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International investment agreements: key issues and features Thomas Westcott Legal Advisor UNCTAD.

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Presentation on theme: "International investment agreements: key issues and features Thomas Westcott Legal Advisor UNCTAD."— Presentation transcript:

1 International investment agreements: key issues and features Thomas Westcott Legal Advisor UNCTAD

2 Topics for discussion 1. Definitions and scope 2. Admission and establishment 3. Four pillars of protection: −Standards of treatment −Expropriation −Transfers −Settlement of disputes 4. Liberalisation through NT and MFN 5. Transparency

3 Definitions and Scope

4 Matter coverage: define those assets to which the treaty applies. Subject coverage: define those persons and legal entities to which the treaty applies. Geographical coverage: define the territory to which the treaty provisions apply. Temporal coverage: determine the date of entry into force of the IIA and its duration. Scope of an IIA

5 Definition of “investment” Depending on purpose of treaty, two main approaches: A. Open-ended asset-based definition : broad protection Including usually:  Movable and immovable property  Various types of interest in companies  Claims to money and claims under a contract having a financial value  Intellectual Property Rights  Business concessions, including natural resources concessions

6 Example of asset-based definition BIT Ethiopia – Sudan 2000 Art. 1 Definitions For the purpose of this Agreement: a) "Investment" means every kind of asset invested by Investors of one Contracting Party in the territory of the other Contracting Party, in accordance with the laws and regulations of the latter, and in particular, though not exclusively, includes: (i) movable and immovable and any other rights such as mortgages, liens or pledges; (ii) Shares, stocks and debentures of companies or interests in the property of such companies; (iii) claims to money or to other assets or any performance having an economic value, (iv) intellectual and industrial property rights, including rights with respect to copy rights, patents, trade marks, trade names, industrial designs, trade secrets, technical processes and know-how and goodwill; (v) business concessions conferred by Law or under contract, including concessions to search for, cultivate, extract or exploit natural resource; A change in the form in which assets or capitals have been invested or reinvested shall not affect their designation as "Investments" for the purpose of this Agreement.

7 Definition of “investment” B. Alternative definitions:  Closed list definition (finite list)  Enterprise–based definition Focus on the “business enterprise” or the “controlling interests in a business enterprise”. Includes the establishment or acquisition of a business enterprise, as well as a share in a business enterprise, which gives the investor control over the enterprise  Tautological definition Definition of the term "investment" in economic terms. Covering every asset that an investor owns and controls, directly or indirectly, that has the characteristics of an investment. Approach complemented by explicit exclusion of several kind of assets

8 Investment - key issues  Claims of money: will all claims of money be covered? Even those claims of money not related to FDI? What about payments derived from commercial transactions or from the sale of goods and services?  Debt instruments: will all debt instruments be covered? What about those debt instruments with short-term maturity? Should there be a minimum maturity term specified?  Intellectual property rights (IPRs): should a reference to a legal framework be included? Would only those IPRs provided in accordance to domestic legislation be considered an investment? Those IPRs existing pursuant international agreements?  State Contracts: need for special treatment in definitions or substantive parts of the agreement.  Exclusions: Public debt? Property acquired not for an economic activity (i.e. leisure houses)? Short term debt instruments?

9 Definition of “investor” A. Natural persons  Criteria of nationality  Criteria of domicile or residence

10 Natural persons - example Nationality criterion: BIT China - Germany, 2003, Art. 1 Definitions 2. the term "investor" means (a) in respect of the Federal Republic of Germany: Germans within the meaning of the Basic Law for the Federal Republic of Germany, (…) (b) in respect of the People’s Republic of China: natural persons who have the nationality of the People’s Republic of China in accordance with its laws, (…) BIT Uganda – Mozambique, Art. 1 Definitions 4. "investor" of a Contracting Party shall mean: a) any natural person who is a national of that Contracting Party in accordance with its law… Domicile or residence criterion: BIT Canada -Argentina, 1991, Article 1- Definitions b) The term "investor" means (i) any natural person possessing the citizenship of or permanently residing in a Contracting Party in accordance with its laws, (…) who makes the investment; (…).

