Investment Treaty News (ITN)

Norway shelves its draft model bilateral investment treaty

Damon Vis-Dunbar — Mon, 08 Jun 2009 15:07:00 GMT

By Damon Vis-Dunbar
8 June 2009

Norway has abandoned a draft model bilateral investment treaty (BIT), following public input that was largely critical.

The draft text of the model BIT, released to the public in December 2007, features a number of innovations over previous Norwegian BITs, including transparent investor-state dispute settlement procedures, the requirement to exhaust local remedies before recourse to international arbitration, and efforts to limit the ability of so-called mailbox companies from using the treaty’s protections.

In addition, a lengthy preamble to the proposed model BIT affirms the desire for “stable equitable, favourable and transparent conditions for investors”, but also emphasises the importance of corporate social responsibility, human rights and sustainable development.

Yet despite efforts to achieve a model BIT that balanced investor protections with consideration of public goods, a number of nongovernmental organizations and businesses charged that the proposed model agreement was imbalanced.

Indeed, public feedback fell broadly in two categories, said a Norwegian government official: groups that felt the model did not provide investors with enough protection, and those that felt the model would restrain governments’ ability to regulate in the public interest.

The feedback was so polarized that Norway “decided that achieving a proper balance was too difficult,” said this person.

The Norwegian government is currently a coalition between the Labour Party, the Socialist Left Party and the Center Party. The Socialist Left Party and the Center Party both opposed the model BIT.

In a statement to the press, the Minister of Finance, Kristin Halvorsen, who belongs to the Socialist Left Party, praised the decision to “put away the model agreement,” saying that doing so was an important cause for the Socialist Left Party, the Center Party, and environmental and develoment organizations.

It is uncertain whether Norway will negotiate BITs in the future. For now, Norway will only consider agreeing to provisions on investor protection in the context of free trade agreements with India, China, the Ukraine and Russia. Norway has already embarked on negotiations for FTAs with India, China and the Ukraine, and preliminary discussions are underway with Russia.

“What happens after that is unclear,” said a government source.

For earlier analysis of the proposed draft Norwegian BIT, see: “Norway proposes significant reforms to its investment treaty practices”, By Luke Eric Peterson, Investment Treaty News, March 27, 2008, available here: http://www.iisd.org/pdf/2008/itn_mar27_2008.pdf

Waguih Elie George Siag and Clorinda Vecchi v. Arab Republic of Egypt: A Question of Nationality?

Damon Vis-Dunbar — Mon, 08 Jun 2009 08:29:00 GMT

By Elizabeth Whitsitt
8 June 2009

On 1 June 2009 an ICSID tribunal found the Arab Republic of Egypt liable to Mr. Waguih Elie George Siag and Mrs. Clorinda Vecchi for damages totaling more than US$74 million plus interest after finding that Egypt violated numerous provisions of the Italy-Egypt bilateral investment treaty.

The claimants in this case, both natural citizens of Italy, were the principal investors in two Egyptian corporations, Touristic Investments and Hotels Management Company (SIAG) S.A.E. and Siag Taba Company. In 1989, the Egyptian Ministry of Tourism sold a large parcel of oceanfront land on the Red Sea’s Gulf of Aqaba to SIAG for the purpose of developing a tourist resort. SIAG subsequently transferred a portion of the property to Siag Taba Company.

The claimants alleged that, commencing in 1995, Egypt unlawfully expropriated their investment, consisting of the property and the resort which was under development.

In addition, the claimants asserted that Egypt contravened a number of its obligations under the Italy-Egypt BIT by: (i) failing to protect their investment; (ii) failing to provide the claimants and their investment fair and equitable treatment; (iii) subjecting the claimants and their investment to unreasonable and discriminatory measures; and (iv) failing to apply the most favoured nation principle.

In response, Egypt advanced a number of defenses, particularly but not exclusively in relation to Mr. Siag. Specifically, Egypt contended that Mr. Siag was at all relevant times a national of Egypt and was thereby precluded from succeeding in a claim against Egypt under the Italy-Egypt BIT. Even though the majority of the tribunal rejected those arguments in its April 2007 Decision on Jurisdiction, Egypt reformulated this contention and forcefully pursued it before the tribunal. In so doing, Egypt made two arguments in support of its continued objection to the jurisdiction of the tribunal.

First, Egypt claimed that it had recently discovered that Mr. Siag had been declared bankrupt on 16 January 1999, with retroactive effect from 20 August 1994. As a result, Egypt contended that Mr. Siag (from the date he become bankrupt in 1999) lacked the capacity to arbitrate the dispute.

Second, Egypt reasserted its earlier claim that Mr. Siag was an Egyptian national and accordingly failed the negative nationality requirement of Article 25(2)(a) of the ICSID Convention. In support of that latter argument, Egypt contended that Mr. Siag had fraudulently obtained Lebanese nationality, and, therefore, never properly shed his Egyptian nationality under Egyptian law.

In both instances, the majority of the tribunal held that Egypt’s objections to the tribunal’s jurisdiction were out of time under ICSID Rule 41 and should be disregarded pursuant to ICSID Rule 26. Rule 41 requires that jurisdictional objections be made as early as possible. The majority of the tribunal also found that in waiting too long to raise arguments regarding Mr. Siag’s bankruptcy and alleged lack of Lebanese nationality, Egypt had waived its right to object on both grounds pursuant to Rule 27.

Having confirmed its jurisdiction, the majority of the tribunal went on to consider the merits of the case. In so doing, it found that:

"…the evidence clearly establishes that Egypt [had] unlawfully expropriated Claimants’ investment, in breach of Article 5(1)(ii) of the BIT; that Egypt failed to provide full protection to Claimants’ investment, in breach of Article 4(1) of the BIT; that Egypt failed to ensure the fair and equitable treatment of Claimants’ investment, in breach of Article 2(2) of the BIT; and that Egypt allowed Claimants’ investment to be subjected to unreasonable measures, in breach of Article 2(2) of the BIT."

Further, the majority of the tribunal dismissed Egypt’s defenses to liability. In particular, Egypt argued that the claimants were estopped from denying their Egyptian nationalities, which both had relied on numerous occasions in the past in order to acquire and use Egyptian passports and to conclude business deals. The claimants did not contest those submissions, but denied that their behavior provided grounds for estoppel. The majority of the tribunal held that:

"…the Claimants acted in good faith in obtaining their Egyptian passports and in their subsequent business and other dealings with Egypt. As to the latter, Claimants did not know at that point, nor as lay persons could they reasonably be expected to have known, that in law they had lost their Egyptian nationality. Thus the Claimants are not estopped from now denying their Egyptian nationality."

In a dissenting opinion primarily on the issue of estoppel, Professor Francisco Orrego Vicuña disagreed and found that Mr. Siag’s evidence of Lebanese nationality—a certificate of registration issued by the Lebanese authorities—was apparently originally obtained for money to avoid Egyptian military service and was inconsistent with the Lebanese Ministry of the Interior’s records, which did not have any registration of Mr. Saig’s Lebanese nationality. Accordingly, Professor Vicuña would have applied the doctrine of “clean hands” and found that the claimants’ were estopped from disavowing their Egyptian nationality.

US forestry company and Canada dispute British Columbia logging regulations

Damon Vis-Dunbar — Fri, 05 Jun 2009 12:55:00 GMT

By Elizabeth Whitsitt
8 June 2009

Oral hearings were held in May over a claim by an American forestry and land management company against the Government of Canada for damages of US$25 million for alleged breaches of NAFTA Chapter 11.

At the heart of Merrill & Ring’s complaint is a complex regulatory regime in Canada that controls the export of logs out of the Canadian province of British Columbia (BC). All logs exported from Canada require federal export permits for any destination. Logs exported from BC, however, are subject to different export permit application procedures depending on whether the federal or provincial government owns the land from which logs are harvested.

Under both regulatory schemes, log exporters in BC must comply with a surplus testing process before they are considered eligible for an export permit. Specifically, the surplus testing process requires that logs harvested from either federal or provincial lands in BC be deemed “surplus” to BC’s needs before they can be exported. BC, however, is the only Canadian province in which the federal government exercises its authority to control the export of logs harvested from federal lands through a surplus testing process. As such, log exports generated from timber grown on federal lands in another province do not have to be deemed “surplus” to that province’s needs before they can be exported.

In addition to the surplus testing process, potential exporters whose logs are harvested from timber grown on provincial lands may obtain an export permit when: (i) timber cannot be processed and/or transported economically by or for a mill in BC (the “economic exemption”) and/or (ii) permitting the export of logs from BC would prevent the waste of or improve the use of timber from provincially owned lands (the “utilization exemption”).

Potential exporters whose logs are harvested from timber grown on federal lands in BC are not entitled to obtain an export permit on the basis of an economic or utilization exemption.

Merrill & Ring claims that the economic and utilization exemptions available exclusively to provincial landowners under the BC Forest Act provide them with significant advantages, including: (i) increased revenues because such landowners have a greater likelihood of obtaining the international price for logs instead of the BC price, (ii) reduced compliance costs because such landowners do not have to go through the surplus testing process if they can obtain an economic or utilization exemption, and (iii) longer term contracts because such landowners are better able to provide a predictable timber supply to international buyers.

Moreover, Merrill & Ring argues that the surplus testing process—which is only applicable to log exports generated from timber grown on federal lands in BC—provides similar advantages to those investors and investments situated in other Canadian provinces.

As a result, Merrill & Ring claims that Canada, among other things, has breached its obligations under Section A of Chapter 11 of NAFTA, including Articles 1102 (National Treatment), 1105 (International Standards of Treatment), 1106 (Performance Requirements), and 1110 (Expropriation).

While Canada disputes the foregoing alleged breaches, its primary argument is an objection to jurisdiction of the Tribunal. Specifically, Canada asserts that Merrill & Ring’s claim is time barred. Article 1116(2) prevents an investor from making a claim “if more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor has incurred loss or damage.”

Noting that the regulation governing timber grown on federal lands has been in effect since 1998, Canada claims that Merrill & Ring has known about the alleged breaches of NAFTA Chapter 11 for almost a decade, and certainly more than three years, before it commenced arbitral proceedings in this case. Consequently, Canada has requested that the Tribunal dismiss Merrill & Ring’s claim without further consideration.

Recently Published: A Thirst For Distant Lands: foreign investment in agricultural land and water

Damon Vis-Dunbar — Fri, 05 Jun 2009 12:51:00 GMT

Recently Published:

A Thirst For Distant Lands: foreign investment in agricultural land and water
http://www.iisd.org/pdf/2009/thirst_for_distant_lands.pdf

A new paper published by the International Institute for Sustainable Development (IISD), and authored by Howard Mann and Carin Smaller, analyzes current trends in the expansion of foreign investment in agriculture. The paper highlights the causes, mechanisms and growth of long-distance farming for home country consumption, while also identifying a range of issues in relation to domestic law, the international investment contracts and international investment agreements. The authors posit that these three sources of law can have positive and negative implications for community and individual rights to land, water and food.

In brief: Suspension extended in Piero Foresti, Laura de Carli and others v. Republic of South Africa

Damon Vis-Dunbar — Fri, 05 Jun 2009 12:48:00 GMT

By Damon Vis-Dunbar
8 June 2009

European claimants and the government of South Africa have agreed to extend the suspension of their ICSID arbitration.

The high-profile case was suspended at the end of March for two months, as the parties seek to resolve the dispute. The suspension is now due to run until June 19th.

The claimants—several Italian citizens and a Luxembourg corporation—hold interests in South African granite quarrying companies. They claim that legislation enacted in 2004 to increase the participation of historically disadvantaged South Africans effectively “extinguished” their mineral rights without providing adequate compensation.

