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Volume I, issue #02 - May 2004
Introduction to International Commercial Arbitration

30 August - 3 September 2010. Dundee, United Kingdom

The course aims to provide lawyers and non-lawyers with a firm grounding in the legal aspects of international commercial arbitration as well as offering practical skills on how to conduct such arbitrations.
Presented by James Hope and Steven Walker 		    4th CEPMLP International Oil and Gas Disputes Seminar - Specialised Arbitration and Advocacy Skills
6 - 10 September 2010. London, United Kingdom (Provisional Dates)
This course provides specialised insights and training; - looks in-depth at the application of investment and commercial arbitration; - identifies the key issues of arbitration procedures; - highlights the pitfalls that can arise due to the subtleties of arbitration law; ... 		    The 15th Geneva Global Arbitration Forum - Ahead of the Curve
December 8 - 9. Geneva, Four Seasons Hotel des Bergues.


More information about the program and registration details at the www.ggaf.ch website.

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Focussing on recent developments in the area of Investment arbitration and Dispute Management, regulation, treaties, judicial and arbitral cases, voluntary guidelines, tax and contracting.

TDM is supported by CEPMLP / Dundee, the International Bar Association and other law firms, international organizations and companies.

Founding editor

Founding editor was Thomas Wälde, Professor of International Energy Law (and former Executive Director) of the Centre for Energy, Petroleum and Mineral Law and Policy (CEPMLP) at the University of Dundee, the internationally leading graduate school in oil, gas and energy law and policy. Professor Wälde was the former principal UN adviser on oil, gas, energy and investment law.

Investment Arbitration under the Energy Charter Treaty: An Overview of Key Issues

Thomas W. Wälde[1]

1. Introduction: Background and Context

This comment provides an “overview” of several key issues relevant in investment arbitration between investors and governments under the Energy Charter Treaty (ECT). It does not discuss history, background or relationship with other investment treaties. Reference is made to other relevant publications[2]. This overview is based on the writer’s previous work on the overall role of the ECT and of investment arbitration (Art. 26) in the Treaty and in particular on the author’s role as expert and adviser in several recent (unpublished) cases involving the practice and prospect of arbitration under the ECT.

Some words should be said here about the context of Art. 26 ECT arbitration. They apply, to some extent, to all investment arbitration:

Energy Charter Treaty arbitration is not inactive, as it is often believed, but has started to move. First, in the less litigious European context disputes probably get settled under the shadow of ECT arbitration more frequently than in the more litigious North American commercial culture under NAFTA Chapter XI. Second, the ECT has been signed in 1994, effective in 1998 and it is taking a while for the business and commercial community to wake up to the potential of the ECT to provide a remedy for maltreatment at the hands of government. One case (AES v Hungary) was settled; another case has moved beyond the hearing stage, a third is reportedly being raised.

The Energy Charter Treaty’s investment regime is largely adopted from NAFTA Chapter XI, US/UK bilateral investment treaties. It often codifies therefore, in a “forward direction”, contrary to positions taken by the “Third World” and its proponents during the “NIEO” period, customary international law. Given the time of its drafting and the influences on it (NAFTA, WTO, EU – then – draft energy directives, BIT practice), it is possibly the most advanced text in terms of extensive investor protection. There are two distinguishing features, though:

First, the ECT is largely a product of EU external political, economic and energy policy. It is meant to integrate the formerly Communist countries, provides an ante-chamber to EU accession for many of them, intended to promote EU investment in these countries and energy flows from these countries to the EU and is therefore linked more closely to the EU integration and external relations law than the “run-of-the-mill” BIT. It goes beyond BIT practices in its emphasis (I suggest) on extensive state responsibility for sub-state autorities and enterprises, beyond much of BIT practice in its emphasis on “pacta sunt servanda” (the umbrella clause of Art. 10, (1, last sentence) and its emphasis on incorporating better-treatment standards from international law and other international treaties (Art. 10, (1)). It can not be properly applied without an eye towardsd the authoritative interpretative guidance in the 1991 “European Energy Charter” and its preamble – both express the idea of a “high quality” of investment protection and a special purpose of transparent, stable and attractive investment conditions. A similar import can arguably be effected by reference to the now many guidelines on the regulation of energy markets issued by the various EU (and accession-to-EU) energy regulatory forums, in particular the “Madrid” and “Florence” processes. By way of the many treaties of the EU with accession countries (“Europe Agreements”) obliging those countries to adopt the “EU acquis communautaire”, the ECT in effect imports – directly or at least or in addition by an indirect interpretative effect – the law of the EU - as it relates to investor treatment. With this – as yet not clarified – conduit, both primary EU law (in particular Art. 81, 82 and 86 on competition) and secondary EU law (in particular the energy directive) become directly or indirectly applicable. The ECT compels a careful assessment of the treaties between the EU and the respective investor host state, but also other treaties the host state has acceded to (WTO in particular) to see if standards from such treaties can improve or help to interpret in an improving way the generally open-ended treatment disciplines of the ECT. Such an import – directly by Art. 10 (1) – most favoured treaty treatment – or indirectly – by interpretative guidance and by specification of what the standards of “fair and equitable”, “no unreasonable impairment” and “constant protection and security” mean, is arguably also mandated for the “unwritten rules and principles” developed by the ECJ for European law: legal certainty, protection of investment-backed legitimate expectation, proportionality and least-restrictiveness[3]. The same applies to the rules of the European Convention on Human Rights, in particular Art. 1 of the Additional Protocol. Finally, environmental protection has a higher role in the ECT and the specification of its rules and principles than in most BITs – indicated by the European Energy Charter, Art. 19 ECT and the affiliated Energy Efficiency Protocol.

The ECT, as a multilateral treaty, is subject to the interpretation rules of the Vienna Convention on Treaties (VCT). Art. 31 VCT does not only provide the authoritative guideline for interpretation, but makes also a lot of practical sense. It emphasises the literal meaning, the legal context and the identifiable (Preamble, 1994 E E Charter) purpose, and relegates the “travaux” to a secondary position. There are no official “travaux preparatoires”; there are collections of – always fragmented – files with the ECT Secretariat, the IEA and probably some of the larger countries that participated. Recollections of the – probably over 300 in total – participants of the negotiations, including more significant players – are not reliable, often contradictory and of limited value. One needs to bear in mind the rationale for the secondary role of the “travaux” in Art. 31 of the VCT: The treaty’s legal effect is primarily and in most countries based on ratification by national legislatures. This is where legal effectiveness and democratic legitimacy are derived from. The legislatures ratified as a rule based primarily on the text of the treaty and in a secondary way on the accompanying governmental memoranda (itself mostly written to facilitate ratification and not necessarily containing reliable information on problematic issues). There is a great temptation on controversial issues to delve into the travaux, but the result of such trawls for favourable evidence is as a rule not very trustworthy.

There is one factor distinguishing the ECT – as all other modern investment treaties – from the type of intergovernmental treaty the Vienna Convention had in mind: The investment treaties (including the ECT) bestow direct rights on non-state actors. This is a relatively new phenomenon in international law and reinforces the view that investment treaties can perhaps be conceptualised as a special type of “human rights treaties”[4]. They share with those the good-governance orientation and the deployment of individual rights, enforceable against the state, before international institutions. Does this specialty of the ECT make a difference for the application of the VCT interpretation guidelines? Possibly, the principles of predictability, avoidance of retro-active effect and legal certainty based on a more literal approach merit greater weight, i.e. principles more readily associated with the way international commercial contracts are usually interpreted.

The ECT is not a stand-alone treaty. As most of its terms are borrowed from other instruments of international economic law – foremost NAFTA and BITs, the concepts need to be constructed in alignment with the emerging NAFTA and BIT jurisprudence – with due regard to relevant differences as already identified. The reasoning of almost all modern arbitral awards demonstrate the great care investment arbitral tribunals apply to ensure they are positioned in the mainstream of emerging jurisprudence. While there is no formal “stare decisis” rule, there is a de facto and very strong pressure on each tribunal to heed what other tribunals have done with identical or very similar legal language. This does not necessarily prevent contradictory awards – e.g. the “Stockholm” versus the “London” tribunal awards in the Lauder/CME v Czech Republic case. But even here the main cause for the apparent contradiction seems to have been rather in the assessment of facts than in the definition of the legal obligations applicable to the Czech Republic. The increasing transparency (almost complete with NAFTA, reasonably far-reaching with ICSID, and very limited with arbitration under Art. 26 ECT under the Uncitral or Stockholm rules) in fact increases the pressure on tribunals to heed established jurisprudence: It makes both more relevant cases available and ammunition for counsel and it nudges tribunals to formulate judgements that can stand up to the quality control exercised by peer debate. The much higher acceptance and legitimacy of WTO decisions (based on ad-hoc constituted panels and the standing Appeals Body) as compared to the ad-hoc nature of investment arbitral tribunals is probably also due to the more developed state of legal reasoning developed by the two-stage WTO judicial process.

In the following, we will highlight some key issues that can arise or have arisen with respect to the key disciplines and the operation of the Art. 26 arbitration mechanism of the ECT. The discussion is not aiming at complete comprehensiveness, but rather as a commentary on a selected number of so far hotly debated issues.

