprudence when interpreting the provisions of bits. There is no obstacle to do so, even if the parties to a particular dispute do not themselves present arguments based on human rights.172 In one early case, Lauder v. Czech Republic, the tribunal also referred to the jurisprudence of the ECtHR.173 Similarly, such reference was made in the context of an expropriation. When faced with an expropriation claim, the ­tribunal had to analyze the concept of indirect (or “de facto,” or “creeping”) expropriation.174 In this context, it observed that the ECtHR “held that a ‘formal’ expropriation is a measure aimed at a ‘transfer of property,’ while a ‘de facto’

168 Ibid, para. 116, with references to the judgment of the ECtHR in Matos e Silva et al. v. Portugal, application no. 15777/89, judgment (16 September 1996), para. 85 [Matos e Silva v. Portugal], and of the IACtHR in Baruch Ivcher Bronstein v. Peru, judgment (6 February 2001), para. 124. 169 Ibid, para. 122, with reference to Matos e Silva v. Portugal, ibid. 170 Ibid, with references to the judgment of the ECtHR in Mellacher v. Austria, supra note 72, para. 48, and Pressos Compañía Naviera et al. v. Belgium, application no. 17849/91, judgment (3 July 1997), para. 38. 171 Azurix v. Argentina, supra note 37. 172 Although it must be noted that the tribunal in Fireman’s Fund v. Mexico, faced with the claim on expropriation based on the same provision of the same investment treaty (i.e. art. 1110 of the nafta) explicitly declined to follow the Tecmed tribunal’s reasoning. See: Fireman’s Fund v. Mexico, icsid Case No. ARB(AF)/02/1, award (17 July 2006), footnote 161. 173 Ronald S. Lauder v. Czech Republic, uncitral, award (3 September 2001). 174 Ibid, para. 200.

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e­ xpropriation occurs when a State deprives the owner of his ‘right to use, let or sell (his) property’.”175 Similarly in Saipem v. Bangladesh the tribunal referred to the jurisprudence of the ECtHR.176 When faced with an expropriation claim, the tribunal referred to the jurisprudence of the ECtHR in order to determine what is capable of being expropriated. The relevant issue was whether an award rendered by another arbitral tribunal can be expropriated. The tribunal observed in this context that “it is widely accepted under general international law that immaterial rights can be the subject of expropriation. Moreover, as the European Court of Human Rights unequivocally held, rights under judicial decisions are protected property that can be the object of an expropriation […].”177 The tribunal then quoted the ECtHR’s judgment in the Stran Greek Refineries and Stratis Andreadis v. Greece case.178 The tribunal in Saipem v. Bangladesh once again referred to the jurisprudence of the ECtHR when analyzing whose actions on behalf of the state can result in expropriation. It agreed with the claimant that a judicial act is capable of resulting in an expropriation. It supported this conclusion by noting that the ECtHR “had no hesitation to hold that court decisions can amount to an expropriation” and referring to the judgment issued by the ECtHR in the ­Allard v. Sweden case.179 The aforementioned three cases illustrate that arbitral tribunals deciding bit claims may indeed benefit from the jurisprudence of human rights bodies. In all of these cases, the tribunals referred to the jurisprudence of the ECtHR regarding the issue of a human right to property, and in one case also to the IACtHR, in order to inform their understanding of protection against unlawful expropriation, as guaranteed in many bits. The tribunals did not apply human rights standards which did not form part of the applicable law. Instead, they sought guidance in understanding different concepts relevant to the allegation of expropriation under bits. This shows one of the possible interpretations by arbitrators and the impact of human rights on arbitral proceedings. This is 175 Ibid [emphasis as in original]. The tribunal referred to Mellacher v. Austria, supra note 72, para. 44. 176 Saipem v. Bangladesh, icsid Case No. ARB/05/07, decision on jurisdiction and recommendation on provisional measures (21 March 2007) [Saipem v. Bangladesh]. 177 Ibid, para. 130. 178 Stran Greek Refineries and Stratis Andreadis v. Greece, application no. 13427/879, judgment (9 December 1994), paras. 59–62. In the footnote the tribunal referred also to Brumarescu v. Romania, application no. 28342/95, judgment (28 October 1999). 179 Saipem v. Bangladesh, supra note 176, para. 132, with reference to Allard v. Sweden, ­application no. 35179/97, judgment (24 June 2003).

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possible due to certain similarities between the nature of investment law and international human rights. The above observation is supported by the Thunderbird v. Mexico case.180 Although in the arbitral award itself the tribunal made no reference to human rights, one of the tribunal’s members – Wälde – issued a dissenting opinion. In his analysis, he noted the similarities between the nature of international investment law and human rights.181 He reiterated this observation when analyzing the issue of costs allocation, where he observed that “[t]he judicial practice most comparable to treaty-based investor-state arbitration is the judicial­recourse available to individuals against states under the European Convention on Human Rights.”182 When analyzing the notion of legitimate expectations as part of the fet standard, he referred to the jurisprudence of the ECtHR concerning the definition of legally protected “acquired rights.”183 He also invoked a judgment of 180 International Thunderbird Gaming v. Mexico, uncitral, arbitral award (26 January 2006) [Thunderbird v. Mexico]. It must be noted that the classification of this case into the category of the present section may be considered controversial. The claimant referred to human rights in its statement of claim. It observed, for example, the impact of human rights on the understanding of a denial of justice and protection against arbitrary state actions. However, references to human rights were made only incidentally and were of minor importance with respect to the investor’s line of argument. See: International Thunderbird Gaming v. Mexico, uncitral, statement of claim, 15 August 2003, pp. 63, 67, 72, 73, 76. 181 International Thunderbird Gaming v. Mexico, uncitral, separate opinion (December 2005), para. 13: “[…] while public international law still provides the main principles (in particular Art. 31 of the Vienna Convention, which moreover is an expression of an international consensus on interpretative principles), one needs to bear in mind that investment treaties such as the nafta, deals with a significantly different context from the one envisaged by traditional public international law: At its heart lies the right of a private actor to engage in an arbitral litigation against a (foreign) government over governmental conduct affecting the investor. That is fundamentally different from traditional international public law, which is based on solving disputes between sovereign states and where private parties have no standing. Analogies from such inter-state international law have therefore to be treated with caution; more appropriate for investor-state arbitration are analogies with judicial review relating to governmental conduct – be it international judicial review (as carried out by the wto dispute panels and Appellate Body, by the ­European- or Inter-American Human Rights Courts or the European Court of Justice) or national administrative courts judging the disputes of individual citizens’ over alleged abuse by public bodies of their governmental powers.” 182 Ibid, para. 141. Wälde added in the context of costs allocation that “again, states have to defray their own legal representation expenditures, even if they prevail.” 183 Ibid, para. 27.

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the (then) European Commission of Human Rights confirming that legitimate expectations, if they are to be protected by international law, should not be contrary to law.184 The tribunal in Total v. Argentina also referred to the “general principles and public international law in a non-bit context,” including the jurisprudence of the ECtHR, to support its conclusions on the meaning of legitimate expectations.185 The Micula v. Romania case also shows that the guidance sought by tribunals in human rights jurisprudence is not limited to the right to property.186 This case concerned, inter alia, the question of the investor’s nationality. The tribunal observed in this context that “in interpreting the bit, i.e., an instrument between two sovereign States, it may take into account, as directed by Article 31(3)(c) of the Vienna Convention on the Law of Treaties, any relevant rules of international law.”187 It then added that it “will be mindful of Article 15 of the Universal Declaration of Human Rights according to which everyone has the right to a nationality, and that no one shall be arbitrarily deprived of his nationality nor denied the right to change his nationality.”188 This award is also worthy of attention because the tribunal clearly identified the Universal Declaration of Human Rights as one of the relevant rules of international law for treaty interpretation within the meaning of art. 31 of the vclt. The tribunal in ibm v. Ecuador made a general reference to “human rights jurisprudence” to support its conclusions that domestic law – even at a constitutional level – cannot justify breaches of international law.189 In Electrabel v. Hungary the tribunal referred to, inter alia, the ECtHR’s jurisprudence to support its view that state measures must be proportional, understood as “the requirement that the impact of the measure on the investor be proportional to the policy objective sought.”190 184 Ibid, para. 93. 185 Total v. Argentina, icsid Case No. ARB/04/01, decision on liability (27 December 2010), paras. 129, 134 and references made in footnote 139. Moreover, in the context of discussing discrimination the tribunal referred to the definition of discrimination developed by the ECtHR (footnote 259). 186 Ioan Micula et al. v. Romania, icsid Case No. ARB/05/20, decision on jurisdiction and admissibility (24 September 2008). 187 Ibid, para. 87. 188 Ibid, para. 88. 189 ibm World Trade v. Ecuador, icsid Case No. ARB/02/10, decision on jurisdiction and competence (22 December 2003), para. 72. 190 Electrabel v. Hungary, icsid Case No. ARB/07/19, award (25 November 2015), para. 179. The European Commission filed a submission in this case, relying on human rights arguments

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In adc v. Hungary the tribunal quoted parts of the ECtHR’s judgment in Papamichalopoulos v. Greece to support its decision that the valuation date of compensation payable for illegal expropriation should be the date of the award, as opposed to the date of the expropriatory measures.191 In Perenco v. Ecuador the tribunal referred to the echr and quoted the ECtHR’s judgment in Mamatkulov and Askarov v. Turkey when analyzing the relevant provisional measures and their role “in the administration of public international law.”192 In Quiborax v. Venezuela the tribunal referred to the ECtHR’s jurisprudence twice.193 Firstly, in the context of expropriation the tribunal had to decide whether to quantify the losses suffered by the claimant as of the date of the award or as of the date of the expropriatory measures. It relied, inter alia, on the ECtHR’s judgments to justify the first approach.194 Secondly, when faced

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and the ECtHR’s case law. See: Electrabel v. Hungary, icsid Case No. ARB/07/19, decision on jurisdiction, applicable law and liability (30 November 2012), paras. 4.102, 4.102. adc Affiliate and adc & admc Management v. Hungary, icsid Case No. ARB/03/16, award (2 October 2006), para. 497, referring to Papamichalopoulos v. Greece, application no. 14556/89, judgment (31 October 1995), paras. 36, 37. Perenco v. Ecuador, icsid Case No. ARB/08/6, decision on provisional measures (8 May 2009), para. 70, quoting the ECtHR’ judgment in Mamatkulov and Askarov v. Turkey, applications nos. 46827/99 and 46951/99, judgment (4 February 2005), paras. 123, 124. Quiborax et al. v. Bolivia, icsid Case No. ARB/06/2, award (16 September 2015) [Quiborax v. Venezuela – merits]. Ibid, para. 378 and references made in footnote 437, but with dissenting opinion of Stern. Quiborax v. Venezuela case is an example of reliance on human rights by the tribunals on their own initiative, although it does not exactly suit the First Model Situation. It is also referred to as an example of the Third Model Situation, when the investor relied on the ECtHR’s jurisprudence to support its claims for moral damages. The Occidental v. Ecuador case is yet another possible example of tribunals referring to human rights on their own initiative, but not necessarily falling within the classification as a First Model Situation – see ­Occidental Petroleum and Occidental Exploration and Production v. Ecuador, icsid Case No. ARB/06/11, award (5 October 2012). In this case, the claimant alleged that the measures undertaken by the state were not proportionate, which resulted in a breach of the FET standard. When analyzing these arguments, the tribunal referred to the jurisprudence of, inter alia, the ECtHR on proportionality (para. 403). The tribunal then relied on the Tecmed and Azurix cases, explicitly mentioning their references to the ECtHR’s judgment in James v. the uk case (paras. 404–409). The award was partially annulled, but for reasons unrelated to the proportionality analysis of the tribunal. The annulment committee upheld the tribunal’s analysis of proportionality, having referred to, inter alia, the tribunal’s reliance on the ECtHR’s case law. See: Occidental Petroleum and Occidental Exploration and Production v. Ecuador, icsid Case No. ARB/06/11, decision on annulment of the award (29 October 2015), paras. 342, 350.

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with a request to award satisfaction in the form of a declaratory judgment, the tribunal relied on the ECtHR’s judgments to support its view that moral harm “can be compensated in monetary terms,”195 and that provisional measures bind the parties to the proceedings.196 With respect to the latter, it even observed that it will “follow this consistent line of cases and the evolution of international law evidenced in icj and ECtHR jurisprudence.”197 In El Paso v. Argentina the tribunal had to decide, inter alia, whether Argentina could rely on non-precluded measures provision in the applicable bit.198 In this context, the crucial issue was whether such a clause was self-judging, i.e. whether Argentina could authoritatively decide whether or not the prerequisites for applying this provision had been fulfilled. In its analysis the tribunal referred to art. 15 of the echr and art. 27 of the American Convention on Human Rights (referred to as the “iachr”). These provisions allow states to derogate from certain obligations under the respective treaties if stated prerequisites are fulfilled. The tribunal was guided by the ECtHR’s jurisprudence according to which such emergency clauses “are far from being self-judging.”199 In ConocoPhillips v. Venezuela, one of the tribunal’s members – Abi-Saab – issued a dissenting opinion. He opposed the majority’s view that the tribunal had no power to reconsider previously issued decisions on jurisdiction and merits. When presenting his reasoning, he referred to the jurisprudence of, inter alia, the ECtHR, which recognized such a power “in the interest of justice.”200 Finally, in Philip Morris v. Uruguay the tribunal also invoked human rights. Firstly, when analyzing the reasonableness of the state’s measures aiming to protect public health in the context of the fet standard, the tribunal “agreed with the Respondent that the “margin of appreciation” is not limited to the context of the echr but “applies equally to claims arising under bits,” at least in contexts such as public health.”201 It then applied the concept of margin 195 Ibid, para. 558 and references made in the footnote 711. 196 Ibid, para. 580, quoting the ECtHR’s judgment in Mamatkulov and Askarov v. Turkey, applications nos. 46827/99 and 46951/99, judgment (4 February 2005), para. 125. 197 Ibid, para. 582. 198 El Paso Energy International v. Argentina, icsid Case No. ARB/03/15, award (31 October 2011), paras. 561–562. 199 Ibid, para. 598. 200 ConocoPhillips Petrozuata et al. v. Venezuela, icsid Case No. ARB/07/30, dissenting opinion (10 March 2014) of Abi-Saab, para. 57. In para. 59 he quoted part of the ECtHR’s decision in Storck v. Germany, application no. 61603/00, decision as to the admissibility (26 October 2004). 201 Philip Morris Brands et al. v. Uruguay, icsid Case No. ARB/10/7, award (8 July 2016), para. 399. The text of the award suggests that the respondent invoked the ECtHR’s ­jurisprudence Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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of appreciation when assessing the state’s measures in the case at hand.202 Secondly, the tribunal referred to human rights in the context of a claim concerning an alleged denial of justice. This aspect of the dispute related to a challenge to regulatory measures brought before local courts, which led to contradictory judgments having been issued by two judicial authorities having a “co-equal position” and “independent from each other.”203 The tribunal concluded that such situation “may appear unusual, even surprising, but it is not shocking and it is not serious enough in itself to constitute a denial of justice.”204 The tribunal referred to the ECtHR’s judgment in Nejdet v. Turkey to support its decision that “the position of separate administrative tribunals in the civil law tradition” does not amount to denial of justice.205 Although the tribunal did not expend much effort explaining the impact of the ECtHR’s judgment on its decision, the dissenting opinion of one of the arbitrators – Born – confirmed that this appears to be “the sole basis for the Tribunal’s conclusion on this point.”206 Although the tribunal did not explain the theoretical underpinnings of its reliance on the ECtHR concept of the margin of appreciation and the ECtHR’s judgments, this suggests that human rights had a genuine impact on the tribunal’s reasoning and conclusions. In his dissenting opinion Born opposed this approach. With respect to the margin of appreciation he observed that it “is a specific legal rule, developed and applied in a particular context, that cannot properly be transplanted to the bit (or to questions of fair and equitable treatment more generally). There are well-considered legal rules, already applicable to questions of fair and equitable treatment, which serve similar purposes to those of the “margin of appreciation,” but in a more nuanced and balanced manner.”207 In his view, the concept of margin of appreciation as developed by the ECtHR “is based upon the specific language of the echr and its Protocols and, as the weight of other authority concludes, is not transferable to the specific terms of Article 3(2) of the bit or to customary international law more generally.”208 He opposed the majority’s application of the margin of appreciation because the provisions

202 203 204 205 206 207 208

in the contexts of an alleged denial of justice and unlawful police powers, but not in the context of the tribunal’s references (para. 495, footnote 696, para. 304, footnote 403). Ibid, para. 419. Ibid, para. 523. Ibid, para. 529. Ibid, paras. 531–532, referring to the ECtHR’s judgment in Nejdet Sahin and Perihan Sahin v. Turkey, application no. 13279/05, judgment (20 October 2011), paras. 81–86, 94. Philip Morris Brands et al. v. Uruguay, icsid Case No. ARB/10/7, concurring and dissenting opinion (8 July 2016), para. 44. Ibid, para. 87. Ibid, para. 138. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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of the bit are drafted differently and do not “contain language reserving any particular sphere of discretion or immunity for state actions.”209 With respect to the denial of justice claim, the dissenter did not share the view that the ECtHR’s case law was relevant when interpreting the applicable bit.210 He further observed that even if one was to rely on the ECtHR’s judgment in Nejdet v. Turkey, as the majority did, this “does not support the Tribunal’s holding and, on the contrary, requires the opposite conclusion from that reached by the Tribunal.”211 He followed with a detailed analysis of the ECtHR’s judgment in Nejdet v. Turkey and paid attention to a strong dissenting opinion issued jointly by seven of the ECtHR’s judges in that case, which he found more convincing.212 The dissenting arbitrator further observed that the facts underlying the ECtHR’s judgment relied upon by the majority of the tribunal were “plainly distinguishable from the present dispute, which involves a very different and significantly more troubling set of circumstances.”213 He referred to the udhr, iccpr and IACtHR to support his conclusion that, in the dispute at hand, the claimant suffered a denial of access to a court which, in turn, amounted to a denial of justice.214 3

Second Model Situation – Host States Invoking Human Rights Where Violations Have been Committed by Investors

The Second Model Situation refers to scenarios where an investor who initiates a claim based on a bit has been involved in human rights violations in the territory of a host state. It also includes scenarios when human rights are violated in complicity with the host state, or at least when the host state is aware of the violations. The case of Phoenix Action v. Czech Republic should be mentioned first.215 The investment in this case was alleged to consist of two local companies 209 210 211 212

Ibid, para. 143. Ibid, para. 45. Ibid, para. 44. Ibid, paras. 49–52. Born also referred to other judgments of the ECtHR – Tudor Tudor v. Romania, application no. 21911/03, judgment (24 March 2009), para. 31 and Brumarescu v. Romania, application no. 28342/95, judgment (28 October 1999), para. 61. 213 Ibid, para. 53. 214 Ibid, para. 67, footnote 69. He also added that “if the present case was brought before the ECtHR, I do not believe that the Court would have viewed these circumstances as “tolerable,” for either a period or at all.” See: ibid, para. 71. 215 Phoenix Action v. Czech Republic, icsid Case No. ARB/06/5, award (15 April 2009).

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whose business activity consisted of the export and import of ferroalloys. One of the companies was engaged in a legal dispute with its commercial partner. Before that dispute was resolved by the Czech courts, the other party went bankrupt. The claim in investor – state arbitration alleged that the Czech courts had failed to promptly resolve the private commercial dispute.216 The second of the companies was engaged in a dispute with the police and the public prosecutor concerning the freezing of its funds in bank accounts and the seizure of its accounting and business documents.217 These measures were related to a criminal investigation which had been initiated against the company’s executive officer – Beňo. When the Czech police took Beňo into custody and attempted to escort him to the office dealing with corruption and financial crimes, he escaped and fled to Israel. He then incorporated a new company under Israeli law and commenced arbitral proceedings against the Czech Republic on the basis of the Israel – Czech Republic bit. The tribunal in the Phoenix Action v. Czech Republic case declined jurisdiction to hear the claim. It decided that the investment was “purported” and that it “does not qualify as a protected investment” under the applicable bit and the icsid Convention.218 Importantly, the tribunal observed that jurisdictional requirements “cannot be read and interpreted in isolation from public international law, and its general principles. To take an extreme example, nobody would suggest that icsid protection should be granted to investments made in violation of the most fundamental rules of protection of human rights, like investments made in pursuance of torture or genocide or in support of slavery or trafficking of human organs.”219 Strictly speaking, the Phoenix Action v. Czech Republic case does not fit neatly­as a factual example of the Second Model Situation, since no human rights were violated by the investor in the case. However, the mere fact of the tribunal’s observation above justifies the relevance of this case when analyzing legal issues concerning the Second Model Situation. The tribunal made it clear that there is no protection granted by bits if investors violate the “most fundamental rules of protection of human rights.” Contrary to the section above, illustrating First Model Situations, the following illustrations of the Second Model Situation cannot be limited solely to the case law of investor – state arbitration. Apart from Phoenix Action v. Czech Republic, there are no publicly available cases explicitly referring to human 216 217 218 219

Ibid, para. 31. Ibid, para. 32. Ibid, para. 145. Ibid, para. 78.

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rights and illustrating the Second Model Situation. This can be explained by the fact that, if an investor violates human rights, it is rather improbable that he will decide to commence arbitration based on a bit if the state reacts to such violations. In addition, if the violations are committed in complicity with the host state, it is unlikely that any dispute will actually arise between the two cooperating parties. Given the above, the present section illustrates some situations which happen in reality. Despite the above comments, it cannot be precluded that such situations may become part of complex sets of facts, underlying possible future investment disputes leading to bit proceedings. Investor – state arbitrations often concern foreign investments in such sectors of economic activity as the exploitation of natural resources and privatization of services.220 In the opinion of this author, disputes in these sectors give rise to many issues of public interest which may be framed in human rights language. Starting with considerations concerning the exploitation of natural resources­sector, reference can be made to an example concerning Shell’s activities in the Niger Delta in Nigeria. It illustrates the activities of business actors in the context of the right to a clean environment. It is alleged that Shell’s investment activities led to numerous oil spills. These spills in turn resulted in contamination of the Niger Delta and the pollution of numerous water sources.­ As a consequence, the Niger Delta is considered to be “one of the world’s most severely petroleum-impacted ecosystems.”221 These developments led to the extinction of many fish species and the related disappearance of whole villages which previously lived on fishery.222 It also resulted in damage to agricultural lands.223 Part of the broad picture is illustrated by violations of the Ogoni people’s human rights. In 2001, the African Commission on Human and Peoples’ Rights (referred to as the “African Commission”) concluded its consideration of a communication under Article 55 of the African Charter on Human and Peoples’ Rights (referred to as the “African Charter”). The abuses related 220 Lahra Liberti “Investissements et droits de l’homme,” in: Philippe Kahn, Thomas Wälde, “New Aspects of International Investment Law” (Brill 2007), pp. 796–797. 221 Amnesty International, “Nigeria: Petroleum, pollution and poverty in the Niger Delta” (Amnesty International Publications 2009), p. 14. 222 Nils Klawitter, “Nigeryjscy rybacy kontra Shell,” available at: http://wiadomosci.onet.pl/ swiat/nigeryjscy-rybacy-kontra-shell/5plzj [accessed on 2 February 2017]. 223 Amnesty International, “Oil industry has brought poverty and pollution to Niger Delta,” available at: http://amnesty.org/en/news-and-updates/news/oil-industry-has-brought -poverty-and-pollution-to-niger-delta-20090630 [accessed on 30 November 2014].

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to ­human rights violations committed by Shell in complicity with the state’s military government and the local state oil company. The facts of the case concerned “disposing toxic wastes into the environment and local waterways in violation of applicable international environmental standards” and “contamination of water, soil and air.”224 The state military forces even “attacked, burned and destroyed several Ogoni villages and homes” under a pretext and left “thousands of villagers homeless.”225 The African Commission found violations of numerous human rights, including the right to health (art. 16 of the African Charter), the right to a clean environment (art. 24 of the African Charter) and the right to food (derived from arts. 4, 16 and 22 of the African Charter). The African Commission found violations of all aspects of the state’s international human rights obligations – i.e. to respect, to protect and to fulfil. By way of example, when considering the right to food, it stated that “[t]he government’s treatment of the Ogonis has violated all three minimum duties of the right to food. The government has destroyed food sources through its security forces and state oil company; has allowed private oil companies to destroy food sources; and, through terror, has created significant obstacles to Ogoni communities trying to feed themselves.”226 With respect to the right to a clean environment, the African Commission concluded that “[t]he pollution and environmental degradation to a level humanly unacceptable has made it living in the Ogoni land a nightmare. The survival of the Ogonis depended on their land and farms that were destroyed by the direct involvement of the government.”227 Similar problems were reported with reference to other investors in the Niger Delta. For example, with respect to the activities of Eni it was reported that a zone known as a “pristine paradise” has become more and more polluted by crude oil. The pollution is a direct consequence of the exploration, exploitation and transportation of crude oil. It is considered as having a detrimental effect on the environment. In consequence, it affects the lives of local peoples who have based their livelihoods on fishing.228 224 The Social and Economic Rights Action Center and the Center for Economic and Social Rights v. Nigeria, African Commission on Human and Peoples’ Rights Communication No. 155/96 (2001), Decision of 13 October 2001, para. 2. 225 Ibid, paras. 7, 8. 226 Ibid, para. 66. 227 Ibid, para. 67. The African Commission did not receive a “substantive response” from the state and decided “on the facts provided by the Complainants” and treated them “as given.” See paras. 40 and 49. 228 Will Ross, “Niger Delta pollution: Fishermen at risk amidst the oil,” available at: http:// www.bbc.co.uk/news/world-africa-22487099 [accessed on 2 February 2017].

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Many situations concerning the potentially negative effects on the environment of foreign investors’ activities are related to accidents which happen in facilities. One of the most well known of such accidents occurred in Bhopal, India. It took place in an establishment which produced chemical substances and led to toxic gas escaping from the establishment and into the air. In consequence of the accident, 16,000 people died and a further 100,000 started to have health problems.229 Numerous other examples exist of accidents caused by business activity which have a negative effect on the environment and public health. The most well known recent example is perhaps the explosion and oil spill from the Deepwater Horizon platform in the Gulf of Mexico in the United States. States’ reactions to such situations can be considered from the perspective of states’ obligations to protect and fulfil human rights. The human rights of indigenous peoples offer the next illustration of possible factual situations which prove the possible interrelationship between international investment law and human rights in the exploitation of natural resources sector. The Glamis Gold v. the us case, already commented upon in greater detail as an illustration of the First Model Situation, proves that there are “examples of investment projects which collided with the rights of indigenous peoples living in the area of the investment, especially rights related to their ancestral lands.”230 The following example can also illustrate the problem. The existence of the Matsés people, an uncontacted community of indigenous peoples living in voluntary isolation in Peru was endangered by the activities of a petroleum company. The company performed exploration activities in a zone which was established as an indigenous reserve for an “isolated” tribe of the Matsés people. It was suggested that this situation could result in the death of the tribe, given the non-immunity of the tribe’s members to diseases which would be brought by the company’s employees. It could also lead to the death of company employees who could be subject to violent attacks of the tribe in defense of its territory.231 As is explained in the cescr General Comment No. 21, “the strong communal dimension of indigenous peoples’ cultural life is indispensable to their ­existence, well-being and full development, and includes the right to the lands, 229 Centralny Instytut Ochrony Pracy – Państwowy Instytut Badawczy, “Informacje o przebiegu i skutkach wybranych poważnych awarii,” available at: http://www.ciop.pl/18388 .html [accessed on 2 February 2017]. 230 Schadendorf, supra note 1, p. 2. 231 Survival, “El “pueblo del jaguar” hace un llamamiento urgente a los accionistas de una petrolera,” available at: http://www.survival.es/noticias/9333 [accessed on 2 February 2017].

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territories and resources which they have traditionally owned, occupied or otherwise used or acquired.”232 More striking examples of human rights violations exist in the exploitation of natural resources sector. They relate to abuses committed by security forces contracted by business actors. They include situations where security forces open fire on local peoples in response to protests – whether lawful or ­otherwise – against the company’s activities. Such situations can even lead to the declaration of martial law and the need for local authorities to use the police and/or army to stabilize the situation. By way of example, one may refer to a situation in Guatemala (in Santa Rosa and Jalapa), where a multinational company Tahoe Resources was involved.233 The conflict which arose there led to the deaths of six people. Both sides claimed that the violence was commenced by the other side.234 Without engaging in an analysis of who commenced the violence, the simple fact is that the local authorities decided to introduce martial law and to suspend numerous constitutional rights for a period of thirty days, in order to normalize the situation.235 Human rights violations consisting in extrajudicial killings need not always be committed by security forces directly contracted by business actors. In the context of exploiting natural resources, in many circumstances business actors actively cooperate with the host states. Such cooperation may lead to situations whereby a host state provides personnel whose actions violate the human rights of local peoples. An example of such a situation was reported to have happened in the North Mara Mine in Tanzania. The African Barrick Gold company decided not to contract private security forces but, rather, to rely on local police. It was reported that the police’s authority was abused and led to a “shocking number of gunshot deaths and injuries to local people.”236 232 un Committee on Economic, Social and Cultural Rights, General comment No. 21 (E/C.12/GC/21), para. 36. 233 http://blog.mimundo.org/2013/05/2013-05-02-tahoes-san-rafael-mine-conflict-leads-to -state-of-siege/ [accessed on 2 February 2017]. 234 http://www.tahoeresourcesinc.com/tahoe-clarifies-reports-regarding-incidents-near -escobal-project/ [accessed on 2 February 2017]. 235 It is reported that seven Guatemalan individuals seek justice in the jurisdiction of the mother company and filed a civil lawsuit today in a Vancouver court. See: http://www .ccij.ca/programs/cases/index.php?DOC_INST=24 [accessed on 5 January 2015]. A copy of the notice of civil claim is available at: http://www.ccij.ca/webyep-system/program/ download.php?FILENAME=74-9-at-File_Upload_24.pdf&ORG_FILENAME=Notice_Civil _Claim.pdf [accessed on 5 January 2015]. 236 http://www.leighday.co.uk/News/2013/December-2013/High-Court-orders-African -­Barrick-Gold-to-stop-sui [accessed on 5 January 2015]. See also: http://business -humanrights.org/Links/Repository/1023863 [accessed on 5 January 2015].

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In this context, an even more striking situation was reported with reference to the construction of the Yadana pipeline in Myanmar-Burma. Foreign investors actively participated and technically enabled the construction of the said pipeline on territories where many people lived. The construction works were secured by the army. During its operations, the army violated the human rights of the local peoples by inter alia extrajudicial killings, forced labor and expropriation without compensation.237 The involvement of business actors in another pipeline project in the same state was considered by the Norwegian Council on Ethics to be “an unacceptable risk of the companies contributing to serious and systematic human rights violations.”238 Another similar situation may be seen when examining the construction of the Baku-Tbilisi-Ceyhan oil pipeline. bp led an international consortium which was responsible for this project. It was alleged that, during the construction of the project, in a region in north-east Turkey “paramilitary police” and “state security forces” detained and tortured local activists who acted against the project or sought fair compensation for expropriated lands.239 Six environmental and human rights groups filed a complaint under the oecd Guidelines for Multinational Enterprises related to the problems reported to have happened with respect to the construction of this pipeline. On 22 February 2011, the United Kingdom’s National Contact Point released a revised final statement. Although it did not agree with all of the allegations made by the complainants, it affirmed that “the company failed to identify specific complaints of intimidation against affected communities by local security forces where the information was received outside of the formal grievance and monitoring channels, and, by not taking adequate steps in response to such complaints, failed to adequately safeguard against the risk of local partners undermining the overall consultation and grievance process.”240 Situations of this kind, involving the use of the state’s armed forces to secure investors’ activities, can be considered from the perspective of the obligation 237 http://www.czsz.bzzz.net/node/3609 [accessed on 3 January 2015]. 238 Council on Ethics, the Government Pension Fund Global, Recommendation on the exclusion of Daewoo International Corporation, Oil and Natural Gas Corporation Ltd., gail India and Korea Gas Corporation from the investment universe of the Government Pension Fund Global (2 May 2011), p. 11. 239 The Corner House, “bp violating human rights rules, says uk government,” available at: http://www.thecornerhouse.org.uk/resource/bp-violating-human-rights-rules-says-uk -government [accessed on 2 February 2017]. 240 uk National Contact Point – revised final statement, Specific Instance: btc Pipeline, available at: http://www.thecornerhouse.org.uk/sites/thecornerhouse.org.uk/files/11-766 -revised-final-statement-ncp-btc.pdf [accessed on 2 February 2017], p. 2.

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to respect human rights. At the same time, if human rights violations are committed by private security forces contracted by the investors, the obligation to protect human rights by the host states come into play. Also, if one thinks about the home state of the investors, both the obligation to protect and to fulfil human rights become relevant. Privatizations represent another significant sector of economic activity from the perspective of investor – state arbitrations. Privatized sectors often lie at the very core of investor – state arbitrations.241 Some examples of this are presented in the previous section, in the context of the First Model Situation. Privatization is an ongoing process which takes place in economic sectors which provide essential goods and services, such as health care, education, security, prison administration or public transportation. Privatization often occurs with respect to the supply of water, gas or electricity. Traditionally, states were responsible for these sectors and related infrastructure. Generally speaking, privatization is not by default considered as a negative phenomenon, although it involves certain risks.242 Privatization by itself can have both a positive and negative impact: “[o]n the one hand, privatization can promote 241 “Complex State contracts involving public utility concessions, build–operate–transfer (bot) contracts or privatization schemes are more often at the origin of disputes than other types of investment instruments, depending also on the extent of the obligations of the State. Numerous disputes have arisen in connection with concession agreements for public services such as water distribution or waste collection. Mining and petroleum extraction projects are also more often at the origin of disputes than foreign investment in other sectors of the economy.” See: unctad, “Investor-State Disputes: Prevention and Alternatives to Arbitration” (United Nations 2010), p. 74. Additionally, in privatized sectors relevant for local communities, the relationships between investors and states are more complex because of the fact that even if a dispute arises, services for the people must be still provided. See for example on p. 12: “A country’s population may be dependent on a private foreign investor for the provision of public services, while the investor will have committed substantial amounts of capital to the enterprise, with a return on investment only feasible after a number of years. Hence, investor and State might be obliged to maintain a functioning working relationship despite the existence of a dispute.” 242 “Privatization consists in hiring private enterprises to carry out public service functions. Its aim is, theoretically, to bring market efficiency and new sources of capital to underfunded and poorly managed public enterprises. Sometimes, this operation may replace a state-owned monopoly with a private one. Thus, if not carefully considered, the economic cure may only displace the problem of realising the right to water for all, from the realm of politics and public decision-making to the realm of markets and private profit seeking.” See: Fabrizio Marrella, “On the Changing Structure of International Investment Law: The Human Right to Water and icsid Arbitration,” (2010) 12 International Community Law Review, p. 343 [Marrella].

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investment into failing essential services in need of new technology, infrastructure and management and can play an important role in modernizing sectors such as telecommunications. On the other hand, privatization can lead to market concentration amongst large corporations and the crowding out of smaller firms.”243 In other words, during the process of privatization states withdraw from areas relevant for human rights, which traditionally fell within state powers and where states previously typically had a monopoly to provide such services. They cease to provide such services by themselves and “outsource” them to private parties.244 However, even if privatized, these sectors remain important from the perspective of human rights.245 It is states who remain responsible for the condition of such services from the standpoint of international human rights. Public services can be privatized, but this process does not “exempt” states from their international human rights obligations.246 As it was explained by the cescr in the General Comment No. 14, considering the example of health care and health-related services, the protective obligation requires states to “ensure that privatization of the health sector does not constitute a threat to the availability, accessibility, acceptability and quality of health facilities.”247 243 Human rights, trade and investment, supra note 3, para. 44, p. 24. It is added on p. 25: “privatization can, in some cases, lead to: the establishment of a two-tiered service supply with a corporate segment focusing on the healthy and wealthy and an underfinanced public sector focusing on the poor and sick; brain drain from the public to higher paying private sector; an overemphasis on commercial objectives at the expense of social objectives; and an increasingly large and powerful private sector that can threaten the role of the Government as primary duty bearer of human rights by subverting regulatory systems through political pressure.” 244 Other aspect of privatization involves the “transfer of ownership or control of enterprises or assets from the government to private individuals or entities,” i.e. from the public sector to the private sector. See: Rumu Sarkar, “International Development Law: Rule of Law, Human Rights, and Global Finance” (Oxford University Press 2009), p. 333. 245 Human rights, trade and investment, supra note 3, para. 55, p. 29: “Private sector participation in essential services concerns not only commercial considerations relating to financing projects but a range of other social, political, cultural and environmental concerns.” 246 In the context of the children’s rights, the un Committee on the Rights of the Child observed: “The Committee does not prescribe the form of delivery of such services but it is important to emphasize that States are not exempted from their obligations under the Convention when they outsource or privatize services that impact on the fulfilment of children’s rights.” See: un Committee on the Rights of the Child, General Comment No. 16 (CRC/C/GC/16), para. 33. 247 un Committee on Economic, Social and Cultural Rights, General Comment No. 14 (E/C.12/2000/4), para. 35. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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It is commented that “[a]s various foreign investments are related to the privatisation of basic services and infrastructure, such as the supply of water, the investor’s failure to provide these services may infringe on the economic and social rights of the population.”248 It was also correctly noted that “[…] privatising the supply of essential services has often led to the false assumption that the responsibility for the realisation of these rights has also been subcontracted to the foreign private provider and that the state would no longer be responsible for the realization of the corresponding human rights. On the basis of the economic and social rights standards accepted by the states they are under an obligation to ensure that everyone under their jurisdiction has access to the necessary minimum supply of these services.”249 This refers to the concept of the minimum core obligations. Such obligations require states to “ensure the satisfaction of, at the very least, minimum essential levels of each of the rights is incumbent upon every State party.”250 This is particularly visible in the example of the right to water, where the minimum core obligations require states, among others, to ensure access to the minimum essential amount of water, to ensure physical access to water facilities or services and to ensure personal security when having to physically access water.251 Although the state remains internationally responsible for the realization of human rights in those sectors which provide goods and services that are essential for local communities, privatization does have an impact from the perspective of human rights. As an effect of privatization the importance of states’ obligations to respect human rights diminishes, whilst at the same time their obligation to protect and fulfil human rights increases.252 “It should not 248 Schadendorf, supra note 1, p. 2. 249 Kriebaum, Privatizing…, supra note 8, p. 166. She also notes on pp. 165–166: “During the 1990s a trend to infrastructure privatization in the developing world emerged. Before that development the state or the local communities were in charge of services such as water and sewage systems, electricity supply, public transportation etc. Access of the population to the necessary minimum supply of some of these services is protected by economic, social and cultural rights.” She correctly concluded on p. 189: “It should be kept in mind that while services can be subcontracted to a foreign investor, the responsibility for the realisation of human rights cannot. It rests with the State.” 250 un Committee on Economic, Social and Cultural Rights, General Comment No. 3 (E/1991/23), para. 10. 251 un Committee on Economic, Social and Cultural Rights, General Comment No. 15 (E/C.12/2002/11), para. 37. 252 Nowak, supra note 4, pp. 49–50. See also: Koen de Feyter, Felipe Gómez Isa, “Privatisation and Human Rights: an Overview,” in: Koen de Feyter, Felipe Gómez Isa, “Privatisation and Human Rights in the Age of Globalisation” (Intersentia 2005), p. 3: “Privatisation does not affect the legal responsibility of the State under international human rights law. The actions that the State will need to undertake at the domestic level in order to avoid Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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be forgotten that it is the task of the state to protect people within its frontiers against human rights infringements by non-state players. Privatization of essential goods and services does not amount to privatizing international responsibility. Human rights covenants are international legal conventions, agreements between countries making contracting states responsible for implementation of human rights. Countries which have mutually undertaken to protect, respect, fulfil and enforce human rights described in international human rights conventions have to implement these rules through national practice.”253 From the perspective of international human rights obligations, states must meet the standard of “due diligence” when performing their positive human rights obligations, i.e. the obligation to protect and fulfil human rights. This standard may be understood as consisting of “the reasonable measures of prevention that a well-administered government could be expected to exercise under similar circumstances.”254 This explains why the mere process of privatization must be undertaken with due care and consideration. Privatization has a great impact on human rights, especially with regard to water and sanitation. This can be seen from the cases referred to in the previous section, regarding the First Model Situation, such as: Suez and Vivendi v. Argentina, awg v. A ­ rgentina, Aguas del Tunari v. Bolivia, Impregilo v. Argentina, Saur v. Argentina. In the privatized sectors there is a risk that situations caused by business breach of its human rights obligations do change, however. […] States will need to focus more after privatization on the duty to provide protection against abuses by third parties.” Similarly Angelos Dimopoulus, “ec Free Trade Agreements: An Alternative Model for Addressing Human Rights in Foreign Investment Regulation and Dispute Settlement?” in: ­Pierre-Marie Dupuy, Ernst-Ulrich Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford University Press 2009), p. 572 [Dimopoulus]: “The liberalization of investment rules in economic sectors which provide essential goods and services to the population, such as water, electricity, transport, education, and health services, may contravene the obligations of the host state to protect and promote basic economic, social, and cultural rights.” See also Kriebaum, Privatizing…, supra note 8, p. 173: “From a human rights’ perspective, States have an obligation to respect, protect and fulfil human rights of the population in all contexts, thus also with regard to foreign investment and privatization. Hence, when entering into privatization agreements they are under an obligation to make sure that they are able to honour their human rights obligations.” 253 Marrella, supra note 242, p. 345. He also notes on p. 342: “Have then they privatised the international obligations they had in terms of protecting, respecting and fulfilling human rights, including the right to water of the people? The answer is negative.” 254 Dinah Shelton, “Private Violence, Public Wrongs, and the Responsibility of States,” (1989) 13:1 Fordham International Law Journal, p. 23.

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a­ ctors – including foreign investors – may result in obstacles to the enjoyment of human rights by local peoples. This may happen if the privatization process is done improperly, and the private entities do not provide the services in an appropriate manner. However, states themselves remain responsible under international human right treaties to observe the minimum standards towards individuals on their territories. Therefore, such situations can lead to violations of human rights which are factually committed by investors but are legally attributable to states from the perspective of states’ obligations to protect human rights. In summary, privatization does not relieve a state from its human rights obligations to respect, protect and fulfil human rights.255 Other examples of factual backgrounds relevant to the Second Model Situation are related to labor rights. It was noted that: “investors could undermine the enjoyment of the socio-economic rights of their employees, for instance, by not offering healthy and safe working conditions.”256 In addition, “[…] if the working conditions within the investment project do not correspond to human rights standards, investors may also impinge on labour rights.” Generally, many reports focus on the tensions that exist between companies and their employees who are denied the right to form unions.257 Other examples in this context refer to child (underage) labor, excessive working hours, improper working conditions which pose risk to health of employees etc.258 Moreover, such situations can form part of the factual matrix underlying possible investment disputes, which are relevant to the Second Model Situation.259 The situation of the kpr Mill, operating in India, can serve as an example of child labor used by business actors. It is reported that the company hires approximately 5,000 girls aged between 13 and 15. Child employees live in the 255 Kriebaum, Privatizing…, supra note 8, p. 173: “From a human rights’ perspective, States have an obligation to respect, protect and fulfil human rights of the population in all contexts, thus also with regard to foreign investment and privatization. Hence, when entering into privatization agreements they are under an obligation to make sure that they are able to honour their human rights obligations.” 256 Leinhardt, supra note 120, p. 5. 257 http://www.bilaterals.org/?honduras-us-korean-maquila-accused&lang=en [accessed on 2 February 2017]. 258 Kate O’Keeffe, “Cambodia Factories Grapple With Issue of Underage Workers,” available at: http://business-humanrights.org/en/cambodia-factories-grapple-with-issue-of -underage-workers [accessed on 2 February 2017]; Gardiner Harris, “Bangladeshi Factory Owners Charged in Fire That Killed 112,” available at: http://www.nytimes.com/2013/12/23/ world/asia/bangladeshi-factory-owners-charged-in-fatal-fire.html?ref=world&_r=0 [accessed on 2 February 2017]. 259 Schadendorf, supra note 1, p. 2.

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company’s premises for their entire 3 years of employment. 12 persons are allocated to each room. Child employees have no employment contract and receive a total remuneration of approximately 500 euros for the entire 3-years’ period of work. No remuneration at all is paid if a child employee leaves the workplace before the lapse of the 3 year period.260 In the context of foreign direct investments, violations of labor rights can also occur in relation to large construction projects. The alleged abuses of migrant workers’ rights in Qatar, related to preparations for the 2022 World Cup, serve as an example. These abuses are alleged to consist not only of poor working conditions (resulting in numerous deaths) or inadequate accommodation conditions. Many migrant workers are employed under a sponsorship system known as “kafala.” It binds workers to their employer and prohibits them from leaving the country where the construction site is located until their contracts expire.261 Such a situation is sometimes perceived as “modern day slavery.” Other situations may also be described as modern day slave labor. This may assume the guise of forced labor, stemming from human trafficking. An example of such a situation was reported to have occurred in the Ivory Coast. Children were human trafficked and forced to work at harvesting and/or cultivating cocoa beans. The final beneficiaries of these situations were foreign investors – Nestlé, Archer Daniels Midland and Cargill.262 Many more examples could be cited in the context of the impact of investments on human rights. The United Nations Special Representative of the Secretary General on the issues of Human Rights and Transnational Corporations and other Business Enterprises noted that business activities “can affect virtually all internationally recognized rights.”263 This includes many other 260 Grażyna Raszkowska, “Jak wielki biznes łamie prawa człowieka,” available at: http://www .rp.pl/artykul/566804-Spoleczne-odpowiedzialne-koncerny-lamia-prawa-czlowieka .html#ap-1 [accessed on 2 February 2017]. 261 Martin Chulov, “Qatar to publish report into claims of abuse of World Cup migrant workers,” available at: http://www.theguardian.com/world/2013/dec/15/qatar-to-publish -report-into-claims-of-abuse-migrant-workers-world-cup [accessed on 2 February 2017]. 262 Karen Gullo, “Nestle, adm Child Labor Lawsuit Revived by Appeals Court (1),” available at: https://www.bloomberg.com/news/articles/2013-12-19/nestle-adm-child-labor-lawsuit -revived-on-appeal [accessed on 2 February 2017]. 263 Protect, Respect and Remedy: a Framework for Business and Human Rights: Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, (2008) un Doc A/HRC/8/5, paras. 6 and 24. In the subsequent Report it is added for example that “companies can affect the entire spectrum of rights, as documented in the Special Representative’s mapping of nearly 400 public allegations against companies.” See: Business and ­human rights: Towards operationalizing the “protect, respect and remedy” framework: Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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­ uman rights than those specifically commented on in detail above, such as h for example the right to peaceful assembly, the rights to freedom of expression, of conscience and of religion, the right to adequate food, guarantees against arbitrary detention or against cruel and inhuman treatment and many more.264 4

Third Model Situation – Investors Invoking Human Rights

The examples described in this section refer to the Third Model Situation. They demonstrate that human rights arguments can be presented in the course of bit proceedings not only in support of the position of the respondent states, but also in favor of claimants. The cases described below illustrate the existence of proceedings in which investors relied on human rights arguments. They show the potential relevance of human rights invoked by investors in order to support their claims in bit arbitrations. One of the most recent examples relates to the Bozbey v. Turkmenistan case. These proceedings directly follow a decision of the United Nations Human Rights Committee from 2010, according to which a Turkish businessman suffered violations of his human rights after being illegally convicted for economic­ crimes.265 It is alleged that the investor was requested by state officials to pay a bribe, but he refused. As a result of the refusal, the tax authorities conducted an investigation which resulted in criminal charges being brought against the investor. The criminal proceedings were conducted in the Turkmen language and without an interpreter. In 2004, the investor was found guilty of several economic crimes, his property was confiscated and he was sentenced to imprisonment. It is alleged that, during the imprisonment, the investor was tortured and subject to degrading and humiliating conditions.266 He was released

­ eport of the Special Representative of the ­Secretary-General on the issue of human R rights and transnational corporations and other business enterprises, John Ruggie, (2009) un Doc A/HRC/11/13, para 52. 264 Luke Eric Peterson, Kevin R. Gray, “International Human Rights in Bilateral Investments Treaties and in Investment Treaty Arbitration” (International Institute for Sustainable Development 2003), pp. 6 and 22. 265 Views of the Human Rights Committee, communication no. 1530/2006, un Doc CCPR/ C/100/D/1530/2006, 3 November 2010 [hr Committee Communication]. 266 Jarrod Hepburn, Luke Eric Peterson, “After claims of human rights violation are borne out, businessman pursues ad-hoc investment treaty arbitration against Turkmenistan,” Investment Arbitration Reporter, published on 3 April 2013, available at: http://www.iareporter. com/articles/20130403_3 [accessed on 2 February 2017] [Hepburn, Peterson]. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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from prison in 2005, after the Turkish embassy intervened and the Turkmen president granted him a pardon.267 Apparently, the Bozbey v. Turkmenistan case was suspended “just prior to the oral hearings taking place in July of 2012,” which was caused by a fact that the tribunal’s request for advance payments on costs were not fully satisfied.268 Despite the fact that the proceedings were suspended, the case demonstrates that the same measures undertaken by a state which led to violations of an investor’s human rights may constitute the cause of action of a claim in ­investor – state arbitrations. From the publicly available information, it seems that the sole reason for suspending the proceedings concerned a failure to pay the costs of the arbitration, which indeed may involve an advance payment of significant amounts. Bozbey v. Turkmenistan proves that the two fields may be more interconnected than appears at first glance. It has been noted that these arbitral proceedings were commenced as a consequence of the decision rendered by the United Nations Human Rights Committee, which “considers that the State party is under an obligation to provide the author with an effective remedy and, to that effect, take appropriate steps to: […] provide the author with appropriate reparation, including compensation.”269 It appears that the Bozbey v. Turkmenistan case was commenced as a direct consequence of the fact that Turkmenistan did not comply with this decision of the United Nations Human Rights Committee. Another case which recently came to public knowledge is Mykhailenko v. Belarus.270 The investor was a Ukrainian who was wrongfully imprisoned in Belarus for six years on false charges of economic crimes. The alleged crimes related, among others, to the mere fact of holding bank accounts outside Belarus. The State Security Agency (kgb) was involved in the actions attributable to the state. The investor spent the imprisonment time in a labor camp. In addition, his steel tube factory was expropriated without any compensation being paid.271 According to his legal representatives: “Not only did Belarus 267 Matthew Weiniger, Dominic Roughton, Andrew Cannon, “bit claim brought against ­Turkmenistan following un finding of human rights violations”, available at: http://www .lexology.com/library/detail.aspx?g=8359ab05-b6a3-4864-ba9e-36b5e17d2cca, published on 12 April 2013 [accessed on 2 February 2017]. 268 Hepburn, Peterson, supra note 266. 269 hr Committee Communication, supra note 265, para. 9. 270 The case has not been formally commenced, however the notice of intent, submitted on 23 August 2013, is publicly available. 271 William Kirtley, “The u.n. Criticizes Belarus Wrongful Imprisonment Yet Again,” available at: https://international-arbitration-attorney.com/belarus-wrongful-imprisonment/ [accessed on 2 February 2017]. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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e­ xpropriate our clients’ factory for the production of cold-shaped seamless steel pipes, the first of its kind in Belarus, but following the illegal arrest and lengthy detention without charge by the State Security Agency of Belarus (the Belarus “kgb”) of Mykhailenko, a foreign investor, as well as an obvious show trial that made a mockery of both justice and due process, Belarus forced our client to spend six full years in a Belarus labor camp in dreadful conditions, being forced to work six days a week and sharing a cell with dozens of other prisoners. To add insult to injury, this foreign investor was forced on a regular basis by prison guards to watch President Lukashenko’s speeches on television, and to listen to them being read to him by guards.”272 Mykhailenko intended to present a case and demand compensation of 165 million us dollars for the expropriation and for moral damages. If successful, he intended to donate a portion of the compensation to organizations ­fighting for the establishment of the rule of law in Belarus.273 Technically, however, the case did not become pending. The investor presented a Notice of Intent, but did not present the Notice of Arbitration, whereas it is only the latter step which formally commences arbitral proceedings. According to the information obtained from the claimant’s counsel, the continued development of the case depends upon third-party funding. Mykhailenko v. Belarus is relevant for the analysis for two main reasons. First, it shows that human rights violations of investors may result in breaches of bits and, therefore, may lead to international arbitration – and ­responsibility – for such actions of states. Secondly, this case shows that the two systems of international law – human rights and investment law – supplement each other. Belarus is not a member of the Council of Europe and has not signed the echr. Therefore, international investment arbitration is, in fact, the only available venue at which to seek justice for the investor who suffered human rights violations in the territory of Belarus with respect to his investments. It can be summarized by the following passage from the notice of intent: “What is unique about the current dispute is that Belarus targeted a foreign investor and his investments in Belarus, rather than another human rights group or the political opposition within Belarus, which has significant implications regarding the legal regime applicable to the dispute and the remedies that are 272 Gennady Mykhailenko and United Pipe Export Company Trading v. Belarus, notice of intent to submit dispute to arbitration (2 August 2013), para. 2 [Mykhailenko v. Belarus]. 273 Given the difficult personal situation of the investor, resulting from the actions of Belarus, the case would only go ahead in the event that it is financed by a third-party funder. This leads to a situation whereby part of the received compensation would be transferred to this third-party. It appears that the formal lodging of these proceedings depends predominantly on the possibility to secure third-party funding. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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available. Many victims of the current regime in Belarus have no recourse to independent and impartial courts with respect to the egregious human rights violations which have become the norm in Belarus, and they have no recourse to even the European Court of Human Rights since Belarus is the sole member of Europe which is not a party to the European Convention on Human Rights. The investments of foreign investors, however, have additional legal protections arising from Belarus’ binding international commitments concerning such investments, which allow foreign investors to have their cases heard before independent and impartial arbitral tribunals.”274 Another case relevant for the present subsection is Biloune v. Ghana.275 It was commenced in 1988 and is the earliest publicly known investor – state arbitration which refers to an investor’s human rights. Although this dispute was based on domestic legislation, as opposed to a bit, it remains an example of investment arbitration which is relevant to the Third Model Situation. The case concerned the construction of a hotel resort complex. When the project was close to being finished, the authorities issued an order to cease works, allegedly due to the absence of a necessary permit. Subsequently, the investor was arrested, held in custody without being charged for a period of thirteen days, deported from Ghana and not permitted to return. The investor filed a claim for “damages for expropriation, denial of justice and violation of human rights.”276 When deciding whether it had jurisdiction to hear the case, the tribunal observed that Ghana had agreed to arbitrate disputes “in respect of” the foreign investment only.277 Accordingly, the tribunal decided that it lacked jurisdiction to address a claim concerning the alleged violation of an investor’s human rights “as an independent cause of action.”278 This decision was reached because the offer to arbitrate, given in advance by Ghana in its domestic legislation, did not extend to the person of the investor. The tribunal noted in this context that: “under the facts of this case it must be concluded that, whilst the acts alleged to violate the international human 274 Mykhailenko v. Belarus, supra note 272, para. 8. 275 Biloune and Marine Drive Complex v. Ghana, award of jurisdiction and Liability (27 October 1989) [Biloune v. Ghana]. 276 Ibid, p. 187. Also on p. 203: “In the final cause of action asserted, the Claimants seek recovery for alleged violation by the Government of Ghana of Mr. Biloune’s human rights.” 277 The relevant part of the jurisdiction clause reads as follows: “any dispute between the foreign investor and the Government in respect of an approved enterprise which is not amicably settled through mutual discussions may be submitted to arbitration.” 278 Biloune v. Ghana, supra note 275, p. 203. The arbitral tribunal also declined its jurisdiction over the denial of justice claim, but accepted jurisdiction over the claim of alleged expropriation.

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rights of Mr. Biloune may be relevant in considering the investment dispute under arbitration, the Tribunal lacks jurisdiction to address, as an independent cause of action, a claim of violation of human rights.”279 Although in Biloune v. Ghana the tribunal decided that it lacked jurisdiction to hear an independent claim concerning human rights violations, it certainly did not decline the relevance of human rights for the dispute. It can be understood that the tribunal agreed that human rights may be relevant during the merits and/or compensations stages, and it expressly recognized that they “may be relevant” to an investment dispute.280 This author agrees with the opinion of Fry, who commented that the tribunal in Biloune v. Ghana “did not reject or somehow denigrate the notion of human rights. On the contrary, the tribunal expressly acknowledged that there are fundamental human rights that governments are not allowed to violate, and even went so far as to say that the claimant’s human rights “may be relevant in considering the investment dispute under arbitration,” thus showing that investment arbitration supports human rights even when the relevant arbitral panels refuse to pronounce upon such rights due to a perceived lack of jurisdiction.”281 Another example where human rights arguments were invoked by an investor is the Channel Tunnel v. France and the UK case.282 This dispute was based on an arbitral clause which was included in a concession agreement read in the light of the Treaty concerning the Construction and Operation by Private Concessionaires of a Channel Fixed Link.283 Therefore, this case also represents an example of investor – state arbitration which was not based on a bit, within the meaning adopted for the purposes of the present book. Nevertheless, it can serve as an example of factual situations that are relevant to the Third Model Situation.

279 Ibid, p. 203. 280 Ibid. 281 Fry, supra note 2, p. 102. 282 Channel Tunnel Group and France-Manche v. France and United Kingdom, partial award on jurisdiction and dissenting opinion, pca—uncitral Rules (30 January 2007) [Channel Tunnel v. France and the uk]. 283 The Concession Agreement signed on 14 March 1986 by the ministre de l’équipement, du transport et de l’habitat for France and the Secretary for Transport for the United Kingdom, on the one hand, and France-Manche s.a. and the Channel Tunnel Group Ltd., on the other.; France-United Kingdom, Treaty concerning the Construction and Operation by Private Concessionaires of a Channel Fixed Link, Canterbury, 12 February 1986, 1497 United Nations Treaty Series 334.

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The dispute concerned the development of the Channel Tunnel, a fixed twin-bored tunnel rail link under the English Channel designed to accommodate traffic through trains and shuttles for road vehicles. When the Channel Tunnel was opened in 1994, it was considered by some experts as the largest privately-financed infrastructure project in history.284 The investor alleged that it had not been offered necessary protection from disruptions caused by clandestine migrants. Apparently, in 1999–2003 “the clandestine migration to the Pas-de-Calais region in Northern France was a serious problem.”285 Migrants, counted in thousands, aspired to reach the United Kingdom, among other means, by breaking into the Tunnel’s infrastructure and seeking to smuggle themselves into shuttle trains. In addition, the investors alleged that illegal financial support had been paid by France to the Sea France sea link, a competitor of the investors. The investors presented their claims defining the applicable law as “the relevant principles of international law,” including provisions of the echr.286 The main focus was put on art. 1 of Protocol 1 to the echr, read in conjunction with Article 14 of the echr. The tribunal decided that the arbitration clause in question did not grant it jurisdiction to consider alleged breaches of obligations extrinsic to the provisions of the Concession Agreement itself, which was the ground for its jurisdiction, and the treaty which was expressly given effect by the Concession Agreement. This is to say – as in the Biloune v. Ghana case – in the tribunal’s eyes, allegations of violations of the investor’s human rights were incapable of constituting a separate cause of action. At the same time the tribunal observed, however, that its decision regarding jurisdiction did not limit the scope of applicable law in determining issues which are within the tribunal’s jurisdiction. In the view of the tribunal, the applicable law can not only provide “the legal background” for the interpretation and application of the primary sources of obligations, but it can also be “relevant in other ways.”287 Thus, Channel Tunnel v. France and the UK provides an example of the approach according to which human rights can generally (i) form part of the law applicable to a dispute, and (ii) inform understanding of the primary sources of obligations owed to investors. The next example of situations which led to the invocation of human rights by investors is a series of cases related to the situation of Yukos in Russia.

284 285 286 287

Channel Tunnel v. France and the uk, supra note 282, para. 55. Ibid, para. 59. Ibid, para. 101. Ibid, para. 151.

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­ ukos was a “vertically integrated group engaging in exploration, production, Y refining, marketing and distribution of crude oil, natural gas and petroleum products.”288 In 2003, it employed approximately 100,000 people and was the fourth largest oil producer worldwide.289 Russia undertook various measures against Yukos and its associated companies. Such measures comprised tax reassessments, criminal investigations and arresting the members of the investor’s management bodies. All of this led to the bankruptcy of Yukos in August 2006. The actions undertaken by Russia resulted in a number of arbitral cases, as well as proceedings being initiated before the ECtHR.290 In its judgment of 20 September 2011, the ECtHR decided that Russia had breached the right to property guaranteed in Article 1 of Protocol 1 to the echr and the right to a fair hearing, guaranteed in Article 6(1) of the echr.291 The successful claims alleged the arbitrariness of Russia’s actions, the speed of tax debt enforcement proceedings conducted by the Russian authorities, the unfairness of domestic proceedings challenging the tax assessments and the retrospective application of fines for non-payment. 288 Yukos Universal v. Russia, pca Case No. aa 227, interim award on jurisdiction and admissibility (30 November 2009), para. 46. 289 Ibid. 290 Quasar de Valores et al. v. Russia, scc case No. arbitration V 024/2007 (award on preliminary objections – 20 March 2009, award 20 July 2012), RosInvest v. Russia, scc case No. arbitration V 079/2005 (award on jurisdiction – 5 October 2007, final award – 12 September 2010), Hulley Enterprises v. Russia, pca Case No. aa 226 (interim award on jurisdiction and admissibility – 30 November 2009, final award – 18 July 2014), Yukos Universal v. Russia, pca Case No. aa 227 (interim award on jurisdiction and admissibility – 30 November 2009, final award – 18 July 2014), Veteran Petroleum v. Russia, pca Case No aa 228 (interim award on jurisdiction and admissibility – 30 November 2009, final award – 18 July 2014). It must be noted, however, that the arbitral awards rendered in the Hulley Enterprises, Yukos Universal and Veteran Petroleum v. Russia cases were set aside by the court in the place of arbitration – the Hague District Court in its judgment of 20 April 2016 (cases no. C/09/477160 / ha za 15-1, C/09/477162 / ha za 15-2 and C/09/481619 / ha za 15-112). The judgment is not final and an appeal was filed to the Hague Court of Appeal. The award rendered in Quasar de Valores et al. v. Russia was set aside by the court in the place of arbitration – the Svea Court of A ­ ppeal in its judgment of 16 January 2016 (case no. T 9128-14, the judgment is final) overruling the judgment of the Stockholm District Court of 11 September 2014 (case no. T 15045-09). 291 oao Neftyanaya Kompaniya Yukos v. Russia, Application No. 14902/04, judgment (20 September 2011) [Yukos – ECtHR’s judgment]. Other proceedings were commenced before the ECtHR by members of the company’s board of directors, i.e. cases Khodorkovsky v. Russia, application no. 5829/04, judgment (31 May 2011), Khodorkovsky and Lebedev v. Russia, applications nos. 11082/06 and 13772/05, judgment (25 July 2013) and Lebedev v. Russia, application no. 4493/04, judgment (25 October 2007).

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Without entering into the details of the complex factual background and legal issues involved, the proceedings related to Yukos conducted in various fora illustrate that the same facts may lead to legal arguments (and proceedings) based on both: (i) bits and (ii) international human rights treaties.292 The ECtHR decided that the case brought on the basis of the echr was not “substantially the same” as the cases brought on the basis of bits. The basis of such a conclusion was that the parties (claimants) in the arbitral proceedings and in the case before the ECtHR were different.293 It is not clear what would be the approach had the claimants been the same legal entities. The adjudicative bodies may decide that claims based on the same facts, but alleged to be in breach of human rights norms in one forum (before the ECtHR), and in breach of bits in another forum (before an arbitral tribunal) be considered as “substantially the same.” If that were the case, pursuant to art. 35(2)(b) of the echr, the ECtHR would rule that the claim was inadmissible. A similar decision on inadmissibility could be issued by an arbitral tribunal. Toto v. Lebanon is yet another case in which the investor relied on human rights arguments.294 Among other claims, the investor sough compensation for a denial of justice, understood as emerging from the fact that a competent authority – the Conseil d’Etat – did not issue a judgment for approximately 6 years since the hearings it had completed. From the text of the decision on jurisdiction rendered by the tribunal in the bit proceedings, it is not perfectly clear whether the claimant (i) invoked human rights arguments in order to indicate the proper manner of interpreting the Fair and Equitable Treatment as guaranteed in the applicable provision of the Italy – Lebanon bit, or (ii) as a separate cause of action, based on art. 14 of the iccpr. The relevant 292 It has been noted that: “It is difficult to consider that the multiple proceedings commenced by the Yukos company, the Yukos company’s senior management, as well as various investors in Yukos, represented an elaborate litigation strategy.” See: Chester Brown, “Investment Treaty Tribunals and Human Rights Courts. Competitors or Collaborators?” (2016) 15:2 The Law and Practice of International Courts and Tribunals, p. 296. 293 Yukos – ECtHR’s judgment, supra note 291, para. 526. As expressed in art. 35(2)(b) of the echr, the ECtHR cannot decide a case which is “substantially the same as a matter that has already been examined by the Court or has already been submitted to another procedure of international investigation or settlement and contains no relevant new information.” A similar limitation may impact on jurisdiction or the admissibility of a claim before an arbitral tribunal only if the underlying bit contains a fork-in-the-road provision. However, if the same facts give rise to parallel proceedings, adjudicators should remember about the risk of double recovery. 294 Toto Costruzioni Generali v. Lebanon, icsid Case No. ARB/07/12, award (7 June 2012).

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passage of the decision reads as follows: “[a]lthough Lebanon is not party to the Council of Europe, Toto finally refers to the case law on due process of the European Court of Human Rights. It also refers to Article 14 of the 1966 International Covenant on Civil and Political Rights (“iccpr”), ratified by Lebanon,­which imposes the right of every person to have an equitable trial.”295 However, the tribunal’s decision suggests that the claim based on a denial of justice represented a separate cause of action, initiated by the investor on the basis of human rights treaties. In this context, the tribunal stated: “[t]he Treaty sanctions not only breaches of specific Treaty provisions, such as Article 3.1, but also breaches of any rule of international law (Article 7.3). The Treaty thus covers also a denial of justice under international law.”296 The provision of the bit referred to by the tribunal stipulated that the applicable law is the bit and “applicable rules and principles of international law.”297 In this sense, the tribunal considered it possible to bring a separate claim based on international law – including human rights treaties – in the course of the arbitral proceedings, provided that such claim falls within the tribunal’s scope of jurisdiction. Having said that, the tribunal went on to analyze the content of international law on the standard of a denial of justice.298 With respect to the echr, it confirmed the ECtHR’s broad jurisprudence on the issue “to which extent lengthy court proceedings are a breach of the right to due process and to a fair and equitable trial” as guaranteed in art. 6 of the echr. However, it decided that “as Lebanon is not party to the echr and lies outside the territorial scope of the echr, these decisions are not relevant in this case.”299 It then affirmed that Lebanon is a party to the iccpr, Article 14.1 of which guarantees the right to a fair hearing and “entails a number of requirements, including the requirement that the procedure before the national tribunals be conducted

295 Toto Costruzioni Generali v. Lebanon, icsid Case No. ARB/07/12, decision on jurisdiction (11 September 2009), para. 144 [Toto v. Lebanon – jurisdiction]. The respondent “dismisses the references made by the Claimant to the European Convention on Human Rights (“echr”) and to the case law of the European Court of Human Rights as irrelevant, since Lebanon is not a member of the Council of Europe.” See: para. 150. 296 Ibid, para. 154. 297 Art. 7(3) of the bit Italy – Lebanon reads as follows: “The arbitral tribunal shall decide the dispute in accordance with the provisions of this Agreement and the applicable rules and principles of international law. The awards of arbitration shall be final and binding on both parties to the dispute. Each Contracting Party shall carry out without delay any such award and such award shall be enforced in accordance with domestic law.” 298 Toto v. Lebanon – jurisdiction, supra note 295, paras. 155–156. 299 Ibid, para. 157.

