A WORKSHOP ON GLOBAL INVESTMENT GOVERNANCE · 2 It is worth noting that unlike most World Trade...

Globalization and Finance Project, University of Oxford 28 JUNE 2012 / 1

CONTENTSForeword

» Ngaire Woods 2 Summary of Proceedings

» Taylor St.John 3 (1) Free Transfer of Funds Clause

» Xavier Carim 6 » Moataz Hussein 8 » Anna Joubin-Bret 10 » James Mendenhall 15 » Prabhash Ranjan 16 » Elisabeth Tuerk and Cree Jones 18

(2) MFN Clause

» Alexandra Koutoglidou 20 » Santiago Montt 23 » Charles Nevhutanda 24 » Michael Waibel 25

(3) National Security Exceptions

» N Jansen Calamita 27 » Thomas Sebastian 28 » Kenneth J Vandevelde 29 » Robert Volterra 30

List of participantsAhmad I. Aslam:Counsellor in the Permanent Mission of Pakistan

to the WTO, and Charles Wallace Fellow, Global Economic Governance Programme,Oxford University

N Jansen Calamita:Director of the BIICL Investment Treaty Forum

Xavier Carim:Deputy Director General, International Trade and Economic Development Division, Department of Trade and Industry,Republic of South Africa

Jayant Dasgupta:Ambassador and Permanent Representative of India to the WTO

Ana Gallo:Senior Director, Trade and EU Government Affairs, Dechert LLP

Anna Joubin-Bret:partner at Foley Hoag, formerly Senior Legal Adviser at UNCTAD

Alexandra Koutoglidou:European Commission DG Trade

Vaughan Lowe:Chichele Professor of Public International Law and Fellow of All Souls College, Oxford University

James Mendenhall:counsel at Sidley Austin LLP, and former General Counsel at the USTR

Santiago Montt:Professor of Law at the University of Chile, and Senior Manager, Group Legal, Base Metals, BHP Billiton

Charles Nevhutanda:Deputy General Manager in the Financial Surveillance Department of the South African Reserve Bank

Veniana Qalo:Economic Advisor, Commonwealth Secretariat

Thomas Sebastian:Advocate (formerly Counsel at the ACWL and Senior Associate at Allen & Overy LLP)

Elisabeth Tuerk Officer in charge of the IIA Section of the Division on Investment and Enterprise at UNCTAD

Kenneth J Vandevelde:Professor of Law, Thomas Jefferson School of Law

Ngaire Woods:Dean of the Blavatnik School of Government, and Professor of International Political Economy, Oxford University

Additional memosMoataz Hussein:International Investment Agreements Specialist at

The General Authority for Investment and Free Zones(GAFI) of Egypt

Prabhash Ranjan:Associate Professor, National Law University- Jodhpur, India and PhD Candidate at King’s College London

Robert Volterra:Partner at Volterra Fietta

Michael Waibel:University Lecturer in Law and Fellow of the Lauterpacht Centre, Cambridge University

MULTILATERAL LIBERALIZATION THROUGH BILATERAL TREATIES?A WORKSHOP ON GLOBAL INVESTMENT GOVERNANCE28 June 2012

www.bsg.ox.ac.uk

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FOREWORDNgaire Woods

Dean of the Blavatnik School and Professor of International Political Economy, Oxford University

This workshop is one of a series which form part of the Globalization and Finance project sponsored by the Ford Foundation. Previous meetings focussed on cross-border capital flows, global financial regulation and the financing of development. This meeting turned attention to Bilateral Investment Treaties and their relationship to global finance. The concern driving the meeting was expressed by Charles Nevhutanda of South Africa’s Reserve Bank in his memo: “BITs may constrain the ability for countries to use prudential or other regulatory measures to deal with the current global economic crisis”. We drew together a group of top policy-makers and scholars to explore the extent to which BITs have in fact constrained policy, and to what extent there is an international regime or standard in relation to BITs which countries can draw upon or influence.

The problem is a straightforward one. As countries across the world seek to galvanize growth in the aftermath of the global financial crisis, they need to balance measures which attract investment into their economy, with their ability to apply

prudential measures to prevent finance from being destabilizing. Bilateral Investment Treaties are often referenced as either helping or exacerbating this trade-off.

The memos in this document explore the experience of a number of countries and the constraints and opportunities they have experienced as a result of Bilateral Investment Treaties. The conclusions are sobering for any policy-maker. BITs need to be entered into with great care. Their impact on inward-investment is not uniform. The constraints they can impose – including for future policy - are important to consider. That said, Moataz Hussein presents the new Egyptian model BIT as an example of a dynamic process which responds to new developments and balances the protection of investors’ and states’ rights and responsibilities.

Thank you Enormous thanks go to Taylor St John for organizing the meeting, editing the memos, and preparing this publication, and to Emily Jones for her assistance and impressive summary. I would also like to thank Ahmad Aslam, Visiting Fellow at the Global Economic Governance Programme for inspiring us to hold this meeting and helping to plan its overall direction and focus. Finally, thanks to Toby Whiting from the Blavatnik School of Government for his support on publications, and to Leonardo Burlamaqui from the Ford Foundation for making the whole exercise possible.


SUMMARY OF PROCEEDINGSTaylor St.John

Research Associate, Globalization and Finance Project, Blavatnik School of Government, Oxford University

With the support of the Ford Foundation, on 28 June the Blavatnik School hosted a workshop on global investment governance. This workshop was unique because it brought a wide range of perspectives – negotiators, arbitrators, domestic policymakers, private-sector lawyers, and academics – together around one table, and prioritized broader political economy questions raised by investment treaties. Some of the key debates and themes that emerged during the workshop are summarized below.

Free transfer of funds clause

The free transfer of funds clause, which guarantees investors the right to repatriate their capital, is a central pillar of the bilateral investment treaty (BIT) regime. Most participants seemed to agree the content of free transfer clauses is clear, and there is a certain degree of harmony in the way most of these clauses read. They have not been contentious in the past; out of 300 known investment treaty cases, only 4 cases have been based on a violation of free transfer of funds clauses. What remains unclear is the implication of free transfer clauses, particularly during a financial crisis. Do free transfer clauses unduly limit the ways a state can respond to a financial emergency?

Many participants seemed to agree that free transfer clauses constrain policy choices and structure state decision making. The crux of the debate is if these constraints push states in more predictable and productive directions, or if they preclude the use of helpful policy tools. While most BIT provisions focus on discriminatory action toward a single company, free transfer clauses pertain to a broad government policy. If the free transfer clause becomes a more common basis for disputes, many fear that fiscal and monetary policies of host states will increasingly be under review by arbitration tribunals. On the other hand, these fears have not materialized yet and may be misplaced. It was noted that some states have conditions that must be met before capital can be transferred, for instance getting the approval of the central bank, which tribunals have not found to be tantamount to expropriation.

There is evidence that attitudes toward capital controls are becoming more favourable, which may attract more attention to free transfer of funds clauses. The International Monetary Fund (IMF) has recently begun to advocate that capital flow management measures, more commonly known as capital controls, may be useful in crisis conditions to prevent damaging reserve depletion and currency depreciation, as well as to “provide breathing space while fundamental policy is adjusted.”1 Recent IMF reports suggest rigid BIT

1 International Monetary Fund (2012) Liberalizing Capital Flows and

provisions may work against macroeconomic stability. An IMF report argued, “the limited flexibility afforded by some bilateral and regional agreements in respect to liberalization obligations may create challenges for the management of capital flows.”2 The IMF also argues that BITs “in many cases do not provide appropriate safeguards or proper sequencing of liberalization, and could thus benefit from reform to include these protections.”3 This suggests that free transfer clauses should be made less absolute, or exceptions be added to protect policy flexibility.

Some participants in the workshop went further, and questioned if free transfer clauses were needed in BITs at all. One participant argued free transfer clauses should be removed from BITs entirely, and that states should “return the system to its feet.” Returning the system to its feet means returning to customary international law, in which states have a sovereign right to regulate flows of capital into and out of their territory. In BITs, states consent to abandon their right to regulate capital flows, and then add exceptions that suggest states still retain the right to regulate flows in certain circumstances. This is akin to a state choosing to walk on its head, and then adding pillows (exceptions) around so that it is more comfortable.

For some participants, domestic legal codes have evolved in most states to the point where they can guarantee the free transfer of funds, without a BIT. Other participants still see considerable value in free transfer clauses, perhaps with a balance of payments exception to provide policy space in financial emergencies. The range of views among participants about the desirability of free transfer clauses suggests the debate on these provisions has only just begun.

Policy space

For some participants, the metaphor of policy space triggers alarm bells. One participant outlined a spectrum running from legitimate policy space on one side to political cover on the other, illustrating that not all requests for policy space are in good faith. Another noted that the purpose of every treaty is to

Managing Outflows. March 13, page 41. http://www.imf.org/external/np/pp/eng/2012/031312.pdf

2 It is worth noting that unlike most World Trade Organization (WTO) agreements, BITs and preferential trade agreements often do not reference the IMF Articles of Agreement in their free transfer provisions. In theory, at least, Article XV section 9 of GATT 1994 supports state members having a right to regulate capital flows, although many questions remain about capital controls and WTO policy remain. GATT 1994 is framed so that capital controls in accordance with the IMF Articles of Agreement are permissible. Article VI, Section 3 of the IMF Articles of Agreement gives state members the right to “exercise such controls as are necessary to regulate international capital movements.” Of course, IMF policy advice on capital controls has varied over time, as is well known.

3 International Monetary Fund (2012) Liberalizing Capital Flows and Managing Outflows. March 13, page 8. http://www.imf.org/external/np/pp/eng/2012/031312.pdf

http://www.imf.org/external/np/pp/eng/2012/031312.pdf





constrain state action. By itself, the idea that a state is constrained is not problematic; one must be specific about the harm.

Other participants argued policy space should automatically be part of the discussion, given that investment treaties may affect taxation, employment law, and other domestic policy issues. Policy space was defined as flexibility plus the right to re-connect some of these issues with the domestic political arena. The political process gives contesting interests the space to fight it out, which gives outcomes legitimacy. By design, investment treaties and arbitration remove certain issues from messy public and political debates. As one participant asked, is it time to repoliticize some of these disputes?

Some participants were concerned about regulatory chill, while others argued that the jury is still out - it is not clear that BITs prevent states from taking particular prudential measures. Examples were given of ways states have been strategic and pro-active in managing economic problems, while abiding by their treaty obligations. In particular, a striking example was given of an Organization for Economic Cooperation and Development (OECD) state structuring its takeover of a private enterprize in a way that did not violate any of its treaty obligations. Another participant suggested that in the future, states could set up claims commissions after economic emergencies, instead of having to litigate details in scores of simultaneous arbitrations. These examples suggest there are ways to make policy around BIT obligations, but this ingenuity requires capacity that not all states have.

For states without the capacity to strategically design policies within their obligations, what are the consequences of behaving with one eye on their treaty obligations? One participant pointed out that the presence of disputes actually tells us very little about the effect of clauses. The more important question is: do policymakers understand certain BIT clauses as binding constraints and pre-emptively modify their behaviour to fit them? Another participant framed this question in a positive light: do certain provisions steer countries away from bad policies? Both framings suggest BITs have a meaningful impact on economic policymaking.

Participants disagreed on the degree to which BITs should or do influence economic policy. For some participants, BITs are inherently tied up with economic policy. These participants tend to see BITs, particularly those with pre-establishment clauses, as a liberalizing force. For others, BITs just provide a set of good governance norms; the provisions outline a baseline standard of treatment for foreign investors. Liberalization as such is not a political value that drives BITs, according to one participant. The BIT regime, in this view, provides a sort of global administrative law that guides states, preventing wrong actions and fostering the rule of law. Most participants, however seemed to agree that the distinction between influencing economic policy and supporting good

governance is very slippery. Tribunals, particularly in cases where the state uses a necessity defense, have often written judgments with very specific, detailed treatment of the relevant economic policy.

