Interpreting the Term ‘Investment’ in International Investment Law by Subsequent Agreements

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Department of Law Spring Term 2020

Master’s Thesis in International Investment Treaty Law 30 ECTS

Interpreting the Term ‘Investment’ in International Investment Law by

Subsequent Agreements

Tolkning av begreppet ’investering’ i internationell investeringsrätt genom efterföljande tolkningsavtal

Author: Oskar Rydermark

Supervisor: Kaj Hobér

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List of Abbreviations

ASEAN Association of Southeast Asian Nations BIT Bilateral Investment Treaties

CISG United Nations Convention on Contracts for the International Sale of Goods (1980)

ECT Energy Charter Treaty (1991)

GATS General Agreement on Trade and Services (1995) GATT General Agreement on Tariffs and Trade (1948) ICJ International Court of Justice

ICSID International Centre for Settlement of Investment Disputes

ILC International Law Committee

ISDS Investor-State Dispute Settlement

NAFTA North American Free Trade Agreement (1994)

OECD Organization for Economic and Co-operation and Development TRIPS Trade-Related Aspects of Intellectual Property Rights

SCC Stockholm Chamber of Commerce

UNCTAD United Nations Conference on Trade and Development UNCITRAL United Nations Commission on International Trade Law VCLT The 1969 Vienna Convention of the Law of Treaties

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1 Introduction

The current investmet protection treaty system took form in the mid to end of the last century, and is often credited to have started with the 1959 bilateral investment treaty (BIT) between Germany and Pakistan.1 The purpose of an investment treaty is to enact a set of standards of treatment to protect investments between the contracting countries in order to promote investments. These standards typically include broad articles granting

‘fair and equitable treatment’ and ‘full protection and security’. Investment treaties also often protect investment from discriminatory measures compared with the host states national companies, by adopting a national treatment clause, and guard investments against being treated less favourably compared to other investors, through a most favoured nation clause. Additionally, many investment treaties state that in no case are foreign investments to be treated less favourably than is required by international law, and oftentimes include articles to protect monetary transfers and against expropriation.2

All of these standards of treatment are intended to create favourable conditions for investment by increasing predictability in order to facilitate investments leading to economic development.3 Importantly, although investment treaties are concluded between states, these treaties are designed for the benefit of private investors, as third parties, to gain protection under the treaty and to be able claim damages from the state parties where the investor have suffered economic loss due to failure to uphold the abovementioned standards of treatment.

According to United Nations Committee on Trade and Development (UNCTAD) there are today 2334 active BITs and 315 active treaties with investment provisions in the world.4 The majority of these active treaties were signed in the 1990s and beginning of 2000s.5 Investment treaties are, as such, commonly divided into two generations. The first generation contain treaties signed in the 1990s and are short, general and much more protective of investors than state sovereignty compared to later investment treaties. The second generation include treaties signed after the 1990s, are longer, and to a greater

1 Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments, Signed 25 November 1959, Bundesgesetzblatt II, No 33 (6 July 1961), p. 793.

2 Salacuse, The Law of Investment Treaties, p. 147-148; Vandevelde, Bilateral Investment Treaties, p. 2- 10.

3 Salacuse, p. 12.

4 UNCTAD, Investment Policy Hub, 29 February 2020.

5 UNCTAD, Recent Developments in the International Investment Regime, p. 2.

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extent balance the interests of investors and state sovereignty.6 Primarily the first generation, but to an extent also the second generation of the investment treaties, has been met with criticism for its lack of consistency and predictability.7 These issues can be traced, at least partly, to how the first generation’s vague general definitions are interpreted differently by tribunals, leading to unpredictability in explaining terms such as ‘most favoured nation’, ‘fair and equitable treatment’, and also of the definition of

‘investment’ itself which is central in deciding the scope of the treaty.

This unclarity in investment protection treaties and the difficulty interpreting these agreements is problematic for investors as well as states. Investors are unable to predictably plan investments because they do not know when an investment will be protected by the treaty. States on the other hand, struggle to explain why the equivalence of hundreds of millions of US dollars are spent on damages in one case, yet not in another.

This uncertainty breeds mistrust in the international investmet system and is one of the reasons that countries like Bolivia, Ecuador, South Africa, and Venezuela, have opted to exit the current investment treaty system.8

The problems connected with overly general definitions in the first generation investment agreements are further prolonged due to the design of exit provisions and the inclusion of initial validity and survival clauses creating lock in effects. These lock in effects give investment agreements a long life span, even after one party decides to leave a treaty. As described in an OECD working paper, at least 90 per cent of treaties would still have effect 15 years after one party denounced the treaty.9

To counter these issues, a number of remedies have been proposed. Broadly speaking, a party can either choose to alter an existing treaty (voice) or opt for leaving it (exit).

