International Investment Law 5

1. International Investment Law 5 Standards ofprotection

2. Standards of Investment Protection • Sources • Customary International Law • Multilateral Agreements • Bilateral Agreements (BITs) • Jurisprudence • Different standards • Eachagreementhasitsownsetofstandards • But the same terminologyleadstotheelaborationofcommonperceptionsofwhatthesestandardsare (c) Prof. Dr. Werner Meng

3. Jurisprudentialelaboration • Standards arenecessarilybroad, jurisprudencemakesthemconcrete • See thegeneralproblemsofinvestmentjurisprudence • Different judges, different texts (in concrete, but also assystematicenvironmentoftheclauses) • Reference toothercourtsystems? • ICJ jurisprudence: yes (see e.g. ELSI case) • WTO jurisprudence? E.g. about NT or MFN • Onesingularparticulartext, but termsandsystematicenvironmentmaybe different • The legislative purposesof WTO laware different • Free trade • Least andcontrolledstateintervention • Discriminationdistortsthemarketforces (c) Prof. Dr. Werner Meng

4. List ofcommonstandards • Fair andequitabletreatment (FET) • Fullprotectionandsecurity • Umbrellaclauses • Due process: fair procedureandaccesstojustice • Emergency standards • Emergency • Necessity • Armedconflict • Force majeure • Preservationofrights • Noarbitrarinessordiscrimination • National treatment (NT) • Most favorednationtreatment (MFN) (c) Prof. Dr. Werner Meng

5. Fair andequitabletreatment • Nowadaysthemostimportantstandard • Not: ex aequo et bono • BITs, but also MIGA, NAFTA, ECT • Ruleof International Law, Independent from national law • Not: National treatment • But also not: PIL minimumstandard (disputed) • Isit a different generalstandardofcustomary PIL? (disputed). Whatwouldthatmean? Case bycasemethod? • Coulditat least become such a standard? • Ruleoflawapproach (ELSI) (c) Prof. Dr. Werner Meng

6. Fair andequitable Treatment • See Art. 2.2 MT, 1105.1 NAFTA, 10.1 EnChT • Customarylaw: noarbitrarydenialof legal protection • Transparency • Ruleof Law • Protectionofjustifiedexpectations • Generally: stableandreliableinvestmentconditions (CMS / Argentinien, ICSID ARB/01/8 of May 12, 2005) (c) Prof. Dr. Werner Meng

7. FET Definitions: Tecmed - 1 • Tecmed v. Mexico (2003) • „154: The Arbitral Tribunal considersthatthisprovisionofthe Agreement, in light ofthegoodfaithprincipleestablishedby international law, requirestheContractingPartiestoprovideto international investmentstreatmentthatdoes not affectthebasicexpectationsthatweretakenintoaccountbytheforeigninvestortomaketheinvestment. • The foreigninvestorexpectsthehost State toact in a consistentmanner, freefromabiguityandtotallytransparently in itsrelationswiththeforeigninvestor, so thatitmayknowbeforehandanyand all rulesandregulationsthat will governitsinvestmentsaswellasthegoalsofthe relevant policiesandadminstraivepracticesordirectives, tobeableto plan itsinvestmentandcomplywith such reguations (c) Prof. Dr. Werner Meng

8. FET Definitions: Tecmed– 2 • The foreigninvestor also expectsthehost State toactconsistently, i.e. withoutarbitrarilyrevokinganypreexistingdecisionsorpermitsissuedbythe State thatwererelied upon bytheinvestortoassumeitscommitmentsaswellasto plan andlaunchitscommercialandbusinessactivities. • The investor also expectsthe State tousethe legal instrumentsthatgoverntheactionsoftheinvestorortheinvestment in conformitywiththefunctionusuallyassignedto such instruments, and not todeprivetheinvestoritsinvestmentwithouttherequiredcompensation.“ (c) Prof. Dr. Werner Meng

9. CritiqueoftheTecmeddefinition • MTD v. Chile (ad hoc Committee) • The obligationsofthehost State towardsforeigninvestorsderivefromthetermsoftheapplicableinvestmenttreatyand not fromanysetofexpectationsinvestorsmayhaveorclaimtohave. • Suez v. Argentina: • Not: subjectiveexpectations, but expectationsbased on factsthatmaybeverifiableobjectively. (c) Prof. Dr. Werner Meng

