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Can Domestic Law Be Used by the Host State

as a Defence

in Expropriation Disputes?

—The role of states’ right to regulate in investor-State dispute

settlement: a ‘microscopic’ perspective

Student Name: Hu Binhan

Master Track: International and European Law: International Trade and Investment Law

Supervisor: Dr. Hege Elisabeth Kjos

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Abstract

The relationship between states‟ right to regulate and investor-State dispute settlement (ISDS) has been highly controversial. It has been suggested that international arbitrators have applied international investment agreements (IIA) in a manner which prejudices states‟ domestic policy space and imposed supra-national law on states. This criticism forms part of the larger challenge to the legitimacy of international investment law and international investment arbitration. To determine whether such criticism is tenable, perhaps a critical step is to scrutinize how domestic law is actually treated in international investment arbitration. While abundant researches have been made in this respect from a rather macroscopic perspective, studying investment arbitration in its entirety, explorations of the effect of domestic law on specific investment claims are few.

Expropriation claims are the most frequently advanced claims in international investment arbitration. Moreover, it has been suggested that the expropriation provision is one of the IIA provisions that have the greatest potential impact on states‟ right to regulate. Thus an examination of the defensive role of domestic law in expropriation disputes may offer valuable insight into the relationship between states‟ right to regulate and ISDS.

This paper explores the rationale behind the potential role of domestic law in expropriation disputes, the various defensive roles that domestic law actually plays in expropriation disputes, as well as main remaining uncertainties regarding the

defensive role. It takes into consideration relevant international investment

agreements, arbitral case law, as well as customary international law that have been recognized by tribunals. It focuses on the domestic law of the host State and the impact of domestic law as a defence of the host State on the merits in expropriation disputes where the cause of action is based on violations of IIA provisions.

It is shown that the possible domestic law defence is principally built on sovereignty of host States and parties‟ agreement. It is demonstrated that an extensive defensive role can be played by domestic law in expropriation disputes. In defending against an expropriation claim, domestic law may serve as the substantive applicable law, a precondition of a right, a justification for an act, or proof of factual matters. This seems to suggest states‟ right to regulate is carefully considered by arbitral tribunals, and international law is not the sole benchmark in expropriation disputes. However, the defensive role of domestic law is not without ambiguity. This is mainly attributed to the uncertainties in connection with the application of „police power doctrine‟; the wording of certain IIA provisions, such as the public measure exceptions; and the corrective role that can be played by international law. To better define the role of states‟ right to regulate in ISDS, clarification through development of arbitral case law and perfection of IIAs is needed in this connection.

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Table of Contents

1. Introduction ... 3

2. The rationale behind the seeming difficult yet possible domestic law defences in expropriation disputes ... 7

2.1 International obligations to protect foreign investment ... 8

2.2 The legality principle and the principle of estoppel ... 9

2.3 Sovereignty of States and the obligation of investors to comply with domestic law ... 10

2.4 The agreement of parties ... 14

3. The domestic law defence in expropriation disputes—the establishment of an expropriation ... 15

3.1 The existence of an investment ... 15

3.2 Attribution of acts ... 18

3.3 Detrimental effect of acts of the host State... 18

3.4 Distinction between expropriations and certain legitimate governance measures ... 20

3.4.1 Sanctions against violation of national law ... 20

3.4.2 Refusal to issue or termination of a license ... 21

3.4.3 Taxation ... 21

3.4.4 Adjudication ... 22

4. The domestic law defence in expropriation disputes—justifications for, the lawfulness of and compensation for an expropriation ... 23

4.1 Justifications for an expropriation ... 23

4.1.1 ‘Police power doctrine’ ... 23

4.1.2 Necessity and emergency ... 25

4.2 The lawfulness of an expropriation ... 27

4.3 The compensation of an expropriation ... 28

4.4 Interim conclusions ... 29

5. The uncertainties surrounding domestic law defences in expropriation disputes ... 30

5.1 „Police power doctrine‟—a theory that needs further development in international investment arbitration ... 31

5.2 The vagueness of provisions of the IIA ... 34

5.3 Uncertainties arising from the corrective role of international law as applicable law ... 36

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Can Domestic Law Be Used by the Host State as a Defence

in Expropriation Disputes?

The role of states’ right to regulate in investor-State dispute

settlement: a ‘microscopic’ perspective

1. INTRODUCTION

In September 2015, the European Commission approved a proposal for incorporation of an Investment Court System into ongoing and future EU investment agreements in lieu of the existing investor-State dispute settlement (ISDS), with a view to ensuring

government‟s regulatory rights, transparency and accountability.1

In November 2015, the Parliament of South Africa passed a bill abolishing international trade and investment arbitration in pursuit of „the right to regulate‟.2 In February 2016, the

Trans-Pacific Partnership agreement (TPP) was signed by 12 countries.3 However,

criticism persists complaining about the detriment caused by the agreement on domestic legislation in the public interest.4 In comparison with those accusations about ISDS for infringing on states‟ right to regulate, the US Trade Representative and the Australian Department of Foreign Affairs and Trade clarified that the ISDS provisions contained in the TPP and the China-Australia Free Trade Agreement would not prevent the public authorities from adopting domestic measures and would protect

US/Australian investors abroad.5

1

See European Commission, ‘Commission proposes new Investment Court System for TTIP and other EU trade and investment negotiations’ (Press Release, 16 September 2015) <http://europa.eu/rapid/press-release_IP-15- 5651_en.htm> accessed 15 July 2016.

2

See Mark Allix, ‘Bill could be investment drawbridge’ (30 November 2015) <http://www.bdlive.co.za/opinion/ 2015/11/30/bill-could-be-investment-drawbridge> accessed 15 July 2016.

3

See the Trans-Pacific Partnership Ministers’ Statement (4 February 2016) <https://ustr.gov/about-us/policy- offices/press-office/press-releases/2016/February/TPP-Ministers-Statement> accessed 15 July 2016.

4

See e.g. Lisa Sachs and Lise Johnson, ‘TPP would let foreign investors bypass the Canadian public interest’ (25 November 2015) <http://www.theglobeandmail.com/report-on-business/rob-commentary/tpp-would-let-foreign -investors-bypass-the-canadian-public-interest/article27463985/> accessed 15 July 2016; IUF, ‘Trade deals and the TPP corporate power grab-resistance must continue!’ (January 27 2016) <http://www.iuf.org/w/?q=node/47 22> accessed 15 July 2016.

5

See USTR, ‘Upgrading & Improving Investor-State Dispute Settlement’ <https://ustr.gov/sites/default/files/TPP- Upgrading-and-Improving-Investor-State-Dispute-Settlement-Fact-Sheet.pdf> accessed 15 July 2016; Australian Department of Foreign Affairs and Trade, ‘Quick Guide: Key Investment and Investor-state Dispute Settlement

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The foregoing divergence regarding the impact of ISDS on domestic regulation is part of the larger debate over the legitimacy of international investment law and

international investment arbitration.6 It has been suggested that international

arbitrators have applied international investment agreements (IIA) in a manner which prevents states from adopting regulations in the public interest, reducing domestic policy space.7 Moreover, international investment law has even been labelled as an

anti-democratic system by imposing supra-national law on states.8 Hence a picture of

international arbitrators‟ advocating international law and ignoring states‟ right to

regulate seems to be taken on.9 To identify whether the picture is a piece of „realism

art‟ or an „idealism art‟, and to consider further whether the challenge that international investment arbitration prejudices states‟ right to regulate is tenable, perhaps a critical step is to scrutinize how domestic law is actually treated in international investment arbitration. What role can domestic law play in international investment arbitration? Do arbitrators allow for domestic law defences in international investment arbitration in particular? While abundant researches have been made in this respect from a rather macroscopic perspective, studying investment arbitration in

its entirety,10 explorations of the effect of domestic law on specific investment claims

are few.

