Concept of Fair and Equitable Treatment in Investment Treaties - Essay Example

? Critically analyse the concept of "fair and equitable treatment” in investment treaties, taking into account recent investment treaty practice and arbitration cases. LIST OF CASES INTERNATIONAL CENTER FOR SETTLEMENT OF INVESTMENT DISPUTS (ICSID) Cases Bayindir Insaat Turizm Ticaret v. Sanayi A.S. v. Islamic Republic of Pakistan, measures affecting FET provisions, ICSID Case No. ARB/03/29, (Nov .14, 2005). Biwater Gauff (Tanzania) Ltd. V. United Republic of Tanzania, Violation of FET provisions, ICSID Case No. ARB/05/22 (Adopted April 18 2006). CMS Gas Transmission Company v. Republic of Argentina, Violation of FET provisions, ICSID Case No. ARB/01/8 (Adopted May 25 2005). Eureko B.V. v. Republic of Poland Eureko B.V. v. Republic of Poland, violation of FET provisions, ICSID Case No. ARB/02/17, (Adopted August 19 2005). Jan de Nul N.V. and Dredging International N.V. v. Arab Republic of Egypt, violation of FET principles, ICSID Case No. ARB/04/13) (Decision on Jurisdiction, June 16, 2006). LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. Argentine Republic, ICSID Case No. ARB/. 02/1, Emphasis on the obligation of transparency (Decision on Liability, Oct 3, 2006). Loewen Group, Inc. and Raymond L. Loewen v. United States of America, violation of FET provisions, ICSID Case No. ARB (AF)/98/3, (Awarded on Award of June 26, 2003). Metalpar S.A. and Buen Aire S.A. v. Republic of Argentina, violation of FET provisions, ICSID Case No. ARB/03/5, (Awarded on April 27, 2006). MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, violation of FET provisions, ICSID Case No. ARB/07/27, (Awarded on Mar 21, 2007). Parkerings-Compagniet AS v. Republic of Lithuania, violation of FET provisions, ICSID Arbitration Case No. ARB/05/8, (Awarded on September 11, 2007). PSEG Global Inc. and Konya Ilgin Elektrik Uretim v. Ticaret Limited Sirketi v. Republic of Turkey, obligation on transparency on FET provisions, ICSID Case No. ARB/02/5, (Awarded on January 19, 2007). Siemens A.G. v The Argentine Republic, violation of FET provisions, ICSID Case No. ARB/02/8 (Awarded on August 3, 2004). Sempra Energy International v. Argentine Republic, violation of FET provisions, ICSID Case No. ARB/02, (Decision on Jurisdiction of May 11, 2005). Waste Management, Inc. v. United Mexican States, rule of law under FET provisions, ICSID Case No. ARB (AF)/00/3, (Awarded on June 2, 2007). NAFTA –UNCITRAL Cases Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v. Republic of Estonia, violation of FET provisions, Case No. ARB/99/2, (Awarded on June 25, 2001). S.D. Myers, Inc. v. The Government of Canada, Chapter 11-NAFTA ARBITRAL TRIBUNAL/ UNCITRAL RULES, (Awarded on November 26, 2002). UNCITRAL (UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW GAMI Investments, Inc. v. The United Mexican States, UNCITRAL, (Final Award November 12, 2004). International Thunderbird Gaming Corporation v The United Mexican States, violation of FET principles ,UNICITRAL ( NAFTA), ( Final Award January 26,2006). Occidental Exploration and Production Co. v. Republic of Ecuador, violation of FET provisions, UN 3467, (Final Award July 1, 2004). Pope & Talbot v. Canada, violation of FET provisions, UNCITRAL (NAFTA) (Award on Merits of Phase 2 of April 10, 2001). Ronald S. Lauder v. Czech Republic, violation of FET provisions, UNCITRAL, (Final Award of 3 September 2001). Saluka Investments BV v. The Czech Republic, violation of FET Provisions, UNCITRAL Rules; IIC 211 (2006); 4P 116/2006 (Award on September 7, 2006). INTERNATIONAL COURT OF JUSTICE (ICJ) Elettronica Sicula S.p.A. (ELSI) (US v. Italy), violation of FET provisions, ICJ Rep.15, 94-95, 28, ILM 1109 (1989), (Final Award n July 20, 1989). List of Treaties and Conventions “Convention on the Protection of Foreign Property of the Organisation for Economic Cooperation and Development (OECD).” (Adopted 1995 entered into force 1997). “North American Free Trade Agreement (NAFTA)” (Entered in to force from 1 January 1994). Abs /Shawcross Draft of 1967 (adopted 1959 entered into force 1967). Bilateral Investment Treaties between countries (BIT) (entered on various dates). Energy Charter Treaty ( ECT) (adopted in June 1991 entered into force on April 1998) Free Trade Agreements (FTA) between countries ( entered on various dates) Friendship ;commerce and navigation treaties (FCN) ( entered on various dates) International Trade Organisation ( Havana Charter) (entered into force 1967 24 March 1948) Multilateral Agreement on Investment ( MIA) ( entered on various dates) Multilateral Investment Guarantee Agency ( MIGA) ( entered