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‘Caveat Investor’? The Relevance of the Conduct of the Investor Under the Fair and Equitable Treatment Standard*

Published online by Cambridge University Press:  17 January 2008

Peter Muchlinski
Peter Muchlinski
Affiliation:
Professor in International Commercial Law, The School of Oriental and African Studies, University of London. E-mail [email protected].
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Abstract

The role that investor conduct plays in applying the fair and equitable treatment standard is relatively unexplored. On the basis of conceptual analysis, and emerging international judicial and arbitral case law, this article suggests that investor conduct is an important consideration. Investor duties are being accepted in relation to the avoidance of unconscionable conduct, the reasonable assessment of investment risk in the host country, and a duty to operate an investment reasonably. These requirements may be said to lead to a new limit upon the fair and equitable treatment standard encapsulated in the phrase ‘Caveat Investor’.

Type
Articles
Information
International & Comparative Law Quarterly , Volume 55 , Issue 3 , July 2006 , pp. 527 - 558
Copyright
Copyright © British Institute of International and Comparative Law 2006

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References

1 See further UNCTAD Fair and Equitable Treatment Series on issues in international investment agreements (United Nations New York and Geneva 1999); Vasciannie, Steven ‘The Fair and Equitable Treatment Standard in International Investment Law and Practice’ (1999) 70 BYIL 99 OECD Fair and Equitable Treatment Standard in International Investment Law Working Papers on International Investment Law No 2004/3 (OECD Paris September 2004);Google ScholarFoy, Patrick G and Deane, Robert J ‘Foreign Investment Protection under Investment Treaties: Recent Developments under Chapter 11 of the North American Free Trade Agreement’ (2001) 16 ICSID Rev-FILJ 299;CrossRefGoogle ScholarThomas, J C ‘Reflections on Article 1105 of NAFTA: History, State Practice and the Influence of Commentators’ (2002) 17 ICSID Rev-FILJ 21;CrossRefGoogle ScholarDumberry, Patrick ‘The Quest to Define “Fair and Equitable Treatment” for Investors under International Law—The Case of the NAFTA Chapter 11 Pope and Talbot Awards’ (2002) 3 JWI 657;Google ScholarSchreuer, Christoph ‘Fair and Equitable Treatment in Arbitral Practice’ (2005) 6 JWIT 357;Google ScholarDolzer, Rudolf ‘Fair and Equitable Treatment: A Key Standard in Investment Treaties’ (2005) 39 Int'L Law 87.Google Scholar

2 See further the discussion of the cases in Schreuer, ibid 370–3.

3 See Choudhury, Barnali ‘Evolution or Devolution?—Defining Fair and Equitable Treatment in International Investment Law’ (2005) 6 JWIT 297.Google Scholar

4 The question arises whether the investor's conduct is only relevant where it constitutes a major reason for the impugned administrative or judicial action, or whether any other conduct on their part may be referred to in defence. Here two issues need to be distinguished: the justification, by the respondent country, of the impugned measure by reference to the investor's conduct, where a direct causal relationship between the impugned act and the motivating conduct will be necessary to make out the defence (see eg Genin v Estonia ICSID Case No ARB/99/2 award of 25 June 2001: ICSID Rev-FILJ395 (2002)), and the attribution of causal responsibility for the alleged harm to the investor, where wider evidence of investor conduct may be of relevance to show that the alleged harm suffered by the investor was caused, either in whole or in part, by their own actions and not as a result of the impugned act of the host government (see, eg, MTD Equity v Chile ICSID Case No ARB/01/7 award of 25 May 2004: (2005) 44 ILM 91).

5 (1970) ICJ Reports 3.

6 (1989) ICJ Reports 15. According to Vacsiannie (n 1) 137, the majority opinion in the ELSI Case did not seek to apply the fair and equitable treatment standard to the facts as the FCN Treaty did not contain any explicit reference to that standard. However, the emphasis placed on corporate conduct in that case is instructive to the present discussion as it helps to shed light on how such conduct might be used in determining whether the investor can rely on the protection of the IIA in question.

