International investment law between commitment and flexibility: A contract theory analysis

Journal of International Economic Law

Volumn 12, Issue 2, 2009, Pages 507-538

  Van Aaken, Anne ^a  

^a UNIVERSITY OF ST GALLEN   (Switzerland)

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[No Author keywords available]

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EID: 72549086591     PISSN: 13693034     EISSN: 14643758     Source Type: Journal    
DOI: 10.1093/jiel/jgp022     Document Type: Article

References (205)

1. Liberty's great advance, The Economist (A Survey of Capitalism and Democracy), 28 June 2003, at 4, 6.
2. Alan Greenspan, We will never have a perfect model of risk, Comment, Financial Times, 16 March 2008.
3. The Marrakesh Agreement establishing the World Trade Organization, done at Marrakesh, 15 April 1994, entry into force 1 January 1995, 1867 U.N.T.S. 154. The WTO Agreements contain several flexibility mechanisms, e.g. in the General Agreement on Tariffs and Trade (GATT) Article XII (Restrictions to Safeguard the Balance of Payments), Article XVIII (Infant Industry Protection and Balance of Payments Crises), Article XIX (Emergency Actions on Imports of Particular Products, also known as the 'safeguards clause'), Article XX (General Exceptions), Article XXI (Security Exceptions) and Article XXVIII (Modification of Schedules, also known as tariff renegotiation). For a detailed analysis, see Simon Schropp, Trade Policy Flexibility and Enforcement in the WTO. A Law and Economics Analysis (Cambridge University Press, Cambridge 2009).
4. The term 'International Investment Arrangements' (IIAs) includes both Preferential Trade and Investment Agreements (PTIA) that include investment protection and BITs, see UNCTAD 'Intellectual Property Provisions in International Investment Arrangements' http://www. unctad.org/sections/dite- pcbb/docs/webiteiia20071-en.pdf (accessed 12 July 2008), at 2.
5. For a thorough treatment of uncertainty in international relations, especially concerning the capacity of states to implement international treaties in internal policies, see George W Downs and David M Rocke, Optimal Imperfection? Domestic Uncertainty and Institutions in International Relations (Princeton University Press, Princeton 1995);
6. and for uncertainty in contracts as applied to Public International Law, see Robert E Scott and Paul B Stephan, The Limits of Leviathan. Contract Theory and the Enforcement of International Law (Cambridge University Press, New York 2006).
7. For a seminal work, see Albert O Hirschman, Exit, Voice and Loyalty (Cambridge University Press, Cambridge 1970).
8. In 2007, total FDI inflows reached a record of $1833 trillion USD, thereby outpacing the increase in trade; UNCTAD, World Investment Report 2008 (UNCTAD, Geneva/New York 2008), at 3.
9. In 1995, OECD Ministers launched negotiations on a multilateral agreement on investment (MAI) with high standards of liberalization and investment protection, with effective dispute settlement procedures, and open to non-OECD members. Negotiations were discontinued in April 1998 and will not be resumed. For the negotiating history and reasons for failure, see Rainer Geiger 'Towards a Multilateral Agreement on Investment' (1998) 31 Cornell International Law Journal 467. For the text of the draft see http://www1.oecd.org/daf/mai/ pdf/ng/ng987r1e.pdf (accessed 13 November 2008).
10. Ministers from WTO member countries decided at the 1996 Singapore Ministerial Conference, Singapore Ministerial Declaration, WT/MIN(96)/DEC, adopted on 13 December 1996, to set up new working groups: on trade and investment, on competition policy, on transparency in government procurement and on trade facilitation. The carefully negotiated mandate was for negotiations to start after the 2003 Cancún Ministerial Conference, 'on the basis of a decision to be taken, by explicit consensus, at that session on modalities of negotiations'. There was no consensus, and the members agreed on 1 August 2004 to drop the issues (except trade facilitation) from the Doha agenda.
11. For an overview, see Andreas F Lowenfeld, International Economic Law (OUP, Oxford 2002), at 391-414.
12. For a discussion of the customary international law character of protective norms in BITs, see Bernard Kishoiyian 'The Utility of Bilateral Investment Treaties in the Formulation of Customary International Law' (1994) 14 Northwestern Journal of International Law and Business 327
13. and Abdullah Al Faruque 'Creating Customary International Law Through Bilateral Investment Treaties: A Critical Appraisal' (2004) 44 Indian Journal of International Law 292, arguing against the formation of CIL through BITs
14. as well as Matthew C Porterfield 'An International Common Law of Investors Rights?' (2006) 27 University of Pennsylvania Journal of International Economic Law 79, arguing against the acceptance of even the minimum standard of treatment as a CIL norm due to its vagueness.
15. Arguing for the formation of CIL through BITs is Steffen Hindelang 'Bilateral Investment Treaties, Custom and a Healthy Investment Climate - The Question of Whether BITs Influence Customary International Law Revisited' (2004) 5 Journal of World Investment and Trade 789;
16. Stephan Schwebel 'The Influence of Bilateral Investment Treaties on Customary International Law' (2004) 98 Proceedings of the American Society of International Law 27.
17. The so-called 'Hull rule', which called for prompt, adequate and effective compensation in case of expropriation. This rule lost its customary law character in the seventies due to several UN General Assembly Resolutions in the 1960s and 1970s; e.g. Article 2 of Charter of Economic Rights and Duties of States, GA Res. 3281 (XXIX), 29 GAOR, Supp. (No.31), 50, UN Doc. A/9631 (1974), 14 I.L.M. 251 (1975).
18. Nevertheless, this kind of compensation requirement is now to be found in the BITs. For details and an economic explanation at the first sight paradoxical behaviour of developing countries, see Andrew T Guzman 'Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties' (1998) 38 Virginia Journal of International Law 639.
19. North American Free Trade Agreement, done at Ottawa; Mexico, D.F.; Washington, D.C., 17 December 1992, entry into force 1 January 1994, 32 I.L.M 289 (1993), Chapter 11. UNCTAD, above n 7, at 16, states that 12 IIAs were concluded in 2007, bringing the total of such agreements to 254.
