Fair and Equitable Treatment in the Context of International Investment Law - Essay Example

Page Fair and Equitable Treatment in the Context of International Investment Law Introduction Trade and commerce are very important for the exchange of goods, flow of money, trans-cultural interactions, international relationships, etc. At both the domestic and international levels, the activities and customs related to trade and commerce are regulated by different authorities under different circumstances. Investment is a vital process in the context of trade and commerce, and therefore, it needs special attention. After the collapse of erstwhile Soviet Union, international investment proceedings achieved new dimensions world wide. The flow of money across the countries along with exchange of technical know-how have increased manifold in the recent years. In the context of international investment, inter-state negotiation, inter-governmental treaty drafting, diplomatic exchange, etc. have become frequent and critical. Naturally, the number of disputes between investors and host countries is increasing as well. Hence, the issue of fair and equitable treatment in international investment dealing is gaining momentum very rapidly. There is a need to urge the different countries of the world to avoid activities like confiscation, expropriation, discrimination, etc. in regards of the foreign investors and the objective can be achieved if and only if the basic principles of mutual respect are legally defined and incorporated in the treaty frameworks. This paper is developed through a literature review followed by an analysis phase which will critically evaluate the importance of fair and equitable treatment in relation to the recent trends of investment treaties and the different related arbitration cases. Arbitration case examples have been appended after the analysis, followed by a viable conclusion. The paper also aims to comprehend the present trends in the light of the older developments which have shaped up today’s international investment scenario. Research Question The research question is in the form of the following statement: Critically analyse the concept of ‘fair and equitable treatment’ in investment treaties, taking into account recent investment treaty practice and arbitration cases. Literature Review The clause to provide and ensure “fair and equitable treatment” is generally put forward, along with certain other standards, as component of protection for Foreign Direct Investment (FDI) by the host countries. It is a non-contingent and absolute treatment standard which states that the treatment would be executed in such terms whose exact meanings are well defined, by the means of references to certain situations of application. The “relative” standards specified in “national treatment” are not of primary importance in this regard. The standards to determine fair and equitable treatment were developed through multilateral investment and trade instruments, and with the increasing numbers of Bilateral Investment Treaties (BITs), these standards became more critical and debated. “The obligation of the parties to investment agreements to provide to each other’s investments fair and equitable treatment has been given various interpretations by governmental officials, arbitrators and scholars.”1 Thus the backdrop of analysis of the concept of “fair and equitable treatment” must be based on the literature that describes the trends of international investment law. “International investment law is one of the fastest-growing areas of international law today. Only a decade ago, the current surge in investor–state arbitrations, having cumulated in approximately 300 investment treaty disputes, 1 was beyond imagination. At the same time, investment treaties enshrine principles of international investment law, rather than hard and fast rules. Almost unavoidably, international investment law therefore became coined more by the dispute settlement activities of arbitral tribunals which entertain claims between foreign investors and host states brought under investment treaties rather than by diplomatic exchange, inter-governmental negotiation, and inter-state treaty-making. Similarly, international investment law transpires and develops more in view of arbitral precedent and case law than on the basis of traditional textual approaches to treaty interpretation. Nonetheless, applying investment treaties in practice as well as studying and understanding the field not only requires knowledge about the jurisprudential developments but also demands awareness of the historic, economic, and customary international law context of foreign investment activities.”2 In the light of the above discussion, certain things become concerns of major consideration. These things include a scrutiny of the dynamics of the recent investment activities across the world along with a brief discussion on the existing legal instruments and establishments in this field. Also, it should be mentioned here that recent investment treaty practices considerably involve investor-state arbitrations. “Investor-State arbitration has seen tremendous growth in the last decade. Most of the cases are administered by the World Bank Group’s International Centre for Settlement of Investment Disputes (ICSID) under its constituent Convention3 or Additional Facility Rules.4 Established in 1966, ICSID registered cases at the rate of one or two new cases a year in its first 30 years. The rate of growth then quickened greatly, to about one new case a month in the period 1997 to 2002. That rate of growth more than doubled in 2003 and ICSID has since been registering 25 to 30 new cases annually. Altogether, ICSID has registered 231 arbitration cases, of which 111 are pending.” 