International Investment Agreements: Recent Trends in Investor-State Case Law and Treaty Negotiation Roberto Echandi Taipei, March, 2011 Issues of Scope

Scope of Application The different dimensions in the application of IIAs: subject matter, time and space Subject matter –Measures related to an investment –Definitions and related issues: “ investment” “investor” –“Legality” of investments Geographic application and application in time The right of establishment

General Scope of Application Clauses Taiwan- Honduras FTA, NAFTA, CAFTA, Canadian Model BIT (2005) “This Agreement applies to measures adopted or maintained by a Party relating to: (a) investors of the other Party with respect to all aspects of its investments; (b) investments of investors of the other Party in the territory of the Party; and (c) all investments of the investors of a Party in the territory of the other Party with regard to Article (performance requirements).” Relevance: Methanex Case “phrase “relating to “ in Article 1101(1) NAFTA signifies something more than the mere effect of a measure on an investor or an investment and that it requires a legally significant connection between them…” Exclusions in some IIAs Subject-matters (inter-alia: subsidies, government procurement, taxation,financial services) Taiwan: “ … measures adopted by a Party to limit the participation of investment of investors of the other Party in its territory for reasons of public order or national security; … government services or functions such as law enforcement, correctional services, income security or unemployment insurance, social security services, social welfare, public education, public training, health, and child care…”

Definitions of “Investment”: Types and Implications “ Asset-based” definition –Tipical European Model BIT Asset invested by an investor a Party in the territory of the other Party –Taiwan “investment: any kind of goods or rights of any nature acquired or used with the purpose of obtaining an economic profit or other business objective, acquired with resources transferred or reinvested by an investor, and including…” – Some IIAs limit the scope of the definition of “investment”: Assets used for non-business purposes Financial transactions that do not entail a real acquisition of interests Public debt Include characteristics of investment: commitment of resources, expectation for profit, assumption of risk “Direct investment” –Australia-Thailand FTA (Art. 901,903) Closed list approach –NAFTA –New Canada model BIT

Definitions of “Investment”: main issues discussed in case law Scope of the definition: –Pope & Talbot vs. Canada: is market share an investment? –Fedax vs. Venezuela: investment goes beyond that just FDI What is an investment? –Discussion started in context of determining jurisdiction in ICSID cases, but has lead to a broader discussion: how free are the parties to define the term “investment”? –Subjective vs. Objective tests (intent of the parties or textual interpretation of the text?) Salini vs. Morocco Joy Mining vs.Egypt »Certain duration »Regularity of profit and return »Element of risk »Substantial commitment »Significant contribution to host State´s development –In practice, several non-ICSID tribunals have used some “objective” criteria Romak vs.Uzbekistan (UNCITRAL) »Definition of investment in UNCITRAL is not wider than in ICSID, substantive application of the BIT cannot depend on the choice between the various dispute resolution mechanisms sponsored by the Treaty. Legality of the investments –Assets invested in accordance with laws of the host State –even without a specific language included in BIT, and assets invested in good faith. Phoenix Action vs. the Czech Republic –Inceysa Vallisoletane v. El Salvador, Fraport vs.the Philippines (juridiction denied)

Definitions of “Investor” Natural persons –Citizens –Permanent residents Case law Nottebohm case –request for a “effective link” (tradition, interests, activities or family ties) between home State and national Champion Trading vs. Egypt, Soufraki vs. UAE, Pey Casado v.Chile –examine domestic law of the home State and all other relevant facts What about dual nationals? –Varies according to the forum and applicable IIA

Definitions of “Investor” Legal entities: –Place of incorporation –Real seat or principal place of business (effective management) –Nationality of ownership or control Different IIAs use one or more of these requirements Case law: When does a company is a covered investor? –Prevailing criteria: nationality by incorporation –Autopista Concesionada vs. Venezuela Company constituted in the U.S. controlled by Mexicans –Tokios Tokelés vs.Ukraine –Rompetrol vs. Romania Companies constituted abroad but owned or controlled by nationals of the host State –ASEAN effective management approach (avoid “protection shopping”) – Yaung Chi Oo Trading vs. Myanmar (Additional Facility) Unless some indication against protection shopping exists in the IIA, company would be a national of place of incorporation. Claimant determined to be a company of a Contracting State Are State enterprises covered? –Depends on applicable IIA –Debate on whether these entities behave in the same manner as private ones.

