1
The juridical foundations
of investment treaty arbitration
Rule 1: Where the contracting states to an investment treaty have
agreed to a procedure for the judicial settlement of disputes
between an investor and the host state, a claim advanced by the
investor in accordance with such procedure is its own claim and the
national contracting state of the investor has no legal interest in
respect thereof.
Rule 2: The rules of admissibility of diplomatic protection in general
international law are not generally applicable to the regime for the
settlement of disputes between an investor and the host state
created by an investment treaty.
A . I N V E S T M E N T T R E AT I E S A N D I N V E S T M E N T
T R E AT Y A R B I T R AT I O N
1. There is a highly competitive global market for foreign direct investment. The
standing of each nation state in that market depends upon a myriad of factors,
among which the stability and predictability of the existing regulatory regime
for investments is always important and often decisive. Stability and predictability
are attributes that are rarely ascribed to a regulatory environment created
by nascent public institutions and hence many developing countries might be
expected to suffer from a serious competitive disadvantage. Many of those
developing countries have sought to redress that disadvantage by concluding
investment treaties. These operate to reduce the level of sovereign risk inherent
in every foreign direct investment project by establishing a regime of international
minimum standards for the exercise of public power by the host
contracting state in relation to investments made in its territory by the nationals
of another contracting state. In this way, a state that is unable to trade on an
inherent confidence in its regulatory regime (predicated upon decades of proven
commitment to the rule of law) can nevertheless compete for foreign direct
investment by subjecting the conduct of its public institutions to exogenous
minimum standards. Those minimum standards take the form of investment
treaty obligations such as the probibition of uncompensated expropriation,
fair and equitable treatment, national treatment, full protection and security
1
compromis.120
It is possible to assert more generally that international law always
governs arbitrations or other judicial proceedings involving two states when the
claim is for a breach of an international treaty or of an obligation in general
international law. As will be considered further in Rule 13, this principle is likely
to have its roots in the immunity of foreign states from the jurisdiction of national
courts insofar as an arbitration governed by international law remains outside the
legal order of the state that provides the territorial seat of the arbitration.
54. Investment treaty arbitrations, in contrast, are ultimately governed by the lex
loci arbitri, viz. the municipal law of the seat of the arbitration.121
This is also a
principle of general application but subject to the exceptional instance of
investment treaty arbitrations conducted under the ICSID Convention, where
the procedural rules set out in the Convention govern the conduct of the
arbitration largely to the exclusion of any municipal law.122
55. If an investor were in essence bringing a claim on behalf of its national state,
the logical consequence would be that international law would govern the
arbitration by default as the rights of two states under an international treaty
would be the subject matter of the dispute. Put differently, if the claim belonged
to the national state of the investor, the municipal courts at the seat of
the arbitration arguably could not sit in judgment in respect of a challenge to
the validity of the treaty tribunal’s award. Hence the general application of the
municipal law of the seat of the arbitration to investment treaty arbitrations and
the jurisdiction of the municipal courts once again refute the derivative theory
for investment treaty claims.
(5) The exhaustion of local remedies
56. The defendant state has the primary interest in compliance with the rule that
the injured national must exhaust local remedies available in the host state before
120
Mann, ibid.
121
See the commentary to Rule 13 below.
122
The ICSID Convention creates, according to Broches, ‘a complete, exclusive and closed
jurisdictional system, insulated from national law’: A. Broches, ‘Awards Rendered Pursuant
to the ICSID Convention: Binding Force, Finality, Recognition, Enforcement, Execution’
(1987) 2 ICSID Rev – Foreign Investment LJ 287, 288. See also: I. Shihata and A. Parra,
‘Applicable Substantive Law in Disputes Between States and Private Foreign Parties: The Case
of Arbitration under the ICSID Convention’ (1994) 9 ICSID Rev – Foreign Investment LJ 183,
186; A. Parra, ‘Provisions on the Settlement of Investment Disputes in Modern Investment
Laws, Bilateral Investment Treaties and Multilateral Instruments on Investment’ (1997) 12
ICSID Rev – Foreign Investment LJ 287, 301. This ‘insulation’ from national law is achieved as
follows. Art. 44 of the ICSID Convention, which exhaustively prescribes the sources of
procedural rules for ICSID arbitration, makes no reference to domestic law. Art. 53 excludes
any remedies in relation to ICSID awards save those speficied in Arts. 50–2. The exclusivity of
these remedies was confirmed by the French Cour de cassation: Guinea v Atlantic Triton Co.,
Cass Civ 1re, 11 June 1991 (1991) 118 Journal du droit international 1005. Art. 54 obliges
Contracting States to recognise and enforce ICSID awards. The execution of ICSID awards is,
however, governed by national law at the place of execution pursuant to Art. 54(3).
28 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
and most-favoured-nation treatment. These investment treaty obligations are
generally enforceable against the host state of the investment at the suit of the
investor by recourse to international arbitration. Hence the protection afforded
by investment treaties is tangible enough to feature in the investor’s calculus
of investment risks. An investment treaty can thus serve to bridge part of the
gap between the perception of sovereign risk in a developing country, on the
one hand, and in a highly developed country with public institutions that
have acquired a firm reputation for fairness and transparency, on the other. An
investment treaty cannot, of course, be expected to bridge that gap entirely.
That is not its function. Investment treaties do not create a uniform law on
the establishment, acquisition, expansion, management, conduct, operation or
alienation of foreign investments; their object and purpose is not to create a
single regulatory regime for foreign investment. Sovereign risk will vary considerably
from country to country regardless of the existence of investment
treaties. For a developing country to compete successfully for foreign direct
investment, however, it is sufficient if the level of sovereign risk is counterbalanced
by its comparative advantages as a destination for foreign capital
(cheaper labour or material costs, expanding consumer markets, higher profit
margins, etc.). An investment treaty can assist a developing country to tip these
scales in its favour.1
2. Bilateral investment treaties (‘BITs’) for the reciprocal encouragement of
investment, predominantly between capital importing and exporting states,
numbered 2,573 at the end of 2006.2
Multilateral investment treaties such as
the North Atlantic Free Trade Agreement (‘NAFTA’)3
and the Energy Charter
Treaty4
create reciprocal investment protection obligations across the same
divide but are also notable for extending the regime to investment relations
between states with highly developed economies as well.5
Investment treaties
usually create two distinct dispute resolution mechanisms: one for disputes
1
J. Voss, ‘The Protection and Promotion of Foreign Direct Investment in Developing Countries:
Interests, Interdependencies, Intricacies’ (1982) 31 ICLQ 686, 687; G. Sacerdoti, ‘Bilateral
Investment Treaties and Multilateral Instruments on Investment Protection’ (1997) 269 Hague
Recueil 251, 290–1.
2
UNCTAD, World Investment Report 2007 (2007) xvii, available at www.unctad.org/en/docs/
wir2007p1_fn.pdf.
3
Reprinted at: (1993) 32 ILM 605.
4
Reprinted at: (1995) 35 ILM 509.
5
See generally the following studies on the NAFTA and Energy Charter Treaty: T. Wälde (ed.), The
Energy Charter Treaty: An East–West Gateway for Investment and Trade (1996); M. Omalu,
NAFTA and the Energy Charter Treaty: Compliance with, Implementation, and Effectiveness of
International Investment Agreements (1999); T. Wälde, ‘International Investment under the 1994
Energy Charter Treaty’ (1995) 29 J of World Trade L 5; T. Wälde, ‘Investment Arbitration under the
Energy Charter Treaty’ (1996) Arbitration Int 429; T. Weiler (ed.), NAFTA Investment Law and
Arbitration: Past Issues, Current Practice, Future Prospects (2004); M. Kinnear, A. Bjorklund and
J. Hannaford, Investment Disputes under NAFTA: An Annotated Guide to NAFTA Chapter 11
(2006); C. Ribiero, Investment Arbitration and the Energy Charter Treaty (2006).
2 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
between a qualifying investor and the host state in relation to its investment
(‘investor/state disputes’) and another for disputes between the contracting state
parties to the treaty (‘state/state disputes’). Investment treaties generally provide
that the state/state mechanism covers disputes ‘concerning the interpretation or
application’ of the treaty,6
whereas disputes relating to a specific investment
of a particular investor (which may of course give rise to interpretative questions)
are encompassed by the investor/state dispute resolution procedure.7
This
study focuses almost exclusively on the resolution of investor/state disputes
through recourse to international arbitration, which is by far the most utilised
dispute resolution mechanism that is available under investment treaties.8
Nevertheless, it is useful to set the stage with a brief appraisal of each type of
mechanism.
3. The judicial forums specified for the resolution of investor/state disputes
generally include one or more of the following at the option of the claimant
investor:
6
Asian–African Legal Consultative Committee Model BIT, Art. 11(i), UNCTAD Compendium
(Vol. III, 1996) 122; Chile Model BIT, Art. 9(1), ibid. 148; China Model BIT, Art. 8(1), ibid. 154;
Switzerland Model BIT, Art. 9(1), ibid. 181; UK Model BIT, Art. 9(1), ibid. 190; Egypt Model
BIT, Art. 9(1), ibid. (Vol. V, 2000) 297; France Model BIT, Art. 11(1), ibid. 306; Jamaica Model
BIT, Art. 9(1), ibid. 321; Malaysia Model BIT, Art. 8(1), ibid. 329; Netherlands Model BIT, Art.
12(1), ibid. 337; Sri Lanka Model BIT, Art. 9(1), ibid. 344; Cambodia Model BIT, Art. 9(1), ibid.
(Vol. VI, 2002) 467; Croatia Model BIT, Art. 11(1), ibid. 477; Iran Model BIT, Art. 13(1), ibid.
483; Peru Model BIT, Art. 9(1), ibid. 498; USA Model BIT, Art. 10(1), ibid. 508; Austria Model
BIT, Art. 18, ibid. (Vol. VII) 267; Belgo-Luxembourg Economic Union Model BIT, Art. 11(1),
ibid. 276; Denmark Model BIT, Art. 10(1), ibid. 284; Finland Model BIT, Art. 10(1), ibid. 293;
Germany Model BIT, Art. 10(1), ibid. 300; South Africa Model BIT, Art. 8(1), ibid. (Vol. VIII)
277; Turkey Model BIT, Art. 8(1), ibid. 284; Benin Model BIT, Art. 8(1), ibid. (Vol. IX) 282;
Burundi Model BIT, Art. 9(1), ibid. 292; Mauritius Model BIT, Art. 9(1), ibid. 300; Mongolia
Model BIT, Art. 9(1), ibid. 306; Sweden Model BIT, Art. 9(1), ibid. 314; Indonesia Model BIT,
Art. 9 (‘Disputes between the Contracting Parties concerning the interpretation or application of
this Agreement should, if possible be settled through diplomatic channels’ but fails to provide for
any compulsory dispute resolution in the event that diplomacy is not successful), ibid. (Vol. X)
313; OPEC Fund Model BIT, Art. 9.01, ibid. (Vol. VI) 489; Bolivia Model BIT, Art. 10, ibid.
(Vol. X) 283; Burkina Faso Model BIT, Art. 10(1), ibid. 292; Guatemala Model BIT, Art. 9(1),
ibid. (Vol. XII) 292; Italy Model BIT, Art. 9(1), ibid. 300; Kenya Model BIT, Art. 11(a), ibid. 310;
Uganda Model BIT, Art. 11(1), ibid. 319; Ghana Model BIT, Art. 11(1), ibid. (Vol. XIII) 284;
Romania Model BIT, Art. 10(1), ibid. 291; Canada Model BIT, Art. 48(1), ibid. (Vol. XIV) 252–3;
Energy Charter Treaty, Art. 27(1), Appendix 4; USA Model BIT (2004), Art. 37(1); Germany
Model BIT (2005), Art. 10(1), Appendix 7; France Model BIT (2006), Art. 11(1), Appendix 6;
China Model BIT (1997), Art. 8(1), Appendix 5; UK Model BIT (2005), Art. 9(1), Appendix 10.
7
See the discussion accompanying Rule 25 in relation to the jurisdiction rationae materiae of an
investment treaty tribunal.
8
The only example of a state/state arbitration to date has arisen under the Peru/Chile BIT, where
Peru invoked the state/state dispute mechanism against Chile after being served with a notice of
arbitration by a Chilean investor under the same BIT. Peru apparently sought a favourable interpretation
of the BIT in the state/state arbitration to assist its case in the investor/state arbitration. In
the end, the claim of the Chilean investor failed. See: Lucchetti v Peru (Preliminary Objections)
12 ICSID Rep 219, 221/7.
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 3
– municipal courts of the host state;9
– arbitration pursuant to the ICSID Arbitration Rules or the ICSID Additional
Facility Rules;10
– ad hoc arbitration pursuant to the UNCITRAL Arbitration Rules;11
9
Chile Model BIT, Art. 8(2)(a), UNCTAD Compendium (Vol. III, 1996) 147; China Model BIT,
Art. 9(2), ibid. 155; Egypt Model BIT, Art. 8(2)(a), ibid. (Vol. V, 2000) 297; Jamaica Model BIT,
Art. 8(2)(a), ibid. 322; Sri Lanka Model BIT, Art. 8(2)(a), ibid. 343; Croatia Model BIT, Art. 10
(2)(a), ibid. (Vol. VI, 2002) 476; Iran Model BIT, Art. 12(2), ibid. 483; Peru Model BIT, Art. 8(2)
(a), ibid. 497; USA Model BIT, Art. 9(2)(a), ibid. 507; Austria Model BIT, Art. 12(1)(a), ibid.
(Vol. VII) 264; Finland Model BIT, Art. 9(2)(a), ibid. 292; Benin Model BIT, Art. 9(2)(a), ibid.
(Vol. IX) 283; Indonesia Model BIT, Art. 8(2), ibid. (Vol. V) 313; Bolivia Model BIT, Art. 10,
ibid. (Vol X) 283; Burkina Faso Model BIT, Art. 9(2)(a), ibid. 292; Guatemala Model BIT, Art. 8
(a), ibid. (Vol. XII) 292; Italy Model BIT, Art 10(3)(a), ibid. 301; Kenya Model BIT, Art. 10(b)(1),
ibid. 309; Uganda Model BIT, Art. 7(2), ibid. 317; Ghana Model BIT, Art. 10(1), ibid. (Vol. XIII)
283; Romania Model BIT, Art. 9(2)(a), ibid. 291; China Model BIT (2003), Art. 9(2)(a), Appendix 5;
Energy Charter Treaty, Art. 26(2)(a), Appendix 4.
10
Asian–African Legal Consultative Committee Model ‘A’ BIT, Art. 10(v), UNCTAD
Compendium (Vol. III, 1996) 122; Asian–African Legal Consultative Committee Model ‘B’
BIT, Art. 10(v), ibid. 133; Chile Model BIT, Art. 8(2)(b), ibid. 147; Switzerland Model BIT, Art.
