Fair and Equitable Treatmentin Investment Agreements

Karen Millswith Windri Marieta

KarimSyah Law Firm

1st Annual Forum of Developing Country Investment Negotiators

October 1-2, 2007

Singapore

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Fair & Equitable Treatment

What does it mean?

Expressed differently in various treaties. Why? Parties’ negotiations based on experiences, intentions. “Standard” language No coordination; each negotiator reinvents the wheel

Is it synonymous with “Minimum Treatment under International Law”? Contradictory arbitral awards Definition of both are evolving Standard raising ala arbitration awards

Provide stable framework or business environmentOccidental Exploration and Production Company v. The Republic of Ecuador LCIA Case No. UN3467 Final Award, 1 July 2004;

Expectations of the investorLG&E v. The Argentine Republic, ICSID Case No. ARC/02/1, 2007

Protection for securityAmerican Manufacturing & Trading, Inc. (AMT) (US) v. Republic of Zaire, ICSID case No. ARB/93/1 Award, 21 February, 1997.

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Fair & Equitable Treatment

Or is it a greater or lesser standard of obligation?

Awards stating one includes the other, which implies a possible higher standard on the former.

Who and what is covered? What constitutes investment?

What standard is required by F&ET clearly will have to be left in each case to the arbitral tribunal hearing the case. Thus the meaning is fluid and will certainly evolve over the years.

The current trend is for the obligations of the host state to become more and more stringent, perhaps even onerous.

This trend could easily change.

Stand alone obligation, not dependent upon any conditions or comparisons.

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Minimum Standard req. by International Law

The Organization for Economic Co-operation and Development (OECD) links fair and equitable treatment with minimum standard required by international law, which they define asa norm of customary international law that governs the treatment of aliens, by providing for a minimum set of principles which States, regardless of their domestic legislation and practices, must respect when dealing with foreign nationals and their property.

Absolute global requirement. Not dependent upon treaty.

Some treaty language implies it is a lesser standard than fair & equitable treatment. But at least one arbitral award characterized F&ET as being part of minimum standard, implying minimum standard a higher one.

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Protection & Security

Language differs:

Adequate protection and security

Full protection and security

Full and adequate protection and security

Full and constant protection and security

How to determine these relative standards? No awards nor authority on this issue.

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Other variables in language

Linked with international law Linked with domestic law

Treatment accorded to: Investors Investments Investors and their investments

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Comparison of language differences:Fair & Equitable Treatment

Indonesia-Ukraine Bilateral

Investment Treaty

Malaysia-Jordan

Bilateral Investment

Treaty

NAFTAThe OECD Draft

Multilateral Agreement on

Investment (1998)

IISD Model InternationalAgreement on

Investmentfor

SustainableDevelopment

The US Model BIT

Investments of nationals of either Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy adequate protection and security in the territory of the other Contracting Party.

Investments of investors of each Contracting Party shall at all times be accorded equitable treatment and shall enjoy full and adequate protection and security in the territory of the other Contracting Party.

Each Party shall accord to investments of investors of another Party treatment inaccordance with international law, including fair and equitable treatment and full protectionand security

Each contracting Party shall accord fair and equitable treatment and full and constantprotection and security to foreign investments in their territories. In no case shall a contracting Party accord treatment less favourable than that required by international law

Each Party shall accord to investors or their investments treatment inaccordance with customary international law, including fair and equitabletreatment and full protection and security

Each Party shall accord to covered investments treatment in accordance with customaryinternational law, including fair and equitable treatment and full protection and security

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National Treatment

“National Treatment” requires the host state to afford to investors of the other Party, and/or their investments, treatment not less favorable than they treat those of their own nationals.

Sometimes qualified by “in like circumstances”. In US Model Bit, applies to “covered” investments.

Sometimes qualified in that it will apply only where not inconsistent with applicable domestic law.

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Most Favored Nation Treatment

Most Favored Nation Treatment requires the host state to afford to investors of the other Party, and/or their investments, treatment not less favorable than that that which it affords investors of any other state, whether or not party to the same (if MIT) or another treaty (if BIT).

Sometimes qualified to exclude affording the same treatment as might be required under any specific tax, customs or other agreement or treaty specifically affording mutual tax or customs benefits or similar.

Some treaties call for MFN or LT, some for both. Some provide that the better of the two must be afforded.

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Examples of Language: National Treatment

US Model BIT IISD Model International

Agreement on Investmentfor Sustainable Development

BIT: Indonesia & Finland

Article 3: National Treatment

1. Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.

Article 5: National treatment

(A) Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the management, conduct, operation, expansion and sale or other disposition of investments. Where a foreign investor may, under domestic law, establish an investment.

This Article shall apply to the extent it is not inconsistent with such domestic law relating to the establishment or acquisition of investments.

Article 3: Treatment of Investments

1. Each Contracting Party shall accord to investors of the other Contracting Party and to their investments once admitted, a treatment no less favorable than the treatment it accords to its own investors and their investments with respect to the acquisition, expansion, operation, management, maintenance, use and sale or other disposal of investments.

