FINAL MEMORIAL COMPENDIUM

Submitted by: Richika Tyagi

Side Arguing for: Respondents

Issue Addressed: Jurisdiction Ratione Personae

Argument advanced:

1) The validity of existence of the Claimant (Banco de Portugal) is under question. The reforms made in 1931 were not registered according to the Portuguese Commercial laws.

Case law/Article/Authority: Art. 104 Portuguese Commercial Code

Relevant Paragraph: Art. 104: “Essential requirements for a company to be considered commercial are: […] 2. That the company is constituted in harmony with the provisions of this Code.”19

The Portuguese Commercial Code stipulates certain registration requirements: Art. 18: “Traders are particularly obliged to: […] 3. Register all acts related to the commercial register

[…]”20

Art. 47: “The trader’s registration of individual sole traders is optional; the registration of the companies and of the ships is mandatory.”21

Art. 49: “The following are subjected to registration: […] 5. The instruments of incorporation, the renewal of the company, the modification of the firm, object, head office or registered office, modification of status, reform, decrease or reintegration in the capital, dissolution or merger, cession of one managing partner on behalf of others and generally, every kind of change of the social contract,

Registration is necessary to preserve the firm’s rights under the Portuguese Commercial Code (Art. 26) and for acts to take effect vis-à-vis third parties (Art. 57): Art. 26: “Every trader should register his firm at the commercial register of the community where his head office and subsidiaries are based, to preserve all the right for his firm this code recognises.”23

Art. 57: “Acts subjected to the commercial register only take effect for third parties upon the date of registration and in the order in which the registration occurred. […].”24

However, despite the requirement of Articles 18(3), 47 and 49(5) Portuguese Commercial Code, Banco de Portugal was registered in the commercial register only in 1926.

2) The Claimant (Banco de Portugal) does not fulfil the criteria of being a National of another contracting State neither the Waterlow and Sons Ltd. being an agency of the State (Respondent).

Case Law/Article/Authority: Nationality Requirements in Investor–State Arbitration

Robert W ISNER and Nick G III. C ORPORATE C LAIMANTS A.T REATY AND I CSID D EFINITIONS

The rules for determining nationality become even more complex when they are applied to corporations. Treaties apply a variety of tests to determine if a corporation qualifies as an investor of a party. Some treaties set a low threshold for a corporation to qualify as an investor of aparty. Article 1(2) of the Ukraine–Lithuania BIT, for example, defines a “Lithuanian investor” as “any entity established in the territory of the Republic of Lithuania in conformity with its laws and regulations”. Other treaties set a higher threshold. Article 1(1)(b) of the Indonesia–Chile BIT, for example, not only requires that the corporation be “constituted or otherwise duly organized under the law” of the home State, but also requires that its “effective economic activities” be in that State. Some treaties limit corporations’ standing based on who controls the corporation.The NAFTA, for example, states that, following consultations with other NAFTAParties, a Party may deny the benefits of the Treaty to an investor of another Party “if investors of a non-Party own or control the enterprise and the enterprise has no substantial business activities” in the putative home State.Similarly, the NAFTA allows its Parties to deny the Treaty’s benefits to corporations that are controlled or owned by a StateWith whom the Party “does not maintain diplomatic relations”.While control is used to limit standing, it is also used to extend investors’ standing.Article 25(2)(b) of the ICSID Convention, for example, offers the forum to: “... any juridical person which had the nationality of the Contracting State party to thedispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of this Convention.”

Similarly, the Indonesia–Australia BIT is representative of several BITs deeming that companies incorporated in States that are not party to the treaty still have standing if nationals from one of the parties control those companies.

Despite such detailed descriptions of which corporations will have standing tobring a claim, gaps remain. Recent decisions help to fill some of those gaps.

1. Banro Resources v. Congo The Banro dispute arose out of a contract between Banro Resources, a Canadian mining company, and the Democratic Republic of the Congo, in which they were mining. Article 35 of their contract referred all disputes to the ICSID for settlement. Canada is not a signatory to the ICSID Convention and, therefore, Banro Resources could not bring a claim to the ICSID, despite Article 35 of the contract. In an apparent attempt to overcome this problem, Banro Resources transferred the claim to its U.S. subsidiary, Banro America, before claiming before the ICSID. The United States is a signatory to the Convention. The Tribunal rejected the standing of Banro America for two reasons. First, it held that the claim failed to comply with Article 25 of the ICSID Convention. That Article states that: “The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State ... and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre.”

The Tribunal drew from the final sentence of this phrase the requirement that the investor must be a national of a contracting State at the time consent is given. It found that the claimant failed this requirement because, at the time consent was given in the contract, it was given by Banro Resources. Furthermore, the Tribunal found that Banro Resources could not have transferred that consent to its subsidiary, Banro America, because it never held such consent to transfer.

Case law/article/authority: Cambodia Power Company v

Cambodia and Electricité du Cambodge LLC, Decision on jurisdiction,

ICSID Case No ARB/09/18, IIC 586 (2011), 22nd March 2011,

International Centre for Settlement of Investment Disputes [ICSID]

Relevant Paragraph:

c. Tribunal’s Decision

215. This is a crucial issue because unless the designation provision contained in Article 25 of the Convention has been complied with, the claim against EDC must fail.

216. The Tribunal must deal with two separate issues. The Tribunal will first decide whether EDC was properly designated as an agency of KOC within the meaning of Article 25(1) of the Convention. If the answer is negative, the Tribunal will then consider if an estoppel argument prevents the Respondents from arguing that such designation was not properly made.

(i)  EDC was not properly designated as an agency of KOC so as to comply with Article 25(1) of the Convention

217. The first issue that the Tribunal needs to consider is whether designation in conformity with Article 25(1) of the Convention requires actual communication of the designation to the Centre. The second issue is, if designation requires communication, what are the forms and channels that such communication could take? Finally, a correlative question is who can communicate the designation to the Centre for the purposes of Article 25(1) of the Convention?

(a)  The need for communication

218. On the issue of whether a designation pursuant to Article 25(1) requires some sort of communication, the Claimant relies upon observations by Aaron Broches, who chaired the Legal Committee on the Settlement of Investment Disputes which ultimately produced the phrase “designated to the Centre by that state”. Broches stated:

“The limited purpose of the requirement of designation is to avoid doubt whether an entity is a constituent subdivision or agency and thus qualified to be a party to a dispute before the Centre. Failure of a formal designation should therefore not itself defeat jurisdiction if the entity concerned is proved or conceded to be a constituent, subdivision or agency of a contracting state.” (A. Broches, “Convention on the

Settlement of Investment Disputes between States and Nationals of Other States of 1965, Explanatory Notes and Survey of its Application” 18 YCA 627, 642 (1993))

219 . However, more recently, Professor Schreuer has considered the issue of designation and has stated that:

“[t]here must be some communication by the host state to the Centre.” (C Schreuer, The ICSID Convention: A Commentary (2nd ed., 2009) (ICSID Commentary) §25-252)

“[t]he Tribunal considers that the lack of a valid designation is a bar to its jurisdiction under the ICSID Convention. While holding so, the Tribunal is mindful of Aaron Broches’ view that failure of a formal designation should … not by itself defeat jurisdiction if the entity concerned is proved or conceded to be a constituent subdivision or agency of a contracting state’. With Christoph Schreuer, the Tribunal considers, however, that Broches’ view ‘goes too far’ and that designation cannot be dispensed with altogether. Accepting jurisdiction in the absence of designation by the state would not be in line with the ICSID Convention, which expressly constrained the possibility for constituent subdivisions to submit to ICSID arbitration within specified limits.”(Schreuer supra at §186–187)

221 . The present Tribunal agrees with the East Kalimantan decision and Professor Schreuer’s position that Mr. Broches’ view “goes too far” and that “there must be some form of communication”.

The text of Article 25(1) of the Convention is clear. It imposes the following requirements as jurisdictional thresholds for constituent subdivisions or agencies of a Contracting State: (1) “designation”, (2) “to the Centre”:

“Chapter II: Jurisdiction of the Centre

Article 25 

(1)  The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, …”

225. If “designation” alone, without any communication, were sufficient for these purposes, the words “to the Centre” would be otiose. Indeed, as the Respondents submitted, communication is inherent in the very notion of “designation” as used in this provision.

226. Beyond the text itself, the Tribunal finds further support for this proposition in the Convention’s object and purpose. As elaborated in the Parties’ submissions, the Convention is intended to promote foreign investment within a secure framework. Article 25 plays a critical role in delimiting the scope of the Convention regime. In

this context, the designation requirement in Article 25(1) itself serves at least two specific purposes.

227. First, the designation requirement provides both clarity and a guarantee of protection to investors (or at least some certainty in this regard) as to which entities within (and in addition to) a given Contracting State may be subject to the Convention regime. This information may, for example, be critical in an investor’s choice of contractual counterparty. For such clarity and certainty to be achieved, a structured and standardised system of notification is obviously necessary, which in Article 25(1) consists of communication to the Centre.

