I NVESTMENT L AW 1 B ASICS, H ISTORY I NTERPRETATION, A PPLICATION Prof. Dr. Werner Meng Director of the Europa – Institut Saarland University Saarbruecken

INVESTMENT LAW 1BASICS, HISTORY

INTERPRETATION, APPLICATION

Prof. Dr. Werner MengDirector of the Europa – Institut

Saarland UniversitySaarbruecken /Germany

Prof. Dr. Werner Meng - Europa Institut - Saarland University 1

2Prof. Dr. Werner Meng - Europa Institut - Saarland University

• Dolzer, Schreuer, Principles of International Investment Law, 2008

• Sornarajah, M., The international law on foreign investment, 3rd ed. 2010

• Weiler, T., International investment law and arbitration, 2005• Ortino, F., Investment treaty law, (2006), • Subedi, International Investment Law, 2008• OECD, International Investment Law. Understanding Concepts

and Tracking Innovations (2008)• Muchlinski, Ortino, Schreuer, The Oxford Handbook of

International Investment Law, 2008• Folsom, Gordon, Spanogle, Fitzgerald, International Business

Transactions, 10th edition, 2009• Salacuse. The law of Investment Treaties, 2010

Literature

History - 1

• 1796: FCN Treaty – Protection of foreigner‘s property by PIL– By national laws

• 1868: Calvo clause• 1907 Drago – Porter convention• PIL: minimum standard for aliens• 1930 Lena Goldfield arbitration• 1928 Hull Formula: adequate, prompt and

effective

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History - 2

• 1962 UNGA Res. 1803: appropriate compensation

• 1974 UNGA: Charter of the New Economic Order– National heritage protection– Right to expropriation w/o compensation

• NAFTA (1974)• ECT – Energy Charter Treaty (1994)

Prof. Dr. Werner Meng - Europa Institut - Saarland University

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International Minimum Standard

• Right to recognition of legal capacity, to a fair procedure, to egality before the law

• Diplomatic Protection (Barcelona Traction ICJ)

Is it just and fair to treat foreigners better than own citizens?



• Case concerning the Barcelona Traction, Light and Power company Ltd. (Second Phase), Judgement of Feb. 5, 1970 (ICJ Rep. 1970, 3

• Canadian Company (incorporation and head office in Toronto). Subsidiaries ran an electric power distribution net in Catalonia. Bonds. whose servicing in Spain was suspended in the civil war. Resumption thereafter was blocked by the Spanish exchange control. 1948: Declaration of bankruptcy and appointment of Spanish directors. Extended to all subsidiaries in Spain. Sale to a spanish company.

• Could Belgium bring a case because a majoirity of shareholders was purportedly Belgian? – BT had its own legal personality. Acts were not directed against the

shareholders– No „piercing of the veil“.

• BT still exists outside Spain. • It is a recognized company of Canadian nationality. Canada can exercise diplomatic

protection• No agreement on special protection btw. Spain and Belgium

Barcelona Traction Case – Diplomatic Protection for companies


• Property– Generally defined by national law– Permits, concessions, licenses, public rights?• Oscar Chinn Case: no vested right. Same: Mc Harg et al. vs. Iran• LIAMCO: protection as incorporeal property rights. Same: CME v.

Czech Republic• Right to property - minimum standard (law relating to aliens)– PCIJ: Factory of Chorzow case, Mavrommatis Case– Not: Calvo clause (national treatment)– Res. 1803 (XVIII) of 14.12.1962 (compensation)– Charter of Economic Rights and Duties (1974) (freedom to

expropriate)• Right of transfer– of compensation for expropriation - yes– Of current profits -no

Rules of Customary International Law on property


• Special agreements– E.g. „Lump sum agreements“

• „Just compensation“ (Hague Arbitral Court, Norwegian Shipowners, 1922)– Complete restitution of the status quo ante

• Only due in case of illegal expropriation!!

