International Investment Agreements: Recent Trends in Investor-State Case Law and Treaty Negotiation Roberto Echandi Taipei, March, 2011 Key Substantive Disciplines: National Treatment, MFN and Minimum Standard of Treatment

Presentation Outline Non discrimination –National Treatment –Most Favoured Nation (MFN) Treatment Minimum Standard of Treatment –Fair and equitable treatment –Full protection and security

Non-discrimination: National Treatment Standard entails that investment or investors of a Contracting Party are entitled to a treatment by the other Contracting Parties which is no less favourable than the treatment the latter grant to their own investments or investors.

National Treatment Conventional, not customary obligation Wording and scope varies among different IIAs –Not included (numerous IIAs) – « Best efforts » clause to grant NT (e.g. APEC) –NT principle subject to domestic law (e.g. BIT between Hong Kong-China and New Zealand) –Legally binding NT principle (the most common approach; e.g. BITs, NAFTA, Taiwan and U.S. FTAs) Content, “de facto” and “de jure” “Like circumstances” Application in federal systems of government

National Treatment: ISDS Experience Sequential analysis: Identification of the subjects for comparison –Same business or economic sector (Pope & Talbot vs. Canada, S.D. Myers vs. Canada) –“like in all relevant aspects except nationality or ownership” (Methanex vs. U.S.) –“It is possible for two investors to be in the same sector or to be in competition and nontheless be quite unlike in respect of some characteristic critical to a particular treatment” (UPS vs. Canada) –Some tribunals have determined the comparators exclusively based on the measure challenged (Occidental vs. Ecuador) Comparison of treatment of the foreign investor with that of the domestic investor –Adverse effect, de jure or de facto, demonstration of discriminatory intent is neither necessary nor sufficient to find a breach of the standard (Feldman vs. Mexico, Siemens AG. vs. Argentina) Whether foreign and domestic investors are in “like circumstances” –Once a difference in treatment has been found, it is left to the tribunal whether investors or investments are in “like circumstances” –Pope & Talbot (subsequently followed by most NAFTA related cases) “Differences in treatment will presumptively violate Article 1102(2), unless they have a reasonable nexus to rational government policies that (1) do not distinguish, on their face or de facto, between foreign-owned and domestic companies, and (2) do not otherwise unduly undermine the investment liberalizing objectives of NAFTA”

Exceptions/Reservations to the NT Principle General exceptions –Public order or national security (e.g. Taiwan FTAs, BIT between Japan and Korea); –Prudential measures (e.g. Canadian model BIT); –Essential security interests (e.g. BIT between Australia and India); –Protection of health and the environment (e.g. BIT between Armenia and Canada) Subject-specific exceptions –Prudential measures; –Incentives; –Public procurement; –Cultural industries; –Special establishment formalities; –Taxation (taxation treaties only or all taxation matters except expropriation) Country-specific reservations –Related to the right of establishment

Non-discrimination: MFN Standard entails that investment or investors of a Contracting Party are entitled to a treatment by the other Contracting Parties which is no less favourable than the treatment the latter grants to investments or investors of any other third State

MFN: Rationale and Effects Links IIAs by ensuring that each Contracting Party grants investments and/or investors the best treatment granted to any other investments/investors of any other country –Impact in terms of harmonization of norms and disciplines –Levels the playing field in international negotiations –Conventional, not customary obligation –Important for smaller countries

MFN: Rationale and Effects Countries tend to have several IIAs which differ in their contents With more than IIAs, practical impact of MFN can be significant MFN can lead to obligations applying to different contexts than originally envisaged by the Contracting Parties Countries must fully understand impact of MFN when negotiating and implementing IIAs

MFN: Main issues Issues that often arise in the context of negotiations of IIAs Issues that have arisen in the context of investor-State dispute settlement procedures

MFN: Main Issues Issues that often arise in the context of negotiations of IIAs –Scope Regarding pre or post establishment phase, DTTs –Content, “de facto” and “de jure” –“Like circumstances” –Application in federal systems of government –General and subject-specific exceptions/ reservations

MFN: relevant case law Scope of MFN and dispute settlement – Mafezzini v. Spain – Salini v. Jordan – Plama v. Bulgaria MFN and substantive standards – Equity Bhd. v.Chile

MFN and ISDS Does MFN applies to dispute settlement procedures? Maffezini vs. Spain; Siemens vs. Argentina Broad language used in MFN clause leads to apply MFN to ISDS procedures Limitations: –Ejusdem generis principle –Public policy considerations as fundamental conditions for the acceptance of the agreement

The « ejusdem generis » principle MFN clause can only attract matters belonging to the same subject matter or the same category of subject as to which the clause relates

Public policy considerations as fundamental conditions for the acceptance of the agreement Maffezini vs. Spain “… As a matter of principle, the beneficiary of the clause should not be able to override public policy considerations that the Contracting Parties might have envisaged as fundamental conditions for their acceptance of the agreement in question, particularly if the beneficiary is a private investor…”

MFN Issues: Dispute Settlement Salini vs. Jordan; Plama vs. Bulgaria Cases where tribunals rejected to “ import ” other ISDS from other BITs Salini: –Situation is different from Maffezini –BIT explicitly refers to domestic forum –MFN clause does not apply to “ all matters covered by the agreement ” Plama: –Agreement to arbitrate must be clear and unambiguous, and cannot incorporated by reference to another IIA unless parties explicitly state otherwise –How can it be determined which ISDS is more favourable? Suez/AWG v. Argentina follows Maffezini and Siemens

MFN and Other Standards: ISDS Practice MFN and Fair and Equitable Treatment Standard MTD Equity Bhd v. Chile Article 3.1 of the BIT between Chile and Malaysia: “Investments made by investors of either Contracting Party in the territory of the other Contracting Party shall receive treatment which is fair and equitable, and not less favourable than that accorded to investments made by investors of any third State.”

