Investor state dispute settlement under TPP risks and implications for vietnam

Since the idea of forming a free trade area in Asia Pacific, it has received lots of attentions from the governments, researchers, enterprises, NGOs, as well as citizens from the world a

FOREIGN TRADE UNIVERSITY

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DISSERTATION

Investor-State Dispute Settlement under TPP: Risks and Implications for Vietnam

Major: International Trade Policy and Law

Full name: Dinh Thuc Anh

Hanoi, 2017

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DISSERTATION

Investor-State Dispute Settlement under TPP: Risks and Implications for Vietnam

Major: International Trade Policy and Law

Full name: Dinh Thuc Anh SUPERVISOR: DR VU VAN NGOC

Hanoi, 2017

REASSURANCE

I hereby assure that this master thesis is exclusively made by myself and that

all data and results stated in this master thesis are honest

In addition, I hereby assure that all of the supports in the process of implementation of this master thesis have been thanked and all of data and information cited in the master thesis have been specified its sources

The author,

Dinh Thuc Anh

ACKNOWLEDGEMENT

First of all, I would like to express my deep gratitude and great appreciation

to my supervisor Dr Vu Van Ngoc, for his exemplary guidance and valuable encouragement throughout the course of this thesis The support and guidance given

by him have been priceless

I also take this opportunity to express a deep sense of gratitude to all the professors and lectures of the master program of International Trade policy and Law for their valuable supports and guidance, which helped me in growing in knowledge and experience through various stages

Furthermore, I would like to especially thank for the support, encouragement, and assistance from my family, colleagues and friends during the time of this thesis

Hanoi, 05th April, 2017

TABLE OF CONTENTS REASSURANCE I ACKNOWLEDGEMENT II TABLE OF CONTENTS III LIST OF ABBREVIATIONS VII LIST OF FIGURES IX LIST OF BOXES IX

ABSTRACT 1

INTRODUCTION 2

1 Research rationale 2

2 Research objectives 3

3 Scope of the research 4

4 Research methodology 4

5 Structure of the research 5

CHAPTER 1: OVERVIEW ON INVESTOR – STATE DISPUTE SETTLEMENT 6

1.1 INVESTMENT AND INTERNATIONAL INVESTMENT 6

1.1.1 Investment 6

1.1.2 International investment 7

1.1.3 General effects of foreign investment on host states 13

1.2 INTERNATIONAL INVESTMENT AGREEMENTS 15

1.2.1 History and development of international investment agreements 15

1.2.2 Main contents of international investment agreements 19

1.3 INVESTOR – STATE DISPUTE SETTLEMENT 21

1.3.1 General features of investor –state dispute 22

1.3.1.1 With regards to the objects of the dispute 22

1.3.1.2 With regards to the scope of investor – state dispute 24

1.3.1.3 With regards to the method of investor – state dispute settlement 24

1.3.2 Current situation of investor – state dispute settlement 29

CHAPTER 2: INVESTOR – STATE DISPUTE SETTLEMENT UNDER TPP AND EVALUATION OF RISKS OF INVESTOR-STATE DISPUTE SETTLEMENT UNDER TPP ON VIETNAM 33

2.1 Investor-state dispute settlement under TPP agreement 33

2.1.1 Objectives and main contents of TPP agreement 33

2.1.1.1 Objectives of TPP agreement 33

2.1.1.2 Current situation of TPP agreement 36

2.1.2 Regulations on investor-state dispute settlement under TPP agreement

37

2.1.2.1 Regulations on foreign investor protection 37

2.1.2.2 Investment dispute settlement procedural regulations 44

2.1.3 Preliminary evaluation of investor – state dispute settlement under TPP on host state 48

2.1.3.1 Benefits for the host state 48

2.1.3.2 Risks for the host state 51

2.2 Evaluation of investor-state dispute settlement under TPP agreement on Vietnam 57

2.2.1 Increase in risks of being sued 57

2.2.1.1 Current inconsistent, instable law system with cumbersome procedures 58

2.2.1.2 Gap between implementation in reality and in laws 61

2.2.2 Risks in state-investor dispute settlement system 63

2.2.3 Burden of costs for international arbitral procedures 64

2.2.4 Difficulties and risks in developing and protecting domestic economy and society 65

2.2.4.1 Risks in developing and protecting domestic enterprise/industry 66

2.2.4.2 Risks in protecting environment 67

2.2.4.3 Risks in foreign exchange control and financial stability 68

2.2.5 Risks arising from the unefficient management mechanism of State owned enterprise 69

CHAPTER 3: RECOMMENDATION 71

3.1 Improvement of capacities in issuance and implementation of legal documents 71

3.1.1 Innovating procedures of issuance of laws and regulations 71

3.1.2 Improving capacity of authorities’ organs/staff in building legal documents 73

3.1.3 Enhancing effectiveness of supervision/checking of laws and regulations system 74

3.1.4 Improvement of capacities of implementing of laws in reality 74

3.2 Use of other alternatives for dispute settlement under arbitral procedures 75

3.3 Preparation of resources for investor state dispute settlement by arbitration 76

3.3.1 Obtaining experience through participation in investor state dispute settlement mechanism 76

3.3.2 Improvement of human resources 77

3.4 Utilization of exceptions in signed TPP agreement 78

3.5 Other preventive methods 79

CONCLUSION 81

REFERENCES 83

LIST OF ABBREVIATIONS

ICSID International Centre for Settlement of Investment

Disputes

TPP Trans-Pacific Partnership Agreement

LIST OF FIGURES

Figure 1: The openness to FDI and trade 13

Figure 2: Poverty and inward FDI stock (in 60 developing states) 14

Figure 3: Known ISDS cases annual and cumulative (1987-2015) 29

Figure 4: Home state by level of development (total as of end 2013) 30

Figure 5: The most frequent home states (total as of end 2015) 30

Figure 6: Respondent states by development status (total as of end 2013) 31

Figure 7: The most frequent respondent states (total as of end 2015) 31

Figure 8: The outcomes of concluded cases (total as of end 2015) 32

LIST OF BOXES Box 1: Definition of investment in Asean Comprehensive Investment Agreement 8