7 See Techmed v Mexico ICSID Case No ARB (AF)/00/2 award of 29 May 2003: 23 ILM 133 (2004) paras 154–5.

8 See eg Loewen v United States ICSID Case No ARB (AF)/98/3 award of 26 June 2003: 42 ILM 811 (2003).

9 See Loewen v United Sates ibid; Waste Management Inc v Mexico ICSID Case No ARB (AF)/00/3 award of 30 Apr 2004: 43 ILM 967 (2004) para 98; MTD Equity v Chile (n 4) para 109.

10 TECMED v Mexico (n 7) paras 156–7. See also International Thunderbird Gaming Corporation v Mexico NAFTA Arbitration under UNCITRAL Rules award of 26 Jan 2006 (available at <www.asil.org/ilib>) where the majority of the Tribunal suggests that under NAFTA, and the international minimum standard embodied in its fair and equitable treatment provision, Article 1105, only a gross denial of justice or manifest arbitrariness would fall below acceptable international standards (para 194). This would appear to be more restrictive of the standard than other recent awards. See also the Separate Opinion of Professor Thomas Waelde for an extensive discussion of the scope of the doctrine of legitimate expectations in relation to the standard and its application to the particular facts of the case (available at <www.asil.org/ilib>). A summary of the main points of the case appears at notes 75 and 92 below.

11 PT Muchlinski Multinational Enterprises and the Law (revised paperback edition Blackwell Oxford 1999) 625. See also Mondev International Ltd v United States ICSID Case No ARB (AF)/99/2 award of 11 Oct 2002: 42 ILM 85 (2003) para 118 and Waste Management (n 9) para 99.

12 Here it is not enough merely to take a literal approach to definition, but to use a holistic perspective where text is interpreted in its actual context and in the light of the functions of international investment agreements. This is a general problem in international economic law. See, for example, the jurisprudence of the WTO, as discussed in Ortino, Federico ‘Treaty Interpretation and the WTO Appellate Body report in US-Gambling: A Critique’ 9 JIEL 117 (2006).CrossRefGoogle Scholar

13 Concise Oxford Dictionary (8th ednClarendon Press Oxford 1990) 420.Google Scholar

14 ibid 396.

15 ibid.

16 See further Baker, JHAn Introduction to English Legal History (4th ednButterworths Lexis Nexis London 2002) 105–11.Google ScholarSee also Maitland, FWEquity and the Forms of Action at Common Law (CUP Cambridge 1929) 1–22.Google Scholar

17 See Brownlie, IanPrinciples of Public International Law (6th ednOUP Oxford 2003) 25. In the Tunisia-Libya Continental Shelf Case the International Court of Justice (ICJ) held that: ‘Application of equitable principles is to be distinguished from a decision ex aequo et bono. The Court can take such a decision only on condition that the parties agree (Art 38, para 2 of the Statute), and the Court is then freed from the strict application of legal rules in order to bring about an appropriate settlement. The task of the Court in the present case is quite different: it is bound to apply equitable principles as part of international law, and to balance up the various considerations which it regards as relevant in order to produce an equitable result’ ICJ Reports (1982) 18, para 71.Google Scholar

18 See further Watt, GaryTrusts and Equity (OUP Oxford 2003) 17–27.Google Scholar

19 See eg the law relating to fraud, misrepresentation or undue influence in contract. See generally Beatson, JAnson's Law of Contract (28th ednOUP Oxford 2002) chs 6–7.Google Scholar

20 See SirGoode, RoyCommercial Law (3rd ednPenguin London 2004) 94. Equally such concerns have been expressed through increased regulation of contracts to ensure fairness, as in the field of consumer protection.Google Scholar

21 See ADF Group Inc v United States ICSID Case No ARB (AF)/00/1 award of 9 Jan 2003 18 ICSID Rev-FILJ 195 (2003) paras 179–81, citing Mondev International Ltd v United States (n 11) paras 114–16.

