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International Investment Arbitration - Substantive Principles, 2nd Edition by McLachlan, Campbell; Shore, Laurence; Weiniger, Matthew (23rd March 2017)

Part I Overview, 1 Introduction

From: International Investment Arbitration: Substantive Principles (2nd Edition)

Campbell McLachlan, Laurence Shore, Matthew Weiniger

From: Investment Claims (http://oxia.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. date: 21 February 2019

Subject(s):
Precedent — Investor — Standards of treatment — Customary international law — Relationship of international law & host state law

(p. 3) Introduction

Owing to the binding character of express promises and agreements, a wise and prudent Nation will carefully examine and maturely consider a treaty of commerce before concluding it, and will take care not to bind itself to anything contrary to its duties to itself and to others.

Vattel, Le Droit des Gens (1758)1

The great accumulation of capital in the money centers of the world, far in excess of the opportunities for home investment, has led to a great increase of international investment extending over the entire surface of the earth … All these forms of peaceful interpenetration among the nations of the earth naturally contribute their instances of citizens justly or unjustly dissatisfied with the treatment they receive in foreign countries …

Elihu Root (1910)2

A.  Objective

The investment treaty arbitration phenomenon

1.01  The question of the best way of promoting and protecting investment under international law, and at the same time of ensuring that States’ binding obligations in this field are carefully balanced, is as pressing today as it has ever been. But a development in legal technique in the (p. 4) latter part of the twentieth century has fundamentally altered the context in which disputes between foreign investors and host States fall to be resolved.

1.02  Traditionally, the only available solution for the foreigner aggrieved at the treatment that he had received in the host State was to seek diplomatic protection from his home State. The result of such protection might be an agreement of the host State to submit to the arbitration of the dispute by a claims commission. But the prior intervention of the home State was always required.

1.03  This did not mean that the protection of foreign investment was solely the province of customary international law, with all the uncertainty and dissension about basic principles with which this area of custom has been bedevilled. States have been concluding treaties of commerce between themselves for centuries. Guarantees of investment treatment have long been a subject of specific agreement by treaty. However treaty provision alone would not justify the claim made by a distinguished arbitration expert of the emergence of a field ‘dramatically different from anything previously known in the international sphere’.3

1.04  Nor did the development in 1965 of a dedicated framework for the arbitration of investor-State disputes on its own provoke a revolutionary new form of jurisprudence. The Convention on the Settlement of Investment Disputes between States and Nationals of other States 1965 (the ICSID Convention)4 undoubtedly marks a considerable improvement in the procedures available for the settlement of such disputes. Its uniquely self-contained process avoids many of the pitfalls that may otherwise attend the pursuit of such a claim before a national court or commercial arbitration body. But the ICSID Convention secured widespread consensus on procedure by deliberately eschewing any provisions on the substance of investment law, and enshrining the consent of the host State as the sole basis for the jurisdiction of the International Centre for Settlement of Investment Disputes (ICSID).5 Its early modest caseload was predominantly concerned with contract claims, where the parties had nominated the Centre in their arbitration agreement.

1.05  The development in legal technique that has transformed the landscape of modern investment protection has been the emergence of widespread provision, within investment treaties, for the direct invocation of arbitration claims by investors themselves against the host State. Suggestively described as ‘arbitration without privity’,6 this new form of dispute resolution does not require the intervention of the home State in the prosecution of a claim. Nor does it require any prior contractual relationship between host State and investor. Previously, the concession contract, complete with arbitration agreement, had been the essential predicate for investor-State arbitrations. But successful recourse to arbitration on the basis of the standing and general consent of the host State to all nationals of the other contracting State requires no such privity of contract. The result is dispute resolution that is arbitration in procedural terms, but which in substance has been said to share more of the characteristics of the direct right of action before human rights courts.7 The State will always be the respondent, (p. 5) never a claimant.8 Its conduct vis-à-vis the investor falls to be judged according to general standards imposed by international law and not by reference to any national system of law.

1.06  Since the potential of this form of dispute resolution was realised, the results have been dramatic. The first arbitration under a bilateral investment treaty (BIT) was registered in 1987.9 The growth in this form of dispute resolution in the two decades since then has been exponential, with the number of registered cases now totalling nearly 700.10 If this level of activity seems daunting enough, it is dwarfed by the scale of the underlying network of BITs, with over 3,300 BITs and other investment agreements having been concluded since the first such treaty in 1959.11

Exposition of common principles of investment protection

1.07  Yet this patchwork quilt of interlocking but separate bilateral treaties—each the product of its own negotiation—in fact betrays a surprising pattern of common features. No doubt part of the ready success of the investment treaty phenomenon has been the willingness of negotiators to confine their texts, for the most part, to a limited number of rather general guarantees, each expressed in conventional form. The form of the modern BIT may be traced to a series of initiatives shortly after World War II, which produced draft conventions.12 In turn, State practice in this area has been characterised by an ongoing sharing and borrowing of concepts, which one of the authors has described elsewhere as ‘akin to a continuous dialogue within an open-plan office’.13 Moreover, the inclusion of most-favoured-nation (MFN) clauses in most BITs drives convergence in treaty drafting, as each State strives to ensure that the benefits that it is extending to the nationals of one State are consistent with obligations already undertaken in prior treaties—the very point made by Vattel, cited at the outset of this chapter. This means that it is possible to speak of a common lexicon of investment treaty law.

1.08  In earlier decades, these common features might simply have provided food for thought for the dedicated observer of treaty-making practice. However, the inclusion of provision for direct investor-State arbitration in so many modern investment treaties has ensured that the general treaty guarantees would be tested in the crucible of the arbitration process. The result is the emergence of a jurisprudence of investment treaty law, which interprets the key common provisions of the treaties, and applies them to the myriad of contexts in which relations between host State and foreign investor are played out.

(p. 6) 1.09  The procedural framework of investment arbitration has been the subject of elaborate attention from scholars and practitioners.14 But the substantive meaning of the central tenets of investment treaties lies, at times uncomfortably, between two different fields of legal scholarship.

1.10  To the arbitration specialist, the law applicable to the merits is a matter of secondary importance to the procedure, since it may vary from one case to the next, depending upon the expressed wishes of the parties and the discretion of the arbitrators.15 Even where the arbitration involves a sovereign State, public international law is only one potentially applicable source of law.16 However, the conventional approach to applicable law in commercial arbitration is displaced in the context of a claim founded upon an investment treaty. In that case, the treaty itself forms the basis for the parties’ applicable rights and duties. The treaty is itself ‘governed by international law’.17 As such it must be ‘applied and interpreted against the background of the general principles of international law’.18

1.11  To the public international lawyer, however, the BIT sits at the margins of the mainstream. Being lex specialis, the traditional assumption is that its provisions cannot be said necessarily to state, influence, or be derived from principles of customary international law. Delivering its judgment on Preliminary Objections in Diallo in 2007, the International Court of Justice observed:

… in contemporary international law, the protection of the rights of companies and the rights of their shareholders, and the settlement of the associated disputes, are essentially governed by bilateral or multilateral agreements … In that context, the role of diplomatic protection somewhat faded …19

The Court held that it could not find new developments in custom from special treaty regimes in the field since the need for such regimes ‘could equally show the contrary’.20 In the view of the authors of this work, this proposition is highly contestable. Nevertheless it has had its influence on the position of investment treaty law within the firmament of public international law more generally.

1.12  The considerable repository of scholarship on the treatment of aliens, which accumulated in the first half of the twentieth century,21 casts an uncertain light on the modern treaties. To what extent does this old law, which evolved in an era of Western expansionism, and before the independence of much of the developing world, still hold sway in interpreting subsequent compacts?

