Treaty Standards: Part 1 Comparative Public Law –

slide1. Treaty Standards: Part 1 Comparative Public Law – Module 5
DEBORSHI BARAT<br>
slide2. 1. FULL PROTECTION AND SECURITY The ‘FPS’ Standard<br>
slide3. Common clause in investment treaties: “full protection and security”
Variations:
“constant protection and security”
“protection and security”
“physical protection and security” INTRODUCTION<br>
slide4. The clause is usually kept vague
NAFTA, Art. 1105(1): “shall accord to investments of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security”
Interpretation*: Article 1105(1) reflects the CIL minimum standard and does not require treatment in addition to or beyond that which is required by the CIL standard of aliens
Question: What Is Security? How Is It Defined?
Debate includes application beyond physical protection INTRODUCTION (contd.)<br>
slide5. The FPS standard relates to the physical protection of the investor and their assets
A number of tribunals have assumed that this standard applies exclusively or preponderantly to physical security and to the host state’s duty to protect the investor against violence directed at persons and property stemming from state organs or private parties
Rumeli v. Kazakhstan: “…protection to foreign investment from physical damage” PHYSICAL SECURITY<br>
slide6. Saluka v. the Czech Republic:
Applies essentially when foreign investment has been affected by civil strife and physical violence
NOT meant to cover any impairment of an investor’s investment but to protect, more specifically, the physical integrity of an investment against interference by the use of force PHYSICAL SECURITY (CONTD.)<br>
slide7. Eastern Sugar v. the Czech Republic:
The tribunal suggested that the standard protected investors against violence stemming from third parties
Such as mobs, insurgents, rented thugs and others engaged in physical violence against the investor in violation of the state monopoly of physical force
Thus, when a host state fails to grant FPS, it fails to act to prevent actions by third parties that need to be prevented PHYSICAL SECURITY (CONTD.)<br>
slide8. PROTECTION A/G PRIVATE VIOLENCE Wena Hotels v. Egypt:
Involved the forcible seizure of two hotels by the employees of a state entity (EHC) with whom the investor had contractual relations
Government officials did not participate in the forcible seizure, but the police and other authorities took no effective measures to prevent or redress the seizure
The tribunal held that Egypt had violated its obligation u/ FPS<br>
slide9. Held that Egypt was aware of the intentions to seize the hotels and took no action to prevent EHC from doing so
In addition, the police and the competent ministry took no immediate action to restore the hotels to the investor
Also, no substantial sanctions had ever been imposed on the perpetrators WENA HOTELS vs EGYPT (CONTD.)<br>
slide10. Tecmed v. Mexico:
The claimant alleged that the Mexican authorities did not act efficiently against social demonstrations and disturbances at the site of the landfill under dispute
The tribunal found that the evidence was not sufficient to prove that the Mexican authorities had encouraged, fostered or contributed to the actions in question
There was also no evidence stating that the authorities had not acted reasonably in accordance with the parameters inherent in a democratic state PRIVATE VIOLENCE (CONTD.)<br>
slide11. Noble Ventures v. Romania:
Involved demonstrations and protests by employees
The tribunal held that it was difficult to identify any specific failure on the part of Romania to exercise due diligence in protecting the claimant
In addition, it had not been established that any non-compliance with the FPS obligation had prejudiced the claimant to a material degree PRIVATE VIOLENCE (CONTD.)<br>
slide12. Pantechniki v. Albania:
The claimant alleged that the respondent was under an obligation not only actively to protect the claimant’s investment against riots and looting but also to take precautionary measures to prevent these events from occurring.
The tribunal held that the extent of the state’s duty under this provision depended to some extent on the resources available to the state
Concluded that the Albanian authorities were powerless in the face of the social unrest of the magnitude in this case PRIVATE VIOLENCE (CONTD.)<br>
slide13. The overall picture emerging from these cases is that a forcible seizure of or interference with the investment, even by a private party, may find its sanction in the standard of protection and security
Most tribunals found that the host state’s only duty was to exercise due diligence in protecting the investors from forcible interference
Significantly, the only case in which a breach of the FPS standard was found (Wena) involved a state-controlled entity as the perpetrator of the violence PRIVATE VIOLENCE: CONCLUSIONS<br>
slide14. Biwater Gauff v. Tanzania:
The FPS standard extends to actions by organs and representatives of the state itself
AMT v. Zaire:
The investment had been subject to looting by elements of Zaire’s armed forces
The tribunal found that the treaty provision imposed upon Zaire a duty of vigilance that would not be inferior to the minimum standard of international law VIOLENCE BY STATE ORGANS<br>
slide15. Held:
Zaire had breached the FPS obligation by taking no measure that would ensure the protection and security of investment
Zaire was responsible for its inability to prevent the disastrous consequences of the underlying events
Zaire had manifestly failed to respect the minimum standard required of it by international law AMT vs ZAIRE (CONTD.)<br>
slide16. Eureko v. Poland:
The claimant alleged harassment by the Polish authorities of the investor’s senior representatives
The tribunal found that there was no clear evidence that Poland was the author or instigator of the actions in question
Although the tribunal was not convinced that the harassment breached the FPS standard, certain acts were disturbing and came close to the line of treaty breach
The tribunal added that if such actions were to be repeated and sustained, it may be that the responsibility of the government would be incurred VIOLENCE BY STATE ORGANS (CONTD.)<br>
slide17. The cases summarised above indicate that unjustified coercive measures taken by the organs of the host state against the investor and their property constitute violations of the FPS standard if they prejudice the investor to a material degree VIOLENCE BY STATE ORGANS: CONCLUSIONS<br>
slide18. The FPS standard goes beyond safeguarding from mere physical violence and requires legal protection for the investor
