HO CHI MINH CITY UNIVERSITY OF LAW MANAGING BOARD OF SPECIAL TRAINING PROGRAMS BACHELOR’S THESIS INTERNATIONAL LAW MAJOR THE TENTATIVE INVESTMENT CHAPTER OF TRANS – PACIFIC PARTNERSHI
TRANS – PACIFIC PARTNERSHIP AGREEMENT AND ITS
Overview of the negotiation of Trans – Pacific Partnership Agreement
The Trans-Pacific Partnership Agreement (TPP) evolved from the original Trans-Pacific Strategic Economic Partnership (P4 Agreement) established in 2005 among Brunei, Chile, New Zealand, and Singapore Notably, the TPP includes a provision for additional countries to join, leading to the United States' official participation in negotiations in 2009 Currently, the TPP encompasses 12 countries across the Asia-Pacific region, including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam, collectively representing 40% of the world's GDP The TPP aims to enhance economic cooperation and trade among its member nations.
―21 st century agreement‖ that will announce all of the problems of modern era,
The Trans-Pacific Strategic Economic Partnership, as outlined in Article 20.6 Clause 1, allows for accession by any APEC Economy or other State under mutually agreed terms, considering their specific circumstances and liberalization timetables This agreement aims to promote innovation, economic growth, and job creation To date, there have been 20 formal negotiation rounds, with the most recent occurring in July 2014.
The Trans-Pacific Partnership (TPP) aims to be a comprehensive agreement addressing various trade-related issues, including industrial goods, agriculture, textiles, services, investment, intellectual property, and environmental concerns Although negotiations were expected to conclude in 2012, contentious topics such as agriculture and intellectual property have hindered progress This ambitious "21st century" agreement presents both opportunities and challenges, necessitating further negotiations to reconcile the differing levels of development among participating countries.
Features of Trans – Pacific Partnership Agreement as an International
All 12 countries involved in the Trans-Pacific Partnership (TPP) are also members of the World Trade Organization (WTO) and other regional trade agreements, leading to significant interactions among these treaties As the negotiating parties aim to establish TPP as a model for future free trade agreements with enhanced integration, it is essential for TPP to incorporate features from recent regional trade agreements, including an investment chapter This would position TPP as a regional investment agreement with a "ratchet" mechanism to ensure increased liberalization in investment Consequently, TPP is characterized as a comprehensive WTO-plus commitment.
International investment agreement (hereinafter ―IIA‖) can be generally referred as treaty with the aim of protecting, promoting, and liberalizing cross – border
The Trans-Pacific Partnership (TPP) was a proposed trade agreement involving 12 Pacific Rim countries, aimed at reducing trade barriers and enhancing economic cooperation By the end of 2012, there were approximately 3,196 International Investment Agreements (IIAs) signed globally, predominantly in the form of Bilateral Investment Treaties (BITs) The TPP sought to establish a comprehensive framework for trade and investment, but faced significant political opposition, particularly in the United States, leading to its eventual withdrawal and the formation of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Negotiations surrounding International Investment Agreements (IIAs) have evolved significantly over the years In the 1970s and 1980s, newly independent developing countries largely opposed IIAs following decolonization However, by the 1990s, two key factors prompted a shift in their perspective: an increased political commitment to economic liberalism among both developing and developed nations, and the diminishing availability of alternative funding methods, such as international lending and aid As a result, there is a growing optimism regarding IIAs, suggesting that their prevalence is likely to rise in the future.
1.2.2 Form of international investment agreement
The initial form of International Investment Agreements (IIAs) was established at the bilateral level, incorporating foreign investor protection provisions into "Friendship, Commerce and Navigation" Treaties, which primarily focused on trade relations Notable examples include the Treaty of Amity and Commerce between the U.S and France in 1782, and the Treaty of Peace and Friendship between the U.S and Morocco in 1786 However, these treaties were eventually supplanted by Bilateral Investment Treaties (BITs) that specifically address investment matters.
In the modern era, International Investment Agreements (IIAs) are increasingly represented as Preferential Trade and Investment Agreements, including specific types such as Free Trade Agreements and Economic Partnership Agreements This trend is exemplified in Chapter IV of the US-Vietnam Bilateral Agreement.
3 Howard Mann (2008) “International Investment Agreements, Business and Human Rights: Key Issues and Opportunities”, International Institute for Sustainable Development Publication, p.3
4 United Nations Conference on Trade and Development (hereinafter ―UNCTAD‖) (2013), “World Investment Report 2013: Global Value Chains: Investment and Trade for Development”, United Nations Publication, p x
5 Andrew Newcombe and Lluís Paradell (2009), “Law and Practice of Investment Treaties: Standard of Treatment”, Kluwer Law International, p.41
The Trade Agreement, effective December 2001, and Chapter 5 of the Brunei – Japan Economic Partnership Agreement, effective July 2008, exemplify the inclusion of investment provisions in trade treaties These provisions are typically contained within one or two chapters, representing a minor aspect of the overall agreements As trade and investment increasingly complement each other rather than serve as substitutes, the number of trade agreements incorporating investment provisions has risen, particularly at regional and inter-regional levels Notably, the North American Free Trade Agreement stands out among these treaties.
Since its establishment in 1994, NAFTA has been the most utilized legal instrument for investor-state dispute settlement (ISDS), with a total of 51 investment cases initiated under its framework.
1.2.3 Features of Trans – Pacific Partnership Agreement
The Trans-Pacific Partnership (TPP) is recognized as a regional investment agreement due to its 12 negotiating parties located in the Asia-Pacific region A leaked investment chapter from June 2012 reveals that this chapter comprises 28 articles and 8 annexes, with square brackets indicating that not all articles have received unanimous agreement This draft highlights that the TPP includes common investment provisions, particularly regulations concerning promotion and protection, which establish minimum standards.
