Investment Law 1

Question 1

Generally, what two trends exist in investment law?

Answer 1

1) More investments into developing countries.
2) Push to SDG.

Question 2

What are the two essential aspects of international investment law?

Answer 2

1) FDI
2) Resolution of disputes between foreign states and host states

Question 3

FDI is generally considered to include …

Answer 3

foreign investment which serves to establish lasting and direct links with the undertaking to which capital is made available in order to carry out an economic activity.

Question 4

What are portfolio investments?

Answer 4

Foreign investments where there is no intention to influence the management and control of an undertaking. Such investments, which are often of a more short-term and sometimes
speculative nature, are commonly referred to as “portfolio investments”.

Question 5

Besides shareholding, what other kind of assets qualify as FDI?

Answer 5

Real estate or productive assets.

Question 6

Where does the definition of FDI stem from?

Answer 6

It stems initially from BITs. Also been used by the IMF. Might be differences between BITs, but unlikely.

Question 7

What is the definition of a foreign investor?

Answer 7

A foreign direct investor is an entity (an institutional unit) resident in one economy that has acquired, either directly or indirectly, at least 10% of the voting power of a corporation (enterprise), or equivalent for an unincorporated enterprise, resident in another economy.

Question 8

Why is FDI so important? (3 reasons)

Answer 8

• **FDI creates direct, stable and long-lasting links between economies. **
• It encourages the transfer of technology and know-how between countries, and allows the host economy to promote its products more widely in international markets.
• FDI is also an additional source of funding for investment and, under the right policy environment, it can be an important vehicle for development.

Question 9

How does FDI relate to globalization?

Answer 9

FDI is both a cause and effect of globalization.

Question 10

What are three factors that led to increased FDI?

Answer 10

Reduce of cost of transportation
Globalization of trade
Established protection of investment

Question 11

What was the record flow of FDI in 2007?

Answer 11

2 trillion USD.

Question 12

How much did developing economies account for in 2019 in global FDI?

Answer 12

Two thirds of global FDI.

Question 13

Which countries actually gained FDI during the pandemic (2019-20)?

Answer 13

China, Hong Kong, India, Luxemburg

Question 14

In the EU, which are the most targeted countries for FDI?

Answer 14

Germany and the Netherlands

Question 15

Between 1999 and 2013, how did the ratio of FDI outflows change between (1) developed economies and (2) developing economies?

Answer 15

from 93:7 to 61:39

Question 16

What are the four largest source countries in Europe?

Answer 16

The Netherlands, Germany, Ireland and the UK.

Question 17

Why was Brexit an issue before the Lisbon Treaty?

Answer 17

It was not even considered that a state could exit the EU.

Question 18

When was the Lisbon Treaty enacted?

Answer 18

2009.

Question 19

Who is currently the largest investor in the world (as a state)?

Answer 19

China.

Question 20

What is the trend in newer agreements?

Answer 20

They cover both investment and trade

Question 21

Why does it make sense to link trade agreements with investment agreements?

Answer 21

Investment is a key in creating and maintaining businesses and jobs. They not only create new opportunities for trade but also value-added, jobs and income.

Question 22

What was the first trade agreement that included investment provisions?

Answer 22

NAFTA.

Question 23

When was NAFTA established and replaced?

Answer 23

1994 until 2020. Canada, US, Mexico.

Question 24

Between 2000 and now, how has liberalization of markets developed compared to restriction/regulation?

Answer 24

Negative trend for liberalization
Positive trend for restriction

Question 25

What can be said about BRICS states regarding FDI restrictiveness?

Answer 25

China, Russia, India have traditionally been difficult to invest.

Question 26

What kind of legal system is the international legal system?

Answer 26

Everything that is not forbidden is allowed. Permissive.

Question 27

What two opposing doctrines existed in the 18th century for treatment and protection of foreign nationals abroad?

Answer 27

Developed countries: De Vettel and the Diplomatic Protection
Developing countries: Calvo Doctrine

Question 28

What is the origin of De Vattel and the Diplomatic Protection?

Answer 28

In 1758, Emer de Vattel addressed the status of foreigners in his treatise The
Law of Nations.

Question 29

What is the idea of De Vattel and the Diplomatic Protection?

Answer 29

He explained that once a State admitted a foreigner to its territory, which it was not obliged to do, it had to protect him or her in the same manner as its own subjects.

• In addition, the foreigner maintained the bond to the home State and his or her property remained part of the wealth of the home State.
• As a result, an injury to the property of a foreigner was an injury to the foreigner’s home State which obtained the right to exercise protection over that property, known as diplomatic protection.

Question 30

What was the silent assumption in De Vattel’s Diplomatic Protection doctrine?

Answer 30

There was no obligation to protect foreign nationals and their property before.

Question 31

What was the first international treaty with an expropriation protection?

Answer 31

US-Switzerland Treaty from 1850

Question 32

Explain how De Vattel’s Diplomatic Protection doctrine and gunboat diplomacy are linked

Answer 32

The link between Emer de Vattel’s principles and gunboat diplomacy is evident in the assertion of diplomatic protection. Vattel’s idea that an injury to a foreigner’s property was an injury to their home State provided a legal foundation for States to intervene, sometimes forcefully, in order to protect the rights and property of their nationals. This connection underscores the intersection of legal principles and practical geopolitical actions during the historical period described.

Question 33

What was the concern of European States regarding the treatment of their nationals in less developed regions, such as South America?

Answer 33

European States, and developed States in general, were not troubled by the protection of their nationals in other developed States. However, their concern arose when considering the treatment of their nationals in less developed regions like South America. The issue revolved around perceived insufficient protection for their nationals’ interests, leading these States to argue that there exists a legal requirement under international law for all States to treat foreigners, particularly nationals of other States, according to a minimum standard of treatment. This standard was seen as a universal expectation for fair and equitable treatment, irrespective of the economic or social development of the host State.

Question 34

How was the minimum standard of treatment enforced?

Answer 34

States, particularly in the eighteenth and nineteenth centuries, actively espoused the claims of their nationals through diplomatic protection. The Permanent Court of International Justice formally recognized a state’s right to engage in diplomatic protection. States employed various means—economic, political, and military—to exercise this protection. However, this approach, sometimes referred to as “gunboat diplomacy,” also led to numerous inter-state conflicts and military interventions.

Question 35

What four claims did the Calvo doctrine make?

Answer 35

1) The treatment a foreign investor should receive should be the same as the treatment the host State offers its own citizens’ property, no matter what the level of protection
2) Home states should not be able to interfere in another state’s treatment of its nationals
3) Foreign investors should be limited to national courts when in search of remedies
4) International law should be substantially removed from investment law

Question 36

How can the Calvo doctrine be summarized in two words?
How can the De Vattel doctrine be summarized in two words?

Answer 36

National treatment
Diplomatic protection

Question 37

When did the Calvo doctrine emerge?

Answer 37

1868: 110 years after the De Vattel doctrine

Question 38

When expropriating foreign property, how did the Soviet Union (implicitly) apply the Calvo doctrine?

Answer 38

Equal treatment to foreign nationals can be equally bad.
The Soviet Union expropriated the property of nationals and foreign nationals alike.

Question 39

Where has the Calvo doctrine seen a revival?

Answer 39

Latin America

Question 40

According to the Calvo doctrine, who should be in charge of remedies in investment law disputes?

Answer 40

Domestic courts

Question 41

Differentiate between the De Vattel doctrine and Calvo doctrine in substantive and procedural points

Answer 41

De Vattel

Substantive: Diplomatic Protection, extends to property (investment), minimum standard of treatment
Procedural: Settlement before international Courts

Calvo Doctrine

Substantive: National Treatment
Procedural: Settlement before Domestic Courts

Question 42

The first half of the 20th century saw two examples of expropriations, which?

Answer 42

1917: Russian revolution
1938: Mexico nationalized US assets in agrarian and oil business

Question 43

What is the “Hull Formula”?

Answer 43

In 1938, the US Secretary of State, Cordel Hull, wrote a diplomatic note acknowledging the Mexican right to expropriate but stating that “expropriation must be accompanied by prompt, adequate and effective compensation”.

Question 44

The Hull Formula was a result of Mexico nationalizing US assets. What is the surprising part about the formula?

Answer 44

The US recognized the Mexican government’s right to expropriate US national’s property.

Question 45

What impact did the Hull Formula have on domestic legislation across the world?

Answer 45

It is now part of domestic legislation in many countries.

Question 46

How did the international minimum standard become binding?

Answer 46

It was initially open to debate. Over time, it became recognized as a customary international law rule. 1926: Neer decision. Then codified in the Vienna Convention on the Law of Treaties (1980).

Question 47

In general, what becomes customary international law?

Answer 47

1) Repeated practice by states (not just Western states)
2) Opinio juris: Belief or conviction that a particular practice is obligatory because it is required by law.

Question 48

What effect did Neer v. Mexico 1926 have on the international minimal standard? Give the definition

Answer 48

Set the standard for an international minimal 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 every reasonable and impartial man would readily recognize its insufficiency”

This has been cited many times by international arbitration tribunals. Also note the reference to the objective theory.

Question 49

What is private international law?

Answer 49

Private international law, also known as conflict of laws, is a field of law that addresses legal issues arising from situations involving individuals, entities, or legal relationships that span multiple countries or legal jurisdictions. The primary objective of private international law is to determine which jurisdiction’s laws should apply to a particular dispute or legal relationship.