11 Definitions - investor B. Legal entities  Criteria to determine the nationality of the legal entity/investor:  Country of organization or incorporation  Country of seat  Ownership and control  Denial of benefits clause:  Denial of benefits clause: (deny treaty protection to those companies that are controlled by investors of a non-Party (particularly with which the host country does not maintain diplomatic relations) and/or that have no substantial business activities in the territory of the party under whose laws it is constituted)

12 Legal entities – example 1 Criterion of the “seat”: BIT China - Germany, 2003 Article 1: Definition 2. the term "investor" means (a) in respect of the Federal Republic of Germany: any juridical person as well as any commercial or other company or association with or without legal personality having its seat in the territory of the Federal Republic of Germany, irrespective of whether or not its activities are directed at profit; (…).

13 Legal entities – example 2 Criterion of ownership or control: Andean Community - Decision 291 Regime for the Common Treatment of Foreign Capital and Trademarks, Patents, Licensing Agreements and Royalties Article 1: … Foreign Enterprise: an enterprise incorporated or established in the recipient country, in which national investors own less than fifty one percent of the equity capital or, if more than that, in the judgment of the competent national agency that percentage is not reflected in the technical, financial, administrative and commercial management of the enterprise.

14 Legal entities – example 3 Example of combined criteria: BIT China - Germany, 2003 Article 1: Definition 2. the term "investor" means (b) in respect of the People’s Republic of China: economic entities, including companies, corporations, associations, partnerships and other organizations, incorporated and constituted under the laws and regulations of and with their seats in the People’s Republic of China, irrespective of whether or not for profit and whether their liabilities are limited or not.

15 Legal entity – example 4 Extent of treaty protection: US BIT Model, 2004 Article 17: Denial of Benefits 2. A Party may deny the benefits of this Treaty to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of the other Party and investors of a non-Party, or of the denying Party, own or control the enterprise.

16 Admission and Establishment

17 Admission of foreign investment  Traditionally, right of States to control and limit addmission. Recent trend towards States deciding to limit this right.  Two approaches in IIAs:  Admission model: entry in accordance with laws and regulations of the host country: NO LIBERALIZATION  Pre-establishment model: right of establishment. National treatment at the pre-establishment stage (approach of western hemisphere, Japan, Korea): LIBERALIZATION : removal of barriers to access

18 Admission model  Host country discretion: laws and regulations relating to entry may change  Once admitted, foreign investment is granted NT and MFN  No exceptions in the treaty: no need.

19 Australia – India BIT 1. Each Contracting Party shall encourage and promote favourable conditions for investors of the other Contracting Party to make investments in its territory. Each Contracting Party shall admit such investments in accordance with its laws and investment policies applicable from time to time. Tanzania – Netherlands BIT (2001) Art 2 Promotion and Protection of Investments “Each Contracting Party shall within the framework of its laws and regulations, promote economic cooperation through the protection in its territory of investments of investors of the other Contracting party. Subject to its right to exercise powers conferred by its laws or regulations, each Contracting Party shall admit such investments.” Examples of admission model:

20 Pre-establishment model  NT and MFN at all stages of the investment, including at the pre-establishment stage: ‘establishment, acquisition and expansion’.  Lists of exceptions: all countries have closed sectors or non conforming measures.  Mostly negative lists. Very few exceptions (TAFTA)  The commitment is made in the Treaty, the national laws must be in conformity with Treaty obligations.