The claim is pursuant to the Italy-South Africa and Benelux-South Africa bilateral investment treaties, and was registered with ICSID in 2007.
Both parties have submitted memorials and hearings are currently scheduled for April 2010.

NGOs claim the Philippine-Japan free trade agreement is unconstitutional

Damon Vis-Dunbar — Fri, 05 Jun 2009 12:35:00 GMT

By Damon Vis-Dunbar
8 June 2009

A petition lodged with the Philippine Supreme Court by non-governmental organizations (NGOs) argues that the investment chapter of the Japan-Philippines Economic Partnership Agreement (JPEPA) violates the Philippine constitution.

The Japan-Philippines EPA—a comprehensive trade and investment agreement—grants Japanese the right to establish investments in sectors like public utilities, education, mass media and advertising, in violation of constitutional limits on foreign ownership in these sectors, argue the Philippine NGOs.
Under the Philippine constitution, foreigners are restricted to a 40% ownership stake in public utilities and education, 30% for advertising, and no foreign ownership of mass media is allowed.

The NGOs also maintain that the JPEPA liberalizes land ownership, in violation of the strict limits currently in place. Only Filipino citizens and corporations with at least 60% Filipino-owned capital may acquire private lands.

Although the Philippines exempts national treatment for the establishment of investments in private land ownership for manufacturing and services, it does not exclude other subsectors, such as real estate development, residential purchases and agribusiness ventures. As a result, the NGOs argue that “if a Japanese corporation wishes to own private lands in the Philippines for its real estate projects and/or agribusiness, it may do so ...”.

NGOs seek to bar implementation of JPEPA

It is a matter of contention whether an exchange of notes that followed the JPEPA ensures harmony between the Philippine Constitution and the JPEPA. The note agreed to by both the Philippines and Japan in August 2008, states that the JPEPA must be implemented in accordance with their respective constitutions. Yet the NGOs charge that despite the note the JPEPA is still incompatible with the Philippine constitution.

The Philippine Solicitor General has yet to respond on behalf of the Philippine Government to the claims made by the Philippine NGOs. ITN also requested comment from Senator Mar Roxas, Chairman of the Senate Committee on Trade and Commerce and a co-sponsor of JPEPA, but he declined to respond.

The NGOs are seeking an order from the Supreme Court that would bar the implementation of the agreement. However, JPEPA has already been ratified by the Senate, and the process of implementing the agreement has been underway since December 2008.

Moreover, the question of the JPEPA’s compatibility with the constitution may become at least partly moot by the time a Supreme Court ruling is rendered. The Philippine Congress is currently considering amending the constitution to ease foreign ownership restrictions.

Nonetheless, a complete lifting of foreign ownership restrictions in sensitive sectors like education, mass media and public utilities is unlikely. The Philippine Chamber of Commerce and Industry, for example, has endorsed the idea of relaxing foreign ownership restrictions in principle, but cautions it “should not apply to all industries, because some may benefit and some might be harmed due to this proposal.”

No consent for investor-to-State arbitration

As ITN previously reported, the JPEPA is notable for the fact that it does not provide consent to arbitrate investor disputes through international arbitration.

The agreement states: “the disputing Party may, at its option or discretion, grant or deny its consent in respect of each particular investment dispute and that, in the absence of the express written consent of the disputing Party, an international conciliation or arbitration tribunal shall have no jurisdiction over the investment dispute involved.”

Following the signing of the JPEPA in 2006, a Japanese official confided to ITN that the Philippines had resisted including a provision that would allow investment disputes to be settled through international arbitration, in part because the Philippines was involved in fending itself against a high-profile investment-treaty claim by the German firm Fraport AG.

A member of an NGO who helped draft the Supreme Court petition said the failure adequately to exclude certain sectors from the national treatment provisions of the investment chapters was “blunted” by the absence of an investor-state dispute settlement mechanism.

A right to transparency?

This is the second Supreme Court case that Philippine civil society groups have launched in reaction to the JPEPA. The first saw a petition in 2005 for access to the full text of the draft agreement, as well as the Philippine and Japanese negotiating offers.

The petitioners submitted that the JPEPA was sufficiently in the public interest to require the disclosure of draft texts and other documents related to the negotiations pursuant to a constitutional right of access to information (currently, the Philippines does not have Freedom of Information legislation which implements this right).

As it was, the court ruled by majority against disclosure, but only after the negotiations had been concluded, at which point the text of the agreement had been made public. As for access to the Japanese and Philippine offers, the court refused to order disclosure due to the privileged character of diplomatic negotiations.

The Initiative for Dialogue and Empowerment through Alternative Legal Services (IDEALS), a Philippine NGO, is currently preparing to bring a similar case to the United Nations Committee on Human Rights by the middle of August. IDEALS will be joined by the Center for International Environmental Law (CIEL) and the Open Society Initiative, both based in the United States.

CIEL, together with two other American NGOs, launched a similar case in 2001 in the United States, seeking access to records related to the negotiation of the United States-Chile Free Trade Agreement. In that case, a U.S. District Judge ordered the USTR to release documents which revealed the negotiating positions of the United States and Chile.

Ecuador continues exit from ICSID

Damon Vis-Dunbar — Fri, 05 Jun 2009 12:32:00 GMT

By Fernando Carbrera Diaz
8 June 2009

Ecuadorian president Rafael Correa announced on May 30 that his country would be denouncing the International Centre for Settlement of Investment Disputes (ICSID), calling the World Bank’s arbitration facility an atrocity and claiming that his government was working on a regional alternative involving the South American Union (UNASUR).

In remarks made on the weekly radio program, ‘Dialogue with the President,’ Correa said withdrawing from ICSID is necessary for “the liberation of our countries because this [ICSID] signifies colonialism, slavery with respect to transnationals, with respect to Washington, with respect to the World Bank and we cannot tolerate this.”

As ITN reported in August 2008, Ecuador’s Oil and Mining Minister at the time, Galo Chiriboga, also questioned the impartiality of ICSID arbitration, at a point when Ecuador faced over US$10 billion in claims at the World Bank’s arbitration facility. Most of the pending claims stem from a 2006 tax on oil company ‘windfall profits’.

Ecuadorians approved a new constitution in September which makes it unconstitutional for the country to submit itself to arbitration outside of Latin America.

Hernán Pérez Loose, a partner at Quito-based Coronel & Pérez Abogados and former Attorney General of Ecuador, maintains that the constitutional change does not affect existing contracts or Bilateral Investment Treaties (BITS), on the grounds that governments cannot use domestic legislation to shield themselves from commitments made under international law.

Ecuador has been working vigorously to renegotiate existing contracts with oil companies. Last year agreements were reached with Andes Petroleum (owned by China’s state oil company) and Brazilian state-owned Petrobras. A source with knowledge of the negotiations tells ITN that in both these cases the renegotiated contracts include arbitration clauses under UNCITRAL Rules administered by the Permanent Court for Arbitration in Chile.

In March, Ecuador also reached an interim deal with Argentinean-Spanish oil company Repsol, under which both sides agreed not to advance their ICSID arbitration pending final negotiations. Repsol has also agreed to begin to pay US$444.7 million owed under the windfall profits tax. A final agreement with the company is expected later this year, and will presumably include regional arbitration.

However, Ecuador has not reached agreements with the oil companies Burlington and Perenco, both of which have initiated ICSID arbitration against the Andean nation.

Ecuador has also denounced 9 BITs, mostly with other developing countries in the region. The Attorney General Diego García Carrión said that these BITs were cancelled because they did not foster foreign investment. Many of these BITs included ICSID arbitration clauses which have now been eliminated.

A government official who wished to remain anonymous tells ITN that Ecuador is currently working on a model BIT that will be used to initiate negotiations with other states on the remaining 17 BITs it is a party to. The Ecuadorean model BIT is also expected to limit dispute settlement to regional arbitration fora.

Ecuador defies provisional measures in dispute with French oil company

Damon Vis-Dunbar — Fri, 05 Jun 2009 12:29:00 GMT

By Damon Vis-Dunbar
8 June 2009

An ICSID tribunal authorized provisional measures on May 8th in an effort to stop the Government of Ecuador from seizing assets belong to the French oil company Perenco. Nonetheless, the state-owned Petroecuador attempted a week later to auction 1.4 million barrels of oil confiscated from Perenco, although no bidders stepped forward to purchase the oil.

Ecuador is seeking US$327 million owed under a windfall tax enacted in 2006 (Law 42)—a tax Perenco contests is in violation of its contract with Ecuador and the France-Ecuador bilateral investment treaty.

Perenco’s application for provisional measures was in response to “coercive measures” announced by Ecuador in February, which led to the seizure of oil produced by Perenco a month later. Perenco requested provisional measures to preserve its existing contract with Ecuador, and prevent Ecuador for taking action to collect the payments due under the windfall tax.

In its May 8th decision, the Tribunal granted the provisional measures, having concluded that the seizure of Perenco’s assets risked “crippling” the company’s business in Ecuador.

The tribunal also recommended that Perenco deposit the contested tax payments into an escrow account, which would be released to Ecuador in the case that the tribunal declines jurisdiction, or finds that Ecuador is within its rights to enforce payment of the taxes. Ecuador and Perenco have been given 3 months to agree on terms and conditions for the escrow account.

Tribunal stresses legal consequences of provisional measures

Although ICSID tribunals are empowered to “recommend” rather than “order” provisional measures, the tribunal maintains that ICSID provisional measures carry “legal consequences”. After referring to case law from ICSID, the International Court of Justice, and the European Court of Justice, the tribunal submits that state parties to the ICSID Convention are inherently “under an international obligation to comply with provisional measures issued by an ICSID tribunal”.

However, the repercussions of non-compliance are not provided; the tribunal simply states that it “would have to take a serious view of any failure to comply with its request.”

A tribunal hearing a contract dispute over the oil windfall tax (City Orient v. Ecuador) also issued provisional measures against Ecuador in a 2007 decision. In this case, the tribunal called on Ecuador to refrain from prosecuting representatives of the oil company City Oriente, and to cease demanding payment of the windfall royalty tax. Yet Ecuador’s General Prosecutor proceeded to seek the arrest of several of City Oriente’s Quito-based in employees, despite the provisional measures.

United States reviews its model bilateral investment treaty

Damon Vis-Dunbar — Fri, 05 Jun 2009 12:25:00 GMT

By Damon Vis-Dunbar
5 June 2009

The United States has embarked on a review of its model bilateral investment treaty (BIT). Last updated in 2004, the US closely adheres to the model in its BIT negotiations with other countries.

The BIT review follows campaign pledges by President Barack Obama, in which he committed to “ensure that foreign investor rights are strictly limited and will fully exempt any law or regulation written to protect public safety or promote the public interest.”

A subcommittee to the Advisory Committee on International Economic Policy (ACIEP)—a committee of non-government advisers to the US government on matters of international economic policy—has been charged with “taking a fresh look” at the US model BIT.

Co-chaired by Alan Larson, a Senior International Policy Advisor to the law firm Covington and Burling LLP, and Thea Mei Lee, Policy Director for the American Federation of Labor and Congress of Industrial Organizations, the subcommittee will directly counsel the ACIEP. The ACIEP, in turn, advises the US government.

The subcommittee will seek input from interested groups and individuals through a public hearing and invitations for written statements, said a U.S. government official. A date for the public hearing will be announced in the next couple of weeks. ITN was unable to confirm whether the public hearings would be open to groups and individuals based outside of the United States.

The BIT review will also include consultations with a range of government agencies, including the Environmental Protection Agency, Department of the Interior, Justice Department and Department of Labor.

The US model BIT underwent its last transformation in 2004, after an inter-agency review. The 2004 model BIT has received mixed reviews for its efforts to “balance” investor rights with state rights to regulate to protect health, safety, and the environment.