• „Juste indemnité“ – (Max Huber, British Property in Spanish Morocco (RIAA II, 731), 1925)

• „Just compensation“ (Restatement Third, 1987)• „Adequate, prompt and effective“ (Hull formula, 1938)– Appropriate (Dolzer EPIL, UN Res. 1803)– Full, prompt and effective

Compensation


• National Law– Restricted by general customary International Law• Legal rules relating to aliens

– Bound or added by multilateral Public International Treaty Law• Material guarantees (MIGA, WTO GATS and WTO TRIMS)• Legal protection (ICSID)• Human rights protection• Regional law (NAFTA, Energy Charter Treaty etc.)

– Bound by bilateral treaties• Comprehensive rules on all three regulating phases• BITs and investment protection treaties

Matters to be Regulated by Investment Law


Matters to be regulated

Substantive legal framework Procedural legal protection


• PIL:– admission, treatment, lawfulness of

expropriations• Special regulations• Law relating to aliens• Human rights

• conflict of laws: recognition of expropriations

Substantive Legal Framework


• Acquisition phase– Conditions of admission• See GATS, as far as applicable• Newer BITS of the USA and NAFTA: right to access to

national markets, if this is not excluded• Certain tension relating to public regulatory goals

• Investment phase (in its classical meaning)– Framework conditions

• Post - investment phase– Investment protection– Expropriation– Expropriation-like measures („statutory takings“)

Regulating Phases


• In particular, exploration and exploitation treaties in the raw material sector

• Concepts– internationalization as a persistant guarantee: exemption

from the national law of the investment recipient– Attribution to PIL, quasi-PIL, law sui generis?

• General Assembly resolution 1803 (XVII) of 14 December 1962, "Permanent sovereignty over natural resources“:

• 3. In cases where authorization is granted, the capital imported and the earnings on that capital shall be governed by the terms thereof, by the national legislation in force, and by international law. The profits derived must be shared in the proportions freely agreed upon, in each case, between the investors and the recipient State, due care being taken to ensure that there is no impairment, for any reason, of that State's sovereignty over its natural wealth and resources.

– Loss of importance when the ICSID was created

Internationalized Treaties of States with Investors


• Serbian Loans Case (PCIJ Ser. A 20/21, 1929)– Agreements between private persons and states cannot be part of

PIL.

• Anglo-Iranian Oil Company (ICJRep. 1981, 98)– Subsumption under PIL refused (112): „The Court cannot accept the

view that the contract signed between the Iranian Government and the Anglo-Persian Oil Company has a double character. It is nothing more than a concessionary contract between a government and a foreign corporation.”

• Rooting the Agreements in PIL in order to protect them from subsequent intervention of the host state in the agreement– ARAMCO Case– Libyan Crude Oil - Cases

• Texaco / Calasiatic Case• British Petroleum Case

– Aminoil Case

Cases on internationalized Agreements


• Multilateral regulations– Havanna Charter (failed in 1947)– OECD attempts (failed)– MAI (OECD) failed in 1998– ECT (Energy Charter Treaty)– NAFTA Chapter 11– MIGA (World Bank)– TRIMs and GATS (WTO)

ICSID (World Bank) 1965

– Bilateral: BITS /Investment Protection Agreements

Approaches of Regulation through Treaties

Bilateral Investment Treaties (BITs)• 1959: BIT Germany – Pakistan (i.f. 1962) today

about 130• Other European States followed• 1969 Italy – Chad: first ISDS (Investor – State

dispute settlement)• 1977 first BIT of the USA (today about 50)• India close to 100, China more than 130• More than 1300 of EU Member States• Developed – Developing, but also within the

two groups.• Isolated – Combined (FTA, e.g. TTIP)

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Bilateral vs. Multilateral

• Particularly DCs prefer BITs• Is there any advantage to them?• Wouldn‘t they be better off with

multinational conventions?• Do developed countries need BITs or

multinational agreements– Like the ECT (Energy Charter Treaty)


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Development of Investment Law

• Multilateral rules?• BITs (model BITs in some countries)– Consistency ?– Clarity?