Whilst exit consists of unilateral withdrawal or mutual termination of the treaty, voce consists broadly of four options. The first option is to mutually denounce and redrafting the treaty. The second option consists of renegotiating and amending the treaty through amendment procedures. The third option is for the parties, as masters of the treaty, to

6 Roberts, A, Incremental, Systemic, and Paradigmatic Reform of Investor-State Arbitration, p. 411.

7 Roberts, Clash of Paradigms: Actors and Analogies Shaping the Investment Treaty System, p. 50;

Hanotiau, Are Bilateral Investment Treaties and Free Trade Agreements Drafted with Sufficient Clarity to Give Guidance to Tribunals?, p. 314; UNCTAD, Scope and Definition, UNCTAD Series on Issues in International Investment Agreements, p. 5-7; Reinisch, The Interpretation of International Investment Agreements, International Investment Law a Handbook, p. 373; Hobér, Does Investment Arbitration have a Future?, International Investment Law a Handbook, p. 1877.

8 Gordon, Pohl, OECD working paper Papers on International Investment 2015/02, Investment Treaties over Time - Treaty Practice and Interpretation in a Changing World, p. 7 and 19.

9 Investment Treaties over Time …, p. 20-22.

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interpret the agreement. Lastly, the fourth option is to work on a larger scale to influence the broader framework for arbitration.10

Both redrafting and amending a treaty requires renegotiations that can take a lot of time and can therefore be costly. An amendment is subject to an amendment procedure under Articles 39-41 under Part IV of the 1969 Vienna Convention of the Law of Treaties (VCLT). An amendment further constitutes a new agreement and therefore does not necessarily have retroactive effect on previous investments. The fourth alternative, systematic reform, is hard for an individual country to achieve on its own. Instead, here the third alternative might be a cheaper and faster way to remedy the unclarity in investment agreements. This alternative might include joint or unilateral instruments clarifying the intent of treaty parties, pleadings filed by respondent governments for Investor-State Dispute Settlement (ISDS) cases, other evidence of state practice, and authoritative interpretations issued by treaty partners and other subsequent agreements by treaty partners. 11 This last option, issuing authoritative interpretations, has its legal basis in Article 31-33 of the VCLT and has the potential of being a relatively quick and cost- effective way to specify the will of the parties.12 This is advantageous considering the great number of investment protection treaties, and as a result the time and cost, in comparison, taking legal actions of reform.

The idea of interpreting an investment agreement through subsequent practise and subsequent agreements is in not itself a new idea. This idea has, however, gained traction in the last decennia among organisations like the OECD and the UNCTAD as well as a number of legal scholars.13 Although a substantial amount of ink has been dedicated to discuss subsequent agreements in theory, relatively little has been written on the practical issues that potentially could be addressed through joint interpretive agreements. The purpose of this thesis is therefore to examine if interpreting the term ‘investment’ through subsequent agreements with legal basis in Article 31 of the 1969 Vienna Convention of

10 Treaties over Time - Treaty Practice and Interpretation in a Changing World, p. 5; Roberts, Power and Persuasion In Investment Treaty Interpretation, 191.

11 Roberts, Power and Persuasion … , p. 193-198.

12 Roberts, Power and Persuasion … , p. 193-198.

13 See Gaukrodger, D., The legal framework applicable to joint interpretive agreements of investment treaties, OECD Working Papers on International Investment 2016/01; UNCTAD Recent Developments in the International Investment Regime; Roberts, A., Incremental, Systemic, and Paradigmatic Reform of Investor-State Arbitration; Arato, J., Subsequent Practice and Evolutive Interpretation: Techniques of Treaty Interpretation over Time and Their Diverse Consequences; Titi, C., Non-adjudiciary State-State Mechanisms in Investment Dispute Prevention and Dispute settlement: Joint Interpretations, Filters and Focal points.

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Law of Treaties (VCLT) is a viable and effective remedy to address unclarities in and the difficulties interpreting international investment protection treaties.

1.1 Outline

In order to determine if interpreting investment protection agreements by subsequent agreements can be an effective remedy to address unclarities in these treaties, this thesis will first, in Chapter 2, discuss the legal basis for interpreting international treaties through subsequent practice and subsequent agreements in the VCLT. Here will be addressed what a subsequent agreement is, how it is differentiated from subsequent practice, and that it is only the parties of the original agreement who can create a subsequent agreement. Here will also be discussed the legal effect of a subsequent agreements, notably, that a subsequent agreement is not necessarily legally binding and that is can have retroactive effect. Lastly, Chapter 2 will also touch upon some of the possible challenges interpreting a treaty by a subsequent agreement.

After the legal basis has been established, the following chapter, Chapter 3, will describe the common methods to define ‘investment’. Here will be discussed that the term

‘investment’ has historically have been defined by including ‘every type of investment’

followed by an illustrative list. This has in some cases been combined with specifying substantive investment characteristics. A newer method is to limit the type of possible investments covered by the treaty, by adopting an exhaustive list of investment forms.

This chapter will also include a discussion of the possibility of interpreting these different definitions.

