Lawful investment

Standard Chartered Bank v Tanzania, Award, ICSID Case No ARB/10/12; IIC 581 (2012)2 November 2012

-existence of active contribution of the investor to the investment – to constitute as an investment by the investor (BIT of UK and Tanzania)

-Rather, for an investment to be “of” an investor in the present context, some activity of investing is needed, which implicates the claimant’s control over the investment or an action of transferring something of value (money, know-how, contacts, or expertise) from one treaty-country to the other.

-passive ownership lang yung claimant

PHOENIX ACTION, LTD. v. THE CZECH REPUBLICRespondent (ICSID Case No. ARB/06/5)

-The Tribunal is of the view that if the sole purpose of an economic transaction is to pursue an ICSID claim, without any intent to perform any economic activity in the host country, such transaction cannot be considered as a protected investment.

To summarize all the requirements for an investment to benefit from the internationalprotection of ICSID, the Tribunal considers that the following six elements have to betaken into account:1 – a contribution in money or other assets;2 – a certain duration;3 – an element of risk;4 – an operation made in order to develop an economic activity in the host State;5 – assets invested in accordance with the laws of the host State;6 – assets invested bona fide.

A. A CONTRIBUTION IN MONEY OR OTHER ASSETS?-The question of the low price paid by Claimant for the acquisition of the shares, whose payment the Tribunal considers acknowledged by the submitted bank accounts, has been extensively discussed between the parties. The Tribunal considers that the existence of a nominal price for the acquisition of an investment raises necessarily some doubts about the existence of an “investment” and requires an in depth inquiry into the circumstances of the transaction at stake. If there is indeed a real intent to develop economic activities on that basis, the existence of a nominal price is not a bar to a finding that there exists an investment.85

B. A CERTAIN DURATION?

The Respondent does not per se deny the duration of the alleged investment, but arguesthat since the investment itself is inexistent, it can have no duration. According to it, “(t)he duration criterion generally requires that the investment project be carried out overa period of at least two years. Phoenix, however, never intended to carry out a business project at all.”90

125. The Tribunal is therefore not convinced that this element of duration constitutes a bar to

the qualification of the purchase of BP and BG as an apparent investment, if all other elements of the definition of an investment are satisfied.It appears to the Tribunal that if the money paid in 2002 could be considered as having given rise to an investment, the mere fact that Phoenix had not sold its shares in BP and BG before January 2008 shows that the operation in which the Claimant engaged had a certain duration.

C. AN ELEMENT OF RISK?

In general, in buying companies in bad shape, an investor certainly assumes a certain risk, the risk not to be able to revitalize the corporation, if such was the intent. It is common practice in international business for certain businessmen to buy bankrupt companies for a token price and to try to transform them into profitable going concerns. On its face, the purchase of a bankrupt company, for a small price, still carries a risk: namely that the investor loses the amount he has paid, because the company has to be liquidated and no cash is left to satisfy the shareholders.The Tribunal does not consider that it should deny the existence of what looks like an investment based on the alleged absence of a risk in the operation performed by Phoenix.

D. AN OPERATION MADE IN ORDER TO DEVELOP AN ECONOMIC ACTIVITY IN THE HOST

STATE?

The development of economic activities must have been foreseen or intended, but need not necessarily be successful, especially when the problems an investor faces in the development of its activities come from the host State’s actions. It is true that an investment that has come to a standstill, because of the host State’s actions97

, would still qualify as an investment, otherwise the international protection of foreign investment provided by the BITs would be emptied of its purpose. The Tribunal is therefore inclined to accept that, although there were no significant activities performed by the Czech companies owned by Phoenix since it acquired them, this alone would not be sufficient to disqualify the operation as an investment, provided that, and this caveat is fundamental, the Claimant had really the intention to engage in economic activities, and made good faith efforts to do so and that its failure to do so was a consequence of the State’s interference. Thus the Tribunal needs to analyze more thoroughly the different facets of the operations in which Phoenix has engaged.