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Examples of Language: Most-Favored Nations Provisions

BIT between Indonesia-Pakistan IISD Model International

Agreement on Investmentfor Sustainable Development

Draft OECD Multilateral Agreement on Investment (1998)

ARTICLE IIIMost- Favored - Nation Provisions

1. Each Contracting Party shall fair and equitable treatment of the investments of nationals of the other Contracting Party and shall not impair, by unreasonable or discriminatory measures the operation, management, maintenance, use, enjoyment or disposal thereof by those nationals. Each Contracting Party shall accord to such investment adequate physical security and protection. 2. More particularly, each Contracting Party shall accord to such investments treatment, which in any case shall not be less favorable than that accorded to investments of nationals of any third State.

Article 6: Most - Favored-nation treatment

(B) Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to investors of any other Party or of a non-Party with respect to the management, conduct, operation, expansion, sale or other disposition of investments. Where a foreign investor of a Party or non-Party may, under domestic law, establish an investment, this provision shall apply to the extent it is not inconsistent with such domestic law relating to the establishment or acquisition ofinvestments.

2. Each Contracting Party shall accord to investors of another Contracting Party and to their investments, treatment no less favorable than the treatment it accords in like circumstances to investors of any other Contracting Party or of a non-Contracting Party, and to the investments of investors of any other Contracting Party or of a non-Contracting Party, with respect to the establishment, acquisition expansion, operation, management, maintenance, use, enjoyment, and sale or other disposition of investments.

3. Each Contracting Party shall accord to investors of another Contracting Party and to their investments the better of the treatment required by Paragraphs 1 (MFN) and 2 of this Article, whichever is the more favorable to those investors or investments.

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Exception contained in some, but few, Most-Favored Nations provisions

BIT: Indonesia and Finland (1992) BIT: Indonesia and Pakistan (1996)

Article 4Exceptions

The provisions of this Agreement shall not beunderstood so as to oblige one ContractingParty to extend to the investors and investments by investors of the other Contracting Party the benefit of a treatment, preference or privilege by virtue of an existing or future:

(a)Free trade area, customs union, common market, economic and monetary union or other similar regional economic integration agreement, including regional labor market agreements, to which one of the Contracting Parties is or may become a party, or(b) Agreement for the avoidance of double taxation or agreement with other countries relating wholly or mainly to taxation, or(c) Multilateral agreement relating wholly or mainly to investments.

ARTICLE III Most-Favored-Nations Provisions

. . . . . .

2. More particularly, each Contracting Party shall accord to such investments treatment which in any case shall not be less favorable than that accorded to investments of nationals of any third State.

3. If a Contracting Party has accorded special advantages to nationals of any third State by virtue of agreements establishing customs unions, economic unions, monetary unions or similar institutions, or on the basis of interim agreements leading to such unions of institutions, that Contracting Party shall not be obliged to accord such advantages to nationals of the other Contracting Party

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Variations in some Indonesian BITs

BIT

FE&T in accordance w. Laws and regs:

Protection and security NT MFN

Exception for

Treaties, &c.own Int’l full Adeq. NS

Australia , 1992 √ √ √ √

Belgium, 1970 √ √ √ √ √ √

Bangladesh, 1998 √ √ √ √

Chile, 1999 √ √ √ √

Finland, 2006 √ √ √ √ √

Croatia, 2002 √ √ √ √ √

Jordan, 1996 √ √ √ √

South Korea , 1991 √ √ √ √ √

Mauritius, 1997 √ √ √ √

Pakistan, 1996 √ √ √ √

Thailand, 1998 √ √ √ √

Ukraine, 1996 √ √ √ √

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Variations in coverage

Definition of “investor”: who is entitled to F&ET? Include host-state subsidiary of other party entity? Need an entity maintain a presence in the host state?

Definition of “investment”: what is covered? Does it include:

Portfolio investments, bonds, securities? Sales of goods or services? Loans? intellectual property rights?

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Definition of investment: What is covered?

US Model BIT/OECD ModelIISD Model International Agreement on Investment

for Sustainable Development

Article 1“Investment” means every asset that

an investor owns or controls, directly or indirectly, that has the characteristics

of an investment, including such

characteristics as the commitment of capital or other

resources, the expectation of gain or profit, or the assumption of risk. Forms that an

investment may take include:

(a) an enterprise;(b) shares, stock, and other forms of

equity participation in an enterprise;(c) bonds, debentures, other debt

instruments, and loans;(d) futures, options, and other

derivatives;(e) turnkey, construction, management, production, concession, revenue-

sharing, and other similar contracts;(f) intellectual property rights;(g) licenses, authorizations, permits, and

similar rights conferred pursuant to domestic law; and

(h) other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges.