“The 2004 US Model BIT attempts to accommodate the emergence of the regulatory state exercising authority over health, safety and the environment in a normative space already occupied by international economic law,” said Marcos Orellana, an attorney with the Center for International Environmental Law.

“Environmental law is a relatively new field of law, owing to the increasing awareness of the deterioration of the local and global environment, and it is still developing in most countries of the world. Thus, the 2004 US Model BIT is more an effort at rebalancing and accommodation, and not a weakening of investment protection, in order to ensure that the government can effectively exercise its authority for the public good in a vitally important area such as environmental protection,“ said Mr. Orellana.

The current review promises to invigorate the debate over the “balance” struck in US investment agreements.

Indeed, addressing a Congressional trade committee in May, the co-chair of the ACIEP investment subcommittee lamented an imbalance in US investment agreements.

Ms. Lee said her key concerns include: “the investor-state dispute resolution; failure to distinguish between regulatory action on the part of government and ‘indirect expropriation’; an overly broad definition of investment; potential impact on needed future national and global financial regulation efforts; and the need to establish commensurate and enforceable responsibilities for investors with respect to workers ‘ rights and the environment.”

Meanwhile, Mr. Larson stressed the “valuable role” that international investment treaties play in “providing a more stable and predictable environment” to international investment.

Referring to investor-state arbitrations pursuant to BITs, Mr. Larson remarked: “On balance, it is fair to say that the outcome of such cases does not suggest a bias in favor of either the State or the investor”.

Tribunal rechaza Alegato de Contramedidas en laudo recientemente publicado en el caso Corn Products International Inc. c. Los Estados Unidos Mexicanos

Damon Vis-Dunbar — Mon, 11 May 2009 13:50:00 GMT

Por Elizabeth Whitsitt
28 de Abril, 2009

En un laudo del CIADI recientemente publicado, un tribunal declaró culpable a México por violar el Capítulo 11 del TLCAN ante la empresa americana, Corn Products International Inc. (CPI) y su subsidiaria mexicana de su total posesión. Si bien la decisión del 15 de enero de 2008 no aborda el alcance de las responsabilidades de México, representa otro revés para México en su continua diferencia con los Estados Unidos en el comercio de azúcar.

High Fructose Corn Syrup (en adelante, HFCS) es un endulzante que se obtiene del maíz amarillo y es utilizado en la industria de alimentos y bebidas. El HFCS compite directamente con los endulzantes fabricados de caña de azúcar. A mediados de la década de 1980, el HFCS era el endulzante más comúnmente utilizado en bebidas no alcohólicas en EUA y Canadá, habiendo ganado una ventaja competitiva sobre los endulzantes provenientes del azúcar porque era menos costoso y más fácil de utilizar (es decir, era suministrado en forma líquida en vez de sólida).

A principios de la década de 1990, CPI ya se había establecido como el principal productor y proveedor de HFCS a la industria de bebidas sin alcohol en EUA y Canadá. Después de que el TLCAN entrara en vigor, CPI expandió sus operaciones y comenzó a producir y proveer HFCS a la industria mexicana de bebidas no alcohólicas a través de CPIng.

Mientras HFCS comenzaba a desplazar al azúcar como endulzante en la industria mexicana de bebidas no alcohólicas, México y los productores azucareros mexicanos se encontraban en una diferencia con EUA sobre el acceso al mercado azucarero en los Estados Unidos. Específicamente, el gobierno mexicano y los productores azucareros mexicanos alegaban que EUA estaba restringiendo la importación de azúcar mexicana dentro del mercado estadounidense en violación de sus obligaciones bajo el TLCAN y ciertas cartas que intercambiaron ambos gobiernos adjuntas al TLCAN.

Intentando resolver esta diferencia, México invocó el mecanismo de resolución de diferencias en el Capítulo 20 del TLCAN, pero no pudo resolver su desacuerdo con EUA. De hecho, los esfuerzos por resolver la diferencia bajo el Capítulo 20 solo exacerbaron las tensiones entre los dos países, con México sosteniendo que EUA violó sus obligaciones del TLCAN por efectivamente frustrar el funcionamiento del mecanismo del Capítulo 20.

Posteriormente, México modificó su legislación sobre el impuesto al consumo en 2001. El efecto de dicha modificación fue la imposición de un impuesto del 20% sobre toda bebida que utilizara HFCS como endulzante.

Afirmando que el impuesto sobre el HFCS llevó a la industria mexicana de bebidas no alcohólicas a reemplazar el HFCS por endulzantes de caña de azúcar, y por ende, destruyó su presencia en el mercado, el demandante inició procedimientos arbitrales contra México bajo del Capítulo 11 del TLCAN. Específicamente, CPI alegó que: (i) el impuesto sobre el HFCS infringió el principio de trato nacional bajo el Artículo 1102; (ii) el efecto del impuesto sobre el HFCS fue el de condicionar la obtención de una ventaja (es decir, la exención de pagar el impuesto) sobre el uso de la caña de azúcar producida en México en violación del Artículo 1106; y (iii) el impuesto sobre el HFCS fue equivalente a una expropiación de la inversión de CPI en violación del Artículo 1110.

Si bien México alegó que CPI no demostró la violación de ninguna disposición del Capítulo 11 sobre el cual se basó su demanda, la argumentación principal de México fue que el impuesto sobre el HFCS constituyó una contramedida adoptada en respuesta a anteriores violaciones del TLCAN por parte de EUA. En particular, México se refirió a los Artículos sobre Responsabilidad Estatal de la Comisión de Derecho Internacional y sostuvo que el estatus del impuesto sobre el HFCS como una contramedida excluía su ilegalidad frente a EUA y el demandante.

Al abordar los argumentos antes mencionados, el tribunal primero evaluó las demandas de CPI bajo los Artículos 1106 y 1110. Específicamente, el tribunal concluyó que CPI no demostró que el impuesto sobre el HFCS fuera un requisito de desempeño, dando lugar a una responsabilidad bajo el Artículo 1106. Además, el tribunal concluyó que el impuesto sobre el HFCS no llegó al nivel de constituir una expropiación o una medida equivalente a una expropiación según su significado en el Artículo 1110. Sí encontró, sin embargo, que México violó el principio de trato nacional del Artículo 1102 al “no conferir a CPI, y a sus inversiones, un trato no menos favorable que el conferido a sus propios inversores en circunstancias similares, es decir, los productores de azúcar mexicanos que estaban compitiendo por el mercado de endulzantes en bebidas no alcohólicas."

Dadas sus conclusiones de que el impuesto sobre el HFCS violó el Artículo 1102, el tribunal comenzó a debatir el alegato de contramedidas de México. Al hacerlo, el tribunal remarcó “…que, en el contexto de una reclamación [del Capítulo 11 del TLCAN], no cabe un alegato basado en una presunta infracción, no del demandante sino de su Estado de nacionalidad...". Por consiguiente, el tribunal, en una opinión mayoritaria y separada, sostuvo que México no podía invocar un alegato como tal dentro del contexto de una diferencia entre inversor-estado.

Si bien el intento de utilizar principios tradicionales del derecho internacional como defensa en diferencias entre inversor-estado no es nuevo*, esta decisión refleja la dificultad que frecuentemente tienen los estados cuando intentan hacer esto. De hecho, surge que los estados tendrán una dificultad especial para utilizar contramedidas como un alegato en contra de reclamaciones presentadas por inversionistas extranjeros.

La decisión sobre responsabilidad en el caso Corn Products International, Inc. c. México, CIADI Caso No. ARB(AF)/04/01 (NAFTA) está disponible en (inglés): http://ita.law.uvic.ca/documents/CPI-DecisiononResponsibility-eng.pdf

Una Opinión Separada de Andreas F. Lowenfeld está disponible en (inglés): http://ita.law.uvic.ca/documents/CPI-DecisiononResponsibility-LowenfeldOpinion.pdf

Tribunal deniega alegato de necesidad en laudo recientemente publicado: National Grid p.l.c. c. la República Argentina”, Por Elizabeth Whitsitt, Noticias sobre Tratados de Inversión, Marzo de 2009: http://www.investmenttreatynews.org/cms/news/archive/2009/03/27/tribunal-deniega-alegato-de-necesidad-en-laudo-recientemente-publicado-national-grid-p-l-c-c-rep-250-blica-argentina.aspx

Grupo de transportistas mexicanos lanza diferencia contra EUA bajo el Capítulo 11 del TLCAN sobre prohibición de transporte terrestre

Damon Vis-Dunbar — Mon, 11 May 2009 13:40:00 GMT

Por Fernando Cabrera Diaz
28 de Abril, 2009

El grupo industrial de transportistas mexicanos, CANACAR, ha iniciado un arbitraje bajo el Capítulo 11 contra Estados Unidos, alegando que EUA violó sus compromisos del TLCAN al prohibir a las empresas transportistas mexicanas operar libremente dentro de sus fronteras.

La diferencia en torno al servicio de transporte terrestre transfronterizo entre México y Estados Unidos se originó en 1982 cuando EUA promulgó legislación que establecía una moratoria en la emisión de permisos para que las empresas de transporte extranjeras pudieran operar en EUA. Aunque la moratoria inicialmente se aplicaba tanto a firmas canadienses como a mexicanas, ésta fue luego enmendada para incluir solo a empresas mexicanas.

Cuando el TLCAN entró en vigor en 1994, EUA aseguró que la moratoria sería eliminada progresivamente. Sin embargo, EUA no cumplió con este compromiso, y en cambio, en 1995 promulgó legislación para extender la moratoria indefinidamente.

Si bien se permite a los transportistas mexicanos operar en los Estados Limítrofes entre México y EUA o en tránsito a través de los Estados Unidos hacia Canadá, no se les autoriza transportar cargamento internacional dentro de EUA.

En 1995 el gobierno de México recusó la continua moratoria de Estados Unidos a través del mecanismo de resolución de diferencias entre partes del Capítulo 20 del TLCAN. (En el caso: In the Matter of Cross-Border Trucking Services).

En 2001, un panel de cinco miembros concluyó unánimemente que, entre otras cosas, EUA infringió las obligaciones de trato nacional y de nación más favorecida del Capítulo 11. Después del fallo, EUA levantó la prohibición de que ciudadanos mexicanos poseen empresas de transporte americanas, una movida que no resolvió la diferencia dado que las empresas de propiedad mexicana siguen sin recibir los permisos necesarios para operar en EUA.

NTI habló con Pedro M. Ojeda Cárdenas, asesor de CANACAR, quien señaló que EUA no implementó la decisión del tribunal de 2001.
Según el Sr. Ojeda, después de años de negociación, la administración de Bush procuró implementar el fallo del tribunal pero no pudo obtener la aprobación del Congreso. En cambio, la administración creó en 2007 un programa piloto que permitía que empresas de transporte mexicanas inscriptas en el programa operaran en los Estados Unidos.

Sin embargo, el Congreso de EUA se rehusó a financiar el proyecto, presuntamente debido a presiones del Sindicato Teamsters. En marzo de este año, el presupuesto del Presidente Obama descartó el proyecto, induciendo a los demandantes a iniciar su arbitraje.

NTI contactó al Departamento de Estado de EUA, quienes señalaron que no podían comentar sobre el caso, pese a que según su sitio Web intentaran defender la demanda vigorosamente.

En su notificación de arbitraje remitida al gobierno de Estados Unidos el 2 de abril de 2009, la defensa legal de CANACAR acusa a EUA de violar la obligación de nación más favorecida del Capítulo 11, sobre la base de que la política restrictiva impuesta sobre México no se aplica a otras naciones, incluyendo a Canadá. CANACAR también alega la violación de la obligación de trato nacional, dado que los transportistas mexicanos son discriminados frente a sus contrapartes americanas.

