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�Chapter 3 �Substantive Standards I

Introduction to International Investment Law

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Badrinath Srinivasan, LLM, FIII, MCIArb

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�Fair & Equitable Treatment

Introduction to International Investment Law

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Badrinath Srinivasan, LLM, FIII, MCIArb

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Fair & Equitable Treatment

  • One of the widely used substantive protections
  • Applications
    • transparency, stability and the protection of the investor’s legitimate expectations,
    • compliance with contractual obligations,
    • procedural propriety and due process,
    • good faith, and
    • freedom from coercion and harassment.
  • Article 5(1) of the India UAE BIT states: “Each Contracting Party shall, at all times, ensure Investments made in its territory by Investors of the other Contracting Party, fair and equitable treatment.”

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FET & Brazil India BIT, 2020

  • No FET in Brazil India BIT, 2020 in traditional form
  • Article 4(1):
  • “Based on the applicable rules and customs of international law as recognized by each of the Parties and their respective national law, no Party shall subject investments made by investors of the other Party to measures which constitute:
  • a) denial of justice in any judicial or administrative proceedings;
  • b) fundamental breach of due process;
  • c) targeted discrimination, such as gender, race or religious belief;
  • d) manifestly abusive treatment, such as coercion, duress and harassment; or
  • e) discrimination in matters of law enforcement, including the provision of physical security.”

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FET in Brazil India BIT

FET Elements

* transparency, stability and the protection of the investor’s legitimate expectations

* compliance with contractual obligations,

* procedural propriety and due process, * good faith,

* freedom from coercion and harassment.

Brazil India BIT

* denial of justice in judicial/ administrative proceedings;

* fundamental breach of due process;

targeted discrimination, such as gender, race or religious belief;

* manifestly abusive treatment, such as coercion, duress and harassment;

* discrimination in matters of law enforcement, including the provision of physical security

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FET in Brazil India BIT (2)

  • Considerable overlap
  • Replacement of widely worded FET
  • Picked up elements of FET and adopted
  • Article 3(1):
  • “3.1 No Party shall subject investments made by investors of the other Party to measures which constitute a violation of customary international law through:
  • (i) Denial of justice in any judicial or administrative proceedings; or (ii) fundamental breach of due process; or
  • (iii) targeted discrimination on manifestly unjustified grounds, such as gender, race or religious belief; or
  • (iv)manifestly abusive treatment, such as coercion, duress and harassment.”

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FET in Brazil India BIT (3)

  • Moraes and Cavalcante, “The Brazil-India Investment Cooperation and Facilitation Treaty: Giving Concrete Meaning to the “Right to Regulate” in Investment Treaty-Making” (ICSID Review, 2021: forthcoming)

“Following a preference incorporated in the Brazilian approach and partially in the Indian Model BIT, the agreement eschews wording that evokes the notion of “standards of protection”, referring instead to “treatment” of investments… [T]his is more than a terminological option. Rather, it implies a difference in the drafting style as the agreement abstains from resorting to broadly-worded expressions—e.g. “fair and equitable treatment” and “full protection and security”—preferring to break down as much as possible what is encompassed by the “treatment” to be granted to foreign investments.”

  • Does Brazil- India BIT exclude FET Standard?

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FET Standard: History

  • Article 29, Havana Charter for an International Trade Organisation, 1948
  • “With respect to such imports, and with respect to the laws, regulations and requirements referred to in paragraph 8 (a) of Article 18, each Member shall accord to the trade of the other Members fair and equitable treatment.”
  • “just and equitable treatment” to foreign nationals and enterprise: Articles 11(2) and 72 of the Havana Charter
  • Article XVII(2) of the FCN Treaty between USA and Nicaragua, 1956
  • Switzerland-Tunisia BIT, 1961

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Nature & Function of FET Standard

