Y E A R B O O K O N

I N T E R N A T I O N A L

I N V E S T M E N T

L A W & P O L I C Y

00-Sauvant&Sachs-FM.indd i 3/11/09 1:42:22 PM

00-Sauvant&Sachs-FM.indd ii 3/11/09 1:42:23 PM

Edited by

K A R L P . S A U V A N T

1

Y E A R B O O K O N

I N T E R N A T I O N A L

I N V E S T M E N T

L A W & P O L I C Y2008–2009

00-Sauvant&Sachs-FM.indd iii 3/11/09 1:42:23 PM

1Oxford University Press, Inc., publishes works that further Oxford University’s objective of excellence

in research, scholarship, and education.

Oxford New YorkAuckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto

With offi ces inArgentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam

Copyright © 2009 by Oxford University Press, Inc.

Published by Oxford University Press, Inc.198 Madison Avenue, New York, New York 10016

Oxford is a registered trademark of Oxford University PressOxford University Press is a registered trademark of Oxford University Press, Inc.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press, Inc.

_____________________________________________

Library of Congress Cataloging-in-Publication Data

_____________________________________________

1 2 3 4 5 6 7 8 9

Printed in the United States of America on acid-free paper

Note to Readers

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is based upon sources believed to be accurate and reliable and is intended to be current as of the time it was written. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legaladvice or other expert assistance is required, the services of a competent professional person should be sought. Also, to confi rm that the information has not been affected or changed by recent developments, traditional legal research techniques should be used, including checking primary sources where appropriate.

If you would like to be placed on Standing Order status for United States International Insolvency Law, whereby you will automatically receive and be billed for new annual volumes as they publish, please contact a Customer Service Representative.

In the United States, Canada, Mexico, Central and South America, contact:Customer ServiceOxford University Press USA, 2001 Evans Road, Cary, NC 27513Email: custserv.us@oup.comPhone (toll free in US): 1-866-445-8685, Phone (international customers): 1-919-677-0977Fax: 1-919-677-1303

In the United Kingdom, Europe, and Rest of World, contact:Customer ServiceOxford University Press, Saxon Way West, Corby, Northants, NN18 9ES, United KingdomEmail: bookorders.uk@oup.comPhone: +44 1536 741017Fax: +44 1536 454518

00-Sauvant&Sachs-FM.indd iv 3/11/09 1:42:23 PM

PU: Please provide CIP data. Also, please confirm whether we need to follow exact style as there in source folder for CIP data?

To Thomas W. Wäelde, good friend and eminent scholar

00-Sauvant&Sachs-FM.indd v 3/11/09 1:42:23 PM

00-Sauvant&Sachs-FM.indd vi 3/11/09 1:42:23 PM

Contents

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

List of Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

Foreword by Jeffrey D. Sachs . . . . . . . . . . . . . . . . . . . . . . xvii

Preface by David M. Schizer . . . . . . . . . . . . . . . . . . . . . . . xix

Introduction by Karl P. Sauvant . . . . . . . . . . . . . . . . . . . . . . xxi

PART ONE

1. Trends and Issues in International Investment . . . . . . . . . . . . . . .3Persephone Economou, John H. Dunning, and Karl P. Sauvant

2. Trends in International Investment Agreements: Balancing Investor Rights and the Right to Regulate the Issue of National Security . . . . . . 35Peter Muchlinski

3. Trends in International Investment Disputes: 2007 in Review. . . . . . . 79Ian A. Laird and Borzu Sabahi

4. Foreign Direct Investment in the Oil and Gas Sector: Recent Trends and Stategic Drivers . . . . . . . . . . . . . . . . . . . 117Albert Bressand

PART TWO

5. Driving and Countervailing Forces: A Rebalancing of National FDI Policies . . . . . . . . . . . . . . . . . . . . . . . . . . 215Karl P. Sauvant

6. The Law of International Investment: Can the Imbalance be Redressed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273Patrick Juillard

7. A Comparison of the 2004 and 1994 U.S. Model BITs: Rebalancing Investor and Host Country Interests . . . . . . . . . . . . 283Kenneth J. Vandevelde

vii

00-Sauvant&Sachs-FM.indd vii 3/11/09 1:42:24 PM

8. Proximate Causation in International Investment Disputes . . . . . . . 317Stanimir A. Alexandrov and Joshua M. Robbins

9. Obstacles and Pathways to Consideration of the Public Interest in Investment Treaty Disputes . . . . . . . . . . . . . . . . . 347Charles H. Brower, II

10. The Argentine Crisis and Foreign Investors: A Glimpse into the Heart of the Investment Regime . . . . . . . . . . . . . . . . . . 379José E. Alvarez and Kathryn Khamsi

11. Economic Security Defenses in International Investment Law . . . . . 479Andrea K. Bjorklund

12. Improving the Mechanisms for Treaty Negotiations and Investment Disputes: Competition and Choice as the Path to Quality and Legitimacy. . . . . . . . . . . . . . . . . . . . . 505Thomas W. Wälde

SPECIAL SECTION

Winning Memorials from the Inaugural Foreign Direct Investment International Moot Competition (FDI Moot) . . . . . . . . . . . . . . 585

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 669

viii CONTENTS

00-Sauvant&Sachs-FM.indd viii 3/11/09 1:42:24 PM

Acknowledgements

I would like to thank all contributors to this volume for their outstanding work and for their patience to bring this inaugural volume of the Yearbook on International

Investment Law & Policy 2008–2009 to fruition. Special thanks go to Lisa Sachs, without whom the volume hardly would have seen the light of day.

