INVESTOR STATE DISPUTE SETTLEMENT ON THE FAIR AND EQUITABLE TREATMENT STANDARD AND LESSONS FOR VIETNAM

MASTER THESISINVESTOR-STATE DISPUTE SETTLEMENT ON THE FAIR AND EQUITABLE TREATMENT STANDARD AND LESSONS FOR VIETNAM Major: International Economics Specialization: International Trade Pol

MASTER THESIS

INVESTOR-STATE DISPUTE SETTLEMENT

ON THE FAIR AND EQUITABLE TREATMENT STANDARD

AND LESSONS FOR VIETNAM

Major: International Economics Specialization: International Trade Policy and Law

Code: 8310106

Full name: Truong Thi Kim Xuyen Supervisor: Dr Vo Sy Manh

STATEMENT OF AUTHORSHIP V ACKNOWLEDGEMENTS VI ABBREVIATIONS VII LIST OF FIGURES IX SUMMARY OF THESIS RESEARCH RESULTS X ABSTRACT XI INTRODUCTION XII

1 BACKGROUND OF THE STUDY XII

2 LITERATURE REVIEW XIII

3 OBJECTS AND SCOPE OF THE STUDY XVIII

4 OBJECTIVES OF THE STUDY XIX

5 METHODOLOGY OF THE STUDY XX

6 EXPECTED CONTRIBUTION OF THE THESIS XX

7 STRUCTURE OF THE THESIS XX CHAPTER 1 AN OVERVIEW OF THE INVESTOR-STATE DISPUTE

SETTLEMENT AND THE FAIR AND EQUITABLE TREATMENT

STANDARD 1

SUMMARY 11 CHAPTER 2 REGULATION AND APPLICATION OF THE FAIR AND EQUITABLE TREATMENT 12

INTERNATIONAL INVESTMENT AGREEMENTS 12

2.1.2 F AIR AND E QUITABLE T REATMENT AS AN UNQUALIFIED STANDARD 14

2.1.2.1 Stand-alone Fair and Equitable Treatment Standard 14

2.1.2.2 Fair and Equitable Treatment combined with other standards 15

2.1.2.3 FET standard with an open-ended list of State obligations 20

2.1.3.1 Fair and Equitable Treatment with references to Minimum Standard

2.1.3.2 Fair and Equitable Treatment with references to international law 22 2.1.3.3 Fair and Equitable Treatment with references to international law 22 2.1.3.4 Fair and Equitable Treatment with “exhaustive list” of State

2.2.2.1 Interpretation of “No Fair and Equitable Treatment Clause” 26

2.2.2.2 Interpretation of Unqualified Fair and Equitable Treatment 28

2.2.2.3 Interpretation of the Qualified Fair and Equitable Treatment 34

2.3.1 M ICHAEL L EE M C K ENZIE V T HE S OCIALIST R EPUBLIC OF V IETNAM 38

2.3.4 T RINH V INH B INH V T HE S OCIALIST R EPUBLIC OF V IETNAM 45

SUMMARY 47 CHAPTER 3 INVESTOR-STATE DISPUTE SETTLEMENT ON THE FAIR AND EQUITABLE TREATMENT ON THE PERSPECTIVE OF THE HOST STATE AND LESSONS FOR VIETNAM GOVERNMENT 50

INTERNATIONAL INVESTMENT AGREEMENTS 50

3.1.1.1 The FET standard with reference to the minimum standard of

3.1.1.2 The Fair and Equitable Treatment clause with an open-ended list of

3.1.1.3 The Fair and Equitable Treatment clause with an “exhaustive list”

3.1.2.2 Most-Favoured Nation Treatment Provision 59

INVESTOR-STATE DISPUTES ON THE FAIR AND EQUITABLE

TREATMENT 61

3.2.1 T HE C IRCUMSTANCES OF V IETNAM IN THE F AIR AND E QUITABLE T REATMENT C LAIMS 62 3.2.2 T HE I NVESTOR ’ S O BLIGATIONS IN THE F AIR AND E QUITABLE T REATMENT C LAIMS 63 3.3 LESSONS FOR VIETNAM GOVERNMENT IN PREVENTION OF INVESTOR-STATE DISPUTES ON THE FAIR AND EQUITABLE TREATMENT 66

SUMMARY 68

CONCLUSION 70

BIBLIOGRAPHY 73

APPENDIX: LIST OF FORMULATIONS OF FET CLAUSES IN INTERNATIONAL INVESTMENT AGREEMENTS OF VIETNAM 82

A LIST OF FORMULATIONS OF FET CLAUSES IN BILATERAL

B LIST OF FORMULATIONS OF FET CLAUSES IN TREATIES WITH

STATEMENT OF AUTHORSHIP

I, Truong Thi Kim Xuyen hereby declare, in fulfilment of the requirements of theForeign Trade University that the thesis is my original work under the supervision

of Dr Vo Sy Manh

AANZFTA ASEAN-Australia-New Zealand Free Trade Agreement

ASEAN Association of Southeast Asian Nations

Department of Planning and Investment

GATT General Agreement on Trade and Tariffs

ICSID International Center for Settlement of

LCIA London Court of International Arbitratio

NAFTA North American Free Trade Agreement

UNCITRAL United Nations Commission on International Trade LawUNCTAD United Nations Conference on Trade and DevelopmentVIAC Vietnam International Arbitration Center

LIST OF FIGURES

1 Figure 1.1 Known ISDS cases filed by arbitral rules, from

Number and share of BITs with unqualified, qualified and no FET clause, signed between 1959

SUMMARY OF THESIS RESEARCH RESULTS

Being an attractive investment destination with a huge number of international

investment agreements (IIAs) signed with other member states, apart from theeconomic benefits achieved, Vietnam has to face more legal risks arising from theclaims of foreign investors on the ground of the IIAs, and one of the most concern isthe breach of FET clause The study provides the legal risks arising from theunqualified FET clauses in most IIAs of Vietnam To have such conclusion, theresearch firstly examines the formulations of the FET in IIAs and then make acomparison between the thresholds of investors’ protection regarding to theseformulations

The study also examines the investor-state dispute settlement (ISDS) cases on theFET claims, specifically four cases in which Vietnam government was a respondentand the provides the elements that Vietnam government should take them intoaccount when being sued by the foreign investors on the ground of the FETstandard