  • Generalisation: not correct
  • Variants
    • Standalone basis
    • Tempered with “principles of international law”
    • Combination with Full Protection and Security clause or NT/ MFN clause
    • Brazil India BIT: exhaustive elements are listed out
  • Practice in Civil Codes
  • Does not depend on national laws
  • Considerable overlap with other substantive protections

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Violation of FET Standard- examples

  • Lack of respect for the obligation of vigilance and protection
  • Denial of due process or denial of justice.
  • Non-observance or frustration of investors' legitimate expectations;
  • Coercion and harassment by the organs of a host State;
  • Failure to offer a stable and predictable legal framework;
  • Unjust enrichment;
  • Evidence of bad faith. (Note that many tribunals have held bad faith is not required to for establishing the violation of FET);
  • Absence of transparency;
  • Arbitrary and discriminatory treatment.

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Is FET = MST?

  • whether FET standard is a part of customary international law relating to minimum standard of treatment (MST)?
  • Debated
  • Diametrically opposite views
  • Dumberry argues: “There is therefore no legal basis for an investor to claim the general benefit of FET protection before an arbitral tribunal (which has jurisdiction over a given dispute) whenever the standard is not expressly mentioned in a treaty, the domestic law of the host State or in a State contract.”

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Evolution of FET Standard

  • L. F. H. Neer and Pauline Neer v Mexico, US Mexico General Claims Commission dt. 15.10.1926: “[T]he 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.”
  • United States v Italy (Elettronica Sicula SpA case)(20.07.1989)(ICJ):“Arbitrariness is not so much something opposed to a rule of law, as something opposed to the rule of law… It is a wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety. Nothing in the decision of the Prefect, or in the judgment of the Court of Appeal of Palermo, conveys any indication that the requisition order of the Mayor was to be regarded in that light.” (Para 128)

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Evolution of FET Standard (2)

  • Preference to ICJ’s standard
  • Técnicas Medioambientales Tecmed, S.A v. Mexico, Award dt. 29 May 2003 standard
  • Scope of FET Standard explained.
    • Consistency, free from ambiguity, transparent in laws and goals of laws
    • Lack of arbitrariness
    • Non-deprivation without required compensation

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References

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FET & White Industries Award

  • Standard for determining FET violation based on legitimate expectation

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  • Rejected FET violation

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Cairn BIT Award & FET Violation

  • Retrospective taxation violated FET?
  • General principles of law resorted to determine FET normative content
  • No public purpose for retrospective amendment
  • Violated legal certainty- deprived the Claimants their ability to plan in consideration of legal consequences of their conduct.
  • Grossly unfair and violates Article 3(2) of the India UK BIT containing the FET standard.

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References

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�Chapter 3 �Full Protection & Security Standard (FPSS)

Introduction to International Investment Law

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Badrinath Srinivasan, LLM, FIII, MCIArb

lawbadri@gmail.com

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Full Protection & Security Standard

    • FPSS- Common in Investment Treaties
    • Article 4(1)of India- UAE BIT, 2013: “Investments by Investors of either Contracting Party shall enjoy full protection and security in the territory of the other Contracting Party in a manner consistent with the provisions of domestic law of the host Contracting Party, this Agreement and applicable rules of international law. Neither Contracting Party shall in any way impair by arbitrary or discriminatory Measures, the management, maintenance, use, enjoyment or disposal of Investments.”
    • Positive and negative elements
    • Measures

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More on FPSS

  • Variants: “full”, “full and complete”, “complete”, “constant”, “continuous”,
  • Brief history: In vogue since 18th century
  • FCN Treaties of US.
  • US-Nicaragua FCN Treaty, 1956 provided in Article III.1: 
  • “Nationals of either Party within the territories of the other Party shall be free from illegal molestations of every kind, and shall receive the most constant protection and security, in no case less than that required by international law.”