Karl P. SauvantNew York, November 2008

00-Sauvant&Sachs-FM.indd ix 3/11/09 1:42:24 PM

00-Sauvant&Sachs-FM.indd x 3/11/09 1:42:24 PM

List of Contributors

Stanimir A. Alexandrov is a partner at Sidley Austin LLP and heads Sidley’s interna-tional arbitration practice, focusing on investor-state arbitration. He has guided the arbitration team in representing one of the largest dockets of arbitration cases and cur-rently serves as an arbitrator in fi ve arbitration disputes. Mr. Alexandrov was elected to membership in the prestigious Institut du Droit International in October 2007 and is listed in Chambers Guide to America’s Leading Lawyers for Business 2005, 2006, and 2007; The International Who’s Who of Business Lawyers (Arbitration) 2005, 2006, and 2007; Chambers Global World’s Leading Lawyers for Business 2007; and Prac-tical Law Company’s Cross-Border Handbook on Dispute Resolution 2007/08.Mr. Alexandrov is a former vice foreign minister of Bulgaria. He has been an Adjunct Professor for many years at The George Washington University School of Law, where he earned his doctorate in juridical science. Mr. Alexandrov has published several books and numerous articles on public international law and investor-state arbitration matters.

José E. Alvarez is the Hamilton Fish Professor of Law & Diplomacy and director of the Center on Global Legal Problems at Columbia Law School. At Columbia, he has taught courses on public international law, international legal theory, human rights, international organizations, and foreign investment. Mr. Alvarez, who is the immediate past president of the American Society of International Law, has also taught at New York University Law School, the University of Michigan Law School, and George Washington School of Law. His book, International Organizations as Law-Makers,was published by OUP in 2005.

Andrea K. Bjorklund is Professor of Law at the University of California, Davis. She teaches courses in international arbitration and litigation, international trade, interna-tional investment, confl ict of laws, and contracts. Ms. Bjorklund is co-rapporteur of the International Law Association’s Study Group on the Role of Soft-Law Instruments in International Investment Law. She has written extensively on investor-state arbitration issues, and is co-author of Investment Disputes Under NAFTA: An Annotated Guide to

NAFTA Chapter 11. Prior to entering the academy, Ms. Bjorklund worked on the NAFTA arbitration team in the U.S. Department of State’s Offi ce of the Legal Adviser,

xi

00-Sauvant&Sachs-FM.indd xi 3/11/09 1:42:24 PM

and also worked for Commissioner Thelma J. Askey on the U.S. International Trade Commission and in private practice at Miller & Chevalier in Washington, D.C. A grad-uate of Yale Law School, she clerked for Judge Sam J. Ervin, III, on the U.S. Court of Appeals for the Fourth Circuit.

Albert Bressand is the Executive Director of Columbia University’s Center for Energy, Marine Transportation and Public Policy and Professor of Practice in International and Public Affairs at Columbia’s School of International and Public Affairs (SIPA). Dr Bressand has also been appointed Special Adviser to the EU Commissioner in charge of energy in Brussels. Formerly, Mr. Bressand headed the Global Business Environment department in Royal Dutch Shell’s global headquarters in London from 2003–2006. In this capacity, he was responsible notably for designing a new generation of Shell Global Scenarios around an enhanced, original methodology for risk and opportunity assessment. Mr. Bressand also served as Economic Advisor to the Minister of Foreign Affairs of France and held key positions with the French Institute for International Relations and the World Bank. He earned advanced degrees in both math-ematics and engineering at École Polytechnique in Paris, École Nationale des Ponts et Chaussées and Université Paris-Sorbonne, and an MPA and a PhD in Political Economy and Government at the Kennedy School of Government at Harvard University.

Charles H. “Chip” Brower, II is the Jessie D. Puckett, Jr. Lecturer and Croft Associate Professor of International Law at University of Mississippi Law School. Mr. Brower teaches human rights, international commercial arbitration, international trade, the law of armed confl ict, and public international law. His research interests include human rights, investor-state arbitration, jurisdictional immunities, and the law of armed con-fl ict. In addition to his academic work, Mr. Brower is an arbitrator and member of the Commercial Panel of the American Arbitration Association, the Executive Committee of the Institute for Transnational Arbitration (ITA), the Chartered Institute of Arbitrators (MCIArb), and the London Court of International Arbitration (North American User’s Council). He also serves as co-editor-in-chief of World Arbitration & Mediation Review

and as co-chair of the ABILA-ASIL Joint Study Panel on Transparency in International Commercial Arbitration. He has also served as Advocate for the Government of the Republic of Costa Rica in advisory proceedings before the International Court of Justice, as a member of the ASIL’s Executive Council, co-chair of the ASIL’s 97th Annual Meeting, and co-chair of the ITA’s 18th Annual Workshop. Mr. Brower received his BA, summa cum laude from the University of Vermont and his JD from the University of Virginia.

