Sie sind auf Seite 1von 344

International Investment Law

UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS


A Companion Volume to International Investment Perspectives
International
International investment agreements set ground rules for how host governments treat
foreign investors. This publication provides an unparalleled source of information on
Investment Law
four key issues: the denition of investor and investment; the interpretation of umbrella UNDERSTANDING CONCEPTS
clauses in investment agreements; coverage of environmental, labour and anti-corruption AND TRACKING INNOVATIONS

International Investment Law


issues; and the interaction between investment and services chapters in selected
regional trade agreements.
The Denition of investor and investment reviews the determinants of the scope
of application of international investment treaties in light of recent state practice and
jurisprudence. The article on the Interpretation of the umbrella clause in investment A Companion Volume to International Investment Perspectives
agreements sheds light on a controversial provision whose meaning has been disputed
recently before international arbitral tribunals. International Investment Agreements:
A survey on environmental, labour and anti-corruption issues reviews the treatment
of societal issues in 295 investment agreements and in related arbitration decisions.
The interaction between investment and services chapters in selected regional trade
agreements looks at the implications for investment protection and liberalisation
of 20 treaties investment and services chapters.

UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS


The full text of this book is available on line via this link:
www.sourceoecd.org/finance/9789264042025
Those with access to all OECD books on line should use this link:
www.sourceoecd.org/9789264042025
SourceOECD is the OECDs online library of books, periodicals and statistical databases.
For more information about this award-winning service and free trials, ask your librarian, or write to
us at SourceOECD@oecd.org.

ISBN 978-92-64-04202-5

www.oecd.org/publishing
20 2008 01 1 P -:HSTCQE=UYWUWZ:
International
Investment Law
UNDERSTANDING CONCEPTS
AND TRACKING INNOVATIONS

Companion Volume to International Investment


Perspectives
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT

The OECD is a unique forum where the governments of 30 democracies work


together to address the economic, social and environmental challenges of globalisation.
The OECD is also at the forefront of efforts to understand and to help governments
respond to new developments and concerns, such as corporate governance, the
information economy and the challenges of an ageing population. The Organisation
provides a setting where governments can compare policy experiences, seek answers to
common problems, identify good practice and work to co-ordinate domestic and
international policies.
The OECD member countries are: Australia, Austria, Belgium, Canada, the
Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland,
Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand,
Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey,
the United Kingdom and the United States. The Commission of the European
Communities takes part in the work of the OECD.
OECD Publishing disseminates widely the results of the Organisations statistics
gathering and research on economic, social and environmental issues, as well as the
conventions, guidelines and standards agreed by its members.

This work is published on the responsibility of the Secretary-General of


the OECD. The opinions expressed and arguments employed herein do not
necessarily reflect the official views of the Organisation or of the governments
of its member countries.

Also available in French under the title:


Le droit international de linvestissement
COMPRENDRE LES CONCEPTS ET SUIVRE LES INNOVATIONS
Complment aux Perspectives de linvestissement international

Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda.

OECD 2008

No reproduction, copy, transmission or translation of this publication may be made without written permission.
Applications should be sent to OECD Publishing rights@oecd.org or by fax 33 1 45 24 99 30. Permission to photocopy a
portion of this work should be addressed to the Centre franais dexploitation du droit de copie (CFC), 20, rue des
Grands-Augustins, 75006 Paris, France, fax 33 1 46 34 67 19, contact@cfcopies.com or (for US only) to Copyright Clearance
Center (CCC), 222 Rosewood Drive, Danvers, MA 01923, USA, fax 1 978 646 8600, info@copyright.com.
FOREWORD

Foreword
I nternational Investment Law: Understanding Concepts and Tracking
Innovations is a companion volume to International Investment Perspectives.
The present volume is the second edition of the International Investment Law series. It
follows the 2005 publication of International Investment Law: A Changing
Landscape. This publication is part of the OECD Investment Committees continuing
effort to enhance common understanding and to improve outcomes of international
investment agreements by providing analysis of core provisions and of critical legal
issues arising out of their interpretation and application.
International investment agreements are key instruments of co-operation for the
promotion, protection and liberalisation of foreign investment. Their proliferation,
including South-South treaties and investment chapters in regional integration
agreements, the increase in the number of investment disputes and the emergence of
new legal issues in this context are all factors which have contributed to the complexity
of the legal framework for foreign investment.
This publication consists of four surveys on: i) the definition of investor and
investment; ii) the interpretation of umbrella clauses; iii) societal issues in
investment treaties (mainly environmental, labour, human rights and anti-
corruption); and iv) the interaction between investment and services chapters in
selected regional trade agreements.
The present publication sheds light on some of the recent issues that have arisen
in connection with certain substantive provisions of international investment
agreements. The common theme of the four papers is the international investment
communitys search for greater clarity in the interpretation of concepts and in the
language used in these treaties. In some cases, the surveys also track innovations in
treaty language and in arbitral decisions.
As a collection of factual surveys, the publication does not necessarily reflect the
views of the Organisation for Economic Co-operation and Development or those of its
member governments. It cannot be construed as prejudging ongoing or future
negotiations or disputes arising out of international investment agreements.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
3
TABLE OF CONTENTS

Table of Contents
Chapter 1. Definition of Investor and Investment in International
Investment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Annex 1.A1.Definition of Investment in Bilateral Investment Treaties . . . 79

Chapter 2. Interpretation of the Umbrella Clause


in Investment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Annex 2.A1.Examples of Umbrella Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Annex 2.A2.2004 US Model Bilateral Investment Treaty . . . . . . . . . . . . . . . . 133

Chapter 3. International Investment Agreements: A survey


of Environmental, Labour and Anti-corruption Issues . . . . . 135
Annex 3.A1.Methodology and List of IIAs Included in Survey . . . . . . . . . . . 162
Annex 3.A2.Inventory of Environmental, Labour
and Anti-corruption Texts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
Annex 3.A3.A Fact-finding Survey of the Social Content
of Non-OECD International Investment Agreements . . . . . . . . 229
Annex 3.A4.Methodology and List of BITs Included in Survey . . . . . . . . . . . 236

Chapter 4. The Interaction Between Investment and Services Chapters


in Selected Regional Trade Agreements . . . . . . . . . . . . . . . . . . 241
Annex 4.A1.Key Features of the RTAs Reviewed . . . . . . . . . . . . . . . . . . . . . . 301
Annex 4.A2.Analysis of the Schedules of Commitments: Methodology,
Caveats and Summary Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . 324
Annex 4.A3.The GATS W/120 Services Sectoral Classification List . . . . . . . 333

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
5
ISBN 978-92-64-04202-5
International Investment Law:
Understanding Concepts and Tracking Innovations
OECD 2008

Chapter 1

Definition of Investor and Investment


in International Investment Agreements*

The definition of investor and investment is key to the scope of application


of rights and obligations of investment agreements and to the
establishment of the jurisdiction of investment treaty-based arbitral
tribunals. This factual survey of state practice and jurisprudence aims to
clarify the requirements to be met by individuals and corporations in
order to be entitled to the treatment and protection provided for under
investment treaties. It further analyses the specific rules on the
nationality of claims under the ICSID Convention. As far as the definition
of investment is concerned, most investment agreements adopt an open-
ended approach which favours a broad definition of investment.
Nevertheless recent developments in bilateral model treaties provide
explanatory notes with further qualifications and clarifications of the
term investment. The survey further reviews the definition of investment
under ICSID as well as non-ICSID case-law for jurisdictional purposes.

This survey was prepared by Catherine Yannaca-Small, Investment Division, OECD


Directorate for Financial and Enterprise Affairs. Lahra Liberti, Investment Division,
OECD Directorate for Financial and Enterprise Affairs prepared Section II of Part II
and revised the document in light of the discussions in the OECD Investment
Committee. This paper is a factual survey which does not necessarily reflect the
views of the OECD or those of its member governments. It cannot be construed as
prejudging ongoing or future negotiations or disputes arising under international
investment agreements.

7
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Executive summary
The definition of investor and investment are among the key elements
determining the scope of application of rights and obligations under
international investment agreements.
There are two types of investors: natural and legal persons. For natural
persons, investment agreements generally base nationality exclusively on the
law of the state of claimed nationality. Some investment agreements also
introduce alternative criteria, such as a requirement of residency or domicile.
The issues related to the nationality of legal persons are more complicated.
Companies today operate in ways that can make it very difficult to determine
nationality. Tribunals have usually adopted the test of incorporation or seat
rather than control when determining the nationality of a juridical person,
unless the test of control is provided for in the agreement. Accordingly, it is the
general practice in investment agreements to specifically define the objective
criteria which make a legal person a national, or investor, of a Party, for
purposes of the agreement. When the objective criteria used may include
investors to whom a Party would not wish to extend the treaty protection,
some treaties include denial of benefits clauses allowing exclusion of
investors in certain categories.
The ICSID Convention, the main instrument for the settlement of
investor-state disputes, limits the jurisdiction of its Centre to disputes
between one Contracting State and a national of another Contracting State. It
provides specific rules on the nationality of claims. For natural persons, it
requires nationality to be established on two important dates: the date of
consent to arbitration and the date of registration, and does not cover dual
nationals when one of the nationalities is the one of the other Contracting
State party to one dispute. The ICSID jurisprudence as to the nationality of
natural persons is so far limited to four cases brought by dual nationals. For
legal persons, the ICSID Convention requires nationality to be established only
on the date on which the parties consented to submit such dispute to
arbitration and allows a departure from the principle of incorporation or seat,
when the Parties agree to treat a legal entity with the nationality of the
Contracting State as a national of another Contracting State because of foreign
control. A related issue is the question of the extent to which shareholders can
bring claims for injury sustained by the corporation. Recent jurisprudence has

8 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

decided in favour of the right of shareholders, to be accepted as claimants


with respect to the portion of shares they own or control.
There is no single definition of what constitutes foreign investment.
International investment agreements usually define investment in very broad
terms. They refer to every kind of asset followed by an illustrative but
usually non-exhaustive list of assets, recognising that investment forms are
constantly evolving. The ICSID Convention does not define the term
investment. It is, however, possible to identify certain typical characteristics of
investment under the Convention which have been increasingly used by
arbitral tribunals: i) duration of the project; ii) regularity of profit and return;
iii) risk for both sides; iv) a substantial commitment; and v) the operation
should be significant for the host states development.

Introduction
The definition of investor and investment are among the key elements
determining the scope of application of rights and obligations under
international investment agreements. An investment agreement applies only to
investors and investments made by those investors who qualify for coverage
under the relevant provisions. Only such investments and investors may benefit
from the protection and be eligible to take a claim to dispute settlement.
Why is the definition of investor and investment so important? From the
perspective of a capital exporting country, the definition identifies the group of
investors whose foreign investment the country is seeking to protect through
the agreement, including, in particular, its system for neutral and depoliticised
dispute settlement. From the capital importing country perspective, it identifies
the investors and the investments the country wishes to attract; from the
investors perspective, it identifies the way in which the investment might be
structured in order to benefit from the agreements protection.1
This definition may also be central to the jurisdiction of the arbitral
tribunals established pursuant to investment agreements since the scope of
application rationae personae may depend directly on what investor means,
i.e. being an investor of a state party to the treaty is a necessary condition of
eligibility to bring a claim. In addition, the scope of application rationae
materiae depends on the definition of investment and in particular with
respect to the jurisdiction of the International Centre for the Settlement of
Investment Disputes (ICSID), as it extends to any dispute arising out of an
investment.

1. B. Legum Defining Investment and Investor: Who is Entitled to Claim?


presentation at the Symposium Making the Most of International Investment
Agreements: A Common Agenda co-organised by ICSID, OECD and UNCTAD,
12 December 2005, Paris.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
9
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

The Investment Committee, in its discussions on the interpretations of


provisions of investment agreements, identified the definition of investor and
investment as among the core elements of these agreements. It requested the
Secretariat to undertake legal research and analysis, looking at state practice
and jurisprudence related to these issues, with a view to improving mutual
understanding and outcomes of agreements. As a factual survey this paper
does not necessarily reflect the views of the OECD or those of its member
governments. It cannot be construed as prejudging ongoing or future
negotiations or disputes arising under international investment agreements.
The issue is becoming of increased relevance in the current context
where national security and other essential interest concerns are on the rise
and the nationality and identity of an investor and the nature of an
investment face growing scrutiny by regulators and policy makers in a number
of OECD and non-member countries, taking into account their countries
rights and obligations under international investment agreements. The
definition of investor and investment under these agreements is relevant in
relation to such concerns, including protecting intellectual property and
politically motivated corporate takeovers by foreign government-controlled
investors or sovereign investment funds.
The present document responds to the Investment Committees request.
First, this paper addresses the definition of investor by examining the way in
which natural persons qualify as investors under both international
customary and treaty law with reference to the arbitral awards that address
such qualification. It then looks at the criteria used by investment agreements
to qualify a legal person as an investor and the way they have been interpreted
by arbitral tribunals. Second, it examines the definition of investment as
included in international investment agreements as well as the jurisprudence
arising out of the interpretation of the term investment included in these
agreements. In Annex 1.A1, it gives samples of a large number of investment
agreement provisions defining investment.

Part I. Definition of Investor


I. Natural persons
It is a firmly established principle in international law that the nationality
of the investor as a natural person is determined by the national law of the
state whose nationality is claimed. However, some investment agreements
introduce alternative criteria such as a requirement of residency or domicile.
The ICSID Convention requires nationality to be established on two
important dates: the date of consent to arbitration and the date of registration.
The Convention does not cover dual nationals when one of the nationalities is

10 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

the one of the Contracting State. The jurisprudence as to the nationality of


natural persons is so far limited to four cases brought by dual nationals.

1. Customary international law


The right to grant and withdraw nationality of natural persons remains
part of the sovereign domain. The question before tribunals has been whether
and to what extent a state can refuse to recognise the nationality of a claimant.
International law practice on questions of nationality has developed primarily
in the context of diplomatic protection.
In the Nottebohm case,2 the ICJ held that even though a state may decide on
its own accord and in terms of its own legislation whether to grant nationality
to a specific person, there must be a real connection between the state and the
national. The Court made the following statement:
Nationality is a legal bond having as its basis a social fact of attachment, a
genuine connection of existence, interests and sentiments, together with the
existence of reciprocal rights and duties. It may be said to constitute the juridical
expression of the fact that the individual upon whom it is conferred, either directly
by the law or as the result of an act of the authorities, is in fact more closely
connected with the population of the State conferring nationality than with that of
any other State. Conferred by a State, it only entitles that State to exercise
protection vis--vis another State, if it constitutes a translation into juridical terms
of the individuals connection with the State which has made him its national.
However, in todays circumstances of the modern world it would be very
difficult to demonstrate effective nationality following the Nottebohm
considerations, i.e. the persons attachment to the state through tradition,
interests, activities or family ties.3 The International Law Commissions (ILC)

2. The Nottebohm case (Liechtenstein v. Guatemala), 2nd phase, Judgment of 6 April


1955, 1955 ICJ Reports 4, at 23. The case concerned Mr. Nottebohm, a German
national who resided in Gu atemala (since 1 905). In 193 9, he travelled to
Lichtenstein to visit his brother and obtained Liechtenstein nationality in
exceptional circumstances of speed and accommodation in order to gain the status
of a neutral State instead of the one of a belligerent State. He returned to Guatemala
in 1940 and remained there until his deportation to the US in 1943. He then tried to
rely on his Liechtenstein nationality to seek diplomatic protection against
Guatemala. In these circumstances, the Court said he could not assert his
Liechtenstein nationality against Guatemala where he had settled for 34 years.
3. Amerasinghe comments that: There is a distinction between diplomatic protection
and jurisdiction for the purposes of the [ICSID] Convention [E]ven if the
Nottebohm Case were to be used as an applicable precedent, it is arguable that an
effective link is relevant to negating the existence of nationality only in the
particular circumstances of that case, or at any rate, in very limited circumstances
in The Jurisdiction of the International Centre for Settlement of Investment
Disputes (1979) 19 Indian Journal of International Law 166, 203.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
11
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Report on Diplomatic Protection recognised the limitations presented by the


Nottebohm ruling in the context of modern economic relations:
[] it is necessary to be mindful of the fact that if the genuine link requirement
proposed by Nottebohm was strictly applied it would exclude millions of persons
from the benefit of diplomatic protection as in todays world of economic
globalisation and migration there are millions of persons who have moved away
from their State of nationality and made their lives in States whose nationality they
never acquire or have acquired nationality by birth or descent from States with
which they have a tenuous connection.4
However, the Nottebohm principles are still useful in cases of dual or
multiple nationality when the nationality of the claimant in order to be
accepted has to be predominant.
In the case of dual nationality, Article 7 of the ILC Draft Articles on
Diplomatic Protection states:
A State of nationality may not exercise diplomatic protection in respect of a person
against a State of which that person is also a national unless the nationality of the
former State is predominant, both at the time of the injury and the date of the
official presentation of the claim.5
Under customary international law, a state may exercise diplomatic
protection on behalf of one of its nationals with respect to a claim against
another state, even if its national also possessed the nationality of the other
state, provided that the dominant and effective nationality of the person was
that of the state exercising diplomatic protection. In this respect, customary law
has evolved from the earlier rule of non-responsibility under which diplomatic
protection could not be exercised in those circumstances.6

4. ILC, Report of the International Law Commission on the Work of its fifty-eighth
Session (1 May-9 June and 3 July-11 August 2006) UN Doc A/61/10, Chapter IV, 33.
5. Draft Articles on Diplomatic Protection, ibidem, 43.
6. Support for the rule of non-responsibility can be found in the 1930 Hague
Convention on Certain Questions Relating to the Conflict of Nationality Laws.
Article 4 provides that: A State may not afford diplomatic protection to one of its
nationals against a State whose nationality such person also possesses. See also
Art. 16(a) of the 1929 Harvard Draft Convention of Responsibility of States for
Damage Done in Their Territory to the Person or Property of Foreigners, (1929)
23 AJIL Special Supplement 133-139. See Art. 23(5) of the 1960 Harvard Draft
Convention on the International Responsibility of States for Injuries to Aliens,
reproduced in (1961) 55 AJIL 548; Article 4(a) of the resolution on Le caractre national
dune rclamation internationale prsente par un tat en raison dun dommage subi par un
individu adopted by the Institute of International Law at its 1965 Warsaw Session.

12 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

The Iran-United States Claims Tribunal 7 had recourse to the test of


dominant and effective nationality in that it had to determine whether a
claimant with dual US-Iranian nationality was to be regarded as predominantly
American or Iranian for purposes of bringing a claim before the Tribunal. In
Esphahanian v. Bank Tejarat,8 Chamber Two found that the claimant could
claim before the Tribunal because his dominant and effective nationality at all
relevant times [was] that of the United States and the funds at issue in the present case
related primarily to his American nationality, not his Iranian nationality.
Nevertheless, the Chamber distinguished the case as one in which the dual
national, rather than the state, brought his own claim before the international
tribunal against one of the states whose nationality he possessed.

2. Investment agreements
Some Bilateral Investment Treaties (BITs) include a single definition of
national which applies to both parties. Other BITs offer two definitions, one
relating to one Contracting Party and the other to the second Contracting Party.
For example the Finland-Egypt BIT9 provides that the term national means:
a)In respect of Finland, an individual who is a citizen of Finland according to
Finnish law.
b) In respect of Egypt, an individual who is a citizen of Egypt according to
Egyptian Law.
The US-Uruguay BIT10 defines national to mean:
a)For the United States, a natural person who is a national of the United
States as defined in Title III of the Immigration and Nationality Act.
b) For Uruguay, a natural person possessing the citizenship of Uruguay, in
accordance with its laws.
Some investment agreements require some link beyond nationality. For
example, the Germany-Israel BIT11 provides in its Article (1)(3)(b), that the term
nationals means with respect to Israel, Israeli nationals being permanent
residents of the State of Israel.

7. The Algiers Accords resolved the hostage crisis between Iran and the United
States. Pursuant to these Accords the Iran-US Claims Tribunal was established
in 1981 in order to adjudicate claims by nationals of each country following the
Iranian revolution.
8. Esphahanian v. Bank Tejarat (Case No. 157), Award No. 31-157-2 (29 March 1983),
reprinted in 2 IRAN-US C.T.R. 157 (1983). See also Case No. A/18, 5 IRAN-US C.T.R.
251 (1984).
9. Finland-Egypt BIT, entered into force on 5 February 2005.
10. US-Uruguay BIT, entered into force on 1 November 2006.
11. Germany-Israel BIT, signed on 24 June 1974, not entered into force yet.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
13
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

The criterion of permanent residence is sometimes used as an alternative


to citizenship or nationality. For instance in the Canada-Argentina BIT12 the
term investor means i) any natural person possessing the citizenship of or
permanently residing in a Contracting Party in accordance with its laws.
Natural persons that are covered by the Energy Charter Treaty (ECT)13 are
similarly defined by reference to each states domestic laws determining
citizenship or nationality but also extends coverage to permanent residents:
Investor means: a) with respect to a Contracting Party: i) a natural person
having the citizenship or nationality of or who is permanently residing in that
Contracting Party in accordance with its applicable law.
Article 201 of NAFTA equally provides in part that: National means a
natural person who is a citizen or permanent resident of a Party.
The new Canada Model FIPA which replaces the 2004 Model FIPA covers
citizens as well as permanent residents of Canada, but it expressly provides that
a natural person who is a national of both contracting parties shall be deemed
to be exclusively a national of the party of his or her dominant or effective
nationality. Not many investment agreements address the issue of dual
nationality.14 Nevertheless Dolzer and Stevens15 say that in the absence of treaty
regulation, general principles of international law would apply, according to
which the effective nationality of the individual would govern.16

3. ICSID Convention
Article 25(1) of the ICSID Convention provides that: The jurisdiction of
the Centre shall extend to any legal dispute arising directly out of an
investment between a Contracting State [] and a national of another
Contracting State []. With respect to natural persons, Article 25(2) of the
Convention defines National of another Contracting State to mean:
a) Any natural person who had the nationality of a Contracting State
other than the State party to the dispute on the date on which the parties

12. Canada-Argentina BIT, entered into force on 29 April 1993.


13. Energy Charter Treaty, entered into force in April 1998.
14. See also the 2005 United States-Uruguay BIT, Art. 1: Investor of a Party means a Party
or state enterprise thereof, or a national or an enterprise of a Party, that attempts to
make, is making, or has made an investment in the territory of the other Party;
provided, however, that a natural person who is a dual citizen shall be deemed to be
exclusively a citizen of the State of his or her dominant and effective citizenship.
15. R. Dolzer and M. Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers,
The Hague/Boston/London, 1995).
16. Ibidem, at 34. See the 1991 BIT between Israel and Romania which in its Protocol
provides that: With respect to physical persons an individual who possesses both
Israeli and Romanian citizenship who invests in Israel shall be considered as
Romanian investors, under Israeli law in force, for the purposes of this Agreement.

14 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

consented to submit such dispute to conciliation or arbitration as well as


on th e d ate on wh ich th e req uest was registered p ursuan t to
paragraph (3) of Article 28 or paragraph (3) of Article 36, but does not
include any person who on either date also had the nationality of the
Contacting State party to the dispute.
The ICSID Convention requires claimants to establish that they had the
nationality of a Contracting State on two different dates: the date at which the
parties consented to ICSIDs jurisdiction and the date of the registration of the
request for arbitration.
An extension of treaty rights to permanent residents cannot extend
ICSIDs jurisdiction beyond nationals of Contracting States to the ICSID
Convention.17
With respect to dual nationality, the ICSID Convention excludes dual
nationals, if one of the nationalities is that of the host state.18
In practice, investment treaty jurisprudence under the ICSID Convention
as to the nationality of natural persons is limited to four cases brought by dual
nationals.
The first case is Eudoro A. Olgun v. Republic of Paraguay.19 Mr. Olgun, a
dual national of Peru and the United States, brought a claim against the
Republic of Paraguay under the Peru-Paraguay BIT, for the treatment allegedly
received from the Paraguayan authorities, in relation to his investment in a
company for the manufacture and distribution of food products in Paraguay.
The arbitral tribunal rejected Paraguays objection to jurisdiction based on the
claimants dual nationality by relying on the fact that Mr. Olguns Peruvian
nationality was effective, which was deemed enough for purposes of the ICSID
Convention and the BIT.
In Soufraki v. United Arab Emirates,20 the claim was related to a port
concession in Dubai. When a dispute arose, Mr. Soufraki, a dual Italian and
Canadian national, invoked the Italy-United Arab Emirates BIT to bring a claim
based on his Italian nationality. The Tribunal investigated his claim of Italian
nationality and found that he had lost it when he acquired Canadian citizenship.

17. Schreuer refers to the Report of the Executive Directors which explains the
provision of dual nationality as follows: It should be noted that under clause a)of
Article 25(2) a natural person who was a national of the State party to the dispute
would not be eligible to be a party in proceedings under the auspices of the Centre,
even if at the same time he had the nationality of another State. This ineligibility
is absolute and cannot be cured even if the State party to the dispute had given its
consent in ICSID Convention: A Commentary (CUP, Cambridge 2000).
18. Amerasinghe (n. 3) at 205.
19. Eudoro A. Olgun v. Republic of Paraguay, ICSID Case No. ARB/98/5, Award, 26 July 2001.
20. Hussein Nuaman Soufraki v. United Arab Emirates, ICSID Case No. ARB/02/7, Award,
7 July 2004.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
15
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

The fact that he could present certificates of nationality only provided prima facie
evidence of his Italian nationality.21 The tribunal therefore held that he was not
entitled to bring a claim under the Italy-U.A.E. BIT as an Italian national.22
The Tribunal recognised the difference between the ease with which an
investor may incorporate an investment in a favourable jurisdiction in order to
have the most advantageous BIT coverage and the many difficulties faced by
Mr. Soufraki as a natural person in proving that he had Italian nationality,
when he had previously lost it:
had Mr. Soufraki contracted with the United Arab Emirates through a
corporate vehicle incorporated in Italy, rather than contracting in his personal
capacity, no problem of jurisdiction would now arise. But the Tribunal can only
take the facts as they are and as it has found them to be.23
On 4 November 2004, Mr. Soufraki submitted a request for annulment of
the Arbitral Award issued on 7 July 2004 because of a manifest excess of power
by the Tribunal and its failure to state reasons. The core issue was whether the
Tribunal could make an independent determination of the nationality of the
claimant or whether it was bound by the determination made by the Italian
authorities relying on passports and certificates of nationality issued to the
claimant. The ad hoc Committee found that the arbitral tribunal correctly
stated that certificates issued by consular authorities are not binding on the
tribunals determination of the claimants nationality in order to ascertain its
own jurisdiction. The presumption in favor of the existence of the Italian
n ationality was not corroborated by further evidence sh ow ing that
Mr. Soufraki had reacquired his lost Italian nationality.
In the case Champion Trading v. Egypt, 24 US nationals who were also
found to be Egyptian nationals were denied the right to bring a claim against
Egypt (based on the US-Egypt BIT) because of the rule in Article 25(2)a)
excluding nationals having the nationality of the Contracting State Party to
the dispute. The tribunal dismissed three claims brought by these individual
shareholders in the National Cotton Company (NCC), a firm involved in cotton
processing and trading, although it affirmed jurisdiction over two related

21. Soufraki, para. 63.


22. An interesting argument was raised by the defendant but was not elaborated by
the Tribunal: had Mr. Soufraki qualified as an Italian national, would he still need
to meet a further test of effective or dominant nationality under international
law? Such a test might have required that, as a dual passport-holder, he
demonstrate that he had closer or more effective ties with the home State
under whose BIT he sought to bring a claim (i.e. Italy).
23. Soufraki, para. 83.
24. Champion Trading Company Ameritrade International Inc., James T. Wahba, John B.
Wahba, Timothy T. Wahba v. Arab Republic of Egypt, ICSID Case No. ARB/02/9,
Decision on Jurisdiction 21 February 2003.

16 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

claims brought by US corporate entities, Champion Trading Company and


Ameritrade International Inc., which each held larger stakes in the NCC.
The individual claimants argued that the tribunal should employ the
international law test of real or effective nationality, which they contended
would show that they have not effectively acquired Egyptian nationality. In
the end, the tribunal did not wholly rule out the applicability of such a test in
the ICSID context, where it would be manifestly absurd or unreasonable for a
person to be classified as a dual national, perhaps where a third or fourth
generation individual has no ties whatsoever with the country of its
forefathers and where a test of real or effective nationality might be
appropriate to use in ICSID. However, the tribunal was convinced that there
could be little doubt that the claimants in this case had sufficient ties to Egypt
and that that they were therefore clearly excluded from ICSID arbitration. It was
relevant that their Egyptian nationality had been used for the registration of
their business. After dismissing jurisdiction for the individual claims, the
tribunal upheld jurisdiction for the claims brought by the two corporate entities
observing that there was no bar to ICSID claims by companies whose shares
were held by dual nationals of the two parties engaged in the arbitration.
In the case Siag and Vecchi v. Egypt,25 Mr. Siag and his mother Ms. Vecchi,
former Egyptian nationals submitted a claim under the Italy-Egypt BIT as
Italian nationals. Because the ICSID Convention does not allow persons to
initiate arbitration against their own state, the tribunal examined extensively
the Egyptian law in order to determine whether they had ceased to be Egyptian
nationals. Although all three arbitrators held that Ms. Vecchi had lost her
Egyptian nationality on the date she re-acquired her Italian nationality, one
tribunal member,26 in a partial dissenting opinion disagreed that this was the
case with Mr. Waguih Siag. Two of the three arbitrators held that Mr. Waguih
Siag had lost his Egyptian nationality by virtue of his failure to take formal
steps to retain it.

II. Legal persons


The issues related to the nationality of legal persons can be even more
complicated than for natural persons. Companies today operate in ways that
can make it very difficult to determine nationality. Layers of shareholders,
both natural and legal persons themselves, operating from and in different
countries make the traditional picture of a company established under the

25. Waguih Elie George Siag and Clorinda Vecchi v. The Arab Republic of Egypt, ICSID case
No. ARB/05/15, Decision on Jurisdiction, 11 April 2007. Mr. Siag and his mother
Ms. Vecchi claimed that Egypt confiscated a property which had been purchased
by their Egyptian company and slated for development into a resort property.
26. See F.O. Vicuas Dissenting Opinion in the Decision cited above.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
17
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

laws of a particular country and having its centre of operations in the same
country, more of a rarity than a common situation. It is quite common that a
company can be established under the laws of country A, have its centre of
control in country B and do its main business in country C. Tribunals have
usually refrained from engaging in substantive investigations of a companys
control and they have usually adopted the test of incorporation or seat rather
than control when determining the nationality of a juridical person.27
Accordingly, it is the general practice in investment treaties to specifically
define the objective criteria which make a legal person a national, or investor,
of a Party, for purposes of the agreements, rather than to simply rely on the
term nationality and international law. Since the objective criteria used may
include investors to whom a Party would not wish to extend the treaty
protection, some treaties themselves include denial of benefit clauses
allowing exclusion of investors in certain categories.
OECD governments are often confronted with requests by their investors
to advocate on their behalf in their relations with the host state, before any
arbitral claims are presented. It seems that in such situations government
determinations on the nationality of an investor are not based exclusively on
BITs provisions, but often use different, more flexible tests. The ICSID
Convention which limits the jurisdiction of the Centre to disputes between
one contracting state and a national of another contracting state, provides
specific rules on the nationality of claims in its Article 25 and investment
treaties specify any other or additional requirements that the contracting
states wish to see apply to determine the standing of claimants.
A related issue is the question of the extent to which shareholders can
bring claims for injury sustained by the corporation, an issue that has evolved
significantly since the ICJ decision of Barcelona Traction.

1. Investment agreements
There is no single test used by all investment treaties to define the link
required between a legal person seeking protection under the treaty and the
contracting state under whose treaty the investor asks for protection. 28
Bilateral investment treaties have essentially relied on the following tests29 for

27. Schreuer (n. 17) Article 25, para. 465.


28. Judge Jessup, in his Separate Opinion in Barcelona Traction said: [t]here are two
standard tests of the nationality of a corporation. The place of incorporation is
the test generally favoured in the legal systems of the common law, while the siege
social is more generally accepted in the civil law systems.
29. Judge Jessup, in his Separate Opinion in Barcelona Traction said: [t]here are two
standard tests of the nationality of a corporation. The place of incorporation is
the test generally favoured in the legal systems of the common law, while the siege
social is more generally accepted in the civil law systems.

18 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

determining the nationality of legal persons: i) the place of constitution in


accordance with the law in force in the country; ii) the place of incorporation
or where the registered office is; iii) the country of the seat, i.e. where the place of
administration is; and iv) less frequently, the country of control. Most investment
treaties use a combination of the tests30 for nationality of legal persons so that a
company must satisfy two or more of them in order to be covered. The most
common approach is a combination of the place of incorporation or constitution
and seat, although the combination of incorporation or constitution and control
and also of all three tests is also found.
Place of constitution in accordance with the law. In order to determine the
nationality of a legal person, some bilateral investment treaties have adopted
the test of the place of constitution in accordance with the law in force in the
country. By so doing, the contracting parties simply make reference to
national law provisions of each contracting party in order to establish the legal
persons entitled to protection. A legal person constituted in accordance with
the laws of a contracting party will be considered an investor of that state.
Since states are free to chose the criteria for the attribution of nationality to
legal persons, such criteria be they incorporation, seat or control, etc. may
vary in accordance with the specific provisions of the applicable laws of each
contracting party. Investment treaties concluded by Greece have often
followed this pattern in order for legal persons to qualify as investors under
investment agreements. Article 1 of the Greece-Cuba BIT31 defines as investors:
with regard to either Contracting Party, legal persons constituted in
accordance with the laws of that Contracting Parties.
The US-Uruguay BIT32 for instance provides that:
Enterprise of a Party means an enterprise constituted or organised
under the law of a Party and a branch located in the territory of a Party
and carrying out business activities there.33

30. A. Sinclair notes that, cultural, economic and political factors will influence
which test a particular State will prefer to apply [] No question arises as to the
validity of the choices, nor is it appropriate to identify a general rule in the abstract
because different States legitimately take different approaches to qualification for
protection in The Substance of Nationality Requirements in Investment Treaty
Arbitration (2005) 20(2) ICSID Review Foreign Investment Law Journal.
31. Greece-Cuba BIT, entered into force on 18 October 1997.
32. US-Uruguay BIT, entered into force on 1 November 2006.
33. In the US Model BIT, enterprise is further defined as any entity constituted or organised
under applicable law, whether or not for profit, and whether privately or governmentally owned
or controlled, including a corporation, trust, partnership, sole proprietorship, joint venture,
association, or similar organisation; and a branch of an enterprise.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
19
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

The most recent definitions section of the Canada Model FIPA34 reads:
enterprise means: i) Any entity constituted or organised under
applicable law, whether or not for profit, whether privately-owned or
governmentally-owned, including any corporation, trust, partnership,
sole proprietorship, joint venture or other association.
The Energy Charter Treaty (ECT) in its article 1(7)(a)(ii) defines investor
with respect to a contracting Party to include a company or other organisation
organised in accordance with the law applicable in that Contracting Party. This
broad definition is somewhat qualified by Article 17 of the ECT which calls for
an inquiry into a companys substantive connection with the state in which it is
incorporated35 (see below, denial of benefits clause).
The draft MAI defined as investor: A legal person or any other entity
constituted or organised under the applicable law of a Contracting Party [],
whether or not for profit, and whether private or government owned or
controlled, and includes a corporation, trust, partnership, sole proprietorship,
joint venture, association or organisation.
Place of incorporation. In othe r trea ties the pla ce of constitution in
a ccordan ce w ith the law s is ofte n found in combin ation w ith the
incorporation test. Because of its potential opening for treaty shopping, it may
be accompanied by a denial of benefits clause which allows the state party
c on cern e d to de ny trea ty protection to a com pa ny, un d er c e rtain
circumstances, which is controlled by nationals of a non-party. The UK is one
of the countries which, in the majority of their BITs, use the place of
incorporation or constitution as the sole test. The UK-El Salvador36 and the
UK-Yugoslavia BIT37 for instance, define an investor as:
i) in respect of the United Kingdom: [] corporations, firms and
associations incorporated or constituted under the law in force in any
part of the United Kingdom or in any territory to which this Agreement is
extended [].
The two cases that follow show how arguments related to the economic
reality have not succeeded in preventing tribunals from applying the test that
the contracting parties have agreed upon and included in their treaties.

34. See Article 1, Definitions. The 2004 Canada Model FIPA has been recently revised.
35. These companies are usually called mailbox or brass-plate companies. They
are typically favoured for tax and regulatory reasons and also for treaty protection
availed to the investors.
36. UK-El Salvador BIT, 1 December 2001.
37. UK-Yugoslavia BIT, not yet in force, presented to the UK Parliament in
February 2007.

20 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

In Tokios Tokels v. Ukraine, 38 the Tribunal held that a company


incorporated in Lithuania was entitled to bring a claim against the Ukraine
under the Lithuania-Ukraine BIT although it was controlled and 99 per cent
owned by Ukrainian nationals. Tokios Tokels, the claimant company, was
qualified as a Lithuanian investor under the Lithuania-Ukraine BIT that
defined corporate nationality by incorporation:39
According to the ordinary meaning of the terms of the Treaty, the Claimant is an
investor of Lithuania if it is a thing of real legal existence that was founded on a
secure basis in the territory of Lithuania in conformity with its laws and
regulations. The Treaty contains no additional requirements for an entity to
qualify as an investor of Lithuania.40
Ukraine argued, however, that the tribunal should deny jurisdiction on
the ground that the Ukrainian owners had incorporated the company in
Lithuania for the sole purpose of availing themselves of the protection of the
Lithuania-Ukraine BIT. Although the Tribunal acknowledged that a number of
investment agreements provide for the denial of benefits to entities controlled
by the host states own nationals, it noted that the Ukraine-Lithuania BIT did
not do so: it is not for Tribunals to impose limits on the scope of BITs not found in the
text.41 The tribunal held that, consistent with the ICJs ruling in the Barcelona
Traction,42 the clear treaty language could only be avoided and the corporate
veil doctrine applied if there was a showing of abuse or fraud.43 The tribunal

38. Tokios Tokels v. Ukraine, Case No. ARB/02/18, 29 April 2004.


39. The language in the BIT was: Any entity established in the territory of the Republic
of Lithuania in conformity with its laws and regulations.
40. Tokios Tokels v. Ukraine, para. 28.
41. Idem, para. 36.
42. In Barcelona Traction, the ICJ had to consider an application by Belgium
espousing a claim of Belgian nationals who were the majority shareholders in a
Canadian incorporated company whose assets included Spanish subsidiaries.
The Court held that Belgium was unable to pursue claims against Spain for
damage done to the company.
43. In Barcelona Traction, the ICJ indicated that the wealth of practice already
accumulated on the subject in municipal law indicates that the veil is lifted, for instance, to
prevent the misuse of the privileges of legal personality, as in certain of fraud or
malfeasance, to protect third persons such as a creditor or purchaser, or to prevent the
evasion of legal requirements or of obligations. Barcelona Traction, Light and Power Co.
Ltd. (Belgium. v. Spain), 1970 I.C.J., Reports 3, para. 58.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
21
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

found that there was no such abuse or fraud as the founding of Tokios Tokels
predated the Lithuania-Ukraine BIT.44
In Saluka v. The Czech Republic,45 an arbitral tribunal arrived at similar
conclusions as to the validity of the place of incorporation. The arbitration
arose out of the reorganisation and privatisation of the Czech bank system.
Saluka Investments BV, a Dutch Company, which had acquired shares of the
Czech state-owned bank IPB, claimed a violation of Article 5 (deprivation of
investment) and Article 3 (fair and equitable treatment) of the BIT between the
Netherlands and the Czech Republic. According to the Czech Republic, the real
investor was not Saluka but an English-registered company, Nomura Europe (a
subsidiary of the Japanese Investment Bank). It asserted that Saluka was
merely a shell company with no real economic interest in the IPB shares and
therefore it failed to meet the definition of an investor under the BIT, because
as an agent for the parent corporation Nomura could not benefit from the BIT.
The tribunal rejected these arguments and decided based on the language
of the treaty which defined the investor as legal persons constituted under the
law of one of the Contracting Parties. The tribunal considered the
disadvantages of the formalistic test, in particular the risk for treaty shopping,
but respected the contracting parties choice of definition of investor.46
Company seat. Possibly with the intention of preventing treaty shopping
by acquiring or establishing a shell company in a jurisdiction where a relevant
BIT applies, some states require that in order to qualify as an investor, a legal
person should not only be constituted or incorporated in the host country but
also have its seat and/or effective management there. The rationale is
different with respect to BITs of EU member states (e.g. Germany-China BIT).
Such BITs extend their benefits to companies which transfer their seat to
another member state without giving up the original form of incorporation.
An example of a treaty using the company seat as the basis for attributing
nationality is the 2003 Germany-China BIT.47 The treaty defines company to

44. This decision of the Tribunal was taken by majority of the arbitrators. The
President of the Tribunal, Professor P. Weil, issued a strong dissenting opinion on
this part of the decision. He felt that the ICSID mechanism and remedy were not
meant for investments made in the State by its own citizens with domestic capital
through the channel of a foreign entity. He Stated: When it comes to mechanisms and
procedures involving States and implying therefore, issues of public international law,
economic and political reality is to prevail over legal structure, so much that the application
of the basic principles rules of public international law should not be frustrated by legal
concepts and rules prevailing in the relations between private economies and juridical
players, Tokios Tokels, para. 24.
45. Saluka Investments B.V. v. The Czech Republic, under UNCITRAL Rules, Partial Award
17 March 2006.
46. Saluka, paras. 240-1.
47. Germany-China BIT, entered into force on 11 November 2005.

22 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

include in respect of Germany any juridical person as well as any commercial


or other company or association with or without legal personality having its
seat in the territory of the Federal Republic of Germany [].
Other BITs make the location of the investors seat or sige social one of
the necessary conditions. Examples include:
The France-Singapore BIT48 in its article 1(3)(a) restricts its coverage in the
case of French bodies corporate, to legal persons constituted in France
conforming to the French law and having a Head Office in France.
The Italy-Libya BIT49 in its article 1(3) also applies to juridical persons
organised under the law of the contracting state and having in that territory its
sige social or main headquarters.
The ASEAN Agreement for the Promotion and Protection of Investments also
uses a combination of the tests of the place of constitution or incorporation and
the company seat. It provides that the term company of a contracting Party
shall mean a corporation, partnership or other business association, incorporated
or constituted under the laws in force in the territory of any Contracting Party
wherein the place of effective management is situated [emphasis added].
In the first case under the ASEAN Agreement, Yaung Chi Oo Trading Pte
Ltd. v. Government of the Union of Myanmar,50 the tribunal observed that this
effective management requirement was primarily included in the ASEAN
Treaty to avoid what has been referred to as protection shopping, i.e. the
adoption of a local corporate form without any real economic connection in
order to bring a foreign entity or investment within the scope of treaty
protection. It finally held that the claimant was a Company of a Contracting
State other than Myanmar. It noted that unless some indication of improper
protection shopping exists, the company would be a company of the state of
incorporation when the legal requirements of that state on this issue are
satisfied and there are some other indicia of management in that state.51 The
Tribunal decided that the requirements were satisfied: i) the claimant had a
resident director in Singapore; and ii) the claimant also conducted certain
business activities (procurement) from Singapore. According to the Tribunal,

48. France-Singapore BIT, entered into force on 18 October 1976.


49. Italy-Libya BIT, entered into force on 20 October 2004.
50. Yaung Chi Oo Trading Pte Ltd v. Government of the Union of Myanmar, ICSID Additional
Facility Rules Case No. ARB/01/1 (31 March 2003), 42 ILM 540 (2003). Yaung Chi Oo
Trading Pte Ltd., a Singapore-incorporated company maintained a brewery
investment in Myanmar which, it claimed, had been expropriated in violation of the
ASEAN Agreement. The fact that the Claimants management spent considerable
time in Myanmar attending to its investment prompted Myanmar to claim that the
claimants place of effective management had shifted to Myanmar.
51. Idem, paras. 49 and 62.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
23
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

with these conditions satisfied, the nationality of the companys shareholders


was irrelevant, as was the source of the capital.
The UK-Philippines BIT52 in its article 1(4) stipulates that: A Company of
a Contracting Party must be incorporated or constituted and actually doing
business under the laws in force in any part of the territory of that Contracting
Party where a place of effective management is situated[emphasis added].
The Belgian-Luxembourg-Croatia BIT53 in its article 2(b), provides that an
investors seat must be in its home state, and that the investor must engage
in local activities in the home State territory.
Control. It is not an easy task to determine what control means. The Draft
4th Edition of the OECD Benchmark Definition of Foreign Investment 54
emphasises the percentage of ownership or voting power in a company as the
measure of control, constituting the quantitative approach:
To classify an enterprise within a country on the basis of the presence or absence
of effective foreign control [emphasis in original text], the criterion
recommended for use is whether or not a majority of ordinary shares or voting
power (more than 50% of the capital) is held by a single foreign direct investor or
by a group of associated investors acting in concert []. Application of this
criterion avoids the use of subjective concepts or case by case review [].
The Tribunal in the NAFTA case Thunderbird v. Mexico 55 gave the
following interpretation of what might constitute control:
Control can also be achieved by the power to effectively decide and implement
the key decisions of the business activity of an enterprise and, under certain
circumstances, control can be achieved by the existence of one or more factors
such as technology, access to supplies, access to markets, access to capital, know-
how and authoritative reputation.56
The Convention establishing the Multilateral Investment Guarantee Agency
combines the tests of the place of incorporation with the company seat but
also allows the use of the place of ownership or control as an alternative.
Article 13a)ii) provides that a legal entity is an eligible investor under the
Agencys insurance program provided that such juridical person is
incorporated and has its principal place of business in a member or the
majority of its capital is owned by a member or members or nationals thereof,
provided that such member is not the host country in any of the above cases.

52. UK-Philippines BIT, entered into force on 2 January 1981.


53. Belgium/Luxembourg-Croatia BIT, entered into force on 19 December 2003.
54. OECD Benchmark Definition of Foreign Investment (Draft) 4th Edition,
DAF/INV/STAT(2006)2/REV. 3, 2007.
55. International Thunderbird Gaming Corporation v. United Mexican States, Award,
26 January 2006.
56. Thunderbird, para. 180.

24 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

The test of control is often combined with other formal criteria such as
incorporation and seat to justify coverage of an investor under the treaty. This
element can be found in the French model BIT and some other BITs concluded
by Sweden, Switzerland, Belgium-Luxembourg and the Netherlands.
The French model BIT defines the term investor as follows:
b) Toute personne morale constitue sur le territoire de lune des
Parties contractantes, conformment la lgislation de celle-ci et y
possdant son sige social, ou contrle directement ou indirectement par des
nationaux de lune des Parties contractantes, ou par des personnes morales
possdant leur sig e social sur le territoire de lune des Parties
contractantes et constitues conformment la lgislation de celle-ci.
Article 1 of the Swedish-India BIT 57 uses as well a combination of
incorporation/ownership/control tests and provides that:
d) companies mean any corporations, firms and associations
incorporated or constituted under the law in force in the territory of
either Contracting Party, or in a third country if at least 51 per cent of the
equity interest is owned by investors of that Contracting Party, or in
which investors of that Contracting Party control at least 51 per cent of
the voting rights in respect of shares owned by them.
The Belgium/Luxembourg-Philippines BIT58 does the same:
Investor shall mean [] the companies, i.e. with respect to both
Contracting Parties, a legal person constituted on the territory of one
Contacting Party in accordance with the legislation of that Party having
its head office on the territory of that Party, or controlled directly or
indirectly by the nationals of one Contracting Party, or by legal persons
having their head office in the territory of one Contracting Party and
constituted in accordance with the legislation of that Party.
The Switzerland-Ethiopia BIT 59 uses different language to describe
control:
Le terme investisseur dsigne, en ce qui concerne chaque Partie
contractante :
[]
b. toute personne morale qui est constitue ou autrement organise
conformment la lgislation de cette Partie contractante et qui exerce
dimportantes activits conomiques sur le territoire de cette mme
Partie contractante ;

57. Sweden-India BIT entered into force on 1 April 2001.


58. Belgium/Luxembourg-Philippines BIT entered into force on 19 December 2003.
59. Switzerland-Ethiopia BIT entered into force on 7 September 1998.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
25
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

c. toute personne morale qui nest pas tablie conformment la


lgislation de cette Partie contractante :
i) lorsque plus de 50 % de son capital social appartient des personnes
de cette Partie contractante ;
ii) lorsque des personnes de cette Partie contractante ont la capacit de
nommer une majorit de ses administrateurs ou sont autrement
habilites en droit diriger ses oprations.
The Netherlands-Bulgaria BIT60 covers:
Legal persons constituted under the law of one of the Contracting Parties
[] Legal persons not constituted under the law of that Contracting Party
but controlled directly, or indirectly by natural persons as defined in a) or by
legal persons as defined in b).
The Netherlands-Bolivia BIT61 includes the following additional language:
[] legal persons constituted in accordance with the law of that
Contracting Party [] Legal persons controlled directly or indirectly, by
nationals of that Contracting Party, but constituted in accordance with
the law of the other Contracting Party.
This latter BIT was the basis for the case Aguas de Tunari, S.A. v. Republic
of Bolivia.62 Aguas del Tunari (AdT) initiated ICSID arbitration proceedings
alleging that several acts of Bolivia amounted to an expropriation of its
investment in violation of the Netherlands-Bolivia BIT. The majority of the
Tribunal dismissed Bolivias objections to jurisdiction.
When Bechtel informed the Bolivian water and electricity authorities of
proposed changes in AdTs ownership, transferring International Water Ltd.s
shares to a Dutch company, the Bolivian water authorities gave their approval.
However, Bolivia disputed both the content and the legal effect of such
approval.
At the core of Bolivias objections was the argument that Bolivia could not
have consented to an arrangement by which a company registered in Bolivia

60. Netherlands Bulgaria BIT, entered into force on 1 March 2001.


61. Netherlands-Bolivia BIT, entered into force on 1 November 1994.
62. Aguas de Tunari v. Bolivia, ICSID case No. ARB/02/03, Decision on Jurisdiction,
21 October 2005. The background of the dispute concerns Bolivias international
tender process to privatise water, sewage services and an electricity generation
license in 1998. Aguas de Tunari (AdT) is the locally incorporated Bolivian entity for
a consortium led by International Water, Ltd., incorporated in the Cayman Islands,
and 100% owned by Bechtel Enterprise Holding, a US company. A concession
agreement between the Bolivian government and AdT took effect in 1999, and
provided for a 40-year relationship between AdT and the Bolivian water and
electricity authorities. The concession agreement resulted in significant public
controversy in Bolivia, especially among labor organisations and civil society groups.

26 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

such as AdT could, at any time, restructure itself as a Dutch company in 1999
in a post facto attempt to claim the benefit of the Netherlands-Bolivia BIT. It
argued that the claimant was controlled by the US-based Bechtel Corporation,
and that the Netherlands shareholders were merely shell companies which
did not exert any real control.
The Tribunal examined the question of whether AdT was a national of the
Netherlands in accordance with Article 1b) of the treaty which includes legal
persons controlled directly or indirectly, by nationals of that Contracting Party, but
constituted in accordance with the law of the other Contracting Party. The
Tribunal, after a lengthy analysis of the meaning of the phrase controlled
directly or indirectly in the treaty, concluded that Bolivias interpretation would
frustrate the treatys purpose. It concluded that the phrase controlled directly
or indirectly means that one entity may be said to control another entity (either
directly, that is without an intermediary entity, or indirectly) if that entity
possesses the legal capacity to control the other entity:63
[I]t is not uncommon in practice and absent a particular limitation not illegal
to locate ones operations in a jurisdiction perceived to provide a beneficial
regulatory and legal environment in terms, for example, of taxation or the
substantive law of the jurisdiction, including the availability of a BIT.64
Although titled bilateral investment treaties, this case makes clear that which
has been clear to negotiating States for some time, namely, that through the
definition of national or investors, such treaties serve in many cases more
broadly as portals through which investments are structured, organised, and,
most importantly, encouraged through the availability of a neutral forum.65
Sedelmayer v. Russia66 is the first case in which an arbitral tribunal has
interpreted the notion of investor in a way that allowed the protection of an
investment made by the intermediary of a company incorporated in a third
state.67 In this case, Sedelmayer, a German national, was the sole owner and
CEO of SGC International incorporated in Missouri, USA. The latter made an
investment in Russia in the area of enforcement equipment. When a dispute
arose from this activity, Mr. Sedelmayer initiated an arbitration procedure
under the German-Russia BIT (since the US-Russia BIT was not in force).

63. One of the arbitrators, Jos Luis Alberro-Semerana, issued a declaration of dissent
in which he maintained that Bolivia could not have consented to face arbitration
from an unlimited universe of beneficiaries and that the tribunal should have
undertaken further inquiry as to the motivations and the timing of Bechtels
decision to restructure the corporate ownership of the claimant company.
64. Idem, para. 330(d).
65. Idem, para 332.
66. Franz Sedelmayer v. The Russian Federation, SCC Award, 7 July 1998.
67. See the analysis of the case by W. Ben Hamida La notion dinvestisseur, La Gazette
du Palais, December 2005.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
27
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

The Tribunal held that SGC international was a simple vehicle by which
Mr. Sedelmayer has transferred his capital to Russia and that he was a de facto
investor. Although the language of the Treaty did not mention the element of
control but only the elements of incorporation and sige social, the Tribunal
accepted jurisdiction and noted that:
The question then arises whether an individual who makes his investments
through a company might be regarded as an investor a de facto investor under
the treaty. This question concerns the general issue to what extent the theory of
control may be applied. [] during recent years, there has been a growing support
of the control theory [] In the Tribunals opinion, the mere fact that the Treaty is
silent on the point now discussed should not be interpreted so that Mr. Sedelmayer
cannot be regarded as a de facto investor[emphasis in the original].68
Denial of benefits. As investors try to build their legal structure in their
favour, states may also seek in advance to avoid claims from certain entities to
which they did not intend to offer treaty protection. Therefore, some treaties
include a denial of benefits clause by which the state party to the Treaty is
entitled to deny the treaty protection to investors incorporated in one of the
states party to the treaty but under control of investors of a third country not
party to the treaty or when they do not have any substantial activity in the
country of incorporation. This provision gives the host state the authority
effectively to carve out from the definition of investor shell companies
owned by nationals of a third-country or the host state and companies owned
by certain third-country aliens.69
The Austria-Libya70 and Austria-Lebanon71 BITs also include a denial of
benefits clause:
A Contracting Party may deny the benefits of this Agreement to an
investor of the other Contracting Party and to its investments, if investors
of a Non-Contracting Party own or control the first mentioned investor
and that investor has no substantial business activity in the territory of
the Contracting Party under whose law it is constituted or organised.

68. One of the arbitrators, Professor S. Zykin, issued a very forceful dissenting opinion
based in particular on the lack of the criterion of control in the BIT. He concluded
that: The claimant could have made investments personally or through a German
company, but instead he preferred to act [] for tax reasons through a company of
a third State. It seems unlikely that the purpose of the 1989 Treaty between Russia
and Germany was to encourage such kind of investment and to offer them
protection []. Dissenting opinion, paras. 1-4.
69. See B. Legum (n. 1).
70. Austria-Libya BIT, entered into force on 1 January 2004.
71. Austria-Lebanon BIT, entered into force on 20 September 2002.

28 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

The draft MAI provided for a choice of clauses for denial of benefits.72
a. [Subject to prior notification to and consultation with the Contracting
Party of the investor] a Contracting Party may deny the benefits of the
Agreement to an investor [as defined in 1ii)] and to its investments if
investors of a non-Party own or control the first mentioned investor and
that investor has no substantial business activities in the territory of the
Contracting Party under whose law it is constituted or organised, or
b. [Subject to prior notification and consultation in accordance with
Articles XXX (Transparency) and XXX (Consultations),] a Contracting
Party may deny the benefits of this Agreement to an investor of another
Contracting Party that is an enterprise of such Contracting Party and to
investments of such investors if investors of a non-Contracting Party
own or control the enterprise and the enterprise has no substantial
business activities in the territory of the Contracting Party under whose
law it is constituted or organised.
The NAFTA in its Article 1132(2),73 the new US74 and Canada75 Model BITs, the
US FTAs with Chile,76 US-CAFTA-Dominican Republic,77 Australia,78 Colombia,79

72. Views differed on whether the definition of investment should cover investments
indirectly owned or controlled by investors of a Party. Some delegations are of the
opinion that covering such investment offers maximum protection to investors,
including access to MAI dispute settlement. In addition, those delegations believe that
this approach offers the most flexibility to investors in managing their capital flows,
and avoids diverting investment flows from developing countries. The Group
considered four cases: a) investment by an investor established in another MAI Party,
but owned or controlled by a non-MAI investor (example: an investment in Austria by
a Belgian subsidiary of a non-MAI parent); b) investment by an investor established in
a non-MAI Party, but owned or controlled by a MAI Party investor (example: an
investment in Canada by a non-MAI subsidiary of a Danish parent); c) investment by
an investor established in another MAI Party, but owned or controlled by an investor
of a third MAI Party (example: an investment in France by a German subsidiary of a
Hungarian parent); and d) investment in a MAI Party by an investment there covered
by the MAI (example: an investment in Italy by an Italian subsidiary of a Japanese
parent). There was a broadly shared view that case a) investments should be covered
by the MAI. Most delegations favoured providing for certain exclusions in a denial of
benefits clause which would permit, but not require, exclusion. Some delegations
were concerned about possible abuse of this provision. It was suggested that the
condition for exclusion would be where the MAI investor lacked substantial business
activity in the MAI Contracting Party. One delegation suggested limiting this to cases
in which the investor was constituted for no other purpose than obtaining MAI
benefits (exact wording not finalised). There was wide support for covering case b)
investments; however, whether to do so was considered a policy issue to be
considered by the Negotiating Group. There was consensus that case c) and case d)
investments would be covered by the MAI.
73. NAFTA Article 1113(2).
74. US Model BIT, Article 17.
75. Canada FIPA, Article 18.
76. Article 10.11, US-Chile FTA.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
29
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Morocco,80 Panama,81 Peru82 and the Canada-Chile FTA83 contain similar language
with some variation. Article 17 of the US Model BIT provides as follows:
1. A Party may deny the benefits of this Treaty to an investor of the other
Party that is an enterprise of such other Party and to investments of that
investor if persons of a non-Party own or control the enterprise and the
denying Party:
a) does not maintain diplomatic relations with the non-Party; or
b) adopts or maintains measures with respect to the non-Party or a
person of the non-Party that prohibit transactions with the enterprise or
that would be violated or circumvented if the benefits of this Treaty were
accorded to the enterprise or to its investments.
2. A Party may deny the benefits of this Treaty to an investor of the other
Party that is an enterprise of such other Party and to investments of that
investor if the enterprise has no substantial business activities in the
territory of the other Party and persons of a non-Party, or of the denying
Party, own or control the enterprise.
This clause is also found in Part III, Article 17, of the Energy Charter Treaty
which stipulates:
Each Contracting Party reserves the right to deny the advantages of this
Part to:
1) a legal entity if citizens or nationals of a third State own or control such
entity and if that entity has no substantial business activities in the Area
of the Contracting Party in which it is organised.
The two qualifications of i) substantial business connection and
ii) ownership or control residing in the territory of an ECT Contracting Party
are cumulative.
The Plama v. Bulgaria 84 decision on jurisdiction rendered by an ICSID
tribunal under the Energy Charter Treaty provides guidance for the
interpretation of the meaning of the denial of benefits clauses with regard
both to its conditions of exercise and substantial requirements. Unlike most
investment treaties, the denial of benefits clause provided for under the ECT,
Article 17(1) does not operate as a denial of all benefits to a covered investor

77. Article 10.12(2), US-CAFTA-Dominican Republic.


78. Article 11.12, US-Australia FTA.
79. Article 10.12, US-Colombia FTA.
80. Article 10.11, US-Morocco.
81. Article 10.12, US-Panama FTA (under negotiation text as of January 2007).
82. Article 10.12, US-Peru FTA.
83. Article G-13, Canada-Chile FTA.
84. Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision
on Jurisdiction, 8 February 2005, reprinted in 20 ICSID Rev.-FILJ 262 (2005).