20. Most of the agreements concluded in 2007 are, in their investment chapters, comparable to BITs, including with regard to dispute settlement. See generally UNCTAD, Investment Provisions in Economic Integration Agreements (UNCTAD, Geneva/ New York 2006).
21. For an overview on BITs, see Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff, Dordrecht 1995);
22. Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (OUP, Oxford 2008).
23. See David AR Williams QC 'Jurisdiction and Admissibility' in Peter Muchlinski/Federico Ortino and Christoph Schreuer (eds) The Oxford Handbook of International Investment Law (OUP, Oxford 2008), 868-931, at 870-906.
24. This is by now established case-law, see e.g. GAMI Investments, Inc. v. Mexico, NAFTA by UNCITRAL Rules, Final Award (15 November 2004), at paras 26-42, where the investor had 14.18% of the total shares as well as CMS Gas Transmission Company v. Republic of Argentina, (ICSID Case No. ARB/01/8). Decision on Jurisdiction (17 July 2003), para 51 ff. See for an overview Stanimir A Alexandrov 'The "Baby Boom" of Treaty-Based Arbitrations and the Jurisdiction of ICSID Tribunals: Shareholders as "Investors" and Jurisdiction Ratione Temporis' (2005) 4 The Law and Practice of International Courts and Tribunals 19.
25. Among many possible sources, see August Reinisch 'Expropriation' in Peter Muchlinski/ Federico Ortino and Christoph Schreuer (eds) The Oxford Handbook of International Investment Law (Oxford University Press, Oxford 2008), 407-458.
26. Rudolf Dolzer 'Indirect Expropriations: New Developments?' (2002) 11 New York University Environmental Law Journal 64;
27. OECD '"Indirect Expropriation" and the "Right to Regulate" in International Investment Law', Working Papers in International Investment No. 2004/4 (2004);
28. Andrew Paul Newcombe 'The Boundaries of Regulatory Expropriation in International Law' (2005) 20 ICSID Review-Foreign Investment Law Journal 1;
29. Simon Baughen 'Expropriation and Environmental Regulation: The Lessons of Nafta Chapter Eleven' (2006) 18 Journal of Environmental Law 207;
30. Ursula Kriebaum 'Regulatory Taking: Balancing the Interests of the Investor and the State' (2007) 8 Journal of World Investment and Trade 717.
31. Among many possible sources, see Stephen Vasciannie 'The Fair and Equitable Treatment Standard in International Investment Law and Practice' (2000) 70 The British Yearbook of International Law 99;
32. Rudolf Dolzer 'Fair and Equitable Treatment: A Key Standard in Investment Treaties' (2005) 39 International Lawyer 87;
33. Christoph Schreuer 'Fair and Equitable Treatment in Arbitral Practice' (2005) 6 Journal of World Investment and Trade 357;
34. Stephan Schill 'Fair and Equitable Treatment under Investment Treaties as an Embodiment of the Rule of Law' (2006) 3 Transnational Dispute Management; Online Journal; see Dolzer and Schreuer, above n 14, at 119-149.
35. See Rudolf Dolzer and Terry Myers 'After Tecmed. Most-Favored-Nation Clauses in Investment Protection Agreements' (2004) 19 ICSID Review 49;
36. Dolzer and Schreuer, above n 14, at 256;
37. Okezie Chukwumerije 'Interpreting Most-Favoured-Nation Clauses in Investment Treaty Arbitrations' (2007) 8 Journal of World Investment and Trade 597 at 643.
38. Jürgen Kurtz 'The MFN Standard and Foreign Investment - An Uneasy Fit?' (2004) 5 Journal of World Investment and Trade 861;
39. Jürgen Kurtz 'The Delicate Extension of MFN Treatment to Foreign Investors: Maffezini v Kingdom of Spain', in Todd Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, Loudou 2005), 523-556;
40. Scott Vesel 'Clearing a Path Through a Tangled Jurisprudence: Most-Favored-Nation Clauses and Dispute Settlement Provisions in Bilateral Investment Treaties' (2007) 23 Yale Journal of International Law 125;
41. Dana H Freyer and David Herlihy 'Most-Favored-Nation Treatment and Dispute Settlement in Investment Arbitration: Just How "Favored" is "Most-Favored"?' (2005) 20 ICSID Review Foreign Investment Law Journal 58;
42. Yannick Radi 'The Application of the Most-Favoured-Nation Clause to the Dispute Settlement Provisions of Bilateral Investment Treaties: Domesticating the "Trojan Horse'" (2007) 18 European Journal of International Law 757;
43. Emmanuel Gaillard 'Establishing Jurisdiction Through a Most-Favored-Nation Clause' (2005) 233 New York Law Journal; Online Journal.
44. RosInvestCo UK Ltd v Russian Federation (SCC Case No. V079/2005) Jurisdiction Award, signed October 2007.
45. For a discussion of the latest developments in the MFN clause in procedural and jurisdictional issues, see Anne van Aaken 'The Most Favored Nation Clause in Investment Arbitration: Is It Taking an Unfavorable Development?' (Paper presented at the Investment Committee of the International Law Association, Rio de Janeiro, August 2008, on file with the author).
46. Among many possible sources, see Thomas Wälde 'The "Umbrella" Clause in Investment Arbitration: A Comment on Original Intentions and Recent Cases' (2005) 6 Journal of World Investment and Trade 183;
47. Bjorn Kunoy 'Singing in the Rain: Developments in the Interpretation of Umbrella Clauses' (2006) 7 Journal of World Investment and Trade 275;
48. Dolzer and Schreuer, above n 14, at 153-162.
49. Convention on the Settlement of Investment Disputes Between States and the Nationals of Other States (ICSID Convention), done at Washington DC, 18 March 1965, entry into force
50. October 1966, 575 U.N.T.S. 159.
51. For an overview on ICSID arbitration including its advantages and disadvantages, see Lucy Reed/Jan Paulsson and Nigel Blackaby, Guide to ICSID Arbitration (Kluwer Law International, The Hague 2004);
52. Christoph Schreuer, The ICSID Convention. A Commentary on the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (Cambridge University Press, Cambridge 2001).
