Extractive Industries and Sustainable Development
Executive Training Program
June 9-20, 2014
Lise Johnson
ljj2107@columbia.edu
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Otherwise known as “International Investment Agreements” (IIAs) or Bilateral Investment treaties (BITs)
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Can be between two countries – a BIT; or
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Can be between many countries –e.g., the Energy Charter Treaty (ECT)
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Agreements between states regarding the protection of foreign investment
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Why have countries signed them: Tools for protection (and promotion?) of foreign investment
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What do they do: Impose obligations on host states to protect foreign investors/investments:
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National Treatment
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Most-Favoured Nation Treatment (MFN)
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Expropriation (Direct and Indirect)
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Fair and Equitable Treatment (FET)
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Umbrella Clause
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Restrictions on Performance Requirements
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Guarantees on Free Transfers of Capital
How are they enforced: Allow investors to bring claims via investor-state arbitration
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costs of arbitration are now roughly USD 10 million on average
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claims for money damages reach into the hundreds of millions, if not billions of dollars;
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per two treaties (the New York Convention and the ICSID Convention) domestic courts’ review of resulting arbitral awards is significantly narrowed.
For low long: the treaties are in effect typically for 10-15 years with “survival clause” of another 10-15 years.
What does this all mean for extractive industries?
Domestic law is not the only thing you have to think about
Investment Treaties: What?
S Who has them? (as of June 1, 2013)
S Roughly 3000 of these agreements have been signed by most
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countries around the world, e.g.,
Brazil – no BITs in force
Burundi – has signed 7
Ethiopia – has signed 29
Equatorial Guinea – has signed 8
Kazakhstan – has signed 42
Kyrgyzstan – has signed 29
Papua New Guinea – has signed 6
Tajikistan – has signed 32
Tanzania – has signed 17
S Where can you find these?
S Bilateral investment treaties: www.unctad.org
http://unctad.org/en/pages/DIAE/International%20Investment%20Agr
eements%20(IIA)/IIA-Tools.aspx
Who is a Covered “Investor”?
S “Investors”- often multinational enterprises
“MNEs”
S “Investors” include individuals and
companies; minority shareholders, portfolio
investors, etc.
S Two main issues:
S Problem of multiple claims S
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Example: Possible shareholding of a
mining company
Who
Can potentially face claims by the foreign
companies, the shareholders in those companies,
foreign shareholders in the domestic state-owned
mining company, etc.
Problem of “treaty shopping” through
indirect ownership S
E.g., foreign Mining Company B, a Canadian
company, is not protected by a treaty, but routes
its investment through a shell company in the
Netherlands; and that shell company is protected
by the treaty.
is an “investor” under the IIA?
Publicly Traded
Shares
19%
Foreign Mining
Company B
15%
Foreign Mining
Company A
15%
Domestic stateowned mining
company
51%
Treaty Shopping
Brazil: No BITs in force
BMC: Brazilian Mining
Company
BMC invests in
Argentina
No BIT Protection
Treaty Shopping
“Dutch Mailbox
BMC” invests in
Argentina
There is a BIT
between Argentina
and the Netherlands
Brazil: no BITs in force
BMC: Brazilian Mining
Company
The Netherlands:
hundreds of BITs
BMC sets up a
subsidiary in the
Netherlands – “Dutch
Mailbox BMC”
Treaty Shopping
S Mr. Ablyazov – a Kazakh national, businessman in Kazakhstan, and
former Minister of Energy, Industry and Trade
S Since 1998, he was the beneficial owner of the majority of shares in
BTA – shareholding was through different offshore companies and not
disclosed to the government
S August 1, 2007 – BIT between Kazakhstan and the Netherlands enters
into force
S December 12, 2007 – claimant incorporated a shell company in the
Netherlands, KT Asia, to hold its shares in BTA
S KT Asia, the “Dutch” company beneficially owned by the Kazakh
national, was a foreign investor in Kazakhstan and protected by the
BIT between the Netherlands and Kazakhstan
• Some tribunals may reject an investor’s attempt to treaty shop
• Key consideration for some tribunals is when the affiliate was created – before or after the
dispute arose
What is a Covered “Investment”?
S “Investments” often include a broad range of tangible and
intangible property rights and interests
S “every kind of asset”, “including, but not limited to” …
S “expectations” regarding future rights?
S Example 1: From Kazakhstan-Netherlands BIT:
What is a Covered “Investment”?
Example 2: From Energy Charter Treaty, Art. 1:
(6) “Investment” means every kind of asset, owned or controlled directly or indirectly by an Investor and
includes: 5
(a) tangible and intangible, and movable and immovable, property, and any property rights such as leases,
mortgages, liens, and pledges;
(b) a company or business enterprise, or shares, stock, or other forms of equity participation in a company or
business enterprise, and bonds and other debt of a company or business enterprise;
(c) claims to money and claims to performance pursuant to contract having an economic value and associated with
an Investment;
(d) Intellectual Property;
(e) Returns;
(f) any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to
undertake any Economic Activity in the Energy Sector.