Question 50

How did foreign private companies protect their interests through contracts abroad?

Answer 50

Foreign private companies to protect their interests abroad began to incorporate applicable law clauses into their contracts with host States. Two examples:

1. they provide for the application of another law (the ‘lex mercatoria’) instead of domestic law, or
2. They had the effect of ‘freezing’ the domestic law of host States at the time of the conclusion of the contract

Question 51

What is the ‘lex mecratoria’?

Answer 51

Body of rules of international commerce developed by customs, affirmed by national courts. Now it’s codified in the Vienna Treaty on Goods (United Nations Convention on Contracts for the International Sale of Goods).

Question 52

Why did developed countries favor international courts over domestic courts when deciding over matters regarding foreigners?

Answer 52

Lack of impartiality of domestic tribunals: they would, as a matter of principle,
decide disputes against foreigners and in favour of their State

Question 53

Which three solutions did states have to protect their investment interests abroad?

Answer 53

1) Use of force
2) Diplomatic protection
3) State contracts

Question 54

What was an early example of Gunboat Diplomacy? How was this practice forbidden?

Answer 54

1902: Venezuela: British, France, and Italian forces enforce repayment of bonds by force
1907: Drago-Porter Convention: Prevent the use of force for the collection of debt. Adopted in the Hague, it stipulated that arbitration and litigation should always be used first. It grew from ideas of the Calvo Doctrine.

Question 55

What does state responsibility refer to?

Answer 55

State responsibility refers to the legal obligations and accountability of a state for its actions or omissions under international law. It encompasses the idea that states, as subjects of international law, are responsible for complying with their obligations and duties towards other states and the international community.

The five key elements of state responsibility include:

1) Breach of International Law: State responsibility is triggered when a state breaches its obligations under international law. This breach can occur through actions (acts of commission) or failures to act (acts of omission) that violate established international norms.

2) Attribution: The wrongful act must be attributable to the state. This involves establishing a direct link between the state and the act or omission, which can be through the actions of state organs, officials, or entities acting on behalf of the state.

3) Internationally Wrongful Act: The act or omission must constitute an internationally wrongful act. This means that the conduct must violate a rule of international law, whether established by treaty, customary international law, or general principles recognized by the international community.

4) Consequences: State responsibility involves consequences for the state responsible. These consequences may include diplomatic protests, negotiations, countermeasures by the injured state, or other forms of dispute resolution.

5) Reparation: If a state is found to be internationally responsible, it may be required to make reparations or compensate the injured state for any damage caused. Reparations can take various forms, including restitution, compensation, or satisfaction.

The rules and principles of state responsibility are primarily codified in the Articles on Responsibility of States for Internationally Wrongful Acts, adopted by the International Law Commission (ILC) in 2001. These Articles provide a comprehensive framework for determining when a state is responsible for its actions and the consequences that may follow.

State responsibility plays a crucial role in maintaining order and justice in the international system by holding states accountable for their actions and promoting compliance with international legal norms.

Question 56

How does diplomatic protection work as a redress mechanism for a national?

Answer 56

In this mechanism, the State of nationality can officially support the claim of its national against the host State, elevating the dispute to the inter-state level. However, it’s important to note that the State of nationality is not obligated to exercise its diplomatic protection. If it chooses to do so, any monetary compensation owed by the host State is paid directly to the State of nationality. Significantly, the State of nationality is not obliged to transfer this compensation to its national, introducing a layer of discretion in the process. This is an additional mechanism to going through domestic courts. Domestic courts have to be exhausted.

Question 57

What was the only protection before investment treaties and human rights?

Answer 57

Diplomatic protection was the only protection.

Question 58

“State contracts” have what requirement when it comes to disputes?

Answer 58

They have to refer to arbitration.

Question 59

What is the New International Economic Order?

Answer 59

The end of the Second World War, with growing wealth and development gaps between the industrialized and developing countries, led the latter to start questioning the global economic system’s basic structures. A strong voice came from former colonies.

By virtue of GA Res. 1803 (1962), the newly independent States acquired not only their political sovereignty, but also their economic sovereignty over natural resources.

Based on three further GA resolutions in the 1970s developing states set out formally the concept of NIEO and raw up a Charter of the economic rights and duties of States.

Their goals include: (1) a fair allocation of the world’s resources, (2) technology transfer to developing countries, (3) preferential trade conditions and a (4) reformation of the international monetary system.

Question 60

What provisions did the New International Economic Order contain regarding investment law?

Answer 60

• Provided for the right of States to treat foreign investors in their territory according to their domestic law
• Set out the developing States right to compensate expropriations and nationalisations according to their own relevant laws and regulations

It was a renaissance of the Calvo doctrine.

Question 61

What was the US reaction on the New International Economic Order?

Answer 61

The US rejected it.

Question 62

In general, how can GA resolutions become binding international law?

Answer 62

If they become customary international law.

Question 63

Post WWII until the early 1990s, what led to insecurity in international investment? Why did this change early 1990s?

Answer 63

The New International Economic Order created insecurity.
The collapse of the Soviet Union weakened the socialist view of property. The call for economic independence in Latin America led to many states to conclude BITs. This was at odds with the Calvo Doctrine.

Question 64

Where can we find the primary sources of international law?

Answer 64

ICJ Statute, art. 38

Question 65

What are the primary sources of international law according to the ICJ Statute?

Answer 65

• International conventions as “rules expressly recognized by the contesting
  States”
• International customary law as “ evidence of a general practice accepted as
  law”
• General principles of law “recognized by States”

Question 66

What secondary sources does art. 38 of the ICJ Statute state?

Answer 66

Judicial decisions and teachings by scholars around the world, as subsidiary sources.

Question 67

Name four soft laws involving human rights

Answer 67

GA Resolutions
Declaration on Human Rights
Stockholm Declaration on the Human Environment
Guiding Principles on Business and Human Rights

Question 68

What is jus cogens? (5)
Source?

Answer 68

Protect fundamental values of the international community
Universally applicable and hierachically superior to other rules of international law
Recognized by entire international community
Cannot be derogated
Can only be modified by a subsequent norm of general international law having the same character

Draft conclusions on identification and legal consequences of peremptory norms of general international law (jus cogens) (International Law Commission, 2022)

Question 69

Where can we find the legal basis for jus cogens?

Answer 69

Art. 53 of the 1969 Vienna Convention.

Question 70

What is the biggest difference to trade law?

Answer 70

Unlike trade law, IIL is not organized around a multilateral treaty or central international organization.

Question 71

What are the six sources of laws to look to in international investment law?

Answer 71

1. A multitude of bilateral, regional and multilateral treaties (BITs, NAFTA, FTAs, the ECT etc.),
2. Customary international law,
3. General principles of law
4. Domestic laws,
   5. Contracts and insurance schemes, and a diversity of arbitral institutions (ICSID, UNCITRAL, PCA, ICC, SCC etc.) and
5. Domestic courts and investment agencies, without central authority

Question 72

Second most arbitration institute resorted to after the ICSID

Answer 72

Swedish Chamber of Commerce Arbitration Institute in Sweden

Question 73

In absence of a treaty, which sources do we have to consider?

Answer 73

International customary law and general principles

Question 74

IIL is uniquely bifurcated, what does that mean?

Answer 74

On the one hand, substantive rules of investment protection and promotion set out especially in customary international law and treaties (mainly BITs) and, on the other hand, dispute settlement provisions and institutions such as ICSID and UNCITRAL.

Question 75

Which awards rely on the New York Convention?

Answer 75

UNCITRAL and SCC.

Question 76

What is surprising in international arbitration tribunals, despite the fact that there exists no stare decisis in IIL?

Answer 76

Like most adjudicatory decision-makers, arbitral tribunals often give significant weight to the findings of earlier panels that examines the same general issues of law.

Question 77

What are the five rules important for IIL from customary international law?

Answer 77

• Rules on attribution and other areas of State responsibility
• Rules on damages
• Rules on expropriation
• Rules on denial of justice
• Rules on the nationality of investors.

Question 78

State eight general principles used in IIL

Answer 78

Good Faith:

Good faith is a fundamental principle requiring parties to act honestly, fairly, and with integrity in their dealings. It is often invoked to ensure the fair performance of contractual obligations and to prevent abuse of rights.

Nemo Auditur Propriam Turpitudinem Allegans (No-One Can Be Heard, Who Invokes His Own Guilt):

This principle precludes a party from benefiting or seeking relief from a situation in which they are at fault or have engaged in wrongdoing. It bars individuals from relying on their own misconduct as a basis for a legal claim.

Estoppel:

Estoppel prevents a party from denying or asserting a fact that contradicts a previous position or representation made by that party. It aims to ensure consistency and prevent unfairness in legal proceedings.

Nullus Commodum Capere de Sua Injuria Propria (No Advantage May Be Gained from One’s Own Wrong):

This principle prohibits a party from benefiting or gaining an advantage from their own wrongful or illegal actions. It reflects the idea that one should not profit from their own misconduct.

Pacta Sunt Servanda:

Pacta sunt servanda means “agreements must be kept.” It is a fundamental principle emphasizing the sanctity of contracts, requiring parties to honor the terms and obligations they have willingly agreed to.

Unjust Enrichment:

Unjust enrichment occurs when one party unfairly benefits at the expense of another, without legal justification. The principle seeks to prevent windfall gains and promotes fairness in situations where there is no valid contractual relationship.