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AAPL v Sri Lanka

  • (ICSID Case No. ARB/87/3- Final Award dt. 27.06.1990.
  • Reliance on FPSS Standard
  • Strict liability v Due diligence standard

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  • Failure by Sri Lanka to adhere to due diligence standard
  • Awarded US$ 0.46 million against claim of US$ 8 million

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Physical & Legal Security

  • Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22 (Final Award dt. 24 July 2008) the Tribunal stated:
  •  “729. The Arbitral Tribunal adheres to the Azurix holding that when the terms “protection” and “security” are qualified by “full”, the content of the standard may extend to matters other than physical security. It implies a State’s guarantee of stability in a secure environment, both physical, commercial and legal. It would in the Arbitral Tribunal’s view 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, directed at the protection of commercial and financial investments.”
  • Undue burden on States with limited resources

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Features of FPSS

  • Obligation of vigilance: State’s actions and third party actions
  • For third party actions: effective measures of prevention
  • Debate:
    • Only physical security: Rumeli v. Kazakhstan (2008) and Saluka v. Czech Republic (Partial Award dt 17 March 2006)
    • Includes legal harm: Biwater Tribunal
  • Pantechniki S.A. Contractors & Engineers (Greece) v. The Republic of Albania, ICSID Case No. ARB/07/21: Final award links standard to ability of state.
  • Due diligence test

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Physical Harm

    • civil unrest, civil strife, civil disturbance, and physical violence: 01 European Grp. B.V. v. Venez., ICSID Case No. ARB 11/25, Award, ¶¶ 576-77 (Mar. 10, 2015)
    • threats and attacks on investment: Saluka Invests. B.V. v. Czech, UNCITRAL, Partial Award, ¶¶ 483-84 (Mar. 17, 2006),
    • physical invasion of business premises or investment sites: Tulip Real Estate v. Turk., ICSID Case No. ARB/ 11/28, Award, ¶¶ 430-3 7 (Mar. 10, 2014)
    • rioting and looting: Am. Mfg. & Trading, Inc. v. Zaire, ICSID Case No. ARB/93/1, Award, ¶ 6.07- 6.11 (Feb. 21, 1997),
    • attack and seizure of property: Wena Hotels Ltd. v. Egypt, ICSID Case No. ARB/98/4, Award, ¶ 80 (Dec. 8, 2000),

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Physical Harm (2)

    • impairment affecting the physical integrity of investment by forceful interference: See Saluka Invs., UNCITRAL, ¶ 484; Binder v. Czech, UNCITRAL, Final Award, ¶ 477 (July 15, 2011),
    • wrecking, looting, and dismantlement of equipment and property: Al Tamimi v. Oman, ICSID Case No. ARB/1 1/33, Award, ¶¶ 394, 448-49 (Nov. 3, 2015)
    • forceful expropriation of investment: Siag v. Egypt, ICSID Case No. ARB/05/15, Award, ¶¶ 445-48 (June 1, 2009)
    • killings and destruction of property: Asian Agric. Prods. Ltd. v. Sri Lanka, ICSID Case No. ARB/87/3, Final Award, ¶ 85(b) (June 27, 1990)
    • occupation of a building and physical assault of the CEO: MNSS B.V. v. Montenegro, ICSID Case No. ARB(AF)/12/8, Award, ¶¶ 352-55 (May 4, 2016), Von Pezold v. Zim., ICSID Case No. ARB/10/15, Award, ¶¶ 582-96 (July 28, 2015)

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Legal Harm

    • host state's failure to keep its judicial system available for the investor to bring claims;
    • host state's change of the legal framework making the investor susceptible to negative acts by private persons;
    • host state's conferral of immunity from suit for public authorities' assaults of the investor's staff: Mondev Int'l Ltd. v. U.S., ICSID Case No. ARB(AF)/99/2, Award, ¶¶ 151- 52 (Oct. 11, 2002);
    • host state's refusal to honor a "cover losses" provision in its written agreement with the investor: Mondev Int'l Ltd. v. U.S., ICSID Case No. ARB(AF)/99/2, Award, ¶¶ 153- 54 (Oct. 11, 2002);
    • host state's change in its tax law interpretation and refusal to reimburse value-added tax (VAT) paid by the investor: Occidental Expl. & Co. v. Ecuador, UNCITRAL Arbitration, London Court of International Arbitration Administered Case No. UN 3467, Final Award, ¶¶ 181, 183- 84, 187 (July 1, 2004)
    • host state's failure to apply the regulatory framework and the concession agreement: Azurix Corp. v. Arg., ICSID Case No. ARB/01/12, Award, 11 395-96 (July 14, 2006),