Los demandantes argumentan que la política de EUA es una medida proteccionista destinada a proteger a los transportistas americanos de la competencia de las firmas mexicanas cuyos conductores disponen de sueldos significativamente inferiores. EUA, por otro lado, cita cuestiones de seguridad como la razón que yace detrás de esta política.

Pese a que en su notificación de arbitraje no se especifica la suma que reclaman por daños, los demandantes apuntan a un costo estimado de más de US$ 2 mil millones por año debido a la política de EUA sobre las empresas de transporte de propiedad mexicana.

¿Derribando el TLCAN?

Damon Vis-Dunbar — Mon, 11 May 2009 13:09:00 GMT

Por Howard Mann, Asesor Senior en Derecho Internacional del Instituto Internacional de Desarrollo Sostenible
2 de Mayo 2009

El 31 de marzo de 2009 Dow AgroSciences LLC, subsidiaria de la Empresa Química Dow de EUA, inició un arbitraje bajo el Capítulo 11 del TLCAN contra Canadá debido a la prohibición de productos químicos del césped para uso estético en la provincia de Quebec. Este no es el primer caso en que un inversor extranjero recusa legislación que protege el medio ambiente y la salud humana bajo el TLCAN. Pero si Dow triunfa en su fuerte ataque al derecho de los gobiernos de proteger a sus ciudadanos contra riesgos potenciales, este podría ser el último caso antes de que el capítulo de inversión del TLCAN sea eliminado o enmendado significativamente.

La demanda de Dow bajo el TLCAN se centra en el alegato de que Quebec no realizó una prueba estrictamente basada en la ciencia para basar su prohibición del pesticida 2,4 – D tal como lo requieren las reglas del TLCAN para proteger a los inversores extranjeros. Parece haber dos fundamentos para este argumento: Que el capítulo de inversión del TLCAN impone la realización de una prueba basada en la ciencia a las nuevas regulaciones; y que el gobierno de Quebec presuntamente se había comprometido a aplicar un proceso basado en la ciencia que luego no realizó.

La reclamación de Dow no aborda el hecho de que la prohibición de Quebec no es la única en Canadá. De hecho, al momento de la adopción de la medida provincial, ya había casi 50 leyes municipales en la provincia que prohibían el uso de este tipo de pesticida. Actualmente, hay más de 100. Las municipalidades de otras provincias han seguido su ejemplo, tal como otros gobiernos provinciales.

La reclamación de Dow tampoco menciona que la Corte Suprema de Canadá (en inglés, SCC) emitió en 2001 un veredicto estableciendo que estas prohibiciones municipales sobre pesticidas para uso estético eran constitucionales y legales. Además, la SCC señaló expresamente que servían para proteger el derecho de los gobiernos de tomar acciones preventivas en virtud del “principio precautorio,” internacionalmente reconocido.*

¿Entonces porqué ninguna de estas otras medidas están siendo recusadas? ¿La protesta nacional sería demasiado grande si se hiciera esto? ¿O quizás Dow
pretende comenzar despacio y después ampliar su reclamación? Ninguna empresa puede argumentar realistamente que literalmente cientos de gobiernos se encuentran infringiendo simultáneamente "reglas básicas de proceso debido, transparencia, buena fe y justicia natural”, tal como argumenta Dow en este caso.** Pero si establece otra prueba primero en un caso, ¿después podría ser aplicada a otras medidas?

Esto solo sucedería si un tribunal del TLCAN respaldara el argumento de Dow de que el Capítulo 11 exige una prueba basada en la ciencia para la adopción de toda nueva regulación que involucre a sus productos. Pero no lo hace. Así, Dow está solicitando que esto se lea en el Capítulo 11.

Ninguna jurisprudencia bajo el TLCAN u otros tratados de inversión establece el requisito de una prueba basada en la ciencia para adoptar una nueva regulación, o el requerimiento de abandonar el principio precautorio como la base para proteger el bienestar público.

Además, este enfoque sería más estricto que el aplicado bajo el derecho mercantil internacional. En un enfoque coincidentemente establecido en el caso Asbestos iniciado por Canadá ante la OMC sobre la prohibición de asbestos en la Unión Europea, el argumento actual de Dow de que el producto es seguro si es utilizado siguiendo las instrucciones fue rechazado por el organismo de apelación de la OMC como la prueba legal crucial. Más bien, lograr el nivel de riesgo deseado que establece el gobierno- en ese caso, cero riesgos de envenenamiento por asbestos- fue identificado como el punto de partida más apropiado. Dow busca revertir este enfoque del derecho mercantil y establecer una prueba estricta basada en la ciencia que los gobiernos deben cumplir para todas las regulaciones que apliquen a los inversores extranjeros. Una prueba como tal simplemente no está expresada en el TLCAN o en ningún otro tratado de inversión, y esto limitaría seriamente si no completamente la capacidad de los gobiernos para establecer niveles de riesgo aceptables a la salud humana y el medio ambiente basados en el principio precautorio.

Dow va más lejos. También parece argumentar que un gobierno democráticamente electo que en realidad responde a demandas políticas para la protección de la salud humana y el medio ambiente, tal como fue evidenciado por las más de cien prohibiciones municipales y provinciales es, ensimismo, ilegítimo frente a la presunta prueba basada en la ciencia bajo el TLCAN.

Además, Dow argumenta que la medida que prohíbe la venta de sus productos a fin de proteger la salud humana y el medio ambiente constituye una expropiación. Este argumento fue rechazado en circunstancias casi idénticas en la decisión de 2005 del tribunal del TLCAN en el caso Methanex c. Estados Unidos. Una decisión en este caso que contradiga la del caso Methanex demostraría inequívocamente la inconsistencia del TLCAN y otros tratados de inversión similares, y la total incapacidad de los gobiernos para predecir lo que esto significaría y cuándo. La obvia inaceptabilidad de esto exigiría la introducción de cambios al TLCAN y a otros aproximadamente 2.600 tratados bilaterales de inversión. Pero mientras tanto, sería un poderoso impedimento para la adopción de nuevas medidas ambientales y para proteger la salud humana por parte de muchos gobiernos, lo cual podría ser la meta final de Dow en el presente caso.

La reclamación de Dow ahora es por sólo US$2.000.000. Pero los intereses son, mucho, pero mucho más elevados que eso.

*114957 Canada Ltée (Spraytech, Société d’arrosage) v. Hudson (Town), [2001] 2 S.C.R. 241, 2001 SCC 40, párrafos. 31, 32

**Dow Notice of Arbitration, parrafo 49.

Notice of Arbitration to Submit a Claim to Arbitration Under Chapter Eleven of the North American Free Trade Agreement, Dow Agrosciences LLC v. the Government of Canada, disponible en el sitio web del Departamento de Asuntos Exteriores y Comercio Internacional de Canadá: http://www.international.gc.ca/trade-agreements-accords-commerciaux/disp-diff/agrosciences_archive.aspx?lang=en

Para consultar otros informes sobre la reclamación de Dow bajo el TLCAN véase “Chemical company warns Canada of potential lawsuit over pesticide ban”, Por Damon Vis-Dunbar, Noticias sobre Tratados de Inversión, 23 de Octubre de 2008 http://www.investmenttreatynews.org/cms/news/archive/2008/10/23/chemical-company-warns-of-lawsuit-over-pesticide-ban-a-canadian-province.aspx

German government mum on Vattenfall ECT Claim

Damon Vis-Dunbar — Sun, 03 May 2009 10:09:00 GMT

By Damon Vis-Dunbar
2 May 2009

The German government has declined to provide information on an investment dispute with the European utility Vattenfall on the grounds that it is against government policy to comment or disclose information on pending arbitrations.

As has been reported in the financial press, Vattenfall is bringing the German government to international arbitration due to environmental restrictions imposed on a planned coal-fired power plant.

According to press reports, Vattenfall was given preliminary approval to build the plant in 2007; however, a new coalition government that includes the Green Party raised concerns over the environmental impact of the plant. The company complains that Hamburg has introduced restrictions on the plant that make the operation economically unfeasible.

Vattenfall is suing Germany for violations of the Energy Charter Treaty (ECT), a multilateral trade and investment agreement that governs investments in the energy sector.

The ECT contains a dispute resolution mechanism that allows investors to bring member governments to international arbitration over alleged violations of the treaty. While twenty investor-state arbitration cases under the ECT have been documented, this is the first publicly disclosed claim against a western European government. The governments of the former Soviet Union and Eastern Europe have received the bulk of the ECT investor claims.

There is, however, no definitive account of the number of ECT claims, since the parties to an ECT investor-state dispute are under no obligation to publicly reveal the existence of arbitration cases.

Vattenfall has not disclosed how much money it is seeking in damages. A German source tells ITN that the government is in talks with the company, and both parties hope to reach a settlement.

DOWning NAFTA?

Damon Vis-Dunbar — Sun, 03 May 2009 09:34:00 GMT

By Howard Mann, Senior International Legal Advisor to the International Institute for Sustainable Development
2 May 2009

On 31 March 2009 Dow AgroSciences LLC, a subsidiary of the U.S. Dow Chemical Company, initiated its NAFTA Chapter 11 arbitration against Canada due to the banning of cosmetic lawn chemicals in the province of Quebec. This is not the first case of a foreign investor challenging environmental and human health protection legislation under NAFTA. But if Dow’s full frontal assault on the right of governments to protect its citizens from potential risks wins, it may be the last before NAFTA’s Investment chapter is either torched or significantly amended.

Dow’s NAFTA claim centers on the allegation that Quebec failed to apply a strict science-based test to its ban on the lawn pesticide 2,4-D as required by NAFTA’s rules protecting foreign investors. There appears to be two grounds for this: that NAFTA’s investment chapter imposes a science-based test for new regulations; and that the Quebec government had allegedly committed to applying a science-based process which it then did not do.

Dow’s claim fails to address the fact that the Quebec ban is not alone in Canada. Indeed, at the time of adoption of the provincial measure, there were almost 50 municipals laws in the province banning cosmetic pesticide use. Today, there are over 100. Municipalities in other provinces have followed suit, as have other provincial governments.

Dow’s claim also fails to note that the Supreme Court of Canada (SCC) had issued a judgment in 2001 holding that these municipal bans on cosmetic pesticides were constitutional and legal. Moreover, the SCC stated expressly that they were in keeping with the right of governments to take preventive action under the internationally recognized “precautionary principle”.*

So why are none of these other measures being challenged? Would the national outcry for doing so would be too great? Or, perhaps Dow hopes to start slow and grow afterwards in its claim? No company can realistically argue that literally hundreds of governments are all simultaneously in breach of “basic due process, transparency, good faith and natural justice”, as Dow argues here.** But if it establishes another test first in one case, maybe it can then be applied to the other measures?

This can only be done if a NAFTA tribunal supports Dow’s argument that Chapter 11 creates a science-based test for the adoption of all new regulations impacting its products. But it does not do so. So Dow is asking that it be read into Chapter 11.

No existing case law under NAFTA or other investment treaties establishes a science-based test for adopting all new regulations, or a requirement for the abandonment of the precautionary principle as a basis for protecting the public welfare.

Moreover, this approach would be stricter than what is applied under international trade law. In an approach coincidentally established in the Asbestos case brought by Canada to the WTO over the ban of asbestos in the European Union, Dow’s current argument that the product is safe if used according to instructions was rejected by the WTO appellate body as the critical legal test. Rather, achieving the desired risk level set by the government—in that case, zero risk of asbestos poisoning—was identified as the appropriate starting point. Dow seeks to reverse this trade-law approach and establish a strict science-based test for governments to meet for all regulations applying to foreign investors. Such a test is simply not expressed in NAFTA or any other investment treaty, and would seriously constrain if not fully deny governments the ability to establish acceptable risk levels to human health and the environment based on the precautionary principle.