Expropriation claims are among the most frequently advanced claims in international investment arbitration. According to the UNCTAD database, among 432 cases the data in respect of which is available as of 15 July 2016, 374 cases involve a

(ISDS) Outcomes’ <http://dfat.gov.au/trade/agreements/chafta/fact-sheets/Pages/quick-guide-key-investment-an d-investor-state-dispute-settlement-outcomes.aspx> accessed 15 July 2016.

6

See Stephan W. Schill, ‘Enhancing International Investment Law’s Legitimacy: Conceptual and Methodological Foundations of a New Public Law Approach’ (2011) 52 Virginia Journal of International Law 57, 66; Charles N. Brower and Sadie Blanchard, ‘What’s in a Meme? The Truth about Investor-State Arbitration: Why It Need Not, and Must Not, Be Repossessed by States’ (2014) 52 Columbia Journal of Transnational Law 688, 719.

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Ibid (mentioning this view from critics).

8

See Donald Earl Childress III, ‘Does international investment law needadministrative law?’ (2013) 54 Harvard International Law Journal Online 115, 116 (discussing this view from Professor Jason Yackee).

9

States’ right to regulate may be understood as a right to establish conditions for the entry and operation of foreign investment for the public good, subject to international commitments (See UNCTAD, ‘Reform of the IIA Regime: Four Paths of Action and a Way Forward’ (July 2014) IIA Issue Note No 3 <http://unctad.org/en/Publica tionsLibrary/webdiaepcb2014d6_en.pdf> accessed 15 July 2016, 7).

10

See e.g. Charles N. Brower and Sadie Blanchard (n 6); Aikaterini Titi, The right to regulate in international

investment law (Nomos Verlagsgesellschaft, Baden-Baden 2014); Tai-Heng Cheng, ‘Power, Authority and

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claim of infringement of expropriation provisions, followed by 347 cases concerning fair and equitable treatment claims.11 Besides, the expropriation provision is one of the two provisions in an IIA that have the greatest potential impact on states‟ right to

regulate, indicated by a report from the Swedish National Board of Trade.12

Consequently, an enquiry into the domestic law defence in expropriation disputes in international investment arbitration may offer valuable insight into the relationship between states‟ right to regulate and ISDS. Besides, it could furnish host States with a basis for further discussions on how to make use of domestic law as a defence effectively in specific cases, promoting a better accommodation of domestic regulatory power to international investment arbitration.

In exploring the role that domestic law may play in defending against expropriation claims in international investment arbitration, this paper mainly focuses on addressing the following questions: First, why do domestic law defences in expropriation disputes appear to be difficult? Second, what on earth drives domestic law to play a part in the disputes and makes domestic law defences possible? Third, whether and how domestic law can be utilised to defend against an expropriation claim in international investment arbitration? Fourth, is the defensive role of domestic law sufficiently clear in expropriation disputes, and fifth, if not, what contributes to that and are there any possible solutions?

For the purpose of this paper, domestic law (also referred to as national or

municipal law13) shall comprise all laws and regulations enacted by a State within its

territory, whether through central authorities or local authorities,14 in contrast to international law. A domestic law defence shall mean a defence based on or relying on

11

See UNCTAD Investment Policy Hub website <http://investmentpolicyhub.unctad.org/ISDS/FilterByBreaches> accessed 15 July 2016. An Expropriation claim and a fair and equitable treatment claim can be brought in the same case.

12

The Swedish National Board of Trade, ‘“The Right to Regulate” in the Trade Agreement between the EU and Canada’ <http://www.kommers.se/Documents/dokumentarkiv/publikationer/2015/Publ-The-right-to-regulate. pdf> accessed 15 July 2016, 4.

13

See e.g. Sompong Sucharitkul, ‘International Law as Law’ (2010) 16 Annual Survey International & Comparative Law 1, 6; Andre Nollkaemper, ‘The Independence of the Domestic Judiciary in International Law’ (2006) 17 Finnish Yearbook of International Law 261, 270; Tawhida Ahmed and Israel de Jesús Butler, ‘The European Union and Human Rights: An International Law Perspective’ (2006) 17 European Journal of International Law 771, 775.

14

See ILC, ‘Draft articles on Responsibility of States for Internationally Wrongful Acts (with commentaries)’ (2001) 2 Yearbook of the International Law Commission 26, 38.

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domestic law, no matter whether domestic law acts as applicable law or functions otherwise therein.

The legal frameworks taken into consideration in this paper are relevant international investment agreements, investment arbitration case law, as well as customary international law that has been recognized by tribunals. As far as the role of domestic law in international investment arbitration is concerned, domestic law may impact on the proceedings in a broad way. Under IIAs where the dispute settlement provision is broadly formulated,15 the cause of action brought by the investor can build not only upon international law but also upon domestic law.16 In the latter case, domestic law will obviously play a role in the arbitration. This paper, however, only deals with the domestic law of the host State and the impact of domestic law as a defence of the host State on the merits in expropriation disputes where the cause of action is based on violations of an IIA.17

This paper shows that the possible domestic law defence is principally built on sovereignty of host States and parties‟ agreement. It is demonstrated that an extensive defensive role can be played by domestic law in expropriation disputes. In defending against an expropriation claim, domestic law may serve as the substantive applicable law, a precondition of a right, a justification for an act, or proof of factual matters. In contrast to the alleged imposition of international law on states, domestic law has been carefully considered and respected by tribunals in expropriation disputes. This seems to suggest that ISDS is not a mechanism precluding states‟ right to regulate. On the contrary, space is made for accommodating such right, at least in expropriation disputes. However, the defensive role of domestic law is not without ambiguity. This is mainly attributed to the uncertainties in connection with the application of „police

15

See Hege Elisabeth Kjos, Applicable Law in Investor-State Arbitration: The Interplay Between National and

International Law (OUP 2013) 118 (a dispute settlement clause in an IIA may allow investors to submit any

dispute or all disputes concerning investments to arbitration).

16

E.g Wena Hotels Limited v Arab Republic of Egypt ICSID Case No ARB/98/4 (Wena Hotels), Award, 8 December 2000, Para 75 (the investor claimed violation of the UK-Egypt BIT, Egyptian law and international law by Egypt through expropriating its investments without compensation).

17

The impact of domestic law on procedural matters, for example jurisdiction of the tribunal and admissibility of the dispute, governing law of the arbitration procedures, as well as on trivial matters that appeared in the proceedings, e.g. the identity of the witness or the position it serves/served under the host State’s national law, are not considered here. Neither is the domestic law of the home State of the investor or other relevant states.

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power doctrine‟; the wording of certain IIA provisions, such as the public measure exceptions; and the corrective role that can be played by international law. To better define the role of states‟ right to regulate in ISDS, clarification through development of arbitral case law and perfection of IIAs is needed in this connection.

The discussions in this paper proceed in the following order: Section 2 explores the reasons why domestic law defences appear to be difficult and what drives domestic law to play a role in expropriation disputes and makes domestic law defences possible. Section 3 examines the possible domestic law defence against the establishment of an expropriation. Section 4 continues to inspect the defensive role played by domestic law in justifications for, the lawfulness of and compensation for an expropriation. Section 5 identifies the main factors contributing to the uncertainties surrounding domestic law defences in expropriation disputes, accompanied by some suggestions. Finally, Section 6 summarizes the major conclusions reached in this paper.