1.13  The post-war era has been marked by continuing and fundamental disagreement between States on the basic rules of international investment law, precluding any possibility of (p. 7) multilateral agreement. No doubt wisely, therefore, the International Law Commission has studiously avoided tackling the primary rules on the treatment of aliens in its work on State responsibility and diplomatic protection. In the process, it has made clear that its codification of the customary international law rules of diplomatic protection does not apply to BITs, to the extent of any inconsistency.22 Meanwhile, and by contrast, the process of conclusion of BITs has proceeded apace. As FA Mann wryly observed: ‘The cold print of these treaties is a more reliable source of law than rhetorics in the United Nations.’23 It is these treaties, rather than the direct application of customary international law, which have dominated the investment field in modern times.

1.14  When the first edition of this work was published in 2007, there was a striking absence of detailed studies of the substantive rights protected in investment treaties.24 Nearly a decade later, this is certainly not the case. On the contrary, the field has now spawned a welter of secondary literature of all types—from treatises to monographs and journal articles. If the first edition placed on the authors the challenge of mapping the field for the first time, the second edition has posed challenges of a different kind, given the richness of the jurisprudence and the doctrine now available.

1.15  This work retains its original simple—but nevertheless demanding—aim of providing within the compass of a single volume a concise yet critical elucidation of those common features of investment treaties that may form the basis of an arbitration claim, in the light of the reported jurisprudence. In so doing, it seeks to marry the twin influences in this field of both arbitration and public international law. It brings together guidance derived from the applicable general international law with the specific consideration of the concepts in arbitral awards in order, by close analysis, to elucidate the meaning and application of those key common terms. The preparation of the second edition has presented the authors with a uniquely valuable opportunity to revisit and re-evaluate these fundamental questions after nearly a decade of development in the law. In the process they have sought to draw upon the many insights offered by arbitrators and scholars and in turn to reflect upon and refine their own judgements.

1.16  Others have sought to describe the emergence of modern investment treaties within the broad lines of development of international economic law in the twentieth century.25 This book’s objective is modest in comparison. Yet the very novelty and variety of the problems being constantly thrown up in investment arbitrations has made its ambit challenging enough. Above all, the authors hold to the approach that they took in the first edition. While ensuring that they reflect the range of views expressed on difficult issues by others, they consider that the enduring value of a legal treatise lies in the authors’ willingness to assist their readers by coming to reasoned judgements of their own on the issues before them.

(p. 8) B.  Structure

1.17  In addressing this task, the authors have adopted a structure that seeks to address the main substantive principles of investment treaty law in an order in which they are likely to be addressed in arbitration. Accordingly, the work is divided into three parts: ‘Overview’; ‘Ambit of Protection’; and ‘Substantive Rights’. Each part contains three chapters.

Part I:  Overview

1.18  Following this Introduction, Chapter 2 sets out the basic features of investment treaties. It is designed to provide a route map to the key substantive provisions typically found in an investment treaty, and thus to the book as a whole. The chapter is divided into two main sections that deal in turn with BITs and with the major multilateral investment treaties studied in this work. There are many features that these two types of treaties share. Nevertheless, the multilateral investment treaties also contain a number of distinctive elements, reflecting their broader scope and the increased need for inter-State cooperation in their implementation. The chapter concludes by noting the continued relevance of the parallel stream of investment arbitrations under national foreign investment laws.

1.19  Chapter 3, ‘Dispute Settlement’, then looks in more detail at four fundamental issues in the settlement of investment disputes through arbitration—issues which may be said to frame the rest of the debate:

  1. (1)  Dispute Settlement Provisions. In the first place, Chapter 3 analyses the clauses in investment treaties that provide for investor-State arbitration. Although dispute resolution provisions are commonly found towards the conclusion of an investment treaty, it is these provisions, and the array of options that they provide to the investor, which provide the key to the rest of the process. They are therefore dealt with at the outset. The central issue discussed is the existence and limits of the consent to arbitrate.

  2. (2)  Transparency. A feature of investment arbitration, which distinguishes it from commercial arbitration, and which reflects its mixed public/private character, is the extent to which the process, and the resulting award, is exposed to public scrutiny. An element of this is the extent to which non-parties may be heard in the process, whether as amici curiae or otherwise. There have been important developments since the first edition of this work on this topic: in arbitral practice and through the preparation, under the auspices of UNCITRAL, of a new set of ‘Rules on Transparency in Treaty-based Investor-State Arbitration 2013’—a sister set of provisions to those adopted in the ICSID Rules in 2006.

  3. (3)  Legal Nature of the Rights at Issue. The rights contained in investment treaties have been rightly described as having a mixed or hybrid character,26 entered into on the plane of public international law between States, but vindicated directly through claims brought by private investors. This section explores the relative emphasis to be put on the respective roles of the contracting State and the claimant investor in determining the basis of the rights asserted. It places the substantive rights of investment treaties, protected under international law, within the choice of law framework applicable to investment arbitration, in which both international law and host State law have a role to play.

  4. (p. 9) (4)  Interpretation of BITs. The final section examines the overall approach to be taken to the interpretation of investment treaties under the general rule of interpretation provided in the VCLT.

1.20  The chapter concludes by discussing the extent to which precedent is playing a role in the development of investment treaty law.

Part II:  Ambit of protection

1.21  Part II is concerned with three major sets of issues related to the ambit of the protections afforded by investment treaties. In turn, these provisions contribute to the determination of whether the arbitral tribunal may assume jurisdiction to hear the claim. It is divided into three chapters: ‘Parallel Proceedings’; ‘Nationality’; and ‘Investment’.

Parallel proceedings

1.22  Chapter 4 is concerned with a complex set of problems that have arisen in determining the relationship between parallel claims in investment arbitration, and other forms of dispute resolution, notably proceedings in host State courts. These issues typically arise at the preliminary jurisdictional phase of investment arbitration. The response of tribunals has been shaped by a combination of the specific treaty provisions dealing with conflicts of jurisdiction, and consideration of more general principles of law: lis pendens, res judicata, election, and abuse of process.

1.23  The chapter addresses five issues in particular:

  1. (1)  Breach of contract and breach of treaty. What is the essential basis of the distinction between those claims that may properly be characterised as treaty claims, which are therefore amenable to arbitration under the provisions of an investment treaty, and claims which instead are founded upon contractual or other rights? This distinction provides the starting-point for the analysis of the problems in this area, since it provides a tool to delimit the respective provinces of investment treaty arbitration and host State litigation or commercial arbitration.

  2. (2)  Election, waiver, and ‘fork in the road’. May the parties resolve some of the conflict between jurisdictions by requiring the claimant to make a choice between available fora? The techniques which insist that the claimant electa una via comprise election (suggestively entitled ‘fork in the road’), as well as waiver upon the commencement of an arbitration proceeding.

  3. (3)  Prior resort to local remedies. What is the effect of clauses in investment treaties that require a claimant to resort to local remedies prior to arbitration? Few States have insisted on their right to require exhaustion of local remedies, but a number of current investment treaties contain clauses requiring resort to national courts for a time. These clauses have attracted much attention in the jurisprudence since the first edition of this work.

  4. (3)  Internationalised contract claims and ‘umbrella clauses’. Conversely, to what extent can specific provisions in an investment treaty extend the scope of disputes amenable to investment arbitration to contract claims by way of an ‘umbrella clause’? Of all the issues addressed in this chapter, the proper characterisation of the umbrella clause has provoked the sharpest differences of opinion amongst arbitral tribunals, resisting the emergence of a jurisprudence constante. Part D elucidates the four different approaches taken by tribunals on this question in order, analyses them, and presents a synthesis of the principles that emerge.

  5. (p. 10) (4)  Parallel treaty arbitration. Finally, what restrictions does international law impose upon parallel treaty arbitrations brought under different investment treaties, but concerning the same underlying dispute? Since the first edition of this work, arbitrators have come increasingly to recognise that that tools well recognised as general principles of law for the control of parallel or overlapping claims in domestic law require application and adaptation to the specific circumstances of investment arbitration. At the same time, both the drafters of investment treaties and arbitrators have had to confront novel issues in the institution of multi-party claims.