Building upon the previous two chapters, Chapter 4, will address currently debated issues in investment protection law and discusses specific measures how the state parties of an investment protection treaty can interpret the agreement to increase clarity and predictability. Here, inspiration of requirements to further define ‘investment’ are drawn from requirements adopted in other treaties, in precedent or discussed in literature. First addressed are the so-called Salini criteria which aim to set objective criteria in order to determine if an asses is an investment. This chapter also addresses the temporal and territorial scope of an agreement, requirements of compliance with local law, restricting the scope of coverage of the agreement to specific sectors, and requirements that the projects of investment are approved by host state authorities. Touched upon is further the use of general exceptions to protect the environment and public health, as well as

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exceptions for public policy. Thereafter are discussed pre-investment expenditures, or costs before an investment is concluded, and if a minority shareholder or a foreign parent company indirectly holding shares in a subsidiary company in the host county is covered by the investmet protection treaty at hand. Lastly is discussed the possibility of limiting the scope of investment protection treaties to cover commercial contracts, loans and debt and intellectual property. Each of these methods to limit scope will be analysed regarding their effectiveness as means to interpret the term investment. As will become apparent, some of these forms of investments are more appropriate to exclude by subsequent agreements than others.

Finally, the fifth and last chapter summarizes and analyses the conclusions drawn in the preceding chapters by discussing the effectiveness of interpreting investment protection treaties through subsequent agreements in theory and in practice. Here will also be addressed why subsequent agreements have not been used more frequently in the past. In its conclusion, this thesis lays out a roadmap for which investment types state parties most successfully can interpret in investment protection treaties by subsequent agreements. Here are summarized which types of investment that have the possibility of being interpreted effectively through subsequent agreements, and which types are unsuited to be interpreted by subsequent agreements.

1.2 Delimitations

Considering the breadth and complexity of subsequent practice and subsequent agreements in international treaty law, it is necessary to restrict the subject matter discussed in this thesis. To start with, a lot more has been written on the definition and interpretation of the concepts of ‘fair and equitable treatment’, ‘most favoured nation’, and ‘umbrella clauses’ than the term ‘investment’ . These concepts, however, have been considered too broad to be thoroughly discussed in this thesis. Instead, the function of the term ‘investment’, both as the scope for the substantive protection of investors as well as the jurisdictional scope of application of the treaty, gives an interpretation of the term effect throughout the treaty.14 This makes the term suitable for interpretation to address unclarities in investment agreements.

Moreover, since this thesis focuses on active interpretation of investment treaties, because subsequent practice is practices of longer duration that is shared by the states

14 Salacuse, p. 174; Bischoff, Happ, International investment Law a Handbook, p. 497.

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parties and reflects an underlying agreement, this thesis will mainly focus on subsequent agreements. Subsequent practice will therefore be discussed only to the extent where it in some cases can be difficult to discern from subsequent agreements. Further, in order to limit the analysis to the principal question of the effectiveness of subsequent agreements as a method of joint interpretation, this thesis will not venture into the thorny matter of tacit agreements by acquiescence.

Additionally, this thesis will not touch upon joint interpretative mechanisms, as those under the North American Free Trade Agreement (NAFTA) or Association of Southeast Asian Nations (ASEAN) . Because this would, in many cases, constitute a complete overhaul of the treaty at hand, establishing a new interpretation mechanism, instead of simply interpreting the treaty as written.15 With this said, cases from NAFTA will however be discussed.

Lastly, considering that every investment treaty needs to be interpreted with regards to the text at hand, this thesis recognises that it will not be able to draw any significant conclusions applicable to every treaty. Rather, this text will provide a roadmap for matters that can be taken into consideration drafting a joint interpretation agreement and possible remedies in order to increase predictability of a treaty.

1.3 Methodology

This thesis will apply a formal-dogmatic method. The aim of the formal-dogmatic method is to find an answer to a concrete legal query in order to establish applicable law by consulting legal sources with consideration to their legal weights.16 The task at hand is therefore to establish which legal rules are applicable in a specific situation, interpret the meaning and relevance of these rules, and lastly, to describe the result of the application of the rules.17 Generally, these legal sources include legal texts, preparatory work, precedents and literature.18 In public international law, Article 38(1) of the statute of the international Court of Justice (ICJ) is widely recognised as the most authoritative and complete statement as to the sources of international law.19Article 38(1) states that:

15 NAFTA was on the 18 of September 2018 replaced by the Agreement between the United States of America, the United Mexican States, Canada (USMCA).

16 Kleineman, Juridisk Metodlära, p. 26.

17 Kleineman s. 30.

18 Kleineman, p. 21.

19 Shaw, International Law, p. 52.

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the court, whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply: (a) international conventions, whether general or particular, establishing rules expressly recognized by the contesting states; (b) international custom, as evidence of a general practice accepted as law; (c) the general principles of law recognized by civilized nations; (d) subject to the provisions of Article 59, judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.

As abovementioned, the legal question of this thesis is to analysis if interpreting the term ‘investment’ in investment protection agreements by subsequent agreements can be a remedy to current issues related to the broadness of the definition of ‘investment. In order to investigate this, this theses will, pursuant to Article 38 (a) of the Statue of the ICJ, primarily address the treaty text of the international protection agreements at hand, as well of the application of the VCLT is the convention which regulates the interpretation international treaties.

