6110Eng Coastal Engineering And Modelling Assessment Answers

Investor-State Contracts

The increased trade and economic liberalization have come with the need for the improvement of transportation and communication systems, energy demands, minerals exploration, petroleum projects and demands for advancement in agriculture systems in developing nations. On the other hand, this comes as new opportunities for trade from the international investors where the country does not have enough resources for carrying out the activities needed for the promotion of growth. Investors, therefore, on their side, they emphasize that they would be creating benefits such as jobs and infrastructural development. In addition to relevant national and international laws, an investor-state contract is created to provide the terms of the investment developments, define the contemplated risks, and then provide for the costs and benefits for the parties. The parties involved are the state termed as the host, and the other contracting party which can be a foreign State or its entity which for purpose of the contract has been created through statutes within that State and mandated with the control of the project or the economic activity.

As like any other contract, breaches of contractual terms lead to remedies on the breached party. It is an undisputed rule that where a state’s action results in a breach, the breach would be weighed in as per the available laws. There is also a need to mention that the sources of laws applicable to Investor-State Contracts are mainly the provision of the international law. These provisions consequently feature the principles provided by the treaties governing international investments, the widespread customs which expresses the opinio iuris in the international community accepted a certain principle as a rule of law. The contract may also draw its provisions from the general legal principles which are the internationally accepted principles. Lastly, the contract can also draw its principles from the judicial decisions mainly those from the International Court of Justice or the decisions made by its predecessor. For instance, the decision of Chorzow Factory is featured on matters of compensation and recovery of compensation through seizure of foreign property. The decision of Barcelona Traction inform on corporate nationality together with diplomatic safety of shareholders. The decision of the ELSI provides principles for handling matters of liquidation of foreign corporations. Another recent decision of Diallo v. Congo affirmed the decision of nationality. 

A Critical Appraisal of Contractual Clauses

Most contracts are long-term agreements and they are meant to take a long time before completion, such as the Impregilo v. Argentina that was contemplated to take 30 years. Also, as the country grows, it is not surprising that its laws would be subjected to modifications to suit the current demands. Some of these modifications may be a change in Government operations that subsequently may affect the investor or may directly cripple the long-term agreements. Therefore, the need to take care of investors’ protection from such unforeseen future circumstances is a prudent strategy. The move requires the contract to include clauses that offer such protection as international laws may not extend to the scope of the contract. The two main clauses are the Umbrella clauses and the Stabilization clauses. The distinction between two is that the latter provides the remedies to the investor in case the state changes its laws that affect the investor while carrying out its activities. The former is a treaty provision, it is created to establish inter-state obligations to monitor investment agreements and ensure that the state complies with the agreed obligations.

Stabilization Clauses

Stabilization clauses are introduced in an Investor-State Contract as a shield to the investor from unforeseen future modification of the hosting state laws that might affect the investor’s contractual rights and benefits. The primary objective of the stabilization clauses is precluding the agreement from any state’s subsequent legislative or administrative actions that may be issued by the host state or its administration and alter the legal position of the investor. As can be seen, there is nowhere the clauses preclude the state from the enactment and enforcement of new legislation, only that the state should not extend the enforcement of those new regulations to the parties’ contractual bond.

In addition, the scope of the stabilization clauses can extend to other laws that affect the contract’s economic conditions and stability. In this case, the stabilization clauses' space may include the property, fiscal regime, labor regulations, export-import regulations, free transferability, the general laws that may touch on the contractual framework. Some of these critics are introduced especially where they seem to incapacitate effective application of legislation required by the international human rights commitments. As a result, depending on the magnitude of the preclusion of the state’s action, a stabilization clause may be carved-out especially if it involves rights to employment, human rights laws or environmental regulations.In other words, where there is a contradiction between the the human rights provision and the stabilizing clause provisions, the human rights’ will prevail. The various available stabilization clauses are the freezing clauses, economic stabilizing clauses, and the hybrid stabilization Clauses.

i) Freezing Clauses

Freezing clauses are the most substantial stabilization clauses. These clauses ensure that any law, principle, fiscal regime or any other essential economic regulation applicable principle provided by the investment contract will be untouched by the modification of the state’s laws of regulations. Therefore, such clauses freeze any state’s legal regime that may affect the contractual position of the investor. Further, their application start from the date when the agreement was created, and it retains the position of the contract despite any enactment of the government’s laws. In this way, the investor is assured of its contractual benefits throughout the life of the agreement. The two principles of the freezing clauses are; the state consents that any changes in its legislation that may be enacted any other day after the formation of the contract will never have force on the scope of the contract. Secondly, any future provision that the government would enact which would be inconsistent with the contract provisions, the provisions of the contract would prevail. A freezing clause can be limited of full. The latter meant to freeze the fiscal and nonfiscal matters that may affect the contract during its life while the former protect the investor from some but not all forms of legislative activities.

