S

International Investment Law & Extractive Industries: An Overview of the Connections and

TensionsExtractive Industries and Sustainable Development

Executive Training ProgramJune 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.

Domestic state-owned mining

company51%

Foreign Mining Company A15%

Foreign Mining Company B

15%

Publicly Traded Shares19%

Example: Possible shareholding of a mining company

Who is an “investor” under the IIA?

Treaty Shopping

Brazil: No BITs in force

BMC: Brazilian Mining Company

BMC invests in Argentina

No BIT Protection

Treaty Shopping

Brazil: no BITs in force

BMC: Brazilian Mining Company

The Netherlands: hundreds of BITs

BMC sets up a subsidiary in the Netherlands – “Dutch Mailbox BMC”

“Dutch Mailbox BMC” invests in Argentina

There is a BIT between Argentina and the Netherlands

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: Mahammed Ammar 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

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 foreign investors

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

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 United States

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)

lightscrutin

y

heavyscrutin

y

(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”

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

Narrow

Broad

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 Claims

Infrastructure-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).

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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

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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

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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

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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.

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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.

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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

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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

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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 ratione materiae under the ECT and the BIT on the basis that the JVA and the Concession could be void ab initio under Georgian law.

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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).

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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

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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.

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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

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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)

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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: Renco v. 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 Oroya residents 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)

Renco v. PeruThe Mining Operations and Clean-up Obligations

1922-1974 – metal smeltering and refining facilities owned and operated by a US company;

1974 – Peru nationalized the company and owned and operated it through a SOE for roughly the next two decades;

1997 – Doe Run Peru ((DRP) a subsidiary of US entity, The Renco Group) purchased the company; according to Renco, when DRP purchased the business, the Peruvian government agreed to clean up “much of” the pre-existing contamination in and around La Oroya. As part of the transaction, DRP, in turn, agreed to invest in and modernize the facilities and reduce toxic emissions from them to acceptable and legal levels by 2006.

2004 – DRP asked for a 4-year extension on its clean-up obligations; the government gave it an appoximate 3-year extension;

Inter-American Commission on Human Rights, Report No. 76/09, Petition 1473-06, Admissibility, Community of Law Oroya, Peru (Aug. 5, 2009)

2009 – DRP asked for another extension, which the Ministry of Energy and Mines initially declined, but Congress later granted;

February 2010 – DRP put into involuntary bankruptcy;

July 2010 – after clean-up obligations still not met, the government cancelled DRP’s operating permit

December 2010 – Renco initiated an investor-state arbitration action against Peru

Renco v. PeruThe Investment Arbitration

Renco is claiming at least USD 800 million in damages;

Alleges Peru breached the investment treaty between the US and Peru by violating (1) the minimum standard of treatment obligation in Article 10.5 the treaty; (2) the national treatment obligation in Article 10.3 of the treaty; and (3) the “umbrella clause” (which is not contained within the US-Peru treaty, but

which Renco argues it can import from other treaties to which Peru is party based on the US-Peru treaty’s most-favoured-nation clause);

Renco bases its claims on, inter alia, assertions that Peru refused to grant it the needed extensions for completing its clean-up obligations; that similar enforcement action was not taken against the state-owned company (a “lowest common denominator” claim); that the government made disparaging remarks about and created a “hostile investment environment” regarding the company; and that Peru has not assumed liability in connection with claims brought against DRP in the United States;

Lone Pine Resources v. Canadasuspension of exploration & revocation of permits

Lone Pine Resources v. Canada

Nov. 8, 2012: Notice of Intent to Arbitrate

“Between 2006 and 2011, Lone Pine … expended millions of dollars and considerable time and resources in Quebec to obtain the necessary permits and approvals from the Government of Quebec to mine for oil and gas in the province…. Suddenly, and without any prior consultation or notice, the government of Quebec introduced Bill 18 into the National Assembly on May 12, 2011, to suspend all exploration for oil and gas in the province…. Bill 18 also purported to revoke all permits pertaining to oil and gas resources beneath the St. Lawrence River without a penny of compensation. … [L]ess than a month after Bill 18 was introduced into the National Assembly – the Act was quietly and quickly passed, receiving Royal Assent on June 13, 2011.” (paras. 3-4).

Claimants allege the Act was a “political” one enacted without proper “notice” or basis, and that it violates the FET standard and illegally expropriated the investors’ property. They are seeking more than Cdn $250 million as damages.