Some treaties actually refer to ‘legal security’
Walde describes FPS as going beyond ‘police protection’ in a physical sense of security
Instead, this standard would include economic regulatory powers as well LEGAL PROTECTION<br>
slide19. TW Walde, ‘Energy Charter Treaty-based Investment Arbitration’ (2004) 5 J World Invest Trade 390–1:
The FPS obligation would be breached not only by active and abusive exercise of state powers but also by the omission of the state to intervene where it had the power/duty to protect the ability of the investor’s business to function
It involves a duty to use the powers of the government to ensure that foreign investment can function properly on a level playing field, unhindered and not harassed by the political and economic domestic powers WALDE<br>
slide20. Elettronica Sicula SpA (USA v. Italy) [1989] ICJ (“ELSI”):
The guarantee of ‘the most constant protection and security’ in the underlying FCN Treaty was relied upon in the following TWO contexts:
One concerning the factory workers’ occupation
The second complaint based concerning the time taken (16 months) for a decision on an appeal against an order requisitioning the factory LEGAL PROTECTION (CONTD.)<br>
slide21. The ICJ’s Chamber found that the time taken, though undoubtedly long, did not violate the treaty standard in view of other procedural safeguards that are available under local the Italian law
The ICJ Chamber rejected the claimant’s argument on factual grounds
Nevertheless, ELSI provides support to the argument that the FPS standard is not restricted to physical protection ALONE but extends to legal protection through domestic courts as well ELSI CASE (CONTD.)<br>
slide22. CME v. the Czech Republic:
A regulatory authority (media council) had created a legal situation that enabled the investor’s local partner to terminate the investment contract
The BIT between the Czech Republic and the Netherlands
Lauder v. the Czech Republic:
Concerned the same set of facts as mentioned above
BIT between the Czech Republic and the US LEGAL PROTECTION (CONTD.)<br>
slide23. CME:
The respondent was found to be in breach of FPS
The host state is obligated to ensure that through the actions of its administrative bodies, the security and protection of the foreign investor’s investment should not be withdrawn
Lauder:
The tribunal found that FPS had not been violated because none of the actions or inactions of the media council had caused direct or indirect damage to the claimant’s investment
The termination of the contract by the investor’s local business partner was not attributable to the host state CME/LAUDER (CONTD.)<br>
slide24. Lauder (contd.)
Held:
The treaty created no duty of due diligence on the part of the Czech Republic to intervene in the dispute between the two companies over the nature of their legal relationships
The respondent’s only duty under the treaty was to keep its judicial system available for the claimant and any entities it controls to bring their claims CME/LAUDER (CONTD.)<br>
slide25. Thus, CME and Lauder reached different conclusions BASED ON THE SAME SET OF FACTS
However, the differences are the consequence of the diverse assessments of the same facts
Nevertheless, both decisions indicate that the principle of protection and security is relevant to the protection of legal rights, including the availability of a judicial system that protects the investor’s interests CME/LAUDER (CONTD.)<br>
slide26. Azurix v. Argentina:
Confirmed that ‘full protection and security’ may be breached even if no physical violence or damage occurs
FPS was understood to go beyond protection and security ensured by the police
It is not only a matter of physical security. The stability afforded by a secure investment environment is equally important from an investor’s point of view
When the terms ‘protection’ and ‘security’ are qualified by ‘full’ with no other adjective or explanation, they extend, in their ordinary meaning, the content of this standard beyond physical security LEGAL PROTECTION (CONTD.)<br>
slide27. Siemens v. Argentina:
‘Full protection and security’ goes beyond physical security because the applicable BIT’s definition of investment applied to intangible assets as well
Based on this definition of investment, which included tangible and intangible assets, the tribunal held that the obligation to provide full protection and security is wider than ‘physical’ protection and security
HELD that it is difficult to understand how the physical security of an intangible asset would be achieved LEGAL PROTECTION (CONTD.)<br>
slide28. Vivendi v. Argentina:
The respondent argued that the standard of protection and full security was limited in its applicability to physical interference
The tribunal rejected this contention
HELD that if the parties to the BIT had intended to limit the obligation to ‘physical interferences’ only, they could have done so by including words to that effect in the section
In the absence of such words of limitation, the scope of the protection should be interpreted to apply to reach any act or measure that deprives an investor’s investment of protection and full security, providing, in accordance with the Treaty’s specific wording, the act or measure also constitutes unfair and inequitable treatment LEGAL PROTECTION (CONTD.)<br>
slide29. Such actions or measures need not threaten the physical possession or the legally protected terms of operation of the investment.
Thus, protection and full security (sometimes full protection and security) can apply to more than the physical security of an investor or its property because either one could be subject to harassment without being physically harmed or seized VIVENDI vs ARGENTINA (CONTD.)<br>
slide30. Biwater Gauff v. Tanzania:
Adhered to the Azurix holding that when the terms ‘protection’ and ‘security’ are qualified by ‘full’, the standard may extend to matters other than the physical
It would be unduly artificial to confine the notion of ‘full security’ only to one aspect of security, particularly in light of the use of this term in a BIT
BITS are directed at the protection of commercial and financial investments LEGAL PROTECTION (CONTD.)<br>
slide31. Siag v. Egypt:
A claim based on the guarantee of ‘full protection’ argued for BOTH legal as well as police protection
The claimant’s investment had been expropriated by force based on the executive resolutions that were contrary to several court decisions
The claimants had made several unsuccessful requests to the police that their investment be protected LEGAL PROTECTION (CONTD.)<br>