• Arbitral jurisprudence?


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Layers of Laws regulating Int.Inv.


•Multilateral Treaties•BITsPIL•Multilaterals (ECT)•BITs •Powers (207 TFEU)EU Law•Multilaterals•BITs•National Constitutions (powers, HRs)Nat.Law

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PIL in general

• Bound subjects of law• Sources– Treaties– Customary Law– General Principles of Law

• Multilateral, Regional, Bilateral• Relation to trade law

• What about state sovereignty?


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PIL Treaty Law

• Multilateral – Bilateral• Interpretation: Art. 31 (General Rules), 32

(Supplementary Rules), 33 (Language Diversity)– Authentic interpretation (NAFTAs Free Trade

Commission)– International adjudication – Precedents? Cour of

Appeals?• BITs: Definitions, Standards in substance (like

e.g. FET), Rules on Dispute Settlement (state-state or state-investor)

• Non-retroactivity (of jurisdiction)Prof. Dr. Werner Meng - Europa Institut -

Saarland University


• FCN treaties of the USA– BITs of the USA (40 in force, 7 signed, as of 2009)

• Newer BITs include accession rights to the internal investment market

– Investment promotion agreements

• IPAs of the BRD (130 in force, 8 signed, as of July, 2010)– First IPA concluded with Pakistan in 1959– German Model Treaty as of 2005 (AVR 45 [2007], 276 ff.) – Phase 1 with duty to endeavor, phases 2 and 3 with strict

legal duties: fairness, national treatment, most favored principle, compensation

– Dispute settlement• State - state• State – investor (often ICSID)

– Rules are differing, dependent on the negotiating power

Bilateral Agreements


• NAFTA chapter 11– 1122 referring to ICSID

• CAFTA-DR chapter 10– Similar to NAFTA

• Mercosur Protocol of Colonia (1994)– Similar to NAFTA

• ASEAN– Non-discrimination– Supplementary agreement of 1987: protection from expropriation and investor-

state dispute settlement

• Energy Charter Treaty 1994– Investment and trade with energy products – European states, CIS states, Japan, (Russia and Belarus up to now only signatories,

provisional application)– Discrimination prohibition is only a duty to endeavor– Expropriation rules – Investor-state dispute settlement (e.g. ICSID, article 26)

• Comp.Vattenfall versus BRD - ICSID ARB/099/6

Regional Agreements


• Codes– Liberalization of capital movements– Liberalization of the international trade in services

• Decisions of the Ministerial Council

– Article 5• “In order to achieve its aims, the Organisation may:• (a) take decisions which, except as otherwise provided, shall be

binding on all the Members; …”– No protection from expropriation

• MIA (Multilateral Investment Agreements)– fruitless negotiations on a multilateral agreement in the

frame of OECD• no agreement on market access rights (among others)

– fruitless attempts to reintroduce such negotiations in the WTO Doha Round (failed in Cancún in 2003)

OECD Activities


• WTO– TRIMS

• Local content / local performance requirement• Referring to article III and XI GATT

– GATS• Mode 3 (commercial presence in the state where the service is

rendered)• Most favored nation principle (II.1) and national treatment (XVII)• Market access (XVI), as far as granted• no real protection from expropriation, but non-violation complaint

after XXIII.3 possible

– TRIPS• commercial property rights, but no protection from expropriation

Multilateral Treaties - 1


• World Bank– ICSID• Convention on the settlement of investment disputes

(1965)• Conciliation commissions/arbitration courts for

investor-state-disputes• institution of organs, rules of procedure,

implementation• 144 Member States, 168 procedures (102 since 2000)• Additional Facility (1974) (non-Member States /

investors of non-Member States)– MIGA (1985)

Multilateral Treaties - 2


Article 207 TFEU 1. „The common commercial policy shall be based on uniform principles, particularly with regard to ... foreign direct investment, ... The common commercial policy shall be conducted in the context of the principles and objectives of the Union‘s external action.“

o Exclusive competence, see article 3.1 e) TFEUo Regulations in accordance with the ordinary legislative procedure (2)o Agreements concluded after article 218. Council authorizes

commission to negotiate. Assisted by a special committee appointed by the council (3)

o (4) qualified majority for negotiation and conclusion, unanimously only where unanimity would also be required for the adoption of internal rules (4)

EU Competences


• Article 351TFEU– The rights and duties from more than 1,200 BITs of the Member States are not

affected by the provisions of the treaty, but incompatibilities have to be eliminated.