John H. Dunning is Emeritus Professor of International Business at the University of Reading, UK and at Rutgers University. He has been researching into the economics of international direct investment and the multinational enterprise since the 1950s. He has authored, co-authored, or edited 42 books on this subject, and on industrial and regional economics. His latest publications are a book of essays, Globalisation at Bay, a two-volume compendium of his more infl uential contributions to international business over the past 30 years (Edward Elgar, 2002), and a newly edited volume on Making

xii LIST OF CONTRIBUTORS

00-Sauvant&Sachs-FM.indd xii 3/11/09 1:42:24 PM

Globalization Good (Oxford University Press, 2003). The revised edition of his text-book Multinational Enterprises and the Global Economy (with Sarianna Lundan), fi rst published in 1993, was published in July 2008 by Edward Elgar.

Persephone Economou is a consultant at the Multilateral Investment Guarantee Agency of the World Bank Group. Prior to that she was the Managing Editor and Book Review Editor of the Journal of International Business Studies, where she also co-edited a “Symposium on International Business Negotiations” (published in 1998). Previously she was a staff member of the United Nations Conference on Trade and Development (UNCTAD) in Geneva and of the United Nations Centre on Transnational Corporations in New York. While at the United Nations, she was extensively involved in the annual World Investment Report series and was the Associate Editor of Transnational Corporations. Ms. Economou has been a consultant to various organiza-tions, including the World Bank’s Development Economics Vice Presidency and UNCTAD.

Patrick Juillard received his Master of Comparative Law (MCL) at Columbia University in 1959 and his Doctor of Laws (University of Paris), with highest honors, in 1966. He was Agrégé des Facultés de Droit until 1968, Assistant Professor (1962–1966, University of Paris), and Adjunct Professor (1966–1968, University of Poitiers). From 1969 to 2005 he was Professor (Universities of Limoges, 1969–1972; Paris X—Nanterre, 1972–1976; Paris V René Descartes, 1976–1983; Paris 1 Panthéon-Sorbonne, 1983–2005). After that he became Professor Emeritus of the University of Paris 1 Panthéon-Sorbonne. Mr. Juillard’s main publications are Droit international

économique (8th ed, Dalloz, 2007), L’évolution des sources de droit des investisse-

ments (Recueil des cours de l’Académie de droit international, La Haye, 1994), and Chronique de droit international (AFDI—French Yearbook of International Law, 1972–1996). He did consulting work for government institutions and international organizations, namely UNCTAD and OECD, in the fi eld of international investment law. Also, he was active in the fi eld of international arbitration. From 1964–1974 he was Counsel, and from 1974–1983 European Counsel, for the Californian Law fi rm of O’Melveny & Myers.

Kathryn Khamsi is an Associate at Shearman & Sterling LLP, practicing in the International Arbitration group based in Paris. Previously, she was Legal Advisor to, and eventually also Coordinator of, the Timor Sea Offi ce, the part of the Government of Timor-Leste mandated to conduct maritime boundary negotiations and draft a petro-leum investment regime for the country. She has also worked for the International Development Law Organization in Kabul, Afghanistan and for The Carter Center on matters concerning mining investment contracts in the Democratic Republic of Congo. Ms. Khamsi holds an AB from Harvard (cum laude), an LLB and BCL from McGill (with distinction), and an LLM from Columbia (James Kent Scholar).

Ian A. Laird is Counsel in the Washington, D.C. offi ce of Crowell & Moring LLP. His practice is focused in the fi eld of international investment law and arbitration.

LIST OF CONTRIBUTORS xiii

00-Sauvant&Sachs-FM.indd xiii 3/11/09 1:42:24 PM

Mr. Laird has spoken extensively and published numerous articles on international investment arbitration, and serves as Editor-in-Chief of InvestmentClaims.com, an on-line investment arbitration award service published by Oxford University Press. He received his LLB from Windsor and his LLM from Cambridge.

Peter Muchlinski is Professor in International Commercial Law at the School of Oriental and African Studies (SOAS), University of London. He is the author of Multinational Enterprises and the Law (second edition, Oxford University Press, 2007) and is co-editor (with Federico Ortino and Christoph Schreuer) of the Oxford

Handbook of International Investment Law (Oxford University Press, 2008). He acts as an adviser to the United Nations Conference on Trade and Development (UNCTAD) on investment law issues. He was Co-Rapporteur to the International Law Association Committee on the International Law on Foreign Investment and occasionally advises in international investment arbitrations.

Joshua M. Robbins is an associate at Sidley Austin LLP and a member of Sidley’s international arbitration practice. Mr. Robbins has served as counsel in numerous investor-state arbitration matters, representing both investors and sovereign govern-ments. He previously served in the Offi ce of the Legal Adviser at the U.S. Department of State, where he represented the United States in disputes under Chapter 11 of NAFTA. Mr. Robbins is a graduate of Harvard Law School and the Fletcher School of Law and Diplomacy.

Borzu Sabahi is an Adjunct Professor of Law at Georgetown University where he co-teaches a seminar on investor-State arbitration. He is an Assistant Editor for Investment Claims (Oxford University Press) and for Transnational Dispute Management (TDM). Ms. Sabahi regularly speaks in conferences and workshops about investment treaties and investor-State arbitration. His most recent publications include a casebook entitled Investor-state Arbitration (Oxford University Press 2008, coauthored with Messrs. Dugan, Wallace and Rubins). He received his SJD (International Investment Law) and LLM from Georgetown University Law Center and his MA (Public International Law) and LLB from the University of Tehran.

