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Direct Investor Obligations in

International Investment Agreements:

A Contribution to the Legitimacy of

International Investment Law?

Niklas Kaufmann

Supervisor: Prof. Dr. S. W. Schill Final Submission: Friday, July 27, 2018

Abstract

This thesis examines the relatively new approach in international investment law to include direct obligations for investors into international investment agreements. Based on the concept of sustainable development, it argues that the current criticism towards the lack of legitimacy of international investment law and international investment arbitration could be met by balancing investors’ and states’ rights and obligations. To this end, the thesis analyses

how including direct investor obligations into international investment agreements could affect international investment law as a whole and whether these effects can strike a balance

between rights and obligations of states and investors. As a means to evaluate such a balance, it relies on the proportionality analysis.

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Table of content

A. Introduction...4

B. Legitimacy criteria and evaluation method...5

I. “Legitimacy Crisis”...5

1. Broad approach to lack of legitimacy...6

2. Limitation of legitimacy concerns to predictability and coherence of arbitration...7

3. Understanding of legitimacy...7

II. Legitimacy on the basis of sustainable development...8

1. The principles of sustainable development as per the New Delhi Decl...9

2. Balance between rights and obligations...10

a. Balance as a necessary element of sustainable development...10

b. Requirements of balance...12

3. Preliminary conclusion...12

III. Evaluation of legitimacy...13

1. Proportionality Analysis...13

2. Evaluation of legitimacy criteria...13

3. Conclusion on evaluation of legitimacy...14

IV. Conclusion on legitimacy criteria and evaluation method...14

B. Evaluation of DIOs...15

I. Opening Remark: Enforcement of DIOs...15

II. Provisions on compliance with domestic law...16

1. Potential changes to the IIL-system through the application of DIOs...16

a. Illegality as jurisdictional requirement...16

aa. PAIC...17

bb. Nigeria-Morocco BIT...18

cc. IISD Model...18

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ee. Summary...20

b. Effect of illegality?...20

c. Scope of legal provisions applicable to illegality...20

aa. PAIC...21

bb. Nigeria-Morocco BIT...21

cc. IISD Model...21

dd. Summary...22

d. Temporal scope of illegality...22

2. Proportionality of these changes...22

a. Legitimate purpose...22

b. Suitability...23

aa. Limitation of the scope to “laws on investment”...23

bb. Limitation to “laws in effect at the time of the establishment of the investment” ...24

cc. Comparison to “general exception clauses”...24

cc. Preliminary Conclusion...26

d. Proportionality strictu sensu...26

e. Alternative proportionate provision?...27

f. Summary...27

3. Conclusion on provisions on compliance with domestic law...27

III. Provisions on compliance with international law...28

1. Obligations as per the ILO TD and their effects on the treaties...28

a. Obligations of MNEs as per the ILO TD (selected overview)...28

b. Effects of the ILO TD’s application on the treaties...30

aa. Applicability of MNE obligations to investors and investments...30

bb. Binding character?...30

2. Proportionality...31

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IV. The right to bring individual claims against the investor...31

1. Content and scope...32

2. Proportionality...32

a. Legitimate purpose...32

b. Suitability...33

c. Necessity...33

d. Proportionality strictu sensu...33

aa. Right of host states to bring claims...33

bb. Right to bring claims in the host state...33

3. Conclusion on individual remedies...34

C. Conclusion...34

Bibliography...35

A. Introduction

The system of international investment law1 currently suffers in part from a lack of legitimacy as several scholars have noted2. In an attempt to contribute to the discussion surrounding a possible reform of the current system of this field of public international economic law, this thesis examines the recent treaty practice of including direct investor obligations (DIOs) into international investment agreements (IIAs). More and more model treaties refer to DIOs3, the most recent one being the draft of the Pan-African Investment Code (PAIC)4. Given this

apparent rise of popularity, this thesis aims to examine to which extent the newly introduced DIOs can contribute the system’s overall legitimacy. The overarching goal of this thesis is to provide treaty designers with an argument to include DIOs into IIAs as an attempt to meet legitimacy concerns. Legitimacy in this regard is refined through the scope of sustainable development.

1 Hereinafter: IIL-system; this term is used to describe the body of international rules on investment protection as contained in IIAs and encompasses substantive protections as well as procedural rules.

2 Stephan Hindelang and Markus Krajewski, Conclusion and Outlook – Whither International Investment Law in HINDELANG/KRAJEWSKI, Shifting Paradigms, p. 378.

3 Examples: Arts. 13 and 16 COMESA Investment Agreement; Annex 1 Art. 10, SADC Protocol on Finance and Investment; Pt. 3 of the IISD Model International Investment Agreement.

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The first chapter of this thesis deals with the term “legitimacy crisis” and develops a legitimacy understanding on the basis of the concept of sustainable development (A.). In order to develop a technique to measure legitimacy, it relies on the proportionality analysis. The second chapter introduces some of the most important DIOs and their legal embedment (B.). It describes their potential effects on the existing provisions of international and evaluates how these effects may contribute to the system’s legitimacy.

B. Legitimacy criteria and evaluation method

The IIL-system in general is being criticised for a lack of legitimacy by parts of the international scholarship5 and the term “legitimacy crisis” is in fact being commonly used in this regard6. Although the concept of legitimacy is being referred to by both, critics as well as supporters of the IIL-system, the agreement on common grounds only reaches this far. In order to examine, whether and how DIOs in IIAs may contribute to strengthening the system’s legitimacy the following section considers different approaches to the use of the term “legitimacy crisis” (II). Based on the findings on the criticism as to a lack of legitimacy it adduces the concept of sustainable development to define the requirements needed to strengthen the IIL-system’s legitimacy (III). The author argues that the IIL-system’s legitimacy could be raised by balancing investors’ and host states’ rights and obligations. For this purpose, it is furthermore held that the influence of DIOs on the IIL-system’s legitimacy can best be examined by virtue of the proportionality analysis which provides for an effective tool to weigh opposing legal interests (IV).

I. “Legitimacy Crisis”

The use of the term “legitimacy crisis” is rather widely spread amongst scholars, however, opinions as to its meaning as well as its origins differ: While some scholars hold that the lack of legitimacy arises from the disregard of public policy concerns such as state sovereignty7 and democracy8 (1.), others restrict issues with IIL’s legitimacy to a lack of predictability and coherence of arbitration9 (2.). The following part presents both approaches and argues that these opposing understandings in fact relate to different aspects of the IIL-system, namely the

5 MYSORE/VORA, Middle Path, p. 137; FRANCK, Legitimacy Crisis, p. 1523; HUECKEL, Legitimacy and

Sovereignty, p. 605; BEHN/LANGFORD, Trumping the Environment, p. 15; SCHILL/BROWER, Threat or Boom, p. 473.

6 Stephan Schill, “Conceptions of Legitimacy of International Arbitration” in CARON/SCHILL/SMUTNY/TRIANTAFILOU, Practising Virtue (hereinafter: SCHILL, Conceptions), p. 107; SCHILL/BROWER, Threat or Boom, p. 473.