slide32. SIAG vs EGYPT (CONTD.) Held:
The conduct of Egypt fell well below the standard of protection that the claimants could reasonably have expected
The violation arose BOTH (a) in allowing the expropriation to occur and (b) in subsequently failing to take steps to return the investment to the claimants following repeated rulings of Egypt’s own courts that the expropriation was illegal<br>
slide33. These cases suggest that the duty of protection and security extends to providing a legal framework that offers legal protection to investors
This includes substantive provisions protecting investments and appropriate procedures that enable investors to vindicate their rights LEGAL PROTECTION: CONCLUSIONS<br>
slide34. Whether provisions referring to FPS create independent treaty standards or are merely references to the international minimum standard under CIL is debated
Article 1105(1) of the NAFTA refers to FPS and is widely treated as reflecting the traditional international minimum standard
Article 1105(1): Minimum Standard of Treatment (MST) Each party shall accord to the investments of the investors of another party treatment in accordance with international law, including fair and equitable treatment and full protection and security RELATIONSHIP WITH CIL<br>
slide35. This NAFTA provision refers to FPS as part of international law
Article 1105(1) has been officially interpreted by the NAFTA Free Trade Commission (FTC)
The interpretation states that Article 1105(1) reflects the CIL minimum standard and does not require treatment beyond what is required by the CIL
FTC Note of Interpretation of 31 July 2001 RELATIONSHIP WITH CIL (CONTD.)<br>
slide36. NAFTA tribunals have accepted this official interpretation
The subsequent BIT practice of the US and Canada has also followed this interpretation
However, the relevance of this interpretation is limited to Article 1105(1) of the NAFTA alone and cannot be transposed to other treaties ARTICLE 1105(1), NAFTA<br>
slide37. In ELSI, the FCN treaty supplemented the ‘most constant protection and security’ standard by adding “and shall enjoy in this respect the full protection and security required by international law”
The ICJ Chamber took this to mean that while the ‘protection and security’ must conform to the minimum international standard, this treaty provision sets standards that may go further in their protection than general international law requires
Thus, the ICJ Chamber interpreted the reference to international law not as a limitation of the standard to the international minimum standard but found that general international law provided a residual standard below which the treaty standard may not fall REVISITING ELSI<br>
slide38. The Tribunal Held:
…it seems doubtful whether the provision can be understood as being wider in scope than the general duty to provide for protection and security of foreign nationals found in the CIL of aliens”
Thus, the view that FPS represents an autonomous treaty standard that is independent of the international minimum standard under CIL appears to be preferable
From whose perspective? REVISITING NOBLE VENTURES vs ROMANIA<br>
slide39. In terms of the ordinary meaning of the term, it is hard to understand why the drafters of a treaty would use ‘full protection and security’ where they mean the ‘minimum standard under customary international law’
This is particularly so if the treaty in question contains a separate reference to general international law
A number of authors have argued in favour of an autonomous concept of FET that is independent of and additional to CIL NOBLE VENTURES vs ROMANIA (CONTD.)<br>
slide40. Amco v. Indonesia was NOT decided based on a BIT but on the CIL framework
In this case, the investor’s local partner (PT Wisma) in a lease and management contract took over the hotel (i.e., the investment itself) by force with the assistance of the members of the Indonesian armed forces
The tribunal held that the forcible takeover was not attributable to the Government of Indonesia.
However, it found that Indonesia was in breach of international law since it had failed to protect the investor against the takeover of the hotel by its citizens RELATIONSHIP WITH CIL (CONTD.)<br>
slide41. Held:
A state has a duty to protect aliens and their investment against unlawful acts committed by some of its citizens
If such acts are committed with the active assistance of state organs, a breach of international law occurs AMCO vs INDONESIA (CONTD.)<br>
slide42. Some tribunals have equated the standards of FPS with FET; e.g., National Grid v. Argentina
Similarly, Wena Hotels v. Egypt dealt with the two standards jointly without drawing any distinction between them
Also, Occidental v. Ecuador seemed to regard the two standards as largely equivalent SIMILARITIES B/W FPS AND FET<br>
slide43. WENA HOTELS: TIMELINE<br>
slide44. Facts:
In 1989–1990, Wena, a British company, entered into two long-term agreements with the Egyptian Hotels Company (EHC) that are wholly owned by the Egyptian Government
Under the agreements, two hotels, Nile Hotel in Cairo and Luxor Hotel in Luxor, were leased to Wena
Following the rent-related disputes that arose between the parties shortly thereafter, on 1 April 1991, EHC took possession of both hotels by force
As a result of the domestic legal procedures, in 1992, both hotels were returned to Wena but in a damaged state WENA HOTELS: SUMMARY<br>
slide45. In addition, owing to the Egyptian Government’s interference with operating licences, Wena was effectively prevented from operating the hotels again
Wena attempted to cover its damages through commercial arbitrations provided for in the agreements but was able to obtain only E£1.5 million* for damages from the seizure of Nile Hotel
As a result of these arbitrations, Wena had to surrender and was evicted from both hotels WENA HOTELS: SUMMARY
(CONTD.)<br>
slide46. In 1998, Wena initiated ICSID arbitral proceedings against Egypt under the provisions of the Egypt-UK BIT (1995) claiming that Egypt’s actions constituted an unlawful expropriation and that Egypt had failed to accord Wena’s investments FET and FPS
Tribunal:
Found merit in both substantive claims of the investor
Awarded ‘prompt, adequate and effective compensation’ (the so-called ‘PAE’ standard) that would amount to “the market value of the investment immediately before the expropriation” as required u/ the BIT WENA HOTELS: SUMMARY
(CONTD.)<br>
slide47. Background to the dispute:
Shortly after entering into agreements:
Wena alleged to have received the hotels in a condition below that stipulated in the agreements and withheld part of the rent