on various dates) Promotion and Protection of Investments of “the Association of the Southeast Asian Nations (ASEAN). “( entered on 8th August 1967) Introduction The global legal frame work of administering foreign investment contains of a large network of international investment agreements, which are referred as “IIAs” appended by the common rules of international law. IIAs can be referred as a major public international law mechanism administering the fortification and encouragement of foreign investment. IIAs are having analogues content and structures of an investment agreement, but they differ in many significant aspects. Majority of the provisions in IIAs include analogues treaty-based norms for protection and promotion of foreign investment, including an investor-state arbitration provision that permits foreign investors to implement these norms against host countries. The contents of IIAs offer foreign investors with a dynamic and powerful method of international treaty enforcement1. The emergence of international investment treaties which has acted a major role in regulating and in addressing investor –state disputes into the province of international arbitration. Usually, investment treaties will offer guarantees like foreign –owned investments or assets will not be attached without adequate compensation, treatment to investors will be fair, equitable and without any discrimination and that the respective governments will honour the specific obligations committed with regard to foreign investments. This is mainly aimed to offer a predictable and stable environment for foreign investors and to minimise investment risks. Significantly, investment treaties will permit for settlement of disputes between host government and investors directly through international arbitrations without accessing to diplomatic shields by the investor’s home governments. Thus, of late, investment disputes have come to the vanguard of the international investment law.2 This research paper is intended at recognising the various elements that form the commitments of Fair and equity treatment (FET) under various international investment agreements and tries to analyse the FET in various contexts of FET with the decided arbitral awards on the subject in an exhaustive manner. Sources of International Investment Law Due to globalisation, the flow investments across nations have been liberalised. Due to that, there has been a considerable increase in investment disputes between nations. As a result, there do exist many international investments instruments and activities in the gamut of investment. Some of them are the OECD, the United Nations (UN), the MIGA, BITs, FTAs, and the WTO which has their rules as regards to international investments3. Investment Contracts Private foreign capital investment in a country can be arranged by contractual arrangements in three principal methods; Contracts between foreign private investors and states. Contracts between foreign private investors and nationals (including companies) of the receiving country which are administered by the rules of private international law. Inter-country contracts – a treaty administered by canons of public international law. A wide range of commercial activities is governed by contracts between foreign investors and respective states. A government may, under a contract, may accord permission to foreign investors the privilege to exploit its natural resources either by producing or prospecting for mining or mineral oil and exporting those minerals. Such contracts may for the setting of manufacturing units by foreign companies or investors or may set up manufacturing units with joint collaboration with state or a foreign company may use its trademarks and patents in the host countries and to the joint venture with the state owned companies in the host nations. It is usual business practice to pump in finance by way of loans and capital in the host nations secured by contracts where repayment of capital and payment of interest is guaranteed by a host nation. Investment contracts may achieve flow of a large amount of private foreign capital in any one of the major economic activities of the host nation, and it may kindle the economic development of the contracting state4. Admission and Entry The term admission means the privilege of foreign investors and investments to flow into a host nation. Entry or admission rights without equivalent rights of establishment may be enough for economic activities that simply need a short-run presence of foreign investors in the host nation like transferring the investment fund to the host nation or to negotiate