10. Overviewofthefactors • Justifiedexpectationsoftheinvestor on an objectivebasis • Consistent, unambiguousand transparent actsofthehoststate • Knowledge in advanceofthe legal, politicaland administrative ramificationsoftheinvestment • Consistencywithpreexistingdecisionsandpermits. Noarbitraryrevocal. • Normal, impartialand non-abusive applicationofthelaw • Nodeprivationofpropertywithoutcompensation (c) Prof. Dr. Werner Meng

11. FET Cases – 1 • Change ofprivatizationpolicyandwithdrawalofconsenttofurtheracquisitionsofland (Eureko v. Poland) • Not generally a changeof national legislation. Investment treatyisno „insurancepolcyagainsttheriskofanychanges in thehostState‘s legal andeconomicframework“ (EDF v. Romania). Onlywithreasonableexpectations. • Reliance on governmentsofficalstatements: transparencyrequirement (SPP v. Egypt) • Reliance on promisestocertify an activity (Metalclad) • Replacing an unlimitedlicenceby a license limited in time (Tecmed v. Mexico) • Breachofcontractbysovereignpowers, not a simple failureofpaymentofbillsthatare due. • Violation of due process, denialofjustice, failuretoheartheinvestor (Metalclad) (c) Prof. Dr. Werner Meng

12. FET Cases - 2 • Violation ofGood Faith. Nopurposefullyinflictionofdamages, no unfair expulsionoftheinvestor. • But badfaithofthestate in generalis not required • Nofactualcoercionorharassment (physicalorpsychological) (Pope&Talbot v. Canada, Tecmed, Total v. Argentina, Desert Line v. Yemen) • Bystateorgansorbyinstigationof private protestsorpressure (c) Prof. Dr. Werner Meng

13. Tecmed Case • Tecmed v. Mexico (ARB(AF)/00/2 • Operation of a landfill in Mexico • Noprolongationoftheauthorization (twoyears after theoperationstarted) • Promisestograntnewlandforrelocation not fulfilled • Reason: pressureof regional groups • Minor violationsof environmental rulesofTecmed wer not the real causefortheendingoflicensing • Investment was completelydevaluated • AT • De facto indirectexpropriation, persistingproperty not usable • Noadequatecompensation • Violation of fair andequaltreatment (c) Prof. Dr. Werner Meng

14. Metalclad Case • Metalclad v. Mexico ARB(AF)/97/1 • American wastedisposalcompanywantedtooperatelandfill in Mexico • Permit bythe national andthe regional governments. Prolongation bythe national government, but ordertostopbythemunicipality after furtherconstructionofthesite. National authoritiesencouraged M. toapplyfor a municipalpermit. Contradictorybehaviourofthestateauthorities. M. completedtheconstruction. Protests blockedthebeginningoftheoperations. Municipalityrefusedpermitwithoutproperlyhearing M. Finallythe regional governordeclaredthelandfillas an environmentallyprotectedzone • AT (NAFTA Court under art. 1110) • No FET, noexplicationofthemexican legal situation, noclearprocedures, no proper evaluationofthe legal rules, no proper hearing • Expropriation withoutcompensation • Purposeis not decisive (c) Prof. Dr. Werner Meng

15. Fullprotectionandsecurity • Againstinsurgents, terroristsorriotsbymobs • State hastotakereasonable legislative and administrative actstoprotect • State hastoabstainfromanyinstigation • State hastoactivelyrefrainandprotectfromphysicalviolenceandharassment. • State hastogive legal protection • State hastoguaranteetheminimumstandard (c) Prof. Dr. Werner Meng

16. Umbrellaclauses • Agreement on „pactasuntservanda“ in ordertoappendthecontract (State-Private) totheagreement (State-private) • Art. 7.2 MT • (2) Each Contracting State shall fulfil any other obligations it may have entered into with regard to investments in its territory by investors of the other Contracting State. • Art. 10 EnChT • 1.3: Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment ordisposal. • 1.5: Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party • BIT Germany – Pakistan (1959) • “The violation of such an obligation” (i.e. of the investment contract) “will also amount to a violation of the international legal obligation contained in the present Treaty” (c) Prof. Dr. Werner Meng