Over the course of the day, two interesting twists to the arguments in the preceding paragraph emerged. The first is that BITs reflect good policy in the year they were signed. It is impossible for negotiators to fully anticipate what policies they should save space for, which becomes more serious as BITs get more specific about economic policy. The second relevant point is that investment treaties may do a better job of balancing the interests of states and investors than it appears. This is because the countervailing law is not written in the treaty, but is held in the sovereignty of the state, in obligations on the investor in national legislation.

Has the MFN clause created de facto multilateralization?

Even though persuasive arguments exist characteriszng the investment treaty regime as effectively multilateral,4 there was wide agreement among participants that this is inaccurate. The differences between BITs are too important. Even if two treaties have mostly similar standards, they often differ in scope. The presence of a pre-establishment clause, for instance, is enough to make two treaties meaningfully different.

At the same time, participants actively discussed if the Most-Favored Nation (MFN) clause creates a situation of de facto multilateralization for many states. One participant noted that the MFN clause is invoked mostly to seek favorable treatment, to put together a collection of the strongest provisions that a given state has signed. This has the potential to create a “Frankenstein Treaty.” Another noted that the uncertainty surrounding the application of the MFN clause makes it “a real headache for states.” The overlapping network of treaties is so complex that it injects the entire system with a degree of unpredictability. One participant noted that whereas the WTO dispute resolution system generates very predictable outcomes, the unpredictability of the BIT system makes it difficult to be confident when giving legal advice. Unpredictability and inconsistency are serious issues for any legal order, and while the MFN clause has the potential to provide increased predictability, it has not been used in practice to smooth out the inconsistencies between treaties.5

Participants remarked how differently the MFN clause is used in investment when compared to trade, where it has provided a cornerstone principle of multilateralism. The MFN clause has a clear meaning, but that meaning is easier to apply in trade; it is relatively straightforward to compare tariffs across 4 Most notably S. Schill (2009) The Multilateralization of International

Investment Law, New York: Cambridge UP. 5 For more discussion, see the recent OECD scoping paper on arbitration,

where consistency was one of eight key issues. See Gaukrodger, D. (2012) “Investor-State Dispute Settlement Public Consultation: 16 May-23 July 2012.” Organization for Economic Cooperation and Development, Investment Division, Directorate for Financial and Enterprise Affairs.


states. In investment, it can be difficult to determine what constitutes most favorable treatment. As trade and investment are increasingly interwoven through services negotiations at the WTO and investment chapters in free trade agreements, it is likely that key points of rupture will emerge between the two regimes. One participant pointed out a similarity in the two regimes; in both trade and investment, the binary is not “MFN versus no-MFN” it is “MFN versus narrower preferential treatment.”

Comparisons were also drawn between the culture of the WTO and the culture of investment treaties. One comparison highlighted a disconnect between the negotiators of BITs and the lawyers who interpret the treaties. Everyone who works in trade has a good sense of the bargain; WTO lawyers know what was negotiated and why. BIT lawyers, in contrast, don’t have any information about the bargaining or negotiation; they interpret the text without a sense of the negotiating history. The BIT system is lawyer driven, whereas the WTO has a policy emphasis. The arguments made in the WTO must make sense from a policy perspective, cases are public and the decisions become precedents. BIT awards, by contrast, may never become public and are one-off remedies; they are not designed to ensure policy consistency.

Furthermore, one participant noted, the term multilateral connotes many states intentionally taking part in one process of negotiation, framed in a formal organization. By contrast, each BIT emerges out of its own process of negotiation. Theoretically, every time a treaty is negotiated its scope and dispute resolution options are up for debate, alongside debates on the presence and wording of substantive standards.6 In practice, many treaties closely resemble each other because they were negotiated off the same model treaty. The international investment regime is growing through clusters of model treaties. There are often stark differences between clusters. According to many participants, to elide the gaps between these different clusters and view the BIT regime as effectively multilateral is misguided. De facto multilateralization 6 There is evidence that treaties do change slightly based on the relative

power of the negotiating parties. See (a) Simmons, B.A. (2011) The International Investment Regime since the 1980s: A Transnational “Hands-Tying” Regime for International Investment. Annual Meeting of the American Political Science Association, September 1-4, and (b) Allee, T. and Peinhardt, C. (2010) Delegating Differences: Bilateral Investment Treaties and Bargaining Over Dispute Resolution Provisions. International Studies Quarterly 54, 1-25.

requires consensus on the contents of the treaty text. This consensus does not yet exist, and is unlikely to arise unintentionally; this consensus will likely be hard-fought, if and when it does emerge.

Are BITs dead?

According to one participant, BITs are dead. They are an instrument of the past, made obsolete by the evolution of domestic legal systems. For another participant, it is the BITs themselves that are evolving, and in particular becoming more sensitive to the policy and regulatory concerns of states.7 A different participant predicted that states would keep entering into BITs because they want to “keep up with the Joneses.” Implicit in this prediction was that states were unlikely to undertake a thorough review of their BIT policies, but would keep adding reservations and exceptions to ameliorate their concerns.

One question was raised early in the day but went unanswered. It was: why should states ratify BITs? The premise is ambiguous. The empirical correlation between ratifying a BIT and receiving more investment is weak. Infrastructure, natural resources, human skills, domestic regulation, there are many other determinants of investment that are far more influential then BITs. Why don’t states put aside BITs, and focus on these other determinants?

This question about the purpose of BITs brings to mind some of the larger questions driving the Blavatnik School’s Globalization and Finance Project: why are there different types of legal arrangements for different types of international economic law? For instance, as one participant pointed out, while binding bilateral treaties that protect foreign investment have proliferated, prudential regulation has proceeded more slowly, through multilateral standards that tend to be non-binding. What purposes are these arrangements designed to serve, and secondly, are these arrangements fit for purpose? This workshop provided interesting insights related these questions, but more work is needed to explore the contours of the BIT regime and its implications.

7 Sauvant and Alvarez also make this point. K. P. Sauvant and J. E. Alvarez. (2011) “Introduction: international investment law in transition”, in J. E. Alvarez, K.P. Sauvant, with K. Ahmed and G. Vizcaino, eds.,The Evolving International Investment Regime: Expectations, Realities, Options New York: Oxford UP.


PERSONAL REFLECTIONS1 Xavier Carim

Deputy Director General, International Trade and Economic Development Division, Department of Trade and Industry, Republic of South Africa

Context

South Africa’s position on bilateral investment treaties (BITs) has been informed by the outcome of its Review of BITs in 2010. The Review highlighted risks that BITs pose to the Government’s Constitutional obligations and to its transformational agenda that aims to address the socio-economic legacies of apartheid.

Aside from the fact that there is no unambiguous evidence that BITs lead to increased investment flows, there is a growing sense that BITs, conceived in an earlier period, are increasingly out of touch with shifts in policy thinking aimed at meeting the complex global economic challenges of the 21st century. New thinking and practice in international economic policy-making, notably with respect to the role of state in economic development, finance and industry, also need to find expression in international investment policy.

Other concerns about BITs are well-documented. Imprecise standards for investor protection that encourage expansive, inconsistent interpretations by Panels - even on similar matters - have a chilling impact on, and impose unacceptable risks to, otherwise legitimate and reasonable government policy. Investor-state dispute resolution that opens the door for narrow commercial interests to subject matters of vital national interest to unpredictable international arbitration is of growing concern to constitutional and democratic policy-making.

In discussions on investment policy, a broad distinction between a Freedom of Investment Model (FOI), on the one hand, and an Investment for Sustainable Development Model (ISD), on the other, can be discerned. The FOI model tends to assume that all investment is good, and that all investment promotes development. The derived policy implications are that Governments should continue to liberalize their investment regimes, reduce or limit regulations and conditions on investors and, in so doing, realize the benefits of FDI. “First generation” BITs tend to reflect this approach.

By contrast, while the ISD approach recognizes that investment can make a positive contribution to sustainable development, it suggests the benefits to host countries are not automatic. It posits that regulations are needed to balance the economic requirements of investors with the need to ensure that investments make a positive contribution to sustainable development in the host state. The associated benefits

of investment as they relate to technology transfer, skills development, research, establishing local economic linkages etc., need to be purposefully built into the investment regime, and not taken for granted.

The ISD model would suggest that investment policies be embedded into countries’ overall development strategies. In this context, the blunt prescriptions underpinning BITs do not meet the requirements for a broader, more intricate policy agenda that serves sustainable development objectives at national and global levels.

South Africa’s updated approach would aim to achieve an appropriate balance between the rights and obligations of investors, the need to provide adequate protection to foreign investors, while ensuring that constitutional obligations are upheld, and that government retains the policy space to regulate in the public interest.

South Africa’s BIT Review

South Africa’s three-year BITs review by the Department of Trade and Industry was concluded in 2010. This intensive and extensive consultation involving national constituencies, and national and international experts, culminated in a set of recommendations to the Executive. The Executive recognized the risks and limitations posed by BITs on the ability of the Government to pursue its Constitutional-based transformation agenda.

The Executive concluded that South Africa should refrain from entering into BITs in future, except in cases of compelling economic and political circumstances. It instructed that all “first generation” BITs which South Africa signed shortly after the democratic transition in 1994, many of which have now reached their termination date, should be reviewed with a view to termination, and possible renegotiation on the basis of a new Model BIT to be developed. The Executive further decided that South Africa should strengthen its domestic legislation in respect of the protection offered to foreign investors by, amongst other things, codifying typical BIT-provisions into domestic law.

Importantly, too, the Executive elevated all decision-making in respect of BITs to an Inter-Ministerial Committee of Cabinet Ministers tasked with oversight of investment, international relations and economic development matters.

1 This note is without prejudice nor purports to represent the future position of the South African Government on investment policy.


Some of the objectives which are sought to be achieved through domestic legislation on investment include:

» Codifying BIT protections into South African law; » Where relevant, clarifying the meaning of

provisions such as “expropriation”, and “fair and equitable treatment” within the context of the South African Constitution

» Providing legitimate exceptions to BIT protections in cases where warranted by public policy considerations including for example national security, health, environmental or addressing historical injustice, and meeting developmental priorities.

It is in this context that the “free transfer of funds” clause in BITs would be considered. South Africa’s first generation BITS contained unfettered clauses on the repatriation of funds. The risks have been made apparent by recent panel interpretations of such clauses. In updating our approach, therefore, South Africa would reaffirm the right of investors to freely repatriate their investment-related funds (as an essential element of an open investment regime,) but it would also provide for safeguards that would limit that right by permitting measures to mitigate risks arising from unforeseen circumstances where capital movements may cause, or threaten to cause, serious balance of payments problems.

In this respect, it is noteworthy that recent policy discussions in the International Monetary Fund reaffirm that tailored capital controls may, in certain circumstances, be necessary to address the risks associated with capital movements, particularly in emerging economies.

We would also seek to ensure that the South African Reserve Bank regulations relating to the protection of creditors; protection against criminal and penal offences and the proceeds from crime, financial reporting; taxation; and other such requirements, can be fully enforced.

None of this should not be construed to mean that South Africa will impose capital controls but, rather, that the policy option of capital controls is not foreclosed in advance by international commitments.

Way forward

International jurisprudence is no substitute for multilateral cooperation to strengthen global economic governance. UNCTAD provides a transparent and universal platform for wide-ranging inter-governmental consultations on investment policy that can also draw on the views of other, relevant multilateral institutions and concerned sectors of civil society. UNCTAD’s Investment Policy Framework for Sustainable Development offers a useful starting point for international cooperation in the area of international investment policy-making within a universally-accepted human rights framework.