Egypt claimed that Wena had failed to pay the rent
Having reached a stalemate, EHC took possession of both hotels by force in April 1991 WENA HOTELS: SUMMARY
(CONTD.)<br>
slide48. In early 1992, the Chief Prosecutor of Egypt ruled that the seizure of the hotels had been illegal
The hotels were returned to Wena but in a damaged state, especially Nile Hotel
In addition, owing to the interference of Egypt’s Ministry of Tourism in the operating licences for the hotels, Wena was effectively prevented from operating the hotels again WENA HOTELS: SUMMARY
(CONTD.)<br>
slide49. After the return of the hotels, Wena sought compensation from Egypt
In two arbitrations that it initiated, Wena was awarded E£1.5 million for damages from the seizure of Nile Hotel (in 1994, paid by Egypt in 1997) and E£9 million for Luxor Hotel
The latter arbitral award was subsequently nullified by the Cairo Appeal Court
The awards also required Wena to surrender the hotels to the EHC’s control
Wena was evicted from Nile Hotel in 1995 and from the Luxor Hotel in 1997 WENA HOTELS: SUMMARY
(CONTD.)<br>
slide50. On Applicable Law:
The tribunal affirmed the BIT as the primary source of applicable law
In accordance with Article 42(1) of the ICSID Convention, the tribunal also held that because other than the BIT, there was no special agreement between the parties on the applicable law, the tribunal should subsidiarily apply both Egyptian law and “such rules of international law as may be applicable” WENA HOTELS: SUMMARY
(CONTD.)<br>
slide51. On FET and FPS:
The tribunal agreed with Wena that Egypt had failed to accord its investment FET and FPS in violation of the BIT because of the following reasons:
Egypt was aware of EHC’s intentions to seize the hotels and took no actions to prevent EHC from doing so
Once the seizures occurred, both the police and the Ministry of Tourism took no immediate action to restore the hotels promptly to Wena’s control
Egypt never imposed substantial sanctions on EHC or its senior officials, suggesting Egypt’s approval of EHC’s actions WENA HOTELS: SUMMARY
(CONTD.)<br>
slide52. On Expropriation:
The tribunal also agreed with Wena that Egypt’s actions constituted an expropriation without PAE in violation of the BIT
Whether or not [Egypt] authorised/participated in the actual seizure of the hotels, Egypt deprived Wena of its fundamental rights of ownership by allowing EHC to forcibly seize the hotels, to possess them illegally for nearly a year and to return the hotels stripped of much of their furniture/fixtures (para 99)
Moreover, even after the hotels were returned to Wena, Egypt failed to satisfy its obligation under the BIT and the international norms generally by refusing to offer Wena PAE for the losses that it suffered as a result of Egypt’s failure to act WENA HOTELS: SUMMARY
(CONTD.)<br>
slide53. Annulment Proceedings:
Mainly, on quantum of compensation
Article 5 of the BIT provided that in the event of an expropriation, the private investor shall be entitled to PAE and “such compensation shall amount to the market value of the investment immediately before the expropriation”
The tribunal applied this standard to the determination of damages
In the decision on the application for annulment, the Annulment Committee (AC) added that such a standard “confers to a Tribunal a certain margin of discretion”, which apparently means that the tribunal may choose between different methods that would allow, in its view, to reach the PAE standard WENA HOTELS: SUMMARY
(CONTD.)<br>
slide54. In the Annulment Proceedings, Egypt Argued That Wena:
Had not supplied any evidence of the sums it claimed to have invested in the hotels nor;
Had it given any evidence as to the losses it claimed to have suffered
Essentially, Egypt argued that Wena had not met its burden of proving the amount of damages suffered WENA HOTELS: SUMMARY
(CONTD.)<br>
slide55. In its decision, the Annulment Committee (AC) emphasised that it was at the tribunal’s discretion to make its opinion about the relevance and evaluation of the elements of proof presented by each party
The AC did not go into the discussion of whether Wena had presented sufficient evidence to prove damages
Rather, the AC adopted a stance of deference to the tribunal in the matter of assessing the evidence WENA HOTELS: SUMMARY
(CONTD.)<br>
slide56. On Interest:
Egypt complained that the tribunal had awarded interest even though the applicable BIT provision (on compensation for expropriation) did not provide for the award of interest
The AC reasoned that “[a]lthough not referring to interest, the provision must be read as including a determination of interest that is compatible with BOTH the principles of PAE and PRE-EXPROPRIATION market value”
In particular, the compensation must not be eroded by the passage of time or by the diminution in the market value
The award of interest that reflects such international business practices meets these two objectives. Thus, the AC upheld the tribunal’s award of interest in principle WENA HOTELS: SUMMARY
(CONTD.)<br>
slide57. On Interest (contd.):
In the annulment proceedings, Egypt also complained that the Tribunal had fixed the interest rate of 9% without giving reasons
The AC dismissed this argument, stating, inter alia, the following:
As extended practice shows, international tribunals (and arbitration panels) usually dispose of a large margin of discretion when fixing interest
Thus, it is normal to provide very limited reasons for a decision that is left entirely to the discretion of the tribunal WENA HOTELS: SUMMARY
(CONTD.)<br>
slide58. Occidental v. Ecuador:
After finding a violation of the FET standard, the tribunal said that the question of whether there has been a breach of FPS in addition becomes irrelevant because a treatment that is not fair and equitable automatically entails an absence of full protection and security of the underlying investment
Similarly, PSEG v. Turkey found that FPS would only exceptionally go beyond physical safety, in which case the connection with FET would become very close SIMILARITIES B/W FPS AND FET (CONTD.)<br>
slide59. In contrast, Azurix v. Argentina found that the two standards were separate.
Azurix pointed out that in some BITs, FET and FPS appear as a single standard, while in others, they appear separately
In the BIT in question, for instance, the two phrases describing the protection of investments appear sequentially as different obligations
Article II.2(a): “Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and…” DIFFERENCE B/W FPS AND FET<br>
slide60. Thoughts? What do you think?