7 MYSORE/VORA, Middle Path, p. 137; HUECKEL, Legitimacy and Sovereignty, p. 605. 8 BEHN/LANGFORD, Trumping the Environment, p. 16.

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legitimacy of substantive IIA-provisions as opposed to the legitimacy of investment arbitration (3.). It argues that the legitimacy of arbitration depends on the provisions contained in IIAs, thus rendering a treaty re-design necessary to react to the alleged “legitimacy crisis”. 1. Broad approach to lack of legitimacy

Mysore and Vora reason that the “legitimacy crisis” regarding international investment

agreements (IIAs) “stems from the fear that such agreements severely restrict the state`s authority to regulate various legitimate policy objectives”10. According to their account, this restriction of states’ sovereignty becomes apparent in two ways: On the one hand, the confinement of a state’s power to regulate in the interests of environment, health and other objectives by investors challenging such measures11; on the other hand, the fact that access to tribunals is limited to foreign investors, given that “similar avenues are not provided to domestic investors”12. According to Langford and Behn, there are five different legitimacy critiques, two out of which concern state sovereignty: The respect of arbitral tribunals towards democratic processes including states’ regulatory autonomy and the restriction of host states’ environmental regulatory autonomy13. Hueckel finds that the system’s legitimacy requires it to respect the state’s sovereignty and argues simultaneously that arbitration can only be legitimate if it is independent from states14. To her, the main reason for states doubting their decision to consent to IIL arises from their fear of insufficient protection of their sovereignty15. Simma adduces the system’s legitimacy critique from a general lack of balance “leading to apprehension, disillusionment and disappointment on the parts of the participants”16.

This short summary of the most common criticism as to the systems overall legitimacy from a broad perspective shows that most critics focus on aspects surrounding the concept of state sovereignty and general balance when using the term “legitimacy crisis”. Other critics point out additional deficiencies such as the non-reciprocity of the right to bring claims17, the limited access ratione personae to remedies18 and “regulatory chill”19 but do so without clear reference to the system’s legitimacy; thus, they are disregarded in the context of this paper. To the author, the presented criticism addresses the concern that the provisions contained in IIAs

10 MYSORE/VORA, Middle Path, p. 137. 11 Ibid.

12 Ibid.

13 BEHN/LANGFORD, Trumping the Environment, p. 16. 14 HUECKEL, Legitimacy and Sovereignty, p. 606. 15 Ibid., p. 603.

16 SIMMA, Place for Human Rights, p. 575. 17 VAN HARTEN, Justifications, p. 37.

18 Ibid., p. 33; VAN OS/KNOTTERNUS, Uneasy Mix, p. 109. 19 VAN OS/KNOTTERNUS, Uneasy Mix, p. 109.

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do not leave enough room to provide host states with the power to regulate important public policy matters.

2. Limitation of legitimacy concerns to predictability and coherence of arbitration

The opposing view agrees with the basic assumption that IIL lacks legitimacy but finds this lack only with regard to procedural aspects resulting in a general inconsistency of arbitral decisions as well as “the vagueness and indeterminacy of the standard of investment rights”20. According to Brower and Schill, these aspects are “considerable and in need of serious attention21”. This approach argues that the criticism as presented above which centres around the claim that the IIL-system’s lack of legitimacy arises from its detrimental effect on state sovereignty22 and additional public policy concerns can be met through the system’s own mechanisms, rendering a treaty re-design unnecessary23. The author understands this approach as to reduce legitimacy concerns towards the IIL-system to aspects of investment arbitration. 3. Understanding of legitimacy

When dealing with these opposing approaches one must differ between the legitimacy of the IIL-system and the legitimacy of investment arbitration. The legitimacy of investment arbitration mainly depends on the consent of the parties as well as the neutrality of the dispute settlement (“party legitimacy”)24. The legitimacy of the IIL-system, on the other hand, depends on the inclusion of additional public policy concerns, as shown above. However, if the legitimacy of investment arbitration were to depend on additional factors such as public policy concerns (“global legitimacy”)25, a treaty re-design would be necessary even under the narrower legitimacy criticism: In order to effectively protect these matters in an arbitral proceeding, the arbitrators’ discretion would need to be restricted through the development of clear IIA-provisions. Hence, the question arises as to whether the legitimacy of investment arbitration, too, must be judged on the basis of the inclusion of public policy concerns.

The author contends that this is the case: If past arbitral decisions are considered, it is shown that investment arbitration is more frequently used to influence states’ regulation of public

20 SCHILL/BROWER, Threat or Boom, p. 473. 21 Ibid.

22 Ibid., p. 474. 23 Ibid., p. 497.

24 SCHILL, Conceptions, p. 117. 25 Ibid., p. 121.

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policy concerns, such as public health26 or energy production27. The decision as to whether to include these concerns so far has been left to the tribunals. In the opinion of the author, a rising occupation of tribunals with public policy concerns requires a clearer limitation of the arbitrators’ discretion so as to support the predictability of arbitration proceedings dealing with public policy. The rising tendency to deal with public policies in investment arbitration thus requires the application of “global legitimacy” as opposed to mere consent-based “party legitimacy”. In conclusion, the legitimacy of investment arbitration, too, must thus be made dependant from the inclusion of public policy concerns into IIAs’ provisions. The legitimacy of investment arbitration therefore depends on whether the criticism as to the IIL-system’s legitimacy can be met.

The following part examines a criterion by virtue of which it can be assessed whether a specific provision in fact strengthens the IIL-system’s legitimacy and thus consequently the legitimacy of investment arbitration, too.

II. Legitimacy on the basis of sustainable development

The term legitimacy although commonly used entails various approaches as to its source. In this thesis it is understood in its most basic sense to contain the requirements that a (legal) system must fulfil to convince its participants of its legality and thereby motivating them to comply with its rules. The criticism as to the IIL-system’s “legitimacy crisis” evolves around the claim that public policy concerns are not sufficiently included into IIAs. Aiming to develop a feasible criterion upon which to judge a provision’s effect on the IIL-system’s legitimacy, this part has recourse to the concept of sustainable development. The choice to employ it as a decisive legitimacy criterion is informed by the fact that sustainable development is “the principal objective of some of the system’s most vocal critics”28 and that “[it] is becoming the overriding goal of new policy initiatives”29.

The UNCTAD Investment Policy Framework for Sustainable Development considers it one of the key challenges of IIL policy to “ensure that investment supports sustainable development”30. This begs the question what the term “sustainable development” in fact

26 Cf. Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of

Uruguay, ICSID Case No. ARB/10/7; Philip Morris Asia Limited v. The Commonwealth of Australia,

UNCITRAL.

27 Cf. Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG v. Federal Republic of Germany, ICSID Case No. ARB/09/6.

28 SPEARS, Policy Space, p. 1074.

29 Muchlinski, Negotiating New Generation International Investment Agreements in: HINDELANG/KRAJEWSKI, Shifting Paradigms (hereinafter: MUCHLINSKI, New Generation IIAs), p. 43. 30 UNCTAD, Investment Policy Framework for Sustainable Development 2015 [hereinafter: UNCTAD Framework], p. 18.

