W14: Introduction to IIA Flashcards
1. IIA and ICA 2. Basic elements of IIA
History and Development of IIA
Historically, an individual or a corp. who wished to assert a claim against a foreign state for breach of a customary int’l law couldn’t do so directly.
Instead s/he or it had to petition its govt. to take up/espouse the claim on its behalf.
19th Century: Gunboat Diplomacy
Influential individuals/corps. would convince their govt. to send a small contingent of warships to moor off the coast of the offending State until REPARATION was forthcoming.
Exercised frequently by European powers on behalf of their subjects.
E.g., 1902: Venezuela’s default on its sovereign debt - Govts. of Great Britain, Germany, and Italy sent their warships to the Venezuelan coast to demand reparation for the losses incurred by their nationals.
1868: Calvo Doctrine
Argentine jurist, Carlos Calvo fought for the newly independent states to be free of gunboat-diplomacy by foreign powers, promoting the Calvo Doctrine:
Whereby foreign investors should be in no better position than local investors, with their rights and obligations to be determined through the exclusive jurisdiction of the courts of the State.
Adopted by:
- 1889, First Int’l Conference of American States: Ad Hoc Commission on Int’l Law
Incorporated into:
- 1956, Treaty of Friendship, Commerce and Navigation (FCN Treaty)
- FCN Treaty: ‘Italy and Colombia’ Art. 21:
Contracting Parties express their desire to avoid all types of dispute which might affect their cordial relations, and agree that, in connection w disputes which involve individuals arising out of criminal, civil or administrative matters, their diplomatic agents will abstain from intervening except in cases of ‘denial of justice’ or ‘extraordinary/unlawful delay in the admin. of justice’
1907: Diplomatic Protection
Second Int’l Peace Conference of The Hague
Convention on the Peaceful Resolution of Int’l Disputes signed.
Provided framework for conclusion of Bilateral Arb. Treaties.
In the event of a dispute b/w 2 states arising out of particular interests of a foreign national, an independent arb. tribunal would be formed.
In effect, a State could espouse the claim of its national (i.e. Diplomatic Protection) via a Horizontal Inter-State Procedure.
- There was no direct cause of action by the foreign national whose interests had been harmed.
Legal Basis:
- Panevezys-Saldutiskis Railway case
1. State asserting own tight, to ensure in person, of its nationals respect for the rules if int’l law.
2. In absence of special agreement, it is the bond of nationality b/w the State and the individual which alone confers upon the state the right of diplomatic protection
1963: Prof. Brierley’s Critique of DP - ‘Diagonal Clause’
The procedure was unsatisfactory from the individual claimant’s POV.
- inevitable politicisation of disputes
- leaving investors, particularly small and medium-sized enterprises, with little recourse save what their govt. cares to give them
- AFTER weighing the diplomatic pros and cons of bringing any particular claim
*reform made possible in 1956 ICSID Convention
1965: Convention on the Settlement of Investment Disputes b/w States and Nationals of Other States (ICSID Convention)
AIM: Creating a new arbitral forum for the resolution of disputes b/w investors and states thru inclusion of arb. clauses in state contracts
TRAVAUX PRÉPARATOIRES (official record of negotiations):
The consent of the state to arb. could be estd. thru provisions of an investment law
HISTORY:
1. 1959 Abs-Shawcross Draft Convention on Investments Abroad
2. 1977 Organisation for Economic Cooperation and Development (OECD) Draft Convention on the Protection of Foreign Property
RESULT: BITs: set out explicit protections in favour of foreign investments
- Natural successor of FCNs (still suffered from limitations imposed by DPs)
3. ICSID Convention: incorporating a clause establishing consent of the State to arbitrate w covered investors.
- Prof. Brierley’s ‘Diagnoal Clause’: permitting investors to claim directly u/Treaty against a ‘host state’ (where investment was made), thus became a reality.
E.g. 1981 BIT: Switzerland and Sri Lanka
Right of Direct Recourse: Ensures that the investor’s claim is not sub: political considerations inherent in DP.
- Even if no agreement b/w investor and host state
2014: Newcomers to ICSID
- New Cases: 38 (7x than those in the first 10 yrs of existence)
- End of the year: 608 Cases (approx. 10x those in 2000)
RESULT:
- Investment Chapters/Collateral Agreements
1. Assn. of SE Asian Nationals (ASEAN) Comprehensive Investment Agreement
2. North American Free Trade Agreement (NAFTA)
3. Energy Charter Treaty (ECT)
4. Dominican Republic and Central America - U.S. Free Trade Agreement (DR-CAFTA) - Provisions: Free Trade Agreements (FTAs)
1. U.S.-Chile FTA
2. 2010 Canada-Panama FTA
Arising Concerns from Growth of IIA
- Perceived deficit of legitimacy (states being judged on conduct by pvt. non-elected individuals)
- Inconsistent arbitral awards
- Independence and impartiality of arbitrators
- Delays and costs of procedures
2007-2012: Small group of Latin American countries defending multiple claims (Bolivia, Ecuador and Venezuela) DENOUNCED the ICSID Convention and certain BITs.