2.) Some Comments on key Investment disciplines of the ECT (part III)

One needs to bear in mind that only a breach of an obligation of treatment of investors in part III of the Treaty is justiciable under Art. 26 investment arbitration. There are many other obligations in the Treaty – transit, competition law, environment, TRIMs for example, but these are not justiciable under Art. 26. Sometimes they are justiciable under Art. 27 – the traditional form of intergovernmental arbitration; but governments now rarely take up investor concerns themselves. Others are subject to only specific forms of dispute settlement (Art. 7 - transit[5]) or just to soft forms such as conference discussion and consultation.

The ECT does not contain a “list” of clearly defined investment treaty obligations. Most of the most relevant ones – discrimination (national treatment), fair and equitable treatment, most constant protection and security, pacta sunt servanda, treatment no less favourable than international law and treaty obligation requirements, no unreasonable impairment) are spelled out in Art. 10 (1). But one needs to read these obligations together with the (in my view) multiple reference to non-discrimination and most-favoured nation treatment in Art. 10 (2 & 7). Finally, one needs to appreciate that these “primary” obligations are tempered by the miscellaneous provisions of part IV – with reference to sovereignty (Art. 18 (1), presumably an emphasis on respecting the power of economic regulation of states and perhaps equivalent to the reference to “subsidiarity” under the EU Treaty, the – partial and to some extent only suspensive – tax veto in Art. 21, the exceptions in Art. 24 and the hotly contested attribution rules in Art. 22 and 23. The ECT is everything but a model of clarity. It is very hard, without experience and hard even with experience to identify the relevant obligations, their exceptions and finally the many, usually restrictive or suspensive annexes. An application of the ECT’s investment disciplines is not complete without consideration of the “Decisions”, “Understandings” and “Declarations” included in the “Final Act” of the Conference. Their interpretive value is often not clear; in the main, one should view them as constituting the legal context – with varying shades of legal weight – for interpretation. They mainly reflect the concerns of delegations at the end of negotiations – in 1994; it is rare that they are of direct usefulness in settling the many interpretation challenges that now arise.

In applying the several investment disciplines of the ECT and in looking around for authoritative and relevant precedent among the older and newer investment treaty awards, one needs to be careful about comparison: Older cases – e.g. post 1900 ICJ, Mexican claims Commission, post WW I German-Polish claims, US-Iran claims tribunal – will often not have as many investment obligations as the ECT to rely upon. What in the ECT can be dealt with by “pacta sunt servanda”, discrimination, fair and equitable and “measures equivalent to expropriation”, may have been dealt with in older cases without so many “heads of claims” just under the expropriation or under a general and unwritten “pacta sunt servanda” head. I have argued elsewhere[6] that one should see the several investment disciplines not as fully separated treatment obligations, but rather as different ways to express the general idea of inappropriate government conduct towards investor, a conduct that is below current and relevant governance standards as expressed in the authoritative and for the relevant countries pertinent legal instruments available. In this view, it matters less if a particular conduct is subsumed under the “discrimination”, the “fair and equitable”, the “unreasonable impairment” or the “action tantamount to expropriation” standard, but rather that it combines a number of elements which reflect sub-standard governance quality. It is therefore normal that claimants will tend to raise all relevant treatment standards and that tribunals, once they have determined a breach, will tend to find a breach not only of one, but of several (if not sometimes all) relevant investment disciplines. A finding of discrimination or breach of commitment will help the finding of expropriation. I argue that behind most standards – discrimination, breach of commitment and regulatory expropriation – lies the concept of disappointment of legitimate, investment-backed expectations built up by governmental assurances – the reliance principle.

2.1 National Treatment (Non-Discrimination)[7] is possibly the most relevant discipline. Many investor complaints have to do with the fact that domestic competitors, in cahoots with the surviving or newly formed “nomenklatura” in politics, governments, business and in particular state enterprises, manipulates the regulatory and tax powers of the state to the detriment of the foreign investors, either by making its life more difficult or even by engineering strategies to squeeze out the foreign investor in order to allow a cheap take-over (e.g. CME v. Czech Republic). This means that the non-discrimination discipline with its focus on a worse treatment meted out by government to foreigners, without good reasons, is usually the most relevant treatment obligation and for tribunals the easiest handle. The non-discrimination obligation is derived mainly from the WTO, and tribunals and claimants (Feldman Karpa v. Mexico; Myers v. Canada; Ethyl v. Canada; Methanex v. US) now tend to apply the well established WTO methodology: The situation of the foreign investor is compared with a “like” situation of domestic investors – or the “best treated” domestic investor. This requires sometimes very difficult tests to define “likeness”, usually relying on a situation of competition between both products – and hence investors. If the two compared businesses are treated differently, to the detriment of the foreign investor, then the government has the burden of proof to show there is a good enough justification. If it does not or can not, the claimant has proved discrimination. The claimant hence has to find, in a prima facie way of proof, a domestic investor in a “like” situation that is treated better; it is then up to the respondent government to either show that the situation is not like or that the domestic business it not treated better or that there are legitimate reasons. Lack of response by the government or an insufficient or unsubstantiated response is not enough: The Feldman Karpa award indicates tribunals will draw a “negative inference” from silence, from unsubstantiated and not documented factual assertions and from an unwillingness of the government to submit information requested by the claimant and approved by the tribunal. This way of prima-facie proof of discrimination combined with a shift of the burden or proof, both to counter the prima facie evidence and to justify discrimination, is perhaps the most potent instrument in the hands of claimants. Governments seem – both in NAFTA and in ECT arbitration – quite unwilling (or unable) to reveal the facts that lie behind the more favourable treatment of domestic businesses; this is consistent with our model of a “nomenklatura collusion” between politicians, bureaucrats and state and private national businessmen. The use of the burden or proof and presumption procedural tools by arbitral tribunals is the right response.

The discrimination test is well developed in the GATT, though there are extensive debates, in particular over the “likeness” of two competing products (Asbestos, reformulated gasoline cases). There is also a GATT debate – reverberating in the Methanex v. US case – if likeness can already be denied if one – competing – product has intrinsic advantages which justify a preferred status or if such advantages (e.g. better environmental qualities) are to be decided in the justification phase of the test. The Methanex case is also throwing up the question if only end products (MBTE versus EBTE) or major inputs (methanol versus ethanol) are covered, as well as the question how “direct” the government measure must be with respect to the affected product. Similarly, several NAFTA cases (Myers, Pope-Talbot, Methanex, Ethyl) deal with situations which could be seen as mainly trade cases which can also be looked on from an investment perspective. These questions have as yet not surfaced in ECT arbitration.

The automatic transfer of the WTO test (as perhaps best formulated in Feldman Karpa v Mexico) to investment – rather than trade – situations is not that easy. Investors and their investments (e.g. domestic subsidiaries in the host state) are not “products”. Products are compared mainly in their function to compete with each other in a market. Investors may compete with domestic businesses – and then the protectionist effect of a government measure in favour of a domestic competitor and to the detriment of the foreign investor can indicate discrimination relatively easily. But what if the domestic investment is treated in several aspects differently from the foreign investor which may be derived from its particular history, special deals it has made with the government in unique situations or particular steps it has taken to protect its interests? Is that discrimination – i.e. does the government not only have the “negative duty” to avoid a discriminatory treatment meted out to the foreign investor, but also a “positive duty” to equalise the playing field, possibly even to grant benefits to the foreign investor which were once available or granted without a particular eye on treating a specific foreign investor differently? The language of Art. 10 suggests that there is rather a positive duty, with its repeat emphasis (10, 1 and 10, 7) on treatment no worse than “accorded” to a foreign investor. How far does this duty go? If a domestic investor has burdens the foreign investor does not assume (e.g. greater social obligations; environmental clean-up; higher historical cost base), are then for example subsidies (or a higher purchase price) for the domestic investor still discrimination? Our suggestion is that the discrimination test is much more complex than the easier comparison of competing products and product-relevant measures in the GATT. We suggest that a more in-depth, fact-oriented process of comparing the impact of all relevant government measures in their totality on both the best-treated domestic investor and the foreign investor is necessary for a finding that there is a significant, not justified material imbalance to the foreign investor’s detriment. Findings of protectionist intention – which may as in WTO language be identified from the “objective design and architecture of the measure”, or an intentional collusive squeeze-out would make it easies to prove discrimination. Discrimination can – different from the WTO scenario – also occur outside a competitive context, e.g. when domestic businesses in a comparable, but not necessarily competitive situation are treated in the sense of total material equivalence substantially better, and with no good reason. GATT, on one hand, uses the concept of governmental “measures”, the ECT, on the other hand, uses the concept of “treatment” of investors. What does “treatment” mean? Presumably, it is the effect of the exercise of governmental powers – by the government and the agencies, entities and enterprises included in the notion of “government” by attribution – which notably betters a comparable (or competing) domestic business vis-à-vis the foreign investment. Such measures can be legal measures (e.g. export quotas and trade rules: Myers, Ethyl, Feldman Karpa, ME cement v Egypt), or the way the law is applied, it can be tax rules (much in the focus of the ECJ), it can be environmental rules and administrative practice (e.g. the ECJ Danish bottle case). It can also be the exercise of dominant buying or selling power – e.g. by state energy/utility and infrastructure monopolies. Paying tariffs lower than paid to comparable domestic producers by a state energy monopoly on which a supplier is captive, or difficulties with access or higher tariffs for access than paid by domestic industries to public infrastructure (pipelines, power grids, roads, railroads) can all be instruments of discrimination. To anyone with a competition or energy law background, it is clear that we are now very close to the competition rules under primary and secondary EU law (Art. 82, 86) and the energy directives and national implementing law. The discrimination obligation on states obliges them to enact and apply what in effect is the competition law of the EU. It is therefore natural – but not yet tested – that one would look for precedent not only, and perhaps even less, in the WTO national treatment practice, as rather in the practice of the ECJ and the EU Commission on third-party access and of abuse of a dominant position.

