International Law & Extractive Industries: Connections, Tensions, and Guidance

International Law & Extractive Industries: Connections, Tensions, and Guidance Extractive Industries and Sustainable Development Executive Training Program June 9-20, 2014 Lise Johnsonljj2107@columbia.edu

Investment Treaties:Why, What, How – and What Does it Mean for You? • Otherwise known as “International Investment Agreements” (IIAs) or Bilateral Investment treaties (BITs) • Can be between two countries – a BIT; or • Can be between many countries –e.g., the Energy Charter Treaty (ECT) • Agreements between states regarding the protection of foreign investment • Why have countries signed them:Tools for protection (and promotion?) of foreign investment • What do they do: Impose obligations on host states to protect foreign investors/investments: • National Treatment • Most-Favoured Nation Treatment (MFN) • Expropriation (Direct and Indirect) • Fair and Equitable Treatment (FET) • Umbrella Clause • Restrictions on Performance Requirements • Guarantees on Free Transfers of Capital • How are they enforced: Allow investors to bring claims via investor-state arbitration • costs of arbitration are now roughly USD 10 million on average • claims for money damages reach into the hundreds of millions, if not billions of dollars; • per two treaties (the New York Convention and the ICSID Convention) domestic courts’ review of resulting arbitral awards is significantly narrowed. • For low long: the treaties are in effect typically for 10-15 years with “survival clause” of another 10-15 years. What does this all mean for extractive industries? Domestic law is not the only thing you have to think about

Investment Treaties: What? • Who has them? (as of June 1, 2013) • Roughly 3000 of these agreements have been signed by most countries around the world, e.g., • Brazil – no BITs in force • Burundi – has signed 7 • Ethiopia – has signed 29 • Equatorial Guinea – has signed 8 • Kazakhstan – has signed 42 • Kyrgyzstan – has signed 29 • Papua New Guinea – has signed 6 • Tajikistan – has signed 32 • Tanzania – has signed 17 • Where can you find these? • Bilateral investment treaties: www.unctad.org http://unctad.org/en/pages/DIAE/International%20Investment%20Agreements%20(IIA)/IIA-Tools.aspx

Who is a Covered “Investor”? • “Investors”- often multinational enterprises “MNEs” • “Investors” include individuals and companies; minority shareholders, portfolio investors, etc. • Two main issues: • Problem of multiple claims - • Can potentially face claims by the foreign companies, the shareholders in those companies, foreign shareholders in the domestic state-owned mining company, etc. • Problem of “treaty shopping” through indirect ownership - • E.g., foreign Mining Company B, a Canadian company, is not protected by a treaty, but routes its investment through a shell company in the Netherlands; and that shell company is protected by the treaty.

Treaty Shopping Brazil: No BITs in force BMC: Brazilian Mining Company BMC invests in Argentina No BIT Protection

Treaty Shopping “Dutch Mailbox BMC” invests in Argentina There is a BIT between Argentina and the Netherlands The Netherlands: hundreds of BITs BMC sets up a subsidiary in the Netherlands – “Dutch Mailbox BMC” Brazil: no BITs in force BMC: Brazilian Mining Company

Treaty Shopping • Mr. Ablyazov – a Kazakh national, businessman in Kazakhstan, and former Minister of Energy, Industry and Trade • Since 1998, he was the beneficial owner of the majority of shares in BTA – shareholding was through different offshore companies and not disclosed to the government • August 1, 2007 – BIT between Kazakhstan and the Netherlands enters into force • December 12, 2007 – claimant incorporated a shell company in the Netherlands, KT Asia, to hold its shares in BTA • KT Asia, the “Dutch” company beneficially owned by the Kazakh national, was a foreign investor in Kazakhstan and protected by the BIT between the Netherlands and Kazakhstan • Some tribunals may reject an investor’s attempt to treaty shop • Key consideration for some tribunals is when the affiliate was created – before or after the dispute arose