(5) “Economic Activity in the Energy Sector” means an economic activity concerning the exploration,
extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of
Energy Materials and Products except those included in Annex NI, or concerning the distribution of heat to
multiple premises.
Case example: Mahammed Ammar Al-Bahloul v. Tajikistan (SCC Arbitration No. V (064/2008)
“[C]laims to money and claims to performance pursuant to contract having an economic value” include claims
that the state breached a contractual obligation with the foreign investor to issue necessary licenses.
What is a Covered Investment?
S Additional questions and issues, e.g.,:
S When was the asset or interest acquired?
S When has it crystallized into an “investment”?
S Can it be fleeting, e.g., a portfolio investment, or need it
involve a long-term commitment?
S Does it have to involve a substantial commitment of resources
into the host state?
S These are among the questions you might have to face when
there is a dispute between a foreign company/foreign
investor and the host state
S Impose obligations on host states to protect
foreign investors/investments.
S Typically include:
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National Treatment
Most-Favoured Nation Treatment (MFN)
Expropriation (Direct and Indirect)
Fair and Equitable Treatment (FET)
Umbrella Clause
Restrictions on Performance Requirements
Guarantees on Free Transfers of Capital
S Impose obligations on host states to protect
foreign investors/investments.
S Typically include:
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National Treatment
Most-Favoured Nation Treatment (MFN)
Expropriation (Direct and Indirect)
Fair and Equitable Treatment (FET)
Umbrella Clause
Restrictions on Performance Requirements
Guarantees on Free Transfers of Capital
(1) Non-discrimination: The basic rules
National and MFN treatment:
S GENERAL RULE: Requires treatment of foreign investors that is
“no less favourable” than treatment of domestic or other foreign
investors
S Example A: Germany-Ethiopia BIT
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“Post-establishment” meaning once the investment is there – no
discrimination is allowed:
(1) Non-discrimination: National and MFN Treatment
Policy Issues
These rules can bar both intentional and unintentional
or “de facto” discrimination
S When might you want to intentionally discriminate between foreign and
domestic companies? E.g.,
To build up infant industries by providing grants, loans, or tax credits
To favor historically disadvantaged groups or address socioeconomic
inequalities
S To promote development of minority-owned businesses
S To encourage procurement from indigenous communities
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S When might you want to intentionally discriminate between foreign
businesses from different countries? E.g.,
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Have negotiated different agreements on a state-state level (e.g., customs
unions, preferential trade agreements)
S When might you unintentionally discriminate between companies? E.g.,
S Preferring one company’s bid over another company’s
S Taking enforcement action (e.g., to ensure compliance with environmental,
labor, or tax law) against one company but not another
S Offering an incentive (e.g., tax stabilization) to one company, but not another
S Requiring use of technology employed by one company but not another
(1) Non-discrimination: National and MFN Treatment
“Likeness”
S Prohibition focuses on discrimination between
investors in “like circumstances”
S Countries can discriminate between investors in
“unlike circumstances”.
S But what does that mean?
S Are state-owned companies “like” privately owned
companies?
S Are companies exporting minerals “like” companies
exporting other products such as oil, flowers, or
manufactured goods?
S Are companies that procure locally “like” companies
that source their goods and services from foreign
affiliates?
Grab extra
protection
from treaty
between
Costa Rica
and Chile
Grab extra protection
from treaty between
Costa Rica and
Switzerland
German Mining
Company in Costa Rica
Protected by treaty
between Germany and
Costa Rica
But the company wants
better and stronger
protection
Grab extra
protection from
treaty between
Costa Rica and
United States
….etc.
Is there a
limit?
GENERAL RULE:
S The state has the right to expropriate
foreign investment generally allowed, but
must be
S done for a public purpose,
S in accordance with the law, and
S accompanied by payment of
compensation.
S Expropriation may be direct or indirect.
Example –
Treaty between Zambia and the Belgium-Luxembourg Economic Union, Art 4(1)-(3)
S Direct expropriation – e.g., outright seizure or takeover of a
facility or a mine; nationalization
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Easy to identify
Harder question is question of compensation
Some treaties specify what proper compensation is – but determination
of the value is still difficult
S Indirect expropriation – e.g., regulation eliminating the value of an
investment
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Much more controversial
Harder to identify whether there has been an expropriation; line between
“expropriation” and general, legitimate regulation is hard to draw
S A law banning production of a chemical? Does it expropriate the
business of the company that produced the chemical?
S A law changing zoning and preventing construction in ecologically
sensitive areas? Does it expropriate the landowner’s rights regarding
the land?
S A law strengthening environmental requirements for mining? Do the
added costs “expropriate” the investors’ investment?
S Different tests and considerations are used to determine whether a
regulation, decree, law, judicial decision, or other measure is an
“indirect expropriation”: e.g.,
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“Sole effects” test: Look at the impact of the measure and assess whether it
has the same effect as an actual “taking” of the foreign investor’s property;
S The government’s intent is of little or no weight
S The main issue is whether the measure has destroyed or substantially
destroyed the value of the investment;
Multi-factor balancing test; this involves consideration of:
S The economic impact of the measure;
S The character of the government’s conduct; and
S The degree to which the measure interferes with distinct, investmentbacked expectations.