8(2), ibid. 181; UK Model BIT, Art. 8, ibid. 189; Egypt Model BIT, Art. 8(2)(b), ibid. (Vol. V,
2000) 297; France Model BIT, Art. 8, ibid. 305; Indonesia Model BIT, Art. 8(3)(a), ibid. 313;
Jamaica Model BIT, Art. 10, ibid. 322; Malaysia Model BIT, Art. 7(3), ibid. 329; Netherlands
Model BIT, Art. 9, ibid. 336; Sri Lanka Model BIT, Art. 8(2)(b), ibid. 343; Cambodia Model BIT,
Art. 8(3)(a), ibid. (Vol. VI, 2002) 467; Croatia Model BIT, Art. 10(2)(b), ibid. 476; Peru Model
BIT, Art. 8(2)(b), ibid. 497; USA Model BIT, Art. 9(3)(a), ibid. 507; Austria Model BIT, Art. 12
(1)(c), ibid. (Vol. VII) 264; Belgo-Luxembourg Economic Union Model BIT, Art. 10(3), ibid.
275; Denmark Model BIT, Art. 9(2)(a), ibid. 283; Finland Model BIT, Art. 9(2)(b), ibid. 292;
Germany Model BIT, Art. 11, ibid. 301; South Africa Model BIT, Art. 7(2), ibid. (Vol. VIII) 276;
Turkey Model BIT, Art. 7(2)(a), ibid. 284; Benin Model BIT, Art. 9(3), ibid. (Vol. IX) 283;
Burundi Model BIT, Art. 8(3), ibid. 292; Mongolia Model BIT, Art. 8(2)(a), ibid. 306; Sweden
Model BIT, Art. 8(2), ibid. 313; Indonesia Model BIT, Art. 3(a), ibid. (Vol. V) 313; Bolivia
Model BIT, Art. 10, ibid. (Vol. X) 283; Burkina Faso Model BIT, Art. 9(2)(c), ibid. 292;
Guatemala Model BIT, Art. 8(b), ibid. (Vol. XII) 292; Italy Model BIT, Art. 10(3) (c), ibid.
301; Kenya Model BIT, Art. 10(b)(ii), 10(c), ibid. 310; Uganda Model BIT, Art. 7(3), ibid. 317;
Ghana Model BIT, Art. 9(2)(b), ibid. (Vol. XIII) 284; Romania Model BIT, Art. 10(1), ibid. 291;
Canada Model BIT, Art. 27(1)(a),(b), ibid. (Vol. XIV) 240; Germany Model BIT (2005), Art. 11,
Appendix 7; France Model BIT (2006), Art. 8, Appendix 6; China Model BIT (1997), Art. 9(2)
(b) (‘provided that the Contracting Party involved in the dispute may require the investor to go
through the domestic procedures specified by the laws and regulations of the Contracting Party
before the submission to the ICSID’); UK Model BIT (2005), Art. 8(2)(a) (if ‘the national or
company and the Contracting Party concerned in the dispute may agree …’), Appendix 5; Energy
Charter Treaty, Art. 26(4); NAFTA, Art. 1120(1), Appendix 3.
11
Asian–African Legal Consultative Committee Model ‘A’ BIT, Art. 10(v), UNCTAD
Compendium (Vol. III, 1996) 122; Asian–African Legal Consultative Committee Model ‘B’
BIT, Art. 10(v), ibid. 133; UK ‘Alternative’ Model BIT, Art. 8, ibid. 189; Egypt Model BIT, Art.
8(2)(c), ibid. (Vol. V, 2000) 297; Indonesia Model BIT, Art. 8(3)(b), ibid. 313; Sri Lanka Model
BIT, Art. 8(2)(f), ibid. 343; Cambodia Model BIT, Art. 8(3)(b), ibid. (Vol. VI, 2002) 467; Iran
Model BIT, Art. 12(6), ibid. 483; USA Model BIT, Art. 9(3)(a)(iii), ibid. 507; Austria Model BIT,
Art. 12(1)(c), ibid. (Vol. VII) 265; Belgo-Luxembourg Economic Union Model BIT, Art. 10(3),
ibid. 275; Denmark Model BIT, Art. 9(2)(c), ibid. 283; Finland Model BIT, Art. 9(2)(d), ibid.
292; Turkey Model BIT, Art. 7(2)(b), ibid. 284; Benin Model BIT, Art. 9(3)(b), ibid. (Vol. IX)
284; Mongolia Model BIT, Art. 8(2)(b), ibid. 306; Sweden Model BIT, Art. 8(2), ibid. 313;
Indonesia Model BIT, Art. 3(b), ibid. (Vol. V) 313; Bolivia Model BIT, Art. 10, ibid. (Vol X) 283;
4 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
– arbitration pursuant to the Rules of Arbitration of the International Chamber
of Commerce;12
– arbitration pursuant to the Rules of Arbitration of the Stockholm Chamber of
Commerce;13
– arbitration pursuant to the Rules of the Cour Commune de Justice et
d’Arbitrage (CCJA);14
– a settlement procedure previously agreed to between the investor and host
state.15
4. In relation to state/state disputes, investment treaties almost without
exception refer such disputes to ad hoc arbitration with the President of the
International Court of Justice nominated as the appointing authority.16
Also,
Burkina Faso Model BIT, Art. 9(2)(d), ibid. 292; Guatemala Model BIT, Art. 8(d), ibid. (Vol. XII)
292; Italy Model BIT, Art. 10(3)(b), ibid. 301; Uganda Model BIT, Art. 7(3), ibid. 317; Ghana
Model BIT, Art. 9(2)(c), ibid. (Vol. XIII) 284; Romania Model BIT, Art. 10(2)(b), ibid. 291;
Canada Model BIT, Art. 27(1)(c), ibid. (Vol. XIV) 240; UK Model BIT (2005), Art. 8 (2) (‘If after
a period of six months from written notification of the claim this is no agreement on one of the
above procedures [ICSID or ICSID Additional Facility, ICC or UNCITRAL]’), Appendix 10;
Energy Charter Treaty, Art. 26(4), Appendix 4; NAFTA, Art. 1120(1), Appendix 3.
12
UK ‘Alternative’ Model BIT, Art. 8(2)(b), UNCTAD Compendium (Vol. III, 1996) 190; Austria
Model BIT, Art. 12(1)(c), ibid. (Vol. VII) 265; Belgo-Luxembourg Economic Union Model BIT,
Art. 10(3), ibid. 275; Denmark Model BIT, Art. 9(2)(d), ibid. 283; Germany Model BIT, Art. 11,
ibid. 301; Guatemala Model BIT, Art. 8(c), ibid. (Vol. XII) 292; Uganda Model BIT, Art. 7(3), ibid.
317; UK Model BIT (2005), Art. 8(2)(b), Appendix 10; Germany Model BIT, Art. 11, Appendix 7.
13
Sri Lanka Model BIT, Art. 8(2)(e), UNCTAD Compendium (Vol. V, 2000) 343; BelgoLuxembourg
Economic Union Model BIT, Art. 10(3), ibid. (Vol. VII, 2002) 275; Energy
Charter Treaty, Art. 26(4).
14
Burkina Faso Model BIT, Art. 9(2)(b), UNCTAD Compendium (Vol. X) 292.
15
USA Model BIT, Art. 9(3)(a)(iv), UNCTAD Compendium (Vol. VI, 2002) 507; Austria Model
BIT, Art. 12(1)(b), ibid. (Vol. VII) 264; Guatemala Model BIT, Art. 8(d), ibid. (Vol. XII) 292;
Kenya Model BIT, Art. 10(b)(iii), 10(c), ibid. 310; Ghana Model BIT, Art. 9(2)(c), ibid. (Vol.
XIII) 284; Romania Model BIT, Art. 10(2)(b), ibid. 291; Canada Model BIT, Art. 27(d), ibid.
(Vol. XIV) 240 (‘any other body of rules approved by the Commission as applicable for
arbitration under this Section’, the Commission to be established in accordance with Art. 51
and ‘comprising cabinet-level representatives of their designees’); Energy Charter Treaty, Art. 26
(2)(6), Appendix 4.
16
Asian–African Legal Consultative Committee Model BIT, Art. 11(iii), UNCTAD Compendium
(Vol. III, 1996) 122; Chile Model BIT, Art. 9(4), ibid. 148; China Model BIT, Art. 8(4), ibid. 154;
Switzerland Model BIT, Art. 9(4), ibid. 182; UK Model BIT, Art. 9(4), ibid. 191; Egypt Model
BIT, Art. 9(4), ibid. (Vol. V, 2000) 298; Jamaica Model BIT, Art. 9(4), ibid. 321; Malaysia Model
BIT, Art. 8(4), ibid. 330; Netherlands Model BIT, Art. 12(4), ibid. 337; Sri Lanka Model BIT,
Art. 9(4), ibid. 344; Croatia Model BIT, Art. 11, ibid. (Vol. VI, 2002) 477; Iran Model BIT, Art. 13,
ibid. 483–4; Peru Model BIT, Art. 9, ibid. 498; Austria Model BIT, Art. 20, ibid. (Vol. VII)
267; Belgo-Luxembourg Economic Union Model BIT, Art. 11, ibid. 276; Denmark Model BIT,
Art. 10, ibid. 284–5; Finland Model BIT, Art. 10, ibid. 293; Germany Model BIT, Art. 10, ibid.
300–1; South Africa Model BIT, Art. 8, ibid. (Vol. VIII) 277; Turkey Model BIT, Art. 8, ibid.
284–5; Benin Model BIT, Art. 8, ibid. (Vol. IX) 282–3; Burundi Model BIT, Art. 9, ibid. 292–3;
Mauritius Model BIT, Art. 9, ibid. 300; Mongolia Model BIT, Art. 9, ibid. 306–7; Sweden Model
BIT, Art. 9, ibid. 314. The USA Model BIT nominates the Secretary-General of ICSID as the
appointing authority: Art. 10, ibid. (Vol. VI) 508; Bolivia Model BIT, Art. 10, ibid. (Vol. X) 283;
Burkina Faso Model BIT, Art. 10(5), ibid. 293; Guatemala Model BIT, Art. 9(4), ibid. (Vol. XII)
293; Italy Model BIT, Art. 9(5), ibid. 300–1; Kenya Model BIT, Art. 11(d), ibid. 310; Uganda
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 5
in the vast majority of cases, investment treaties prescribe that the arbitral
tribunal shall determine its own rules of procedure. In the rare instances that
a model set of rules is specified, those rules designed for public international
law arbitrations between states are generally preferred.17
5. The rights and obligations as between the state parties to investment treaties
arise in the context of a classic bilateral relationship on the international plane
and are opposable by one state party against another on that basis. Furthermore,
disputes between the contracting states fit into the familiar paradigm of arbitrations
governed by public international law. In contradistinction, it will be
demonstrated in this chapter that the public international law paradigm for
international claims for harm to individuals or legal entities – the customary
law of diplomatic protection – is inappropriate as a foundation for the rationalisation
of the legal relationship between the private investor and the host state
of the investment. It is a relationship that can only be described as sui generis;
one of the principal objectives of this study is to give precise content to that
characterisation.
B . T H E L E G A L C H A R A C T E R O F T H E I N V E S T M E N T
T R E AT Y R E G I M E
6. The analytical challenge presented by the investment treaty regime for the
arbitration of investment disputes is that it cannot be adequately rationalised
either as a form of public international or private transnational dispute resolu-
tion.18
Investment treaties are international instruments between states governed
by the public international law of treaties. The principal beneficiary of the
investment treaty regime is most often a corporate entity established under a
municipal law,19
while the legal interests protected by the regime are a bundle of
Model BIT, Art. 11(3), ibid. 319; Ghana Model BIT, Art. 11(4), ibid. (Vol. XIII) 284; Romania
Model BIT, Art. 10(3), ibid. 291; Canada Model BIT, Art. 48(4), ibid. (Vol. XIV) 253. The
France Model BIT nominates the Secretary General of the UN, Art. 11: ibid. (Vol. V) 307. The
Energy Charter Treaty nominates the Secretary General of the Permanent Court of Arbitration:
Art. 27, see Appendix 4.
17
The Austria Model BITselects the Permanent Court of Arbitration Optional Rules for Arbitrating
Disputes, Art. 21(2), UNCTAD Compendium (Vol. VII, 2002) 267. The NAFTA Parties have
enacted a very detailed set of ‘Model Rules of Procedure for Chapter 20 of the NAFTA’ (relating
to state/state disputes) in accordance with Article 2012 of the NAFTA. Conversely, the Energy
Charter Treaty makes no distinction between the procedural rules for investor/state and state/
state arbitrations by selecting the UNCITRAL Arbitration Rules for state/state disputes in
Article 27(3)(f), see Appendices 3 and 4.
18
See, e.g.: J. Paulsson, ‘Arbitration Without Privity’ (1995) 10 ICSID Rev – Foreign Investment LJ
232, 256 (‘[T]his is not a sub-genre of an existing discipline. It is dramatically different from
anything previously known in the international sphere’).
19
See the commentary to Rule 7 below.
6 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
rights in an investment arising under a different municipal law.20
The standards
of protection are prescribed by the international treaty,21
but liability for their
breach is said to give rise to a ‘civil or commercial’ award for enforcement
purposes.22
7. There is nothing revolutionary in abandoning the simple dichotomy between
public and private international law conceptions of dispute resolution. Modern
international society and commerce are characterised by a complex and sometimes
disordered web of relationships between states, individuals, international
organisations and multinational corporations. As this web grows in density and
coverage, traversing territorial and jurisdictional frontiers, the challenges for the
international or transnational legal order become ever more acute. The response
to these challenges has often been in the form of innovative international treaties
that introduce an array of substantive norms and a distinct dispute resolution
mechanism. In the sphere of legal relationships between private entities and
sovereign states, there are parallels between the legal regime created by investment
treaties on the one hand, and those regimes established by the European
Convention on Human Rights,23
and the Algiers Accords (creating the Iran/
US Claims Tribunal), on the other.24
Anyone within the ‘juridical space’ of
the European Convention on Human Rights has the right to pursue remedies
directly against a contracting state party for violations of international minimum
standards of treatment, formulated as universal and inalienable human rights,
before an international tribunal.25
Nationals of Iran and the United States have
the right to pursue remedies directly against the other state for certain violations
of international minimum standards of treatment, such as the prohibition against
20
See the commentary to Rule 4 below.
21
See the commentary to Rule 10 below.
22
See the commentary to Rule 12 below.
23
This link was made by G. Burdeau, ‘Nouvelles perspectives pour l’arbitrage dans le contentieux
économique intéressant l’Etat’ (1995) Revue de l’arbitrage 3, 16 (‘[L]a “philosophie” des deux
mécanismes paraît la même: il s’agit dans l’un et l’autre cas d’ouvrir à des particuliers non
identifiés à l’avance un droit de recours direct contre un Etat en vue de sanctionner le respect de
l’engagement pris par ce dernier dans un traité international d’accorder un certain traitement à des
personnes privées.’).