Dow goes further. It also seems to be arguing that a democratically elected government actually responding to political demands for the protection of human health and the environment, as witnessed by the hundred plus municipal and other provincial bans is, in itself, illegitimate in the face of this claimed science-based test under NAFTA.

In addition, Dow argues that the measure banning the sale of its products in order to protect human health and the environment constitutes an expropriation. This argument was rejected in almost identical circumstances by the 2005 NAFTA tribunal decision in the Methanex v. United States case. A decision here that contradicts the Methanex case would demonstrate unequivocally the inconsistencies of NAFTA and other similar investment treaties, and the complete inability of governments to predict what it might mean when. The obvious unacceptability of this would necessitate changes to NAFTA and some 2600 other bilateral investment treaties. But in the meantime it would act as a powerful deterrent for the taking of new environmental and human health measures by many governments, which may well be Dow’s ultimate goal in the present case.

Dow’s claim now is for just US$2,000,000. But the stakes are much, much higher than that.

*114957 Canada Ltée (Spraytech, Société d’arrosage) v. Hudson (Town), [2001] 2 S.C.R. 241, 2001 SCC 40, paras. 31, 32

**Dow Notice of Arbitration, para 49.

Notice of Arbitration to Submit a Claim to Arbitration Under Chapter Eleven of the North American Free Trade Agreement, Dow Agrosciences LLC v. the Government of Canada, available from the website of the Canada’s Department of Foreign Affairs and International Trade: http://www.international.gc.ca/trade-agreements-accords-commerciaux/disp-diff/agrosciences_archive.aspx?lang=en

For further reporting on Dow’s NAFTA claim, see “Chemical company warns Canada of potential lawsuit over pesticide ban”, By Damon Vis-Dunbar, Investment Treaty News, 23 October 2009: http://www.investmenttreatynews.org/cms/news/archive/2008/10/23/chemical-company-warns-of-lawsuit-over-pesticide-ban-a-canadian-province.aspx

Do Bilateral Investment Treaties Lead to More Foreign Investment?

Damon Vis-Dunbar — Thu, 30 Apr 2009 10:14:00 GMT

By Damon Vis-Dunbar and Henrique Suzy Nikiema
30 April 2009

The global network of over 2600 bilateral investment treaties (BITs) has been built on the basis of promoting foreign direct investment (FDI), and yet, after a decade of research, whether in fact BITs lead to an increase in FDI flows is a matter of debate. There are a number of reasons for the diverse results in the empirical studies that have addressed this question, and they are well explained in a book published last month by Oxford University Press, which brings together an impressive collection of essays and empirical studies on the impact of investment treaties on FDI flows (The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows). As an introduction to the topic, ITN has posed a few questions to three academics for their views on the relationship between BITs, FDI flows and sustainable development.

Eric Neumayer is a professor in the department of geography and environment at the London School of Economics and Political Science. An economist by training, he is the coeditor of the Handbook of Sustainable Development and author of Greening Trade and Investment: Environmental Protection Without Protectionism.

Kevin P. Gallagher is an economist in the Department of International Relations at Boston University and senior researcher at the Global Development and Environment Institute at Tufts University. He is the co-editor of a new book titled Rethinking Foreign Investment for Sustainable Development: Lessons from Latin America, and co-author of The Enclave Economy: Foreign Investment and Sustainable Development in Mexico's Silicon Valley.

Horchani Ferhat is professor of law and political science at the University of Tunis, Tunisia. He is the author of numerous articles and books on international law, including Les Sources Du Droit International Public.

Interview with Eric Neumayer

ITN: What does your research tell us about the relationship between BITs and FDI?

My research, which was published in an article co-authored by Laura Spess in the journal World Development in 2005, was one of the very first studies to demonstrate a positive effect of BITs on FDI to developing countries. In other words, by signing more BITs with developed countries, particularly those that are major FDI exporters, developing countries give up some of their domestic policy autonomy by binding themselves to foreign investment protection, but could expect to receive more FDI in exchange. The research also showed that the effect was possibly more pronounced in countries with weak domestic institutions, i.e. in countries for which the confidence and credibility-inspiring signal to foreign investors following the signing of BITs was most important.

ITN: Different analyses produce different results on the question of BITs and their impact on FDI flows. What are the key methodological differences, and differences in assumptions, that drive the different results? Are there any clear "best practices" in estimating these impacts?

The majority of studies confirm a positive effect of BITs on FDI. Some of the earlier studies had key methodological deficiencies, such as employing a small and non-representative sample. Best practice studies now should employ a large, representative sample, should use so-called bilateral or dyadic FDI data (i.e. data that tells us from where the FDI comes from and where it is flowing to) and not just aggregate FDI data (i.e. total FDI flows to countries without information on where it comes from), should estimate both static and dynamic models (i.e. models that exclude and include the temporally lagged dependent variable, respectively), should deal with possible non-stationarity (in simple words: should deal with trends in the data) and should deal with errors in the data generating process. My own research on BITs is now more than five years old, which is a long time in academia. Naturally, in retrospect it should have done all of the things I would now regard as "best practice". It did some of it, but not others. However, other more recent studies have improved on our initial study and most of them come to the same overall conclusion. This makes me confident that our initial result is in fact robust.

ITN: What steps should governments take to ensure that BITs make a positive contribution to their economic development?

Governments can promote sustainable development with appropriate policies. There is nothing in BITs that would prevent them from adopting these policies, as long as they affect all economic actors evenly, and do not discriminate against foreign investors merely because they are foreign. There is a widespread misunderstanding that BITs, or BIT-like provisions in regional trade agreements such as the North American Free Trade Agreement (NAFTA), have been abused by foreign investors to knock down environmental and other sustainable development related policies. However, as I have tried to show in my book Greening Trade and Investment: Environmental Protection without Protectionism (London: Earthscan 2001), in practically all cases where foreign investors have sued governments and were awarded damages by an arbitration panel they have done so because the policies in question were formulated in a way that clearly discriminated against foreign investors. If governments wish to pursue policies that promote sustainable development without discriminating against foreign investors, BITs and the investor-to-state dispute resolution mechanisms contained therein will not stand in their way.

Moreover, by promoting FDI, BITs are likely to make an indirect contribution to sustainable development. There is some evidence that, on average, foreign investors pay higher wages and are environmentally more friendly than their domestic counterparts. Naturally, this depends on which country the foreign investment comes from and to which sector it goes to. Chinese foreign investment is likely to contribute less than FDI from Scandinavian countries to sustainable development. FDI into natural resource sectors has often created large-scale environmental damage in the past, but this may be changing for the better as multinational corporations take corporate social responsibility more seriously.

Interview with Kevin P. Gallagher

ITN: What do empirical studies tell us about the relationship between BITs and FDI?

There is widespread agreement in the peer reviewed literature that the major determinants of FDI are macro economic and political stability, having a large and growing GDP, or being in proximity to a country with a large and growing GDP that can be exported to. A BIT or an FTA may help but without a stable and growing economy (or the ability to serve as an export platform to a stable and growing economy) a BIT is of little help.

An illustrative example is comparing Brazil and Haiti. Brazil, year after year, is the leading recipient of FDI in Latin America. Indeed, it is always in the top three among developing nations. Firms move there to serve its large domestic market, access natural resources, and serve as an export platform to other hubs (that are less stable) in South America. Brazil has no BITS and is very concerned about some of the measures that are found in US style BITS. Haiti receives little to no FDI and if they signed a BIT they would not become the new fad for foreign investors.

Thus, given that the benefits in terms of increased market access to FDI are in question, countries should think twice about surrendering the costs in terms of the lost policy space for sustainable development policies.

ITN: Is there any evidence that BITs in combination with other reforms can drive sustainable development?

Investment forms the core of growth and sustainable development. Thus, agreements that can attract and steer investment into productive and sustainable economic activity should be a top priority. Unfortunately we are not there yet. Indeed, most US BITS make it more difficult to put together a sustainable development path by giving countries little wiggle room in terms of having the necessary tools to do so. A country needs a very well developed set of institutions to counteract some of the components of the treaties.

Of course, nations "trade away" such instruments for the hope that a BIT will bring more investment. As the World Bank implicitly said in the Global Economic Prospects of 2005, nations need to be careful about this trade off.

That being said, Chile is a nation that has been able to have FDI enable broader based development. Although BITS and the US-Chile FTA outlaw the ability of the nation to have pre-establishment screening of firms, selective performance requirements, and environmental impact statements, Chile pursues many of these instruments at the deal level, rather than requiring them. They bargain hard to ensure that the environmental practices of firms are reviewed, that linkages to the local economy will be created and so forth. They also have policies at the national level for research and development and supplying credit to local firms to make sure their domestic economy has the absorptive capacity to make FDI work for development.

In the case of Mexico however, FDI has been of only limited success. Mexico's policy focuses on increasing the quantity of FDI with hopes that other benefits will come automatically. Foreign firms ended up wiping out a lot of local capacity, creating "enclave economies" cut off from the rest of the economy. This process partly explains Mexico's slow growth despite massive surges in FDI and exports.

The US is now in the process of reforming its model BIT. Given the heightened awareness regarding some of the impacts BITS have had, the process will include many more inputs from stakeholders than in the past. I'm confident and hopeful that the new US BIT will look different than recent ones.

ITN: What steps should governments take to ensure that BITs make a positive contribution sustainable development?

The best way for smaller developing countries to ensure that investment agreements are more conducive to sustainable development is to lean toward multilateral and larger regional FTAs. In those settings they have more bargaining power by working in coalition with the larger developing nations like Brazil, India, and China that are able to attract FDI for development.

ITN: Different analyses produce different results on the question of BITs and their impact on FDI flows. What are the key methodological differences, and differences in assumptions, that drive the different results? Are there any clear "best practices"in estimating these impacts?

Most of the studies done are econometric analyses that model the extent to which a BIT has a statistically significant and independent effect on investment flows. The results vary depending on the sample size, number of countries and years analyzed, and the types of control variables. A best practice would be to systematically combine a large N panel econometric analysis (having lots of countries and lots of data for those countries)with a series of corresponding qualitative on the ground case studies where researchers put together surveys on firm behavior. The big econometric analysis would help deal with some of the statistical issues that are beyond the scope of this interview to go into. The case studies would help capture things that are tough to quantify.

Interview with Horchani Ferhat

ITN: In your opinion, have international investment agreements concluded between developed and developing countries had a positive impact on economic development?

It is difficult to answer this question precisely, in part because the extent to which IIAs effect the flow of FDI is unclear. The presence of IIAs is certainly less important to foreign investors than factors like market size, quality of infrastructure and the availability of a skilled workforce. That said, not concluding IIAs may have a negative effect on economic attractiveness of the country, as it may raise concerns regarding the security of investments, particularly if other factors that are important to investors are not present to a significant degree.

Overall, I believe that IIAs are an important factor in promoting economic development, as they can influence not only the flow of FDI, but also whether FDI serves a public good. However, whether IIAs promote FDI in a positive way very much depends on how well they are negotiated. Unfortunately, many countries still lack the necessary expertise in this area, particularly in understanding the relationship between investment and sustainable development.

ITN: Are there certain clauses or provisions on which developing countries should be particularly careful when negotiating bilateral investment treaties?

Many terms must be given special attention by developing countries. First the preambles of the agreements are particularly useful in interpreting agreements in the case of disputes. Preambles should include development issues in addition to other issues such as economic cooperation. One must be aware that IIAs between African and European countries, for example, are not reciprocal agreements: the rationale for such agreements for each country is different (development for the former and market penetration for the latter). So, this should be written in the preambles to protect the interests of both parties. Notably, the first generation of IIAs tended more balanced. Often other agreements were concluded in parallel, such as agreements on technical assistance, cooperation in education, financial assistance, etc. Unfortunately, this is not the case with most modern IIAs, in which the sole purpose is to protect the interests of investors and not those of the host countries.

