Alexandra Ivakhnik

2019-2020

INTERNATIONAL INVESTMENT LAW

Table des matières
Module 1: The history of international investment law
Introducing Module 1
Chapter 1: The genesis of international investment law
Introduction
Section 1: The law of the protection of aliens abroad: substantive aspects
Section 2: The law of the protection of aliens abroad: procedural aspects
Conclusion
Chapter 2: The development of international investment law
Introduction
Section 1: The claim of ‘developing’ States to a New international economic order
Section 2: The ‘systemic package deal’ concluded between ‘developing’ and European States
Conclusion
Chapter 3: The current features of international investment law
Introduction
Section 1: The current features of investment treaty practice
Section 2: The current features of investment arbitration practice
Conclusion
Concluding Module 1
Module 2: The standards of treatment
Introducing Module 2
Chapter 1: The fair and equitable treatment standard
Introduction
Section 1: The FET standard in treaty practice
Section 2: The FET standard in arbitration practice
Section 3: The relations between the FET standard and the minimum standard of treatment
Conclusion
Chapter 2: 'Focus': ‘legitimate expectations’
Introduction
Section 1: The origins of ‘legitimate expectations’
Section 2: The basis of the legitimate expectations
Conclusion
Chapter 3: The full protection and security standard
Introduction
Section 1: The FPS standard in treaty practice
Section 2: The FPS standard in arbitration practice
Conclusion

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Chapter 4: The national treatment and most-favoured-nation treatment

standards
Introduction
Section 1: The protection against discrimination
Section 2: The national treatment standard
Section 3: The most-favoured-nation treatment standard
Conclusion
Chapter 5: The ‘umbrella clause’
Introduction
Section 1: The origins and the rationale of the ‘umbrella clause’
Section 2: The ‘umbrella clause’ in treaty practice
Section 3: The ‘umbrella clause’ in arbitration practice
Conclusion
Concluding Module 2
Module 3: The protection against illegal expropriations
Introducing Module 3
Chapter 1: The categories of expropriation
Introduction
Section 1: Direct expropriation
Section 2: Indirect expropriation
Conclusion
Chapter 2: The conditions of legality of expropriations
Introduction
Section 1: Legal and illegal expropriations
Section 2: Public interest, non-discrimination and due process of law
Section 3: Compensation
Conclusion
Chapter 3: The identification of indirect expropriations
Introduction
Section 1: The criteria of indirect expropriation in treaty practice
Section 2: The criteria of indirect expropriation in arbitration practice
Conclusion
Chapter 4: 'Focus': ‘Regulatory measures’ versus ‘expropriatory
measures’
Introduction:
Section 1: The legal appraisal of the ‘regulatory measures’ versus ‘expropriatory measures’
divide
Section 2: The practical consequences of the ‘regulatory measures’ versus ‘expropriatory
measures’ divide
Section 3: The ‘regulatory measures’ versus ‘expropriatory measures’ divide in recent treaty
practice

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Conclusion
Concluding Module 3
Module 4: Investor-state arbitration: institutional and
procedural aspects
Introducing Module 4
Chapter 1: The features of the settlement of investor-state disputes
Introduction
Section 1: The definition of investor-state disputes
Section 2: The methods to settle investor-state disputes
Section 3: The institutional and procedural features of investor-state arbitration
Conclusion
Chapter 2 : The jurisdiction of arbitration tribunals
Introduction
Section 1: The notion of ‘jurisdiction’
Section 2: The condition ratione materiae
Section 3: The condition ratione personae
Section 4: The condition ratione voluntatis
Conclusion
Chapter 3: 'Focus': from 'confidentiality' to 'transparency' in investor-
state arbitration
Introduction
Section 1: The evolution of investor-state disputes
Section 2: The evolution of arbitration proceedings
Conclusion
Chapter 4: Provisional measures
Introduction
Section 1: The legal basis under the ICSID rules of arbitration
Section 2: Which rights can be preserved and under which conditions?
Section 4: Procedural aspects
Conclusion
Chapter 5: Annulment proceedings
Introduction
Section 1: The definition and purpose of annulment proceedings
Section 2: Manifest excess of power
Section 3: The serious departure from a fundamental rule of procedure
Section 4: The failure to state the reasons on which the award is based
Conclusion
Concluding Module 4
Module 5: Investor-state arbitration: interpretation,
applicable law and State responsibility
Introducing Module 5
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Chapter 1: Interpretation
Introduction
Section 1: The VCLT methods of interpretation
Section 2: The teleological method of interpretation in the practice of arbitration tribunals
Section 3: The use of Article 31(3)(c) of the VCLT in the practice of arbitration tribunals
Conclusion
Chapter 2: Applicable law
Introduction
Section 1: The choice of the applicable law
Section 2: The status and role of past arbitration awards
Conclusion
Chapter 3: 'Focus': 'coherence' in investor-state arbitration
Introduction
Section 1: The role of coherence in investor-state arbitration
Section 2: The vectors of coherence in investor-state arbitration
Conclusion
Chapter 4: Circumstances precluding wrongfulness
Introduction
Section 1: The notion of ‘circumstances precluding wrongfulness’
Section 2: Circumstances precluding wrongfulness in investor-state arbitration
Conclusion
Chapter 5: Reparation
Introduction
Section 1: Reparation in international law
Section 2: Reparation in investor-state arbitration
Conclusion
Concluding Module 5
Module 6: The future of international investment law
Introducing Module 6
Chapter 1: The future of investor-state dispute settlement
Introduction
Section 1: The context of the reforms
Section 2: The reforms of investor-state dispute settlement
Conclusion
Chapter 2: The protection of sustainable development
Introduction
Section 1: An overview of ‘sustainable development’ provisions
Section 2: An analysis of ‘sustainable development’ provisions
Conclusion
Chapter 3: The obligations of foreign investors
Introduction

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Section 1: The obligations of private persons under international law

Section 2: IIA approaches to foreign investors’ obligations
Conclusion
Concluding Module 6

What you will learn from this course :

 the history of international investment law (Module 1)

 the standards of treatment of foreign investors (Module 2)
 the protection against illegal expropriation (Module 3)
 the institutional and procedural features of investor-state arbitration
(Module 4)
 issues of interpretation, applicable law and State responsibility in
investor-state arbitration (Module 5)
Mode of dispute settlement between the investor and the host.
 the future of international investment law (Module 6)
Chaque module est divisé en chapitres.
Dans les chapitres, il y a des focus :où on s’intéresse
 à « droit des Etats de réguler » et
 la légitimité des tribunaux arbitraux ».

The course will try to make moot courts between investors, courts and sollicitors. At least 2 tries. Try
to get the flavor of the profession. The MOOT court will be based on a real case. Only the facts, the
settlement is av liable only if you fail to figure. The teacher expects us to build a full argument.
The moot court is not graded, it’s only for the experience.

This Course is based on a MOOC on edX. Part of the Course is not only to prepare moot courses but
also follow the MOOC

There is also a book at the DUC Examen

 A mid-term exam (multiple choice questions): 30% of your final

grade. The questions relate to the first three modules (including
the readings compulsory for all of you).
 A final exam (multiple choice questions + essay): 70% of your final
grade. This final exam relates to all the modules of the MOOC. It's
based on:
o multiple choice questions. The questions relate to
the videos in all the modules as well as the readings
compulsory for all of you AND the additional compulsory
readings. This MCQ is worth 35% of your final grade.
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o an essay or a case-note to write. This essay will be graded by

the professor. The essays are graded every two months. For
deadline submissions (end of the course), you'll receive your
grade maximum 1 month after the end of the course. This essay is
worth 35% of your final grade.

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Module 1: The history of international investment law

Introducing Module 1
Chapter 1: The genesis of international investment law
Introduction
Section 1: The law of the protection of aliens abroad: substantive aspects
Section 2: The law of the protection of aliens abroad: procedural aspects
Conclusion
Chapter 2: The development of international investment law
Introduction
Section 1: The claim of ‘developing’ States to a New International Economic Order
Section 2: The ‘systemic package deal’ concluded between ‘developing’ and European States
Conclusion
Chapter 3: The current features of international investment law
Introduction
Section 1: The current features of investment treaty practice
Section 2: The current features of investment arbitration practice
Conclusion
Concluding Module 1

This module will give you an overview of the history of international investment law; from its
genesis to the present day.
Chap 1. you will learn that international investment law finds its origins in the law
Chap.2. we will then focus on the development of international investment law.
Chap 3. you will learn about international investment law as it stands today, from the
perspective of both treaty and arbitration practice of the protection of aliens abroad

Chapter 1: The genesis of international investment law

This module will give you an overview of the history of international investment law; from its
genesis to the present day.

In this chapter, we will focus on the law relating to the protection of aliens abroad.

→This field of law has its historical roots in the expansionist ambitions of European States.
Beginning in the 18th century, this period of European imperialism led to the movement of European
nationals all across the world. This begged the question of how these nationals should be treated and
protected abroad.

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This question became relevant, not only for those involved in trade and investment operations, but,
more broadly, for all persons present in the territory of another State.
As a result, the law that emerged at that time did not aim solely at the protection of foreign investors,
but more generally, at the protection of any foreigner abroad.
What were the features and the content of the law of the protection of aliens abroad? What
arguments were put forward in favour or against it? We will analyse these issues together in this
chapter.

A. The law of the protection of aliens abroad: substantive aspects

To start off, you should note that European States and, more generally, ‘developed’ States had no
issue with regard to the protection and treatment granted to their nationals in other ‘developed’
States.

In fact, they found their respective domestic law perfectly adequate in this respect. On the other
hand, these ‘developed’ States were concerned with the level of protection and treatment granted to
their nationals in other States, for instance in South America.

→ They believed that the law in these Countries did not give sufficient protection to the interests of
their nationals.

Of course, this assessment was based on the standards of those ‘developed’ States and it was
vigorously contested by those other Countries. In this context, ‘developed’ States argued that all
States must treat foreigners in accordance with a so-called minimum standard of treatment. They
argued that this was a legal requirement under international law.

Accordingly, if the domestic law of a host State provided for treatment below this
minimum, aliens could still avail of the minimum standard of treatment under international
law.

This claim was fiercely denied, most notably by the well-known Argentinian jurist, Carlos Calvo. Calvo
rejected the minimum standard of treatment and instead favoured national treatment. In his view,
‘developed’ States could not insist that the host States treat foreign nationals more favourably than
their own nationals.

In addition, there were similar disagreements concerning the conditions by which nationalisations and
expropriations could be carried out. (In those situations, ‘developed’ States required that ‘prompt,
adequate and effective’ compensation must be paid to the foreign nationals. )This view was especially
expressed by Cordell Hull, who was the Secretary of State of the United States at that time.

You should note that initially the status under international law of both the minimum standard of
treatment and of the duty to provide compensation for expropriation and nationalization was open
to debate. However, over time, state practice has led to their recognition as customary international
law rules.

To give you a better idea of the minimum standard of treatment, we can look to a classic statement
found in the 1926 Neer decision, which is widely regarded as embodying this standard. In this decision,
the United States and Mexico Claims Commission provided that:

‘the treatment of an alien, in order to constitute an international delinquency, should amount

to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action

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so far short of international standards that every reasonable and impartial man would readily
recognize its insufficiency’.

In addition to these developments, an interesting solution was also developed by foreign private
companies seeking to ensure that their interests were protected abroad. These companies began to
incorporate applicable law clauses into their contracts with host States. These clauses removed the
contract from the exclusive umbrella of the domestic law of those States with regard to specific
operations.

For instance, these clauses could:

1. provide for the application of another law, notably the lex mercatoria, instead of domestic law,
2. they had the effect of ‘freezing’ the domestic law of host States at the time of the conclusion of
the contract.
As you can imagine, this latter option was appealing to foreign companies, as it prevented host
States from changing their domestic law in a way that would be detrimental to their interests –
regardless of whether the proposed change was arbitrary or not.
That type of contracts is called a ‘State contract’ and it still exists today;
 You may see it being used for oil concessions
A grant extended by a government to permit a company to explore for and produce oil,
gas or mineral resources within a strictly defined geographic area, typically beneath
government-owned lands or lands in which the government owns the rights to produce
oil, gas or minerals.
 The grant is usually awarded to a company in consideration for some type of bonus or
license fee and royalty or production sharing provided to the host government for a
specified period of time.

States enter into various types of international investment agreements such as traditional oil and
mining concessions, production sharing contracts, joint ventures (equity and contractual),
agriculture and manufacturing concessions, power development contracts, technical assistance
contracts, etc. All the variants are also known as State contracts.

B. The law of the protection of aliens abroad: procedural aspects

The concerns of ‘developed’ States did not end with the type of treatment and protection of their
nationals which we have discussed in section one. They were also concerned with the enforcement
of their rights and with the settlement of disputes between their nationals and the host States in
which they had settled.

These concerns arose because domestic tribunals were not viewed as being completely impartial in
the settlement of these disputes. In other words, the fear was that those domestic tribunals would,
as a matter of principle, decide them against foreigners and in favour of their State.

→ To avoid this risk, we will see that various mechanisms were used to internationalize the
settlement of the disputes between foreign nationals and host States.

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At first, when the threat or use of force was still legal under international law, ‘developed’ States
did not hesitate to use or to threaten to use force to protect their nationals abroad when a dispute
arose between them and their host State. This practice was known as ‘Gunboat diplomacy’; and it
culminated between 1902 and 1903 in the military intervention conducted against Venezuela. This
was initiated most notably by Germany and the United Kingdom, and the aim was the recovery of
contractual debts.

→ However, as you know, the threat or use of force has been progressively prohibited under
international law, in particular its use for the recovery of contractual debts, requiring States to turn to
methods of dispute settlement.

 This contributes to explain why they made an increasing use of diplomatic protection. It gained
popularity following the prohibition of the threat or use of force in international law. Diplomatic
protection still exists today, although it is not used as frequently.

This mechanism enables the State of nationality to endorse the claim of its national against the host
State. This elevates the dispute to the inter-state level, meaning that it becomes a dispute between
those two States. However, this mechanism has major drawbacks for nationals.

1. The State of nationality has no obligation to exercise its diplomatic protection; this entails that
political interests can play an important role in a State’s decision to exercise diplomatic
protection.
2. Where a State does decide to exercise its diplomatic protection, any monetary compensation
owed by the other State, is paid directly to the State of nationality, which has no obligation to
transfer this to its national. Clearly this is very problematic, notably for those persons involved
in trade and investment operations.
These drawbacks in diplomatic protection can certainly provide some explanation for why foreign
private companies began to include dispute settlement provisions in their contracts with States, as
we mentioned in section one.

These contracts required any disputes arising from the interpretation and application of the
contract to be referred to arbitration. So, as you can see, long before the conclusion of international
investment agreements, these contracts were the first type of instruments to have referred
disputes between foreign private persons and host States to arbitration.

Professor: International Investment Agreements have two categories:

1) Free trade agreements – have an investment aspect in them (NAFTA)

2) Bilateral investment treaties (only about the investment)

Investment contract - any contract, scheme or arrangement which in substance and irrespective of
the form thereof involves the investment of money in or under such circumstances that the investor
acquires or may acquire an interest in or right in respect of property which under or in accordance
with the terms of investment will, or may at the option of the investor, be used or employed in
common with any other interest in or right in respect of property acquired in or under like
circumstances.

An investment contract is an agreement concluded between an investor and the host government (or
a state-owned enterprise) for the purposes of regulating a specific investment project. Outside
extractive industries, contracts may also be concluded with a private entity based in the host country,
including companies or other structures controlled by local communities.

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Contracts should not be confused with investment treaties, which are concluded between two or
more states to regulate establishment and treatment of all investments by nationals of one state in
the territory of the other state(s).

Investment contracts may take many different forms, including concessions or ‘production sharing
agreements’ for the exploitation of mineral and petroleum resources, ‘host government agreements’
for the construction and operation of pipelines and land concessions or leases for agricultural
investments.

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Chapter 2: The development of international investment law

Video 1:
 Introductory section
 Section 1: The claim of ‘developing’ States to a New International Economic Order
Video 2
 Section 2 :The ‘systemic package deal’ concluded between ‘developing’ and European
States
 Concluding section

In this chapter, we will focus on the development of international investment law.

1. The claim to a New International Economic Order that was made in the aftermath of
decolonization as well as its impact on both international law and foreign direct investment
operations, which I will refer to as FDI operations.
2. The strategies adopted by ‘developed’ and ‘developing’ States that led to the birth of
international investment law.

A. The claim of ‘developing’ States to a New International Economic Order

The end of the Second World War was marked by decolonization and a wave of independence.

The newly independent States acquired, not only their political sovereignty, but also their economic
sovereignty over their natural resources. This was recognized in Resolution 1803 on the Permanent
sovereignty over natural resources which was adopted in 1962 by the United Nations General
Assembly, that I will call from now on the UNGA.

Against this backdrop, these newly independent States, together with other ‘developing’ States, used
their voting power at the UNGA to adopt in 1974, Resolutions 3201, 3202 and 3281.

The aim of these Resolutions was

A. to establish a New International Economic Order, and
B. to draw up a Charter of the economic rights and duties of States.

Crucially, this Charter:

1. provided for the right of States to treat foreign investors in their territory according to their
domestic law;
2. set out their right to compensate expropriations and nationalisations according to their own
relevant laws and regulations.

In other words, ‘developing’ States promoted rules which ran counter to customary international law,
which we discussed in chapter one. However, as you know, the resolutions adopted by the UNGA are,
as a matter of principle, non-binding. As such, they do not form part of positive international law. But
they can have an impact on customary international law. Hence, the question is what was the impact
of Resolutions 3201, 3202 and 3281 on customary international law?

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In short, it cannot be said that they led to the creation of new customary international law rules on
the treatment and protection of foreign investors in the territory of host States.

 This is due to the strong opposition of ‘developed’ States to these Resolutions. Their
opposition meant that there was a lack of opinio juris, an essential component in the
establishment of customary international law.
 However, on the other hand, the Resolutions were considered by many to have dismantled
the existing customary rules.

In any case, these three Resolutions resulted in great legal uncertainty.

 This uncertainty was detrimental to all stakeholders involved in FDI operations, not only to
foreign investors, but also to ‘developing’ States, which largely depended on such operations
to foster their economic development.

B. The ‘systemic package deal’ concluded between ‘developing’ and European States

The solution to the uncertainty generated at the UNGA came from what we call a ‘systemic package
deal’ concluded between European States and ‘developing’ States. At the core of this deal, we find
bilateral investment treaties, which I will refer to as BIT. These BITs will be central to our analyses in
the upcoming modules.

The first ever BIT was concluded between Germany and Pakistan in 1959.

You should note that the United States did not welcome this BIT policy at first, and waited until 1982
to conclude its first ever BIT, which was with Panama.

For the most part, European BITs were largely modelled on the 1967 Draft Convention on the
protection of foreign property prepared by the Organisation for Economic Cooperation and
Development, which I will refer to as the OECD.

As we will see, these treaties have largely been seen as unbalanced.

The main reasons:

1. These BITs have traditionally contained obligations which were binding only on States and not
on foreign investors. This is due to the decoupling of the two issues of, on the one hand, foreign
investors’ rights as promoted by European States, and on the other hand, the obligations of
corporations’ as advanced by ‘developing’ States. This latter issue was discussed at the
multilateral level, in particular at the OECD, where Guidelines for multinational enterprises
were first issued in 1976. More on this will be said in module six, where we will focus on the
obligations of multinational corporations and foreign investors more generally.
2. Although BITs are reciprocal in law, they have long been non-reciprocal in practice. Indeed, the
treaties operated almost exclusively to protect persons from ‘developed’ States, because it was
almost only these persons who invested abroad.
3. We can see how this last aspect is reinforced by the way these BITs were negotiated: they were
in fact hardly negotiated as ‘developed’ States simply used their own BIT Model to conclude
treaties with ‘developing’ States.
So now we have seen three reasons why BITs were considered to be unbalanced. However, to assess
whether or not international investment law as a whole was balanced, we must not look only at BITs.
Rather, we must look at the entire legal framework, viewed in light of the economic context, which

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we have explored in section one. As you will remember, the legal uncertainty generated at the UNGA
led ‘developed’ States and their investors to become suspicious towards ‘developing’ States.

These investors were reluctant to invest in these ‘developing’ States due

 to the ambiguity of the regulatory framework, and
 also because their home States were reluctant to grant them insurances against political risks.

It is against this backdrop that ‘developed’ States finally agreed to grant these insurances on the
condition that ‘developing’ States agreed either to conclude BITs or to adopt domestic legislation
which granted protection to foreign investors. Therefore, a focus not only on BITs, but also on the
broader legal framework is required.

Another key lesson we can learn from this legal framework concerns the objectives of international
investment law.

 It is often said that this field of law was created to protect foreign investors.
While this is certainly a valid objective, you should note that this aim is only subsidiary and
instrumental.

 It is instrumental, because protection is granted in order to attract foreign investors.

 And it is subsidiary, because attracting foreign investors aims, at the end of the day, to foster
States’ economic development.

You can see this objective appearing clearly in various instruments, notably

 in the Preamble of the 1965 Convention on the settlement of investment disputes between
States and nationals of other States,
 as well as the Report of the executive directors of the International Bank for Reconstruction
and Development on this Convention.

The International Centre for Settlement of Investment Disputes, which I will refer to as ICSID, was
created by this Convention; and it was intended to play a key role in the architecture of the ‘package
deal’.

The importance of the ICSID is that it was the first specialized institution aimed at providing facilities
to host States and foreign investors to settle their disputes, in particular through arbitration. However,
it did not become a popular mechanism until the 1990s, as we will discuss in chapter three.

Alongside ICSID, other institutions have played a role in settling disputes relating to FDI or commercial
operations. In situations where States exercised their diplomatic protection, some of these disputes
were adjudicated at the International Court of Justice, for instance in the Barcelona Traction case.

Another example is the Iran-United States Claims Tribunal which was created in 1981. This tribunal
was set up following the 1979 hostage crisis at the US Embassy in Tehran, and the subsequent freezing
of Iranian assets by the US. Its task is to decide the claims of US nationals against Iran and of Iranian
nationals against the United States arising out of measures affecting property rights stemming from
this crisis.

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Chapter 3: The current features of international investment lawµ

 Introductory section

 Section 1: The current features of investment treaty practice

 Section 2: The current features of investment arbitration practice

 Concluding section

A. The current features of investment treaty practice

As you have learnt in chapter two, the first bilateral investment treaty, which I will refer to as BIT, was
concluded in 1959 between Germany and Pakistan. We have come a long way since then – so much
so, that today, there are 2368 BITs in force. A notable feature of this development is that ‘developing’
States have also begun to conclude BITs between themselves. And along the same lines, when we look
at the BITs concluded between ‘developing’ and ‘developed’ States, we can see a de facto
‘bilateralization’ of BITs. As you remember from chapter two, BITs were originally not reciprocal in
practice – almost all those investing abroad came from ‘developed’ States, and were thus the main
beneficiaries of treaty protection. However, BITs have recently become more reciprocal in practice, as
we can see that investors from ‘developing’ States have increasingly begun investing in ‘developed’
States. As a result, the traditional assimilation between ‘developing’ States as the host States of
investors on the one hand, and ‘developed’ States as the home States of investors on the other, is
becoming moot.

This ‘bilateralization’ has also led investors from ‘developing’ States to initiate arbitration proceedings
against ‘developed’ States. In reaction to this development, ‘developed’ States have redrafted their
BIT models, as the United States did, for example. As you will see in modules two and three, they have
clarified the content of treaty standards in order to protect the right of States to regulate, as well as
other public interest considerations.

Another feature of contemporary treaty practice is the rise of multilateral treaties which notably
contain investment provisions. Currently, there are 303 such treaties in force. Among these treaties,
free trade agreements are preeminent.

 This practice was greatly influenced by the North American Free Trade Agreement concluded
in 1994 between Canada, Mexico and the United States.

 The Comprehensive Economic and Trade Agreement adopted in 2016 by the European Union
and its member States and Canada illustrates this contemporary trend.

Of course, these multilateral agreements are not solely concerned with international investment law;
however, these agreements still represent an important development, due to the fact that all past
attempts to establish a multilateral investment agreement have ended in failure.

Such was the fate of the Convention on the protection of foreign property, which I mentioned in
chapter two, as well as of the Multilateral Agreement on Investment, which were both negotiated at
the Organisation for Economic Cooperation and Development respectively in the 1960s and 1990s.

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B. The current features of investment arbitration practice

The number of investor-state disputes settled by arbitration tribunals has exploded over the past few
decades. Looking, for example, at the International Centre for Settlement of Investment Disputes,
the jump in cases between the early 1970s and today is very telling.

For example, in 1972 and 1973, as little as one and zero cases, respectively, were registered by the
Centre, while in 2015 and 2016, that number rose significantly to 52 and 48.

Furthermore, since its creation, the Centre has registered a total of 597 cases.

There are many reasons for this surge in the number of cases:

1. the rise in the number of agreements in force which contain investment provisions
2. the opportunity foreign investors now have to initiate arbitration proceedings against host
States directly.
Initially, investors could only initiate proceedings on the basis of dispute settlement provisions
contained in ‘State contracts’. However, since the 1988 decision in SPP v Egypt and the 1990
award in AAPL v Sri Lanka, it is recognized that investors can initiate proceedings on the basis
of the dispute settlement provisions contained respectively in the domestic investment code
of the host State and in an international investment agreement.
As you can imagine, the fact that foreign investors no longer needed to have a contractual
relationship with the host State to initiate proceedings led to a greater number of foreign
investors being able to avail of dispute settlement with States. The possibility for foreign
investors to initiate proceedings directly.
This power which was given to investors has given rise to the criticism of the so-called ‘chilling’ effect
of investor-state arbitration.

 In other words, it is argued that where investors consider that States will adopt or have
adopted measures which are harmful to their own investment, they will threaten States with
arbitration to prevent this from coming about or to lead them to withdraw such measures.