30 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

under the treaty but is expressly limited to a denial of the advantages related
to the substantial protection under Part III of the ECT.85 Taken into account the
specific language of the ECT, the Tribunal ruled against Bulgaria submissions
and held that Art. 17(1) is related to the merits of the dispute and cannot be
invoked to support a complaint to the jurisdiction of the tribunal. By contrast,
the right to deny provision provided for in many other BITs can result in a filter
on the admissibility of claims.86
The Tribunal addressed the question of the conditions under which the
right to deny the benefits under the treaty may be exercised. The issue at stake
was whether the denial of benefits under Article 17(1) operates automatically
and requires no further action from the host state as argued by the
respondent, or whether it requires the right to deny to be exercised through
positive action taken by the host state as argued by the claimant.
In this case, Bulgaria, after it had received the request for arbitration, sent
to ICSID a letter by which, in accordance with Article 17(1) of the ECT, it denied
ECT protection to the claimant on the grounds that the claimant was a
mailbox company with no substantial business activities in the Republic of
Cyprus87 and it was not owned or controlled by a national of an ECT state.
Bulgaria further argued that the ECTs drafters intended to confer on a host
state a direct and unconditional right of denial, which may be exercised at any
time and in any manner.
The tribunal clarified that the existence of a right is distinct from the exercise
of that right.88 It further held that:
The exercise would necessarily be associated with publicity or other notice so as
to become reasonably available to investors and their advisers. To this end, a
general declaration in a Contracting States official gazette could suffice; or a
statutory provision in a Contracting States investment or other laws; or even an
exchange of letters with a particular investor or class of investors.
By way of comparison, the tribunal contrasted Art. 17(1) with the
different language of Article VI of the 1995 ASEAN Framework Agreement on

85. See E. Gaillard, Energy Charter Treaty: International Centre for Settlement
Decision, (2005) 233(66) New York Law Journal; Id., Investment and Investors
Covered by the Energy Charter Treaty in C. Ribeiro (ed), Investment Arbitration and
the Energy Charter Treaty (Juris Net LLC, 2006) 67-73 and S. Jagusch and A. Sinclair
The Limits of Protection for Investments and Investors under the Energy Charter
Treaty, ibidem, 89-103. See also Sinclair (n. 30); and Ben Hamida (n. 67).
86. See the Sweden-Bulgaria BIT (1994) at Art. 1(c), cited by Gaillard, Investment and
Investors Covered by the Energy Charter Treaty, op. cit., p. 71. See also Generation
Ukraine v. Ukraine, ICSID Case No. ARB/00/9, Award 16 September 2003, paras. 15.7
and 15.9.
87. Plama Consortium Limited v. Republic of Bulgaria, para. 31.
88. Ibidem, paras. 155-165.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
31
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Services to clarify in which case no exercise or other action by a contracting


state to deny a covered investor the benefits of the treaty would be required.
Article VI stipulates that:
The benefits of this Framework Agreement shall be denied to a service
supplier who is a natural person of a non-member State or a juridical
person owne d or controlled by person s of a non-member State
constituted under the laws of a member State, but not engaged in
substantive business operations in the territory of member States.
On the substantial business requirement, the tribunal held that the lack
of substantial business activity cannot be made good with business activities
undertaken by an associated but different legal entity, even where the latter owns or
controls the claimant. The requirement of ownership and control by a third party is
also difficult to determine and may prove highly controversial. In the tribunals view,
ownership includes indirect and beneficial ownership; and control includes control in
fact, including an ability to exercise substantial influence over the legal entitys
management, operation and the selection of members of its board of directors or any
other managing body. The burden of proof to establish the lack of substantial
business activity falls with the respondent state.
This was also confirmed by the Generation Ukraine v. Ukraine 89 case. In
this case, the claimant was a company registered in the US which had
established a subsidiary in Ukraine. Ukraine invoked Article 1(2) of the
US-Ukraine BIT to deny the claimant the advantages of the BIT because the
claimant had no substantial business in the US and was in fact controlled by
Canadians. Article 1(2) provides: Each Party reserves the right to deny to any
company the advantages of this treaty, if nationals of any third country control
such company and, in the case of a company of the other Party, that company
has no substantial business activities in the territory of the other Party or is
controlled by nationals of a third country with which the denying Party does
not maintain normal economic relations.
However, Ukraine failed to produce evidence to support the assertion and
therefore the objection was not retained. The Tribunal concluded that this [the
denial of benefits clause] is not, as the Respondent [Ukraine] appears to have assumed,
a jurisdictional hurdle for the Claimant to overcome in the presentation of its case;
instead, it is a potential filter on the admissibility of claims which can be invoked by
the respondent State.90
Finally the tribunal found that denial of Part III investment Protection
benefits under Article 17(1) could only be prospective and that it had

89. Generation Ukraine Inc. v. Ukraine, ICSID Case No. ARB/00/9, 16 September 2003.
90. Generation Ukraine, para. 15.7.

32 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

jurisdiction under Part V to hear the merits of these claims, which arose prior
to the time the investor was notified of the denial of benefits.
In anticipation of potential disputes, a number of investment treaties
provide for consultations when the lack of meaningful links between a
company and contracting party is at issue. The US BIT practice has provided
for examples of prior recourse to consultations to seek a mutually satisfactory
resolution to the matter.91 Though in different terms, NAFTA Article 1113(2)
also provides for a form of prior notification and consultation. Since recent US
and Germany model BITs no longer offer this possibility, the interpretation of
requirements to be met for the exercise of the right to deny will be
increasingly submitted to judicial scrutiny.

2. ICSID Convention
If a dispute is submitted to ICSID, it must qualify for coverage not only
under the investment treaty but also under the ICSID Convention. That means
that each Party must be either an ICSID Convention Contracting State or a
national of another Contracting State, and that their dispute must be a legal
dispute arising directly out of an investment under both the ICSID Convention
and the investment treaty in question.
With the evolving legal order, however, the rule of nationality has lost
some of its importance. As A. Broches, one of the main drafters of the ICSID
Convention noted:
The significance of nationality in traditional instances of espousal of a
nationals claim should be distinguished from its relatively unimportant role within
the framework of the Convention. In the former case, the issue of nationality is of
substantive importance as being crucial in determining the right of State to bring
an international claim, while under the Convention it is only relevant as regards the
capacity of the investor to bring a dispute before the Centre.92
Article 25(1) of the 1966 Convention on the Settlement of Investment
Disputes between States and Nationals of Other States (Washington
Convention) provides that:
The jurisdiction of the Centre shall extend to any legal dispute arising
directly out of an investment between a Contracting State (or any
constituent subdivision or agency of a Contracting State designated to
the Centre by that State) and a national of another Contracting State,

91. Dolzer and Stevens, (n. 15) at 42. See the reference made to the text of the US and
Morocco BIT (1985), at Art. I(2).
92. A. Broches, Chairmans Report on the Preliminary Draft of the Convention, 9 July
1964, doc. Z11, reprinted in ICSID, Documents Concerning the Origin and Formulation of
the Convention on the Settlement of Investment Disputes between States and
Nationals of Other States Vol. II, (1968) at 557, 579-582.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
33
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

which the parties to the dispute consent in writing to submit to the


Centre. When the parties have given their consent, no party may
withdraw its consent unilaterally.
With respect to legal persons, a national of a Contracting State is defined
in Article 25(2) as:
Any juridical person which had the nationality of a Contracting State
other than the State party to the dispute on the date on which the parties
consented to submit such dispute to conciliation or arbitration and any
juridical person which had the nationality of the Contracting State party
to the dispute on that date and which, because of foreign control, the
parties have ag reed should be treated as a national of another
Contracting State for the purposes of this Convention.
The Convention in its Article 25(2)(a) requires the claimants to establish
that they had the nationality of a Contracting State on the date on which the
parties consented to ICSIDs jurisdiction.
Article 25(2)(b) allows a foreign investor and the host State to agree that
the local company, established in the host state by the foreign investor in
order to make the investment, may be considered as a national of another
Contracting State in order that the local subsidiary may have recourse to
available ICSID arbitration.93 These narrowly circumscribed conditions of
Article 25(2)(b) allow a departure from the principle of incorporation or siege
social in favour of foreign control.
As explained by A. Broches, the purpose of the control test in the second
part of Article 25(2)(b) is to expand the jurisdiction of ICSID.94
The Energy Charter Treaty, although using place of incorporation as a
criterion for its application to investors, specifically provides the agreement

93. Several cases dealt with this question: Holiday Inns v. Morocco; Klckner v. Cameroon;
Amco Asia v. Indonesia; Vacuum Salt v. Ghana; Aucoven v. Venezuela; Soabi v. Senegal.
94. There was a compelling reason for this last provision. It is quite usual for host
States to require that foreign investors carry on their business within their
territories through a company organised under the laws of the host country. If we
admit, as the Convention does implicitly, that this makes the company technically
a national in the host country, it becomes readily apparent that there is need for an
exception to the general principle that the Centre will not have jurisdiction over
disputes between a Contracting State and its own nationals. If no exception were
made for foreign-owned but locally incorporated companies, a large and
important sector of foreign investment would be outside the scope of the
Convention A. Broches, The Convention on the Settlement of Investment
Disputes Between States and Nationals of Other States (1972) 136, Recueil des
Cours de lAcadmie de Droit International, 331 at 358-9 and 361.

34 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

required for the application of Article 25(2)(b) of the ICSID Convention. In its
Article 26(7) it states that:
An Investor other than a natural person which has the nationality of a
Contracting Party to the dispute on the date of the consent in writing
referred to in paragraph (4) and which, before a dispute between it and
that Contracting Party arises, is controlled by Investors of another
Contacting Party, shall for the purpose of Article 25(2)(b) of the ICSID
Convention be treated as a national of another Contracting State [].
A similar approach was taken in the draft MAI which included a blanket
consent to the controlled enterprise having standing to bring a claim directly
on its own behalf, whether in ICSID or under other MAI dispute settlement
options.95 A somewhat different approach was taken in NAFTA.96
The question of the judicial persons nationality could be clarified
through an agreement between the host state and the investor. Such an
agreement cannot however create a nationality that does not exist. An
agreement on nationality was very useful in the case MINE v. Guinea.97 An
agreement between the parties providing for the settlement of their dispute by
ICSID arbitration stated that the parties specified that the investor was Swiss

95. Standing of the Investment: An enterprise constituted or organised under the law of
a Contracting Party but which, from the time of the events giving rise to the
dispute until its submission for resolution under paragraph 2.c. was an investment
of an investor of another Contracting Party, shall, for purposes of disputes
concerning that investment, be considered an investor of another Contracting
Party under this article and a national of another Contacting State for purposes
of Article 25(2)(b) of the ICSID Convention regarding a dispute not submitted for
resolution by the investor which owns or controls it. The MAI negotiators inserted
this provision because they were concerned to provide a more efficient and
economically rational remedy for the many cases in which the investment was not
wholly owned by the foreign investor.
96. NAFTA parties, two of which (Canada and Mexico) were not parties to the ICSID
Convention, included Article 1117, Claim by an Investor of a Party on Behalf of an
Enterprise, which provides in part: 1. An investor of a Party, on behalf of an
enterprise of another Party that is a juridical person that the investor owns or
controls directly or indirectly, may submit to arbitration under this Section a claim
that the other Party has breached an obligation under: Section A [Investment
Protection] and the enterprise has incurred loss or damage by reason of, or
arising out of, that breach [] Similar language can be found in Article 24(b) of the
2004 US Model BIT, Submission of a Claim to Arbitration.
97. MINE v. Guinea, as discussed in Schreuer (n. 17).

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
35
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

(incorporated in Lichtenstein, a non ICSID Party but under Swiss control).98


Definitions of corporate nationality in treaties providing for ICSID jurisdiction
w ill be important for the dete rmin ation of whether the nation ality
requirements of Article 25(2)(b) have been met.
A question that arises is how closely tribunals should examine foreign
control and the nationality of such control.
Amco v. Indonesia,99 Klckner v. Cameroon100 and AMT v. Zaire101 involved
a local subsidiary incorporated in the host state. The protection was granted to
the foreign investor for investments made through a local company in the host
state.102 In Amco v. Indonesia for instance, the Tribunal looked at the first
instance of control103 and held that: The concept of nationality is there a classical
one, based on the law under which the juridical person has been incorporated, the place
of incorporation and the place of the social seat. An exception is brought to this concept
in respect of juridical persons having the nationality, thus defined, of the Contracting
State Party to the dispute, where said juridical persons are under foreign control [].104
In Banro v. Democratic Republic of Congo 105 Banro Resource Corporation
was the Canadian parent company that signed a concession agreement with
the Congolese state. The concession agreement contained an ICSID arbitration
agreement, though it was not effective for Banro since Canada was not Party
to the ICSID Convention. No BIT existed between Congo and Canada. Banro
Resource Corporation subsequently transferred its rights under the
concession agreement to Banro American Resource, a wholly owned
US subsidiary. A BIT existed between Congo and the US. The tribunal found
that Banro American could not avail itself of its Canadian parents consent to

98. According to C. Schreuer, An agreement on the investors nationality need not be


made in the form of an express stipulation. Consent to ICSIDs jurisdiction expressed
in a direct agreement between the parties implies an understanding that the investor
fulfils the Conventions nationality requirements. This would hold true only if two
conditions are fulfilled: the host State must have expressed its consent specifically
with respect to the particular investor [] and the parties must have been fully aware
of the circumstances surrounding the investors nationality, Schreuer (n. 17).
99. Amco Asia Corporation, Pan American Development Ltd. and P.t. Amco Indonesia v. The
Republic of Indonesia, Decision on Jurisdiction, ICSID case No. ARB/81/1,
25 September, 1 ICSID reports.
100. Klckner v. Cameroon , Award, ICSID case No. ARB/81/2, 21 October 1983, 2 ICSID Reports.
101. American Manufacturing & Trading (AMT) v. Zaire, Award, ICSID Case No. ARB/93/1,
21 February 1997.
102. For a detailed analysis of these decisions and commentaries see E. Gaillard, La
jurisprudence du CIRDI (Pdone, Paris, 2004); Schreuer (n. 17).
103. C. Schreuer points out that there was no need to go further since the
determination of the controlling nationality was of no relevance since all the
parties involved were Contracting States.
104. Amco, p. 396.
105. Banro v. Democratic Republic of Congo, Award, 1 September 2000, (2003)17 ICSID Rev-FILJ 382.

36 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

ICSID arbitration under the concession agreement, as that consent was invalid
and could not be transferred due to the fact that Banro Resource did not have
the requisite nationality at the time the concession agreement was entered
into and therefore could not transfer any valid consent to Banro American. It
therefore found that the requirements of the Article 25(2)(b) of the ICSID
Convention were not fulfilled. The Tribunal indicated that:
In view of the approach adopted by the jurisprudence of ICSID tribunals
concerning relationships between companies of the same group, [it] could have
addressed the issue of jus standi of Banro American in a flexible manner if the
issue raised by the present case were limited to the jus standi of a subsidiary in
the presence of an arbitration clause which concerns the parent company only.
But this is not the case.106
A different decision was reached by the Tribunal in the case Aucoven
v. Venezuela.107 Venezuela objected to the Tribunals jurisdiction by pointing
out that Aucoven108 was in fact controlled by ICA Holding, a company
incorporated under the laws of Mexico, and therefore it could not initiate an
ICSID arbitration proceeding, since Mexico was not a Contracting State of the
ICSID Convention. Venezuela claimed that the transfer of 75% of Aucovens
shares from ICA Holding to ICATECH (a US company) did not diminish the
Holdings control over Aucovens operations in Venezuela. It further stated
that even if the parties had agreed on majority shareholding as constituting
control, the pervasive control by Mexican nationals over, and involvement in
the affairs of Aucoven should lead the Tribunal to decline jurisdiction. On
27 September 2001, the Tribunal upheld jurisdiction on the basis that the tests

106. Idem, para. 10. See further paras. 11-12, in which the tribunal added that [] in
general, ICSID tribunals do not accept the view that their competence is limited by
formalities, and rather they rule on their competence based on a review of the
circumstances surrounding the case, and, in particular, the actual relationships
among the companies involved. [] It is for this reason that [they] are more willing
to work their way from the subsidiary to the parent company rather than the other
way around. Consent expressed by a subsidiary is considered to have been given by
the parent company, the actual investor, whose subsidiary is merely an
instrumentality. The extension of consent to subsidiaries that are not designated
or not yet created, even following a transfer of shares, is less readily accepted.
107. Autopista Concesionada de Venezuela [Aucoven] v. Bolivarian Republic of Venezuela,
Decision on Jurisdiction, 27 September 2001, published in (2001)16 ICSID
Review 469.
108. The arbitration was brought under the ICSID arbitration clause contained in a
concession agreement with Venezuela for the construction and maintenance of
two major highways linking Caracas to La Guaira. The claimant is a company
incorporated under the laws of Venezuela and owned by ICATECH Corporation, a
US company. On 24 January 1996, ICA and Baninsa consortium incorporated the
Autopista Concesionada de Venezuela, Aucoven C.A., a Venezuelan corporation,
to serve as concessionaire. On 23 December 1996, the claimant entered into the
concession agreement with Venezuela.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
37
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

chosen by the parties to define foreign control were reasonable. The Tribunal
held that an Arbitral Tribunal may not adopt a more restrictive definition of foreign
control, unless the parties have exercised their discretion in a way inconsistent with
the purpose of the [ICSID] Convention.109
It added that: The Convention does not contain any definition of the objective
requirements such as foreign control. It cited A. Broches who had stated that: the
purpose of Article 25(2)(b) being to indicate the outer limits within which
disputes may be submitted to conciliation or arbitration under the auspices of
the Centre, the parties should be given the widest possible latitude to agree
on the meaning of nationality. Any definition of nationality based on a
reasonable criterion should be accepted.110
As a result, the Tribunal must respect the parties autonomy and may
not discard the criterion of direct shareholding, unless it proves unreasonable.
Direct shareholding confers voting right, and, therefore, the possibility to
participate in the decision-making of the company. Hence, even if it does not
constitute the sole criterion to define foreign control, direct shareholding is
certainly a reasonable test for control.111

3. Nature of the investor


Private or public entity? The ICSID definition is not explicit as to whether
eligibility is limited to investors who are private entities or whether they could
be state-controlled.112 ICSID was confronted with this question of the access
to the Centre of an investor with legal personality but controlled by a state in
the case CSOB v. Slovak Republic 113 (the state retained 65% of the capital). The
tribunal noted that the term investor in the Convention, did not exclusively
concern the companies with private capital but also companies partially or
entirely controlled by a state.114 It therefore decided that a legal person could
have access as an investor to proceedings under ICSID unless it acts as a state
agent or undertakes a governmental function.115

109. See discussion on the case by E. Gaillard (n. 102); E. Teynier Notion
dinvestisseur : sentences commentes in (2003) 2 Gazette du Palais, Les Cahiers
de lArbitrage, 2e partie.
110. Broches (n. 94) at 361.
111. Aucoven, paras. 120-1.
112. On this issue see the discussion by S. Manciaux: Investissements trangers et
arbitrage entre tats et ressortissants dautres tats : trente annes dactivit du CIRDI
(Travaux du Centre de recherche sur le droit des marchs et des investissements
internationaux, Paris, Litec, 2004).
113. Ceskoslovenska Ochodni Banka (CSOB) v. Slovak Republic, ICSID case ARB/97/4,
Decision on Jurisdiction, 24 May 1999.
114. CSOB v. Slovak Republic, para. 16.
115. Idem, paras. 17, 20-25.

38 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Some investment agreements make it clear that state entities are


included. For instance, the 2004 US Model BIT and Canada Model FIPA cover
governmentally owned or controlled entities. According to Article 1,
Definitions, enterprise means any entity constituted or organised under
applicable law, whether or not for profit, and whether privately or governmentally
owned or controlled [] [emphasis added].
Similarly, Article 13(a)(iii) of the Convention establishing the Multilateral
Investment Agency, defines eligible investors to include a juridical person
whether or not is privately owned [] [emphasis added].
Some investment agreements include in addition to state entities, the
government itself. For instance, in the 1996 Czech Republic-Kuwait BIT and in
the 2001 Belgium-Saudi Arabia BIT, the Government qualifies as an investor.116
Different legal forms. Some BITs include language indicating that all legal
entities, regardless of form may be considered investors. The US and Canada
Model BITs for instance, provide that investors may consist of legal entities
including a corporation, trust, partnership, sole proprietorship, joint venture,
association, or similar organisation; and a branch of any such enterprise.
The Swiss Model BIT also provides that the term investor refers to legal
entities including companies, corporations, business associations and other
organisations.
The German Model BIT, in addition to the above forms of companies,
includes also non-profit entities in the definition of investor. In its Article 1.2a),
it defines companies to include any juridical person as well as any commercial
or other company or association with or without legal personality [] irrespective
of whether or not its activities are directed at profit [emphasis added].
In the case Impregilo v. Pakistan,117 based on the Italy-Pakistan BIT, the
tribunal found that it did not have jurisdiction rationae personae because
Impregilo was only one of the companies of a joint venture and could not
bring a claim on behalf of the others. 118 Pakistan argued inter alia that
Impregilo, which claimed to be entitled to claim the entirety of the

116. A number of governments expressed some concern about the insistence of their
counterparts in BIT negotiations to include the Government itself as an investor,
in particular with respect to national security issues.
117. Impregilo S.p.A. v. Pakistan, ICSID case No. ARB/03/3, Decision on Jurisdiction,
22 April 2005.
118. GBC (Ghazi-Barotha Contractors), a joint venture (JV) established under the laws
of Switzerland, concluded two contracts (the Contracts) in 1995 with the Pakistan
Water and Power Development Authority (WAPDA). The Contracts called for the
construction of a barrage downstream and the construction of a channel
respectively. Impregilo, an Italian company, was one of the five joint venture
participants. The JV was established between an Italian, German, French, and two
Pakistani companies, and Impregilo was selected to act as leader of the JV.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
39
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

damages suffered by GBC because of its role in the JV with the partners,
lacked locus standi due to the fact that GBC itself had no legal personality.
Moreover, the respondent continued, the claimant could not have the right
to bring claims on behalf of the other parties of the JV, as the BIT was only
concluded to confer privileges to Italian investors. The tribunal, citing a
treatise on the drafting history of the ICSID Convention, indicated that
legal personality is a requirement for the application of Art. 25(2)(b) and that a
mere association of individuals or of juridical persons would not qualify. As a
result, the tribunal found that Impregilo was not able to bring claims on
behalf of the JV. The tribunal then examined whether Impregilo could make
claims on behalf of the other participants in the JV. The tribunal reiterated
that consent of the parties is the cornerstone of the jurisdiction of the Centre.
Due to the fact that the other investors did not fall within the ambit of the
BIT, Impregilo could not make claims on their behalf.

4. Rights of Shareholders to bring claims


Investment protection treaties in their definitions of investments very
often include shares or participation in companies as forms of investment.
The US-Argentina BIT 119 for instance which is the basis of numerous
concluded and pending cases, includes in its definition of investment:
A company or shares of stock or other interests in a company or interests in
the assets thereof.
An investment may therefore include shareholders that may be
controlling or non-controlling; they may be majority or minority and they may
be direct or indirect through another company.
Barcelona Traction120 recognised the central role of shareholders as
investors. In this case, the ICJ held that the state of nationality of the majority
shareholders (Belgium) of a company incorporated in Canada was not entitled
to pursue claims against Spain for damage done to the company.121 The ICJ
Chamber held:
Notwithstanding the separate corporate personality, a wrong done to the company
frequently causes a prejudice to its shareholders. But the mere fact that damage is
sustained by both company and shareholder does not imply that both are entitled

119. US-Argentina BIT, entered into force on 20 October 1994.


120. Case Concerning the Barcelona Traction, Light and Power Company, Limited (Belgium
v. Spain), 5 February 1970 (1970) I.C.J. Reports 3 at 35-36, 9 I.L.M. 227.
121. For a discussion on the Barcelona Traction case see I. Laird A Community of
Destiny The Barcelona Traction case and the Development of Shareholder Rights
to Bring Investment Claims in T. Weiler (ed.), International Investment law and
Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary
International Law (Cameron, May 2005); R. Higgins, Aspects of the Case
Concerning the Barcelona Traction Company (1971) 11 Virginia J. Int. Law.

40 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

to claim compensation []. In such cases, no doubt, the interests of the aggrieved
are affected, but not their rights. Thus whenever a shareholders interests are
harmed by an act done to the company, it is to the latter that he must look to
institute appropriate action; for although two separate entities may have suffered
the same wrong, it is only one entity whose rights have been infringed.122
The Court suggested however that international law may provide for
three narrow exceptions in which shareholders claims may be brought in
particular where: i) the rights of shareholders are directly affected; ii) the
company has ceased to exist in the country of incorporation; or iii) the state of
incorporation lacks capacity to take action.
It is interesting to note that the ICJ was well aware of the new trends in
respect of the protection of foreign investors under the growing web of
bilateral investment treaties.123 On this point it held that:
Considering the important developments of the last half-century, the growth of
foreign investments and the expansion of international activities of corporations
[] and considering the way in which economic interests of States have
proliferated, it may at first sight appear surprising that the evolution of law has
not gone further and that no generally accepted rules in the matter have
crystallised on the international plane []. Thus, in the present State of the law
the protection of shareholders requires that recourse be to treaty stipulations or
special agreements directly concluded between the private investors and the State
in which the investment is placed.124

122. (1970) I.C.J. Reports 3, at 35.


123. Judge Jessup in his separate opinion stated the following: The International
Court of Justice in the instant case is not bound by formal conceptions of
corporate law. We must look at the economic reality of the relevant transactions
and identify the overwhelmingly dominant feature. The overwhelmingly
dominant feature in the affairs of Barcelona Traction was control which may
constitute the essential link. At n. 1.
124. Ibid., at 46-47. The Court identified these BITs and other agreements as a lex
specialis thus allowing the conclusion that customary international law had not
yet develope d and that recourse of shareholders can only be found in
international instruments such as BITs or the Washington Convention. It should
be noted that 1970 was only four years since the entry into force of the
Washington Convention (1966) and there were only a few hundred BITs instead of
the thousands today.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
41
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

As it was to be expected, this decision drew a considerable discussion.125 It


also constituted the basis for Argentinas defence126 in the numerous claims
brought against this country in the recent years. However, an important element
to retain in relation to this case is that, as the ICJ itself recognised, it was decided
under customary international law and limited to the exercise of diplomatic
protection and did not rule on the protection of shareholders in a corporation
outside of that context under investment protection agreements.
A few years later, a Chamber of the ICJ, in the case concerning Elettronica
Sicula S.p.A. (ELSI),127 permitted the US to bring a claim against Italy on behalf of
US shareholders with respect to their wholly owned Italian company, ELSI. This
case was based on a claim brought by the ELSI shareholders whose plant and
assets were requisitioned by local Italian authorities, allegedly interfering with
certain rights of the shareholders to own and manage the company. In that case
the Chamber did not rule on the basis of Barcelona Traction, but rather focused on
terms of the governing Treaty of Friendship, Commerce and Navigation, which
expressly provided for the protection of US shareholders in Italy.
Since then, the jurisprudence related to investor-state disputes has
decided in favour of the right of shareholders to be accepted as claimants with
respect to the portion of shares they own or control.128
Minority shareholders. Tribunals have found in some cases that minority
shareholders may also rely on the inclusion of shares as part of the definition
of qualifying investments in the investment treaty concerned and claim for
loss of shareholder value rather than for loss or damage to the company.129

125. Recent writings on the rights of shareholders in general, with comments on the
Barcelona Traction case include: C.H. Schreuer, Shareholder Protection in
International Investment Law, (2005) 2(3) Transnational Dispute Management,
available at www.transnational-dispute-management.com; S. Alexandrov, The Baby
Boom of Treaty-Based Arbitrations and the Jurisdiction of ICSID Tribunals
Shareholders as Investors under Investment Treaties, (2005) 6(3) The Journal of
World Investment and Trade.
126. Argentina repeatedly stated in its defence that the shareholders are entitled to
bring a claim only when their own rights have been infringed and not the rights
of the corporation of which they are shareholders.
127. Elettronica Sicula S.p.A (US v. Italy), I.C.J. Reports, 20 July 1989, 15.
128. Schreuer (n. 125).
129. Other cases which dealt with the rights of the minority shareholders are:
Compania de Aguas Aconquija, S.S. & Compagnie Gnrale des Eaux v. Argentine
Republic (the Vivendi case), ICSID Case No. ARB/97/3, Decision on Annulment,
3 July 2002, 6 ICSID Reports 340; Champion Trading Co. and Others v. Arab Republic of
Egypt, ICSID Case No. ARB/02/9, Decision on Jurisdiction, 21 October 2003; LG&E
Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/01, Decision on
Objections to Jurisdiction, 30 April 2004.

42 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

AAPL v. Sri Lanka 130 was a case based on the UK-Sri Lanka BIT. AAPL was
a minority shareholder in a Sri Lankan company. Its status was never
challenged nor its right to bring a claim.
In Lanco v. Argentina, 131 18.3% shareholding was sufficient to find
jurisdiction as an investment. It was the first time an ICSID tribunal expressly
recognised a minority shareholders right to asset claims under an investment
treaty.132 The Tribunal noted that there was nothing in the Treaty that required
an investor in the capital stock to have either control over the administration of
a company, or a majority share, in order to qualify as an investor for the
purposes of the Treaty.133 The Tribunal further noted inter alia that Lanco was
liable for all contractual obligations to the extent of its equity share and
concluded that Lanco was a party to the Agreement in its own name and right.134
In CMS v. Argentina,135 the CMS Gas Transition Company (CMS) purchased
shares of an Argentine company, Transportadora de Gas del Norte (TGN),
pursuant to Argentinas privatisation program in 1995. Argentina argued that
CMS lacked standing to file its claim because it was merely a minority non-
controlling shareholder and thus did not have standing to claim damages
suffered by TGN.136 The Tribunal ruled that the Convention did not require
control over a locally-incorporated company in order to qualify under the
Convention. It also ruled that the Convention does not bar a claim brought by
a minority non-controlling shareholder such as CMS, observing that previous
ICSID tribunals in also finding jurisdiction had not been concerned with the
question of majority [ownership] or control but rather whether shareholders can claim
independently from the corporate entity.137 In affirming the acceptance of this

130. AAPL v. Sri Lanka. Award, 27 June 1990, 4 ICSID Reports 246.
131. Lanco Intl Inc. v. Argentina Republic, Preliminary Decision on Jurisdiction,
40 I.L.M.457, 463 (2001).
132. See Alexandrov (n. 125).
133. Lanco, Sect. 10.
134. Ibid., Sect. 12, 14.
135. CMS Gas Transmission Company v. The Republic of Argentina, ICSID case
No. ARB/01/8, Decision on Objections to Jurisdiction , in (2003) 42 ILM 788,
www.asil.org/ilib/cms-argentina.pdf.
136. The only claim that it could make, argued Argentina, was one regarding direct
damages to its shares in TGN (infringement of voting rights) not for its
proportionate share of TGNs damages. Because the ICSID Convention does not
provide a definition of the term investment, the Tribunal analysed both the pre-
Convention commentary on ownership of shares and a line of cases dealing with
the issue of majority ownership of control. The Tribunal ruled that the
Convention did not require control over a locally-incorporated company in order
to qualify under the Convention.
137. CMS, para. 55.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
43
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

concept, the Tribunal referred to the approach now prevailing in international law
in respect of claims arising out of foreign investments.138
In Sempra v. Argentina,139 the Tribunal made findings in line with those cited
above. Based on the definition of investment and investor in the US-Argentina
BIT, it held that there is no question that this is a broad definition, as its intent is to
extend comprehensive protection to investors.140 It then referred to previous tribunals
acting under both ICSID and UNCITRAL rules [the Goetz, Enron, CMS and Enron
(Additional Claim) Tribunals] which have concluded that in the light of the very terms
of the provision, it [the definition] encompasses not only the majority shareholders but also
the minority ones, whether they control the company or not.141 It finally concluded that
if the purpose of the Treaty and the terms of its provisions have the scope the parties
negotiated and accepted, they could not now, as has been noted, be ignored by the Tribunal
since that would devoid the Treaty of all useful effect.142
In GAMI v. Mexico, 143 GAMI, a US company held 14 per cent equity
interest in Grupo Azucarero Mexico S.A. de C.V. (GAM). After the Mexican
government expropriated five of GAMs sugar mills, GAMI initiated a NAFTA
claim against Mexico. The tribunal held that GAMI had an independent right
to seek redress for damages to its investment and the fact that it was only a
minority shareholder does not affect its right.144
Indirect shareholders. In some cases the claimant is not the immediate
shareholder of the affected company. This raises the issue whether an
investor can claim for damages inflicted to a company of which it owns shares
only indirectly through the intermediary of another company.

138. CMS, para. 49.


139. Sempra Energy International v. Argentina, ICSID case No. ARB/02/16, Decision on
Objections to Jurisdiction, 11 May 2005. Sempra, participated in Argentinas
privatisation of the gas sector, a program beginning in 1989. It owns 43.09% share
capital of Sodigas Sur S.A. (Sodigas Sur) and Sodigas Pampeana S.A. (Sodigas
Pampeana), Argentine companies that hold licenses granted by Argentina to
supply and distribute natural gas in several Argentine provinces. Sempra
maintained that the suspension of licensee companies tariff increases that were
based on the US producer index and the subsequent pesification of these tariffs
pursuant to Law No. 25561, gave rise to a breach of investment protections
afforded under the BIT.
140. Ibid., para. 93.
141. Idem.
142. Ibid., para. 94.
143. GAMI Investments, Inc. v. United Mexican States, Final Award, 15 November 2004.
144. GAMI, at 15, para 37. The US, in its submission argued that [] a minority non-
controlling shareholder may not bring a claim under the NAFTA for loss or
damages incurred directly by an enterprise. A minority non-controlling
shareholder has standing to bring a claim only for loss or damage to itself
proximately caused by a breach, Submission of the United States of America,
30 June 2003.

44 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

In Azurix v. Argentina,145 the Tribunal found that given the wide meaning
of investment in the definition of Article, the provisions of the BIT [US-Argentina]
protect indirect claims. It cited the CMS Tribunal saying that jurisdiction can be
established under the terms of the specific provision of the BIT. Whether the protected
investor is in addition a party to a concession agreement or license agreement with the
host State is immaterial for the purpose of finding jurisdiction under those treaty
provisions since there is a direct right of action of shareholder.
In Gas Natural SDG S.A. v. Argentina,146 Argentina also maintained that
the claimant could not, pursuant to the BIT between Argentina and Spain,
qualify as an investor under the BIT as it was only an indirect shareholder of
the Argentine company. The Tribunal found that the claimant qualified within
the definition of investment clearly stating that assertion that a claimant under
a Bilateral Investment Treaty lacked standing because it was only an indirect investor
in the enterprise that had a contract with or a franchise from the State party to the BIT,
has been made numerous times, never, so far as the Tribunal has been made aware,
with success. The Tribunal made clear that for example the CMS v. Argentina
tribunals analysis was very close to the analysis of the present Tribunal.
In Siemens v. Argentina,147 the underlying BIT between Germany and
Argentina defined investment to include shares and other forms of interests
in legal entities. The claim was brought by Siemens A.G., which wholly owned
SNI A.G. Both German companies owned SITS S.A., an Argentinian company.
Argentina argued that indirect claims could only be brought, if there was
express authorisation to do so in the treaty. The tribunal rejected Argentinas
argument and concluded that the shareholder was allowed to bring
proceedings for a wrong inflicted upon an indirect subsidiary:
The plain meaning of this provision [Article 1(1)b) of the Treaty] is that
shares held by a German shareholder are protected under the Treaty. The
Treaty does not require that there be no interposed companies between
the investment and the ultimate owner of the company. Therefore, the

145. Azurix Corp. v. Argentina, ICSID case No. ARB/01/12, Decision on Jurisdiction,
8 December 2003.
146. Gas Natural SDG S.A. v. Argentina, Decision of the Tribunal on Preliminary
Questions on Jurisdiction Case No. ARB/03/10, 17 June 2005. Gas Natural is a
corporation organised under Spanish law and has its principal place of business
in Spain. In 1992, the claimant took part in a tender offer by the Argentine
government as part of the privatisation of its gas sector. It then participated in a
consortium that purchased 70% of the shares of an Argentine corporation and
formed an Argentine company. According to the claimant, it invested in
Argentina in reliance on Law No. 23, 928 and Decree 2/28 of 1991, which
established the parity and convertibility of the Argentine peso with the US dollar.
The claimant alleged that the measures taken by the Argentine government
pursuant to the emergency law breached the guarantees set forth in the BIT.
147. Siemens A.G. v. Argentine Republic, ICSID case No. ARB/02/8, Decision on
Jurisdiction, 3 August 2004, 44 ILM 138 (2005).

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
45
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

literal reading of the Treaty does not support the allegation that the
definition of investment excludes indirect investments.148
In Enron v. Argentina,149 the claimants owned 35.2 per cent of the shares
in TGS, an Argentine corporation. Enrons shareholdings in the affected local
company TGS was not only indirect but involved a number of other locally
registered companies and several layers of ownership. Argentina again argued
the governmental measures affected only TGS. The tribunal decided not to
repeat the reasoning of prior ICSID tribunals on this point. It upheld the
concept that shareholders may claim independently from the corporation concerned,
even if those shareholders are not in the majority or in control of the company150 but
was nevertheless concerned by the several intermediate companies that were
also involved.151 It sought and found a solution in Argentinas consent to
arbitration Enron had been specifically invited by Argentina to make its
i nve s tm e nt an d t he inve s t ors h ad d ec is ion m aking p owe rs in the
management of TGS.152 Therefore Enron had jus standi to pursue its claim.

Part II. Definition of investment


I. Definition of investment in international instruments
There is no single definition of what constitutes foreign investment.
According to Juillard and Carreau, the absence of a common legal definition is
due to the fact that the meaning of the term investment varies according to
the object and purpose of different investment instruments which contain
it.153 The multiplication of definitions of investment thus results from the
proliferation of different sources.154

148. Siemens
149. Enron Corp. and Ponderosa Assets, L.P. v. Argentine Republic, ICSID case No. ARB/01/3,
Decision on Jurisdiction, 14 January 2004.
150. Enron, para. 39.
151. The tribunal noted that: [] The Argentine Republic has rightly raised a concern about
the fact that if minority shareholders can claim independently from the affected corporation,
this could trigger an endless chain of claims, as any shareholder making an investment in a
company that makes an investment in another company, and so on, could invoke a direct
right of action for measures affecting a corporation at the end of the chain [] there is indeed
a need to establish a cut-off point beyond which claims would not be permissible as they
would have only a remote connection to the affected company. Enron, paras. 50, 52.
152. See analysis by Schreuer (n. 125).
153. D. Carreau, P. Juillard, Droit international conomique (3e dition, Dalloz, Paris, 2007),
403 : La difficult que lon rencontre, lorsque lon veut proposer une dfinition de
linvestissement international, vient de la multiplicit des conceptions en cette
matire cette multiplicit des conceptions, en dfinitive, ne refltant que la
prolifration des sources.

46 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Customary international law and earlier international agreements did


not use the notion of investment but the one of foreign property155 dealing
in a similar manner with imported capital and property of long-resident
foreign nationals.156 According to Juillard the static notion of property has
been substituted by the more dynamic notion of investment which implies a
certain duration and movement.157
Traditionally, investments have been categorised as either direct or
portfolio investments. During the nineteenth and the early years of the
twentieth century, the predominant form of foreign investment was portfolio
investment, mainly in the form of bonds issued by governments of developing
countries floated in the financial markets. The first half of the twentieth
century was marked by the contraction of investment flows brought about by
the two Wars, stagnation of direct investment and virtual collapse of portfolio
investment in developing countries.158 The post-war period was characterised
by the growing expansion of multinational corporations setting up wholly or
majority owned subsidiaries with the consequent change in the form of
foreign investments which became predominantly direct in character. The
increase of direct investment in several sectors led to the steady evolution of
new forms of investment, when the investor enters a country and markets a
product or service but does not own the asset.159 A great variety of assets are
included today in the definition of investment and broad definitions appeared
in national investment codes and international instruments.
A narrow approach was followed by earlier agreements which were
aiming at the gradual liberalisation of capital movements and preferred to
enumerate the transactions covered by these agreements. Today, most

154. See also Ph. Khan, Les investissements internationaux, nouvelles donnes : vers un
droit transnational de linvestissement, in Ph. Kahn, Th. Wlde (eds.), New Aspects of
International Investment Law (Martinus Nijhoff Publishers, Leiden/Boston 2007) 17-19.
See also Id., Lextension de la notion dinvestissement in J. Bourrinet (ed.), Les
investissements franais dans le tiers-monde (Economica, Paris, 1984).
155. UNCTAD Scope and Definition, UNCTAD Series on issues in international
investment agreements (1999) UNCTAD/ITE/IIT/11 (Vol. II).
156. See for instance the OECD Draft Convention on the protection of foreign
property (OECD, Paris, 1967).
157. [] la notion dinvestissement, notion dynamique, a fait son apparition dans la
langue du droit international, et sest substitue la notion de bien, notion
statique. La notion dinvestissement est, en effet, une notion dynamique, en ce
sens quelle ne peut se concevoir que dans la dure et dans le mouvement []
P. Juillard, Lvolution des sources du droit des investissements (1994),
250 Recueil des cours de lAcadmie de droit international, 9-216, 24.
158. Ibid., 11.
159. These new forms are found in license agreements, management contracts, joint
venture, service and production sharing agreements in which there is transfer of
capital but no establishment of an entity, nor is the transaction executed through
the stock exchange.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
47
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

international investment instruments, in particular investment protection


treaties, adopt a broad definition of investment.

A. OECD Code of Liberalisation of Capital Movements


Among the liberalisation instruments, the OECD Code of Liberalisation of
Capital Movements160 is the main representative example. The Code covers all
categories of capital operations, including direct investment. In the Code, the
investors control over the company is a necessary element of a direct
investment which is defined in its Annex A as follows:
Investment for the purpose of establishing lasting economic relations with
an undertaking such as, in particular, investments which give the possibility
of exercising an effective influence on the management thereof:
A. In the country concerned by non-residents by means of:
1. Creation or extension of a wholly-owned enterprise, subsidiary or
branch, acquisition of full ownership or an existing enterprise;
2. Participation in a new or existing enterprise;
3. A loan of five years or longer.
B. Abroad by residents by means of:
1. Creation or extension of a wholly-owned enterprise, subsidiary or
branch, acquisition of full ownership or an existing enterprise;
2. Participation in a new or existing enterprise;
3. A loan of five years or longer.
The existence of a direct investment requires the combination of several
elements:
There should be a contribution.
This contribution should be in capital.
It should allow the establishment of durable relations between the investor
and an enterprise.
The investor should be in a position to exercise a real influence on the
management of the company where it had invested.
A similar list of elements is found in the OECD Benchmark Definition of
Foreign Direct Investment (Benchmark Definition), which sets the standard for
foreign direct investment statistics. This definition characterises direct
investment as follows:
Direct investment is a category of cross-border investment made by a
resident in one economy (the direct investor) with the objective of
establishing a lasting interest in an enterprise resident in an economy

160. See www.oecd.org/dataoecd/10/62/4844455.pdf.

48 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

other than that of the investor (the direct investment enterprise). The
motivation of the direct investor is a strategic long-term relationship
between the direct investment and the enterprise which allows a
significant degree of influence by the direct investor in the management of
the direct investment enterprise. The lasting interest is evidenced where
the director investor owns at least 10 per cent of the voting power of the
direct investment enterprise. 161

B. Investment Agreements
Most multilateral and bilateral investment treaties and trade agreements
with investment chapters include a broad definition of investment. They
usually refer to every kind of asset followed by an illustrative but usually
non-exhaustive list of covered assets. Most of these definitions are open-
ended and cover both direct and portfolio investment. Their approach is to
give the term investment a broad, non exclusive definition, recognising that
investment forms are constantly evolving. However, there are some
agreements which provide a different approach to defining investment,
setting forth a broad but exhaustive list of covered economic activities.162
Multilateral and Regional Instruments. The draft MAI defined investment
broadly in terms of assets. It was however accompanied by an interpretative note
stipulating that in order to qualify as an investment under the MAI, an asset must
have the characteristics of an investment, such as the commitment of capital or
other resources, the expectation of gain or profit or the assumption of risk.163
Article 1(6) of the Energy Charter Treaty defines investment as every kind
of asset and refers to any investment associated with an economic activity in
the energy sector.
NAFTA, in its Article 1139 provides for a broad business activity related,
exhaustive list of assets, with specific exclusions. Investments under the NAFTA
include FDI, portfolio investment (equity securities), partnership and other
interests and tangible and intangible property acquired in the expectation [] of
economic benefit. Loan financing is only protected when funds flow within a
business group or when debt is issued on a relatively long-term basis (more than
three years). Contract rights not falling under other categories of investment are

161. OECD Benchmark Definition of Foreign Investment (Draft) 4th Edition,


DAF/INV/STAT(2006)2/REV. 3, 2007.
162. Rubins uses three categories of International Investment Agreements in order to
organise the different approaches to defining investment: those which contain an
illustrative list of elements (broad definition, most BITs), an exhaustive list (NAFTA)
or a hybrid list (US-Singapore FTA for instance). See N. Rubins, The Notion of
Investment in International Investment Arbitration in N. Horn, S. Kroll (eds.),
Arbitrating Foreign Investment Disputes (Kluwer Law International, The Hague, 2004).
163. See Schreuer (n. 17).

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
49
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

covered only if they involve a commitment of capital or other resources in the


territory of a party [] to economic activity in such territory. NAFTA
complements its exhaustive list of investment categories with a negative
definition, establishing certain types of property not to be considered
investments, such as money claims arising solely from commercial contracts for
the sale of goods or services.
BITs. The broad formula which refers to every kind of asset has become a
standard definition in most BITs 164 which contain a general statement
followed by a non-exhaustive list of categories of covered investments directly
or indirectly controlled by investors of either Party. An exception is the new
Canadian Model FIPA which continues to use the NAFTA approach with a broad
definition of investment combined with specific exclusions.165
According to some commentators, most BITs take four basic definitional
dimensions into consideration: 1) the form of the investment; 2) the area of
the investments economic activity; 3) the time when the investment is made;
and 4) the investors connection with the other contracting state. 166
Usually, the broad definition is followed by a list that typically includes at
least five categories:
iii) Movable and immovable property which covers tangible property.
iv) Interests in companies which usually covers debt and equity investment.
v) Claims to money and claims under a contract having a financial value which
suggests that investment includes not only property but also certain
contractual rights. Some agreements however, such as BITs negotiated by
Canada, Mexico and the United States exclude from the definition of
investment claims to money that arise exclusively from commercial
contracts for the sale of goods and services. In addition, some of these
BITs also exclude from the definition of investment debt instruments with
short-term maturity periods, usually less than three years (Mexico).
vi) Intellectual property rights, which may include trademarks, patents and
copyrights. In some investment agreements such as the 2005 UK Model
BIT, intellectual property rights include goodwill, technical processes
and know how.
vii) Business concessions under public law, including concessions to search for, extract
and exploit natural resources (1995 and 2001, German Model BITs, Art. 1).

164. Dolzer and Stevens (n. 15).


165. The 2004 Canada FIPA has recently undergone a revision which is reflected in the
new definitions section reproduced in Annex 1.A1.
166. J.W. Salacuse and N.P. Sullivan, Do BITs Really Work? An Evaluation of Bilateral
Investment Treaties and their Grand Bargain, (2005) Harv. Intl L.J. 67.

50 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Such a definition is sufficiently broad to encompass foreign direct


investments as well as portfolio investment. There are BITs which expressly
include in the list of covered assets bonds, debentures and other debt
instruments (2007 Canada FIPA, 1998 Austria-Mexico BIT) as well as futures,
options and other derivatives (2004 US Model BIT). While referring to the same
broad asset-based definition, other BITs do not contain such a provision.
Examples may be found in the 2005 Germany Model BIT and Turkey treaty
practice.
Under the 1994 US Model BIT, the notion of investment is described as
any kind of investment owned or controlled directly or indirectly followed by
a non-exhaustive list of asset categories falling within the definition of
investment. The 2004 US Model BIT and the recent US FTAs represent a
departure from the previous definition: they define investment broadly as
every asset owned or controlled, directly or indirectly, by an investor, which
has the characteristics of an investment and include a non-exhaustive list of
forms such investments may take. Besides the typical core investment
types, they also cover various debts instruments, futures, options and other
derivatives and turnkey, construction management production, concession,
revenue sharing and other similar contracts. They also include certain
explanatory notes, designed to clarify certain elements of the definition.167
Hence, the characteristics of an investment include the commitment of
capital, the expectation of gain or profit, or the assumption of risk.168

167. Footnote 1 stipulates that some forms of debt such as bonds, debentures, and long-
term notes that are more likely to have the characteristics of an investment while
other forms of debt, such as claims to payment that are immediately due and result
from the sale of goods or services are less likely to have such characteristics.
Footnote 2 provides indications as to whether or not a particular type of license,
authorisation, permit or similar instrument has the characteristics of an
investment: whether a particular type of license, authorisation, permit, or similar
instrument (including a concession, to the extent that it has the nature of such an
instrument) has the characteristics of an investment depends on such factors as
the nature and extent of the rights that the holder has under the law of the Party.
Among the licenses, authorisations, permits, and similar instruments that do not
have the characteristics of an investment are those that do not create any rights
protected under domestic law. For greater certainty, the foregoing is without
prejudice to whether any asset associated with the license, authorisation, permit,
or similar instrument has the characteristics of an investment. Footnote 3 clarifies
that the term investment does not include an order or judgment entered in a
judicial or administrative action.
168. Some forms of debts, such a bonds, debentures and long-term notes, are more
likely to have the characteristics of an investment, while other forms of debt,
such as claims to payment that are immediately due and result from the sale of
goods or services, are less likely to have such characteristics. (US-Singapore FTA,
Art. 15.1.13; US-Chile FTA, Art. 10.27; US-Australia FTA, Art. 11.17.4; US-DR-CAFTA,
Art. 10.28; US-Morocco FTA, Art. 10.27; US Model BIT, Art. 1).

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
51
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

The new Canadian Model FIPA which replaces the 2004 model still
provides for a finite but more comprehensive definition of investments based
on NAFTAs Article 1139 definition. The highly detailed requirements for a
loan to qualify as an investment which characterised the 2004 model no
longer figure in the revised model, while intellectual property rights have been
added to the list of covered assets. The new definition of investment still
follows the NAFTA model by excluding ordinary commercial transactions from
the definition of investment. It now reads as follows:
investment means:
a) an enterprise;
b) shares, stocks and other forms of equity participation in an enterprise;
c) bonds, debentures, and other debt instruments of an enterprise;
d) a loan to an enterprise;
e) notwithstanding subparagraphs c) and d) above, a loan to or debt security
issued by a financial institution is an investment only where the loan or
debt security is treated as regulatory capital by the Party in whose territory
the financial institution is located;
f) an interest in an enterprise that entitles the owner to a share in income or
profits of the enterprise;
g) an interest in an enterprise that entitles the owner to share in the assets of
that enterprise on dissolution;
h) interests arising from the commitment of capital or other resources in the
territory of a Party to economic activity in such territory, such as under:
i) contracts involving the presence of an investors property in the territory
of the Party, including turnkey or construction contracts, or concessions
such as to search for and extract oil and other natural resources, or
ii) contracts where remuneration depends substantially on the production,
revenues or profits of an enterprise;
i) intellectual property rights; and
j) any other tangible or intangible, moveable or immovable, property and
related property rights acquired in the expectation or used for the purpose
of economic benefit or other business purpose;
but investment does not mean,
k) claims to money that arise solely from:
i) commercial contracts for the sale of goods or services by a national or
enterprise in the territory of a Contracting Party to an enterprise in the
territory of the other Contracting Party, or
ii) the extension of credit in connection with a commercial transaction,
such as trade financing, other than a loan covered by subparagraph d); or
l) any other claims to money, that do not involve the kinds of interests set out
in subparagraphs a) to j).

52 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

In Article 1.2 of the Belgium-Luxembourg Model BIT (2002), investment is


defined as any kind of asset and any direct or indirect contribution in cash, in
kind or in services, invested or reinvested in any sector of economic activity.
Article 1.2 of the Japan/Korea BIT (2003) provides a straightforward
definition of investment that includes namely [] an enterprise; [] shares,
stocks or forms of equity participation [] bonds, debentures, loans and other
forms of debt, including rights derived there from, [] rights under contracts,
[] claims to money and to any performance under contract having a
financial value, intellectual property rights, [] any other tangible and
intangible [] property [...]. In addition, the term investment includes the
amounts yielded by investment, in particular profit, interest, capital gains,
dividends, royalties and fees.
While Article 1 of the Mexico-Greece BIT (2000) explicitly provides for a
non-exhaustive definition of investment, it also provides a negative definition
of investment but investment does not include, a payment obligation from,
or the granting of a credit to a Contracting Party or to a state enterprise [] but
investment does not mean, claims to money that arise [] from: i) commercial
contracts for the sale of goods or services by an investor in the territory of a
Contracting Party to a company or a business of the other Contracting Party; or
ii) the extension of credit in connection with commercial transaction [];
iii) any other claims to money that do not involve the kinds of interests set out
in subparagraphs a) through e).

II. Investment for jurisdictional purposes


The definition of investment is also crucial for the establishment of the
jurisdiction of arbitral tribunals. Dispute settlement clauses in investment
treaties usually provide for the submission of investment disputes between states
and investors to arbitration. Foreign investors are frequently given the choice to
submit the investment dispute to more than one dispute settlement mechanism.
International arbitration under either the ICSID Convention or its Additional
Facility is widely included in many investment treaties. Alternatively reference is
frequently made to the Rules of arbitration of the International Court of
Arbitration of the International Chamber of Commerce (ICC), the Rules of the
Arbitration Institute of the Stockholm Chamber of Commerce (SCC) or to ad hoc
arbitration under the UNCITRAL Arbitration Rules. Jurisdictional questions
relating to the scope of arbitrable investment disputes may arise, no matter
which forum of arbitration is selected, since the jurisdiction of an arbitral tribunal
under an applicable BIT relies on a showing of the existence of an investment.
At the same time it should be pointed out that neither the ICC, nor UNCITRAL nor

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
53
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

SCC arbitration rules filter claims through their own autonomous notion of
investment as a condition of jurisdiction rationae materiae.169
In this section the interplay between the definition of investment under
investment treaties and the choice of different potential venues for the
settlement of investment disputes is reviewed and compared.

A. Definition of investment and non-ICSID arbitration


Recently one of the most critical question in BIT cases has been whether
rights conferred by contract constitute covered investments.
1. Trade in goods. In the case Petrobart v. Kyrgyz Republic170 brought under
the Energy Charter Treaty (ECT) under the auspices of the Arbitration Institute
of the Stockholm Chamber of Commerce, the arbitral tribunal had to decide
whether a contract for the sale of gas condensate, which did not involve any
transfer of money or property as capital in a business, qualified as an
investment under the ECT. It should be pointed out that in a previous action
brought by Petrobart against the Kyrgyz Republic under Kyrgyz Foreign
Investment Law, an UNCITRAL Tribunal declined jurisdiction. The question
before the Stockholm Tribunal was whether the sale of goods constituted an
investment under the ECT. In the Tribunals view:
There is no uniform definition of the term investment, but the meaning of this
term varies (cf. Dolzer-Stevens, Bilateral Investment Treaties, 1995, p. 25-31, and
Sacerdoti, Bilateral Treaties and Multilateral Instruments on Investment
Protection, Collected Courses of the Hague Academy of International Law 1997,
Tome 269, p. 305-310). While in ordinary language investment is often
understood as being capital or property used as a financial basis for a company
or a business activity with the aim to produce revenue or income, wider
definitions are frequently found in treaties on the protection of investments,
whether bilateral (BITs) or multilateral (MITs).
The term investment must therefore be interpreted in the context of each particular
treaty in which the term is used. Article 31(1) of the Treaty on the Law of Treaties
provides, as the main rule for treaty interpretation, that a treaty shall be
interpreted in good faith in accordance with the ordinary meaning to be given to the
terms of the treaty in their context and in the light of its object and purpose. It is
obvious that, when there is a definition of a term in the treaty itself, that definition
shall apply and the words used in the definition shall be interpreted in the light of
the principle set out in Article 31(1) of the Treaty on the Law of Treaties.

169. S. Jagusch and A. Sinclair, The Limits of Protection for Investments and Investors
under the Energy Charter Treaty in C. Ribeiro (ed.), Investment Arbitration and the
Energy Charter Treaty (Juris Publishing, 2006), 73, 75.
170. Petrobart v. Kyrgyz Republic, Stockholm Chamber Case No. 126/2003, Final Award,
29 March 2005.

54 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

The relevant treaty in this case is the Energy Charter Treaty which protects
investments of an investor of one Contracting Party in the Area of another
Contracting Party, and the terms Investor and Investment are defined in Article 1
of the Treaty.171
In order to appreciate whether Petrobarts right to payment for goods
delivered constituted an investment the tribunal turned to Article 1(6) of the
ECT. The tribunal found that relevant items of the provisions were Article 1(6)c)
which covers claims to money and claims to performance pursuant to contract
having an economic value and associated with an investment and Article 1(6)f)
relating to any right conferred by law or contract or by virtue of any licences and
permits granted pursuant to law to undertake any Economic Activity in the
Energy Sector. Economic Activity in the Energy Sector is in Article 1(5) defined
as economic activity concerning the exploration, extraction, refining,
production, storage, land transport, transmission, distribution, trade,
marketing, or sale of Energy Materials and Products except those included in
Annex NI, or concerning the distribution of heat to multiple premises. The
Tribunal found that a right conferred by contract to undertake an economic
activity concerning the sale of gas, including the right to be paid for such a sale,
is an investment according to the Treaty.
Although supported by some commentators who have interpreted the
extensive definition of investment in the ECT to encompass proprietary rights
of any sort, including claims to money based on sales contract,172 it has been
pointed out by some others that this conclusion is not indisputable with
regard to the requirement that the claims to money and performance be
associated with an investment under Article 1(6)c).173
In NAFTA-based cases submitted to arbitration under the UNCITRAL rules,
a few tribunals have shown some readiness to retain jurisdiction even when
the governmental measures of the host state concern trade in goods, so long
as those measures relate to an investor or its investment within the
meaning of Chapter 11.

171. Ibid., pp. 69-70.


172. Th. Wlde, Energy Charter Treaty-based Investment Arbitration Controversial
Issues, (2004) The Journal of World Investment & Trade, 373, 409-410.
173. The reference to the presence of distribution facilities in the host state in the
understandings which appear in the text of the Final Act for the adoption of the ECT
regarding economic activities in the energy sector has also been interpreted as casting
into doubt the conclusion that international supply contracts qualify as investments
under Art. 1(6)(f). See further B. Poulain, Petrobart vs. The Kyrgyz Republic a few
reservations regarding the Tribunals constructions of the material, temporal and
spatial application of the Treaty (2005) 2(5) Transnational Dispute management 1,
www.tra nsnational-disp ute-management.com. See also F. Yala, La notion
dinvestissement, Gazette du Palais, December 2005, (2006) 3(2) Transnational Dispute
management 22, 24-27 www.transnational-dispute-management.com.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
55
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

In Pope and Talbot v. Canada,174 the claimant challenged the implementa-


tion of the Canada-US Softwood Lumber Agreement and the allocations of export
quota that had been made under that Agreement and alleged multiple breaches
of the NAFTA. The respondent claimed that softwood lumber was a good and
therefore the dispute related to trade in goods, which should be heard under
Chapter 20, rather than Chapter 11, of the NAFTA. In response, the tribunal
observed that the claimant had alleged breaches of the NAFTA that both related
to, and harmed, the investor or its investment within the maning of Chapter 11.
Assuming the truth of those allegations, the tribunal found jurisdiction over the
claim. It added: There is no provision to the express effect that investment and trade in
goods are to be treated as wholly divorced from each other [].175
In S.D. Myers, Inc v. Canada 176 the US company alleged that Canada
violated Chapter 11 by banning the export of PCB waste to the United States
where S.D. Meyers operated a PCB remediation facility. S.D. Meyers claimed that
the promulgation of the export ban by Canada was done in a discriminatory and
unfair manner. Unlike the Pope & Talbot tribunal, the one in S.D. Meyers looked
first at the definition of investment contained in NAFTA and found that the
Canadian subsidiary was an enterprise and therefore among the assets
enumerated in Article 1139. In addition, the tribunal noted that the chapters of
NAFTA form part of a single undertaking under which a measure can relate to
an investor or its investment within the meaning of Chapter 11 even if the
measures concern goods within the meaning of Chapter 3:
The chapters of the NAFTA are part of a single undertaking. There appears to be
no reason in principle for not following the same preference as in the WTO system
for viewing different provisions as cumulative and complementary. The view that
different chapters of the NAFTA can overlap and that the rights it provides can be
cumulative except in cases of conflict, was accepted by the decision of the Arbitral
Tribunal in Pope and Talbot. The reasoning in the case is sound and compelling.
There is no reason why a measure which concerns goods (Chapter 3) cannot be a
measure relating to an investor or an investment (Chapter 11).177
Notably, although a measure concerning trade in goods does not necessarily
preclude jurisdiction under Chapter 11, claimants must demonstrate that they
were seeking to make, were making, or had made an investment in the territory
of the host state to qualify as an investor under Chapter 11.178

174. Pope & Talbot, Inc. v. Government of Canada, UNCITRAL Award, 26 January 2000.
175. Idem, para. 26.
176. S.D. Myers, Inc. v. Government of Canada, Partial Award, 13 November 2000.
177. Idem., paras. 292-294.
178. See Bayview Irrigation District v. United Mexican States, ICSID Case No. ARB(AF)/05/1,
Award on Jurisdiction, 11 June 2007.