a contract .However , if the economic activity in question needs periodical interaction between the foreign investor and the host state economy, then such foreign investor may be needed to corroborate a permanent economic presence in the host nation. In such scenario, the foreign investor may have also the right to establishment in the host nation5. Fair and Equitable Treatment The term Fair and Equitable treatment was first conceived in the 1959 Draft Convention on Investment Abroad (Abs –Shawcross Draft Convention6). The 1967 Draft OECD Convention included the provision of minimum norms of treatment as follows: “Each Party shall at all phase to make sure fair and equitable treatment to the assets of the citizens of the other Parties.” Fair and equal treatment (FET) clause under international investment treaty offers protection that will make the host state with offering compensation if its provisions are violated. Of late, non-observance with the provisions of FET clauses is the most alleged infringement in arbitrations under international investment contracts along with the protection against expropriation. The clause FET can be found in various international investment agreements like International Trade Organisation ( Havana Charter) Economic Agreement of Bogota. Friendship ;commerce and navigation treaties (FCN) Abs /Shawcross Draft of 1967 “Convention on the Protection of Foreign Property of the Organisation for Economic Cooperation and Development (OECD).” U.N Code of Conduct on Transnational Corporations 1992 World Bank Guidelines “1994 Colonia and Buenos Aires Investments Protocols of the Mercado Comun Del Sur (Mercosur).” Multilateral Agreement on Investment ( MIA) Multilateral Investment Guarantee Agency ( MIGA) Promotion and Protection of Investments of “the Association of the Southeast Asian Nations (ASEAN). “ North American Free Trade Agreements ( NAFTA) Energy Charter Treaty ( ECT) Bilateral Investment Treaties between countries ( BIT) Free Trade Agreements (FTA) between countries7. Of late, majority of the above mentioned investment treaties have included FET clause as one of its investment safeguards. In most of the FTAs (Free Trade Agreements) and BITs, (Bilateral Investment Treaties), FET clause is being included now, which is almost similar to Article 1105 (1) of NAFTA. NAFTA, under the heading “minimum standard of treatment, “includes the FET provision as follows: “Each side of the dispute shall grant to investments of patrons of other Party treatment as per the international law which includes “fair and equitable treatment” and full security and protection8. “ In 9Bayyindir Insaat Trurizm Trcaret Ve Sanayi A.S.r Pakistan10 , it was held by the tribunal that “ it is unsure that for want of a precise provision in the BIT itself , the exclusive wording of the preface tantamount an adequate footing for a self-standing fair and equitable dealing commitment under the BIT11.” FET principles can also be applied under the perception of canon of the process under the principle of rule of the common law where its infringement tantamount to the international illegal act of refusal of justice. Where earlier decided arbitral awards in 12Compania de Aguas dell Aconquija , MTD, Saluka , 13Parkerings , Metalpar, Sempra , 14Plama , Rumeli , Vecchi , Jan de Nul, Bayindir and Lemire refer to rule of law, which may be infringed both by the executives and by the judiciary. In the context of NAFTA cases like Lowwen, S.D Myers, Thunderbird and 15Waste management also refer to FET in the background of rule of law. In the U.S.A BITs also, the significance of the due process as a factor of FET has been acknowledged. The recent Free Trade Agreements concluded by U.S.A includes FET provisions, which expressly states that FET includes, “the duty not to refuse justice in civil, criminal or administrative proceedings as per the canons of due process included in the major legal setup of the world16.” As explained in the ELSI17 case which decision was also followed in the Neer Claim, the responsibility of due process is intimately linked to the theory of arbitrariness, which can be demonstrated as an act which surprises or shocks, a sense of juridical decorum. In BIT arbitration cases like TECMED, Genin, CMS, Saluka, Eureko, Biwater Gauff, Parkerings, LESI, Rumeli, Lemire and Bayindir, one of the issues referred was the violation of FET provisions. In some NAFTA arbitration cases like Mondev, S.D.Myers, Waste Management, Loewen, Thunderbird and GAMI, one of the disputes raised was about the FET provisions. The obligation of non-discrimination will also fall under the due process principle. BIT oriented