 By the same token, it is said that States have internalized this risk and, as a result, they simply
refrain from regulating. This is one of the reasons why investor-state arbitration is currently
the subject of intense criticism and why some States are currently reforming the settlement
of investor-state disputes.

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Module 2: The standards of treatment

Introducing module 2
Chapter 1: The fair and equitable treatment standard
Introduction
Section 1: The FET standard in treaty practice
Section 2: The FET standard in arbitration practice
Section 3: The relations between the FET standard and the minimum standard of treatment
Chapter 2: Focus: ‘legitimate expectations’
Introduction
Section 1: The origins of ‘legitimate expectations’
Section 2: The basis of the legitimate expectations
Chapter 3: The full protection and security standard
Introduction
Section 1: The FPS standard in treaty practice
Section 2: The FPS standard in arbitration practice
Chapter 4: The national treatment and most-favoured-nation treatment standards
Introduction
Section 1: The protection against discrimination
Section 2: The national treatment standard
Section 3: The most-favoured-nation treatment standard
Chapter 5: The ‘umbrella clause’
Introduction
Section 1: The origins and the rationale of the ‘umbrella clause’
Section 2: The ‘umbrella clause’ in treaty practice
Section 3: The ‘umbrella clause’ in arbitration practice

In this module, we will analyse the main standards of treatment regulating the way host States must
treat foreign investors in their territory. More precisely, we will focus on those standards of treatment
provided in international investment agreements, in particular in bilateral investment treaties.

1. the main features of the fair and equitable treatment standard

2. a main component of the fair and equitable treatment standard – which is the concept of
‘legitimate expectations’.
→ This concept is directly connected with the right of States to regulate – an issue
which you will see recurring throughout the MOOC.
3. the standard of full protection and security
4. two more standards of treatment – the most-favoured-nation treatment standard and the
national treatment standard
5. ‘umbrella clauses’

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Chapter 1: The fair and equitable treatment standard

The fair and equitable treatment standard is often shortened to FET standard. The questions we are
about to address in this chapter include:

1. what is the relationship between the FET standard and the minimum standard of treatment
(mod.1)
2. what does ‘fair’ and ‘equitable’ actually mean
3. what rights does the FET standard actually give to foreign investors

A. The FET standard in treaty practice

When we look to international investment agreements (IIA), we can see a wide diversity in the way
these agreements are structured.

1. Some IIAs choose to combine the FET standard with other standards, such as the national
treatment and the most-favoured nation treatment standards.
2. Other IIAs prefer to keep the FET standard as a standalone provision.
However, although treaties diverge in how they structure the FET standard, traditionally they have
had all one thing in common – that is, the terseness (краткость) of the FET provision.
Indeed, except for the reference some of these IIAs give to ‘international law’, ‘principles of
international law’, ‘customary international law’, or to the ‘minimum standard of treatment’, FET
provisions mostly refer only to the terms ‘fair’, ‘equitable’, ‘treatment’, and nothing else.

You can find a good example of this in Article 2 of the 1975 bilateral investment treaty concluded
between the United Kingdom and Egypt, which states:
‘Investments of nationals or companies of either Contracting Party shall at all times be accorded
fair and equitable treatment and shall enjoy full protection and security in the territory of the
other Contracting Party’.

But the question remains – what is ‘fairness’ and what is ‘equity’?

How do we define these concepts in order to know how host States must treat foreign investors? As
you will see in section two, this terseness has meant that arbitrators have had to define these
standards themselves in order to assess whether or not host States have actually violated FET
provisions.
Thus, the result has been a de facto conferral of interpretative power to arbitrators.
This has led some States to clarify the content of the FET standard in newly adopted instruments. An
example of this in recent years is the 2016 Comprehensive Economic and Trade Agreement concluded
between the European Union and its member States and Canada, that I will refer to as the CETA.
Article (8)(10)(1) classically provides:
‘Each Party shall accord in its territory to covered investments of the other Party and to investors
with respect to their covered investments fair and equitable treatment and full protection and
security in accordance with paragraphs 2 through 6’.

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Paragraph (2) then goes on:

‘A Party breaches the obligation of fair and equitable treatment referenced in paragraph 1 if a
measure or series of measures constitutes:
(a) denial of justice in criminal, civil or administrative proceedings;
(b) fundamental breach of due process, including a fundamental breach of transparency, in
judicial and administrative proceedings;
(c) manifest arbitrariness;
(d) targeted discrimination on manifestly wrongful grounds, such as gender, race or religious
belief;
(e) abusive treatment of investors, such as coercion, duress and harassment; or
(f) a breach of any further elements of the fair and equitable treatment obligation adopted by
the Parties in accordance with paragraph 3 of this Article.’
As we will discuss in chapter two, Article (8)(10)(4) also provides that a Tribunal may take into account
a specific representation given by a Party to an investor. The CETA in fact largely codifies mainstream
arbitration practice regarding the FET standard.
Aside from this example, and contrary to the approach of the European Union, its member States and
Canada, other States have instead made the radical choice to withdraw any reference to the FET
standard in their instruments.
 You can find an example of this in the 2017 Mercosur’s Protocol for cooperation and
facilitation of investments.

B. The FET standard in arbitration practice

The terseness of treaty practice with regards to the FET standard has meant that arbitration tribunals
had to then determine, in light of the specifics of each case, whether or not host States had acted
fairly and equitably.
Needless to say the notions of ‘fairness’ and ‘equity’ call for an assessment grounded on facts.
However, legal reasoning teaches us that courts and tribunals need legal categories in order to analyse
the facts.
This need for legal categories explains why arbitration tribunals have clarified the content of the FET
standard and delineated substandards.
2. Of course, there are still on-going debates between tribunals as to the exact content of the
FET standard and of its sub-standards. But it nonetheless remains that the existence of these
sub-standards is well-merited and is necessary to guide the factual assessment of whether
host States have acted fairly and equitably towards foreign investors in their territory.
Although the terminology arbitration tribunals use to refer to these sub-standards varies, we
can identify the following sub-standards from arbitration practice:
1. Host States shall provide transparency and stability to foreign investors, in particular by
respecting their legitimate expectations.
2. Host states shall respect due process and not commit any denial of justice with respect to
foreign investors.
3. Host States shall not act in an arbitrary or discriminatory manner

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4. They shall not exert any coercion or harassment on foreign investors.

5. Their treatment of foreign investors shall be guided by good faith.
Among these sub-standards, the concept of ‘legitimate expectations’ has proven to be the most
controversial of all, the reason being that it is seen as threatening the right of States to regulate.
C. The relations between the FET standard and the minimum standard of treatment

As you remember from section one, some FET provisions refer to

 ‘the principles of international law’,
 to ‘customary international law’, or
 to the ‘minimum standard of treatment’.
o In this way, these provisions link the FET standard to the minimum standard of
treatment.

As for those IIA provisions which do not establish such a link, you should note that the minimum
standard of treatment can still be relevant to the FET standard, notably in the interpretation process.
The reason that the interpretation process has this effect is by virtue of Article 31 (3) (c) of the 1969
Vienna Convention on the Law of Treaties.

This Article provides that, when interpreting a treaty provision, any relevant rules of international law
which is applicable in the relations between the parties can be taken into account.

Irrespective of this question as to whether the minimum standard of treatment can be used to define
the FET standard, either as a tool of interpretation or as part of the applicable law, another issue
remains controversial in arbitration practice.

This issue is the nature of the link between the two standards of treatment (the minimum standard
of treatment and the FET) and the consequences of this link. Some tribunals have argued that the
minimum standard of treatment has evolved since it became part of customary international law, in
particular due to the influence of the FET standard in IIAs. They have argued that this evolution has
reached a point where these two standards can essentially be seen as one and the same. The result
of this argument is that any reference to the minimum standard of treatment is purely circular,
because not only do they share the same purpose – now, they also share the same normative content.

On the other hand, other tribunals have advanced the opinion that the definition of the minimum
standard of treatment given in the 1926 Neer decision is still valid, although they have acknowledged
that the circumstances of its application have changed.

Minimum standard of treatment - ‘the treatment of an alien, in order to constitute an

international delinquency, should amount to an outrage, to bad faith, to wilful neglect of duty,
or to an insufficiency of governmental action so far short of international standards that every
reasonable and impartial man would readily recognize its insufficiency’.

Albeit this discussion may seem to be simply theoretical, you should be aware that it has strong
practical implications. In particular, you will see that the heart of this debate rests on the threshold
standard by which States’ conduct towards foreign investors will ultimately be assessed. If all
arbitration tribunals have agreed that conducts which one hundred years ago would not have been
seen as egregious can be considered egregious today, there still remain disagreements as to which
standard shall be applied – that of egregiousness (вопиющий) or reasonableness.

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Egregiousness requires the conduct to reach a higher threshold before it violates the FET standard;
the standard of reasonableness setting a lower standard, it has the effect to broaden the number of
situations where the FET standard is considered to be violated.

The standard of egregiousness (the minimum standard of treatment reference) is supported by one
line of authority, that is well illustrated by this statement of the Tribunal in Cargill v Mexico:

‘In reviewing the awards cited and, as importantly, the evidence of custom analyzed in those
proceedings, this Tribunal agrees in part with the assessment cited above. The Tribunal observes
a trend in previous NAFTA awards, not so much to make the holding of the Neer arbitration more
exacting, but rather to adapt the principle underlying the holding of the Neer arbitration to the
more complicated and varied economic positions held by foreign nationals today. Key to this
adaptation is that, even as more situations are addressed, the required severity of the conduct
as held in Neer is maintained.’

Opposing this standard, the standard of reasonableness (the fair and equitable treatment reference)
is supported by another line of authority, which is exemplified by the Tribunal’s award in Merill v
Canada, where it stated that:

‘A requirement that aliens be treated fairly and equitably in relation to business, trade and
investment is the outcome of this changing reality and as such it has become sufficiently part of
widespread and consistent practice so as to demonstrate that it is reflected today in customary
international law as opinio juris. In the end, the name assigned to the standard does not really
matter. What matters is that the standard protects against all such acts or behaviors that might
infringe a sense of fairness, equity and reasonableness.’

So, as you can see from these two opinions, arbitration tribunals have split into two radically different
approaches as to how to interpret the FET standard. Far from being a matter of pure theory, the
approach the tribunals take to the matter will entail important practical consequences for both host
States and foreign investors.

Chapter 2: Focus: ‘legitimate expectations’

‘Legitimate expectations’ is a sub-standard of the fair and equitable treatment standard (Chap1).
We pay a particular attention to this substandard in this module as it is related to the issue of the right
of States to regulate.

As you will discover, this concept of ‘legitimate expectations’ has been highly criticized because of its
alleged ‘freezing’ effect on the regulatory power of host States.

In this chapter, we will examine whether this criticism is well-founded, by analysing the features of
this sub-standard. We will answer questions, such as, what do treaty and arbitration practices teach
us about these features? Which type of state measures can ground legitimate expectations on the
side of foreign investors? What are the origins of the ‘legitimate expectations’?

These are the main issues that we will address in this chapter. To do so, we will:

1. inquire into the origins of this sub-standard

2. analyse which type of state measures can give rise to legitimate expectations
3. briefly summarise what we have learnt

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A. The origins of ‘legitimate expectations’

States have traditionally been silent on ‘legitimate expectations’: it has been nowhere to be found in
investment treaty practice.

Yet, it plays a fundamental role in arbitration practice.

While some tribunals, for instance the MESA v Canada Tribunal in its 2016 award, have considered
that the breach of investors’ legitimate expectations by host States does not in itself violate the FET
provision, other tribunals have viewed it as a self-standing sub-standard in and of itself.

For instance, in the case of Thunderbird v Mexico, Arbitrator Wälde opined:

‘One can observe over the last year a significant growth in the role and scope of the legitimate
expectation principle, from an earlier function as a subsidiary interpretative principle to
reinforce a particular interpretative approach chosen, to its current role as a self-standing
subcategory and independent basis for a claim under the “fair and equitable standard” …’

This means that where a tribunal adopts this latter approach, a violation by a host State of the
legitimate expectations of a foreign investor is sufficient to establish the violation of the FET
provision.

Following this approach, a breach of legitimate expectations is more than just an element to be taken
into account when assessing whether other components of the FET standard have been violated.

 In justifying their use of ‘legitimate expectations’, most arbitration tribunals have referred to
its use in past arbitration awards. A few have justified it by linking it to ‘good faith’ which is
recognized as a customary international law rule. An example of the latter can be seen in the
2016 award of the Tribunal in the case of Charanne v Spain.

Other tribunals have argued that ‘legitimate expectations’ is a general principle of law recognized by
civilized nations.

 Such principles constitute a primary source of public international law – however, in order to
constitute a general principle, its normative content must be common to all domestic legal
systems worldwide, and one might question whether this is really the case for ‘legitimate
expectations’.

That being said, those systems where ‘legitimate expectations’ does form part of domestic law, such
in Europe, provide for a useful guide to better understand the way arbitration tribunals rely on this
notion in the field of international investment law.

 Domestic tribunals usually make a distinction between procedural and substantive legitimate
expectations, the former traditionally being the most important. In a nutshell, their reasoning
is made up of two steps:
a. First of all, they investigate whether the claimant in fact has legitimate expectations.
Such an assessment is generally based on a specific commitment, promise or
representation given by a State toward that claimant or to a limited group of persons
to which the claimant belongs. In carrying out their assessment, domestic courts take
into account all the circumstances of the case at hand, in particular whether it was

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foreseeable that the commitment would be reconsidered, or whether the claimant

was diligent.
b. If they conclude that the claimant has legitimate expectations, these tribunals then
move on to the second step – a proportionality test. This proportionality test is used
to assess whether it was permissible for the State to frustrate the claimant’s
expectations.
Now that we have gotten an insight into the use of ‘legitimate expectations’ in domestic law, we can
discuss the basis of legitimate expectations in international investment law.
B. The basis of the legitimate expectations

Ultimately, the question of the basis of foreign investors’ legitimate expectations boils down to one
thing.

We must determine what type of state measures can be said to create legitimate expectations on the
side of foreign investors, and which, as a corollary, States cannot frustrate. In this respect, we can
identify two approaches to this question in arbitration practice:

1. The first approach was famously formulated by the Tribunal in the case of Tecmed v Mexico.
Arbitrators stated that:
‘The foreign investors expect the host State to act in a consistent manner, free from
ambiguity and totally transparently in its relations with the foreign investor, so that it may
know beforehand any and all rules and regulations that will govern its investments, as
well as the goals of the relevant policies and administrative practices or directives, to be
able to plan its investment and comply with such regulations.’
This approach provides that legitimate expectations can arise from the entire regulatory
framework as a whole which was applicable to the investment at the time it was made. This
approach, and its exclusive focus on foreseeability which underpins it, greatly limits the
regulatory power of host States.
Thus, it will be no surprise to you that it has been the subject of much criticism from certain
arbitration tribunals.
For instance, in the case of EDF v Romania, the Tribunal stated that:
‘The idea that legitimate expectations, and therefore FET, imply the stability of the legal
and business framework, may not be correct if stated in an overly-broad and unqualified
formulation. The FET might then mean the virtual freezing of the legal regulation of
economic activities, in contrast with the State’s normal regulatory power and the
evolutionary character of economic life.’
2. The second approach is supported by a great majority of arbitration tribunals, and is much
more protective of the regulatory power of host States.
For instance, in its 2016 award, the Tribunal in the case of Crystallex v Venezuela explained
that:
‘A legitimate expectation may arise in cases where the Administration has made a
promise or representation to an investor as to a substantive benefit, on which the investor
has relied in making its investment, and which later was frustrated by the conduct of the
Administration.

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To be able to give rise to such legitimate expectations, such promise or representation –

addressed to the individual investor – must be sufficiently specific, meaning it must be
precise as to its content and clear as to its form.’
As you can see, by limiting the basis of the legitimate expectations
 to specific acts
 as opposed to the entire regulatory framework,
this approach strikes a balance between the foreseeability that foreign investors
need and States’ regulatory power.

You should know that this second, predominant approach is also in line with the approach of
domestic courts.
Along the same lines as these arbitration tribunals, more recent investment agreements expressly
limit the basis of legitimate expectations to specific representations and commitments. You can see
this approach being taken, for example, in the Comprehensive Economic and Trade Agreement which
was adopted in 2016 by the European Union and its member States and Canada.
In addition,
other States have adopted a more radical approach, by expressly excluding ‘legitimate expectations’
as a protection under the scope of their IIA. For instance, Article 6(4) of the 2016 bilateral investment
treaty concluded between Chile and Hong Kong, China SAR provides that:
‘For greater certainty, the mere fact that a Party takes or fails to take an action that may be
inconsistent with an investor’s expectations does not constitute a breach of this Article, even if
there is loss or damage to the covered investment as a result.’

Chapter 3: The full protection and security standard

In this chapter, we will focus on the full protection and security standard, which can be abbreviated
as the FPS standard.

A. The FPS standard in treaty practice

The FPS standard has long been a part of customary international law.

It is now a typical provision which you will find in virtually all IIAs.

We can see a variety of ways in which FPS provisions are drafted.

 They refer to ‘full protection and security’,

 ‘most constant protection and security’,
 ‘protection and constant security’,
 ‘full and complete protection and security’,
 or simply to the fact that State parties shall protect investors.

As we will discuss in section two, these textual differences have been invoked by some arbitration
tribunals to justify their diverging interpretations of the FPS provisions.

Aside from these diverging interpretations, we can see that these provisions suffer from the same
vagueness as the fair and equitable treatment provisions which we analysed in chapter one.

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As such, the exact treatment which the FPS standard guarantees to foreign investors has not been
specified.

In recent times, newly adopted agreements have clarified this standard somewhat. For instance,
Article 3(5) of the 2016 bilateral investment treaty concluded between Argentina and Qatar reads
as follows:

‘Full protection and security is to be referred to the provision of adequate physical protection
pursuant to customary international law’. As you will see in the next section, this provision
codifies the approach adopted by most arbitration tribunals concerning the limitation of the FPS
standard to physical protection.’

B. The FPS standard in arbitration practice

In line with customary international law and whatever the exact language of the FPS provision that
they have had to apply, virtually all arbitration tribunals have agreed that this standard entails an
obligation of due diligence.

This entails that the obligation for the State parties is an obligation of effort – meaning, that they shall
endeavour to prevent or to repress certain conducts that harm foreign investors or their investments
in their territory.

As stated by the MNSS v Montenegro Tribunal in its 2016 award, the assessment of the
compliance with this due diligence obligation requires arbitration tribunals to take into
account all the circumstances of the case, for instance States’ resources.

In other words, under the FPS standard, States are merely required to do their utmost.

Such obligations of effort are to be contrasted with obligations of result.

Obligations of result are fulfilled only by achieving the result, and not merely endeavouring to
achieve it.

As the Tribunal recalled in its 2016 award in the case of Tenaris v Venezuela, this obligation of due
diligence also entails that it is not necessary to establish malice or negligence on the party of the host
States’ authorities in order to evidence a breach of the FPS provision.

On the other hand, two particular questions have been the subject of much disagreement among
arbitration tribunals. These two questions were formulated by the Tribunal in the case of Suez v
Argentina:

1. from whom does the FPS standard protect foreign investors?

2. against what are they protected?

1. ‘protection from whom?’

As regards the first question, ‘protection from whom?’, most arbitration tribunals have answered that
the FPS standard protects foreign investors from non-state entities

As was held, for instance, by the Tribunal in the case of Oxus Gold v Uzbekistan in its 2015
award. These tribunals have come to this conclusion because they have considered that the
FPS standard exists separately from the FET standard which protects foreign investors from
host States.

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However, other tribunals have argued that foreign investors can also be protected from host States
under the FPS standard. The majority of those tribunals which have adopted this broader approach,

The Tribunal in the case of Biwater v Tanzania, have justified it by reference to the meaning of
the word ‘full’ in the expression ‘full protection and security’ as well as by reference to the purpose
of bilateral investment treaties.

In this respect, because they have argued that these treaties aim at the protection of foreign
investors, an issue which we discussed in module one, they have concluded that the FPS standard
should be broadly interpreted, so as to maximise the protection of investors.

2. ‘protection against what?’

Turning to the second question, ‘protection against what?’, we can reduce the debate to one issue –

 does the FPS standard grant only a physical protection to foreign investors and their
investment,
 or does it also cover legal security and the stability of the legal framework?

The majority of arbitration tribunals have opted for the first alternative.

 They have argued in particular that to decide otherwise would lead to an overlap with the FET
standard which has been interpreted as covering transparency and stability.

However, some tribunals have favoured the second, broader alternative, relying on various grounds.
One ground, for instance, was advanced in the 2016 award rendered by the Tribunal in the case of
Houben v Burundi; it referred to the language of the FPS provision of the 1989 BLEU-Burundi bilateral
investment treaty which provides for the ‘exclusion of any unjustified or discriminatory measure which
could hamper in fact or in law’, notably ‘the use of investments’.

Another ground can be seen in the Biwater v Tanzania award. The Tribunal in that case stated that:

‘It would … be unduly artificial to confine the notion of “full protection” only to one aspect of
security, particularly in light of the use of this term in a BIT, directed at the protection of
commercial and financial investments’.

As you can see, here again, the purpose of the treaty played an important role in the decision to adopt
a broad interpretation of the FPS standard. In module five, we will return to the role which the purpose
of an IIA plays in the interpretation process when we discuss teleological interpretation.

Chapter 4: The national treatment and most-favoured-nation treatment

standards

Introduction Welcome! In this chapter,

 we will focus on the national treatment standard as well

 as the most-favoured-nation treatment standard, which I will call from now on the MFN
treatment standard.

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We will explore questions like, what are the origins and the rationales for these standards? Which
type of protection do they bring to foreign investors, and in which circumstances? In order to answer
these questions, we will:

1. Analyse the common principle of these two standards: the principle of non-discrimination
2. Analyse the national treatment standard from the perspective of both treaty and arbitration
practices
3. Analyse the MFN treatment standard

A. The protection against discrimination

The national treatment and pursue the same objective: that is, ensuring that foreign
investors and their investment do not suffer any discrimination.
the MFN treatment provisions

These two provisions are conventional ‘embodiments’ of the non-discrimation principle, which has
long been a part of customary international law.

On the surface, we can say that they constitute the two sides of the same coin. For example, with
regards to bilateral investment treaties, the national treatment provision aims at avoiding that the
investors of one State party to a BIT be discriminated by the other State party vis-à-vis its own
nationals. The rationale of the MFN treatment provision is, all things being equal, similar. It protects
investors of each State party to a BIT from the discrimination that they may suffer vis-à-vis investors
of any State non-party to this BIT.

Both of these provisions will be analysed further in the next two sections, focusing on how they
function and their scope of application. But you can already see that they do not set an absolute
standard, unlike, for example the fair and equitable treatment provision which we discussed in chapter
one. Instead, they set a relative standard whose content is based on factual comparisons.

B. The national treatment standard

Beginning with the national treatment standard, this has always been a sensitive political issue. There
was initially a dichotomy between, on the one hand, the national treatment standard and, on the
other hand, the minimum standard of treatment. The minimum standard of treatment was preferred
by ‘developed’ States, but opposed by, for example Calvo, who found it unacceptable that foreigners
not be treated as nationals.

Nowadays, the problem is more complex. As you can imagine, States want to be free to help their own
nationals, for instance through subsidies, without having to extend the same treatment to foreign
investors. This can explain the differences in treaty practice as regards this standard. It can also explain
why the national treatment standard is absent from some IIA. However, such agreements still contain
the fair and equitable treatment standard which is defined as protecting foreign investors from
discriminatory treatment. So arguably the FET standard acts as a useful substitute in the absence of
the national treatment standard.

When we look at treaty practice, the main difference between IIAs relates to the issue of how the
national treatment standard applies, or does not apply, to the establishment of foreign investors and
of their investments. In some IIAs, in particular those concluded by the United States, the national
treatment standard applies to this establishment phase and not merely to post-establishment. For
instance, Article 1102(2) of the 1994 North American Free Trade agreement (NAFTA) provides that:

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

In contrast, other IIAs, notably those concluded by European States, do not extent the national
treatment standard to this establishment phase and instead limit its application to the post-
establishment period. They merely encourage admission. You can find a good example of this practice
in Article 3(1) of the 2014 bilateral investment treaty concluded between Greece and the United
Arab Emirates which provides that:

‘Each Contracting Party promotes in its territory investments by investors of the other
Contracting Party and admits such investments in accordance with its laws and regulations’.

As I mentioned earlier, the national treatment provision sets a relative standard. This explains why its
application by arbitration tribunals is very much based on facts. However, as pointed out by Salacuse
and regardless of the factual and legal specificities of each case, arbitration tribunals have, all things
being equal, taken a three-step approach to assessing whether there is a violation of the national
treatment provision:

1. The first step is to identify a group of nationals with whom we can compare the claimant.
2. The second step is to compare the treatment that the two groups have received and to assess
whether the treatment received by the claimant is less favourable than that granted to the
group of nationals.
3. The third step is to evaluate whether the two groups are in like circumstances or whether
certain factors exist which could justify any differential treatment.
In general, this three-step process corresponds to the definition of a discriminatory conduct given by
the Tribunal in the case of Saluka v Czech Republic. The Tribunal stated that:

‘State conduct is discriminatory, if (i) similar cases are (ii) treated differently (iii) and without
reasonable justification’.

C. The most-favoured-nation treatment standard

The first observation we can make about the most-favoured-nation treatment standard is that it is not
as politically sensitive as the national treatment standard. You will find it in a great number of IIAs. For
instance, Article 4 of the 2016 bilateral investment treaty concluded between Nigeria and Singapore
provides that:
‘Each Party shall accord to investments of investors of the other Party treatment no less
favourable than it accords, in like circumstances, to investments in its territory of investors of
any non-Party with respect to management, conduct, operation, and sale or other disposition of
investments.’
As you can deduce from this Article, the aim of this provision is to ensure that the treatment Nigeria
grants to the investments of Singaporean investors is no less favourable than the treatment it gives to
the investors of other States, such as Germany, once they are in like circumstances, for instance with
regards to the management of their investment. In practical terms, this means that if Nigeria does
treat the investments of German investors more favourably than the investments of Singaporean
investors, Nigeria must grant that more favourable treatment to the Singaporean investors, with the
result that the investments of Singaporean and German investors are then treated the same. And,

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because the obligation is a reciprocal one, you should note that Singapore is subject to the same
obligation as regards Nigerian investors.