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entails. The meaning of this term is highly contested amongst international law scholars31 but the International Law Association (ILA) has developed principles of international law relating to sustainable development which will be used to further explain this legal concept, the New

Delhi Declaration32 (1.). Furthermore, it is held that sustainable development – when applied

to the design of IIAs – requires that a balance between the rights and obligations of states and investors be struck (2.).

1. The principles of sustainable development as per the New Delhi Decl.

The New Delhi Decl. formulates seven principles: The first principle is the duty of states to ensure a sustainable use of natural resources33 which entails a management of natural resources “so as to contribute to the development of their peoples”34. The second principle, equity and eradication of poverty35, considers the “right to use and enjoy the resources of the Earth (…) under the obligation to take into account the long-term impact of [a present generation’s] activities”36. According to the third principle, which establishes common but differentiated responsibilities “international organizations, corporations, non-governmental organizations and civil society should co-operate in and contribute to” the achievement of “global sustainable development”37; it particularly refers to the responsibilities of corporations38. The fourth principle addresses the precautionary approach to human health, natural resources and ecosystems, in other words the attempt to “avoid human activity which may cause significant harm” to these legal interests39; amongst others, this includes “accountability for harm caused”40. The fifth principle is that of public participation and access to information and justice41. According to the New Delhi Decl., this encompasses i. a. the requirement for “effective protection of the human right to hold and express opinions”42.

31 Sacerdoti for example refers to the definition in the Bruntland Commission Report “Our Common Heritage “of 1987 which considers sustainable development to be a “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (cf. Sacerdoti, Investment

Protection and Sustainable Development in: HINDELANG/KRAJEWSKI, Shifting Paradigms [hereinafter:

SACERDOTI, Protection and Development]). According to Newcombe, it is not even clear whether the term “sustainable development” refers to a legal rule, an objective or a process (cf. NEWCOMBE, Sustainable

Development, p. 361). For the purpose of this thesis no distinction is necessary as sustainable development is

considered a concept on the basis of which legitimacy can be evaluated.

32 ILA, New Delhi Declaration of Principles of International Law Relating to Sustainable Development (2002) (hereinafter: New Delhi Decl.).

33 New Delhi Decl., 1. 34 Ibid., 1.2. 35 Ibid., 2. 36 Ibid., 2.2. 37 Ibid., 3.1. 38 Ibid. 39 Ibid., 4.1. 40 Ibid., 4.2 (a). 41 Ibid., 5. 42 Ibid., 5.2.

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According to the sixth principle which comprises good governance43, the rule of law and human rights must be complied with44; this principle also “calls for corporate social responsibility”45. The seventh principle deals with integration and interrelationship which “reflects the interdependence of social, economic, financial, environmental and human rights aspects of principles and rules of international law relating to sustainable development”46. According to this understanding, “States should strive to resolve apparent conflicts between competing economic, financial, social and environmental considerations, whether through existing institutions or through the establishment of appropriate new institutions”47.

2. Balance between rights and obligations

The following section argues that a balance between the rights and obligations of host states and investors constitutes an essential element of sustainable development and that it should therefore be acknowledged as the decisive legitimacy criterion.

a. Balance as a necessary element of sustainable development

In the context of the UNCTAD Investment Policy Framework for Sustainable Development, this criterion is described as an important element of “new generation” IIAs, which shall further sustainable development48. Moreover, a balance of rights and obligations is listed as one of the core principles for investment policy making49 and finds mentioning in different

articles on the reform of IIL: Spears refers to the balance between protection and promotion of investments on the one hand and the protection of social and environmental aspects on the other as “one of the most important challenges facing the international investment regime today”50. Muchlinski holds that a position arguing that a rebalance of investor and state obligations through the development of new agreements is necessary, has entered the mainstream51 whereas Simma describes the “lack of balance” as one of the reasons on the basis of which the system’s legitimacy is criticised52.

Although it has been argued that the New Delhi Decl. contains no reference to a balance between investors’ and host states’ rights and obligations53, the author holds that three of the

43 Ibid., 6. 44 Ibid., 6.1 (c). 45 Ibid., 6.3. 46 Ibid., 7.1. 47 Ibid., 7.3. 48 UNCTAD Framework, pp. 6, 19. 49 UNCTAD Framework, p. 30. 50 SPEAR, Policy Space, p. 1037.

51 MUCHLINSKI, New Generation IIAs (fn. 29), p. 41. 52 SIMMA, Place for Human Rights, p. 575.

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principles of sustainable development contained therein do in fact refer to this concept: Firstly, it can be read into the principle of common but differentiated responsibilities according to which corporations should contribute to the partnership of states which attempts to achieve global sustainable development and must (at least) adhere to the “polluter-pays principle”54. The notion that corporations, too, must meet responsibilities, informs the concept of re-balancing state and investor obligations. Secondly, the principle of the precautionary approach to human health, natural resources and ecosystems points to the avoidance of harm to these legal interests55 i. a. through the establishment of “an appropriate burden of proof on the person or persons carrying out” activities “which may cause long-term or irreversible harm”56. Given that investment activities under the protection of IIAs are being criticised for worsening human rights practices57 and the fact that burden of proof is only relevant where the breach of a legal obligation must be determined, this formulation must be interpreted as referring to accountability of investors, hence the aforementioned balance. Thirdly, the principle of good governance and the reference to corporate responsibility58 contained therein also speaks to the inclusion of the balancing approach into sustainable development: If corporate responsibility is a requirement for the good governance of states, the same can be argued in respect to a balance between these states’ rights and investors’ obligations.

To define legitimacy in terms of sustainable development so as to mean that investors’ and states’ rights and obligations must be balanced is convincing under consideration of the following: foreign investment is necessary to stimulate economic growth59, thus a legal framework aimed to encourage sustainable development must protect foreign investments effectively. On the other hand, however, economic growth and development can only be sustainable where the investment activity does not infringe upon the interests of a community. The negative corollaries of an investment must thus be balanced with community interests in order for economic development to be sustainable. Balancing investors’ and states’ rights and obligations in IIAs can redress alleged current imbalances “so that investors that benefit from profitable investments protected by IIAs are required in return to protect the communities and the natural environment in which they operate” 60.

In conclusion, a balance between the rights and obligations of host states and investors must therefore be considered an essential element of sustainable development and thus supports the

54 New Delhi Decl., 3.1. 55 Ibid., 4.1.

56 Ibid., 4.2 (d).

57 VAN OS/KNOTTERNUS, Uneasy Mix, p. 109. 58 New Delhi Decl., 6.3.

59 SPEARS, Policy Space, p. 1074.

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governance character of IIL. It is of particular importance to the evaluation of substantive IIA provisions as well as the arbitral proceedings and will therefore be taken into account as the most important aspect of sustainable development for the purpose of this thesis.

b. Requirements of balance

However, the idea of balancing investor and state obligations must be defined more clearly to be used as a legitimacy criterion. Using it as a means to evaluate IIA provisions interplays with the more fundamental question whether a balance between the competing legal interests should be struck by arbitrators on a case by case basis or rather through the provisions of an IIA: Does “balance” in the context of treaty design refer to giving broad procedural discretion to arbitrators or to the creation of precise provisions leaving only limited space to the arbitrators?