24
Investment treaty tribunals, and counsel pleading before them, cite precedents of the Iran/US
Claims Tribunal with great frequency. However, the tribunal in Pope & Talbot v Canada (First
Merits) 7 ICSID Rep 69, 84–94 and 84–104, appeared to reject the significance of the precedents
of the Iran/US Claims Tribunal in relation to the prohibition against expropriation in Article 1110
of NAFTA. For a critique of this approach: M. Brunetti, ‘The Iran-United States Claims Tribunal,
NAFTA Chapter 11, and the Doctrine of Indirect Expropriation’ (2001) 2 Chicago J of Int L 203.
25
See generally: J. Fawcett, The Application of the European Convention on Human Rights (1987);
P. Van Dijk and G. Van Hoof, Theory and Practice of the European Convention of Human
Rights (2006, 4th edn); D. Harris, M. O’Boyle and A. Warbick, Law of the European Convention
on Human Rights (1995); D. Shelton, Remedies in International Human Rights Law (2004,
2nd edn) 147; M. Janis, R. Kay and A. Bradley, European Human Rights Law (2008, 3rd edn);
A. Mowbray, Cases and Materials on the European Convention on Human Rights (2007, 2nd edn);
R. Blackburn and J. Polakiewicz (eds.), Fundamental Rights in Europe (2002); H. Steiner,
P. Alston and R. Goodman, International Human Rights in Context (2007, 3rd edn).
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 7
uncompensated expropriation, before an international tribunal.26
The right of
recourse to the European Court of Human Rights, the Iran/US Claims Tribunal
and the international tribunals established pursuant to investment treaties has
catapulted individuals and corporate entities into an international system of
adjudication alongside states. In this respect also the traditional view of the
international legal order that relegated individuals and corporate entities to the
status of mere ‘objects’ of international law is no longer sustainable.27
8. An analysis of these different treaty regimes would be distorted if one were to
adhere to a strict distinction between public and private international law
conceptions of dispute resolution. Many of the awards of investment treaty
tribunals – and the pleadings of parties to these disputes – disclose a dogmatic
distinction between ‘international’ or ‘treaty’ versus ‘municipal’ or ‘contractual’
spheres, as if each concept can be forced into a separate hermetically sealed box.
By characterising the status of an investment treaty tribunal as ‘international’,
arbitrators have professed to occupy a position of supremacy in a ‘hierarchy’ of
legal orders to justify the relegation of any competing law or jurisdiction. The
principle of international law that is used to buttress this approach, whether
expressly or implicitly, is the rule of state responsibility that a state cannot invoke
provisions of its own law to justify a derogation from an international obligation.
Article 3 of the ILC’s Articles on the Responsibility of States for International
Wrongs, titled ‘Characterization of the act of a State as internationally wrongful’,
is a codification of this rule, which reads:
The characterization of an act of a State as internationally wrongful is
governed by international law. Such characterization is not affected by the
characterization of the same act as lawful by internal law.28
9. When an investment treaty tribunal rules upon the international legality of
a state’s conduct then an appeal to this conflict-regulating norm is entirely
justified. But investment disputes give rise to a host of other issues that do
not generate a clash between the international and municipal legal orders –
questions pertaining to the existence, nature and scope of the private rights
26
See generally: G. Aldrich, The Jurisprudence of the Iran–United States Claims Tribunal (1996);
R. Lillich, D. Magraw and D. Bederman, The Iran–United States Claims Tribunal: Its Contribution
to the Law of State Responsibility (1997); C. Brower and J. Brueschke, The Iran–United States
Claims Tribunal (1998); M. Mohebi, The International Law Character of the Iran–United States
Claims Tribunal (1999); C. Drahozal and C. Gibson, The Iran–U.S. Claims Tribunal at 25 (2007).
27
The ‘father’ of the positivist conception of the subjects of international law was arguably
Bentham, who in 1789 defined international law as ‘the mutual transactions between sovereigns’:
J. Bentham, Introduction to the Principles of Morals and Legislation (1789) 296. Janis has
pointed out the irony that in the same year as Bentham propounded this thesis, the First United
States Congress authorised suits by individuals to address grievances under the law of nations
before the Federal District Courts pursuant to the Judiciary Act: M. Janis, ‘Subjects of
International Law’ (1984) 17 Cornell Int L J 61.
28
The ILC’s Articles and official commentary thereto are reproduced in: Crawford, ILC’s Articles, 61.
8 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
comprising the investment being the prime example. These matters are outside
the purview of international law and the rule of state responsibility just recalled.
To treat international law as a self-sufficient legal order in the sphere of foreign
investment is untenable. At the intersection of private investment rights and
international investment regulation, problems relating to overlapping adjudicative
competence and the application of municipal law cannot be resolved by
playing the simple ‘international trump card’ of Article 3 of the ILC’s Articles.
10. There is, moreover, precious little utility in adopting a binary classification
scheme that distinguishes between ‘international’ and ‘municipal’ in respect of
procedural matters. Witness the example of the Iran/US Claims Tribunal, whose
precise legal status remains a subject of controversy even as its mandate expires
after nearly thirty years of activity. The literature on the subject testifies to a
complete lack of consensus. Judge Brower of the Tribunal asserts that ‘there
can be little doubt that the Tribunal is an international institution established
by two sovereign States and subject to public international law’.29
Similarly,
Fox regards the Tribunal as an example of ‘private claims taken up by the State
and presented through an inter-State arbitration’.30
The Iranian writer, Seifi,
emphasises the Tribunal’s ‘exclusively international character’,31
while the
American writer, Caron, takes the view that, at least in relation to claims involving
nationals, ‘the Accords established a clear presumption that the legal system of the
Netherlands would govern the Tribunal’s arbitral process’.32
Two Dutch lawyers,
Hardenberg and van den Berg, reach contrary conclusions on the applicability
of Dutch law as the lex loci arbitri.33
Other commentators have perhaps sought
the middle ground in describing the procedural regime for the Iran/US Claims
Tribunal as ‘denationalised’:
[I]t appears truer to the Accords to recognize the Tribunal as a denationalized
body subject to its organic treaty and its rules, but not to national
arbitral law.34
29
Brower and Brueschke, The Iran–United States Claims Tribunal, 16.
30
H. Fox, ‘States and the Undertaking to Arbitrate’ (1988) 37 ICLQ 1, 3.
31
J. Seifi, ‘State Responsibility for Failure to Enforce Iran–United States Claims Tribunal Awards
by the Respective National Courts: International Character and Non-Reviewability of the Awards
Reconfirmed’ (1999) 16 J of Int Arbitration 5, 17.
32
D. Caron, ‘The Nature of the Iran–United States Claims Tribunal and the Evolving Structure of
International Dispute Resolution’ (1990) 84 AJIL 104, 146.
33
L. Hardenberg, ‘The Awards of the Iran–US Claims Tribunal Seen in Connection with the Law of
the Netherlands’ (1984) Int Business Lawyer 337 (concluding that Dutch law does not apply as
the lex loci arbitri); A. van den Berg, ‘Proposed Dutch Law on the Iran–United States Claims
Settlement Declaration, A Reaction to Mr. Hardenberg’s Article’ (1984) Int Business Lawyer 341
(concluding that Dutch law does apply).
34
W. Lake and J. Dana, ‘Judicial Review of Awards of the Iran–United States Claims Tribunal: Are
the Tribunal’s Awards Dutch?’ (1984) 16 Law & Policy in Int Business 755, 811. Sacerdoti also
avoids the public/private dichotomy simply by characterising the awards as commercial arbitral
awards: G. Sacerdoti, ‘Bilateral Investment Treaties and Multilateral Instruments on Investment
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 9
11. An Iranian writer, Avanessian, agrees with this analysis, but adds:
[The Tribunal] somehow exists and operates on the borderline of public
and private international law, sometimes falling in the domain of one and
sometimes in that of the other.35
12. A complete spectrum of views can thus be distilled from the literature on the
juridical status of the Iran/US Claims Tribunal. The fact that the writers just
mentioned reach divergent conclusions on this subject should at least put those
dealing with investment treaty arbitration on notice of the complexity of the
issues at hand. Any single-sentence proclamations about the true nature of the
legal regime for the settlement of investor/state disputes must be viewed with
scepticism.
Rule 1. Where the contracting states to an investment treaty have
agreed to a procedure for the judicial settlement of disputes
between an investor and the host state, a claim advanced
by the investor in accordance with such procedure is its own
claim and the national contracting state of the investor has no
legal interest in respect thereof.
Rule 2. The rules of admissibility of diplomatic protection in general
international law are not generally applicable to the regime
for the settlement of disputes between an investor and the
host state created by an investment treaty.
A . T H E B E N E F I C I A RY O F I N V E S T M E N T
T R E AT Y R I G H T S
13. In this chapter we are concerned with a question of singular importance:
whether a claimant investor, by prosecuting an investment treaty claim, is
vindicating its own rights conferred by the treaty or is acting as a proxy for its
national state as the true repository of the rights and obligations set out in the
treaty. From the perspective of public international law the same question can be
formulated differently: does the investor/state arbitral mechanism in the modern
investment treaty create a device for triggering the rights and obligations of
diplomatic protection? If it does, then the investor would essentially be stepping
into the shoes of its national state and bringing a claim on behalf of its national
Protection’ (1997) 269 Hague Recueil 251, 423 (‘[J]udgments issued by the Tribunal on private
claims can be equated to those of international commercial arbitral tribunals and … can be
enforced accordingly.’).
35
A. Avanessian, ‘The New York Convention and Denationalised Arbitral Awards (With Emphasis
on the Iran–United States Claims Tribunal)’ (1991) J of Int Arbitration 5, 8.
10 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
state. This is the ‘derivative’ as opposed to ‘direct’ model for rationalising the
juridical nature of investment treaty arbitration.
14. The implications that follow either approach range from the possibility of
the investor’s waiver of investment treaty protection to the justiciability of the
judicial review of arbitral awards rendered by investment treaty tribunals.
Moreover, if the investment treaty regime can be conceptualised according to
the ‘derivative’ model, then it would be logical to import into the investment
treaty regime the admissibility rules of diplomatic protection in general international
law.
15. For the purposes of the following analysis, a distinction will be made between
the procedural right to prosecute an international arbitration against the host state
and the substantive obligations of treatment upon which the claims in such an
arbitration are founded.
B . T H E ‘ D E R I VAT I V E ’ M O D E L V E R S U S
T H E ‘ D I R E C T ’ M O D E L
(i) The ‘derivative’ model and diplomatic protection
16. At the heart of the ‘derivative’ theory is the idea that investment treaties
‘institutionalise and reinforce’36
the system of diplomatic protection. In accordance
with this model, the obligations of minimum treatment are owed to the
contracting states just as in general international law, but those states confer
standing upon their national investors to enforce such obligations before an
international tribunal. Investors therefore procedurally step into the shoes of
their national state, without thereby becoming privy to their inter-state legal
relationship. This was the procedural regime adopted by the Mixed Claims
Commissions established to hear US and British claims against Latin American
states including Mexico, Chile, Venezuela and Peru as well as claims against
Germany after the First World War.37
As the institution of diplomatic protection
forms the centrepiece of the ‘derivative’ model it is necessary to examine the
legal relationships that are generated by that institution.
17. The rights and obligations in the general international law of diplomatic
protection arise exclusively as between states. The injured foreign national is
not privy to this legal relationship and is thus impotent to enforce the obligations
of general international law in its own right. This has been the orthodox view of
36
J. Crawford, ‘The ILC’s Articles on Responsibility of States for International Wrongful Acts: A
Retrospect’ (2002) 96 AJIL 874, 888.
37
J. Simpson and H. Fox, International Arbitration, Law and Practice (1959) Chs. 1–4.
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 11
diplomatic protection since it was first rationalised by Vattel in the middle of the
eighteenth century:
Anyone who mistreats a citizen directly offends the State. The sovereign
of that State must avenge its injury, and if it can, force the aggressor to
make full reparation or punish him, since otherwise the citizen would
simply not obtain the main goal of civil association, namely, security.38
18. Borchard, in his influential treatise on diplomatic protection in 1913, was
able to divine a consistent line of judicial authority supporting Vattel’s rationalisation
of diplomatic protection, and on this basis articulated his own restatement
of the principle:
Diplomatic protection is in its nature an international proceeding, constituting
an appeal by nation to nation for the performance of the obligations
of the one to the other, growing out of their mutual rights and duties.39
19. It was some years later that the Permanent Court of International Justice
made its pronouncement in the Mavrommatis Palestine Concessions case40
in
line with these earlier authorities:
It is an elementary principle of international law that a State is entitled to
protect its subjects, when injured by acts contrary to international law
committed by another State, from whom they have been unable to obtain
satisfaction through the ordinary channels. By taking up the case of one of
its subjects and by resorting to diplomatic action or international judicial
proceedings on his behalf, a State is in reality asserting its own rights – its
right to ensure, in the person of its subjects, respect for the rules of international
law.41
20. The dispute in Mavrommatis Palestine Concessions originated in the
British Government’s decision, as Mandatory for Palestine, to grant concessions
for the provision of public services which duplicated earlier concessions
obtained by a Greek national (Mavrommatis) from the previous ruler of
Palestine (the Ottoman Empire). The Permanent Court found that upon the
election by the Government of Greece to espouse a diplomatic protection claim
to redress the wrong to its national, the dispute became a dispute between the
Mandatory (United Kingdom) and a member of the League of Nations, Greece,
38
E. de Vattel, Le droit des gens ou les principes de la loi naturelle (Vol. I, 1758) 309. The
context of Vattel’s formulation of diplomatic protection, as an alternative to the private right of
reprisal, is explained by R. Lillich, ‘The Current Status of the Law of State Responsibility for
Injuries to Aliens’, in R. Lillich (ed.), International Law of State Responsibility for Injuries to
Aliens (1983) 2–3.
39
E. Borchard, The Diplomatic Protection of Citizens Abroad or The Law of International Claims
(1915) 354; J. Brierly, ‘Implied State Complicity in International Claims’ (1928) 9 BYBIL 48.
40
(UK v Greece) 1924 PCIJ (Ser. A) No. 2.
41
Ibid. 12.
12 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
for the purposes of the dispute resolution provision contained in the British
Mandate over Palestine.42
21. The Mavrommatis ‘formula’ was applied in several other cases before the
Permanent Court43
and found its way into the judgments of the International
Court of Justice44
and several other international tribunals45
so that its continued
validity is beyond doubt.46
This is not to say that the modalities of
diplomatic protection have not come under criticism as out of step with the
modern system of international law, which elevates the rights of individuals and
private entities to a more prominent place. But deviations from the orthodox
position articulated in Mavrommatis Palestine Concessions have been few and
unpersuasive. García Amador argued that developments in international human
rights law have rendered the device whereby a state asserts its own right when it
acts on behalf of its national an ‘outdated fiction’ that should be discarded.47
O’Connell likewise rejected the Mavrommatis formula as ‘a survival of the
nineteenth-century thesis of a world composed of absolute sovereignties unwilling
to limit their sovereign freedom of action except in their own interests’.48
These critiques may be fair, but far from providing an analytical rationale for
rejecting the received orthodoxy in general international law, they simply
anticipate the reason that human rights conventions and investment treaties
now overshadow recourse to diplomatic protection. Attempts to equate the
traditional institution of diplomatic protection to the new treaty regimes that
provide direct rights of recourse are counterproductive because they ultimately
undermine the possibility of diplomatic protection assuming even a residual
role in the resolution of international disputes.49
42
Ibid.