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expeditiously.”300 The tribunal recognized that, even though Lebanon had not ratified the Optional Protocol to the iccpr, which allows individuals to file a complaint before the Human Rights Committee, its decisions “are relevant to interpret the scope of Article 14 of the iccpr.”301 The tribunal then analyzed the content of the human right to a fair hearing under Article 14 of the iccpr and the relevant facts of the case.302 It observed that any decision as to whether­ “justice is rendered within a reasonable delay depends on the circumstances and the context of the case.”303 The tribunal took into consideration serious disturbances in the functioning of the respondent state during the controversial period and furthermore noted that, at the moment of issuing the decision, the domestic proceedings were finally advancing.304 The tribunal’s final decision on the claim for a denial of justice based on the investor’s human rights was to decline jurisdiction over this claim. The main reason for this approach was that “the Tribunal has not seen evidence that Toto made use of local remedies to speed up the proceedings before the Conseil d’Etat.”305 For this reason, the tribunal decided that the claimant had failed to establish grounds that the tribunal enjoyed jurisdiction over this claim: “[t]he Tribunal has therefore not seen prima facie evidence that Toto itself has made use of the local remedies to shorten the procedural delays. In the absence of such evidence the Tribunal has no jurisdiction under Article 3.1 of the Treaty to decide whether the delays before the Conseil d’Etat were unfair and inequitable.”306 The reasoning presented by the tribunal in Toto v. Lebanon allows the conclusion that, in the event that the claimant had exhausted local remedies, the tribunal would have been willing to declare its jurisdiction over the claim for a denial of justice based on the iccpr. Although one cannot foresee with certainty whether this approach would indeed have been adopted by the tribunal, the presented reasoning of the tribunal justifies this conclusion. In ups v. Canada the investor also relied on international human rights. It claimed that the host state had violated its obligations under article 1105 of the nafta, which requires that the nafta contracting states “shall accord to 300 301 302 303 304 305 306

Ibid, para. 158. Ibid, para. 159. Ibid, paras. 160–166. Ibid, para. 163. Ibid, paras. 165–166. Ibid, para. 167. Ibid, para. 168. Although this suggests that human rights were invoked as a tool for interpreting the fet standard, rather than as a separate cause of action.

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investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.” The argument presented by the investor was that the host state had violated this provision due to its failure to comply with international law obligations regarding core labor standards, derived inter alia from the International Labour Organization’s (referred to as the “ILO”) Convention number 87 (Freedom of Association and Protection of the Right to Organise), the ILO’s Declaration on Fundamental Principles and Rights at Work, articles 20 and 23(4) of the udhr, article 22 of the iccpr and art. 8 of the icescr.307 The claimant then argued that the rights recognized in the udhr form part of customary international law.308 It claimed that the breach of customary international law and conventional international law committed by Canada amounted to a breach of art. 1105 of the nafta.309 The respondent contested this approach and argued that, in order for the state’s measure to amount to a breach of art. 1105 of the nafta, the claimant must prove that the violated provision – extrinsic to the nafta – amounts to “custom relevant to the treatment of aliens.”310 The respondent argued that this provision of the nafta does not incorporate every provision of any international treaty, but only the “international minimum standard of treatment of foreign investors” as prescribed by customary international law.311 The claimant has the burden of proof to show that an allegedly violated international norm extrinsic to the nafta forms part of customary international law.312 The respondent denied the relevance of any arguments based on human rights, 307 United Parcel Services of America v. Canada, Investor’s Memorial (Merits Phase, 23 March 2005), paras. 649, 651, 655–658, 664–668 [ups v. Canada – investor’s memorial]. Art. 20 of the udhr reads as follows: “Everyone has the right to freedom of peaceful assembly and association.” Art. 23(4) of the udhr: “Everyone has the right to form and to join trade unions for the protection of his interests.” Art. 22 of the iccpr: “Everyone shall have the right to freedom of association with others, including the right to form and join trade unions for the protection of his interests.” Art. 8 of the icescr: “The right of everyone to form trade unions and join the trade union of his choice, subject only to the rules of the organization concerned, for the promotion and protection of his economic and social interests. No restrictions may be placed on the exercise of this right other than those prescribed by law and which are necessary in a democratic society in the interests of national security or public order or for the protection of the rights and freedoms of others.” 308 ups v. Canada – investor’s memorial, ibid, para. 669. 309 Ibid, para. 671. 310 United Parcel Services of America v. Canada, counter-memorial (merits phase, 22 June 2005), para. 905. 311 Ibid, paras. 906–907. 312 Ibid, para. 908.

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claiming that any such violations – even if proven – related to the employees of Canada Post and not to the entity considered as the an “investor” who had legal standing in the dispute.313 Human rights issues were also invoked by counsels for both parties during the oral phase of the proceedings.314 The tribunal in ups v. Canada did not address the issue of human rights in the rendered award. It dismissed the claim by simply stating that the investor “has demonstrated no sufficient interest to justify its pursuit of the other two claims nor any substantive ground which could begin to show a breach of the minimum standard reflected in article 1105. This claim too must fail.”315 In this context, it is important to note that the tribunal adopted a pragmatic approach by not engaging with the arguments presented by the parties. It must be also noted that the discussion between the parties did not concern “whether” human rights can play a role in the proceedings, but rather “how” – whether they must enjoy the status of customary international law in order to find application through art. 1105 of the nafta. A similar line of reasoning was presented by the investor in Grand River v. the US.316 The nafta was also the applicable bit in this dispute. The investors alleged a violation of the standards of protection guaranteed in the nafta.317 The investor further argued that the law applicable to the dispute was not limited to the nafta, but also included other international treaties, including international human rights treaties.318 The investor relied on art. 31(3)(c) of the vclt, arguing that “any relevant rules of international law applicable in the relations between the parties” to a treaty “shall be taken into account, together with the context” of the treaty.319 The investor intended to prove the existence of “the duty of States to respect and protect the rights and interests of First Nations across borders” as an element of customary i­ nternational 313 Ibid, para. 970. 314 United Parcel Services of America v. Canada, hearing on the merits (12 December 2005), hearing transcript. 315 United Parcel Services of America v. Canada, award on the merits (24 May 2007), para. 187 [ups v. Canada]. 316 Grand River Enterprises Six Nations and et al. v. United States, uncitral Arbitration Rules, award (12 January 2011) [Grand River v. the us]. 317 Mainly: (i) expropriation (art. 1110), violations of the (ii) fair and equitable treatment (art. 1105), (iii) the most-favored nation treatment (art. 1103) and (iv) the national treatment (art. 1102). 318 Grand River v. the us, supra note 316, para. 182. 319 Grand River Enterprises Six Nations and et al. v. United States, uncitral Arbitration Rules, claimant’s memorial, merits phase (10 July 2008), para. 146 [Grand River v. the us – claimant’s memorial]. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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law.320 It relied on the udhr, the United Nations Declaration on the Rights of Indigenous Peoples, the ilo Convention 169, the iachr, the jurisprudence of the IACtHR, the Charter of the United Nations and the Charter of the Organization of American States.321 The investor also argued that the provisions of the nafta should be interpreted in accordance with international law, including human rights.322 The respondent contested that the claimants had not established any violation of the human rights norms upon which they relied and that, in any case, they had not proved their status as part of customary international law.323 The relevance of human rights was discussed during the oral phase.324 In Grand River v. the us, the investor’s reliance on international human rights norms also proved to be unsuccessful. The tribunal observed that the relevant question was “whether the asserted legal protections are imported into the minimum standard of protection owed to foreign investments under customary international law and thus under Article 1105.”325 The tribunal decided that this has not been “shown.”326 320 321 322 323

Ibid, para. 150. Ibid, paras. 150–153, 157, 170–172, 182, 197. Ibid, paras. 134–153; Grand River v. the us, supra note 316, paras. 66–67. Grand River Enterprises Six Nations and et al. v. United States, uncitral Arbitration Rules, counter-memorial, merits phase (22 December 2008), pp. 4–5: “Claimants also invoke numerous international human rights instruments in an attempt to demonstrate the existence of “evolving” norms of customary international law which they allege have been breached here. But Claimants cannot establish any violation of such norms arising from the challenged measures in this case, and in any event they fail to demonstrate that those norms have risen to the level of customary international law applicable under Article 1105.” 324 Grand River v. the us, supra note 316, para. 180. It was even affirmed by the counsel for the respondent that “some parts” of the un Declaration of the Rights of Indigenous Peoples could “reflect fundamental human rights principles and emerging customary law.” See: Grand River v. the us, supra note 316, para. 210. 325 Grand River v. the us, ibid, para. 218. Previously in para. 71 the tribunal expressed its hesitance regarding the argument on the applicable law: “The Tribunal understands the obligation to “take into account” other rules of international law to require it to respect the Vienna Convention’s rules governing treaty interpretation. However, the Tribunal does not understand this obligation to provide a license to import into nafta legal elements from other treaties, or to allow alteration of an interpretation established through the normal interpretive processes of the Vienna Convention. This is a Tribunal of limited jurisdiction; it has no mandate to decide claims based on treaties other than nafta.” 326 Ibid, para. 219: “The Tribunal concludes that it has not been shown that they are. As the basis of the fair and equitable treatment standard of Article 1105, the customary standard of protection of alien investors’ investments does not incorporate other legal protections that may be provided investors or classes of investors under other sources of law. To hold Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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Even though the attempts made by the investors in ups v. Canada and in Grand River v. the us were unsuccessful, it must be remembered that every case is fact and law specific. Importantly, these two cases were decided on the basis of the nafta. This is a particular bit because, in the wording of art. 1105 (i.e. the provision guaranteeing the fet standard), it specifically links the fet and fps standards with the minimum standard of treatment in accordance with international law.327 Furthermore, the nafta contracting states had issued a binding interpretation of this provision which states that it: (i) “prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party, (ii) the concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens, and (iii) a determination that there has been a breach of another provision of the nafta, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1).”328 The reasoning of the tribunals in these two cases could have been different had the disputes arisen under bits which does not link the fet standard with customary international law, or at least if the tribunals were not obliged to follow the binding interpretation of the contracting states with respect to this issue. The Pey Casado v. Chile case is also relevant to illustrate the Third Model Situation.329 In this case, the investors invoked the ECtHR’s jurisprudence when arguing their compensation claim. The case concerned an individual otherwise would make Article 1105 a vehicle for generally litigating claims based on alleged infractions of domestic and international law and thereby unduly circumvent the limited reach of Article 1105 as determined by the Free Trade Commission in its binding directive.” 327 Art. 1105 nafta: “Minimum Standard of Treatment. 1. Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security. 2. Without prejudice to paragraph 1 and notwithstanding Article 1108(7)(b), each Party shall accord to investors of another Party, and to investments of investors of another Party, non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife. 3. Paragraph 2 does not apply to existing measures relating to subsidies or grants that would be inconsistent with Article 1102 but for Article 1108(7)(b).” 328 Notes of Interpretation of Certain Chapter 11 Provisions (nafta Free Trade Commission, July 31, 2001). 329 Victor Pey Casado and President Allende Foundation v. Chile, icsid Case No. ARB/98/2, award (8 May 2008) [Pey Casado v. Chile].

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who owned shares in a local newspaper in Chile, which were confiscated by the military junta in 1973.330 The investors “based principally on the judgments of the ECtHR” argued that the alleged violation had “continuous effect” even after the entry into force of the bit in 1994.331 When analyzing this issue, the tribunal did not question the potential relevance of the ECtHR’s judgments to the dispute. It analyzed the investors’ arguments and came to the conclusion that, in the particular case, the invoked jurisprudence of the ECtHR was not applicable and could not serve as a basis for classifying the expropriation as a continuous violation.332 The tribunal observed that the concept of continuous breach adopted by the ECtHR in the Loizidou v. Turkey case, which had been relied upon by the claimants, was based on a particularly broad interpretation which was not shared by the tribunal.333 With respect to Papamichalopoulos v. Greece, which was another case upon which the claimants principally relied, the tribunal concluded that it concerned different facts. In the case at hand, the expropriation had taken place at a specified moment, whereas the invoked ECtHR’s judgment concerned the de facto occupation of land by the army for a continuous period of time.334 The tribunal also analyzed other ECtHR’s judgments invoked by the claimants and concluded that they did not concern expropriations and were therefore not useful for the case at hand.335 What is important for the analysis is that the tribunal itself referred to the jurisprudence of the ECtHR when justifying its own approach. The tribunal considered its decision was in conformity with the general approach of the ECtHR, according to which expropriation is an instantaneous act which does not create a continuing “deprivation of a right.”336 In order to support this position, 330 Ibid. 331 Ibid, paras. 59, 604. 332 Ibid, para. 605: “El Tribunal considera que la jurisprudencia invocada no es aplicable en este caso concreto y no puede servir de fundamento para calificar de hecho ilícito continuo una expropiación que, en este caso, fue condenada antes de la entrada en vigor del tratado.” 333 Ibid, para. 606, with reference to Loizidou v. Turkey, application no. 15318/89, judgment (18 December 1996). The tribunal referred to dissenting opinions of judges Bernhardt, Baka, Jambrek, Pettiti and Gölcüklü, supporting the disagreement of the tribunal with the approach of the ECtHR. 334 Ibid, para. 607. The tribunal referred to Papamichalopoulos v. Greece, application no. 14556/89, judgment (24 June 1993), para. 40. 335 Ilascu et al. v. Moldova and Russia, application no. 48787/99, (8 July 2004); Broniowski v. Poland, application no. 31443/96, decision as to the admissibility (19 December 2002). 336 Pey Casado v. Chile, supra note 329, para. 608.

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the tribunal quoted a passage from the ECtHR’s judgment issued in Malhous v. Czech Republic, and in a footnote referred to other ECtHR’s judgments.337 In addition to the above, the tribunal was also required to decide upon a claim of a denial of justice. It found these allegations to be justified. In its analysis, the tribunal took into consideration art. 6(1) of the echr and the ECtHR’s judgment in Ruíz-Mateos v. Spain, in which the ECtHR held that a delay of 7 years in rendering a judgment by national courts constituted a breach of the right to be heard in a reasonable time.338 Finally, in the same case, the tribunal also referred to international human rights in the context of nationality. One of the claimants had previously held dual nationality, but subsequently renounced his Chilean nationality. ­However, the impact of his Chilean nationality could have resulted in a loss of the ­protection guaranteed in the bit. In its analysis of the nationality issue, the tribunal took into consideration the 1974 report of the Inter-American Commission on Human Rights on the observance of human rights in Chile, the 1985 report of the Inter-American Commission on Human Rights on the issue of nationality in Chile governed by military junta and a list of individuals deprived of the Chilean nationality by the government, delivered to the Inter-American Commission on Human Rights by Chile.339 It also observed that permitting the voluntary renouncement of nationality, as provided for in the relevant domestic law, amounted to a transposition of the iachr.340 Following a detailed analysis of the applicable domestic and international law, the tribunal dismissed the argument that it lacked jurisdiction to decide the case on the basis that one of the claimants held Chilean nationality. Pey Casado v. Chile is an example which confirms that human rights arguments can be relevant for bit arbitrations. In this case, the tribunal not only accepted and analyzed in detail the legal reasoning of the parties based on the ECtHR’s jurisprudence in the context of an expropriation claim, but also 337 Ibid, paras. 609–610, and footnote 580. The tribunal quoted the Malhous v. Czech Republic, application no. 33071/96, decision as to admissibility (13 December 2000). The other ECtHR decisions referred to by the tribunal were: Smoleanu v. Romania, application no. 30324/96, judgment (3 December 2002), paras. 45–46; Bergauer v. Czech Republic, ­application no. 17120/03, decision as to the admissibility (13 December 2005), p. 10; Abbasov v. Azerbaijan, application no. 24271/05, partial decision as to the admissibility (24 October 2006), para. 4. The tribunal referred also to: Lupuleţ v. Romania, application no 25497/94, decision of the European Commission on Human Rights (17 May 1996), p. 126. 338 Ibid, para. 662, with reference to Ruíz-Mateos v. Spain, application no. 12952/87, judgment (23 June 1993). 339 Ibid, paras. 267, 269, 271. 340 Ibid, paras. 314–315.

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referred to such jurisprudence of its own volition when analyzing the claim concerning a denial of justice. In this case, human rights informed the tribunal’s understanding of the substantive protections guaranteed in bits – the fet standard and the prohibition on expropriation. In the st-ad v. Bulgaria case the investor also relied on the ECtHR’s ­jurisprudence. Firstly, when arguing how the bit protection against indirect expropriation should be understood, the investor argued, inter alia, that the “protection of human rights” can “at the very least, be understood as a minimum standard below which the Investment Protection Treaty cannot in any case fall.”341 Secondly, it referred to the ECtHR’s jurisprudence when arguing which rights are capable of being expropriated.342 The tribunal declined jurisdiction in the case and did not comment on the human rights’ references made by the investor.343 Likewise, in Quiborax v. Venezuela the investor relied on the ECtHR’s jurisprudence. In this case the reference was made in the context of a compensation claim for moral harm.344 The tribunal dismissed the claim, deciding that the high threshold which applies to moral damages claims had not been met in the case.345 Also this tribunal remained silent on the human rights arguments invoked by the investor. In Hassan Awdi v. Romania the investors made reference to human rights with respect to two issues. Firstly, the investors argued against the respondent’s objection to the claims’ admissibility due to the illegal conduct of one of the investors, including human trafficking, running a criminal organization, tax evasion and money laundering.346 In this context, the investors relied on the presumption of innocence as guaranteed in the echr and requested that the tribunal rule that the objection was inadmissible.347 The respondent, in turn, 341 st-ad v. Bulgaria, supra note 94, para. 171. 342 Ibid, para. 241. 343 The only reference to the ECtHR made by the tribunal concerned the respondent’s submissions that, prior to commencing the arbitration, the investor had filed four complaints to the ECtHR, which were declared as inadmissible. The tribunal commented that it “is at pains to find how they might relate to the present case before it.” See: Ibid, para. 264. 344 Quiborax v. Venezuela – merits, supra note 193, para. 604, relying on ECtHR’s judgments: Comingersoll v. Portugal, application no. 35382/97, judgment (6 April 2000), para. 35, and Freedom and Democracy Party (özdep) v. Turkey, application no. 23885/94, judgment (8 December 1999), para. 57. 345 Quiborax v. Venezuela – merits, supra note 193, para. 618. 346 Hassan Awdi et al. v. Romania, icsid Case No. ARB/10/13, decision on the admissibility of the respondent’s third objection to jurisdiction and admissibility (26 July 2013), para. 15. 347 Ibid, paras. 29, 34.

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relied on the ECtHR’s jurisprudence to argue that any decision of the tribunal would not influence or have a prejudicial effect on any criminal proceedings, and would therefore have no effect on the investor’s rights under the echr.348 The tribunal agreed with the latter submission, quoting art. 6(2) of the echr and referring to the ECtHR’s jurisprudence to confirm the meaning of the presumption of innocence.349 Secondly, the investors relied on “various decisions issued by the European Court of Human Rights” in the context of compensation. They argued that compensation for breaches of the bit, consisting in the expropriation of real estate which was subsequently restituted by the respondent to a third party, should cover both the initial payment price and the money­spent on making improvements to the property.350 The tribunal remained silent on the ECtHR’s jurisprudence invoked by the investors with respect to this issue. It observed that, in this particular case, the investors had “accepted the risk of restitution” and awarded compensation only for the price initially paid.351 In Tulip v. Turkey the issue of human rights arose after the award had been rendered, during annulment proceedings commenced by the investor.352 One of the arguments raised during these proceedings was that the tribunal had ignored crucial evidence, which resulted in a violation of the investor’s right to be heard and the principle of equal treatment of the parties.353 The investor urged the annulment committee “to take into account human rights instruments and decisions in interpreting Article 52(1)(d) of the icsid Convention, such as the jurisprudence on the right to a fair trial” guaranteed in art. 6 of the echr and to “seek guidance from the jurisprudence” of the ECtHR, which can be relevant due to art. 31(3)(c) of the vclt.354 The respondent, in turn, argued that “the jurisprudence under the echr is irrelevant” in this context and that the both treaties “refer to different concepts in different regimes.”355 348 Ibid, para. 57. 349 Ibid, para. 80, in which the tribunal quoted the ECtHR’s judgment in Böhmer v. Germany, application no. 37568/97, judgment (3 October 2002) para. 67. 350 Hassan Awdi et al. v. Romania, icsid Case No. ARB/10/13, award (2 March 2015), para. 464. The respondent, in turn, relied on “pressure” from the ECtHR following Romania’s accession to the echr to explain the reasons behind the legislative changes which led the property acquired by the investors to be restituted to third parties (para. 125). 351 Ibid, para. 517. 352 Tulip Real Estate and Development Netherlands v. Turkey, icsid Case No. ARB/11/28, decision on annulment (30 December 2015). 353 Ibid, paras. 60, 131. 354 Ibid, para. 65. 355 Ibid, para. 69.

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The committee “did not duck from considering the human rights issues raised by the litigants but on the contrary, took them as an opportunity to expound on the “relevance of human rights” to an extent rarely seen in isds awards.”356 It commented that the icsid Arbitration Rules reflect “that the right to be heard is a fundamental rule of procedure” and that “the principal human rights instruments also accept the right to present one’s case as an essential element of a fair hearing.”357 It observed that “[t]here is a widespread sentiment that the integration of the law of human rights into international investment law is an important concern.”358 It added that “any relevant rules of international law” within the meaning of art. 31(3)(c) of the vclt “cover all sources of international law. The only requirements of Article 31(3)(c) are that the rules are relevant and that they are applicable as between the States parties to the treaty to be interpreted.”359 Having referred to various arbitral awards issued in disputes based on bits in which tribunals referred to human rights, the committee concluded that “[p]rovisions in human rights instruments dealing with the right to a fair trial and any judicial practice thereto are relevant to the interpretation of the concept of a fundamental rule of procedure as used in Article 52(1)(d) of the icsid Convention. This is not to add obligations extraneous to the icsid Convention. Rather, resort to authorities stemming from the field of human rights for this purpose is a legitimate method of treaty interpretation.”360 Having made these general observations on the relevance of human rights in investment arbitration, the committee referred to the ECtHR’s jurisprudence when applying the right to be heard to the facts of the case. Firstly, it referred to the ECtHR’s judgment in Dombo v. the Netherlands when identifying one of the elements of this right – the “equality of arms.”361 Secondly, the committee quoted the ECtHR’s judgment in Ruiz Torija v. Spain when analyzing the obligation of arbitral tribunals to give reasons for their decisions. The committee concluded that “these broad parameters apply equally to international tribunals constituted under the icsid Convention.”362 356 Alvarez, supra note 15, p. 49. 357 Ibid, para. 80, referring to art. 10 of the udhr, article 14 of the iccpr and art. of the 6 of the echr. 358 Ibid, para. 86. 359 Ibid, para. 87. 360 Ibid, paras. 91–92. 361 Ibid, para. 146, in which the committee quoted ECtHR’s judgment in Dombo Beheer v. the Netherlands, application no. 14448/88, judgment (27 October 1993), para. 33. 362 Ibid, paras. 152–153, quoting Ruiz Torija v. Spain, application no. 18390/91, judgment (9 December 1994), para. 29.

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Even though the committee decided to dismiss the application for annulment, it explicitly confirmed that international human rights law can be relevant when interpreting bits, the icsid Convention and the rules of procedure applicable in a particular investor – state dispute in accordance with art. 31(3) (c) of the vclt. In Spyridon Roussalis v. Romania the investor adopted a different approach. Apart from having initiated claims based on the applicable bit, he also claimed violations of the echr.363 Art. 10 of the Romania – Greece bit served as the gateway for these attempts.364 The investor claimed, inter alia, that the state’s measures created legal uncertainty contrary to the state’s obligations under art. 1 of Protocol 1 to the echr.365 He further claimed that in the domestic judicial proceedings concerning his investment the Romanian Supreme Court “lacked independence and impartiality in contravention of” art. 6(1) of the echr.366 He also argued that “he has been prevented from having the tax litigation solved, since his challenge was suspended,” which allegedly violated art. 6 of the echr and art. 1 of Protocol 1 to the ECtHR.367 The respondent opposed the possibility of presenting separate claims based on the echr.368 It also relied on the echr and the ECtHR’s jurisprudence to argue, inter alia, that because the investor’s rights were not “extinguished” but, rather, had been affected by a reversible situation which “substantially reduced” the investor’s rights, there was no expropriation within the meaning 363 Spyridon Roussalis v. Romania, icsid Case No. ARB/06/1, award (7 December 2011), paras. 63, 64, 66, 148, 149, 151 [Spyridon v. Romania]. 364 This provision reads as follows: “[i]f the provisions of law of either Contracting Party or obligations under international law existing at present or established hereafter between the Contracting Parties in addition to this Agreement, contain a regulation, whether general or specific, entitling investments by investors of the other Contracting Party to a treatment more favourable than is provided for by this Agreement, such regulation shall to the extent that it is more favourable, prevail over this Agreement.” In para. 117 the investor argued that “[s]ince Article 1 of the First Additional Protocol to the European Convention creates far better treatment than Article 4 of the Treaty, Article 1 of the First Additional Protocol comes within the jurisdiction of the Tribunal.” 365 Spyridon v. Romania, supra note 363, para. 134, quoting the ECtHR’s judgments in Maşinexportimport Industrial Group v. Romania, application no. 22687/03, judgment (1 December 2005), para. 32, and in Riabykh v. Russia, application no. 52854/99, judgment (24 July 2003), para 52. 366 Ibid, para. 151. In para. 156 the investor added that the “malicious attitude of the Supreme Court is not an isolated case in Romania” and referred to Brumarescu v. Romania, application no. 28342/95, judgment (28 October 1999), para 61. 367 Ibid, paras. 404–407. 368 Ibid, paras. 309, 463.

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of art. 1 of Protocol 1 to the echr.369 It further argued that the investor’s “reliance on decisions of the European Court asserting violation of legal certainty is misplaced.”370 It then analyzed each of the ECtHR’s judgments relied upon by the investor and explained why, in its view, these cases were irrelevant to the case at hand, since they concerned facts which were markedly different from those in the dispute.371 The tribunal summarized its view on the claims based on the echr in a single paragraph. It explained that it “does not exclude the possibility that the international obligations of the Contracting States mentioned at Article 10 of the bit could include obligations deriving from multilateral instruments to which those states are parties, including, possibly, the European Convention of Human Rights and its Additional Protocol No. 1. But the issue is moot in the present case and does not require decision by the Tribunal, given the higher and more specific level of protection offered by the bit to the investors compared to the more general protections offered to them by the human rights instruments referred above. Consequently Article 10 of the bit cannot, in its own terms and in the instant case, serve as a useful instrument for enlarging the protections available to the Claimant from the Romanian State under the bit.”372 Thus, although the tribunal avoided determining whether the investor could successfully present his claims based on the echr in arbitral proceedings based on the bit, it did not exclude this possibility. Finally, the Al-Warraq v. Indonesia case should be mentioned. These proceedings were commenced on the basis of the Organization for Islamic Cooperation­ international investment agreement (referred to as the “oic Agreement”),­a multilateral treaty which, nevertheless, “contains typical investment protection provisions.”373 Thus, the case is relevant for this book’s analysis. The investor alleged, inter alia, a violation of art. 10(1) of the oic Agreement which, in his view, refers to a prohibition on measures depriving an investor “of his basic rights.”374 The investor claimed that this provision should be 369 370 371 372 373

Ibid, para. 248. Ibid, para. 269. Ibid, paras. 270–274. Ibid, para. 312. Hesham T.M. Al-Warraq v. Indonesia, uncitral, award on preliminary objections to jurisdiction and admissibility (21 June 2012), para. 73. 374 Hesham T.M. Al-Warraq v. Indonesia, uncitral, final award (15 December 2014), para 177. Art. 10(1) of the oic Agreement reads as follows: “The host state shall undertake not to adopt or permit the adoption of any measure itself or through one of its organs, institutions or local authorities if such a measure may directly or indirectly affect the ownership of the investor’s capital or investment by depriving him totally or partially of his

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­interpreted in accordance with art. 31(3)(c) of the vclt “to include basic international law and rights,” including the presumption of innocence and the right to a fair trial.375 With respect to the presumption of innocence, he referred to art. 14(2) of the iccpr.376 The investor further argued that “the presumption of innocence is one of the most established fundamental rights of individuals recognized by customary international law” and referred to art. 11 of the udhr.377 He alleged that his right to be presumed innocent until proven guilty had been violated by public statements made by certain Indonesian public officials.378 With respect to his right to a fair trial, the investor argued that “the principle of systemic integration requires the Tribunal to take Article 14(3)(a) iccpr and other governing norms of international law into account” when interpreting art. 10(1) of the oic Agreement.379 He alleged that the criminal proceedings initiated against him were unfair and contrary to the most fundamental elementary procedural guarantees, that the motive underpinning those proceedings was to “pursue his assets,” that we was not informed about the criminal proceedings, that they were conducted without “hearing or taking a statement from him” and that they were improperly conducted in absentia.380 The respondent opposed any reference being made to human rights when interpreting the applicable provisions of the oic Agreement.381 The tribunal applied art. 31(1) of the vclt to interpret art. 10(1) of the oic Agreement. Based on the text of the latter, the tribunal decided that the

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­ownership or of all or part of his basic rights or the exercise of his authority on the ownership, possession or utilization of his capital, or of his actual control over the investment, its management, making use out of it, enjoying its utilities, the realization of its benefits or guaranteeing its development and growth.” Ibid, para. 177. Ibid, paras. 177–181. The investor referred also to the echr, iachr, African Charter, as well as to the case law of the IACtHR, the ECtHR and the African Commission. Ibid, para. 182. Ibid, paras. 184–188. Ibid, para. 203. Ibid, paras. 189–193, 207, 239–246, 248–249. The tribunal summarized these arguments in para. 519: “The Claimant argues that the phrase ‘basic rights’ in Article 10(1) means ‘fundamental rights’ and ‘includes the Claimant’s human and civil and political rights codified in international law. These include the basic right to a fair trial, as enumerated in Article 14 of the iccpr’ (Claimant’s Post-Hearing Brief, paragraph 119). The Claimant argues that this interpretation is supported by the principle of systematic integration of international law norms articulated in Article 31.3(c) of the vclt as well as the ordinary meaning of the terms in Article 10(1).” Ibid, para. 285.

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provision­did not guarantee protection of “basic rights” as a stand-alone clause, but rather protection of “basic ownership rights.”382 Consequently, the tribunal rejected the investor’s “submission that his right to a fair trial is guaranteed by Article 10(1) of the oic Agreement.”383 This did not, however, conclude the tribunal’s analysis of the relevance of human rights to the dispute. The tribunal devoted a whole section of the award to an analysis of the “iccpr and its relevance to the Claimant’s fet claim,” applied by virtue of the Most-Favored ­Nation clause.384 It observed, inter alia, that the iccpr is regarded as constituting “part of general international law,” being “a universal instrument which contains binding legal obligations for the States parties to it. The rights enshrined within it represent the basic minimum set of civil and political rights recognized by the world community.”385 It added that if a state party to the ­i ccpr failed to comply with its obligations under the iccpr “it is the duty of the competent Court or Tribunal to so declare: even though there is no recourse to be had to the implementing agency – the Human Rights Commission – with respect to remedies.”386 The tribunal then offered a detailed interpretation of art. 14 of the iccpr.387 It decided that the claim alleging a breach of the fet standard “as enshrined in the iccpr” was justified. It observed that “[…] the Claimant was not properly notified of the criminal charges against him, he was tried and convicted 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. The Tribunal concludes, therefore, that the Claimant did not receive fair and equitable treatment as enshrined in the ­i ccpr for the above reasons – and not for any other pleaded by the Claimant. Accordingly, the Claimant’s fair and equitable treatment claim is upheld.”388 This resulted to be a Pyrrhic victory given that the tribunal found those claims to be inadmissible because the investor did not have “clean hands” by virtue of his “failing to uphold the Indonesian laws and regulations and in acting in a manner prejudicial to the public interest.” In the tribunal’s view, this “prevented” the investor “from pursuing his claim” and receiving any compensation.389 382 383 384 385 386 387

Ibid, para. 521. Ibid, para. 522. Ibid, para. 556. Ibid, paras. 558–559. Ibid, para. 561. Ibid, paras. 564–577, making references to the Human Rights Committee, the IACtHR, ECtHR, echr, the African Commission, the African Charter and the udhr. 388 Ibid, para. 621. 389 Ibid, paras. 647, 648, 654.

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chapter 1

Interrelations between the Model Situations

This chapter introduces the methodological tool which will be applied in the analysis contained in Chapters 2–4. Three model situations were proposed: (i) the First Model Situation, (ii) the Second Model Situation and (iii) the Third Model Situation. Identification of such methodological tool is crucial to ensure clarity of the analysis contained in the following chapters. The proposed model situations are illustrated in the following chart: MODEL SITUATIONS

FIRST MODEL SITUATION

SECOND MODEL SITUATION

THIRD MODEL SITUATION

An investor who presents a claim based on a bit has not been involved in any human rights violations in the territory of the host state during any moment of its activities.

An investor who presents a claim based on a bit has been involved in human rights violations in the territory of the host state.

An investor is a victim of human rights violations committed by the host state where the investment is located.

The respondent (host state defending a bit claim) invokes its international human rights obligations in an attempt to justify measures which are alleged to be in breach of the bit.

The claimant (investor who presents a claim based on a bit) invokes his own human rights.

The analysis shows that the proposed methodological tool is justified in analyzing the interrelations between international investment law and human rights. It provides numerous examples of cases in which the parties presented human rights arguments. This proves that there is case law, or at least examples from the real world, confirming the proposed model scenarios. This chapter not only introduces the division into the proposed Model Situations, but also justifies all three perspectives from which the situations should be considered. By way of reminder, the Model Situations serve as: (i) classification of factual situations, (ii) legal classification from the perspective of actors involved in arbitral proceedings,

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(iii) legal classification from the perspective of host states’ international obligations to respect, protect and fulfil human rights. From the first perspective – i.e. the classification of factual situations – a typical situation would be that each Model Situation occurs separately. One exception to this is that facts which could be classified as falling within the Third Model Situation may also be classified as falling with the First Model Situation. The First and the Second Model Situations are mutually exclusive. It is not possible that facts of a particular dispute would constitute the basis for a situation falling within both categories of these Model Situations. Theoretically, a dispute may concern the facts underlying a Third Model Situation together with facts underlying a Second Model Situation. However, this would constitute an exceptional situation. All of the cases described in this chapter serve as examples which illustrate the point that, in arbitrations based on bits, there is scope for human rights arguments. The presented cases involved the invocation of human rights: (i) by respondents, on the general notion of human rights, (ii) by respondents, on particular human rights, such as the right to water, (iii) by investors, on their human rights, and (iv) by arbitral tribunals, not necessarily related to arguments of the parties, which referred to the jurisprudence of human rights’ bodies. When analyzing the Model Situations from the perspective of the actors involved in arbitral proceedings, both parties to a dispute have the possibility to invoke human rights in order to support their position. The First and Second Model Situations refer to human rights arguments invoked by host states. From this perspective, they can be classified jointly as representing a “shield” in the proceedings. The Third Model Situation refers to human rights arguments invoked by investors. As such, human rights arguments constitute a “sword,” contrary to the First and the Second Model Situations.390 This does not, however, preclude the possibility that, within the context of a particular dispute, both parties to the dispute will seek to rely on human rights arguments. Regardless of whether any of the parties decides to present arguments based on human rights, both branches of law – international investment law and international human rights law – remain part of international law. C ­ onsequently, arbitral tribunals which decide cases based on bits can analyze norms of 390 See for example: Łukasz Kułaga, “Ochrona praw człowieka w międzynarodowym arbitrażu inwestycyjnym,” (2014) 21:1 Forum Prawnicze, pp. 50–56. Kułaga identifies even third category – “double shield”, by which he understands human rights arguments used in amicus curiae submissions. According to the assumptions underlying the analysis, this work does not focus on potential amicus curiae submissions.

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i­ nternational human rights and the relevant jurisprudence of the human rights’ bodies, and consider whether or not to utilize concepts which may be appropriate for the investment dispute at hand. Such an approach may prove useful in developing an interpretation of the norms of international investment law. The Second Model Situation, contrary to the First and the Third Model Situations, does not find support in numerous examples of existing investor – state arbitration case law. This is unsurprising, given that it is hardly probable that an investor who has violated human rights will subsequently commence bit arbitration in connection with state actions which amount to a response to such violations. Nevertheless, this chapter proves that, in reality, numerous examples exist of factual situations which fit into the Second Model Situation. Such examples may form part of the factual backgrounds of potential, future investment disputes. The examples presented in this chapter prove that, from the third perspective (i.e. legal classification from the perspective of host states’ international human rights obligations), every part of the three-fold obligation to respect, protect and fulfil human rights may be relevant in the context of investor – state arbitrations. The First Model Situation can be considered mainly from the viewpoint of a state’s international obligation to fulfil human rights, understood as the obligation to take measures to ensure that human rights are implemented to the greatest possible extent. The Second Model Situation relates in principle to a state’s international obligation to protect human rights, which requires that states exercise due diligence to prevent the violation of human rights by private persons. Both types of obligations are closely interrelated. They impose positive obligations on states, including legislative obligations. As such, it is common that obligations imposed in the context of particular human rights (as defined, for example, in the General Comments) under the obligation to fulfil and to protect human rights are closely interrelated. Finally, the Third Model Situation is related to a state’s international obligation to respect human rights. This is understood as a negative obligation which requires a state not to infringe an investor’s human rights. Nevertheless, this summary is a simplification. One cannot ignore the fact that various aspects of a state’s triad of obligations are closely interconnected and are dependent not only on the circumstances of each case but also on the human rights involved. Nevertheless, this simplified classification serves as a good reference for understanding the Model Situations. As regards all of the above, the conclusion is that the proposed methodological tool is appropriate for analyzing the interrelations between international investment law and human rights and that it is appropriate to deploy this tool in the subsequent Chapters (2–4). Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:43:00PM via free access

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Apart from justifying the adopted methodological tool, Chapter 1 also proves that problems concerning the intersections between the two fields have been seen to exist in the course of arbitral proceedings. This cannot be deemed as exceptional. Furthermore, it shows that this is an issue which is not of purely academic interest, but also has relevance for practice. It also demonstrates that the issue of interrelations between international investment law and human rights relates to a wide range of human rights. Before proceeding to further analysis, the following assumption must be clarified. When the proposed methodology is applied in the subsequent chapters, it is assumed that any human rights argument presented by any of the parties is genuine, based on true intentions and grounded on the facts of the case (i.e. that such argument was invoked in good faith). It is also assumed that it is not discriminatory. In practice, it may happen that a state will invoke human rights arguments as a post factum attempt to justify measures which, at the time of their implementation, were not deemed to concern human rights. For the sake of clarity, such situations are not reflected in the adopted methodological tool. Arbitral tribunals have separate tools to assess the facts of cases before them and to reject such artificial arguments when it is appropriate to do so. It is also assumed that the applicable law includes international law (or applicable rules and principles of international law), as emerging for example from art. 1131(1) nafta and art. 26(6) of the Energy Charter Treaty. This approach is not excluded by art. 42(1) of the icsid Convention.

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chapter 2

Human Rights Context of Jurisdiction and Admissibility in Investor – State Arbitration 1

Scope of Jurisdiction of Tribunals in Investor – State Arbitration and Human Rights

General Remarks on the Grounds of Jurisdiction of Arbitral Tribunals Having mapped possible scenarios of interactions between human rights norms and investment law, it is possible to proceed to the analysis of the potential influence of human rights on the conduct of arbitral proceedings based on bits. The present chapter analyses the issue of tribunals’ jurisdiction in investor – state arbitrations and the scope of such jurisdiction.1 The issue of jurisdiction is a vital element of the legal framework of investor – state arbitration. Assessment of jurisdiction and of the scope thereof­ is the first and basic issue which must be decided in the course of arbitral proceedings. Only once jurisdiction and the scope thereof have been determined can an arbitral tribunal proceed to analyze the merits of a dispute and any possible impact of human rights considerations on the dispute’s merits, compensation and/or costs shifting. In other words, any discussion regarding the possible place of human rights arguments in the arbitral proceedings can take place only once the tribunal decides upon its mandate in the context of a particular dispute – the scope and any limits of its jurisdiction. This is a consequence of the legal framework of investment arbitration in particular, and of arbitration in general. In other words, the mandate of all arbitral tribunals is to decide particular cases but solely within the limits of their powers (jurisdiction, authority) granted to them by the parties to the dispute. The analysis of jurisdiction contained in the present chapter should commence by explaining the meaning of the term “jurisdiction.” It can be understood as the power to decide the case at hand. Generally – whether in the case of investment or commercial arbitration – the jurisdiction of arbitral tribunals i

1 In this context see also: Filip Balcerzak, “Jurisdiction of Tribunals in Investor–State Arbitration and the Issue of Human Rights,” (2014) 29:1 icsid Review – Foreign Investment Law Journal, pp. 216–230.

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004339002_004

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is based on the consent of the parties to a particular dispute.2 Without such consent to arbitrate, an arbitral tribunal will lack the power (authority) to decide a case. A correct determination of the existence and scope of jurisdiction is of vital importance. If an arbitral tribunal improperly assesses its jurisdiction and an award is rendered by a tribunal which had no jurisdiction to rule upon the dispute, serious practical complications may arise. Chiefly, the subsequent recognition and enforceability of the award may be denied.3 In addition, the award may be annulled in the context of investment arbitration rendered in proceedings conducted under the icsid Convention. Similar consequences may occur if a tribunal, although having jurisdiction, renders an award which exceeds the scope of such jurisdiction. It is important to consider the ways in which tribunals’ jurisdiction may be established in international arbitration in general. This is crucial because the dispute resolution system has been subsumed into bits from the realm of commercial arbitration. Thus, in commercial arbitration, the consent to arbitrate is typically given in “arbitration agreements.” These are provisions included in commercial contracts. Arbitration agreements refer to possible, future disputes which arise out of the contract, and stipulate that arbitration shall be the venue for resolving such disputes.4 As stated above, this is a typical method for providing consent to arbitrate in the context of commercial arbitration, where two (or more) parties conclude a contract. This form of providing consent to arbitrate can also be relevant in investor – state arbitration. It is not uncommon for disputes to arise out of investment contracts which are 2 “The consent of the parties is the basis of the jurisdiction of all international arbitration tribunals.” See: Christopher R. Dugan, Don Jr. Wallace, Noah Rubins, Borzu Sabahi, “Investorstate arbitration” (Oxford University Press 2008), p. 219 [Dugan, Wallace, Rubins, Sabahi]. Also: “While jurisdiction of courts does not depend on submission by the parties, but is decided by law, jurisdiction of an arbitral tribunal exists only if and insofar as the parties have expressed their submission to it. This submission must, therefore, be interpreted and found to exist in every given case […].” See: Tradex Hellas v. Albania, decision on jurisdiction, icsid Case No. ARB/94/2 (24 December 1996), para. 94. See also: Clara Reiner, Christoph Schreuer, “Human Rights and International Investment Arbitration,” in: Pierre-Marie Dupuy, ErnstUlrich Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford University Press 2009), p. 83 [Reiner, Schreuer]. 3 Gary B. Born, “International commercial arbitration” (Kluwer Law International 2009), vol. i, pp. 201–202 [Born]: “Although the parties’ consent is essential for an agreement to arbitrate, the ultimate efficacy of an international arbitration agreement depends in large part upon its validity and enforceability in national courts.” 4 Dugan, Wallace, Rubins, Sabahi, supra note 2, p. 220.

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concluded between investors and host states. If a contract is to be qualified as an investment contract within this meaning, a host state must act in its sovereign capacity via one of its state agencies. Only when it acts de iure imperii may such a dispute result in investor – state arbitration. If a state acts as a commercial actor (de iure gestionis), any possible dispute which arises out of a contract containing an arbitration agreement should, conversely, be considered as an example of commercial arbitration. Apart from the above, it is possible that the parties refer an already existing dispute to arbitration. This can be done through direct agreement between the parties to such a dispute. This method is known as a “compromis.” By expressing their consent to arbitrate in such a manner, the parties create a valid basis for an arbitral tribunal’s jurisdiction.5 This situation can occur if there is no previous consent to arbitrate.6 However, the parties may also decide to take this approach in order to “cure” a previous, invalid consent to arbitrate, or even to extend the scope of a previous consent. The methods of giving consent to arbitrate briefly described above are of general applicability and, as such, they may also become important in the context of investment disputes. However, the legal framework of international investment law offers additional possibilities to express the parties’ consent to arbitrate, which are not present in commercial arbitration. One such possibility is that states can include their consent to arbitrate (considered also as an “offer” to arbitrate) in their domestic legislation. Another possibility is for states’ consent to arbitrate (the “offer” to arbitrate) to be incorporated into bits. The present book and the following considerations only discuss the jurisdiction of arbitral tribunals based on bits. In other words, they refer only to the latter method of expressing consent to arbitrate (i.e. where host states give their consent to arbitrate in bits). This is the method which has become much more significant in practice than recourse to domestic legislation. As has been noted, “with the expansion of the network of bits around the world, there has been less recourse to international dispute resolution pursuant to domestic investment protection legislation.”7 Nevertheless, this author wishes to underline that the consent given by states in domestic legislation shares many characteristics of the consent expressed in bits. Thus, the majority of the following

5 Ibid. 6 This is not the situation when an investor decides to commence proceedings based on a bit or on domestic legislation. 7 Dugan, Wallace, Rubins, Sabahi, supra note 2, p. 234.

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observations may also be applicable to the situation when states’ consent to arbitrate is contained in domestic investment laws. Characteristics of the Consent to Arbitrate Given in Investment Treaties Having briefly described the meaning of the term jurisdiction and the grounds therefor, it is the proper moment to refer to the characteristics of consent given in bits. In this context, the consent to arbitrate is provided by states (in their capacity as contracting parties to a particular investment treaty) in so-called “jurisdiction clauses.” Such consent is commonly described as an “open offer” to arbitrate possible disputes. This offer is given to investors who possess the nationality of the other contracting state to the bit, and covers a specifically defined class of investments set out in the treaty.8 In other words, an investor must meet certain requirements laid down in the applicable bit in order to be “eligible” to effectively accept the state’s offer to arbitrate. The offer of the states cannot, of course, by itself constitute a valid basis for the jurisdiction of arbitral tribunals in investor – state arbitration, since it represents the consent of merely one of the parties to the dispute. For this reason, by itself an offer to arbitrate given by states in bits cannot constitute a valid basis for the jurisdiction of an arbitral tribunal. In order to constitute such a basis, the consent to arbitrate must be provided by both parties to the dispute.9

ii

8 Nigel Blackaby, “Investment Arbitration and Commercial Arbitration (or the Tale of the Dolphin and the Shark),” in: Loukas A. Mistelis, Julian D.M. Lew, “Pervasive Problems in International Arbitration” (Kluwer Law International 2006), p. 219. See also: Hege Elisabeth Veenstra-Kjos, “Counter-claims by Host States in investment Dispute Arbitration ‘without Privity,’” in: Philippe Kahn, Thomas Wälde, “New Aspects of International Investment Law” (Brill 2007), p. 604 [Veenstra-Kjos]: “As was noted, “arbitration without privity” refers to the practice whereby a State, in its legislation or an investment treaty, extends a generic offer of arbitration to a category of foreign investors.” The consent of the state included in bits is also described as “standing offer to arbitrate.” See: Andrea K. Bjorklund, “Waiver and the Exhaustion of Local Remedies Rule in nafta Jurisprudence,” in: Todd Weiler, “nafta Investment Law and Arbitration: Past Issues, Current Practice, Future Prospects” (Transnational Publishers 2004), p. 274. It can be also described as a “continuing offer to a class of potential claimants.” See: Jack J. Jr. Coe, “The Mandate of Chapter 11 Tribunals – Jurisdiction and Related Questions”, in: Todd Weiler, “nafta Investment Law an Arbitration: Current Practice, Future Prospects” (Transnational Publishers 2004), p. 219 [Coe]. See also: Marie-Claire Cordonier Segger, Andrew Newcombe, “An Integrated Agenda for Investment Law,” in: MarieClaire Cordonier Segger, Markus W. Gehring, Andrew Newcombe, “Sustainable Development in World Investment Law” (Kluwer Law International 2011), p. 112. 9 Veenstra-Kjos, ibid, p. 602. In this context it must be noted that some commentators question the accurateness of speaking about an “offer to arbitrate” and argue that reference should be

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In other words, the offer to arbitrate given in the bit by the state must be accepted by the investor. As a general rule, it is considered that investors give their consent to arbitrate investment disputes at the moment when they commence arbitral proceedings.10 This is considered as having been fulfilled at the moment when a notice of arbitration (request for arbitration) is filed.11 In other words, the investor gives his consent to arbitrate at the moment of filing a notice of arbitration. From this moment, the consent to arbitrate has been given by both parties to the dispute. As a result, the basis for an arbitral tribunal’s jurisdiction is established from that moment. Some bits contain explicit references to the issue of the consent of the private party (i.e. the investor). For example art. 26(4) of the Energy Charter Treaty requires the investor to “provide its consent in writing.”12 Similarly, the

10

11

12

made solely to “consent to arbitrate.” See for example: “While investment arbitration practitioners often tend to speak, somewhat loosely, about an ‘offer’ made by a State in an investment treaty to arbitrate disputes between foreign investors – which ‘offer’ is then accepted by the foreign investor when submitting the dispute arbitration, which invariably occurs after the dispute has arisen – such talk, while harmless if not taken literally, is conceptually and legally inaccurate. The State does not make an ‘offer’ to arbitrate in a dispute resolution clause included in an investment treaty; it provides its firm and standing consent to arbitrate. As a firm and standing consent, it is not an ‘offer’ that is conditional upon an investor’s accepting it; it is a consent that is binding on the State that has given it, regardless of whether it will ever be accepted by any foreign investor.” Veijo Heiskanen, “Comment on Andrea Marco Steingruber’s Remarks on Veijo Heiskanen’s Note ‘Ménage à Trois? Jurisdiction, Admissibility and Competence in Investment Treaty Arbitration,’” (2014) 29:3 icsid Review – Foreign Investment Law Journal, p. 671 [Heiskanen]. “The investor’s consent to arbitration is generally expressed in its request for arbitration and hence limited to the substance of the request.” See: Reiner, Schreuer, supra note 2, p. 89. Similarly Matthew T. Parish, Annalise K. Nelson, Charles B. Rosenberg, “Awarding Moral Damages to Respondent States in Investment Arbitration,” (2011) 29:1 Berkeley Journal of International Law, p. 242: “That arbitration agreement is formed when the investor accepts a unilateral arbitration offer made by a state to all investors within the scope of the investment treaty. The investor’s act of acceptance is made by commencing arbitration proceedings; at that time, a valid arbitration agreement between investor and state is formed.” Zachary Douglas, “The Plea of Illegality in Investment Treaty Arbitration,” (2014) 29:1 icsid Review – Foreign Investment Law Journal, p. 161 [Douglas]. See also: ParkeringsCompagniet v. Lithuania, icsid Case No. ARB/05/8, award (14 August 2007), para. 246: “The parties gave their consent to arbitration: the Republic of Lithuania, on 16 June 1992, by signing the bit and Parkerings, on 11 March 2005, with its Request for Arbitration.” Art. 26(4) of the Energy Charter Treaty: “In the event that an Investor chooses to submit the dispute for resolution under subparagraph (2)(c), the Investor shall further provide its consent in writing for the dispute to be submitted to: […]” Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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nafta requires investors to give their consent “in writing” and in addition to present a “waiver.”13 Regardless of whether or not a particular bit introduces any formal requirements related to investors’ consent to arbitrate, a proper consent to arbitrate of both parties to a dispute is present only after the state’s “offer” to arbitrate, as previously expressed in the bit, is “accepted” by a particular investor, either by filing a notice of arbitration or by providing such consent in writing and in accordance with any additional formal requirements that the particular bit may stipulate. Only from this moment can the jurisdiction of a particular arbitral tribunal be duly established.

13

However, it is subject to discussion whether the requirement of waiver is an element of the consent to arbitrate, and therefore of jurisdiction, or whether it should be considered as an element of admissibility of a claim. Art 1121 of the nafta reads as follows: “1. A disputing investor may submit a claim under Article 1116 to arbitration only if: (a) the investor consents to arbitration in accordance with the procedures set out in this Agreement; and (b) the investor and, where the claim is for loss or damage to an interest in an enterprise of another Party that is a juridical person that the investor owns or controls directly or indirectly, the enterprise, waive their right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceedings with respect to the measure of the disputing Party that is alleged to be a breach referred to in Article 1116, except for proceedings for injunctive, declaratory or other extraordinary relief, not involving the payment of damages, before an administrative tribunal or court under the law of the disputing Party. 2. A disputing investor may submit a claim under Article 1117 to arbitration only if both the investor and the enterprise: (a) consent to arbitration in accordance with the procedures set out in this Agreement; and (b) waive their right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceedings with respect to the measure of the disputing Party that is alleged to be a breach referred to in Article 1117, except for proceedings for injunctive, declaratory or other extraordinary relief, not involving the payment of damages, before an administrative tribunal or court under the law of the disputing Party. 3. A consent and waiver required by this Article shall be in writing, shall be delivered to the disputing Party and shall be included in the submission of a claim to arbitration. 4. Only where a disputing Party has deprived a disputing investor of control of an enterprise: (a) a waiver from the enterprise under paragraph 1(b) or 2(b) shall not be required; and (b) Annex 1120.1(b) shall not apply.” Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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As can be seen, certain differences exist between the aforementioned method for providing consent to arbitrate in disputes arising out of bits when compared with the typical methods for providing consent to arbitrate within commercial arbitration. One such difference is the moment of giving consent. In a typical relationship leading to the constitution of an arbitral agreement in commercial arbitration, the consent of both parties is given simultaneously. This happens, for example, at the moment when a contract is concluded. This justifies another conclusion on the differences between the methods of giving consent to arbitrate in investment and commercial contexts, namely that there is frequently no contractual relationship which exists between the parties to an investment dispute where the tribunal’s jurisdiction is based on a bit. In fact, until such time as an investor decides to present a notice of dispute, the central authorities of a state may even be unaware of the existence of a situation leading to an investment dispute.14 This type of arbitration, with no contractual relationship in existence between parties to the dispute, is commonly known as “arbitration without privity.”15 Regardless of whether or not a contractual relationship exists between the parties, they conclude an agreement to arbitrate (arbitration agreement) by giving their consent to arbitrate. The arbitration agreement is a separate contract (agreement). It is independent of any other relationship which may bind the parties, and may even exist in the absence of any contractual relationship between them, as is common in bit cases.16 In the context of jurisdiction 14

15 16

However, certain bits establish that only approved investments enjoy protection granted by the bit. See for example the protocol to the Poland – Iran bit, which requires such approval for investments made in the territory of Iran, but with respect to investments made in Poland introduces a legality requirement only. The respective provision reads as follows: “On signing the Agreement on reciprocal promotion and protection of investments between the Government of the Republic of Poland and the Government of the Islamic Republic of Iran Contracting Parties also agreed on the following provision, which shall be deemed as an integral part of the Agreement: – As far as the Islamic Republic of Iran is concerned this Agreement shall only apply to investments approved by the competent authorities of the Islamic Republic of Iran. The competent authority in the Islamic Republic of Iran is: Organization for Investment, Economic and Technical Assistance of Iran (o.i.e.t.a.i.). – As far as the Republic of Poland is concerned this Agreement shall apply to all investments made by investors of the Islamic Republic of Iran within the territory of the Republic of Poland in accordance with the legislation in the Republic of Poland related to investment and its implementing regulations or laws and regulations which will succeed to the above mentioned law and regulations.” Jan Paulsson, “Arbitration Without Privity,” (1995) 10:2 icsid Review – Foreign Investment Law Journal. The doctrine of separability of the arbitration agreement is not as important in investment arbitration as in international commercial arbitration, although it may play a role. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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based on bits, the arbitration agreement is therefore concluded when consent is given at a later moment in time (i.e. when the investor gives his consent to arbitrate). From that moment (i.e. when the investor gives his consent to arbitrate, typically by filing a notice of arbitration), “[…] both the material conditions for consent and the formal requirements for an arbitration agreement are satisfied at that juncture.”17 From the perspective of the future recognition of an arbitral award in jurisdictions other than the place of arbitration, the arbitration agreement concluded in such a manner between the investor and the host state in a particular dispute is considered to: (i) emerge from a defined legal relationship, (ii) be commercial in nature, and (iii) be done in writing. In other words, the above classification of the arbitration agreement leads to the conclusion that an arbitral award rendered in proceedings based on a bit fulfils the requirements necessary for it to be recognizable under conventions governing the recognition and enforceability of arbitral awards. For example, such requirements are set forth in article ii of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done in New York in 1958. This conclusion is of vital importance in the context of states which are not party to the icsid Convention.18 Art. 54(1) of the Convention establishes that “Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State. A Contracting State with a federal constitution may enforce such an award in or through its federal courts and may provide that such courts shall treat the award as if it were a final judgement of the courts of a constituent state.” This provision means that arbitral awards rendered under the icsid Convention should be automatically enforceable in all the states which are parties to the Convention. As regards states which are not party to the icsid Convention any involuntary compliance with an arbitral award rendered by a tribunal operating under a bit must be assessed under the general rules on the recognition and enforceability of arbitral awards. iii Types of Jurisdictional Limits and Their Possible Consequences The jurisdiction of arbitral tribunals is of limited scope. It is a direct consequence of the consent to arbitrate given by the parties and the scope of such consent. This also remains true with respect to the jurisdiction of arbitral tribunals in bit disputes. As was explained in the previous section, jurisdiction in investment arbitration is based on the parties’ consent to arbitrate, as is also 17 Douglas, supra note 11, p. 161. 18 For example Poland. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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true of commercial arbitration. This classification remains accurate despite the fact that consent of the host states is given in advance (as an “offer” to arbitrate) and is directed to an open group of potential claimants. In consequence, the scope of jurisdiction in every case depends on the scope of the given consent to arbitrate and any limitations placed thereupon.19 Typically, the limitations of jurisdiction are classified into three types: (i) “rationae personae,” (ii) “rationae temporis,” and (iii) “rationae materiae.” Sometimes the existence of an additional type of limitation is argued: (iv) “rationae voluntatis.”20 The limitation referred to in point (i), rationae personae, refers to the parties to a dispute. The second type of limitations, referred to in point (ii), rationae temporis, concerns time-related issues. Finally, the type of limitation referred to in point (iii), rationae materiae, concerns subject matter-related issues.21 The arguable additional type of limitation, rationae voluntatis, refers to consent to arbitrate. In this author’s opinion, there is no need to distinguish this latter type of limitation, as it in principle refers back to the existence of the parties’ “will” to arbitrate. In consequence, this limitation refers to the very essence of arbitration (i.e. the consent to arbitrate), without which there is no jurisdiction at all. For the purposes of the present book, the third type of limitation – rationae materiae – is relevant. This limitation concerns subject matter-related issues. It allows one to understand what exactly the parties agreed to submit to arbitration. Determining the limitations “rationae materiae” allows one to decide which matters fall within the jurisdiction of arbitral tribunals and, as a result, which matters can be ruled upon by tribunals.22 The issue of jurisdiction and any limits thereupon is of utmost importance. Firstly, within the legal framework of investment arbitration there is no ­“second instance.” Therefore, there is no “appeal” instance to which a losing party can refer in an attempt to correct possible mistakes made by an arbitral tribunal. The legal framework of investment law offers, however, certain mechanisms which enable the correction of some errors made by tribunals when assessing 19 Coe, supra note 8, p. 223; Reiner, Schreuer, supra note 2, p. 83. 20 See for example: Joseph M. Boddicker, “Whose Dictionary Controls?: Recent Challenges to the Term “Investment” in icsid Arbitration,” (2010) 25:5 American University Law Review, p. 1043; Phoenix Action v. Czech Republic, icsid Case No. ARB/06/5, award (15 April 2009), para. 66 [Phoenix v. Czech Republic]. From theoretical standpoint also territorial jurisdiction (“rationae loci”) could be identified. 21 Coe, supra note 8, p. 223. 22 Jean-Francois Poudret, Sebastien Besson, “Comparative Law on International Arbitration” (Sweet & Maxwell 2009), p. 265.

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the existence and scope of their jurisdiction. In the context of the icsid Convention, the non-observance of jurisdictional limits by a particular tribunal can result in a successful request to annul the rendered award. Annulment is not an appeal. It can be requested under specific grounds listed in art. 52 of the icsid Convention, including where a tribunal “has manifestly exceeded its powers.” Therefore, it may refer to a situation in which a tribunal exceeds rationae matariae limits on its jurisdiction. If particular arbitral proceedings are not conducted under the framework of the icsid Convention and if a tribunal does not respect the limits of its jurisdiction, a party may petition the appropriate court(s) in the place of the arbitration to set aside the rendered award. In addition, the party can also undertake steps to have the award declared unenforceable, if the winning party seeks to enforce the award in a jurisdiction other than the place of arbitration. Having said all of this, it is crucial to observe that it is arbitral tribunals themselves which, in the course of arbitral proceedings, have the competence to determine the existence and scope of their own jurisdiction. The power to decide upon the existence of jurisdiction, any limits thereupon and any/all jurisdictional objections is known as the competence-competence doctrine (also known as “kompetenz-kompetenz,” “jurisdiction to decide jurisdiction” and “jurisdictional competence”).23 It pertains to arbitral tribunals themselves. In summary, a failure to observe jurisdictional limits placed upon a tribunal can have important consequences which lead to the annulment, setting aside or unenforceability of any award it issues. iv Types of Jurisdiction Clauses Typically Present in Investment Treaties At the very outset of this section, it must be recognized that any generalization concerning the scope of jurisdiction of arbitral tribunals in investor – state disputes is possible only to a limited extent. It is beyond doubt that the scope of jurisdiction in every case must always reflect the wording of the jurisdiction clause contained in the applicable bit. “But for certain general features, bits are worded differently and although a certain issue may appear to arise in the same disguise more than once, the circumstances of each case will always be different.”24 Therefore, the starting point for analyzing the scope of 23 Born, supra note 3, pp. 402–404, 851–877. See also: Art 41(1) icsid Convention, art. 21(1) uncitral Rules 1976, art. 23(1) uncitral Rules 2010. 24 See: Jacomijn J. van Haersolte-van Hof, Anne K. Hoffmann, “The relationship between international tribunals and domestic courts,” in: Peter Muchlinski, Federico Ortino, Christoph Schreuer, “The Oxford Handbook of International Investment Law” (Oxford University Press 2008), pp. 963–964 [van Haersolte-van Hof, Hoffmann].

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­jurisdiction established on the basis of a particular bit should be the precise wording of the jurisdiction clause included in that bit. Keeping in mind the above restrictions, certain generalizations are indispensable for the analysis performed herein. In this author’s opinion it is justifiable to propose a simplified “typology” of jurisdiction clauses that are commonly found in bits. The proposed typology is based on the ­“rationae materiae” limits of tribunals’ jurisdiction. It is submitted that, from the ­perspective of jurisdictional limitations concerning subject matter, the jurisdiction clauses included in bits can be divided into the following types: (i) standard (referred to as the “Standard Jurisdiction clauses”), (ii) narrow (referred to as the ­“Narrow Jurisdiction clauses”) and (iii) wide (referred to as the “Wide ­Jurisdiction clauses”). Standard Jurisdiction clauses are those which “restrict” consent to arbitrate “to disputes involving their substantive provisions.”25 The jurisdiction of arbitral tribunals based on such jurisdiction clauses covers exclusively disputes concerning alleged breaches of a particular bit in which such clauses are included, arising out of measures attributable to a state and related to specified investments. An example of a Standard Jurisdiction clause can be found in art. xii of the Canada – Uruguay bit which states that: “Any dispute between one Contracting Party and an investor of the other Contracting Party, relating to a claim by the investor that a measure taken or not taken by the former Contracting Party is in breach of this Agreement, and that the investor has incurred loss or damage by reason of, or arising out of, that breach […].”26 Narrow Jurisdiction clauses can be characterized as limiting the scope of jurisdiction exclusively to one or some of the standards of protection guaranteed in the particular bit. Typically, the scope of jurisdiction of a tribunal based on a Narrow Jurisdiction clause is limited to expropriation and the amount of compensation due following expropriation.27 An example of such a clause can be found in art. 9 of the Poland – Cyprus bit, which relates to: “[a]ny dispute between either Contracting Party and the investor of the other Contracting Party concerning expropriation of an investment […].” 25

26 27

Christoph Schreuer, Loretta Malintoppi, August Reinisch, Anthony Sinclair, “The ­i csid Convention: A Commentary” (Cambridge University Press 2009), p. 236, para. 533 [Schreuer, Malintoppi, Reinisch, Sinclair]. Other examples are: art. 1116 nafta, art. 26(1) Energy Charter Treaty. Schreuer, Malintoppi, Reinisch, Sinclair, supra note 25, p. 236, para. 538. The tribunal in the st-ad case described such a type of clause as providing “a “narrow door” to enter the realm of international arbitration.” See: st-ad v. Bulgaria, uncitral, pca Case No. 201106, award on jurisdiction (18 July 2013), para. 372.

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Finally, Wide Jurisdiction clauses grant arbitral tribunals a broad scope of jurisdiction by using phraseology such as “all disputes concerning investments” or “any legal dispute concerning an investment.”28 They are considered to express states’ consent to arbitrate in a “wide and unlimited” manner.29 For example, the Norway – Lithuania bit provides in art. ix that the scope of jurisdiction of an arbitral tribunal refers to: “Any dispute which may arise between an Investor of one Contracting Party and the other Contracting Party in connection with an investment on the Territory of that other Contracting Party […].” There is an ongoing discussion concerning the factual scope of jurisdiction where claims are based on “other legal grounds,” not being a bit. This is reflected in discussion as to whether or not Wide Jurisdiction clauses grant arbitral tribunals jurisdiction over contract claims, as opposed to treaty claims.30 For the purposes of the present book, there is no need to enter into this aspect of the ongoing debate, which by itself could form the subject of a separate academic study.31 28 29 30

31

Schreuer, Malintoppi, Reinisch, Sinclair, supra note 25, p. 233, para. 526. Ibid. Van Haersolte-van Hof, Hoffmann, supra note 24, p. 964: “The issue as to where to draw this distinction [between contract claims and treaty claims – author’s note] and the implications resulting therefrom is still not fully settled.” A strong opinion in favor of allowing the broad understanding of jurisdiction clauses containing such wording was expressed for example by Alexandrov, see: Stanimir A. Alexandrov, “Breaches of Contract and Breaches of Treaty – the Jurisdiction of treaty-based Arbitration Tribunals to Decide Breach of Contract Claims in sgs v. Pakistan and sgs v. Philippines,” (2006) 5 Transnational Dispute Management. For the purposes of this work, the debate can be summarized as follows: “there is no reason in law or policy why this should not be possible or desirable” – i.e. that arbitrators may have the power to decide that the scope of their jurisdiction also covers contract claims. See: Schreuer, Malintoppi, Reinisch, Sinclair, supra note 25, p. 235, para. 531. It is interesting to note that the acceptance of the broad jurisdiction clauses may be used as a ­mechanism to avoid parallel proceedings concerning the same factual situations. In addition, it should not be forgotten that even if an investment treaty contains a Narrow Jurisdiction clause, or if one does not agree with the assumption above, the situation can be still influenced by the presence of so called “umbrella clauses,” also known as “observance of undertakings” clauses. The topic of “umbrella clauses” is very controversial and “has triggered substantial debate and the case-law is far from consistent.” See: van Haersolte-van Hof, Hoffmann, supra note 24, p. 974. This is most visible in the example of the contradictory conclusions reached by the arbitral tribunals in sgs Société Générale de Surveillance v. Pakistan, icsid Case No. ARB/01/13, decision on objections to jurisdiction (6 August 2003), and sgs Société Générale de Surveillance v. Philippines, icsid Case

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Following this approach, it is this author’s submission that Wide Jurisdiction clauses provide for jurisdiction covering not only alleged breaches of substantive standards guaranteed in a particular bit but also claims based on other legal grounds, if and to the extent that they affect the investments in question. As a result, Wide Jurisdiction clauses covering claims based on “other legal grounds” can theoretically cover claims based on other international treaties, including international human rights treaties. This author agrees with the view that Wide Jurisdiction clauses “would also cover disputes involving human rights violations, if and to the extent that they affect the investment.”32 Therefore, “[…] it must be decided on a case by case basis whether and how far a particular human rights problem can be looked at by the investment tribunal,” depending on whether the human rights issues affect the investment.33 The tribunal in the Urbaser v. Argentina case explicitly confirmed that if a bit contains a Wide Jurisdiction Clause, “the definition of disputes capable of being submitted to arbitration and, hence, the possible scope of claims to be submitted to arbitration under Article x [of the applicable Argentina-Spain bit – author’s note] is not limited to rights directly based on the application (or interpretation) of the bit.”34 The tribunal decided that such a provision allows a cause of action to be based on law which is extrinsic to the bit itself. The extent to which extraneous law may capable of founding a cause of action depends on the precise wording of the provision defining the applicable law.35 It then applied the vclt to interpret whether “other parts of international law may be relevant in the instant case.”36 Although these observations concerned the host state’s counter-claim, they are relevant to general considerations concerning the scope of Wide Jurisdiction clauses.