1.24  These issues are not only of fundamental practical importance to the successful invocation of an investment arbitration claim. They also shed light on the underlying role of treaty arbitration vis-à-vis other methods of resolving investment disputes.

Nationality and investment

1.25  Chapter 5 (‘Nationality’) and Chapter 6 (‘Investment’) address the two principal respects in which investment treaties define the ambit of their protection. Since these provisions are the critical, if not exclusive, determinant of the jurisdiction of an arbitral tribunal in an investment claim, they have not unnaturally attracted a considerable amount of litigation since the first edition of this work.

1.26  The authors have not imposed an a priori distinction between jurisdiction ratione personae and jurisdiction ratione materiae. For many purposes, the treaty provisions on nationality may be said to deal with arbitral jurisdiction over persons (ratione personae) while the treaty provisions on investment prescribe the extent of arbitral jurisdiction over subject-matter (ratione materiae). But the treaties themselves proceed simply on the basis of nationality and investment, and the dividing line between persons and things is not exact. Indeed, the definition of ‘investment’ may well extend the reach of a treaty’s protection to many classes of persons (such as minority shareholders) who would have no basis for a claim under customary international law. The temporal application of investment treaties (ratione temporis) is dealt with as part of the consideration of covered investments.

1.27  Chapter 5 (‘Nationality’) identifies the key issues that have proved contentious as: (a) the dual nationality of individuals; (b) the problems arising for corporations under foreign control; and (c) the restructuring of corporate nationality in order to seek to achieve the benefits of treaty protection. It examines the role of precedent in resolving these issues: questioning the relevance of the diplomatic protection cases and analysing the manner and extent to which arbitral decisions in the investment context have developed a jurisprudence constante on the most difficult issues since the first edition.

1.28  Having set forth the nationality tests prescribed in investment treaties and in Article 25 of the ICSID Convention itself, the chapter then takes in turn the position of the individual and the corporation, in order to discuss the case law in detail, addressing each of the key issues identified. Finally, the chapter addresses the effectiveness of denial of benefits clauses. Such clauses enable States to control attempts to claim the benefits of treaty protection by corporations who may meet the formal nationality criteria, but have no other connection with their State of nationality other than incorporation there and are controlled by third State or host State nationals.

1.29  Chapter 6 (‘Investment’) takes up an issue that is central to the field, namely the concept of investment itself. The regime as a whole exists to promote and protect ‘investment’. It (p. 11) proceeds on the basis that investment is a form of economic activity that may properly be distinguished from other forms of economic activity and afforded treaty protection. Article 25 of the ICSID Convention provides that ‘[t]he jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment.’ The Convention makes no attempt to offer a definition of ‘investment’. By contrast, investment treaties typically do contain elaborate definitional sections. These provisions do clarify the legal means by which an investment may be made. That is to say, they determine the nature of the asset or proprietary interest that is capable of constituting an investment—its legal materialisation. They do not clarify the essential economic concept of an investment.

1.30  Since the publication of the first edition of this work, this issue has become an arena of great controversy in arbitral case law. Section B of Chapter 6 tackles this central question both within and outside the scope of the ICSID Convention. It then addresses a number of specific issues: (a) determining the time when an investment is made in relation to the temporal scope of the treaty protections; (b) identifying the extent to which pre-contract investment may obtain treaty protection; (c) locating the place of an investment; and (d) analysing the role of host State law in defining ‘investment’.

1.31  Finally, Chapter 6 examines a set of issues that arise out of indirectly held investments: (a) the relation between the losses suffered by a subsidiary in the host State and the investor’s investment; (b) the rights of minority shareholders; (c) claims brought by holding companies; (d) the position of ultimate beneficiaries; and (e) the position of portfolio investments. The chapter provides an analysis of investment approval requirements. It concludes with a synthesis of the conclusions reached as a result of the authors’ analysis.

Part III:  Substantive rights

1.32  The third part of the book deals with the core substantive rights accorded to investors under an investment treaty. It is divided into three chapters: ‘Treatment of Investors’, ‘Expropriation’, and ‘Compensation’.

Treatment of investors

1.33  In general, investment treaties seek to protect investors by assuring them of two types of treatment. The standards of fair and equitable treatment and full protection and security have been described as ‘non-contingent’, in the sense that the protections that they extend are absolute.27 They are not dependent upon the extent of protection afforded to others. By contrast, the provisions for national treatment and MFN treatment are contingent standards. The extent of the protection that they afford is dependent upon the treatment that the host State metes out to others, who stand in the requisite legal relationship to the protected investor.

1.34  The concepts of national treatment and MFN treatment have long been used in international economic law. Such protections are only obtained by way of express provision by treaty. The non-contingent standards, on the other hand, while employing language distinctive to the treaty context, perform in substance a task that is undertaken in customary international law by the minimum standard of treatment of aliens.

(p. 12) 1.35  Chapter 7 opens by placing these central provisions on the treatment of investors within their context. Section 1 addresses (a) the function that they perform, (b) the structure of investor treatment provisions within investment treaties, (c) the historical evolution of the treatment standards, and (d) the use of general rules in their interpretation.

1.36  Section 2 then analyses the way in which the treatment standards have been developed and applied in contemporary case law. It considers in turn the two principal non-contingent standards: (a) fair and equitable treatment; and (b) full protection and security. This is followed by the contingent standards: (c) national treatment; and (d) most-favoured-nation treatment.

Non-contingent standards

1.37  The assurance of ‘fair and equitable treatment’ provides the most basic protection for foreign investment. Reflecting its foundational function, it has by design an open-textured character, capable of application to many different types of State measures that may constitute an international delict. This is not an unusual feature of general rules of delictual liability, whether in national or international law. It imposes a special responsibility on arbitral tribunals to develop the application of the general standard through arbitral decision in ways that achieve a reasonable degree of consistency and predictability—the very Rule of Law qualities that the standard would impose on national decision-making. In part because of its elasticity, this standard has proved to be the most frequently invoked of all the investment treaty standards. It has also provoked the most public controversy, since it directly engages the relation between the proper province of international law in assuring a basic standard of justice of general acceptance and the right of States to pursue their own regulatory policies under national law in the public interest.

1.38  Treaty drafters and arbitrators, in seeking to address this larger question, have done so in part through the medium of a legal debate about (a) the relation between the treaty standard and the minimum standard of treatment in customary international law and (b) the extent to which either standard is capable of evolution over time. Some have argued that the treaty standard is detached from custom, save where the treaty language expressly prescribes a link. Where a link with custom is expressly made, others have contended that the customary standard remains unchanged from the approach taken in arbitral awards in the early part of the twentieth century.

1.39  The approach taken in this chapter is to suggest that this debate is largely misdirected. It proceeds upon a false dichotomy between the treaty and customary standard; it posits incorrectly that the customary standard had a fixed content that was generally accepted at any particular time; and it distracts attention from the core question of the contemporary content of a standard that must be applied in quite different contexts to those of an earlier era of international law. This is not to say, however, that the standard is a licence for arbitral discretion, such that the tribunal is entitled simply to substitute its view for that of the organs of the host State. On the contrary, the tribunal must always be satisfied that the State’s international responsibility is engaged because its breach of the standard rises to the level of an international delict.

1.40  Fortunately, the elaboration of the standard through case law since the first edition of this work gives a much greater degree of clarity as to the circumstances in which the standard is likely to be breached. These developments in the case law necessitate extended discussion and analysis.

(p. 13) 1.41  Sub-section 3A divides its consideration of the application of the fair and equitable treatment according to the three functions of government: judicial, legislative, and executive.