The answer to this problem depends on whether one perceives the IIL regime as a mere party-consent-based dispute settlement mechanism or rather a governance mechanism that touches the legal interests of non-participants to the system, too. Depending on which perception is chosen, the legitimacy requirements vary as demonstrated above. Since this thesis considers the inclusion of public policy concerns into the IIL-system necessary, the author holds that predictability of the outcome of arbitrations certainly contributes to the system’s legitimacy. Considering that the predictability of arbitral decisions is strongly impacted by the limitation of arbitrators’ discretion through a particular provision, it must be concluded that balance as a legitimacy requirement means the following: Balance between the rights and obligations of host states and investors is achieved through the creation of clear provisions which determine the relation of the competing legal interests and limit the arbitrator’s discretion.

3. Preliminary conclusion

It can therefore be stated that sustainable development is a legitimacy requirement of this thesis, in particular represented by the requirement to balance host states’ and investors’ rights and obligations. In other words, under this requirement, a provision contributes to sustainable development if it balances the legal interests of investors and host states. Including sustainable development in turn strengthens the IIL-system’s legitimacy.

III. Evaluation of legitimacy

In this section it is argued that the best approach to measuring legitimacy on the basis of sustainable development is the proportionality analysis.

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1. Proportionality Analysis

Proportionality is a legal concept contained in international law as well as domestic law and – as a general principle – contains the notion that “a State’s acts must be a rational and reasonable exercise of means towards achieving a permissible goal, without unduly encroaching on protected rights of either the individual or another State”61. Typically, proportionality is divided in three elements: suitability, the appropriateness of the measure to the sought objective; necessity, the consideration that the chosen measure is the least onerous amongst several suitable measures and proportionality strictu sensu, the balancing of the measure and its objective with the measure’s effects on the opposing legal interest62.

2. Evaluation of legitimacy criteria

The proportionality analysis in general facilitates the balancing of opposing rights and interests63 and therefore constitutes a very effective tool to evaluate the legitimacy as per the requirement of sustainable development in the form of balance as described above:

The development of the aforementioned proportionality elements can partly be traced back to the jurisprudence of the German Constitutional Court (Bundesverfassungsgericht) which has based proportionality on the rule of law64. It argued that the rule of law required that the individual freedom of the citizen vis-à-vis the state be only limited to “the extent indispensable for public interests”65. Transferred to the context of IIL, this reasoning could be translated into the following premise: the protection of the investor as per the IIA in effect between the parties should only be limited to the benefit of the host state’s regulatory power to the extent indispensable for the effective exercise of the latter. The degree of indispensability shall be determined by virtue of the proportionality analysis.

In regard to the criterion of balance between host states’ and investors’ rights and obligations, it can be argued that the proportionality analysis provides for the perfect tool to first clearly define the competing legal interests and secondly weigh them against each other66.

Additionally, it must be taken into account that this legal instrument is applied in various fields of international law such as for example human rights, the law regarding the use of

61 CRAWFORD, Proportionality, para. 1. 62 Ibid., para. 2.

63 Ibid., para. 23.

64 BVerfGE 19, 342 ff. in: Neue Juristische Wochenschrift [NJW], 1966 (243 – 245), at p. 244. 65 Ibid. („als es zum Schutz öffentlicher Interessen unerlässlich ist“).

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force or the law of treaties67 as well as the jurisprudence of ICJ68, ECHR69, ECJ70 and – in the opinion of the author most importantly – the WTO Dispute Settlement Bodies71. Especially the application of proportionality by the latter supports the use of this legal instrument to determine the legitimacy effect of DIOs on the basis of the developed legitimacy criteria: In WTO jurisprudence, proportionality is used to balance trade and non-trade interests72 which is similar to the balancing sought in the case at hand, the economic investment interest of the investor versus the interest of the state to develop and protect certain policies in the public interest.

3. Conclusion on evaluation of legitimacy

The proportionality analysis is a very efficient tool to weigh opposing legal interests with broad application throughout international as well as domestic law. Its application to DIOs therefore enables an in-depth analysis of the latter which will allow to draw conclusions as to their effects on the legitimacy of IIL: If the limitation of investors’ rights through DIOs is proportionate to the legal interest of the host state in regulating these issues, the overall legitimacy of IIL as per the above definition is heightened.

IV. Conclusion on legitimacy criteria and evaluation method

This section has found that the legitimacy of the IIL-system is strongly criticised. It argued that the criticism can be met by re-designing IIAs so as to establish a balance between the rights and obligations of states and investors. Requiring the IIL-system to include public policy concerns, this conclusion is drawn from the concept of sustainable development. To correctly assess whether a provision balances rights and obligations and thus strengthens the IIL-system’s legitimacy, the proportionality analysis has been chosen as this legal technique allows to define and weigh opposing legal interests.

B. Evaluation of DIOs

The second chapter of this thesis examines the approach to include DIOs into IIAs. To this end, a two-tier approach is used: First, the potential effects of a DIO on the IIL-system per se are analysed; secondly, the proportionality of these effects is determined. The process of including DIOs into IIAs will be exemplified by reference to three different legal sources: The

67 Ibid., para. 1. 68 Ibid., paras. 9 ff. 69 Ibid., para. 13. 70 Ibid., para. 17. 71 Ibid., para. 14 ff. 72 Ibid., p. 15.

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current Nigeria-Morocco BIT73, the draft of the Pan-African Investment Code74 and the IISD Model Agreement on Investment75. The Nigeria-Morocco BIT is an actual IIA concluded by two states whereas the other two models depict the perspective of an international organisation (the African Union) and that of an NGO (the IISD). These three sources were chosen to demonstrate the different approaches to the inclusion of DIOs.

Regarding the evaluation of particular clauses, this section differentiates between three main groups of provisions upon which particular focus is put, given that these provisions appear in other models for DIO inclusion a well: First, the obligation to comply with the domestic law of the host state76; secondly, the obligation to comply with international covenants on human rights protection77 (especially compliance with the ILO-Tripartite Declaration78); and thirdly,

the newly introduced possibility of individual remedies against the investor79 I. Opening Remark: Enforcement of DIOs

DIOs are only one of several attempts to recalibrate the balance between host states and investors in IIAs. Alternatives include for example the creation of general exception clauses and a clarification of substantive IIA provisions (particularly regarding FET and indirect expropriation)80. These approaches aim at a limitation of the investor’s substantial protection: If a provision applies, the investor is without protection. DIOs have the potential to cause much broader corollaries, especially if they exceed the application as between host state and investor and provide for a remedy of individuals against the investor81. Depending on the scope of such a provision, the result of the proportionality analysis can differ; the examination of DIOs and their legitimacy effect must duly consider this fact and include the designated as well as the potential enforcement mechanisms into its evaluation.

