n o

i la
i M
i d
u d
S t
l i
Int’l Commercial and e gInvestment Arbitration
d
An historicalti à overview
r s
v e &
n i
t U
Means h of settling investment disputes
r i g
p y
C o Prof. Albert Henke
albert.henke@unimi.it
Int’l Investments in the past
n o
i la
M i
Investments in foreign countries have i always d
u d
existed in history in: t
il S
Europe eg
d
ti à
Asia
r s
v eMiddle East
n i
t U
h Africa
r i g
p y
C o
Int’l Investments in the past o
n
i la
iM
Traditionally, law on foreign investments has i dbeen
u d
built up as a part of the area of international
S t law
regarding: l i
e g
d
ti à
r s
e of citizens abroad
• diplomatic protection
v
n i
t U and
g h
i
r responsibility for injuries to aliens
• state
p y
C o
Int’l Investments in the past
n o
i la
M
i
d
• Some thinkers’ views about the treatment of aliens (and foreign
i
investments): u d
S t
• Francisco de Vitoria (1483 – 1546) l i
e g
• Grotius (1583 – 1645) d
ti à
r
• de Vattel (1714 – 1767) s
v e
n
• All these views: law
ishould be designed to serve the interests of
t U
states able to expand their overseas trade
g h
i
r Ex: Grotius’ theory on the freedom of the sea
p y
C o
Historical development of o
international investment law n
i la
i M
2 main historical periods: i d
u d
S t
l i
• the colonial period eg
d
ti à
r s
ev
n
• the post-coloniali period
t U
g h
r i
p y
C o
The colonial period
n o
i la
M i
• In the 18th and 19th centuries, foreigni direct d
d
investment was largely made in thetucontext of
i S
colonial expansion (British Empire g l in India)
d e
ti à
r s
• In the context ofiv e colonial empires:
the
U n
t
• no real need for protecting foreign
h
r i g
investments
p y
C o
The colonial period
n o
i la
i M
i d
• The colonial legal systems were integrated with those of the
imperial powers, within which the protection of investments
u d
was ensured by the
S t
l i
eg
imperial parliament / imperial courts / imperial rules
d
ti à
r s
• The rules in force were mostly the codification of the
ve
commercial rules developed by the major trading companies
n i
(such as the British East India company)
t U
g h
• Notions of collective ownership of property (widely prevalent
r i
in the colonies) replaced by European notions of individual
p y
property to accommodate European interests

C o
The colonial period
n o
i la
i M
Therefore, in the context of the colonial empires:
i d
u d
S t
l i
eg
• the need for an int’l law on foreign
investment was minimal
d
ti à
r s
ve
n i
U
• there was no need for the growth of a
t
h
separate body of law for the protection of
g
r i
foreign investments
p y
C o
The colonial period
n o
i la
i M
d
In this period, in areas which remained outside the
i
colonial control, the protection of foreign
u d
investments was ensured through: S t
l i
eg
d
Diplomacy
ti à
r s
ve
n i
t U
h Military force
rig
p y
C o
The colonial period
n o
i la
i M
i d
u d
S t
l i
eg
d
ti à
r s
ve
n i
t U
gh
r i
p y
C o
The case of Latin America
n o
i la
i M
• Some doctrines had to be formulated to justify the
i d
use of force
u d
S t
i
• State’s responsibility for foreign investments and
l
g
thus for injuries to aliens and their property
e
d
ti à
• Standards of protection of foreign investments
r s
e
• Int’l minimum standards v. equal treatment
v
n i
• Disputes resolution mechanism
U
h t
r i g • Int’l tribunals v. local courts

p y
• The Calvo doctrine
C o
The post-colonial period
n o
i la
i M
Some common features:
i d
u d
S t
l i
Pressures for a new world economic order
eg
d
ti à
r s
The emergence of
v e economic nationalisms,
especially in respect
n i of natural resources sector
t U
g h
r i
p y
C o
The post-colonial period
n o
i la
i M
•4 main sub – periods:
i d
u d
t
1) Immediately following the ending of colonialism
S
l i
•
e g
hostility and antagonism towards FDI

d
ti à
2) Realism and pragmatism by developing States
r s
3) The post cold war
v e period
n i
•
t U
the rise and dominance of neo liberalism policies