Box 2: Definition of investment in the Canada Model Bilateral Investment Agreement 2004 10

Box 3: Definition of investment in United States Model Bilateral Investment Agreement 2012 12

ABSTRACT

Undeniably, TPP agreement is considered as a typical free trade agreement

of the 21st century Since the idea of forming a free trade area in Asia Pacific, it has received lots of attentions from the governments, researchers, enterprises, NGOs, as well as citizens from the world and one of the most controversial issues is risks for host states raised from regulations of TPP on investment and investor-state dispute settlement Therefore, the aims of this master thesis are to assess the risks of investor-state dispute settlement mechanism of TPP agreement on Vietnam and give recommendations

First, the master thesis provides an overview of international investment and investor-state dispute settlements Based on this background, the thesis analyzes main provisions of investment and investor-state dispute settlement under TPP agreement, then preliminarily assesses the risks for host states After that, the thesis identifies characteristics of Vietnam which, under regulations of investment chapter

of TPP agreement, will create risks of being sued by foreign investors and risks in building and issuance policies for encouraging the development of domestic industries, SMEs, protection of the environment, stabilization of macro-economy, etc Finally, the thesis gives implications for Vietnam to eliminate the above risks

In conclusion, as required by the world integration, participation of Vietnam

in international cooperation agreements is inevitable However, in order to use these agreements as a tool to develop the economy, Vietnam needs to innovate institutional capacity

INTRODUCTION

1 Research rationale

It is a trend that integration among states in the world becomes more and more extensive which manifested in thousands of effective free trade agreements, international investment agreements and other cooperation agreements at bilateral, regional as well as multilateral levels in economic, social and even political aspects Until the end of October 2016, the total number of signed international investment agreements reached to more than 3,320 (UNCTAD, 2016, page 1) In theory, integration creates the specialization among states, eliminates the barriers in trades

of goods, services, and investments, enhances the innovation process of administration procedures, promotes economy growth and also enhances social benefits

Being seen as one of the effective tools for integration process, international investment agreements have the main role in attracting foreign direct investment, which in turn, may result in economic growth in some cases There are a variety of researches conducted to prove the link between the international investment agreements and the increase of foreign direct investment; however, there still has not been obvious evident in reality to demonstrate that signing more and more investment agreements will increase the amount of foreign direct investment into host state (UNCTAD, 2009a) Besides some positive effects on the host state such

as pressure to improve institution and law systems of the host state, international investment agreements also bring lots of risks for the host state, especially investor-state dispute settlement mechanism

TPP agreement is a free trade agreement between 12 states including Canada, Brunei, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, Australia, the US, Japan, and Vietnam, formed with the primary objectives to eliminate tariffs and barriers to goods and services trade, liberalize investment, improve trade facilitation between member states In addition, TPP also covers other cooperation

aspects such as e-commerce, state-owned enterprises, labor, intellectual properties, government procurement, etc Upon in effect, TPP agreement will create a free trade area with 800 million people, accounting for 30% of global trade and approximately 40% of global economic output (Nguyen Quang Thai, 2015)

For Vietnam, participation into TPP agreement may bring more opportunities for developing economy due to the increase of export, attraction of more foreign direct investment capital, etc, especially in the context of the slow economy growth

of Vietnam after the world economic crisis in 2008-2009 (based on data of World Bank, average of GDP growth of Vietnam is 7.2% in period from 2003 to 2007 in comparison with the average of 5.8% in period from 2010 to 2014)1 However, Vietnam, being developing state with short of experience in investor-state dispute settlement and incomplete laws system, will face a lot of difficulties with regulations and obligations under investment chapter of TPP agreement

However, it should be noted that integration is inevitable but the most importance is how to attract more foreign investment capital by accord more preferential conditions treatment for foreign investors while remaining active position in building policies to develop sustainably domestic economy and protect

domestic society This lead the author to choose and research the topic “Investor State Dispute Settlement under TPP: Risks and Implications for Vietnam”

2 Research objectives

This thesis aims to analyze regulations of investment chapter of TPP agreement, in which focus on investor-state dispute settlement in order to preliminarily assess some main negative impacts on host state On basis of analysis

of main characteristics of Vietnam, the thesis evaluates possible risks of investor dispute settlement mechanism under TPP agreement on Vietnam and give the recommendation on preventing the investment dispute

1 For more information, please see

http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

3 Scope of the research

The thesis focuses on the analysis of regulations on investment and investor –state dispute settlement of TPP agreement which have negative impacts on the host state at the aspect of the legislative and implementation of laws and policies of the host state and the effects of the increase of risks of being sued by foreign investors Under such direction, the thesis tries to find typical characteristics of Vietnam which, under regulations of investment chapter of TPP agreement, will creates difficulties in building, issuance and implementation of policies to protect public interests such as environment, promote the development of small and medium domestic enterprises, infant domestic industries, protect foreign exchange reserve and finally, risks of being sued by foreign investor In addition, the thesis will give recommendations for elimination of the above risks

