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Executive Summary

An international investment agreement protects investments in the host state made by those foreign investors — natural persons and legal entities — who qualify for the protection under the definitions of the agreement. In accordance with the terms of the agreement, some of the protections may apply even before the investment has been established. IIAs usually seek to balance investment protection against sovereign and public interests, and therefore tend to contain certain exceptions to the investment protections.

1.0 Introduction: International Treaties and Other Instruments of Investment Protection

Foreign investors and their investments may be protected under international investment agreements (IIAs) to which the state of their nationality and the “host state” to their investment are parties. The most common IIAs are bilateral investment treaties (often referred to as BITs). As trade and commercial flows have increased over the past decades, investment protection has also become commonplace in free trade agreements through an investment chapter. Foreign investors may also be protected under the national laws of the host state (e.g., a foreign investment law), as well as other investment-specific instruments such as investment contracts between individual foreign investors and the host government (discussed in the next chapter).

According to the United Nations Conference on Trade and Development (UNCTAD), by December 2017 there were nearly 2,700 IIAs in force.¹ In order to promote investment and increase the transparency of their investment climate, host states often make information available online about IIAs to which they are party.

Ministries of foreign affairs and trade, relevant sectoral authorities, as well as the authorities specialising on trade and investment promotion, are natural points of contact for investors seeking information about a state’s investment climate, incentives, and other investment-related matters.

1.1 Determining the Existence of IIAs

In their IIAs, states tend to commit to publishing and making available relevant laws and regulations. For example, state parties to the Trans-Pacific Partnership (TPP) have agreed as follows:

Article 26.2: Publication. (1) Each Party shall ensure that its laws, regulations, procedures and administrative rulings of general application with respect to any matter covered by this Agreement are promptly published or otherwise made available in a manner that enables interested persons and Parties to become acquainted with them.

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There are many sources for identifying whether a state is a party to an IIA. They include sites hosted by states themselves, such as the US Department of State’s website: https://www.state.gov/e/eb/ifd/bit/117402.htm; as well as UNCTAD’s International Investment Agreements Navigator http://investmentpolicyhub.unctad. org/IIA; ICSID’s Database of Bilateral Investment Treaties https://icsid.worldbank. org/en/Pages/Resources/Bilateral-Investment-Treaties-Database.aspx; the WTO’s Regional Trade Agreements Information System http://rtais.wto.org/UI/ PublicMaintainRTAHome.aspx; and the Organization of American States Foreign Trade Information System (SICE) http://www.sice.oas.org/. It is always essential to confirm that the relevant agreement is in force.

2.0 Nationality Requirements in IIAs

IIAs afford investors of one contracting party and their investments substantive protections in the territory of the other contracting party (discussed in Chapters 8 and 9). For this reason, IIAs specifically determine who qualifies as an investor under the treaty by defining which persons and legal entities are nationals of a contracting party. Prospective investors must meet these qualifications if they intend to rely on the IIA’s protections when investing in the host state.

2.1 Natural Persons

IIAs usually define a natural person as a national of a contracting party in accordance with its laws. For example, Article 1 of the 2012 US Model BIT provides that a “‘national’ means: (a) for the United States, a natural person who is a national of the United States as defined in Title III of the Immigration and Nationality Act”.² Similarly, Article 126 of the 2009 China-Peru Free Trade Agreement, provides that “investors means: (a) for China: (i) natural persons who have nationality of the People’s Republic of China in accordance with its law.”³

This formal approach to nationality has been tested in disputes between investors who once held the host state’s nationality, as shown in the following example.

2.1.1 Dual Nationals

When the investor holds the nationality of the contracting party and the host state (a dual national), parties sometimes disagree as to whether a natural person qualifies as an investor for purposes of the IIA. Some IIAs disqualify such investors outright.⁶ Other IIAs do not, but specify how nationality is to be determined. For example, Article 8.1 of the Comprehensive Economic and Trade Agreement (CETA) between the European Union and Canada, provides: “A natural person who is a citizen of Canada and has the

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nationality of one of the Member States of the European Union is deemed to be exclusively a natural person of the Party of his or her dominant and effective nationality.”⁷

2.1.1.2 ICSID Rule

The International Centre for Settlement of Investment Disputes (ICSID) provides a specialised framework for arbitrating investor-state disputes.⁸ However, pursuant to Article 25 of the ICSID Convention, ICSID lacks jurisdiction over claims submitted by natural persons holding the nationality of the contracting party and the host state, even if the underlying IIA does not prohibit such claims.