32 33 34 35

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No. ARB/02/6, decision on objections to jurisdiction and separate declaration (29 January 2004) [sgs v. Philippines]. Although “umbrella clauses” are provisions having a substantive and not a jurisdictional nature, they can have jurisdictional consequences by including contractual claims within the scope of jurisdiction clauses contained in investment treaties. Ursula Kriebaum, “Foreign Investments & Human Rights – The Actors and Their Different Roles,” (2013) 10:1 Transnational Dispute Management, p. 12. Ibid. Urbaser et al. v. Argentina, icsid Case No. ARB/07/26, award (8 December 2016), para. 1191 [Urbaser v. Argentina]. In this case, art. X(5) of the Argentina – Spain bit defined the applicable law in the following way: “The arbitral tribunal shall make its decision on the basis of this Agreement and, where appropriate, on the basis of other treaties in force between the Parties, the domestic law of the Party in whose territory the investment was made, including its norms of private international law, and the general principles of international law.” Urbaser v. Argentina, supra note 34, para. 1204.

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To sum up this section, it can be concluded that, typically, offers to arbitrate included by states in bit jurisdiction clauses cover the substantive standards of protection guaranteed in bits. Standard Jurisdiction clauses cover all standards of protection included in the bits in which they are included. Narrow ­Jurisdiction clauses limit the scope of jurisdiction to only some of the standards included in bits, whilst Wide Jurisdiction clauses go beyond claims based exclusively on the bit in which they are included. The latter grant jurisdiction to arbitral tribunals in connection with any legal dispute between an investor and a host state, provided that such dispute concerns an investment as defined and protected by the relevant bit. Scope of Arbitral Tribunals’ Jurisdiction in Investor – State Arbitration and Human Rights Invoked by Investors This section analyses whether or not a claim presented in the course of bit arbitration by an investor with reference to alleged violations of the investor’s human rights, committed by a host state, can fall within the scope of jurisdiction of a tribunal constituted under a bit. It refers to the Third Model Situation. Biloune v. Ghana is relevant in this context.37 In these proceedings the ­investor claimed “damages for expropriation, denial of justice and violation of human rights.”38 Before proceeding further, it must be noted that, in this particular case, the consent to arbitrate given by the host state was not expressed in a bit but in an investment agreement concluded with the investor. The relevant part of the jurisdiction clause reads as follows: “any dispute between the foreign investor and the Government in respect of an approved enterprise which is not amicably settled through mutual discussions may be submitted to arbitration.” Although it was not included in the bit, the wording of the arbitration agreement which formed the basis of the arbitral tribunal’s jurisdiction allows one to draw conclusions which are relevant to bit arbitration.39 The arbitral tribunal in Biloune v. Ghana decided that it lacked jurisdiction to address a claim which alleged the violation of the investor’s human rights “as an independent cause of action.”40 It also declined jurisdiction over a denial of justice claim, but accepted the jurisdiction over a claim concerning expropriation. The approach adopted by this tribunal is sometimes described v

37 38 39 40

Biloune and Marine Drive Complex v. Ghana, award of jurisdiction and liability (27 October 1989) [Biloune v Ghana]. Ibid, p. 187. Also on p. 203: “In the final cause of action asserted, the Claimants seek recovery for alleged violation by the Government of Ghana of Mr. Biloune’s human rights.” As long as there is no uncommon wording of the jurisdiction clause of the applicable bit. Biloune v. Ghana, supra note 37, p. 203.

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as demonstrating that a claim alleging the violation of an investor’s human rights as an “independent cause of action” does not fall within the scope of jurisdiction of arbitral tribunals in investor – state disputes.41 However, in this author’s opinion, this would be an oversimplification. This author agrees with the opinion of Fry, who observed that the tribunal in Biloune v. Ghana “did not reject or somehow denigrate the notion of human rights. On the contrary, the tribunal expressly acknowledged that there are fundamental human rights that governments are not allowed to violate, and even went so far as to say that the claimant’s human rights “may be relevant in considering the investment dispute under arbitration,” thus showing that investment arbitration supports human rights even when the relevant arbitral panels refuse to pronounce upon such rights due to a perceived lack of jurisdiction.”42 First of all, with respect to cases brought under Wide Jurisdiction clauses, it is possible for investors to base their claims not only on the substantive provisions of a bit. Relying on this type of jurisdiction clauses, investors may seek to bring a claim based on customary international law or human rights treaties, provided that the claim concerns (refers to) undertaken investments. A similar conclusion can be drawn if a jurisdiction clause included in a bit provides for jurisdiction over disputes with regard to investors, apart from jurisdiction over disputes regarding investments. This approach finds support in some views expressed in academic writings. Dupuy and Viñuales observed that “there is some room to bring human rights claims as independent heads of claim provided that the arbitration clause is broad enough.”43 Although this is theoretically possible, it must be clearly observed that, in practice, it is hardly imaginable that claims alleging the violation of human rights norms, extrinsic to allegations of bit violations, would be the only claims submitted by investors in the course of arbitral proceedings. A much more realistic scenario is that such claims will be submitted together with allegations of breaches of the substantive standards of protection 41

42

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Luke Eric Peterson, “Human Rights and Bilateral Investment Treaties. Mapping the role of human rights law within investor-state arbitration” (Rights & Democracy 2009), p. 25 [Peterson]: “It must be recalled that arbitrators in investment treaty disputes lack the jurisdiction to hold states liable for breach of their human rights obligations.” James D. Fry, “International Human Rights Law in Investment Arbitration: Evidence of International Law’s Unity,” (2007) 18 Duke Journal of Comparative & International Law, p. 102 [Fry]. Pierre-Marie Dupuy, Jorge E. Viñuales, “Human Rights and Investment Disciplines: Integration in Progress,” in: Marc Bungenberg, Jörn Griebel, Stephan Hobe, August Reinisch, “International Investment Law” (C.H. Beck/Hart/Nomos 2015), available since 2012 at: http://ssrn.com/abstract=2125205, p. 24 [Dupuy, Viñuales].

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g­ uaranteed in the bit. For example, an allegation of expropriation contrary to the bit could be made together with an alleged infringement of the peaceful enjoyment of possessions (protection of property) as guaranteed by art. 1 of Protocol 1 to the echr. Alternatively, an allegation of discrimination under a bit could also be argued on the grounds of potentially applicable human rights instruments, such as art. 14 of the echr or art. 1 of Protocol 12 to the echr.44 The second example may be of particular importance if the applicable bit does not provide for an express prohibition on discrimination, which would require any such allegation to be based on provisions guaranteeing the observance of the fet standard. Toto v. Lebanon case confirms the above.45 It concerned the Italy – Lebanon bit, which contains a Wide Jurisdiction clause.46 An analysis of the award suggests that the investor presented one claim (an alleged denial of justice) as a separate cause of action brought on the basis of human rights treaties. The tribunal referred to the wording of art. 7(3) of the bit, which defined international law as the applicable law: “the arbitral tribunal shall decide the dispute in accordance with the provisions of this Agreement and the applicable rules and principles of international law.” The tribunal observed that “[t]he Treaty sanctions not only breaches of specific Treaty provisions, such as Article 3.1, but also breaches of any rule of international law (Article 7.3). The Treaty thus covers also a denial of justice under international law.”47 In that sense, the tribunal in Toto v. Lebanon confirmed that a claim based on human rights treaties may fall within the tribunal’s scope of jurisdiction based on a Wide Jurisdiction clause. This conclusion is appropriate even though, ultimately, the tribunal declined jurisdiction over this claim. This decision was fact-driven. It was justified by the fact that the investor had not utilized local remedies to accelerate the proceedings which were alleged to constitute a

44 45 46

47

It must be noted that art. 14 of the echr does not refer to a standing alone right, whilst Protocol 12 to the echr was ratified by 18 members of the Council of Europe only. Toto Costruzioni Generali v. Lebanon, icsid Case No. ARB/07/12, award (7 June 2012). The case is described in further detail in Chapter 1. Art. 7(1): “In case of disputes regarding investments between a Contracting Party and an investor of the other Contracting Party, consultations will take place between the Parties concerned with a view to solving the case, as far as possible, amicably.” Art. 7(2): “If these consultations do not result in a solution within six, months from the date of written request for settlement, the investor may submit the dispute, at his choice, for settlement to: [arbitration].” Toto Costruzioni Generali v. Lebanon, icsid Case No. ARB/07/12, decision on jurisdiction (11 September 2009), para. 154.

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denial of justice.48 The wording of the award allows one to conclude that, in the event that the investor had exhausted local remedies before commencing the arbitration, the tribunal would have been willing to declare its jurisdiction over the claim concerning an alleged denial of justice based on an international human rights treaty. To conclude the above, if a bit contains a Wide Jurisdiction clause, the possibility exists to initiate a claim based on the investor’s human rights as a separate cause of action. This is possible as long as the human rights in question affect the investments protected by the bit. The investor will need to “demonstrate substantively that the human rights at issue effectively impact on the implementation of the investment at stake. This constraint is explained by the fact that the arbitrator’s jurisdiction is specifically limited to the settlement of disputes arising out of a given international investment.”49 When analyzing Standard Jurisdiction clauses, one should recall that this type of jurisdiction clause limits the scope of jurisdiction solely to alleged breaches of provisions of bits. As a consequence, in order to fall within the scope of jurisdiction of a tribunal in proceedings commenced on the basis of a Standard Jurisdiction clause, the claim must allege a breach of the substantive provisions of the applicable bit. Therefore, in such situations, potential claims concerning violations of an investor’s human rights, presented as independent causes of actions, fall outside of the tribunal’s scope of jurisdiction. The same conclusion applies with respect to Narrow Jurisdiction clauses. For the above reasons, in arbitrations based on Narrow and Standard Jurisdiction clauses, the approach adopted by the tribunal in Biloune v. Ghana should be followed – i.e. an arbitral tribunal has no jurisdiction to address claims concerning an alleged violation of the investor’s human rights “as an independent cause of action.” This does not exclude, however, the possibility of invoking human rights arguments in the course of arbitral proceedings based on Narrow or Standard Jurisdiction clauses. As has been correctly observed, while a tribunal “may indeed not be competent for an independent claim, human rights violations cannot per se be excluded from its jurisdiction. If and to the extent that the human rights violation affects the investment, 48

49

Ibid, paras. 167–168. The text of the award is not consistent and some parts suggest that the investor relied on human rights as a tool for interpreting the fet standard, rather than as a separate cause of action. See: Pierre-Marie Dupuy, “Unification Rather than Fragmentation of International Law? The Case of International Investment Law and Human Rights Law,” in: Pierre-Marie ­Dupuy, Ernst-Ulrich Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford university Press 2009), pp. 61–62 [Dupuy].

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it will ­become a dispute ‘in respect of’ the investment and must hence be arbitrable.”50 It has also been noted that: “the practical effect of the traditional consent principle and the restrictive wording used is to deny tribunals the competence to deal with free‐standing affirmative human rights claims. But the door is not shut completely. Conversely, contingent human rights contentions that – ­depending on the precise formulation of the dispute resolution clause – concern or relate to the investment, such as violations of the investor’s human rights or defences of a host state based on human rights norms, are within the jurisdiction of the tribunal.”51 The reason for this is that, within the scope of jurisdiction covering exclusively claims based on standards of protection guaranteed in bits, arbitral tribunals have jurisdiction to consider human rights arguments insofar as they are related to the alleged breaches of the bit, as invoked by the claimants. In other words, even in the course of proceedings commenced under bits containing Standard or Narrow Jurisdiction clauses, human rights can fall within the scope of arbitral tribunals’ jurisdiction. This is possible as long as the invoked human rights are relevant for the analysis of the investment treaties’ obligations alleged to have been breached by the host state. This approach finds support in the Grand River v. the US case.52 In that case, the investor based its claim on specific provisions of the applicable investment treaty – the nafta. The nafta contains dispute resolution clauses which can be understood as Standard Jurisdiction clauses, since they limit the scope of the offer to arbitrate given by the contracting states exclusively to breaches of the substantive standards of protection guaranteed in the nafta itself.53 The standards of protection included in the nafta constituted the cause of action in the proceedings in Grand River v. the US. The investors alleged expropriation (art. 1110) and violations of the fair and equitable treatment (art. 1105), the most-favored nation treatment (art.1103) and the national treatment (art. 1102). Only then did the investors add arguments which ­alleged that: (i) the applicable law goes beyond the nafta itself and includes other international treaties, such as the “Jay Treaty” and the “Treaty of

50 51

52 53

Reiner, Schreuer, supra note 2, p. 84. Marc Jacob, “International Investment Agreements and Human Rights” (inef Research Paper Series on Human Rights, Corporate Responsibility and Sustainable Development 2010), p. 26. Grand River Enterprises Six Nations and et al. v. United States, uncitral Arbitration Rules, award (12 January 2011) [Grand River v. the us]. Arts. 1116 and 1117 of the nafta.

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Ghent,” as well as international human rights treaties,54 and that (ii) the nafta provisions should be interpreted in accordance with international law, including human rights law.55 The investors presented the cause of action which directly concerned alleged breaches of specific provisions of the nafta. The claim, thus framed, led the arbitral tribunal to declare that it enjoyed jurisdiction over the dispute. The tribunal hearing the case decided that the United States’ consent to arbitrate, understood as a standing offer included in the nafta and covering disputes concerning alleged breaches of the provisions of the nafta, covered the claims brought by the claimants. This resulted in its decision that it had jurisdiction to hear the case.56 This allows one to conclude that the manner in which investors frame their claims may allow them to include human rights arguments within the scope of jurisdiction of the arbitral tribunal. Once jurisdiction was established, the case then moved to the merits, including: (i) identifying the applicable law, and (ii) interpreting the directives to be applied to the provisions of the nafta. Ultimately, the tribunal in Grand River v. the US dismissed all of the claims and rejected the investor’s arguments concerning the relevance of human rights to the dispute. Nevertheless, the case serves as an example that the scope of jurisdiction based on a Standard or Narrow Jurisdiction clause is sufficiently broad as to enable human rights arguments to be made. The scope of jurisdiction established on the basis of such clauses limits neither the applicable law nor the possible influence of human rights on the interpretation of the provisions of investment treaties.57 54

55 56 57

Treaty of Amity, Commerce and Navigation, Between His Britannic Majesty and the United States of America, By Their President, with the Advice and Consent of Their Senate, Nov. 19, 1794, u.s.-u.k., t.s. No. 105 (“Jay Treaty”); Treaty of Peace and Amity, Between His Britannic Majesty and the United States of America, Dec. 24, 1814, u.s.-u.k., t.s. No. 109 (“Treaty of Ghent”), following the citation in counter-memorial of respondent United States of America (22 December 2008), available at: http://www.state.gov/documents/ organization/114065.pdf [accessed on 2 February 2017], footnote 401. The investor also invoked the following in an attempt to prove the existence of customary international law in its favour: art. 21 of the iachr, art. 17 of the udhr, Arts. 17 and 19 of the Declaration on the Rights of Indigenous Peoples, art. 6(1)(a) of the ILO’s Convention 169 and a decision of the IACtHR. See: Grand River v. the us, supra note 52, para. 182. Ibid, paras. 66–67; Grand River Enterprises Six Nations and et al. v. United States, uncitral Arbitration Rules, claimant’s memorial, merits phase (10 July 2008), paras 134–153. Grand River v. the us, supra note 52, paras. 71–72. Nevertheless, the tribunal expressed its hesitancy towards such an approach concerning the applicable law: “The Tribunal understands the obligation to “take into account”

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This approach finds support in academic literature. Reiner and Schreuer observed that “[i]t depends on the choice of law provisions whether human rights norms of international or domestic law will be applicable to the case. Numerous bits contain composite choice of law clauses, typically including treaty rules, host state law, and customary international law. Under these provisions, human rights, as a component of international law, are part of the applicable law.”58 Mann observed in this context that “[t]he critical issue for present purposes is whether, if the underlying issues also raise international human rights law questions, they can be raised in the course of the legal arguments? Existing jurisprudence suggests that they can be.”59 Fry commented: “[t]ribunals of limited jurisdiction (which includes most international tribunals) are not limited in the scope of the applicable law that they can use in interpreting and applying the relevant treaties they are limited to interpreting and applying.”60 The following comment of Peterson should also be referred to: “As tribunals with limited jurisdiction, arbitrators are usually limited to determining whether a particular investment treaty protection has been breached. However, this does not mean that human rights law might not form part of the backdrop against which investment treaty obligations are read and applied. It has long been recognized that the law applicable to investment arbitrations typically encompasses international law (rather than simply the given investment protection treaty), and that this could include other non-economic forms of international law.”61 Finally, account should be taken of the following comment: “Arbitral tribunals have no jurisdiction to consider human rights violations as an independent cause of action. Consequently, tribunals only address human rights issues to the extent that they affect the underlying investment dispute. Despite this jurisdictional limitation, human rights abuses committed by an investor in a host State can prevent an investor from bringing claims other rules of international law to require it to respect the Vienna Convention’s rules governing treaty interpretation. However, the Tribunal does not understand this obligation to provide a license to import into nafta legal elements from other treaties, or to allow alteration of an interpretation established through the normal interpretive processes of the Vienna Convention. This is a Tribunal of limited jurisdiction; it has no mandate to decide claims based on treaties other than nafta.” See: Ibid, para. 71. 58 Reiner, Schreuer, supra note 2, pp. 84–85. 59 Howard Mann, “International Investment Agreements, Business and Human Rights: Key Issues and Opportunities” (International Institute for Sustainable Development 2008), available at: http://www.iisd.org/pdf/2008/iia_business_human_rights.pdf [accessed on 2 February 2017], p. 26. 60 Fry, supra note 42, pp. 143–144. 61 Peterson, supra note 41, p. 22.

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against that State p ­ ursuant to an iia. Additionally, even if a foreign investor has not been involved in any human rights violations, States may sometimes legitimately adopt measures aimed at the protection of certain international human rights commitments, ultimately affecting the value or profitability of foreign investments.”62 It is also in line with the following approach of Karamanian: “An investor–state tribunal, however, has jurisdiction to resolve only the disputes arising under the applicable iia. Those disputes are claims relating to mistreatment of the investor or the investment. They do not expressly authorize the tribunals to resolve human rights claims.”63 The Channel Tunnel Group v. France and the UK also supports this view.64 Although that case was not based on a jurisdiction clause included in a bit but in a concession agreement and an international treaty which was expressly given effect by the concession agreement, it can serve as an example of the approach regarding the possibility of invoking human rights in arbitral proceedings between investors and host states. The investor based its claims, among other grounds, on art. 1 of Protocol 1 to the echr. The decision of the arbitral tribunal hearing the case was that the arbitration agreement in question did not grant it jurisdiction to consider alleged breaches of obligations extrinsic to the provisions of the concession agreement and the treaty given effect by the concession agreement. However, the tribunal went on to add that its decision regarding jurisdiction did not limit the scope of applicable law in deciding the dispute within the scope of its established jurisdiction. The tribunal recognized that obligations extrinsic to the provisions of the agreement which granted its jurisdiction can provide “the legal background” for the interpretation and application of the primary sources of obligations, as well as “be relevant in other ways.”65 In summary, the scope of jurisdiction based on Standard Jurisdiction clause, although excluding human rights claims brought as separate causes of action, does not preclude the possibility that human rights arguments may nonetheless be relevant either as part of the applicable law or as having importance for interpreting the provisions of bits.66 The same conclusions 62

Ignacio Madalena, Diogo Pereira, “Human Rights as a Defence in Investor – State Arbitration” (Advocates for International Development 2011), p. 4. 63 Susan L. Karamanian, “The Place of Human Rights in Investor – State Arbitration,” (2013) 17:2 Lewis & Clark Law Review, p. 432. 64 Channel Tunnel Group and France-Manche v. France and United Kingdom, partial award on jurisdiction and dissenting opinion, pca—uncitral Rules (30 January 2007). 65 Ibid, para. 151. 66 Eric De Brabandere, “Human Rights Considerations in International Investment Arbitration” (Grotius Centre Working Paper 2013), available at: https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2230305 [accessed on 2 February 2017], p. 14: “However, the limited

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apply to the scope of jurisdiction pursuant to Narrow Jurisdiction clauses, with the obvious exception that the scope of jurisdiction will cover only certain substantive provisions of the applicable bit. The considerations included in the present section are important for the Third Model Situation and may be summarized as follows. Human rights can fall within the jurisdiction of arbitral tribunals constituted on the basis of Standard Jurisdiction clauses and Narrow Jurisdiction clauses. This is true insofar as human rights (i) are considered to form part of the law applicable to the dispute concerning the investment (or the investor, if this is permitted by the jurisdiction clause in question), or (ii) are used as interpretative directives for the analysis of the substantive provisions of the bit in question. Arbitral tribunals have jurisdiction to analyze and decide the potential impact of international human rights on the application of the standards of investment protection, as long as these standards of investment protection remain the cause of action on which investors rely.67 Once jurisdiction is established on that basis, there is no reason to prevent human rights arguments being invoked by

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scope of jurisdiction of an arbitral tribunal does not imply that the tribunal cannot as a matter of principle consider human rights issues raised by either party. In practice, the wording of the compromissory clause is paramount, not only for the limitation of the scope of the jurisdiction of the tribunal, but also for the law to be applied by the tribunal. When deciding on an investment dispute, there is no reason for the tribunal to exclude human rights considerations as a matter of applicable law” [emphasis as in original]. In Spydridon v. Romania the investor attempted to make use of yet another theoretical possibility of basing his claims on international human rights. He relied on art. 10 of the Romania – Greece bit, which stipulates that if a provision of another international treaty is more favorable to the investments, it shall prevail over the provisions of the bit. Although at a general level the tribunal did not deny such a possibility, it observed that the bit offered a “higher and more specific level of protection” than “the more general protections offered to them by the human rights instruments.” See: Spyridon Roussalis v. Romania, icsid Case No. ARB/06/1, award (7 December 2011), para. 312. This theoretical possibility relied upon by the investor in Spyridon v. Romania could come into play only in exceptional circumstances, where a particular bit has a comparable, rather unusual, provision. In such a situation, the investor would need to convince the tribunal that the protection guaranteed in human rights treaties (being treaties which bind the contracting states to the particular bit) is more favorable to the investments than the bit itself. See for example Dupuy, supra note 49, pp. 61–62: “party to a dispute invoking a human rights argument – be it the state or the investor – must demonstrate substantively that the human rights at issue effectively impact on the implementation of the investment at stake. This constraint is explained by the fact that the arbitrator’s jurisdiction is specifically limited to the settlement of disputes arising out of a given international investment.”

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the parties to the dispute.68 If the bit in question contains a Wide Jurisdiction clause, the scope of jurisdiction can be even broader. In addition to the scope of the jurisdiction which exists with respect to Standard Jurisdiction clauses and Narrow Jurisdiction clauses, it can also cover separate claims based on customary international law and international human rights treaties, provided that such claims concern investments as defined in the applicable bit. Scope of Arbitral Tribunals’ Jurisdiction in Investor – State Arbitration and Human Rights Invoked by Host States The present section analyses whether human rights arguments invoked by host states are capable of falling within the scope of jurisdiction of a tribunal constituted under a bit. This scenario refers to the First and Second Model Situations. The possible consequences of a successful invocation of human rights obligations by the host states can be extremely relevant for the outcome of a dispute. This is to say, if investors invoke their human rights, the main aim of doing so is to support their claim. It can be assumed that the claim will in any case be based on alleged breaches of standards of protection, as guaranteed in a particular bit, and in some situations even breaches of an investment contract. However, conversely, the possible consequences of invoking the international human rights obligations of host states are more extensive. If argued successfully, host states could either (i) justify breaches of the standards of protection, leading to exclusion of any liability for the undertaken measures, or at least (ii) reduce the level of compensation payable for such breaches of the bit. As described in Chapter 1, states have international obligations to respect, protect and fulfil human rights.69 Host states can invoke human rights arguments in their own name, as actors who have their own obligations in the field of human rights at an international level. In this context it was observed that, whereas human rights “were traditionally conceived of as a protection for vi

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“Tribunals may only address claims for which it has jurisdiction under the given investment treaty, it should be reiterated that citizen claims of a violation of the international human right to water would not be arbitrable by investment Tribunals. This does not signal, however, that human rights norms might not be of relevance for purposes of ­interpreting the substantive provisions of an investment treaty” [emphasis as in original]. See: Luke Eric Peterson, Kevin R. Gray, “International Human Rights in Bilateral Investments Treaties and in Investment Treaty Arbitration” (International Institute for Sustainable Development 2003), p. 28. This tridimensional model was introduced for the first time in 1999 in the un Committee on Economic, Social and Cultural Rights, General Comment No. 12 (E/C.12/1999/5).

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­individuals from state interference, today host states may contend that certain measures including legislation that conflict with investors’ interests were enacted so as to comply with hr obligations.”70 Thus, in the course of arbitral proceedings, human rights may be presented by the host states as being the obligations of states themselves, and not merely as the rights of the people living in their territories. The first observation which must be made in that context is that the arguments and conclusions concerning the scope of jurisdiction presented in the preceding section apply equally to both parties to a dispute, not merely to investors. Thus, the conclusions presented therein allow for the possibility that host states may also invoke human rights arguments. At the same time, from the perspective of host states, the distinction between the scope of jurisdiction emerging from Wide, Standard and Narrow ­Jurisdiction clauses is of less importance than from the perspective of investors. If an investment treaty has a jurisdiction clause limited to the substantive provisions of the bit, the jurisdiction of the tribunal will remain to be determined in accordance with the particular allegations made by investors. The host state will remain free to argue as to the correct applicable law and/ or interpretative directives. Even if the scope of jurisdiction would be broader on the basis of a Wide Jurisdiction clause, the state will remain entitled to do the same – i.e. to submit arguments based on potential human rights treaties and norms of customary international law which may also be invoked by investors. In any case, jurisdiction clauses of all of the previously identified types “are wide enough to include human rights aspects of investments.”71 Thus, the relevance of which type of jurisdiction clause is included in an applicable bit would be limited to discussing the potential use of counter-claims. Following the reasoning of the tribunal in Urbaser v. Argentina, Wide Jurisdiction clauses can open the door for host states’ counter-claims based on international human rights law.72 Even with reference to the scope of jurisdiction covering exclusively standards of protection included in bits (i.e. Standard and Narrow Jurisdiction 70 71

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Stephanie Barbara Leinhardt, “Some Thoughts on Foreign Investors Responsibilities to Respect Human Rights,” (2013) 10:1 Transnational Dispute Management, p. 8 [Leinhardt]. Sarah Schadendorf, “Human Rights Arguments in Amicus Curiae Submissions: Analysis of icsid and nafta Investor-State Arbitrations,” (2013) 10:1 Transnational Dispute Management, p. 14. Although, in this particular case, the tribunal accepted its jurisdiction to hear the counter-­claim, it dismissed the claim on its merits. The tribunal decided that the particular counter-claim was not grounded in international law, which was “a reason sufficient” to dismiss it. See: Urbaser v. Argentina, supra note 34, para. 1204.

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clauses), and despite the limits of jurisdiction pursuant to such clauses, its scope is broad enough to allow states to invoke their human rights obligations in an attempt to justify actions that are alleged to be in breach of the bit. As has been noted: “It is indeed true that the jurisdiction of investment tribunals is limited to particular disputes between a foreign investor and a host state, and that those tribunals could not be used to enforce other treaties or customs, such as the violation of human rights law. […] Nonetheless, a possibility of a state wanting to defend its position in terms of human rights must be added to the picture. […] States should be encouraged to invoke human rights obligations in their defence in international treaty-governed investor-state dispute settlement, as it is reflective of their good faith effort to respect different international obligations simultaneously.”73 This approach is correct, as the scope of jurisdiction would still exclusively cover claims based on the bit, which were relied upon by the investor who commenced the arbitral proceedings. In such a scenario, attempts to invoke the human rights obligations of host states remains a question of applicable law and treaty interpretation. As such, it cannot be excluded from considerations on the merits, provided that they remain related to the investment in question. In other words, tribunals’ jurisdiction may extend to assessing the possible impact of states’ international obligations to respect, protect and fulfil human rights concerning the standards of protection guaranteed and allegedly violated in bits, insofar as such violations constitute a cause of action of the proceedings. However, in order for host states to successfully invoke such arguments, their obligations to respect, protect and fulfil human rights must be related to both: (i) the cause of action presented by the investor in the arbitral proceedings, and (ii) the host state’s measures undertaken in connection with the presented cause of action. Only when these two conditions are met will it be possible for an analysis of the reasoning for/against the impact of rights and obligations flowing from international human rights law to fall within the scope of tribunals’ jurisdiction in investor – state disputes. As was observed in the context of the First Model Situation: “[…] a tribunal would have jurisdiction over such human rights allegations to the extent that 73

Jasper Krommendijk, John Morijn, “‘Proportional’ by What Measure(s)? Balancing Investor Interests and Human Rights by Way of Applying the Proportionality Principle in Investor-State Arbitration,” in: Pierre-Marie Dupuy, Ernst-Ulrich Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford ­University Press 2009), p. 430 [emphasis as in original]. Similarly: Dupuy, supra note 49, p. 59.

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they are related or connected to the investor’s investment about which it filed a claim.”74 Of course, an assessment of the actual impact – if any – of human rights obligations takes place later, once the arbitral tribunal’s jurisdiction has been established and it proceeds to analyze the substantive merits of the case and potential compensation. The above reasoning finds support in academic literature. Dumberry and Dumas-Aubin have observed that “[t]he first possibility is for the host country to raise allegations of human rights violations when acting as respondent in arbitration proceedings. It could be argued that the investor had itself c­ ommitted human rights violations against its citizens in the context of the investment. A tribunal would have jurisdiction over such a defense provided that the bit contains a broadly worded dispute resolution clause and that such allegations are related or connected to the underlying investment to which the claim directly relates.”75 They subsequently added that: “the situation is different when human rights violations are not directly related to the investor’s investment examined by the tribunal. This would be the case, for instance, if violations were committed in the context of another (previous or concomitant) unrelated investment project in the country. In our view, a tribunal would lack jurisdiction over such a defense since the investor’s consent to arbitration (when it files an arbitration request) is limited to the specific investment to which the claim is related; it is not a “general” consent for anything involving the investor in the country.”76 This reasoning is also confirmed in the award rendered in Phoenix Action v. Czech Republic. In that case, the tribunal correctly observed that jurisdictional requirements “cannot be read and interpreted in isolation from public international law, and its general principles” and continued to state: “[t]o take 74

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Patrick Dumberry, Gabrielle Dumas-Aubin, “When and How Allegations of Human Rights Violations can be Raised in Investor-State Arbitration,” (2012) 13 the Journal of World Investment & Trade, p. 361. Similarly for example Dupuy, Viñuales, supra note 43, p. 28: “as regards the adjudication of investment disputes in general, this interaction between international investment law and human rights law cannot be claimed lightly, be it by host States or by foreign private investors. Indeed, the party to a dispute invoking a human rights argument must thoroughly demonstrate that the human rights at issue effectively impact on the investment dispute. This constraint is explained by the fact that the arbitrator’s jurisdiction is not unconstrained […].” Patrick Dumberry, Gabrielle Dumas-Aubin, “How to Impose Human Rights Obligations on Corporations Under Investment treaties? Pragmatic Guidelines for the Amendment of bits,” (2012) Yearbook on International Investment Law & Policy 2011–2012, p. 575 [Dumberry, Dumas-Aubin – How to…]. Ibid, footnote 30 at p. 575.

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an extreme example, nobody would suggest that icsid protection should be granted to investments made in violation of the most fundamental rules of protection of human rights, like investments made in pursuance of torture or genocide or in support of slavery or trafficking of human organs.”77 This approach is correct and it would be difficult to imagine a protection granted by a bit in such an “extreme example” as that presented above. This is of particular importance when analyzing the Second Model Situation. The tribunal in Phoenix Action v. Czech Republic expressed the above view when analyzing its jurisdiction. However, in this author’s opinion, this is more an issue which concerns the admissibility of a claim. If an investment complies with the requisites imposed in the relevant investment treaty (and the icsid Convention if applicable), and at the same time the investment is undertaken in violation of the most fundamental rules of protection of human rights, the tribunal has jurisdiction to hear the claim, but may rule that the claim is inadmissible. On the other hand, in a hypothetical case of such an extreme nature, it is possible that there would be no “investment” at all. This conclusion can be achieved by a potential application of the requirement that investments must be made in accordance with local laws. Then the issue could actually be one of jurisdiction, as opposed to admissibility, because if there is no investment, there is equally no jurisdiction either.78 These aspects of investor – state arbitrations are analyzed in more detail in the subsequent section of this chapter. Regardless of the discussion as to whether or not the issue concerns jurisdiction or admissibility, the general rule is that, firstly, the existence and scope of the tribunal’s jurisdiction must be determined, and only thereafter may any analysis of the relevance of human rights take place. As the tribunal in Phoenix Action v. Czech Republic noted itself, the example given by the tribunal was of extreme nature. Human rights issues and arguments of a more sophisticated nature are more relevant in practice, as it is much more probable that they will have an impact on disputes. Only in “extreme” situations would possible human rights violations committed by investors be so manifest as to enable them to be ruled upon during the jurisdictional stage of arbitral proceedings. In conclusion, in both the First and Second Model Situations it is irrelevant whether or not investors rely on Narrow, Standard or Wide Jurisdiction clause. In any case, the scope of jurisdiction of an arbitral tribunal appointed to decide a particular case is broad enough to allow the invocation of a state’s 77 78

Phoenix Action v. Czech Republic, supra note 20, para. 78. Another reason to include such considerations at an earlier, jurisdictional, stage of the proceedings rather than during the merits, could be justified on the grounds of judicial economy.

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human rights obligations (i) as an element of the applicable law, and/or (ii) as interpretative directives of the provisions of bits. This is true as long as the human rights arguments presented by the host state relate to (i) the cause of action of the presented claim, and (ii) the measures undertaken by the states were adopted in connection with the cause of action. 2

Admissibility of Claims in the Light of Possible Human Rights Violations Committed by Investors and the Requirement to Undertake Investments in Accordance with Local Law

Distinction between Jurisdiction and Admissibility in International Investment Law The present section starts by discussing the differences between admissibility and jurisdiction. It then analyses the nature of the “in accordance with local laws” requirement – both explicit and implied. It defines whether this requirement is an issue for jurisdiction or admissibility. Based on these observations, the significance of that requirement is analyzed from the perspective of the Second Model Situation. An ongoing debate exists as to whether or not the issue of admissibility should be differentiated from the analysis of jurisdiction. Some opinions consider that the distinction between admissibility and jurisdiction in the legal framework of international investment law has no legal basis and no practical consequences.79 However the prevailing opinion, with which this author i

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One of the reasons behind this approach to the issue is the fact that the icsid Convention, icsid Arbitration Rules and the uncitral Arbitration Rules make no reference to “admissibility.” For example, the tribunal in the Burlington v. Ecuador case found that the claim was inadmissible and “as a result, the Tribunal upholds Respondent’s objection and declares that it lacks jurisdiction” over the particular claim. With respect to another claim, the tribunal ruled that it was inadmissible and stated that “the inadmissibility of claims has the same consequence as the failure to meet the requirements for jurisdiction under Article 25 of the icsid Convention or the bit, such consequence being that the Tribunal cannot exercise jurisdiction over the dispute.” See: Burlington Resources et al. v. Ecuador, icsid Case No. ARB/08/5, decision on jurisdiction (2 June 2010), paras. 317, 318, 339 and 340. The tribunal in Pan American Energy v. Argentina observed: “[…] there is no need to go into the possible – and somewhat controversial – distinction between jurisdiction and admissibility. Whatever the labelling, the parties have presented their case on the basis of the six objections raised by the Respondent.” See: Pan American Energy and bp Argentina Exploration v. Argentina, icsid Case No. ARB/03/13, decision on preliminary objections (27 July 2006), para. 54. The tribunal in Daimler v. Argentina stated that “[…] admissibility

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agrees, is that jurisdiction and admissibility are different issues. Accordingly, they should be differentiated, being “conceptually distinct and have been extensively developed and applied in international context […].”80 In addition, they “are indeed as different as night and day. It may be difficult to establish the dividing line between the two. There is a twilight zone. But only a fool would argue that the existence of a twilight zone is proof that day and night do not exist.”81 The distinction between jurisdiction and admissibility is present in public international law. The International Court of Justice (referred to as the “ICJ”) has in its jurisprudence developed “a clear distinction between the two concepts.”82 However, the approach of the icj can also be explained by the wording of the Rules of the Court, which expressly mention both concepts – jurisdiction and a­ dmissibility.83 In addition to the presence of the distinction

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analyses patterned on domestic court practices have no relevance for bit-based jurisdictional decisions in the context of investor-State disputes” and “[a]ll bit-based dispute resolution provisions, on the other hand, are by their very nature jurisdictional. […]” See: Daimler Financial Services v. Argentina, icsid Case No. ARB/05/1, award (22 August 2012), paras. 192 and 193. It must be noted, however, a dissenting opinion of one of the arbitrators not only favored recognizing the division between jurisdiction and admissibility, but would also have applied it in the case. See: Daimler Financial Services v. Argentina, icsid Case No. ARB/05/1, dissenting opinion (15 August 2012), para. 13. It has also been suggested that: “It would not be fair to say that investment treaty tribunals have struggled with the distinction between jurisdiction and admissibility. They have rather often tended to avoid it, just as they have tended to avoid dealing with the related but somewhat obscure concept of ‘competence’ […].” See: Heiskanen, supra note 9, p. 231. Ian A. Laird, “A distinction without a Difference? An Examination of the Concepts of Admissibility and Jurisdiction in Salini v. Jordan and Methanex v. usa,” in: Todd Weiler, “International investment law and arbitration: Leading Cases from the icsid, nafta, ­Bilateral Treaties and Customary International Law” (Cameron May 2005), p. 222. Jan Paulsson, “Jurisdiction and Admissibility,” first published in: Gerald Aksen “Global Reflections on International Law, Commerce and Dispute Resolution. Liber Amicorum in honour of Robert Briner” (icc Publishing 2005), Publication 693, available at: http://ssrn .com/abstract=1707490 [accessed on 2 February 2017], p. 603. David AR Williams, “Jurisdiction and Admissibility,” in: Peter Muchlinski, Federico Ortino, Christoph Schreuer, “The Oxford Handbook of International Investment Law” (Oxford University Press 2008), p. 919 [Williams]. “Any objection by the respondent to the jurisdiction of the Court or to the admissibility of the application, or other objection the decision upon which is requested before any further proceedings on the merits, shall be made in writing as soon as possible, and not later than three months after the delivery of the Memorial. Any such objection made by a party other than the respondent shall be filed within the time-limit fixed for the delivery of that party’s first pleading.” See: International Court of Justice, Rules of the Court, art. 79(1), available at: http://www.icj-cij.org/documents/index.php?p1=4&p2=3&p3=0 ­[accessed on 2 February 2017]. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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in public international law, it is also present in international commercial arbitration.84 It must be remembered that the rules of procedure which apply in investor – state arbitration, which were adopted in bits and apply to international investment cases, are the rules which had been developed for and applied in international commercial arbitration.85 In this context, the following simplification can be proposed: in investment cases the merits of the cases relate to obligations of public international law, whereas the rules of procedure are regulated by the rules of international commercial arbitration, subsumed into bits. bits themselves are instruments of public international law. However, their provisions adopt a dispute resolution system which is based on private mechanisms found in commercial arbitration. With the exception of the icsid regime, which contains a sui generis mechanism, investor – state disputes based on bits are decided under the same rules of procedure as disputes in commercial arbitration. In other words, the provisions of bits include reference to a private dispute settlement mechanism whose aim is to enable the resolution of possible disputes between investors from one state and the other state, being a contracting party to the bit in question. With that in mind, in this author’s understanding there is no reason why the differentiation between jurisdiction and admissibility (which is clearly present in both public international law and international commercial arbitration) would not exist also in investment arbitration. When bits adopt a pre-already established mechanism, they refer to the black letter of the law together with its practical application. In fact, the presence of the distinction between jurisdiction and admissibility has already been affirmed in investor – state cases.86 However, as Waibel noted, “some tribunals use the terms interchangeably, or inconsistently. ­Accordingly, it is challenging to articulate general principle on jurisdiction and admissibility in investment arbitration.”87 Despite that, he continued to state that the 84 Paulsson, supra note 81, pp. 601–617. 85 “Investment treaty arbitration relies, to a significant extent, upon the procedural framework developed for commercial arbitration.” See: Douglas, supra note 11, p. 157. 86 For example: Ethyl v. Canada, Ad hoc—uncitral Arbitration Rules, award on jurisdiction (24 June 1998) para. 58, sgs v. Philippines, supra note 31, para. 154, Waste ­Management v. Mexico, icsid Case No. ARB(AF)/00/3, decision on Mexico’s preliminary objection concerning the previous proceedings (26 June 2002), para. 43; Commerce Group and San Sebastian Gold Mines v. El Salvador, icsid Case No. Arb/09/17, award (14 March 2011), para. 116; Mondev International v. United States, ICSID Case No. ARB(AF)/99/2, award (11 October 2002) para. 41. 87 Michael Waibel, “Investment Arbitration: Jurisdiction and Admissibility” (University of Cambridge Faculty of Law Research Paper 2014), available at: http://ssrn.com/abstract=2391789 [accessed on 2 February 2017], p. 79 [Waibel]. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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d­ istinction is important and has a potential of having increased role in the future: “Questions of admissibility and jurisdiction are likely to feature prominently in the case law of investment tribunals for the foreseeable future.”88 Therefore, before proceeding to analyze the relevance of ­admissibility for issues concerning human rights in the context of international investment arbitration, it is essential to understand the differences between jurisdiction and admissibility. The concept of jurisdiction has been explained in detail in the previous section of this chapter. When a tribunal decides that it lacks jurisdiction to hear a case, it adopts such a decision based on the absence of one or more of the elements of jurisdiction (rationae materiae, rationae personae or rationae temporis). Therefore, the tribunal decides that it has no power to decide the case. It is entitled to analyze and decide upon its jurisdiction in accordance with the kompetenz-kompetenz principle. As a result, the tribunal does not in any way rule on the merits of the case. However, even if a tribunal decides that it has jurisdiction to hear the case, it may ultimately arrive at the conclusion that the claim is inadmissible. Such a decision can be taken with respect to all claims presented in the litigation, or only in respect of some of those claims. In this context, as it has jurisdiction­ the tribunal is entitled to decide the case on its merits. Based on that, it decides that the claim is not admissible. Therefore, the tribunal – exercising its jurisdiction – dismisses the claim. Generally speaking, there are various reasons for a decision that a claim is inadmissible. For example, a claim may be premature (“lack of ripeness”) or there may have been an undue delay in presenting the claim (“staleness”).89 Also considerations regarding whether or not additional claims may be raised once the initial pleadings have been submitted, or whether the claim was formally submitted within the time limits provided for in the relevant bit, are typically considered as related to admissibility.90 88 Ibid, p. 80. 89 sgs v. Philippines, supra note 31, para 155. 90 Paulsson, supra note 81, p. 609. In addition, the following issues can be considered as related to admissibility: “issues relating to standing (whether the plaintiff has the right to bring a particular case or to seek particular relief) […]; issues relating to the judicial/ arbitral function (e.g. whether a court can give a merely ‘advisory’ opinion; settlement of a dispute after seisin; whether a court can express an opinion on an ‘abstract’ issue unrelated to the present rights and obligations of the parties); […] the failure to exhaust local remedies; the tribunal’s discretion not to hear a dispute on the ground that the same (or similar) claim is allocated to or pending in another – lis alibi pendens or forum non conveniens; the claim implicates a necessary third party and res judicata.” See: Waibel, supra note 87, p. 8. Therefore, issues like nationality of investor or lack of exhaustion of Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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Considerations of a claim’s admissibility concern the defectiveness of the case itself – i.e. whether it is appropriate for the tribunal to hear the claim. It can be added that “admissibility concerns the power of a tribunal to decide a case at a particular point in time in view of possible temporary or permanent defects of the claim.”91 Therefore, some defects of the claim which would otherwise result in its inadmissibility can be “cured” by the claimant.92 For example, a claim which is inadmissible because of being premature can, in general, be filed once again later in time once it becomes admissible. However, certain defects which result in the inadmissibility of a claim are be permanent and impossible to “cure.” A commonly referred passage concerning the distinction between jurisdiction and admissibility is that: “[…] lack of jurisdiction refers to the jurisdiction of the Tribunal and inadmissibility refers to the admissibility of the case. […] Jurisdiction is the power of the tribunal to hear the case; admissibility is whether the case itself is defective – whether it is appropriate for the tribunal to hear it. If there is no title of jurisdiction, then the tribunal cannot act.”93 The tribunal in Hochtief v. Argentina observed that: “[j]urisdiction is an attribute of a tribunal and not of a claim, whereas admissibility is an attribute of a claim but not of a tribunal.”94 In practice, the proper distinction between jurisdiction and admissibility can cause a great deal of problems and generalizations are only possible to a certain extent. The conclusion regarding the distinction between jurisdiction and admissibility in investment cases can be summarized as follows: “To u ­ nderstand whether the challenge [objection presented by the respondent state – author’s note] pertains to jurisdiction or admissibility, one should imagine that it succeeds: – If the reason for such an outcome would be that the claim could not be brought to the particular forum seized, the issue is ordinarily one of jurisdiction and subject to further recourse.

local remedies would be typically related to admissibility of claims in investment treaty arbitrations. 91 Waibel, supra note 87, p. 2. 92 For example the tribunal in Western nis Enterprise v. Ukraine issued an order in which it suspended the proceedings in order to give the claimant “an opportunity to remedy” a lack of proper notice of arbitration, which affected the admissibility of the claim. See: Western nis Enterprise v. Ukraine, icsid Case No. ARB/04/2, order (16 March 2006). 93 Waste Management v. Mexico, icsid Case No. ARB(AF)/98/2, dissenting opinion (8 May 2000), paras. 57 and 58. 94 Hochtief v. Argentina, icsid Case No. ARB/07/31, decision on jurisdiction (24 October 2011), para. 90 [Hochtief v. Argentina]. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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– If the reason would be that the claim should not be heard at all (or at least not yet), the issue is ordinarily of admissibility and the tribunal’s decision is final.”95 The proper distinction between jurisdiction and admissibility has important practical consequences on the development of a case. One such consequence is that the “the critical date for determining whether investment tribunals have jurisdiction is the date of the request for arbitration (seisin). As a result, new developments after that critical date cannot be taken into account for purposes of assessing the tribunal’s jurisdiction. In contrast, new developments that concern admissibility may be taken into account.”96 Furthermore, a decision on jurisdiction does not have the effect of res iudicata. There is “nothing preventing the claimant from commencing fresh proceedings against the host State if jurisdiction has been previously declined.”97 Conversely, a decision regarding the inadmissibility of a claim – being decision on merits – has precisely such an effect. This conclusion remains valid despite the fact that, in some situations, an inadmissible claim can be “cured.” In such a case, the res iudicata objection will not apply because the claim will relate to a new set of facts and, as a result, the cases will not be identical. Another aspect of the distinction between the two concepts are the consequences of the decision made by tribunal, i.e. possible recourse against ­decisions of the arbitrators. Findings “of tribunals which do not respect jurisdictional limits may be invalidated by a controlling authority. But if parties have consented to the jurisdiction of a given tribunal, its determinations as to the admissibility of claims should be final.”98 Consequently, it must be understood that, in this context, decisions concerning the admissibility of claims are decisions regarding the merits. “There can be no question that, while jurisdiction is procedural in nature, the notion of admissibility has a lot to do with the merits of the case.”99 Therefore, decisions on admissibility are final and cannot be reviewed by a controlling authority.

95 Paulsson, supra note 81, p. 617. 96 Waibel, supra note 87, p. 67. 97 Douglas, supra note 11, p. 157. He states before that the determination that there is no arbitration agreement is an exercise of competence-competence doctrine, and it “means that there is no independent source of authority for a decision upholding the jurisdictional objection in the sense that the decision will not be res judicata. There is no consent to the rendering of a binding decision through arbitration and separability doctrine is of no avail.” 98 Paulsson, supra note 81, p. 601. 99 Gerold Zeiler, “Jurisdiction, Competence, and Admissibility of Claims in icsid Arbitration Proceedings,” in: Christina Binder, Ursula Kriebaum, August Reinisch, Stephan Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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An additional consequence of the distinction is that tribunals should, of their own volition (ex officio) investigate whether or not they have jurisdiction, whereas objections to admissibility are considered by a tribunal only if and to the extent that they are raised by the parties themselves.100 In this author’s view, this is only correct to a certain degree. Mainly, this standpoint may serve as a starting point for considerations, but there is no obstacle to prevent tribunals from analyzing issues of admissibility even in the absence of any clear objection having been raised by a party. A decision on admissibility should not be classified as a decision which is procedural in character. In practice, issues of admissibility “may be addressed alongside questions of jurisdiction, or they may be addressed together with the merits. It is very rare for there to be three phases to investment arbitrations, the first focusing on objections to jurisdiction, the second focusing on objections as to admissibility and the third focusing on the merits.”101 The decision on a possible bifurcation of arbitral proceeding remains at the tribunal’s discretion and will depend on the facts of a particular case and on the arguments presented by the parties. Some authors have claimed that decisions on admissibility are decisions concerning the merits of a dispute, whereas other differentiate it as a separate type of decision, thus dividing decisions into those concerning jurisdiction, admissibility and merits.102 In this author’s view, the latter approach is more legitimate: “[…] an objection to the admissibility of a claim is the equivalent of pleading that the tribunal should rule the claim to be inadmissible on a ground other than its ultimate merits […].”103 ­ ittich, “International Investment Law for the 21st Century, Essays in Honour of W ­Christoph Schreuer” (Oxford University Press 2009), p. 85. 100 Hochtief v. Argentina, supra note 94, para. 94: “Questions of admissibility, on the other hand, are different from questions of jurisdiction. The disputing parties are entitled to raise objections based upon questions of admissibility, but they are not bound to do so; and if they do not raise those objections, they will have acquiesced in any breach of the requirements of admissibility and that acquiescence will ‘cure’ the breach. The tribunal, if it has jurisdiction, will proceed to hear the case.” 101 Waibel, supra note 87, p. 7. 102 Approach that admissibility forms part of the merits can be seen at: Heiskanen, supra note 9, pp. 233, 241. The second approach can be seen at: Douglas, supra note 11, pp. 179, 183; Andrew Newcombe, “Investor misconduct: Jurisdiction, admissibility or merits?” in: Chester Brown, Kate Miles, “Evolution in Investment Treaty Law and Arbitration” (Cambridge University Press 2011), pp. 199–200 [Newcombe]. He also added that: “Dismissing a claim as inadmissible, however, is a very powerful tool and could not be misused, which may explain tribunals’ reluctance to use it.” 103 Williams, supra note 82, p. 919. See also: Filip Balcerzak, Stanisław Sołtysik, “Jurysdykcja trybunałów arbitrażowych w sporach inwestycyjnych a kwestia rozszerzenia zgody na Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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ii “In Accordance with Local Laws” Requirement Some bits contain an explicit requirement stating that, in order to acquire protection granted by the particular bit, the investments performed by ­investors must be made “in accordance with local laws” (referred to as the “Legality clause”). The following observation made by the tribunal in Gustav Hamester v. Ghana can be recalled when analyzing such Legality clauses: “it is clear that States may specifically and expressly condition access of investors to a chosen dispute settlement mechanism, or the availability of substantive protection. One such common condition is an express requirement that the investment comply with the internal legislation of the host State.”104 Legality clauses have important consequences in practice, since an investment not made in accordance with the host state’s law will not be a “protected investment” under the bit. The requirement of “in accordance with local laws” can be found in definitions of “investments.” For example art. 1 of the Germany – ­Philippines bit reads as follows: “the term ‘investment’ shall mean any kind of asset accepted in accordance with the respective laws and regulations of either Contracting State, and more particularly, though not exclusively: […].”105 Provisions requiring that investments be made in “accordance with local laws” may be found, however, not only in the definitions of investments.106 Such provisions “come mostly in two forms: first, clauses that tie compliance with domestic law directly to the definition of “investment” protected under international investment treaties; and second, clauses linking compliance with domestic law to the provision on admission of new investments coupled with a limitation of the scope of application of the relevant investment treaty to existing investments made in accordance with host State law.”107

104 105

106 107

arbitraż państwa przyjmującego w wyniku zastosowania klauzuli największego uprzywilejowania,” (2013) 12 Problemy Prawa Prywatnego Międzynarodowego, p. 153. Gustav F W Hamester v. Ghana, icsid Case No. ARB/07/24, award (18 June 2010), para. 125 [Hamester v. Ghana]. Similar provisions can be found for example in the bit Sweden-Bosnia and Herzegovina, art. 1: “The term “investment” means […] provided that the investment has been made in accordance with the laws and regulations of the latter and shall include, in particular, though not exclusively: […].” Inceysa Vallisoletana v. El Salvador, icsid Case No. ARB/03126, award (2 August 2006), para. 188 [Inceysa v. Salvador]. Stephan W. Schill, “Illegal Investments in International Arbitration” (4 January 2012) ­available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1979734 [accessed on 2 February 2017], p. 2 [Schill].

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It must be explained, however, how one should understand the formula of “not being protected” by the bit in the context of the express requirement that an investment be made “in accordance with local law.” The prevailing opinion is that observance of the Legality clause is an element of jurisdiction, as opposed to admissibility.108 Such classification was confirmed by the tribunal in Gustav Hamester v. Ghana case, which determined that the bit at hand provided for an express requirement of compliance with the host state’s legislation and considered the alleged illegality of the investment at the moment of establishing the investment as being a matter of jurisdiction.109 Similarly, the tribunal in Fraport v. Philippines was faced with a bit which, in its definition of investments, required investments to be made in accordance with local law. The tribunal decided that “[b]ecause there is no “investment in accordance with law,” the Tribunal lacks jurisdiction ratione materiae.”110 Similarly, the tribunal in Inceysa v. Salvador decided that the objection raised by the respondent that although “investment is not protected by the Agreement because it is an investment that was not made in accordance with the laws of Salvador can be identified as a substantive defense related to the merits of the matter, this presumption is incorrect. Indeed, if it is determined that the investment is not protected by the Agreement, it would imply recognizing that the necessary premise for the Arbitral Tribunal to validly assume jurisdiction was not met.”111 The tribunal continued to state that the consent to arbitrate, given by contracting states to the bit in question “is limited to investments made in accordance with the laws of the host State of the investment. Consequently, this Tribunal decides that the disputes that arise from an investment made illegally are outside the consent granted by the parties and, consequently, are not subject to

108 Patrick Dumberry, Gabrielle Dumas-Aubin, “The Doctrine of “Clean Hands” and the Inadmissibility of Claims by Investors Breaching International Human Rights Law,” (2013) 10:1 Transnational Dispute Management, p. 4 [Dumberry, Dumas-Aubin]: “A tribunal will have to decline jurisdiction over a claim when faced with an investment not in compliance with a bit’s “in accordance with the law” provision. This is indeed a matter of jurisdiction rather than admissibility.” 109 Hamester v. Ghana, supra note 104, paras. 126–139. 110 Fraport ag Frankfurt Airport Services Worldwide v. Philippines, icsid Case No. ARB/03/25, award (16 August 2007), para. 401 [Fraport v. Philippines]. The tribunal added in para. 404 that “compliance with the host state’s laws is an explicit and hardly unreasonable requirement in the Treaty and its accompanying Protocol.” 111 Inceysa v. Salvador, supra note 106, para. 160. It is worth noting that the tribunal in the Inceysa case seems to not differentiate between jurisdiction and competence, as worded in the icsid Convention.

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the jurisdiction […].”112 A similar line of reasoning was adopted by the tribunal in Ross Anderson v. Costa Rica, where the tribunal concluded that the Legality clause “reflects both sound public policy and sound investment practice” and investments made contrary to local laws result in lack of jurisdiction.113 Also in Alpha Projektholding v. Ukraine and Kardassopoulos v. Georgia the tribunals considered the Legality clause to constitute a matter of jurisdiction.114 However, according to other approaches the “in accordance with local laws” requirement is not an issue of jurisdiction: “The non-compliance with municipal law and regulations would not result in a jurisdictional bar since it ‘does not create an obstacle to treaty coverage per se and access to a neutral forum for the resolution of investment disputes, to the extent that the asset under consideration falls under the definition of an investment provided by the applicable treaty; rather, such alleged non-compliance may constitute a limitation with respect to the merits of the claim related to the covered investment’.”115 Case law exists in support of this approach. For example in the Salini v. Morocco case, the tribunal understood the Legality clause as not relating to jurisdiction but referring 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.”116 This approach 112 Ibid, para. 207. 113 Alasdair Ross Anderson et al. v. Costa Rica, icsid Case No. ARB(AF)/07/3 (award 19 May 2010), paras. 58 and 59. Although the tribunal in Saba Fakes v. Turkey declined jurisdiction on different grounds, it observed that: “This provision plainly states that the bit protection shall not apply to investments which have not been established in conformity with the Respondent’s laws and regulations, the term “investment” having been defined in Article 1(b) of the bit. If this condition is not satisfied, the bit does not apply. As a result, the Contracting Party cannot be deemed to have given its consent to arbitrate the dispute under Article 8(3) of the bit and there would therefore be no consent to the Centre’s jurisdiction within the meaning of Article 25(1) of the icsid Convention.” See: Saba Fakes v. Turkey, icsid Case No. ARB/07/20, award (14 July 2010), para. 115. 114 Alpha Projektholding v. Ukraine, icsid Case No. ARB/07/16, award (8 November 2010), para. 297, Ioannis Kardassopoulos v. Georgia, icsid Case No. ARB/05/18, decision on jurisdiction (6 July 2007), paras. 174–184. 115 Katia Yannaca – Small, “Definition of Investor and Investment in International Investment Agreements,” in: oecd, “International Investment Law: Understanding Concepts and Tracking Innovations” (Organisation for Economic Co-operation and Development 2008), p. 76, and her quotation of: Emmanuel Gaillard, “Investments and Investors Covered by the Energy Charter Treaty,” in: Clarisse Ribeiro, “Investment Arbitration and the Energy Charter Treaty” (JurisNet 2006), p. 62 [emphasis as in original not included]. 116 Salini Costruttori v. Morocco, icsid Case No. ARB/00/4, decision on jurisdiction (23 July 2001), para. 46. Similar comment was given by the tribunal in footnote 11 of the decision on jurisdiction in Saipem v. Bangladesh, icsid Case No. ARB/05/07, decision on jurisdiction

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also finds support in the dissenting opinion of Cremades in Fraport v. Philippines, where he observed that it would be unbalanced to consider issues concerning the legality of investors’ behavior as a matter of jurisdiction, whilst considering issues of the legality of respondent states’ behavior as a matter of merits. His dissenting opinion went on to state that “the legality of the investor’s conduct is a merits issue” and that “[i]n cases of gross illegality there may also be other reasons for the inadmissibility of a claim. In some cases, for example, the principles of good faith and public policy may bar a claim.”117 In l.e.s.i. v. Algeria, whilst analyzing jurisdiction, the tribunal dismissed the objection raised by respondent. It did not agree that the Legality clause forms part of the consent to arbitrate and observed that the Legality clause “does not constitute a formal recognition of the notion of investment, as understood in a restrictive manner in Algerian law, but rather, under a traditional and perfectly justified formula, it seeks to exclude from protection all investments made in violation of the fundamental principles in force.”118 Also the tribunal in M ­ alicorp v. Egypt did not consider the Legality clause as being an issue of jurisdiction. It came to that conclusion by referring to concepts present in international commercial arbitration: “The solution derives, first, from the principle of autonomy of the arbitration agreement, a principle so fundamental that it also has its place in investment arbitration. According to that principle, defects undermining the validity of the substantive legal relationship, which is the subject of the dispute on the merits, do not automatically undermine the validity of the arbitration agreement. Thus, an arbitral tribunal is competent to decide on the merits even if the main contract was entered into as a result of misrepresentation or corruption. Only defects that go to the consent to arbitrate itself can deprive the tribunal of jurisdiction.”119 Yet another approach to classifying Legality clauses was presented by the tribunal in Pheonix v. Czech Republic. It observed that the “in accordance with local laws” prerequisite refers to the merits of the case which, in this authors’ understanding, could lead to a determination that a claim was inadmissible. and recommendation on provisional measures (21 March 2007). The tribunal’s conclusion in the Salini case was also recognized by the tribunal in the Bayindir case. See: Bayindir Insaat Turizm Ticaret Ve Sanayi v. Pakistan, icsid Case No. ARB/03/29, decision on jurisdiction (14 November 2005), para. 109. 117 Fraport ag Frankfurt Airport Services Worldwide v. Philippines, icsid Case No. ARB/03/25, dissenting opinion (19 July 2007), paras. 37, 38, 40. 118 Consorzio Groupement l.e.s.i.-dipenta v. Algeria, icsid Case No. ARB/03/08, award (10 January 2005), paras. 24 and 26. 119 Malicorp v. Egypt, icsid Case No. ARB/08/18, award (7 February 2011), para. 119 [emphasis as in original].

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However, the tribunal went on to state that if a violation of law is “manifest,” judicial economy would require a denial of jurisdiction.120 The approach adopted by the tribunal in Pheonix v. Czech Republic has been criticized for replacing a decision on law (i.e. the correct legal classification of the issue) with “reference to procedural considerations like ‘judicial economy’.”121 Another argument for classifying Legality clauses as an element of admissibility, as opposed to jurisdiction, can be based on references to the concepts of: (i) separability and (ii) kompetenz-kompetenz, present in the legal framework of international commercial arbitration.122 The principle of separability requires that the validity of an arbitration agreement is always assessed separately from the validity of the underlying contract in which it is contained or, in the case of investment arbitration, of substantive provisions of bits. The principle of competence-competence means that arbitral tribunals themselves are competent to assess whether they have jurisdiction to decide a case. These principles apply to jurisdiction of an international tribunal established under bits, regardless of whether or not there is any express reference to them or any indirect incorporation by reference to a set of particular arbitral rules.123 Application of the above mentioned principles in investor – state arbitrations means, in turn, that a “plea of illegality relating to the conduct of the putative investor never goes to the tribunal’s jurisdiction in investment treaty arbitration.”124 As can be seen from the above, the classification of a Legality clause as referring to jurisdiction or to admissibility is far from uniform. However, it seems 120 Phoenix Action v. Czech Republic, supra note 20, para. 104: “There is no doubt that the requirement of the conformity with law is important in respect of the access to the substantive provisions on the protection of the investor under the bit. This access can be denied through a decision on the merits. However, if it is manifest that the investment has been performed in violation of the law, it is in line with judicial economy not to assert jurisdiction.” 121 Douglas, supra note 11, p. 171. He added: “It is not within the discretion of a tribunal to characterize something as jurisdictional in order to dispose of it quickly and efficiently.” Indeed, tribunals have other powers to manage the proceedings to ensure that they are effective. 122 As explained above, bits adopted dispute resolution mechanisms that originated in commercial arbitration. 123 Douglas, supra note 11, p. 177: “Investment treaty arbitration relies, to a significant extent, upon the procedural framework developed for commercial arbitration.” 124 Ibid, p. 185. See also pp. 180 and 181. On p. 177 Douglas stated: “a limitation upon the host State’s consent to arbitration should not be implied in respect of investments that have been acquired in contravention of laws of the host State either.”

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that the prevailing approach is that, in the light of an express requirement that investments must be made in accordance with local laws, any investments were contrary to local laws do not fall within the scope of a state’s consent to arbitrate. This would result in a lack of jurisdiction.125 However, this author does not concur with the above assessment of the legal nature of the Legality clauses. First of all, the final determination as to whether or not “in accordance with local laws” provisions are an element of jurisdiction or admissibility can potentially vary from case to case. It may depend upon a determination of whether, in a particular case, the requirement forms part of the definition of investment (in which case it would fall within the analysis of consent to arbitrate, being relevant for the subject matter jurisdiction) or is a separate provision in the text of a particular bit, concerning the merits of a claim.126 The answer to this question remains dependent on the circumstances of each case, such as the exact wording of the applicable bit, preparatory works to the bit, the preamble etc.127 Furthermore, this author agrees that the two concepts “are not really conceptual ‘opposites.’ Rather they focus on aspects of arbitral decision-making: jurisdiction concerns the scope of the State’s consent to arbitrate – the tribunal’s jurisdictional ‘field’ – whereas admissibility is about the claim and its temporal, personal and substantive dimensions. Furthermore, as admissibility depends on the particulars of the claim, it is also a more ‘concrete’ concept than jurisdiction […].”128 With all of the above in mind, the final determination as to whether or not Legality clauses refer to the jurisdiction of tribunals or the admissibility of claims depends upon the consequences of the investor’s unlawful behavior. If the illegality means that the investor, under the local laws, did not acquire 125 Schill, supra note 107, p. 5: “For most arbitral tribunals faced with the interpretation of explicit “in accordance with host State law”-clauses, the issue is one of jurisdiction ratione materiae. The reference point of statements in arbitral awards to this effect, however, is sometimes blurry […].” He concludes at p. 20: “arbitral jurisprudence relating to the interpretation of explicit “in accordance with host State law”-clauses shows that tribunals recognize that non-compliance of investments with domestic law deprives such investment from treaty protection and limit the tribunals’ jurisdiction.” 126 “Where an investor meets the technical requirements for jurisdiction […], the tribunal should proceed to exercise its adjudicative power, rather than imply additional jurisdictional requirements.” See: Newcombe, supra note 102, p. 198. 127 Urbaser et al. v. Argentina, icsid Case No. ARB/07/26, decision on jurisdiction (19 December 2012), para. 112: “[t]he question whether a particular legal issue falls in one and not the other is contingent on the meaning of the relevant provisions of the bit. This latter consideration is all that matters.” 128 Heiskanen, supra note 9, p. 242.

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assets which constitute an “investment,” such defect relates to jurisdiction. In other words, if the illegality of the investor’s behavior results in the nullity of the acquisition of “investment” protected under the bit, such investment cannot fall within the scope of the host state’s consent to arbitrate. This would be an element of jurisdiction.129 If, however, the consequence of the illegal behavior under the host state’s law would be different in nature, such as for example a penalty or an obligation to make restitution, the illegality of the investor’s behavior is not an issue related to the existence of a protected investment. As a result, it cannot refer to jurisdiction and, in principle, it would affect admissibility of a claim. In addition, if the breach of local laws and related consequences are minor, it may be even considered to be taken into account at the merits stage. iii Non-explicit “in Accordance with Local Laws” Requirement The above considerations related to Legality clauses which were explicitly included in the texts of bits. However, not all bits contain an express provision requiring that investments be made “in accordance with local laws.” Therefore, the question remains as to what happens if a particular dispute is commenced on the basis of a bit which does not contain an explicit Legality clause. Many arbitral awards recognize that, even in the absence of an express obligation to make investments in accordance with the local laws, there is an implicit obligation to do so. For example, in Fraport v. Philippines the tribunal stated: “[a]s for policy, bits oblige governments to conduct their relations with foreign investors in a transparent fashion. Some reciprocal if not identical obligations lie on the foreign investor. One of those is the obligation to make the investment in accordance with the host state’s law.”130 In Phoenix v. Czech Republic the tribunal affirmed that the obligation for investors to make their investments in accordance with the host State’s law “is implicit even when not expressly stated in the relevant bit.”131 The tribunal in Gustav Hamester v. Ghana even recognized it as a “general principle” that “exist[s] independently of specific language to this effect in the Treaty.”132 In Inceysa v. Salvador the 129 Douglas, supra note 11, p. 178: “If the asset it not recognized under the host State’s law then there is no investment. If the foreign national has purported to acquire property rights in a manner that is not effective to pass title or another legal interest under the host State’s law then there is no investment. This is the extent of the inquiry into compliance with the host State’s laws that is relevant to establish the tribunal jurisdiction.” 130 Fraport v. Philippines, supra note 110, para. 402. 131 Phoenix Action v. Czech Republic, supra note 20, para. 101. 132 Hamester v. Ghana, supra note 104, para. 124.

