Van Hecke, g, ‘Contracts between States and Foreign Private Law Persons’, 1 epil 814 (1992)

W?lde T (ed), The Energy Charter Treaty (The Hague, Kluwer Law International, 1996) Footnotes ?The views presented in this chapter are those of the authors and should not be associated with any of their past or present employers. The authors would like to express their sincere thanks to Nicolas Nohlen whose initial assistance made this chapter possible, to Simon Evenett, Milos Barutciski, Margot Salomon, and Todd Weiler for their detailed and thoughtful comments on earlier versions of this chapter, and to Christoph Fischer and Emmanuel Saurat for their careful reading of the final drafts of the chapter. 1 SA Riesenfeld, ‘Foreign Investment’ in Rudolf Bernhardt and Peter Macalister-Smith (eds), 2 E PIL (Published under the Auspices of the Max Planck Institute for Comparative Public and International Law) (1992–2000) 435. 2 See further M Sornarajah, The International Law on Foreign Investment (Cambridge, Cambridge University Press, 2nd edn, 2004) 7 ff; J Kurtz, A General Investment Agreement in the WTO? Lessons Learned from Chapter 11 of NAFTA and the OECD Multilateral Agreement on Investment, Jean Monnet Working Paper 6/02 (2002) at 3; for the purposes of this chapter the general term ‘foreign investment’ shall be used. 3 See for comprehensive data the yearly World Investment Reports of the United Nations Conference on Trade and Development (UNCTAD), available at the UNCTAD website <http://www.unctad.org>. 4 See eg J Kokott, ‘Interim Report on the Role of Diplomatic Protection in the Field of the Protection of Foreign Investment’ in International Law Association (ILA), Report of the Seventieth Conference, New Delhi (London, ILA, 2002) 259 at 261. 5 See R Chandra, ‘International Law on Foreign Investment’, Seminar on Transnational Enforcement of Environmental Law and International Law on Foreign Investment on 1 May 2004 at the Constitution Club, organized by International Law Association 81 (2004). The UNCTAD webpage notes as follows on the growing importance of foreign investment for developing countries: foreign affiliates of some 64,000 transnational corporations (TNCs) generate 53 million jobs; FDI is the largest source of external finance for developing countries; developing countries’ inward stock of FDI amounted to about one-third of their GDP, compared to just 10 per cent in 1980; one-third of global trade is intra-firm trade: <http://www.unctad.org/Templates/StartPage.asp?intItemID=2527&lang=1>. 6 See Kokott, above n 4 at 263 ff. 7 According to the UNCTAD, World Investment Report 2006 (New York and Geneva, United Nations, 2006), at the end of 2005 the total number of BITs was 2,495, with 2,758 double taxation treaties, and 232 other international agreements, bringing the overall total of International Investment Agreements (IIAs) to 5,500 ( ibid 26). For an online compilation with search engine of all BITs, see UNCTAD at <http://www.unctadxi.org/templates/DocSearch 779.aspx>. 8 The marked exception are the bilateral investment agreements concluded by the USA and Canada which, following the practice of the North American Free Trade Agreement (NAFTA), cover pre-entry treatment of foreign investors as well. See NAFTA Chapter 11 at 32 ILM 605 (1993). See below at nn 80-8 for more detailed discussion of the right to establishment. See too G?mez-Palacio and Muchlinski, ‘Admission and Establishment’ ch 7 below. 9NAFTA 32 ILM 289 (1993); the Framework Agreement on the ASEAN Investment Area (concluded under the ASEAN Free Trade Agreement (AFTA); the Colonia Protocol on the Reciprocal Promotion and Protection of Investments within Mercosur, signed on 17 January 1994; and the Buenos Aires Protocol on the Promotion and Protection of Investments Made by Countries that are not Parties to Mercosur, signed on 8 August 1994 (both protocols concluded under the Asunci?n Treaty Establishing a Common Market between Argentina, Brazil, Paraguay and Uruguay (Mercosur), signed on 26 March 1991); the Treaty on Free Trade between Colombia, Mexico and Venezuela, signed on 13 June 1994. See further UNCTAD, Investment Provisions in Economic Integration Agreements (New York and Geneva, United Nations, 2006). 10 See eg the recently concluded EU-Chile Association Agreement and the EU-Mexico Association Agreement, the text of both available at <http://ec.europa.eu/comm/trade/issues/bilateral/index_en.htm>. See for further examples UNCTAD, above n 9. On US FTAs, see Jeffrey Scott (ed), Free Trade Agreements: US Strategies and Priorities (Washington, Institute for International Economics, 2004). 11 See the Energy Charter Treaty 34 ILM 381 (1995) and see further Thomas W?lde (ed), The Energy Charter Treaty (The Hague, Kluwer Law International, 1996). 1233 ILM 44 (1994). 13 See also Kurtz above n 2 at 10; Sornarajah, above n 2 at 303; K Sidhu, ‘Die Regelungen von Grenz?berschreitenden Investitionen in der WTO’, 7 Zeitschrift f?r Europarechtliche Studien (ZEuS) 335, 348 ff (2004). 14Art I(2)(c) GATS. For more details on the scope of the GATS, see <http://www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm>. 