II. Provisions on compliance with domestic law

The following section examines if and how selected DIOs obliging the investors to comply with domestic law could change the existing rules of the IIL-regime (1.). In a second step, this

73 Reciprocal Investment Promotion and Protection Agreement Between the Government of the Kingdom of

Morocco and the government of the Federal Republic of Nigeria (2016).

74 African Union Commission, Draft Pan-African Investment Code (2016) (hereinafter: PAIC).

75 IISD, IISD Model International Agreement on Investment for Sustainable Development (2005) (hereinafter: IISD Model).

76 Cf. Art. 20 (1) (a) PAIC, Art. 24 (1) Nigeria - Morocco BIT and Art. 11 A, B IISD Model. 77 Cf. Art. 34 (3) PAIC, Art. 24 (2) Nigeria-Morocco BIT and Art. 16 B IISD Model.

78 ILO, Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (2017) (hereinafter: ILO TD).

79 Art. 20 Nigeria-Morocco BIT and Art. 18 F IISD Model. 80 YU/MARSHAL, Investor Obligations, p. 3.

81 Cf. for example Art. 20 Nigeria-Morocco BIT which provides for a remedy of individuals in the courts of the investor’s home state.

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section evaluates the impact of these changes on the legitimacy of the IIL-regime as a whole under application of the proportionality analysis (2.).

1. Potential changes to the IIL-system through the application of DIOs

Under the current IIL regime, the violation of domestic law by investors has been introduced into the arbitral proceedings on the base of investment definitions in BITs which required the investment’s compliance with domestic law82: Illegality – meaning the non-compliance of the investment with domestic law – has been invoked by host states to argue that the jurisdictional requirements ratione materiae were not fulfilled. Despite the general agreement that illegality should derive the investment of its protections83, the application of these “in accordance with the host State law” – clauses84 encompasses several important legal issues as to its scope: On the one hand the question whether illegality (only) impacts the substantive protection of the investor or whether it (already) derives the tribunal of its jurisdiction85 (a.); on the other hand, the debate as to the time of illegality: Does only the law in force at the establishment of the investment apply or does the violation of subsequent law also have an effect86(b.)? Regarding the nature of applicable law, there seems to be consent to only apply those legal provisions which are concerned with the admission of investments87; it is to be examined to which extent this applies under a DIO (c.).

a. Illegality as jurisdictional requirement

The first issue that arises is whether DIOs on compliance with domestic law influence the debate as to illegality as a jurisdictional requirement.

aa. PAIC

Art. 20 (1) (a) PAIC stipulates:

“Investors shall adhere to socio-political obligations including, but not exclusively, the following: a. respect for national sovereignty and observance of domestic laws, regulations and administrative practices”

Art. 4 (4) PAIC contains an “in accordance with host State law” – clause which must be taken into account when interpreting this provision; if such a clause were not contained, illegality

82 Cf. Phoenix v Czech Republic, Award (2009), para. 101, 104; Gustav F.W. Hamester GmbH & Co. K.G. v.

Republic of Ghana, Award (2010), paras. 123-124; Saur International SA v. Republic of Argentina, Award on

Jurisdiction and Liability (2012), para. 308. 83 Cf. SCHILL, Illegal Investments, p. 288. 84 Ibid., p. 283.

85 Ibid., p. 288. 86 Ibid., 307.

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could not deprive the tribunal of its jurisdiction but would be an issue on the merits. Since the investor’s rights under the BIT could still be pleaded, the author holds that this constellation would in fact heighten the protection of the investor vis-à-vis the host state: Any illegality claim of the host state would have to be dealt with on the merits and would not automatically deprive a tribunal of its jurisdiction.

However, the existence of the investor’s obligation to comply with domestic law and the fact that the creators of the PAIC have provided for the host state’s right to bring counterclaims (Art. 43 [1] PAIC) speaks to their will to allow jurisdiction over claims arising from illegal investments, too; otherwise the right to bring a counterclaim would be void in regard to the investor’s obligation to comply with domestic law. Whether or not Art. 20 (1) (a) PAIC impacts the existing jurisprudence on illegality therefore depends on the interpretation of Art. 43 (1) PAIC.

Art. 43 (1) PAIC stipulates:

“Where an investor or its investment is alleged by a Member State party in a dispute settlement proceeding under this Code to have failed to comply with its obligations under

this Code or other relevant rules and principles of domestic and international law, the

competent body hearing such a dispute shall consider whether this breach, if proven, is materially relevant to the issues before it, and if so, what mitigating or off-setting effects

this may have on the merits of a claim or on any damages awarded in the event of such award.” (emphasis added)

Art. 43 (1) PAIC refers to “[the investor’s] obligations under this Code” which includes Art. 20 (1) (a) PAIC. Additionally, Art. 43 (1) PAIC also refers to “obligations (…) under (…) relevant rules and principles of domestic (…) law”. Such a wording is a clear indicator that the creators of the PAIC wanted to allow host states to rely on the violation of domestic law to defend themselves against investors’ claims. It thus appears that illegality, too, should be covered by the scope of counterclaims as per Art. 43 (1) PAIC. This informs an interpretation of the PAIC that illegality only impacts the merits of a claim based on an investment but not the tribunals jurisdiction.

bb. Nigeria-Morocco BIT

Art. 24 (1) Nigeria-Morocco BIT stipulates:

“In addition to the obligation to comply with all applicable laws and regulations of the Host State and the obligations in this Agreement (…)”

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The Nigeria-Morocco BIT also contains an “in accordance with host State law” – clause in Art. 1 (3), hence a similar issue as with Art. 20 (1) (a) PAIC could potentially arise. Although the BIT does not contain a clear reference to the right of a host state to bring a counterclaim, its Art. 28 (1) provides that “any dispute” may be submitted to an arbitral tribunal “at the request of either Party” which has been considered sufficient for the right to bring counterclaims by most tribunals: It is often argued that arbitration clauses which either directly encompass an investor obligation or at least leave room for it, must infer that the parties to the dispute allowed for counterclaims to be brought88. Given that the Nigeria-Morocco BIT explicitly provides for investor obligations vis-à-vis the host state, it must be concluded that counterclaims can be brought forward in an arbitral proceeding. This right to bring counterclaims must at least apply to all claims made on the basis of the BIT which includes Art. 24 (1) Nigeria-Morocco BIT89. Therefore, the author holds that the same reasoning as regarding Art. 20 (1) (a) PAIC can be employed; a tribunal has thus jurisdiction over an investor’s claim even if the claim is based on an illegal investment.

cc. IISD Model

Art. 11 IISD Model stipulates:

“(A) Investments are subject to the laws and regulations of the host state.

(B) Investors and investments must comply with the host state measures prescribing the formalities of establishing an investment and accept host state jurisdiction with respect to the investment.”