Another thing you should be aware of is that the MFN treatment provision can be found notably in
the host state’s domestic law or in IIAs that it concluded with other States.

Last but not least, the functioning of this provision is governed by what is called the ejusdem generis
principle. This principle provides notably that the process through which the MFN treatment provision
attracts the provisions of other agreements is confined to those cases where there is a substantial
identity between the subject-matter of the two sets of provision concerned. An example of this
principle can be seen in the International Law Commission’s commentaries to the 1978 Draft Articles
on the most favoured-nation clause – if the MFN treatment provision promises most-favoured nation
treatment solely for fish, then such treatment cannot be claimed under the same clause for meat.

Ejusdem generis is latin for "of the same kind." When a law lists classes of persons or things, this
concept is used to clarify such a list. For example, if a law refers to automobiles, trucks, tractors,
motorcycles, and other motor-powered vehicles, a court might use ejusdem generis to hold that such
vehicles would not include airplanes, because the list included only land-based transportation.
Turning back to focus on IIAs, it is important that you realize that the features and the scope of
application of the MFN treatment provision in any given IIA depends on its exact language. As you will
see, many treaties phrase the MFN provision differently. Some IIAs confine the MFN treatment
standard only to the post-establishment phase, while others make it applicable to the establishment
phase as well. This divide in the drafting of MFN treatment provisions can best be seen in the treaty
practice of the United States and European States. But you will also encounter similarities in the MFN
treatment provisions. For instance, a great number of IIAs exclude certain advantages or rights from
the scope of those provisions. For example, Article 4(2) of the 2016 bilateral investment treaty
concluded between Iran and Japan provides that:

‘If a Contracting Party has accorded or would accord in future special advantages or rights to
investors of any non-Contracting party by virtue of any agreement establishing a free trade area,
a customs union, a common market or a similar regional organisation or by virtue of any
convention for the avoidance of double taxation, it shall not be obliged to accord such
advantages or rights to investors of the other Contracting Party.’

When we look at arbitration practice, you will see that the MFN treatment provision is often disputed.
De Nanteuil argues that there are three main situations in which parties will dispute this provision:

1. The first situation relates to claims where foreign investors use the MFN treatment provision
to attract better treatment provided for in a substantive provision of an IIA concluded
between the host State and a third State, for example the fair and equitable treatment
provision. This situation is the least controversial – the principle behind such claims is virtually
unanimously accepted.
2. The second situation concerns cases where foreign investors intend to change the scope of
application of an IIA – for example, by giving a wider definition to ‘investment’ in order to
expand the category of investments to which that IIA applies. It is well-established that the
MFN provision cannot be used in this situation.
3. The third situation is where foreign investors seek to use the MFN provision to avail of a
dispute settlement provision in another IIA which they consider to be more favourable than a

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dispute settlement provision in the IIA concluded between their home and host States. This
situation is most frequent in arbitration practice, and, as you will see, the most controversial.
Beginning with two decisions – that of Maffezini v Spain and Plama v Bulgaria – in 2000 and 2005
respectively, we have seen a split between two lines of arbitration cases. One line of authority argues
that the MFN treatment provision can, as a matter of principle, apply to dispute settlement provisions,
while the other opposes this thesis. Alongside this controversy, we can see that a number of newly
adopted agreements contain MFN provisions which are in line with the first line of arbitration
authority. An example of this trend can be seen in Article 4(3) of the bilateral investment treaty
concluded between Nigeria and Singapore.
You should also be aware that, although these three situations are distinct, they do share similar
factual and legal challenges. Among those challenges is:
1. first the question as to whether the treatment which the foreign investor is seeking is in fact
more favourable,
2. second, whether the investor’s argument complies with the ejusdem generis principle, both
which can be complex issues in practice.

Chapter 5: The ‘umbrella clause’

In this chapter, we will focus on a new treatment standard which is often called the ‘umbrella clause’.
Together, we will answer questions, such as, what does this elusive label mean? What are the origins
and the rationale of this clause? What protection does it afford to foreign investors? In order to answer
these questions, we will:

1. shed some light on the origins and the rationale of the ‘umbrella clause’
2. examine how this clause is formulated in international investment agreements
3. analyse the way arbitration tribunals have interpreted ‘umbrella clauses’

A. The origins and the rationale of the ‘umbrella clause’

From the perspective of public international law, a breach of a contract under domestic law does not
entail a breach of international law – in particular, it does not entail a breach of an IIA. The reason for
this is due to the fundamental divide between international law and domestic law. This can be
problematic for private entities, notably for foreign investors whose contractual rights can be violated
by host States, without them having any satisfactory remedy available. Thus, the ‘umbrella clause’
has been conceived in order to avoid such situations and to establish a ‘link’ between contractual
breaches and international law. More fundamentally, the basic rationale and effect of ‘umbrella
clauses’ is to oblige host States to respect their obligations towards foreign investors as a matter of
international law.

In the context of a bilateral investment treaty (BIT), a clause that obliges the host state to observe
specific undertakings towards its foreign investors. An umbrella clause protects investments by
bringing obligations or commitments that the host state entered into in connection with a foreign
investment under the protective "umbrella" of the BIT. Investors often rely on an umbrella clause as
a catch-all provision to pursue claims when a host state's actions do not otherwise breach the BIT.
Umbrella clauses are usually broadly written to cover every conceivable obligation of the host state.

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Practically speaking, an umbrella clause can elevate a contract claim to the level of a treaty claim.
Usually, violating a contract does not invoke treaty protection under international law. However,
adding an umbrella clause to a BIT:
 Effectively circumvents that customary restriction by expressly stating that a violation of an
investment contract is deemed a violation of the BIT.
 Removes the need for investors to rely on the dispute resolution clauses in an investment contract
(which may, for example, give exclusive jurisdiction to local courts).
 Allows an investor to bring the claim before an international arbitral body, such as the International
Centre for Settlement of Investment Disputes (ICSID).
‘Umbrella clauses’ originated in a proposal formulated in the 1950s by Elihu Lauterpacht to the Anglo-
Iranian Oil Company in relation to the settlement of the Iranian oil nationalisation disputes. His idea
was to elevate a contractual obligation into the conventional realm though an ‘umbrella treaty’. This
idea then inspired those drafters who intended to elevate obligations towards foreign investors
through a specific provision contained in an international investment instrument. A notable example
of such a provision can be found in the 1959 Abs-Shawcross Draft Convention on foreign investment
and the 1967 Draft Convention on the protection of foreign property prepared by the Organisation
for Economic Cooperation and Development.
B. The ‘umbrella clause’ in treaty practice

Today, you can find ‘umbrella clauses’ in a large number of international investment agreements. For
example, we can refer to Article 3(4) of the 1992 bilateral investment treaty between Paraguay and
the Netherlands, which provides that:

‘Each Contracting Party shall observe any obligation it may have entered into with regard to
investments of nationals of the other Contracting Party’.

You will see that the wording of the ‘umbrella clause’ varies across different agreements. This diversity
has been used by some arbitration tribunals to justify diverging interpretations of these provisions.

The first thing to note is that the majority of IIAs place an obligation of result upon States, which we
can see from the Paraguay-Netherlands BIT that I have just mentioned. Obligations of result can be
contrasted with obligations of effort, as you will remember from chapter three in relation to the full
protection and security standard. Some IIAs elect to impose an obligation of effort with respect to the
‘umbrella clause’. For instance, Article 10 of the 1991 BIT concluded between Australia and Poland
provides:
‘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.’

As you can see, State parties are here not bound to reach this result, but instead to do all in their
power to reach it. This is typical of obligations of effort.

You should also be aware that most IIAs do not specify the type of obligations and commitments
which are covered by the ‘umbrella clause’. Conversely, some IIAs expressly limit their scope to
‘contractual obligations’, like the 1997 Austria-Chile BIT, or to ‘written obligations’, such as Article 10
of the Australia-Poland BIT that I have just quoted.

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Also, some IIAs specify that the ‘umbrella clause’ covers the obligations entered into with respect to
‘specific investments’; this is the case for instance in the 1997 SwissPhilippines BIT.

C. The ‘umbrella clause’ in arbitration practice

The differences in treaty practice mentioned in section two can explain to some extent the divergent
interpretations of ‘umbrella clauses’ given by arbitration tribunals. However, certain divergences,
such as in the cases of SGS v Philippines and SGS v Pakistan, reflect fundamentally different
approaches that cannot be reconciled simply by reference to differences in drafting. This sentiment is
echoed by tribunals such as the BIVAC v Paraguay Tribunal in its 2009 decision.

These fundamental divergences among arbitration tribunals relate in particular to the issue of the
type of obligations covered by ‘umbrella clauses’ and to the issue of contracts specifically.

3. Type of obligations

As for the first issue, we can focus on the question as to whether, or not, obligations under domestic
laws and regulations are covered by ‘umbrella clauses’. Of course, where an ‘umbrella clause’
expressly limits its scope to contractual obligations only, as in the Austria-Chile BIT that I referred to
in section one, this questions does not arise.

The problem lies especially where the provision reads as follows:

‘Each Party shall observe any obligation it may have entered into with regard to investments’.

Where tribunals have been faced with such a provision, three different approaches have been taken:

1. On the one end of the spectrum, some tribunals have argued, without any apparent
qualification, that where an ‘umbrella clause’ contains the phrase ‘entered into’, then it does
not cover general commitments, for example legislative acts. As such, they have opined that
such clauses are limited to specific commitments. You can see this approach in the case of
Noble v Romania, for example.
2. Other tribunals have adopted a more nuanced approach. While they have acknowledged that
such ‘umbrella clauses’ do not cover general commitments imposed by the law of host States,
they have argued that they do cover unilateral commitments arising from provisions of their
law regulating a particular business sector and addressed specifically to foreign investors in
relation to their investments. This approach was taken, for instance, by the Tribunal in the
case of Continental Casualty Company v Argentina.
3. Finally, on the other end of the spectrum, tribunals belonging to the third line of authority
have, without any apparent qualification, accepted that such clauses cover obligations
stemming from laws and regulations, as you can see in the decision by the Noble v Ecuador
Tribunal.
Importantly, the differences in these three lines of authority cannot be explained by the specific
language of the ‘umbrella clause’ that were being interpreted, as the provisions in these cases were
strictly identical. So, you can see, these divergences show irreconcilable views about the rationale and
the effect of ‘umbrella clauses’.
4. Issue of contracts
Moving on to the issue of contracts, the problem is somewhat similar. For instance, the approach of
the SGS v Pakistan Tribunal towards the ‘umbrella clause’ in that case was largely influenced by its
own view on the limited effect that ‘umbrella clauses’ should have. In particular, it stated that:

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‘As a matter of textuality therefore, the scope of Article 11 of the BIT, while consisting in its
entirety of only one sentence, appears susceptible of almost indefinite expansion … [C]onsidering
further that the legal consequences that the Claimant would have us attribute to [this] Article …
are far-reaching in scope, and so automatic and unqualified and sweeping in their operation, so
burdensome in their potential impact upon a Contracting Party, we believe that clear and
convincing evidence must be adduced by the Claimant’.
You should note that nowadays, most arbitration tribunals oppose this view and as a matter of
principle do not exclude contracts from the scope of ‘umbrella clauses.’
However, disagreements still exist as to the ways in which ‘umbrella clauses’ apply to contracts, most
notably in relation to the effect of an exclusive forum selection clause (an exclusive jurisdiction clause
mandates that all disputes must be resolved by a particular court) in a contract.

Where an arbitration tribunal is called upon to determine whether the violation of such a contract
entails a violation of the ‘umbrella clause’, once they have accepted jurisdiction over the claim, the
question then boils down to its admissibility – meaning, whether they can exercise their jurisdiction
in its respect.
1. In response to this issue, some tribunals have considered that exclusive forum selection
clauses in a contract make the claim inadmissible, leading them to stay the proceedings. You
can see this approach being taken in the case of SGS v Philippines, for example.
2. Arbitration tribunals have considered that the ‘umbrella clause’ claim might become
admissible only in cases where either the tribunals which benefit from this exclusivity clause
do not meet the standards of the sound administration of justice or where States disregard
their decisions. This is illustrated in the 2012 decision rendered in BIVAC v Paraguay.
3. Conversely, other tribunals take a different point of view, arguing that these exclusive forum
selection clauses in a contract do not lead to a finding that the ‘umbrella clause’ claim is
inadmissible. Notably, these tribunals have denounced the opposite approach as being
nonsensical. They have argued that to accept jurisdiction over contract-based ‘umbrella
clause’ claims but to declare them inadmissible because of an exclusive forum selection clause
in the contract is functionally equivalent to the conclusion of tribunals like in SGS v Pakistan,
which decline to exercise jurisdiction over contract-based ‘umbrella clause’ claims.
Professor:

 Admissibility – to claim itself – did the parties consent to the jurisdiction of the tribunal?
 Jurisdiction – to the tribunal

Contracts – exceptional jurisdiction to a domestic tribunal on the interpretation of the contracts. Some
tribunals consider that they cannot exercise jurisdiction with regard to the umbrella clause because it
is inadmissible – because there is another provision in the contract giving the power to interpret to
another court.

If a tribunal declines the jurisdiction when actually it should not do that – that will be an excess of
powers.

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Module 3: The protection against illegal expropriations

In this module, you will get an insight into the protection that international investment agreements
grant to foreign investors against illegal expropriation. Because expropriation is considered as a
sovereign prerogative of States, these agreements do not prohibit expropriation as such; instead, they
make it subject to conditions of legality. In this module, you will learn about what treaty and
arbitration practice tell us about expropriation:

1. foreign investors are protected against different types of expropriation and you will learn
about the distinctive features of each
2. the conditions which must be fulfilled for an expropriation to be considered legal, with a
specific focus on compensation
3. the way arbitration tribunals determine the instances of indirect expropriation, as well as with
the guidelines laid down in new agreements in this respect
4. the distinction which is made between regulatory measures and expropriatory measures in
order to reinforce the right of States to regulate.

Chapter 1: The categories of expropriation

In this chapter, we will analyse the different categories of expropriation that exist in international law
and which can be deduced from the language of international investment agreements.

You should note that almost all IIAs contain a provision similar to Article 16(1) of the 2015 bilateral
investment treaty concluded between Japan and Uruguay, which provides that:

‘Neither Contracting Party shall expropriate or nationalize investments in its Area of investors of
the other Contracting Party or take any measure equivalent to expropriation or nationalization
…’.

There is a distinction to be made between nationalisations and expropriations.

This distinction is notably based on their respective scope:

1. nationalisations → concern investments in an entire sector of the economy

2. expropriations → concern only specific investments

From a legal perspective, the question of whether a state measure is characterised as a nationalisation
or as an expropriation is not important.

 This is because both measures must fulfil the same conditions of legality.

However, from a factual perspective, arbitration tribunals nowadays are mainly asked to rule over the
legality of expropriations, as opposed to nationalisations.

In particular, expropriations, as is illustrated by Article 16(1), give rise to a number of issues, such as
what exactly is meant by prohibiting a State from taking any measure equivalent to expropriation?
What are the features of those measures? And what is the difference between expropriations and
measures equivalent to expropriation?

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A. Direct expropriation

At the time of the law of the protection of aliens abroad and of the development of international
investment law that we discussed in module one, the issue of direct expropriation was at the
forefront of States’ policies and arbitration practice. Most disputes related to measures which were
characterised as direct expropriations.

However, over the past decades, the issue of direct expropriation has become less important. This is
due to the fact that States have become reluctant to directly expropriate foreign investors;

 the reason being their desire to attract foreign investors into their territory,
and the lengths they have gone to so as not to deter foreign investors.

In spite of this trend, however, we can see that the number of direct expropriations is in fact growing
in recent years. ‘Direct expropriation’ nowadays does not raise any major issues in terms of its
definition or legal status.

This consensus among arbitration tribunals is well illustrated by this statement of the Tribunal
in the case of SD Myers v Canada:
‘The term “expropriation” in Article 1110 must be interpreted in light of the whole body of state
practice, treaties and judicial interpretations of that term in international law cases. In general,
the term “expropriation” carries with it the connotation of a “taking” by a governmental-type
authority of a person’s “property” with a view to transferring ownership of that property to
another person, usually the authority that exercised its de jure or de facto power to do the
“taking.”’

You should note that, in certain situations, the transfer of the legal title alone is sufficient to establish
direct expropriation.

For instance, in its 2015 award, the Tribunal appointed in Bernhard von Pezold v Zimbabwe
considered that the transfer of the legal titles by Zimbabwe constituted a direct expropriation,
despite the fact that the claimants still retained a de facto control over part of their properties.

B. Indirect expropriation

In the introduction to this chapter, we heard the phrase ‘any measure equivalent to expropriation’,
which was included in Article 16(1) of the 2015 bilateral investment treaty concluded between Japan
and Uruguay.

This phrase is often used by States to refer to the category of ‘indirect expropriation’. You will see
various ways of phrasing this type of expropriation across the agreements, most notably ‘measures
tantamount to expropriation’ or simply ‘indirect expropriation’.

However, it is widely acknowledged that these various formulations provide the same protection to
foreign investors.

Another feature these various formulations have in common is the lack of definition as to the meaning
of ‘measures equivalent to expropriation’. As you will remember from module two, this lack of
definition for treaty terms is an issue we have seen in relation to treatment standards. The issue here
is that it is unclear what criteria tribunals should use to determine whether a state measure is an
indirect expropriation.

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We will clarify the definition of an indirect expropriation in order for you to get a better grasp of what
this category entails. Traditionally, the term ‘measure’ has not been defined in provisions on
expropriation and, more generally, in any IIA provisions.

However, as stated by the Tribunal in OI European Group v Venezuela in its 2015 award, it is
well-established that measures constitutive of indirect expropriations relate to any type of
administrative, legislative or judicial acts performed by any of the branches of the State or any
entity whose acts can be attributed to the State.

It is also largely accepted that measures can consist of omissions as well as actions, that they do not
need to benefit the State and that the State’s intent to expropriate is irrelevant.
# For instance, the revocation of decrees or licenses can constitute measures equivalent to
expropriation, as can an excessive taxation increase.

Professor: the investor is deprived of the attributes of the investment, not the direct transfer of the
ownership of the investment.

There exist two sub-categories of indirect expropriation:

1. single measures which have an effect equivalent to expropriation
2. a series of measures which together have an expropriatory effect
This second sub-category of indirect expropriation is known in international investment law and, more
generally, in international law, as ‘creeping expropriation’. You can find a good definition of this sub-
category in this statement of the Tribunal in the case of Generation Ukraine v Ukraine:

‘Creeping expropriation is a form of indirect expropriation with a distinctive temporal quality in

the sense that it encapsulates the situation whereby a series of acts attributable to the State
over a period of time culminate in the expropriatory taking of such property.’

In other words, each measure on its own, although harmful, is insufficient to constitute an indirect
expropriation; however, taken collectively, they become sufficiently significant to constitute an
indirect expropriation.

To help you better understand this idea of a ‘creeping expropriation’, consider this metaphor
used by the Tribunal in the case of Siemens v Argentina:

‘The last step in a creeping expropriation that tilts the balance is similar to the straw that breaks
the camel’s back. The preceding straws may not have had a perceptible effect but are part of
the process that led to the break’.

Chapter 2: The conditions of legality of expropriations

In this chapter, we will focus on the conditions of legality of expropriations as they are stated in
international investment agreements, and as they are interpreted by arbitration tribunals.

In this analysis, we will address questions such as,

 why are States entitled to expropriate?

 What are the precise conditions States must meet in order for their expropriations to be legal,
and

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 which issues do they raise?

In answering these questions, we will look:

1. The distinction between legal and illegal expropriations

2. Analyse three of those conditions of legality: public interest, non discrimination and due
process of law
3. The most controversial of those conditions: compensation

B. Legal and illegal expropriations

As you learnt in module one, international law has not traditionally prohibited expropriations as such;
instead, expropriations have remained legal, provided that they meet certain conditions. In other
words, States have been free to exercise their regulatory power with the view to or simply with the
effect of expropriating foreign investors. This power is a part of their sovereign prerogatives. But for
this to comply with international law and for expropriations to be legal, certain conditions must be
met. States have adopted this approach in their treaty practice, and as such, their IIAs ‘codify’ it.

You should note that the conditions in each IIA are conjunctive rather than disjunctive. As explained
by the Tribunal in the case of Adel A Hamadi Al Tamini v Oman in its 2015 award, this means that in
order for the expropriation to be lawful, all conditions must be satisfied. If one of these conditions is
not met, the expropriation is therefore illegal.

The conditions of legality across the many IIAs are very consistent. Article 7(1) of the 2014 bilateral
investment treaty concluded between Egypt and Mauritius illustrates this consensual treaty practice.
It provides that:

‘Investments of an investor of either Contracting Party in the territory of the other Contracting
Party shall not be subjected to nationalization or expropriation or subjected to any measure
having an effect equivalent to nationalization or expropriation unless the measures are taken
on a non-discriminatory basis, for public purpose, in accordance with due process of law and
against payment of compensation in accordance with this Article.’

=>
i. public purpose
ii. non-discrimination
iii. due process of law
iv. compensation
These are the main conditions of legality of expropriation. Besides these, some agreements add other
conditions. For instance, Article 5(c) of the 1992 bilateral investment treaty concluded between the
Netherlands and Poland requires expropriatory measures not to be contrary to any undertaking given
by the host State.
C. Public interest, non-discrimination and due process of law

5. Public interest

Let’s begin this section by looking at the condition of public purpose. As stated in 2016 by the Tribunal
in the case of Crystallex v Venezuela:

‘States are afforded a wide margin of appreciation in determining whether an expropriation

serves a public purpose’.

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This wide margin is due to the fact that tribunals have considered that it is not their role to second-
guess the appropriateness of measures adopted by the organs of a sovereign state. This is well
illustrated in the 2016 award rendered by the Tribunal in Rusoro Mining v Venezuela.

However, at the same time, this condition of legality still exists, and it cannot be reduced to an ‘empty
shell’. Hence, there must be some limits to States’ discretion, to prevent them from pursuing other
objectives under the false pretext of a public purpose. This explains why arbitration tribunals have
readily held that the public purpose condition was not met, in particular in cases where the State failed
to demonstrate any link between the measure taken and a public purpose. Albeit very rarely, such a
conclusion has been reached by a few tribunals, for instance by the Belokon v Kyrgyz Republic Tribunal
in its 2014 award.

6. Non-discrimination

Let’s move on now to our second condition of legality – the condition of non-discrimination. Non-
discrimination is an important component of IIAs. We have seen its influence in module two, when
discussing the fair and equitable treatment, the national treatment and the most-favoured-nation
treatment standards. So too is this principle important in the conditions of legality of expropriations.

In assessing whether an expropriation is discriminatory, tribunals have often adopted the approach
taken in the case of Saluka v Czech Republic. This approach asks the question of whether similar cases
were treated differently without reasonable justification. You can find a good example of this
approach in the reasoning of the Quiborax v Bolivia Tribunal in its 2015 award. When considering
whether a reasonable justification exists, tribunals have not considered a measure ceases to be
discriminatory merely because it aims to achieve a laudable or necessary goal. However, you should
note that in practice, tribunals have rarely concluded that an expropriation was illegal purely on the
basis that it was discriminatory. In the case of ADC Affiliate v Hungary for instance, they concluded
that the measure was illegal on the additional ground that it did not pursue a public purpose.

7. Due process of law

The third condition of legality discussed in this section is due process of law. The definition of due
process of law adopted by arbitration tribunals is similar to the statement of the Tribunal in the case
of Rusoro v Venezuela:

‘The requirement does not specifically refer to the municipal expropriation law of Venezuela, but
to due process in general, a generic concept to be construed in accordance with international
law. In essence, due process requires (i) that the decision to nationalize be properly adopted,
and that (ii) the expropriated investor have an opportunity to challenge such decision before an
independent and impartial body.’

You should note that, unlike the other conditions of legality, due process of law relates to the
procedure and not to the substance of the expropriatory measure.

D. Compensation

When we talk about compensation as a condition of legality, it is important not to confuse this with
the compensation owed by a host State when it is held internationally responsible for breaching an
expropriation provision. The difference is that compensation as a condition of legality is a part of the
primary obligation which prohibits illegal expropriations. The secondary obligation to pay
compensation, on the other hand, results from the violation of this primary obligation, which is an
internationally wrongful act.

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In module one, you learnt that compensation was a very sensitive issue during the development of
international investment law, and even earlier, when the law of the protections of aliens abroad was
in use. Central to this controversy was the formula expressed in 1938 by the then Secretary of States
of the United States, Cordell Hull - a formula which is now very popular in IIAs. All things being equal,
many IIAs now adopt this Hull formula by stating that, in order to be legal, expropriations must be
promptly, adequately and effectively compensated.