15 E Kentin, ‘Prospects for Rules on Investment in the New WTO Round’, 29 LIEI 61, 64 (2002). 16 P Sauve, ‘Scaling Back Ambitions on Investment Rule-Making at the WTO’, 2 JWI 529–36 (2001). 17 P Sauve and C Wilkie, ‘Investment Liberalization in GATS’ in P Sauve and RM Stern (eds), New Directions in Services Trade Liberalization (Washington, DC, Brookings Institution, 2000) at 331–63. 18 See generally P Civello, ‘The TRIMS Agreement: A Failed Attempt at Investment Liberalization’, 8 Minnesota J of Global Trade 97 (1997). 19 Full text available at <http://www.unctad.org/en/docs/tdrbpconf10r2.en.pdf>. 20 See, however, below as regards the so-called Singapore Issues in the WTO, including investment. 21 For a comprehensive documentation of the negotiation process, see at the OECD's website <http://www.oecd.org/daf/mai>; see also PT Muchlinski, ‘The Rise and Fall of the Multilateral Agreement on Investment: Where Now?’, 34 Int'l Law 1033, 1037 ff (2000). The abbreviated name, ie MAI, was to prove a harbinger of things to come. ‘Mai’ in Italian means ‘never’. 22 See Muchlinski, above n 21 at 1039. 23 See further Tony Clarke and Maude Barlow, MAI: The Multilateral Agreement on Investment and the Threat to Canadian Sovereignty (Toronto, Stoddard Publishing, 1997). 24 For an insightful and refreshing account of the MAI negotiations and the lessons they offer, see EM Graham, Fighting the Wrong Enemy—Antiglobal Activists and Multinational Enterprises, (Washington, Institute for International Economics, 2000). 25 The 1998 MAI Negotiating Text as of 24 April 1998 is available at the OECD's website at <http://www.oecd.org/dataoecd/46/40/1895712.pdf>. 26 Muchlinski, above n 21 at 1049. Graham, above n 24 at 7, argues that the MAI draft ‘was becoming little more than a codification of existing law, policy and practice among the negotiating countries’. 27 The very active opposition of some NGOs has been regarded by several authors as one of the main reasons for the failure of the MAI; see A Rugman, ‘New Rules for International Investment: The Case for a Multilateral Agreement on Investment (MAI) at the WTO’ in C Milner and R Read (eds), Trade Liberalization, Competition and the WTO (Northampton, Mass, Edward Elgar Publishing, 2002) 176; J Kurtz, ‘NGO's, the Internet and International Economic Policy Making: The Failure of the OECD Multilateral Agreement on Investment’, 3 Melbourne J Int'l L 213, (2002) 231 ff. See also Muchlinski, above n 21 at 1039 ff; see also D Henderson, The MAI Affair: A Story and its Lessons (London, Royal Institute of International Affairs, 1999) 16. 28 The texts of the various Ministerial Declarations emerging from these meetings are available at <http://www.wto.org/english/thewto_e/minist_e/min_declaration_e.htm>. 29 The letter is available at: <http://www.ictsd.org/ministerial/cancun/docs/zoellick-letter.pdf>. 30 See Press Notice of the Commission of 26 November 2003, available at <http://www.europa.eu.int/comm/trade/issues/newround/pr261103_en.htm>; in which the Commission proposes to ‘show flexibility’ on the ‘Singapore Issues’. 31 WTO Working Group on the Relationship between Trade and Investment, established at the first Ministerial Meeting in Singapore in 1996. The Doha Ministerial Declaration clearly spells out the mandate of this working group, WTO Doc No. WT/MIN(01)/DEC/1, p 5, at paras 20–2, see above n 28. 32 See T L Brewer and S Young, The Multilateral Investment System and Multinational Enterprises (Oxford, Oxford University Press, 1998) 122; see also Kurtz, above n 2 at 9. 33 Cf B Ferrarini, ‘A Multilateral Investment Framework: Would it be Justifiable on Economic Welfare Grounds?’, 58 Aussenwirtschaft 491 (2003) at 494. 34 For an extensive Agenda of the European Union on international investment see <http://europa.eu.int/comm/trade/issues/sectoral/investment/conswtoag_inv.htm>; see also the EU's submission to the WGTI, WTO Doc No. WT/WGTI/W/110. 35 See Ferrarini, above n 33 at 494. 36 Working Group on the Relation between Trade and Investment, WT/WGTI/M/9, Report on the Meeting of 3 June 1999, at para 56; WT/WGTI//M/12, Report on the Meeting of 11 October 2000, at para 23. 37 Cf B Ferrarini, ‘A Multilateral Framework for Investment?’ in SJ Evenett (ed), The Singapore Issues and the World Trading System: The Road to Cancun and Beyond (Berne, Swiss State Secretariat of Economic Affairs/World Trade Institute, 2003) ch I at 27. 38 Ferrarini, above n 33 at 494. 39 A B?hmer, ‘The Struggle for a Multilateral Agreement on Investment—An Assessment of the Negotiation Process in the OECD’, 41 German YB Int'l Law 267, 268 (1998); Ferrarini above n 37, at 27; Kentin, above n 15, at 66. 40 See <http://www.dailyexcelsior.com/web1/03sep13/busi.htm#3>. The release of the statement forced CII to disassociate itself and to say that it had been misquoted. 41 See AV Ganesan, ‘Developing Countries and a Possible Multilateral Framework on Investment: Strategic Options’, 7(2) Transnational Corporations 1, 14 (1998). 42 See ibid . 43 See Ferrarini, above n 33 at 513. 