2010-2014: HOWEVER, as per UNCTAD (UN Conference on Trade and Development)
- 330 new investment treaties were concluded (more than 2 dozen in Latin America alone)
- 7 new member states in ICSID
Systematic reforms are being considered and implemented, incl. the into. of new transparency provs.
Merits
If jurisdictional hurdles are overcome, q. arises whether the host state has breached its substantive treaty obligations.
ESSENTIAL PROTECTIONS:
- Against expropriation/measures equivalent w/out compensation
- Against arbitrary/discriminatory treatment
- Against a state’s breaches of its investment obligations and undertakings.
RIGHTS (to):
- Be treated fairly and equally
- Full protection and security
- National and MFN treatment
- Free transfer of funds and assets
MERITS OF DISPUTE:
- No expropriation w/out prompt, adequate, and effective compensation
a) Direct
b) Indirect
c) Acts contrary to undertakings and assurances granted to investors may constitute indirect expropriation
d) Purpose of the host state’s measures does not affect their characterisation - ‘Fair and equitable treatment’ and the int’l minimum standard
VIOLATIONS:
a) The State has failed to offer stable and predictable legal framework
b) The State made specific representations to the investor
c) Due Process has been denied to the investor
d) There is absence of transparency in the legal procedure/actions of the State
e) There has been harassment, coercion, abuse of power, or other bad faith conduct by the host state
f) Any of the actions of the state (that) can be labelled as arbitrary, discriminatory, or inconsistent - Full protection and security
- No arbitrary or discriminatory measures impairing the investment
- National and ‘most favoured nation’ (MFN) treatment
- Free transfer of funds related to investments
- Observance of specific investment undertakings
Investor v State Disputes: The Limited Usefulness of Domestic Courts
I. Host State Courts
Reason: Conflict of laws rules point to these courts due to dispute likely to have closest connection to the state in which investment was made.
Investor’s POV: NOT an attractive solution
OBSTACLES:
- Fear of impartiality (factors likely to influence outcome where large amounts of money are involved):
a) independent judiciary cannot be taken for granted
b) executive interventions in court proceedings
c) sense of judicial loyalty to the forum state - Legislation as cause of complaint (cannot offer effective remedy to foreign investors):
a) domestic courts bound to apply local laws even if at odds w/int’l rules protecting the rights of investors
b) relevant int’l treaties may not be part of domestic legal order
c) domestic courts may even be perpetrators of the alleged violation of investor rights
d) executive may ignore decisions in favour of investors
II. Investor State Courts/Third States
Reasons:
- Lack territorial jurisdiction over investments taking place in another state
- Agreement on forum selection for investment disputes in a state other than the host state is unlikely to be accepted by the latter
- EXCEPTION: loan contracts often sub: jurisdiction of the law of a major financial centre
OBSTACLES:
1. Rules of state immunity - host states dealing w/foreign investors will frequently act in the exercise of state immunity (JURE IMPERII) rather than a commercial capacity (JURE GESTIONIS)
2. Even where Doctrine f Restricted Immunity - lawsuits against foreign states arising from investment disputes likely to FAIL.
- Explicit waiver of immunity is possible but difficult to obtain.
3. Act-of-State Doctrine: enjoins courts from examining the legality of official acts of foreign states in their own territory
E.g., U.S. SC: it would not examine the validity of taking of property by a foreign govt. in its territory even if its illegality u/int’l law is alleged.
4. Doctrines of Non-Justiciability
5. Political Questions
6. Lack of a Close Connection to the Local Legal System
FOR THE ABOVE REASONS, alternative methods have been created for the settlement of disputes b/w States and foreign investors. Consist of granting the foreign investor DIRECT ACCESS to arb. w/the host state.
Arbitration and Conciliation
ADVANTAGES:
- For Investor: Access to effective int’l remedy
- For Host State:
a) Improves investment climate
b) Likely to attract more foreign investment
c) Shields itself against other processes, e.g. DP
- In ICSID, Arbitration = Conciliation (equivalent alternatives)
- But, Arb > Conciliation (usage)
- Because, Conciliation leaves final word w/disputing parties.