6 Kenneth J Vandevelde (2005), ―A Brief History of International Investment Agreements‖, U.C Davis Journal of International Law & Policy, Vol 12, No 1, p.181
At least 110 countries are currently participating in 22 regional negotiations, highlighting the growing trend of regionalism in international investment policymaking This phenomenon raises questions about whether it leads to consolidation or increased complexity in global investment frameworks.
8 UNCTAD (2014), “Recent developments in international investment agreements”, p.9
The article discusses key provisions related to investment agreements, including fair and equitable treatment, full protection and security, and clauses against unlawful expropriation and fund transfers It highlights the importance of liberalization measures such as national treatment and most-favored-nation treatment Notably, the Draft introduces the Investor-State Dispute Settlement (ISDS) mechanism, which allows foreign investors to directly initiate lawsuits against host states in international arbitration Further details on these provisions will be elaborated upon later.
In November 2011, TPP negotiating parties outlined their goal to establish a comprehensive, next-generation regional agreement aimed at liberalizing and promoting trade and investment Some experts argue that the investment provisions in trade agreements, including TPP, exceed WTO standards by addressing issues not covered by the WTO or by imposing stricter regulations on existing topics This perspective highlights the challenges faced in negotiating comprehensive investment rules within the WTO framework, where references to foreign investment are notably limited.
The General Agreement on Trade in Services (GATS) defines "commercial presence" as a service provided by foreign companies establishing operations in host countries Additionally, the Trade-Related Investment Measures (TRIMs) prohibit certain performance requirements that affect trade Notably, the World Trade Organization (WTO) lacks specific articles for investment protection, such as fair and equitable treatment and expropriation, and does not provide an Investor-State Dispute Settlement (ISDS) mechanism Therefore, the inclusion of investment protection provisions in the Trans-Pacific Partnership (TPP) is significant.
10 Office of the U.S Trade Representative (USTR), “Trans - Pacific Partnership Leadership Statement” (Press Release), available at
Matsushita Mitsuo and Lee Yong-sik (2008) discuss the implications of free trade agreements in relation to WTO disciplines and development perspectives in their work featured in "Law and Development Perspective on International Trade Law," edited by Yong-Shik Lee, Gary Horlick, Won-Mog Choi, and Tomer Broude, published by Cambridge University Press in 2011, page 262.
12 See more at Article 2 and Annex of TRIMs
The tentative chapter introduces "WTO-plus" obligations, expanding the performance requirement clause beyond the existing TRIMs provisions Notably, Article 12.7.1 points (f) and (h) prohibits technology transfer requirements, which are not explicitly addressed in TRIMs While these enhanced commitments may improve market access for foreign investors, they also impose additional compliance burdens on host states.
Another feature that most likely appears in TPP is the inclusion of a so – called
The "ratchet" clause in trade agreements mandates that any unilateral liberalization by a member after the treaty's implementation must automatically lead to a lower level of restrictiveness This concept has been integrated into recent Regional Trade Agreements following the NAFTA model The ratchet effect arises from the combination of the "standstill clause" and the "rollback clause." The "standstill clause," as defined by the OECD during the drafting of the Multilateral Agreement on Investment, aims to establish an irreversible minimum standard for liberalization by prohibiting new or additional restrictions Similarly, the TPP is designed to ensure national treatment, most-favored nation treatment, and other liberalization commitments across all sectors, with the exception of existing and future "non-conforming measures" that countries choose to retain These measures can be modified, but not in a manner that reduces their level of conformity.
13 Axel Berger, Matthias Busse, Peter Nunnenkamp, and Martin Roy (2010), ―Do Trade and Investment Agreements Lead to More FDI? Accounting for Key Provisions inside the Black Box‖, p.6
14 OECD (1996), "Mechanisms for standstill, rollback and listing of country specific reservations”, Note by MAI Negotiating Group chairman, p.6
Tentative investment chapter
The leaked investment chapter reveals key provisions found in modern International Investment Agreements (IIAs), particularly the U.S Model Bilateral Investment Treaty (BIT) of 2012 This discussion will focus on three critical aspects: the terminology of investment, the minimum standard of treatment, and expropriation, along with the Investor-State Dispute Settlement (ISDS) mechanism included in the Draft Trans-Pacific Partnership (TPP) For clarity, the terms "Draft TPP" and "Tentative Investment Chapter" will be used interchangeably to refer to the 2012 leaked version Additionally, this analysis will compare these provisions with those in two IIAs that Vietnam has signed with TPP negotiating parties: the U.S.-Vietnam Bilateral Trade Agreement (UBTA) and the Japan-Vietnam Bilateral Investment Treaty (JBIT).
At first glance, Article 12.2 of Draft TPP addresses the term ―investment‖ by using the broad asset – based definition in the same way as UBTA and JBIT Those treaties
18 Article 12.4 (2) and Article 12.10 of Draft TPP refers to ―Schedule to Annex I or II of non – conforming measures‖
19 Axel Berger, Matthias Busse, Peter Nunnenkamp, and Martin Roy, supra note 13, at 6
The Japan-Vietnam Economic Partnership Agreement, effective from October 1, 2009, incorporates the Japan-Vietnam Bilateral Investment Treaty, which has been in force since November 14, 2003, excluding Article 20 and any amendments Both agreements address foreign direct and portfolio investments Additionally, the Trans-Pacific Partnership (TPP) defines "investment" to encompass various forms of investment.