Secondly, clauses that permit exceptions or derogations from the rules of treatment and protection are of crucial importance, particularly in the case of a dispute between the host country and foreign investor. Indeed, some BITs contain exceptions related to health, safety, public morals or the protection of the environment. This is the case of the 2004 U.S. model BIT, for example, which allows the parties to take necessary measures if such measures do not constitute "arbitrary or unjustifiable discrimination or a disguised restriction on trade or investment." In all cases, the more clearly the exception is explained, the better. Exceptions that are broadly worded provide a lot of discretion to tribunals.

In addition, Most-Favoured Nation provisions should be negotiated with caution, especially regarding the question of its extension to the settlement of disputes. Regarding the application of fair and equitable standard of treatment, it is now generally recognized that tribunals need to take into account of the investor’s conduct. The investor cannot claim unfair and inequitable treatment, if he commits a fraud or is liable for illegal conduct, for example. But this should still be emphasized treaties.

I could go on; this list is certainly not comprehensive.

ITN: What additional steps should governments take to ensure that BITs make a positive contribution sustainable development?

We should keep in mind that BITs have as their primary purpose the protection of foreign investments against discriminatory measures by the host state. This explains the range of provisions relating to non-discrimination, fair and equitable treatment, prohibition of arbitrary measures, full protection and security, prohibition of measures equivalent to expropriation, and the arbitration of disputes. Foreign investors should be able to use these standards of treatment and protection, including access to arbitration.

Clearly, however, there is an imbalance. The concerns of the host state, including sustainable development, are not covered in a significant way by these agreements. The question, therefore, is how to restore the balance? One solution is for clauses in IIAs that place obligations on foreign investors, such as refraining from activities that amount to an infringement of sustainable development, including human rights, labour law and environmental protection. This proposal could be combined with a consultation mechanism between the host state and national state of the investor, as a prerequisite to any investor-state judicial remedies under the treaty. Another option is a mechanism similar to “Disputes Boards” used by the International Chamber of Commerce, which accompany the implementation of major construction contracts to facilitate the execution of these contracts and prevent possible disputes.
.

IISD Announcement: Nathalie Bernasconi joins IISD’s investment program

Damon Vis-Dunbar — Wed, 29 Apr 2009 12:07:00 GMT

The International Institute for Sustainable Development (IISD) is pleased to announce that Nathalie Bernasconi, a Swiss-based international lawyer with an extensive background in trade and investment law, has joined the IISD’s program on investment.

Ms. Bernasconi will take over the management of IISD’s Investment for Sustainable Development program. The program has been managed since its inception over a decade ago by Howard Mann, who will continue to play a major role in the development and delivery of IISD’s work on investment.

“I am delighted to be able to hand over the reins to Nathalie. We have worked together on many occasions in the past few years. I do not think there is anyone better placed to take the program forward into its second decade. I look forward to working with Nathalie, and to the opportunities her joining IISD will create,” said Mann.

Mark Halle, Director of IISD’s Trade and Investment Program, said that the team at IISD dedicated to foreign investment issues has been remarkable for the influence it has achieved. The addition of Ms. Bernasconi to the team will allow that influence to grow:

“Nathalie is a fantastic addition to our team. She has established herself as an extremely articulate advocate of trade and investment laws and policies that make a positive contribution to sustainable development. Nathalie’s management experience also brings added depth at a time when the program’s scope and workload is expanding.” said Halle.

Ms. Bernasconi joins the IISD after four years as the managing attorney of the Center for International Environmental Law’s Geneva office, where she concentrated on issues relating to trade, investment and sustainable development. Prior to this, Ms. Bernasconi was a fellow of the Institute of International Economic Law in Washington D.C. She has also worked for the UNDP in Viet Nam, for the Australian law firm of Phillips Fox, and in the International Law Section of the Justice Department of Switzerland.

She has an LL.M., Georgetown University Law Center, Washington D.C., and Lic. iur. Université de Neuchatel, Switzerland. She is a member of the Bar of Basel, Switzerland.

IISD’s Investment for Sustainable Development program focuses primarily on the international legal regime that governs foreign investment. Among its many activities in this field, the Institute provides capacity support and capacity training to developing countries, has developed a model international investment agreement designed to foster sustainable development, conducts research into the state of the art of investment treaties, and has actively engaged with the UNCITRAL Working Group on Arbitration in an effort to promote greater transparency in investor-state arbitrations.

IISD is also the publisher of Investment Treaty News.

Nathalie can be reached at nbernasconi@iisd.org.

Mexican truckers group launches NAFTA Chapter 11 dispute against the U.S. over trucking ban

Damon Vis-Dunbar — Wed, 29 Apr 2009 07:34:00 GMT

By Fernando Cabrera Diaz
28 April 2009

The Mexican trucking industry group CANACAR has initiated Chapter 11 arbitration against the United States, alleging that the U.S. has violated its NAFTA commitments by barring Mexican trucking companies from operating freely within its borders.

The cross-border trucking services dispute between Mexico and the United States originated in 1982 when the U.S. passed legislation establishing a moratorium on issuing permits for foreign trucking companies to operate in the U.S. Although the initial moratorium applied to both Canadian and Mexican firms, it was subsequently amended to include only Mexican firms.

When NAFTA came into force in 1994, the U.S. made assurances that the moratorium would be phased-out. However, the U.S. reneged on that commitment, instead passing legislation indefinitely extending the moratorium in 1995.

While Mexican-owned carriers are allowed to operate between Mexico and U.S. Border States or in transit through the U.S. on their way to Canada, they are not authorized to transport international cargo within the United States.

In 1995 the government of Mexico challenged the United States’ continued moratorium under NAFTA’s Chapter 20 party-to-party dispute resolution mechanism (In the Matter of Cross-Border Trucking Services).

In 2001, a five-member panel unanimously concluded that, among other things, the U.S. was in violation of Chapter 11’s national treatment and most favoured nation obligations. After the ruling, the U.S. lifted a ban on Mexican citizens owning American trucking companies, a move that did not resolve the dispute as Mexican-owned companies were still not granted the necessary permits to operate in the U.S.

ITN spoke to Pedro M. Ojeda Cárdenas, council for CANACAR, who says that the U.S. has failed to implement the tribunal’s 2001 decision. According to Mr. Ojeda, after years of negotiations the Bush administration sought to implement the tribunal’s ruling but could not gain approval from Congress. Instead, the administration set up a pilot program in 2007 which allowed inscribed Mexican trucking companies to operate in the United States.

Yet the U.S. Congress refused to fund the project, allegedly bowing to pressure from the Teamsters Union. In March of this year, President Obama’s budget scrapped the project, prompting the claimants to commence their arbitration.

ITN contacted the U.S. State Department who said they could not comment on the case, although according to their website they intend to defend the claim vigorously.

In their notice of arbitration sent to the United States government on 2 April 2009, legal counsel for CANACAR charges the U.S. with violating Chapter 11’s most favoured nation obligation, on the grounds that its restrictive policy towards Mexico does not apply to other nations, including Canada. CANACAR also alleges violation of the national treatment obligation, given that Mexican carriers are discriminated against vis-à-vis their American counterparts.

The claimants argue that the U.S. policy is a protectionist measure designed to shield American carriers from competition from Mexican firms whose drivers command significantly lower wages. The U.S., on the other hand, has cited safety concerns as the reason behind its policy.

Although their notice of arbitration does not specify the damages being sought, the claimants point to the over US$ 2 billion per year estimated cost of the U.S. policy toward Mexican-owned trucking companies.

Tribunal rejects the Defense of Countermeasures in recently published Corn Products International Inc. v. The United Mexican States award

Damon Vis-Dunbar — Tue, 28 Apr 2009 15:58:00 GMT

By Elizabeth Whitsitt
28 April 2009

In a recently published ICSID award, a tribunal found Mexico liable to an American company, Corn Products International Inc. (CPI) and its wholly-owned Mexican subsidiary, Corn Products Ingredientes (CPIng) for violating NAFTA Chapter 11. While the 15 January 2008 decision does not address the extent of Mexico’s liabilities, it represents yet another setback for Mexico in its continued dispute with the United States over the sugar trade.

High Fructose Corn Syrup (HFCS) is a sweetener made from yellow corn and used in the food and beverage industry, where it competes directly with sweeteners made from sugar cane. By the mid-1980s, HFCS was the sweetener most commonly used in soft drinks in the US and Canada, having gained a competitive advantage over sweeteners made from sugar because it was less expensive and easier to use (i.e. it was supplied in liquid versus solid form).

By the early 1990s, CPI had established itself as a major producer and supplier of HFCS to the soft drink industry in the US and Canada. After NAFTA entered into force, CPI expanded its operations and began producing and supplying HFCS to the Mexican soft drink industry through CPIng.

While HFCS began displacing sugar as a sweetener in the Mexican soft drink industry, Mexico and Mexican sugar producers were in a dispute with the US over access to the United States’ sugar market. Specifically, the Mexican government and Mexican sugar producers argued that the US was restricting the importation of Mexican sugar into the US market in violation of its obligations under NAFTA and certain letters exchanged between both governments attached to NAFTA.

Attempting to resolve this dispute, Mexico invoked the dispute-settlement machinery under Chapter 20 of NAFTA, but was unable to resolve its disagreement with the US. In fact, efforts at dispute resolution under Chapter 20 only exacerbated tensions between the two countries, with Mexico maintaining that the US violated its NAFTA obligations by effectively frustrating the operation of the Chapter 20 mechanism.

Subsequently, Mexico amended its excise tax legislation in 2001. The effect of those amendments was to impose a tax of 20% on any drink which used HFCS as a sweetener.

Asserting that the HFCS tax caused the Mexican soft drink industry to switch from HFCS to sugar cane sweeteners, and thereby destroyed its presence in the market, the claimant commenced arbitral proceedings against Mexico under NAFTA Chapter 11. Specifically, CPI argued that: (i) the HFCS tax violated the national treatment principle under Article 1102; (ii) the effect of the HFCS tax was to condition the receipt of an advantage (i.e. exemption from paying the tax) on the use of Mexican produced sugar cane in violation of Article 1106; and (iii) the HFCS tax was tantamount to an expropriation of CPI’s investment in violation of Article 1110.

While Mexico argued that CPI had failed to establish a breach of any of the Chapter 11 provisions upon which it relied, Mexico’s primary assertion was that the HFCS tax was a countermeasure taken in response to prior violations of the NAFTA by the US. In particular, Mexico referred to the International Law Commission’s Articles on State Responsibility and contended that the status of the HFCS tax as a countermeasure precluded its wrongfulness vis-à-vis the US and the claimant.

In addressing the above arguments, the tribunal first assessed CPI’s claims under Articles 1106 and 1110. Specifically, the tribunal found that CPI failed to establish that the HFCS tax was a performance requirement giving rise to liability under Article 1106. Moreover, the tribunal concluded that the HFCS tax did not rise to the level of an expropriation or a measure tantamount to an expropriation within the meaning of Article 1110. It did find, however, that Mexico violated the national treatment principle in Article 1102 by “fail[ing] to accord CPI, and its investment, treatment no less favourable than that it accorded to its own investors in like circumstances, namely the Mexican sugar producers who were competing for the market in sweeteners for soft drinks.”