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tribunal considered that an “in accordance with local laws” requirement is “a clear manifestation of” international public policy.133 Moreover, the tribunal in Yaung Chi v. Myanmar observed that there exists “the general rule that for a foreign investment to enjoy treaty protection it must be lawful under the law of the host State.”134 It is also worth to note statements made by the tribunal in the Plama v. Bulgaria case. The tribunal stated that the absence of any express provision (in the underlying treaty – ect) requiring investments to be made in accordance with local laws does not mean that “the protections provided for by the ect cover all kinds of investments, including those contrary to domestic or international law.”135 The tribunal decided that “the substantive protections of the ect cannot apply to investments that are made contrary to law.” It denied “substantive protections of the ect” for an investment “obtained by deceitful conduct that is in violation of Bulgarian law,” adding that granting protection in such case would be contrary to the principle nemo auditur propriam turpitudinem allegans and “the basic notion of international public policy—that a contract obtained by wrongful means (fraudulent misrepresentation) should not be enforced by a tribunal.”136 There is no doubt that investments made contrary to local laws are not protected by bits even if no express Legality clause is included in the text of the bit. In such a situation, the answer to the legal classification of the “in accordance with local laws” requirement is more uniform. In the absence of an express provision concerning the state’s consent to arbitrate, tribunals have ­jurisdiction to decide cases but, if investments are made contrary to host states’ laws, they should rule that such claims are inadmissible. “In contrast with an express ‘in accordance with the law’ provision in a bit, this implicit obligation should not be considered as a jurisdictional prerequisite, but, as mentioned by one writer, ‘determined at the merits phase, perhaps with an impact on the admissibility of the claimants’ claims.’ In other words, while a tribunal would have jurisdiction over the investor’s claim, it should nevertheless find it inadmissible.”137 In this context, this author is of the opinion that there is no 133 Inceysa v. Salvador, supra note 106, paras. 246, 252. 134 Yaung Chi Oo Trading v. Myanmar, asean i.d. Case No. ARB/01/1, award (31 March 2003), para. 58. 135 Plama v. Bulgaria, icsid Case No. ARB/03/24, award (27 August 2008), para. 138. 136 Ibid, paras. 139, 143 and 146. Some commentators consider the reasoning of this tribunal as representing “a typical pattern of reasoning found in international commercial arbitration.” See: Schill, supra note 107, p. 22. 137 Dumberry, Dumas-Aubin, supra note 108, p. 7, with reference to the quotation: Rahim Moloo, “The Compliance with the Law Requirement in International Law,” (2010)

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reason why the classification of the Legality clause would be conditional upon whether the “in accordance with local laws” requirement is explicit or implied. In any case, whether explicit or implied, an “in accordance with local laws” requirement is understood “only to target initial illegality.”138 As correctly noted by the tribunal in Gustav Hamester v Ghana: “[…] a distinction has to be drawn between (1) legality as at the initiation of the investment (“made”) and (2) legality during the performance of the investment. […] Thus, on the wording of this bit, the legality of the creation of the investment is a jurisdictional issue; the legality of the investor’s conduct during the life of the investment is a merits issue.”139 A similar observation was made, for example, by the tribunal in Quiborax v Bolivia: “[…] under this bit, the temporal scope of the legality requirement is limited to the establishment of the investment; it does not extend to the subsequent performance.”140 This allows one to conclude that illegality which occurs not at the moment of making the investment but, rather, later in time, is neither an issue of 34 ­Fordham International Law Journal, p. 1486. Similar approach was agreed by Schill, ­although he seems to apply the conclusion only if there is a breach of “certain fundamental breaches of domestic and international law.” See: Schill, supra note 107, p. 29. 138 Schill, supra note 107, p. 19. See for example decision in Fraport v. Philippines, in which the tribunal observed that: “The language of both Articles 1 and 2 of the bit emphasizes the initiation of the investment. Moreover the effective operation of the bit regime would appear to require that jurisdictional compliance be limited to the initiation of the investment. 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 action with respect to the investment, might be a defense to claimed substantive violations of the bit, but could not deprive a tribunal acting under the authority of the bit of its jurisdiction.” See: Fraport v. Philippines, supra note 110, para. 395. 139 Although it must be noted that different wording of the underlying bit may change this conclusion. See: Hamester v. Ghana, supra note 104, para. 127 [emphasis as in original]. 140 Quiborax et al. v. Bolivia, icsid Case No. ARB/06/2, decision on jurisdiction (27 September 2012), para. 266. This approach was confirmed in the decision on merits: “To the extent that the Respondent’s allegations refer to the operation or performance of the investment (Bolivia’s allegations of “ongoing illegality”), they are not relevant to the availability of the bit’s substantive protections. Instead, they are matters for the merits which the Tribunal will address when determining whether the Respondent breached its bit obligations. By contrast, to the extent that the Respondent’s allegations of illegality refer to the establishment of the investment (Bolivia’s allegations of “original illegality”) they fall under the temporal scope of the bit’s legality requirement.” See: Quiborax et al. v. Bolivia, icsid Case No. ARB/06/2, award (16 September 2015), para. 129 [Quiborax v. Venezuela – merits].

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a­ dmissibility nor jurisdiction. It should be taken into account when assessing merits or compensation. “Here there is a total consensus in the jurisprudence and it is a consensus that can be endorsed: any plea of illegality relating to the use of the assets comprising the investment by the foreign national must be considered as a defence to the merits of the claims. A plea of this nature may require an analysis of the evolution of the law of the host State and the manner of its application to the investment in question, as well as an assessment of the conduct of both the investor and the host State.”141 To conclude the above considerations, it can be said that investments made contrary to host states’ laws are not protected by bits. This conclusion remains true regardless of whether there is an explicit Legality clause or where the “in accordance with local laws” requirement is implied. This requirement affects the admissibility of a claim (or jurisdiction of a tribunal) only if the illegal behavior takes place when the investments are made. Admissibility of and Jurisdiction Over Claims Concerning Investments Made Contrary to Host States’ Laws Concerning Human Rights The above conclusions are important in the context of the Second Model Situation. The requirement of investments to be made in accordance with local laws “offer additional possibilities to take community interests ­[“international ­concern with human rights” being categorized as one of such community ­interests – author’s note] into account. Where international law is i­ ncorporated into domestic law its relevant provisions are also applicable.”142 In consequence, “[t]he iias’ wordings such as ‘made in accordance with its laws and regulations,’ could be understood to include the host’s legislation with a horizontal hr dimension.”143 iv

141 Douglas, supra note 11, p. 185. 142 Christoph Schreuer, Ursula Kriebaum, “From Individual to Community Interest in International Investment Law,” in: Ulrich Fastenrath, Rudolf Geiger, Daniel-Erasmus Khan, Andresa Paulus, Sabine von Schorlemer, Christoph Vedder, “From Bilateralism to Community Interest: Essays in Honour of Judge Bruno Simma” (Oxford University Press, 2011), p. 1095. Also Newcombe recognizes that human rights violations may constitute misconduct which – depending on its timing, type and severity – may require “a different response,” i.e. should be considered as issue of jurisdiction, admissibility or merits. See: Newcombe, supra note 102, pp. 190–191. 143 Leinhardt, supra note 70, p. 19. This has been explicitly confirmed in art. 12(1)(v) of the Indian Model bit, available at: https://www.mygov.in/sites/default/files/master_image/ Model%20Text%20for%20the%20Indian%20Bilateral%20Investment%20Treaty.pdf [accessed on 2 February 2017].

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International human rights are integrated into a large number of states’ domestic laws. Therefore, any investment made contrary to the host state’s laws regulating issues which may be qualified as implementing internationally-­ recognized human rights cannot be protected by bits. In other words, “an investor breaching existing human rights obligations under the laws of these States would consequently not be in compliance with this implicit obligation to make investments ‘in accordance with the law’. In these circumstances, an investor should be denied bit protection.”144 Depending on the approach adopted with respect to classification of the “in accordance with local laws” requirement, this would result in declining jurisdiction over a dispute or, alternatively, in deciding that a claim is inadmissible. If under the domestic law the illegality of investors’ behavior does not prevent the investor from acquiring the investment, it is this author’s submission that the decision should be that such a claim is inadmissible.145 At the same time, if a breach of the applicable local law means that the investor does not acquire the property or other legal title to the investment, the tribunal should declare that it has no jurisdiction, since the host state’s consent to arbitrate given in the bit does not extend to such a dispute. The above argument is relatively straightforward when considering situations when investments are made contrary to express regulations of domestic law concerning human rights issues. However, a few following observations must be made before continuing this discussion. The consequence of a tribunal’s lack of jurisdiction or of the inadmissibility of a claim would be relevant for breaches of law which are significant. Minor violations should not have such an effect and they should be analyzed together with the merits. This is in accordance with the view of Leinhardt that “[a]part from serious hr violations, other inconsistencies with horizontal hr legislation or responsibilities to respect international hr could be regarded at the merits stage.”146 To present an extreme example, it would be unreasonable to deny bit protection to an investor merely due to a violation of local law consisting of breaching a speed limit, even though such a breach could be related to the investment if it was done by a representative of the investor on his/her way to the official ceremony for opening of a facility.147 144 Dumberry, Dumas-Aubin, supra note 108, pp. 7–8. 145 Dumberry, Dumas-Aubin – How to…, supra note 75, p. 593: “In our view, a tribunal should be allowed (under new or amended bits) to take into account human rights violations committed by an investor when deciding a claim’s admissibility. We believe that this is a matter of admissibility rather than jurisdiction.” 146 See for example: Leinhardt, supra note 70, p. 20. 147 As noted, for example, by the tribunal in the Quiborax v. Venezuela case, an opposite approach “would create deleterious incentives, as host States would be in a position to Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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The above conclusions as to the consequences of human rights violations considered as examples of illegality apply in both monist and dualist states. In monist states, international law need not be implemented into national law.148 The act of ratifying an international treaty immediately incorporates the international law into national law, which is directly applicable by the national authorities. Thus, human rights regulations adopted by states’ in pursuit of their international human rights obligations and responsibilities can be additional norms that influence the application of international norms. In dualist states, by contrast, international law must be implemented into national legislation before it can be applied by the national authorities. Without such implementation, international law is not applicable in the domestic legal system, although it binds states at an international level. As a result, international human rights must be implemented by dualist states into national law. Therefore, the above conclusion applies to dualist states only if they have implemented international human rights into their national legal systems, so that they form part of “domestic law.” The whole picture under the present analysis may become more complex. It is possible that, in a particular state, human rights do not form part of domestic law – for example they were not implemented into national legislation by a dualist state. In such a situation, would an investment made contrary to international human rights law, which has not been implemented into domestic legal order, nevertheless be a protected investment under a bit? Such a conclusion is not legitimate. In the Second Model Situation, investors should not benefit from the mere fact that a particular state has failed to fully implement its international human rights obligations into its domestic legal order.149 In the situation of a monist state, the conclusion is grounded on the fact that international human rights form part of the state’s legal system regardless of whether or not they were implemented into the domestic legal system. Thus, the very nature of the legal system of such a state means that international human rights can strip investors of treaty protection by finding any minor breach at any time.” See: Quiborax v. Venezuela – merits, supra note 140, para. 263. The tribunal added that such an approach “favours a balanced interpretation that takes account of the need to protect foreign investments, on the one hand, and of the State’s other responsibilities, on the other” (para. 264). 148 Dupuy, Viñuales, supra note 43, p. 26: “When, in particular, the national Constitution of the host State contains an option in favor of monism granting primacy to public international law, the latter partakes to the law applicable to the dispute.” 149 Dumberry, Dumas-Aubin, supra note 108, p. 8; Dumberry, Dumas-Aubin – How to…, supra note 75, p. 593. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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nevertheless be considered as “local laws” which, if breached when making an investment, may result in the inadmissibility of a claim. The situation would be more complex in dualist states which did not implement international human rights into its national system. Such a situation can be summarized by a passage in the award rendered in Phoenix v. Czech R ­ epublic, namely that: “[t]he protection of international investment arbitration cannot be granted if such protection would run contrary to the general principles of international law, among which the principle of good faith is of utmost importance.”150 This is certainly true with respect to the gross violations of human rights committed by investors, such as “investments made in pursuance of torture or genocide or in support of slavery or trafficking of human organs.”151 However, in order to apply the same mechanism to other human rights violations, which cannot be classified as “general principles of international law,” it would require referral to a specific principle of i­ nternational law. The principle of “clean hands” could be considered for these purposes. If it is agreed that the doctrine of clean hands can be considered as a general principle of international law, the conclusion would be that investments made contrary to international human rights – even if not implemented by a state into its domestic legal order – fall outside the protection offered by a bit. The reason would be that the investors in the Second Model Situation do not have “clean hands” when seeking protection under the bit. It must, however, be recognized that application of the clean hands doctrine in international law remains controversial: “the conclusion reached by ­Rousseau seems still to be valid: ‘[I]t is not possible to consider the ‘clean hands’ theory as an institution of general customary law’.”152 Although the following observation is controversial and not commonly agreed with, it should be referred to in the present context. Dumberry and Dumas-Aubin argue that the clean hands doctrine “has never been formally rejected by the icj. What is clear is the fact that the doctrine of “clean hands” has been recognized in the domestic orders of many States. As a result, it has been qualified by many, including Schwebel and Anzilotti, as a general principle of law. As such, the d­ octrine of clean hands is a source of law that can be applied by international tribunals in accordance with Article 38(1)(c) of the icj Statute. Nothing therefore prevents

150 Phoenix Action v. Czech Republic, supra note 20, para. 106. 151 Ibid, para. 78. 152 James Crawford, “Second report on State responsibility,” (1999) ii:2 Yearbook of the International Law Commission, A/CN.4/SER.A/1999/Add.1 (Part 1) p. 83, para.336, quoting: Charles Rousseau, Droit international public, vol. v, Les rapports conflictuels. Paris, Sirey (1983), p. 177, para. 170 [Crawford]. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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an arbitral tribunal in the context of an investor-State arbitration from referring to the doctrine.”153 Thus, although the “clean hands” doctrine does not form part of customary international law, it is considered by some commentators as being a general principle of international law. As such, it would raise a question regarding the admissibility of a claim (and not of jurisdiction) to preclude the protection of bits investments made contrary to international human rights which had not been implemented into domestic legal orders. This stems from the very nature of the clean hands doctrine, which “would operate as a ground of inadmissibility rather than as a circumstance precluding wrongfulness or responsibility.”154 This understanding of the clean hands doctrine was applied by the tribunal in Al-Warraq v. Indonesia case, where the tribunal decided that “the doctrine of “clean hands” renders the Claimant’s claim inadmissible. As Crawford observes, the “clean hands” principle has been invoked in the context of the admissibility of claims before international courts and tribunals.”155 The tribunal failed, however, to explain the legal basis of applying the “clean hands doctrine,” i.e. whether it was understood as an element of customary international law, a general principle of international law or, more broadly, a general principle of law as recognized by civilized nations. Similar conclusions were presented in an expert opinion by Dolzer, who observed that “investment jurisprudence shows that tribunals have frequently not named the doctrine, but have applied it by way of introducing concepts with the same rationale.”156 He summarized the matter thus: in his view the doctrine of clean hands “has long been recognized,” “its place has in part been taken over with other doctrines based on the same rationale” and it “remains valid today and applicable to areas and settings not clearly covered by the doctrines applied in recent investment awards.”157 At the same time, however, it must be admitted that the practical impact of the reflections over the doctrine of clean hands in 153 Dumberry, Dumas-Aubin, supra note 108, pp. 2–3. 154 Crawford, supra note 152, p. 83, para. 333. 155 Hesham T.M. Al-Warraq v. Indonesia, uncitral, final award (15 December 2014), para. 646 [emphasis as in original]. The tribunal decided the case on the basis of the oic Agreement which contains an unusual Legality clause. The tribunal found that the investor had breached the obligations imposed in the Legality clause: “[…] the Claimant failed to uphold the Indonesian laws and regulations. The Tribunal further considers that the Claimant’s action, 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” (para. 645). 156 Expert opinion of Rudolf Dolzer (20 October 2015), submitted in the proceedings before the United States District Court for the District of Columbia, case no. 1:14-cv-01996-ABJ, para. 297. 157 Ibid, para. 309. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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the above context is limited. This is because international human rights obligations bind states. It is only the action of a state – for example by way of adopting legislation with the aim of realizing its international obligations to protect or fulfil human rights – which can impose obligations on investors, as private actors. It can be argued that the most fundamental human rights, the violation of which would amount to “international crimes, including genocide, slavery, human trafficking, forced labour, torture and some crimes against humanity,”158 have horizontal effect and impose specific obligations not only on states but also on private actors. However, if one agrees with such an approach, this would mean accepting such fundamental human rights as general principles of international law or norms having a ius cogens nature. Therefore, no referral to the doctrine of “clean hands” will be required, because the actions of an investor would in any case be contrary to the general principles of international law. In this meaning, following the approach adopted in Phoenix v. Czech Republic, this by itself would bar the investor from the protection of the applicable bit. Therefore, although from the perspective of investment law it is possible to conclude that claims could be declared inadmissible if investments were made contrary to international human rights even if they were unimplemented in domestic law, when read together with content of these rights, this conclusion is valid only with respect to the most fundamental human rights, examples of which are given above. To conclude all of the above, this author concurs with the opinion that issues of admissibility should be distinguished from issues of jurisdiction. In this author’s opinion, as a general rule, the illegal behavior of an investor affects the admissibility of a claim. However, if such illegality has the effect that the investor failed to acquire the investment under the host state’s law, this is an issue of jurisdiction. This is correct (i) with reference to both explicit and implicit in accordance with local laws requirement, but (ii) only when one considers the initial legality of the investor’s behavior, i.e. illegality at the time when the investments are being made. This is relevant because international human rights are implemented into domestic legal systems and therefore form part of the host state’s laws. If investors breach human rights that were implemented in domestic laws at the moment of making their investments, this may affect the admissibility of their claim. In certain situations, if under local law the breach results in the investor failing to acquire the property right or other legal title to the investment, this could affect the jurisdiction of the tribunal. 158 Interim Report of the Special Representative of the Secretary-General of the United Nations on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, E/CN.4/2006/97 (February 22, 2006), para. 61. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:54PM via free access

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The Impact of Human Rights on the Merits of Investor – State Arbitration 1

Influence of Human Rights on the Interpretation of the Provisions of Investment Treaties

i General Rules of Treaty Interpretation Investment law forms part of public international law. As such, it cannot be interpreted or applied in isolation. “Investment treaties are not self-contained regimes. International law is a legal system, and investment treaties are creatures of it and governed by it.”1 As a result, international human rights – which also are part of international law – can play a role in the interpretation of legal norms included in bits. This approach has been confirmed by numerous academics. In this author’s opinion, one can speak about a certain “human rights friendly” interpretative approach, which is widely argued for by many commentators.2 For example: 1 Campbell McLachlan, “Investment Treaties and General International Law,” (2008) 57 International and Comparative Law Quarterly, p. 369 [McLachlan]. Similarly: Lahra Liberti “Investissements et droits de l’homme,” in: Philippe Kahn, Thomas Wälde, “New Aspects of International Investment Law” (Brill 2007), p. 824 [Liberti]. 2 For example, when analyzing Tecmed v. Mexico case, Dimopoulus argued that: “Mexico could support the non-expropriatiory character of its measure based on human rights arguments by reference to the International Covenant on Economic, Social, and Cultural Rights ­(icescr) and the International Covenant on Civil and Political Rights (iccpr). Given that both parties have concluded the above human rights instruments, a balanced approach between their human rights and bit obligations would require a reading of the investment provisions consistent with the icescr and the iccpr. However, the lack of explicit reference to the icescr and the iccpr in current investment agreements means that they can only be invoked by virtue of the general principles of treaty interpretation.” See: Angelos Dimopoulus, “ec Free Trade Agreements: An Alternative Model for Addressing Human Rights in F­ oreign Investment Regulation and Dispute Settlement?” in: Pierre-Marie Dupuy, Ernst-­Ulrich ­Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford University Press 2009), p. 592 [Dimopoulus]. Vadi states: “[…] according to the canon of systematic interpretation, investment treaties should not be considered as selfcontained regimes, but as an important component part of public international law. Accordingly, arbitrators should adopt a holistic approach, taking human rights treaties and relevant customary law into account when they interpret relevant investment

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“The law of this regime should not be applied and interpreted in a ‘clinical vacuum,’ nor read in ‘clinical isolation from public international law,’ to borrow a phrase from the first dispute in the wto context.”3 It was also observed that: “Tribunals will often have recourse to interpret investment treaty rights in light of applicable rules of international law. And it is here that there may be important scope for tribunals to consider applicable human rights obligations including, for example, those contained in human rights treaties which have been acceded to by host states.”4 Van Aaken describes it as “interpretational freedom” to take human rights into consideration when interpreting openended provisions of bits: “Tribunals are aware that human rights issues are at stake and they have the interpretational freedom to take the human rights obligations of host states into account when adjudicating upon indirect expropriation as well as fair and equitable treatment.”5 Also the following view can be referred to: “Through treaty interpretation, human rights norms may treaty provision. […].” Valentina Sara Vadi, “Reconciling Public Health and Investor Rights: The Case of Tobacco,” in: Pierre-Marie Dupuy, Ernst-Ulrich Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford University Press 2009), p. 485. Similarly: Liberti, supra note 1, pp. 822–823 and Ernst-Ulrich Petersmann, “Constitutional Theories of International Economic Adjudication and Investor-State Arbitration,” in: Pierre-Marie Dupuy, Ernst-Ulrich Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford University Press 2009), p. 183. 3 Jasper Krommendijk, John Morijn, ““Proportional” by What Measure(s)? Balancing Investor Interests and Human Rights by Way of Applying the Proportionality Principle in InvestorState Arbitration,” in: Pierre-Marie Dupuy, Ernst-Ulrich Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford University Press 2009), p. 427 [Krommendijk, Morijn], adding on p. 423 that: “Within investor-state arbitration practice there are various interconnected ways in which states’ prerogatives to protect human rights can be accommodated: by (re)interpreting investment law provisions and principles, such as the fair and equitable treatment standard, to take account of parallel international obligations, and by mitigating the amount of compensation awarded.” 4 Luke Eric Peterson, Kevin R. Gray, “International Human Rights in Bilateral Investments Treaties and in Investment Treaty Arbitration” (International Institute for Sustainable Development 2003), p. 28. 5 Anne van Aaken, “Fragmentation of International Law: The Case of International Investment Protection” (University of St. Gallen Law School, Law and Economics Research Paper Series Working Paper 2008), available at: http://ssrn.com/abstract=1097529 [accessed on 2 February 2017], p. 27. In another publication, van Aaken observed: “No international law norm can be considered in isolation and it must be interpreted in light of other international law, be it general international law, customary international law, or even other treaty norms.” See: Anne van Aaken, “Defragmentation of Public International Law Through Interpretation: A Methodological Proposal,” (2009) 16:2 Indiana Journal of Global Legal Studies, p. 497 [van Aaken].

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i­nfluence the meaning of the terms and provisions of the investment treaty. They can be of importance, for example, to determine the meaning of the fair and equitable treatment standard and of full protection and security clauses, with regard to decisions on direct or indirect expropriation or the international minimum standard. Furthermore, human rights considerations can find their way into investment law through the concept of “legitimate expectations.” This concept has a role in all protection standards.”6 Karamanian commented in this context: “The challenge for the tribunal is to dissect the treaty language in the context of the applicable law. For example, human rights principles could give effect to the meaning of the fair and equitable treatment clause or the state’s obligation to afford the customary international law minimum standard of treatment of aliens to the investment, such as the standard set forth in Article 1105 of nafta Chapter 11.”7 González García has observed that “[…] human rights can be relevant when interpreting investment treaty standards of protection. This becomes more apparent as investment treaty case law shows divergence of views amongst investment tribunals with respect to the content of investment protection obligations. […] Can an investment treaty tribunal rely on jurisprudence from human rights bodies though? The answer is yes.”8 With respect to human rights arguments used as a “shield,” as identified in the First and the Second Model Situations, Desierto has observed that “[w]ithin the investment treaty regime, the State can assert its regulatory freedom to vindicate public interest or human rights concerns within the interpretation of the primary norm asserted to constitute the treaty breach (e.g. interpretation of the iia standard of treatment alleged to have been violated such as fair and equitable treatment or indirect expropriation).”9 6 Ursula Kriebaum, “Foreign Investments & Human Rights – The Actors and Their Different Roles,” (2013) 10:1 Transnational Dispute Management, p. 13 [Kriebaum – Foreign Investments…]. 7 Susan L. Karamanian, “The Place of Human Rights in Investor – State Arbitration,” (2013) 17:2 Lewis & Clark Law Review, p. 444 [Karamanian]. 8 Luis González García, “The Role of Human Rights in International Investment Law,” in: N. Jansen Calamita, David Earnest, Markus Burgstaller, “The Future of icsid and the Place of Investment Treaties in International Law” (British Institute of International and Comparative Law 2013), p. 39. 9 Diane A. Desierto, “Public Policy in International Economic Law. The icescr in Trade, ­Finance, and Investment” (Oxford University Press 2015), p. 317. She added that “[i]t may also attempt to assert the issue to establish an independent first-order defence (e.g. “necessity” as a circumstance precluding wrongfulness under Article 25 of the Articles of State Responsibility, “non-precluded measures” under an iia provision, or the notion of regulatory freedom as an independent customary norm of international law).”

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Pahis even argues that “international investment tribunals have not only the authority but the obligation to consider international human rights norms while interpreting and applying bits.”10 He adds that “[n]either the limited jurisdiction of investment tribunals nor the applicable choice of law rules prevent the consideration of other international law in the interpretation of bits. In fact, other international law often plays a considerable role in the interpretation and application of bits.”11 The “human rights friendly” interpretative approach has been described by the annulment committee in Tulip v. Turkey as a “widespread sentiment that the integration of the law of human rights into international investment law is an important concern.”12 It is based on the belief that various international obligations undertaken by states should be interpreted in a way which ensures consistency between them.13 As Marrella observed: “The test of this decade for international investment law is when a decision needs to be made between ensuring the profits of a private investor and protecting human or environmental rights. The answer is certainly difficult, since a balance has to be made by arbitrators outside the specific context of human rights courts or international bodies. The unity of international law and not its fragmentation can provide the basis to reconcile conflicting rules.”14 In this author’s opinion, this approach is correct. It is consistent with the understanding that the conflict between international investment treaties and international human rights occurs at the moment of application (implementation) of the norms. It is only apparent when one looks at the black letter of law. Any such apparent conflict could be resolved by finding the proper meanings of norms included in the provisions of the treaties which are apparently in conflict, i.e. by effective interpretation. As noted by Kammerhofer, norms “are merely a frame of possible meanings and they may have a multitude of possible meanings. If a norm has multiple ­meanings (e.g., ‘A,’ ‘B’ and ‘C’), an organ authorized to apply a specific norm 10

11 12 13

14

Stratos Pahis, “Bilateral Investment Treaties and International Human Rights Law: Harmonization through Interpretation” (International Commission of Jurists 2011), p. 1 [Pahis]. Ibid, p. 17. Tulip Real Estate and Development Netherlands v. Turkey, icsid Case No. ARB/11/28, ­decision on annulment (30 December 2015), para. 86 [Tulip v. Turkey]. Andrea K. Bjorklund, “The Necessity of Sustainable Development?” in: Marie-Claire Cordonier Segger, Markus W. Gehring, Andrew Newcombe, “Sustainable Development in World Investment Law” (Kluwer Law International 2011), pp. 375–376. Fabrizio Marrella, “On the Changing Structure of International Investment Law: The ­Human Right to Water and icsid Arbitration,” (2010) 12 International Community Law Review, p. 359 [Marrella]. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:30PM via free access

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may choose any of the meanings. A decision in favour of ‘B’ is as legal as one for ‘C.’ The choice within the frame that makes up the norm is not determined by the norm. ‘One necessary right answer’ does not exist.”15 In light of the above, an analysis of the potential relevance of international human rights to the interpretation of bits is important. By allowing a “harmonized approach towards distinct areas of law,”16 a proper interpretation of bits can lead to a result where no conflict exists between human rights and international investment law. The interpretation of bits should be conducted in accordance with the vclt. Case law confirms the applicability of the vclt to investment arbitrations. The tribunal in Azurix v. Argentina expressly stated that “[t]he bit is an international treaty and should be interpreted in accordance with the interpretation norms set forth by the Vienna Convention on the Law of the Treaties (‘the Vienna Convention’), which is binding on the States parties to the bit.”17 Because the vclt reflects customary international law on treaty interpretation, it is applicable even if a particular state is not party to the vclt.18 15

Jörg Kammerhofer, “The Theory of Norm Conflict Solutions in International Investment Law,” in: Marie-Claire Cordonier Segger, Markus W. Gehring, Andrew Newcombe, “Sustainable Development in World Investment Law” (Kluwer Law International 2011), p. 90 [emphasis as in original]. See also: Chester Brown, “Bringing Sustainable Development Issues before Investment Treaty Tribunals,” in: Marie-Claire Cordonier Segger, Markus W. Gehring, Andrew Newcombe, “Sustainable Development in World Investment Law” ­(Kluwer Law International 2011), p. 187. 16 Ashfaq Khalfan, “International Investment Law and Human Rights, Preface,” in: ­Marie-Claire Cordonier Segger, Markus W. Gehring, Andrew Newcombe, “Sustainable ­Development in World Investment Law” (Kluwer Law International 2011), p. 54. 17 Azurix v. Argentina, icsid Case No. ARB/01/12, award (14 July 2006), para. 307 [Azurix v. Argentina]. See also for example Ceskoslovenska Obchodni Banka v. Slovakia, icsid Case No. ARB/97/4, decision on objections to jurisdiction (24 May 1999), para. 57: “[…] Such a construction of the terms of a treaty would be incompatible with the applicable international rules for the interpretation of these types of agreements. (Vienna Convention, art. 31(1).).” See also for example S.D. Myers v. Canada, uncitral, partial award (13 November 200), para. 200 [S.D. Myers v. Canada], in which the tribunal observed that “[i]t is appropriate for the Tribunal to examine the international law rules of interpretation.” In the next paragraph the tribunal quoted art. 31 of the vclt and based on these observations, it continued with interpretation of the nafta. 18 “As treaties, bits are to be interpreted in accordance with principles of public international law. Treaties are generally interpreted in accordance with the principles contained at Articles 31 to 33 of the 1969 Vienna Convention on the Law of Treaties. These principles would apply in interpreting a bit even if the State contracting parties were not parties to the Vienna Convention as they reflect customary international law.” See: Matthew Weiniger, “Jurisdiction Challenges in bit Arbitrations – Do You Read a bit by Reading a bit or by Reading Into a bit?” in: Loukas A. Mistelis, Julian D.M. Lew, “Pervasive ­Problems Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:30PM via free access

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For the purposes of the present chapter, art. 31(1), art. 31(3) and possibly art. 32 of the vclt are relevant. Articles 31 and 32 of the vclt “seem to provide a universal tool box in determining the meaning encapsulated in a conventional text. This box mainly provides three elements: the text; the context; and the object and purpose of a treaty reflecting a logical progression in the procedure of interpretation.”19 Art 31(1) of the vclt states as follows: “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” For the purposes of this book the requirement of a “good faith” interpretation is assumed. In any case, it would be “difficult to detect any evidence that an interpretation has been proffered in bad faith, still less that an interpretation in a judgment or arbitral award has been reached in bad faith.”20 The part “in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose” should be understood as the requirement to keep as central the text of the interpreted treaty. The application of all other rules of treaty interpretation is subject to this general rule, based on the specific words of the interpreted treaty.21 However, often this proves to be indecisive in the context of bits. There is no one “ordinary meaning” of broad terms typically present in bits. As was noted by McLachlan, using the example of the Fair and Equitable Treatment standard, an analysis of its ordinary meaning “may result in little more than an exchange of synonyms.”22 Also “context” is not very useful. It is understood as the “grammatical construction of the provision or phrase within which a word in issue is located.”23 in International Arbitration” (Kluwer Law International 2006), p. 254. For the applicability of the Vienna Convention in the investor – state arbitrations, see for example: Suez, Sociedad General de Aguas de Barcelona and Vivendi Universal v. Argentina, icsid Case No.  ARB/03/19, decision on liability (30 July 2010), paras. 211–215 [Suez v. Argentina], Grand River Enterprises Six Nations and et al. v. United States, uncitral Arbitration Rules, award (12 January 2011), para. 64 [Grand River v. the us], Canadian Cattlemen for Fair Trade v. United States, Ad hoc—uncitral Arbitration Rules, award on jurisdiction (28 January 2008), para. 45. 19 Roland Kläger, “‘Fair and Equitable Treatment’ in International Investment Law” ­(Cambridge University Press 2011), p. 40 [Kläger]. 20 Richard Gardiner, “Treaty interpretation” (Oxford University Press 2008), p. 148. [Gardiner]. 21 McLachlan, supra note 1, p. 399. 22 Ibid, p. 371. 23 Gardiner, supra note 20, p. 178.

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Context can be also derived from title, headings and chapeau. Only exceptionally will these elements have a real impact on the interpretation of a bit’s standards of protection. Finally, one should also analyze the object and purpose of treaties. It is understood that bits have two purposes: (i) the protection of investors and (ii) developing the economies of the contracting states. In this context, the preambles of bits should be taken into consideration to consider how to balance these purposes. However, typically, their analysis would be unhelpful, as in general neither the texts of bits nor their preambles contain any references to human rights. “In fact, it is exceptional to find any reference at all to human rights in bits. Only a few bits contain such references in their preamble. There are a few exceptions, for example European Free Trade Area – ­Singapore Free Trade Agreement,24 Canada – Colombia Free Trade Agreement25 or the 2007 Norway Model bit.26 A limited number of bits contain a provision dealing with non-investment issues. These provisions do not impose any human rights, labour law, or environmental obligations upon foreign investors.”27 However, the recent Indian Model bit imposes an explicit obligation on investors to comply with local law which “includes, but is not limited to,” inter alia, “law relating to human rights.”28 In addition, the preambles of some bits make reference to sustainable development.29 24 25

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“[…] REAFFIRMING their commitment to the principles set out in the United Nations Charter and the Universal Declaration of Human Rights” [emphasis as in original]. “Affirming their commitment to respect the values and principles of democracy and promotion and protection of human rights and fundamental freedoms as proclaimed in the Universal Declaration of Human Rights” [emphasis as in original]. This treaty is a free trade agreement. However, one of its chapter relates to investment protection and ­contains provisions typical for bits. “Reaffirming their commitment to democracy, the rule of law, human rights and fundamental freedoms in accordance with their obligations under international law, including the principles set out in the United Nations Charter and the Universal Declaration of Human Rights.” It must be noted, however, that this model bit was abandoned and none treaty based on this text ever entered into force. Patrick Dumberry, Gabrielle Dumas-Aubin, “How to Impose Human Rights Obligations on Corporations Under Investment treaties? Pragmatic Guidelines for the Amendment of bits,” (2012) Yearbook on International Investment Law & Policy 2011–2012, p. 574. Art. 12(1)(v) of the Indian Model bit, available at: https://www.mygov.in/sites/default/files/ master_image/Model%20Text%20for%20the%20Indian%20Bilateral%20Investment %20Treaty.pdf [accessed on 2 February 2017]. See for example the bit Canada – Peru: “Recognizing that the promotion and the protection of investments of investors of one Party in the territory of the other Party will be ­conducive to the stimulation of mutually beneficial business activity, to the

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Art. 31(2) of the vclt refers to the understanding of the “context” of interpretation. It is irrelevant for the analysis of the present dissertation. Art. 31(3) of the vclt reads as follows: “There shall be taken into account, together with the context: (a) Any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; (b) Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; (c) Any relevant rules of international law applicable in the relations between the parties.” The application of art. 31(3)(a) and 31(3)(b) of the vclt may be of limited importance: “Most iias are seen as separate from treaties dealing with ‘­regular’ inter-State matters and hence their ‘object and purpose’ is limited to the protection and promotion of foreign investment. Although subsequent agreements and subsequent State practice are relevant for the interpretation of a treaty, Article 31(2) and (3)(a) and (b) refer to subsequent agreements between the original parties of the iia and subsequent practice in the application of the iia.”30 On the contrary, art. 31(3)(c) is more relevant to the present analysis: “Article 31(3)(c) deals with the case where material sources external to the treaty are relevant in its interpretation. These may include other treaties, customary rules or general principles of law.”31 It “embodies a principle of systemic integration in treaty interpretation” and has two aspects: (i) positive, i.e. when interpreting a treaty one should refer to general principles of international law for all questions which the treaty does not itself resolve, either expressly or otherwise; and (ii) negative, i.e. when states enter into treaty obligations, they intend to act consistently with generally recognized principles of international law and with previous treaty obligations towards other states.32 ­development of economic cooperation between them and to the promotion of sustainable development.” 30 Freya Baetens, “The Kyoto Protocol in Investor-State Arbitration: Reconciling Climate Change and Investment Protection Objectives,” in: Marie-Claire Cordonier Segger, Markus W. Gehring, Andrew Newcombe, “Sustainable Development in World Investment Law” (Kluwer Law International 2011), p. 709 [emphasis as in original]. 31 Conclusions of the work of the Study Group on the Fragmentation of International Law: Difficulties arising from the Diversification and Expansion of International Law, (2006) ii:2 Yearbook of the International Law Commission, para. 18. 32 McLachlan, supra note 1, p. 373.

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International human rights treaties binding the contracting states to a bit which underlies a particular dispute contain “rules of international law applicable in the relations between the parties” within the meaning of the vclt.33 In a situation when human rights treaties do not bind the states – parties to a bit, human rights norms having a ius cogens nature and those which form part of customary international law remain important for the interpretation of the bit.34 The above finds certain support in case law. The tribunal in edf v. Argentina did not “call into question the potential significance or relevance of human rights in connection with international investment law,” even though it ruled that it was not relevant on the facts of that case.35 The tribunal in Micula v Romania expressly referred to vclt, stating that “in interpreting the bit, i.e., an instrument between two sovereign States, it may take into account, as directed by Article 31(3)(c) of the Vienna Convention on the Law of Treaties, any relevant rules of international law,” adding that in its analysis it “will be mindful of Article 15 of the Universal Declaration of Human Rights according to which everyone has the right to a nationality, and that no one shall be arbitrarily deprived of his nationality nor denied the right to change his nationality.”36 33

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See for example N. Jansen Calamita, “International human rights and the interpretation of international investment treaties: constitutional considerations,” in: Freya Baetens, “Investment Law within International Law. Integrationist Perspectives” (Cambridge University Press 2013), p. 178 [Calamita]: “Under this provision, such ‘relevant rules’ may in principle include international human rights treaties to which the parties to an investment treaty are also parties. Because of its general applicability, Article 31(3)(c) provides a potential gateway for reference to human rights instruments in the interpretation of investment treaties.” Similarly the annulment committee in Tulip v. Turkey observed that: “Article 31(3)(c) of the vclt directs that, in the interpretation of treaties, “any relevant rules of international law applicable in the relations between the parties” are to be taken into account. The relevant rules of international law cover all sources of international law. The only requirements of Article 31(3)(c) are that the rules are relevant and that they are applicable as between the States parties to the treaty to be interpreted.” See: Tulip v. Turkey, supra note 12, para. 87. Van Aaken, supra note 5, p. 498: “human rights or environmental law that has acquired the status of customary international law can thus be considered in the application of treaties under Article 31(3)(c) without checking if the state parties to the disputes are also state parties to the other treaty applicable to interpretation.” edf International, saur International and León Participaciones Argentinas v. Argentina, icsid Case No. ARB/03/23, award (11 June 2012), para. 912. Ioan Micula et al. v. Romania, icsid Case No. ARB/05/20, decision on jurisdiction and admissibility (24 September 2008), paras. 87–88.

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The annulment committee in Tulip v. Turkey referred to art. 31(3)(c) of the vclt and concluded that “[p]rovisions in human rights instruments,” dealing with the right to a fair trial, relevant for the case at hand, “and any judicial practice thereto are relevant to the interpretation of the concept of a fundamental rule of procedure as used in Article 52(1)(d) of the icsid Convention. This is not to add obligations extraneous to the icsid Convention. Rather, resort to authorities stemming from the field of human rights for this purpose is a legitimate method of treaty interpretation.”37 The tribunal in Al-Warraq v. Indonesia went even further and when interpreting the fet, it devoted a whole section of the award to meaning of the relevant human rights articulated in art. 14 of the ­i ccpr. It concluded that “the Claimant did not receive fair and equitable treatment as enshrined in the iccpr.”38 The tribunal in Urbaser v. Argentina also applied art. 31(3)(c) of the vclt, which resulted in a conclusion that the applicable bit “has to be construed in harmony with other rules of international law of which it forms part, including those relating to human rights.”39 There are, however, also opposite views concerning art. 31(3)(c) of the vclt, according to which: “The wording of Article 31(3)(c) vclt could be conceived as referring only to other substantive international law rules relevant in the ‘context’ of the provision that needs to be interpreted. Consequently, the consideration of other rules could be understood as being limited to rules related to the subject-matter of the iia, or the provision eiusdem generis at issue.”40 The eiusdem generis means “of the same kind” and requires referral to the rules concerning the same subject-matter.41 However, even if one agrees with that 37 38 39 40 41

Tulip v. Turkey, supra note 12, para. 92. Hesham T.M. Al-Warraq v. Indonesia, uncitral, final award (15 December 2014), para. 621. Urbaser et al. v. Argentina, icsid Case No. ARB/07/26, award (8 December 2016), para. 1200 [Urbaser v. Argentina]. Stephanie Barbara Leinhardt, “Some Thoughts on Foreign Investors Responsibilities to Respect Human Rights,” (2013) 10:1 Transnational Dispute Management, p. 13 [Leinhardt]. Although in the context of bit arbitrations this principle is mainly referred to in the context of mfn clauses, it is a principle of general application. On the eiusdem generis principle see, for example, Newcombe and Paradell: “[a]nother principle of textual interpretation is the ejusdem generis doctrine, i.e., ‘general words following or perhaps preceding special words are limited to the genus indicated by the special words.’ The principle derives from the fundamental rule of contract construction that the ‘meaning of a term is determined not in the abstract but in its context.’ This principle has been followed by some international tribunals, and could be used, for example, to interpret the so-called ‘war and civil disturbance’ or ‘losses due to war’ clause, present in some bits. These typically contain a list of situations covered by the clause including fairly specific and easily understandable expressions such as ‘war or other armed conflict, revolution […], revolt, insurrection or riot,’ but which interject other terms of a more elusive nature such as ‘state Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:30PM via free access

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view, it is submitted that international human rights can be considered as related to the subject-matter of bits. In other words, they may be related to the investment (or investor) concerned in a particular dispute. Otherwise, without this linkage to the subject-matter of the dispute, such arguments would not fall within the scope of jurisdiction of the arbitral tribunals hearing investment cases, and could not be considered at all. Finally, art. 32 of the vclt may also be potentially relevant to the analysis. It reads as follows: “Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) Leaves the meaning ambiguous or obscure; or (b) Leads to a result which is manifestly absurd or unreasonable.” On the one hand, typically this provision is “unlikely to assist” in the interpretation of bits.42 One reason for this is that access to the travaux préparatoires documents can be impossible (including for states) or at least difficult (for private parties).43 Another reason is that the conclusion of numerous bits was done without any prior genuine negotiations, being rather a good “photo opportunity.”44 On the other hand, art. 32 of the vclt must not be ignored. of national emergency.’ Arguably, the latter general expression could be interpreted as referring to another type of civil disturbance situation in the context of the former, more specific ones.” See: Andrew Newcombe, Lluís Paradell, “Law and Practice of Investment Treaties. Standards of Treatment” (Kluwer Law International 2009), p. 112 [Newcombe, Paradell]. Paparinskis describes eiusdem generis principle as “relevant for identifying the subject matter that has to be assessed from the perspective of favorability.” See: Martins Paparinskis, “mfn Clauses and International Dispute Settlement: Moving beyond Maffezini and Plama?” (2011) 26:2 icsid Review – Foreign Investment Law Journal, p. 41. 42 McLachlan, supra note 1, p. 372. 43 J. Romesh Weeramantry, “Treaty Interpretation in Investment Arbitration” (Oxford ­University Press 2012), p. 108. He explained that “[e]ven if access is available, the documentation or minutes kept of discussions might be (and often are) incomplete or lacking sufficient details to draw a well-grounded conclusion. And documentation that may appear complete may not reflect discussions that took place in corridors or meeting points outside the negotiation rooms. Moreover, many States parties to treaties, particularly from the developing world, do not have the governmental resources to document the preparatory work relating to treaties they enter.” 44 Lauge Skovgaard Poulsen, Damon Vis-Dunbar, “Reflections on Pakistan’s investmenttreaty program after 50 years: an interview with the former Attorney General of Pakistan, Makhdoom Ali Khan,” (April 2009) Investment Treaty News, available at: http://www.iisd .org/itn/wp-content/uploads/2009/04/ITN-April-2009.pdf, p. 3 [accessed on 2 February 2017]: “I asked the Ministry of Industries, who were responsible for bits at the time, how these treaties were signed. I was told that when the President, or Prime Minister, went Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:30PM via free access

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It cannot be totally excluded that with respect to a particular, applicable bit the travaux préparatoires will not only be accessible, but will be helpful in informing the meaning of the bit provisions. The following sections relate to the First and the Second Model Situations. They focus on whether, within the scope of jurisdiction of arbitral tribunals in investor – state arbitrations, states can successfully invoke their obligations to respect, protect and fulfil human rights as interpretative tools for a proper understanding of the Fair and Equitable Treatment standard and Expropriation when defending claims concerning alleged breaches of bits.45 As the case law dealing with the intersections between international investment law and human rights is limited, the following analysis must be theoretical in nature. For this reason, the following sections deal neither with all of the standards of protection commonly encountered in bits nor with every single aspect of those standards which are analyzed. The choice as to which standards (and which aspects thereof) are analyzed here has been determined by this author on the basis of his assessment of their connection with human rights. However, given the theoretical nature of these considerations, it cannot be excluded that certain aspects – which may appear relevant in some circumstances – are not analyzed below. ii Fair and Equitable Treatment a) General Remarks The vast majority of bits contain provisions which guarantee the Fair  and ­Equitable Treatment (fet) standard.46 It has been noted that it “has e­ xisted as  a

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abroad, our foreign missions would tell the Ministry that bits are ‘one of the doables.’ Since Pakistan had signed bits without any consequences for a long time, everyone simply considered the treaties a piece of paper, something for the press, a good photo ­opportunity – and that was the end of it” [emphasis as in original]. Patrick Dumberry, Gabrielle Dumas-Aubin, “When and How Allegations of Human Rights Violations can be Raised in Investor-State Arbitration,” (2012) 13 the Journal of World Investment & Trade, p. 360: “One example where a human rights-based argument could be used by the respondent State in arbitration proceedings is in the context of the application of the obligation for the host State to provide a fair and equitable treatment to investors (a provision typically found in modern bits). In the event that an investor claims compensation alleging that the host State has breach this obligation, the latter could argue that it acted in accordance with its own international obligations as existing under a human rights treaty. In other words, the State could raises human rights arguments to justify its own actions taken against a claimant investor.” Even if it is not provided in a particular investment treaty, it is likely to be applicable to potential disputes arising from the treaty on the basis of Most-Favored Nation Treatment. See: Newcombe, Paradell, supra note 41, p. 255. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:30PM via free access

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sleeping beauty for about fifty years tucked away in a number of documents but was rarely, if ever, kissed awake.”47 With the development of the field of international investment law it became probably the most frequently invoked standard in bit arbitrations.48 The fet standard is considered to be one of the “absolute” standards. This means that it establishes a certain standard of conduct required from host states, independently from how the same host state treats its own nationals or nationals of any other state.49 “Absolute” standards contrast with “­ relative” standards, such as the National Treatment and the Most-Favoured Nation Treatment. Such “relative” standards require a “comparison” between the treatment accorded by the host state to the investor and to another subject (a “comparator”).50 Only after such a comparison is made is it possible to determine whether a “relative” standard has been violated. The text of a typical provision containing the fet standard does not provide the reader with any guidelines as to how interpret it in accordance with the “ordinary meaning,” as required by art. 31(1) of the vclt. By way of example, one can look at art. 3(2) of the Australia – Poland bit, which reads as follows: “A Contracting Party shall ensure fair and equitable treatment in its own territory to investments and activities associated with investments.” Some bits provide a reference to principles of international law in those provisions containing the fet standard. For example, art. III(1) of the Poland – Canada bit reads as follows: “Investments or returns of investors of either Contracting Party shall at all times be accorded fair and equitable treatment in accordance with principles of international law and shall enjoy full protection and security in the territory of the other Contracting Party.” References to international law can also be found in the texts of some bits, as for example in art. 1105(1) of the nafta: “Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.” As can be noted, the text of the respective provisions allows for various interpretative approaches. In addition, any general analysis of the fet standard 47 48 49 50

Christoph Schreuer, “Fair and Equitable,” (2005) 2:5 Transnational Dispute Management, p. 1 [Schreuer]. Rudolf Dolzer, Christopher Schreuer, “Principles of International Investment Law” ­(Oxford University Press 2012), p. 130 [Dolzer, Schreuer]. Joshua P. Meltzer, “Investment,” in: Simon Lester, Bryan Mercurio, “Bilateral and Regional Trade Agreements. Commentary and analysis” (Cambridge University Press 2009), p. 240. Ian A. Laird, “Betrayal, Shock and Outrage – Recent Developments in nafta Article 1105,” in: Todd Weiler, “nafta Investment Law and Arbitration: Past Issues, Current Practice, Future Prospects” (Transnational Publishers 2004), pp. 50–51 [Laird]. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:30PM via free access

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is possible only to a certain degree, because there is no universal wording of the provisions in the investment treaties which provide for such a standard.51 This reservation is of crucial importance, as the wording of the clause which provides for the fet standard in a particular bit is the starting point – and crucial factor – for its interpretation. As can be seen from the examples provided above, some bits simply guarantee the fet standard, whilst others link the standard to the protection guaranteed by international law or relate it to general principles of international law. Another general distinction can be made between bits containing provisions which guarantee the fet standard alone and those which link it to other standards, such as Full Protection and Security. The fet standard emerges from concepts such as good faith, venire contra factum propium and estoppel.52 It is a single standard in the sense that the “fair and equitable” adjectives should be considered jointly, and not as two separate standards of “fair” and “equitable” treatment.53 The analyzed standard is considered to have the vaguest content when compared with other standards of protection, typically included in the bits. As noted by Kinnear with respect to art. 1105(1) of the nafta, this provision “comprises 26 words. Arguably, these have been the most controversial words in Chapter 11.”54 On the one hand, this may be considered as constituting a negative factor of the fet standard, granting too much discretion to arbitrators when deciding cases based on provisions worded in such a manner. On the other hand, it grants the fet standard a high degree of flexibility.55 Some commentators even describe the fet standard as a “catch-all” cause of action for investors.56 This is particularly true if one keeps in mind that a 51

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The treaties present “a diversity of formulations” of the clause. See: Ioana Knoll-Tudor, “The Fair and Equitable Treatment Standard and Human Rights Norms,” in: Pierre-Marie Dupuy, Ernst-Ulrich Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford University Press 2009), p. 315 [Knoll-Tudor]. Dolzer, Schreuer, supra note 48, p. 132; Todd J. Grierson-Weiler, Ian A. Laird, “Standards of Treatment,” in: Peter Muchlinski, Federico Ortino, Christoph Schreuer, “The Oxford Handbook of International Investment Law” (Oxford University Press 2008), p. 272 ­[Grierson-Weiler, Laird]. Dolzer, Schreuer, ibid, p. 133; Newcombe, Paradell, supra note 41, pp. 276–277. Meg N. Kinnear, Andrea K. Bjorklund, John F.G. Hannaford, “Investment Disputes under nafta. An Annotated Guide to nafta Chapter 11” (Kluwer Law International 2006), pp. 1105–1116. Suez v. Argentina, supra note 18, para. 187: “It is a flexible term that applies to all kinds of investments in all industries and economic endeavors.” Ryan Suda, “The Effect of Bilateral Investment Treaties on Human Rights Enforcement and Realization,” in: Olivier De Schutter, “Transnational Corporations and Human Rights” (Hart Publishing 2006), p. 101.

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s­ uggested purpose of the fet standard is “to fill gaps that may be left by the other standards.”57 Depending on the wording of a particular bit, the fet standard may apply either to investments, or to investments and investors.58 Despite its broad scope, the meaning of this standard of protection will always be closely linked to the facts and circumstances of each case, which makes it impossible to agree on one, abstract definition of the fet standard.59 It is important to take account of the situation as a whole, and not merely separate events: “The record as a whole – not isolated events – determines whether there has been a breach of international law.”60 The potential for a very broad meaning of the fet standard makes it relevant to the whole range of states’ activities, including those which seek to implement their human rights policies. This justifies why the fet standard is analysed when discussing the presence of human rights arguments in the First and the Second Model Situations. One major problem when trying to determine the meaning of the fet standard is whether it reflects customary international law or is an autonomous 57

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Dolzer, Schreuer, supra note 48, p. 132. In this sense: “Given the breadth of the treatment standard, claims of a breach of fair and equitable treatment can succeed where claims under more specific standards might fail.” See: Newcombe, Paradell, supra note 41, p. 255. See also: Santiago Montt, “State Liability in Investment Treaty Arbitration. Global Constitutional and Administrative Law in the bit Generation” (Bloomsbury Publishing 2009), p. 296 [Montt]; Alec Stone Sweet, Florian Grisel, “Transnational Investment A ­ rbitration: From Delegation to Constitutionalization?” in: Pierre-Marie Dupuy, Ernst-Ulrich ­Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford University Press 2009), p. 130. Newcombe, Paradell, supra note 41, pp. 262–263. mtd Equity and mtd Chile v. Chile, icsid Case No. ARB/01/7, award (25 May 2004), para. 118 [mtd v. Chile]. Similarly Mondev International v. United States, icsid Case No. ARB(AF)/99/2, award (11 October 2002), para. 118 [Mondev v. the us]: “A judgment of what is fair and equitable cannot be reached in the abstract; it must depend on the facts of the particular case.” See also Waste Management v. Mexico, icsid Case No. ARB(AF)/00/3, award, (30 April 2004), para. 99 [Waste Management v. Mexico]: “Evidently the standard is to some extent a flexible one which must be adapted to the circumstances of each case.” gami Investments v. Mexico, Ad hoc—uncitral Arbitration Rules, final award (15 November 2004), para. 97. However, this is not always strictly followed. For example, the arbitral tribunal in Glamis Gold v. the us analyzed whether separate actions violated the minimum standard of treatment under nafta. Only following such an analysis did it proceed to consider them together. See: Glamis Gold v. United States, Ad hoc— uncitral Arbitration Rules, award (14 May 2009), paras. 756–757, 824–825 [Glamis v. the us].

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standard which goes beyond the protection guaranteed under customary international law.61 Art. 1105 of the nafta is the most commonly known example of an fet standard interpreted as reflecting customary international law. It has been interpreted in the Free Trade Commission Notes of Interpretation.62 Under other bits, the fet standard is frequently interpreted as an autonomous one.63 As was observed by the tribunal in Tecmed v. Mexico, vinculating the fet standard with customary international law without such specific wording in the provision of the applicable bit would deprive that provision of any utility. This, in turn, would be contrary to the intention of the state – parties to the bit, who included such provision in the treaty.64 Following art. 31(1) of the vclt, bits shall be interpreted in accordance with the ordinary meaning to be given to the terms of the treaty. Therefore, an answer as to whether the fet standard in a particular case prescribes customary international law or is autonomous standard should depend on the wording of the bit applicable to a particular dispute.65 On one hand, this division “when applied to the specific facts of a case, may well be more apparent than real.”66 In some contexts the difference between 61

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Or, to put it in different words, whether the fet is autonomous or embodies the minimum standard of treatment of aliens as established in international law. See: Montt, s­ upra note 57, p. 298, Grierson-Weiler, Laird, supra note 52, p. 262. Also Glamis v. the us, supra note 60, para. 606: “The Tribunal notes that it finds two categories of arbitral awards that examine a fair and equitable treatment standard: those that look to define customary international law and those that examine the autonomous language and nuances of the underlying treaty language.” Notes of Interpretation of Certain Chapter 11 Provisions (nafta Free Trade Commission, July 31, 2001) [nafta Free Trade Commission Interpretation]. Técnicas Medioambientales Tecmed v. Mexico, icsid Case No. arb (AF)/00/2, award (29 May 2003), para. 155 [Tecmed v. Mexico]; mtd v. Chile, supra note 59, para. 112; Enron and Ponderosa Assets v. Argentina, icsid Case No. ARB/01/3, award, (22 May 2007), para. 258. Tecmed v. Mexico, ibid, para. 156. Knoll-Tudor observes that “to justify and bring enough proof as to the customary character of fet is a challenging operation with few chances to success” and that the fet of “conventional” nature does not cancel possible presence of the fet in customary international law. See: Knoll-Tudor, supra note 51, pp. 317–318. Glamis v. the us, supra note 60, para. 609; Suez v. Argentina, supra note 18, para. 184, Philip Morris Brands et al. v. Uruguay, icsid Case No. ARB/10/7, award (8 July 2016), para. 316 [Philip Morris v. Uruguay]. Saluka Investments v. Czech Republic, pca—uncitral Arbitration Rules, partial award (17 March 2006), para. 291 [Saluka v. Czech Republic]. Similarly CMS Gas ­Transmission v. Argentina, icsid Case No. ARB/01/8, award (12 May 2005) para. 284 [CMS v. ­Argentina]: “While the choice between requiring a higher treaty standard and that of equating it with

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the two types of the fet (prescribing customary international law and being an autonomous standard) may be irrelevant. On the other hand, in certain situations this difference may be important to the outcome of the dispute. For example, a breach of another international treaty does not equate to a breach of the fet under the nafta.67 However, this can be decided differently when the fet is applied as an autonomous standard. Furthermore, investors who invoke the fet standard as one which prescribes customary international law must prove its content, which is complicated. Even under nafta, which was interpreted by numerous tribunals, being the basis of a number of investment disputes – there is no uniform approach towards the exact content of the fet standard. One approach is that the fet prescribing customary international law may be the same standard as was identified in the Neer case. In that sense “the treatment of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.”68 Another possible approach is that, although customary international law concerning the treatment of aliens has not evolved since 1926, the threshold triggering its application is lower at present than it was before.69 The third possibility is to identify the evolution of customary international law since the Neer case was decided.70 Although, the international minimum standard might have relevance in the ­context of some disputes, the Tribunal is not persuaded that it is relevant in this case.” In the same sense Biwater Gauff v. Tanzania, icsid Case No. ARB/05/22, award and separate opinion (18 July 2008), para. 592 [Biwater v. Tanzania]: “the actual content of the treaty standard of fair and equitable treatment is not materially different from the content of the minimum standard of treatment in customary international law.” 67 nafta Free Trade Commission Interpretation, supra note 62, point 2.3. 68 L.F.H. Neer and Pauline Neer (u.s.a.) v. Mexico, 15 October 1926, available at: http://legal .un.org/riaa/cases/vol_IV/60-66.pdf [accessed on 2 February 2017, Neer v. Mexico]. 69 In Glamis v. the us case the tribunal observed that “it is difficult to establish a change in customary international law” and decided that “the fundamentals of the Neer standard thus still apply today.” It added that the possible evolution of customary international law concerns “a change in the international view of what is shocking and outrageous.” See: Glamis v. the us, supra note 60, paras. 602, 613 and 616. Moreover in para. 22 the tribunal observed: “that although the standard for finding a breach of the customary international law minimum standard of treatment therefore remains as stringent as it was under Neer; it is entirely possible that, as an international community, we may be shocked by State actions now that did not offend us previously.” 70 adf Group v. United States, icsid Case No. ARB(AF)/00/1, award (9 January 2003), para. 179: “The customary international law referred to in Article 1105(1) is not ‘frozen in time’

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as with the autonomous fet standard, its content is far from unambiguous, the burden of proof regarding its content does not lie exclusively on investors. Additionally, the differentiation has an impact on the line of reasoning and argumentation used in the proceedings. Tribunals hearing cases under the nata interpreted the fet standard commencing from the Neer case of 1926 and the subsequent evolution of customary international law until modern times.71 There is no reason for tribunals constituted under bits which provide for an autonomous fet standard to conduct a similar analysis.72 Another possible difference refers to allegations of discrimination. It is not clear whether or not the fet linked with customary international law provides for protection against discrimination.73 The autonomous fet standard does so, if the bit does not include a separate provision regulating discrimination.74 Under any of the approaches – whether the fet prescribes customary international law or is an autonomous standard – the tribunals must analyse (i) the substantive content of the fet,75 (ii) the threshold for the fet to be applied in a particular dispute,76 (iii) whether the threshold was met. The above differentiation between the fet standards, understood as the autonomous standard and one prescribing customary international law, is important and cannot be ignored. However, regardless of the decision on this issue in a particular dispute, it is possible to identify commonly accepted “elements” of the fet standard. This is understood to be the substantive content of the fet, as indicated in point (i) above. The “threshold” identified in point (ii) depends on the circumstances of the case,77 whilst point (iii) refers to a decision in a particular dispute. and that the minimum standard of treatment does evolve. The ftc Interpretation of 31 July 2001, in the view of the United States, refers to customary international law ‘as it exists today.’” It is equally important to note that Canada and Mexico accept the view of the United States on this point even as they stress that “the threshold [for violation of that standard] remains high.” See also: Merril & Ring Forestry v. Canada, Ad hoc – uncitral Arbitration Rules, award (31 March 2010), para. 213 [Merril & Ring v. Canada]. 71 Neer v. Mexico, supra note 68. 72 Dolzer, Schreuer, supra note 48, p. 139. 73 Methanex v. United States, Ad hoc—uncitral Arbitration Rules, final award on jurisdiction and merits (3 August 2005), Part iv, C, paras. 14 and 15 [Methanex v. the us]. 74 mtd v. Chile, supra note 59, para. 109. 75 Laird, supra note 50, pp. 53–54. 76 Knoll-Tudor, supra note 51, p. 321. 77 Ibid: “The arbitrator’s aim, in an initial phase, is to appreciate the situation of the state in order to situate it in a group of similar states and identify the average type of treatment that a reasonable state in similar conditions would offer to its investors. This rather

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With respect to the substantive content of the fet standard, some tribunals have attempted to provide a definition of the fet standard. None of these definitions has gained a common acceptance.78 Keeping in mind the problems of adopting one, universal and abstract definition of the fet standard, identification of its typical “elements” is a commonly accepted method of identifying its substantive content.79 This is a consequence of the broad and vague wording used in typical bit provisions containing the fet standard, which renders the interpretative tools provided by arts. 31 and 32 of the vclt of limited utility.80 abstract operation is necessary in order to determine the threshold at which fet has to be applied in a particular case. It aims at establishing a threshold which is anchored in reality and follows the logical path of the current world: an investor may not invest in Romania, acting and hoping to be treated as if he or she were in Switzerland.” 78 See for example: Tecmed v. Mexico, supra note 63, para. 154; mtd v. Chile, supra note 59, para. 113; Waste Management v. Mexico, supra note 59, para. 98, S.D. Myers v. Canada, supra note 17, para. 263. 79 Schreuer, supra note 47, p. 2; Dolzer, Schreuer, supra note 48, p. 145; Knoll-Tudor, supra note 51, p. 310. See also: Rompetrol Group v. Romania, icsid Case No. ARB/06/3, award (6 May 2013), para. 197 [Rompetrol v. Romania]: “It sees no benefit in engaging in an abstract debate as to whether Article 3(1), and in particular its reference to ‘fair and e­ quitable treatment,’ was or was not intended by the Parties simply to incorporate the ‘minimum standard’ under customary international law, still less to engage in any debate as to what that ‘minimum standard’ should now be understood to be. It prefers instead (in keeping with the approach adopted by other arbitral tribunals) to follow the ordinary meaning of the words used, in their context, and in the light of the object and purpose of the bit. In doing so, it will take into particular account the two general elements that other tribunals have found come into play in connection with claims to ‘fair and equitable treatment,’ namely the way in which the foreign investor or the foreign investment have been treated by the organs of the host State (whether in a regulatory context or otherwise), measured against the expectations legitimately entertained by the foreign investor in making its investment.” 80 Kläger, supra note 19, p. 45: “[…] it appears that the interpretative tools provided by Article 31 of the vclt are of little value for the identification of the concrete meaning of fair and equitable treatment. Especially the literal literal meaning of fair and equitable treatment has proved to be so vague that it may only be described by similarly vague terms the literal meaning of which is equally questionable. In addition, the adjacent context and the object and purpose are hardly more enlightening. These means of interpretation show, at best, some of the outer contours of the obligation or indicate contradictory approaches of how fair and equitable treatment could be construed. Remaining supplementary means of interpretation like the travaux préparatoires are also unable to solve this problem. The latter is because the negotiations relating to investment agreements rarely produce explanatory reports that could serve as supplementary means of interpretation; even if such material were available, it would not deliver a readily applicable formula, but would rather provide evidence that the negotiating parties did not know the meaning of fair and

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The elements presented below are identified based on situations in which the standard has been typically applied in the course of investor – state arbitrations. The “elements” of the fet standard do not constitute a closed list (numerus clausus). Not only it is numerus apertus, but it also evolves over time. For the purposes of the present analysis, the elements of the fet standards can be identified as follows: (i) good faith, (ii) protection of legitimate expectations, (iii) due process, (iv) prohibition of coercion and harassment, (v) transparency, (vi) prohibition of arbitrary and discriminatory treatment.81 Since a degree of overlap exists between these elements, it is not always possible to draw a clear line between the specific elements of the fet standard.82 First two selected elements of the fet standard are analyzed below from the perspective of the topic of the book. This by no means suggests that other elements are less important from the perspective of the fet standard. However, it is this author’s understanding that, when analyzing the First and the Second Model Perspectives, the elements discussed below are of crucial importance. b) Good Faith and the Issue of Human Rights Good faith is not only an element of the fet standard, but also one of the fundamental principles on which the standard is based.83

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equitable treatment either. Thus, any approach relying exclusively on the general rules of interpretation necessarily suffers from underdetermination […].” See for example Rumeli Telekom and Telsim Mobil Telekomunikasyon Hizmetleri v. Kazakhstan, icsid ARB/05/16, award (29 July 2008), para 609: “The parties rightly agree that the fair and equitable treatment standard encompasses inter alia the following concrete principles: – the State must act in a transparent manner; – the State is obliged to act in good faith; – the State’s conduct cannot be arbitrary, grossly unfair, unjust, idiosyncratic, – discriminatory, or lacking in due process; – the State must respect procedural propriety and due process. The case law also confirms that to comply with the standard, the State must respect the investor’s reasonable and legitimate expectations.” Newcombe, Paradell, supra note 41, p. 279. Waste Management v. Mexico, supra note 59, para. 138: “A basic obligation of the State under Article 1105(1) is to act in good faith and form, and not deliberately to set out to destroy

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It is well established that “action in bad faith against the investor would be a violation of fet.”84 Therefore, the presence of bad faith on the side of host states always leads to a breach of the fet.85 The tribunal in Frontier Petroleum v. Czech Republic observed that: “Bad faith action by the host state includes the use of legal instruments for purposes other than those for which they were created. It also includes a conspiracy by state organs to inflict damage upon or to defeat the investment, the termination of the investment for reasons other than the one put forth by the government, and expulsion of an investment based on local favouritism. Reliance by a government on its internal structures to excuse non-compliance with contractual obligations would also be contrary to good faith.”86 At the same time, a determination of existence of bad faith is not necessary to find a state in breach of the fet.87 As was observed by the tribunal in Tecmed v. Mexico, the fet standard requires the observance of good faith: “the commitment of fair and equitable treatment included in Article 4(1) of the Agreement is an expression and part of the bona fide principle recognized in international law, although bad faith from the State is not required for its violation.”88 As has already been explained, the present analysis is conducted based on a series of assumptions. One such assumption is that measures undertaken by a state in pursuit of its human rights obligations and alleged to be in breach of investor’s protection as guaranteed by bit are undertaken in good faith (i.e. they are truly undertaken for the stated purposes). In other words, it is assumed that the host state’s international human rights are not invoked in the course of arbitral proceedings as a mere excuse or as an ingenuine attempt to justify measures that are alleged to breach the bit.