REBALANCING EGYPTIAN BITSMoataz Hussein

International Investment Agreements Specialist at The General Authority for Investment and Free Zones(GAFI) of Egypt

This memo is not the tale of the Egyptian BITs, rather it is the story of generations of those investment treaties, actually born with the emergence of the first BIT signed between Germany and Pakistan in 1959, that maintained for decades a state of imbalance in favour of the foreign investors at the expense of the host country. This kind of bias, especially flagrant in those BITs signed between developed and developing countries, deviated most BITs from one of the essential objectives usually stipulated in preambles concerning the contribution of the BIT to the economic development of contacting states.

The Egyptian experience with BITs consequently came in this historical context starting with the conclusion of its first BIT with Switzerland in 1973 and persisting throughout four decades to reach a total of around 111 BITs, occupying a rank between the fifth and sixth among the top ten signatories of BITs worldwide.8 However, analysing the nature of the world top 10 demonstrates that Egypt is the only mainly investment recipient country among a list comprising nine huge FDI exporters.

This fact was accompanied by another two facts. The first relates to the high percentage of Egyptian BITs which didn’t enter into force; this is around 44% of the above-mentioned total. On the other side, the review of many BITs showed that they lacked a clear pattern identifying the economic priorities of Egypt behind its signature. These deficiencies were mainly attributed to the dominance of the political objectives over the economic ones during the process of negotiation and signature of many BITs.

The challenges posed by the Egyptian BITs encouraged the adoption of a new Egyptian model BIT in 2007. The new model was adopted after three years of work and consultations with all the stakeholders including governmental entities, investors, law firms and arbitration centres, depending on the technical assistance of UNCTAD. In addition, a new policy was adopted regarding the process of concluding new BITs, based on seeking real economic interests with Egypt’s partners instead of leaving it all to political considerations.

The main objective of the new model - besides achieving consistency and conformity between Egyptian BITs - was restoring the sustainable balance in those BITs. The balance sought is between the objectives of liberalization of foreign investment and regulation in the territories of the host country, through admitting the state’s right to regulate and to maintain policy space. The new model also highlights the 8 Source: UNCTAD database on International Investment Agreements,

available at www.unctad.org/iia.

role of foreign investment in achieving sustainable development of the host state, respecting its rules, regulations and security concerns, and abiding by the principles of CSR and human rights.

This kind of balance in the new Egyptian model came in the framework of the international and regional commitments of Egypt including those in the “OECD Declaration on International Investment and Multinational Enterprises” that Egypt acceded to in 2007.

Thus, the main features of the new model BIT, that represents the main guide for Egypt in its negotiations, can be demonstrated through the following points:

1. Providing precise definitions of the main terms in BITs especially those of “investment” and “investor” that represented real sources of disputes and claims. This includes going against the traditional broad asset-based definition of “investment” through imposing limitations and linking covered investment with satisfying certain economic characteristics. In addition, the new definition of “investor” uses multiple criteria in defining natural persons and legal entities in order to exclude non-welcome investors.

2. Promoting and facilitating investments of foreign investors and providing them favourable treatment, protection and security according to the international standards of treatment and ensuring that the investor’s rights and assets are guaranteed and protected in a manner that is legitimate, transparent and accountable.

3. Recognizing more widely the values of transparency and exchange of information and experiences between the BIT contracting states on investment laws, regulations, policies and opportunities.

4. Enhancing the role of BITs in achieving sustainable development and maintaining national and human security for the host country, through ensuring that the objectives of FDI attraction and promotion are implemented without relaxing the environmental, health and safety standards of general application and the internationally recognized human rights especially those relating to labour. In addition, recognizing the indispensable role of BITs in combating corruption, money laundering, and other kinds of crimes related to investment activities.

5. Guarantee the free transfer of funds without delay in a freely convertible currency, while acknowledging the host state’s right to take safeguard measures to deal with serious short-term balance of payments difficulties or monetary


policy difficulties. However, these safeguard measures - derived from the GATS commitments - shall be pursued through respecting the following principles: non-discrimination, avoidance of unnecessary damage, proportionality, phasing out and conformity with the IMF Articles of Agreement.

6. Developing a convenient and flexible mechanism for Investor-State Dispute Settlement that pays substantial attention to the settlement by amicable ways and administrative review within a cooling off period. After this period, the investor is granted the right to choose between multiple tools for settlement of the dispute, including national litigation and international arbitration, in addition to the respect of dispute settlement mechanisms in state contracts between foreign investors and host states.

The adoption of the new Egyptian model BIT represents a dynamic process that should always respond to new developments in the international investment policies and rulemaking to retain the right balance between protecting investors and states’ rights and obligations in the manner that restores the right track for BITs.


TRANSFER OF FUNDS PROVISIONS IN IIAS Anna Joubin-Bret

Partner at Foley Hoag, formerly Senior Legal Adviser at UNCTAD

The Provision of free and unconditional transfer of funds, whether returns or invested capital, is one of the essential pillars of protection afforded under International Investment Treaties (IIAs) to foreign investors. Together with protection against unlawful expropriation, it responds to the main risk faced by foreign investors when investing in a host economy.

Under international law, it the right of a sovereign State to regulate flows of capital into and out of its territory and therefore, IIAs are providing for this specific protection to the foreign investor against measures taken by the host State that restrict this ability.

Most IIAs include provisions granting investors the right to make capital transfers in relation to their investment without undue delay, in a freely convertible currency and at a specified rate of exchange.

The prevailing trend in BITs over the 5 past decades has been for unconditional and open-ended transfer of funds provisions allowing freedom to transfer into and out of the territory of the host State payments related to an investment, whether the initial capital, additional amounts required for the maintenance or extension or expansion of the investment, returns, proceeds from the sale of liquidation of all or part of the investment, funds relating to the repayment of loans relating to the investment, compensation as provided under the Expropriation article of the treaty, earnings of personal as well as payments arising out of the settlement of investment disputes under the ISDS articles of the treaty.

The list of operations and transfers for which the freedom is guaranteed under the BIT vary but in most cases the list is exhaustive and includes transfers of payments for compensation or reparation as well as transfer of payments of fees, expatriate personnel wages, servicing of debt, etc.

See example 1.

Generally, in BITs, the freedom of transfer is guaranteed for any outbound transfers. The inclusion of the right to make transfers into the host country is more common in BITs or FTAs granting the investor a right of establishment. Some BITs contain transfer clauses that explicitly apply to inward and outward transfers of funds.

See example 2.

Conditions to free transfer:

Some treaties attach conditions to the freedom of transfer. For instance, some treaties require that clarify that investor has fulfilled all his tax and other financial obligations.

See example 3.

Few treaties refer to the application of the laws and regulations of each of the party however this provision tends to empty the Transfer of Funds provision of its raison d’etre.

See example 4.

A less frequent approach is to attach exceptions to Transfer of Funds provisions. For example, with this approach the transfer provision does not prevent Contracting Parties from ensuring compliance with other measures relating to matters such as bankruptcy, trading in securities, criminal acts or compliance with resolutions of tribunals.

In this case, it is expressly provided for under the treaty that the freedom of transfers is the rule but that the States may, for given reasons and under certain conditions, not follow it.

Another exception commonly found in treaties concluded by Canada, Japan and the United States is designed to maintain the proper functioning of financial institutions. For example, the 2004 Canada model treaty. The Energy Charter Treaty is another example of the exception in order to protect the rights of creditors.

See example 5.

A recent trend

A recent trend however is to include into the Transfer of funds provision an exception in case of balance of payment problems or risk thereof, following the WTO exceptions and the IMF articles. However, it is important to note that both the WTO exception and the IMF articles apply to current transactions and not to capital transactions.

Example 6 and 6b.

The trend in the European Union, to ensure conformity with the Treaty of Rome is mandated by rulings of the EU Court of Justice. In 2009, the EU Court of Justice found that Finland had failed to comply with Article 351 §2 TFEU (ex Article 307 §2 EC) because it had not amended the bilateral investment treaties it had concluded with the Russian Federation, the Republic of Belarus, the People’s Republic of China, Malaysia, the Democratic Socialist Republic of Sri Lanka and the Republic of Uzbekistan.

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12008E351:EN:HTML



It had failed to amend those agreements to include stipulations to include possible exceptions, as required by Articles 64 §2 TFEU (ex Article 57 §2 EC), 66 TFEU (ex Article 59 EC) and 75 §1 TFEU (ex Article 60 §1 EC). Those provisions confer on the Council (and European Parliament now) the power to restrict in certain circumstances movements of capital and payments between the member States and non member countries.

Comments:

» Tension between IIAs and the States right (need) to regulate transfers.

» The Asian financial crisis and more recent global economic and financial crisis show the relevance of some policy space for the State in regulating outflows of capital. Example of Costa Rica and Intel.

» Freedom of transfers and the IMF articles. Tension in global policies.

» Some recent cases of ISDS (see attached list). » Relevance of the OECD Capital Movements

Codes and some codes on capital movement liberalization.

PART II - EXAMPLES OF TRANSFER OF FUNDS PROVISIONS IN IIAS Example 1 Croatia-Lithuania BIT (2008)

Article 6 – Transfers

1. Each Contracting Party shall guarantee to investors of the other Contracting Party free transfer into and out of its territory of payments related to an investment, in particular:A. initial capital and additional amounts for the maintenance and extension or expansion of the investment,B. returns,C. proceeds from the sale or liquidation of all or any part of the investment,D. funds in repayment of loans directly related to the investment,E. compensation provided for in Articles 4 and 5,F. payments under a guarantee or insurance contract referred to in Article 7,G. earnings of personnel engaged from abroad in connection with an investment in its territory,H. payments arising out of the settlement of an investment dispute under Article 8 of this Agreement.

2. Without prejudice to measure adopted by the European Union, transfers shall be made in the currency in which the original investment was made or in any freely convertible currency if agreed upon by the investor, at the agreed applicable market rate of exchange prevailing on the date of transfer, and effected without undue delay.

Example 2 BIT between Japan and Viet Nam (2003)

“Article 12

1. Each Contracting Party shall ensure that all payments relating to investments in its Area of an investor of the other Contracting Party may be freely transferred into and out of its Area without delay. Such transfers shall include, in particular, though not exclusively […]” (emphasis added)






Example 3 The Croatia-Bulgaria BIT

“Each Contracting Party shall permit investors of the other Contracting Party, after the fulfillment of all tax and other financial obligations in accordance with the law, the free transfer of […]”

Example 4 Pakistan-China FTA (2006)

Article 51 Transfers

1. Each Party shall, subject to its laws and regulations, guarantee to the investors of the other Party transfer of their investments and returns held in its territory, including:A. profits, dividends, interests and other legitimate income;B. proceeds obtained from the total or partial sale or liquidation of investments;C. payments made pursuant to a loan agreement in connection with investments;D. royalties in relation to the matters in Paragraph 1 (d) of Article 46E. payments of technical assistance or technical service fee, management fee;F. payments in connection with projects;G. earnings of nationals of the other Party who work in connection with an investment in its territory.

2. Nothing in Paragraph 1 of this Article shall affect the free transfer of compensation paid under Article 49 and 50 of this Chapter.

3. The transfer mentioned above shall be made in a freely convertible currency, at the prevailing market rate of exchange on the date of transfer in the territory of the Party accepting the investments.

Example 5

Canada model BIT of 2004.

“Article 14

Transfer of Funds

[…]

6. Notwithstanding the provisions of paragraphs 1, 2 and 4, and without limiting the applicability of paragraph 5, a Party may prevent or limit transfers by a financial institution to, or for the benefit of, an affiliate of or person related to such institution, through the equitable, nondiscriminatory and good faith application of measures relating to maintenance of the safety, soundness, integrity or financial responsibility of financial institutions. […]”

Example 6 ASEAN Comprehensive Investment Agreement (2009)

Article 13 - Transfers

1. Each Member State shall allow all transfers relating to a covered investment to be made freely and without delay into and out of its territory. Such transfers include:A. contributions to capital, including the initial contribution;B. profits, capital gains, dividends, royalties, license fees, technical assistance and technical and

management fees, interest and other current income accruing from any covered investment;C. proceeds from the total or partial sale or liquidation of any covered investment;D. payments made under a contract, including a loan agreement;E. payments made pursuant to Articles 12 (Compensation in Cases of Strife) and 14 (Expropriation and

Compensation);F. payments arising out of the settlement of a dispute by any means including adjudication, arbitration or

the agreement of the Member States to the dispute; andG. earnings and other remuneration of personnel employed and allowed to work in connection with that

covered investment in its territory.