56 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

2. Debt and rights derived from shares. In the case Link-Trading v. Department
for Customs of Republic of Moldova,179 the claimant submitted to an ad hoc
UNCITRAL arbitration a claim under the 1993 US-Republic of Moldova BIT alleging
to have suffered an indirect expropriation because of a change in the rates of
duties and VAT exemptions, the effect of which was to destroy the economic
viability of the claimants business consisting essentially of the duty-free
import of consumer products into the Free Economic Zone of Chisinau and
their resale to Moldovan customers. Since the BIT permits claims to
expropriation to be brought to UNCITRAL arbitration if they constitute an
investment dispute, the arbitral tribunal found that an investment was
defined very broadly in Article I(1)a), including:
Every kind of investment in the territory of one Party owned or controlled directly or
indirectly by [] companies of the other Party, such as equity, debt, and service and
investment contracts; and includes: i) tangible and intangible property [] (V) any
right conferred by law or contract, and any licences and permits pursuant to law.
The tribunal was satisfied with the evidence submitted by the claimant
showing the existence of such investments, both equity and debt. In the tribunals
view, the fact that an investment consists of debt financing did not appear to
affect its characterisation as an investment under the BIT. The tribunal thus
recognised to have jurisdiction over the subject matter of the dispute before it.
In Eureko B.V. v. Poland,180 the claimant submitted to an ad hoc arbitration a
dispute arising from the privatisation of a Polish insurance company and the
related alleged breaches of the 1992 Netherlands-Poland BIT. Eureko sought
protection for its investment in Poland which allegedly consisted not only of PZU
20% shareholding, but also of the rights derived from those shares, namely
corporate governance rights and the right under certain conditions to acquire
additional shares in the company. To establish whether the claimant made an
investment entitled to protection, the tribunal noted that the term investment
used in Article 1 of the Dutch-Polish BIT is very broad: covered investments
include inter alia [] ii) rights derived from shares, bonds and other kind of
interests in companies and joint ventures; iii) title to money and other assets and
to any performance having an economic value; [] v) right to conduct economic
activity [] granted under contract []. The tribunal examined in turn the
different rights, which Eureko derived from its shareholding in PZU and
considered whether they amounted to investments entitled to protection under
the treaty. The tribunal held that the grant to Eureko to its corporate governance
rights derived from the shareholding as a key element of the investment had
some economic value and are thus entitled to protection as well as the right to an
international public offer.

179. Link-Trading v. Department for Customs of Republic of Moldova, UNCITRAL Arbitration,


Award on Jurisdiction, 6 February 2001.
180. Eureko B.V. v. Republic of Poland, Partial Award on Liability, 19 August 2005.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
57
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

The Tribunal found that the Republic of Poland contracted obligations


and Eureko acquired rights derived from its shareholding in PZU which were
an investment entitled to protection under the Treaty.
3. Limitations as to what can be an investment. In the case William Nagel
v. Czech Republic 181 brought under the 1990 UK-Czech BIT before the
Arbitration Institute of the Stockholm Chamber of Commerce, the claimant filed
a request of arbitration, arguing that he had been deprived of his rights, claims
to money or to any contractual performance under a cooperation agreement
with a Czech wholly owned state-enterprise created in order to make joint
efforts to obtain the n ecessary lice nses to establish and operate a
telecommunication business. The Czech authorities went on to hold a public
tender for two mobile phone contracts, neither of which was awarded to
Mr. Nagel. The tribunal had to determine first whether the claimant had an
asset, which constituted an investment under the bilateral investment treaty.
The tribunal found that the rights derived from a co-operation agreement
between the Claimant and a state owned enterprise were not deemed to have
a financial value, and therefore did not constitute an investment in the
meaning of the bilateral investment treaty. The tribunal recognised that:
the question as to whether or not [Mr. X] was an investor who made an
investment within the meaning of Article 1 of the Investment Treaty is an
important question in this case.182
Article 1(1) of the UK-Czech BIT contains a broad asset-based definition of
investment, including claims to money or to any performance under contract
having a financial value. The claimant argued that his rights arising from the
Cooperation Agreement were indeed investments within the definition of
the BIT because they were claims to money or to any performance under
contract having a financial value. After a careful examination of the terms of
the cooperation agreement, the arbitral tribunal came to the conclusion that
the basic undertaking under the contract was that the parties should work
together for the purpose of obtaining a licence. The tribunal considered that a
claim could have financial value only if it appears to be well-founded or at the
very least creates a legitimate expectation of performance in the future. In
the tribunals view, the claimants mere prospects of obtaining the deal could
not be raised to the level of legitimate expectations with a financial value
since there was not and could not be a guarantee that a licence would in fact
be obtained. The arbitral tribunal therefore concluded that Mr. Nagels rights
under the Cooperation Agreement were not such as to constitute an asset
and an investment within the meaning of Article 1 of the investment treaty.

181. SCC Case 49/2002, Award 9 September 2003, in 1 Stockholm Arbitration Report
(2004) 141 with observations by Sarah Franoit-Poncet & Caline Mouawad.
182. Ibid.

58 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

B. Definition of investment and ICSID arbitration


Investor-state arbitration under the aegis of the ICSID Convention and
ICSID Arbitration Rules deserves a separate analysis in consideration of its
specific features. Unlike other arbitral regimes, bilateral and multilateral
investment treaties which include ICSID clauses, provide for the submission
of investment disputes between states and foreign investors under another
multilateral treaty, namely the 1965 Convention on the Settlement of
Investment Disputes between States and Nationals of Other States. As clearly
put by A. Parra in these cases the dispute concerned must qualify for coverage
not only under the bilateral or multilateral investment treaty, but also under
the ICSID Convention.183 In other words, the dispute must be a legal dispute
arising out of what is an investment for investment treaties as well as for
ICSID Convention purposes.
The outer limits of the jurisdiction ratione materiae of the Centre are
clearly set out in Article 25(1) which provides as follows:
The jurisdiction of the Centre shall extend to any legal dispute arising
directly out of an investment, between a Contracting State (or any
constituent subdivision or agency of a Contracting State designated to
the centre by that State ) and a national of another Contacting State,
which the parties to the dispute consent in writing to submit to the
Centre. When the parties have given their consent, no party may
withdraw its consent unilaterally.
The term investment is not defined in the Convention. The relevant
passage of the World Bank Executive Directors Report accompanying the
Convention reads as follows:
no attempt was made to define the term investment given the essential
requirement of consent by the parties, and the mechanism through which
Contracting States can be made known in advance, if they so desire, the classes
of disputes which they would or would not consider submitting to the centre
[Article 25(4)].
An account of these negotiations given by A. Broches is pertinent:
During the negotiations, several definitions of investment were considered and
rejected. It was felt in the end that a definition could be dispensed with given the
essential requirement of consent by the parties. This indicates that the
requirement that the dispute must have arisen out of an investment may be
merged into the requirement of consent to jurisdiction. Presumably, the parties
agreement that a dispute is an investment dispute will be given great weight in

183. A. Parra Investments and Investors covered by the ECT and other investment
protection treaties in C. Ribeiro (n. 169) 51.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
59
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

any determination of the Centres jurisdiction, although it would not be


controlling.184
The Report of the Executive Directors on the ICSID Convention further
remarked that:
[w]hile the consent of the parties is an essential prerequisite for the jurisdiction
of the Centre, consent alone will not suffice to bring dispute within its
jurisdiction. In keeping with the purpose of the Convention, the jurisdiction of the
Centre is further limited by reference to the nature of the dispute and the parties
thereto.185
In order to accept jurisdiction under the ICSID Convention, arbitral
tribunals have to consider whether there is an investment under
Article 25(1) of the Convention, as well as under the relevant investment
agreement. So far, they have given wide interpretations of the term.186 The
approach adopted in the Convention gives parties to ICSID arbitration wide
discretion to describe a particular transaction as an investment which results
from the fact that the notion of investment is broad. But the parties do not
have unlimited freedom in determining what constitutes an investment. Any
s uch determination is not conclusive for a tribunal de ciding on its
competence. Under Article 41 of the Convention, a Tribunal may examine on
its own motion whether the requirements of jurisdiction are met.
In this connection the ICSID tribunal in the Joy Mining v. Egypt, case made
it clear that:
The parties to a dispute cannot by contract or treaty define as investment, for the
purposes of ICSID jurisdiction, something which does not satisfy the objective
requirements of Article 25 of the Convention. Otherwise Article 25 and its
reliance on the concept of investment, even if not specifically defined, would be
turned into a meaningless provision.187
In 1985, the Secretary General of ICSID refused to accept a request for
arbitration of a dispute involving a sale of goods, on the ground that such an

184. A. Broches The Convention on the Settlement of Investment Disputes: Some


Observations on Jurisdiction (1966) 5 Columbia Journal of Transnational Law,
261-280, 268.
185. Report of the Executive Directors on the Convention on the Settlement of
Investment Disputes Between States and Nationals of Other States (1993) 1 ICSID
Reports 23, 28.
186. The tribunal in CSOB v. Slovak Republic observed in this regard: This statement [in
the Report of the ICSID Executive Directors] also indicates that investment as a concept
should be interpreted broadly because the drafters of the Convention did not impose any
restrictions on its meaning []. Ceskoslovenska Obchodni Banka AS (CSOB) v. The
Slovak Republic, ICSID Case No. ARB/97/4, 24 May 1999, para. 64.
187. Joy Mining Machinery Ltd. v. The Arab republic of Egypt, Award, 6 August 2004.

60 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

operation could not be considered an investment.188 This was done despite


the fact that the request
had been made on the basis of a BIT [bilateral investment treaty] providing for
arbitration under the Convention in respect of disputes arising out of investments
which, as defined in the BIT, could be understood as including sale of good
transaction.189

1. Typical features of an investment

According to C. Schreuer,190 it is possible to identify certain features of an


investment under the Convention on the basis of ICSID case-law:
the project should have a certain duration;
there should be a certain regularity of profit and return;
there is typically an element of risk for both sides;
the commitment involved would have to be substantial;
the operation should be significant for the host states development.
C. Schreuer has clarified that these features should not be necessarily
understood as jurisdictional requirements but as typical characteristics of an
investment. The expectation of a long-term relationship and return would
exclude that a one-spot transaction or a one-time lump sum agreement can
qualify as an investment. With regard to the last feature, Schreuer also
remarked that, although not necessarily a characteristic of investments in
general, the operations significance for the host states development becomes
a relevant feature under the ICSID Convention:
The only possible indication of an objective meaning that can be gleaned from
the Convention is contained in the Preambles first sentence, which speaks of the
need for international co-operation for economic development and the role of
private international investment therein. This declared purpose of the
Convention is confirmed by the Report of the Executive Directors which points out
that the Convention was prompted by the desire to strengthen the partnership
between countries in the cause of economic development. Therefore it may be
argued that the Conventions object and purpose indicate that there should be
some positive impact on development.191

188. See Asian express v. Greater Colombo Economic Commission (1985) ICSID Annual
Report 6.
189. I. Shihata and A. Parra The Experience of the International Centre for Settlement
of Investment Disputes (1999) 14 ICSID Review Foreign Investment Law Journal
299, 308.
190. See C. Schreuer (n. 17) 139-141.
191. See C. Schreuer (n. 17) 124-5.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
61
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Under ICSID case-law, the reference to the these typical features of an


investment operation has varied according to the specific circumstances of each
case and to the more or less readily recognisable character of the activity at stake.
i) Readily-recognisable investments.192192Until the tribunal in Fedax N.V.
v. Venezuela193 was faced with an objection to jurisdiction on the ground that
the underlying transaction, promissory notes, did not meet the investment
requirement under the Washington Convention, the term investment had
been broadly understood in the ICSID practice as well as in scholarly writings.
Before this case, ICSID tribunals194 had examined on their own initiative the
question whether an investment was involved, and in each case have reached
the conclusion that the investment requirement of the Convention had been
met on the basis of a global assessment of an economic operation often
composed of interrelated transactions. In Kaiser Bauxite v. Jamaica as in Alcoa
Minerals of Jamaica Inc. v. Jamaica, the Tribunal established the Centres
jurisdiction both on the consent given by the parties and on the fact that the
case in which a mining company has invested substantial amounts in a
foreign state in reliance upon an agreement with that state, is among those
contemplated by the Convention. Amounts paid out to develop a concession
and other undertakings based on a concession agreement, were also
considered to qualify as an investment under the Convention in LETCO
v. Liberia. Also in SOABI v. Senegal the tribunal considered the issue of
jurisdiction in respect of an operation encompassing separate agreements,
but this dealt only indirectly with the existence of an investment. In Holiday
Inns v. Morocco, the tribunal emphasised the general unity of an investment
operation, in spite of it being composed of multiple interrelated transactions.
Even in certain recent cases, ICSID tribunals have not deemed it
necessary to review all the hallmarks of an investment. In the PSEG Global Inc.
v. Republic of Turkey,195 the dispute concerned a contract for the development

192. A. Broches, cited by C. Schreuer, (n. 17), 124, para. 86: [] Mr. Broches recalled that
none of the suggested definitions of the word investment had proved
acceptable. He suggested that while it might be difficult to define the term, an
investment was in fact readily recognisable.
193. Fedax N.V. v. The Republic of Venezuela, ICSID Case No. ARB/96/3 Decision on
Objection to Jurisdiction, 11 June 1997, (1998) 37 ILM 1378.
194. Kaiser Bauxite Company v. Government of Jamaica, 1975 (1993), 1 ICSID Reports, 296;
Alcoa Minerals of Jamaica Inc. v. Government of Jamaica 1975, (1979) Yearbook
Commercial Arbitration, Vol. IV, 206; Liberian Eastern Timber Corporation (LETCO)
v. Government of the Republic of Liberia, 1984, (1994), 2 ICSID Reports, 346; Socit
Ouest Africaine des Btons Industriels (SOABI) v. State of Senegal; 1988, (1994), 2 ICSID
Reports, 165; Holiday Inns S.A., Occidental Petroleum Corporation et al. v. Government of
Morocco; case No. ARB/72/1.
195. PSEG Global Inc., The North American Coal Corporation, and Konya Ilgin Elektrik
retimve Ticaret Limited Sirketi v. Republic of Turkey, ICSID Case No. ARB/02/5
Decision on Jurisdiction, 4 June 2004.

62 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

of an energy plant in Turkey. The tribunal did not discuss in detail how a
concession contract amounted to an investment, because the operation in
question was a readily recognisable investment.
In M.C.I. Power Group L.C. and New Turbine, Inc. v. Republic of Ecuador,196
the claimant carried on the business of acquiring, assembling and installing
two electricity generating plants and selling their power to INECEL, an
Ecuadorian state-owned entity. After these operations were completed and
the power generating assets sold, Seacoast continued to hold and manage its
accounts receivable and other contractual rights against INECEL. In the
tribunals view, Article Ia) of the Ecuador-United States BIT gives a broad
definition of investment. The rights and interests alleged by the Claimants to
have subsisted as a consequence of the so-called Seacoast project, after the
entry into force of the BIT such as the intangible assets of accounts
receivable, the existence of an operating permit would fit that definition. It
also added that the requirements that were taken into account in some arbitral
precedents for purposes of denoting the existence of an investment protected by a
treaty (such as the duration and risk of the alleged investment) must be considered as
mere examples and not necessarily as elements that are required for its existence.197
Nevertheless, without giving a detailed explanation, the tribunal concluded
that the very elements of the project and the consequences thereof did fall
within the characterisations required in order to determine the existence of
protected investments.
ii) Construction contracts In several other cases ICSID arbitral tribunals have
scrutinised more closely whether the operation under consideration was an
investment under the BIT and whether it did meet the features of an
investment under the ICSID Convention.
In Salini Costruttori S.P.A. and Italstrade S.P.A. v. Marocco198 the arbitral
tribunal held that a civil construction contract was an investment within the
meaning of the Italy-Morocco BIT since it created a right to a contractual benefit
having an economic value covered by Article 1c) as well as a right of economic
nature conferred [] by contract under Article 1e). The tribunal observed that
the investment requirement must be respected as an objective condition of
the jurisdiction of the Centre, which cannot be diluted by the consent of the
parties. Of the contributions made by the two claimants, the Tribunal
considered that:

196. M.C.I. Power Group L.C. and New Turbine, Inc. v. Republic of Ecuador, ICSID Case
No. ARB/03/6, Award, 31 July 2007.
197. Ibid., para. 165.
198. Salini Costruttori S.P.A. and Italstrade S.P.A. v. Marocco ICSID Case No. ARB/00/4,
Decision on Jurisdiction, 23 July 2001.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
63
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

It is not disputed that they [i.e. the two claimants] used their know-how, that
they provided the necessary equipment and qualified personnel for the
accomplishment of the works, that they set up the production tool on the building
site, that they obtained loans enabling them to finance the purchases necessary
to carry out the works and to pay the salaries of the workforce, and finally that
they agreed to the issuing of bank guarantees, in the form of a provisional
guarantee fixed at 1.5% of the total sum of the tender, then at the end of the
tendering process, in the form of a definite guarantee fixed at 3% of the value of
the contract in dispute. The Italian companies, therefore, made contributions in
money, in kind, and in industry.
The project indeed required not only heavy capital investment but also
services and other long-term commitments. The risk, as noted by the tribunal
in that case, was quite evident, as were the elements of duration (36 months)
and contribution to development. With particular regard to this last feature
the tribunal observed that:
[] the contribution of the contract to the economic development of the
Moroccan State cannot seriously be questioned. In most countries, the
construction of infrastructure falls under the tasks to be carried out by the State
or by other public authorities. It cannot be seriously contested that the highway
in question shall serve the public interest. Finally, the Italian companies were also
able to provide the host State of the investment with know-how in relation to the
work to be accomplished.199
While recalling the usual hallmarks of investment such as contributions,
a certain duration of performance of the contract, a participation in the risks
of the transaction and, as an additional condition derived from the
Conventions preamble, the contribution to the economic development of the
host state, the tribunal pointed out that in reality, these various elements may be
interdependent and that these various criteria should be assessed globally, even if,
for the sake of reasoning they are considered individually. The acknowledgment
of the interdependent character of the various hallmarks of investment and
the favor for a global assessment indicates that the tribunal was actually
approaching the issue of whether there was an investment from an
empirical perspective.
The need for the contribution to the host states development in the
qualification process was cast into doubt by the ICSID tribunal in the L.E.S.I.
S.p.A. and ASTALDI S.p.A. v. Algeria.200 The dispute arose out of a concession
agreement for the costruction of a dam. The tribunal acknowledged that some

199. Ibid., para. 57.


200. L.E.S.I. S.p.A. et ASTALDI S.p.A. v. Rpublique Algrienne Dmocratique et Populaire,
Decision on Jurisdiction, ICSID Case No. ARB/05/3, 12 July 2006. See also L.E.S.I.
DIPENTA v. Algeria, ICSID Case No. ARB/03/8, Award, 10 January 2005.

64 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

objective criteria have emerged from ICSID case-law and that a contract
should fulfill the following three conditions: 1) the contracting party has made
contributions in the host country which have an economic value such as
loans, materials, labour and services. The investor must also incur some
outlay of expenses, in pursuit of an economic objective; 2) those contributions
had a certain duration, keeping in mind that an excessively rigorous
appreciation of this test should be avoided; 3) they involved some risks for the
contributor. The tribunal was satisfied that the claimant had made initial
expenditures or loans justifying payment. It also went on to note that it was
not necessary that the investment contributes more specifically to the host
countrys economic development, something that is difficult to ascertain and
that is implicitly covered by the other three criteria.
In Bayindir v. Pakistan 201 the operation at stake was a highway
construction contract. In determining whether there was an investment, the
Tribunal relied once again on the Salini-test. It took the view that Bayindir
made a significant contribution, both in terms of know-how, equipment and
personnel and in financial terms. The duration of the contract was considered
as a paramount factor to distinguish investments from ordinary commercial
transactions, having in mind that the bar should not be put very high. In the
present case, the project extending over three years was deemed sufficient to
meet the duration test. The tribunal recognised that besides taking the risk
inherent to long-term contracts, Bayindir incurred an obvious risk related to
the very existence of a defect liability period of one year and of a maintenance
period of four years against payment. On the last feature, the tribunal while
recognising that an investment should be significant to the host states
development, it also pointed out that as stated by the LESI tribunal this
condition is often already included in the three classical conditions set out in
the Salini test. In any event, Pakistan did not challenge the declarations of its
own authorities on the importance of the road infrastructure for the
development of the country. The tribunal indicated that all these elements
may be closely interrelated, should be examined in their totality, and will normally
depend on the circumstances of each case.202
In Jan de Nul N.V. Dredging International N.V. v. Arab Republic of Egypt,203
the tribunal concurred in relying on the so-called Salini-test to qualify as an
investment the activities carried out in connection with the dredging
operation of the Suez Canal. It identified the following elements as indicative

201. Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan ICSID Case
No. ARB/03/29, Decision on Jurisdiction ,14 November 2005.
202. Ibid., para. 130.
203. Jan de Nul N.V. Dredging International N.V. v. Arab Republic of Egypt, ICSID Case
No. ARB/04/13, Decision on Jurisdiction, 16 June 2006.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
65
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

of an investment for purposes of the ICSID Convention: 1) a contribution; 2) a


certain duration over which the project is implemented; 3) sharing of
operational risks and 4) a contribution to the host states development. The
tribunal also emphasised that these elements may be closely interrelated,
should be examined in their totality and will normally depend on the
circumstances of each case. The tribunal found that the amount of work
involved and the related compensation showed that the Claimants
contribution was substantial. The operation was deemed of such magnitude
and complexity that there could be no question as to the involvement of a risk.
Lastly, the tribunal noted that it could not be seriously denied that the
operation of the Suez Canal was of paramount significance for Egypts
economy and development.
The typical features of an investment operation have also been referred
to in the Helnan International Hotel A/S v. The Arab Republic of Egypt.204 The
tribunal accepted the Respondents argument that to be characterised as an
investment a project must show a certain duration, a regularity of profit and
return, an element of risk, a substantial commitment, and a significant
contribution to the host states development. The tribunal found that the
project for the refurbishment and transformation of a hotel into a five-star
tourist site did me et these requirements in spite of their excessive
narrowness. A twenty-six years project was deemed to be of a certain
duration, the refurbishing ativity implied some risk of no commercial success
and the amount of money necessary to transform the hotel into a five-star
building and keep such classification was supposed to involve a substantial
commitment and to provide the claimant with regular remuneration. As to the
contribution to the development of the Egypt economy, the tribunal held that
the importance of the tourism industry in the Egyptian economy made it
obvious. According to the tribunal, the project did qualify as an investment
under both the ICSID Convention and Art. 1 of the bilateral investment treaty
be twee n De nmark and Egypt, wh ich by cove ring any othe r rights
[] pursuant to contract having an economic value encompasses the
management contract and the obligations deriving from it.
In Saipem S.P.A. v. The Peoples Republic of Bangladesh,205 Saipem and
Petrobangla entered into a contract to build a pipeline of 409 km to carry
condensate and gas in various locations of the north east of Bangladesh. To
determine whether Saipem made an investment within the meaning of

204. Helnan International Hotel A/S v. The Arab Republic of Egypt, ICSID Case No. ARB
05/19, Decision of the Tribunal on Objection to Jurisdiction, 17 October 2006.
205. Saipem S.P.A. v. The Peoples Republic Of Bangladesh, ICSID Case No. Arb/05/07,
Decision on Jurisdiction and Recommendation on Provisional Measures, 21 March
2007.

66 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Article 25 of the ICSID Convention, the Tribunal applied the Salini-test, making
reference to the following elements: a) a contribution of money or other assets
of economic value, b) a certain duration, c) an element of risk, and d) a
contribution to the host states development. However, the Tribunal
emphasised that for the purpose of determining whether there is an
investment under Article 25 of the ICSID Convention the entire operation
should be taken into consideration. In the present case, the entire or overall
operation included the construction contract as well as the credits for sums of
money deriving from an ICC award.
iii) Financial instruments. The Fedax v. Venezuela and CSOB v. Slovak Republic
cases are frequently invoked to demonstrate that financial instruments such
as promissory notes and loans were held to qualify as investments both under
the bilateral treaties and the ICSID Convention. But, in Joy Mining Machinery
Limited v. The Arab Republic of Egypt, the arbitral tribunal declined jurisdiction
considering that bank guarantees did not qualify as an investment neither
under the bilateral investment treaty nor under the ICSID Convention. The
reference to the typical features mentioned above has assisted tribunals in
assessing whether and to what extent the operation under consideration was
an investment.
In the case of Fedax v. Venezuela,206 the respondent challenged the
claimants argument that promissory notes acquired by way of endorsement
from the respondent qualified as investments under the Netherlands-
Venezuela BIT and the ICSID Convention, because they did not amount either
to foreign direct investment or to portfolio investment carried out through
approved stock market transactions. The tribunal disagreed, noting that
according to the underlying BIT, the phrasing every asset justifies a broad
interpretation and that in addition [] this interpretation is also consistent with
the broad reach that the term investment must be given in light of the negotiating
history of the Convention.207 It held that promissory notes were covered by the
definition of investment in both instruments and stated that:
Loans qualify as an investment within ICSIDs jurisdiction [] Since promissory
notes are evidence of a loan and a rather typical financial and credit instrument
there is nothing to prevent their purchase from qualifying as an investment under
the Convention in the circumstances of a particular case such as this.
The particular circumstances of the case which the tribunal referred to
have regard to the fact that promissory notes were issued by the Republic of
Venezuela under the terms of the Law on Public Credit, which specifically

206. Fedax N.V. v. Republic of Venezuela, ICSID Case No. ARB/96/3, Decision on Objection
to Jurisdiction, 11 June 1997, 37 ILM 1378 (1998).
207. Ibid., para. 29.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
67
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

governs public credit operations aimed at raising funds and resources to


undertake productive works, attend to the needs of national interest and cover
transitory needs of the treasury. It is quite apparent that the transactions
involved in this case are not ordinary commercial transactions and indeed
involve a fundamental public interest. The tribunal further noted that:
The status of the promissory notes under the Law of Public Credit is also
important as evidence that the type of investment involved is not merely a
shortterm, occasional financial arrangement, such as could happen with
investments that come in for quick gains and leave immediately thereafter
i.e. volatile capital. The basic features of an investment have been described
as involving a certain duration, a certain regularity of profit and return,
assumption of risk, a substantial commitment and a significance for the host
States development. The duration of the investment in this case meets the
requirement of the Law as to contracts needing to extend beyond the fiscal year in
which they are made. The regularity of profit and return is also met by the
scheduling of interest payments through a period of several years. The amount of
capital committed is also relatively substantial. Risk is also involved as has been
explained. And most importantly, there is clearly a significant relationship
between the transaction and the development of the host State, as specifically
required under the Law for issuing the pertinent financial instrument. It follows
that, given the particular facts of the case, the transaction meets the basic
features of an investment.208
In CSOB v. Slovakia209 the respondent argued that the transaction
underlying the claimants case, a loan, did not involve a transfer of resources
into the Slovak Republic and therefore, did not constitute an investment.210
Although loans were not expressly mentioned under the Czech Republic-
Slovakia BIT, the tribunal found that terms as broad as assets and monetary
receivables or claims clearly encompassed loans extended to a Slovak entity
by a national of the other Contracting Party. In order to establish whether
there was an investment under Art. 25(1) of the ICSID Convention, the tribunal
recalled that an investment is frequently a rather complex operation,
composed of various interrelated transactions, each element of which,
standing alone, might not in all cases qualify as an investment.211 The Slovak
Republic suggested that an investment should be essentially understood as
the acquisition of property or assets through the expenditure of resources by
one party in the territory of a foreign country which was expected to produce

208. Ibid., para. 43.


209. Ceskoslovenska Obchodni Banka, A.S.(CSOB) v. The Slovak Republic, ICSID Case
No. ARB/97/4, Decision on Jurisdiction, 24 May 1999.
210. Ibid., para 76.
211. Idem, para. 72.

68 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

a benefit on both sides and to offer a return in the future, subject to the
uncertainties of the risk involved. In the tribunals view, while these elements
tend as a rule to be present in most investments, they are not a formal
prerequisite for the finding that a transaction constitutes an investment as
that concept is understood under the Convention. Nevertheless, the tribunal
found that the resources provided through CSOBs banking activities in the
Slovak Republic were designed to produce a benefit and to offer CSOB a return
in the future, subject to an element of risk that is implicit in most economic
activities. The tribunal upheld jurisdiction by stressing the basic and ultimate
goal of the Consolidation Agreement which was to ensure a continuing and
expanding role of the banking sector:
[] this undertaking involved a significant contribution by CSOB to the
economic development of the Slovak Republic [] this is evident from the fact
that CSOBs undertakings include the spending or outlays of resources in the
Slovak Republic in response to the need for the development of the Republics
banking infrastructure.212
In Joy Mining Machinery Limited v. The Arab Republic of Egypt 213 the
arbitral tribunal had to decide whether bank guarantees issued in support of a
project entailing the supply, installation of equipment and the provision of
related incidental services for a fixed, pre-determined and certain price
constituted an investment within the meaning of the bilateral investment
treaty between the United Kingdom and Egypt. The tribunal noted that [e]ven
if a claim to return of performance and related guarantees has a financial value it
cannot amount to recharacterising as an investment dispute a dispute which in
essence concerns a contingent liability. 214
The tribunal summarised the elements that an activity must have in
order to qualify as an investment by making reference to a certain duration, a
regularity of profit and return, an element of risk, a substantial commitment
and that it should constitute a significant contribution to the host states
development. But at the same time the tribunal clarified that the appreciation
of the existence of these criteria is of course specific to each particular case as they
will normally depend on the circumstances of each case. The requirement mentioned
above, that a given element of a complex operation should not be examined in isolation
because what matters is to assess the operation globally or as a whole, is a perfectly
reasonable one in the view of the Tribunal.215 On these basis, the tribunal noted
that the activities carried out by the claimant fell squarely under the features

212. Idem, para. 88.


213. Joy Mining Machinery Limited v. The Arab Republic of Egypt, ICSID Case No. ARB/03/11,
Award on Jurisdiction, 6 August 2004.
214. Ibid., para. 47.
215. Ibid.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
69
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

of the contract for the supply of complex equipment with the related
additional activities and incidental services, which cannot be considered an
investment.
Under the specific circumstances of the case, the duration of the
commitment was not particularly significant as evidenced by the fact that the
total price was paid at an early stage. Neither was therefore the regularity of
profit and return. As to the element of risk, that was not different from that
involved in any commercial contract. The tribunal drew a distinction between
the present case and Fedax in which financial contributions made in the form of
promissory notes did qualify as an investment, being the proceeds of an earlier
credit transaction pursuant to which the state received value in exchange for its
promise of future payment. In reaching this conclusion, the tribunal relied on
the fact that the financing in question had and was being used by the State to finance
its budget under a law of public credit, designed for raising funds and resources to
undertake productive works, attend to the needs of national interest and cover transitory
needs of the treasure. Unlike the Fedax case in which the transactions at stake
involved a fundamental public interest, in Joy Mining the Egyptian Government
did not benefit from the bank guarantees. The Tribunal declined jurisdiction
because the claim fell outside both the Treaty and the Convention. It held the
view that a bank guarantee is simply a contingent liability and to conclude that a
contingent liability is an asset under Article 1a) of the Treaty and hence a protected
investment, would really go far beyond the concept of investment, even if broadly
defined, as this and other treaties normally do.
iv) Services. SGS v. Pakistan216 and SGS v. Philippines217 have been relied on as
having recognised inspection services as an investment. In both cases the
dispute arose out of the non-payment by Pakistan and the Philippines
respectively, of invoices allegedly due to SGS, a Swiss company, under contracts
for the provision of pre-shipment inspection and certification services.
In SGS v. Pakistan, the tribunal held that the provision of pre-shipment
inspection services did fall under the non-exhaustive and sufficiently broad
definition of investment of the Switzerland-Pakistan BIT, which included
claims to money deriving from rights conferred by law or by contract. The
tribunal also emphasised the fact that Pakistan entrusted SGS with the public
function of raising the financial revenue of the state by putting into place
trustful and simplified proceedings, conduct enquiries in conjunction with the
Pakistan Customs, educate the Pakistani Custom authorities on the
techniques of evaluation and application of Customs rules. The tribunal

216. SGS Socit Gnrale de Surveillance S.A. v. Pakistan, ICSID Case No. ARB/01/13,
Decision on Objection to Jurisdiction, 6 August 2003.
217. SGS Socit Gnrale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6,
Decision on Objection to Jurisdiction, 29 January 2004.

70 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

concluded that by doing so SGS did not perform a simple commercial activity,
but was granted the right to operate in a field which is normally left to the
public power of the state. Accordingly, the tribunal held that the expenditures
made by SGS pursuant to the agreement constituted an investment within the
meaning of the BIT and that it amounted to a concession under public laws
falling well within the BITs definition of investment. Moreover, the tribunal
found that the ICSID Conventions requirement that there be a legal dispute
arising directly out of an investment was satisfied.
In ord er to de cide w hethe r an inve stme nt was ma de, th e SGS
v. Philippines tribunal also considered relevant that the functions delegated to
SGS were performed in aid of the collection of tax revenue.
v) Non-readily recognisable investments ICSID Tribunals have also been
confronted with the question of whether such activities as the provision of
professional services or a salvage operation could qualify as investments.
In the Patrick Mitchell v. Democratic Republic of Congo218 arbitration, the
ad hoc Committee which was formed to preside over the annulment
proceedings ultimately annulled the award rendered under the 1984 US-Zaire
(now DRC) BIT in which the tribunal upheld jurisdiction over the alleged
expropriation of claimants law firm. The ad hoc Committee held that the
tribunal had manifestly exceeded its power and failed to state its reasons for
finding that Mr. Mitchell had made investments in the DRC covered under
the relevant BIT and the ICSID Convention. The Committee expressly recalled
that the case at hand did not involve a readily recognisable investment, as it
concerned a legal counseling firm established by a US citizen in the DRC,
which was deemed to be a rather uncommon operation from the standpoint
of the concept of investment. As noted by Schreuer, it would be atypical to
qualify a contract with an individual consultant as an investment.219
In spite of the fact that it was the first time that such an operation was
brought before ICSID, the arbitral tribunal affirmed its jurisdiction by identifying
the elements of the operation falling within the scope of application of the BIT
and assuming that the definition of investment under the BIT was as broad as
that found under the Convention. No further discussion was devoted to the
existence of an investment within the meaning of the ICSID Convention. With
regard to the terms of both the ICSID Convention and the US-Zaire BIT, the
ad hoc Committee held that the arbitral tribunals
[a]ward is incomplete and obscure as regards what it considers an investment:
it refers to various fragments of the operation, without finally indicating the

218. Mr. Patrick Mitchell v. The Democratic Republic of Congo, Case No. ARB/99/7, Decision
on the Application for Annulment of the Award, 1 November 2006.
219. Schreuer (n. 17) 140.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
71
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

reasons why it regards it overall as an investment, that is, without providing the
slightest explanation as to the relationship between the Mitchell & Associates
firm and the DRC. Such an inadequacy of reasons is deemed to be particularly
grave, as it seriously affects the coherence of the reasoning and, moreover, as it
opens the door to a risk of genuine abuses, to the extent that it boils down to
granting the qualification as investor to any legal counseling firm or law firm
established in a foreign country, thereby enabling it to take advantage of the
special arbitration system of ICSID.220
The existence of an investment was seriously contested by the
respondent mainly in respect of the criterion of the contribution to the
economic development of the country. The ad hoc Committee did not exclude
the possibility that the services provided by a legal counseling firm could
qualify as an investment under the ICSID Convention if the contribution to the
economic development or at least the interests of the state were somehow
present. As pointed out by the ad hoc Committee, it was the same BIT which
expressly recognised in its preamble the relevance of the economic
development of both parties. Thats why it would have been necessary for the
arbitral tribunal to indicate that, through his know-how, the claimant had
concretely assisted the DRC, for example by providing it with legal services in
a regular manner or by specifically bringing investors. Doing otherwise would
imply the risk of genuine abuses by granting the qualification as investor to
any legal counselling firm or law firm established in a foreign country, thereby
enabling it to take advantage of the special arbitration system of ICSID.
The ad hoc Committee clarified that:
the existence of a contribution to the economic development of the host State as
an essential although not sufficient characteristic or unquestionable criterion
of the investment, does not mean that this contribution must always be sizable
or successful; and, of course, ICSID tribunals do not have to evaluate the real
contribution of the operation in question. It suffices for the operation to contribute
in one way or another to the economic development of the host State, and this
concept of economic development is, in any event, extremely broad but also
variable depending on the case.221
The tribunal in Malaysian Historical Salvors, SDN, BHD v. Malaysia222
declined jurisdiction in a case involving a salvage operation off the coast of
Malaysia. The investor, Malaysian Historical Salvors, had retrieved some
24 000 pieces of Chinese porcelain from the Strait of Malacca in the early 1990s.
Much of the porcelain was sold at auction in 1995 for USD 3.4 million. Malaysian

220. Mr. Patrick Mitchell v. The Democratic Republic of Congo (n. 226), para. 40.
221. Ibid., para. 33.
222. Malaysian Historical Salvors SDN, BHD v. The Government of Malaysia, ICSID Case
No. ARB/05/10, Award on Jurisdiction, 17 May 2007.

72 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Historical Salvors later alleged that it received a smaller share of the profits than
it was promised under its contract with Malaysia. The company sought relief
through international arbitration under the UK-Malaysia BIT. In coming to a
decision on jurisdiction, the sole arbitrator wrestled with whether the company
had an investment in Malaysia as required under the ICSID Convention. After
reviewing previous cases where there was discussion on the definition of
investment, he considered to what degree the hallmarks of investment were
met: i) regularity of profits and returns; ii) contributions in money, in kind and in
industry; iii) the duration of the contract; iv) the risks assumed under the
contract and v) contribution to the economic development of the host sta te.
The Tribunal found that the Claimant made contributions in money, in kind and
in industry although, as the Respondent has pointed out, their size was in no
way comparable to those found in Salini, Bayindir and Jan de Nul or even in Joy
Mining. The criterion of duration was not satisfied in the qualitative sense
envisaged by ICSID jurisprudence. The fact that salvage contracts are typically
on a no-finds-no-pay basis also showed that risks assumed under the Contract
were no more than ordinary commercial risks assumed by many salvors in a
salvage contract.
Finding that the unusual nature of the salvage companys activities
meant that some of these criteria were either not met, or met only
superficially, the arbitrator paid particular attention to the criterion whether
the contract made a significant contribution to the economic development of
the host state. In the tribunals view, the term investment should be interpreted
in light of the Preamble of the ICSID Convention so that the contributions result
in some form of positive economic development for the host state. The tribunal
ultimately decided that the retrieved treasure did not make a significant
contribution to the Malaysian economy. The claim that local residents were
employed to wash, pack, inventory and photograph the porcelains did not meet
the quantity or quality envisaged by ICSID jurisprudence, nor should cultural
and historical benefits be conflated with economic benefits. Having decided
that Malaysian Historical Salvors contract with Malaysia did not constitute an
investment under the ICSID Convention, the arbitrator found it unnecessary
to determine whether it met the definition of an investment under the
UK-Malaysia BIT.
2. Limitations as to what can be an investment
Pre-investment expenditures. The question if expenditures prior to a
mutual agreement w ith the host country on a project constitute an
investment was raised in the cases Mihaly v. Sri Lanka, Zhinvali v. Georgia and
Nagel v. the Czech Republic (see above).
In Mihaly v. Sri Lanka,223 an ICSID tribunal constituted under the US-Sri
Lanka BIT, held that that pre-investment expenditure is not an investment

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
73
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

within the meaning of Article 25 of the ICSID Convention and that therefore it
lacked jurisdiction. The Tribunal stated that:
The Claimant has not succeeded in furnishing any evidence of treaty
interpretation or practice of states, let alone that of developing countries or Sri
Lanka for that matter, to the effect that pre-investment and development
expenditures in the circumstances of the present case could automatically be
admitted as investment in the absence of the consent of the host state to the
implementation of the project.224
In Zhinvali Development Ltd. v. Georgia, Zhinvali mounted a claim under
the terms of the Georgian national investment law. The dispute arose out of
the firms negotiations for the rehabilitation of a hydro-electric power plant in
Georgia. The firm reclaimed expenses of more than USD 26 million incurred
during negotiations with the government. However, in the award rendered by
an ICSID tribunal, the Tribunal argued that these up-front costs do not fall
under the definition of investment as set out in the ICSID Convention. In
addition, the required consent of the host state to treat development costs as
an investment was missing.
3. Typical characteristics v. jurisdictional requirements: A meaningful
distinction?
The review of the ICSID case-law suggests that in most cases the various
features of an investment have been examined in their totality, that they have
been frequently seen as interdependent and not always decisive.225 A closer
look at ICSID case-law also shows that the approach of ICSID tribunals
towards the issue of investment within the meaning of Article 25(1) tends
more towards an empirical rather than a dogmatic analysis, the qualification
of a specific operation essentially depending on the circumstances of each
case. The need for a global assessment of the indicative elements of an
investment and the recurring remarks calling for caution against casting them

223. Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, ICSID Case
No. ARB/00/2, Award and Concurrent Opinion of 15 March 2002, 17 ICSID Review
FILJ 142 (2002); 41 ILM 867 (2002). Mihaly Internatioanl Corp., a US company,
wanted to build a power plant in Sri Lanka. Although the negotiations between
Mihaly and Sri Lanka were never finalised, Mihaly invested in the preparation of
the BOT (build, operate, transfer) agreement and Sri Lanka issued a number of
documents guaranteeing the exclusivity of negotiations with Mihaly.
224. Zhinvali Development Ltd. v. Republic of Georgia, ICSID case No. ARB/00/1, Award of
24 January 2003, not published.
225. Malaysian Historical Salvors SDN, BHD v. The Government of Malaysia (n. 228)
para. 108. The tribunal agrees with the claimant that the criterion of regularity of
profits and return is not always critical. The claimant cited the example of a
pharmaceutical companys investment in the development of a drug. Before any
profits and returns could be realised the drug would have to be discovered, tested,
approved by the regulatory authority and accepted by the market.

74 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

as prerequisites, tend to deprive of any meaningful distinction any attempt to


oppose the so-called typical characteristic approach to the jurisdictional
requirements approach.226

C. Investment and ICSID Additional Facility


The Additional Facility provides for conciliation and arbitration
proceedings for the settlement of legal disputes that fall short of the
jurisdiction of the Centre because they do not arise directly out of an
investment. However, as pointed out by C. Schreuer, this does not mean that
any kind of dispute may be brought under the Additional Facility. The approval
of the Secretary-General being always necessary, the underlying transaction
must show features that distinguish it from an ordinary commercial
transaction such as:
Economic transactions which a) may or may not, depending on their terms be
regarded by the parties as investments for the purposes of the Convention; which
b) involve long-term relationships or the commitment of substantial resources on the
part of either party; and which, c) are of special importance to the economy of the
State party, can be clearly distinguished from ordinary commercial transactions.
Examples of such transactions may be found in various forms of industrial
cooperation agreements and major civil works contracts.227
Although many bilateral investment treaties expressly provide in their
dispute settlement clauses for proceedings under the Additional Facility to fill
a jurisdictional gap ratione personae, that would also open the door to for the
settlement of disputes that are covered by the BIT but excluded from ICSID
jurisdiction ratione materiae.

226. Ibid., para. 72: The Typical Characteristics Approach seeks to identify the established
hallmarks of investment, but cautions against casting them as prerequisites, no doubt to
guard against the infinite variety of cases that would arise before ICSID tribunals that
may deserve to be categorised as an investment notwithstanding the absence, whether
qualitatively or quantitatively, of a particular hallmark of investment since these
hallmarks of investment may be interdependent. Similarly, the Jurisdictional Approach
seeks to identify these established hallmarks of investment but is expressed in such
language as to lead to the conclusion that the failure to satisfy one or more of the
hallmarks of investment may be fatal to an investors claim. However, within the
Jurisdictional Approach, ICSID tribunals often remark that these hallmarks may be
interrelated, and must be examined in relation to other hallmarks as well as in relation to
the circumstances of the case. In other words, it may be that a particular hallmark of
investment may not be present when it is viewed in isolation; yet, when examined in the
light of other hallmarks of investment or taking into account the circumstances of the
case, a tribunal may still find jurisdiction for the Centre.
227. Comment iii) to Art. 4 of the Additional Facility Rules, 1 ICSID Reports 220.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
75
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

D. The relevance of the in accordance with the laws requirement


Many BITs provide for additional requirements by limiting the treaty
protection to investments that have been made in accordance with the laws
and regulations of the host state. Similar provisions are to be found, for
example, in the Sweden-Bosnia BIT, Art. 1(1). An analogous provision is
contained in the Italy-Morocco BIT according to which investments include all
categories of assets invested [] by a natural or legal person, [] on the
territory of the other Contracting Party, in accordance with the laws and
regulations of the aforementioned party. In the ICSID case Salini v. Morocco,
the tribunal interpreted the reference to the requirement of the conformity
with national laws and regulations as follows:
The Tribunal cannot follow the Kingdom of Morocco in its view that paragraph 1
of Article 1 refers to the law of the host State for the definition of investment. In
focusing on the categories of invested assets [] in accordance with the laws and
regulations of the aforementioned party, this provision refers to the validity of
the investment and not to its definition. More specifically, it seeks to prevent
the Bilateral Treaty from protecting investments that should not be protected,
particularly because they would be illegal228 [emphasis added].
In LESI-Dipenta v. Algeria, the ICSID tribunal similarly held that:
the reference by the provision to the requirement of the conformity to the
applicable laws and regulations does not constitute a formal recognition of the
notion of investment as defined by Algerian law in a restrictive manner, but,
in line with a standard and perfectly justified rule, the exclusion of the protection
for all investments that have been made in violation of the fundamental
principles that apply229 [emphasis added].
The non-compliance with municipal law and regulations would not result
in a jurisdictional bar since it does not create an obstacle to treaty coverage per se
and access to a neutral forum for the resolution of investment disputes, to the extent that
the asset under consideration falls under the definition of an investment provided by the
applicable treaty; rather, such alleged non-compliance may constitute a limitation with
respect to the merits of the claim related to the covered investment.230
In Saipem v. Bangladesh the tribunal concurred with the Salini v. Morocco
tribunal previous case-law by noting that the phrase in conformity with the laws
and regulations [of the host state] following the investment in Article 1(1) of

228. Salini Costruttori S.p.A. & Italstrade S.p.A., v. Kingdom of Morocco, (ICSID Case
No. ARB00/4), Decision on Jurisdiction, 16 July 2001, (2003) 42 ILM 606.
229. Consortium Groupement LESI-Dipenta v. Algeria, ICSID Case No. ARB/03/08, Award,
10 January 2005, para. 24 (unofficial translation from the original French text
available at www.worldbank.org/icsid).
230. E. Gaillard, Investments and Investors Covered by the Energy Charter Treaty, in
C. Ribeiro (n. 169), 62.

76 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

the BIT does not limit the definition of investment under the treaty to investment
within the laws and regulations of Bangladesh.231
However, the non-compliance with national laws has been recently
interpreted as a jurisdictional requirement. In Fraport v. The Republic of the
Philippines,232 the tribunal held by majority that an investment intentionally
structured in violation of Philippine Law in order for the investor to gain the
prohibited management and control of a project did not qualify as an
investment and fell outside the ICSID jurisdiction and the competence of the
tribunal. As a consequence, since the tribunal held by majority that there was
no investment in accordance with law, it also found that it lacked jurisdiction
ratione materiae. According to the majority of the tribunal economic transactions
undertaken by a national of one of the parties to the BIT have to meet certain
legal requirements of the host state in order to qualify as an investment.
In the dissenting opinion appended to the award, the third arbitrator took
the view that since the claimants shareholdings do constitute an investment
covered by Article 1(1) of the Germany-Philippines BIT which defines
investment as an asset and includes shares as a kind of asset, the
requirement that the investment shall be accepted in accordance with the
Philippine law could not be interpreted as a jurisdictional bar. As pointed out
in the dissenting opinion, [t]he purpose of these provisions is not to condition the
right to arbitrate on the minute compliance by the investor at all times and in all respects
with the domestic law and regulation of the Host State. [] Such an argument has been
raised before an international arbitral tribunal and was properly rejected because to
exclude an investment on the basis of such minor errors would be inconsistent with the
object and purpose of the Treaty (see Tokios Tokeles v. Ukraine, ICSID Case
No. ARB/02/18, Decision on Jurisdiction of 29 April 2004, paras 83-86). The
dissenting arbitrator also took care in distinguishing the present case form the
award rendered in Inceysa Vallisoletana S.L. v. Republic of El Salvador 233 which
involved systematic fraud in securing a contract with the Republic of
El Salvador, for the operation of vehicle inspection stations. In that case, the
tribunal held that there was no jurisdiction on a number of grounds, including
that the investment was not made in accordance with the laws of El Salvador.
But both good faith and international public policy considerations were
relevant in reaching this conclusion.

231. See also PSEG et al. v. Turkey, Decision on Jurisdiction, 4 June 2004, paras. 109,
116-120; Plama v. Bulgaria, Decision on Jurisdiction, 8 February 2005, 44 ILM 721
(2005), paras. 126-131; Bayindir v. Pakistan, Decision on Jurisdiction, 14 November
2005, paras. 105-110.
232. Fraport AG Frankfurt Airport Services Worldwide v. The Republic of the Philippines,
ICSID Case No. ARB/03/25, Award, 16 August 2007.
233. Inceysa Vallisoletana S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26, Award,
2 August 2006.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
77
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

E. Final remarks
The review of the investment treaty based arbitration case-law dealing
with the question of the definition of investment confirms that a variety of
activities can be included within this concept, which so far has been
interpreted in broad terms within certain outer limits under both ICSID and
non-ICSID arbitration. Another issue concern borderline operations, especially
those related to the supply of services. As made clear by ICSID tribunals, the
possibility that the supply of services might qualify as investments is not to be
excluded. As clearly shown by analysis of the arbitral awards, ICSID
jurisdiction is not open to any kind of operation that the parties might qualify
as an investment. Contracts for the international supply or the sale of goods,
no matter how complex they might be, have fallen outside ICSID jurisdiction.
Nevertheless, any claim not related to a purely commercial transaction could
be brought before ICSID under the Additional facility rules, if the parties do
provide their consent in the submission clause. Purely commercial disputes
have been successfully brought before ad hoc UNCITRAL tribunals or under the
auspices of the Stockholm Chamber of Arbitration, which have upheld their
jurisdiction on the basis of the ECT or BITs by extending the notion of
investment to encompass sales transactions, thus covering mere commercial
risks. Once the claim has been brought before an ICSID tribunal and
jurisdiction denied on the basis of lack of investment for the purposes of
Article 25 of the ICSID Convention, the same dispute could be resubmitted to
one of the other available fora. But if the ICSID tribunal rejects its jurisdiction
under both Art. 25 and the BIT, claimants would have no alternative options
on the basis of Art. 53 of the ICSID Convention, according to which the award
shall be binding on the parties.

78 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

ANNEX 1.A1

Definition of Investment
in Bilateral Investment Treaties
Model BITs
Canada model FIPA (2007)
Article 1 Definitions
investment means:
a) an enterprise;
b) shares, stocks and other forms of equity participation in an enterprise;
c) bonds, debentures, and other debt instruments of an enterprise;
d) a loan to an enterprise;
e) notwithstanding subparagraphs c) and d) above, a loan to or debt
security issued by a financial institution is an investment only where
the loan or debt security is treated as regulatory capital by the Party in
whose territory the financial institution is located;
f) an interest in an enterprise that entitles the owner to a share in income
or profits of the enterprise;
g) an interest in an enterprise that entitles the owner to share in the
assets of that enterprise on dissolution;
h) interests arising from the commitment of capital or other resources in
the territory of a Party to economic activity in such territory, such as
under:
i) contracts involving the presence of an investors property in the
territory of the Party, including turnkey or construction
contracts, or concessions such as to search for and extract oil
and other natural resources; or
ii) contracts where remuneration depends substantially on the
production, revenues or profits of an enterprise;

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
79
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

i) intellectual property rights; and


j) any other tangible or intangible, moveable or immovable, property and
related property rights acquired in the expectation or used for the
purpose of economic benefit or other business purpose;
but investment does not mean,
k) claims to money that arise solely from:
i) commercial contracts for the sale of goods or services by a
national or enterprise in the territory of a Contracting Party to an
enterprise in the territory of the other Contracting Party; or
ii) the extension of credit in connection with a commercial
transaction, such as trade financing, other than a loan covered
by subparagraph d); or
l) any other claims to money, that do not involve the kinds of interests set
out in subparagraphs a) to j).

France model BIT


Article 1 Definitions
For the purpose of this Agreement:
1. The term investment means every kind of assets, such as goods, rights
and interests of whatever nature, and in particular though not exclusively:
a) movable and immovable property as well as any other right in rem such
as mortgages, liens, usufructs, pledges and similar rights;
b) shares, premium on share and other kinds of interest including
minority or indirect forms, in companies constituted in the territory of
one Contracting Party;
c) title to money or debentures, or title to any legitimate performance
having an economic value;
d) intellectual, commercial and industrial property rights such as
copyrights, patents, licenses, trademarks, industrial models and mock-
ups, technical processes, know-how, trade names and goodwill;
e) business concessions conferred by law or under contract, including
concessions to search for, cultivate, extract or exploit natural resources,
including those which are located in the maritime area of the
Contracting Parties.
It is understood that those investments are investments which have already
been made or may be made subsequent to the entering into force of this
Agreement, in accordance with the legislation of the Contracting Party on the
territory or in the maritime area of which the investment is made.

80 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Any alteration of the form in which assets are invested shall not affect their
qualification as investments provided that such alteration is not in conflict
with the legislation of the Contracting Party on the territory or in the maritime
area of which the investment is made.

German model BIT (2005)


Article 1
For the purposes of this Treaty:
1. the term investments comprises every kind of asset, in particular:
a) movable and immovable property as well as any other rights in rem,
such as mortgages, liens and pledges;
b) shares of companies and other kinds of interest in companies;
c) claims to money which has been used to create an economic value or
claims to any performance having an economic value;
d) intellectual property rights, in particular copyrights, patents, utility-
model patents, industrial designs, trade-marks, trade-names, trade
and business secrets, technical processes, know-how, and good will;
e) business concessions under public law, including concessions to search
for, extract and exploit natural resources.
Any alteration of the form in which assets are invested shall not affect their
classification as investment.

UK model BIT (2005)


Article 1 Definitions
For the purposes of this Agreement:
investment means every kind of asset and in particular, though not
exclusively, includes:
i) movable and immovable property and any other property rights such as
mortgages, liens or pledges;
ii) shares in and stock and debentures of a company and any other form
of participation in a company;
iii) claims to money or to any performance under contract having a
financial value;
iv) intellectual property rights, goodwill, technical processes and know-
how;
v) business concessions conferred by law or under contract, including
concessions to search or, cultivate, extract or exploit natural resources.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
81
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

A change in the form in which assets are invested does not affect their
character as investments and the term investment includes all investments,
whether made before or after the date of entry into force of this Agreement.

US model BIT (2004)


Article 1 Definitions []
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;234
d) futures, options, and other derivatives;
e) turnkey, construction, management, production, concession, revenue-
sharing, and other similar contracts;
f) intellectual property rights;
g) licenses, authorisations, permits, and similar rights conferred pursuant
to domestic law;235, 236 and
h) other tangible or intangible, movable or immovable property, and
related property rights, such as leases, mortgages, liens, and pledges.

234. Some forms of debt, such as bonds, debentures, and long-term notes, are more
likely to have the characteristics of an investment, while other forms of debt,
such as claims to payment that are immediately due and result from the sale of
goods or services, are less likely to have such characteristics.
235. Whether a particular type of license, authorisation, permit, or similar instrument
(including a concession, to the extent that it has the nature of such an instrument)
has the characteristics of an investment depends on such factors as the nature and
extent of the rights that the holder has under the law of the Party. Among the
licenses, authorisations, permits, and similar instruments that do not have the
characteristics of an investment are those that do not create any rights protected
under domestic law. For greater certainty, the foregoing is without prejudice to
whether any asset associated with the license, authorisation, permit, or similar
instrument has the characteristics of an investment.
236. The term investment does not include an order or judgment entered in a
judicial or administrative action.

82 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

BIT by countries
Australia-Czech Republic BIT
(Canberra, 30 September 1993 Entry into force: 29 June 1994)
Article 1 Definitions
1) For the purposes of this Agreement:
a) investment means every kind of asset, owned or controlled by
investors of one Contracting Party and admitted by the other
Contracting Party subject to its law and investment policies applicable
from time to time including activities associated with investments.
Investment includes but is not limited to:
i) tangible and intangible property, including rights, such as
mortgages, liens and pledges;
ii) shares, stocks, bonds and debentures and any other form of
participation in a company;
iii) a loan or other claim to money or a claim to performance having
economic value;
iv) intellectual property rights, including industrial property rights
such as patents, trademarks, trade names, industrial designs,
copyright, know-how and goodwill; and
v) business concessions and any other rights required to conduct
economic activity and having economic value conferred by law
or under a contract, including rights to engage in agriculture,
forestry, fisheries and animal husbandry, to search for, extract or
exploit natural resources and to manufacture, use and sell
products.

Austria-Mexico BIT
(29 June 1998 Entry into force: 26 March 2001)
Article 1 Definitions []
2) Investment by an investor of a Contracting Party means every kind of
asset in the territory of one Contracting Party, owned or controlled, directly or
indirectly, by an investor of the other Contracting Party, including:
a) an enterprise constituted or organised under the applicable law of the
first Contracting Party;
b) shares, stocks and other forms of equity participation in an enterprise
as referred to in subparagraph a), and rights derived therefrom;
c) bonds, debentures, loans and other forms of debt and rights derived
therefrom;

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
83
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

d) rights under contracts, including turnkey, construction, management,


production or revenue-sharing contracts;
e) claims to money and claims to performance pursuant to a contract
having an economic value;
f) intellectual and industrial property rights as defined in the multilateral
agreements concluded under the auspices of the World Intellectual
Property Organisation, including copyright, trademarks, patents,
industrial designs and technical processes, know-how, trade secrets,
trade names and goodwill;
g) rights conferred by law or contract such as concessions, licenses,
authorisations or permits to undertake an economic activity;
h) any other tangible or intangible, movable or immovable property, or any
related property rights, such as leases, mortgages, liens, pledges or
usufructs.
Commercial transactions designed exclusively for the sale of goods or services
and credits to finance commercial transactions with a duration of less than three
years, other credits with a duration of less than three years, as well as credits
granted to the State or to a State enterprise are not considered an investment.

Belgian-Luxembourg-Economic Union-China treaty


(Brussels, 4 June 1984 Entry into force: 5 October 1986)
Article 1 []
2. Investments means every kind of asset or property used as investments or
reinvestment, in particular, though not exclusively, includes:
a) movable, or immovable property and any other property rights such as
mortgages, liens, pledges, usufructs and other similar rights;
b) shares, stock, and interests in other forms;
c) debentures, claims or claims to any performance having a financial
value;
d) copyrights, industrial property rights, technical process, registered
trademarks, trade names and goodwill; or
e) concessions to search for, extract or exploit natural resources.
The above asset or property used as investment shall be in conformity with
the laws of the Contracting Party accepting the investment.
Any change in the form in which assets or property are invested does not
affect their character as investments defined in this Agreement.

84 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Canada-Argentina BIT
(Toronto, 5 November 1991 Entry into force: 29 April 1993)
Article 1 Definitions
For the purpose of this agreement:
a) the term means any kind of asset defined in accordance with the laws
and regulations of the Contracting Parties in whose territory the
investment is made, held or invested either directly, or indirectly
through an investor of a third State, by an investor of one Contracting
Party in the territory of the other Contracting Party, in Accordance with
the latters laws It includes in particular, though not exclusively:
i) movable and immovable property and any related property
rights, such as mortgages, liens or pledges;
ii) shares, stock, bonds and debentures or any other form of
participation in a company, business enterprise or joint venture
money, claims to contract having a and loans;
iii) money, claims to performance under financial value, related to a
specific investment;
iv) intellectual property rights, including rights with respect to
copyrights, patents, trademarks as well as trade names,
industrial designs, good will, trade secrets and know-how;
v) rights, conferred by law or under contract, to undertake any
economic and commercial activity, including any rights to
search for, cultivate, extract or exploit natural resources.
Any change in the form of an investment does not affect its character as an
investment.

Czech Republic-United States BIT


(Washington, 22 October 1991 Entry into force: 19 December 1992)
Article 1
1. For the purposes of this Treaty:
a) investment means every kind of investment in the territory of one
Party owned or controlled directly or indirectly by nationals or
companies of the other Party, such as equity, debt, and service and
investment contracts; and includes:
i) tangible and intangible property, including movable and
immovable property, as well as rights, such as mortgages, liens
and pledges;
ii) a company or shares of stock or other interests in a company or
interests in the assets thereof;

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
85
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

iii) a claim to money or a claim to performance having economic


value, and associated with an investment;
iv) intellectual property which includes, inter alia, rights relating to:
literary and artistic works, including sound recordings,
inventions in all fields of human endeavour, industrial designs,
semiconductor mask works, trade secrets, know-how, and
confidential business information, and trademarks, service
marks, and trade names; and
v) any right conferred by law or contract, and any licenses and
permits pursuant to law.