2. THE RATIONALE BEHIND THE SEEMING DIFFICULT YET POSSIBLE DOMESTIC LAW DEFENCES IN EXPROPRIATION DISPUTES

As a result of the conclusion of an IIA, a host State is under international obligations to protect foreign investment, including the obligation to refrain from expropriation except in particular situations. By virtue of the basic international law rule that a state

cannot invoke national law as a justification for breach of international obligations,18

it appears to be difficult to raise a domestic law defence in expropriation disputes. Besides, further limitations may be imposed by the tribunal on the host State‟s invocation of its domestic law in light of the legality principle and the principle of estoppel.

However, as will be shown in the subsequent sections, domestic law could actually play a part in expropriation disputes; and it is indeed possible for host States to make use of domestic law to put forward a defence therein. An important reason is

18

See e.g. Article 27 VCLT; Article 3 & 32 of the ILC Articles on State Responsibility; Malcolm N. Shaw,

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that the investor and its investment are subject to the sovereignty of the host State and the investor has an obligation to comply with the domestic law of the host State. In addition, the agreement of parties involved in an expropriation dispute introduces the operation of domestic law in international investment arbitration. By accepting the offer to international arbitration incorporated in an IIA, the investor accepts not only

the expropriation provisions but also the choice-of-law provision,

exceptions-of-expropriation provision and other relevant provisions in the IIA, making room for the function of domestic law in the arbitration.

2.1 International obligations to protect foreign investment

By virtue of the conclusion of an IIA with the home State of foreign investors, the host State agrees to limit its sovereign rights by reciprocity.19 It is therefore under international obligations to protect foreign investment. Most IIAs include a provision on direct expropriation or measures that have an equivalent effect.20 Under such expropriation provision, the host State is generally required not to expropriate or nationalize foreign investment except for a public purpose and in the case where relevant requirements are met. In view of the basic international law rule that a state cannot invoke national law as a justification for breach of international obligations, it appears to be difficult to raise a domestic law defence in expropriation disputes—the host State‟s international obligations to refrain from expropriatory acts except under particular circumstances cannot be removed or amended by relevant national law rules.

IIAs may also contain other foreign investment protection clauses that affect the host State‟s application of its national law. For example, Article 10(1) of the US-Rwanda BIT and Article 8(1) of the Japan-Kazakhstan BIT impose an obligation on the host State to make laws and regulations which relate to or affect foreign

19

See Charles N. Brower and Sadie Blanchard (n 6) 720-722; Schill (n 6), 66-67.

20

See Christoph H. Schreuer, ‘The Concept of Expropriation under the ECT and other Investment Protection Treaties’ in Clarisse Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (Huntington 2006) 111-114.

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investment publicly available promptly.21 Under Article 4(1) of the India-United Arab

Emirates BIT, Article II(2) of the United Kingdom-Colombia BIT, and Article 3(1) of the Spain-Dominican Republic BIT, the host State shall not take arbitrary or discriminatory measures that affect the management, maintenance, use, enjoyment, or disposal of foreign investment.

Moreover, with the introduction of foreign investment protection obligations, international law comes into play. A treaty claim often entails the application of international law.22 As will be discussed in Section 5, domestic law defences in international investment arbitration could be restricted by applicable international law.

2.2 The legality principle and the principle of estoppel

Under EU administrative procedural law, a good administrative action shall comply with, inter alia, the principle of legality, the principle of legal certainty, and the principle of timeliness.23 Similar requirements apply under circumstances where a host State invokes domestic law in international investment arbitration. Tribunals have taken account of the legality principle and the principle of estoppel in this connection.

A domestic law which is not lawfully enacted cannot be resorted to by the host State.24 By way of example, in Occidental v Ecuador, the tribunal rejected the justification by Ecuador based on the Caducidad Decree because it had found the decree was promulgated in breach of the principle of proportionality enshrined in

Ecuadorian law, customary international law as well as provisions of the IIA.25

In light of the principle of estoppel, if the host State chose not to have recourse to

21

For detailed information about BITs and other IIAs referred to in this paper, please refer to the Table of International Investment Agreements annexed to this paper; the same applies hereinafter.

22

See Kjos (n 15) 108, 124.

23

See Directorate-General Internal Policies, ‘The General Principles of EU Administrative Procedural Law’ (2015) <http://www.europarl.europa.eu/RegData/etudes/IDAN/2015/519224/IPOL_IDA(2015)519224_EN.pdf> accessed 15 July 2016, 16-19.

24

See Jan Paulsson, ‘Unlawful Laws and the Authority of International Tribunals’ (2008) 23(2) ICSID

Review—Foreign Investment Law Journal 215, 224 (Paulsson argues that tribunals should refuse to recognize unlawful national law regardless its de facto fate in that state).

25

Occidental Petroleum Corporation and Occidental Exploration and Production Company v The Republic of

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a rule of national law when it was aware of, or should have been aware of the rule, it may not be able to invoke that rule at a later stage. For instance, in Railroad Development v Guatemala, the tribunal considered that Guatemala could not challenge the compliance of the claimant‟s investment with its domestic law as it had

overlooked it and accepted that investment.26

2.3 Sovereignty of States and the obligation of investors to comply with domestic law

Notwithstanding the abovementioned seeming difficulty, as will be shown, domestic law could actually play a role in expropriation disputes, which allows of domestic law defences. A critical reason is that the investor and its investment are subject to the sovereignty of the host State and the investor has an obligation to comply with the domestic law of the host State. In other words, the relationship between a foreign investor and the host State is regulated by not only international law but also domestic

law.27 International investment law does not solely concern a number of international

obligations assumed by the host State. It also involves the State‟s interests. As observed by Schreuer, international investment law seeks to strike a balance between

the host State‟s interests and international protection of investments.28

A small number of IIAs refer to sovereignty of the host State directly or indirectly. For example, the preamble of the China-Guyana BIT and the Korea-Trinidad and Tobago BIT requires „respecting the sovereignty and laws of the Contracting Party within whose jurisdiction the investment falls‟; the preamble of the Japan-Korea-China investment agreement stresses the importance of the compliance with domestic law of the host State by investors; and Article 12 of Indian Model BIT (2015) lays down obligations of investors to comply with the law of the host State. Certain other BITs, such as the Austria-Guatemala BIT, the Moldova-Estonia BIT, and

26

Railroad Development Corporation v Republic of Guatemala ICSID Case No ARB/07/23, Second Decision on Objections to Jurisdiction, 18 May 2010, Para 146.

27

See Kjos (n 15) 105-127.

28

See Christoph Schreuer, ‘Investments, International Protection’ <http://www.univie.ac.at/intlaw/wordpress/ pdf/investments_Int_Protection.pdf> accessed 15 July 2016, Paras 1-2.