Art. 2 (C) (c) IISD Model contains an “in accordance with the host State law” – clause and Art. 18 (E) IISD Model provides for the host state’s right to initiate a counterclaim “for damages resulting from an alleged breach of the agreement”. On the basis of the above-mentioned reasoning, the author therefore holds that this provision, too, circumvents legality of the investment as a jurisdictional requirement and would thus force a tribunal to discuss the violation of domestic law on the merits.

dd. Influence of Al-Warraq v. Indonesia90

In this case, the claimant (Al-Warraq) had launched proceedings on the basis of violations of the OIC91. The respondent invoked Art. 9 of the OIC which obliges investors to adhere to

88 KJOS, Applicable Law, p. 134. 89 Ibid.

90 Hesham Talaat M. Al-Warraq v The Republic of Indonesia, UNCITRAL Arbitration, Final Award (2014) (hereinafter: Al-Warraq).

91 General Secretariat of the Organisation of Islamic Conference, Agreement on Promotion, Protection and

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domestic law and argued that the claimant could not rely on protection of the OIC as it had broken Indonesian law92. Relying on the “clean hands” doctrine, the majority of the Tribunal agreed with the respondent and ruled that the claimant’s claim was inadmissible93. However, the Tribunal still allowed the respondent to initiate a counterclaim arguing that the OIC’s provisions and an additional agreement between the parties permitted the respondent to bring claims independent from the investor’s claim94.

This decision deviates strongly from the opinion described above in that the tribunal concludes from the existence of a DIO on compliance with domestic law that the “clean hands” doctrine ought to be applied. Albeit the similarities with the provisions at hand, the author argues that the approach in Al-Warraq cannot serve as a blueprint for dealing with DIOs on domestic law compliance. First, the decision to allow a counterclaim independent from the ancillary claim in Al-Warraq was based on a special agreement between the parties according to which “one clear agreement was Indonesia's ability to bring a counterclaim if the Claimant's claim survived the jurisdictional phase”95. This specific agreement was concluded by the disputing parties and not contained in the OIC; the judgement can thus not be seen as to set a standard for the interpretation of provisions where such an additional agreement does not exist. Secondly, there is no provision in the OIC that states that the clean hands principle should be applied. The choice of the parties to allow for counterclaims indicates their will to settle disputes on the merits. Thirdly, the “clean hands” doctrine only applies “where two parties have assumed an identical or a reciprocal obligation”96. As the minority in Al-Warraq rightly pointed out: the clean hands doctrine does not apply “unless that illegality relates to the acquisition of [the] investment, which is not the present case”97. Thus, the tribunal in Al-Warraq erred, the issue of illegality is an issue of the merits.

ee. Summary

All three provisions must be interpreted to mean that illegality can only be brought forward against the merits of a claim and not against the tribunal’s jurisdiction. This expands the protection of the IIAs to illegal investments in the sense that claims which are based on them cannot be dismissed right away. These three DIOs impact the existing IIL-regime by turning

(hereinafter: OIC). 92 Al-Warraq, para. 161. 93 Ibid., paras. 646, 654.

94 Ibid., paras. 441, 442, 447 – 449. 95 Ibid., para 449.

96 PCIJ,The Diversion of Water from the Meuse (Netherlands v. Belgium), para. 323.

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the legality of the investment from a jurisdictional requirement into a requirement on the merits. The author argues that this benefits the investor because it is given more procedural leeway: A claim is not dismissed right away when the investment violated domestic law but the investor can argue on the substantive aspect of every claim which potentially raises its chances to convince the arbitrators.

b. Effect of illegality?

Since it has been established that illegality cannot cause the default of jurisdiction, it must be determined which effects illegality as per the above-described provisions can have on the merits of an investor’s claim. All three provide for the right to bring counterclaims, thus, illegality would probably have to be dealt with in connection with the right of the host state to bring a counterclaim. The Nigeria-Morocco BIT additionally provides for the possibility of victims of DIO violations to bring claims against the investor in its home state (Art. 20). Under the IISD Model, the same applies regarding both, courts of the home state as well as courts of the host state (Art. 18 [F]).

c. Scope of legal provisions applicable to illegality

Given the broad scope of all three provisions (“domestic laws, regulations and administrative practices” [PAIC], “all applicable laws and regulations of the Host State” [Nigeria-Morocco BIT] and “subject to the laws and regulations of the host state” [IISD Model]), it is questionable whether illegality is limited to violations of the law on the admission of investments or whether it covers all applicable law.

aa. PAIC

The limitation of illegality to laws concerned with the admission of investments has been established on the basis of the wording found in “in accordance with host State law” – clauses98 (for example “established in accordance with the laws and regulations”99). Art. 4 (4) PAIC contains a similar reference (“established or acquired”), hence, following arbitral practice, illegality would have to be interpreted as to arise from only the violation of domestic laws on investment admission. However, this interpretation would lead the reference to “domestic laws” contained in Art. 20 (1) (a) ad absurdum. How this contradiction can be

98 SCHILL, Illegal Investments, p. 301 f.

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solved might one day be subject to arbitral proceedings. The author argues that the introduction of Art. 20 (1) (a) PAIC can only have been aimed at extending the obligations of investors vis-à-vis the host state. As its inclusion would otherwise not have any effect on the scope of illegality under existing IIL, Art. 20 (1) (a) PAIC must be interpreted to expand the scope of illegality to all domestic laws.

bb. Nigeria-Morocco BIT

Art. 1 (3) Nigeria-Morocco BIT refers to “an enterprise (…) established, acquired, expanded or operated (…) in accordance” with host state law. Although this provision contains no limitation as to laws concerned with the admission of investments, it is unclear how it relates to the DIO in question, Art. 24 (1) Nigeria-Morocco BIT. Given the wording “applicable laws”, the author suggests that Art. 1 (3) be used as a specification of Art. 24 (1) Nigeria-Morocco BIT: Only those laws are “applicable” that refer to how the investment is “established, acquired, expanded or operated”. This interpretation, however, does not impact the existing jurisprudence on the scope of illegality (see above).

cc. IISD Model

Art. 2 (C) (c) IISD Model stipulates the requirement that “the investment is made in accordance with the laws of that home state”. This wording rather clearly points to rules concerning the admission of investments. However, based on the wording of Art. 11 A IISD Model (“Investments are subject to the laws and regulations of the host state”), the author applies the same reasoning as for the PAIC. Thus, under the IISD Model, too, the scope of illegality is expanded to all domestic laws.

dd. Summary

Under the PAIC and the IISD Model, the scope of illegality is extended to all domestic law, whereas the Nigeria-Morocco BIT does not have a larger impact on existing arbitral jurisprudence.

d. Temporal scope of illegality

Furthermore, it is questionable which effect these DIOs will have on the temporal scope of illegality. In past decisions, tribunals have distinguished between initial and subsequent illegality: Illegality at the establishment of the investment (ab initio) was seen as a jurisdictional impediment whereas illegality in the course of the investment (ex post) was