Jeffrey D. Sachs is the Director of The Earth Institute, Quetelet Professor of Sustainable Development, and Professor of Health Policy and Management at Columbia University. He is also Special Advisor to United Nations Secretary-General Ban Ki-moon. From 2002 to 2006, he was Director of the UN Millennium Project and Special Advisor to United Nations Secretary-General Kofi Annan on the Millennium Development Goals, the internationally agreed goals to reduce extreme poverty, disease and hunger by the year 2015. Mr. Sachs is also President and Co-Founder of Millennium Promise Alliance, a nonprofi t organization aimed at ending extreme global poverty. He is author of hundreds of scholarly articles and many books, including the New York Times

bestsellers Common Wealth: Economics for a Crowded Planet (Penguin 2008) and The

End of Poverty (Penguin, 2005). Prior to joining Columbia, he spent over 20 years at

xiv LIST OF CONTRIBUTORS

00-Sauvant&Sachs-FM.indd xiv 3/11/09 1:42:25 PM

Harvard University, most recently as Director of the Center for International Development. A native of Detroit, Michigan, Mr. Sachs received his BA, MA, and PhD degrees at Harvard.

Karl P. Sauvant is the founding Executive Director of the Vale Columbia Center on Sustainable International Investment, Research Scholar and Lecturer in Law at Columbia Law School, Co-Director of the Millennium Cities Initiative, and Guest Professor at Nankai University, China. Before that, he was Director of UNCTAD’s Investment Division. He is the author of, or responsible for, a substantial number of publications. In 2006, he was elected an Honorary Fellow of the European International Business Academy. He received his PhD from the University of Pennsylvania in 1975.

David M. Schizer is Dean of Columbia Law School and the Lucy G. Moses Professor of Law. A graduate of Yale University where he earned his BA, MA, and JD, Mr. Schizer clerked for U.S. Appeals Court Judge Alex Kozinski and Supreme Court Justice Ruth Bader Ginsburg. One of the leading experts in tax law, Mr. Schizer worked at Davis Polk & Wardwell prior to joining the Columbia Law faculty in 1998. He was elected Dean of the faculty in 2004. Mr. Schizer continues to teach a colloquium on tax. Before becoming Dean, he started a highly popular Deals course, bringing stu-dents academics and practitioners together to examine the art of the deal in the real world.

Kenneth J. Vandevelde graduated from Harvard Law School, practiced law in Washington, D.C., and then joined the State Department Legal Adviser’s offi ce, where his responsibilities included the negotiation of BITs and the arbitration of investment claims. He currently is Professor of Law at the Thomas Jefferson School of Law in San Diego, where he served as dean from 1994 to 2005. In 1992, he published United

States Investment Treaties: Policy and Practice. In 2009, Oxford will publish his books Bilateral Investment Treaties: History, Policy and Interpretation and U.S. International

Investment Agreements. Mr. Vandevelde has published numerous articles on BITs, has spoken on this topic in some 20 countries in Europe, Asia, Africa, and North and South America, and has served as a consultant on BITs to several governments and international organizations.

Thomas W. Wälde was Professor of International Economic, Natural Resources and Energy Law and the Jean-Monnet Chair, CEPMLP/University of Dundee. He was a member of the Association of International Petroleum Negotiators and several interna-tional arbitral institutions, including Rechtsanwalt (Frankfurt) and Essex Court Chambers, London, and a former UN Inter-Regional Adviser on Petroleum and Mineral Legislation. Mr. Wälde also served as adviser to numerous international institutions in the oil and gas fi eld (OPEC, IEA, UN, APEC, EU, World Bank). He was Editor of the online Oil, Gas & Energy Law Intelligence Service and the online journal Transnational

Dispute Management, and was moderator of the ENATRES & OGEMID Internet

LIST OF CONTRIBUTORS xv

00-Sauvant&Sachs-FM.indd xv 3/11/09 1:42:25 PM

discussion communities. He published in the fi elds of international investment, energy and natural resources law, including works on tax, renegotiation, indirect expropriation, capital control, sustainable development, good governance and legislative reform, fair and equitable treatment, EU energy-competition law and the Energy Charter Treaty. Mr. Wälde was also frequently appointed as Expert Counsel, Mediator, and Arbitrator in international energy and investment disputes.

xvi LIST OF CONTRIBUTORS

00-Sauvant&Sachs-FM.indd xvi 3/11/09 1:42:25 PM

Foreword

One of the great challenges of global governance is to make international law function in a world of sovereign states. There are basic challenges of formulating international law in a manner that is internationally agreeable and also enforceable. Yet beyond agreement and enforcement, there are even more important goals. International law should support sustainable development, meaning the reduction of global poverty, the narrowing of gaps between rich and poor, the continued progress of high-income regions, and the sustainable utilization of natural resources. This is a tall order. We have many examples where international law seemingly fails to protect the poor or the envi-ronment, and serves as a shield for powerful interests who leave little behind in the way of sustainable development.

Foreign direct investment is an especially powerful vehicle for the fl ow of capital, technology and skills. It can therefore be a key instrument for economic growth and sustainable development. However, investment fl ows, to be benefi cial, need to be underpinned by an international legal order that recognizes the various interests at stake: the host country, the local community, the natural environment, and of course the investor itself. Without such a clear recognition of all of these key interests, the legal order for foreign direct investment will lack legitimacy and fail to serve its purpose. Indeed, shortcomings in the existing legal order are threatening to create a backlash against foreign investment and are spawning protectionist sentiments in some countries. There are simply too many cases, for example, where natural-resource investors have despoiled the local environment and ignored the interests of the local communities. The legitimacy of the legal order governing international foreign invest-ment fl ows requires that all actors believe that this order is benefi cial to their long-term interests.

