Europe’s Formulation of Fair and Equitable Treatment

Europe as an Investment Treaty ActorBIICL Investment Treaty Forum MeetingStockholm, 12 June 2015

Martins Paparinskis

Lecturer, University College London

Fair and Equitable Treatment

• Background– European practice

– Canadian practice

– Singaporean practice

• European Union’s practice– Source

– Elaboration

– Content

European Union’s practice

• EU-Canada Comprehensive Economic and Trade Agreement (CETA) (consolidated text of 28 September 2014), trade.ec.europa.eu/doclib/docs/2014/september/tradoc_152806.pdf, Article X.9

• EU-Singapore Free Trade Agreement (draft version of October 2014), trade.ec.europa.eu/doclib/docs/2014/october/tradoc_152844.pdf, Article 9.4

• [Transatlantic Trade and Investment Partnership (TTIP) (leaked EU draft proposal of 2 July 2013), eu-secretdeals.info/upload/EU-Investment-Text-TTIP-v_July2nd-2013_v1.pdf, Article 12]

Background: European practice (I)

• 2004 Netherlands Model Article 3(1)Each Contracting State shall ensure fair and equitable treatment of the investments of nationals of the other Contracting Party and shall not impair, by unreasonable or discriminatory measures, the operation, management, maintenance, use, enjoyment or disposal thereof by those nationals. Each Contracting Party shall accord to such investments full physical security and protection.

• 2008 Germany Model Article 2(2) (Admission and Protection of Investments) Each Contracting State shall in its territory in every case accord investments by investors of the other Contracting State fair and equitable treatment as well as full protection under this Treaty.

Background: European practice (II)

• 2008 UK Model Article 2 (Promotion and Protection of Investments)Investments of nationals or companies of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party. Neither Contracting Party shall in any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or disposal of investments in its territory of nationals or companies of the other Contracting Party. Each Contracting Party shall observe any obligation it may have entered into with regard to investments of nationals or companies of the other Contracting Party.

Background: Canadian practice (I)

• 2004 Model Article 5 (Minimum Standard of Treatment)1. Each Party shall accord to covered investments treatment in accordance with the customary international law minimum standard of treatment of aliens, including fair and equitable treatment and full protection and security.

2. The concepts of "fair and equitable treatment" and "full protection and security" in paragraph 1 do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.

3. A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not establish that there has been a breach of this Article.

Background: Canadian practice (II)

• 2012 Canada-China BIT Article 4 (Minimum Standard of Treatment)1. Each Party shall accord to covered investments fair and equitable treatment and full protection and security, in accordance with international law.

2. The concepts of "fair and equitable treatment" and "full protection and security" in paragraph 1 do not require treatment in addition to or beyond that which is required by international law.

3. A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not establish that there has been a breach of this Article.

Background: Singaporean practice (I)

• De facto Model Article 3(2) (Promotion and Protection of Investment) (Jean Ho in C Brown (ed), Commentaries on Selected Model BITs, OUP 2013 at 635)Investments made or approved under Article 2 shall be accorded fair and equitable treatment and protection in accordance with this Agreement.

• 2008 Singapore-Turkey BIT Article 2(3) (Promotion and Protection of Investment)Investments made or approved under Article 2 shall be accorded fair and equitable treatment and protection in accordance with this Agreement.

Background: Singaporean practice (II)

• 2009 ASEAN Comprehensive Investment Agreement Article 11 (Treatment of Investment)1. Each Member State shall accord to covered investments of investors of any other Member State, fair and equitable treatment and full protection and security.

2. For greater certainty: (a) fair and equitable treatment requires each Member State not to deny justice in any legal or administrative proceedings in accordance with the principle of due process; and (b) full protection and security requires each Member State to take such measures as may be reasonably necessary to ensure the protection and security of the covered investments.

3. A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not establish that there has been a breach of this Article.

Fair and equitable treatment: source

• Autonomous treaty obligation, treaty obligation supplemented by customary obligation, or treaty obligation that has the content of customary obligation?

• Reference to customary law– 'Fair and equitable treatment' (?)– Yes: ‘denial of justice', 'manifest arbitrariness', structure of Waste Management v Mexico (II), ICSID

Case no ARB(AF)/00/3, Award, 30 April 2004 [98], 'a breach ... does not establish'– Probably: ‘due process‘ – Probably not: 'legitimate expectations‘, Lemire v Ukraine, ICSID Case no ARB/06/18, Decision on

Jurisdiction and Liability, 14 January 2010 [284]

• Setting out special customary law

• Taking into account customary law, VCLT Article 31(3)(c)

• 'Other rules and principles of international law applicable between the Parties', FTA Article 9.22(2), CETA Article X.27(1)

Fair and equitable treatment: elaboration (I)

• ‘To comply with the obligation to provide fair and equitable treatment set out in paragraph 1, neither Party shall adopt measures that constitute’ (FTA)

• ‘A Party breaches the obligation of fair and equitable treatment referenced in paragraph 1 where a measure or series of measures constitutes’ (CETA)