Res Judicata:

Res judicata means “a matter judged.” This principle prevents the same matter or cause of action from being relitigated once a final judgment has been rendered. It promotes judicial efficiency and the finality of legal decisions.

General Principles of Due Process, Including the Right to Be Heard:

These principles encompass the fundamental rights to a fair and impartial hearing, notice, and an opportunity to present one’s case. They form the cornerstone of procedural fairness and are essential for upholding justice in legal proceedings.

Question 79

“the full compensation of prejudice, by awarding to the injured party the damnum emergens and the lucrum cessans is a principle common to the main systems of municipal law, and therefore, a general principle of law which may be considered as a source of international law” - Source? What do the Latin expressions mean? What does this ruling mean in the context of an arbitration decision?

Answer 79

MCO Asia Corp and others v. the Republic of Indonesia (1984)

Damnum Emergens:

Meaning: “actual loss.” It refers to the actual, immediate, and quantifiable financial loss suffered by a party as a result of a wrongful act or breach of duty by another party.

Lucrum Cessans:

Meaning: “loss of profit.” It refers to the loss of potential profits or benefits that the injured party could have gained but for the wrongful act or breach of duty by another party.

This ruling made the award of damages taken from general principles of law applicable to international investment disputes.

Question 80

What is the essential characteristic of a BIT?

Answer 80

It sets the standard to regulate the treatment of host states to investors.

Question 81

What are the common elements of bilateral investment treaties?

Answer 81

• Definitions and scope of application
• Conditions for the entry of foreign investment and investors
• Substantive – protection of investment
• Exclusion clauses
• General treaty provisions
• Dispute settlement

Question 82

What is usually established in “definitions and scope of application” in BITs?

Answer 82

What constitutes nationality.

Question 83

Are BITs valid indefinitely?

Answer 83

No, they have an expiry date.

Question 84

What are the four key protections contained in BITs?

Answer 84

• Protection against discrimination (most-favoured nation treatment and national treatment);
• Protection against expropriation which is not for a public policy purpose and not fairly compensated;
• Protection against unfair and inequitable treatment – e.g. denying basic procedural fairness; and,
• Protection on the possibility to transfer capital.

Question 85

What is the difference between most favoured nation treatment and national treatment?

Answer 85

Most favoured nation treatment ensures non-discrimination vis-à-vis other foreign investors.

National treatment ensures treatment like domestic investors (Calvo doctrine).

Question 86

In what cases can a foreign investor bring a claim under investor-state dispute settlement?

Answer 86

The investor can only bring a case where it can allege that one of the provisions of the agreement (e.g. the four key guarantees above) has been breached.

Question 87

Which EU member states has no investment treaties?

Answer 87

Ireland

Question 88

Europe is at the heart of BITs, what’s the percentage of BITs that have been signed by European states?

Answer 88

Around half

Question 89

How many BITs were signed between 1990s and 2000s?

Answer 89

The number of BITs increased dramatically during the 1990s and the 2000s (more than 1000 BITs were signed in this period), and helped enshrine a regime that was very protective for investors.

Question 90

What is the general trend of BITs?

Answer 90

More treaties are being withdrawn than signed and ratified, which indicates that a peak has been reached.

Question 91

In the big multilateral agreements like China-EU CAI, UK-EU TCA, RCEP, USMCA and CPTPP, what is a common observation?

Answer 91

Either no IDSD at all or limited scope (particularly for the FET standard).

Question 92

Is the China EU CAI in force?

Answer 92

No.

Question 93

Is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership in force?

Answer 93

Yes.

Question 94

What has been the major change from NAFTA to USMCA in regard to dispute settlement?

Answer 94

Limited Application of ISDS:

Under the USMCA, ISDS provisions are limited exclusively to investor–state disputes between the United States and Mexico. This represents a departure from NAFTA, where ISDS was applicable to all three countries.
Narrowed Scope of Investor Claims:

The USMCA narrows the claims that investors can bring under ISDS. Disputes between Canadian and Mexican investors and the respective other country are subject to the investment arbitration provisions of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Between Canada and the United States, the only avenue for dispute settlement is the USMCA’s state–state dispute settlement mechanism.

Question 95

According to the ICSID convention, which nationals are barred from raising disputes against states?

Answer 95

Nationals of that state.

Question 96

If the investor wishes to rely on a BIT, what does the investor need to demonstrate?

Answer 96

That they are a national of one of the two contracting parties.

Question 97

Do treaties necessarily need to be ratified to be made operative?

Answer 97

No. There have been treaties that have been made operative prior to ratification.

Question 98

Which case was discussed regarding nationality?

Answer 98

Soufraki v United Arab Emirates (2004)

An Italian citizen emigrated to Canada and tried to arbitrate against the UAE. He acquired the Canadian citizenship. Albeit Italy allowing for dual citizenship, the tribunal held that he could not rely on the Italy-UAE BIT.

Question 99

Can dual citizen arbitrate against one of his states? Source?

Answer 99

No (art. 25 ICSID Convention).

Question 100

For a company to be covered by the treaty, most treaties require that a treaty partner at least be one of which three conditions?

Answer 100

1. the country of the company’s incorporation
2. the country of the company’s seat, registered office, or principal place of business
3. the country whose nationals have control over, or a substantial interest in, the company making the investment.

Question 101

In Tokios Tokeles v Ukraine (ICSID Case No. ARB/02/18, Decision on jurisdiction, 29 April
2004), the claimant was a business enterprise established under the law of Lithuania. But nationals of Ukraine owned 99% of its shares.

Article 1(2)(b) of the Lithuania–Ukraine BIT defines the term ‘investor,’ with respect to Lithuania, as ‘any entity established in the territory of the Republic of Lithuania in conformity with its laws and regulations’.

What did the tribunal find regarding nationality? Which two requirement does a claimant need to fulfil in such a case?

Answer 101

The majority of the Tribunal concluded that the claimant was an ‘investor’ of Lithuania under the BIT and a ‘national of another Contracting State’ under Article 25 of the ICSID Convention.

Question 102

Saluka v Czech Republic (UNCITRAL, Partial Award, 4 March 2006): The claimant was a legal person incorporated under the laws of the Netherlands. The respondent objected that it was merely a shell company controlled by its Japanese owners.

Under the Czech–Netherlands BIT, the definition of ‘investor’ in Article 1(b)(ii) includes ‘legal persons constituted under the laws of [the Netherlands]’. What did the tribunal find?

Answer 102

It found that it is a Dutch company.

Question 103

Sometimes these requirements are combined so that an investing company must
satisfy two or more conditions to qualify for coverage under a particular
investment treaty. Give two examples from Switzerland and ASEAN.

Answer 103

• the Switzerland–Slovakia BIT provides that the term ‘investor’ refers to ‘legal entities, including companies, corporations, business associations and other organizations, which are constituted or otherwise duly organized under the law of that Contracting party and have their seat, together with real economic activities, in the territory of that same Contracting Party’.
• Article I(2) of the Association of Southeast Asian Nations (ASEAN) Agreement provides: “The term ‘company’ of a Contracting Party shall mean a corporation, partnership or other business association, incorporated or constituted under the laws in force in the territory of any Contracting Party wherein the place of effective management is situated”

Question 104

In Alps Finance and Trade AG v The Slovak Republic (UNCITRAL Award 5 May 2011), how did the Swiss corporation have to prove that it has real economic activities?

Answer 104

Defining the term ‘business seat’ as meaning ‘an effective center of administration of
business operations’, the tribunal stated that proof of a seat requires regular board or shareholder meetings, top management, a certain number of employees, an address with phone and fax numbers, and expenses and overhead costs in the location of the seat.

Question 105

Aguas del Tunari v Bolivia (ICSID Case No. ARB/02/3, Decision on jurisdiction, 21 October
2005). The claimant was a legal person constituted under Bolivian law.
* It relied on the definition of ‘national’ in Article 1(b) of the Bolivia–Netherlands BIT which included legal persons incorporated in the host State but controlled by nationals of the other State.
* Aguas del Tunari argued that it was controlled by Netherlands corporations.
* Bolivia objected arguing that these Netherlands corporations were, in turn, controlled by a US corporation.

Answer 105

The Tribunal found that the controlling Netherlands companies were more than just corporate shells set up to obtain jurisdiction over the dispute before it. Therefore, it found that the BIT’s nationality requirements were fulfilled.

Question 106

In what kind of cases would courts most likely refuse claims if there is a suspicion of treaty shopping?

Answer 106

Treaty shopping is not illegal.

When an investor had restructured its investment in such a fashion as to obtain the protection of a treaty.

Question 107

In which case it was clarified that ICSID does not accept post-dispute ownership transfer to access ICSID?

Answer 107

In Banro v Congo, a transfer of the ownership of the investment was carried out from a company registered in a non-ICSID party, Canada, to an affiliate company in the United States, a party to the ICSID Convention. The transfer was made after the dispute had arisen and only days before the institution of the arbitration proceedings. It served the obvious purpose to obtain access to ICSID. The Tribunal refused to accept jurisdiction under these circumstances.

Same in Phoenix v Czech Republic, Czech investor transferred the ownership to Israeli company, which he set up, to benefit from Israel-Czech Republic BIT. ICSID refused to accept jurisdiction as it was clearly abusive.

Question 108

What are denial of benefit clauses?