4) Theg h
rise of new economic powers, the economic
i
r and the emergence of new social concerns
y
crises

C op
The third period: neo liberalism policies
n o
i la
i M
Collapse of communism ideology
i d
d
u (on which
• Norms hostile to the notion of property
foreign investment protection is S
t
based) lost their
force l i
e g
Technological development, marketdintegration, free flow of
capitals ti à
r s
v e
Prevailing economic philosophy in this period - the neo
liberalism, promotednby:
i
t U
h
• Reagan administration & Thatcher premiership
g
r i
p y • World Bank

C o • The IMF
The third period: neo liberalism policies
n o
i la
i M
they wanted to secure financial assistance from Westerni d
Open policies had to be introduced by developing countries if

u d
t
States and int’l financial institutions (such as WB and IMF)
S
l i
eg
Limited amount of liquidity in the aftermath of the
d
petroldollar crisis (banks did not provide loans to states after
the petroldollar crisis) ti à
r s
v e
i
n In the end
t U
foreign investments were seen as the only available means of
h
external financing of the economic development
g
r i
p y
C o
The fourth period:
n o
A) Rise of new economic powers
i la
i M
• Rise of BRIC countires (Brasil – China – India – Russia)
i d
u d
Home of large multinational corporations, with the
S t
capacity to invest overseas
l i
eg
d
• Europe and the USA have progressively become:
ti à
r s
• the largest recipients of foreign investments
v e
n i
• respondents in claims brought by those corporations

t U
h
• Trend to raise more and more exceptions and defenses
g environmental concerns, national security
basedrion
and
p y
similar (ex. Sinopec v. Unilocal)
C o
The fourth period:
n o
B) Economic crises
i la
i M
• Economic crises in Russia, Mexico, Asia, Argentina and
recently USA and Europe i d
u d
t
il S
• rethinking of the neo liberalism philosophy

• introduction of measures of capital e g

control
d
• The rise of new concerns in int’l ti àinvestment law
r s
• new actors (NGOs…)e
i v
• new concerns U n
(human rights, environment, rights of
indigenous
h t communities in the host states…)

r
• thei g
rise of corporate social responsibility
p y
C o
Some economic data: the ‘80s
n o
i la
i M
Until the 1980s
i d
u d
most developing countries viewed foreign direct investment (FDI) with great wariness:

S t
i
many restrictions on FDI and slow growth
l
In the ‘80s and till their end,
e g
d
sensible growth of FDI, due to:
ti à
• r s
accelerating technological change
v e
•
n i
emergence of globally integrated production and marketing
U
networks
t
•
g h
stipulation of BITs

r i
p y • positive evidence from developing countries as to the role
of FDI for their economic development