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Legal Harm (2)

    • host state's illicit deprivation of the investor's access to foreign currency indispensable for the daily operations of its subsidiaries: Rusoro Mining Ltd. v. Venez., ICSID Case No. ARB(AF)/12/5, Award, ¶¶ 549- 54 (Aug. 22, 2016)
    • measures that deprive investors of or restrict property or that have similar effects: Goetz v. Burundi, ICSID Case No. ARB/95/3, Award, ¶ 131 (Feb. 10, 1999), 6 ICSID Rep. 5 (2004).
    • host state's allowance of wrongful application of new legislation by its agency, failure to comply with domestic law, and breach of the provisions of the investment agreement: AES Corp. v. Kaz., ICSID Case No. ARB/10/16, Award, 11 337-39 (Nov. 1, 2013),
    • judicial wrongs (the whole trial and resultant judgments): Loewen Grp., Inc. v. U.S., ICSID Case No. ARB(AF)/98/3, Award, 11 121, 241 (June 26, 2003); Loewen Grp., Inc. v. U.S., ICSID AF Case No. ARB(AF)/98/3, Decision on Hearing of Respondent's Objection to Competence and Jurisdiction, ¶¶ 40-60 (Jan. 5, 2001),
    • court decisions that lack independence and impartiality: Vannessa Ventures Ltd. v. Venez., ICSID Case No. ARB(AF)04/6, Award, ¶ 228 (Jan. 16, 2013)

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Legal Harm (3)

    • "the initiation of the renegotiation of the Contract [by the host state] for the sole purpose of reducing its costs, unsupported by any declaration of public interest, affected the legal security of [the investor's] investment": Siemens A.G. v. Arg., ICSID Case No. ARB/02/8, Award, ¶¶ 308-09 (Jan. 17, 2007)
    • the changes made to the regulatory framework by the host state's measures adopted to address its crisis, which resulted in the effective dismantlement of the framework and the uncertainty reigning: Nat'1 Grid PLC v. Arg., UNCITRAL, Award, ¶ 189 (Nov. 3,2008);
    • the denial of procedural protection of the investor's right to recover effective participation in the capital equity, the non-compliance of the host state's court judgments by other state organs, the inability of the host state's legal system to correct its error, or the alleged insufficiency of its courts, and the involvement of the host state's legislative and executive branches in decreasing the impartiality of the host state's judges or courts: Levy de Levi v. Peru, ICSID Case No. ARB/10/17, Award, 11 410, 412, 425, 430-43, 506. (Feb. 26,2014),
    • the amendments of the law or administrative actions causing negative effects on investment: PSEG Glob. v. Turk., ICSID Case No. ARB/02/5, Award, ¶¶ 257-59 (Jan. 19, 2007),

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Legal Harm (4)

    • the removal of the management and the seizure of the premises by the host state not associated with use of force but unnecessary and abusive: Biwater Gauff Ltd. v. Tanz., ICSID Case No. ARB/05/22, Award, ¶ 731 (July 24, 2008);
    • Failure by the Host State’s authorities to follow its courts decisions constitute violation of the FPSS [Siag v. Egypt (Award dt. 1 June 2009), Para 448]
    • Failure by the Host State to implement its own regulations resulting in impairment of foreign investor’s investment constituted a failure ensure legal security of the foreign investment and thus a violation of the FSS. [AES v. Hungary (2010)].