1.42  The judicial function considers the circumstances in which the standard may be breached as a result of a denial of justice by the judicial organs of the host State. It addresses four different ways in which a denial of justice may arise: (a) denial of access to a court; (b) delay; (c) a failure in due process; and (d) the extent to which the content of the State court’s judgment may evidence a denial of justice. It then considers (e) the requirement that there be finality within the national judicial system and (f) the relation between a claim founded upon an allegation of denial of justice and other claims.

1.43  The legislative function addresses the scope of regulatory stability in host State law. It starts from the basic premise that the investor must take host State law at the time of investment as he finds it. It then addresses the difficult question of the extent to which the standard protects from subsequent changes in host State law. Accepting the general proposition that the standard is not a stabilisation clause protecting the investor from regulatory changes, this section considers the nature of the showing that must be made in the more limited class of cases in which the treaty standard is engaged vis-à-vis legislative change.

1.44  The executive function considers the application of the standard in relation to the administrative decisions of the executive branch. In this context, the international law standard performs a role fundamental to the Rule of Law in holding the executive to account for the ways in which its decisions may affect private persons. In the investment treaty context, the awards have primarily been concerned with identifying cases in which the claimant may properly assert that he had a legitimate expectation of a certain type of treatment that has been breached by the host State’s subsequent executive decisions. A second equally important category of cases concerns due process in administrative decision-making.

1.45  Sub-section 3B turns to the treaty assurance of ‘full protection and security’ for investments. It addresses three questions: (a) what standard of care is applicable under this head; (b) against whose acts does the protection apply and (c) what kinds of interests are protected by this standard?

Contingent standards

1.46  The discussion of the contingent standards opens by drawing together the common threads of national treatment and MFN treatment and discussing their relation with the more general right of non-discrimination. Developments in the case law since the first edition have made it both possible and necessary to give a more extended analysis of the two contingent standards. Experience has shown that, although these are terms that have a long lineage in treaties of commerce and trade more generally, they apply in distinctive ways in their application to the investment context.

1.47  National treatment, the subject of sub-section 3C, considers in turns each of the three elements necessary to make good a claim under this head: (a) the identification of the treatment accorded by the host State to the claimant; (b) the requirement that the foreign investor be ‘in like circumstances’ with local investors (the comparator); and (c) the level of treatment accorded: the host State must treat the foreign investor ‘less favourably’ than the local investor.

1.48  Most-favoured-nation treatment, in sub-section 3D, addresses a similar set of issues in the application of the standard to the substantive treatment afforded to investors from third (p. 14) States. It then concludes with an extended discussion of an issue that has proved controversial in both the jurisprudence and the doctrine—a controversy that has, if anything, increased since the first edition of this work. That is the extent to which the dispute settlement provisions of the basic treaty (including the consent to arbitration) may be subject to variation if they can be said to provide treatment less favourable than that accorded under another treaty entered into between the host State and a third State. Drawing upon insights from the case law and from the recent renewed work of the International Law Commission on this topic, this section offers a synthesis as to how this topic may be analysed and decided.

Expropriation

1.49  By contrast with the rights discussed in Chapter 7, the protection of property rights in investments from expropriation has long been the subject of close consideration by arbitral tribunals. However, the factual matrix in which the modern expropriation claim arises may well be very different to the context of outright nationalisation of foreign property, which characterised many of the earlier causes célèbres. Giving her lectures at The Hague Academy of International Law in 1982 on ‘The Taking of Property by the State’,28 Rosalyn Higgins commented on the relative paucity of literature dealing with the concept of ‘indirect expropriation’, which addressed many of the more difficult questions in which the law of State takings had to be applied in modern times.29 The observation proved prescient. Many of the modern arbitral awards have been concerned with the determination of the appropriate boundary between two potentially conflicting values: a legitimate sphere for State regulation in the pursuit of public goods on the one hand (even if it may result in a loss of economic benefits to those subject to the regulation); and the protection of private property from State interference on the other.

1.50  Chapter 8 enriches consideration of this important topic by elaborating the circumstances in which tribunals have found State conduct to be expropriatory. It addresses the degree of State interference required to constitute expropriation, the kinds of Governmental measures that may constitute expropriation, and the nature of the claimant’s rights that are capable of being expropriated.

Compensation

1.51  The final chapter is concerned with the approach to be taken to the determination of the appropriate level of compensation for breach of treaty rights. The law on this topic is an amalgam of the provisions of general international law with the specific provisions of the treaties themselves. Compensation is a potential form of reparation for any internationally wrongful act of a State.30 This part of the work is therefore closely linked to the international law of State responsibility. But the specific provisions of investment treaties, as lex specialis, have resolved a number of contentious issues as to the appropriate approach to be taken to the calculation of the amount of compensation. Nevertheless, the detailed principles to be applied when determining the amount of compensation, both for expropriation claims, as for other claims for breach of treaty, have continued to raise difficulties for arbitral tribunals. This chapter discusses the range of options adopted in actual practice by tribunals, and (p. 15) offers insights into the application in practice of the main methods of valuation, notably the ‘discounted cash flow’ (DCF) method. It then addresses, in Section D, the important and neglected topic of causation—a question of particular importance in cases in which the claimant seeks compensation for breaches that do not amount to a total loss of the investment.

1.52  Thereafter the chapter considers a set of five topics that are assuming greater practical importance in the approach of tribunals to the award of remedies: (a) the award of moral damages in exceptional circumstances; (b) the claimant’s duties of mitigation of loss; (c) the potential for the availability of non-pecuniary remedies; (d) interest; and (e) costs.

C.  Approach

1.53  With this syllabus in mind, it is now possible to make three points about the overall approach that the authors have sought to adopt throughout the work.

The principles of investment treaty law

1.54  The overall purpose of the book is to distil the principles that apply in the application of the general standards found in investment treaties. This is not a matter of mere description. On the contrary, it is the authors’ view that what is most needed in this area is to subject the awards to critical analysis. Where possible, the authors have also sought to assist the reader by providing a principled approach to problem-solving, setting out guidance by way of specific conclusions.

Awards

1.55  The authors consider that this critical analysis is best fostered through a selective approach to reference to both awards and to treaties. In contrast to commercial arbitration, where the reporting of awards is often restricted or fragmentary, the practice in investment arbitration, described in more detail in Chapter 3, has come to be that the majority of awards are made public. They are now widely available in electronic form, in particular on Oxford Reports on International Investment Claims (IIC),31 on the website for the International Centre for the Settlement of Investment Disputes (ICSID),32 and on Investment Treaty Arbitration (ITA).33 As IIC is provided by Oxford University Press and has a broad coverage of awards, the authors have included in this edition cross-references to the IIC report numbers in the case citations.

1.56  As the volume of awards has continued to grow, it has become more and more important to be discriminating. This work does not purport to be an exhaustive digest. Rather, it aims to select and discuss in depth the significant investment arbitration awards in terms of doctrinal development or the exposition of original perspectives.

Treaties

1.57  How should a work on the principles of investment treaties cope with the sheer multiplicity of texts? With over 2,500 agreements in force and more in the offing, an attempt to be (p. 16) encyclopaedic would quickly bury the reader under the weight of detail and obscure the lines of principle. In addition to the official treaty series (which the authors have cited wherever possible), the United Nations Commission on Trade and Development (UNCTAD) has also collected many investment treaties in its Investment Policy Hub in electronic form.34

1.58  Any process of interpretation of the rights arising from an investment treaty must start from the specific provisions of the treaty in force between the relevant States. However, the striking degree of commonality of language between treaties does facilitate a general work of this kind. This is particularly so as many States, capital importing as well as capital exporting, have adopted model form BITs. These are of more general juridical significance as evidence of State practice, since they are a statement of the provisions, which that State considers acceptable in its international relations.