2.2 “Fair and Equitable Treatment”

This is the other most popular standard for tribunals willing to decide in favour of claimants. The standard derives from earlier formulations in international law and was re-developed by the Abs-Shawcross and OECD model investment conventions. It has become for the NAFTA and BIT tribunals[8] an important discipline, is raised inevitably by claimants and was the basis of an award in favour of claimants in several cases (Pope-Talbot, Metalclad,with significant discussion in Mondev v US; ME Cement v Egypt). The NAFTA debate has largely been if this standard should be read in “plain meaning” – e.g. means what the words say according to Art. 31 VCT, or if it represents nothing else but the traditional minimum standard and should be read in the style of the 1926 Neer case as requiring “egregious” and “shocking” behaviour[9]. The 2001 interpretative NAFTA decision[10] made clear the three NAFTA parties wish this to be seen as international law’s minimum standard. This can only have a faint echo for the handling of this standard under the ECT where Art. 31 VCT with its emphasis on the plain meaning within context and purpose “trumps” the governmental interpretation of the NAFTA. But what is clear even for awards subsequent to the NAFTA 2001 authoritative interpretation is that no self-respecting tribunal would interpret the standard as it was done in 1926, but rather sees it as an “evolutionary” standard reflecting the expected minimum expectation in the 21st century or the contemporary notion of what is “fair” and what is “equitable” (in my view two slightly different concepts[11]). Both the “minimum standard” and the plain-meaning interpretations may not be, and should not be, different. What comes out clearly from the NAFTA awards (Pope-Talbot, also Mondev) is that this standard is not an opening for private value-judgement of arbitrators (as much as they do naturally play a subcutaneous role in the awards), but requires that the standard be developed on the basis of an in-depth factual assessment interacting with standard of good-government conduct identified from authoritative and relevant, principally legal, instruments. It is natural that the legal instruments providing a “source” for expectations of fair and equitable governance would be primarily multilateral treaties, but also BIT-practice where such treaties and state practice expresses a common, universally shared core of good-governance expectations. Other treaties would be human right treaties and other authoritative, but non-treaty, sources of human rights law, in particular the key UN General Assembly resolutions.

A not yet settled question is if the relevant standards are global and universal, i.e. a one-fits-all standard to be applied indistinctly to impoverished developing countries and, say, the European transition countries in the Baltics. If one looks rather towards the idea of an “international law minimum standard”, one might be more tempted to think of an universal standard; if one rather adopts the “plain meaning”, Vienna Convention approach, then “fairness” and “equitableness” should be rather formulated in view of the specific region and the pertinent countries. Since I view the ECT as a distinct investment treaty in the primarily European regional, historical and cultural context, I would suggest to interpret “fair” and “equitable” rather in the context of contemporary European standards of governance. The European Convention on Human Rights (in particularly, but not exclusively Art. 1 of the Additional Protocol) and the standards of good-governance expressed by the European Court of Justice, the “Europe” agreements and other agreements of the EU with Eastern countries (e.g. the EU-Russia 1994 agreement) would be most authoritative as the most pertinent and special principles. One could, even, within the ECT distinguish rules pertinent for the EU and accession countries (which would be much more reliant on the EU acquis on good governance) and rules and principles pertinent for investment in the farther-out ECT countries – such as the Central Asian countries. These, not accession countries through usually linked to the EU by various types of economic cooperation agreements, would be subject to perhaps a less stringent standard closer to a universal minimum standard. But the distinction between a more regional and more universal “fair and equitable” standard is probably less than the conceptual discussion suggests: Any application of the standard has to be fact-based and take into account the specific country context; countries which are developing countries or closer to developing countries in terms of governance quality, but also governance resources and capability can not be expected to apply the same quality of EU-like governance as, for example, countries that have joined or are about to join the EU, with many linkages already in place[12]. But one should not be overly lenient with transition countries which are, still, quite underdeveloped in terms of governance quality: The ECT is an instrument to upgrade governance, the investment arbitration disciplines are an instrument of “tough love” to help such countries, very much in their own interest, to get there and excessive tolerance for governmental misconduct can therefore easily become misguided and undershoot the principal purpose of the ECT process.

Such a general theoretical discussion of the standard is, however, only helpful to a limited extent. In the end, it is necessary to identify and apply specific principles to give to the “fair and equitable standard” a concrete shape and scope. In this overview, we can not do this in an exhaustive way. But it is perhaps useful to highlight what so far has been the core component of the standard in recent application and argument: The concept – widespread in constitutional, EU and administrative law of most if not all developed countries – of the protection of “legitimate, investment-backed expectations” created by proper government assurances. This principle has been – quite correctly – relied upon in the Metalclad, Techmed v. Mexico and CME v Czech Republic awards. It is often combined with the principle of transparency – that government administration has to be clear about what it wants from the investor and can not hide behind ambiguity if it has created such ambiguity and contradiction itself. Art. 20 and Art. 1 (1, first sentence) of the ECT reinforce the emphasis on transparency as a component of “clear, stable, equitable, favourable” conditions of investment. The devil is as always in the detail: The expectation must be “legitimate” – an expectation created, for example, that illegal activities would be tolerated can not lead to investment protection (the Feldman Karpa case sailed quite closely to the wind), same as one can not claim discrimination, for example, for a quite plausible more effective police enforcement against illegal activities against foreigners than against domestic businesses with tighter links to domestic politics and administration. An expectation provided by assurances obtained in a – clearly and visibly – illegal way or about a – clearly and visibly – illegal content deserves no protection, though this can not be a justification to deny protection to investors caught in complex domestic regulatory, procedural and bureaucratic entanglements for which a governmental assurance (comfort letter) is the normal way to seek clarity. The “illegality” must be of a major sort and not a from a vantage point minor and less material character.

Other already identifiable aspects of the “fair and equitable” are the reference to the good-faith and abuse of right principles and the prohibition on arbitrariness. The new US/Chile FTA interprets (in its intention restrictively) the standard as essentially covering the core elements of the “due process”, i.e. a procedural principle[13]. While this formulation is motivated by the US’s government’s opposition to in particular the Pope-Talbot award, it has the potential of extending at least the procedural scope of the “fair and equitable” standard. “Due process” in the major administrative law systems of the world connotes ideas of transparency, prior consultation and careful, impartial and informed decision-making free from inappropriate and in particular partisan and hostile considerations. The frequent collusive relationship of the domestic “politico-commercial-administrative complex” against foreign investors is likely to be often tainted by breaches of such procedural rules.

Governments, for example, should not be able to rely on legal and formal technicalities if they consistently (in particular with respect to nationals) disregard such technicalities or if such technicalities were not discernible to the investor and its domestic legal advisers for reasons of lack of transparency. Discrimination plays a role in reinforcing a presumption of the breach of the “fair and equitable standard” as it does in the other investment disciplines (supra). A breach of international treaty obligation should – as the Pope-Talbot tribunal said correctly – “weigh” heavily in favour of the finding of a breach, but only provided that the respective rule of international law is specifically designed to protect investors at least as a secondary, but clearly detectable underlying policy. Similarly, the existence of unconscionable coercion (e.g. towards an interim agreement in Techmed v. Mexico, or the specific administrative harassment of a foreign investor to punish for raising the NAFTA complaint in Pope-Talbot) indicates an abuse of overwhelming government power which is to be constrained by this good-governance standard. It is also important to appreciate that this standard – as all relevant ECT and investment treaty standards – requires a balancing process. Investment treaties as international law disciplines interfere in domestic regulatory and administrative sovereignty; that is their very purpose. They are meant to do so in order to upgrade the quality of governance. But they must also not be operated in order to become an excessively interventionist instrument. The EU Treaty’s – so far quite theoretical – rule of “subsidiarity” can help as some guidance. A judicial restraint – even more pronounced for ad-hoc arbitral tribunals with limited acceptance and legitimacy so far – is one factor that should be part of the balancing process. A simple breach of a rule is not enough: The “fair and equitable” standard is only then breached if there is an accumulation of breaches of relevant standards of sufficient severity, weight and impact to justify the intervention of the treaty in domestic governance. Both the accumulation of breaches and the impact on the investor must therefore reach a minimum threshold of intensity.