228. Secondly, the designation requirement also serves a “gate-keeping” function for Contracting States. As Schreuer states, it embodies the:

“Desire on the part of the State to preserve control over semi-autonomous entities in their dealings with foreign investors” (C.Schreuer, “Commentary on the ICSID Convention” (1996) 11 ICSID Rev-FILJ 318, §152).

Therefore, the Tribunal finds that in order for there to be a “designation” of an agency or subdivision of a Contracting State under the Convention, there has to be a written designation which is communicated to the Centre. It may be possible for this to be done other than in a direct communication from the Contracting State to the Centre, such as in a Treaty or Legislation that would inevitably have public notoriety. But in most cases, it would be by direct communication and thus cannot be complied with by the investor itself providing a document to the Centre which contains, or is said to contain, a designation.

247. (c) Communication by whom?

The Tribunal agrees with Professor Schreuer’s view that:

“designation in an agreement with the investor is not enough. It is clear that the entity concerned cannot designate itself. But even an agreement of the contracting state with the investor or a promise to make the designation to the Centre will not suffice.”(supra)

254. The Tribunal therefore concludes that the alleged designation of EDC as an agency or subdivision of KOC by the Claimant through its Request does not comply with the requirements of Article 25(1) of the Convention.”

ANDREA VINCZEPh.D. student, Department of European Law and Private International Law

University of Miskolc,3515 Miskolc-Egyetemváros, Hungaryandreavincze@hotmail.com

Field of research: Jurisdiction in ICSID arbitration

1. About ICSID jurisdiction in general

The purpose of this article is to clarify the issue of ratione personae jurisdiction in ICSID arbitration. Besides the two other jurisdictional requirements, i.e. written consent of the parties to submit legal disputes to ICSID arbitration and jurisdiction ratione materiae, jurisdiction ratione personae is one of the vital elements required by the ICSID Convention1 to submit legal disputes to ICSID arbitration. In lack of any of the three conditions, jurisdiction of an ICSID arbitral tribunal to settle a certain dispute will be denied. The latter can be done either by the Secretary-General of ICSID still before the registration of the request to arbitrate2 or, provided that the Secretary-General registered the request, by the respective arbitral tribunal which has the right to make a decision on its own jurisdiction3.

Provisions on ICSID jurisdiction are set in Articles 25 to 27, while jurisdiction ratione personae are governed by Article 25 (1) and (2). In the following, these two paragraphs will be analysed with special regard to practical issues as well.

2. Elements of jurisdiction ratione personae

The ICSID Convention sets forth the following provisions concerning jurisdiction ratione personae:

Article 25

(1) The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally.

(2) "National of another Contracting State" means:

(a) any natural person who had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration as well as on the date on which the request was registered pursuant to paragraph (3) of Article 28 or paragraph (3) of Article 36, but does not include any person who on either date also had the nationality of the Contracting State party to the dispute; and

(b) any juridical person which had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration and any juridical person which had the nationality of the Contracting State party to the dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of this Convention.

Based on the latter provisions, the following elements of jurisdiction ratione personae can be derived. Firstly, a Contracting State or any constituent subdivision or agency of a Contracting State designated to the Centre by that State shall stand on one side.

1 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Washington, 1965., hereinafter: ICSID Convention.2 Art. 36 (3) ICSID Convention3 Art. 41 ICSID Convention

On the other side, there must be an investor being the national of another Contracting State. The investor party to the dispute can be either a natural or a juridical person.

The only requirement of the Convention with regard to natural persons is that on certain dates 4 they must bear the nationality of a Contracting State other than the State party to the dispute. The case is not so simple as to juridical persons which, on the one hand, are eligible for ICSID jurisdiction if it had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration. On the other hand, there is a special opportunity for juridical persons having the same nationality as the State party on the date on which the parties consented to submit such dispute to conciliation or arbitration. If such a juridical person is involved in the dispute and the parties have agreed that because of foreign control that juridical person shall be treated as a national of another Contracting State for the purposes of the Convention, the jurisdictional requirements are also met.

So much is provided for in the ICSID Convention. The exact meaning of those provisions, i.e. the identity of the State party, constituent subdivisions and agencies, the identity of the investor party, natural and juridical persons, will be dealt with separately hereinafter.

3. The identity of the State party

Identification of a State party is not difficult; the list of Contracting States is registered at the ICSID Secretariat continuously5. It is important to mention at this point which states can become ICSID Contracting States. Pursuant to Article 67 of the ICSID Convention, the Convention shall be open for signature on behalf of States members of the Bank. It shall also be open for signature on behalf of any other State which is a party to the Statute of the International Court of Justice and which the Administrative Council, by a vote of two-thirds of its members, shall have invited to sign the Convention.

4. Constituent subdivisions and agencies of a Contracting State

It is a slightly more complex issue to determine what is a constituent subdivision or agency of a Contracting State and whether it is authorized to act as a party in ICSID arbitration proceedings. These concepts have a different meaning with regard to different Contracting States but exactly this is the reason why the drafters of the Convention did not give any clarification but left it for the Contracting States to designate those constituent subdivisions and agencies which can be involved in ICSID arbitration proceedings6.

The term ‘constituent subdivision’ covers a broad range of entities, depending on whether a particular state is a unitary or a non-unitary state. In unitary states, municipalities and local government bodies fall under this category, whereas in non-unitary states semi-autonomous dependencies, provinces or federated states7.

The range of ‘agencies’ covers entities acting on behalf of the government of the State or one of its constituent subdivisions. Government-owned companies or government-controlled corporations might fall under this category as well but the decisive factor, here too, is that the latter must act on behalf of the State, mere governmental ownership of shares is not enough8.

4 On the date on which the parties consented to submit such dispute to conciliation or arbitration as well as on the date on which the request was registered pursuant to paragraph (3) of Article 28 or paragraph (3) of Article 36.5 As of 3 November 2003 (status displayed on http://www.worldbank.org/icsid/constate/c-states-en.htm on 26 October 2004), there are 154 signatories to the Convention 140 of which have deposited the instruments of ratification. 6 Based on paras (1) and (3) of Article 25 ICSID Convention. See http://www.worldbank.org/icsid/pubs/icsid-8/icsid-8-c.htm 7 Practical examples are: Australia designated the States of New South Wales, Victoria, Queensland, South Australia, Tasmania, The Northern Territory and The Australian Capital Territory as constituent subdivisions; the United Kingdom designated Bermuda, British Virgin Islands, Cayman Islands, Falkland Islands, Dependencies, Gibraltar, Montserrat, Anguilla, St. Helena, St. Helena Dependencies, Turks & Caicos Islands, Bailiwick of Guernsey, Bailiwick of Jersey and the Isle of Man as its constituent subdivisions.8 For example Ecuador designated Corporación Estatal Petrolera Ecuatoriana and Consejo National de Electricidad; Nigeria designated Nigerian National Petroleum Corporation; and Sudan designated the General Petroleum Corporation.

Designation of constituent subdivisions and agencies to the Centre must be made formally, a mere designation or undertaking in the investment agreement, or a mere agreement between the State and the constituent subdivision or agency is not sufficient for the purposes of the Convention. It is also arguable that if the intention of the parties was to designate a constituent subdivision or agency but this had not been done officially by the respective State, then if designation was brought to the attention of ICSID by any of the parties would be sufficient. On the other hand, an agreement between the parties to the investment and in which the Contracting State itself designates the constituent subdivision or agency suffices as a proper designation.

As to the time of designation, the latest point of time for a designation to be made is the filing of the request to arbitrate. If the designation is not made at that time, the Secretary-General, pursuant to Article 36 (3) refuses to register the request.

It is an additional requirement set forth by the Convention, relating to one of the other two main conditions of jurisdiction, that when a party to the dispute on one side is a constituent subdivision or agency, the consent to be given must be of special nature as well. Pursuant to Article 25 (3) consent by a constituent subdivision or agency of a Contracting State shall require the approval of that State unless that State notifies the Centre that no such approval is required. The latter has been done by Australia, Peru, Portugal and the United Kingdom in their designations of constituent subdivisions or agencies. In respect of all other Contracting States, consent by a constituent subdivision or agency of a Contracting State shall require the approval of that State.

Validity of such approval is an important prerequisite. A valid approval can be given in an agreement with the host state or in a separate designating instrument. In either case, however, approval must be express and unambiguous and must be given at least prior to the filing of the request. On the other hand, it is not necessary for an approval to be valid to communicate it to the constituent subdivision or agency and acceptance of the approval by the latter is not required either. It is also not necessary, pursuant to the wording of the Convention, that the approval be communicated to ICSID. This means that the approval, once given in the appropriate form, is valid and cannot be withdrawn. Yet, at the filing of the request to arbitrate the requesting party will have to give information on whether the consent to arbitrate was approved by the respective Contracting State, otherwise the Secretary-General will refuse to register the request.

