!
Master’s Thesis
Keeping up with the Shifting Tides: Rethinking the Human Rights
Responsibility of the Investor within the current International
Investment Regime
The Author: K. Can Alkan
Student Number: 12328081
Table of Contents
Introduction
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I. Background of Transnational Corporate Responsibility under IIL:
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II. New Generation Bilateral Investment Treaties
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II.1. Preambles 11
II.2. Substantive Provisions on the Responsibility of the Investor
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II.2.a. General Obligations on Human Rights 13
II.2.b. Regulatory Margin of the Host State
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II.2.c.Pre-establishment Obligations of Investors 15
III. Indirect Remedies Against Human Rights Violation Committed by the
Investor
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III.1. The Legality of the Investment 18
III.2. Bear Creek Mining Corp. v. Republic of Peru Decision 20
IV. Counterclaim 23
IV.1. Consent
24
IV.2. Connexity Requirement 26
IV.3. Urbaser Decision 28
IV.3.a. Merits of the Dispute: 30
IV.3.b. Subjectivity of Corporations 33
IV.3.c. Integration of the external sources pertinent to human rights: 35
V. Conclusions
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Introduction
Business operations with a transnational character hold a critical place in bringing foreign direct investment (FDI) through long-term, financial involvement with a wide range of economic sectors within the capital-importing states. Hence, safeguarding and advancing the rights of the vestors as well as the state of their lucrative operations have long been the primary focus of the in-ternational investment regime, which is reflected in a large number of Inin-ternational Investment Agreements (IIAs). Most of the conventional IIAs have been drafted and ratified in an effort to en1
-sure economic advancement both for the investor and the host state, largely confining the content of such documents to issues pertinent to economic objectives. The mere purpose of the protective standards laid down by the conventional IIAs is to hold liable states for breaches of investors’ eco-nomic interests.
This fundamental characteristic of the investment regime is reflected in the procedural and substantial asymmetry governing the field of IIL, which allows the investor and not the state to commence arbitral proceedings. With regard to substantial asymmetry, IIAs were designed to confer rights upon the investor but not limited to privileges such as Fair and Equitable Treatment (FET) and Most Favoured Nation (MFN) while awarding no such protections to the state actors. The op2
-erations carried out by such corporations and transnational entities, however, have gradually started damaging the socio-economic and cultural well-being of the individuals, groups and protected communities that reside within such host states, ultimately creating a massive and irrevocable im-pact on matters related to sustainable development, severe human rights abuses and the destruction of the environment. The adverse effects formed by such entities are currently being addressed in a 3
number of new generation IIAs, an evolving body of arbitral case law as well as highly significant
ARCURI, A., ‘The Great Asymmetry and the Rule of Law in International Investment Arbitration’, Yearbook on In
1
-ternational Investment Law and Policy, April 2018, pp. 68.; LEVASHOVA, Y., ‘The Accountability and Corporate So-cial Responsibility of Multinational Corporations for Transgressions in Host States through International Investment Law’, Utrecht Law Review, 14(2), June 2018, pp. 40–55.
FRANCK, S.D., ‘The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law
2
Through Inconsistent Decisions’,73 Fordham Law Review, 2005, pp. 1521, 1584.
See Chevron Corporation and Texaco Petroleum Corporation v. The Republic of Ecuador. It is significant to note here
3
that this particular case has been adjudicated before Courts and arbitral tribunals for over two decades. See also PCA Case No. 2009-23, Chevron Corporation and Texaco Petroleum Corporation v. The Republic of Ecuador, UNCITRAL (2003). The Chevron case has a strong environmental component where the mechanisms have addressed the pollution caused by the corporation that is going back to the 1970s. The severity of the pollution caused by Chevron as well as other domestic oil companies has resulted in an environmental catastrophe, causing irreparable harm to the natural re-sources and the socio-economic well-being of the individuals and groups residing within the host state. See de la TORRE, B.G., ‘Chevron-Texaco v. Ecuador: The Environmental Claim within a Claim of Denial of Justice’, in LEV-ASHOVA,Y. (eds.), Bridging the Gap between International Investment Law and the Environment, 2015, pp. 440-62.
international instruments such as the ‘zero draft’ of an international binding Convention on Transna-tional Companies and other business enterprises and human rights due to undeterred human rights advocacy. The recent attempt to hold investor responsible for their exploitive and abusive conduct 4
have inspired the focal point of this dissertation. Hence, this study aims to inquire whether these developments signal a structural change within the existing regime of international investment law (IIL) that is making strides in responsibility and accountability of the investors for severe abuses of human rights.
A comprehensive examination of new generation IIAs, the normative reach and the current prominence of human rights obligations and illustrative case law is expected to demonstrate that various forms of abusive conduct carried out by the investor that damage international recognised fundamental rights could fall under the scope of IIL. This research aims to demonstrate the necessi-ty for the establishment of an investment regime that is concerned with acknowledging the respon-sibility of the investor for their active involvement in certain policies systematically attacking the socio-economic and cultural wellbeing of individuals and groups as well as the need for a suprana-tional system of binding, universal benchmarks.
It is significant to note here that this dissertation does not make any claims with regard to the supremacy of the IIL regime in tackling the adverse effects of the investor’s conduct on human rights and or preservation of the environment. This study recognised that such misconduct can well be addressed both by international and regional human rights instruments as well as the domestic mechanisms within the host state. This study, however, finds great merit in exploring the outer limit of the IIL regime pertinent to the protection and promotion of human rights and sustainable devel-opment objectives. Hence, it is essential to inquire whether the investor could be held responsible in a self-contained and asymmetric investment regime. 5
In the context of investor’s accountability, it is also worth to mentioning that there are ample soft law instruments regarding Corporate Social Responsibility of transnational corporations that a re non-binding in their nature. These non-binding sources could be effective on building a strong 6
UNHRC, ‘Resolution 26/9 Elaboration of an Internationally legally binding instrument on Transnational corporations
4
and other business enterprises with respect to human rights, 26 June 2014, UN Doc A/HRC/RES26/9, para 1; UN-HCHR, OEIGWG, ‘Element for the draft Legally binding Instrument on Transnational Corporations and Other Bussi-ness Enterprises with respect to Human Rights, 29 September 2017.
SIMMA B., PULKOWSKI D., ‘Of Planets and the Universe: Self-contained Regimes in International Law, The Eu
5
-ropean Journal of International Law. Vol. 17 no.3, 2006, p 494-499.
see generally VINUALES, J. Â., ‘Investor Diligence in Investment Arbitration: Sources and Argumentsâ’, 32 ICSID
6
compliance culture on some human rights the investor deems worthy or comfortable putting an ef-fort in. The broad discretion given to the TNCs on has been criticized by human rights scholars. 7
These instruments include the Global Compact, the International Labor Organization (ILO) Tripar-tite Declaration of Principles concerning Multinational Enterprises and Social Policy (TDP), the OECD Guidelines for Multinational Enterprises, and most recently the UN Guiding Principles on Business and Human Rights (UNGP). Given that these sources are non-binding regulations and 8
mostly confined to the domestic law of the host state, such documents will be deliberately excluded from the scope of this thesis.
