1. International Investment Agreements: Recent Trends in Investor-State Case Law and Treaty Negotiation Roberto Echandi Taipei, March, 2011 Key Substantive Disciplines: Protection against expropriation, Umbrella clauses & Special formalities

2. Protection against expropriation Two key issues: –Which are the conditions for a taking to be lawful? –Expropriation vs. State regulatory authority What amounts to a taking? Breath of the obligation: relationship between what constitutes a taking and the definition of investment…

3. Protection against expropriation 4 conditions for a taking to be lawful: –Public purpose Genuine public need and good faith In practice States have been granted a wide margin of appreciation in this determination (Amoco International Finance Corporation vs. Iran) –Non-discrimination Under CIL expropriations solely on the basis that the foreign national belongs to a specific racial,religious,cultural, ethnic or national group are not allowed. Highly context specific –Due process of law Some basic legal mechanisms, such as reasonable advance notice, fair hearing, unbiased and impartial adjudicator. Legal procedure must grant the affected investor with a reasonable chance within a reasonable time to claim its legitimate rights and have its claims heard. ADC vs. Argentina –Compensation:IIAs typically address 4 issues: Standard of compensation and valuation methods Date for determining compensation Convertibility and transferability Payment of interest

4. Protection against expropriation The historic debate on the compensation formula: –Hull formula: prompt, adequate and effective –Fair, just, appropriate… Is this an issue of the past? Perhaps, but determining the amount of damages is always a tricky business…. PCIJ: Chorzów Factory (Germany vs. Poland, 1928) –“…an illegal act…reparation must, as far as possible, wipe out consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed..” –PICJ distinguished between illegal expropriation which require total reparation of status quo ante (which includes lost profits) and legal expropriations requiring fair and just compensation equal to the”value of the undertaking at the moment of disspossesion”. Is this an illusory distinction?

5. Protection against expropriation Valuation methods Classical case: Starret Housing Corp. vs.Iran (Iran-U.S. Claims Tribunal) fair market value was defined as –“…the price that a willing buyer would pay to a willing seller in circumstances in which each had good information, each desired to maximize his financial gain,and neither was under duress or threat, the willing buyer being a reasonable business person.” Different methods to calculate fair market value –Discounted cash flow analysis Business as going concern (examination of history of operations and assessment based on estimation of future profits subject to a discounted cash flow analysis). DFC is relatively new in the world of arbitration. Cannot be used when enterprise has not operated for a long time to establish a performance record or where it has failed to make a profit, tribunals have found that future earnings cannot be used to determine going concern or fair market value as such approach may lead to speculation. Vivendi II vs. Argentina, Middle East vs. Egypt –Net book value, replacement or liquidation value –Actual investment (Metalclad vs. Mexico, Wena vs. Egypt, Sedelmayer vs.Russia)

6. Protection against expropriation What amounts to a taking ? –Direct takings –Indirect takings Confiscatory tax measures, environmental measures... IIAs tend to lack a clear-cut definition or list the exact factual criteria that entail an indirect taking Measures tantamount or equivalent to a taking: – Negative impact on patrimony? – Loss of right of property?

7. Indirect Expropriation Finding whether there has been a taking… Case by case approach: –Permanent deprivation of ownership rights –Substantiality of such interference –Existence of reasonable investment-backed expectations –Proportionality between public policy objective and the impact on the property rights of the investor Breath of the obligation: what is expropriated is the investment not only tangible property… –IPRs

8. Expropriation: Case Law Wena vs. Egypt –Seizure of Wena’s two hotels, followed by its illegal possession of the hotels for almost a year, period during which it stripped them of fixtures and furniture Goetz vs.Burundi –Revocation of certificate of «free zone» Metalclad vs. Mexico –Ecological decree banning economic activity Tecmed vs. Mexico –Failure to renew the hazardous waste landfill permit already held by the investor’s subsidiary (as a result of the non-renewal, economic and commercial operations in the landfill were destroyed) Middle East Cement Shipping and Handling vs. Egypt –Annulment of a ten year authorization for the import and storage of bulk cement, and seizure and auction of a ship CME vs. Czech Republic –Investor was deprived of business arrangement under which it was to have the exclusive use of a broadcasting license. Eureko vs. Poland –Investor deprived of benefits of contractual rights to acquire a controlling stake in an insurance company.

9. Expropriation: Case Law Feldman v. Mexico “…governments must be free to act in the broader public interest though the protection of the environment, new or modified tax regimes, the granting or withdrawal of governent subsidies, reductions or increases in tariff levels, imposition of zoning restrictions and the like. Reasonable government regulation of this trype cannot be achieved if any business that is adversely affected may seek compensation, and it is safe to say that customary international law recognizes this.”

10. Case Law and Impact on Rule-making “New generation” Agreements on Expropriation -- Text has been included in order to make it explicit that the obligations regarding expropriation are intended to reflect the level of protection granted by customary international law ─Clarification has been complemented by guidelines and criteria in order to determine whether, in a particular situation, an indirect expropriation has in fact taken place

11. Umbrella Clauses Clause under which the Contracting Party assumes the responsibility to respect other obligations undertaken regarding investment of investors of the other Contracting Party Art.11 BIT Switzerland-Pakistan –« Either Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the other Contracting Party » Issue: Does such clauses convert any violation regarding any commitment with respect of an investment a treaty violation?

12. Umbrella Clauses SGS v. Pakistan –Effects of umbrella clauses are so sweeping that evidence is needed to demonstrate that those effects were in fact intended by the contracting parties SGS v. Philippines and L.E.S.I-DIPENTA v. Algeria –Effects of umbrella clauses is to transform breaches of State’s contractual obligations into violation of that provision of the treaty, and thus, endows arbitral tribunal constituted in accordance with the treaty with jurisdiction over such breaches.

13. Special Formalities and Information Requirements Special Formalities –National treatment obligation will not prevent a Party from adopting or maintaining a measure that prescribes special formalities in connection with the establishment of investments by investors of the other Party such as residence requirements for investors or requirements that investments be legally constituted under the laws or regulations of the Party –Provided that such formalities do not materially impair the protections afforded by a Party to investors of the other Party and investments of investors of the other Party pursuant to this Chapter. Information Requirements –National treatment and MFN will not prevent a Party from requiring an investor or its investment, to provide routine information concerning that investment solely for informational or statistical purposes. –The host State shall protect any confidential information from any disclosure that would prejudice the competitive position of the investor or the investment, but the host State ill not be prevented from otherwise obtaining or disclosing information in connection with the equitable and good faith application of its law.

14. Thank you for your attention roberto.echandi@wti.org