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the Macedonia-Kazakhstan BIT, incorporate the sovereign rights of the host State into the definition of the term „territory‟, recognizing the sovereign rights and jurisdiction of the host State over its territory.29

While a substantial number of IIAs do not refer to sovereign rights of the host State, those rights, however, remain effective. The sovereignty of a State within its territory is well recognized under international law.30 As a result, a State has the

jurisdiction over its „territory and the permanent population living there‟.31 Then the

question is whether the customary rules regarding state sovereignty and territorial principle extend to foreign investors and investments in the host State‟s territory. The

answer should be in the affirmative: it was acknowledged inthe S.S. ‘Lotus’ case that

unless prohibited by specific international rules, a state is entitled to exercise jurisdiction in its territory even if the issue in question involves extraterritorial

elements (for example the acts were initiated abroad).32 Moreover, there exists

evidence conveying opinio juris and practice of states which confirms this point. From the perspective of opinio juris, it is laid down in international treaty, General Assembly resolution and report of the International Law Commission that a state has jurisdiction over all persons and acts in its territory and the right to regulate

29

Article 1(6) of the Austria-Guatemala BIT reads ‘“territory” means with respect to each Contracting Party the land territory, internal waters, maritime and airspace under its sovereignty, including the exclusive economic zone and the continental shelf where the Contracting Party exercises, in conformity with international law, sovereign rights and jurisdiction.’; Article 1(4) of the Moldova-Estonia BIT and the Macedonia-Kazakhstan BIT contain similar formulation. Note that many IIAs contain a provision requiring foreign investment be made in accordance with the national law of the host State, see Thomas Obersteiner, ‘“In Accordance with Domestic Law” Clauses: How International Investment Tribunals Deal with Allegations of Unlawful Conduct of Investors’ (2014) 31(2) Journal of International Arbitration 265, 267.

30

E.g. the Declaration on Principles of International Law concerning Friendly Relations and Co-operation among States in accordance with the Charter of the United Nations (1970, the ‘Friendly Relations and Co-operation Declaration’) confirms that each State has ‘the rights inherent in full sovereignty’; Article 9 of Montevideo Convention on the Rights and Duties of States, which entered into force in 1936, provides ‘the jurisdiction of states within the limits of national territory’; In the S.S. Lotus case, PCIJ confirmed States’ jurisdiction over their territory and extraterritorial Jurisdiction within the limits imposed by international law (Case of the S.S. ‘Lotus’

(French v Turkey) (Merits) [1927] PCIJ Rep Series A No 10, 18-20); In the Island of Palmas Case, Max Huber,

President of PCIJ, as the sole arbitrator, pointed out that the development of international law had established the principle of ‘the exclusive competence of the State in regard to its own territory […]’ (See Christopher Greenwood, ‘Sovereignty: A View from the International Bench’ in Richard Rawlings and others (eds), Sovereignty

and the Law: Domestic, European and International Perspectives (OUP 2013) 253-254); Malcolm N Shaw in his

article noted ‘the principle whereby a state is deemed to exercise exclusive power over its territory can be regarded as a fundamental axiom of classical international law’, citing a number of scholars’ works (Malcolm N Shaw, ‘The International Court of Justice and the Law of Territory’ in Christian J. Tams and James Sloan (eds), The

Development of International Law by the International Court of Justice (OUP 2013) 151). 31

See James R Crawford, Brownlie's Principles of Public International Law (8th edn, OUP 2012) 447.

32

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foreign investment within that territory. For instance, Article 9 of Montevideo Convention on the Rights and Duties of States provides for states‟ jurisdiction over all the inhabitants within its territory and equal protection for nationals and foreigners under law.33 Also, the Charter of Economic Rights and Duties of States adopted by the General Assembly in 1974 makes it clear the right of each State to regulate and exercise authority over foreign investment and transnational corporations within its

territory.34 Moreover, the International Law Commission in its 2006 report noted the

jurisdiction of a State had been exercised over „persons, property and acts within its

territory‟;35 and the Draft Declaration on Rights and Duties of States (1949) prepared

by the International Law Commission, though not approved by States, provides that „every State has the right to exercise jurisdiction over its territory and over all persons and things therein‟.36

As regards state practice, most, if not all, countries have enacted laws and/or regulations regarding foreign investment and foreign investors.37 Consequently, it

33

Convention on Rights and Duties of States (signed 26 December 1933, entered into force 1936) 165 UNTS 19.

34

The Charter of Economic Rights and Duties of States, UNGA Res 3281 (XXIX) (12 December 1974) GAOR 29th Session Supp 31, Article 2 (a) & (b). While disputes exist as to the legal effect of provisions relating to

expropriation therein, no challenge to the right of the host State to regulate and exercise jurisdiction over foreign investment and investors has come to the author’s attention.

35

ILC, ‘Annex E: Extraterritorial Jurisdiction’ in Report of the International Law Commission: Fifty-eighth session (1 May-9 June and 3 July-11 August 2006) GAOR 61th Session Supp 10, Para 1.

36

ILC, ‘Draft Declaration on Rights and Duties of States with commentaries’ (1949) YBILC 287, Article 2.

37

OECD and UNCTAD have been reviewing investment policy of states including national laws and regulations relating to foreign investment and investors <http://www.oecd-ilibrary.org/finance-and-investment/oecd-invest ment-policy-reviews_19900910> & <http://unctad.org/en/Pages/DIAE/Investment%20Policy%20Reviews/IPRs- countries-covered.aspx>. As of 15 July 2016, reviews of laws relating to foreign investment and investors of 66 States have been published or drafted. These states include Algeria, Antigua and Barbuda, Bangladesh, Belarus, Benin, Bosnia and Herzegovina, Botswana, Brazil, Burkina Faso, Burundi, China, Colombia, Congo, Costa Rica, Czech Republic, Dominican Republic, Djibouti, Ecuador, Egypt, El Salvador, Estonia, Ethiopia, Ghana, Grenada, Guatemala, Hungary, India, Indonesia, Israel, Jamaica, Jordan, Kazakhstan, Kenya, Kyrgyzstan, Lesotho, Lithuania, The former Yugoslav Republic of Macedonia, Madagascar, Malaysia, Mauritania, Mauritius, Moldova, Mongolia, Morocco, Mozambique, Myanmar, Nepal, Nigeria, Peru, Philippines, Romania, Russian Federation, Rwanda, Sierra Leone, Slovenia, Sri Lanka, St. Lucia, Sudan, Tajikistan, Tanzania, Tunisia, Uganda, Ukraine, Uzbekistan, Viet Nam, Zambia. A report of United States Government Accountability Office on Laws and Policies Regulating Foreign Investment in 10 Countries (2008) included briefs of foreign investment law of 7 other states including Canada, France, Germany, Japan, the Netherlands, United Arab Emirates, and UK <http://www.gao.gov/new.items/d0832 0.pdf> accessed 15 July 2016. An OECD Report on Regulatory Environment for International Investment in Mena Countries (2004) revealed information regarding laws and regulations on foreign investment of 8 other states including Bahrain, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, and Yemen <http://www.oecd.org/investm ent/investmentfordevelopment/32298493.pdf> accessed 15 July 2016. A World Bank report on Regulating Foreign Direct Investment in Latin America (2013) showed foreign investment regulation was maintained by 8 other Latin American states including Argentina, Bolivia, Chile, Haiti, Honduras, Mexico, Nicaragua, and Venezuela <http://iab.worldbank.org/~/media/FPDKM/IAB/Documents/Regulating-FDI-in-Latin-America.pdf> accessed 15 July 2016. Information on foreign investment regulation of more states may be found in the World Bank Doing Business online library <http://www.doingbusiness.org/law-library>.

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could be said that it is a rule of customary international law that the host State has sovereign rights in its territory, including the right to regulate foreign investment and investors. Corollarily, foreign investors are under an obligation to comply with national law of the host State.