(b) shares, stock, and other forms of equity participation in an enterprise;
(c) bonds, debentures, [other debt instruments,] and loans [but does not include a debt instrument of a Party or of a state enterprise] 22 ;
(d) futures, options and other derivatives;
(e) turnkey, construction, management, production, concession, revenue- sharing and other similar contracts;
(g) intellectual property rights [which are conferred pursuant to domestic laws of each Party];
(h) licenses, authorizations, permits and similar rights conferred pursuant to domestic law, and
(i) other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens and pledges…
Basically, the formation of the clause in those treaties is equivalent Nonetheless, when compared with the previous IIAs, some modifications in the draft TPP can be found:
The TPP imposes stricter regulations on portfolio investments, particularly excluding short-term debt or loans, as the draft stipulates that eligible investments must have an original maturity of at least three years.
It is important to clarify that the terminology used does not specifically indicate that equity securities, like shares and stocks, and debt securities, such as bonds and debentures, are exclusively considered portfolio or indirect investments; they can also be classified as direct investments.
22 Another proposal of types is read as follows:
(c) debt securities and loans, as follows:
(i) a debt security of an enterprise:
(A) where the enterprise is an affiliate of the investor, or (B) where the original maturity of the debt security is at least three years, (ii) a loan to an enterprise
(A) where the enterprise is an affiliate of the investor, or (B) where the original maturity of the debt security is at least three years;
Certain types of debt, including bonds, debentures, and long-term notes, are more likely to be considered investments, while other forms, such as immediate payment claims from the sale of goods or services, are less likely to possess these characteristics Additionally, the debt must be associated with an enterprise that is an affiliate of the investor, and it does not apply to the debt of a Party or a state enterprise.
The introduction of derivatives as a new form of transaction has raised concerns among the public, particularly regarding their role in the financial crisis and ongoing regulatory reforms A derivative is defined as a financial contract whose value is based on the performance of underlying market factors, such as interest rates, currency exchange rates, and commodity or equity prices In Vietnam, the derivatives market is still in its infancy, and its full development is yet to be realized.
2016 and given that derivative is troublesome, we should not pay less attention to this type of transaction
Instead of specifically indicating which intangible rights are intellectual rights, Draft TPP provides that these are rights “conferred pursuant to domestic laws of each
The Trans-Pacific Partnership (TPP) differs from both the United States-Bahrain Free Trade Agreement (UBTA) and the Japan-Bahrain Investment Treaty (JBIT) due to its nature as a multinational agreement Unlike bilateral treaties, it is challenging to create a comprehensive list that addresses all viewpoints However, the regulations established by the TPP ensure a degree of consistency between domestic laws and international obligations.
The Draft TPP aims to restrict the broad interpretation of "contracts with financial value" found in previous International Investment Agreements (IIAs) It specifically excludes "claims to money" from contracts that are unlikely to be associated with investment activities.
24
25 Public Citizen, ―Investment Rules in Trade Agreements - Top 10 Changes to Build a Pro-Labor, Pro- Community and Pro-Environment Trans-Pacific Partnership‖, August 9, 2010
Intellectual property, as defined in Article 1(1) of the UBTA, encompasses a range of protections including copyrights, trademarks, patents, layout designs of integrated circuits, encrypted satellite signals, trade secrets, industrial designs, and rights in plant varieties Similarly, Article 1(2)(f) of the JBIT outlines intellectual property to include trademarks, industrial designs, layout designs of integrated circuits, copyrights, patents, trade names, indications of source or appellations of origin, and undisclosed information.
“commercial contracts for the sale of goods or services by a national enterprise in the territory of a Party to an enterprise in the territory of the other Party”
The Draft TPP refines the definition of "investment" by introducing additional requirements, stating that investment must encompass characteristics such as capital commitment, profit expectation, and risk assumption These features align with common economic investment elements and are likely to be referenced by ICSID tribunals when interpreting the ICSID Convention However, the Draft lacks definitions for "expectation of gain or profit" and "assumption of risk," potentially granting arbitral tribunals the discretion to interpret these terms on a case-by-case basis This ambiguity has attracted significant criticism regarding the conjunction of these characteristics.
The distinction between "or" and "and" is crucial, as it suggests that a small capital commitment without risk and profit expectation can still qualify as an investment It is advisable to replace "or" with "and" in the draft to create a cumulative assessment of these characteristics, similar to the ICISD tribunal's approach Furthermore, a covered investment under the Draft TPP must be legally established in accordance with the host state's laws and regulations; thus, any investment that contravenes domestic law will not receive protection.
In summary, Vietnam's new IIAs introduce significant changes compared to its previous agreements Key modifications include restrictions on certain types of assets and the inclusion of derivatives as a new asset class.
27 Rudolf Dolzer and Christoph Schreuer (2008), “Principles of International investment law”, Oxford
28 More details on ICSID tribunal and ICSID Convention will be discussed in later part
The WTO Center at the Chamber of Commerce and Industry of Vietnam has proposed recommendations for negotiating the Investment Chapter of the Trans-Pacific Partnership (TPP), focusing on investment dispute resolution mechanisms.
The article outlines the requirements for a qualified investment, emphasizing the importance of aligning with the characteristics of an investment and the laws of the host state Instead of creating new obligations, the Article serves as a framework for future tribunals to interpret the term in line with the intentions of the contracting parties.
The minimum standard of treatment is a fundamental obligation for states to extend certain basic rights to foreigners, as dictated by customary international law, irrespective of the treatment given to their own citizens This principle ensures that even if a state fails to adequately protect its nationals or investments under the most-favored-nation principle, foreign entities can still seek protection, highlighting the importance of this standard in international relations.
Under Article 12.6 titled ―Minimum standard of treatment‖, the Draft TPP requires that:
“Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security.”