ARE THEY ONE AND THE SAME?<br>
slide61. The view that the two standards are to be seen as different obligations has merit
As a matter of interpretation, it appears unconvincing to assume that two standards listed separately in the same document have the same meaning
For example,, Jan de Nul v. Egypt held that continuous protection and security is to be distinguished from the FET standard since they are placed in two different provisions of the BIT, even if the two guarantees can overlap
Also held that the FPS concept SPECIFICALLY relates to the exercise of due diligence by the state ANALYSIS: FPS AND FET<br>
slide62. As a matter of substance, too, the content of the two standards is distinguishable
The FET standard consists mainly of an obligation on the host state’s part to desist from behaviour that is unfair and inequitable
In contrast, by assuming an FPS obligation, the host state promises to provide a factual/legal framework that grants security and to take necessary measures to protect the investment against any adverse action taken by private persons as well as state organs
In particular, FPS requires the creation of legal remedies against adverse action affecting the investment and the creation of mechanisms for the effective vindication of investors’ rights DIFFERENCES: CONCLUSIONS<br>
slide63. STANDARD OF LIABILITY: FPS The obligation to provide protection and security does NOT create absolute liability
Instead, the standard is one of ‘due diligence’ or a reasonable degree of vigilance
FPS provides a general obligation for the host state to exercise due diligence in the protection of foreign investment as opposed to creating ‘strict liability’ that would render a host state liable for any destruction of the investment even if caused by persons whose acts could not be attributed to the state (Dolzer and Stevens)<br>
slide64. ELSI case:
The reference to the provision of ‘constant protection and security’ cannot be construed as the giving of a warranty that property shall never, in any circumstances, be occupied or disturbed
AAPL v. Sri Lanka:
The claimant argued that the provision granting FPS created a strict or absolute liability STANDARD OF LIABILITY: FPS (CONTD.)<br>
slide65. Held:
The tribunal declared that this plea was unfounded
It could not be considered that the Government of Sri Lanka had assumed strict liability under Article 2(2) of the Bilateral Investment Treaty
There is a need (1) to prove that the damages suffered were attributable to the state or its agents and (2) to establish the state’s responsibility for NOT acting with ‘due diligence’ AAPL vs SRI LANKA (CONTD.)<br>
slide66. Tecmed v. Mexico:
The guarantee of full protection and security is not absolute and does not impose strict liability upon the state that grants it
Noble Ventures v. Romania:
FPS is not a strict standard
It is merely one that requires due diligence to be exercised by the host s STANDARD OF LIABILITY (CONTD.)<br>
slide67. OTHER tribunals have ALSO expressed similar views, which are given below:
Wena Hotels Ltd. v. Arab Republic of Egypt, para 84
Saluka Investments BV (The Netherlands) v. the Czech Republic, para 484
MCI v. Ecuador, paras 245–6
Plama v. Bulgaria, para 181
Biwater Gauff v. Tanzania, paras 725, 726
Rumeli v. Kazakhstan, para 668
Siag v. Egypt, para 447 STANDARD OF LIABILITY (CONTD.)<br>
slide68. Whether the level of due diligence should depend on the host state’s development and stability is contested
The availability of resources may have a decisive impact on a state’s ability to provide protection and security
Pantechniki v. Albania:
Distinguished between (1) situations involving physical violence and (2) situations akin to a denial of justice
The tribunal found that no proportionality factor taking into account a country’s resources was to be applied with respect to denial of justice DUE DILIGENCE<br>
slide69. PANTECHNIKI vs ALBANIA (CONTD.) Judicial protection is not subject to a relativistic standard
To take a country’s state of development into account would remove any incentive for improvement
In contrast, the tribunal applied a modified objective standard of due diligence in a situation of public violence
It found that in a situation involving civil strife, the liability DID depend on the host state’s resources<br>
slide70. Held:
A failure of protection and security is likely to arise in an unpredictable instance of civil disorder that could have been readily controlled by a powerful state but that overwhelms the limited capacities of one that is poor and fragile
There is no issue of incentives or disincentives with regard to unforeseen breakdowns of public order PANTECHNIKI vs ALBANIA (CONTD.)<br>
slide71. Held (contd.):
It seems difficult to maintain that a government incurs international responsibility for failure to plan for unprecedented trouble of unprecedented magnitude in unprecedented places
The case for an element of proportionality in applying the international standard is stronger than that with respect to the claims of denial of justice PANTECHNIKI vs ALBANIA (CONTD.)<br>
slide72. Where acts of the host state’s judiciary are at stake, the state is under an obligation to make a functioning system of courts and legal remedies available to the investor
This, however, does not mean that every failure to obtain redress is a violation of FPS
Even a decision that, in the eyes of an outside observer, (e.g., an international tribunal) is ‘wrong’ would not automatically lead to responsibility as long as the courts:
have acted in good faith; and
have reached decisions that are tenable FPS AND THE LOCAL JUDICIARY<br>
slide73. Parkerings v. Lithuania:
Analysed the host state’s duty under the FPS standard to make its judicial system available in the following terms:
The host State’s duties are given below:
First: To keep its judicial system available for the claimant to bring its contractual claims
Second: The claims would be properly examined in accordance with domestic and international law by an impartial and fair court
There was no evidence that the respondent had violated this obligation LOCAL JUDICIARY (CONTD.)<br>
slide74. The claimant had the opportunity to raise the violation of the [State contract] and to ask for reparation before local courts
The claimant, however, had failed to show that it was prevented to do so
As a result, the respondent did not violate its obligation of protection and security under the relevant BIT PARKERINGS vs LITHUANIA (CONTD.)<br>
slide75. As long as people have been trading, a question of security and who is responsible has been discussed
Reflected in how a civilisation approaches foreigners whereby most start by being antagonistic, but over time, they realise the importance of trade and other benefits
Greeks initially blocked foreigners from owning property owing to war, but at times of peace and alliances, the sentiments change
Romans were less exclusive HISTORY OF FPS<br>
slide76. 18th Century:
Foreigners not favoured by customary law
Could be imprisoned and their property confiscated
Had limited access to local courts
Late 18th / early 19th Century:
Treaties of commerce, which stated that enemy property could no longer be confiscated, coupled with the rise of the US
The US understood that adopting such treaty obligations would benefit its own nationals who participated in overseas trading and investments RECENT HISTORY<br>
slide77. Typical language in BITs: obligation to provide ‘full protection and security’ or ‘constant protection and security’
Precise meaning subject to varying forms of interpretation, but some principles are accepted as general standards
The host country may not be held responsible for all injuries that befall the investment
ICSID - AAPL v. Sri Lanka (1990)
ICJ - Elettronica Sicula SPA (the US v. Italy) (1989) [ELSI] INTERPRETATION AND APPLICATION<br>
slide78. Generally, host country is not an absolute guarantor but must satisfy its due diligence obligations to protect the investor
ICSID: ‘due diligence’ is 'reasonable measures of prevention which a well-administered government could be expected to exercise under similar circumstances” – AAPL v. Sri Lanka
Thus, host governments must take reasonable measures to protect investments against threats if they are to escape liability for failing to provide full protection and security INTERPRETATION AND APPLICATION (CONTD.)<br>
slide79. The wording of these clauses suggests that the host state is under an obligation to take active measures to protect the investment from adverse effects
The adverse effects may stem from private parties or from actions of the host state and its organs KEY TAKEAWAYS<br>
slide80. More recently, tribunals have found that provisions of this type also guaranteed legal security enabling the investor to pursue its rights effectively
Tribunals have disagreed on whether FPS merely reflects the broader FET standard and CIL or offers an independent and additional standard
It is generally agreed upon that arbitral practice is the standard of protection that merely requires due diligence and does not create absolute liability KEY TAKEAWAYS (CONTD.)<br>
slide81. The ‘full protection and security’ standard is coming into the arbitral spotlight
A number of leading arbitral awards focus on the following standard:
6 between 1990 and 2004
24 between 2004 and 2009 RECENT DEVELOPMENTS<br>
slide82. Some recent cases have adopted an expansive interpretation of the standard of protection
e.g., Biwater Gauff v. Tanzania (ICSID, 2008): it “implies a State’s guarantee of stability in a secure environment, both [sic.] physical, commercial and legal.”