EnCana v. Ecuador & Occidental v. EcuadorNew Interpretations of Tax Regulations & Taxation Carve-

outs

Occidental v. Ecuador&

EnCana v. Ecuador

Occidental v. Ecuador

Tax carve-out doesn’t apply

EnCana v. Ecuador

Tax carve-out applies

Breach of National Treatment

• no intent to discriminate necessary

• broad reading of “likeness

X NT claim precluded per tax carve-out

Breach of FET

• stability and predictability an element of FET

X FET claim precluded per tax carve-out

Occidental v. Ecuador (Part II)requirement of proportionality

“… Claimants are awarded the amount of US$ 1,769,625,000

(US One billion, seven hundred sixty nine millions, six hundred

twenty five thousand dollars)” for damages suffered as a result

of treaty breach.

VIOLATIONS:• FET• Expropriation• Domestic and

customary international law

Occidental v. Ecuador (Part II)

“The parties’ dispute concerns the termination [caducidad] of a 1999 Participation Contract between OEPC and PetroEcuador for the exploration and exploitation of hydrocarbons in Block 15 of the Ecuadorian Amazon region (the ‘Participation Contract’).” (para. 2)

Participation Contract:

16.1 Transfer of this Participation Contract or assignment to third parties of the rights under the Participation Contract, must have the authorization of the Corresponding Ministry, in accordance with existing laws and regulations, especially the provisions contained in Art. 79 of the Hydrocarbons Law and Executive Decrees No. 809, 2713 and 1179.

[...]

16.4 If Contractor deems it advisable to create consortia or associations for one or several exploration and exploitation activities covered by this Participation Contract, Contractor may do so with the prior acceptance of PETROECUADOR and authorization from the Corresponding Ministry. Contractor’s obligations shall continue to exist in their parts, and the companies forming the consortium or association shall be jointly and severally liable for performance of same; and for such purpose shall furnish the corresponding guarantees. A joint and several commitment shall constitute an indispensable requirement for PETROECUADOR to accept the creation of the aforementioned consortia or associations. PETROECUADOR shall continue to maintain its direct legal relations with Contractor, to demand compliance with all obligations, and to pay the agreed participation percentages.

16.5 The integration of such consortia or associations, or the withdrawal of Contractor from same, without the authorization of the Corresponding Ministry, shall constitute legal grounds for declaring the termination of this Participation Contract.

Occidental v. Ecuador (Part II)Participation Contract, cont’d:

This Participation Contract shall terminate …

21.1.1 By a declaration of forfeiture [caducidad] issued by the Corresponding Ministry for the causes and following the procedure established in Articles seventy four (74), seventy five (75) and seventy six (76) of the Hydrocarbons Law, insofar as applicable.

21.1.2 Due to a transfer of rights and obligations of the Participation Contract without prior authorization from the Corresponding Ministry.

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Hydrocarbons Law:

Art. 74. The Ministry of Energy and Mines may declare the caducidad of contracts, if the contractor:

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11. Transfers rights or enters into a private contract or agreement for the assignment of one or more of its rights, without the Ministry’s authorization;

12. Forms consortia or associations for exploration and exploitation operations, or withdraws from them, without the Ministry’s authorization; and,

13. Commits repeat violations of the Law and the regulations thereto.

Occidental v. Ecuador (Part II)“[T]he Tribunal finds, based on the above, that OEPC, by failing to secure the required ministerial authorization, breached Clause 16.1 of the Participation Contract and was guilty of an actionable violation of Article 74.11 of the HCL.” (para. 381)

But, according to the tribunal, there were alternatives to declaration of caducidad, including “insistence on payment of a transfer fee, a negotiated settlement,” or issuing “a statement making it plain to all foreign oil companies that all transfers of economic interests must be authorized and that if not so authorized caducidad proceedings would be inevitable.” (paras. 434-35)

“[T]he Caducidad Decree was not a proportionate response in the particular circumstances, and the Tribunal so finds. The Caducidad Decree was accordingly issued in breach of Ecuadorian law, in breach of customary international law, and in violation of the Treaty. … the Tribunal now has no hesitation in finding that, in the particular circumstances of this case which it has traversed earlier, the taking by the Respondent of the Claimants’ investment by means of this administrative sanction was a measure ‘tantamount to expropriation’ and thus in breach of Article III.1 of the Treaty.” (paras. 452 & 455).

Mobil v. CanadaPerformance Requirements and Non-conforming Measures Exceptions

Hibernia and Terra Nova OilfieldsDiscovered in 1979 in the North Atlantic Ocean, 315 km east-southeast of St John’s, Newfoundland (NL)

Discovery of oil off the coast of Newfoundland (NL) – a new opportunity for sustainable development

Mobil v. Canadadomestic legal framework

The conduct of petroleum projects in the NL offshore area is governed by the “Accord Acts”, established the Canadian-Newfoundland Offshore Petroleum Board (the “Board”), which regulates oil development projects in NL.

