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Investor–State Arbitrations: Can the ‘Fair and Equitable Treatment’ Clause Consider International Human Rights Obligations?

Published online by Cambridge University Press:  02 February 2010

Abstract

The recent investor–state arbitration claim of Piero Foresti, Laura De Carli and others v. Republic of South Africa considers the extent to which international human rights obligations might be compromised by investor protections. In this regard, the paper examines the investor protection known as fair and equitable treatment (FET). It addresses this treatment obligation in the context of the South Africa–Italy bilateral investment treaty, and its invocation by investors who feel wronged by South Africa's black economic empowerment policies. It analyses the main interpretative theories of the FET clause, and concludes that it is to be interpreted as a self-contained treaty standard. This sui generis approach to interpreting FET clauses more accurately reflects the intentions of the state parties. Such a view supports the conclusion that international human rights should be considered in the interpretation of the FET clause.

Type
CURRENT LEGAL DEVELOPMENTS
Copyright
Copyright © Foundation of the Leiden Journal of International Law 2010

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References

1 Based on the 1966 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 575 UNTS 159 (ICSID Convention); see ICSID, ‘About ICSID’, available at http://icsid.worldbank.org/ICSID/ICSID/AboutICSID_Home.jsp (last visited 30 July 2008).

2 UNCTAD, ‘Latest Developments in Investor–State Dispute Settlement’, (2008) IIA Monitor No. 1, available at www.unctad.org/Templates/StartPage.asp?intItemID=2310&lang=1 (last visited 30 August 2008).

3 For example, the tribunal in CMS Gas Transmission Co. v. Argentina (12 May 2005) ICSID No. ARB/01/8, 44 ILM 1205, at 1209, awarded US$149 million to the investors against Argentina; and in CME Czech Republic B.V. (Netherlands) v. Czech Republic, Final Award (14 March 2003) 9 ICSID 264 (hereinafter CME), US$350 million was awarded against the Czech Republic. See Mayeda, G., ‘Playing Fair: The Meaning of Fair and Equitable Treatment in Bilateral Investment Treaties’, (2007) 41 (2) Journal of World Trade 274Google Scholar.

4 Piero Foresti, Laura De Carli and others v. Republic of South Africa, ICSID Case No. ARB(AF)/07/1.

5 L. Peterson, ‘South Africa's Bilateral Investment Treaties – Implications for Development and Human Rights’, (2006) Dialogue on Globalization, No. 26, at 32.

6 1969 Vienna Convention on the Law of Treaties, 1155 UNTS 331, at 340.

7 The claim was registered with ICSID on 8 January 2007 under the subject matter of ‘quarrying and trading enterprise’. The tribunal was constituted on 18 September 2007 and its first session was held in London on 11 December 2007. The president is Vaughan Lowe and the other two arbitrators are Charles Brower and Joseph Matthews. Regarding the constitution of the tribunal, see ICSID Convention, Arts. 37–40. Rules of Procedure for Arbitration Proceedings of ICSID were adopted by the Administrative Council of the Centre pursuant to Art. 6(1) of the ICSID Convention. See also ICSID, Annual Report 2007, available at http://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDPublicationsRH&actionVal=ViewAnnualReports# (last visited 25 June 2008), 47; ICSID, Case Information: Piero Foresti, Laura De Carli and others v. Republic of South Africa, available at http://icsid.worldbank.org/ICSID/FrontServlet (last visited 10 April 2008).

8 M. Judin, ‘The International Centre for Settlement of Investment Disputes – Piero Foresti, Laura De Carli and others v. Republic of South Africa’, available at www.elawnet.co.za/elawnetdata/publications/public000079_pub.pdf (last visited 24 June 2008).