2.3 Most Constant Protection and Security

This standard is one of the least explored – as the “no unreasonable impairment” standard, also in Art. 10 (1). It seems to be derived mainly from the Abs-Shawcross and OECD model convention. There are two interpretations – a narrow and an extensive one – possible: The narrow interpretation (reflected in the new US-Chile Free Trade Agreement) views this as a “police protection” clause[14]. With a historical link to ancient cases requiring host states to provide a due diligence effort of police protection for foreigners – with account to be taken of domestic resources and capabilities and without a strict security guarantee, the obligation would only seem to provide certain protection if the security forces allow the foreign investor to be harassed by domestic thugs, sometimes even associated with government agencies (Wena Hotels v Egypt) themselves. But this interpretation is not mandated by the ECT. The ECT refers to a reinforced standard: “Most constant protection and security” and links this in one sentence with the concepts of impairment of property enjoyment, discrimination and unreasonable”. There is therefore an argument to view the standard as encompassing more than a low-level standard of police protection in a merely physical sense of security and rather link it to the “economic police” (in the traditional sense) and now rather termed “economic regulatory” powers of the state. With much of the Communist state’s previously state-operated activities in delegated or private hands, but often with a dominant economic power and in particular so if in implicit collusion with political and administrative forces, the standard could therefore rather be read to stand for an obligation of the state to use its “police” and economic regulatory powers in a wider sense to ensure that the foreign investor can operate its business in a context free from direct physical harassment, but also free from harassment by administrative powers and abusively used dominant economic powers derived from control over natural monopolies, essential facilities and other sources of dominant economic power in the sense of Art. 82 of the EC Treaty. This obligation would not only be breached by active and abusive exercise of state powers, but also by the omission[15] of the state to intervene where it had the power and duty to intervene to protect the normal ability of the investor’s business to function in a level playing field. If one links the – advocated – duty of the state in Art. 22 (infra) to supervise effectively its subordinated entities (as an independent obligation arguably not justiciable under Art. 26 as not in part III) with the – justiciable (as in part III) duty to provide “constant security and protection”, one would arrive at reading this discipline as providing a duty, enforceable by investment arbitration, to use the powers of government to ensure the foreign investment can function properly on a level playing field, unhindered and not harassed by the political and economic domestic powers that be.

2.4 No unreasonable or discriminatory impairment

This standard is as unexplored as the “constant security and protection” standard. The ECT links both in one sentence which gives weight to an argument that the security and protection is linked to the normal enjoyment and operations of the investment. There have been suggestions that the standard intends to capture conduct that affect property rights, but without rising to the threshold of action equivalent to expropriation[16]. A “plain meaning” approach – mandated by Art. 31 of the VCT – would simply examine government “measures” affecting the investment (which in my view also include omissions where the government could and should act) to determine if they are “unreasonable” or “discriminatory”. With these reference standards one is not very far from the method of “filling” the “fair and equitable” standard described earlier. What is discriminatory will be determined in the same way as discrimination, and what is unreasonable should be determined in the same way as what is not “fair and equitable”, i.e. by reference to objective, authoritative, preferably legal standards applicable to the country and the region in question. These interlinkage between the various standards in Art. 10 reinforces my view that one needs to view these standards as largely inter-related, if not identical: A reference to the pertinent and applicable good-governance standards. They should be seen as reinforcing each other. The “unreasonable impairment” standard thus should be construed as clarifying and confirming that it is government measures (and omissions) directed against the normal functioning of the investor’s business on a level-playing field that are targeted by the “fair and equitable”, “the most constant protection and security”, the “no unreasonable impairment” and by the discrimination standard in Art. 10 of the Treaty.

2.5 Observance of any obligations entered into with an investor or an investment” (Umbrella, pacta sunt servanda, sanctity of contract clause) in Art. 10 (1, last sentence)

This provision is one of the hardest for tribunals to crack. It is a relatively new invention and does not figure in many older BITs and in particular the NAFTA. The only case where a tribunal relied on the provision seems, so far, to have been the Fedax v Venezuela case. In this case, the tribunal did not bother to develop any extensive reasoning, but simply seems to have assumed that payment on promissory notes issued by the government was the type of obligation that was covered under the “pacta sunt servanda” clause. This does not mean that the obligation to respect commitments entered into with either the foreign investor or the domestic subsidiary (“investment”) is not covered either by customary international law or treaties without explicit inclusion of this discipline. The general consensus (with some reservations from the historical Calvo-doctrine and the NIEO-debate in the 1970s and some surviving remnants) is that states have to respect contracts freely entered into with a foreign party provided that such contracts (or similar instruments creating a commitment) have at least to some extent a “governmental” character[17]. Tribunals have therefore in the past dealt with breaches of contract – provided the breach implicated the specific powers of government – under the category of expropriation (i.e. a taking of contractually formed proprietary rights), of the international law principle of “pacta sunt servanda”[18] or under the “disappointment of legitimate, investment-backed expectations” concept usually subsumed under the “fair and equitable” discipline. One should assume that the explicit reference in the ECT, the most pronounced investment protection and pro-property rights multilateral treaty around, of the obligation to respect commitments adds something more than customary international law. This additive “more” can be found in two ways: First, the existence of a formal commitment – by contract, agreement or any other form of undertaking (e.g. an agreement constructed in the style of the Pyramids-case out of general government assurances contained in investment laws and brochures and accepted by the investor) – obviates the usually more complex and very much fact-based process of examination and balancing that is necessary for most of the other investment disciplines (except a formal expropriation by simple “taking”). The examination here needs to focus only on three issues:

The “plain text” of Art. 10 (1, last sentence) has no such limitations – nor does it have the sometimes advocated qualification that only “investment agreements” are covered. To the contrary, the plain text with its use of the word “any obligations” suggests an extensive reading. Assuming that the ECT is the currently most extensive treaty-based “codification” of customary international law principles, it is possible to accept the “plain meaning” as the intended meaning; there is the 1987 US Restatement reference that international law protects even non-governmental contracts against breach without compensation[19]. It is also not “absurd”, in the terminology of the Vienna Convention, to hold a state (including its instrumentalities) to respect contracts with foreign investors of whatever nature: The greater the respect for any contractual commitments – a notorious problem in all ex-Communist societies, the more likely is the attractiveness of the country for investors and its potential for economic development[20]. Should therefore be any contract, including of a purely commercial character (example: delivery of fuel oil to a French village?) be covered by the – on the plain meaning rule – very extensive scope of this discipline? Investment treaties are addressed to governments. They seek to provide a discipline for governmental conduct. Covering any commercial contract with no governmental character – neither at the entry, the implementation nor the exit phase – can be argued to go beyond what the ECT is about. The set-up of the Art. 26 arbitration with its reference to the Treaty and international law (Art. 26 (6) might also suggest (though there is the danger of a circular argument) that the treaty is about an international law obligation addressed to government, and not to situations where the governmental character of the instrumentality entering into an obligation is purely accidental. The Azinian v. Mexico case is sometimes cited as authority for the proposition that “merely commercial” contracts are not covered by Art. 10 (1, l.s) ECT. But such reference is not justified: First, the NAFTA, on which Azinian was decided, does not have any, and certainly not the broad (“any obligations”) reference to pacta sunt servanda. The Azinian case, in spite of some broad obiter dicta, was decided on one issue: That foreign contractors who have chosen to go to domestic tribunals on the validity of the contract, can no longer start litigation before an investment tribunal again, except if there is evidence of “denial of justice”. The Azinian case itself is rather a story of a contract obtained by deception, with the tribunal concurring with the decision of the Mexican courts in all aspects. The main holding is that going to domestic courts over a domestic contracts uses up a treaty remedy except if the last formal Mexican state decision – the one made by the court of last resort in the matter – can be considered as “denial of justice”.

One way to solve this dilemma between the “plain meaning” and purpose and target of the ECT is to imply into Art. 10 (1, last sentence) a qualification that the contractual relationship must have at least in one significant aspect – its conclusion, its implementation or its breach or termination – something that involves governmental powers and prerogatives; such a qualification would then have to be read widely to satisfy the explicitly wide and unqualified “plain meaning” of Art. 10 (1, last sentence). One would therefore exclude from Treaty coverage such conduct by government entities which are purely commercial in any sense of the word, where the dispute does not involve any typically governmental aspect. A breach of commercial contracts by a government entity might still be qualified as involving governmental powers if, for example, a government attempts to exit from the contractual obligations because its governmental status gives it special privileges (e.g. sovereign immunity). This solution would therefore formally support an implied qualification in the text, but would reduce the impact of the qualification by construing it widely. That would also do justice to the overall ECT objective: To constraint the abuse of governmental powers of whatever nature if directed against foreign investors.