Given its finding that the HFCS tax violated Article 1102, the tribunal turned to a discussion of Mexico’s countermeasures defense. In so doing, the tribunal noted “…that, in the context of [a NAFTA Chapter 11] claim, there is no room for a defense based upon the alleged wrongdoing not of the claimant but of its State of nationality…” As a result, the tribunal, in a majority and separate opinion, held that Mexico could not invoke such a defense within the context of an investor-state dispute.

While the attempt to use traditional principles of international law as defenses in investor-state disputes is not new*, this decision reflects the difficulty states often have when attempting to do so. Indeed, it appears that states will have particular difficulty using countermeasures as a defense against claims made by foreign investors.

The decision on responsibility in Corn Products International, Inc. v. Mexico, ICSID Case No. ARB(AF)/04/01 (NAFTA) is available at: http://ita.law.uvic.ca/documents/CPI-DecisiononResponsibility-eng.pdf

A Separate Opinion of Andreas F. Lowenfeld is available at:http://ita.law.uvic.ca/documents/CPI-DecisiononResponsibility-LowenfeldOpinion.pdf

*“Tribunal Rebuffs Defense of Necessity in Recently Published Award: National Grid p.l.c. v. Argentine Republic”, By Elizabeth Whitsitt, Investment Treaty News, March 2009: http://www.investmenttreatynews.org/cms/news/archive/2009/03/02/tribunal-rebuffs-defense-of-necessity-in-recently-published-award-national-grid-p-l-c-v-argentine-republic.aspx

Tribunal orders compensation in Dutch farmers' claims against Zimbabwe

Damon Vis-Dunbar — Tue, 28 Apr 2009 15:54:00 GMT

By Damon Vis-Dunbar
28 April 2009

An ICSID tribunal has ordered the government of Zimbabwe to compensate a group of Dutch nationals who saw their farms expropriated under Zimbabwe’s controversial land-reform program. The victory is expected to lead other European nationals who lost farms in Zimbabwe to seek compensation under bilateral investment treaties.

The thirteen Dutch claimants in the case Bernardus Henricus Funnekotter and Others v. Republic of Zimbabwe owned some of the thousands of farms that were expropriated by the state, as the Mugabe-led government adopted an aggressive approach to redistributing farm land from white owners to the historically disenfranchised black population.

Between 2001 and 2003, thousands of acres of farmland were forcibly seized by settlers, after a proposed constitution that would have empowered the government to compulsorily take over farms was rejected in a referendum. The claimants maintain that the government of Zimbabwe was complicit in the invasions; a charge that the government denies.

In any case, an amendment to the Zimbabwean constitution in 2005 formalized the state’s right to expropriate the farms that had been seized by settlers.

The claimants, who have not been paid for the loss of their farms, registered their case with ICSID in 2005, in an effort to leverage the Netherlands-Zimbabwe BIT to gain compensation.

In its defense, Zimbabwe recounted its effort since independence to address inequities in land ownership, rooted in its colonial past. While Zimbabwe held that its land reform measures were “in the public interest and under due process of law”, the country acknowledged that “the deprivation (of property) was not accompanied by compensation.”

Indeed, in its counter-memorial, Zimbabwe declared its intention to compensate the claimants. But later in the proceedings Zimbabwe would double back on its offer, on the grounds that the claimants had failed to fulfill certain certification procedures prescribed under domestic law.

The Tribunal would conclude, however, that the certification procedure referred to by Zimbabwe did not provide for full compensation; rather, it only promised payment for “fixed improvements on or to the land expropriated.”

Zimbabwe also invoked the state of necessity defense, essentially arguing that its land reform program was an effort to address entrenched historical inequalities in land-ownership in Zimbabwe, and therefore was justified as a measure taken in the public interest.

Yet, according to the Tribunal, Zimbabwe failed to explain “why such a state of necessity prevented it from calculating and paying the compensation due to the farmers in conformity with the BIT.”

The Tribunal was left to conclude that Zimbabwe was in violation of its obligation to provide “just compensation” in the case of expropriation, and moved to a consideration of how best to calculate damages.

Zimbabwe and the claimants came to widely divergent estimates on the value of the expropriated farms, based on differing methodologies.

An valuation conducted by the Zimbabwean Ministry of Lands, Lands Reform and Resettlement, which placed a value on the arable land, as well as buildings and farm equipment on the farms, was rejected because it did not arrive at the market value of the whole farm.

Zimbabwe also argued that large-scale nationalizations called for a discounted rate of compensation, although this was swiftly dismissed by the tribunal, which held the value of an investment should be considered independently “of the number and aim of the expropriations done.”

According to the Tribunal, a valuation conducted on behalf of the claimants, which took into account the production of each farm, came closer to the mark, although it arrived at figures that were too high when considering the unstable economic situation in Zimbabwe at the time of expropriations.

Ultimately, the Tribunal would establish a value based on the quality of the land, the production of the farms, and equipment on the farms. The claimants are to receive between 450 000 Euro and 930 000 Euro for the expropriated farms, in addition to compensation for assets left on the farms. Interest was set at 10%, compounded every six months. The Tribunal also ordered a payment of 20 000 Euro to each claimant for reparation (i.e., for the cost of re-settling), while it rejected a claim for moral damages. Each party was ordered to bear its own legal costs, while Zimbabwe must cover the Tribunals’ costs and ICSID fees.

Co-counsel for the claimants, Matthew Coleman, confirms that his firm is in the process of organizing additional claims for some 50 European nationals have also had their farms expropriated in Zimbabwe.

Zimbabwe has ratified bilateral investment treaties with China, Denmark, Germany, the Netherlands, Serbia and Montenegro, and Switzerland.

The 22 April 2009 award in Bernardus Henricus Funnekotter and others v. Republic of Zimbabwe (ICSID Case No. ARB/05/06) is available at: http://ita.law.uvic.ca/documents/ZimbabweAward.pdf

Malaysian Historical Salvors jurisdictional award annulled; committee split on question of economic development as criteria of ICSID investments

Damon Vis-Dunbar — Thu, 23 Apr 2009 13:08:00 GMT

By Damon Vis-Dunbar
23 April 2009

The members of an ICSID committee hearing an annulment request in Malaysian Historical Salvors v. the Government of Malaysia have come to starkly different conclusions on whether a foreign investment must contribute to the economic development of the host state in order to fall within the ambit of ICSID Convention.

Two out of three members of the ICSID committee—Judge Stephen M. Schwebel and Judge Peter Tomka —have annulled a 2007 award in which the sole arbitrator, Michael Hwang, declined jurisdiction.

Schwebel and Tomka conclude that Hwang “manifestly exceeded” his powers as arbitrator by failing to exercise jurisdiction that was granted under the ICSID Convention and the Malaysia-UK bilateral investment treaty.

In his jurisdictional award, Hwang concluded that Malaysian Historical Salvors’ investment in a marine salvage operation had not made a significant contribution to the Malaysian economy, and therefore fell outside the scope of the ICSID Convention.

That award garners strong support from a third committee member, Judge Mohamed Shahabuddeen, who asserts that the promotion of economic development is an essential hallmark of an investment under the ICSID Convention.

The diverging approaches of the committee members “marks a titanic struggle between ideas, and correspondingly between capital exporting countries and capital importing ones”, writes Shahabuddeen in his dissenting opinion.

Annulment committee divided on definition of an ICSID investment

Malaysian Historical Salvors (MHS), a marine salvage outfit owned by a British national, retrieved thousands of pieces of Chinese porcelain from the Straight of Malacca in the 1990’s. In its contract with Malaysia, the company was to receive a portion of the proceeds from the sale of the treasure; however, MHS maintains that it received a smaller cut of the profits than was promised under the contract.

Following an unsuccessful bid to recover damages through domestic courts in Malaysia, MHS turned to ICSID arbitration under the Malaysia-United Kingdom bilateral investment treaty.

However, the claim was disqualified after Hwang concluded that MHS had not made an “investment” as contemplated by the ICSID Convention.

Hwang's jurisdictional award has been denounced by Schwebel and Tomka on several grounds.

First, the two committee members censure Hwang for not considering the Malaysia-UK BIT, which provides a broad definition of investment. Hwang had considered it unnecessary to apply the Malaysia-UK BIT, reasoning that the ICSID Convention formed the “outer-limits” of ICSID’s jurisdiction, and therefore the definition given to investment in the BIT would not alter his decision. However, according to Schwebel and Tomka, ignoring the BIT’s definition of investment undermines the importance of these treaties in granting jurisdiction to ICSID.

“To ignore or depreciate the importance of the jurisdiction they bestow upon ICSID, and rather to embroider upon questionable interpretations of the term ‘investment’ ... risks crippling the institution,” write the two committee members.

Second, while Schwebel and Tomka acknowledge that Hwang is not alone among arbitrators in considering economic development as an important criteria for an ICSID investment, they maintain that he erred by elevating it to a jurisdictional condition.

Third, in concluding that an ICSID investment must make a significant contribution to economic development, the committee members say that Hwang failed to account for the fact that the drafters of the ICSID Convention purposely decided not to establish a monetary baseline for ICSID investments.

Dissenting opinion makes the case for development in ICSID investments

Shahabuddeen’s dissenting opinion offers a strong defense to the position that an investment must demonstrate a significant contribution to economic development if an ICSID tribunal is to hold jurisdiction.

This view is buttressed by the fact that ICSID operates under the auspices of the World Bank—an intergovernmental organization that offers financing to governments in an effort to alleviate poverty. Shahabuddeen also points to the Preamble of the ICSID Convention, which considers “the need for international cooperation for economic development, and the role of private international investment therein.”

According to Shahabuddeen, these facts lead to the conclusion that ICSID is not “meant to be just another arbitration institution”; rather, its overarching objective is economic development.

Shahabuddeen laments the tendency among tribunals to diminish the imporance of economic development as criteria of an ICSID investment, a trend he states “is not compatible with the original objectives of the institution.”

Indeed, that trend is highlighted in a jurisdictional award in Phoenix Action vs. the Czech Republic, rendered a day before the MHS annulment decision.

In the Phoenix Action award, the tribunal unanimously rejected the notion that a contribution to development should be criteria of an ICSID investment, on the view that “development of the host State is impossible to ascertain.”

In the words of the Phoenix Action tribunal:

“A less ambitious approach should therefore be adopted, centered on the contribution of an international investment to the economy of the host state, which is indeed normally inherent in the mere concept of investment as shaped by the elements of contribution/duration/risk, and should therefore in principle be presumed.”

Sources:

The annulment decision and dissenting opinion, Malaysian Historical Salvors, SDN, BHD v. Malaysia, is available from the ICSID website at: http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=viewCase&reqFrom=Home&caseId=C247

For further ITN reporting on the Malaysian Historical Salvors v. Malaysia, see “Underwater salvaging firm fails “investment” test in ICSID case against Malaysia,” By Damon Vis-Dunbar, 30 June 2007: http://www.iisd.org/pdf/2007/itn_june30_2007.pdf

For ITN reporting on Phoenix Action Ltd., v. The Czech Republic, see “Tribunal disqualifies ‘abusive’ claim by Phoenix Action against the Czech Republic,” By Damon Vis-Dunbar, 20 April 2009, http://www.investmenttreatynews.org/cms/news/archive/2009/04/20/tribunal-disqualifies-quot-abusive-quot-claim-by-phoenix-action-against-the-czech-republic.aspx

Tribunal disqualifies "abusive" claim by Phoenix Action against the Czech Republic

Damon Vis-Dunbar — Mon, 20 Apr 2009 09:01:00 GMT

By Damon Vis-Dunbar
20 April 2009

A three-member tribunal has disqualified a claim by the Israeli-based Phoenix Action LTD, concluding that its purchase of two Czech companies was solely a pretext for exploiting the Israel-Czech Republic bilateral investment treaty.