arbitration cases that cite to this feature include CMS , Lauder , Saluka, 18Eureko , Metalpar , Parkerings ,Biwater Gauff , Plama , Rumeli , LESI , Continental Casualty , Bayindir, Siag and Veechi and Lemire. The precise treatment anticipated by the foreign investor must be footed on the host’s nation’s legal structure, or on a promise made implicitly or explicitly by it. The duty to honour legitimate expectations espouses the guise of a duty of reliable demeanour by the officials of the host nation where the investment has been parked. For example, the u-turn of promises by the host-nation which paved to legitimate expectations will infringe the principle of FET. Under FET provisions, what international investors expect that there should be a predictable and a stable business and legal frame work in the host nations for the investors19. As regards to the legitimate expectations, the obligations of transparency also exist. It connotes that the domestic officials should make it clear what they expect from the investor and cannot conceal themselves behind their own contradiction or ambiguity. In the arbitration cases like TECMED , Maffezini , Saluka , MTD, PSEG , LG&E , Metalpar , Siemens , Rumeli , Biwater Gauff , Continental Casualty, Siag and Veechi , LESI and Lemire, the obligation of transparency has been emphasised. The duty of good faith is one another element acknowledged in the FET standard. This is a canon of law principle that demands parties to a transaction to deal fairly and honestly with each other. The duty of good faith was insisted and referred in the cases like Saluka, TECMED, PSEG, LG&E, Sempra, Siemens, Rumeli, Biwater Gauff, Siag and Veechi, Plama and Lemire In “MTD Equity Std. Bhd and MTD Chile S.A. v. Chile,” an issue arose where an investment had been accepted, whether it is qualified to receive necessary approvals, even where according the approval is against the local law. In this case, an investment in real estate development was approved by Chile under its foreign investment legislation. It was divulged that such real estate project was not entertained under Chile’s land use planning regulations. However, the Croatian investor argued that he was authorised to such land development project footed on Article 3 (2), Chile-Croatia (1994), which states: “Where a Contracting Party’s investment is approved in its territory, it shall accord the required approvals in accordance with regulations and laws.” The appellant argued that the IIA requisite to accord “the required consents as per directives and laws connotes that the required approvals for its real estate development must also be granted as long as doing so was not illegal. The tribunal found that there was no infringement of the commitment since the claimant’s development was correlated on the actual change in the respective land usage planning rules instead of issue of an approval and tribunal held that Chile was responsible for infringing the fair and equitable treatment20. In “Occidental Exploration and Production Co. v. Republic of Ecuador”, the plaintiff claimed that host government’s rejection to reimburse VAT payment made on the purchase of material for exploitation and exploration activities amounted to a circuitous confiscation of its investments. The Tribunal was of the view that there was no indirect expropriation but observed that Ecuador had infringed the reasonable and impartial standard. Applying the Metalclad case, the Tribunal was of the view that deprivation must impact the investment in a major way and here, there had been no major deprivation on the monetary advantage of the investment scheme21. Expropriation Host states have the sovereign privilege to confiscate investments and to administer investment functions within their nation under International law footed on the principle of permanent sovereignty of states over natural resources. Expropriation under international investment law is based on the principle of customary law and also affirmed by “the UN General Assembly resolution 1803 of 1962.” There are preconditions on which host states can expropriate assets of the foreign investors under international law, and they are as follows; host states should expropriate on the basis of the due process, in a non-discriminatory way, for a public purpose and by paying adequate compensation. These preconditions for expropriation have been mentioned in various bilateral investment treaties, international investment instruments and arbitral awards. For instance, “the article 1110(1) of the North American Free Trade Agreement (NAFTA)” offers' damages for both indirect and direct confiscation. “In