Those agreements go even further by clarifying the standard of compensation:

1. compensation shall be equivalent to the fair market value of the expropriated investment at
the time when the expropriation was publicly announced or immediately before the
expropriation occured, whichever is earlier;
2. compensation shall include interest at a commercial reasonable rate
3. compensation shall be paid without undue delay
4. compensation shall be effectively realizable and freely transferable.
You will find a good illustration of this treaty practice in Article 16 of the 2015 bilateral investment
treaty concluded between Japan and Uruguay.
However, although these IIAs provide some guidance, there still remain unanswered questions. Some
of these issues are very technical in nature – for instance, how should the ‘fair market value’ be
interpreted, or which valuation method should be used to determine the fair market value of an
investment.
In addition, other questions are deeply legal in nature – in particular, whether an expropriation which
meets all the conditions of legality except compensation can be characterized as a legal expropriation.
In this respect, some tribunals have considered that the mere fact that an investor has not received
compensation does not in itself make the expropriation unlawful, as an offer may have been made. In
such a situation, the legality of the expropriation depends on the terms of that offer.
This approach was taken by the Tribunal in the case of Venezuela Holdings v Venezuela, for
example.
However, some arbitrators have gone even further. This is illustrated by the partially dissenting
opinion of Arbitrator Stern in Quiborax v Bolivia, where she argued the following:
‘[An] expropriation, which only lacks fair compensation to be lawful has to be treated as a
potentially lawful expropriation (or a provisionally unlawful expropriation until the tribunal has
awarded the compensation due for the expropriation to be legal): this is so, because, as soon as
the fair compensation needed for a lawful expropriation is granted, the situation has been
reestablished and that condition for a lawful expropriation has been fulfilled.’
On the other hand, some arbitration tribunals have considered that the lack of payment alone is
sufficient for the expropriation to be deemed unlawful.

Chapter 3: The identification of indirect expropriations

In this chapter, we will focus on indirect expropriation, and how this type of expropriation can be
identified. We will ask questions,

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 what does treaty practice teach us about this issue?

 What are the criteria and doctrines used by arbitration tribunals?
 From where do these originate?

In answering these questions, we will focus on:

1. the language of international investment agreements

2. the arbitration practice

A. Language of IIAs

The criteria of indirect expropriation in treaty practice IIAs usually prohibit indirect expropriations
using a number of different formulations. The most common of these formulations are ‘indirect
expropriations’, ‘measures having an effect equivalent to expropriation’, or ‘measures tantamount to
expropriation’. It is widely accepted that these expressions all mean the same thing, in that they give
the same protection to foreign investors against indirect expropriations, including creeping
expropriations.

As you will see, IIAs have traditionally not specified what criteria should be used in determining
whether a measure is an indirect expropriation. This is yet another example of the normative
indeterminacy that has traditionally characterised treaty practice. This vagueness has led arbitration
tribunals to come up with criteria and doctrines in order to determine whether a state measure
constitutes an indirect expropriation.

However, more recently, States have introduced more clarity in their newly concluded agreements,
in order to provide guidelines to arbitrators in applying the provisions on indirect expropriation. In
particular, they have done this by following the bilateral investment treaty model of the United
States, which I will refer to as the US BIT model. This model provides a non-exhaustive list of criteria
to be used by arbitration tribunals; its Annex B(4)(a) reads as follows:

‘The determination of whether an action or series of actions by a Party, in a specific fact

situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that
considers, among other factors:

(i) the economic impact of the government action, although the fact that an action or series
of actions by a Party has an adverse effect on the economic value of an investment,
standing alone, does not establish that an indirect expropriation has occurred;
(ii) the extent to which the government action interferes with distinct, reasonable
investment-backed expectations;
(iii) the character of the government action.’
You should note that these criteria originate from the case-law of the United States Supreme Court,
in particular from the 1978 Penn Central v New York City case, which relates to the Fifth Amendment
to the Constitution protecting the right to property. These criteria, grounded in the domestic and
international practices of the United States, are now influencing many other States in their treaty
practice. You can find a good example of this in Annex 8(A) of the 2016 Comprehensive Economic and
Trade Agreement concluded between the European Union and its member States and Canada. In
fact, this agreement is even more specific than the US BIT model:

(iv) adds the duration of the measure or series of measures

+ character of the government measure = includes their object, context and intent.

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B. The criteria of indirect expropriation in arbitration practice

In order to deal with the vague provisions on indirect expropriation, arbitration tribunals have
originally relied on two doctrines in determining whether a state measure constitutes an indirect
expropriation. These two doctrines are generally seen as conflicting with one another.

Professor: there is no hierarchy between the doctrines.

8. The police powers doctrine

The first of these doctrines is called the ‘police powers’ doctrine and has long been considered a part
of customary international law. This doctrine focuses on the object of the measure in order to
determine its nature. The reasoning behind this approach is that measures which protect a public
interest should not be characterised as an indirect expropriation.

However, you will find that arbitration tribunals have disagreed as to the exact content of this ‘police
powers’ doctrine. The more radical approach suggests that, as a matter of principle, any non-
discriminatory measure which protects a public interest and which is enacted in accordance with due
process does not constitute an indirect expropriation, no matter what its impact is. This was the
approach taken by the Tribunal in the case of Methanex v United States, for example.

On the other hand, other tribunals have embraced a more nuanced approach. For instance, in El Paso
v Argentina, the Tribunal concurred with

‘the decisions which have refused to hold that a general regulation issued by a State and
interfering with the rights of foreign investors can never be considered [as] expropriatory
because it should be analysed as an exercise of the State’s sovereign power or of its police
powers’.

In other words, this more nuanced approach to the doctrine of ‘police powers’ leaves open the
possibility that a non-discriminatory measure constitutes an indirect expropriation even if it is taken
in the exercise of police powers.
Professor: The police power doctrine – if a state measure aims at the protection of public interests, it
is not a discriminatory and respects due process - it is not expropriation and no compensation to be
paid. There are two types of these doctrine:

1) The radical approach - if a state measure aims at the protection of public interests, it is not a
discriminatory and respects due process - it is not expropriation and no compensation to be
paid
2) Nuanced – the starting point is the same one, but if the state measure which pursues the
public interest objective, ND, but IT HAS SEVERE consequences on the investment in terms of
effects – it is indirect expropriation. Compensation may take place. This will not be found in
the current agreements. Severe consequences – the attributes of ownership are not
necessarily affected, there might be a measure, but you still may control the investment. This
means that not every measure is severe. Control or ability of the investment to generate profit
– two ways to assess the consequences.

There is an issue with the radical approach. If the measure is adopted with the due process and ND –
the measure is not an expropriation. The problem is that the criteria used to define the measure as
non-expropriation are also used to define whether the measure is legal or not. The same criteria are
relied on to understand whether the measure is legal. The two categories are somewhat merged then.

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Blurred distinction: is this an expropriation, first, is it legal or not, second. Makes the notion of the
expropriation an empty shell. If you exclude the effects – then the protection is an empty shell.

The only difference is the condition of legality.

Nuanced approach is usually classified as being a part of the PPD. But in opinion of the professor it
should be a proportionality approach and not of the SED. Balance of interest – states need to protect
public interest and there is a risk in investing. But there is one point when the risk should not be
supported by the investor – when it is severe => hence, it is a question of balance of interest and the
question of proportionality, proportionality approach. Sometimes this approach is explicit but
sometimes they do not form it in the sense of proportionality.
International tribunals to decide which doctrine to use refer to the treaties. New generation treaties
have more space to apply new criteria, etc, they are mentioned there usually. If there is nothing in the
treaty – you as an arbitrator has to decide on what is applicable. But in practice you do not need to
directly refer to one of the doctrines.

9. The sole effects doctrine

Moving away from this ‘police powers’ doctrine, we see that other tribunals have relied on another
doctrine: which is known as the ‘sole effects’ doctrine. This doctrine focuses on the effect of a state
measure rather than its object in order to determine whether it constitutes an indirect expropriation.

As with the ‘police powers’ doctrine, tribunals have also disagreed as to the correct approach to be
taken to the ‘sole effects’ doctrine.

The approach adopted by the Tribunal in Metalclad v Mexico has often been seen as the most
radical. In that case, the Tribunal stated that:

‘Thus, expropriation under NAFTA includes not only open, deliberate and acknowledged takings
of property, such as outright seizure or formal or obligatory transfer of title in favour of the host
State, but also covert or incidental interference with the use of property which has the effect of
depriving the owner, in whole or in significant part, of the use or reasonably-to-be expected
economic benefit of property even if not necessarily to the obvious benefit of host State.’

Other tribunals have taken a more nuanced approach to the ‘sole effects’ doctrine. This nuanced
approach provides that, in order to constitute an indirect expropriation, the deprivation of the
economic use and enjoyment of the investment must be no less than radical.

We can find this approach being taken in the decision of the Tribunal in the case of Tecmed v Mexico,
for example.

10. Proportionality approach

Interestingly, in recent years, we can see that an ‘in-between’ approach has emerged.

This new approach takes into account all the circumstances of the case in order to assess whether the
measure constitutes an indirect expropriation, including both its effect and its object.

This approach is known as the ‘proportionality’ approach.

It was first formulated by the Tribunal in Tecmed v Mexico which ‘borrowed’ it from the case-law of
the European Court of Human Rights. In that case, the Tribunal stated:

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‘[I]n addition to the negative financial impact of such actions or measures, the Arbitral Tribunal
will consider, in order to determine if they are to be characterized as expropriatory, whether
such actions or measures are proportional to the public interest presumably protected thereby
and to the protection legally granted to investments, taking into account that the significance
of such impact has a key role upon deciding the proportionality ... There must be a reasonable
relationship of proportionality between the charge or weight imposed to the foreign investor
and the aim sought to be realized by any expropriatory measure.’

Chapter 4: ‘Regulatory measures’ versus ‘expropriatory measures’

In this chapter, we will focus on the key topic of this module three: the divide between ‘regulatory
measures’ and ‘expropriatory measures’. The reason why we will pay attention to this divide is that
it is related to the issue of the right of States to regulate, which constitutes one of the ‘common
threads’ of the MOOC. As you have learnt in our previous modules, international investment law is
highly criticized nowadays because it is seen as preventing States from regulating in order to protect
public interests, for instance, the environment or public health. In particular, the concept of ‘legitimate
expectations’ which we analysed in module two is one of the key sources of this criticism. So too is
‘indirect expropriation’. It is in this context that the distinction between ‘expropriatory measures’ and
‘regulatory measures’ has been promoted, in particular by some arbitration tribunals, in order to
reinforce the regulatory power of host States. But what precisely is the difference between
expropriatory and regulatory measures? What do regulatory measures entail for host States and
foreign investors? What does treaty practice tell us about this divide? These are the main questions
which we will discuss in this chapter. In doing so, we will
1. the divide between ‘regulatory measures’ and ‘expropriatory measures’
2. the practical consequences of this divide
3. newly concluded agreements to see what new features we can find in recent treaty practice

A. The legal appraisal of the ‘regulatory measures’ versus ‘expropriatory measures’ divide

In international investment law, the divide between ‘regulatory measures’ and ‘expropriatory
measures’ has traditionally been promoted in arbitration rather than in treaty practice.

The idea that regulatory measures differ from expropriatory measures was notably formulated by
the Tribunal in the case of Methanex v United States. It stated that:

‘[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 not deemed expropriatory and compensable unless specific commitments had
been given by the regulating government to the then putative foreign investor contemplating
investment that the government would refrain from such regulation.’

As you can see, this approach does not take into account the effect of the measure, even when the
deprivation of the property of the foreign investor is radical.

This approach raises one fundamental contradiction; in order to appreciate this contradiction, you
should recall the conditions of legality for an expropriation which you learnt about in chapter two.

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Indeed, this approach, as stated by the Tribunal in Methanex v Canada, entails that a regulatory
measure which deprives radically an investor of his property need not be compensated when it does
not discriminate, when it pursues a public purpose and when it follows due process.

However, at the same time, the expropriation provisions of international investment agreements tell
us that an expropriatory measure which does not discriminate, which pursues a public purpose and
which follows due process shall in fact be compensated to be legal.

 So what is the difference between these expropriatory and regulatory measures which
justifies that compensation be paid for one and not for the other?
 Does the difference lie in the public interest at stake in each case?
 If so, given the vagueness of these provisions in IIAs, can we expect arbitration tribunals to
engage in the classification of public interests?

You will remember from chapter two that tribunals grant host States a broad margin of appreciation
in characterising their own measures.

In any case, if an arbitration tribunal was to proceed to such a classification of public interests, it is
doubtful that local populations and their representatives would acknowledge this as legitimate.
Professor: what is the difference between the regulatory and expropriatory measure? According to
the professor there is not much difference. Regulatory is almost the same as the radical measure.

B. The practical consequences of the ‘regulatory measures’ versus ‘expropriatory measures’

divide

It is now time for us to analyse the practical and far-reaching consequences of the distinction between
‘regulatory measures’ and ‘expropriatory measures’. The issue is not just the vague criteria with which
we must distinguish expropriatory from regulatory measures – rather, the issue is that it significantly
limits the scope of expropriatory measures.

This is due to the combined effect of two elements which underpin the characterisation of ‘regulatory
measures’:
1. the exclusion of the effect of the measure as a criteria by which to characterise a state measure
2. the use of the object of the measure as a criteria by which to characterise it

This is problematic because the object has traditionally been regarded as a criteria by which to assess
the legality of a measure characterized as an (indirect) expropriation.

Given that virtually all state measures pursue a public interest objective and that States are granted a
very large margin of appreciation in this regard, the divide between ‘regulatory measures’ and
‘expropriatory measures’ gives rise to a radical consequence – meaning, that virtually all measures are
characterised as non-compensable regulations, unless they are discriminatory or are not enacted in
accordance with due process.

As a result, this considerably limits the scope of those measures which can be characterised as
compensable expropriations.

This is very likely why the Tribunal in the case of Pope & Talbot v Canada argued that this approach
creates a ‘gaping loophole in international protections against expropriation’.

C. The ‘regulatory measure’ versus ‘expropriatory measure’ divide in recent treaty practice

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Many of the newer agreements concluded by States which address the right of the States to regulate
with regards to indirect expropriation adopt a careful approach regarding the divide between
‘regulatory measures’ and ‘expropriatory measures’. A good example of this cautious approach can
be found in the bilateral investment treaty Model of the United States, which was the first one to
single out non-compensable regulatory measures. This provides that:

‘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.’

This provision embodies a nuanced approach in the sense that it creates an exception to the rule
according to which non-discriminatory regulatory actions aiming to protect a legitimate public welfare
objective shall not be characterised as indirect expropriations.

Article 8(A)(3) of the 2016 Comprehensive Economic and Trade Agreement concluded by the
European Union and its member States and Canada, which is based on that Model, gives some
clarification to the notion of ‘rare circumstances’ referred to in that Model BIT. It mentions those
circumstances where the impact of a measure or series of measures is so severe in light of its purpose
that it appears manifestly excessive. In fact, this ‘exception to the exception’ allows us to consider the
effect of the measure as a criteria in characterising the measure as an indirect expropriation.

For the sake of completeness, you should also note that a few newly concluded agreements do not
provide for this ‘exception to the exception’.

For instance, Article 5(5) of the 2015 bilateral investment treaty Model of India provides that:

‘Non-discriminatory regulatory measures by a Party or measures or awards by judicial bodies of

a Party that are designed and applied to protect legitimate public interest or public purpose
objectives such as public health, safety and the environment shall not constitute expropriation
under this Article.’

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Module 4: Investor-state arbitration: institutional and procedural

aspects

Chapter 1: The features of the settlement of investor-state disputes

Section 1: The definition of investor-state disputes
Section 2: The methods to settle investor-state disputes
Section 3: The institutional and procedural features of investor-state arbitration
Chapter 2 : The jurisdiction of arbitration tribunals
Section 1: The notion of ‘jurisdiction’
Section 2: The condition ratione materiae
Section 3: The condition ratione personae
Section 4: The condition ratione voluntatis
Chapter 3: Focus: from 'confidentiality' to 'transparency' in investor-
state arbitration
Section 1: The evolution of investor-state disputes
Section 2: The evolution of arbitration proceedings
Chapter 4: Provisional measures
Section 1: The legal basis under the ICSID rules of arbitration
Section 2: Which rights can be preserved and under which conditions?
Section 4: Procedural aspects
Chapter 5: Annulment proceedings
Section 1: The definition and purpose of annulment proceedings
Section 2: Manifest excess of power
Section 3: The serious departure from a fundamental rule of procedure
Section 4: The failure to state the reasons on which the award is based

In the previous modules, we have analysed

 the main treatment standards contained in international investment agreements

 as well as their provisions on expropriation.

In this module and also in the next module,

 we will discuss how disputes are settled when a foreign investor alleges a host State has
breached an international investment agreement, with a focus on arbitration.
 We will refer to those disputes as investor-state disputes and to arbitration as investor-state
arbitration.
More specifically, we will focus on investor-state arbitration governed by
o the 1965 Convention on the settlement of investment disputes between States and
nationals of other States, which I will shorten to the ICSID Convention,
o and its Rules of procedure for arbitration proceedings.
We will refer to these instruments which govern what is called ICSID Convention arbitration
proceedings as the ICSID rules of arbitration.

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Module four aims at shedding light on the institutional and procedural features of investor-state
arbitration. You will learn about the main features and stages of arbitration proceedings.

Chapters:

1. the distinctive characteristics of arbitration compared to other methods of dispute settlement

as well as with the main features of the ICSID.
2. the conditions which must be fulfilled in order for an arbitration tribunal to have jurisdiction to
settle an investor-state dispute.
3. the move from confidentiality to transparency in investor-state arbitration proceedings.
4. arbitration tribunals can, subject to certain conditions, grant provisional measures.
5. awards rendered by ICSID arbitration tribunals can be annulled, or partly annulled, by
annulment committees on the basis of a limited number of grounds.

Chapter 1: The features of the settlement of investor-state disputes

In this chapter, you will gain an insight into the main features of how investor-state disputes are
settled.

We will address questions, such as,

 what is precisely a dispute between a foreign investor and a host State?

 How are they settled and where?
 What are the main characteristics of investor-state arbitration?

In order to answer these questions, we will:

1. define the notion of ‘investor-state dispute’

2. review the methods by which these disputes can be settled
3. introduce some of the main institutional and procedural features of arbitration, in particular
with regards to the International Centre for Settlement of Investment Disputes, which I will
shorten to ICSID.

A. The definition of ‘investor-state disputes’

In international law, a dispute has traditionally been defined as a ‘disagreement on a point of law or
fact, a conflict of legal views or of interests between two persons’.

This definition was provided by the Permanent Court of International Justice in the 1924
Mavrommatis Palestine concessions case, and is often referred to by arbitration tribunals, for
example in the 2016 award rendered by the Tribunal in Crystallex v Venezuela.

As for investor-state disputes, they arise most notably in two situations:

1. a ‘contract claim’ = where it is alleged by a foreign investor that a State violated the contract
they concluded;
2. a ‘treaty claim’ = where it is alleged by a foreign investor that a host State violated the
international investment agreement it concluded with its home State.

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The focus of this module and of the next module will be on ‘treaty claims’. When talking about these
‘treaty claims’, you should know that it may be possible for the host State to bring a counterclaim
against the claimant investor, depending on the language of the treaty.

However, in this module, we will not focus on those counterclaims – rather, we will focus on the
claims of foreign investors regarding the alleged violation of international investment agreements by
host States.

B. The methods to settle investor-state disputes.

As you remember from module one, originally, disputes between foreigners and their host States
were mainly settled:

1. either by the domestic courts of those States

 were criticized due to their lack of objectivity – meaning they tinged the dispute with
undue political considerations =>
 were seen as being biased towards their host States

2. through diplomatic protection

1) required the foreigners’ State of nationality to endorse their claim, transforming these
disputes into inter-state disputes between the home and the host States
2) was also criticized due to their lack of objectivity – meaning they tinged the dispute with
undue political considerations =>
3) the discretion that States had to choose whether to exercise diplomatic protection was seen
as a door through which political considerations could enter
4) the fact that under diplomatic protection any compensation owed is paid to the States,
which are not obliged to then transfer it to their nationals, was obviously seen as a major
drawback of diplomatic protection

This explains why arbitration has emerged as the preferred method to settle investor-state disputes,
 first in contracts concluded between foreign investors and host States and
 then later in international investment agreements.

Arbitration has been seen as a tool to depoliticize the settlement of these disputes.

Arbitration is a legal, as opposed to a political, method of dispute settlement.

→ This means notably that disputes are settled by third parties, usually according to law, with
their decisions being binding upon the parties to the dispute.

However, it is interesting to note that arbitration is today highly criticized.

One core reason for this are the public interest considerations with which arbitrators must deal, and
the fact that these arbitrators are said to lack the legitimacy to rule over such public interests.

 This explains why many are calling not only for the reform of arbitration, but for its
substitution with an entirely different method of dispute settlement.

Depending on the circumstances, other methods than arbitration can already be used to settle
investor-state disputes, in particular, mediation and conciliation.

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These two methods are political in nature, and their output is not binding on the parties to the
dispute. Mediation and conciliation differ with regards to the role played by the third party in assisting
the disputing parties in the settlement of their disputes.

C. The institutional and procedural features of investor-state arbitration.

You have learnt in section two that arbitration is a legal method of dispute settlement.

The main difference between arbitration and the other legal method of dispute settlement, meaning
permanent courts, is:

- the command that disputing parties retain over the settlement of the dispute: the parties can
choose the procedure to be followed, the law applicable to the settlement of the dispute, and
the arbitrators who will settle it.

As we will discuss in module six, the fact that arbitrators are appointed by the parties to the dispute
is one of the reason why some want to replace arbitration with a court system.

 This control the disputing parties have over the settlement of the dispute, which is a typical
feature of arbitration, entails that arbitration is by nature ad hoc.
 This means that a new tribunal is set up for every new dispute.

However, this does not mean that arbitration tribunals operate in a vacuum.

Many tribunals are assisted by administrative centres which play a fundamental role in ensuring their
efficient functioning. They can play this role because a great number of international investment
agreements allow investor-state disputes to be submitted to one or several of these centres. Among
these centres, we can mention in particular:

1. the ICSID which is based in Washington,

2. the Permanent Court of Arbitration which is located in The Hague,
3. the Stockholm Chamber of Commerce.

The range of services those administrative centres can provide varies.

→ All of them provide at least legal, technical and logistical support.

The ICSID also sets out arbitration rules which regulate the different stages and aspects of the
proceedings. You should note that the ICSID also administers proceedings in accordance with other
rules,

→ such as the rules of arbitration of the United Nations Commission on International Trade
Law, which I will refer to as the UNCITRAL arbitration rules.

Today most investor-state disputes are settled under the ICSID’s rules of arbitration.

→ More precisely, they are settled according to the 1965 ICSID Convention and the ICSID
Rules of procedure for arbitration proceedings.

These govern what is called ICSID Convention arbitration proceedings. These proceedings are open
to disputes arising between an investor who is a national of a State party to the ICSID Convention and
a host State which is also a party to this Convention.

Those ICSID Convention arbitration proceedings are to be distinguished from the ICSID Additional
Facility arbitration proceedings.

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Those ICSID Convention arbitration proceedings are to be distinguished from the ICSID Additional
Facility arbitration proceedings.

This second type of proceedings are governed by the ICSID Additional facility rules and the ICSID
Arbitration (Additional facility rules).

Those proceedings were created in 1978, and are available for disputes between a State and a foreign
investor, where either the host State or the State of nationality is not a party to the ICSID Convention.
Due to the prevalence of ICSID Convention arbitration proceedings, we will focus on them in this
module and in module five.

We will refer to both the 1965 ICSID Convention and the ICSID Rules of procedure for arbitration
proceedings which govern them collectively as the ICSID rules of arbitration.

Important features of the ICSID rules of arbitration:

1. where proceedings are conducted under the ICSID rules of arbitration, this excludes the use
of diplomatic protection, unless the host State party to the dispute fails to honor the award.
2. The ICSID rules of arbitration obliges State parties to the Convention to recognize and enforce
its awards. This prevents foreign investors from having to request the recognition of the award
in the State where they want to enforce it.

Chapter 2: The jurisdiction of arbitration tribunals

In this chapter, we will focus on the jurisdiction of arbitration tribunals.

In order for tribunals to have jurisdiction to decide investor-state disputes, conditions must first be
met.

The conditions traditionally discussed in arbitration practice are referred to in Latin as:
1. ratione materiae,
2. ratione personae,
3. ratione temporis,
4. ratione voluntatis.

In this chapter, we will:

1. explore what these Latin expression mean, and what the notion of jurisdiction entails
2. examine the role the ICSID Convention plays in relation to issues of jurisdiction

In order to answer these questions, we will:

1. shed some light on the notion of jurisdiction

2. analyse three of the conditions required for a tribunal to have jurisdiction: rationae materiae
in section two, ratione personae in section three, and ratione voluntatis in section four.

At the outset, you should bear in mind that the conditions ratione materiae and ratione personae are
very much intertwined.

But for didactic purposes, it is worth analysing them separately here.

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A. The notion of ‘jurisdiction’

You learnt that private persons cannot avail of the substantial protection under international
investment agreements, such as the protection against illegal expropriation, unless certain conditions
have been met.

These are mainly the three conditions:

1. ratione personae - they must be ‘investors’ as defined in the agreements

2. ratione materiae - they must have an ‘investment’ as defined in the agreements
3. ratione temporis - these agreements must be applicable from a temporal perspective.

When establishing the jurisdiction of an arbitration tribunal, these same three conditions ratione
personae, materiae and temporis must, all things being equal, be met. However, in addition to those
three conditions, another condition must also be met –

4. that of ratione voluntatis - requires the parties to the dispute, meaning the foreign investor and
the host State, to have given their consent to the jurisdiction of the tribunal.

For a tribunal to have jurisdiction to hear and decide a dispute, all four of these conditions must be
met.

→ If one of them is not met, the tribunal must decline jurisdiction.

As for the arbitration proceedings governed by the ICSID rules of arbitration, on which this MOOC
focuses, whether or not these conditions have been met must be assessed not only in light of the
international investment agreement applicable, but also in light of the ICSID Convention.

→ In this respect, its Article 25 reads 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 the State) and a national of another Contracting
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.’

We can better understand this relationship between international investment agreements and the
ICSID Convention as regards jurisdiction, by referring to the 2017 decision of the Tribunal in Vladislav
Kim v Uzbekistan, where it stated that:

‘For jurisdiction to be established, the claim must pass both through the institutional
jurisdictional keyhole set forth in Article 25 as well as the specific jurisdictional keyhole defined
in the BIT’.