4 Research methodology

The research method used in this thesis is desk research with the aim to collect information, data from official sources in order to analysis and evaluate risks

of ISDS under TPP agreement on Vietnam and give the recommendation

4.1 Information and data to be collected:

4.1.1 General information and data related to international investment agreements

such as history and development of international investment agreement, main provisions of international investment agreement (interpretation, analysis of provisions, cases and policies related to each provision); investor-state dispute settlement: main features and methods of investor-state dispute settlement and current situation of investor-state dispute settlement

4.1.2 Information and data on TPP agreement, especially regulations on

investor-state dispute settlement under TPP agreement together with its benefits and risks on host states

4.1.3 Current law and policies systems of Vietnam, especially process of issuance,

implementation of law and policies in realities

4.1.4 Information in improving current laws and policies system of Vietnam and

experience of other states in investor-state dispute settlement

4.2 Sources of information and data to be collected: the information and data

collected from series on investment issued by UNCTAD, OECD, General Statistics of Vietnam, WTO center, research and papers of authors, etc 4.3 Results of the collection of information and data

Based on collected information and data on the international investment agreement and investor – state dispute settlement as mentioned above, the thesis preliminarily analyzes regulations in the investment of TPP agreement, then evaluates the benefits and risks for the host states Based on this evaluation and analysis of current laws and policies system of Vietnam, the thesis finds out the main risks of investor – state dispute settlement under TPP agreement for Vietnam Finally, the thesis gives the recommendation to improve capacities in issuance and implementation of laws and policies and other solutions based on experiences from other states

5 Structure of the research

The thesis includes introduction, conclusion and 3 chapters as follows:

Chapter 1: Overview on investor-state dispute settlement;

Chapter 2: Investor-state dispute settlement under TPP agreement and evaluation of risks of investor-state dispute settlement under TPP agreement on Vietnam;

Chapter 3: Recommendation for Vietnam

CHAPTER 1: OVERVIEW ON INVESTOR – STATE DISPUTE

be defined as activities using current sources to bring for the economy and society

in the future greater results than sources used for archiving such result (National Economic University, 2003) All of the investment activities are conducted for certain benefits such as the increase in materials or spirits and results of investment may bring benefit for not only the investor(s) but also the economy and society

In legal aspect, investment is defined more typically that investor(s) use his capital, assets under the manner allowed by prevailing laws to conduct activities for profitable purpose or for other economic and social benefits purposes However, in general, investment is mostly related to business with the nature of expenditure to acquire property or other assets in order to produce revenue; assets so acquired The placing of capital or laying out of money in a way intended to secure income or profit from its employment (H.C Black, 1990, page 825) Capital may be tangible assets such as money, equipment, machinery, works or intangible assets such as intellectual property, land use right, right to exploit natural resources or other assets rights

Under Vietnamese Investment Law No 67/2014/QH13, “business investment” means an investor’s investing capital to do business by establishing a business organization; making capital contribution, buying shares or capital contributions to a business organization; making investments in the form of contracts or execution of investment projects

Depending on different criteria, investment activities could be classified as follows:

a Based on purpose of investment, investment activities could be classified as

nonprofit investment and profit investment

b Based on sources of investment capital, investment activities could be

classified as domestic investment and foreign investment

c Based on nature of capital management of investor, investment activities

could be classified as direct investment and indirect investment Direct investment is the investment activities in which investor directly participates into the management, operation of uses of its invested capital/sources Meanwhile, indirect investment is the investment activities in which the investor does not directly involve the process of management or operation of its invested capital/sources In this type of investment, there is a distinction between the possession and management of invested capital Investors and managers of the invested capital are the different objects and have different rights/power to control over the invested capital

1.1.2 International investment

International investment, in general, involves the transfer of tangible and/or intangible from one country to another country in order to do business for profit purpose In Encyclopedia of Public International laws, foreign investment is the transfer of funds or materials from one country (called capital exporting country) to another country (called capital importing country) to be used in the conduct of an enterprise in that country in return for a direct or indirect participation in earning of

an enterprise (Rudolf Bernhardt, 1992, page 246)

The definition of investment confined in most of the IIAs is foreign investment The scope of assets/transaction being defined as an investment is very crucial since it is under the protection of IIAs In different periods, the list of such assets/transactions changed From the early time, in the mid-nineteenth century, investment or in another way, capital flow through the frontier of a country to

another country existed under the form of tangible properties possessed by aliens or loans from foreign countries However, it is clear that the assets being defined as the investment are tangible properties or interest of financial investment After the post-colony period, the investment also includes intangible assets such as rights associated with the right of holding invested assets, land use right, right to exploit natural resources when there are lots of concession agreement on natural resources signed; and also include shares of the companies Until the late twenty century which is the period of technology innovation and the establishment of TNCs with global famous trademark, intellectual property rights is considered as an important value and also included in the investment term

Together with the changes in the nature of investment term, the definition of investment in IIAs changes from time to time In addition, there are two trends in defining investment in IIAs: open-end definition and exhausted definition (UNCTAD, 2011)

In order to protect the investment of foreign investor, the state of the investor tends to use an open-ended list of invested assets in the IIA with host state Almost

of IIAs are under the form of the open-ended list Accordingly, such type of IIA has the tendency to include “every kind of assets”, and especially, the list of assets in this definition is not exhausted

Box 1: Definition of investment in Asean Comprehensive Investment

Agreement

“investment” means every kind of asset, owned or controlled, by an investor,

including but not limited to the following:

(i) movable and immovable property and other property rights such as mortgages, liens or pledges;

(ii) shares, stocks, bonds and debentures and any other forms of participation in a juridical person and rights or interest derived therefrom;

(iii) intellectual property rights which are conferred pursuant to the laws and regulations of each Member State;

(iv) claims to money or to any contractual performance related to a business and having financial value;