Petroleum operators looking to to be licensed for activities in the area must submit proposals which are subject to approval by the Board. The proposals consist of a Development Plan, which lays out the general approach of developing an oil field, and a Benefits Plan explaining how NL and Canada would benefit.

As per Section 45.3, a Benefits Plan must contain a proposal for research and development (R&D) and employment and training (E&T) expenditures to be carried out in NL. This proposal must be approved by the Board.

The Accord Acts themselves do not specify any fixed amount or percentage of revenue to be spent on R&D and E&T under the Benefits Plan

Mobil v. CanadaBackground

The Board made adjustments to the Guidelines in 1986, 1987, 1988, and 2004.

The 2004 Guidelines were notable for two reasons: they were the first set of guidelines to directly address R&D expenditure at the production phase of a petroleum project and were also for the first time required fixed amounts of expenditures to be made.

For the Board, the 2004 Guidelines had the aim of ensuring effective administration of Section 45 of the Accord Acts - ensuing that the exploitation of offshore petroleum created a lasting economic legacy for the people of NL, which was they thought was best achieved by building on NL’s intellectual capital and human resources

But the petroleum companies saw this as requiring them to pay millions of dollars per year for research and development in NL

They therefore decided to make a legal case that the 2004 Guidelines are more restrictive and onerous than the provisions on minimum research and development expenditures found in existing agreements

Mobil v. Canadathe claims

This began a series of legal battles that resulted in the Claimant filing a request for arbitration with ICSID in November, 2007.

The parties’ dispute concerns the legality of the 2004 Guidelines in view of Articles 1105, 1106, 1108 of the NAFTA Article 1105 of the NAFTA: FET/“Minimum Standard

of Treatment” Article 1106 of the NAFTA: Performance

Requirements Article 1108 of the NAFTA: Reservations and

Exceptions

NAFTA Article 1106Performance Requirements

1. No party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the establishment, acquisition, expansion, management, conduct or operation of the an investment of an investor of a Party or of a non-Party in its territory …

C) to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory

The Claimants’ Case

The Claimants (Mobil) argued that the imposition of the 2004 Guidelines requiring investors to spend a fixed percentage of project revenues on R&D in NL, and the enforcement of the requirement by the Board, constituted a prohibited performance requirement and violate NAFTA Article 1106(1).

They believe that the changes in the 2004 Guidelines would force them to spend several million more dollars per year of R&D activities than they would under the approach set forth in the 1986, 1987, and 1988 Guidelines

This effectively substitutes their own business judgment with the Board’s, the Claimants argued, and distorts investment flows in favor of the Province

Respondent’s Position

The Respondent (Canada) argued that Article 1106(1)(C) of the NAFTA does not prohibit requirements regarding R&D or E&T as performance requirements. Such performance requirements must be distinguished from the requirement to purchase local goods or services.

Even if R&D and E&T requirements were to be placed within the scope of Article 1106, Canada argued, the 2004 Guidelines do not necessarily compel the purchase, use, or accordance of a preference to local goods or services.

Tribunal

The legal issues that arise concern two issues: First, what constitutes the proper scope and

interpretation of Article 1106, and in particular, do the R&D and E&T requirements under the 2004 Guidelines (and the application thereof) constitute ‘services’ within the meaning of Article 1106

Second, whether the 2004 Guidelines compel spending on R&D and E&T such that they construe a ‘requirement’ to “purchase, use, and accord a preference to goods produced or services provide in its territory, or to purchase goods or services from persons in its territory”

The Tribunal’s Findings

The tribunal ruled in favor of the Claimants. They shared the claimants’ view that the ordinary meaning of the term “services” is broad enough to encompass R&D and E&T.

Since the term “services” covers a broad range of economic activities, R&D and E&T may be seen as mainstream forms of services sector activity.

They therefore see that there is nothing inherent in the term ‘services’ in Article 1106(1) that necessarily excludes R&D and E&T

The Tribunal’s Findings, II In the Tribunal’s view, while the policy purposes may differ in

some respects as between different types of performance requirements, the requirement to utilize domestic sources of R&D and E&T appears rather clearly to be a form of performance requirement imposed on an investor.

Excluding R&D and E&T from a definition of ‘services’ because the for of transmission is not always cross-border is an argument for a special meaning to be given for R&D and E&T which we do not see reflected in the NATFA text.