Answer 108

Through these clauses, a States reserve the right to deny the benefits of the treaty to a company that is owned or controlled by nationals of a third country but is incorporated in a State Party to the treaty without having an economic connection to that State. The economic connection would consist of substantial business activities in the State of incorporation or ownership or control by a national of a State Party to the treaty.

The Swiss model BIT has incorporated that substantial business activities (see Slowak-Swiss BIT).

Question 109

In regard to denial of benefit clauses, what did tribunals hold?
Who carries the burden of proof?

Answer 109

Tribunals have held that:

• a denial of benefits clause does not operate automatically but had to be exercised actively by the host State
• the conditions for the denial of benefits must be met at the time of commencement of proceedings
• the burden of proof for the existence of the conditions for a denial of benefits is with the respondent State invoking it.

Question 110

What is the IMF definition of FDI?

Answer 110

an investment made by a resident entity in one economy to acquire lasting interest in an enterprise resident in an economy other than that of the foreign direct investor operating outside of the economy of the investor

Question 111

What is the purpose of FDI? What is the quantitative limit according to the IMF?

Answer 111

Purpose is to gain an effective voice in the management of the enterprise and create capacity. “Immediate direct investment relationships arise when a direct investor directly owns equity that entitles it to 10 percent or more of the voting power in the direct investment enterprise” (IMF)

Question 112

What is portfolio investment?

Answer 112

Portfolio investment is the category of international investment that covers investment in equity and debt securities, excluding any such instruments that are classified as direct investment or reserve assets.

Question 113

Did customary international law protect portfolio investments in the past? What positive development was there?

Answer 113

No, but more international treaties now also cover portfolio investments.

Question 114

What happens to bonds, notes, and other negotiable once they have been issued?

Answer 114

Once issued, such bonds, notes, and other negotiable instruments are often traded among investors on capital markets.

Question 115

Are minority shareholdings and indirect shareholdings also protected under BITs?

Answer 115

• The protection of shareholdings is not limited to majority or controlling shareholding but also covers minority shareholding.
• The protection may extend to indirect shareholding /that is, shareholding by way of intermediate companies, and to the assets of the company whose shares the investor holds.

Question 116

Are intellectual property rights protected under investments?

Answer 116

• Intellectual property rights: such as patents, trademarks, and designs are routinely listed in definitions of the term investment. Their potential as investment is beyond doubt, although they have until now generated only limited case law.

Question 117

Are arbitral awards protected under investments?

Answer 117

In some cases, tribunals found that claims arising from the non-performance of commercial arbitration awards gave rise to protected rights. They classified the awards either as investments or as reflecting rights arising from the investment.

Question 118

How is investment defined in the ICSID Convention?

Answer 118

The ICSID Convention does not offer a definition or even a description of this basic term.

Question 119

What are the two elements under the ICSID Convention for a tribunal to establish jurisdiction?

Answer 119

Consent and the existence of an investment. The latter was established in Salini costruttori SPA v Morocco (ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July 2001).

Question 120

Salini costruttori SPA v Morocco (ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July 2001) established the requirement of the existence of an investment to establish jurisdiction (besides consent). What are the four criteria? Are all of them accepted?

Answer 120

1. a (substantial) contributions
2. a certain duration of performance of the contract
3. a participation in the risks of the transaction
4. the contribution to the economic development of the host State of the investment

*In tribunal practice, the first three of these criteria (contribution, duration, and risk) have been applied widely. The fourth criterion (contribution to host State development) has turned out to be controversial.

Question 121

Explain how in practice the first Salini test element for investments was interpreted.

Answer 121

Contributions

• Tribunals have accepted a large variety of assets as investments.
• A contribution may be financial but may also consist of anything that has
  economic value such as know-how, management, equipment, material,
  personnel, labour, and services.
• There is no minimum value, but purely symbolic contributions will not
  qualify. Thus, some amount of financial outlay, material shipment, technical
  transfer, or personnel involvement by the investor is necessary

Question 122

Explain how in practice the second Salini test element for investments was interpreted.

Answer 122

Duration

• A certain duration distinguishes an investment from a one-off transaction like a sale of goods.
• There is no clear limit for a minimum duration. Some tribunals have suggested a minimum period of between one and five years. Generally, a two-year time-span is considered sufficient.
• In calculating the duration, tribunals take account also of the time taken for tender, work interruption, renegotiation, extension maintenance, and a contractor’s guarantee.
• What matters is the intended/expected duration. An early termination does not affect the nature of the transaction as an investment. Conversely, short-term transactions do not become investments due to an inadvertent delay in the sale of assets.

Question 123

Explain how in practice the third Salini test element for investments was interpreted.

Answer 123

Risk

• Historically, it was the claimant’s acceptance of the extra risk of putting resources into a foreign sovereign’s territory that necessitated the particular protections for aliens.
• Tribunals have accepted a wide range of risks, such as sovereign interference, unforeseen incidents, and commercial circumstances. In some cases, the tribunals found that the very existence of the dispute before them was an evidence of risk. Tribunals also found that the economic and political circumstances in the host State posed a relevant risk.

Question 124

Explain in which two cases the fourth Salini test element was used against the investor

Answer 124

• In Mitchell v DR Congo, the Tribunal had found that the claimant’s law firm in the Congo constituted an investment. The ad hoc Committee annulled the Award since it considered that the law firm did not contribute to the host State’s economic and social development.
• In Malaysian Historical Salvors v Malaysia, the Sole Arbitrator declined jurisdiction finding that there was no investment since the salvage of historical objects from an ancient shipwreck did not make a significant contribution to the host State’s economy. The Award was annulled because it had elevated the criterion of contribution to the host State’s development into a jurisdictional condition and interpreted that condition as excluding small contributions and contributions of a cultural and historical nature.

Question 125

Some treaties refer to investments ‘in the territory’ of the host State. At times, respondents have argued that this requirement had not been met, since the would-be investor had not established a significant physical presence in the host State.

The problem has arisen primarily in cases involving financial instruments, such as loans, and in cases involving pre-shipment inspection services. In what cases has this been discussed?

Answer 125

Fedax v Venezuela (ICSID Case NO. ARB/96/3, Award 9 March 1998).

*In Fedax v Venezuela the investor had merely acquired promissory notes issued by
the host country. The Tribunal rejected the respondent’s argument that the claimant
had not invested ‘in the territory’ of Venezuela:

“It is a standard feature of many international financial transactions that the funds involved are not physically transferred to the territory of the beneficiary, but are put at its disposal elsewhere.”

Abaclat v Argentine (ICSID Case No. ARB/07/5, Decision on Jurisdiction, 4 August 2011)

*The case concerned Argentinean government bonds held by Italian investors. The tribunal held: With regard to investments of a purely financial nature, the relevant criteria should be where and/ or for the benefit of whom the funds are ultimately used, and not the place where the funds were paid out or transferred”.

Question 126

Where were expropriations prevalent in the 20th century?

Answer 126

The twentieth century witnessed significant expropriations of foreign investment in Latin America, the Soviet Union, the Middle East, and Eastern Europe. In those cases, the governments asserted their legal rights to take the property and denied any obligation to compensate investors for what they had taken.

As will be recalled, such actions raised a fundamental question as to the standard of
treatment that host countries legally owed to foreign investors.

Question 127

What was established in the NAFTA case Fireman’s Fund Insurance v. Mexico regarding expropriation? 9 factors.

Answer 127

NAFTA does not give a definition of expropriation. The tribunal summarized the law of expropriation as follows:

• a. Expropriation requires a taking (which may include destruction) by a government type authority of an investment by an investor covered by the NAFTA.
• b. The covered investment may include intangible as well as tangible property.
• c. The taking must be a substantially complete deprivation of the economic use and enjoyment of the rights to the property, or of identifiable distinct parts thereof (i.e. it approaches total impairment).
• d. The taking must be permanent, and not ephemeral or temporary.
• e. The taking usually involves a transfer of ownership to another person (frequently the government authority concerned), but that need not necessarily be so in certain cases (e.g. total destruction of an investment due to measures by a government authority without transfer of rights).
• f. The effects of the host state’s measures are dispositive, not the underlying intent, for determining whether there is expropriation.
• g. The taking may be de jure or de facto.
• h. The taking may be ‘direct’ or ‘indirect’.
• i. The taking may have the form of a single measure or a series of related or unrelated measures over a period of time (the so-called ‘creeping’ expropriation).

Question 128

Give an example where we can find the requirements for legal expropriation

Answer 128

Bahrain Germany BIT

Question 129

What is the difference between nationalization and expropriation? Does this difference matter legally?

Answer 129

Nationalisations concern investments in an entire sector of the economy, - expropriations concern only specific investments.

From a legal perspective, the question of whether a state measure is characterised as a nationalisation or as an expropriation is not important. This is because both measures must fulfil the same conditions of legality.

Question 130

The United States and Western European governments claimed that the international standard allowed host governments to expropriate foreign investments only under what conditions?

When did this discussions continue?

Answer 130

1. for a public purpose,
2. in a non-discriminatory manner,
3. in accordance with due process of law,
4. and upon payment, in the words of the Hull formula, of ‘prompt, adequate, and effective compensation’.

The dispute over the conditions under which a host state could expropriate continued into the post-World War II era when newly decolonized countries in the 1960s and 1970s called for a NIEO.

Question 131

How did the practice of expropriations change after 1980s?