The jurisdictional award rendered on 15 April 2009 charges Phoenix Action with “an abuse of the international investment protection regime”, and orders the company to bear the full cost of the arbitration, including the Czech Republic’s legal costs.

Phoenix Action’s claim, lodged with the International Centre for Settlement of Investment Disputes (ICSID) in 2006, relates to its purchase in 2002 of two companies, Benet Praha and Benet Group, both of which were involved in the purchase and sale of ferroalloys (iron mixed with other elements, used in the production of steel).

Phoenix Action bought the two Czech companies while they were under a criminal investigation over alleged custom duty evasion. The Israeli company argued that lengthy litigation proceedings, which continued after it took ownership of the companies, amount to a denial of justice.

For its part, the Czech Republic characterized Phoenix Action has a “sham Israeli entity”, whose purpose was to gain access to international arbitration by way of the Israel-Czech Republic BIT. Indeed, the case represents “one of the most egregious cases of ‘treaty-shopping’ that the investment arbitration community has seen in recent history,” argued counsel for the Czech Republic.

Tribunal doubts investment was made in good faith

The Tribunal’s decision to nix the claim on jurisdictional grounds was linked to the revelation that one family remained in control of the Benet companies, despite their sale to different corporate entities.

According to the evidence presented to the Tribunal, the former Chairman of Benet Praha, Vladimir Beno, established Phoenix Action after fleeing to Israel under charges of tax evasion. Phoenix Action subsequently purchased Benet Praha from a company owned by Mr. Beno's his wife for US$4000. In 2008, Phoenix Action sold Benet Praha back to Mr. Beno’s wife for the same price.

In light of these facts, the Tribunal concluded that Phoenix Action’s purchase of the Benet companies was “simply a rearrangement of assets within a family, to gain access to ICSID jurisdiction to which the initial investor was not entitled.”

“The unique goal of the ‘investment’ was to transform a pre-existing domestic dispute into an international dispute subject to ICSID arbitration under a bilateral investment treaty,” writes the Tribunal.

Tribunal weighs in on the concept of investment under the ICSID Convention

The Tribunal’s verdict is significant, in part, for its analysis of what constitutes an investment under the ICSID Convention.

Because the ICSID Convention does not define the concept of investment, tribunals and commentators have formulated their own criteria. The most common is the so-called Salini test, which sets four criteria for an ICSID investment: a contribution of money or other assets of economic value; a certain duration; an element of risk, and; a contribution to the host State’s development.

In this case, the Tribunal adopts the Salini test as its starting point, but takes issue with the fourth criteria, on the grounds that determining an investment’s contribution to development is “impossible to ascertain.” Instead, the Tribunal favours “a less ambitious approach”, and proceeds to consider if there has been a contribution to the economy of the host state.

In addition to restricting the scope of the Salini test’s fourth criteria, the Tribunal would consider two other criteria: were the assets invested in accordance with the laws of the host state and was there a bona fide investment of those assets?

Ultimately, Phoenix Action’s claim would fail to meet the Tribunal’s benchmark for of bona fide investment.

This conclusion was drawn in part because the company displayed no intention of engaging in actual economic activities (the Tribunal notes, for instance, the absence of a business plan, program of re-financing, valuations, etc).

The timing of the claim—served two months after Phoenix Action purchased the Benet companies—also served to bolster the Tribunal conviction that Phoenix Action was a vehicle designed to bring a domestic dispute to international arbitration.

Indeed, the Tribunal characterized the claim as “an abusive manipulation of the system of international investment protection under the ICSID Convention and BITs.”

This damning assessment led the Tribunal to order Phoenix Action to pay the full cost of the arbitration proceedings, amounting to some USD$356 000, in addition to the Czech Republic’s legal costs of some US$1 million. Phoenix Action estimated its own legal costs at some US$1.6 million.

Number of investment claims against the Czech Republic undisclosed

The prompt release of the Phoenix Action award—published by the Czech Republic a day after it was dispatched to the parties—stands in contrast with the secrecy that shrouds other investment treaty claims against the Czech Republic.

Indeed, the exact number of investment-treaty claims against the Czech Republic has not been disclosed. An official with the Czech Ministry of Finance declined to provide ITN with a list of investment treaty claims currently pending against the Czech Republic, explaining that it is “not a policy of the Czech Republic to actively support the public availability of that information.”

At least a few recent rulings in known claims against the Czech Republic, which are not in favour the country, remain confidential.

The award on jurisdiction in Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5 (Israel/Czech Republic) is available at: http://ita.law.uvic.ca/documents/PhoenixAward.pdf

Deutsche Bank targets Sri Lanka with a BIT claim connected to a hedging contract

Damon Vis-Dunbar — Fri, 03 Apr 2009 11:53:00 GMT

By Damon Vis-Dunbar
3 April 2009

A dispute related to oil derivatives entered into by Sri Lanka’s state-run petroleum utility has led at least one foreign bank to file arbitration proceedings against the Government of Sri Lanka.

The state-run Ceylon Petroleum Corporation (CPC) entered into hedging contracts with a number of foreign and local banks in 2007 to protect against a surge in oil prices. While the contracts were originally profitable for CPC, they led to heavy losses when oil prices fell steeply in the fall of 2008. The heads of CPC and the banks involved have come under criticism by politicians, citizens and the news media in Sri Lanka.

According to reports in the Sri Lankan press, several citizens have submitted petitions to the Supreme Court alleging corruption played a part in the contracts, leading the court to order CPC to temporarily suspend payments under the contracts. While that order was lifted in January 2009, The Sri Lankan Central Bank has also stepped in, ordering CPC to suspend the hedging transactions, on the grounds that they were “materially affected and substantially tainted.”

Media reports also quote government officials as saying that the Government of Sri Lanka and the banks have been engaged in talks on re-negotiating the hedging contracts.

Deutsche Bank has filed an arbitration claim against the government of Sri Lanka in relation to the hedging contracts, registered with the International Centre for Settlement of Investment Disputes (ICSID) on 24 March 2009. In its claim, Deutsche Bank argues that the government of Sri Lanka has violated the German-Sri Lanka bilateral investment treaty. Deutsche Bank has declined to comment on the case.

Citibank is also rumored to have turned to arbitration in order to enforce the hedging contracts. An official with the bank said he could not comment, because a case related to the contracts is pending in the Sri Lankan Supreme Court.

European miners and South Africa suspend proceedings

Damon Vis-Dunbar — Thu, 02 Apr 2009 15:07:00 GMT

By Damon Vis-Dunbar
2 April 2009

(Note: a correction has been made to this article. An explanation is posted below).

A group of European’s with a stake in South Africa’s granite-quarrying sector and the Government of South Africa have agreed to suspend arbitration proceedings* for two months.

The claimants—several Italians and a Luxembourg corporation—allege that their interests in granite-quarrying companies were indirectly expropriated with the introduction in 2004 of the Mineral and Petroleum Resources Development Act (MPRDA).

The MPRDA forms part of South Africa’s efforts to increase participation by historically disadvantaged South Africans in the mining industry.

The claimants argue that their mineral rights have been “extinguished” under the MPRDA, only to be replaced with rights of lesser value when changed to mining licenses under the new regime.

Notably, the quarrying companies indirectly owned by the claimants have lodged their so-called old-order mineral rights for 'conversion' to new-order rights. The MPRDA requires lodgement by 1 May 2009. (The actual 'conversion', however, may take longer. Until the new order rights are issued, the rights holder continues to mine under the terms of the old-order rights.)

In an interview with ITN, co-counsel for the claimants, Peter Leon of the law firm Webber Wentzel, stressed that the process of 'converting' their mineral rights under the MPRDA was unrelated to their decision to request a stay in the proceedings. Rather, Leon said high-level negotiations between South African officials and the claimants have been in process for several months, and the parties felt that a stay in the proceedings would be advantageous in reaching a settlement.

However, in a statement, the Government of South Africa said it has "consistently maintained that the MPRDA conversion mechanism amply protects security of tenure of mining/prospecting rights and complies with South Africa’s commitments under international law."

Counsel for South Africa said that South Africa firmly believes that the Claimants’ case has no merits.

“Whatever new order rights the Claimants’ South African companies may obtain, and the terms and conditions of such rights, will be determined in accordance with the MPRDA and the Mining Charter. The companies will receive the same substantive treatment as any old order rights holder in a similar position,” said Jonathan Gass, a senior associate with the law firm Freshfields Bruckhaus Deringer.

The suspension of the proceedings at the International Centre for Settlement of Investment Disputes (ICSID) came into effect on 28 March 2009 and runs until 28 May 2009.

On 27 March 2009, South Africa submitted a counter-memorial and objections to jurisdiction to the tribunal. The claimants submitted their memorial in July 2008. Hearings are currently scheduled for April 2010.

The dispute has drawn attention for its human rights implications, and civil society groups in South Africa have considered making amicus curiae (friend of the court) applications. As ITN reported in October, the ICSID Secretariat has prepared a two-page brief outlining the steps and criteria required of potential amici.

So far, however, there have not been any requests to make amicus curiae applications.

*Piero Foresti, Laura de Carli and others v. Republic of South Africa (ICSID Case No. ARB(AF)/07/1)

This article has been revised to reflect the following correction:

Correction: 3 April 2009

The original version of this article, published on 2 April 2009, did not reflect South Africa’s position with regards to the Claimants assertion that “settlement” negotiations are in progress. The following lines were added to the article as a result:

Counsel for South Africa stresses that South Africa firmly believes that the Claimant’s case has no merits.

“Whatever new order rights the Claimants’ South African companies may obtain, and the terms and conditions of such rights, will be determined in accordance with the MPRDA and the Mining Charter. The companies will receive the same substantive treatment as any old order rights holder in a similar position,” said Jonathan Gass, a senior associate with the law firm Freshfields Bruckhaus Deringer.

CIT Group settles with Argentina

Damon Vis-Dunbar — Mon, 30 Mar 2009 13:35:00 GMT

By Damon Vis-Dunbar
30 March 2009

The American finance company CIT Group has reached a settlement with Argentina, bringing to close ICSID arbitration proceedings which began in 2003.

CIT Group had been seeking some US$124 million for alleged violations of the US-Argentina bilateral investment treaty, in one of the many disputes that arose with foreign investors in the wake of Argentina’s 2001-2002 economic crisis.

In a 20 March 2009 letter to the tribunal, counsel for CIT Group announced that it had reached an agreement with Argentina, and requested discontinuance of the arbitration proceedings. Argentina concurred with the request, and accepted to split the cost of the arbitration with CIT Group.

Requests by ITN to CIT Group for further information about the settlement were not returned.

Of the cases at ICSID launched by foreign investors against Argentina, eight have so far been discontinued after a settlement was reached. A number of others have been suspended on the request of the disputing parties.

Recently published: The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties and Investment Flows

Damon Vis-Dunbar — Fri, 27 Mar 2009 13:59:00 GMT

The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties and Investment Flows (Oxford University Press, 2009), edited by Karl P. Sauvant and Lisa E. Sachs.

In recent years, the treaties and strategies promoting foreign direct investment (FDI) have changed dramatically. In particular, countries have liberalized their FDI laws and have entered into bilateral investment treaties (BITs) and double taxation treaties (DTTs) to attract such investment. The basic purpose of these treaties is to signal to investors that investments will be legally protected under international law in case of political turmoil and to mitigate the possibility of double taxation of foreign entities. But the actual effect of BITs and DTTs on the flows of foreign direct investment has been debated. The Effect of Treaties on Foreign Direct Investment is a comprehensive assessment of the performance of these treaties in this respect, and presents the most recent literature on BITs and DTTs and their impact on foreign investment flows.

The Table of Contents and the Introduction are both available on the publication page of the Vale Columbia Center on Sustainable International Investment website: http://vcc.columbia.edu/pubs/