“The Tribunal concurs with ICSID precedents which, subject to minor variations, have relied on the so-called “Salini test”. Such test identifies the following elements as indicative of an "investment" for purposes of the ICSID Convention: (i) a contribution, (ii) a certain duration over which the project is implemented, (iii) a sharing of operational risks, and (iv) a contribution to the host State’s development, being understood that these elements may be closely interrelated, should be examined in their totality and will normally depend on the circumstances of each case.”Such approach has been used for example in the recent55

-Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decisionon Jurisdiction, July 23, 2001 §

Sedelmayer v. Russian Federation - “It must be presupposed, however, that investments are made within the frame of a commercial activity and that investments are, in principle, aiming at creating a further economic value.”58 Sedelmayer v. Russian Federation, (Germany/Union of the Soviet Socialist Republics BIT), ad hoc arbitration under the Stockholm Chamber of Commerce arbitration rules, Award, July 7, 1998, § 224

FET:Arbitrary HRI report release without consultation with CAMRuritania allowed the competitors to take advantage of the HRI report to the prejudice of CAMThe MAB act was enacted without consultation with the claimant The video tape of the detention of CAM executive in connection with a baseless allegation [t]he minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the state and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety – as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process.44

(- Waste Management Inc. vs Mexico April 30, 2004)

Transparency- THe interim report was not revealed to CAM- the idea that all legal requirements for the purpose of initiating, completing and successfully operating investments made, or intended to be made, under the Agreement should be capable of being readily known to all affected investors of another party. There should be no room for doubt or uncertainty in such matters.(Metalclad Corporation v Mexico, Award, 25 August 2000 (ICSID Case No ARB (AF)/97/1) (2001) 40 ILM )

Moreover, the tribunal in Tecmed also required a proportionality test which weighs 1) the reasonableness of a measure to its goal, 2) the deprivation of the economic rights, and 3) the legitimate expectations of the investor. There must be a reasonable relationship of proportionality between the charge or weight imposed to the foreign investor and the aim sought by the expropriatory measure. This weight is valued by the degree of the deprivation and whether the deprivation was compensated.132

the foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relation with foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations. (Tecmed vs. Mexico, ICSID AF Award, 2003, para. 154)

3. Denial of justice and due processCompliance with the most basic due process requirements is necessary to avoid a denial of justice.Denial of justice is traditionally defined as any gross misadministration of justice by domestic courts resulting from the ill-functioning of the State’s judicial system (Focarelli, 2009). It is generally recognized that only

gross or manifest instances of injustice are considered a denial of justice and that a simple error, misinterpretation or misapplication of domestic law is not per se a denial of justice.79 While it is commonly emphasized that any attempt accurately and exhaustively to define the forms of denial of justice is bound to fail, the following are likely to be considered a denial of justice:(a) Denial of access to justice and the refusal of courts to decide;(b) Unreasonable delay in proceedings;(c) Lack of a court’s independence from the legislative and the executive branches of the State;81

(d) Failure to execute final judgments or arbitral awards;(e) Corruption of a judge;(f) Discrimination against the foreign litigant;(g) Breach of fundamental due process guarantees, such as a failure to give notice of the proceedings and failure to provide an opportunity to be heard.Page- 99 unctadFocarelli (2009). See, for example, Pantechniki v. Albania, ICSID CaseNo. ARB/07/21, Award, 30 July 2009, paras. 96-97; Jan de Nul v Egypt,Award, 6 November 2008, paras. 255–259.

Hearings in the legislation of MAB act - unstable legal framework for advertisement and sale

It is well established in public international law that a failure of the state to inform others of the proposed changes in policy or to retreat from previously made assurances may lead to an obligation to indemnify the party which placed reliance upon the pre-existing state of affairs to its own detriment. ( Bin Cheng, General Principles of Law as applied by International Courts and Tribunals (CUP, Cambridge 1994) 137-43. See also WM Reisman and MH Arsanjani, ‘The Question of Unilateral Governmental Statements as Applicable Law in Investment Disputes’ (2005) ICSID Rev- FILJ 328. )

StabilityIn the tribunal’s view, FET entitled foreign investors to expect the host state to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investors, so that it may know beforehand any rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulation. (Técnicas Medioambientales Tecmed SA v Mexico, Award, 29 May 2003 (ARB(AF)/00/2) 10 ICSID Rep 130.)