• Cf. ‘The determination of whether a measure or series of measures by a Party, in a specific fact situation, constitute an indirect expropriation’ (FTA, CETA)

Fair and equitable treatment: elaboration (II)

• An exhaustive list or examples? – FTA Article 9.4(3) (‘Treatment not listed in paragraph 2 can also constitute a breach of fair and equitable

treatment where the Parties have so agreed in accordance with the procedures provided in [Article 17.1(4)(c)]’)

– CETA Article X.9(1) (FET ‘in accordance with paragraphs 2 to 6’)

• (How) can the list be changed? – FTA Articles 9.4(3) and 17.1(4)(c) (‘The Trade Committee may: … consider amendments to this Agreement

or amend provisions of this Agreement in cases specifically provided for in this Agreement’)– CETA Article X.9(3) (‘The Parties shall regularly, or upon request of a Party, review the content of the

obligation to provide fair and equitable treatment. The Committee on Services and Investment may develop recommendations in this regard and submit them to the Trade Committee for decision.’), Article X.42(3)(c) (‘The Committee may, on agreement of the Parties, and after completion of the respective legal requirements and procedures of the Parties: … recommend to the Trade Committee the adoption of any further elements of the fair and equitable treatment obligation pursuant to Section 5, Article X.9(4) (Treatment of Investors and of Covered Investments’)

• Note also the general rules on interpretation by the Trade Committee

Fair and equitable treatment: denial of justice

• ‘Denial of justice12 in criminal, civil and administrative proceedings’ (FTA)

• Fn 12: ‘For greater certainty, the sole fact that the investor’s claim has been rejected, dismissed or unsuccessful does not in itself constitute a denial of justice’

• ‘Denial of justice in criminal, civil or administrative proceedings’ (CETA)

– Technical term for reference to customary international law of denial of justice

Fair and equitable treatment: due process

• ‘A fundamental breach of due process’ (FTA) • ‘Fundamental breach of due process, including a fundamental breach of

transparency, in judicial and administrative proceedings’ (CETA)– ‘a serious departure from a fundamental rule of procedure’ (ICSID Convention Article 52(1)(d))– ‘a lack of due process leading to an outcome which offends judicial propriety – as might be the

case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in administrative process’ (Waste Management II [98])

– ‘[A] state incurs responsibility if it administers justice to aliens in a fundamentally unfair manner’, Spence International Investments, LLC, Berkowitz et al. v Costa Rica, ICSID Case no UNCT/13/2, Submission of the US, 17 April 2015, fn 15.

– ‘due process’ as a criterion of lawfulness of expropriation– ‘a fundamental error in procedure which has occasioned a failure of justice’ (Application for Review

of Judgment no 158 of the UNAT [1973] ICJ Rep 209 [92]), decision ‘vitiated by a fundamental fault in the procedure followed’ (Judgment no 2867 of the ILOAT [2012] ICJ Rep 10 [30]-[31])

Fair and equitable treatment: arbitrariness

• ‘Manifestly arbitrary conduct’ (FTA)• ‘Manifest arbitrariness’ (CETA)

– ‘It therefore appears that, although situations may be more varied and complicated today than in the 1920s, the level of scrutiny is the same. The fundamentals of the Neer standard thus still apply today: to violate the customary international law minimum standard of treatment codified in Article 1105 of the NAFTA, an act must be sufficiently egregious and shocking — a gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons — so as to fall below accepted international standards and constitute a breach of Article 1105(1). … The standard for finding a breach of the customary international law minimum standard of treatment therefore remains as stringent as it was under Neer; it is entirely possible, however that, as an international community, we may be shocked by State actions now that did not offend us previously’ (Glamis Gold v US, UNCITRAL Case, Award, 8 June 2009 [616], emphasis added, also [627]).

– Arbitrary, unreasonable, or discriminatory measures; ‘manifest’ in Articles 36(3), 52(1)(b), and 57 of the ICSID Convention; ‘arbitrariness’ in ELSI [1989] ICJ Rep 15

Fair and equitable treatment: coercion and harassment • ‘Harassment, coercion, abuse of power or similar bad faith conduct’ (FTA)• ‘Abusive treatment of investors, such as coercion, duress and harassment’

(CETA) – ‘The FET standard defined in the BIT is an autonomous treaty standard, whose precise meaning

must be established on a case-by-case basis. It requires an action or omission by the State which violates a certain threshold of propriety, causing harm to the investor, and with a causal link between action or omission and harm. The threshold must be defined by the Tribunal, on the basis of the wording of Article II.3 of the BIT, and bearing in mind a number of factors, including among others the following: - whether the State has failed to offer a stable and predictable legal framework; - whether the State made specific representations to the investor; - whether due process has been denied to the investor; - whether there is an absence of transparency in the legal procedure or in the actions of the State; - whether there has been harassment, coercion, abuse of power or other bad faith conduct by the host State; - whether any of the actions of the State can be labeled as arbitrary, discriminatory or inconsistent’ (Lemire [284], emphasis added)

