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State responsibility in a liberalised world economy: “state, privileged and subnational authorities” under the 1994 Energy Charter Treaty: An analysis of Articles 22 and 23*

Published online by Cambridge University Press:  07 July 2009

T.W. Waelde  and
P.K. Wouters
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Extract

The unprecedented expansion and growing complexity of international economic relations over the last decades have significantly affected the scope and nature of existing international law. Numerous bilateral investment trade agreements (BITs), and multilateral instruments such as the GATT, NAFTA and the 1994 Energy Charter Treaty (ECT) have added to the increasing body of international trade and investment law. From the perspective of general international law, this emerging lex mercatoria is a force to be reckoned with. It is the ‘interface of international business/commercial law with public international law has never been an easy exercise. An issue that perhaps best identifies the complexity of such an endeavour relates to the responsibility of the State for non-State actors in the area of commercial transactions. While this issue has yet to be clarified fully in international law, it is one that is of particular importance to international economic relations.

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Articles
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Netherlands Yearbook of International Law , Volume 27 , December 1996 , pp. 143 - 191
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Copyright © T.M.C. Asser Press 1996

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References

1. See two major recent works on the subject: Sornarajah, M., The International Law of Foreign Investment (1994)Google Scholar; Muchlinski, P., The Law of Multinational Enterprises (1995)Google Scholar and the contributions by Norton, P., ‘Back to the Future: Expropriation and the Energy Charter Treaty’, pp. 365–385Google Scholar; Sornarajah, M., ‘Compensation for Nationalization: The Provision in the Energy Charter Treaty’, pp. 386–408Google Scholar; Paasivirta, E., ‘The Energy Charter Treaty and Investment Contract: Towards Security of Contracts’, pp. 349–364Google Scholar; and Waelde, T., ‘International Investment Underthe 1994 Energy Charter Treaty’, pp. 251–320Google Scholar, in Waelde, T., ed., The Energy Charter Treaty, A Gateway for East-West Investment & Trade (1996)Google Scholar. Two interesting doctoral theses (so far unpublished) have been prepared on these topics by A. Kolo and G. Ndi (1994) at the Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Scotland.

2. We refer here to the over 1200 bilateral investment treaties so far concluded, see most recently Dolzer, R. and Stevens, M., Bilateral Investment Treaties (1995)Google Scholar and the contributions of Salacuse, J., Muchlinski, P., ‘The Energy Charter Treaty: Towards a New International order for Trade and Investment or a Case of History Repeating Itself?’ pp. 205–225Google Scholar and Vandevelde, K., ‘Arbitration Provisions in the BITs and the Energy Charter Treaty’, pp. 409–421Google Scholar in T. Waelde, ed., op. cit. n. 1. It is interesting to note than none of the current standard treatments of the subject of international investment law/ BITs (e.g., Somarajah, Dolzer, Stevens and Muchlinski) deals with the extent and scope of State responsibility with respect to subnational agencies and State/private enterprises.

3. Lillich, R., ed., International Law of State Responsibility for Injuries to Aliens (1983)Google Scholar; insurrections, civil wars, revolutions and armed intervention by another State have provided recent cases such as the US-Iran Hostages case, 19 ILM (1980) p. 553 or the Nicaragua v. US (mining of Nicaraguan harbours) case, 25 ILM (1986) p. 1023.

4. On State responsibility generally, see Rosenne, S., The International Law Commission's Draft Articles on State Responsibility (1991)Google Scholar; Amerasinghe, C., State Responsibility for Injuries to Aliens (1967)Google Scholar; Brownlie, I., Principles of Public International Law, 4th edn. (1990)Google Scholar; Smith, B., State Responsibility and the Marine Environment (1988).Google Scholar

5. Wouters, P.K., and Waelde, T.W., ‘State Responsibility and the Energy Charter Treaty: The Rules Regarding State Enterprises, Entities, and Subnational Authorities’, Hofstra JIL (1996/1997) forthcoming.Google Scholar

6. But see the few observations in B. Smith, op. cit. n. 4; Higgins, R., Problems and Process (1994) p. 153Google Scholar and the remarks by Chalmers, J., ‘State Responsibility of Parastatals Organized in Corporate Form’, ASIL Proc. (1990) pp. 60–64Google Scholar. These focus on the financial joint liability of a controlling State over the financial liabilities engendered by the commercial acts of a parastatal organisation set up with limited liability – i.e., the issue of ‘piercing the corporate veil’ to reach a more solvent government. The main issue then was the question – mostly, but not always answered in the negative – if the State was financially responsible for financial obligations generated by commercial activities of its State enterprises (Banec case 22 ILM (1983) p. 840) or if the State enterprise could effectively rely on State-issued regulation to claim force majeure in commercial contracts – such as the famous Rolimpex case (Czarnikov v. Rolimpex (1979) AC 351, 364 – see Mann, F.A., Further Studies in International Law (1990) pp. 199–216)Google Scholar. M. Sornarajah has proposed that home State responsibility should include harm effected, in particular environmental damage, by multinational companies abroad, as a mirror image of the diplomatic protection the home State offers, ‘Foreign Investment and International Environmental Law’, in Sun, Lin, ed., UNEP's New Way Forward: Environmental Law and Sustainable Development (1995) pp. 283–295Google Scholar; in the 1970s, developing countries postulated a home State responsibility of home States for ‘developmental damage’ caused by multinational companies, fora discussion of this ‘NIEO’ position, see Waelde, T., ‘Requiem for the “New International Economic Order”: The Rise and Fall of Paradigms in International Economic Law’, in Al-Nauimi, N., ed., International Legal Issues Arising from the UN Decade of International Law (1995)Google Scholar and earlier: ‘Industry 2000’, Vol. II, International Industrial Enterprise Cooperation published by UNIDO, Doc. IOD.325 of 19 December 1979, Vienna.

