International Investment Law: Standards of Protection

1. International Investment Law: Standards of Protection Valentina Vadi, PhD Lecturer, University of Maastricht China University of Political Science and Law, 30 March 2011

2. Synopsis Substantive Protection Expropriation: Principle of Non Discrimination: -Most Favoured Nation Principle (MFN); -National Treatment; Fair and Equitable Treatment; Full Protection and Security; Stabilization clause

3. The Architecture of Investment Treaties • Protection of foreign investment; • Substantive standards • Dispute settlement mechanisms

4. Lawful expropriation Public purpose Non discriminatory Just compensation Due process of law Unlawful Expropriation - Lack of one of the requirements mentioned before Protection against Unlawful Expropriation

5. Compensation ‘ The very raison d’être of compensation for expropriation ordered in the public interest is the idea that the State, i.e. the community, must not benefit unduly at the expense of private individuals’ (García-Amador, ILC Special Rapporteur)  Rationale for compensation: unjust enrichment, corrective justice

6. What Compensation? expropriation Compensation How much? Appropriate? Full market value? prompt adequate and effective? Cordell Hull and the Hull formula (1938)

7. Compensation: Santa Elena • American investor v Costa Rica • Direct expropriation • The area is added to the WH List • ICSID case (2000)

8. Compensation: Pyramids Southern Pacific Properties ltd v Arab Republic of Egypt, ICSID 1992 • Tourist village at the Pyramids of Gyza; • The area is added to the WH List Arbitral tribunal:  lawful expropriation Equitable compensation

9. Expropriation • No definition in BITs! • 2 Types: 1) Direct Expropriation= Nationalization; = Deprivation of foreign investor’s rights and corresponding acquisition or appropriation of those rights by the state. • Example: the state takes property to build a school 2) Indirect Expropriation

10. Indirect Expropriation • A government measure, while not on its face expropriatory, results in the deprivation of foreign investor’s property. • Indirect expropriation = regulatory expropriation = de facto expropriation = disguised expropriation

11. Indirect Expropriation  Examples: • confiscatory taxation; • repudiation of the concession agreement; • denial of permits necessary to operate the concession; • freezing of the investor’s bank accounts; • detention and deportation of key personnel necessary to run the business comprising the investment • Biloune v Ghana- stop work order, partial demolishment, arrest and deportation

12. 1) Sole-Effect doctrine (Dolzer) • Effect-based approach - Deprivation; - Compensation is due; • the objective of the government is irrelevant: intent to expropriate is not a necessary element of state responsibility

13. ‘It is recognized in international law that measures taken by a state can interfere with property rights to such an extentthat these rights are renderedso useless that they must be deemed to have been expropriated, even though the State does not purport to have expropriated them and the legal title to the property formally remains with the original owner’ • Iran-US Claims Tribunal, Starret Housing Case

14. ‘Expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal… transfer of title in favor of the host state, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or 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’ • Metalclad, § 103

15. Starret Housing (1983) • Islamic revolution 1979 in Iran • US company was in financial difficulties; • Iranian government appoints a temporary manager to control the company • The tribunal loss of control= expropriation

16. Ethyl v. Canada (1997) • Canadian environmental regulation of gasoline additive MMT • US chemical company • Investor-state arbitration, UNCITRAL • Settled; • Ban reversed; • $13 billion in damages and legal fees

17. Metalclad v Mexico (2000) • Planned use as a landfill site • Assurance by the Mexican federal government that the land can be used in this way; • Refusal by the regional government indirect expropriation, in violation of Article 1110 NAFTA

18. 2) Police Powers Doctrine • Legitimate and bona fide exercise of state police powers • Essential public interest; public health, environment, public morals • Preventing harm/nuisance-inherent limitation of property rights • No compensation is due • No clear definition!

19. ‘In the opinion of the tribunal, 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 powers of the states forms part of customary international law today’. Saluka v Czech Republic § 262

20. It is well established that the mere exercise by government of regulatory powers that create impediments to business or entail the payment of taxes or other levies does not of itself constitute expropriation. Any investor entering into a concession agreement must be aware that investment involves risks and that in some degree the investor’s activities are likely to be regulated and payments made for which the investor will not receive compensating advantages. These are all part of the price the investor has to pay for securing the concession…The conduct complained of must be such as to have a major adverse impact on the economic value of the investment.[1] • [1]Telenor Mobile Communications A.S. v. Republic of Hungary, § 64.