43
Panecezys-Saldutiskis Railway (Estonia v Latvia) 1938 PCIJ (Ser. A/B) No. 76; Serbian and
Brazilian Loans (France v Serbia) 1929 PCIJ (Ser. A) No. 20; Chorzów Factory (Germany v
Poland) 1928 PCIJ (Ser. A) No. 17 (Merits).
44
Reparations for Injuries Suffered in the Service of the United Nations Case (Advisory Opinion)
1949 ICJ Rep 174, 181 (‘[T]he defendant State has broken an obligation towards the national
State in respect of its nationals.’); Nottebohm (Liechtenstein v Guatemala) 1954 ICJ Rep 4;
Barcelona Traction, Light and Power Co. Ltd (Belgium v Spain) 1970 ICJ Rep 4.
45
Administrative Decision No. V (USAv Germany) 7 RIAA 140 (1924) per Umpire Parker: (‘[T]he
nation is injured through injury to its national and it alone may demand reparation as no other
nation is injured.’) See also the cases cited by: C. Amerasinghe, Local Remedies in International
Law (1990) 57 at note 15; C. Parry, ‘Some Considerations upon the Protection of Individuals in
International Law’ (1956) Hague Recueil 672, 676–80.
46
J. Dugard, ‘First Report on Diplomatic Protection’ (2000) UN Doc A/CN.4/506, paras. 10–32.
47
F. García Amador, ‘State Responsibility. Some New Problems’ (Vol. II, 1958) 94 Hague Recueil
421, 437–9, 472.
48
D. O’Connell, International Law (Vol. 2, 1970, 2nd edn) 1030; C. de Visscher, ‘Cours général de
principes de droit international public’ (1954/II) 86 Hague Recueil, 507 (‘[Diplomatic protection
is] a procedure by which States assert the right of their citizens to a treatment in accordance with
international law’).
49
In her report to the Committee on Diplomatic Protection of Persons and Property of the
International Law Association, Kokott raised two possible approaches to the law of diplomatic
protection. The first is to ‘call for a change of the rules governing diplomatic protection with the
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 13
22. The notion of a vicarious injury caused to the state of the national is essential
to the rationalisation of diplomatic protection because it transforms damage
done to private interests into an international delict opposable by one sovereign
state to another. This transformation is not a procedural quirk or ‘fiction’ as is
sometimes maintained,50
but is instead fundamental to the compatibility of
diplomatic protection with the traditional principles of state responsibility for
international wrongs. As Judge Fitzmaurice stated in Barcelona Traction:
Clearly the ‘bond of nationality’ between the claimant State and the
private party for whom the claim is brought must be in existence at the
time when the acts complained of occurred, or it would not be possible for
the claimant State to maintain that it had suffered a violation of international
law ‘in the person of its national’, – and although this doctrine
has been called the ‘Vatellian fiction’, it nevertheless seems to constitute
an indispensable foundation for the right of international claim on behalf
of private parties.51
23. It would be a mistake, therefore, to postulate that the international law of
diplomatic protection could do without this transformation if push came to
shove. A state bringing a diplomatic protection claim is not an agent of its
national who has a legally protected interest at the international level; the state
is rather seeking redress for the breach of an obligation owed to itself.52
(ii) The ‘derivative’ model and the Iran/US Claims Tribunal
24. The Iran/US Claims Tribunal, established by the Algiers Accords,53
has
jurisdiction over: (i) claims by American and Iranian nationals against Iran and
the United States respectively that ‘arise out of debts, contracts … expropriations
or other measures affecting property rights’;54
(ii) ‘official claims of the
United States and Iran against each other arising out of contractual arrangements
aim of meeting the demands of investors’. The second option, which the author endorsed as more
‘realistic’, is ‘to accept that, in the context of foreign investment, the traditional law of diplomatic
protection has been to a large extent replaced by a number of treaty-based dispute settlement
procedures’. It is submitted that Kokott’s conclusion is correct. J. Kokott, ‘Interim Report on the
Role of Diplomatic Protection in the Field of the Protection of Foreign Investment’ in
International Law Association, Report of the Seventieth Conference, New Delhi (2002) 31. It
was later adopted by the ILA: F. Orrego Vicuna, D. Bederman and J. Kokott, ‘Diplomatic
Protection of Persons and Property’, in International Law Association, Report of the Seventy
second Conference, Toronto (2006) 388.
50
J. Dugard, ‘First Report on Diplomatic Protection’ (2000) UN Doc A/CN.4/506, paras. 19–21.
51
Barcelona Traction, Light and Power Co. Ltd (Belgium v Spain) 1970 ICJ Rep 4, 99 at para. 61.
52
The ILC’s Articles on Diplomatic Protection are neutral as to whether the state exercising
diplomatic protection does so in its own right or that of its national: ILC, Report of the Fiftyeighth
Session (2006) UN Doc A/CN 4/L 684, Commentary to Art. 1 at para. 5.
53
The General Declaration and the Claims Settlement Declaration (the ‘Algiers Accords’) are
reproduced at: (1981) 75 AJIL 418.
54
Art. II(1) of the Claims Settlement Declaration.
14 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
between them for the purpose and sale of goods and services’;55
and (iii) disputes
between Iran and the United States concerning the interpretation or performance
of the General Declaration or the Claims Settlement Declaration.56
25. There is an important difference between the three types of jurisdiction
vested in the Iran/US Claims Tribunal57
for the investment treaty regime.
Investor/state disputes under investment treaties most closely resemble the
first of the three heads of jurisdiction of the Iran/US Claims Tribunal because
private interests are clearly at stake. Therefore it is valuable to examine how the
Tribunal itself has rationalised the nature of the claimant’s cause of action. Is
this an example of a private claimant stepping into the shoes of its national state?
26. The issue arose most directly in the Dual Nationality case.58
Iran challenged
the admissibility of claims brought against it by persons who were both citizens
of the United States and Iran by relying on a rule of general international law
prohibiting the exercise of diplomatic protection on behalf of a national who
also has the nationality of the respondent state.59
Iran justified its reliance on
this rule on the basis that the Algiers Accords ‘intended the function of the
Tribunal to be the adjudication of international claims on the basis of the
exercise of diplomatic protection’.60
27. The Full Tribunal rejected Iran’s argument emphatically, clearly distinguishing
its jurisdiction over inter-state disputes from its jurisdiction extending to
private claimants:
While this Tribunal is clearly an international tribunal established by treaty
and while some of its cases involve the interpretation and application
of public international law, most disputes (including all of those brought
by dual nationals) involve a private party on one side and a Government
or Government-controlled entity on the other, and many involve primarily
issues of municipal law and general principles of law. In such cases it is rights
of the claimant, not of his nation, that are to be determined by the Tribunal.61
55
Ibid. Art. II(2).
56
Ibid. Art. II(3).
57
The distinction is explored by some writers, including: D. Lloyd Jones, ‘The Iran–United States
Claims Tribunal: Private Rights and State Responsibility’ (1984) 24 Victoria J of Int L 259,
261–2; H. Fox, ‘States and the Undertaking to Arbitrate’ (1988) 37 ICLQ 1, 21.
58
Iran v USA (Case DEC 32-A18-FT, 6 April 1984) (Dual Nationality) 5 Iran-US CTR 251.
59
Ibid.
60
Ibid. 254.
61
Ibid. 26. See also: Concurring Opinion of Willem Riphagen, ibid. paras. 2–3; Esphanian (Nasser) v
Bank Tejarat (Case 31-157-2, 29 March 1983) 2 Iran-US CTR 157, 165 (‘[T]he agreement of the
two Governments to create this Tribunal was not a typical exercise of diplomatic protection of
nationals in which a State, seeking some form of international redress for its nationals, creates a
tribunal to which it, rather than its nationals, is a party. In that typical case, the State espouses
the claims of its nationals, and the injuries for which it claims redress are deemed to be injuries to
itself; here, the Government of the United States is not a party to the arbitration of claims of United
States nationals, not even in the same claims where it acts as counsel for these nationals.’).
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 15
28. The Full Tribunal later reiterated in Case A/21, when confronted again with
Iran’s submission that the claims of nationals are in reality the claims of their
governments, that ‘Tribunal awards uniformly recognize that no espousal of
claims by the United States is involved in the cases before it.’62
(iii) The ‘derivative’ model and investment treaty arbitration
29. In the investment treaty context, the leading authority for a ‘derivative’
conceptualisation of the international claim brought by the investor is Loewen v
USA.63
The tribunal first endorsed a sharp distinction between the ‘municipal’
and ‘international’ legal orders in its description of the rights and obligations
existing under NAFTA:
Rights of action under private law arise from personal obligations …
brought into existence by domestic law and enforceable through domestic
tribunals and courts. NAFTA claims have a quite different character,
stemming from a corner of public international law in which, by treaty, the
power of States under that law to take international measures for the correction
of wrongs done to its nationals has been replaced by an ad hoc definition
of certain kinds of wrong, coupled with specialist means of compensation.64
30. Upon this foundation, the tribunal then articulated a ‘derivative’ scheme for
understanding the investor’s claim:
There is no warrant for transferring rules derived from private law into a
field of international law where claimants are permitted for convenience to
enforce what are in origin the rights of Party states.65
31. The result of this derivative approach in Loewen was the application
of the continuous nationality rule in diplomatic protection. In
the NAFTA context, the United States of America,66
Canada67
and
62
Iran v USA (Case DEC 62-A21-FT, 4 May 1987) (State Party Responsibility for Awards
Rendered against its Nationals) 14 Iran-US CTR 324, 330 at para. 12. The position was different
in relation to the small claims: Claims Settlement Declaration, Article III(3) (‘Claims of nationals
of the United States and Iran that are within the scope of this Agreement shall be presented to the
Tribunal either by claimants themselves or, in the case of claims of less than $250,000, by the
government of such national.’).
63
(Merits) 7 ICSID Rep 442.
64
Ibid. 488/233.
65
Ibid. 488/233 (emphasis added). Elsewhere in its award, the Loewen tribunal appears to contradict
this ‘derivative’ approach by stating that ‘Chapter Eleven of NAFTA represents a progressive
development in international law whereby the individual investor may make a claim on its
own behalf and submit the claim to international arbitration’ ibid. 485/223.
66
See, in particular, the US Government’s arguments to the effect that ‘direct claims’ are no
different, and subject to the same rules as ‘espoused claims’: Reply to the Counter-Memorial
of the Loewen Group, Inc on Matters of Jurisdiction and Competence (26 April 2002) 33 et seq.,
available at: www.state.gov/documents/organization/9947.pdf.
67
S.D. Myers v Canada (Merits) 8 ICSID Rep 18; Amended Memorandum of Fact and Law of
the Applicant, the Attorney General of Canada, The Attorney General of Canada v S.D. Myers,
Inc, Court File No. T-225-01, para. 67, available at: www.dfait-maeci.gc.ca/tna-nac/documents/
Myersamend.pdf (‘The obligations listed in Section A of NAFTA Chapter Eleven are not owed
16 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
Mexico68
have argued for the derivative model in defending claims based upon
the NAFTA Chapter 11 obligations.
(iv) The investment treaty regime and diplomatic protection
distinguished
32. In deciding between the competing ‘derivative’ and ‘direct’ theories, the
starting point must be that international legal theory allows for both possibilities.
There is no impediment to states in effect delegating their procedural right to bring
a diplomatic protection type claim to enforce the substantive rights of the states
concerned within a special treaty framework. On the other hand, there is also no
reason why an international treaty cannot create rights for individuals and private
entities, whether or not such rights fall to be classified as ‘human rights’. This was
the conclusion of the International Court of Justice in the LaGrand case.69
33. The following analysis of the practice of investment treaty arbitration
suggests that investment treaties do not give legislative effect to the ‘derivative’
model based on the Mavrommatis formula for the presentation of international
claims against a state, but rather encapsulate a ‘direct’ model.
(1) Functional control of the claim
34. In the context of diplomatic protection, the state of the injured national has
full discretion as to whether to take up the claim on behalf of its injured national
at all.70
It may waive, compromise or discontinue the presentation of the claim
irrespective of the wishes of the injured national.71
In exercising this discretion,
the state often gives paramount consideration to the wider ramifications of
the espousal of a diplomatic protection claim for the conduct of its foreign
policy vis-à-vis the host state.72
If the state does elect to espouse a diplomatic
directly to individual investors. Rather, the disputing investor must prove that the NAFTA Party
claimed against has breached an obligation owed to another NAFTA Party under Section A and
that the investor had incurred loss or damage by reason of or arising out of that breach.’).
68
See Chapter 2 note 357 below.
69
(Germany v USA) Judgment of 27 June 2001, 2001 ICJ Rep 466, 494 at para. 78 (‘At the
hearings, Germany further contended that the right of the individual to be informed without delay
under Article 36, paragraph 1, of the Vienna Convention was not only an individual right, but has
today assumed the character of a human right. In consequence, Germany added, “the character of
the right under Article 36 as a human right renders the effectiveness of this provision even more
imperative”. The Court having found that the United States violated the rights accorded by
Article 36, paragraph 1, to the LaGrand brothers, it does not appear necessary to it to consider the
additional argument developed by Germany in this regard.’).
70
See the state practice on the regulation of this discretion under municipal law: J. Dugard, ‘First
Report on Diplomatic Protection’ (2000) UN Doc A/CN.4/506, paras. 80–7.
71
Borchard, Diplomatic Protection of Citizens Abroad, 366.
72
Barcelona Traction, Light and Power Co. Ltd (Belgium v Spain) 1970 ICJ Rep 4, 44 at paras. 78–9;
G. Berlia, ‘Contribution à l’étude de la nature de la protection diplomatique’ (1957) Annuaire
français de droit international 63; A. Lowenfeld, ‘Diplomatic Intervention in Investment Disputes’
(1967) 61 American Society Int Law Proceedings 97.
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 17
protection claim then it is master of the claim in the sense that it is not obliged to
consult with its national on the conduct of the proceedings. If liability is
established then damages are awarded to the state and not to the national, and
there is no international rule to compel any form of distribution of the monetary
award to the de cujus.73
Moreover, the national state is entitled to compromise
the award of full compensatory damages by settling the claim for a reduced
amount with the host state. It may enter into a general lump sum agreement
for the partial compensation of multiple claims.74
It may abandon the claim
entirely, in effect waiving the right in question.