7. See Carcevic, P., ed., Privatisation in Central and Eastern Europe (1992)Google Scholar; Webb, D., in Pritchard, R., ed., Economic Development, Foreign Investment and the Law (1996)Google Scholar; Waelde, T., ‘Restructuring and Privatisation: Viable Strategies for State Enterprises in Developing Countries’, 5 Utilities Policy (1991) pp. 412–418Google Scholar; Brown, M. and Ridley, G., Privatisation, Current Issues, (1994)Google Scholar; Veljanowski, C., Privatisation and Competition (1991).Google Scholar

8. See Ogus, A., Regulation: Legal Form and Economic Theory (1994).Google Scholar

9. Waelde, T., ‘Die Regelung der britischen Energiewirtschaft nach der Privatisierung’Google Scholar, in Tettinger, P., Strukturen der Versorgungswirtschaft in Europa (1996) pp. 59–95.Google Scholar

10. See Waelde, T., ‘Critical Review of Legal and Policy Arguments Driving the Discussion on Third Party Access’Google Scholar, in Mestmaecker, E.J., ed., Natural Gas in the Internal Market (1992) pp. 227–241Google Scholar; Salter, J., ‘Third-Party Access to Gas and Electricity Transmission Systems’ in McDougal, D. and Waelde, T., eds., EC Energy Law (1994) p. 85.Google Scholar

11. Penrose, E., Gaffe, G., and Stevens, P., ‘Nationalisation of Foreign-Owned Property for a Public Purpose: An Economic Perspective on Appropriate Compensation’, 55 MLR (1992) p. 351CrossRefGoogle Scholar; Anthill, N. and Arnaud, R., Oil & Gas Equities: Evaluation and Trading (1994)Google Scholar; for this expanding notion of protected property/investment in international law: R. Dolzer and M. Stevens, op. cit. n. 2, at pp. 25–26.

12. Ibid. Also Reich, C., ‘The New Property’ 73 Yale LJ (1964) p. 733CrossRefGoogle Scholar focused on the social rights as part of a modern property concept, but the same applies to ‘business rights’, i.e., rights, to function in a fair competitive market within a non-discriminatory environment.

13. In the energy business, pipeline transport charges are therefore a significant part of an investment's economic viability. Most of the energy projects in the CIS suffer from pipeline charges up to and over 20% of the value of the transported products. Natural – but also political – monopolies emerge very easily in the transport area, partly because of the political control over pipeline construction, and partly because of the very high capital cost of building such pipelines. It is for this reason that the Energy Charter Treaty, Art. 7, provides a special and novel regime for transit, see Roggenkamp, M., ‘Transit of Network-bound Energy’Google Scholar, in Waelde op. cit. n. 1 pp. 499–518 and Stevens, P., ‘The History of Mideast Pipelines and Lessons for the CIS’Google Scholar, in ‘Boundaries and Energy! Problems and Prospects’, Durham, July 1997.

14. See Dolzer and Stevens, op. cit. n. 2, at pp. 61–65. The concept seems traditional since non-discrimination is a well known principal often asserted to be part of international customary law (Brownlie, op. cit. n. 4, at p. 523) and has equally been the classical standard raised by Latin American countries to counter privileged treatment of foreign investors (Garcia-Amador, C.F., ‘Calvo Doctrine, Calvo Clause’, 8 EPIL (1985) p. 62Google Scholar; Schwarzenberger, G., Foreign Investments and International Law (1969) pp. 120, 121)Google Scholar. The principle is equally found in international trade (GATT/WTO) law and applied to State enterprises under Article XVII of the GATT. One of the troublesome features of the Energy Charter Treaty is the import of legal concepts – and their jurisprudential and interpretative baggage – from legal areas such as diverse as international trade and investment law (this has so far only been observed by very few, among them Paasivirtta and Salacuse, op. cit. n. 1, at pp. 321 and 349; see also Waeide, T., ‘International Investment under the 1994 Energy Charter Treaty-Lega', Negotiating and Policy Simplications for International Investors within Western and Commonwealth of Independent States / Eastern European Countries’, 20 JWT (1995) pp. 5–72Google Scholar. Much of the interpretative confusion stems, in our view, from the merging of trade and investment issues, and often language-wise identical, but meaning- and implication-wise different technical terms (such as discrimination, national treatment and most-favoured clause).

15. On non-discrimination as discussed by the OECD and applied by organs of the European Communities: Waelde, op. cit. n. 14 pp. 44–45. The content of this principle is not at all easy to ascertain. In our view, one needs to distinguish the meaning of the concept as a trade law term from the meaning as an investment law term. Jurisprudence by the European Court of Justice and the US Supreme Court would seem to be the most helpful antecedents – rather than GATT-panel cases.

16. See Duffy, P., The Single Market (1992) pp. 2–4.Google Scholar

16a. For a parallel discussion in international trade law see Petersmann, E.U. and Hilf, M., National Constitutions and International Law (1993) pp. 1–52.Google Scholar

17. See Sornarajah, M., ‘Towards an International Antitrust Law’, 22 Indian JIL (1982)Google Scholar and R. Higgins, op. cit. n. 6, at pp. 165–168 commenting on Article 19 of the ILC Draft Article.

18. Horn, N., Legal Problems of Codes of Conduct for Multinational Enterprises (1980) pp. 89–102Google Scholar, Muchlinski, op. cit. n. 1, at p. 592; Shihata, I., ‘Recent Trends Relating to Entry of Foreign Direct Investment’, 9 ICSIDRev/FILJ (1994) pp. 47–70.Google Scholar

19. Hartley, T., The Foundations of European Community Law (1994) pp. 195–236Google Scholar; Collins, L., European Community Law in the UK (1992) pp. 67–74.Google Scholar

20. Hartley, op. cit. n. 19, at pp. 216–222.

21. See in particular the Foster v. British Gas case, Case C-188/189 [1990] ECR I-3313; the test used required provision of public service, control of the State, pursuit of measures adopted by the State and possession of special powers beyond those nominally possessed by companies in ‘normal’ commercial intercourse.