Unclear: Are developing countries held to the same standard as developed countries?
Omitted from recent investment treaties: SADC* (2006) and COMESA** (2007) RECENT DEVELOPMENTS (CONTD.)<br>
slide83. Foreign-owned shrimp farm destroyed during a military operation
AAPL’s Case:
‘Full protection’ provided unconditional obligations
‘Wanton’ destruction and not necessitated by the situation
Sri Lanka’s Case:
The security clause did not provide ‘strict liability’
Destruction caused by rebels
AAPL should have known that investments in this region were risky ASIAN AGRICULTURAL PRODUCTS LTD (AAPL) vs SRI LANKA<br>
slide84. Majority Decision:
The Sri Lankan government was responsible because it failed to engage in less violent precautionary measures
The tribunal rejected the suggestion that FPS created a strict liability on the part of the host state BUT held that the traditional rule of due diligence had to apply
Based on that, it found that the force deployed by the armed forces was excessive and unwarranted by the circumstances and found Sri Lanka responsible AAPL (CONTD.)<br>
slide85. Dutch investor sued the Czech Republic for actions of the Czech media council
Importance: Full protection and security includes legal security, not only physical CME vs THE CZECH REPUBLIC 2001<br>
slide86. Held:
The host state is obligated to ensure that:
Neither by amendment of its laws;
Nor by actions of its administrative bodies
is the agreed-upon and approved security and protection of the foreign investor’s investment withdrawn or devalued CME (CONTD.)<br>
slide87. In October 1991, the Czech Republic passed a legislation allowing private parties—domestic or foreign—to broadcast radio and television programs in the country
The law also created a ‘Media Council’ to implement the law and issue broadcasting licences
In January 1993, the Media Council granted a broadcasting licence to CET 21, a Czech company, that an individual, Ron Lauder, had agreed to invest in and finance
The Media Council’s decision, however, drew immediate political fire from those opposed to the significant and direct involvement by foreign capital in the licence holding CME: HISTORY<br>
slide88. To resolve the controversy, the Media Council, CET 21 and Mr Lauder worked to create an entirely new entity that would avoid his direct participation in the licence holder, CET 21
Under the new arrangement, instead of Mr Lauder investing directly in CET 21, he, along with CET 21, agreed to form a new Czech company, CNTS
In exchange for their respective ownership interests in that new company, CET 21 provided CNTS with ‘irrevocable and exclusive’ rights to use the licence, and Mr Lauder provided CNTS with financing CME: HISTORY<br>
slide89. The claimant, CME Czech Republic B.V. (CME) was a Dutch corporation with a 99% equity interest in CNTS, which remained a Czech television services company
This shareholding had been acquired by CME during 1994–1997
CNTS, along with CET 21, which remained a local Czech company without foreign capital, organised the first nationwide private TV station in the Czech Republic (TV NOVA) after being authorised to do so by the Media Council CME: FACTS<br>
slide90. The licence conditions stipulated inter alia that CET 21 would be the licence holder and CNTS, the operator of the broadcasting station
The licence guaranteed CNTS an exclusive control over commercial, technical, management and other activities of the station BUT prevented interference with the programming and editorial independence
Such a dual scheme had been designed as more acceptable for public opinion, that remained largely opposed full foreign control, over a private TV channel CME: FACTS (CONTD.)<br>
slide91. TV NOVA began broadcasting in 1994 and soon became the most popular and successful TV station with a big audience and multi-million dollar net annual income
CNTS produced and bought programmes and sold advertising time to CET 21 while the latter acted only as a licence holder
Dr Železny, an influential Czech journalist and businessman, headed both entities, CNTS and CET 21 CME: FACTS (CONTD.)<br>
slide92. In 1996, the Media Council began pressuring for the reorganisation of the CNTS-CET 21 relationship
CNTS (CME) gave in to this pressure, and the conditions of the licence were changed to weaken the legal ties between the two companies
However, CNTS continued to provide its exclusive broadcasting services to CET 21 under the newly concluded service agreement CME: FACTS (CONTD.)<br>
slide93. Nevertheless, by 1999, Dr Železny became resolved to remove CNTS as the exclusive provider of broadcasting services
Accordingly, pursuant to communications between the Media Council and Dr Železny, CET 21 terminated the service agreement, albeit on contested grounds
CNTS was subsequently replaced by other providers of broadcasting services CME: FACTS (CONTD.)<br>
slide94. In the arbitration proceedings instituted under the Netherlands-Czech BIT, CME claimed that CNTS’ business and, thus, CME’s investment were completely destroyed
CME attributed this result to the actions and omissions of the Media Council, whose control over the issuing, renewing and modification of the mandatory TV licence was the main instrument in making CNTS go out of business
CME alleged multiple violations of the BIT (including expropriation, FPS and FET) and claimed damages of nearly US$ 500 million plus interest
The Czech Republic denied all claims CME: FACTS (CONTD.)<br>
slide95. CME’s owner and the ultimate benefactor of the CME’s investment, as mentioned above, remained the American TV entrepreneur, Mr Ron Lauder
To obtain compensation for his damages, he pursued several legal avenues, including proceedings before the Czech courts, the ICC International Court of Arbitration and two investment treaty arbitrations:
One: Initiated by himself under the US-Czech BIT roughly two weeks after CET 21 terminated its contract with CNTS (held in London)
Second: Initiated by CME 6 months later under the Netherlands-Czech BIT (held in Stockholm) PROCEEDINGS AND BACKGROUND<br>
slide96. In each case, the claimant alleged that the Czech Republic violated its obligations under the relevant treaty to:
Not expropriate investments without paying compensation,
Accord investments fair and equitable treatment,
Provide investments with full protection and security,
Treat investments in accordance with international law, and
Refrain from impairing investments through arbitrary and discriminatory measures PROCEEDINGS (CONTD.)<br>
slide97. In each case, the Czech Republic raised, among other defences, a jurisdictional defence that the tribunals lacked the power to hear the claims because Mr Lauder’s attempt to seek the same relief from two separate tribunals was improper and an abuse of processes
Both tribunals rejected those jurisdictional arguments
On Merits:
The Lauder Tribunal rejected the claimant’s requests for relief
The CME Tribunal, however, found for the claimant on each of its causes of action PROCEEDINGS (CONTD.)<br>
slide98. The London arbitration tribunal (Lauder v. the Czech Republic) found one breach of the US-Czech BIT
However, it did not award damages owing to the failure of the claimant to show a causal link between the 1993 breach and the 1999 damages
Thus, the Stockholm arbitration (CME v. the Czech Republic) was a much more successful venture for the claimant PROCEEDINGS (CONTD.)<br>
