Presentation on theme: "International investment agreements: key issues and features"— Presentation transcript:
1 International investment agreements: key issues and features Thomas WestcottLegal AdvisorUNCTAD
2 Topics for discussion Definitions and scope Admission and establishmentFour pillars of protection:Standards of treatmentExpropriationTransfersSettlement of disputesLiberalisation through NT and MFNTransparency
4 Scope of an IIAMatter 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.
5 Definition of “investment” Depending on purpose of treaty, two main approaches:A. Open-ended asset-based definition : broad protectionIncluding usually:Movable and immovable propertyVarious types of interest in companiesClaims to money and claims under a contract having a financial valueIntellectual Property RightsBusiness concessions, including natural resources concessionsThis broad conceptualization of "investment“ is typically complemented by an illustrative list of assets that are included within the definition. Such listscommonly include five categories of assets: movable and immovable property, interests in companies – including both portfolio and direct investment – contractual rights, intellectual property and business concessions.
6 Example of asset-based definition BIT Ethiopia – Sudan Art. 1 DefinitionsFor 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 definitionFocus 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 enterpriseTautological definitionDefinition 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 assetsCanada and Japan use asset-based definition.
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?Among the particular assets that arbitration tribunals have considered to be "investments" for the purposes of the ICSID Convention are shares in companies, public concession agreements, corporations organized under domestic law, loans, promissory notes, construction contracts, money spent in the renovation and development of a hotel, and the setting up of a law firm.So, what are the key issues when thinking about the types of assets that may fall within the definition?Ok - question to participants - so having defined investment, what do you think another key definition might be? We’ve seen what “things” might be covered by an investment treaty. What else?[next slide - Investor]
9 Definition of “investor” A. Natural personsCriteria of nationalityCriteria of domicile or residenceOne of the issues addressed by various arbitration tribunals has been the kind of link that a particular investor – either a natural or a legal person – should have with the countries that are parties to the applicable IIA in order to justify the protection under the agreement. With respect to natural persons, most IIAs have traditionally protected investors who have thenationality of one contracting party in the territory of the other contracting party. Thus, the typical definition of a national of a party used in most treaties is a natural person recognized by that party’s domestic law as a national or a citizen.The relevance of this question has been particularly important for cases submitted to ICSID, as Article 25 (1) of the ICSID Convention explicitly provides, inter alia, that the "[…] jurisdiction of the Centre shall extend only to those legal disputes arising directly out of an investment, between a Contracting State […] and a national of another Contracting State […]" (emphasis added). This means that the investor’s status under ICSID proceedings is subject to a positive and a negative nationality requirement. The investor not only has to be a national of a contracting state, but also must not be a national of the host country contracting party. Furthermore, Article 25 (2) (a) of the ICSID Convention provides that this nationality requirement must be met at two different moments: first, on the date on which the parties consented to submit the dispute to arbitration, and, second, on the date on which therequest for arbitration is registered at the Centre by the Secretary-General.Issue: Inconsistency between IIA and ICSID Article 25Under Article 25, someone with dual nationality cannot bring a claim to ICSID. They must submit their claim to another forum. This will be problematic where the IIA only allows claims to be submitted to ICSID.Same for permanent residents. Not allowed under Article 25 unless investor’s nationality is of the other contracting party.
10 Natural persons - example Nationality criterion:BIT China - Germany, 2003, Art. 1 Definitions2. 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 Definitions4. "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- Definitionsb) The term "investor" means (i) any natural person possessing thecitizenship of or permanently residing in a Contracting Party in accordance with its laws, (…) who makes the investment; (…).
11 Definitions - investor B. Legal entitiesCriteria to determine the nationality of the legal entity/investor:Country of organization or incorporationCountry of seatOwnership and controlDenial 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)‘Seat’ or principal place of business.