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References

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LDA v. India

  • Louis Dreyfus Armateurs SAS (France) v. India

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  • 2009 Agreement
  • Kolkata Port- labour issues

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ALBA

LDA- 49%

ABG- 51%

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LDA v. India (2)

FPSS Violations complained against India

  • India obstructed HBT from operationalising the project;
  • the police failed to ensure safe passage of HBT’s cargo handling equipment to the Berths;
  • Kolkata Port coerced HBT to employ redundant workers and engage redundant sub-contractors, which resulted in financial strain to HBT;
  • When HBT retrenched extra workers, it was “subjected to a violent backlash,” including “mobs preventing operations, assaulting HBT personnel …, and threatening their personal security,” to which KoPT, the police, the District Magistrate, and the Ministry of Shipping (“MoS”) were unresponsive.
  • Three HBT employees and their families were abducted at gunpoint;
  • Kolkata Port chocked HBT’s finances by not allocating cargo;
  • HBT was unable to withstand the continued financial and administrative pressure and was forced to terminate the agreement;

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LDA v. India (3)

  • Article 4(1) of the India France BIT read: “The investments made by investors of one Contracting Party shall enjoy full and complete protection and safety in the area of the other Contracting Party.”
  • Tribunal: LDA had to establish the following in order to succeed in the claim:
  • LDA must show something more than a State failure to afford requisite “protection and safety” to HBT.
  • It must demonstrate either:
    • a failure to afford the required protection to ALBA itself (or to LDA’s shareholding interest in ALBA) or
    • a causal link between ALBA’s ownership of HBT and the State’s conduct towards HBT, namely that the State withheld protective services towards HBT on account of its being owned by ALBA (and/or in part by LDA), i.e., that the State intentionally targeted LDA’s protected investment in ALBA by withholding protection to its constituent holding in HBT.

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LDA v. India (4)

LDA allegations

  • Failure to prevent physical threats and harm
  • failure to insulate HBT from Kolkata Port’s and the Ministry of Shipping’s excesses and arbitrary and discriminatory behavior

Tribunal rejected the allegations and dismissed the claim

  • No evidence that failure was attributable to the foreign nature of investment
  • No evidence that authorities deliberately failed to act.
  • Law enforcement decisions are judgment calls which tribunal should be wary of reviewing
  • If evidence suggests bad faith, improper intent, or serious lack of due diligence in response to reasonably foreseeable & otherwise manageable threat, case can be made out
  • Here, no such case was made out.

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References

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�Chapter 3 �Non-Impairment

Introduction to International Investment Law

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Badrinath Srinivasan, LLM, FIII, MCIArb

lawbadri@gmail.com

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What is Non-Impairment

    • Non-Impairment
      • a right of the Investor
      • to have the investment not subjected to unreasonable or discriminatory behavior by the host State
      • that would impair the reasonable use, enjoyment or disposal of the investment

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    • Article 4(1) of India UAE BIT, 2013:

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    • “Neither Contracting Party shall in any way impair by arbitrary or discriminatory Measures, the management, maintenance, use, enjoyment, or disposal of Investments.”

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Relation with FET

    • Can exist as a separate clause or is subsumed in FET standard
    • CMS Gas Transmission Co. v. The Argentine Republic, ICSID Case No. ARB/01/8 (Award dated 12 May 2005):

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Relation with FET (2)

    • Some BITs couple Non-impairment explicitly with FET clause.
    • Article 3(1) of the Argentina-Netherlands BIT:
    • “Each Contracting Party shall ensure fair and equitable treatment to investments of investors of the other Contracting Party and shall not impair, by unreasonable or discriminatory measures, the operation, management, maintenance, use, enjoyment or disposal thereof by those investors.”