Dominant approach has been that benefit to the state not necessary
General rule is that deprivation or loss must be severe in scope and duration
– total or near total – in order to constitute an expropriation.
S Police powers “exception”: good faith regulatory measures taken by a
state that are designed and applied to protect or enhance legitimate
public welfare objectives, such as public health, safety and the
environment, are not an “expropriation” and don’t give rise to a duty to
pay compensation.
GENERAL RULE: A state must accord investors
treatment that is “fair and equitable”.
Has become the key question in investment
treaties: What does this mean?
It can cost a lot of money to find the answer!
You may not like the answer that you get!
Vague words – have been interpreted to mean much more than what might have been
intended
Example – Japan-Papua New Guinea BIT
Example – Germany-Afghanistan BIT
Fair and Equitable Treatment
S “Expropriation light”
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Bad faith not a requirement
Protection of investors’ “legitimate expectations”(?)
Protection of “commitments”(?)
A range of approaches
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Light scrutiny:
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only bars “egregious” or “shocking” conduct, or conduct that “grossly subvert[s] a domestic
law or policy for an ulterior motive”
does not position international tribunals as courts of appeal review
(does not include protection of “legitimate expectations” or stable regulatory environment)
Heavy scrutiny:
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conduct must “not affect the basic expectations that were taken into account by the
foreign investor to make the investment”;
conduct must be “free from ambiguity and totally transparent,” so that the investor may
know all the relevant rules and regulations and their respective goals before investing
(Tecmed v. Mexico, ICSID Case No. ARB(AF)/00/2, Award, May 29, 2003, para. 154);
requires “stability and predictability” and “certainly entails an obligation not to alter the
legal and business environment in which the investment has been made” (Occidental v.
Ecuador, Award, July 1, 2004, paras, 186, 190-91);
enables review of correctness of domestic court/administrative determinations (Occidental
v. Ecuador, Award, July 1, 2004, para. 185)
Some reported elements:
S transparency;
S stability;
S protection of the investor's legitimate
expectations;
S compliance with contractual obligations;
S procedural propriety and due process;
S action in good faith; and
S freedom from coercion and harassment.
S Many agreements – no provisions
S Some incorporate WTO’s TRIMs Agreement +
investor-state arbitration
S Others – TRIMs +
S Add new restrictions
S Apply to investment measures relating to goods and
services
S Implications for local content requirements in contract
or law; can hinder, e.g., government freedom to induce
investors to invest in R&D, education and training, or
favor local producers of goods or services
Requires compliance with “any obligation” owed to the
investor
S Only covers obligations specifically entered into between the
state and investor in a written contract, and governed by
domestic law
S Covers “any” obligation, including those “assumed” under
generally applicable laws or regulations
Investment Treaties - exceptions
S General Exceptions, e.g.,
S To conserve natural resources
S To protect animal, human and plant life or health
S For essential security or national security interests
S For taxation measures
S For balance of payments and prudential reasons
S Specific Exceptions,, e.g.,
S To promote domestic small and medium sized enterprises
S For sub-national authorities
S For existing non-conforming measures
S For specific sectors
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General Features of Domestic System
S Who can bring claims?
S Who decides?
S Where and how?
S What law do they apply?
S Can you appeal?
S What are the remedies or damages?
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General Features of Investment Arbitration:
S Who can bring claims?
S Who decides?
S Where and how do they decide?
S What law do they apply?
S What is the role of domestic law?
S Can you appeal?
S What are the remedies or damages?
At least 56 new cases were filed in 2013 – likely more
Source: ICSID
Source: ICSID
Getting Free Information about the Cases
italaw.com
Can sort by, e.g.,
Company that is suing 
State being sued 
Date 
Getting Free Information about the Cases
S Other sites:
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Search for cases on ICSID:
https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=ShowH
ome&pageName=Cases_Home
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In the future: UNCITRAL transparency registry: http://www.uncitral.org/transparencyregistry/registry/index.jspx#country
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Other information on
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CCSI website
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UNCTAD.org
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IISD investment program website
S New and stronger environmental regulations (e.g., Glamis Gold v.
United States, Lone Pine v. Canada);
S Termination of contracts with investors (e.g., Occidental v. Ecuador);
S Revocation of permits authorizing investors’ operations (e.g., Renco
v. Peru);
S Decisions not to grant permits (e.g., Pac Rim v. El Salvador);
S Changes to fiscal regimes (including changes in interpretations of and
enforcement strategies for existing laws and regulations) (e.g. Russia
and Ecuador cases);
S Requirements to purchase local goods and services/invest in research
and development (e.g., Mobil v. Canada); and
S Obligations of States to respond to/prevent/stop harm caused by
third persons (e.g., RDC v. Guatemala).
Key Points
S Domestic law NOT the standard (e.g., CCSI research on US law)
S New players – e.g., Chinese investors are also claimants
S Links with industrial policy – government efforts to encourage
investment, and government efforts to regulate investments are the
key triggers for claims.