35. The International Court of Justice gave a stark appraisal of these features of
a diplomatic protection claim in Barcelona Traction:75
[W]ithin the limits prescribed by international law, a State may exercise
diplomatic protection by whatever means and to whatever extent it thinks
fit, for it is its own right that the State is asserting…
The State must be viewed as the sole judge to decide whether its protection
will be granted, to what extent it is granted, and when it will cease. It
retains in this respect a discretionary power the exercise of which may be
determined by considerations of a political or other nature, unrelated to the
particular case. Since the claim of the State is not identical with that of the
individual or corporate person whose cause is espoused, the State enjoys
complete freedom of action.76
36. The situation with an investment treaty claim is very different. In pursuing
its own claim, the investor is under no obligation to inform its national state of
the existence of proceedings against the host state, nor to consult with the state on
the substantive and procedural issues that arise in the proceedings. The investor
is guided in the prosecution of its claim solely by the dictates of self-interest
without necessary regard for any consequences to the diplomatic relationship
between its national state and the host state. The financial burden of presenting an
investment treaty claim falls exclusively on the investor. Damages recovered in
the award are to the account of the investor and the national state has no legal
interest in the compensation fixed by the arbitral tribunal.
37. Although the point is by no means conclusive, one would expect that if
the investor were merely stepping into the shoes of its national state to enforce
73
Administrative Decision No. V (USA v Germany) 7 RIAA 119, 152–3 (1924). See also the
precedents cited by: Amerasinghe, Local Remedies in International Law, 60 at note 24. The same
rule applies in relation to lump sum agreements: D. Bederman, ‘Interim Report on Lump Sum
Agreements and Diplomatic Protection’ in International Law Association, Report of the Seventieth
Conference, New Delhi (2002) 7.
74
M. Bennouna, ‘Preliminary Report on Diplomatic Protection’ (1998) UN Doc A/CN.4/484,
para. 20.
75
Barcelona Traction, Light and Power Co. Ltd (Belgium v Spain) 1970 ICJ Rep 4.
76
Ibid. 44 at paras. 78–9.
18 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
that state’s treaty rights, the national state would retain a residual interest in the
investment treaty arbitration. The precedents of the American–Turkish Claims
Commission are instructive on this point. Many claims were dismissed summarily
by the Commission because they were presented directly by counsel
retained by the injured nationals. This was found to be incompatible with the
diplomatic protection model incorporated into the American–Turkish Claims
Settlement of 1937:
It would, of course, bemonstrous to suggest thata governmentwouldthrough
some subterfuge pretend to support a claim without having any knowledge
of what, if anything, had in some way come before the Commission.77
38. The conclusion must be that, in the absence of a specific provision in the
BIT to the contrary, the national state of the investor retains no interest in
an investment treaty arbitration instituted against another contracting state.
It would no doubt be open to states to regulate their nationals’ conduct of
arbitration proceedings under investment treaties, for example by imposing an
obligation to keep the relevant government ministry informed of the existence
and progress of such arbitrations. Such a development is not reflected in investment
treaty practice and this is consistent with the notion that an investor is
invoking its own right in instituting an investment treaty arbitration.
39. This conclusion is reinforced by the instances when the national state of the
investor has actually opposed its claim before an investment treaty tribunal.
In the NAFTA case of GAMI v Mexico,78
the national state of the investor, the
United States of America, intervened pursuant to Article 1128 to contend that
the tribunal had no jurisdiction to hear GAMI’s claim.79
Likewise, in Mondev v
USA80
Canada (the national state of Mondev) made submissions to the tribunal,
which, without claiming to address the specific facts, tended to the conclusion
that Mondev’s claims should be dismissed on the merits.81
This practice contradicts
the view that investors are bringing derivative claims on behalf of their
own national state. There may be no community of interest between them in the
prosecution of investment treaty arbitrations; indeed, it may well be that their
interests are adverse.82
77
J. Moore, A Digest of International Law (1906) 616.
78
(Merits).
79
Submission of the United States of America, 30 June 2003, available at: www.state.gov/docu-
ments/organization/22212.pdf.
80
(Merits) 6 ICSID Rep 192.
81
Second Submission of Canada Pursuant to NAFTA Article 1128, 6 July 2001, available at: www.
state.gov/documents/organization/18271.pdf.
82
In Occidental Exploration & Production Company v Republic of Ecuador [2005] EWCA Civ
1116, [2006] QB 432, 12 ICSID Rep 129, 136/16–17, the English Court of Appeal referred to
these examples as set out in Z. Douglas, ‘The Hybrid Foundations of Investment Treaty
Arbitration’ (2003) BYBIL 151, 169–70 and adopted this writer’s conclusion that the situation
is ‘very different’ as compared with diplomatic protection.
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 19
(2) The nationality of claims rule
40. The nationality of claims rule in diplomatic protection prescribes that the
injured national must have the nationality of the claimant state at the time of
injury through to when notice of the claim is presented or the date of the award
or judgment.83
41. The doctrine of continuous nationality developed in response to the frictions
caused by individuals shifting allegiances to powerful states for the purposes
of espousing a diplomatic protection claim.84
This concern is obviously not
applicable to investment treaty arbitration because the procedural right of
recourse vests directly in the investor and remains with that investor; hence
there is less to be gained by the investor in contriving to ‘swap’ investment
treaties with a change of nationality.85
Here one would not necessarily expect
identity in the tests for nationality for diplomatic protection claims in general
international law and for investment treaty claims.
42. In relation to natural persons, the International Court of Justice in the
Nottebohm case86
imposed a requirement for the admissibility of diplomatic
protection claims that there must be an ‘effective’ or ‘genuine link’ between the
individual who has suffered the injury and the national state prosecuting the
claim. The Court thereby rejected the conferral of nationality under municipal
law as definitive for this purpose.87
The Court was concerned to ensure that only
one state could have standing to bring a diplomatic protection claim on the basis
83
The authorities are divided as to whether the doctrine of continuous nationality requires the
relevant nationality at the time of the presentation of the claim or through to the date of the
award. The ‘limited’ requirement is favoured by the ILC in its Articles on Diplomatic Protection,
Art. 5(1) and (4). See further: J. Dugard, ‘Fourth Report on Diplomatic Protection’ (2003) UN
Doc A/CN.4/530, para. 93l; J. Dugard, ‘Fifth Report on Diplomatic Protection’ (2004) UN Doc.
A/CN.4/538, para. 10; J. Dugard, ‘Seventh Report on Diplomatic Protection’ (2006) UN
Doc.A/CN.4/567, paras. 31–47. See also: D. O’Connell, International Law (Vol. 2 1970, 2nd
edn) 1033. Judge Fitzmaurice asserted in Barcelona Traction that the only relevant date was
the time of the injury for the nationality of the claim ‘then became once and for all indelibly
impressed with Belgian national character, and that any subsequent dealings in the shares were
immaterial’: 1970 ICJ Rep 4, 102 at para. 65. The majority of lump sum agreements favour
the test of nationality at the date of claim accrual: D. Bederman, ‘Interim Report on Lump Sum
Agreements and Diplomatic Protection’, in International Law Association, Report of the
Seventieth Conference, New Delhi (2002) 10. Nevertheless, a majority of writers appear to support
the more ‘expansive requirement’: E. Borchard, ‘The Protection of Citizens Abroad and Change of
Original Nationality’ (1933–4) 43 Yale LJ 359, 372; Sohn and Baxter, Harvard Draft Convention,
Art. 22(8) at 186–7; Oppenheim’s International Law (Vol. 1, 1992, 9th edn by R. Jennings and
A. Watts) 512–13; I. Brownlie, Principles of Public International Law (2003, 6th edn) 460.
84
E. Borchard, ibid. 377–80. Judge Jessup in Barcelona Traction noted that ‘One of the reasons for
the rule of continuity of nationality is the avoidance of assignments of claims by nationals of a
small State to nationals of a powerful State’: 1970 ICJ Rep 4, 189 at para. 48.
85
This is not to deny that the jurisdictional provisions and substantive provisions on the minimum
standards of investment protection do differ from one investment treaty to the next.
86
(Liechenstein v Guatemala) 1954 ICJ Rep 4.
87
Ibid. 23.
20 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
that the individual ‘is in fact more closely connected with the population of
the State conferring nationality than with that of any other State’.88
43. The International Court in the Barcelona Traction case89
also examined the
‘manifold links’ between the company Barcelona Traction and Canada as the
state of incorporation and concluded that ‘a close and permanent connection
ha[d] been established’.90
On the other hand, Belgium’s assertion of an independent
right to exercise diplomatic protection on behalf of the shareholders of
Barcelona Traction was rejected by the Court, despite the fact that the majority
of the shareholders were Belgium nationals. Hence by recognising that Canada
alone as the state of incorporation could pursue a claim on behalf of Barcelona
Traction, the Court achieved the same objective of channelling the interests of
an aggrieved foreign entity into a single rubric of nationality.
44. A number of writers have juxtaposed the ‘genuine connection’ test for natural
persons in Nottebohm with the ‘mere place of incorporation’ test for corporations
in Barcelona Traction. This is not a satisfactory dichotomy for at least two
reasons.91
First, the International Court was careful to describe the ‘manifold
88
Ibid. The ILC rejected the requirement in Nottebohm of proving an effective or genuine link
between the state exercising diplomatic protection and its national in its Draft Articles on
Diplomatic Protection: ILC, Report of the Fifty-eighth Session (2006) UN Doc A/CN 4/L 684,
Commentary to Art. 4 at para. 5.
89
1970 ICJ Rep 4.
90
Ibid. 42 at para. 71. The ICJ summarised the links as follows: ‘The incorporation of the company
under the law of Canada was an act of free choice. Not only did the founders of the company seek
its incorporation under Canadian law but it has remained under that law for a period of over 50
years. It has maintained in Canada its registered office, its accounts and its share registers. Board
meetings were held there for many years; it has been listed in the records of the Canadian tax
authorities.’ Ibid.
91
In particular, it is widely commented that the ICJ rejected the Notebohm test in the context of a
diplomatic claim on behalf of a corporate entity. The Court stated that: ‘[R]eference has been
made to the Nottebohm case. In fact the Parties made frequent reference to it in the course of the
proceedings. However, given both the legal and factual aspects of protection in the present case
the Court is of the opinion that there can be no analogy with the issues raised or the decision given
in that case.’ Ibid. ICJ Rep 4, 42 at para. 70. As Judge Fitzmaurice explained, the Court refrained
from pronouncing upon the relevance of the Nottebohm decision because neither Spain nor
Belgium contested Canada’s right to pursue a diplomatic protection claim on behalf of Barcelona
Traction and hence there was no need to inquire whether there was, according to Nottebohm, a
‘genuine link’ between Barcelona Traction and Canada. In light of what the Court said about the
‘manifold links’ in the very next paragraph after its statement about the relevance of Nottebohn, it is
clear that the test would have been satisfied in the eyes of the Court. See Separate Opinion of Judge
Fitzmaurice: 1970 ICJ Rep 4, 80 at para. 28. See further: I. Brownlie, Principles of Public
International Law (2003, 6th edn) 467; A. Watts, ‘Nationality of Claims: Some Relevant
Concepts’, in V. Lowe and M. Fitzmaurice (eds), Fifty Years of the International Court of Justice.
Essays in Honour of Sir Robert Jennings (1996) 424. The ILC has also recognised that ‘the Court in
Barcelona Traction was not … satisfied with incorporation as the sole criterion for the exercise of
diplomatic protection’ and ‘it suggested that in addition to incorporation and a registered office,
there was a need for some “permanent and close connection” between the State exercising
diplomatic protection and the corporation.’: ILC, Report of the Fifty-eighth Session (2006) UN
Doc A/CN 4/L 684, Commentary to Art. 9 at para. 3; J. Dugard, ‘Seventh Report on Diplomatic
Protection’ (2006) UN Doc.A/CN.4/567, paras. 52–3.
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 21
links’ between the company Barcelona Traction and Canada as the state of
incorporation and it is clear from the Court’s judgment that it was satisfied of a
‘genuine connection’ in this respect. Second, the theoretical right of Canada to
exercise diplomatic protection on behalf of Barcelona Traction was actually
conceded by both Spain and Belgium. The point of contention was whether
Belgium should have an independent or parallel right to pursue a claim on behalf
of its national shareholders.92
Hence the Canadian nationality of Barcelona
Traction for the purposes of diplomatic protection was never disputed.
45. The decision in Barcelona Traction was thus without prejudice to the
practice of states which, in general, reveals that diplomatic protection is not
exercised merely on the basis of incorporation.93
In deciding whether or not to
take up claims based on the corporate interests of their nationals, states are
naturally preoccupied with the extent to which their own economy has been
affected by the alleged violation of the host state. Thus it is common for states
to insist that the corporate interest comprises a dominant shareholding or
beneficial ownership or a connection based on the siège social of the company.94
This practice is reflected in the International Law Commission’s Draft Articles on
Diplomatic Protection:
For the purposes of the diplomatic protection of a corporation, the State of
nationality means the State under whose law the corporation was incorporated.
However, when the corporation is controlled by nationals of another
State or States and has no substantial business activities in the State of
incorporation, and the seat of management and the financial control of the
corporation are both located in another State, that State shall be regarded as
the State of nationality.95
46. Conversely, it is certainly true that the majority of investment treaties
concluded after Barcelona Traction adopt the test of mere incorporation,96
92
In the words of Judge Fitzmaurice: ‘[T]he Belgian position… does not imply any denial of the
Canadian nationality of the Barcelona Company or the right of the Company and its Government
to claim, but merely asserts (failing such a claim) a “parallel” right of Belgium also to claim on
behalf of any shareholders who are Belgian.’ Barcelona Traction, Light and Power Co. Ltd
(Belgium v Spain) 1970 ICJ Rep 4, 46 at para. 92.
93
The ILC acknowledged this: ILC, Report of the Fifty-eighth Session (2006) UN Doc A/CN 4/L
684, Art. 9.
94
See the official commentary to Rule IV of the applicable rules for the United Kingdom: ‘In
determining whether to exercise its right of protection, Her Majesty’s Government may consider
whether the company has in fact a real and substantial connection with the United Kingdom.’
Reproduced at: (1988) 37 ICLQ 1006, 1007.
95
ILC, Report of the Fifty-eighth Session (2006) UN Doc A/CN 4/L 684, Art. 9.
96
Energy Charter Treaty, Art. 1(7), Appendix 4; UK Model BIT, Art. 1(d), UNCTAD Compendium
(Vol, III, 1998) 186; Egypt Model BIT, Art. 2(b), ibid. (Vol. V, 2000) 294; Indonesia Model BIT,
Art. 1(2)(ii), ibid. 310; Malaysia Model BIT, Art. 1(b)(ii), ibid. 326; Netherlands Model BIT, Art.
1(b)(iii), ibid. 334; Cambodia Model BIT, Art. 1(2)(ii), ibid. (Vol. VI, 2002) 464; Peru Model
BIT, Art. 1, ibid. 494; United States Model BIT, Art. 1, ibid. 501; Austria Model BIT, Art. 1, ibid.