slide99. MULTIPLE FORUMS The same conduct by a single host state toward a single investment may cause the host state to have to concurrently defend itself in a number of different forums
This could prove to be a costly burden, especially for developing countries
Yet, states may frequently have to bear the said burden<br>
slide100. Despite jurisdictional challenges in either case, the respective tribunals rejected such arguments based on formalistic interpretations of what constitutes the same ‘dispute’ and who the relevant ‘parties’ are (Lauder 160–180; CME 412)
More specifically, the tribunals held that the disputes differed from each other because notwithstanding the same facts and ‘virtually identical claims’ (CME 412), each dispute was covered by a different BIT (Lauder 160–180; CME 412). MULTIPLE FORUMS (CONTD.)<br>
slide101. They also stated that the parties were different because Mr Lauder was the claimant in one case, whereas CME was the claimant in the other (Lauder 165, 171; CME 412)
Neither tribunal deemed it legally significant for the purposes of jurisdiction that Mr Lauder exercised control over CME (Lauder 77, 165; CME 412)
Both tribunals, however, noted that the Czech Republic did not agree to consolidate the proceedings as requested by the claimants, which might have influenced the tribunals’ receptiveness to the Czech Republic’s arguments on the jurisdiction issue (Lauder 173; CME 412) MULTIPLE FORUMS (CONTD.)<br>
slide102. These cases are notable because the two tribunals arrived at opposite conclusions regarding whether the Czech Republic should be held liable under the governing BITs
With respect to their interpretations of the facts, the Lauder Tribunal demonstrated deference to the governmental Media Council’s actions in stark contrast to the CME Tribunal’s skepticism of the Media Council’s motives
With respect to the law, although both tribunals often recited similar general statements regarding the meaning of the relevant treaty provisions, they diverged in certain key areas such as when setting forth and applying the elements of expropriation claims, examining whether there was an offending ‘measure’ and requiring proof of causation ISSUES TO PONDER<br>
slide103. Upon its examination of evidence, the tribunal found that the Media Council ‘exerted coercion’ on CME’s investment
As a result of this coercion, the safety of CME’s investment was endangered and, consequently, the investment was destroyed
The tribunal singled out three episodes of the unlawful behaviour of the Media Council in relation to the investor CME: FINDINGS ON MERITS<br>
slide104. In 1996, the Media Council materially weakened the legal protection of CME’s investment (legal situation of CNTS’ exclusiveness as a service provider) by requiring to substitute the original 1993 licence scheme by the contractual relationship
The unlawful pressure by the Media Council manifested itself primarily in the threat of (unsubstantiated) the administrative proceedings to withdraw the TV licence unless CNTS cooperated (Partial Award, paras. 460–538) THREE EPISODES: NUMBER 1<br>
slide105. In 1999, the Media Council unlawfully supported Dr Železny
The Media Council did this by means of a letter fabricated in collusion with Dr Železny in his commercial conflict with CME
This entire move was aimed at eliminating CNTS as the exclusive service provider for CET 21 (Partial Award, paras. 539–558) THREE EPISODES: NUMBER 2<br>
slide106. In 1999, the Media Council also disregarded CNTS’ requests for clarification of the legal situation relating to the question of exclusivity
It further supported the elimination of the contractual exclusivity of the service agreement (Partial Award, paras. 559–574) THREE EPISODES: NUMBER 3<br>
slide107. The negative effects of this gradual loss of legal security for CME’s investment materialised in 1999 when CET 21 unilaterally terminated the service agreement on questionable grounds
Thus, CNTS was effectively squeezed out of business
The tribunal concluded that the described actions and inactions of the Media Council constituted breaches of various BIT provisions, including FPS
Obligation to accord full security and protection (Partial Award, para. 613) ON MERITS (CONTD.)<br>
slide108. As a general rule, before holding a host state accountable for the damages suffered by an investor, the investor must not only show that the state breached its obligations under a treaty but also prove that the state’s actions caused the investor harm 
Lauder illustrates the role that this requirement can play in narrowing host–state liability CAUSATION<br>
slide109. In Lauder, the tribunal held that the Czech Republic acted discriminatorily and arbitrarily towards the claimant when, in response to political opposition, it required Mr Lauder to invest in broadcasting activities by forming a new entity with CET 21 rather than investing directly in CET 21 as Mr Lauder had originally intended (Lauder 222–232)
The Lauder Tribunal then explained that to hold the Czech Republic liable for damages based on that breach of the BIT, Mr Lauder was required to prove that the Czech Republic’s arbitrary and discriminatory conduct caused the harm that he ultimately suffered (Lauder 234) CAUSATION: LAUDER<br>
slide110. To establish the necessary causal link, MR Lauder had to show:
That the Czech Republic’s conduct was a ‘but for’ cause of his harm (i.e., the harm would not have occurred ‘but for’ the government’s conduct); and
That the wrongful conduct was a legal or proximate cause of the harm (i.e., the harm was foreseeable) (Lauder 234)
Applying those tests of causation, the tribunal held that the Czech Republic’s efforts to change the nature of Mr Lauder’s investment were a ‘but for’ cause of CET 21’s termination of the contract and Mr Lauder’s resulting damages CAUSATION: LAUDER (CONTD.)<br>
slide111. However, they were ‘too remote’ from the harm that Mr Lauder eventually suffered to qualify as the legal or proximate cause (Lauder 235)
Accordingly, the Lauder Tribunal concluded that the Czech Republic was not liable for any damages based on its breach
Similarly, the Lauder Tribunal cited the lack of causation as one of the factors supporting its rejection of Mr Lauder’s other claims (Lauder 243, 274, 288, 304 and 313) CAUSATION: LAUDER (CONTD.)<br>
slide112. In contrast, the CME Tribunal concluded that the Media Council caused “the collapse of CME’s investment” by “coercing” CNTS to amend its legal agreement with CET 21 and by issuing the March 1999 letter (CME 575)
Although it did not explicitly require that both ‘but for’ and proximate causation be established, the CME Tribunal stated its belief that the Media Council “must have foreseen” that its actions would lead to CET 21’s termination of the contract and CME’s losses (CME 585) CAUSATION: CME<br>
slide113. Both CME and Lauder Tribunals seemed to interpret the FPS obligation to provide protection beyond situations involving physical violence or destruction
However, they reached two opposite conclusions
Crucially, the reason for the opposite findings seem to reside in the different ‘standard of care’ imposed by the two tribunals rather than on a different application of the same interpretation to the facts at hand CME AND LAUDER: FPS CONCLUSIONS<br>
slide114. According to the Lauder Tribunal’s interpretation, the relevant standard obliges the parties to exercise “due diligence in the protection of foreign investment as reasonable under the circumstances.”