17. Effectof an umbrellaclause • The consequence: the legal situation in the time of the conclusion of the contract remains “frozen” (or “preserved”) • Although the contract is based on national law (PCIJ Serbian loans case) • A breach entails state responsibility of the host state to the home state • But: restrictive interpretation of the clause necessary (binding of sovereignty, “in dubiomitius”): not covering merely commercial contractual obligation or minor violations of the contract (?) without the use of sovereign powers • Only applicable to direct state obligations in a contract (disputed) • Also applicable to unilateral state acts (legislation) (c) Prof. Dr. Werner Meng

18. Due processandjudicialprotection • Basis istheminimumprotectionofpublic international lawforAliens • Accesstocourts, righttobeheard, localprocedure, nodenialofjustice, Nomiscarriageofjustice • Establishment of an effectivejudicialsystem • Noretroactiveapplicationofthelawspriortothebeginningoftheinvestment. (c) Prof. Dr. Werner Meng

19. Emergency exceptions • A stateisresponsiblefor all militaryactionsandcivilstrifeon ist territory. • at least insofar, asithasto do itsbest, toprotecttheinvestor • A stateis not responsibleforforcemajeurebeyonditscontrol. • Necessitymeans (article 25 ofthe ILC articles on stateresponsibility) • thatthestatehasnoothermeansagainstthe grave and imminent periland • thathe does not seriously impair an essential interest • ofthestatetowardswhichtheobligationexistsor • tothe international communityas a whole • A stateis not excusedifithasnomoneyforeconomicreasons (c) Prof. Dr. Werner Meng

20. Loss ofrights, arbitrarybehaviorordiscrimination • BITs do not abrogaterightsoftheinvestorunder national orother international law • Arbitrary: not reasonable, but based on prejudiceor personal preferences. Againsttheruleoflaw (ELSI). Is also a FET violation (?). • Nodiscriminationbased on nationalityorother irrational differentiation. Intentnecessary? (c) Prof. Dr. Werner Meng

21. Justificationofdiscrimination • Art. 3 MT • (2) Neither Contracting State shall in its territory subject investors of the other Contracting State, as regards their activity in connection with investments, to treatment less favourable than it accords to its own investors or to investors of any third State. The following shall, in particular, be deemed treatment less favourable within the meaning of this Article: • different treatment in the event of restrictions on the procurement of raw or auxiliary materials, of energy and fuels, and of all types of means of production and operation; • different treatment in the event of impediments to the sale of products at home and abroad; and • other measures of similar effect. • Measures that have to be taken for reasons of public security and order shall not be deemed treatment less favourable within the meaning of this Article. (c) Prof. Dr. Werner Meng

22. National Treatment • Duty not totreatforeigninvestmentsworsethandomesticones in „likesituations“ or „circumstances • And, ifcontractuallyagreed: activitiesofforeigninvestors (like in GATS) • Concerningexpropriationsandcompensation (customarylaw) • Discrimination de iureand de facto • Not necessarilybased on nationality • Nointentnecessary • Legitimatepublicpurposesmayjustifydiscrimination (otherthan in the GATT, aimsandpurposes) • See 3.2. MT • Sincetherearenogeneraljustificationclauses in investmenttreaties, justificationsplay a rolehere! Theyrelievethequalificationasdiscrimination (c) Prof. Dr. Werner Meng

23. Most Favored Nation Principle • Investors mayrely on themost favorable treatmentgrantedtoanyforeigner • In the „basictreaty“, the MFN clausepointsto a more favorable treatment in a „thirdpartytreaty“ • E.g. ifcitizen of oneforeignnationalitymay bring an international casewithoutexhaustingthelocalremedies, all theforeignersmay do so. • Eiusdem generis – principle: doesthethird-party treaty deal withthe same subject matter thanthebasictreaty? (c) Prof. Dr. Werner Meng