What is a Covered “Investment”? • “Investments” often include a broad range of tangible and intangible property rights and interests • “every kind of asset”, “including, but not limited to” … • “expectations” regarding future rights? • Example 1: From Kazakhstan-Netherlands BIT:

What is a Covered “Investment”? Example 2: From Energy Charter Treaty, Art. 1: (6) “Investment” means every kind of asset, owned or controlled directly or indirectly by an Investor and includes: 5 (a) tangible and intangible, and movable and immovable, property, and any property rights such as leases, mortgages, liens, and pledges; (b) a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise; (c) claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment; (d) Intellectual Property; (e) Returns; (f) any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector. (5) “Economic Activity in the Energy Sector” means an economic activity concerning the exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of Energy Materials and Products except those included in Annex NI, or concerning the distribution of heat to multiple premises. Case example: MahammedAmmar Al-Bahloul v. Tajikistan (SCC Arbitration No. V (064/2008) “[C]laims to money and claims to performance pursuant to contract having an economic value” include claims that the state breached a contractual obligation with the foreign investor to issue necessary licenses.

What is a Covered Investment? • Additional questions and issues, e.g.,: • When was the asset or interest acquired? • When has it crystallized into an “investment”? • Can it be fleeting, e.g., a portfolio investment, or need it involve a long-term commitment? • Does it have to involve a substantial commitment of resources into the host state? • These are among the questions you might have to face when there is a dispute between a foreign company/foreign investor and the host state

Investment Treaties: What do they do? • Impose obligations on host states to protect foreign investors/investments. • Typically include: • National Treatment • Most-Favoured Nation Treatment (MFN) • Expropriation (Direct and Indirect) • Fair and Equitable Treatment (FET) • Umbrella Clause • Restrictions on Performance Requirements • Guarantees on Free Transfers of Capital

(1) Non-discrimination: The basic rules National and MFN treatment: • GENERAL RULE: Requires treatment of foreign investors that is “no less favourable” than treatment of domestic or other foreigninvestors • Example A: Germany-Ethiopia BIT • “Post-establishment” meaning once the investment is there – no discrimination is allowed:

(1) Non-discrimination: National and MFN TreatmentPolicy Issues These rules can bar both intentional and unintentional or “de facto” discrimination • When might you want to intentionally discriminate between foreign and domestic companies? E.g., • To build up infant industries by providing grants, loans, or tax credits • To favor historically disadvantaged groups or address socioeconomic inequalities • To promote development of minority-owned businesses • To encourage procurement from indigenous communities • When might you want to intentionally discriminate between foreign businesses from different countries? E.g., • Have negotiated different agreements on a state-state level (e.g., customs unions, preferential trade agreements) • When might you unintentionally discriminate between companies? E.g., • Preferring one company’s bid over another company’s • Taking enforcement action (e.g., to ensure compliance with environmental, labor, or tax law) against one company but not another • Offering an incentive (e.g., tax stabilization) to one company, but not another • Requiring use of technology employed by one company but not another

(1) Non-discrimination: National and MFN Treatment“Likeness” • Prohibition focuses on discrimination between investors in “like circumstances” • Countries can discriminate between investors in “unlike circumstances”. • But what does that mean? • Are state-owned companies “like” privately owned companies? • Are companies exporting minerals “like” companies exporting other products such as oil, flowers, or manufactured goods? • Are companies that procure locally “like” companies that source their goods and services from foreign affiliates?

(1) Non-discrimination: Using MFN to create “super treaties” Grab extra protection from treaty between Costa Rica and Chile Grab extra protection from treaty between Costa Rica and United States German Mining Company in Costa Rica Protected by treaty between Germany and Costa Rica But the company wants better and stronger protection Grab extra protection from treaty between Costa Rica and Switzerland ….etc. Is there a limit?

Investment Law: Core Obligations(2) Expropriation GENERAL RULE: • The state has the right to expropriate foreign investment generally allowed, but must be • done for a public purpose, • in accordance with the law, and • accompanied by payment of compensation. • Expropriation may be direct or indirect.