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or frustrate the investment by improper means.” Other fundamental principles on which the fet is based are estoppel and venire contra factum propium. Dolzer, Schreuer, supra note 48, p. 157. See also for example Genin et al. v. Estonia, icsid Case No. ARB/99/2, award (25 June 2001), para. 367: “While the exact content of this standard [Fair and Equitable Treatment – author’s note] is not clear, the Tribunal understands it to require an “international minimum standard” that is separate from domestic law, but that is, indeed, a minimum standard. Acts that would violate this minimum standard would include acts showing a wilful neglect of duty, an insufficiency of action falling far below international standards, or even subjective bad faith” [emphasis as in original]. Frontier Petroleum Services v. Czech Republic, uncitral (1976), award (12 November 2010), para. 300. Mondev v. the us, supra note 59, para. 116; Glamis v. the us, supra note 60, para. 627; Loewen Group and Raymond L. Loewen v. United States, icsid Case No. ARB(AF)/98/3, award (25 June 2003), para. 132 [Loewen v. the us]. Tecmed v. Mexico, supra note 63, para. 153.

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In line with the above assumption, a host state invoking international human rights does not act in bad faith. If a measure is undertaken with the aim of realizing the state’s international human rights obligations, one cannot claim that the same measure was undertaken in bad faith. The burden of proof of showing that the measure alleged to breach the bit was undertaken in pursuit of the state’s international human rights obligations lies on the respondent. If this argument is successfully invoked by the respondent, any claim presented by the investor that the state acted in bad faith should be dismissed.89 It is possible that a state “targets” a particular investor by adopting measures which are “labelled” in human rights language. If this is the case, one cannot preclude the existence of bad faith on the part of the host state. Such a situation, although possible, is contrary to the above assumptions adopted for the sake of clarity of the arguments. It can be noted, though, that this aspect refers to facts of the case and evidence presented to the tribunal, rather than legal arguments. The above conclusion is relevant for the topic of the book. As described above, if an investor proves bad faith on the part of the host state when undertaking measures related to its investment, this leads to a determination that a breach of the fet standard occurred. Nevertheless, whenever a host state states undertakes actions in pursuance of its international obligations to respect, protect and fulfil human rights, the state acts in good faith. As a result, in such a situation the investor cannot successfully claim bad faith on the part of the respondent. Nevertheless, this does not mean that any measure undertaken by host states in good faith in pursuance of their international human rights is incapable of breaching a bit. It has only a limited impact on a final decision as to whether there was a breach of the fet standard. As described above, the existence of bad faith is not necessary to find that there was a violation of the fet. The already-quoted paragraph from the award rendered in Tecmed v. Mexico clarifies that bad faith on the part of the state is not required for finding a violation of the fet standard.90 The tribunal in cms v. Argentina confirmed that a “deliberate intention or bad faith” in adopting the measures alleged to be in breach of the fet can aggravate the situation, but “are not an essential element of the standard.”91 Therefore, measures adopted by host states can breach the 89 Leinhardt, supra note 40, p. 13: “Taking the example of the fet standard, the definition of what is a treatment in accordance with good faith would also need to consider what is in accordance with hr standards.” 90 Tecmed v. Mexico, supra note 63, para. 153. 91 cms v. Argentina, supra note 66, para. 280. The same approach was adopted by the tribunal in Loewen v. the us: “Neither State practice, the decisions of international tribunals

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fet even if they were adopted in good faith. In the analyzed context, by this term it is understood that the measure was adopted in pursuance of the state’s human rights obligations. In summary, measures undertaken by states in genuine pursuance of their international obligation to respect, protect and fulfil human rights cannot constitute measures in bad faith when analyzing the fet standard. However, even those measures undertaken by states with the purpose of realizing states’ international obligations to respect, protect and fulfil human rights, being therefore undertaken in good faith, are not – by this reason alone – precluded from constituting a possible violation of the fet standard. Although these circumstances will prove states’ good faith, this by itself does not preclude a possible breach of the fet standard. A tribunal will need to analyze other elements of the fet in order to decide whether, in a particular case, the fet standard was violated. c) Legitimate Expectations and the Issue of Human Rights One of the elements of the fet standard are the legitimate expectations of investors.92 They are even considered to be a “dominant” or “key” element of the fet.93 Legitimate expectations as an element of the fet standard protect investors’ expectations which (i) existed at the moment of making the

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nor the opinion of commentators support the view that bad faith or malicious intention is an essential element of unfair and inequitable treatment or denial of justice amounting to a breach of international justice.” See: Loewen v. the us, supra note 87, para. 132. Besides the fet standard, legitimate expectations can play a role also when analyzing indirect expropriation. See: Dolzer, Schreuer, supra note 48, p. 115. The relationship between the legitimate expectations under the fet and under the indirect expropriation is not clear. See for example Stephen Fietta, “Expropriation and the “Fair and Equitable” Standard. The Developing Role of Investors’ “Expectations” in International Investment Arbitration,” (2006) 23:5 Journal of International Arbitration, p. 375: “The guiding principles that have been applied by tribunals in deciding whether or not a breach of the claimant’s expectations should be sufficient to establish state liability under the “expropriation” head or the “fair and equitable” one, or both together, or indeed neither of them, remain somewhat unclear.” For cases regarding the legitimate expectations in the context of the indirect expropriation, see for example: Tecmed v. Mexico, supra note 63, Waste Management v. Mexico, supra note 59, Methanex v. the us, supra note 73, International Thunderbird Gaming v. Mexico, uncitral, arbitral award (26 January 2006) [Thunderbird v. Mexico], Metalclad v. Mexico, Ad hoc—icsid Additional Facility Rules; icsid Case No. ARB(AF)/97/1, award (25 August 2000) [Metalclad v. Mexico]. Saluka v. Czech Republic, supra note 66, para. 302: “The standard of “fair and equitable treatment” is therefore closely tied to the notion of legitimate expectations which is the dominant element of that standard.” See also: Newcombe, Paradell, supra note 41, p. 279:

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i­ nvestments, (ii) are reasonable and legitimate, and (iii) have been relied upon by the investor to make the investment.94 Legitimate expectations can be understood as being based on two different sets of factual situations. On the one hand, they can be based on the stability and predictability of host states’ legal frameworks. Such legitimate expectations can be described as being “without assurances.”95 In such situations, investors cannot reasonably expect that the legal systems will not change at all with time. Host states’ legal frameworks are not frozen vis-à-vis investors because of the latter’s’ legitimate expectations as an element of the fet standard. However, legitimate expectations as an element of fet protect investors from revolutions in these systems, rather than evolution.96

“Tribunals have identified the protection of legitimate expectations as a key element of fair and equitable treatment.” 94 Biwater v. Tanzania, supra note 66, para. 602. See also for example LG&E v. Argentina, icsid Case No. arb 02/1, decision on liability (3 October 2006), para. 130 [LG&E v. ­Argentina]: “It can be said that the investor’s fair expectations have the following characteristics: they are based on the conditions offered by the host State at the time of the investment; they may not be established unilaterally by one of the parties; they must exist and be enforceable by law; in the event of infringement by the host State, a duty to compensate the investor for damages arises except for those caused in the event of state of necessity; however, the investor’s fair expectations cannot fail to consider parameters such as business risk or industry’s regular patterns.” 95 Montt, supra note 57, p. 360. See also: Newcombe, Paradell, supra note 41, p. 286. 96 For example the tribunal in El Paso v. Argentina observed that “[e]conomic and legal life is by nature evolutionary.” See: El Paso Energy International v. Argentina, icsid Case No. ARB/03/15, award (31 October 2011), para. 365. The tribunal further observed that: “[…] despite the standard reference to “the stability of the legal and business framework,” this cannot mean that when concluding a bit a State gives any guaranty to foreigners concerning its economic health and the maintenance of the economic conditions for business prevailing at the time of the investment” (para. 365) and “[t]he State has to be able to make the reasonable changes called for by the circumstances and cannot be considered to have accepted a freeze on the evolution of its legal system” (para. 371). It added in para. 374 that the conclusion on these issues would be different if “very specific commitments have been made” towards the investors (i.e. in the context of legitimate expectations based on specific representations) or when “the alteration of the legal framework is total” (i.e. when there is a revolution, rather than evolution, within the legal framework). See also for example amicus curiae submission in icsid case No. ARB/03/19, available at: http://www.ciel.org/Publications/SUEZ_Amicus_English_4Apr07.pdf [accessed on 2 February 2017], p. 19: “The notion that an investor can expect the legal framework to remain frozen in time is by nature incompatible with the foreseeable and foreseen reality of expected regulatory change, especially in the public health and environmental context.”

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On the other hand, legitimate expectations can be based on representations made by officials of host states.97 This group of legitimate expectations is based on commitments, representations and other undertakings, whether explicit or implicit, given or entered into by authorities of the host states. The legitimate expectations of investors are therefore a direct result of states’ actions.98 In this sense, legitimate expectations are considered to relate to the principle of estoppel and, in general, the consistency of states’ conduct. It is this author’s understanding that the legitimate expectations of investors should encompass host states’ international obligations to respect, protect and fulfil human rights. This is justified with respect to both types of legitimate expectations: based on the stability of the legal framework and based on the host state’s specific commitments. In this context, a clear opinion expressed by Kriebaum should be referred to: “[…] human rights considerations can find their way into investment law via the interpretation of certain concepts prevalent in that area of the law like “legitimate expectations.” […] There can be no legitimate expectations that are contrary to human rights law.”99 Similarly Simma and Kill stated that: “[…] a tribunal in interpreting what is and what is not a legitimate expectation should have reference also to the host State’s obligations under international human rights law. Whatever expectations an investor may have had, these must have included an expectation that the State would honour its international human rights obligations.”100 With respect to the first type of legitimate expectations, when an investor relies on the legal framework of a host state, it cannot rely solely on selected parts of legislation whilst ignoring other parts which are less favorable for it. National legal systems include international human rights treaties which have been ratified by host states. This leaves no place for doubts if the host state is a monist state. Then, the investors must inform their legitimate expectations by The situation could be different if there is a “stabilization clause” applicable to a particular investor. 97 Dolzer, Schreuer, supra note 48, p. 145. 98 Newcombe, Paradell, supra note 41, p. 279. 99 Ursula Kriebaum, “Human Rights of the Population of the Host State in International Investment Arbitration,” (2009) 10:5 the Journal of World Investment & Trade, p. 669. 100 Bruno Simma, Theodore Kill, “Investment Protection and Human Rights,” in: Christina Binder, Ursula Kriebaum, August Reinisch, Stephan Wittich, “International Investment Law for the 21st Century, Essays in Honour of Christoph Schreuer” (Oxford University Press 2009), p. 705. Similarly: Alexandra Diehl, “The Core Standard of International Investment Protection. Fair and Equitable Treatment” (Kluwer Law International 2012), pp. 512–513 [Diehl].

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international human rights treaties ratified by the host state, as they form part of the domestic legal orders. It was described in greater detail in the section dealing with the admissibility of claims that, in the case of dualist states, international law must be implemented into national legislation before it can be applied by the national authorities. However, even if international treaties are not implemented into national law, they bind dualist states at an international level. Therefore, it is submitted that also in case of dualist states, international human rights treaties ratified by host states should inform an understanding of investors’ legitimate expectations. They continue to be part of the host state’s legal framework, even if they are not directly applicable by the national authorities. This was confirmed by the tribunal in Urbaser v. Argentina, which commented as follows: “the host State is bound by obligations under international and constitutional laws. Therefore, the host State is legitimately expected to act in furtherance of rules of law of a fundamental character. The scope of such rules is broad.”101 As a consequence, if an investor ignores host states’ responsibilities undertaken in human rights international treaties or binding them as part of customary international law, its expectations cannot be considered as “legitimate” within the meaning of the fet standard. In the Second Model Situation (i.e. when an investor has been involved in human rights violations in the territory of a host state), the investor cannot ignore the fact that the state is obliged under relevant rules of international law – human rights treaties – to react and to stop violations.102 Therefore, the investor cannot ignore that host states have obligations under international law to respect, protect and fulfil human rights. Again, contrary expectations will not be legitimate and therefore will not be protected as an element of the fet standard. This approach finds support in academic literature. Leinhardt has observed that “[…] if considering whether legitimate expectations should be protected under the fet standard, the tribunal should also consider whether the investor violated its responsibilities to respect hr. If the population, for example, cannot be supplied with drinking water because the investor did not apply proper business standards, its expectations should not be taken as legitimate if the host terminates the ‘expectedly stable business environment’ in order to

101 Urbaser v. Argentina, supra note 39, para. 621. 102 It must be remembered that this analysis refers to human rights violations committed after an investment has been established. Otherwise, the claim could be declared inadmissible.

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protect its population’s basic needs.”103 Similarly Radi has commented that: “[…] When a state creates legitimate expectations with regard to the r­ egulatory framework, it knows – or at least it is expected to know – what the consequences of that specific economic/investment policy are with regard to human rights. Quite the contrary, when a state enacts measures for protecting human rights from a situation threatening their enjoyment by local societies in an unpredictable context, the circumstances are totally different. The state acts under urgency. It is in principle unable to foresee the necessity to enact special measures for safeguarding human rights. If, for instance, after having granted a licence for the production of a medicine, proof comes from the science revealing that this product is a threat to health, then, there is no alternative way for that state than to ban the production of the medicine. In the same vein, if scientific research concludes that a chemical product is dangerous for the environment, what else can the state do other than to ban its production? In these cases, the circumstances surrounding the conflict between the interests of the investor and the state and the absence of any other available means for protecting human rights justify in principle the infringement of the legitimate expectations of investors and turn legal the relevant state practice, which is deemed to be necessary for the protection of public interest and therefore to pass the test of proportionality.”104 Any assessment of the issue becomes more complex when analyzing it from the perspective of the First Model Situation (i.e. when an investor has not been involved in any human rights violations). As was already noted in Chapter 1, 103 Leinhardt, supra note 40, p. 23. This passage can suggest that Leinhard’s view is that investors are legally obliged to respect human rights. In this author’s view, this is correct only if the legal system of the host state imposes such obligations. No such obligations of a legally binding nature can be found in international law. This author’s approach is confirmed in the following passage of Leinhard’s submission on pp. 3–4: “[…] The present discussion on tncs’ responsibilities for hr builds upon the understanding that hr, as moral rights of right holders give rise to duties in order to become effective. Where the host state provides for a horizontal dimension of hr (Drittwirkung), investors could be held legally accountable in the event of non-compliance with national legislation to respect other individuals’ rights. At the international level, however, tncs generally do not have concrete legal hr duties, but they do nevertheless have less-precise moral responsibilities for hr such as, for example, responsibilities to respect hr. Accordingly, even if a host state does not have an effective system for the protection of hr in place, foreign investors are nevertheless morally obliged to avoid interfering with the enjoyment of the basic individual freedoms of their employees and the host’s population affected by their conduct.” 104 Yannick Radi, “The ‘Human Nature’ of International Investment Law,” (2013) 10:1 Transnational Dispute Management, p. 15 [Radi].

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the First Model Situation refers to states’ obligation to fulfil human rights, understood as the obligation to “to take legislative, administrative, judicial and practical measures necessary to ensure that the rights in question are implemented to the greatest extent possible.”105 Therefore it is states’ positive obligation to “take positive action to facilitate the enjoyment of human rights.”106 A state implementing new human rights policies faces two-fold international obligations: from the perspective of international human rights treaties and from the perspective of bits. Therefore, one should take into consideration states’ obligations in both fields. In line with art. 31(3)(c) of the vclt, the fet standard should therefore be interpreted in accordance with international human rights treaties.107 As a result, legitimate expectations should be informed by states’ obligations to fulfil human rights. This conclusion follows the reasoning of Pahis, who commented that the interpretation of the fet standard “could potentially be problematic if, in application, investors’ expectations conflicted with the requirements of international human rights law. Avoiding such a conflict requires informing what constitutes a “legitimate” expectation with what is required of States under human rights treaties.”108 It is also in line with the understanding that legitimate expectations “set the stage for a balancing process between the investor’s legitimate expectations and the state’s legitimate needs to develop its policies.”109 This approach could have been analysed by the tribunal in Foresti v. South Africa.110 This did not happen, however, because the case was discontinued. South Africa’s constitution provided for so-called affirmative action measures to redress the inequalities that existed post-apartheid, and it was in force ­before the signing of the South Africa–Italy bit applicable in the case. The investors claimed that the state’s measures violated their legitimate expectations. Wythes summarized it as follows: “Based on existing jurisprudence and the circumstances surrounding Foresti v. South Africa, a reasonable person might expect South Africa to have implemented domestic laws, as it did, 105 Manfred Nowak, “Introduction to the International Human Rights Regime” (Brill 2003), p. 49. 106 Dinah Shelton, Ariel Gould, “Positive and negative obligations,” in: Dinah Shelton, “The Oxford Handbook of International Human Rights” (Oxford University Press 2013), p. 566. 107 Assuming that state-parties to the bit are both parties to the same international human rights treaties. 108 Pahis, supra note 10, p. 38. 109 Thomas W. Wälde, Borzu Sabahi, “Compensation, Damages and Valuation,” in: Peter Muchlinski, Federico Ortino, Christoph Schreuer, “The Oxford Handbook of International Investment Law” (Oxford University Press 2008), p. 1089. 110 Piero Foresti et al. v. South Africa, icsid Case No. ARB(AF)/07/01, award (4 August 2010).

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to  address the racial inequalities. Thus the likely argument of the Investors, that the fet clause entitles them to assume that their ‘legitimate expectations’ would be respected, prima facie should not hold true; more specifically, the question of whether or not the South African government’s introduction of the bee policies would constitute a violation of the Investors’ ‘legitimate expectations’ would likely be decided in the negative. Thus it is to be concluded that due to the nature of the policies and, a fortiori, South Africa’s unique position post-apartheid would not allow for such expectations of the Investors to be considered ‘legitimate.’”111 To sum up this part, it can be said that the legitimate expectations of investors based on the stability of the host state’s legal framework encompass states’ international obligations to respect, protect and fulfil human rights. This is correct with respect to both, monist and dualist states. It is now a proper place to turn attention to the second type of legitimate expectations, namely those based on commitments, representations and other undertakings, whether explicit or implicit, given to a particular investor or entered into by the authorities of host states. One can imagine a possible argument that, if specific representations and/ or commitments are made by agents of the state to an investor, the investor’s legitimate expectations are framed by such representations and are relied upon even if they are not in line with the state’s international human rights obligations. In other words, the argument could be that for the purposes of assessing the scope of an investor’s legitimate expectations that are protected by the fet standard, if such expectations are based on representations contrary to the state’s international human rights obligations, the representations overrule the investor’s responsibility to take account of the state’s international human rights obligations. One can imagine that, following a lapse of time after the initial representations were made, the policy of the state changes. The state undertakes measures of self-correction, seeking to comply with its international human rights obligations. That could be questioned by an investor as being contrary to the state’s previous representations and, consequently, as being in breach of the investor’s legitimate expectations as an element of the fet standard. This is a situation falling within the First Model Situation, as the investor did not violate any human rights, but nevertheless the new measures adopted by the state impact on his investment. 111 Annika Wythes, “Investor–State Arbitrations: Can the ‘Fair and Equitable Treatment’ Clause Consider International Human Rights Obligations?” (2010) 23 Leiden Journal of International Law, p. 251.

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It must be remembered that legitimate expectations as an element of the fet standard must (i) have existed at the moment of making the investments, (ii) have been reasonable and legitimate and (iii) have been relied upon by the investor to make the investment. The last of the conditions is important in this context. If it is to be met in a particular case, certain additional requirements must also be met in order to allow an investor to rely on legitimate expectations as part of the fet standard. First, the specific representations (or commitments) must have been made (or given) by an agent whose actions are attributable to the state.112 In this context, it is submitted that the specific representations made by representatives of the state, and any direct commitments, do not relieve the investor from the duty to act as an experienced business actor and to take reasonable decisions. If this is agreed upon, this author can see no reason why an investor could fail to take into account the state’s obligation to respect, protect and fulfil human rights, even if the investor received representations or commitments made by agents of the state which are contrary to these obligations.113 112 With respect to the first requirement see, for example, Waste Management v. Mexico, supra note 59, para. 98: “In applying this standard [Fair and Equitable Treatment under art. 1105 nafta – author’s note] it is relevant that the treatment is in breach of representations made by the host State which were reasonably relied on by the claimant.” Similarly Metalclad v. Mexico, supra note 92, para. 89: “Metalclad was entitled to rely on the representations of federal officials and to believe that it was entitled to continue its construction of the landfill. […].” See also Thunderbird v. Mexico, supra note 92, para. 147: “[…] the concept of “legitimate expectations” relates, within the context of the nafta framework, to a situation where a Contracting Party’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure by the nafta Party to honour those expectations could cause the investor (or investment) to suffer damages.” The second requisite may be described in other words that a representation “must have been provided by a competent official acting within his or her jurisdiction.” See: Montt, supra note 57, p. 364. 113 An additional argument in support of this view is the possible relevance of the oecd Guidelines for Multinational Enterprises, according to which investors whose home states are oecd states are expected inter alia to “respect human rights, which means they should avoid infringing on the human rights of others and should address adverse human rights impacts with which they are involved,” “within the context of their own activities, avoid causing or contributing to adverse human rights impacts and address such impacts when they occur” and “seek ways to prevent or mitigate adverse human rights impacts that are directly linked to their business operations, products or services by a business relationship, even if they do not contribute to those impacts.” See: oecd Guidelines for Multinational Enterprises 2011 Edition, available at: http://www.oecd.org/ daf/inv/mne/48004323.pdf [accessed on 2 February 2017], p. 31. Although of course the

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Furthermore, legitimate expectations should not be based on specific representations made contrary to law.114 Any expectations contrary to states’ obligations to respect, protect and fulfil human rights would be contrary to law. These obligations of states form part of states’ legal frameworks. This is certainly correct with respect to monist states. This author submits that this conclusion is also correct with respect to dualist states. This is based on an understanding that international obligations undertaken by states, even if they were not implemented into domestic legislation, are part of the legal framework of dualist states (i.e. they remain binding at an international level). For the purposes of assessing legitimate expectations, the legal framework should be understood in a broad manner, as encompassing both – domestic legislation and international treaties ratified by states. For the above reasons, even if an investor alleges a breach of legitimate expectations based on specific representations made by an agent of the host state which are contrary to the state’s international human rights obligations, the legitimate expectations of the investor should still encompass these obligations of the host state.115 Expectations contrary to the international human rights obligations of the host state, even if based on representations made by agents of the host state acting within his/her competence, are illegal and are therefore not protected as an element of the fet standard. d)

Impact of Human Rights on Legitimate Expectations with Respect to Privatized Sectors As was noted in Chapter 1, the privatization of public services is important for the topic of this book. This raises the question whether the influence of host oecd Guidelines for Multinational Enterprises do not bind investors, they can be used as a tool when analyzing which expectations are “legitimate.” 114 Montt, supra note 57, p. 364: “[…] representations must be legal, or at least, not contra legem […].” 115 See also for example Pahis, supra note 10, p. 38: “But what of expectations borne of specific representations made by the State? Should it be considered legitimate for an investor to rely upon an assurance that the investor could affirmatively violate a human right or be exempt from regulations aimed at fulfilling a human right? That such an assurance would likely violate domestic and international law and therefore be unenforceable, suggests that it would not be. In addition, it appears neither fair nor equitable on its face. What if, however, the original assurances were at the time understood by both parties to conform to international law, but that, because of changed or unanticipated circumstances, they no longer did? In this case, a harmonious interpretation of fet may be aided by considering the intent behind the creation and the breach of the expectations – specifically, whether the former was done in good faith and whether the latter was justifiable.”

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states’ international human rights obligations can have a greater impact on the fet standard in privatized sectors of the economy than in other sectors. In this context it is important to keep in mind that “[p]rivatisation does not affect the legal responsibility of the State under international human rights law. The actions that the State will need to undertake at the domestic level in order to avoid breach of its human rights obligations do change, however. […] States will need to focus more after privatization on the duty to provide protection against abuses by third parties.”116 From the perspective of states’ tripartite human rights obligations, the relevance of the obligation to respect human rights diminishes, whilst the ­obligations to protect and to fulfil human rights increases as a result of privatizing services that are important from the perspective of local communities’ human rights. As Manfred Nowak explained, “[a]s the state withdraws from areas relevant for human rights, e.g. by privatizing and outsourcing the health care, ­educational system, refugee care, security and prison administration, and leaves them for the free market to take over, opportunities for direct state interventions and consequently the state’s obligation to respect such rights are diminished. Yet, at the same time relevant obligations to fulfil and protect increase, which means that extensive transfer of human rights obligations to private persons may result in violation of the relevant human rights.”117 In other words, states’ negative obligation to refrain from infringing human rights becomes less important. This is a logical consequence of the limited scope for any direct state violations of human rights in situations where states no longer directly provide the relevant services themselves. Simultaneously, however, states’ obligations to undertake positive actions become relevant, i.e. the obligation to fulfil and protect human rights – for example by administrative, legislative and judicial activities, with the aim being to facilitate the enjoyment of human rights to the greatest extent possible and to ensure that private actors (who now provide the privatized services) do not infringe the human 116 Koen de Feyter, Felipe Gómez Isa, “Privatisation and Human Rights: an Overview,” in: Koen de Feyter, Felipe Gómez Isa, “Privatisation and Human Rights in the Age of Globalisation” (Intersentia 2005), p. 3. 117 Nowak, supra note 105, p. 49. Similarly: Ursula Kriebaum, “Privatizing Human Rights. The Interface Between International Investment Protection and Human Rights,” in: August Reinisch, Ursula Kriebaum, “The Law of International Relations – Liber Amicorum Hanspeter Neuhold” (Eleven International Publishing 2007), p. 173 [Kriebaum, Privatizing…]: “From a human rights’ perspective, States have an obligation to respect, protect and fulfil human rights of the population in all contexts, thus also with regard to foreign investment and privatization. Hence, when entering into privatization agreements they are under an obligation to make sure that they are able to honour their human rights obligations.”

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rights of local populations. States have a wide margin of appreciation regarding how to achieve these goals. Given that states’ international human rights obligations form part of the legal framework within which investors frame their legitimate expectations, investors must accept also such nature of states’ obligations in privatized sectors. This was acknowledged by the tribunal in Urbaser v. Argentina, which observed that the host state’s obligation “to ensure the population’s health and access to water” was “an important objective of the privatization of the water and sewage services, including the investment in this particular case.”118 It then added that the fet standard “is not focused exclusively on interests and expectations of a legal nature. It does include the actual social and economic environment of the host State, which is also part of the expectations the investor has to acknowledge when making its business decision.”119 As a result, the tribunal in Urbaser v. Argentina confirmed that the protection of a “basic human right” – in this case the basic water supply to the local ­population – “constitutes the framework within which Claimants should frame their expectations.”120 Support may also be found in the interpretation of legitimate expectations in “highly regulated sectors.” It is not uncommon for host states acting as respondents in investment disputes to argue that certain sectors of the investors’ activities are highly regulated. This would have particular relevance when one thinks about such fields of investment activities as, for example, the extraction of natural resources or tobacco. Foreign investors who decide to make investments in the territories of host states in this type of economic fields must be aware of the high level of regulation of such fields. By way of example, the approach taken by the tribunal in the Grand River v. the us case can be referred to. The tribunal observed that “trade in tobacco products has historically been the subject of close and extensive regulation by u.s. states, a circumstance that should have been known to the Claimant from his extensive past experience in the tobacco business. An investor entering an area traditionally subject to extensive regulation must do so with awareness of the regulatory situation.”121 An analogous approach should be adopted with respect to privatized sectors which remain important for people living in the territory of the host state.

118 119 120 121

Urbaser v. Argentina, supra note 39, para. 622. Ibid, para. 623. Ibid, para. 624. Grand River v. the us, supra note 18, para. 144. Although made with reference to the ­legitimate expectations when considering the expropriation, the tribunal indicated in para. 218 that its analysis has relevance also in fet context.

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This is to say, if one accepts the approach that foreign investors are expected to take additional, extra efforts to adapt their expectations regarding investments made in highly regulated sectors, the same should also be true of investments made in privatized sectors which remain important for local communities and the public interest of the host state. In other words, investments made in sectors where the state has a greater obligation to fulfil and protect human rights due to their privatization may require more diligence from investors with respect to human rights in order to consider their expectations as “legitimate” and therefore protected under bits.122 To conclude, the impact of the host state’s obligations to protect and/or fulfil human rights in privatized sectors on interpreting the concept of the legitimate expectations protected as an element of the fet standard is higher than in other sectors of investors’ activities. This conclusion refers to privatized fields of the economy which remain important for people living in the territory of the host state. The reason is that investors who make investments in such fields should be expected to be aware of host states’ obligations in the field of human rights. This is highly relevant, especially for the First Model Situation, where tribunals may be faced with “balancing” new policies (adopted by host states with the aim of achieving a better level of human rights protection) with the legitimate expectations of the investors.123 iii Expropriation a) General Remarks One of the fundamental attributes of state sovereignty is the right of states to expropriate alien property, even though expropriation is understood as “the most severe form of interference with property.”124 Generally, bits do not 122 Radi, supra note 104, p. 19: “Given that human rights norms have been in force since the aftermath of World War ii and that very often investors develop an activity in highly regulated sector, it can be considered in particular in the former that this ‘human rights normative environment’ gives them notice that a state measure may be enacted which affects their investment.” 123 Juan Pablo Bohoslavsky, Juan Bautista Justo, “The Conventionality Control of Investment Arbitrations: Enhancing Coherence Through Dialogue,” (2013) 10:1 Transnational Dispute Management, p. 1: “The simultaneous submission of a state to the international human rights systems and foreign investment regimes can generate a dilemma for governments, which becomes tangible when subjected to claims from those two fronts: either the state is liable for not taking the measures that are required by human rights covenants, or it does so by taking such actions and thus, affecting the interests of investors.” 124 Dolzer, Schreuer, supra note 48, p. 98. Timmers observed: “The right to expropriate is an inherent feature of sovereignty, and more specifically a state’s permanent sovereignty Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:30PM via free access

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­ rohibit expropriation, but focus on conditions which must be met if a state p decides to expropriate. Art. 4(1) of the Poland – Albania bit can serve as an example of a provision regulating expropriation: “Neither of the contracting Parties shall take, either directly or indirectly, measures of expropriation, nationalization or any other measure having the same nature or an equivalent effect against investments belonging to investors of the other Contracting Party, unless the measures are taken in the public interest, on a non-discriminatory basis and under due process of law and provided that provisions be made for effective and adequate compensation. […].” As there is no one, common wording of provisions regulating expropriations, the example above merely serves as an illustration. Other bits refer, for example, to “any measures depriving, directly or indirectly, an investor […] of an investment […].”125 Sometimes the analysis of indirect expropriation also refers to “a measure tantamount to nationalization or expropriation.” This is based on the wording of art. 1110 of the nafta, which was analyzed in a number of investment arbitrations.126 For the purposes of this book there is no need to engage in any detailed analysis of the differences between expropriation and nationalization. Although this author is aware of the differences between the two concepts, for the purposes of the present work it suffices to refer to both terms jointly.127 over its natural resources […].” See: Leonie Timmers, “The protection against expropriations in Venezuela: a right to property in theory?” in: Freya Baetens, “Investment Law within International Law. Integrationist Perspectives” (Cambridge University Press 2013), p. 131. 125 For example art. 6(1) of the Poland – Chile bit, which does not provide for the fourth requirement – due process: “Neither Contracting Party shall take any measures depriving, directly or indirectly, an investor of the other Contracting Party of an investment unless the following conditions are complied with: (a) the measures are taken in the public or national interest and in accordance with the law; (b) the measures are not discriminatory; (c) the measures are accompanied by provisions for the payment of prompt, adequate and effective compensation.” 126 Art. 1110(1) of the nafta reads as follows: “No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (“expropriation”), except: (a) for a public purpose; (b) on a non-discriminatory basis; (c) in accordance with due process of law and Article 1105(1); and (d) on payment of compensation in accordance with paragraphs 2 through 6.” 127 For example unctad, “Taking of Property,” unctad Series on issues in international investment agreements (United Nations 2000), p. 4 [unctad – Taking…]: “Usually, outright takings in all economic sectors or on an industry-specific basis have been l­abeled Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:30PM via free access

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An analysis of expropriation under international investment law can be done from three perspectives: (i) the interests protected against expropriation, (ii) the definition of what constitutes expropriation, (iii) the conditions under which states may lawfully expropriate alien  pro­ perty.128 With respect to the first perspective, it can be summarized that “investments” which fall within the meaning of the definition of an “investment” laid down in a particular bit, are typically interests that are capable of being expropriated. They cover both tangible property and intangible assets of economic value.129 When turning to the definition of expropriation, typically bits lack any such definition. As can be seen in the exemplary provision quoted above, it is typical that bits lay down the conditions under which expropriation is considered lawful, as opposed to defining expropriation per se. For the purposes of this book, expropriation can be understood as occurring when private assets (i.e. an “investment” as defined in the bit) are “taken” by authorities whose actions are attributable to the host state. Although, typically, expropriation is related to the transfer of the expropriated investment to the state, it also covers transfers to third parties – i.e. there is no requirement of “enrichment” on the side of the host state.130 Expropriatory measures are those undertaken as iure imperii acts, i.e. when the states act in their sovereign capacity, and not ‘nationalizations.’ Firm specific takings on the other hand have often been called ­‘expropriations.’” 128 Dolzer, Schreuer, supra note 48, p. 99. 129 August Reinisch, “Expropriation,” in: Peter Muchlinski, Federico Ortino, Christoph Schreuer, “The Oxford Handbook of International Investment Law” (Oxford University Press 2008), p. 410 [Reinisch]. In this context, a controversial issue is the extent to which contractual rights are capable of being expropriated. However, it is not necessary to enter into this discussion for the purposes of the present work. 130 Tecmed v. Mexico, supra note 63, para. 113: “Although formally an expropriation means a forcible taking by the Government of tangible or intangible property owned by private persons by means of administrative or legislative action to that effect, the term also covers a number of situations defined as de facto expropriation, where such actions or laws transfer assets to third parties different from the expropriating State or where such laws or actions deprive persons of their ownership over such assets, without allocating such assets to third parties or to the Government.” However, also the opposite view can be found in the case law, for example in Ronald S. Lauder v. Czech Republic, uncitral, award (3 September 2001), para. 215.

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iure gestionis. As explained by the tribunal in Siemens v. Argentina, “[w]hat all these decisions have in common is that for the State to incur international responsibility it must act as such, it must use its public authority. The actions of the State have to be based on its “superior governmental power.” It is not a matter of being disappointed in the performance of the State in the execution of a contract but rather of interference in the contract execution through governmental action.”131 When one seeks to define expropriation, a distinction must be drawn between direct and indirect expropriation. Direct expropriation involves the formal seizure of legal title to an investment. It is described as “an outright seizure or transfer of title”132 or “open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favor of the host State.”133 It is also known as formal expropriation. Indirect expropriation, also known as de facto expropriation, consists of measures which do not affect the formal title to the investment, which remains with the investor. It nevertheless deprives investors of “the possibility of utilizing the investment in a meaningful way.”134 Indirect expropriation results in “the effective loss of management, use or control, or a significant depreciation of the value, of the assets of a foreign investor.”135 It leads to a “substantial deprivation” of the investment, which amounts to a measure equivalent to expropriation.136 Having confirmed the requirement of substantial deprivation, the 131 Siemens v. Argentina, icsid Case No. ARB/02/8, award (6 February 2007), para. 253 [Siemens v. Argentina]. 132 Alpha Projektholding v. Ukraine, icsid Case No. ARB/07/16, award (8 November 2010), para. 408 [Alpha v. Ukraine]. 133 Metalclad v. Mexico, supra note 92, para. 103. 134 Dolzer, Schreuer, supra note 48, p. 101. 135 unctad – Taking…, supra note 127, p. 2. 136 Société Générale v. Dominican Republic, uncitral, lcia Case No. un 7927, award on preliminary objections to jurisdiction (19 September 2008), para. 64: “Such facts could also result in a form of indirect or creeping expropriation if there has been substantial deprivation of the benefits or value of the investment, if the investor has been deprived of the control, management or operation of the investment or some other such form of sufficient interference with the business has taken place.” See also: Alpha v. Ukraine, supra note 132, para. 408: “[…] in order to establish an indirect expropriation of this sort, it is necessary to demonstrate that the investment has been deprived of a significant part of its value.” Also for example Merril & Ring v. Canada, supra note 70, para: 145: “The standard of substantial deprivation identified in Pope & Talbot, and followed by many other decisions, both in the context of nafta and other investment protection agreements, is the appropriate measurement of the requisite degree of interference.” See also: Pope & Talbot v. Canada, interim award (26 June 2000), para. 102 [Pope & Talbot v. Canada].

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tribunal in Biwater v. Tanzania added that it must last “for at least a meaningful period of time.”137 This approach was confirmed for example by the tribunal in Telenor v. Hungary, which observed that “[i]n considering whether measures taken by government constitute expropriation the determinative factors are the intensity and duration of the economic deprivation suffered by the investor as the result of them.”138 The Metalclad v. Mexico case is often quoted in the analysis of indirect expropriation under bits.139 The tribunal observed in that case that indirect expropriation includes “covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably–to–be–expected economic benefit of property even if not necessarily to the obvious benefit of the host State.”140 In cme v. Czech Republic, the tribunal defined indirect expropriations as “measures that do not involve an overt taking but that effectively neutralize the benefit of the property of the foreign owner.”141 The term indirect expropriation also covers “regulatory expropriation,” namely situations where the investment is considered to be expropriated as a result of measures of general application.142 States as sovereigns have the “right to regulate,” understood as the power to regulate their domestic affairs.143 The differentiation must be made between “regulatory measure” and “regulatory expropriation.”144 The right to regulate is not absolute and if it amounts to regulatory expropriation, its exercise may lead to responsibility for indirect expropriations under bits.145 It was summarized by the tribunal in adc v. Hungary 137 Biwater v. Tanzania, supra note 66, para. 463. 138 Telenor Mobile Communications v. Hungary, icsid Case No. ARB/04/15, award (13 September 2006), para. 70 [Telenor v. Hungary]. 139 Metalclad v. Mexico, supra note 92. 140 Ibid, para. 103. 141 cme v. Czech Republic, uncitral, partial award (13 September 2001), para. 604. 142 It is this author’s understanding that regulatory takings and creeping expropriations constitute types of indirect expropriation. Indirect expropriation is a term which has a broader meaning, including regulatory and creeping expropriations, but also exceeding beyond them. However, other approaches exist which use all three terms interchangeably. 143 Saluka v. Czech Republic, supra note 66, para. 255: “It is now established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare.” 144 Reinisch, supra note 129, p. 434. 145 Methanex v. the us, supra note 73, Part iv, D, para. 7: “an intentionally discriminatory regulation against a foreign investor fulfils a key requirement for establishing expropriation. But as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:30PM via free access

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in the following way: “[i]t is the Tribunal’s understanding of the basic international law principles that while a sovereign State possesses the inherent right to regulate its domestic affairs, the exercise of such right is not unlimited and must have its boundaries. As rightly pointed out by the Claimants, the rule of law, which includes treaty obligations, provides such boundaries. Therefore, when a State enters into a bilateral investment treaty like the one in this case, it becomes bound by it and the investment-protection obligations it undertook therein must be honored rather than be ignored by a later argument of the State’s right to regulate.”146 This is an important issue for the present book. As Mann observed, in the light of states’ international obligations to protect and to fulfil human rights “the most critical issue that arises are the duties to legislate in order to implement international human rights obligations into domestic law and to enforce such legislation. In investment law terms, this relates to what has been described in some texts as the right of host states to regulate. At the same time, however, iias limit the right of states to regulate, and these limits may extend to the state duty to protect and promote human rights.”147 Simma added that nowadays “human rights compliance is a priority in any decent host State’s public policy agenda and thus it cannot but affect the regulatory spaces of a host State vis-a`-vis foreign investors and other States.”148 Finally, “creeping expropriation” is yet another category of indirect expropriation. It consists of a series of measures. Although any of these measures, taken alone and in isolation, does not amount to expropriation, the measures taken together as a whole have an expropriatory effect. It “may be defined as the slow and incremental encroachment on one or more of the ownership rights of a foreign investor that diminishes the value of its investment.”149

146 147

148 149

a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.” adc Affiliate and adc & admc Management v. Hungary, icsid Case No. ARB/03/16, award (2 October 2006), para. 423 [adc v. Hungary]. Howard Mann, “International Investment Agreements, Business and Human Rights: Key Issues and Opportunities” (International Institute for Sustainable Development 2008), available at: http://www.iisd.org/pdf/2008/iia_business_human_rights.pdf [accessed on 2 February 2017], p. 8 [Mann]. Bruno Simma, “Foreign Investment Arbitration: A Place for Human Rights?” (2011) 60 International and Comparative Law Quarterly, p. 577 [Simma]. unctad – Taking…, supra note 127, p. 11. This definition was relied upon for example by the tribunal in Compañiá de Aguas del Aconquija and Vivendi Universal v. Argentina, icsid Case No. ARB/97/3, award (20 August 2007), para. 7.5.17. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:30PM via free access

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­ xamples of steps which may result in creeping expropriation are “prohibition E of dividend distribution coupled with compulsory loans, imposition of administrators, prohibition of dismissal of staff, refusal of access to raw materials or essential export or import licences.”150 The tribunal in Generation Ukraine v. Ukraine defined creeping expropriation as “a form of indirect expropriation with a distinctive temporal quality in the sense that it encapsulates the situation whereby a series of acts attributable to the State over a period of time culminate in the expropriatory taking of such property.”151 It added that a “plea of creeping expropriation must proceed on the basis that the investment existed at a particular point in time and that subsequent acts attributable to the State have eroded the investor’s rights to its investment to an extent that is violative of the relevant international standard of protection against expropriation.”152 Referring to the third perspective, if an expropriation is to take place, generally bits lay down certain conditions for its legality. Typically, these conditions are: (i) public purpose, (ii) non-discrimination and non-­arbitrariness, (iii) prompt, adequate and effective compensation,153 and sometimes also (iv) due process.154 If the requirements set up in the applicable bit are met, the expropriation is legal (lawful). Therefore, there is no breach of the bit and the host state does not violate international law. Conversely, if those conditions are not met, the expropriation is illegal (unlawful). In such circumstances, the 150 The oecd Draft Convention on the Protection of Foreign Property, 12 October 1967, 7 ilm 117 (1968), Notes and Comments to Art. 3, p. 19, available at: http://www.oecd.org/investment/ internationalinvestmentagreements/39286571.pdf [accessed on 2 February 2017]. Similar examples were given by the tribunal in Feldman v. Mexico: “The Tribunal notes that the ways in which governmental authorities may force a company out of business, or significantly reduce the economic benefits of its business, are many. In the past, confiscatory taxation, denial of access to infrastructure or necessary raw materials, imposition of unreasonable regulatory regimes, among others, have been considered to be expropriatory actions.” See: Feldman Karpa v. Mexico, icsid Case No. ARB(AF)/99/1, award and separate opinion (16 December 2002), para. 103. 151 Generation Ukraine v. Ukraine, icsid Case No. ARB/00/9, award (16 September 2003), para. 20.22 [Generation v. Ukraine, emphasis as in original]. 152 Ibid, para. 20.26. Similarly for example the tribunal in Tradex Hellas v. Albania, although without an express reference to the concept of indirect expropriation: “whether the combination of the decisions and events can be qualified as expropriation of Tradex’ foreign investment in a long, step-by-step process by Albania.” See: Tradex Hellas v. Albania, icsid Case No. ARB/94/2, award (29 April 1999), para. 191. 153 “Prompt” compensation requires payment of compensation without undue delay. “Adequate” requires “full” compensation, i.e. fair market value of the expropriated investments. Effective requires the compensation to be paid in convertible currency. 154 Dolzer, Schreuer, supra note 48, pp. 99–100.

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consequences of unlawful expropriation should be analyzed in the same way as the consequences of any other acts of the host states in breach of international law. This can have an impact on the amount of compensation payable.155 As was the case in relation to the fet standard, the prohibition of illegal expropriations is considered as an “absolute,” as opposed to a “relative,” standard. This means that it establishes a certain standard of conduct which does not require a “comparison” between the treatment accorded to the investor and the treatment accorded to other subjects. b) Public Purpose and the Issue of Human Rights This section analyzes the place of host states’ international human rights obligations in the context of direct expropriation. As was briefly discussed above, typically bits do not prohibit expropriation but, rather, list the conditions which must be complied with when states intend to expropriate investments protected by bits. However, these conditions are relevant only for direct expropriation. Indirect expropriations by their nature cannot be lawful.156 This is because the parties are in disagreement as to whether or not the measures actually amount to expropriation. As a result, the host state believes that it did not expropriate the investment and does not consider itself as obliged to pay any compensation. Therefore, in the case of indirect expropriations at least one condition – the payment of compensation – is not met. If there is a direct expropriation, it remains to be determined whether it was lawful or unlawful. One of the conditions for lawful expropriation is the existence of a “public purpose,” which means that the expropriation must be undertaken “for” a public purpose.157 This should be assessed at the moment of expropriation. Even if the purpose of expropriation changes later on, it does not necessarily mean that the expropriation was not made for a public purpose.158 This condition may be worded differently, for example as “public 155 The issue of compensation is analyzed in more detail in the following chapter. 156 Irmgard Marboe, “Calculation of Compensation and Damages in International Investment Law” (Oxford University Press 2009), pp. 59–62. 157 See for example art. v of the Poland – Turkey bit: “Investments of investors of either Contracting Party shall not be nationalised, expropriated or subjected to measures having effect equivalent to nationalisation or expropriation (hereinafter referred to as “expropriation”) in the territory of the other Contracting Party except for a public purpose which is not discriminatory and against prompt, adequate and effective compensation. Such compensation shall […].” 158 Newcombe, Paradell, supra note 41, p. 372.

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interest,”159 “public utility,”160 “public use, in the public interest, or in the interest of national defence.”161 None of this alters the following observations. There is very little analysis of this condition in academic literature and in the case law of bit arbitrations. This is because the existence of a “public purpose” is a highly fact-driven circumstance. In reality, it does not give rise to significant legal uncertainty. As was noted by Newcombe and Paradell, “in practice, the public purpose requirement has rarely arisen in international expropriation cases and states have been afforded a wide margin of appreciation in determining whether an expropriation serves a public purpose. Thus, the public purpose requirement has generally not been a significant issue in iia jurisprudence.”162 In the few cases analyzing this requirement, states were granted a wide margin of appreciation to decide what fell within their “public purpose.” For example in the Goetz v. Burundi case, the tribunal stated that “in an absence of an error of fact or of law, of an abuse of power or of a clear misunderstanding of the issue, it is not the Tribunals’ role to substitute its own judgment for the discretion of the Government of Burundi of what are imperatives of ‘public need … or of national interests.’”163 This wide discretion cannot, however, be understood as making the public purpose condition a self-judging clause.164 As observed by the tribunal in adc v. Hungary, “a treaty requirement for “public interest” requires some genuine interest of the public. If mere reference to “public interest” can magically put such interest into existence and therefore satisfy this requirement, then this requirement would be rendered meaningless since the Tribunal can imagine no situation where this requirement would not have been met.”165 This author agrees that the public purpose condition of lawful expropriation encompasses states’ “non-investment” concerns, including human rights.166 This condition should be interpreted in a manner broad enough to also include 159 For example art. 5(1) of the bit Austria – Azerbaijan (“for a purpose which is in the public interest”). 160 For example art. 5(2) of the bit France – Sudan (“si ce n’est pour cause d’utilite publique”). 161 For example art. 5(1) of the bit United Kingdom – Philippines. 162 Newcombe, Paradell, supra note 41, p. 371. 163 Antoine Goetz et al. v. Burundi, icsid Case No. ARB/95/3, award (10 February 1999), para. 126. 164 Newcombe, Paradell, supra note 41, p. 372. 165 adc v. Hungary, supra note 146, para. 432 [emphasis as in original]. 166 Pia Acconci, “Is it Time to Integrate Non-investment Concerns into International Investment Law?” (2013) 10:1 Transnational Dispute Management, p. 1: “I refer to public interests as those related to the protection of non-investment concerns, such as the protection of

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the perspective of states’ international obligations to respect, protect and fulfil human rights. In this sense, the public purpose condition is relevant to both, the First and the Second Model Situations. With respect to the First Model Situation, as an example one can refer to the human right to water. The obligation to fulfil the human right to water requires states inter alia to “adopt comprehensive and integrated strategies and programmes to ensure that there is sufficient and safe water for present and future generations. Such strategies and programmes may include: (a) […] damming; […].”167 Thus, for instance, a state may intend to expropriate real estate from an investor in order to construct a dam and thereby pursue its human rights policy related to water supplies. This would constitute a “public purpose,” the condition which must be fulfilled to ensure that the expropriation is lawful. Similar conclusions can be made with respect to the Second Model Situation. By way of illustration, one can imagine a private investor who operates water distribution services following their privatization and who is unable to provide the service at the level required by the core obligations imposed on states with respect to the human right to water. Such a situation was illustrated in Chapter 1, which referred to the example of Aguas del Tunari v. Bolivia case. In such a context, the host state may decide to repossess the water distribution facilities in order to meet its core human rights obligations. The “public purpose” condition of lawful expropriation is met in such circumstances. Having said this one cannot forget that, even though lawful expropriation does not constitute an internationally wrongful act triggering host states’ international responsibility, one of its conditions is the payment of prompt, adequate and effective compensation. Therefore, the host state is obliged to pay the fair market value for the expropriated investment.168 At the same time, in certain situations, compensation for unlawful expropriation may be higher. This issue is analyzed in further detail in the following chapter. However, the importance of these conclusions is of limited significance in practice. In the modern world, direct expropriations are rare. Indirect expropriation is the “predominant form” of expropriation.169 As was noted by the tribunal in Telenor v. Hungary, “[n]owadays direct expropriation is the exception the environment and human rights. These concerns have become very important in the last decade owing to some changes which have occurred in the international practice.” 167 un Committee on Economic, Social and Cultural Rights, General Comment No. 15 (E/C.12/2002/11), para. 28. 168 See for example: saur International v. Argentina, icsid Case No. ARB/04/4, decision on jurisdiction and liability (6 June 2012), para. 376 [saur v. Argentina]. 169 Reinisch, supra note 129, p. 409.

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rather than the rule, as States prefer to avoid opprobrium and the loss of confidence of prospective investors by more oblique means.”170 States are hesitant to expropriate foreign investors in a direct manner, depriving them of legal titles to their property. Such actions have a negative impact on states’ reputations and on the future inflow of direct investments. This explains why indirect expropriations are much more prevalent in the practice of bit arbitrations. c) Proportionality Test and the Issue of Human Rights This section focuses on the place of host states’ international human rights obligations in the context of indirect expropriation. It also shows how some arbitral tribunals have benefited from the intellectual legacy of the ECtHR. When a tribunal is faced with an allegation of indirect expropriation, the crucial question is where to draw the line between “non-compensable regulatory and other governmental activity and measures amounting to indirect, compensable expropriation.”171 In other words, the essential issue is to decide whether the measures indeed had “an equivalent effect” to expropriation. As was correctly noted, “almost any governmental measure could be construed as an act of interference in the business of a foreign investor. The difficulty lies in distinguishing between regulatory measures that have to be compensated and measures that do not carry with them, under international law, the obligation to pay compensation. This has become an increasingly grey area.”172 Some factual situations leave no doubt as to whether there was a substantial detriment of the investment. It was correctly summarized by the tribunal in the Tokios Tokelés v. Ukraine case: “[…] one can reasonably infer that a diminution of 5% of the investment’s value will not be enough for a finding of ­expropriation, while a diminution of 95% would likely be sufficient.”173 ­However, among such extreme examples, there is the whole area of “grey” situations, in which the answer as to whether or not a deprivation was substantial is unclear. It is not possible to create abstract, clear percentage limits. As noted by the tribunal in Generation Ukraine v. Ukraine, “[i]t would be useful if it were absolutely clear in advance whether particular events fall within the definition of an “indirect” expropriation. It would enhance the sentiment of respect for legitimate expectations if it were perfectly obvious why, in the context of a particular decision, an arbitral tribunal found that a governmental action or ­inaction crossed the line that defines acts amounting to an indirect 170 171 172 173

Telenor v. Hungary, supra note 138, para. 69. Dolzer, Schreuer, supra note 48, p. 102. unctad – Taking…, supra note 127, p. 6. Tokios Tokelés v. Ukraine, icsid Case No. ARB/02/18, award (26 July 2007), para. 120.

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e­ xpropriation. But there is no checklist, no mechanical test to achieve that purpose. The decisive considerations vary from case to case, depending not only on the specific facts of a grievance but also on the way the evidence is presented, and the legal bases pleaded.”174 When assessing the impact of the measures on the investment, and its direct consequence of assessing whether indirect expropriation took place, one can identify two dominating doctrines: the sole effects doctrine and the police powers doctrine.175 According to the first doctrine, “[t]he effect of the measure upon the economic benefit and value as well as upon the control over the investment is the key question when it comes to deciding whether an indirect expropriation has taken place. Whenever this effect is substantial and lasts for a significant period of time, it will be assumed prima facie that a taking of the property has occurred.”176 Following the sole effects doctrine, the intention behind the measure adopted by the state is irrelevant when assessing whether substantial deprivation (and therefore – indirect expropriation) took place. The only relevant factors are the economic considerations – i.e. “solely the effect” counts.177 The sole effects doctrine was referred to, for example, in the Tecmed v. Mexico case, where the tribunal observed that “[t]he government’s intention is less important than the effects of the measures on the owner of the assets or on the benefits arising from such assets affected by the measures […].”178 Similarly the tribunal in Siemens v. Argentina case stated that the applicable bit “refers to measures that have the effect of an expropriation; it does not refer to the intent of the State to expropriate.”179 In the Santa Elena v. Costa Rica case the tribunal also adopted the sole effect doctrine.180 The tribunal denied the relevance of the fact that expropriation was performed for environmental reasons. It confirmed that this factor may be relevant as a condition of lawful expropriation, but was not relevant when assessing the nature of the expropriation: “[w]hile an expropriation or taking for environmental reasons may be classified as a taking for a public purpose, 174 175 176 177 178 179 180

Generation v. Ukraine, supra note 151, para. 20.29. Kriebaum, Privatizing…, supra note 117, p. 179. Dolzer, Schreuer, supra note 48, p. 112. Kriebaum, Privatizing…, supra note 117, p. 179. Tecmed v. Mexico, supra note 63, para. 116. Siemens v. Argentina, supra note 131, para. 270. Compañia del Desarrollo de Santa Elena v. Costa Rica, icsid Case No. ARB/96/1, final award (17 February 2000). Although that case concerned direct expropriation, the tribunal’s approach to the relevance of the intention behind a measure is equally relevant for indirect expropriation.

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and thus may be legitimate, the fact that the Property was taken for this reason does not affect either the nature or the measure of the compensation to be paid for the taking. That is, the purpose of protecting the environment for which the Property was taken does not alter the legal character of the taking for which adequate compensation must be paid. The international source of the obligation to protect the environment makes no difference.”181 The opposite approach is known as the police powers doctrine. The term “police powers” has been defined as the “inherent and plenary power of a sovereign to make all laws necessary and proper to preserve the public security, order, health, morality, and justice. It is a fundamental power essential to ­government, and it cannot be surrendered by the legislature or irrevocably transferred from government.”182 It is understood as a concept of customary international law and also as the “origin” of the “right to regulate” commented above in the context of regulatory expropriation.183 According to the police powers doctrine, the economic effects of measures undertaken by states are not the only factor which is relevant in determining whether there was an indirect expropriation. Tribunals should also consider “a range of other factors such as the purpose and context of the measure, the character of the measure and the interference in legitimate expectations of the investor. In some cases, as will be seen almost exclusive importance is attached to the purpose.”184 In Saluka v. Czech Republic, the tribunal observed that “the principle that a State does not commit an expropriation and is thus not liable to pay compensation to a dispossessed alien investor when it adopts general regulations that are “commonly accepted as within the police power of States” forms part of customary international law today.”185 It also identified that the exercise of states’ police powers refers to regulations adopted in a non-discriminatory manner, which were adopted in good faith and which are aimed at improving the general welfare.186 The tribunal in sd Myers v. Canada stated that it “must look at the real interests involved and the purpose and effect of the government measure.”187 The tribunal in LG&E v. Argentina observed that, in order to determine whether the measures constituted an expropriation under the

181 Ibid, para. 71. 182 Black’s Law Dictionary (Thomson Reuters 2014), p. 1345. 183 Mann, supra note 147, p. 18. 184 Kriebaum, Privatizing…, supra note 117, p. 180. 185 Saluka v. Czech Republic, supra note 66, para. 262. 186 Ibid, para. 255. 187 S.D. Myers v. Canada, supra note 17, para. 285.

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applicable bit, it “must balance two competing interests: the degree of the measure’s interference with the right of ownership and the power of the State to adopt its policies.”188 Between these two “extremes,” an intermediary approach can be identified. “Gradually, a middle way seems to be emerging between the two positions sketched above, with neither view gaining unqualified acceptance. […] Generally speaking, a more nuanced, and hence also somewhat nebulous concept of expropriation is evolving, which among other things takes into account the impact of regulation, its purpose, legitimate investor expectations, the degree and intensity of interference, the importance of the interests at stake, and even-handedness in the application of state measures.”189 This approach is confirmed by state practice. This can be seen in the attempts of some states’ treaty practice to define further details concerning the scope of their police powers. Canada serves as merely one such example. Based on its 2004 Model bit, Canada includes annexes to its modern bits, which seek to specify in detail the meaning of indirect expropriation. For example, annex A of the Canada – Slovakia bit, concluded in 2010, reads as follows: “a. The concept of “measures having an effect equivalent to nationalization or expropriation” can also be termed “indirect expropriation.” Indirect expropriation results from a measure or series of measures of a Contracting Party that have an effect equivalent to direct expropriation without formal transfer of title or outright seizure; b. The determination of whether a measure or series of measures of a ­Contracting Party constitute an indirect expropriation requires a ­case-by-case, fact-based inquiry that considers, among other factors: a. the economic impact of the measure or series of measures, although the sole fact that a measure or series of measures of 188 LG&E v. Argentina, supra note 94, para. 189. 189 Marc Jacob, “International Investment Agreements and Human Rights” (inef Research Paper Series on Human Rights, Corporate Responsibility and Sustainable Development 2010), p. 16 [Jacob]. See also: Radi, supra note 104, p. 16: “In the past mainly, arbitration practice seemed to be ‘Manichean’ inasmuch as it appeared to focus either on the effect of state measures (‘sole effect power doctrine’), favouring thereby investor’s interests or on their purpose (‘police power doctrine’), favouring, on the opposite, state’s interests. However, beyond the dogma of the ‘sole effect’ and ‘police power’ doctrines as asserted in obiter dicta and the divergences among tribunals as to the exact weight to be given to the various circumstances, […]. While being at the core of the case law, this balancing test is made explicit in the test of proportionality that has been used by some arbitration tribunals.”

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a Contracting Party have an adverse effect on the economic value of an investment does not establish that an indirect expropriation has occurred, b. the extent to which the measure or series of measures interfere with distinct, reasonable, investment-backed expectations, and c. the character of the measure or series of measures, including their purpose and rationale; and c. Except in rare circumstances, such as when a measure or series of measures are so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith, non-discriminatory measures of a Contracting Party that are designed and applied to protect legitimate public welfare objectives do not constitute indirect expropriation.” This citation proves that certain states intend to influence the development of international investment law via treaty-making. It shows that the interpretation of bits should not be limited to the sole effect of the measures only. It should take into account also the “intention” behind the measure, understood as their public purpose and rationale. It cannot be excluded that verification of the intention behind the measures can result in revealing that they were discriminatory.190 If a measure appears on its surface to be aimed at protecting public welfare, but in reality “targets” a specific investor only, it would be discriminatory and can be deemed to constitute indirect expropriation. This would be of particular importance with respect to regulatory expropriations, whereby a state adopts legislation which on its surface appears to have general application, but has special effects visà-vis a particular investor. This was expressly confirmed in the Methanex v. the us case, where the tribunal confirmed that “an intentionally discriminatory regulation against a foreign investor fulfils a key requirement for establishing expropriation.”191 Also the award in Pope and Talbot v. Canada refers to “nondiscriminatory regulation.”192 The “intermediary” approach should be adopted in future cases. Although, indeed, the concept of police powers seems “at first glance, to be a good entry 190 For example the tribunal in Eureko v. Poland, after revising the intention behind the measures adopted by Poland found that they were discriminatory. See: Eureko v. Poland, partial award (19 August 2005), para. 242 [Eureko v. Poland]. 191 Methanex v. the us, supra note 73, Part iv, D, para. 7. 192 Pope & Talbot v. Canada, supra note 136, para. 96.

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point for human rights arguments,” it must be admitted that “a wide concept of police powers entails the danger of an almost unlimited regulatory capacity of states to adopt new measures in the general interest.”193 Having specified the balancing process of the economic effect of the measure and the intention behind it (its public purpose) as the appropriate test to be applied in cases concerning allegations of indirect expropriations, it is submitted that one should apply the “proportionality test” when performing this balancing exercise.194 This approach was already applied in practice. The tribunal in the Tecmed v. Mexico case observed that “in addition to the negative financial impact of such actions or measures, the Arbitral Tribunal will consider, in order to determine if they are to be characterized as expropriatory, whether such actions or measures are proportional to the public interest presumably protected thereby and to the protection legally granted to investments, taking into account that the significance of such impact has a key role upon deciding the proportionality.”195 The tribunal added that “[t]here must be a reasonable relationship of proportionality between the charge or weight imposed to the foreign investor and the aim sought to be realized by any expropriatory measure.”196 The tribunal then referred to the ECtHR case of James v. the UK in order to explain what was understood by the proportionality test. It noted that there “must be a reasonable relationship of proportionality between the means employed and the aim sought to be realized” and there should be no “individual and excessive burden” imposed on a particular subject.197 193 Krommendijk, Morijn, supra note 3, pp. 433 and 436. 194 Alternative views oppose the applicability of the proportionality test in international investment law. See for example: N. Jansen Calamita, “The principle of proportionality and the problem of indeterminacy in international investment treaties,” (2013–2014) Yearbook on International Investment Law & Policy, pp. 157–200. He argues, inter alia, that the principle of proportionality is embedded in “constitutional considerations which are absent from the current investment treaty regime” (p. 160). He also opposes the reliance of arbitral tribunals on the ECtHR’s jurisprudence in this context, arguing that “[t]o understand proportionality in any meaningful sense means to understand the whole. As a consequence, applications of proportionality from one constitutional context to another do not travel well” (p. 182). 195 Tecmed v. Mexico, supra note 63, para. 122. 196 Ibid. 197 In Tecmed v. Mexico, supra note 63, para. 122, the tribunal referred to James et al. v. United Kingdom, application no. 8793/79, judgment (12 February 1986), paras. 50 and 63: “Not only must a measure depriving a person of his property pursue, on the facts as well as in principle, a legitimate aim “in the public interest,” but there must also be a reasonable relationship of proportionality between the means employed and the aim sought

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The tribunal then added that, in its opinion, the proportionality test as developed by the ECtHR was also applicable in bit arbitrations and should “apply to the actions of the State in its capacity as administrator, not only to its capacity as law-making body.”198 It made it clear that the proportionality test can be applied not only to regulatory expropriations but also to indirect expropriations in general. It was observed that the tribunal’s reliance on human rights case law of the ECtHR in the Tecmed v. Mexico case in the context of expropriation “has laid down the possibility for arbitration tribunals to look to other systems of law in determining the substance and content of rights.”199 The applicability of the proportionality test understood in the above manner was confirmed in the Azurix v. Argentina case.200 The tribunal agreed that “[t]he public purpose criterion as an additional criterion to the effect of the measures under consideration needs to be complemented.”201 It then referred to the award rendered in Tecmed v. Mexico and confirmed the reasoning and references to the jurisprudence of the ECtHR.202 Also the tribunal in the LG&E v. Argentina case confirmed the applicability of the proportionality test as presented by the tribunal in Tecmed v. Mexico.203

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to be realized […]. The requisite balance will not be found if the person concerned has had to bear “an individual and excessive burden” […]. The Court considers that a measure must be both appropriate for achieving its aim and not disproportionate thereto. […] non-­nationals are more vulnerable to domestic legislation: unlike nationals, they will generally have played no part in the election or designation of its authors nor have been consulted on its adoption. Secondly, although a taking of property must always be effected in the public interest, different considerations may apply to nationals and nonnationals and there may well be legitimate reason for requiring nationals to bear a greater burden in the public interest than non-nationals.” Tecmed v. Mexico, supra note 63, para. 122. Fola Adeleke, “Human rights and international investment arbitration,” (2016) 32:1 South African Journal on Human Rights, p. 15. Azurix v. Argentina, supra note 17. Ibid, para. 311. Ibid, para. 312: “The Tribunal finds that these additional elements provide useful guidance for purposes of determining whether regulatory actions would be expropriatory and give rise to compensation.” LG&E v. Argentina, supra note 94, para. 195: “With respect to the power of the State to adopt its policies, it can generally be said that the State has the right to adopt measures having a social or general welfare purpose. In such a case, the measure must be accepted without any imposition of liability, except in cases where the State’s action is obviously disproportionate to the need being addressed. The proportionality to be used when making use of this right was recognized in Tecmed […].”

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In that sense, it can be said that the tribunal in Tecmed v. Mexico and those which followed its approach benefited from the intellectual legacy of the ­ECtHR. Reinisch notes that the jurisprudence of the ECtHR on the protection of property rights “has been considered to be of particular relevance to modern investment arbitration”204 and that “a balancing approach may be regarded as inherent in the tests relied upon by many investment arbitral tribunals.”205 This approach would not be contrary to the police powers doctrine, understood as part of customary international law. If a measure would be considered by the tribunal as “proportional,” that would mean that it can be classified as falling within the police powers of a state. On the contrary, a measure not passing the proportionality test would not be considered as a valid exercise of a state’s police powers. In other words, the “proportionality test” could be understood as a condition which must be met in order to decide whether a measure is a valid exercise of police powers.206 Therefore, further guidance from the case law of human rights bodies is justified in the future. It would be a logical consequence of this approach to rely on the jurisprudence of the ECtHR, which has developed the proportionality test within the context of the right to property.207 The jurisprudence of the ECtHR concerning the proportionality test is wide and may be relied upon in bit arbitrations. The following passage can be understood as a summary of the ECtHR’s opinion on this matter: “An interference with the peaceful enjoyment of possessions must strike a fair balance between the demands of the general 204 Reinisch, supra note 129, p. 409. 205 Ibid, p. 450. 206 This understanding is confirmed, for example, in the Philip Morris v. Uruguay case, where the tribunal observed that “[…] in order for a State’s action in exercise of regulatory powers not to constitute indirect expropriation, the action has to comply with certain conditions. Among those most commonly mentioned are that the action must be taken bona fide for the purpose of protecting the public welfare, must be non-discriminatory and proportionate.” See: Philip Morris v. Uruguay, supra note 65, para. 305. 207 Alvarez notes: “Where a bit fails to provide criteria to distinguish direct takings from indirect or regulatory ones or to determine whether compensation is due in the latter instance, as appears to have been the case in the Tecmed and Philip Morris cases, echr analogies seem to be irresistible, though they are not, of course, determinative.” He adds, however, that the application of this analogy is less persuasive in the proceedings based on new generations of bits, which enumerate in more detail a balancing test to determine whether compensation is due in the case of a regulatory taking. See: José E. Alvarez, “The Use (and Misuse) of European Human Rights Law in Investor-State Dispute Settlement,” in: Franco Ferrari, “The Impact of eu Law on International Commercial Arbitration” (Juris, Forthcoming), available at: https://papers.ssrn.com/sol3/papers .cfm?abstract_id=2875089 [accessed on 2 February 2017], pp. 89–90 [Alvarez].