44 On different kinds of legitimacy, cf J Kokott, ‘Sind wir auf dem Wege zu einer Internationalen Umweltorganisation’ in JA Frowein, K Scharioth, I Winkelmann, and R Wolfrum (eds), Verhandeln f?r den Frieden, Liber amicorum Tono Eitel (Heidelberg, Springer Verlag, 2003) 381, 408 ff. 45 For a comprehensive analysis of arguments put forward by both developed and developing countries in the WGTI, see Ferrarini, above n 37 at 16 ff. 46 For the IIASD Model Agreement as of April 2006 see: <http://www.iisd.org/pdf/2005/investment_model_int_handbook.pdf>. 47 Sauve, above n 16 at 529–30. 48 See eg Ganesan, above n 41 at 3 and 30 ff.; P-T Stoll and F Schorkopf, WTO—Welthandelsordnung und Welthandelsrecht (Cologne, Heymanns Verlag, 2nd edn, 2002) 247. 49 See above n 31. Furthermore, WTO members decided in 2001 at the Ministerial Conference in Doha to commence negotiations on an MAI. The Doha Declaration says that ‘negotiations will take place after the Fifth Session of the Ministerial Conference on the basis of a decision to be taken, by explicit consensus, at that session on modalities of negotiations’, WTO Doc No. WT/MIN(01)/DEC/1, p 5, at paras 20–2; ‘explicit consensus’ means that any of the WTO members could veto the inclusion. 50 B Hoekman and K Saggi, ‘Multilateral Disciplines for Investment-Related Policies?’, Paper presented at the conference ‘Global Regionalism’, Instituto Affari Internazionali, Rome, 8–9 February (1999) at 18. 51 As Ferrarini correctly points out, the ‘great bargain’ argument implies somehow that there is not much to gain for developing countries from multilateral investment rules, see above n 33 at 508. 52 The WTO dispute settlement system is an intergovernmental dispute settlement system and does not at present allow claims to be brought by private parties. 53 Although traditionally hailed as a truly multilateral organization, there are certain WTO agreements that are plurilateral in nature. These agreements are contained in Annex 4 of the Results of the Uruguay Round of Multilateral Trade Negotiations. 54NAFTA Art 1139. 55 See the MAI Negotiating Text (1998), above n 25 at 11, Ch 2 Art 2: ‘Investment means every kind of asset owned or controlled, directly or indirectly, by an investor’; also the term ‘investor’ was approached broadly: ‘Investor means a natural person having the nationality of, or who is permanently residing in, a Contracting Party in accordance with its applicable law or a legal person or any other entity constituted or organized under the applicable law of a Contracting Party …’. 56 See Schlemmer, ‘Investment, Investor, Nationality, and Shareholders’ ch 2 above and R Dolzer and M Stevens, Bilateral Investment Treaties (The Hague, Martinus Nijhoff, 1995) at 26; I Madalena, ‘Foreign Direct Investment and the Protection of the Environment: The Border between National Environmental Regulation and Expropriation’, 12 European Env L Rev 70, 71 (2003). A broad asset-based definition of investment was also favoured by the USA in the context of the WGTI. See eg WT/WGTI/W/142 at 2. 57 Muchlinski above n 21 at 1040 ff. 58 See UNCTAD, Lessons from the MAI, Series on Issues in International Investment Agreements, (New York and Geneva, United Nations, 1999) at 11, available at the UNCTAD website, <http://www.unctad.org/en/docs/psiteiitm22.en.pdf>. 59 Ibid . 60 EA Duruigbo, Multinational Corporations and International Law: Accountability and Compliance Issues in the Petroleum Industry (Ardsley, NY, Transnational Publishers, 2003) 189 ff (2003); Sornarajah, above n 2 at 55; I Seidl-Hohenveldern, The Corporation in and under International Law (Cambridge, Grotius Publications, 1987). 61 See RJ Dupuis, Arbitrator, Texaco v Lybia, 17 ILM 1 ff (1978); G van Hecke, ‘Contracts between States and Foreign Private Law Persons’, 1 EPIL 814 ff (1992); further references at K Doehrung, V?lkerrecht (Heidelberg, M?ller Verlag, 2004) 297 ff. 62 For example, the recently established post of UN Special Representative of the Secretary-General on Human Rights and Transnational Corporations and Other Business Enterprises was mandated to focus initially on addressing the ‘sphere of influence’ and complicity with regard to human rights and these non-state actors, Commission on Human Rights Res 2005/69, para 1(c). 63 One example of an international instrument placing obligations on businesses operating abroad is the OECD Anti-Bribery Convention. Admittedly, this agreement is ratified and implemented by the signatories rather than TNCs, but nevertheless illustrates the application of certain obligations for businesses operating abroad by adoption of the necessary domestic legislation. See <http://www.oecd.org/topic/0,2686,en_2649_34855_1_1_1_1_37447,00.html>. 64 See eg S Deva, ‘Human Rights Violations by Multinational Corporations and International Law: Where From Here?’, 19 Conn J Int'l Law 1 (2003); see also SR Ratner, ‘Corporations and Human Rights: A Theory of Legal Responsibility’, 111 Yale LJ 443, 461 (2001). Ratner argues that ‘a system in which the State is the sole target of international legal obligations may not be sufficient to protect human rights’. 