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Investment Treaty Arbitration and the (New) Law of State Responsibility

Published on October 21, 2013        Author: 
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Martins PaparinskisI am grateful to EJIL:Talk! for hosting the discussion of my article and chapter. I am privileged to have Anastasios Gourgourinis, Jessica Howley, and Robert Howse as discussants. In the following paragraphs I summarise the main arguments made in the article and the chapter.

The starting point of the argument is that investment law partly borrows and partly diverges from pre-existing regimes of international law. An interpreter of an investment protection treaty is required to determine the degree of similarity and difference so as to elaborate the meaning of particular terms, broader systemic structures, and underlying secondary rules. In order to situate investment protection law within the broader international legal order, an interpreter might draw upon multiple legal techniques from established legal regimes. Within the four corners of international law reasoning, the models of direct rights, beneficiary rights, and agency are the most plausible, relying on techniques drawn from, respectively, the law of human rights, law of treaties on third parties, and diplomatic protection. A firm position regarding the legally most plausible model will not be taken. Instead, the implications of relying on the techniques of those regimes will be spelled out, applying across different branches of international law.

The EJIL article under discussion examines whether and how the invocation of responsibility by a non-state actor has affected secondary rules of state responsibility. The shift from the state to the investor as the entity invoking responsibility for the breach of investment treaties seems to have influenced the law of state responsibility in a number of distinct ways. The apparent disagreement about the law of state responsibility may sometimes properly relate to questions of treaty interpretation, while in other cases rules from an inter-state context are applied verbatim. In yet other cases, the different perspectives lead to importantly different conclusions regarding circumstances precluding wrongfulness, elements of remedies, waiver of rights, and, possibly, interpretative relevance of diplomatic protection rules. The forthcoming chapter applies the same analytical perspective to the law of treaties, examining rules on interpretation and treaty-making through the lenses of other regimes of international law. The overall thesis is that the conceptual perspective of plausibly different readings of the genealogy of foundational structures of investment law is very important, but needs to be applied with subtlety: sometimes all the perspectives point in the same direction; sometimes they do not; sometimes they do but for very different reasons; and, in any event, a diligent application of such traditional techniques of legal reasoning as interpretation, resolution of conflicts, and analogies is just as important for reaching the right legal result.

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Discussion of Martins Paparinskis’s Investment Treaty Arbitration and the (New) Law of State Responsibility

Published on October 21, 2013        Author: 
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This week we will be hosting a discussion of Martins Paparinskis’s EJIL article, Investment Treaty Arbitration and the (New) Law of State Responsibility, and his related forthcoming chapter, Analogies and Other Regimes of International Law. Martins  is a Lecturer in Law at the University College London and a book review editor of the Journal of World Investment and TradeHis article  will be subjected to careful scrutiny this week by Anastasios Gourgourinis (Lecturer, National and Kapodistrian University of Athens), Jessica Howley (DPhil Candidate, Oxford), and Robert Howse (Professor, New York University). We are grateful to all four for agreeing to have this discussion here.

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An EU-China Investment Agreement?

Published on October 15, 2013        Author: 
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Notes from Glasgow #1

EU China BITMany thanks to Dapo, Marko and Iain for inviting me to contribute to EJIL: Talk! on a regular basis. It’s a great blog, and it complements my favourite international law journal, so I accept with pleasure. The first of my ‘Notes from Glasgow’ focuses on international investment law – an area of law that EJIL: Talk! has, I think it is fair to say, so far approached with a measure of caution. Investment law is exciting, though: not so much because of the number of awards produced, week by week, by arbitral tribunals. (In fact, just tracing awards quickly becomes boring.) But rather because it is such an interesting field-study in how international law evolves, how ‘exotic’ branches are rapidly mainstreamed, and how they change in the process.

The latter aspect – change in international investment law – is the theme of the following thoughts. I take my cue from a resolution passed in the European Parliament (EP) on 8 Oct 2013. (See here for the BBC’s coverage of the debate.) As was reported in the media, the EP in principle approved the start of negotiations towards a China-EU Investment Agreement, but added a number of caveats: notably, according to a useful summary by the EP Library (which condenses the resolution’s 49 recitals and thus can be quoted meaningfully), the EP wants the future agreement to “ensur[e] equality of investment environments” in China and the EU, to include binding provisions on “social responsibility, social and environmental standards”, to protect European public services, and to be negotiated with maximum transparency. All this is interesting for a number of reasons. I’ll flag four of them, hoping to return to some of them in subsequent posts. (photo above left, accompanying China’s announcement that it will seek an investment treaty with the EU) Read the rest of this entry…

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A Rejoinder to Yenkong Ngangjoh-Hodu

Published on September 20, 2013        Author: 
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Thank you, Yenkong, for the thoughtful reply to my post.