24. MFN - 1 • Art. 3 German MT: • National and most-favoured-nation treatment • (1) Neither Contracting State shall in its territory subject investments owned or controlled by investors of the other Contracting State to treatment less favourable than it accords to investments of its own investors or to investments of investors of any third State • (2) Neither Contracting State shall in its territory subject investors of the other Contracting State, as regards their activity in connection with investments, to treatment less favourable than it accords to its own investors or to investors of any third State. The following shall, in particular, be deemed treatment less favourable within the meaning of this Article: • different treatment in the event of restrictions on the procurement of raw or auxiliary materials, of energy and fuels, and of all types of means of production and operation; • different treatment in the event of impediments to the sale of products at home and abroad; and • other measures of similar effect • Measures that have to be taken for reasons of public security and order shall not be deemed treatment less favourable within the meaning of this Article. (c) Prof. Dr. Werner Meng

25. MFN - 2 • (3) Such treatment shall not relate to privileges which either Contracting State accords to investors of third States on account of its membership of, or association with, a customs or economic union, a common market or a free trade area • (4) The treatment granted under this Article shall not relate to advantages which either Contracting State accords to investors of third States by virtue of an agreement for the avoidance of double taxation in the field of taxes on income and assets or other agreements regarding matters of taxation • (5) This Article shall not oblige a Contracting State to extend to investors resident in the territory of the other Contracting State tax privileges, tax exemptions and tax reductions which according to its tax laws are granted only to investors resident in its territory. • (6) The Contracting States shall within the framework of their national legislation give sympathetic consideration to applications for the entry and sojourn of persons of either Contracting State who wish to enter the territory of the other Contracting State in connection with an investment; the same shall apply to employed persons of either Contracting State who in connection with an investment wish to enter the territory of the other Contracting State and sojourn there to take up employment. Where necessary, applications for work permits shall also be given sympathetic consideration (c) Prof. Dr. Werner Meng

26. MFN - 3 • US Model BIT 2004 • Article4: Most-Favored-Nation Treatment • 1. Each Party shallaccordtoinvestorsoftheother Party treatmentnoless favorable thanthatitaccords, in likecircumstances, toinvestorsofany non-Party withrespecttotheestablishment, acquisition, expansion, management, conduct, operation, andsaleorotherdispositionofinvestmentsin itsterritory. • 2. Each Party shallaccordtocoveredinvestmentstreatmentnoless favorable thanthatitaccords, in likecircumstances, toinvestments in itsterritoryofinvestorsofany non-Party withrespecttotheestablishment, acquisition, expansion, management, conduct, operation, andsaleorotherdispositionofinvestments. (c) Prof. Dr. Werner Meng

27. MFN - 3 • Art. 3 BIT UK – Mozambique of 2004 • ARTICLE 3 • National Treatment and Most-favoured-nation Provisions • (1) NeitherContracting Party shall in itsTerritorysubject Investments orReturns ofNationalsor Companies oftheotherContracting Party totreatmentlessfavourablethanthatwhichitaccordsto Investments or Returns ofitsownNationalsor Companies orto Investments or Returns ofnationalsorcompaniesofanythird State. • (2) NeitherContracting Party shall in itsTerritorysubjectNationalsor Companies oftheotherContracting Party, asregardstheirmanagement, maintenance, use, enjoymentordisposaloftheir Investments, totreatmentlessfavourablethanthatwhichitaccordstoitsownNationalsor Companies ortonationalsorcompaniesofanythird State. • (3) Fortheavoidanceofdoubtitisconfirmedthatthetreatmentprovidedforin paragraphs(1) and (2) ofthisArticleshallapplytotheprovisionsofArticles 1 to 11 ofthis Agreement. • In thearticles 1 to 11 wefindprovisions on expropriations, compensations, investor-statearbitration, state – statedisputesettlement etc. (c) Prof. Dr. Werner Meng

28. Whatcouldbepossible MFN situations ? • Substantive rights • Clauses in othertreaties (e.g. FET) • Clausesaboutcompensation • Proceduralrights? • Venuesofclaims • Jurisdictionofcourtsortribunals • Conditions (e.g. exhaustionofremediesorcooling off – period) • Investor – State arbitration? • Matter ofinterpretationorsubjectto express acceptanceorrefusalbytheparties (c) Prof. Dr. Werner Meng