(v) rights under contracts, including turnkey, construction, management, production

or revenue-sharing contracts; and

(vi) business concessions required to conduct economic activities and having financial value conferred by law or under a contract, including any concessions to search, cultivate, extract or exploit natural resources

The term “investment” also includes amounts yielded by investments, in particular, profits, interest, capital gains, dividend, royalties and fees Any alteration of the form in which assets are invested or reinvested shall not affect their classification

Germany BIT 2005 “[t]he present Agreement shall also apply to investments by nationals or companies of either Contracting Party, made prior to the entering into force of this Agreement and accepted in accordance with the respective prevailing legislation of either Contracting Party”), etc

Box 2: Definition of investment in the Canada Model Bilateral Investment

Agreement 2004

investment means:

(I) an enterprise;

(II) an equity security of an enterprise;

(III) a debt security of an enterprise

(i) where the enterprise is an affiliate of the investor, or

(ii) where the original maturity of the debt security is at least three years, but

does not include a debt security, regardless of original maturity, of a state enterprise;

(IV) a loan to an enterprise

(i) where the enterprise is an affiliate of the investor, or

(ii) where the original maturity of the loan is at least three years, but does not include a loan, regardless of original maturity, to a state enterprise;

(V) (i)Notwithstanding subparagraph (III) and (IV) above, a loan to or debt

security issued by a financial institution is an investment only where the loan

or debt security is treated as regulatory capital by the Party in whose territory the financial institution is located, and (ii) a loan granted by or debt security owned by a financial institution, other than a loan to or debt security of a financial institution referred to in (i), is not an investment; for greater certainty: (iii) a loan to, or debt security issued by, a Party or a state enterprise thereof is not an investment; and (iv) a loan granted by or debt security owned by a cross-border financial service provider, other than a loan to or debt security 5 issued by a financial institution, is an investment if such loan or debt security meets the criteria for investments set out elsewhere in this Article;

(VI) an interest in an enterprise that entitles the owner to share in income or

profits of the enterprise;

(VII) an interest in an enterprise that entitles the owner to share in the assets of

that enterprise on dissolution, other than a debt security or a loan excluded from subparagraphs (III) (IV) or (V);

(VIII) real estate or other property, tangible or intangible, acquired in the

expectation or used for the purpose of economic benefit or other business purposes; and

(IX) interests arising from the commitment of capital or other resources in the

territory of a Party to economic activity in such territory, such as under (i) contracts involving the presence of an investor's property in the territory

of the Party, including turnkey or construction contracts, or concessions, or (ii) contracts where remuneration depends substantially on the production, revenues or profits of an enterprise; but investment does not mean,

(X) claims to money that arise solely from (i) commercial contracts for the sale

of goods or services by a national or enterprise in the territory of a Party to

an enterprise in the territory of the other Party, or (ii) the extension of credit

in connection with a commercial transaction, such as trade financing, other than a loan covered by subparagraphs (IV) or (V); and

(XI) any other claims to money, that do not involve the kinds of interests set out in

subparagraphs (I) through (IX)

Box 3: Definition of investment in United States Model Bilateral Investment

Agreement 2012

“investment” means every asset that an investor owns or controls, directly or

indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk Forms that an investment may take include:

(a) an enterprise;

(b) shares, stock, and other forms of equity participation in an enterprise;

(c) bonds, debentures, other debt instruments, and loans; 2

(d) futures, options, and other derivatives;

(e) turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts;

(f) intellectual property rights;

(g) licenses, authorizations, permits, and similar rights conferred pursuant to domestic law; 3 4 and

2 Some forms of debt, such as bonds, debentures, and long-term notes, are more likely to

have the characteristics of an investment, while other forms of debt, such as claims to payment that are immediately due and result from the sale of goods or services, are less likely to have such characteristics

3 Whether a particular type of license, authorization, permit, or similar instrument

(including a concession, to the extent that it has the nature of such an instrument) has the characteristics of an investment depends on such factors as the nature and extent of the rights that the holder has under the law of the Party Among the licenses, authorizations, permits, and similar instruments that do not have the characteristics of an investment are those that do not create any rights protected under domestic law For greater certainty, the foregoing is without prejudice to whether any asset associated with the license, authorization, permit, or similar instrument has the characteristics of an investment

(h) other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges

1.1.3 General effects of foreign investment on host states

Economic development is a significant target which any state aims at and attraction of foreign investment is considered as one of the ways to obtain such target and it is especially necessity for the developing state Foreign investment, especially foreign direct investment, through its linkages to the foreign trade flow, can affect the GDP of the host state The following figure shows the linkages between the openness to trade and investment

Figure 1: The openness to FDI and trade

4 The term “investment” does not include an order or judgment entered in a judicial or

administrative action

Singapore, China in the 1980s, India in 1960-1970s, however, it also been unsuccessfully used in Africa

Foreign investment to some extent may create more jobs for local people and local people may have the chance to improve its capacities and skills, quality of living in the host state may increase

Figure 2: Poverty and inward FDI stock (in 60 developing states)

Source: World Development Indications

However, it is the reality in developing or least developed state such as Vietnam that local people are employed for jobs which need low technique, therefore, the capacity of local people may not improve as expected

In addition, environment pollution and natural resources exhaustion are one

of the effects of foreign investment on host state, especially with developing states with loose rules and regulations on environmental protection as mentioned in the following parts Finally, it is may be the risk of being sued by foreign investors with

a huge amount of compensation and legal fee based on international investment agreement in which the host state is a member