In practice it is not only useful but also vital to make sure whether a certain constituent subdivision or agency is authorized to take part in ICSID arbitration proceedings and to include this in the arbitration agreement as well. For example if, at the time of contracting, the exact identity of constituent subdivisions or agencies to be involved cannot be identified because of the elongated nature of the investment or because the investment is to be carried out in several, not yet completely determinable stages, the arbitration clause should contain general phrasing which is eligible to mean and include any constituent subdivision or agency. If such preparatory steps are not taken in advance, the registration of the request may be denied by the Secretary-General or later the arbitral tribunal may find that since the ratione personae requirements are not met, the tribunal does not have jurisdiction to hear the case.

5. Identity of the investor party

As shown above, the investor party can be:a) a natural person having a nationality of a Contracting State other than that of the State party

on the date on which the parties consented to submit such dispute to conciliation or arbitration as well as on the date on which the request was registered,

b) a juridical person having the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to arbitration, or

c) a juridical person which had the nationality of the Contracting State party to the dispute on the date on which the parties consented to submit such dispute to arbitration and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of the Convention.

Side Arguing for: Respondent

Issue Addressed: Jurisdiction Ratione Materiae

Argument Advanced: The dispute arising between the Banco de Portugal and UK is not of an investment.

Case Law/Article/Authority: Burlington Resources Inc v Ecuador, Decision on

Jurisdiction, ICSID Case No ARB/08/5, IIC 436 (2010),

Despatched 2nd June 2010, International Centre for

Settlement of Investment Disputes [ICSID]

Relevant Paragraph:

Law Applicable to the Jurisdiction of the Tribunal

101. Jurisdiction is governed by the relevant provisions of the ICSID Convention and the BIT between the United-States and Ecuador.

102. In particular, Article 25(1) of the ICSID Convention provides as follows:

"The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally."

103. The relevant provision of the BIT, in turn, is Article VI, pursuant to which ICSID arbitration is available in the following terms:

"1 . For purposes of this Article, an investment dispute is a dispute between a Party and a national or company of the other Party arising out of or relating to (a) an investment agreement between that Party and such national or company; (b) an investment authorization granted by that Party’s foreign investment authority to such national or company; or (c) an alleged breach of any right conferred or created by this Treaty with respect to an investment.

2. In the event of an investment dispute, the parties to the dispute should initially seek a resolution through consultation and negotiation. If the dispute cannot be settled amicably, the national or company concerned may choose to submit the dispute, under one of the following alternatives, for resolution: […]

3. (a) Provided that the national or company concerned has not submitted the dispute for resolution under paragraph 2(a) or (b) and that six months have elapsed from the date on which the dispute arose, the national or company concerned may choose to consent in writing to the submission of the dispute for settlement by binding arbitration:

(i)  to the International Centre for the Settlement of Investment Disputes (“Centre”) established by the Convention on the Settlement of Investment Disputes between States and Nationals of other States, done at Washington, March 18, 1965 (“ICSID convention”), provided that the Party is a party to such Convention […]."

1.4. Test for Establishing Jurisdiction

110. At the jurisdictional stage, it must be established that the conditions to jurisdiction set in Article 25 of the ICSID Convention and in the BIT are met. In addition, Claimant's allegations of fact are subject to a prima facie standard according to which the alleged facts should be susceptible of constituting a breach of the Treaty if they were ultimately proven6. The Tribunal finds that this standard strikes a proper balance between a more exacting standard which would call for examination of the merits at the jurisdictional stage, and a less exacting standard which would confer excessive weight to the Claimant's own characterization of its claims.

Side Arguing for: Respondent

Issue Addressed: Jurisdiction Ratione Materiae

Argument Advanced: The dispute arising between the Banco de Portugal and UK is not of an investment.

Case law/Article/Authority:

Volume 29 (2012) / Issue 4

Laurens J.E. Timmer , 'The Meaning of ‘Investment’ as a Requirement for Jurisdiction Ratione Materiae of the ICSID Centre' (2012) 29 Journal of International Arbitration , Issue 4, pp. 363–373

Relevant Paragraph:

Abstract

It follows from Article 25 of the ICSID Convention that the ICSID Centre has jurisdiction only if the dispute arises from an 'investment'. Despite the importance of this term, there is a fundamental lack of consensus on its meaning. Although the general view appears to be that the term 'investment' under Article 25 of the ICSID Convention has some objective meaning that is not at the disposition of the parties, not every tribunal has explicitly accepted the existence of these outer limits to the Centre's jurisdiction. The tribunals that do accept these outer limits are divided on the relevant characteristics that can be used to identify the term 'investment' and the nature and meaning of these characteristics. A divide has been recognized by tribunals and legal commentators between the 'jurisdictional' and a 'typical characteristics' approaches when considering abstract criteria relevant for 'defining' or 'identifying' the existence of an investment under Article 25 of the Convention. After considering recent case law, this article proposes that a hybrid between these two approaches can be identified. On the one hand, the concept of using abstract criteria as mandatory requirements to test the existence of an investment is consistently rejected. On the other hand, exception has been made by several tribunals which have required that the claimed investment should at a minimum be suitable to contribute to the economic development of the host State. The author of this article considers this to be a reasonable approach and in line with the purpose of the ICSID Convention.

Side Arguing for: Respondent

Issue Addressed: Jurisdiction Ratione Materiae

Argument Advanced: The dispute arising between the Banco de Portugal and UK is not of an investment.

Argument Advanced:

2) The Claimant (Banco de Portugal) cannot avail the benefit of “protection”, “immunity” or “privilege”

Case law/ Article/Authority: Chevron Corporation and Texaco Petroleum Corporation v

Ecuador, Interim Award, IIC 355 (2008), 1st December 2008,

Ad Hoc Tribunal (UNCITRAL)

Relevant Paragraph: In order for an investor to be able to rely on the substantive protections and procedural safeguards of a BIT, his investment must lie squarely within the ambit of the BIT. As there is no single definition of ‘investment’ and most BITs are closely tailored, a tribunal must carefully consider the definition of investment in a given treaty in order to satisfy itself as to jurisdiction. Investment projects tend to have an extended duration over time. Indeed, this is one of their main characteristics.

The Tribunal here considered that this was consistent with the approach taken by the tribunal in Canadian Cattlemen for Fair Trade v United States , Ad hoc-UNCITRAL Arbitration Rules, 28 January 2008. There, the tribunal held that the definition of investment excluded claims to money arising from ‘mere cross border trade interests’ but included claims arising from ‘something more permanent’ such as commitment of capital or other resources in the territory of a party. (Paragraphs 190–195)

Side Arguing for: Respondent

Issue Addressed: Jurisdiction Ratione Materiae

Argument advanced:2) There is no relation between the dispute and the alleged investment

Case law/article/authority: Google browser (Internet)

Relevant Paragraph:

2.  The legal dispute

13.14 In the Mavrommatis Palestine Concessions case29 the court defined a ‘dispute’ as ‘a disagreement on a point of law or fact, a conflict of legal views or interests between the two persons’. (p. 257) this definition was adopted in numerous other cases before the ICJ and ICSID tribunals. On the other hand, the mere assertion by the claimant that a dispute exists or the mere denial by the respondent party that a dispute exists is not conclusive of either fact. A necessary condition for the existence of a dispute between the parties is that the parties have a legal right or interest with regard to the subject matter of the dispute.

13.15 Assuming there is a dispute, the next question to be raised is whether the dispute is a legal one. While no clear decision was taken on the meaning of the qualification ‘legal’, a reasonable interpretation might be that it must be concerned with a breach or violation of law in the fundamental sense—that what is basically in dispute is the violation of legal rights and obligations. Attempts have been made to come to terms with the concept of legal dispute by listing typical factual situations and the questions that they entail. Examples of ‘legal’ disputes are disputes regarding non-performance, including cases of excuse based on force majeure or similar events, the violation of ‘stabilization’ clauses, the interpretation of the agreement and of the relevant legislation, or the termination of the agreement, including expropriation or nationalization, and related issues of compensation. These examples show that the distinction between factual and legal disputes must be made in the light of the circumstances, and this may be difficult to do in advance. On the other hand, Schreuer has observed that while these descriptions are undoubtedly useful, it must be borne in

mind that fact patterns alone do not determine the legal character of a dispute. Indeed, it is rather the type of claim that is put forward and the prescription or policy that is invoked that decides whether a dispute is legal or not. The dispute will only qualify as legal if legal remedies such as restitution or damages are sought, and if legal rights based on, for instance, treaties or legislation are claimed.

(p 258 )3.  The direct nexus between the legal dispute and the investment (‘arising directly out’)

13.16 The legal dispute caused by a particular State’s measure must be directly related to a particular investment. On the other hand, the element of directness does not relate to the investment as such. In Fedax v Venezuela the arbitral tribunal held that:

Jurisdiction can exist even in respect of investments that are not direct, so long as the dispute arises directly from such transaction.

13.17 Investment operations typically involve a number of ancillary transactions and legal contracts which include financing, the lease of property, purchase of various goods, marketing of produced goods, and tax liabilities. While in economic terms these transactions and contracts are all more or less linked to the investment, the question of whether these peripheral activities arise directly out of an investment for the purposes of ICSID’s jurisdiction may be subject to doubt. Any decisions in this respect have to be taken on a case-by-case basis.