Article 2 (C)“Investment” means:i) a company;ii) shares, stock and other forms of equity participation in a company, and bonds,

debentures and other forms of debt interests in a company;iii) contractual rights, such as under turnkey, construction or management

contracts, production or revenue-sharing contracts, concessions or other similar contracts;

iv) tangible property, including real property; and intangible property, including rights, such as leases, mortgages, hypothecs, liens and pledges on real property;

v) rights conferred pursuant to law, such as licenses and permits

provided that a) such investments are not in the nature of portfolio investments which shall

not be covered by this Agreement;b) that there is a significant physical presence of the investment in the host state;c) that the investment in the host state is made in accordance with the laws of

that host state;d) the investment is part or all of a business or commercial operation; ande) the investment is made by an investor as defined herein. (“Investor” is a

national or company of a home State Party that makes, or is making, an investment into the territory of another Party.)

For greater certainty, an investment does not include: market share, whether or not it is based

on foreign origin trade; claims to money deriving solely from commercial contracts for the sale

of goods and services to or from the territory of a Party to the territory of another country, or a

loan to a Party or to a State enterprise; a bank letter of credit; or the extension of credit in

connection with a commercial transaction, such as trade financing.

* The wording of US Model BIT and OECD Model are almost the same

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Definition of investment: What is covered - sample Indonesian BITS

Bangladesh-Indonesia Finland-Indonesia

Article I (1)

The term "investment" shall mean any kind of asset invested by investorsof one Contracting Party in the territory of the other Contracting Party,in conformity of the laws and regulations of the latter including:a. movable and immovable property as

well as other rights such as mortgages, privileges and guarantees, and any other similar rights;

b. rights derived from shares, bonds, or any other form of interest in companies or joint venture in the territory of the other Contracting Party;

c. claims to money or to any performance having a financial value;

d. intellectual property rights, technical processes, goodwill, and know-how;

e. business concessions conferred by law or under contract related to investment including concessions to search for or exploit natural resources.

Article 1(1)

The term of “investment” means every kind of asset established or acquiredby an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and regulations of the latter Contracting Party, including in particular, not exclusively:(a) Moveable and immovable property or any property rights such as

mortgages, liens, pledges, leases and similar rights;(b) Reinvested returns;(c) Shares and stocks in and debentures of a company or any other forms of

participation in a company;(d) Claims to money or rights to a performance having a financial value;(e) Intellectual property rights including but not limited to patents, copyrights,

trade marks, geographical indications, industrial designs, layout design of integrated circuits, trade secrets, and rights in plants varieties, as well as business names, technical processes, know-how and good will;

(f) Concessions conferred by law, by an administrative act or under a contract by a competent authority, including concession to search for, develop, extract or exploit natural resources.

Investments made in the territory of one Contracting Party by any legal entityof that same Contracting Party, but actually owned by investors of the other Contracting Party, shall likewise be considered as investments of investors ofthe latter Contracting Party if they have been made in accordance with the laws and regulations of the former Contracting Party.

Any change in the form in which assets are invested or reinvested does not affect their character as investments.

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What protections for Host State?

Investors not party to BITS nor MITS.

Thus investors have no contractual obligations thereunder. Investors are protected beneficiaries, but assume no risks. Investors may bring action against host state for failure; but host

state has no recourse under BIT or MIT against investor.

What is standard of conduct for investors? Do party states guarantee to cause investors to comply? Do states guarantee conduct of their citizens?

Were these issues thought about in the drafting?

Do some investment agreements or arbitral awards go too far?

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What Conduct Complies or Breaches F&ET?Interpretations by a few Tribunals:

Constant Protection and Security not a warranty to investor that no disturbance in any circumstances would occur. (US Co. partial owner of insolvent Italian insurance company requisitioned by Italy).

Electronic Sicula S.P.A. v. Italy, 1989; ICJ 15 (“ELSI”)

Investor suffered damage due to widespread looting in Zaire. Although the damage was not caused by the state,

the Tribunal nonetheless found that Zaire had “manifestly failed to respect the minimum standard required of it by

international law”, and therefore had breached the duty to afford protection and security.

American Manufacturing & Trading (AMT) Inc. v. Republic of Zaire, ICSID case No. ARB/93/1, 1997.

“Neither State practice, the decisions of international tribunals nor the opinion of commentators support the view

that bad faith or malicious intention is an essential element of unfair and inequitable treatment or

denial of justice amounting to a breach of international justice…”

Loewen Group, Inc and Raymond L. Loewen v. United States of America (ICSID case No. ARB(AF)/98/3

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What Conduct Complies or Breaches F&ET?Interpretations by a few Tribunals:

“The minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrarily, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety, …, or a complete lack of transparency and candour in an administrative process”Waste Management, Inc. v. The United Mexican States, ICSID Case No. ARB(AF)/00/3.

The terms ‘fair and equitable’ and ‘full protection and security’ must be read in conjunction with treatment according to international law.

“A breach of ‘fair and equitable treatment’ occurs only when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective. … In light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders”S.D. Myers Inc v. Canada (November 13, 2000), Partial Award.

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