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considered on the merits100. On the basis of the above-mentioned reasoning, the author holds that this distinction cannot be applied to the three DIOs presented in this section: It has already been established that the illegality of an investment does not lead to the default of jurisdiction under any of the above-mentioned provisions; all violations of domestic law must be dealt with on the merits. Furthermore, none of the displayed DIOs on compliance with domestic law contains any limitation as to its temporal scope; even Art. 1 (3) Nigeria-Morocco BIT which specifies Art. 24 (1) Nigeria-Nigeria-Morocco BIT (see above) refers to legality during the operation of investments and thus to a subsequent application of laws. In conclusion, the author argues that the temporal scope of illegality as per the cited DIOs covers both, initial as well as subsequent illegality which must both be dealt with on the merits. 2. Proportionality of these changes

The following section examines to which extent the DIOs in question, the obligation to adhere to domestic law can be considered proportionate, given the three different effects on the IIL-regime as described above.

a. Legitimate purpose

When examining the obligation to comply with the domestic law of the host state and its effect on the IIL-system’s overall legitimacy as per the proportionality analysis, one must first separate the opposing legal interests at issue: The one legal interest is the purpose of the IIL-system, the protection of the investor from wrongful conduct of the host state trough the allocation of legal security in the form of IIAs101. The opposing interest is the host state’s legal interest to regulate its own affairs, especially regarding matters of public interest (e. g. public health or environmental protection). The limitation of the first legal interest, the investors’ protection, is proportionate if it can be justified by the legitimate purpose which is the second legal interest, the right of the host state to regulate. If the limitation of the investors’ rights is proportionate, the provision at hand can be regarded as contribution to the IIL-system’s legitimacy.

b. Suitability

The measures at issue, the DIO provisions obliging the investor to adhere to domestic law, are suitable if they are appropriate to reach the sought objective102, in this case the realization of

100 Cf. Gustav F.W. Hamester GmbH & Co. K.G. v. Republic of Ghana, Award (2010), para. 127; Fraport AG

Frankfurt Airport Services Worldwide v. The Republic of the Philippines, Award (2007), para. 345.

101 VAN OS/KNOTTERNUS, Uneasy Mix, p. 108. 102 CRAWFORD, Proportionality, para. 2.

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broader regulatory power of the state. In the case at hand, it seems questionable whether the host state is in fact given broader regulatory power since the procedural options of the investor seem to have become greater. On the other hand, it must be considered that the existence of the obligation to adhere to domestic law does not per se render the host state’s regulatory power void. Given that all three treaties provide for the right to bring counterclaims, the violation of domestic law can in fact allow the host state to use the arbitral forum to obtain an award against the investor if such a violation is detected by the tribunal. When operating in the host state, the investor must be aware of the danger of a counterclaim in later arbitral proceedings; in the opinion of the author, the investor is thus more likely to comply with domestic law, to avoid endangering potential later claims against the host state. Hence, the DIO in question is suitable to achieve broader regulatory power of the host state. c. Necessity

Necessity requires that the measure at issue, the DIOs on domestic law adherence, has the least onerous effect on the investor’s legal interest when compared with other suitable measures103. There are three provisions with a potentially less onerous effect which might be equally suitable.

aa. Limitation of the scope to “laws on investment”

A potentially less intrusive measure could be to limit the scope of applicable law to those domestic laws that explicitly concern the admission and operation of investments as undertaken in the Nigeria-Morocco BIT (see above). This would provide the investor with broader autonomy while at the same time safeguarding the regulatory power of the host state. However, it is doubtful whether the degree of regulatory power of the host state would in fact be equal to that under the “[all] domestic law” – provision. There are circumstances in which a law does not explicitly relate to the admission or operation of an investment but can still be violated by or rather in connection with the investment. This is the case with the prohibition of bribery: If the scope of illegality was limited to operation and admission of investments, tribunals could argue that acts of bribery do not constitute violations of domestic law as per the DIOs which would in turn give an incentive to investors not to adhere to the domestic law on bribery. The two measures at issue, the wording “[all] domestic law” and the wording “domestic law on the admission and operation of investments”, are thus not equally suitable to achieve broader regulatory power of the host state.

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bb. Limitation to “laws in effect at the time of the establishment of the investment” Another less onerous measure could be to limit the laws applicable to the obligation to comply with domestic law to those that were in effect at the time the investment was made. This would provide far greater predictability to the investors and thus strengthen their legal protection. On the other hand, these measures would effectively erase the host state’s regulatory power as any law passed after the establishment of an investment could not be applied thereto anymore; the main instrument of regulation, the passing of new laws, would be rendered useless. Hence, the limitation to “laws in effect at the time of the establishment of the investment” is not equally suitable neither.

cc. Comparison to “general exception clauses”

The question arises as to which extent the inclusion of the DIO in question is necessary when compared to an alternative clause, a general exception.

“General exception clauses” exclude certain regulatory actions of states from the application of investor protection, in other words: the investor cannot invoke a violation of an IIA, if a general exception applies. This method can be found in the GATT and GATS agreements but it is being incorporated more and more into the investment chapters of “new mega-regional trade agreements” – often by reference to GATT and GATS104. Often, this reference entails legal interests that are also contained in Art. XX GATT such as human, animal or plant life, public morals or the protection of exhaustible resources105. Its inclusion into IIAs serves the purpose of allowing a host state to regulate its own affairs by balancing national sovereignty and international responsibility106; it thus has the same legitimate purpose as DIOs. As exempting certain regulatory measures from the scope of investment protection certainly speaks to a host state’s regulatory authority, this method is furthermore suitable to achieve the legitimate purpose.

However, the question arises as to whether the inclusion of general exception clauses into IIAs has less onerous effects on an investors’ protection than DIOs. Given the broad discretionary power that these provisions transfer onto arbitral tribunals, the author considers this questionable. In favour of including general exceptions into IIAs to strengthen the IIL-system’s legitimacy, Collins argues that the broad discretion that these exceptions give to an arbitral tribunal must be condoned because “certainty must be sacrificed for justice to be

104 COLLINS, Line of Equilibrium, p. 580. 105 Ibid., p. 578.

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done”107. Furthermore, he argues, broad discretion of a tribunal is needed to reveal the goal of a measure by looking at its application “rather than its substance”108.

In the opinion of the author, these arguments in fact speak against the necessity of including general exceptions into IIAs: Firstly, a decrease of legal certainty and in turn a lower predictability of the outcome of arbitral proceedings constitutes a more rather than a less onerous option to the protection of the investors’ rights. Under a general exception, the host state can determine whether and how the investor is protected, whereas under a DIO investors themselves establish their own protection through adherence or non-adherence to their obligations. This makes DIOs a preferable solution in terms of legal certainty. Secondly, it is not convincing to argue that a tribunal must look at the application of a measure and not at its substance: The legality is determined by the interplay of both; a measure must be applied in compliance with the legal substance in order for it to be legal. Moreover, the author fails to see how this argument is related to the aim of making arbitral decisions more predictable through clearer provisions and thus strengthening the IIL-system’s legitimacy.