Yenkong has now clarified that his original post was suggesting that a State may raise a defense (rather than a counter-claim) to a claim that it violated an investor’s legitimate expectations, on the grounds that the investor engaged in tax avoidance.  I agree wholeheartedly that an investor’s own conduct may be relevant to a determination of whether its legitimate expectations were violated. That is an uncontroversial point. However, to be relevant, the investor’s conduct must relate in some way to the State’s alleged breach such that it contextualizes or justifies the State’s actions. Where the State’s conduct would otherwise violate the applicable legal standard, it may show that its conduct was in fact an appropriate response to some action or omission of the investor. In contrast to such a circumscribed approach, Yenkong’s original post seems to argue that a State may raise a “tit for tat” defense without needing to establish the existence of a causal relationship between the investor’s tax avoidance and the State’s allegedly breaching conduct.

Further, it is still not clear to me how invoking “legitimate expectations” would advance the State’s position in such a scenario or even how that standard would become legally applicable to the investor’s conduct. Yenkong acknowledges that the fair and equitable treatment (FET) obligation on which the legitimate expectations standard is based runs one way, defining the State’s obligations to the investor. That the investor’s actions may be relevant to assessing whether the State violated its FET obligation does not imply a reversal of the direction of the obligation. It is not the objective of investment treaties to govern the investor’s obligations toward the host State. The treaties instead set out substantive obligations of the State and offer investors recourse to arbitration in order to correct a real or perceived power imbalance created by the obsolescing bargain problem and a lack of credibility of domestic courts in handling claims by foreigners. The aim is to permit the host State to make a credible commitment to protect foreign investors. The investor’s obligations toward the State, by contrast, are governed by its contract with the State (where applicable) and the host State’s laws. The State is able to pursue the captive investor for violations through its own domestic administrative, criminal, and civil processes and, where applicable, international arbitration. In short, investment treaties do not seek to protect the State’s legitimate expectations (expressly or implicitly), because there are other legal mechanisms available for that purpose.

As regards balancing the interests of the investor and the development needs of the host State as a method of interpreting the State’s substantive obligations, the treaty would have to provide a textual basis for such an approach. Read the rest of this entry…

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Legitimate Expectations in Investment Disputes: A Reply to Sadie Blanchard

Published on September 17, 2013        Author: 
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Let me clarify some few points which Sadie Blanchard has disagreed with in my last post. As indicated in my last post, the fair and equitable standard from which the doctrine of legitimate expectations is derived requires the host state among other things to act in good faith and without arbitrariness towards foreign investors (See Techmed v Mexico, ICSID,  2003).  While it is clear that the state is always at the receiving end with regards to the fair and equitable treatment doctrine, the role/the conduct of the investor may not be totally irrelevant in assessing the application of the standard. Surprisingly, Sadie seems to disagree with this very simple fact despite the well settled maxim ‘Caveat Investor’.  In EDF (Services) Limited v. Romania , the tribunal stated that: “Legitimate expectations cannot be solely the subjective expectations of the investor. They must be examined as the expectations at the time the investment is made, as they may be deduced from all the circumstances of the case, due regard being paid to the host State’s power to regulate its economic life in the public interest.” (Award Merits, (8/10/2009), para. 219). Moreover, it is clearly not sufficient not to contextualise the interpretation of fair and equitable treatment when considering whether the legitimate expectation of an investor has been frustrated. Such context will obviously take into account the conduct of the claimant as well as the overall objective of the investment treaty. Surprisingly, Sadie finds this view problematic although it is not new (see Peter Muchlinski, 55 ICLQ, 2006, Garcia-Bolivar, O. CUP, (2011)).

Sadie seems to be unconvinced that the legal framework of foreign investment must protect the legitimate expectations and interests of both the investor and the host state. To Sadie, the centre of the universe in investment treaty should be the protection of the interests of the investors rather than balancing the interest of the latter and the development needs of the host state expected under any FDI. Sadie’s one-sided approach is very troubling because it is incongruous with the object and purpose of most investment treaties. Read the rest of this entry…

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The Shaky Proposition of the State’s Legitimate Tax Expectations: A Response to Yenkong Ngangjoh-Hodu

Published on September 17, 2013        Author: 
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I do not share a number of Yenkong Ngangjoh-Hodu’s views about the legitimate expectations doctrine, but this response focuses on the final paragraph of his post, in which he argues that a State could somehow raise a legitimate expectations argument against a foreign investor that engages in “tax avoidance.” For the sake of clarity, I understand Yenkong to mean not tax evasion, which would violate the law of the host State and thus subject the investor to domestic criminal and civil penalties, but what has been defined as “the minimization of tax liability by lawful methods.” This is also known as “tax planning.” (Photo: Avoiding the window tax in England, credit)