Legitimate expectationFBI - sales and production since its inception under the State property fund was prosperous - cite the circumstances of FBI before the acquisition- the traditional use of Reyhan

The tribunal did not deny the existence of the right to stability and predictability of the legal environment but simply stressed that an expectation of stability ought to be reasonable and based on specific assurances made by the host state to the investor.143

AES Summit Generation Limited and AES-Tisza Erömü Kft v Hungary,

The warranty in the SPAIt is commonly agreed that where a host state’s conduct creates reasonable and justifiable expectations on the part of an investor to act in reliance on the said conduct, a failure by the host state to honour those expectations may cause the investor or investment to suffer damages. (Thunderbird, Award (n 24) para 147. For arbitral decisions referring to elements of legitimate expectations, such as assurances and reliance, see Tecmed (n 102) para 154 (FET construed as a standard of treatment “that does not affect the basic expectations that were taken into account by the foreign investor to make the investment”), CME Czech Republic BV v Czech Republic, Partial Award and Separate Opinion, 13 September 2001 (Ad hoc—UNCITRAL Arbitration Rules) para 155 (finding the government in breach of FET ‘by evisceration of the arrangements in reliance upon which the foreign investor was induced to invest’), Waste Management (n 24) para 98 (noting that for a breach of FET to be established it is relevant that ‘the treatment is in breach of representations made by the host State which were reasonably relied on by the claimant’). See also Saluka (n 24) para 302 (holding that legitimate expectations has become the dominant element of FET).

Expropriation

Deprive of the use of trademark to distinguish the FBI from competitorsThe goodwill established by the trademark and the traditional bottle size was desecrated The value of the trademark was diminished

It construed the expropriation standard in Article 1110 NAFTA as justifying the finding of expropriation whenever the interference with the use of investment ‘has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property.’ (Metalclad Corporation v Mexico, Award, 25 August 2000 (ICSID Case No ARB (AF)/97/1) (2001) 40 ILM 36 )

As stated by the tribunal in Pope & Talbot, expropriation requires a ‘substantial deprivation.’14 After having observed that it might sometimes be uncertain whether a particular interference is expropriatory, the tribunal found that the proper test would be to examine whether the challenged regulation is ‘sufficiently restrictive to support a conclusion that the property has been ‘taken’ from the owner.’15 (Pope & Talbot Inc v Canada, Interim Award, 26 June 2000 (Ad hoc—UNCITRAL Arbitration Rules) para 102. )

Interference of how to use and utilize the trademark - strict labeling requirement- the peculiarity of the trademark was lostThere are certain types of measures or state conduct that are considered a form of expropriation because of their material impact on property…One may distinguish between: (a) outright suppression or deprivation of the right of ownership, usually by its forced transfer to public entities; (b) limitations and hampering with property, short of outright suppression or deprivation, interfering with one or more key features, such as management, enjoyment, transferability, which are considered as tantamount to expropriation, because of their substantial impact on the effective right of property. Both of these types of measures entail indemnification under relevant international treaties…16 (Continental Casualty Company v Argentina, Award, 5 September 2008 (ICSID Case No ARB/03/9) para 276. )

It is not necessary that the the whole trademark be taken away nor does it require that the CAM lose the legal title or ownership as to the trademark

For instance, the tribunal in SD Myers expressly held that in some contexts and circumstances it would be appropriate to view deprivation as amounting to an expropriation even if it were partial. (SD Myers Inc v Canada, First Partial Award and Separate Opinion, 13 November 2000 (Ad hoc—UNCITRAL Arbitration Rules) para 283.)