65 See also J Kokott ‘Soft Law Standards under Public International Law, A Contribution on the Effects of the Transformation of International Law on the Sources of International Law’ in P Nobel (ed), International Standards and the Law (Berne, Staempfli, 2005). 66 The United Nations Codes of Conduct on Transnational Corporations, UN Centre on Transnational Corporations, UN Doc ST/CTC/SER.A/4 at 1 (1988), 23 ILM 626 (1984). 67UN Doc E/CN.4/Sub.2/2003/12/Rev.2 (2003). 68 See for a comprehensive analysis C Hillemanns, ‘UN Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with regard to Human Rights’, 10 German Law Journal No. 10 (1 October 2003), available at <http://www.germanlawjournal.com>. 69 In particular the Universal Declaration of Human Rights, GA Res 217A (III), UN Doc A/810 at 71 (1948); the International Covenant on Civil and Political Rights, GA Res 2200A (XXI), 21 UN GAOR Supp (no. 16) at 52, UN Doc. A/6316 (1966), 999 UNTS 171; and the International Covenant on Economic, Social and Cultural Rights, GA Res 2200A (XXI), 21 UN GAOR Supp (no. 16) at 49, UN Doc A/6316 (1966), 993 UNTS 3. 70ILO Doc GN 204/4/2 (1978), 17 ILM 422 (1978). 71OECD Doc DAFFE/IME(2000)20 (2000), 40 ILM 236 (2001). 72 Information available at <http://www.unglobalcompact.org>.? 73 See above n 67. 74 See also the ‘Interim report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises to the United Nations Economic and Social Council’, E/CN.4/2006/97 of 22 February 2006 (hereinafter referred to as the Ruggie Report). The Special Representative, John Ruggie, states (para 61) that ‘[u]nder customary international law, emerging practice and expert opinion increasingly do suggest that corporations may be held liable for committing, or for complicity in, the most heinous human rights violations amounting to international crimes, including genocide, slavery, human trafficking, forced labour, torture and some crimes against humanity’. See too UNCTAD, World Investment Report 2007 (New York and Geneva, United Nations, 2007) Part II. 75 The non-binding OECD Guidelines for Multinational Enterprises, above n 71, were annexed to the draft agreement. 76 See O De Schutter, ‘Transnational Corporations as Instruments of Human Development’, in Phillip Alston and Mary Robinson (eds), Human Rights and Development—Towards Mutual Reinforcement (Oxford, Oxford University Press, 2005) 403 at 405. Noteworthy initiatives in the extractive sector include the ‘Extractive Industries Transparency Initiative’. For the principles and criteria, see <http://www.eitransparency.org/section/abouteiti/principlescriteria>. See also ‘Business and Human Rights: Policy Commitments and Disclosure in the Extractive Sector’, published by the International Business Leaders Forum, available at <http://www.iblf.org/resources/general.jsp?id=123736>. 77 See IIASD Model Agreement, above n 46 Part 3 (Arts 13–20). 78 Drawn from Art 9 IIASD Model Agreement, above n 46, but common in all kinds of investment treaties. See further Reinisch ‘Expropriation’ Ch 11 below. 79 See the MAI Negotiating Text (1998) above n 25 at p 57, Chapter IV, the ‘General Treatment’ provision. 80 The most well-known case is Ethyl Corporation v Canada , 24 June 1998 (Jurisdiction Phase), UNCITRAL, 38 ILM 708 (1999). Ethyl Corporation, a US-based TNC, used the NAFTA provisions to claim damages against the Canadian government for banning the import of a gasoline additive, MMT, which is a dangerous toxin. The ban was on health, safety, and environmental grounds; see for further case-law n 99 below. For a commentary on a number of NAFTA disputes, see M Barutciski, ‘In the Eye of the Beholder: A Commentary on Investor Protection under NAFTA’, in Alan S Alexandroff (ed), Investor Protection in the NAFTA and Beyond: Private Interest and Public Purpose (Ottawa, CD Howe Institute, Policy Study 44, The Border Papers, 2006) 61. 81 MAI Negotiating Text (1998) above n 25 at p 13, Chapter III. 82 Kurtz points, however, to the ‘fundamental differences’ between applying non-discriminatory standards in the trade rather than in the investment field, see Kurtz, above n 2 at 49. 83 MAI Negotiating Text (1998) above n 25 at pp 77 ff, Chapter VI. 84 Requiring national treatment already in the pre-establishment phase, the provisions within the 1998 MAI Negotiating Text provided investors a de facto right of entry into the host state and, thus, went beyond the majority of the existing BITs. 85 See Kurtz, above n 27 at 229. 86 See the OECD Code of Liberalisation of Capital Movements and the Code of Liberalisation of Current Invisible Operations, available at <http://www.oecd.org/document/63/0,2340,en_2649_34887_1826559_1_1_1_1,00.html . 87 See IIASD Model Agreement, above n 46 Art 4(E). Note also that in the Energy Charter Treaty this issue was dealt with by having a separate agreement on the extension of investor and investment protection to the pre-entry stage. To date that agreement has not entered into force. See Energy Charter Treaty Art 10(4), above n 11. See further Energy Charter Treaty Secretariat (1998), Draft Supplementary Treaty to the Energy Charter Treaty, available at <http://www.encharter.org/fileadmin/user_upload/document/SP_draft_text.pdf>. 