The existing regime has already deprived the investor of long-standing privileges awarded to the foreign investor such as protective standards of FET and protection against unlawful expro-priation based on investors’ conduct that has severely damaged the human rights of the individuals and communities residing in the territorial state. The international community has also witnessed other methods, which are the denial of jurisdiction or finding the claim brought by the investor in-admissible before the arbitral tribunal when the investor has been found non-compliant with the domestic law of the host state (including domestic regulations pertinent to the protection of human rights) during the establishment of the investment. Deprivation of the protection granted by BITs or reduction of the compensation due to contributory fault of the investor will be referred to as ‘indi-rect remedy’ for human rights violations resulted by the operations of the investor. 9
More importantly, direct remedy will be referred to as a counterclaim initiated by the re-spondent state vis-a-vis the preservation of human rights standards or protection of the environ-ment. Although counterclaims with a human rights dimension brought by respondent states have not succeeded to this date, the recent jurisprudential interpretation - particularly on jurisdiction and ap-plicable law- has paved the way for subsequent tribunals to establish the liability of the investor. For the purposes of this thesis, the author will examine the practical value of such methods in detail.
This research will employ doctrinal legal research methodologies in an effort to claim that foreign investor might be held liable for their abusive conduct in IIL through the counterclaims brought by the respondent state as well as deprivation of substantive or procedural rights granted to
ALSTON, P. & GOODMAN, R., International Human Rights, Oxford, Oxford University Press, 2016, p. 1476.
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UN Human Rights Council, ‘Report of the Special Representative of the Secretary-General on the Issue of Human
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Rights and Transnational Corporations and other Business Enterprises, John Ruggie, Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect, and Remedy’ ‘Framework’ UN Doc A/HRC/ 17/31 21 March 2011.
ZARRA, G., ˜International Investment Treaties as a Source of Human Rights Obligations for Investors’ in BUSCEMI,
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the investor . To that end, the thesis will first conduct a systematic analysis of a selected group new generation BITs inter alia Morocco- Nigeria BIT, ECOWAS, CETA Agreement, Norwegian Model BIT in order to assess the normative reach of the relevant articles pertinent to human rights. Second, the relevant arbitral jurisprudence will be analyzed within the context of investor’s responsibility. In investment arbitration, precedents do not have a binding effect. However, the reasoning of the tri-bunals do have salience for the subsequent cases before arbitral tritri-bunals. International human 10
rights considerations have been invoked as a defence by states in investment arbitration which gave rise either to the dismissal of the claim at the jurisdictional and admissibility phases or as reduction of the compensation at the merits phase. It is safe to assume that such decisions made by the tri-bunals in question had already been perceived as a form of liability of investors for their conduct that is damaging to human rights. Therefore, a detailed examination of the relevant case law 11
where tribunals have adopted methods such as the dismissal of the claim of the investor or a modi-fied compensation due to the investor’s abusive conduct, is essential to demonstrate the significance of the principal arguments brought by this research. Furthermore, the thesis will examine the coun-terclaim mechanism in detail prescribed both by illustrative BITs and the ICSID Convention.
The study also will rely on the field reports of reputable non-governmental organizations (NGOs) as well as the the reports and communications issued by international organisations will be utilized mainly to conduct a qualitative analysis of the dire circumstances arising from the operative misconduct carried out by the foreign investor. The thesis will then examine the reports, resolutions and policy documents issued by the UN Economic and Social Council, the HRC, the governing body of the International Labor Organization (ILO) and the Office of the High Commissioner for
Human Rights (OHCHR) in an effort to demonstrate the areas of convergence between corporate
accountability for international human rights law abuses and the prospect of holding such actors liable within the confines of international investment law.
This research assumes a legal perspective while examining the possibility of holding the foreign investor responsible for their conduct that is damaging to the human rights standards aris-ing from international law as well as domestic law of the host state. To this end, the relevant legal framework and arbitral practice will be analyzed using a descriptive and interpretive approach in an
ZARRA, G., ‘Orderliness and Coherence in International Investment Law and Arbitration: An analysis through the
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lens of state as necessity’, 34 Journal of International Arbitration, 2017, p. 669.
LEVASHOVA, Y., ‘The Accountability and Corporate Social Responsibility of Multinational Corporations for Trans
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effort to explore the outer limits regarding the inclusion of human rights obligations within the IIL regime.
It is crucial to reiterate here that the author of this dissertation does not claim that any con-duct, which may damage the socio-economic and cultural well-being of the individuals and groups within the territory of the host state, amounts to a violation that may give sufficient grounds to hold the investor responsible within the IIL regime -nor does such damaging operational behaviour car-ried out by the investor directly gives rise to the accountability of the investor. The research, does not claim that simply any conduct that is not compliant with the human rights norms and standards must directly fall under the scope of IIL or the methods developed by the IIL regime are the most feasible avenues for tackling human rights concerns. Nevertheless, the thesis finds great merit in employing an interpretative approach to the existing IIL framework as well as to the international human rights obligations arising from the International Covenant on Economic, Social and Cultural rights (ICESCR); Universal Declaration of Human Rights (UDHR); International Convention on Civil (ICCPR) and Political Rights to fully comprehend the extent of the investor’s responsibility within the existing scope of IIL and point to certain areas that may have been overlooked due to the inherently asymmetrical nature of the investment regime. The study values such systematic exami-nations also as a gateway to the future discussions regarding de lege feranda recommendations for this relatively young discipline by identifying the outer limits of its evolving scope.
In Chapter I, background and development of the investor’s responsibility will be ad-dressed in light of the asymmetric structure of the traditional BITs. A comprehensive examination of the relatively progressive, new generation BITs will form the essence of Chapter II. Such an exam-ination is comprised of the preambles, general obligations pertinent to human rights, pre-establish-ment obligations imposed on the investors and the exception clauses laid down in such BITs. In
Chapter III, indirect remedies for the human rights violations of the investor based on the arbitral
jurisprudence will be explained. As mentioned earlier, such remedies are based on the exclusion of the investment from the protection of the BIT or the reduction of compensation due to the contribu-tory fault of the investor. In Chapter IV, the counterclaim mechanism, which is utilised by state actors to bring the investor’s conduct that is damaging to the fundamental rights of the individuals and groups residing in the host state into the scope of the international investment law, will be ex-amined both through the repercussions on the jurisdictional and merits aspects of the arbitral pro-ceedings. Specifically, issues pertaining to the jurisdiction and admissibility of a counterclaim will be examined in light of the approach taken by the precedents set by the tribunals. Furthermore, two
other crucial issues will be addressed. The first is the issue of corporate subjectivity to the extent of its relevance to the human rights liability for the investor and the second is the prospects of a direct horizontal effect of human rights treaties upon investors. The thesis will conclude by reflecting on the main findings discussed within the previous chapters and point to areas for further research.