Denmark-India BIT
(New Delhi, 6 September 1995 Entry into force: 28 August 1996)
Article 1 Definitions
For the purpose of this Agreement:
1) the term investment means every kind of asset established or acquired in
accordance with the national laws of the Contracting Party in whose territory
the investment is made and shall include in particular, but not exclusively:
a) movable and immovable property, as well as any other rights such as
leases, mortgages, liens, pledges, privileges, guarantees and any other
similar rights;
b) shares, stock or other forms of participation in a company or business
enterprise and bonds and debt of a company or business enterprise;
c) returns reinvested, rights to money and performance pursuant to
contract having an economic or financial value;
d) industrial and intellectual property rights, such as copy rights, patents,
trade names, technical processes, trademarks, goodwill and know-how
in accordance with relevant laws of the respective Contracting Party;
e) concessions or other rights conferred by law or under contract,
including concessions to search for, extract or exploit oil and other
minerals.

Finland-Turkey BIT
(Ankara, 13 May 1993 Entry into force: 12 April 1995)
Article 1 Definitions
1. For the purposes of this Agreement: []
b) investment means any kind of asset and in particular, though not
exclusively, includes:

86 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

i) movable and immovable property and any other property rights


such as mortgages, liens or pledges;
ii) shares or any other form of participation;
iii) title or claim to money or right to any performance having an
economic value and related to an investment;
iv) intellectual and industrial property rights, including rights with
respect to copyrights, patents, trademarks, business names,
industrial designs, trade secrets, technical processes, know-how
and goodwill;
v) concessions conferred by law or under contract including
concessions to search for, cultivate, extract or exploit natural
resources.

France-Mexico BIT
(12 November 1998)
Article 1 Definitions
For the purpose of this Agreement:
1. the term investment means every kind of asset, such as goods, rights and
interest of whatever nature, including property rights, acquired or used for the
purpose of economic benefit or other business purposes, and in particular
though not exclusively:
a) movable and immovable property as well as any other right in rem such
as mortgages, liens, usufructs, pledges and similar rights;
b) shares, premium on share and other kinds of interest including
minority or indirect forms, in companies constituted in the territory of
one Contracting Party;
c) title to money or debentures, or title to any legitimate performance
having an economic value;
d) intellectual, commercial and industrial property rights such as
copyrights, patents, licenses, trademarks, industrial models and mock-
ups, technical processes, know-how, trade names and goodwill;
e) rights derived from any concession conferred by any legal means.
In accordance with the definition here above, any alteration of the form in
which assets are invested shall not affect their qualification as investments
provided that such alteration is nor in conflict with the legislation of the
Contracting Party in the territory or in the maritime area of which the
investment is made.
But investment does not mean claims to money derived solely from
commercial transactions designed exclusively for the sale of goods or services

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
87
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

by a national or legal person in the territory of one Contracting Party to a


national or legal person in the territory of the other Contracting Party, credits
to finance commercial transactions such as trade financing, and other credits
with a duration of less than three years, as well as credits granted to the State
or to a State enterprise.
However, this shall not apply to credits or loans provided by an investor of a
Contracting Party to an enterprise of the other Contracting Party which is
owned or controlled by that investor.

Germany-Russian Federation BIT


(Bonn, 28 January 1993)
Article 1
1) For the purposes of this Agreement:
a) the term investment shall apply to all types of assets which an
investor of one Contracting Party invests in the territory of the other
Contracting Party in accordance with its legislation, in particular:
i) property, and other real rights such as usufructs, mortgages and
similar rights ;
ii) shares and other forms of participation in commercial
enterprises and organisations;
iii) claims to money invested to create an economic value, or
services having an economic value;
iv) copyright, industrial property rights such as rights to inventions,
including rights deriving from patents, trademarks, industrial
models, trading marks of retail bodies, models, trade names,
and technology and know-how;
v) rights to engage in economic activity, including concessions for
prospecting for, cultivating, mining or developing natural
resources accorded under the legislation of the Contracting
Party in whose territory the investments are made, or by virtue
of a contract.

Greece-Korea BIT
(Athens, 25 January 1995 Entry into force: 4 November 1995)
Article 1 Definitions
For the purposes of this Agreement:
1. investments shall mean every kind of asset invested by investors of one
Contracting Party in the territory of the other Contracting Party, and in
particular, though not exclusively, include:

88 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

a) movable and immovable property and any other property rights such as
mortgages, liens and pledges;
b) shares in, stocks and debentures of a company and any other form of
participation in a company;
c) claims to money or to any performance under contract having an
economic value;
d) industrial and intellectual property rights, including rights with respect
to copyrights, patents, trademarks, trade names, industrial designs,
trade secrets, technical processes and know-how and goodwill;
e) business concessions of economic value necessary for conducting
economic activities, conferred by law or under contract, including
concessions to search for, cultivate, extract and exploit natural
resources; and
f) goods that, under a leasing agreement, are placed at the disposal of a
lessee in the territory of a Contracting Party in conformity with its laws
and regulations.
Any alteration of the form in which assets are invested shall not affect their
character as investments, provided that such a change does not contradict the
laws and regulations of the relevant Contracting Party.

Hungary-Spain BIT
(Budapest, 9 November 1989 Entry into force: 1 August 1992)
Article 1
For the purposes of the present Agreement:
1. the term investments shall comprise every kind of asset connected with
the participation in companies and joint ventures, more particularly, though
not exclusively:
a) movable and immovable property as well as any other rights in rem in
respect of every kind of asset;
b) rights derived from shares, bonds and other kinds of interests in
companies;
c) title to money, goodwill and other assets and to any performance
having an economic value;
d) rights in the field of intellectual property, technical processes and
know-how;
e) business concessions conferred by law or under contract, including
concessions to search for, cultivate, extract or exploit natural resources.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
89
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Iceland-Lebanon BIT
(Montreux, 24 June 2004)
Article l Definitions
For the purposes of this Agreement:
l. the term investment shall mean every kind of asset invested in connection
with economic activities by an investor of one Contracting Party in the
territory of the other Contracting Party in accordance with the legislation of
the latter and shall include, in particular, though not exclusively:
a) movable and immovable property and derived rights, such as leases,
mortgages, liens or pledges;
b) shares, stocks and any other form of participation in a company;
c) claims to money or to any performance under contract having a
financial value associated with an investment or returns reinvested;
d) intellectual property rights, including trademarks, patents, registered
design rights, copyright, semiconductor topographies rights and plant
varieties rights associated with an investment;
e) any right conferred by laws or under contract and any licenses and
permits pursuant to laws, including the concessions to search for,
extract, cultivate or exploit natural resources.
Any alteration of the form in which assets are invested shall not affect their
character as investment.

Ireland-Czech Republic BIT


(Dublin, 28 June 1996 Entry into force: 1 August 1997)
Article 1 Definitions
For the purpose of this Agreement:
1. the term investment shall comprise every kind of asset investment in
connection with business activities by an investor of one Contracting Party in
the territory of the other Contracting Party in accordance with the laws and
regulations of the latter and shall include, in particular, though not
exclusively:
a) movable and immovable property and any other property rights such as
mortgages, liens or pledges;
b) shares, stocks and debentures of a company and any other form of
participation in a company;
c) claims to money or to any performance under contract having a
financial value associated with an investment;

90 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

d) intellectual property rights, including copyrights, trademarks, patents,


industrial designs, technical processes, know how, trade secrets, trade
names and goodwill associated with an investment;
e) any right conferred by laws under contract and any licenses and
permits pursuant to laws, including the concessions to search for,
extract, cultivate or exploit natural resources.
Any alteration of the form in which assets are invested does not affect their
character as investments.

Italy-Korea BIT
(Seoul, 10 January 1989 Entry into force: 26 June 1992)
Article 2
For the purpose of this Agreement:
1. the term investment means every kind of asset accepted in accordance
with the respective laws and regulations of either Contracting party, and more
particularly, though not exclusively:
a) movable and immovable property as well as any other rights in rem,
such as mortgages, liens, pledges, usufructs and similar rights;
b) shares, stocks and debentures of companies or interests in the property
of such companies;
c) claims to money utilised for the purpose of creating an economic value
or to any performance having an economic value;
d) copyrights, industrial property rights, technical process, know-how,
trademarks and trade names;
e) business concessions conferred by law or under contract, including
concessions to search for, extract or exploit natural resources.
Any admitted alternation of the form in which assets are invested shall not
affect their classification as an investment.

Japan-Turkey BIT
(Ankara, 12 February 1992 Entry into force: 12 March 1993)
Article 1
For the purposes of the present Agreement:
1. the term investments comprises every kind of asset including:
a) shares and other types of holding of companies;
b) claims to money or to any performance under contract having a
financial value which are associated with investment;
c) rights with respect to movable and immovable property;

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
91
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

d) patents of invention, rights with respect to trademarks, trade names,


trade labels and any other industrial property, and rights with respect
to know-how ; and
e) concession rights including those for the exploration and exploitation
of natural resources.

Korea-Belgian-Luxemburg economic union treaty


(Brussels, 20 December 1974 Entry into force: 3 September 1976)
Article 3
1) The term investments shall comprise every direct or indirect contribution
of capital and any other kind of assets, invested or reinvested in enterprises in
the field of agriculture, industry, mining, forestry, communications and
tourism. The following shall more particularly, though not exclusively, be
considered as investments within the meaning of the present Agreement:
a) movable and immovable property as well as any other right in rem
such as mortgages, pledges, usufructs and similar rights;
b) shares and other kinds of interest in companies;
c) debts and rights to any performance having economic value;
d) copyrights, marks, patents, technical processes, trade-names, trade-
marks and goodwill;
e) concessions under public law.

Mexico-Greece BIT
(Mexico City, 30 November 2000 Entry into force: 26 September 2002)
Article 1 Definitions
For the purposes of this Agreement:
1. investment means every kind of asset acquired or used for economic
purposes and invested by 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 and, in particular though not exclusively, includes:
a) movable and immovable property and any rights in rem such as
servitudes, ususfructus, mortgages, liens or pledges;
b) shares in and stock of a company and any other form of participation in
a company;
c) claims to money, to other assets and to any performance having an
economic value, except for:
i) claims to money that arise solely from commercial contracts for
the sale of goods and services;

92 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

ii) the extension of credit in connection with a commercial


transaction, such as trade financing;
iii) credits with a maturity of less than three years, by an investor in
the territory of a Contracting Party to a natural or legal person in
the territory of the other Contracting Party. However, the
exception concerning credits with a maturity of less than three
years, shall not apply to credits granted by an investor of a
Contracting Party to a legal person of the other Contracting Party
that is an affiliate of that investor.
d) intellectual property rights;
e) rights, derived from a concession, conferred by any legal means;
f) returns.
A possible change in the form in which the investments have been made does
not affect their character as investments, provided that such a change is
included in the definition of investment.
A payment obligation from, or the granting of a credit to a Contracting Party or
to a state enterprise is not considered an investment.

Netherlands-China BIT
(26 November 2001)
Article 1 Definitions
For the purpose of this Agreement:
1. the term investment means every kind of asset invested by investors of
one Contracting Party in the territory of the other Contracting Party, and in
particularly, though not exclusively, includes:
a) movable and immovable property and other property rights such as
mortgages and pledges;
b) shares, debentures, stock and any other kind of participation in
companies;
c) claims to money or to any other performance having an economic
value associated with an investment;
d) intellectual property rights, in particularly copyrights, patents, trade-
marks, trade-names, technological process, know-how and goodwill;
e) business concessions conferred by law or under contract permitted by
law, including concessions to search for, cultivate, extract or exploit
natural resources.
Any change in the form in which assets are invested does not affect their
character as investments.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
93
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

New Zealand-China BIT


(Wellington, 22 November 1988 Entry into force: 25 March 1989)
Article 1 Definitions
For the purposes of this Agreement:
1) the term investments means all kinds of assets which have been invested
in accordance with the laws of the Contracting Party receiving them including
though not exclusively any:
a) movable and immovable property and other property rights such as
mortgage, usufruct, lien or pledge;
b) share, stock, debenture and similar interests in companies;
c) title or claim to money or to any contract having a financial value;
d) copyright, industrial property rights (such as patents for inventions,
trademarks, industrial design), know-how, technical processes, trade
names and goodwill; and
e) business concessions conferred by law or under contract including any
concession to search for, cultivate, extract or exploit natural resources.

Norway-Czech Republic BIT


(Oslo, 21 May 1991 Entry into force: 6 August 1992)
Article I Definitions
For the purpose of the present agreement:
1. the term investment shall comprise every kind of asset invested by an
investor of one contracting party in the territory of the other contracting party,
provided that the investment has been made in accordance with the laws and
regulations of the other contracting party and shall include in particular,
though not exclusively:
a) movable and immovable property and any other property rights such as
mortgages, liens, pledges and similar rights;
b) shares, debentures or any other forms of participation in companies;
c) claims to money which has been used to create an economic value or
claims to any performance under contract having an economic value;
d) copyrights, industrial property rights (such as patents, utility models,
industrial designs or models, trade or service marks, trade names,
indications of origin), know-how and good-will;
e) business concessions conferred by law, or under contract if permitted
by law, including concessions to search for, cultivate, extract and
exploit natural resources.

94 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Poland-China BIT
(Beijing, 7 June 1988 Entry into force: 8 January 1989)
Article 1
For the purpose of this Agreement:
a) the term investments means every kind of asset made as investment in
accordance with the laws and regulations of the Contracting Party accepting
the investment in its territory, including mainly:
i) movable and immovable property and other rights in rem;
ii) shares in companies or other form of interest in such companies;
iii) a claim to money or to any performance having an economic value;
iv) copyrights, industrial property rights, know-how and technical process;

Portugal-Mexico BIT
(11 November 1999 Entry into force: 4 September 2000)
Article 1 Definitions
For the purpose of this Agreement:
1. the term investment shall mean every kind of asset and rights invested by
investors of one Contracting Party in the territory of the other Contracting
Party in accordance with the laws and regulations of the latter including, in
particular, though not exclusively:
a) movable and immovable property, acquired or used for economic
purposes, as well as any other rights in rem, such as mortgages, liens,
pledges and similar rights;
b) shares, stocks, debentures, or other forms of interest in the equity of
companies or other forms of participation and/or economic interests
from the respective activity;
c) claims to money, to other assets and to any performance having an
economic value, except for:
i) claims to money that arise solely from commercial contracts for
the sale of goods or services;
ii) the extension of credits in connection with a commercial
transaction, such as trade financing;
iii) credits with a maturity of less than three years, by an investor in
the territory of a Contracting Party to an investor in the territory
of the other Contracting Party. However, the exception
concerning credits with a maturity of less than three years, shall
not apply to credits granted by an investor of a Contracting Party

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
95
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

to a company of the other Contracting Party owned by the


former investor.
d) intellectual property rights such as copyrights, patents, utility models,
industrial designs, trademarks, trade names, trade and business
secrets, technical processes, know-how and good will;
e) concessions conferred by law under a contract or administrative act of
a competent authority;
f) assets that are placed at the disposal of a lessee, in the territory of a
Contracting Party, under a leasing agreement and in conformity with its
laws and regulations.
Any alteration on the form in which assets are invested does not affect their
character as investments, provided that such alteration is included in the
aforesaid definition and do not contradict the laws and regulations of the
Contracting Party in which territory the investment was made.
A payment obligation from, or the granting of a credit to a Contracting Party or
to a state enterprise is not considered an investment.

Slovak Republic-Republic of Korea BIT


(Seoul, 24 May 2005)
Article 1 Definitions
For the purposes of this Agreement:
1. investment means every kind of assets or rights invested by investors of
one Contracting Party in the territory of the State of the other Contracting
Party in accordance with the legislation of the latter Contracting Party and in
particular, though not exclusively, includes:
a) movable and immovable property and any other property rights such as
mortgages, liens, leases or pledges;
b) shares in, stocks and debentures of, and any other form of participation
in a company or any business enterprise and rights or interest derived
therefrom;
c) claims to money or to any performance under contract having an
economic value;
d) intellectual property rights including rights with respect to copyrights,
patents, trademarks, trade names, industrial designs, technical
processes, trade secrets and know-how, and goodwill; and
e) business concessions having an economic value conferred by law or
under contract, including concessions to search for, cultivate, extract or
exploit natural resources.

96 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Any change of the form in which assets or rights are invested or reinvested
shall not affect their character as an investment.

Spain-Czech Republic BIT


(Madrid, 12 December 1990 Entry into force: 28 November 1991)
Article 1 Definitions
For the purposes of this Agreement:
1. the term investments shall apply to all types of assets acquired in
accordance with the laws of the country in which such investment is made
and particularly, but not exclusively, to:
a) movable and immovable property and all other real rights such as
mortgages, sureties, beneficial interests and similar rights as regards
any type of assets;
b) rights deriving from shares, bonds, and other types of participation in
private or public companies, whether having a fixed or variable income,
commercial financial bans and whether capitalised or not;
c) monetary assets, claims and cash, other assets and any other benefit
having an economic value;
d) industrial property rights, trademarks and other rights derived from
intellectual property including business assets and technical know-how;
e) concessions accorded by law or by virtue of a contract, including
concessions for prospecting, cultivating, mining or developing natural
resources.

Sweden-Argentina BIT
(Stockholm, 22 November 1991 Entry into force: 28 September 1992)
Article 1 Definitions
1) The term investment shall comprise every kind of asset, invested by an
investor of one Contracting Party in the territory of the other Contracting
Party, provided that the investment has been made in accordance with the
laws and regulations of the other Contracting Party, and shall include un
particular, though not exclusively:
a) movable and immovable property as well as any other property rights,
such as mortgage, lien, pledge, usufruct and similar rights;
b) shares and other kinds of interest in companies;
c) title to money which is directly related to specific investment or to any
performance under contract having an economic value;

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
97
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

d) patents, other industrial property rights, technical processes, trade


names, know-how and other intellectual property rights as well as
good-will; and
e) business concessions conferred by law, administrative decisions or
contracts, including concessions to search for, cultivate, extract or
exploit natural resources.
The meaning and scope of the assets above mentioned shall be determined by
the laws and regulations of the Contracting Party in whose territory the
investment was made.
No alteration of the legal form under which the assets have been invested or
reinvested shall affect their qualification as investments according to this
Agreement.

Switzerland-Mexico BIT
(10 July 1995 Entry into force: 14 March 1996)
Article 1 Definitions
For the purposes of this Agreement: []
3. investment means every kind of asset and particularly:
a) movable property, immovable property acquired or used for economic
purposes, as well as any other rights in rem, such as servitudes,
mortgages, liens, pledges;
b) shares, parts or any other kind of participation in companies;
c) claims to money or to any performance having an economic value,
except for claims to money that arise solely from commercial contracts
for the sale of goods or services, and the extension of credit in
connection with a commercial transaction, which maturity date is less
than three years, such as trade financing;
d) copyrights, industrial property rights (such as patents, utility models,
industrial designs or models, trade or service marks, trade names,
indications of origin), know-how and goodwill;
e) interests arising from the commitment of capital or other resources in
the territory of one Party to economic activity in such territory, such as
under contracts involving the presence of an investors property in the
territory of such Party, including turnkey or construction contracts, or
concessions.
A payment obligation from, or the granting of a credit to, the State or a state
enterprise is not considered an investment.

98 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

Turkey-Denmark BIT
(Copenhagen, 7 February 1990 Entry into force: 1 August 1992)
Article 1 Definitions
For the purpose of this Agreement:
1) a) The term investment means every kind of asset and in particular, but
not exclusively:
i) stocks or any other form of participation in companies;
ii) returns reinvested, claims to money or other rights having a
financial value to an investment;
iii) movable and immovable property, as well as any other rights as
mortgages, liens, pledges and any other similar rights as defined
in conformity with the law of the Contracting Party in the
territory where the property is situated;
iv) industrial and intellectual property rights, patents, industrial
designs, trademarks, goodwill, know-how and any other similar
rights, business concessions conferred by law or by contract,
including the concessions related to natural resources.
b) The said term shall refer to all direct investments made in accordance
with the laws and regulations in the territory of the Contracting Party
where the investments are made.
The term investments covers all investments made in the territory of a
Contracting Party by investors of the other Contracting Party before or after
the entry into force of this Agreement.

United Kingdom-South Africa BIT


(Cape Town, 20 September 1994 Entry into force: 27 May 1998)
Article 1 Definition
For the purpose of this Agreement:
a) investment means every kind of asset and in particular, though not
exclusively, includes:
i) movable and immovable property and any other property rights such as
mortgages, liens or pledges;
ii) shares in and stock and debentures of a company and any other form
of participation in a company;
iii) claims to money or to any performance under contract having a
financial value;
iv) intellectual property rights, goodwill, technical processes and know-
how;

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
99
1. DEFINITION OF INVESTOR AND INVESTMENT IN INTERNATIONAL INVESTMENT AGREEMENTS

v) business concessions conferred by law or under contract, including


concessions to search for, cultivate, extract or exploit natural resources.
A change in the form in which assets are invested does not affect their
character as investments and the term investment includes all investments,
whether made before or after the date of entry into force of this Agreement.

United States-Argentina BIT


(Washington, 14 November 1991 Entry into force: 20 October 1994)
Article 1
1. For the purposes of this Treaty:
a) investment means every kind of investment in the territory of one
Party owned or controlled directly or indirectly by nationals or
companies of the other Party, such as equity, debt, and service and
investment contracts; and includes without limitation:
i) tangible and intangible property, including rights, such as
mortgages, liens and pledges;
ii) a company or shares of stock or other interests in a company or
interests in the assets thereof;
iii) a claim to money or a claim to performance having economic
value and directly related to an investment;
iv) intellectual property which includes, inter alia, rights relating to:
literary and artistic works, including sound recordings,
inventions in all fields of human endeavour, industrial designs,
semiconductor mask works, trade secrets, know-how, and
confidential business information, and trademarks, service
marks, and trade names; and
v) any right conferred by law or contract, and any licenses and
permits pursuant to law.

100 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
ISBN 978-92-64-04202-5
International Investment Law:
Understanding Concepts and Tracking Innovations
OECD 2008

Chapter 2

Interpretation of the Umbrella Clause


in Investment Agreements*

Umbrella clauses have become a regular feature of international


investment agreements and have been included to provide additional
protection to investors by covering the contractual obligations in
investment agreements between host countries and foreign investors. The
meaning of the umbrella clauses is one of the most controversial issues
with which international arbitral tribunals have been recently confronted
with while adjudicating investment disputes brought before them.
Through a wide review of the specific textual provisions included in
investment agreements, the survey seeks to serve as guidance for
negotiators by clarifying the implications deriving from the choice of
different drafting options. The paper further examines the interpretation
of the clause given by arbitral tribunals on a case-by-case basis. Caution
is recommended in trying to draw any conclusions on the interpretation of
the clause since the jurisprudence in this field is constantly evolving.

* This paper was prepared by Katia Yannaca-Small, Legal Advisor, Investment


Division, Directorate for Financial and Enterprise Affairs, OECD. Thanks are due to
Catriona Paterson, a consultant to the Investment Division, for research input. The
paper as a factual survey does not necessarily reflect the views of the OECD or those
of its member governments. It cannot be construed as prejudging ongoing or future
negotiations or disputes pertaining to international investment agreements.

101
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

Introduction
An increasing number of investment treaty arbitrations involve not only
the treaties themselves but also investor-state contracts.
The extent of subject matter (rationae materiae) jurisdiction is not uniform
under Bilateral Investment Treaties (BITs). Some BITs cover only disputes
relating to an obligation under this agreement, i.e. only for claims of BIT
violations. Others extend the jurisdiction to any dispute relating to
investments. Some others create an international law obligation that a host
state shall, for example, observe any obligation it may have entered to;
constantly guarantee the observance of the commitments it has entered into;
observe any obligation it has assumed, and other formulations, in respect to
investments. These provisions are commonly called umbrella clauses, although
other formulations have also been used: mirror effect, elevator, parallel
effect, sanctity of contract, respect clause and pacta sunt servanda. Clauses
of this kind have been added to provide additional protection to investors and
are directed at covering investment agreements that host countries frequently
conclude with foreign investors.
Although the umbrella clause has been known since the 1950s and its
effects have been discussed in literature and doctrine, it was not until the
recent two SGS Socit Gnrale de Surveillance SA cases where it started to be
tested.1 Given the very frequent occurrence of the umbrella clause in modern
investment treaties, and the different language used in these treaties, it would
be useful to examine further the meaning of this clause in particular by taking
stock of the specific language included in a number of BITs. The aim of this
examination is to improve an understanding of the interpretations of this
clause and assist treaty negotiators and parties in taking informed decisions.
For a better understanding of the clause, the present paper first gives a
brief overview of its history and its place in the literature and doctrine.
Second, it takes stock of the specific language included in a number of BITs,
using those of Switzerland, Germany, Denmark, Japan and the United States

1. As Thomas Wlde notes: The question of whether an international arbitration


tribunal had jurisdiction over contractual counter-claims was never fully examined,
nor was the question of whether contractual jurisdiction clauses should oust or
precede the jurisdiction of treaty-based tribunals in The Umbrella Clause in
Investment Arbitration A Comment on Original Intentions and Recent Cases, The
Journal of World Investment and Trade, Vol. 6 No. 2, April 2005, Geneva.

102 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

as representative examples of the different types. Third, it looks at the


interpretation given to the clause by arbitral tribunals.

I. History of the clause and literature


A. History of the clause and state practice
The first occurrence of the umbrella clause2 as a distinct investment
protection clause can be traced to the 1956-59 Abs Draft International
Convention for the Mutual Protection of Private Property Rights in Foreign
Countries (the Abs draft) (article 4):3
In so far as better treatment is promised to non-nationals than to nationals
either under intergovernmental or other agreements or by administrative decrees
of one of the High contracting Parties, including most-favoured nation clauses,
such promises shall prevail.
This approach was reformulated in the 1959 Abs-Shawcross Draft
Convention on Foreign Investment (Article II):4
Each Party shall at all times ensure the observance of any undertakings which it
may have given in relation to investments made by nationals of any other party.
The clause appeared right afterwards in the first BIT between Germany
and Pakistan in 1959 (Article 7):
Either Party shall observe any other obligation it may have entered into with
regard to investments by nationals or companies of the other party.
The clause was also one of the core substantive rules of the 1967 OECD draft
Convention on the Protection of Foreign Property (Article 2)5 which provided that:

2. For a complete history of the umbrella clause see A.C. Sinclair: The Origins of the
Umbrella Clause in the International Law of Investment Protection, Arbitration
International 2004, Vol. 20, No. 4, pp. 411-434. Sinclairs research suggests that the
origins can be traced to the advice provided by Sir Elihu Lauterpracht in 1953-54 to
the Anglo-Iranian Oil Company in connection with the settlement of the Iranian oil
nationalisation dispute. The so-called umbrella or parallel protection treaty was
again proposed in Lauterprachts advice given in 1956-57 to a group of oil companies
contemplating a trunk pipeline from Iraq in the Persian Gulf through Syria and
Turkey to the Eastern Mediterranean.
3. See H.J. Abs Proposals for Improving the Protection of Private Foreign Investments,
In Institut International dtudes Bancaires, Rotterdam, 1958 as cited by A. Sinclair,
op. cit., note 2.
4. The text of the Abs-Shawcross Draft is reprinted in UNCTAD International
Investment Instruments: A Compendium in United Nations, New York, 2000, Vol. V.
p. 395.
5. Draft Convention on the protection of foreign property and Resolution of the
Council of the OECD on the Draft Convention, OECD Publication No. 23081,
November 1967.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
103
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

Each Party shall at all times ensure the observance of undertakings given by it
in relation to property of nationals of any other Party.
The Notes and Commentaries accompanying the draft Convention
describe this article as an application of the general principle of pacta sunt
servanda in favour of the property of nationals of another party, and their
lawful successors in title unless the undertaking expressly excludes such
succession. According to the Commentaries, property included but is not
limited to investments which are defined in Article 9 as all property, rights and
interests whether held directly or indirectly, including the interest which a
member of a company is deemed to have in the property of the company.
Property is to be understood in the widest sense.6 However, the commentary
limits the scope of Article 2 by insisting that undertakings must relate to the
property concerned; it is not sufficient if the link is incidental.7
The draft MAI text provided in the Annex, listing negotiating proposals,
two formulations for a respect clause:
Respect Clause: Each Contracting Party shall observe any obligation it has
entered into with regard to a specific investment of an investor of another
Contracting Party and,
Substantive approach to the respect clause: Each contacting Party shall
observe any other obligation in writing, it has assumed with regard to
investments in its territory by investors of another Contracting Party. Disputes
arising from such obligations shall only be settled under the terms of the
contracts underlying the obligations.
The Energy Charter Treaty8 in the final sentence of Article 10(1) requires
that:
Each Contracting Party shall observe any obligations it has entered into with an
Investor or an Investment of an Investor of any other Contracting Party.9
This is however accompanied by a derogation provision included in the
Annex IA. This provision allows the contracting parties to opt out of the final
sentence of Article 10(1) by not permitting their investors to submit a dispute
concerning this provision to international arbitration. Four ECT contracting

6. For a detailed analysis of this provision and the Notes and Commentaries as well as
related reactions by scholars, see A. Sinclair, op. cit., note 2, pp. 427-433.
7. Notes and Comments to Article 2, para. 3(a), op. cit., note 5.
8. The Energy Charter Treaty was signed on 17 December 1994, available at
www.encharter.org.
9. The accompanying Secretariat document defines the scope of the provision as
follows: Article 10(1) has the important effect that a breach of an individual investment
contract by the host state country becomes a violation of the ECT. As a result, a foreign
investor and its home country may invoke the dispute settlement mechanism of the Treaty,
The Energy Charter Treaty: A Readers Guide, June 2002, p. 26.

104 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

parties have chosen to apply this derogation: Australia, Canada, Hungary


and Norway.
It is estimated that, of the 2 500 or more BITs currently in existence
approximately forty per cent contain an umbrella clause.10 Treaty practice of
States does not point to a uniform approach to the treatment of these clauses.
While Switzerland, the Netherlands, the United Kingdom and Germany,11, 12
often include umbrella clauses in their BITs, France, Australia and Japan
include umbrella clauses in only a minority of their BITs. Of 35 French BITs
e xam in ed, only 4 contain a n umbre lla claus e 1 3 w hile on ly 5 out of
20 Australian BITs14 and 2 of the 9 Japanese BITs examined.15 Canada is the
only OECD member state examined in this study which has never included an
umbrella clause in its BITs.16 Treaty practice of the United States has changed
with the new model BIT; while 34 of the 41 US BITs examined, based on the
former Model, contained an umbrella clause, its presentation is very different
in the 2004 US Model BIT.

B. Literature
The understanding of commentators and drafters on the umbrella clause
provision at the time of the draft OECD Convention was that while the clause
probably did cover international obligations, its focus was contractual
obligations accepted by the host state with regard to foreign property.17
Commenting on the same provision, Brower,18 raised the possibility that
the articles scope rationae materiae may have been limited so as only to apply

10. Figure cited in Gill, Gearing and Birt, Contractual Claims and Bilateral Investment
Treaties: A Comparative Review of the SGS Cases (2004) 21:5 J. Int. Arb. 397 at
footnote 31.
11. Article 10 Swiss Model BIT, Article 3(4) Netherlands Model BIT, Article 2(2) UK
Model BIT and Article 8 Germany Model BIT 1991(2).
12. Of 66 Swiss BITs examined, 48 contain an umbrella clause; of 89 UK BITs examined
87 contain an umbrella clause; of 86 Dutch BITs examined 76 contained an
umbrella clause; of 71 German BITs examined 68 contain an umbrella clause.
13. Article 3 France-Hong Kong BIT 1995; Article 2 France-Peru BIT 1993; Article 8
France-Russia BIT 1989; Article 2(2) France-Yemen BIT 1984.
14. Article 11 Australia-Chile BIT 1996; Article 11 Australia-China BIT 1988; Article 2(2)
Australia-Hong Kong BIT 1993; Article 11 Australia-Papua New Guinea BIT 1990;
Article 10 Australia-Poland BIT 1991.
15. Article 2(3) Japan-Hong Kong BIT 1997; Article 3(3) Japan-Russia BIT 1998.
16. 23 Canadian BITs were examined in this study; the BITs not examined are those
concluded with Bangladesh (1990) and Slovakia (2001).
17. See Sinclair, op. cit., note 2.
18. C.N. Brower, The Future of Foreign Investment-Recent Developments in the
International Law of Expropriation and Compensation in V.S. Cameron (eds.), Private
Investors Abroad Problems and Solutions in International Business in 1975 (Southwestern
Legal Foundation Symposium Series, Private Investors Abroad, Matthew Bender, New
York, 1976), pp. 93, 105, note 27, as cited by A. Sinclair, op. cit., note 2.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
105
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

Box 2.1. The discussions during the MAI negotiations


The MAI Drafting Group considered the question of provisions which might be
included in the MAI on investor rights arising from other agreements. Three
broad conceptual approaches emerged. These were, in ascending order of
ambition: i) a zero option, i.e., no special provision in the MAI on rights under
investor-state agreements; ii) a procedural provision, i.e., a dispute settlement
clause; or iii) a substantive and procedural provision, i.e., a respect clause. The
third approach was considered the most ambitious. It would make respect for
such investor-state agreements into a MAI obligation, giving them substantive
protection of the international law rule, pacta sunt servanda. Arguably, this could
affect the defences of or damages owed by a government asserting rights to
cancel or modify a contract for sovereign reasons or to change laws affecting an
investment. It also has the following essential procedural effect: violations of the
investor-state agreement would be subject to the full range of MAI dispute
settlement mechanisms, including state-state consultations and arbitration. In
such settlement, the issues would be considered in a broad context including
both domestic and international law.
The MAI Drafting Group considered that: the second and third approaches
would, in effect, amend investor-state agreements. They could introduce
uncertainties about the law and remedies to be applied in case of dispute. They
raise the questions of whether and how to draw a line between the kinds of
agreements for which the additional protection might be appropriate and those
for which it might not, such as purely commercial bargains, or agreements
settling tax or other administrative claims.
There was no consensus in the Group on the basic choice of approach. That
choice might have also been affected by outcome on a provision stating that the
more favourable of the MAI or those investor-state agreements prevailed. If a
decision were taken to pursue either the second (procedural) or third (substantive
and procedural) approach, there would be subsidiary questions, the most
important being scope of coverage. Should the provision apply broadly to all
investor rights under investor-state agreements? If not, should it be limited by, for
example, distinguishing between rights arising under essentially commercial
agreements (presumably excluded) and those under which a state is acting as a
sovereign (presumably covered) a distinction which may be difficult to make in
practice; or enumerating or defining categories of covered rights, such as those
arising out of investment agreements and authorisations on which an investor
has relied.
The Group examined the strategic choices and issues thoroughly, in the time
available, and clarified their implications. Given the range of views, the Group did
not elaborate draft provisions for inclusion in the MAI. However, it agreed to provide
the above mentioned provisions to aid in understanding the basic choices. These
texts were not examined by the Group and did not represent specific
recommendations. See Report of The Drafting Group Concerning the Protection of
Investor Rights Arising from Other Agreements, DAFFE/MAI/DG1(96)REV1,
18 March 1996, in www1.oecd.org/daf/mai/pdf/dg1/dg1961r1e.pdf.

106 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

specifically to large-scale investment and concession contracts in the


making of which the state is deliberately exercising its sovereignty and thus
it might be argued that the ordinary commercial contracts are an implied
exception to the general rule set forth in Article 2.19
Tod ay, it s e e m s t h at a mo re c on s i st en t v iew e m e rg e s a m on g
commentators on the scope of the umbrella clause. In his Hague lecture,
Prosper Weil presented the idea that an investment treaty would transform a
mere contractual obligation between state and investor into an international
law obligation, in particular if the treaty included a clause obliging the state to
respect such contract.20
F. Mann also was of the view that the umbrella clause in the BITS protects
the investor against a mere breach of contract: This is a provision of
particular importance in that it protects the investor against any interference
with his contractual rights, whether it results from a mere breach of contract
or a legislative or administrative act, and independently of the question
whether or not such interference amounts to expropriation. The variation of
the terms of a contract or license by legislative measures, the termination of
the contract or the failure to perform any of its terms, for instance, by non-
payment, the dissolution of the local company with which the investor may
have contracted and the transfer of its assets (with or without the liabilities)
these and similar acts the treaties render wrongful.21
I. Shihata, former Secretary-General of ICSID, also recognised that
treaties may furthermore elevate contractual undertakings into international
law obligations, by stipulating that breach by one State of a contract with a

19. Wlde notes that contracts related to investment at this time seen in a much
more narrow way as foreign direct investment than today did by their very
nature always involve a governmental dimension. Treaties at this time also only
provided for state-to-state arbitration which was a screening mechanism against
exorbitant and gratuitous use of treaties by private commercial operators. The
Umbrella (or Sanctity of Contract/Pacta Sunt Servanda) Clause in Investment
Arbitration: A Comment on Original Intentions and Recent Cases, Transnational
Dispute Management, Vol. 1, Issue #04, October 2004.
20. Il ny a, en effet, pas de difficults particulires [en ce qui concerne la mise en jeu
de la responsabilit contractuelle de ltat] lorsqu il existe entre ltat contractant
et ltat national du cocontractant un trait de couverture qui fait de
lobligation dexcuter le contrat une obligation internationale la charge de ltat
contractant envers ltat national du cocontractant. Lintervention du trait de
c ou ve r tu re t ra n sfo r me le s obli g a t io ns c o nt r ac t u e lle s e n o blig at i on s
internationales et assure ainsi, comme on la dit, lintangibilit du contrat sous
peine de violer le trait ; toute inexcution du contrat, serait-elle mme rgulire
au regard du droit interne de ltat contractant, engage ds lors la responsabilit
internationale de ce dernier envers ltat national du cocontractant. Recueil des
Cours III, 1969, pp. 132 et seq.
21. F.A. Mann British Treaties for the Promotion and Protection of Investments,
52 British Yearbook of International Law 241 (1981), p 246.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
107
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

private party from the other State will also constitute a breach of the treaty
between the two States.22
Dolzer and Stevens along the same lines state that: These provisions seek
to ensure that each Party to the treaty will respect specific undertakings
towards nationals of the other Party. The provision is of particular importance
because it protects the investors contractual rights against any interference
w hich migh t be caused by either a simple breach of contract or by
administrative or legislative acts and because it is not entirely clear under
general international law whether such measures constitute breaches of an
international obligation.23
E. Gaillard notes that an historical examination of the origins of
observance of undertakings clauses clauses with a mirror effect shows in
the clearest manner that the intention of States negotiating and drafting such
clauses is to permit a breach of contract to be effectively characterised as the
breach of an international treaty obligation by the host state. The effect of the
clause is to reflect at the level of international law what is analysed at the level
of applicable private law as simple contractual violation.24
C. Schreuer states that umbrella clauses have been added to some BITs to
provide additional protection to investors beyond the traditional international
standards. They are often referred to as umbrella clauses because they put
contractual commitments under the BITs protective umbrella. They add the
compliance with investment contracts, or other undertakings of the host
State, to the BITs substantive standards. In this way, a violation of such a
contract becomes a violation of the BIT.25
UNCTADs26 analysis of the provision is less categorical. It notes that the
language of the provision is so broad that it could be interpreted to cover all
kinds of obligations, explicit or implied, contractual or non-contractual,
undertaken with respect to investment generally. A provision of this kind
might possibly alter the legal regime and make the agreement subject to the
rules of international law.
A middle approach is expressed by T. Wlde. He believes that the
principles of international law would only protect breaches and interference

22. I. Shihata, Applicable Law in International Arbitration: Specific Aspects in Case of


the Involvement of State Parties, in I.F.I. Shihata and J.D. Wolfensohn (eds.), The
World Bank in a Changing World: Selected Essays and Lectures, Vol. II, Brill Academic
Publishers, Leiden, Netherlands, 1995, p. 601.
23. R. Dolzer and M. Stevens Bilateral Investment Treaties, Kluwer Law, 1995, pp. 81-82.
24. E. Gaillard, Larbitrage sur le fondement des traits de protection des
investissements, Revue de lArbitrage, p. 868, note 43.
25. C. Schreuer, Travelling the BIT Route: of Waiting Periods, Umbrella clauses and
Forks in The Road, J. World Inv. (2004) pp. 231-256.
26. Bilateral Investment Treaties in the mid-1990s, United Nations, 1998, p. 56.

108 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

with contracts made with government or subject to government powers, if the


government exercised it particular sovereign prerogatives to escape from its
contractual commitments or to interfere in a substantial way with such
commitments. This would apply as well to contracts concluded only with
private parties in the host state if such contracts are destroyed by government
powers. [] If the core or centre of gravity of a dispute is not about the
exercise of governmental powers [] but about normal contract disputes,
then the BIT and the umbrella clause has no role.27
A different view is expressed by P. Mayer, who maintains that the nature
of the inter pares relationship remains unchanged and is subject to the
lex contractus and that only the interstate relation ship is s ubject to
international law.28

II. Significance of the language of the umbrella clause in treaties


A comparative analysis of the umbrella clauses reveals some common
features but also a certain disparity in language use which leads to the
question of the scope and effect of each particular clause (Annex 2.A1).
Arbitral jurisprudence and doctrine demands each clause to be interpreted on
its own terms; as such, the specific wording of an umbrella clause is crucial to
its scope and effect. More specifically, these questions relate to i) whether the
placement of the clause has any effect on the interpretation of umbrella
clauses; ii) what obligations or commitments are protected under umbrella
clauses and iii) which investors and/or investments can benefit from the
protection of an umbrella clause.

Common features of a general nature


As a general proposition, a common factor between umbrella clauses is
the use of mandatory language. For example, Article 8(2) of the German Model
BIT 1991(2) reads:
Each Contracting Party shall observe any obligation it has assumed with regard
to investments in its territory by nationals or companies of the other Contracting
Party.
A different formulation is found in Article 10 of the Australia-Poland
BIT 1991 which is phrased in less forceful terms:
A Contracting Party shall, subject to its law, do all in its power to ensure that a
written undertaking given by a competent authority to a national of the other
Contracting Party with regard to an investment is respected.

27. T. Wlde, op. cit., notes 1 and 19.


28. P. Mayer, La neutralisation du pouvoir normatif de ltat en matire de contrats
dtat, JDI, 1986, pp. 36-37.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
109
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

A second feature common to the majority of BITs examined is that they


relate to obligations undertaken by the State and do not refer to obligations
between private individuals. The Czech Republic-Singapore BIT 1995 however,
provides a noteworthy exception to this general proposition by providing that
it is also incumbent on the State not to interfere with contracts relating to the
investment entered into between private parties. Article 15 reads:
(2) Each Contracting Party shall observe commitments, additional to those
specified in this Agreement it has entered into with respect to investments of the
investors of the other Contracting Party. Each Contracting Party shall not interfere
with any commitments, additional to those specified in this Agreement, entered
into by nationals or companies with the nationals or companies of the other
Contracting Party as regards their investments.

Structure of the Bilateral Investment Treaty


The placement of the umbrella clause within the framework of the
bilateral investment treaty is a point of variance in treaty practice. The
Netherlands Model BIT29 places the umbrella clause within an article detailing
the substantive protections provided under the Treaty. This structure can also
been seen in a number of BITs including those concluded by the United
Kingdom, New Zealand, Japan, Sweden and the US. By contrast, the Swiss Model
BIT places the umbrella clause in a provision entitled other commitments and
separates it from the substantive provisions by two dispute resolution clauses
and a subrogation clause. The majority of BITs concluded by Switzerland
follow this format; a notable exception however, is the Switzerland-Kuwait
BIT 1998 which places the umbrella clause in Article 3 on protection of
investments. The Swiss Model BIT format is also found in the Finnish and
Greek Model BITs and BITs concluded by Mexico.30 A third variant is to place
the umbrella clause in a separate provision from the substantive protections
but before the dispute resolution clauses. This structure can be seen in the
German Model BITs which place the umbrella clause in Article 8.
The effect of the placement of the umbrella clause within the overall
framework of the BIT is uncertain. The Tribunal in SGS v. Pakistan (see below)
was of the opinion that the placement of the clause near the end of the Swiss-
Pakistan BIT, in the same manner as the Swiss Model BIT, was indicative of an
intention on the part of the Contracting Parties not to provide a substantive
obligation. The Tribunal considered that had the Contracting Parties intended to

29. Article 3 Netherlands Model BIT; but see the Netherlands-Malaysia BIT 1971 and
the Netherlands-Senegal BIT 1971 which place the umbrella clause in Articles 14
and 8, respectively.
30. France-Mexico BIT 1998, Mexico-Switzerland BIT 1995, Mexico-Austria BIT, Belgium
and Luxembourg-Mexico BIT 1998.

110 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

create a substantive obligation through the umbrella clause it would logically


have been placed alongside the other so-called first order obligations. By
contrast, the SGS v. Philippines Tribunal opined that while the placement of the
clause may be entitled to some weight, it did not consider this factor as
decisive. In this respect, the Tribunal stated it is difficult to accept that the
same language in other Philippines BITs is legally operative, but that it is legally
inoperative in the Swiss-Philippines BIT merely because of its location.31

Scope and effect


A crucial issue in respect of umbrella clauses is the scope and nature of the
obligations undertaken. Textual differences can be seen between umbrella
clauses that refer to commitments,32 any obligation33 and any other obligation.34
Importantly, the phrase any obligation was given greater elucidation in the
Partial Award rendered in Eureko v. Poland; the Tribunal stated: Any obligations is
capacious; it means not only obligations of a certain type, but any that is to say, all
obligations.35
While some umbrella clauses refer to obligations entered into36 by a State,
others refer to obligations assumed37 by the State. The Finnish Model BIT refers
to obligations which the State may have with regard to a specific investment.38
These variations raise the question whether the obligation referred to is a
contractual obligation between the State and the investor or whether it could
extend to unilateral obligations undertaken by the State through, inter alia,
promises, legislative acts or administrative measures. It has been suggested that
the words obligations entered into may be interpreted as confining the obligations
in question to those undertaken vis--vis the other Contracting Party.39 On the
other hand, the Tribunal in SGS v. Pakistan found the language commitments
entered into broad enough to encompass unilateral obligations, including
municipal acts and administrative measures.40
While in most of the BITs which contain an umbrella clause the language is
clear and straightforward: shall observe or shall respect, in some others it is
more ambiguous and may leave room for different interpretations. This is the

31. Ibid., note 2, para. 124.


32. Article 7(2), Belgium and Luxembourg-Saudi Arabia BIT 2002.
33. Article 11(2), Greek Model BIT 2001.
34. Article 2(3), Greece-Argentina BIT 1999 [not in force].
35. Eureko B.V. v. Poland, Partial Award 19, August 2005, para. 246.
36. UK Model BIT Article 2, Promotion and protection of investment.
37. UK-Lebanon BIT 1999, Article 10, Other obligations.
38. Article 12, Application of other rules Finland Model BIT.
39. W. Ben Hamida, La clause relative au respect des engagements dans les traits
dinvestissement, Institut des Hautes tudes Internationales, 21 May 2005 and
arguments of the Parties in SGS v. Pakistan, ibid., note 1.
40. SGS v. Pakistan, at 163-166.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
111
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

case for instance of the Switzerland-Pakistan BIT (the basis for the SGS v. Pakistan
case) where either contracting Party shall constantly guarantee the observance of the
commitments; the Italy-Jordan BIT (the basis for the Salini v. Jordan case) each
contracting Party shall maintain in its territory a legal framework apt to guarantee to
investors the continuity of legal treatment, including the compliance, in good faith of all
undertakings assumed with regards to each specific investor.
Certain BITs provide greater specificity as to their scope of application by
identifying more precisely the types of obligations covered by the clause. Australian
BITs concluded with Chile, China, Papua New Guinea and Poland all refer to
written obligations.41 In a similar vein Article 2 of the Austria-Chile BIT 1997
refers to contractual obligations. The majority of BITs concluded by Mexico that
contain an umbrella clause appear to qualify its scope of application, stating that
disputes arising from such obligations shall be settled under the terms of the contract
underlying the obligation.42 A number of Mexican BITs also make explicit reference
to written obligations;43 in contrast, both the Mexico-Netherlands44 and Mexico-
Switzerland BITs are phrased in broader terms. Article 10 of the latter BIT
provides:
Each Party shall observe any other obligation it has assumed with regard to
investments in its territory by investors of the other Party.
A further distinction between various BITs is the degree to which the object of
the obligations is specified. An example of a broadly phrased umbrella clause is in
the 1983, 1984 and 1987 US Model BITs,45 as found in Article 2(2)(c) of the US-
Argentina BIT 1991, for instance, which states: Each Party shall observe any
obligation it may have entered into with regard to investments, and in many UK BITs
as well, including its first with Egypt in 1975: Each Contracting Party shall observe
any obligation it may have entered into with regard to investments of nationals or
companies of the other Contracting Party.
This can be contrasted to Article 9 of the Austrian Model BIT which
provides Each Contracting Party shall observe any obligation it may have entered
into with regard to specific investments by investors of the other Contracting Party.

41. Article 11, Australia-Chile BIT 1996; Article 11, Australia-China BIT 1988; Article 11,
Australia-Papua New Guinea BIT 1990; and Article 10, Australia-Poland BIT 1991.
42. Article 9, Austria-Mexico BIT 1998.
43. Article 9, Mexico-Austria BIT 1998; Article 9, Mexico-Belgium and Luxembourg
BIT 1998; Article 8(2), Mexico-Germany BIT 1998 [not in force]; Article 19, Mexico-
Greece BIT 2000; Article 10, Mexico-France BIT 1998.
44. Article 3(4), Mexico-Netherlands BIT 1998 Each Contracting Party shall observe
any other obligation it may have entered into with regard to investments in its
territory by nationals of the other Contracting Party []
45. US-Senegal BIT, US-Panama, US-Zaire BITs. See R.S. Gudgeon, United States
Bilateral Investment Treaties: Comments on their Origin, Purposes, and General
Treatment Standards in 11 Intl Tax and Bus. L. 105 at 111 (1986).

112 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

Similar language is included in the Swiss-Philippines BIT (basis for the SGS
v. Philippines arbitration).

Example 1: Treaty Practice of Switzerland


Even within the Treaty practice of a single state, it is difficult to find
uniformity in use of umbrella clauses. As noted above, the Swiss Model BIT
separates the umbrella clause from the other substantive provisions, placing it
near the end of the Treaty after the dispute resolution and subrogation clauses. Its
Article 10(2) reads:
Each Contracting Party shall observe any obligation it has assumed with regard to
investments in its territory by investors of the other Contracting Party.
Of the 66 Swiss BITs examined, 12 contained no umbrella clause while
22 followed the text and format of the Model BIT. A notable departure from this
Model can be seen in the Switzerland-Kuwait BIT 1998 which places the umbrella
clause in Article 3 on Protection of investments. Article 11 of the Switzerland-
Pakistan BIT (the basis for the SGS v. Pakistan case) uses a different language:
Either contracting Party shall constantly guarantee the observance of the
commitments it has entered into with respect to the investments of the investors of
the other Contracting Party.
All the above clauses can be contrasted to Article 13 of Switzerland-India
BIT 1997 which provides:
Each Contracting Party shall observe any obligation it may have entered into with
regard to an investment of an investor of the other Contracting Party. In relation to
such obligations dispute resolution under Article 9 of this Agreement shall however
only be applicable in the absence of normal local judicial remedies being available.46

Example 2: Treaty Practice of Denmark


A small difference in language is apparent between the Danish Model BIT
and the Denmark-Korea BIT 1988. Article 3 on the Promotion and protection of
investment of the Model BIT reads:
Each Contracting Party shall observe any obligation it may have entered into with
regard to investment of investors of the other Contracting Party.
The Denmark-Korea BIT, on the other hand, in its Article 3 on Protection
of investment provides:
[] Each Contracting Party shall observe any obligation it may have entered
into with regard to investments of nationals or companies of the other
Contracting Party.

46. For similar language in an umbrella clause see also the Germany-India BIT 1995.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
113
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

In sharp contrast to these two provisions is the Denmark-China BIT 1985


Article 3 on Protection of Investment which provides:
[] Each Contracting Party shall observe any obligation it may have entered
into with regard to approved investment contracts of nationals or companies of
the other Contracting Party.
In a similar vein, the Denmark-Kuwait BIT 2001 refers to obligations
entered into with regard to any particular investment of an investor while the
Denmark-India BIT 1995 closely follows the Model BIT but adds with disputes
arising from such obligations being only redressed under the terms of the contracts
underlying the obligations.

Example 3: Treaty Practice of Germany


The German Model BIT 47 places the umbrella clause in a separate
Article 8 and reads:
Each Contracting Party shall observe any obligation it has assumed with regard
to investments in its territory by nationals or companies of the other Contracting
Party 48/investments in its territory by investors of the other Contracting State.49
Of 71 German BITs examined, 3 contained no umbrella clause and
16 paralleled the Model BITs. The Germany-Bangladesh BIT 1981 provides
greater specificity by providing in Article 7(2):
Each Contracting Party shall observe any other obligation it may have entered
into with regard to investments in its territory by agreement with nationals or
companies of the other Contracting Party.50
The Germany-India BIT 1995 departs from the above-mentioned BITs. In
its Article 13(2) Application of other rules it provides:
Each Contracting Party shall observe any other obligation it has assumed with
regard to investments in its territory by investors of the other Contracting Party,
with dispute arising from such obligations being only redressed under the terms
of the contracts underlying the obligations.

47. J. Karl, in an analysis of this Model BIT, states that this clause relates particularly to
investment contracts between the investor and the host country and that the protection
of such contracts is now a standard clause in bilateral investment agreements. He notes
that some countries are reluctant to accept this provision which transforms
responsibility incurred towards a private investor under a contract into international
responsibility. The Promotion and Protection of German Foreign Investment
Abroad, 11 ICSID Rev.-F.I.L.J. 1, No. 1, Spring 1996 at 23.
48. Model BIT 1991(2).
49. Model BIT (No. 201).
50. This language is reproduced in a further 9 BITs.

114 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

Example 4: Treaty Practice of Japan


Only two of the 9 Japanese BITs examined in this study contain an
umbrella clause. While both include the clause in a provision relating to
substantive protections accorded under the BIT, the language used in each
clause differs. Article 2(3) of the Japan-Hong Kong BIT 1997 reads:
Each Contracting Party shall observe any obligation it may have entered into
with regard to investments of investors of the other Contracting Party.
This can be contrasted to the Japan-Russia BIT 1998 which reads in its
Article 3(3):
Each Contracting Party shall observe any of its obligations assumed in respect of
the capital investments made by an investor of the other Contracting Party.

Example 5: Treaty Practice of the United States


As mentioned above, an umbrella clause is contained in 34 of the
41 US BITs examined that are based on the former Models:
Each Party shall observe any obligation it may have entered into with regard to
investments.
This clause is not present in the most recent 2004 US Model BIT.
Article 24(1) of the model BIT limits the application of this clause to cover only
claims stemming from an investment agreement and not other contractual
obligations (Annex 2.A2).
[] the claimant may submit to arbitration under this Section a claim that the
respondent has breached [] c) an investment agreement.
In its Article 26, it provides for an explicit waiver of this right:
No claim may be submitted to arbitration under this Section unless: b) the notice
of arbitration is accompanied i) for claims submitted to arbitration under
Article 24(1)a by the claimants written waiver [] of any right to initiate or
continue before any administrative tribunal or court under the law of either Party
or other dispute settlement procedures, any proceeding with respect to any
measure alleged to constitute a breach referred to in Article 24.
The Model BIT, in its Article 1, provides for a detailed definition of an
investments agreement:
investment agreement means a written agreement51 that takes effect on or
after the date of entry into force of this Treaty between a national authority 52 of
a Party and a covered investment or an investor of the other Party that grants the
covered investment or investor rights: a) with respect to natural resources or
other assets that a national authority controls; and b) upon which the covered
investment or the investor relies in establishing or acquiring a covered
investment other than the written agreement itself.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
115
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

III. Jurisprudence
Although as mentioned above, the umbrella clause has been a subject of
discussion among scholars for some decades now, it has never been part of
jurisprudence until very recently.53 The first ICSID case that addressed the
umbrella clause arose in 1998: Fedax NV v. Republic of Venezuela54 based on the
BIT between the Netherlands and the Republic of Venezuela. In this case, the
tribunal was unaware that there was an umbrella clause, and did not carry out
any in-depth examination of the clause or its application. It simply applied the
plain meaning of the provision, that commitments should be observed
under the BIT, to the promissory note contractual document. It found that
Venezuela was under the obligation to honour precisely the terms and conditions
governing such investment, laid down mainly in Article 3 of the Agreement, as well as
to honour the specific payments established in the promissory notes issued.55 The
merits of the case were partially settled by the parties.

A narrow interpretation
The first time 56 an arbitral tribunal evaluated the scope of an umbrella
clause was in the SGS Socit Gnrale de Surveillance S.A. v. Pakistan case, 57
(2003) based on the Pakistan-Switzerland BIT.
The Tribunal rejected SGSs contention that this clause elevated breaches
of a contract to breaches of the treaty:
The text itself of Article 11 does not purport to state that breaches of contract
alleged by an investor in relation to a contract it has concluded with a State

51. Written agreement refers to an agreement in writing, executed by both parties,


whether in a single instrument or in multiple instruments, that creates an
exchange of rights and obligations, binding on both parties under the law
applicable under Article XX [Governing Law](2). For greater certainty, a) a unilateral
act of an administrative or judicial authority, such as a permit, license, or
authorisation issued by a Party solely in its regulatory capacity, or a decree, order,
or judgment, standing alone; and b) an administrative or judicial consent decree or
order, shall not be considered a written agreement.
52. For purposes of this definition, national authority means for the United States,
an authority at the central level of government.
53. For a detailed discussion on all recent ICSID cases dealing with the umbrella clause
see E. Gaillard, Journal du droit international, Clunet No. 1/2006, Janvier-Fvrier-
Mars 2006 at 326-350.
54. Fedax NV v. Republic of Venezuela, Award, 9 March 1998, 37 ILM 1391 (1998).
55. Id., paras. 25, 29. (2002) 5 ICSID report, 186 pp.
56. The first Energy Charter Treaty tribunal in Nycomb v. Latvia could have rendered its
judgment on the basis of the ECT umbrella clause as was proposed by the
claimant, but preferred to rest its decision on national treatment. By doing so, it
avoided having to decide whether, in this case, the contracts jurisdictional clause
in favour of domestic courts should be overridden by the ECTs arbitral jurisdiction.
57. SGS Socit Gnrale de Surveillance S.A. v. Pakistan, ICSID case No. ARB/01/13,
decision on Jurisdiction, 6 August 2003, 18 ICSID rev- F.I.L.J. 307 (2003).

116 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

(widely considered to be a matter of municipal rather than international law) are


automatically elevated to the level of breaches of international treaty law.58
The Tribunal added that the legal consequences were so far-reaching in scope
and so burdensome in their potential impact on the State that clear and convincing
evidence of such an intention of the parties would have to be proved. Such proof
was not brought forward according to the Tribunal.59 It also argued that the
claimants interpretation would amount to incorporating by reference an unlimited
number of state contracts the violation of which would be treated as a breach of the
treaty.60
It is worth noting that after the publication of the decision, the Swiss
authorities explained in a letter their intention when entering into the
Switzerland-Pakistan BIT as follows:
[] the Swiss authorities are alarmed about the very narrow interpretation
given to the meaning of Article 11 by the Tribunal, which not only runs counter to
the intention of Switzerland when concluding the Treaty but is quite evidently
neither supported by the meaning of similar articles in BITs concluded by other
countries nor by academic comments on such provisions [] With regard to the
meaning behind provisions such as Article 11 the following can be said: [] they
are intended to cover commitments that a host State has entered into with regard
specific investments of an investor or investment of a specific investor, which
played a significant role in the investors decision to invest or to substantially
change an existing investment, i.e. commitments which were of such a nature
that the investor could rely on them [] It is furthermore the view of the Swiss
authorities that a violation of a commitment of the kind described above should
be subject to the dispute settlement procedures of the BIT.61
The Tribunal in Joy Mining Machinery, Ltd. v. The Arabic Republic of Egypt62
interpreted the umbrella clause in a way similar to the SGS v. Pakistan
tribunal, i.e. that the disputes at issue, which related to the release of bank

58. Ibid., para. 166.


59. Ibid., paras. 167 and 173.
60. Ibid., para. 168.
61. Note on the Interpretation of Article 11 of the Bilateral Investment Treaty between
Switzerland and Pakistan in the light of the Decision of the Tribunal on Objections
to Jurisdiction of ICSID in Case No. ARB/01/13 SGS Socit Gnrale de Surveillance SA
v. Islamic Republic of Pakistan, attached to the Letter of the Swiss Secretariat for
Economic Affairs to the ICSID Deputy Secretary-General dated 1 October 2003,
published in 19, Mealeys: Intl Arb. Rep. E3, February 2004, as referred to by
E. Gaillard in Investment Treaty Arbitration and Jurisdiction Over Contract Claims
the SGS Cases Considered in International Investment Law and Arbitration: Leading
cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, Tod
Weiler Editor (2005).