22 See generally UNCTAD World Investment Report 2003 (United Nations New York and Geneva 2003) ch v.Google Scholar

23 Franck, Thomas MFairness in International Law and Institutions (Clarendon Press Oxford 1995) 439.Google Scholar

24 ibid.

25 See further Bartlett, Christopher A, Ghoshal, Sumantra, and Birkinshaw, JulianTransnational Management: Text Cases and Readings in Cross-Border Management (4th ednMcGraw Hill Irwin Boston 2004) ch 3.Google Scholar

26 Indeed, the legitimate expectations of the investor will be bounded by the objective state of the applicable law as the investor found it at the time of entering into the investment. In addition, the investor cannot require the host country to determine or organise the law in any particular manner See, for further discussion, Dozer (n 1) 102–3.

27 OECD Guidelines for Multinational Enterprises (OECD Paris 2000) <www.oecd.org/daf/ investment/guidelines/mnetext.htm>..>Google Scholar

28 See further <www.unglobalcompact.org>. See also the UN Norms on the Responsibilities of Transnational Enterprises and Other Business Enterprises with regard to Human Rights UN Doc E/CN.4/Sub.2/2003/12/Rev.2 (2003) available on <www.umn.edu/humanrts/links/norms Aug2003.html>.

29 See further UNCTAD Social Responsibility Series on issues in international investment agreements (United Nations New York and Geneva 2001). The only legally binding international convention in this area to date is the OECD Convention on Combating Bribery in International Business Transactions which came into force on 15 Feb 1999. See further OECD Guidelines for Multinational Enterprises (n 27) ‘Commentaries’ para 44.Google Scholar

30 For a fuller discussion see Muchlinski, Peter T ‘The Social Dimension of International Investment Agreements’ in Faundez, Julio, Footer, Mary E, and Norton, Joseph J (eds) Governance, Development and Globalization (Blackstone Press London 2000) 373.Google Scholar

31 ICSID Case No ARB(AF)/97/2 award of 1 Nov 1999; 14 ICSID Rev-FILJ 538 (1999).

32 ibid para 106.

33 ibid para 29.

34 ibid para 33.

35 ibid para 110.

36 ibid paras 114–15.

37 ICSID Case No ARB/84/3 award of 20 May 1992: 8 ICSID Rev-FILJ 328 (1993).

38 ibid para 113.

39 ibid para 114–15.

40 ibid paras 117–21.

41 ibid paras 124–5.

42 ibid para 127.

43 ibid para 128. But see the dissenting opinion of arbitrator Mohamad Amin El Mahdi who felt there was sufficient evidence of improper conduct: 8 ICSID Rev-FILJ 400 (1993) 461–72.

44 ICSID Case No ARB/98/5 award of 26 July 2001: 18 ICSID Rev-FILJ 169 (2003).

45 ibid para 78.

46 ibid para 81.

47 ibid para 70.

48 ICSID Case No ARB(AF)/99/1 award of 16 Dec 2002: 18 ICSID Rev-FILJ 488 (2003).

49 ibid paras 128–31, and see the dissenting opinion of arbitrator Jose Covarrubias Bravo which asserts that the profitability of the investment was based on the availability of illegal tax rebates: (2003) 18 ICSID Rev-FILJ 580.

50 On this point the dissenting opinion seems more robust: ‘If, in actual fact, the Claimant is not entitled to IEPS rebates, it is repugnant to grant him a somewhat equivalent amount as compensation for damages, only because he alleges that there is another investor—a Mexican investor, in like circumstances—who has been granted IEPS tax rebates without being entitled to them either.’ Opinion of arbitrator Bravo ibid 593, point 10.

51 (n 4).

52 ibid para 362. Note that in Saluka v Czech Republic UNCITRAL Arbitation Partial Award (17 March 206) available at <www.asil.org/ilib>, the Tribunal held that a portfolio investor has no duty to disclose long-term investment plans: paras 232–5.

53 ibid para 348.