Answer 131

• Whereas outright expropriation through government seizure was common until the 1980s, it has become an increasingly less common phenomenon thereafter.
• In the twenty-first century, governments dissatisfied with the original bargains made with foreign investors rarely send their troops to seize a factory or occupy a mine; instead, they use their legislative and regulatory power in more subtle ways to alter the benefits flowing to the investor from the investment. Thus, a government may impose new regulations on the way the investment is operated, raise taxes on the investment substantially, or unilaterally change a contract to reduce the revenues flowing to a concessionaire.

Question 132

What is the difference between a direct and indirect expropriation?

Answer 132

The difference between a direct or formal expropriation and an indirect
expropriation turns on whether the legal title of the owner is affected by the measure in question. In consequence, indirect expropriations have gained importance. An indirect expropriation leaves the title untouched but deprives the investor of the possibility to utilize the investment in a meaningful way.

Question 133

What is a typical feature of an indirect expropriation?

Answer 133

A typical feature of indirect expropriation is that the state denies the very existence of an expropriation and justifies its actions as a legitimate exercise of its regulatory or ‘police powers’, thereby rejecting the investor’s claim of compensation.

Question 134

What are four typical measures that constitute indirect expropriation?

Answer 134

• Disproportionate tax increase
• Interference with contractual rights
• Unjustified interference with the management of the investment
• Revocation or denial of government permits or licences

Question 135

What is creeping expropriation? In which case was it defined?

Answer 135

Each measure on its own, although harmful, is insufficient to constitute an indirect expropriation; however, taken collectively, they become sufficiently significant to constitute an indirect expropriation. Generation Ukraine v Ukraine (2003).

Question 136

“Recognizing direct expropriation is relatively easy: governmental authorities take
over a mine or factory, depriving the investor of all …”

Which case?

Answer 136

Meaningful benefits of ownership and control.

Feldman v Mexico, ICSID Case No ARB(AF)/99/1 (Award on Merits) (16 December 2002).

Question 137

Can contractual rights be expropriated? (Case)

Answer 137

Yes. IUSCT, Phillips Petroleum Company Iran v. Iran, Award No. 425-39-2: expropriation
entails liability “whether the property is tangible, such as real estate or a factory, or intangible, such as the contract rights in this case”

Question 138

What are the conditions for lawful expropriation?

Answer 138

Conditions for lawful expropriation

1. Public purpose - broad
2. Non-discrimination and not arbitrary
3. Due process of law (cf link to FET and IMS)
4. Compensation

Question 139

Can the transfer of a legal title result in a direct expropriation when the claimant still de jure keeps control? (case)

Answer 139

Pezold v Zimbabwe: The transfer of the legal titles by Zimbabwe constituted a direct expropriation, despite the fact that the claimants still retained a de facto control over part of their properties.

Question 140

Why was the Yukos v. Russia case significant?

Answer 140

It was the largest-ever award from an international arbitration tribunal: 50 B USD.

Question 141

Recent direct expropriation case involving Argentina

Answer 141

In 2012, the Argentine government seized the 51% interests in YPF, an Argentine
oil company, whose majority shareholder was Repsol.

In March 2014, Repsol and Argentina agreed to settle their dispute with the payment of US$5billion in bonds issued by Argentina.

Question 142

Swembalt AB v Latvia (UNCITRAL, Award 23 October 2000)

Answer 142

This is a case of direct expropriation.

In the case of Swembalt AB v Latvia, Swedish investors, operating under the belief of a formal agreement with Latvian authorities, purchased and refurbished a ship intended for use as a floating trade center in the port of Riga, Latvia. However, without prior notice to the investors, Latvian port authorities relocated the ship and eventually auctioned it off. The Swedish investors initiated a claim against Latvia, alleging that the actions taken amounted to the unlawful deprivation of their investment. The tribunal, in its findings, determined that Latvia’s conduct constituted a direct expropriation. This conclusion was based on Latvia’s various actions, including moving the ship, preventing its use, auctioning it, and allowing its scrapping, all without providing any compensation to the investors. As a result, the tribunal awarded the Swedish investors over US$2.5 million in compensation.

Question 143

When is it legal for states to expropriate? (more general, not 4 factors)

Answer 143

Unless it constitutes a violation of treaties or customary international right.

States have been free to exercise their regulatory power with the view (or simply with the effect of) expropriating foreign investors. This power is a part of their sovereign right.

However, in order for this to comply with international law and for expropriations to be legal, certain conditions must be met.

Question 144

What is the problem with the “public purpose” element of expropriation test?

Answer 144

Since virtually any taking by a government can ostensibly be justified on these
grounds, investors are rarely successful in challenging the legality of government
taking because it is not for a public purpose.

Question 145

As stated in 2016 by the Tribunal in the case of Crystallex v Venezuela, ‘States are afforded a wide margin of appreciation in determining whether an expropriation serves a public purpose’. Why is this wide margin not challenged by arbitration tribunals?

Answer 145

Tribunals have considered that it is not their role to second-guess the appropriateness of measures adopted by the organs of a sovereign state.

Question 146

In the Yukos cases, Russia had argued that it had acted for a public purpose in seizing Yukos assets; however, the tribunal rejected this argument. What was its reasoning?

Answer 146

“Whether the destruction of Russia’s leading oil company and largest taxpayer was in the public interest is profoundly questionable. It was in the interest of the largest State-owned oil company, Rosneft, which took over the principal assets of Yukos virtually cost-free, but that is not the same as saying that it was in the public interest of the economy, polity and population of the Russian Federation”.

Question 147

What does due process require to justify expropriation?

Answer 147

In essence, due process requires (i) that the decision to nationalize be properly adopted, and that (ii) the expropriated investor have an opportunity to challenge such decision before an independent and impartial body.’ (Rusoro v. Venezuela)

Question 148

How does the due process element to justify expropriation differ from the other elements in the test?

Answer 148

Unlike the other conditions of legality, due process of law relates to the procedure
and not to the substance of the expropriatory measure.

Question 149

In the Yukos case, what was the tribunal’s surprising finding on the due process?

Answer 149

In the Yukos cases, Russia claimed that the seizure of the assets and treatment of the investors had been done according to law, but the tribunal concluded that it had not been ‘carried out under due process of law’, as required by Article 13(1)(c) of the ECT. In particular, it found that ‘Russian courts bent to the will of Russian executive authorities to bankrupt Yukos, assign its assets to a State controlled company, and incarcerate a man who gave signs of becoming a political competitor.’

Question 150

What does non-discrimination mean in international law?

Answer 150

In international law, non-discrimination rule prohibits governments from distinguishing the treatment of economic resources or actors on the basis of national origin in order to ensure the competitive equality between comparable economic actors.

Question 151

In ADC v Hungary, Hungary argued that the claimants were unable to raise that
argument, since the claimants were the only foreign parties involved in the
airport’s operation. How could the claimants prove that Hungary’s actions were discriminatory?

Answer 151

The tribunal responded that while it was true that ‘for discrimination to exist there must be different treatments to different parties’, the relevant comparison was between the treatment granted to the replacement operator appointed by Hungary and the treatment given to foreign investors as a whole. By this standard, the tribunal found that Hungary’s actions against the claimants had indeed been discriminatory.

Question 152

How can a state and an investor both address discrimination outside the non-discrimination prohibition in investment treaties?

Answer 152

1) Investor and state make a contract in which they refer to an arbitration tribunal.
2) In a treaty between states there could be a provision that refers to arbitration tribunals in any case of dispute (catch-all clause, non specific to discrimination).

Question 153

How does legality play a role in compensation?

Answer 153

• Legality → compensation is part of the conditions → primary norm that prohibits illegal expropriation
• Illegality → compensation is result of wrongful act → secondary norm → Chorzow Factory principles (incl. lost profits)

Question 154

What is the difference between primary and secondary rules in international law?

Answer 154

Primary Rules:

Nature: Primary rules are substantive norms that directly regulate the behavior of states and other subjects of international law. They articulate the rights and obligations of states in various areas of international relations.
Examples: Primary rules include prohibitions against the use of force, the principle of sovereign equality, human rights obligations, and the rules governing the conduct of armed conflicts. These rules create legal obligations for states and individuals.

Secondary Rules:

Nature: Secondary rules, on the other hand, are procedural norms that govern the creation, interpretation, and application of primary rules. They provide the framework for the functioning of the legal system.
Examples: Secondary rules include rules of treaty interpretation, the principles of state responsibility, and the rules regarding the settlement of disputes. These rules guide how primary rules are understood, implemented, and enforced.

Question 155

What is the most popular rule in IIA adduced to calculate the damages?

Answer 155

Hull Formula

Question 156

What is the standard of compensation in many IIAs?

Answer 156

Many IIAs provide, all things being equal, that:

1. Compensation shall be equivalent to the fair market value of the expropriated investment at the time when the expropriation was publicly announced or immediately before the expropriation occurred, whichever is earlier and that compensation shall include interest at a commercial reasonable rate (adequate)
2. That it shall be paid without undue delay (promptly)
3. That it shall be effectively realizable and freely transferable (effective).

Question 157

What is a common example of when the fair market value is determined in BITs?

Answer 157

Article 5 of the Korea–Congo BIT provides that such compensation shall amount to:
* “the fair market value of the expropriated investments immediately before the expropriation took place or before the impending expropriation became public knowledge, whichever is the earlier, shall include interest at the applicable commercial rate from the date of expropriation until the date of payment.