In the Tribunal’s view, this interpretation of Article 1106 is not an expansive reading of ‘services’ but is rather one that is consistent with the treatment of R&D and E&T in the NAFTA and the object and purpose of the treaty, which is to eliminate barriers to trade and increase investment opportunities within the NAFTA Parties.

(Award, pp. 103-104)

Damages - TBD

The breach of Article 1006 of the NAFTA gives the Claimants a right to claim damages

The Claimants have been invited to submit further evidence on actual damages and the Respondent will have an opportunity to respond. The Tribunal will then rule on the quantum damages due to the Claimant in a final Award.

Article 1108 – NAFTA Reservations

The Respondent argued that the 2004 Guidelines (having being ruled non-conforming with Article 1106) are exceptions covered by NAFTA Article 1108.

When NAFTA came into effect, it barred performance requirements; however, it includes Article 1108 and Annex I arrangements for instances in which existing measures did not conform to NAFTA obligations.

The relationship between a “non-conforming measure” and a “subordinate measure” and the conditions under which a “subordinate measure” will be evaluated and determined to be compatible with an earlier “non-conforming measure” have emerged as the issues that lie at the heart of this case. (p. 120)

There was agreement that Section 45 of the Federal Accord Act was an “existing non-conforming measure”; the Tribunal viewed new subordinate measures (the Guidelines) as subject to the reservation, but not insulated from review and challenge.

The Tribunal viewed the changes in the 2004 Guidelines as a fundamentally different approach to compliance compared to the Federal Accord Act and the Hibernia and Terra nova Benefits Plans.

Tribunal’s Ruling on 1108

The Tribunal sees the 2004 Guidelines as not only significantly altering the legal obligations required of the claimants, but also doing so in a way that makes the local content regime more contradictory and incompatible with Article 1106.

The 2004 Guidelines introduce additional and different expenditure, reporting, oversight and administrative requirements that are quantitatively and qualitatively different, and more burdensome from that which existed prior to the introduction of the 2004 Guidelines. In doing so, the 2004 Guidelines render the local content regime that rises, more non-conforming with Article 1106 than was the case when the measures that applied to the Hibernia and Terra Nova investment projects were defined by the Federal Accord Act, the Hibernia and Terra Nova Benefits Plans, and related Board Decisions. (p. 178)

Extractive Industries & Investment Law

Key message – there are tensions that are important to address – in advance to the extent possible

Policy dialogue and coherence is crucial in connection with negotiation of new and existing treaties and models.

Issues to consider for new treaties include: Do you want the treaties? If so – what should they look like?

Carve-outs from some treaty provisions for existing and future non-conforming measures

Exceptions for certain policy areas (e.g., taxation, environmental protection, development of energy resources)

Exclusion of certain obligations (e.g., prohibitions on performance requirements) Requires intra-governmental coordination and communication to identify what

should be carved-out/excepted New models – Southern African Development Community Model Bilateral Treaty

Template

For existing treaties – consider advantages and disadvantages of amendments and interpretations

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Addressing Issues in Existing Treaties: Subsequent Agreement & Practice

States have untapped powers as masters of their treaties to shape interpretation of the agreements

Joint agreement per treaty FTC statement – expressly binding

Joint agreement Exchange of diplomatic notes (e.g., Argentina-Panama,

US-Czech Republic)

Unilateral conduct Swiss letter in SGS Respondent briefs Non-disputing state party submissions Statements of interpretation posted online

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International Framework:Hard- and Soft-Law Standards

Growing body of standards (voluntary or strictly enforced (under law or via public pressure)) governing conduct of extractive industry firms.

These operate at the “host country”, “home country” or international level

Important to keep in mind not only to understand what is already expected or required of investors by governments, citizens, and their peer enterprises when is the government asking the investor to do

more than is already expected of it? what are society’s expectations of the investor (key

to managing expectations and avoiding conflicts and tensions in a long-term project)

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International Law – Recap and Overview

Investment treaties provide further protection to foreign investment – it is not just domestic law you need to think about

May also strengthen the legal value of investment contracts

Creates/locks in additional (cf. Investment law)

Treaty protection may depend on investor’s corporate structure

There are ways of addressing the challenges – but policy dialogue is crucial

Other international legal norms and standards form part of the legal framework and define rights, obligations, and expectations, e.g. human rights obligations, obligations under treaties of the International Labour Organization, Performance Standards required by the World Bank, etc. … (contracts and laws, such as the Constitution, may refer to them)