1.59  Nevertheless, a choice has had to be made for the purpose of this volume. In the result, the authors have selected the model bilateral investment treaties of Sri Lanka (as a representative example of a capital importing State), the United Kingdom, France, Germany, the Netherlands, and the United States. Each of these is reproduced in full in the Appendices, and the clauses relevant to the particular topic are analysed chapter by chapter. These prototypes have also had considerable influence on the treaty-making practice of other States. The United States 2012 model BIT35 is of particular current significance, and reflects the formulation of investment protection provisions in new-model free trade agreements.36 Other bilateral treaties are referred to in the text where they offer particular solutions, which are germane to the topic or award under discussion.

1.60  In addition to the bilateral treaties, there are two important multilateral instruments in this field: Chapter XI of the North American Free Trade Agreement (NAFTA)37 and the Energy Charter Treaty (ECT),38 whose provisions are reproduced in the Appendix and are analysed in detail in the text. Both of these treaties have a restricted scope: NAFTA is restricted ratione personae to its three contracting States (Canada, Mexico, and the United States). The ECT is restricted ratione materiae to the energy sector. Further, in important respects they adopt legal solutions that differ from the bilateral treaties. But both treaties represent significant State practice in the investment field, and both have given rise to a number of significant arbitration awards.

1.61  There have also been important multilateral developments in the investment field in the Asia-Pacific region since the first edition of this work. The member States of ASEAN concluded a new Comprehensive Investment Agreement in 2009.39 An ASEAN–Australia–New Zealand Free Trade Agreement followed in 2010.40

(p. 17) 1.62  A potentially even more significant multilateral agreement, given the range of States parties and the scope of its coverage, is the Trans-Pacific Partnership Agreement (TPPA).41 At the time of writing, the TPPA has been signed. It has not yet come into force and the question whether it ought to be ratified is controversial in a number of the signatory States. The authors have decided to include reference to its salient provisions in this edition. They represent the most recent solutions adopted in treaty drafting in this field and will have, if the Treaty comes into force, very widespread and profound effect.

Relevance of general public international law

Custom in treaty interpretation

1.63  The book starts from the proposition that investment treaties are not self-contained regimes.42 The meaning of their operative terms must therefore be informed by reference to the ‘relevant rules of international law applicable in the relations between the parties’.43 On one level, this requirement states little more than a truism—no treaty can exist in isolation from general international law.44 But it is nevertheless indispensable in reminding the treaty interpreter of the potential guidance in interpretation which may be obtained beyond the four corners of the treaty. This may be expressed in terms of a presumption with both positive and negative aspects:

  1. (1)  negatively that, in entering into treaty obligations, the parties intend not to act inconsistently with generally recognised principles of international law or with previous treaty obligations towards third States;45 and

  2. (2)  positively that the parties are taken ‘to refer to general principles of international law for all questions which [the treaty] does not itself resolve in express terms and in a different way’.46

1.64  This approach was specifically approved as part of a general approach to interpretation of investment treaties by the Tribunal in the first ICSID treaty arbitration: Asian Agricultural Products Ltd v Sri Lanka.47 Indeed, in this context, there may be particularly compelling reasons to refer to general international law in interpretation. In the first place, there is evidence that the treaty framers often consciously sought not to go beyond obligations that (p. 18) were thought to reflect the current state of international law.48 Their purpose was to enhance the mechanisms for the protection of the rights, rather than to extend the rights themselves.

1.65  In some treaties, this is made express. Thus, for example, the French prototype guarantees: ‘traitement juste et équitable, conformément aux principes du Droit international’.49 The 2012 US model BIT goes even further, enshrining ‘the customary international law minimum standard of treatment of aliens’,50 and recites a shared understanding of the parties that the expropriation and compensation clause ‘is intended to reflect customary international law’.51 For good measure, the US model even offers a definition of customary international law as resulting from ‘a general and consistent practice of States that they follow from a sense of legal obligation’.52 Even the most determined classicist could not object.

1.66  Article 1105 of NAFTA requires that: ‘Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.’ Controversy among arbitral tribunals as to whether that form of words left room for a more expansive reading of ‘fair and equitable treatment’53 was settled by the NAFTA Free Trade Commission, which issued an Interpretation of the Article providing that it ‘prescribes the customary international law minimum standard of treatment of aliens’ and not more.54

1.67  Even where the matter is not dealt with expressly, there is much room for reference to custom. In the case of expropriation, for example, the definition commonly found in investment treaties has been so patently adopted from a formulation widely employed in customary international law that it invites reference to the general authorities on its meaning. Similarly, the standard of full protection and security is on all fours with that expected in customary international law.55 In the case of compensation, the concept fits within a larger framework of reparation in the law of State responsibility.

1.68  Practical considerations may impel the interpreter to seek guidance from general international law. Investment treaties typically enshrine guarantees of investor treatment in general open-textured language. The standard extrinsic aids to treaty interpretation may yield only limited guidance. There is rarely much in the way of travaux préparatoires. Bilateral treaties normally lack any formal mechanism for the contracting States to agree subsequently on troublesome matters of interpretation.56 In contrast, then, to a complex multilateral treaty in other spheres of international law, the bilateral investment treaties appear more than usually dependant upon their wider context.

(p. 19) Limitations in custom as a source of law

1.69  Yet the relationship between investment treaties and general international law remains deeply problematic for at least three reasons.

1.70  In the first place, it is evident that on many issues, States have entered into investment treaties precisely in order to remedy perceived gaps or limitations in the protections afforded by customary international law in the field of the treatment of aliens. The law of diplomatic protection imposes a number of strict pre-conditions upon the exercise of an international claim. Conditions such as the requirement to exhaust local remedies, or the strict rule on nationality of claims, make good sense in the context of a remedy of last resort between sovereign States. But, as will be seen, it was part of the very object and purpose of investment treaties, with their provision for direct investor-State arbitration, to remedy the perceived shortcomings in diplomatic protection. This objective would be fundamentally undermined if restrictions of this kind were to be re-imported into investment treaties by the back door of interpretation. In any event, many of the rights found in investment treaties require the express agreement of States. National treatment and MFN treatment, for example, must always be creatures of convention, not custom. The same is true for dispute settlement provisions, and for many of the more detailed clauses summarised in Chapter 2. In short, where the treaty itself resolves the matter in a different way, it must prevail as lex specialis.

1.71  Secondly, the invocation of customary international law is apt to neglect the essentially contested nature of so many of the rights in customary international law. Even in the inter-war years, when the development of this branch of the law reached its zenith in terms of both regular application and codification, the very existence of many of the rights was denied by many key capital-importing States.57 The fate, since World War II, of any attempt to frame a multilateral treaty on investment; the development in the General Assembly of the doctrine of permanent sovereignty over natural resources; the early exclusion by the International Law Commission of primary rules on the treatment of aliens from its codification of the law of State responsibility and diplomatic protection; the paucity of post-war jurisprudence applying these customary rights—all of these speak volumes as to the difficulties of stating the rules of custom in this field with any confidence. Of course, one purpose of the proliferation of treaties has been to remedy this uncertainty. The investor, who has the benefit of an applicable investment treaty, at least need not ask whether the right exists. But the wide extent of treaty protections may also be said to limit the possibility of the further development of custom outside the treaty context. In the result, one is still left with a treaty provision of an open-textured character that requires interpretation.

1.72  Thirdly, the overwhelming majority of State practice in this field in the last few decades has been through the medium of the very treaties that are the subject of this book. Is all of this to be ignored in treaty interpretation on the grounds that ‘the application of international law rules on interpretation of treaties to identical or similar provisions of different treaties may not yield the same results, having regard to, inter alia, differences in the respective contexts, objects and purposes, subsequent practice of parties, and travaux préparatoires’?58 Undoubtedly, the bilateral character of most investment treaties precludes the adoption of (p. 20) binding rules of general application across the whole field. But the practice of international arbitrators, documented in this book, demonstrates an extensive exchange of ideas on the interpretation of similar provisions.