9 The Investors’ primary claim is that the expropriation clause in the BIT was violated when they were ‘forced to divest 26% of their investments to [Black or] Historically Disadvantaged South Africans’. This expropriation claim is based on Arts. 2(3) and 3(1) of the South Africa–Italy BIT. The claimants maintain that ‘the [Mineral and Petroleum Resources Development Act 2002 (South Africa)] extinguished their ownership of mineral rights in South Africa, without providing “prompt, adequate and effective compensation”’, as required by Art. 4(2). While it does not form the focus of this paper, the argument of expropriation is central to the claim being made by the Investors in Foresti v. South Africa (L. Peterson, ‘European Mining Investors Mount Arbitration over South African Black Empowerment, Investment Treaty News, 14 February 2007, available at www.iisd.org/pdf/2007/itn_feb14_2007.pdf (last visited 30 June 2008)).

10 Peterson, supra note 5, at 32.

11 L. Peterson, ‘Italian Government Distancing Itself from Dispute between Italian Miners and South Africa’, Investment Treaty News, 16 March 2007, available at www.iisd.org/pdf/2007/itn_mar16_2007.pdf (last visited 30 August 2008).

12 Art. 2(3) states: ‘Each Contracting Party shall at all times ensure just and fair treatment of the investments of investors of the other Contracting Party. Each Contracting Party shall ensure that the management, maintenance, use, transformation, enjoyment or assignment of the investments effected in their territory by investors of the other Contracting Party, as well as companies and enterprises in which these investments have been effected, shall in no way be subject to unjustified or discriminatory measures.’

13 Peterson, supra note 5.

14 Arts. 12(1) and 12(2) of the Mineral and Petroleum Resources Development Act 2002 (South Africa) (MPRDA) respectively.

15 ICSID, List of Contracting States and Other Signatories of the Convention, available at http://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=ContractingStates&ReqFrom=Main (last visited 27 June 2008).

16 Art. 8(3)(c) of the South Africa–Italy BIT states, ‘In the event that such dispute cannot be settled amicably within six months of the date of the written application for settlement, the investor in question may submit at his choice the dispute for settlement to: . . . the International Centre for Settlement of Investment Disputes (ICSID), for the implementation of the arbitration procedures under the Washington Convention of 18 March 1965, on the settlement of investment disputes between States and Nationals of other States, if or as soon as both the Contracting Parties have acceded to it. As long as this requirement is not met, each Contracting Party agrees that the dispute may be submitted to arbitration pursuant to the rules of the Additional Facility of ICSID, of 1978.’

17 On 2 November 2009, the claimants requested the discontinuance of the ICSID arbitral proceedings in Foresti v. South Africa. In early December 2009, an announcement on the ICSID website indicated that South Africa had objected to such a request and on 20 November 2009 had filed an application for a default award. The tribunal has given the claimants until mid-January 2010 to respond (E. Whitsitt, ‘An End to European Mining Claims in South Africa?’, Investment Treaty News, 6 December 2009, available at www.investmenttreatynews.org/cms/news/archive/2009/12/04/an-end-to-european-mining-claims-in-south-africa.aspx).

18 L. Peterson, ‘South African Arbitration May Raise Delicate Human Rights Issues’, Investment Treaty News, 14 February 2007, available at www.iisd.org/pdf/2007/itn_feb14_2007.pdf (last visited 30 June 2008). The existence of a stabilization clause, protecting investors’ interests from subsequent changes to the host state's law that might affect investment, does not seem to be in question in Foresti v. South Africa. See A. Shemberg, ‘Stabilization Clauses and Human Rights’, (2008) IFC/SRSG Research Paper, available at ila-hq.org/pdf/British%20Branch%20Events/Papers_2008/IFC-SRSG%20Stabilization%20%20Final.pdf (last visited 25 July 2008).

19 Peterson, supra note 11.

20 For example, Malaysia has similarly excluded measures designed to promote the economic empowerment of the Bumiputras ethnic group from the scope of its BITs. H. Mann, ‘International Investment Agreements, Business and Human Rights: Key Issues and Opportunities’, IISD (2008), available at www.iisd.org/pdf/2008/iia_business_human_rights.pdf (last visited 24 June 2008), at 11–12; M. Sornarajah, The International Law on Foreign Investment (2004), 120–1, 366–7.