88 Graham, above n 24 at 63, notes that OECD countries also use the combination of performance requirements and incentives. 89 Ibid . 90 See Ferrarini, above n 37 at 12; N Bernasconi-Osterwalder, ‘International Legal Framework on Foreign Investment—Background Paper’ in Seminar on Transnational Enforcement of Environmental Law and International Law on Foreign Investment on 1 May 2004 at Constitution Club, organized by International Law Association 69, 70 (2004); Muchlinski above n 21 at 1050. 91 Cf J Kokott, ‘Naturrecht und Positivismus im V?lkerrecht, Sind wir auf dem Wege zu einer Weltverfassung?’ in C Meier-Schatz and R Schweizer (eds), Recht und Internationalisierung, Fg. Zum Juristentag 2000 in St. Gallen (2001) 3 ff. 92 See the 1998 MAI Negotiating Text, above n 25, at p 7, Preamble; there was, however, never consensus among OECD members that language on the environment should appear even in the Preamble. 93 Ibid at p 56 esp n 129. 94 Ibid at p 54, the ‘not lowering labour and environmental standards’ clause. 95OECD Doc DAFFE/IME above n 71. 96 See L Compa, ‘The Multilateral Agreement on Investment and International Labor Rights: A Failed Connection’, 31 Cornell Int'l LJ 683, 685 ff (1998). 97 For a comprehensive analysis, see ibid at 687 ff. 98NAFTA Art 1114 allows merely for environmental measures which are ‘otherwise consistent’ with the provisions of Chapter 11. 99NAFTA Art 1110. 100 See eg Metalclad v The United Mexican States , 30 August 2000, ICSID Case No. Arb(AF)/97/1, 40 ILM 35 (2001); T?cnicas Medioambientales Tecmed, SA v United Mexican States , 29 May 2003, Award, ICSID Case No. Arb(AF)/00/2; Methanex v United States , 7 August 2002 (1st Partial Award), UNCITRAL; SD Myers, Inc v Canada , NAFTA Arbitration, 40 ILM 1408 (2001); see also in general Madalena above n 56 at 71. 101 See above sub-section (ii). 102 Experience from the WTO has also shown that attempts to include core labour standards as an issue for negotiation met with fierce resistance from developing countries. 103 See eg Report of the UN Working Group on the Right to Development, UN Doc. E/CN.4/2006/26, para 59: ‘The right to development implies that foreign direct investment (FDI) should contribute to local and national development in a responsible manner, that is, in ways that are conducive to social development, protect the environment, and respect the rule of law and fiscal obligations in the host countries. The principles underlying the right to development, as mentioned above, further imply that all parties involved, i.e. investors and the host countries, have responsibilities to ensure that profit considerations do not result in crowding out human rights protection …’. 104 MAI Negotiating Text (1998), above n 25 at 63 ff, Chapter V. 105 See R Geiger, ‘Regulatory Expropriations in International Law: Lessons from the Multilateral Agreement on Investment’, 11 NYU Env LJ 94, 105 (2002–3). 106 Needless to say, however, just as investors may bring abusive claims against states, so too may states do so against investors. This calls for careful crafting of any such dispute settlement mechanisms. 107 Such claims by individuals were then likely to take place at a national level, but special international dispute settlement mechanisms may also be provided. 108IIASD Model Agreement, above n 46, Art 19. 109 See MAI Negotiating Text (1998), above n 25 at 70-6, Chapter V. D. Art 2: the three options were the ICSID, the UN Committee on International Trade Law (UNCITRAL) and the International Chamber of Commerce (ICC). 110NAFTA Article 1120 offers ICSID and UNCITRAL arbitration. 111 See Sect 4(a) above; for proponents of the WTO as the right forum for multilateral investment rules see above n 48. 112Art 24.3 calls for the establishment of a Permanent Group of Experts who may be requested to assist a dispute settlement panel. 113 See in particular Art 22 of the DSU. 114 It should be noted that before the Canc?n Ministerial the USA floated the idea of allowing investor-state dispute settlement for a future WTO investment agreement. Some have (perhaps cynically) noted that this was a deliberate attempt on the part of the USA to kill off the prospect of negotiations. 115 See generally for possible improvements of the WTO dispute settlement system, D McRae, ‘What is the Future of WTO Dispute Settlement?’, 7 JIEL 3 (2004); E-U Petersmann, ‘WTO Negotiators Meet Academics: The Negotiations on Improvements of the WTO Dispute Settlement System’, 6 JIEL 237 (2003). 116 See above n 109. 117 Bernasconi-Osterwalder, above n 90 at 73. 118 Cf Art 43 IIASD Model Agreement, above n 46. Authors: Moshe Hirsch ? Keywords: Review of arbitral awards – Failure to apply applicable law – Applicable law – Conflict of laws – Customary international law – General principles of international law This chapter addresses questions relating to the impact of non-investment international obligations in the sphere of international investment law. Topics discussed include principles of public and international law, international investment jurisprudence, and emerging principles in international investment law.