The sovereign rights of the host State have also been confirmed in investment arbitration. For instance, in Goetz v Burundi, the arbitral tribunal recalled the territorial sovereignty principle which granted a State an exclusive right to carry out its activities in its territory.38 In Parkerings-Compagniet v Lithuania, it was held that „it is each State‟s undeniable right and privilege to exercise its sovereign legislative

power. A state has the right to enact, modify or cancel a law at its own discretion‟.39

Similarly, in ADC v Hungary, it is considered a basic international law principle that a State has „the inherent right to regulate its domestic affairs‟ subject to limitations.40

The corollary of the sovereignty of the host State and the obligation of investors to comply with domestic law is that investors have to live with certain interference arising from the legitimate exercise of the right to regulate by the host State, which cannot fall within the category of expropriatory acts, for instance measures under the

„police power doctrine‟.41

Moreover, foreign investors have to bear the consequences in the event of breach of the national law, which may lead to sanctions from the host State, deprivation of substantial and/or procedural protection under the IIA,42 or mitigation/elimination of the responsibility of the host State, including that associated with expropriations.

38

Antoine Goetz, et al. v The Republic of Burundi ICSID Case No ARB/95/3, Award, 10 February 1999 in Albert Jan van den Berg (ed), Yearbook Commercial Arbitration (Volume 26, Kluwer Law International 2001) 24, 30.

39

Parkerings-Compagniet AS v Republic of Lithuania ICSID Case No ARB/05/8 (Parkerings-Compagniet v

Lithuania), Award, 11 September 2007, Para 332. 40

ADC Affiliate Ltd., ADC & ADMC Management Ltd. v The Republic of Hungary ICSID Case No ARB/03/16 (ADC v

Hungary), Award, 2 October 2006, Para 423. 41

See OECD (2004), ‘“Indirect Expropriation” and the “Right to Regulate” in International Investment Law’, OECD Working Papers on International Investment, 2004/04, OECD Publishing. http://dx.doi.org/10.1787/78015587232 1 <https://www.oecd.org/daf/inv/investment-policy/WP-2004_4.pdf> accessed 15 July 2016, 4.

42

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2.4 The agreement of parties

Domestic law could become the applicable law of the arbitration if it is so agreed. In the event that the IIA makes it clear the national law of the host State should become the applicable law of the arbitration exclusively or non-exclusively,43 investors are obliged to accept application of national law in arbitration when they bring a claim in light of the arbitration clause in the IIA.44

Another element that allows a potential defence of national law of the host State in international investment arbitration is that many IIAs contain exceptions to the host State‟s obligations, including, inter alia, public measure exceptions,45

intellectual property rights exceptions,46 and general exceptions.47 When an investor relies on the expropriation provision in an IIA to bring a claim, it is bound to acknowledge other provisions of the treaty. Indeed, some IIAs explicitly provide that the provisions of the IIA are applicable rules of international investment arbitration.48

Since these matters agreed by the foreign investor and the host State are endorsed by the IIA, the potential domestic law defence has already been embedded in the applicable international law in expropriation disputes. When an investor raises a domestic law defence on this basis, the hurdle that domestic law cannot justify a violation of an international obligation does not exist anymore.

43

E.g. Article 14(1) of the India-United Arab Emirates BIT, Article 14 of the Colombia-India BIT, and Article 7(6) of the Lebanon-Sweden BIT.

44

See Kjos (n 15) 72.

45

See e.g. Annex B.10 (Expropriation) of the Canada-Senegal BIT; Article 6(2)(c) of the Colombia-India BIT; Article VI(2)(c) of the United Kingdom-Colombia BIT; Paragraph 4(b) of Annex B (Expropriation) of the US-Rwanda BIT; Paragraph 3 (b) of Annex 9-B (Expropriation) TTP <https://ustr.gov/sites/default/files/TPP-Final-Text-Investment.p df > accessed 15 July 2016.

46

See e.g. Article 10(5) of the Canada-Senegal BIT; Article 6(6) of the Switzerland-Egypt BIT; Article 6(5) of the US-Rwanda BIT.

47

See e.g. Article 18 of the Canada-Senegal BIT; Article 13 of the Colombia-India BIT; Article 5 of the Turkey-Gambia BIT; Article 7 of the Israel-Mongolia BIT; Article 13 of the Macedonia-Kazakhstan BIT.

48

E.g. Article 7(6) of the Lebanon-Sweden BIT, Article 9 of the United Arab Emirates-Ukraine BIT, and Article 11(2) of the Spain-Dominican Republic BIT. Where the IIA does not provide for the application of other provisions in the arbitration, they may still be considered as applicable rules. For example, in M.C.I. Power Group L.C. and New

Turbine, Inc. v Republic of Ecuador (M.C.I. v Ecuador), the IIA in dispute did not specify any applicable law, the

tribunal considered the provisions of the IIA apply by reason of the second sentence of Article 42(1) of the ICSID Convention (Award, 31 July 2007, Para 217).

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3. THE DOMESTIC LAW DEFENCE IN EXPROPRIATION

DISPUTES—THE ESTABLISHMENT OF AN EXPROPRIATION

Insofar as the merits are concerned, domestic law may play a role in defending against an expropriation claim in various ways. The domestic law defence could be realized via many forms: domestic law may serve as substantive applicable law, a justification, proof of factual matters, or other roles. This section will focus on the domestic law defence against the establishment of an expropriation. A further discussion as to the influence of domestic law of the host State on justifications for, the lawfulness of and compensation for an expropriation will be provided in Section 4.

In order to demonstrate that an expropriation has occurred, a number of elements must be established. These factors mainly include the existence of an investment, attribution of acts, and detrimental effects of acts of the host State. Moreover, distinction must be made between expropriations and certain legitimate governance measures. The defensive role of domestic law in these matters will be examined one by one.

3.1 The existence of an investment

Expropriation provisions in IIAs are generally directed at the „investment‟.49 It is the

„investment‟ that the host State shall refrain from expropriating. Therefore, in order to claim that an expropriation has occurred, it is first required that there exists an investment as defined in the IIA.

IIAs generally define an „investment‟ in a broad manner, including „every kind of asset‟ such as movable and immovable property, property rights, shares and interests in companies, „claims to money or to a performance having an economic value‟, intellectual property rights, and business concessions.50 What are covered by the definition decides the scope of assets the expropriation of which may be challenged

49

See UNCTAD, Expropriation: A Sequel (United Nations 2012) <http://unctad.org/en/Docs/unctaddiaeia2011d7 _en.pdf> accessed 15 July 2016, 17.

50

See e.g. Article 1(1) of the Egypt-Germany BIT; Article 1(a) of the United Kingdom-Viet Nam BIT; Article 1(a) of the China-Korea BIT; See also August Reinisch, ‘Expropriation’ in Peter T Muchlinski and others (eds), The Oxford

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under the IIA.51 Tribunals typically examine whether the asserted asset constitutes an

investment under the IIA before conducting an analysis of whether an expropriation has taken place.52

A frequently discussed issue concerning the role of domestic law in challenging the existence of an investment relates to the requirement of compliance with the host

State‟s law by foreign investment.53

A number of IIAs require the investment must be made in accordance with the law of the host State.54 Accordingly, an investment made in violation of the national law of the host State may not qualify as an investment in an IIA sense. Further, the requirement has also been acknowledged by arbitral tribunals in the absence of an express reference in the IIA.55 In order for a breach of the requirement to deprive an investment of treaty protection, it has been suggested that the domestic law violated must be „fundamental legal principles of the host country‟ in principle.56 In addition, a critical point in time taken into account by

arbitral tribunals is when the investment was made.57 Failure to meet the „compliance‟

requirement by foreign investment could lead to denial of jurisdiction of the arbitral tribunal or inadmissibility of the investment treaty claim, or could affect the merits including the denial of substantial protection under the IIA.58 Considering it as an

51

See UNCTAD (n 49), 17-18.