I see several problems with Yenkong’s suggestion. First, as he correctly explains, the legitimate expectations doctrine is an interpretation of the fair and equitable treatment (FET) provisions contained in many investment treaties. Those provisions invariably impose a one-way obligation that governs the State’s treatment of the investor, not the reverse. This is a separate issue from whether (a) a State can invoke an investor’s actions to show that it treated the investor fairly in the circumstances (it can), or (b) a State can raise counterclaims (it can in some cases), or even (c) some treaties do or may in the future impose specific substantive obligations on investors (they likely will). However, even considering those possibilities, it is not clear on what legal ground a State would “develop” “an argument . . . that its legitimate expectations [were] frustrated.”

Second, Yenkong asserts that tax avoidance or tax planning is “incongruous with the spirit of any bilateral investment agreement.” While he makes no attempt to support this claim, it is not obviously true. BITs typically state their goals in their preambles, and I have yet to see one that refers to increasing tax revenue. Instead, they refer to promoting greater economic cooperation, stimulating the flow of private capital, fostering economic growth and development, and maximizing effective use of economic resources. It thus appears entirely possible for an investment to uphold the “spirit” of a BIT by creating new and beneficial cross-border economic activity while still minimizing its tax liability within the confines of the law.

Third, he states that, “instead of an unqualified ‘legitimate expectations’, tribunals ought to clearly take into account investor’s conduct.” There are a few problems here. He appears to have shifted from an argument that a State should be able to claim that its expectations were violated to an argument that an investor’s tax conduct might appropriately be raised as a defense to the investor’s allegation that its legitimate expectations were violated. Is he hinting at the possibility of a counter-claim (in which case, on what legal theory, since as noted above FET is a one-way obligation), or is he suggesting a defense? If the latter, as he acknowledges earlier in his post, the investor’s conduct is already considered as part of the determination of whether its alleged expectations were legitimate and whether the State’s actions thwarted them. However, it is not at all apparent in what factual situation tax avoidance/planning would be relevant to an investor’s claim that its legitimate expectations were violated. Such scenarios would certainly be rare.

Finally, assuming for the sake of argument that there were a legal foundation on which a State could raise a legitimate expectations claim, on what basis would a State allege to have developed a legitimate expectation to collect a certain level of tax beyond that legally required? It seems to me there would have to be some kind of agreement on this between the investor and the State to found a claim.

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A Critique of the Legitimate Expectations Doctrine in Investment Treaty Arbitration

Published on September 16, 2013        Author: 
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Yenkong Ngangjoh-HoduDr Yenkong Ngangjoh Hodu is a Senior Lecturer in Law at the University of Manchester School of Law.

In recent years, the concept of ‘legitimate expectations’ has routinely been put forward by claimants as the basis of claims in investment treaty arbitrations, and endorsed by some arbitrators (see International Thunderbird Gaming Corporation v  United Mexican States, Separate Opinion of T. Walde, para. 37). Relying on ‘legitimate expectations’ that have been frustrated as grounds for an award is troubling, and in the words of a recent EJIL article by Martins Paparinskis “suggest[s] a radical departure from the traditional model of international responsibility”, and may even be tantamount to deciding ex aequo et bono [(2013) 24 EJIL 617, 628]. Tribunals have regarded the doctrine of legitimate expectations as  a part of the fair and equitable treatment standard provided for in investment treaties (see Sempra Energy International v Argentine Republic, pp. 87-88 at para. 298). This is incongruous with the law of state responsibility where the breach of a contract between a state and an alien is not necessarily a violation of international law (Article 4, ILC Articles on State Responsibility). Apart from references to precedent, investment tribunals have, in the majority of cases, hardly taken the pain to justify the overwhelming reliance on legitimate expectations in making awards (Anthea Roberts, 104 AJIL 2010).

Legitimate expectations presuppose that an agreement or a promise generates a certain level of expectations, known as legitimate expectations. It is still unclear what exactly will give rise to legitimate expectations and under what conditions such expectations require unhindered protection. The most popular use of legitimate expectations in domestic jurisdictions (England and Australia) has been in the area of administrative law and more precisely, concerning issues of judicial review. In this context, the basic test for legitimate expectations is the prior existence of a promise (R (Bibi) v London Borough of Newham [2001] EWCA Civ 607) that needed protection by a public authority (Wheeler v Office of the Prime Minister [2008] EWHC 1409). Similarly, in German law the doctrine is connected to the protection of trust (for instance, Article 38 of the German code on Administrative Procedure).