2. Each Member State shall allow transfers relating to a covered investment to be made in a freely usable currency at the market rate of exchange prevailing at the time of transfer.

3. Notwithstanding paragraphs 1 and 2, a Member State may prevent or delay a transfer through the equitable, non-discriminatory, and good faith application of its laws and regulations relating to:

A. bankruptcy, insolvency, or the protection of the rights of creditors;B. issuing, trading, or dealing in securities, futures, options, or derivatives;C. criminal or penal offences and the recovery of the proceeds of crime;D. financial reporting or record keeping of transfers when necessary to assist law enforcement or financial

regulatory authorities;E. ensuring compliance with orders or judgments in judicial or administrative proceedings;F. taxation;G. social security, public retirement, or compulsory savings schemes;H. severance entitlements of employees; andI. the requirement to register and satisfy other formalities imposed by the Central Bank and other relevant

authorities of a Member State.

4. Nothing in this Agreement shall affect the rights and obligations of the Member States as members of the IMF, under the Articles of Agreement of the IMF, including the use of exchange actions which are in conformity with the Articles of Agreement of the IMF, provided that a Member State shall not impose restrictions on any capital transactions inconsistently with its specific commitments under this Agreement regarding such transactions, except:A. at the request of the IMF; B. under Article 16 (Measures to Safeguard the Balance-of-Payments); or C. where, in exceptional circumstances, movements of capital cause, or threaten to cause, serious

economic or financial disturbance in the Member State concerned.D. The measures taken in accordance with sub-paragraph 4(c)E. shall be consistent with the Articles of Agreement of the IMF;F. shall not exceed those necessary to deal with the circumstances described in sub-paragraph 4(c);G. shall be temporary and shall be eliminated as soon as conditions no longer justify their institution or

maintenance;H. shall promptly be notified to the other Member States;I. shall be applied such that any one of the other Member States is treated no less favourably than any

other Member State or non-Member State;J. shall be applied on a national treatment basis; andK. shall avoid unnecessary damage to investors and covered investments, and the commercial, economic

and financial interests of the other Member State(s).

Example 6b Australia-Chile FTA (2008)

Article 22.4 on Restrictions to Safeguard the Balance of Payments

“1. Where a Party is in serious balance of payments and external financial difficulties, or under threat thereof, it

may adopt or maintain restrictive measures with regard to trade in goods and in services and with regard to payments and capital movements, including those related to direct investment.

2. The Parties shall endeavour to avoid the application of the restrictive measures referred to in paragraph 1.3. Any restrictive measure adopted or maintained under this Article shall be nondiscriminatory and of limited

duration and shall not go beyond what is necessary to remedy the balance of payments and external financial situation. They shall be in accordance with the conditions established in the WTO Agreement and consistent with the Articles of Agreement of the International Monetary Fund, as applicable.

4. The Party maintaining or having adopted restrictive measures, or any changes thereto, shall promptly notify them to the other Party and present, as soon as possible, a time schedule for their removal.

5. The Party applying restrictive measures shall consult promptly with the other Party within the Joint FTA


Committee. Such consultations shall assess the balance of payments situation of the Party concerned and the restrictions adopted or maintained under this Article, taking into account, inter alia, such factors as:A. the nature and extent of the balance of payments and the external financial difficultiesB. the external economic and trading environment of the consulting Party; andC. alternative corrective measures which may be available.

The consultations shall address the compliance of any restrictive measures with paragraphs 3 and 4. All findings of statistical and other facts presented by the International Monetary Fund relating to foreign exchange, monetary reserves and balance of payments shall be accepted and conclusions shall be based on the assessment by the Fund of the balance of payments and external financial situation of the consulting Party.”

Investor-State dispute cases relating to transfer of funds provisions

1. Metalpar S.A. and Buen Aire S.A. v. Argentine Republic, Award, 6 June 2008, ICSID Case No. ARB/03/5 (O.Blanco (P), D. Cameron & J. P. Chabaneix);

2. Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, Award, 24 July 2008, ICSID Case No. ARB/05/22 (B. Hanotiau (P), G. Born & T. Landau);

3. Continental Casualty Company v. Argentine Republic, Award, 5 September 2008, ICSID Case No. ARB/03/9 (G. Sacerdoti (P), V. Veeder & M. Nader).

In CMS Gas Transmission Company v. The Argentine Republic, Award, 12 May 2005, ICSID Case No. ARB/01/8, the investor had initially claimed that Argentina breached a free transfer of funds provision, but this claim that was later withdrawn.

Pan American Energy LLC and BP Argentina Exploration Company v. Argentine Republic, Decision on Preliminary Objections, 27 July 2006, ICSID Case No. ARB/03/13


GRAPPLING WITH THE POLITICAL AND POLICY CHOICES RAISED BY FREE TRANSFER OBLIGATIONSJames Mendenhall

Counsel at Sidney Austin LLP, and former General Counsel at the USTR

International investment agreements (IIAs) serve the dual purpose of protecting cross-border investments while at the same time promoting economic integration and efficiencies that contribute to growth. In seeking to craft agreements that achieve these objectives, however, negotiators of IIAs face two countervailing points of resistance. First, the agreements must accommodate the regulatory discretion necessary to protect fundamental social interests, including financial stability. Second, negotiators must be cognizant of the need to “sell” the agreement to legislators or other constituencies whose support is critical but who may be motivated more by politics than policy. In some cases, locating a particular concern along this spectrum between policy and politics is clear. In many cases, however, it is largely subjective.

Negotiators can manage these tensions through general or specific exceptions to an IIA’s substantive obligations. Indeed, some exceptions may be necessary given that IIAs tend to blunt instruments, incorporating broad guarantees of non-discrimination, fair and equitable treatment, free transfers, and the like. The particular modalities for incorporating exceptions vary widely among agreements and over time. Some IIAs incorporate few exceptions on the theory that the substantive protections are inherently flexible. Some IIAs contain sweeping carve outs from certain obligations that may cover entire sectors of the economy. Others contain a long and highly prescriptive list of excepted measures, as is the case with modern U.S. IIAs. Still others wall off particular areas of regulation, such as national security. The effect of these exceptions also varies. Some provide complete immunity for a defined scope of government action, while others appear to be more symbolic than substantive.

Capital account liberalization is an excellent case study for examining these dynamics. Traditionally, IIAs have incorporated an obligation to allow free transfers of currency and capital across borders. Free transfers are critical for attracting and maintaining foreign direct investment, and in periods of prosperity, the obligation to allow free transfers is not particularly controversial. In times of economic difficulty, however, the obligation is viewed by some as eliminating or limiting the utility of capital controls, which some believe is an important tool for preserving a country’s balance of payments position, protecting the value of the country’s currency, or preventing the sudden flight of capital or “hot money” that can contribute to economic volatility.

There is thus a legitimate (and divisive) policy debate about the extent to which IIAs should address capital account liberalization, but the debate is often infused with emotional political overtones.

Investors, of course, view free transfers as essential to their operations and investment decisions. These interests must be balanced by the need for good governance, but the correct policy path is poorly understood. Economists have debated whether capital controls are a necessary part of the cure for the financial crises that have intermittently stricken economies for the past two decades, or whether capital controls prolong and exacerbate those very same crises. At the same time, the fallout of those economic difficulties has provided an opportunity for politics to enter the arena, with some quarters calling for a dismantling or significant paring back of the legal structures, including IIAs, that have flourished in recent years and provided the framework for global FDI. In times such as these, there is a risk of a knee-jerk backlash against free flows of capital that could be damaging to economic recovery and growth in the long run.

The investment community has just started to come to grips with these issues over the past decade. Consensus is still a long way off, but models have begun to emerge. Certain recent U.S. IIAs have tried to strike a balance through creative manipulation of the dispute settlement mechanism, i.e., they preserve the underlying free transfer obligations but limit the options for enforcement through investor-state arbitration. This mechanism had been sufficient to allow necessary constituencies to support the agreements. However, it has not been stress-tested to determine whether it will help or hinder countries dealing with severe economic crises.

Further thought should be given to whether existing models are sufficient, whether there are better ways (including multilateral solutions) to address the problem, or whether it is simply too early to tell. Unfortunately, the same phenomenon that brought these important questions to the fore, i.e., the most recent global economic crisis, may make it difficult to have a meaningful policy debate outside the hothouse of politics. In such conditions, negotiators must be wary of politically expedient positions that may ultimately do more harm than good.


MONETARY TRANSFER PROVISION IN INDIAN IIAS

Prabhash Ranjan

Associate Professor, National Law University- Jodhpur, India and PhD Candidate at King’s College London

As of December 2011, India has entered into International Investment Agreements (IIAs) with 86 countries out of which 73 have already come into force. India’s latest IIAs that came into force in 2011 are with Bangladesh and Lithuania.9 All these 73 Indian IIAs contain the monetary transfer provision (MTP). The MTPs in these 73 Indian IIAs follow the same structure. They all provide a general obligation that all funds related to investment can be freely transferred followed by a list of transactions that are allowed. Barring a few exceptions, in all IIAs, this list is inclusive.

Anatomy of MTPs in Indian IIAs

The MTPs in all these 73 Indian IIAs can be divided in two categories on the basis of exceptions to the right of the foreign investor to freely transfer funds. These two types are “free-transfer” and “regulatory-transfer”. The key difference between these two types is that the “free-transfer” MTPs do not contain any exception to the right of the foreign investor to transfer funds whereas “regulatory-transfer” MTPs recognize exceptions to free transfer of capital. 58 IIAs have “free transfer” MTPs whereas 15 IIAs have “regulatory-transfer” MTPs.

Table 1 - MTPs in 73 Indian IIAs

Type Number of IIAs

‘Free-transfer’ type 58‘Regulatory-transfer’ type 15

Source – Author’s study of 73 Indian IIAs

MTPs in 58 Indian IIAs neither subjects capital transfers to domestic laws and regulations; nor contains any “monetary” or “non-monetary” exceptions. Thus, the “free-transfer” MTPs give an absolute right to the foreign investor to transfer funds related to investment. While this is certainly advantageous for the foreign investors because it gives them maximum freedom to transfer funds related to investment; it will not serve India’s interests as a host nation. Adoption of capital controls by India on those transfer of funds related to investment that fall under these 58 IIAs can be challenged by foreign investors in arbitration even if such capital controls have been duly adopted by India under its domestic legislation called Foreign Exchange Management Act (FEMA Act). Important to note that the “free-transfer” MTPs do not prohibit India from adopting capital controls. However, if such controls are adopted, the “free-transfer” MTPs are capable of interpretation where investor’s right to transfer funds will get precedence over India’s 9 Ministry of Finance, Government of India, Bilateral Investment Promotion

and Protection Agreement available at http://finmin.nic.in/bipa/bipa_index.asp?pageid=3.

regulatory power to impose capital controls because these 58 “free-transfer” MTPs do not recognize any exception to the investor’s right to transfer funds.

The exception in the MTPs in these ‘regulatory-transfer’ type IIAs are worded differently. The exceptions are of all the three types mentioned above – first, some IIAs state that funds will be repatriated in accordance with domestic laws and policies; second, some IIAs state that India, as a host country, can impose restrictions on the transfers of funds in situations of BoP difficulty (monetary objectives); and third, restrictions can be imposed for other non-monetary objectives. Some IIAs contain both ‘monetary’ and non-monetary’ objectives.