The emergence of a common law of investment protection

1.73  What explanation is to be given to this phenomenon? In Chapter 3, it is submitted that, while no de jure doctrine of precedent exists in investment arbitration, a de facto doctrine has in fact been building for some time. This was well put by the Tribunal in AES v Argentina, when it held that ‘precedents may also be rightly considered, at least as a matter of comparison and, if so considered by the Tribunal, of inspiration.’59 The Tribunal in Saipem v Bangladesh went further in holding that:60

The Tribunal considers that it is not bound by previous decisions. At the same time, it is of the opinion that it must pay due consideration to earlier decisions of international tribunals. It believes that, subject to compelling contrary grounds, it has a duty to adopt solutions established in a series of consistent cases. It also believes that, subject to the specifics of a given treaty and of the circumstances of the actual case, it has a duty to seek to contribute to the harmonious development of investment law and thereby to meet the legitimate expectations of the community of States and investors towards certainty of the rule of law.

1.74  The extensive exchange of ideas between tribunals has been facilitated by the wide publication of awards, as well as by scholarly journals61 and committees. Further, it is no accident that this new jurisprudence has developed in the internet era, which has rapidly built a global community of scholars, practitioners, and arbitrators exchanging ideas about current developments in the field as they arise.62

1.75  Does this ongoing conversation between arbitrators, in which findings arrived at in prior awards on particular provisions are cited and relied upon as authorities in the interpretation of different investment treaties, have any broader significance for the development of international law in the field? It is the thesis of this book that what is emerging is a common law of investment protection, with a substantially shared understanding of its general tenets. This still depends for the most part on the existence of a treaty forming the basis for the enforceable rights. It will always yield to particular provisions of a treaty which diverge from the general rule, or to other contrary indications resulting from the application of the rules of treaty interpretation. But the differences between treaties, and indeed between treaty and the substantive rights in custom, may be less than the common elements. As one award put it, ‘the difference between the Treaty standard … and the customary minimum standard, when applied to the specific facts of a case, may well be more apparent than real.’63

(p. 21) 1.76  This process may share more with the way in which ‘general principles of law common to civilized nations’ are used as a source of law in international law.64 Chapter 4 explores the way in which the general principles of res judicata and lis pendens, common to civilised nations, may be applied in investment arbitration, where the parallel claims meet the conditions for the application of the doctrines. In Chapter 7 it is submitted that the content of the principle of ‘fair and equitable treatment’ is to be derived by reference to such general principles, and reference is also made to general principles as a basis for the approach to causation in determining damages in Chapter 9.65

1.77  The point here is a related, but broader, one. It is that the very iterative process of the formulation and conclusion of investment treaties, and the vindication of the rights contained in those treaties in arbitration, is producing a set of general international principles about the meaning of the common substantive clauses, and indeed the larger operation of the system of investment arbitration.

1.78  Lest it be thought that too uncritical a picture is being presented of the internal coherence of investment treaty law, a note of real caution must be added. Investment arbitration lacks an appellate structure. This was a deliberate choice of the States that negotiated the ICSID Convention. Those States hard wired into the design of the system of dispute settlement that they were creating a strong preference for the finality of awards. The grounds for review on annulment under art 52 are narrowly framed and exclude substantive appeal on grounds of error of substantive law. In this respect, the investment field stands in contrast to its sister field of world trade law, in which States saw the adoption of an appellate structure as a key element in the new Dispute Settlement Body created by the Marrakesh Agreement.66

1.79  There are few levers within the system to achieve consistency beyond the Saipem Tribunal’s self-enforcing injunction. A criticism of investment treaty arbitration that is constantly made is that it has failed to achieve a jurisprudence constante. Certainly, the research presented in this book demonstrates that there continue to be a number of issues of law that seriously divide tribunals despite, or perhaps because of, the number of cases in which they have been tested. Examples include the legal nature of the umbrella clause,67 and the question whether, and if so to what extent, the dispute resolution provisions in a BIT may be affected by an MFN clause.68 The arbitral system itself lacks a ready mechanism to resolve such issues. More generally, the atomised nature of the arbitral process may lead to the institution of numerous claims arising out of the same or closely related State measures. These are not claims that can easily be consolidated, given the diversity of parties and of constituent treaties. Yet the proliferation of related claims of this kind can pose acute problems for the achievement of a consistent approach on common legal issues.

1.80  If inconsistency were endemic across the whole field, it would have serious Rule of Law implications for the legitimacy of investment arbitration as a mechanism for dispute settlement that could continue to command the respect of the participants. It would lead to a lack of predictability that would inhibit the very stability in legal relations that the regime as a (p. 22) whole seeks to promote. This would in turn have serious negative effects for both investors and for States, since the very uncertainty would chill long term planning.69

1.81  Fortunately, the detailed research presented in this work suggests that, while the risk of inconsistency remains, there is a degree of convergence in the case law around common principles. To some extent, this is to be expected after what has now been two generations of modern investment awards. This process is akin to that which may be expected in the development of any category of delictual liability. It is only once the principles have been tested in the litigation process against a sufficient number of fact patterns that it becomes possible to discern the detailed working out of the rule and its exceptions. The modest aim of the present work is to contribute to that process through exposition and analysis.

The contribution of treaty practice to the development of custom

1.82  To what extent can it be said that this common treaty practice itself contributes to the development of customary international law?70 FA Mann gave an initial answer to this question in 1981. While accepting the general point made by the International Court of Justice in the North Sea Continental Shelf Cases,71 that it is difficult to deduce a rule of international law from a treaty, he continued that the significance of that decision should not be overrated, at least in the context of investment treaties:

There is, in the first place, the very large number of treaties the scope of which is increased by the operation of the most-favoured-nation clause. There is, secondly, the fact that many States which have purported to reject the traditional conceptions and standards included in these treaties have accepted them, when (if the colloquial phrase may be permitted) it came to the crunch. There is, thirdly, the most important fact that these treaties establish and accept and thus enlarge the force of traditional conceptions. Is it possible for a State to reject the rule according to which alien property may be expropriated only on certain terms long believed to be required by customary international law, yet to accept it for the purpose of these treaties? The paramount duty of States imposed by international law is to observe and act in accordance with the requirements of good faith. From this point of view it follows that, where these treaties express a duty which customary international law imposes or is widely believed to impose, they give very strong support to the existence of such a duty and preclude the Contracting States from denying its existence.72

1.83  This last point merits careful consideration, especially in the light of the practice adopted in many States of promulgating model investment treaties, which indicate the standards which those States find acceptable; and the adoption, express or implied, in many such treaties of standards which are based upon customary international law, especially in relation to the non-contingent treatment standards and expropriation. The result is a convergence, on these issues, between treaty practice and custom, in which the modern understanding of the content of the customary right is being elaborated primarily through the treaty jurisprudence. (p. 23) As the Tribunal put it in CMS v Argentina, ‘the fact is that lex specialis in this respect is so prevalent that it can now be considered the general rule.’73

1.84  This process of cross-fertilisation in the development of the customary standards through the treaty jurisprudence saves general international law from being cast in aspic at some earlier point in time; and saves treaty tribunals from isolation and inconsistency. It reflects the fact that the general standards are of their nature evolutionary.74 The Tribunal in Mondev75 described this process in the following way:

Thirdly, the vast number of bilateral and regional investment treaties … almost uniformly provide for fair and equitable treatment of foreign investments, and largely provide for full security and protection of investments. Investment treaties run between North and South, and East and West, and between States in these spheres inter se. On a remarkably widespread basis, States have repeatedly obliged themselves to accord foreign investment such treatment. In the Tribunal’s view, such a body of concordant practice will necessarily have influenced the content of rules governing the treatment of foreign investment in current international law.76

1.85  It is this ‘body of concordant practice’ which serves as the central, and defining, feature of modern investment law, and which may in the end provide the most satisfactory explanation for the extensive application of precedent in the recent treaty jurisprudence.