Additionally, in analysing the application of the VCLT this thesis theses will also draw from custom as a means of interpretation according to Article 38 (b) of the Statue of the ICJ. In its application of custom this thesis references the writings of the International Law Committee (ILC). The draft conclusions of the ILC may constitute evidence of custom, contributing to the corpus of usages which may create new law and evidence as the opinio juris and the reports and draft conclusions of the ILC are often referred to in the judgments of the ICJ. Adding to this, the fact that the conclusions referenced in this thesis have been adopted by the United Nations General Assembly further increases their legal interpretative value as custom.20

Continuing, in the interpretation of international protection agreements this thesis will also apply general legal principles, pursuant to Article 38 (c) of the Statute of the ICJ. Examples of principles used are, inter alia: pacta sunt servanda, which states that the treaty is binding upon the parties, and; the legal maxim ex turpi causa non oritur action, or put differently, no one should benefit from their own wrong, applied when analysing legal requirements.

Adding to this, in order to analyse how investment protection agreements have been applied in practice this thesis will also reference cases of international courts and tribunals according to Article 38 (d) of the statute of the ICJ. Here, the precedent of ICJ and WTOs appellate body will be applied interpreting the VLCT. Cases will also be referenced from the Permanent Court of Arbitration (PCA), International Centre for Settlement of

20 Shaw, p. 89-90.

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Investment Disputes (ICSID), and other arbitrations centres like the Stockholm Chamber of Commerce (SCC) to discuss previous interpretation of investment protection agreements. Because most investment agreements state that ‘the award shall be binding to the parties […]’, it is common to conclude that there is no explicit stare decisis for international investment tribunals.21 With this said, although it is clear that there is no binding president (stare decisis) in investment arbitration, it is common practice for tribunals to take guidance from previous decisions and awards while stressing that, although they are not bound by precedent, it is an aid to interpretation.22

It should further be noted that investment treaty law inhabits a legal space encompassing public international law, private international law, domestic public law, international trade law, and international human rights law.23 As a result, there is in international investment law a clash between public international law, based on the relationship between state parties, and private international law composed of the rights granted to third parties, the investor.24 However, for the purposes of this thesis, i.e.

interpretation of international investment treaties, primarily public international law will be dealt with, although to what extent it is appropriate to remove rights granted to investors as third parties through interpreting the agreement will be addressed.

Lastly, this thesis will in its analysis rely on basic economic theory in drawing its conclusions about growth and creation of wealth. The bases for this are models like the Solow model and the Mankiw-Romer-Weil approach, which consider capital a factor of output, meaning that an increase in capital investment leads to increased output, i.e.

economic growth. It is further assumed that lowered costs for doing business and moving capital increases investments, and again, as a result, growth. It is also assumed that economic growth is facilitated by the rule of law; hence, being able to take legal action as protection of capital investments will further increase capital investment and growth.25

It is easy to see how this connects to international investment law, which both upholds rule of law for investors as well as creates predicable conditions for investments.

21 See Bayindir Insaat Turizm Ticaret Ve Sanayi v. Islamic Republic of Pakistan, Case No ARB/03/29, (Decision on Jurisdiction) 14 November 2005, para. 76 (‘The Tribunal agrees that it is not bound by earlier decisions, but will certainly carefully consider such decisions whenever appropriate’).

22 Reinisch, A., Investment Agreements and General Investment Law, in Bungenberg, Griebel, Hobe, Reinisch (editors), International Investment law a Handbook, p. 408.

23 Roberts, Clash of Paradigms: What Is Revealed and Obscured, p. 58.

24 Ibid, p. 60-63.

25 Jones, Macroeconomics, p. 1-77.

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2 Interpreting International Investment Treaties

The basis for interpreting international treaties, and therefore also international investment agreements, is the 1969 Vienna Convention of the Law of Treaties. There is general agreement among scholars and arbitration tribunals alike that international investment agreements are to be interpreted in accordance with article 31 to 33 of the VCLT.26 The main rule for treaty interpretation is stipulated in Article 31 which states that: ‘[a] treaty shall be interpreted in good faith 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’.

In order to clarify the ordinary meaning, object and purpose of the treaty Article 31 (3)(a) and 31 (3)(b) states inter alia that:

‘There shall be taken into account, together with the context:

(a) Any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;

(b) Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation’

It is also possible for the parties to, instead of conveying the ordinary meaning of the terms, convey a special meaning pursuant to article 31 (4) of the VCLT which states: “A special meaning shall be given to a term if it is established that the parties so intended”.

This refers to a special meaning at the moment of the conclusion of the treaty.27 Although subsequent practice can show the meaning intended by the parties at the moment of the conclusion of the agreement, no cases have referred to 31 (4) to achieve this.28 Article 31 should further be read together with Article 32 which provides:

‘Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:

(a) leaves the meaning ambiguous or obscure; or

(b) leads to a result which is manifestly absurd or unreasonable’.

To provide guidance interpreting Article 31 and 32, the ILC was given the task in 2008 as part of its ‘treaties over time’ series to provide commentaries on subsequent agreement and subsequent practice. Their work, which started with Professor Georg

26 Reinish, see Supra (21), p. 374; Salacuse, p. 156.

27 Draft Articles on the Law of Treaties (1966) ILC Yearbook vol 2, p. 222.

28 Crema, Subsequnet Agreements and Subsequent Practice within and outside the Vienna Convention, see Notle, G., (editor), Treates and Subsequent Practice, p. 22.