21 Establishment of investment Each contracting Party shall permit establishment of a new business enterprise or acquisition of an existing business enterprise or a share of such enterprise by investors or prospective investors of the other Contracting Party on a basis no less favorable than that which, in like circumstances, it permits such acquisition or establishment by: (a) investors or prospective investors of any third state; (b) its own investors or prospective investors. Treatment of Established Investment 1. Each Contracting Party shall grant to investments and to returns of investors of the other Contracting Party treatment no less favourable than that which, in like circumstances, it grants to investments and returns of: (a) investors of any third State; (b) its own investors. Each Contracting Party shall grant investors of the other Contracting Party, as regards the enjoyment, use, management, conduct, operation, expansion, and sale or other disposition of their investments or returns, treatment no less favourable than that which, in like circumstances, it grants to: (a) investors of any third State; (b) its own investors. Pre-establishment NT and MFN model Canada-Lebanon BIT

22 Fair and Equitable Treatment

23 1. Fair and Equitable Treatment  Absolute standard (not relative)  3 approaches: Stand alone FETStand alone FET FET in accordance with the principles of international lawFET in accordance with the principles of international law FET combined with MFN/NTFET combined with MFN/NT

24 Dutch model BIT “1. Each Contracting Party shall ensure fair and equitable treatment of the investments of nationals of the other Contracting Party and shall not impair, by unreasonable or discriminatory measures, the operation, management, maintenance, use, enjoyment or disposal thereof by those nationals. Each Contracting Party shall accord to such investments full physical security and protection. …” Kenya – United Kingdom BIT (1999), Art. 2 Promotion and Protection of Investment “(2) Investments of nationals or companies of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party. Neither Contracting Party shall in any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or disposal of investments in its territory of nationals or companies of the other Contracting Party” Fair and Equitable Treatment: examples

25 Uganda – Eritrea BIT (2001), Article 3 Treatment of Investment (1). Each Contracting Party shall in its territory accord to investments made by investors of the other Contracting Party fair and equitable treatment which in no case shall be less favourable than that accorded to its own investors or to investors of any third state, whichever is the more favourable from the point of view of the investors. (2) Each Contracting Party shall in its territory accord investors of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investment, fair and equitable treatment which in no case shall be less favourable than that accorded to its own investors or to investors of any third State, whichever of these standards is the more favourable from the point of view of the investor.

26 2. International Minimum Standard of Treatment Content of the clause in US and Canadian treaties  Clarification of the standard  Explicit reference to international customary law (ICL) Relationship with other standards  Explicit clarification that the violation of any other obligation of the agreement does not entail the violation of the minimum standard of treatment – Same issue for State Contracts.

27 1. Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. 2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights. The obligation in paragraph 1 to provide: (a)“fair and equitable treatment” includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and (b)“full protection and security” requires each Party to provide the level of police protection required under customary international law. 3. A determination that there has been a breach of another provision of this Treaty, or of a separate international agreement, does not establish that there has been a breach of this Article. Fair and Equitable Treatment US model BIT(2004)

28 Expropriation

29 Expropriation protection Content of the clause Several categories of takings: Several categories of takings: expropriations,expropriations, nationalizations,nationalizations, direct or indirectdirect or indirect Regulatory takings: measures tantamount to expropriationRegulatory takings: measures tantamount to expropriation Creeping expropriationsCreeping expropriations  Conditions for the expropriation to be lawful:  Public purpose  Non-discrimination  Due process of law  Compensations

30 Possible standards of compensation:   The Hull formula (prompt, adequate, effective)   Appropriate compensation   Different valuation methods: book-value method, discounted cash-flow method,.. Expropriation and Regulatory Takings: Necessary clarification of the obligation   General exception: public health and safety.   The right to regulate for public purpose. Expropriation - compensation

31 Expropriation protection: Uganda – Eritrea BIT (2001) Article 4 Expropriation (1) Investments of each Contracting Party shall not be nationalised, expropriated or subjected to measures having effect equivalent to nationalisation or expropriation (hereinafter referred to as ‘’expropriation’’) in the territory of the other Contracting Party except for expropriations made in the public interest, on a basis of non-discrimination, carried out under due process of law, and against prompt, adequate and effective compensation. (2) Such compensation shall amount to the fair market value of the investment expropriated immediately before the expropriation or impending expropriation became known in such a way as to affect the value of the investment. The fair market value shall include but not exclusively the net asset value thereof as certified by an independent firm of auditors. (3) Compensation shall be paid promptly and include interest at a commercial rate established on a market basis from the date of expropriation until the date of payment.