I. Background of Transnational Corporate Responsibility under IIL:
‘Foreign Direct Investment (FDI) is a category of cross-border investment in which an in-vestor resident in one economy establishes a lasting interest and ‘a significant degree of influence over an enterprise resident in another economy.’ Transnational Corporations, which are the main 12
actors of Foreign Direct Investment, bring their investments to capital importing states (host state) and operate as ‘investors’ in that territory. In this context, the traditional objective of International Investment Law has long been regarded as the promotion and protection of the investor’s interests. Particularly, Foreign Direct Investment (FDI) plays a crucial role in the economic development of capital importing states in the global south. 13
More than 3,000 Bilateral Investment Treaties constitute the main framework of In-ternational Investment Law. Traditionally, these documents are formulated in an asymmetric struc14
-ture in which protective standards and procedural rights are granted to the foreign investor against the host state. With regard to the procedural aspect, the investor is the sole actor capable of initiat-ing legal proceedinitiat-ings against the host state before the tribunal when a potential breach occurs. State actors, on the other hand, are not granted such a cause of action against the investor but a mere right to bring counterclaims. Regarding the protective standards, states are obliged to treat foreign in-vestors in accordance with certain protective standards including Fair and Equitable Treatment and Most Favored Nations Clause. BITs safeguard the economic interests of the investor against a num-ber of potential wrongdoings that may be committed by the host state including but not limited un-lawful expropriation. Therefore, the traditional framework that governs the IIA regime is largely 15
designed to uphold the rights and protections the investor enjoys in accordance with the guarantees arising from investment agreements while imposing virtually no obligation on the investor.
OECD Benchmark Definition of Foreign Direct Investment, 4th Edition, 2008, see. https://www.oecd-ilibrary.org/
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finance-and-investment/foreign-direct-investment-fdi/indicator-group/english_9a523b18-en
ALFARO, L. & CHANDA, A. & KALEMLIOZCAN, S. & SAYEK, S., ‘How Does Foreign Direct Investment Pro
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-mote Economic Growth’, Exploring the Effects of Financial Markets on Linkages, HBC Working Paper Number: 07/13, September 2006.
UNCTAD, ‘World Investment Report 2017’, p. xii. According to the report 3324 IIAs were concluded in 2017.
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KRYVOI, Y., ‘Counterclaims in Investor-State Arbitration’, LSE Law, Society and Economy Working Papers 8, Au
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Against this backdrop, accountability of the investor and regulatory power of states to pur-sue public policies under investment regime has been a concern of states, international tribunals, human rights monitoring bodies and legal scholars in the last decades. Several important devel16
-opments in the IIL regime clearly prove the existence of such a concern. The first is the emergence of the provisions and preambles obliging all actors to respect human rights and promote sustainable development objectives. Although early examples of BITs contain ‘compliance with host states’ domestic law’ clause, a broader set of obligations for the investor have been included in IIA’s, par-ticularly the ones drafted in the recent years. Parpar-ticularly sustainability concerns have heavily af-fected the policymakers and ‘is at the core of modern treaty making.’ The second development is 17
the increasing number of counterclaims by respondent states in ISDS, demanding the responsibility of claimant investor under domestic or international law. The third development could be consid18
-ered as actions taken by international organisations. As stated by the Special Representative of Sec-retary General (SRSG) on the issue of human rights and Transnational Corporations, John Ruggie, in his speech before the United Nations Human Rights Council in 2009 :
‘Recent experience suggests that some (investment) treaty guarantees and contract provi-sions may unduly constrain the host Government’s ability to achieve its legitimate policy objectives, including its international human rights obligations. That is because under threat of binding in-ternational arbitration, a foreign investor may be able to insulate its business venture from new laws and regulations, or seek compensation from the Government for the cost of compliance.’ 19
Due to the above-mentioned concerns, the open-ended intergovernmental working group on transnational corporations and other business enterprises with respect to human rights (IGWG) has a mandate ‘to elaborate an internationally binding instrument’ as stated by the Resolution 26/9 is-sued by the UN Human Rights Council in 2014. The totality of these considerations indicates a strong tendency to alter the perception of the place of human rights in traditional IIL, arising from the efforts of pressure groups, states and judicial members with regard to the responsibility of cor-porations due to their immense power in the global economy as well as their significant impact on human rights. On the other hand, it is essential to reaffirm that under the domestic law of the states,
UNCTAD, ‘World Investment Report 2017’, p. 119. According to the report, the majority of the new generation BITs
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contain sustainable development oriented characteristics including the State’s right to regulate and the protection of the environment.
UNCTAD, ‘World Investment Report 2019’, p. 99.
17
Urbaser v. Argentina, ICSID Case No. ARB/0726 Award, 2016, paras. 1199-1210, Dec. 8, 2016. (Urbaser v. Argenti
18
-na)
Report of SRSG, Business and Human Rights: Towards Operationalizing the ‘Protect, Respect and Remedy’ Frame
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international treaties, states or affected victims could invoke the state’s responsibility to protect and ‘gain compliance or compensation upon the showing of a human right breach through quasi-judicial or judicial process.’ In this regard, states have been perceived as the sole bearer of human rights 20
obligations. Such a traditional approach has also been reaffirmed by the General Comment No.24 pertinent to the obligations of states within the context of human rights in August 2017. Yet, a 21
large body of case law indicates that the abusive and damaging conduct of the investor could fall under the current and ever-growing scope of IIL.
II. New Generation Bilateral Investment Treaties
A number of new generation BITs address the conduct of the investor regarding human rights. Although there are a range of applicable sources other than the BITs under treaty-based in22
-vestor-state arbitration namely domestic law of host state or the investment contract, the
in-ternational community has repeatedly expressed the need to impose certain obligations directed at the investor under Investment Agreements. This particularly comes from the ‘accountability gaps 23
that result from weak and dysfunctional national legal and judicial systems’. In other words, ‘the 24
problem is that many states do not have adequate human rights protections in place. In other cases, states are unwilling or unable to enforce existing laws.’ In this chapter, an attempt will be made to 25
analyse a theoretical framework for the duties of the investor under the new generation of progres-sive BITs.
Since the International Investment regime is perceived as a ‘spaghetti bowl’ and investors are not contracting parties to Bilateral Investment Treaties, it is complex on several levels to enu-merate an exhaustive list of the investor’s duties under the current regime. However, it is safe to ac-knowledge the new trend among states to negotiate and ratify treaties with a more balanced
SPEARS, S.A., ‘The Quest for Policy Space in a New Generation of International Investment Agreements’, Journal
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of International Economic Law Volume 13, Issue 4, December 2010, p. 1037-1075.
UN Human Rights Committee (HRC), General comment no. 31, CCPR/C/21/Rev.1/Add.13 The nature of the general
21
legal obligation imposed on States Parties to the Covenant, 26 May 2004.
According to The UNCTAD’s IIA Project, 28 out of 1,958 include Corporate Social Respoonsibility (CSR) Provi
22
-sions. <http://investmentpolicyhub.unctad.org/IIA/mappedContent#iiaInnerMenu>
UNHCHR, OEIGWG, ‘Element for the draft Legally binding Instrument on Transnational Corporations and Other
23
Bussiness Enterprises with respect to Human Rights, 2017.