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Notle’s reports as the Special Rapporteur in 2014, resulted in 2018 in the adoption of a set of draft conclusions by the United Nations General Assembly through resolution 73/202.29

In the draft conclusions, the Commission emphasizes that Article 31 and 32 VCLT should be read together. The ILC stresses that the interpretation of a treaty consists of a single combined operation which places appropriate emphasis on the various means of interpretation indicated in Article 31 and 32. 30 The ILC used this language to avoid a possible misunderstanding that any one of the different means of interpretation has priority over others, regardless of the specific treaty provision or the case concerned.31

In Conclusion 3 the commission, follows its 1966 commentary on the draft articles on the law of treaties, and underlines that subsequent agreement and subsequent practice, being objective evidence of the understanding of the parties as to the meaning of the treaty, are authentic means of interpretation.32 In Conclusion 4, the ILC identifies and defines three legal bases for subsequent means of treaty interpretation under the VCLT.

Firstly and secondly, subsequent agreement and subsequent practice are authentic means according to 31 3 (a) and (b) VCLT. A subsequent agreement is an agreement between the parties, reached after the conclusion of a treaty, regarding the interpretation of the treaty or the application of its provisions. Subsequent practice, on the other hand, consists of the conduct in the application of a treaty after its conclusion, which establishes the agreement of the parties regarding the interpretation of the treaty. Thirdly, the Commission defines subsequent practice under art 32 VCLT as conduct by one or more parties in application of the treaty, after its conclusion.33

The ILC goes on to explain that it does not intend to denote a difference concerning the possible legal effects of subsequent agreement versus practice in art 31 paragraph 3 VCLT. Rather, the difference lies in the fact that a subsequent agreement has the effect of constituting an authentic means of interpretation of the treaty, whereas a subsequent practice has this effect only if its different elements, taken together, show “the common understanding of the parties as to the means of the terms”. Hence, the two concepts are

29 See General Assembly resolution A/RES/73/202 on the adoption of the Draft Conclusions on subsequent agreements and subsequent practice in relation to the interpretation of treaties, with commentaries, Yearbook of the International Law Commission 2018, vol. II, Part Two (hereafter Draft Conclusions).

30 Draft Conclusions, p. 17; for previous comment see Yearbook of the International Law Commission 1966, vol. II, document A/6309/Rev.1, p. 221, para. 15,.

31 Draft Conclusions, Conclusion 2, p. 22.

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distinguished based on whether an agreement of the parties can be identified as such, in a common act or undertaking, or whether it is necessary to identify an agreement through separate acts that in combination demonstrate a common position. A subsequent agreement must therefore be reached, whilst, on the other hand, subsequent practice encompasses all other relevant forms of subsequent conduct.34 Additionally, Article 32 differs from 31 paragraph 3 (b) in that Article 32 requires neither the agreement of all of the parties nor that the relevant practice regards the interpretation.

The Commission further notes that subsequent practice under Article 31, paragraph 3 (b) may consist of any ‘conduct and thus includes omissions, including silence, which contribute to establish agreement.35 As examples, the ILC enumerates official statements, such as diplomatic conference; statements in the course of a legal dispute; or judgments of domestic courts; as well as official communications to which the treaty gives rise, or the enactment of implementing a treaty even before any specific act of application takes place at the international level. Importantly, this does not contravene Article 27 of the VCLT, which states that ‘[a] party may not invoke the provisions of its internal law as justification for its failure to perform a treaty’, this does not signify that national legislation may not be taken into account as an element of subsequent practice in the application of the treaty. I.e. there is a difference between invoking internal law as a justification for a failure to perform a treaty, and using internal law for the purpose of interpreting a provision.36

In practice, however, this distinction between subsequent practice and agreement is not as clear. Gazzini poses that subsequent agreements can be made through a variety of forms, including the exchange of letters, diplomatic notes, notes verbales, joint statements, joint decisions, agreed minutes, or any other instruments susceptible to express the agreement of the parties.37 In comparison with the description of subsequent practice described by the ILC above, there seems to be an overlap between subsequent agreements and subsequent practice.

This was also observed by the Special Rapporteur on the law of the treaties in his third report, stating that it may be difficult to distinguish subsequent practice under Article 31 (3)(a), which is to be taken into account only among other means of interpretation, and

34 Draft Conclusions, Conclusion 4, p. 30

37 Gazzini, T., Interpretation of International Investment Treaties, p.192.

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a later agreement the parties consider to be binding.38 However, the ILC emphasizes that the distinction between the two ‘does not denote a difference concerning their authentic character’ of interpretation.39 The difference instead lies in the manner of establishing the agreement of the parties, ‘with the difference being the greater ease with which an agreement is established’.40

Lastly, and importantly, although international investment treaties assign rights to third parties, i.e. investors, the state parties remain the masters of the treaty and as such have the mandate to interpret it.41 However, a closely related issue therefore is what interpretation is appropriate in regards to the obligations to the third parties. Here, Roberts has proposed a set of metrics whilst considering the effect of an interpretation based on scope, reasonableness and timing, on a scale from the reasonable to unreasonable and early to late.42 This set of metrics, does not, however, say much about how far an interpretation may diverge from the treaty to be seen as reasonable; this determination is still up to the tribunal at hand to decide.