S Use of incentives, policy change/shifts, government support for
domestic actors – all issues that you can see addressed in
investment disputes
S Rough estimate – 65% of disputes relate to infrastructure and
extractives
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Case examples – an overview
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Issue by issue approach, rather than standard-by-standard approach, illustrating how
liability arises
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FET the crucial obligation
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Issues:
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Tenders and Negotiations
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Illegality in the Making of the Contract
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Firm-led and Government-led Renegotiation
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Legal and Policy Change
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Leveraging Investment for Sustainable Development
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This is just a sample – there is a whole host of examples of other claims
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Not necessarily the law, but examples of what the law has been interpreted to be
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TENDERS AND NEGOTIATIONS
PSEG V. TURKEY: STATE LIABILITY FOR FAILED
NEGOTIATIONS
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1996 – approved proposal for mining and power plant project by PSEG;
“Implementation Contract” agreed by Ministry
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PSEG revises its mining plan and seeks a change in terms
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1998 – “Concession Contract” incorporating the “Implementation
Contract” approved by Turkish State Council
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2000 – negotiations collapse
S shift in terms
S shift in policy
S dispute over taxes
S Arbitration clause
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Tribunal’s determination:
no bad faith required; negligence the standard
246. The Tribunal is persuaded … that the fair and equitable
treatment standard has been breached, and that this breach is serious
enough as to attract liability. Short of bad faith, there is in the
present case first an evident negligence on the part of the
administration in the handling of the negotiations with the Claimants.
The fact that key points of disagreement went unanswered and were
not disclosed in a timely manner, that silence was kept when there was
evidence of such persisting and aggravating disagreement, that
important communications were never looked at, and that there was a
systematic attitude not to address the need to put an end to
negotiations that were leading nowhere, are all manifestations of
serious administrative negligence and inconsistency. The Claimants
were indeed entitled to expect that the negotiations would be
handled competently and professionally, as they were on occasion.
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Tribunal’s determination – role of stability
254… Stability cannot exist in a situation where the law kept
changing continuously and endlessly, as did its interpretation and
implementation. While in complex negotiations, such as those involved
in this case, many changes will occur beyond the control of the
government, as was particularly the case with the increased costs, the
issue is that the longer term outlook must not be altered in such a way
that will end up being no outlook at all. In this case, it was not only
the law that kept changing but notably the attitudes and policies of
the administration.
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Tribunal’s determination - damages
S Investor obtained compensation for expenditures incurred
from the submission of its feasibility study through
continued negotiation;
S All expenses pre-construction, many pre-Concession
Contract, and many pre-Implementation Contract
S Awarded a payment of USD 9 million plus interest, and
USD 13.65 million in costs of the arbitration
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Illegal Investments:
RDC V. Guatemala and Kardassopolous v. Georgia
S Note – special case of corruption in the making of the
contract
S Contracts secured through illegal processes/in breach of the
law – may be void or unenforceable under domestic law;
S One rationale – binding governments to illegal acts of its
officials penalizes the public, not the wrongdoer
S BUT tribunals may have a different rule – if the government
was involved, it may still be bound, even if conduct was
illegal, or beyond the scope of authority
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Kardassopolous v. Georgia
S [E]ven if the [Joint Venture Agreement] and the Concession were
entered into in breach of Georgian law, the fact remains that these
two agreements were “cloaked with the mantle of Governmental
authority”. Claimant had every reason to believe that these
agreements were in accordance with Georgian law, not only because
they were entered into by Georgian State-owned entities, but also
because their content was approved by Georgian Government
officials without objection as to their legality on the part of Georgia
for many years thereafter. Claimant therefore had a legitimate
expectation that his investment in Georgia was in accordance with
relevant local laws. Respondent is accordingly estopped from
objecting to the Tribunal’s jurisdiction ratione materiae under the
ECT and the BIT on the basis that the JVA and the Concession
could be void ab initio under Georgian law.
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RDC v. Guatemala – binding government to action
of state entity
146. Even if FEGUA’s actions [as the government entity entering into
the contracts] … were ultra vires (not “pursuant to domestic law”),
“principles of fairness” should prevent the government from raising
“violations of its own law as a jurisdictional defense when [in this
case, operating in the guise of FEGUA, it] knowingly overlooked them
and effectively endorsed an investment which was not in compliance
with its law.”
147. Based on these considerations the Tribunal finds that Respondent
is precluded from raising any objection to the Tribunal’s jurisdiction on
the ground that Claimant’s investment is not a covered investment
under the Treaty or the ICSID Convention.
RDC v. Guatemala, Second Decision on Objections to Jurisdiction, ICSID Case No. ARB/07/23, May 18, 2010,
paras. 146-47 (quoting Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID
Case No. ARB/03/25, Award, August 16, 2007, para. 346).