21 Oil Platforms Case (Islamic Republic of Iran v. United States of America), Preliminary Objection, Judgment of 12 December 1996, [1996] ICJ Rep. 803, at 858 (Judge Higgins, Separate Opinion); see also Dolzer, R., ‘Fair and Equitable Treatment: A Key Standard in Investment Treaties’, (2005) 39 International Law 87Google Scholar.

22 ‘It appears that the authors of BITs considered that it was desirable to include a general standard, in addition to the specific rules, which would cover such issues and matters relevant for the desirable extent of protection which did not fall under the specific rules.’ Dolzer, supra note 21, at 89. ‘Essentially, the purpose of the clause as used in BIT practice is to fill gaps which may be left by the more specific standards, in order to obtain the level of investor protection intended by the treaties.’ Ibid., at 90. See also Falsafi, A., ‘The International Minimum Standard Treatment of Foreign Investors’ Property: A Contingent Standard’ (2007) 30 (2) Suffolk Transnational Law Review 317Google Scholar; Bronfman, M., ‘Fair and Equitable Treatment: An Evolving Standard’, in von Bogdandy, A. and Wolfrum, R. (eds.), (2006) 10 Max Planck Yearbook of United Nations Law 618Google Scholar. ‘While there is still no precise definition of the content of this standard, its inclusion in bilateral investment treaties serves several purposes, not only as a basic standard but also an auxiliary element for the interpretation of specific provisions of the treaty or in order to fill gaps in the treaty.’ J. Head, Principles and Practice of International Commerce and Investment (2007), 547.

23 Dolzer, supra note 21, at 88.

24 Falsafi, supra note 22, at 317. Due to its inclusion in almost two thousand bilateral investment agreements, it has reached the status of customary international law: S. Schwebel, ‘The Reshaping of the International Law of Foreign Investment by Concordant Bilateral Investment Treaties’, in S. Charnovitz, D. Steger, and P. van der Bossche (eds.), Law in the Service of Human Dignity (2005), 241, at 244–5; A. Alvarez-Jiménez, ‘Minimum Standard of Treatment of Aliens, Fair and Equitable Treatment of Foreign Investors, Customary International Law and the Diallo Case before the International Court of Justice’ (2008) 9 (1) Journal of World Investment and Trade 52.

25 Dolzer, supra note 21, at 87. See also Falsafi, supra note 22, at 317, where it is claimed that ‘[i]t is no coincidence that almost all claims of expropriation arising from investment treaties are coupled with an alleged breach of the obligation of fair and equitable treatment.’

26 For example, consider T. Franck, Fairness in International Law and Institutions (1995), at 440, where Franck states that the purpose of international law is to ‘create a legitimate framework within which future, unanticipated disputes can be addressed through further discourse or institutions and rules of process-legitimacy’. In a working paper by the Organisation for Economic Co-operation and Development (OECD) there is no provision for substantive protection to be afforded to the profitability of investments by the principle of FET. See OECD, ‘Fair and Equitable Treatment Standard of International Investment Law’, Working Papers on International Investment No. 2004/03, 9. See also Mayeda, supra note 3, at 284–7.

27 Peterson, supra note 5, at 33; Falsafi, supra note 22, at 354; Dolzer, supra note 21, at 88. See also ADF Group Inc. v. United States of America (16 December 2002), ICSID Case No. ARB (AF)/ 00/ 1 (16 December 2002), (2004) 6 ICSID Rep. 470, at para. 195; Mondev International Ltd. v. United States of America (11 October 2002), ICSID Case No. ARB (AF)/99/2, (2003) 42 ILM 85, para. 106.

28 I. Tudor, The Fair and Equitable Treatment Standard of the International Law of Foreign Investment (2008), 144.

29 For discussion on the three theories see C. Yannaca-Small, ‘Fair and Equitable Treatment Standard in International Investment Law’ (2004), Working Papers on International Investment No. 2004/3, at 8–40. Bronfman also claims there to be a fourth theory that focuses on the FET clause being an independent rule of CIL, but this has been considered under interpretation (ii). Bronfman, supra note 22, at 632.