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Unreasonable AND discriminatory

    • Difference between Unreasonable or Discriminatory treatment and Unreasonable and Discriminatory treatment
    • Article II(2)(b) of the BIT of United States of America- Czech and Slovak Federal Republic, 1991 : “Neither Party shall in any way impair by arbitrary and discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investment…”
    • Investor has to establish both: that the measure complained of was (1) unreasonable, and (2) discriminatory.
    • Wide definition of measure: India-UAE BIT, 2013

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References

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Violation of Non-Impairment Std.

  • EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13- Award dated 8 October 2009 at para. 303- Prof. Schreur
  • a. a measure that inflicts damage on the investor without serving any apparent legitimate purpose;
  • b. a measure that is not based on legal standards but on discretion, prejudice or personal preference;
  • c. a measure taken for reasons that are different from those put forward by the decision maker;
  • d. a measure taken in wilful disregard of due process and proper procedure.”

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Ingredients of Discrimination

  1. an intentional treatment
  2. in favor of a national
  3. against a foreign investor, and
  4. that is not taken under similar circumstances against another national.
  5. ELSI Elettronica Sicula SpA case (United States of America v. Italy- ICJ)- Judgment dt. 20 July 1989

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Discrimination- Subjective & Objective

  • Subjective Element: intent to discriminate
  • Objective Element: Effects
  • Siemens v Argentina, ICSID Case No. ARB/02/8, Award (6 February 2007), at Para 321, the Tribunal held:
  • “The Tribunal concurs that intent is not decisive or essential for a finding of discrimination, and that the impact of the measure on the investment would be the determining factor to ascertain whether it had resulted in non-discriminatory treatment…”
  • Relevance of discriminatory Intent. LG&E Energy Corp v. Argentine Republic, ICSID Case No. ARB/02/1 is an example of this approach. The tribunal held:
  • “146. In the context of investment treaties, and the obligation thereunder not to discriminate against foreign investors, a measure is considered discriminatory if the intent of the measure is to discriminate or if the measure has a discriminatory effect…”

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Other Aspects

  • For discrimination, no need for violation of domestic law of host State: Ronald S. Lauder v The Czech Republic, Final Award (3 September 2001)
  • Overlap between Non-Impairment and Most Favoured Nation/ National Treatment

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References

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�Chapter 3 �Umbrella Clause

Introduction to International Investment Law

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Badrinath Srinivasan, LLM, FIII, MCIArb

lawbadri@gmail.com

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What is Umbrella Clause?

  • Guarantees observation of obligations by host state vis-à-vis the investor.
  • Article 10(1) of the Energy Charter Treaty provides, among other things: “Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.”
  • Elevates contractual obligation between the investor and host State to the level of an inter-state obligation
  • Previously known as “mirror effect”, “elevator”, “parallel effect”, “sanctity of contract”, “respect clause”

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History

  • 1953-1954, Mr. Elihu Lauterpacht’s advise to Anglo-Iranian Oil Company on settlement of the Iranian oil nationalization dispute
  • 1956-1957: Trunk pipeline advice
  • 1956-59, the clause found its place in Article 4 of the 1956-59 Abs Draft International Convention for the Mutual Protection of Private Property Rights in Foreign Countries:

“In so far as better treatment is promised to non-nationals than to nationals either under intergovernmental or other agreements or by administrative decrees of one of the High contracting Parties, including most-favoured nation clauses, such promises shall prevail”.

  • Lauterpacht connection

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History (2)

  • 1959 Reformulation: “Each Party shall at all times ensure the observance of any undertakings which it may have given in relation to investments made by nationals of any other party”.
  • Germany- Pakistan BIT, 1959 (first BIT):
  • “Either Party shall observe any other obligation it may have entered into with regard to investments by nationals or companies of the other party”.
  • As on 2004, 40% of the BITs contain this clause