Out of these 15, 5 Indian IIAs subject transfer of funds related to investment, to domestic laws and policies. The other 10 Indian IIAs (India-Slovakia; India-Iceland; India-Mexico; India-Singapore, India-Korea, India-Japan, India-Malaysia, India-Bulgaria, India-Romania and India-Czech Republic) contain express exceptions to MTPs. For example, Article 6(3) of the India-Slovakia IIA states ‘notwithstanding paragraphs 1 and 2 above, a contracting party may prevent or restrict transfer through non equitable, non-discriminatory and good faith application of its laws…’. The India-Slovakia IIA then provides that this restriction could be for adoption of safeguard measures in circumstances such as macroeconomic or serious BoP difficulties. These restrictions are to be imposed for a limited duration and may not go beyond what is necessary to remedy the BoP situation.10 This IIA also allows the host country to impose restrictions on capital transfer for non-monetary policy objectives like protection of rights of creditors, criminal or penal offences and the recovery of proceeds of crime. However, this IIA does not mention anything regarding the IMF obligations.

The MTP in India-Iceland IIA is different from India-Slovakia in the sense that it only allows imposition of restrictions on transfers in case of serious BoP difficulty or the threat thereof.11 It does not recognize situations of macroeconomic difficulty (there could be situations of macroeconomic difficulty different from BoP difficulty like appreciating currency). On the other hand, the MTPs in the other three IIAs - India-Mexico, India-Singapore and India-Korea, contain both the monetary and non-monetary objectives and also talk of consistency of the measures adopted with the IMF articles. For example, the MTP in India-Mexico IIA allows for preventing a transfer in cases of bankruptcy, insolvency, or the protection of the rights of creditors and similar other situations provided this prevention is applied through equitable, non-discriminatory and 10 Article 6.4 of the India-Slovakia IIA. 11 Article 7(4) of the India-Iceland IIA.

http://finmin.nic.in/bipa/bipa_index.asp?pageid=3

http://finmin.nic.in/bipa/bipa_index.asp?pageid=3


good faith application of laws of the country adopting these measures.12 Apart from this, India-Mexico IIA also allows the host country to adopt restrictions on transfers in cases of serious balance of payments crisis or an external difficulty provided the restriction imposed is consistent with the Articles of the IMF; avoid unnecessary damage to commercial interest of the investor; are no more than necessary to deal with the problem; are temporary and are phased out progressively; are applied on an equitable and non-discriminatory basis; and are promptly notified to the other country.13 Similar sort of provisions exist in India-Korea and India-Singapore IIA. On the other hand, India-Japan and India-Malaysia recognize exceptions to MTP only for non monetary objectives and not for serious macroeconomic difficulties or for balance of payments related problems.

Summary

MTPs in majority of Indian IIAs provide a broad and unqualified right to foreign investors to transfer funds without recognising any restrictions on this right. Only a handful of Indian IIAs contain provisions on monetary transfer that recognize India’s right to restrict transfer of funds in certain monetary and non-monetary related situations. As a result, adoption of capital controls by India can be challenged as a violation of the provision on monetary transfer by foreign investors in 58 out of 73 Indian IIAs.

12 See Article 8(3) of India-Mexico IIA. 13 See Article 8(4) of India-Mexico IIA.


FUNDS TRANSFER RESTRICTIONS AND SUSTAINABLE DEVELOPMENT: POLICY OPTIONS FROM UNCTAD’S INVESTMENT POLICY FRAMEWORK FOR SUSTAINABLE DEVELOPMENT* Elisabeth Tuerk and Cree Jones

Officer in charge of the IIA Section of the Division on Investment and Enterprise at UNCTAD Legal intern at the IIA Section and a concurrent JD/MPP candidate at the University of Michigan.

On June 12, 2012 the United Nations Conference for Trade and Development (UNCTAD) launched its Investment Policy Framework for Sustainable Development (IPFSD).14 The IPFSD is a framework to support sustainable development friendly investment policymaking at both the national and international level. It consists of a set of core principles for investment policymaking, guidelines for national investment policies, and guidance (in the form of options) for the design and negotiation of international investment agreements (IIAs). Its purpose is to provide a point of reference for stakeholders of the investment-development community. The IPFSD includes a section on free transfer of funds provisions and presents four policy options for IIAs (see Box 1).

IIAs virtually always incorporate a State obligation to allow foreign investors free transfers of currency and capital related to their investments. This obligation facilitates investment flows by ensuring that, at the end of the day, a foreign investor will be able to enjoy the financial benefits of a successful investment. Historically, free transfer of funds provisions in IIAs offered expansive protections to investors and did not grant exceptions to the free-transfer-of-funds obligation.15 This formulation is presented in policy option 4.7.0. Policy option 4.7.1 is a more selective variation of this unqualified formulation.

Recent developments in international investment law indicate, however, that an unqualified free transfer of funds provision in IIAs may pose challenges to the sustainable development of a host State. The primary concern is that such a provision may reduce a host State’s ability to deal with sudden and massive outflows or inflows of capital, balance of payments (BoP) difficulties and other macroeconomic problems. This is illustrated by claims brought against Argentina following the imposition of capital controls in response to the Argentine economic crisis of 2001.16

* This memo is based on the free transfer of funds section of UNCTAD’s Investment Policy Framework for Sustainable Development and draws on aspects of other UNCTAD publications. The views expressed in this article are those of the authors and do not reflect the views of the UNCTAD Secretariat or its member States. The authors would like to thank Hamed El-Kady for his assistance in reviewing this article in preparation for publication.

14 The complete text of the IPFSD is available in Chapter IV of UNCTAD’s 2012 World Investment Report available at: http://www.unctad-docs.org/files/UNCTAD-WIR2012-Chapter-IV-en.pdf.

15 Transfer of Funds (2000). UNCTAD Series on Issues in International Investment Agreements.

16 For example, see CMS Gas Transmission Company v. Argentine Republic (ICSID Case No. ARB/01/8).

Box 1: IPFSD

Section 4.7: Transfer of funds4.7.0 Grant foreign investors the right to freely

transfer any investment-related funds (e.g. open ended list) into and out of the host country.

4.7.1 Provide an exhaustive list of types of qualifying transfers.

4.7.2 Include exceptions (e.g. temporary dero-gations):

» In the event of serious balance-of-payments and external financial difficulties or threat thereof

» Where movements of funds cause or threaten to cause serious difficulties in macroeconomic management, in particular, related to monetary and exchange rate policies.

Condition these exceptions to prevent their abuse (e.g. application in line with IMF rules and respecting conditions of temporality, equity, non-discrimination, good faith and proportionality).

4.7.3 Reserve the right of host States to restrict an investor’s transfer of funds in connec-tion with the country’s (equitable, non-discriminatory, and good faith application of its) laws, relating to, e.g.:

» Fiscal obligations of the investor/investment in the host country

» Reporting requirements in relation to currency transfers

» Bankruptcy, insolvency, or the protection of the rights of creditors

» Issuing, trading, or dealing in securities, futures, options, or derivatives

» Criminal or penal offences (e.g. imposing criminal penalties)

» Prevention of money laundering » Compliance with orders or judgments

in judicial or administrative proceedings.

http://www.unctad-docs.org/files/UNCTAD-WIR2012-Chapter-IV-en.pdf

http://www.unctad-docs.org/files/UNCTAD-WIR2012-Chapter-IV-en.pdf


Additionally, recent attention has focused on the need for States to regulate cross-border capital flows in the wake of the global financial crisis. The International Monetary Fund (IMF) has now put significant importance on the use of regulations to limit both the inflows and outflows of capital in order to prevent and mitigate financial crises.17 The IMF has also noted that many IIAs do not have the appropriate safeguards for such regulation.18

In light of these growing concerns, many recent IIAs now include an exception that allows States to impose restrictions on the free transfer of funds in specific circumstances while qualifying the exception with checks and balances to prevent misuse. This formulation is aligned with similar provisions in principal multilateral agreements that permit countries to impose restrictions on transfers in circumstances where a member is confronted with a BoP crisis.19 A formulation of this exception is presented in policy option 4.7.2.

In addition to the BoP exception, another exception incorporated into the free transfer of funds provisions in recent IIAs is a reservation of the right of a State to restrict transfers if such a restriction is required for the enforcement of the State’s laws (e.g. to prevent fraud on creditors etc.). The purpose of this reservation is to carve-out regulatory space and allow host States to regulate transfers for this specific subset of cases. This exception is similarly qualified by checks and balances to prevent abuse. A formulation of this exception is presented in policy option 4.7.3.

17 Liberalizing Capital Flows and Managing Outflows (2012). International Monetary Fund. Available at: http://www.imf.org/external/np/pp/eng/2012/031312.pdf.

18 Reference Note on Trade in Financial Services (2010). International Monetary Fund. Available at: http://www.imf.org/external/np/pp/eng/2010/090310.pdf.

19 For example, see the Articles of Agreement of the International Monetary Fund and the Organization for Economic Co-operation and Development’s (OECD) Code of Liberalisation of Capital Movements.

These policy options are meant to serve as a starting point and not an end point for investment and development stakeholders. The IPFSD is a living document and a dialogue regarding this framework is already underway on UNCTAD’s online discussion forum.20 For example, Kevin Gallagher of Boston University has suggested that policy options 4.7.2 and 4.7.3 do not go far enough to protect the regulatory space of a host State.21 Gallagher recommends the use of interpretations or amendments to assure that the language “external difficulties or the threat thereof” in 4.7.2 includes measures to regulate the inflow and outflow of capital to prevent a crisis. He also recommends that the good faith application of host State laws with respect to financial regulatory reform and stability be added to the carve-outs listed in 4.7.3.

Many States are now including free transfer of funds exceptions in new IIAs similar to the formulations presented in 4.7.2 and 4.7.3. For example, of the 23 IIAs signed in 2011 for which complete text is publicly available, 17 (74 per cent) include a detailed exception for BoP difficulties and/or enforcement of national laws.22 This emerging trend is evidence of the timeliness of the policy options presented in the IPFSD and illustrates the evolving nature of the IIA framework.

20 The IPFSD discussion forum can be accessed at: http://ipfsd.unctad.org/.

21 Kevin Gallagher’s recommendations can be viewed on the IPFSD discussion forum at: http://ipfsd.unctad.org/Views/Public/Forum.aspx?sid=3&tocid=234#tocitem_234.

22 For a complete list of IIAs including these exceptions see UNCTADs World Investment Report 2012, p. 90.





http://ipfsd.unctad.org/

http://ipfsd.unctad.org/


MULTILATERAL LIBERALIZATION THROUGH BILATERAL TREATIES: A WORKSHOP ON GLOBAL INVESTMENT GOVERNANCE*Alexandra Koutoglidou

DG Trade, Investment Unit, the European Commission

In contrast to the other fields of international economic law –trade and monetary law- efforts to multilateralize substantive standards of investment law have up to now failed. Hence, investment protection has been developed through a great number of bilateral investment treaties. Simultaneously, a number of other investment related instruments, negotiated amongst states either within a multilateral (GATS) or a bilateral context (FTAs) have been negotiated to govern primarily the liberalization of investment flows. Evidently and in spite of having been negotiated in different fora and serving divergent objectives, the ensemble of all of those treaties overlap in scope with regards to provisions covering post-establishment treatment. Moreover, all or the greatest majority of those treaties contain MFN clauses, a fact that raises the following two questions:

1. Has the inclusion of MFN clauses in almost all existing BITs led to a de facto multilateralization of investment protection (substantive and procedural) law?

2. To the extent that the GATS, FTAs and BITs partially overlap in scope, can the MFN clauses, contained therein, lead to either more liberalization or to unification of investment law in the broad sense?

Ahead of analysing these two queries, it is important to note certain observations, useful to explore both of the aforementioned issues.