Based on its previous findings - denying the existence of any “arbitrary and discriminatory measure” by the host government, Lauder concluded that none of the facts alleged by the claimant constituted an FPS violation
In other words, the respondent had exercised due diligence FPS CONCLUSIONS (CONTD.)<br>
slide115. On the other hand, the CME Tribunal did not seem to limit the FPS obligation to a standard of due (i.e., reasonable) diligence
Rather, the CME Tribunal seems to have imposed an ‘absolute’ (i.e., strict liability) obligation of protection
In the event of multiple treaty violations, one of which is expropriation, an expropriation standard tends to be applied
The CME Tribunal extensively referred to the ILC Commentary to the Articles on State Responsibility, even though the latter deals with state-to-state responsibility
Thus, it appears that the rules of CIL embodied in the draft articles also apply when states are held liable to private investors FPS CONCLUSIONS (CONTD.)<br>
slide116. 2. FAIR AND EQUITABLE TREATMENT The ‘FET’ Standard<br>
slide117. Roots in the history of the treatment of international aliens – Neer v. Mexico (1926)
Havana Charter, 1948 - Article 11 (2)- Just and Equitable Treatment
Economic Agreement of Bogota – Article 22
Treaties of Friendship and Amity in the 1950s signed by the US
OECD Draft Convention on Protection of Foreign Property, 1967
Mondev v. USA - Protection of aliens and their property
Taken up by the UN, MIGA and the World Bank in their documents as well DEVELOPMENT<br>
slide118. UN Charter: Article 2.1: Principle of equal sovereignty between states
UNGA 2625 (XXV) Declaration on the principles of International Law concerning friendly relations and cooperation among states in accordance with the Charter of the United Nations FET IN INTERNATIONAL LAW<br>
slide119. Good Faith Principles
CMS v. Argentina
Legitimate Expectations of States
CME v. the Czech Republic
El Paso v. Argentina (unreasonable modification of the legal framework)
Alpha v. Ukraine (arbitrary change of rules)
LG&E v. Argentina (stability of the legal and business framework)
Total v. Argentina (general regulations that are not specifically addressed to the investor are not prospective rules) COMPONENTS OF FET<br>
slide120. Transparency
Emilio Agustín Maffezini v. The Kingdom Of Spain
Due Process Requirement
Mondev v. USA
Due Diligence Requirement
MTD v. Chile COMPONENTS OF FET (CONTD.)<br>
slide121. Absence of Coercion
Saluka Investments BV v. the Czech Republic
Non Arbitrariness
Mondev v. USA
Elettronica Sicula (ICJ ELSI Case) COMPONENTS OF FET (CONTD.)<br>
slide122. Various Methods of Interpretation
Customary International Law (CIL) Minimum Standard of Treatment
Is there a CIL notion for FET?
Neer or BIT-based?
Independent Standard Approach
Interpretation in a manner to give effect to the object and the purpose of the treaty
􏰀Requirement to determine whether conduct is fair and equitable in all circumstances INTERPRETATION<br>
slide123. INTERPRETATION (CONTD.) Ordinary Meaning Approach
MTD v. Chile
- Fair and equitable means just, legitimate and even handed<br>
slide124. Space for interpretation is large
Need not necessarily keep in mind the intention of the parties
Highly subjective and aimed at domestic action towards regulating investment
On the contrary, umbrella protection to investors
Covers a broad range of issues that might arise ISSUES AND BENEFITS<br>
slide125. NEER AND MST The most cited expression of the MINIMUM STANDARD OF TREATMENT (MST) is found in the 1926 decision in LFH Neer and Pauline Neer (United States v. Mexico)
In this case, a claim was brought before the Mexico-United States General Claims Commission alleging that the Mexican authorities had failed to exercise due diligence in finding and prosecuting the murderer of a United States national and, so, had committed a denial of justice
The commission rejected the claim, having set a high threshold of state responsibility limited to egregious acts of failure to protect the rights of aliens<br>
slide126. The commission stated:
The propriety of governmental acts should be put to the test of international standards
The treatment of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency NEER AND MST (CONTD.)<br>
slide127. NAFTA Tribunal, Article 1105:
Only when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective
That determination must be made in light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders. The determination must also take into account any specific rules of international law that are applicable to the case MYERS vs CANADA<br>
slide128. ‘Absolute’ standard of protection
Confines of justice and good faith
Government decision-making is still important
Overarching standard, many specific circumstances under it
Core exists; yet, vagaries leave space for creative interpretation
Should not replace other parts of the Investment Treaty SCOPE<br>
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