A balance between the rights of investors and host States

1.86  The final element of the overall approach has been a conscious effort to discern an appropriate balance between protection of the rights of foreign investors on the one hand, and recognition of the legitimate sphere of operation of the host State on the other. After all, host States have a responsibility to govern in the interests of all of those within their jurisdiction, and to promote many other public objectives as well as investment. As the editors of Oppenheim put it: ‘The requirements of international law in this field … represent an attempt at accommodation between the conflicting interests involved’.77 The need to chart such a balance was recognised by the Tribunal in CMS v Argentina, which held: ‘The right of the host State to adopt its economic policies together with the rights of investors under a system of guarantees and protection are at the very heart of this difficult balance, a balance which the [ICSID] Convention was careful to preserve.’78

1.87  Investment arbitration wears a very public face. To an extent that could not have been fully anticipated even at the time of the publication of the first edition, the provisions in BITs and free trade agreements that provide for the arbitration of investment disputes have aroused considerable public controversy amid claims that the process gives insufficient weight to other social goods or that it infringes national sovereignty. These objections have not been limited to traditional capital-importing States. Arbitration under NAFTA has provoked (p. 24) considerable public dissent within North America.79 This controversy has extended to civil society in other States in the wake of the negotiation of the TPPA and to the Trans-Atlantic Trade and Investment Partnership (TTIP), in particular. It has been rightly observed that: ‘If investment arbitration is to fulfil its promise, however, some mechanism must be found to promote greater sensitivity to vital host State interests.’80

1.88  There is some evidence that these concerns are impacting on drafting practice. The 2012 US model BIT81 incorporates numerous innovations designed to reflect the public interests of States, and to achieve its investment objectives ‘in a manner consistent with the protection of health, safety, and the environment, and the promotion of internationally recognized labor rights’.82 There are specific articles that are designed to ensure that investment measures will not conflict with environmental and labour standards.83 The model treaty’s extended definition of expropriation expressly provides: ‘Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations’.84

1.89  Both NAFTA and the ECT similarly make provision for environmental and other measures. Article 1114 of NAFTA provides that nothing in its investment chapter is to prevent a State party from adopting environmental measures and that investment should not be encouraged by relaxing domestic health, safety, or environmental measures. Article 19 of the ECT commits State parties to taking account of environmental considerations in the formulation of energy policy.85 The current high-water mark in the attempts of treaty drafters to articulate a balance between public and private interests is the EU–Canada Comprehensive Economic and Trade Agreement (CETA).86

1.90  Where, however, disputes arise under treaties already in force, these issues will have to be worked out by arbitrators in the course of applying the general, unqualified treaty language. In so doing, arbitrators must still adopt a balanced approach between the rights of investors, and those of host States. As was rightly observed in Saluka:

The protection of foreign investments is not the sole aim of the Treaty, but rather a necessary element alongside the overall aim of encouraging foreign investment and extending and intensifying the parties’ economic relations. That in turn calls for a balanced approach to the interpretation of the Treaty’s substantive provisions for the protection of investments, since an interpretation which exaggerates the protection to be accorded to foreign investments may serve to dissuade host States from admitting foreign investments and so undermine the overall aim of extending and intensifying the parties’ mutual economic relations.87

(p. 25) 1.91  On the present state of the law, it cannot be said that this dictum has always been observed. Where the authors have found instances of the balance having swung too far in favour of investors or of States, they have said so. However, a close analysis of the jurisprudence developed through the recent awards demonstrates that the general concepts contain within them considerable flexibility. This enables arbitrators to balance the public and the private interest, and to ensure that the treaty protections retain their role as a safety net, leaving a considerable margin of appreciation for the exercise of State sovereignty. Indeed, the open-textured nature of tests such as fairness and equity invites such an exercise. This work seeks to facilitate such a balancing exercise, by isolating the factors that tribunals have regarded as significant in deciding on which side of the line particular conduct may fall.

Footnotes:

1  M de Vattel, Le Droit des Gens ou Principes de la Loi Naturelle (1758) trans C Fenwick (1916) Book II Chapter VIII para 28, vol III, 122.

2  E Root, ‘The Basis of Protection to Citizens Residing Abroad’ (1910) 4 AJIL 517, 518–19.

3  J Paulsson, ‘Arbitration without Privity’ (1995) 10 ICSID Rev-FILJ 232, 256.

4  Convention on the Settlement of Investment Disputes between States and Nationals of other States (signed 18 March 1965, entered into force 14 October 1966) 575 UNTS 159 (‘ICSID Convention’).

5  ibid (Appendix 12 below), art 25.

7  G Burdeau, ‘Nouvelles Perspectives pour l’Arbitrage dans le Contentieux Economique intéressant l’Etat’ [1995] Revue de l’Arbitrage 3, 16.

8  Though it may be able to assert a counter-claim.

9  Asian Agricultural Products Ltd v Sri Lanka (Award) ICSID Case No ARB/87/3, 4 ICSID Rep 245, IIC 18 (1990, El-Kosheri P, Goldman & Asante (dissenting)) (‘AAPL v Sri Lanka’).

10  UNCTAD ‘Investment Dispute Settlement’ Investment Policy Hub <http://investmentpolicyhub.unctad.org/isds> (last accessed 6 September 2016).

11  UNCTAD ‘International Investment Agreements’ Investment Policy Hub <http://investmentpolicyhub.unctad.org/IIA> (last accessed 23 August 2016).

12  H Abs and H Shawcross, ‘Draft Convention on Investments Abroad’ (1960) 9 J Pub L 115, 116 and OECD, ‘Draft Convention on the Protection of Foreign Property and Resolution of the Council of the OECD on the Draft Convention’ (1967). On the historical evolution see further 7.54 et seq below.

13  C McLachlan, ‘The Principle of Systemic Integration and Article 31(3)(c) of the Vienna Convention’ (2005) 54 ICLQ 279, 284.

14  See, notably, Schreuer; see also L Reed, J Paulsson and N Blackaby, Guide to ICSID Arbitration (2nd edn, 2010).

15  For further discussion see: Dicey 712 (chap 16 Rule 57(3)) and commentary at 730–4; and Redfern chap 3.

16  See ICSID Convention, art 42; and see further 3.98 et seq below; Schreuer 545–639.

17  Vienna Convention on the Law of Treaties (signed 23 May 1969, entered into force 27 January 1980) 1155 UNTS 331 (VCLT) art 2(1)(a).

18  A McNair, The Law of Treaties (1961) 466.

19  Diallo (Guinea v Democratic Republic of the Congo) (Preliminary Objections) [2007] ICJ Rep 582, para 88.

20  ibid para 90.

21  Notably Borchard; Freeman; Harvard Research Draft, ‘Responsibility of States for Damage done in their Territory to the Person or Property of Foreigners’ (1929) 23 AJIL 133 (Special Supplement).

22  ILC ‘Diplomatic Protection: Draft Articles’ (Dugard, Special Rapporteur) [2006] 2(2) YB ILC 22, art 17.

23  FA Mann, ‘British Treaties for the Promotion and Protection of Investments’ (1981) 52 BYIL 241, 250 reprinted in FA Mann, Further Studies in International Law (1990) 234, 246.

24  Both R Dolzer and M Stevens, Bilateral Investment Treaties (1995) and G Sacerdoti, ‘Bilateral Treaties and Multilateral Instruments on Investment Protection’ (1997) 269 Recueil des Cours 251 predated the modern advent of investment claims.

25  eg AF Lowenfeld, International Economic Law (2002); M Sornarajah, The International Law on Foreign Investment (3rd edn, 2010); P Muchlinski, Multinational Enterprises and the Law (1995).