5 Further, we have got certain critical instruments and establishments in regards of the international investment treaties, related disputes and arbitration methods. In words of A. R. Parra, “Underlying these developments have been great expansions of world investment flows and an accompanying proliferation of bilateral and multilateral investment treaties since about 1990. There are now an estimated 2,500 bilateral investment treaties (BITs) involving some 170 countries. Most of these treaties provide for the ICSID arbitral settlement of covered investor-State disputes. Many also, or instead, refer in this context to other forms of arbitration, such as arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).6 Similar provisions may be found in such multilateral treaties as the North American Free Trade Agreement (NAFTA)7 and the Energy Charter Treaty (ECT).8 The overwhelming majority of the many new investor-State arbitrations have been initiated on the basis of such treaty arrangements. Thus, 100 of the 111 cases now pending at ICSID were brought to the Centre under BITs, the NAFTA, or the ECT.”9 Hence, it can be well understood that the international investment law functionary is based on the various multilateral and bilateral investment treaties. Moreover, the disputes arising in this context are recorded and settled by the organisations like UNCITRAL. Therefore, the matter, that how the foreign investors and their investments on the very territory of the host country would be treated depends on certain factors. These factors are the trade relationships between the host country and the foreign country wherefrom the investor belongs. These trade relationships may be subject to the framework of a BIT (e.g. India-UK BIT) or a MIT (e.g. NAFTA). The factor of free and equitable treatment defines and determines the legal circumstances under which the rights of the foreign investors are ascertained. Hence, recent investment treaty practices must provide a legal basis to the concept of fair and equitable treatment. However, the perspective of standardising the concept of fair and equitable treatment against the International Minimum Standard appears to be limiting the scope of the very concept mentioned.10 In this context, it can be further noted that most of the international investments are directed from the investors of the developed countries to the territories of the developing ones. The foreign investors are often doubtful and prone to examine the domestic legal circumstances of the country, while the country that is receiving investment is eager to maintain the international capital flow. However, in this course of legal development, “developing countries accept restrictions on their sovereignty.”11 However, this situation often becomes a reason for tensions between the investor and the host country, leading to treaty based arbitrations and the jurisdiction of ICSID tribunals.12 Therefore, along with the concept of fair and equitable treatment, proper regulation of international investment practices also becomes an imperative. “Under BITS/MITs States offer an arbitration agreement to investors, typically ICSID arbitration and under the 1965 Washington Convention, States undertake to honour ISCID awards. However, international conventions (eg the European Convention 1972 or the UN Convention 2004) and local laws (the UK State Immunity Act 1978) grant immunity to certain state assets. A major exception to that immunity is in respect of ‘property’ relating to a ‘commercial transaction’ but what is ‘property’, what is a ‘commercial transaction’ and where lie the boundaries of the respective definitions ?”13 Surely, we still have to wait for more results to understand the vital questions related to the international investments in the context of national and international law. Analysis There are both pros and cons in regards of the concept of fair and equitable treatment. On one hand, this concept provides for a legal framework of conditions and propositions that would prove to be constructive in relation to investment treaty practice from the viewpoint of the investor. If there is a BIT between the country wherefrom the investor belongs and the country whereto the investment is directed, fair and equitable treatment becomes a mandatory inclusion in the BIT concerned. This provides the investor legal power in the case his/her interests clash with the domestic legal and trade activities of the host country. On the other hand, the clause of fair and equitable treatment puts a sort of restriction on the sovereignty of the host country. By means pf this legal instrument, the international community is able to interfere in the domestic legal and trade affairs of the host country as far as the financial interests of the investor are concerned. To understand the contemporary investment treaty practices, we should have a brief discussion on the evolution of the related processes and the implications derived thereof. Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965) and International Investment Disputes Act (1966) are the key instruments that helped in the evolution of the contemporary investment treaty practices. The process involved the determination of the responsibility of the host states to foreign investors. This facilitated customary international law dispute settlement and international investment in the same context. From 1948 to 1994, General Agreement on Trade and Traffic (GATT) remained instrumental in deciding the course of the evolving standards of international law on international investments. Gradually, by the end of twentieth century, World Trade Organisation (WTO) took the control of the process.14 However, recently the number of disputes and related arbitration cases has risen considerably. Many host countries are cancelling the benefits and reservations they are supposed to render to the foreign investors. For example, the Russian Federation has recently challenged the enforcement of some arbitral awards which was heard at the Court of Appeal of Amsterdam in 2009. 15 These sorts of activities can be considered in the general context of BITs. A BIT can be controlled by “general international law principles and host state law should be applied by tribunals constituted in investor-state proceedings.” This has been a noted trend in the disputes like Vivendi Universal v. Argentine Republic.16 In this case, the Argentine Republic was directed to synchronise its domestic law with its conduct in regards of its commitments and agreements under the BIT concerned (BIT between France and Argentina).17 However, the issue of state immunity is a major consideration in this context. Domestically, the host country can still put up certain legal measures that might provide it a sort of fiscal immunity in the face of state-investor arbitration. “The statutory position in the United Kingdom is straightforward, represented by the State Immunity Act 1978 (“SIA”) which substantially reflects the 1972 European Convention on State Immunity which came into force on 11th June 1976; however, only eight states18 are presently party to that Convention so it has been a limited success. Unsurprisingly, former Soviet bloc countries and others which have democratised in the last 25 years or so have starting points reflecting absolute immunity; further, countries such as France, a non-signatory to the 1972 Convention, adopt a different approach to immunity to that in the UK. The SIA reflects the principle set out above that States retain immunity for sovereign acts but do not for commercial transactions – but what are the boundaries of “commercial transaction”? A UN Convention on the Jurisdictional Immunities of States and Their Property was finalised in 2004 and has been adopted by the General Assembly; it provides that it shall enter into force after it has been signed and ratified by 30 states; but, to date, it has been signed only by four.”19 Right from the middle of the twentieth century, numerous ways are being found out to guide a host country that how can it safeguard the long term and short term interests of its investor. Hence, in the due course of time, government guarantees in relation to the foreign investors began to take form and obtain legal structure and significance.20 However, in the late twentieth century, the effects of the uncertainties in the political environment of the host countries became discernable. The international investment practices could not remain immune to the political environment of the countries taking part in the process. This analysis could be obtained particularly after the break up of Soviet Union since it gave way to several investment treaties. Hence, cases of annulling international arbitrations, confiscation, expropriation and prolonged disputes started becoming preponderant. The BITs have been particularly under focus in this process of strong interventions of political economy. 21 Therefore the analysis of the course of evolution of the recent investment treaty practices once again puts emphasis on the concept of fair and equitable treatment. The question of discrimination is still prominent in international trade and commerce, hence inter-state equity has to be achieved. “In addition to condoning inequities between states and investors, international investment law perpetuates certain inter-state inequities when it inflicts different outcomes on weak and powerful states. Some arbitral tribunals deciding claims against developing states have found these states responsible for the losses suffered by foreign investors because they deemed the states' courts' decisions against the investor to constitute denials of justice.”22 However, the host countries too have some incentives and advantages if they assure fair and equitable treatment in the BITs and MITs. This would help them to attract foreign direct investment. But what is the future of the investor once the investments are obtained by the host country? Hence, a legally binding investment treaty would serve as a commitment device.23 Despite the fact that many scholars criticise the implementation of such commitment devices, international investment practices cannot leave too much room for state immunity. Therefore, synchronising the host county’s domestic legal system becomes a reliable strategy. But still, “when international investment law fails to support its policies of promoting investment and distributing values equitably, international investment law should deploy corrective mechanisms. Early intervention mechanisms against investors or states that abuse power and authority include negotiation among investors and states, diplomatic pressure by the state of the