53. UNCTAD, above n 7, figure I.14.
54. Christoph Schreuer and Matthew Weiniger 'A Doctrine of Precedent?' in Peter Muchlinski/ Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, Oxford 2008), 1188-1206.
55. This has given rise to various proposals on the procedure, the most prominent one for an appellate mechanism, see e.g. Susan D Franck 'The Legitimacy Crisis in Investment Arbitration: Privatizing Public International Law Through Inconsistent Decisions' (2005)
56. Fordham Law Review 1521, at 1617-1625
57. and Gus van Harten, Investment Treaty Arbitration and Public Law (Oxford University Press, Oxford 2007) (arguing for independent investment courts).
58. Even though Argentina is an extreme case due to the emergency measures it took in its economic crisis 2000/2001, some estimates are around 80 billion USD in damages claimed in around 44 originally pending cases in connection with the crisis, see William W Burke- White and Andreas von Staden 'Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties' (2008) 48 Virginia Journal of International Law 307, at 311.
59. This would amount to almost double the amount of the annual state revenue of around 50 billion USD in 2007, see CIA World Factbook, https://www.cia.gov/ library/publications/the-world-factbook/geos/ar.html#Econ (accessed 13 November 2008).
60. In those cases that have been decided, the tribunals have awarded on average 33% of the damages claimed by the investors, see UNCTAD, Latest Developments in Investor-State Dispute Settlement, UNCTAD, Doc. UNCTAD/WEB/ITE/IIA/2008/3 IIA MONITOR NO.1 1-2 (2008), at 11, available at http:// www.unctad.org/en/docs/iteiia20083-en.pdf (accessed 13 January 2009).
61. For an economic theory of compliance also based on reputational effects, see Andrew Guzman, How International Law Works: A Rational Choice Theory (OUP, New York 2008). See also Scott and Stephan, above n 5, at 68.
62. This did not hold true after the Argentinian or Russian default; investors went back quite quickly.
63. For a short overview of incomplete contracting in a commercial law setting, see Robert E Scott 'The Law and Economics of Incomplete Contracts' (2006) 2 Annual Review of Law and Social Science 279.
64. The state is analyzed as one entity, as in most theories of International Relations. This is not to deny that different governments at different points of time are influenced by different national interest groups and might have diverging interests (a government concluding the treaties and attracting investment might not care about the regulatory restrictions it will impose in 10 years time). A two-level game analysis thus might be more accurate, but to reduce complexity, we will assume state preferences as given and unitary.
65. This constraint is a notion of game theory, more specifically mechanism design; it is satisfied if a mechanism leaves all participants at least as well off as they would have been had they not participated in contracting.
66. Steven Shavell 'Damage Measures for Breach of Contract' (1980) 11 Bell Journal of Economics 466at 467.
67. Scott and Stephan, above n 5, at 76.
68. Jean Tirole 'Incomplete Contracts: Where Do We Stand?' (1994) 67 Econometrica 741, at 743 defines an incomplete contract as one that 'does not exhaust the contracting possibilities envisioned in the complete contract'.
69. Contract theorists distinguish between observable and verifiable information. The former can be observed by the two parties but it may still be that the information is not verifiable in the sense that the observing party is unable to establish the fact sufficiently to convince a neutral third party at reasonable cost, e.g. the investment tribunal. For details, see Scott and Stephan, above n 5, at 71-72.
70. Ibid, at 61.
71. A contract theory analysis of state contracts between host states and investors would also be of utmost interest in a second step of analysis; I thank Robert Howse for this hint. Nevertheless, the analysis in this article logically precedes state contracts arbitrated under IIAs.
72. Therefore, in The Government of the State of Kuwait v The American Independent Oil Company (AMINOIL), I.L.M. 1982, 976, 1023, para 95, the tribunal stated that sovereignty rights might not be waived for such a long time (60 years).
73. It held that '(W)ith reference to every long-term contract, especially such as involve an important investment, there must necessarily be economic calculations, and the weighing up of rights and obligations, of chances and risks, constituting the contractual equilibrium . . .. It is in this fundamental equilibrium that the very essence of the contract consists.' (para 148).
74. The Iran-US Claims Tribunal, Amoco International Finance Corporation and Government of the Islamic Republic of Iran, Partial Award No. 310-56-63 of 14 July 1987, 83 ILR 501
75. reprinted in 27 I.L.M. 1314, para 179 held: 'In the present case, the Khemco Agreement was concluded for a shorter period (35 years) than the concession in the AMINOIL case (60 years), but in economic and legal terms 35 years cannot be considered a "relatively limited period'".
76. Scott and Stephan, above n 5.
77. As e.g. in Argentina's economic and political crisis of 2000/2001, which gave rise to 44 disputes, and the public unrest in the case Aguas del Tunari v Bolivia (ICSID Case No. Arb/02/3), Decision on Jurisdiction (21 October 2005).
78. Rigidity mostly comes in the form of 'hard legal terms', but not necessarily. 'Soft terms' or indeterminate legal terms can also be interpreted in a 'hard way'. Both result in a stricter viewing of the obligation of the injurer (states), i.e. they provide less leeway for actions of the injurer (state).
79. Scott and Stephan, above n 5at 77.
80. See similarly Alan O'Neil Sykes 'Protectionism as a "Safeguard" : A Positive Analysis of the GATT "Escape Clause" With Normative Speculations' (1991) 58 University of Chicago Law Review 255 for WTO law.
81. Susan Franck 'Empirically Evaluating Claims about Investment Treaty Arbitration' (2007-2008) 86 North Carolina Law Review 1, at 22, footnote 97 states that 'As a respondent, a government has never been successful in bringing a counter-claim against an investor'.
82. In investment law, capital flows have until recently been largely unidirectional from developed to developing countries; that is, in reality states knew who will be the injurer (the host state) and who the victim (the investor from the developed country). This is changing, see UNCTAD, World Investment Report 2006 (Geneva/New York: UNCTAD, 2006). Furthermore, an increasing number of BITs and FTAs are now concluded between develop ing countries.
83. At least 73 governments-45 of them in the developing world, 16 in developed countries and 12 in Southeast Europe and the Commonwealth of Independent States-have faced invest ment treaty arbitration. Argentina (46 cases), Mexico (18 cases), the Czech Republic (14 cases) and the US (12 cases), as well as Canada (12 cases) have found themselves mostly in the role as a defendant. See UNCTAD, World Investment Report 2008 (Geneva/New York: UNCTAD, 2008), at 16.