52

See e.g. Burlington Resources Inc. v Republic of Ecuador ICSID Case No ARB/08/5 (Burlington v Ecuador), Decision on Liability, 14 December 2012, Paras 257-335; Railroad Development Corporation (RDC) v Republic of

Guatemala ICSID Case No ARB/07/23, Award, 18 May 2010, Paras 81-84; Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v The Argentine Republic ICSID Case No ARB/03/19 (Suez v Argentina),

Decision on Liability, 30 July 2010, Paras 129-130. Since whether there exists an investment concerns jurisdiction of the tribunal, many tribunals deal with the problem in the analysis of issues of jurisdiction.

53

There have been plenty of researches on this matter, see e.g. Stephan W. Schill, ‘Illegal Investments in Investment Treaty Arbitration’ (2012) 11 The Law and Practice of International Courts and Tribunals 281; Ursula Kriebaum, ‘Investment Arbitration-Illegal Investments’ in Christian Klausegger and others (eds), Austrian Yearbook

on International Arbitration 2010 (Manz’sche Verlags- und Universitätsbuchhandlung 2010) 307; Obersteiner (n

29); Andrea Carlevaris, ‘The Conformity of Investments with the Law of the Host State and the Jurisdiction of International Tribunals’ (2008) 9 The Journal of World Investment & Trade 35.

54

See e.g. Article 1(1) of the India-United Arab Emirates BIT, Article 1(1) of the Egypt-Germany BIT, and Article 1(2) and 2(1) of the Spain-Dominican Republic BIT. See also Schill (n 53), 283-287.

55

E.g. the tribunal in Gustav FW Hamester GmbH & Co KG v Republic of Ghana (Gustav v Ghana) observed ‘an investment will not be protected if it has been created in violation of national or international principles of good faith […] It will also not be protected if it is made in violation of the host State’s law. These are general principles that exist independently of specific language to this effect in the Treaty’ (Award, 18 June 2010, Paras 123-124). Similarly, it was held by the tribunal in Teinver v Argentina ‘it is widely acknowledged in investment law that the protection of the ICSID dispute settlement mechanism should not extend to investments made illegally’ (Decision on Jurisdiction, 21 December 2012, Para 317).

56

See Obersteiner (n 29), 276-277.

57

See Obersteiner (n 29), 278-280; Schill (n 53), 307-308.

58

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issue relating to the merits, in Plama v Bulgaria, the tribunal rejected the claimant‟s claims including, inter alia, an expropriation claim because the investment in dispute was made contrary to Bulgarian law and international law by fraudulent misrepresentation.59

In addition to the „compliance‟ requirement, another role played by domestic law regarding the existence of an investment is that the domestic law of the host State decides „whether a particular right in rem exists, the scope of the right, and in whom it

vests‟.60 As put by Newcombe, „when foreign nationals invest in a state, they acquire

rights subject to the existing domestic regulatory framework. International law looks

to domestic law to determine the scope of acquired rights‟.61

In Burlington v Ecuador, the claimant asserted that its rights under the production

sharing contracts (PSCs) had been expropriated by the respondent.62 While not

disputing the existence of those rights, Ecuador disagreed on the content of those rights associated with the „economy‟ of the PSCs.63 The tribunal interpreted the disputed contract rights by taking account of relevant context of the PSCs and

Ecuador's Hydrocarbons Law.64 Similarly, in International Thunderbird Gaming v

Mexico, domestic law was consulted by the tribunal to ascertain whether the investor enjoyed a right in its operating business.65 A major factor leading to denial of the right lies in that the letter rendered by the Mexican authority could not be regarded as an authorization to the investor‟s business since the letter made it clear, inter alia, gambling was illegal under Mexican law and the conclusion that investor‟s machines did not constitute gambling machines was based on the information submitted, which

turned out to be incomplete.66

59

Plama Consortium Limited v Republic of Bulgaria ICSID Case No ARB/03/24, Award, 27 August 2008, Paras 112, 130-140, 325.

60

See Zachary Douglas, The International Law of Investment Claims (CUP 2009) 52-72.

61

Andrew Newcombe, ‘The Boundaries of Regulatory Expropriation in International Law’ (2005) 20 ICSID Review—Foreign Investment Law Journal 1, 28.

62

Burlington v Ecuador (n 52), Para 127.

63

Ibid, Paras 262, 269-274.

64

Ibid, Paras 275-335.

65

International Thunderbird Gaming Corporation v The United Mexican States UNCITRAL/NAFTA, Arbitral Award, 26 January 2006, Paras 146-166.

66

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3.2 Attribution of acts

The rules on the attribution of acts to a State have been set out in the ILC Articles on Responsibility of States for Internationally Wrongful Acts (ILC Articles). However, in deciding whether an entity is a State organ or an entity exercising governmental authority,67 or whether an entity or its conduct is controlled or directed by a State,68 domestic law is an important indicator to be considered. For example, in Gustav v Ghana, the tribunal resorted to Ghanaian law when faced with the question whether Cocobod was an organ of the Ghanaian State or an entity „empowered by the law of the State to exercise elements of the governmental authority‟ and found Cocobod fell within the latter category.69

Another related matter is that only an act of a sovereign nature can give rise to an expropriation. As stated by the tribunal in Saipem v Bangladesh, „it is generally

accepted that an act must be governmental in nature to constitute an expropriation‟.70

To ascertain the nature of an act, domestic law could be a useful reference. In Jan de Nul v Egypt, the Suez Canal Authority was found to have been empowered to exercise two types of governmental authority under Egyptian law.71 However, turning to the question whether the actual acts in dispute are commercial or governmental in nature, the tribunal eventually observed that the refusal to grant an extension of time during the tender by the Authority was not of a sovereign nature since neither of that

governmental authority was used.72

3.3 Detrimental effect of acts of the host State

The actual effect of relevant acts of the host State is undoubtedly a key link in the

67

The ILC Articles, Article 4 & 5.

68

Ibid, Article 6 & 8.

69

Gustav v Ghana (n 55), Paras 183-190.

70

Saipem S.p.A. v The People's Republic of Bangladesh ICSID Case No ARB/05/7 (Saipem v Bangladesh), Award, 30 June 2009, Para 131. See also Impregilo S.p.A v Islamic Republic of Pakistan ICSID Case No ARB/03/3, Decision on Jurisdiction, 22 April 2005, Para 260; Azurix Corp. v The Argentine Republic ICSID Case No ARB/01/12 (Azurix), Award, 14 July 2006, Para 315; Parkerings-Compagniet v Lithuania (n 39), Para 443; Biwater Gauff (Tanzania) Ltd.,

v United Republic of Tanzania ICSID Case No ARB/05/22 (Biwater v Tanzania), Award, 24 July 2008, Para 457. 71

Jan de Nul N.V. and Dredging International N.V. v Arab Republic of Egypt ICSID Case No ARB/04/13, Award, 6 November 2008, Para 166.

