A host State’s obligations in ISDS are the commitments undertaken in the legal instrument expressing the State’s consent to arbitration.1 These may include an investment treaty,2 an investment agreement between the host State and the investor,3 or domestic legislation or regulation which provide investors certain rights to entice investment.4 Host States may also undertake certain obligations when implementing domestic legislation.
When interpreting host State obligations under a treaty, tribunals frequently turn to Article 31 of the Vienna Convention on the Law of Treaties. This article is the “primary rule of interpretation” and requires tribunals to interpret a treaty’s terms in accordance with the “ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.”5 As a result, the terms of the treaty itself will serve as the basis of the host State’s obligations.
Where the arbitration arises pursuant to a contract between the host State and the investor, the applicable law will be the law governing the contract, but it may be interpreted by reference to international law.6 Other soft law principles such as the UNIDROIT Principles of International Commercial Contracts (the “UNIDROIT Principles”) may also be applied when interpreting the contract’s provisions.7
Where the dispute arises under domestic law, that law will be the starting point for the dispute, which should contain the host State’s consent to arbitrate, the mechanism for arbitration (i.e., a dispute resolution clause), and a choice of law provision. But, even in those circumstances, international law may be relevant to interpreting the host State’s obligations,8 and the tribunal’s jurisdiction may remain a matter of international law.9 As the Zhinvali v. Georgia explained, while its interpretation the domestic legislation was primarily governed by Georgian law, that was subject to the control of international law.10
II. Limitations on host State obligations
Where the host State’s obligations derive from contract, the parties will generally benefit from freedom of contract when determining the precise benefits afforded to investors, and obligations on the host State.13 However, investment contracts “implicate the interests of economic development of the host [S]tate” and so host States “will seek to ensure that its rules and regulations relating to foreign investment are mandatorily applied to the contract…”14
Similarly, disputes arising under domestic law will be governed by that legislation. Tribunals have considered such legislation to be “analogous to a unilateral declaration of a State;” however, such declarations are likely to be interpreted restrictively.15 This is because Article 7 of the ILC Guiding Principles to unilateral declarations of States capable of creating legal obligations provides that “[i]n the case of doubt as to the scope of the obligations resulting from such a declaration, such obligations must be interpreted in a restrictive manner,” and that the content of the State’s obligation must be based “first and foremost on the text … together with the context and the circumstances in which it was formulated.”16
III. Scope of a host State's obligations
A host State’s obligations under international law are based on its undertakings. This is because “[u]nder customary international law, states have the sovereign right to control the admission of foreign investors and their investments into their territories” and “[a] state is not required to admit foreign investors or investments, or otherwise allow foreigners to engage in commercial activities in its territory unless it has made an express commitment to do so.”17 Thus, where an investor alleges that the host State failed to comply with its obligations, “it may be necessary … to identify the particular right of the investor said to have been violated … so as implicate those obligations of the host State…”18
Depending on context, whether a claimant brings its claims under the dispute resolution clause found within a treaty, contract, or domestic legislation, it may be possible to also raise claims concerning host State obligations entered into in another context. Notably, tribunals may analyze (A) the relationship between a host State’s contractual commitments and its treaty obligations; and (B) the relationship between a host State’s unilateral undertakings (through domestic legislation or regulation) and its treaty obligations.
A. The relationship between host State's contractual commitments and its treaty obligations
Host States may undertake an obligation to fulfill their contractual commitments pursuant to an investment treaty where it contains an umbrella clause. However, as explained by James Crawford, “some umbrella clauses are more equal than others.”20 As a result, while some umbrella clauses have been interpreted to create a binding commitment by host States to respect specific obligations they have entered into with respect to a foreign investment, others have not.
Tribunals often interpret umbrella clauses as a “shortcut to enforce contractual obligations.”22 For example, the Salini v. Jordan tribunal found that the umbrella clause in the treaty at issue constituted an obligation by the host State to “create and maintain a legal framework apt to guarantee compliance of all undertakings assumed with regard to each specific investor."23 Similarly, the Noble Ventures v. Romania tribunal held that “[a]n umbrella clause is usually seen as transforming municipal law obligations into obligations directly cognizable in international law.”24 The Khan Resources v. Mongolia tribunal also found that an umbrella clause could incorporate a domestic foreign investment law which was passed specifically to entice foreign investment.25
Some tribunals have gone further and consider umbrella clauses to also elevate regulatory breaches to treaty breaches. The LG&E tribunal adopted a broad approach and considered that a host State’s contractual commitments and laws and regulations alike as are capable of becoming treaty obligations.26 This approach was adopted in Enron v. Argentina27 and Duke Energy v. Ecuador;28 among others.29 However, the use of an umbrella clause to enforce regulatory regimes remains a minority position. See further Treaty claims vs. Contract claims.