84. Example taken from Schropp, above n 3, footnote 5: 'To grasp the concept of ex post regret, consider the simple example of a fixed-price (non-contingent) contract that obliges one party to produce and the other party to buy a product. An earthquake destroys the production facilities and makes delivery as prescribed extremely costly: The producer will prefer not to perform; by means of a side payment to the buyer (exceeding the latter's personal value of the good) both parties can be made better off by not conducting the transaction'. For a numerical example see Shavell, above n 34, footnote 4.
85. Schropp, above n 3, at 81, footnote 134.
86. Matching the damages with the cause of breach in investment law would exceed the scope of this article and must be left to future research. Economic theory on efficient breach recom mends expectation damages for inducing performance when it is efficient, and breach when it is not, since expectation damages place the promisee in as good as a position as it would have been in, if the promisor had performed. See Robert Cooter and Thomas Ulen, Law and Economics, 4th ed. (Boston et al., Pearson/Addison Wesley, 2004), at 201-205.
87. On the question of damages in investment law, see Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law, London 2008).
88. If damages awarded are higher than expectation damages, 'efficient breach' is discouraged, maybe leading to inefficient behaviour by the host state. For a discussion of contracts covered by BITs, see Fabrizio Marrella and Irmgard Marboe '"Efficient Breach" and Economic Analysis of International Investment Law' (2007) 4 Transnational Dispute Settlement; Online Journal 6.
89. For the WTO, see Schropp, above n 3;
90. more generally, see Jeffrey L Dunoff and Joel P Trachtman 'Economic Analysis of International Law' (1999) 24 Yale Journal of International Law 1
91. as well as Scott and Stephan, above n 5.
92. See German Constitutional Court Decision BVerfG, 2 BvM 1/03 of 8 May 2007, at para 51. Available at http://www.bverfg.de/entscheidungen/ms20070508- 2bvm000103.html (accessed 10 January 2009).
93. For reciprocity as an informal enforcement mechanism in contract theory, see e.g. Scott, above n 31, at 295
94. and for reciprocity in international law, see Beth V Yarbrough and Robert M Yarbrough 'Reciprocity, Bilateralism, and Economic "Hostages": Self-Enforcing Agreements in International Trade' (1986) 30 International Studies Quarterly 7;
95. Francesco Parisi and Nita Ghei 'The Role of Reciprocity in International Law' (2003) 36 Cornell International Law Journal 93.
96. See Beth Simmons/Elkins Zachary and Andrew Guzman 'Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000' (2008) Illinois Law Review 265;
97. Guzman, above n 12.
98. This applies certainly to states that do not have strong property rights protection in national law, which in turn leads to the problem that they may not have the capability to live up to the 'one size fits all' provisions of BITs. Furthermore, 'rule of law' states as the United States have also been defendants in many cases.
99. Relation specificity or asset specificity is usually defined as the extent to which the invest ments made to support a particular transaction have a higher value to that transaction than they would have if they were redeployed for any other purposes. See, seminally, Oliver E Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (Free Press, New York 1975)
100. as well as Scott, above n 31, at 283 ff. If the contract is not performed, the costs of the investment are sunk.
101. Hold-up problems occur when two parties may be able to cooperate most efficiently but refrain from doing so due to concerns that they may give the other party increased bargaining power and thereby reduce their own profits. See Oliver E Williamson 'Transactions-Cost Economics: The Governance of Contractual Relations' (1979) 22 Journal of Law and Economics 233.
102. Here, some issues may be contested. The first problem is the definition of the preference functions of states or, to be more precise, of the government in power at a certain time. Furthermore, the question of which costs are included in the calculus is of importance: are only direct sanctions via a damage claim to be calculated or also indirect sanctions, like reputational costs? The ongoing discussion in international law and international relations literature cannot be surveyed here. For two rational choice approaches mirroring the different approaches, see Guzman, above n 29, on the one hand, and Jack L Goldsmith and Eric A Posner, The Limits of International Law (OUP, Oxford 2005), on the other.
103. As Ian Brownlie, Principles of Public International Law, 6th ed. (OUP, Oxford 2003), at 523 holds: 'A government acting in good faith may enact exchange control legislation or impose trade restrictions which incidentally (and without discrimination) lead to the annulment or non-enforceability of contractual rights. It is difficult to treat such action as illegal on the international plane'.
104. For example, Mondev International Ltd v United States of America (ICSID Arbitration No. ARB(AF)/99/2), p. 40, para 116 (11 October 2002), available at http://www.naftaclaims.org (accessed 13 January 2009);
105. Tecnicas Medioambientales SA v Mexico (ICSID Arbitration Nr. ARB (AF)/00/2) (29 May 2003) (Tecmed), para 153;
106. CMS Gas Transmission Company v Argentine Republic (ICSID Case No. Arb/01/8) (12 May 2005), para 280 holds for the interpretation of fair and equitable treatment: 'The Tribunal believes this is an objective requirement unrelated to whether the Respondent has had any deliberate intention or bad faith in adopting measures in question. Of course, such intention and bad faith can aggravate the situation but are not an essential element of the standard'.
107. This holds at least in theory; empirical evidence of the impact of BITs on FDI has been inconclusive. In any case, BITs work only at the margin. Among many possible sources, see Eric Neumayer and Laura Spees 'Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?' (2005) 33 World Development 1567.
108. See Downs and Rocke, above n 5, at 105-107.
109. Ibid see a clear danger of a gambling for resurrection, e.g. in case of war. In investment law, the danger is rather that the costs felt by overly strict BITs are shifted by governments to successor governments (and generations), whereas the gains are reaped rather immediately.
110. There is extensive literature on 'efficient breach', some of it critical. In a nutshell, it means that a party to a contract should be allowed to breach the contract and pay damages if it is more economically efficient than performance. See, seminally, Charles Goetz and Robert Scott 'Liquidated Damages, Penalties, and the Just Compensation Principle: A Theory of Efficient Breach' (1977) 77 Columbia Law Review 554.