First, the MFN concept as such is one of the oldest in international economic law and there are not doubts as to its meaning or rationale irrespective of the legal instrument containing it: the clause aims at levelling the playing field between foreign investors of different nationalities by according to each of them the most favourable treatment available, within the limits of the subject matter of the clause23. In practice, nevertheless, the application of the clause seems to be more straightforward in the field of trade – for example when it comes to comparing tariff rates or market access concessions – than to “treatment” for the purposes of investment protection. This discrepancy seems to be reflected in the investment protection case law, where investors mainly, if not exclusively, invoke the MFN clause in order to benefit from the application of a more favourable provision included in another treaty, than to claim for actual equal “on-the-ground” treatment. Having said that, this discrepancy is by no means justified by the text of the MFN clauses in trade and investment treaties. * The views expressed in this article are the author’s own views and by no

means do they reflect the formal European Commission’s position.

23 See Draft Articles on Most-Favored-Nation Clauses, ILC Report of 30th Session.

Second, bilateral investment treaties have been negotiated and concluded as reciprocal treaties. Many of the EU Member States BITs even include this qualification in the title, while they have also been criticized for not being genuinely reciprocal when signed between a developed and a developing country, where the investment protection standards –although reciprocal in theory- actually aim at guaranteeing legal security in only one way: for the investors of the developed country establishing in the developing country. What is interesting hence is that MFN in bilateral investment treaties has not been regarded or labelled as “the cornerstone” of the investment protection regime worldwide, as was the case with MFN in the multilateral trade system. Nor has anyone ever questioned the compliance of the reciprocal nature of obligations arising out of BITs with the existence of an MFN clause; in contrast, in the multilateral trade system it is widely acceptable that reciprocity is fundamentally incompatible with the obligation to accord MFN treatment.

The aforementioned thoughts are useful in order to now turn into addressing the initial questions, starting from whether BITs MFN clauses have de facto multilateralized the obligations arising from the legal instruments containing them. Although there exist well established arguments that this is indeed the case, one can still be sceptical for the following reasons:

1. In spite the expanded network of BITs and the similarity in their provisions, MFN clauses continue to be part of bilaterally negotiated treaties which very often divert as to their subject, personal or temporal scope of application. Even though an MFN clearly means that the “more favoured” treatment should be extended, the MFN cannot really be used to alter the scope of application of a BIT, hence, those important divergences between different treaties cannot be overcome.

2. Leaving aside those differences, if one tried to put in writing the “multilateral” consent of States on specific standards of treatment or other provisions that are common in all BITs, one would have to embark in the exercise of building the “most favourable”, i.e. the optimal text (comparing for example all fair and equitable clauses between BIT signatories and drafting the most favourable of them all). Such an exercise would stumble on two difficulties: First, in certain cases, it would be difficult to compare in absolute terms standards of protection, which do not contain strictly defined rules but rather imply that a State can comply with them by acting in more than one ways. In addition, for provisions that are more complex,


such as dispute settlement clauses, would that comparison mean that the “most favourable” treatment would consist in picking individual “more favourable elements” from each one of them in order to construct the optimal and most favourable to the investor treatment, or would one have to choose the most favourable dispute settlement clause as a “package”? In both cases, but mostly in the second one, it could be difficult for one to compare and conclude whether the optimal dispute settlement clause should be one that provides for a waiver obligation instead of a fork in the road clause, UNCITRAL instead of ICSID etc. Second and most important, even if one managed to conclude the drafting of such a text, it would be highly unlikely for any State to consent to it, especially for States that have not been part of large BIT networks and those, whose conventional practice changed more recently to being “less favourable” than their earlier approach.

3. By all standards, investment tribunals have made considerable efforts to systematize the application of MFN clauses, even if the latter are not part of a single but of many agreements and hence arbitrators had no obligation to do so. This body of case law could potentially contribute to exploring a consensus as to determining what the “more favourable treatment” is. However, arbitral decisions are issued on the basis of circumstance-specific cases, which cannot hence always be used to establish a rule as to what the most favourable fair or full protection treatment standard is in the abstract and for all purposes.

4. Finally, by objective standards, one can say that the law contained in investment protection treaties is currently evolving rather than crystallising in the sense of reflecting a consensus. A lot of new elements, such as notably sustainable development provisions, are inserted in what used to be pure legal protection treaties. Those standards most probably escape the MFN test, since they do not alter the level of protection. However, the lack of consensus around them can prove to be even greater, since a lot of developing or emerging countries are not necessarily willing to embrace them. This type of evolution adds to the complexity of using MFN to define commonly acceptable ground, since investment law seems to be evolving around networks of model treaties whose divergences in approach are not necessarily comparable, in the sense that they do not instruct a better or a worse treatment, but simply a different treatment, reflecting a political stance that is difficult to modify by legal and technical means. Consequently, even if ten years ago one could discern a relative consensus on principles that could potentially lead to multilateralization, the divergences in approaches expressed during this last decade rather reflect

a kind of “legal imperialism”24, in the sense that different groups of like-minded countries are seeking to attract consensus on their model texts or on their doctrinaire stance towards the system and are, hence, less willing to compromize.

In all, this is to argue that although technically the application of MFN may be invoked to claim for a case by case better treatment, this treatment cannot yet be translated into a particular text for the purposes of drafting the “most favourable” investment treaty. This exercise would require above all the political drive and will of States themselves to multilateralize investment law, something which does not seem to be the case at this point in time.

With regards to the impact of an MFN clause on investment law in the broader sense, i.e. beyond protection, there are a number of challenging and less explored issues to look into:

1. Bilateral investment protection treaties covering pre-establishment treatment (market access, national treatment, most favoured nation treatment) would overlap partially in scope with the GATS, but they would probably not fall within the scope of Article V GATS and hence would not be exempted from GATS MFN clause (Article II GATS). Would that mean that more favourable national treatment or market access concessions in such BITs should be extended to all WTO members?

2. Neither the GATS MFN clause nor the MFN clause of most BITs specify in which legal instrument is the most favourable treatment supposed to be found. The Commentary of the ILC Draft Articles on Most Favoured Nation Clauses (Commentary to Article 8 para. 1) clarifies that the obligation to extend the most favoured nation treatment “…is not dependent on whether the treatment extended by the granting State to a third State, or to persons or things in a determined relationship with the latter, is based upon a treaty, another agreement or a unilateral, legislative, or other act, or mere practice.” It has up to now remained unexplored what the impact of this provision would be with respect to more liberal concessions granted by national law, but not bound at the GATS level (the so called divergence between autonomous liberalization and international commitments). Could investors from a given WTO Member invoke GATS MFN to claim more favourable treatment accorded to certain investors under the host state’s legislation?

3. Could the MFN in the GATS be invoked to brink under the multilateral framework certain BIT provisions that correspond to GATS Domestic Regulation principles, such as fairness, equity, transparency or non-arbitrariness? Is there any room for facilitation of agreement in the multilateral context on standards already embraced by a great majority of States in their BITs?

24 See for ex. Methanes v. USA, Submission in Response to Application for Amicus Standing - Mexico, 10 November 2000, where Mexico claims that the power of the tribunal to receive amicus curiae briefs is a well- established one in US and Canadian, but not in Mexican law.


Concluding remarks

The policy space question is inevitably implicit throughout the above reflection, although not always right so. As the ILC Articles specify the right of an investor to claim MFN treatment arises at the moment the more favourable treatment is extended to a third state, i.e. a state other than the investor’s home state. Hence, the granting of MFN is not a restriction to policy space, but rather the exercise of sovereignty of the State having undersigned the MFN clause and having chosen to accord a better treatment to the nationals of a third state, while knowing that it has already assumed an MFN obligation. Moreover, States can very well guarantee their policy space by other means, such as inserting exceptions or certain restrictions to the scope of application of either the agreement containing the MFN or of the MFN clause itself. In sum, MFN is by no means a threat to policy space of states; as Stephan Schill25 rightly points out “States, unlike private parties, do not have to be protected against the enforcement of obligations under international law. On the contrary, one of the major deficiencies in traditional investor-State relations is the lack of effective enforcement mechanisms under international law.”

25 St. Schill, Enabling Private Ordering-Function, Scope and Effect of Umbrella Clauses in International Investment Treaties, 18 Minn. J. Int’l L., 1, 23-26 (2009).


DWORKIN VISITS INVESTMENT ARBITRATION: ON NETWORK EFFECTS AND LAW AS INTEGRITYSantiago Montt

Academic at Universidad de Chile Law School, and Senior Manager, Group Legal, Base Metals, BHP Billiton

Have obligations in bilateral investment treaties become multilateral? What is the driving force behind this multilateral phenomenon? In my opinion, the answer for the first question is positive. But the driving force behind it is not the MFN clause—as suggested by the title of the second session of this workshop—but the network effects of a system of BITs and the Dworkinian law-as-integrity instinct that mobilizes lawyers worldwide. Given this multilateral reality, the question today is whether integrity as a political value justifies our common legal practice in investment arbitration.

In my book State Liability in Investment Treaty Arbitration I claim that the thousands of BITs existing today constitute a virtual network. The substantive similarity of wording among the treaties’ main provisions—particularly the expropriation and fair and equitable treatment (FET) clauses—is such that case law developed under one treaty influences the future interpretation of all other treaties. This constitutes a true ‘network externality’—a positive demand side externality, growing in magnitude with the number of existing treaties—which, effectively, defines the BIT system as a virtual network.

This network theory assumes that investment treaty lawyers and arbitrators take previous decisions seriously and care about the coherence and consistency of the system. Today even more than when I wrote the book, I have no doubt that this is the case. Thousands of memos, briefs, awards, academic articles prove it. The causal explanation does not lie in the MFN clause—which although contributes to this result, is not the controlling factor—but in the unavoidable Dworkinian law-as-integrity instinct that characterizes lawyers, by education and training, worldwide.

In Law’s Empire, Dworkin gives a description of our legal practices that I considered particularly illuminating. We lawyers are “legal integrators”. As ants are programmed to collect and transport leaves, we constantly look back to previous legal materials in order to structure solution to legal questions. We feel compelled to produce solutions that fit these materials and that furthermore achieve the best and most coherent outcome in terms of justice and fairness. Incoherence is a declared enemy.

In terms of previous legal materials, the international lawyer, as compared to its domestic colleague, is a famished animal. Before BITs, international lawyers in the area of protection of property of aliens were among the most undernourished of all, particularly given the extreme political division in the field. So

when BIT awards started to be issued in the 1990s, there was no way to prevent their argumentative use in new cases under different treaties. Given the proximity of language, neighbour BITs constituted the natural “concentric circles” that legal integrators would necessarily look for in their instinctual search for fit.

As a result, today investment arbitration is what Dworkin calls a “department”. In other words, investment treaty arbitration is a distinctive legal practice. As any other “department” of legal practice it can show treatises, books, law journal articles, seminars, professional gatherings, comprehensive courses in law schools, and units in law firms, among other working proofs of what Dworkin calls “local priority”.

This leads us to the key question today: what is the political value behind this law-as-integrity force that ties together the practice of investment arbitration? Is it merely “fetishism”, the obsession for elegance, or a mechanistic lawyerly character trait? Or can we find integrity as a political value in our common legal practice in investment arbitration? My claim here is that there is such a political value, and it is, as defended by Latin American publicists of the 19th century (mainly among them, Andrés Bello), “equality among nations”.

Open-ended BITs standards such as indirect expropriations and FET should crystallize at a reasonable common level. As I defended in State Liability in Investment Arbitration, investment arbitration should not protect property rights in terms more rigorous than those generally applied by domestic courts in developed countries. The BIT system must produce a coherent and moderate common body of global law that defines what is arbitrary government conduct and what is the extent of the anti-redistributive strength of investments. To have a flourishing investment arbitration practice we are not forced to espouse “liberalization on a non-discriminatory basis” as its foundational political stone. “Equality among nations” is less demanding, but more persuasive, effective and necessary.