Metalclad v. MexicoError: Reference source not found “which is a NAFTA arbitral case”, where the arbitral tribunal viewed that “expropriation under NAFTA includes incidental or covert intrusion of property, which has the impact of denial of property right to the owner either in significant or whole part, of the utilisation of rationally –to-be –expected economic advantages of property, even if not necessarily to the palpable advantage of the host state22. In Metalclad Corporation v United Mexican States23 case, the tribunal held that the subjective rejection of a construction permit and the issuance of an “ ecological decree” creating a confined province in the venture site tantamount to circuitous confiscation as they thwarted the process of the waste management facility of the investor24. In “Pope & Talbot v. Canada25, the arbitral tribunal held that for a authoritarian expropriation to happen, a “sizeable deprivation “of assets ‘rights must be demonstrated whereby the investor “may not be able to enjoy, use or dispose of the property26.” In Tecmed v. Mexico, a “radical deprivation” should be shown to prove the allegation of expropriation. In several arbitration cases like LG & E Energy v. Argentina27 (in this case, the tribunal viewed that the “substantial deprivation test “was not fulfilled where the investment prolongs to operate, even if profits are reduced), CMS Gas Transmission Company v. Argentina, Enron v. Argentina, Sempra v. Argentina and Siemens v. Argentina28, it was held that no expropriation had occurred. In Vivendi v. Argentina, it was found that expropriation had indeed occurred29. Compensation of Expropriation The expropriation law states that an investor whose investment or assets have been expropriated will be authorised to have an adequate compensation. Compensation should be equal to the commercial value of real estate where its value may not be more than its fiscal value for tax purpose and commercial value of the expropriated investment or asset. When there is a disagreement in arriving at the amount of compensations, then each party can appoint an expert third party to assess the relative assets. When the two experts are unable to reach agreement, a third –party expert or an arbitrator can be jointly appointed. Under bilateral trade agreements also, compensation for expropriation will be equal to the just commercial value of the expropriated assets. Further, compensations should be paid without delay and immediately and interest should be paid wherever applicable and quantum of compensation must be liquid and freely transferrable. For instance, under NAFTA, the compensation should be at “the reasonable market price of the investment immediately before the confiscation” and it should be paid immediately. Further, the article 1109 of NAFTA requires that the payment must be fully transferrable30. Method of calculating the compensation can be classified in to two categories. Under “Hull formula “, the compensation should be adequate, fair, prompt and effective. This connotes that payment should be freely transferable, fully realisable and made without any delay. The “Hull formula “can be found in many of the multilateral and bilateral treaties and International investment agreements. One another method suggests ‘adequate compensation “, and “appropriate compensation”. Under this method, the government should pay the market value or the full value of the property expropriated. This view is endorsed in the declaration of UN General Assembly .Resolution no 1803 of Article 4 acknowledges the Hull Formula, and it endorsed the phrase “ appropriate compensation31.” In case of unlawful expropriation, the tribunal may order not only compensation for loss actually sustained due to expropriation (damnum energens), but also compensation should cover the lost future profits also (lucrum cersans)32. International arbitral tribunals have upheld that government guarantees and assurances create “acquired rights” for investors. Thus, the host government offers core assurance to foreign investors so as to strengthen the investment, both in the future and today, so as to offer safeguard against any major shift in local political or legal conditions that would be unfavourable to their interests. In CME v Czech Republic case33, the investor alleged before the international arbitration tribunal that there was a collapse of the joint venture with Czech Republic as Czech broadcasting authority compelled the investor to give up its special licensing rights. It was held by the tribunal that action by Czech government interfered with the legal and economic basis of CME’s investment and hence resulted