ii) Economic Stabilizing Clauses

Unlike the freezing provisions that shield the investor from the application of the future laws, the economic stabilizing clauses shield the investor from financial consequences of the modification of the host state’s laws. Also, the clauses confer the rights to revise the contract where the rights and benefits of the investor are affected adversely by the changes of the circumstances by renegotiation mechanism. In other words, these clauses aim to retain the contract financial position of the investor at the economic equilibrium from the date when the agreement was made throughout its life. 

On application, a contract may have a clause stating that where the hosting state makes a law or takes an administrative activity that exacerbates the contracted project costs, both parties will consult to decide on the remedy for the economic effects that may occur from such activities. Else, the clause may stipulate an action such as automatic price adjustment that will restore the price of the contract to its original value as affected by the changes. That is, if the effects cause a 10% increase, the same would be effected on the contract price.

The economic harmonizing provisions exist in three categories. The first one is the Stipulated Economic Equilibrium. In this category, the effects of the state’s modification of the law are automatically effected in the contract to reflect the coinciding value. An example of such a clause can be found in Pakistan articles “OFFSHORE PRODUCTION SHARING AGREEMENT.” The second one is the Non-Specified Economic Equilibrium. In this one, the contract is silent on both the amendment and the agreement of the parties regarding the amendment. An example of such clause can be found in “AGREEMENT ON THE EXPLORATION, DEVELOPMENT AND PRODUCTION SHARING FOR THE SHAH DENIZ PROSPECTIVE AREA IN THE AZERBAIJAN SECTOR OF THE CASPIAN SEA.” Lastly there is the Negotiated Economic Balancing. In this one, both parties are required to reach a mutual agreement regarding the amendments. An example of such a clause can be seen in “ON TAXES AND OTHER OBLIGATORY PAYMENTS INTO THE BUDGET (TAX CODE)”

iii) The Hybrid Stabilization Clauses

The hybrid clauses are simply an approach of combining both the freezing and the economic equilibrium clauses in one contract. In regard to these clauses, the investor may not automatically be released from complying with the state’s newly enacted laws. Instead, these clauses are provisions for the investor to allowed could be allowed the exemption depending on the situations. On the other hand, compensation on these clauses may be provided depending on the situations specified in the changes made by the law but does not involve all the laws. Also, the clauses would generally provide the investor with an opportunity for demanding adjustments on the contract to the contract.

Umbrella Clauses

Apart from stabilizing clauses, the investor contracts include umbrella clauses which are meant to ensure that the state observance all its promises and its contractual commitments. The other names that refer to umbrella clauses are; the sanctity of contract clauses, pacta sunt servanda clauses, parallel effect clauses, mirror effect clauses, elevator clauses, respect clause clauses. Umbrella Clauses are added as additional protections to the stabilizing clauses to enforce the state's private undertakings as required by the international laws and treaties. The rationale behind Umbrella Clauses is that a breach of any state’s private undertakings would be taken as a neglect of international responsibilities. In practice, where there is no Umbrella Clause, private undertakings would be taken as domestic legal matters unless the breach is one that can be categorized as a violation of treaty regulation or a violation of international customary legal requirements. That is, the international law separates between a contract and BIT requirements of a state.

In addition, apart from creating international responsibilities to the state, umbrella clauses work as dispute elevators. That is, they transform the dispute from an investor-state dispute to an international dispute that can be tabled before an international tribunal. In this way, the investor gets an opportunity to involve an impartial third party, the international tribunal as hearing the dispute within the state may not provide an unbiased solution. Therefore, by having the matter heard by the international tribunal, the investor is assured of a fair resolution that could have stemmed from the host’s municipal laws. Thus, through the Umbrella Clauses, the tribunal will find an avenue of offering a settlement using some of the BIT provisions.

However, there is no uniformity regarding how Umbrella Clauses are interpreted. From the history of the Umbrella Clauses, the trend shows that Umbrella Clauses are interpreted depending on their wording. In the interpretation, some tribunal scholars consider Umbrella Clauses as automatic elevators of Investor-State breach to a violation of a treaty. Other scholars seem to reject such interpretation but never provide the reason behind the rejection. The interpretation of these clauses have been deeply scrutinized by Crawford and placed under four grouping of tribunal scholars, refferring to each group as a school of thought or a camp. 

