i nternational i nvestment l aw 5 standards of protection

INTERNATIONAL INVESTMENT LAW 5

Standards of protection

(c) Prof. Dr. Werner Meng 2

Standards of Investment Protection

• Sources– Customary International Law– Multilateral Agreements– Bilateral Agreements (BITs)– Jurisprudence

• Different standards– Each agreement has its own set of standards– But the same terminology leads to the elaboration

of common perceptions of what these standards are


Jurisprudential elaboration

• Standards are necessarily broad, jurisprudence makes them concrete

• See the general problems of investment jurisprudence– Different judges, different texts (in concrete, but also as systematic

environment of the clauses)• Reference to other court systems?

– ICJ jurisprudence: yes (see e.g. ELSI case)– WTO jurisprudence? E.g. about NT or MFN

• One singular particular text, but terms and systematic environment may be different

• The legislative purposes of WTO law are different– Free trade– Least and controlled state intervention– Discrimination distorts the market forces


List of common standards• Fair and equitable treatment (FET)• Full protection and security• Umbrella clauses• Due process: fair procedure and access to justice• Emergency standards

– Emergency– Necessity– Armed conflict– Force majeure

• Preservation of rights• No arbitrariness or discrimination• National treatment (NT)• Most favored nation treatment (MFN)


Fair and equitable treatment

• Nowadays the most important standard– Not: ex aequo et bono

• BITs, but also MIGA, NAFTA, ECT• Rule of International Law, Independent from

national law– Not: National treatment– But also not: PIL minimum standard (disputed)– Is it a different general standard of customary PIL?

(disputed). What would that mean? Case by case method?• Could it at least become such a standard?

– Rule of law approach (ELSI)

6(c) Prof. Dr. Werner Meng

• See Art. 2.2 MT, 1105.1 NAFTA, 10.1 EnChT• Customary law: no arbitrary denial of legal protection• Transparency• Rule of Law• Protection of justified expectations• Generally: stable and reliable investment conditions

(CMS / Argentinien, ICSID ARB/01/8 of May 12, 2005)

Fair and equitable Treatment


FET Definitions: Tecmed - 1

• Tecmed v. Mexico (2003)• „154: The Arbitral Tribunal considers that this provision of

the Agreement, in light of the good faith principle established by international law, requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment.

• The foreign investor expects the host State to act in a consistent manner, free from abiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments as well as the goals of the relevant policies and adminstraive practices or directives, to be able to plan its investment and comply with such reguations


FET Definitions: Tecmed – 2

• The foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any preexisting decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities.

• The investor also expects the State to use the legal instruments that govern the actions of the investor or the investment in conformity with the function usually assigned to such instruments, and not to deprive the investor its investment without the required compensation.“


Critique of the Tecmed definition

• MTD v. Chile (ad hoc Committee)– The obligations of the host State towards foreign

investors derive from the terms of the applicable investment treaty and not from any set of expectations investors may have or claim to have.

• Suez v. Argentina:– Not: subjective expectations, but expectations

based on facts that may be verifiable objectively.


Overview of the factors

• Justified expectations of the investor on an objective basis

• Consistent, unambiguous and transparent acts of the host state

• Knowledge in advance of the legal, political and administrative ramifications of the investment

• Consistency with preexisting decisions and permits. No arbitrary revocal.

• Normal, impartial and non-abusive application of the law

• No deprivation of property without compensation


FET Cases – 1

• Change of privatization policy and withdrawal of consent to further acquisitions of land (Eureko v. Poland)

• Not generally a change of national legislation. Investment treaty is no „insurance polcy against the risk of any changes in the host State‘s legal and economic framework“ (EDF v. Romania). Only with reasonable expectations.