(2) Expropriation – Sample Language Example – Treaty between Zambia and the Belgium-Luxembourg Economic Union, Art 4(1)-(3)

(2) Expropriation: What Is It? • Direct expropriation – e.g., outright seizure or takeover of a facility or a mine; nationalization • Easy to identify • Harder question is question of compensation • Some treaties specify what proper compensation is – but determination of the value is still difficult • Indirect expropriation – e.g., regulation eliminating the value of an investment • Much more controversial • Harder to identify whether there has been an expropriation; line between “expropriation” and general, legitimate regulation is hard to draw • A law banning production of a chemical? Does it expropriate the business of the company that produced the chemical? • A law changing zoning and preventing construction in ecologically sensitive areas? Does it expropriate the landowner’s rights regarding the land? • A law strengthening environmental requirements for mining? Do the added costs “expropriate” the investors’ investment?

(2) Indirect Expropriation: What Is It? • Different tests and considerations are used to determine whether a regulation, decree, law, judicial decision, or other measure is an “indirect expropriation”: e.g., • “Sole effects” test: Look at the impact of the measure and assess whether it has the same effect as an actual “taking” of the foreign investor’s property; • The government’s intent is of little or no weight • The main issue is whether the measure has destroyed or substantially destroyed the value of the investment; • Multi-factor balancing test; this involves consideration of: • The economic impact of the measure; • The character of the government’s conduct; and • The degree to which the measure interferes with distinct, investment-backed expectations. • Dominant approach has been that benefit to the state not necessary • General rule is that deprivation or loss must be severe in scope and duration – total or near total – in order to constitute an expropriation. • Police powers “exception”: good faith regulatory measures taken by a state that are designed and applied to protect or enhance legitimate public welfare objectives, such as public health, safety and the environment, are not an “expropriation” and don’t give rise to a duty to pay compensation.

Investment Law: Core Obligations(3) Fair and Equitable Treatment (FET) GENERAL RULE: A state must accord investors treatment that is “fair and equitable”. Has become the key question in investment treaties: What does this mean? It can cost a lot of money to find the answer! You may not like the answer that you get!

(3) Fair and Equitable Treatment (FET) – Sample Language Vague words – have been interpreted to mean much more than what might have been intended Example – Japan-Papua New Guinea BIT Example – Germany-Afghanistan BIT

(3) Fair and Equitable Treatment (FET) Fair and Equitable Treatment • “Expropriation light” • Bad faith not a requirement • Protection of investors’ “legitimate expectations”(?) • Protection of “commitments”(?) • A range of approaches • Light scrutiny: • only bars “egregious” or “shocking” conduct, or conduct that “grossly subvert[s] a domestic law or policy for an ulterior motive” • does not position international tribunals as courts of appeal review • (does not include protection of “legitimate expectations” or stable regulatory environment) • Heavy scrutiny: • conduct must “not affect the basic expectations that were taken into account by the foreign investor to make the investment”; • conduct must be “free from ambiguity and totally transparent,” so that the investor may know all the relevant rules and regulations and their respective goals before investing (Tecmed v. Mexico, ICSID Case No. ARB(AF)/00/2, Award, May 29, 2003, para. 154); • requires “stability and predictability” and “certainly entails an obligation not to alter the legal and business environment in which the investment has been made” (Occidental v. Ecuador, Award, July 1, 2004, paras, 186, 190-91); • enables review of correctness of domestic court/administrative determinations (Occidental v. Ecuador, Award, July 1, 2004, para. 185) light scrutiny heavy scrutiny

(3) Fair and Equitable Treatment (FET) Some reported elements: • transparency; • stability; • protection of the investor's legitimate expectations; • compliance with contractual obligations; • procedural propriety and due process; • action in good faith; and • freedom from coercion and harassment.