DISPUTES BETWEEN NATIONALS OF TPP NEGOTIATING
This chapter explores the interpretation of obligations under an International Investment Agreement (IIA) by past Tribunals, highlighting the arguments presented by Claimants and Respondents Data indicates that the TPP negotiating parties have been Respondents in 44 ICSID arbitration cases and 30 UNCITRAL cases Notably, Mexico, despite not being a member of the ICSID Convention, has resolved 21 disputes with investors under ICSID, while only facing 2 cases under UNCITRAL This suggests that Vietnam may also encounter more ICSID arbitration than anticipated, despite its non-membership in the ICSID Convention Conversely, the number of UNCITRAL cases involving the U.S and Canada, the other NAFTA parties, exceeds their ICSID cases Additionally, the two concluded cases involving Vietnam were settled under UNCITRAL Therefore, it is essential to consider both ICSID and UNCITRAL cases in the study of Investor-State Dispute Settlement (ISDS), as each case presents unique and significant issues.
2.1 Cases between nationals of negotiating parties and other countries
2.1.1 ICSID case: Metalclad v Mexico a) The Tribunal’s finding of breaches of “fair and equitable treatment” and
“expropriation” provisions – Award review by Supreme Court of British Columbia
OTHER COUNTRIES, AND OTHERS BETWEEN TPP
Cases between nationals of negotiating parties and other countries
2.1.1 ICSID case: Metalclad v Mexico a) The Tribunal’s finding of breaches of “fair and equitable treatment” and
“expropriation” provisions – Award review by Supreme Court of British Columbia
Metalclad, a U.S investor, faced a denial of the necessary permit for its business operations by Mexico's municipal state 74 The company claimed that Mexico's interference with its investment, specifically regarding the development and operation of a hazardous waste landfill, violated the principle of "fair and equitable treatment" as outlined in Article.
The claim was brought to ICSID under the Additional Facility Rules, citing provisions related to "expropriation" in Chapter Eleven of NAFTA ICSID had jurisdiction over the dispute for two main reasons: first, the claim was submitted in accordance with NAFTA, specifically Article 1120(1)(b), which permits arbitration under ICSID Additional Facility Rules; second, the requirement that neither the home state nor the host state are contracting parties to the ICSID Convention was met, as only the U.S is a contracting party There were no objections to the tribunal's jurisdiction.
The tribunal's interpretation of an International Investment Agreement (IIA) was notably broad, leading to the partial annulment of the award A significant aspect of both claims was the issue of "transparency." In the context of the "fair and equitable treatment" claim, the Tribunal determined that Article 102(1) of NAFTA imposes an obligation on countries to ensure transparency, as it is a fundamental principle governing NAFTA.
The Tribunal interprets this to encompass the necessity of fulfilling all pertinent legal obligations essential for initiating, completing, and effectively managing investments made or intended under the Agreement.
Metalclad, through its Mexican subsidiary, obtained a permit from the Mexican federal government to construct a hazardous waste landfill in Guadalcazar, Mexico However, five months into construction, the Municipality of Guadalcazar informed Metalclad that it was operating without a municipal construction permit Despite applying for the necessary permit and completing the landfill's construction, Metalclad's application was denied, effectively halting operations Subsequently, the Governor issued an Ecological Decree that designated the landfill site as a protected natural area, leading to the permanent closure of the facility For further details, refer to Metalclad Corporation v Mexico (ICSID Case No ARB(AF)/97/1, Award, 30 August 2000).
In the case of Metaclad v Mexico, it is emphasized that all affected investors from another Party must have clear and accessible information There should be no ambiguity or uncertainty regarding these matters.
The Tribunal found a lack of clear rules regarding the requirement for a municipal construction permit, leading the Claimant to reasonably rely on Federal officials' assurances that such a permit was unnecessary The Municipality's denial of the Claimant's application came 13 months after it was submitted, well after construction had been completed, and the failure to properly notify the Claimant of this denial constituted a procedural deficiency Additionally, the Tribunal noted that the reasons cited by the Municipality for refusing the application were beyond its authority Consequently, the Tribunal reached a conclusion based on these findings.
Mexico did not provide a transparent and predictable environment for Metalclad's business planning and investment These circumstances highlight a failure to maintain an orderly process and timely actions regarding an investor's expectation of fair and just treatment under NAFTA.
With regard to expropriation claim, it was the first time that a Tribunal under NFTA defined an expropriation:
Expropriation under NAFTA encompasses both overt and acknowledged property takings, such as outright seizures or formal transfers of title to the host State, as well as covert actions that may not be immediately recognized.
76 Metaclad v Mexico, supra note 74, par 76 (emphasis added)
The Municipality initially denied authorization for Metalclad's landfill due to ecological concerns about its environmental impact on the site and nearby communities However, after reviewing evidence from both parties, the Tribunal concluded that the Municipality's authority was limited to construction-related issues Consequently, any reasons for denial that were not directly related to physical construction or site defects were deemed improper The Tribunal ultimately found no relevant grounds for the Municipality's denial.
In the case of Metaclad v Mexico, it was emphasized that incidental interference with property use can significantly deprive the owner of expected economic benefits, even if this does not directly benefit the host State.
The Tribunal determined that Mexico's lack of transparency and justifiable reliance significantly impacted Metalclad's property, resulting in indirect expropriation This finding, along with the implementation of the Ecological Decree, constituted a violation of Article 1110 of NAFTA.
The Supreme Court of British Columbia partially set aside the Award based on Mexico's submission, agreeing that Chapter lacked transparency requirements.
The Court determined that the Tribunal's application of transparency obligations to Chapter was akin to establishing new obligations under NAFTA, exceeding the Tribunal's jurisdiction Consequently, the Court ruled that the Tribunal addressed a matter beyond the arbitration submission's scope Additionally, the Court annulled the Tribunal's findings regarding expropriation, which were also founded on the principle of transparency.