Without denying the possibility of a state being held responsible for a partial expropriation, Kriebaum has argued that a deprivation should be deemed substantial in the case where an investor has been deprived of a right which is capable of an economic exploitation independently of the remainder of the investment. (Kriebaum (n 28) 83. Montt supports the idea that the common denominator can be found in the capacity of an asset to be exploited independently of the remainder of the investment. As he puts it, in establishing whether a deprivation is substantial only an identifiable distinct part of an investment should be used as a reference unit (Montt (n 19) 270, emphasis original). Thus, a concession contract is a separate investment that can be individually expropriated, but bundles of rights within that contract are not autonomous and hence cannot be expropriated (ibid). )

The Chemtura v Canada tribunal acknowledged the fact that both an overall investment and specific assets can be evaluated as part of an examination of whether a deprivation is substantial enough to constitute an expropriation.(Chemtura Corporation v Canada, Award, 2 August 2010 (Ad hoc—UNCITRAL Arbitration Rules) para 249. The tribunal observed that ‘[i]t would make little sense to state a percentage or a threshold that would have to be met for a deprivation to be “substantial” as such modus operandi may not always be appropriate. )

The Pope & Talbot tribunal held that the conduct of a host state would be expropriatory if it involves detention of the investor’s employees, appropriation of the proceeds of the company’s business, interference with the management or shareholders’ activities, preventing the investor from paying dividends or other actions ‘ousting the investor from full ownership and control.’83

In contrast, the tribunal in Sempra v Argentina held that the substantial deprivation threshold presupposed that the investor was no longer in control of its business operation or that the value of the business was virtually annihilated. The tribunal established the existence of a substantial deprivation by reference to both the loss by the investor of its rights of ownership and control over the business and the economic loss reflected in the decrease of the economic value of the business.(Sempra Energy International v Argentina, Award, 18 September 2007 (ICSID Case No ARB/02/16) para 285. )

Similarly, in Occidental v Ecuador the existence of a substantial deprivation was determined on the basis of the tribunal’s findings as to the effect of the disputed measures on both the fundamental rights of ownership and the reasonably to be expected economic benefit. (Occidental v Ecuador (n 36) para 88-89. See also LG&E v Argentina where in rejecting the claim of expropriation, the tribunal discussed the substantiality of deprivation criterion by reference to both the rights of ownership and the enjoyment and an economic value of an investment. )

In Bayindir v Pakistan, the tribunal considered a conduct-based analysis to be crucial in a determination of whether an expropriation has occurred.11 After identifying the assets that were allegedly expropriated by the state in the exercise of its sovereign powers, the tribunal held that, in order to establish the existence of an expropriation, analysis ought to focus on the lack of public purpose, discrimination and a breach of due process, as well as an absence of compensation and departure from general principles of treatment. (11 Bayindir Insaat TurizmTicaretve Sanayi A Ş v Pakistan, Award, 24 August 2009 (ICSID Case No ARB/03/29) para 446.)

Full Protection and Security

The foundations for this approach were laid in Saluka v. CzechRepublic.56 In the course of this decision the tribunal analysed thebalancing process involved in a claim based on breach of legitimateexpectations:“[Legitimate] expectations, in order for them to be protected,must rise to the level of legitimacy and reasonableness in lightof the circumstances. […] No investor may reasonably expectthat the circumstances prevailing at the time the investment ismade remain totally unchanged. In order to determine whetherfrustration of the foreign investor’s expectations was justifiedand reasonable, the host State’s legitimate right subsequentlyto regulate domestic matters in the public interest must betaken into consideration as well. […] The determination of abreach of Article 3.1 by the Czech Republic therefore requires aweighing of the Claimant’s legitimate and reasonableexpectations on the one hand and the Respondent’s legitimateregulatory interests on the other.[…]A foreign investor […] may in any case properly expect that theCzech Republic implements its policies bona fide by conductthat is, as far as it affects the investors’ investment, reasonablyjustifiable by public policies and that such conduct does notmanifestly violate the requirements of consistency,transparency, even-handedness and nondiscrimination. […][T]he host State must never disregard the principles ofprocedural propriety and due process and must grant theinvestor freedom from coercion or harassment by its ownregulatory authorities.”57 [Emphasis added]

Accordingly, the standard obliges the host State to adopt all reasonable measures to protect assets and property from threats or attacks which may target particularly foreigners or certain groups of foreigners.OECD, Fair and Equitable Treatment Standard in International Investment Law, Working Papers onInternational Investment, No. 2004/3 (2004)