Investment Law: Other Obligations(4) Prohibitions on Performance Requirements • Many agreements – no provisions • Some incorporate WTO’s TRIMs Agreement + investor-state arbitration • Others – TRIMs + • Add new restrictions • Apply to investment measures relating to goods and services • Implications for local content requirements in contract or law; can hinder, e.g., government freedom to induce investors to invest in R&D, education and training, or favor local producers of goods or services

Investment Law: Other Obligations(5) “Umbrella Clause” Narrow Broad Requires compliance with “any obligation” owed to the investor • Only covers obligations specifically entered into between the state and investor in a written contract, and governed by domestic law • Covers “any” obligation, including those “assumed” under generally applicable laws or regulations

Investment Treaties - exceptions • General Exceptions, e.g., • To conserve natural resources • To protect animal, human and plant life or health • For essential security or national security interests • For taxation measures • For balance of payments and prudential reasons • Specific Exceptions,, e.g., • To promote domestic small and medium sized enterprises • For sub-national authorities • For existing non-conforming measures • For specific sectors

Investment Arbitration: an overview • General Features of Domestic System • Who can bring claims? • Who decides? • Where and how? • What law do they apply? • Can you appeal? • What are the remedies or damages? • General Features of Investment Arbitration: • Who can bring claims? • Who decides? • Where and how do they decide? • What law do they apply? • What is the role of domestic law? • Can you appeal? • What are the remedies or damages?

Rise in Investor-State Arbitrations • At least 56 new cases were filed in 2013 – likely more

Diverse Set of Respondent States Source: ICSID

Investor-State Disputes & Extractive Industries - Roughly Thirty Percent of ClaimsInfrastructure-Related Disputes Also Significant Source: ICSID

Getting Free Information about the Cases italaw.com Can sort by, e.g., Company that is suing  State being sued  Date 

Getting Free Information about the Cases • Other sites: • Search for cases on ICSID: https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=ShowHome&pageName=Cases_Home • In the future: UNCITRAL transparency registry: http://www.uncitral.org/transparency-registry/registry/index.jspx#country • Other information on • CCSI website • UNCTAD.org • IISD investment program website

Extractive Industries & Investor-State Disputes:Diverse Factual Scenarios Giving Rise to Claims • New and stronger environmental regulations (e.g., Glamis Gold v. United States, Lone Pine v. Canada); • Termination of contracts with investors (e.g., Occidental v. Ecuador); • Revocation of permits authorizing investors’ operations (e.g., Renco v. Peru); • Decisions not to grant permits (e.g., Pac Rim v. El Salvador); • Changes to fiscal regimes (including changes in interpretations of and enforcement strategies for existing laws and regulations) (e.g. Russia and Ecuador cases); • Requirements to purchase local goods and services/invest in research and development (e.g., Mobil v. Canada); and • Obligations of States to respond to/prevent/stop harm caused by third persons (e.g., RDC v. Guatemala).

Key Points • Domestic law NOT the standard (e.g., CCSI research on US law) • New players – e.g., Chinese investors are also claimants • Links with industrial policy – government efforts to encourage investment, and government efforts to regulate investments are the key triggers for claims. • Use of incentives, policy change/shifts, government support for domestic actors – all issues that you can see addressed in investment disputes • Rough estimate – 65% of disputes relate to infrastructure and extractives

Case examples – an overview • Issue by issue approach, rather than standard-by-standard approach, illustrating how liability arises • FET the crucial obligation • Issues: • Tenders and Negotiations • Illegality in the Making of the Contract • Firm-led and Government-led Renegotiation • Legal and Policy Change • Leveraging Investment for Sustainable Development • This is just a sample – there is a whole host of examples of other claims • Not necessarily the law, but examples of what the law has been interpreted to be

Tenders and negotiationsPSEG v. Turkey: state liability for failed negotiations • 1996 – approved proposal for mining and power plant project by PSEG; “Implementation Contract” agreed by Ministry • PSEG revises its mining plan and seeks a change in terms • 1998 – “Concession Contract” incorporating the “Implementation Contract” approved by Turkish State Council • 2000 – negotiations collapse • shift in terms • shift in policy • dispute over taxes • Arbitration clause