29. EnlargementofJurisdiction? • BIT China Australia (1988) Article XII Settlement ofdisputesbetweenoneContracting Party and a national oftheotherContractingParty relatingtoinvestments 1. In theeventof a disputebetween a Contracting Party and a national oftheotherContractingParty relatingto an investmentor an activityassociatedwith an investment, thepartiestothedisputeshallinitiallyseektoresolvethedisputebyconsultationsandnegotiations. 2. Ifthedisputehas not beensettledwithinthreemonthsfromthedateeitherpartygavenotice in writingtotheotherconcerningthedispute, eitherpartymaytakethefollowingaction: • in accordancewiththelawoftheContracting Party whichhasadmittedtheinvestment, initiateproceedingsbeforeitscompetentjudicialor administrative bodies; and (b) wherethepartiesagreeorwherethedisputerelatestotheamountofcompensationpayableunderArticle VIII, submitthedisputeto an Arbitral Tribunal constitutedin accordancewith Annex A ofthis Agreement. 4. In theeventthatboththePeople'sRepublicof China andAustraliabecomepartytothe 1965 Convention on the Settlement of Investment Disputes Between States andNationalsof Other States, a disputemaybesubmittedtothe International Centreforthe Settlement of Investment Disputes forresolution in accordancewiththetermson whichtheContracting Party whichhasadmittedtheinvestmentis a partytotheConvention. (c) Prof. Dr. Werner Meng

30. EnlargementofJurisdictionby MFN? 2 • The BITS between China and Germany (2003) and China andtheNetherland (2004) do not know a limitationofthejurisdictionofinvestor – state – arbitrationtoquestionsofcompensation. • Can an Australianinvestor in China open an ICSID-procedure on thejustificationof a chinese environmental measure? (c) Prof. Dr. Werner Meng

31. Maffezinicase • Maffezini v. Spain (ICSID ARB/97/7 – Jurisdiction) • BIT Argentina – Spain • Disputes – Negotiationfor 6 months – national remedies – 18 months – international arbitration • BIT Chile – Spain • Disputes – Negotiationfor 6 months – thendirectly: international arbitration (ISDS) • MFN clausecovering „all matters“ ofthetreaty • AT: MFN also consideringjurisdiction, becauseinextricablyrelatedtotheprotectionofforeigninvestors • But: nooverridingof „publicpolicyconsiderations“ • Likeeg. Exhaustion oflocalremedies (but not the „eighteenmonths in domesticcourtsrule in thepresentcase) • Fork in theroadstipulation • Particulararbitrationforum • Highlyinstitutionalizedsystemofarbitrationthatincorporatespreciserulesofprocedure • Noretroactiveapplicationof a BIT („Tecmedaddendum“) i.e. noapplicationtothe „coreofmatters“ in an agreement. • No „disruptivetreaty-shopping“ (c) Prof. Dr. Werner Meng

32. ReactionstoMaffezini • Gas Natural v. Argentina(ARB/03/10): extension, if not clearreasonsagainstit • 18 monthsruleis not exhaustionoflocalremediesrules • Most ofArgentinas BITS do not contain such a rule, i.e. nopublicpolicy • Salini v. Jordan (ARB/02/13) such clauseshavetobeusednarrowly in ordertoavoid“treatyshoppping“ • Plama v. Bulgaria (ARB/03/24): extensive consentofthepartieshastobeproven • Siemens v. Argentina (Arb/02/8): likeMaffezinithequestiontoskipthe 18 months in national courts. Here, the BIT referredto „treatment“ relatingto „activitiesrelatedtotheinvestment“. Extension of MFN tothejurisdictionrules. Noadditional importationof a „fork in theroad“ – clause, becauseonly favorable clausesmaybereferredto. • Critique: „cherrypicking“ • It all depends on thewordingoftheclauseandtheintentionoftheparties • See Gaillard, E., EstablishingJurisdictionthrough a Most-Favored-Nation Clause, New York Law Journal 233 (2005), 1 ss. (c) Prof. Dr. Werner Meng