– ‘Duress’ (Desert Line Projects LLC v Yemen, ICSID Case no ARB/05/17, Award, 6 February 2008)

Fair and equitable treatment: legitimate expectations (I)• ‘A breach of the legitimate expectations of an investor arising from specific or

unambiguous representations13 from a Party so as to induce the investment and which are reasonably relied upon by the investor’ (FTA)

• Fn 13: ‘For greater certainty, representations made so as to induce the investments include the representations made in order to convince the investor to continue with, not to liquidate or to make subsequent investments’

• ‘When applying the above fair and equitable treatment obligation, a tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated’ (CETA)

Fair and equitable treatment: legitimate expectations (II)• ‘Legitimate expectations’• ‘In applying this standard it is relevant that the treatment is in breach of

representations made by the host State which were reasonably relied on by the claimant’ (Waste Management (II) Award [98])

• ‘The Tribunal therefore agrees with International Thunderbird that legitimate expectations relate to an examination under Article 1105(1) in such situations “where a Contracting Party’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct ….” In this way, a State may be tied to the objective expectations that it creates in order to induce investment’ (Glamis Gold [621], emphasis in the original)

Fair and equitable treatment: discrimination

• ‘Targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief’ (CETA only)

– ‘Taken together, the S.D. Myers, ADF and Loewen cases suggest that the minimum standard of treatment … of fair and equitable treatment is infringed … if the conduct … is discriminatory and exposes the claimant to sectional or racial prejudice’ (Waste Management (II) [98])

– ‘Respondent argues that the excessive verdict was not caused by inadmissible appeals to prejudice and local favouritism but by Loewen’s flawed trial strategy. First, it is said that because the foreman of the jury was formerly a Canadian, it would be wrong to impute anti-Canadian bias to the jury. This argument is based very largely on post-trial interviews with the jurors, including the foreman. We do not regard these interviews as establishing that the verdict was uninfluenced by appeals to local sentiment, racial or class-based prejudice. These influences may well have played a part in the verdict, even if there was an absence of actual bias on the part of the jurors themselves. The magnitude of the verdict suggests that the verdict was influenced by bias, prejudice, passion or sympathy’ (Loewen v US, ICSID Case no ARB(AF)/98/3, Award, 26 June 2003 [115]). ‘It is the responsibility of the courts of a State to ensure that litigation is free from discrimination against a foreign litigant and that the foreign litigant should not become the victim of sectional or local prejudice’ ([123], emphasis added throughout).

Fair and equitable treatment: contractual breach• ‘Where a Party, itself or through any entity mentioned in article 1 paragraph 5, had given any specific

and clearly spelt out commitment in a contractual written obligation14 towards an investor of the other Party with respect to the investor’s investment or towards such an investment, that Party shall not frustrate or undermine the said commitment through the exercise of its governmental authority15 either: (a) deliberately; or (b) in a way which substantially alters the balance of rights and obligation in the contractual written obligation unless the Party provides reasonable compensation to restore the investor or investment to a position which it would have been in had the frustration or undermining not occurred’ (FTA only)

• Fn14 ‘For the purposes of this paragraph, a “contractual written obligation” means an agreement in writing, entered into by both parties, whether in a single instrument or multiple instruments, that creates an exchange of rights and obligations, binding both parties’

• Fn15: ‘For the purposes of this article, a Party frustrates or undermines a commitment through the exercise of its governmental authority when it frustrates or undermines the said commitment through the adoption, maintenance or non-adoption of measures mandatory or enforceable under domestic laws’

– Not significantly different from traditional customary law

Fair and equitable treatment: a breach … does not establish• ‘A breach of another provision of this Agreement, or of a separate

international agreement, does not establish that there has been a breach of this Article’ (FTA)

• ‘For greater certainty, a breach of another provision of this Agreement, or of a separate international Agreement, does not establish that there has been a breach of this Article’ (CETA)

– ‘A determination that there has been a breach of another provision of the NAFTA, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1)’ (NAFTA Free Trade Commission’s Interpretation, 31 July 2001 B(3))

Overall, then, what is the EU FET?

• Seemingly an exhaustive list of:– Traditional customary law of denial of justice– Article 1105 of NAFTA, as interpreted in the FTC 2001 Interpretation, Waste Management II,

and Glamis Gold– Elements of ‘autonomous’ fair and equitable treatment from Desert Line v Yemen and (at least

parts of) Lemire v Ukraine– (FTA) rule on contractual breach not significantly different from traditional customary law

• Consistent on most issues but also divergent on both minutiae and important points

• Which the Trade Committee may supplement with further elements (but not remove existing elements?)

• And interpret under the general rules on interpretation by the Trade Committee

Europe’s Formulation of Fair and Equitable Treatment

Europe as an Investment Treaty ActorBIICL Investment Treaty Forum Meeting Stockholm, 12 June 2015

Martins Paparinskis

Lecturer, University College London