• Article 64.1– Old provisions may persist until a fixed date.

• ECJ 3.3.2009 – C-249/06, COM. v. Sweden and C-205/06, COM. v. Austria– Investment protection treaties of Members include unconditional transfer rights

(and corresponding duties of the states)– Article 64.2, 66 and 75 TFEU contain the rights of the Council to immediately

restrict the movement of capital with regard to third states. • general restrictions or short-term safeguard measures• measures against the finance of terrorism

– Inherent conflicts may not only be eliminated when a concrete case arises• no direct effect• negotiations take too long• suspension or cancellation too „insecure“ (??)

– Therefore, adaptation in cooperation with other Member States

Older Treaties between States


• Article 351 is not applicable internally, not even in an analogous meaning– Protection of third states only

• Collision with single market rules?– Admission and treatment: rather yes– investor – state – dispute settlement: no

• Collision with the ECJ‘s competence to give a final interpretation?– As far as European Law has priority, courts of arbitration

have to apply European law.– Right to judicial reference?

• Permanent jurisdiction?• Of a Member State?

Internal old treaties between EU Member States


• Proposal of a regulation for a transitional rule (July 2010) COM(2010)344 final

• Authorization – for a provisional continuation of national rules, where

necessary with adaptations• revocable, if necessary

– to modify existing national BITs and renegotiate treaties of merely national importance

• Start of a development towards a gradual Europeanisation of investment protection

• Communication of 7.7.2010 COM(2010)343 final

Investment Protection Policy in the EU


• Economic: „Investment climate“– Need– Expected advantages: technology, management, market

access– Reservations

• Legal– Regulation of rights and duties in the investment phase in

its sense proper– National treatment, but minimum standard of the law

relating to aliens as lower limit– Special rules for foreigners

• Transfer of profits• Joint ventures• Standards of behavior for MNUs /TNUs

Framework Conditions


Legal Relations in Investment Law

investor

investment state

home country

diplomatic protectionguaranteesubrogation

diplomatic protection subrogated rightsinvestment protection agreementlegal protection

• claim before a national court or tribunal

• ICSID/arbitration

Investment Contract

Investment Treaty

Rights and Obligations, Interests

• Investment state rights / obligations /Interests

• Home state rights / obligations/ interests• Investor rights / obligations / interests– Risk (political)– Configuration of the investment contract– Shift of the negotiation position?– Conformity with local law?


• OECD Guidelines for Multinational Enterprises (1976)– Labor rights (compare also the Tripartite Declaration of ILO

of 1977)– Contribution to the development of the host country

• UNCTAD Set of Principles and Rules for the Control of Restrictive Business Practices (1980)– against cartels and abuse of market power

• UN Norms on Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights, U.N. Doc. E/CN.4/Sub.2/2002/13 at 15-21 (2002)– Human rights – to be respected

• Not binding

Duties of Investors - 1


• Global Compact (2000)– Initiative by GS Kofi Annan– voluntary self-binding initiative by more than 2000

companies, based on 10 principles • protection of human rights, of core labor rights,

the environment and fight against all forms of corruption

– Not legally binding, but influence on public opinion• Negative, if offenses become known?