• Reliance on governments offical statements: transparency requirement (SPP v. Egypt)

• Reliance on promises to certify an activity (Metalclad)• Replacing an unlimited licence by a license limited in time

(Tecmed v. Mexico)• Breach of contract by sovereign powers, not a simple failure of

payment of bills that are due.• Violation of due process, denial of justice, failure to hear the

investor (Metalclad)


FET Cases - 2

• Violation of Good Faith. No purposefully infliction of damages, no unfair expulsion of the investor.– But bad faith of the state in general is not required

• No factual coercion or harassment (physical or psychological) (Pope&Talbot v. Canada, Tecmed, Total v. Argentina, Desert Line v. Yemen)– By state organs or by instigation of private protests

or pressure


• Tecmed v. Mexico (ARB(AF)/00/2– Operation of a landfill in Mexico– No prolongation of the authorization (two years after the

operation started)– Promises to grant new land for relocation not fulfilled– Reason: pressure of regional groups– Minor violations of environmental rules of Tecmed wer

not the real cause for the ending of licensing– Investment was completely devaluated– AT• De facto indirect expropriation, persisting property not usable• No adequate compensation• Violation of fair and equal treatment

Tecmed Case


• Metalclad v. Mexico ARB(AF)/97/1– American waste disposal company wanted to operate landfill in

Mexico– Permit by the national and the regional governments. Prolongation

by the national government, but order to stop by the municipality after further construction of the site. National authorities encouraged M. to apply for a municipal permit. Contradictory behaviour of the state authorities. M. completed the construction. Protests blocked the beginning of the operations. Municipality refused permit without properly hearing M. Finally the regional governor declared the landfill as an environmentally protected zone

– AT (NAFTA Court under art. 1110)• No FET, no explication of the mexican legal situation, no clear procedures,

no proper evaluation of the legal rules, no proper hearing• Expropriation without compensation• Purpose is not decisive

Metalclad Case


Full protection and security

• Against insurgents, terrorists or riots by mobs• State has to take reasonable legislative and

administrative acts to protect• State has to abstain from any instigation• State has to actively refrain and protect from

physical violence and harassment.• State has to give legal protection• State has to guarantee the minimum standard


• Agreement on „pacta sunt servanda“ in order to append the contract (State-Private) to the agreement (State-private)

• Art. 7.2 MT– (2) Each Contracting State shall fulfil any other obligations it may have entered

into with regard to investments in its territory by investors of the other Contracting State.

• Art. 10 EnChT– 1.3: Such Investments shall also enjoy the most constant protection and

security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal.

– 1.5: Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party

• BIT Germany – Pakistan (1959)– “The violation of such an obligation” (i.e. of the investment contract) “will also

amount to a violation of the international legal obligation contained in the present Treaty”

Umbrella clauses


• The consequence: the legal situation in the time of the conclusion of the contract remains “frozen” (or “preserved”)– Although the contract is based on national law (PCIJ Serbian loans

case)– A breach entails state responsibility of the host state to the home state– But: restrictive interpretation of the clause necessary (binding of

sovereignty, “in dubio mitius”): not covering merely commercial contractual obligation or minor violations of the contract (?) without the use of sovereign powers

– Only applicable to direct state obligations in a contract (disputed)– Also applicable to unilateral state acts (legislation)

Effect of an umbrella clause


• Basis is the minimum protection of public international law for Aliens

• Access to courts, right to be heard, local procedure, no denial of justice, No miscarriage of justice

• Establishment of an effective judicial system • No retroactive application of the laws prior to

the beginning of the investment.

Due process and judicial protection


• A state is responsible for all military actions and civil strife on ist territory. – at least insofar, as it has to do its best, to protect the investor

• A state is not responsible for force majeure beyond its control.

• Necessity means (article 25 of the ILC articles on state responsibility) – that the state has no other means against the grave and

imminent peril and – that he does not seriously impair an essential interest • of the state towards which the obligation exists or • to the international community as a whole

• A state is not excused if it has no money for economic reasons

Emergency exceptions


• BITs do not abrogate rights of the investor under national or other international law

• Arbitrary: not reasonable, but based on prejudice or personal preferences. Against the rule of law (ELSI). Is also a FET violation (?).