54 On the question of coercion of the investor by the host country see Muchlinski (n 11) 498–501.

55 (n 6). See further Murphy, Sean D ‘The ELSI Case: An Investment Dispute at the International Court of Justice’ (1991) 16 Yale Jo Int'l L 391.Google Scholar

56 ibid para 81.

57 One issue that may need to be determined is how negotiations at the pre-entry stage might affect subsequent negotiations between the investor and the host country. On the issue of renegotiation generally see Muchlinski (n 11) 493–8.

58 Maffezini v Spain Case No ARB/97/7 award of 13 Nov 2000: 16 ICSID Rev-FILJ 248 (2001) para 64.

59 Waste Management v Mexico (n 9) para 57.

60 ibid paras 115–16. The additional claim of denial of justice was also not upheld see ibid paras 118–39.

61 ibid para 177. See also Feldman v Mexico (n 48) para 111.

62 (n 4). The award is subject to annulment proceedings: Dolzer (n 1) 96.

63 See ibid paras 166, 189 and 214.

64 ibid paras 80–2.

65 ibid paras 169–70.

66 ibid paras 244–5.

67 (n 4) paras 343–5. See also Noble Ventures Inc v Romania ICSID Case No Arb/01/11 award 12 Oct 2005, available at <www.asil.org/ilib> paras 103–13, where, in the absence of being able to prove an alleged fraudulent misrepresentation by the host country authorities, the claimant was held to have a responsibility to make an independent verification of public records as to the state of litigation with third parties involving the iron and steel works in which it had invested as part of its privatization.

68 (n 44) para 65(b).

69 See text at nn 52–4.

70 ICSID Case No ARB/00/9 award of 16 Sept 2003: (2005) 44 ILM 404.

71 ibid para 20.37

72 (n 44) para 75.

73 CMS v Argentina ICSID Case No ARB/01/8 award of 12 May 2005: (2005) 44 ILM 1205 para 244.

74 ibid para 248.

75 Note that the regulatory and political environment may be a factor that the investor should take into account, and to anticipate regulatory change in areas where high levels of regulation can be foreseen, unless the host country has given assurances that no regulatory changes will take place: see Methanex v United States Final Award on Jurisdiction and Merits (3 Aug 2005) Part IV, Chapter D, p 5 paras 9–10 available on <www.state.gov/s/1/c5818.htm>. See further text at nn 92–4 below and see also Dolzer (n 1) 100–4. See also International Thunderbird Gaming Corporation v Mexico (n 10) where a majority of the Tribunal found that the Claimant had not been unfairly or inequitably treated by reason of a closure of its gaming outlet, caused by a change in government policy on gaming in Mexico, following a change of government. See however the Separate Option of Professor Thomas Waelde who felt that this change of policy required a proper settlement of the dispute with the Claimant, rather than a unilateral closure of its outlet.

76 See further Gallus, Nick ‘The Influence of the Host State's Level of Development on International Investment Treaty Standards of Protection’ (2005) 6 JWIT 711. Gallus notes that there has been a significant number of BIT based ICSID cases in which the developing host country's level of development was not taken into account. However in AMT v Zaire (ICSID Case No ARB /93/1 award of 21 Feb 1997: (1997) 36 ILM 1531) the issue was relevant to the determination of compensation, where the claimant was found to have been aware of local conditions (paras 7.14–7.15).Google Scholar

77 (n 5).

78 ibid para 99.

79 See too the Oscar Chinn Case (United Kingdom v Belgium) 12 Dec 1934 PCIJ Ser.A/B, No 63 (1934) 88: ‘No enterprise—least of all a commercial or transport enterprise, the success of which is dependent on the fluctuating level of prices and rates—can escape from the chances and hazards resulting from general economic conditions. Some industries may be able to make large profits during a period of general prosperity, or else by taking advantage of a treaty of commerce or of an alteration of customs duties; but they are also exposed to the danger of ruin or extinction if circumstances change. Where this is the case, no vested rights are violated by the State.’