22. Hankey, S., Westbrook, B. and Warne, P., ‘The EU Hydrocarbons Licensing Directive’, OGLTR, (1994) pp. 280–283.Google Scholar

23. See (including the text of the draft 1994 directive): von Burchard, F. and Eckert, L., Natural Gas and EU Energy Law (1995) 159 pp.Google Scholar; also Cameron, P., Gas Regulation in Europe: From Monopoly to Competition (1995)Google Scholar; on the end-1995 status: Klom, A., ‘Liberalisation of Regulated markets for trade; The internal market for electricity as a case study’, 14 JENRL (1996) pp. 1–13 (1996)Google Scholar; Jerass, H., Europaeisches Energierecht (1996) pp. 32–62Google Scholar, the so far mostdetailed examination of this issue.

24. For a report on litigation of such issues in Germany, under German competition law: Schmidt-Preuss, M., ‘Verfassungskonflict um die Durchleitung – Zum Streitstand nach dem VNG-Beschluss des BGH’, RDE (1996) pp. 1–8.Google Scholar

25. See Buckley, /Holberton, , ‘Plucking for the Generation Gap’, Financial Times, 26 June 1996 at p. 13Google Scholar; also Klom, op. cit. n. 23.

26. On doctrinal issues: see Klaue, S., ‘Wettbewerb durch Regulierung’, RDE (1994) pp. 51–56Google Scholar; critically Burchard and Eckert, op. cit. n. 23.

27. T. Waelde, in Mestmaecker, op. cit. n. 10, and in Tettinger, op. cit. n. 9 (on the US, Canada and the UK). Liberalisation of the energy industry structures – as happened or happening in the US, Canada, Norway, Sweden, the UK – seems to lead inevitably to a direct right of access based on general competition law (‘dominant facility’ or ‘refusal to deal by monopolist’ concepts) or based on or in the shadow of specific regulatory powers.

28. See the discussion between Ehlermann, C.D., ‘Role of the EC as Regards National Energy Policies’, 12 JENRL (1994) p. 342Google Scholar; Klaue loc. cit. n. 26 and Von Burchard and Eckert, op. cit. n. 23.

29. See Sornarajah, loc. cit. n. 17; Muchlinski, op. cit. n. 1, at pp. 384–411.

30. Art. 6 of ECT and Holmes, K., ‘Legal Implications of the Energy Charter Treaty, Competition – Rules and Competition’, pp. 546–564Google Scholar, in Waelde, op. cit. n. 1, at pp. 546–561;

31. The sensitivity over the – very carefully and restrictively crafted – process of panel-plus-appeal procedures for GATT and NAFTA disputes illustrates this restraint of States to give up their complete control over national competition law – outside die EU, see Sornarajah, loc. cit. n. 17.

32. Waelde, T., ‘Investment Arbitration under the Energy Charter Treaty’, Arbitration International, (1997) 12 Arbitration International (1997) pp. 429–466CrossRefGoogle Scholar and Paulsson, J., ‘Arbitration Without Privity’, pp. 422–442Google Scholar in Waelde, op. cit. n. 1, at p. 422.

33. This is not to say that there could not be a ‘direct’ effect/ self-executing effect of such Treaty obligations in the national law of member States and the EU. For example, the new Russian Production-Sharing law, contains what appears to be a direct transformation of international Treaty obligation into Russian law – similar to a number of ‘monist’ national legal systems, Waelde, T. and Friedrich, M., ‘Russian Federation: Law on Production Sharing Agreements’, 35 ILM (1996) p. 1251Google Scholar. Similarly, there can be an ‘indirect effect’ of such international law obligation by a Treaty conforming interpretation of national law by national courts, see on this indirect effect of EC law: Hartley, op. cit. n. 19, at p. 223; Hans Baade has traced other indirect effects of international law in national law, e.g, by influence on the concept of ‘public policy’ in conflict of law balancing, see Baade, H., ‘The Legal Effects of Codes of Conduct for Multinational Enterprises’Google Scholar, in Horn, op. cit. n. 18, at p. 3. One would therefore expect the Energy Charter Treaty's key hard-law treatment principles (in particular non-discrimination) to gradually develop effectivenes through a direct, but also indirect, interpretation-orientated impact by penetration of national law. This theme will be explored in a separate study. It is noteworthy that the classic work by Jackson, J., World Trade and the Law of GATT (1969) p. 345Google Scholar (in particular note 18) raises the possibility of direct application of GATT rules by incorporation into the domestic law of member States, with the result that an injured private party might sue in a domestic court to obtain compliance. Jackson's, later work – ‘Status of Treaties in Domestic Legal Systems’, 86 AJIL (1992) pp. 310–340CrossRefGoogle Scholar is, in particular for US constitutional reasons, more cautious.

34. Zamora, A. and Brand, , International Economic Law CCH 1990, Vol. I.Google Scholar

35. 32 ILM (1993) p. 605 in particular Art. 1502; on its investment/arbitration sections: Smith, E. and Cluchey, D., ‘GATT, NAFTA and the Trade in Energy’, 12 Journal of Energy & Natural Resources Law (1994) p. 2CrossRefGoogle Scholar; Erlund, C., ‘A Primer on the Arbitration of NAFTA Chapter Eleven Investment Disputes’, 11 JIA (1994) pp. 135–171Google Scholar; Horlick, G. and Debusk, A., ‘Resolution under NAFTA’, 27 JWT (1993) p. 21.Google Scholar

36. See Rosenne, op. cit. n. 4.

37. See Art. 3, ILC Draft Articles.

38. The objective test relates to the breach of the obligation, the subjective test refers to the attribution to the State of such breach. See Wouters and Waelde, op. cit. n. 5.

39. See Arts. 5, 6, 7 and 8, ILC Draft Articles.

40. See Arts. 7(1)(2), 8 and 10, ILC Draft Articles. In all cases not expressly covered in Arts. 7 and 8, the conduct is in ‘no circumstances’ attributable to the State regardless of whether there is a causal link; see Commentary to Arts. 7 and 8.