30 FET ‘requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment’: Tecnicas Medioambientales TECMED S.A. v. Mexico (29 May 2003), ICSID Case No. ARB (AF)/00/2, at para. 154 (hereinafter Tecmed). It might also have ‘been established that the guarantees given in this connection under the legal framework and its various components were crucial for the investment decision’. CMS v. Argentina, (2005) 44 ILM 1205, para. 275. The requirement of ‘transparency’ has also been linked to ‘legitimate expectations’: Metalclad Corporation v. United Mexican States (1999), ICSID Case No. ARB(AB)/97/1, para. 76. See also Choudhury, B., ‘Evolution or Devolution? Defining Fair and Equitable Treatment in International Investment Law’, (2005) 6 (2) Journal of World Investment and Trade 308CrossRefGoogle ScholarPubMed.

31 Dolzer, supra note 21, at 103.

32 Ibid., at 104. The ‘stability of the legal and business framework is an essential element of fair and equitable treatment in this case’: LG&E v. Argentina (2003), ICSID Case No. ARB/02/1, at para. 124.

33 Tecmed, supra note 30, para. 154.

34 CME, supra note 3, para. 611.

35 MTD Equity Sdn. Bhd. v. Chile (Malay. v. Chile) (25 May 2004), ICSID Case No. ARB/01/7, at para. 115.

36 Saluka Investments B.V., v. Czech Republic (Partial Award) (17 March 2006), under UNCITRAL Rules, at para. 309.

37 It is to be noted that of importance to ‘legitimate expectations’ is the level of knowledge required by investors of the law of the host state at the time the investment was acquired. For example, see GAMI Investments Inc. v. United Mexican States (15 November 2004), ICSID Case No. ARB(AF)/ 98/ 3; (2005) 44 ILM 545.

38 Bronfman, supra note 22, at 678. See also Vasciannie, S., ‘The Fair and Equitable Treatment Standard in International Investment Law and Practice’, (2000) 70 British Yearbook of International Law 103CrossRefGoogle Scholar.

39 UNCTAD, Fair and Equitable Treatment (1999), 40.

40 Mann, F., ‘British Treaties for the Formation of Investment’, (1991) 52 British Yearbook of International Law 244Google Scholar. Sornarajah claims that Mann's statement ‘could not have anticipated the manner in which it was later employed in NAFTA litigation’. Sornarajah, supra note 20, at 333. Indeed, Mann later stated that ‘[s]ome cases, it is true, merely repeat, perhaps in slightly different language, what in essence is a duty imposed by customary international law’. F. Mann, The Legal Aspect of Money: With Special Reference to Comparative Private and Public International Law (1992), at 510.

41 R. Dolzer, and M. Stevens, Bilateral Investment Treaties (1995), 60.

42 Vasciannie, supra note 38, at 103.

43 Tecmed, supra note 30.

44 Occidental Exploration and Production Company (OEPC) v. Republic of Ecuador (1 July 2004), Final Award, Case No. UN 3467.

45 Ibid., at para 185. Therefore, in para. 183, the tribunal directly concluded that ‘[t]he stability of the legal and business framework is thus an essential element of fair and equitable treatment.’

46 PSEG Global Inc. v. Republic of Turkey (19 January 2007), ICSID Case No. ARB/ 02/ 4.

47 Ibid., at para. 239.

48 A. van Aaken, ‘Fragmentation of International Law: The Case of International Investment Law’, Law and Economics Research Paper Series, Working Paper No. 2008-1, available at http://ssrn.com/abstract=11174482 (last visited 20 August 2008), at 10 (emphasis in original); see also J. Klabbers, ‘Reluctant Grundnormen: Articles 31(3)(c) and 42 of the Vienna Convention on the Law of Treaties and the Fragmentation of International Law’, in M. Craven, M. Fitzmaurice, and M. Vogiatzi (eds.), Time, History and International Law (2006), 144.