• No discrimination based on nationality or other irrational differentiation. Intent necessary?

Loss of rights, arbitrary behavior or discrimination


• Art. 3 MT• (2) Neither Contracting State shall in its territory subject investors

of the other Contracting State, as regards their activity in connection with investments, to treatment less favourable than it accords to its own investors or to investors of any third State. The following shall, in particular, be deemed treatment less favourable within the meaning of this Article:– different treatment in the event of restrictions on the procurement of

raw or auxiliary materials, of energy and fuels, and of all types of means of production and operation;

– different treatment in the event of impediments to the sale of products at home and abroad; and

– other measures of similar effect.• Measures that have to be taken for reasons of public security and

order shall not be deemed treatment less favourable within the meaning of this Article.

Justification of discrimination


• Duty not to treat foreign investments worse than domestic ones in „like situations“ or „circumstances– And, if contractually agreed: activities of foreign investors (like in

GATS)• Concerning expropriations and compensation (customary

law)• Discrimination de iure and de facto– Not necessarily based on nationality– No intent necessary

• Legitimate public purposes may justify discrimination (other than in the GATT, aims and purposes)– See 3.2. MT– Since there are no general justification clauses in investment

treaties, justifications play a role here! They relieve the qualification as discrimination

National Treatment


• Investors may rely on the most favorable treatment granted to any foreigner– In the „basic treaty“, the MFN clause points to a

more favorable treatment in a „third party treaty“

– E.g. if citizen of one foreign nationality may bring an international case without exhausting the local remedies, all the foreigners may do so.

– Eiusdem generis – principle: does the third-party treaty deal with the same subject matter than the basic treaty?

Most Favored Nation Principle


• Art. 3 German MT:• National and most-favoured-nation treatment • • (1) Neither Contracting State shall in its territory subject investments owned or controlled

by investors of the other Contracting State to treatment less favourable than it accords to investments of its own investors or to investments of investors of any third State

• (2) Neither Contracting State shall in its territory subject investors of the other Contracting State, as regards their activity in connection with investments, to treatment less favourable than it accords to its own investors or to investors of any third State. The following shall, in particular, be deemed treatment less favourable within the meaning of this Article:

– different treatment in the event of restrictions on the procurement of raw or auxiliary materials, of energy and fuels, and of all types of means of production and operation;

– different treatment in the event of impediments to the sale of products at home and abroad; and

– other measures of similar effect• Measures that have to be taken for reasons of public security and order shall not be

deemed treatment less favourable within the meaning of this Article.

MFN - 1


• (3) Such treatment shall not relate to privileges which either Contracting State accords to investors of third States on account of its membership of, or association with, a customs or economic union, a common market or a free trade area

• (4) The treatment granted under this Article shall not relate to advantages which either Contracting State accords to investors of third States by virtue of an agreement for the avoidance of double taxation in the field of taxes on income and assets or other agreements regarding matters of taxation

• (5) This Article shall not oblige a Contracting State to extend to investors resident in the territory of the other Contracting State tax privileges, tax exemptions and tax reductions which according to its tax laws are granted only to investors resident in its territory.

• (6) The Contracting States shall within the framework of their national legislation give sympathetic consideration to applications for the entry and sojourn of persons of either Contracting State who wish to enter the territory of the other Contracting State in connection with an investment; the same shall apply to employed persons of either Contracting State who in connection with an investment wish to enter the territory of the other Contracting State and sojourn there to take up employment. Where necessary, applications for work permits shall also be given sympathetic consideration

MFN - 2


• US Model BIT 2004• Article 4: Most-Favored-Nation Treatment

• 1. Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.

• 2. Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.