(Vol. VII) 259; Belgo-Luxembourg Economic Union Model BIT, Art. 1, ibid. 271; Denmark
22 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
thereby refuting the national state’s interest as reflected by the requirement that
the corporation in question has significant connections to that state in order to
benefit from its diplomatic protection. No ‘genuine link’ of any sort is usually
required by the treaty between the individual investor or corporate entity and the
national state.97
The ease with which the formal requirement of incorporation
can be discharged has led to the growing practice of establishing investment
vehicles in a jurisdiction which is ‘covered’ by an investment treaty with the
host state of the investment. These investment vehicles may be corporate shells
in a tax friendly jurisdiction that are bound to transfer any commercial returns
from the investment enterprise to the parent company in a different jurisdic-
tion.98
The national state of the investor does not, in such circumstances, have a
strong interest in the investment treaty claim of such an entity, thereby further
undermining the notion that an investor pursues the claim of its national state in
its conduct of an investment treaty arbitration.
Model BIT, Art. 1(5)(b), ibid. 280; Finland Model BIT, Art. 1(3)(b), ibid. 288; South Africa
Model BIT, Art. 1, ibid. (Vol. VIII) 274; Mauritius Model BIT, Art. 1(1), ibid. (Vol. IX) 296;
Sweden Model BIT, Art. 1(2), ibid. 310; Indonesia Model BIT, Art. 1(2)(i), ibid. (Vol. V) 310;
Bolivia Model BIT, Art. 2(b)–(c), ibid. (Vol. X) 276; Guatemala Model BIT, Art. 1(c)(ii), ibid.
(Vol. XII) 290; Italy Model BIT, Art. 1(4), ibid. 296 (a ‘legal person’ is ‘any entity having its head
office in the territory of one of the Contracting Parties and recognised by it’); Ghana Model BIT,
Art. 1(d)(2), ibid. (Vol. XIII) 280; Romania Model BIT, Art. 1(1), ibid. 287; Canada Model BIT,
Art. 1, ibid. (Vol. XIV) 222, 224; UK Model BIT (2005), Art. 1(d)(ii) (‘firms and associations
incorporated or constituted under the law in force in any part of the United Kingdom or in the
territory to which this Agreement is extended in accordance with the provisions of Article 12,
Appendix 10’).
97
There are examples of BITs that require incorporation in the host state and the presence of the
company’s ‘siège’ or ‘seat’ or ‘headquarters’ in the host state as well, inspired by French Civil
Law. Thus, in the France Model BIT, Art. 1(3) reads: ‘Le terme de “sociétés” désigne toute
personne morale constituée sur le territoire de l’une des Parties contractantes, conformément à la
législation de celle-ci et y possédant son siège social, ou contrôlée directement ou indirectement
par des nationaux de l’une de Parties contractantes, ou par des personnes morales possédant leur
siège social sur le territoire de l’une des Parties contractantes et constituées conformément à la
législation de celle-ci.’ UNCTAD Compendium (Vol. V, 2000) 302. (An identical provision can
be found in the new France Model BIT (2006), Art. 1(2)(b), Appendix 6). See also: China Model
BIT, Art. 1(2), ‘domiciled’, UNCTAD Compendium (Vol. V, 2000) 152 (the new China Model
BIT (1997), Art. 1(2)(b) provides for a slightly different definition (‘incorporated or constituted
… and having their seats’), Appendix 5); Jamaica Model BIT, Art. 1(3)(b), UNCTAD
Compendium (Vol. V, 2000) 318; Iran Model BIT, Art. 1(2)(b), ibid. (Vol. VI, 2002) 280;
Germany Model BIT, Art. 1(3)(a), ibid. (Vol. VII) 298; Turkey Model BIT, Art. 1(1), ibid.
(Vol. VIII) 281; Benin Model BIT, Art. 1(2), ibid. (Vol. IX) 280; Burundi Model BIT, Art. 1(1),
ibid. 287. There are also some exceptional cases of BITs that, in additional to these two requirements,
also demand that the company performs ‘real business activity’ in the host state: Chile
Model BIT, Art. 1(1)(b), seat and ‘effective economic activities’, ibid. (Vol. III, 1998) 144;
Switzerland Model BIT, Art. 1(1)(b), seat and ‘real economic activities’, ibid. 177; Sri Lanka
Model BIT, Art. 1(2)(b), seat and ‘substantial business activities’, ibid. (Vol. V, 2000) 340;
Croatia Model BIT, Art. 1(2)(b), ibid. (Vol. VI) 472; Mongolia Model BIT, Art. 1(1)(b), ibid.
(Vol. IX) 303; Uganda Model BIT, Art. 1(3), ibid. (Vol. XII) 314; Germany Model BIT (2005),
Art. 1(3)(a) (‘any juridical persons as well as any commercial or other company or association
with or without legal personality having its seat in the territory of the Federal Republic of
Germany, irrespective of whether or not its activities are directed at profit’), Appendix 7.
98
E.g. Saluka v Czech Republic (Merits).
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 23
47. The state contracting parties to investment treaties have, furthermore, left
the door wide open for claims relating to a single investment by different
claimants with multiple nationalities. For instance, investment treaties sometimes
define an investment as the ownership of either a company incorporated
in the host state or the shares in such a company.99
This exposes states to claims
by multiple claimants with different nationalities pursuant to several investment
treaties with either type of legal interest in the same underlying investment.
In CMS v Argentina,100
the tribunal held that it is ‘not possible to foreclose
rights that different investors might have under different arrangements’.101
48. Another potential source of overlapping national claims over the same
underlying investment is the acceptance of an ‘indirect’ interest in an investment
as sufficient to qualify for investment protection.102
Thus, in CME v Czech
Republic103
and Lauder v Czech Republic,104
two tribunals established pursuant
to different BITs considered the conduct of the same executive organ of the
Czech Republic in relation to the same investment and came to quite different
results on liability. The CME tribunal recognised the Dutch company CME’s
controlling interest in a local Czech company with rights to operate a television
99
USA Model BIT, Art. 1(d), UNCTAD Compendium (Vol. VI, 2002) 502; Austria Model BIT,
Art. 1(2), ibid. (Vol. VII) 259; Denmark Model BIT, Art. 1(1)(b), ibid. 283; Sweden Model BIT,
Art. 1(b), ibid. (Vol. IX) 309; Indonesia Model BIT, Art. 1(b), ibid. (Vol. V) 310 (‘rights derive
from shares… or any other form of interest in companies’); Bolivia Model BIT, Art. 1(a), (c),
ibid. (Vol. X) 275; Burkina Faso Model BIT, Art. 1(b) ibid. 287; Guatemala Model BIT, Art. 1(a)
(ii), ibid. (Vol. XII) 289; Italy Model BIT, Art. 1(1)(b), ibid. 295 (‘shares, debentures, equity
holdings and any other instruments of credit’); Kenya Model BIT, Art. 1(a)(ii), ibid. 305 (‘rights
derived from shares, bonds and other kinds of interests in companies and joint ventures’);
Uganda Model BIT, Art. 1(b), ibid. 313 (‘shares, premium on shares, and other kinds of interest
including minority or indirect forms, in companies constituted in the territory of one Contracting
Party’); Ghana Model BIT, Art. 1(a)(ii), ibid. (Vol. XIII) 279 (‘shares…and other form of
participation in a company’); Romania Model BIT, Art. 1(2)(b), ibid. 288 (‘shares, parts or any
other kinds of participation in companies’); Canada Model BIT, Art. 1, ibid. (Vol. XIV) 222–4;
USA Model BIT (2004), Art.1, Appendix 11; China Model BIT (1997), Art. 1(1)(b) (‘shares,
debentures, stock and any other participation in companies’), Appendix 5; Germany Model BIT
(2005), Art. 1(1)(b) (‘shares of companies and other kinds of interest in companies’), Appendix 7;
France Model BIT (2006) (‘les actions, primes d’émission at autres formes de participation,
même minoritaires aux sociétés constituées sur le territoire de l’une des Parties contractantes’),
Appendix 6; UK Model BIT (2005), Art. 1(a)(ii) (‘shares in and stock and debentures of a
company and any other form of participation in a company’), Appendix 10; Energy Charter
Treaty, Art. 1(6)(b), Appendix 4; NAFTA, Art. 1139, Appendix 3. See further: UNCTAD, Series
on Issues in International Investment Agreements: Scope and Definition (1999) 10.
100
CMS v Argentina (Preliminary Objections) 7 ICSID Rep 494.
101
Ibid. 512/86.
102
The most ‘indirect’ investment to date, in terms of corporate layers between the claimant investor
and the covered investment, was perhaps that which was recognised in Azurix v Argentina
(Preliminary Objections) 10 ICSID Rep 416. Here, a local investment vehicle registered in
Argentina ‘Z’ had concessionary rights to provide sewerage services in an Argentine Province.
Z was in turn owned by two other Argentine companies, ‘X’ and ‘Y’. The Claimant (a Delaware
company qualifying under the Argentina/USA BIT) ultimately owned and controlled X through
another Argentine company, and Y through two levels of Cayman Island companies.
103
CME v Czech Republic (Merits) 9 ICSID Rep 121.
104
Lauder v Czech Republic (Merits) 9 ICSID Rep 66.
24 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
licence as an investment for the purposes of the Netherlands/Czech Republic
BIT,105
whereas the Lauder tribunal deemed that the shareholding of Mr Lauder
(a US citizen) in the parent company of CME fell within the definition of an
investment under the USA/Czech Republic BIT.106
Hence multiple claims with
respect to the same injury could proceed before two tribunals constituted
pursuant to different treaties. This illustrates the point that, unlike the nationality
of claims rule for diplomatic protection, the investment treaty regime is not
overly concerned with the task of channelling the various interests of private
entities arising from unlawful conduct attributable to a state into a single rubric
of nationality with a single claimant state representing the affected interests.
49. Contrary to these precedents evidencing a less prominent concern with the
nationality of claims, the tribunal’s decision on admissibility in Loewen points
the other way. In the absence of a specific provision of NAFTA dealing with the
temporal requirements for the nationality of claims, the tribunal imported what
it considered to be the rule of general international law requiring continuous
nationality from the date of the events giving rise to the claim through to the
date of the award, and applied it strictly. The claimant company, Loewen, was
incorporated in Canada at the time of the events giving rise to the claim, but had
subsequently reorganised as a US corporation after notice of the claim had been
filed; it assigned its NAFTA claim to a Canadian company established for the
sole purpose of retaining legal title to the claim.107
The tribunal attached
primary significance to the fact that the beneficiary of the claim (in the sense
of the ultimate recipient of a damages award) would be the reorganised US
company and thus the Canadian special purpose vehicle could not ‘qualify as a
continuing national for the purposes of this proceeding’.108
50. The Loewen tribunal recognised that other international treaties had made
special provision for the ‘amelioration of the strict requirement of continuous
nationality’,109
such as the Algiers Accords establishing the Iran/US Claims
Tribunal and several BITs. Furthermore, the ICSID Convention, which governs
the procedure of many investment treaty arbitrations upon an election of this
option by the claimant as permitted by the relevant BIT, expressly provides that
the nationality requirement is to be tested at the time the notice of claim is filed.110
105
CME v Czech Republic (Merits) 9 ICSID Rep 121, 188/376.
106
Lauder v Czech Republic (Merits) 9 ICSID Rep 66, 84/154.
107
Loewen v USA (Merits) 7 ICSID Rep 442, 484/220.
108
Ibid. 489/237.
109
Ibid. 486/229.
110
Article 25(2)(b) of the ICSID Convention defines a ‘National of another Contracting State’ as
‘any juridical person which had the nationality of a Contracting State other than the State party to
the dispute on the date on which the parties consented to submit such dispute to conciliation or
arbitration’. See Appendix 1. In CSOB v Slovak Republic (Preliminary Objections) 5 ICSID Rep
335, 343/31–2, the date-of-submission rule was upheld to dismiss the relevance of the
Respondent’s objection to the Claimant’s standing due to the latter’s assignment of the rights
to the subject matter of the dispute. See also: SOABI v Senegal (Preliminary Objections) 2 ICSID
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 25
And yet, in the absence of a specific provision in Chapter 11 of NAFTA, the
Loewen tribunal saw no reason to depart from what it perceived to be a strict rule
of general international law requiring continuous nationality.111
Most significantly,
the tribunal implicitly rejected the argument advanced by Jennings as
expert witness testifying on behalf of Loewen that ‘the rule of the nationality
of claims was never a free-standing general rule of international law; it was a
concomitant, and of the very essence, of diplomatic protection’.112
(3) Forum selection clauses
51. An exclusive jurisdiction clause in favour of the municipal courts of the host
state in an investment agreement between a foreign investor and the host state
cannot prejudice the standing of the national state of the investor to bring
a diplomatic protection claim against the host state. The right to bring a
diplomatic protection claim vests in the national state of the investor and
hence no agreement concluded by the investor can encumber this right.113
By
parity of reasoning, the foreign investor’s acceptance of a ‘Calvo Clause’ in the
investment agreement that purports to effect an express waiver of any potential
diplomatic protection claim is also ineffective to diminish the right of
the national state of the investor to seek redress on this basis.114
At most, the
Rep 175, 180/29; Banro v Congo (Preliminary Objections); C. Amerasinghe, ‘The International
Centre for Settlement of Investment Disputes and Development Through the Multinational
Corporation’ (1976) 9 Vanderbilt J Transnatl L 793, 809–10 (‘[T]he relevant time for the
fulfilment of the nationality requirement is that date when the consent to jurisdiction is effective
for both parties. It also means that any change in the nationality of a juridical person after that
date is immaterial for the purposes of ICSID’s jurisdiction, regardless of how inappropriate such
an alignment would have been initially.’). Contra: G. Delaume, ‘Le Centre International pour le
Règlement des Différends Relatifs aux Investissements (CIRDI)’ (1982) 109 Journal du droit
international 797.
111
Loewen v USA (Merits) 7 ICSID Rep 442, 484/220–40. Referring to the specific rule in Art. 25
(2)(b) of the ICSID Convention, Loewen argued that the standing requirements of NAFTA
Chapter 11 should be the same regardless of whether a claimant proceeds under the ICSID
Convention (currently not possible because neither Mexico nor Canada are signatories), the
ICSID Additional Facility Rules or the UNCITRAL Arbitration Rules. This contention was
rejected by the Tribunal (ibid. 488/235).
112
Fifth Opinion of Sir Robert Jennings, cited in Counter-Memorial of the Loewen Group, Inc. on
Matters of Jurisdiction and Competence (29 March 2002) para. 69, available at: www.state.gov/
documents/organization/9360.pdf. Sir Robert Jennings also noted the ‘surprising regressive
tendency of the United States’ argument’ which relies on cases ‘stem[ming] from the period
between the two world wars when solely States were the “subjects” of international law and
there was no possibility for individuals or corporations to have direct rights in international law
or to be parties to international litigation’ (ibid. para. 65).