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Renegotiations:
Responding to and Initiating Requests
S Intra-deal and extra-deal renegotiations – an overview
S **Only one side can bring challenge
S Intra-deal renegotiations –
S Can be an important part of long-term contracts
S Obligations of process: duties of good faith and transparency
S Obligations of substance – obligation of outcome; consistency
with domestic law not a defense
S PSEG v. Turkey, TECO v. Guatemala, Impregilo v. Argentina
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Intra-deal renegotiations:
Impregilo v. Argentina
S 330. Since the disturbance of the equilibrium between rights and
obligations in the concession was essentially due to measures taken by the
Argentine legislator [in establishing the floating exchange rate and
regulating water and sewerage services], it must have been incumbent on
Argentina to act to effectively restore an equilibrium on a new or
modified basis. Although Argentina has attributed the failure of the
negotiations to what it regarded as AGBA’s unreasonable demands, it
does not appear that Argentina took any measures to create for AGBA
a reasonable basis for pursuing its tasks as concessionaire which had
been negatively affected by the emergency legislation, including the New
Regulatory Framework.
S 331. In these circumstances, the Arbitral Tribunal considers that
Argentina, by failing to restore a reasonable equilibrium in the
concession, aggravated its situation to such extent as to constitute a
breach of its duty under the BIT to afford a fair and equitable
treatment to Impregilo’s investment.
S Impregilo v. Argentina, paras. 325-331.
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Renegotiations:
Extra-deal renegotiations
The untold story on incidence of renegotiation: The Guash study:
S Review of 1000 concession contracts (telecommunications,
transportation, water and sanitation services, and electricity sectors,
awarded in Latin America and the Caribbean between the mid-1980s
and 2000)
S Extra-legal renegotiations were “extremely common”:
S 61 percent requested by the investor;
S 26 percent requested by the government;
S Remaining requested by both;
S In some sectors, the percentage of investor-initiated renegotiations is
higher (e.g., 74% in water and sanitation services).
S Relationship to rationale for investment treaties
S Impacts of one-sided treaties – investors can request, and also are
given added powers to resist renegotiation requests
S Vivendi II v. Argentina, PSEG v. Turkey
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Extra-deal renegotiations:
AES v. Hungary
[I]t cannot be considered a reasonable measure [consistent with the for
a state to use its governmental powers [including its power to
implement laws or issue decrees] to force a private party to change or
give up its contractual rights. If the state has the conviction that its
contractual obligations to its investors should no longer be observed
(even if it is a commercial contract, which is the case), the state would
have to end such contracts and assume the contractual consequences of
such early termination.
(para. 10.3.12)
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Incentives, Legal Change, and Industrial Policy
Micula v. Romania
S 10-year incentives scheme to support investment
S Inconsistency with EU-state aid rules brought
removal of incentives
S Claim, and liability under investment treaty
S Implications for industrial development
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S
Renco Group v. Peru, Claimants’ Notice of Intent to Pursue Arbitration (Dec.
29, 2010)
La Oroya has been named one of the ten most contaminated cities in the world.
In 2005, a study by the US government’s Center for Disease Control and the School of Public Health of St. Louis University found
that 97% of children between 6 months and 6 years had lead levels considered toxic by the Center for Disease Control and
Prevention. The study also found that 98% of children between seven and 12 years have elevated blood lead levels, in some
cases three or four times the level of concern.
In 2009, the Interamerican Commission on Human Rights (IACHR) accepted a petition filed on behalf of over sixty La Oroya
residents by the Interamerican Association for Environmental Defense (AIDA), Earthjustice, and other non-governmental
organizations alleging human rights violations arising out of the contamination in that community.
The petition, which was filed in 2006, acknowledges that pollution in La Oroya has been an ongoing problem, even when
Centromin, the state-owned Peruvian entity, operated the facilities. However, the petition also alleges that when the
Peruvian government granted DRP extensions to complete its environmental remediation efforts, it improperly allowed the
company to postpone crucial environmental cleanup. The petitioners criticize that the state allowed business activities to
trump public health concerns, and that its lax treatment of DRP’s remediation obligations amounts to a violation of human
rights.
As relief, the petitioners have requested the IACHR to thoroughly evaluate the human rights situation, declare that the State of
Peru has violated the petitioners’ human rights, and recommend Peru implement effective remedies for those violations.
Inter-American Commission on Human Rights, Report No. 76/09, Petition 1473-06, Admissibility, Community of Law Oroya, Peru
(Aug. 5, 2009)
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1922-1974 – metal smeltering and refining facilities owned and operated by a US company;
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1974 – Peru nationalized the company and owned and operated it through a SOE for roughly the next two decades;
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1997 – Doe Run Peru ((DRP) a subsidiary of US entity, The Renco Group) purchased the company; according to Renco, when
DRP purchased the business, the Peruvian government agreed to clean up “much of” the pre-existing contamination in and
around La Oroya. As part of the transaction, DRP, in turn, agreed to invest in and modernize the facilities and reduce toxic
emissions from them to acceptable and legal levels by 2006.