MFN - 3


• Art. 3 BIT UK – Mozambique of 2004

– ARTICLE 3– National Treatment and Most-favoured-nation Provisions– (1) Neither Contracting Party shall in its Territory subject Investments or Returns of

Nationals or Companies of the other Contracting Party to treatment less favourable than that which it accords to Investments or Returns of its own Nationals or Companies or to Investments or Returns of nationals or companies of any third State.

– (2) Neither Contracting Party shall in its Territory subject Nationals or Companies of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their Investments, to treatment less favourable than that which it accords to its own Nationals or Companies or to nationals or companies of any third State.

– (3) For the avoidance of doubt it is confirmed that the treatment provided for in paragraphs (1) and (2) of this Article shall apply to the provisions of Articles 1 to 11 of this Agreement.

• In the articles 1 to 11 wefind provisions on expropriations, compensations, investor-state arbitration, state – state dispute settlement etc.

MFN - 3


• Substantive rights– Clauses in other treaties (e.g. FET)– Clauses about compensation

• Procedural rights?– Venues of claims– Jurisdiction of courts or tribunals– Conditions (e.g. exhaustion of remedies or cooling

off – period)– Investor – State arbitration?– Matter of interpretation or subject to express

acceptance or refusal by the parties

What could be possible MFN situations ?


• BIT China Australia (1988)Article XII Settlement of disputes between one Contracting Party and a national of the other Contracting Party relating to investments 1. In the event of a dispute between a Contracting Party and a national of the other Contracting Party relating to an investment or an activity associated with an investment, the parties to the dispute shall initially seek to resolve the dispute by consultations and negotiations. 2. If the dispute has not been settled within three months from the date either party gave notice in writing to the other concerning the dispute, either party may take the following action: (a) in accordance with the law of the Contracting Party which has admitted the investment, initiate

proceedings before its competent judicial or administrative bodies; and

(b) where the parties agree or where the dispute relates to the amount of compensation payable under Article VIII, submit the dispute to an Arbitral Tribunal constituted in accordance with Annex A of this Agreement.

4. In the event that both the People's Republic of China and Australia become party to the 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, a dispute may be submitted to the International Centre for the Settlement of Investment Disputes for resolution in accordance with the terms on which the Contracting Party which has admitted the investment is a party to the Convention.

Enlargement of Jurisdiction?


• The BITS between China and Germany (2003) and China and the Netherland (2004) do not know a limitation of the jurisdiction of investor – state – arbitration to questions of compensation.

• Can an Australian investor in China open an ICSID-procedure on the justification of a chinese environmental measure?

Enlargement of Jurisdiction by MFN? 2


• Maffezini v. Spain (ICSID ARB/97/7 – Jurisdiction)– BIT Argentina – Spain

• Disputes – Negotiation for 6 months – national remedies – 18 months – international arbitration

– BIT Chile – Spain• Disputes – Negotiation for 6 months – then directly: international arbitration (ISDS)

– MFN clause covering „all matters“ of the treaty– AT: MFN also considering jurisdiction, because inextricably related to the

protection of foreign investors– But: no overriding of „public policy considerations“

• Like eg. Exhaustion of local remedies (but not the „eighteen months in domestic courts rule in the present case)

• Fork in the road stipulation• Particular arbitration forum• Highly institutionalized system of arbitration that incorporates precise rules of

procedure• No retroactive application of a BIT („Tecmed addendum“) i.e. no application to the

„core of matters“ in an agreement.

– No „disruptive treaty-shopping“

Maffezini case


• Gas Natural v. Argentina(ARB/03/10): extension, if not clear reasons against it– 18 months rule is not exhaustion of local remedies rules– Most of Argentinas BITS do not contain such a rule, i.e. no public policy

• Salini v. Jordan (ARB/02/13) such clauses have to be used narrowly in order to avoid“treaty shoppping“

• Plama v. Bulgaria (ARB/03/24): extensive consent of the parties has to be proven

• Siemens v. Argentina (Arb/02/8): like Maffezini the question to skip the 18 months in national courts. Here, the BIT referred to „treatment“ relating to „activities related to the investment“. Extension of MFN to the jurisdiction rules. No additional importation of a „fork in the road“ – clause, because only favorable clauses may be referred to.– Critique: „cherry picking“

• It all depends on the wording of the clause and the intention of the parties• See Gaillard, E., Establishing Jurisdiction through a Most-Favored-Nation

Clause, New York Law Journal 233 (2005), 1 ss.

