Investor-State Disputes and Investment Treaty Arbitration

Author:Anthony Connerty
Profession:Barrister and member of WIPO arbitration panel

1) Introduction. -2) Bilateral Investment Treaties: the Japan-Vietnam Agreement. -3) The ICSID Convention: i) Introduction. ii) The Convention. -4) Some Problems Arising in Investor-State Disputes: i) Jurisdiction Issues. ii) Different Decisions by Different Tribunals. -5) An Example: SGS v Philippines. -6) NAFTA - Chapter 11. -7) Energy Charter Treaty - Article 26.


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1) Introduction

The encouragement of investment, particularly investment into developing countries, is clearly a desirable objective. Investment treaties are designed to achieve two separate but related purposes, one for the benefit of a State and the other for the benefit of an investor. First, there is a need to attract inward investment into a 'host' State. Second, there is a need to protect the investment of the investor in the host State, in particular against un-compensated expropriation by that State.

Those two objectives - the promotion and the protection of investments - have been successfully achieved through the medium of bilateral investment treaties (BITs). BITs have tended to be made between developed capital-exporting countries and developing capital-importing countries, but there is also an increasing trend towards BITs between developing countries.

The first BIT was entered into over 40 years ago between Germany and Pakistan (in 1959). The number of such treaties now exceeds 2,000, and BITs are seen as instruments both for encouraging foreign investment and for protecting the interests of foreign investors.

"The first BITs were made in the period 1959-1969. Much of the inspiration for these and the later treaties came from the 1959 Abs-Shawcross Draft Convention on Investments Abroad and the 1967 OECD Draft Convention on the Protection of Foreign Property...." 34

The resolution of disputes between investors and States was seen to require special machinery. This need was supplied the 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, commonly referred to as the ICSID Convention or the Washington Convention. The Convention created an organisation whose purpose is to deal with investment treaty disputes - the International Centre for Settlement of Investment Disputes (the ICSID Centre) in Washington.

An understanding of investor-State disputes - and investment treaty arbitration - requires a consideration of two matters: BITs and the ICSID Convention. These are considered in sections 2 and 3 of this chapter. Section 4 sets out some of the problems that have arisen in investor-State arbitrations.

The ICSID Arbitration Rules are dealt with in Chapter 14, which also looks at the ICSID Centre. The United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules (which may be used as an alternative to the ICSID Arbitration Rules) arePage 72 dealt with in Chapter 18, which looks at international commercial arbitral institutions and other international bodies.

Because ICSID - both the Convention and the Centre - are dealt with in some detail, only comparatively brief reference can be made in the Manual to two other investment dispute resolution processes: Chapter 11 of the North American Free Trade Association (NAFTA) and Article 26 of the Energy Charter Treaty (ECT) (see sections 5 and 6 of this chapter).

The NAFTA is concerned with trade generally and the ECT with energy disputes specifically. Both are, needless to say, of considerable international importance, and further information about them can be found on their websites.35

2) Bilateral Investment Treaties: the Japan-Vietnam Agreement

Perhaps the simplest way to see how BITs work is to look at the details of one such treaty. A comparatively current example is the agreement made between Japan and the Socialist Republic of Vietnam, entered into in November 2003.36

The agreement between Japan and Vietnam contains the type of provisions that are likely to be found in many BITS:

i) provisions to encourage investment;

ii) fair and equitable treatment provisions and provisions relating to expropriation and compensation;

iii) provisions relating to the free transfer of capital, profits and so on;

iv) investor-State dispute resolution provisions that provide for attempts at amicable settlement, followed if necessary by either ICSID arbitration or arbitration under the UNCITRAL Arbitration Rules.

The Agreement states that Japan and Vietnam wish to promote investment "in order to strengthen the economic relationship between the two countries", intending to "further create favourable conditions for greater investment by investors of one country in the Area of the other country". It contains 23 Articles.