MFN and Other Standards: ISDS Practice MTD Equity Bhd v. Chile –Tribunal imports provisions from other BITs negotiated by Chile –Fair and Equitable Treatment standard must be interpreted in the manner most conducive to fulfill objective of the BIT –BIT has exceptions from MFN principle, and does not exclude Fair and Equitable Treatment Standard –A contrario sensu, other matters that can be construed to be part of the fair and equitable treatment of investors would be covered by the clause

MFN Implications… Recent ISDS jurisprudence has shown that the particular wording of MFN provisions does matter, and can lead to very different outcomes in the application of IIAs MFN can be an useful intrument to level the playing field: –Externally, among countries with different bargaining power –Internally, leading to a single foreign investment policy Risk of “treaty shopping”

Minimum Standard of Treatment Historical origin: customary international law –State responsibility for the protection of aliens and their property –ICL results from a general and consistent practice of States that they follow from a sense of legal obligation. 1926, “General Claims Commission” –Neer and Roberts cases Principles tend to be bundled : –Fair and Equitable Treatment –Full Protection and Security

Minimum Standard of Treatment In order to generate international responsibility the treatment of an alien must represent such an abuse, or bad faith, or a deliberate failure to comply with a duty that any reasonable and impartial person clearly recognizes it (Neer Case)

Minimum Standard of Treatment Absolute standard: detached from host country’s domestic legislation Implication: National Treatment for aliens is not enough 1960s-1970s, developing countries demand the establishment of a New International Economic Order Existence of Minimum Standard of Treatment under ICL subject of controversy 1990s, trend: standard becomes part of numerous bilateral investment agreements

Minimum Standard of Treatment: Full Protection and Security Standard traditionally applied to foreign investors in periods of insurrection, civil unrest and other public disturbances, although not explicitly limited to these circumstances Obligation of conduct, not obligation of results Obligation of good faith efforts to protect the foreign-owned property, without special regard to resources available to do so “due diligence” standard

Minimum Standard of Treatment: Fair and Equitable Treatment Lacks precise meaning Not an obligation of results Obligation of conduct –Reasonable protection –Access to review, access to the courts –Access to police protection

Fair and Equitable Treatment: Why such controversy? IIAs with various wordings –Semantic interpretation –Historical interpretation linked to ICL –Application of Article 1105 NAFTA Content of the standard –Linked to international law or ICL? –Whether a violation of any obligation of an IIA entails a violation of the standard

Experience under NAFTA “Article 1105: 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. “

Experience under NAFTA and other IIAs Different cases –Metalclad Mexico violated transparency obligations in NAFTA Award set aside by Supreme Court of British Columbia –SD Myers Violation found on the basis of NT violation –Pope & Talbot Fair and Equitable Treatment and Full Protection and Security concepts that entailed a treatment beyond what required under international law (“presence of “fairness” elements that are additive to the requirements of international law) Trend to expand application of the standard Interpretative note of NAFTA’s Administration Commission

Experience under NAFTA and other IIAs After interpretative note of NAFTA’s Administration Commission –Mondev “Neer and like arbitral awards were decided in the 1920s… To the modern eye, what is unfair or inequitable need not to equate with outrageous or the egregious. In particular, a State may treat foreign investment unfairly and inequitably without necessarily acting in bad faith…” –Waste Management The standard is infringed “..if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety – as might be the case with manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process”

New trends in drafting by some countries Minimum Standard of Treatment ─Explicit clarification that the obligation undertaken by the Contracting Parties is to accord covered investments treatment in accordance with customary international law ─Such treatment includes the standards of fair and equitable treatment and full protection and security ─The IIAs also define each of these standards

Experience under other IIAs In a series of cases tribunals have held that fair and equitable treatment has a meaning independent of the minimum standard of treatment. Basis for this interpretation: wording of the specific provision with reliance on the expressed purpose of the IIA, which in most cases is to promote and protect investments. –Maffezini vs. Spain –Middle East Shipping v. Egypt –SGS vs. Philippines –Occidental vs Ecuador –Siemens vs. Argentina –Enron vs. Argentina Some tribunals have applied a somewhat more restrictive approach following reasoning in Neer and linking standard to customary international law –Alex Genin vs. Estonia (requires bad faith) Other tribunals intepret the FET standard and link it with customary international law but note that CIL has evolved since the Neer case No need for bad faith Some awards against Argentina such as CMS Convergence between the plain meaning approach and the evolving content of CIL

General features of the FET standard Legal standard: does not allow the tribunal to adjudicate ex aequo et bono (according to what the tribunal considers is fair and equitable) Saluka vs. Czech Republic One standard, not two No requirement of bad faith or intent to cause injury (CMS vs. Argentina, Azurix vs. Argentina, Mondev vs. U.S., Lowen vs. U.S.) FET requires at least the MST, no less favourable treatment (Sempra vs. Argentina) FET standard allows tribunals to assess the process of state decision-making as well as the substantive fairness of the treatment granted FET protects legitimate expectations of the investor of a stable and predictable legal and administrative framework that meets certain minimum standards, including consistency and transparency in decision-making, but the analysis must take into account the power of the States to regulate and the conduct of the investor. Tecmed vs. Mexico, Encana vs. Ecuador, Saluka vs. Czech Republic, Occidental vs. Ecuador, Waste Management vs. Mexico A highly fact and context dependent assessment

Thank you for your attention