As a number of the authors in this inaugural edition of the Yearbook on International

Investment Law & Policy point out, the current system is in need of rebalancing. This is in response to a growing wariness to a perception that the current regime is biased in favor of politically and fi nancially powerful investors (most of whom still hail from developed countries), while not giving equal weight to the concerns of host countries and local communities. These concerns have spawned important non-governmental efforts to curb abuses and reform the international legal order. One of the distressing current realities is that host countries often lack the legal skills and knowledge to

xvii

00-Sauvant&Sachs-FM.indd xvii 3/11/09 1:42:25 PM

defend their claims. Information is often scarce, so that host countries and local com-munities often do not understand their rights and cannot make comparisons with the terms of agreements in other countries. The studies in this volume, therefore, will be read with tremendous interest by policy makers in these host countries.

Flows of foreign direct investment have risen dramatically over the past decade, in many cases even to impoverished countries. If well-directed and governed, these fl ows can make a major positive contribution to sustainable development. While we have made important progress in creating an international legal framework for one set of cross-border economic transactions—those covered by the World Trade Organization—much remains to be done to improve the legal regime needed to help meet the multiple public-policy challenges surrounding cross-border investment. This Investment

Yearbook offers a valuable start, by exploring a number of these challenges in some detail. I congratulate the authors and editor of this notable volume.

Jeffrey D. Sachs Director, The Earth Institute Columbia University

xviii FOREWORD

00-Sauvant&Sachs-FM.indd xviii 3/11/09 1:42:25 PM

Preface

International trade and foreign direct investment are driving forces of global economic growth. Through them, economic linkages are formed, ideas and technology trans-ferred, and growth and development fostered. Alongside the growth of foreign trade and investment fl ows, international trade and investment law have emerged as distinct fi elds of law that are evolving rapidly to keep abreast of developments.

Historically, much more attention has been paid to international trade law and the institutions underpinning it, and courses have been taught in this subject in law schools and elsewhere around the world. The study of international investment law, on the other hand, has emerged only relatively recently, and the number of courses in this subject is still signifi cantly lower than that of courses on international trade.

This annual Yearbook on International Investment Law & Policy provides a platform for leading thinkers and practitioners to share their views on international investment law and to contribute to its evolution. The chapters in this inaugural edition of the &Investment Yearbook testify to the tremendous evolution of international investment law in recent decades and the strengthening of the international legal regime for such invest-ment. However, the range of issues raised by these chapters also indicates that the regime is still evolving, and the authors suggest a number of areas that require global attention and further study. As the authors note, the realities of the twenty-fi rst century raise critical issues that will come to bear on the evolution of international investment law. For instance, how should domestic institutions balance the economic benefi ts of investment fl ows with a heightened concern over national security? Or how can dispute-settlement tribunals reconcile investor protection provisions in international treaties with the public interest concerns of countries?

The issues raised in this Yearbook call upon two core traditions of Columbia Law School. First, the School has always placed great emphasis on the study of international law and global regimes. Global interdependence requires that the regulatory regimes that govern our economic relations are fair, transparent and fl exible, so as to meet the varied needs of all global players and acquire legitimacy in their eyes. Second, the School puts great emphasis on protecting and advancing the public interest. In the case of interna-tional investment law, especially at this relatively early stage, it is especially critical to take into account the legitimate interests of the principal parties to the investment pro-cess, so that a sound international investment law and policy regime is put in place.

xix

00-Sauvant&Sachs-FM.indd xix 3/11/09 1:42:25 PM

I hope that the thoughtful discussions of the authors in this volume and in subsequent volumes of the Investment Yearbook will provoke discussions that will be valuable for law students preparing to enter and explore the fi eld, for practitioners in the private and public sectors contributing to the growing history of international investment law and policy, and for anyone interested in the issues raised by the role of international invest-ment in an increasingly interconnected world.

David M. SchizerDean of Columbia Law School and the Lucy G. Moses Professor of LawColumbia University Law School

xx PREFACE

00-Sauvant&Sachs-FM.indd xx 3/11/09 1:42:26 PM

Introduction

Karl P. Sauvant

Companies invest abroad for a variety of reasons; what is essential to these fi rms is that they seek to increase their international competitiveness. Countries attract foreign direct investment (FDI)—investments made by a resident entity of a foreign country with the objective of establishing a lasting interest in an enterprise resident in the host country—for a variety of reasons; what is essential to these countries is that they seek to advance their economic development. These two sets of interests overlap to a large extent: fi rms can bring a range of tangible and intangible assets (capital, technology, skills, access to markets, etc.) that are central to development, whereas countries have assets (natural resources, infrastructure, skills, etc.) that fi rms need for their production processes as well as the markets that fi rms require to sell their goods and services.

These interests, combined with competition among fi rms and countries, the liberal-ization of investment regimes, and advances in communication, transportation and information technologies, have driven the rapid growth of FDI and the rise of multina-tional enterprises (MNEs)—enterprises that control assets in two or more countries—during the past three decades. The fi rst chapter of this book, by Persephone Economou, John H. Dunning, and myself, documents this development, its salient features and the key issues related to it, to provide the background for the subsequent chapters. It also discusses the impact of the current fi nancial crisis and recession on future FDI fl ows: these fl ows reached an all-time record of $1.8 trillion in 2007, but they have declined by over 20% in 2008 and will decline even more so (perhaps by more than 30%) in 2009. Still, compared to $40–50 billion at the beginning of the 1980s, FDI fl ows have reached signifi cant proportions. Moreover, as the stock of FDI has risen drastically (reaching $15 trillion in 2007), the global sales of the foreign affi liates of MNEs have grown as well, estimated at $31 trillion in 2007—roughly two times the amount of world exports.1 This makes FDI considerably more important than trade in terms of the delivery of goods and services to foreign markets, and it underlines the importance of dealing with issues relating to the international investment law and policy regime.