A natural person who is disqualified from bringing a claim against the host state as a result of dual nationality should explore other alternatives for dispute resolution, such as other fora that may be specified in the IIA.⁹

2.2 Legal Entities

IIAs usually provide that a legal person (i.e., a non-natural person, such as a corporation) is a national of a contracting party if it is established in the jurisdiction of the contracting party, in accordance with its laws. For example, Article 1 of the United Kingdom-Mexico BIT provides that an “‘enterprise’ means any entity constituted or organised under the law of the relevant contracting party, including any corporation, trust, partnership, sole proprietorship, joint venture or other association.”¹⁰

Companies incorporated in the host state of investment do not normally qualify as an investor, and cannot sue the host state under an IIA. However, the reality of modern investment is that sometimes foreign investors may need to conduct their operations using a company registered in the host state. Recognising this reality, some modern IIAs consider such entities as a national of the investor, provided that it is owned or controlled by a foreign investor which is a national of the other state party to the IIA.¹¹ In addition, Article 25(2)(b) of the ICSID Convention allows the host state of an investment and a foreign investor to agree to recognise such a locally incorporated company as a foreign investor.

Legal entities qualify as an “investor” under an IIA when they satisfy the usually broad definition of “investor” as an enterprise, company, or other organisation constituted under the law of a Contracting Party to a BIT.

2.2.1 Denial of Benefits

This formal approach to corporate nationality for purposes of defining an investor under the governing IIA, coupled with broad definitions of what constitutes an “investment”, have often allowed minority and non-controlling shareholders to claim against host states for the value of their shareholding. Furthermore, in some instances it has allowed nationals of the host state to avail themselves of that state’s IIAs by investing through a corporate vehicle of the other contracting party.¹² This latter scenario has resulted in the incorporation of “denial of benefits provisions” in a number of recent IIAs. Such provisions entitle the host state to deny benefits of the IIA to legal persons controlled by third-country nationals or by nationals of the host state. The Trans-Pacific Partnership contains such a provision:

Article 9.15: Denial of Benefits

1. A Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of that other Party and to investments of that investor if the enterprise:

(a) is owned or controlled by a person of a non-Party or of the denying Party;

and

(b) has no substantial business activities in the territory of any Party other than the denying Party.

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Contracting parties to an IIA are at liberty to agree on the legal entities that will be considered nationals for purposes of the treaty, as illustrated by the following case.

This legal approach to corporate control often allowed claimants to claim against host states when their investment has been channelled through a third country that is not a party to the governing IIA (i.e., indirect investment). However, in an increasing number of disputes between investors and host states tribunals have found that investors have abused their rights if they restructure their investments after the dispute has arisen, or is foreseeable, to avail themselves of IIA protection.¹⁵

Investors should carefully examine the terms of IIA with respect to investor nationality, as recent IIAs may limit who qualifies as a foreign investor.

3.0 Implementation of IIAs

Once an IIA enters into force, IIA provisions will apply to acts and omissions of the state’s national and subnational governments, as well as persons exercising governmental authority. However, IIAs usually do not indicate how the host state should monitor its compliance or how the investor should navigate the state’s bureaucracy. Frequently states now delegate this task to specific government agencies. The designated agency may have an established dispute prevention and management system for coordinating a government’s response to an investor’s concerns and, once the designated agency is notified of a dispute, to represent the state with one voice. Notifications cover such matters as: (a) requesting consultations and negotiations, including good offices, conciliation or mediation; and (b) submitting a claim to arbitration, including providing a notice of intent to submit a claim to arbitration and the notice of arbitration itself.¹⁷

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If the IIA does not designate a government agency to monitor the host state’s compliance with the IIA, investors will find that governments adhering to the OECD’s Guidelines for Multinational Enterprises designate national contact points to provide relevant information. These national contact points “provide a mediation and conciliation platform for resolving practical issues that may arise with the implementation of the Guidelines”. Contact points do not always coincide with agencies that may be designated in IIAs or national legislation for foreign investment dispute prevention and management, but they often are able to provide information on how to contact the appropriate authority concerning specific issues relating to the implementation of the IIA.

4.0 Admission and Establishment

Following their entry into force, IIAs usually provide protection to established investments. Generally, these include protection against unlawful expropriation and impairment by arbitrary measures, fair and equitable treatment, full protection and security, observance of contractual undertakings, national treatment and most favoured- nation treatment.¹⁸ These forms of protection, which are very important for investors, are discussed in Chapters 8 and 9.

Investors should note that the trend in recent IIAs is to go beyond protecting existing investments, and to provide pre-establishment protection — the right to have an investment admitted and established in the host state’s territory.