111. This theory has been much criticized. The important point is that efficiency is judged only from the standpoint of the parties to the contract; possible externalities, third-party effects, and consequences for the system as a whole are not included in the efficiency calculus. For efficient breach in the WTO context, see Alan O'Neil Sykes and Warren F Schwartz 'The Economic Structure of Renegotiation and Dispute Resolution in the World Trade Organization' (2002) 31 Journal of Legal Studies (Supplement) S179.
112. This means that if expectation damages have to be paid by the injurer and the damages can be calculated correctly, the injurer is better off and the victim is compensated wholly for his loss. Liability rules with expectation damages are thus a means to foster efficient breach.
113. See ibid, at S181 f.
114. There is, of course, a dispute whether Investment Law, just a WTO law, is a 'contract' that may be breached or whether there are absolute obligations of states. For a more general discussion, see Joost Pauwelyn, Optimal Protection of International Law: Navigating Between European Absolutism and American Voluntarism (Cambridge University Press, Cambridge 2008).
115. This holds for all substantive provisions except expropriation, since here compensation has to be paid in any case.
116. Of around 2000 BITs in force, such clauses appear in about 200 treaties. See Burke-White and von Staden, above n 28, at 313 and at 318 f. for examples of BITs that contain NPM clauses. The US BITs are an exception in this respect. The Model BIT of 2004 (but also earlier treaties) contains such a clause in Article 18. Similarly, Article 24 of the Energy Charter, done at Lisbon, 17 December 1994, entry into force 16 April 1998, 33 I.L.M. (1994) 381 (although it does not apply to direct or indirect expropriation).
117. For an extensive analysis, see Burke-White and von Staden, above n 28.
118. For examples, see ibid, at 326 ff.
119. Draft Norwegian Model BIT, available at http://www.regjeringen.no/upload/ NHD/Vedlegg/ hoeringer/Utkast%20til%20modellavtale2.doc (accessed 10 January 2009).
120. Canadian 2004 Model Foreign Investment Protection and Promotion Agreement (FIPA), Article 10 (2), available at http://www.sice.oas.org/Investment/NatLeg/ Can/2004-FIPA- model-en.pdf (accesssed 10 January 2009): '2. Nothing in this Agreement shall be construed to prevent a Party from adopting or maintaining reasonable measures for prudential reasons, such as: (a) the protection of investors, depositors, financial market participants, policy-holders, policy-claimants, or persons to whom a fiduciary duty is owed by a financial institution; (b) the maintenance of the safety, soundness, integrity or financial responsibility of financial institutions; and (c) ensuring the integrity and stability of a Party's financial system'.
121. Burke-White and von Staden, above n 28, at 335, footnote 133.
122. For example, Agreement on the Encouragement and Reciprocal Protection of Investments, Protocol, P.R.C.-F.R.G., Article 4(a), 1 December 2003, available at http://www.unctad.org/ sections/dite/iia/docs/bits/china-germany.pdf (accessed 10 January 2009): 'Measures that have to be taken for reasons of public security and order, public health or morality shall not be deemed "treatment less favourable" within the meaning of Article 3'.
123. How the necessity requirement is interpreted is again another question, on which tribunals vary widely, see extensively Burke-White and von Staden, above n 28, at 342 ff. The same problem can indeed be found in WTO law, see Panagiotis A Delimatsis 'Determining the Necessity of Domestic Regulations in Services: The Best is Yet to Come' (2008) 19 European Journal of International Law 365.
124. For a discussion of the broader context of state necessity and investment protection, see Anne van Aaken, 'Zwischen Scylla und Charybdis: Völkerrechtlicher Staatsnotstand und Internationaler Investitionsschutz' (2006) 105 Zeitschrift für vergleichende Rechtswissenschaft 544;
125. Jürgen Kurtz 'Adjudging the Exceptional at International Law: Security, Public Order and Financial Crisis' Jean Monnet Working Paper 06/08, available at http://www.JeanMonnetProgram.org (2008);
126. Andrea K Bjorklund 'Emergency Exceptions: State of Necessity and Force Majeure', in Peter Muchlinski/Federico Ortino and Christoph Schreuer (eds), Oxford Handbook of International Investment Law (OUP, Oxford 2008), 459-523, Burke-White and von Staden, above n 28;
127. José E Alvarez and Kathryn Khamsi 'The Argentine Crisis and Foreign Investors: A Glimpse into the Heart of the Investment Regime', IILJ Working Paper 2008/5, available at http://www.iijl.org.
128. The tribunal in CMS Gas Transmission Company v Argentine Republic (ICSID Case No. Arb/ 01/8) (12 May 2005) subjected the security clause provision to full scrutiny in the first Argentine Crisis Case.
129. Even though it confirmed the applicability in economic crisis cases, it denied the protection for Argentina with the reasoning that there was no economic emergency. It also held, in contradiction to the expert opinion of Prof. Slaughter that there are no limits to the control by the tribunal on that clause, that is, it did not defer to the assessment of the Argentine government and only checked for obvious misuse (good faith limits), as national constitutional courts would usually do. Argentina argued in its Application for Annulment and Request for Stay of Enforcement of Arbitral Award of 8 September 2005, at para 39 that the State Department of the United States viewed such clauses as self-judging. Thus, although both states involved argued for self-judgment, the tribunal did not agree. See Gas Transmission Company v Argentine Republic, (ICSID Case No. Arb/01/8), Decision of the Ad Hoc Committee on the Application for Annulment of The Argentine Republic (25 September 2007) (paras 122-127).
130. The tribunal applied similar reasoning in LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v Argentine Republic (ICSID Case No. ARB/02/1), Decision on Liability (3 October 2006) (para 212) The tribunal also supported that the escape clause was not self-judging and stated that the US at the time of concluding the Argentina BIT still supported the position that these clauses were not self-judging and changed its position only later.
131. For an extensive discussion of the US practice, see Burke-White and von Staden, above n 28, at 376 ff.
132. Vienna Convention on the Law of Treaties, done at Vienna, 23 May 1969, in force 27 January 1980, 1155, U.N.T.S. 331; 8 I.L.M. (1969) 679.