1 UNCTAD, World Investment Report 2008, p. 10 (2008).

xxi

00-Sauvant&Sachs-FM.indd xxi 3/11/09 1:42:26 PM

While the interests of MNEs and countries overlap to a signifi cant degree, the context within which this overlap is defi ned, as well as the extent of this overlap, is determined largely by the regulatory framework governing FDI and the activities of MNEs. First and foremost is the national regulatory framework for FDI. I expect that future editions of this Yearbook on International Investment Law and Policy will contain a chapter reviewing regulatory developments at that level. Increasingly, however, national regulatory and policy approaches take place—and need to take place—within the parameters set by inter-national investment agreements (IIAs), agreements that, in a substantial manner, address investment issues. Pride of place among IIAs belongs to bilateral investment treaties, of which some 2,600 were concluded by the end of 2007.2 In Chapter 2, Peter Muchlinski traces the main recent developments concerning IIAs, including the continued growth in the number of IIAs and the diverse range of issues addressed by these agreements. He notes that, although the traditional “fi rst generation investor protection model” of IIAs is still the most widely used, more recent agreements have been addressing some of the sys-temic issues that have come to light recently—in particular, the relationship between investor rights and regulatory discretion, and the effect of the increasing number of arbitral awards in investment disputes (discussed in more depth in Chapter 3).

Given that there are differences in the interests of investors and host country govern-ments, it is not surprising that, at times, the relationships between the two can become confl ictual. This is not new. What is new, however, is that a growing number of such confl icts are the subject of formal and public international adjudication, i.e. become disputes subject to international arbitration. That number has risen rapidly and reached at least 300 by mid-2008, with more than half of the disputes arising during the past fi ve years.3 In many ways this is not surprising, as the overwhelming number of IIAs allows investor-State disputes, and there are at least 80,000 MNEs with at least 800,000 foreign affi liates. Depending on the availability of an IIA and its applicable provisions, each of them (and, under certain circumstances, even individual shareholders) can ini-tiate an arbitration case. As José Alvarez puts it, the international law system is enforced by the “private attorney generals” of MNEs.4 Chapter 3, by Ian A. Laird and Borzu Sabahi, discusses recent developments in international investment arbitration. The authors focus in particular on several important issues addressed in investment arbitra-tions in 2007, including novel jurisdictional issues, issues related to the merits and stan-dards of compensation in damages awards, and the limited power of annulment committees. They also note that although there is no formal rule of stare decisis in inter-national investment law, several tribunals in 2007 directly referenced precedent, and there is an informal development of jurisprudence constante in investment arbitration.

The interest that investment disputes are beginning to attract in institutions of higher learning is refl ected in the fact that foreign investment moot courts are becoming more popular. Moot courts such as these allow law students—the future practitioners and policy makers—to attain a practical understanding of the issues by representing investors

2 Id.3 Id.4 José E. Alvarez, Law of Empire, Ala. L. Rev. (forthcoming, 2009).

xxii KARL P. SAUVANT

00-Sauvant&Sachs-FM.indd xxii 3/11/09 1:42:26 PM

and host countries in hypothetical investor-State disputes. For this reason, the winning claimant and respondent memorials from the inaugural Foreign Direct Investment International Moot Competition held in November 20085 are included in a special sec-tion at the end of this volume.

Historically, natural resources accounted for an important part of FDI. This role greatly diminished during the 1970s, when, in a spate of nationalizations, host countries took over natural resource assets (although, in many cases, non-equity relationships remained). Still, FDI in natural resources accounted for 13% of world FDI fl ows in 2006 and 8% of its stock. With the recent rise in commodity prices and the stronger capacities of host countries, host countries have become more assertive, giving rise to a new resource nationalism. Hence, Albert Bressand examines, in Chapter 4, a range of issues relating to FDI in one sector that has received particular attention, oil and gas. He gives an overview of the rapid rise in energy demand and the key transformations reshaping the investment scene. Going beyond the one-size-fi ts-all view of “resource nationalism,” the chapter distinguishes six different ways in which sovereignty and market considerations interact in strategically signifi cant major resource-holding states. In three of these groups of countries, sovereignty considerations come fi rst, yet this emphasis on sovereignty can range from an absolute ban on foreign investment in the upstream (and sometimes mid-stream and downstream) parts of the value chain to a strategically guided effort to strengthen the national oil and gas companies into major international players and inves-tors in their own right. Special attention is given to the implications of the international-ization of national oil and gas companies in the more outward-oriented group of sovereignty-conscious countries, a group that includes countries as important as Russia, Kazakhstan, China, India, and Algeria. By contrast, in three other groups, market consid-erations come fi rst, but environmental considerations, concerns for the security of supply, and efforts by governments to capture a larger part of the economic rent imply that sov-ereign objectives are never entirely absent. The challenges for international investors are discussed in light both of this analytical framework and insights from important micro-economic developments and specifi c oil and gas investments during the recent years.