According to UNCTAD, 10% of all IIAs and about half of those concluded in 2014 provided for pre-establishment protection by the host state. For example, the Comprehensive and Economic Trade Agreement (CETA) between Canada and the EU provides that an “investor”, protected under the agreement, is one “that seeks to make, is making or has made an investment.” ¹⁹ Similarly, the 2012 United States Model BIT defines an investor as one that “attempts to make, is making, or has made an investment of the other [Contracting] party.”²⁰

Pre-establishment protection is often limited to a few key provisions, such as the grant of national treatment and most-favoured nation treatment (see Chapter 9), and the prohibition of performance requirements. Some modern IIAs go further in the preestablishment protection afforded to investors and their investment. For example, Article 8.4 of CETA contains a market access clause for the establishment of investments that prohibits, among others, imposing limitations on the number of enterprises that may carry out a specific economic activity or putting numerical quotas on the total value of transactions or assets.²¹

While providing some degree of pre-establishment protection, IIAs usually reserve some degree of host state control over the admission and establishment of investments in their territory. Under domestic law, this control may range from host state screening of an investment to an absolute restriction by the host state of foreign investments in certain sectors, as well as limitations on foreign ownership, licensing or authorisation processes, and/or the imposition of performance requirements and/or reporting requirements.

The host state’s control over the admission and establishment of investments is also reflected in IIAs which usually require that investments be made in accordance with the host state’s laws. For example, the United Kingdom’s model Investment Promotion and Protection Agreement (IPPA) provides that a Contracting Party “shall encourage and create favourable conditions for nationals or companies of the other Contracting Party to invest capital in its territory, and, subject to its right to exercise powers conferred by its laws, shall admit such capital.”²² Similarly, the practice of the People’s Republic of China is to have a contracting party invest “in accordance with its laws and regulations.”²³

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Prospective investors intending to rely on an IIA when making their investment must carefully review the treaty’s scope and coverage. This due diligence must include not only domestic laws and the main text of the treaty, but also the treaty’s annexes which may contain important reservations and exceptions (such as a negative list) which are described below. It is also advisable to review the host state’s treatment of other foreign investors seeking to invest in the host state.

5.0 Host State Exceptions

IIAs often set forth exceptions to the investment protection provided in the agreement. Such exceptions can apply to the IIA as a whole or to some of its provisions. For example, Article 10.1 of the Canada-Peru BIT provides that:

Subject to the requirement that such measures are not applied in a manner that would constitute arbitrary or unjustifiable discrimination between investments or between investors, or a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures necessary:

1. to protect human, animal or plant life or health;
2. to ensure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement; or
3. for the conservation of living or non-living exhaustible natural resources.²⁴

IIAs may also contain “negative lists” of closed sectors and non-conforming measures, which are often found in annexes. Modern IIAs seek to balance the protections afforded to investors and their investments with certain public interests, for example, protection of labour rights and the environment. The 2012 US Model BIT provides “that it is inappropriate to encourage investment by weakening or reducing the protections afforded in domestic labor and environmental laws”.²⁵

Finally, IIAs often contain exceptions for the protection of the host state’s essential security interests, which could include a range of sovereign interests, from maintaining peace and public order to addressing economic crises. For example, the US-Argentina BIT provides:

This treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.²⁶

In a number of cases arising out of the Argentine economic crisis of the early 2000s, the tribunal rejected Argentina’s claim that invocation of this provision was self-judging and therefore was unreviewable. They also rejected the Claimants’ arguments that economic crises did not fall within the scope of the provision. ²⁷

The US views the national security exception as self-judging, and to that end uses the term “it considers necessary” in its 2012 Model BIT,²⁸ and in various BITs and Free Trade Agreements. For example, Article 18.2 of the United States-Uruguay BIT (2006) provides that nothing in the Agreement is:

to preclude a Party from applying measures that it considers necessary for the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.²⁹ (emphasis supplied).

The US is very likely to argue in an ISDS case that a tribunal has no right to question its reliance on national security to justify the challenged action.³⁰ However, a tribunal might well apply a “good faith” test if the action appeared to have little or no connection with national security. For example, in LG&E v Argentina, the Tribunal said that were it to conclude that the provision was self-judging, Argentina’s action “would be subject to a good faith review anyway.” ³¹

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6.0 Dispute Resolution

One of the notable aspects of IIAs, and the one that has greatly contributed to their relevance in foreign investment, is that they usually contain provisions for resolution of disputes between foreign investors and host states over whether certain acts or omissions of the host state breached a commitment to specific protection in the IIA,³² and whether damages were caused by the breach.³³ By including dispute-resolution provisions in the IIAs, host states usually provide a standing offer of consent that investors can accept should they wish to submit the dispute to international arbitration. Dispute-resolution provisions vary in scope and terms but usually offer the host state’s consent to submit a dispute to international arbitration under the rules of different forums.³⁴ Dispute resolution is discussed in detail in Part VI of this volume.

IIAs often require investors to take specific steps before the arbitration of a claim can begin. Investors intending to become claimants in the arbitration against the host state need to be aware of the specific conditions for initiating a dispute and the jurisdictional requirements in the particular IIA,³⁵ before submitting their claims to arbitration.

Notes

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