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International practice shows a clear tendency to protect the interests of foreign shareholders where the company itself belongs to the respondent state
A general regulation can amount to an indirect expropriation if it is unreasonable, i.e. arbitrary, discriminatory, disproportionate or otherwise unfair
To promote the security and predictability of international investment law, the standards of protection should not be used indifferently one for the other; past arbitral practice has caused some confusion in this regard
The standard of full protection and security in IITs is no more than the traditional obligation to protect aliens under international customary law
- International Minimum Standard / The Law of Aliens
- International Investment Treaties (IITs) > Protection of Investors under IITs > Expropriation and Standards of Protection > Full Protection and Security > Customary International Law Standard of Protection and Security
Minority shareholdings can constitute investments
Past decisions on the protection of shareholders draw similar conclusions
Reasonable expectations should be protected by the fair and equitable treatment-standard, not by the protection against unlawful expropriation
- International Investment Treaties (IITs) > Protection of Investors under IITs > Expropriation and Standards of Protection > Expropriation > Indirect Expropriation / Regulations > Determining Whether a Regulation Constitutes an Indirect Expropriation
- International Investment Treaties (IITs) > Protection of Investors under IITs > Expropriation and Standards of Protection > Fair and Equitable Treatment > Case Groups > Legitimate Expectations
A direct expropriation is the forcible appropriation by the state of the tangible or intangible property by means of administrative or legislative action
While as a matter of principle, a general regulation does not amount to an indirect expropriation, this general principle has to be set aside in some circumstances on account of the content of the regulation
The exception clause in the IIT between the USA and Argentina, regarding e.g. measures necessary for the maintenance of public order, is not self-judging
An expropriation requires a substantial deprivation not only of the benefits, but the use of the investment; even an important loss of value is not sufficient, if it is unrelated to the interference with the use or control of the investment
Bad faith on the part of the state is not required for determining a frustration of legitimate expectations
A tribunal may award compound interest
A discriminatory measure does not require a discriminatory intent by the government
A state's omission can constitute an IIT violation only if the state was obliged to act; a state has no duty to adapt its tax regime to the best interest of foreign investors
- International Investment Treaties (IITs) > Protection of Investors under IITs > Applicability of IITs > State Conduct as a ‘Measure’ Violating the Treaty
- International Investment Treaties (IITs) > Protection of Investors under IITs > Exception Clauses
An article exempting tax policies from an IIT embodies the general presumption of validity in favour of legislative measures adopted by a state
If individual measures do not constitute a breach of the FET standard in isolation, their cumulative effect can still qualify as an IIT breach inasmuch as they constitute a composite act
- International Investment Treaties (IITs) > International Law Rules Applicable to IITs > Law of State Responsibility > Attribution of Acts > General Remarks
- International Investment Treaties (IITs) > Protection of Investors under IITs > Applicability of IITs > State Conduct as a ‘Measure’ Violating the Treaty
In the same way as a creeping expropriation, a creeping violation of the FET standard is possible; it is a process extending over time and comprising a succession or an accumulation of measures that only when taken together constitute a breach of the standard
The exception for tax policies in Article XII(1) of the US-Argentina IIT creates a best-effort obligation only
The protection and security standard is not inferior to the minimum standard to vigilance and of care required by international law; the state has to take all measures necessary to ensure the full enjoyment of protection and security of its investment
The relevant date for the calculation of damages is the time when compensation is paid
An unfavourable calculation of taxes does not constitute an expropriation
The claimant must show a causal relationship between the host state’s actions and the asserted damages
The FET standard does not guarantee a stable legal and business framework
The standard of fair and equitable treatment can be distinguished from other standards of treatment in several ways
The non-discrimination standard is not violated de jure if the host state accorded identical treatment to national and foreign investors
Definition of arbitrary
Article XI of the US-Argentina IIT is lex specialis compared to Article 25 ILC-Articles
A differential treatment based on different factual and legal situations does not violate the non-discrimination standard