Question 158

What is the fair market value? Do we have a definition in a case?

Answer 158

One useful definition of market value was elaborated by the Iran–US claims tribunal in Starrett Housing Corporation v Iran.

‘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 person’

Question 159

What valuation methods exist that have been used by arbitration tribunals?

Answer 159

• 1. book value, which is based on the actual costs incurred to establish the investment as those costs are reflected on the books (the balance sheet) of the affected enterprise;
• 2. replacement value, which is the amount needed to acquire an asset of the same type as that which was expropriated;
• 3. liquidation value, which is what a willing buyer would pay for the assets of the expropriated enterprise in liquidation; and
• 4. going-concern value or discounted cash flow (DCF), which is a forward-looking method that values the enterprise on the basis of its future expected cash and then, using a discount rate that takes account of the cost of capital and risk, discounts that estimated cash flow to arrive at a present value.

Question 160

Do treaties always specify that compensation needs to be according to “real market value”?

Answer 160

A few treaties are less specific in establishing standards of compensation. Instead of market value, they may require ‘real value’, ‘reasonable compensation’, or simply ‘compensation’.

These formulations of a treaty’s standard for compensation provide ample room for controversy as to their meaning and application in specific expropriation cases.

Question 161

Which case established that a distinction must be made for compensation in cases of legal and illegal expropriation?

Answer 161

In Amoco v Iran (US Claims Tribunal, 14 July 1987): “A clear distinction must be made between lawful [merely lacking compensation] and unlawful expropriation, since the rules applicable to the compensation to be paid by the expropriator State differ according to the
legal characterization of the taking”.

Question 162

How must compensation be calculated in cases of illegal expropriation? In what case was this found?

Answer 162

• Compensation for illegal expropriation is governed not by the treaty provisions on expropriation compensation (the “Hull formula”) but on the principles of customary international law, as illustrated by the Chorzów Factory case
• The tribunal in ADC v Hungary concluded that the appropriate standard was found in the Chorzów Factory case judgment:
• ‘reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed’
• Under this view, while market value immediately prior to expropriation might be the applicable standard in cases of legal expropriation, in cases of illegal expropriation, the appropriate standard is “the amount necessary to restore the investor to the situation it would have been in had the illegal act never taken place”.

Question 163

What are two possible explanations for the shift by host governments from direct expropriations to regulatory actions?

Answer 163

1. First, official acts that seize title or control of a foreign investor’s property will attract negative publicity and are likely to do serious damage to the state’s reputation as a site for foreign investments.
2. Second, complex contemporary investment transactions, such as concessions, mineral development agreements, and long-term economic development contracts, which are based on shared benefits and risks between the host country and the investor are susceptible to being altered to the benefit of the host country through its regulatory power.

Question 164

IIAs usually prohibit indirect expropriations using a number of different
formulations. The most common of these formulations are ‘indirect
expropriations’, ‘measures having an effect equivalent to expropriation’, or
‘measures tantamount to expropriation’, ‘measures which have similar effects’.

Legally, how do these formulations differ?

Answer 164

It is widely accepted that these expressions all mean the same thing, in that they give the same protection to foreign investors against indirect expropriations, including creeping expropriations.

Question 165

What is the test for indirect expropriation?

Answer 165

IIAs have traditionally not specified what criteria should be used in determining whether a measure is an indirect expropriation. This is yet another example of the normative indeterminacy/vagueness that has traditionally characterised treaty practice.

Question 166

Where can we find a definition for indirect expropriation?

Answer 166

Middle East Cement v Egypt (ICSID Case No. ARB/99/6, 12 April 2002).

“When measures are taken by a State the effect of which is to deprive the investor of the use and benefit of his investment even though he may retain nominal ownership of the respective rights being the investment, the measures are often referred to as ‘indirect’ expropriation or, as in the BIT, as measures ‘the effect of which is tantamount to expropriation.’ As a matter of fact, the investor is deprived by such measures of parts of
the value of his investment.

Question 167

Two opposing doctrines have emerged for indirect expropriation, which?
How do they relate to each other?

Answer 167

Police power doctrine
Sole effects doctrine

These two doctrines are generally seen as conflicting with one another.

Question 168

What is the police power doctrine?

Answer 168

• This doctrine has long been considered a part of customary international law.
• It focuses on the aim of the measure in order to determine its nature.
• The reasoning behind this approach is that measures which protect a public interest should not be characterised as an indirect expropriation.
• However, arbitration tribunals have disagreed as to the exact content of this ‘police powers’ doctrine.

Question 169

What is the principle of the police power doctrine?
Under that doctrine, what becomes the only way to enforce indirect expropriation?

Answer 169

Any non-discriminatory measure which protects a public interest and which is enacted in accordance with due process does not constitute an indirect expropriation, no matter what its impact is.

Discrimination and lack of due process becomes the only way to enforce.

Question 170

What was held in Saluka v Czech Republic in regard to indirect expropriation?

Answer 170

*State does not commit expropriation when it adopts general regulations that are generally accepted within the police power of states
*No compensation is required
*This is customary international law today

Question 171

What is the sole effects doctrine?

Answer 171

• This doctrine focuses on the effect of a state measure rather than its aim in order to determine whether it constitutes an indirect expropriation.
• As with the ‘police powers’ doctrine, tribunals have also disagreed as to the correct approach to be taken to the ‘sole effects’ doctrine.

Question 172

In Metalclad v Mexico, a US company had been granted a permit for the development
and operation of a hazardous waste landfill by the Mexican federal government.
Subsequently, the local municipal authorities refused to grant the necessary
construction permit and the regional government declared the land in question a
national area for the protection of cactuses. What did the tribunal hold? (the case was under NAFTA)

Answer 172

According to the Tribunal: ‘Thus, expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour 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 in significant part, of the use or reasonably-to-be expected economic benefit of property even if not necessarily to the obvious benefit of host State.’

Question 173

What is the in between approach for indirect expropriation?

Answer 173

The Proportionality Approach: In recent years, we can see that an ‘in-between’ approach has emerged. This new approach takes into account all the circumstances of the case in order to assess whether the measure constitutes an indirect expropriation, including both its effect and its object. This approach is known as the ‘proportionality’ approach.

Question 174

What is interesting about the Proportionality Approach?

Answer 174

It borrowed from case law of the European Court of Human Rights.

Question 175

Where was the Proportionality Approach first mentioned? What did the tribunal state?

Answer 175

Tribunal in Tecmed v Mexico (29 May 2003)

“There must be a reasonable relationship of proportionality between the charge or weight imposed to the foreign investor and the aim sought to be realized by any expropriatory measure [justified with public interest]”

Question 176

Most contemporary arbitral tribunals have struggled to define the precise boundary between legitimate host country regulation and illegitimate regulatory takings. Which tribunal has provided with five factors? Which doctrine does this test follow?

Answer 176

In its summary of expropriation jurisprudence under NAFTA, the tribunal in Fireman’s Fund Insurance Company v United Mexican States listed the following factors as relevant:

(1) whether the measure is within the recognized police powers of the host state;
(2) the public purpose and effect of the measure;
(3) whether the measure is discriminatory;
(4) the proportionality between the means employed and the aim sought to be
realized; and
(5) the bona fide nature of the measure.

Proportionality doctrine.

Question 177

According to the “Methanex” approach a regulatory measure which deprives radically an investor of his/her property need not be compensated when it does not discriminate, when it pursues a public purpose and when it follows due process. How is this at odds with expropriation provisions in international investment agreements?

Answer 177

The expropriation provisions of international investment agreements tell us that an expropriatory measure which does not discriminate, which pursues a public purpose and which follows due process shall in fact be compensated to be legal. This follows from US v. Mexico 1938.

Question 178

What is the A + B = C problem in regard to indirect expropriation?

Answer 178

A: Virtually all states measures pursue a public interest objective
B: States are granted a very large margin of appreciation in this regard
C: Virtually all measures are characterised as non-compensable regulation, unless they are discriminatory or are not enacted in accordance with due process

Question 179

In regard to the indirect expropriation issue, what did the US Model BIT aim to do?

Answer 179

States have introduced more clarity in their newly concluded agreements, in order to provide guidelines to arbitrators in applying the provisions on indirect expropriation and thus in approaching the divide between ‘regulatory measures’ and ‘expropriatory measures’.
The US Model BIT is an example of that.

Question 180

What were the facts of the Neer v. Mexico case (1926)?

For what principles is it one of the most cited cases in international law?

Answer 180

Neer v. United Mexican States, a three-page decision rendered in 1926, is one of the most cited precedents on denial of justice, fair and equitable treatment, and minimum standard of treatment in international law.

In the evening of November 16, 1924, Paul Neer, an American superintendent of a mine in Guanaceví, Mexico, was horseback riding to his home with his wife. They were stopped by a group of armed men, who shot and killed Paul Neer. His wife escaped.

The United States espoused a claim against the United Mexican States on behalf of American citizens, L. Fay H. Neer, widow, and Pauline E. Neer, daughter, who claimed that they sustained damages in the amount of $100,000.00. The United States alleged that the Mexican authorities were liable as they “showed an unwarrantable lack of diligence or an unwarrantable lack of intelligent investigation in prosecuting the culprits.”

Question 181

How did the international minimum standard become codified in the Vienna Convention on the Law of Treaties?