SHORT PERSONAL REFLECTIONSCharles Nevhutanda

Deputy General Manager in the Financial Surveillance Department of the South African Reserve Bank

Bilateral Investments treaties (“BITs”) are agreements signed between two countries concerning the reciprocal promotion and protection of investments. The signing of a BIT has an important symbolic value to prospective investors, as a formal welcome and provides valuable publicity and an important symbolic declaration of stronger diplomatic and commercial ties between the two nations.

BITs are more inclined to assist the FDI inflows of the host country as a part of broad Foreign Direct Investment (“FDI”) policy. Not only do the treaties assist developing countries to attract scarce capital to finance liquidity constrains, they also help giving signals to the multinational companies that the host government is committed in providing investments protection and guarantees. BITs, thus, have positive spill-over effects on FDI flows.

Nevertheless, BITs may have negative consequences for domestic investors if they are treated less well relative to foreign investors, inter alia, repatriation of profits is an area that may have negative consequences for developing countries. The majority of treaties grant the investor the ability to repatriate profits “without undue delay” unless there is a situation of economic emergency. If the treaties are interpreted to give a narrow reading to the term “economic emergency,” the ability to repatriate profits could intensify liquidity problems face by host countries.

Since 1994, the South African government has adopted the gradual liberalization of capital controls in the form of exchange controls as opposed to the “Big Bang” approach. This approach has been supported by the International Multinational Bodies such as the IMF. Significant progress has been made with regard the liberalization of exchange controls to an extent that as at today, there are no exchange controls on non-residents. This means that non-residents can freely invest in South Africa and freely repatriate their earnings and profits with no restrictions. There are still some capitals controls on South African residents that are continuously being liberalized.

The respective South African government departments are responsible to negotiate and enter into the relevant BITs with other respective countries. The South African Reserve Bank, in some cases, is required to issue Currency Transfer Guarantees that irrevocably and unconditionally guarantees that the transfer to the Fiscal Agent of all sums in the amount and in the currency required for the fulfilment of the financial obligations arising from the Notes and the Amended Fiscal Agency Agreement will be authorized in good time, under all circumstances and without any limitations, notwithstanding any restrictions that may be in force at the time thereof in the Republic of South Africa, and without any obligation to submit any affidavit or to comply with any other formality.

It can, therefore, be argued that in the case of capital flight during financial crises, it may be difficult to re-impose capital controls on outward capital transfers by foreign investors as a result of BITs. This is because, the re-imposition of capital controls may require extended negotiations with respective multinational creditors, which may be time consuming or too late to be effective. This delay in imposing capital controls could intensify liquidity problems faced by the host countries during a financial crisis.

Taking cognizance of the above, it is, therefore, justified to argue that BITs may constrain the ability for countries to use prudential or other regulatory measures to deal with current global economic crisis.


THE IMPLICATIONS OF THE MFN CLAUSE FOR DOMESTIC POLICY SPACEMichael Waibel

University Lecturer in Law and Fellow of the Lauterpacht Centre, Cambridge University

“Most favored nation” (MFN) sounds like a contradiction in terms. Historically, MFN did not mean necessarily mean equal treatment. It implies some kind of special treatment to a particular trade partner, though in contemporary international economic law it is one of the two pillars of non-discrimination by nationality.

Each WTO member is required to treat all other WTO members as “most-favored” trading partner, thereby multilateralizing market access concessions. If any country lowers barriers to trade, it is generally obliged to give the same treatment to all the other WTO members so that they all remain “most-favored”. Host states are obliged, by virtue of the MFN clause in BITs, to grant investors the higher standards of protection extended under any other BIT to which the host state is a party:

As a result of MFNs, BITs are arguably no longer isolated bilateral bargains struck between two treaty parties, but part of a de facto multilateral framework. Bilateral negotiations preserve the bargaining advantages of powerful vis-à-vis weaker players, while simultaneously multilateralizing higher standards of investor protection.

MFN clauses could contribute to regulatory chill, that is governments abandoning or modifying measures of general economic policy due to the threat of litigation or arbitration. They could increase the sovereignty costs, potentially substantially, by extending more favourable treatment granted in one BIT to all BITs covered by the MFN clause. Both are ultimately empirical questions, and cannot be answered in the abstract.

MFN clauses operate somewhat differently in trade, investment and finance, and so their implications for domestic policy autonomy differ. The degree of involvement in the host countries’ economic and social fabric is generally higher with investment than with trade. Investment, due to its longer-term nature and presence in the host country, is likely to leave a bigger footprint in the host country, positive or negative. BITs and investment chapters in PTAs are therefore

potentially more restrictive of domestic policy space than trade agreement.

In investment law, MFN clauses are the key ingredient that glues thousands of legally bilateral relationships into a de facto multilateral investment regime. In trade, MFN underpins the multilateral character of the WTO. MFN clauses function as a core engine of liberalization in international trade. In international investment law, they are a force for maximized investor protection. MFN clauses in trade law liberalize, while in investment law they protect investors.

In modern international finance, MFN are a rare species, and even where they exist, they generally have limited impact on domestic policy autonomy. They became largely obsolete with the widespread abolition of exchange restrictions in the 1970s. In the 1930s, it was common to include MFN clauses in financial treaties. The objective was to ensure that the treatment in respect of exchange matters conferred upon the nationals of either of the contracting parties was at least as favourable as the treatment conferred by either of the contracting parties on the nationals of any third State.26

Their efficacy was however limited. In its standard form, the MFN clause only prohibited discrimination based on nationality - in the context of the administration of exchange restrictions, they required that the nationality of the prospective recipient of the available foreign exchange be considered by the restricting State to be irrelevant in its determination of who will receive the foreign exchange. However, exchange restrictions typically attached to the residence of the recipient. No actionable discrimination existed if the inequality of treatment resulted from genuine reasons of exchange control.

In modern times, countries have committed to a gradual liberalization of their capital accounts, BIT by BIT. Are variations in free transfer clauses, a substantive guarantee to foreign investors, or their absence in particular BITs swept away by operation of MFN clauses in included as a standard feature of virtually all BITs? According to the mainstream view that applies MFN clauses to substantive investment standards, the answer is yes. Accordingly, host country commit not to restrict the investor’s ability to freely transfer earning and other proceeds of the investment out of the host country, not just vis-à-vis a particular treaty partner, but with respect to all its BIT partners by virtue of MFN clauses.

26 A common formulation was: “Should either of the High Contracting Parties introduce exchange or payment restrictions, it shall in such questions grant most-favoured nation treatment to the other Party.”


Consider how MFN clauses work in the context of sovereign debt restructurings (taking as given that sovereign debt constitutes an “investment” for purposes of the BIT) and in international finance more generally. MFN clauses in international finance have limited impact on domestic policy space. This is one reason why specific sovereign debt restructuring annexes provide generally for only two substantive treatment standards: MFN and national treatment. The inclusion of a fair and equitable treatment guarantee would have a much greater impact on the host country’s policy space. Some recent restructurings include most favoured creditor protections (e.g. Argentina in 2005).

The primary fault line of discrimination in sovereign debt restructurings is between creditors who participate in a restructuring and those who choose to retain their old bonds (rather than nationality). Whether MFN clauses contained in BITs would have any traction, depends on what type of discrimination occurred:

A. Within-instrument (only paying domestic or intra-EU/Eurozone creditors under a particular bonds, and defaulting on bonds held by third country nationals)

B. Similar debt instrument: potentially problematic if led to de facto discrimination of foreign holders

C. Dissimilar debt instruments: legal challenges by holders are unlikely to succeed; examples include: restructuring debt governed by the law of the debtor country, but not foreign-law governed debt (e.g. Greece in February/March 2012); restructuring only debt issued in a particular currency; restructuring only one type of debt (long-term debt vs. short-term; bonds vs. bank debt); preferentially paying official creditors (such as Paris Club creditors or the IMF), ahead of private creditors; remaining current on suppliers, while restructuring debt. There are some restructuring conventions, but few hard rules.


STRUCTURING INVESTMENT TREATIES FOR FINANCIAL AND MONETARY CRISES: PRUDENTIAL MEASURES, TEMPORARY SAFEGUARDS, ESSENTIAL SECURITY, AND DISPUTE RESOLUTION MECHANISMSN Jansen Calamita

British Institute of International and Comparative Law; University of Birmingham School of Law

Investment treaties and investment chapters of broader trade agreements increasingly contain provisions specifically addressing state fiscal and monetary regulation, especially in times of crisis. Although the language of such provisions can vary significantly, it is possible to identify several principal types of these provisions:

» “Prudential measures” taken by the state to maintain the safety, soundness and integrity of financial institutions, the financial system and capital markets as a whole27; and

» “Temporary safeguards,” such as capital controls and exchange restrictions, adopted by the state to protect monetary reserves and the national currency.28

In addition to specialized provisions, contemporary investment treaties may also contain a general exceptions clause establishing the state’s right to take action in its broad “essential security” interests without incurring liability to investors.29 Further, in a number of free trade agreements with investment chapters, the provisions applicable to investments in the financial services sector are carved-out from the provisions applicable to investments generally.30 Thus, for example, an investment in financial services may be subject to fewer protections than an investment outside of the sector or redress for violations of certain protections may only be available in state-to-state dispute settlement.31

How effective are these specialized provisions on prudential measures and temporary safeguards at reserving to states the regulatory space to address crises without incurring liability? To date, such provisions have received limited application by arbitral tribunals. Temporary safeguards (i.e., balance of payments) provisions appear not to have factored in arbitral decisions thus far, while a prudential measures clause seems to have been addressed only in one award.32 In that instance, a NAFTA arbitral tribunal determined, obiter dicta, that Art. 1401(1) of the NAFTA “permits reasonable measures of a prudential

27 See, e.g., US Model BIT (2004), Art. 20.1; Canada-Peru FTA (2009), Art. 1110; ASEAN-Austr.-N.Z. FTA (2009), Annex on Financial Services, Arts. 3 & 4; Korea-India CEPA (2009), Annex 6-C, Art. 2; Japan-Mexico EPA (2004), Art. 110; Singapore-Japan EPA (2007), Art. 85; China-Japan-Korea Investment Treaty (2012), Art. 20 (“measures relating to financial services for prudential reasons”); NAFTA (1994), Art. 1410(1) (“reasonable measures for prudential reasons”).

28 See, e.g., Japan-Vietnam BIT (2003), Art. 16; Greece-Mexico BIT (2000), Art. 7; Canada-Chile FTA (1997), Annex G-09.1.

29 See, e.g., US Model BIT (2004), Art. 18.30 See, e.g., ASEAN-Austr.-N.Z. FTA (2009), Annex on Financial Services.31 See, e.g., NAFTA (1994), Ch. 14; Japan-Mexico EPA (2004), Art. 111.32 Fireman’s Fund Ins. Co. v. Mexico, ICSID Case No. ARB(AF)/02/01,

Award (17 July 2006).

character even if their effect (as contrasted with their motive or intent) is discriminatory.”33

Are such provisions necessary in the first place? Do not states retain the right to regulate fiscal and monetary matters during crises without concern that the exercise of that right will result in liability to investors? The simple answer is that the state’s scope of action may depend upon the treaty text. In this regard, one might consider Saluka Investments BV v. Czech Republic, a case involving regulation of the banking sector where the applicable treaty did not contain a prudential measures provision. There, the investor claimed that the Czech authorities’ adoption of new, stricter capital requirements for the banking sector, coupled with the authorities’ discriminatory refusal to provide it with financial assistance to meet those requirements constituted, inter alia, an indirect expropriation and a violation of the fair and equitable treatment standard. The tribunal rejected the expropriation claim, upholding the right of the Czech government to adopt general regulatory measures with respect to its banking sector, even if such measures effectively deprived the investor of its investment. However, the tribunal also held that it was a violation of the fair and equitable treatment standard for the Czech authorities not to provide financial assistance to the investor when it had done so for other banks owned by Czech investors.