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
117
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

guarantees, were commercial and contractual disputes to be settled through


the mechanism set forth by contract. It held that:
[i]n this context, it could not be held that an umbrella clause inserted in the
treaty, and not very prominently, could have the effect of transforming all contract
disputes into investment disputes under the Treaty, unless of course there would
be a clear violation of Treaty rights and obligations or a violation of contract
rights of such a magnitude as to trigger the Treaty protection, which is not the
case. The connection between the Contract and the Treaty is the missing link that
prevents any such effect. This might be perfectly different in other cases where
that link is found to exist, but certainly it is not the case here.63
In Salini Construttori S.P.A. and Italstrade S.P.A. v. The Hashemite Kingdom of
Jordan,64 the Claimant requested the Tribunal to recognise that the Treaty
[Article 2(4) of the Italy-Jordan BIT (see above in paragraph 33)], contained a
commitment to observe obligations from investor-state contracts. The
Tribunal did not agree and found that the only obligation Jordan had, was to
create and maintain a legal framework apt to guarantee the compliance of
undertakings:
[] under Article 2(4), each Contracting Party did not commit itself to observe
any obligation it had previously assumed with regards to specific investments
of investors of the other contracting Party as did the Philippines. It did not even
guarantee the observance of commitments it had entered into with respect to the
investments of the investors of the other Contracting Parties as did Pakistan. It
only committed itself to create and maintain a legal framework apt to guarantee
the compliance of all undertakings it has assumed with regards to each specific
investor.65
In El Paso Energy International Company v. The Argentine Republic, 66 the
Tribunal rejected the arguments advanced by the US-based energy firm

62. Joy Mining Machinery Limited v. The Arabic Republic of Egypt, Award on Jurisdiction,
ICSID case No. ARB/03/11, 6 August 2004. Joy Mining, a company incorporated
under the laws of the United Kingdom initiated an ICSID arbitration pursuant to
the UK-Egypt BIT. The dispute concerned a Contract for the Provision of Longwall
Mining Systems and Supporting Equipment for the Abu Tartur Phosphate Mining
Project, executed in April 1998 between Joy Mining and the General Organisation
for Industrial Projects of the Arab Republic of Egypt. The parties disagreement
related to performance tests of the equipment and to the release of guarantees.
The Tribunal addressed the issue of whether bank guarantees may be considered
to be an investment under the BIT. Noting that bank guarantees are simply
contingent liabilities, concluded that they could not constitute assets under the
BIT and were not protected investments.
63. Idem, para. 81.
64. Salini Construttori S.p.A. and Italstrade S.p.A v. The Hashemite Kindgom of Jordan, ICSID
case No. ARB/02/13), Decision on Jurisdiction, 29 November 2004, available at
www.worldbank.org/icsid/cases/salini-decision.pdf.
65. Ibid., para. 126.

118 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

El Paso, which would have permitted contractual breaches to be considered as


breaches of the US-Argentina BIT under the treatys wide proper umbrella
clause provision that each Party shall observe any obligation it may have entered
into with regard to investments.
The tribunal took issue with earlier arbitral tribunals and in particular the
SGS v. Philippines one, who had held that ambiguities in investment treaty
terms should be resolved in favor of foreign investors. Instead, the El Paso
tribunal called for a balanced approach to investment treaty interpretation,
one which takes into account both State sovereignty and the States responsibility
to create an adapted and evolutionary framework for the development of economic
activities, and the necessity to protect foreign investment and its continuing flow.67
This rejection of the view that interpretive doubts should be resolved in favor
of foreign investor interests would guide the interpretation of the tribunal
with respect the umbrella clause of the treaty.
It rejected a wide interpretation of the clause distancing itself from the
ones which had provided broad scope for contractual breaches to be asserted
as treaty breaches and aligned itself with several earlier tribunal rulings which
adopted a narrow meaning.
In view of the necessity to distinguish the State as a merchant, especially when it
acts through instrumentalities, from the States as a sovereign, the Tribunal
considers that the umbrella clause in the Argentine-US BIT [] can be interpreted
in the light of Article VII(1) which clearly includes among the investment disputes
under the Treaty all disputes resulting from a violation of a commitment given by
the State as a sovereign State, either through an agreement, an authorization, or
the BIT [] Interpreted this way, the umbrella clause read in conjunction with
Article VII, will not extend the Treaty protection to breaches of an ordinary
commercial contract entered into by the State or a State-owned entity, but will cover
additional investment protections contractually agreed by the State as a sovereign
such as stabilisation clause inserted in an investment agreement.68
The tribunal went on to say that the broad interpretation of the so-called
umbrella clauses would have far reaching consequences, quite destructive of the
distinction between national legal orders and the international legal order. In
addition, it expressed its conviction that the investors will not use appropriate
restraint why should they? if the ICSID Tribunals offer them unexpected remedies.
This responsibility for showing appropriate restraint rests rather in the hands of the
ICSID Tribunals.69

66. El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15,
Decision on Jurisdiction, 27 April 2006.
67. Decision on Jurisdiction, para. 70.
68. Idem, para. 81.
69. Idem, para. 82.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
119
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

Another tribunal in the case Pan American Energy LLC and BP Argentina
Exploration Company v. Argentine Republic,70 presiding over a dispute brought by
BP America and several subsidiaries of the energy firm Pan American, has
followed the approach laid down in the earlier El Paso arbitration. The tribunal
consisting of two of the same three arbitrators of the El Paso tribunal held that
the contested provision in the US-Argentina BIT could not be considered to be
an umbrella clause which would transform contract claims into breaches of
international law. It observed that:
It would be strange indeed if the acceptance of a BIT entailed an international
liability of the State going far beyond the obligation to respect the standards of
protection of foreign investments embodied in the Treaty and rendered it liable for
any violation of any commitment in national or international law with regard to
investments.71
The Tribunal in CMS Gas Transmission Company v. Republic of Argentina,72 in
its final award, found Argentina internationally responsible pursuant to the
umbrella clause contained in the Article II(2)c) of the US-Argentina BIT. It
expressed however the view that the application of this proper umbrella
clause was restricted to contracts concluded between an investor and the
State acting as sovereign:
Purely commercial aspects of a contract might not be protected by the treaty in
some situations, but the protection is likely to be available when there is
significant interference by governments or public agencies with the rights of the
investor.73
While many, if not all, such interferences are closely related to other standards
of protection under the Treaty, there are in particular two stabilisation clauses
contained in the License that have significant effect when it comes to the
protection extended to them under the umbrella clause. The first is the obligation
undertaken not to freeze the tariff regime or subject it to price controls. The
second is the obligation not to alter the basic rules governing the License without
TGNs written consent.74

70. Pan American Energy LLC and BP Argentina Exploration Company v. Argentine Republic,
ICSID Case No. ARB/03/13 and BP America Production Co. and Others v. Argentine
Republic, ICSID Case No. ARB/04/8; Decision on Preliminary Objections, 27 July 2006.
71. Decision on Preliminary Objections, para. 110.
72. CMS v. Republic of Argentina, ICSID case No. ARB/01/8, Award 12 May 2005.
73. Award, p. 299.
74. Award, paras. 302, 303.

120 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

A wide interpretation
At the same time as the SGS brought the claim against Pakistan, it
brought another case against the Philippines,75 based on the Philippines-
Switzerland BIT.76 The Tribunal in this case examined the interpretation of the
clause in the SGS v. Pakistan decision and although it recognised that the
language of the clause was not the same, it found the decision unconvincing77
and highly restrictive.78 It concluded that:
To summarise the Tribunals conclusions on this point, Article X(2) makes it a
breach of the BIT for the host State to fail to observe binding commitments,
including contractual commitments, which it has assumed with regard to specific
investments. But it does not convert the issue of the extent of content of such
obligations into an issue of international law.79
However, while the Tribunal took a wider reading of the scope of the umbrella
clause, than the SGS v. Pakistan Tribunal, it required at the end that if the contract
vests exclusive jurisdiction over disputes arising under its terms to another
tribunal (domestic court or a contractual arbitral tribunal) then this tribunal has
the primary jurisdiction. The Tribunal decided to suspend the proceedings
indefinitely until the claimant got a judgment from the domestic courts and then
return to it if he considered that such judgment was not satisfactory.80
The Tribunal in Sempra Energy International v. Argentina81 noted that the
dispute arose from how the violation of contractual commitments with the licensees
[Sempra] [] impacts the rights of the investor claims to have in the light of the
provisions of the treaty and the guarantees on the basis of which it made the protected
investment. 82 It recognised that these contractual claims were also treaty
claims and was reinforced in its view by the fact that:
the Treaty also includes the specific guarantee of a general umbrella clause,
[such as that of Article II(2)(c)], involving the obligation to observe contractual

75. SGS Socit Gnrale de Surveillance SA v. the Republic of the Philippines, ICSID case
No. A RB /02/6, D ec isi on on Ju ri sdi c ti on , 2 9 Jan u ar y 2004 , ava il able at
www.worldbank.org/icsid/cases/SGSvPhil-final.pdf.
76. On both cases, see the analysis by E. Gaillard, op. cit., note 61; C. Schreuer, op. cit.,
note 25; T. Wlde, op. cit., notes 1 and 19; and S. Alexandrov in Breaches of Contract
and Breaches of Treaty The Jurisdiction of Treaty-based Arbitration Tribunals to
Decide Breach of Contract Claims in SGS v. Pakistan, and SGS v. Philippines in The
Journal of World Investment and Trade, No. 4, Vol. 5, August 2004.
77. Ibid.
78. Ibid., paras. 119 and 120.
79. Ibid., para. 128.
80. Ibid., paras. 136-155 and 170-76. One of the three members of the Tribunal,
Professor A. Crivellaro, dissented.
81. Sempra Energy International v. Republic of Argentina, ICSID case No. ARB/02/16,
Decision on Objections to Jurisdiction, 11 May 2005.
82. Idem, para. 100.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
121
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

commitments concerning the investment, creates an even closer link between the
contract, the context of the investment and the Treaty.83
The Partial Award in Eureko B.V. v. Poland84 examined the question of the
umbrella clause included in the Netherlands-Poland BIT in great detail. It
interpreted this provision according with its ordinary meaning as stipulated in
Article 31, paragraph 1 of the Vienna Convention. It stated that:
the plain meaning the ordinary meaning of a provision prescribing that a
State shall observe any obligations it may have entered into with regard to
certain foreign investments is not obscure. The phrase shall observe is
imperative and categorical. Any obligations is capacious; it means not only
obligations of a certain type, but any that is to say, all obligations entered into
with regards to investments of investors of the other Contracting Party.85
It therefore concluded that Eurekos contractual arrangements with the
Government of Poland were subject to the jurisdiction of the Tribunal.86
One analytical point in dispute before the tribunal in Noble Ventures,
Inc. v. Romania 87 was the question of whether contractual obligations also
amounted to international obligations by virtue of the umbrella clause in
the US-Romania BIT. The tribunal, in a thorough discussion on this clause,
in which it expressed its view on all previous decisions on this matter,

83. Idem, para. 101.


84. Eureko B.V. v. Poland, Partial Award, 19 August 2005, can be found at
www.investmentclaims.com/decisions/Eureko-Poland-LiabilityAward.pdf.
85. Idem, para. 246.
86. The decision was taken by the majority of two arbitrators with the third arbitrator
dissenting. In his dissenting opinion, Professor Jerzy Rajski the third member of
the arbitral tribunal, declared that the majoritys jurisdictional reasoning
including its analysis of the umbrella clause might lead to a privileged class of
foreign parties to commercial contract who may easily transform their contractual disputes
with State-owned companies into BIT disputes. Paragraph 11 of the dissenting
opinion, 19 August 2005.
87. Noble Ventures, Inc. v. Romania, Award, 12 October 2005, ICSID Case No. ARB/ 01/11.
The decision concerns a dispute between a US company, Noble Ventures, Inc. (the
claimant) and Romania arising out of a privatisation agreement concerning the
acquisition, management and operation of a Romanian steel mill, Combinatul
Siderugic Resita (CSR) and other associated assets. The privatisation agreement
was entered into between the claimant and the Romanian State Ownership Fund
(SOF). Noble Ventures paid SOF the initial instalment of the purchase price and
SOF transferred to Noble Ventures its shares of CSR, comprising almost all of CSRs
equity share capital. Noble Ventures alleged, inter alia, that Romania failed to honour
the terms of several agreements related to the control of CSR, that Romania
misrepresented CSRs assets in the tender book prepared for the privatisation, that
Romania failed to carry out its obligation to negotiate debt rescheduling with state
budgetary creditors in good faith, that Romania failed to provide full protection and
security to its investment during a period of labour unrest in 2001, and that
Romanias initiation of insolvency proceedings were in bad faith, in violation of fair
and equitable treatment, and tantamount to expropriation.

122 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

found that Article II(2)(c) of the BIT intended to create obligations and
obviously obligations beyond those specified in other provisions of the BIT itself
and by doing so it referred clearly to investment contracts. It also noted
that such an interpretation was also supported by the object and the
purpose rule:
any other interpretation would deprive Article II(2)c) of practical content,
reference has necessarily to be made to the principle of effectiveness []
On this point, it stated that:
a clause that is readily capable of being interpreted in this way and which would
otherwise be deprived of practical applicability is naturally to be understood as
protecting investors also with regard to contracts with the host State generally in
so far as the contract was entered into with regard to an investment.
It then added that by the negotiation of a bilateral investment treaty, two
States may create an exception to the general separation of States obligations
under municipal and under international law:
in the interest of achieving the objects and goals of the treaty, the host state may
incur international responsibility by reason of a breach of its contractual
o bliga tio n [ ] th e b rea ch of con tra ct b eing thus int ern at iona lised ,
i.e. assimilated to a breach of a treaty. The umbrella clause introduces this
exception.
The Tribunal in LG&E v. Argentina 88 was also called to examine the
umbrella clause included in the US-Argentine BIT. It characterised the
umbrella clause as one which creates a requirement by the host State to meet its
obligations towards foreign investors, including those that derive from a contract;
hence such obligations receive extra protection by virtue of their consideration under
the bilateral treaty.
It had to decide whether the abrogation of the guarantees under the
statutory framework (Gas Law) calculation of the tariffs in dollars before
conversion to pesos, semi-annual tariff adjustments and no price controls
without indemnification violated Arg entinas obligations to LG&Es
investments. It concluded in the positive, by expressing the view that the
provisions of the Gas Law obligations were not legal obligations of a general
nature but were very specific in relation to LG&Es investment in Argentina. It
stated that these laws and regulations became obligations [] that gave rise to
liability under the umbrella clause of the treaty.
Two tribunals, although not confronted with an umbrella clause,
expressed their views as for the meaning of such a clause. In Waste

88. LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. the Argentine Republic,
ICSID case No. ARB/02/1, Decision on Liability, 3 October 2006, paras. 169-175.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
123
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

Management v. United Mexican States,89 the NAFTA Tribunal, expressed its view
on the umbrella clause although NAFTA Chapter 11 does not contain such a
clause. It observed that:
NAFTA Chapter 11 unlike many bilateral and regional investment treaties,
does not provide jurisdiction in respect of breaches of investment contracts such
as [the Concession Agreement]. Nor does it contain an umbrella clause
committing the host state to comply with its contractual commitments
[emphasis added].
Along the same lines, the Tribunal in Consorzio Groupement L.E.S.I.
DIPENTA v. Republic of Algeria,90 although it held that the BIT between Italy and
Algeria did not contain an umbrella clause, it stated that:
the effect of such clauses is to transform the violations of the States contractual
commitments into violations of the treaty umbrella clause and by this to give
jurisdiction to the Tribunal over the matter [] 91 [translation by the
Secretariat].

IV. Summary remarks


The umbrella clause made its appearance in investment agreements
since the 1950s. It has been a regular, although not omnipresent, feature of
bilateral investment treaties. Until recently, it had retained only the attention
of scholars, who in their majority considered it as a clause elevating
contractual obligations to treaty obligations. No arbitral tribunal had yet
considered the issue until the ones arbitrating the SGS v. Pakistan and
v. Philippines cases. Since then, it has attracted considerable discussions both
by arbitral tribunals and scholars. The interpretation by the Swiss authorities
of the clause, in the aftermath of the SGS v. Pakistan Decision on Jurisdiction, is
the only interpretation by a State expressing what its intention had been at
the time of the inclusion of that clause into its treaties in the circumstance,
to subject contractual commitments to treaty disciplines.

89. Waste Management Inc. v. United Mexican States, ICSID Case No. ARB (AF)/00/3, Award,
30 April 2004, para. 73, in www.economiasnci.gob.mx/sphp_pages/importa/sol_contro/
consultoria/ Casos_Mexico/Waste_2management/laudo/laudo_ingles.pdf.
90. Consorzio Groupement L.E.S.I.-DIPENTA v. Rpublique algrienne dmocratique et
p o p u l a i re , I C S I D c a s e N o . A R B / 0 3 / 0 8 , Awa r d , 1 0 Ja n u a r y 2 0 0 5 , i n
www.worldbank.org/icsid/cases/lesi-sentence-fr.pdf.
91. Idem, para. 25ii). [] Cette interprtation est confirme a contrario par la rdaction
que lon trouve dans dautres traits. Certains traits contiennent en effet ce quil
est convenu dappeler des clauses de respect des engagements ou umbrella
clauses . Ces clauses ont pour effet de transformer les violations des engagements
contractuels de ltat en violation de cette disposition du trait et, par l-mme, de
donner comptence au tribunal arbitral mis en place en application du trait pour
en connatre [].

124 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

There is diversity in the way the umbrella clause is formulated in


investment agreements. Because of this diversity, the proper interpretation of
the clause depends on the specific wording of the particular treaty, its ordinary
meaning, context, the object and purpose of the treaty as well on negotiating
history or other indications of the parties intent. The review of the language of
this clause included in a representative sample of treaties indicate that, although
there are some disparities, the ordinary meaning of shall observe any
commitments/obligations seem to point towards an inclusive, wide interpretation
which would cover all obligations assumed/entered into by the contracting
States, including contracts, unless otherwise stated. A different wording such
as shall guarantee the observance or shall maintain a legal framework apt to
guarantee the continuity of legal treatment might lead to a narrower interpretation.
On the other hand, there are clauses which specifically exclude the
jurisdiction of the treaty-based arbitral tribunal in favour of an administrative
tribunal or a court, by preserving the distinctive jurisdictional order for the
existing contracts.
Arbitral tribunals, in their majority, when faced with a proper umbrella
clause, i.e. one drafted in broad and inclusive terms, seem to be adopting a
fairly consistent interpretation which covers all state obligations, including
contractual ones. At the same time, prudence requires to recognise that no
conclusions can be drawn as for the interpretation of the clause since
jurisprudence is constantly evolving. Case-by-case consideration which may
shed additional light will continue to be called for. In addition, further
interpretations by governments which are parties to investment agreements
including an umbrella clause, as for their intention regarding this clause, as
well as the insertion of clear language in new treaties, would be a welcome
and much needed development.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
125
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

ANNEX 2.A1

Examples of Umbrella Clauses


Model clauses and standard clauses
Austria model BIT92
Article 9. Other obligations
(1) Each Contracting Party shall observe any obligation it may have
entered into with regard to specific investments by investors of the other
Contracting Party.

Belgium and Luxembourg-Albania BIT 199993


Article 9. Accords particuliers
(2) Chacune des Parties contractantes assure tout moment le respect
des engagements quelle aura pris envers les investisseurs de lautre Partie
contractante.94

92. This umbrella clause is also found in BITs concluded with the following countries:
Armenia (2001); Bosnia and Herzegovina (2000); Jordan (2001); Libya (2002); the
Former Yugoslav Republic of Macedonia (2001); Oman (2001); Slovenia (2001);
United Arab Emirates (2001); Uzbekistan (2000).
93. See also BITs concluded with: Algeria (1991); Bolivia (1990); Estonia (1996); Georgia
(1993); Latvia (1996); Lithuania (1997); Republic of Moldova (1996); Mongolia (1992);
Paraguay (1992); Ukraine (1996); Uruguay (1991). BITs concluded with Benin (2001),
Burkina Faso (2001), Comoros (2001), The Former Yugoslav Republic of Macedonia
(1999) contain the same language with the exception envers les investisseurs is
replaced by lgard des investisseurs.
94. This umbrella clause is repeated in 15 other BITs concluded by Belgium and
Luxembourg: Algeria (1991); Bolivia (1990); Estonia (1996); Georgia (1993); Latvia
(1996); Lithuania (1997); Republic of Moldova (1996); Mongolia (1992); Paraguay
(1992); Ukraine (1996); Uruguay (1991). BITs concluded with Benin (2001), Burkina
Faso (2001), Comoros (2001), The Former Yugoslav Republic of Macedonia (1999)
contain the same language with the exception envers les investisseurs is
replaced by lgard des investisseurs.

126 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

Denmark model BIT95


Article 3. Promotion and protection of investments
(3) Each Contracting Party shall observe any obligation it may have
entered into with regard to investment of investors of the other Contracting
Party.

Finland model BIT96


Article 12. Application of other rules
(2) Each Contracting Party shall observe any other obligation it may have
with regard to a specific investment of an investor of the other Contracting
Party.

German model BIT 1991(2)97


Article 8.
(2) Each Contracting Party shall observe any obligation it has assumed
with regard to investments in its territory by nationals or companies of the
other Contracting Party.

German model BIT (No. 201)98


Article 8.
(2) Each Contracting State shall observe any other obligation it has
assumed with regard to investments in its territory by investors of the other
Contracting State.

95. The Model BIT language is repeated in BITs with the following states: Algeria
(1999); Bulgaria (1993); Chile (1993); Croatia (2000); Cuba (2001); Egypt (1999) [not in
force]; Estonia (1991); Ethiopia (2001) [not in force]; Ghana (1992; Hong Kong (1994);
Kyrgyzstan (2001) [not in force]; Peoples Democratic Republic of Lao (1998); Latvia
(1992); Lithuania (1992); Mongolia (1995); Nicaragua (1995); Pakistan (1996);
Philippines (1997); Poland (1990); Slovenia (1999); Turkey (1990); Uganda (2001) [not
in force]; Ukraine (1992); United Republic of Tanzania (1999) [not in force].
96. See also BITs concluded with: Bosnia and Herzegovina (2000); Kyrgyzstan (2003);
Nicaragua (2003) [not in force] and; United Republic of Tanzania (2001).
97. The Model BIT is followed in BITs with: Barbados (1994); Botswana (2000) [not in
force]; Cambodia (1999); Guyana (1989); Hong Kong (1996) [but replaces territory
with area]; Jamaica (1992); Kenya (1996); Namibia (1994); Sri Lanka (2000);
Zimbabwe (1995).
98. This umbrella clause is reproduced in BITs with the following countries: Antigua
and Barbuda (1998); Bosnia and Herzegovina (2001) [not in force]; Lebanon (1997);
Nigeria (2000); Philippines (1997); Thailand (2002).

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
127
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

Greek model BIT 200199


Article 11. Application of other rules
(2) Each Contracting Party shall observe any obligation it may have
entered into with regard to a specific investment of an investor of the other
Contracting Party.

Korea-Belarus BIT 1997100


Article 10. Application of other rules
(3) Each Contracting Party shall observe any other obligation it may have
entered into with regard to investments in its territory by investors of the
other Contracting Party.

Netherlands model BIT101


Article 3(4).
Each Contracting Party shall observe any obligation it may have entered
into with regard to investments of nationals of the other Contracting Party.

Sweden model BIT 2002102


Article 2. Promotion and protection of investment
(4) Each Contracting Party shall observe any obligation it has entered into
with investors of the other Contracting Party with regard to their investment.

99. Greece-Turkey BIT 2000.


100. See also BITs concluded with: Algeria (1999); Costa Rica (2000); El Salvador (1998);
Guatemala (2000); Honduras (2000); Hong Kong (1997); Nicaragua (2000); Panama
(2001); Qatar (1999); Romania (1990); Saudi Arabia (2003) [not in force]; South
Africa(1995); Tajikistan (1995); Trinidad and Tobago (2002); Ukraine (1996);
Vietnam (2003).
101. The model BIT umbrella clause is reproduced in BITs with the following
countries: Albania (1994); Bangladesh (1994); Belarus (1995); Bolivia (1992); Bosnia
and Herzegovina (1998); Chile (1998); Croatia (1998); Egypt (1996); Estonia (1992);
Gambia (2002); Georgia (1998); Ghana (1989); Honduras (2001); Indonesia (1994);
Jamaica (1991); Jordan (1997); Kazakhstan (2002); Peoples Democratic Republic of
Lao (2003); The Former Yugoslav Republic of Macedonia (1998); Republic of
Moldova (1995); Mongolia (1995); Mozambique (2001); Namibia (2002); Nicaragua
(2000); Paraguay (1992); Peru (1994); Slovenia (1996); Tajikistan (2002); Tunisia
(1998); Ukraine (1994); Uruguay (1988); Uzbekistan (1996); Vietnam (1994); Zambia
(2003); Zimbabwe (1996).
102. Sweden-Bosnia Herzegovina BIT 2000.

128 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

Switzerland model BIT103


Article 10. Other commitments
(2) Each Contracting Party shall observe any obligation it has assumed
with regard to investments in its territory by investors of the other Contracting
Party.

United Kingdom model BIT104


Article 2. Promotion and protection of investment
(2) [] Each Contracting Party shall observe any obligation it may have
entered into with regard to investments of nationals or companies of the other
Contracting Party.

US-Argentina BIT 1991105


Article 2.
(2)(c) Each Party shall observe any obligation it may have entered into
with regard to investments.

103. See also BITs concluded with: Argentina (1991); Belarus (1993); Cape Verde (1991);
Estonia (1992) Gambia (1993); Ghana (1991); Honduras (1993); Peoples Democratic
Republic of Lao (1996); Latvia (1992); Lithuania (1992); Former Yugoslav Republic of
Macedonia (1995); Nicaragua (1998); Pakistan (1995); Paraguay (1992); Peru (1991);
Slovakia (1990); Turkey (1988); Uruguay (1988); Uzbekistan (1993); Vietnam (1992);
Zambia (1994).
104. The umbrella clause in the model BIT is repeated in the BITs with the following
countries: Albania (1994); Angola (2000); Antigua and Barbuda (1987); Armenia
(1993); Azerbaijan (1996); Bahrain (1990); Bangladesh (1980); Barbados (1993);
Belarus (1994); Belize (1982); Benin (1987); Bulgaria (1995); Burundi (1990); China
(1986); Congo (1989); Cte dIvoire (1995); Croatia (1997); Cuba (1995); Dominica
(1987); Ecuador (1994); Egypt (1997); Estonia (1994); Georgia (1995); Grenada (1988);
Guyana (1989); Haiti (1985); Honduras (1993); Indonesia [Article 3] (1976); Jordan
(1979); Kazakhstan (1995); Republic of Korea (1976); Kyrgyzstan (1994); Peoples
Democratic Republic of Lao (1995); Latvia (1994); Lesotho (1981); Lithuania (1993);
Malaysia (1981); Malta (1986); Mauritius (1986); Republic of Moldova (1996);
Mongolia (1991); Nepal (1993); Nicaragua (1996); Nigeria (1990); Oman (1995);
Pakistan (1994); Panama (1983); Papua New Guinea (1981); Paraguay (1981); Peru
(1983); Poland (1987); Saint Lucia (1983); Senegal (1980); Sierra Leone (2000);
Singapore (1975); Slovenia (1996); South Africa (1994); Sri Lanka (1980); Swaziland
(1995); Tonga (1997); Turkey (1991); Turkmenistan (1995); Uganda (1998); United
Republic of Tanzania (1994); Uruguay (1991); Vietnam (2002); Yemen (1982);
Zimbabwe (1995).
105. See also BITs concluded with: Armenia (1992); Bulgaria (2003); Congo (1990);
Ecuador (1993); Estonia (2003); Grenada (1986); Jamaica (1994); Kazakhstan (1994);
Kyrgyzstan (1993); Latvia (2003); Lithuania (2003); Republic of Moldova (2003);
Mongolia (1994); Morocco (1985); Romania (2003); Sri Lanka (1991); Ukraine (1994).

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
129
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

Clauses of note
Australia-Chile BIT 1996/China BIT 1988
Article 11. Undertakings given to investors
A Contracting Party shall, subject to its law, adhere to any written
undertakings given by a competent authority to a national of the other
Contracting Party with regard to an investment in accordance with its law and
the provisions of this Agreement.

Australia-Hong Kong BIT 1993


Article 2. Promotion and protection of investment and returns
(2) [] Each Contracting Party shall observe any obligation it may have
entered into with regard to investments of investors of the other Contracting
Party.

Australia-Poland BIT 1991


Article 10. Undertakings given to investors
A Contracting Party shall, subject to its law, do all in its power to ensure
that a written undertaking given by a competent authority to a national of the
other Contracting Party with regard to an investment is respected.

Austria-Chile BIT 1997


Article 2. Promotion, admission and protection of investments
(4) Each Contracting Party shall observe any contractual obligation it may
have entered into towards an investor of the other Contracting Party with
regard to investments approved by it in its territory.

Belgium and Luxembourg-Malta BIT 1987


Article 8.
(1) Where a dispute arises between an investor of one of the Contracting
Parties and the other Contracting Party affecting an investment of the former
and relating to a matter with respect to which the latter has undertaken an
obligation in favour of the other Contracting Party under this Agreement, such
a dispute shall in the first instance be dealt with in pursuit of local remedies,
unless some other method, including arbitration, has been agreed between
the investor and the Contracting Party.

130 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

Czech Republic-Singapore BIT 1995


Article 15. Other obligations
(2) Each Contracting Party shall observe commitments, additional to
those specified in this Agreement, it has entered into with respect to
investments of the investors of the other Contracting Party. Each Contracting
Party shall not interfere with any commitments, additional to those specified
in this Agreement, entered into by nationals or companies with the nationals
or companies of the other Contracting Party as regards their investments.

Finland-Estonia BIT 1992


Article 4. Most favoured nation provisions
(1) [] Each Contracting Party shall observe any obligation it may have
entered into with regard to investments.

France-Peru BIT 1993


Article 2.
Les investissements ayant fait lobjet dun engagement particulier de lune
des Parties contractantes lgard des nationaux et socits de lautre Partie
contractante sont rgis, sans prjudice des disposition du prsent Accord, par
les termes de cet engagement dans la mesure o celui-ci comporte des
dispositions plus favorables que celles qui sont prvues par le prsent Accord.

France-Yemen BIT 27 April 1984


Article 2. Encouragement et protection des investissements
(2) [] Chaque Partie contractante sengage honorer les obligations
quelle peut avoir contractes relativement aux investissements des
nationaux ou socits de lautre Partie contractante.

Greece-Serbia and Montenegro BIT 1997


Article 2. Promotion and protection of investment
(4) Each Contracting Party shall, in its territory, respect in good faith all
obligations concerning a particular investor of the other Contracting Party
undertaken within its legal framework.

France-Mexico BIT 1998


Article 10. Special commitments
(2) Chacune des Parties contractantes respecte tout autre engagement
quelle a contract par crit au titre des investissements raliss sur son

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
131
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

territoire par des investisseurs de lautre Partie contractante. Les diffrends


soulevs au sujet de ces engagements sont rgls conformment aux
conditions des contrats rgissant lesdits engagements.

Netherlands-Philippines BIT 1985


Article 3(3).
Each Contracting Party shall observe any obligation arising from a
particular commitment it may have entered into with regard to a specific
investment of nationals of the other Contracting Party.

UK-Philippines BIT 1980


Article 3(3).
Each Contracting Party shall observe any obligation arising from a
particular commitment it may have entered into with regard to a specific
investment of nationals or companies of the other Contracting Party.

132 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

ANNEX 2.A2

2004 US Model Bilateral Investment Treaty


Article 24: Submission of a Claim to Arbitration
1. In the event that a disputing party considers that an investment dispute
cannot be settled by consultation and negotiation:
a) the claimant, on its own behalf, may submit to arbitration under this
Section a claim
i) that the respondent has breached
(A) an obligation under Articles 3 through 10,
(B) an investment authorisation, or
(C) an investment agreement; and
ii) that the claimant has incurred loss or damage by reason of, or
arising out of, that breach; and
b) the claimant, on behalf of an enterprise of the respondent that is a
juridical person that the claimant owns or controls directly or
indirectly, may submit to arbitration under this Section a claim
i) that the respondent has breached
A) an obligation under Articles 3 through 10,
B) an investment authorisation, or
C) an investment agreement; and
ii) that the enterprise has incurred loss or damage by reason of, or
arising out of, that breach, provided that a claimant may submit
pursuant to subparagraph a)i)(C) or b)i)(C) a claim for breach of
an investment agreement only if the subject matter of the claim
and the claimed damages directly relate to the covered
investment that was established or acquired, or sought to be

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
133
2. INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS

established or acquired, in reliance on the relevant investment


agreement.
2. []

Article 26: Conditions and Limitations on Consent of Each Party


1. No claim may be submitted to arbitration under this Section if more than
three years have elapsed from the date on which the claimant first acquired,
or should have first acquired, knowledge of the breach alleged under
Article 24(1) and knowledge that the claimant [for claims brought under
Article 24(1)a)] or the enterprise [for claims brought under Article 24(1)b)] has
incurred loss or damage.
2. No claim may be submitted to arbitration under this Section unless:
a) the claimant consents in writing to arbitration in accordance with the
procedures set out in this Treaty; and
b) the notice of arbitration is accompanied,
i) for claims submitted to arbitration under Article 24(1)a), by the
claimants written waiver, and
ii) for claims submitted to arbitration under Article 24(1)b), by the
claimants and the enterprises written waivers
of any right to initiate or continue before any administrative
tribunal or court under the law of either Party, or other dispute
settlement procedures, any proceeding with respect to any
measure alleged to constitute a breach referred to in Article 24.
3. Notwithstanding paragraph 2b), the claimant [for claims brought under
Article 24(1)a)] and the claimant or the enterprise [for claims brought under
Article 24(1)b)] may initiate or continue an action that seeks interim injunctive
relief and does not involve the payment of monetary damages before a judicial
or administrative tribunal of the respondent, provided that the action is
brought for the sole purpose of preserving the claimants or the enterprises
rights and interests during the pendency of the arbitration.

134 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
ISBN 978-92-64-04202-5
International Investment Law:
Understanding Concepts and Tracking Innovations
OECD 2008

Chapter 3

International Investment Agreements:


A survey of Environmental, Labour
and Anti-corruption Issues*

This paper surveys the societal dimension of 296 international investment agreements
(IIAs) signed by the 30 member countries and of by the 9 non-member countries that
participate formally in OECD investment work. Annex 3.A1 to the paper looks at the
same issues for 131 IIAs signed by 15 developing countries (including China and India)
that are not part of the OECD sample. The survey finds that, in practice, the societal
dimension covers mainly environment and labour issues, but some (usually) more recent
agreements contain language on human rights and anti-corruption. More generally,
however, the survey shows that few of the countries in both the OECD and non-OECD
samples include language on societal issues in their IIAs 16 of the 39 countries in the
OECD-related sample and 6 out of the 15 countries in the non-OECD sample include such
language in any of their IIAs. The others never include societal language in their IIAs,
although they emphasise that this does not diminish the importance that they attach to
such issues. For the countries in the OECD sample that do include such language, the
most common approach is to include a short text in the preamble; however, Canada,
Mexico and the United States include lengthy texts in preambles, articles and annexes.
While the OECD texts focus on such issues as upholding internationally agreed principles,
right to regulate and not lowering standards, the issue most frequently encountered in the
non-OECD sample is exceptions to most favoured nations in relation to benefits stemming
from regional co-operation in the economic, social or labour fields. The survey of recent
arbitration decisions revealed several claims dealing with environmental permits and
regulation and two cases involving corruption allegations. One observation is that
arbitration panels in some of these cases refer to broader international instruments in the
environmental and anti-corruption fields when making their decisions, even if these
instruments are not explicitly cited in the IIA under which the case has been brought.

* This survey was prepared by Kathryn Gordon, Investment Division, OECD


Directorate for Financial and Enterprise Affairs, with the contribution of
Monica Bose working as a consultant to the Investment Division. This document, as
a factual survey, does not necessarily reflect the views of the OECD or those of its
member governments. It cannot be construed as prejudging ongoing or future
negotiations or disputes pertaining to international investment agreements.

135
INTERNATIONAL INVESTMENT AGREEMENTS

Executive summary
This scoping paper looks at the societal dimension of international
investment agreements (defined as bilateral investment treaties and regional
trading agreements with an investment chapter). It reviews environmental,
labour and anti-corruption texts in a sample of 296 agreements signed by the
30 OECD member countries or by the 9 non-member countries that adhere to
the OECD Declaration on International Investment and Multinational
Enterprises. The paper also reviews investor-state arbitration decisions
dealing with the same issues. The aim of the paper is to provide institutional
information and to propose topics for discussion within the Investment
Committee on the role (if any), nature and scope of language in investment
agreements relating to certain societal issues.
The papers key findings are:
Incidence of language in investment agreements. Twenty-four countries do not
include any language on societal issues in their agreements. Among the
16 countries that have included such language in one or more agreements,
the language covers mainly environmental and labour issues. More
recently, anti-corruption issues have been mentioned in a few treaties.
Treatment of these issues varies from language in the Preambles of some
agreements (e.g. Finland and the Netherlands) to language including texts
in preambles as well as substantive and procedural language in provisions,
annexes and side agreements (e.g. many North American agreements).
Changes in coverage of issues over time. Over the past two decades, more
countrie s have been including such languag e in their investment
agreements. In the sample of treaties surveyed for this paper, the first
agreem en t c ove rin g such is sues was the 19 90 Polis h-US bilateral
investment treaty (BIT). Since the mid-1990s, Canada, Mexico and the
United States have accumulated a large stock of agreements that include
language on environmental and labour issues. More recently, other
countries (Belgium, Finland, Japan) and regional organisations (European
Union and European Free Trade Area) have included environmental and
labour language in agreements. Anti-corruption language is a more recent
innovation it appears in four US agreements in the sample as well as in
three co-operation and partnership agreements (Japan-Philippines and EU-
Russia and the Cotonou Cooperation Agreement between the EU and the
Africa, Caribbean and Pacific (ACP) countries).

136 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Variation and harmonisation in treatment of issues. The survey shows that some
countries routinely include labour and environmental texts (anti-
corruption texts are much less common) and that the treatment of these
issues varies considerably from one agreement to the other. However, some
treaties appear to have been influenced by broader international initiatives
and that some explicitly refer to relevant international instruments
(e.g. Universal Declaration of Human Rights). The sample texts also show
that innovations in language in one agreement are often adopted by other
countries for use in their own agreements and that this process of mutual
influence has resulted in partial harmonisation of texts (for example,
NAF TA- like e nvironme nt al and labour la ng uag e on performa nce
requirements appears in the 2005 Korea-Singapore agreement).
Arbitration decisions. The review of arbitration decisions shows that claims
dealing with environmental permits and regulation have frequently been
brought to arbitration panels. Two recent decisions have also dealt with
allegations of corruption. Two points emerge with respect to these
decisions: 1) the decisions dealing with environmental matters shed little
direct light on the role of explicit environmental language in influencing
arbitration panels (as opposed, for example, to provisions on fair and
equitable treatment), either because the agreements environmental
provisions are not referred to directly in the arbitration decision or because
the agreement in question does not contain environmental language;
2 ) arbitration pa ne ls re fe r to broad er in tern ation al in s trume nts
(e.g. conventions) in the environmental and anti-corruption fields.
Relationship to broader international policy goals. The environmental, labour
and anti-corruption content of investment agreements occurs in a context
of rapid development of related international norms and of active
involvement of national governments in the development of these norms
and in setting the international policy agenda. For example, international
initiatives in the environmental, labour and anti-corruption fields have
produced a rich array of international instruments (conventions,
declarations and protocols). In anti-corruption, for example, six major
conventions or protocols have been signed since 1996. Several hundred
international environmental agreements have been signed since the
Stockholm Conference of 1972 and the International Labour Organisation
has been active in the development and promotion of labour norms.

I. Introduction
The core mission of the OECD Investment Committee is to promote
investment for growth and sustainable development worldwide. The

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
137
INTERNATIONAL INVESTMENT AGREEMENTS

Committees work on international investment agreements helps it achieve


this mission by enhancing understanding of emerging legal and policy issues.1
This scoping paper looks at the inclusion if any of language addressing
societal issues in a sample of 296 international investment agreements
(defined as bilateral investment treaties plus regional trade agreements with an
investment chapter). In practice, this language deals with three main issue
areas: environment, labour and anti-corruption. The paper aims to support
dialogue in the Investment Committee about these texts purpose and impacts.
It also looks at decisions arising from investor-state arbitration in relation to
th ese issues. Finally, it provide s ba ckg roun d ma te rial relevant for
understanding how these issues relate to the broader aims of international
investment agreements and how they fit into the existing framework of
international initiatives in the environmental, labour and anti-corruption fields.
The paper provides factual background and proposes issues for
discussion in the following sections:
Section II. What are the major initiatives for international co-operation in
the environmental, labour and anti-corruption fields? How do international
investment agreements and related institutions interact with these other
processes of international co-operation?
Section III. Which international investment agreements contain texts on
environmental, labour and anti-corruption issues? What do these texts say?
Section IV. How have arbitration tribunals dealt with environmental and
anti-corruption issues (no disputes involving labour issues were found in
the survey of arbitration cases)?

II. IIAs and International Co-operation on Environment,


Labour and Anti-corruption Policies
While nearly all OECD and non-OECD governments can be assumed to be
committed to sus tainable development objectives, mos t do not use
international investment agreements as a mechanism for achieving these
objectives.2 Indeed, governments use many policy instruments and processes

1. The present paper aims to provide a factual basis for discussing the treatment of
environmental, social and anti-corruption issues in international investment
agreements and by related institutions. It takes previous OECD work on international
investment agreements as given. This work has looked at: Relationships between
international investment agreements; most-favoured nation treatment in
international investment law; fair and equitable treatment standard in international
investment law; indirect expropriation and the right to regulate in international
investment law; transparency; third party participation in investor state dispute
settlement; the umbrella clause; consolidation of claims; interaction between the
investment and trade in services chapter of regional trade agreements. For more
information on this work, see www.oecd.org/daf/investment/agreements.

138 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

in order to achieve them. In addition to domestic policy instruments and


processes, governments participate in a wide array of international co-
operation processes (e.g. in the International Labour Organisation and the
United Nations Environment Programme) and cooperate internationally in law
making and law enforcement (e.g. the OECD Convention on Combating Bribery
of Foreign Public Officials in International Business Transactions, pursuant to
which the Parties have agreed to outlaw foreign bribery, and monitoring
process of the OECD Working Group on Bribery, which ensures effective
enforcement of the laws).
As will be seen in the next section, most of the governments whose
agree men ts are s tudied in th is s urvey focus th eir e fforts on the se
international and domestic policy processes and do not use international
investment agreements as a means for pursuing their environmental, labour
and anti-corruption objectives. This practice of focusing investment
agreements on a fairly standard set of issues investment promotion and
protection and economic co-operation and development can be seen in
many of the preambles in the sample. Other countries include explicit
references in one or more of their agreements to sustainable development or
to related issues or refer to international instruments in the environmental
and labour fields. The survey shows that some international investment
agreements explicitly cite international co-operation processes in the
environmental, labour and anti-corruption fields and that some of these
instruments are also cited in several arbitration decisions. 3 Thus, the
international framework provides concepts and principles that interact with
international investment agreements in at least three ways. First, it influences
investment via its effects on domestic and international laws and practices
and therefore constitutes a central pillar of the broader legal context in which
investment agreements evolve. Second, it provides a source of concepts and
principles that are directly integrated into the texts of these agreements.
Third, it is sometimes used as guidance in decision making by investor-state
arbitration panels.
Over the past several decades, significant progress has been made in
developing international norms in all three fields. Concerted work on labour

2. Annex 3.A1 to this paper presents the results of a fact-finding study looking at the
environmental, labour and anti-corruption language contain in investment
agreements signed between non-OECD member countries. It finds a pattern of
inclusion of such language with is similar to the pattern found in this study most
countries do not include such language, but some do. Moreover, the language that
is included in the non-OECD agreements shows some common patterns, but also
wide variations in subjects covered and in treatment of issues.
3. For further discussion of this issue, see also Moshe Hirsch, Interactions between
Investment and Non-Investment Obligations in International Investment Law,
International Law Forum, the Hebrew University of Jerusalem (November 2006).

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
139
INTERNATIONAL INVESTMENT AGREEMENTS

norms can be dated from at least the early twentieth century, with the creation
of the International Labour Organisation. Since its creation in 1972, of the
United Nations Environment Programme has extended work on environmental
agreements and greatly expanded international environmental co-operation.
The rapid development of anti-corruption conventions is a more recent
phenomenon, but six major initiatives have been undertaken since the mid-
1990s. This sub-section briefly reviews these developments.

Labour
Most work on international labour standards takes place in the
International Labour Organisation (ILO). Since its creation in 1919, the ILO has
sought inter alia to define and guarantee labour rights and improve conditions
for working people by building a system of international labour standards
expressed in the form of Conventions, Recommendations and Codes of
Practice. Th e ILO has adopted more than 18 0 IL O Conve ntion s an d
190 Recommendations covering all aspects of working life. A supervisory
process helps to ensure that standards ratified by individual member States
are applied and the ILO provides advice in the drafting of national labour laws.
With the adoption of the Declaration on Fundamental Principles and Rights at
Work in 1998, ILO member States decided to uphold a set of core labour
standards that are relevant for all members regardless of whether they had
ratified the relevant conventions.4

Environment
Th e framework of environm ental tre aties has bee n developin g
progressively throughout the twentieth century. The birth date of modern
international environmental law is often given as 1972, when countries
gathered for the United Nations Stockholm Conference on the Human
Environme nt and the Unite d Nation s Environment Programme was
established.5 The Conference gave currency to an all-embracing concept of the
biosphere [i]t approached not sectorally but holistically the earths seas and
atmosphere, outer space, non-renewable resources, biogenetic diversity and
much else.6 Since then, hundreds of international environmental agreements
have been concluded (including bilateral, regional and global instruments and

4. This description of the history of ILO standards-setting is taken from page 4 of The
ILO at a Glance, which can be found at: www.ilo.org/public/english/download/glance.pdf
(no date provided in publication).
5. Edith Brown Weiss, International Environmental Law: Contemporary Issues and the
Emergence of a New World Order, Georgetown Law Journal number 81, volume 675.
March 1993.
6. Thomas M. Franck, Fairness in International Law and Institutions; Oxford University
Press, 1995, p. 358.

140 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

both binding and non-binding agreements).7 These cover such areas as


biodiversity, climate chang e and protection of the ozone layer. The
agreements implementation mechanisms vary with their subject matters,
but implementation often includes information exchang e, research,
monitoring and efforts to meet specific targets.

Anti-corruption
Global and regional initiatives in the anti-corruption field have evolved
rapidly over the past decade. The OECD Convention on Combating Bribery of
Foreign Public Officials in International Business Transactions, which came into
force in 1999, is the first and so far the only international instrument
specifically aimed at the supply side of bribery of foreign public officials. The
United Nations Convention against Corruption, which was adopted in 2003 and
came into force in 2005, addresses various forms of corruption, including the
active and passive bribery of domestic and foreign public officials as well as
bribery in the private sector. The Organisation of American States Inter-
American Convention against Corruption, signed in 1996, was the first major
regional initiative. Other regional initiatives include those of the African Union,8
the Council of Europe9 and the Southern African Development Community.10
All of these initiatives involve processes of global or regional co-operation that
are designed to help the parties to the agreement to implement their anti-
corruption commitments more effectively. For example, Parties to the OECD
Convention on Bribery of Foreign Public Officials participate in a two-phase
peer-review monitoring process. In the first Phase, the Working Group on
Bribery assesses Parties national enabling legislation and, in Phase 2, the Group
assesses how effectively Parties are enforcing relevant legislation.

III. Environmental, labour and anti-corruption issues in IIAs


Overview
This section reviews the language dealing with environmental, labour
and anti-corruption issues in a sample of 296 international investment
agreements (IIAs). The sample consists of 269 bilateral investment treaties11
(BITs) signed by the thirty OECD member countries or by the nine non-

7. See www.unep.org for a discussion of the major environmental instruments housed


in the UN system.
8. African Union Convention on Preventing and Combating Corruption, 2002.
9. Council of Europe Criminal Law Convention on Corruption, 1999 and the Civil Law
Convention of Corruption, 1999.
10. The Southern African Development Community Protocol on Corruption, 2001.
11. Also included are the model treaties of: Belgium, Canada, Estonia, Finland, France,
Germany, Greece, Netherlands, Portugal, Slovakia, Slovenia, Sweden, United
Kingdom, and United States.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
141
INTERNATIONAL INVESTMENT AGREEMENTS

member adherents to the OECD Declaration on International Investment and


Multinational Enterprises.12 The sample also includes the NAFTA and 25 free
trade, co-operation or partnership agreements signed by Australia, Canada,
Chile, Japan, Korea, Mexico, the United States, the European Union, and the
European Free Trade Area. Only agreements including explicit investment
agreements were included in the sample. These agreements may also contain
independent chapters or side letters concerning environmental, labour and
anti-corruption issues. For example, the EU-Russia Partnership Agreement
contains independent articles13 that deal with co-operation on all three
issues, but these issues are not referred to in Article 58 (on Investment
promotion and protection). Annex 3.A1 describes the methodology and lists
the investments agreements included in the sample. Annex 3.A2 contains an
inventory of the texts found in the sample of agreements.
Table 3.1 summarises the findings for the 39 countries covered in the
survey. It shows that 16 countries include texts dealing with environmental,
labour or anti-corruption issue s in at least one of the ir investment
agreements. While such language was found in relatively few of the bilateral
investment treaties, the Free Trade Agreements (FTAs) in the sample almost
always include language on environmental and labour issues and, in many
cases, such language is detailed and, often, is found in independent chapters
or side letters that are separate from the investment text.14
Based on the survey of BIT and FTA language, countries policies in this
area can be categorised as follows:
1. No language is included. Twenty three of the 39 countries covered in the
survey do not deal with these issues in any of the international investment
agreements in the sample (Table 3.1).
2. Countries with a policy of including such language. Eleven of the countries
shown in Table 3.1 appear to have a policy of including such language in

12. The nine non-member adherents are: Argentina, Brazil, Chile, Estonia, Israel,
Latvia, Lithuania, Romania and Slovenia.
13. These are Article 69 on the Environment, Article 74 on Social Cooperation (which
covers co-operation on many aspects of labour market regulation) and Article 84 on
Cooperation on the Prevention of Ilegal Activities (which specifically cites
corruption).
14. This finding echoes a similar finding reported in the Joint Working Party on Trade
and Environments study Regional Trade Agreements and Environment. The study
finds that [] the number of RTAs including significiant environmental provisions
remains small and also documents variability in the scope and detail of treatment
of environmental issues. However, the study also finds, in contrast to the results
reported here, that RTAs negotiated by most OECD members include some type of
environmental provisions. Pages 7-8 COM/ENV(2006)47. See also Labour and
Employment Issues in Foreign Direct Investment: Public Support Conditionalities
Working Paper No. 95, International Labour Office Geneva.

142 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Table 3.1. Environmental, labour and anti-corruption texts in the sample


of International Investment Agreements
Texts
in at least IIAs in sample that contain such texts
one IIA surveyed?

OECD countries
Australia Yes FTA with the United States
Austria No
Belgium-Luxembourg Yes Covered in many recent agreements (starting in 2004)
Canada Yes Covered in many agreements (starting in 1994)
Czech Republic No
Denmark No
Finland Yes Preambles of Finlands Model BIT and of its most recent BITs (starting in 2000)
France No
Germany No*
Greece No
Hungary No
Iceland No
Ireland No
Italy No
Japan Yes Japans BITs with Korea and Vietnam; Cooperation agreement with the Philippines
Korea Yes Bilateral treaties with Belgium, Japan, FTA with Chile and Singapore
Mexico Yes Covered in many agreements
Netherlands Yes Preamble of 2004 Model BIT
New Zealand No
Norway No
Poland Yes Bilateral treaty with the United States
Portugal No
Slovak Republic No
Spain No
Sweden Yes Preamble of 2003 Model BIT and bilateral treaty with Russia
Switzerland Yes Bilateral treaty with Mexico
Turkey No
United Kingdom No
United States Yes Covered in many agreements (starting in 1994)

Non-member adherents
Argentina No
Brazil No
Chile Yes Covered in FTAs with China, Korea, Panama and Peru
Estonia No
Israel No
Latvia Yes Preamble of Model BIT
Lithuania No
Romania No
Slovenia No

Regional Parties
European Union Yes EU-Russia and EU-ACP (Cotonou) Partnership Agreements
EFTA Yes EFTA-Singapore Agreement
NAFTA members Yes North American Free Trade Agreement

* The German BITs indicated with asterisks in Annex 3.A1 list public health measures as exceptions to
national treatment.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
143
INTERNATIONAL INVESTMENT AGREEMENTS

their international investment agreements (Belgium, Canada, Finland,


Japan, Luxembourg, Mexico, Netherlands, Sweden, United States, Chile and
Latvia). Evidence that countries have such a policy is of two types: 1) such
language appears in their model agreements; and/or 2) they have two or
more agreements containing similar or identical environmental and/or
labour texts. Within this group there are substantial variations in: 1) the
extent of the language on environmental and labour issues; 2) the number
of agreements; and 3) the length of time such language has appeared in the
agreements. Some countries (e.g. Canada, Mexico and the United States)
have included such language since the early 1990s and are parties to many
agreements with environmental and labour texts. The earliest example in
the sample is the labour texts contained in the 1990 United States-Poland
BIT. The NAFTA addresses these issues in its preamble, provisions and side
agreements. All of the Canadian and US BITs signed in 1994 and after
con tain some environm en tal an d/or labour la nguage. Mexi co
systematically includes such language in agreements signed with Latin
American and North American countries, but not with European countries.
Other countries have adopted such language in more recent agreements or
have included it in their model BITs (e.g. Belgium, Finland, Japan, the
Netherlands and Sweden).15
3. Other cases. Some countries are party to agreements containing
environmental and/or labour texts, but do not appear to have a set policy on
whether or not such language should be included and, if so, on the type of
language that should be used. For example, Australias 2004 FTA with the
United States contains environmental and labour language that resembles
language found in other US agreements in the sample, but that is not
duplicated in other Australian agreements.16 Likewise, Koreas agreement
with Japan uses environmental and labour language found in other
Japanese treaties (e.g. with Vietnam), but not in other Korean treaties.
Kore as agreements with Singapore and Chile contain NAFTA-like
language17 on performance requirements that is not found in other Korean
agreements. In other cases, the inclusion of environmental and/or labour
language appears to be related to the idiosyncrasies of the negotiations for
example, the 1995 treaty between Russia and Sweden contains a text
dealing with exceptions to national treatment and the environment (see
Annex 3.A1 section 1.8) which is found only in this agreement.

15. Japans two most recent treaties with Korean (2002) and Vietnam (2003) contain
identical environmental texts (see Annex 3.A2, section 1.4), but the earlier
9 treaties in the sample (signed between 1988 and 1998) do not.
16. See list for Australian BITs in Annex 3.A1.
17. In Annex 3.A2, compare language in NAFTA section 2.3 (Investment Chapter under
Article 1106) with performance requirements language in section 4.5.

144 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Extent of text
Countries adopt different approaches to environmental, labour and anti-
corruption issues in their international investment agreements. In some
cases, this language appears only in the Preamble, which may offer a broad
picture of the relationship between the agreement and the promotion of
labour standards and protection of the environment. Examples of such
preamble language can be found in the recent BITs for Finland and in the
Finnish and Latvian Model BITs (see also, in Annex 3.A2 section 1.7, the
preambular language in the Netherlands Model BIT, which contains very
similar language):
RECOGNISING that the development of economic and business ties can promote
respect for internationally recognised labour rights;
AGREEING that these objectives can be achieved without relaxing health, safety
and environmental measures of general application
In other cases, the treatment of these issues is lengthier. For example,
NAFTA (signed 1992) contains language on environmental and labour issues in
the preamble, the investment chapter (which contains environmental
articles), and in separate side agreements dealing with labour and the
environment (see Annex 3.A2, section 2).18

Set of issues addressed


The environmental, labour and anti-corruption texts in the sample cover
many of the issues already discussed by the Investment Committee in a
variety of other contexts. For example, the various texts address: right to
regulate, not lowering standards, indire ct expropriation, promoting
sustainable development,19 performance requirements, and consultation.
The environmental and/or labour texts most often take the form of
language addressing on not lowering standards and right to regulate.

18. NAFTA contains texts on inter alia: promotion of respect for internationally-
recognised standards, co-operation among Parties, transparency, right to regulate,
continuous improvement of domestic policy frameworks; creation of institutions
in support of co-operation and consultation in the labour and environment fields;
resolution of disputes; creation of institutions for promoting public participation
and raising public awareness.
19. See, for example, NAFTA (Annex 3.A2, section 2.1) and Annex 3.A2 section 3 for the
following FTAs: Canada-Chile, Canada-Costa Rica, Chile-China, Chile-Panama and
all US FTAs.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
145
INTERNATIONAL INVESTMENT AGREEMENTS

Table 3.2 reviews the coverage of environmental and labour issues for all
countries whose bilateral treaties contain such content. These are:

Table 3.2. Environmental and labour texts in selected bilateral investment treaties
Japans
Finland/
US Belgium/ Canadian BITs with Swedish
Netherlands Latvia
model Luxembourg model Korean model
model model
BIT 2004 model BIT BIT 2004 and BIT
BITs
Vietnam

Preamble
Labour issues Yes No No Yes Yes Yes Yes
(e.g. promotion of labour rights) preamble preamble
Not lowering environmental standards No No Yes Yes Yes Yes
preamble preamble
Not lowering labour standards No No
preamble preamble
Promoting sustainable development No No
preamble preamble
Environmental protection and promotion Yes No No
of international standards preamble preamble

Provisions1
Environment
Not lowering standards Yes Yes Yes Yes
Right to regulate Yes Yes Yes
Indirect expropriation Yes Yes
Environmental exception for rules on Yes Yes
performance requirements
State to state consultation Yes Yes Yes
Labour
Not lowering standards Yes Yes Yes
Right to regulate Yes Yes
Labour exception for rules on performance Yes Yes
requirements (employment
creation
and training)
State to state consultation Yes Yes Yes
1. Provisions cover language in chapters, articles, annexes and protocols.

Other issues appear less often in the sample of agreements. For example:
Anti-corruption. References in the sample to this issue were found in
agreements signed by Japan, the United States, by the European Union. They
can be found in US FTAs with Oman (2005), Morocco (2004) and Singapore
(2003) (see Annex 3.A2, section 3.3) and the preamble of the US-Peru
agreement, in which the Parties agree to promote transparency and prevent and
combat corruption, including bribery, in international trade and investment. Article 8
of the General Provisions Chapter of the Japan-Philippines Economic

146 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Partnership Agreement (2006) contains the following text: Each Party shall
ensure that measures and efforts are undertaken to prevent and combat corruption
regarding matters covered by this Agreement in accordance with its laws and
regulations. The EU-Russia Cooperation and Partnership Agreement states
that: The Parties shall establish co-operation aimed at preventing illegal activities
such as: [] illegal activities in the sphere of economics, including corruption.
Human rights are explicitly cited in two of the sample agreements: The EU-
Russia Agreement and the Agreement between the EFTA States and
Singapore. The EU-Russia Agreement commits the Parties to cooperating on
matters pertaining to the observance of the principles of democracy and human
rights, and hold consultations, if necessary, on matters related to their due
implementation. The EFTA-Singapore Agreement reaffirms the Parties
commitment to the Universal Declaration of Human Rights.