The thesis also goes further by analyzing the reform of FET clauses in generation IIAs which is one of the most important goals in World InvestmentForum in 2018 As a result, the study then argues the advantages and disadvantage

new-of each formulation new-of FET so that Vietnam government can easily make acomparison and consideration between these formulations of FET when it comes tonegotiating and signing new IIAs

Last but not least, the study provides the Vietnamese authorities lessons andrecommendations for better practice in prevention the disputes with foreigninvestors regarding to FET claims as well

Fair and equitable treatment (FET) as an international investment treatmentstandard, has been incorporated in most international investment agreements.According to UNCTAD’s IIA Mapping database, which includes over 2500 mappedBITs (UNCTAD 2016), there are only 117 BITs with no FET clauses out of 2538BITs signed between 1959 and 2016 The standard, however, as interpreted byinvestor-state arbitration tribunals, is an ambiguous, imprecise and unclearobligation that turns it into a “catch-all” provision FET is therefore frequentlyinvoked by investors in investor – state arbitration that the awards sometimes costfor billions of dollars

For these reasons, it is time for the government to pay more attention to thisstandard, especially developing country as Vietnam As a small contribution, thethesis attemps to find the best approach for Vietnam government when it comes tosign a new IIA in order to balance the interest between the state and foreigninvertors as well as analyzing the legal problems that Vietnam government shouldhandle to minimize the violation of FET clause Moreover, the thesis desires to givesome recommendations for Vietnam government when it comes to be a respondentwith a claim on the FET clause during the hearing of investment arbitral tribunal

1 Background of the study

According to United Nations Conference on Trade and Development (UNCTAD)(UNCTAD 2018) as of 2018, Vietnam has signed about 65 Bilateral InvestmentTreaties and 26 Treaties with Investment Provisions (hereinafter collectivelyreferred to as the International Investment Agreements- IIAs) It should be notedthat in most of the IIAs that Vietnam has signed such as the ASEANComprehensive Investment Agreement (ACIA), the Comprehensive andProgressive Agreement for Trans-Pacific Partnership (CPTPP), the Agreement onInvestment among the Governments of the Hong Kong Special AdministrativeRegion of the People’s Republic of China and the Member States of the Association

of Southeast Asian Nations, Korea- Vietnam Bilateral Investment Agreement andFrance - Vietnam Bilateral Investment Agreement or others like the EU-VietnamFree Trade Agreement and the Regional Comprehensive Economic Partnership thatVietnam has been negotiating and shall sign as a member in the near future, they allinclude the standard of fair and equitable treatment (FET)

Being an attractive investment destination with a huge amount of IIAs signed withother member states, apart from the economic benefits achieved, Vietnam has toface more legal risks arising from the claims of foreign investors on the ground ofthe IIAs, and one of the most concern is the breach of FET clause since thisstandard is commonly regulated in unqualified way (which shall be discussedfurther in Chapter II) In practice, Vietnam’s law, particularly foreign investmentlaw, treats foreign investors fairly and equitably; however, in practice Stateauthorities, when applying the law, have not fully accorded such treatment inadministrative and court proceedings (Tuan 2016, p.288) As a result, thegovernment of Vietnam could be sued in the international arbitral tribunals where

the awards can cost billions of dollars (as in the case between Occidental Petroleum

Corporation and Occidental Exploration and Production Company v The Republic of

xiii

Ecuador, ICSID Case No ARB/06/11, in 2012, the arbitration award is roundly

equal to 1.77 billion USD)

Because of the increase of ISDS in both scale and severity, specially the ISDS onFET clauses, the author attemps to find the best approach for Vietnam governmentwhen it comes to negotiation of a new IIA in order to balance the interests betweenthe state and foreign invertors as well as analyzing the legal problems that Vietnamgovernment should handle to minimize the violation of FET clause Moreover,regarding to the ISDS, the author would like to give some lessons for Vietnamgovernment when being sued before the arbitral tribunals in a dispute related to theFET clause

2 Literature review

Due to the fact that FET is controversial topic in international investment law, thereare a large number of foreign authors and scholars writing about this topic Ingeneral, the FET standard can be analyzed from the historical background to thedefinition1 as well as the arbitral practice on the FET claim2 while the others address

1 See more in: (1) Abhijit P.G Pandya, Interpretations and Coherence of the Fair and Equitable Treatment Standard in

Investment Treaty Arbitration, Ph.D thesis in Law, London School of Economics, London in 2011; (2) D Hauksdóttir, The Fair and Equitable Treatment Standard in International Investment Treaties, Master thesis in Law, Reykjavík

University, Reykjavík in 2015; (3) Deng Ting Ting, The impact of the Fair and Equitable Treatment Standard on State

Sovereignty, Ph.D thesis in Juridical Science, City University of Hong Kong, Hong Kong in 2012; (4) Julien Fouret, The notion of Fair and Equitable treatment, Master thesis in Law, McGill University, Montreal in 2003; (5) J Roman

Picherack, The Expanding Scope of the Fair and Equitable Treatment Standard: Have Recent Tribunals Gone Too Far?,

Journal of World Investment & Trade, Vol 9, Issue 4, 2008.

2 See more in (1) Fulvio Maria Palombino, Fair and Equitable Treatment and the Fabric of General Principles, T.M.C Asser Press, The Hague and Springer-Verlag, Berlin Heidelberg, 2018; (2) Ioana Tudor, The Fair and Equitable

Treatment Standard in the International Law of Foreign Investment, Oxford University Press, 2007; (3) Roland Klager, Fair and Equitable Treatment in International Investment Law, Cambridge University Press, 2011; (4) Marc Jacob &

Stephan Schill, Fair and Equitable Treatment: Content, Practice, Method, ACIL Research Paper 2017-20, 2017; (5) OECD, Fair and Equitable Treatment Standard in International Investment Law, 2004; (6) Rudoff Dolzer, Fair and

Equitable Treatment: A Key Standard in Investment Treaties, The International Lawyer Vol 39, 2005; (7) Thomas J.

Westcott, Recent Practice on Fair and Equitable Treatment, The Journal of World Investment & Trade, Vol 8, Issue 3, 2007; (8) UNCTAD, Fair and Equitable Treatment: UNCTAD Series on Issues in International Investment Agreement II

the balance of the rights between the investors and the host states.3 Morespecifically, there are so many studies focusing on the formulations of the FETstandard.