C o
Some economic data: the ’90s till today
n o
i la
In the 1990s (neo liberalism period)
i M
Strong grow of FDI, at rates well above those of world ieconomic
d
growth and trade u d
S t
13 % a year in the period 1990 – 1997 l i
e g
50 % a year during the years 1990 – 2000 d (due to large privatizations
in Asia, Latin America)
ti à
r sEurope, Japan) have long dominated
eIn 2001, they accounted for:
Industrial countries (mainly USA,
v
i
the FDI inflows and outflows.
n
94% Uof outflows / over 70% of inflows
h t
i g
Peak in 2006-2008 = 1,8 trilion dollars (record of cross border
M&As) yr
o p
C
Post 2008 – dramatic drop (world crisis and slow recovery)
Global FDI inflows….
n o
i la
i M
i d
u d
S t
l i
eg
d
ti à
r s
ve
n i
t U
gh
r i
p y
C o
Global FDI inflows, top 20 host economies in
n o
2008 and 2009
i la
i M
i d
u d
S t
l i
eg
d
ti à
r s
ve
n i
t U
gh
r i
p y
C o
Global FDI inflows – 2007 - 2011
n o
i la
i M
i d
u d
S t
l i
eg
d
ti à
r s
ve
n i
t U
gh
r i
p y
C o
Global FDI outflows – 2007 - 2011
n o
i la
i M
i d
u d
S t
l i
eg
d
ti à
r s
ve
n i
t U
gh
r i
p y
C o
Emerging markets inflows 2009 - 2011
n o
i la
i M
i d
u d
S t
l i
eg
d
ti à
r s
ve
n i
t U
gh
r i
p y
C o
 In general o
n
i la
M i
• Civil/commercial disputes between i d
u d
t
phisical/legal persons il S
e g
domestic courts / arbitral
d tribunals
ti à
r s
• Disputes between v e States
n i
t U
g h
Diplomacy / ICJ /Arbitration
r i
p y
C o
 Settling investment disputes nowadays o
n
i la
i M
• Mixed disputes (private parties – corporations v. States).
i d
u d
• In the past: NO DIRECT ACTION
S t
• Diplomatic protection l i
e g
• Use of force
d
• Inter-State Arbitration ti à
r s
• Today: YES DIRECT ACTIONe
i v
U n
• Before the domestic courts (of the host state)

h t
• Through arbitration (ICSID– ADD. FACILITY– OTHER INST - AD HOC)

r i g
p y • Diplomatic protection (ICJ – Inter-State Arbitration – extra-

C o judicial solutions)
 Domestic courts o
n
i la
i M
• If no agreement between State & investor: i d
u d
t
•
il S
domestic courts will have jurisdiction (par. 3 preamble ICSID Convention)

e g
• Competent courts = d
t à
iState, because they are the most
• usually those of the host
r s
v
closely connected withethe investment
n i
• More unlikelyUthose of the home State of the investor (save
h t
loan agreements)
r i g
p y
C o
 Disadvantages of domestic courts o
n
i la
i M
• Lack of expertise on the part of national judges
i d
d
• Applicable law – rules of private int’l law / conflict of laws of the host
u
state
S t
l i
• In any event, even though choice of law of another jurisdiction, the
eg
mandatory norms under the law of the host State will apply
d
ti à
• Courts might give preference to the application of national over int’l law,
even if the former clearly contradicts the latter
r s
• Risk of lack of impartiality
v e
n i
U
• Pressure of the local public opinion
t
h
• Possible other political implications with the host State
g
r i
p y
• FOR ALL THESE REASONS, THE OPTION OF DOMESTIC COURTS
IS NOT VERY ATTRACTIVE FOR THE FOREIGN INVESTOR

C o
 To avoid home/host states courts o
n
i la
i M
• Possible choice for other national courts (through jurisdiction
agreements) i d
u d
• Problems with the courts of a third State
S t
l i
• they might not have jurisdiction
e g
d
ti à
• they might dismiss the action for reasons of state immunity

•
r s
they might consider investment disputes as disputes of political
e
nature, inappropriate for judicial disputes settlement
v
n i
• Sabbatino case (1964) – Entitlment to the prices and revenues
U
of sugar sales on the us market (but in essence: validity of the
t
h
Cuban government’s expropriation)
g
r i
• Case of measures of nationalization of the Allende
p y government (1971) – French and German courts - continuning