The first remark from this case is that an arbitral tribunal will not be hesitate interpreting the federal, state and local laws of the parties Eventually, they may
79 See id par.103 (emphasis added)
80 This is Tribunal‘s remark in Metaclad v Mexico, supra note 74, par 111
81 In United Mexican States v Metalclad Corporation, Supreme Court of British Columbia, 2001 BCSC 664,
On May 2, 2001, the Court recognized that transparency, as outlined in Article 102(1) of NAFTA, is a fundamental principle However, Article 102(2) clarifies that not all NAFTA provisions must be interpreted according to the principles in Article 102(1) The Court concluded that the principle of transparency is specifically implemented through the provisions of Chapter 18, rather than Chapter 1.
Cases between negotiating countries and nationals of other countries
a) The utilization of “proportionality” method in ISDS case
The Metalclad case marked a significant moment in NAFTA's expropriation discourse, as the tribunal appeared to endorse the "sole-effect" doctrine, suggesting that any effective deprivation equates to expropriation However, subsequent cases indicate a shift away from this strict interpretation For instance, in the Tecmed case, the tribunal evaluated the nature of governmental actions in relation to the legitimate interests of the investor Tecmed, a Spanish investor, faced denial of a license renewal essential for operating a landfill by Mexican authorities, prompting it to file a claim with ICSID.
91 Saluka v Czech Republic, supra note 83, par 486 – 496
In 1996, Tecmed, through its Mexican subsidiaries Tecmed Mexico and Cytrar, acquired a controlled landfill for hazardous industrial waste at a public auction in Mexico To operate this landfill, Tecmed obtained the necessary license from INE, the Hazardous Materials, Waste and Activities Division of the National Ecology Institute of Mexico, a federal government agency.
The Spain-Mexico Bilateral Investment Treaty (BIT) and the ICSID Additional Facility Rules were invoked in a claim alleging that Mexico unlawfully expropriated investments, including lands, buildings, and other assets in Sonora Ultimately, the International Centre for Settlement of Investment Disputes (ICSID) established jurisdiction over the case, as all necessary conditions for ICSID jurisdiction were met, similar to the Metalclad case.
The Tribunal assessed whether expropriation occurred by determining if the Claimant was "radically deprived of the economical use and enjoyment of its investments" due to the Resolution It referenced prior cases regarding expropriation effects, noting that measures deemed "irreversible and permanent" that eliminate any form of exploitation or destroy the economic value of assets would qualify as indirect expropriations In this instance, Mexico's decision not to renew the license effectively resulted in direct expropriation, as it permanently closed the landfill, rendered it unusable for any other purpose, and irreparably destroyed the investment's commercial value.
The key aspect of this case is the application of the "proportionality" principle The Tribunal determined that the "sole-effect" doctrine alone was inadequate to establish that an expropriation had taken place.
The Arbitral Tribunal will assess whether certain actions or measures are expropriatory by examining their financial impact and determining if they replace a previously indefinite license, which required annual extensions This license was consistently renewed until November 1998, when INE adopted a resolution.
In 1998, the request by Tecmed to renew its landfill operation permit was denied due to identified breaches in operational compliance This decision was supported by the INE, which cited specific violations as the basis for the refusal For further details, refer to the case Técnicas Medioambientales Tecmed, SA v Mexico, ICSID Case No ARB (AF)/00/2, Award, dated 29 May 2003.
94 Tecmed v Mexico, supra note 93, par 115 (emphasis added)
95 European Court of Human Rights, in the case of Matos e Silva, Lda., and Others v Portugal, Judgment of September 16, 1996, 85, p 18, cited in Tecmed v Mexico, supra note 93, par.116
The significance of the impact on public interest is crucial in determining the proportionality of legal protections granted to investments, as highlighted in Tecmed v Mexico.
… 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.‖ 97
The Mexican authorities failed to maintain a reasonable balance between protecting public interests and safeguarding investor rights, as the Tribunal determined that the minor breaches by Tecmed did not warrant the INE's Resolution The Tribunal found no public health concerns and identified social and political pressures as the primary factors influencing the decision to remove the landfill Furthermore, the Tribunal concluded that there were no emergencies or serious social situations justifying the deprivation of the investment, ultimately indicating that an indirect expropriation had occurred.
The proportionality principle has gained significance in the ISID case, as it is not solely associated with Tecmed Annex 12 –D in the draft TPP also incorporates this principle Historically, the European Court of Human Rights has extensively applied the proportionality test to assess the justification for state interference with individual fundamental rights in the interest of the community This test can effectively distinguish between various interests at stake.
97 Id at par 122 (emphasis added)
99 See more Azurix Corp v The Argentine Republic, ICSID Case No ARB/01/12, Award, 14 July 2006; Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania, ICSID Case No ARB/05/22, Award, 24 July 2008
The application of regulatory measures and indirect expropriation, particularly in lawful takings for public purposes, raises significant questions in investment cases The appropriateness of applying principles from the European Court of Human Rights is debated, as there is a lack of clear guidance on the "reasonable relationship of proportionality." Key issues include determining when a state's exercise of sovereign power is justified and when a taking is considered excessive in relation to public interest The necessity for urgency, as highlighted in the Tecmed case, further complicates the matter, leaving tribunals with the discretion to interpret these situations without definitive answers.
2.2.2 UNCITRAL case: Philip Morris v Australia a) Philip Morris’s “attack on” Australia’s regulatory power
The ongoing case involving Philip Morris Asia (PM Asia) is a significant factor in Australia's reluctance to accept Investor-State Dispute Settlement (ISDS) provisions in the Trans-Pacific Partnership (TPP) On November 21, 2011, PM Asia initiated arbitration against the Australian government at the Permanent Court of Arbitration, citing the Hong Kong-Australia Bilateral Investment Treaty (BIT) and UNCITRAL Arbitration Rules The company claimed that Australia's plain packaging legislation was both unfair and inequitable, alleging unlawful expropriation of its investments, which included shares in Philip Morris Australia and Philip Morris Limited, as well as intellectual property rights.