Reactions to Maffezini


• Free right to repatriate the capital as a rule• Other payments and proceeds originating

from the investment• Mostly existing standards– Convertible currency at the official rate of

exchange– Without undue delay

• Various special rules in BITs• Impact of Currency policies? -> IMF law

Transfer of any funds of the investor


• Art. 1 Nr. 2 MT:– the term "returns" means the amounts yielded by an investment

for a definite period, such as profit, dividends, interest, royalties or fees;

• Art. 5 MT:• (1) Each Contracting State shall guarantee to investors of the

other Contracting State the free transfer of payments in connection with an investment, in particular– the principal and additional amounts to maintain or increase the

investment;– the returns;– the repayment of loans;– the proceeds from the liquidation or the sale of the whole or any

part of the investment;– the compensation provided for in Article 4.

Freedom of Transfer – German MT - 1


• (2) Transfers under Article 4 (2) or (3), under the present Article or Article 6, shall be made without delay at the market rate of exchange applicable on the day of the transfer. A transfer shall be deemed to have been made without delay if made within such period as is normally required for the completion of transfer formalities. The period shall commence with the submission of the corresponding application, where such an application is necessary, or the notification of the intended transfer, and must in no circumstances exceed two months.

• (3) Should it not be possible to ascertain a market rate pursuant to paragraph (2), the cross rate obtained from those rates which would be applied by the International Monetary Fund on the date of payment for conversions of the currencies concerned into Special Drawing Rights shall apply.

Freedom of Transfer – German MT - 2


• Host state may not require a re-investment of the proceeds• Certain restrictions– Art. 1109.4 NAFTA:• 4. Notwithstanding paragraphs 1 and 2, a Party may prevent a transfer

through the equitable, non-discriminatory and good faith application of its laws relating to:

– (a) bankruptcy, insolvency or the protection of the rights of creditors; – (b) issuing, trading or dealing in securities; – (c) criminal or penal offenses; – (d) reports of transfers of currency or other monetary instruments; or – (e) ensuring the satisfaction of judgments in adjudicatory proceedings.

– Art. 14.4 EnChT• Notwithstanding paragraphs (1) to (3), a Contracting Party may protect the

rights of creditors, or ensure compliance with laws on the issuing, trading and dealing in securities and the satisfaction of judgements in civil, administrative and criminal adjudicatory proceedings, through the equitable, nondiscriminatory, and good faith application of its laws and regulations.

Freedom of Transfer – Re-Investment


• In the Federal Republic of Germany– At the end of 2009, 24,3 billion € (in 1960: 5,1 Mia. €)– In total, 56 billion € for projects in 123 countries

• Damages 156,2 Mia. €, but the balance is positive

– Guarantees on the basis of investment protection agreements– mandated companies distribute funds of the state

• PricewaterhouseCoopers AG• Euler Hermes Kreditversicherungs AG

– Since 1960, on the basis of decisions by the Interministerial Committee for Investment Guarantees• This committee analyzes if projects are worth promoting and the legal

protection situation, six meetings per year

– Europe and Africa increasing, America and Asia decreasing

Monthly report of BMWiT (Federal Ministry for Economics and Technology), 07-2010

Promotion of Investments by Investment Guarantees


– MIGA (1985)• MIGA Members and investors from Member States

provided they are not nationals of the host country (article 13• for direct investments, equity interests and loans

(article 12)• Guarantees for non-commercial risks

– transfer risk (capital transfer)– expropriation risk– breach of contract risk– risk of war and civil war

• against a risk premium

MIGA of the World Bank

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