1.2 International investment agreements

1.2.1 History and development of international investment agreements

Prior to the Second World War II, regulations on the international investments as well as protection of foreign investments did not receive any concern from states Some provisions on foreign investment were mentioned rarely in international trade agreements, which were usually expressed under the form of protection of foreign nationals’ properties in the territory of other states, such as bilateral agreements under the name of “Friendship, Commerce and Navigation” of United States (Kenneth J.Vandevelde, 2009) These trade agreements included provisions on the full and perfect protection of foreign nationals’ properties in the territories of other states, required payment of compensation for expropriation, included provisions on most favored nation, national treatment for some certain business activities of foreign nationals in the territories of the member states However, it is noted that these provisions are sourced from customary international laws, which required host state to treat foreign investment in accordance with international minimum standards (Ian Brownlie, 1998, pages 527-528)

With regards to the application of such international customary provisions, in reality, there are many obstacles Firstly, in American Latin countries, under Calvo doctrine, foreign investors were entitled only to the treatment that the host state afforded to its own investors (Donald R Shea, 1955), while in developed states, it was argued that there were international minimum standards on the treatment of foreign investment Secondly, the definition of international minimum standards was vague and arguable Thirdly, because there was no agreement between the host state and the foreign investors or the home state to submit the dispute to the arbitration, the enforcement of these customary norms were difficult and depended

on the discretion of the home state, which was called as espousal Accordingly, the home state would assume the claim of its national as its own and bring the claim against the host state to the arbitration However, the home state would be reluctant

to initiate the dispute because this may disrupt the relationship between the home

state and host state In addition, the home state may initiate the claim only after its nationals has exhausted the remedies under the laws of the host state Furthermore, after the host state initiates the claim to the arbitration, the investor loses his control over the claims

In addition to this dispute settlement, there may be other alternative methods such as diplomacy and military force

However, in general, in this period, regulations on international investment and protection of foreign investment were weak and limited, and as a result, the enforcement mechanism in event of violation was only through diplomacy and military force, not the legal mechanism

After the World War II, there was a trend in favor of liberalizing trade as a reaction to the protectionist policies of the 1920s which was considered as one of the causes of economic depression prior to the war The Hanavan Charter included some provisions on, directly or indirectly, the investment and competition However, it was not concluded In this period, the United States launched a number

of FCN agreements from 1946 and continued for next twenty years with 21 signed agreements (Kenneth J.Vandevelde, 2009) These FCNs of the United States extended its scope to the corporate entities, while earlier agreements protected only individuals In some FCNs, it also included provisions on the protection of foreign exchange control, dispute settlement in which the parties consented to submit the dispute to International Court of Justice5 regarding the interpretation or application

of the agreements

After the World War II, especially since the 1960s, there was a decolonization which led to the creation of a number of newly independent states with the undeveloped economy There had been a large-scale nationalization of

5For example, FCN Japan, at art XXIV(2), provided that: “Any dispute between the Parties as to the interpretation or application of the present Treaty, not satisfactorily adjusted by diplomacy, shall be submitted to the International Court of Justice, unless the Parties agree to settlement by some other pacific means.”

private sectors as well as foreign assets The newly independent states were held that foreign investment was a form of neocolonialism (Shaw, 2003, p.203) because

it was involved the foreign control in production, trade in the territory of the host state Those states concerned about the possibilities of interference in domestic affairs and the developed states would exploit the natural resources and key industries which then would lead to the political independence (M Sornarajah, 1994) Therefore, many newly established states chose to close its economies to new foreign investment

Because of the deficiencies of protection mechanism of foreign investment in customary laws, treaties would be the effective means to prevent the uncompensated expropriation and other violations against the foreign investment or investor In realization of this, Germany – the defeated state in the Second World War II and sensitive to its lost in expropriation, was the first state to sign the bilateral investment agreements in 1959 with Pakistan and Dominican Republic (Jeswald W Salacuse & Nicholas P Sullivan, 2005) Other Western European states also quickly signed BITs such as France in 1960, Switzerland in 1961, Netherland in 1963, Italy in 1964, etc

In comparison with the previous period, there are some different features of the signed IIAs First, BITs were signed between a developed state and a developing state The developed state signed to obtain the protection of its foreign investment and the developing state signed for the motivation of attracting foreign capital Secondly, because of skepticism of developing states toward foreign investment, from 1959 to 1969, only 75 BITs signed, from 1970 to 1979, the rate grew slightly with 92 BITs signed and from 1980 to 1989, 219 BITs signed (UNCTAD, 1998) Thirdly, regarding contents of BITs, the BITs still contained common provisions on national treatment, most favor treatment, fair and equitable treatment, restriction on exchange controls, but for provision on dispute settlement, there were agreements

on submitting to the ad arbitral tribunal, instead of International Court of Justice The BITs did not require the exhaustion of local remedies before submitting to the

ad arbitral tribunal Especially, with the establishment of ICSID under World Bank,

there has been an effective organ for dispute settlement between the host state and the foreign investor

At the end of the 1980s until now, there were profound changes in the development of international investment agreements, which rooted from two causes Firstly, it was the victory of market ideology It was proved by the economic successes of some Asian economies with high rates of private investment and promoted the production of goods for export, relative to that of developing states that pursued import substitution policies (World Bank, 1993), demonstrated the role

of foreign investment and global integration In addition, with the collapse of the Soviet bloc, the market capitalism ideology was also discredited Secondly, the debt crisis of the 1980s reduced the availability of private lending (John Rapley, 1996), therefore, developing countries must seek from foreign investment For these reasons, developing states became less hostility to foreign investment and more open in economic policies to attract foreign investment From 1990 to 2005, there were around 2000 BITs signed, five times higher than the period from 1959 to 1989 (UNCTAD, 2005)