26  Z Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 151.

27  H Walker, ‘Modern Treaties of Friendship, Commerce and Navigation’ (1957–1958) 42 Minn LR 805, 810–11.

28  (1982) 176 Recueil des Cours 259.

29  ibid 322.

30  ILC ‘Responsibility of States for Internationally Wrongful Acts: Draft Articles’ (Crawford, Special Rapporteur) [2001] 2(2) YB ILC 30, art 36.

35  2012 US model BIT (Appendix 6 below).

36  cf eg Trans-Pacific Partnership Agreement (signed 6 February 2016, not yet in force) (TPPA), available at <www.tpp.mfat.govt.nz/text> (Chapter 9, Appendix 11 below).

37  North American Free Trade Agreement (adopted 17 December 1992, entered into force 1 January 1994) 107 Stat 2057, CTS 1994 No 2 (NAFTA) (Chapter 11, Appendix 1 below).

38  Energy Charter Treaty (signed 17 December 1994, entered into force 16 April 1998) 2080 UNTS 100 (ECT) (Part III, Appendix 2 below).

39  ASEAN Comprehensive Investment Agreement (adopted 26 February 2009, entered into force 29 March 2012) (ACIA) (Appendix 3 below).

40  ASEAN–Australia–New Zealand Free Trade Agreement (signed 27 February 2009, entered into force 1 January 2010) [2010] NZTS 1 (ASEAN Agreement).

41  Trans-Pacific Partnership Agreement (signed 6 February 2016, not yet in force) (TPPA), available at <www.tpp.mfat.govt.nz/text> (Chapter 9, Appendix 11 below).

42  See generally ILC ‘Fragmentation of International Law: Difficulties arising from the Diversification and Expansion of International Law, Report of the Study Group of the International Law Commission’ (Koskenniemi, Chair) UN Doc A/CN4/L682, 4 April 2006, UN Doc A/CN.4/ L.702, 18 July 2006 (‘ILC Fragmentation Report’); C McLachlan, ‘The Principle of Systemic Integration and Article 31(3)(c) of the Vienna Convention’ (2005) 54 ICLQ 279; C McLachlan, ‘Investment Treaties and General International Law’ (2008) 57 ICLQ 361; L Boisson de Chazournes and C McLachlan (eds) ‘The Intersection of Investment Arbitration and Public International Law’ (2016) 31 No 2 ICSID Rev–FILJ (Special Issue).

43  VCLT art 31(3)(c).

44  See the comments of R Higgins, ‘A Babel of Judicial Voices? Ruminations from the Bench’ (2006) 55 ICLQ 791.

45  Right of Passage over Indian Territory (Portugal v India) (Preliminary Objections) [1957] ICJ Rep 125, 142; Oppenheim 1275.

46  Georges Pinson (1927–1928) AD Case No 292, 426 per Verzijl P.

47  AAPL v Sri Lanka (Award) ICSID Case No ARB/87/3, 4 ICSID Rep 245, IIC 18 (1990, El-Kosheri P, Goldman & Asante (dissenting)).

48  See eg E Denza and S Brooks ‘Investment Protection Treaties: United Kingdom Experience’ (1987) 36 ICLQ 908, 912.

49  France model BIT (Appendix 10 below) art 4.

50  US model BIT 2012 (Appendix 6 below) art 5.

51  ibid Annex B.

52  ibid Annex A.

53  Pope & Talbot Inc v Canada (Award on the Merits of Phase 2) 7 ICSID Rep 102, IIC 193 (NAFTA/UNCITRAL, 2001, Dervaird P, Belman & Greenberg).

54  NAFTA Free Trade Commission (FTC), Interpretation of NAFTA Chapter 11 (31 July 2001) 6 ICSID Rep 567, 568. The full text is set out at 7.34 below.

55  AAPL v Sri Lanka, and see further 7.185 et seq below.

56  cf the procedure of the Free Trade Commission under NAFTA Art 2001(2), referred to at 7.34 below.

57  eg Montevideo Convention on the Rights and Duties of States (signed 26 December 1933) 165 LNTS 19 Art 9; E Borchard, ‘The “Minimum Standard” of the Treatment of Aliens’ (1940) 38 Mich LR 445.

58  MOX Plant (Ireland v United Kingdom) (Provisional Measures) (2002) 126 ILR 334 (ITLOS, 2001).

59  AES Corp v Argentina (Decision on Jurisdiction) ICSID Case No ARB/02/17, 12 ICSID Rep 308, IIC 4 (2005, Dupuy P, Bello Janeiro & Böckstiegel) paras 30–1.

60  Saipem SpA v Bangladesh (Decision on Jurisdiction) ICSID Case No ARB/05/7, IIC 280 (2007, Kaufmann-Kohler P, Otton & Schreuer) para 67; and see also G Kaufmann-Kohler, ‘Arbitral Precedent: Dream, Necessity or Excuse?’ (2007) 23 Arb Int’l 357.

61  Notably ICSID Review—Foreign Investment Law Journal (ICSID Rev-FILJ) and Transnational Dispute Management (TDM).

62  Notably the OGEMID Discussion List established by the Centre for Energy Petroleum and Mineral Law and Policy at the University of Dundee.

63  Saluka Investments BV v Czech Republic (Partial Award) PCA Case No 2001–04, 15 ICSID Rep 274, IIC 210 (UNCITRAL, 2006, Watts C, Behrens & Fortier) para 291 (‘Saluka’).

64  Statute of the International Court of Justice (signed 26 June 1945, entered into force 24 October 1945) 59 Stat 1055, UKTS 67 (1946) art 38(1)(c).

65  See especially 7.106 et seq and 9.103 et seq below.

66  Dispute Settlement Understanding, 1869 UNTS 401, Annex 2 to Marrakesh Agreement establishing the World Trade Organisation (signed 15 April 1994) 1868 UNTS 186.

67  Paras 4.55 et seq below.

68  Paras 7.298 et seq below.

69  For a critical view see D Schneiderman, Constitutionalizing Economic Globalization: Investment Rules and Democracy’s Promise (2008).

70  See further P Dumberry, The Formation and Identification of Rules of Customary International Law in International Investment Law (2016); C McLachlan, ‘Is There an Evolving Customary International Law on Investment?’ (2016) 31 ICSID Rev-FILJ 257.

71  North Sea Continental Shelf (Germany v Denmark; Germany v The Netherlands) [1969] ICJ Rep 3.

72  FA Mann, Further Studies, 245.

73  CMS Gas Transmission Co v Argentina (Decision on Jurisdiction) ICSID Case No ARB/01/8, 7 ICSID Rep 492, IIC 64 (2003, Orrego Vicuña P, Lalonde & Rezek) para 48.

74  McLachlan, ‘The Principle of Systemic Integration’ 317; ILC Fragmentation Report, 16–17; Gabčíkovo-Nagymaros Project (Hungary v Slovakia) [1997] ICJ Rep 7, 67–8.

75  Mondev International Ltd v United States of America (Award) ICSID Case No ARB(AF)/99/2, 6 ICSID Rep 181, IIC 173 (NAFTA/ICSID (AF), 2002, Stephen P, Crawford & Schwebel).

76  Mondev paras 116–17.

77  Oppenheim 933.

78  CMS para 28.

79  GA Álvarez and WW Park, ‘The New Face of Investment Arbitration: NAFTA Chapter 11’ (2003) 28 Yale JIL 365.

80  ibid 399.

81  2012 US model BIT (Appendix 6 below).

82  ibid Preamble.

83  ibid arts 12–13.

84  ibid Annex B, discussed at 8.42 below.

85  See further, T Wälde and A Kolo, ‘Environmental Regulation, Investment Protection and “Regulatory Taking” in International Law’ (2001) 50 ICLQ 811.

86  Not yet in force, see <http://ec.europa.eu/trade/policy/in-focus/ceta> (last accessed 8 September 2016).

87  Saluka para 300.