Answer 181

After the Neer Decision in 1926, which has been cited many times in international arbitration tribunals, Article 31(3)(c) of the Vienna Convention on the Law of Treaties provides that together with the treaty’s context ‘any relevant rules of international law applicable in the relations between the parties’ shall be taken into account. The international minimum standard is such a rule. Both general principles and customary international law are included in these rules of international law.

Question 182

Which protections are granted in the international minimum standard? What is it?

Answer 182

This standard provides a “floor” to the treatment that States must afford to aliens in the form of a set of essential rights that States are obliged to respect vis-à-vis foreign nationals and their property. Tribunals also consider that the standard is “a flexible” standard, which must be adapted to the circumstances of each case.

The customary MST has been generally understood to comprise rights, guarantees and obligations (non exhaustive)
*Denial of justice (also in the fair and equitable treatment formulations in most BITs)
*Protections of foreign nationals and their property
*Transparency (some courts have opposing view)
*Due process

Question 183

What is the relationship between the FET standard and the MST standard?

Answer 183

It remains a matter of debate whether the Fair and equitable treatment standard currently reflects the MST or offers an autonomous standard that is additional to general international law. A number of investment tribunals suggest that the difference between FET and MST may well be “more apparent than real, when applied to the specific facts of a case.” - i.e., less signfiicant.

Question 184

In current treaties, where can we find definitions of the MST? What do these treaties clarify? (4)

Answer 184

The most salient formulations of MST in current treaty practice are found in NAFTA (Article 1105), the US Model BIT (Article 5), and several FTAs recently concluded by Canada (e.g., CPTPP or the Canada-Colombia FTA).

These treaty formulations clarify that:

*the MST provision prescribed the customary rule as a minimum standard of treatment;
*references to the Fair and equitable treatment and Full protection and security standards do not require treatment “in addition to or beyond” that required under MST;
*and a determination of a breach of any other standard of protection does not per se establish a breach of the MST. Such reference does not create additional substantive rights.

Question 185

Where did we see the exceptions for indirect expropriation for the first time?

Answer 185

US Model BIT and CETA (Canada-EU Trade Agremeent)

Question 186

What exceptions to the exception does the CETA provide for the public policy measures exception?

Answer 186

It’s possible to violate the provision in rare circumstances where the measures taken are excessive in light of their objective.
The US Model BIT only defines “except in rare circumstances”.

Question 187

Which factors did the CETA and US Model BIT mention to consider if a measure is indirect expropriation?

Answer 187

1) Economic impact of the measure on the investor
2) Extent to which government action interferes with distinct, reasonable investment-backed expectations
3) Character of the government action
4) Duration of the measure (CETA only)

Question 188

In what way is the 2015 BIT Model of India extreme?

Answer 188

Because it contains an absolute no indirect expropriation clause for public policy purposes.

Question 189

How did Brazil address the issue of indirect expropriation in its BIT?

Answer 189

It eliminated the protection against indirect expropriation.

Question 190

In regard to the indirect expropriation decision, how was Philip Morris v. Uruguay case interesting?

Answer 190

The Tribunal brought forth an additional reason to reject the claim.
It found that Uruguay had validly exercised the state’s police powers.
The power to regulate is customary international law and should be interpreted as such under art. 31(3)(c) of the Vienna Convention on the Law of Treaties.

The court also adduced a number of secondary sources (Harvard Draft Convention, Restatements, OECD working paper, and other, newer established BITs).

Question 191

If another investor enjoys additional protection from a BIT, can a foreign investor make a claim of violation of MFN treatment?

Answer 191

No.

Question 192

If states create contracts with foreign investors, would it be possible that they thereby violate the MNF treatment?

Answer 192

Yes.

Question 193

What is the difference between general and specific standards of treatment?

Answer 193

General standards of treatment apply to all facets of an investment’s activities in the host country. These include host government commitments to grant investors and investments ‘fair and equitable treatment’, ‘full protection and security’, and ‘treatment in accordance with international law’. General treatment standards may be found in separate treaty articles or paragraphs or combined into a single treaty provision.

Specific treatment standards concern particular matters relating to an investment, such as monetary transfers, expropriation, and investor rights in times of war, revolution, or civil disturbance.

Question 194

What is the difference between absolute and relative standards?

Answer 194

• absolute standards, which are not contingent upon specified factors, happenings, or government behaviour towards other investors or persons.
  Examples of absolute standards include guarantees of full protection and security, fair and equitable treatment, or treatment in accordance with the minimum standard of international law.
• relative standards, which are dependent upon the host government’s treatment of other investments or investor. Examples of relative standards are most-favoured-nation (MFN) treatment and national treatment.

Question 195

How frequent is the FET standard?
How old is it?

Answer 195

It is present in almost all BITs.
1954 Friendship Treaty US and Germany.

Question 196

How does the FET standard relate to MIGA?

Answer 196

To provide guarantees, MIGA sets the FET as a precondition for investors.

Question 197

Which multilateral treaty contains an elaborate article on the FET standard?

Answer 197

Energy Charter Treaty.

Question 198

How often is the FET standard cited in claims?

Answer 198

Around 99% of the claims contain the FET standard.

Question 199

Why is the FET standard a major source of legal uncertainty?

Answer 199

Because it is not defined in most treaties (exception: Energy Charter Treaty). Therefore, arbitrators have to define it themselves. Moreover, arbitrators are not bound by earlier decisions of arbitration tribunals.

Question 200

Give three reasons why the FET standard is overly complex

Answer 200

1) The standard is vague, general, and elastic
2) Treaty provisions offer no definition and no guidance on how to apply it
3) Despite an abundance of scholarly works on the standard, the application is tied to the facts of the case

Question 201

The Tecmed v. Mexico tribunal (2003) stated what on the FET standard?

Answer 201

It has to be applied in good faith (art. 26 of the VTLT)

Question 202

What are the summarized factors that so far tribunals have applied to identify breaches of the FET standard?

Answer 202

Whether the host state has:

(1) failed to protect the investor’s legitimate expectations;
(2) failed to act transparently;
(3) subjected the investor to discriminatory, arbitrary, or unreasonable actions;
(4) denied the investor access to justice or procedural due process; or
(5) acted in bad faith.

The list is neither definitive not exhaustive. It may evolve over time in response to developments in arbitral jurisprudence. One must also recognize, however, that these five general principles are not separate and distinct, but often overlap and blend into one another.

Question 203

The failure to protect investor’s legitimate expectations in case law has created a specific obligation for investors. Which?

Answer 203

It requires reliance. Therefore, the investor must prove that they have conducted due diligence and their expectations were reasonable in the light of the circumstances.

Question 204

What is the fundamental notion of the failure to protect investor’s legitimate expectations?

Answer 204

The fundamental notion is that it is unfair for a state to create certain expectations in the minds of investors through its laws, regulations, and actions; and then, once the investment is made, to change those laws and regulations in ways that significantly frustrate or cancel the expectations that the state itself has been instrumental in creating.

Question 205

What are the limits to protect investor’s legitimate expectations?

Answer 205

The host state does not have to freeze its legal system. The adjustment of environmental regulations to internationally accepted standards or the improvement of labour laws does not lead to violations of the FET standard if applied in good faith and without discrimination.

Question 206

In which case did the claimant fail because it relied on information that it could not reasonably rely?

Answer 206

Thunderbird v. Mexico (same issue as experienced, got an opinion from the government, but left out vital facts)

Question 207

What does transparency mean?

Answer 207

(1) to make information on relevant laws, regulations, and other policies publicly
available;
(2) to notify interested parties of relevant laws and regulations and changes to
them; and
(3) to ensure that laws and regulations are administered in a uniform, impartial, and
reasonable manner

Question 208

Transparency requires making information on relevant laws, regulations, and other policies publicly available. What is “relevant”?

Answer 208

Any laws, regulations, and other policies that affect the sector of activity that the investor operates.

Question 209

Full transparency is not a reasonable expectation. Which case?

Answer 209

Miacula v. Romania (2020)

Question 210

What did we learn from Stadtwerke München GmbH v. Spain?

Answer 210

Something about timing of information in transparency. Eleven months to formulate a complicated compensation system requiring input from many organizations was deemed reasonable.

Question 211

How does the ICJ define arbitrariness?

Answer 211

A willful disregard of due process of law
An act which shocks, or at least surprises, a sense of juridical propriety (Korrektheit)

Question 212

When is a measure considered discriminatory?

Answer 212

When the intent is to discriminate or the effect is discriminatory.

Question 213

Which is easier to prove? Discrimination or arbitrariness?

Answer 213

Discrimination.

Question 214

What are the three elements that need to be assessed for the wrongful act test?

Answer 214

1) Was there a wrongful act? (here the violation of the standards is included)
2) Can it be attributed to a government actor? (this is usually easy in BIT cases)
3) Can it be excused? (self-defense, necessity)

Question 215

What are the requirements for a foreign investor to claim denial of justice under the FET standard?

Answer 215

The investor must have exhausted the domestic courts first.

Question 216

Give examples of how tribunals have found that due process was not followed (4)

Answer 216

The intervention of executive in court proceedings
Secret awarding of licenses without the possibility of judicial review
Bias on the part of a court
Corruption of a judge

Question 217

To what kind of proceedings does denial of justice extend?