102 See more Andrew Newcombe (2005), The Boundaries of Regulatory Expropriation in International Law, 20:1
ICSID Review – FILJ, p.14 Available at SSRN: http://ssrn.com/abstractp3244
The Australian government's Trade Policy Statement emphasizes that it will not accept any provisions that restrict its ability to implement health warnings or plain packaging on tobacco products, nor will it compromise the Pharmaceutical Benefits Scheme Additionally, PM Asia has sought compensation for its investment losses and requested the Tribunal to suspend the enforcement of this legislation.
PM Asia claimed that the new legislation undermined its investment by limiting its competitiveness and ability to differentiate from other tobacco companies, resulting in a loss of commercial value for its intellectual property The company argued that the expropriation was unlawful due to the lack of compensation and failure to serve the public interest, leaving PM Asia uncertain about the implications of the new legislation.
Australia's actions may have undermined the effectiveness of health warnings and consumers' understanding of smoking's health effects PM Asia argued that alternative methods exist to reduce smoking without impacting their investments Consequently, the Claimant contended that Australia breached the "Expropriation" clause of the Bilateral Investment Treaty (BIT).
Second, about the fair and equitable treatment claim, PM Asia cited a conclusion from Saluka v Czech Republic case:
Other case: CSOB v Slovak Republic
(a) Jurisdiction of ICSID Tribunal under ICSID Convention
When a suit is initiated under the ICSID Convention, the Tribunal must assess its jurisdiction based on the provisions of ICSID Convention Article 114 and the relevant Bilateral Investment Treaty (BIT) or any agreement that allows the parties to submit their disputes to ICSID This case exemplifies the importance of interpreting the definitions involved in this context.
In 1997, CSOB, a state-owned bank, initiated ICSID arbitration against the Slovak Republic, claiming that the government failed to compensate for losses suffered by the Slovak Collection Company, which was a violation of the Consolidation Agreement.
In the legal context, a chilling effect refers to the discouragement of individuals from exercising their natural and legal rights due to the fear of legal repercussions This phenomenon can arise from various legal actions, such as the enactment of laws or the threat of lawsuits, which may inhibit free expression and legitimate activities.
111 Razeen Sappideen and Ling Ling He (2012), ―Investor-State Arbitration: The Roadmap from the Multilateral Agreement on Investment to the Trans-Pacific Partnership Agreement‖, Federal Law Review, 40 (2), p.219
113 See more Leon E Trakman, supra note 42, at 12
Article 25(1) of the ICSID Convention establishes that the Centre's jurisdiction covers legal disputes directly related to investments between a Contracting State (or its designated subdivisions or agencies) and a national of another Contracting State, provided that both parties consent in writing to submit the dispute to the Centre.
CSOB, a state-owned commercial bank in the Czech Republic, entered into a Consolidation Agreement with both the Slovak Republic and the Czech Republic.
The Tribunal initially assessed whether CSOB qualifies as a national of the Czech Republic, a contracting party to the ICSID Convention It concluded that the Convention's scope includes state-owned companies, albeit under specific conditions.
According to the Convention, a mixed economy company or government-owned corporation is not considered a "national of another Contracting State" unless it acts as an agent for the government or performs a fundamentally governmental function.
CSOB was recognized as a national and investor entity from the Czech Republic While it was presumed that CSOB operated on behalf of the State in international banking, this did not imply that it performed a fundamentally governmental role The Tribunal determined that CSOB's activities were primarily commercial rather than governmental in nature, highlighting the organization's focus on commercial efforts.
To enhance its financial stability, CSOB aimed to "improve its balance and consolidate its financial position" by eliminating non-performing receivables from the Czech command economy Additionally, the strategies employed by CSOB to attract private capital for its restructuring during privatization mirrored the approaches used by private banks to strengthen their positions.
CSOB made a qualified investment related to a loan to the Slovak Collection Company The Tribunal applied a two-fold test to this transaction While the loan met the broad definition under the BIT, it did not qualify as an investment.
Under the Agreement, each country established a specialized "Collection Company" to manage non-performing receivables assigned by CSOB, which are loans failing to meet payment obligations To facilitate the payment for these receivables, CSOB provided loans equivalent to their nominal values The Agreement also mandated the Slovak Republic to cover any losses incurred by the Slovak Collection Company and referenced the applicability of the Czech-Slovak BIT, including the right to submit disputes to ICSID For further details, refer to Ceskoslovenska Obchodni Banka, A.S v The Slovak Republic, Decision on Jurisdiction, 24 May 1999 (14 ICSID Review-Foreign Investment Law Journal 251 (1999)).
116 CSOB v Slovak Republic, supra note 115, par.18
ICSID Convention The main criterion the Tribunal set out to interpret the non – defined ―investment‖ term under the Convention was whether a transaction
The loan provided to the Slovak Company by CSOB was deemed to have no value, as the expected value of the non-performing receivables was significantly lower than the repaid amount However, the Tribunal continued its assessment by examining the broader expansion activities of CSOB in the Slovak Republic, recognizing that this loan was merely a preliminary step in their overall strategy.
Individual transactions can qualify as investments under the Convention if they are closely connected to the overall operation aimed at consolidating CSOB, which itself must meet the criteria for an investment.
The Tribunal recognized that CSOB's operations significantly benefited the Slovak economy, noting the intention to establish a subsidiary in the Slovak Republic to encompass the entire banking sector All assigned receivables were to be processed through CSOB's branch in Slovakia, further enhancing its business activities in the region Additionally, CSOB's investments were characterized by the allocation of resources with the expectation of returns, while also bearing risks inherent in economic activities Consequently, the overall development of CSOB in Slovakia was classified as an investment, fulfilling the criteria outlined in the Convention.