13.18 The requirement of directness is one of the objective criteria for jurisdiction and is, thus, independent of the parties’ consent. This means that, no matter what the parties have agreed, the dispute must not only be connected to an investment but must also be reasonably closely connected. Nevertheless, in practical terms, the objective and the subjective elements may be related, as disputes arising from ancillary or peripheral aspects of the investment operation are likely to give rise to the objection that they do not arise directly from the investment and are not covered by the consent agreement.

13.19  A number of cases suggest that ICSID tribunals are inclined to follow a broad view of consent clauses where the agreement between the parties is reflected in several successive instruments. Expressions of consent are not applied narrowly to the specific document in which they appear but are read in the context of the parties’ overall relationship:

• a series of interrelated contracts may be regarded, in functional terms, as representative of the legal framework for one investment operation; and

• ICSID clauses contained in some, though not all, of the different contracts may be interpreted as applicable to the entire operation.

It has been observed that the need to settle an investment dispute finally and comprehensively would make any other solution impracticable. Therefore, in this case the jurisdictional side of arbitration tends to prevail over the contractual one.

(p. 259) 13.20  While in several Argentinian cases the host State Argentina tried to argue that the taken measures were of a general nature and designed to serve the national welfare but not specifically directed to the particular investor’s operation, arbitral tribunals have not accepted this view. A host State cannot rely, therefore, on the general policy nature of measures taken by it if these measures had a concrete effect on the investment and violated specific commitments and obligations.

4.  The investment

13.21 The existence of an investment is a keystone of ICSID’s jurisdiction. However, despite the fact that the term ‘investment’ appears at the heart of both the name of the ICSID as well as in the title of the Convention on the Settlement of Investment Disputes between States and Nationals of other States, no definition of this term is provided in the text of the treaty.

13.22  It is therefore left to the parties as to what kinds of investments they wish to bring to ICSID, and the only possible indication of an objective meaning that can be derived from the Convention is contained in the preamble’s first sentence, which speaks of ‘the need for international co-operation for economic development and the role of private international investment therein’.

13.23 The reasons for the absence of a definition are to be found in the inability of the draftsmen of the ICSID Convention to agree on a definition sufficiently broad, yet precise enough, to accommodate the variety of situations that may be encountered in actual cases. From a practical point of view this restraint has proved justified, because it has allowed the Convention to accommodate new types of investments, which were barely emerging, or were as yet unknown, at the time the Convention was drafted.

Definitions provided by investment treaties and national investment laws are often of little use as well.

13.24  The evolution of the ICSID case-law on the general understanding of the concept of ‘investment’ has largely been guided by the ruling in Fedax v Venezuela,62 which addressed the status of promissory notes, and where the arbitral tribunal examined the existence of an investment in three steps:

•  under Article 25 of the ICSID Convention; •  under the rules of the applicable BIT; and

•  under a scheme intending to distinguish foreign investment from an ‘ordinary commercial transaction’.

(p. 260) in the eyes of the Fedax tribunal all three steps were distinct but necessary for the finding of an ‘investment’.

Issue Addressed: Respondent s

Issue Addressed: Jurisdiction Ratione Consensus

Argument Advanced: Consent between the Claimant and the

Respondent cannot be developed for arbitration over the alleged dispute

Since the requirements of the definition of investment are not fulfilled and therefore Article 7 of UK-China BIT 1919 cannot be called in unless there is a mutual consensus.

Case law/ Article/ Authority:

Part III Consent in Investment Arbitration, 13 Consent and Jurisdiction » From: Consent in International ArbitrationAndrea Marco SteingruberContent type- Book ContentProduct- International Commercial Arbitration [ICMA]Series- Oxford International Arbitration SeriesSubject(s)- International Centre for Settlement of Investment Disputes — Arbitral tribunal — Waiver of domestic proceeding (NAFTA article 1121) Published in print- 15 March 2012ISBN- 9780199698158

Relevant Paragraph:

A. Consent as the Subjective Side of Jurisdiction

13.03 Like any form of arbitration, investment arbitration is always based on an arbitration agreement, and consent to arbitration is an indispensable requirement for an arbitral tribunal’s jurisdiction.1 Both parties (host State and foreign investor) must have expressed their respective consent. Therefore, although a State’s participation in investment treaties plays an important role for the jurisdiction of tribunals, it cannot, by itself, establish jurisdiction, because both disputing parties must have expressed their consent to arbitrating disputes related to investments.2 Moreover, the host State and the foreign investor must have reached mutual consent to the arbitration of investment disputes in a direct agreement3 or pursuant to the provisions of a national investment law4 or an investment treaty5 and, where relevant, the ICSID Convention.

References

13.04 Under Article 25 of the ICSID Convention, the parties’ consent to submit a dispute to an ICSID arbitration proceeding is a threshold requirement to establish an ICSID tribunal’s jurisdiction over the matter.6 This requirement is so critical that the executive directors of the World Bank, in their 1965 Report on the ICSID Convention, observed: ‘Consent of the parties is the cornerstone of the jurisdiction of the Centre’.7 Consent is the explicit expression of both parties’ acceptance of ICSID arbitration, where:

•  the foreign investor expresses his consents to arbitrate disputes under a specific investment; and

• the host State expresses its consent to arbitrate a specific dispute or anticipated classes of disputes,8 related, however, to an investment.

References

13.05 While ICSID arbitrations require that all parties concerned have agreed to submit to ICSID arbitration, the mere ratification of the ICSID Convention is not in itself consent (p. 255) to arbitration by a State.9 As was made clear in the Preamble to the ICSID Convention, the State never consents to arbitration by simply ratifying the ICSID Convention.10 Ratification therefore only serves to make the State party to the ICSID Convention—it does not grant jurisdiction to an ICSID tribunal.11

References

13.06  However, in contrast to commercial arbitration, where the jurisdiction of the arbitral tribunal is based exclusively on a valid arbitration clause contained in the main contract between the parties or concluded ad hoc, the power of the tribunal in an investment dispute usually emanates from an interplay of parties’ consent and objective jurisdictional requirements contained either in the investment protection law of the host State or in bilateral or multilateral investment treaties.12

13.07  Although in the ICSID Convention the jurisdictional requirements are in part regulated by the ICSID Convention itself—the requirements relating to the nature of

the dispute (ratione materiae) and those relating to the parties (ratione personae)—and in part left to the parties’ disposition in framing their consent, the relationship between the objective and consensual sides of jurisdiction has given rise to some debate.13 Indeed, during the Convention’s drafting, a number of delegates felt that the parties’ consent in a particular case implied their recognition that the objective criteria had been met,14 whereas another group of delegates objected to an imprecise or open-ended description of the Centre’s scope of activities, because they feared that the mere participation in a convention which opens the door to a far-reaching jurisdiction would create expectations that would make it difficult for host States to resist pressure to give their consent.

13.08 On the other hand, it has been underlined that it would be inaccurate to assume that the general phrasing of the objective criteria in Article 25 of the ICISID Convention gives the parties complete freedom to determine, by the terms of their consent, which disputes they wish to submit to the Centre. This fact has been borne out by the Report of the Executive Directors:

While consent of the parties is an essential prerequisite for the jurisdiction of the Centre, consent alone will not suffice to bring a dispute within its jurisdiction. In keeping with the purpose of the Convention, the jurisdiction of the Centre is further limited by reference to the nature of the dispute and the parties thereto.

13.09 The objective jurisdictional requirements set out in Article 25 of the ICSID Convention are outer limits to the Centre’s jurisdiction that are not at the disposal of the parties. Moreover, with regard to the scope of consent, Article 25(1) of the ICSID Convention permits submission to the jurisdiction of the Centre of any legal dispute. The parties are therefore free to agree to submit contractual disputes to ICSID, provided that the jurisdictional requirements of the ICSID Convention are met. In other words, the scope of consent can be extended beyond treaty claims. On the other hand the contracting States parties may also limit the scope of their consent.

Issue Addressed: Respondent s

Issue Addressed: Jurisdiction Ratione Consensus

Argument Advanced: Consent between the Claimant and the

Respondent cannot be developed for arbitration over the alleged dispute

Since the requirements of the definition of investment are not fulfilled and therefore Article 7 of UK-China BIT 1919 cannot be called in

unless there is a mutual consensus.

Case law/article/authority: Google browser (Internet)

Relevant Paragraph:

4.1 ICSID Convention as outer limit for parties’ consent

13.25   The importance of Article 25 of the ICSID Convention in ICSID arbitrations is that it places limits upon the parties’ ability to consent to ICSID arbitration. With regard to the notion of investment, arbitral tribunals have adopted a list of criteria that they find typical for investments. These criteria are:

• a substantial commitment/contribution of the investor; • a certain duration of the project;

• the existence of operation risk; and

• a contribution for the host State’s development.