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interest of the community and the requirements of the protection of the individual’s fundamental rights […]. The concern to achieve this balance is reflected in the structure of Article 1 of Protocol 1 as a whole, including therefore the second sentence, which is to be read in the light of the general principle enunciated in the first sentence. In particular, there must be a reasonable relationship of proportionality between the means employed and the aim sought to be realized by any measure depriving a person of his possessions.”208 Of course, when one refers to the jurisprudence of the ECtHR the differences between the wordings of Protocol 1 to the echr and a bit applicable to a particular dispute must not be ignored.209 On the one hand, they should not prevent the tribunals from referring to the ECtHR’s jurisprudence. However, these differences explain why the concept of a margin of appreciation – understood as the state’s “freedom to act, maneuvering, breathing or “elbow” room, or the latitude of deference or error which the Strasbourg organs will allow to national legislative, executive, administrative and judicial bodies […]”210 – may be applied differently by the ECtHR and tribunals hearing bit cases. Following the approach of the ECtHR, in the context of bit arbitrations “the first step is a decision whether an interference has occurred. A second step is an analysis of whether this interference was proportional.”211 This second step, the proportionality test, implies analysis of three elements: (i) “suitability,” requiring that the measures are “appropriate or helpful” to achieve their objectives, which includes a causal relationship between the objective and the measure; (ii) “necessity,” requiring that the measures are “necessary to achieve the end and that the state takes the least restrictive and burdensome, but equally effective” measures;

208 Former King of Greece et al. v. Greece, application no. 25701/94, judgment (23 November 2000), para. 89. 209 Art. 1 of Protocol 1 to the echr reads as follows: “Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.” 210 Howard Charles Yourow, “The Margin of Appreciation Doctrine in the Dynamics of European Human Rights Jurisprudence” (Brill 1996), p. 13. 211 Kriebaum, Privatizing…, supra note 117, p. 184.

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(iii) “proportionality sensu stricto,” requiring that the impact of the measures on the situation of the investors “are not disproportionate or excessive compared with the public purpose.”212 When proportionality sensu stricto is considered, the legitimate expectations, already commented as an element of the fet standard, may also play a role when assessing indirect expropriation.213 For example, Radi stated that the tribunals should “take into account the objectives pursued by the measure, its effect as well as the legitimate expectations of the investor.”214 In this context, one can refer back to the types of legitimate expectations presented in the previous section, when discussing the fet standard. Legitimate expectations based on the stability of a regulatory framework will have a very limited, if any, significance in the context of expropriation. It is precisely legislative changes which cause the effect of regulatory expropriation. However, legitimate expectations based on “special representations” made to an investor can play a role as one of the factors to be balanced during the proportionality test.215 212 Krommendijk, Morijn supra note 3, p. 438. See also for example: Calamita, supra note 33, p. 175. 213 Reinisch, supra note 129, p. 448. 214 Radi, supra note 104, p. 17. 215 See for example: Methanex v. the us, supra note 73, Part iv, D, para. 10. See also: Radi, supra note 104, pp. 19–20: “[…] what comes into play here is the question of the legitimate expectations that have been created for the investor by a special commitment of the state, promising to not modify the regulatory framework that concerns the activity of the investor. But, as was already explained above, neither the existence of legitimate expectations nor the mere fact that these have been violated, suffices for establishing the liability of the host state. Under the principle of the ‘legitimate expectations,’ such an infringement has – at the second step of the test – to be balanced against the purpose pursued by the measure in question, that is to say that its legality is judged on the basis of the necessity of the public interest protected. According to the argument that was developed concerning the fet, the application of proportionality will lead to the conclusion that the infringement of the legitimate expectations of the investor is not justified for measures aiming at the long-term promotion of human rights. So, if a specific commitment was given by the host state to the investor and the state measure in question is found to pursue a long term human rights objective, the expropriation will have to be compensated in order to be legal. On the other hand, in principle, the protective measures regarding an unforeseeable situation will pass the ‘balancing test,’ especially in the cases where it is due to the (illegal) conduct of the investor that the enactment of a human rights measure became necessary. Thus, the balancing process that is inherent to the principle of ‘legitimate expectations’ reduces further the already narrowly defined situations, where a state measure that has

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The following observations may be made when one analyzes indirect expropriation from the perspective of the Second Model Situation, i.e. when an investor violates human rights. This should be considered from the perspective of states’ obligations to protect human rights. First of all, following the reasoning presented above when discussing the fet standard, investors’ legitimate expectations cannot ignore host states’ international human rights obligations. This is justified because special representations relied upon must not be contrary to law. Otherwise expectations cannot be “legitimate.” It has also already been explained that this has even greater significance in privatized sectors which remain vital for the local communities and the public interest of host states. Furthermore, in the Second Model Situation the objectives of the measures alleged to be tantamount to expropriation will be legitimate. One cannot imagine a more striking example of the legitimate purpose of measures than host states’ fulfilling their international obligation to protect human rights against violations committed by third parties (i.e. the investor).216 Finally, the effects of the measures (i.e. how substantial the deprivation of investment was and how long it lasted) must also be taken into consideration when applying the proportionality test. It is impossible to give a general, invariably-applicable answer as to what would be the outcome of such a balancing test in the Second Model Situation, since this is a highly fact-driven exercise. However, it can be assumed that if the effects of the measures do not result in a total deprivation of the investment, the two other factors (i.e. the purpose of the measures and the l­egitimate been enacted pursuant to human rights objectives will be found to breach the indirect expropriation provision.” 216 Karamanian, supra note 7, p. 16: “States have duties under treaties to protect, promote and fulfill human rights so a state that enacts non-discriminatory laws consistent with those duties surely would be undertaking to protect the legitimate public welfare.” Also Simma commented in this line: “Covenant obligations to protect can help inform the characterization of ‘creeping or indirect expropriations,’ where Methanex and Sedco (awards that affirm the host State’s police powers for environmental or social welfare-related objectives) stand against Metalclad, Tecmed, and Compania de Desarrollo de Santa Elena (that is, awards focusing solely on the impact of regulatory measures as ‘substantial deprivation of investment,’ disregarding social welfare or environmental objectives). Covenant obligations to protect can also inform the interpretation of elements like ‘public purpose,’ ‘non-discrimination,’ and ‘just compensation’ in lawful regulatory takings, similarly to the approach taken in the Mondev award which looked to the European Court of Human Rights’ interpretation of ‘public purpose’ in relation to the European Convention.” See: Simma, supra note 148, pp. 589–590 [emphasis as in original not included].

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e­ xpectations of the investor) would balance the test toward dismissing a claim alleging indirect expropriation.217 An example can be given based on the illustration presented in Chapter 1 – Glamis Gold v. the us.218 One can imagine an investor who owns real estate and plans to construct an open-pit mine in accordance with generally applicable legislation. At the same time, the location of the planned mine collides with an area which is important for the environment and for the local communities, in particular for indigenous peoples as was the case in Glamis Gold v. the us. As was explained by the un Committee on Economic, Social and Cultural Rights, the human right to take part in cultural life, as guaranteed in art. 15 of the iccpr, is important for the realization of the human rights of indigenous peoples. “The strong communal dimension of indigenous peoples’ cultural life is indispensable to their existence, well-being and full development, and includes the right to the lands, territories and resources which they have traditionally owned, occupied or otherwise used or acquired. Indigenous peoples’ 217 “Hence, relying on human rights law, the assessment of whether the state measure in question has the power to legally limit all economic use of investment without a compensation being due, should turn mainly on one objective factor: the nuisance generated by the investment. An investor cannot expect to cause nuisances with regard to human rights, without triggering any reaction from the state. It is so whatever the exact responsibility of the investor in the nuisance. Obviously, it is so with regard to an investor which consciously causes such a nuisance, because of the illegal nature of her activity or the violation of the rules regulating a lawful business. But it is so as well with regard to ‘innocent’ investors whose investment turns out to be harmful. Regarding these ‘innocent investors,’ they generally develop an investment in sensitive sectors of activity, about which scientific discoveries may reveal their risk for health, the environment… Therefore, investors have to be conscious of the fact that they evolve in a sector of activity whose regulation may be called to change in order to answer potential nuisances. In these situations of nuisance caused by investments, a state measure enacted to protect human rights which fully deprives an investor from her investment should not be considered as violating the provision on indirect expropriation, even if it is not compensated.” See: Radi, supra note 104, pp. 20–21. He added: “This conclusion would not be affected by the existence of a state specific commitment not to modify the normative framework. As for the ‘guilty investor,’ either in case she was granted with a license or a permit or she operates in a freezing normative framework on the basis of a specific commitment, the legitimate expectations thus created are obviously annihilated by their unlawful behaviour. They were indeed not granted with the legitimate expectation to cause nuisance in relation to human rights. Regarding innocent investors, it has been analyzed in relation with the fet provision, that the application of the ‘legitimate expectations’ principle led to the conclusion that a state measure aiming to protect human rights in an unpredictable and emergency context will pass the balancing test.” 218 Glamis v. the us, supra note 60.

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cultural values and rights associated with their ancestral lands and their relationship with nature should be regarded with respect and protected […].”219 Faced with such a situation, a state may introduce a specially-protected area, where construction of open-pit mine would require a more financial commitment, for example by introducing a requirement of backfilling the mine after its exploitation. This in turn may destroy the business plan, result in the project becoming economically unfeasible and consequently trigger a claim for expropriation. In the given example, one may assume that the proportionality test would result in the dismissal of a possible claim for indirect expropriation. At the same time, however, it shows how different factors may influence the proportionality test. Let us assume that, in the given example, the state does not introduce a requirement of backfilling the mine after its exploitation, but a requirement of a total prohibition of any construction on the land. In such a situation, it is much more probable that an application of the proportionality test would point towards the existence of indirect expropriation. Another alteration one can imagine is that the public purpose of the restrictions is not introduced because of a state’s international obligation to protect human rights. The genuine reason behind the restrictions would be that the land in question is close to a private plot of a local governor, who is afraid of the loss of value of property in the neighborhood of the mine. In such a situation, there is no doubt that the proportionality test would balance the decision towards the existence of indirect expropriation. The outcome of the exemplary balancing processes discussed above can also be affected by an attempt by the investor to frame its claim in a narrower way, to allege that its right to construct a mine was expropriated, rather than the broader “investment” per se. Such a decision was taken in Eureko v. Poland, where the tribunal decided that not only the shares in a company constituted an investment capable of being expropriated, but also that the “rights derived from” the shareholding were a separate investment capable of being expropriated.220 This is, however, an exceptional approach which is, again, highly fact specific and not generally accepted in the case law. Similar conclusions can be drawn with respect to the First Model Situation, i.e. when investors are not involved in human rights violation. This should be considered from the perspective of states’ obligations to fulfil human rights. In this context, the problem refers mainly to states’ “right to regulate,” understood 219 un Committee on Economic, Social and Cultural Rights, General comment No. 21 (E/C.12/GC/21), para. 36. 220 Eureko v. Poland, supra note 190, paras. 157, 241–243.

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as the powers to adopt legislation implementing human rights. Other forms of indirect expropriation are of less practical importance for the First Model Situation. As was noted in 2003 by the High Commissioner for Human Rights, states should ensure in bits that “they maintain the flexibility to use certain policy options to promote and protect human rights. Similarly, States should maintain the flexibility to promote cultural diversity and to implement special measures to protect vulnerable, marginalized, disadvantaged or poor people. Moreover, it is important to highlight the need for States to introduce new regulations to promote and protect human rights in response to changing conditions and knowledge of health, water, education, environmental and other issues that affect the enjoyment of human rights. In this context, broad interpretations of some provisions of investment agreements such as “expropriation provisions” could affect States’ capacity or willingness to regulate for health, safety or environmental reasons; […].”221 At the same time, as it was observed with respect to the provisions of bits providing for indirect expropriations that: “[s]uch clauses can make it prohibitively expensive for states to regulate for human rights reasons in areas such as labour rights, land use, the environment, and public health and safety where this would – deliberately or inadvertently – cause a sufficient economic impact on foreign investments.”222 In other words, states may adopt regulatory measures in pursuit of their international human rights obligations, which at the same time have an impact on foreign investments. Such measures may trigger allegations of indirect expropriation. These concerns can be illustrated by recent cases in which investors sought compensation for losses caused by anti-tobacco policies adopted in Uruguay and Australia. Domestic legislation introduced “plain packaging” requirements on the cigarettes packages. Such factual background underlies the proceedings in Philip Morris v. Australia and Philip Morris v. Uruguay cases.223 There were concerns that such claims could “undermine states’ right to adopt measures to protect public health.”224 Both cases concluded in favor of the respondents. In Philip Morris v. Australia the tribunal decided that the claims were 221 Economic, Social and Cultural Rights, Human rights, trade and investment. Report of the High Commissioner for Human Rights, E/CN.4/Sub.2/2003/9, 2 July 2003, para. 58, pp. 30–31. 222 Jacob, supra note 189, p. 14. 223 Philip Morris Asia v. Australia, uncitral, pca Case No. 2012-12; Philip Morris Brands et al. v. Uruguay, icsid Case No. ARB/10/7. 224 Carlos M. Correa, “Investment agreements: A new threat to health and trips flexibilities?” available at: http://www.bilaterals.org/spip.php?article23414&lang=en [accessed on 2 February 2017].

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­inadmissible, which “precluded” the tribunal “from exercising jurisdiction.”225 In Philip Morris v. Uruguay, in turn, the tribunal exercised its jurisdiction and dismissed the claims on the merits. From the texts of the awards it seems that the human rights dimension of the facts underlying the disputes was not relied upon by the respondents as a defense. In Philip Morris v. Uruguay the respondent relied on a treaty external to the applicable bit – who Framework Convention on Tobacco Control.226 However, besides that, there is a place for respondent states to also rely on international human rights in such proceedings. “Tobacco control has been conceptualized as ‘a human rights issue,’ and in particular as a component part of the right to health.”227 The un Committee on Economic, Social and Cultural Rights explained that the normative content of the human right to health, as enshrined in art. 12 of the icescr, imposes on states, the obligation to fulfil, which in this context requires states “to give sufficient recognition to the right to health in the national political and legal systems, preferably by way of legislative implementation, and to adopt a national health policy with a detailed plan for realizing the right to health.”228 It then added that “[t]he obligation to fulfil (promote) the right to health requires States to undertake actions that create, maintain and restore the health of the population. Such obligations include: (i) fostering recognition of factors favouring positive health results, e.g. research and provision of information; […] (iii) ensuring that the State meets its obligations in the dissemination of appropriate information relating to healthy lifestyles and nutrition, harmful traditional practices […].”229 The measures adopted by Uruguay and Australia, consisting of “plain packaging” requirements on the cigarettes packages, constitute a realization of the above commented obligation to fulfil the human right to health.230 Therefore, Philip Morris v. Australia and Philip Morris v. Uruguay cases can serve as examples 225 Philip Morris Asia v. Australia, uncitral, pca Case No. 2012-12, award on jurisdiction and admissibility (17 December 2015), para. 588. 226 The respondent relied on the jurisprudence of the ECtHR, but solely in the context of interpreting the meaning of a denial of justice. See: Philip Morris v. Uruguay, supra note 65, para. 495, footnote 696. 227 Valentina Vadi, “Public Health in International Investment Law and Arbitration” (Routledge 2013), p. 94. 228 un Committee on Economic, Social and Cultural Rights, General Comment No. 14 (E/C.12/2000/4), para. 36 [General Comment 14]. 229 Ibid, para. 37 [emphasis as in original]. 230 In this context also the obligation to protect can become important. As explained in the General Comment 14, “the failure to discourage production, marketing and consumption of tobacco […]” is an example of violation of the obligation to protect the human right to health. See: General Comment 14, supra note 228, para. 51. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:30PM via free access

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showing that states’ obligation to fulfil the human right to health can become relevant in bit arbitrations in the First Model Situation. Health concerns, as well as for example environmental issues, concern a public interest which may be analyzed from a human rights perspective, even if they are not universally considered as directly concerning the human rights of local communities or the international human rights obligations of host states.231 In this sense, there is no obstacle preventing states from relying on human rights arguments to defend their measures against allegations of bit violations. The above considerations allow one to conclude that, in the context of the First Model Situation, host states’ international obligations to fulfil human rights may have significance for the proportionality test, leading to a determination whether a “regulatory expropriation” has occurred or whether the legislative measures adopted by the state do not amount to expropriation at all. This conclusion can have a significant impact on the outcome of investment disputes. If a tribunal decides than a particular regulatory measure did not amount to indirect expropriation, the host state has not committed an internationally wrongful act. As a result, the host state does not breach the bit and is not liable to compensate any harm suffered by the investor. No compensation is to be paid. 2

Possibility of Invoking Investors’ Human Rights in the Course of Arbitral Proceedings

This section refers to situations when the investor’s human rights are violated by the host state where the investment is located. It analyzes arbitral 231 James Harrison, “Human Rights Arguments in Amicus Curiae Submissions: Promoting Social Justice?” in: Pierre-Marie Dupuy, Ernst-Ulrich Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford University Press 2009), p. 413: “Human rights are international and national legal obligations through which particular values are given legal expression.” Also Kriebaum, Privatizing…, supra note 117, p. 170: “Another scenario where the privatization of formerly public services may lead to conflicts between investors and the State bound by human rights obligations is the field of waste management. Though typically considered from the environmental law point of view such situations may also have a human rights aspect.” Kriebaum adds on p. 181 that public health concerns human rights, and on p. 172 that “an extreme situation of pollution of a waste treatment facility can lead to violations of the right to privacy, a home and family life.” In addition, arguments concerning sustainable development and its relevance to arbitral proceedings may also be analyzed from a human rights perspective. See for example Dimopoulus, supra note 2, p. 580: “Promotion and protection of fundamental human rights are at the heart of the notion of sustainable development.” Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:30PM via free access

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­ roceedings based on bits from the perspective of the Third Model Situation, p when investors invoke their own human rights. It has been observed in academic writings that “human rights and bit claims may exist in parallel.”232 Although academic discussion concerning the interrelations between human rights and international investment law focuses mainly on the notion of human rights as a possible defense for the host states acting as respondents in the arbitral proceedings, “[h]uman rights issues can also arise at the other side of the equation, namely with regard to investors’ rights.”233 As observed by Karamanian, “[i]n some cases, the investor may inject human rights arguments to support its position. In this situation, a conscientious tribunal has no choice but to focus on the human rights issues.”234 As was noted in Chapter 2 concerning jurisdiction and admissibility, in certain circumstances human rights can constitute a separate cause of action in arbitral proceedings which are based on the consent given by states in bits. When a bit contains a Wide Jurisdiction clause, provisions drafted by using phrases such as “all disputes concerning investments” or “any legal dispute concerning an investment” define its meaning. The scope of jurisdiction of arbitral tribunals, thus defined, naturally covers allegations made by investors that respondent states have violated the standards of protection included in bits in which the Wide Jurisdiction clause was included. However, its scope is also broad enough to cover allegations of a breach of customary international law and/or international human rights treaties, as long as they relate to (concern) a “dispute concerning an investment.” As was observed by Newcombe and Paradell, “[a]s part of international law, human rights law may be applicable in iia disputes. It may be possible for human rights claims to be brought to iia tribunals, which may have jurisdiction over them depending on the terms of the iia and, presumably, the extent to which such claims are connected to an underlying investment dispute.”235 Toto v. Lebanon confirms that, in certain circumstances, investors may base their claims on international human rights treaties.236 Among other claims, 232 Timothy G. Nelson, “Human Rights Law and bit Protection: Areas of Convergence,” (2011) 12:1 Journal of World Investment & Trade, p. 34 [Nelson]. 233 Kriebaum, Privatizing…, supra note 117, p. 167. 234 Karamanian, supra note 7, pp. 430–431. 235 Newcombe, Paradell, supra note 41, p. 107. On p. 252 they add “[v]iolations of international human rights may also give rise to a violation of minimum standard of treatment provisions in iias. With respect to procedural rights, there may be significant overlap between claims of human rights violations on the one hand, and claims of denial of justice and due process on the other.” 236 Toto Costruzioni Generali v. Lebanon, icsid Case No. ARB/07/12, award (7 June 2012).

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the investor sought compensation for a denial of justice. The tribunal observed that: “[t]he Treaty sanctions not only breaches of specific Treaty provisions, such as Article 3.1, but also breaches of any rule of international law (Article 7.3). The Treaty thus covers also a denial of justice under international law.”237 The provision of the bit referred to by the tribunal stipulated that the applicable law is the bit and “applicable rules and principles of international law.”238 Having said this, the tribunal went on to analyze the content of international law regarding the standard of a denial of justice.239 Ultimately, the tribunal decided that the claimant had failed to establish grounds that would enable the tribunal to exercise jurisdiction over this claim: “[t]he Tribunal has therefore not seen prima facie evidence that Toto itself has made use of the local remedies to shorten the procedural delays. In the absence of such evidence the Tribunal has no jurisdiction under Article 3.1 of the Treaty to decide whether the delays before the Conseil d’Etat were unfair and inequitable.”240 It must be noted that a contrary approach was adopted by the tribunal in Rompetrol v. Romania, which expressly stated that it was not “called upon to decide any issue under the echr, whether the issue in question lies in the past or is still open. Its function is solely to decide, as between trg and Romania, “legal dispute[s] arising directly out of an investment” and to do so in accordance with “such rules of law as may be agreed by the parties,” which in the present case means essentially the bit, in application of the appropriate rules for its interpretation.”241 It continued to decide that it was not “competent to decide issues as to the application of the echr within Romania, either to natural persons or to corporate entities.”242 It added that, in its view, the applicable law was the bit, excluding the echr, but agreed that human rights could inform the interpretation of particular standards of protection, such as the fet.243 237 Toto Costruzioni Generali v. Lebanon, icsid Case No. ARB/07/12, decision on jurisdiction (11 September 2009), para. 154 [Toto v. Lebanon – jurisdiction]. 238 Art. 7(3) of the bit Italy – Lebanon reads as follows: “The arbitral tribunal shall decide the dispute in accordance with the provisions of this Agreement and the applicable rules and principles of international law. The awards of arbitration shall be final and binding on both parties to the dispute. Each Contracting Party shall carry out without delay any such award and such award shall be enforced in accordance with domestic law.” 239 Toto v. Lebanon – jurisdiction, supra note 237, paras. 155–156. 240 Ibid, para. 168 [emphasis as in original]. 241 Rompetrol v. Romania, supra note 79, para. 170 [emphasis as in original]. 242 Ibid, para. 172. 243 Ibid, para. 172: “ii. The governing law for the issues which do fall to the Tribunal to decide is the bit, and notably its requirements for fair and equitable treatment and nonimpairment of, and full protection and security for, the investments of investors of one

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In this author’s view, the approach adopted by the tribunal in Rompetrol v. Romania with reference to the issue of human rights was incorrect. Kriebaum notes that this tribunal “adopted a restrictive approach concerning the applicability of human rights law in investment cases.”244 It is not clear for this author to what the tribunal was referring when it stated that it was not “competent” to decide issues related to the echr. In this dispute, both of the contracting states to the bit (i.e. the Netherlands and Romania) are parties to the echr. The Netherlands – Romania bit contains a Wide Jurisdiction clause, which covers “disputes with respect to investments.”245 This jurisdiction clause “would also cover a dispute arising out of a violation of the echr if only the investor is the victim of the violation.”246 Therefore, the scope of jurisdiction could cover a claim based on the echr.247

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Party in the territory of the other Party; iii. The category of materials for the assessment in particular of fair and equitable treatment is not a closed one, and may include, in appropriate circumstances, the consideration of common standards under other international regimes (including those in the area of human rights), if and to the extent that they throw useful light on the content of fair and equitable treatment in particular sets of factual circumstances; the examination is however very specific to the particular circumstances, and defies definition by any general rule.” Ursula Kriebaum, “Case Comment: The Rompetrol Group N.V. v. Romania,” (2014) 15 the Journal of World Investment & Trade, p. 1030 [Kriebaum, Case Comment…]. Art. 8(1) of the bit Netherlands – Romania: “For the purpose of solving disputes with respect to investments between a Contracting Party and an investor of the other Contracting Party, consultations will take place between the parties concerned.” Art. 8(2): “If these consultations do not result in a solution within three months, the investor may submit the dispute, at his choice, for settlement to: (a) the competent court of the Contracting Party in the territory of which the investment has been made; or (b) the International Centre for Settlement of Investment Disputes (icsid) provided for by the Convention on the Settlement of Investment Disputes between States and Nationals of other States, of 18 March 1965; or (c) an ad hoc arbitral tribunal which, unless otherwise agreed upon by the parties to the dispute, shall be established under the arbitration rules of the United Nations Commission on International Trade Law (uncitral).” Kriebaum, Case Comment…, supra note 244, p. 1031. Alvarez, amongst others, criticized the tribunal’s approach in this respect: “The dispute over the relevance of echr law in Rompetrol, for example, could have been less equivocal on the applicability of echr law had the tribunal considered the relevance of Article 3(5) of the applicable Netherlands-Romania bit – which provides, as do some other bits – that investors of either Party (which in this case were both echr parties) enjoy the benefits of any more favorable treatment accorded under international agreements between the Contracting Parties “whether general or specific.” Such specific permission to apply more favorable echr obligations ought to be distinguished from attempts to draw on that law because of Articles 59 or 31(3)(c) of the vct or other interpretative rules promoted

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Furthermore, the applicable law also included the echr. The dispute was conducted under the icsid Convention, art. 42(1) of which refers to the applicable law. It reads as follows: “The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal 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.” Based on this, the applicable law included “such rules of international law as may be applicable.” It is this author’s understanding that this “would include the echr if a violation of the Convention is directly related to the legal dispute arising out of the investment given the fact that it is ratified by the Netherlands and Romania.”248 Moreover, one cannot deny the powers of arbitral tribunals to analyze a possible breach of the echr merely due to the fact that the ECtHR is competent to interpret the echr.249 The approach argued for by this author finds support in Saur v. Argentina.250 The tribunal expressly recognized that human rights are one of the sources which the tribunal should take into consideration when analyzing the dispute. This was based on two observations: (i) such rights were integrated in the domestic legal system, and (ii) they form part of the general principles of international law.251 The scope of possible claims based on investor’s human rights depends upon the web of international human rights treaties which have entered into force with respect to the respondent state. If the respondent state is a member of one of the regional human rights systems, claims presented by an investor can be based on the respective regional human rights convention. In the analyzed example of Rompetrol v. Romania case, this was the echr. Depending upon the identity of the contracting states to the applicable bit, this could also be the iachr or the African Charter. With a few exceptions, the legal ground for such claims can also be found in un treaties, especially in the ­i ccpr and the icescr, which legally entrenched the rights set out in the udhr. As noted above, public international law can form part of the law applicable to the dispute. It was correctly observed that “[…] the applicability

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by the ilc to promote the defragmentation of international law or because of scholarly arguments against self-contained regimes.” See: Alvarez, supra note 207, p. 86. Kriebaum, Case Comment…, supra note 244, p. 1031. Ibid. saur v. Argentina, supra note 168. Ibid, para. 330. Although it must be noted that, when considering the merits of the case, the tribunal did not refer back to human rights.

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of public ­international law raises no difficulty, including that part of general international law (i.e. customary international law) which entails a set of obligations to protect fundamental human rights, ranging from the right to life to the principle of non-discrimination based on race or sex, including rights that have a peremptory character as they belong to jus cogens – which, contrary to what has been alleged for too long is rather easily identifiable in its content […].”252 In practice, claims based on an investor’s human rights will be presented together with claims based on the bit. Although theoretically possible, it is hardly likely that an investor would commence bit arbitration and present claims based exclusively on substantive human rights norms, without also relying on the bit’s standards of protection. This is because investors tend to present “any legitimate argument” in order to strengthen their cases.253 Furthermore, human rights should inform an understanding of the substantive protections included in bits. This could be the case in any proceedings where the facts so require, regardless of the scope of jurisdiction. As argued above, in the chapter dealing with jurisdiction, human rights can also fall ­within the scope of jurisdiction of tribunals as part of the law applicable to the dispute concerning the investment (or the investor, if this is allowed by the jurisdiction clause in question), as well as constituting interpretative directives for the analysis of the substantive provisions of the bit in question. This situation is equally applicable to all arbitral proceedings, regardless of the wording of the jurisdiction clause included in a particular bit. Therefore, this is true with respect to all types of jurisdiction clauses: whether Wide, Standard or Narrow. In fact, the possible relevance of human rights to interpreting particular standards of protection included in bits was expressly recognized in the passage of the award in the Rompetrol v. Romania case referred to above.254 252 Pierre-Marie Dupuy, Jorge E. Viñuales, “Human Rights and Investment Disciplines: Integration in Progress,” in: Marc Bungenberg, Jörn Griebel, Stephan Hobe, August Reinisch, “International Investment Law” (C.H. Beck/Hart/Nomos 2015), available since 2012 at: http://ssrn.com/abstract=2125205, p. 24 [Dupuy, Viñuales, emphasis as in original]. 253 Karamanian, supra note 7, p. 432: “Investors, after encountering state action that crippled their investment, no doubt would feel compelled to use any legitimate argument to give meaning to the protections afforded under investment treaties. And one of those arguments could be a human rights-based claim.” 254 Rompetrol v. Romania, supra note 79, para. 172: “The category of materials for the assessment in particular of fair and equitable treatment is not a closed one, and may include, in appropriate circumstances, the consideration of common standards under other international regimes (including those in the area of human rights), if and to the extent that they throw useful light on the content of fair and equitable treatment in particular

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This approach is understood as emerging from the very nature of human rights on the one hand, and investors’ rights on the other hand. They have a “common lineage in the customary international law related to treatment of aliens. Indeed, many provisions of human rights treaties expressly provide for the protection of property, in terms similar to the customary international law standard. This convergence, in turn, means that case law from one area of law is potentially useful in the other – indeed, in some cases, it is interchangeable.”255 It is also worth noting that “[h]uman rights law and international investment law have developed as two separate disciplines. But, despite a certain tendency of fragmentation, these two fields of international law are not hermetically separated. They have the same common goal: the protection of the right to property, which is also a human right. Human rights have the potential to protect opposite sides in certain scenarios: they may operate in favour of investors or against them where investment operations interfere with human rights of the population of the host State.”256 sets of factual circumstances; the examination is however very specific to the particular circumstances, and defies definition by any general rule.” 255 Nelson, supra note 232, p. 28. Similarly Conway Blake, “Moral Damages in Investment Arbitration: A Role for Human Rights?” (2012) 3:2 Journal of International Dispute Settlement, p. 390: “[…] human rights disputes provide one of the closest structural parallels to investment arbitration in the context of international law. Both systems of law share a common lineage in the law of diplomatic protection and the customary rules relating to the treatment of aliens.” A similar observation was made by Eric De Brabandere, ­“Human Rights Considerations in International Investment Arbitration” (Grotius Centre Working Paper 2013), available at: https://papers.ssrn.com/sol3/papers2.cfm?abstract _id=2230305 [accessed on 2 February 2017], p. 1: “[…] human rights protection and international investment law in fact share many common features, the most important being the weak or vulnerable position of both individuals and foreign investors in relation to the state, which can take decisions affecting their rights and obligations without their participation.” In addition, in the context of the similar nature of both fields: international investment law and international human rights law, it was even suggested that: “lately a new approach is gaining increasing support in the academic community: Investment protection could be understood as being part of human rights law. Such a conclusion may be perceived as highly controversial, however, from a conceptual perspective iil and ihrl share more common ground than differences.” See: Nicolas Klein, “Human Rights and International Investment Law: Investment Protection as Human Right?” (2012) 4:1 Goettingen Journal of International Law, p. 200. 256 Kriebaum – Foreign Investments…, supra note 6, p. 1. Likewise, it has been stated that: “The cross-regime analysis between international investment law and human rights thus proposed relies on the conviction that both bodies of law are functionally comparable: they are both public law disciplines that aim at limiting governmental power by granting both substantive rights to private actors and the possibility to enforce these rights

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A common example is the right to property, which is protected both in the provisions of bits which prohibit unlawful expropriation and in human rights treaties.257 Access to justice can serve as another example. The right to a fair trial is considered as a human right.258 At the same time, a denial of justice can lead to a violation of the fet standard included in bits.259 Another example is the human right to liberty and security of the person.260 The protection

through an international dispute settlement mechanism. Both international investment law and human rights, in other words, share the common aim of holding governments to rule of law standards and of sanctioning the abuse of public power.” See: Stephan W. Schill, “Cross-Regime Harmonization through Proportionality Analysis: The Case of International Investment Law, the Law of State Immunity and Human Rights,” (2012) 27:1 icsid Review – Foreign Investment Law Journal, p. 108. 257 For example in art. 1 of Protocol 1 to the echr or art. 17 of the udhr. However, the human right to property can cause additional problems, commonly overlooked in the analysis of its relevance in international investment law. Primarily, under the echr the right to property is also considered as applying to legal persons. “[…] it should be observed that, in the framework of the European Convention on Human Rights, it is now settled that companies and their shareholders benefit from human rights protection against the host State in which they operate.” See: Marrella, supra note 14, p. 342. However, this is not a common approach under other regional human rights systems. “[…] the American Convention on Human Rights is different. Unlike art. 1, 1st Protocol to the European Convention, art. 21 of the American Convention does not refer to the property of juridical persons. Under the established practice of the Inter-American Commission on Human Rights there is no jurisdiction for applications alleging violations of property rights of juridical persons. […] On the other hand, the Inter-American Court has recognized the principle that shares are property in the sense of the Convention.” See: Ursula Kriebaum, Christoph Schreuer, “The Concept of Property in Human Rights Law and International Investment Law,” in. Stephan Breitenmoser, Bernhard Ehrenzeller, Marco Sassoli, Walter Stoffel, Beatrice Wagner Pfeifer, “Liber Amicorum Luzius Wildhaber, Human Rights Democracy and the Rule of Law” (Nomos 2007), available at: http://www.univie.ac.at/intlaw/concept_property.pdf [accessed on 2 February 2017], p. 12. 258 It is recognized for example in arts. 14, 15 and 16 of the iccpr or art. 6 of the echr. 259 Nelson, supra note 232, p. 40. See also for example Dupuy, Viñuales, supra note 252, p. 8: “It goes without saying that a general analysis of the underlying and deep entrenched relationship between the fair and equitable treatment (‘fet’) standard and a series of basic human rights, including the right to property, the right to a fair trial and many others would exceed the scope of this chapter. Such an account could be grounded in the shared concept of ‘fairness’ or ‘equity’ understood as the search for the elementary respect of justice, inherent to the application of the rule of law (equity infra legem) […].” 260 Recognized in art. 5 of the echr.

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granted by these human rights can be partially embodied in the Full Protection and Security and the Fair and Equitable Treatment standards commonly encountered in bits. Dupuy and Viñuales identified “four conceptual grounds shared by human rights and investment disciplines: (1) non-discrimination; (2) due diligence; (3)  procedural fairness; and (4) proportionality.”261 With respect to the first ground (non-discrimination), they observed that this concept “is deeply rooted in both human rights and investment disciplines.”262 With reference to due diligence, their view is that: “”[w]e are here indeed very close to the diligence that, under contemporary international law, a “well governed State” must display to ensure the respect of basic human rights on its territory including, under some conditions, private property rights.”263 When analyzing procedural fairness they concluded that the conceptual similarities between the concepts within human rights and international investment law cannot be overlooked.264 Finally, when examining the fourth identified conceptual ground (proportionality), they recognized that (i) it has played a key role in the case-law of the ECtHR, (ii) some arbitral tribunals expressly referred to the reasoning of the ECtHR when assessing investment claims, and that “from a conceptual standpoint, one should not lose sight of the considerable similarities of content of human rights and investment disciplines.”265 Within the analyzed context of the Third Model Situation and human rights as a “sword,” Kulick has observed that “[…] the role of human rights and human rights jurisprudence, albeit considerably limited at the present state, is expanding – however, mostly within the confines of an established investor right enshrined in an investment treaty; much more rarely as an independent basis for compensation.”266 This author shares the view that the human rights of investors can inform the interpretation of bit standards. In this sense, “a claim for breach of human rights may be brought in the form of an investment claim before an investment

261 262 263 264 265

Dupuy, Viñuales, supra note 252, p. 8: Ibid, p. 9. Ibid, p. 10. Ibid, p. 12. Ibid, pp. 12–13. In addition “under some specific circumstances, such similarities may place the host State before a dilemma or, in other words, a ‘normative conflict.’” 266 Andreas Kulick, “Global Public Interest in International Investment Law” (Cambridge University Press 2012), p. 276.

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tribunal.”267 Of course, this may be done only within the limits of tribunals’ jurisdiction. Accordingly, the claim must “relate to” (concern) the investment.268 Therefore, if one interprets bits in accordance with an investor’s human rights, it would be a purely theoretical exercise to analyze the consequences of an award in which a tribunal decides that a respondent state has violated the investor’s human rights, but did not violate the bit. Diehl suggested that: “[w]hether an investor will actually profit from the application of human rights standards is doubtful as most human rights violations will constitute a violation of the fet standard and, in the case of property rights, of the prohibition of expropriation.”269 What is crucial, therefore, for the purposes of this book is to determine the possible result of presenting a separate claim based on the human rights of the investor. This is to say, what would be the outcome of a possible decision that the investor’s human rights have been violated. If a breach of human rights is identified together with a breach of the bit, this finding should not result in a higher compensation award. The loss suffered by the investor would have to be compensated, but it would not be higher due to the mere fact that the investor’s human rights were breached. As the measures violating human rights would be the same as those violating the bit, the decision would not result in a compensation exceeding the amount which would have been awarded if a breach of the bit had been identified with no reference to human rights, since the loss suffered would remain the same. One possible outcome of a decision which identifies a breach of the investor’s human rights is satisfaction of the investor. As stated in art. 34 of the ilc Articles: “Full reparation for the injury caused by the internationally wrongful act shall take the form of restitution, compensation and satisfaction, either singly or in combination, in accordance with the provisions of this chapter.” In accordance with art. 38(2) of the ilc Articles: “Satisfaction may consist in an 267 Dupuy, Viñuales, supra note 252, p. 22. They add: “[a] claim for breach of due process rights could therefore be framed as one for breach of the fet standard. A claim for discriminatory treatment could also be framed as a claimed for breach of a non-­discrimination standard in a bit. Still another example would be a claim for breach of the right to property, which could be framed, depending on the circumstances of the case, as a claim for breach of an expropriation clause or the fet standard of a bit. From a jurisdictional perspective, these claims are no different than a conventional investment claim.” 268 Karamanian, supra note 7, pp. 444–445: “To be sure, the fair and equitable clauses are not open doors for any argument of investors, including ones that fit within the rubric of human rights, that the state conduct is unfair or inequitable, and the same would hold true for the state’s assertion of a defense. The conduct must relate to the investment.” 269 Diehl, supra note 100, p. 511.

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acknowledgement of the breach, an expression of regret, a formal apology or another appropriate modality.” If the arbitral award states that the respondent violated the human rights of the investor, it may be considered as constituting a sufficient “satisfaction” for an internationally wrongful act. In this context, satisfaction would consist of an acknowledgment of the breach, albeit one made by the tribunal in the arbitral award, and not by the state in a separate declaration.270 Satisfaction may, of course, by itself be a sufficient remedy in the eyes of the investor whose human rights were violated by the host state. However, from a practical point of view and from the perspective of the Third Model Situation, the economic aspects of initiating a claim in costly and complex bit arbitration are more important. It is submitted that, in the context of the Third Model Situation, if a tribunal identifies a violation of an investor’s human rights, it opens the door for a claim for moral damages. This issue is analyzed in further detail in Sections (vi) and (vii) of the subsequent chapter. 270 “One of the most common modalities of satisfaction provided in the case of moral or nonmaterial injury to the State is a declaration of the wrongfulness of the act by a competent court or tribunal.” See: Articles on Responsibility of States for Internationally Wrongful Acts, text adopted by the International Law Commission at its fifty-third session, in 2001, and submitted to the General Assembly as a part of the Commission’s report covering the work of that session (A/56/10), (2001) ii:2 Yearbook of the International Law Commission, p. 106. It must be noted, however, that this commentary refers to moral damages suffered by a state, and not by an individual.

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Compensation and Costs in Investor – State Arbitration and the Issue of Human Rights 1

Impact of Human Rights on the Level of Compensation Awarded in Investor – State Arbitration

i General Remarks1 The foregoing discussion has examined the situations in which human rights may become relevant when determining the admissibility and merits of a claim. However, in certain situations, even if the obligation to respect, protect and fulfil human rights indeed plays a role in the proceedings, the arbitral tribunal may still decide that a breach of the bit took place. Obviously, if the tribunal finds that it has no jurisdiction to hear the claim, that such a claim is inadmissible or that no breach of the bit occurred with respect to the whole claim, there is no scope for considering the possible value of a compensation award. However, if at least part of the claim is decided to fall within the scope of the tribunal’s jurisdiction, to be admissible and it is established that a breach of the bit occurred (or even, in certain situations, that an infringement of international human rights law occurred), the next step is to determine the consequences of the breach. The analysis begins with general remarks on compensation in bit arbitrations and explains why other forms of remedies are not analyzed. Following the introductory sections, the analysis focuses on the concept of contributory negligence. Once its content and applicability in investor – state arbitration are determined in Section (iii), Section (iv) analyzes whether human rights violations committed by investors (the Second Model Situation) can be considered as contributory negligence and thereby impact on a reduction of compensation. Section (v) discusses the compensation stage of bit arbitration from the perspective of the First Model Situation. The following sections relate to the Third Model Situation. Section (vi) describes the general possibility of seeking moral damages in investor – state arbitrations. Section (vii) analyzes the extent 1 In this context see also: Filip Balcerzak, “Determination of compensation in investor – state arbitrations: is there a place for human rights arguments?” in: Freya Baetens, José Caiado, “Frontiers of International Economic Law – Tools to Confront Economic and Social Challenges” (Brill 2014), pp. 134–150.

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to which this tool can be used in order to seek a remedy for violations of investors’ human rights. Before starting the analysis, it is needed to clarify the terminology adopted. This is necessary in light of the fact that, historically, the term “damages” was used in connection with the consequences of an illegal act, whereas the term “compensation” was used in connection with the consequences of a legal act. However, at present no clear distinction exists anymore and both terms are used interchangeably, with the term “compensation” being deemed to constitute a direct equivalent of the terms “damages” and “pecuniary damages.”2 The compensation stage of arbitral proceedings is “a strategic stage of the arbitral award.”3 On no account should it be underestimated. Proper attention to this stage must be paid by the parties to the proceedings. What would be the purpose of claimants conducting lengthy and costly arbitral proceedings if not in order to receive compensation? The attention devoted by practitioners to the compensation stage can be seen in the example of proceedings wherein the compensation stage constitutes a separate procedural phase.4 From a theoretical perspective, it is perfectly possible that when no loss has been suffered by the claimant, a tribunal still finds that there was a breach of the bit, but nevertheless decides not to award compensation. Such outcomes sometimes occur in practice. In Rompetrol v. Romania the tribunal expressly recognized that “[a]s a matter of law, though, it remains the case that breaches of that kind of obligation under an investment treaty may give rise to claims for relief of different kinds: for example for the cessation of host State measures against an investor, or for the re-instatement of a status quo ante, or (if the circumstances were appropriate) for a bare declaration of breach. To the extent, however, that a claimant chooses to put its claim (as in the present Arbitration) in terms of monetary damages, then it must, as a matter of basic principle, be for the claimant to prove, in addition to the fact of its loss or 2 Sergey Ripinsky, Kevin Williams, “Damages in International Investment Law” (British Institute of International and Comparative Law 2008), p. 4 [Ripinsky, Williams]. Similarly Wälde and Sabahi, using both terms as synonyms. See: Thomas W. Wälde, Borzu Sabahi, “Compensation, Damages and Valuation,” in: Peter Muchlinski, Federico Ortino, Christoph Schreuer, “The Oxford Handbook of International Investment Law” (Oxford University Press 2008), pp. 1052–1053 [Wälde, Sabahi]. 3 Ioana Knoll-Tudor, “The Fair and Equitable Treatment Standard and Human Rights Norms,” in: Pierre-Marie Dupuy, Ernst-Ulrich Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford University Press 2009), p. 340 [Knoll-Tudor]. 4 For example: Pope & Talbot v. Canada, Ad hoc—uncitral Arbitration Rules, award on damages (31 May 2002).

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damage, its quantification in monetary terms and the necessary causal link between the loss or damage and the treaty breach.”5 In Rompetrol v. Romania the tribunal identified a breach of the applicable bit, but did not award compensation. Also in Biwater v. Tanzania the tribunal identified a breach of the applicable bit without awarding compensation: “[g]iven that none of the Republic’s violations of the bit caused the loss and damage for which bgt now claims compensation, it follows that each of bgt’s claims for damages must be dismissed, and that the only appropriate remedies for the Republic’s conduct can be declaratory in nature.”6 Of course, in such a case the investor may consider that he received “moral satisfaction” by the mere finding of the appointed adjudicative body in a binding award that the respondent state committed a breach of international law. However, in practice it is improbable that an investor would decide to commence arbitral proceedings merely for such a purpose. Moreover, even if “moral satisfaction” would be enough for the investor, it is certain that, if such satisfaction were capable of being granted together with monetary compensation, the investor would undertake all available steps in an attempt to be awarded both. At first glance, it may appear surprising that one speaks about compensation instead of commencing the analysis with a broader term such as “­ remedy” or “reparation.” Under international law, nothing prevents arbitral tribunals from awarding non-pecuniary remedies, especially in the form of specific performance orders. “There is a wide range of possibilities for non-pecuniary obligations that awards might impose. In addition to the restitution of seized property, the return of a licence or the non-collection of unreasonable taxes, the possibilities include the granting of a permission to transfer currency and the discontinuance of harassment of the investor’s personnel.”7 Under public international law, the ilc Articles (arts. 34–39) recognize a broad concept of “reparation,” which is divided into three subcategories: restitution, compensation and satisfaction.8 In this context, it is sometimes 5 Rompetrol Group v. Romania, icsid Case No. ARB/06/3, award (6 May 2013), para. 190 ­[Rompetrol v. Romania]. 6 Biwater Gauff v. Tanzania, icsid Case No. ARB/05/22, award and separate opinion (18 July 2008), para. 807 [Biwater v. Tanzania]. 7 Christoph Schreuer, “Non-Pecuniary Remedies in icsid Arbitration,” (2004) 20:4 Arbitration International, at p. 332 [Schreuer – Non-Pecuniary…]. See also: Enron and Ponderosa Assets v. Argentina, icsid Case No. ARB/01/3, decision on jurisdiction (14 January 2004), paras. 79, 81; Texaco Overseas Petroleum and California Asiatic Oil v. Libya, award on the merits (19 January 1977), paras. 509 and 511. 8 Articles on Responsibility of States for Internationally Wrongful Acts, text adopted by the International Law Commission at its fifty-third session, in 2001, and submitted to the General

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s­ uggested that a distinction be made between “primary remedies,” understood as restorative (or preventive) ones, and “secondary remedies,” understood as pecuniary damages (monetary compensation).9 However, in the context of investor – state arbitration there are various factors which limit arbitral tribunals’ authority to order remedies other than monetary compensation.10 Firstly, the remedies available in any particular dispute are determined by the substantive law applicable to the particular ­proceedings. Some bits preclude relief other than monetary compensation.11 Secondly, even if a particular bit contains no such limitations, in practice it rarely happens that investors ask for remedies other than monetary compensation.12 This has a crucial consequence for the development of disputes. As expressed in the Latin maxim non ultra petita, the arbitral tribunals cannot



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Assembly as a part of the Commission’s report covering the work of that session (A/56/10), (2001) ii:2 Yearbook of the International Law Commission, p. 86, paras. 34–37 [ilc Articles]. See: Anne van Aaken, “Primary and Secondary Remedies in International Investment Law and National State Liability: A Functional and Comparative View,” in: Stephan Schill, ­“International Investment Law and Comparative Public Law” (Oxford University Press 2010), available at: http://ssrn.com/abstract=1444253 [accessed on 2 February 2017], p. 722. Although the starting point of the analysis is that, as a general rule, such remedies are available. For example in Bernhard v. Zimbabwe the tribunal awarded restitution. See: Bernhard von Pezold v. Zimbabwe, icsid Case No. ARB/10/15, award (28 July 2015), paras. 699–700, 723, 1020 [Bernhard von Pezold v. Zimbabwe]. For example art. 1135(1) of the nafta, although formally allowing for the restitution of property, requires that such an obligation must be ordered together with the alternative possibility of paying monetary compensation. It reads as follows: “Where a Tribunal makes a final award against a Party, the Tribunal may award, separately or in combination, only: (a) monetary damages and any applicable interest; (b) restitution of property, in which case the award shall provide that the disputing Party may pay monetary damages and any applicable interest in lieu of restitution. A tribunal may also award costs in accordance with the applicable arbitration rules.” Carole Malinvaud, “Non-pecuniary Remedies in Investment Treaty and Commercial Arbitration,” in: Albert Jan van den Berg, “50 Years of the New York Convention: icca International Arbitration Conference” (Kluwer Law International 2009), p. 221 [Malinvaud]: “As a matter of fact, claimants rarely look for non-pecuniary remedies in their requests for relief and case law on this subject is therefore limited.” Similarly Schreuer – N ­ on-Pecuniary…, supra note 7, p. 329: “the fact that icsid Tribunals have granted pecuniary relief rather than ordered specific performance is not based on any fundamental restriction on their power to do so. Rather, investors almost always seem to frame their claims in terms of monetary damages.”

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go beyond the claimant’s requests.13 In other words, arbitral tribunals hearing bit cases are bound by the remedies sought by the claimant investors. This explains why awards rendered in investor – state arbitral proceedings almost always comprise a payment of monetary compensation.14 In addition, in the context of this book, another justification exists to limit the analysis to pecuniary compensation. Leaving aside an analysis of possible human rights claims brought by investor, as examined in Sections (vi) and (vii), Sections (ii)–(v) concern human rights invoked by host states. It is understood that the measures undertaken by the state were intended to be a realization of the state’s obligation to protect and/or fulfil human rights (First and Second Model Situations). In accordance with the assumption that this justification of the measures is genuine (i.e. it is undertaken in good faith and that human rights are not invoked as a mere excuse), the state will not be willing to change the adopted measures merely because one or several foreign investors decided to commence bit proceedings.15 In this sense, it is logical for the state to pay the awarded compensation, but to remain able to maintain in force the measures undertaken by the state in realization of its international human rights obligations. ii Principles Governing Compensation in Investor – State Arbitration Although the passage of time has caused this observation to lose some of its preciseness, this author still agrees that, even today, the issue of the ­compensation 13

Wälde, Sabahi, supra note 2, p. 1059: “[…] meaning that if the parties have not asked for a particular remedy, then the tribunal should not award it.” 14 Malinvaud, supra note 12, p. 210: “The pre-eminence of damages as the almost systematic mode of reparation is clear.” Compensation is “perhaps the most commonly sought in international practice.” See: ilc Articles, supra note 8, p. 99. 15 On the other hand, this author observes that there may be multiple different ways of achieving human rights goals. In theory, this could result in a state preferring to revoke measures which were found to be in breach of the bit rather than to pay compensation. However, in this author’s opinion, this would be the case only if, at the moment when the measures in question were adopted, the state acted without due diligence. This is to say, if there are two (or more) possible measures, one of which violates the bit whereas the other(s) does not, adopting the first one proves the absence of necessary due diligence on the state’s part. This issue may be complicated even further in the light of art. 30 of the ilc Articles, which illustrates two core legal consequences of an internationally wrongful act: (i) an obligation to perform the obligation breached (in case of a single breach) and to cease the internationally wrongful act with possible assurances of non-repetition (if it is continuing breach) and (ii) an obligation to make full reparation for the injury. If both consequences were applied in investor-state arbitrations this would mean that, even when compensation is due, a state still must withdraw any of its human rights policies which breach the applicable bit. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:46PM via free access

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in investor-state arbitration remains relatively unexamined when compared to the issues of jurisdiction and merits.16 The starting point for all compensation-related discussions is the decision of the Permanent Court of International Justice issued in the Chorzów Factory case in 1928.17 The Court noted that reparation for an internationally illegal act: “must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed.”18 In other words, following the decision issued in the Chorzów Factory case, an arbitral award rendered by a tribunal hearing a bit dispute, in the event that a breach of the bit took place, should put an investor back in the position in which it would have been “but for” the breach.19 In accordance with this principle, “damages for a violation of international law have to reflect the damage actually suffered by the victim.”20 The “damage suffered” can be also described using words such as “loss” or “harm.” There is no doubt that the principle of “full reparation” established in the Chorzów Factory case remains applicable nowadays, including within the legal framework of investor – state disputes.21 Furthermore, this principle – requiring full reparation to be made – finds confirmation in art. 31 of the ilc Articles, which reads as follows: “1. The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act. 2. Injury includes any damage, whether material or moral, caused by the internationally wrongful act of a State.” This principle is the starting point for an analysis of the issue of compensation. It is unquestionable that there must exist a causal relationship between 16

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Todd Weiler, Luis Miguel Diaz, “Causation and Damages in nafta Investor-State Arbitration,” in: Todd Weiler, “nafta Investment Law and Arbitration: Past Issues, Current Practice, Future Prospects” (Transnational Publishers 2004), p. 179 [Weiler, Miguel Diaz]. They observe that the questions of causation and damages “remain rather undiscovered.” Although they make this observation in the context of nafta, it remains valid for all investor-state arbitrations. Similarly Wälde, Sabahi, supra note 2, p. 1051: “the question of compensation and damages is often a the poor cousin when the battle royal rages first about jurisdiction and then about merits.” Factory at Chorzów, judgment of the Permanent Court of International Justice (13 September 1928), available at: http://www.icj-cij.org/pcij/serie_A/A_17/54_Usine_de_ ­ Chorzow_Fond_Arret.pdf. Ibid, p. 47. Weiler, Miguel Diaz, supra note 16, p. 188. Rudolf Dolzer, Christopher Schreuer, “Principles of International Investment Law” ­(Oxford University Press 2012), p. 295 [Dolzer, Schreuer]. Its applicability in investor – state arbitrations has been confirmed for example in S.D. Myers v. Canada, uncitral, Partial Award (13 November 200), para. 311. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:46PM via free access

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the damage suffered by the investor and the state measures found to have breached the bit.22 Looking in more detail into the rules governing compensation in investor – state disputes, one can note that the standard of compensation for expropriation is “relatively well established” when compared to compensation for ­breaches of other standards commonly found in bits.23 With respect to the standards of compensation for expropriation, although there was a debate during the last 80 years, it has now been accepted that, under modern customary international law, “full compensation” is due. Sometimes this is referred to as “market value,” “genuine value” or “adequate compensation.”24 In addition to the existence of a consensus regarding the standard present in customary international law, the vast majority of bits explicitly refer to the principle of full compensation in their provisions concerning the prohibition on expropriation. By way of example, one can look at the Poland – Switzerland bit, art. 6 of which expressly refers to “effective and adequate” compensation as one of the prerequisites for legal expropriation. Accordingly, it may be summarized that, as a general rule, the compensation payable for expropriation is defined in an applicable bit and that “effective and adequate” compensation means “full” compensation. The quantity of compensation awarded for expropriation should correspond to the fair market value of the investment. This can be objectively ­determined by applying one of the methods of valuation of the expropriated investment. Application of the chosen method of valuation of the investment leads to a certain result. When analyzing compensation for expropriation, it is due to a level which corresponds with the total value of the investment. It is considered to be an “all or nothing approach.” Accordingly, if expropriation has occurred, full (i.e. “effective and adequate”) compensation is to be paid.25 There is no space for “balancing.” 22

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24 25

See for example Biwater v. Tanzania, supra note 6, para. 778: “[…] it is well settled that one key requirement of any claim for compensation (whether for unlawful expropriation or any other breach of Treaty) is the element of causation.” See also: Nordzucker v. Poland, uncitral (1976), third partial and final award (23 November 2009), para. 60. Wälde, Sabahi, supra note 2, p. 1082: “The calculation of due compensation for expropriation is, despite of debates, relatively well established. There is, however, little precedent and even less theoretical analysis of how financial compensation should be assessed for breaches of non-expropriation standards of treatment in investment treaties, such as in particular national treatment and fair and equitable treatment.” Ibid, pp. 1068–1070. Ursula Kriebaum, “Privatizing Human Rights. The Interface Between International­ Investment Protection and Human Rights,” in: August Reinisch, Ursula Kriebaum,

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These considerations apply as a general rule to compensation awarded for legal (lawful) expropriation. Furthermore, the payment of compensation established in accordance with these rules is basically a constituent element of a lawful expropriation. However, in certain situations, the amount of compensation due for illegal (unlawful) expropriation may differ. If expropriation is unlawful, it is contrary to the relevant bit.26 As an internationally illegal act, it should be followed by compensation which should wipe out the damage suffered by the investor. This wiping out should be done in accordance with the principle established in the Chorzów Factory case. On the one hand, it frequently transpires that the only damage sustained due to an unlawful ­expropriation is the loss of the value of the expropriated property. In such a situation, no difference exists between the amount of compensation payable in consequence of lawful or unlawful expropriation. The compensation due in such a situation should amount to the fair market value of the expropriated investment, calculated in the same way as in the case of legal expropriation. However, this is not always the situation.27 In certain situations, the loss suffered due to illegal expropriation may exceed the loss which would have taken place if the expropriation was lawful.28 In such situations, compensation for

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“The Law of I­ nternational Relations – Liber Amicorum Hanspeter Neuhold” (Eleven International Publishing 2007), p. 183. Irmgard Marboe, “Calculation of Compensation and Damages in International Investment Law” (Oxford University Press 2009), pp. 75–79. Abby Cohen Smutny, “Principles relating to compensation in the investment treaty context” (iba Annual Conference, Chicago Investment Treaty Arbitration Workshop September 19, 2006), available at: http://www.josemigueljudice-arbitration.com/xms/ files/02_TEXTOS_ARBITRAGEM/01_Doutrina_ScolarsTexts/investment_arbitration/ compensation_in_inv_treaties-_abbey_cohen_smutny.pdf [accessed on 2 February 2017], pp. 17–18. Irmgard Marboe, “Compensation and Damages in International Law: The Limits of ‘Fair Market Value,’” (2006) 7:5 Journal of World Investment & Trade, pp. 758–759: “The standard of compensation with regard to the lawful exercise of the State’s right to expropriate under international law, at least under treaty law, is the fair market value. As it refers to the price a hypothetical willing buyer would pay to a hypothetical willing seller, it can be regarded as an “objective” or “impersonal” standard. […] At first sight, the calculation of damages according to the Chorzow standard should lead to higher amounts than compensation based on the fair market value. In cases of expropriation, this is correct, ­because damages for an unlawful expropriation cannot be less than compensation for a lawful expropriation. According to the Chorzow standard, an increase in value of the affected property after the expropriation must be included in the valuation if the expropriation was unlawful. Fair market value at the time of expropriation, in this case, represents the lower limit of the amount of damages.”

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illegal expropriation may exceed the level of compensation for lawful expropriation and exceed the value of the expropriated investment. In addition it may be possible, when unlawful expropriation has occurred, to seek specific performance or re-instatement of the investment, whereas this would not be possible in the event of a lawful expropriation.29 In addition, some commentators argue that the valuation of compensation for illegal expropriation (which is illegal not merely due to the absence of compensation) can be done ex post, i.e. “on the date of the award and taking into consideration information available then.”30 However, this position is not unanimously accepted.31 Having said the above about compensation for expropriation, one should pay attention to the principles governing compensation for non-expropriation standards included in bits. In this context, it has been noted that there is “little precedent and even less theoretical analysis” of the compensation for breaches of the non-expropriation standards.32 Typically, bits contain no provision concerning the standard of compensation for breaches either of the fet or of other non-expropriation standards.33 Faced with this issue in practice, 29

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Jan H. Dalhuisen, Andrew T. Guzman, “Expropriatory and Non-Expropriatory Takings ­ nder International Investment Law,” (2013) 10:4 Transnational Dispute Management, U p. 16. They add on pp. 16–17: “Another possibility is that there simply is no remedy beyond full compensation. It is hardly unusual for international law to declare something unlawful without imposing a formal sanction. Perhaps the distinction between a lawful and unlawful expropriation is nothing more than the identification of the latter as impermissible. All of this suggests that the concept of unlawful expropriation may have little meaning beyond full compensation. Indeed, there may in practice be no difference between lawful and unlawful expropriation at all if full compensation as of the day of the taking is being offered. If so, host governments could take for any reason and in any manner if they offer full compensation, though in the case of unlawful expropriations that are perhaps some additional reputational harms as a result of being seen to act outside the law. The reputational consequences would not be limited to the reaction of other states. An investor may prefer to invest in a country where unlawful expropriation is less, rather than more, likely. A country that engages in unlawful expropriation, therefore, may be seen as a less desirable host.” As opposed to the valuation of compensation for lawful expropriation. See: Quiborax et al. v. Bolivia, icsid Case No. ARB/06/2, award (16 September 2015), para. 370 [Quiborax v. Venezuela – merits]. For example Stern issued a dissenting opinion in Quiborax v. Venezuela, in which she explained the arguments supporting the opposite view. See: Quiborax et al. v. Bolivia, icsid Case No. ARB/06/2, partially dissenting opinion (7 September 2015), in particular para. 24. Wälde, Sabahi, supra note 2, p. 1082. cms Gas Transmission v. Argentina, icsid Case No. ARB/01/8, award (12 May 2005), para. 409 [cms v. Argentina]: “The Tribunal is faced with a situation where, absent ­expropriation

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­tribunals tend to apply by analogy the standard of compensation due for expropriation34 or for a breach of contractual obligations.35 It has been noted that, typically, a breach of the fet standard is argued together with allegations of indirect expropriation, which in turns creates a possibility to determine compensation in accordance with the rules governing compensation for expropriation.36 The same approach is sometimes applied to determine compensation for breaches of non-expropriation standards other than the fet.

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under Article iv, the Treaty offers no guidance as to the appropriate measure of damages or compensation relating to fair and equitable treatment and other breaches of the standards laid down in Article ii. This is a problem common to most bilateral investment treaties and other agreements such as nafta.” Similarly, the tribunal in the mtd v. Chile case observed: “The Tribunal first notes that the bit provides for the standard of compensation applicable to expropriation, “prompt, adequate and effective” (Article 4(c)). It does not provide what this standard should be in the case of compensation for breaches of the bit on other grounds.” See: mtd Equity and mtd Chile v. Chile, icsid Case No. ARB/01/7, award (25 May 2004), para. 238 [mtd v. Chile]. Enron and Ponderosa Assets v. Argentina, icsid Case No. ARB/01/3, award, (22 May 2007), para. 363: “On occasions, the line separating indirect expropriation from the breach of fair and equitable treatment can be rather thin and in those circumstances the standard of compensation can also be similar on one or the other side of the line. Given the cumulative nature of the breaches that have resulted in a finding of liability, the Tribunal believes that in this case it is appropriate to apply the fair market value to the determination of compensation.” See also for example: cms v. Argentina, ibid, para. 410; mtd v. Chile, ibid, para. 38, Azurix v. Argentina, icsid Case No. ARB/01/12, award (14 July 2006), para. 424 [Azurix v. Argentina]. “An award obliging the Republic to make payments to Windau in accordance with the Contract would also in effect be equivalent to ordering payment under Contract No. 16/07 in the present Treaty arbitration. The Arbitral Tribunal therefore finds the appropriate approach, for the time up to the time of this award, to be an assessment of compensation for the losses or damages inflicted on the Claimant’s investments.” See: Nykomb Synergetics Technology Holding v. Latvia, scc Case No. 118/2001, award (16 December 2003), para. 154. This is especially important when one takes into consideration the fact that legitimate expectations, understood as an element of the fet standard, can also play a role in determining whether there has been an indirect expropriation. See: Ioana Tudor, “Balancing the Breach of the fet standard,” (2007) 4:6 Transnational Dispute Management, p. 1 [Tudor], who observed: “In most cases, the breach of the fet standard also results in the expropriation of property, which means that the compensation awarded to the investor is calculated in the context of expropriation, rather than that of a breach of a standard of treatment. Few arbitral procedures have had the opportunity to calculate compensation directly and solely on the basis of a breach of the fet standard. A survey of recent cases reveals that the majority of investors’ claims contain both a claim for expropriatory and non-expropriatory violations. Few of these claims contain only a claim for non-­ expropriatory violations, and almost none have only claims for expropriatory violations.”

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As was described by the tribunal in the Biwater v Tanzania case, “[…] in many bit cases, arbitral tribunals appear to have simply deployed the fair market value of the investment in question as the measure of damages both for claims of expropriation and breaches of other treaty standards.”37 It can be concluded that no precise rules or standards of compensation apply in investor – state arbitration for breaches of the non-expropriatory standards of protection included in bits. Therefore, a breach of the bit other than by way of expropriation gives rise to a duty to provide for compensation as defined under general international law for internationally wrongful acts. The same approach may apply in certain situations to illegal expropriation, if the damage suffered by investors exceeds the fair market value of the expropriated investment.38 In consequence, as already noted, customary international law requires that the awarded compensation wipes out all of the consequences of the act which infringed the bit. It has been observed that: “[t]he customary rule of full compensation is of a very general nature and it does not offer a conceptual framework for the recovery of damages that would be comparable in specificity to the ‘value’ approach generally applicable in expropriation cases. Rather, it provides a general principle, according to which any loss suffered and established must be compensated in full. The generality of the customary rule provides t­ ribunals with flexibility as to what the precise methodology for assessing damages should be in a specific case.”39 Such situation results in a broad discretion being left to tribunals at the moment of taking decisions on how to assess the harm suffered following a breach of non-expropriatory standards.40 This discretion is further ­strengthened 37 38

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Biwater v. Tanzania, supra note 6, para. 777. It must be noted that the practical significance of this statement is limited. Mainly, if the damage exceeds the fair market value of the expropriated investment, it may be assumed that the prohibition on expropriation is breached in conjunction with a breach of the fet standard. When the same measure gives rise to allegations of breaches of different standards of protection, compensation is due for the damage caused by all breaches of an iia taken together. Therefore, the practical significance of this statement could be visible only when the bit in question contains a Narrow Jurisdiction clause, and therefore allegations of breach of the fet fall outside the scope of the tribunal’s jurisdiction. Ripinsky, Williams, supra note 2, pp. 90–91. Feldman Karpa v. Mexico, icsid Case No. ARB(AF)/99/1, award and separate opinion (16 December 2002), para. 197: “It is obvious that in both of these earlier cases [Pope & Talbot and S.D. Myers – author’s note], which as here involved non-expropriation violations of Chapter 11, the tribunals exercised considerable discretion in fashioning what they believed to be reasonable approaches to damages consistent with the requirements

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­because tribunals have the mandate, and are expected, to take into consideration a broad number of elements.41 The discretion of arbitrators at the moment of determining compensation can also be noticed at the moment when arbitrators choose the method of valuation of the loss suffered by investors to be applied in the particular case. There are various methods of valuation which are generally available. They include, for example, the market based valuation (“fair market value”), the discounted cash flow (“dcf”) or the book value and related methods focusing on historic cost and income information.42 In the context of availability of a variety of valuation methods, it is worth quoting a relevant passage from the decision of the tribunal in cms v. Argentina: “In the case of a business asset which is quoted on a public market, that process [determining the compensation – author’s note] can be a fairly easy one, since the price of the shares is determined under conditions meeting the above mentioned definition. However, it happens frequently that the assets in question are not publicly traded and it is then necessary to find other methods to establish fair market value. Four ways have generally been relied upon to arrive at such value. (1) The “asset value” or the “replacement cost” approach which evaluates the assets on the basis of their “break–up” or their replacement cost; (2) the “comparable transaction”

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of nafta.” In amt v. Zaire the tribunal first appointed an expert to determine the loss suffered by the investor. Then it treated it as one of the “circumstances” before it: “The tribunal proceeds to exercise its discretionary and sovereign power to determinate the quantum of compensation that the republic of Zaïre shall pay to amt, taking into account all the circumstances of the case before it.” See: American Manufacturing & Trading v. Zaire, icsid Case No. ARB/93/1, award and separate opinion (11 February 1997), para. 7.21. Similarly Kinnear: “What is required to effect full reparation in any particular case will be solely within the discretion of the tribunal.” See: Meg Kinnear, “Damages in Investment Treaty Arbitration,” in: Katia Yannaca-Small, “Arbitration under international investment agreements: a guide to the key issues” (Oxford University Press 2010), p. 560. Also Desierto: “As may be seen in the above approaches taken in different arbitrations arising from Argentina’s governmental measures during its 2001/2002 financial crisis, the arbitral tribunal has considerable discretion as to the choice of benchmarks to be used for estimating compensation in the form of reparations within the general law of international responsibility.” See: Diane A. Desierto, “Conflict of Treaties, Interpretation, and Decision-Making on Human Rights During Economic Crises,” (2013) 10:1 Transnational Dispute Management, p. 56 [Desierto – Conflict…]. At least with respect to the fet. See for example: Knoll-Tudor, supra note 3, p. 340: “[…] when ruling on a fet claim, the arbitrators account for a number of elements, such as the specific economic and political situation of the state, or a wrongdoing of the investor that has allegedly contributed to the violation of fet.” Wälde, Sabahi, supra note 2, pp. 1070–1079.