Another thorny problem of the “observance of obligations” clause is the question to what extent the contracts entered into by subordinated and in particular state enterprises (and possibly also Art. 22 (3) enterprises are covered. The state’s central machinery – the government – rarely concludes agreements with foreign investors – as many developing countries, in particular in Africa, did in the past (“convention d’etablissement”). Most modern energy investments are arranged by complex contractual packages, usually consisting of long-term power-purchase agreements by state-owned energy monopolies, sometimes guaranteed by government. Much of the previous state roles in the energy industries is now delegated to independent regulatory agencies (who don’t contract, but regulate) and to still-state-owned enterprises or, after privatisation, energy companies often in a monopoly situation. The main problems with foreign investors thus will occur in the interface between the investor, the domestic energy company and regulatory authorities. It is hence essential for Art. 10 (1, l.s.), as for most other disciplines, to distinguish between the state’s conduct, and the conduct of private companies. In case of private companies, the state will only be responsible if these act with governmental authority or if the state as such retains a duty to regulate and intervene; such scenario is responsible for the question of state responsibility by omission to intervene effectively now becoming more acute. In essence, what is necessary is that the conduct of actors which are not clearly part of the state can be “attributed” to the state, i.e. that their actions have to be considered exactly as if the central state apparatus – the government – had undertaken them. If the relevant actor and its pertinent conduct – attribution is usually required for both – is considered part of the state, the state itself is fully responsible. That is not always understood clearly, e.g. when the theory is proposed that a non-core actor’s conduct needs to be attributed to the state itself, and then another investigation must come to the result that the state itself has entered into the relevant commitment (focus on the “it” in Art. 10, 1, ls. ECT). If a state enterprise – or a 22 (3) private enterprise - has entered into a contract and if this contract, or rather contractual relationship, can be attributed, from entry to the end, to the state, then the state has entered into a commitment and is obliged to respect it. More on this later.

2.6 Does the ECT (and comparable investment treaties) require that the contract is adjudicated first by a domestic court

There are two main scenarios in investment arbitration: In one, there is no prior direct relationship, normally constituted by an agreement or a contract-like license between the state and the investor. The government rather interferes in the investment by exercising its regulatory, administrative and in particular permitting powers (Pope-Talbot; Ethyl; Myers; Methanex; Feldman Karpa). In other cases, there is a contract-based relationship; sometimes the qualification of a “license” as contract can pose problems. Such contract is mostly not with the central government, but with one of its instrumentalities, state enterprises (Sodiga in Maffezini; ADM in Salini; Yaung Chi Oh v. Myanmar) or subnational government (Tucuman province in the two Vivendi decisions). The government is then usually much surprised by being held to account for contractual dealings it had no, or no direct role in. It raises, as a rule, the objection that there is a domestic contract and that based on contract or domestic law the investor (in its role as contractor) should seek a remedy primarily from the domestic courts (or contractually available arbitral tribunals). Respondent governments concede that only in case of denial of justice by the domestic courts there may be recourse to the treaty-based arbitral tribunal. The reasoning is that only domestic courts can deal with a contract which is concluded under domestic law. It is sometimes supplemented by the reference that the treaty tribunal is not a “super-appeal” authority for domestic courts. While this objection of exclusive domestic jurisdiction has been raised by every government in the now many recent cases, it has never been effectively accepted by the treaty-based tribunals. In all relevant cases – CMS v Argentina (jurisdiction),Lanco v. Argentina, MAffezini (jurisdiction), Salini (jurisdiction), Yuang Chi Oh, CME v Czech Republic, Tradex v. Albania – the tribunals assumed jurisdiction. The object of their jurisdiction was not exactly the contract under domestic law, but rather government conduct (including the contract) to be assessed under the relevant investment treaty disciplines. This position has been so far best explained by Emmanuel Gaillard[21], but also Bernardo Cremades – a frequent arbitrator, chair and counsel in BIT cases[22]. They explain properly that in doctrinal terms the tribunal does not decide on the contract under domestic law, but it decides on the application of treaty to a factual situation, which includes the contract and domestic law.

This doctrinal explanation is the consequence of the investment treaties’ underlying approach and purpose: If domestic courts were to have exclusive jurisdiction, with the Treaty tribunal limited to “denial of justice” claims at the end of the domestic litigation, then the principle of “exhaustion of domestic” remedies, consciously abolished in virtually all modern investment treaties, would in effect be re-introduced[23]. The wording of the investment arbitration clauses in modern BITs, in particular Art. 26 ECT, makes abundantly clear that the investor has the choice of either pursuing domestic remedies or choose the “fork in the road” towards international remedies. The international remedies will often be more limited in its review than national courts, but it has the – for any investor anywhere – key advantage of giving him recourse to a court that is not an agency of the government against which it seeks remedy. In addition, the “pacta sunt servanda” clause of Art. 10 (1, l.s.) of the ECT, would be largely meaningless if the tribunals were kept from examining compliance, had to refer claimants to first have – long and protracted – recourse to domestic courts and could exercise only a true international appeal jurisdiction based on the narrow grounds of denial of justice over the final decision of domestic courts. In very practical terms, the “recourse to domestic courts” approach would undermine the provision of effective remedies to investors as an additional layer of time, expense and exhaustion would be injected into the anyway difficult, risky and often not very balanced process of investment arbitration.

The battle of arguments founds its so far ultimate expression in the Vivendi awards: In the first, the tribunal effectively said: Attribution may make the Argentine government responsible for the province’s of Tucuman conduct, but it did all it could by offering good offices. The concession contract with Tucuman has to be adjudicated under domestic law by the provincial administrative courts – and we may later review it under very limited denial of justice grounds. With such reasoning, the tribunal effectively (after denying it first) re-introduced the “exhaustion of domestic remedies” principle if and when an exclusive domestic jurisdiction for a contract could be established. This award – much criticised[24] - was properly annulled for not assuming jurisdiction available under the Treaty by the ICSID annulment committee, in a way the only real “appeal authority” for BIT-awards around. The inclusion of the pacta sunt servanda obligation in Art. 10 (1, ls) ECT makes the now absolutely prevailing jurisprudence even more imperative for the ECT: A respondent government can not avoid a tribunal’s jurisdiction for contracts with “it” (and that includes the conduct of entities which can be attributed to the state) by pointing towards an available, and under domestic law possibly exclusive jurisdiction of domestic courts. Domestic law can not be held up against a tribunal jurisdiction based on international law[25].

2.7 Treatment “no less favourable than that required by international law, including “treaty obligations” (Art. 10 (1 & 7)

The ECT includes another untested and un-explored duty that of treatment no less favourable than accorded to investors from other countries (Art. 10, 7) or as “required by international law, including treaty obligations” (Art. 10, 1, 4. sentence). Perhaps one can distinguish both obligations, but it seems to us better to consider it as one composite investment discipline under the ECT. Art. 1 (7) focuses on treatment accorded to investors from other countries, Art. 10 (1, 4.s.) treatment “required” under international law and treaty obligations. I suggest that this means:

If another BIT provides better treatment, then such better treatment should be “imported” into the ECT. The Maffezini (jurisdiction) tribunal has used a comparable clause to import a more rapid dispute mechanism from another BIT. It is important as a precedent that the MFN-mechanism can lead to importation (from one BIT to another investment treaty – eiusdem generic) of a procedural mechanism but closely linked to the substantive obligations. It saw the problem of a “pick-and-choose” approach where investors would look at other investment treaties and pick selective items from that treaty into the applied treaty. Its response was that such Treaty-shopping would then not be possible if the treaty provision overridden by the MFN important reflected a fundamental policy choice for the country and if it is unlikely to have signed the treaty if the imported, rather than the applied treaty’s own, language had been chosen. This is a helpful test, but it does not help when an investor picks an individual item out of another treaty for import into the applied treaty and the “fundamental policy choice” test is not relevant. We suggest that one needs not to look at individual items in the other (“export”) treaty, but at the overall package. A particular item clause in a treaty will often improve another treaty’s treatment if imported, but it would disrupt the particularly quid-pro-quo which lies at both the export and the import treaty’s content. One should therefore be careful with a selective export without regard to the quid-pro-quo and the overall context of both treaties. If another treaty provides an overall better treatment, then such overall treatment package may be more easy to import. To sum up: The MFN issue is more difficult than it appears at first sight. The Maffezini award’s ruling needs to be more examined and debated.

The second part of the MFN obligation of the ECT rests on Art. 10 (1, 4. s.). It refers to international law and other treaties. While this may partly overlap with Art. 10 (7), it seems to have distinct features of its own. There has been some argument in NAFTA submissions by claimants that a comparable clause allows the import of, for example, WTO obligations so that a breach of a relevant WTO obligation would constitute a breach of the MNF obligation in NAFTA. In the ECT context, other international treaties with a “treatment of investors” obligation can be identified mainly in the internal and external law of the European Union – e.g. the unwritten general principles of EU law, the freedom of movement and competition law provisions of the EU Treaty, the energy directives and the external agreements of the EU with the ECT member states (“Europe Agreements”, “Partnership and Cooperation Agreements”) as well as the ECHR (Art. 1, Additional Protocol). To the extent these treaties and the EU law provide a “treatment” for investors that is better than the ECT, they should be relevant for Art. 10 (1). EU law itself can – arguably – be viewed as “international law”. The challenge is to identify in such EU-affiliated law provisions that deal with the treatment of investors. The competition law provisions of the EU Treaty, for example, require monopolies to abstain from abusive conduct and states to regulate against abusive context. This can be seen as “treatment of investors”. The energy directives (electricity and gas, 1996/98 and 2003) oblige states to regulate third-party access to natural monopolies. The same obligation is contained in Art. VIII of the GATS. Again, this could be seen as “treatment” of investors dependent on the non-discriminatory access to infrastructure facilities. This field of application of the MFN and the treaty-reference clause is so far completely underdeveloped. It requires more in-depth study and debate before the applicability can be defined in more detail. Tribunals will be very reticent to venture into such uncharted legal territory and rather rely on the more easily manageable investment disciplines, except in cases where they feel justice needs an award in favour of the claimant and the other ECT disciplines are not helpful. The main effect of the MFN clause and the treaty reference is perhaps rather to rely on such legal reference material not for a direct import, but for an indirect interpretative effect in shaping the specific content of in particular the discrimination, the fair and equitable and the expropriation disciplines.