41. Ibid.

42. See discussion in Wouters and Waelde, op. cit. n. 5.

43. So the US Supreme Court in the BANEC case, op. cit. n. 6, see both critically: Chalmers, op. cit. n. 6 and Mann, op. cit. n. 6. Both argue for the an ‘identification’ – in both ways, State for State enterprise, State enterprise for State – in cases of tightly controlled parastatals in centrally planned economies where the State enterprise forms an integral part of the State-owned economy.

44. Smith, op. cit. n. 4, at p. 30.

45. Seidl-Hohenveldern, I., Corporations in and under International Law (1987) p. 63Google Scholar; also Shihata, I., ‘Role of Law in Economic Development. The Legal Problem of International Public Ventures’, 25 Revue Egyptienne du Droit International (1969) p. 125.Google Scholar

46. ASIL Proc (1990) op. cit. n. 6, pp. 70–71 (1990) pp. 70–71.

47. Restatement of the Law Third. The American Law Institute Restatement of the Law. The Foreign Relations Law of the United States. Vol. 1 (1987), 96.

48. See Mann, op. cit. n. 6.

49. Also Higgins, op. cit. n. 6, at pp. 154–157, 160 when she quotes, approvingly, Amerasinghe: ‘The basis of State responsibility will vary with the content of the international obligation’.

50. Higgins, ibid, at p. 154 (discussing the Iranian ‘Revolutionary Guards’, but also, p. 157, activities of private companies in the environmental sphere; Smith, op. cit. n. 4, at p. 37.

51. See in particular the case-rich discussion by F.A. Mann, op. cit. n. 6, also Boeckstiegel, K.-H., Der Staat als Vertragspartner auslaendischer Privatunternehmen, (1971) pp. 31–45, 55–70Google Scholar; Mann argues – against both the highest US and English courts – for a far-reaching identification of State enterprises with – Communist – States. While this may to some extent now be a moot issue, it embodies a problematic approach since States could under his approach largely absolve themselves from responsibility by materially privatising a large part of their State machinery. Those States who are least concerned over what their nationals are doing abroad would equally carry least responsibility. Until one builds up a countervailing direct-right-to-sue method against such privatised dominant enterprises, international obligations would lose most of their effectiveness since there was no longer a target: No longer the no longer owning and controlling State, and not yet the uncontrollable private economic actor.

52. Published in 34 ILM (1995) p. 360 with introduction by T. Waelde; also – with numerous commentaries and analyses (but not on this topic) – in Waelde, ed., op. cit. n. 1; US letter (on withdrawal from Treaty signing process): 34 ILM (1995) p. 556; OJ (1994) No. L 380.

53. Canada and the US signed the 1991 European Energy Charter, but ultimately did not sign the 1994 Energy Charter Treaty (on reasons: Fox, W., ‘The United States and The Energy Charter Treaty’, pp. 194–201Google Scholar in Waelde, op. cit. n. 1); the signatories include the CIS and European (East and West) countries plus Australia and Japan.

54. See Part III in the Annex to this paper.

55. Waelde, T., ‘International Investment Under the 1994 Energy Charter Treaty’, pp. 251–320Google Scholar, Muchlinski, P., ‘The Energy Charter Treaty: Towards a New International Order for Trade and Investment or a Case of History Repeating Itself?’ pp. 205–225Google Scholar in Waelde, op. cit. n. 1.

56. Frasl, I., ‘The Trade Rules of GATT and Related Instruments and the Energy Charter Treaty’ pp. 459–496Google Scholar; and Footer, M., ‘Trade and Investment Measures in the Energy Charter Treaty’ pp. 445–458Google Scholar, in Waelde, op. cit. n. 1.

57. See Arts. 10–17, Part III, ECT.

58. For a first extensive analysis (which by no means exhausts the subject): Waelde, op. cit. n. 14. Also C. Bamberger ‘overview’ pp. 1–34; in Waelde, op. cit. n. 1.

59. J. Paulsson and K. Vandevelde, op. cit. n. 32, ‘Arbitration Provisions in the BITs and the Energy Charter Treaty’, pp. 409–421 in Waelde, op. cit. n. 1; Waelde, T., ‘Investment Arbitration under the Energy Charter Treaty’, Arbitration International (1997).Google Scholar

60. Toquote from the Preamble: ‘desiring to place the commitments contained in that (European Energy) Charter on a secure and binding international legal basis’; ‘to catalyse economic growth by means of measures to liberalise investment and trade in energy,’ ‘affirming that contracting parties attach the utmost importance to the effective implementation of full national treatment and mostfavoured nation treatment.’

61. See Moreno, A.M., ‘Presidential Coordination of the Independent Regulatory Process’, 8 Admin. LJAU (1994) p. 461Google Scholar; Waelde, in Tettinger, ed., op. cit. n. 9; Dow, S., A Survey of Major Developments in the Post-Privatisation Phase of UK Gas and Electricity Supply Industries, LL.M. diss., CEPMLP, Dundee (1995)Google Scholar; Khelil, C. and Fitzpatrick, J.S.M., ‘Argentinian hydrocarbon privatisation’ 13 JENRL (1995) pp. 120–128.Google Scholar

62. See Fox, in Waelde, op. cit. n. 53; similarly, we understand that Canada had considerable difficulties with the application of the ECT to its federated states; the exception in Art. 27 (3)(i)/Annex P was negotiated to accomodate Canada (Australia selected this exception as well).

63. For a list: Von Burchard and Eckert, op. cit. n. 23; Cameron, P., ‘Gas Regulation in Europe’, Financial Times Report (1996)Google Scholar; Klom, loc. cit. n. 23.

64. The influence of the European energy debate on the Treaty emerges from several indications: First, the European Energy Charter of 1991 as the Treaty of 1994 emphasise both the significance of ‘liberaliation’ and make reference to the EC's completion of its ‘internal energy market’ (Charter, Preamble); second, a curious ‘understanding’ (No. IV 1 (b)) in the Final Act inserts a reference (albeit a negative one) to the EC's efforts to introduce 'third-party access’.