Would Saluka have turned out differently for the Czech government had the applicable investment treaty contained a “prudential measures” provision? It depends, of course, on how that provision was drafted. Under NAFTA Chapter 14, for example, it seems as though the case would have turned out differently. Under Chapter 14, as interpreted by the tribunal in Fireman’s Fund Insurance, the investor’s only available claim would have been for expropriation; complaints about discrimination would have needed to be resolved at the state-to-state level.34

33 Id. para. 162.34 NAFTA Chapter 14 specifically addresses investments in financial

services. Several provisions of NAFTA Chapter 11 – the general chapter on investment – are incorporated into Chapter 14, including the protection against uncompensated expropriation (Art. 1110) and certain provisions on the procedural aspects of dispute resolution in investor-state claims (Art. 1115-1138). Article 1102 on National Treatment and Article 1105 on Minimum Standard of Treatment are not incorporated into Chapter 14. Notably, while the text of Chapter 14 contains no counterpart to the Minimum Standard of Treatment provision of Chapter 11, it does contain, in Article 1405, a counterpart to Chapter 11’s national treatment provision. Article 1405, however, is not among the provisions to which the procedural provisions of Chapter 11 apply, and Article 1414 makes clear that claims under Article 1405 are subject to state-to-state dispute settlement pursuant to Chapter 20, not to investor-state dispute settlement under Chapter 11.


DISPUTE SETTLEMENT DESIGN AND PRACTICE: SOME COMPARISONS BETWEEN WTO DISPUTE SETTLEMENT AND BIT ARBITRATIONThomas Sebastian

Advocate (formerly Counsel at the ACWL and Senior Associate at Allen & Overy LLP)

1. Enforcement arrangements under economic treaties display considerable variation. States have a range of design options at their disposal when entering into treaties and the same substantive obligation can be enforced through radically different arrangements. For example, the prohibition on discriminatory taxes is enforced in the WTO Agreements using state-to-state dispute settlement and prospective cessation orders while it is enforced in the EU Treaty arrangements through the grant of private rights of action and awards of monetary compensation. Similarly, the culture of adjudication can differ considerably across different treaty regimes. For instance, “activism” in the sense of a willingness to depart from the expressed common intention of state parties in order to achieve regime objectives appears to be more easily accepted in the culture of the European Court of Justice than in the WTO.

2. It is worth dwelling on the variations in design as well as culture between WTO dispute settlement and investor-state arbitration. Although, both sets of treaties are concerned with protecting foreign economic actors from adverse state conduct, I suggest that they utilize very different enforcement arrangements and involve very different cultures of adjudication. Arguably, they also reach different substantive outcomes as a consequence.

3. Differences in dispute settlement design: A. Inter-state enforcement in the WTO while

private enforcement under BITsB. Dispute settlement is embedded in a

multilateral institutional setting in the WTO while BIT dispute settlement is ad hoc and separate from the state parties

C. There is an Appellate Body in the WTO while there is no centralized appeal system under BITs.

D. ‘Public law remedies’ in the WTO - prospective and non-monetary. ‘Private law remedies’ under BITs – compensatory

5. Differences in dispute settlement culture: A. WTO dispute settlement is strongly connected

to the negotiating forum. In comparison, BIT tribunals have limited awareness of the underlying BIT bargain.

B. WTO panellists are effectively chosen by the Secretariat. The Appellate Body is chosen by the WTO Membership as a whole. In BITs, at least one adjudicator is chosen by the parties. The ICSID Secretariat does not appear to have a comparable role to the WTO Secretariat (while in UNCITRAL arbitration there is no secretariat support at all). Lawyers, in particular, private sector lawyers, have a smaller role in the WTO.

C. Arguments advanced in the WTO should make sense in policy terms- if they curtail widespread practices in Member States then they are unlikely to succeed. Equally, if a large number of WTO Members are opposed to an interpretation it is less likely to succeed. BIT tribunals do not have access to this type of feedback. For these reasons, WTO adjudication appears to be more sensitive to the preferences of the state parties.

4. Arguably, these differences lead to different outcomes:A. Interpretation of fair and equitable treatment

(FET) clause in comparison to Article X:3(a) of the GATT (“uniform, impartial and reasonable administration of laws”). Article X:3(a) claims rarely succeed. FET claims appear to have fared better.

B. Reactions to authoritative interpretations. Reception of the NAFTA FTC Interpretation in comparison to the Doha Declaration.

C. Rejection of the use of legitimate expectations as an interpretative aid by the WTO’s Appellate Body. Comparison to FET standard where frustration of legitimate expectations is a cause of action.

Questions

A. What lessons does each system hold for the other?

B. Why have states chosen such different models of enforcement?

C. Are these systems comparable? Are there other comparisons, such as to domestic public law adjudication, which may be more useful?


ECONOMIC CRISES AND THE NATIONAL SECURITY EXCEPTIONKenneth J Vandevelde

Professor of Law, Thomas Jefferson School of Law

The national security exception in bilateral investment treaties (BITs) is often traced to the General Agreement on Tariffs and Trade (GATT) and the failed Charter of the International Trade Organization (ITO), although antecedents also may be found in U.S. friendship, commerce and navigation (FCN) treaties. The history of the national security exception suggests two features in particular.

First, the drafters of the exception appear originally to have been concerned primarily with preserving for the host state the ability to defend itself against hostile states. The drafters were not unaware of the threat of an economic crisis related to capital movements. They addressed such concerns principally by limiting commitments to capital account liberalization and by adopting exceptions for balance of payments difficulties.

Second, the drafters did not regard the exception as self-judging. While the GATT and ITO Charter language did authorize each party to determine in its sole discretion whether measures that the party sought to justify under the exception were necessary, the language imposed additional conditions on the invocation of the exception that were not self-judging. The United States in proposing the language feared its abuse by other countries and believed that to make it entirely self-judging would render the GATT and the ITO Charter legal nullities.

The exception, as it appears in most BITs, is much shorter than the language of the GATT or the ITO Charter. It usually omits the self-judging language of the GATT and ITO Charter, but it also often omits qualifying phrases that in the two multilateral agreements had signalled the connection between the exception and national defence.

The question of whether the exception is self-judging might never have arisen in a BIT arbitration, had the United States not argued before the International Court of Justice (ICJ) in the early 1980s that the national security exception of the U.S.-Nicaragua FCN treaty was self-judging, despite the absence of explicit self-judging language. The ICJ rejected the U.S. argument. Nevertheless, when dozens of claims against Argentina were submitted to arbitration in the first decade of the twenty-first century, Argentina adopted the U.S. argument that the national security exception was self-judging, although Argentina’s definition of the term “self-judging” was not the same as the United States’ definition.

In any event, all of the tribunals that have considered the issue have rejected Argentina’s argument that the exception is self-judging, given the absence of explicit self-judging language in the BIT. A question that remains, however, is whether a self-judging exception, as Argentina has maintained, is subject to a good faith obligation, or, as the United States in at least some contexts has maintained, upon invocation renders the issue of its applicability completely nonjusticiable.

Despite the origins of the national security exception in concerns about military defence, all of the tribunals that have addressed the issue in the Argentina cases have been willing to treat the exception as potentially embracing measures necessary to address an economic crisis. The language that appears in many BITS is sufficiently vague that it does not explicitly preclude such a reading.

Yet, the exception generally has not proved to an effective shield for Argentina. Precisely because it was not drafted with economic crises specifically in mind, the national security exception, unlike the balance of payments exception, does not set forth economic criteria that determine when it applies. Because a bilateral investment treaty is meant to discipline certain aspects of a state’s economic policy, a broad exception for economic crises potentially could undermine the central purpose of the treaty. Thus, tribunals appear to have been reluctant to allow Argentina to rely on the vague language of the national security exception to escape liability for various measures taken during its economic crisis. Economic crises are perhaps best addressed through exceptions crafted with those kinds of crises in mind.


MEMORANDUM FOR THE WORKSHOP ON GLOBAL INVESMENT GOVERNANCERobert Volterra

Partner at Volterra Fietta

Introduction

This memorandum contains our reflections on the following two questions:

i. Some States and analysts are concerned that bilateral investment treaties (BITs) may constrain their ability to use prudential measures or other regulatory measures to deal with the current global economic crisis. Are these concerns justified?

ii. How might the content, interpretation and application of BITs affect the capacity of States to regulate finance?

BITs and states’ abilities to deal with the economic crisis

1. Since the 1990s, both the number and scope of BITs has grown rapidly. In the context of the current global economic crisis, this growth has set up a conflict between the objective of promoting and protecting foreign investment and the legitimate desire of States to retain their ability to deal with situations that may endanger their essential interests. This is because in situations of economic crisis States often need to adopt extraordinary measures that can affect investors’ rights under BITs.

2. There is limited and conflicting jurisprudence that addresses the role of international law in a State’s management of a financial crisis. However, the arbitral decisions derived from the 2001 Argentine financial crisis demonstrate that BITs can restrict the range of measures with which States can deal with an economic crisis.

3. Only a minority of BITs contain clauses that limit the applicability of investor protections in exceptional circumstances. These include “national security”, “prudential measures”, and other regulatory measures exception clauses. Moreover, while it is generally accepted that an economic crisis can justify the invocation of a national security exception,35 what remains uncertain is both the level of severity of the crisis as well as the conditions required to invoke that clause. Regarding “prudential measures”, usually it is for the Arbitral Tribunal to decide whether the measure in question qualifies as “prudential”.36

35 See CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Award (12 May 2005), paragraph 319; LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability (3 October 2006), paragraphs 251 to 257.

36 Fireman’s Fund Insurance Co. v. Mexico, ICSID Case No. ARB(AF)/02/1, Award (17 July 2006), paragraphs 166-167.

4. In the absence of such clauses, States may rely on the customary international law principle of necessity in order to avoid liability for BIT breaches. However, customary international law establishes a highly restrictive test of necessity and does not exempt States from the obligation to compensate for any material loss caused by their wrongful acts.37

5. Thus, BITs may indeed constrain States’ abilities to use regulatory measures to deal with the economic crisis, particularly when the applicable BIT does not contain an exception clause.

How BITs might affect the capacity of states to regulate finance

1. The significant textual variation in substantive BIT provisions makes it impossible to give a general answer to this question. However, there are at least three groups of measures that States may need to take to regulate finance and mitigate the effects of the current economic crisis. These measures could conflict with common BIT standards of protection.

2. The first group of measures is designed to ensure the stability of the financial services industry and the continuation of bank funding. They usually consist of liquidity support, recapitalization, capital controls or lending guarantees. The standards of “national treatment” and “no discrimination” may prohibit such kind of measures if they are aimed at some but not all financial entities. Moreover, a State’s nationalization of shares in banks may breach “expropriation” or “fair and equitable treatment” clauses when the State does not pay the compensation required under the applicable BIT. Measures such as capital controls could breach these standards as well as a free transfer of funds clause.

3. The second group of measures are seen as an alternative to coordinated global bailouts. When a State cannot pay its debts, it may decide to restructure its sovereign debt and swap out its defaulted bonds for new bonds with lower interest rates and longer maturities. Since a bond swap reduces the value of bonds, bondholders could invoke the “expropriation” and “fair and equitable treatment” clauses against such sovereign debt restructuring measures.38

37 See Articles 25 and 27 of the Articles on Responsibility of States for Internationally Wrongful Acts.

38 See Abaclat and others v. Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility (4 August 2011). The Tribunal decided that Argentina’s restructuring of debt during its financial crisis fell under its jurisdiction, inter alia, because bonds were

part of the definition of investment under the Argentina-Italy BIT.


4. Finally, in order to increase the availability of credit to other sectors of the economy, States may need to impose conditions on banks benefiting from the first group of measures. Such conditions typically create an obligation or provide incentives to extend credit to local companies. “National treatment” and “no discrimination” clauses may impact a State’s ability to adopt such measures.

Globalization and Finance Projectsupported by the Ford Foundation

A WORKSHOP ON GLOBAL INVESTMENT GOVERNANCE · 2 It is worth noting that unlike most World Trade...

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