Furthermore, in this period, there was a mixture of trade and investment provisions in the agreement, which reflected the changes in the nature of economic activities Accordingly, in this period, investment was not seen as a mean to replace trade For examples, foreign subsidiary, under traditional view, seen as means to deliver goods or services to foreign markets because of high tariff, however, it is now seen as a mean to link the chain of production, import raw materials from other subsidiaries and export product to other subsidiaries for more completion The notable agreements in this combination are European Community, NAFTA, TPP, etc The investment provisions appeared in agreements of all levels from bilateral, regional to multilateral levels The contents of agreements include trade in goods, trade in services, investment and also other aspects such as intellectual properties protection, custom, etc In different with the previous period, the parties to the agreement may between developing states, between developed states and may not from the same region By the end of 2004, one-fourth of all BITs was concluded

between developing states (UNCTAD, 2005) In addition, while in the previous period, the main purpose of IIAs is for the protection of investment of developed states from expropriation, in this period, the IIAs intend to liberalize investment flow Nowadays, with the deeper economic integration, more than 170 states are parties to at least one BITs (UNCTAD, 2005)

1.2.2 Main contents of international investment agreements

In general, international investment agreement nowadays includes preambles, provisions on investment liberalization and investment protection; and provisions on investment dispute settlement The below are main contents of the IIAs:

(i) Preambles stipulates general objectives and purposes of the IIAs The main

objectives of any IIA are for liberalizing investment, bringing economic growth and social benefits, creating new opportunities for workers and businesses, contributing to raising living standards, benefit consumers, reducing poverty and promoting sustainable growth

(ii) Definitions of “investment” and “investor” play an important roles in any

IIAs because they determine the limitation of protection of host state for foreign investor as well as the bases for initiating claim against the violation

of host state “Investment” includes tangible and intangible assets, movable

or immovable, properties or rights related to properties Currently, there is a trend on defining a broad definition of “investment” which creates a more protective possibility for foreign investors “Investor” included natural person and legal entity A natural person is the nationals or citizenship or permanent resident or in the case of two nationals, it is the dominant nationality of the member state of the IIA A legal entity is the entity established under the laws of the member state of IIAs or has headquartered

in the member state of IIAs In reality, some entity establishing a holding company in the member state in order to enjoy the preferential conditions of

IIAs, which is considered as “treaty shopping” Therefore, many IIAs has stipulated provisions on the prohibition of treaty shopping

(iii) Regulations on standards of investment protection include:

- National treatment: accordingly, it requires the host state to accord to

investors/investment of another party treatment no less favorable than that it accords, in like circumstances, to its own investors/investment of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments

in its territory

- Most favored nation: accordingly, it requires the host state to accord to

investors/investment of another party treatment no less favorable than that it accords, in like circumstances, to investors/investment of any other party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory

- Fair and equitable treatment, full protection and security: those principles

come from international customary laws of vague nature, and there has been not the method to define exactly The purpose of the principle of FET is for offering the investors a stable and predictable investment environment The principle of “full protection and security” requires the host state to perform necessary acts to protect the foreign investors/investment against the physical threat as well as other infringements of the foreign investor’s rights

- Expropriation provisions stipulate methods to define direct and indirect

expropriation, the formula for compensation in case of expropriation The common requirements for legal expropriation include for a public purpose, in

a non-discriminatory manner, on payment of prompt, adequate and effective compensation and in accordance with due process of law

- Free transfer of fund requires the host state to permit the transfers relating to

a covered investment to be made freely and without delay into and out of its

territory and transfers relating to a covered investment to be made in a freely usable currency at the market rate of exchange prevailing at the time of transfer

- Other protection regulations such as umbrella clause, no discrimination

measures (non-conforming measures, requirements on senior management and board of directors, etc)

(iv) Regulations on dispute resolution stipulate the methods to dispute settlement

including but not limited to diplomatic methods such as negotiation, mediation, conciliation, etc and legal methods such as international arbitration or even national litigation at host state; and procedures to perform such methods of dispute settlement Accordingly, the parties may be required

to prioritize to use diplomatic measures, after certain limited time, if those measures can not bring results, the foreign investor may use international arbitration or after the exhaustion of litigation method in host state, the foreign investor may submit the claim to the international arbitration (Calvo doctrine) In addition, this part also stipulates regulation on enforcement mechanism of the awards

Detailed wording of the main contents above may be different depending on the purposes of each IIAs being protective for the host state or liberalized in favor

of the foreign investor

1.3 Investor – state dispute settlement

The dispute, as defined in Black Law‘s Dictionary means a conflict or controversy, a conflict of claims or rights, an assertion of a right, claim or demand

on one side, met by contrary claims or allegations on the other (H.C Black, 1990) Accordingly, investor – state dispute could mean any conflict or disagreement in the point of law or fact on the right and/or obligations of foreign investor and the host state In view of Vietnamese laws, according to Article 2 of Decision No 04/2014/QD-TTg dated 14 January 2014 on promulgation of regulation on coordination in resolution of international investment disputes, investor – state

dispute is defined as disputes arising from time when foreign investors sue Vietnamese Government or State (hereinafter collectively referred to as Vietnamese Government) or state agencies, organizations authorized for state management (hereinafter collectively referred to as state agencies) on the basis:

a) The Agreement on Promotion and Guarantee of Investments or commercial agreements or other international treaties which provide for investment promotion and guarantee of which Vietnam is a contracting member (hereinafter collectively referred to as investment guarantee agreements), in which provide for resolution of disputes between foreign investors and Vietnamese Government at international arbitration or competent foreign tribunals; or

b) Contracts, agreements between Vietnamese Government or Vietnamese state agencies and foreign investors, in which provides that agencies for resolution of disputes arising from these contracts, agreements shall be international arbitration or competent foreign tribunals