The discussion on the relation between the FET standard and the minimum standard is somewhat futile, as neither IITs nor public international law define the scope and content of the standard precisely
The FET standard entails reasonableness and proportionality; it is a means to guarantee justice
The FET standard is the international minimum standard required by public international law, regardless of the protection afforded by the national legal orders
The existence of legitimate expectations has to be examined objectively
Legitimate expectations necessarily vary with the surrounding circumstances
A "losses due to war" clause cannot be interpreted as precluding the wrongfulness of a host state's breach of another standard of protection
An investor cannot expect that the legal regime of the host state remains unchanged; however, an investor's expectation is legitimate and protected by the FET standard, if the host state explicitly assumes a specific legal obligation for the future
No general definition of what constitutes a commitment can be given; one can, however, differentiate between commitments specific as to their addressee and those specific regarding their object and purpose
An agreement between the host state and a domestic company cannot constitute a waiver of IIT rights by a foreign investor holding a minority of the shares in that company
While Article XI US-Argentina IIT precludes the application of the substantive obligations in the IIT, Article 25 ILC-Articles excuses a breach of such an obligation
- International Investment Treaties (IITs) > International Law Rules Applicable to IITs > Law of State Responsibility > Circumstances Precluding Wrongfulness
- International Investment Treaties (IITs) > Protection of Investors under IITs > Exception Clauses
The ordinary meaning of an IIT's terms is the starting point of any interpretation
In principle treaty rules must be regarded as objective in nature; unless the contrary is specified, they are not self-judging
- International Investment Treaties (IITs) > International Law Rules Applicable to IITs > Law of Treaties > Rules of Interpretation > Further Problems
- Vienna Convention on the Law of Treaties > Article 31 - General rule of interpretation > Ordinary Meaning
Article 31(4) VCLT must be read in conjunction with Article 32 VCLT
Article 31(3)(b) VCLT requires at least some communication between the state parties
In practice it is always possible to have recourse to the supplementary means of interpretation mentioned in Article 32 VCLT
Due to Article 31(3)(c) VCLT a tribunal has to interpret an exception clause in an IIT in a way that takes into account Article 25(2) ILC-Articles
- International Investment Treaties (IITs) > International Law Rules Applicable to IITs > Law of State Responsibility > Circumstances Precluding Wrongfulness
- International Investment Treaties (IITs) > Protection of Investors under IITs > Exception Clauses
- Vienna Convention on the Law of Treaties > Article 31 - General rule of interpretation > Context > Article 31(3) a-c
There is both a rule of general international law (Article 25 ILC-Articles) as well as a general principle of law that necessity may not be invoked if the respondent has significantly contributed to creating that necessity; both are relevant for the interpretation of an IIT's exception clause due to Article 31(3)(c) VCLT
- International Investment Treaties (IITs) > International Law Rules Applicable to IITs > Law of State Responsibility > Circumstances Precluding Wrongfulness
- International Investment Treaties (IITs) > Protection of Investors under IITs > Exception Clauses
A "LIBOR plus 2%" rate appears less speculative than other rates of interest
General principles are rules applied in foro domestico, in private or public, substantive or procedural matters, which are suitable for application on the level of public international law
The respondent bears the burden of proof regarding the conditions required by an exception clause; if the claimant asserts that respondent contributed to the state required by the exception, the burden of proof is upon him or her
According to the principle derived from the Chorzów Factory case, reparation should eliminate the consequences of the illegal act and re-establish the situation which would have existed if that act had not been committed
Exceptions must not be applied restrictively; instead, a balanced interpretation is necessary
The BIT and international law govern the responsibility of a treaty violation; domestic law, however, establishes which rights have been recognized by the respondent
It would amount to a double compensation if claimants were allowed to claim damages for the taking of rights assigned to domestic companies as well as for the diminution in value of the shares of those companies
The Barcelona Traction case is not relevant for the protection accorded to foreign shareholders under an IIT
In principle, the ordinary meaning of a treaty provision is that given to its terms at the time of its conclusion
International practice shows a clear tendency to protect the interests of foreign shareholders where the company itself belongs to the respondent state
The standard of full protection and security in IITs is no more than the traditional obligation to protect aliens under international customary law
International Law Rules Applicable to IITs