According to one of the earliest studies about the FET of the OECD in 2004 (OECD

2004), there are three main formulations of the FET, which are:

 FET is linked to the international minimum standard required by customaryinternational law;

 FET is linked to the international law including all sources;

 FET is an independent self-contained treaty standard

The sequent study of UNCTAD in Bilateral Investment Treaties 1995‐2006: Trends

in Investment Rulemaking (UNCTAD 2007, pp.30‐33) grouped FET into seven formulations:

 Treaties that grant investments fair and equitable treatment without makingany reference to international law or to any other criteria to determine the content ofthe standard

 Treaties that state that investments will receive fair and equitable treatment

no less favourable than accorded to its own investors or to investors of any thirdState

– A Sequel, 2012.

3 As in (1) Rumana Islam, The Fair and Equitable Treatment (FET) Standard in International Investment Arbitration:

Developing Countries in Context, Springer, Singapore, 2018; (2) Gaukrodger D., “Addressing the balance of interests in investment treaties: The limitation of fair and equitable treatment provisions to the minimum standard of treatment under customary international law”, OECD Working Papers on International Investment 2017, OECD Publishing, Paris, 2017;

(3) Graham Mayeda, Playing Fair: The Meaning of Fair and Equitable Treatment in Bilateral Investment Treaties , Journal of World Trade, Vol 41, No 2, 2007; (4) Srilal M Perera, Equity-Based Decision-Making and the Fair and

Equitable Treatment Standard: Lessons from the Argentine Investment Disputes – Part I & Part II, The Journal of World

Investment & Trade Vol 13, Issue 3, 2012; (5) Om Krishna Shrestha, A Host State Regulatory Right in Fair and

Equitable Treatment (FET) in Bilateral Investment Treaties (BITs), Master thesis in Law, University of Lapland,

Rovaniemi in 2016.

 Treaties that couple the fair and equitable treatment standard with anobligation to abstain from impairing the investment through unreasonable ordiscriminatory measures.

 Treaties that require investments to be granted “fair and equitable treatment

in accordance with the principles of international law”

 Treaties that similarly require fair and equitable treatment in accordance withthe principles of international law, but that in addition expressly identify somerequirements of the standard These specific inclusions may broaden the scope ofthe standard

 Treaties that make the fair and equitable treatment standard contingent on thedomestic legislation of the host country

 Finally, some recent BITs and free trade agreements provide a moreprecisely defined scope of the fair and equitable treatment standard They oblige thecontracting parties to accord covered investments treatment in accordance with theminimum standard of treatment under customary international law Some also make

it express that fair and equitable treatment is part of the minimum standard and doesnot create additional substantive rights

In a survey of I.Tuona, she classified FET into five formulations (I.Tuona 2008,

p.22):

 In the first one, the standard appears alone;

 In the second one, together with the FET, there is a reference to internationallaw;

 In the third one, besides the reference to the FET standard, the States giveexamples of concrete acts that amount, in their view, to a breach of the FETstandard and of international law,

 In the fourth one the standard is referred to jointly with the notions ofarbitrariness and discrimination and

 In the fifth one, the standard appears next to the “full protection and security”clause

According to other study of UNCTAD (UNCTAD 2012): The most important and widespread approaches to the FET standard in treaty practice are the following:

 No FET obligation;

 FET without any reference to international law or any further criteria(referred to as unqualified, autonomous or self-standing FET standard)

 FET linked to international law;

 FET linked to the minimum standard of treatment of aliens under customaryinternational law;

 FET with additional substantive content (denial of justice,unreasonable/discriminatory measures, breach of other treaty obligations,accounting for the level of development)

Moreover, in a book of Roland (R.Kläger 2011), the FET was categorized as threemain type in IIAs The first one is “no reference to fair and equitable treatment”, thesecond one is “hortatory references to fair and equitable treatment” and last one is

“legally binding references to fair and equitable treatment.” In “legally bindingreferences to fair and equitable treatment”, there are five different formulations can

be found as follow:

 Fair and equitable treatment in combination with other standards;

 Fair and equitable treatment combined with a reference to generalinternational law;

 Fair and equitable treatment combined with a reference to customaryinternational law;

 Fair and equitable treatment contingent on domestic law

Also about FET, Rumana Islam has other idea by listing FET into three main types

namely: FET minus, simple FET and FET plus (Islam 2014).

 FET minus - which refers to those treaties where treaty framers haveconnected the definition of the standard to other concepts that define, and appear tolimit its scope The FET standard then simply means the standard whichinternational law or customary international law guarantees for aliens (Islam 2014,p.62) or [t]his appears to be a clear way of limiting the scope of the FET The denial

of justice in administrative or legal proceedings is clearly narrowing the obligation.The FET clause then only relates to judicial or quasi-judicial processes Clauses likethis therefore can potentially provide much clearer limits to the scope of the FETthan invocation of international law or customary international law (Islam 2014,p.77).4

 Simple FET where the FET clause is formulated without any reference tointernational law, customary international law, or any other limitation.5 The secondcategory of treaties stipulate FET without any reference to international law,customary international law, or any other limitation, thereby implying that FET inthese treaties is an unqualified, autonomous, and separate standard

 FET plus – which refers to treaties which combine the FET standard with anadditional substantive obligation, such as full protection and security, prohibition ofdenial of justice, prohibition of arbitrary or discriminatory measures, obligations ofMFN, or guarantee of protection and security The notions of arbitrariness,unreasonableness, and discrimination are understood as inherent to the FETstandard Therefore, it appears that such clauses give further substance to theotherwise general wording of the standard.6

In Vietnam, there are some studies examining the FET clause as follow:

 Hanoi Law University, Textbook on International Investment Law, Youth Publishing House, 2017; (2) Trinh Thi Hai Yen, Textbook on International

Investment Law, National Political Publishing House, 2017.

 Nguyen Phuong Dung, The Fair and Equitable Treatment Standard in

Investor-State Arbitration in Vietnam, International Arbitration Asia, 2016.

 Nguyen Quoc Tri, The principles of investor treatment in Comprehensive

and Progressive Agreement for Trans-Pacific Partnership, Journal of Democracy

of international law or customary international law (R.Islam 2014, p.77).