It is important that you do not confuse the notion of ‘jurisdiction’ with the notion of ‘admissibility’.

The notion of admissibility means that even were a tribunal has jurisdiction to decide an investor-state
dispute, certain features of the claim itself may nevertheless lead the tribunal to dismiss it.

This is well-illustrated by the ‘umbrella clause’ claims which we discussed in module two.

→ You remember that I explained that some tribunals, after having established their jurisdiction over
those claims, considered that they were inadmissible because the contract at stake contained an
exclusive forum selection clause.

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→ As it appears and as is explained by the Tribunal in the case of Hochtief v Argentina,

 ‘admissibility’ is an attribute of a claim but not of a tribunal;

 on the contrary, ‘jurisdiction’ is an attribute of a tribunal and not of a claim.

Professor: What is it based on?

 BIT – 90% consent can be found here – parties to a treaty say mut. mut. we give consent that
all disputes arising in relation to an investment or any violation of BIT
 Contracts b/w HS/I – consent to the jurisdiction of an arbitration tribunal in relation to all
disputes that will arise in the future
 Domestic investment law statutes – many states in Africa – confers rights to foreign investors,
including procedural rights

The offer to arbitrate is in BIT:

States offer to settle the disputes to an arbitration tribunal. In most treaties you will find a pre-
condition to arbitration. They can be submitted to arbitration, but certain conditions have to be
fulfilled. In all treaties you will find consultations. In some treaties, an obligation to go to domestic
courts in some states. Usually 3, 6 months. BIT India – 5 years for the exhaustion of local remedies.

Once the conditions have been complied with, a dispute can be submitted to arbitration.

The period of time is very short – what can a tribunal can do in 6 months, not enough to settle a
dispute. So some tribunals do not pay attention at this requirement and some say no you still need to
go, we are not here to judge on the effectiveness of national judicial systems. Tribunals split here in
practice.

B. The condition ratione materiae

For the condition ratione materiae to be met, the dispute must relate to an investment as it is defined
in the international investment agreement at hand. International investment agreements have
traditionally provided for a very broad definition of the term ‘investment’. They often refer to ‘every
kind of asset’ and mention a non-exhaustive list including

1. ‘movable and immovable property’,

2. ‘shares in and stock and debentures of a company and any other form of participation in a
company’,
3. ‘claims to money or to any performance under contract having a financial value’.

→ You can find a good illustration of this broad approach in the 1989 bilateral investment treaty
concluded between the United Kingdom and Ghana.

Turning to Article 25 of the ICSID Convention, you should note that it does not provide any definition
of the term ‘investment’. This is due to the fact that the representatives of the States that negotiated
the Convention found it unnecessary to do so.

‘Jurisdiction of the center: Article 25

(1) 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, 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.

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(2) “National of another Contracting State” means:

(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 consented to submit such dispute to
conciliation or arbitration as well as on the date on which the request was registered
pursuant 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 Contracting State party to
the dispute; and

(b) 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 agreed should be treated as a national of another Contracting State for
the purposes of this Convention.

(3) Consent by a constituent subdivision or agency of a Contracting State shall require the
approval of that State unless that State notifies the Centre that no such approval is required.

(4) Any Contracting State may, at the time of ratification, acceptance or approval of this
Convention or at any time thereafter, notify the Centre of the class or classes of disputes which
it would or would not consider submitting to the jurisdiction of the Centre. The Secretary General
shall forthwith transmit such notification to all Contracting States. Such notification shall not
constitute the consent required by paragraph (1)’.

However, arbitration practice reveals that some tribunals have argued that this provision introduces
objective criteria as to the jurisdiction of the Centre.

→ In this respect, the Salini v Morocco Tribunal set out the following criteria in determining what
constitutes an ‘investment’:
1. contributions,
2. the duration of the operation,
3. the economic risk,
4. the contribution to the economic development of the host State.

Nowadays, there is a large consensus among arbitration tribunals in support of the view that the
contribution to the economic development of the host State
 is difficult to evaluate and
 that it is not an autonomous criteria.

As such, they view contribution to economic development as being covered by the first three
criteria.

More generally, there is also a large consensus according to which those criteria must be considered
flexibly as a whole.

 This was for instance explained in 2016 by the Tribunal appointed in MNSS v
Montenegro:

‘The Tribunal considers that, for the purposes of ascertaining the meaning of the term
“investment” in Article 25 of the ICSID Convention, the elements of the Salini test need to be
considered flexibly and as a whole in the context of the specific facts of an investment operation.

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The elements of a contribution for certain duration with the assumption of certain risk seem to
be inherent to the plain meaning of the term “investment.” To borrow the more precise wording
of the tribunal in Poštová Banka v. Greece, it can be said that an investment is “a contribution
to an economic venture of a certain duration implying an operational risk ….” How much
contribution or risk and for how long will depend on the circumstances of the case.

As to the element of a contribution to economic development, in most cases it would be difficult

for a tribunal to ascertain whether such contribution has been made; in particular when the
dispute arises shortly after the investment has been made and the effects on the development
of the host State may be imperceptible. Moreover, the Tribunal agrees with the analysis
presented by the tribunal in Phoenix v. Czech Republic, when it stated:

“It is the Tribunal’s view that the contribution of an international investment to the development
of the host State is impossible to ascertain – the more so as there are highly diverging views on
what constitutes ‘development.’ A less ambitious approach should therefore be adopted,
centered on the contribution of an international investment to the economy of the host State,
which is indeed normally inherent in the mere concept of investment as shaped by the elements
of contribution/duration/risk, and should therefore in principle be presumed.’

Professor: The legality requirement is incorporated in the definition of the investment. What does it
entail that it is in the definition of the investment? Legality – investor has to make the investment in
conformity with the national law and depending on the definition also with the IL.

If investment is made in violation of the domestic law then => it is not an investment and it is not
protected under the treaty. The tribunal has no jurisdiction. #investment through corruption

 Even if there is no legality requirement in the treaty still there is an obligation.

Only a few international agreements say that the legality requirement has to be complied with in the
course of the investment. Only a few.

C. The condition ratione personae

For private persons to be considered investors, they must have an investment.

This links it with the condition ratione materiae, which we discussed in section two.

Another issue which is central to the condition ratione personae is the issue of nationality. Private
persons, be they natural or juridical persons, must have the nationality of one of the State parties to
the international investment agreement in question. This requirement becomes particularly
problematic when applied to juridical persons. This is due to the fact:
1. the nationality of corporations is determined by reference to a range of diverse criteria, for
example, the place of registration or the head of office;
2. the difficulty in identifying the link between the investment and the claimant in certain
situations. This is especially true for those multinational corporations which have a complex
corporate structure.
In the latter respect, you should note that some tribunals have declared claims inadmissible, as an
abuse of process, where there had been a change in the corporate structure in order to gain the
protection of an international investment agreement where they foresaw the existence of a dispute.
A recent example of this is the 2016 decision reached by the tribunal in Philip Morris v Australia.

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As for the ICSID Convention, you should be aware that Article 25 provides that natural and juridical
persons cannot have the nationality of the contracting State party to the dispute. However, an
exception to this is where the parties have agreed that the juridical person should be treated as a
national of another contracting State due to foreign control.

D. Consent to arbitration

Consent is a key principle in international adjudication. This means that no international court or
tribunal has jurisdiction to decide a dispute unless the disputing parties have given their consent. In
your domestic legal systems, there is no need for such a consent; rather, tribunals have an ‘automatic’
jurisdiction over disputes. This requirement for a consent applies to investor-state arbitration. Both
host States and foreign investors must consent to the jurisdiction of arbitration tribunals.

As for host States, their consent is typically established on the basis of the international investment
agreements to which they are a party. More precisely, their consent is established on the basis of the
open offer they give in the agreements to arbitrate a set of future disputes. This consent of States
‘meets’ the foreign investors’ consent when the latter file their request for arbitration. The result is
that the expression of consent to arbitrate by the disputing parties is separated in investor-state
arbitration.

With regards to how States express their consent to arbitrate, you should note that this expression
differs across international investment agreements, in particular with regards to the scope of consent.
In most agreements, State parties express a broad consent. This is well illustrated by the 2002 bilateral
investment treaty concluded between Spain and Bosnia and Herzegovina, which refers to

‘disputes that may arise between one of the Contracting Parties and an investor of the other
Contracting Party with regard to an investment in the sense of the present Agreement’.

However, in some treaties, the scope of consent is narrowed down. For example, China has
traditionally limited its consent to arbitration to disputes involving the amount of compensation for
expropriation, as illustrated by its 1993 bilateral investment treaty concluded with Croatia.

You should also make note of the disagreements in arbitration practice as regards the nature of some
conditions set out in such agreements, for example the domestic litigation requirement. Some have
regarded the domestic litigation requirement:

 as a pre-condition to consent, which would make it a jurisdictional requirement

 the approach of the Tribunal in the case of Daimler v Argentina

On the other hand, some tribunals have viewed it:

 as merely a procedural requirement, which would make it an issue of admissibility

 the approach of the Tribunal in the case of Ickale v Turkmenistan

Chapter 3: Focus: from 'confidentiality' to 'transparency' in investor-state

arbitration

In this new chapter, we will devote our attention to a topic which will form the focus of module four
– the move from ‘confidentiality’ towards ‘transparency’ in investor-state arbitration.

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The reason we will pay such attention to this evolution is because it is related to the issue of the
legitimacy of arbitration tribunals.

Arbitration proceedings are often criticised for being too confidential, in particular when we consider
how these tribunals are tasked with making decisions that relate to public interest considerations.

However, over the past two decades, we can see various initiatives being put in place to make these
proceedings more transparent.

In this chapter, we will analyse questions such as, what are the distinctive features of these new
initiatives, and what are the old features of arbitration they are displacing? Which evolutions have
triggered those initiatives? In order to answer these questions, we will:

1. focus on the evolution of investor-state disputes

2. devote our attention to analyse the evolution of arbitration proceedings

A. The evolution of investor-state disputes

When you think back to module one, you will remember how foreign investors and host States started
to conclude ‘State contracts’ towards the start of the 20th century in order to regulate specific
operations.

Those contracts served notably to establish the jurisdiction of arbitration tribunals. The disputes they
had to decide often related to public interest considerations, but the number of disputes were still
scarce as they concerned a very limited number of contractual operations.

The situation changed towards the end of the 1980s, as a result of two landmark decisions:

1. SPP v Egypt - the consent of the host State to arbitration could be established on the basis of
the domestic law of Egypt;
2. AAPL v Sri Lanka - the consent of the host State to arbitration could be established on the
basis of the international investment agreement between the United Kingdom and Sri Lanka.
It is important that you realize the consequences of these decisions which are now largely accepted
in practice. They have meant that the conclusion of a contract between the investor and the host State
is no longer a prerequisite to the initiation of arbitration proceedings.

→ As for the AAPL v Sri Lanka decision, this entails that all the private persons to whom
international investment agreements are applicable can rely on their dispute settlement
provisions within which the consent of the host State to arbitrate is contained, provided the
jurisdictional conditions that we discussed in chapter two are satisfied.

In addition, this also means that those private persons can challenge the legality of any state
measure which is allegedly in breach of these agreements. And, as we know, those measures
are often tinged with public interest considerations. => the number of private persons and the
type of measures which are now ‘in the sphere’ of investor-state arbitration has increased
significantly in the aftermath of the AAPL v Sri Lanka revolution.
The effect of this revolution has been multiplied by the growing treaty practice in the field of
international investment law.
The first international investment agreement was concluded in 1959 between Germany and
Pakistan; today 2671 such agreements are in force.

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This means that under the great majority of those 2671 agreements, the private persons to whom
they are applicable can directly initiate proceedings, in accordance with the conditions that these
agreements set out, in order to challenge the legality of any state measure that they consider breaches
of those agreements.

All of this contributes to explain why the number of investor-state disputes has drastically
increased,

 one dispute registered by the ICSID in 1972

 48 in 2016,
o with a total of 597 disputes registered since the creation of the Centre.
All in all, the past few decades have given rise to an important change as regards public interest
considerations. Of course, it has always been the case that the measures which are challenged in
investor-state disputes are tinged with these public interest considerations. On the other hand, the
change which has taken place is a quantitative one – the number of measures challenged and, as a
result, the number of disputes settled by arbitration tribunals has multiplied.

However, you should not infer from this that States can no longer regulate freely under international
investment law. First of all, this is due to the fact that the findings of arbitration tribunals cannot be
equated with the claims of foreign investors. Second of all, the way that most arbitration tribunals
have notably applied the fair and equitable treatment and indirect expropriation provisions has not
annihilated the right of States to regulate. Nonetheless, of course, the possibility given to foreign
investors to initiate proceedings can be seen as a ‘Sword of Damocles’ which has a ‘chilling effect’ on
host States, causing them to refrain from regulating in order to avoid such costly challenges. In this
respect, it is crucial that host State authorities acquire a better knowledge of arbitration practice: this
would help them to realize that often the measures that they contemplate are in conformity with
international investment agreements.

That being said, the fact that arbitration tribunals are so often called to rule over the legality of state
measures tinged with public interest considerations raises for many an issue of legitimacy. The
criticism of investor-state arbitration in this respect has recently led some stakeholders to call for the
replacement of arbitration. However, so far we have seen only reforms of existing arbitration
proceedings aiming to increase transparency and ultimately to reinforce the legitimacy of arbitration
tribunals.

B. The evolution of arbitration proceedings

Initially investor-state arbitration was very similar to commercial arbitration.

In addition to the traditional features of arbitration explained in chapter one, something they also
had in common was the confidentiality of the proceedings. This confidentiality applied to both the
process and its output.

The process, meaning the written and the oral phases, was kept confidential notably in the sense that
no document or memorial was made available to the public; in the same vein, the hearings took place
beyond closed doors. The output of the proceedings, meaning the final award, was not released.

Such a degree of confidentiality is not criticized in commercial arbitration; in fact, it is seen as

normal that disputes relating to commercial transactions between private persons be kept
secret.

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In international investment law, however, such a level of confidentiality has been debated and
criticised due to the fact that one party to the dispute is a State acting as a sovereign and because the
measure at stake is tinged with public interest considerations.

Many have viewed this level of confidentiality as unacceptable, in particular when the number of
investor-state disputes and the awareness of local populations of these disputes have increased. This
contributes to explain why the rules of arbitration have been revised since the 2000s in order to make
arbitration proceedings more transparent.

→ This is well illustrated by the 2006 revision of the Rules of procedure for arbitration
proceedings of the International Centre for Settlement of Investment Disputes, which I will
refer to as the ICSID Rules of procedure for arbitration proceedings for short.

Particular features of this evolution are:

1. the briefing of amicus curiae,

2. the opening of hearings
3. the publication of awards.

As for amicus curiae, arbitration tribunals can now, after consultation of the parties, allow a person
or an entity to file a written submission with the tribunal regarding a matter within the scope of the
dispute.

Rule 37 of the ICSID Rules of procedure for arbitration proceedings provides a non-exhaustive list of
the elements that tribunals shall take into account in making the decision to grant or not this
authorisation, including:

1. the extent to which the non-disputing party has a significant interest in the proceeding,
2. the extent to which they would address a matter within the scope of the dispute,
3. the extent to which they would assist the tribunal in the determination of a factual or legal issue
by bringing a perspective,
4. a particular knowledge or an insight that is different from that of the disputing parties.

As a result of this evolution, non-governmental organisations and international organisations have

since been active in filing such amicus curiae. For instance, the World Health Organisation did so in
the case of Philip Morris v Uruguay in which Philip Morris challenged the legality of a plain packaging
regulation adopted by Uruguay.

Professor: Amicus curiae – to bring an input as to the law or as to the facts. A dispute – is a conflict of
views on both facts and law.

The distinction between the law and the facts is important. Parties cannot oppose them. But usually
tribunals accept a.c. related to facts. In the Ph.Mor. case the court accepted an a.c. from the WHO.
But reluctant to accept the a.c. related to law, especially from law professors. The following reasons
exist: 1) arbitrators already have the necessary expertise; 2) it is the job of a counsel to plead a certain
position.
A.c. is different from an opportunity left to MS parties to a treaty who are not parties to the dispute
to intervene. A.c. – non-party to a dispute and non-party to a treaty. No interest for these third parties
is required! They are assumed to have interest as parties to a treaty.

A.c. – to the contrary has to demonstrate has an interest in the settlement.

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#NAFTA – an example of an intervention of a third party to a dispute but treaty party. NAFTA will be
terminated btw. A different name will be used.

You have to disclose if you have any links to the parties to a dispute.

Up to the tribunal to decide how much importance these submissions have.

If the intervention of a third party is considered to be unfair (for instance, because a third party
supports the interests of one of the parties), then a tribunal can refuse their participation. The
question of whether their participation is burdensome.

A third party can be any entity. How can they learn there is a dispute?

1. Publications – ISCID – an obligation to make public the information about the dispute =>
publication on the website
2. Some of these cases are of great interest to the general public => people follow them

The publication of awards is prohibited by ISCID but nevertheless they get published somehow.

Concerning the hearings themselves,

 the tribunal can, after consultation with the Secretary General, allow any person not
involved in the proceedings to attend or observe all or part of the hearings, provided
neither party objects to this.
 In such a case, the tribunal shall establish procedures for the protection of proprietary or
privileged information. For instance, in BSG v Guinea, the hearings on jurisdiction and
merits were open to the public via webcast from the 22nd of May 2017 to the 2nd of June
2017.
Finally, as for the awards, the Rules of procedure for arbitration proceedings provide that the ICSID
shall not publish them without the consent of the disputing parties. However, even if the parties
oppose the publication, the ICSID shall promptly publish excerpts of the legal reasoning of arbitration
tribunals.
This evolution, initiated in the 1984 amendment of the Rules, introduces an element of transparency
in that it helps us to understand how these tribunals decide whether state measures conform with the
relevant international investment agreements. As we will discuss in module five, it is also crucial for
the formation of what is called ‘jurisprudences constantes’.

In addition to the 2006 revision of the ICSID Rules of procedure for arbitration proceedings, we can
also refer to the 2013 Rules on transparency in treaty-based investor-state arbitration prepared by
the United Nations Commission on International Trade Law. This instrument contains a set of rules
that provide transparency and accessibility to the public in investor-state arbitration.

Professor: Document protection, publication of awards, participation of non-disputing parties in the

proceedings (including the possibility of attending the hearings) – transparency increase.

Revised in 2016, now there is an ongoing revision – should be enforced in a year. A new
revision goes more into transparency matters.

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Chapter 4: Provisional measures

In this chapter, we will focus on the issue of provisional measures. Provisional measures can be
requested under several arbitration rules, notably the rules of arbitration of the United Nations
Commission on International Trade Law, which I will shorten to the UNCITRAL rules of arbitration,
and also the rules of arbitration of the International Centre for Settlement of Investment Disputes,
which I will shorten to the ICSID rules of arbitration. We will use this chapter to focus on what these
rules say about provisional measures. What are those measures, and what do they aim at? What
conditions must be met in order to request a provisional measure, and following which procedure?
We will begin our discussion by:

1. shedding light on the legal basis of provisional measures under the ICSID rules of arbitration
2. analyzing the rights that can be preserved through provisional measures and the conditions
upon which they can be granted
3. addressing procedural issues

A. The legal basis under the ICSID rules of arbitration

Provisional measures are dealt with in Article 47 of the ICSID Convention and Rule 39 of the ICSID
Rules of procedure for arbitration proceedings. These two provisions provide clear information about
the procedural aspects of provisional measures.

On the other hand, and contrary to the 2010 version of the UNCITRAL rules of arbitration, they do
not define what is meant by provisional measures and they offer little guidance to parties and
arbitrators as to the conditions which must be fulfilled in order to grant them. Article 47 of the ICSID
Convention simply provides that the tribunal may recommend provisional measures to preserve the
respective rights of either party if it considers that the circumstances so require. Rule 39 of the ICSID
Rules of procedure for arbitration proceedings does not add anything to this: it merely states that a
party may request the tribunal to recommend provisional measures for the preservation of its rights.
This leaves two questions unanswered: what are the rights that can be preserved and what are the
conditions upon which provisional measures can be granted?
Professor: #The home state puts in jail the investor – what happens with the proceedings? The
question on provisional measures. The proceedings cannot continue without the investor – a violation
of fundamental rights.

It has happened in such cases that and Arbitration Tribunal has asked a HS to postpone the criminal
proceedings in the HS. Very cautious not to intervene too much. So provisional measures come from
the arbitration tribunals.
Language versions are different, so the question is to which extent the provisional measure is binding
on MS. 99% of arbitrators consider it is binding despite the provision being phrased as recommend.

B. Which rights can be preserved and under which conditions?

There now exists a consensus among arbitration tribunals that both substantive and procedural rights
can be preserved using provisional measures.

In this context, substantive rights refer to the rights which form the subject matter of the dispute or
of the main claim, while procedural rights relate to the ability of the claimant to have his claim fairly
considered and decided by the tribunal, as stated in 2016 by the Tribunal in Teinver v Argentina. These
procedural rights include the right to status quo or the right to the non-aggravation of the dispute.

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Such procedural rights have been at stake most notably in relation to criminal proceedings engaged
by host States against foreign investors.

It is unanimously accepted that provisional measures can be granted only in exceptional

circumstances. In this respect, arbitration tribunals have required that the measures requested be
necessary, urgent and proportional. These three considerations are often merged in the tribunals’
analyses.

In addition, tribunals have required their prima facie jurisdiction to be established.

 Necessity

Let’s discuss these conditions in more detail, beginning with necessity. As explained in 2016 by the
Tribunal in the case of United Utilities v Estonia, the condition of necessity requires the tribunals to
investigate the nature and extent of the harm that may occur if the provisional measure is not granted.
This assessment of necessity raises two issues which relate:

1. the nature of the harm

2. the occurrence of the harm
As to the occurrence of the harm, all tribunals have agreed that the applicant does not need to prove
that the harm would be a certainty.
Concerning the nature of the harm, we can see from the practice that tribunals have adopted different
terminology and, more importantly, diverging standards. The three different standards applied by
tribunals in this regard are:

1. ‘irreparable harm’
2. ‘serious harm’
3. ‘significant harm’

At the core of this divergence is the issue of whether the standard to be applied should limit necessity
to include only harm which cannot adequately be repaired by an award of damages.

 Urgency

Let’s move now to the second requirement set out in arbitration practice: urgency. Tribunals have
generally agreed that this requirement is satisfied as long as the claimant can show that the measure
she requests must be obtained before the issuance of the award. Aside from the issue of how this
principle should be formulated, tribunals have agreed that urgency should be assessed on the basis of
the facts of the case – in particular, the type of measure sought by the applicant.
In this respect, there is also a consensus that where certain rights are being threatened, the measures
are inherently urgent. As explained by the Tribunal appointed in the case of Teinver v Argentina in its
2016 decision, this applies most notably when the integrity of the proceedings is at stake.

 Proportionality

We can now move to the third requirement for provisional measures – that of proportionality. In
order to assess proportionality, arbitration tribunals have balanced the harm which would be caused
to the claimant if the measure is not granted with the harm the measure would cause to the
respondent if it is granted. Again, arbitration practice has shown that this inquiry depends very much
on the facts of each case.

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A good illustration of this factual inquiry can be seen in the decision in the case of Hydro v Albania,
which related to criminal proceedings engaged against foreign investors by a host State. In that case,
the provisional measure related to the possibility of incarceration, and the Tribunal considered that a
stay of the proceedings would allow the claimant to participate in the arbitration, without putting an
end to proceedings.

 Prima facie jurisdiction

Let’s finally consider the fourth requirement for provisional measures to be granted – meaning, that
the tribunal must have prima facie jurisdiction.

Most arbitration tribunals have focused on all the conditions for jurisdiction discussed in chapter two,
as a cumulative requirement – as a reminder, these four conditions are ratione personae, ratione
materiae, ratione temporis and ratione voluntatis. This is well-illustrated by the reasoning of the
Tribunal in the case of Quiborax v Bolivia.

On the other hand, some tribunals have narrowed down the scope of their inquiry and appraised their
prima facie jurisdiction only on the basis of, for instance, their jurisdiction ratione voluntatis. A good
example of this narrower approach can be seen in the decision of the Tribunal in the case of United
Utilities v Estonia.

C. Procedural aspects

As you learnt in section two, Article 47 of the ICSID Convention and Rule 39 of the ICSID Rules of
procedure for arbitration proceedings are clear on many procedural aspects.

 A request for provisional measures can be made by a party at any time after the
institution of the proceedings.
 In addition, the tribunal may also recommend such measures on its own initiative or
measures other than those requested by the claimant.

Regardless of whoever takes the initiative, provisional measures can only be

recommended after all parties have had the opportunity to present their observations.
This also applies to the modification and revocation of these measures.

Despite the fact that Article 47 of the ICSID convention refers in its English and French versions to
‘recommend’ and ‘recommander’, respectively,

→ it is nonetheless widely accepted by arbitration tribunals that the provisional measures

that they grant are binding.

→ As pinpointed by the Tribunal appointed in the case of Transglobal Green Energy v

Panama, this interpretation is in line with the Spanish version of the ICSID Convention which
refers to ‘dictar’.