12 Legal entities – example 1 Criterion of the “seat”:BIT China - Germany, 2003Article 1: Definition2. 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 theCommon Treatment of Foreign Capital and Trademarks,Patents, Licensing Agreements and RoyaltiesArticle 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, 2003Article 1: Definition2. the term "investor" means (b) in respect of the People’sRepublic 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, 2004Article 17: Denial of Benefits2. 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.
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 LIBERALIZATIONPre-establishment model: right of establishment. National treatment at the pre-establishment stage (approach of western hemisphere, Japan, Korea): LIBERALIZATION : removal of barriers to access[draw diagram of investment timeline to illustrate pre and post]Under customary international law, countries have the right to regulate or prohibit the admission of foreign investors – and consequently, of their investments – into theirterritories. Traditionally, most countries have refrained from granting foreign nationals and companies an unrestricted right to invest in their economies. Most IIAs protect only investment that has been admitted into, and established in, the territory of the host country in accordance with the latter’s domestic legislation (UNCTAD 1999a).
18 Admission modelHost country discretion: laws and regulations relating to entry may changeOnce admitted, foreign investment is granted NT and MFNNo exceptions in the treaty: no need.Need to explain here NT and MFN. ASK PARTICPANTS – DISCUSSOverwhelming majority of BITs admit investments of the other Party only if such investments conform to the host country’s legislation.Under this model a country can apply any admission or screening mechanism for foreign investment that it may have in place.In other words, the country determines the conditions on which foreign investment is allowed into the country.
19 Examples of admission model: 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.”
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.Most IIAs, in particular BITs, do not include pre-establishment rights. And there has not been much ISDS jurisprudence addressing pre-establishment.The only issue to have been raised is whether pre-investment expenditures undertaken by a potential investor qualify as an "investment".This has been one of the central questions addressed by tribunals in the three most relevant cases on this matter, namelyMihaly International Corporation v. Sri LankaZhinvali Development Limited v. GeorgiaWilliam Nagel v. Czech Republic.
21 Pre-establishment NT and MFN model Canada-Lebanon BIT 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.
23 1. Fair and Equitable Treatment Absolute standard (not relative)3 approaches:Stand alone FETFET in accordance with the principles of international lawFET combined with MFN/NTExplain difference between relative standard (NT MFN) and absolute standard.
24 Fair and Equitable Treatment: examples 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”
25 Fair and Equitable Treatment: examples 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 treatiesClarification of the standardExplicit reference to international customary law (ICL)Relationship with other standardsExplicit 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 Fair and Equitable Treatment US model BIT(2004) 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 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. Now being used by US, Canada, Mexico with all their treaty partners.Also has been used by Japan, Chile, Australia etc.
29 Expropriation protection Content of the clauseSeveral categories of takings:expropriations,nationalizations,direct or indirectRegulatory takings: measures tantamount to expropriationCreeping expropriationsConditions for the expropriation to be lawful:Public purposeNon-discriminationDue process of lawCompensations
30 Expropriation - compensation Possible standards of compensation:The Hull formula (prompt, adequate, effective)Appropriate compensationDifferent valuation methods: book-value method, discounted cash-flow method,..Expropriation and Regulatory Takings: Necessary clarification of the obligationGeneral exception: public health and safety.The right to regulate for public purpose.
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.
34 Free Transfer of FundsTwo types of transfers: inward and outward.ExceptionsBOP safeguards: temporary derogationsTransitional provisions: maintaining existing restrictions.
35 Free Transfer of Funds 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 5.2. 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.