64a. See on these issues in particular the 1997 PhD thesis by Seek, A., ‘Oil and Gas Finance and Investment in the CIS’, CEPMLP, Dundee.Google Scholar

65. Problems Western investors face with respect to both access and access charges to the Russian pipeline network are continuously reported in the Russian Petroleum Investor and the Financial Times East European Energy Newsletter.

66. See Final Act, reprinted in Waelde, op. cit. n. 1, p. 611.

67. Higgins, op. cit. n. 6, at pp. 50–55; 152–159.

68. We have already made reference to the possibility of ‘direct effect’ of the Treaty in member countries which would allow plaintiffs to sue and directly invoke the obligations of the Energy Charter Treaty against discriminating energy monopolies, see supra. The ‘effects’ doctrine invoked, for example, in US and EC competition law, would be an instrument to obtain extraterritorial reach of a member country's national law incorporating the Treaty against a foreign energy monopoly acting abroad. The scenario would be a EC member countries suing a GAZPROM subsidiary in the plaintiff's home State for discriminating action in Russia which would be alleged to have had a significant effect in the forum country.

69. See above and Higgins, op. cit. n. 6, at pp. 153–155;

70. See Preamble, para. 6, ECT.

71. Part III, ECT bears witness to considerable influence from US bilateral investment treaties and, in particular, the NAFTA, as does Art. 26 on investment arbitration.

72. Arts. 22 and 23 ECT are quite similar in language to Art. XVII of the GATT. GATT/WTO interpretative tradition is, however, inappropriate for dealing with the non-trade part of the Energy Charter Treaty: Here, we have investment situations, i.e., the treatment of companies who have set up a permanent, high-risk operation in host States, that is categorically distinct from the GATT-scenario of trade in products and services across borders.

73. The USA withdrew its participation toward the end of the negotiations. The parties to the Treaty are largely European, including States from the CIS, European and Western Europe.

74. See Art. 7(1) and (2), ILC Draft Articles, reprinted in Rosenne, op. cit. n. 4. See also the example in State practice represented by, inter alia, Art. XIII of the US-Argentina BIT: ‘This treaty shall apply to the political subdivisions of the Parties,’ 31 ILM (1992) p. 135.Google Scholar

75. See Wildhaber, L., Treaty-Making Power and Constitution (1971)Google Scholar; Jackson, J., ‘US’, in Jacobs, F., ed., The Effect of Treaties in Domestic Law (1987).Google Scholar

76. See Preamble, ECT.

77. See Art. 26 (8) ECT, in Annex to this paper.

78. Such as the US Federal Energy Regulatory Commission (FERC) – Fox, W., Federal Energy Law (1991)Google Scholar update; the UK regulators: OFGAS, OFFER and (for oil: Department for Trade & Industry); the new Russian Energy Regulatory Agency or the energy regulatory agencies set up in Poland and Ukraine. See Waelde, in Tettinger, op. cit. n. 9; Ronne, A., ‘The Polish Draft Energy Law’, 14 JENRL (1996) pp. 99–107.Google Scholar

79. Ogus, op. cit. n. 8.

80. Seidl-Hohenveldern, op. cit. n. 45, mentions a case of railway policing entrusted to private agents.

81. Vagts, D., ‘Treaty interpretation and the New American Ways of Law Reading’, 4 EJIL (1993) pp. 472–505CrossRefGoogle Scholar; Bernhardt, R., ‘Interpretation in International Law’, EPIL (1995) p. 1416Google Scholar; on the main underlying philosophies underlying international law: Neff, S., Friends But no Allies, Economic Liberalism and the Law of Nations (1990).Google Scholar

82. See Smith, A., The Wealth of Nations, The Cannan Edition (1937)Google Scholar which recognises both the importance of the state's role in guaranteeing law and public order – and the wealth-creating role of free markets. See most recently and eloquently: Muller, J., Adam Smith in his time and ours (1993).Google Scholar

83. In the discussion on State responsibility see Chalmers, loc. cit. n. 6.

84. Wouters and Waelde, loc. cit. n. 5. See also the discussion by US/OPIC Deputy General Counsel Jane Chalmers on parastatals in ASIL Proc, loc. cit. n. 6, at pp. 60–63; her discussion, however, though entitled ‘state responsibility’ is not oriented a the usual perspective of State responsibility, i. e., the State assuming responsibility for breach of international obligations by a statederived actor, but rather at the ‘piercing of the corporate veil’ of corporate limited liability to make the State take on the financial liability of primarily financial obligations of a State enterprise (typically for off-set or execution purposes) or make the State enterprise take on financial liability for obligations of the State.

85. For a review of the discussion Higgins, op. cit. n. 6, at pp. 152, 153; Chalmers, loc. cit. n. 6.

86. Banec case op. cit. n. 6.

87. See also Allott, P., ‘State Responsibiltiy and the unmaking of International Law’, 29 Harvard ILJ (1985) p. 1Google Scholar; Higgins, op. cit. n. 6, at pp. 152–155.

88. A look at the GATT precedent language for Art. 22 (i.e., Art. XVII GATT) does not shed much light on the meaning of ‘ensuring’: Article XVII GATT uses ‘Each contracting party undertakes that if it establishes or maintains a State enterprises … or grants to any enterprise, formally or in effect, exclusive or special privileges, such enterprise shall, in its purchases or sales involving either imports or exports, act in a manner consistent with the general principles of nondiscriminatory treatment prescribed in this Agreement for governmental measures affecting imports or exports by private traders.’ The transferability of GATT meaning, understanding and practice to the ECT (in spite of similar language) is very doubtful – GATT is a much older legal instrument dealing with a very different issue – trading in lieu of investment – and does not recognise, as the ECT does, the method of direct private company against State arbitration to enforce Treaty-based rights.