113
E. Borchard, The Diplomatic Protection of Citizens Abroad or The Law of International Claims
(1915) 372, 799.
114
North American Dredging Co. (USA v Mexico) 4 RIAA 26, 29 (1926); D. Shea, The Calvo
Clause (1955) 217; D. O’Connell, International Law (Vol. 2, 1970, 2nd edn) 1061;
Oppenheim’s International Law (Vol. 1, 1992, 9th edn by R. Jennings & A. Watts) 930–1;
K. Lipstein, ‘The Place of the Calvo Clause in International Law’ (1945) 22 BYBIL 130, 139 and
cases cited at note 4; Borchard, Diplomatic Protection of Citizens Abroad, 809–10.
26 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
investor’s consent to a Calvo Clause raises a presumption in diplomatic protection
proceedings that the rule on the exhaustion of local remedies should
be applied strictly.115
52. The limited effect given by international tribunals to a Calvo Clause is
naturally predicated upon the national state’s own interest and right in pursuing
a diplomatic protection claim to enforce the minimum standards for the protection
of aliens in general international law.116
The status of forum selection
clauses in investment agreements between the investor and host state on the
admissibility of claims before an international treaty tribunal is a controversial
subject that will be dealt with in detail in Chapter 10. Less controversial,
however, is the possibility that an investor can foreclose its procedural right to
have its treaty claims heard by an international tribunal by instituting proceedings
with respect to those claims before a municipal court of the host state.
This is the effect of the so called ‘fork in the road’ provision in many BITs,
which affords the investor the option of selecting between several different
judicial fora in the presentation of its claims based on the minimum standards
of protection in the treaty.117
By choosing to litigate in a municipal court, for
instance, the investor takes a positive step down one of the paths leading from
this junction with no right of return. This does not exclude the possibility that a
new claim for denial of justice may ripen if the investor is denied a minimum
standard of procedural fairness before the municipal court. In this instance,
the investor would simply return to the same fork in the road but now in a
different vehicle (perhaps relying on a breach of the fair and equitable standard
of treatment), and this time would predictably select the path to a hearing before
an international tribunal. The point is, however, that upon the initial election by
the investor to institute proceedings before a domestic court, there is no residual
interest in the claim as pleaded that survives on an international level for the
national state.118
If the investor were in reality invoking the procedural right
of its national state in advancing an investment treaty claim, this would be a
curious result.
(4) The applicable procedural law
53. The law applicable to questions of procedure in arbitrations between
states is generally international law.119
This is certainly the case for a diplomatic
protection claim submitted to arbitration by a special agreement or
115
O’Connell, International Law (Vol. 2) 1062.
116
C. Amerasinghe, State Responsibility for Injuries to Aliens (1967) 60.
117
See the commentary to Rule 21 below.
118
Furthermore, if the treaty obligation is owed directly to the national state of the investor, the
investor should not be able to compromise its national state’s corresponding right by a forum
selection in the first place.
119
Simpson and Fox, International Arbitration, Law and Practice, 128–30; F.A. Mann, ‘State
Contracts and International Arbitration’ (1967) 42 BYBIL 1, 2.
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 27
a diplomatic protection claim is made on its behalf.123
This interest was described
by the International Court in the Interhandel case124
in the following terms:
Before resort may be made to an international court in such a situation, it
has been considered necessary that the State where the violation occurred
should have an opportunity to redress it by its own means, within the
framework of its own domestic legal system.125
57. The local remedies rule is thus a concession to the sovereign independence
of the host state, which must be presumed in the first instance to be capable of
rendering justice by its own courts.126
It also gives effect to the principle that
foreign nationals or entities going abroad are subject to the municipal law of the
host state and the means of redress available under this law for any injury to
their person or property.127
58. Several commentators have latched onto the local remedies rule as evidence
that diplomatic protection obligations are owed to the individual rather than the
national state. If the rights of the national state were infringed directly, then its
remedy could not, as the argument goes, be conditional upon exhaustion of local
remedies by the individual.128
But this contention ignores the reality that the
national state also has a strong interest in the observance of the local remedies rule
itself because it acts as a ‘sieve’ to prevent any grievance of its national from
being transformed into an international dispute with the host state.129
States are
often vigilant about insisting on the observance of the rule by their own nationals
to limit the burden of international litigation as far as possible and the concomitant
political ramifications on the bilateral relationship with the host state concerned.
59. In the absence of a specific provision in the investment treaty,130
investment
treaty tribunals have uniformly dispensed with the local remedies rule as a
procedural impediment to proceedings before an international arbitral tribunal
otherwise with jurisdiction over the investor’s claims.131
This conclusion is
123
C. Amerasinghe, Local Remedies in International Law (1990) 69–72. The exhaustion of local
remedies rule is codified in Arts. 14 and 15 of the ILC’s Draft Articles on Diplomatic Protection:
ILC, Report of the Fifty-eighth Session (2006) UN Doc A/CN 4/L 684.
124
(Switzerland v USA) 1956 ICJ Rep 6.
125
Ibid. 27.
126
C. Amerasinghe, Local Remedies in International Law (1990) 71, citing C. de Visscher, ‘Denial
of Justice in International Law’ (1935) 52 Hague Recueil 422; Ambatielos (Greece v UK) 12
RIAA 119 (1956).
127
E. Borchard, The Diplomatic Protection of Citizens Abroad or The Law of International Claims
(1915) 817–18.
128
D. O’Connell, International Law (Vol. 2, 1970, 2nd edn) 1031.
129
A. McNair, International Law Opinions (Vol. 2, 1956) 197; C. Amerasinghe, Local Remedies in
International Law (1990) 68.
130
A provision requiring the exhaustion of local remedies in the Argentina/Spain BIT was
considered in: Maffezini v Spain (Preliminary Objections) 5 ICSID Rep 396.
131
See the arbitral awards cited at Chapter 2 note 277 below.
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 29
without prejudice to the situation where the host state’s conduct only attains the
requisite threshold for a breach of a treaty standard upon a denial of justice in
the judicial system of the host state. In this sense, the local remedies rule is a
substantive requirement for liability rather than a procedural precondition for
the presentation of claims to an international court or tribunal.132
By dispensing
with the local remedies rule as a procedural requirement for the investor’s treaty
claims, the contracting states have also abandoned their interests that are
protected by the rule. If they had a legal interest at stake in an investment treaty
claim then this would be a surprising concession.
(6) The assessment of damages
60. Whilst it is true that damages are most often assessed on the basis of the loss
suffered by the national in a diplomatic protection claim, other considerations
can play a part, such as the nature of the international obligation that has been
breached. The Permanent Court of International Justice stated the position
succinctly in the Chorzów Factory case:133
The reparation due by one State to another does not, however, change its
character by reason of the fact that it takes the form of an indemnity for the
calculation of which the damage suffered by a private person is taken as
the measure. The rules of law governing the reparation are the rules of
international law in force between the two States concerned, and not the
law governing relations between the State which has committed a wrongful
act and the individual who has suffered the damage. Rights or interests
of an individual the violation of which rights causes damage are always in
a different plane to rights belonging to a State, which rights may also be
infringed by the same act. The damage suffered by an individual is never
therefore identical in kind with that which will be suffered by a State; it
can only afford a convenient scale for the calculation of the reparation due
to the State.134
61. As far as investment treaty claims are concerned, damages awarded to an
investor do not take into account any independent interest of the national state
which may have been prejudiced by the breach. For instance, it would be
inconceivable that an investment treaty tribunal would increase the amount of
damages to account for the fact that the host state had breached its obligations
132
E.g. Generation Ukraine v Ukraine (Merits) 10 ICSID Rep 240; Mondev v USA (Merits) 6
ICSID Rep 192; Waste Management v Mexico (No. 2) (Merits) 11 ICSID Rep 361. The debate as
to whether the rule on the exhaustion of local remedies is a procedural precondition to the
admissibility of an international claim, or a substantive precondition with the result that no
breach of international law is committed until local remedies have been exhausted, has been
summarised with extensive citation of authorities by J. Dugard, ‘Second Report on Diplomatic
Protection’ (2001) UN Doc A/CN.4/514, paras. 32–62.
133
Chorzów Factory (Germany v Poland) 1928 PCIJ (Ser. A) No. 17 (Merits).
134
Ibid. 28.
30 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
under a BIT on several occasions in relation to different investors of the same
nationality. Damages in an investment treaty claim are assessed purely on the
basis of the harm caused to the economic interests of the investor by the host
state, without regard for any factors in the relationship between the host state
and the national state of the investor.135
This supports the conclusion that the
investor is not vindicating ‘public’ or ‘international’ interests by bringing an
investment treaty claim.
(7) The challenge to and enforcement of awards
62. A truly international judgment or award, such as a judgment of the
International Court of Justice, owes its existence and binding force to the
international legal order and is impervious to any challenge or review before
a municipal court.136
Only an international court or tribunal is competent to
hear applications pertaining to the validity of a truly international judgment or
award that has settled a public controversy between states. Thus, for instance,
Nicaragua challenged the validity of an award rendered in favour of Honduras
on the demarcation of their maritime boundary before the International Court,137
as did Guinea-Bissau in relation to an award that favoured Senegal’s position in a
maritime boundary dispute.138
63. Awards rendered by international arbitral tribunals in investor/state disputes
are not truly international awards and as a result they may be subject to challenge
and review in accordance with municipal and international legislative instruments
dealing with international commercial arbitral awards. Municipal courts have been
seised of challenges to investment treaty awards pursuant to legislation on international
commercial arbitration,139
and the drafters of investment treaties have
expressly recognised that investor/state awards fall within the purview of the New
York Convention on the Recognition and Enforcement of Foreign Arbitral Awards
or the Inter-American Convention on International Commercial Arbitration.140
135
In S.D. Myers v Canada (Merits) 8 ICSID Rep 18, the tribunal distinguished ‘lawful’ expropriations
pursuant to Art. 1110 from ‘unlawful’ breaches of the NAFTA under other provisions
of the NAFTA. The tribunal found that: ‘The standard of compensation that an arbitral tribunal
should apply may in some cases be influenced by the distinction between compensating for a
lawful, as opposed to an unlawful, act. Fixing the fair market value of an asset that is diminished
in value may not fairly address the harm done to the investor’ (ibid. 62/308).
136
Chorzów Factory (Germany v Poland) 1928 PCIJ (Ser. A) No. 17 (Merits) 33; See O. Schachter,
‘The Enforcement of International Judicial and Arbitral Decisions’ (1960) 54 AJIL 1, 12–5. Art.
36 of the ILC’s Final Draft Articles on Arbitral Procedure for arbitrations between states
provides that the ICJ shall have jurisdiction over any challenge to the validity of an award
where the state parties have not agreed to another tribunal: ‘Model Rules on Arbitral Procedure
with a General Commentary’ YB of Int L Commission (Vol. 2, 1958) 86.
137
Arbitral Award Made by the King of Spain on 23 December 1906 (Honduras v Nicaragua) 1960
ICJ Rep 192.
138
Arbitral Award of 31 July 1989 (Guinea-Bissau v Senegal) 1991 ICJ Rep 53.
139
See the commentary to Rule 13 below.
140
Ibid.
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 31
64. If the investor were vindicating the rights of its national state in bringing an
investment treaty claim, one would expect that the resulting decision of the
tribunal could be properly characterised as a public international award and
binding as between the national state and the host state on the inter-state plane.
The fact that investor/state awards are capable of being classified as ‘commercial’
is not consistent with them having a truly public international law status
because it suggests that the primary relationship between the disputing parties is
private rather than public or sovereign. Furthermore, investor/state awards are
not binding on the national state of the investor.141
C . C O N C L U S I O N S O N T H E N AT U R E
O F T H E I N V E S T O R ’ S R I G H T S : T W O A LT E R N AT I V E
‘ D I R E C T ’ M O D E L S
65. The foregoing analysis of the principal features of diplomatic protection
under general international law and investment treaty arbitration reveals their
essential divergence. Given that the raison d’être of the investment treaty
mechanism for the presentation of international claims may well be a response
to the inadequacies of diplomatic protection,142
this should come as no sur-
prise.143
The fundamental assumption underlying the investment treaty regime
is clearly that the investor is bringing a cause of action based upon the vindication
of its own rights rather than those of its national state.144
In these
circumstances it is untenable to superimpose the Mavrommatis formula of diplomatic
protection over a triangular relationship between investor, its national
state and the host state of the investment for a rationalisation of investment
treaty arbitration. In this respect, the International Law Commission’s treatment
of the relationship between diplomatic protection and ‘special regimes for the
141
Article 1136(7) of NAFTA is explicit: ‘An award made by a Tribunal shall have no binding force
except between the disputing parties and in respect of the particular case.’ See Appendix 3.
142
J. Kokott, ‘Interim Report on the Role of Diplomatic Protection in the Field of the Protection of
Foreign Investment’ in International Law Association, Report of the Seventieth Conference,
New Delhi (2002) 27.
143
The novelty of the investor’s cause of action under investment treaties was emphasised by
Justice Kelen of the Federal Court in Ottawa, on this occasion in relation to NAFTA: ‘NAFTA
provides, unlike its predecessor, the Canada–U.S. Free Trade Agreement, a mechanism which
allows individual investors to settle disputes with respect to alleged discriminatory treatment.
This creates a powerful and significant new cause of action to protect investors.’ The context for
this statement was a challenge to a NAFTA award in Attorney General of Canada v S.D. Myers,
Inc (Decision, 13 January 2004) 2004 FC 38, 8 ICSID Rep 194, 201/32.
144
This statement made in Z. Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’
(2003) BYBIL 151, 182, was quoted with approval by the English Court of Appeal in Occidental
Exploration & Production Company v Republic of Ecuador [2005] EWCA Civ 1116; [2006]
QB 432; 12 ICSID Rep 129, 137/20. It was further endorsed in: Czech Republic v European
Media Ventures SA [2007] EWHC 2851 (Comm); [2008] 1 Lloyd’s Rep 186, para. 52.
32 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
protection of foreign investors provided for in bilateral and multilateral investment
treaties’145
is highly relevant. The Special Rapporteur proposed a lex
specialis exception to the application of rules of diplomatic protection for
corporations or shareholders because:
There is a clear inconsistency between the rules of customary international
law on the diplomatic protection of corporate investment, which envisage
protection only at the discretion of the national State and only, subject
to limited exceptions, in respect of the corporation itself, and the special
regime for foreign investment established by bilateral and multilateral
investment treaties, which confers rights on the foreign investor, either
as a corporation or as a shareholder, determinable by an international
arbitration tribunal.146
66. In the Case Concerning Ahmadou Sadio Diallo,147
the International Court
of Justice affirmed that investment treaties create a lex specialis so that the wider
protection afforded to shareholders under such treaties could not affect the rules
of admissibility of diplomatic protection.148
67. A number of investment treaty awards149
and the writings of publicists150
also support the notion of international treaty rights conferred directly upon
investors of the contracting state to the investment treaty.