2.8 Art. 13: Measure having effect equivalent to expropriation

It is now generally recognised that governmental action can constitute a compensable expropriation even if no formal “taking” and transfer of ownership has taken place. Thus it is recognised that in modern business it is less tangible property, but the ability to manage the bundle of proprietary rights in a commercially profitable way which counts. Government can, by intervening in the context, in particularly the competitive context, of a business undermine its ability to function properly[26]. The US-Iran claims tribunal cases confirm mainly that a formal taking is not necessary, but that the governments interference in the ability of the owner to manage their property, or its omission to protect the property against disruption, can amount to expropriation. Modern investment treaty cases have developed this notion of “regulatory taking”[27]. The issue is how to define the required “ pain threshold” – a mere reduction in value due to government regulation is not enough, the deprivation has to be significant and intensive (Pope-Talbot). If one examines the cases where a regulatory taking was accepted, one finds that tribunals engage in a very much fact-based process of balancing of a number of factors. The intensity of the deprivation of ownership rights is one issue, the economic impact is another. But they also take into account factors such as discrimination and the disappointment of legitimate expectations created by the state (Techmed v. Mexico; Metalclad). Breach of contract can amount to expropriation if the government action makes contract execution more onerous in discriminatory conditions (Salini v. Morocco) or if the governmental measure deprives the foreign enterprises of the benefits of agreements concluded and if such agreements are absolutely essential to the proper functioning of the property rights[28]. There is also the suggestion that excessive taxation will qualify as expropriation[29]. If one focuses on the material economic effect, then serious underpayment by an energy monopoly to an energy producer dependent on the uptake of electricity would have the same effect on the business’ cash flow and should therefore qualify as expropriation as well. The depriving act must, however, be directed at a legitimate business; if an illegal business is affected, that can not constitute expropriation (Feldman Karpa v. Mexico).

The factors relevant in the balancing act required for determining indirect expropriation are summed up in the new Chile-US FTA (Annex 10-D)[30]. Its formulations have been drawn up with the explicit intention to ward off spurious and far-fetched expropriation claims as have sometimes been raised in NAFTA cases by claimants.

A finding of regulatory taking/ indirect expropriation has some implications which have so far not been fully explored. The normal consequence is for the government to pay compensation. The calculation of compensation itself is fraught with difficulties. The ILC draft reflects traditional international law with its identification of two components for compensation: investment expenditures made and lost profits. But these criteria are likely to lead in long-term projects to a double recovery, paying to the investor both what he spent and, additionally, the discounted value of future cash flows, with existing contracts delineating future income that is reasonably certain from possible future income that is too speculative to be taken into account[31]. The right solution is to define the likely market value of the investment at the time the government actions for the taking began (Sta Elena v. Costa Rica) by developing a valuation range bounded by both the investment expenditures on one hand and the discounted net future cash flow on the other, with additional factors such as indications of market-based valuation (where applicable), equitable considerations.[32] The discount factor – a key variable for the amount produced by the calculation – should reflect the relative risk of the project and the normal return rate in comparable projects. The issue of damages requires considerable further study where legal and financial analysis expertise needs to be more combined than it is at present.

Another implication of a finding of “indirect expropriation” is the concomitant obligation of the investor to transfer all proprietary rights and expertise to run the operation to the government. Applying the indirect expropriation discipline therefore implies the construction of a sale to the government at a price determined by the tribunal. In many cases it will be very much in the investor’s interest as it is unlikely to want to continue in a country where there have been attempts to squeeze the foreign investor out by deploying the regulatory and administrative arsenal of the government apparatus.

3. Attribution (Art. 22 ECT)

3.1 Attribution by customary international law

The key issue in the first fully litigated ECT case was attribution, i.e. the examination if the conduct of a state enterprise towards a foreign investor can be attributed to the state, with the effect that the state is responsible for that conduct as if it were its own. This question has also been dealt with in the Maffezini I and Salini I case; state enterprises have also been traded as part of the state in several US Iran cases dealing with NIOC[33] , in the ICSID case Tradex v. Albania and the currently pending UPS v Canada case. The question is of great significance as in the former Communist countries state enterprises or privatised, but privileged and licensed, energy monopolies dominate the energy industry, in particular the “natural monopolies” of energy transport and distribution. What was once the Soviet-style “Ministry of Electricity” is now the state-owned electricity company. As states have delegated much of their former direct operational role to these enterprises, usually established in the form of private law, but owned and controlled by government, the power of misconduct has migrated from central government to these state and privileged enterprises, but also the relatively autonomous energy regulatory bodies set up after privatisation. Attribution, in the ECT, can be operated in two ways: First by application of customary international now being formulated in particular by the draft convention on state responsibility by the International Law Commission[34] (in particular articles 5 and 8) and recent cases, mainly Maffezini I and Salini I. The second way of attribution is the – much more contested – method of considering Art. 22 as the ECT’s special and additional attribution norm.

Attribution by international law (Art. 26 (6) ECT) requires in essence that both the state enterprise (or a privileged private enterprise) is controlled, with respect to the conduct at issue, by the state (the “structural” test) and that the conduct at issue displays a characteristically governmental character (“functional test”). Ownership of a privately set up company alone is not sufficient for attribution to the state, as the law respects the formally separate legal personality of the state enterprise. But ownership sets up a rebuttable presumption that the “structural test” is fulfilled, i.e. the enterprise controlled by the state. Possibly (Maffezini I), state ownership plus the existence of formal objectives for the state enterprise which are related to public policy (energy policies, public service function) also sets up a – rebuttable – presumption that the conduct at issue is governmental. Such references to the public function of the state enterprise may be identified in its charter, in any laws setting up or providing special rights to the enterprise or in authoritative statements by the government and the enterprise itself.

The “functional test” – aiming to identify a public function – is usually the most controversial one, in particular as it examines not the activities of the enterprise as such, but the particular conduct vis-à-vis the foreign investor. In Maffezini II, for example, the tribunal split the conduct into three components, of which it found that two had no particularly governmental character, but one – use of the state enterprise’s particular powers and authority with respect to financial institutions – which had a governmental character. It found a breach of a BIT discipline and awarded damages only with respect to those consequences that flowed from the one act or conduct where it could discern a particular governmental role involved. It is hence crucial in any disputed case to carry out an extensive investigations of the facts to find out if the particular conduct or relationship[35] is coloured rather by a commercial character or displays indications of a particular government role.

How can one characterise state enterprise conduct as either mainly commercial or as mainly or significantly “governmental”? Our suggestion is to deploy a similar distinction used in the GATT (for Art XVII) and EU competition law (in the context of the prohibition of state aids (ex Art. 92): Here, the decisive question is if a conduct displays normal “business judgement” or “market investor principle” or if it is characterised significantly by public policy concerns[36]. If a “normal” enterprise had carried out the type of transaction at issue and entered into the contractual relationship at issue, the indicators are rather towards a “commercial character” and non-attribution. But if the contractual relationship reflects rather particular governmental purposes – e.g. support to domestic industry, regional development or subsidies to make an environment-friendly energy investment competitive vis-à-vis lower-cost energy products, the indications are rather towards a governmental character. Sale of standardised commodities, a transaction that would normally be done by commercial operators acting at-arm’s length in a competitive market and transaction where solely business judgement prevails are likely to be qualifiable as “commercial”. On the other hand, factors that rather suggest the presence of a significant governmental element are:

The tribunal therefore has to carry out a process of close examination of the facts and balance the criteria for or against a “merely commercial” character. Such qualification may already have taken place under domestic law, e.g. when the relationship between state enterprise and investor is characterised not as a normal commercial contract, but rather as an “administrative contract”, i.e. subject to administrative courts (where in existence), subject to intensive regulation relating to the procedure of entering into the contract (e.g. tendering rules not applicable to private companies), or with respect to the content of the obligations (e.g. little ad-hoc negotiations and mostly a take-it-or-leave-it mechanism. The ILC Convention commentary observes that the characterisation as “governmental” also will have to take into account the particular history, tradition and public perceptions of the industry and the state enterprise[39]. In former Communist countries, for example, it is likely that the public will consider a service – such as energy provision – that was traditionally provided by a state ministry rather to be in the sphere of government than in the sphere of “normal” business. A close scrutiny by the government, accountability to government and legislature, and intensive involvement by the government in the state enterprise and the particular conduct are also natural indicators for a rather governmental character. A commercial character, on the other hand, would be where the state enterprise conducts is business as if it were a normal commercial company and where government and politics keep aloof from its operations.