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2004 – DRP asked for a 4-year extension on its clean-up obligations; the government gave it an appoximate 3-year
extension;
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Inter-American Commission on Human Rights, Report No. 76/09, Petition 1473-06, Admissibility, Community of Law Oroya,
Peru (Aug. 5, 2009)
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2009 – DRP asked for another extension, which the Ministry of Energy and Mines initially declined, but Congress later
granted;
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February 2010 – DRP put into involuntary bankruptcy;
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July 2010 – after clean-up obligations still not met, the government cancelled DRP’s operating permit
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December 2010 – Renco initiated an investor-state arbitration action against Peru
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Renco is claiming at least USD 800 million in damages;
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Alleges Peru breached the investment treaty between the US and Peru by
violating
S (1) the minimum standard of treatment obligation in Article 10.5 the treaty;
S (2) the national treatment obligation in Article 10.3 of the treaty; and
S (3) the “umbrella clause” (which is not contained within the US-Peru treaty,
but which Renco argues it can import from other treaties to which Peru is
party based on the US-Peru treaty’s most-favoured-nation clause);
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Renco bases its claims on, inter alia, assertions that Peru refused to grant it the
needed extensions for completing its clean-up obligations; that similar
enforcement action was not taken against the state-owned company (a “lowest
common denominator” claim); that the government made disparaging remarks
about and created a “hostile investment environment” regarding the company;
and that Peru has not assumed liability in connection with claims brought against
DRP in the United States;
Nov. 8, 2012: Notice of Intent to Arbitrate
“Between 2006 and 2011, Lone Pine … expended millions of dollars and
considerable time and resources in Quebec to obtain the necessary permits
and approvals from the Government of Quebec to mine for oil and gas in the
province…. Suddenly, and without any prior consultation or notice, the
government of Quebec introduced Bill 18 into the National Assembly on May
12, 2011, to suspend all exploration for oil and gas in the province…. Bill 18
also purported to revoke all permits pertaining to oil and gas resources
beneath the St. Lawrence River without a penny of compensation. … [L]ess
than a month after Bill 18 was introduced into the National Assembly – the
Act was quietly and quickly passed, receiving Royal Assent on June 13,
2011.” (paras. 3-4).
Claimants allege the Act was a “political” one enacted without proper “notice”
or basis, and that it violates the FET standard and illegally expropriated the
investors’ property. They are seeking more than Cdn $250 million as
damages.
Occidental v. Ecuador
EnCana v. Ecuador
Tax carve-out doesn’t apply
Tax carve-out applies
Breach of National Treatment
X NT claim precluded per tax carveout
• no intent to discriminate necessary
• broad reading of “likeness
Breach of FET
• stability and predictability an element
of FET
X FET claim precluded per tax carveout
“… Claimants are awarded the amount of US$ 1,769,625,000 (US
One billion, seven hundred sixty nine millions, six hundred twenty
five thousand dollars)” for damages suffered as a result of treaty
breach.
VIOLATIONS:
• FET
• Expropriation
• Domestic and
customary
international law
“The parties’ dispute concerns the termination [caducidad] of a 1999 Participation Contract between OEPC and
PetroEcuador for the exploration and exploitation of hydrocarbons in Block 15 of the Ecuadorian Amazon region
(the ‘Participation Contract’).” (para. 2)
Participation Contract:
16.1 Transfer of this Participation Contract or assignment to third parties of the rights under the Participation Contract,
must have the authorization of the Corresponding Ministry, in accordance with existing laws and regulations,
especially the provisions contained in Art. 79 of the Hydrocarbons Law and Executive Decrees No. 809, 2713 and
1179.
[...]
16.4 If Contractor deems it advisable to create consortia or associations for one or several exploration and
exploitation activities covered by this Participation Contract, Contractor may do so with the prior acceptance of
PETROECUADOR and authorization from the Corresponding Ministry. Contractor’s obligations shall continue to
exist in their parts, and the companies forming the consortium or association shall be jointly and severally liable for
performance of same; and for such purpose shall furnish the corresponding guarantees. A joint and several
commitment shall constitute an indispensable requirement for PETROECUADOR to accept the creation of the
aforementioned consortia or associations. PETROECUADOR shall continue to maintain its direct legal relations
with Contractor, to demand compliance with all obligations, and to pay the agreed participation percentages.
16.5 The integration of such consortia or associations, or the withdrawal of Contractor from same, without the
authorization of the Corresponding Ministry, shall constitute legal grounds for declaring the termination of this
Participation Contract.
Participation Contract, cont’d:
This Participation Contract shall terminate …
21.1.1 By a declaration of forfeiture [caducidad] issued by the Corresponding Ministry for the causes and following the
procedure established in Articles seventy four (74), seventy five (75) and seventy six (76) of the Hydrocarbons Law, insofar as
applicable.
21.1.2 Due to a transfer of rights and obligations of the Participation Contract without prior authorization from the
Corresponding Ministry.
________________
Hydrocarbons Law:
Art. 74. The Ministry of Energy and Mines may declare the caducidad of contracts, if the contractor:
[...]
11. Transfers rights or enters into a private contract or agreement for the assignment of one or more of its rights, without the
Ministry’s authorization;
12. Forms consortia or associations for exploration and exploitation operations, or withdraws from them, without the
Ministry’s authorization; and,
13. Commits repeat violations of the Law and the regulations thereto.
“[T]he Tribunal finds, based on the above, that OEPC, by failing to secure the required
ministerial authorization, breached Clause 16.1 of the Participation Contract and was
guilty of an actionable violation of Article 74.11 of the HCL.”