These four chapters make up Part One of the Investment Yearbook. Future editions will update each of these areas, to keep readers abreast of salient developments in each of them.

Part Two, then, contains chapters that address key issues in international investment law and policy. Perhaps no question has led to more legal and policy debate in recent years than matters involving national security, essential security interests and similar concepts, and, in particular, the question of who judges the applicability of such con-cepts in a given situation. This discussion is foreshadowed in the chapter by Muchlinski, in which he discusses the increased attention to the question of “national security” and “essential security interests” in the context of FDI, and specifi cally in IIAs. Most of the

5 The co-founders of the FDI Moot are the Center for International Legal Studies (CILS) in Salzburg, Austria; Suffolk University Law School in Boston; Pepperdine University Law School in California; the Centre for Energy, Petroleum and Mineral Law at the University of Dundee in Scotland; and the German Institution of Arbitration in Cologne, Germany.

INTRODUCTION xxiii

00-Sauvant&Sachs-FM.indd xxiii 3/11/09 1:42:26 PM

chapters in Part Two also deal with the question of what constitutes the appropriate balance between the rights and responsibilities of investors and those of governments. It is a question that, sooner or later, had to arise because the international investment law and policy regime, by design, has largely been created, fi rst of all, to protect inves-tors and then also to liberalize the conditions under which they operate; from a host country perspective, such a regime was meant to encourage FDI fl ows.6 In fact, it is actually quite astonishing how rapidly the international investment law and policy regime has developed during the past few decades. To quote Jeswald W. Salacuse and Nicholas P. Sullivan regarding the status of this regime today: “In most cases, a foreign investor benefi ting from a BIT [bilateral investment treaty] may now look to a compre-hensive, specifi c, and largely uncontested set of international rules, with recourse to international tribunals for enforcement.”7

While there is broad agreement that the evolution of the international investment law and policy regime is, indeed, an outstanding success, questions are increasingly being raised as to the nature of this regime and especially as to the balance of rights and responsibilities between governments and fi rms. At the moment, a good part of this discussion crystallizes around the question of how much leeway governments have to undertake actions that may contravene otherwise agreed treaty provisions, and who judges under what conditions this can occur.

In Chapter 5, I suggest that this discussion needs to be placed into a broader context, namely a certain reevaluation of the costs and benefi ts of FDI for host (and home) countries and the attendant effect on national regulatory frameworks for such invest-ment. After two decades of a broad and strong consensus that FDI has an overwhelm-ingly positive impact on host countries and during which such investment fl ows grew substantially, a number of governments are taking a more skeptical attitude, be it for national security (however defi ned), economic development, or other reasons. The result has been, at the national level, that the overwhelming liberalization trend of FDI laws seems to be slowing down: for example, while some 95% of all changes in national FDI laws and regulations during 1991 and 2002 were in the direction of creating a more friendly investment environment, this percentage had dropped to 84% for the period 2003–2007.8 Indeed, during 2006–2007, the countries worldwide that intro-duced at least one regulatory change making the investment climate less welcoming for MNEs accounted for 40% of all FDI infl ows.9 This suggests that a certain rebalanc-ing of the national regulatory framework for FDI is taking place.

Importantly, there are also signs that a certain rebalancing may be happening at the international level as well. As Patrick Juillard argues, in Chapter 6, this is a response to

6 On the infl uence of bilateral investment treaties (and double taxation treaties) on FDI fl ows, see

KARL P. SAUVANT AND LISA SACHS, eds., THE EFFECT OF TREATIES ON FOREIGN DIRECT INVESTMENT:BILATERAL INVESTMENT TREATIES, DOUBLE TAXATION TREATIES, AND INVESTMENT FLOWS (2009).

7 Jeswald W. Salacuse & Nicholas P. Sullivan, Do BITs Really Work: An Evaluation of Bilateral

InvestmentTreaties and Their Grand Bargain, HARVARD JOURNAL OF INTERNATIONAL LAW 46), 70 (2005).

8 UNCTAD, World Investment Report 2008, supra note 1.9 Calculation of the author, based on UNCTAD data.

xxiv KARL P. SAUVANT

00-Sauvant&Sachs-FM.indd xxiv 3/11/09 1:42:26 PM

an international investment law and policy regime created with the principal objective of protecting foreign investors. He suggests that there is a growing feeling, including among governments, that bilateral investment treaties are “causing a gradual erosion of countries’ rights to legislate in the public interest,” and that the investment dispute settlement mechanism currently favors investors and “casts [States] in a no-win situa-tion.” He notes, as other authors in this volume do as well, that more recent BITs “tend to make more and more room for the preservation of State interests and, by so doing, start to strike a new balance between investors and States.”

In fact, the more restrictive approach of the United States to such protection standards as fair and equitable treatment and cases of indirect expropriation, suggests that one of the chief promoters of an open international investment law and policy regime is begin-ning to take a more cautious approach when it comes to the rights of investors vis-à-vis governments. By comparing the 1994 and 2004 U.S. model bilateral investment treaties, Kenneth J. Vandevelde traces this change in treaty language systematically in Chapter 7. He notes that the 2004 model BIT strengthens the position of BIT parties vis-à-vis inves-tors and, importantly, vis-à-vis the investor-State arbitral tribunals as well, reclaiming some of the power handed to the tribunals in the previous model BIT. Overall, he fi nds that the 2004 model “refl ects a more cautious and tentative foreign investment policy.”