3.2 Attribution by Art. 22

The second method of attribution is by operation of Art. 22 which contains, in my view, an attribution norm making the state “guarantee” the conduct of its state enterprises and its independent regulatory agencies. This interpretation relies on the fact that Art. 22 is in part IV where miscellaneous provisions defining the context for the “primary” part III investment disciplines are located (Art. 18, 21, 24)[40]. Art. 22, in this view, provides an extensive codification of customary international law; it can therefore not be less, but should be rather more than what can be derived from Art. 5 and 8 of the ILC convention.

The opposing view suggests that Art. 22 is an independent obligation – presumably a “due diligence” obligation of the state to regulate effectively its dependent entities; its location in part IV of the treaty means that it is not justiciable under Art. 26 investment arbitration (note Art. 26 (1), but only under the politically safer mode of Art. 27 – intergovernmental arbitration[41]. If the opposing view were accepted, the scope of Art. 22 were severely limited. There are, however, no indications that this was the intention of the Treaty. Travaux indications are not available, silent or contradictory on this question. We suggest that in order to achieve the overall ECT purpose – a “high level” of investment protection – an extensive interpretation is required.

The outcome of this legal debate is, however, of no great significance. If Art. 22 is seen as the special attribution norm in the Treaty (so my view), then it is nothing more than a reflection of the evolving international law principles of attribution, perhaps with an indirect interpretative effect on such principles towards a wider view. If it is, on the other hand, seen as an independent supervisory obligation outside the purview of part III and Art. 26, then attribution is done by customary international law, which again would take the expression found in Art. 22 as an indirect aid to interpretation. Art. 22 could also be used to construct a rebuttable presumption that a state enterprise acting against the Treaty’s rule acts under the flag of the state. If a conduct of a state-owned enterprise (or a private, but privileged enterprise) is seen as involving significant elements of government and public policy, then attribution is inevitable, either by international law and Art. 22, or by international law indirectly supported by Art. 22. In this case, the state enterprise (or the private enterprise acting with governmental character) is “the state” – the “it” in Art. 10 (1, l.s.). The purpose of the treaty to disallow evasion of state responsibility by letting controlled, but privately incorporated companies do the “dirty business” against the foreign investor suggests a broad interpretation of the “governmental” criterium. Otherwise, the largest part of possible breaches of investment disciplines under the ECT in still very much state-dominated ex-Communist countries would be immune from the rules of the ECT; this was certainly not the purpose – rather the opposite.

4. Other Issues: “Investment” and “flow-through damages”

Other issues are usually brought up in ECT as in NAFTA litigation, but they are perhaps rather of secondary significance as jurisprudence has been close to establishing relative clarity.

The dispute must relate to an “investment” (Art. 26 (1), defined in Art. 1 (6) in the widest possible way. The definition in the ECT encompasses virtually any right with a financial value (“asset)”, including contractual claims for money and performance. This “extensive” definition of investment seems to express a revival of the historical concept that property rights – and not only “foreign direct investment” is protected. It makes sense: Protection of property rights of any sort against unjustified governmental interference is a pre-condition for any economic development. Such protection – both for foreigners and for nationals – is a key component of any economic good-governance regime. One needs to bear in mind, though, that lawyers accustomed to the earlier, more narrow definition of foreign investment – not as “any asset”, but rather as “foreign direct investment”, i.e. a lasting commitment of capital and management for a project designed to earn revenues – have great difficulty of appreciating that the text of the ECT – as of all modern BITs – explicitly uses the very wide concept of investment – basically proprietary rights of any sort. This means that the ECT covers not only contractual claims to performance when the contract is part of a foreign direct investment scheme – the traditional notion, but also simple contract claims, e.g. non-payment on a sales contract or on a judgement based on the sales contract. One can not bring back the abolished “exhaustion of domestic remedies rule” by claiming that it is the task of domestic judges to decide if the contract at issue is valid under domestic law and hence an “investment” under Art. 1 (6). This approach would undermine the option of the investor to go straight to an ECT tribunal. As in all other relevant cases (Maffezini; Salini; CMS v Argentina; Vivendi annulment, Wena Hotels; Yaung Chi Oo v Myanmar), tribunals now fully assume the jurisdictional power over disputes which involve contracts under domestic law: the contractual relationship is a fact that is subject to assessment carried out by the tribunal under the ECT investment disciplines.

There is a trap for the unwary to heed: If the claimant chooses the ICSID tribunal (rather than a Stockholm or ad-hoc Uncitral tribunal), it will have to comply not only with the low-threshold requirements for an “investment” under Art. 1 (6), but also on the – possibly – higher threshold of Art. 25 of the ICSID Convention. A pure commercial contract claim was refused registration with the ICSID in the past; the Salini I v Morocco decision, though, has established a clearly lower threshold (2 years construction contract with a modest participation in the risk) than might have been considered in the past. A dispute relating to a pure commercial contract claim – e.g. non-payment – might therefore be better brought before a Stockholm or ad-hoc Uncitral tribunal. Arguably, the mistake of going first to an ICSID tribunal and being rejected there for lack of an “investment” in the sense of Art. 25 ICSID Convention can be corrected – at considerable cost though – by re-submitting the dispute to one of the alternative venues.

Lawyers brought up in traditional international law – much of which has been consciously reformed by the new investment treaties – and in awe of the Barcelona Traction decision of the ICJ will usually object to a claim by the foreign parent that the damage is suffered primarily by the domestic subsidiary. NAFTA – in Art. 1116, 1117 – provides therefore alternatives for recovering either the subsidiary’s or the parent’s damages. We suggest that this is no longer a real issue: The ECT (Art. 1 (6), 26 (including paras 1, 7, 8) makes it clear that the dispute for arbitration is between the “investor” – the foreign parent – and the host state, and that the investment for purposes of investment arbitration is subsumed under the investor and seen as constituting an economic entity with the investor. The Treaty – as all modern investment treaties – rejects explicitly the limited protection afforded under the Barcelona Traction judgement. It appreciates that the “investment”, i.e. the subsidiary, is subject to regulatory manipulation and pressures by the host state, and that for proper arbitral equality there are only two types of parties: The foreign parent and the host state. There is accordingly a “flow-through” of damages from the subsidiary to its foreign parent. One can qualify this as “action pro socio” or a “derivative litigation right”. BIT judgements have gone so far as to allow minority shareholders to litigate for damages inflicted on the subsidiary (CMS v Argentina). Damage calculation is a difficult issue by itself and can not be discussed here in more detail. The ILC Convention draft provides guidance as do recent awards and the – sometimes – critical discussion: CME v Czech Republic, Karaha Bodas v. Indonesia; Himpurna v. Indonesia[42]. Damages must be directly related with the incriminated measure (which can be an omission); they can not be too remote. Equitable considerations play a role in the calculation of damages as such principles distillable from comparable law as the duty to mitigate damages and other pertinent rules of damages law. The existence of a contractual commitment helps to distinguish between reasonably certain and “too speculative” damages that can not be taken into account. It is important for tribunals to avoid double-recovery, something that the Karaha Bodas award may have fallen succumbed to.

A last word on evidence: As in national litigation, email and the internet play an increasing role. Parties now usually submit not only evidence, but also relevant legal documentation (writings, laws, treaties and awards) to the tribunal – ICSID tribunals, perhaps because of their greater transparency and critical review of their awards seem to be ready and be expected to deal with a much larger documentation (which can be measured in meters/foots of shelf space) than other tribunals operating in greater confidentiality. Much of the legal authorities referred to is now available by internet, but the tribunals seem still to require submission of such documentation in hard copy format. While evidence by witnesses and submission of filed documentation is still at the core, the internet now provides an increasingly wide potential to find out relevant information which is publicly available. Tribunals have not yet, it seems, come to grips with the submission of and reference to publicly available information via the internet. Finally, the “Google” search machine plays a role not only in locating very efficiently relevant information (e.g. a country’s laws, politics, regulation, political debate, policy statements, treatment of investors), but also allows a quick and sometimes very effective check on the participating actors: arbitrators (their expertise, background and indications for possible conflict), experts and counsel.

5. Conclusion

The process of applying the ECT by arbitration has only started recently. In quantitative terms, the interpretation of the ECT has to rely largely on the much more extensive arbitral jurisprudence emerging from BITs and the NAFTA, though we expect that the ECT will in its time make its own contribution. Such contribution may, though, be more limited to the extent more confidential venues than the ICSID option under Art. 26 are chosen. There are three venues now competing: ICSID, Stockholm and ad-hoc Uncitral tribunals. Potential claimants have to observe the three venues and their particular rules, culture and the competence of counsel and arbitrators to identify what is the best option for their own cases. My recommendation is to open up such arbitral tribunals in the style of the now very transparent NAFTA procedures. Such transparency can only lead to greater public acceptance and understanding of the valuable functions of investment arbitration, and also greater quality control by the discussion of awards and their reasoning in the relevant professional peer groups.