Tribunal’s determination: no bad faith required; negligence the standard 246. The Tribunal is persuaded … that the fair and equitable treatment standard has been breached, and that this breach is serious enough as to attract liability. Short of bad faith, there is in the present case first an evident negligence on the part of the administration in the handling of the negotiations with the Claimants. The fact that key points of disagreement went unanswered and were not disclosed in a timely manner, that silence was kept when there was evidence of such persisting and aggravating disagreement, that important communications were never looked at, and that there was a systematic attitude not to address the need to put an end to negotiations that were leading nowhere, are all manifestations of serious administrative negligence and inconsistency. The Claimants were indeed entitled to expect that the negotiations would be handled competently and professionally, as they were on occasion.

Tribunal’s determination – role of stability 254… Stability cannot exist in a situation where the law kept changing continuously and endlessly, as did its interpretation and implementation. While in complex negotiations, such as those involved in this case, many changes will occur beyond the control of the government, as was particularly the case with the increased costs, the issue is that the longer term outlook must not be altered in such a way that will end up being no outlook at all. In this case, it was not only the law that kept changing but notably the attitudes and policies of the administration.

Tribunal’s determination - damages • Investor obtained compensation for expenditures incurred from the submission of its feasibility study through continued negotiation; • All expenses pre-construction, many pre-Concession Contract, and many pre-Implementation Contract • Awarded a payment of USD 9 million plus interest, and USD 13.65 million in costs of the arbitration

Illegal Investments: RDC V. Guatemala and Kardassopolous v. Georgia • Note – special case of corruption in the making of the contract • Contracts secured through illegal processes/in breach of the law – may be void or unenforceable under domestic law; • One rationale – binding governments to illegal acts of its officials penalizes the public, not the wrongdoer • BUT tribunals may have a different rule – if the government was involved, it may still be bound, even if conduct was illegal, or beyond the scope of authority

Kardassopolous v. Georgia • [E]ven if the [Joint Venture Agreement] and the Concession were entered into in breach of Georgian law, the fact remains that these two agreements were “cloaked with the mantle of Governmental authority”. Claimant had every reason to believe that these agreements were in accordance with Georgian law, not only because they were entered into by Georgian State-owned entities, but also because their content was approved by Georgian Government officials without objection as to their legality on the part of Georgia for many years thereafter. Claimant therefore had a legitimate expectation that his investment in Georgia was in accordance with relevant local laws. Respondent is accordingly estopped from objecting to the Tribunal’s jurisdiction rationemateriae under the ECT and the BIT on the basis that the JVA and the Concession could be void ab initio under Georgian law.

RDC v. Guatemala – binding government to action of state entity 146. Even if FEGUA’s actions [as the government entity entering into the contracts] … were ultra vires (not “pursuant to domestic law”), “principles of fairness” should prevent the government from raising “violations of its own law as a jurisdictional defense when [in this case, operating in the guise of FEGUA, it] knowingly overlooked them and effectively endorsed an investment which was not in compliance with its law.” 147. Based on these considerations the Tribunal finds that Respondent is precluded from raising any objection to the Tribunal’s jurisdiction on the ground that Claimant’s investment is not a covered investment under the Treaty or the ICSID Convention. RDC v. Guatemala, Second Decision on Objections to Jurisdiction, ICSID Case No. ARB/07/23, May 18, 2010, paras. 146-47 (quoting Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/03/25, Award, August 16, 2007, para. 346).