in the expropriation34. ICSID tribunal ordered compensation of expropriation of foreign investment in Compania Del Desarrollo de Santa ELENA, S.A. v. The Republic of Costa Rica35 by viewing that while an expropriation for the public purpose could be deemed to be legitimate, and even though it was alleged that it was meant for safeguarding the environment, host government was asked to pay adequate compensation. In Siemens v. Argentina, the expropriating decree offered for the payment of compensation but later Argentina refused to pay compensation claiming that investor had infringed the contractual commitments. However, the tribunal held that reasons cited by the Argentina was not adequate and did not validate the non-payment of compensation. Thus, the expropriation was held to be invalid36. Where a contract prohibits the State from expropriation or termination of an investment contract, such expropriation will be a violation of principle of pacta sunt servanda and thus become internationally illegal. However, if there is “stabilisation clause” in the international investment contract, then the State retains its privilege to nationalise. Thus, a State can nationalise the property under the public interest as a manifestation of state’s sovereignty – which survives whether the property is non-contractual or contractual in nature. It supersedes the principle of pacta sunt servanda and the private interests of foreign investors. However, the State is under obligation to pay adequate compensation for such expropriation37. In Amco v. Indonesia38, the main ground of allegation was the legality of the expropriation of the hotel, and the legality of the suspension of the investment license. The claimant pleaded for damages for the losses caused due to wrongful attachment of a hotel constructed by the appellants by Indonesian government. The appellant claimed that the Indonesian government had infringed ‘Articles 21 and 22 of the Foreign Investment Law of Indonesia” which specifically promised the no expropriation can be made by the government except under certain scenarios. The tribunal in this case held that revocation is not acceptable on the ground of public interest as it violated the basic canon of pacta sunt sevanda as personified in the “Civil Code by Article 1338” and the principle of pacta sunt sevanda also clearly recognised under International law. Finally, the tribunal made an award of US$3,200,000 with payment of interest at the rate of six percent per year and this had to be borne by the Indonesian government severally and jointly and was to be paid to the three claimants outside of Indonesia39. Settlement of Investment Dispute Investment disputes can be resolved through host nations’ judicial system or through international arbitration or any special tribunal established for this purpose40. For instance, the Iranian revolution in 1979 and the successive crisis in US-Iran's relations resulted in a huge number of investment disputes, which were adjudicated by US –Iran Claims Tribunal. There were several dozen investments related disputes that came up under international investment arbitration due to the economic crisis that was witnessed in Argentina in the early 200041. Conclusion International arbitration tribunals on international investments have offered its insight into the vague legal concept of FET (Fair and Equal Treatment) in the guise of some elements consisting this legal obligation. Thus , international investment agreements , the element fair and equity treatment includes the following viz. requirements of non-arbitrary treatment , due processes , due diligence , non-discrimination, stability , legitimate expectations and predictability , good faith and transparency . Thus, in the international investment agreements, the outlines of FET are ambiguous and far from being clear-cut. Yet, these components permit decision –makers to apply the standard to particular scenarios. However, the elements of FET are focused at offering good administration and governance in the host-nation for the foreign investor. Thus, FET provisions can be said to offer a coherent, transparent and accountable public administration, which will be respectful of the rule of law42. References Caliskan, Yusuf, The Development of International Investment Law: Lessons from the OECD MAI. (Universal Publishers, Istanbul 2008) Campbell Dennis, International Protection of Foreign Investment [2008], (Lulu Publishers, New York 2008) Erkan Mustafa, International Energy Investment Law: Stability Through Contractual Clauses, (Kluwer Law International, New York 2010). 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