133. As codified in Article 25 of the International Law Commission's Draft Articles on Responsibility of States for Internationally Wrongful Acts. For the text of the Articles see Official Records of the General Assembly, Fifty-sixth session, Supplement No.10 (A/56/10), Chapter V.
134. To date, only a few cases against Argentina in connection with the financial crisis have been decided (with Argentina having to pay around 2/3 of a billion USD): The following tribunals found the security clauses not fulfilled: CMS v Argentine Republic, above n 76, Enron Corporation, Ponderosa Assets L.P. v Argentine Republic (ICSID Case No. ARB/01/3) (22 May 2007);
135. Sempra Energy International v Argentine Republic, (ICSID Case No. ARB/02/ 16), Award, 28 September 2007.
136. Requests for annulment of the LG& E, Enron, and Sempra decisions are pending. The tribunal in LG&E v Argentine Republic, above n 76, found that for 17 months, Argentina indeed was in a state of necessity. This was followed by Continental Casualty Company v Argentine Republic (ICSID Case No. ARB/03/9) (5 September 2008).
137. Argentina's annulment application in the CMS case was in this respect unsuccessful, see Decision of the ad hoc Committee on the Application for Annulment of the Argentine Republic, above n 76, although the annulment committee found serious flaws in the reasoning of the tribunal (paras 130, 135, 136).
138. For an excellent analysis of the (faulty) interpretation, see Kurtz, above n 75.
139. As has indeed been the case in CMS v Argentine Republic, above n 76.
140. This is requested by Article 25 ILC Draft on State Responsibility, above n 78. Given that not even the International Monetary Fund could come up with measures to be taken in Argentina, it is unclear how three lawyers could judge the situation.
141. Article 5 (b) and (c) of the Declaration on the TRIPs Agreement and Public Health (WT/ MIN(01)/DEC/2), adopted on 14 November 2001.
142. For a discussion concerning the US, see Raj Bhala 'National Security and International Trade Law: What the GATT Says, and what the United States Does' (1998) 19 University of Pennsylvania Journal of International Economic Law 263. (Pubitemid 128429136)
143. Article 24 of the Norwegian Model BIT, above n 70, which is basically modelled on the General Exceptions in GATT and GATS.
144. See the Chapeau of Article XX GATT. For a discussion of states' ability to invoke non-trade law in trade disputes, e.g. environmental or human rights concerns or to regulate public health, see Gabrielle Marceau 'WTO Dispute Settlement and Human Rights' (2002) 13 European Journal of International Law 753;
145. Gabrielle Marceau/Joel Trachtman 'The Technical Barriers to Trade Agreement, the Sanitary and Phytosanitary Measures Agreement, and the General Agreement on Tariffs and Trade' (2002) 36 Journal of World Trade 811 and more generally Joost Pauwelyn 'The Role of Public International Law in the WTO: How far Can we Go?' (2001) 95 American Journal of International Law 535;
146. Joost Pauwelyn, Conflict of Norms in Public International Law. How WTO Law Relates to Other Rules of International Law (Cambridge University Press, Cambridge 2003);
147. Joost Pauwelyn 'How to Win a World Trade Organization Dispute Based on Non-World Trade Organization Law?' (2003) 37 Journal of World Trade 997;
148. Joost Pauwelyn 'WTO Compassion or Superiority Complex?: What to Make of the WTO Waiver for "Conflict Diamonds'" (2003) 24 Michigan Journal of International Law 1177.
149. Thomas Buergenthal 'The Proliferation of Disputes, Dispute Settlement Procedures and Respect for the Rule of Law' (2006) 3 Transnational Dispute Settlement; Online Journal 6. Arbitration Rule 6 of the new Arbitration Rules of the ICSID Convention meanwhile indeed has stricter conflict of interest rules for arbitrators.
150. Judith Levine 'Dealing with Arbitrator "Issue Conflicts" in International Arbitration' (2006) 3 Transnational Dispute Management; Online Journal.
151. States have only lately started to employ international law firms for investment cases, which provided a strong incentive for law firms to cater to the interests of those which initiate a claim, i.e. the investors.
152. Franck, above n 45, at 78, finds that 75% of arbitrators come from OECD countries, but that it is not a small 'in group' of arbitrators. Nevertheless, there is no empirical study on the revolving-door issue, i.e. including counsels. Also, there is no empirical analysis whether international public lawyers adjudicate in a more state-friendly manner than do commercial arbitrators in the investment cases. I thank Joseph Weiler for the hint that the legal back ground might make a difference.
153. Ibid empirically evaluated the claim that mostly states lose the cases. She finds that the win rate of investors is just about half. This number includes the cases in which jurisdiction is declined, at 48 ff.
154. How narrowly the object and purpose of a BIT is to be seen, is open to discussion but most tribunals take a narrow view, e.g. Siemens A.G. v The Argentine Republic (ICSID Case No. ARB/02/8), Decision on Jurisdiction, 3 August 2004, para 81: 'The Tribunal shall be guided by the purpose of the Treaty as expressed in its title and preamble. It is a treaty "to protect" and "to promote" investments. . .. It is to create favourable conditions for investments and to stimulate private initiative'.
155. Nevertheless, some preambles (e.g. the US, Norway and Swiss Model BIT) reveal that the protection of investment is rather a means to an end, i.e., welfare, development or prosperity (of home and host states). The ICSID Convention was set up under the auspices of the World Bank not primarily to protect private property as such, but to foster development. All these texts reveal a means-end relationship between investment and development. Schreuer, above n 24, Preamble, para 11: 'The ICSID Convention's "primary aim is the promotion of economic development"
156. Ibid. at Article 25, para 88: "Therefore, it may be argued that the Convention's object and purpose indicate that there should be some positive impact on development'".
157. Similarly, Prosper Weil invokes the purpose of the ICSID Convention in his dissenting opinion in Tokios Tokeles v Ukraine (ICSID Case No. Arb/02/18), Decision on Jurisdiction (29 April 2004), available at http://www.ita.law.uvic. ca/documents/ Tokios-Jurisdiction-000.pdf (accessed 12 July 2008).
158. For a more extensive discussion, see Anne van Aaken 'Investment and Development: A Legal and Economic Analysis', Working Paper (on file with the author).