21. Is There an Expropriation? • Ban on highway advertising • To prevent accidents caused by distracted drivers • Is business entitled to protection?

22. Is There an Expropriation? Grand River v US 1998 Master Settlement Agreements NAFTA Article 1110, 1105 (FET), 1102 (NT), 1103 (MFN) Marlboro Advertisement

23. Is There an Expropriation? Pietro Foresti, Laura de Carli and Others v South Africa (2007) 1994 end of Apartheid Black Economic Empowerment, to redress past historical wrongs 2004 Minerals and Petroleum Resources Development Act (MPRD): private ownership of mineral rights was replaced with a system of licenses offered by the government.  Companies who held mineral rights under the old regime were given an opportunity to apply for licenses under new regime

24. Performance Requirements • TRIMS Agreement forbids the imposition of measures inconsistent with GATT’s Article III on national treatment and Article XI (on elimination of quantitative restrictions) • No local content as a condition for foreign investment projects

25. Fair and Equitable Treatment • Already in the Havana Charter • Very frequent, almost ubiquitous • NAFTA Article 1105 • Not a license to render an equitable award or decision ex aequo et bono! • Legal standard

26. Fair and Equitable Treatment • Neer case: • FET = international minimum standard • ‘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 ever reasonable and impartial man would readily recognize its insufficiency’ the claim was dismissed

27. Has the standard developed? • Yes; Transparency as an element of FET • Maffezini v Spain; • Metalclad v Mexico • No; only egregious misconduct • Myers v Canada (ban of shipments of chemicals from Canada to the US); • Supreme Court of British Columbia annulled Metalclad

28. NAFTA Commission 2001 Agreed interpretation of Article 1105 NAFTA: ‘Article 1105 prescribes the international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another party. The concept of ‘FET’ 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’.

29. NAFTA Commission 2001 -conservative approach -amendment rather than interpretation? -nemo judex in re sua? Subsequent cases UPS v Canada; Waste Management v Mexico; Thunderbird

30. However: -customary int’l law standard is evolving; the content of the standard develops as international law evolves -investor’s expectations -duty of transparency (See Art. X GATT), stability and predictability -development of the Rule of Law in the host state -case by case assessment -MTD Equity v Chile; CMS v Argentina; Occidental v. Ecuador

31. FET • Glamis Gold, a Canadian corporation: open pit gold mine • Sacred sites of the Quechan Indian Nation • Denial of the project; then admissibility conditioned to backfilling;  NAFTA claim: Indirect expropriation, violation of FET? Open Pit gold mine, Imperial county, California

32. Most-Favored Nation Treatment • MFNT enables the nationals of the parties to profit from favorable treatment that may be given to nationals of third states by either contracting state -it may concern even dispute settlement mechanism! Maffezini v Spain But see: Telenor v Hungary (2006)

33. MFN Parkerings v. Lithuania ICSID September 11, 2007 Indirect expropriation? Discrimination? Expenses?

34. National Treatment • Famous dichotomy between industrialized countries and developing countries; • Nowadays NT is an important component of BIT which require pre-entry and post-entry NT

35. Umbrella Clause • ‘Each Contracting Party shall observe any obligation it may have entered into with regard to investments of investors of the other Contracting Party’ [Article 3 (3) UK-India BIT] • What is the effect of this clause?

36. Full Protection and Security • States’ forces should not be utilized to harm the foreign investor’s property nor that the state should give protection from violence against the interests of the foreign investor if such violence could be anticipated • Example AMT v Zaire – production of automotive batteries, army’s devastation of the plant

37. Water Wars: Cochabamba Bolivia 2000; Bechtel v Bolivia Settlement: 1 $. Giuseppe Pellizza da Volpedo, the Fourth Estate, 1901

38. The Linkage Issue: Investment & … Public Health; Environmental goods; Culture; Morality; Human Dignity; Labour Rights; …

39. Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measureotherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. The Parties recognize that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. Accordingly, a Party should not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such measures as an encouragement for the establishment, acquisition, expansion or retention in its territory of an investment of an investor… NAFTA 1114