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Non-Uniform Language

  • Generally mandatory
  • Article 10 of the Australia -Poland BIT 1991: Less forceful language: “A Contracting Party shall, subject to its law, do all in its power to ensure that a written undertaking given by a competent authority to a national of the other Contracting Party with regard to an investment is respected.”
  • Article 15 of the Czech Republic - Singapore BIT 1995: “(2) Each Contracting Party shall observe commitments, additional to those specified in this Agreement it has entered into with respect to investments of the investors of the other Contracting Party. Each Contracting Party shall not interfere with any commitments, additional to those specified in this Agreement, entered into by nationals or companies with the nationals or companies of the other Contracting Party as regards their investments.”
  • Host State Obligation

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References

  • Dolzer & Schreuer, Principles of International Investment Law (2008), Chapter VII (Standards of Protection)
  • Anthony C. Sinclair, The Origins of the Umbrella Clause in the International Law of Investment Protection, Arbitration International, Volume 20, Issue 4, 1 December 2004, Pages 411–434, https://doi.org/10.1093/arbitration/20.4.411
  • Yannaca-Small, K. (2006), “Interpretation of the Umbrella Clause in Investment Agreements”, OECD Working Papers on International Investment, 2006/03, OECD Publishing. http://dx.doi.org/10.1787/415453814578
  • Thomas Wälde, The Umbrella Clause in Investment Arbitration – A Comment on Original Intentions and Recent Cases”, The Journal of World Investment and Trade, Vol. 6 No 2, April 2005, https://www.biicl.org/files/946_thomas_walde_presentation.pdf

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SGS v Pakistan (2003)

  • Elevator effect
  • 2003- SGS v Pakistan- against the conventional view
  • Controversial
  • Umbrella Clause in Switzerland Pakistan BIT, 1995:
  • “Either Contracting Party shall constantly guarantee the observance of commitments it has entered into with respect to the investments of the investors of the other Contracting Party.”
  • Whether violation of Investor-State Agreement- Pre-Shipment Inspection Agreement violated the Umbrella Clause?

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Tribunal’s Decision in SGS v Pakistan

  • in dubio, pars mitior est sequenda which means in case of doubt, the milder course should be pursued
  • Four justifications
    • If the conventional view is taken to its logical end, it will also cover non-contractual commitments arising under the law of the host State, including the smallest types of commitments- this would lead to a flood of claims before tribunals.
    • Conventional view would obviate meaning of other guarantees as even a violation of a small legal obligation would lead to a claim.
    • The location of the Umbrella clause at the end of an investment treaty went against the conventional view.
    • Forum selection in investment agreements would not be binding on the investor but on the host State, if the conventional view is taken.
  • No jurisdiction over claims arising from agreement.

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References

  • Dolzer & Schreuer, Principles of International Investment Law (2008), Chapter VII (Standards of Protection)
  •  SGS v Pakistan, ICSID Case No. ARB/01/13 Decision on Objections to Jurisdiction (6 August 2003), https://www.italaw.com/sites/default/files/case-documents/ita0779.pdf

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Approaches to Umbrella Clause

  • SGS v Pakistan- Narrow construction
  • SGS v Philippines (2004) criticised the narrow construction approach
  • “115… Interpreting the actual text of Article X(2), it would appear to say, and to say clearly, that each Contracting Party shall observe any legal obligation it has assumed, or will in the future assume, with regard to specific investments covered by the BIT.47 Article X(2) was adopted within the framework of the BIT, and has to be construed as intended to be effective within that framework.”
  • Para 116- ambiguities in BIT to be resolved in favour of investor protection
  • Middle ground- El Paso v. Argentina (2006) & Pan American v. Argentina (2006)
    • Cue from SGS v Pakistan
    • Distinction between acts as merchant and as sovereign