159. See e.g. SGS Société Générale de Surveillance S.A. v Republic of the Philippines (ICSID Case No. ARB/02/6) (29 January 2004), para 116: 'It is legitimate to resolve uncertainties in its inter pretation so as to favour the protection of covered investments'.
160. Pan American Energy LLC and BP Argentina Exploration Company v Argentine Republic (ICSID Case No. ARB/03/13), Decision on Preliminary Objections (27 July 2006), para 99 and El Paso Energy International Company v Argentine Republic (ICSID Case No. ARB/03/15), Decision on Jurisdiction (27 April 2006), paras 66 ff., para 70: 'a balanced interpretation is needed, taking into account both State sovereignty and the State's responsibility to create an adapted and evolutionary framework for the development of economic activities, and the necessity to protect foreign investment and its continuing flow', thus rejecting a one-sided interpretation either in favour of foreign investors or in favour of host states.
161. See also Noble Ventures, Inc. v Romania (ICSID Case No. ARB/01/11) (12 October 2005), para 52.
162. For example, S.D. Myers, Inc. v Government of Canada, NAFTA by UNCITRAL Rules, 1st Partial Award (13 November 2000) paras 261 and 263;
163. Saluka Investments B.V. v Czech Republic (Partial Award) (17 March 2006), para 304 f.
164. Methanex Corp. v United States of America, NAFTA by UNCITRAL Rules, 1st Partial Award (7 August 2002) para 103. See the literature cited above in n 17 and n 18. European Convention for the Protection of Human Rights and Fundamental Freedoms, Rome, adopted 4 November 1950, entry into force 3 September 1953, 213 U.N.T.S 222. Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms, Paris, adopted 20 March 1952, entry into force 18 May 1954, E.T.S 009.
165. Tecmed, above n 59, para 122: 'There must be a reasonable relationship of proportionality between the charge or weight imposed to the foreign investor and the aim sought to be realized by any expropriatory measure'. See Anne van Aaken 'Fragmentation of International Law: The Case of International Investment Law' (2008) 17 Finnish Yearbook of International Law 91;
166. Ursula Kriebaum 'Regulatory Taking: Balancing the Interests of the Investor and the State' (2007) 8 Journal of World Investment and Trade 717;
167. Ursula Kriebaum, Eigentumsschutz im Volkerrecht (Duncker & Humblot, Berlin 2008). See the literature cited above in n 19.
168. See extensively Campbell MacLachlan 'The Principle of Systematic Integration and Article 31(3)(c) of the Vienna Convention' (2005) 54 International and Comparative Law Quarterly 279 at 280-281 who describes that interpretational method as the "master-key" of constructing the large building of international law.
169. Submission of Non-Disputing Party Quechan Indian Nation (16 October 2006), Glamis Gold Ltd v The United States of America, available at http://www.state.gov/s/l/c10986.htm (accessed 12 July 2008), at 8 f. Here, the people potentially affected by the investment project in question, a mine, assert that they are protected by inter alia, the 1966 International Covenant on Civil and Political Rights, the 1972 UNESCO Convention on World Cultural Heritage, the ILO 169 Convention on Indigenous and Tribal Peoples, and the Inter-American Convention on Human Rights.
170. For details, see van Aaken, above n 100.
171. I thank Joseph Weiler for this hint.
172. For details of the former use of the test in WTO law and its decline, see Robert E Hudec 'GATT/WTO Constraints on National Regulation: Requiem for an "Aims and Effects" Test' (1998) 32 International Lawyer 619 and Henrik Horn and Petros C Mavroidis 'Still Hazy after All These Years: The Interpretation of National Treatment in the GATT/WTO Case- law on Tax Discrimination' (2004) 15 European Journal of International Law 39.
173. From 1990 to 2007, there was a surge from less then 500 BITs to 2608 BITs, see UNCTAD, above n 7, at 14. If investment chapters of regional trade agreements such as NAFTA are included, there was even more treaty-making activity in the investment protec tion area, at 16.
174. Known investment treaty arbitrations surged from almost zero in 1994 to 290 by 2007, the majority of cases being conducted under ICSID. IIA Monitor No.1 (2008), Latest Developments in Investor-State Dispute Settlement, UNCTAD/WEB/ITE/IIA/2008/3, avail able at http://www.unctad.org/en/docs/ iteiia20083-en.pdf (accessed 13 November 2008), at 1. The ICISD Website registers 155 concluded cases (not all of them concluded by arbitra tion) and 125 pending cases as of 12 January 2009. Not all arbitrations are known, e.g. if they are conducted under UNCITRAL.
175. UNCTAD, above n 41, compare Fig. I.10 and I. 14 and p. 28.
176. See also UNCTAD, Investment Provisions in Economic Integration Agreements (UNCTAD, Geneva/New York 2006).
177. Information taken from the online investment forum OGEMID.
178. Article 366: 'Todas las empresas extranjeras que realicen actividades en la cadena productiva hidrocarbuŕ?fera en nombre y representación del Estado estarán sometidas a la soberań?a del Estado, a la dependencia de las leyes y de las autoridades del Estado. No se reconocerá en ningún caso tribunal ni jurisdicción extranjera y no podrán invocar situación excepcional alguna de arbitraje internacional, ni recurrir a reclamaciones diplomáticas'. Available at http://www.repac.org.bo.
179. Article 27 VCLT.
180. Susan D Franck 'Occidental Exploration and Production Co. v Republic of Ecuador' (2005) 99 AJIL 675
181. and Reuters, Ecuador Says Won't Extend U.S. Investment Treaty, 6 May 2007, available at http://www.reuters.com/article/politicsNews/ idUSN0626423520070507 (accessed 12 January 2009) concerning the termination of the US-Ecuador BIT. Furthermore, Official Register No. 452, dated 23 October 2008, the Government of Ecuador has published copies of the formal letters that it has sent to Cuba, El Salvador, Guatemala, Honduras, Nicaragua, Paraguay, the Dominican Republic and Uruguay stating its decision to cancel the BITs that it had signed with them in the past. Ecuador also notified under Article 25(4) of the Washington Convention that it intends to exempt oil and mining disputes from ICSID and Venezuela's Legislature called to withdraw from ICSID entirely.