32 Uganda – Eritrea BIT (2001) cont. (4) The expropriated investor shall have a right to prompt review under the law of the Contracting Party making the expropriation, by a judicial or other competent and independent authority of the Contracting Party, of its case, of the value of investment, and of the payment of compensation, in accordance with the principles set out in paragraph 1 of this Article. (5) When a Contracting Party expropriates the assets of a Company or an enterprise in its territory, which is incorporated or constituted under its law, and in which investors of other Contracting Party have an investment, including shareholding, the provisions of this Article shall apply to ensure prompt, adequate and effective compensation for those investors for any impairment or diminishment of the fair market value of such investment resulting from the expropriation.

33 Transfers

34 Free Transfer of Funds  Two types of transfers: inward and outward.  Exceptions  BOP safeguards: temporary derogations  Transitional provisions: maintaining existing restrictions.

35 South Africa – Mauritius BIT (1998) 1. Each Contracting Party shall allow investors of the other Contracting Party the free transfer of payment relating to their investments and returns, which shall include in particular, though not exclusively - (a) profits, capital gains, dividends, royalties, interest, and other current income accruing from any investment; (b) the proceeds of the total or partial liquidation of any investment; (c) repayments made pursuant to a loan agreement in connection with investments; (d) licence fees in connection to matters in Article 1(1)(b); (e) payment in respect of technical assistance, technical services and management fees; (f) payments in connection with contracting projects; (g) earnings of nationals of the other Contracting Party who work in connection with an investment in the territory of the Contracting Party; (h) compensation paid pursuant to the provisions of Articles 4 and All transfers shall be effected without undue delay in any convertible currency at the market rate of exchange applicable on the date of transfer. In the absence of a market for foreign exchange, the rate to be used will be the most recent exchange rate applied to inward investments or the most recent exchange rate for conversion of currencies into Special Drawing Rights, whichever is the more favourable to the investor. Free Transfer of Funds

36 Dispute Settlement

37 Two types of Dispute Settlement mechanisms Two types of Dispute Settlement mechanisms State-to-State: applies only between State parties to the Agreement. State-to-State: applies only between State parties to the Agreement. (like the DSU in the WTO, the ASEAN DSB) (like the DSU in the WTO, the ASEAN DSB) Investor-to-State: allows private investors to submit claims against a host State to international arbitration Investor-to-State: allows private investors to submit claims against a host State to international arbitration (eg. NAFTA and BITs) (eg. NAFTA and BITs) Most IIAs contain both types of mechanisms Most IIAs contain both types of mechanisms

38 Investor-to-State mechanism Investor-to-State mechanism Consultations and negotiations (time-period) Most IIAs do not require exhaustion of local remedies In some, resort to local courts precludes subsequent submission to international arbitration: the fork in the road. Direct resort to international arbitration (institutional or ad hoc):  ICSID Convention  Ad hoc arbitration following UNCITRAL Arbitration Rules

39 Investor-to-State mechanism Investor-to-State mechanism Constitution of tribunal ( as per arbitral rules ) Applicable law: IIA’s provisions; law of the host-State; investment contract, rules of international law.  ICSID Convention (Article 42): absent agreement between parties, the tribunal shall apply the law of the host State and the applicable rules of international law. Arbitral awards: final and binding, but require exequatur (except in the case of ICSID awards)  ICSID Members shall recognize and enforce the awards in their territory as if they were final judgements of a State court

40 NT and MFN

41 Non discrimination: NT and MFN  National treatment: grant foreign investors, in like circumstances, treatment no less favourable than the treatment of nationals.  Most-favoured-nation treatment: treat all foreign investors alike. No discrimination among foreign investors on the basis of nationality.

42 National Treatment 1. The application “de jure” and “de facto” of the standard  Most agreements do not specifically limit the scope of the national treatment standard only to a “de jure” test. Thus, jurisprudence has found that the standard applies both to “de jure” and “de facto” discrimination.  Approach may have a positive effect in fostering discipline in the domestic application of legislation  However, it is important to examine administrative practice and existing legislation that may have a “de facto” discriminatory impact on foreign investment.