However, the definition and scope of the object of the dispute (investor and the host state) in different international agreement on investment are not the same Detail is analyzed in the following items below

1.3.1 General features of investor –state dispute

1.3.1.1 With regards to the objects of the dispute

Relationships between the foreign investor and state in dispute is regulated under private international laws However, one party to the dispute being a host is enjoyed judicial immunity and asset of state immunity (in general referred to as

“national immunity”), which are recognized by international laws in many previous decades Under this legislation, judicial immunity is a national privileges and states (including any organs and individuals acting in represent of the states such as central, regional or local government/authorities or any organs and individuals exercise any governmental authorities delegated to it by central, regional or local government) will not be brought to trial before the court and in case the state is initiated by any individual or organs before court, the court is obliged dismissed it,

except for the case of waiver of such right of the state Judicial immunity also includes immunity from enforcement of issued awards Such national immunity right was recorded in Vienna Convention 1961 on the diplomatic relationship and Vienna Convention 1963 on consul relations However, after the triumph of October Russia Revolution, there has been the existence of a number of socialism states with

a new economic model in which state directly involve the economic activities through its state-owned and monopoly companies Therefore, there is a question raised whether such entities were enjoyed immunity rights as the state In this circumstance, scholars of the capitalism country develop relative immunity theory According to this theory, states participating in the international civil relations will enjoy judicial immunity and immunity of states’ assets in all fields of civil relations, except for some cases (M Sornarajah, 2004) This theory was soon supported by other states and concretized into national legislation United Nation Convention on judicial immunities and states’ assets immunities also provided the cases in which states will not enjoy such immunity in the areas of trade, labor contracts, damage to people and property

With regards to the investor, however, the definition of such term is different

in laws of host states and international agreement on investment and all of them bases on the factor of the nationality of the investor Under Article 14.3 Investment law 2014 of Vietnam, foreign investor means an individual holding a foreign nationality or an organization established under foreign laws making the business investment in Vietnam However, definition of investor in US BIT model (Article 1

of US BIT model 2012) is broader: investor means a Party or state enterprise thereof, or a national or an enterprise of a Party, that attempts to make, is making, or has made an investment in the territory of the other Party; provided, however, that a natural person who is a dual national shall be deemed to be exclusively a national of the State of his or her dominant and effective nationality

1.3.1.2 With regards to the scope of investor – state dispute

The scope of investor – state dispute is based on provisions of IIAs or laws and other regulations of the host state Content of investor – state dispute in general

is complex, diversified because such dispute is related to rights and obligations of host state and foreign investors when the foreign investors implement its investment activities under the form of direct or indirect investment from pre-investment such

as procurement, procedures to obtain license/permit to investment, procedure to land rent, until activities during investment such as tax, land use, transfer of funds to home state, possession of properties, indirect expropriation and compensation, etc

1.3.1.3 With regards to the method of investor – state dispute settlement

With characteristics of objects of the dispute as mentioned above, unlike other civil dispute, there are many methods to resolve the dispute; including through diplomatic protection, mediation or negotiation, court, and arbitration Depending

on the IIAs, international agreement on investment dispute settlement in which the home state and host state are the members, and other agreements between two disputing parties, which methods apply will be decided Details analysis of each method is below

a Diplomatic protection

In investment dispute settlement, diplomatic protection is a traditional method to resolve the dispute, in which a home state, on behalf of its national whose interest are damaged by the host state, will take diplomatic or other actions against the host state Diplomatic protection principle affirms the home state’s responsibilities in the protection of its national abroad and it has been recognized as customary laws such as in Barcelona Traction case (Barcelona Traction Case [1970] ICJ Rpts) According to customary laws, in order for a state to espouse its national’s claim, there are 2 requirements: the first, local remedies has been exhausted and second, the dominant and effective nationality of the injured person is of the state exercising diplomatic protection

Diplomatic protection could be an efficient method of dispute resolution in case the home state of the investor is a powerful state However, in any circumstances, the investor depends totally at the discretion of its state The home state, due to its political intention or other intention may negotiate and settle in its way and the investor must accept the result of the settlement despite its disagreement

b Diplomatic dispute settlement methods

Diplomatic dispute settlement methods include negotiations, good office and mediation, and conciliation

Negotiation is the method in which the disputing parties discuss and exchanges view to understand the other parties’ opposing opinion and to reconcile the differences In this method, there will be no participation of the third party Negotiation is usually the first step of dispute settlement and after the failure of negotiation in a limited time, there will be other dispute settlement methods for the parties to use such as mediation, conciliation, arbitration or adjudication Negotiation is not always a good method of dispute resolving and depending totally

on the good faith of the disputing parties

In good office and mediation method, there is involvement of third parties in assisting the disputing parties to resolve the dispute In the good office, the third party will persuade the disputing parties to enter into negotiation and when the negotiation starts, its function will end However, in mediation method, the third party involves more actively, accordingly, the third party also takes parts in negotiation and may suggest opinion for dispute settlement

Conciliation, as defined in Article 1 of Regulation on the procedure of

international conciliation is as follows: “A method for the settlement of international dispute of any nature according to which a commission set up by the parties, either

on a permanent basis or an ad hoc basis to deal with a dispute, proceed to the impartial examination of the dispute and attempts to define the terms of a settlement susceptible of being accepted by them or affording the parties, with a view to its

settlement, such aids as they may have requested.” Accordingly, in this method, the

conciliator may investigate the fact of the dispute and then propose the solution to the dispute in which the latter is the main function (J.G Merrills, 2005) At the end

of the conciliation, the conciliator will issue a report and suggest the solution to resolving the dispute Such suggestion is the only recommendation and not binding the disputing parties