Introductory matters

Article 1 sets out a series of definitions, including "investments". That term covers "every kind of asset owned or controlled... by any investor", including enterprises, shares, bonds, debentures, loans, rights under contracts, claims to money, intellectual property rights and concessions ("including those for exploration and exploitation of natural resources"), and tangible and intangible, movable and immovable property.

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Article 2 requires each Contracting Party to accord "no less favourable treatment" to investors of the other Contracting Party than it accords to its own investors. Article 3 requires no less favourable treatment for investment in relation to access to the courts and tribunals of the host State.

Requirements are not to be imposed, as a condition of investment activity, in connection with matters such as the appointment of managers, etc, of any particular nationality, or in relation to the location of an investor's headquarters in the host country (Article 4). However, Article 5 permits each Contracting Party to maintain "exceptional measures" in relation to the matters set out in Annex 1. For example, in relation to Japan, these are matters relating to fisheries, the space industry and the electricity and gas industries. For Vietnam, the matters covered include oil and gas exploration, precious mineral mining and the exploitation of timber.

Article 6 permits the maintenance of the "exceptional measures" listed in Annex 11 that existed at the date of the Agreement. For Japan, these include the mining and oil industries. For Vietnam, they cover legal, accounting, insurance and banking services.

Article 7 requires each Contracting Party to publish "its laws, regulations, administrative provisions and administrative rulings and judicial decisions of general application as well as international agreements" that pertain to or affect investment activities. "Sympathetic consideration" is to be given by each Contracting Party to applications for entry and residence of natural persons of the nationality of the other Contracting Party (Article 8).

Fair and equitable treatment / no expropriation clause

Article 9 sets out essential provisions relating to fair and equitable treatment:

"Each Contracting Party shall accord to investments in its Area of investors of the other Contracting Party fair and equitable treatment and full and constant protection and security."

Article 9 (2) (3) and (4) contain the "no expropriation without fair compensation" provisions. Article 9 (2) states that neither Contracting Party shall "expropriate or nationalize investments in its Area of investors of the other Contracting Party or take any measure tantamount to expropriation or nationalization... except: (a) for a public purpose; (b) in a non-discriminatory manner; (c) upon payment of prompt, adequate and effective compensation; and (d) in accordance with due process of law".

Article 9 (3) provides that compensation shall be equivalent to the "fair market value of the expropriated investments immediately before the expropriation occurred. The fair market value shall not reflect any change in value because the expropriation had become publicly known earlier. The compensation shall be paid without delay and shall carry an appropriate interest, taking into account the length of time until the time of payment. It shall be effectively realizable and freely transferable and shall be freely convertible into the currency of the Contracting Party of the investors concerned, and into freely usable currencies as defined in the Articles of Agreement of the International Monetary Fund, at the market exchange rate prevailing on the date of expropriation."

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Article 9 (4) states that, without prejudice to Article 14 (dealing with investment dispute resolution), the investor affected is to have the right of access to the courts of justice or administrative tribunals or agencies of the Contracting Party making the expropriation "for a prompt review of the investors' case, and the amount of the compensation".

Article 10 contains provisions dealing with compensation for losses suffered to investment activities due to armed conflict, civil disturbances and similar events. Article 11 deals with subrogation and insurance.

Free transfer of capital, etc

Article 12 deals with a matter of considerable importance to the investor: the freedom to transfer monies out of the host State. Each Contracting Party is to ensure that all payments relating to investments in its Area of an investor of the other Contracting Party:

"may be freely transferred into and out of its Area without delay. Such transfers shall include, in particular, though not exclusively:

(a) the initial capital and additional amounts to maintain or increase investments;

(b) profits, interest, capital gains, dividends, royalties and fees...."

Various other types of payments are listed in Article 12 (1)

Neither of the Contracting Parties is to prevent transfers being made without delay and in freely convertible currencies at the market rate of exchange existing as at the date of the transfer. However, transfers may be delayed or prevented in circumstances involving bankruptcy...

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