investor's incorporation and other interested states, and signals by the international business community about appropriate investment behaviour.”24 However, in the case these strategies prove to be insufficient, “international investment law's next corrective mechanism is adjudication by arbitral tribunals or foreign courts, which power and authority are triggered by forum selection clauses or arbitration agreements. Such tribunals often correct deviations from international investment law's policies. Where an investor has abused its power, the host state is permitted to unilaterally claim back its authority and power over its resources and investment.”25 Hence, an analytical approach derives that fair and equitable treatment is related to power, authority, sovereignty, international tendencies and national and individual interests in a complex way. Fair and equitable treatment appears to be an imperative, particularly in dispute settlement and arbitration proceedings. Case Examples: Arbitration Cases 1. The case of City of London v Sancheti In the year 1999, the Corporation of London had let 4th Floor, 124 New Bond Street, London W1 to a Japanese company named ALC Press Inc. The lease was to be governed under the English Law and the date of expiry was 24th March, 2003. In the year 2001, Mr Sancheti (an Indian lawyer), got assigned the unexpired term of the said lease, since the Japanese company left the premises for some reason much earlier than the date of the expiry of the lease. However, Mr Sancheti continued occupation of the lease hold property until 24th December, 2004. Hence, the Corporation of London demanded the payment of an increased rental amount (including extra interests) counted over the extra period of time for which the lease hold premises remained occupied by Mr Sancheti. Mr Sancheti moved to the England and Wales Court of Appeal and denied to pay this extra amount of money. In the due course of the subsequent developments, Mr Sancheti further argued that the case must be heard in relation to the UK/India BIT (1995), which was an accord for the purpose of Promotion and Protection of Investments. Mr Sancheti kept his point that he had actually made “investments” in the lease that was now disputed. He also sought relief under UNCITRAL Arbitration Rules, so that an amicable solution could be reached. Moreover, he complained he faced discrimination by the Law Society, the judiciary and the Home Office. However, Mr Sancheti’s points were given due importance but the final decision was not in his favour. The judges dismissed the appeal. Actually, even in the view of the clause of fair and equitable treatment incorporated in the UK/India BIT, Mr Sancheti’s case remained under the protection of the Landlord and Tenant Act 1954, which is a domestic legislation of the UK. In such a state of affair, the provisions for the potential arbitration proceeding provided enough scope for the British law to be implemented first. The significance of this case lies in the fact that in justified conditions, a country’s domestic laws cannot be completely neglected in relation to international investment dispute arbitration.26 27 2. The case of Republic of Ecuador v Occidental Exploration and Production Company Through a contract with Petroecuador (an Ecuadorian public owned company), Occidental Exploration and Production Company was carrying out oil production and exploration activities in Ecuador. Occidental, a United States based company, had entered this contract in the year 1999. Through the years 2000-2001, Occidental achieved regular reimbursements in Value Added Tax (VAT) which it paid on the purchases it needed for its activities. But in the middle of the year 2001, the tax authority of Ecuador stopped all VAT refunds. Further, it demanded from Occidental that the amounts reimbursed so far were to be returned now. In the year 2002, Occidental initiated arbitral proceedings challenging the Republic of Ecuador. The investments made by the company were being governed under Ecuador/United States BIT (1993). Occidental claimed that several BIT provisions had been contravened including: 1. Fair and Equitable Treatment 2. National Treatment 3. Full Security and Protection 4. Prohibition of Discriminatory or Arbitrary Steps Occidental demanded that the reimbursement were to be continued on the VAT amounts. Also, it requested VAT reimbursement for the amounts it had already paid and the future damages too were to be compensated. In response, the Tribunal under the auspices of the London Court of International Arbitration examined the contract which Occidental had signed with Petroecuador. The contract excluded VAT refunds, which were completely under the authority and consideration of the legislation of the tax authority of Ecuador. Yet, the Tribunal found that Ecuador’s conduct had violated the BIT provisions of 1. Fair and Equitable Treatment 2. National Treatment 3. Full Security and Protection Hence the Tribunal awarded the VAT amounts that Occidental had paid and on which it had requested for refund. However, the Tribunal did not allow award for future damages so that Occidental might not obtain a ‘double recovery’. 28 This case example shows full utilisation and application of the concept of fair and equitable treatment in arbitration proceeding. The case also demonstrates a balanced approach of the Court of Appeal that prevented Occidental from obtaining double recovery and hence the judgement cannot be regarded as biased in favour of the investor. 