2.1 Legal Effect of a Subsequent Agreements

In Conclusion 3 the Commission, as aforementioned, concluded that subsequent agreements are authentic means of interpretation. However, the Commission does not imply that these means necessarily possess a conclusive effect, and recalls the phrasing of only “taking into account” in Article 31. A subsequent agreement or practice between the parties regarding the interpretation is therefore not necessarily legally binding.43

Instead, the weight of a subsequent agreement or subsequent practice as a means of interpretation under Article 31, paragraph 3 depends, inter alia, on its clarity and specificity. Additionally, subsequent practice in 31, paragraph 3 (b) also depends, inter alia, on whether and how it is repeated. The same also applies to Article 32.44

38 Draft Conclusions, p. 25; see also Yearbook of the International Law Committee 1964, vol. II, document A/CN.4/167 and Ass.1-3, p. 60, para. 25.

39 Yearbook of the International Law Commission 1966, vol. II, document A/6309/REV.1, p. 221-222, para. 15.

40 Draft Conclusions, p. 26, see also Kasiklili/Sedudu Island (Botswana v. Namibia) Judgment, I.C.J.

Reports 1999, p. 1087, para. 63.

41 Crawford, A Concensualist Interpretation of Article 31(1) of the Vienna Convention on the Laws of Treaties, p. 31; Report of the International Law Committee on the Work of Its Eighteenth Session, 1966, UN doc A/CN.4/SER.A/1966/Add.1, p. 230.

42 Roberts, Power and Persuasion …, p. 210.

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The ILC continues to state in Conclusion 7 that subsequent agreement and practice contribute, together with other means of interpretation, to clarifying the meaning of a treaty. This can result in narrowing, widening, or otherwise determining the range of possible interpretations, including the scope for discretion. Importantly, it is presumed that the parties, by agreeing to practice in the application of the treaty, intend to interpret the treaty and not to amend or modify it, because the possibility of amending a treaty by subsequent practice has not been generally recognized.45 In other words, it is possible to determine the original intention of the parties; however, it is not possible to change the treaty and the obligation of the parties.

What, then, is then the theoretical limit in interpreting an agreement? In addressing this the ILC put forward a line of reasoning, beginning by quoting the WTO appellate body:

the term “application” in Article 31 (3)(a) relates to the situation where an agreement specifies how existing rules or obligations in force are to be “applied; the term does not connote the creation of new or the extension of existing obligations that are subject to a temporal limitation.⁴⁶

The ILC adds two things to this: firstly, as stated by Murphy, ‘Articles 31 paragraph (3)(a), and 39, if read together, demonstrate that agreements that the parties reach subsequently to the conclusion of a treaty can interpret and amend or modify the treaty’.47

Secondly, that an agreement under Article 39 need not display the same form as the treaty that it amends. As such, the ILC concludes that it may be difficult to distinguish ‘between agreements of the parties under a specific treaty provision that attributes binding force to subsequent agreements […] under Article 31, paragraph (3)(a), which are not binding‘

and ‘amendments or modifications of a treaty under Article 39 to 41’.48 The Committee further provide that there does not seem to be any other formal criteria to make this distinction other than those in Article 39 and those in the treaty at hand.49 States and international courts have applied a wide scope to what is a subsequent agreement, going beyond even the original meaning of the terms of the treaty.50 A reason for this might be the reluctance of states to recognize that an agreement relating to application of a treaty

45 Draft Conclusions, p. 51.

46 WTO, Appellate Body report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, Second Recourse to Article 21.5 of the DSU by Ecuador, paras. 391-393.

47 Draft Conclusions, p. 58; compare with Murphy, The Relevance of Subsequent Agreement and Subsequent Practice for the Interpretation of Treaties, in Treaties and Subsequent Practice, p. 88.

50 Roberts, Power and Persuasion …, p. 201.

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has the effect of amending or modifying the treaty. The ILC thusly concludes ‘an agreement to modify a treaty is thus not excluded, but also not presumed’.51

An example of when subsequent agreements have amounted to a modification or an amendment of a treaty is when the European Economic Community changed the name of the ‘European currency unit’ to ‘the Euro’ by adding a conclusion of a meeting instead of going through the length ratification proceedings.52 Another example is the interpretation of the 1971 Ramsar Wetlands Convention. Here, the conference of the parties in 1990 clarified that the ‘two-thirds of the Contracting Parties’ necessary for amending the treaty, referred to the parties of the treaty at the time the clause was adopted.53 A last example is the interpretation of Article 1.F(c) of the UN General Assembly of the 1951 Refugees Convention. This interpretation was not legally binding nor does it amount to an amendment, yet carries considerable weight in interpretation.54