0subscriber_article?script=yes&id=%2Fic%2FMonograph%2Flaw-iic-9780199231386&recno=62&searchType=browse Chapter 5 Interactions between Investment and Non-investment Obligations

(1)Principles of Public International Law157

(2)International Investment Jurisprudence163

(a) SD Myers v Canada163

(b) SPP v Egypt166

(c) Santa Elena v Costa Rica168

(d) TECMED v Mexico170

(3)Emerging Principles in International Investment Law173

(a) Relevance of Non-investment Treaties 173

(b) Voluntary/Non-voluntary International Obligations 174

(c) The Parties' Motivations 175

(d) Chronological Sequence of Obligations and Available Information 176

(e) Least Restrictive Measures 177

(f) Sharing the Burden and Measure of Compensation 177

Concluding Remarks178

THE current wave of increasing investor-state arbitrations under international investment agreements 1 is accompanied by a growing overlap between international investment law and international rules derived from other domains of international law. The increasing interaction between investment obligations and environmental, human rights 2 or other international obligations brings to the fore a host of questions regarding the relationships between these spheres of international law. 3 International investment tribunals have long applied some general rules of public international law (mainly the law of treaties 4 as well as rules of state responsibility) but this chapter focuses on the interrelationships between inconsistent substantive standards of behaviour prescribed by international investment law and other branches of international law.

This chapter addresses questions relating to the impact of non-investment international obligations in the sphere of international investment law. 5 Such questions may arise not only before investment tribunals but also in other international fora, such as the European Court of Human Rights, which has already rendered several decisions regarding foreign investors' rights. 6 The development of regulatory rules that apply to overlapping spheres necessitates striking a balance between the competing rules and aims that lie at the heart of different domains of international law. Consequently, the question of which tribunals will shape the balancing principles may well be of major importance.

end p.155

The possible overlap of investment and non-investment obligations, as well as the potential involvement of more than one international institution, is well illustrated in the amicus brief submitted by the Quechan tribe in the ongoing NAFTA litigation between Glamis and the USA. 7 Glamis argues that the US and Californian authorities adopted regulatory measures designed to prevent customary open-pit mining methods and block the development of the Glamis mining claims. Glamis argues that the US government, through California's regulation, has expropriated, or taken, its property in violation of the NAFTA provisions. The Quechan tribe argues that the territory upon which Glamis would have dug its mine is located within the tribe's sacred areas, and that the US measures are justified under international customary law as well as several treaties. The Quechan people contend that their indigenous rights, which are threatened by possible approval of the Glamis claim, are protected by international instruments, inter alia, the 1966 International Covenant on Civil and Political Rights, the 1972 UNESCO Convention on World Cultural Heritage, the ILO Convention on Indigenous and Tribal Peoples, and the Inter-American Convention on Human Rights. 8 As to the possibility that the NAFTA tribunal may rule in favour of Glamis (and that the implementation of this ruling will violate the Quechan people's rights), the Quechan tribe threatens to file a petition with the Inter-American Commission of Human Rights against the USA. 9

It is noteworthy that the interrelationships between international investment and non-investment obligations are not necessarily contradictory. Legal rules deriving from these international spheres often complement and reinforce each other. As

end p.156

discussed below, international investment tribunals may in some cases interpret international investment treaties' provisions in the light of non-investment treaties. Finally, even where investment and non-investment rules are clearly inconsistent, this conflict may lead not only to a normative determination of which rule trumps the other. Additional legal consequences of such incompatibility may arise with regard to the appropriate remedies (particularly regarding the amount of compensation) or the burden of proof.

Encountering inconsistent rules derived from international investment and other branches of international law, tribunals and specialists may draw upon rules included in two legal tool-kits that clarify the interactions of obligations in the interface area: the first set of rules has been developed in the sphere of public international law and the second set of rules emerges from decisions of international investment tribunals. Sections 1 and 2 will examine these sets of distinctive rules.

(1) Principles of Public International Law

Public international law includes a coherent body of rules that regulates inconsistencies among international legal rules. International norms that are considered as jus cogens (peremptory norms) 10 prevail over all other inconsistent rules of international law. 11Article 53 of the 1969 Vienna Convention on the Law of Treaties (Vienna Convention) further establishes that such a conflicting treaty is void. 12 The superior normative status of jus cogens rules 13 was recently confirmed by the European Court

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of Justice (First Instance) in regard to the relationship between certain fundamental human rights (which are considered as peremptory norms) and the provisions of the United Nations Charter:

226. […] jus cogens, understood as a body of higher rules of public international law binding on all subjects of international law, including the bodies of the United Nations, and from which no derogation is possible. […]

230. International law thus permits the inference that there exists one limit to the principle that resolutions of the Security Council have binding effect: namely, that they must observe the fundamental peremptory provisions of jus cogens. If they fail to do so, however improbable that may be, they would bind neither the Member States of the United Nations nor, in consequence, the Community. 14 (Emphasis added)

Unless peremptory rules of international law are involved, Article 103 of the United Nations Charter provides that the Charter's provisions prevail over other incompatible treaties. 15 The special status of the UN Charter's provisions was affirmed by the International Court of Justice's decision in the Lockerbie case regarding the relationship between Article 25 of the Charter and the 1971 Montreal Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation:

39. Whereas both Libya and the United Kingdom, as Members of the United Nations, are obliged to accept and carry out the decisions of the Security Council in accordance with Article 25 of the Charter; … and whereas, in accordance withArticle 103 of the Charter, the obligations of the Parties in that respect prevail over their obligations under any other international agreement, including the Montreal Convention. 16 (Emphasis added)

end p.158

International investment tribunals have extensively cited various provisions of the Vienna Convention but they have not resorted yet to Articles 30 or 53 regarding the primacy of the rules of jus cogens or UN Charter provisions over investment treaties. Still, these well-known principles of public international law may be invoked by parties to future investment disputes. This is particularly true with regard to host states that may attempt to justify the infringement of investors' rights by invoking their obligation to protect international human rights within their jurisdiction. Since some fundamental human rights are protected by peremptory rules of international law as well as the UN Charter, 17 recognizing the superior status of these rules may require future investment tribunals to subject some provisions included in investment treaties to these higher principles of public international law (eg with regard to the prohibition of racial discrimination).