13.26 The four criteria are considered to be embodied in Article 25 of the ICSID Convention. The earliest award which considered the meaning of the concept ‘investment’ in depth was Fedax v Republic of Venezuela, which adopted these descriptors based on the Commentary written by Professor Schreuer. These criteria were then restated clearly in Salini v Morocco in 2001 and have also been applied in subsequent decisions. The application of these criteria is now generally referred to as the Salini test. Such an application of the Salini test happened more recently in the Phoenix case.

13.27 However, Reed, Paulsson, and Blackaby have observed that ICSID tribunals seem to have been less uniform in recent years with the Salini criteria following different approaches:

• a first approach adopted by the tribunals considers that the notion of ‘investment’ under the ICSID Convention can be understood and illustrated through the Salini criteria. These characteristics are, however, not a strict test, but only criteria establishing ‘benchmarks or yardsticks to help a tribunal in assessing the existence of an investment’, that ‘must be considered as mere examples’;

(p. 261) • a second approach, on the other hand, considers such criteria as necessary elements that must be satisfied cumulatively. ICSID tribunals which have followed this second approach did, however, not agree on the exact criteria. Some tribunals have adopted three or all four of the characteristics of the Salini test, whereas others have added criteria to be fulfilled, such as a regularity of profit and return, and investment of assets in good faith and in accordance with the laws of the host State.

Recently in Abaclat and Others v Argentina  the majority tribunal even departed from the Salini test. The tribunal found that the ICSID Convention’s aim is ‘to encourage private investment while giving the parties the tools to further define what kind of investment they want to promote’.

13.28 Professor Schreuer, however, observed that the ICSID Convention ‘does not imply unlimited freedom for the parties . . . the term “investment” has an objective meaning independent of the parties’ disposition’. Therefore, an asset which is considered to be an investment under an investment treaty may not necessarily be one under Article 25 of the ICSID Convention.

13.29  Yet in Fedax v Republic of Venezuela  the tribunal held that Article 25(1) of the ICSID Convention covers direct and indirect foreign investments and that promissory notes, as such, were not excluded from the Convention, so that the definition given to the term ‘investment’ by the parties was of relevance. The Abaclat majority tribunal even considered bonds and the security entitlements therein to be generated by a contribution that is in line with the spirit and aim of Article 25 of the ICSID Convention and therefore qualified as ‘investment’ under Article 25 of the ICSID Convention.

4.2 The importance of State parties’ consent to arbitration (offers) in defining ‘investment’

13.30 The ICSID Convention links its jurisdiction in Article 25 to ‘disputes arising directly out of an investment’ but leaves the definition of ‘investment’ to the parties’ autonomy. Therefore, while, according to the ICSID Convention, ordinary financial transactions are not investments for (p. 262) objective reasons, any investment can be defined by the parties as ‘investment’ in the meaning of Article 25 of the ICSID Convention as far as it respects the objective limits of investments.

Side Arguing for: Respondent

Issue addressed: No denial of Justice to the Claimants.

Argument Advanced: There was not a situation for the Claimants that they had exhausted the local remedies available to them and no damages were awarded to them. The House of Lords, High Court and the Appeals Court gave them a fair chance to claim.

Case Law/Article/Authority: Chevron Corporation and Texaco Petroleum Corporation v Ecuador, Interim Award, IIC 355 (2008), 1st December 2008, Ad Hoc Tribunal (UNCITRAL)

A7 Denial of justice at jurisdictional stage and precedent: The Tribunal was inspired by decisions rendered in respect of denial of justice claims by arbitral tribunals constituted under the ICSID and NAFTA frameworks. For instance, the Tribunal quoted The Loewen Group Inc and Raymond L Loewen v United States , ICSID Case No ARB (AF)/98/3, 25 June 2003, where that tribunal had ruled that the exhaustion of local remedies was a requisite substantive element to a denial of justice claim, but that at the jurisdictional phase this requirement should be limited to a prima facie showing of a denial of justice. (paragraphs 231–238) In the present case, the claimants were able to demonstrate the inability of the Ecuadorian judiciary to rule on their claims. (paragraph 69) This solution respects the prima facie approach and the characterization of issues at a jurisdictional stage.

A8  Beyond this, the Tribunal’s reference to and reliance on decisions rendered under other institutional frameworks raises the issue of precedent in investment treaty arbitration. Whilst there is no doctrine of precedent per se in international investment law, tribunals will generally take into consideration previous decisions. The tribunals in AES Corp v Argentina , ICSID Case No ARB/02/17, 26 April 2005 and Saipem SpA v Bangladesh , ICSID Case No ARB/05/17, 21 March 2007 have remarked on this practice. Indeed, no obligation of stare decisis binds arbitral tribunals in the context of international investment arbitration. Nevertheless, prior decisions on similar legal and/or factual issues often serve as guidance for tribunals. The most important consequence of reference to or reliance upon previous decisions is the

strengthening of predictability in decision-making, which serves to enhance the authority of arbitral tribunals in the international investment sphere and ensure the stability of international investment law.

Side Arguing for: Respondent

Issue addressed: No denial of Justice to the Claimants.

Argument Advanced: There was not a situation for the Claimants that they had exhausted the local remedies available to them and no damages were awarded to them. The House of Lords, High Court and the Appeals Court gave them a fair chance to claim.

Case Law/ Article/Authority:British Treaties for the Promotion and Protection of Investments

F A MannContent type: Yearbook ArticlesOUP reference: IC-JA 17 (1981)Citation(s): British Yearbook of International Law, 1981; 52:1 241 - 254 (Other Reference) (1981) 52(1) BYBIL 241 (Other Reference)Product: Investment Claims [IC]

Relevant Paragraph:III. Remedies

9. Among the remedies available to an investor there is in the first place any local remedy which the law of the host country may provide. In the event of expropriation, as has been pointed out in paragraph 7 above, there exists the specifically guaranteed right to have both the legality of the expropriation and the valuation of the investments reviewed by a judicial or other independent body, though this is without prejudice to the additional remedies presently to be mentioned.

10.  Among these there is in the first place the investor's (though not the host country's) right to have any dispute decided by a tribunal set up under the World Bank's Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 18 March 1965. This affords the best legal protection which, probably, in present circumstances is available, though the Convention of 1965 and, in particular, the panel of arbitrators set up by the World Bank cannot by any means be viewed with unqualified enthusiasm.

The right of access to the Convention and the tribunal contemplated by it is considerably strengthened by the express provision according to which a company incorporated in the host country may itself be a claimant if the foreign investor owns the majority of the shares in it; this probably includes an investor who owned the shares prior to expropriation.

On the other hand, the protection afforded to the investor is considerably prejudiced if he fails to obtain a direct undertaking to him to apply the Convention and submit to the jurisdiction of the tribunal. The Investment Protection Agreement is a treaty between the High Contracting Parties, from which the private investor is unlikely to be able to derive any benefit unless he ensures the inclusion of a corresponding clause in the document to which he is a party. In the absence of such a clause, he would depend upon the readiness of his government to apply under Article XI, for according to Article 25 of the Convention on the Settlement of Investment Disputes it is a condition of the Centre's jurisdiction that ‘the parties to the dispute consent in writing to submit to the Centre’.

11.  Independently of the remedies available to the investor, any ‘dispute between the Contracting Parties as to the interpretation or application of the present Agreement’ may be submitted to arbitration ‘in accordance with the provisions of this Agreement and the applicable principles of international law’.

This, it is submitted, is not a case of a State affording diplomatic protection to one of its nationals: any legitimate interest of the State in the dispute which concerns the interpretation and application of the Agreement is sufficient to give it jus standi. This may be important, for instance, if the disputes involve a company incorporated in the host country if all or most of the shares in its capital are owned by the protecting State's nationals. This particular result, however, is probably in line with the general rules relating to diplomatic protection; the point is one on which, it will be remembered, important dicta are to be found in the International Court of Justice's judgment in the Barcelona Traction case, but which has never been finally decided

and is not dealt with in the treaties under discussion. It is, however, possible that even in this procedural connection the overriding entitlement to fair and equitable treatment may have a significant function.

II. The Meaning of Fair and Equitable Treatment

At least two different views have been advanced as to the precise meaning of the term ‘fair and equitable treatment’ in investment relations. One possible approach is that the term is to be given its plain meaning: hence, where a foreign investor has an assurance of treatment under this standard, a straightforward assessment is to be made whether particular treatment meted out to that investor is both ‘fair’ and ‘equitable’. Under this approach, treatment is fair when it is ‘free from bias, fraud or injustice; equitable, legitimate … not taking undue advantage; disposed to concede every reasonable claim’; and, by the same token, equitable treatment is that which is ‘characterized by equity or fairness … fair, just, reasonable’.

The plain meaning approach is no doubt, entirely consistent with canons of interpretation in international law. Also, because there are very few judicial decisions on the precise meaning of the fair and equitable standard in particular situations, there may be a tendency to assume that the expression is so readily understood that it has not generated significant differences of opinion. This would suggest that States are agreed on the meaning of the term; in the absence of clear pronouncements to the contrary, it would also suggest that States are agreed that the term should be understood in its plain, or literal, sense.