This growing reluctance to entrust tribunals with vast interpretation authority is examined in one specifi c context by Stanimir A. Alexandrov and Joshua M. Robbins in Chapter 8. They delve into the relatively unexamined subject of proximate causation in international investment disputes, specifi cally noting the fl exibility that investment tri-bunals enjoy in interpreting the multifaceted doctrine of “proximate causation,” and the potential impact of such interpretations of fi ndings of liability or damages. They explain how the pragmatic considerations may infl uence the application of proximate causation principles, especially when “the investor-State dispute resolution system comes under criticism,” but they conclude that “only time and . . . scrutiny” will tell how it is applied in future cases.

These chapters echo (some more, some less) the sentiment of an increasing number of governments that the investor-State relationship at the international level—includ-ing IIAs and the investor-State dispute settlement mechanisms—pay too little attention to public interest concerns and to the regulatory needs of host governments. In this context, Charles H. Brower II, in Chapter 9, examines the political character of invest-ment disputes and the reluctance of investor-State arbitral tribunals to consider openly and systematically the serious public interest implications of the issues at stake. The most signifi cant obstacle to tribunals’ systematic consideration of the public interest, he fi nds, is a combination of “practical diffi culties and limitations imposed by the applicable law.” Brower suggests, however, that general principles of treaty interpreta-tion can be used to “bring investment treaty arbitration into a public law framework,” thereby giving the public interest greater attention.

Nowhere is the change in attitude toward the current regime and the calls for a rebal-ancing of the regime in favor of the public interest more apparent than in the discus-sions surrounding the essential security exception in IIAs and the extent to which it is self-judging. Therefore several contributors in this inaugural volume of the Investment

Yearbook specifi cally deal with various aspects of this problématique.

INTRODUCTION xxv

00-Sauvant&Sachs-FM.indd xxv 3/11/09 1:42:27 PM

In Chapter 10, José E. Alvarez and Kathryn Khamsi discuss in detail how the essen-tial security exception issue was dealt with in fi ve Argentina arbitral decisions. They suggest that Argentina’s defense of necessity in those cases “raises a number of inter-pretive questions that go to the heart of the . . . investment regime.” After discussing the interpretive questions extensively, they fi nd that the “measures-not-precluded” clause of the Argentina-U.S. BIT was not meant to be “self-judging,” that it should be inter-preted in light of the customary defense of necessity, and that, even if properly invoked, it does not excuse the obligation to compensate. Although they fi nd some of the under-lying concerns about the investment regime’s legitimacy to be overstated, they also believe that the regime’s genuine legitimacy concerns may require fi xing the applicable substantive law. (Vandevelde, in his chapter, notes that the United States revised its Model BIT in 1998 to include language stating that the essential security exception of its (future) BITs is, indeed, self-judging—one of the several ways in which more recent BITs shift the balance away from investor protection toward regulatory fl exibility. That later revision, however, does not retroactively apply to the U.S.-Argentina BIT con-cluded prior to the revision.)

Andrea Bjorklund, in Chapter 11, looks more closely at the customary international law defense of necessity, primarily through the lens of the ILC State Responsibility Article 25 and the Argentina arbitral decisions. While noting that some of the Argentine cases distinguish the Argentine-U.S. BIT’s essential security provision from the cus-tomary defense of necessity, possibly setting a lower threshold for invoking the former, she concludes that the better interpretation of the treaty provision is that it incorporates the relevant provisions of the customary defense. The former approach raises two seri-ous problems. First, there are no standards against which to measure when a state faces an “essential security” threat; incorporating the customary law standards alleviates that diffi culty. Second, it is more likely to be inconsistent with the object and purpose of the investment treaty itself, which was designed to confer greater protections on for-eign investors than would be available to them under customary law. Bjorklund also discusses the complicated question of whether compensation is owed in the case of a successful necessity defense, ultimately suggesting that it is unlikely to exculpate states from all of their compensatory obligations, but that it might reduce compensation owed to restitution.

Finally, in Chapter 12, Thomas Wälde returns to the broad canvas and examines not only the nature of the international investment law and policy regime but also discusses a range of proposals that have been made to improve its functioning. In particular, he deals with the questions of consistency, treaty content and negotiation, soft-law instru-ments, mediation, procedural reform of arbitral tribunals, transparency, and amicus participation. Although Wälde suggests that investment arbitration is “one of the most successful institutional reforms on the plane of international law,” he nevertheless dis-cusses some measures to improve the quality of the current investment arbitration regime, including the establishment of a legal aid facility for defendants, and the devel-opment of a practical arbitration manual to help newcomers navigate the investment dispute process.

What these various chapters show is that the international investment law and policy regime is evolving, and is likely to continue to do so in the future. Indications suggest

xxvi KARL P. SAUVANT

00-Sauvant&Sachs-FM.indd xxvi 3/11/09 1:42:27 PM

that this will lead to more circumscribed rights for investors on the one hand, and more fl exibility for governments, in the form of a stronger right to regulate, on the other. At the same time, care needs to be taken to prevent this rebalancing from going too far and undermining a transparent, predictable, and rule-based system. In future editions, the Investment Yearbook will monitor these developments and examine their implications for the international investment law and policy regime, especially those relationships between governments and investors.

INTRODUCTION xxvii

00-Sauvant&Sachs-FM.indd xxvii 3/11/09 1:42:27 PM