Relationship of IITs to Other Sources of International Law
Relationship of an IIT to General Principles of International Law
Further Problems
General principles are rules applied in foro domestico, in private or public, substantive or procedural matters, which are suitable for application on the level of public international law
Law of Treaties
Rules of Interpretation
Further Problems
In principle treaty rules must be regarded as objective in nature; unless the contrary is specified, they are not self-judging
Law of State Responsibility
Attribution of Acts
General Remarks
If individual measures do not constitute a breach of the FET standard in isolation, their cumulative effect can still qualify as an IIT breach inasmuch as they constitute a composite act
Circumstances Precluding Wrongfulness
While Article XI US-Argentina IIT precludes the application of the substantive obligations in the IIT, Article 25 ILC-Articles excuses a breach of such an obligation
Due to Article 31(3)(c) VCLT a tribunal has to interpret an exception clause in an IIT in a way that takes into account Article 25(2) ILC-Articles
There is both a rule of general international law (Article 25 ILC-Articles) as well as a general principle of law that necessity may not be invoked if the respondent has significantly contributed to creating that necessity; both are relevant for the interpretation of an IIT's exception clause due to Article 31(3)(c) VCLT
Protection of Investors under IITs
Applicability of IITs
Ratione Materiae – Definition of Investment
The Concept of "Investment"
Shares
Minority shareholdings can constitute investments
Past decisions on the protection of shareholders draw similar conclusions
It would amount to a double compensation if claimants were allowed to claim damages for the taking of rights assigned to domestic companies as well as for the diminution in value of the shares of those companies
The Barcelona Traction case is not relevant for the protection accorded to foreign shareholders under an IIT
State Conduct as a ‘Measure’ Violating the Treaty
A state's omission can constitute an IIT violation only if the state was obliged to act; a state has no duty to adapt its tax regime to the best interest of foreign investors
If individual measures do not constitute a breach of the FET standard in isolation, their cumulative effect can still qualify as an IIT breach inasmuch as they constitute a composite act
Expropriation and Standards of Protection
Expropriation
General Requirements of an Expropriatory Act
Degree of Interference
An expropriation requires a substantial deprivation not only of the benefits, but the use of the investment; even an important loss of value is not sufficient, if it is unrelated to the interference with the use or control of the investment
Direct Expropriation
A direct expropriation is the forcible appropriation by the state of the tangible or intangible property by means of administrative or legislative action
Indirect Expropriation / Regulations
Right to Regulate
While as a matter of principle, a general regulation does not amount to an indirect expropriation, this general principle has to be set aside in some circumstances on account of the content of the regulation
An unfavourable calculation of taxes does not constitute an expropriation
Determining Whether a Regulation Constitutes an Indirect Expropriation
A general regulation can amount to an indirect expropriation if it is unreasonable, i.e. arbitrary, discriminatory, disproportionate or otherwise unfair
Reasonable expectations should be protected by the fair and equitable treatment-standard, not by the protection against unlawful expropriation
Fair and Equitable Treatment
Relationship to Public International Law
The discussion on the relation between the FET standard and the minimum standard is somewhat futile, as neither IITs nor public international law define the scope and content of the standard precisely
The FET standard is the international minimum standard required by public international law, regardless of the protection afforded by the national legal orders
Character and Scope
In the same way as a creeping expropriation, a creeping violation of the FET standard is possible; it is a process extending over time and comprising a succession or an accumulation of measures that only when taken together constitute a breach of the standard
The standard of fair and equitable treatment can be distinguished from other standards of treatment in several ways
The FET standard entails reasonableness and proportionality; it is a means to guarantee justice
Case Groups
Legitimate Expectations
Reasonable expectations should be protected by the fair and equitable treatment-standard, not by the protection against unlawful expropriation
Bad faith on the part of the state is not required for determining a frustration of legitimate expectations
The existence of legitimate expectations has to be examined objectively
Legitimate expectations necessarily vary with the surrounding circumstances
An investor cannot expect that the legal regime of the host state remains unchanged; however, an investor's expectation is legitimate and protected by the FET standard, if the host state explicitly assumes a specific legal obligation for the future