At the same time, however, the plain meaning approach is not without its difficulties. In the first place, the words ‘fair’ and ‘equitable’ are by themselves somewhat subjective, and therefore lacking in precision. Consequently, if one relies only on the plain meaning of the words, it is conceivable that a given situation satisfies the standard of fair and equitable treatment in the perspective of a capital-importing country, but it fails to do so from the point of view of the foreign investor or the capital-exporting country. This is especially true in circumstances where the parties involved are individuals or nations ‘of unlike faculties of appreciation and different cultural and juridical backgrounds’.

Secondly, difficulties of interpretation may also arise from the fact that the words ‘fair and equitable treatment’, in their plain meaning, do not refer to an established body of law or to existing legal precedents; instead, the plain meaning approach presumes that, in each case, the question will be whether the foreign investor has been treated fairly and equitably, without reference to any technical understanding of the meaning of fair and equitable treatment.

On the other hand, the vagueness inherent in the plain meaning approach is not altogether disadvantageous. In some circumstances, both the States and the foreign investors may view lack of precision as a virtue, for it promotes flexibility in the investment process. Investment treaties and contracts are almost invariably prepared in advance of the projects to which they will be applicable; and, usually, the parties to these treaties and contracts cannot predict the range of possible occurrences which may affect the future relationship between the State and particular investors. Accordingly, States and investors may support the fair and equitable treatment.

On the other hand, the vagueness inherent in the plain meaning approach is not altogether disadvantageous. In some circumstances, both the States and the foreign investors may view lack of precision as a virtue, for it promotes flexibility in the investment process. Investment treaties and contracts are almost invariably prepared in advance of the projects to which they will be applicable; and, usually, the parties to these treaties and contracts cannot predict the range of possible occurrences which may affect the future relationship between the State and particular investors. Accordingly, States and investors may support the fair and equitable standard precisely because they believe it does not provide a detailed a priori solution to certain issues which could arise in the future.

The second approach to the meaning of the term suggests that fair and equitable treatment is synonymous with the international minimum standard in international law. This interpretation proceeds from the assumption that under customary international law foreign investors are entitled to a certain level of treatment, and that treatment which falls short of this level gives rise to liability on the part of the State. If, in fact, fair and equitable treatment is the same as the international minimum standard, then some of the difficulties of interpretation inherent in the plain meaning approach may be overcome; there is a substantial body of jurisprudence and doctrine concerning the elements of the international minimum standard.

At the policy level, however, the approach which equates fair and equitable treatment with the international minimum standard is problematic in certain respects. For one thing, it is to be noted that if States and investors believe that the fair and equitable standard is entirely interchangeable with the international minimum standard, they could indicate this clearly in their investment instruments. But most investment instruments do not make a link between the two standards.

For another, attempts to equate the two standards may be perceived as paying insufficient regard to the substantial debate in international law concerning the international minimum standard. More specifically, while the international minimum standard has strong support among developed countries, Latin American countries in particular have traditionally held reservations as to whether this standard has become a part of customary international law. In this context of uncertainty, it is difficult to assume that Latin American countries and others freely accept that the international minimum standard will be applied to their investment treaties in instances where they have not opted to incorporate that standard expressis verbis.

As the foregoing suggests, there is scope for more extensive consideration of the meaning of the term ‘fair and equitable treatment’ as used in investment instruments,

an examination which will be undertaken in Section IV below. This assessment follows a general review concerning the history and utilization of the standard.

Side Arguing for: Respondent

Issue addressed: No denial of Justice to the Claimants.

Argument Advanced: There was not a situation for the Claimants that they had exhausted the local remedies available to them and no damages were awarded to them. The House of Lords, High Court and the Appeals Court gave them a fair chance to claim.

Case Law/Article/Authority: Remedies in Investor-State Arbitration: A Public Interest PerspectiveMargaret B. Devaney – March 22, 2013

Author: Margaret Devaney is a PhD student at the Centre for Commercial Law Studies, Queen Mary University of London.

Relevant Paragraph:

It would be strange indeed, if the outcome of acceptance of a bilateral investment treaty took the form of liabilities ‘likely to entail catastrophic repercussions for the livelihood and economic well-being of the population’ of [the host state].”

This quote from Professor Brownlie’s Separate Opinion on the Issues at the Quantum Phase in CME v Czech Republic[1]points to the potentially deleterious impact of an award of damages in investor-state arbitration and, more generally, highlights the potential intersection between the remedies awarded in investor-state arbitration and matters of public interest.[2] While an extensive body of literature maps the tensions between regulatory sovereignty and investor protection in international investment

law and analyses the balancing of private and public interests in arbitral practice, only a small sub-set of this literature makes reference to public interest considerations at the remedies stage of the investor-state arbitration process.[3] Conversely, the literature on the remedies awarded in investor-state arbitration is primarily aimed at describing the mechanics of the complex valuation methods that have been applied by investment treaty tribunals in assessing damages rather than in considering the potential role of the remedies stage from a public interest perspective.

This trend, with few exceptions, appears to be mirrored in arbitral practice. Concepts such as the public interest, regulatory autonomy or sustainable development have seldom been referred to by investor-state tribunals when deciding on the quantum of damages or compensation to be awarded to claimant investors. The references that do exist have generally denied the relevance of such considerations at the remedies stage, at least in the specific circumstances of the case at hand. This is true for both the existing standards of ‘fair market value’ for lawful expropriations and ‘full reparation’ for unlawful expropriations, which derive from the rules on state responsibility under international law.

For example, in deciding on the quantum of compensation to award for a lawful expropriation based on the ‘fair market value’ standard, the tribunal in Santa Elena v Costa Rica noted that the fact that property was taken for a legitimate public purpose, in this case the protection of the environment, does not alter the level of compensation that must be paid. The same tribunal also noted that the international source of the obligation to protect the environment makes no difference to the the level of compensation payable.

Similarly, in relation to the ‘full reparation’ or Chorzów Factory standard applicable to unlawful breaches, the only substantial explicit recognition of public interest considerations have come in the form of the distinction drawn between lawful and unlawful expropriations in ADC v Hungary and in subsequent awards. Prior to the ADC award, arbitral tribunals generally applied the relevant treaty standard for lawful expropriation to determine the quantum of damages for unlawful expropriations, even in the case of multiple treaty breaches. However, in ADC v Hungary the ‘full reparation’ standard rather than the standard set out in the relevant investment treaty was applied. The investor possessed a series of development rights at Budapest airport, which were expropriated just as passenger traffic was about to substantially increase. Since the value of the investment had increased between the date of the taking and the date of the award, that extra amount was awarded in accordance with the ‘full reparation’ standard. The ADC tribunal did, however, note that such an increase in value between the date of the taking and the date of the award was unusual, if not unique.

Despite the current lack of reference to public interest considerations in determining the quantum of damages or compensation to be awarded to claimant investors, there is a close connection between the design and application of a remedy and how the rights which that remedy protects are balanced with public policy goals. This ‘social’ function of remedies has been recognised in public law cases in domestic legal systems in which a balancing of the interests of the injured party as against the interests of the public generally occurs in deciding on the extent of the remedy to be awarded. In investor-state arbitration, while some (but by no means all) tribunals have

recognised that host state and investor interests should be balanced in assessing liability at the merits stage and have applied proportionality testing to achieve this, this normative choice has not discernibly affected the approach of those tribunals to assessing the quantum of damages or compensation payable by the host state.

I would argue that, in order to ensure an optimal balance between host state and investor interests, the normative basis deemed appropriate to the merits stage should in fact carry through to the remedies stage. This would accord tribunals greater flexibility to recognize the ‘shades of grey’ which may exist in the relationship between the investor and host state as opposed to requiring an ‘all or nothing’ approach to liability. Such flexibility is much needed given that the lack of flexibility displayed by arbitrators in interpreting long-term contracts and investment treaties when dealing with fundamental changes in circumstances (such as a situation of economic turmoil) has been identified as a key factor underlying the backlash against investment arbitration.

In fact, the remedies stage can be seen as a ‘natural home’ for the balancing of interests given that investment treaty tribunals are accorded a much greater degree of discretion at the remedies stage than at other stages of the arbitral process. This allows tribunals to approximate compensation or damages or to rely on ‘equitable considerations’ or ‘equitable principles’ in justifying a particular award. For example, in AMT v Zaire the tribunal stated that it was exercising “its discretionary and sovereign power to determinate (sic) the quantum of compensation….taking into account the circumstances of the case before it.” Similarly, in Santa Elena v Costa Rica “proceeded by means of a process of approximation” based on the parties’ submissions as to the value of the property on the date of the expropriation.

In any event, application of the ‘fair market value’ and ‘full reparation’ standards involves a significant element of arbitral discretion. For example, investment treaty tribunals must commonly determine a ‘fair market value’ in respect of a unique asset which the seller does not want to sell and for which no willing buyer is likely to appear following an expropriation, which means that the market value of the asset must be constructed by inference from a range of other evidence. Similarly, applying the ‘full reparation’ standard involves plotting the hypothetical alternative course of events which would have occurred had the unlawful act not occurred: an exercise which requires a certain margin of discretion to be afforded to arbitrators.