Chapter 5: Annulment proceedings

In this chapter, we will focus on annulment proceedings under the arbitration rules of the
International Centre for Settlement of Investment Disputes, which I will refer to as ICSID for short.
Annulment proceedings can be instituted at the request of either party following the pronouncement
of the award. The result of such proceedings would be the potential annulment of the award, or of
any part of it. You should be careful not to confuse annulment proceedings with appeal proceedings.
There has traditionally been no appeal mechanism in investor-state arbitration; but, as we will see in

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module six, treaty practice is evolving in this respect. So, then, the question remains – what are
annulment proceedings and what is their purpose? What are the main grounds for annulment and
what are the main features of these proceedings? In answering these questions, we will:

1. defining annulment proceedings and explaining their purpose

2. the main grounds for annulment
3. manifest excess of power
4. the serious departure from a fundamental rule of procedure
5. the failure to state reasons

A. The definition and purpose of annulment proceedings.

The purpose of an annulment is to ensure procedural justice, meaning the integrity, the propriety
(уместность, правильность) and the fairness of the arbitration proceedings which lead to the award.
As stated in 2016 by the annulment Committee in TECO v Guatemala, this means that annulment
committees are not entitled, for instance, to review the substantive correctness of awards, either in
fact or in law, as an appeal tribunal would do.

This purpose of guaranteeing procedural justice conflicts with another fundamental objective: the
finality of the award. In this respect, committees, such as the Postova banka v Greece Committee in
2016, have often stressed that the need to balance these two objectives explains why annulment
should be seen as an extraordinary remedy with a high threshold.

This also explains why there are so few grounds on which a party can request an annulment. Article
52 of the ICSID Convention lists those grounds, which are:

1. the improper constitution of the tribunal

2. the manifest excess of power
3. corruption on the part of a member of the tribunal
4. serious departure from a fundamental rule of procedure
5. the failure to state the reasons on which the award is based

Where an annulment committee finds that at least one of these grounds is fulfilled, it has the power
to annul the award in part or in its entirety. However, as a matter of principle, it is not entitled to
amend or replace the parts annulled; this is the task of a new arbitration tribunal, at the request of
either party.

We can see from the practice of annulment committees that manifest excess of power (2), serious
departure from a fundamental rule of procedure (4) and the failure to state reasons (5) are the main
grounds for an annulment. For this reason, we will focus on these three grounds in the upcoming
sections.

Professor: This is not an appeal tribunal. It looks into the fundamental fairness of the proceedings.
Sometimes they are very critical regarding how arbitrators have solved the case.

Annulment is about the integrity of the award. Finality – the award is final and that there is no tribunal
that can rule on the dispute again.

B. Manifest excess of power (2)

Manifest excess of power gives rise to two questions:
1. what is an excess of power
2. when can such an excess be said to be manifest

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 Excess of power

We can find the answers to these two questions in the practice of annulment committees. These
committees have considered that excess of power relates to issues of jurisdiction and applicable law.
This is due to the fact that these two issues are key elements of the parties’ consent to arbitration.

With regards to jurisdiction, the excess of power relates to the requirements set out in Article 25 of
the ICSID Convention as well as in the parties’ arbitration agreement. As explained for instance by the
Micula v Romania Committee in its 2016 decision, it can consist of:

1. a tribunal’s failure to exercise its jurisdiction

2. a tribunal exceeding the jurisdiction granted to it

As for applicable law, a failure to apply the proper law and the application of a law that is not proper
have both been characterized as an excess of power. This was well explained, for example, in 2016 by
the Committee in Tidewater v Venezuela. On the other hand, as long as the arbitration tribunal
correctly identifies the proper law, endeavours to apply it to the facts and stays within its limits when
applying it, it is considered that there is no excess of power.

 Manifest

It has been largely acknowledged that the applicable standard in assessing whether an excess of
power is manifest is similar for both excesses relating to jurisdiction and to the applicable law.

On the other hand, there is no consensus among annulment committees regarding the actual
standard to be applied.

One line of authority, exemplified by the annulment decision in Micula v Romania, assesses how
readily apparent the excess is. This standard has been referred to by Committees using various
formulations: the excess must be ‘plain on its face’, ‘evident’, ‘obvious’, ‘clear’ or ‘easily recognizable’.

A second line of authority focuses instead on the effect of the excess of power. For instance, in Vivendi
v Argentina, the Committee stated that the excess of power should be capable of making a difference
to the result.

You should note that for some committees, there is no conflict between those two approaches. For
instance, the Committee in Lahoud v DRC expressed this view in its 2016 decision.

C. The serious departure from a fundamental rule of procedure (4)

When considering departure from a fundamental rule of procedure, you should note that not all the
rules of procedure are covered by this ground for annulment, nor are all potential departures. This is
indicated by Article 52 of the ICSID Convention.

In order to plead this ground, two conditions must be met:

1. the rule must be of a fundamental nature

2. the departure must be serious
This is why annulment committees, when they assess whether arbitration tribunals have seriously
departed from a fundamental rule of procedure, conduct an analysis which focuses on these two
cumulative conditions.

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When we look at the practice of annulment committees, we can see that in order for a rule of
procedure to be considered fundamental, it must meet a very high threshold. Virtually all annulment
committees have considered that only those rules of natural justice which are concerned with the
essential fairness of the procedure are fundamental rules of procedure.

→ This was the finding of the annulment Committee in SAUR v Argentina, for instance.

These rules include

 the equal treatment of parties,
 the right to be heard,
 the right to an independent and impartial tribunal,
 the treatment of evidence and burden of proof,
 and the deliberations among members of the tribunal.
Unlike the first condition, the seriousness of the departure cannot be ascertained in the abstract – it
is a purely factual assessment, as was emphasized in 2016 by the Committee in Adem Dogan v
Turkmenistan.

In order for the annulment to be granted, the departure must have a material impact on the outcome
of the award. This appraisal of the material impact caused by the violation of a fundamental rule of
procedure is, as you can imagine, highly speculative.

For this reason, committees have considered that they cannot do more than determine whether
the tribunals’ compliance with a rule of procedure could potentially have affected the award.

→ As illustrated by the annulment decision in TECO v Guatemala, committees have argued that
expecting more from them would require them to stand in the shoes of the arbitration tribunals
– which is something annulment bodies are simply not permitted to do.

D. The failure to state the reasons on which the award is based (5)

The parties to the dispute and the public at large must be able to understand the reason why a tribunal
has decided that a sovereign act does or does not violate the law. It is often emphasized by annulment
committees that this requirement exists as a matter of public policy.

→ For instance, the annulment Committee in Tidewater v Venezuela explained that the
legitimacy of the process depends on its intelligibility and its transparency.

Consequently, they have considered that it is the tribunals’ duty to identify and to let the parties know
the factual and legal premises that led to their decision.

→ As was explained in MINE v Guinea, the requirement to state reasons is satisfied as long as
the award makes clear how the tribunal got from point A to point B and eventually to its
conclusion, even if it made an error of fact or of law.
On the other hand, we can see from the practice of annulment committees that this ground does not
allow a committee to appraise the correctness or persuasiveness of the reasoning or to inquire into
the quality of the reasons given. Given that the ICSID Convention is silent about what exactly
constitutes a failure to state reasons, it has been up to annulment committees to define this ground
further.

Although we can see diverging views across their practice, annulment committees have identified five
situations in which this ground is satisfied:

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1. contradictory reasons
2. frivolous and inadequate reasons
3. insufficient reasons
4. implicit reasons
5. unintelligible reasons

The main ground on which committees have found that there was a failure to state reasons is
contradictory reasons. T

he threshold for such a finding is very high. All committees have agreed that the reasons must be
genuinely contradictory in that they cancel each other out so as to amount to no reasons at all.
 As stated by the Committee in Continental Casualty v Argentina, they must be such as to
be incapable of standing together on any reasonable reading of the decision.

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Module 5: Investor-state arbitration: interpretation, applicable law

and State responsibility

We will discuss specific issues pertaining to interpretation, applicable law and State responsibility. As
you will see, international law plays an important role in relation to these matters.
1. In chapter one, we will analyse how arbitration tribunals interpret the provisions of
international investment agreements. This will lead us to discuss the methods of
interpretation which are codified in the 1969 Vienna Convention on the Law of Treaties.
2. In chapter two, we will investigate the law arbitration tribunals apply in settling investor-state
disputes. We will concentrate in particular on the role and status of past arbitration awards in
this respect.
3. Chapter three will then be dedicated to the focus of this module: which is, coherence in
investor-state arbitration. This issue of coherence constitutes one of the main themes of the
MOOC. As you will remember from the general introduction, the lack of coherence in
arbitration practice is one the main reason why arbitration tribunals are currently the subject
of much criticism.
4. In chapters four and five, we will move on to discuss investor-state arbitration from the
perspective of the law of State responsibility. In discussing State responsibility, we will refer
to the customary international law rules which are codified in the Articles on Responsibility
of States for Internationally Wrongful Act, which were adopted by the United Nations
General Assembly in 2001. Under these rules, a State is held internationally responsible when
three conditions are met:
a) there has been an act which can be attributed to that State
b) this act breaches one of its international obligations
c) no circumstances exist which would preclude the wrongfulness of that act.
When these three conditions are met, there exists an internationally wrongful act, which
entails certain consequences. In chapter four, we will focus on those circumstances which can
preclude the wrongfulness of an act of a host State when it breaches its obligations under an
international investment agreement. In chapter five, we will focus on the consequences that
are attached to the internationally wrongful acts in investor-state arbitration, focusing on
reparation.

Chapter 1: Interpretation
We will focus on the interpretation of international investment agreements (IIA).
What methods of interpretation can arbitration tribunals use, and what are the distinctive features of
each? What does arbitration practice teach us about the way in which tribunals use these methods?

These are the main issues which we will discuss in this chapter.

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We will begin our discussion by reviewing the methods of interpretation that arbitration tribunals can
use under international law, in light of the 1969 Vienna Convention on the Law of Treaties (VCLT).

Then, we will move on to focus on teleological interpretation, in section two, and on Article 31(3)(c)
of the VCLT, in section three. Finally, we will conclude by briefly summarizing our findings from this
chapter.

A. The VCLT methods of interpretation

You have noticed in modules two and three the vagueness of many key IIA provisions – for example,
the standard of fair and equitable treatment, which has traditionally not been defined in such treaties.
In order to interpret these treaty provisions, most arbitration tribunals rely on the methods of
interpretation codified in Articles 31 and 32 of the VCLT.

When needed, they also make use of the rules contained in Article 33 of the VCLT regarding
agreements authenticated in two or more languages as well as of other rules such as effectiveness.

The methods codified in Article 31 are threefold:

1) exegetic interpretation
- a treaty shall be interpreted in accordance with the ordinary meaning to be given to the
terms of the treaty
2) teleological interpretation
- interpret the terms of a treaty in light of its object and purpose
3) contextual interpretation
- terms to be interpreted also in light of their context

The contextual method of interpretation can be viewed as having both:

a) an ‘internal’ dimension:
- the context at the time of the conclusion of the treaty
It encompasses the text of the entire treaty including its preamble and annexes, as
well as the agreements and instruments made in connexion with the conclusion of
the treaty.
- the context after its conclusion
It covers any subsequent agreement and practice regarding the interpretation of the
treaty.
b) an ‘external’ dimension
Relates to any relevant rules of international law applicable in the relations between the
parties.
Article 32 of the VCLT provides that tribunals can resort to supplementary means of interpretation, in
particular the preparatory work of the treaty and the circumstances of its conclusion.

Article 32 states that this can be done in two situations only:

1) To confirm an interpretation which was reached using the methods referred to in Article 31.
2) Where they are necessary in order to determine the meaning when the interpretation
according to Article 31 leaves this meaning ambiguous or obscure, or where it leads to a
manifestly absurd or unreasonable result.

Much can be said about the way arbitration tribunals make use of these methods of interpretation. In
this chapter, we will focus on two of these methods:

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 the teleological method of interpretation and

 the external contextual method of interpretation.

B. The teleological method of interpretation in the practice of arbitration tribunals

When tribunals interpret a provision of an IIA in light of its object and purpose, which is usually stated
in the preamble, this traditionally lead them to focus on the protection of foreign investors and/or the
promotion of the economic development of States.

As we will discuss in module six, this objective of economic development is increasingly incorporated
into the broader objective of sustainable development.
The language of those preambles can vary, which explains why some tribunals have, for instance,
emphasized in particular the protection of foreign investors.

However, you should note that some of those tribunals have focused on this object and purpose when
the text of the preamble should in fact have led them to give a greater role to States’ economic
development.

This is well illustrated by the SGS v Philippines case. In this case, the Tribunal had to apply the 1997
bilateral investment treaty concluded between Switzerland and the Philippines. The Preamble of this
Treaty reads as follows:

‘The Government of the Republic of the Philippines and the Swiss Federal Council. Desiring to
intensify economic cooperation to the mutual benefit of both States. Intending to create and
maintain favourable conditions for investments by investors of one Contracting Party in the
territory of the other Contracting Party. Recognizing the need to promote and protect foreign
investments with the aim to foster the economic prosperity of both States.’

As you can see, the language of the Preamble shows that the economic prosperity of the States is key.
However, the Tribunal nonetheless opined that:

‘The BIT is a treaty for the promotion and reciprocal protection of investments. According to the
preamble it is intended “to create and maintain favourable conditions for investments by
investors of one Contracting Party in the territory of the other”. It is legitimate to resolve
uncertainties in its interpretation so as to favour the protection of covered investments.’

This opinion expressed by the Tribunal in SGS v Philippines is not only at odds with the plain wording
of the Preamble of the Swiss-Philippines BIT, but it also exemplifies the fact that sometimes IIA clauses
are interpreted exclusively in favour of investors, which was noted by the Tribunal in the case of
Noble v Romania.

As a reaction to this, a growing number of tribunals share this view expressed in the case of Pan
American Energy v Argentina, which is that

‘[a] balanced interpretation is needed, taking into account both the State’s sovereignty and its
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’.

C. The use of Article 31(3)(c) of the VCLT in the practice of arbitration tribunals

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As you learnt in section one, Article 31(3)(c) of the VCLT allows relevant rules of international law
applicable in the relations between the parties to be taken into account in the interpretation process.

For investor-state arbitration, this means that arbitration tribunals can take into account any such rule
which is binding upon the parties in order to interpret the provisions of an international investment
agreement.

To illustrate this, I will present you with a basic scenario inspired by past investor-state disputes:

Imagine that a French investor has concluded a concession agreement with Argentina in order to
manage water supply.

A couple of years later, the government decides to freeze water tariffs in order to protect the right
of its population to access water. The French investor argues that this measure breaches the fair
and equitable treatment provision of the bilateral investment treaty concluded between France
and Argentina.

To interpret this fair and equitable treatment provision,

the arbitration tribunal can make use of Article 31(3)(c) in order to take into account the right to
water which is a component of the right to an adequate standard of living, which is protected by the
International Covenant on Economic, Social and Cultural Rights.

The tribunal can do this because, first of all, both Argentina and France are parties to this Covenant;
which means that the right to water is applicable in the relation between the parties. Secondly, the
tribunal can take into account the right to water insofar as it appears as a relevant rule in light of the
facts of this dispute.

As you can see, Article 31(3)(c) VCLT gives the possibility to use rules from other international law
regimes in investor-state arbitration, such as human rights law or international environmental law.

It will not come as a surprise to you then that this Article was called ‘the master key to the house of
international law’ by a former member of the United Nations International Law Commission.

As you will see in chapter two, the applicable law can have a similar effect.

Traditionally, this ‘master key’ has not been used by arbitration tribunals, even though investor-state
disputes often relate to public interest considerations, which involve a large set of international law
rules.
However, we have witnessed in recent times the increased use of Article 31(3)(c) in the practice of
arbitration tribunals.

A good illustration of this is the award rendered by the Tribunal in the case of Philip Morris v
Uruguay. In this case, the Tribunal was called to rule over the legality of a plain packaging
regulation which aimed at protecting the health of the Uruguayan population.

As you can see, international investment law is not a closed system disconnected from other
international law regimes and the public interests considerations that underpin them, such as public
health or the protection of the environment.

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This is an important aspect which you should consider when reflecting on the criticism that
international investment law annihilates the right of States to regulate and that it is at odds with public
interest considerations.

Chapter 2: Applicable law

In this chapter we will focus on the issue of applicable law.
As such, we will examine the law that arbitration tribunals apply when deciding investor-state
disputes.
 We will explore questions such as, what are the different bodies of law which can be applied
by tribunals?
 How is the applicable law chosen and by whom?
 What is the exact status and role of past arbitration awards in this respect?

These are the main issues that we will analyse in this chapter.
1) We will investigate how the applicable law is chosen and what the components of this law are.
2) We will pay a particular attention to the status and role of past arbitration awards.
3) We will briefly conclude on the matter with a summary of our findings from this chapter.
A. The choice of the applicable law
As we discussed in module four, the ability of the parties to the dispute to choose the applicable law
is a distinctive feature of arbitration.
Of course, this feature is adapted to the specificities of international investment law. Foreign
investors which are a party to an investor-state dispute play no role in this choice.

Rather, the choice is made primarily by the State parties to the IIA. In this respect, you should note
that most IIAs have traditionally not specified the applicable law.

As for arbitration proceedings under the ICSID rules of arbitration, Article 42(1) of the ICSID
Convention addresses this situation. It reads as follows:

‘The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by
the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting
State party to the dispute (including its rule on the conflicts of laws) and such rules of
international law as may be applicable.’

Let’s focus now on these two situations: first, when the IIA contains a provision on the applicable law
and second, when the IIA is silent as to the applicable law, and as a result the arbitration tribunal
applies the second sentence of Article 42(1).

Virtually all provisions on the applicable law in IIAs state that the provisions of the IIAs in question
form a part of the law applicable in the settlement of the disputes. As such, these IIA provisions are
usually combined with international law and the domestic law of the host State, according to various
formula and terminologies. Where an IIA makes both international law and the domestic law of the
host State applicable, this raises an issue which, all things being equal, also applies when the second
sentence of Article 42(1) is applied. This issue relates to the exact interplay between international law

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and domestic law. It raises the question of the circumstances in which they should respectively be
applied. For a long time, a consensus existed that international law plays purely a complementary and
corrective role. As such, it would come into play only where the application of domestic law gives rise
to a lacuna, or where domestic law would be contrary to international law. However, there is now a
consensus among arbitration tribunals that international law should not be limited to such a subsidiary
role and that the proper application of international law and domestic law depends on the issues at
stake. You can see this approach being taken, for instance, by the Tribunal in the case of Vestey Group
v Venezuela in its 2016 award.
The applicability of international law to the settlement of investor-state disputes also begs the
question of the exact sources that arbitration tribunals can rely on.

1) When the IIA provides that international law shall applied, the answer to this question can be
found in the exact language of the choice of law provision.
2) However, when international law is applicable pursuant to Article 42(1) of the ICSID
Convention, the question remains as to what this provision tells us about which sources can
be relied upon. As you can see from the language of Article 42(1), this provision is in fact silent
on this issue.
On the other hand, if we look to the preparatory works behind Article 42(1), which you will
remember from chapter one can be used to interpret the ICSID convention, the answer is in
fact clear: arbitration tribunals can rely on the international law sources listed in Article 38 of
the Statute of the International Court of Justice. Accordingly, tribunals can resort to primary
sources of law, meaning treaties, customary international law and ‘general principles of law
recognized by civilized nations’. They can also make use of subsidiary sources, meaning judicial
decisions and ‘the teachings of the most highly qualified publicists of the various nations’, as
‘subsidiary means for the determination of rules of law’.
Article 38 of the ICJ Statute and Article 42(3) of the ICSID Convention also provide that a case
can be decided ex aequo et bono, meaning in equity (в равной степени), if the parties agree
to this.
In terms of substance and in relation to Article 31(3)(c) VCLT which we discussed in chapter one, you
should note that these various sources of international law also give the possibility to use rules from
other regimes of international law in the settlement of disputes where public interest considerations
are at stake, such as cultural heritage.
B. The status and role of past arbitration awards

As you learnt in section one, Article 38 of the ICJ Statute teaches us that arbitration tribunals can rely
on past judicial decisions as a subsidiary source of law, meaning as a source to determine the rules of
law. This means that they cannot apply past arbitration awards as such in the settlement of investor-
state disputes. Rather, they can only use them instrumentally in order to ascertain the normative
content of, in particular, IIA provisions. In other words, past arbitration awards constitute an
interpretative tool. Bearing this in mind, you should now realise the diversity in the role that
arbitration tribunals give to past arbitration awards.

Some tribunals, such as in the case of Romak v Uzbekistan, have argued that they constitute ‘mere
sources of inspiration, comfort or reference’. Other tribunals have granted a larger role to past
arbitration awards, such as the Tribunal in Mesa v Canada in its 2016 award. In that case, the Tribunal
stated that:

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‘The Tribunal is not bound by the decisions of other arbitral tribunals. At the same time however,
the Tribunal does believe that it should pay due respect to such decisions. Unless there are
reasons to the contrary, the Tribunal will adopt the approaches established in a series of
consistent cases comparable to the case at hand, subject, of course, to the specifics of the NAFTA
and to the circumstances of the actual case. By doing so, the Tribunal believes it will meet its
duty to contribute to the harmonious development of investment law and thereby to meet the
legitimate expectations of the community of States and investors towards legal certainty and
the rule of law.’
As you can see, this statement addresses the issue of coherence which we will discuss more in chapter
three. What matters for us here is the fact that the approach formulated by the Tribunal in Mesa v
Canada has been seen as transforming past arbitration awards into a primary source of international
investment law (transforming into judicial decisions, so not anymore the rules helping to ascertain the
normative content, but the ones helping to determine the rules). If this analysis is correct, this means
that this approach is contrary to Article 42(1) of the ICSID Convention as it is interpreted in light of its
preparatory works, to which I referred to in section one.

Similarly, this means that this approach breaches Article 53(1) of the Convention which states that:

‘The award shall be binding on the parties and shall not be subject to any appeal or to any other
remedy except those provided for in this Convention.’

In other words, past arbitration awards cannot be transformed into a primary source of international
law insofar as these awards shall not be binding for the future decisions of tribunals.

The question remains, then, whether this interpretation of the statement of the Tribunal in Mesa v
Canada is correct. In fact, it appears that this interpretation is a mistaken one. This is due to the fact
that the Tribunal made the reliance on ‘approaches established in a series of consistent cases’
conditional, depending upon the specificities of the IIA in question as well as of the circumstances of
the case. This means notably that past arbitration awards are to be applied only within the normative
framework established by the IIA and not as a substitute for it. In other words, past awards are used
only to determine the content of the IIA provisions at hand. If past arbitration awards are used in that
way, this means that they are not in fact being used as a primary source. This could only be the case
if they were being used to discard IIA provisions, in a way that runs counter their clear meaning. As
long as this line is not crossed, past arbitration awards remain no more than a subsidiary source used
to interpret a primary source.

Chapter 3: Focus: coherence in investor-state arbitration

The reason we will pay a particular attention to the issue of coherence in investor-state arbitration is
because it constitutes one of the main themes of this MOOC.

Tribunals today are the subject of much criticism, and the incoherence of arbitration practice is one
of the main reasons for this.

You have seen this incoherence in particular from modules two and three. In this chapter, we will
investigate whether coherence should in fact be an attribute of arbitration practice, and how
coherence can be promoted.
We will analyse why coherence matters and for whom?

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What are the arguments for and against it?

And how coherence can be achieved in investor-state arbitration?

In assessing these issues, we will examine:

1. the role coherence plays in investor-state arbitration

2. how coherence can be achieved and what impediments exist to this goal
B. The role of coherence in investor-state arbitration

In module four, you learnt that investor-state arbitration is ad hoc – meaning, that for each new
dispute a new arbitration tribunal is appointed.
This is the case where an investor alleges that an IIA has been violated by a State, giving rise to an
investor-state dispute. This means that it is possible for arbitration tribunals to come up with different
interpretations of similar provisions in different IIAs, or even to come up with different interpretations
of the same provision in the same IIA.

When we look at ICSID Convention arbitration proceedings, upon which we are focusing in the MOOC,
this also means that arbitration tribunals can provide different interpretations of the provisions in the
ICSID Convention and of the ICSID Rules of procedure for arbitration proceedings.

Where these situations arise, some arbitration tribunals find this position very unsatisfactory.

For instance, in the case of Burlington v Ecuador, the majority of the Tribunal opined:

‘Subject to the specifics of a given treaty and of the circumstances of the actual case, it has a
duty to seek to contribute to the harmonious development of investment law, and thereby to
meet the legitimate expectations of the community of States and investors towards establishing
certainty in the rule of law.’

To better understand this opinion, you must realise that these different interpretations of similar
provisions, such as the fair and equitable treatment provision, give rise to uncertainty which is harmful
for both States and foreign investors. This is because States have a need to know the extent they can
regulate without breaching IIAs, while investors must know the degree of protection they can expect
under those agreements. This legal certainty cannot be achieved unless the practice of arbitration
tribunals is coherent.

On the other hand, some arbitration tribunals have considered that coherence is irrelevant in their
practice. For instance, in the case of Romak v Uzbekistan, the Tribunal stated:

‘[T]he Arbitral Tribunal has not been entrusted, by the Parties or otherwise, with a mission to
ensure the coherence or development of “arbitral jurisprudence.” The Arbitral Tribunal’s mission
is more mundane, but no less important: to resolve the present dispute between the Parties in a
reasoned and persuasive manner, irrespective of the unintended consequences that this Arbitral
Tribunal’s analysis might have on future disputes in general.’

And so, we can see from these two approaches that there is a clear divide among arbitration tribunals
concerning the role and relevance of coherence in investor-state arbitration.

C. The vectors of coherence in investor-state arbitration

The issue of coherence is debated among arbitration tribunals largely because of the procedural
features of investor-state arbitration: so far, there exists no mechanism which can really ensure the

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coherence of arbitration practice. More specifically, no appeal mechanism has been established that
could harmonise this practice. This is true at both the bilateral level and the multilateral level.

As we will discuss in module six, the Comprehensive Economic and Trade Agreement adopted in 2016
by the European Union and its member States and Canada constitutes an important evolution in this
respect.

This Agreement provides for the creation of an appellate body; moreover, it expresses the
commitment of the parties to establish a multilateral court system with other partners, which would
contain a multilateral appellate body.

But for the time being, only arbitration tribunals can bring coherence to investor-state arbitration.