33. Transfer ofanyfundsoftheinvestor • Free righttorepatriatethecapitalas a rule • Other paymentsandproceedsoriginatingfromtheinvestment • Mostlyexistingstandards • Convertiblecurrencyattheofficial rate ofexchange • Withoutunduedelay • Variousspecialrules in BITs • Impact of Currency policies? -> IMF law (c) Prof. Dr. Werner Meng

34. Freedom of Transfer – German MT - 1 • Art. 1 Nr. 2 MT: • the term "returns" means the amounts yielded by an investment for a definite period, such as profit, dividends, interest, royalties or fees; • Art. 5 MT: • (1) Each Contracting State shall guarantee to investors of the other Contracting State the free transfer of payments in connection with an investment, in particular • the principal and additional amounts to maintain or increase the investment; • the returns; • the repayment of loans; • the proceeds from the liquidation or the sale of the whole or any part of the investment; • the compensation provided for in Article 4. (c) Prof. Dr. Werner Meng

35. Freedom of Transfer – German MT - 2 • (2) Transfers under Article 4 (2) or (3), under the present Article or Article 6, shall be made without delay at the market rate of exchange applicable on the day of the transfer. A transfer shall be deemed to have been made without delay if made within such period as is normally required for the completion of transfer formalities. The period shall commence with the submission of the corresponding application, where such an application is necessary, or the notification of the intended transfer, and must in no circumstances exceed two months. • (3) Should it not be possible to ascertain a market rate pursuant to paragraph (2), the cross rate obtained from those rates which would be applied by the International Monetary Fund on the date of payment for conversions of the currencies concerned into Special Drawing Rights shall apply. (c) Prof. Dr. Werner Meng

36. Freedom of Transfer – Re-Investment • Host statemay not require a re-investment of theproceeds • Certainrestrictions • Art. 1109.4 NAFTA: • 4. Notwithstanding paragraphs 1 and 2, a Party may prevent a transfer through the equitable, non-discriminatory and good faith application of its laws relating to: • (a) bankruptcy, insolvency or the protection of the rights of creditors; • (b) issuing, trading or dealing in securities; • (c) criminal or penal offenses; • (d) reports of transfers of currency or other monetary instruments; or • (e) ensuring the satisfaction of judgments in adjudicatory proceedings. • Art. 14.4 EnChT • Notwithstanding paragraphs (1) to (3), a Contracting Party may protect the rights of creditors, or ensure compliance with laws on the issuing, trading and dealing in securities and the satisfaction of judgements in civil, administrative and criminal adjudicatory proceedings, through the equitable, nondiscriminatory, and good faith application of its laws and regulations. (c) Prof. Dr. Werner Meng

37. Promotion of Investments by Investment Guarantees • In the Federal Republicof Germany • Atthe end of 2009, 24,3 billion € (in 1960: 5,1 Mia. €) • In total, 56 billion € forprojects in 123 countries • Damages 156,2 Mia. €, but thebalanceis positive • Guarantees on thebasisofinvestmentprotectionagreements • mandatedcompaniesdistributefundsofthestate • PricewaterhouseCoopers AG • Euler Hermes Kreditversicherungs AG • Since 1960, on thebasisofdecisionsbythe Interministerial Committeefor Investment Guarantees • Thiscommitteeanalyzesifprojectsareworthpromotingandthe legal protectionsituation, sixmeetings per year • Europe andAfricaincreasing, AmericaandAsiadecreasing MonthlyreportofBMWiT (Federal Ministryfor Economics and Technology), 07-2010 (c) Prof. Dr. Werner Meng

38. MIGA ofthe World Bank • MIGA (1985) • MIGA Members andinvestorsfrom Member States providedtheyare not nationalsofthehostcountry (article 13 • fordirectinvestments, equityinterestsandloans (article 12) • Guaranteesfor non-commercialrisks • transferrisk (capitaltransfer) • expropriationrisk • breachofcontractrisk • riskof war andcivil war • against a riskpremium (c) Prof. Dr. Werner Meng