The Article in question states that if there are serious reasons for considering that a person is ‘guilty of acts contrary to the purposes and principle of the UN’, he or she is not entitled to refugee status. On the 17 December 1996 the Assembly adopted, notably without a vote, a declaration that terrorism is contrary to the purposes and principles of the UN.55

Interestingly, whilst drafting the VCLT, a provision was proposed for an article stating that: ‘a treaty may be modified by subsequent practice in the application of the treaty establishing the agreement of the parties to modify its provisions’.⁵⁶ The article was, however, voted down by 53 to votes to 15, with 26 abstentions. A relevant question, therefore, is whether the decision not to adopt this article meant that the parties had excluded the possibility to modify a treaty by subsequent practice.57 Many writers concluded that the negotiating states simply did not wish to address this question on the treaty.58 Most international courts and tribunals have refrained from recognizing the possibility of modifying a treaty by subsequent practice.

Although there have been a few notable exceptions, most courts, including the ICJ, has thus far not explicitly recognised an interpretation gaining the effect of an amendment

51 Draft Conclusions, p. 59; see also Pulp Mills on the river Uruguay (Argentina v. Uruguay), Judgment, I.C.J. Reports 2010, p. 66; Crawford, A consensualist interpretation of article 3 of the VCLT, p. 32.

52 Aust, Modern Treaty Law and Practice, p. 213; see also Conclusions of the Madrid European Council 1995 (Bulletin of the EU, 12 (1995), p. 10.

53 Aust, Modern Treaty Law and Practice, p. 213.

54 Aust, Modern Treaty Law and Practice, p. 213.

55 A/RES/51/210.

56 Yearbook of the International Law Commission 1996, vol. II document A/6309/REV.1, p. 236.

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a specific case.59 Hence, current view is that the amendment procedures are not to be circumvented by informal means seems to have gained weight. The ILC thusly concludes that, despite some support in international case law for the parties to theoretically modify a treaty through subsequent practice, the actual occurrence of subsequent practice amending or modifying a treaty is not to be presumed and this have not been generally recognized.60

Furthermore, it has been discussed what effect a subsequent agreement have on past investments. Some scholars have argued that subsequent practice and agreements have retroactive effect: since they interpret the original will of the parties, the joint interpretation agreement will have effect on investment made before the joint interpretation agreement was concluded.61 An example of this in precedent is the Sanum v. Laos case. The Laotian Government stated through diplomatic announcements that the China-Laos BIT did not extend to Macau and requested China’s response. China, however, responded that the relevant BIT was only concluded and binding only upon the central government and not on Macau.62 When Laos proceeded to set aside the award in the courts of the seat of arbitration in Singapore, the Singapore High court considered China’s announcement to be an interpretation of the BIT and therefore could be applied retroactively; however, the Singapore court of appeal held that the announcements where amendments and therefore lacked retroactive effect.

Moreover, there have in case law been instances in case law which State Parties have expressed their view on how a provision is to be interpreted after the fact that an arbitration process has begun. Cases under the North American Freed Trade Agreement (NAFTA), which, under the Free Trade Commission (FTC), had the mandate to issue interpretative agreements, have reached different conclusions. On one end of the spectrum, the Pope & Talbot Tribunal viewed the interpretation as an illegitimate attempt to amend the treaty retroactively in order to interfere with an ongoing case. On the other end, in ADF Group the Tribunal accepted the interpretation on the basis that all the Parties themselves were speaking to the Tribunal, which was considered the most authentic and authoritative source of instruction on what the Parties intended to convey.

61 Roberts, Power and Persuasion … p. 201.

62 Sanum Investments Ltd v. Government of the Lao People’s Democratic Republic, UNICENTRAL (Award on Jurisdiction) PCA Case No. 2013-13; proceedings at Singapore High Court and Court of Appeal as seat of arbitration, Sanum v. Laus [2015] SGHC 15, and Sanum v. Laos, [2016] SGCA 57.

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2.2 Practical Application of Subsequent Agreements

In contemplating the use of interpreting a treaty by subsequent agreements, a few questions might be considered. Although these questions have yet to be thoroughly addressed in case law and literature, a few conclusions can be drawn from the previous discussion about legal effect. First can be considered if the parties of a treaty can decide to interpret the same term multiple times. Since the parties by interpreting the treaty are to find the original will of the state parties, only that original ‘meaning’ can be found.

Here, one cannot ignore the that because many international investment agreements have been adopted with limited negotiations, it might be difficult to examine whether an interpretation agreement actually reflects the original intentions of the parties. With this said, it is entirely imaginable that the first interpretation leaves room for further interpretation and as a result the term can be further narrowed by interpretation.

Second, can the state parties continuously interpret different articles of the treaty over time? Although a continuous interpretation may be possible, it might be inappropriate to extensively do so, because of that it will be very difficult investors to know if their investments will be protected by the treaty. This uncertainty will therefore lessen the economically stimulating effect of the treaty.