This leaves us with two keys questions:

1) Would a function which ensures coherence be legally compatible with the features of
investor-state arbitration?
2) What can be the vectors of coherence?
Let’s start with this second question.
In considering this question, you should note that a distinction can be made between a single past
award, known as a ‘precedent’, and a series of consistent past awards, known as a ‘jurisprudence
constante’. The difference between the two relates to their respective authority. To understand this,
you must be aware that there exists no hierarchy between arbitration tribunals and that there is no
rule of stare decisis in investor-state arbitration. This means that arbitration awards are not binding
for the future upon other arbitration tribunals.

This can be inferred from Article 53(1) of the ICSID Convention, which provides that arbitration
awards are binding on the parties to the dispute. The result is that a single tribunal lacks the authority
to set out an interpretation which must be followed by other tribunals in the future.

However, if an interpretation is adopted by a series of arbitration tribunals over a period of time, that
interpretation holds a greater authority as a result of this inter-subjectivity.
This leads us back to the first of our questions. Is the function of ensuring coherence legally compatible
with the features of investor-state arbitration? Those who oppose coherence mainly do so on two
grounds:

1) The first of these grounds relates to the lack of stare decisis (the legal principle of determining
points in litigation according to precedent), as well as the fact that arbitration awards
constitute only a subsidiary source of law.
2) The second argument is linked to the ad hoc nature of arbitration tribunals and the fact that
disputes shall be autonomously decided by each tribunal, on the basis of no more than the
law applicable and the facts of the case at hand.
The first of these two arguments does not seem to constitute an insurmountable hurdle. Indeed, as
we discussed in chapter two, past arbitration awards can be used as a subsidiary source in the
interpretation process, so long as they are used only to ascertain the meaning of an IIA provision and
not to contradict its plain meaning.
Similarly, for the second argument, the ad hoc nature of arbitration tribunals does not seem to
prohibit the use of past arbitration awards either. This applies when past awards are used to interpret

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the same provision of the same IIA in question. This is also the case regarding the interpretation of the
provisions of the ICSID Convention and of the ICSID Rules of procedure for arbitration proceedings.
Subject to the specificities of the object, purpose and context of each IIA, which can lead to different
interpretation of the similar provisions that they contain, this is also the case as for such provisions.
Indeed, in these situations, the use of past arbitration awards would not deny the legal specificity of
the case at hand.
Similarly, as long as the tribunals, when using past awards, do not set aside the factual specificities of
cases, there seems to be no legal incompatibility between ensuring coherence and the ad hoc nature
of arbitration.
In fact, the real issue raised by ensuring coherence is not a legal issue, but it is rather a deontological
issue. It boils down to this question: what do arbitrators believe is their role and function? The
deontological nature of this issue is well-illustrated by the language used by the Tribunal in Burlington
v Ecuador. As I mentioned above, the majority of the Tribunal expressed its view that
‘it has a duty to seek to contribute to the harmonious development of investment law’. On the
other hand, the award also states that, ‘Arbitrator Stern does not analyze the arbitrator’s role
in the same manner, as she considers it her duty to decide each case on its own merits,
independently of any apparent jurisprudential trend.’
As you now realize, the divergences as to the way arbitrators conceive of their function is key for our
discussion. At the end of the day, then, whether we can achieve coherence in arbitration practice
depends largely on the coherence in how arbitrators view their role and function!

Chapter 4: Circumstances precluding wrongfulness

In this chapter, we will look at investor-state arbitration from the perspective of the law of State
responsibility.
We will focus on circumstances precluding wronfulness, which is one of the three conditions for State
responsibility.
We will address questions such as,
 what is the function of circumstances precluding wrongfulness? What exactly are these
circumstances?
 What are the main circumstances invoked in investor-state arbitration?
In order to address these issues,
 we will start by introducing the notion of ‘circumstances precluding wrongfulness’ and the
various categories of circumstances, in section one.
 Then, in section two, we will analyse those circumstances in the context of investor-state
arbitration, with a specific focus on necessity.
 We will finally conclude with a brief overview of our findings.

A. The notion of ‘circumstances precluding wrongfulness’

Three conditions must be met for a State to be held internationally responsible under IL:
1) The act must be attributable to a State
2) The act must constitute a breach of one of the State’s international obligations

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3) There must be no circumstance that precludes the wrongfulness of this act. Such
circumstances have the effect of precluding the wrongfulness of an act which would otherwise
not be in conformity with the international obligation of the State.
The International Law Commission of the United Nations in its commentaries to the 2001 Articles on
Responsibility of States for Internationally Wrongful Acts, or ARSIWA for short, noted that the notion
of ‘circumstances precluding wrongfulness’ can be traced back to the work of the Preparatory
Committee of the 1930 Hague Conference which focused in particular on self-defence and reprisals.
This notion was then developed by the International Law Commission, in particular in its work on
international responsibility for injuries to aliens.
This work then led to the establishment of six circumstances precluding wrongfulness which are
provided in ARSIWA and which form now part of customary international law:
1) Consent - those situations where one State has consented to the act of another State, thereby
making that act not wrongful in relation to this consenting State;
2) Self-defence - Article 21 of the ARSIWA provides that ‘the wrongfulness of an act of a State is
precluded if the act constitutes a lawful measure of self-defence taken in conformity with the
Charter of the United Nations’.
This provision does not address the use of force as such; indeed the use of force in self-defence
is not a breach of the United Nations Charter as long as it conforms the conditions therein.
Instead Article 21 provides that self-defence precludes the wrongfulness of the conduct of a
State acting in self-defence in certain situations and regarding certain of its obligations other
than its obligation not to use or to threaten to use force.
3) Countermeasures - refers to a conduct which aims at stopping a prior internationally wrongful
act of another State and at achieving reparation;
4) Force majeure - The International Law Commission defines force majeure, as a situation where
the State, involuntarily or at least with no other choice, is compelled to act in a manner
contrary to one of its international obligation.
5) Distress - precludes the wrongfulness of the act which is decided in a situation of peril where
there is no other reasonable way to save life. The ‘peril’ can relate to the individual committing
the act or to a group of persons.
6) Necessity
You should be careful not to confuse these circumstances precluding wrongfulness with the general
and specific exceptions in international investment agreements. These latter exceptions do not
preclude the wrongfulness of a state act; instead, these exceptions limit the scope of the protection
granted to foreign investors in certain situations, such as the exception relating to indirect
expropriation, as we discussed in module three.
B. Circumstances precluding wrongfulness in investor-state arbitration
Circumstances precluding wrongfulness have traditionally not often been invoked by host States in
investor-state arbitration. However, one of the circumstances, that of necessity, has been largely
discussed by arbitration tribunals in disputes that have arisen in the aftermath of the economic crisis
faced by Argentina in the early Twentieth century.
We will therefore focus on this circumstance and this factual situation in order to illustrate how
circumstances precluding wrongfulness may apply in investor-state arbitration. In order to get a better

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understanding, we will first shed some light on the circumstance of necessity, and we will also briefly
sketch the Argentinian reaction to the economic crisis which led more than 40 foreign investors to
initiate arbitration proceedings against that State.
In the early Twentieth century, Argentina was hit by a major economic crisis, which led the
government to default on its debt and to the collapse of the peso with respect to the US dollar to
which it was fixed.
The government reacted to this situation by deciding a series of measures, in particular the
‘pesification’ of all obligations and the freezing of the gas distribution tariffs. This latter measure was
in particular challenged by foreign investors as being incompatible with the international investment
agreements in force between their home States and Argentina.
Turning now to the circumstance of necessity, we must look to Article 25 of the ARSIWA to analyse
its content. Necessity is a difficult circumstance to be proved – this is illustrated by the fact that Article
25 is framed in negative terms – meaning, it provides that necessity may not be invoked unless certain
conditions are met.
Those conditions:
1) The act must be the only way for the State to safeguard an essential interest against a grave
and imminent peril;
2) The act must not seriously impair an essential interest of the State or States towards which
the obligation exists, or of the international community as a whole;
3) Necessity may not be invoked if the international obligation in question excludes this
possibility of invoking necessity;
4) Necessity may not be invoked if the State has contributed to the situation of necessity.
The International Court of Justice in the Gabcikovo-Nagymaros case confirmed that these conditions
must all be met cumulatively.

Applying those conditions to the Argentinian economic crisis, many arbitration tribunals have
rejected the argument of necessity.
As you can imagine, the four conditions of necessity gave rise to numerous legal issues. One of these
issues which proved to be highly controversial was whether Argentina could be said to have
contributed to the economic crisis, thereby barring it from pleading necessity.
Although the various tribunals have agreed that the causes of the crisis were both internal and
external, they have not drawn the same consequences from this.
For instance, in the case of Enron v Argentina, the Tribunal concluded that Argentina made a
substantial contribution to the crisis, as did the Tribunal in CMS v Argentina after having
explained that the crisis was the making of several administrations and that it was grounded
in the earlier crisis of the 1980s and the evolving policies of the 1990s.
On the other hand, in the case of Urbaser v Argentina, the Tribunal argued that the fact that
the crisis was linked to both external and internal factors was not sufficient to demonstrate
that Argentina made a sufficient contribution to the state of necessity.
In the view of the Tribunal, Argentina should at least have known that such crisis and emergency would
be the outcome of its policy.

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You find here another illustration of the incoherence of arbitration practice and, as you learnt in
chapter three, how it affects legal certainty and the predictability that States need.
The difference between the awards: Enron v Argentina – made a substantial contribution, while
Urbaser v Argentina – was not a sufficient contribution. => tribunals differ in the appraisal o the facts
not only of the law.

Chapter 5: Reparation
In this chapter, we will focus on the consequences attached to internationally wrongful acts of States,
where these wrongful acts are comprised of the violation of IIA.

More specifically we will focus on reparation.

We will address issues like,

 what exactly does reparation entail for foreign investors?

 What can be repaired and what are the different forms of reparation?

In order to address these issues,

 we will begin by reviewing the international customary rules applicable to reparation in

section one.
 Then, in section two, we will focus on the way tribunals use these rules in investor-state
arbitration.
 We will finally conclude with a brief summary of what we have learnt in this chapter.

A. Reparation in international law

A great majority of IIAs are silent on the consequences attached to internationally wrongful acts. As a
result, we must look to customary international law to find out what those consequences are. These
customary rules are codified in the 2001 Articles on Responsibility of States for Internationally
Wrongful Acts (ARSIWA). Depending on the case at hand, the consequences of an internationally
wrongful act are:

1) the cessation of the internationally wrongful act

2) the provision of assurances and guarantees of non-repetition
3) the continued duty to perform the obligation
4) full reparation

You should note that specific consequences also arise where a State commits a serious breach of
obligations under the peremptory norms of general international law, but this will not be addressed
in this chapter.

Among these various consequences, the States’ duty to make full reparation for the injury caused by
the wrongful act is quite central, especially for foreign investors. For this reason, we will now focus on
this particular consequence.

The first question that arises in relation to this consequence is what exactly is meant by full
reparation.

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The answer to this question is always provided by referring to the famous 1924 Chorzow Factory
case decided by the Permanent Court of International Justice, or PCIJ for short. In its
judgement, the Court stated that:

‘The essential principle contained in the actual notion of an illegal act – a principle which seems
to be established by international practice and in particular by the decisions of arbitral tribunals
– is that reparation must, as far as possible, wipe out all the consequences of the illegal act and
re-establish the situation which would, in all probability, have existed if that act had not been
committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the
value which a restitution in kind would bear; the award, if need be, of damages for loss sustained
which would not be covered by restitution in kind or payment in place of it – such are the
principles which should serve to determine the amount of compensation due for an act contrary
to international law.’

As you can see, full reparation means that reparation should put the claimant back in the situation it
would have been in, had the internationally wrongful act not occurred.

This statement of the PCIJ, together with ARSIWA, sheds light on other aspects of customary
international law regarding reparation:

1) any injury, whether it is of a material or of a moral nature, must be fully repaired

2) full reparation can take the form of restitution, compensation and satisfaction, either singly
or in combination
3) restitution is the primary form of reparation – this means notably that compensation will only
be used if restitution is materially impossible
4) compensation shall cover any damage which can be assessed in financial terms, including loss
of profits insofar as it is established
5) interest on any principal sum due shall also be payable if it is necessary in order to provide full
reparation
6) satisfaction can comprise an acknowledgment of the breach or a formal apology
7) where the injured party contributes to its injury, either wilfully or by his own negligence, this
shall be taken into account in determining the reparation
Arbitration tribunals have systematically relied on the customary international law rules codified in
ARSIWA in order to decide issues of reparation, as we learnt in section one.

When relying on these rules, many tribunals have noted that those rules were developed in an inter-
state context and that ARSIWA provides for rules applicable between States.

At the same time, all tribunals have agreed that those rules can still be applied in the context of
investor-state disputes.

For instance, the Tribunal appointed in the case of Vestey Group v Venezuela adopted this
approach in its 2016 award.

As a result of this transposition, arbitration tribunals have applied the full reparation principle and
have virtually always granted compensation in order to reach this result.

In order to determine the compensation payable, three steps must be followed, as noted by Salacuse:

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1) tribunals must determine the value the investment would have had if the breach had not been
committed;
2) they must determine the value the investment has now as a result of the breach;
3) tribunals must subtract the second value from the first value.

Although this process may seem easy in theory, it is a highly difficult exercise as the assessments are
carried out in hypothetical situations and also require a command of complex financial methodologies.
To make reparation full, arbitration tribunals also award interests. In this respect, you should note
that there has been an evolution of arbitration practice in awarding interest.

While initially arbitration tribunals were inclined to award only simple interests, there has been a
growing recognition that it is not adequate and that compound interests is preferable.

Also of interest for us here is that some arbitration tribunals have explained that the obligation to
make full reparation may be reduced on the basis of mitigating factors, for instance when there exists
a contributory negligence on the part of the foreign investor, or when there are other concurring
causes.

This was for instance stated by the Tribunal appointed in the case of Quiborax v Bolivia in the
2015 award.

As for the type of damages to be repaired, there is a distinction between moral damages and material
damages. All arbitration tribunals have agreed that material damages shall be repaired.

On the other hand, they have been more reluctant to grant reparation for moral damages.

As explained by the Oxus Gold v Uzbekistan Tribunal in its 2015 award, the bar for repairing moral
damages is very high, such that moral damages can only be awarded in exceptional circumstances.

More specifically, the Tribunal in the case of Lemire v Ukraine concluded from the case-law that
moral damages could only be awarded in the following exceptional cases:

1) when ‘the State’s actions imply a physical threat, illegal detention or other analogous
situations in which the ill-treatment contravenes the norms according to which civilized nations
are expected to act’;
2) when ‘the State’s actions cause a deterioration of health, stress, anxiety, other mental
suffering, such as humiliation, shame and degradation, or loss of reputation, credit and social
position’;
3) ‘when both cause and effect are grave or substantial’.
As for loss of profits, there is a broad consensus that these may be awarded only if there is sufficient
and reasonable certainty that these profits would have materialized.
Whatever the exact nature of the damage, arbitration tribunals have required that claimants evidence
the causal link between the breaches of international investment agreements and the losses
sustained. Where investors failed to do so, tribunals have not hesitated to reject the claim for
reparation.
This is well illustrated by the 2017 award rendered by the Tribunal in the case of Garanti Koza
v Turkmenistan in which it found that there was no causal connection between both the
umbrella clause claim and the FET claim and the loss of the factory and its equipment by the
investor.

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By the same token, if there was insufficient proof for the damage, arbitration tribunals have refused
to grant reparation,
as did the Tribunal appointed in the case of Houben v Burundi, for instance.

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Module 6: The future of international investment law

In the previous modules, we have reviewed the past features of international investment law and
analyzed its current substantive, institutional and procedural characteristics.

This module looks to the future of international investment law.

We will analyse the on-going reforms and the emerging trends in investment treaty practice:

1. the future of investor-state dispute settlement, including the current initiatives to replace
arbitration with other methods of dispute settlement
2. how international investment agreements are increasingly used to protect and promote
‘sustainable development’ objectives, especially the labour conditions of workers => how
international investment agreements could be used in the future to protect global commons
3. the reequilibrium which is taking place between the obligations of States and the obligations
of foreign investors. It will shed light on the different strategies that may be used to regulate
the conduct of foreign investors in the future.

Chapter 1: The future of investor-state dispute settlement

In this chapter, we will discuss the future of investor-state dispute settlement.
More specifically, we will focus on the trends which are emerging in treaty practice as a reaction to
the criticism which arbitration is currently facing.

 So, what are precisely those criticisms, and who are the critics of investor-state arbitration?
 What are those trends in treaty practice and what issues do they give rise to?

In answering these questions, we will:

1. the criticisms of investor-state arbitration in order to inform and shed light on these proposed
reforms
2. the main reforms of investor-state dispute settlement which have been proposed in newly
adopted instruments

A. The context of the reforms

In module one, we learnt that the reason behind the emergence of arbitration as the main method
of investor-state dispute settlement was the depoliticisation of the settlement of these disputes.

Indeed, both domestic tribunals and the exercise of diplomatic protection were seen as being
influenced by political considerations, making an objective settlement impossible.

Today, however, investor-state arbitration faces different criticisms –

1. that is, the lack of legitimacy of arbitration tribunals and

2. the lack of coherence in their practice.
As you remember, we discussed the issue of coherence in module five.

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As for legitimacy, critics argue that arbitration tribunals lack the legitimacy to make decisions which
impact fundamentally on public interests.

As you will see, there are a number of dimensions to this criticism:

1. Based on the fact that investor-state arbitration has private features as well as an
international dimension.
These critics say that investor-state disputes should be settled by a court which is both public
and permanent.
In fact, many of those critics consider that only domestic courts have the legitimacy to review
the legality of state measures which concern public interests.
2. Relates to the arbitrators themselves. As you know, these arbitrators are appointed by the
parties to the disputes, including foreign investors, and as such, some argue that they lack
impartiality.
3. In this respect, arbitrators are often viewed as favouring foreign investors to the detriment of
host States.
It is important to realize that although these criticisms exist, many are in fact ill-founded.
For instance, we have seen in modules two and three that arbitration tribunals are not ‘pro-
investors’; in fact, most of them interpret and apply the indirect expropriation provision or
the notion of ‘legitimate expectations’ in a balanced manner.
Of course, a few awards may be viewed as having favoured investors’ interests; but here again
they do not represent mainstream arbitration practice.
You may be wondering, then, why such ill-founded criticism has gained such popularity. There are
many reasons for this:
1. Due to their lack of knowledge of international investment law.
2. Other critics simply compare investor-state arbitration to globalisation, and transfer their
anxiety generated from globalisation to investment law.
3. Another class of critics are motivated by political agendas, which leads them to condemn
international investment law for self-interested purposes, whether they do so consciously or
not.
Whatever the reasons of those critics and the reaction of their opponents, what matters is that you
manage to shape your own opinions and build up the arguments to defend them.
Professor: Different strategies to replace arbitration – # India or Brazil

Legitimacy has been severely criticized so states are trying to find a way to legitimise the arbitration
procedure. Legitimacy – acceptance of the power, decision, procedure.

Acceptance of power of a certain entity – but in which eyes it should be legitimate? Cannot be in the
abstract. Only investors or states and their community.

People – cannot be settled by private persons. These arbitrators are not a public institution. Before it
was only in the eyes of the parties, now in the eyes of the people in general, the society of a state.

Arbitrators are not defending a certain party but they are just chosen as representatives.

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B. The reforms of investor-state dispute settlement

Regardless of whether the criticisms we have explored in section one are well-founded or not, States
have chosen recently to begin reforming investor-state dispute settlement. We can see that various
strategies are used to bring about this reform by looking at treaty practice; some entail a radical
departure from the current system, while others simply tweak the system as it now exists. Some States
have decided to retain arbitration to settle investor-state disputes; however, before arbitration can
be used, they require foreign investors to submit their case to the domestic courts of the host State.

For instance, the 2015 Indian model bilateral investment treaty sets out the duty to exhaust
local remedies, with a time-limit of five years.
More precisely, it provides that investors can initiate arbitration proceedings only if, after
exhausting all judicial and administrative remedies relating to the measure underlying the
claim for at least a period of five years, no resolution has been reached satisfactory to them.
While obligations like this one are not new in investment treaty practice, the duration of the
time limit is a new feature.

In contrast to this approach, other States have departed radically from the current system by setting
aside investor-state arbitration completely. The alternatives they propose in their new instruments
are many.

For instance, the 2015 bilateral investment treaty between Brazil and Malawi, which reflects
Brazilian practice, provides that disputes shall be settled through a dispute settlement
mechanism including State-State arbitration.

Another approach has been put forward by the European Union: that is, the Investment Court
System, which I will call the ICS, for short.

This mechanism was proposed during the negotiation of the Transatlantic Trade Investment
Partnership negotiated with the United States.

Meanwhile, the ICS has been incorporated in a new version of the Comprehensive Economic and Trade
Agreement concluded in 2016 between the European Union and its member States and Canada.

This mechanism is conceived as being a permanent court replacing ad hoc arbitration tribunals.

Some of its more distinctive features are the fact that it includes both a tribunal and an
appellate tribunal, and the fact that the tribunals’ members are appointed by the parties to
the CETA, and not by the parties to the disputes. Interestingly, the European Union, its
member States and Canada have given their commitment to pursue the establishment of a
multilateral investment tribunal and appellate mechanism with other partners.

In the first meetings in which this project was discussed, we saw opposition on the part of
other States present, notably India and Japan.

This should come as no surprise for you given that many Countries are, for the time being at
least, following different paths away from the current system of investor-state dispute
settlement.

Although many different paths of reform are being followed, we can see that each new mechanism
addresses at least part of the criticism against arbitration. For instance, the requirement to exhaust
local remedies gives domestic tribunals a greater role in the settlement of investor-state disputes. By

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the same token, the ICS get rid of the ad hoc nature of arbitration, bringing a partial solution to the
issue of coherence.

That being said, you should also realize that these mechanisms have their own drawbacks. For
instance, the ICS, if it is ever created, will likely face the criticism that it is an international mechanism
that lacks the legitimacy to rule over disputes relating to domestic public interests. For example, the
European Court of Human Rights, which is an international court, currently faces this criticism.

As for State-State arbitration, the fact that States are given the power to decide whether or not to
initiate arbitration will bring back the issues of political interests and considerations which were rife
in the time of diplomatic protection. Similarly, where local remedies are pursued, we will again see
the risk that domestic tribunals will be seen as lacking independence.

If you compare this discussion to our analysis of the history of international investment law in module
one, you can see that these ‘reforms’ in fact bring us back to the past. Furthermore, the discussion is
made even more complex by the current rise of hostility towards international institutions.

In light of all these considerations, you may now realize that there is no ideal system to settle investor-
state disputes.
Professor: Reforms initiated by states. ISDS – reference to arbitration. This is investor-state dispute
settlement. Anything can be this. Arbitration is just one type of ISDS.

 Permanent courts СETA – has one, UNCITRAL – discussing the establishment of a multilateral
permanent court
 State-state arbitration – stick to arbitration but no investors involved – promoted by Brazil
 Domestic litigation requirement – trend to extend this limitation period to 5 years in practice

Are domestic courts more objective and independent that they used to be?

Replacing arbitration because too confidential and illegitimate. But if you go back to the arbitration
on contracts – you make the proceedings again confidential.

If a state does not want to rely on the arbitration anymore then that is an issue of terminating a treaty
and application of the Law of the Treaties. ‘Sunset clause’ – a period during which the issues can still
be submitted to arbitration. Multilateral treaties – withdrawal.

Conventions remain the same so an Appellate instance can solve the problem of consistent
interpretation but not the issue of substance cannot change the law as such – that is the necessity to
change conventions etc. and underlying rules.

International nature of a tribunal will raise issues and resistance on behalf of the people.

 So a permanency of a court will not solve all the issues.

The crisis of multilateralism – everything that is international is criticised.

Chapter 2: The protection of sustainable development

In this chapter, we will focus on ‘sustainable development’ and its growing importance in States’
treaty practice, to illustrate how international investment agreements could be used to protect global
commons in the future. What does ‘sustainable development’ mean and what is the normative
content of this notion? How do international investment agreements protect and promote sustainable

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development, and what are the main features of their relevant provisions? These are the main issues
that we will address in this chapter. In doing so, we will:

1. the normative characteristics of the rise of ‘sustainable development’ in IIAs

2. stock of these characteristics to better understand what they teach us about the future of
international investment law

A. An overview of ‘sustainable development’ provisions

The rise of ‘sustainable development’ is a cross-cutting phenomenon; it can be witnessed in various

international settings and fields of law.
This notion started to emerge and develop in the 1960s; the 1972 Stockholm declaration constituted
an important milestone in its development and recognition in international law. This notion is both
multidimensional and intergenerational.

It is multidimensional in the sense that it aims to protect and promote various global commons and
objectives: meaning, the environment, human rights and social rights as well as economic
development.
‘Sustainable development’ is intergenerational because it protects and promotes these commons and
objectives not only for the benefit of the present population, but also for the benefit of future
generations.

In this context, policymakers have over the past few decades increasingly used IIAs as a tool in the
service of sustainable development in order to reinforce States’ regulatory power.

It is important to note that economic development, which as you remember has traditionally been
seen as a core objective of international investment law, is integrated into this broader notion of
‘sustainable development’.

This trend translates in the mention of ‘sustainable development’ as such, or sustainable development
objectives, for instance workers’ rights, in IIA preambles.
The 1990 bilateral investment treaty concluded between the US and Poland was the first one
ever to make such a mention; in its Preamble the Parties recognize that:

‘the development of business and economic ties can contribute to the well-being of workers in
both countries and promote respect for fundamental worker rights’.

As you learnt in module five, such references in the preamble can have an impact on how the IIA is
interpreted, through the teleological method of interpretation.

In addition to the preamble, the incorporation of ‘sustainable development’ as an objective of

international investment law results in the provision of specific and general exceptions;

in module three, we discussed such an exception applicable to indirect expropriation (it creates an
exception to the rule according to which non-discriminatory regulatory actions aiming to protect a
legitimate public welfare objective shall not be characterised as indirect expropriations.).