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Middle Ground

  • El Paso Tribunal (2006)
  • “81. In view of the necessity to distinguish the State as a merchant, especially when it acts through instrumentalities, from the State as a sovereign, the Tribunal considers that the "umbrella clause" in the Argentine-US BIT, which prescribes that "[e]ach Party shall observe any obligation it may have entered into with regard to investments", can be interpreted in the light of Article VII (1), which clearly includes among the investment disputes under the Treaty all disputes resulting from a violation of a commitment given by the State as a sovereign State, either through an agreement, an authorisation, or the BIT…”
  • Tribunal clarified: “65. It is the Tribunal's view that it will not be enough to assert that a dispute is of a contractual nature to disqualify it as a legal dispute. It is well known that ICSID tribunals have been dealing over the years with contractual as well as non-contractual disputes…”

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Middle Ground (2)

  • El Paso & Pan American Tribunals

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  • Criticism by Dolzer & Schreuer:
    • Article 31 VCLT
    • Construction of substantive obligations and legitimacy

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El Paso Tribunal

Pan American Tribunal

Prof. Lucius Caflisch (President)

Prof. Brigitte Stern (Arbitrator)

Prof. Piero Bernardini (Arbitrator)

Prof. Lucius Caflisch (President)

Prof. Brigitte Stern (Arbitrator)

Prof. Albert Jan van den Berg (Arbitrator)

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Summing Up

  • Summary
    • Broad construction [e.g., SGS v. Philippines]
    • Narrow construction [e.g., SGS v. Pakistan]
    • The Middle ground- the clause covers only sovereign acts. [El Paso v. Argentina]
  • Recent trends- Broad construction: Nissan v. India (29 April 2019- Paras 274-281).

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References

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Nissan v India and the Umbrella Clause

  • Comprehensive Economic Partnership Agreement between Japan and the Republic of India, 2011 (CEPA)
  • Article 87(2) provided: “Each Party shall observe any obligation it may have entered into with regard to investment activities in its Area of investors of the other Party.”
  • Nissan argued on violation of the CEPA- FET standard and Umbrella Clause
  • India raised jurisdictional objections
    • Nissan’s claims under the CEPA are excluded by Clause 15 of the 2008 MoU
  • Bifurcation on the proceedings

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India’s Objections on Reliance on Umbrella Clause

  • India’s Jurisdictional Objections on Umbrella Clause
    • Nissan cannot claim under the 2008 MoU without also complying with the exclusive jurisdiction clause in Clause 15 and
    • in the alternative, should the Tribunal find the parties to the dispute are not substantially the same as those to the 2008 MoU, the umbrella clause claims then fail for lack of privity. India’s argument was that the MOU was between the State of Tamil Nadu (not the Republic of India) and the claimants, while the Treaty was with the Republic of India.
  • Clause 15- Exclusive Jurisdiction clause

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Tribunal’s Findings on Clause 15 vis-à-vis Umbrella Clause

  • The CEPA to be interpreted in the light of its object and purpose (Article 31, VCLT).
  • The parties must have understood, at the time of the CEPA, that many state contracts have their own forum selection clauses, but gave no indication in the text of Article 87(2) that the wording could be relevant for the scope of the Umbrella clause.
  • India’s argument regarding Clause 15 of the MOU against the Umbrella clause claim would significantly limit the reach of the Umbrella clause when it did not provide so.
  • Taken to its logical end, Umbrella clause would be restricted to:
    • non-observance of commitments of non-contractual nature or
    • to instruments not containing a clause such as Clause 15 of the MOU.
  • The tribunal is not required to delineate the sequence of the dispute resolution processes- possibility of parallel proceedings too but the CEPA does not forbid this possibility.
  • Since no agreement on sequence of dispute resolution processes in BIT, Cl. 15 cannot bar a CEPA claim under Umbrella clause

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Tribunal’s Finding on Privity of Contract Issue & Outcome

  • Both India and Nissan have an arguable case on the issue.
  • Interpretative issue of whether the phrase “it may have entered into” in the Umbrella clause is too important to be decided at Jurisdictional Stage
  • Consequently, the issue is deferred to examination on merits.
  • Ultimately, Tribunal dismissed India’s jurisdictional objections
  • Parties are reported to have settled the dispute.

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References

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