- Occasionally, Conciliation is a necessary prerequisite for arbitration
- Some DR Clauses offer both by mentioning/referring to ICSID Convention w/out further specification. Choice is with initiating party.
- SPP v Egypt:
IIA: Arbitration
PROS of ARBITRATION:
- More efficient than litigation thru regular courts.
- Offers parties the opportunity to select confident arbitrator w necessary field-expertise
- Pvt. nature assures confidentiality (valued by parties to major economic development projects)
- come u/attack, calls for more transparency - Formal (but Adversarial)
- Final and Binding Outcome
IIA PROCEDURE:
- Mechanism original developed for settlement of Commercial Disputes b/w pvt. parties (main characteristics also present in IIA)
- Distinctive feature of IIA: Application of int’l law rules governing the conduct of the state
- Performs function of judicial review of admin. acts
- States have negotiated ICSID Convention as distinct set of rules for investment disputes, HOWEVER, mechanisms developed primarily for classic commercial disputes b/w 2 pvt. entities are also used for the settlement of investment disputes.
IIA: Conciliation
PROS of CONCILIATION:
- Flexible
- Relatively informal
- Designed to assist the parties in reaching an agreed settlement
CONCILIATION PROCEDURE
- Takes place before a conciliation commission
- Examines facts and prepares a report: suggests non-binding solution
Arbitration Institutions and Regimes
Arb. b/w a host state and foreign investor may take place in a framework of a variety of institutions/rules
If not supported by a particular arb. institution, then ref. to as Ad Hoc arbitration (required arb. agreement regulating a no. of issues):
- Selection of arbitrators
- Applicable law
- Large no. of procedural Qs.
- Standard (e.g. UNCITRAL) Rules may be incorporated into the agreement
INSTITUTIONS and REGIMES:
- ICSID
- ICSID Additional Facility
- Non-ICSID Investment Arbitration:-
i) The International Chamber of Commerce (ICC)
ii) The London Courts of International Arbitration (LCIA)
iii) The UNCITRAL Rules
iv) The Iran-US Claims Tribunal
v) The Permanent Court of Arbitration (PCA)
Institutions and Regimes: ICSID
- Drafted in the framework of the World Bank
- Adopted on 18 March 1965 in Washington D.C. (aka Washington Convention)
- Enforced on 14 October 1966
- Created Int’l Centre for Settlement of Investment Disputes
- Summer 2012, 148 States parties to ICSID Convention
AIM: Promote economic development thru creation of a favourable investment climate
MECHANISM:
- System of dispute settlement designed exclusively for investor-state disputes
- Standard clauses
- Detailed rules of procedure
- Institutional Support
a) Selection of arbitrators
b) Conduct of arbitration proceedings, e.g.:
i) Each tribunal assisted by a legal secretary (staff of ICSID)
ii) Venues for hearings arranged by ICSID
iii) All financial arrangements surrounding the arbitration admin. by ICSID
iv) Secretary General of ICSID - exercises SCREENING POWER over requests for arbitration and will refuse to register a request that is manifestly outside ICSID’s jurisdiction
JURISDICTION:
- Investment dispute of a legal nature b/w a State (party to Convention) and a national of another State (also party to convention)
- Parties to dispute (host state and investor) must have consented ICSID’s jurisdiction (participation in Convention is not sufficient to est. jurisidiction since it is NOT = consent to jurisdiction)
PROCEEDINGS:
- Self-contained, not sub: intervention of any outside bodies
- Domestic courts have NO power to stay, compel, otherwise influence proceedings
- ^Nor any power to set aside/otherwise review ICSID awards
COOPERATION:
1. Proceedings not threatened by non-cooperation of a party -
Failure to act by a party does NOT stall proceedings
2. Watertight system against frustration of proceedings by a recalcitrant party:
a) Arbitrators not appointed by the parties will be appointed by the Centre
b) Decision on whether there is jurisdiction in a particular case lies w Tribunal
c) Non-submission of memorials by a party will NOT affect the award’s binding force and enforceability
AWARDS:
- Final and binding
- Not sub: review, EXCEPT u/narrow conditions provided by the Convention: (Arts. 49-52)
- Non-compliance w an Award by a State = Breach of the Convention = Revival of Right to DP by the investor’s state of nationality (Arts. 53 and 27)
- Own system of enforcement: Awards recognised as final in all states parties to the Convention
- Pecuniary obligations from awards are to be enforced in the same way as final judgments of the local courts in all states parties to the Convention (Art. 54)