Proposals for Elements of a Legally Binding Instrument on Transnational Corporations and Other Business Enterpris
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-es, The International Commission of Jurists (ICJ), October 2016,
p. 6. Available at: http://www.icj.org/wp-content/uploads/2016/10/Universal-OEWG-session-2-ICJ-submission-Advo-cacy-Analysis-brief-2016-ENG.pdf.
AGUIRRE, D., Regulating Investor Responsibility, not just Rights., Business & Human Rights Resource Centre, 2016
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proach on the legitimate interests of investors and public interests such as the protection of human rights and environmental preservation. Both preambles and substantive provisions of these treaties 26
deal with issues pertinent to the promotion of human rights, establishment of corporate social re-sponsibility and recognition of the regulatory margin of the host state in an effort to pursue public policy objectives. The latest generation investment treaties ratified by the African States are the most remarkable examples of the present trend.
II.1. Preambles
A considerable amount of new generation IIAs introduce a number of goals vis-a-vis the protection of human rights and sustainable development in their preamble. Traditionally, pream27
-bles recognise the main objectives to be achieved by International Investment Agreements. In the earlier IIAs, economic objectives were promoted in contrast to the new generation preambles that generally foresee objectives pertinent to sustainable development. From the perspective of the UN, sustainable development contains 17 goals including, ‘clean water and sanitation, sustainable cities and communities, affordable and clean energy, life on land’. The promotion and protection of ‘in28
-vestment opportunities that enhance sustainable development’ have been determined as the primary aim of the Morocco -Nigeria BIT. Preamble of the Norwegian Model BIT sustainable develop29
-ment has been referred to by the following:
‘Desiring to strengthen their economic and investment relations in accordance with the ob-jective of sustainable development in its economic, social and environmental dimensions, and to promote investment in a manner aiming at high levels of environmental, health, safety and labour protection in accordance with relevant internationally recognized standards and agreements in these fields to which they are parties;’ 30
GAZZINI, T., Nigeria and Morocco Move Towards a ‘New Generation’ of Bilateral Investment Treaties, European
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Journal of International Law, May 2017, Available at: https://www.ejiltalk.org/nigeria-and-morocco-move-towards-a-new-generation-of-bilateral-investment-treaties/
According he UNICTAD’s IIA Project, 223 out of 1,959 include Social Aspect of Investment (e.g. CSR, Human
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Rights, health etc. UNCTAD, ‘IIA Mapping Project 2016’ Provisions. Available at: <http://investmentpolicyhub.unc-tad.org/IIA/mappedContent#iiaInnerMenu>
United Nations General Assembly, Preamble of the Resolution adopted by the General Assembly on 25 September
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2015, ‘Transforming our world: the 2030 Agenda for Sustainable Development’, A/RES/70/1.
Reciprocal Investment Promotion and Protection Agreement between the Government of the Kingdom of Morocco
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and the Government of the Federal Republic of Nigeria, ‘Morocco–Nigeria BIT’ adopted on 3 December 2016. Avail-able at: http://investmentpolicyhub.unctad.org/IIA/treaty/3711.
Draft Agreement between the Kingdom of Norway and . . . for the Promotion and Protection of Investments, May
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2015, https://www.regjeringen.no/contentassets/e47326b61f424d4c9c3d470896492623/draft-model-agreement-eng-lish.pdf.
Morocco-Nigeria BIT, one of the most progressive and ambitious investment treaties, has a relatively more inclusive wording, refraining from limiting the scope to a narrow subset of human rights. Although a more inclusive list of human rights obligations in such documents could lead to 31
different interpretations. The primary goal, in essence, is to increase the contribution of all actors including states and corporations to the protection of human rights and relevant sustainable devel-opment objectives. In this regard, the lack of specificity does not prejudice the ‘interpretative value of preamble.’ On the contrary, a more inclusive wording broadens the scope of applicable human 32
rights standards in a particular case.
It is also worth mentioning that preambles have no binding effect upon parties, in contrast to the substantial provisions. Tribunals, however, consider preambles within the context of treaty in-terpretation. Article 31 of the Vienna Convention on the Law of Treaties (VCLT) require adjudica-tors to interpret the treaty ‘in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose’ Given that preambles are 33
included in the context of treaty interpretation as a whole under the same article of VCLT, invest-ment Tribunals resorted to preambles also on substantive legal issues. For instance, in Occidental v.
Ecuador, the tribunal found the ‘stability of legal and business framework is an essential element of
fair and equitable treatment’ in the absence of any definition of fair and equitable treatment under the applicable treaty. 34
Therefore, it should be clear that the recognition of human rights in the new generation BIT preambles will compel investment tribunals to consider human right standards in the interpretation of the investment protection standards when the countervailing considerations are in stake. Apart from that, such a wording in a preamble could affect the assessment of the connexity requirement between the counterclaim and the ancillary claim which will be examined in the next chapters.
II.2. Substantive Provisions on the Responsibility of the Investor
A number of new generation BITs lay down a more balanced approach towards recalibration of the rights and obligations of states and the investor. In this regard, they deal with the investor’s
Preamble of Morocco Nigeria BIT.
31
ZUGLIANI, N., ‘Human Rights in International Investment Law: The 2016 Morocco–Nigeria Bilateral Investment
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Treaty”, 68 International and Comparative Law Quarterly, May 2019, p. 761.
International Council on Human Rights Policy: Beyond Voluntarism Human Rights and the Developing International
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Obligations on Companies, 2002 p. 3. Available at: http://www.ichrp.org/files/reports/7/107_report_en.pdf
Occidental Exploration and Production Company v. The Republic of Ecuador, LCIA Case No: UN 3467, Final
34
responsibility, sustainable development and recognition of regulatory powers of state to pursue pub-lic popub-licies. From a broad perspective, substantive provisions could impose an obligation on corpo-rations directly or indirectly. Indirect obligation refers to obligations imposed ‘on states to ensure that private actors such as companies respect human rights and that failures to do so result in legal consequences.’ In that case, international law does not have the direct horizontal effect upon the 35
non-state actor. On the other hand, direct obligation refers to the possibility a direct horizontal effect of human right treaties imposed upon corporations. 36
II.2.a. General Obligations on Human Rights
Sustainability has been stressed in substantive provisions of the Nigeria-Morocco Treaty as well as under its preamble. In addition to the ‘accordance with the law of the host state’ clause un-der the definition of investment, the treaty requires all investments to ‘make maximum feasible con-tributions to the sustainable development of the host state and the local community.’ Practically, 37
the scope of these contributions is open to interpretation as the actual applicability of such norms depends on each case.