The primacy of some international human rights over investment obligations may be invoked not only by host governments but also by foreign investors 18 or some NGOs. Thus, for instance, individual investors may invoke the superior status of the above rules with regard to their right to property as well as regarding their right to fair trial. Allegations regarding a conflict between these fundamental human rights and international treaties were given serious consideration by the European Court of Justice (First Instance) in the Kadi case. 19 Still, it is important to note that while the normative superiority of rules of jus cogens is not disputed in international law jurisprudence, international tribunals have demonstrated a cautious approach and declined to pronounce any treaty void because of conflict with peremptory norms.

Where rules of jus cogens or UN Charter provisions are not involved, different rules regulate the relationships between inconsistent rules of international law. Where the incompatible rules derive from different sources of international law (eg treaty rules v general principles of law), an embedded hierarchy is apparent: treaty and customary rules are regarded as primary sources of international law, 20 general

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principles of law are viewed as complementary rules, 21 and the judicial decisions and writings of authors are considered as subsidiary sources of international law. 22 Consequently, where a legal rule derives from either treaty or custom, it will generally prevail over rules derived from other sources of international law.

A more frequent and difficult question arises where the different international rules arise from customary 23 and treaty law. Such a contradiction may arise, for instance, where a rule included in an investment treaty is inconsistent with a customary rule regarding environmental protection. Under international law, generally, treaty and custom have equal weight, 24 and inconsistencies are regulated by three interrelated principles: (i) lex specialis derogat generali, that is, a specific rule prevails over a general one; (ii) lex posterior derogate priori, that is, a later rule prevails over a prior one; (iii) respecting the parties' intentions, that is, where the parties intend to replace a rule deriving from one source of international law with another rule included in another source of law (eg replacing a customary rule with a treaty rule), the rule preferred by the parties will prevail. 25

The latter principle is illustrated by Article 16 of the 2004 US Model BIT that explicitly regulates the relationship between investors' rights under the investment treaty and other contracting parties' international obligations: 26

Non-Derogation: This Treaty shall not derogate from any of the following that entitle an investor of a Party or a covered investment to treatment more favorable than that accorded by this Treaty:

1. laws or regulations …

2. international legal obligations of a Party.… 27 (Emphasis added)

Similar regulatory principles apply where the inconsistent rules are included in the same source of international law. Thus, where rules emanating from two (or more) treaties are incompatible, the specific treaty trumps the general one. 28 Additional rules regarding the relationships between conflicting treaties are elaborated in

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Article 30 of the Vienna Convention. If the two treaties address a subject-matter of a comparable degree of generality, and the parties' preference in favour of one of the treaties is expressed in the treaty, Article 30(2) directs us to accept the normative order as specified by the contracting parties. 29

Thus, for instance, Article 103 of the NAFTA reflects the parties' intention regarding the relationships between this treaty and the GATT 30 (and other agreements):

1. The Parties affirm their existing rights and obligations with respect to each other under the General Agreement on Tariffs and Trade and other agreements to which such Parties are party.

2. In the event of any inconsistency between this Agreement and such other agreements, this Agreement shall prevail to the extent of the inconsistency, except as otherwise provided in this Agreement. 31 (Emphasis added)

Similarly, the Energy Charter Treaty, 32 the Canadian, 33 and US 34 model BITs include several provisions that explicitly set out the relationships between investment agreements and other treaties. 35

Equally, where the conclusion of a later treaty by the same parties indicates that the contracting parties intended to terminate the prior treaty, Article 59 of the Vienna Convention provides that the prior treaty shall be considered as terminated. 36 Where the conflicting treaties do not indicate any precedence, and all the parties to the earlier treaty are parties also to the later treaty, and the earlier treaty is not terminated under Article 59, Article 30(3) of the Vienna Convention applies the lex posterior principle and accords precedence to the later treaty. 37

The most intricate question arises where the parties to the two conflicting treaties are not identical; for example, one party is a contracting party to both treaties and

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the other party is a contracting party to only one of them. Article 30(4)(b) of the Vienna Convention provides that:

(b) as between a State party to both treaties and a State party to only one of the treaties, the treaty to which both States are parties governs their mutual rights and obligations.