Indeed, some tribunals have directly cautioned against the LG&E tribunal’s broad approach.30 For example, the Al-Bahloul v. Tajikistan tribunal found that despite the phrase “any obligation” found in the relevant umbrella clause, those obligations must be limited to those which had been “entered into ‘with’ an Investor or an Investment of an Investor” and therefore did not “refer to general obligations of the State arising as a matter of law.”31 And the OperaFund v. Spain tribunal likewise concluded that obligations of the State must be specific and so legislation passed in the exercise of regulatory power – which affect all investors regardless of their nationality or the origin of funds – cannot give rise to host State obligations vis-à-vis an umbrella clause.32
But, it should be noted that some tribunals have also cautioned against interpreting an umbrella clause to some tribunals and commentators have expressed caution in “tak[ing] breaches of contract under municipal law and elevat[ing] them immediately to the level of a breach of an international treaty.”33 Recently in 2017, the Supervision tribunal affirmed that “the violation of a contract between a State and an investor of another State does not constitute by itself a violation of International Law and the Treaty” citing to SGS v Pakistan for support.34
Some scholars have similarly cautioned against the use of umbrella clauses to incorporate contractual obligations, arguing that this approach may give rise to concerns that an investor might try to use a host State’s obligations under a treaty in order to escape exclusive jurisdiction clauses within a contract between the investor and the State.35
Finally, while less common, a contract might itself incorporate treaty protections through contractual provisions. As Professor Thomas W. Wälde has explained: “There is no reason why specific investment agreements should not incorporate—'contractualize’—international treaty obligations. Such specific investment agreements can, and at times do, contain both state-addressed and investor-addressed obligations. Specific investment contracts have long provided an instrument of investment protection that in effect ‘contractualizes’ obligations otherwise found in an investment treaty.”36
B. The relationship between a host State's obligations through domestic legislation or regulation and its treaty obligations
Most notably, where a treaty gives rise to an obligation by a host State to grant foreign investors fair and equitable treatment, a tribunal may analyze whether the host State’s domestic legislation gave rise to legitimate expectations for the investor. This process does not, however, operate independent from the terms of the applicable investment treaty.
As the Suez tribunal explained, “the obvious fact in any investor-State dispute under a BIT” is that the “obligations of the host State towards the foreign investor derive from the terms of the applicable investment treaty and not from any set of expectations investors may have or may claim to have.”37 In its reasoning, the Suez tribunal affirmed the MTD annulment committee’s conclusions, which have been similarly affirmed in MCI v. Ecuador,38 CMS v. Argentina (annulment),39 Investmart v. Czech Republic,40 UFG v. Egypt,41 United Utilities v. Estonia,42 and most recently in RWE Innnogy v. Spain.43
Thus, while a host State’s obligations must derive from the text of the treaty or other instrument itself, this does not mean that an investor’s expectations or other ancillary information is never relevant. In particular, an investor’s expectations may be relevant when assessing the fair and equitable treatment standard. This does not mean that the expectations of an investor can act as a substitute for the relevant contractual and treaty arrangements.44
For example, the Urbaser tribunal explained that a host State’s obligations also “encompass fundamental principles like due process and acting in good faith.”45 These principles were not considered separate or independent legal obligations. As that tribunal explained, they “are generally considered as part of the fair and equitable treatment protection” and “are, in other words, comprised in the range of rules that the investor can legitimately expect as being protected as part of the fair and equitable treatment standard.”46
Crawford, J., Treaty and Contract in Investment Arbitration, Arbitration International, Vol. 24, Issue 3, 1 September 2008, pp. 351–374.
Crawford, J., Brownlie’s Principles of Public International Law, 8th ed., 2012.
Reed, L., Paulsson, J. and Blackbay, N., Chapter 3: ICSID Investment Treaty Arbitration, Guide to ICSID Arbitration, 2010.
McLachlan, C., Shore, L. and Weiniger, M., Chapter 7: Treatment of Investors, International Investment Arbitration: Substantive Principles, 2nd ed., 2017.
Newcombe, A. and Paradell, L., Chapter 3: Promotion, Admission and Establishment of Obligations, Law and Practice of Investment Treaties: Standards of Treatment, 2009, pp. 121-146.
Ofodile, U.E., African States, Investor-State Arbitration and the ICSID Dispute Resolution System: Continuities , Changes and Challenges, in Kinnear, M. and McLachlan QC, C. (eds.), ICSID Review – Foreign Investment law Journal, Vol. 34, Issue 2, 2019.
Schreuer, C., Investment Arbitration based on National Legislation, in Völkerrecht und die Dynamik der Menschenrechte, Liber Amicorum Wolfram Karl, 2012, pp. 527-537.
Sornarajah, M., Chapter 8: Theory of Internationalisation of Foreign Contracts, The Settlement of Foreign Investment Disputes, 2000.
Wälde, T., Improving the Mechanisms for Treaty Negotiation, in Sauvant, K. (ed.), Yearbook on International Investment Law & Policy, 2009, pp. 507, 540.
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