37 Two types of Dispute Settlement mechanisms State-to-State: applies only between State parties to the Agreement.(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(eg. NAFTA and BITs)Most IIAs contain both types of mechanismsDispute settlement provisions are necessary to guarantee fair and impartial resolution of disputes and to avoid disruption of investment flows due to an accumulation of disputes.Two broad models of dispute settlement mechanisms exist in international investment agreements:State-to-State dispute resolution: available only among the States party to an agreement (DSU in WTO)Investor-State mechanism: which allows private investors to submit claims against the host country to international arbitration (such as in NAFTA and many bilateral investment treaties).Besides, the fact that an investor-State mechanism would involve a fundamental shift in the nature of dispute settlement in the WTO (raising, for example, the question of why trade disputes should not also involve other non-governmental actors), many Members have serious concerns and reservations about the idea. Investor-to-State disputes are probably one of the most contentious aspects of NAFTA - with several high profile cases seemingly pitting the rights of governments to regulate in the public interest against the rights of private investors to seek protection from “creeping expropriation”.Another likely source of contention is that investor-State mechanisms typically envisage an investor taking a State to international tribunals, but do not allow the reverse.The Doha mandate only seeks clarification of dispute settlement among Members, which implies that the DSU would apply to an eventual investment agreement. Even without a multilateral agreement, future disputes involving FDI-related WTO provisions will be resolved under the integrated dispute settlement of the WTO.Finally, several Members have pointed out that consideration should be given to the financial cost and human resources involved in using the system, particularly for developing countries.
38 Investor-to-State mechanism Consultations and negotiations (time-period)Most IIAs do not require exhaustion of local remediesIn 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 ConventionAd hoc arbitration following UNCITRAL Arbitration RulesTotal of 290 known treaty-based cases (as at first half of 2008).62% of known claims have gone through ICSID.28% go to UNCITRAL.International Chamber of CommerceStockholm Chamber of CommerceOverall 42 cases have been decided in favour of the State,40 cases decided in favour of the investor,37 cases settled amicably, and154 pending cases.For 17 cases that were decided, the decision is not in the public domain.
39 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
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 Treatment1. The application “de jure” and “de facto” of the standardMost 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 legislationHowever, it is important to examine administrative practice and existing legislation that may have a “de facto” discriminatory impact on foreign investment.
43 National Treatment 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.
44 National Treatment4. Exceptions and reservations to national treatmentGeneral 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.
45 MFN Treatment Additional specific issues: The Maffezzini jurisprudence and subsequent casesFree rider issue: is there a free-rider problem in investment policy?REIO and other exceptions: taxation, other investment agreements.
47 Other issuesGovernmental measures: home country measures, host country operational measures (limitation to operations and performance requirements), incentivesEntry and sejourn of key foreign personelTransparencyEnvironment and labourImplementation issues: ratification, entry into force, enactment/implementation of treaty obligations into national legislation, management of investment disputes
48 Transparency in IIAs Identify the actors of transparency obligations: Host countryHome countryInvestorContent of the transparency obligation:Degree of intrusiveness of transparency measures into the national legal system.
49 TransparencyModalities for the implementation of transparency obligations:Consultation and exchange of informationMaking information publicly availableAnswering request for informationNotification requirementsModalities can be voluntarily, binding, reciprocal, unilateral, ad hoc or be part of a on-going process
50 Transparency Timing- Timely implementation of transparency Exceptions and safeguards:National security and defenseLegislative or judiciary processConfidentiality of business informationRecent developments in IIAs:Transparency in the negotiation processTransparency in dispute settlement procedures
51 UNCTAD’s IIA work programme Research and policy analysis:1st Series on issues in IIAs (28 booklets): completed2nd Series on international investment policies for development: on-goingE-tools:BIT database (2,000 texts available)Country list of BITsCompendium of international investment instruments (selection of relevant instruments and model agreements)Database of investment dispute casesNetwork of IIA Experts to exchange information and experiences (600 members)51
52 UNCTAD’s IIA work programme Technical assistance:The distance-learning course on key issues in IIAs (5 modules) in 5 languagesThe regional training sessions for IIA negotiators (including a negotiation skills workshop)The advanced training courses on managing investment disputesNational and regional seminars on IIAs (tailor-made at the request of countries or regional organizations)Ad hoc advisory servicesFacilitation of BIT negotiations and BIT signing ceremonies52