Differences and similarities in treaty language


Among the 16 countries whose agreements contain languag e on
environmental, labour and corruption matters, the texts show both
similarities and differences. Sometimes similarities appear to arise from
countries adopting each others language, a process that gives rise to a partial
harmonisation of texts. For example:
The Netherlands and the Finnish/Latvian Model BITs contain very similar
language on promoting internationally-recognised labour rights and on not
compromising or relaxing health, safety and environmental measures of
general application.
In some cases, alignment of texts appears to be a matter of deliberate policy
of harmonisation: the recently-signed agreements or the Model BITS of
Canada, Mexico and the United States show similar or identical language in
such areas as performance requirements, right to regulate and not lowering
standards. This language also appears in the Chile/Korea FTA and (for
performance requirements) in the Korea-Singapore Agreement. Likewise,
Chile, the United States and Canada have similar or (in some cases)
identical Annex language relating to indirect expropriation and non-
discriminatory regulatory measures designed to protect public health,
safety, and the environment.
Other similarities texts can be found in the preamble language on
promoting sustainable development, protecting basic workers rights in
the Chile/Panama FTA and in US and Canadian FTA preambles with Chile.
As shown in the Box 3.1, the 2004 US Model BIT and the 2006 Japanese-
Philippines Partnership Agreement contain identical lists of internationally-
recognised labour rights.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
147
INTERNATIONAL INVESTMENT AGREEMENTS

Box 3.1. Lists of labour rights in the ILO Declaration


and selected IIAs
List of fundamental labour rights from Article 2 of the ILO Declaration
on Fundamental Principles and Rights at Work
2. Declares that all members, even if they have not ratified the Conventions in question,
have an obligation arising from the very fact of membership in the Organisation to respect,
to promote and to realise, in good faith and in accordance with the Constitution, the
principles concerning the fundamental rights which are the subject of those Conventions,
namely:
a) freedom of association and the effective recognition of the right to collective
bargaining;
b) the elimination of all forms of forced or compulsory labour;
c) the effective abolition of child labour; and
d) the elimination of discrimination in respect of employment and occupation.
List of core labour standards from the Belgian model BIT
The terms labour legislation shall mean legislation of the Kingdom of Belgium, of the
Grand-Duchy of Luxembourg or of XXX, or provisions thereof, that are directly related to
the following internationally recognised labour rights:
a) the right of association;
b) the right to organise and bargain collectively;
c) a prohibition on the use of any form of forced or compulsory labour;
d) a minimum age for the employment of children;
e) acceptable conditions of work with respect to minimum wages, hours of work, and
occupational safety and health.
List of core labour standards from the 2004 US Model BIT
and the 2006 Japan-Philippines Economic Partnership Agreement:
For purposes of this Article, labour laws means each Partys statutes or regulations,or
provisions thereof, that are directly related to the following internationally recognised
labour rights:
a) the right of association;
b) the right to organise and bargain collectively;
c) a prohibition on the use of any form of forced or compulsory labour;
d) labour protections for children and young people, including a minimum age for the
employment of children and the prohibition and elimination of the worst forms of
child labour; and
e) acceptable conditions of work with respect to minimum wages, hours of work, and
occupational safety and health.

The differences in textual approaches include:


Location of text. Table 3.2 shows that BITs differ in terms of where these
issues are treated. Some place them in the preamble whereas others
include texts in both the preamble and in the main body of the agreement
or in annexes).

148 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Lists of labour rights. The Box 3.1 reproduces the lists of five internationally
recognised labour rights contained in the Belgian and US Model BITS and
in the Japanese-Philippines Economic Partnership Agreement). The
language is identical for four of the five rights, but Belgium differs in
relation to child labour. The Belgian text mentions a minimum age for the
employment of children and the US and Japan text additionally cites labour
protections for children and young people and prohibition and elimination of the
worst forms of child labour.
Cooperative relationships between labour and management. The Japanese BIT
preamble language (which recognises the importance of the cooperative
relationship between labour and management in promoting investment)
stresses the importance of promoting harmonious labour relations and of
labour and management working toward shared goals. All other countries
whose preambles cite labour issues couch these issues in terms of
internationally recognised labour rights or standards (e.g. Netherlands,
Finland, Latvia, the United States and Japan in its Partnership Agreement
with the Philippines).
How investment issues are linked with environmental, labour and anti-corruption
issues. Some agreements make explicit the links between environmental
and labour issues and investment issues for example, most of the BITs in
Table 3.2 discuss environmental issues in relation to right to regulate,
indirect expropriation and not lowering standards. In contrast, the EU-
Russia Partnership and Cooperation Agreement contains lengthy texts on
c o- op e ra tio n in re l ati on to in t er a lia inve st me n t , e nvi ron m e n t,
labour/societal security issues and law enforcement/anti-corruption. For
the most part, though, the Agreement deals with these matters in parallel
and as part of an ambitious blueprint for policy co-operation and economic
integration with Russia. Nevertheless, the Agreements blueprint for co-
operation in the environment, labour and anti-corruption fields, if fully
realised, can be expected to have major impacts on investment processes.

References to other international instruments


Generally, the investment agreements do not discuss in detail the
relationship between the agreement and other international commitments in
the environmental, labour and anti-corruption fields. However, several
US Agreements in the sample (with Australia, Chile, Morocco, Oman, Peru,
Sin gapore and CAFTA) disc uss th e relation sh ip to environ men tal
agreements: For example, Article 19.8 of the US-Australia FTA states: The
Parties recognise that multilateral environmental agreements to which they are both
party play an important role, globally and domestically, in protecting the environment
and that their respective implementation of these agreements is critical to achieving
the environmental objectives of these agreements. Accordingly, the Parties shall

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
149
INTERNATIONAL INVESTMENT AGREEMENTS

continue to seek means to enhance the mutual supportiveness of multilateral


environmental agreements to which they are both party and international trade
agreements to which they are both party. The Parties shall consult regularly with
respect to negotiations in the WTO regarding multilateral environmental agreements.
Nevertheless, the language used in some IIAs has clearly been influenced
by international conventions, declarations and protocols and, in some cases,
these are explicitly cited. For example:
The Belgian Model BIT and the Labour Chapters of US FTAs explicitly cite
the ILO Declaration on Fundamental Principles and Rights at Work.
The NAFTA preamble cites the Convention on International Trade in
Endangered Species; the Montreal Protocol on Substances that Deplete the
Ozone Layer, the Basel Convention on the Control of Trans-boundary
Movement of Hazardous Wastes and their Disposal.
The EU-Russia Partnership and Cooperation Agreement refers to the
European Energy Charter, the Declaration of the Lucerne Conference
of 1993, the Basel Convention and the Espoo Convention on Environmental
Impact Assessment in a Trans-boundary Context.
The EFTA-Singapore Agreement reaffirms, in its preamble, the Parties
commitment to the principles set out in the United Nations Charter and the
Universal Declaration of Human Rights.
In some cases, international instruments appear to have influenced the
content of investment agreements, even though they are not explicitly cited in
the agreement. For example, the anti-corruption texts found in the US FTAs
with Oman and Morocco deal inter alia with criminalisation of active bribery.
These treaties define active bribery using language that is very similar to that
used in Article 1 of the OECD Convention on Combating Bribery of Foreign
Public Officials in International Business Transactions. The US-Morocco FTA
definition is as follows: To offer, promise, or give any undue pecuniary or other
advantage, directly or indirectly, to a foreign official, for that official or for another
person, in order that the official act or refrain from acting in relation to the performance
of official duties, in order to obtain or retain business or other improper advantage in
the conduct of international business.20
Thus, some of the environmental and labour texts in international
investment agreements promote or have been influenced by the framework of

20. Under Article 1 of the OECD Convention on Combating Bribery of Foreign Public
Officials, each Party must establish that it is a criminal offence for any persona
intentionally to offer, promise or give any undue pecuniary or other advantage, whether directly
or through intermediaries, to a foreign public official or for a third party, in order that the official
act or refrain from acting in relation to the perform of official duties, in order to obtain or retain
business or other improper advantage in the conduct of international business.

150 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

international norms. However, these texts also occasionally differ from


i n t e r n a t i o n a l l y - r e c o g n i s e d s t a n d a rd s. Fo r e x a m p l e , th e l i s t s o f
internationally-recognised labour rights found in Belgian, Japanese and
US agreements (see Box 3.1) differ not only from each other, but also from the
list of fundamental rights set forth in the ILO Declaration (the ILOs list of
fundamental rights is also produced in the Box 3.1). In particular, they do not
mention elimination of discrimination in respect of employment and
occupation (one of the ILOs four fundamental rights). In addition, the Belgian
and US texts mention acceptable conditions of work with respect to
minimum wages, hours of work and occupational health and safety (all of
which are covered by other ILO instruments, but are not included in the ILO
list of fundamental rights).
Only one treaty in the sample the 2001 Mexican-Switzerland BIT
refers to OECD Investment Instruments. It states:
The Parties recognise that the entry and the expansion of investments in their
territory by investors of the other Party shall be subject to relevant instruments
of the Organisation for Economic Cooperation and Development (OECD) in the
field of international investments.

Adaptation and innovation in treaty language


The environmental and labour texts in the sample agreements show
evidence of both innovation and progressive dissemination of innovations.
The inclusion of environmental and labour languag e is, in itself, an
innovation. As noted earlier, the chronological listing provided in Annex 3.A1
shows that the earliest environmental and labour texts in this sample of
agreements are to be found in the 1990 Poland-US BIT, in NAFTA (signed
in 1992) and in two bilateral treaties signed by the United States in 1992.
Canada and the United States systematically included such language in all
agreements in the sample after 1994. In 1995, Mexico signed a BIT21 with
Switzerland containing such language and has since signed many FTAs
(particularly with other Latin American countries) containing environmental
and/or labour texts. Thus, the initial impetus for the inclusion of such
language appears to have originated in North America. The policy of including
such language was later taken up by other member countries (e.g. Belgium,
Finland, Japan).

21. The Mexican-Swiss text uses language on not lowering standards and on
consultation that is identical to a passage in NAFTA; compare texts in Annex 3.A2
section I.6 and Annex 3.A2, section 2.6)

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
151
INTERNATIONAL INVESTMENT AGREEMENTS

Several factors appear to be driving innovations in this field:


Learning from experience. For countries that have the longest history of
including such language in their agreements, innovation may reflect
learning from experience. One example of such an innovation might be the
language on indirect expropriation listed above,22 several variants of which
exist in recent Canadian, Chilean and US agreements and in the Canadian
and US Model BITs. Such language appears to be designed to lower the risks
that arbitration under the agreements will be used in ways that were not
intended by the parties to the agreements.
Emerging international priorities. Other innovations in environmental, labour
and anti-corruption language appear to reflect the dynamic nature of
priority-setting in international economic policy. For example, the relatively
recent inclusion of anti-corruption lang uag e in Japanese, US and
EU agreements may reflect growing recognition that corruption is a major
international policy issue.
Comparison of the older and more recent agreements in the sample
shows that innovations in investment-treaty language are not reflected
quickly into a countrys entire stock of international investment agreements.
Once a country adopts an innovation, it does not immediately go back to older
treaties to incorporate the innovation in all of its other agreements
(presumably because of the high costs of treaty renegotiation). For countries
that are actively innovating with treaty language (as is the case of the
environmental, labour and corruption language), this gives rise to distinct
vintage effects in the stock of treaties that is, older treaties contain
language that differs from the language found in newer treaties.

IV. Arbitration decisions


BITs and FTAs typically provide that certain disputes between an investor
and a state that are not settled through negotiations may be submitted to
arbitration. The following discussion is based on a review of a sample of recent
publicly-available decisions. Because treaties of some countries contain
environmental and labour language in the preamble only, the paper first looks
at the role of preambular language in arbitral tribunals interpretation of
treaties. Next, it examines a few recent decisions that address environmental
and anti-corruption issues.

22. An example of this language is: Except in rare circumstances, non-discriminatory


regulatory actions by a Party that are designed and applied to protect legitimate public
welfare objectives, such as public health, safety, and the environment, do not constitute
indirect expropriations.

152 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Preamble language in arbitration cases


The interpretation of any treaty begins with Article 31(1) of the Vienna
Convention on the Law of Treaties, which states that a treaty shall be
interpreted in good faith in accordance with the ordinary meaning to be given
the terms of the treaty in their context and in light of its object and purpose.
In interpreting an investment treaty, arbitration tribunals may, as part of its
analysis, be guided by the purpose of the Treaty as expressed in its title and
preamble. 23 In interpreting the Germany-Argentina BIT, the preamble of
which speaks about economic co-operation and protection of investments, a
tribunal found that it was intended to create favourable conditions for
investments and to stimulate private initiative. 24 Another tribunal noted that
where the preamble of a treaty speaks to maintaining favourable conditions
for investment, [i]t is legitimate to resolve uncertainties in its interpretation
so as to favour the protection of covered investments.25 By contrast, another
tribunal called for a balanced approach to the interpretation of the
[Netherlands-Czech Republic BITs] substantive provisions for the protection
of investments, since an interpretation which exaggerates the protection to be
accorded to foreign investments may serve to dissuade host States from
admitting foreign investments and so undermine the overall aim of extending
and intensifying the parties mutual economic relations.26
In inte rpreting NAF TA, th e S.D. Myers tribunal con sid ered the
environmental language in NAFTAs preamble as well as its companion, the
North American Agreement on Environmental Cooperation (NAAEC), to
conclude that the provisions of NAFTA should be interpreted in light of several
principles, including that the parties have a right to establish high levels of
environmental protection, and are not obliged to compromise their
standards merely to satisfy the political or economic interests of other states,
and that environmental protection and economic development can and
should be mutually supportive.27

23. Siemens AG v. the Argentine Republic, ICSID Case No. ARB/02/08, Decision on Jurisdiction,
3 Aug. 2004, para. 81, available at www.worldbank.org/icsid/cases/cases.htm.
24. Idem., para. 81.
25. SGS Socit Gnrale de Surveillance S.A. v. Republic of the Philippines, ISCID Case No. ARB/02/06,
29 Jan. 2004, para. 116, available at www.worldbank.org/icsid/cases/cases.htm.
26. Saluka Investments B.V. v. The Czech Republic, Partial Award, 17 Mar. 2006, para. 300,
available at www.investmentclaims.com/decisions/Saluka-CzechRep-Partial_Award.pdf.
27. S.D. Myers, Inc. v. Canada, UNICTRAL/NAFTA case, Partial Award, 13 Nov. 2000,
para. 220, available at www.naftalaw.org/disputes_canada_sdmyers.htm.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
153
INTERNATIONAL INVESTMENT AGREEMENTS

Environmental and anti-corruption issues in investor-state


arbitrations
Environmental and anti-corruption issues have arisen in a number of
arbitrations under NAFTA and under BITs. Before describing these cases, it is
worth noting some issues which do not appear to have been addressed by any
arbitral tribunals. No decisions were found that address: 1) labour issues;
2) provisions relating to expropriation contained in recent US and Canadian
treaties; 3) the environmental, labour, and anti-corruption provisions found in
the articles28 and side agreements of many of the North American investment
agreements. Thus, the impact of treaty language dealing with these issues on
resolution of disputes cannot be ascertained by looking at arbitration decisions.
This section reviews several recent publicly-available decisions dealing
with environmental issues or corruption.29 While there are other decisions
that discuss environment or corruption, the cases below were chosen because
they are recent decisions that contain significant analysis of the issues and
provide useful examples of how disputes on these issues have been resolved
by certain tribunals. Some of the cases involve investment agreements that
contain no language on any of the societal issues addressed in this paper.

Denial of permits for projects with environmental impacts


Investors that have been denied permits on alleged environmental
grounds have prevailed in a number of arbitrations, including Metalclad
Corporation v. Mexico, Tecnica Mediambientales v. Mexico, and MTD Equity Sdn. Bhd
and MTD Chile S.A. v. Republic of Chile.30 In Metalclad, a tribunal interpreting the
inve stment chapter of NAF TA found that the denial of a municipal
construction permit to a hazardous waste landfill amounted to indirect
expropriation31 and a violation of the fair and equitable treatment
requirement of NAFTA32 where the federal government of Mexico had granted

28. For examples of such language, see Annex 3.A2. For language in bilateral
investment treaties, see section 1.2 (Canada); 1.6 (Mexico) and 1.9 (United States).
Se e also Anne x 3 .A2 , sec tion 2 (NA F TA), se ction 2.3 (which deals with
environmental language in NAFTAs Chapter 11 (the Investment Chapter).
29. To locate relevant decisions, all published final awards available on the ICSID
website were reviewed. In addition, recent decisions on environmental and social
issues that have been in publications were reviewed. There are some pending
arbitration claims that might implicate human rights issues, but they are not
discussed here because no final decision has been rendered. See, for example,
Suez, Sociedad General de Aquas de Barcelona, SA and Vivendi Universal SA v. the
Argentine Republic (ICSID Case No. ARB/03/19).
30. Metalclad Corporation v. Mexico, ICSID Case No. ARB (AF)/97/1, Award, 30 Aug. 2000;
Tecnica Mediambientales Tecmed S.A. v. United Mexican States, ISCID Case No. l ARB
(AF)/00/2, Award, 29 May 2003; and MTD Equity Sdn. Bhd and MTD Chile S.A.
v. Republic of Chile, ICSID Case No. ARB/01/07, Award, 25 May 2004; all available at
www.worldbank.org/icsid/cases/cases.htm.

154 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

federal permits for the project and assured Metalclad, a US-based company,
that municipal permits were not needed. Public opposition to the landfill
appeared to have been a factor in the municipalitys decision making. The
tribunal noted that: 1) Metalclad had been assured by federal officials that
municipal permits would not be required; and 2) Metalclad was not notified of
the town meeting where the municipal permit was denied. The tribunal
observed that NAFTAs statement of principles and rules gives prominence to
transparency, which the tribunal reasoned must include provision of clear
information regarding the legal requirements for an investment. 33 The
tribunal also ruled that a subsequent Ecological Decree issued by the
municipality that prevented operation of the landfill was a further ground for
a finding of expropriation.34
The Metalclad tribunals decision was partially set aside by the British
Columbia Supreme Court in Canada, which has jurisdiction to review
arbitration decisions when the legal seat of arbitration is in British Columbia.
United Mexican States v. Metalclad, 2001 BCSC 664, Supreme Court of British
Columbia, Reasons for the Judgment (2 May 2001). The court ruled that the
tribunal had improperly imposed a requirement of transparency into
Chapter 11 of NAFTA. Because the transparency rationale was used by the
tribunal to find that the denial of the municipal permit constituted an
expropriation and a violation of the fair and equitable standard, the court set
aside that portion of the decision.35 However, the court did not set aside the
tribunals separate finding that the Ecological Decree was an expropriation.
I n a n o t h e r l a n d f i l l d i s p u t e , t h e S p a n i s h i n v e s t o r Te c n i c a
Mediambientales challenged, under the Spain-Mexico BIT, the Mexican
federal governments denial of the renewal of a permit to operate a hazardous
waste landfill. Again, the principal impetus for the non-renewal of the permit
was substantial public opposition to the landfill, which was located eight
kilometres from an urban centre. The Spanish investor claimed that the
resolution denying renewal of the permit constituted indirect expropriation.

31. For a discussion of indirect expropriation and the right to regulate, see Indirect
Expropriation and the Right to Regulate in International Investment Law,
Chapter 2 in International Investment Law: A Changing Landscape, OECD (2005).
32. For a discussion of the fair and equitable standard see Fair and Equitable
Treatment Standard in International Investment Law, Chapter 3 in International
Investment Law: A Changing Landscape, OECD (2005).
33. Metalclad Corporation v. Mexico, ICSID, Case No. ARB (AF)/97/1, Award, 30 Aug. 2000,
para. 76.
34. Idem, para. 109.
35. NAFTA allows investors to arbitrate only issues under Chapter 11, the Investment
Chapter. The court reasoned that the Transparency provisions are in Chapter 18.
By contrast, Chapter 11 does contain the most-favoured-nation standard and the
minimum treatment standard (including fair and equitable treatment).

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
155
INTERNATIONAL INVESTMENT AGREEMENTS

The tribunal considered the environmental reasons proffered by Mexico for


the decision, and found that there were no significant environmental
concerns that justified non-renewal of the permit,36 but that the decision was
made principally to put an end to the political problems defined as
community pressure caused by the Landfill.37 On the question of a states
right to regulate, the Tribunal reasoned: we find no principle stating that
regulatory administrative actions are per se excluded from the scope of [the
expropriation provision in the Spain-Mexico BIT], even if they are beneficial to
society as a whole such as environmental protection particularly if the
negative impact of such actions on the financial position of the investor is
sufficient to neutralise in full the value, or economic or commercial use of its
investment without receiving any compensation whatsoever.38 The Spain-
Mexico BIT does not have any environmental language.
Similarly, a Malaysian investor that signed a Foreign Investment Contract
(FIC) with the government of Chile to develop a model township in the
Pirque Metropolitan Region prevailed in an arbitration against Chile for failure
to grant the necessary permits. The municipal government rejected the
zoning modifications required for the project as well as the Environmental
Impact Statement for the project, concluding that the proposal conflicted with
existing urban development policy. While the tribunal agreed that Chile has a
right to decide its urban policies and legislation, it concluded that Chiles
approval of an investment by the FIC for a project that is against the urban
policy of the Government is a breach of the obligation to treat an investor fairly
and equitably. 39 The tribunal held that the fair and equitable treatment
standard of the Chile-Malaysia BIT would be breached by failing to grant the
necessary permits to carry out an investment already authorised.40 Notably,
however, the tribunal substantially reduced the award to the investor, finding
that a large portion of its losses resulted from other business risks that are
properly borne by the investor. The Chile-Malaysia BIT does not have any
environmental language.

36. While the record showed a few relatively minor past violations of environmental
requirements by the facility, the government of Mexico conceded that the facility
was generally in compliance with environmental laws and that the site met all
applicable criteria for the siting of a hazardous waste disposal facility.
37. Tecnica Mediambientales Tecmed S.A. v. United Mexican States, ISCID, Case No. l ARB
(AF)/00/2, Award, 29 May 2003, para. 129.
38. Tecnica Mediambientales Tecmed S.A. v. United Mexican States, ISCID, Case No. l ARB
(AF)/00/2, 29 May 2003, para. 121.
39. MTD Equity Sdn. Bhd and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/07,
Award, 25 May 2004, paras. 104 and 166.
40. Idem, paras. 104 and 105. This quoted language is found in the Chile-Croatia Treaty
and not in Chiles BIT with Malaysia. Under the Most Favoured Nation Clause of the
Malaysia-Chile BIT, the tribunal agreed to include within the scope of the BIT the more
favourable language on granting of permits contained in Chiles treaty with Croatia.

156 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Challenges to environmental regulation


A recent NAFTA decision, Methanex v. United States,41 sheds light on the
right to regulate in the environmental context. Methanex, a Canadian investor
and the worlds largest producer of methanol, which is feedstock for the
gasoline additive MTBE (methyl tertiary-butyl ether), brought a claim against
the United States challenging the state of Californias ban on the sale and use
of MTBE in gasoline.42 Methanex argued that the California law violated
national treatment, was inconsistent with the fair and equitable treatment
article, and constituted indirect expropriation. The tribunal held that national
treatment was not violated because the law applied equally to all MTBE
manufacturers, whether domestic or foreign. In so ruling, the tribunal rejected
M e th an e xs arg um e n t th at th e re l ev an t c om p ar is on s h ou ld be to
manufacturers of all gasoline additives. Further, the tribunal did not find any
evidence of intentional discrimination, concluding that the scientific and
administrative record establishes clearly that Governor Davis and the
California agencies acted with a view to protecting the environmental
interests of the citizens of California, and not with the intent to harm foreign
methanol producers.43 After reviewing at length the scientific studies and
other information that formed the basis for the law as well as the expert
scientific testimony proffered as part of the arbitration, the tribunal found
that Californias legislation was a reasonable response to the widespread
MTBE contamination of its water resources. The tribunal found no violation of
the fair and equitable treatment article. Finally, the tribunal found that there
was no indirect expropriation, reasoning:
[A]s a matter of general international law, a non-discriminatory
regulation for a public purpose, which is enacted in accordance with due
process and which affects, inter alios, a foreign investor or investment is

41. Methanex Corporation v. United States of America, UNCITRAL/NAFTA, Final Award of


t h e Tr i b u n a l o n J u r i s d i c t i o n a n d M e r i t s , 3 A u g . 2 0 0 5 , av a i l a bl e a t
www.state.gov/documents/ organisation/51052.pdf.
42. The first NAFTA arbitration was also a challenge to the ban of a gasoline additive.
Ethyl Corporation challenged Canadas adoption of legislation that banned the
import of another gasoline additive known as MMT (methylcyclopentadienyl
manganese tricarbonyl). Ethyl Corporation v. Canada, UNCITRAL/NAFTA, Award on
Jurisdiction, 24 June 1998, available at www.investmentclaims.com/oa1.html. Ethyl, a
US-based manufacturer and distributor of MMT, challenged the law on a number
of grounds, including that it violated national treatment, was an unlawful
performance requirement, and amounted to expropriation. After the tribunal
rejected Canadas challenge to jurisdiction and a separate domestic adjudicatory
body found that the Act was inconsistent with Canadas Agreement on Internal
Trade, Canada moved to resolve other challenges to the legislation and settled the
case for USD 13 million. The Ethyl case attracted significant attention, though the
tribunal never reached a decision on the merits.
43. Methanex, Part IV, Chapter E, para. 20.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
157
INTERNATIONAL INVESTMENT AGREEMENTS

n o t d e e m e d e xp r o p r ia to ry a n d c o m p e n sa bl e u n l e s s sp e c i f i c
commitments had been given by the regulating government to the then
putative foreign investor contemplating investment that the government
would refrain from such regulation.44
The exception for specific commitments given by the government
echoes the reasoning in the Metalclad case. In finding that no promises were
made regarding future regulation of MTBE, the tribunal noted that Methanex
entered a political economy in which it was widely known, if not notorious,
that governmental environmental and health protection institutions at the
federal and state level, [] continuously monitored the use and impact of
chemical compounds and commonly prohibited or restricted the use of some
of those compounds for environmental and/or health reasons. 45
Another NAFTA challenge to environmental regulation is S.D. Myers
v. Canada, where Canadas regulation imposing a temporary ban on the export
of PCB waste was held to violate the national treatment and the fair and
equitable treatment provisions of NAFTA. Because the export ban was found to
favour the use of Canadian companies for disposal of the waste and because the
government of Canada conceded that there were environmental benefits to
allowing export of the waste,46 the tribunal found that the Canadian measure
was discriminatory in intent. Noting the preamble language in NAFTA and the
NAAEC, the tribunal clearly recognised that states have the right to establish
high levels of environmental protection and that environmental protection
and economic development can and should be mutually supportive. However,
in this case, it found that there was no legitimate environmental reason for
Canadas export ban.47 The tribunal also found that the type of measure at issue
did not constitute a performance requirement because no requirements
were imposed on S.D. Myers. Finally, the measure was not tantamount to
expropriation because the ban was only temporary and only resulted in a
delayed opportunity for S.D. Myers.48

Arbitration cases involving allegations of corruption


The issue of corruption in connection with foreign investment has arisen
in some recent investor-state disputes, where international arbitration
tribunals have considered allegations of corruption, reviewed evidence

44. Idem, Part IV, Chapter D, para. 7.


45. Idem, Part IV, Chapter D, para. 9.
46. Canadas PCB wastes were located in closer proximity to the waste disposal sites in
the US than to domestic disposal options.
47. S.D. Myers, Inc. v. Canada, UNICTRAL/NAFTA case, Partial Award, 13 Nov. 2000,
paras. 220 and 195.

158 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

presented, including circumstantial evidence, and made inferences from the


evidence to decide whether corruption took place.49
In the Methanex case (discussed above), Methanex made allegations of
improper payments against Californias then governor, Gray Davis. Methanex
claimed that Archer Daniels Midland (ADM), a US-based ethanol producer,
made large campaign contributions to Governor Davis reelection campaign
and in return was able to secure Californias ban on MTBE. Methanex claimed
that concerns about MTBEs effect on water were a mere pretext for the ban,
and that it was really motivated by a desire to help ADM and others in the
domestic ethanol industry and hurt foreign methanol producers like
Methanex. The tribunal carefully considered the evidence put forward by
Methanex and agreed that a connect the dots approach could be used to
consider the evidence, i.e., that circumstantial evidence and reasonable
inferences from the evidence could be considered by a tribunal in determining
whether corruption took place.50
The tribunal rejected Methanexs allegation because the campaign
contributions were not unlawful and because the circumstantial evidence did
not lead to an inference of a quiproquo, i.e., that the contributions were given
in return for enactment of the MTBE ban. The tribunal noted that the timing
of the payments did not support an inference that they helped gain passage of
the ban because 1) at the time of the first ADM contribution to Davis, the
California legislature had already required a study on the effects of MTBE and
had already passed legislation requiring the Governor to take all appropriate
action to protect the public based on the future results of the study; 2) the
second campaign contribution came long after Governor Davis had already

48. The S.D. Myers tribunal was also called upon to determine whether Canadas
actions did not violate NAFTA because they were authorized by the US-Canada
bilateral Transboundary Agreement on Hazardous Waste or the Basel Convention
on Transboundary Movement of Hazardous Waste. The tribunal reasoned that
while NAFTAs Article 104 states that obligations under the Basel Convention shall
prevail in the event of inconsistency with NAFTA, it also requires that parties
should choose such means of compliance with the other treaty obligations that are
least inconsistent with NAFTA. Both the bilateral agreement and the Basel
Convention permit the export of hazardous waste if certain conditions for safe
management of the waste are met. Based on the language of the waste treaties and
the evidence that Canada was motivated by protectionism, the tribunal concluded
that NAFTA had been violated. For a further discussion of the relationship between
other international obligations and IIAs, see Moshe Hirsch, Interactions between
Investment and Non-Investment Obligations in International Investment Law,
International Law Forum, the Hebrew University of Jerusalem (November 2006).
49. Many more arbitrations involving corruption in foreign investment have arisen in
disputes between private companies. See Martin, Timothy, International
Arbitration and Corruption: An Evolving Standard, in Transnational Dispute
Management, Vol. I, Issue No. 2 (May 2004).
50. Methanex, Part III, Chapter B, paras. 2-3.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
159
INTERNATIONAL INVESTMENT AGREEMENTS

signed an Executive Order banning MTBE, which was later codified into a
statute; and 3) California, during this same time period, had also sought a
waiver from the federal governments oxygenate requirement which, had it
been granted, would have harmed ADM.51
Another recent decision, World Duty Free Limited v. The Republic of Kenya,52
addresses the issue of corruption raised as a defence by the government.53
World Duty Free, a UK company, contended that, through a series of actions,
the government of Kenya expropriated its investment in a duty free shop
which had been established pursuant to an investment contract with the
Kenyan authorities. Kenya argued in defence that the investment contract was
unenforceable because it was procured by payment of a bribe of USD 2 million
to the then President of Kenya, Daniel arap Moi. The claimant conceded that
the payment had been made, but argued that it saw the payment not as a bribe
but as a gift of protocol or a personal donation made to the President to be
used for public purposes within the framework of the Kenyan system of
Harambee. 54 Based on the claimants statement that the payments were
concealed (given in cash and left in a brown briefcase by the wall) and that
claimant perceived that the payments were required to secure the investment
contract, the tribunal determined that the payments must be regarded as a
bribe made in order to obtain the conclusion of the 1989 Agreement. 55
As to the consequences of the bribe, the tribunal reviewed the
international conventions on corruption, including the OAS, OECD, and
African Union conventions, the domestic laws criminalising corruption in
Kenya and elsewhere, as well a number of court and arbitral decisions
considering corruption, to conclude that bribery is contrary to the
international public policy of most, if not all, States or, to use another formula,
to trans-national public policy and therefore claims based on contracts of
corruption or on contracts obtained by corruption cannot be upheld by this
Arbitral Tribunal.56 Moreover, the fact that the President of Kenya had sought

51. The tribunal also noted that the contributions were not a substantial portion of
Daviss re-election funds and that domestic methanol producers also contributed
to Daviss campaign (showing that campaign contributions came not just from
Methanexs competitors in the ethanol industry).
52. World Duty Free Company Limited v. the Republic of Kenya, ICSID Case No. Arb./00/7, Award,
5 Sep. 2006 (provisional copy), available at www.investmentclaims.com/oa1.html.
53. Although the decision focuses on the investment contract rather than a BIT, we
discuss the decision because the same claims could have been raised under a BIT.
54. Idem, para. 133. Harambee is explained by the tribunal as follows: [T]he concept of
Harambee had its root in the African culture where societies made collective
contribution toward individual or communal activities and this practice became
popularized by President Kenyatta just after Kenyan independence. Idem, para. 134.
55. Idem, para. 136.
56. Idem., para. 157.

160 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

the bribe did not prevent the State of Kenya from raising the bribe as a
defence. The tribunal reasoned that the President held elected office under
the Constitution, was subject to the rule of law, and was separate from the
State. The tribunal held that the claimant was not legally entitled to maintain
any of its pleaded claims, but that the arbitration clause of the agreement
remained valid and gave the tribunal jurisdiction.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
161
INTERNATIONAL INVESTMENT AGREEMENTS

ANNEX 3.A1

Methodology and List of IIAs


Included in Survey
Methodology
This survey is based on a sample of 296 international investment
agreements signed by the 30 OECD member countries or by the 9 non-member
adherents to the OECD Declaration on International Investment and
Multinational Enterprises. The sample contains 269 bilateral treaties
(including 14 model treaties) and of 25 free trade agreements with investment
provisions. The relevant texts of NAFTA are also reviewed.
For BITs, the population of treaties is that available on the UNCTAD
website at www.unctadxi.org/templates/DocSearch____779.aspx. For Free Trade
Agreements, it is those listed on the US Treasury and OAS websites
(www.ustr.gov/Trade_Agreements/SEction_Induex.html) and www.sice.oas.org/Trade).
The only exception to this are four treaties signed by Belgium (with the
Democratic Republic of Congo, Korea, the Peoples Republic of China and the
United Arab Emirates, which were provided directly by Belgium. The research was
conducted in December 2006. Because of the time lag between signature of
treaties and their inclusion on the internet, some recent treaties might not be
included in this survey.
The survey uses a flexible sampling methodology more emphasis was
put on countries with many investment agreements and with significant
environmental, labour or anti-corruption texts. Treaties that were not
available electronically or that were not available in English, French or Spanish
were not considered. The sample was also selected so as to give a time
dimension to the survey results. While more effort was spent in examining
recent agreements, older treaties were also examined. In particular, the oldest
treaty still in force and available electronically was read and, where relevant,
several treaties from the early nineties were selected.

162 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

The intent of the survey methodology was to produce a comprehensive


inventory of the international investment agreements treatment of societal
issues (mainly, labour, environment and anti-corruption). However, because
the survey is based on a sample and not the complete set of all treaties, some
relevant texts may be missing.
The BITs were reviewed to see whether any texts (including the preamble,
articles and annexes) discussed the environment, human rights, labour rights
or corruption. Where the texts were searchable, searches were made for the
following terms: environment, societal, human, labour, labor,
worker, and corruption.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
163
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A1.1. Bilateral investment treaties


Country Treaty Environment Labour

Australia Sri Lanka 2002 no no


Egypt 2001 no no
Uruguay 2001 no no
India 1999 no no
Lithuania 1998 no no
Argentina 1995 no no
Indonesia 1995 no no
Chile 1996 no no
Hong Kong 1993 no no
Czech Republic 1993 no no
Hungary 1991 no no
China 1988 no no
Austria Philippines 2002 no no
Slovenia 2001 no no
Mongolia 2001 no no
Saudi Arabia 2001 no no
Armenia 2001 no no
Egypt 2001 no no
Mexico 1998 no no
Chile 1997 no no
Korea 1991 no no
Malaysia 1985 no no
Belgium/Luxembourg Model BIT yes yes
Korea 2006 yes yes
Peoples Republic of China yes (MOA) yes (MOA)
Uganda 2005 no no
Democratic Republic of Congo 2005 yes yes
United Arab Emirates 2004 yes yes
Costa Rica 2002 no no
Thailand 2002 no no
Benin 2001 no no
Burkina Faso 2001 no no
Estonia 1996 no no
Mexico 1996 no no
Czech Republic 1989 no no
Sri Lanka 1982 no no
Indonesia 1970 no no
Canada Model BIT yes yes
El Salvador 1999 yes no
Costa Rica 1998 yes no
Uruguay 1997 yes no
Croatia 1997 yes no
Thailand 1997 yes no
Lebanon 1997 yes no

164 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A1.1. Bilateral investment treaties (cont.)


Country Treaty Environment Labour

Armenia 1997 yes no


Barbados 1996 yes no
Egypt 1996 yes no
Ecuador 1996 yes no
Panama 1996 yes no
Venezuela 1996 yes no
Romania 1996 yes no
South Africa 1995 yes no
Philippines 1995 yes no
Latvia 1995 yes no
Trinidad and Tobago 1995 yes no
Ukraine 1994 yes no
Slovakia 1992 no no
Hungary 1991 no no
Argentina 1991 no no
Czech Republic 1990 no no
Poland 1990 no no
Russian Federation 1989 no no
Czech Republic Model BIT 2005 no no
Bosnia and Herzegovina 2002 no no
Nicaragua 2002 no no
Mexico 2002 no no
Lithuania 1994 no no
Ireland 1996 no no
Israel 1997 no no
Turkey 1992 no no
Australia 1993 no no
Greece no no
United States 1991 no yes
Canada 1990 no no
Finland 1990 no no
Belgium and Luxembourg 1989 no no
Denmark Ethiopia 2001 no no
Kuwait 2001 no no
Uganda 2001 no no
Slovenia 1999 no no
Estonia 1991 no no
Poland 1990 no no
Hungary 1988 no no
Indonesia 1968 no no
Finland Model BIT yes Yes
Armenia 2004 yes yes
Uruguay 2005 yes yes
Nicaragua 2003 yes yes

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
165
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A1.1. Bilateral investment treaties (cont.)


Country Treaty Environment Labour

Kyrgyzstan 2003 yes yes


Tanzania 2001 yes yes
Bosnia and Herzegovina 2000 yes yes
Croatia 1999 no No
Slovenia 1998 no no
Poland 1996 no no
Brazil 1995 no no
Argentina 1993 no no
Turkey 1993 no no
Czech Republic 1990 no no
France Model BIT no No
Iran 2003 no No
Madagascar 2003 no No
Cambodia 2000 no No
Slovenia 1998 no No
Mexico 1998 no No
Brazil 1995 no No
Hong Kong 1995 no No
Romania 1995 no No
Chile 1992 no no
Lithuania 1992+B98 no no
Estonia 1992 no no
China 1984 no no
Korea 1977 no no
Dem. Republic of the Congo 1972 no no
Germany Model BIT 2005 no* no
China 2003 no* no
Thailand 2002 no* no
Sri Lanka 2000 no* no
Mexico 1998 no* no
Romania 1996 no no
Poland 1989 no* no
Russian Federation 1989 no no
Yemen 1974 no no
Ethiopia 1964 no no
Indonesia 1968 no no
Malaysia 1960 no no
Greece Model BIT no no
Azerbaijan 2004 no no
Kazakhstan 2002 no no
Turkey 2000 no no
Mexico 2000 no no
Slovenia 1997 no no
Chile 1996 no no

166 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A1.1. Bilateral investment treaties (cont.)


Country Treaty Environment Labour

Korea 1995 no no
Estonia 1994 no no
Egypt 1993 no no
Czech and Slovak Republics 1991 no no
Hungary Yemen 2004 no no
India 2003 no no
Latvia 1999 no no
Romania 1993 no no
Australia 1991 no no
Israel 1991 no no
Norway 1991 no no
Canada 1991 no no
Denmark 1990 no no
Iceland Lebanon 2004 no no
China 1994 no no
Chile 2003 no no
Ireland Czech Republic 1996 no no
Italy Nicaragua 2004 no no
Jordan 2001 no no
Tanzania 2001 no no
Korea 1989 no no
Japan Vietnam 2003 yes yes
Korea 2002 yes yes
Bangladesh 1998 no no
Russian Federation 1998 no no
Turkey 1992 no no
Egypt 1977 no no
Korea Dem. Republic of the Congo 2005 no no
Mauritania 2005 no no
Slovakia 2005 no no
Albania 2003 no no
Japan 2002 yes no
Mexico 2000 no no
Greece 1995 no no
Austria 1991 no no
Romania 1990 no no
Russian Federation 1990 no no
Italy 1989 no no
France 1977 no no
Mexico Czech Republic 2002 no no
Cuba 2001 yes no
Sweden 2000 No no
Korea 2000 No no
Greece 2000 No no

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
167
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A1.1. Bilateral investment treaties (cont.)


Country Treaty Environment Labour

Austria 1998 No no
France 1998 No no
Germany 1998 No no
Spain 1998 No no
Netherlands 1998 No no
Belgium/Luxembourg 1996 no no
Switzerland 1995 yes no
Netherlands Model BIT yes yes
Cambodia 2003 no no
Laos 2003 no no
Zambia 2003 no no
Malawi 2003 no no
Belize 2002 no no
Tajikistan 2002 no no
Kazakhstan 2002 no no
Brazil 1998 no no
Mexico 1998 no no
Venezuela 1991 no no
Russian Federation 1989 no no
Turkey 1986 no no
Yemen 1985 no no
New Zealand Argentina 1999 no no
Chile 1999 no no
Hong Kong 1995 no no
China 1988 no no
Norway Russian Federation 1998 no no
Peru 1995 no no
Hungary 1991 no no
Malaysia 1984 no no
Poland United States 1990/2004 no yes
Jordan 1997 no no
Finland 1996 no no
Canada 1990 no no
Denmark no no
Germany 1989 no* no
Portugal Model Bit no no
Turkey 2002 no no
Bosnia and Herzegovina 2002 no no
Philippines 2002 no no
India 2000 no no
Romania 1993 no no
Slovakia Model BIT no no
Korea 2005 no no
Israel 1999 no no
Turkey 1992 no no

168 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A1.1. Bilateral investment treaties (cont.)


Country Treaty Environment Labour

Spain Model BIT no no


Chile 1991 no no
Albania 2003 no no
Jamaica 2002 no no
Uruguay 1992 no no
Syrian Republic 2003 no no
Namibia 2003 no no
Serbia and Montenegro 2002 no no
Iran 2002 no no
Mexico 1998 no no
Sweden Model BIT no no
Romania 2002 no no
Uzbekistan 2001 no no
Mexico 2000 no no
Bosnia and Herzegovina 2000 no no
Slovenia 1999 no no
Russia 1995 yes no
China 1992 no no
Latvia 1992 no no
Estonia 1992 no no
Sri Lanka 1984 no no
Switzerland Chile 2003 no no
Sudan 2002 no no
Lebanon 2000 no no
Bangladesh 2000 no no
Mexico 1995 yes no
Czech and Slovak Republics 1990 no no
Turkey Model BIT no no
Lebanon 2004 no no
Portugal 2002+B346 no no
Greece 2000 no no
Russian Federation 1997 no no
Finland 1993 no no
Japan 1992 no no
Slovakia 1992 no no
United Kingdom 1991 no no
Netherlands 1986 no no
United States 1985 no no
United Kingdom Model BIT no no
Bosnia and Herzegovina 2002 no no
Vietnam 2002 no no
Hong Kong 1998 no no
Slovenia 1996 no no
Latvia 1995 no no

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
169
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A1.1. Bilateral investment treaties (cont.)


Country Treaty Environment Labour

Estonia 1994 no no
Czech and Slovak Republic 1994 no no
Turkey 1991 no no
Argentina 1990 no no
Korea 1978 no no
United States Model BIT 2004 yes yes
Uruguay 2005 yes yes
Bahrain 1999 yes yes
El Salvador 1999 yes yes
Mozambique 1998 yes yes
Bolivia 1998 yes yes
Jordan 1997 yes yes
Azerbaijan 1997 yes yes
Albania 1995 yes yes
Nicaragua 1995 yes yes
Honduras 1995 yes yes
Jamaica 1994 no yes
Mongolia 1994 (1992 prototype) no yes
Georgia 1994 yes yes
Trinidad and Tobago 1994 yes yes
Ukraine 1994 no yes
Uzbekistan 1994 yes yes
Armenia 1992 no yes
Ecuador 1993 no yes
Lithuania 2000 (1992 prototype) no yes
Kazakstan 1992 no yes
Argentina 1991 no no
Poland 1990/2004 protocol no yes
Egypt no no
Cameroon 1986 no no
Bangladesh 1986 no no
Turkey 1985 no no
Argentina Panama 2004 no no
Thailand 2000 no no
New Zealand 1999 no no
Australia 1995 no no
Finland 1993 no no
Canada 1991 no no
Brazil Netherlands 1998 no no
Finland 1995 no no
Venezuela 1995 no no
France 1995 no no
Chile 1994 no no

170 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A1.1. Bilateral investment treaties (cont.)


Country Treaty Environment Labour

Chile Spain 2004 no no


Chile 2003 no no
Peru 2000 no no
Switzerland 2003 no no
New Zealand 1999 no no
Austria 1997 no no
Australia 1996 no no
Brazil 1994 no no
Greece 1996 no no
France 1992 no no
Estonia Belgium 1996 no no
Greece 1994 no no
Israel 1994 no no
United Kingdom no no
United States 1994 no yes
France 1992 no no
Denmark 1991 no no
Israel Model BIT no no
Ethiopia 2003 no no
Romania 1998 no no
Slovakia 1999 no no
Czech Republic 1997 no no
Estonia 1994 no no
Hungary 1991+B109 no no
Latvia United States 1995 no yes
United Kingdom 1994 no no
Hungary 1999 no no
Canada 1995 yes no
Sweden 1992 no no
Lithuania Kuwait 2001 no no
Australia 1998 no no
France 1992 no no
United States 1998 no yes
Czech Republic 1994 no no
Romania Sweden 2002 no no
Hungary 1993 no no
Israel 1998 no no
Portugal 1993 no no
United States 1992 no no
Germany 1996 no no
Canada 1996 yes no
Korea 1990 no no

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
171
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A1.1. Bilateral investment treaties (cont.)


Country Treaty Environment Labour

Slovenia Model BIT no no


Bosnia and Herzegovina no no
Austria no no
Finland 1998 no no
China 1997 no no
Greece 1997 no no
Denmark 1999 no no

Annex Table 3.A1.2. Free trade agreements or Cooperation/Partnership


agreements with investment content

Australia-Singapore Mexico-Nicaragua US-Singapore


Canada-Chile Mexico-El Salvador-Guatemala-Honduras CAFTA
Canada-Costa Rica Mexico-Uruguay Chile-China
Japan-Philippines US-Australia Chile-Korea
Korea-Singapore US-Chile Chile-Panama
Mexico-Colombia-Venezuela US-Morocco Chile-Peru
Mexico-Bolivia US-Oman EU-Russia
Mexico-Chile US-Peru EU-ACP (Cotonou)
Mexico-Costa Rica EFTA-Singapore

172 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

ANNEX 3.A2

Inventory of Environmental,
Labour and Anti-corruption Texts

1. Bilateral Investment Treaties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175


1.1. Belgium/Luxembourg. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
1.2. Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
1.3. Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
1.4. Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
1.5. Latvia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
1.6. Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
1.7. Netherlands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
1.8. Sweden. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
1.9. United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
2. NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
2.1. Preamble and objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
2.2. Relation to other environmental agreements . . . . . . . . . . . . . 187
2.3. Investment chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
2.4. Side egreements to NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
2.4.1. Labour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
2.4.2. Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
3. Free trade agreements with investment provisions
North and South America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
3.1. Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
3.1.1 Canada-Chile FTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
3.1.2 Canada-Costa-Rica FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
3.2. Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
3.2.1. Mexico-Colombia-Venezuela FTA . . . . . . . . . . . . . . . . . . 194
3.2.2. Mexico-Bolivia FTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
3.2.3. Mexico-Chile FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
3.2.4. Mexico-Costa Rica FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
3.2.5. Mexico-Nicaragua FTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . 196

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
173
INTERNATIONAL INVESTMENT AGREEMENTS

3.2.6. Mexico-El Salvador-Guatemala-Honduras FTA . . . . . . . 197


3.2.7. Mexico-Uruguay FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
3.3. United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
3.3.1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
3.3.2. US-Australia FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
3.3.3. US-Chile FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
3.3.4. US-Morocco FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
3.3.5. US-Oman FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
3.3.6. US-Peru Trade Protection Agreement . . . . . . . . . . . . . . . 210
3.3.7. US-Singapore FTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
3.3.8. CAFTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
3.4. Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
3.4.1. Chile-China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
3.4.2. Chile-Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
3.4.3. Chile-Panama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
3.4.4. Chile-Peru . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
4. Other agreements with investment provisions. . . . . . . . . . . . . . . 216
4.1. Australia-Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
4.2. Japan-Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
4.3. EU-ACP Partnership Agreement (Cotonou Agreement) . . . . . 218
4.4. EU-Russia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
4.5. EFTA-Singapore. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
4.6. Korea-Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226

174 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

1. Bilateral investment treaties


This section summarises the environmental, labour and anti-corruption
provisions in the signed BITs and model BITs for Belgium/Luxembourg,
Canada, Finland, Japan, Latvia, Mexico, the Netherlands, Sweden, and the
United States.57 In cases where the Parties to the treaty are two OECD
countries (e.g. the bilateral investment treaty between Japan and Korea), we
have listed the relevant provisions under the OECD member that has more
treaties with the noted language.

1.1. Belgium/Luxembourg
The Belgian/Peoples Republic of China BIT has a Memorandum of
Agreement on Cooperation in the Field of Environment and a Memorandum
of Agreement on Cooperation in the Field of Employment, Labour, Social
Dialogue and Social Affairs.
The preamble of the Belgian/Korea BIT contains the following language:
Recognising the right of each Contracting Party to establish its own levels
of domestic environmental protection, development policies, priorities
an d labour s tan dards , an d to adop t or mo dify ac cordin g ly its
environmental and labour legislation,
Understanding that no Contracting Party shall change or relax its
domestic environmental and labour legislation in a way that undermines
internationally recognised labor rights to encourage investment,
investment maintenance or the expansion of the investment that shall be
made in its territory.
The Definitions section of the Belgian/Luxembourg Model BIT and its
BITs with the Democratic Republic of Congo contain the following texts (Note:
The Belgian-United Arab Emirates BIT contains the chapeaux of the texts

57. The summary is based on signed BITs available on the UNCTAD database as of
December 2006. Many of the more recent treaties were not available in the
database and therefore could not be included. Model BITs were obtained from the
governments or found online.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
175
INTERNATIONAL INVESTMENT AGREEMENTS

below, but not the lists of environmental measure and internationally


recognised labour rights):
5. The terms environmental legislation shall mean any legislation of the
Contracting Parties, or provision thereof, the primary purpose of which is
the protection of the environment, or the prevention of a danger to
human, animal, or plant life or health, through:
a) the prevention, abatement or control of the release, discharge, or
emission of pollutants or environmental contaminants;
b) the control of environmentally hazardous or toxic chemicals,
substances, materials and wastes, and the dissemination of
information related thereto;
c) the protection or conservation of wild flora or fauna, including
endangered species, their habitat, and specially protected natural areas
in the Contracting Partys territory.
6. The terms labour legislation shall mean legislation of the Kingdom of
Belgium, of the Grand-Duchy of Luxembourg or of .XXX, or provisions
thereof, that are directly related to the following internationally
recognised labour rights:
a) the right of association;
b) the right to organise and bargain collectively;
c) a prohibition on the use of any form of forced or compulsory labour;
d) a minimum age for the employment of children;
e) acceptable conditions of work with respect to minimum wages, hours
of work, and occupational safety and health.
In addition, Article 5 of the Belgium/Luxembourg Model BIT and in the
Belgian/DRC BIT contain the following environmental provisions:
1. Recognising the right of each Contracting Party to establish its own levels
of domestic environmental protection and environmental development
policies and priorities, and to adopt or modify accordingly its
environmental legislation, each Contracting Party shall strive to ensure
that its legislation provides for high levels of environmental protection
and shall strive to continue to improve this legislation.
2. The Contracting Parties recognise that it is inappropriate to encourage
investment by relaxing domestic environmental legislation. Accordingly,
each Contracting Party shall strive to ensure that it does not waive or
otherwise derogate from, or offer to waive or otherwise derogate from,
such legislation as an encouragement for the establishment,
maintenance or expansion in its territory of an investment.

176 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

3. The Contracting Parties reaffirm their commitments under the


international environmental agreements, which they have accepted.
They shall strive to ensure that such commitments are fully recognised
and implemented by their domestic legislation.
4. The Contracting Parties recognise that co-operation between them
provides enhanced opportunities to improve environmental protection
standards. Upon request by either Contacting Party, the other Contracting
Party shall accept to hold expert consultations on any matter falling
under the purpose of this Article.
The Model BIT and the Belgian DRC BIT also contain detailed labour
provisions in Article 6:
1. Recognising the right of each Contracting Party to establish its own
domestic labour standards, and to adopt or modify accordingly its labour
legislation, each Contracting Party shall strive to ensure that its
legislation provide for labour standards consistent with the
internationally recognised labour rights set forth in paragraph 6 of
Article 1 and shall strive to improve those standards in that light.
3. The Contracting Parties recognise that it is inappropriate to encourage
investment by relaxing domestic labour legislation. Accordingly, each
Contracting Party shall strive to ensure that it does not waive or
otherwise derogate from, or offer to waive or otherwise derogate from,
such legislation as an encouragement for the establishment,
maintenance or expansion in its territory of an investment.
4. The Contracting Parties reaffirm their obligations as members of the
International Labour Organisation and their commitments under the
International Labour Organisation Declaration on Fundamental
Principles and Rights at Work and its Follow-up. The Contracting Parties
shall strive to ensure that such labour principles and the internationally
recognised labour rights set forth in paragraph 6 of Article 1 are
recognised and protected by domestic legislation.
5. The Contracting Parties recognise that co-operation between them
provides enhanced opportunities to improve labour standards. Upon
request by either Contacting Party, the other Contracting Party shall
accept to hold expert consultations on any matter falling under the
purpose of this Article.
The Belgian BIT with the United Arab Emirates contains similar language
to that reproduced above in its Articles 5 and 6 on the environment and
labour, respectively.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
177
INTERNATIONAL INVESTMENT AGREEMENTS

1.2. Canada
Canadas most recent treaties contain language specifically addressing
environmental protection. The Canada-El Salvador BIT, signed in 1999, was
the most recent Canadian treaty available in the UNCTAD inventory. Annex I,
Article III of this treaty contains the following provision, providing exceptions
from the agreement:
Nothing in this Agreement shall be construed to prevent a Contracting
Party from adopting, maintaining or enforcing any measure otherwise
consistent with this Agreement that it considers appropriate to ensure
that investment activity in its territory is undertaken in a manner
sensitive to environmental concerns.
Provided that such measures are not applied in an arbitrary or
unjustifiable manner, or do not constitute a disguised restriction on
international trade or investment, nothing in this Agreement shall be
construed to prevent a Contracting Party from adopting or maintaining
measures, including environmental measures:
necessary to ensure compliance with laws and regulations that are not
inconsistent with the provisions of this Agreement;
necessary to protect human, animal or plant life or health; or
relating to the conservation of living or non-living exhaustible natural
resources if such measures are made effective in conjunction with
restrictions on domestic production or consumption.
Similar language is found in Canadas BITs with the following nations:
Costa Rica, signed in 1998 (Annex I, Article III); Armenia, signed in 1997
(Article XVII); Croatia, signed in 1997 (Annex I, Article III); Lebanon, signed
in 1997 (Annex I, Article III ); Thailand, signed in 1997 (Article XVII); Uruguay,
signed in 1997 (Annex I, Article III ); Venezuela, signed in 1996 (see Annex,
Paragraph 2); Egypt, Ecuador, Barbados, Panama, and Romania, all signed
in 1996 (Article XVII in each treaty); South Africa, the Philippines, Trinidad and
Tobago, and Latvia, all signed in 1995 (Article XVII in each treaty); and with
Ukraine signed in 1994 (see Article XVII). The earlier Canadian BITs reviewed
did not contain any environmental, labour or anti-corruption provisions.
Canadas 2004 Model BIT58 contains the following environmental
provisions:
Article 10. General exceptions
1. Subject to the requirement that such measures are not applied in a
manner that would constitute arbitrary or unjustifiable discrimination
between investments or between investors, or a disguised restriction on

58. Available at http://ita.law.uvic.ca/investmenttreaties.htm/.

178 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

international trade or investment, nothing in this Agreement shall be


construed to prevent a Party from adopting or enforcing measures
necessary:
a) to protect human, animal or plant life or health;
b) to ensure compliance with laws and regulations that are not
inconsistent with the provisions of this Agreement; or
c) for the conservation of living or non-living exhaustible natural
resources.
2. Nothing in this Agreement shall be construed to prevent a Party from
adopting or maintaining reasonable measures for prudential reasons,
such as:
a) the protection of investors, depositors, financial market participants,
policy-holders, policy-claimants, or persons to whom a fiduciary duty
is owed by a financial institution;
b) the maintenance of the safety, soundness, integrity or financial
responsibility of financial institutions; and
c) ensuring the integrity and stability of a Partys financial system.
Article 11. Health, safety and environmental measures
The Parties recognise that it is inappropriate to encourage investment by
relaxing domestic health, safety or environmental measures. Accordingly, a
Party should not waive or otherwise derogate from, or offer to waive or
otherwise derogate from, such measures as an encouragement for the
establishment, acquisition, expansion or retention in its territory of an
investment of an investor. If a Party considers that the other Party has offered
such an encouragement, it may request consultations with the other Party
and the two Parties shall consult with a view to avoiding any such
encouragement.
Annex B.13(1) of the Model BIT also provides that environmental measures
shall not usually be considered indirect expropriation:
c) Except in rare circumstances, such as when a measure or series of
measures are so severe in the light of their purpose that they cannot be
reasonably viewed as having been adopted and applied in good faith,
non-discriminatory measures of a Party that are designed and applied
to protect legitimate public welfare objectives, such as health, safety
and the environment, do not constitute indirect expropriation.
There is also a provision in the Model BIT allowing an arbitration panel to use
experts or environmental, health or safety issues. Article 42. The UNCTAD
inventory does not include any new treaties that use as a base the new
Canadian model BIT.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
179
INTERNATIONAL INVESTMENT AGREEMENTS

1.3. Finland
Finlands 2004 Model BIT and recent signed treaties contain preamble
language (but no provisions in the main text) on the environment and labour
issues. Finlands model treaty and its BITs with Uruguay, signed in 2005,
Armenia, signed in 2004, Nicaragua and Kyrgyzstan, signed in 2003, Tanzania,
signed in 2001, and Bosnia and Herzegovina, signed in 2000, all have the
following relevant preamble language:
RECOGNISING that agreement on the treatment to be accorded such
investments will stimulate the flow of private capital and the economic
development of the Contracting Parties;
AGREEING that a stable framework for investment will contribute to
maximising the effective utilisation of economic resources and improve
living standards;
RECOGNISING that the development of economic and business ties can
promote respect for internationally recognised labour rights;
AGREEING that these objectives can be achieved without relaxing health,
safety and environmental measures of general application []
The earlier Finnish BITs (before 2000) reviewed for this paper did not
include such language.

1.4. Japan
Japans most recent BITs contain environmental provisions as well as a
reference to co-operation between labor and management. Japans BIT with
Vietnam, signed in 2003, and with Korea, signed in 2002, both contain the
following preamble language:
Recognising that these objectives can be achieved without relaxing
health, safety and environmental measures of general application;
Recognising the importance of the cooperative relationship between
labour and management in promoting investment between both
countries; []
Both BITs also include an Article 21 which provides that:
[Both contracting parties] recognise that it is inappropriate to encourage
investment by investors of the other Contracting Party by relaxing
environmental measures. To this effect each Contracting Party should not
waive or otherwise derogate from such environmental measures as an
encouragement for the establishment, acquisition or expansion in its
territory of investments by investors of the other Contracting Party.
The earlier Japanese BITs reviewed for this paper did not include any
environmental language.

180 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

1.5. Latvia
Latvias current Model BIT contains the following environmental and
labour language in the preamble:
Agreeing that a stable framework for investments will contribute to
maximising the effective utilisation of economic resources and improve
living standards;
Recognising that the development of economic and business ties can
promote respect for internationally recognised labour rights,
Agreeing that these objectives can be achieved without relaxing health,
safety and environmental measures of general application []
The general exceptions section of the Model BIT has the following right
to regulate language on environment and health:
2. Provided that such measures are not applied in an arbitrary or
unjustifiable manner, or do not constitute a disguised restriction on
international trade or investment, nothing in this Agreement shall be
construed to prevent a Contracting Party from adopting or maintaining
measures, including environmental measures:
a) necessary for the maintenance of public order;
b) necessary to protect human, animal or plant life or health.

1.6. Mexico
Article 5(2) of Mexicos BIT with Cuba, signed in 2001, has the following
environmental provision (in Spanish) on performance requirements:
La medida que exija que una inversin emplee una tecnologa para
cumplir en lo general con requisitos aplicables a salud, seguridad o medio
ambiente, no se considerar incompatible con el prrafo 1f). Para brindar
mayor certeza, los Artculos 3 y 4 se aplican a la citada medida.
Ad Article 3 of Mexicos BIT with Switzerland, signed in 1995, has the following
environmental provision:
The Parties recognise that it is inappropriate to encourage investment by
re la xin g d om e sti c h e alth , s afe ty or e nv iron me n ta l me a su re s .
Accordingly, neither Party should waive or otherwise derogate from, or
offer to waive or derogate, such measures as an encouragement for the
establishment, acquisition, expansion or retention in its territory of an
investment of an investor. If either Party considers that the other Party
has offered such an encouragement, it may request consultations.
In Protocol, Ad Article 3, the treaty also references the OECDs instruments:
The Parties recognise that the entry and the expansion of investments in
their territory by investors of the other Party shall be subject to relevant

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
181
INTERNATIONAL INVESTMENT AGREEMENTS

instruments of the Organisation for Economic Co-operation and


Development (OECD) in the field of international investments.
However, Mexicos BITs with the Czech Republic, signed in 2002, with
Sweden and Korea, signed in 2000, and with the Netherlands, signed in 1998,
contain no environmental or societal provisions. As noted below, Mexicos
FTAs do have environmental provisions.