All of the mediation, good office, and conciliation methods have advantage and disadvantage in comparison with adjudication and arbitration They are more flexible and the disputing parties control of the outcome of the dispute settlement However, conciliation and mediation can only be started if there is consent of the both parties, the outcome of the dispute settlement is not compulsory

c Legal method of dispute settlement

(i) Adjudication

Investor- state dispute may be referred mostly to the competent court of the host state or may be the competent court of the home state of the investor In general, being one of the methods of dispute settlement, it has advantages including the judgment of the court/tribunal or the appellate is final and enforceable However, the enforcement of court judgment depends on mutual legal assistant signed between two parties or the reciprocal principle among states In addition, settlement investor-state dispute by the court of host state also has advantages as follows

Investor-state dispute exclusively settled exclusively by the court of host state is based on Calvo doctrine which is a famous doctrine of Latin America in XIX century and applied in investment relations between Latin America states and European states Accordingly, Carlos Calvo – Argentina publicist and historian argued that alien must be treated same to the citizen, and must not more favorable than the citizen In investment field, the foreign investor must accept to submit his investment dispute to the court of the host state and applicable law is the law of the host state However, such type of dispute settlement always creates conflict between

disputing parties on the judgment of the court of the host state and foreign investor assumes that such judgment is not fair As a result, this is considered as an excuse for the home state to interfere in internal matters of the host state under the form of diplomatic protection to protect injured rights and benefits of its national abroad Examples are UK-France interfered military in Egypt in 1956 in order to prevent the expropriation of Suez Channel Company, Mossadegh government of Iran was overthrown after the expropriation of Anglo-Iranian Oil Company of UK in 1951 (M Sornarajah, 2004)

For the above reason, settlement of the dispute between host state and foreign investor by international arbitration is more efficient and advantages

(ii) Arbitration

Dispute settlement by international arbitration is considered as more fair because such method is conducted based on independent international arbitrators, rather than the national court of host state which to some extent, may be influenced

by executives in the host state In comparison with the court, arbitration has more advantages: the arbitration proceeding is confidential while court proceeding is public accordingly, the parties will keep its fame, time for arbitration proceeding is more flexible than the court proceeding, some incumbent procedure of court proceeding may be reduced and thus, the parties economize its time The award of arbitration is final and binding as the same to the court However, the enforcement

of arbitration judgment is more challengeable than national court Accordingly, if the arbitration award is issued within national territory, the enforcement is assisted

by award enforcement organ; if the arbitration award is issued outside national territory, the recognition and enforcement of arbitration is based on international agreement in which they are members Currently, there are many international agreements on recognition and enforcement of foreign arbitration abroad New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards

of 1958 is one of the most popular agreement Until the end of 2014, there are 149 member states and Vietnam participated in this convention in 1995 However,

related to the recognition and enforcement of arbitration award, in international laws as well as national laws, there are cases in which national competent authorities set aside the arbitral award for the reasons such as the award has violated fundament principles of laws, the arbitral tribunal has no competent jurisdiction on dispute, evident provided for arbitrator tribunal to issue award is fake, etc

With regards to arbitration method, there are two types including ad-hoc arbitration and institutional arbitration Ad-hoc arbitration is set up by the disputing parties for only their dispute and the parties in their own discretion, decide all aspects of the arbitration such as the number of arbitrators, procedures to appoint arbitrators, procedure laws and substantive laws to resolve the dispute, etc In contrast, institutional arbitration is set up by institution provided services of administration for the arbitration process Accordingly, in institutional arbitration, there are available arbitration rules (such as procedure arbitration proceeding, the list of the arbitrator for selection, secretariat services) for dispute settlement Therefore, although ad-hoc arbitration is more flexible for the parties, institutional arbitration has more advantages for dispute settlement in economize time due to available rules on pre-arbitration proceeding and arbitration proceeding, and because the institutional arbitration has clear and suitable administration rule of arbitral proceeding may not cause errors in judgment which in turn, results in un-recognition and unenforceable of arbitral award

Currently, there are about 1200 institutional arbitrations in the world 6and most of them are in the field of trade, investment, or other industries Some popular institutional arbitration are such as International Center for settlement of investment dispute (ICSID), London Court of International Arbitration (LCIA), the International Chamber of Commerce (ICC), Dubai International Arbitration Centre

6 For more information, please see construction/international-arbitration/institutional-vs-ad-hoc-arbitration/ (last access on

http://www.out-law.com/en/topics/projects 14 th December 2016)

(DIAC), Singapore Investment Arbitration Court (SIAC), International Centre for Dispute Resolution (ICDR), etc

1.3.2 Current situation of investor – state dispute settlement

In recognition of the importance in the protection of foreign investor, many states have included provision related to ISDS in its IIAs for more than 50 years ago when the first provision of ISDS was included in BIT between Germany and Pakistan in 1959 However, for the first twenty years, there is almost no ISDS case brought to the arbitration Until 1987, there was an ISDS based on BIT between Asian Agricultural Products Ltd (AAPL) v Republic of Sri Lanka was brought to the World Bank's International Centre for Settlement of Investment Disputes (ICSID) In the next 10 years, it was recorded that only 19 cases brought before ICSID, and only 02 awards were issued (UNCTAD, 2014)

However, the period from 1998 until 2015 witnesses a surge increase of the number of cases brought to the arbitrary, from 10 cases initiated in 1998 to 70 cases initiated in 2015 The cases cumulative in 1998 was 29 while such number in 2015 was 696 During this period, the year of 2015 saw the highest number of initiated cases of 70 cases

Figure 3: Known ISDS cases annual and cumulative (1987-2015)

Sources: UNCTAD (2015)