One of the characteristic features of the Morocco-Nigeria BIT is the fact that it not only im-pose negative obligations (to respect) but also obliges the investor to preserve (positive) human rights. Article 18 of the Morocco-Nigeria BIT stipulates that investors ‘shall uphold human rights in the host state and shall act in accordance with core labour standards as required by the ILO Dec-laration on Fundamental Principles and Rights of Work’ and that investor and investments ‘shall not manage or operate the investment in a manner that circumvents international, environmental, labour and human rights obligations to which the host state and/or home state are Parties’. 38
Accordingly, Article 18 is the most innovative and tangible provision that could be effective within the context of the investor’s accountability. The normative reach of this highly broad formu-lation of Article 18 has been construed in different ways. On this point, it is crucial to reiterate that states are deemed to be the sole bearers of the obligations laid down in international human rights treaties. In the absence of a direct horizontal effect of human rights treaties upon corporations, it
International Council on Human Rights Policy: Beyond Voluntarism Human Rights and the Developing International
35
Obligations on Companies, 2002, p. 3. Available at: http://www.ichrp.org/files/reports/7/107_report_en.pdf
Id.
36
Article 24 of the Morocco-Nigeria BIT
37
Article 24 of the Morocco-Nigeria BIT
would be accurate to interpret these obligations as a ‘reverse umbrella clause’ which extends the 39
breaches of domestic law pertaining to human rights to a violation of the applicable BIT. Hence, such provisions convert human rights obligations embedded within the domestic laws of the host state, rather than the international human rights obligations arising from international and regional treaties the host state has ratified.
Overall, obligations laid down in these treaties cannot render human rights treaties to be a basis for the direct horizontal effect imposed upon corporations. However, such a strong and some-what revolutionary formulations embedded within the BIT can nonetheless be taken into account by arbitral tribunals, addressing the investor’s abusive behaviour that may be subject to liability for damaging sustainable development or amounting to major violations of human rights. Such issues may, therefore, fall under the scope of investment disputes both on jurisdictional phase and merits. Breaches of these obligations by the investor could possibly be a ground for a human rights-based counterclaim.
II.2.b. Regulatory Margin of the Host State
An alternative approach on the accountability of the investor is to provide the host state with regulatory powers to pursue legitimate objectives pertinent to the protection and promotion of hu-man rights and sustainable development. This is typically achieved through exception clauses under the new generation BITs. The ‘chilling effect' of traditional ISDS on the state’s regulatory power to achieve its obligations relevant to public trust and public safety has been a concern of the
in-ternational community. Particularly, the state’s commitments arising from BITs regrettably render state actors reluctant to enact legislation to pursue its domestic policy since these policies could po-tentially violate substantial standards such as FET, MFN, Full Protection and Security etc. Fur40
-thermore, it constricts the state’s obligations requiring the implementation of certain policies under its existing laws. As mentioned above, under various human rights treaties, direct obligations were 41
LABORDE, G., ‘The Case for Host State Claims in Investment Arbitration’, 1(1) Journal of International Dispute
39
Settlement, Jan 2010, p. 111.; DE BRABANDERE, E., ‘Non-State Actors and Human Rights: Corporate Responsibility and the Attempts to Formalize the Role of Corporations as Participants in the International Legal System’, in d’AS-PREMONT, J. (ed.), Participants in the International Legal System Multiple Perspectives on Non-State Actors in In-ternational Law, Routledge, January 2011.
TIENHARA, K., ‘Regulatory Chill in a Warming World: The Threat to Climate Policy Posed by Investor-State Dis
40
-pute Settlement’, 7 Transnational, Environmental Law, 2, July 2018, pp 229-50. SIMMA, B., 'Foreign Investment Ar-bitration: A Place for Human Rights’, 60 International & Comparative Law Quarterly, July 2011, p. 573.;
JI, J., Attacking ‘ISDS Provisions for causing regulatory chill: a moving target’, 2018, Available at: http://arbitra-tionblog.practicallaw.com/attacking-isds-provisions-for-causing-regulatory-chill-a-moving-target/
SUDA, R., 'The Effect of Bilateral Investment Treaties on Human Rights Enforcement and Realisation’ in DE
41
imposed on ‘states to ensure that private actors such as companies respect human rights and that failures to do so result in legal consequences.’ In this respect, exception clauses safeguard the 42
states’ responsibility to respect, protect and fulfil human rights obligations. Accordingly, new gen-eration investment treaties give leeway to states to regulate the domestic sphere in accordance with legitimate public interests while complying with their obligations to the foreign investors arising from the BIT standards. Article 8.9 of the Comprehensive Economic and Trade Agreement (CETA) states as follows:
1.’For the purpose of this Chapter, the Parties reaffirm their right to regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals, social or consumer protection or the promotion and protection of cultural diversity.
2. For greater certainty, the mere fact that a Party regulates, including through a modifica-tion to its laws, in a manner which negatively affects an investment or interferes with an investor’s expectations, including its expectations of profits, does not amount to a breach of an obligation un-der this Section.’ 43
A similar formulation can be found under the India-Singapore CECA agreement. In es44
-sence, the structure was adopted from Article XX of the General Agreement on Tariffs and Trade 1994 (GATT 1994) and based on several principles including but not limited to necessity and pro-portionality. On the other hand, the Achilles heel of the present formulation could be seen as the overly broad discretion granted to the arbitral tribunal to determine the substantive dimension of the case. Given that there is an undeniable need for a broader margin the host state could enjoy due to the regulatory chilling effect upon the state’s police powers to pursue public policies, the benefits of limiting the restrictive effect of IIAs may well outweigh drawbacks resulted from overly broad dis-cretion granted to tribunals.
II.2.c.Pre-establishment Obligations of Investors
The recalibration of the asymmetric structure of IIL trend, inter alia recently concluded BITs, contain pre-establishment obligations directly imposed on the investor. Assessment of envi-ronmental, social and human rights effects of investment is a novel method employed by the new
International Council on Human Rights Policy: Beyond Voluntarism Human Rights and the Developing International Obligations on Companies, 2002, p. 3. Available at: http://www.ichrp.org/files/reports/7/107_report_en.pdf
Comprehensive Economic and Trade Agreement (CETA)
43
Comprehensive Economic Cooperation Agreement between India and Singapore (CECA), 2005, Art. 6/11
generation BITs to achieve sustainable development -oriented objectives. Impact assessment has simply been defined as ‘the process of identifying the future consequences of a current or proposed action.’ Principles of risk management and evidence based evaluation are used in the social, envi45
-ronmental and Human Rights impact assessment. In this context, Morocco-Nigeria treaty requires the investor to ‘comply with environmental assessment screening and assessment process applicable to their proposed investments prior to their establishment, as required by the laws of the host state for such an investment or the laws of the home state for such an investment, whichever is more rig-orous in relation to the investment in question.’ Furthermore, with regard to its application, the 46
‘precautionary principle’ is referred to under the third paragraph. 47
Aside from environmental assessment, ‘investors or the investment shall conduct a social assessment of the potential investment. The parties shall adopt standards for this purpose at the meeting of the Joint Committee -a body who is responsible for the dispute prevention between par-ties-. ‘ Accordingly, the BIT foresees a comprehensive social impact assessment in order to 48
achieve objectives, inter alia, to respect; protect and fulfil economic, social, cultural, civil, political and other human rights’ in an integrated way.’ The same language can be found under the IISD 49
Model Treaty. In fact, human rights impacts of an investment also fall within the scope of social 50
impact assessment. Furthermore, it also covers the host state’s sustainable development policies such as, ‘Way of life, Culture, Personal and Property Rights…’ 51
Overall, the significance of the ‘social impact assessment’(pre-establishment impact as-sessment) provisions is actually twofold. Not only do they facilitate states to fulfil their obligations
International Association for Impact Assessment, 2019, https://www.iaia.org/about.php
45
Morocco Nigeria BIT Art 14
46
See Article 15 of Rio Declaration on Environment and Development for the definition of the precautionary principle:
47
‘In order to protect the environment, the precautionary approach shall be widely applied by States according to their capabilities. Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost- effective measures to prevent environmental degradation.’ ; UN General Assembly, Report Of The United Nations Conference On Environment and Development, A/CONF.151/26 (Vol. I), June 1994; Morocco Nigeria BIT Art 14.