80 (n 6) and see text at nn 55–6.

81 This conclusion was strongly opposed by Judge Schwebel, who held, in his dissenting opinion, that the parent companies had not lost their ability to manage but had that ability thwarted by the acts of the Italian authorities.

82 (n 6) para 101.

83 ibid.

84 For example, the OECD Guidelines for Multinational Enterprises would support such an approach by reference to Guideline II ‘General Policies’ which includes in para 4 an obligation to ‘[e]ncourage human capital formation, in particular by creating employment opportunities and facilitating training opportunities for employees’. However, the Guidelines, as interpreted, do not prevent the closure of unprofitable facilities provided that such closure is undertaken in accordance with local laws and practices, that reasonable notice is given to the employees and government authorities and that firms cooperate to the greatest possible extent in the mitigation of any adverse social effects: see Muchlinski (n 11) 464–5.

85 See text at nn 56–7. See too the discussion of the case in Lowenfeld, Andreas FInternational Economic Law (paperback ednOxford University Press Oxford 2003) 435–8.Google Scholar

86 The analysis of the ICJ has been criticized on this point: according to Murphy (n 55) 428, the right to control and manage entails an ability to choose a particular course of action, whatever its prospects of success or failure. By coming to its decision, the majority of the ICJ placed too much emphasis on the likelihood of a successful outcome to the liquidation and too little on the freedom of management to choose a particular course of action. According to F A Mann, the right to control and manage subsisted until the requisition: Mann, F A ‘Foreign Investment in the International Court of Justice: The ELSI Case’ (1992) 86 AJIL 92, 96–7. Ultimately, the case may be said to have turned on the failure by the US to establish a key fact–that the company's position was still sufficiently secure to allow its owners to continue to exercise important rights of management and control before the requisition: Murphy, ibid 450.Google Scholar

87 (n 67).

88 ibid para 147.

89 ibid para 152.

90 ibid para 177.

91 On which see, for example, TECMED v Mexico (n 7) para 154. See further Schreuer (n 1) 374–80. See also Occidental Exploration and Production Co v Ecuador award of 1 July 2004, London Court of International Arbitration Administered Case No UN3467 available at <http://ita.law.uvic.ca/documents/Oxy-EcuadorFinalAward_001.pdf>. See for critical comment Susan D Franck 99 AJIL 675 (2005) who feels that this award went too far in allowing a claim for breach of fair and equitable treatment for lack of transparency and clarity in the applicable regulatory framework which was also changed during the life of the investment.

92 (n 75). See also International Thunderbird Gaming Corporation v Mexico (n 10) where the majority of the Tribunal held that the US Claimant had no reasonable basis upon which to rely on an official administrative opinion (Oficio) to its detriment (see para 196) That opinion had been furnished in response to the Claimant's request to ascertain whether certain types of gaming machines, that it proposed to place in a new outlet in Mexico, complied with the legal definition of a ‘game of skill’, which was permissible under the law, rather than a ‘game of chance’ which was prohibited. The Claimant undertook the investment but it was closed by the gaming authority acting under the revised policy of the new Mexican administration, which, unlike its predecessor, was pledged to reverse the liberalization of gaming. In his Separate Opinion, Professor Thomas Waelde disagreed and held that the Mexican authorities had breached the fair and equitable treatment standard in NAFTA. In his view, the Oficio was ambiguously worded, but it led the Claimant to rely upon it and to believe that its machines could be lawfully operated. The Claimant was a small business which did not have the same capacity for independent analysis of the regulatory environment as would a large foreign investor, and that, in all the circumstances, its legitimate expectation, created by the Oficio, that its investment would not be challenged, was violated. This could not be excused by a change of governmental policy pursuant upon a change of administration. In addition Professor Waelde felt that the Mexican authorities had a duty to ascertain the facts independently of the Claimant, whose approach to them was in the manner of advocacy for permission to operate the outlet in question. Accordingly the authorities had failed to comply with principles of good governance by not doing so and by rendering the Oficio on the basis of the facts supplied by the Claimant. For a critique of Professor Waelde's reasoning see Joy Ejegi ‘Re: Thunderbird and Legitimate Expectations’ Transnational Dispute Management OGEMID Archive posted 1 Feb 2006 available at <www.transnational-dispute-management.com/ members/ogemid/2006/01/msg00> (accessed 8 Mar 2006).