49 Van Aaken, supra note 48, at 11.

50 Klabbers, supra note 48, at 161.

51 ILC, ‘Conclusions of the Work of the Study Group on the Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law’, adopted by the ILC at its Fifty-Eighth session, in 2006, and submitted to the General Assembly as a part of the Commission's report covering the work of that session (A/61/10, para. 251), at para. 18.

52 ILC, ‘Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law’, Report of the Study Group of the International Law Commission, finalized by M. Koskenniemi, A/CN.4/L.682 of 13 April 2006, para. 419.

53 Broad-Based Black Economic Empowerment Act 2003 (South Africa).

54 The Constitution of the Republic of South Africa, 1996, adopted by the Constitutional Assembly and certified (at the second attempt) by the Constitutional Court as being in accord with the Constitutional Principles contained in the interim Constitution.

55 This was signed on 9 June 1997.

56 Dupper, O., ‘Affirmative Action in South Africa: (M)Any Lessons for Europe?’ (2006) 39 (2) Verfassung und Recht in Übersee 135CrossRefGoogle Scholar. Affirmative action is also referred to as ‘positive action’ (at 139).

57 Ibid., at 143.

58 Carpenter, G., ‘South Africa and the Human Rights Experience since 1994’, (2004) 45 (2) Codicillus 3Google Scholar.

59 Promotion of Equality and Prohibition of Unfair Discrimination Act 2000 (South Africa). This Act specifically targets unfair discrimination by private persons or bodies.

60 1969 International Convention on the Elimination of All Forms of Racial Discrimination, 660 UNTS 195.

61 M. Shaw, International Law (2003), at 266.

62 Byers, M., ‘Conceptualising the Relationship between Jus Cogens and Erga Omnes Rules’, (1997) 66 Nordic Journal of International Law 211CrossRefGoogle Scholar.

63 Nevertheless, principle of jus cogens ‘found its way into positive international law during the preparations for the [VCLT] . . . the concept was moulded into articles 53 and 64’ (ILC, supra note 52, at para. 362). According to Art. 53 of the VCLT, a peremptory norm is ‘a norm accepted and recognized by the international community of States as a whole as a norm from which no derogation is permitted and which can be modified only by a subsequent norm of general international law having the same character’.

64 G. Abi-Saab, ‘The Third World and the Future of International Legal Order’, (1973) 29 Revue égyptienne de droit international 53; see also A. Bianchi, ‘Human Rights and the Magic of Jus Cogens’, (2008) 19 EJIL 491.

65 South West Africa Case (Ethiopia v. South Africa; Liberia v. South Africa), Second Phase, Judgment of 18 July 1966, [1966] ICJ Rep. 298.

66 Ibid., at 296 (dissenting opinion of Judge Tanaka).

67 J. Dugard, Recognition and the United Nations (1987), 158. Bos commented that it is in the very nature of jus cogens to bind every state, even a persistent objector. Bos, M., ‘The Identification of Custom in International Law’ (1982) 25 German Yearbook of International Law 43Google Scholar. See also L. Hannikainen, Peremptory Norms (Jus Cogens) in International Law (1988).

68 J. Crawford, The Creation of States in International Law (1979), 226–7.

69 ILC, The Report of the International Law Commission on the Work of its Fifty-Third Session, Official Records of the General Assembly, Fifty-Sixth session, Supplement No. 10 (A/56/10), at 208. Also, emphasized by scholars, see, e.g., I. Brownlie, Principles of International Law (2003), 515. Protection from racial discrimination has also been referred to as an erga omnes obligation; see dictum in Barcelona Traction, Light & Power Co., [1970] ICJ Rep. 3, (1970) 64 AJIL 653 (paras. 33–35). However, erga omnes rules need not necessarily also be of a jus cogens character. Byers, supra note 62, at 237.

70 Juridical Condition and Rights of the Undocumented Migrants, Advisory Opinion, judgment of 17 September 2003, Inter-American Court of Human Rights (ser. A) No. 18, at para. 110.

71 L. Peterson and K. Gray, International Human Rights in Bilateral Investment Treaties and in Investment Treaty Arbitration (2003), at 19.