Morocco Nigeria BIT, Art 14/1 and 14/2.
48
UN Committee on Economic, Social and Cultural Rights (CESCR), General Comment No. 14: The Right to the
49
Highest Attainable Standard of Health (Art. 12 of the Covenant), 11 August 2000, E/C.12/2000/4. Available at: https:// www.refworld.org/docid/4538838d0.html
Article 12 of IISD Model International Agreement on Investment for Sustainable Development.
50
DUZER A. & SIMONS P. GRAHAM M. (edt) ,‘Commonwealth Secreteriat, Integrating Sustainable Development
51
into International Investment Agreements’, August 2012, p 267, (the commonwealth secretariat guide)Available at:
to protect public health, environment and human rights standard; but also it is an essential process for other actors - corporations and individuals to respect human rights. 52
III. Indirect Remedies Against Human Rights Violation Committed by the Investor
In a large body of case law, host states have premised their defences on human rights con-siderations. More often than not, the primary aim of states is limited to the dismissal of the claim lodged by the investor. In that sense, it is necessary to draw a distinction between direct remedy and indirect remedy for the damaging conduct of the investor pertaining to human rights. Direct remedy refers to the responsibility of the investor resulting from a counterclaim initiated by the host state in the course of arbitral proceedings since the counterclaim includes not only the rejection of the in-vestor’s claim but also the condemnation of the conduct of the investor. On the other hand, the 53
concept of indirect remedy vis-a-vis human rights arises in two ways within the confines of arbitral jurisprudence. The first is the concept of legality of the investment as a ground to deprive the in-vestor of the protection provided by the BIT. Indeed, Walde has stated in his Dissenting Opinion in the Thunderbird case:
‘…there is ample jurisprudence that a legitimate expectation cannot be created if deception,
fraud or other illicit means were used to obtain the governmental assurance or other rights tained from government in this way. There can be no international treaty protection for rights ob-tained by illicit means. In such cases there may be an expectation but not a legitimate one.’ 54
Alternatively, indirect remedy could also fall in the scope of proceedings when the tribunal assesses the (contributory) conduct of the investor as a legitimate ground for the reduction of the compensation at the merits phase. Tribunals developed a two-tiered assessment for the reduction 55
in which they require the respondent to prove said omission as well as the establishment of a casual link between the wrongdoing in question and the damage resulted from such conduct. 56
Id.; UN Guiding Principles on Business and Human Rights, A/HRC/17/31, Principle 12
52
DE NANTEUIL, A., Counterclaims in Investment Arbitration: Old Questions, New Answers, the Law & Practice of
53
International Courts and Tribunals 17, 2018, p 377.
Id.; International Thunderbird Gaming Corporation v United Mexican States, UNCITRAL Award, 2006, Separate
54
Opinion by Prof. Walde.
ZARRA, G., ˜International Investment Treaties as a Source of Human Rights Obligations for Investors’ in BUSCE
55
-MI, M. LAZZERINI, N. MAGI, L., RUSSO, D. (eds) in Legal Sources in Business and Human Rights, 2020, pp. 57-61. LEATHLEY, C., LINSEY, N., AMBROSE, H., ‘Bear Creek Mining Corp. v. Peru: the Potential Impact on Damages
56
of an Investor’s Contributory Action and Failure to Obtain a Social Licence’, Herbert Smith Freehills Arbitration Notes, 2018, Available at: https://hsfnotes.com/arbitration/2018/01/26/bear-creek-mining-corp-v-peru-the-potential-impact-on-damages-of-an-investors-contributory-action-and-failure-to-obtain-a-social-license/#page=1.
Overall, the decisions where tribunals deprived the investor of the protections granted by the BIT or made a reduction on the compensation has been construed as indirect remedy for the human rights violations committed by the investor.
III.1. The Legality of the Investment
The legality of the investment is intertwined with the human rights responsibility of the in-vestor’s since many treaties exclude illegal investments from the protection of BIT standards and require corporations to comply with and respect their domestic regulations -including the laws re-lated to the protection of human rights-. It has been widely accepted that the provision not only covers securing the necessary licenses and permits within the host state but also addresses severe human rights abuses committed by foreign investors. The practice and regulations eg Bribery Act particularly in the establishment phase of investment.’ The legality of the investment could either 57
be regulated in the definition part of the treaty or within the substantive provisions.
Furthermore, compliance with the domestic law of state has been accepted as the ‘core prin-ciple’ both in the Background Document of International Institute for Sustainable Development (UNCTAD model) and the Guide of Commonwealth Secretariat for Developing Countries. In a 58
broader context, the laws and regulations of the host state partially constitute the reflection of in-ternational human rights obligations, which states undertake to implement in their legal framework. Such international obligations are included in a variety of human rights treaties such as ICCPR, ICESCR, CEDAW, CRC. Yet, it does not necessarily mean that these human rights obligations are 59
implemented or enforced at the same standard in each country. As stated earlier, the reality is that many domestic legal orders, developing economies in particular, do not have the adequate level of human rights protection in their domestic law.