89. For the similarly structured discussion under the GATT, see Jackson, op. cit. n. 33, at p. 340, 341.

90. See (on the structure of the European gas industry: P. Cameron, loc. cit. n. 63; Kalim, Z., ‘Natural Gas in the European Comunity’, Financial Times Report (1991)Google Scholar; Lyons, P., ‘EC Energy Policy’, Report (1992)Google Scholar; Barnett, A., ‘Natural Gas in Europe’, Financial Times (1995)Google Scholar; Stern, J., European Gas Markets (1992)Google Scholar; Hancher, L., EC Electricity Law (1992)Google Scholar; Jones, C., ‘Privatisation in E. Europe and the former Soviet Union’, Management Report (1992)Google Scholar; Petroleum Economist, The Guide to World Energy Privatisation, (1995); the various forms of remaining State influences (also post-privatistion) are discussed by Cameron, P., ‘Promotion of State Interests in Privatisation or Deregulation’, 14 JENRL (1996) p. 108Google Scholar (together with case studies on Canada, Germany, Spain, Norway and Poland).

91. See the State enterprise concept discussion in Jackson, op. cit. n. 33, at p. 341 which is, however, mixed up with the discussion of ‘privileged entities’ (on these infra). The US Suggested Charter (i.e., predecessor to GATT Art. XVII) said: ‘A State enterprise shall be understood to be any enterprise over whose operations a member government exercises, directly or indirectly, a substantial measure of control’ – later to be replaced by ‘effective control’ (GATT Analytical Guide, supra, p. 473. One should note the linkage between the concept of a ‘state enterprise’ and the – from our side so far unresolved – issue if Art. 22 (1) merely clarifies an attribution role and therefore is covered by Art. 26 or if it creates a new primary obligation: A policy to extend and give maximum effect to the Part III investment regime would use a more extensive notion of ‘state instrumentality’ if Art. 22 (1) was considered to be outwith Art. 26 investment arbitration. Presumably, under such a ‘narrow’ construction of the term ‘State enterprise’, only entities organised under private law, but still under material control of the State, would fall under the term ‘state enterprise’, while entities organised under public/administrative law in non-commercial forms of legal organisation, would be considered ‘State instrumentalities/authorities.’

92. The international trade law debate is not very clear or specific on the various forms of control and influence and, apparently, has not taken into account the general regulatory powers of the State (see Ogus, op. cit. n. 8.).

93. While the distinction between State instrumentality and State enterprise is difficult, it is equally difficult to ascertain when the control-criteria discussed allow to identify a particular entity as ‘state enterprise’. GATT/WTO have struggled with this issue over 40 years.

94. For a somewhat comparable debate with respect to GATT's Art. XVII, see Jackson, op. cit. n. 33, at pp. 345–347; GATT/WTO Analytical Index/Guide to GATT Law and Practice, updated 6th edn. (1995) at pp. 475–476.

95. See T.W. Waelde, – for discussion on the difficulty of applying the sanctity of contract principle of Art. 10 (1, last sentence) to State enterprises. While the language of this provision is wide, the scope of the obligation needs to be limited to obligations relating to a foreign energy investment; ‘purely commercial’ contracts, on the other hand, would not be covered by this clause.

96. Again, to highlight a difference with the very similarly worded text in Art. XVII GATT: This provision does not impose ‘national treatment’, but a loosely formulated form of most-favoured nation clause. The Energy Charter Treaty goes further by imposing national treatment (nondiscrimination in comparison to both foreign and national companies).

97. See Waelde, loc. cit. n. 97; McKean, W., Equality and Discrimination under International Law (1983) pp. 195, 265Google Scholar; Vierdag, E.W., The Concept of Discrimination in International Law (1973)Google Scholar; von Wilmowski, P., ‘Zugang zu den Boden- und sonstigen Natureschaetzen and erer Mitgliedsstaaten: EWG-Vertrag und US-Verfassung im Vergleich’ (Access to natural resources located in other member States: A comparison of the EEC Treaty with the US Constitution), 54 RabelsZ (1990) pp. 692–732Google Scholar. It has been suggested that the GATT practice with respect to discrimination should be the main precedent (in particular with respect to Art. III of the GATT). There may be indeed cases of trade-related discrimination which would also constitute discrimination of a foreign investor, e.g., discretionary export permitting (which would deny, for example, a foreign energy company the in the CIS often considerable value of selling at world market prices for foreign currency) or discriminatory application of discretionary import authorisation which would deny a foreign energy investor die access to technologically and economically optimal equipment and services. Nevertheless, the GATT orientation is focused on liberalisation of cross-border trade with a level playing field for importers and exporters – while the Energy Charter Treaty's focus is on the protection of an investor's long-term oriented investment project requiring fair access to essential goods and services and equally fair access to markets for its products.

98. Hartley, op. cit. n. 19, at pp. 156–157.

99. See the survey of several Commission and Court cases in the case of the Dutch horticulturalists (are preferential tariffs granted by the Dutch electricity/gas companies to Dutch horticultural ists discrimination against non-Dutch customers?) in P.J. Slot, Paper presented at the XVth International Forum EG-Kartellrecht, Brussels, 13 May 1993.

100. This approach is very similar to the GATT Article XVII(2) reference to ‘commercial considerations’.

101. Council Directive 93/38/EEC of 14 June 1993, OJ L 199/84 of 9 August 1993 (Utilities Directive); Jarass, op. cit. n. 23, at pp. 32–62.

102. See Dow, S., ‘The Gas Bill 1995’, 6 Utilities Law Review (1995) pp. 105–109Google Scholar; Cameron, loc. cit. n. 63; special issue of 13 Oil & Gas Law & Taxation Review(1995); Waelde in Tettinger, ed., op. cit. n. 9, at pp. 78–80.

103. See Von Wilmowski, op. cit. n. 99.

104. See Hancher, L. et al. , EC State Aids (1993) p. 197Google Scholar and Slot, op. cit. n. 101.

105. For an overview: Waelde, op. cit. n. 32.

106. Ehlermann, C.D., ‘Role of the EC as Regards National Energy Policies’, 12 JENRL(1994) p. 342.Google Scholar

107. Waelde, in Mestmaecker, ed., op. cit. n. 10, at pp. 227–241; Von Burchard and Eckert, op. cit. n. 23; Jarass, op. cit. n. 23. The text of the draft directives on gas and electricity – representative for the EC Commission's original intention is reprinted in Von Burchard and Eckert, supra.