68. What, then, are the conceptual alternatives to the ‘derivative model’ based
on the Mavrommatis formula? It was previously stated that there is no theoretical
impediment in international law to the conferral of rights upon private
entities by an international treaty instrument. The clearest support for this
proposition is to be found in the seminal judgment of the Permanent Court of
International Justice in the Jurisdiction of the Courts of Danzig case.151
A treaty
between Poland and Danzig (called the ‘Beamtenabkommen’) regulated the
employment conditions for employees of the Danzig railways who had passed
145
J. Dugard, ‘Fourth Report on Diplomatic Protection’ (2003) UN Doc A/CN.4/530.
146
Ibid. para. 112.
147
(Republic of Guinea v Democratic Republic of the Congo) Preliminary Objections, 24 May 2007.
148
Ibid. paras. 88, 90.
149
CMS v Argentina (Preliminary Objections) 7 ICSID Rep 494, 503/45 (‘To some extent,
diplomatic protection is intervening as a residual mechanism to be resorted to in the absence
of other arrangements recognising the direct right of action by individuals.’). The tribunal cited
the ICSID Convention as one such arrangement, but clearly had in mind other treaties dealing
with foreign investment as well. The investor was described as the ‘beneficiary’ of substantive
BIT rights in AMT v Zaire (Merits) 5 ICSID Rep 14, 29/6.06.
150
Writers supporting the ‘direct’ theory, at least in relation to the procedural right of an investor to
bring arbitration proceedings against the host state, include: G. Burdeau, ‘Nouvelles perspectives
pour l’arbitrage dans le contentieux économique intéressant l’Etat’ (1995) Revue de
l’arbitrage 3, 12 et seq.; J. Paulsson, ‘Arbitration Without Privity’ (1995) 10 ICSID Rev –
Foreign Investment LJ 232, 256; T. Wälde, ‘Investment Arbitration under the Energy Charter
Treaty’ (1996) Arbitration Int 429, 435–7.
151
(Advisory Opinion) 1928 PCIJ (Ser. B) No. 15.
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 33
into the service of the Polish Railways Administration and an issue arose as
to whether the Danzig employees could sue the Polish Railways directly in the
Danzig Courts to recover compensation based on the provisions of the treaty.
Poland’s submission that the treaty only created rights and obligations as
between the state parties was dismissed by the Permanent Court:
[I]t cannot be disputed that the very object of an international agreement,
according to the intention of the contracting Parties, may be the adoption
by the Parties of some definite rules creating individual rights and enforceable
by the national courts. That there is such an intention in the present case
can be established by reference to the terms of the Beamtenabkommen.152
69. Hersch Lauterpacht interpreted this passage as clear authority to the effect
that ‘there is nothing in international law to prevent individuals from acquiring
directly rights under a treaty provided that this is the intention of the contracting
parties’.153
More recently, the International Court of Justice in the LaGrand
case154
decided that Article 36(1)(b) of the Vienna Convention on Consular
Relations ‘creates individual rights’, whether or not these fall to be classified
as human rights.155
This treaty provision obliged the United States to inform
Germany through the proper diplomatic channels that two of its nationals were
committed to prison in the United States. The United States failed to do so and
the German nationals were later executed. The Court attached significance to
the final sentence of Article 36(1)(b) that the prison authorities ‘shall inform the
person concerned without delay of his rights under this subparagraph’.156
70. Investment treaties also adopt terminology consistent with the vesting of
rights in foreign nationals and legal entities directly. The substantive obligations
relating to minimum standards of investment protection are couched in terms of
a legal relationship between the host state and the foreign investor. The United
States Model BIT (2004), for instance, prescribes in Article 3 that:
Each Party shall accord to investors of the other Party treatment no less
favorable than that it accords, in like circumstances, to its own investors with
respect to the establishment, acquisition, expansion, management, conduct,
operation, and sale or other disposition of investments in its territory.157
152
Ibid. 17–19.
153
H. Lauterpacht, ‘Survey of International Law in Relation to the Work of Codification of the
International Law Commission’ (1949) UN Doc A/CN.4/1/Rev.1, 19–20, reprinted in Collected
Papers of Hersch Lauterpacht (Vol. 1, 1970) 469. A concise and lucid critique of the ‘positivist’
conception of the subjects of international law is provided by: R. Higgins, Problems and
Process: International Law and How We Use It (1994) 49 et seq.
154
(Germany v USA) 2001 ICJ Rep 466.
155
Ibid. paras 75–8.
156
Ibid. para. 77. The Court affirmed this finding in Avena and Other Mexican Nationals (Mexico v
USA) 2004 ICJ Rep 12, at para. 40.
157
See Appendix 11.
34 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
71. The Austria Model BIT employs language that is even more direct: ‘An
investor of a Contracting Party which claims to be affected by expropriation by
the other Contracting Party shall have the right …’158
72. A textual analysis of investment treaties thus appears to be consistent with
the conclusion that the substantive investment protection obligations proclaimed
by the state parties are owed to investors directly, who then have the
means of enforcing their corresponding rights pursuant to the investor/state
arbitration procedure stipulated in the treaty.
73. Another possible approach to a direct theory of rights under investment
treaties is to distinguish between the substantive obligations of investment
protection and the obligation to submit to investor/state arbitration upon the
filing of a notice of claim by the claimant investor. The substantive obligations
might be said to exist purely on the inter state plane and as such opposable only
by one contracting state to another. These obligations do not pertain to investments
of specific investors, which often are not reasonably in the contemplation
of host states,159
but instead require states to establish a particular regime in
abstracto. In contradistinction, the procedural obligation is directly enforceable
by the claimant investor. Upon the claimant’s filing of a notice of arbitration, the
claimant investor perfects the host state’s unilateral offer to arbitrate, and the
two parties thus enter into a direct legal relationship in the form of an arbitration
agreement. At the same time, the claimant becomes a counterparty to the host
state’s obligation to submit to international arbitration for an assessment of its
conduct towards the claimant’s investment on the basis of the norms of investment
protection set out in the treaty. This obligation encompasses the duty of
the host state to pay compensation if the international tribunal adjudges its
conduct to be violative of these norms. The minimum standards of investment
protection could thus be characterised as the applicable adjudicative standards
for the claimant’s cause of action rather than binding obligations owed directly
to the investor.
74. The English Court of Appeal preferred the first of these two rationalisations
by the present writer of the ‘direct’ model, as being the more ‘natural’
and ‘preferable’.160
That the first model is the more ‘natural’ is no doubt correct,
but the full ramifications of that approach need to be explored.
158
Austria Model BIT, Art. 5(3) (emphasis added), UNCTAD Compendium, (Vol. VII) 262.
159
And thus perhaps distinguishable from human rights obligations.
160
[2005] EWCA Civ. 1116, [2006] QB 432, 12 ICSID Rep 129, 136/18. When the case came back
to Aitken J, however, he stated that the issue remained open: Republic of Ecuador v Occidental
Exploration & Production Co (No. 2) [2006] EWHC 345 (Comm), [2006] 1 Lloyd’s Rep 773,
776 at para. 9 (‘In its judgment on the “justiciability” issue, the Court of Appeal held that the
present BIT confers or creates direct rights in international law in favour of investors. The point
at which these rights are created or conferred might be in issue; but, at the least, it is at the point
when investors pursue claims in one of the ways provided by article VI of the BIT.’).
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 35
75. The investment treaty obligations of states are not coterminous with their
human rights obligations. Human rights deserve a special status; they are
inalienable because their protection is fundamental to the dignity of every
human being. They are not susceptible to being waived. On the other hand, if
the substantive obligations in investment treaties are owed to investors directly,
then it should follow that investors are capable of waiving their rights.161
The
arguments employed to defeat the Calvo Clause in the diplomatic protection
context are inapposite, for this is no longer an instance of a foreign investor
waiving the international rights properly vested in its national state. In the investment
treaty context, the investor is master of its own destiny and keeper of its own
rights. Logic would seem to dictate that an investor can sign away its substantive
rights under an applicable investment treaty in a contract with the host state.
76. The second model, on the other hand, would rule out the possibility of
waiver. The investor’s procedural right to have the host state’s conduct adjudged
according to the investment treaty standards is only perfected upon the filing of
a notice of arbitration. At that point the investor is free to waive its procedural
right and this of course is common practice whenever an investment treaty claim
is settled and withdrawn.162
The substantive obligations cannot be waived by
the investor because they are not directly vested.
76C. Occidental Exploration & Production Company v The
Republic of Ecuador163
It will be recalled that in Loewen v USA,164
the tribunal propounded the
following conception of the investment treaty regime:
[C]laimants are permitted for convenience to enforce what are in
origin the rights of Party states.165
In other words, according to this dictum, investment treaties confer standing
upon investors to bring what is in essence a diplomatic protection claim on
behalf of their own state.
This was precisely the argument that was made before the English Court
of Appeal in Occidental v Ecuador. Occidental was not relying upon the
diplomatic protection rationalisation of an investment treaty claim to invoke
nationality of claims rules. Instead, Occidental employed this argument to
161
See TSA Spectrum v Argentina (Preliminary Objections) paras. 62–3.
162
Eureko v Poland (Merits) 12 ICSID Rep 335, 372/175 (‘International law thus recognizes that
an investor may, after a claim against a State has arisen, enter into a settlement agreement with
that State and commit to a final waiver of those claims. The State can subsequently rely on that
waiver and assert it as a defense against the investor, should such investor attempt to raise
those claims again.’).
163
[2005] EWCA Civ 1116, [2006] QB 432, 12 ICSID Rep 129.
164
(Merits) 7 ICSID Rep 442.
165
Ibid. 488/233.
36 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
resist the jurisdiction of the English court in proceedings commenced by
Ecuador. Ecuador had applied under section 67 of the English Arbitration
Act to challenge the arbitral award rendered in Occidental’s favour in an
arbitration pursuant to the USA/Ecuador BIT. The seat of the arbitration
had been London.166
Ecuador moved to have the award set aside on the grounds that the tribunal
had exceeded its jurisdiction by ruling upon a taxation matter. Article 10 of
the BIT carved out taxation matters from the tribunal’s jurisdiction subject
to three exceptions.167
One of those exceptions concerned disputes about
taxation obligations under an investment agreement, and it was this exception
that the tribunal invoked upon its own motion. That is to say, neither
the claimant, nor the respondent, had characterised the dispute as one
relating to ‘the observance and enforcement of terms of an investment
agreement’.168
The tribunal went out on this limb because, in its view, the
dispute touched upon the scope of the clause dealing with Occidental’s tax
liability in its production sharing agreement with Ecuador.169
The clause
in the PSA was known as Factor X. The tribunal thus concluded that the
dispute could be characterised as a dispute about whether Occidental
had been refunded its VAT payments under Factor X,170
even though
Ecuador had never defended Occidental’s claim for VAT reimbursement
on that basis.
So for jurisdictional purposes, the claim was characterised by the tribunal
as a taxation dispute arising out of the terms of an investment agreement.
But on the merits, the tribunal found that Occidental was not refunded
for its VAT payments under Factor X of the PSA.171
This perhaps explains
why Occidental did not formulate its claim as a breach of an entitlement
under a contract. Instead, the tribunal held that Occidental was entitled to a
refund of its VAT payments under the general tax law of Ecuador.172
But
if the claim had been characterised as a dispute about the tax liability of
Occidental under the general law of Ecuador, the tribunal would not have
had jurisdiction by virtue of Article 10 of the Treaty.
Occidental was awarded more than USD 75 million by the tribunal and
naturally wished to resist any challenge to the award. Occidental’s argument
before Aikens J and then the Court of Appeal was that Ecuador’s
section 67 application should not be heard at all because it was not justiciable
before an English Court. Occidental maintained that, in the arbitration
against Ecuador, it was claiming no more than to enforce the rights
166
Ibid. 129/2.
167
Namely, expropriation, transfers and the observance and enforcement of terms of an investment
agreement or authorisation: Occidental v Ecuador (Merits) 12 ICSID Rep 59, 70/64.
168
Ibid. 72/72–3.
169
Ibid. 72–3/74.
170
Ibid.
171
Ibid. 80–1, 82/110, 115.
172
Ibid. 87/143.
J U R I D I C A L F O U N D AT I O N S O F I N V E S T M E N T T R E AT Y A R B I T R AT I O N 37
which the United States would have under the investment treaty against
Ecuador.173
Therefore, in reviewing the jurisdiction of the arbitral tribunal,
the English court would be compelled to ‘adjudicate upon the transactions
of foreign sovereign states’. And this, following Lord Wilberforce’s speech
in Buttes Gas and Oil Co v Hammer,174
would not be justiciable.
The Court of Appeal found that international treaty instruments can create
rights and obligations for non-state actors and the investment treaty is such
an instrument. An investor does not step into the shoes of its national state
in bringing an investment treaty arbitration; rather, an investor has a direct
procedural right to invoke the substantive obligations in the treaty against
the state that is host to its investment. The Court of Appeal adopted the
present writer’s analysis of this point:
The fundamental assumption underlying the investment treaty regime
is clearly that the investor is bringing a cause of action based upon the
vindication of its own rights rather than those of its national State.175
It followed that neither the investor/state arbitration proceedings, nor the
arbitration agreement giving rise to the arbitration, could be characterised
as transactions between foreign states.176
Certainly, when the English Court
later ruled upon Ecuador’s challenge to the award under section 67 of the
Arbitration Act, it was obliged to interpret the provisions of the investment
treaty in order to review the tribunal’s decision on its own jurisdiction.177
But this interpretive task does not transform the substance of the legal
relationship between Occidental and Ecuador into a transaction between
foreign states:
The case is not concerned with an attempt to invoke at a national legal level
a Treaty which operates only at the international level. It concerns a Treaty
intended by its signatories to give rise to rights in favour of private investors
capable of enforcement, to an extent specified by the Treaty wording, in
consensual arbitration against one or other of its signatory States.178
The Court of Appeal was careful to note that the situation would be different
with respect to an arbitration between the contracting state parties to
the treaty, for which there is of course a wholly separate dispute resolution
mechanism.179
173
12 ICSID Rep 129, 133–4/11.
174
[1982] AC 888, 931.
175
12 ICSID Rep 129, 137–8/20; Z. Douglas, ‘The Hybrid Foundations of Investment Treaty
Arbitration’ (2003) BYBIL 151, 182.
176
12 ICSID Rep 129, 144–5/32.
177
Republic of Ecuador v Occidental Exploration & Production Co (No. 2) [2006] EWHC 345
(Comm), [2006] 1 Lloyd’s Rep 773; Republic of Ecuador v Occidental Exploration &
Production Co (No. 2) [2007] EWCA Civ 656, [2007] 2 Lloyd’s Rep 352.
178
12 ICSID Rep 129, 147–8/37.
179
Ibid. 147/39.
38 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S