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approach which reviews comparable transactions in similar circumstances; (3) the “option” approach which studies the alternative uses which could be made of the assets in question, and their costs and benefits; (4) the “discounted cash flow” (“dcf”) approach under which the valuation of the assets is arrived at by determining the present value of future predicted cash flows, discounted at a rate which reflects various categories of risk and uncertainty.”43 Although the methods themselves are, naturally, based on objective criteria, the choice as to which method is to be applied in a particular case can result in different outcomes. It is even sometimes suggested that “the choice of valuation methodology favouring a lower-end outcome or of compensation-­ reducing concepts (eg mitigation, contributory negligence) can be used to achieve consensus” between the arbitrators so as to facilitate a unanimous decision.44 Every method of valuation entails a margin of “uncertainty.”45 This was well illustrated in the award rendered in Abengoa v Mexico. The tribunal in these proceedings decided to apply the discounted cash flow methodology. It was faced with two expert opinions applying the chosen methodology. The experts appointed by the parties to the dispute applied the same valuation method, but based their calculations of different data and therefore came to different outcomes. In view of this, the tribunal asked both experts to present a joint opinion. On the basis of this document, the tribunal analyzed the data applied by the experts in their calculations and decided which of them was to be used. Only after that did the tribunal arrive at the conclusion regarding the amount of compensation to be paid.46 This example proves the high degree of discretion available to tribunals. It shows that even the application of a specific method – in this particular case, the discounted cash flow – can result in different outcomes, depending upon which data is used for calculations. Also, the choice of applicable data depends, at least to a certain degree, on the tribunal. This is, however, not the end of tribunals’ scope of discretion when assessing the level of compensation. Although the valuation of loss suffered by the investor can be calculated objectively, by applying one of the objective methods, the starting point for the application of such methods is always the ­situation of the investor. Determining the starting point is necessary in order compare the investor’s situation before and after the breach of the applicable 43 44 45 46

cms v. Argentina, supra note 33, para. 403. Wälde, Sabahi, supra note 2, p. 1064. Abengoa and cofides v. Mexico, icsid Case No. ARB(AF)/09/2, award (18 April 2013), para. 685. Ibid, paras. 695–727.

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bit. In this ­context, it is important to determine the relevant period of time – i.e. the proper moment to which the valuation should refer. Another element of the investor’s situation which cannot be ignored are those elements of the investment which are to be taken into consideration. These elements of the investor’s situation are, at least to a certain extent, subjective.47 Thus, these factors also influence the scope of arbitrators’ discretion when determining the compensation due. iii Concept of Contributory Negligence In the realm of investor – state arbitration tribunals have the power to take “negligent behaviour by the investors into account when calculating damages due to them.”48 The concept of contributory negligence is included in art. 39 of the ilc Articles. Its application in bit arbitrations is confirmed by existing case law. In mtd v. Chile the tribunal reduced the compensation by 50% of the value of the loss suffered, due to the fact that “a wise investor” would not have acted in the way in which the claimant did.49 The tribunal provided no explanation as to the legal basis for the applied reduction. This finding was confirmed in the decision on annulment of the award. The annulment committee observed, among others, that “in an investment treaty claim where contribution is relevant, the respondent’s breach will normally be regulatory in character, whereas the claimant’s conduct will be different, a failure to safeguard its 47

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Wälde, Sabahi, supra note 2, p. 1115: “Valuation for compensation is essentially torn between two conflicting poles: on one hand, a subjective approach where the individual situation of the investor (always volatile, changing, and hard to identify objectively) is relied upon (eg to calculate interest rates, value an asset, identify risk relevant for discount rates) and, on the other hand, a more standardized or generic approach where an ‘objective’ generic comparator is used to identify the value and compensation due to the investor.” Dolzer, Schreuer, supra note 20, p. 295. mtd v. Chile, supra note 33, para. 243. The negligent behavior of the investor was explained by the tribunal in para. 242 of the award: “The Tribunal decided earlier that the Claimants incurred costs that were related to their business judgment irrespective of the breach of fair and equitable treatment under the bit. As already noted, the Claimants, at the time of their contract with Mr. Fontaine, had made decisions that increased their risks in the transaction and for which they bear responsibility, regardless of the treatment given by Chile to the Claimants. They accepted to pay a price for the land with the Project without appropriate legal protection. A wise investor would not have paid full price up– front for land valued on the assumption of the realization of the Project; he would at least have staged future payments to project progress, including the issuance of the required development permits.”

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own interests rather than a breach of any duty owed to the host State. In such ­circumstances, it is not unusual for the loss to be shared equally.”50 What is important, the annulment committee explained the legal ground of the reduction of ­compensation by referring to art. 39 of the ilc Articles.51 In Bogdanov v. Moldova the arbitral tribunal also reduced the due compensation. The reduction was also based on the behavior of the investor. In this case, the negligent behavior of the investor consisted in a failure to ensure that the concluded privatization contract contained “appropriately precise regulation of the compensation” payable in case of a breach of the contract.52 The award rendered in the Azurix v. Argentina case shows not only the power of tribunals to take into account the negligent behavior of investors, but also proves the existence of the previously noted discretion of tribunals when deciding the issue of compensation. In this case, the tribunal decided to apply the “actual investment method” as the valuation method in order to calculate the value of the investment.53 This led the tribunal to a certain outcome regarding the amount of due compensation. However, the tribunal reduced the achieved outcome by “adjusting” the obtained value to the real value of the investment. The reason behind that was to take into account the unreasonably high price paid by the investor for the concession, which constituted the investment in the case.54 With the passage of time, one can note a trend towards the recognition of the concept of contributory negligence and the relevance of this circumstance for the reduction of the awarded compensation. This issue was also analyzed in Gemplus v Mexico. The tribunal expressly referred to art. 39 of the ilc ­Articles as a ground for taking into account concepts known in domestic legal systems under denominations such as “contributory negligence,” “comparative fault,” “faute de la victime” etc.55 Despite analyzing this issue, in these

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mtd Equity and mtd Chile v. Chile, icsid Case No. ARB/01/7, annulment proceedings, decision on annulment (21 March 2007), para. 101. Ibid, para. 99. Iurii Bogdanov v. Moldova, Ad hoc—scc Arbitration Rules, award (22 September 2005), para. 84 [Bogdanov v. Moldova]: “The Arbitral Tribunal does not find that the Respondent is liable for payment of damages corresponding to the entire loss, and that the Local Investment Company must be deemed partially responsible for the loss because it did not ensure that the Privatization Contract contained an appropriately precise regulation of the compensation.” Azurix v. Argentina, supra note 34, para. 425. Ibid, para. 426. Gemplus et al. v. Mexico, icsid Case No. ARB(AF)/04/3, award (16 June 2010), para. 11.12.

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­ articular proceedings the tribunal did not find any contributory negligence p by the investors.56 Also the award rendered in Occidental v. Ecuador expressly refers to art. 39 of the ilc Articles.57 The tribunal recognized that there must be a causal link between the negligence and the damage suffered.58 Referring to the decision of the annulment committee in the mtd v. Chile case, the tribunal observed that “it is not any contribution by the injured party to the damage which it has suffered which will trigger a finding of contributory negligence. The contribution must be material and significant. In this regard, the Tribunal has a wide margin of discretion in apportioning fault.”59 After having analyzed the existence of the contributory negligence principle in international law, referring to the award in mtd v. Chile, the tribunal concluded that it “agrees that an award of damages may be reduced if the claiming party also committed a fault which contributed to the prejudice it suffered and for which the trier of facts, in the exercise of its discretion, considers the claiming party should bear some responsibility.”60 In Occidental v. Ecuador the tribunal found that the investor acted negligently and committed an unlawful act, and therefore the claimants should “pay a price” for that.61 The tribunal explained that, on the facts of the case, it was very difficult to weigh the relative causal link of a different series of causes which subsequently led to the state’s measures which infringed the bit and caused harm to the investors.62 Based on the whole analysis, the tribunal in Occidental v. Ecuador decided that “as a result of their material and significant wrongful act, the Claimants have contributed to the extent of 25% to the prejudice which they suffered.” It added that “[t]he resulting apportionment of responsibility as between the Claimants and the Respondent, to wit 25% and 75%, is fair and reasonable in the circumstances of the present case.” The tribunal also expressly confirmed that it exercised “wide discretion” when deciding on this issue.63

56 57 58 59 60 61 62 63

Ibid, para. 11.15. Occidental Petroleum and Occidental Exploration and Production v. Ecuador, icsid Case No. ARB/06/11, award (5 October 2012), paras. 665–668 [Occidental v. Ecuador]. Ibid, para. 669. Ibid, para. 670. Ibid, para. 678. Ibid, paras. 679–680. Ibid, para. 685. Ibid, para. 687. The award was partially annulled, but for reasons unrelated to the ­reduction of compensation and the principle of contributory negligence. The annulment committee explicitly referred to a 25% reduction and also applied it in its decision. See:

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The scope of the discretion exercised by the tribunal in Occidental v. Ecuador is striking. It must be noted that one of the arbitrators, Stern, issued a dissenting opinion which, based on her assessment of the facts, stated that: “a fair and reasonable apportionment of responsibility between the Claimants and the Respondent should more appropriately have been a 50/50 split.”64 It may be said that Stern would have exercised the discretion left to the tribunal differently. With respect to this issue, she explained that her dissenting opinion was not based on an error of law or an excess of power committed by the arbitral tribunal but, rather, on a “different appreciation of the factual situation, which is at the discretion of the Tribunal.”65 The dissenting arbitrator therefore expressly confirmed the wide scope of the discretion left to the tribunal. The applied reduction of compensation “[…] seems to be a very subjective exercise, because its nature defies any mathematical precision. This explains the wide divergence between the majority and the dissenting arbitrator in this case; converted into money, the arbitrators allocated about us$500 million (roughly 25 percent of the value plus interest) based on ‘discretion’. That is larger than all prior investment treaty arbitration awards but one or two.”66 Similar reasoning to that found in the Occidental v Ecuador case with respect to contributory negligence can be found in three awards related to the Yukos v Russia dispute.67 It can be noted that certain passages from the award rendered in Occidental were almost literally repeated in three Yukos awards.68

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Occidental Petroleum and Occidental Exploration and Production v. Ecuador, icsid Case No. ARB/06/11, decision on annulment of the award (29 October 2015), paras. 398, 585. Occidental Petroleum and Occidental Exploration and Production v. Ecuador, icsid Case No. ARB/06/11, dissenting opinion (20 September 2012), para. 8. Ibid, para. 7. Borzu Sabahi, Kabir Duggal, “Occidental Petroleum v Ecuador (2012) Observations on Proportionality, Assessment of Damages and Contributory Fault,” (2013) 28:2 icsid Review – Foreign Investment Law Journal, p. 289. Hulley Enterprises v. Russia, uncitral, pca Case No. aa 226, final award (18 July 2014) [Hulley v. Russia]; Yukos Universal Limited (Isle of Man) v. Russia, uncitral, pca Case No. aa 227, final award (18 July 2014) [Yukos v. Russia]; Veteran v. Russia, uncitral, pca Case No. aa 228, final award (18 July 2014) [Veteran v. Russia]. Hulley v. Russia, Yukos v. Russia and Veteran v. Russia are jointly referred to as the [Yukos awards]. The three cases were formally brought separately by each claimant and were not consolidated. However, the parties appointed the same arbitrators to each tribunal and the three tribunals proceeded to hear and decide the claims together in three substantially identical awards, which were handed down on the same day. See for example: Occidental v. Ecuador, supra note 57, paras. 666–670 and Yukos awards, ibid, paras. 1596–1600; see also: Occidental v. Ecuador, supra note 57, paras. 686 and 687 and Yukos awards, ibid, paras. 1636 and 1637. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:46PM via free access

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This can be explained to a certain extent by the fact that one of the arbitrators, Fortier, was an arbitrator in all these cases. When analyzing the issue of reduction of compensation, the tribunal hearing the three Yukos cases observed that it must determine whether there was a sufficient causal link between any willful or negligent act or omission of the investors, or the local company which they controlled, and the loss they ultimately suffered.69 It also made it clear that the investors’ contribution to the injury “must be material and significant” for the purpose of reducing the compensation due, and that the tribunal “has a wide margin of discretion in apportioning fault.”70 The tribunal in the Yukos cases clarified that the concept of contributory negligence cannot be confused with the investors’ duty to mitigate their losses.71 The facts underlying the dispute led the tribunal to conclude that investors “should pay a price” for the tax abuses committed by the local companies, which in turn contributed in a material way to the prejudice they subsequently suffered at the hands of the host state.72 The tribunal went on to analyze to what extent and in what proportion the investors’ conduct contributed to the measures undertaken by the host state, which was found to constitute expropriation, so as to lessen the responsibility of the host state.73 It finally decided that, as a result of the “material and significant misconduct” by the investors and the local company controlled by them, they had “contributed to the extent of 25 percent to the prejudice which they suffered.” It followed that the apportionment of responsibility is “fair and reasonable in the circumstances of the present case” and that in arriving at these conclusions, the tribunal had done nothing more than exercise its “wide discretion.”74 As one can notice, the reasoning adopted by the tribunal in the Yukos case is similar to the reasoning adopted in Occidental. What is striking, however, is that “[i]n its lengthy 615-page verdict, no explanation has been given by the tribunal on how did it arrive at 25 per cent of claimants’ contributory fault? Why not 30 or 40 or 50 per cent?”75 The first awards rendered in investor – state arbitrations which reduced compensation did so without explanation as to the legal basis for such a ­reduction. 69 70 71 72 73 74 75

Yukos awards, ibid, para. 1599. Ibid, para. 1600. Ibid, para. 1603. Ibid, para. 1634. Ibid, para. 1635. Ibid, para. 1637. See also: para. 1827. Kavaljit Singh, “The era of mega-arbitration: International court rules against Russia in $50 billion decision,” available at: http://www.bilaterals.org/?the-era-of-mega-arbitration &lang=en#sthash.6TYwau2H.KTi1QtxI.dpuf [accessed on 2 February 2017]. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:46PM via free access

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The awards do not explain where the authority to r­ educe ­compensation, ­applied by the tribunals hearings the cases, stems from. Proper attention to the legal basis of such powers was given in the Occidental and Yukos awards. The ­tribunals hearing these cases expressly referred to art. 39 of the ilc Articles, which reads as follows: “In the determination of reparation, account shall be taken of the contribution to the injury by wilful or negligent action or omission of the injured State or any person or entity in relation to whom reparation is sought.”76 The tribunals in Occidental and Yukos made use of their discretion provided in art. 39 of the ilc Articles. However, they did not provide an explanation as to how they came to these particular results when applying this provision. The tribunals did not explain why they decided to reduce the awarded compensation by the adopted figure (25%) as opposed to any other amount. From a theoretical perspective, the application of art. 39 of the ilc Articles in investor – state arbitrations can cause certain doubts. Art. 39 of the ilc Articles applies to obligations owed to states.77 Therefore, possible doubts relate to the nature of the obligations undertaken by states in bits. Do the obligations of the states undertaken in bits create investors’ own substantive and procedural rights (being therefore states’ obligations towards investors), or do they merely create procedural rights which can be applied to trigger arbitral proceedings related to alleged breaches of obligations owed to the state of the investor’s nationality (being therefore obligations towards the other contracting state, and not towards the investors themselves)? 76 77

ilc Articles, supra note 8, p. 109. Ibid, pp. 87–88: “Article 28 does not exclude the possibility that an internationally wrongful act may involve legal consequences in the relations between the State responsible for that act and persons or entities other than States. This follows from article 1, which covers all international obligations of the State and not only those owed to other States. Thus, State responsibility extends, for example, to human rights violations and other breaches of international law where the primary beneficiary of the obligation breached is not a State. However, while Part One applies to all the cases in which an internationally wrongful act may be committed by a State, Part Two has a more limited scope. It does not apply to obligations of reparation to the extent that these arise towards or are invoked by a person or entity other than a State. In other words, the provisions of Part Two are without prejudice to any right, arising from the international responsibility of a State, which may accrue directly to any person or entity other than a State, and article 33 makes this clear.” Art. 33 of the ilc Articles reads as follows: “1. The obligations of the responsible State set out in this Part may be owed to another State, to several States, or to the international community as a whole, depending in particular on the character and content of the international obligation and on the circumstances of the breach. 2. This Part is without prejudice to any right, arising from the international responsibility of a State, which may accrue directly to any person or entity other than a State.”

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The debate concerning the above distinction is illustrated by the so-called “Mexican sweeteners cases”: Cargill, Corn Products and Archer Daniels v Mexico.78 In these three cases one of the defenses invoked by Mexico was that the measures questioned by the investors constituted countermeasures taken against the United States of America. In order to properly explore this argument, the arbitral tribunals had to analyze the nature of the investors’ rights guaranteed in bits. In Archer Daniels v. Mexico the tribunal supported the approach that bits create procedural rights which remain obligations owed by one contracting state to the other contracting state. It observed that the relevant part of the nafta (which was the applicable treaty in that case) “sets forth substantive obligations which remain inter-State, without accruing individual rights for the Claimants” and “does not provide individual substantive rights for investors, but rather complements the promotion and protection standards of the rules regarding the protection of aliens under customary international law.”79 Thus, the obligations to accord certain standards of protection as required by bits “remain inter-state,” although there is a “procedural right” given to the investors to “trigger arbitration” against the host state.80 The possibility of commencing arbitral proceedings “makes the investor the holder of a procedural right.”81 This approach allowed the tribunal in Archer Daniels v. Mexico to agree on the general applicability of countermeasures in investor-state arbitration, although the tribunal did not find the requisites to have been fulfilled in this particular case.82 The tribunals in Corn Products v. Mexico and in Cargill v. Mexico came to opposite conclusions. They decided that countermeasures cannot preclude the wrongfulness of actions undertaken in breach of nafta Chapter 11 ­obligations.83 The tribunal in Cargill v. Mexico did not consider it “fruitful” to give a clear answer as to whether or not to characterize the investors’ rights as substantive or merely procedural. However, it observed that “it is the i­nvestor 78

79 80 81 82 83

Cargill v. Mexico, icsid Case No. ARB(AF)/05/2, award (18 September 2009) [Cargill v. Mexico], Corn Products International v. Mexico, icsid Case No. arb (AF)/04/1, decision on responsibility (15 January 2008) [Corn Products v. Mexico], Archer Daniels Midland and Tate & Lyle Ingredients Americas v. Mexico, icsid Case No. arb (AF)/04/5, award (21 November 2007) [Archer Daniels v. Mexico]. Archer Daniels v. Mexico, ibid, paras. 168, 171. Ibid, para. 173. Ibid, para. 177. Ibid, paras. 168, 171–173, with strong dissenting opinion on this issue. Cargill v. Mexico, supra note 78, para 424; Corn Products v. Mexico, supra note 78, para. 161.

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that institutes the claim, that calls a tribunal into existence, and that is the named party in all respects to the resulting proceedings and award.”84 In Corn Products v. Mexico the tribunal decided that “nafta confers upon investors substantive rights separate and distinct from those of the State of which they are nationals.”85 It explained that “states are not the only entities which can hold rights under international law; individuals and corporations may also possess rights under international law.”86 It concluded that, in its opinion, the intention of the nafta contracting states was “to confer substantive rights directly upon investors.”87 Therefore “an investor which brings a claim is seeking to enforce what it asserts are its own rights under the treaty and not exercising a power to enforce rights which are actually those of the State.”88 For the purposes of the present book it is unnecessary to engage in an indepth analysis of the proper approach towards the nature of the obligations undertaken by states in bits. If one agrees that these obligations remain interstate, the legal norm written in art. 39 of the ilc Articles can be invoked as the express basis for reducing compensation due to the behavior of investors.89 However, even if the second approach is agreed upon, in which situation art. 39 of the ilc Articles cannot be invoked as the directly applicable legal basis for reducing compensation due to the investors’ behavior, the legal norm expressed therein may be applied per analogiam, or at least indirectly influence a tribunal’s analysis. In both cases, the referred provision remains important for the application of the concept of contributory negligence and the related possible reduction of compensation due. It can be concluded that the legal norm expressed in art. 39 of the ilc Articles serves as a basis of the principle of contributory negligence and is applicable in investor – state arbitration. The practice of tribunals expressed in the awards rendered in the Occidental and Yukos cases confirms this conclusion. 84 85 86 87

88 89

Cargill v. Mexico, supra note 78, para 426. Corn Products v. Mexico, supra note 78, para. 167. Ibid, para. 168. Ibid, para. 169. The tribunal added: “The notion that Chapter xi conferred upon investors a right, in their own name and for their own benefit, to institute proceedings to enforce rights which were not theirs but were solely the property of the State of their nationality is counterintuitive.” Ibid, para. 174. The wording of the “direct applicability” of art. 39 may be misleading, as the whole document is not legally binding, being an attempt to codify and progressively develop international law. See: ilc Articles, supra note 8, p. 31: “These articles seek to formulate, by way of codification and progressive development, the basic rules of international law concerning the responsibility of States for their internationally wrongful acts” [author’s emphasis].

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The tribunals did not question the applicability of art. 39 of the ilc Articles due to the characterization of nature of the rights conferred upon investors by bits. However, even if one has doubts as to the direct applicability of art. 39 of the ilc Articles, the norm expressed there can be relied upon by analogy. Art. 39 of the ilc Articles establishes that the following three requirements must be met in order to apply the concept of contributory negligence: (i) the existence of an internationally wrongful act of a state, (ii) “wilful or negligent action or omission,” i.e. blameworthy conduct of the injured party, and (iii) a causal link between such the blameworthy conduct and the injury suffered by that party.90 The first and the third requirements are not expressly mentioned in the wording of the referred article. However, there is no doubt that they form part of the concept of contributory negligence. The first requirement can be deduced from the mere fact that the issue is regulated in Part ii of the ilc Articles. Whereas Part i of the ilc Articles defines the conditions necessary for the international responsibility of a state to arise, Part ii deals with the legal consequences of an internationally wrongful act for the responsible state. With reference to the third requisite, although it is not expressly included in the wording of art. 39 of the ilc Articles, it is beyond any doubt that there must be a causal link between the blameworthy conduct of the investor and the injury suffered. Contributory Negligence and Human Rights Violations Committed by Investors In some cases, the value of compensation awarded in investor – state arbitrations can reach very high levels. By way of example, the recent three awards in Yukos v. Russia amounted in total up to approximately 50 billion us dollars.91 This sum reflects the amount of the award after the 25% reduction applied due to the investors’ contributory negligence and without any payable interest being reflected. In Occidental v. Ecuador the awarded compensation amounted to approximately 1 billion 800 million us dollars, also following a 25% reduction due to the investors’ contributory negligence and without interest. By way of illustrating the proportions of compensation relative to the size iv

90

Wojciech Sadowski, “Yukos and Contributory Fault,” Transnational Dispute Management, advance publication (6 October 2014), p. 1 [Sadowski]. With respect to the second requirement, Sadowski uses the term “blameable.” However, this author prefers the more ­commonly used term “blameworthy.” 91 In Hulley v Russia the compensation was usd 39,971,834,360.00 in Yukos v. Russia the compensation was usd 1,846,000,687.00 whilst in Veteran v. Russia the compensation was usd 8,203,032,751.00.

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of a state’s economy, one can look at the compensation award in cme v Czech Republic which was set at approximately 270 million us dollars. It was significantly lower than the examples given above and it was not extraordinarily high in the practice of investor – state arbitration. At the same time, it was noted as being comparable to three times the annual budget of the Ministry of the Environment of the respondent state and to the annual budget of its Ministry of Health.92 The above by itself relates to an important issue. Mainly, separate human rights concerns can arise if an arbitral tribunal orders compensation of such an amount that the government is unable to pay it without cutting other expenses that may be relevant from a human rights perspective. As has been recognized, “economic instability […] can have negative effects on the enjoyment of human rights, straining available resources in national budgets needed for the progressive realization of economic, social and cultural rights and the right to development.”93 Thus, there is a risk of extensive compensation being awarded in possible investment cases. Together with a risk of commencement of new arbitrations by investors when host states consider or seek to introduce new laws and regulations that might impact on an investor or its investment, this can cause a so-called “regulatory chill.” In other words, the “threat” of arbitration and the risk of possible, high compensation may block the adoption of new laws and/ or regulations. This by itself can have a negative impact on states’ activity in 92

93

Mihir A. Desai, Alberto Moel, “Czech Mate: Expropriation and Investor Protection in a Converging World” (ECGI Workin Paper 2006) available at: http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=585843 [accessed on 2 February 2017], p. 14. See also: Peter S. Green, “Czech Republic Pays $355 Million to Media Concern,” New York Times (16 May 2003) W1, available at: http://www.nytimes.com/2003/05/16/business/czech-republicpays-355-million-to-media-concern.html [accessed on 2 February 2017]. Economic, Social and Cultural Rights, Human rights, trade and investment. Report of the High Commissioner for Human Rights, E/CN.4/Sub.2/2003/9, 2 July 2003, para. 8, p. 9. See also for example: Desierto – Conflict…, supra note 40, p. 29: “[i]t is clear that there would be a situation of incompatibility or direct treaty conflict between the host State’s duty to compensate investors, with the same State’s duty to observe the icescr minimum core obligation even in times of economic emergencies. Given a finite pool of public funds available to meet the host State’s obligations during an economic emergency, a situation could foreseeably arise where, due to the gravity of the economic emergency in the host State, the latter has to completely allocate all available public funds exclusively to providing the minimum essential levels required under the icescr minimum core obligation, leaving nothing for the compensation immediately due to investors injured by the host State’s direct or indirect expropriatory measures.”

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the field of human rights, preventing them from realizing their international obligations to protect and/or fulfil human rights.94 It is not uncommon for commentators to note that the determination of compensation can be the right moment when states’ obligations to respect, protect and fulfil human rights can have a real influence on investor – state arbitrations.95 The analysis commences from the perspective of the Second Model Situation in which an investor which brings a claim under a bit is involved in human rights violations in the territory of the host state. In other words, the Second Model Situation in this context relates to the question whether compensation awarded for a breach of the bit can be reduced due to human rights violations committed by the investor. The arbitral awards analyzed in the previous section evidence the practice of arbitral tribunals in which they confirmed their power to reduce compensation for a breach of a bit due to the behavior of investors. Looking at the 94

95

Jeff Waincymer, “Balancing Property Rights and Human Rights in Expropriation,” in: Pierre-Marie Dupuy, Ernst-Ulrich Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford University Press 2008), p. 309: “The human rights concern arises when a government cannot afford the compensation without cutting other important spending initiatives.” For example Knoll-Tudor, supra note 3, p. 340: “In the specific case of the fet, the last scenario, where the non-investment obligations are taken into account at the stage of compensation, appears to be promising.” She adds on p. 342: “The only stage where a human rights claim may impact upon a fet claim is the compensation stage. The tribunal, after considering a human rights claim, may conclude that the compensation of the investor has to be reduced proportionally to the investor’s violation of hr.” See also: Jasper Krommendijk, John Morijn, “‘Proportional’ by What Measure(s)? Balancing Investor Interests and Human Rights by Way of Applying the Proportionality Principle in Investor-State Arbitration,” in: Pierre-Marie Dupuy, Ernst-Ulrich Petersmann, Francesco Francioni, “Human Rights in International Investment Law and Arbitration” (Oxford University Press 2009), p. 423: “Within investor-state arbitration practice there are various interconnected ways in which states’ prerogatives to protect human rights can be accommodated: by (re)interpreting investment law provisions and principles, such as the fair and equitable treatment standard, to take account of parallel international obligations, and by mitigating the amount of compensation awarded.” See also for example: Diane A. Desierto, “Public Policy in International Economic Law. The ICESCR in Trade, Finance, and Investment” (Oxford University Press 2015), p. 718, when she states that human rights can be asserted “as an alternative defense to equitable mitigate or substantially reduce the ultimate value of compensation that it [the state – author’s note] must pay for incurring liability through the iia breach.” Similarly: Lahra Liberti, “Investissements et droits de l’homme,” in: Philippe Kahn, Thomas Wälde, “New Aspects of International Investment Law” (Brill 2007), p. 833 [Liberti].

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issue in chronological order, the first awards in which tribunals reduced the compensation provided no explanation as to the legal basis for making such a reduction. This trend evolved and, in recent awards, tribunals expressly based their powers on art. 39 of the ilc Articles. In other words, the principle of contributory negligence of investors, as illustrated in art. 39 of the ilc Articles, has been confirmed as the basis for reducing compensation in investor – state arbitration. The crucial question is whether human rights violations committed by investors can be deemed to constitute a “contribution to the injury.” In other words, can these actions of investors be considered as fulfilling the second requirement for the application of art. 39 of the ilc Articles – “wilful or negligent action or omission” of the injured party.96 Although this question may appear somehow surprising, proper attention must be paid to the fact that investment cases in which arbitral tribunals decided to reduce compensation related mainly to the behavior of investors which was understood to be “negligent” from an economic perspective. In the first cases, such negligent behavior related to “business activity,” such as payment of an elevated price for an investment in mtd v. Chile and the absence of precise contractual agreements to protect the investors’ interests in Bogdanov v. Moldova.97 In this author’s opinion, the arbitral awards rendered in the Occidental v. Ecuador and in Yukos v. Russia awards suggest that there is a trend from “economic” negligent behavior towards “illegal” negligent behavior.98 The tribunal in Occidental considered the violation of a relevant contractual provision to amount to contributory negligence. In the Yukos awards, in turn, the tribunals confirmed that contributory negligence can consist in violations of applicable tax regulations. It is submitted that there is no reason why arbitral tribunals would be barred from applying the same power to reduce compensation in situations where investors have engaged in behavior that violates human rights. This is in line with the trend of evolution in case law towards the illegality of investors’ behavior. In a simpler scenario, such behavior would be contrary to domestic laws implementing international human rights standards. In such a situation, there would be no difference when compared to actions which triggered the 96

97 98

For the ongoing considerations, it is assumed that the first (existence of an internationally wrongful act of a state) and third (the existence of a causal link between the blameworthy conduct and the injury suffered by that party) requisites are met. mtd v. Chile, supra note 33, Bogdanov v. Moldova, supra note 52. Occidental v. Ecuador, supra note 57, Hulley v. Russia, supra note 67, Yukos v. Russia, supra note 67, Veteran v. Russia, supra note 67. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:46PM via free access

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­applicability of the contributory negligence principle in the Yukos cases. Even if no such domestic laws had been adopted in a particular host state, the behavior of investors which violates human rights could be considered to contribute to the injury if it triggers the state’s reaction in accordance with the state’s international obligation to protect human rights. Obviously, despite the possible decision on reducing compensation in the above described situations, the findings of tribunals that a state has breached the applicable bit remain binding. It must be remembered that, in order to trigger the possible application of art. 39 of the ilc Articles, the conduct of the investor must be willful or negligent. The above is obviously conditioned upon a finding that the measures which breach the bit are undertaken by the state as a response to human rights violations committed by the investor and in pursuit of the state’s obligation to protect human rights. Otherwise, the third requirement for the application of art. 39 of the ilc Articles – i.e. a causal link between the blameworthy conduct and the injury suffered – would not be fulfilled. The conclusions presented above find support in certain opinions expressed by academics. According to Dumberry and Dumas-Aubin “[t]here is no doubt that a tribunal has power to take the investor’s behavior into account when calculating compensation. Some arbitral awards have reduced compensation based on the investor’s behavior (on matters unrelated to human rights violations). Also, nothing prevents a tribunal from taking into account international obligations arising under other areas of international law than international investment law to determine the quantum of compensation.”99 Also Knoll-Tudor observed that a possible violation of human rights by investors may influence the level of compensation awarded for breach of the fet standard: “One possible situation in which a tribunal would have to examine the consequence of a breach of human rights by an investor is that of a State arguing in its defence, that its actions, which presumably violated the fet standard, were determined by the need to end a violation of human rights by the investor. One can imagine, for example, a unilateral termination of a contract by the host State because the investor was not respecting the labor conditions of the nationals he was employing. In this case, since fairness and equity imply that each one of the Parties receives what it deserves, only an investor who respects human rights deserves full compensation.”100 In the quoted paragraph, Knoll-Tudor refers to the concept of fairness and equity. On other occasion, 99

Patrick Dumberry, Gabrielle Dumas-Aubin, “How to Impose Human Rights Obligations on Corporations Under Investment treaties? Pragmatic Guidelines for the Amendment of bits,” (2012) Yearbook on International Investment Law & Policy 2011–2012, pp. 595–596. 100 Tudor, supra note 36, p. 20. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:46PM via free access

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she also relies on the “clean hands” doctrine, understood as meaning that an investor (i) should not receive “full compensation for a situation to which he or she contributed,” and (ii) the awarded compensation should be reduced “proportionally to the investor’s violation of hr.”101 Although the “clean hands” doctrine does not form part of international law102 and is obviously a concept separate from that of contributory negligence, the above opinion strengthens the idea that the violations of human rights by investors might be treated in certain circumstances as amounting to a “contribution to injury” (or in other words be considered as a “blameworthy conduct”). Furthermore, the concept of “caveat investor” presented by Muchlinski should be referred to.103 Muchlinski argues that the behavior of an investor is relevant for its claims alleging a breach of the fet standard. In accordance with this concept, investors have three major duties: (i) a duty to refrain from unconscionable conduct, (ii) a duty to engage in the investment in the light of an adequate knowledge of its risks, and (iii) a duty to conduct business in a reasonable manner.104 He differentiates between the various consequences arising from a breach of these duties. Whilst a breach of the first duty “may vitiate any right to a claim,” a possible breach of the other two duties “may result in a reduction of compensation commensurate with the causal connection between the investor’s conduct and the degree of loss that can be attributed to that conduct, rather than to any alleged abuse of regulatory powers on the part of the host country.”105 The third of the identified duties requires investors not only to manage their investments in the best interests of their shareholders, but also to demonstrate “a corporate responsibility to act in the best interests 101 Knoll-Tudor, supra note 3, pp. 341–342. With reference to the “clean hands” doctrine she explains on p. 341 that, in accordance with this equity principle which dates back to the 18th century, “a person coming to court with a lawsuit or petition for a court order must be free from unfair conduct (have ‘clean hands’) with regard to the subject matter of his or her claim.” The presented approach is in line with the maxim “he who seeks equity must do equity.” 102 James Crawford, “Second report on State responsibility,” (1999) ii:2 Yearbook of the International Law Commission, A/CN.4/SER.A/1999/Add.1 (Part 1), p. 83, para. 336. Even if its presence in international law was accepted, it would be considered as a question of admissibility of the claim rather than a factor relevant at the compensation stage. See: para. 333, p. 83. 103 Peter Muchlinski, “ ‘Caveat Investor’? the Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard,” (2006) 55:3 The International and Comparative Law Quarterly. 104 Ibid, p. 530. 105 Ibid.

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of the host country and its economic development.”106 This brief description of the concept of “caveat investor” supports this author’s position with respect to the Second Model Situation, i.e. that violations of human rights committed by investors are capable of leading to a reduction in compensation due for a breach of a bit. Although the opinions of Knoll-Tudor and Muchlinski were presented in the context of an analysis of the fet standard, there is no reason why such considerations would not also be applicable to other standards included in bits. In summary, in the Second Model Situation it is possible to apply art. 39 of the ilc Articles – directly or per analogiam, depending upon how one assesses the nature of obligations imposed on states in bits – and to reduce the level of compensation awarded for a breach of bit due to investors’ contributory negligence consisting in human rights violations. This conclusion does not apply to instances of lawful expropriation. As stated above, one of the conditions of lawful expropriation is the payment of “effective and adequate” compensation. In the context of lawful expropriation, compensation is payable not by virtue of a breach of a bit, but as one of the requisites of lawful expropriation. Art. 39 of the ilc Articles – as applicable to compensation for internationally wrongful acts – is not applicable to compensation for lawful expropriation.107 In this context, it is observed that contributory negligence should not “serve in investment treaty arbitration as a rule of equity available to the tribunals when they intend to do justice.”108 This author shares these concerns. Art. 39 of the ilc Articles encompasses a defined legal concept. Although it grants a wide margin of appreciation to tribunals, it remains to be a legal tool available in the course of arbitral proceeding based on bits. It cannot be assumed that applying the concept of contributory negligence serves the purpose of “doing justice” by tribunals. At the same time it should be noted that, in general, if contribution to the injury is to be set at a level which exceeds 50%, this could mean that the investor’s conduct was itself the main reason for the injury. Such a situation could 106 Ibid, p. 548. 107 Another question is whether these considerations affect the possibility of reducing compensation for illegal expropriation. If one agrees with the presented argument concerning lawful expropriation, it may be argued that a reduction for illegal expropriation could be possible only to the extent of the amount of compensation which exceeds the value of the taken property, i.e. the potential difference in compensation between lawful and unlawful expropriation. 108 Sadowski, supra note 90, p. 32.

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“give rise to doubts whether, under the facts of a particular case, the state should bear any responsibility for its acts, or whether it would rather be appropriate to let the investor bear the consequences of the self-inflicted loss.”109 In other words, in such a situation, the conduct of the investor may primarily be relevant in determining whether or not there was a breach of the bit at all and, thus, whether the international responsibility of the state arises at all. Answers are always fact specific. Keeping in mind the above, it must be noted that the tribunal’s assessment of the extent to which the investor’s “wilful or negligent action or omission” conduct contributed to the injury (and the actions of the state in general) ­explains why the same considerations may be relevant for both stages – i.e. during both the merits and compensation stages. If the tribunal decides that the human rights violations committed by the investor had a causal link with the reaction of the state, but nevertheless that they represented a contribution of 50% or less to the injury, the tribunal can decide that the compensation due should be reduced. If the human rights violations triggered the state’s reaction, being its main cause, and thereby contributed more than 50% to the injury ultimately suffered, it is a question of the merits as to whether there was an illegally wrongful act committed by the host state (breach of the bit) at all. To summarize this section, arbitral tribunals hearing investment disputes based on bits enjoy a broad discretion at the moment of determining the level of compensation and the possible reduction thereof. In the Second Model Situation, tribunals can apply the principle of contributory negligence and reduce the awarded compensation. In this sense, host states’ international obligations to protect human rights, which require them to take actions to protect individuals against human rights violations committed by investors, can impact on the amount of compensation awarded in investor – state arbitration. v Reduction of Compensation and Remaining Human Rights Concerns The possibility of reducing the levels of compensation due for a breach of a bit becomes less clear when one analyzes it from the perspective of the First Model Situation – i.e. where the investor is not involved in any human rights violations, but nevertheless the host state invokes its international obligation to fulfil human rights in order to justify the measures which were found to breach the bit. In this scenario, the reaction of the state is therefore independent of the investors’ behavior. 109 Ibid.

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Examples of case law concerning such factual situations are given in Chapter 1. Some of the examples refer to the right to water and disputes ­concerning privatized water sectors. In this context, the obligation to ensure the human right to water requires states “to adopt the necessary measures directed towards the full realization of the right to water,” including “sufficient recognition of this right within the national political and legal systems, preferably by way of legislative implementation; adopting a national water strategy and plan of action to realize this right; ensuring that water is affordable for everyone […].”110 These regulatory actions require measures such as of “appropriate pricing policies such as free or low-cost water.”111 Such pricing policies may be pursued in many ways, including by the adoption of legislation introducing subsidies. However, improper strategies or their ineffective implementation may lead to economic loss for investors who operate in the privatized water sector and result in bit claims. In addition, the obligation to fulfil the human right to water requires states to “adopt comprehensive and integrated strategies and programmes to ensure that there is sufficient and safe water for present and future generations. Such strategies and programmes may include: (a) reducing depletion of water resources through unsustainable extraction, diversion and damming; […].”112 One may expect such regulations to impose on investors additional, new ­expenses. Also such regulations adopted by host states may be potentially challenged in bit arbitrations, for example as being contrary to legitimate expectations under the fet standard. From the perspective of this book, art. 39 of the ilc Articles cannot serve as a basis for reducing compensation in the First Model Situation. There can be no “contribution to the injury” by an investor who has not been involved in any human rights violations. As a result, there is no legal basis for arbitral tribunals to formally deduct anything from compensation due to such an investor. In this context, it must be recognized that certain academics have suggested that arbitral tribunals can depart from the standard of full compensation if a measure which is found to have breached a bit was undertaken by the state in pursuit of the state’s positive obligations in the field of human rights. This would allow the tribunal to “balance” the interests of the investor and the state.113 Such an approach can definitely be seen as “just” and in accordance 110 un Committee on Economic, Social and Cultural Rights, General Comment No. 15 (E/C.12/2002/11), para. 26 [General Comment 15]. 111 Ibid, para. 27. 112 Ibid, para. 28. 113 Liberti, supra note 95, p. 845.

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with what is required by a general sense of equity. However, in this author’s opinion, this theory is not based on any legal ground. As such, there is no legal basis for its application. This does not mean that human rights are incapable of having any impact on compensation in the First Model Situation. It has already been noted that, when deciding on the issue of compensation, arbitral tribunals are granted considerable discretion. This discretion can be considered as opening the door – at least to a certain degree – to the possibility of introducing human rights considerations during the compensation stage of the arbitral proceedings. At the same time, compensation must be based on the loss of the investor. This loss must be objectively proven. This is done by way of applying one of the valuation methods. It has already been noted that the choice between various objectively available valuation methods lies within the discretion of tribunals. The tribunal in adc v. Hungary observed: “[…] the assessment of damages is not a science. True it is that the experts use a variety of methodologies and tools in order to attempt to arrive at the correct figure. But at the end of the day, the Tribunal can stand back and look at the work product and arrive at a figure with which it is comfortable in all the circumstances of the case.”114 It has been confirmed that the choice of the valuation methodology to be applied in a particular case from various objectively available methods of valuation can be used by to achieve a consensus amongst arbitrators and to render a unanimous award.115 The above can be also perceived as “equitable considerations.”116 It is commented that “[t]he psychological need of being ‘comfortable’ with the outcome of the award opens the door for considerations of an equitable nature.”117 In addition, “[b]ecause of difficulties involved in the precise assessment of damages, subjective elements present in many assessment methodologies and the need for approximations, tribunals are almost inevitably, although to varying degrees, guided by equitable considerations.”118 114 adc Affiliate and adc & admc Management v. Hungary, icsid Case No. ARB/03/16, award (2 October 2006), para. 521. 115 Wälde, Sabahi, supra note 2, p. 1064. 116 Ibid, p. 1105. In addition, “equitable considerations” can theoretically also serve as a concept which seeks to correct possibly excessive results of an applied valuation methodology and, as such, serve as an “emergency brake.” However, it is more controversial to apply “equitable considerations” not at the moment when the choice of valuation methodology is made but, rather, once the extent of damage has already been valuated. 117 Ripinsky, Williams, supra note 2, p. 124. 118 Ibid.

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The above was confirmed, albeit outside the context of human rights, for example by the tribunal in Tecmed v. Mexico, which observed that: “the Arbitral Tribunal also considers that, although the Arbitral Tribunal may consider general equitable principles when setting the compensation owed to the Claimant, without thereby assuming the role of an arbitrator ex aequo et bono, the burden to prove the investment’s market value alleged by the Claimant is on the Claimant.”119 A similar observation was made by the tribunal in Santa Elena v. Costa Rica when it analyzed the issue of interest payable and was faced with the choice between compound and simple interest: “[…] the determination of interest is a product of the exercise of judgment, taking into account all of the circumstances of the case at hand and especially considerations of fairness which must form part of the law to be applied by this Tribunal.”120 It was noted that, although it is not expressly stated in the text of the award, it can be read between the lines that the tribunal took equitable considerations into account when determining the amount of compensation and interest to be paid and balanced the interests of the two parties. “At the end of the day, the Santa Elena Tribunal, perhaps consciously, granted compensation in an amount that, on the one hand, would not ‘break’ Costa Rica, or, worse still, tempt it back for lack of funds to consider returning a World Heritage Site back to its owners for development into a ‘Disney-field’ golf courses and hotel resort, and, on the other hand, would not so far disappoint [claimant’s] expectations as to cause it to seek annulment of the Award.”121 The above proves that, also when choosing from the objectively available options which valuation method to apply in a particular case, arbitrators hearing investment disputes are granted a considerable margin of discretion. The use of this discretion may be driven by concepts such as “fairness” or ­“equity.” As Ripinsky and Williams correctly observed, “[t]he notion of equity is ­inherently subjective: a conception of what is equitable or fair in particular circumstances will differ depending on a view-point, so there can be little guidance as to the application of the principle. In this respect, much depends on the personal 119 Técnicas Medioambientales Tecmed v. Mexico, icsid Case No. arb (AF)/00/2, award (29 May 2003), para. 190 [Tecmed v. Mexico]. 120 Compañia del Desarrollo de Santa Elena v. Costa Rica, icsid Case No. ARB/96/1, final award (17 February 2000), para. 103. 121 Charles N. Brower, Jarrod Wong, “General Valuation Principles: The Case of Santa Elena” in: Todd Weiler, “International Investment Law and Arbitration: Leading Cases from the icsid, nafta, Bilateral Treaties and Customary International Law” (Cameron May 2005), pp. 774–775. They add: “All told, the case of Santa Elena makes for a fascinating yet instructive story, not least for what one might read between the lines.”

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and collective views and beliefs of the members of the arbitral tribunal and their reading of the facts of the case. Generally, however, in the context of an investment dispute, equitable considerations can well serve as a basis for finding a just balance between private interests of the foreign investor and public interests of the respondent State.”122 This author can see no reason why the same discretion in the choice of valuation method could not be applied in cases which are sensitive from the human rights perspective and which can be categorized as falling within the First Model Situation. In this context, the discretion could be used to lower the quantum of compensation with the aim of achieving “balance” between, on the one hand, the breach of the applicable bit and, on the other hand, the host state’s obligation to fulfil human rights. This is without prejudice to the limitation that arbitrators can make use of this discretion only within the limits of principles governing compensation, that is (i) using a valuation method from those which are objectively available in a particular case, (ii) respecting the need for “full and adequate” compensation for legal expropriation or compensation which aims at wiping out all damage caused by an illegal act. From the analysis included in the present section, it can be summarized that arbitral tribunals have been granted a certain discretion when deciding upon the amount of compensation to be paid for breaches of bits. Although in the First Model Situation no legal ground exists for the formal reduction of compensation, tribunals may use their discretionary power at the moment of choosing which of the valuation methods objectively available shall be applied in the particular case. By doing so, they can introduce an element of “balancing” interests of investors and host states, seeking to accommodate the host state’s international obligation to fulfil human rights. However, they must not ignore the requirement for compensation to be “effective and adequate” insofar as concerning lawful expropriation and for compensation to “wipe out” all consequences from an unlawful act which breaches a bit. vi Concept of Moral Damages123 In international law the term “damage” includes both: (i) “material” and (ii) “moral” damage. As affirmed in art. 31(2) of the ilc Articles: “Injury includes any damage, whether material or moral, caused by the ­internationally

122 Ripinsky, Williams, supra note 2, p. 126. 123 In the context of Sections (vi) and (vii) see also: Filip Balcerzak, “The extent of human rights protection for investors in arbitration based on international investment treaties,” (2016) vii Czech Yearbook of International Law, pp. 29–63.

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­ rongful act of a State.”124 Moral damage can be also described as “non-­ w material” damage.125 The concept of moral damage dates back to 1923, when the United States – Germany Mixed Claims Commission issued an “Opinion in the Lusitania cases” which recognized an obligation to compensate moral damage. The ­commission observed, among others, that the difficulties in valuation of moral damage should not preclude payment of compensation for it. At the same time, compensation for moral damage should not constitute punitive damages imposed on the respondent: “That one injured is, under the rules of i­ nternational law, entitled to be compensated for an injury inflicted resulting in mental suffering, injury to his feelings, humiliation, shame, degradation, loss of social position or injury to his credit or to his reputation, there can be no doubt, and such compensation should be commensurate to the injury. Such damages are very real, and the mere fact that they are difficult to measure or estimate by money standards makes them none the less real and affords no reason why the injured person should not be compensated therefor as compensatory damages, but not as a penalty.”126 Although it must be agreed that “there is no universally accepted definition of moral damages,”127 they are described as including “such items as individual pain and suffering, loss of loved ones or personal affront associated with an intrusion on one’s home or private life.”128 They are considered as “non-economic interests of investors,” as opposed to material damage being “damage to property, contractual or other economic interests of investors.”129 Moral damage is sometimes described as meaning simply the opposite of material damage.130 124 ilc Articles, supra note 8, p. 91. 125 Patrick Dumberry, “Satisfaction as a Form of Reparation for Moral Damages Suffered by Investors and Respondent States in Investor – State Arbitration Disputes,” (2012) 3:1 Journal of International Dispute Settlement, available at: http://ssrn.com/abstract=1996500 [accessed on 2 February 2017], p. 2 [Dumberry – Satisfaction…]. 126 Opinion in the Lusitania Cases, us – Germany Mixed Claims Commission, 1 November 1923, Reports of International Arbitral Awards, vol. vii, pp. 32–44 (United Nations 2006), available at: http://legal.un.org/riaa/cases/vol_VII/32-44.pdf [accessed on 2 February 2017], p. 40. 127 Matthew T. Parish, Annalise K. Nelson, Charles B. Rosenberg, “Awarding Moral Damages to Respondent States in Investment Arbitration,” (2011) 29:1 Berkeley Journal of International Law, p. 225 [Parish, Nelson, Rosenberg]. 128 ilc Articles, supra note 8, p. 92. 129 Ripinsky, Williams, supra note 2, p. 307. 130 Patrick Dumberry, “Compensation for moral damages in investor – state arbitration ­ disputes,” (2010) 27:3 Journal of International Arbitration, p. 248 [Dumberry – Compensation…].

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Under international law, the general obligation to compensate for non-­ economic harm has been affirmed in numerous human rights cases, but also in awards of mixed arbitral tribunals, the ilo tribunal, the Court of Justice of the European Union and in the jurisprudence of the International Tribunal on the Law of the Sea.131 It is basically accepted that monetary compensation in international law is considered to be an appropriate remedy for moral damage suffered by an individual, whilst satisfaction – as a form of reparation for an internationally wrongful act – is adequate for moral damage caused directly to a state, not its nationals.132 In this sense, compensation is due for moral damage which is financially assessable, whereas satisfaction is appropriate for “those injuries, not financially assessable, which amount to an affront to the State.”133 Therefore, compensation would also constitute proper reparation for financially assessable moral damage which directly affects a state. The issue of moral injuries suffered by investors has been analyzed by tribunals hearing investor – state arbitrations based on bits. In Desert Line Projects v. Yemen the tribunal decided to award compensation for moral damage suffered by the investor.134 The claimant was a construction company which entered into contracts with the host state’s government for the construction of roads. The government did not pay the invoices and subsequently forced the investor to enter into an unfavorable settlement agreement. The investor claimed that its officers suffered psychological damage caused by actions undertaken by the state. The armed forces dispatched by the government and other armed groups opened fire when confronted with the investor’s personnel, committed “harassment, threat and theft” and detained members of the claimant’s personnel.135 The investor argued that its executives “suffered

131 Conway Blake, “Moral Damages in Investment Arbitration: A Role for Human Rights?” (2012) 3:2 Journal of International Dispute Settlement, p. 373 [Blake]. 132 Dumberry – Satisfaction…, supra note 125, p. 1. This is true not only under international law in general, but also with respect to international investment law in particular. However, in the latter context there are also views that this “mainstream” view “that moral damages are a ‘one-way street’ open only to investor claimants, but not respondent states” is not appropriate and that compensation for moral damages should be allowed also for respondent states. See: Parish, Nelson, Rosenberg, supra note 127, p. 226. 133 ilc Articles, supra note 8, p. 106. 134 Desert Line Projects v. Yemen, icsid Case No. ARB05/17, award (6 February 2008) [Desert Line v. Yemen]. 135 Ibid, paras. 20, 26, 27, 33, 38. It was also claimed that, at a certain moment, works performed by the investor were interrupted by a subcontractor and that “15 armed i­ ndividuals,

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the stress and anxiety of being harassed, threatened and detained by the Respondent as well as by armed tribes; the Claimant has suffered a significant injury to its credit and reputation and lost its prestige; the Claimant’s executives have been intimidated by the Respondent in relation to the Contracts.”136 When analyzing the issue of moral damages, the tribunal recognized that “[e]ven if investment treaties primarily aim at protecting property and economic values, they do not exclude, as such, that a party may, in exceptional circumstances, ask for compensation for moral damages. It is generally accepted in most legal systems that moral damages may also be recovered besides pure economic damages. There are indeed no reasons to exclude them.”137 The tribunal added that, in specific circumstances, legal persons and not merely natural persons may be awarded moral damages – including a loss of reputation.138 On the facts of this particular case, the tribunal decided that the violations of the applicable bit, and “in particular the physical duress exerted on the executives of the Claimant, as malicious and is therefore constitutive of a fault-based liability. Therefore, the Respondent shall be liable to reparation for the injury suffered by the Claimant, whether it be bodily, moral or material in nature. The Arbitral Tribunal agrees with the Claimant that its prejudice was substantial since it affected the physical health of the Claimant’s executives and the Claimant’s credit and reputation.”139 In consequence, the tribunal awarded the investor one million us dollars for moral damage, including for loss of reputation.140 However, the tribunal did not explain on what legal basis it awarded compensation to the claimant – a legal entity – for the moral damage suffered by natural persons, the claimant’s employees. These natural persons did not have standing by themselves to be a party to the arbitral proceedings, as they did not qualify as “investors” under the applicable bit. This case is not the only one to have awarded moral damages in investor – state arbitration. References are frequently made to Benvenuti v. Congo.141

136 137 138 139 140 141

d­ emanding payment of outstanding invoices and threatening the Claimant’s personnel.” See: ibid, para. 19. Ibid, para. 286. Ibid, para. 289. Ibid. Ibid, para. 290. Ibid. Benvenuti and Bonfant v. Congo, icsid Case No. ARB/77/2, award (8 August 1980) [Benvenuti v. Congo]. Reference to the case was made, for example, by the tribunal in Rompetrol v. Romania case. See: Rompetrol v. Romania, supra note 5, footnote 451.

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However, this author observes that this case was not based on a bit but, rather, on an investment contract between the investor and the government of the respondent state.142 Furthermore, the parties agreed that the tribunal rendered its decision on an ex aequo et bono basis.143 Despite the above reservations, it should be noted that in Benvenuti v. Congo the claimant also sought moral damages.144 The dispute concerned the execution of an agreement to establish a local company to manufacture plastic bottles. The claimant alleged that the government expropriated 40% of its shares in this joint venture. The factual background of the case included criminal proceedings against one of the investor’s officers. The Italian diplomatic authorities advised the officer to leave the country and the military occupied the investor’s premises.145 The tribunal awarded compensation for the value of the interest of the shares in the joint venture as well as for lost profits. With respect to moral damages, the claimant sought to recover loss of credit with suppliers and banks, loss of business opportunities and loss of personnel, as its employees “dispersed” following their “forced and precipitous departure from Congolese territory.”146 Faced with this claim, the tribunal considered these allegations to be “mere assertions unaccompanied by concrete evidence, or even the beginning of evidence.”147 Nevertheless, the tribunal awarded compensation for moral damages: “in view of the measures to which B and B has been subject and the suit that was the consequence thereof, which have certainly disturbed the activities of B and B, the Tribunal deems it equitable to award it the amount of cfa 5,000,000 for moral damages.”148 However, it was correctly noted by commentators that the awarded compensation was not in fact a reparation of the moral injury suffered by the claimant or its officers. Its aim was rather to address the consequences of disturbances to the investor’s activities. Moreover, the approach of the tribunal towards moral damages would probably have been different had not the tribunal been deciding on an ex aequo et bono basis.149 142 Denominated also as Congo-Brazzaville. See: Benvenuti v. Congo, ibid, para. 1.1. 143 Ibid, paras. 1.22, 4.4. This is expressly allowed by the icsid Convention, which in its art. 42(3) states: “The provisions of paragraphs (1) and (2) shall not prejudice the power of the Tribunal to decide a dispute ex aequo et bono if the parties so agree.” 144 Ibid, para. 3.1. 145 Ibid, para. 2.23. 146 Ibid, para. 4.95. 147 Ibid, para. 4.96. 148 Ibid, para. 4.96. 149 Dumberry – Compensation…, supra note 130, p. 255.

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Numerous examples exist of awards rendered in investor – state arbitrations which confirm that “[d]espite clear principles governing compensation for moral injury in international law, arbitral tribunals have displayed a reticence in awarding this remedy.”150 Pey Casado v. Chile concerned an individual who owned shares in a local newspaper in Chile, which were confiscated by the military junta in 1973.151 After this happened, the claimant fled to Spain. He returned to Chile in the late 80s, following a change of government. As he was unable to obtain any remedies for the expropriation before the domestic courts, he commenced bit proceedings under the Chile – Spain bit. The tribunal decided that it did not have the jurisdiction to assess measures undertaken by the state before 1994, when the bit entered into force. However, the tribunal decided that the claimant’s inability to obtain a decision rendered by domestic courts for about 7 years constituted a denial of justice, which amounted to breach of the fet standard. What is important in the present context is that the claimant sough compensation for moral damage. The tribunal did not award compensation for moral loss because it considered that the claimant had failed to provide sufficient proof.152 However, the tribunal added that, despite having decided not to award compensation for moral damage, it considered the arbitral award to constitute “substantial and sufficient moral satisfaction” since it recognized the claimant’s rights and denial of justice.153 The approach adopted by the tribunal in Pey Casado v. Chile can be understood as meaning that an award itself, which declares the wrongfulness of state actions, can constitute satisfaction – as a form of reparation – for moral damage suffered.154 It remains unclear whether the tribunal would have adopted the same approach had the tribunal found proof of actual moral loss suffered by the investor in this particular dispute. As the tribunal found no proof of moral loss suffered, the conclusion refers to a situation in which no such loss was proven. The respondent requested the annulment of the award issued in the Pey Casado v. Chile case. On the basis of art. 52(1)(d) and art. 52(1)(e) of the icsid Convention, the committee annulled part of the award related to damages.155 150 Blake, supra note 131, p. 371. 151 Victor Pey Casado and President Allende Foundation v. Chile, icsid Case No. ARB/98/2, award (8 May 2008). 152 Ibid, para. 689. 153 Ibid, para. 704. 154 See for example: Dumberry – Satisfaction…, supra note 125, pp. 20–21. 155 These provisions state as follows: “Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the ­following

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The reasons for the annulment related to the right of the parties to the arbitral proceedings to be heard and the fact that the award contained contradictory reasoning on the issue of the amount of compensation and the appropriate calculation method.156 They did not refer to the issue of moral damages. Therefore, the annulment committee did not question the validity of the tribunal’s approach concerning moral damages, described above. Similar conclusions can be drawn from the award rendered in Lemire v. Ukraine.157 The dispute concerned an individual who invested in the radio broadcasting industry. The bit claim was based on allegations that the respondent unfairly rejected several of the claimant’s applications for new radio frequencies. The tribunal bifurcated the proceedings. In 2010, it issued a decision on jurisdiction and liability, in which it held that Ukraine had violated the fet standard and that the claimant was entitled to compensation. It left the quantification of compensation for the next stage of the proceedings. The investor sought, inter alia, compensation for moral damage. His allegations were summarized by the tribunal in the following way: “the Ukrainian authorities’ desire to get rid of an annoying American investor, by systematically denying any application for further frequencies, thwarting plans to create new channels, and harassing him with irregular inspections and difficulties for the renewal grounds: (d) that there has been a serious departure from a fundamental rule of procedure; or (e) that the award has failed to state the reasons on which it is based.” 156 Victor Pey Casado and President Allende Foundation v. Chile, icsid Case No. ARB/98/2, decision on the application for annulment (12 December 2012). With respect to the right to be heard, in para. 269 the annulment committee observed: “The Committee considers that this departure from the right to be heard which it has found is serious as the issue on which Chile was denied an opportunity to be heard was substantial and outcomedeterminative. Chile was deprived of the right to present its arguments on the standard applicable to the calculation of damages for the breach by Chile of the fair and equitable treatment provision of the bit. […]” With respect to the failure to state reasons, in para. 285 the committee stated: “The Tribunal’s use of the expropriation-based damage calculation is manifestly inconsistent with its decision a few paragraphs earlier that such an expropriation-based damage calculation is irrelevant and that all evidence and submissions relevant to such a calculation could not be considered.” In the following paragraph it added: “While the Committee recognizes that arbitral tribunals are generally allowed a considerable measure of discretion in determining quantum of damages, the issue in the present case is not per se the quantum of damages determined by the Tribunal. Nor does the problem lie per se in the Tribunal’s chosen method of calculating the damages suffered by the Claimants. The issue lies precisely in the reasoning followed by the Tribunal to determine the appropriate method of calculation, which, as demonstrated above, is plainly contradictory.” 157 Joseph Charles Lemire v. Ukraine, icsid Case No. ARB/06/18, award (28 March 2011) [Lemire v. Ukraine].

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of his licence.”158 Thus, the tribunal considered the claim for compensation for moral damage as founded in allegations of harassment by the state authorities and related to the “anxiety, pain and suffering” alleged by the claimant.159 The tribunal decided that compensation for moral damage can be awarded only in “exceptional circumstances” and postponed its analysis of this issue.160 In its subsequent decision on the quantum of compensation, the tribunal in Lemire v. Ukraine reiterated that moral damages may be awarded in investor – state arbitrations, but only in exceptional circumstances.161 It concluded in the following way: “[…] as a general rule, moral damages are not available to a party injured by the wrongful acts of a State, but that moral damages can be awarded in exceptional cases, provided that – the State’s actions imply physical threat, illegal detention or other analogous situations in which the ill-treatment contravenes the norms according to which civilized nations are expected to act; – the State’ s actions cause a deterioration of health, stress, anxiety, other mental suffering such as humiliation, shame and degradation, or loss of reputation, credit and social position; and – both cause and effect are grave or substantial.”162 When applying the above standard to the facts of the case, the tribunal did not find that the threshold of “exceptional circumstances” had been met. It observed that the investor’s situation in the circumstances of this particular case could not have been compared, for example, to an injury suffered in response to armed threats or the witnessing of deaths.163 Although the tribunal expressed its sympathy and understanding for the stress and anxiety which the investor must have felt, it decided that “the moral aspects of his injuries have already been compensated by the awarding of a significant amount of economic compensation, and that the extraordinary tests required for the recognition of separate and additional moral damages have not been met in this case.”164

158 Joseph Charles Lemire v. Ukraine, icsid Case No. ARB/06/18, decision on jurisdiction and liability (14 January 2010), para. 449. 159 Ibid, para. 475. 160 Ibid, para. 486. 161 Lemire v. Ukraine, supra note 157, para. 326. 162 Ibid, para. 333. 163 Ibid, para. 339. 164 Ibid, para. 344.

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The above part of the award suggests that the tribunal in Lemire v. Ukraine adopted a similar approach to the tribunal in Pey Casado v. Chile. Both tribunals reasoned that a declaration on the wrongfulness of respondent states’ actions, contained in arbitral awards rendered in the proceedings, jointly with monetary compensation for the material loss suffered by the claimants, already constituted full reparation for any moral damage caused by the respondent states’ internationally wrongful acts. However, on the facts, the tribunals assessed that the claimants had not suffered moral injuries in these two cases. It may be assumed that their reasoning and decisions may have been different in the event that the tribunals had assessed the acts otherwise.165 In the Bernhard v. Zimbabwe case the tribunal explicitly followed the principles governing moral damages, as established in the Lemire v. Ukraine and Desert Line v. Yemen cases.166 It confirmed that moral damages can be awarded to legal entities and even to investors’ employees because there is a need to provide “recourse to competent, fair tribunals that can reflect the consequences of their poor treatment in an award of moral damages in favour of their employer. In some sense, this serves not only the function of repairing intangible harm, but also of condemning the actions of the offending State.”167 The tribunal awarded moral damages and in considering their amount, again it sought guidance in the Desert Line v. Yemen case and decided to award the same amount, i.e. one million us dollars.168 In Arif v. Moldova the investor also sought compensation for moral damage. Both parties to the dispute referred to the decision in Lemire v. Ukraine and accepted the test of “exceptional circumstances.”169 The tribunal observed that this test was “based on a limited discussion of three cases, with no broader consideration of underlying principles or policies. The statement might serve as a summary of the issues in these cases, but it should not be taken as a cumulative list of criteria that must be demonstrated for an award of moral damages.”170 It continued to state that “the older Lusitania case, the basis of the second factor 165 166 167 168

Dumberry – Satisfaction…, supra note 125, p. 23. Bernhard von Pezold v. Zimbabwe, supra note 10, paras. 909–910. Ibid, para. 916. Ibid, para. 921. The tribunal noted that in the Desert Line v. Yemen case the compensation for moral damage included “the corporation’s loss of reputation and the harm to a number of executives,” which was a circumstance not present in Bernhard v. Zimbabwe. The tribunal concluded, however, that the same amount was also appropriate in the case at hand “especially given the number of years that Heinrich was exposed to these stresses.” 169 Franck Charles Arif v. Moldova, icsid Case No. ARB/11/23, award (8 April 2013), para. 587 [Arif v. Moldova]. 170 Ibid, para. 590. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:46PM via free access

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in Lemire, correctly states the criteria the Tribunal should take into account. This leaves the Tribunal with an element of discretion, but within the general framework that moral damages are an exceptional remedy.”171 Thus, the tribunal accepted that moral damages are “exceptional remedy,” but did not agree that the threshold for their application in investor – state arbitration should be as high as suggested in Lemire v. Ukraine award. It confirmed that moral damages are due when actions of the state “cause a deterioration of health, stress, anxiety, other mental suffering such as humiliation, shame and degradation, or loss of reputation, credit and social position.”172 Having said so, it is this author’s understanding that the tribunal in Arif v. Moldova also impliedly agreed with the third criterion established by the tribunal in Lemire v. Ukraine. According to this criterion, both the cause and effect of the state’s action must be grave or substantial.173 The tribunal in Arif v. Moldova confirmed that any assessment of whether the facts amounted to “exceptional circumstances,” so as to justify awarding compensation for moral damage, can only be done on a case-by-case basis which takes account of the specific facts of each dispute, and even against the background of the individual economy and governance of the host state.174 It is this author’s understanding that the above criteria described by the tribunal in Arif v. Moldova equal to what is sometimes described as a requirement of “egregious” conduct by the host state, triggering claims for moral d­ amages.175 171 Ibid, para. 591. 172 Lemire v. Ukraine, supra note 157, para. 333. 173 Arif v. Moldova, supra note 169, para. 592: “The element of exceptionality must be acknowledged and respected. A breach of a contract or any wrongful act can lead to a sentiment of frustration and affront with the victim. A pecuniary premium for compensation for such sentiment, in addition to the compensation of economic damages, would have an enormous impact on the system of contractual and tortious relations. It would systematically create financial advantages for the victim which go beyond the traditional ­concept of compensation. The fundamental balance of the allocation of risks would be distorted. It would have similar effects if permitted in investment arbitration. The Tribunal is therefore aligning itself to the majority of arbitral decisions and holds that compensation for moral damages can only be awarded in exceptional cases, when both the conduct of the violator and the prejudice of the victim are grave and substantial” [author’s emphasis]. Also para. 602: “The Tribunal has to determine whether in the case at hand the conduct of Respondent and the suffering of Claimant have been so grave and substantial, as to amount to such exceptional circumstances that necessitate a pecuniary compensation for moral damages.” 174 Ibid, para. 603. 175 Such wording was used, for example, by the tribunal in Siag v. Egypt. This case did not involve a claim for moral damages. However, when the tribunal analyzed the issue of punitive damages, it observed that: “it appears that the recovery of punitive or moral damages Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:46PM via free access

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At the same time it must be noted that some consider that there should be no requirement whatsoever to prove the existence of “egregious” measures or of “exceptional circumstances.”176 The background of the Arif v. Moldova case concerned an investment made when the host state’s economy was in the process of transforming from a Soviet to market economy. The tribunal in Arif v. Moldova decided that this background did not lower the standards of protection included in the applicable bit. As a result, it did not influence a decision as to whether or not the state had complied with the fet standard. This general background can, however, inform the tribunal’s understanding of “exceptional circumstances” as a threshold for the pecuniary compensation for moral injuries. Some facts may be considered as “exceptional circumstances” in developed states, whilst not necessarily in “countries where the rule of law and protection against administrative discretion are low and any business is exposed to this risk.”177 As neither the claimant nor any of its employees suffered physical violence, armed threats, deprivation of liberty or a forceful taking of property, and there was no evidence of any threat or intimidation against the investor or sign of danger for his personal security and liberty, the tribunal in Arif v. Moldova dismissed the claim for pecuniary compensation for moral damage.178 Rompetrol v. Romania is another case in which the claimant sought moral damages. The dispute considered allegations that a criminal investigation conducted by the host state’s authorities, including the manner in which the ­investigation was conducted, amounted to a breach of the applicable bit. ­Importantly, the criminal investigations were directed against officers of the investor, a legal person, and not against the investor itself. The tribunal noticed that “reputational damage” should not be treated as an element of moral damage but, rather, as an element of economic damage. A loss of reputation is capable of being calculated and compensated as pecuniary damage. Therefore, it should form part of compensation for economic loss suffered by the claimant. An alternative approach “would be to subvert the burden of proof and the rules of evidence.”179 The tribunal concluded that

176 177 178 179

is reserved for extreme cases of egregious behaviour” and referred to the award rendered in Desert Line v. Yemen. See: Waguih Elie George Siag and Clorinda Vecchi v. Egypt, icsid Case No. ARB/05/15, award (1 June 2009), para. 545. Dumberry – Compensation…, supra note 130, p. 270. He adds that “[s]uch higher level of seriousness is not a precondition for awarding compensation for moral damages.” Arif v. Moldova, supra note 169, para. 606. Ibid, paras. 607, 611, 615. Rompetrol v. Romania, supra note 5, para. 289.