C o property rights in imported Chilean copper

 The ICSID system o
n
i la
i M
• The 1965 Convention established the International
Centre for the Settlement of Investment Disputes i d
u d
• The initiative came from the World Bank S t
l i
• The Convention’s Primary Goals: eg
d
ti à
• To create a mechanism specially designed for the settlement
r s
of disputes between State and foreign investors
ve
n i
• the Promotion of Economic Development

t U
• the Creation of a Favourable Investment Climate
g h
r i
y
C op
 The ICSID system o
n
i la
i M
• Great success i d
u d
• at the beginning most signatory
t
S states:
developing states l i
e g
d
ti à
• now all major jurisdictions in the world are
parties r s
v e
n i
• first case decided in 1974
t U
g h
• in ithe last decades: sensible growth (1 case
y r
registered per month)
C op
 The ICSID system o
n
i la
i M
The Centre does not decide the dispute
i d
u d
it just administers the procedure S t
l i
e g
d
• It provides facilities (locations) for arbitral proceedings

ti à
• It keeps a list of arbitrators
r s
• It adopts rules and v e
regulations
n i
• It assists inUthe constitution of the arbitral tribunal which
h t
will decide the dispute

r i g
p y
C o
 Advantages of ICSID arbitration o
n
i la
i
Fixed set of rules for carrying out arbitral M
d
proceedings di u
S t
Support of an experienced institution l i and staff
e g
d
Flexibility of the procedure i t à designed by its
r s
v e rules
n i
t U
Easy rules h on challenge and enforcement of
r i g awards
p y
C o
 Advantages of ICSID arbitration o
n
i la
• Benefits for the investors
i M
i d
• Possibility to directly sue the State
u d
• Avoiding the domestic courts of the host state
S t
l i
e g
• Investors do not depend on the willingness of their home
states to be protected (diplomatic protection)
d
ti à
• The enforcement of the ICSID awards is very efficient and does
s
not depend on the domestic courts of the host state
r
v e
i
• Benefits for the host state
n
U
• It creates a favorable investment climate which helps to
t
g h attract foreign investments

r i • It avoid tension at int’l level with other states, usually

p y arising out in case of diplomatic protection

C o
 Characteristics of ICSID arbitration o
n
i la
• Optional
i M
• i d
The mere fact that a State is a member of the ICSID Convention does not bind it to
choose ICSID arbitration for all disputes
u d
S t
• For every dispute, (written) consent is needed (in investment agreement /
investment legislation)
l i
e g
• Once given, the consent cannot be withdrawn
d
ti à
• Attorney General v. Mobil Oil NZ Ltd (1987)
• Mine v. Guinea (1988)

r s
e
• Rather infrequent - Prior exhaustion clause (of local remedies)
v
n i
• Default rule for the applicable law on the merits (host state + int’l law) –
U
otherwise choice of law left to the parties
t
g h
i
• Limited revision of the awards (ad hoc committee) – only 5 grounds
r
p y
• Special regime for enforcing the award wordlwide

C o
 Requirements of ICSID arbitration o
n
i la
• Ratione materiae i M
i d
d
• The dispute must be a legal one arising directly out of an
u
investment
S t
l i
• No definition of the notion of «investment» in the Convention
eg
d
• Ratione personae ti à
r s
e
• The dispute must occur between
v
n
• A contracting
istate
t U
g h
• A national of another contracting state
r i
p y
C o
 Possible overlaps between ICSID arbitration o
and domestic courts a n
l i
Mi
Arb. Clause «(…) settlement of disputesdwith
d
i respect to
investments between a Contracting party t u and an investor
of the other Contracting party» il S
e g
d
ti à
Société Générale de Surveillance (SGS) v. Pakistan
r s (2003)
v e
n i
t U
g h
Société Générale de Surveillance (SGS) v. The Philippins
r i (2004)
p y
C o
 The ICSID conciliation o
n
i la
i M
• Rarely used
i d
u d
S t
l i
• Often clauses refer to both arbitration and
eg
conciliation with no further distinction
d
ti à
r s
• Advisable if the parties
v e have ongoing business
n i
t U
g h
r i
p y
C o
 ICSID Additional Facility o
n
i la
• Created in 1978 to allow settlement of disputes under ICSID even if not all
i M
the procedural conditions (rationae personae et materiae) are met
i d
• 3 main groups of disputes:
u d
S t
•
l i
conciliation or arbitration of investment disputes where only one side is
either a party to the ICSID or a national of a party to the ICSID Convention

e g
•
d
conciliation or arbitration of legal disputes which do not directly arise out
of an investment provided that at least one side is a party to the ICSID
Convention
ti à
• r s
fact-finding proceedings between a state and a national of another state
[rarely used]
v e
n i
•
t U
Important within NAFTA (USA party of ICSID, Mexico and Canada no)