One of the controversial issues regarding the ‘accordance with the domestic law of host state’ provision is the applicability of the legality requirement in the operational phase of the in-vestment. It is safe to claim that the illegalities occurring during the operational phase are not per-ceived as a matter of jurisdiction within the arbitral jurisprudence, particularly when the applicable
Harnessing Investment for Sustainable Development: Inclusion of Investor obligations and Corporate Social Respon
57
-sibility in Trade and Investment Agreements, Institute for Sustainable Development (IISD), 2018, p. 9 , Available at:
https://www.iisd.org/sites/default/files/meterial/harnessing-investment-sustainable-development.pdf
DUZER A. & SIMONS P. & GRAHAM M. (edt) ,‘Commonwealth Secreteriat, Integrating Sustainable Development
58
into International Investment Agreements’, August 2012, p 267-70. (the commonwealth secretariat guide) Available at:
https://www.iisd.org/pdf/2012/6th_annual_forum_commonwealth_guide.pdf
KRIEBAUM, U., ‘Privatizing Human Rights: The interface between International Investment Law and Human
59
BIT limits the legality requirement to the initiation of the investment.’ In this regard, the Phoenix 60
tribunal stressed the risk of circumvention of the BIT standards through state’s domestic laws, and consequently have the discretion to unilaterally change their IIA obligations. However, illegalities 61
pertinent to human rights occurring throughout the operational period have been taken into consid-eration by tribunals in the calculation of damages. According to the Hamaster v. Ghana Tribunal, such illegalities could well be relevant to the merits of the dispute. 62
Since there is no uniform standard under the relevant IIL framework, discrepancies exist within arbitral jurisprudence with regard to the nature and the applicability of the legality require-ment. Specifically, the applicability of the legality requirement even in the absence of any provision under the relevant treaty by the virtue of general principles of international law or to what extent the illegalities occurred during the operational phase could fall under the scope of the legality require-ment. Despite these controversies, Salini tribunal had clarified the nature of the legality principle. According to the tribunal, the legality provision ‘refers to validity of the investment not to its defini-tion.’ The main objective is to ‘prevent Bilateral Investment Treaty from protecting investments 63
that should not be protected, particularly because they would be illegal’. With regard to the ques64
-tion whether there is an implicit requirement to comply with the domestic law of the host state , it is crucial to assess the logic behind the recognition of the legality requirement. The primary rationale behind the concept has been deemed to be demo auditor proprium turpitudinem allegens and ‘the basic notion of international public policy, the investor is obliged to establish its investment in ac65
-cordance with the law of the host state even in the absence of any explicit requirement under the applicable treaty. These principles are based on ‘domestic law and practice of international organi66
-sations’ which exist independently from the BIT provisions. 67
Quiborax S.A., Non Metallic Minerals S.A., & Allan Fosk Kaplún v. Plurinational State of Bolivia, ICSID Case No.
60
ARB/06/2, Award on Jurisdiction, 27 Sept. 2012 see Bolivia-Chile BIT, Art. I(2), confined ‘investment’ in ‘any kind of assets or rights related to an investment as long as this has been made in accordance with the laws and regulations of the Contracting Party in whose territory the investment was made’)
Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 Apr. 2009, para. 103.
61
Gustav F W Hamester GmbH & Co KG v. Republic of Ghana, ICSID Case No. ARB/07/24, 18 June 2010, para. 100.
62
Salini v. Morocco, ICSID Case No. ARB/00/4. Decision on Jurisdiction, 23 July 2001, para. 621.
63
Salini Costruttori S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, July 23 2001,
64
para. 46.
World Duty Free Company Limited v The Republic of the Philippines, ICSID Case No ARB/00/7, para. 188.
65
Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 103.
66
HANESSIAN, G., ‘General Principles of Law’ in the Iran-U.S. Claims Tribunal’, 27 Columbia Journal of Transna
67
-tional Law, 1989, p. 309; KRYVOI, Y., ‘Counterclaims in Investor-state Arbitration, LSE Law Society and Economy Working Papers 8/2011,Available at: http://eprints.lse.ac.uk/38469/1/WPS2011-08_Kryvoi.pdf
Ultimately, the exclusion of the illegal investment from the protective standards granted by IIAs contributes to the preservation of human rights even though the nature and function of the le-gality requirement has been interpreted differently by arbitral tribunals.
III.2. Bear Creek Mining Corp. v. Republic of Peru Decision
Within the confines of investment arbitration, the abusive conduct of the investor damaging to human rights could affect the arbitral proceedings in the both in the merits and jurisdictional stages. In this respect, Bear Creek Mining Corp v. Republic of Peru constitutes a remarkable illus-tration of an approach where the tribunal has taken into consideration the investors’s conduct in its calculation of the damages. Particularly, there has been a conflict among the members of the tri-bunal as regards the reduction of the compensation awarded due to the contributory fault of the in-vestor. Therefore, the decision of the tribunal should be assessed in light of the dissenting opinion issued by Sands since he based his considerations on the legal effect of a human rights treaty upon the investor, rather than domestic law of the host state. 68
With regard to the background of the dispute, a Canadian mining Company (Bear Creek Mining Corporation) was authorised to acquire, own and operate the several mining concessions in Santa Ana Silver Mine, a region near the border between Bolivia and Peru, through Supreme De-cree 083-2007. The Peruvian authorities have approved the environmental and social impact as69
-sessment conducted by the investor. However, the investor was urged by the government to im70
-plement a community participation policy even though no further measures were taken to prevent the investor from operating prior to the completion of the process of community participation. 71
Local community has made violent demonstrations against the operations of the investor due to the their considerable mistrust towards the exploitation of the Santa Ana Mine as well its possible impact on their cultural identity. In order to address such concerns, the Peruvian Govern-ment promulgated a Supreme Decree forbidding mining nearby Santa Ana. Eventually, the measure led to the revocation of the rights conferred upon the investor by the Decree 083-2007. In 2014, 72
Bear Creek Mining Corporation v. Republic of Peru, ICSID Case No. ARB/14/21, Partial Dissenting Opinion of Pro
68
-fessor Philippe Sands (English).
Bear Creek Mining Corporation v. Republic of Peru, ICSID Case No. ARB/14/21, Award, para 114.
69
Id. para 168.
70
SCHACHERER., S, ‘Bear Creek Mining Corporation v. Republic of Peru’, International Investment Law and Sus
71
-tainable Development: Key cases from the 2010s, 2018, Available at: https://cf.iisd.net/itn/2018/10/18/bear-creek-v-peru/
Id. para 202.
the claimant has initiated arbitral proceedings against Peru based on the Canada-Peru Free Trade Agreement. The claimant has argued that the subsequent measure adopted by the respondent state is tantamount to indirect expropriation and constituted a breach of the FET standard.
In the absence of an ‘accordance with the domestic law’ provision in the applicable BIT, Peru objected the tribunal’s jurisdiction based on the illegality of the investment both at the estab-lishment and operational phases by referencing the general principles of international law and arbi-tral jurisprudence. In its jurisdictional analysis, the Tribunal rejected the illegality objection 73
brought by the respondent state and stressed that the applicable IIA does not contain any explicit legality requirement. Therefore, the Bear Creek tribunal has made a relatively more restrictive in74
-terpretation on the legality requirement in contrast to the Phoenix Tribunal.