1.7. Netherlands
The Netherlands 2004 Model BIT contains the following environmental
and labour language in the preamble (but no provisions in the main text):
Recognising that the development of economic and business ties will
promote internationally accepted labour standards;
Considering that these objectives can be achieved without compromising
health, safety and environmental measures of general application []

1.8. Sweden
The preamble of Swedens 2003 Model BIT contains the following text:
Recognising that the development of economic and business ties can
promote respect for internationally recognised labour rights; and
Agreeing that these objectives can be achieved without relaxing health,
safety and environmental measures of general application;
Article 2 of Swedens BIT with the Russian Federation, signed in 1995, contains
the following environmental language in the article on Protection and
Reciprocal Protection of Investments:
3) Each Contracting Party may have in its legislation limited exceptions
to national treatment provided for in Paragraph 2) of this Article. Any new
exception will not apply to investments made in its territory by investors
of the other Contracting Party before the entry into force of such an
exception, except when the exception is necessitated for the purpose of
the maintenance of defence, national security and public order,
protection of the environment, morality and public health.
The other Swedish BITs reviewed did not contain such language.
Swedens 2002 Model BIT contains no environmental, labour or anti-
corruption language.

182 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

1.9. United States


The United States 2004 Model BIT59 contains detailed language in the
text and preamble specifically addressing environmental protection and
health and labour rights, as well as other societal issues:
Preamble
Agreeing that a stable framework for investment will maximise effective
utilisation of economic resources and improve living standards;
Desiring to achieve these objectives in a manner consistent with the protection
of health, safety, and the environment, and the promotion of internationally
recognised labour rights; []
Article 8: Performance requirements
[]
c) Provided that such measures are not applied in an arbitrary or
unjustifiable manner, and provided that such measures do not
constitute a disguised restriction on international trade or investment,
paragraphs 1b), c), and f), and 2a) and b), shall not be construed to
prevent a Party from adopting or maintaining measures, including
environmental measures:
i) necessary to secure compliance with laws and regulations that
are not inconsistent with this Treaty;
ii) necessary to protect human, animal, or plant life or health; or
iii) related to the conservation of living or non-living exhaustible
natural resources.
Article 12: Investment and environment
1. The Parties recognise that it is inappropriate to encourage investment
by weakening or reducing the protections afforded in domestic
environmental laws. Accordingly, each Party shall strive to ensure that it
does not waive or otherwise derogate from, or offer to waive or otherwise
derogate from, such laws in a manner that weakens or reduces the
protections afforded in those laws as an encouragement for the
establishment, acquisition, expansion, or retention of an investment in
its territory. If a Party considers that the other Party has offered such an
encouragement, it may request consultations with the other Party and
the two Parties shall consult with a view to avoiding any such
encouragement.
2. Nothing in this Treaty shall be construed to prevent a Party from
adopting, maintaining, or enforcing any measure otherwise consistent

59. Available at http://ita.law.uvic.ca/investmenttreaties.htm.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
183
INTERNATIONAL INVESTMENT AGREEMENTS

with this Treaty that it considers appropriate to ensure that investment


activity in its territory is undertaken in a manner sensitive to
environmental concerns.
Article 13: Investment and labour
1. The Parties recognise that it is inappropriate to encourage investment
by weakening or reducing the protections afforded in domestic labor
laws. Accordingly, each Party shall strive to ensure that it does not waive
or otherwise derogate from, or offer to waive or otherwise derogate from,
such laws in a manner that weakens or reduces adherence to the
internationally recognised labor rights referred to in paragraph 2 as an
encouragement for the establishment, acquisition, expansion, or
retention of an investment in its territory. If a Party considers that the
other Party has offered such an encouragement, it may request
consultations with the other Party and the two Parties shall consult with
a view to avoiding any such encouragement.
2. For purposes of this Article, labor laws means each Partys statutes or
regulations, or provisions thereof, that are directly related to the
following internationally recognised labor rights:
a) the right of association;
b) the right to organise and bargain collectively;
c) a prohibition on the use of any form of forced or compulsory labor;
d) labor protections for children and young people, including a minimum
age for the employment of children and the prohibition and
elimination of the worst forms of child labor; and
e) acceptable conditions of work with respect to minimum wages, hours
of work, and occupational safety and health.
Article 32: Expert reports
Without prejudice to the appointment of other kinds of experts where
authorised by the applicable arbitration rules, a tribunal, at the request of a
disputing party or, unless the disputing parties disapprove, on its own
initiative, may appoint one or more experts to report to it in writing on any
factual issue concerning environmental, health, safety, or other scientific
matters raised by a disputing party in a proceeding, subject to such terms and
conditions as the disputing parties may agree.
Annex B. Expropriation
The Parties confirm their shared understanding that:
[]
b) Except in rare circumstances, non-discriminatory regulatory actions by
a Party that are designed and applied to protect legitimate public

184 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

welfare objectives, such as public health, safety, and the environment,


do not constitute indirect expropriations.
The UNCTAD inventory includes just one BIT, the US-Uruguay BIT signed
in 2005, which was concluded after creation of the 2004 Model BIT. The US-
Uruguay BIT contains the same main text language quoted above from the
2004 Model BIT. The US-Uruguay BIT has an additional phrase regarding
consumer protection in the preamble:
Desiring to achieve these objectives in a manner consistent with the
protection of health, safety, and the environment, and the promotion of
consumer protection and internationally recognised labor rights; []
The United States 1994 Model BIT contained preamble language on the
environment and worker rights (but no language in the main text of the treaty)
and therefore a number of the treaties signed in the mid- to late 1990s contain
this preamble language. For example, the US BIT with Albania, signed in 1995,
provides the following preamble language:
Agreeing that a stable framework for investment will maximise effective
utilisation of economic resources and improve living standards;
Recognising that the development of economic and business ties can
promote respect for internationally recognised worker rights;
Agreeing that these objectives can be achieved without relaxing health,
safety and environmental measures of general application
The Letter of Submittal from the United States Department of State
accompanying the US-Albania BIT, has the following statement:
Title and Preamble
The Title and Preamble state the goals of the Treaty. Foremost is the
encouragement and protection of investment. Other goals include
economic co-operation on investment issues; the stimulation of
economic development; higher living standards; promotion of respect for
internationally-recognised worker rights; and maintenance of health,
safety, and environmental measures. While the Preamble does not
impose binding obligations, its statement of goals may assist in
interpreting the Treaty and in defining the scope of Party-to-Party
consultations pursuant to Article VIII.
Letter of Submittal, US-Albania BIT, submitted by Peter Tarnoff,
US Department of State, 3 August 1995. Other US BITs signed during the mid-
to late-1990s contain the same language in the preamble and the letters of
submittal. Such language is included, for example, in the US BITs with
Azerbaijan, signed in 1997; Bolivia, signed in 1998; El Salvador, signed in 1999;
Georgia, signed in 1994; Honduras, signed in 1995; Jordan, signed in 1997;
Mozambique, signed in 1998; and Uzbekisthan, signed in 1994.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
185
INTERNATIONAL INVESTMENT AGREEMENTS

The US BITs reviewed that predate the 1994 protocol did not include any
environmental language but sometime included language on worker rights.
For example, US BITs with Argentina, signed in 1991; Kazakstan, signed
in 1992; Ecuador, signed in 1993; and Jamaica, signed in 1994, contain the
following preamble language on worker rights but nothing on the
environment:
Recognising that the development of economic and business ties can
contribute to the well-being of workers in both Parties and promote
respect for internationally recognised worker rights;
The 1992 treaty between the US and the Czech and Slovak Republics
provides the following preamble language regarding raising living standards
and worker rights:
Convinced that private enterprise operating within free and open
markets offers the best opportunities for raising living standards and the
quality of life for the inhabitants of the Parties, improving the well-being
of workers, and promoting overall respect for internationally recognised
worker rights [].

2. NAFTA
We set forth below the environmental and societal provisions in NAFTA.
We also provide a brief summary of NAFTAs side agreements on environment
and labor.

2.1. Preamble and objectives


The North American Free Trade Agreement (NAFTA), signed in 1992 by
Canada, Mexico, and the US, includes investment provisions with
environmental language as well as environmental and social issues in the
preamble.60 The following relevant language is in the NAFTA preamble:
CREATE new employment opportunities and improve working conditions
and living standards in their respective territories;
UNDERTAKE each of the preceding in a manner consistent with
environmental protection and conservation;
PRESERVE their flexibility to safeguard the public welfare;
PROMOTE sustainable development;
STRENGTHEN the development and enforcement of environmental laws
and regulations; and
PROTECT, enhance and enforce basic workers rights []

60. Available at www.sice.oas.org/trade/nafta/naftatce.asp.

186 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

NAFTA also has an Objectives article, which does not contain any language
on environmental or social issues. It reads as follows.
1. The objectives of this Agreement, as elaborated more specifically through
its principles and rules, including national treatment, most-favored-
nation treatment and transparency, are to:
a) eliminate barriers to trade in, and facilitate the cross-border movement
of, goods and services between the territories of the Parties;
b) promote conditions of fair competition in the free trade area;
c) increase substantially investment opportunities in the territories of the
Parties;
d) provide adequate and effective protection and enforcement of
intellectual property rights in each Partys territory;
e) create effective procedures for the implementation and application of
this Agreement, for its joint administration and for the resolution of
disputes; and
f) establish a framework for further trilateral, regional and multilateral
co-operation to expand and enhance the benefits of this Agreement.
2. The Parties shall interpret and apply the provisions of this Agreement in
the light of its objectives set out in paragraph 1 and in accordance with
applicable rules of international law.

2.2. Relation to other environmental agreements


NAFTA also contains an article titled Relation to Environmental and
Conservation Agreements which provides:
1. In the event of any inconsistency between this Agreement and the
specific trade obligations set out in:
a) the Convention on International Trade in Endangered Species of Wild Fauna
and Flora, done at Washington, 3 March 1973, as amended 22 June 1979;
b) the Montreal Protocol on Substances that Deplete the Ozone Layer, done at
Montreal, 16 September 1987, as amended 29 June 1990;
c) the Basel Convention on the Control of Transboundary Movements of
Hazardous Wastes and Their Disposal, done at Basel, 22 March 1989, on its
entry into force for Canada, Mexico and the United States; or
d) the agreements set out in Annex 104.1,
such obligations shall prevail to the extent of the inconsistency, provided that
where a Party has a choice among equally effective and reasonably available
means of complying with such obligations, the Party chooses the alternative
that is the least inconsistent with the other provisions of this Agreement.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
187
INTERNATIONAL INVESTMENT AGREEMENTS

2. The Parties may agree in writing to modify Annex 104.1 to include any
amendment to an agreement referred to in paragraph 1, and any other
environmental or conservation agreement.
Article 104. Annex 104.1 sets forth the following bilateral agreements:
1. The Agreement Between the Government of Canada and the Government of the
United States of America Concerning the Transboundary Movement of
Hazardous Waste, signed at Ottawa, 28 October 1986.
2. The Agreement Between the United States of America and the United Mexican
States on Cooperation for the Protection and Improvement of the Environment
in the Border Area, signed at La Paz, Baja California Sur, 14 August 1983.

2.3. Investment Chapter


The Investment Chapter, Chapter 11, contains the following language:
Article 1114: Environmental measures
1. Nothing in this Chapter shall be construed to prevent a Party from
adopting, maintaining or enforcing any measure otherwise consistent
with this Chapter that it considers appropriate to ensure that investment
activity in its territory is undertaken in a manner sensitive to
environmental concerns.
2. The Parties recognise that it is inappropriate to encourage investment by
relaxing domestic health, safety or environmental measures.
Accordingly, a Party should not waive or otherwise derogate from, or offer
to waive or otherwise derogate from, such measures as an
encouragement for the establishment, acquisition, expansion or
retention in its territory of an investment of an investor. If a Party
considers that another Party has offered such an encouragement, it may
request consultations with the other Party and the two Parties shall
consult with a view to avoiding any such encouragement.
In addition, Article 1106, which prohibits certain performance
requirements such as export quotas or minimum domestic content
requirements in products, states that bona fide environmental measures are
not precluded and that investment incentives may be conditioned inter alia on
requirements for employing or training workers (emphasis added in texts
quoted below):
1. No Party may impose or enforce any of the following requirements, or
enforce any commitment or undertaking, in connection with the
establishment, acquisition, expansion, management, conduct or operation of
an investment of an investor of a Party or of a non-Party in its territory:
a) to export a given level or percentage of goods or services;
b) to achieve a given level or percentage of domestic content;

188 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

c) to purchase, use or accord a preference to goods produced or services


provided in its territory, or to purchase goods or services from persons
in its territory;
d) to relate in any way the volume or value of imports to the volume or
value of exports or to the amount of foreign exchange inflows
associated with such investment;
e) to restrict sales of goods or services in its territory that such investment
produces or provides by relating such sales in any way to the volume or
value of its exports or foreign exchange earnings;
f) to transfer technology, a production process or other proprietary
knowledge to a person in its territory, except when the requirement is
imposed or the commitment or undertaking is enforced by a court,
administrative tribunal or competition authority to remedy an alleged
violation of competition laws or to act in a manner not inconsistent
with other provisions of this Agreement; or
g) to act as the exclusive supplier of the goods it produces or services it
provides to a specific region or world market.
2. A measure that requires an investment to use a technology to meet
generally applicable health, safety or environmental requirements shall
not be construed to be inconsistent with paragraph 1(f). For greater
certainty, Articles 1102 and 1103 apply to the measure.
3. No Party may condition the receipt or continued receipt of an advantage,
in connection with an investment in its territory of an investor of a Party
or of a non-Party, on compliance with any of the following requirements:
a) to achieve a given level or percentage of domestic content;
b) to purchase, use or accord a preference to goods produced in its
territory, or to purchase goods from producers in its territory;
c) to relate in any way the volume or value of imports to the volume or
value of exports or to the amount of foreign exchange inflows
associated with such investment; or
d) to restrict sales of goods or services in its territory that such investment
produces or provides by relating such sales in any way to the volume or
value of its exports or foreign exchange earnings.
4. Nothing in paragraph 3 shall be construed to prevent a Party from
conditioning the receipt or continued receipt of an advantage, in
connection with an investment in its territory of an investor of a Party
or of a non-Party, on compliance with a requirement to locate
production, provide a service, train or employ workers, construct or
expand particular facilities, or carry out research and development, in
its territory.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
189
INTERNATIONAL INVESTMENT AGREEMENTS

5. Paragraphs 1 and 3 do not apply to any requirement other than the


requirements set out in those paragraphs.
6. Provided that such measures are not applied in an arbitrary or
unjustifiable manner, or do not constitute a disguised restriction on
international trade or investment, nothing in paragraph 1b) or c) or 3a)
or b) shall be construed to prevent any Party from adopting or
maintaining measures, including environmental measures:
a) necessary to secure compliance with laws and regulations that are
not inconsistent with the provisions of this Agreement;
b) necessary to protect human, animal or plant life or health; or
c) necessary for the conservation of living or non-living exhaustible
natural resources.
Article 1131 on expert reports also stipulates that experts may be appointed
to provide information on environmental, health, or safety matters:
Without prejudice to the appointment of other kinds of experts where
authorised by the applicable arbitration rules, a Tribunal, at the request of
a disputing party or, unless the disputing parties disapprove, on its own
initiative, may appoint one or more experts to report to it in writing on
any factual issue concerning environmental, health, safety or other
scientific matters raised by a disputing party in a proceeding, subject to
such terms and conditions as the disputing parties may agree.

2.4. Side agreements to NAFTA


NAFTA was accompanied by separate detailed agreements on labour and
environment, the North American Agreement on Labor Cooperation
(NAALC) and the North American Agreement on Environmental Cooperation
(NAAEC).61

2.4.1. Labour
The NAALC affirms the right of each party to establish its own labour
standards, requires each party to ensure high labour standards and to enforce
its labour laws. Articles 2 and 3. Each party shall provide access to persons to
administrative, quasi-judicial, judicial or labour tribunals that are fair,
equitable and transparent and comply with due process. Article 5. The parties
shall ensure that their laws are published in advance of adoption and provide
an opportunity to interested persons to comment. Article 6. The parties shall
promote awareness of their labor laws. Article 7.

61. Idem.

190 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

The NAALC creates a Commission for Labor Cooperation comprising a


ministerial Council and a Secretariat. Article 8. The Council will oversee the
implementation of the NAALC and address questions and differences that
may arise between the parties regarding the NAALC. Article 10. The Council is
to promote co-operation among the Parties on labor issues, including by
holding trainings, seminars and providing technical assistance. Article 11.
A party may seek consultations with any other party on whether there has
been a persistent failure to enforce occupational safety and health, child
labour, or minimum wage technical labour standards. Article 27. If the matter
is not resolved after consultations, it may be referred to the Council, which
shall attempt to resolve the dispute through recourse to good offices,
conciliation, mediation or other dispute resolution procedures. Article 28. If
the matter remains unresolved it may go to an arbitral panel if the matter is
trade-related and covered by mutually recognised labour laws. Article 29. The
NAALC also defines labor laws as laws covering certain issues, including
labor protections for children and young persons, the right to bargain
collectively and to strike, elimination of employment discrimination, equal
pay for women and men, prevention of and compensation for occupational
injuries and illnesses, and protection of migrant workers. Article 49.

2.4.2. Environment
The NAAEC is structured much like the NAALC. It recognises that each
government has the right to set its own levels of domestic environmental
protection and priorities and requires each party to ensure high levels of
environmental protection and to enforce its environmental laws and
regulations. Articles 3 and 5. The parties shall ensure that their laws are
published in advance of adoption and provide an opportunity to interested
persons to comment. Article 4. Each party shall provide access to persons with
a legally recognised interest to administrative, quasi-judicial, judicial or
administrative proceedings to enforce environmental laws. Article 6. Such
proceedings shall be fair, open, and equitable and comply with due process.
Article 7.
The NAAEC creates a Commission for Environmental Cooperation
comprising a Council, a Secretariat, and a Joint Public Advisory Committee.
Article 8. The Council will oversee the implementation of the NAAEC and
address questions and differences that may arise between the parties
regarding the NAAEC. Article 10. The Council is to promote co-operation
among the Parties on environmental issues, including establishing a process
for developing recommendations on greater compatibility of environmental
technical regulations, standards and conformity assessment procedures in a
manner consistent with NAFTA. Article 10. The Council shall cooperate with

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
191
INTERNATIONAL INVESTMENT AGREEMENTS

the NAFTA Free Trade Commission to achieve the environmental goals and
objectives of NAFTA by acting as a point of inquiry and receipt for comments
from NGOS and persons and by providing assistance in consultations where a
Party considers that another Party is lowering or offering to lower
environmental measures to encourage investment. Article 10.
The Secretariat will have an Executive Director, who will be chosen by the
Council and will manage the staff of the Secretariat. Article 11. The Secretariat
may consider a submission from NGOs or persons asserting that a Party is
failing to effectively enforce its environmental law. Article 14. After
considering certain criteria, the Secretariat may request a response from the
Party, which shall submit a response to the Secretariat. If the Secretariat
determines that the matter warrants developing a factual record, and if the
Council agrees by a two-thirds vote, then the Secretariat shall develop a
factual record for the matter. A Party may comment on the factual record and
the Council may determine to make the record publicly available. Article 15.
The Joint Public Advisory Committee will have 15 members. It may
provide advice to the Council on any matter under the NAAEC and provide
technical and scientific information to the Secretariat including for developing
a factual record under Article 15. Article 16. Each Party may also convene a
national advisory committee, comprising members of its public, including
representatives of NGOs and persons, to advise it on the implementation of
the NAAEC. Article 17.
Any party may request a consultation with any other party regarding
whether there has been a persistent pattern of failure by the other party to
effectively enforce its environmental laws. Article 22. If the parties are unable to
resolve the matter after consultations, the matter may be referred to the Council,
which shall attempt to resolve the dispute through recourse to good offices,
conciliation, mediation or other dispute resolution procedures. Article 23. If the
matter remains unresolved it may go to an arbitral panel if the lack of
enforcement relates to a situation involving workplaces, firms, companies or
sectors that produce goods or provide services traded between the parties or that
compete, in the territory of the party complained against, with goods or services
produced or provided by persons of another party. Article 24.
The NAAEC defines environmental laws as domestic laws and
regulations on protecting the environment or preventing danger to human life
or health, through 1) prevention or control of the release or emission of
pollutants or environmental contaminants; 2) the control of environmentally
hazardous or toxic chemicals, substances, or wastes; or 3) the protection of
wild flora or fauna, including endangered species and their habitat, but not
including any laws directly related to worker safety or health. Article 45.

192 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

3. Free Trade Agreements with investment provisions North and


South America
We summarise below the environmental and social provisions in the
FTAs signed by the US, Mexico, Canada, and Chile.

3.1. Canada
3.1.1 Canada-Chile FTA
Canada has entered into an FTA with investment provisions with Chile.62
The FTA, signed in 1996, has the following environmental and social language
on the environment in the Preamble:
CREATE new employment opportunities and improve working conditions
and living standards in their respective territories;
UNDERTAKE each of the preceding in a manner consistent with
environmental protection and conservation;
PRESERVE their flexibility to safeguard the public welfare;
PROMOTE sustainable development;
STRENGTHEN the development and enforcement of environmental laws
and regulations;
PROTECT, enhance and enforce basic workers rights []
The FTA contains the following language on the right to regulate the
environment and not lowering standards to encourage investment:
Article G-14: Environmental measures
1. Nothing in this Chapter shall be construed to prevent a Party from
adopting, maintaining or enforcing any measure otherwise consistent
with this Chapter that it considers appropriate to ensure that investment
activity in its territory is undertaken in a manner sensitive to
environmental concerns.
2. The Parties recognise that it is inappropriate to encourage investment by
relaxing domestic health, safety or environmental measures.
Accordingly, a Party should not waive or otherwise derogate from, or offer
to waive or otherwise derogate from, such measures as an
encouragement for the establishment, acquisition, expansion or
retention in its territory of an investment of an investor. If a Party
considers that the other Party has offered such an encouragement, it may
request consultations with the other Party and the two Parties shall
consult with a view to avoiding any such encouragement.

62. Available at www.sice.oas.org/Trade/can_e.ASP.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
193
INTERNATIONAL INVESTMENT AGREEMENTS

There is also a provision allowing tribunals to appoint experts on


environmental issues. Article G-34. Canada and Chile have entered into side
agreements on co-operation on environment and labour issues, similar to the
NAFTA side agreements.

3.1.2 Canada-Costa-Rica FTA


Canada has an FTA with Costa Rica, signed in 2001, which contains a few
investment provisions, but the substance of which refers to the existing BIT
(discussed above). Its FTA with Costa Rica has the following preamble
language on environmental and social issues:
PROMOTE sustainable development;
UNDERTAKE each of the preceding in a manner consistent with
environmental protection and conservation;
PRESERVE their flexibility to safeguard the public welfare;
RECOGNISE that States have the ability to preserve, develop and
implement their cultural policies for the purpose of strengthening
cultural diversity; and
RECOGNISE the increased co-operation between our countries on labour
and environmental co-operation.
Canada and Costa Rica have also entered into side agreements on co-
operation on environment and labour issues.

3.2. Mexico
Mexico has signed a number of bilateral and multilateral FTAs with
investment provisions.63 These FTAs contain environmental provisions,
which are set forth below. The agreements were in Spanish; the following are
unofficial translations.

3.2.1. Mexico-Colombia-Venezuela FTA


This FTA, signed in 1994, contains a provision prohibiting the lowering of
environmental standards to attract investment:
Article 17-13: Policy measures pertaining to the environment
No Party shall eliminate domestic policy measures applicable to health, safety,
or pertaining to the environment, nor undertake to exempt from the
application thereof an investment by an investor from any country as a means
of bringing about the establishment, procurement, expansion, or retention of
said investment on said Partys territory. If one Party believes that another

63. All available at www.sice.oas.org/Trade/mex_e.ASP.

194 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Party has encouraged such an investment in such a manner, the former Party
may request consultations with the aforementioned other Party.

3.2.2. Mexico-Bolivia FTA


This FTA, signed in 1994, contains a right to regulate provision on the
environment and a provision prohibiting the lowering of environmental
standards to attract investment:
Article 15-14: Policy measures pertaining to the environment, health and safety
1. None of the provisions set forth in this Chapter shall be interpreted as an
impediment to a Partys adoption, retention, or implementation of any
measure compatible with this Chapter when said Party deems this
appropriate to ensuring that investments on its territory comply with
environmental laws.
2. The Parties recognise that it is inappropriate to encourage investment by
means of the relaxation of domestic policy measures applicable to the
environment, health and safety. Accordingly, neither Party shall
eliminate such measures or undertake to exempt investors or their
investments from the application thereof as a means of bringing about
the establishment, procurement, expansion, or retention of said
investment on said Partys territory. If one Party believes that the other
Party has encouraged such an investment in such a manner, the former
Party may request consultations with the latter Party.

3.2.3. Mexico-Chile FTA


This FTA, signed in 1998, contains an environmental exception from the
definition of performance requirements, a right to regulate provision on the
environment, a provision against lowering of environmental standards to
encourage investment provision, and a provision allowing environmental
experts in dispute resolution:
Article 9-07: Performance requirements
2. Provided that these measures are not applied in an arbitrary or
unwarranted fashion, and provided they do not constitute a covert
restraint of international investment or trade, none of the provisions set
forth in Paragraph 1b), 1c) or Paragraph 3a) or 3b) shall be interpreted as
preventing a party from adopting or retaining policy measures, including
environmental policy measures, if necessary to:
a) ensure compliance with laws and regulations that are not incompatible
with the provisions of this Treaty;
b) protect human, animal, or plant life; or

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
195
INTERNATIONAL INVESTMENT AGREEMENTS

c) preserve nonrenewable natural resources, whether or not living.


Article 9-15: Measures pertaining to the environment
1. None of the provisions set forth in this Chapter shall be interpreted as an
impediment to a Partys adoption, retention, or implementation of any
measure which is compatible with this Chapter and which said Party
deems appropriate to ensuring that investment activities on its territory
are carried out having due regard for environmental considerations.
2. The Parties recognise that it is inappropriate to encourage investment by
means of the relaxation of domestic policy measures applicable to health,
safety, or pertaining to the environment. Accordingly, no Party shall
waive the implementation of or in any way abolish nor offer to waive or
abolish the aforesaid measures as a means of bringing about the
establishment, procurement, expansion, or retention of an investment by
an investor on said Partys territory. If one Party believes that the Party
has encouraged such an investment in such a manner, the former Party
may request consultations with the latter Party and both shall work
together to help prevent the use of incentives of this nature.
Article 9-34: Expert opinions
Without prejudice to the option to appoint other types of experts when
applicable rules of arbitration so authorise, the Court at the request of a
litigant party, or on its own initiative unless the litigants refuse to accept this
may appoint one or more experts to issue a written opinion on any question of
fact pertaining to issues relating to the environment, health, safety, or such
other scientific matters as may have been raised by a party that is a litigant in
a proceeding, in accordance with the terms and conditions agreed upon by the
litigant parties.

3.2.4. Mexico-Costa Rica FTA


This FTA, signed in 1994, contains a right to regulate provision on the
environment and a provision prohibiting the lowering of environmental
standards to attract investment:
Article 13-15: Policy measures pertaining to the environment
1. None of the provisions set forth in this Chapter shall be interpreted as an
impediment to a Partys adoption, retention, or implementation of any
measure consistent with this Chapter when said Party deems this
appropriate to ensuring that investments on its territory comply with
said Partys ecological or environmental laws.
2. The Parties recognise that it is inappropriate to encourage investment by
means of the relaxation of domestic policy measures applicable to health,
safety, or pertaining to ecology or the environment. Accordingly, neither

196 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Party shall eliminate such measures or undertake to exempt an investors


investment from the application thereof as a means of bringing about the
establishment, procurement, expansion, or retention of the investment
on said Partys territory. If one Party believes that the other Party has
encouraged such an investment in such a manner, the former Party may
engage in consultations with the latter Party.

3.2.5. Mexico-Nicaragua FTA


This FTA, signed in 1992, contains a right to regulate provision on the
environment and a provision prohibiting the lowering of environmental
standards to attract investment:
Article 16-14: Policy measures pertaining to the environment
1. None of the provisions set forth in this Chapter shall be interpreted as an
impediment to a Partys adoption, retention, or implementation of any
measure compatible with this Chapter when said Party deems this
appropriate to ensuring that investments on its territory comply with
ecological laws.
2. The Parties recognise that it is inappropriate to encourage investment by
means of the relaxation of domestic policy measures applicable to health,
safety, or pertaining to the environment. Accordingly, no Party shall
eliminate such measures or undertake to exempt an investors
investment from the application thereof as a means of bringing about the
establishment, procurement, expansion, or retention of the investment
on said Partys territory. If one Party believes that the other Party has
encouraged such an investment in such a manner, the former Party may
engage in consultations with the latter Party.

3.2.6. Mexico-El Salvador-Guatemala-Honduras FTA


This FTA, signed in 2000, contains preamble text on improving working
conditions, protecting and conserving the environment and promoting
sustainable development as well as an environmental exception from the
definition of performance requirements:
2. A policy measure which requires that an investment utilise a technology
in order to comply with generally applicable health, environment, or
safety requirements shall not be deemed incompatible with
Paragraph 1f). For the sake of greater certainty, Article 14-04 and
Article 14-05 shall apply to the aforementioned measure.
Article 14-07.
The FTA also contains provisions on the right to regulate the environment and
prohibiting the lowering of environmental standards to attract investment:

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
197
INTERNATIONAL INVESTMENT AGREEMENTS

Article 14-16 Policy measures pertaining to the environment


1. None of the provisions set forth in this Chapter shall be interpreted as an
impediment to a Partys adoption, retention, or implementation of any
measure compatible with this Chapter when said Party deems this
appropriate to ensuring that investments on its territory comply with
environmental laws.
2. The Parties recognise that it is inappropriate to encourage investment by
means of the relaxation of domestic policy measures applicable to health,
safety, or pertaining to the environment. Accordingly, no Party shall
eliminate such measures or exempt an investors investment from the
application thereof as a means of bringing about the establishment,
procurement, expansion, or retention of the investment on said Partys
territory. If one Party believes that another Party has encouraged such an
investment in such a manner, the former Party may request
consultations with the aforementioned other Party.

3.2.7. Mexico-Uruguay FTA


This FTA, signed in 2003, contains preamble language on an
environmental exception from the definition of performance requirements
and a provision allowing environmental experts in dispute resolution:
Article 13-07: Performance requirements
2. A policy measure which requires that an investment utilise a technology
in order to comply in general with health, safety, or environmental
requirements shall not be deemed incompatible with Paragraph 1f). For
the sake of greater certainty, Articles 13-03 and 13-04 shall be applicable
to the aforementioned policy measure.
6. Provided that such measures are not applied in an arbitrary or
unwarranted fashion and provided they do not constitute a covert
restraint of international investment or trade, none of the provisions set
forth in Paragraph 1b) or c) or Paragraph 3a) or b) shall be interpreted as
preventing a Party from adopting or retaining measures, including
measures pertaining to the environment, competition, consumer
protection, or other provisions necessary to:
a) ensure compliance with laws and regulations that are not incompatible
with the provisions of this Treaty;
b) protect human, animal, or plant life; or
c) safeguard nonrenewable natural resources, whether or not alive.

198 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Article 13-33: Expert opinions


Without prejudice to the option to appoint other types of experts when
applicable rules of arbitration so authorise, the Court whether at the request
of a litigant party, or on its own initiative unless the litigant parties refuse to
accept this may appoint one or more experts to issue a written opinion on
any question of fact pertaining to issues relating to the environment, health,
safety, or such other scientific matters as may have been raised by a litigant
that is a party to a proceeding, in accordance with the terms and conditions
agreed upon by the litigant parties.

3.3. United States


3.3.1. Overview
The US has signed FTAs containing investment provisions with Australia,
Chile, Morocco, Oman, and Singapore. In addition, in 2004, the US, Costa Rica,
the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua
signed the Central American Free Trade Agreement (CAFTA). The US is
negotiating FTAs with many other nations. It has also signed a Trade
Promotion Agreement containing investment provisions with Peru [Note: In
November 2006, Colombia and the United States signed a Trade Promotion
Agreement; this agreement is not included in the sample of agreements
surveyed here]. For ease of reference, we will call CAFTA and the group of six
agreements with Australia, Chile, Morocco, Oman, Peru, and Singapore the
US FTAs reviewed. All of these US FTAs reviewed have detailed language in
the preamble and main text regarding the environment and worker and labor
rights. The investment chapters of the US FTAs reviewed have environmental
provisions that are almost the same as the language in the US 2004 Model BIT.
In addition, all the US FTAs reviewed have separate chapters with detailed
requirements on labor and the environment. CAFTA and the US FTAs with
Morocco, Oman, and Singapore, have anti-corruption provisions, the first
time this language appears in investment agreements.
1. Similarities among the US FTAs Summary of the common provisions
Preambles
Each US FTA reviewed has language in the preamble on creating new
employment opportunities, improving living standards and implementing the
agreement in a manner that protects the environment and promotes
sustainable development. With the exception of the US-Singapore FTA, each
preamble contains a commitment to high labour standards. The preambles of
CAFTA, and the US-Morocco, US-Oman, and US-Singapore FTAs also cover
elimination of bribery.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
199
INTERNATIONAL INVESTMENT AGREEMENTS

Investment chapters
All the US FTAs reviewed have a chapter on investment and each contains the
following environmental language.
First, the provision on Performance Requirements, which prohibits certain
performance requirements such as export quotas or minimum domestic
content requirements in products, states that the bona fide environmental
measures are not precluded:
c) Provided that such measures are not applied in an arbitrary or
unjustifiable manner, and provided that such measures do not
constitute a disguised restriction on investment or international trade,
paragraphs 1b), c), and f), and 2a) and b), [which preclude certain
performance requirements] shall not be construed to prevent a Party from
adopting or maintaining measures, including environmental measures:
i) necessary to secure compliance with laws and regulations that
are not inconsistent with this Agreement;
ii) necessary to protect human, animal, or plant life or health; or
iii) related to the conservation of living or non-living exhaustible
natural resources. 64
Second, there is a provision entitled Investment and Environment, making it
clear that a Party may take steps to ensure that investment is sensitive to the
environment:
Nothing in this Chapter shall be construed to prevent a Party from adopting,
maintaining, or enforcing any measure otherwise consistent with this
Chapter that it considers appropriate to ensure that investment activity in its
territory is undertaken in a manner sensitive to environmental concerns.65
Third, a provision entitled Expropriation states that:
b) Except in rare circumstances, non-discriminatory regulatory actions by
a Party that are designed and applied to achieve legitimate public
welfare objectives, such as the protection of public health, safety, and
the environment, do not constitute indirect expropriations.66

64. US-Australia FTA, Article 11.9; see also US-Chile FTA, Article 10.5(3); US-Morocco
FTA, Article 10.8(3); US-Oman FTA, Article 10.8(3); US-Peru TPA, Article 10.9(3); US-
Singapore FTA, Article 15.8(3); CAFTA, Article 10.9(3).
65. US-Australia FTA, Article 11.11; see also US-Chile FTA, Article 10.12; US-Morocco
FTA, Article 10.10; US-Oman FTA, Article 10.10; US-Peru TPA, Article 10.11; US-
Singapore FTA, Article 15.10; CAFTA, Article 10.11.
66. US-Australia FTA, Annex 11-B; see also US-Chile FTA, Annex 10-D, section 4(b);
US-Morocco FTA, Annex 10-B, section 4(b); US-Oman FTA, Annex 10-B, section 4(b);
US-Peru TPA, Annex 10-B, section 4(b), CAFTA, Annex 10-B, section 4(b). In the
US-Singapore FTA, this expropriation language is contained in an exchange of
letters between the parties, signed on 6 May 2003.

200 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Many of the US FTAs reviewed also have a provision allowing a tribunal set up
to resolve disputes to appoint experts on may appoint experts on
environmental, health, safety, or other scientific matters. See e.g, US-Chile
FTA, Article 10.23.
Labour chapters
All the US FTAs reviewed have a labour chapter. The first two articles in the
labour chapters are substantively similar in all the US FTAs reviewed.
First, the Statement of Shared Commitment reaffirms the parties
obligations under the ILO Declaration on Fundamental Principles and Rights
at Work and its Follow-Up (1998) (ILO Declaration) and states that each Party
shall strive to ensure that such principles in the ILO Declaration and the
internationally recognised labor rights listed in a separate article are
recognised and protected by law. US-Australia FTA, Article 18.1; see also
US-Chile FTA, Article 18.1; US-Morocco FTA, Article 16.1; US-Oman FTA,
Article 16.1; US-Peru TPA, Article 17.1; US-Singapore FTA, Article 17.1. The first
article also recognises that each party has the right to establish its own
domestic labor standards and to adopt or modify its labour laws and
standards and shall strive to improve those standards. id. All the US FTAs
reviewed define internationally recognised labour principles and rights as:
a) the right of association;
b) the right to organise and bargain collectively;
c) a prohibition on the use of any form of forced or compulsory labour;
d) labour protections for children and young people, including a
minimum age for the employment of children and the prohibition and
elimination of the worst forms of child labour; and
e) acceptable conditions of work with respect to minimum wages, hours
of work, and occupational safety and health.67
The second article of the labour chapter, on enforcement of labour laws,
recognises that each Party retains the right to exercise discretion with
respect to enforcement and to allocation of resources to labour matters
determined to have higher priority, but requires that a Party shall not fail to
effectively enforce its labour laws, through a sustained or recurring course of
action or inaction, in a manner affecting trade between the Parties.
US-Australia FTA, Article 18.2; see also US-Chile FTA, Article 18.2; US-Morocco
FTA, Article 16.2; US-Oman FTA, Article 16.2; US-Peru TPA, Article 17.2;

67. US-Australia FTA, Article 18.7; see also US-Chile FTA, Article 18.8 [note item (d) is
worded somewhat differently]; US-Morocco FTA, Article 16.7; US-Oman FTA,
Article 16.7; US-Peru TPA, Article 17.7 [uses minors instead of young people
in (d)]; US-Singapore FTA, Article 17.7.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
201
INTERNATIONAL INVESTMENT AGREEMENTS

US-Singapore FTA, Article 17.2. The second article also contains a provision
stating that labour standards should not lowered to encourage investment:
The Parties recognise that it is inappropriate to encourage trade or
investment by weakening or reducing the protections afforded in their
respective labour laws. Accordingly, each Party shall strive to ensure that
it does not waive or otherwise derogate from, or offer to waive or
otherwise derogate from, such laws in a manner that weakens or reduces
adherence to the internationally recognised labour principles and rights
referred to in Article 18.7 as an encouragement for trade with the other
Party, or as an encouragement for the establishment, acquisition,
expansion, or retention of an investment in its territory.68
While the US FTAs reviewed have somewhat different language on
mechanisms for public involvement and settlement of disputes between
Parties, there are commonalities as well. Each of the US FTAs reviewed
provides that the Parties shall ensure that interested persons have access to
administrative, judicial, quasi-judicial, or labour tribunals to seek
enforcement of the Partys labour standards and that such tribunals are fair,
equitable and transparent. US-Australia FTA, Article 18.3; see also US-Chile
FTA, Article 16.3; US-Morocco FTA, Article 16.3; US-Oman FTA, Article 16.3;
US-Peru FTA, Article 17.3; US-Singapore FTA, Article 17.3. Each of these
provisions also provides for the Parties to increase public awareness of
labour requirements. Idem.
With respect to settlement of labor disputes between Parties, four of the
US FTAs reviewed (with Australia, Morocco, Oman, and Singapore) establish a
Joint Committee, comprised of government officials of the Parties to oversee
implementation of the FTA and to help resolve disputes between the Parties.
US-Australia FTA, Chapter 21; US-Morocco FTA, Chapter 19; US-Oman FTA,
Chapter 19; US-Singapore FTA, Article 20.1. These Joint Committees may
establish subcommittees on labor affairs comprised of labor officials of each
Party. Disputes between the parties are to be resolved by consultations, and
failing that by convening a subcommittee on labor affairs, which can resolve
the dispute by a variety of means, including good offices, concialition, and
mediation. US-Australia FTA, Article 18.5; US-Morocco FTA, Article 16.6;
US-Oman FTA, Article 16.4 and 16.6; US-Singapore FTA, Article 17.6. For
disputes regarding enforcement of labor laws, the parties are to engage in
consultations, and failing that to take the matter to the Joint Committee. Idem.

68. US-Australia FTA, Article 18.2 (2); see also US-Chile FTA, Article 18.2; US-Morocco
FTA, Article 16.2 ; US-Oman F TA, Article 1 6.2; US-Pe ru TPA, A rticle 17.2;
US-Singapore FTA, Article 17.2.

202 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

The other two FTAs (with Chile and Peru), establish a Free Trade Commission,
comprised of government officials of the Parties to implement the FTA and
settle disputes. US-Chile FTA, Chapter 21 and Article 18.4; US-Peru TPA,
Chapter 19. These two FTAs also establish a Labor Affairs Council, comprised
of senior labor officials of each party, to discuss implementation of the labor
chapter and to settle disputes among parties on labor issues. US-Chile FTA,
Article 18.4; US-Peru TPA, Article 17.4. Disputes on labor issues between the
parties are to resolved in the first instance through consultations, next by
reference to the Labor Affairs Council, and finally by the Free Trade
Commission if the Labor Affairs Council is unable to resolve the matter.
US-Chile FTA, Article 18.6; US-Peru TPA, Article 17.6.
All the US FTAs reviewed require that each Party designate an office within its
central government to serve as the contact point on labor matters with the
other party and with the public. Such office is to provide for consultations
with the public including consideration of public communications on matters
under the labor chapter. See US-Australia FTA, Article 18.5; US-Chile FTA,
Article 18.4; US-Morocco FTA, Article 16.4; US-Oman FTA, Article 16.4; US-Peru
FTA, Article 17.4; US-Singapore FTA, Article 17.4. Each party may also convene
an advisory commission, comprising members of the public, including
representatives of labor and business, to advise on implementation of the
labor chapter. US-Australia FTA, Article 18.4; US-Chile FTA, Article 18.4;
US-Morocco FTA, Article 16.4; US-Oman FTA, Article 16.4; US-Peru FTA,
Article 17.4; US-Singapore FTA, Article 17.4.
All the US FTAs reviewed provide that the Parties agree to cooperate to further
advance labor standards, and in many cases, there are side agreements that
further detail labor co-operation. See US-Australia FTA, Article 18.5; US-Chile
FTA, Article 18.5 and Annex 18.5; US-Morocco FTA, Article 16.5 and
Annex 16-A; US-Oman FTA, Article 16.5 and Annex 16-A; US-Peru FTA,
Article 17.5 and Annex 17A; US-Singapore FTA, Article 17.5 and Annex 17A.
Environment chapters
Each US FTA reviewed has a separate chapter on environment. Each one
provides that each party has the right to regulate environmental matters
pursuant to its own priorities but must ensure that its laws provide high levels
of environmental protection:
Recognising the right of each Party to establish its own levels of environmental
protection and environmental development priorities, and to adopt or modify
accordingly its environmental laws and policies, each Party shall ensure that its
laws provide for and encourage high levels of environmental protection and
shall strive to continue to improve their respective levels of environmental
protection, including through such environmental laws and policies.69

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
203
INTERNATIONAL INVESTMENT AGREEMENTS

Further, recognising that each Party retains the right to exercise discretion with
respect to enforcement and to allocation of resources to environmental matters
of higher priorities, a Party shall not fail to effectively enforce its environmental
laws, through a sustained or recurring course of action or inaction, in a manner
affecting trade between the Parties, after the date of entry into force of this
Agreement. US-Australia FTA, Article 19.2; see also US-Chile FTA, Article 19.2;
US-Morocco FTA, Article 17.2; US-Oman FTA, Article 17.2; US-Peru TPA,
Article 18.2; US-Singapore FTA, Article 18.2; CAFTA, Article 17.2.
In addition, there is a provision stating that environmental standards should
not be lowered to encourage investment:
The Parties recognise that it is inappropriate to encourage trade or
investment by weakening or reducing the protections afforded in their
respective environmental laws. Accordingly, each Party shall strive to
ensure that it does not waive or otherwise derogate from, or offer to
waive or otherwise derogate from, such laws in a manner that weakens or
reduces the protections afforded in those laws as an encouragement for
trade with the other Party, or as an encouragement for the establishment,
acquisition, expansion, or retention of an investment in its territory.70
While the US FTAs reviewed have somewhat different language on
mechanisms for public involvement and settlement of disputes between
Parties, there are commonalities as well. Each of the US FTAs reviewed
provides that the Parties shall ensure that interested persons have access to
administrative, judicial, or quasi-judicial proceedings to seek enforcement of
the Partys environmental laws, and that such proceedings are fair, equitable
and transparent. US-Australia FTA, Article 19.3; US-Chile FTA, Article 19.8;
US-Morocco FTA, Article 17.4; US-Oman FTA, Article 17.3; US-Peru FTA,
Article 18.3; US-Singapore FTA, Article 18.3.
As noted in the labor section, with respect to settlement of disputes between
Parties, four of US FTAs reviewed (with Australia, Morocco, Oman, and
Singapore) establish a Joint Committee, comprised of government officials of
the Parties to oversee implementation of the FTA and to help resolve disputes
between the Parties. US-Australia FTA, Chapter 21; US-Morocco FTA,
Chapter 19; US-Oman FTA, Chapter 19; US-Singapore FTA, Article 20.1. These
Joint Committees may establish subcommittees on environmental affairs
comprised of environmental officials of each Party. Disputes between the

69. US-Australia FTA, Article 19.1; see also US-Chile FTA, Article 19.1; US-Morocco FTA,
Article 17.1; US-Oman FTA, Article 17.1; US-Peru TPA, Article 18.1; US-Singapore
FTA, Article 18.1, CAFTA, Article 17.1.
70. US-Australia FTA, Article 19.2; see also US-Chile FTA, Article 19.2; US-Morocco FTA,
Article 17.2; US-Oman FTA, Article 17.2; US-Peru TPA, Article 18.2; US-Singapore
FTA, Article 18.2; CAFTA, Article 17.2.

204 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

parties are to be resolved by consultations, and failing that by convening a


subcommittee on environmental affairs, which can resolve the dispute by a
variety of means, including good offices, conciliation, and mediation. For
disputes regarding enforcement of environmental laws, the parties are to
engage in consultations, and failing that to take the matter to the Joint
Committee. US-Australia FTA, Article 19.7; US-Morocco FTA, Article 16.6;
US-Oman FTA, Article 17.8; US-Singapore FTA, Article 18.7.
As noted in the labor section above, the other two FTAs (with Chile and Peru),
establish a Free Trade Commission, comprised of government officials of the
Parties to implement the FTA and settle disputes. US-Chile FTA, Chapter 21
and Article 18.4; US-Peru TPA, Chapter 19. These two FTAs also establish an
Environmental Affairs Council, comprised of senior environmental officials of
each party, to discuss implementation of the environmental chapter and to
settle disputes among parties on environmental issues. US-Chile FTA,
Article 19.3; US-Peru TPA, Article 18.5. Disputes on environmental issues
between the parties are to resolved in the first instance through consultations,
next by reference to the Environmental Affairs Council, and finally by the Free
Trade Commission if the Environmental Affairs Council is unable to resolve
the matter. US-Chile FTA, Article 19.5; US-Peru TPA, Article 18.10.
Though level of specificity in the text varies, each of the US FTAs reviewed
require that the parties provide opportunities for public participation,
including receipt and consideration of public comments, on environmental
matters under the chapter. US-Australia FTA, Article 19.5; US-Chile FTA,
Article 19.4; US-Morocco FTA, Article 17.6; US-Oman FTA, Article 17.5; US-Peru
FTA, Article 18.6; US-Singapore FTA, Article 18.5. Each party may also convene
an advisory body, comprising members of the public, including
representatives of business and environmental organisations, to seek advice
on implementation of the labor chapter. US-Australia FTA, Article 19.5;
US-Chile FTA, Article 19.4; US-Morocco FTA, Article 17.6; US-Oman FTA,
Article 17.5; US-Peru FTA, Article 18.6 (shall convene advisory council);
US-Singapore FTA, Article 18.5.
Three of the US FTAs reviewed specifically require steps to increase public
awareness of environmental laws. US-Australia FTA, Article 19.3; US-Oman
FTA, Article 16.3; US-Peru FTA, Article 18.6.
All the US FTAs reviewed provide that the Parties agree to cooperate to further
advance environmental standards, and in many cases, there are side
agreements that further detail environmental co-operation.
All the US FTAs reviewed also have a provision entitled Relationship to
Environmental Agreements Recognising the importance of multilateral
environmental agreements to which they are party and agree to seek means to
enhance the mutual supportiveness of the multilateral environmental

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
205
INTERNATIONAL INVESTMENT AGREEMENTS

agreements to which they are both party and international trade agreements
to which they are both party. The exact language in such provisions varies
somewhat from FTA to FTA.
Notes on each of the US FTAs
We set forth below the special features of the different US FTAs reviewed,
particularly the preamble language, the provisions for co-operation on labor
and environmental issues, and the language on relationship to other
environmental agreements.

3.3.2. US-Australia FTA


The US-Australia FTA (signed in 2004) 71 contains the following preamble
language on environmental and social issues:
ENCOURAGE a closer economic partnership that will bring economic and
social benefits, create new employment opportunities, and improve
living standards for their people; []
IMPLEMENT this Agreement in a manner consistent with their
commitment to high labour standards, sustainable development, and
environmental protection; []
With respect to labour co-operation, the Parties also agree to cooperate to
further advance labour standards on a bilateral, regional, and multilateral
basis. Article 18.5.
The Parties also agree to negotiate a United States-Australia Joint
Statement on Environmental Cooperation to explore ways to promote
sustainable development in concert with strengthening bilateral trade and
investment relations. Article 19.6.
The US-Australia FTA has the following provision Recognising the
importance of other environmental agreements:
ARTICLE 19.8: RELATIONSHIP TO ENVIRONMENTAL AGREEMENTS
The Parties recognise that multilateral environmental agreements to which
they are both party play an important role, globally and domestically, in
protecting the environment and that their respective implementation of these
agreements is critical to achieving the environmental objectives of these
agreements. Accordingly, the Parties shall continue to seek means to enhance
the mutual supportiveness of multilateral environmental agreements to
which they are both party and international trade agreements to which they

71. The full text of the FTA is available at www.ustr.gov/Trade_Agreements/Bilateral/


Australia_FTA/Final_Text/Section_Index.html.

206 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

are both party. The Parties shall consult regularly with respect to negotiations
in the WTO regarding multilateral environmental agreements.

3.3.3. US-Chile FTA


The US-Chile FTA (signed in 2003) 72 contains several preamble clauses
that reference the environment and social issues. The parties resolve to:
CREATE new employment opportunities and improve working conditions
and living standards in their respective territories;
BUILD on their respective international commitments and strengthen
their co-operation on labour matters;
PROTECT, enhance, and enforce basic workers rights;
IMPLEMENT this Agreement in a manner consistent with environmental
protection and conservation;
PROMOTE sustainable development;
CONSERVE, protect, and improve the environment, including through
managing natural resources in their respective territories and through
multilateral environmental agreements to which they are both parties;
PRESERVE their flexibility to safeguard the public welfare; []
With respect to labour co-operation, the US-Chile FTA states that the
Parties recognise that co-operation provides enhanced opportunities for the
Parties to promote respect for the principles embodied in the ILO Declaration
and the ILO Convention No. 182 Concerning the Prohibition and Immediate
Action for the Elimination of the Worst Forms of Child Labour (1999) (ILO
Convention 182). Article 18.5. The Parties agree to cooperate on labour issues
under a Labour Cooperation Mechanism. Article 18.5 and Annex 18.5.
With respect to environmental co-operation, Annex 19.3 of the US-Chile
FTA sets forth detailed provisions and further agrees to pursue additional co-
operation under a US-Chile Environmental Cooperation Agreement.
The provision on Relationship to Environmental Agreements has
slightly different language from the US-Australia FTA and reads as follows:
The Parties recognise the importance of multilateral environmental
agreements, including the appropriate use of trade measures in such
agreements to achieve specific environmental goals. Recognising that in
paragraph 31(i) of the Ministerial Declaration adopted on 14 November 2001 in
Doha, WTO members have agreed to negotiations on the relationship between
existing WTO rules and specific trade obligations set out in multilateral

72. The full text of the US-Chile FTA is set forth at www.ustr.gov/Trade_Agreements/
Bilateral/Chile_FTA/Final_Texts/Section_Index.html.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
207
INTERNATIONAL INVESTMENT AGREEMENTS

environmental agreements, the Parties shall consult on the extent to which


the outcome of the negotiations applies to this Agreement.
US-Chile FTA, Article 19.9.

3.3.4. US-Morocco FTA


The US-Morocco FTA (signed in 2004)73 contains several preamble clauses
that reference the environment and social issues, such as:
Recognising Moroccos commitment to reform to improve the lives of its
people;
Desiring to raise living standards, promote economic growth and
stability, create new employment opportunities, and improve the general
welfare in their territories by liberalising and expanding trade and
investment between them; []
Desiring to protect human, animal, and plant health conditions in the
Parties territories, enhance the Parties implementation of the SPS
Agreement, and provide a forum to address sanitary and phytosanitary
matters between the Parties, thereby expanding trade opportunities;
Affirming their commitment to transparency and their desire to
eliminate corruption in international trade and investment; []
Desiring to strengthen the development and enforcement of labor and
environmental laws and policies, promote basic workers rights and
sustainable development, and implement this Agreement in a manner
consistent with environmental protection and conservation;
We note that this FTA has an explicit reference to elimination of
corruption in the preamble.
Like the US-Chile FTA, the US-Morocco FTA recognises that co-operation
between the parties will promote respect for core labor standards embodied in
the ILO Declaration and ILO Convention 182 and establishes a Labor
Cooperation Mechanism (Annex 16-A) to further advance labor standards.
US-Morocco FTA, Article 16.5.
The US and Morocco agree to cooperate on environmental matters
pursuant to a US-Morocco Joint Statement on Environmental Cooperation.
Article 17.3. The provision on Relationship to Environmental Agreements has
the same language as the provision in the US-Australia FTA, except that the
last sentence in the US-Morocco provision has one additional phrase, marked
in italics: The Parties shall consult regularly with respect to negotiations in the

73. Available at www.ustr.gov/Trade_Agreements/Bilateral/Morocco_FTA/FInal_Text/Section_


Index.html.

208 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

WTO regarding multilateral environmental agreements and on the extent to


which the outcome of those negotiations may affect this Agreement. Article 17.7.
The US-Morocco FTA has explicit anti-corruption provisions in its
transparency chapter. It provides:
ARTICLE 18.5: ANTI-CORRUPTION
1. The Parties reaffirm their continuing resolve to eliminate bribery and
corruption in international trade and investment.
2. Each Party shall adopt or maintain the necessary legislative or other
measures to establish that it is a criminal offence under its law, in
matters affecting international trade or investment, for:
a) a public official of the Party or a person who performs public functions
for the Party intentionally to solicit or accept, directly or indirectly, any
article of monetary value or other benefit, such as a favour, promise, or
advantage, for himself or for another person, in exchange for any act or
omission in the performance of his public functions;
b) any person subject to the jurisdiction of the Party intentionally to offer
or grant, directly or indirectly, to a public official of the Party or a person
who performs public functions for the Party any article of monetary
value or other benefit, such as a favour, promise, or advantage, for
himself or for another person, in exchange for any act or omission in
the performance of his public functions;
c) any person subject to the jurisdiction of the Party intentionally to offer,
promise, or give any undue pecuniary or other advantage, directly or
indirectly, to a foreign official, for that official or for another person, in
order that the official act or refrain from acting in relation to the
performance of official duties, in order to obtain or retain business or
other improper advantage in the conduct of international business; and
d) any person subject to the jurisdiction of the Party to aid or abet, or to
conspire in, the commission of any of the offences described in
subparagraphs a) through c).
3. Each Party shall make the commission of an offense described in
paragraph 2 liable to sanctions that take into account the gravity of the
offense.
4. Each Party shall strive to adopt or maintain appropriate measures to
protect persons who, in good faith, report acts of bribery described in
paragraph 2.
5. The Parties recognise the importance of regional and multilateral
initiatives to eliminate bribery and corruption in international trade and
investment. The Parties shall work jointly to encourage and support
appropriate initiatives in relevant international fora.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
209
INTERNATIONAL INVESTMENT AGREEMENTS

3.3.5. US-Oman FTA


The US-Oman FTA (signed in 2005) contains the following preamble
language on environmental and social issues:
Desiring to create new employment opportunities and raise the standard
of living for their citizens by liberalising and expanding trade between
them; []
Affirming their commitment to transparency and their desire to eliminate
bribery and corruption in international trade and investment; []
Desiring to protect, enhance, and enforce basic workers rights and to
strengthen the development and enforcement of labor laws and policies;
Desiring to strengthen the development and enforcement of
environmental laws and policies, promote sustainable development, and
implement this Agreement in a manner consistent with the objectives of
environmental protection and conservation.
The US-Oman FTA recognises that co-operation provides enhanced
opportunities to promote respect for core labor standards embodied in the ILO
Declaration and ILO Convention 182. The Parties agree to cooperate on labor
issues under a Labor Cooperation Mechanism. Article 16.5 and Annex 16-A.
The US and Oman agree to cooperate on environmental matters pursuant
to a US-Oman Memorandum of Understanding on Environmental
Cooperation. Article 17.7. The provision on Relationship to Environmental
Agreements has the same language as the US-Australia FTA except for the
last sentence, which reads as follows: To this end, the Parties shall consult, as
appropriate, with respect to negotiations on environmental issues of mutual
interest. US-Oman FTA, Article 17.9.
The US-Oman FTA has explicit anti-corruption provisions in its
transparency chapter. US-Oman FTA, Article 18.5. The provision has the same
language as the anti-bribery provision in the US-Morocco FTA, with the
exception of paragraph 3. In the US-Oman FTA, paragraph 3 reads: Each Party
shall adopt or maintain appropriate penalties and procedures to enforce the
criminal measures that it adopts or maintains in conformity with
paragraph 2. By contrast, the language in the US-Morocco paragraph 3 is:
Each Party shall make the commission of an offense described in paragraph 2
liable to sanctions that take into account the gravity of the offense.

210 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

3.3.6. US-Peru Trade Protection Agreement


The US has entered into a Trade Protection Agreement (TPA) with Peru
(signed 2006), which is similar in structure to the FTAs discussed above. The
preamble contains the following language on environmental and social issues:
PROMOTE broad-based economic development in order to reduce poverty
and generate opportunities for sustainable economic alternatives to
drug-crop production;
CREATE new employment opportunities and improve labor conditions
and living standards in their respective territories; []
PROMOTE transparency and prevent and combat corruption, including
bribery, in international trade and investment;
PROTECT, enhance, and enforce basic workers rights, strengthen their
co-operation on labor matters, and build on their respective international
commitments on labor matters;
IMPLEMENT this Agreement in a manner consistent with environmental
protection and conservation, promote sustainable development, and
strengthen their co-operation on environmental matters;
PRESERVE their ability to safeguard the public welfare; []
With respect to labor co-operation, the US-Peru TPA recognises that
co-operation enhances development and advances the commitments on labor
matters embodied in the ILO Declaration and ILO Convention 182. Article 17.5.
The Parties agree to cooperate on labour issues under a Labour Cooperation
and Capacity Building Mechanism. Article 17.5 and Annex 17.5.
The Parties agree to increase co-operation on environmental issues
pursuant to an Environmental Cooperation Agreement. Article 18.9.
The TPAs provision on Relationship to Environmental Agreements is
somewhat different in form from that provision in the FTAs discussed above,
with Article 18.12. providing:
1. The Parties recognise that multilateral environmental agreements to
which they are all party, play an important role globally and domestically
in protecting the environment and that their respective implementation
of these agreements is critical to achieving the environmental objectives
thereof. The Parties further recognise that this Chapter and the ECA can
contribute to realising the goals of those agreements. Accordingly, the
Parties shall continue to seek means to enhance the mutual
supportiveness of multilateral environmental agreements to which they
are all party and trade agreements to which they are all party.
2. To this end, the Parties shall consult, as appropriate, with respect to
negotiations on environmental issues of mutual interest.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
211
INTERNATIONAL INVESTMENT AGREEMENTS

3. Each Party recognises the importance to it of the multilateral environmental


agreements to which it is a party.