182. The Nicaragua Attorney General announced in April 2008 that his country might withdraw from ICSID, see http://www-usa.laprensa.com.ni/archivo/2008/ abril/14/noticias/economia/253728.shtml (accessed 12 January 2009).
183. Bolivia submitted its notice of withdrawal from the ICSID Convention on 2 May 2007. In accordance with Article 71 of the Convention, the cancellation took effect 6 months after the receipt of Bolivia's notice, i.e., on 3 November 2007. That does not mean, though, that cases cannot be brought against Bolivia before ICSID under the Additional Facility Rules. Furthermore, as BITs have post-termination protection, the cases under dispute now might still be arbitrated under those BITs. The issues will most probably be clarified in a complaint procedure by E.T.I. Euro Telecom International N.V. v Republic of Bolivia (ICSID Case No. ARB/07/28).
184. For an encompassing analysis, see Laurence R Helfer 'Exiting Treaties' (2005) 91 Virginia Law Review 1579.
185. See Osvaldo J Marzorati 'Argentina Opting Out?' (2005) 2 Transnational Dispute Management; Online Journal.
186. Decision on Argentine Republic's Request for a Continued Stay of Enforcement of the Award CMS v Argentina (1 September 2006). This award has not yet been paid by Argentina.
187. Investment Arbitration Reporter Vol. 1, No.17, of 17 December 2008 concerning the case Compañ́ a de Aguas del Aconquija S.A. and Vivendi Universal S.A. v Argentine Republic (ICSID Case No. ARB/97/3).
188. In the request for a Stay of the Enforcement of the Award in the Enron Case, above n 79, the committee took the view that a posting of security might be ordered in the Enron case, unless Argentina were to signal within 60 days that it takes a different view on its compliance obligations.
189. A growing number of BITs are being renegotiated. As many as 10 of the 44 (23%) BITs signed in 2007 replaced earlier treaties. This brought the total number of renegotiated BITs to 121at the end of 2007. See UNCTAD, above n 7, at 15.
190. As ibid, at 15 states, ever more countries are revising their model BITs to reflect new concerns, e.g., related to environmental and social issues and to the host country's right to regulate. The same is true for negotiations of new BITs (e.g. one under way between Canada and China). As UNCTAD says: 'a growing number of recent agreements mark a step towards a better balancing of the rights of foreign investors, on the one hand and respect for legitimate public concerns on the other'.
191. Tokios Tokeles v Ukraine above n 91. In a rare occurrence, the President of an ICSID arbitral tribunal, Prosper Weil, has dissented from this decision on jurisdiction and has signalled a concern for the "integrity" of the ICSID system, since the interpretation of the majority would ultimately allow nationals to seek protection against their own state in international tribunals. That, in his opinion, would destabilize the system as such and go against principles of international law.
192. As e.g. in the new US Model BIT 2004, which restricts the interpretational discretion con cerning indirect expropriation in Annex B considerably 'Except in rare circumstances, non- discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations'. The same holds for the investment part of the Japan- Philippines Economic Partnership Agreement, available at http://www.mofa.go.jp/region/asia- paci/philippine/epa0609/main.pdf (accessed 13 November 2008), which states several excep tions and safeguards concerning regulatory issues (see Articles. 99 ff.).
193. '2. For greater certainty, the obligation in this Article does not encompass a requirement to extend to investors of the other Party dispute resolution procedures other than those set out in this chapter.' A Website with details of the agreement can be found at http://www.chinaf- ta.govt.nz/ and the text of the agreement is at http://www.chinafta.govt.nz/1-The-agreement/ 2-Text-of-the-agreement/ (accessed 13 November 2008).
194. Above n 70.
195. Emilio Maffezini v Kingdom of Spain (ICSID Case No. ARB/97/7), Decision on Jurisdiction (25 January 2000).
196. On the development of the jurisprudence since Maffezini, see van Aaken, above n 22.
197. See Article 107 Japan-Philippines Economic Partnership Agreement, available at http:// www.mofa.go.jp/region/asia-paci/philippine/epa0609/main.pdf (accessed 13 November 2008).
198. See US-Australian FTA of 18 May 2004, available at http://www.ustr.gov/ assets/ Trade-Agreements/Bilateral/Australia-FTA/Final-Text/asset-upload- file148-5168.pdf (accessed 13 November 2008).
199. Article 18: Essential Security: 'Nothing in this Treaty shall be construed: 1. To require a Party to furnish or allow access to any information the disclosure of which it determines to be contrary to its essential security interests; or 2. To preclude a Party from applying measures that it considers necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests' (emphasis added). Also some newer US treaties, like the 2006 Peru-US FTA, signed on 12 April 2006, foresee auto-interpretation: Article 22.2 with footnote 2 provides: 'For greater certainty, if a Party invokes Article 22.2 in an arbitral proceeding initiated under Chapter 10 (Investment) or Chapter 21 (Dispute Settlement), the tribunal or panel hearing the matter shall find that the exception applies'.
200. For an extensive discussion, see Burke-White and von Staden, above n 28, at 376 ff.
201. Article IX (2) WTO Agreement reserves the ultimate interpretational authority to a three- fourth majority of member states.
202. See 'Free Trade Commission Clarifications Related to NAFTA Chapter 11', 31 July 2001, available at http://www.worldtradelaw.net/nafta/chap11interp.pdf (accessed 12 January 2009). The NAFTA member governments have reacted forcefully in a number of ways to their increasing liability under Chapter 11. On two occasions, they made joint policy statements about Chapter 11 that could limit investors' ability to bring claims. The United States has taken further steps in legislation and trade negotiations to ensure that the developments in some Chapter 11 cases do not become institutionalized in future FTAs between the United States and other countries.
203. Whereas the US model BIT does, the European BITs generally do not.
204. Generally, it would be worthwhile to conduct research on the question how such a provision may change international tribunals' or courts' behaviour, depending on the number of treaty parties and majority requirements for changing the treaty.
205. UNCTAD, Preserving Flexibility in IIAs: The Use of Reservations (UNCTAD Geneva/New York, 2006).