Renegotiations: Responding to and Initiating Requests • Intra-deal and extra-deal renegotiations – an overview • **Only one side can bring challenge • Intra-deal renegotiations – • Can be an important part of long-term contracts • Obligations of process: duties of good faith and transparency • Obligations of substance – obligation of outcome; consistency with domestic law not a defense • PSEG v. Turkey, TECO v. Guatemala, Impregilo v. Argentina

Intra-deal renegotiations:Impregilo v. Argentina • 330. Since the disturbance of the equilibrium between rights and obligations in the concession was essentially due to measures taken by the Argentine legislator [in establishing the floating exchange rate and regulating water and sewerage services], it must have been incumbent on Argentina to act to effectively restore an equilibrium on a new or modified basis. Although Argentina has attributed the failure of the negotiations to what it regarded as AGBA’s unreasonable demands, it does not appear that Argentina took any measures to create for AGBA a reasonable basis for pursuing its tasks as concessionaire which had been negatively affected by the emergency legislation, including the New Regulatory Framework. • 331. In these circumstances, the Arbitral Tribunal considers that Argentina, by failing to restore a reasonable equilibrium in the concession, aggravated its situation to such extent as to constitute a breach of its duty under the BIT to afford a fair and equitable treatment to Impregilo’s investment. • Impregilo v. Argentina, paras. 325-331.

Renegotiations:Extra-deal renegotiations The untold story on incidence of renegotiation: The Guash study: • Review of 1000 concession contracts (telecommunications, transportation, water and sanitation services, and electricity sectors, awarded in Latin America and the Caribbean between the mid-1980s and 2000) • Extra-legal renegotiations were “extremely common”: • 61 percent requested by the investor; • 26 percent requested by the government; • Remaining requested by both; • In some sectors, the percentage of investor-initiated renegotiations is higher (e.g., 74% in water and sanitation services). • Relationship to rationale for investment treaties • Impacts of one-sided treaties – investors can request, and also are given added powers to resist renegotiation requests • Vivendi II v. Argentina, PSEG v. Turkey

Extra-deal renegotiations:AES v. Hungary [I]t cannot be considered a reasonable measure [consistent with the for a state to use its governmental powers [including its power to implement laws or issue decrees] to force a private party to change or give up its contractual rights. If the state has the conviction that its contractual obligations to its investors should no longer be observed (even if it is a commercial contract, which is the case), the state would have to end such contracts and assume the contractual consequences of such early termination. (para. 10.3.12)

Incentives, Legal Change, and Industrial Policy Micula v. Romania • 10-year incentives scheme to support investment • Inconsistency with EU-state aid rules brought removal of incentives • Claim, and liability under investment treaty • Implications for industrial development

Renco v. Perucancellation of operating permit • Renco Group v. Peru, Claimants’ Notice of Intent to Pursue Arbitration (Dec. 29, 2010)

Case Study: Rencov. Peru La Oroya has been named one of the ten most contaminated cities in the world. In 2005, a study by the US government’s Center for Disease Control and the School of Public Health of St. Louis University found that 97% of children between 6 months and 6 years had lead levels considered toxic by the Center for Disease Control and Prevention. The study also found that 98% of children between seven and 12 years have elevated blood lead levels, in some cases three or four times the level of concern. In 2009, the Interamerican Commission on Human Rights (IACHR) accepted a petition filed on behalf of over sixty La Oroyaresidents by the Interamerican Association for Environmental Defense (AIDA), Earthjustice, and other non-governmental organizations alleging human rights violations arising out of the contamination in that community. The petition, which was filed in 2006, acknowledges that pollution in La Oroya has been an ongoing problem, even when Centromin, the state-owned Peruvian entity, operated the facilities. However, the petition also alleges that when the Peruvian government granted DRP extensions to complete its environmental remediation efforts, it improperly allowed the company to postpone crucial environmental cleanup. The petitioners criticize that the state allowed business activities to trump public health concerns, and that its lax treatment of DRP’s remediation obligations amounts to a violation of human rights. As relief, the petitioners have requested the IACHR to thoroughly evaluate the human rights situation, declare that the State of Peru has violated the petitioners’ human rights, and recommend Peru implement effective remedies for those violations. Inter-American Commission on Human Rights, Report No. 76/09, Petition 1473-06, Admissibility, Community of Law Oroya, Peru (Aug. 5, 2009)

International Law & Extractive Industries: Connections, Tensions, and Guidance