Ownership and control - Very few IIAs define the concepts - Definition of ownership tends to be quantitative - Definition of control tends to be qualitative - GATS: - a juridical person is “owned” if more than 50 percent of the equity interest is owned. - a juridical person is “controlled” if there is the power to appoint a majority of the board of directors or othewise to legally direct its actions “Direct and indirect” ownership or control –Rationale: to protect investments or nationals or companies of a contracting party, no matter how many corporate layers exist between the company and the investment. Ownership and Control

Aguas del Tunari (AdT) vs. Bolivia: –Claim under Bolivia-Netherlands BIT –AdT was local Bolivian entity for a consortium led by International Water Ltd. Incorporated in Cayman Islands, and 100% owned by Bechtel Co. (a U.S. company). Claim was brought by Dutch shareholders. Sedelmayer vs. Russia (ICC) –German national sole owner of SGC Intnal. (U.S. company). –SGC Intnal. Invests in Russia –Sedelmayer submits claim under Russia-Germany BIT –BIT did not mentioned elements of control, just place of incorporation and siége social. Tribunal nevertheless upheld jurisdiction: –“… during recent years, there has been a growing support of the control theory…the mere fact that the Treaty is silent on the point…should not be interpreted so that Mr. Sedelmayer cannot be regarded as a de facto investor” Saluka vs. Czech Republic (UNCITRAL) –Tribunal honoured the validity of the place of incorporation under the BIT. –Saluka (Dutch Company) had shares of the Czech State-owned bank IPB, claimed violations of the BIT. Czech Government argued that Nomura Europe ( a U.K. subsidiary of a Japanese investment bank) controlled Saluka. –Tribunal considered the disadvantages of the formalistic test, and the risk of treaty shopping, but opted to “respect” the terms of the text of the BIT. Sociéte Générale vs. Dominican Republic (UNCITRAL, LCIA) –DR argued that tribunal should consider a cut-off point after which claims by indirect investors are too tenuous or remote in terms of the connection to the affected company at issue. –Tribunal held that France-DR BIT does cover indirect and minority forms of equity interest, so there may be several layers of intermediate companies intervening between the claimant and the investment. Ownership and control: Relevant case law

Clause tends to allow host country to deny treaty protection to those companies that are controlled by investors of a non-party and have no susbstantial business activities in the territory of the party under whose laws they are constituted. Clause makes sense in those IIAs that ascribe the nationality of a legal entity solely on the basis of its place of constitution Discretion tends to be granted to the host State to apply the clause Generation Ukraine vs. Ukraine: –U.S.-Ukraine BIT. Claimant was a company registered in the U.S. with a subsidiary in Ukraine. Ukraine argued that claimant did not have substantial business activities in the U.S. and in fact was controlled by Canadians. Claimed failed due to lack of evidence. –Denial of benefits is not a jurisdictional hurdle for the claimant,but a potential filter on the admisibility of claims which can be invoked by the respondent State. Plama vs.Bulgaria: –Denial of benefits is prospective, the tribunal had jurisdiction to hear the merits of the claims raised before the investor was notified of the denial of benefits. –Denial of benefits is a right that must be exercised through positive actions taken by the host State Denial of Benefits

Approaches in IIAs: Admission model: entry in accordance with laws and regulations of the host country Pre-establishment model: provide national treatment and/or MFN treatment regarding the right of establishment Right of Establishment: Entry of foreign investment

Host country discretion – laws and regulations relating to entry may change. –Ex: Most BITs (including some negotiated by Taiwan) –Australian treaties: laws and regulations from time to time applicable. Once admitted, foreign investment is granted NT and MFN. No exceptions in the treaty. Admission model

NT and MFN in all stages of the process: establishment, acquisition and expansion (reference to both investor and investment). Lists of exceptions: all countries have closed sectors. The commitment is made in the Treaty, the national laws must be in conformity with Treaty obligations. Pre-establishment NT and MFN

Positive list: NT and/or MFN only in those sectors that are listed/scheduled in the positive list. –GATS approach –FTAs negotiated by the EU –Australia-Thailand FTA Negative list: NT and MFN except in the sectors listed in the negative list and in the annex of future measures ─U.S. and Canadian BITs ─Chapters on Investment in Taiwan FTAs ─Complemented by Sectoral Exclusions Positive/negative list approaches

The logic, architecture and function of a negative list approach Annex I: Non-conforming measures –Standstill List for illustrative purposes « List or loose » –Roll back –Ratchet –Annex interpretation guidelines Annex II: Exclusions

Right of establishment: relevant case law Most case law has focused on whether pre-investment expenditures undertaken by a potential investor qualify as an “investment” Mihaly International vs. Sri Lanka (U.S. BIT) –ICISD case –Pre-establishment expenditures incurred with a proposed BOT (build, operate and transfer) thermal power station project. Mihaly was selected to enter negotiations after a tendering procedure. –No formal contract was ever signed between the parties, just a letter of intent describing the framework for the negotiations that would lead to the BOT agreement. –Tribunal held that it was “unable to accept as a valid denomination of “investment”, the unilateral or internal characterization of certain expenditures by the claimant in preparation for a project of investment”.

Right of establishment: relevant case law William Nigel vs. Czech Republic (UK-Czech Rep. BIT) –Stockholm Chamber of Commerce case –Cooperation agreement between Nigel and a State telecom Co. (Sra), to establish a consortium and sought to obtain licenses to establish and operate a mobile telephone network. –Czech government held a public tender for two mobile telephone contracts, neither of which was awarded to Mr. Nigel. He claimed that his had been deprived of the rights acquired through the contract, and that the BIT investment definition covered “claims to money or to performance under contract having a financial value”. –Tribunal examined the cooperation agreement and concluded it did not have a financial value, and thus was not an asset protected by the BIT.

Thank you for your attention