• Main features:
g h
r i
p y
•
•
No applicability of the ICSID Rules
No special regime for the enforcement of the award

C o
 Ad hoc arbitrations and arb. with other o
Institutions n
i la
i M
• UNCITRAL
i d
u d
• ICC (Paris) S t
l i
eg
• LCIA (London) d
ti à
r s
• SCC (Stockolm) ve
n i
t U
h
• AAA (New York)
g
r i
y
p(The Hague)
o
• PCA
C
 Ad hoc arbitrations o
n
i la
• Advantages i M
i d
•
u d
Procedural flexibility (peculiar applicable rules on the merits)

• Confidentiality S t
l i
• Disadvantages
eg
d
•
ti à
Lack of support from an institution

• r s
Interference of national courts (challenges of the awards)

ve
•
n i
Not available the special regime for the enforcement of the
awards
t U
SOME OF THE
g hBIGGEST CASES OF THE HISTORY DECIDED BY AD
r i
HOC TRIBUNALS

p y
C o • Aminoil v. Kuwait / British Petroleum v. Lybia / Liamco v. Libya

• Texaco v. Libya / Saudi Arabia v. Aramco

 Diplomatic protection o
n
i la
• The traditional way to settle int’l investment disputes
i M
• Features i d
u d
t
1. No requirement of previous agreement between the parties
S
l i
procedures e g
2. Advantage of being an easily available method, no rules / no
d
3. Always in the discretion ti àof the State whether or not to
r s
protect its own investor
v e
4. Prior conditioniof exhaustion of procedural remedies
U n
5. Diversetrange of remedies
g h
r i
p y
Unfriendly measures (retaliation) / Wrongful act (but not the use of force)
Proceedings before the ICJ if a state does not enforce an ICSID award

C o
 Diplomatic protection o
n
i la
i M
• Disadvantages
i d
• Right of the State and not of its investor
u d
S t
i
• Investor wholly dependent on the will of its State
l
eg
• Decision of the State to act depends on several political factors,
d
ti à
not only on the harm suffered by the investor

r s
• If the investor considers that the State is not adequately
v e
protecting its rights, it has no remedy in int’l law.
n i
t U
• The compensation possibly obtained by State can be of no
satisfaction for the investor
gh
r i
p y
C o
 Int’l courts and tribunals o
n
i la
i M
• Investment disputes may turn into State to State disputes
i d
u d
•
S t
If a state espouses the claim of its own investor

l i
•
e g
If the conduct of a state affects not only the interests of the
d
investor, but also obligations of int’l law

ti à
r s
• Many Bits contain also clauses for the settlement of
v e
disputes between States, and not only betwen State and
investors
n i
t U
h
• However, before resorting to judicial or arbitral settlement, states may
g
i
avail of other mechanism (negotiation, mediation, conciliation…)
r
p y
C o
 State to state disputes o
n
i la
• 3 main fora for state to state disputes:
i M
• The International Court of Justice (ICJ) i d
u d
• Limited jurisdiction ratione personae
S t
• Broad jurisdiction ratione materiae l i
e g
• Anglo-Iranian Oil case (1952)
d
ti à
• Barcelona Traction case (1970)

r s
• Elettronica Sicula case (1989)

v e
n i
•
t U
Iran – U.S. claims Tribunal

gh
•
r i
Inter-state arbitration

p y • Norwegian Shipowners Claims (1921)

C o