Annex: Table of Cases


[1] Dr. iur./ LL.M. Harvard; Professor (and Jean-Monnet Chair), CEPMLP/Dundee; Principal Thomas Wälde & Asscociates and TWA International Mediation Services; websites: http://www.cepmlp.org/ and www.gasandoil.com/ogel.

The cases cited in this comment are as a rule available either on http://www.naftaclaims.com/ (NAFTA Chapter XI cases), on the ICSID website – www.worldbank.org/icsid or republished in International Legal Materials (e.g. the Vivendi I and II cases, the Salini v. Morocco, SGS v Pakistan, the Wena Hotel v. Egypt or the Azinian v. Mexico cases..

[2] The main book on origin, context and specific issues covered is: T. Wälde (Ed) The Energy Charter Treaty, with 27 contributions and the main legal texts; For a re-print of the text with introductory comment by myself: 34 ILM 360 (1995); recent developments of the ECT are summarised by: Bamberger/ Linehan and Wälde, in: Energy Charter Treaty in 2000, 18 JENRL 331 (2000) and in more detail: The Energy Charter Treaty, in: Redgwell et.al., Energy Law in Europe, OUP,2001, 171-213; for a detailed discussion of investment arbitration under the ECT: Thomas W. Wälde, Investment Arbitration under the Energy Charter Treaty, in:12 Arbitration International 429 (1996); T Wälde/T Weiler, investment arbitration under the energy charter Treaty in the light of new Nafta precedents, 159 in: G. Kaufmann-Koehler/B. Stucki, Investment Treaties and Arbitration, ASA Swiss Arbitration Association, Special Series No. 19, Zurich (also: OGEL 2 (2003) at www.gasandoil.com/ogel; Richard Happ, Dispute Settlement under the Energy Charter Treaty, German YB Int’l Law, 2003; W. Benhamida, L’Arbitrage Transnational Unilateral, these pour le doctorat en droit, Paris II, 24 June 2003 (to be published in 2004 by Pedone), which I consider, as of 2003, the most extensive, perceptive and in-depth researched study of investment arbitration.

[3] Usher, General Principles of EC Law, 1998

[4] For a discussion of this: Benvenisti, Cambridge UP, Sharing Transboundary Resources, 2002, 187; J. Alvarez, in: T. Weiler (Ed, forthcoming) NAFTA Investment Arbitration.

[5] I understand the still negotiated transit protocol is unlikely to have strong investor protection, due, inter alia, resistance from major EU countries (or one country).

[6] Multilateral Investment Agreements in the Year 2000, in: Souverainete etatique et marches internationaux, Melanges en l'honneur de Philippe Kahn (C. Leben, E. Loquin, M. Salem), Dijon 2000 (revised version of: International law of foreign investment: towards regulation by multilateral treaties, in Business Law International, 1 Business Law International 50-80 (1999)

[7] Todd Weiler, in: Todd Weiler (Ed, forthcoming 2004), NAFTA investment arbitration

[8] Iain Laird, in: Todd Weiler (Ed) forthcoming in 2004, op. cit supra

[9] J. Thomas, ICSID Journal 200..

[10] Reflected again in the more detailed, anti-Pope-Talbot provisions of the new US-Chile Free Trade Agreement.

[11] Relying on the “plain meaning” interpretation mandated by Art. 31 VCT, I would suggest that “fairness” refers to contemporary concepts of good governance expressed by authoritative legal instruments relevant to the country, or group of countries, implicated in an ECT dispute. I would view “equitable” not just as a synonym of “fair”, but rather as a reference to the abuse of the formality of law, e.g. related to the English law principle of estoppel, the international law and civil law concepts of “good faith”, “Treu und Glauben” , abus de droit and “venire contra factum proprium”. A slight distinction, but nevertheless it indicates two directions for a very much fact-based investigation of the incriminated governmental conduct or omission.

[12]

[13] See the Chile/US FTA: “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world”

[14] sec 5 b: “full protection and security” requires each Party to provide the level of police protection required under customary international law.”

[15] Not the reference by Prof Boeckstiegel (2003) to the need to appreciate not only active conduct, but also conduct by omission as the basis on which to found a claim of breach of Treaty obligations, in: Introduction to this book.

[16] Happ, 2003, 22 with reference to the US-Iran claims tribunal, Brower-Brueschke, 1998, 381

[17] Stephen Schwebel, Whether the breach by a state of a contract with an alien is a breach of international law, in: Essays in Honour of Roberto Ago, Milaneo Giuffre 1987 401. The Commentary to the US 1987 Third Restatement goes a further by suggesting that the breach of commercial contracts may also constitute an international tort provided no compensation is paid, but presumably it envisages breaches which are not exclusively in the sphere of commercial and contract law (e.g. non-compliance), but where the special powers of government are at least somewhere significantly at play.

[18] Texaco/Calasiatic v. Libya 53 ILR (1979)389

[19] Cited in Schwebel, 1987;

[20] Mancur Olson, Power and Prosperity, Basic Books, New York 2000

[21] Case comments on the Salini award (ILM 2003) and in Clunet/JDU 2002; on the Yaung Chi Oh award and the Vivendi v. Argentina annulment decision – New York Law Journal and OGEL 4 (2003) at www.gasandoil.com/ogel

[22] Cremades, in: Horn (ed), 2004

[23] Andrea Bjoerklund, in Todd Weiler (ed), 2004, forthcoming, points out that the Loewen v. US decision may in effect have re-introduced a limited “exhaustion of domestic remedies” rule in NAFTA cases.

[24] Note: Wälde/Weiler, 2002

[25] Also: Sandline v PNG case, Sir Michael Kerr 1998

[26] T Waelde/A. Kolo, Environmental Regulation, Investment Protection and regulatory taking in international Law 50 ICLQ 811-848 (2001)

[27] Pope-Talbot; CME v. Czech Republic; Techmed v. Mexico; Sta Elena v. Costa Rica; Metalclad v. Mexico; Salini v. Morocco; for a mostly theoretical discusión: New York University School of Law Environmental Law Journal 2002 11 N.Y.U. Envtl. L.J. 64

[28] US OPIC decision on payment of compensation for the breach of long-term power purchase agreements – here the state enterprises where the only possible buyers of electricity and there was no “prospect of operating the project outside the scope of the agreements with Indonesia” – Mid-American claim (Himpurna) at www.opic.gov

[29] Happ, 2003, p. 12

[30] An action or a series of actions by a Party cannot constitute an expropriation unless it interferes with a tangible or intangible property right or property interest in an investment. Article 10.9(1) addresses two situations. The first is direct expropriation, where an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure.

4. The second situation addressed by Article 10.9(1) is indirect expropriation, where an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.

(a) The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers, among other factors:

(i) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred;

(ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and

(iii) the character of the government action.

(b) Except in rare circumstances, nondiscriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriation

[31] Note the analysis by Lou Wells, OGEL 2 (2003) at www.gasandoil.com/ogel; Thomas Stauffer, Valuation of Assets in international takings, in 17 Energy Law Journal 459-288

[32] See Himpurna award where the tribunal used the “abuse of rights” doctrine to reduce the amount of damages (though no abuse of rights had actually taken place). Presumably it meant “equitable considerations”. YbkIntlCA , …

[33] Brower/Brueschke, 1998, 380, 386, note 177

[34] J. Crawford, The International Law Commission's Articles on State Responsibility: Introduction, Text and Commentaries , OUP 2002

[35] There is no clear law if it is the overall relationship or particular, distinct acts which have to be examined. I suggest that while an act – or a series of related acts – is what is examined, the nature of the overall relationship of the investor with the state enterprise will have a strong bearing on the qualification of the particular, incriminated conduct as either “merely commercial” or also involving a significant governmental element.

[36] ECH case: no state aids if a state energy company provides cheaper tariffs to Dutch vegetable growers in order to keep them from relocating – and thus losing electricity customers:Commission decision 83/215; Court decisions: 1988 ECR 2129; Ehlermann, Les entreprises publiques et le controle des aides d’etat, RMCUE 1992, 613, 619; ECJ 21 march 1991, Italy v. Commission, C-305/89

[37] Art. 3 19976 Electricity Directive; No. 24 of preamble of 2003 amendment; also No. 26 of preamble and Art. 3 (2) of 2003 amendment to electricity directive

[38] Happ, 2003, p. 26

[39] Crawford, 2002, 101, 113

[40] T. T. Waelde/Wouters, State responsibility in a liberalised world economy: state, privileged and subnational authorities" under the 1994 Energy Charter Treaty, an analysis of Articles 22 and 23, in: 27 Neth.YbkIntlL 143-194 (1996).

[41] There is also some debate about the arguably limitative character of the reference to “ in relation to the sale or provision of goods and services in its area” in Art. 22 (1). This insertion may not be as limitative as is argued as it seems (“to the sale” not to “its sale”) to rather denote the overall character of a transaction. Also, in the energy industry, the purchase of power by an energy monopoly from an independent power producer involves the interconnection “service” – so qualified under the GATS.

[42] Weiler/Diaz, in: Todd Weiler (Ed, 2004 forthcoming op. cit. supra)



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