When a case is submitted under ICSID Convention, parties should specifically pay attention to the way past tribunal explained those non – defined ―national‖ or
119 See id par.82 (emphasis added)
The term "investment" in the Convention no longer requires a "source of capital" test for state-owned enterprises to qualify as investors Instead, the Tribunal has adopted a more objective approach, emphasizing the nature of the act involved.
Michael McKenzie v Vietnam
The recent case involving Vietnam as the Respondent centers on a U.S investor who initiated a resort project called South Fork in Binh Thuan province The investor claims that the revocation of his investment license by the Binh Thuan authority represents a breach of Vietnam's obligations under the UBTA Due to the confidentiality of the McKenzie case award, information is primarily derived from the Ministry of Justice's Press Release 124 and various news outlets.
In Claimant‘s view, the Municipality should have granted lands to South Fork Company to build a resort in Bac Binh District in accordance with the investment
In "Selected Essays: World Bank, ICSID, and Other Subjects of Public and Private International Law," A Broches discusses the standing of state-owned entities under investment treaties, as cited by M Feldman in the Yearbook on International Investment Law & Policy 2010-2011 This work, published by Martinus Nijhoff Publishers, highlights the complexities and implications of international law regarding state-owned enterprises.
122 Emilio Agustín Maffezini v The Kingdom of Spain, ICSID Case No.ARB/97/7, Award, 13 November 2000
123 Salini Costruttori SpA and Italstrade Spa v Kingdom of Morocco (Salini v Morocco), ICSID Case No ARB/00/4, Decision on Jurisdiction, 23 July 2001 (42 International Legal Materials 609 (2003)
124 Press Release of Ministry of Justice dated March 3, 2014,
In 2004, a license was issued for mineral exploitation; however, authorities granted permission to another company to operate on part of the land without the original licensee's knowledge The claimant subsequently argued that Vietnam unlawfully expropriated his investment, breaching the "fair and equitable treatment" and "transparency" provisions outlined in the UBTA, and is now seeking compensation.
Vietnam challenged the Tribunal's jurisdiction, citing several reasons: the Claimant's lack of good faith in investing in the country, the absence of a qualified investment, the unjustified nature of McKenzie's claims, and Vietnam's adherence to its obligations under the Treaty.
In December 2013, the Tribunal issued a final award stating that it lacked jurisdiction over the dispute, resulting in the dismissal of all claims made by Mckenzie Consequently, the Claimant was responsible for covering all arbitration costs, including Vietnam's legal representation and assistance expenses.
The first victory provided valuable lessons for Vietnam, highlighting the government's prompt response to the dispute, which ensured coherence among authorities during the resolution process However, questions remain about the rationale behind the Municipality's decision to grant exploitation rights to another company Consequently, this victory does not fully guarantee the enforcement of the law or the correctness of the Municipality's actions.
After the Municipality granted land rent to South Fork in 2009, they mandated the completion of legal capital within three months and project implementation within five months However, by 2010, the Municipality noted a lack of progress on the project The dispute's origins date back to 2005 when Binh Thuan province denied South Fork the rights to exploit titanium on the project land Despite this, South Fork negotiated with Duong Lam Company, allowing them to exploit titanium in the area The Municipality later licensed Duong Lam, citing respect for the agreement with South Fork However, they claimed an illegal project transfer occurred, as the agreement was made in 2008, prior to South Fork receiving the land rent decision, and Duong Lam had transferred 4 billion to South Fork.
Respondent in 4 cases which are all subjected to UNCITRAL Arbitration Rules 126 Undoubtedly, the number of cases relating to Vietnam after the conclusion of TPP will increase
The following arbitration cases highlight significant disputes involving Vietnam: Trinh Vinh Binh v Vietnam (UNCITRAL, March 1, 2007), where the parties reached a settlement; Michael McKenzie v Vietnam (UNCITRAL, December 11, 2013), which remains unpublished; Dialasie SAS v Vietnam (2011, UNCITRAL arbitration rules, administered by the PCA); and RECOFI v Vietnam (UNCITRAL, Notice of Arbitration, July 1, 2013), also not publicly available These cases reflect the ongoing legal interactions between foreign entities and the Vietnamese government.
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This chapter examines the interpretation of investment commitments through notable cases under ICSID and UNCITRAL arbitration While international investment cases lack binding authority, later tribunals often reference earlier standards to inform their decisions The jurisdiction of the tribunal plays a crucial role, as it will not evaluate additional claims without proper jurisdiction Additionally, the chapter highlights intriguing and problematic aspects of the ISDS mechanism that may instill apprehension in host states.
The Trans-Pacific Partnership (TPP) is poised to remain a significant topic, particularly upon the completion of negotiations This agreement is expected to enhance opportunities for liberalization, promotion, and protection of foreign investment, distinguishing itself as a regional investment agreement with comprehensive WTO-plus obligations The "ratchet" mechanism within TPP will establish an irreversible minimum standard for liberalization, binding member countries to future unilateral liberalization at their lowest level of restrictiveness Additionally, the investment chapter of TPP offers more refined commitments to investor protection compared to previous international agreements involving Vietnam However, the investor-state dispute settlement mechanism remains contentious, as it aims to enforce investor rights but also presents weaknesses, such as reliance on ad-hoc tribunals and the absence of a permanent body to rectify awards, potentially leaving host states vulnerable to violations of their obligations.
If the proposed mechanism is included in the final agreement, Vietnam may face lawsuits under both the ICSID and UNCITRAL forums Analyzing past cases that have interpreted these obligations will be beneficial for Vietnam and its investors in the event of investment disputes arising from the TPP While previous case decisions are not binding on future tribunals, they often influence the determination of awards Additionally, the study highlights potential issues, such as the misuse of "treaty-shopping" and inconsistencies in the award system, which Vietnam should be aware of to safeguard its interests.