3.3.7. US-Singapore FTA


The US-Singapore FTA (signed in 2003)74 contains the following preamble
language on environmental and social issues:
Recognising that economic development, social development, and
environmental protection are interdependent and mutually reinforcing
components of sustainable development, and that an open and non-
discriminatory multilateral trading system can play a major role in
achieving sustainable development; []
Reaffirming the importance of pursuing the above in a manner consistent
with the protection and enhancement of the environment, including
through regional environmental cooperative activities and
implementation of multilateral environmental agreements to which they
are both parties; []
The Parties recognise that co-operation provides enhanced opportunities
to promote respect for core labour standards embodied in the ILO Declaration
and compliance with [ILO Convention 182]. US-Singapore FTA, Article 17.5. The
Parties agree to cooperate on labour issues under a Labour Cooperation
Mechanism. US-Singapore FTA, Article 17.5 and Annex 17-A.
With respect to environmental co-operation, the parties agree to engage
in further cooperative activities under a separate Memorandum of Intent on
Cooperation in Environmental Matters and in other fora. Article 18.6.
The US-Singapore FTA has the following provision on Relationship to
Environmental Agreements:
The Parties recognise the critical role of multilateral environmental
agreements in addressing some environmental challenges, including
through the use of carefully tailored trade measures to achieve specific
environmental goals and objectives. Recognising that WTO Members
have agreed in paragraph 31 of the Ministerial Declaration adopted on
14 November 2001 in Doha to negotiations on the relationship between
existing WTO rules and specific trade obligations set out in multilateral
environmental agreements, the Parties shall consult on the extent to
which the outcome of those negotiations applies to this Agreement.
Article 18.8.

74. Available at www.ustr.gov/Trade_Agreements/Bilateral/Singapore_FTA/Final_Texts/Section_


Index.htm.l

212 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

The US-Singapore FTA also has the following anti-corruption language:


ARTICLE 21.5: ANTI-CORRUPTION
1. Each Party reaffirms its firm existing commitment to the adoption,
maintenance, and enforcement of effective measures, including
deterrent penalties, against bribery and corruption in international
business transactions. The Parties further commit to undertake best
efforts to associate themselves with appropriate international anti-
corruption instruments and to encourage and support appropriate anti-
corruption initiatives and activities in relevant international fora.
2. The Parties shall cooperate to strive to eliminate bribery and corruption
and to promote transparency in international trade. They will look for
avenues in relevant international fora to address these issues and build
upon the potential anti-corruption efforts in these fora.

3.3.8. CAFTA
CAFTA was signed in 2004 and is similar in structure to the FTAs
discussed above. The preamble contains the following language on
environmental and social issues:
PROMOTE transparency and eliminate bribery and corruption in
international trade and investment;
CREATE new opportunities for economic and social development in the
region;
PROTECT, enhance, and enforce basic workers rights and strengthen
their co-operation on labor matters;
CREATE new employment opportunities and improve working conditions
and living standards in their respective territories;
BUILD on their respective international commitments on labor matters;
IMPLEMENT this Agreement in a manner consistent with environmental
protection and conservation, promote sustainable development, and
strengthen their co-operation on environmental matters;
PROTECT and preserve the environment and enhance the means for
doing so, including through the conservation of natural resources in their
respective territories;
PRESERVE their flexibility to safeguard the public welfare.
CAFTA recognises that co-operation between the parties will promote
respect for core labor standards embodied in the ILO Declaration and ILO
Convention 182 and establishes a Labor Cooperation and Capacity Building
Mechanism (Annex 16-5) to further advance labor standards. CAFTA,
Article 16.5.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
213
INTERNATIONAL INVESTMENT AGREEMENTS

The CAFTA parties agree to cooperate on environmental matters


pursuant to an Environmental Co-operation Agreement. Article 17.9. The
provision on Relationship to Environmental Agreements (Article 17.12)
provides:
1. The Parties recognise that multilateral environmental agreements to
which they are all party play an important role in protecting the
environment globally and domestically and that their respective
implementation of these agreements is critical to achieving the
environmental objectives of these agreements. The Parties further
recognise that this Chapter and the ECA can contribute to realising the
goals of those agreements. Accordingly, the Parties shall continue to seek
means to enhance the mutual supportiveness of multilateral
environmental agreements to which they are all party and trade
agreements to which they are all party.
2. The Parties may consult, as appropriate, with respect to ongoing
negotiations in the WTO regarding multilateral environmental agreements.
CAFTAs Chapter 18, Section B contains the following Anti-Corruption
provisions:
Section B: Anti-Corruption
Article 18.7: Statement of principle
The Parties affirm their resolve to eliminate bribery and corruption in
international trade and investment.
Article 18.8: Anti-corruption measures
1. Each Party shall adopt or maintain the necessary legislative or other
measures to establish that it is a criminal offense under its law, in
matters affecting international trade or investment, for:
a) a public official of that Party or a person who performs public functions
for that Party intentionally to solicit or accept, directly or indirectly, any
article of monetary value or other benefit, such as a favor, promise, or
advantage, for himself or for another person, in exchange for any act or
omission in the performance of his public functions;
b) any person subject to the jurisdiction of that Party intentionally to offer
or grant, directly or indirectly, to a public official of that Party or a
person who performs public functions for that Party any article of
monetary value or other benefit, such as a favor, promise, or advantage,
for himself or for another person, in exchange for any act or omission
in the performance of his public functions;
c) any person subject to the jurisdiction of that Party intentionally to
offer, promise, or give any undue pecuniary or other advantage, directly
or indirectly, to a foreign official, for that official or for another person,

214 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

in order that the official act or refrain from acting in relation to the
performance of official duties, in order to obtain or retain business or
other improper advantage in the conduct of international business; and
d) any person subject to the jurisdiction of that Party to aid or abet, or to
conspire in, the commission of any of the offenses described in
subparagraphs a) through c).
2. Each Party shall adopt or maintain appropriate penalties and procedures
to enforce the criminal measures that it adopts or maintains in
conformity with paragraph 1.
3. In the event that, under the legal system of a Party, criminal responsibility
is not applicable to enterprises, that Party shall ensure that enterprises
shall be subject to effective, proportionate, and dissuasive non-criminal
sanctions, including monetary sanctions, for any of the offenses described
in paragraph 1.
4. Each Party shall endeavor to adopt or maintain appropriate measures to
protect persons who, in good faith, report acts of bribery or corruption
described in paragraph 1.

3.4. Chile
3.4.1. Chile-China
The 2005 Chile/China FTA (which deals with promoting investment in
Article 112) contains the following preamble language:
Recognising that this Agreement should be implemented with a view
toward raising the standard of living, creating new job opportunities and
promoting sustainable development in a manner consistent with
environment protection and conservation.
Its Article 10 on Labour, Social Security and Environmental Cooperation
states:
The Parties shall enhance their communication and co-operation on
labour, social security and environment through both the Memorandum
of Understanding on Labour and Social Security Cooperation and the
Environmental Cooperation Agreement between the Parties.

3.4.2. Chile-Korea
The 2003 Chile/Korea FTA contains the same preamble language as that
reproduced above for the Chile-China agreement. It also duplicates the Chile-
China language on exceptions to performance requirements, investment
incentives, environmental measures, and expert reports.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
215
INTERNATIONAL INVESTMENT AGREEMENTS

3.4.3. Chile-Panama
The Panama-Chile FTA contains the following preamble language:
CREATE new employment opportunities and improve working conditions
and living standards in their respective territories;
BUILD on their respective international commitments and strengthen
their co-operation on labour matters;
PROTECT, enhance, and enforce basic workers rights;
IMPLEMENT this Agreement in a manner consistent with environmental
protection and conservation;
PROMOTE economic development in a manner that is consistent with
protection and conservation of the environment and also with
sustainable development;
CONSERVE, protect, and improve the environment, including through
managing natural resources in their respective territories and through
multilateral environmental agreements to which they are both parties;
PRESERVE their flexibility to safeguard the public welfare; []

3.4.4. Chile-Peru
In addition to Preamble language, the Chile-Peru FTA contains the
following Article 11.13 on Investment and Environment:
Nothing in this Agreement shall be construed to prevent a Contracting
Party from adopting, maintaining or enforcing any measure otherwise
consistent with this Agreement that it considers appropriate to ensure
that investment activity in its territory is undertaken in a manner
sensitive to environmental concerns.
As well as language on indirect expropriation in Annex 11.D:
Except in rare circumstances, non-discriminatory regulatory actions by a
Party that are designed and applied to protect legitimate public welfare
objectives, such as public health, safety, and the environment, do not
constitute indirect expropriations.

4. Other agreements with investment provisions

4.1. Australia-Singapore
The Australia-Singapore Free Trade Agreement was signed on
17 February 2003 and came into force on 28 July 2003. SAFTA is a
comprehensive agreement covering areas such as trade in goods, trade in
services, investment, telecommunication, financial services, movement of

216 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

business persons, government procurement, intellectual property rights,


competition policy, e-commerce and education co-operation.
The Investment Chapter, Chapter 8 does not contain any
environmental provision but has a general exceptions clause:
ARTICLE 12
General exceptions
Subject to the requirement that such measures are not applied in a manner
which would constitute a means of arbitrary or unjustifiable discrimination
between the Parties where the same conditions prevail, or a disguised
restriction on international trade, nothing in this Chapter shall be construed
to prevent the adoption or enforcement by a Party of measures:
a) necessary to protect public morals;
b) necessary to protect human, animal or plant life or health;
c) relating to the importations or exportations of gold or silver;
d) necessary to secure compliance with laws or regulations which are not
inconsistent with the provisions of this Chapter, including those
relating to customs enforcement, the enforcement of monopolies
operated under paragraph 4 of Article II and Article XVII of the
GATT 1994, the protection of patents, trade marks and copyrights, and
the prevention of deceptive practices;

4.2. Japan-Philippines
Article 8 of the General Provisions chapter of the Economic Partnership
Agreement between Japan and the Philippines (signed 2006) contains the
following anti-corruption text:
Each Party shall ensure that measures and efforts are undertaken to
prevent and combat corruption regarding matters covered by this
Agreement in accordance with its laws and regulations.
Chapter 8 contains the following environmental and labour texts:
Article 102 Environmental measures
Each Party recognises that it is inappropriate to encourage investments by
investors of the other Party by relaxing its environmental measures. To this
effect each Party should not waive or otherwise derogate from such
environmental measures as an encouragement for establishment, acquisition
or expansion in its Area of investments by investors of the other Party.
Article 103 Investment and labour
1. The Parties recognise that it is inappropriate to encourage investment by
weakening or reducing the protections afforded in domestic labor laws.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
217
INTERNATIONAL INVESTMENT AGREEMENTS

Accordingly, each Party shall strive to ensure that it does not waive or
otherwise derogate from, or offer to waive or otherwise derogate from,
such laws in a manner that weakens or reduces adherence to the
internationally recognised labor rights referred to in paragraph 2 below as
an encouragement for the establishment, acquisition, expansion or
retention of an investment in its Area. If a Party considers that the other
Party has offered such an encouragement, it may request consultations
with the other Party and the Parties shall consult with a view to avoiding
any such encouragement.
2. For purposes of this Article, labour laws means each Partys laws or
regulations that are directly related to the following internationally
recognised labour rights:
a) the right of association;
b) the right to organise and bargain collectively;
c) a prohibition on the use of any form of forced or compulsory labour;
d) labour protections for children and young people, including a
minimum age for the employment of children and the prohibition and
elimination of the worst forms of child labour; and
e) acceptable conditions of work with respect to minimum wages, hours
of work, and occupational safety and health.

4.3. EU-ACP Partnership Agreement (Cotonou Agreement)


The February 2000 expiration of the Lom Convention provided an
opportunity for reviewing ACP-EU relations. Negotiations of a new agreement
started in September 1998 and were successfully concluded in early
February 2000. The new ACP-EC agreement was signed on 23 June 2000 in
Cotonou, Benin, and was concluded for a twenty-year period from March 2000
to February 2020. The agreement contains numerous references to human
rights, environment, labour rights and the fight against corruption. Relevant
preamble language includes:
ASSERTING their resolve to make, through their co-operation, a
significant contribution to the economic, social and cultural development
of the ACP States and to the greater well-being of their population,
helping them facing the challenges of globalisation and strengthening
the ACP-EU Partnership in the effort to give the process of globalisation a
stronger social dimension;
REAFFIRMING their willingness to revitalise their special relationship and
to implement a comprehensive and integrated approach for a
strengthened partnership based on political dialogue, development co-
operation and economic and trade relations;

218 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

ACKNOWLEDGING that a political environment guaranteeing peace,


security and stability, respect for human rights, democratic principles
and the rule of law, and good governance is part and parcel of long term
development; acknowledging that responsibility for establishing such an
environment rests primarily with the countries concerned;
ACKNOWLEDGING that sound and sustainable economic policies are
prerequisites for development;
REFERRING to the principles of the Charter of the United Nations, and
recalling the Universal Declaration of Human Rights, the conclusions of
the 1993 Vienna Conference on Human Rights, the Covenants on Civil
and Political Rights and on Economic, Social and Cultural Rights, the
Convention on the Rights of the Child, the Convention on the Elimination
of all forms of Discrimination against Women, the International
Convention on the Elimination of all forms of Racial Discrimination, the
1949 Geneva Conventions and the other instruments of international
humanitarian law, the 1954 Convention relating to the status of stateless
persons, the 1951 Geneva Convention relating to the Status of Refugees
and the 1967 New York Protocol relating to the Status of Refugees;
CONSIDERING the Convention for the Protection of Human Rights and
Fundamental Freedoms of the Council of Europe, the African Charter on
Human and Peoples Rights and the American Convention on Human
Rights as positive regional contributions to the respect of human rights in
the European Union and in the ACP States;
RECALLING the Libreville and Santo Domingo declarations of the Heads
of State and Government of the ACP countries at their Summits in 1997
and 1999;
CONSIDERING that the development targets and principles agreed in
United Nations Conferences and the target, set by the OECD Development
Assistance Committee, to reduce by one half the proportion of people
living in extreme poverty by the year 2015 provide a clear vision and must
underpin ACP-EU co-operation within this Agreement;
Article 75 (Investment Promotion) of Chapter 7 (Investment and Private
Sector Development) of the Cotonou Agreement does not deal explicitly with
societal issues, though it does note that partner countries will: implement
measures to encourage participation in their development efforts by private investors
who comply with the objectives and priorities of ACP-EC development co-operation
and with the appropriate laws and regulations of their respective States []
Many of the other Chapters contain numerous references to such issues
as human rights, protection of the environment, upholding labour rights and
the fight against bribery and other forms of corruption.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
219
INTERNATIONAL INVESTMENT AGREEMENTS

4.4. EU-Russia
The EU-Russia Agreement on Partnership and Cooperation, which came
into force in 1997 for a period of 10 years and which, after 2007, will
automatically extended on annual basis unless one of the Parties withdraws
from the Agreement. The provisions of the Partnership and Cooperation
Agreement cover a wide range of policy areas including political dialogue;
trade in goods and services; business and investment; financial and legislative
co-operation; science and technology; education and training; energy, nuclear
and space co-operation; environment, transport; culture; and co-operation on
the prevention of illegal activities. Rules of procedure for the dispute
settlement provisions of the PCA were adopted in April 2004.
Thus, the Agreement provides a broad blueprint for co-operation in many
policy areas and it contains quite lengthy texts on co-operation in the areas of
environment, labour/social and anti-corruption legislation and law
enforcement. The strategy of the Agreement seems to be one of setting forth
broad objectives for policy co-operation in these areas, which would
presumably influence investment co-operation indirectly. The investment
texts appear in Title IV of the Agreement (Provisions on Business and
Investment) and in some of the sectoral articles (e.g. energy). Title IV does not
explicitly link investment co-operation and with these other forms of co-
operation, though the sectoral texts do (see Article 65 on Energy). The
Agreement establishes an institutional framework for regular consultations
between the European Union and Russia.
TITLE II POLITICAL DIALOGUE
Article 6
A regular political dialogue shall be established between the Parties which
they intend to develop and intensify. It shall accompany and consolidate the
rapprochement between the European Union and Russia, support the political
and economic changes underway in Russia and contribute to the
establishment of new forms of co-operation. The political dialogue:
shall bring about an increasing convergence of positions on
international issues of mutual concern thus increasing security and
stability;
shall foresee that the Parties endeavour to cooperate on matters
pertaining to the observance of the principles of democracy and
human rights, and hold consultations, if necessary, on matters related
to their due implementation.

220 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

TITLE VI COMPETITION, INTELLECTUAL, INDUSTRIAL AND COMMERCIAL


PROPERTY PROTECTION, LEGISLATIVE COOPERATION
(NB. Some texts have been put in bold type to call attention to them)
Article 55 Legislative Cooperation
1. The Parties recognise that an important condition for strengthening the
economic links between Russia and the Community is the approximation
of legislation. Russia shall endeavour to ensure that its legislation will be
gradually made compatible with that of the Community.
2. The approximation of laws shall extend to the following areas in
particular: company law, banking law, company accounts and taxes,
protection of workers at the workplace, financial services, rules on
competition, public procurement, protection of health and life of
humans, animals and plants, the environment, consumer protection,
indirect taxation, customs law, technical rules and standards, nuclear
laws and regulations, transport.
TITLE VII ECONOMIC CO-OPERATION
Article 56
1. The Community and Russia shall foster economic co-operation of wide
scope in order to contribute to the expansion of their respective
economies, to the creation of a supportive international economic
environment and to the integration between Russia and a wider area of
co-operation in Europe. Such co-operation shall strengthen and develop
economic links to the benefit of both Parties.
2. Policies and other measures of the Parties related to this title shall in
particular be designed to bring about economic and social reforms and
restructuring in Russia and shall be guided by the requirements of
sustainability and harmonious social development; they shall also fully
incorporate environmental considerations.
3. The co-operation shall, inter alia, cover:
development of their respective industries and transport;
exploration of new sources of supply and of new markets;
encouragement of technological and scientific progress;
Article 57 Industrial co-operation
1. Co-operation shall aim at promoting the following in particular:
the development of business links between economic operators,
including small and medium-size enterprises;
the improvement of management on enterprise level;

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
221
INTERNATIONAL INVESTMENT AGREEMENTS

the process of privatisation in the context of economic restructuring,


and the strengthening of the private sector;
efforts in both public and private sector, to restructure and modernise
the industry, during the transition period leading towards a market
economy and under conditions ensuring environment protection and
sustainable development;
Article 61 Mining and raw materials
1. The Parties shall cooperate with a view to fostering the development of
the sectors of mining and raw materials. Special attention shall be paid to
co-operation in the sector of nonferrous metals.
2. The co-operation shall focus in particular on the following areas:
exchange of information on all matters of interest to the Parties
concerning the mining and raw materials sectors, including trade
matters;
the adoption and implementation of environmental legislation;
training.
Article 64 Agriculture and the agro-industrial sector
Co-operation shall aim at the modernisation, restructuring and privatisation
of agriculture and the agro-industrial sector in Russia in conditions which
ensure that the environment is respected. This co-operation shall be through,
inter alia, developing private farms and distribution channels, methods of
storage, marketing and management, modernising the rural infrastructure
and improvement of agricultural land-use planning, improving productivity,
quality and efficiency, and the transfer of technology and know-how. The
Parties shall aim at achieving compatibility between their sanitary and
phytosanitary standards.
Article 65 Energy
1. Co-operation shall take place within the principles of the market
economy and the European Energy Charter, against a background of the
progressive integration of the energy markets in Europe.
2. The co-operation shall include among others the following areas:
[]
improvement in management and regulation of the energy sector in
line with a market the introduction of the range of institutional, legal,
fiscal and other conditions necessary to encourage increased energy
trade and investment;
promotion of energy saving and energy efficiency;
[]

222 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

the environmental impact of energy production, supply and


consumption, in order to prevent or minimise the environmental
damage resulting from these activities;
[]
management and technical training in the energy sector.
Article 68 Construction
The Parties shall co-operate in the field of construction industry, particularly
in the areas covered by Articles 55, 57, 60, 62, 63 and 77 of this Agreement.
This co-operation shall, inter alia, aim at modernising and restructuring the
construction sector in Russia in line with the principles of a market economy
and duly taking into account related health, safety and environmental
aspects.
Article 69 Environment
1. Bearing in mind the European Energy Charter and the Declaration of the
Lucerne Conference of 1993, the Parties shall develop and strengthen
their co-operation on environment and human health.
2. Co-operation shall aim at combating the deterioration of the
environment and in particular:
effective monitoring of pollution levels and assessment of
environment; system of information on the state of the environment;
combating local, regional and transboundary air and water pollution;
ecological restoration;
sustainable, efficient and environmentally effective production and use
of energy; safety of industrial plants;
classification and safe handling of chemicals;
water quality;
waste reduction, recycling and safe disposal, implementation of the
Basle Convention;
the environmental impact of agriculture, soil erosion, and chemical
pollution;
the protection of forests;
the conservation of biodiversity, protected areas and sustainable use
and management of biological resources;
land-use planning, including construction and urban planning;
use of economic and fiscal instruments;
L/CE/RU/en 61
global climate change;

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
223
INTERNATIONAL INVESTMENT AGREEMENTS

environmental education and awareness;


implementation of the Espoo Convention on Environmental Impact
Assessment in a transboundary context.
3. Co-operation shall take place particularly through:
disaster planning and other emergency situations;
exchange of information and experts, including information and
experts dealing with the transfer of clean technologies and the safe and
environmentally sound use of biotechnologies;
joint research activities;
improvement of laws towards Community standards;
co-operation at regional level, including co-operation within the
framework of the European Environment Agency, established by the
Community and at international level;
development of strategies, particularly with regard to global and
climatic issues and also in view of achieving sustainable development;
environmental impact studies.
Article 74 Social co-operation
1. With regard to health and safety, the Parties shall develop co-operation
between them with the aim of improving the level of protection of the
health and safety of workers. The co-operation shall include notably:
education and training on health and safety issues with specific
attention to high risk sectors of activity;
development and promotion of preventive measures to combat work
related diseases and other work related ailments;
prevention of major accident hazards and the management of toxic
chemicals;
research to develop the knowledge base in relation to working
environment and the health and safety of workers.
2. With regard to employment, the co-operation shall include notably
technical assistance to:
optimisation of the labour market;
modernisation of the job-finding and consulting services;
planning and management of the restructuring programmes;
encouragement of local employment development; L/CE/RU/en 67;
exchange of information on the programmes of flexible employment,
including those stimulating self-employment and promoting
entrepreneurship.

224 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

3. The Parties shall pay special attention to co-operation in the sphere of


social protection which, inter alia, shall include co-operation in
planning and implementing social protection reforms in Russia.
These reforms shall aim to develop in Russia methods of protection intrinsic
to market economies and shall comprise all directions of social security
activities.
The co-operation shall also include technical assistance to the development
of social insurance institutions with the aim of promoting gradual transition
to a system consisting of a combination of contributory and social
assistance forms of protection, as well as respective non-governmental
organisations providing social services.
TITLE VIII CO-OPERATION ON PREVENTION OF ILLEGAL ACTIVITIES
Article 84
The Parties shall establish co-operation aimed at preventing illegal activities
such as:
[]
illegal activities in the sphere of economics, including corruption;
L/CE/RU/en 75
[]
The co-operation in the abovementioned areas will be based on mutual
consultations and close interactions and will provide technical and
administrative assistance including:
drafting of national legislation in the sphere of preventing illegal
activities;
creation of information centres;
increasing the efficiency of institutions engaged in preventing illegal
activities;
training of personnel and development of research infrastructures;
elaboration of mutually acceptable measures impeding illegal
activities.
PROTOCOL 1 ON THE ESTABLISHMENT OF A COAL AND STEEL CONTACT
GROUP
4. The Contact Group exchanges all useful information on the structure of
the industries concerned, the development of their production capacities,
the science and research progress in the relevant fields, and the evolution
of employment. The Group also examines pollution and environmental
problems.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
225
INTERNATIONAL INVESTMENT AGREEMENTS

JOINT DECLARATION IN RELATION TO ARTICLE 6 OF PROTOCOL 2


The Parties agree to take the necessary measures in order to assist each other,
as provided for in this Protocol and without delay, for the following
movements of goods:
a) [] b) []
c) movement of poisonous goods as well as the substances dangerous
for the environment and the public health;
d) []

4.5. EFTA-Singapore
The EFTA*-Singapore Agreement was signed on 26 June 2002. Its
preamble mentions human rights and environment and article 43 covers right
to regulate, including to meet environmental concerns.
PREAMBLE
REAFFIRMING their commitment to the principles set out in the United
Nations Charter and the Universal Declaration of Human Rights;
[]
RECOGNISING that trade liberalisation should allow for the optimal use of
the worlds resources in accordance with the objective of sustainable
development, seeking both to protect and preserve the environment;
Article 43 Domestic regulation
Nothing in this Chapter shall be construed to prevent a Party from adopting,
maintaining or enforcing any measure consistent with this Chapter that is in
the public interest, such as measures to meet health, safety or environmental
concerns.

4.6. Korea-Singapore
The Korea-Singapore Agreement was signed on 4 August 2005 and came
into force on 2 March 2006. It is a comprehensive agreement covering trade in
goods, trade in services, investment, customs procedures, mutual recognition
agreements, intellectual property rights, competition policy, government
procurement and co-operation in a wide range of areas. The following
language on performance requirements closely resembles NAFTA language on
performance requirements (emphasis added).
Investment, Chapter 10
Article 10.7: PERFORMANCE REQUIREMENTS
1. Neither Party may impose or enforce any of the following requirements,
or enforce any commitment or undertaking, in connection with the

226 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

establishment, acquisition, expansion, management, conduct, operation,


or sale or other disposition of an investment of an investor of a Party or of
a non-Party in its territory:
a) to export a given level or percentage of goods or services;
b) to achieve a given level or percentage of domestic content;
c) to purchase, use or accord a preference to goods produced in its
territory, or to purchase goods from persons in its territory;
d) to purchase, use or accord a preference to services provided in its
territory, or to purchase services from persons in its territory;
e) to relate the volume or value of imports to the volume or value of
exports or to the amount of foreign exchange inflows associated with
such investment;
f) to restrict sales of goods or services in its territory that such investment
produces or provides by relating such sales to the volume or value of its
exports or foreign exchange earnings;
g) to transfer technology, a production process or other proprietary
knowledge to a person in its territory, except when the requirement is
imposed or the commitment or undertaking is enforced by a court,
administrative tribunal or competition authority to remedy an alleged
violation of competition law or to act in a manner not inconsistent with
other provisions of this Agreement; or
h) to supply exclusively from the territory of the Party the goods that it
produces or the services that it supplies to a specific regional market or
to the world market.
2. The provisions of paragraph 1 do not preclude either Party from
conditioning the receipt or continued receipt of an advantage, in
connection with investment and business activities in its territory of an
investor of the other Party or of a non-Party, on compliance with any of
the requirements set forth in paragraphs 1 d), g) and h).
3. Nothing in paragraph 1 shall be construed to prevent a Party from
conditioning the receipt or continued receipt of an advantage, in
connection with an investment in its territory of an investor of a Party or
of a non-Party, on compliance with a requirement to locate production,
provide a service, train or employ workers, construct or expand
particular facilities, or carry out research and development, in its
territory.
4. Provided that such measures are not applied in an arbitrary or
unjustifiable manner, or do not constitute a disguised restriction on
international trade or investment, nothing in paragraphs 1b), c) or d) shall

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
227
INTERNATIONAL INVESTMENT AGREEMENTS

be construed to prevent a Party from adopting or maintaining measures,


including environmental measures:
a) necessary to secure compliance with laws and regulations that are not
inconsistent with the provisions of this Agreement;
b) necessary to protect human, animal or plant life or health; or
c) necessary for the conservation of living or non-living exhaustible
natural resources.
Article 10.18: ENVIRONMENTAL MEASURES
Nothing in this Chapter shall be construed to prevent a Party from adopting,
maintaining or enforcing any measure otherwise consistent with this Chapter
that it considers appropriate to ensure that investment activity in its territory
is undertaken in a manner sensitive to environmental concerns.
Separate provision on environmental co-operation:
Article 18.9: ENVIRONMENT
Desiring to promote closer co-operation between interested organisations and
industries of the Parties in the field of CNG technologies and applications to
environmental protection, the Parties have concluded a Memorandum of
Understanding to facilitate such co-operation.
Article 21.2: GENERAL EXCEPTIONS
2. Subparagraphs a), b) and c) of Article XIV of GATS are incorporated into
and made part of this Agreement, for the purposes of:
a) Chapters 3 (National Treatment and Market Access for Goods), 4 (Rules
of Origin), 5 (Customs Procedures), 6 (Trade Remedies), and 14
(Electronic Commerce), to the extent that a provision of those chapters
applies to services;
b) Chapter 9 (Cross Border Trade in Services);
c) Chapter 10 (Investment);
d) Chapters 11 (Telecommunication) and 12 (Financial Services); and
e) Chapter 16 (Government Procurement), to the extent that a provision
applies to services.

228 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

ANNEX 3.A3

A Fact-finding Survey
of the Social Content of Non-OECD
International Investment Agreements
I. Introduction and summary of results
This paper presents a companion study focused on international
investment agreements concluded among non-OECD countries to the OECD-
focused survey described in International Investment Agreements: A Survey
of Environmental, Labour and Anti-Corruption Issues. The present survey
documents the treatment of social issues (e.g. labour, environment, anti-
corruption and human rights) in 131 bilateral investment treaties signed
between non-OECD. Comparison of the results of the two surveys allows one
to ascertain whether or not there are differences between OECD and non-
OECD countries in terms of their propensity to address these issues and in
terms of the way they are addressed.
This comparison of findings reveals both similarities and differences:
Propensity to include language covering social issues. The overall propensity to
include such language is approximately the same in the OECD and non-OECD
samples about two fifths of the countries in both samples include such
language in one or more of their agreements. Like for the OECD sample, the
non-OECD sample is skewed toward a limited number of countries that are
quite likely to include such language. In the non-OECD sample, the two
countries with a high propensity are Singapore (half of its agreement contain
such language) and China (17 per cent of its agreements). These two
countries account for 11 of the 16 treaties in the sample found to contain
such language. No country in the non-OECD sample appears to have a
systematic policy of including such language in all of its investment
agreements (whereas several OECD countries have such a policy).
Set of societal issues covered. While, broadly speaking, the same set of
social issues is covered in the OECD and on-OECD samples (e.g. in relation

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
229
INTERNATIONAL INVESTMENT AGREEMENTS

to right to regulate in order to protect the environment, not lowering


environmental or labour standards, and environmental exceptions to
performance requirements), the weight placed on these issues differs. The
issue most likely to be dealt with in the non-OECD sample (covered in
agreements signed by China, Singapore, South Africa) is exceptions to most
favoured nation in relation to benefits or treatments stemming from regional
co-operation in the economic, social or labour fields. Two issues that were
often addressed in the OECD sample (not lowering standards and right to
regulate) are addressed only to a limited extent in the non-OECD sample. Like
the OECD sample, the non-OECD sample contains (in two agreements)
language addressing a number of idiosyncratic issues in the non-OECD
sample, these are preventing fraud, protecting or advancing persons
disadvantaged by unfair discrimination, protecting national treasures.
Placement of language. In the OECD sample, environmental and/or labour
language, if it is found at all, is most likely to be found in the Preamble. In
the non-OECD sample, preambular language of this type is found only in
three of Chinas agreements. All other non-OECD language appears in the
articles of the agreements.
The non-OECD survey takes as its sample investment agreements (all of
them bilateral investment treaties) of 15 non-member countries with whom
the OECD Investment Committee has had recent dealings.75 These countries
are: China, Democratic Republic of Congo, Egypt, India, Indonesia, Jordan,
Malaysia, Morocco, Peru, Russia, Serbia, Singapore, South Africa Vietnam and
Zambia. The sample consists of 131 bilateral investment treaties having as
signatories these countries and another non-OECD country.76 These treaties
were reviewed for their content with respect to a variety of social issues:
environment, labour, anti-corruption (including bribery), human rights, and
consumer affairs.77 More details on the methodology (which is the same as
that used for the companion survey) can be found in Annex 3.A1. The Annex
also contains a list of the treaties in the sample and their dates of signature.

II. The findings of the survey of non-OECD BITs


This section provides a more detailed description of the findings of the
survey of language dealing with social issues in the sample of 131 non-OECD
agreements.78 Annex Table 3.A3.1 summarises these findings.

75. Non-member countries that adhere to OECD investment instruments were


included in the sample for the other paper.
76. Investment agreements having a non-member country as a signatory that is also
an adherent to the OECD Declaration on Inte rnational Inve stme nt and
Multinational Enterprises were not included in the sample.
77. This list is derived from the list of issues that were addressed in the OECD sample.

230 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A3.1. Social issues in a sample of international investment


agreements signed between non-OECD countries
Texts in
No.
Non-OECD at least
of IIAs Details of coverage of these issue in IIAs
countries one IIA
in sample
surveyed?

China 30 Yes Preamble of BIT with Brunei Darussalam recognises the importance
(5 mention of human resources development).
at least Preamble of BITs with Guyana and Trinidad and Tobago state that parties agree
one issue) that investment objectives can be achieved without relaxing health, safety
and environmental measures of general application.
Article 5 (Exceptions) of the China-Singapore BIT states that Parties are not obliged
to extend to the others nationals and companies any arrangement with a third
State or States in the same geographical region designed to promote regional
co-operation in the economic, social, labour [] fields within the framework
of specific projects. Article 8 of Thailand-China BIT contains the same text
on exceptions.
Democratic 2 No
Republic of Congo
Egypt 26 No
India 8 No
Indonesia 26 No
Jordan 13 Yes The Jordan-Kuwait BITs Article 3 contains a text on exceptions to provisions
(2 mention on performance requirements when these are considered vital for public health,
at least public order or the environment which shall be applied according to a publicly
one issue) applicable legal instrument.
The Jordan-Singapore BITs Article 19 (General Exceptions) states that nothing
in the BIT prevents the Parties from taking measures necessary to secure compliance
with laws and regulations which are not inconsistent with the provisions
of this treaty and lists: the prevention of deceptive or fraudulent practices or to
deal with the effects of freau on a default of contract; and the protection of privacy
of individuals, of confidentiality of records and accounts; safety; the protection
of national treasures of artistic, historic or archaeological value and conservation
of exhaustible natural resources.
Malaysia 14 No
Morocco 5 No
Peru 9 Yes The Peru-El Salvador BITs Article 5 (Performance requirements) states that
(one a measure that requires that an investment employ a technology to comply
mentions with generally applicable regulation with regulations applicable to health, safety
at least or environment, will not be considered incompatible with paragraph 1
one issue) [a list of prohibited performance requirements].
Russia 4 No
Serbia 1 No
Singapore 11 Yes Article 5 (Exceptions) of the BIT with China (see entry above).
(6 mention Article 5 (Exceptions) of Singapores BITs with Mauritius, Mongolia, Pakistan
at least and Vietnam contain identical language to the language on exceptions to national
one issue) treatment found in the China-Singapore BIT (see entry under China above).
Article 18 of Jordan Singapore BIT contains a text on right to regulate that includes
references to prevention of fraud, protection of privacy, protection of national
treasures, and conservation of natural resources (see entry under Jordan).

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
231
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A3.1. Social issues in a sample of international investment


agreements signed between non-OECD countries (cont.)
Texts in
No.
Non-OECD at least
of IIAs Details of coverage of these issue in IIAs
countries one IIA
in sample
surveyed?

South Africa 3 Yes Article 3 (Treatment of Investments) of South Africa-Mauritius BIT states that
(one Parties are not obliged to extend to the others nationals and companies any
mentions arrangement with a third State or States in the same geographical region designed
at least to promote regional co-operation in the economic, social, labour [] fields within
one issue) the framework of specific projects. It further states that Parties are not obliged
to extend treatments under laws designed to protect or advance persons,
or categories of persons, disadvantaged by unfair discrimination in its territory.
Vietnam 8 Yes Article 5 (Exceptions) if the Singapore-Vietnam BIT contain same text on MFN
(one exceptions as in China-Singapore BIT (see entry under China above).
mentions
at least
one issue)
Zambia 1 No

Propensity to include social language


Annex Table 3.A3.1 shows that 16 out of the 131 treaties include on one or
more of these issues in one or more of their BITs and that 6 of the 15 countries
in the sample include such language. These six countries are China, Jordan,
Peru, Singapore, South Africa and Vietnam.79 Singapore was the most likely to
include such language in its treaties it is included in 6 out of the eleven
treaties in the sample to which it is a signatory. China is also relatively likely
to include such language it appears in 5 out of the 30 treaties in the sample
signed by China. Thus, there is no equivalent in the non-OECD sample of the
countries in the OECD sample that have a systematic policy of including such
language. In the OECD survey, these countries include the United States and
Canada (which have included such language in every agreement they have
signed since the mid-1990s), Mexico (which also has a large number of treaties
containing such language) as well as Belgium, Finland, Netherlands (which
have included it in their model BITs).

78. This total number of treaties is corrected for double counting thus, it is the total
number of treaties given for each county in Annex Table 3.A3.1, corrected for the
treaties that the countries on the list have signed with each other.
79. Note that the Framework Agreement for Establishing a Free trade Area between
the Republic of India and the Kingdom of Thailand (singed 2003) contains language
on environmental issues. However, its investment chapter refers back to the
200 India-Thailand BIT (which does not contain such references). The sample
contains the 2000 BIT, not the Framework Agreement.

232 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Social/Investment issues covered


The non-OECD countries investment agreements addressed the same
broad set of issues in relation to social matters as in the OECD sample, but
they show differences of emphasis and approach. The survey of OECD
agreements found the following set of issues in relation to labour and
environment: not lowering standards, right to regulate, indirect expropriation
and promoting internationally agreed standards. The first two issues are
found in the non-OECD sample, whereas the latter do are not.
In addition, the OECD survey found, in five more recent agreements,
some language addressing anti-corruption issues and a direct reference to
human rights (in two recent agreements). Neither of these issues were
explicitly cited in the non-OECD sample (though more specific human rights,
notably freedom from discrimination in the workplace and protection of
privacy) are addressed in two non-OECD agreements.

Most favoured nation


The most common social text in the sample of non-OECD agreements
addresses the social and labour dimension of regional co-operation and
creates an exception to most favoured nation (MFN) for legal arrangements
that might arise from this co-operation. This language accounts is found in 7
of the 16 treaties containing social language. Thus, unlike the OECD sample
(where treaties containing social language often refer to international
instruments, standards or norms), the non-OECD sample of language is more
likely to focus on regional co-operation.
The earliest use of this language on social and labour issues in regional
co-operation is found first in Article 5 of Chinas 1985 BITs with Singapore and
Thailand. It is worth noting that this is also the earliest mention of a social
issue in the combined OECD and non-OECD samples. The text is as follows
(identical or closely-related language appears in five other agreements; see
fourth column of Annex Table 3.A3.1):
The provisions of this Agreement relating to the grant of treatment not less
favourable than that accorded to the nationals and companies of any third State
shall not be construed so as to oblige one Contracting Party to extend to the
nationals and companies of the other Contracting Party the benefit of any
treatment, preference or privilege resulting from []
a) []
b) any arrangement with a third State or States in the same geographical region
designed to promote regional co-operation in the economic, social, labour
[] fields within the framework of specific projects.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
233
INTERNATIONAL INVESTMENT AGREEMENTS

The South African-Mauritius BIT contains a text which is very similar to


the one just quoted, but adds the following item (c): any law or measure in
pursuance of any law, the purpose of which is to promote the achievement of equality
in its territory, or designed to protect or advance persons, or categories of persons,
disadvantaged by unfair discrimination in its territory.

Exceptions to performance requirements


Environmental or other social exceptions to performance requirements
are mentioned in two agreements. The Jordan-Kuwait BIT states:
[] investments of the host contracting country may not be subject to performance
requirements [] unless these requirements are considered vital for public health
considerations or public order or the environment which shall be applied according to
a publicly applicable legal instrument.
Article 5 (Performance Requirements) of the Peru-El Salvador BIT
contains a text on exceptions to performance requirements that resembles
closely those found in agreements signed by OECD members or adherents to
OECD investment instruments (e.g. NAFTA, the Mexico-Cuba BIT, several
Mexican FTAs, the US model BIT). The Peru-El Salvador BIT states:
2. A measure that requires an investment to use a technology to meet generally
applicable health, safety or environmental requirements shall not be construed
to be inconsistent with paragraph 1(f) []
3. Provided that such measures are not applied in an arbitrary or unjustifiable
manner, or do not constitute a disguised restriction on international trade or
investment, nothing in paragraph 1b) or c) or 3a) or b) shall be construed to
prevent any Party from adopting or maintaining measures, including
environmental measures:
a) necessary to secure compliance with laws and regulations that are not
inconsistent with the provisions of this Agreement;
b) necessary to protect human, animal or plant life or health; or
c) necessary for the conservation of living or non-living exhaustible
natural resources.

Right to regulate
While right to regulate was one of the most frequently encountered issue
in the OECD sample of agreements, it is found only once in the non-OECD
sample. Article 18 (General Exceptions) of the Jordan-Singapore BIT contains
the following text:
Subject to the requirement that such measures are not applied in a manner which
would constitute a means of arbitrary or unjustifiable discrimination, [] Nothing in

234 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

this Treaty shall be construed to prevent the adoption or enforcement by the Party of
measures:
b) Necessary to protect human, animal or plant health;
c) necessary to secure compliance with laws or regulations which are not
inconsistent with the provisions of this Treaty including those relating to:
i) the prevention of deceptive and fraudulent practices or to deal with the
effects of fraud on a default of contract;
ii) the protection of the privacy of individuals in relation to the processing
and dissemination of personal date and the protection of confidentiality
of individual records and accounts;
iii) safety;
d) imposed for the protection of national treasures of artistic, historic or
archaeological value;
e) relating to the conservation of exhaustible resources if such measures are made
effective in conjunction with restrictions on domestic production or
consumption.

Placement of language in the agreement


In the OECD sample, if a country has any language on environmental and
social issues, it is most likely to be a statement in the preamble (e.g. referring
to promoting sustainable development or internationally recognised labour
rights. A more limited number of countries also include language in the
articles of the agreement or in side agreements.
The situation is reversed in the non-OECD sample. China is the only
country that includes such language in its preambles (in 3 of its
30 agreements). In the preambles of the Chinas BITs with Guyana and with
Trinidad and Tobago, the Parties agree that their objectives can be achieved
without relaxing health, safety and environmental measures of general application.
In the preamble of the China-Brunei Darussalam, the Parties recognise the
importance of the transfer of technology and human resources development arising
from such investments.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
235
INTERNATIONAL INVESTMENT AGREEMENTS

ANNEX 3.A4

Methodology
and List of BITs Included in Survey
The methodology used for this study is identical to that used for the
survey whose results are reported the companion study, International
Investment Agreements: A Survey of Environmental, Labour and Anti-
corruption Issues. This survey reported in this paper is based on a sample of
131 bilateral investment treaties signed between countries that are not
members of the OECD (note non-members that adhere to the OECD
Declaration on International Investment and Multinational Enterprises are
included in the companion paper). The population of BITs is that available
on the UNCTAD website at www.unctadxi.org/templates/DocSearch____779.aspx.
Treaties that were not available in English, French or Spanish were not
considered.
The intent of the survey methodology was to produce a comprehensive
inventory of non-OECD bilateral investment treaties treatment of social
issues. However, because the survey is based on a sample and not the
complete set of all treaties, some relevant texts may be missing.
The BITs were reviewed to see whether any texts (including the preamble,
articles and annexes) discussed the environment, human rights, labour rights
or corruption. Where the texts were searchable, searches were made for the
following terms: environment,social, human, labour, labor, worker,
and corruption.
The list of bilateral investment treaties included in the sample appears in
Annex Table 3.A4.1.

236 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A4.1. Bilateral investment treaties included in the sample


Country Treaty signed with: Year signed Environment Labour

China Madagascar 2005 no no


Guyana 2003 yes no
Ivory Coast 2002 no no
Trinidad and Tobago 2002 yes no
Jordan 2001 no no
Botswana 2000 no no
Brunei Darussalam 2000 no yes
Costa Rica 2000 no no
Qatar 1999 no no
Swaziland 1998 no no
Cameroon 1997 no no
Cambodia 1996 no no
Lebanon 1996 no no
Cuba 1995 no no
Morocco 1995 no no
Ecuador 1994 no no
Egypt 1994 no no
Indonesia 1994 no no
Jamaica 1994 no no
Peru 1994 no no
Georgia 1993 no no
Uruguay 1993 no no
Bolivia 1992 no no
Philippines 1992 no no
Vietnam 1992 no no
Ghana 1989 no no
Pakistan 1989 no no
Kuwait 1985 no no
Singapore 1985 no yes
Thailand 1985 no yes
Democratic Egypt 1998 no no
Republic of Congo Guinea No date given no no
Egypt Serbia 2005 no no
Mauritius 2003 no no
Nigeria 2000 no no
Pakistan 2000 no no
Central African Republic 2000 no no
Thailand 2000 no no
Zambia 2000 no no
Georgia 1999 no no
Dem. Republic of Congo 1998 no no
Ghana 1998 no no
Guinea 1998 no no
Senegal 1998 no no

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
237
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A4.1. Bilateral investment treaties included in the sample (cont.)
Country Treaty signed with: Year signed Environment Labour

Belarus 1997 no no
Malaysia 1997 no no
Russia 1997 no no
Singapore 1997 no no
Vietnam 1997 no no
Jordan 1996 no no
Sri Lanka 1996 no no
Uganda 1995 no no
Egypt 1994 no no
Indonesia 1994 no no
Albania 1993 no no
Kazakhstan 1993 no no
Ukraine 1992 no no
Togo No date given no no
India Thailand 2001 no no
Ghana 2000 no no
Indonesia 1999 no no
Mauritius 1998 no no
Egypt 1997 no no
Oman 1997 no no
Sri Lanka 1997 no no
Kazakhstan 1996 no no
Indonesia Philippines 2001 no no
Algeria 2000 no no
Singapore 2000 no no
Cambodia 1999 no no
India 1999 no no
Jamaica 1999 no no
Zimbabwe 1999 no no
Bangladesh 1998 no no
Sudan 1998 no no
Thailand 1998 no no
Yemen 1998 no no
Cuba 1997 no no
Mauritius 1997 no no
Morocco 1997 no no
Syria 1997 no no
Jordan 1996 no no
Pakistan 1996 no no
Sri Lanka 1996 no no
Ukraine 1996 no no
Uzbekistan 1996 no no
China 1994 no no
Egypt 1994 no no

238 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A4.1. Bilateral investment treaties included in the sample (cont.)
Country Treaty signed with: Year signed Environment Labour

Laos 1994 no no
Malaysia 1994 no no
Tunisia 1992 no no
Vietnam 1991 no no
Jordan Thailand 2005 no no
Singapore 2004 yes no
Lebanon 2002 no no
Kuwait 2001 yes no
Syria 2001 no no
Bahrain 2000 no no
Sudan 2000 no no
Morocco 1998 no no
Algeria 1996 no no
Indonesia 1996 no no
Yemen 1996 no no
Tunisia 1995 no no
Malaysia 1994 no no
Malaysia Saudi Arabia 2000 no no
Ethiopia 1999 no no
Lebanon 1998 no no
Egypt 1997 no no
Ghana 1996 no no
Kazakhstan 1996 no no
Kyrgyzstan 1995 no no
Mongolia 1995 no no
Peru 1995 no no
Uruguay 1995 no no
Cambodia 1994 no no
Indonesia 1994 no no
Jordan 1994 no no
United Arab Emirates 1991 no no
Morocco Pakistan 2001 no no
Jordan 1998 no no
Indonesia 1997 no no
China 1995 no no
Benin No date given no no
Peru Singapore 2003 no no
Colombia 2001 no no
Ecuador 1999 no no
El Salvador 1996 no yes
Malaysia 1995 no no
Paraguay 1994 no no
Bolivia 1993 no no
Thailand 1991 no no
Cuba 1965 no no

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
239
INTERNATIONAL INVESTMENT AGREEMENTS

Annex Table 3.A4.1. Bilateral investment treaties included in the sample (cont.)
Country Treaty signed with: Year signed Environment Labour

Russia Thailand 2002 no no


Ethiopia 1999 no no
1997 no no
Lebanon No date given no no
Serbia Egypt 2005 no no
Singapore Jordan 2004 no no
Peru 2003 no no
Mauritius 2000 no yes
Sri Lanka 1998 no no
Egypt 1997 no no
Cambodia 1996 no yes
Mongolia 1995 no yes
Pakistan 1995 no yes
Vietnam 1992 no no
China 1985 no yes
Sri Lanka 1980 no no
South Africa Madagascar No date given no no
Mauritius 1998 no yes
Iran 1997 no no
Vietnam Cambodia 2001 no no
Tajikistan 1999 no no
Egypt 1997 no no
Bulgaria 1996 no no
China 1992 no no
Madagascar 1992 no no
Indonesia 1991 no no
Thailand 1991 no no
Zambia Egypt 2000 no no

240 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
ISBN 978-92-64-04202-5
International Investment Law:
Understanding Concepts and Tracking Innovations
OECD 2008

Chapter 4

The Interaction Between Investment


and Services Chapters
in Selected Regional Trade Agreements *

This report analyses the interactions between the investment and


services chapters of 20 regional trade agreem ents. It classifies
agreements into two broad categories of NAFTA-inspired and GATS-
inspired agreements and identifies four major types of interaction
between the investment and trade in services chapters. The report then
looks at the implications of the services/investment interface for levels of
investment protection and liberalisation.

* This study has been prepared by Marie-France Houde and Akshay Kolse-Patil of the
OECD Directorate for Financial and Enterprise Affairs (DAF) and Sbastien Miroudot
of the OECD Trade and Agriculture Directorate (TAD), under the supervision of
Dale Andrew, Head of the Trade Policy Linkages and Services Division of TAD and
Pierre Poret, Head of the Investment Division of DAF. It has been discussed in the
Investment Committee and Working Party of the Trade Committee and was
declassified on the responsibility of the Secretary-General. The authors wish to
thank Martin Molinuevo and Martin Roy for helpful comments and discussions
during the preparation of this study. The study is also available as OECD Trade
Working Paper No. 55.

241
4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

Key findings
This report analyses the interactions between the investment and
services chapters of 201 Regional Trade Agreements (RTAs), in terms of the
implications for levels of investment protection and liberalisation.
RTAs can generally be classified into two broad categories of NAFTA-
inspired and GATS-inspired agreements. Investment disciplines in the former
are lodged in the investment chapter and there is limited interaction with the
services chapter. In GATS-inspired agreements, investment disciplines are
divided between the services and the investment chapters and as a
consequence interactions between them are more prevalent and are governed
in either the investment or in the services chapter.
The level of investment protection is determined by the scope and
coverage of the investment protection provisions and not by the type of
interaction between the two chapters. In both types of RTAs, investment in
services industries may benefit from the protections provided by the
investment chapter (such as on expropriation, transfers, compensation for
losses or investor-to-state dispute settlement). As investment provisions vary
from one RTA to another, some countries have decided to maintain a former
BIT alongside the more recently negotiated RTA.
Concerning the level of investment liberalisation, NAFTA-inspired
agreements tend to have an advantage in terms of the number of sectors
covered by non-discrimination disciplines and the degree of transparency and
predictability through a one-shot liberalisation encompassing all sectors and
a ratchet mechanism that locks in future reforms. GATS-inspired agreements
are often favoured by countries that want to preserve a certain flexibility and
progressiveness in their liberalisation, while they reform and establish new
regulatory frameworks. But the differences between the two approaches should
not be overstated. Provisions on future liberalisation and transparency can add
transparency and predictability in the context of GATS-inspired agreements,

1. The list includes one North/North agreement (AUSFTA), 13 North/South agreements


(NAFTA, US-CAFTA-DR, US-Morocco, Japan-Singapore, Japan-Mexico, Japan-
Malaysia, TAFTA, EC-Chile, EC-Jordan, EFTA-Korea (EFTA-Singapore, TPSEP and
ANZSCEP) and six South/South agreements (Chile-Korea, India-Singapore, ASEAN
agreements, COMESA and Andean Community Decisions).

242 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

while flexibility also exists in NAFTA-inspired agreements through reservations


on existing and future non-conforming measures.
An ambitious level of investment liberalisation in a GATS-inspired
agreement is possible by taking commitments in additional sectors or by
increasing the transparency of schedules. Progressive liberalisation of
investment can in principle also be pursued in NAFTA-inspired RTAs. Even
more recently, some GATS-inspired agreements provide insights into the
possibilities offered by a combination of positive and negative listing.
Several factors influence the choice of a GATS- or NAFTA-inspired
approach: existing liberalisation of the negotiating partners regimes; their
administrative capacity; past approaches; and the pace at which they wish to
liberalise. Choosing between positive or negative listing (or a hybrid approach)
is a matter for negotiation between partners.
Not all agreements include a most-favoured-nation clause (MFN). When
they do, GATS-inspired agreements tend to prevent the MFN rule from
applying to third parties through a regional economic integration organisation
(REIO) exception clause. Nonetheless, new investment liberalisation in third
party agreements may be extended to parties of earlier RTAs, following a
review of commitments. A difference in NAFTA-inspired agreements tends to
be that the MFN rule can apply as regards future agreements that might
contain better treatment for investors. However some countries have listed
reservations in specific sectors limiting the extension of any possible better
treatment. In the light of this, one can question the effectiveness of the MFN
rule with respect to investment liberalisation in creating a level playing field
between investors from various Parties.

Synthesis
This document presents the results of the joint work carried out
in 2006-07 by the Working Parties of the Investment and Trade Committees on
the interaction between investment and trade in services provisions in
regional trade agreements (RTAs). The study is divided in three parts preceded
by a one page summary of the Key Findings and synthesis. Part I analyses the
interactions between the investment and services chapters in a representative
sample of 20 agreements. Part II analyses their implications for the level of
investment protection provided. Part III analyses the implications of the
services/investment interface and of the MFN rule for the level of the
liberalisation provided.2

The embracing trend of RTAs


After the abandonment of the Havana Charter of the International Trade
Organisation in 1950, rule-making in international trade and investment largely

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
243
4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

evolved along two separate tracks, the first largely dominated by the GATT
system, the second by the conclusion of bilateral investment treaties (BITs)
aimed at protecting, promoting and in the case of some later agreements,
liberalising foreign investment. This general pattern started to change,
however, with the entry into force of North American Free Trade Agreement
(NAFTA) in 1994 and the establishment of the World Trade Organisation (WTO)
in 1995. The NAFTA was the first agreement to combine BIT-like disciplines with
comprehensive trade in services disciplines. The WTO brought in, for the first
time, through the GATS, the supply of services into the realm of multilateral
trade rules. These two important developments have expanded the landscape
of regional agreements and the possible types of interactions between
investment and service disciplines.
Since 1994, some 180 regional agreements combining investment and
trade in services rules, mainly in the form of Free Trade Areas (FTAs), have
come into existence as compared with 38 RTAs during the previous forty years
altogether. The pace has markedly picked up since 2000. Over forty per cent of
the cumulative total has come into being since 2000, cutting across countries
or regions increasingly further apart and with more diversified economic
backgrounds. Some 70 more agreements are reported to be under active
consideration or negotiation. Mexico, Chile, Singapore, the United States,
Australia and New Zealand are leading in terms of agreements concluded.
EFTA, the EU and ASEAN stand out as the most active country groupings.

Two distinct cultures and sets of disciplines


RTA investment chapters essentially take their origins in BITs introduced
in the late 1950s or early 1960s to provide absolute standards of protection for
the foreign investor and their investments as regards transfers, expropriation
and compensation, fair and equitable treatment, and investor-to-state-
arbitration of investment disputes. Comprehensive obligations on national
treatment and MFN treatment obligations at all phases of operation including
establishment as well as the prohibition of performance requirements were
later introduced in the US and Canadian treaties in the early 1990s. Todays
RTA investment chapters typically provide broad investment coverage, strong
protection and non-discrimination commitments and recourse to investor-
state international arbitration.

2. In the present study, the term investment protection is intended to cover the
typical core protections found in BITs while the term investment liberalisation is
principally intended to cover the non-discrimination obligations found in OECD
liberalisation instruments as well as the WTO and other trade liberalisation
agreements. The BITs and FTA/RTA investment chapters of some OECD countries
also include some of the non-discrimination obligations characterised here as
investment liberalisation provisions.

244 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

Investment disciplines lodged in RTA services chapters, are, on the other


hand, usually based on the GATS. Investment is covered only in the narrower
form of a commercial presence. Transparency and MFN treatment are the
only general obligations. Obligations on market access and national treatment
arise only to the extent liberalisation commitments are listed in separate
schedules. Because of the importance they play in the ability to supply a
service, domestic regulatory issues are also addressed. Avoidance of
restrictions on international payments and transfers is the only significant
protection provided by the trade in services chapters, and even so, only in
sectors where liberalisation commitments are scheduled.
The Investment and Services chapters of NAFTA-inspired and GATS-
inspired agreements differ, therefore, in their coverage of investment in
services.3 This leads to four major types of interaction between these
chapters.

1) NAFTA-inspired agreements Limited interaction


The first type of interaction is characterised by a clear separation
between the Investment chapter and Cross-Border Trade in Services (CBTS)
chapters designed to limit the interaction between the two chapters. The
Investment chapter acts as the depositary of, or controls, all the investment
provisions of both goods and services (except for financial services). The CBTS
chapter, which is partly inspired by the GATS, is uniquely devoted to the
liberalisation of services provided without a commercial presence. Both
chapters use a negative list approach for lodging reservations to their
respective obligations.
NAFTA provides the classical example of no interaction between the
Investment and Services chapters. More recent NAFTA-inspired agreements
(US-CAFTA-DR or US-Morocco for example) allow for a limited interaction. In
this latter case, the Market Access, Domestic Regulation and Transparency
articles of the CBTS chapter apply to the Investment chapter subject to certain
limitations.
The Financial Service chapters may incorporate from the Investment
chapter and the Trade in Services chapters the provisions to be applied to this
sector.
A Relations to Other Chapters clause states that in the event of any
inconsistency between the Investment chapter and other chapters, these
other chapters shall prevail to the extent of the inconsistency.

3. The two EU agreements examined here due to their specificities are separately
discussed in paragraph 25.

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
245
4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

2) GATS-inspired agreements where the interaction is stated


in the Investment chapter
GATS-inspired agreements also generally have separate chapters on
investment and services. However, investment in services is typically covered
by both chapters. Liberalisation of the supply of services, including through
commercial presence is controlled by the Trade in Services chapter whereas the
protection of investments in services, notably the clauses on expropriation,
compensation for losses, investor state dispute resolution, is located in the
chapter on Investment. In addition, these agreements also usually employ a
positive list approach for specific commitments for Trade in Services.
A majority of th ese agreemen ts have adopted a second type of
interaction between the investment and services chapters which is stated in
the Investment chapter. The Trade in Services chapter comes first and
contains the market access an d non-discrimin ation oblig ations on
commercial presence. The Investment chapter which has a broader coverage
based on an asset-based definition of investment identifies the scope of its
application and rules to deal with potential inconsistency between this
chapter and the Trade in Services chapter(s). The Financial Service chapters
however are responsible for the core obligations on financial services.
EFTA agreements provide clear examples of this mode of interaction. In
these agreements, the limitations mainly take the form of the non-application
of the National Treatment and Most Favoured Nation Treatment obligations to
Mode 3 (commercial presence) operations. A similar approach is followed by
other agreements such as TAFTA or New Zealand-Singapore Agreement.
Japans Economic Partnership Agreements also generally fall in this category
as the Investment chapters scope article describes how inconsistencies
between overlapping provisions should be resolved. In the case of Japan-
Singapore FTA, the interaction is not stated in the Investment chapter but in
the parties reservations to this chapter.

3) GATS-inspired agreements where the interaction is stated


in the Trade in Services chapter
In a third type of interaction between the investment and services
chapters, it is the Trade in Services chapter through a Service-Investment
linkage clause which determines which provisions from the Investment
chapter listed therein would apply. This approach has recently been
introduced by the India-Singapore CECA. The specific provisions borrowed
from the Investment chapter concern compensation for losses, expropriation,
repatriation, subrogation, measures in public interest, special formalities and
information requirements, access to courts of justice, senior management,
investment disputes, other obligations and performance requirements. This

246 INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS ISBN 978-92-64-04202-5 OECD 2008
4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

type of interaction seeks to minimize any possible conflict between the two
chapters by listing the various liberalisation and protection obligations that
would apply to investment in services.

4) GATS-inspired agreements where no interaction is stated


A fourth group of agreements are silent on the interaction. This approach
solely relies on the rules of interpretation of international law to sort out the
relationship between the investment and services provisions. This case
mainly concerns separate agreements on investment and trade in services
(ASEAN agreements and Andean Community Decisions). But this situation
may also arise within individual agreements. For example, in the Japan-
Singapore or EFTA-Korea agreements, the clause on transfers is contained in
two chapters, the Trade in Service and Investment chapters, with one less
permissive than the other. However, this duplication does not necessarily lead
to conflict. Rath er, both the se oblig ations apply simultaneously to
investments in services, which are subject to the obligations of both chapters.
More recent agreements, however, are abandoning this approach in favour of
an explicit and more precise mode of interaction between the investment and
services chapters.

EC Trade Agreements
Even though European Communities (EC) Association Agreements with
non-European partners generally follow the GATS approach, other features set
them apart from the GATS-inspired agreements described above. The
European Community and the member states share competence in the
investment area. The coverage and structure of EC agreements are also
un iq ue. For exa mp le, t he EC -C hi le A g re e me n t , wh ich is t h e mos t
comprehensive agreement concluded so far, has separate chapters on Trade in
Services (covering all four modes of supply of services), Financial Services,
Establishment and Current Payments and Capital Movements. In this case, it