Thus, the existing valuation standards of ‘fair market value’ and ‘full reparation’ should be critically evaluated to determine the extent to which they can already accommodate public interest considerations, given the discretion which arbitrators can exercise in applying these standards and in evaluating damages or compensation generally. These valuation standards have the advantage of bringing a level of certainty to the valuation process (at least in theory) and this should not be blithely sacrificed. For example, it may be the case that economic difficulties on the part of the host state can, in many cases, be adequately reflected within the calculation of damages or compensation according to these standards. Thus, in applying the ‘full reparation’ standard, the hypothetical situation of the investor had the wrongful act not occurred would have been (most likely adversely) affected by host state economic conditions and this should be reflected in the damages calculation. Similarly, the

economic conditions prevalent in the host state at the time of the expropriation will generally affect the ‘fair market value’ of the expropriated asset.[20]

In relation to the possibilities for new or renegotiated international investment agreements (IIAs), it is interesting to note that UNCTAD’s Investment Policy Framework for Sustainable Development (IPFSD)[21] includes a number of options relating to the remedies stage in its menu of drafting options for policy-makers, several of which would require derogation from prevalent existing valuation standards. For example, IPFSD suggests a policy option providing for the amount of compensation to be “equitable in light of the circumstances of the case” and goes onto suggest that specific rules on damages for treaty breach could be delineated, such as excluding the recoverability of punitive and/or moral damages, limiting the recoverability of lost profits (up to the date of the award) or ensuring that the amount of damages payable is commensurate with the country’s level of development.[22] IPFSD also suggests that future IIAs could provide that non-compliance with universally recognized standards, such as the International Labour Organization’s Tripartite Multinational Enterprises Declaration,[23] the UN Guiding Principles on Business and Human Rights,[24]or with applicable Corporate Social Responsibility standards,[25] may be considered by a tribunal when interpreting and applying treaty provisions and when determining the amount of damages due to the investor.[26]

Some of IPFSD’s suggestions are likely to prove more workable than others and a number may be perceived to overly dilute the protection afforded to foreign investors under IIAs. In addition, since it is not the function of IPFSD to do so, no guidelines or suggestions are given as to how reforms to future IIAs that affect the various stages of the arbitral process could inter-relate and, in particular, how reforms relating to the merits stage could inter-relate with remedies-related provisions. However, IPFSD’s inclusion of remedies-related suggestions in its menu of policy options is to be welcomed as it opens up for discussion the role of remedies in investor-state arbitration from a public interest/sustainable development perspective.

In conclusion, despite the growing body of literature on both the balancing of private and public interests in investor-state arbitration and an increasing awareness on the part of investor-state arbitration tribunals that public interests may need to be taken into account in applying and interpreting investor rights, the remedies stage has remained largely unexamined from this perspective. Likewise, the question of whether balancing of public and private interests at the remedies stage could ameliorate some of the difficulties associated with balancing of interests at the merits stage has not been comprehensively addressed. It is submitted that these are issues worth exploring as part of an integrated approach to the promotion of sustainable development concerns in investor-state arbitration and, more generally, in international investment law.

Relevant Paragraph:

A. Consent as the Subjective Side of Jurisdiction

13.03 Like any form of arbitration, investment arbitration is always based on an arbitration agreement, and consent to arbitration is an indispensable requirement for an arbitral tribunal’s jurisdiction.1 Both parties (host State and foreign investor) must have expressed their respective consent. Therefore, although a State’s participation in investment treaties plays an important role for the jurisdiction of tribunals, it cannot, by itself, establish jurisdiction, because both disputing parties must have expressed their consent to arbitrating disputes related to investments.2 Moreover, the host State and the foreign investor must have reached mutual consent to the arbitration of investment disputes in a direct agreement3 or pursuant to the provisions of a national investment law4 or an investment treaty5 and, where relevant, the ICSID Convention.

13.04 Under Article 25 of the ICSID Convention, the parties’ consent to submit a dispute to an ICSID arbitration proceeding is a threshold requirement to establish an ICSID tribunal’s jurisdiction over the matter.6 This requirement is so critical that the executive directors of the World Bank, in their 1965 Report on the ICSID Convention, observed: ‘Consent of the parties is the cornerstone of the jurisdiction of the Centre’.7 Consent is the explicit expression of both parties’ acceptance of ICSID arbitration, where:

• The foreign investor expresses his consents to arbitrate disputes under a specific investment; and

• The host State expresses its consent to arbitrate a specific dispute or anticipated classes of disputes,8 related, however, to an investment.

13.05 While ICSID arbitrations require that all parties concerned have agreed to submit to ICSID arbitration, the mere ratification of the ICSID Convention is not in itself consent (p. 255) to arbitration by a State.9 As was made clear in the Preamble to the ICSID Convention, the State never consents to arbitration by simply ratifying the ICSID Convention.10 Ratification therefore only serves to make the State party to the ICSID Convention—it does not grant jurisdiction to an ICSID tribunal.11

13.06  However, in contrast to commercial arbitration, where the jurisdiction of the arbitral tribunal is based exclusively on a valid arbitration clause contained in the main contract between the parties or concluded ad hoc, the power of the tribunal in an investment dispute usually emanates from an interplay of parties’ consen and objective jurisdictional requirements contained either in the investment protection law of the host State or in bilateral or multilateral investment treaties.12

13.07  Although in the ICSID Convention the jurisdictional requirements are in part regulated by the ICSID Convention itself—the requirements relating to the nature of the dispute (ratione materiae) and those relating to the parties (ratione personae)—and in part left to the parties’ disposition in framing their consent, the relationship between the objective and consensual sides of jurisdiction has given rise to some debate.13 Indeed, during the Convention’s drafting, a number of delegates felt that the

parties’ consent in a particular case implied their recognition that the objective criteria had been met,14 whereas another group of delegates objected to an imprecise or open-ended description of the Centre’s scope of activities, because they feared that the mere participation in a convention which opens the door to a far-reaching jurisdiction would create expectations that would make it difficult for host States to resist pressure to give their consent.15

13.08  On the other hand, it has been underlined that it would be inaccurate to assume that the general phrasing of the objective criteria in Article 25 of the ICISID Convention gives the parties complete freedom to determine, by the terms of their consent, which disputes they wish to submit to the Centre.16 This fact has been borne out by the Report of the Executive Directors:

While consent of the parties is an essential prerequisite for the jurisdiction of the Centre, consent alone will not suffice to bring a dispute within its jurisdiction. In keeping with the purpose of the Convention, the jurisdiction of the Centre is further limited by reference to the nature of the dispute and the parties thereto.17

13.09 The objective jurisdictional requirements set out in Article 25 of the ICSID Convention are outer limits to the Centre’s jurisdiction that are not at the disposal of the parties.18 Moreover, with regard to the scope of consent, Article 25(1) of the ICSID Convention permits submission to the jurisdiction of the Centre of any legal dispute. The parties are therefore free to agree to submit contractual disputes to ICSID, provided that the jurisdictional requirements of the ICSID Convention are met.19 In other words, the scope of consent can be extended beyond treaty claims. On the other hand the contracting States parties may also limit the scope of their consent.20

Side Arguing For: Respondents

Issue Addressed: Showing Of Damage

Argument Advanced: The right approach has to be made in calculating the damage actually suffered by the Claimant so that it is fair and equitable for the Respondent also.

Case Law/Article/Authority:

7 Expropriation and Compensation

From: Chinese Investment Treaties: Policies and Practice

Norah Gallagher, Wenhua ShanContent type: Book ContentSeries: Oxford International Arbitration SeriesISBN: 9780199230259Product: International Commercial Arbitration [ICMA]Published in print: 26 March 2009Subject(s): Compensation — Arbitration — Awards

Relevant Paragraph:

Standard of Compensation

7.52 All BITs make the payment of compensation a mandatory condition for an expropriation, but there are variations in the wording of the clauses that provide for the payment of compensation. The Chinese BITs do not adopt the widely used ‘Hull Formula’ of adequate, prompt, and effective compensation. The three Model BITs have different variations that have been followed in China’s treaties with some modifications. The First and Current Model BITs refer to the ‘value’ of the investment. The Austria–China BIT, for example, mirrors the Model. It provides at Article 4(1):

The compensation shall be equivalent to the value of the expropriated investment immediately prior to the time when the expropriation became public. (Emphasis added)

7.53 In this clause, as well as in most others that follow the Model format, the amount of compensation is pegged to the ‘value of the expropriated investment’. The UK BIT refers to ‘reasonable compensation’ which is then linked to the ‘real’ value of the investment. Some BITs specify this link between compensation and value by a reference to the ‘actual’, ‘genuine’, or ‘market’ value. The Netherlands BIT refers to compensation being ‘equivalent to the fair market value of the expropriated investment immediately before the expropriation measures were taken. The fair market value shall not reflect any change in value because the expropriation had become publicly known earlier’. This standard of compensation is similar to the (p. 281) terms of the Canadian and US Model BITs. The fair market value is widely used in BITs and arbitral practice. In fact, the World Bank Guidelines confirm that

compensation will be adequate ‘if it is based on the fair market value of the taken asset’. It may not be appropriate in all cases, as was observed by Professor Schwartz in his Separate Opinion in SD Myers. The fair market value standard ‘may not lead to a just or practicable result in all cases. In some cases it may be difficult or impossible to assess ‘fair market value’. In others, a tribunal might think it lawful and just [to] use a different standard than fair market value’.