(para. 381)
But, according to the tribunal, there were alternatives to declaration of caducidad, including
“insistence on payment of a transfer fee, a negotiated settlement,” or issuing “a
statement making it plain to all foreign oil companies that all transfers of economic
interests must be authorized and that if not so authorized caducidad proceedings would
be inevitable.” (paras. 434-35)
“[T]he Caducidad Decree was not a proportionate response in the particular circumstances,
and the Tribunal so finds. The Caducidad Decree was accordingly issued in breach of
Ecuadorian law, in breach of customary international law, and in violation of the Treaty. …
the Tribunal now has no hesitation in finding that, in the particular circumstances of
this case which it has traversed earlier, the taking by the Respondent of the Claimants’
investment by means of this administrative sanction was a measure ‘tantamount to
expropriation’ and thus in breach of Article III.1 of the Treaty.” (paras. 452 & 455).
Hibernia and Terra Nova Oilfields
Discovered in 1979 in the North Atlantic Ocean, 315 km east-southeast of St
John’s, Newfoundland (NL)
S
The conduct of petroleum projects in the NL offshore area is governed by the
“Accord Acts”, established the Canadian-Newfoundland Offshore Petroleum
Board (the “Board”), which regulates oil development projects in NL.
S
Petroleum operators looking to to be licensed for activities in the area must
submit proposals which are subject to approval by the Board. The proposals
consist of a Development Plan, which lays out the general approach of
developing an oil field, and a Benefits Plan explaining how NL and Canada
would benefit.
S
As per Section 45.3, a Benefits Plan must contain a proposal for research and
development (R&D) and employment and training (E&T) expenditures to be
carried out in NL. This proposal must be approved by the Board.
S
The Accord Acts themselves do not specify any fixed amount or percentage of
revenue to be spent on R&D and E&T under the Benefits Plan
S
The Board made adjustments to the Guidelines in 1986, 1987, 1988, and
2004.
S
The 2004 Guidelines were notable for two reasons: they were the first set of
guidelines to directly address R&D expenditure at the production phase of a
petroleum project and were also for the first time required fixed amounts of
expenditures to be made.
S
For the Board, the 2004 Guidelines had the aim of ensuring effective
administration of Section 45 of the Accord Acts - ensuing that the
exploitation of offshore petroleum created a lasting economic legacy for the
people of NL, which was they thought was best achieved by building on NL’s
intellectual capital and human resources
S
But the petroleum companies saw this as requiring them to pay millions of
dollars per year for research and development in NL
S
They therefore decided to make a legal case that the 2004 Guidelines are more
restrictive and onerous than the provisions on minimum research and
development expenditures found in existing agreements
S This began a series of legal battles that resulted in the Claimant
filing a request for arbitration with ICSID in November, 2007.
S The parties’ dispute concerns the legality of the 2004 Guidelines
in view of Articles 1105, 1106, 1108 of the NAFTA
S Article 1105 of the NAFTA: FET/“Minimum Standard of
Treatment”
S Article 1106 of the NAFTA: Performance Requirements
S Article 1108 of the NAFTA: Reservations and Exceptions
1. No party may impose or enforce any of the following requirements,
or enforce any commitment or undertaking, in connection with the
establishment, acquisition, expansion, management, conduct or
operation of the an investment of an investor of a Party or of a nonParty in its territory …
C) to purchase, use or accord a preference to goods produced or services
provided in its territory, or to purchase goods or services from persons in
its territory
S The Claimants (Mobil) argued that the imposition of the 2004
Guidelines requiring investors to spend a fixed percentage of
project revenues on R&D in NL, and the enforcement of the
requirement by the Board, constituted a prohibited performance
requirement and violate NAFTA Article 1106(1).
S They believe that the changes in the 2004 Guidelines would force
them to spend several million more dollars per year of R&D
activities than they would under the approach set forth in the
1986, 1987, and 1988 Guidelines
S This effectively substitutes their own business judgment with the
Board’s, the Claimants argued, and distorts investment flows in
favor of the Province
S The Respondent (Canada) argued that Article 1106(1)(C) of
the NAFTA does not prohibit requirements regarding R&D
or E&T as performance requirements. Such performance
requirements must be distinguished from the requirement to
purchase local goods or services.
S Even if R&D and E&T requirements were to be placed
within the scope of Article 1106, Canada argued, the 2004
Guidelines do not necessarily compel the purchase, use, or
accordance of a preference to local goods or services.
S The legal issues that arise concern two issues:
S First, what constitutes the proper scope and interpretation of Article
1106, and in particular, do the R&D and E&T requirements under the
2004 Guidelines (and the application thereof) constitute ‘services’
within the meaning of Article 1106
S Second, whether the 2004 Guidelines compel spending on R&D and
E&T such that they construe a ‘requirement’ to “purchase, use, and
accord a preference to goods produced or services provide in its territory,
or to purchase goods or services from persons in its territory”
S The tribunal ruled in favor of the Claimants. They shared
the claimants’ view that the ordinary meaning of the term
“services” is broad enough to encompass R&D and E&T.
S Since the term “services” covers a broad range of economic
activities, R&D and E&T may be seen as mainstream forms
of services sector activity.