108. The European Energy Charter (reprinted in Waelde, ed., op. cit. n. 1, at pp. 603–610) refers explicitly to the completion of the EC's internal energy market (Preamble) and mentions ‘facilitating access to transport infrastructure’ as one ofthe main objectives (Title I (1). Reference should also be made to the undertaking to ‘avoid imposing discriminatory rules on operators’ (Title II (1), the promotion of competition (Title II (23). It may be that the earlier drafts ofthe European Energy Charter had more elaborate rules on access to energy transportation facilities and that these principles only entered into the final textin a somewhat diluted form.

109. See Khartukov, E.M. and Dorian, J.P., ‘International Oil & Gas Investment in the CIS States’Google Scholar, in Waelde, ed., op. cit. n. 1, at p. 37–67; Seck, A., ‘Investing in the Former Soviet Union Industry: The Energy Charter Treaty and its Implications for Mitigating Political Risk’Google Scholar, ibid., at pp. 110–134; Oeguetcue, , ‘Eurasian Energy Politics and Prospects: Need fora Longer-Term Western Strategy’Google Scholar, ibid., at pp. 68–109.

110. Higgins, op. cit. n. 6, at pp. 155, 156.

111. See Ogus, op. cit. n. 8.

112. There are precursors to this formulation in the GATT/WTO agreements, notably Art XVII (1) of the GATT.

113. See Title II (3) of the European Energy Charter; also the Preamble of the ECT: ‘to catalyse economic growth by means of measures to liberalise investment and trade in energy’ and ‘having regard to competition rules concerning mergers, monopolies, anti-competitive practices and abuse of dominant position’.

114. See the survey of regulation of gas and electricity by L. Hancherand P. Cameron in East and Western Europe as well as the special issue of 14 JENRL 108 (1996).

115. See for example for Germany: Klaue, S., ‘Wettbewerb und Privatisierung’, 2 RDE (1994) pp. 51–56Google Scholar; or Kuehne, 14 JENRL (1996) p. 108.

116. There is a German discussion what kind of (German) energy companies qualify for the Art. 90 EC-Treaty concept of enterprises ‘vested with exclusive or special rights’ (translation from German) – a term that is probably reflected in Art. 22 (4) of the EC-Treaty. See Jarass, op. cit. n. 23, at pp. 88, 89.

117. Art. 22 (4) ECT uses ‘entity’, Article XVII GATT ‘enterprise’. We seen no essential difference, in particular since in the pre-GATT negotiations ‘enterprise’ was sometimes confused with ‘any agency of government that engages in purchasing or selling’ (GATT Analytical Guide, p. 473).

118. Ibid., at pp. 340, 341.

119. Ibid., at pp. 474, 475; the reference to natural resources was added on the special request of Chile, the world's major copper and then a major nitrate fertiliser producer. It appears difficult to draw any general conclusion from such a very particular subcommittee report.

120. Jackson, op. cit. n. 33, at p. 340

121. GATT Art. XVII (1) mentions a grant ‘formally or in effect’. This is missing from Art. 22(4) ECT but since a grant can be formal or in effect and the ECT aims at maximum effectiveness, one will have to choose the wider notion and read the ‘formally or in effect’ into Art. 22(4) ECT.

122. Even if such a exclusive license is not granted formally, it may be granted in effect if the State protects an exclusive or dominant position of an entity by not granting required licenses to prospective competitors or if it keeps prospective competitors in other ways from entering the protected market.

123. This was intended to be part of the Havana Charter, but did not survive, see Jackson, op. cit. n. 33, at p. 330.

124. See Holmes, in Waelde, op. cit. n. 13, at p. 546.

125. Tettinger, in McDougal and Waelde, eds., op. cit. n. 10; Jarass, op. cit. n. 23, at p. 90.

126. See e.g., Higgins, op. cit. n. 6, at p. 52; Vagts, D., ‘Protecting Foreign Direct Investment: An International Law Perspective’, in Wallace, C.D., ed., Foreign Direct Investment in the 1990s (1990) p. 102Google Scholar; Salacuse, J.W., ‘BIT by BIT: The Growth of BITS and their Impact on Foreign Investment in Developing Countries’, 24 IL (1990) p. 655.Google Scholar

127. Hartley, op. cit. n. 19; Von Wilmowski, loc. cit. n. 99; on the choice and implications of the various implementation instruments for international economic traeties: Waelde, loc. cit. n. 59.

128. The same issue arises in international environmental law where national bureaucracies are notoriously reluctant to negotiate in international treaties direct litigation rights for individuals and non-governmental environmental organisations.

129. 33 ILM (1994) p. 112; Weiss, F., ‘The General Agreement on Trade in Services 1994’, 32 CMLR (1995) pp. 1178, 1216Google Scholar; E. Smith and D. Cluchey loc. cit. n. 35; I. Frasl, ‘Trade Rules of GATT and the ECT’, in Waelde, op. cit. n. 1, at p. 490.

130. See Higgins, op. cit. n. 6, at pp. 50–55; Burdeau, G., ‘Nouvelles perspectives pour l'arbitrage, dans le contentieux economique interessant les etats’, Rev. del'arbitrage (1995) pp. 2–37Google Scholar; Waelde, loc. cit. n. 59.

131. See Burdeau, op. cit. n. 132; Paulsson, J., ‘Dispute Resolution’, in Pritchard, R., ed., Economic Development, Foreign Investment and the Law (1996) pp. 209–246Google Scholar,; J. Paulsson and K. Vandevelde, in Waelde, op. cit. n. 1, at pp. 409, 422; this approach was first tested in: AAPL v. Rep. of Sri Lanka, 86 AJIL (1992) p. 371.

132. Siqueiros, J.L., ‘NAFTA Institutional Arrangements and Dispute Procedures’, 23 Calif. Western ILJ (1993) pp. 383, 387Google Scholar; Erlund, C., ‘A Primer on the Arbitration of NAFTA Chapter Eleven Investment Disputes’, 11 Journal ofInternational Arbitration (1994) pp. 135–171Google Scholar; Horlick and Debusk, loc. cit. n. 35, at p. 21.