43 2. Treatment “in like circumstances” Comparison requires a comparator. 3. Best “in state treatment”  When negotiating with countries having federal systems of government, a situation may arise when one subnational unit discriminates among other subnational units from the same country.  Important to ensure that the National Treatment standard applies with respect to a regional level of government, treatment no less favourable than the most favorable treatment accorded, in like circumstances, by that regional level of government to investments or investors of the Party from which it forms a part.  Important to ensure that the National Treatment standard applies with respect to a regional level of government, treatment no less favourable than the most favorable treatment accorded, in like circumstances, by that regional level of government to investments or investors of the Party from which it forms a part. National Treatment

44 4. Exceptions and reservations to national treatment General exceptions based on reasons of public health, order and morals, and national security. Such exceptions are present in most regional and multilateral investment agreements, and also in a number of BITs. Subject-specific exceptions which exempt specific issues from national treatment, such as intellectual property, taxation provisions in bilateral tax treaties, prudential measures in financial services or temporary macroeconomic safeguards. Country-specific exceptions whereby a contracting party reserves the right to differentiate between domestic and foreign investors under its laws and regulations – in particular, those related to specific industries or activities – for reasons of national economic and social policy. Country-specific exceptions may overlap with subject-specific exceptions. National Treatment

45 MFN Treatment Additional specific issues:  The Maffezzini jurisprudence and subsequent cases  Free rider issue: is there a free-rider problem in investment policy?  REIO and other exceptions: taxation, other investment agreements.

46 Other Issues Transparency

47 Other issues Other issues Governmental measures: home country measures, host country operational measures (limitation to operations and performance requirements), incentives Entry and sejourn of key foreign personel Transparency Environment and labour Implementation issues: ratification, entry into force, enactment/implementation of treaty obligations into national legislation, management of investment disputes

48 Transparency in IIAs 1. Identify the actors of transparency obligations: Host country Host country Home country Home country Investor Investor 2. Content of the transparency obligation: Degree of intrusiveness of transparency measures into the national legal system. Degree of intrusiveness of transparency measures into the national legal system.

49 Transparency 3. Modalities for the implementation of transparency obligations: Consultation and exchange of informationConsultation and exchange of information Making information publicly availableMaking information publicly available Answering request for informationAnswering request for information Notification requirementsNotification requirements Modalities can be voluntarily, binding, reciprocal, unilateral, ad hoc or be part of a on-going processModalities can be voluntarily, binding, reciprocal, unilateral, ad hoc or be part of a on-going process

50 Transparency 4. Timing- Timely implementation of transparency 5. Exceptions and safeguards: National security and defense National security and defense Legislative or judiciary process Legislative or judiciary process Confidentiality of business information Confidentiality of business information 6. Recent developments in IIAs: Transparency in the negotiation process Transparency in the negotiation process Transparency in dispute settlement procedures Transparency in dispute settlement procedures

51 51 UNCTAD’s IIA work programme Research and policy analysis:  1 st Series on issues in IIAs (28 booklets): completed  2 nd Series on international investment policies for development: on-going E-tools:  BIT database (2,000 texts available)  Country list of BITs  Compendium of international investment instruments (selection of relevant instruments and model agreements)  Database of investment dispute cases  Network of IIA Experts to exchange information and experiences (600 members)

52 52 UNCTAD’s IIA work programme Technical assistance: The distance-learning course on key issues in IIAs (5 modules) in 5 languages The distance-learning course on key issues in IIAs (5 modules) in 5 languages The regional training sessions for IIA negotiators (including a negotiation skills workshop) The regional training sessions for IIA negotiators (including a negotiation skills workshop) The advanced training courses on managing investment disputes The advanced training courses on managing investment disputes National and regional seminars on IIAs (tailor-made at the request of countries or regional organizations) National and regional seminars on IIAs (tailor-made at the request of countries or regional organizations) Ad hoc advisory services Ad hoc advisory services Facilitation of BIT negotiations and BIT signing ceremonies Facilitation of BIT negotiations and BIT signing ceremonies


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