• „Equator Principles“ for larger Banks

Duties of Investors - 2


• Raytheon factory (USA) closed in Italy• The Palermo mayor confiscates the factory– occupied by workers–

production is continued• FCN Treaty USA – I– V.1: minimum standard: most constant protection and security for their

persons and property– V.3: Most favored nation principle and national treatment (but not less

than the minimum standard)– V.1 does not protect from confiscation or infringement of property rights

• Local remedies rule prevails diplomatic protection • The factory remained safe, undamaged and protected by the state• In concrete, the US company was not treated worse than Italian

companies.• I.e.: confiscation was for protection of the investment! Strikes and

occupations are the normal risk of an entrepreneur

ELSI Case (ICJ Rep. 1989, 15)


• State intervention in private property• Taking or restriction of the right to dispose of the property?• Taking: ELSI case• Taking lawful?– Eminent Domain – Sovereign right to expropriate– But only for public purposes, non-discriminatory and with payment of

compensation– Human rights protection (where existent) equivalent to the minimum

standard of the law of aliens and the protection by investment treaties (FCN treaties, BITs, regional or sectoral rules)

• Restriction– Measure tantamount to expropriation? (statutory taking)

• Compensation necessary

– Measure justified by lawful regulatory purposes (like public security and order)• No compensation

Problems of taking property


• Act of State doctrine– USA, GB: separation of powers• The courts of one country will not sit in judgement on the acts

of another country, done within its own territory (Underhill v. Fernandez 168 U.S. 250 (1897))

• Hickenlooper amendment (1962): not to be applied on expropriations, unless the US government requires so

– No PIL• Customary International Law– No obligation to recognize• Disputed, as far as it has been executed on the territory

(prohibition of intervention?)– Rumasa case (CA London) only conflict of laws– Some German cases as well

– no obligation not to recognize expropriations that have violated PIL

Recognition


Conflict of laws, recognition of foreign expropriations.

Recognition is solely a matter of national law

Differences to be consideredTaking completed in the foreign state

Nationality of the former owners?Application to goods and capital abroad

In the state of judgementIn third states


• Human rights protection– Article 17 GDHR 1948– Article 11 and 15 International Covenant on Economic, Social and Cultural Rights 1966– Article 1 1.Additional Protocol of the Convention for the Protection of Human Rights and Fundamental Freedoms– Article 21 American Convention on Human Rights

– Article 14 African Charter of Human Rights

Human rights protection


• 1 Everyone has the right to own property alone as well as in association with others.

• 2 No one shall be arbitrarily deprived of his property.

Article 17 Universal Declaration of Human Rights


• 1. The States Parties to the present Covenant recognize the right of everyone to an adequate standard of living for himself and his family, including adequate food, clothing and housing, and to the continuous improvement of living conditions. The States Parties will take appropriate steps to ensure the realization of this right, recognizing to this effect the essential importance of international co-operation based on free consent.

Article 11 International Covenant on Economic, Social and Cultural Rights


• 1. The States Parties to the present Covenant recognize the right of everyone:

• …

• (c) To benefit from the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author.

• 2. The steps to be taken by the States Parties to the present Covenant to achieve the full realization of this right shall include those necessary for the conservation, the development and the diffusion of science and culture.

• ...• See already Article 17.2 of the Universal Declaration of Human Rights

1948

Article 15 International Covenant on Economic, Social and Cultural Rights


• Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

• The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

Article 1 of 1st addtional protocol to the ECHR


Article 21 ACHR

Article 21. Right to Property

1.Everyone has the right to the use and enjoyment of his property. The law may subordinate such use and enjoyment to the interest of society.

2.No one shall be deprived of his property except upon payment of just com-pensation, for reasons of public utility or social interest, and in the cases and according to the forms established by law.

3.Usury and any other form of exploitation of man by man shall be prohibited by law.


• Article 14The right to property shall be guaranteed. It may only be encroached upon in the interest of public need or in the general interest of the community and in accordance with the provisions of appropriate laws.

Article 14 African Charter on Human and Peoples' Rights

Documents

I NVESTMENT L AW 1 B ASICS, H ISTORY I NTERPRETATION, A PPLICATION Prof. Dr. Werner Meng Director of the Europa – Institut Saarland University Saarbruecken