5 The second category of treaties stipulate FET without any reference to international law, customary international law, or any other limitation, thereby implying that FET in these treaties is an unqualified, autonomous, and separate standard

6 Fair and Equitable Treatment, UNCTAD Series on Issues in International Investment Agreements Vol II (n 42) 31.

 Nguyen Thu Huong, Investment policy under the Vietnam-EU Free Trade

Agreement (EVFTA), Institute of State and Law, 2018.

However, it should be noted that in most of those studies, FET standard is merelyanalyzed as a principle among other principles of investment law

It also can be found the Ph.D thesis related to FET as follows: Nguyen Van Tuan,

The Protection of the Fair and Equitable Treatment Standard under International Investment Law: A Case Study of Vietnam, Ph.D thesis in Philosophy, La Trobe

University, Victoria in 2016 According to Dr Nguyen Van Tuan (Tuan 2016), FET

in IIAs can be classified as two main types: no FET Standard in IIAs and FET Standard in IIAs The second type includes six main formulations:

 FET in Preambles

 FET as an Unqualified Clause

 FET with Reference to International Law

 FET Linked to the Minimum Standard of Treatment under Customary

International Law

 FET Linked to Full Protection and Security

 FET Linked with Other Investment Standards

In comparison with other studies, my thesis has followed different approach bybroadly grouping IIAs into three categories as follow: the IIAs with no FET clause,the IIAs with unqualified FET clause and the IIAs with qualified FET clause Inevery category, I will clearly state the main language utilized in the IIAs andillustrate how it is interpreted by the arbitral tribunals in practice Moreover, bycarefully analyzing the negative and positive effects of each type, I will suggest thesuperior formulation of each category in the perspective of Vietnam governmentwhen it comes to draft new IIAs In my opinion, it is quite a crucial issue since ithas also linked to the sustainable development and the reform of new generationIIAs; however, in Vietnam it has not received adequate attention

3 Objects and Scope of the study

The thesis aims to provide the understanding of FET through its historicalbackground The thesis also describes the regulation of FET in IIAs as well as itsapplication in arbitral tribunal.

The study focuses on the formulations of FET in the IIAs in which Vietnam is amember, in some cases, specific IIAs such as the North American Free TradeAgreement (NAFTA) or the new generation of the IIAs shall be invoked to analyzethe new approach of FET in the reform IIAs regarding to FET clauses The thesisdoes not aim to analyze the relation between the FET standard and other standardssince this issue has been carefully studied7 but merely expressing how thesestandards could be regulated together in treaties practice Moreover, merely theISDS cases of Vietnam regarding to FET claims shall be carefully studied in thethesis

The thesis has been conducted from September 2018 to February 2019 However,the data and information have been collected in various periods of time, not merely

in 2018 and 2019 (for instance, the survey conducted in 2008 by Tudor or themapping of BITs carried out in 2016 by UNCTAD.)

4 Objectives of the study

Through the analysis, the study figures out the reasonable way to regulate the FETstandard so that the Vietnam government can limit the disputes at the verybeginning by setting a threshold of investors’s protection In addition, according tothe elements that investors frequently utilize to claim the states for the breach ofFET clause, the author consumes the features of Vietnamese law, domestic court aswell as administrative proceedings should improve to ensure fair and equitabletreatment for investors and their invesments in the territory of Vietnam

In particular, the study also attempts to highlight some lessons learned from othercountries during the hearing of arbitral tribunal so that Vietnam government can

7 See more R.Islam, Interplay between Fair and Equitable Treatment (FET) Standard and other Investment Protection Standards Bangladesh Journal of Law, Vol 14 Nos 1&2, pp 117-142, 2014; and Roland Klager, Fair and Equitable Treatment in International Investment Law, Cambridge University Press, 2011.

consider these lessons in case being sued by foreign investors on the ground of FETclauses.

5 Methodology of the study

To carry out the study, the author combines the method of synthesizing informationand using the statistics to compare, analyze and clarify the problems Moreover, theauthor also incorporates investment dispute cases to clarify theoretical issues

To be more specific, in Chapter 1, the thesis uses legal analysis to examineprovisions regarding to investor-state dispute settlement and the FET clauses ininternational investment

In chapter 2, cases will be examined to interpret the meaning of the FET standard inpractice Moreover, the thesis also analyze investor-state cases in which Vietnamhas been a respondent

Last but not least, in chapter 3, by comparing the advantages and disadvantagesbetween different formulations of the FET standard, the thesis suggests the lists ofFET clauses that can be used to negotiate in the future international investmentagreements

6 Expected contribution of the thesis

The thesis could become one of reference sources for further research of the FETstandard in Vietnam In particular, Vietnamese authorities can use the informationand recommendations in the thesis for having superior practice when tackling thedisputes with foreign investors, specially the disputes related to the FET clause

7 Structure of the thesis

Equitable Treatment

This chapter aims to provide the overview of Investor-State Dispute Settlement(ISDS) mechanism and specifically, the ISDS in Vietnam before analyzing thehistorical background of FET and its literal meaning.

Chapter 2 Regulation and Application on Fair and Equitable Treatment Standard

The formulations regulated in international investment law that can be broadlycategorized into three groups: (1) No FET clauses; (2) unqualified FET clauses and;(3) qualified FET clauses This chapter then analyzes how these formulations havebeen defined by arbitral tribunals

After analyzing the FET clauses in treaty practice, the thesis then attempts toexpress the arbitral practice of FET claims in general and then carefully examiningthe ISDS cases of Vietnam related to FET claims There are five cases in total: (1)Trinh Vinh Binh and Binh Chau Joint Stock Company v The Socialist Republic ofVietnam (in 2004); (2) Michael L McKenzie v The Socialist Republic of Vietnam

(in 2010); (3) DialAsie SAS v The Socialist Republic of Vietnam (in 2011); (4)

RECOFI v The Socialist Republic of Vietnam (in 2013) and (5) Trinh Vinh Binh v.The Socialist Republic of Vietnam (in 2014).8

Chapter 3 Investor-State Dispute Settlement on the Fair and Equitable Treatment on the perspective of the host state and lessons for Vietnam government

In the last Chapter, the author makes a comparison between different formulations

of FET clauses in order to figure out the best approach for the Vietnam governmentwhen drafting the FET clauses in the IIAs and then the author goes further bysuggest the suitable model of every formulation of FET clause Apart from theseFET clauses that have direct effects on the decisions of the arbitral tribunals ininvestor-state disputes on the FET claims, there are other provisions such as “MFNprovision” and “Exception provision” that may impact these decisions as well Forthis reason, the thesis takes these provisions into account and analyzes them indetail in order to determine its impact on the ISDS awards Moreover, the thesis also

8 In this thesis, the author has examined the two cases of Trinh Vinh Binh together so that the facts appear to be more coherent.

provides the model of these provisions in case the government desires to considerthese provisions.