72 Ibid., at para. 67.

73 Parkerings-Compagniet AS v. Republic of Lithuania (11 September 2007), ICSID Arb Case No. ARB/05/8, sec. 8.3.1.

74 SPP v. Egypt (14 April 1988), dec. on jurisdiction, 3 ICSID Reports 142/3. This was an arbitration under a contract rather than under an international investment agreement – see Mann, supra note 20, at 26. The investor's corruption activities were regarded as ‘ordre public international law’ that prevented the tribunals from having jurisdiction. See World Duty Free v. Kenya (4 October 2006), ICSID Case No. ARB/00/7; Inceysa Vallisoletana v. Republic of El Salvador (2 August 2006), ICSID Case No. ARB/03/26. There are also other direct claims regarding international human rights law, regarding water privatization, and certain environmental and cultural protection measures. Mann supra note 20, at 27–8.

75 Mann supra note 20, at 15.

76 1945 United Nations Charter, 59 Stat. 1031.

77 1948 Universal Declaration of Human Rights, GA Res. 217A (III), UN Doc A/810 at 71.

78 1976 International Covenant on Civil and Political Rights (ICCPR), GA Res. 2200A (XXI), 999 UNTS 171.

79 1960 Discrimination (Employment and Occupation) Convention (ILO No. 111), 362 UNTS 31.

80 South Africa ratified the ICCPR on 10 December 1998 (signed 3 October 1994); ICERD on 10 December 1998 (signed 3 October 1994); and the ILO Convention on 5 March 1997. The International Covenant on Economic, Social and Cultural Rights was signed on 3 October 1994, but has not been ratified. Italy ratified the ICCPR and the International Convention on Economic, Social and Cultural Rights on 15 September 1978 (signed 18 January 1967); ICERD on 5 January 1976 (signed 13 March 1968); and the ILO Convention on 12 August 1963. See University of Minnesota, Ratification of International Human Rights Treaties – South Africa, available at www1.umn.edu/humanrts/research/ratification-southafrica.html (last visited 28 July 2008); University of Minnesota, Ratification of International Human Rights Treaties – Italy, available at www1.umn.edu/humanrts/research/ratification-italy.html (last visited 28 July 2008). South Africa ratified the UN Charter on 7 November 1945 and Italy did so on 14 December 1955 – UN, UN Member States, available at un.org/members/list.shtml#s (last visited 28/07/2008). South Africa was excluded from the General Assembly in 1974 owing to its apartheid practices, but was readmitted in 1994. M. McGregor, ‘Affirmative Action and Non-discrimination: South African Law Evaluated against International Law’, (2006) 39 Comparative and International Journal of Southern Africa 385.

81 The UDHR creates aspirational goals, but is not a legally binding document in its own right. UN, Universal Declaration of Human Rights, available at http://html.knowyourrights2008.org/en/universal-declaration-of-human-rights/universal-declaration.html (last visited 28 July 2008); see also Overview of Rights, available at un.org/Overview/rights.html (last visited 28 July 2008).

82 The Preamble ‘affirms that all human beings, irrespective of race, creed or sex, have the right to pursue both their material well-being and their spiritual development in conditions of freedom and dignity, of economic security and equal opportunity’ and ‘discrimination constitutes a violation of rights’. Art. 1(1)(a) defined discrimination as including ‘[a]ny distinction, exclusion or preference made on the basis of race, colour, sex, religion, political opinion, national extraction or social origin, which has the effect of nullifying or impairing equality of opportunity or treatment in employment or occupation.’

83 The ‘appropriate methods’ are outlined in Art. 3 of the ILO Convention.

84 Mann, supra note 20, at 18.

85 Peterson and Gray, supra note 71, at 3.

86 Pan American Energy LLC and BP Argentina Exploration Company v. Argentine Republic (27 July 2006), ICSID Case No. ARB/03/13.

87 El Paso Energy International Company v. Argentine Republic (27 April 2006), decision on jurisdiction, ICSID Case No. ARB/03/15.

88 P. Weil, ‘Towards Relative Normativity in International Law’, (1983) 77 AJIL 413.