3. The case of ETI Euro Telecom International NV v Republic of Bolivia In the year 1995, ETI Euro Telecom International NV instituted several trade agreements with the republic of Bolivia and Entel, a telecommunications company in Bolivia. Entel had been privatised, and ETI had obtained 50 % ownership of this company through direct investment. The investment framework was being governed by the Netherlands/Bolivia BIT (1994) (known as the Agreement on Encouragement and Reciprocal Protection of Investment). The investments made by ETI were giving considerable returns and the contract was being executed smoothly. But in the year 2006, Bolivia declared re-nationalisation of several private companies which were previously state owned. This was done by the means of a national development plan. Entel was also a previously state owned company that had been privatised in the 1990s. This step directly hit the interests of ETI in Entel. It had already made considerable amounts of investment in Entel and possessed a major stake in the company. ETI accused the Republic of Bolivia of nationalising Entel without adequately compensating ETI, hence violating the principle of free and equitable treatment. It also brought charges of expropriation against Bolivia and demanded that a sum of $50 million, which had been deposited at Deutsche Bank at London in Entel’s account, to be freeze. Hence an international arbitration was initiated under the auspices of ICSID, in response to which Republic of Bolivia immediately claimed state immunity at the Court of Appeal. During the legal proceedings at the England and Wales Court of Appeal, it was decided that the arbitration would be dealt with in the view of the State Immunity Act (SIA) 1978. Accordingly, Bolivia was entitled to state immunity. Thus the asset freezing orders that had been granted in ETI’s favour by the ICSID were rendered useless and ETI’s appeal was dismissed. 29 This case example shows that there are certain limitations to the international investment law and more and more adjustments with the rules like SIA 1978 are wanting. Hence the legal authorities still need to find out ways that how the concept of fair and equitable treatment can be made more helpful to justifiably synchronise the national and international rules. Conclusion International investment law standardises the investment participants’ expectations and behaviours and the outcomes of the investment. This law influences the trends of global decision making by modulating authority and power between the participants by the means of four major processes: (1) Triggering shifts in power and authority; (2) Draining power and authority from states; (3) Transferring this power and authority to other decision-makers; and (4) Restoring state power and authority.30 However, many policy makers look at this nature of international investment law as detrimental to the sovereignty of the different host countries, particularly the developing ones, which receive the investments and depend on foreign currency reserves. Yet, the concept of fair and equitable treatment deserves to be applied more and more in the contemporary and future investment practices. Prominent case examples testify that the international investment law framework is rather evenhanded and the host country can claim immunity in the case it really deserves so. In the same context, application of the concept of fair and equitable treatment will amply protect the interests of the investor, who is practically without any political or military power in the host country. Lest the host country behaves autocratically and puts up unfair demands and restrictions before the investors, bilateral investment treaties must be constituted between different countries so that a legal framework can be kept ready to handle potential disputes. The concept of free and equitable treatment will help the international legal academia; tribunals and forums to simplify the arbitration mechanisms define the powers of the national governments at the international level and finally facilitate global well-being by making international investment practices safer. 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Argentine Republic, award of Nov. 21, 2000, 5 ICSID Rep. 299 [2002] Table of Authorities Cases Vivendi Universal v. Argentine Republic, award of Nov. 21, 2000, 5 ICSID Rep. 299 [2002] …………………………………………………………………………………8 City of London v Sancheti [2008] 2 CLC 730 (EWCA)……………………………. 12 Republic of Ecuador v Occidental Exploration and Production Company [2005] EWCA Civ 1116, [2006] QB 432 …………………………………………………...14 ETI Euro Telecom International NV v Republic of Bolivia [2008] EWCA Civ 880, [2008] 2 Lloyd’s Rep 421……………………………………………………………15 Other Authorities Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Mar. 18, 1965, 575 U.N.T.S. 159 (the ICSID Convention). …………...4 The Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat of the ICSID, as amended effective Apr. 10, 2006 (the Additional Facility Rules). Reprinted in ICSID Additional Facility Rules, Doc. ICSID/11 (Apr. 2006) …………………………………………………………………………………..4 United Nations Commission on International Trade Law, UNCITRAL Arbitration Rules, U.N. Doc. A/3/17 (1976). ……………………………………………………...5 North American Free Trade Agreement, Dec. 8-14, 1992, 32 ILM 289 (1993). ……..5 Energy Charter Treaty, Dec. 17, 1994, 34 ILM 360 (1995)………………………….. 5 France/Argentina BIT 1991, IC-BT 226 [1991]……………………………………... 8 Read More