At this end, the thesis analyzes the elements that may affect the ISDS awards infavour of the states in arbitral practice These elements are the circumstances of thehost state and the investor’s obligations within the FET standard that thegovernment should consider to protect its own legal rights and benefits when beingsued by the investors

Last but not least, the thesis then comes to conclusion that the government shouldremain good governance and should not act without a lawful basis for its conducts

in order to provide the transparent investment environment for the investors That isthe best way to prevent the investor-state disputes on the FET claims

Chapter 1 A

N O V E R V I E W O

F T H

E I N V E S T O R - S T A

E D IS P U T

E S E T T L E M E N

T A N

D T H

E F A I

R

A N

D E Q U I T A B L

E T R E A T M E N

T S T A N D A

R D

This chapter aims to provide the overview of Investor-State Dispute Settlement(ISDS) mechanism and its special features that turns it into controversial topicworldwide This chapter also examines the historical background of FET beforeanalyzing the literal meaning of FET, and the main features of FET Thedetermination of FET’s literal meaning is an essential prerequisite for analysis ofhow the standard is protected under investor-state arbitration

1.1 An overview of Investor-State Dispute Settlement

1.1.1 Definition of Investor-State Dispute Settlement

According to UNCTAD, in 2017, countries concluded 18 new internationalinvestment agreements (IIAs): 9 bilateral investment treaties (BITs) and 9 treatieswith investment provisions (TIPs) [that] brought the size of the IIA universe to3,322 agreements (2,946 BITs and 376 TIPs), of which 2,638 were in force at year-end (UNCTAD 2018a, p.2) The defining feature of IIAs is that of investor-statearbitration, or investor-state dispute settlement (ISDS)9, where investors can legallychallenge a wide range of State measures, including laws, regulations, safeguardsand administrative decisions in economic sectors or the decisions of domestic courts(Muchhala 2018)

Date back to the history, the States started to include ISDS in their investmenttreaties in the late 1960s and early 1970s; by the 1990s this treaty element hadbecome standard (UNCTAD 2014, p.23) because of the disadvantages in regards todiplomatic protection10 and the use of domestic courts11 in settlement of the disputesbetween the investors and the host states

9 According to WIR13 (UNCTAD: WIR13 2013): “The ISDS mechanism was designed to depoliticize investment disputes and create a forum that would offer investors a fair hearing before an independent, neutral and qualified tribunal.

It was seen as a mechanism for rendering final and enforceable decisions through a swift, cheap and flexible process, over which disputing parties would have considerable control Given that investor complaints relate to the conduct of sovereign States, taking these disputes out of the domestic sphere of the State concerned provides aggrieved investors with an important guarantee that their claims will be adjudicated in an independent and impartial manner.”

ISDS can be seen as one of many innovations that have emerged from specificpolicy and legal contexts and that have endowed international law with a rich array

of international judicial bodies, quasi-judicial procedures, implementation controlmechanisms and other dispute settlement bodies (Gaukrodger, Gordon, p.7) ISDSalso serves as a neutral forum that would offer investors the possibility of a fairhearing before a tribunal unencumbered by domestic political considerations andable to focus on the legal issues in the dispute (UNCTAD 2014, p.13)

1.1.2 The specific features of Investor-State Dispute Settlement

ISDS serves as a procedural enforcement mechanism for the core substantiveprovisions of the treaty (UNCTAD 2014, p.20) Firstly, the ISDS provides the de-politicized forum for resolving disputes where any foreign investors could bring aclaim against host states Secondly, international arbitration was expected to offerthe neutrality and independence of a qualified arbitrators The institutional set-up ofISDS draws heavily on that of commercial arbitration (e.g ad hoc, party appointedarbitration panels, emphasis on speed and finality of findings) (Gaukrodger, Gordon

2012, p.8) Thirdly, the advance consent to this form of adjudication, given byStates in IIAs, solved the problem of sovereign immunity (UNCATD 2012, p.24).Finally, regarding to enforcement, the arbitral awards are readily enforceable inmost jurisdictions under international treaties (UNCTAD 2014, p.13)

In fact, there are so many routes that investors can choose to resolve conflicts withthe host states such as conciliation, mediation or through domestic courts but in fact,investors prefer to choose arbitral tribunals to settle the disputes because this forum

10 There are certain requirements for diplomatic protection to be granted to an investor such as: (i) The investor has to be

a national of the state granting diplomatic protection; (ii) the investor must also exhaust all local remedies in the host state prior diplomatic protection being granted; (iii) It is totally up to the discretion of investor’s home state’s government to decide whether diplomatic protection will be granted to the investor or not

11 From the investor’s perspective, the domestic courts are not desirable that the domestic courts can be impartial and biased in favour of the state Even if the court would decide in favour of the investor the executive branch of the host government might ignore the court’s decision.

has significant advantages in comparison with the others.12 In addition, internationaldispute resolution is not dominated by one or a few institutional models embodyingagreed standards of good practice’; instead various institutional designs haveemerged, reflecting the specificities of the related subject matters, politicalconsiderations and historical circumstances (Gaukrodger, Gordon 2012, p.8) As of

31 July 2017, the total number of known treaty-based ISDS arbitrations has reached

817 in which the International Centre for Settlement of Investment Disputes(ICSID) has been the most popular forum, followed by the United NationCommission on International Trade Law (UNCITRAL) Other disputes have beenresolved in the International Chamber of Commerce, the Stockholm Chamber ofCommerce or the London Court of International Arbitration Moreover, someregional ISDS forums have also established such as the China InternationalEconomic and Trade Arbitration Commission set up in 1956, Cairo Regional Centerfor International Commercial Arbitration established in 1979 or Investment CourtSystem (ICS)13 in Europe

Figure 1.1 Known ISDS cases filed by arbitral rules, from 1987 to 31 July 2017

(Per cent)

12 Dispute settlement through negotiation and conciliation is not preferred because conciliation results depend on the willingness of the parties and there is no legal mechanism to ensure the implementation of the conciliation agreements Regarding to domestic regime, the arbitration it is greater neutral as compared to a national court.