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moral damages “cannot be admitted as a proxy for the inability to prove actual economic damage.”180 It decided that no reputational damage was proven by the claimant in the case and dismissed the compensation claim for moral damage. The issue of moral damages was raised in a number of other investor – state arbitrations. In Funnekotter v. Zimbabwe a claim for moral damages was found to be inadmissible on the basis that it had been “formulated briefly and only at a very late stage of the proceedings.” The tribunal observed, nevertheless, that the claim for compensation for moral damages partially concern damages “already compensated” for a breach of the bit.181 In Bogdanov v. Moldova the tribunal dismissed a claim for moral damages due to the absence of any supporting factual evidence having been presented by the claimant.182 Similarly in Tecmed v. Mexico, the tribunal dismissed the claim for moral damages “due to the absence of evidence.”183 In Quiborax v Venezuela the tribunal confirmed that “the threshold to award moral damages is high.” In dismissing the claim for moral damages, the tribunal noted that this is an “exceptional remedy.”184 In Generation Ukraine v. Ukraine the investor also sought compensation for moral damages, but the tribunal held that the claim fell outside the scope of its jurisdiction.185 180 Ibid, para. 293. 181 Bernardus Henricus Funnekotter et al. v. Zimbabwe, icsid Case No. ARB/05/6, award (22 April 2009), para. 140: “The Tribunal considers that those new claims partially concern damages already compensated by the allocation of a disturbances indemnity. In any event, those claims were formulated briefly and only at a very late stage of the proceedings and are, therefore, for that reason inadmissible.” 182 Bogdanov v. Moldova, supra note 52, Section  5.2.: “The Claimant requested also reimbursement of moral damages. The Arbitral Tribunal observes that the Claimant failed to produce any factual evidence for moral damages. Therefore, the Arbitral Tribunal rejects the request of reimbursement of moral damages.” 183 Tecmed v. Mexico, supra note 119, para. 198: “The Arbitral Tribunal finds no reason to award compensation for moral damage, as requested by the Claimant, due to the absence of evidence proving that the actions attributable to the Respondent that the Arbitral Tribunal has found to be in violation of the Agreement have also affected the Claimant’s reputation and therefore caused the loss of business opportunities for the Claimant.” 184 Quiborax v. Venezuela – merits, supra note 30, para. 618. 185 Generation Ukraine v. Ukraine, icsid Case No. ARB/00/9, award (16 September 2003), para. 17.6: “Claim F alleges a cause of action based on Article 56 of the Constitution of Ukraine relating to “moral damages inflicted by unlawful decisions” of state officers. As the Tribunal has found that its jurisdiction is limited to disputes arising out of an “alleged breach of any right conferred or created by [the] Treaty” for the purposes of Article vi(1), Claim F is beyond the scope of the Tribunal’s jurisdiction ratione materiae.” In Helnan v.

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The Europe Cement v. Turkey and Cementownia “Nowa Huta” v. Turkey cases also concern the issue of moral damages.186 However, they are irrelevant for the purposes of the present chapter, since they considered claims for moral damages suffered by the respondent states for an alleged abuse of process ­committed by the investors by bringing fraudulent claims. It suffices for the purposes of the present chapter to simply note that the tribunals confirmed that nothing in the legal framework of bit arbitration would generally prevent tribunals from granting moral damages.187 The analysis presented above shows that moral damage suffered by investors can be the subject of reparation decisions handed down by arbitral tribunals in proceedings based on bits. In the cases which are currently publicly known, moral damages were claimed when the facts of the cases concerned, on the one hand, personality rights (e.g. alleged personal injuries, wrongful detentions, arbitrary deportations or threat) and, on the other hand, a loss of reputation.188 There is no publicly available arbitral award based on a bit which has expressly denied the existence of a principle that moral damages can be awarded in investor – state arbitration. In many awards, arbitral tribunals have dismissed claims for moral damages due to a lack of evidence. This raises the issue of how moral damages can be proven. In this author’s opinion, the issue of proof is commonly mixed up with questions of “causation and general compensability.”189 At the same time, in

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Egypt the investor claimed moral damages, but in this case the tribunal did not address this issue at all. See: Helnan International Hotels v. Egypt, icsid Case No. ARB/05/19, award (3 July 2008). Europe Cement Investment & Trade v. Turkey, icsid Case No. ARB(AF)/07/2, award (13 ­August 2009) [Europe Cement v. Turkey], Cementownia “Nowa Huta” v. Turkey, icsid Case No. ARB(AF)/06/2, award (17 September 2009) [Cementownia v. Turkey]. Cementownia v. Turkey, ibid, para. 169: “[…] there is nothing in the icsid Convention, Arbitration Rules and Additional Facility which prevents an arbitral tribunal from granting moral damages.” The tribunal in Europe Cement v. Turkey considered that, by rendering the award and awarding the reimbursement of costs, it had already granted satisfaction to the respondent: “The Tribunal believes that any potential reputational damage suffered by the Respondent will be remedied by the reasoning and conclusions set out in this Award, including an award of costs, which as set out below is significant. This provides a form of “satisfaction” for the Respondent.” See: Europe Cement v. Turkey, ibid, para. 181. Ingeborg Schwenzer, Pascal Hachem, “Moral Damages in International Investment Arbitration,” in: Stefan Kröll, Loukas A. Mistelis, P. Perales Viscasillas, V. Rogers “International Arbitration and International Commercial Law: Synergy Convergence and Evolution” (Kluwer Law International 2011), p. 418 [Schwenzer, Hachem]. Ibid, pp. 415–416. They also critically comment the pure “public international law,” ignoring private comparative law: “In addition to the at least doubtful methodology there are

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at least two cases in which moral damages were not proven, the tribunals observed that the sufficient reparation of moral damages can be “satisfaction” – by way of a mere declaration in the arbitral award that the respondent violated the international obligations it owed to the claimants. Some case law seems to suggest that “exceptional circumstances” must exist before tribunals may award moral damages. Such circumstances require “grave” or “egregious” violations of the applicable bit. It is this author’s understanding that this requirement relates closely to “damage to the personality rights of individuals,” which affects their “moral interests, dignity and physical integrity.”190 In order to meet the high threshold of “exceptional circumstances,” the measures leading to such a result would have to involve detentions, armed threats etc. It must be noted that imposing a requirement of “exceptional circumstances” constitutes a “…significant departure from established principles of international law concerning reparations.”191 There is nothing in the ilc Articles which differentiates material and moral losses in terms of states’ compensation obligations. Even if a future arbitral tribunal endorses the requirement for “exceptional circumstances,” of itself this would not constitute an obstacle preventing claimants from successfully seeking compensation for moral injury. It is this author’s understanding that, if the existence of such “exceptional c­ ircumstances” and moral damage can be sufficiently proven, monetary compensation is the ­appropriate remedy for moral damage actually suffered by investors.192 This is fundamental misunderstandings of the basic structures of the law of damages and key private law concepts. The legal basis for a damages claim including possible exemption due to force majeure is often confused with the concept of legally compensable loss and its calculation. […] Also the relevance of fault for the liability for and the extent of damages, respectively, are often not separated and correctly evaluated.” 190 Blake, supra note 131, p. 374. 191 Ibid, p. 378. He adds on p. 394 that “the imposition of an ‘exceptionality’ criterion signals a significant departure from general international law. There is no requirement under international law that an injury be ‘substantial’ or ‘grave’ in order to give rise to moral damages” and on p. 395: “[t]here is no clear justification under international law for arbitral tribunals to erect a higher threshold for claimants to receive reparations for non-pecuniary harm.” 192 Dumberry – Satisfaction…, supra note 125, p. 23. He adds at p. 24: “Once a tribunal has identified any moral injury, there is simply no reason why such financially assessable damages should not be remediated with monetary compensation. Similarly, an official apology by a State or any similar declaration of regrets would be well below what is required to remedy the suffering resulting from a moral damage suffered by an individual or a corporation. However, nothing would prevent a tribunal from adopting some form of

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important for a possible claim for moral damages based on human rights violations, which is analyzed in the following section, as it does not increase the threshold beyond that which is required by public international law. This author proposes that the “exceptional circumstances” criterion should be referred to by future arbitral tribunals in a different way. This is to say, if a claimant is able to prove the existence of “exceptional circumstances” and claims moral damages, a tribunal should presume that moral injury was actually suffered. The burden of proof would shift, so that a host state was required to prove that no moral loss was in fact suffered. Conversely, if no exceptional circumstances exist in a particular case, it would be incumbent upon the claimant to prove that it suffered moral injury, and no presumption regarding the reversed burden of proof would apply. It is also this author’s understanding that “loss of reputation,” which has frequently been considered as an element of moral damages, amounts to a pecuniary loss. Therefore, by default, loss of reputation should be considered (and compensated for) not as an element of moral damages, but as an element of pecuniary loss (damage).193 Only in some circumstances can reputational harm cause moral harm in addition to its typical, economic consequences.194 This is crucial in determining the scope of possible moral damages claimed by investors for violations of their human rights. vii Moral Damages and Violations of Investors’ Human Rights Having analyzed the above issues, it is possible to proceed to analyze moral damages from the perspective of the Third Model Situation. It is submitted that, as a general rule, moral damages can be claimed in investor – state arbitrations for violations of human rights of investors. satisfaction in addition to (clearly identifiable) monetary compensation covering moral damages” [emphasis as in original]. 193 Schwenzer, Hachem, supra note 188, pp. 425–426. This is in line with the approach adopted by the tribunal in Rompetrol v. Romania: “[…] reputational damage to a protected foreign investor is a perfectly conceivable consequence of unlawful conduct by the State of the investment, and if so is likely to show itself, for example, in increased financing costs, and possibly other transactional costs as well. But the Tribunal regards that as just another example of actual economic loss or damage, which is subject to the usual rules of proof.” See: Rompetrol v. Romania, supra note 5, para. 289. 194 Blake, supra note 131, p. 374: “In this context, compensation for the ‘moral dimensions’ of reputational harm must be distinguished from other economic dimensions, which will generally be remedied under conventional heads of damages. For example, compensation for damage to good will is usually captured where an award is based on the Fair Market Value of a business, and therefore in this context ‘reputational harm’ need not be addressed by a separate moral damages award.” Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:46PM via free access

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As proven above, investors can successfully claim moral damages for measures undertaken by host states which, for example, lead to a deterioration of health, stress, anxiety, humiliation etc. The probability of a successful claim for moral damages is higher when the measures “imply physical threat, illegal detention or other analogous situations in which the ill-treatment contravenes the norms according to which civilized nations are expected to act.”195 If the claim presented in the bit is based on such circumstances, there are grounds for invoking the human rights of the investor. It could be argued that such measures violate the most fundamental human rights of the investor, such as the right to life or the right to liberty. One may ask what would be the reason for invoking human rights in this context, as moral damages can be awarded without such reference. The answer is two-fold. Firstly, violation of the investor’s human rights should persuade tribunals to agree to award compensation for moral injury. In the realm of human rights, moral damages are not uncommon.196 The IACtHR developed its jurisprudence towards a recognition of the possibility of awarding moral damages when justified. This approach is based on art. 63(1) of the iachr, which explicitly grants it powers to award “fair compensation be paid to the injured party,” together with the applicable principles of international law.197 The ­ECtHR developed its jurisprudence concerning moral damages in the light of art. 41 of the echr, which refers to “just satisfaction.”198 For example in Selmouni v. France the ECtHR awarded compensation for “personal injury and non-­pecuniary damage” grounded on an “equitable basis,” taking into ­consideration the “seriousness of the violations” of the echr.199 In Varnava v. 195 Lemire v. Ukraine, supra note 157, para. 333. 196 Dumberry – Compensation…, supra note 130, p. 269: “Moral injuries, on the other hand, are non-material and are more commonly dealt with in the sphere of human rights disputes. Because of the specific nature of investment treaties, claims for moral damages will remain relatively rare.” 197 Velasquez Rodriguez v. Honduras, judgment of the IACtHR (July 21 1989), para. 31, Godinez Cruz v. Honduras, judgment of the IACtHR (21 July 1989), para. 29. Art. 63(1) reads as follows: “If the Court finds that there has been a violation of a right or freedom protected by this Convention, the Court shall rule that the injured party be ensured the enjoyment of his right or freedom that was violated. It shall also rule, if appropriate, that the consequences of the measure or situation that constituted the breach of such right or freedom be remedied and that fair compensation be paid to the injured party.” 198 Art. 41 of the echr reads as follows: “If the Court finds that there has been a violation of the Convention or the Protocols thereto, and if the internal law of the High Contracting Party concerned allows only partial reparation to be made, the Court shall, if necessary, afford just satisfaction to the injured party.” 199 Selmouni v. France, application number 25803/94, judgment (28 July 1999), para. 123. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:46PM via free access

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Turkey the E ­ CtHR observed that the echr contains no express provision for moral damages. Nevertheless, evolving on a case-by-case basis, its approach recognized that, in some situations, “the impact of the violation may be regarded as being of a nature and degree as to have impinged so significantly on the moral well-being of the applicant as to require something further [than just recognition of violation of the victim’s human rights – author’s note]. Such elements do not lend themselves to a process of calculation or precise quantification. Nor is it the Court’s role to function akin to a domestic tort mechanism court in apportioning fault and compensatory damages between civil parties. Its guiding principle is equity, which above all involves flexibility and an objective consideration of what is just, fair and reasonable in all the circumstances of the case, including not only the position of the applicant but the overall context in which the breach occurred. Its non-pecuniary awards serve to give recognition to the fact that moral damage occurred as a result of a breach of a fundamental human right and reflect in the broadest of terms the severity of the damage; they are not, nor should they be, intended to give financial comfort or sympathetic enrichment at the expense of the Contracting Party concerned.”200 A similar approach could be adopted if a tribunal identifies a violation of an investor’s human rights in a particular bit dispute. In addition, moral damages in the Third Model Situation refer back to the method of valuation of compensation. It has been described above that tribunals enjoy a wide discretion even when calculating e­ conomically-assessable material loss. Such discretion is wider when deciding compensation for moral loss, as it cannot be objectively and accurately assessed.201 This does not mean, however, that moral loss is not financially assessable within the meaning of art. 34 of the ilc Articles.202 The above is sometimes even described as “almost an absolute discretion” based on “arbitrators’ collective understanding of what is equitable, reasonable and proportionate in the circumstances of a specific case.”203 In this context, tribunals take many factors into 200 Varnava et al. v. Turkey, applications nos. 16064/90, 16065/90, 16066/90, 16068/90, 16069/90, 16070/90, 16071/90, 16072/90 and 16073/90, judgment (18 September 2009), para. 224. 201 Ripinsky, Williams, supra note 2, p. 307. 202 ilc Articles, supra note 8, p. 101: “No less than material injury sustained by the injured State, non-material damage is financially assessable and may be the subject of a claim of compensation […].” 203 Ripinsky, Williams, supra note 2, p. 312. Blake observed: “Another area of uncertainty in arbitral law is the basis upon which moral damages ought to be quantified. In many respects, this represents something of a lacuna in the law on moral damages. In principle, moral damages do not differ from pecuniary damages in terms of their legal source, and are therefore governed by the principle of full reparation as articulated in the Chorzow

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c­ onsideration. Some argue that they should include, for example, fault on the side of the host state: “This is where culpa actually matters. State’s fault or malicious intent will be taken into account by tribunals when they actually quantify the amount of compensation to be awarded to remediate moral damages.”204 It is submitted that another factor to be taken into account when tribunals exercise their discretion at the moment of determining moral damages is whether the investors’ human rights were violated. This is, of course, independent from the existence (or absence) of fault on the state’s part. Nevertheless, if measures undertaken by the host state result in a human rights violation against the investor, this is a factor which should not be ignored by tribunals at this stage. Depending on the seriousness of the violations, one can expect that tribunals will exercise their discretion to take account of this factor and will consider awarding compensation which is higher than of merely symbolic nature. Otherwise, a decision on compensation would be far from being ­“equitable” or “reasonable.” Having said the above, it must be clarified that many factors affect the decision whether, in a particular arbitration, to apply the general principle allowing the recovery of compensation for moral damage arising from human rights violations against investors. Every bit is different in its precise scope and wording. If the applicable bit provides for the protection of both investments and investors, no obstacle exists to prevent investors from seeking compensation for moral damage suffered due to violations of their human rights committed by the host state. The Poland – Greece bit or Poland – Finland bit can be seen as examples of bits which provide for a substantive standard of protection which expressly refers to both: investments and investors.205 Based case. Yet, it is unclear how tribunals are to reconcile this general and abstract principle with the obvious subjectivity and indeterminacy involved in evaluating non-pecuniary injuries. Indeed, the general perception of the law in this area is that of a dissonance between actual application and generally articulated principles.” See: Blake, supra note 131, p. 401. 204 Dumberry – Compensation…, supra note 130, p. 272. This is in line with views that the existence (or absence) of fault on the side of the host state should influence the amount of compensation awarded for moral damage. 205 Art. 3(1) of the Poland – Greece bit reads as follows: “Neither Contracting Party shall subject investments in its territory owned wholly or partially by investors of the other Contracting Party to treatment less favourable than that which It accords to investments of its own investors or to investments of investors of any third State.” Its art. 3(2) reads as follows: “Neither Contracting Party shall subject investors of the other Contracting Party, as regards their activity in connection with investments in its territory, to t­ reatment less

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on such bits, investors can claim compensation for moral injury suffered by themselves in consequence of an internationally wrongful act of the state (a breach of the applicable bit). However, some bits limit the scope of their protection solely to investments, and do not protect investors.206 This limitation can become important at all stages of arbitral proceedings, including when one analyzes whether investors may seek compensation for moral damage due for breaches of their human rights. In addition, in the context of the icsid Convention, an additional potential obstacle for successfully claiming moral damages is whether they arise directly out of an investment. This is because, when the claim is brought to the icsid, the tribunal must assess jurisdiction based on the so-called “double barrel” test: on the applicable bit, but also on art. 25 of the icsid Convention, which reads as follows: “The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally.” Consequently, if an applicable bit limits its protection solely to “investments,” the situation is more complex. The starting point for consideration would be that a violation of investors’ rights would not constitute an internationally wrongful act covered by the bit, as no protection was granted by any of the bit’s provisions to the investor itself. Moreover, if the proceedings are based on a Narrow or Standard Jurisdiction clause, such claims could fall outside the tribunal’s scope of jurisdiction. However, in some circumstances favourable than that which it accords to its own investors or to investors of any third State” [author’s emphasis]. Art. 3(1) of the bit Poland – Finland refers to standard of protection granted to investments: “Investments by investors of one Contracting Party in the territory of the other Contracting Party shall be accorded treatment no less favourable than that which the Contracting Party accords to investments of its own investors or to investments made by investors of any third state.” At the same time, the standard of ­protection granted in Art 3.2 covers also investors: “Each Contracting Party shall in its territory accord to investors of the other Contracting Party, as regards the management, maintenance, use, enjoyment or disposal of their investments, fair and equitable treatment which in no case shall be less favourable than that which it accords to its own investors or investors of any third state.” 206 Schwenzer, Hachem, supra note 188, p. 419: “One group of bits requires that such treatment be applied to the investment. The other group of bits requires that such treatment be applied to the investor and the investment.”

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investors would still be entitled to claim moral damages even in that context. If a particular bit limits its protection solely to “investments,” literally offering no protection to “investors,” moral damages may be still claimed on the condition that the measures adopted by the host state affect both an investor and its investment. For example, “if an employee is detained and cannot carry out his or her work, this will affect the investment as, for example, the returns of the company will be decreased.”207 As underlined by arbitral tribunals dealing with the issue of moral damages to date, the burden of proof lies on the claimant. A separate question is whether an investor can claim moral damages for violations of the human rights of its employees (officers, representatives). From a practical perspective, this is an important aspect of the issue of moral damages due for violations of investors’ human rights.208 Typically bits do not contain wording to suggest that they protect the personality rights of individuals who do not qualify as investors, even if they are the investor’s employees.209 This concern is vital. In Desert Line v. Yemen the tribunal did not address this issue at all. It awarded moral damages even though they were suffered by representatives of the investor, and not by the investor itself.210 According to some views, this was based inter alia on considerations that such representatives “would have had no recourse to arbitration under the treaty to obtain redress for the harm they had suffered” and that this “sensible approach is likely to be followed by other tribunals in the future.”211 This approach was followed by the tribunal 207 Ibid, p. 423. 208 Christoph Schreuer, Ursula Kriebaum, “From Individual to Community Interest in International Investment Law,” in: Ulrich Fastenrath, Rudolf Geiger, Daniel-Erasmus Khan, Andresa Paulus, Sabine von Schorlemer, Christoph Vedder, “From Bilateralism to ­Community Interest: Essays in Honour of Judge Bruno Simma” (Oxford University Press, 2011), p. 1089: “Human rights are rarely invoked by investors in investment arbitration. Apart from the nature of the rights pursued, this is also due to the fact that in the majority of cases the investors are juridical persons.” 209 Schwenzer, Hachem, supra note 188, p. 423: “The definition for “investor” typically offered in bits does not indicate that representatives are investors. Therefore, these treaties must be understood to not protect the personality rights of natural persons who are not investors. The result is that if the representative of an investing company sustains infringements of his or her personality rights, he or she him- or herself cannot bring an action directed at the recovery of his or her own losses against the State relying on breach of a bit. They cannot resort to treaty arbitration, but instead have to claim their own (moral) damages in separate proceedings.” 210 Desert Line v. Yemen, supra note 134. 211 Dumberry – Compensation…, supra note 130, p. 267.

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in ­Bernhard v. Zimbabwe.212 However, this author shares the opposite view. Mainly, a general principle in this context is that no legal basis exists to order compensation for moral damage suffered by an investor’s employees (representatives) if they do not themselves qualify as investors.213 However, certain exceptions exist. In this context, the approach adopted by the tribunal in Rompetrol v. Romania should be followed. Not only it is more convincing, but it is based on legal grounds. The tribunal decided that “the following (and only the following) would fall within the area of protection under the bit: (a) actions against the investor itself (or its investment); (b) action against the investor’s executives for their activity on behalf of the investor; and (c) action against the executives personally but with the intent to harm the investor.”214 In other words, even if particular measures undertaken by the state directly affect the representatives of an investor, and not the investor itself, in certain situations this could justify a claim for moral damages being initiated by the investor in bit arbitral proceedings. In this context, actions described by the tribunal in example (a) do not require special attention, as they refer to a typical situation under bits. The remaining two examples are, however, relevant for the present analysis. The tribunal in Rompetrol v. Romania described example (b) as “steps taken against an individual, whether in the form of criminal charges or otherwise, in respect of actions that individual had taken to enforce or defend the investor’s rights,” and example (c) as conduct which “could have been directed against individuals (even in their personal capacity) for the purpose of harming the investor or its investment through the medium of injury to the individuals.”215 Only if moral injury is suffered by the investor’s representatives within the above limits can the investor successfully claim moral damages in bit proceedings. 212 Bernhard von Pezold v. Zimbabwe, supra note 10, para. 916: “[…] this Tribunal finds that it is appropriate that staff members of a company have recourse to competent, fair tribunals that can reflect the consequences of their poor treatment in an award of moral damages in favour of their employer. In some sense, this serves not only the function of repairing intangible harm, but also of condemning the actions of the offending State.” 213 This would not preclude the possibility that the tribunal expressly addresses this issue in the award and in that way at least grants satisfaction to the individuals who suffered moral damages. This is however highly improbable in practice, as it could be considered to exceed the powers (jurisdiction) of the tribunal. 214 Rompetrol v. Romania, supra note 5, para. 200. The tribunal further added: “In each case, much would turn on the facts of the particular complaint, and in particular the crucial question whether, even if the situation fell within the zone of protection, the conduct in question did in fact constitute a failure to respect the treaty protection at issue.” 215 Ibid.

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It must be underlined that, in such cases, since the representatives fall within the specified limits of relationship with the investor, any moral damages claimed by the investor would constitute the investor’s own loss. This is because the actions of the state would be undertaken against the investor, even if “indirectly” through its officers. Therefore, the investor would not claim moral damages “on behalf of” its employees, but on its own behalf. This conclusion is also justified by the concept of remoteness. As noted in the commentary to the ilc Articles, the causal link between an internationally wrongful act and the loss suffered is “a necessary but not a sufficient condition for reparation. There is a further element, associated with the exclusion of injury that is too ‘remote’ or ‘consequential’ to be the subject of reparation. In some cases, the criterion of ‘directness’ may be used, in others ‘foreseeability’ or ‘proximity.’”216 As a result, monetary compensation for internationally wrongful act excludes damage which is too “indirect or remote.”217 Art. 31 of the ilc Articles establishes the general principle that the responsible state is under an obligation to make full reparation for the injury caused by an internationally wrongful act. This provision, which regulates all forms of remedies (restitution, compensation and satisfaction) also embodies a requirement that there exists a sufficient causal link “which is not too remote.”218 This cannot be ignored in the context of claims for moral damages for violations of human rights of the investor’s employees. Claims falling within the proposed limits, concerning state actions (a) against the investor itself (or its investment); (b) against the investor’s employees for their activity on behalf of the investor; and (c) against the employees personally but with the intent 216 ilc Articles, supra note 8, pp. 92–93. 217 Ibid, p. 96. 218 Ibid, p. 93. Blake proposes that arbitral tribunals should look at the jurisprudence of the human rights courts and the developed concept of “indirect moral injuries.” He refers to the concept of “affective relationship” between the claimant and the actual victim of the moral damages developed by the IACtHR, under which it awards compensation for moral damages if the relationship is more than minimal or tenuous. He proposes that “a tribunal may look to the proximity between the employee and the operation of the company in order to assess the actual harm suffered by the company.” He adds: “For example, if a company’s manager suffered moral injury which meant that he was not able to adequately oversee the affairs of the business, the company may claim damages for the loss of the benefit of management. However, if the relevant employee played a minor role in the functioning of the company, this may be deemed to be too remote, and give rise to a more nominal award to the company. In this way, the impact of the employee’s suffering on the economic performance or the reputation of the business would be a key consideration.” See: Blake, supra note 131, p. 406.

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to harm the investor, could be classified as sufficiently closely related to the investor itself and to the internationally wrongful acts. Claims falling beyond the proposed limits would be considered as too remote and, as such, could not justify awarding moral damages in bit arbitration. 2

Human Rights Considerations as a Justification to Shift Costs of the Proceedings

i General Remarks The final issue to be decided by the tribunal in particular arbitral proceedings are the costs of the proceedings. Costs decisions are issued in all ­investor – state arbitral proceedings which have been initiated, regardless of the outcome. In other words, even if a state prevails in its objections to jurisdiction and the tribunal concurs that it lacks jurisdiction to hear the claim, a decision on costs will still be made. Similarly, when a state prevails on the merits and the tribunal finds that no breach of the bit has occurred, a decision on costs will still be made. Such a decision must also be made when an investor is successful and receives compensation for a breach of the bit, regardless of whether any reduction of compensation took place or not. In general, a costs decision relates to two categories of costs: (i) legal costs, understood as costs for legal representation and assistance provided to the parties, and (ii) arbitration costs, understood as the costs related to the fees of arbitrators, travel and other expenses incurred by the arbitrators, the costs of expert advice and of other assistance required by the arbitral tribunal, the travel and other expenses of witnesses insofar as such expenses were approved by the arbitral tribunal, and any fees and expenses of the institution which administers the proceedings. It is commented that “shifts (or lack thereof) of the Parties’ legal expenses and the tribunal’s costs generally occur together, and a treatment of one cost variable may be a useful predictor for other aspects of a tribunal’s treatment of the other costs variable.”219 This part of the arbitral proceedings is often underestimated in the literature. Despite that, it is an issue which in practice can be important for the parties. It is not uncommon for the costs of legal representation in bit a­ rbitrations to

219 Susan D. Franck, “Rationalizing Costs in Investment Treaty Arbitration,” (2011) 88:4 ­Washington University Law Review, p. 833 [Franck].

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exceed 1 million us dollars.220 By way of example, a recently published award in Minnotte v. Poland can be referred to.221 The tribunal decided that it had jurisdiction and that the claim was admissible, but it dismissed all of the initiated claims on their merits. As a consequence, it ordered the investor to bear all of the arbitration costs and expenses and to reimburse the other party’s reasonable costs and expenses. The two categories of costs in that case amounted to usd 1,217,741.29.222 Such amounts are not uncommon in the realm of investor – state arbitration. In exceptional cases, they can even be much higher. In the Yukos cases, the legal costs of the three claimants amounted to in total usd 79,628,055.56 and gbp 1,066,462.10, of which the tribunal ordered reimbursement from the losing party in the amount of usd 60,000,000.00.223 In pseg v. Turkey the costs claimed by both parties (arbitration costs and legal costs) amounted to usd 20,851,636.62.224 As can be seen, costs and legal expenses can reach significant amounts.225 Also in this context there exists the risk of a “regulatory chill,” a phenomenon referred to in Chapter 4 Section (1)(iv). This is also true with respect to the measures undertaken to implement human rights policies: “Even if the host 220 These amounts may be viewed as exaggerated, but they are not necessarily so. If one considers the complexity of the proceedings, their length and the fact that – due to the ­importance of the case for the parties and interests at stake – the parties tend to appoint top law firms, the costs are not necessarily unreasonable. Of course, any assessment of that issue is ultimately subjective. 221 David Minnotte and Robert Lewis v. Poland, icsid Case No. arb (AF)/10/1, award 1(6 May 2014). It is probably the first case which was almost immediately released to the public by a Polish authority (with a possible exception concerning Eureko v. Poland case). This can be explained by the fact that Poland not only prevailed on the merits, but was also awarded the reimbursement of all of its costs. 222 Ibid, para. 217. 223 Hulley v. Russia, supra note 67, para. 1887, Yukos v. Russia, supra note 67, para. 1887, Veteran v. Russia, supra note 67, para. 1887. 224 pseg Global et al. v. Turkey, icsid Case No. ARB/02/5, award (19 January 2007), para. 352. 225 Noah D. Rubins, “The Allocation of Costs and Attorney’s Fees in Investor-State Arbitration,” (2003) 18:1 icsid Review – Foreign Investment Law Journal, pp. 124–125 [Rubins]: “As the cases cited above reveal, the costs of investor-state arbitration are, as a rule, no small matter. This is in part a function of the amounts in dispute, which tend to dwarf typical arbitrations of the commercial variety. […] As a result of the size, duration, and complexity of these disputes, as well as the impressive experience and qualifications of both counsel and arbitrators generally selected by the parties in such high stakes conflicts, expenses not infrequently run into the millions of dollars.”

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State were to win its dispute with the foreign investor over such regulatory measures, the duration and expense incurred from such a settlement might still cause ‘regulatory chill’ in the future, in the sense that the host State would self-censor or limit the possible measures by which it might have otherwise tried to implement international human rights obligations.”226 From the perspective of the regulatory chill and its possible, negative influence on states, the mere threat of commencing bit proceedings is more relevant than the final outcome of the case. Obviously, decisions on the allocation of costs are “secondary” when compared to decisions on damages. However, keeping all of the above in mind, although this element of proceedings is frequently underestimated, costs decisions are important for the involved parties. Both parties can be expected to have incurred significant amounts in order to present their arguments to the tribunal. Ordering the reimbursement of costs enables (innocent) parties to be held harmless and indemnified for the entirety of the costs related to the proceedings. Correct decisions on costs may also have a positive result and diminish the regulatory chill threat felt by states. ii Rules Concerning the Burden of Costs Different principles concerning the allocation of litigation costs exist in different national legal systems. By way of example, the Polish rules concerning civil litigation costs contain a principle that the winning party is entitled to reimbursement of its costs, although certain exceptions exist to this principle.227 At the same time, the amount of costs to be reimbursed by the losing party is specified by regulations which lay down the “minimal” costs of a­ ttorney’s fees in cases concerning material interests.228 Where the value of the ­dispute ­exceeds 226 Bruno Simma, “Foreign Investment Arbitration: A Place for Human Rights?” (2011) 60 International and Comparative Law Quarterly, p. 580. 227 These exceptions may be applied by courts upon the demand of the other party and constitute exceptions to the general rule. See: art. 98(1) of ustawa z dnia 17 listopada 1964 r. Kodeks postępowania cywilnego (unified text – Journal of Laws from 2014 position 101, as amended). Articles 101, 102 and 103 introduce certain limitations on the application of this general rule, which allow for an alternative allocation of costs if the respondent failed to give a reason for the litigation and acknowledged the claim at the beginning of litigation, if it is justified by fairness or when costs were caused by the improper behavior of one of the parties. 228 Rozporządzenie Ministra Sprawiedliwości z dnia 28 września 2002 r. w sprawie opłat za czynności adwokackie oraz ponoszenia przez Skarb Państwa kosztów nieopłaconej pomocy prawnej udzielonej z urzędu (unified text – Journal of Laws from 2013 position 461, as amended).

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pln 200,000.00, the minimal costs to be reimbursed are pln 7,200.00.229 In practice only in rare circumstances – even if the value of the litigation exceeds the upper limits applicable for the calculation of the court fees – will judges decide to grant double the value (or more) of these minimal rates. In any case, a judge is not allowed to reimburse the winning party for the attorneys’ fees in an amount which exceeds more than six times the minimal fee.230 The approach adopted in the Polish domestic legal system represents the so-called “costs follow the event” principle (also known as “cfe,” “loser pays,” “pay-your-own-way” or the “English rule”). According to cfe, “the unsuccessful party in a dispute must indemnify the prevailing party for its legal costs.”231 It is the method adopted in “most jurisdictions,” many of which also extend the cfe method from court litigation to arbitration.232 The “loser-pays” rule is followed in both common law and civil law jurisdictions.233 The second method is known as the “American rule.” It provides that each party shall pay its own expenses, regardless of the outcome of the dispute. According to the American rule, “costs lie where they fall.”234 This approach is applied not only in the United States but also, for example, in Japan and China.235 In the legal framework of investment arbitration no specific principle regulates the issue of costs allocation. The starting point for any such analysis is to look at the rules of procedure governing the proceedings in question. For example, the icsid Convention states in art. 61(2) that: “In the case of arbitration proceedings the Tribunal shall, except as the parties otherwise agree, assess the expenses incurred by the parties in connection with the proceedings, 229 Ibid, § 6. 230 Ibid, § 2.2. 231 David P. Riesenberg, “Fee Shifting in Investor-State Arbitration: Doctrine and Policy Justifying Application of the English Rule,” (2011) 60 Duke Law Journal, p. 979 [Riesenberg]. 232 John Y. Gotanda, “Attorneys’ Fees Agonistes: The Implications of Inconsistency in the Awarding of Fees and Costs in International Arbitrations,” in: Miguel Angel FernándezBallesteros, David Arias, “Liber Amicorum Bernardo Cremades” (La Ley 2010), pp. 542, 543 [Gotanda]. Similarly: Rubins, supra note 225, p. 109. 233 Franck, supra note 219, p. 794, footnote 128. 234 Riesenberg, supra note 231, p. 989. 235 Franck, supra note 219, p. 794, footnote 128. Gotanda observes that “even in the u.s., the American Rule is far from absolute. Over two hundred federal statutes allow for attorneys’ fees awards. Additionally, u.s. courts generally allow fee shifting for malicious claims and when the parties’ agreement allows for it.” See: Gotanda, supra note 232, p. 545. Sometimes a third approach is identified, called a “pro-claimant rule,” under which “prevailing claimants always recover their legal costs, as under the English rule, but prevailing respondents must always bear their own legal costs, as under the American rule.” See: Riesenberg, supra note 231, p. 990.

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and shall decide how and by whom those expenses, the fees and expenses of the members of the Tribunal and the charges for the use of the facilities of the Centre shall be paid. Such decision shall form part of the award.” The icsid Arbitration Rules provide in art. 28(1)(b) that: “Without prejudice to the final decision on the payment of the cost of the proceeding, the Tribunal may, unless otherwise agreed by the parties, decide: [...] with respect to any part of the proceeding, that the related costs (as determined by the SecretaryGeneral) shall be borne entirely or in a particular share by one of the parties,” and in art. 47(1)(j) that: “The award shall be in writing and shall contain: […] any decision of the Tribunal regarding the cost of the proceeding.” Art. 58(1) of the ICSID Arbitration (Additional Facility) Rules states as follows: ­“Unless the parties otherwise agree, the Tribunal shall decide how and by whom the fees and expenses of the members of the Tribunal, the expenses and charges of the Secretariat and the expenses incurred by the parties in connection with the proceeding shall be borne. The Tribunal may, to that end, call on the Secretariat and the parties to provide it with the information it needs in order to formulate the division of the cost of the proceeding between the parties.” The uncitral Arbitration Rules (1976) stipulate in art. 40(1) that “Except as provided in paragraph 2, the costs of arbitration shall in principle be borne by the unsuccessful party. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case.” Art. 40(2) reads as follows: “With respect to the costs of legal representation and assistance referred to in article 38, paragraph (e), the arbitral tribunal, taking into account the circumstances of the case, shall be free to determine which party shall bear such costs or may apportion such costs between the parties if it determines that apportionment is reasonable.” The uncitral Arbitration Rules (as revised in 2010) stipulate in art. 42(1) that “the costs of the arbitration shall in principle be borne by the unsuccessful party or parties. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case.” Art. 42(2) reads as follows: “The arbitral tribunal shall in the final award or, if it deems appropriate, in any other award, determine any amount that a party may have to pay to another party as a result of the decision on allocation of costs.”236 236 Arbitrations conducted under the icsid Arbitration Rules, the icsid Additional Facility Rules and the uncitral Arbitration Rules “account for the lion’s share of published investment arbitration awards to date.” See: Rubins, supra note 225, p. 112.

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The icc Rules of Arbitration provide in art. 37(4) that “The final award shall fix the costs of the arbitration and decide which of the parties shall bear them or in what proportion they shall be borne by the parties,” whereas art. 37(5) states that: “In making decisions as to costs, the arbitral tribunal may take into account such circumstances as it considers relevant, including the extent to which each party has conducted the arbitration in an expeditious and costeffective manner.” The scc Rules provide in art. 43(5) with respect to arbitration costs that “unless otherwise agreed by the parties, the Arbitral Tribunal shall, at the request of a party, apportion the Costs of the Arbitration between the parties, having regard to the outcome of the case and other relevant circumstances,” and with respect to legal costs in art. 44: “Unless otherwise agreed by the parties, the Arbitral Tribunal may in the final award upon the request of a party, order one party to pay any reasonable costs incurred by another party, including costs for legal representation, having regard to the outcome of the case and other relevant circumstances.” Some bits contain a reference to the applicable method of costs allocation. This is true, for example, of art. 10(5) of the Poland – Germany bit, which provides as follows: “The arbitral tribunal shall reach its decisions by a majority of votes. Such decisions shall be binding. Each Contracting Party shall bear the cost of its own member and of its counsel in the arbitral proceedings; the costs of the chairman and the remaining costs shall be borne in equal parts by the Contracting Parties. The arbitral tribunal may make a different regulation concerning costs. In all other respects, the arbitral tribunal shall determine its own procedure.” Although it establishes the American rule as the default approach to costs allocation, it expressly leaves open the possibility for the tribunal to depart from this default position. As can be seen from the provisions cited above, in all cases the parties may decide on costs allocation. This, however, rarely happens in practice once a dispute has already arisen, which is the case of investment arbitration. Even if the applicable rules of procedure lay down a default principle, they grant arbitrators a wide discretion to allocate costs. In any case, they enable arbitrators to issue a decision on costs which takes into account all of the relevant circumstances of the case. The rules of procedure grant arbitrators considerable freedom to decide on costs, even allowing a departure from any default rules. Such a situation is sometimes described as “broad powers”237 or a ­“discretionary 237 After determining the text of the applicable bit and rules of procedure, the tribunal in Alps Finance v. Slovakia observed that these rules “confer broad powers to the Tribunal in determining the costs issue. This is in line with the general tendency in international

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power.”238 Thus, even if the principle regulating costs allocation is that the winning party should be reimbursed by the losing party, tribunals may decide otherwise and vice versa. In the early stage of development of the investor – state arbitration legal framework, there existed no common or clear approach to the issue of costs allocation. However, empirical studies proved that the majority of early ­investor – state arbitral awards reflected the rule that parties to a dispute shall bear their own legal costs and share the arbitration costs equally.239 This can be explained by the fact that earlier claims filed under bits concerned issues which were innovative in nature. In this context, the tribunal in Romak v. Uzbekistan observed that “a general trend has developed that arbitration costs should be equally apportioned between the Parties, irrespective of the outcome of the dispute. One of the reasons for this, as stated in several awards, is that investment treaty tribunals are called upon to apply a novel mechanism and substantive law to the resolution of these disputes […]. Thus, the initiation of a claim that is ultimately unsuccessful is more understandable than would be the case in commercial arbitration, where municipal law applies.”240 At the same time, however, already in 2006 it was noted that the “novelty” of the investor – state arbitration has diminished with time and that in practice it is no longer an important factor.241 The original trend present in early awards, which favored the rule that “each party bears its own legal costs,” was replaced by total uncertainty in 2009.242 arbitration law, whereby the tribunals have an inevitable discretion in giving weight to the specific circumstances of the case when making any such appointment.” See: Alps Finance and Trade v. Slovakia, uncitral, award (5 March 2011), para. 262. 238 Saba Fakes v. Turkey, icsid Case No. ARB/07/20, award (14 July 2010), para. 152. 239 As of 2005, Hamida observed that in the majority of arbitral tribunals decided up to that moment, each party was obliged to bear the expenses (legal costs) incurred by it and that the arbitration costs were to be borne by the parties in equal shares. See: Walid Ben Hamida, “Cost Issue in Investor-State Arbitration Decisions Rendered Against the Investor: a Synthetic Table,” (2005) 5 Transnational Dispute Management, p. 1. 240 Romak v. Uzbekistan, uncitral, pca Case No. AA280, award (26 November 2009), para. 250. The tribunal applied the “American rule,” but observed that “[c]learly, the general practice in investment treaty arbitration disfavoring the shifting of arbitration costs against the losing party does not always apply.” See para. 251. 241 International Thunderbird Gaming v. Mexico, uncitral, arbitral award (26 January 2006), para. 218 [Thunderbird v. Mexico]: “Investment arbitration in general and nafta arbitration in particular have become so well known and established as to diminish their novelty as dispute resolution mechanisms. Thus, this factor is no longer applicable when considering apportionment of costs in international investment disputes.” 242 Gotanda, supra note 232, p. 547: “Recent investment arbitration awards show no uniform practice concerning the award of costs and fees.” Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:46PM via free access

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While some tribunals followed the previous approach, many tribunals started to apply the principle that “the costs follow the event.” It is observed that, although tribunals’ practice on the attribution of costs is far from uniform, more recently “tribunals have shown a growing inclination to adopt the principle that costs follow the event. An award of costs against a losing party may be total or, more frequently, may cover a certain proportion of overall costs.”243 An illustrative statement was made by the tribunal in edf v. Romania, which acknowledged that “the traditional position in investment arbitration, in contrast to commercial arbitration, has been to follow the public international rule which does not apply the principle that the loser pays the costs of the arbitration and the costs of the prevailing party” and that “even in very icsid recent cases, there are examples of tribunals splitting the costs equally or in a manner not corresponding to the outcome of the case.”244 Nevertheless it concluded its considerations by stating that “in the instant case, and generally, the Tribunal’s preferred approach to costs is that of international commercial arbitration and its growing application to investment arbitration. That is, there should be an allocation of costs that reflects in some measure the principle that the losing party pays, but not necessarily all of the costs of the arbitration or of the prevailing party.”245 When deciding on the allocations of costs in Chemtura v. Canada, the tribunal partially applied the cfe principle. The tribunal explained its decision on costs allocation (to be born in totality by the losing party) by stating that it was “fair,” and that its decision on legal costs (half of the winning party’s costs to be borne by the losing party) was “appropriate and just.”246 As can be seen from the cited jurisprudence, no common approach exists to what is the default principle on allocating costs in investment arbitration. Thus, it can be said that no clear pattern exists in cost awards and that arbitrators tend to allocate expenses and fees on a largely case-by-case basis. This is true of cases conducted under any of the rules of procedure applicable to bit arbitration. Furthermore, it is not uncommon for tribunals to modify the application of one of costs allocation principles (the cfe or the American rule) by introducing elements that are found in other principles. For example, tribunals have the power to decide that the losing party shall bear all of the costs of ­arbitration, 243 Dolzer, Schreuer, supra note 20, pp. 299–300. 244 edf (Services) v. Romania, icsid Case No. ARB/05/13, award (8 October 2009), paras. 322 and 324. 245 Ibid, para. 327. One of the arbitrators – Rovine – issued a dissenting opinion, criticizing decision on costs made by the tribunal. 246 Chemtura v. Canada, uncitra, award (2 August 2010), paras. 272 and 273. Filip Balcerzak - 9789004339002 Downloaded from Brill.com01/15/2020 01:42:46PM via free access

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but shall not be obliged to reimburse the winning party’s attorneys’ fees, or shall only be obliged to reimburse a part of such fees. The practice of tribunals is not uniform. Tribunals tend to make use of the freedom to allocate costs as they consider “appropriate.” Regardless of whether the “starting point” is the cfe or the American rule, tribunals have the freedom to use their discretion and to modify the rule if they consider it justified on the facts of a given case. If “specific circumstances” exist, tribunals can decide to allocate costs otherwise than in accordance with the adopted starting point.247 Similarly, it has been acknowledged that “reasonableness” may justify a departure from any default costs allocation rules.248 Keeping the above in mind, when commencing investment arbitration it is hardly possible to foresee whether – regardless of the applicable rules of procedure – a tribunal will decide to reimburse a party’s costs of attorneys’ fees, even if its position and submissions have been upheld. iii Decision on Costs and the Issue of Human Rights Arbitral tribunals in bit proceedings offer very limited explanation of the ­motives underpinning their decisions on allocating the costs of proceedings. Basically, they analyze whether the amounts claimed by the parties are “reasonable” in the circumstances of the case, and sometimes whether the amounts claimed by the parties are proportional between themselves. If the answer to both questions is affirmative, they decide on costs allocation either by following the principle expressed in the rules of procedure (finding “no reason” to depart from the default rule), or decide to allocate costs otherwise, based on the “reasonableness” of the tribunal’s suggested solution in the circumstances of the present case. What is striking is that, even in long awards consisting of numerous paragraphs, those parts of the awards which are devoted to the issue of costs allocation frequently consist of merely a few paragraphs.249 By way of example, one can look at the award rendered in Alpha Projektholding v. 247 For example the annulment committee in aes v. Hungary acknowledged that the starting point for considerations regarding the costs of the proceedings should be cfe, but that the application of this rule should be modified in “specific circumstances.” See: aes Summit Generation and aes-Tisza Erömü v. Hungary, icsid Case No. ARB/07/22, decision of the ad hoc committee on the application for annulment (29 June 2012), para. 181. 248 Nova Scotia Power v. Venezuela, uncitral, award (30 August 2010), para. 18, although this observation related only to the arbitration costs, not legal costs. 249 Rubins, supra note 225, p. 111: “Some tribunals […] have rendered very substantial costs awards without any explanation or indication that these factors were present.”

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Ukraine. The award consisted of 519 paragraphs but the tribunal summarized its analysis of costs allocation in merely two paragraphs.250 There are various circumstances which are taken into account when tribunals decide on the issue of costs allocation. It has been acknowledged that such circumstances can sometimes be considered as improper procedural behavior, such as for example (i) “dilatory or otherwise improper conduct in the proceedings,”251 and (ii) frivolous claims.252 In Cementownia “Nowa Huta” v. Turkey the tribunal applied the cfe rule regarding both legal and arbitration costs, in order to condemn the claimant for its behavior during the arbitration. The tribunal based its decision inter alia on the following findings: (i) the claimant filed a fraudulent claim, (ii) the claimant failed on all of its requests for relief, (iii) the claimant delayed the proceedings and therefore raised the costs.253 In aes v. Hungary the tribunal acknowledged that not only frivolous claim, but also bad faith can constitute a circumstance which influences the decision on costs.254 The case of Commerce Group v. Salvador also confirmed that frivolous or bad faith claims can result in costs shifting.255 250 Alpha Projektholding v. Ukraine, icsid Case No. ARB/07/16, award (8 November 2010), ­paras. 515–516. 251 Christoph Schreuer, Loretta Malintoppi, August Reinisch, Anthony Sinclair, “The icsid Convention: A Commentary” (Cambridge University Press 2009), p. 1230, para. 22. 252 For example in Grynberg v Grenada the tribunal applied the cfe rule and observed that “[h]aving regard to its’ conclusions that Claimants present claims are manifestly without legal merit, and that, it was impermissible for Claimants to advance them in new icsid proceedings, the Tribunal considers it appropriate that Respondent should be fully indemnified for all of its costs, reasonably incurred or borne, in this proceeding.” See: Rachel S. Grynberg et al. v. Grenada, icsid Case No. ARB/10/6, award (10 December 2010), para. 8.3.4. 253 Cementownia v. Turkey, supra note 186, para. 177. 254 aes Summit Generation and aes-Tisza Erömü v. Hungary, icsid Case No. ARB/07/22, award (23 September 2010), para. 15.3.3. “It is the view of the Tribunal that no frivolous claim was filed in the proceeding and that no bad faith was observed from the parties. In fact, the Tribunal notes that the submissions and the argumentations of both parties were presented in a professional manner. Consequently, the Tribunal concludes that each party shall bear its own costs and expenses and share equally in the costs and charges of the Tribunal and the icsid Secretariat.” A similar observation was made, for example, in Nations Energy v. Panama, where the tribunal – when deciding on the allocation of costs – took into account the fact that the claimants had not acted in bad faith. See: Nations Energy et al. v. Panama, icsid Case No. ARB/06/19, award (24 November 2010), para. 712. 255 Commerce Group and San Sebastian Gold Mines v. El Salvador, icsid Case No. Arb/09/17, award (14 March 2011), para. 137.

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The tribunal in Phoenix v. Czech Republic applied the cfe rule based inter alia on a finding that “the initiation and pursuit of this arbitration is an abuse of the international investment protection regime under the bit and, consequently, of the icsid Convention.”256 Although the tribunal in Anderson v. Costa Rica did not decide to shift the costs, it observed that this decision was based on the fact that it had “found no evidence for concluding that special circumstances exist, such as procedural misconduct, the existence of a frivolous claim, or an abuse of the bit process or of the international investment protection regime.”257 Even though Wälde’s separate opinion in Thunderbird v. Mexico opposed the application of the cfe, based on the simple fact that one party “wins” and the other “loses” the case, he observed that he “would have no hesitation whatsoever to penalize the claimant for daring to use an investment treaty to protect the fruits of unethical behaviour.” He stated that he would not even require conclusive proof of such behavior and that it would suffice for there to exist “enough corroborating indicators leading to a reversal of the burden of proof on claimant.”258 In Plama v. Bulgaria the tribunal ordered the investor to pay all arbitration costs and part of the respondent’s legal costs in the amount of usd 7,000,000 because the investor had been found to have made a fraudulent misrepresentation when obtaining its investment, which led to a denial of protection of the applicable treaty in the merits phase.259 The circumstances which are taken into considerations by tribunals, and the reasons stated in their decisions, allow an observer to conclude that human rights can also be considered as having a possible impact on arbitrators’ legal reasoning when deciding the issue of costs allocation. As demonstrated in Chapter 1, human rights issues can form part of the circumstances that are relevant to a case. They may be relevant for the 256 Phoenix Action v. Czech Republic, icsid Case No. ARB/06/5, award (15 April 2009), para. 151: “The Tribunal has concluded not only that the Claimant’s claim fails for lack of jurisdiction, but also that the initiation and pursuit of this arbitration is an abuse of the international investment protection regime under the bit and, consequently, of the icsid Convention. It is also to be noted that the Claimant filed a request for provisional measures which was rejected in its entirety by the Tribunal and which added to the costs of the proceeding.” 257 Alasdair Ross Anderson et al. v. Costa Rica, icsid Case No. ARB(AF)/07/3 (award 19 May 2010), para. 63. 258 International Thunderbird Gaming v. Mexico, uncitral, separate opinion (December 2005), para. 147. 259 Plama v. Bulgaria, icsid Case No. ARB/03/24, award (27 August 2008), paras. 321–323.

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c­ onsiderations at every stage of the proceedings, including when a decision on costs allocation is made. In this sense, human rights may inform a tribunal’s understanding of what is “reasonable” when deciding to shift costs based on the particular circumstances of the case. In light of the previous analysis, in the Second Model Situation (i.e. when human rights violations were committed by investors) tribunals have the power to award costs to the respondent state. As described above, tribunals have ­confirmed on numerous occasions that they may use their discretion when deciding on costs allocation when they face claims brought in “bad faith” or “abuse” of a bit’s protection. In this author’s opinion, the behavior of investors’ in the Second Model Situation is comparable to bringing a claim in “bad faith” or in seeking to “abuse” the protection granted by bits. Therefore, tribunals have the power to award costs to the respondent state, by making use of their discretion even if the applicable default rule was the American rule. This is true even if a reason exists to justify that human rights considerations would not have been applied at any previous stages of the proceedings (i.e. during the merits or compensation stages). The influence of human rights violations committed by the investor could be considered independently when deciding upon costs allocation. A similar conclusion may be drawn with respect to the First Model Situation (i.e. when investors are not involved in human rights violations, but allege that a bit has been violated by measures undertaken in pursuit of host states’ obligation to fulfil human rights). The human right to water can serve as an example of such a situation. As was already noted, the international obligation to fulfil the human right to water requires that states adopt inter alia “appropriate pricing policies such as free or low-cost water” and programs “reducing depletion of water resources through unsustainable extraction, diversion and damming […].”260 These goals can be achieved by various measures, including regulatory measures. The chosen measures, the methods of their implementation and other facts of each particular case constitute relevant factors in determining the extent to which such human rights defenses can be accepted when analyzing the jurisdiction, merits and compensation stages of arbitral proceedings. Regardless of the impact of these aspects during the previous stages of bit proceedings, their impact upon costs allocation decision should be independent. In the First Model Situation, tribunals are faced with a situation when no “bad faith” exists on the part of the investor, as no human rights violations took place. Nevertheless, state actions were undertaken in pursuit of its 260 General Comment 15, supra note 110, paras. 27–28.

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i­ nternational human rights obligations, or at least human rights concerns form part of the public policy relevant to the dispute. Thus, in such a situation it may be “fair” and “reasonable” to take this factor into account when deciding on costs allocation. Depending on the circumstances of the case, it may be a relevant factor either for: (i) ordering reimbursement of the respondent’s costs (if the respondent prevails in the proceedings), or (ii) deciding that no cost shifting will occur (if the claimant prevails in the proceedings). The considerations concerning costs shifting may also be relevant in the Third Model Situation (i.e. when investors rely on their human rights). An example of such a situation was provided in Chapter 1, where the Toto v. Lebanon case was discussed.261 The tribunal declined jurisdiction over the claim, which alleged that a denial of justice had taken place, with respect to which the investor could also have relied on its human right to due process and to a fair and equitable trial. The main reason underlying the no-jurisdiction decision was that the investor had not exhausted all available local remedies which could have accelerated the local proceedings. The Third Model Situation could be relevant to costs allocation. Depending on the circumstances of the case, if an investor does not prevail in a case, the existence of violations of his human rights can nevertheless still influence the decision on costs. For example, the investor’s human rights may have been violated, but the tribunal decides for some reason that these claims are outside its scope of jurisdiction, as in the given example. In such a situation, human rights arguments may justify a decision not to award the respondent full costs (i.e. as a justification to apply the rule that each party pays their own costs). Conversely, if an investor prevails in the proceedings, human rights issues should justify the allocation of costs to the claimant. That would remain appropriate even if the investor prevails only in part, but fails on some aspects of its submissions, including human rights arguments.

261 Toto Costruzioni Generali v. Lebanon, icsid Case No. ARB/07/12, award (7 June 2012).

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Conclusions The growth of international investment law and the related expansion of investor – state arbitration is an undeniable fact. One consequence thereof is a growing public awareness of the system and related concerns about the place of human rights within that system. Other public opinion concerns relate to the system’s legitimacy, including its impact on state sovereignty and the absence of any real public interest considerations in investor – state arbitrations. This book analyzes the place of human rights in arbitral proceedings based on bits. It can be important for both, academia and practice. From an academic point of view, it provides added value to the understanding of two fields of international law: human rights and investment law. From a practical perspective, the observations and proposals presented herein may, hopefully, prove useful for ongoing and future investor – state arbitrations. They may also be helpful in assuring the coherence of states’ activities at two different levels of international obligations: in investment law and in human rights. A methodological tool developed by this author is introduced at Chapter 1, consisting of identifying three graphically-illustrated Model Situations. The proposed methodological tool proved necessary to properly organize the legal analysis conducted on the role of human rights in bit arbitrations. This analysis, in turn, allowed answers to be provided to the questions posed in the introduction of this book. The first question asked whether there is a place for human rights arguments in investor – state arbitration. It focused on whether the jurisdiction of tribunals in investment arbitration is broad enough to include arguments concerning human rights. This focus is legitimate, given that arbitral tribunals must first determine the existence and scope of their jurisdiction before they can decide on merits of the cases. The analysis presented herein demonstrates that there is a place for human rights arguments in investor – state arbitration. The jurisdiction of tribunals in bit arbitrations is sufficiently broad to include arguments concerning human rights. Insofar as the human rights arguments presented by host states relate to both, the cause of action of the presented claim and the state measures undertaken in relation to the cause of action, tribunals’ scope of jurisdiction allows them to take account of host states’ human rights obligations. The analysis contained herein proves that, in the context of the first question, one should not limit research solely to jurisdictional issues but should also analyze the issue of claims’ admissibility. The latter requires that investments be made “in accordance with local laws” in order to enjoy the protection­

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004339002_007

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offered by bits. In the Second Model Situation, host states may argue that certain claims are inadmissible due to human rights violations having been committed by investors. In this context, a distinction must be drawn between violations of human rights committed by investors when undertaking the investments and those committed at a later stage. If such violations take place at the moment of making an investment, tribunals are entitled to consider claims brought by investors as being inadmissible on the basis that the investment was not compatible with the “in accordance with local laws” requirement. If, however, violations of human rights are committed by investors later in time, after the investment was established, this issue should be considered as an element of merits or compensation, depending on the facts of each case. The second question is closely related to the first one. It refers to the possibility that human rights arguments may be relied upon not only by host states (to justify breaches of bits) but also by investors (in order to support their position). The analysis conducted demonstrates that the scope of jurisdiction of tribunals in investment arbitration allows human rights arguments to be made by both parties to a dispute, whether as claimant (investor) or respondent (host state). This possibility is not limited to the latter only. Human rights can fall within the scope of jurisdiction of arbitral tribunals when they are considered to form part of the law applicable to the dispute concerning the investment (or the investor, if this is anticipated by the applicable jurisdiction clause), and/or when they are used as interpretative directives to analyze the substantive provisions of the applicable bit. In addition, in certain circumstances it is possible to present a claim based on an investor’s human rights as a separate cause of action. This can occur when such a claim is based on the investors’ own human rights, insofar as such rights concern the investment protected by the bit and the applicable bit contains a Wide Jurisdiction clause (within the meaning defined in Chapter 2). The third question concerned the subsequent stages of the arbitral proceedings: merits, compensation and costs. It was divided into four issues, the first of which refers to the conflict of norms between those included in international human rights treaties and those contained in international investment treaties. The conducted analysis shows that any conflict of treaties between bits and human rights treaties is more apparent than real. The obligations undertaken by states in bits and in human rights treaties are not irreconcilable merely because they are in force simultaneously. bits should be interpreted in accordance with the vclt, including art. 31(3)(c) thereof which states that “any ­relevant rules of international law applicable in the relations between the parties” should be taken into account. Thus, customary international human

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rights law and international human rights treaties binding the contracting states may not only form part of the applicable law, but should also inform the interpretation of bits. As a result, if bits are interpreted in the light of states’ international human rights obligations, there can be no real conflict between bits and human rights treaties. It is unnecessary to provide a conclusive answer on the “conflict of norms” issue and which norms prevail, because they can be applied in a manner which allows such conflicts to be avoided. Various international obligations undertaken by states are to be interpreted in a way which allows consistency between them. The above is closely related to the second aspect of the third question, which asked whether human rights can influence the interpretation of standards of protection guaranteed by investment treaties. The analysis proves that the answer is affirmative. As noted above, the interpretation of bits must be done in accordance with the vclt, including art. 31(3)(c) thereof. International human rights treaties fall within the category of “any relevant rules of international law applicable in the relations between the parties” which should be taken into consideration when interpreting bits. This is true not only with respect to international human rights treaties that bind the contracting states to the applicable bit, but also with respect to customary international law and human rights of a ius cogens nature. Within this context, the research focuses on selected aspects of two standards of protection commonly encountered in bits: the fet and the p ­ rohibition on expropriation. As regards the first, the conclusions are that the international obligations of host states to respect, protect and fulfil human rights can have an impact on the interpretation of the fet standard when tribunals analyze good faith and legitimate expectations, understood as constituting elements of this standard. With respect to the first of these elements, if defendable human rights reasons underpin a state’s adopted measures, this may prove that no bad faith existed on the part of the host state. As regards the second element, legitimate expectations can be based on the stability of host states’ regulatory frameworks and on specific representations made by the agents of host states. In the first context, the expectations of investors are not legitimate and are not, therefore, protected as an element of the fet standard, if they do not encompass international human rights treaties as part of the regulatory frameworks of the host states. In the second context, the expectations based on representations which are contrary to law (including international human rights treaties ratified by the host states, understood as forming part of laws of the host states) are also not legitimate and are, consequently, unprotected. In the context of expropriation, it can be concluded that host states are entitled to expropriate investments provided that certain conditions precedent

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are fulfilled to ensure that the expropriation measures are lawful. The analysis demonstrates that host states’ international obligations to respect, protect and fulfil human rights can inform the understanding of public purpose, which is considered as a prerequisite for lawful expropriation. Indirect expropriations are much more important in practice than direct (and possibly lawful) ones. This category includes regulatory expropriations (i.e. measures of general application adopted by states which can have “effect equivalent to” expropriation for investments protected by bits). The analysis shows that, when the tribunals analyze whether an indirect expropriation has taken place, they should perform proportionality tests in order to balance the interests of host states and investors. Among other factors, such proportionality tests should take account of host states’ international human rights obligations. The next issue of the third question asked whether human rights can lead to a reduction in the compensation due in the event that an arbitral tribunal has determined the host state to have breached the provisions of a bit. The research shows that, if host states undertakes lawful expropriation, they are obliged to pay “effective and adequate” (i.e. full) compensation for the investment. However, the principles governing compensation are different in respect of breaches of bits when reparation for internationally wrongful acts requires that all of the consequences of such acts be “wiped out.” Arbitral tribunals enjoy a considerable degree of discretion when adopting valuation methods and determining the elements to be taken into consideration when calculating compensation for breaches of bits. In the First Model Situation, they can make use of this discretion to reach conclusions based on “fairness” or “equity.” These concepts are broad enough to include human rights concerns. In the Second Model Situation, the tribunals can apply the concept of contributory negligence as expressed in art. 39 of the ilc Articles. The analysis conducted herein proves that human rights violations committed by investors can be considered to constitute a “contribution to the injury,” as long as they result from willful or negligent behavior. Therefore, in the Second Model Situation it is possible to reduce compensation levels due to investors’ contributory negligence consisting of human rights violations. In addition, the research reveals another possible impact of human rights on compensation levels in investor – state arbitration. When looked at from the perspective of the Third Model Situation, violations of investors’ human rights can result in investors being awarded moral damages. This is a crucial consequence of the possible reliance on human rights by investors in investor – state arbitration.

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Investors can claim moral damages for violations of their human rights if the applicable bit protects both “investments” and “investors.” However, if the applicable bit protects only investments, a claim for moral damages will only be successful if the measure adopted by the host state also adversely affects the investment at the same time. Furthermore, investors can claim moral damages for violations of the human rights of their executives and/or employees, provided that such a claim relates to measures taken against these individuals in connection with their activity on behalf of the investor, and/or with the intention to harm the investor. Finally, the third question also refers to the impact of human rights on determining the burden of costs of arbitral proceedings. The conclusions are that a place exists for human rights considerations also at this stage. Generally speaking, arbitral tribunals tend to make use of the freedom given to them by the applicable bits and their rules of procedure to allocate costs in a manner they consider “reasonable.” Human rights can form part of the circumstances typically taken into consideration by tribunals in this context. All of the above proves that there is certainly a place for human rights arguments in arbitral proceedings based on bits. It also allows to answer the ­“subsidiary” questions presented at the beginning of the work. As Simma noted, “international investment protection and human rights are not ‘separate worlds’. They are not as foreign to each other as some make it appear, preferring to see this branch of the law as a cluster of more or less de-politicized ‘self-contained regimes,’ splendidly isolated from the dynamics and tensions of the rest of the legal universe, including human rights. After all, the ultimate concern at the basis of both areas of international law is one and the same: the protection of the individual against the power of the State.”1 It is unjustified to consider international human rights and investment law as constituting totally separate fields of law. Both fields form important parts of public international law and, as such, they should be interpreted in a systemic manner and be guided by general principles of international law. This justifies a conclusion that the interpretation of certain standards of protection in one field may be informed by interpretations that are present in the other field.

1 Bruno Simma, “Foreign Investment Arbitration: A Place for Human Rights?” (2011) 60 International and Comparative Law Quarterly, p. 576.

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