72

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chain of expropriation analyses. As pointed out by Newcombe, „no matter how the expropriation is described, international expropriation law looks to the effect of the

government measures on the investor‟s property‟.73 Depending on whether the case is

a direct expropriation or an indirect expropriation, the effects of the host State‟s act involved are different. In direct expropriation, the expropriatory acts usually occur in the form of taking of investors‟ property which results in a transfer of ownership of the property.74 In the event of indirect expropriation, no change in the ownership of the property will be involved. A bunch of tribunals have supported the idea that an indirect expropriation is deemed to have occurred if the economic use and enjoyment of the investment has been effectively neutralized or substantially deprived, as if the rights related thereto ceased to exist.75

The analysis of those effects is often fact-based. Nonetheless, domestic law may come into play where it is a source of the effects, in which determination of its content will become necessary. In Achmea v The Slovak Republic, the claimant asserted the introduction of the Act No. 530/2007 Coll. and the Act No. 594/2007 Coll. amounted to an expropriation of its investment, which restricted the profits of health insurance companies to healthcare uses.76 The tribunal was of the view that such restriction, if maintained, would constitute a severe interference with the enjoyment of the investment and an indirect expropriation.77 Conversely, the host State may find such detrimental effects do not materialize under its domestic law in certain circumstances, which enables it to raise a domestic law defence.

73

Newcombe (n 61), 10.

74

See e.g. S.D. Myers, Inc. v Government of Canada UNCITRAL/NAFTA (SD Myers v Canada), Partial Award, 13 November 2000, Para 280; Técnicas Medioambientales Tecmed SA v The United Mexican States ICSID Case No ARB (AF)/00/2 (Tecmed), Award, 29 May 2003, Para 113; Waste Management, Inc. v United Mexican States ICSID Case No ARB(AF)/00/3, Award, 30 April 2004, Para 143.

75

SeeCMS Gas Transmission Company v The Argentine Republic ICSID Case No ARB/01/8 (CMS v Argentina),

Award, 12 May 2005, Paras 262-263; LG&E Energy Corp., LG&E Capital Corp., LG&E International, Inc. v Argentine

Republic ICSID Case No ARB/02/1(LG&E v Argentina), Decision on Liability, 3 October 2006, Paras 188, 192; Tecmed (n 74), Para 115.

76

Achmea B.V. v The Slovak Republic UNCITRAL, Final Award, 7 December 2012, Paras 96-97, 226-227.

77

However, the tribunal noted the restriction was not permanent because it had already been held

unconstitutional by the Constitutional Court of the Slovak Republic. Therefore, the respondent did not violate the expropriation provision (ibid, Paras 228-293).

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3.4 Distinction between expropriations and certain legitimate governance measures

Certain types of governance measures that inherently could produce negative effects on foreign investment are frequently challenged in international investment arbitration. Among them are sanctions against violation of national law, refusal to issue or termination of a license, taxation, and adjudication. Distinction must be made between legitimate governance measures and expropriatory measures. Arbitral jurisprudence to date has indicated, generally, the adoption of those governance measures with a view to properly implementing or enforcing national law should not be hindered, in virtue of sovereign rights of the host State. However, a measure that goes beyond what national law provides or is based on domestic rules which in themselves are illegal or is otherwise deemed inappropriate, may still constitute an expropriation.

3.4.1 Sanctions against violation of national law

Given investors are obliged to comply with domestic law of the host State, it is the host State‟s inherent right to impose sanctions where there is a violation. As observed by the tribunal in Quiborax v Bolivia, „if the Revocation Decree was the legitimate exercise of [Bolivian] sovereign right to sanction violations of the law in its territory, it would not qualify as a compensable taking‟.78 Likewise, in EDF v Romania, the confiscation sanction, which was found within the legal power of the Financial Guard

to punish ASRO‟s illegal activity, was not considered expropriatory.79

In order to qualify as a legitimate sanction, the tribunal in Quiborax declared three conditions must be fulfilled, which include (a) the sanction was based on actual violation; (b) the disputed measure was included in the sanction; and (c) the sanction was carried out according to due process.80 After concluding these conditions were

not met, the tribunal ultimately held an expropriation had occurred in that case.81

78

Quiborax S.A. and Non Metallic Minerals S.A. v Plurinational State of Bolivia ICSID Case No ARB/06/2 (Quiborax), Award, 16 September 2015, Para 202.

79

EDF (Services) Limited v Romania ICSID Case No ARB/05/13, Award, 8 October 2009, Para 311.

80

Quiborax (n 78), Para 207.

81

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3.4.2 Refusal to issue or termination of a license

While a licence could normally constitute an investment under protection of an IIA,82

conditions to obtain, sustain or renew a licence are often set out by national law. Refusal to issue, renew or revocation of a licence on a genuine ground provided by national law could not be regarded as an expropriation. For example, it was held in Quiborax that cancellation of a license by a State as a result of the failure of the investor to meet the relevant legal requirements or its breach of relevant laws and

regulations could not be considered as a taking.83 Similarly, in M.C.I. v Ecuador, the

tribunal noted the revocation of Seacoast‟s permit by the Ecuadorian authorities did not violate domestic law or the BIT as the decision was made on a genuine basis

prescribed by Ecuadorean law.84

By contrast, in Metalclad v Mexico, the denial of a construction permit by the Canadian authorities was, however, deemed improper because it had based on irrelevant reasons not provided by national law, which, together with other factors, contributed to the finding of an expropriation.85

3.4.3 Taxation

It is not disputed that the host State has the right to levy taxes on foreign investment. It is observed in Burlington v Ecuador that „States may tax not only their own nationals but also aliens, including foreign investors, if they effectuate investments in those States. A tax is by definition an appropriation of assets by the State. It is also by

definition non-compensable‟.86

82

Some IIAs explicitly define the investment to comprise ‘licence(s)’ or ‘permit(s)’, e.g. Article 1(1) of the Italy-Qatar BIT and the Czech-Cyprus BIT, Article 1(2) of the Austria-Nigeria BIT. Some IIAs, e.g. Article 1(1) of the Albania-Azerbaijan BIT, adopt broad expressions like ‘the rights to undertake economic and commercial activities’ allowing for embracing licences.

83

Quiborax (n 78), Para 206.

84

M.C.I. v Ecuador (n 48), Paras 297-305, 373.

85

Metalclad Corporation v The United Mexican States ICSID Case No ARB(AF)/97/1 (Metalclad), Award, 30 August 2000, Paras 86-93, 108.

86

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While a number of IIAs lay down specific requirements for the application of

expropriation provisions to tax measures,87 it cannot be presumed that a tax measure

in itself precludes the application of expropriation provisions. A criterion to distinguish between a legitimate tax measure and an expropriatory tax measure, according to the tribunal in Quasar de Valores v Russia, is whether „the ostensible collection of taxes is determined to be part of a set of measures designed to effect a dispossession outside the normative constraints and practices of the taxing authorities‟.88 This position appears to be shared in Hulley v Russia, where the tribunal subscribed to the claimant‟s argument that the taxes and fines imposed by the tax authority could not be bona fide tax measures because the authority had not correctly applied existing Russia law but instead used a novel and arbitrary tax

theory.89 Likewise, relevant national tax legislation may be invoked by the host State

to show the „normative constraints‟ have not been broken.

3.4.4 Adjudication

A ruling against a foreign investor by a national court could have negative impact on its investment. However, as pointed out by the tribunal in Saipem v Bangladesh, detrimental effects alone are insufficient to establish an expropriation, otherwise any national court‟s decision involving disposal of the investor‟s benefits, even one built

on legitimate grounds, could lead to an expropriation claim.90

To examine whether a national court decision could give rise to an expropriation, arbitral tribunals tend to make use of „international law standards of review‟. For example, in Robert Azinian v Mexico, the tribunal endorsed the criteria put forward by

87

For example, Article 14 of the Canada-Senegal BIT provides that an expropriation claim may not be made by an investor unless a notice of claim is provided to the taxation authorities and the taxation authorities fail to make a decision within six months after receiving the notice. Article 13(1) of the Colombia-India BIT is straight forward by declaring ‘nothing in *the BIT+ shall apply to tax matters’.