13 Canada and Vietnam have agreed on a standing investment court and appellate tribunal system for dispute settlement in its Comprehensive Economic and Trade Agreement (CETA) and EVFTA simultaneously

Source: UNCTAD, ISDS Nagivator

Note: Excluding five cases on which such information was not available.

In practice, the actual functioning of ISDS under IIAs has led to concerns aboutsystemic deficiencies in the regime since [m]ost disputes in ISDS are not merecommercial disputes, but involve issues of public policy as measures challenged byinvestors increasingly involve matters such as environmental protection, publichealth, or other issues of public governance (UNCTAD 2014, p.13) In addition, thefinancial damages paid by States to investors have included millions of dollars forthe breach of investment treaties, as interpreted by private arbitrators On average,successful claimants were awarded about 40 per cent of the amounts they claimed

In cases decided in favour of the investor, the average amount claimed was 1.3billion USD and the median 118 million USD The highest in the history ofinvestment treaty arbitration was the combined 114 billion USD claimed and 50billion USD awarded in three cases related to the Yukos company (brought byHulley Enterprises, Veteran Petroleum and Yukos Universal against the RussianFederation) Excluding these values from the calculations above, the averageamount claimed falls to 454 million USD and the amount awarded to 125 millionUSD, i.e about 28 per cent of the amount claimed (UNCTAD 2018b, p.5)

Apart from the monetary compensation, arbitrators can even order injunctive relief

on governments, which mandate what actions the State is allowed to take or not(Johnson, Sachs 2015, p.2).14 That to say, the decision of arbitral tribunals is likely

to affect the sovereignty of the states to some extent, especially in case they cannotafford the compensation It gives the possibility to the tribunal to focus on the needsand perspectives of the investor and a possible underestimation of the need tobalance those claims against the host country’s sovereign rights and duties toregulate in the public interest (UNCTAD 2012, p.105) Merely in 2017, at least 65new ISDS cases were initiated pursuant to IIAs (UNCTAD 2017, p.1) with [a]bout

80 per cent of the new cases were brought under BIT and the majority of theinvoked treaties date back to the 1980s and 1990s (UNCTAD 2018b, p.3) Thispoints to the importance of addressing the stock of “old-generation” treaties,identified by UNCTAD as a priority area for Phase 2 of IIA Reform (UNCTAD,2017a)15 to reduce the disputes arising from those IIAs The new ISDS cases in

2017 were initiated against 48 countries (UNCTAD 2018b, p.2) included Vietnam

As in previous years, the majority of new cases were brought against developingcountries and transition economies (UNCTAD 2017, p.2)

Indeed, after examining the investment legal system of Vietnam, the UNCTADconcluded that from the Law on Foreign Investment in 1987 to the laws onenterprises and investment enacted in 2015, Viet Nam has evolved towards modern,non-discriminatory legislation, closer to the level of the most advanced economiesacross Southeast Asia (OECD 2018a, p.116) Actually, not only providing adomestic legal system for protecting the investment of foreign investors, as of now,Vietnam has been becoming an “active Member” of a huge amount of IIAs Sincethe first BIT between Vietnam and Italy was signed in 1990 (came in force in 1994),

as of 2018, Vietnam has signed about 91 IIAs included 65 Bilateral InvestmentTreaties and 26 Treaties with Investment Provisions (UNCTAD 2018) The OECD

14 See more Perenco v Ecuador, ICSID Case No ARB/08/6, Decision on Provisional Measures, May 8, 2009; Chevron

v Ecuador, PCA Case No 2009-23, Order for Interim Measures, February 9, 2011.

15 Chapter III of WIR18 outlines recent developments in countries’ efforts to modernize “old-generation” treaties

research shows that around 96% of the global IIA stock provides access to ISDS(Pohl et al 2012) and Vietnam is not an exception, with most of Vietnamese IIAs ofcontain ISDS provisions That provides more forums for investors to protect theirinvestments in Vietnam and turns Vietnam into an attractive destination for foreigninvestors However, its side effects are likely significant since it may raise thenumbers of the disputes between foreign investors and Vietnam government.

1.2.1 The literal meaning of Fair and Equitable Treatment

The FET was a standard being found for the first time in the Havana Charter whichaimed for the establishment of International Trade Organization (ITO) in 1948.16

The article 11(2)(a)(i) of the Havana Charter stated that:

“The Organization may, in such collaboration with other inter-governmental

organizations as may be appropriate:

(a) make recommendations for and promote bilateral or multilateral agreements on measures designed

(i) to assure just and equitable treatment for the enterprise, skills, capital, arts and

technology brought from one Member country to another;”

Eventually, the Havana Charter had never entered into force but it did not put anend to the requirement of FET standard Instead, the Economic Agreement ofBogotá which adopted through the Ninth International Conference of AmericanStates at Bogotá, Colombia in May, 1948 successfully remained equitable treatmentfor foreign investment and nationals of member countries in its Article 22:

“Foreign capital shall receive equitable treatment The States therefore agree not to

16 However, according to Martins Paparinskis, the first treaties including “justice and equity” requirements appear in the late seventeenth-century in some British treaties relating specifically to administration of justice ( M.Paparinskis 2013, p.21) For example, in the Peace and Commerce between Great Britain and Denmark which stated: “Both parties shall cause justice and equity to be administered to the subjects and people of each other, according to the laws and statutes of either country, speedily, and without long and unnecessary formalities of law and expenses, in all causes and controversies, as well now depending, as which hereafter arise”.

take unjustified, unreasonable or discriminatory measures that would impair the legally acquired rights or interests of nationals of other countries in the enterprises,

capital, skills, arts or technology they have supplied.” Unluckily, as the HavanaCharter, the Economic Agreement of Bogotá failed to be effective The FET clausethen once again was found in Article 1 of the Abs-Shawcross Draft Convention on

International Abroad that stated: “Each Party shall at all times ensure fair and

equitable treatment to the property of the nationals of the other Parties Such

property shall be accorded the most constant protection and security within theterritories of the other Parties and the management, use, and enjoyment thereof shall

not in any way be impaired by unreasonable or discriminatory measures.”