7.54 Occasionally Chinese BITs refer to concepts such as ‘fair and equitable compensation’, ‘fair, effective and non-discriminatory compensation’, and ‘fair and reasonable compensation’. Another variation appears in the Laos BIT which refers to ‘appropriate and effective compensation’. The Pakistan BIT allows the damages to be calculated under the ‘laws and regulations’ of the host state. An investor would have to look to the provisions of Chinese law on expropriation, which, as can be seen below, is not very prescriptive. The Mauritius BIT refers to ‘just compensation’ being paid. This is then linked to the ‘genuine value’ of the asset which at least gives a tribunal some guidance on how to achieve a ‘just’ quantum award. This is the same compensation provision under the Czech Republic–Netherlands BIT reviewed in CME. In the award on damages the tribunal by majority determined that the standard of compensation on expropriation was the ‘fair market value’. The tribunal was of the view that ‘fair market value’ equates with ‘just compensation’ that represents the ‘genuine value’ of the property affected’ which was what the terms of the BIT provided. The calculation gave a very different result to that under the ‘just compensation’ standard in the BIT.

7.58 Treaties typically do not specify further the content of the compensation requirement. The World Bank Guidelines provide that a tribunal will determine the fair market value using the valuation method agreed to by the parties. Absent an agreement, fair market value ‘will be acceptable if determined by the State according to reasonable criteria related to the market value of the investment i.e. in an amount that a willing buyer would normally pay to a willing seller after taking into account the nature of the investment, the circumstances in which it would operate in the future and its specific characteristics, including the period in which it has been in existence, the proportion of tangible assets in the total investment and other relevant factors pertinent to the specific circumstances of each case. In this respect, the World Bank Guidelines contain a useful restatement (p. 283) and explanation of valuation methods, including ‘going concern’, ‘DCF’, ‘liquidation value’, ‘replacement value’, and ‘book value’.

7.59 China’s current Model BIT includes a reference in Article 4(2) that the value ‘shall be determined in accordance with generally recognized principles of valuation’. This additional specification on how a tribunal should approach the exercise of calculating the compensation appears in more recent treaties. Such valuation principles are set out, for example, in the World Bank Guidelines on the Treatment of Foreign Direct Investment. However, even without an explicit reference to such principles in a treaty, arbitral tribunals will often apply them in principle. The Guyana BIT incorporates this provision as well as adding that valuation shall be determined as

‘if the investments were to be sold as an ongoing concern on the open market’, disregarding any expropriation.

Side Arguing For: Respondents

Issue addressed: production of documents by the Claimant

Argument Advanced: The documents asked for by the respondents are important to be submitted in order to carefully analyse the evidences.

Case law/Article/Authority: 19 Article 19—Evidence

From: A Guide to the ICDR International Arbitration Rules

Martin F Gusy, James M Hosking, Franz T SchwarzContent type: Book ContentPublished in print: 07 April 2011Product: International Commercial Arbitration [ICMA]ISBN: 9780199596843Subject(s): Burden of proof — Production of documents — Arbitral tribunal

Relevant Paragraph:

Article 19 

1. Each party shall have the burden of proving the facts relied on to support its claim or defense.

2. The tribunal may order a party to deliver to the tribunal and to the other parties a summary of the documents and other evidence which that party intends to present in support of its claim, counterclaim or defense.

3 . At any time during the proceedings, the tribunal may order parties to produce other documents, exhibits or other evidence it deems necessary or appropriate.

I. Introduction

19.01 The decisions of tribunals to admit or refuse to admit evidence are crucial to both the arbitral process and the determination of a claim. Therefore, presenting evidence in support of a party’s claim before a tribunal is at the very heart of the arbitral process. Indeed, the function of an arbitral tribunal is to assess the evidence presented by the parties, and make an informed and impartial determination as to the merits of the claims and counterclaims presented. Accordingly, Article 19(1) outlines that each party bears the burden of proving the relevant facts on which it relies to support any claim or counterclaim or to establish any defence.

19.02 Article 19(2) and (3) provides that the tribunal controls the evidentiary process, and may require the parties to produce documents that will assist the tribunal in (p. 190) its determinations. The tribunal has substantial discretion to control the scope and extent of disclosure of documents, and given the 2008 ICDR Guidelines for Arbitrators Concerning Exchanges of Information, tribunals are well equipped to ensure that the parties obtain a fair and just opportunity to present their evidence, yet in a prompt and efficient manner that does not undo the perceived temporal advantage of choosing arbitration over litigation.

A. Burden of proof (Article 19(1))

Article 19(1) 

Each party shall have the burden of proving the facts relied on to support its claim or defense.

19.03 Article 19(1) requires each party to carry the burden of proving the facts on which it relies in support of its claim or defence. While ‘[a]s a general rule, a party to an international arbitration has the burden of proving the facts necessary to establish its claim or defence’,1 there is little guidance in international arbitral practice for determining what standard of proof actually applies (for example, the ‘balance of the probabilities’, ‘clear and convincing evidence’, or even ‘beyond reasonable doubt’). Indeed, ‘[i]international arbitration conventions, national arbitration laws, compromise, arbitration rules and even the decisions of arbitral tribunals are almost uniformly silent on the subject of the standard of proof ’.2

19.04  Perhaps because it has become a general rule of international arbitral practice that each party bears the burden of proof for proving its own claim, Article 19(1) is not reflected in other institutional arbitration rules in that it expressly states a general

rule that already widely known and accepted in arbitral practice. The genesis of Article 19(1) is, presumably, the near-identical language found in the 1976 UNICTRAL Rules, stating that ‘[e]ach party shall have the burden of proving the facts relied on to support his claim or defence’.3

19.05 This language embodies ‘the general principle [that] was expressed by the Tribunal in Reza Said Malek: “it is the Claimant who carries the initial burden of proving the facts upon which he relies. There is a point, however, at which the Claimant may (p. 191) be considered to have made a sufficient showing to shift the burden of proof to the Respondent”’.4 Thus, each party, beginning with the claimant, must discharge its burden of proof by presenting evidence to the tribunal in support of its claims.

B. Exchange of information and document production (Article 19(2) and (3))

Article 19(2) 

The tribunal may order a party to deliver to the tribunal and to the other parties a summary of the documents and other evidence which that party intends to present in support of its claim, counterclaim or defense.

Article 19(3) 

At any time during the proceedings, the tribunal may order parties to produce other documents, exhibits or other evidence it deems necessary or appropriate.

19.08 As discussed in the context of Article 16, the tribunal may, in its discretion, direct the order of proof. Article 19(2) and (3) reinforces in express terms that the tribunal may request that the parties offer specific evidence and/or to order the production of documents by way of disclosure. The tribunal is entitled to order the production of evidence either upon a party’s request or of its own volition if it is deemed appropriate in the circumstances of the case. The tribunal will, in all instances, be guided by the relevance of the evidence for the issues at bar.

19.09  In that regard, the ICDR has recently introduced Guidelines for Arbitrators Concerning Exchanges of Information, aimed at ensuring that document production processes adopted in arbitration do not detract from the arbitrator’s duty to ensure that arbitration remains ‘a simpler, less expensive, and more expeditious process’ than litigation in state courts. Recognizing that each party must have a fair opportunity to present its case, the Guidelines direct the tribunal to ‘manage the exchange of information among the parties in advance of the hearings with a (p. 193) view to maintaining efficiency and economy’. Under the Guidelines, each party is required to produce all documents on which it intends to rely prior to the hearing. The tribunal is authorized to order the production of documents in the possession of the other party if

these documents are described with specificity, and shown to be relevant and material to the outcome of the case.

19.10  On the somewhat controversial subject of the production of ‘electronic documents’, the Guidelines do not treat such electronic documents any differently from traditional sources, and thus apply the same concepts of specificity, relevance, and materiality. The Guidelines merely state in addition that ‘requests for documents maintained in electronic form should be narrowly focused and structured to make searching for them as economical as possible’. The documents can be produced in paper form, or in any other form that is most convenient and costive active in the circumstances. The Guidelines avoid terminology such as ‘disclosure’ or ‘discovery’, and instead emphasize that US court procedures are, in principle, not appropriate for obtaining information in international arbitration.

19.11 The Guidelines also recognize that defences of confidentiality and privilege may be raised against a request for document production. Recognizing the reality in international arbitration that parties and their counsel may be subject to different ethical or professional rules with respect to the documents concerned, the Guidelines direct the tribunal ‘to the extent possible apply the same rule to both sides, giving preference to the rule that provides the highest level of protection’. This approach of a ‘most favourable regime’ appears quite sensible in international cases involving different legal traditions. (p. 194)

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