The first group is identified as the one that interprets the Umbrella Clauses using a very narrow approach. This group argues that Umbrella Clauses are effective only where the tribunal can find that both parties contemplate that the breach was definitely a breach of BIT as decided in the case of SGS v Pakistan and the decision of Joy Mining v Egypt.

 The second group of scholars seems to approach the breach by viewing it as a situation that happened when the state was on its duty as a sovereign state. An example of such stands were taken in the decision of the American Energy versus Argentina, and the case of El Paso Energy versus Argentina. The third groups takes an extreme view of looking at the Umbrella Clauses as an internationalization element of a contract hence giving it the power of transforming the contractual claim from a mere contract dispute to a treaty claim. Such stands were taken in the dispute of FedEx versus Venezuela, the Eureko versus Poland, and the Noble Ventures versus Romania. Lastly, the fourth group takes an operative approach by viewing the Umbrella Clauses as a functional treaty and seeing it as an applicable claim arising from a treaty. This approach does not see the Umbrella Clauses’ authority of converting the claim arising from the contract into one coming from a treaty. However, the approach may provide some basis of a claim arising from a treaty even where the disputed BIT does not have a generic claim clause. Examples of these stands were held in the case of SGS v Philippines, and that of CMS v Argentina.

From this analysis, there is one problem seen from the interpretation of Umbrella Clauses. For one, it is indisputable that Umbrella Clauses has the authority of transforming the dispute into an international claim by way of creating the host’s states international obligations for its private undertakings. Nevertheless, there is a huge gap in the interpretation as there is no consensus or a straight line that defines the scope of these provisions. In brief, Some tribunal arbitrators are viewing the Umbrella Clauses as covering a wide scope in the host state’s undertakings counting even the undertakings stemming from the hosting state’s general domestic laws, as seen in Pakistan case. Other arbitrators are taking a limited approach and extends the scope of the host state’s undertakings narrowly and exclude the general legislations as seen in the Noble Ventures, CMS v. Argentina, and the Joy Mining cases. Others are focusing on the host state’s sovereignty authority rather than looking at the commercial nature of the contract such as the El Paso and Pan America cases.

Clarification on Investor-State Contracts and International Law

Like as mentioned above, Investor-State Contracts relies on international laws created from treaties, customs, general legal principles, and court precedents (ICJ and Predecessors). Therefore, the extent to which Investor-State Contract can transform to international obligations should arise from the the extent to which these sources of law can be identified in the contract. While analyzing the presence of these laws, it is also worth recognizing that there is presence of international provisions within the domestic legal realities. For example, the requirement of the human rights. Recognizing that the investor as a contracting party an entity created by a foreign state (or simply contract as a state), the standard of standards of international provisions should be contemplated by the two states and their promises should feature these provisions as they exercise their sovereign authorities.

Also, even though Investor-State Contract is between the foreign investor and the host State, it does not mean that all contractual disputes and rights should be viewed as international treaties disputes. The idea of the automatic transformation by arbitral tribunals should take an objective approach while determining that such breaches are violations of international laws. From the analysis provided above on Umbrella Clauses, it is unquestionable that the state’s responsibilities within the engagement are clear, but there does not provide clear line as to the extent of the contractual breaches. That is, it is unpredictable that the law will find the breach as between the contracting parties and provide remedies as necessary, or the law will hold the breach as an international treaty breach.

An illumination of the position of the international law can be derived from Stephan Schwebel expression that if an alien proper law has not yet been identified as international, mere violations of contracts by the states cannot amount to violations of international laws. However, due to international provisions within the domestic law, a contravention of the contract or any other non-commercial dealing with the alien can transform to a violation of an international law only on special circumstances (explained above as violation of human rights provision). This law was applied in the Vivendi annulment at para 96-97.

In summarizing what amounts to the breach of international treaties, the tribunal stated that a claim that a state has violated international law must show that the host state acted as such. That is, the claim should show that the host state used its powers as a “superior governmental powers” The court stated that a party cannot be disappointed with the state’s performance in the contract and then claim that such host stat has violated international treaties. As from this analysis, the action of the government and its application the sovereign powers in the scope of Investor-State Contract is operable as to some extent, whether the violations can extend to international laws is a matter of the extent to how the government had the sovereign responsibility on the breach.

References

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