Moreover, the OECD Draft Convention on the Protection of Foreign Property in

196317 and the other Draft in 196718 also included fair and equitable treatmentobligations of the host state It is fair to say that [w]hile failing on their own terms,the attempts at multilateral treaty-making were important in disseminating theconcept of fair and equitable treatment that could be taken up in bilateral treaty-making (Paparinskis 2013, p.90) Indeed, the FET clause seems to be moresuccessful in the zone of bilateral treaties as in some Treaties of Friendship,Commerce and Navigation between the United States and other countries (such asthe Republic of Korea, China or the Republic of Costa Rica) For example, inArticle XVII (2) of the Treaty of Friendship, Commerce and Navigation betweenthe United States of America and the Republic of Korea, there was the FET clause

regulated as follow: “Each Party shall accord to the nationals, companies and

commerce of the other Party fair and equitable treatment, as compared with that

accorded to the nationals, companies and commerce of any third country ”

On the bilateral investment treaties level, the first group of BITs that mentioned theFET were those concluded by European States (including Germany and

17 Article 1 (a) of the OECD Draft Convention on the Protection of Foreign Property in 1963: “Each Party shall at all times ensure fair and equitable treatment to the property of the nationals of the other Parties It shall accord within its territory the most constant protection and security to such property and shall not in any way impair the management, maintenance, use, enjoyment or disposal thereof by unreasonable or discriminatory measures.”

18 The formulation of FET in 1967 OECD Draft Convention on the Protection of Foreign Property was similar to the 1963 OECD Draft Convention.

Switzerland) in the early 1960s (Vandevelde 2010, p.196) Since then the FET hasgradually become a popular clause regulated in BITs So far, almost all of the BITsinclude the requirement of FET obligations According to UNCTAD’s IIA Mappingdatabase, which includes over 2500 mapped BITs (UNCTAD 2016), there are only

117 BITs with no FET clauses out of 2538 BITs signed between 1959 and 2016.According to the other survey taken by Ioana Tudor, out of the 365 BITs studied forthis work, only nineteen belong to this category19 (Tudor 2008, p.23) Themultilateral experience is equally varied: NAFTA) (authoritatively interpreted away

by the NAFTA Free Trade Commission20), the the Energy Charter Treaty (ECT)provides for fair and equitable treatment in parallel to other customary and treatyrules and the recent ASEAN Comprehensive Investment Agreement limits fair andequitable treatment to denial of justice (Paparinskis 2013, p.94)

This section merely attempts to figure out the meaning of FET through its ownwords since the first step in the examination of a FET claim is to take a close andcareful look to the FET clause of the respective instrument and to its wording(Tudor 2008, p.145) Since the use of the word “just” instead of “fair” probably willnot have a profound effect on the interpretation of the FET clause in an IIA (Dolzer,Schreuer 2012), the FET is sometimes illustrated as “just and equitable treatment”

in some IIAs and can be translated in other languages as “traitement juste etéquitable”21 in French or “tratamiento justo y equitativo”22 in Spanish, “trattamentogiusto ed equo”23 in Italian and “gerecht und billig behandeln”24 in German or inVietnamese as “Đối xử công bằng và thoả đáng”.25

Date back to the history, the word “equitableness” derives from the Latin “aequus”

meaning equal division (Tudor 2008, p.128) The Oxford Dictionary defines “fair”

as in accordance with rules and standards; legitimate, or just or appropriate in the

19 “[T]his category” means the BITs with no FET clauses.

20 In July 2001, the three NAFTA Parties, through the Free Trade Commission adopted the Notes of Interpretation of Certain Chapter 11 Provisions (“Joint Interpretation”).

21 See more in Article 3 of the Vietnam – France BIT.

22 See more in Article 3 of the Vietnam - Argentina BIT.

23 See more in Article 2 of the Italy – Lithuania BIT

24 See more in Article 2 of the Vietnam – Germany BIT.

25 See more in Article 2 of the Vietnam - Mongolia BIT.

circumstances According to other famous dictionaries as Cambridge Dictionary andBlack’s Law Dictionary, fairness is defined as “the quality of treating peopleequally or in a way that is right or reasonable” or “equitable” means just, consistentwith principles of justice and right and “fair” means impartial, just, equitable andfree from bias or prejudice The Concise Oxford English Dictionary also have itsown definition by stating that the terms “fair and equitable” mean “just,” “even-handed,” “unbiased,” “legitimate”

To conclude, the meaning of equity that may apply to investment law is that ofequitableness and the characteristic that it may have transmitted to FET is that ofgiving to each party to an arbitration what is due (Tudor 2008, p.128) Moreover, inthe context of investment, equitable treatment implies that each one of the interestedparties receives what it should legitimately possess (Tudor 2008, p.128) However,any such definition is, of course, unable to clarify the legal essence of a norm likefair and equitable treatment, since both notions are described by synonymouswording that is as vague as the terms “fair” and “equitable” themselves (Kläger

2011, p.41) It is therefore unlikely to define the clear obligations of States required

by the FET clause merely by the common understanding of its own words

1.2.2 Specific features of Fair and Equitable Treatment

While almost all countries include obligations relating to fair and equitabletreatment in most of their BITs, the approaches to the relationship with other treaty

or customary rules varies greatly between different States, different treaties, anddifferent times (Henkin 1979, p.47) In fact, there has been no consensus betweenwriters, arbitrators and judges on what would constitute a fair and equitabletreatment

Firstly, with regard to the wording of most FET provisions, many tribunals haveinterpreted them broadly to include a variety of specific requirements including aState’s obligation to act consistently, transparently, reasonably, without ambiguity,

arbitrariness or discrimination, in an even- handed manner, to ensure due process indecision-making and respect investors’ legitimate expectations, but in some cases,they can also link FET standard to international minimum standard.