Concerning the substance of the dispute, Decree 083 was deemed to be expropriatory by the Tribunal based on several reasons including but not limited to its economic impact and the breach of legitimate expectation of the investor. The respondent argued that the contributory fault of Bear 75
Creek Mining Corp., particularly its relationship with the local residents, gave rise to the social un-rest in the area. The final assessment of the Tribunal, however, led to the rejection of the arguments set forth by the Peruvian Government due to its failure to demonstrate the causal link between the social unrest of the local community and the investor’s conduct. 76
Sands dissented from the majority of the tribunal and reached significant conclusions with regard to the relationship between human rights and international investment law as well as the re-sponsibility of the investor pertaining to the rights of indigenous communities. In line with the ar-guments presented by the respondent, Sands concluded that the contributory fault of the investor, which manifested between 2007 and 2011, resulted in the social unrest while stressing the need for a more substantial reduction on the compensation at issue. In his reasoning, he referred to Article 77
15 of the ILO Convention 169 which protects ‘the rights of the peoples concerned to the natural re-sources pertaining to their lands… including the right… to participate in the use, management and
Id., para. 302. 73 Id., para. 319. 74 Id., para. 340. 75
PAEZ-SALGADO, D., ‘Four Takeaways of the Decision in Bear Creek Mining Corp v The Republic of Peru’, Kluw
76
-er Arbitration Blog, 2017. Available at: http://arbitrationblog.kluwerarbitration.com/2017/12/16/bear-creek-mining-v-peru/?doing_wp_cron=1590003805.0655601024627685546875
Bear Creek Mining Corporation v. Republic of Peru, ICSID Case No. ARB/14/21, Partial Dissenting Opinion of Pro
77
conversation of these resources’ Initially, he acknowledged that human rights treaties impose 78
obligations on states not on corporations. Yet, it does not mean that they do not have ‘significance or legal effects for foreign investor.’ According to Sands, the failure of the investor to obtain a so79
-cial licence and its ‘semi-detached relationship to the vital rights set forth in this part of the conven-tion’ form the primary basis for the reduction of the compensation. He further noted that ‘…as an investor has legitimate interests and rights under international law; local communities of indigenous and tribal peoples also have rights under international law.’ 80
Sands’ interpretation has an immense importance for the purpose of this thesis due to his integration of the ILO Convention into the arbitral proceedings as a potential restriction on the in-vestor even though such human rights treaties are not directly binding on the inin-vestor in the absence of a widely accepted premise of direct horizontal effect. Finally, it is crucial to reiterate here that the approach developed by Sands is a highly pragmatic one as his interpretation points to the urgent need to mitigate the discrepancies cultivated by regulatory gaps whilst leaving the more controver-sial discussion of ‘direct horizontal effect’ out of the scope.
Id.
78
LEATHLEY, C., LINSEY, N., AMBROSE, H., ‘Bear Creek Mining Corp. v. Peru: the Potential Impact on Damages
79
of an Investor’s Contributory Action and Failure to Obtain a Social Licence’, Herbert Smith Freehills Arbitration Notes, 2018, Available at: https://hsfnotes.com/arbitration/2018/01/26/bear-creek-mining-corp-v-peru-the-potential-impact-on-damages-of-an-investors-contributory-action-and-failure-to-obtain-a-social-license/#page=1.
Dissenting Opinion of Prof. Sands, para. 36
IV. Counterclaim
The recent increase of counterclaims in ISDS mechanism is the most visible indication of the states’ concern on structural disproportion of the IIL regime which heavily focused on the eco-nomic interests of the investor. It can safely be stated that the current investor-state arbitration still 81
provides very limited remedies for the violations resulted by their operations because states are not provided with the direct cause of action against investor albeit mere possibility to file a counter-claim. Moreover, the respondent must fulfil conditions vis-a-vis jurisdiction and admissibility prior to the tribunal’s examination on substantive issues of the counterclaim. These conditions have often precluded arbitral tribunals to assess the substance of the disputes where the investor has allegedly violate human rights. Hence, the current state of IIL regime renders the counterclaim an indispens-able component of the this thesis.
All the major arbitration rules provide the right to counterclaim as a procedural right includ-ing ICSID Convention and UNCITRAL arbitration rules. Although counterclaim has a substantive jurisprudence since early inter-state arbitration, there are still controversial issues within the context of investor-state arbitration. In this section, the counterclaim mechanism will be examined based on jurisdictional clauses of the relevant BITs, pertinent articles of the ICSID Convention and the re-cent arbitral jurisprudence.
Counterclaim refers to a claim lodged by the respondent which covers both rejection of the investor’s claim and condemnation of the claimant for its breach of applicable law in a dispute. 82
The main rationale behind the concept is the efficiency of dispute resolution by hearing all the con-nected (related) disputes in a single set of proceedings. Bearing its fundamental function in mind, counterclaim mechanism undoubtedly contributes to the principle of equality of arms by providing the respondent with locus standi. In other words, counterclaims have a crucial role given that this 83
mechanism is the only avenue to bring a separate legal claim against the investor before an invest-ment tribunal. It is worth invest-mentioning here the significance of ECOWAS Suppleinvest-mentary Act as it is the only investment treaty providing the host state with a direct cause of action against the investor. Although ECOWAS Act has not yet been subject to an investment dispute, the revolutionary
LEVASHOVA, Y., ‘The Accountability and Corporate Social Responsibility of Multinational Corporations for Trans
81
-gressions in Host States through International Investment Law’, 14 Utrecht L Rev, 2018, p. 41.
DE NANTEUIL, A., Counterclaims in Investment Arbitration: Old Questions, New Answers, the Law & Practice of
82
International Courts and Tribunals 17, August 2018, p 377.
KRYVOI, Y., ‘Counterclaims in Investor-State Arbitration’, LSE Law, Society and Economy Working Papers 8/2011
83
lation is a unique illustration of the recalibration attempt which is primarily reflected on African IIAs.
Conditions relevant to the jurisdiction and admissibility of counterclaim are foreseen under Article 46 of the ICSID Convention. Article 46 of the ICSID Convention states:
‘Except as the parties otherwise agree, the Tribunal shall, if requested by a party, determine
any incidental or additional claims or counterclaims arising directly out of the subject-matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise with-in the jurisdiction of the Centre.’ 84
According to the Article, two conditions must be fulfilled cumulatively for an ICSID tri-bunal to hear a counterclaim lodged by respondent state: the consent of the parties, the connection between the initial claim and the counterclaim presented by the respondent.
IV.1. Consent
Consent of the parties has been perceived as the ‘cornerstone’ of the jurisdiction in in-ternational dispute resolution. The significance of the concept was reaffirmed by the ICJ in Geno85
-cide Convention in which the court stated that even jus cogens norms ‘cannot escape from the
con-ceptual basis of jurisdiction.' Within the existing framework of the investment arbitration, states 86
could consent to arbitrate either in their domestic laws, through an investment contract or arbitra-tion clause laid down under the relevant BIT. Given that investment contracts are usually designed for a specific investment, they contain unambiguous arbitration clauses tailored for the parties. Such unambiguity enables arbitral tribunals to assert jurisdiction over the counterclaim when the arbitra-tion is based on an investment contract. On the other hand, the assessment of the jurisdicarbitra-tion is 87
relatively more controversial when the jurisdiction is based on an arbitral agreement by virtue of the relevant BIT. As reiterated by prominent scholars, ‘arbitration without privity’ refers to the arbitra-tion in which states’ unilateral offer to arbitrate through the investment treaty or its relevant
The Convention on the Settlement of Investment Disputes between States and Nationals of Other States, opened for
84
signature 18 March 1965
See ICSID Convention Art 3, Art 25, Art 46; ICJ Statute Art 36.
85
Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina
86
v. Serbia and Montenegro), Provisional Measures, Order of 13 Sep. 1993, [1993] ICJ Rep. 325, 341; Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v. Serbia and Mon-tenegro), Preliminary Objections, Judgment of 11 Jul. 1996, [1996] ICJ Rep. 595, 620–621
KJOS, H.E., ‘Counter-Claims by Host States in Investment Dispute Arbitration ‘without Privity’, New Aspects of
87