1 Agreement between Japan and the Socialist Republic of Vietnam for the Liberalization, Promotion and Protection of Investment;
2 Agreement between the United States America and the Socialist Republic of Vietnam on Trade Relation – Chapter IV;
3 Agreement on Trade – Related Investment Measures (TRIMs);
4 Convention for the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention);
5 North American Free Trade Agreement 1992 (NAFTA) – Chapter Eleven (Investment);
6 Trans – Pacific Partnership (TPP) – Investment Chapter (draft version);
7 Trans-Pacific Strategic Economic Partnership;
8 Andrew Newcombe and Lluís Paradell (2009), “Law and Practice of Investment Treaties: Standard of Treatment”, Kluwer Law International;
9 Ian Brownlie (2008), “Principles of Public International Law”, 7th edition,
10 Jan Paulsson (2005), “Denial of Justice in International Law”, Cambridge
11 Karl P Sauvant (2012), “Yearbook on International Investment Law & Policy 2010-2011” , Oxford University Press;
12 M Sornarajah (2010), “The International Law on Foreign Investment”, 3rd edition, Cambridge University Press;
13 Oxford Dictionary of English (2005), 2nd edition (revised), ed Catherine Soanes, Angus Stevenson, Oxford University Press;
14 Rudolf Dolzer and Christoph Schreuer (2008), “Principles of International Investment Law”, Oxford University Press;
15 UNCTAD (2011), “Scope and Definition - UNCTAD Series on Issues in International Investment Agreements II”, United Nations Publications;
16 UNCTAD (2012), “Expropriation (A sequel) - Series on Issues in International Investment Agreements II‖, United Nations Publication;
17 UNCTAD (2012), “Fair and Equitable Treatment A sequel - Series on Issues in International Investment Agreements II”, United Nations publication;
18 Yong-Shik Lee, Gary Horlick, Won-Mog Choi, Tomer Broude (2011), “Law and Development Perspective on International Trade Law”, Cambridge University
19 Andrew Newcombe (2005), ―The Boundaries of Regulatory Expropriation in International Law‖, ICSID Review – Foreign Investment Law Journal, vol 20 no
20 David A Gantz (2003), ―The Evolution of FTA Investment Provisions: From NAFTA to the United States - Chile Free Trade Agreement‖, American University
21 Kenneth J Vandevelde (2005), ―A Brief History of International Investment Agreements‖, U.C Davis Journal of International Law & Policy, vol 12, no 1,
22 Kennethj Vandevelde (2010), ―A unified theory of Fair and equitable treatment‖,
International Law and Politics, vol.43, 43 – 106;
23 Leon E Trakman (2012), ―Resolving Investor-State Disputes under a Transpacific Partnership Agreement - What Lies Ahead?‖, Transnational Dispute Management, Forthcoming; vol 7, 1 - 61 ;
24 Lucien J Dhooge (2001), ―The North American Free Trade Agreement and the Environment: The Lessons of Metalclad Corporation v United Mexican States‖,
10 Minnesota Journal of Global Trade, 209 – 289;
25 Peter D Isakoff (2013), ―Defining the Scope of Indirect Expropriation for International Investments‖, 3 Global Business Law Review, 207 – 208
26 Razeen Sappideen and Ling Ling He (2012), ―Investor-State Arbitration: The Roadmap from the Multilateral Agreement on Investment to the Trans-Pacific Partnership Agreement‖, Federal Law Review, 40 (2), 207 – 226;
27 UNCTAD (2013), “The rise of regionalism in international investment policymaking: consolidation or complexity?”, United Nations Publication ;
28 UNCTAD (2013), “World Investment Report 2013: Global Value Chains: Investment and Trade for Development”, United Nation Publication;
29 UNCTAD (2014), “Recent Developments in International Investment Agreements”, United Nations Publication;
30 Ceskoslovenska Obchodni Banka, A.S v The Slovak Republic (CSOB v Slovak Republic),ICSID Case No ARB/97/4, Decision on Jurisdiction, 24 May 1999 (14
ICSID Review-Foreign Investment Law Journal 251 (1999);
31 Emilio Agustín Maffezini v The Kingdom of Spain (Emilio Agustín Maffezini v Spain),ICSID Case No.ARB/97/7, Award, 13 November 2000;
32 LFH Neer and Pauline Neer v Mexico (US v Mexico) (Neer), 15 October 1926, (Reports of International Arbitral Awards, vol IV pp 60-66);
33 Philip Morris Asia Limited v The Commonwealth of Australia,
UNCITRAL, PCA Case No 2012-12, Notice of Arbitration, Nov 21, 2011;
34 Philip Morris Asia Limited v The Commonwealth of Australia, UNCITRAL,
Australia‘s Response to the Notice of Arbitration, Dec 21, 2011;
35 Salini Costruttori SpA and Italstrade Spa v Kingdom of Morocco (Salini v Morocco), ICSID Case No ARB/00/4, Decision on Jurisdiction, 23 July 2001 (42
36 Saluka Investments BV (The Netherlands) v The Czech Republic (Saluka v Czech Republic), UNCITRAL, Partial Award, 17 March 2006;
37 Sporrong and Lửnnroth v Sweden, European Court of Human Rights, Judgment,
38 Te´cnicas Medioambientales Tecmed, SA v Mexico (Tecmed v Mexico), ICSID Case No ARB (AF)/00/2, Award, 29 May 2003;
39 United Mexican States v Metalclad Corporation, Supreme Court of British Columbia, 2001 BCSC 664, L002904, May 2nd, 2001;
MATERIAL FROM WEBSITES (last accessed all on July 15, 2014)
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