Secondly, regarding to threshold of liability plays a crucial role in determination ofbreach of FET clause The threshold for qualifying conduct by the State towards oneinvestor, protected by one type of standard can be different from the finding of aviolation with respect to another investor of a different nationality (UNCTAD 2012,p13)

For example, in cases the IIAs link the FET obligation to the international minimumstandard the State’s conduct needs to be egregious or outrageous in accordance withthe Neer case, in other cases, arbitral tribunals applying unqualified FET clauseshave not limited themselves to the most serious breaches and have found violations

of the FET standard where they considered the State’s conduct in question to besimply unfair towards the claimant (UNCTAD 2012, p.13)

Because of such special features, in international investment law, as an effort todefine the meaning of FET, the contracting parties have increasingly madereferences FET to other standards or substantive obligations of the states instead ofregulating FET alone as in some old-version IIAs Regarding to meaning of FET,Schill once stated that: “Fair and equitable treatment does not have a consolidatedand conventional core meaning as such nor is there a definition of the standard thatcan be applied easily So far it is only settled that fair and equitable treatmentconstitutes a standard that is independent from national legal order and is notlimited to restricting bad faith conduct of host States Apart from this very minimalconcept, however, its exact normative content is contested, hardly substantiated byState practice, and impossible to narrow down by traditional means of interpretativesyllogism” (Schill 2009, p.263)

Summary

ISDS can be seen as one of many innovations that have emerged from specificpolicy and legal contexts and that have endowed international law with a rich array

of international judicial bodies, quasi-judicial procedures, implementation controlmechanisms and other dispute settlement bodies ISDS also serves as a neutral forumthat would offer investors the possibility of a fair hearing before a tribunalunencumbered by domestic political considerations and able to focus on the legalissues in the dispute (UNCTAD 2014, p.13) As of 31 July 2018, the total number

of known treaty-based ISDS arbitrations has reached 904, and merely in 2017, atleast 65 new ISDS cases were initiated pursuant to IIAs (UNCTAD 2017, p.1) with[a]bout 80 per cent of the new cases were brought under BIT and the majority of theinvoked treaties date back to the 1980s and 1990s (UNCTAD 2018b, p.3) in whichnot only procedural protection under ISDS mechanism but also substantive standardprotection as the FET standard

The FET standard was found for the first time in the Havana Charter, then it appears

in most international investment agreements However, it is unlikely to define theclear obligations of States required by the FET clause merely by the commonunderstanding of its own words

Chapter 2 REGULATION AND APPLICATION OF THE FAIR AND EQUITABLE TREATMENT

The FET appears to be a simple provision However, in treaty practice, the FETstandard varies from one treaty to the others Hence, in first section of this chapter,the formulations of FET clauses in international investment agreements will beoutlined It is then to list all possible constitutive elements of the FET standard, theycould be the protection of legitimate expectations, transparency, access to justiceand/or due process, protection from arbitrariness and/or discrimination, acting ingood faith and freedom from harassment and coercion which are determined underinvestor-state arbitration Finally, the cases regarding to FET claim shall beexamined Moreover, there are five of nine cases that had a claim on the fair andequitable treatment (FET) clauses in which Vietnam government was therespondent Since the awards are not public, the information of these cases is merelyfound in the newspapers, the articles and other award Finally, five of nine cases(FET) clauses related to FET clause in which Vietnam government was therespondent will be examined

2.1 Regulation of Fair and Equitable Treatment in International Investment Agreements

As M.Jacob and S.W Schill (Jacob, Schill 2017, p.6) rightly said: “the main textualfault line separates eponymous or synonymous FET prescription from acombination of the treaty standard with an explicit reference to (customary)international law (clarified as qualified FET) or can further be drafted or construed

as a floor (“no less favourable than”) or a ceiling (“not ( ) beyond that which isrequired by”) to demanded treatment (clarified as unqualified FET) Such asupplementary “outside” link could arguably either add to, or detract from, theautonomous demands placed on the host State, inversely strengthening orweakening investment protection, depending on one’s take on the externalcomparator (Jacob, Schill 2017, p.6) In this study, on the basis of the scope given to

the standard and the analytical approach used to determine its content (UNCTAD2016): the IIAs shall be broadly classified into three categories: IIAs with no FETclauses, IIAs with unqualified FET clause and IIAs with qualified FET clause.

In fact, the BITs have accounted for approximately 90 per cent of the IIAs so far(UNCTAD 2018a, p.2); therefore, it is reasonable to treat the study of the FETstandard in the BITs as those in the IIAs

Figure 2.1 Number and share of BITs with unqualified, qualified 26 and no FET

clause, signed between 1959 and 2016

Source: UNCTAD 2015 (World Investment Report -WIR15)

According to this figure, there are about 1991 BITs with unqualified FET clauses in

2538 BITs signed between 1959 and 2016 but qualified FET clauses have been onthe rise in new generation BITs, in line with UNCTAD’s Roadmap for IIA Reform(UNCTAD 2015) More specifically, the percentage of BITs with qualified FETclauses has increased significantly from 14% in the 1959-2000 period to 19% in the

26 “Qualified” FET clauses refer to both clauses containing reference to the minimum standard of treatment/customary international law and containing lists of treatments that constitute breaches of FET.

2001-2010 period and continually reach to 46% in the 2011-2016 period (UNCTAD2016).

2.1.1 No Fair and Equitable Treatment Standard

In treaty practice, there are some IIAs with no reference to FET standard such as theAlbania-Croatia BIT, the Australia-Singapore FTA, the India-SingaporeComprehensive Economic Cooperation Agreement, the New Zealand-SingaporeFTA, the New Zealand-Thailand Closer Economic Partnership Agreement, theCroatia-Ukraine BIT and Bangladesh–Uzbekistan BIT or some others referring toFET in the preamble such as in the Turkey–United Arab Emirates BIT27 or the

Azerbaijan–Estonia BIT In such cases, the language can be found as: “[B]oth

states have been: [a]greeing that fair and equitable treatment of investments is desirable in order to maintain a stable framework for investments and maximum effective utilization of economic resources, and ”28

In theory, when two contracting parties decide to omit the FET clauses that meansthey do not desire to provide FET protections for counterpart investors.Consequently, they should have been free from the FET obligations or at least theycan minimize the obligations of FET in case the FET clauses are just mentioned inthe preamble of IIAs However, in arbitral practice, sometimes the FET standardcould be read into the treaty by way of the MFN clause (UNCTAD 2012, p.19), itmeans the investors could import FET standard from the IIA including FETstandard between the host state and the third-party through MFN clause

2.1.2 Fair and Equitable Treatment as an unqualified standard

2.1.2.1Stand-alone Fair and Equitable Treatment Standard

This kind of formulation can find in Article 3(2) of the Vietnam – Australia BIT

which simply stated: “A Contracting Party shall ensure fair and equitable

27 The preamble of the Turkey–United Arab Emirates BIT regulated that both states have been: “Agreeing that fair and equitable treatment of investments is desirable in order to maintain a stable framework for investments and maximum effective utilization of economic resources, and ”

28 The preamble of the Azerbaijan–Estonia BIT.