93 ibid Part IV, Chapter D, p 5, para 10.

94 Malaysia Model BIT (Feb 1998) Art 1(2)(a) in UNCTAD International; Investment Agreements: A Compendium Vol V (United Nations New York and Geneva 2000) 325, 326.Google ScholarSee also Sornarajah, MThe International Law on Foreign Investment (2nd ednCUP Cambridge 2004) 266.CrossRefGoogle Scholar

95 (n 58) para 71.

96 ibid para 70.

97 (n 48) paras 125–31.

98 ibid paras 132 and 114.

99 ibid para 114.

100 This would be the case, for example, in relation to misrepresentation under English law, where reliance on an independent assessment of the facts when entering into a contract would negate the effect of any misrepresentation made to the representee: see Attwood v Small (1838) 6 Cl & Fin 232.

101 ICSID Case No ARB(AF)/00/1 award of 9 Jan 2003: 18 ICSID Rev-FILJ 195

102 See, for example, the transparency provisions in the US-Uruguay BIT 25 Oct 2004: (2005) 44 ILM 265 Arts 10–11 which include a duty to notify and inform the investor as to legal developments (Art 11(3)). One issue in this regard might be the effect of any disclaimers as to the accuracy of legal information contained in governmental publications that do not purport to be legally binding, such as investment promotion literature. See also, on the issue of official responses to investor requests for clarification of their legal rights, International Thunderbird Gaming Corporation v Mexico (n 10) and (n 92)

103 (n 48) para 134.

104 (n 70) para 20.30.

105 See Schreuer, Christoph ‘Calvo's Grandchildren: The Return of Local Remedies in Investment Arbitration’ (2005) 4 Law and Practice of International Courts and Tribunals 1, 13–16.CrossRefGoogle ScholarSee also UNCTAD Dispute Settlement: Investor State Series on issues in international investment agreements (United Nations New York and Geneva 2003) 32–4;Google ScholarPeters, P ‘Exhaustion of Local Remedies: Ignored in Most Bilateral Investment Treaties’ (1997) Vol XLIV Netherlands International Law Review 233; for a defence of the need to exhaust local remedies where a BIT is silent on the issue see Sornarajah (n 94) 253–5. Note that in the ELSI Case the ICJ held that the US—Italy FCN Treaty, which was silent on the need to exhaust local remedies, did not thereby oust the local remedies rule: (n 6) para 50. However that case involved a State-to-State dispute not an investor-State dispute.CrossRefGoogle Scholar

106 (n 10) para 116.

107 See also, to similar effect, Azanian v Mexico (n 31).

108 See Schreuer (n 105) 15–16 on which this discussion draws.

109 See Maffezini v Spain ICSID Case No ARB/97/7 decision on objections to jurisdiction (25 Jan 2000): (2001) 16 ICSID Rev-FILJ 212.

110 (n 105) 16.

111 It should be remembered that the deliberate exclusion of the local remedies rule from IIAs is based on the concern that national dispute settlement bodies, in developing host countries in particular, may be unable to deal adequately or impartially with investor-State disputes (But see the Lowen Case (n 8) which involved the apparently developed legal jurisdiction of the state of Mississippi). As national legal systems evolve to meet the challenges of attracting investors, such a concern may become less important over time.

112 Dolzer (n 1) 88.

113 Indeed this phrase has been used in at least one recently published article: see Fortier, L Yves and Drymer, Stephen L ‘Indirect Expropriation in the Law of International Investment: I Know it When I See It, or Caveat Investor’ (2004) 19 ICSID Rev-FILJ 293.CrossRefGoogle Scholar