More interestingly for us here, certain IIAs contain specific provisions concerning the protection of
the environment as well as the protection of labour conditions.

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In this chapter, we will focus on three specific provisions aiming at the protection of labour
conditions:

1. ‘no-lowering standards’ provisions

2. ‘statement of shared commitments’ provisions
3. the dispute settlement provisions which are sometimes attached to these first two provisions

 No-lowering standards

These first two provisions can be seen in Article 15 of the 2016 bilateral investment treaty
concluded between Nigeria and Morocco, which I will call the Nigeria-Morocco BIT, for short. As
for ‘no-lowering standards’ provisions, Article 15(2) provides that:

‘The parties recognize that it is inappropriate to encourage investment by weakening or reducing

the protection accorded in domestic labour laws. Accordingly, each Party shall ensure that it
does not waive or otherwise derogate from or offer to waive or otherwise derogate from its
labour laws where the waiver or derogation would be inconsistent with the labour rights
conferred by domestic laws and international labour instruments in which both are signatories,
or fail to effectively enforce its labour laws through a sustained or recurring course of action or
inaction.’

Although the language of ‘no-lowering standards’ provisions varies from one agreement to the other,
they all carry the same rationale: meaning, preventing States from lowering their labour conditions
below a particular set of labour standards, in order to attract or to maintain the presence of foreign
investors over their territory.

Professor: Limitation – has sometimes an erga omnes effect. If there is a treaty between BE and MAR
and there is a clause that obliges MAR not to lower its standards. But this treaty might also has this
provision with the extension of this obligation with respect to other treaties of MAR => MAR cannot
lower labour standards to attract investors from France.

 Statement of shared commitments

The second type of provisions, the ‘statement of shared commitments’ provisions, can be seen in
Article 15 (1) of the Nigeria-Morocco BIT:

‘The Parties reaffirm their respective obligations as members of the International Labour
Organization (ILO) and their commitments under the ILO Declaration on Fundamental Principles
and Rights at Work and its Follow-up.’

Here again, the language used by States in their IIAs varies, in particular in relation to the bindingness
of the obligation. However, despite these variations, all the ‘statement of shared commitments’
provisions aim at reinforcing the effectiveness and efficacy of a set of labour standards obligations
which are binding upon States.

 Dispute settlement

The dispute settlement provisions which are contained in some IIAs pursue the same objective. They
offer a mechanism to ensure that States respect the ‘no-lowering standards’ and ‘statement of shared
commitments’ provisions.

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We can see such dispute settlement provisions in Article 13(4) of the 2012 bilateral investment
treaty model of the United States, which I will call the US BIT model for short. This provides
that:

‘A Party may make a written request for consultations with the other Party regarding any matter
arising under this Article. The other Party shall respond to a request for consultations within
thirty days of receipt of such request. Thereafter, the Parties shall consult and endeavor to reach
a mutually satisfactory resolution’.

Where an IIA contains such a mechanism designed specifically to address issues relating to ‘no-
lowering standards’ and ‘statement of shared commitments’ provisions, these will all have
‘consultation’ as a common denominator.

The mechanisms in some IIAs are more sophisticated, combining consultation with the intervention
of a joint committee or of a dispute settlement panel.

In addition, the ‘outcome’ of the dispute settlement process varies across IIAs: while some IIAs are
silent about this issue, such as the US BIT model, others entitle for instance the claimant to take any
appropriate or commensurate measure.

B. An analysis of ‘sustainable development’ provisions

The provisions that we have discussed in section one represent a landmark evolution in the field of
international investment law. You can see this evolution clearly if you compare them to the rules and
provisions that we have analysed so far in the MOOC.

We will focus here on three features of this evolution regarding:

1. the object of these provisions

2. their ultimate beneficiaries
3. the interests at stake in the situations adressed by those provisions

 Object

As for the first feature, at first glance, you may not be surprised that

 the ‘no-lowering standards’ and

 ‘statement of shared commitments’
provisions place duties and limits on State parties with respect to labour issues.

At the end of the day, the provisions that we discussed in modules two and three also limit
their normative power with respect to foreign investors.

On the other hand, it is remarkable that this limitation of States’ normative power aims to promote
the objective of ‘sustainable development’. Indeed, the promotion of sustainable development
objectives has traditionally been pursued through the reinforcement of States’ normative power, not
through its limitation.
This is something we noticed, for example, when we discussed indirect expropriation in module three:
the exception that you find for instance in the US BIT Model is intended to protect the normative
power of host States by limiting the situations where a state measure pursuing a public welfare
objective shall be characterized as an indirect expropriation.

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 Beneficiaries

In addition to this first feature, you should also note one particular innovation which concerns the
ultimate beneficiaries of ‘no-lowering standards’ and ‘statement of shared commitments’ provisions.
Unlike the full protection and security standard for instance, that we discussed in module two, the
ultimate beneficiaries of these particular provisions are not the investors of IIA State parties.

 The beneficiaries are workers – which is a remarkable feature. But what is

even more remarkable is the fact that those provisions protect workers
against the conduct of their own States.

This is an outstanding feature in the sense that IIA provisions have traditionally aimed at protecting
foreign persons from host State parties to IIAs. In contrast, the situation here is domestic.

 Interests at stake

Last but not least, you should take stock of the complexity of the situations addressed by the ‘no-
lowering standards’ and ‘statement of shared commitments’ provisions. To understand this, you
should first realize that the investor-state disputes we analyzed in the previous modules consist not
only in conflicts of legal views, but also in conflicts of interests. More precisely, these disputes are
tinged by conflicts between the interests of host States and the interests of foreign investors, which
we can refer to as public-private conflicts.

However, the conflicts of interests are more diverse in those situations addressed by the ‘no-lowering
standards’ and ‘statement of shared commitments’ provisions. Let’s focus on the ‘no-lowering
standards’ provisions to illustrate this. As you learnt in section one, these provisions are intended to
prevent States from lowering their labour conditions in order to attract foreign investors or to
maintain their presence over their territory.

At first glance, it may appear that the conflicts of interests at stake in these situations have no specific
features: they relate to the interests of investors to invest in the territory of host States against the
interests of workers’ entitled to good working conditions. However, there is at least one other facet
to the conflicts of interests arising in these situations. In order to understand this, you should bear in
mind that the aim of attracting or maintaining foreign investors relates to the overarching objective
of the economic development of host States – which, as we learnt, is a part of ‘sustainable
development’. In that sense, the situations addressed by the ‘no-lowering standards’ provisions are
not only characterized by a public-private conflict of interests – they are also characterised by a
conflict between various public interests.
There is no doubt that these trends in current investment treaty practice have a great potential and
could be used to protect other global commons, for instance the fight against climate change. For that
reason, international investment agreements and, more generally, international investment law,
should be taken seriously as an opportunity and as a tool to increase the well-being of local
populations worldwide.

Professor: Protection of the key objectives, labour rights, conditions, indigenous rights. Three pillars:
labour, environment, economic development. Both for now and the future. Protection and promotion.

1. Reinforcement of NP of the state

2. Limitation of the NP of the state

Limitation – states cannot lower the protection to workers in order to attract investors or maintain
them in the territory.

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Why is this limitation?

 States need to attract investors, but they cannot go beyond certain limitations. When states
decide to lower the protection to the environment – why? – promote economic development.

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Chapter 3: The obligations of foreign investors

In this chapter, we will focus on the obligations which are placed upon foreign investors in newly
concluded instruments. This emerging trend constitutes a remarkable reequilibrium of the obligations
of States and foreign investors under international investment agreements.

Similar to the promotion of sustainable development which we discussed in chapter two, this new
trend paints a picture of the potential future of international investment law.

 So what exactly are those features, and which obligations are binding upon foreign investors
in those instruments?
 To what extent are they really innovative in international investment law and,
 more generally, in international law?

In addressing these issues, we will:

1. the background you must know to contextualise this recent investment treaty practice
2. the details and the specifics of the obligations that are placed upon foreign investors

B. The obligations of private persons under international law

For centuries, it has been a well-accepted principle that private persons have no obligations, and also
no rights, under international law. This is notably the reason why private persons have traditionally
been conceived as lacking any international legal personality.

Over the past decades, this situation has been increasingly criticised in light of the societal impact of
private persons on local populations and on the international community.

We can see this in particular from the development of international criminal law and the prosecution
of individuals for the commission of international crimes. To a lesser extent, this is also true with
respect to international human rights law and businesses.

In the aftermath of decolonization, attempts to regulate the conduct of businesses largely

failed at the United Nations; on the other hand, the works conducted at the OECD led to the
adoption in 1976 of non-binding Guidelines for multinational corporations.

The debate about their responsibilities in relation to human rights has gained an increasing
importance since the 1990s.

 So far, this has not yet placed binding obligations on these businesses under international
human rights law. On the other hand, we see a large proliferation of nonbinding initiatives
aiming to sensitize and put pressure on these businesses to ensure that they take human
rights into account in their activities and supply chains. Most of these initiatives are referred
to under the notion of ‘corporate social responsibility’, or at least, they relate to it.
It is worth noting that some of these initiatives have emanated from businesses or networks of
businesses themselves, for example, in the energy sector. Other initiatives have been undertaken by
international organisations.

 Under the auspices of the United Nations, we have seen the Global compact
which is a voluntary initiative whereby businesses commit to implement

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universal sustainability principles and to take steps to support the goals of the
United Nations.

Another important initiative is the Guiding principles on business and human rights prepared by the
Special Representative of the Secretary-General on the issue of human rights and transnational
corporations and other business enterprises, which were adopted by the Human Rights Council in
2011.

They implement the United Nations ‘Protect, Respect and Remedy Framework’.

 This Framework rests in particular on the ‘Corporate responsibility to protect’ pillar; it

entails that businesses should act ‘with due diligence to avoid infringing on the rights of
others, and to address harms that do occur’.

In line with this ‘due diligence’ approach, we have also seen the Due diligence guidance for
responsible supply chains of minerals from conflict-affected and high-risk areas which was prepared
by the OECD.

 These guidelines provide recommendations intended to help businesses respect human rights
and to avoid that they contribute to conflicts through their mineral purchasing decisions and
practices.

In addition to the fact that these instruments are non-binding, they are criticized for their lack of
enforcement mechanisms. It is true that for the time-being their respect is largely based on the good
will of businesses and the monitoring done especially by nongovernmental organisations. In this
respect, ‘naming and shaming’ constitutes a substitute to institutionalised enforcement mechanisms.

Professor: States have HRO (human right obligations) – investors have to respect HR that both home
state and host state have in their international law => confirms horizontality of human rights.

 Vertical dimension of human rights – states cannot violate

 Horizontal dimension of human rights – states have to prevent the violations between the
private parties

C. IIA approaches to foreign investors’ obligations

Now that you have been introduced to the context in section one, we can move on to look at the
evolution of investment treaty practice regarding the obligations of foreign investors. There are many
different types of provisions which place obligations on foreign investors.

Of these, we will focus on four categories:

1. the provisions that relate to corporate social responsibility

2. those which address the compliance of foreign investors with domestic law
3. the provisions which link their obligations to the international obligations of States
4. the provisions which focus on the liability of foreign investors in their home States

1. CSR

Within the first category, you should note that, in spite of their different nuances, most of these
provisions use a non-binding language. Furthermore, treaty practice shows that the addressees of
these provisions vary. Some of these provisions target State parties and not foreign investors.

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This is well illustrated by Article 15(2) of the 2014 bilateral investment treaty concluded
between Canada and Cameroon which provides:

‘Each Party should encourage enterprises operating within its territory or subject to its
jurisdiction to voluntarily incorporate internationally recognized standards of corporate social
responsibility in their practices and internal policies, such as statements of principle that have
been endorsed or are supported by the Parties. These principles address issues such as labour,
the environment, human rights, community relations and anti-corruption.’

On the other hand, other provisions refer directly to foreign investors.

For instance, Article 12 of the 2016 bilateral investment treaty concluded between Argentina
and Qatar reads as follows:

‘Investors operating in the territory of the host Contracting Party should make efforts to
voluntarily incorporate internationally recognized standards of corporate social responsibility
into their business policies and practices’.

Professor: Reinforcing but limiting at the same time. The specificity of this limitation. Private vs public
interest – usually when it comes to investment but here there is a novelty with the balancing of two
public interests.

Most InA place responsibilities on states to force the companies to adopt a socially responsible
conduct. In few cases directly upon investors. The current denominator – they do not place strictly
binding obligations => obligations of best efforts as opposed to the obligations of the result. States
should encourage – strictly speaking is not even an obligation.

2. Compliance with domestic law

The second category of provisions addresses foreign investors’ compliance with domestic law.

An example of this is Article 11(i) of the 2015 Indian bilateral investment treaty model, which
provides that:
‘The parties reaffirm and recognize that: (i) [i]nvestors and their investments shall comply with
all laws, regulations, administrative guidelines and policies of a Party concerning the
establishment, acquisition, management, operation and disposition of investments.’

Such provisions make it compulsory for foreign investors to respect the domestic law of the host State,
in particular in relation to human rights and environmental considerations. They can also constitute
the basis of counterclaims, which you learnt about in module three.

3. Link the obligations of investors to the international obligations of states

The provisions of the third category aim at linking the obligations of foreign investors to international
standards more directly. They do so notably through the medium of host States and home States’
obligations.

For instance, Article 15(3) of the 2012 model bilateral investment treaty template of the
Southern African Development Community provides that:

‘Investors and their investments shall not [establish], manage or operate investments in a
manner inconsistent with international environmental, labour, and human rights obligations
binding on the Host State or the Home State, whichever obligations are higher’.

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4. Liability of foreign investors in their home states

Finally, looking at the fourth category, these provisions do not directly place obligations upon foreign
investors; instead they provide for their liability in their home State.

We can see an example of this in Article 20 of the 2016 bilateral investment treaty concluded
between Nigeria and Morocco which provides that:

‘Investors shall be subject to civil actions for liability in the judicial process of their home state
for the acts or decisions made in relation to the investment where such acts or decisions lead to
significant damage, personal injuries or loss of life in the host state’.

Professor: Belgium is obliged to initiate the proceedings before a national court. Belgium investor in
MAR – a Belgian court may say it has not jurisdiction – for the MAR court to deal with it. Sanction
obligation – aims precisely at preventing a court of Belgium like in this case to avoid exercising
jurisdiction based on some other provision of international law like international private law.

In light of these evolutions, we may well see an increased willingness of States to use international
investment agreements to go further into that direction in the future.

Concluding Module 6
You have reached the end of this module.

In these three chapters, you have gotten an insight into how international investment law may look
in the future.

 You have explored the recent trends in investment treaty practice which, in the future, may
become widespread, in relation to dispute settlement, global commons and investors’
obligations.
 You have seen that the face of international investment law may radically change.
 Remarkably, international investment law seems to be breaking its traditional borders.
Currently, this evolution is partly explained by the fact that this field of law is used to protect
and promote not only economic development, but also sustainable development.

Content-wise, this evolution entails that the provisions of international investment agreements do not
solely protect foreign investors– now, these agreements have other objects.

This is well illustrated

1. by the ‘no-lowering standards’ provisions which we analysed in chapter two, and
2. by the investors’ obligations which we discussed in chapter three.

In the future, this move of international investment law beyond its boarders may be triggered by other
objectives beyond sustainable development. Thus, IIAs may become a tool of global governance
geared towards the protection of global commons.

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Glossary

BIT – bilateral investment agreement – an agreement establishing the terms and conditions for
private investment by nationals and companies of one state in another state,
concluded between two states.

IIA – international investment agreement - a type of treaty between countries that addresses issues
relevant to cross-border investments, usually for the purpose of protection,
promotion and liberalization of such investments.

State contract – a contract between an investor and a state which contains clauses that had the effect
of ‘freezing’ the domestic law of host States at the time of the conclusion of the
contract.

Gunboat diplomacy – the recourse of the developed states to the use or threaten to use force to
protect their nationals abroad in case of a dispute between these national and their
host states.

Systemic package deal – a deal between the developing and European states at the core of which one
can find bilateral investment treaties.

Bilateralization of BITs – the process of BITs becoming reciprocal in nature – with developing countries
investing in developed and vice versa.

Creeping expropriation – a series of measures that have an expropriatory effect.

Hull formula - in order to be legal, expropriations must be promptly, adequately and effectively
compensated.

US BIT model - a non-exhaustive list of criteria that are used by arbitration tribunals to establish an
indirect expropriation.

Tests récapitulatifs :

Q1.1 - With regards to the treatment of foreigners, which standard did ‘developed’ States
mainly promote?

A. the most-favoured-nation treatment

B. the national treatment
C. the minimum standard of treatment
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D. the fair and equitable treament

Q1.2. Among the following items, which one does not form part of the objectives of
international investment law?

1. the promotion of States’ economic development

2. the protection of domestic investors
3. the attraction of foreign investors
4. the protection of foreign investors

Q1.3. Among the following items, which trends do not characterise recent treaty practice? (two
answers required)

1. the fall in the number of treaties concluded between ‘developing’ States

2. the de facto bilateralisation of bilateral investment treaties
3. the revision by ‘developed’ States of their treaty model
4. the rise in the number of multilateral treaties containing only investment provisions

Q1.4. During the first half of the Twentieth century, what was the claim of ‘developed States’
with regards to expropriation?
1. States are not entitled to expropriate the property of foreigners
2. States can expropriate the property of foreigners only if they are first authorised to do
so by the State of nationality of these foreigners
3. States are free to expropriate the property of foreigners, notably on the
condition that they provide them with prompt, adequate and effective
compensation
Q1.5. Why have bilateral investment treaties traditionally been seen as unbalanced? (two
answers required)
1. they have operated almost exclusively to the benefit of investors from ‘developing’
States
2. they have been concluded on the basis of the bilateral investment treaty models of
‘developed’ States
3. they have contained obligations binding only upon States

Q1.6. To
which phenomenon does the ‘de facto bilateralisation’ of bilateral
investment treaties in recent times refer?
1. investors from ‘developing’ States have increasingly benefited from the treaty
protection as a result of the fact that they have increasingly begun investing in
‘developed’ States
2. bilateral investment treaties have not only been adopted, but they have also entered
into force

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3. investors from ‘developed’ States have benefited more often from the treaty
protection as a result of the fact that they have increasingly been investing in
‘developing’ States
Q2.1 With regards to the minimum standard of treatment, which one of the following
standards set the highest threshold in determining whether the standard has been breached
by a host State?
1. Reasonableness
2. Fairness
3. Egregiousness
Q2.2. How do arbitration tribunals usually justify the use of ‘legitimate expectations’? (three
answers required)
1. they consider it as a general principle of law recognized by civilized nations
2. they refer to the ‘legitimate expectations’ provision in the text of the applicable
international investment agreement
3. they refer to domestic legal systems
4. they refer to past arbitration awards

Q2.3 With respect to the interpretation of the full protection and security standard, some
arbitration tribunals refer to the fair and equitable treatment standard in order to argue that:
(two answers required)

1. the full protection and security standard protects foreign investors from the conduct of
host States
2. the full protection and security standard does not cover legal security and the
stability of the legal framework
3. the full protection and security standard should be interpreted in such a way
as to avoid overlaps with the fair and equitable treatment standard

Q.2.4. Amost-favoured-nation clause contained in a bilateral investment

treaty aims at: (two answers required)

1. ensuring that the treatment granted to investors of one State party to the treaty
by the other State party is no less favourable than the treatment it gives to the
investors of third States

2. avoiding discriminatory treatment against investors of one of the State party to the
treaty by the other State party vis-à-vis its own investors

3. avoiding discriminatory treatment against investors of one of the State party to

a treaty by the other State party vis-à-vis investors from third States

4. preventing the investors of one of the State party to the treaty from getting better
treatment than the investors of the other State party where they invested

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Q2.5. Which one of the following proposals characterises the practice of

arbitration tribunals with regards to contract-based ‘umbrella clause’ claims
and those contracts which contain an exclusive forum selection clause?
1. all tribunals agree that the existence of a contractual exclusive forum selection clause
makes the claim inadmissible

2. some tribunals argue that a contractual exclusive forum selection clause makes the
claim definitively inadmissible

3. all tribunals agree that the existence of a contractual exclusive forum selection clause
does not make the claim inadmissible, notably because this would be functionally
equivalent to declining jurisdiction over contract-based ‘umbrella clause’ claims

4. some tribunals argue that the claim may become admissible if the State
disregards the decision of the tribunal benefiting from the exclusivity
conferred by the contractual exclusive forum selection clause

Q2.6. Which ones of the following elements can play a role in assessing the
existence of legitimate expectations of foreign investors? (two answers
required)

1. the level of development of the investors' home State

2. the diligence of foreign investors

3. the existence of fraud to get a specific premise

Q2.7. Which ones of the following statements characterise the national

treatment standard? (two answers required)
1. national treatment sets a relative standard

2. the national treatment standard protects foreign investors from the

discrimination they may suffer vis-à-vis the nationals of the host State

3. the national treatment provisions of all international investment agreements cover

both the establishment phase and the post-establishment phase

4. the national treatment standard cannot in any way be compared with the most-
favoured-nation treatment standard

Q2.8. What is the purpose of ‘umbrella clauses’?

1. linking breaches of a contract to international law

2. obliging host States to respect their obligations towards foreign investors as a matter
of domestic law

3. linking breaches of a treaty to international law

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Q3.1. Which of the following proposals do not characterise ‘creeping

expropriation’? (two answers required)
1. it is a form of indirect expropriation

2. it is a form of direct expropriation

3. it is the result of a series of acts which collectively constitute an indirect expropriation

4. it is the result of a single measure which has a continuing character

Q3.2. Among the following items, which one characterises expropriation in

international law?
1. expropriation is prohibited in all circumstances

2. expropriation is prohibited unless the foreign investor authorises the host State to
expropriate her property from her

3. expropriation is a sovereign prerogative of States

4. host States can expropriate on the sole condition that the expropriation is non-
discriminatory

Q3.3. Whichof the following proposals do not characterise the ‘police

powers’ doctrine and the way it is used in investor-state arbitration? (two
answers required)
1. when determining the existence of an indirect expropriation, some tribunals
have focused only on the impact of the measure

2. the ‘police powers’ doctrine unequivocally entails that any non-discriminatory

measure which protects a public interest and which is enacted in accordance
with due process does not constitute an indirect expropriation, whatever its
impact

3. arbitration tribunals disagree on the exact content of the ‘police powers’ doctrine

Q3.4. Which of the following proposals is not correct?

1. some newly concluded international investment agreements provide
that a non-discriminatory regulatory measure aiming at the protection
of a legitimate public purpose objective shall not be characterised as
an indirect expropriation

2. according to the approach adopted by the Tribunal in the case

of Methanex v United States, the object of the measure is not

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taken into account to characterise a measure as being, or not,

an expropriatory measure

3. some newly concluded international investment agreements provide

that a non-discriminatory regulatory measure aiming at the protection
of a legitimate public welfare objective can be characterised as an
indirect expropriation in rare circumstances

Q3.5. Out of the following, which form part of the main considerations in
assessing the legality of an expropriation, as provided in international
investment agreements? (two answers required)
1. the breach of any undertaking given by the host State

2. non-discrimination

3. the effect of the expropriatory measure

4. compensation

5. the proportionality of the measure

Q3.6. Which of the following proposals do not reflect the proportionality

approach adopted by the Tribunal in Tecmed v Mexico? (two answers
required)

1. the legitimacy of the aim pursued by the state measure is key in

the assessment of its proportionality

2. the aim pursued by the state measure is the only factor to be

taken into account

3. there must be a reasonable relationship of proportionality between

the burden imposed on the foreign investor and the aim pursued by
the measure

4. the significance of the impact of the state measure plays a key role in
deciding its proportionality

Q3.7. In the case of Saluka v Czech Republic, the Tribunal argued that:
1. the ‘police power exception’ is absolute

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2. there is a bright and easily distinguishable line between non-

compensable regulations and measures having the effect of
depriving foreign investors

3. the principle that a State does not commit an expropriation

when it adopts a general regulation is commonly accepted as
forming part of States’ police power

Q4.1. ICSID Convention arbitration proceedings are: (two answers

required)
1. open to disputes between a State and a foreign investor, where
either the host State or the State of nationality is not a party to the
ICSID Convention

2. governed by the 1965 ICSID Convention and the ICSID Rules of

procedure for arbitration proceedings

3. open to disputes arising between an investor who is a national

of a State party to the ICSID Convention and a host State which
is also a party to this Convention

Q4.2. With regards to the jurisdiction of arbitration tribunals, which of

the following statements are not correct? (three answers required)
1. jurisdiction is an attribute of the claim and not of the arbitration
tribunal

2. in order to establish the jurisdiction of an arbitration tribunal,

three conditions must cumulatively be met: the conditions
ratione personae, materiae and temporis

3. wth regards to the arbitration proceedings governed by the

ICSID rules of arbitration, the jurisdiction of arbitration tribunals
must be assessed exclusively on the basis of the ICSID
Convention

4. the notion of ‘jurisdiction’ is to be distinguished from the notion of

‘admissibility’

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Q.5.1. What is the effect of Article 31(3)(c) of the Vienna Convention on the
Law of Treaties with regards to investor-state arbitration?
1. it leads arbitration tribunals to focus on the terms of international
investment agreements

2. it leads arbitration tribunals to focus on the object and purpose of

international investment agreements

3. it connects investor-state arbitration to regimes of international

law other than international investment law

4. it leads arbitration tribunals to take into account any rules of

international law

Q6.1. On which of the following grounds is investor-state arbitration notably

criticised?
1. the lack of enforcement of arbitral awards

2. the politicisation which characterises the settlement of disputes

3. the fact that arbitrators are appointed by the parties to the
international investment agreements which have allegedly been
violated

4. the lack of coherence of arbitration practice

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