88

Quasar de Valores SICAV S.A. and others v The Russian Federation SCC, Award, 20 July 2012, Para 48.

89

Hulley Enterprises Limited (Cyprus) v The Russian Federation UNCITRAL (Hulley), Final Award, 18 July 2014, Para 627. Note that on 20 April 2016, the Hague District Court made a judgment setting aside the award on the ground of incorrect declaration of competence by the tribunal. The claimant has declared its intent to appeal from the judgment.

90

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a former ICJ president, namely incompatibility with international law, denial of

justice and violation of national law,91 whereas the tribunal in Saipem v Bangladesh

resorted to general principles of international law such as prohibition of abuse of

rights as well as international treaties,92 and in Swisslion Doo Skopje v Macedonia it

is incompatibility with the IIA that was looked into.93 Among the diverse standards of

review, apparently national law may be invoked to demonstrate compliance with certain standards, for example compatibility with national law or prohibition of abuse of rights.94

4. THE DOMESTIC LAW DEFENCE IN EXPROPRIATION

DISPUTES—JUSTIFICATIONS FOR, THE LAWFULNESS OF AND COMPENSATION FOR AN EXPROPRIATION

Even if all the relevant constituent elements of an expropriation set out above are identified, there are still grounds that the host State may rely on to avoid triggering liability associated with an expropriation. Two frequently invoked justifications comprise the so-called „police power doctrine‟ as well as necessity and emergency. As will be shown below, both justifications are inseparable from domestic law of the host State. Moreover, national law also plays a part in the determination of the lawfulness of an expropriation and the compensation.

4.1 Justifications for an expropriation 4.1.1 ‘Police power doctrine’

The „police power doctrine‟ recognizes the power of a State to pursue public interests

91

Robert Azinian and others v The United Mexican States ICSID Case No ARB (AF)/97/2, Award, 1 November 1999, Paras 98-105.

92

Saipem v Bangladesh (n 70), Paras 145-170.

93

Swisslion Doo Skopje v The Former Yugoslav Republic of Macedonia ICSID Case No ARB/09/16, Award, 6 July 2012, Paras 314-320.

94

It was held in Saipem v Bangladesh that ‘a State exercising a right for a purpose that is different from that for which that right was created commits an abuse of rights’ (Para 160). The tribunal found abuse of rights because the courts used ungrounded reasons and violated due process (Paras 155-159).

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by restricting private property or rights without compensation.95 While there are IIAs

laying down that power,96 most IIAs are silent in this regard. Nevertheless, the doctrine has been recognized by many arbitral tribunals as applicable.97 In terms of law-making activities by the host State, it was held in Methanex v United States of America that „under general international law, a non-discriminatory regulation which is enacted for a public purpose in accordance with due process and, which affects, inter alias, a foreign investor or investment is not deemed expropriatory and

compensable […]‟98

Thus the doctrine gives strong support to the host State‟s right to adopt national legislation in the public interest, such as environmental, health and safety regulations.

The doctrine has been successfully used in, inter alia, Methanex,99 Suez v

Argentina100 and Saluka v The Czech Republic101 to justify the national regulations concerned. But some other cases witnessed the failure to comply with pertinent requirements of the doctrine. For example, in Quiborax, the Revocation Decree could not be deemed a legitimate exercise of police power because it violated minimum

standards of due process.102 In Tecmed, the Mexican authority‟s resolution was found

disproportionate.103

However, what needs to be established in order for a national regulation to be justified by the doctrine is still an issue remaining unsettled. While Methanex identified a number of preconditions such as public purpose, due process, proportionality, non-discrimination, and consistency with previous specific commitments,104 the tribunal in Saluka opined that international law had not clearly

95

See Benedict Kingsbury and Stephan W. Schill, ‘Public Law Concepts to Balance Investors’ Rights with State Regulatory Actions in the Public Interest—the Concept of Proportionality’ in Stephan W. Schill (ed), International

Investment Law and Comparative Public Law (OUP 2010) 91. 96

E.g. Article 6(2)(c) of the United Kingdom-Colombia BIT; Annex B.10 (Expropriation) of the Canada-Senegal BIT; and Paragraph 4(b) of Annex B (Expropriation) of the US-Rwanda BIT.

97

E.g. Tecmed (n 74), Para 119; Burlington v Ecuador (n 52), Para 506; and Quiborax (n 78), Para 200.

98

Methanex Corporation v United States of America UNCITRAL/NAFTA (Methanex), Final Award of the Tribunal on Jurisdiction and Merits, 3 August 2005, Part IV, Chapter D, Para 7.

99

Methanex (n 98), Part IV, Chapter D, Para 15.

100

Suez v Argentina (n 52), Para 140.

101

Saluka Investments BV (The Netherlands) v The Czech Republic UNCITRAL (Saluka), Partial Award, 17 Mar 2006, Paras 265-276. 102 Quiborax (n 78), Paras 200-227. 103 Tecmed (n 74), Paras 149-151. 104 Ibid.

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identified what regulations should be permitted under the doctrine.105 Moreover, as will be discussed in Section 5, the doctrine has left some other important questions unanswered, which creates difficulties for domestic law to serve as a justification in expropriation disputes.

4.1.2 Necessity and emergency

Two groups of provisions are mostly used in IIAs to deal with necessity and/or emergency. One group stresses the host State‟s obligation to compensate investors for losses suffered in emergency, for instance Article 5(1) of the United Arab Emirates-Ukraine BIT, and Article 5 of the Serbia-Morocco BIT. The other group lays down necessity and/or emergency as a circumstance where the host State may derogate from obligations of the treaty. For example, Article 11 of the US-Argentina BIT clarifies the treaty does not preclude the host State‟s right to take measures necessary to protect, inter alia, public order or essential security. Article 13 of the India-Lithuania BIT provides „nothing in [the BIT] precludes the host Contracting Party from taking action […] in circumstances of extreme emergency in accordance with its laws […]‟

Moreover, under Article 25 of the ILC Articles, which codifies customary international law, necessity precludes wrongfulness of a state‟s acts, provided the conditions set forth therein are fulfilled. With regards the consequence of invoking necessity, pursuant to Article 27 of the ILC Articles, the question of compensation shall not be prejudiced.

So questions arise as to the relationship between treaty provisions and rules of customary law enshrined in the ILC Articles. It goes without saying that the rules of the ILC Articles are applicable in the absence of arrangement in the IIA. However, in the presence of relevant treaty provision, which may differ from the rules contained in the ILC Articles, it is less clear which rules shall be given priority. In light of the

105

Saluka (n 101), Para 263. See also Marvin Feldman v Mexico ICSID Case No ARB (AF)/99/1, Award, 16 December 2002, Para 100.

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Although the comprehensive approach lays the guidelines for interaction between military and civilian actors, the amount of civilian actors currently participating in

In conventional query-based sampling, remote servers are sampled by sending random terms as queries, retrieving the results and using these to build a resource description..

In hoofdstuk 8 hebben we deze bevindingen nog eens bevestigd bij een geselecteerde groep patiënten met baarmoedertumoren met klassieke kenmerken voor een hoog risico op

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