However, in the context of investment arbitration, legitimate expectations is somehow seen as an incentive for foreign investors to settle on a particular investment destination based on a legal structure and representations made by the receiving state. Read the rest of this entry…

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The Course Catalogue of The Hague Academy as a Timeline of International Law

Published on August 26, 2013        Author: 
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Sadie BlanchardSadie Blanchard is a Research Fellow at the Max Planck Institute for International, European and Regulatory Procedural Law.

The Hague Academy of International Law (logo, below right, credit) has offered annual courses in public and private international law for eighty-five years as part of its founding objective of promoting “peace through law.” This year’s courses on public international law ended in July and the private international law courses ended this month. Each year the public international law course attracts students from up to eighty countries worldwide, with this year’s hosting a record number of nearly 350 students. The 2013 General Course on Public International Law was delivered by Professor James Crawford (Cambridge) and was titled “The Course of International Law. Practice and Process of the Law of Nations”. Other courses in 2013 included a course by Professor Eyal Benvenisti (Tel Aviv), “The International Law of Global Governance”; a course by Professor Robert Kolb (Geneva) on “Article 103 of the United Nations Charter;” and a course by Professor Anna Wyrozumska (Lodz)  on “The Role of Domestic Judges in the Development of International Law“.

The form and content of Academy courses over the years reflect the evolution of international law and the unfolding of global affairs, and at times Academy courses have even been harbingers of things to come. This post highlights a few examples.

After over forty years of holding courses only in French—then the language of diplomacy—Hague Academywhen the Academy reconvened in 1947 after a hiatus during World War II, it offered its first courses in English, reflecting the rise of U.S. global power after the war. That same year, as the UN General Assembly drafted and considered the Universal Declaration of Human Rights, Hersch Lauterpacht taught The International Protection of Human Rights. The Universal Declaration was adopted the following year.

Interestingly, while among States human rights did not gather steam as an international legal doctrine until after World War II, the courses of The Hague Academy remind us that international law scholars were laying its foundation well before then. Read the rest of this entry…

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Fair and Equitable Treatment: A Rejoinder to Martins Paparinskis

Published on August 16, 2013        Author: 
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I don’t think that there’s all that much between Martins Paparinskis and me.   I certainly don’t decry the difference between treaty and custom in this field, or the important part that both play in encouraging investment and in the not inconsiderable task of balancing in that regard the interests of investors and the prerogatives of governments.

But Martins’s responses, valid as they all are, don’t provide an answer to my question, which is how his analysis helps in solving the individual dispute before the individual arbitral tribunal.   It may of course be that there will be cases (though I wouldn’t care to put a statistical probability on their likelihood) in which it can be conclusively established that the treaty Parties definitely did decide that what they wanted to have applied was the customary law standard (whatever that might be), or that they definitely didn’t want that but something else.   But in the normal run a tribunal is confronted with a general standard of protection expressed by agreement in treaty language.   The choice is whether that should be taken to mean what it says, or as hidden code for something else, and to that choice the Vienna Convention gives a clear answer in Articles 31(1) and 31(4). Read the rest of this entry…

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A Reply to Anthea Roberts and Federico Ortino

Published on August 16, 2013        Author: 
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Anthea Roberts puts the argument of my book into broader international law perspective by asking three questions. First, she wonders whether there might be a need to reformulate the criteria of customary law to make them more realistic. Secondly, she gently chides me for being too hasty in dismissing domestic public law arguments. Thirdly, she is interested in the politics of the human rights analogy of investment law. I will first say a few words about human rights analogies and customary law, and then explain my position regarding domestic public law.

Human Rights Analogies

In a recent article (‘Investment Treaty Arbitration and the (New) Law of State Responsibility’ (2013) 24 EJIL 617) and in a forthcoming chapter I also address the analogical reasoning in investment law, looking at particular case studies in the law of State responsibility and law of treaties from different perspectives, including that of human rights law. It seems to me that the major conceptual objection (and here I quote from the chapter, footnotes omitted)

is that the human rights analogy fails to capture the structural dynamic of the investment protection regime. In particular, the grant of legal protection to investors is explicitly linked with and justified by utilitarian considerations of enticing the non-State actor to make the rational choice of engaging in an investment activity and therefore benefiting from protection. The proposition that there might be a rational choice to be made to become human so as to benefit from human rights protection strikes one as patently absurd from the perspective of human rights law; conversely, in investment protection law, the question of whether, when, and how a claimant becomes an investor is an important yet conceptually unremarkable jurisdictional box to be ticked in every dispute.

The idea of choice – and with it, an analogy with the consent-based law of treaties on third parties, rather than human rights – provides a powerful analytical perspective for examining different approaches in the law of treaties and State responsibility. It is less obvious that differences in teleology and structure between human rights and investment law pose similar challenges to arguments by analogy regarding primary obligations, where peculiarities of either regime may be appropriately incorporated in the process of comparative reasoning regarding particular rules. Read the rest of this entry…

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