133. The arbitral agreement required for the major arbitral institutions to which recourse is so made available is constructed out of a generalised offer of arbitration assumed to be contained in the Treaties and a specific acceptance of such offers by the investor wishing to initiate an arbitral litigation (see Waelde, op. cit n. 59).

134. While clearly Article 27 arbitration prima facie applies to the application or interpretation of Articles 22 and 23, the more difficult question is whether it applies to breaches of Articles 22 and 23? This question is even more difficult in the context of Article 26 direct investor-state arbitration.

135. The argument against exclusion of Article 22 situations from Articles 26 and 27 arbitration may be surprising. But if one considers Article 23 (2) as a special rule subjecting Article 23 cases to arbitration under the Treaty (including Article 26 and Article 27), then the absence of such provision in Article 22 could under strict textual and structural interpretation practices lead to the conclusion that the negotiators/ drafters did not want to subject Article 22 cases to any arbitration - otherwise they would have included a section similar to Article 23 (2) in Article 22. But the Treaty is in our view not really accessible to such fine methods of interpretation: In some cases (e.g. competition, Article 6, transit, Article 7, environment. Article 29), we have a special method for dispute settlement or an exclusion of the general dispute settlement mechanisms. In Article 23 we have a special reference to dispute settlement, in Article 22 we have no mention of dispute settlement at all. The argument can therefore be turned around as well: Article 22 may not have the special reference to arbitration in Article 23, but neither does it have the special exclusion of the Treaty's core arbitral methods as we can find in Article 6, 7 and 29 - so the conclusion can be that given there is no specific exclusion, Article 22 situations are subject to the general regime.

136. Frasl, op.cit. n. 129, highlights these similarities

137. Other provisions contained in this part indicate the miscellaneous nature of this Part: Sovereignty (Article 18(1), Transparency (Article 20) and Exceptions (Article 24). These, together with Articles 22 and 23 clarify the investment treaty regime of Part III.

138. The text reflects our views and discussions with expert, but unnamed, colleagues involved in the negotiating process.

139. See Understanding No. 1(b) in the Final Act, reprinted in Waelde, op. cit. n. 1, at p. 612: “The provisions of the Treaty do not: (i) oblige any Contracting Party to introduce mandatory third party access.’ The origin of this Understanding is not yet known to us and one would have to review the travaux preparatoires and interview negotiators/drafters present at the Final Act session in Lisbon on 14 December 1994. But since the only interested party are the dominant European energy companies dominating gas and electricity grids, it is hard to avoid the conclusion that their lobbying must have been at the source of this quite specific ‘understanding’. The legal value of this, as of the other ‘understandings’, needs to be further explored. It can either be seen as an interpretive agreement defining the context of die Treaty for interpretation purposes (Art. 31 (2)(a) of the Vienna Convention on Treaties or, perhaps closer to the term used ‘Understanding’ rather a joint statement without a legally binding character suggesting, rather than determining, the interpretative context.

140. On the arguments for/against ‘third-party ’ access see Salter, loc. cit. n. 10; Tettinger, op. cit. n. 9; Von Burchard and Eckert, op. cit. n. 23; Jarass, op. cit. n. 23. Third-party access operates without difficulties in the UK, has been proposed, then diluted (‘negotiated access’) and is still not completely settled in the current EC gas/electricity directive formulation process. It has been litigated extensively in particular in Germany: Pritzsche, K.U. and Meier, A., “Third Party Access in Germany after the VNC Decision’, 13 OGLTR (1995) p. 307Google Scholar; Markert, K., ‘Application of European and German Competition Law to Energy Utilities in Germany’, 14 OGLTR (1996) p. 220Google Scholar; there is as yet apparently no litigation of mis issue under EC law, though there are – possible and naturally controversial – precedents with respect to ports and airline reservations systems: see Slot, op. cit. n. 101; Klaue, op. cit. n. 117 and (critically) Von Burchard and Eckert, op. cit. n. 23.

141. In working group 2 the chairman raised at one time the issue of direct arbitration of investors against Art. 22 entities, but no detailed discussion of all the relevant issues and the final text ever ensued.

142. AAPL v. Sri Lanka is essentially the only proper precedent, though die ‘Pyramids’ cases considered by numerous ICC and ICSID arbitral tribunals and French and Dutch Courts also provide some illustration on arbitral jurisdiction without a clear-cut, explicit, formal and simultaneously accepted arbitral agreement – see Pyramids case, Decision (in excerpts) published in 16 YBCA (1991) pp. 16, 32 comments by Delaume, G. and Craig, W.L., 8 ICSID-Rev./FILJ (1993) pp. 231, 264CrossRefGoogle Scholar; also Southern Pacific Properties v. Arab Republic of Egypt 8 ICSID-Rev./FILJ (1993) p. 328.

143. See the pertinent observations by Paulsson, in Pritchard, ed.t op. cit. n. 133.

144. NAFTA, Art. 1502, ‘Monopolies and State Enterprises’, requires States parties to ‘ensure, through regulatory control, administrative supervision or the application of other measures’ – that private or State monopoly conform with the Treaty's obligations and, in particular, provison 3(c) to ‘provide non-discriminatory treatment to investments of investors, to goods and service providers of another party in its purchase or sale of the monopoly good or service in the relevant market’ – in addition to a prohibition on anti-competitive practices, see Provision, 3(d). NAFTA, 32 ILM (1993) p. 663.

144a. Art. 116: An investor of a Party may submit to arbitration under this section a claim that another Party has breached an obligation under a) Section A or Art. 1503(2) State Enterprises, or b) Art. 1502 (3, a) Monopolies and State Enterprises where the monopoly has acted in a manner inconsistent with the Party's obligations under Section A and that the investor has incurred loss or damage by reason of, or arising out of that breach.

145. The NAFTA experience would be the closest analogy. See NAFTA, Chapter 11 and Arts. 1501 and 1502.