This rule does not set a preference ordering between the incompatible treaties and it does not absolve the contracting party that undertook inconsistent treaty obligations from its obligation to comply with both treaties. This provision leaves the latter party with the choice regarding which treaty to honour and which to breach, and as hinted at in Article 30(5), 38 this party is likely to incur international responsibility vis-?-vis the injured party. 39

The trigger to the application of the above regulatory rules necessitates a prior determination that the rules deriving from different treaties or sources of international law are inconsistent. Such a determination depends to a significant extent on the interpretation given to the international rules involved; whether they are reconcilable or not. A softer approach that avoids setting hierarchical order between the different legal rules lies in the harmonious interpretation of the relevant treaties. Such an approach strives to interpret one treaty in light of the other treaty or international customary rules. Article 31(3) of the Vienna Convention, which sets out the general principles of treaty interpretation, provides as follows:

3. There shall be taken into account, together with the context:

…(c) any relevant rules of international law applicable in the relations between the parties. 40

It is noteworthy that while the resort to harmonious interpretation of the international rules involved may often avoid the determination of which rule overrules the other, the result is largely similar; in both cases one rule is applied to the particular disputed issue and the other is excluded. 41

International investment tribunals frequently resort to various articles of the Vienna Convention but they have not invoked the above regulatory rules, including Articles 30 or 53. This practical disregard may appear even more puzzling in light of the fact that contemporary international investment law does not include a coherent

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body of rules in this sphere. (The reasons for this intriguing phenomenon will be discussed in the Concluding Remarks below.) The current situation of unawareness may well be changed in the future with regard to some fundamental human rights that are recognized as jus cogens rules under public international law. Parties involved in investment litigation are more likely to invoke the superior status of peremptory norms as a justification for non-compliance with investment obligations. Such arguments are also likely to be raised in the amicus briefs of NGOs. A second set of regulatory rules that may apply to inconsistent international investment and non-investment obligations emerges from a series of decisions of investment tribunals. These decisions are analysed in Section 2.

(2) International Investment Jurisprudence

Some questions relating to incompatible international investment and non-investment rules were discussed in several investment awards. 42 Unlike the above rules of public international law, contemporary international investment law does not offer a systematic set of rules to be applied to such questions. International investment tribunals that encountered such questions have tended to address these questions in a sporadic manner. Consequently, this section examines these investment awards separately and seeks to trace some systematic principles that emerge from this jurisprudence.

(a) SD Myers v Canada 43

This is the most prominent arbitral decision that dealt with inconsistent investment and non-investment treaties. The claimant, SD Myers (‘the firm’), is a US corporation based in Ohio (approximately 100 km south of the US/Canadian border). The firm specialized in the process of polychlorinated biphenyl (PCB) remediation. In order to

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eliminate highly toxic PCBs from the environment, they must be disposed of either through a process of thermal destruction or by chemical processing. Following a decision of the OECD in 1973, the USA and Canada banned future production of PCBs and they also effectively banned the export of PCB waste (but they allowed the export of this product to each other). 44 In 1986, Canada and the USA concluded the Transboundary Agreement on Hazardous Waste, which contemplated the possibility of cross-border activity, recognizing that the long common border engendered opportunities for a generator of hazardous waste to benefit from using the nearest appropriate disposal facility. 45

In 1989, Canada acceded to the Basel Convention, which deals with international traffic in PCBs and other hazardous wastes. The USA signed but had not ratified the Convention by the relevant time. This global Convention prohibits the export and import of hazardous waste from and to states that are not contracting states 46 unless such movement is subject to bilateral, multilateral, or regional agreement. 47 Following the signing of the Basel Convention, but before it came into force, the Canadian Federal and provincial ministers responsible for the environment agreed that the destruction of PCBs should be carried out to the maximum extent possible within Canadian borders. 48 In 1990, the firm began its attempts to obtain the necessary approval to import equipment containing PCB wastes into the USA from Canada. At that time, the firm became one of the prominent operators of the PCB disposal industry in the USA and it knew it could compete successfully against the Canadian hazardous waste disposal industry. In 1993, Myers Canada was incorporated under the Canadian Business Corporation Act. The Canadian Minister of the Environment stated in 1995 that the Canadian position is ‘that the handling of PCBs should be done in Canada by Canadians’. 49 In 1996, following a discussion in Canadian governmental agencies and a lobbying campaign by the Canadian PCB disposal industry, the Canadian environmental agencies issued orders that banned commercial export of PCB for waste disposal. The Canadian-US border was closed for cross-border movement of PCBs for a period of approximately 16 months. 50

The firm argued that Canada, by its above orders, breached its obligations under Chapter 11 of the NAFTA, and Canada argued that the firm's construction of Chapter 11 was inconsistent with its other international obligations, including the Basel Convention and the Transboundary Agreement, and that these treaties prevailed over Chapter 11 obligations. 51 Following a review of the evidence, the tribunal

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concluded that Canada's policy was shaped to a great extent by the desire to protect and promote the market share of enterprises that would carry out the destruction of PCBs in Canada, and that were owned by Canadian nationals. 52 The tribunal stated that the Canadian orders favoured Canadian nationals over non-nationals. 53

The tribunal examined in detail the relationship between the NAFTA and other international agreements. It cited two of NAFTA's provisions that instruct the tribunal to apply, inter alia, the rules of international law. 54 Following a discussion of Article 31 of the Vienna Convention (regarding treaty interpretation), the tribunal turned to review other international agreements to which the parties adhered. It noted that the 1986 Canada-USA Transboundary Agreement recognized the possibility of achieving both economic efficiencies and the effective management of hazardous waste by cross-border shipments. 55 The tribunal also examined the Basel Convention and noted that Article 11 of the Convention expressly allows the parties to enter into bilateral or multilateral agreements for the cross-border movement of waste, provided that these agreements do not undermine the Basel Convention's rules regarding environmentally sound management. 56

The tribunal mentioned that the NAFTA's drafters took into account that some earlier environmental treaties would prevail over the specific rules of the NAFTA and cited its Article 104:

Article 104: Relation to Environmental and Conservation Agreements