No general definition of what constitutes a commitment can be given; one can, however, differentiate between commitments specific as to their addressee and those specific regarding their object and purpose
Further Cases
The FET standard does not guarantee a stable legal and business framework
Arbitrary and Discriminatory Measures
A discriminatory measure does not require a discriminatory intent by the government
The non-discrimination standard is not violated de jure if the host state accorded identical treatment to national and foreign investors
Definition of arbitrary
A differential treatment based on different factual and legal situations does not violate the non-discrimination standard
Full Protection and Security
Customary International Law Standard of Protection and Security
The standard of full protection and security in IITs is no more than the traditional obligation to protect aliens under international customary law
Character and Scope
The protection and security standard is not inferior to the minimum standard to vigilance and of care required by international law; the state has to take all measures necessary to ensure the full enjoyment of protection and security of its investment
Compensation for Losses in Times of War, National Emergencies etc. Including Necessity Considerations
A "losses due to war" clause cannot be interpreted as precluding the wrongfulness of a host state's breach of another standard of protection
Relationship of Standards of Protection Within a Single IIT
To promote the security and predictability of international investment law, the standards of protection should not be used indifferently one for the other; past arbitral practice has caused some confusion in this regard
Exception Clauses
The exception clause in the IIT between the USA and Argentina, regarding e.g. measures necessary for the maintenance of public order, is not self-judging
A state's omission can constitute an IIT violation only if the state was obliged to act; a state has no duty to adapt its tax regime to the best interest of foreign investors
An article exempting tax policies from an IIT embodies the general presumption of validity in favour of legislative measures adopted by a state
The exception for tax policies in Article XII(1) of the US-Argentina IIT creates a best-effort obligation only
Article XI of the US-Argentina IIT is lex specialis compared to Article 25 ILC-Articles
While Article XI US-Argentina IIT precludes the application of the substantive obligations in the IIT, Article 25 ILC-Articles excuses a breach of such an obligation
Due to Article 31(3)(c) VCLT a tribunal has to interpret an exception clause in an IIT in a way that takes into account Article 25(2) ILC-Articles
There is both a rule of general international law (Article 25 ILC-Articles) as well as a general principle of law that necessity may not be invoked if the respondent has significantly contributed to creating that necessity; both are relevant for the interpretation of an IIT's exception clause due to Article 31(3)(c) VCLT
The respondent bears the burden of proof regarding the conditions required by an exception clause; if the claimant asserts that respondent contributed to the state required by the exception, the burden of proof is upon him or her
Exceptions must not be applied restrictively; instead, a balanced interpretation is necessary
Waiver of Rights Under an IIT
An agreement between the host state and a domestic company cannot constitute a waiver of IIT rights by a foreign investor holding a minority of the shares in that company
Damages and Interest
Forms of Damages
The relevant date for the calculation of damages is the time when compensation is paid
According to the principle derived from the Chorzów Factory case, reparation should eliminate the consequences of the illegal act and re-establish the situation which would have existed if that act had not been committed
Causation
The claimant must show a causal relationship between the host state’s actions and the asserted damages
Interest
Interest Absent Explicit Rules
A tribunal may award compound interest
A "LIBOR plus 2%" rate appears less speculative than other rates of interest
Article 31 - General rule of interpretation
Ordinary Meaning
The ordinary meaning of an IIT's terms is the starting point of any interpretation
In principle treaty rules must be regarded as objective in nature; unless the contrary is specified, they are not self-judging
In principle, the ordinary meaning of a treaty provision is that given to its terms at the time of its conclusion
Context
Article 31(3) a-c
Article 31(3)(b) VCLT requires at least some communication between the state parties
Due to Article 31(3)(c) VCLT a tribunal has to interpret an exception clause in an IIT in a way that takes into account Article 25(2) ILC-Articles
Article 32 - Supplementary means of interpretation
Article 31(4) VCLT must be read in conjunction with Article 32 VCLT
In practice it is always possible to have recourse to the supplementary means of interpretation mentioned in Article 32 VCLT
Arbitration (Articles 36-55)
Article 42
Article 42(1)
Article 42(1)(2) - "absence of such agreement"
The BIT and international law govern the responsibility of a treaty violation; domestic law, however, establishes which rights have been recognized by the respondent