Collins further argues that the reference to GATT and GATS as contained in the

aforementioned “mega-regional trade agreements” allows for a recourse to the “wealth of WTO case law” which he refers to as a “sophisticated tool available to investment arbitrators”109. The author argues to the contrary that WTO case law should not be applied to investment arbitration as the procedural situations of both are fundamentally different. Other than in a WTO dispute settlement proceeding, the parties to an investment arbitration are not equal in power – in fact this lack of equality is the very purpose of investment protection. Furthermore, investment arbitration is typically initiated at a point in the relations between the parties where no future relations are to be expected. This can be drawn from the fact that investors typically request for compensation for state measure rather than its cessation. WTO cases differ in this regard, the claim is typically aimed at cessation which speaks to the initiating party’s interest in continued economic relations.

In conclusion, the author therefore holds that DIOs constitute a preferable approach to balancing rights and obligations of states and investors when compared to general exception clauses.

cc. Preliminary Conclusion

107 Ibid.

108 Ibid, pp. 579, 580. 109 Ibid., pp. 580, 581.

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All three measures are not equally suitable, the obligation to comply with domestic law in its formulation as contained in the three treaties at hand is therefore necessary.

d. Proportionality strictu sensu

Proportionality strictu sensu requires a balancing of the legal interest that is limited, here the protection of the investor, with the legitimate purpose, here the power of the host state to regulate110. In weighing these two interests, the effects of the measure on the limited legal interest must be considered111.

In the opinion of the author, one aspect that deserves particular attention in connection with the DIOs on compliance with domestic law presented in this section is the temporal scope of illegality. If the host state is free to change the law after the establishment of the investment, does that not amount to a one-sided competence to amend the binding obligations of the investor as per the BIT? Since the investor is bound to comply with domestic law and the host state is free to set this law at its own discretion, this DIO could eventually result in a derogation of investor protection. IIAs are, however, designed to limit the host state’s discretion in regard to the treatment of foreign investors, such a wide leeway in determining the investor’s obligations can therefore not be considered proportionate.

Nevertheless, it must be considered that IIAs do contain a threshold to the treatment of investors by the host state which is defined by their substantive protections of the investor vis-à-vis the host state. This threshold must be taken into account when evaluating the potential effect of the DIOs at hand: The change of domestic laws must not limit the investor’s rights beyond the standard of protection prescribed in the IIA. In theory, an investor can always initiate proceedings before an arbitral tribunal if a new law violates its rights. In practice, however, the initiation of such proceedings is quite costly and the investor does not have a legal guarantee to win since many protective provisions are not very clearly defined. The DIO on compliance with domestic law thus leads to a situation in which the host state can one-sidedly pass new laws with direct obliging effect against which an investor only has effective remedy through international arbitration. This constellation limits the rights of the investor considerably in favour of the host state. Given that the effect of domestic law under the obligation to comply as per the above-mentioned DIOs is far larger than without such an obligation, the author holds that proportionality strictu sensu is not existent.

e. Alternative proportionate provision?

110 Ibid. 111 Ibid.

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If the obligation to comply with domestic law contained clear criteria upon which host states could in fact determine new laws without infringing upon the investor’s rights as per the BIT, both sides could avoid the danger of arbitration from the start. Considering that host states must still be able to regulate their own affairs, it is suggested to include a list of clearly described negative thresholds for state regulation (e. g. discriminatory laws) into the IIA. This could create predictability for both sides, the investor as well as the host state.

f. Summary

The examined DIOs on investor compliance with domestic law are disproportionate as they subject the investor to the host state’s discretion without providing for a protective threshold regarding those laws that would violate the investor’s rights as per the IIA. A solution to this problem could be to add a list of issues that prohibit regulation (e. g. discriminatory laws). 3. Conclusion on provisions on compliance with domestic law

The three DIOs on compliance with domestic law have the potential to effect existing IIL-rules on illegality quite extensively. Most of these changes can be considered proportionate and do therefore contribute to the system’s overall legitimacy. However, the right of the host state to regulate the investor through post-establishment legislation must be limited preventively to avoid a situation in which a law clearly violates investor’s rights under the IIA forcing the investor to initiate proceedings.

III. Provisions on compliance with international law

All three treaties, PAIC, IISD Model and the Nigeria-Morocco BIT, contain references to additional international treaties and conventions. The ILO Tripartite Declaration112 is referred

to by the IISD Model and the PAIC113. The following section analyses the obligations arising from this treaty and their effect on investments and investors (1.), aiming to evaluate their proportionality (2.).

1. Obligations as per the ILO TD and their effects on the treaties

112 ILO, Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (2017) (hereinafter: ILO TD).

113 cf. Art. 16 B IISD Model, the PAIC refers to “international conventions and existing labour policies” (cf. Art. 34 [3] PAIC).

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The ILO TD is an instrument to encourage multi-national enterprises (MNEs) to contribute to economic and social progress and to minimize the negative effects that stem from their operations114. It is addressed to MNEs, states and labour organisations but must be accepted voluntarily in order to create a binding effect115. In the case at hand, the DIOs in question refer to this legal instrument, the obligations contained therein could thus be binding on the parties. The following section gives an overview of these obligations and examines how they might influence the investment regime as per the treaties that refer to them.

a. Obligations of MNEs as per the ILO TD (selected overview)

The ILO TD in general is divided into six sections each of which deals with one aspect of the interactions between MNEs as employers and their employees116. This section attempts to give an overview of some of these obligations.

After a few general remarks in the first part, the second part (“general obligations”) addresses fundamental principles and other basic aspects of the ILO TD. According to Art. 9 ILO TD, “[a]ll parties should contribute to the realization of the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up, adopted in 1998”. These fundamental principles encompass the recognition of the freedom of association and of the right to collective bargaining, the elimination of all forms of compulsory labour, the abolition of child labour and the elimination of discrimination117. Art. 10 (c) ILO TD stipulates that “[t]he corporate responsibility to respect human rights requires that enterprises, including multinational enterprises wherever they operate: (i) avoid causing or contributing to adverse impacts through their own activities, and address such impacts when they occur; and (ii) seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts”. Other mentionable aspects of the second part are the reference to the UN Guiding Principles on Business and Human Rights118 and the requirement of

consistency of MNE activities with the national law of the country in which they operate119. Within the section on employment120, several obligations are noteworthy: According to Art. 25 ILO TD, “[m]ultinational as well as national enterprises should take immediate and

114 CARASCO/SINGH, Corporate Responsibility, p. 436. 115 Ibid.

116 The six sections are: Aim and Scope, General Policies, Employment, Training, Conditions of Work and Life and Industrial Relations (cf. ILO TD).

117 Cf. Art. 9 ILO TD.

118 UNO, Guiding Principles on Business and Human Rights: Implementing the United Nations

“Protect, Respect and Remedy” Framework (2011); for reference see Art. 10 (a) ILO TD.

119 Art. 11 ILO TD. 120 Arts. 13 – 36 ILO TD.

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