S They therefore see that there is nothing inherent in the term
‘services’ in Article 1106(1) that necessarily excludes R&D
and E&T
S In the Tribunal’s view, while the policy purposes may differ in some
respects as between different types of performance requirements, the
requirement to utilize domestic sources of R&D and E&T appears rather
clearly to be a form of performance requirement imposed on an investor.
S Excluding R&D and E&T from a definition of ‘services’ because the for of
transmission is not always cross-border is an argument for a special
meaning to be given for R&D and E&T which we do not see reflected in
the NATFA text.
S In the Tribunal’s view, this interpretation of Article 1106 is not an
expansive reading of ‘services’ but is rather one that is consistent with the
treatment of R&D and E&T in the NAFTA and the object and purpose
of the treaty, which is to eliminate barriers to trade and increase
investment opportunities within the NAFTA Parties.
(Award, pp. 103-104)
S The breach of Article 1006 of the NAFTA gives the
Claimants a right to claim damages
S The Claimants have been invited to submit further evidence
on actual damages and the Respondent will have an
opportunity to respond. The Tribunal will then rule on the
quantum damages due to the Claimant in a final Award.
S
The Respondent argued that the 2004 Guidelines (having being ruled non-conforming
with Article 1106) are exceptions covered by NAFTA Article 1108.
S
When NAFTA came into effect, it barred performance requirements; however, it
includes Article 1108 and Annex I arrangements for instances in which existing
measures did not conform to NAFTA obligations.
S
The relationship between a “non-conforming measure” and a “subordinate measure” and the
conditions under which a “subordinate measure” will be evaluated and determined to be
compatible with an earlier “non-conforming measure” have emerged as the issues that lie at the
heart of this case. (p. 120)
S
There was agreement that Section 45 of the Federal Accord Act was an “existing nonconforming measure”; the Tribunal viewed new subordinate measures (the Guidelines)
as subject to the reservation, but not insulated from review and challenge.
S
The Tribunal viewed the changes in the 2004 Guidelines as a fundamentally different
approach to compliance compared to the Federal Accord Act and the Hibernia and
Terra nova Benefits Plans.
S The Tribunal sees the 2004 Guidelines as not only significantly
altering the legal obligations required of the claimants, but also
doing so in a way that makes the local content regime more
contradictory and incompatible with Article 1106.
S The 2004 Guidelines introduce additional and different expenditure,
reporting, oversight and administrative requirements that are
quantitatively and qualitatively different, and more burdensome from that
which existed prior to the introduction of the 2004 Guidelines. In doing
so, the 2004 Guidelines render the local content regime that rises, more
non-conforming with Article 1106 than was the case when the measures
that applied to the Hibernia and Terra Nova investment projects were
defined by the Federal Accord Act, the Hibernia and Terra Nova Benefits
Plans, and related Board Decisions. (p. 178)
S Key message – there are tensions that are important to address – in
advance to the extent possible
S Policy dialogue and coherence is crucial in connection with negotiation
of new and existing treaties and models.
S Issues to consider for new treaties include:
S
S
Do you want the treaties?
If so – what should they look like?
S
S
S
S
S
Carve-outs from some treaty provisions for existing and future non-conforming
measures
Exceptions for certain policy areas (e.g., taxation, environmental protection,
development of energy resources)
Exclusion of certain obligations (e.g., prohibitions on performance requirements)
Requires intra-governmental coordination and communication to identify what should
be carved-out/excepted
New models – Southern African Development Community Model Bilateral Treaty
Template
S For existing treaties – consider advantages and disadvantages of
amendments and interpretations
Addressing Issues in Existing Treaties:
Subsequent Agreement & Practice
S States have untapped powers as masters of their treaties to shape
interpretation of the agreements
S Joint agreement per treaty
S FTC statement – expressly binding
S Joint agreement
S Exchange of diplomatic notes (e.g., Argentina-Panama, US-Czech
Republic)
S Unilateral conduct
S Swiss letter in SGS
S Respondent briefs
S Non-disputing state party submissions
S Statements of interpretation posted online
76
International Framework:
Hard- and Soft-Law Standards
S Growing body of standards (voluntary or strictly enforced
(under law or via public pressure)) governing conduct of
extractive industry firms.
S These operate at the “host country”, “home country” or
international level
S Important to keep in mind not only to understand what is
already expected or required of investors by governments,
citizens, and their peer enterprises
S when is the government asking the investor to do more than is
already expected of it?
S what are society’s expectations of the investor (key to
managing expectations and avoiding conflicts and tensions in a
long-term project)
77
International Law – Recap and Overview
S Investment treaties provide further protection to foreign
investment – it is not just domestic law you need to think about
S May also strengthen the legal value of investment contracts
S Creates/locks in additional (cf. Investment law)
S Treaty protection may depend on investor’s corporate structure
S There are ways of addressing the challenges – but policy dialogue
is crucial
S Other international legal norms and standards form part of the
legal framework and define rights, obligations, and expectations,
e.g. human rights obligations, obligations under treaties of the
International Labour Organization, Performance Standards
required by the World Bank, etc. … (contracts and laws, such as
the Constitution, may refer to them)
78