Answer 217

Criminal, administrative, civil

Question 218

There is a line between an ordinary error and a gross miscarriage of justice, which no longer may be considered as an exercise of the rule of law. In other words, when it is no longer an issue of due process but an issue of arbitrariness. When is that line crossed?

Answer 218

This line will be crossed when it is impossible for a third party to recognize how an impartial judge could have reached the result in question (objective standard).

Question 219

The FET standard also considers good faith. Why is good faith the easiest factor to talk about, yet the least relevant?

Answer 219

The good faith standard is codified in the Vienna Convention on the Law of Treaties and is customary international law. However, no modern arbitral decision has actually found a state to have acted in bad faith.

Question 220

No modern arbitral decision has actually found a state to have acted in bad
faith towards an investor under an applicable investment treaty. Explain this with two reasons.

Answer 220

• proving a state’s bad faith can be an extremely difficult task, since a
  government can usually offer some public policy justification for its actions.
• most arbitral tribunals would be loath to make such a finding against a
  sovereign state, particularly if could give redress to an investor under a different factor

Question 221

Under the protection and security standard, can a state use its own legislation as a defence?

Answer 221

A state may not absolve itself of international responsibility arising out of a treaty violation by invoking its own legislation as a defence.

Question 222

The protection and security standard often does not answer what kind of questions?

Answer 222

1. Against whom is the host state to protect covered investors and investments?
2. Against what actions is the host state to protect investors and their investments?
3. Precisely, what measures must a host state take in order to meet its treaty obligations?

Question 223

What settings has the security and protection standard applied to? (Three groups of cases)

Answer 223

1. In some earlier cases, acts of insurgents or rioting groups had harmed the foreign investment.
2. In a second group of cases, government forces like police authorities or military units were involved.
3. More recent cases have addressed governmental regulatory acts that disturb the legal stability surrounding the investor’s business.

Question 224

Most important case for the protection and security standard

Answer 224

ELSI case (ICJ, 1989)

The United States brought a claim against Italy under the United States–Italy FCN treaty for injuries incurred by Raytheon, a US company, with respect to its subsidiary in Sicily. A factory of Raytheon’s subsidiary in Palermo was taken over by workers and then requisitioned by the mayor in order to prevent its closure by the investor for economic reasons.

The ICJ Chamber referred to a due diligence obligation and found that the Italian government had taken adequate measures to protect the investor and its property, stating that ‘[t]he reference in Article V to the provision of “constant protection and security” cannot be construed as the giving of a warranty that property shall never in any circumstances be occupied or disturbed.

Question 225

What is the due diligence obligation to the host state under the Protection and Security Standard?
Can this obligation be mitigated under certain circumstances?

Answer 225

The due diligence obligation requires a host state to undertake all measures that could be reasonably expected to prevent damage to foreign investments in the circumstances faced by the country at the time of the injury to the investment.

It would seem that a state’s lack of resources or the severity of crisis conditions are factors to be considered in determining whether a state has satisfied the due diligence standard.

Question 226

The cancellation of established international relations may give rise to more injuries to investments. Give an example.

Answer 226

The departure of the UK from the EU.

Question 227

Which two treatment provisions pursue the same objective?
What is their connection to customary international law?

Answer 227

National treatment and MFN
The objective is that the foreign investors and their investment do not suffer any discrimination

These two provisions are conventional ‘embodiments’ of the non-discrimation
principle, which has long been a part of customary international law

Question 228

What is an arbitrary measure? (in general, not ICJ definition)

Answer 228

One that inflicts damage on the investor without serving any apparent legitimate purpose

Question 229

For a measure to be discriminatory, does it have to violate the domestic law?

Answer 229

For a measure to be discriminatory, it does not need to violate domestic law, since domestic law can contain a provision that is discriminatory towards foreign investment, or can lack a provision prohibiting the discrimination of foreign investment.

Question 230

The tribunal in Plama v. Bulgaria gave the “negative formulation” of discrimination. How is it defined?

Answer 230

Discrimination is the negative formulation of the principle of equality of treatment.

Question 231

Initially, there were the national treatment and the minimum standard of treatment. Who was in favor of which?

Answer 231

National treatment: Calvo doctrine. Developing states.
Minimum standard of treatment. Developed states.

Question 232

Why do newer treaties no longer contain the national treatment clause?

Answer 232

States want to be free to help their own nationals, for instance through subsidies, without having to extend the same treatment to foreign investors.

Question 233

States want to be free to help their own nationals, for instance through subsidies, without having to extend the same treatment to foreign investors. What two options do states have if they want to exclude this from their investment treaties?

Answer 233

1) Either remove the protection altogether or 2) include exceptions.

Question 234

Why, in many cases, is it not enough for states to exclude a national treatment provision?

Answer 234

Most treaties will contain a FET clause, which acts as a replacement. It also protects from discrimination (it was one of the factors that we discussed).

Question 235

What disadvantage do treaties have that do not cover the pre-establishment phase with their national treatment clause?

Answer 235

States can introduce all kinds of laws and regulations that bar investors from investing.

Question 236

What are the three steps by which assess the application of the national treatment for a potential claim?

Answer 236

• The first step is to identify a group of nationals with whom we can compare the claimant.
• The second step is to compare the treatment that the two groups have received and to assess whether the treatment received by the claimant is less favourable than that granted to the group of nationals.
• The third step is to evaluate whether the two groups are in like circumstances or whether certain factors exist which could justify any differential treatment.

Question 237

What are the two different types of discrimination in national treatment?

Answer 237

• De jure (direct) discrimination: Refers to discriminatory treatment that is openly linked to (foreign) nationality
• De facto (indirect) discrimination: Treatment that disadvantages foreign investors as a matter of fact even though it may be neutral on its face.

Question 238

Explain the issue of “like circumstances”

Answer 238

The issue of “like circumstances” in national treatment is how “large” the circle of comparison is drawn. The lecture shows two extremes. In one case, the tribunal distinguished between a company that manufactures cigars and those that “just” export them to deny a claim. In another case relating to taxes, a tribunal put all local producers into one circle.

Question 239

It is widely accepted that differentiations are justifiable if rational grounds are shown against national treatment (i.e., locals get better benefits). Give two examples of this.

Answer 239

• In SD Myers v Canada, the Tribunal seems to have assumed that subsidies are allowed to promote national policies.
• In GAMI v Mexico, the Tribunal found that the solvency of an important local industry, in this case sugar, was a legitimate policy goal.

Question 240

The case law is not uniform on whether the pursuit of some rational policy by the government to justify the differential treatment is sufficient. What could be an additional requirement for governments?

Answer 240

The State must use the least interfering means with investor rights if there are several alternative ways to achieve its policy goals.

Question 241

The most favorable treatment limits the treatment to certain activities. Taking the Nigeria Singapore BIT as an example, what kind of activities are these?

Answer 241

Management, conduct, operation, sale or other disposition of investments.

Question 242

What are the sources of comparison for MFN standard?

Answer 242

Other treaties, laws, policies, regulations

Question 243

Can the MFN standard be pre- or post-establishment?

Answer 243

It can be both.

Question 244

Give an example why an MFN provision would contain an exception

Answer 244

So the state can have tax agreements

Question 245

What three situations do we have with the MFN in practice? Are these problematic?

Answer 245

Situation 1: Reference to better treatment in a substantive provision of an IIA concluded with a third state - universally accepted
Situation 2: Change the scope of the present IIA, e.g. by using the definition of “investment” from another IIA - not accepted
Situation 3: Take the dispute settlement provision from another IIA - most frequent and most controversial

Question 246

Give an example how the MFN clause was used to get a better compensation (situation 1)

Answer 246

In CME v Czech Republic, the BIT only contained the provision that the claimant should get “just compensation”. Another BIT contained that investors should get the “fair market value”. Tribunal held that the investor would get the same.

Question 247

Maffezini v Spain is an extreme example of how the tribunal stretched a dispute settlement provision with the MFN clause. Explain.

Answer 247

Claimant complained that another BIT did not require him to wait before invoking arbitration like the present BIT did. Tribunal agreed and waived that requirement.

Question 248

What is the purpose of umbrella clauses?

Answer 248

To bring contractual and other commitments under the treaty’s protective umbrella.

Question 249

A typical umbrella clause is Article 2(2) of the British Model Treaty: “Each Contracting Party shall observe any obligation it may have entered into with regard to investments of nationals or companies of the other Contracting Party” - What is the problem with this? (from the POV of the state)

Answer 249

This can be any kind of obligation under international law, regulatory act, law, contracts, any kind of obligation.,

Question 250

What are two ways the umbrella provision can be limited to reduce the scope?

Answer 250

*Reduce the obligations to written obligations
*Reduce obligations to legal obligations (i.e., “subject to law”)

Question 251

Arbitral jurisprudence has been in no way uniform for the umbrella clauses. What are two reasons?

Answer 251

*Different formulations of the clause
*Different conceptions of the nature of the clause

Question 252

What are the three approaches umbrella clauses have been interpreted?

Answer 252

First Approach: Some tribunals interpret “umbrella clauses” narrowly, arguing that the phrase “entered into” limits the clauses to specific commitments in investment contracts.

Second Approach: A more nuanced approach acknowledges that umbrella clauses don’t cover general commitments imposed by host states’ laws but may include unilateral commitments from specific business sector regulations addressed to foreign investors.

Third Approach: Some tribunals take a holistic approach, accepting that umbrella clauses cover obligations stemming from laws and regulations.