Third, after the parties have interpreted an agreement, how are investors to get news of this interpretation? Considering this, both Article 102(1) of the UN Charter and Article 80 of the VCLT requires the parties to register a treaty, to which it is a party, once it is in force. Yet, when adopting a subsequent the treaty at hand stays the same, hence no change in the treaty must be registered. De lege ferenda it is therefore possible to imagine taking a leaf from domestic commercial law, where changes to agreements that affect third parties are usually publicised or announced in some type of publication, or in an appropriate manner announced. It is important, however, to here recall the relative young age of the international investment system and acknowledge that these issues might be addressed in the future.

2.3 Conclusion

It can from the previous discussion be concluded, firstly, that subsequent agreements are authentic means of interpretations whose weight in interpreting a treaty should be determined according to the clarity and precision of the subsequent agreement. Secondly,

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subsequent agreements are to identify the original intentions of the parties. Thirdly, it can be concluded that the original parties of the treaty, as masters of the treaty, has the right to interpret it, however, to what extent and in what manner it is appropriate to remove previously granted rights to investors can be discussed. Here, the criteria of scope, reasonableness and timing put forward by Roberts may be applied to give guidance.

Fourthly, it can be concluded that subsequent agreements have retroactive effect and therefore can be used as interpretative evidence in cases of damage before a subsequent agreement was signed. Lastly, it can be concluded that it can be troublesome to distinguish subsequent agreements from amendments, yet the practice of amending or modifying a treaty by a subsequent agreement is not to be presumed to have been generally recognized.

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3 The definition of Investment

There is no uniform definition of the term investment in international investment law.

Instead, to provide an effective overview, the following will discuss a categorisation used by a number of authors, divided into three types of investment agreements: (i) a broad asset-based definition with a non-exhaustive list of investment forms; (ii) broad asset- based definition specifying substantive investment characteristics as well as investment forms; and (iii) an asset-based definition with an exhaustive list of investment forms.

However, these definitions of investment can further be refined through adding a negative definition of investment, to specify certain investment forms. Examining how the term

‘investment’ is defined will provide the basis for how, in the following chapters, this definition can be narrowed.

The definition for what constitutes an ‘investment’ is significant because of two related facts. Firstly, what qualifies as an of ‘investment’ provides which actions grants the substantive protection of the treaty. Secondly, the terms definition and scope of application affect the jurisdictional requirement ratione materiae before an arbitration tribunal.63 The definition of ‘investment’ therefore serves a vital role in the application of international investment agreements and, as previously touched upon, makes the term suitable for interpretation to address unclarities in investment agreement.

3.1 Broad asset-Based Definitions of investments with an illustrative list of investment forms

The most common method to define investment is through stating that an investment comprises of ‘every kind of asset’ followed by a illustrative non-exhaustive list of assets.64 An example of this approach is Article 1(1) of the German-Bosnia and Herzegovina BIT (see Box 1). This list usually includes:

(1) movable and immoveable property and any related property rights; (2) various types of interests in companies or any other form of participation in a company, business enterprise, or joint venture; (3) claims to money and claims under a contract having a financial value; (4) intellectual property rights; and (5) business concessions.65

63 Salacuse, p. 174; Bischoff, Happ, The Notion of Investment, International investment Law a Handbook, p. 497.

64 UNCTAD, Bilateral investment Treaties 1995-2006: Trends in Investment Rulemaking (2007), p.7-12.

65 Salacuse, p. 176.

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The fact that a list is non-exhaustive is either expressed directly, by the language ‘not exclusively’ or implied by the wording ‘includes’.

A reason for having a broad definition is to include a wide and potentially expanding spectrum of investments in response to the rapidly changing world of international finance.66 Another motive for such a broad definition is to express that the form of the investment is irrelevant in order to gain protection from the treaty, this enables the treaty to cover types of investment such as portfolio investments and intellectually property rights.67 Because of the non-exhaustive list, it is not necessary to find the type of investment one seeks coverage for specified in the list. Instead, the investment at hand can fall under the category “asset”. With that said, a treaty may still limit the definition of an investment by specifying which specific types of investments are not covered by the treaty.68

However, the disadvantage of this type of definition is the other side of the coin of its advantages, namely, being overly broad covering every type of investment. It is these types of broad definitions that have led to uncertainty of which types of financial actions are to be covered by the treaty, and to the inclusion of investment forms which later have been criticised and questioned by governments.

When considering interpreting and limiting this type of definition the first thing one needs to consider is that the outspoken original intention of the parties to include ‘every type of investment’. This might at first seem to be an obstacle intending the treaty to limit the definition, recalling Article 31 of the VCLT ‘[a] treaty shall be interpreted in good

67 See infra 4.10 and 4.12.1.

Box 1

The term ‘investment’ comprises every kind of asset, in particular, though not exclusively:

(a) Movable and immovable property as well as any other right in rem, such as mortgages, loans and pledges;

(b) Shares of companies and other kinds of interest in companies;

(c) Claims to money which has been used to create an economic value or claims to any performance having an economic value;

(d) Intellectual property rights, in particular copyrights, patents, utility, model patents, industrial designs, trade-marks, trade-names, trade and business secrets, technical processes, know-how, and good will;

(e) (e) Business concessions, under public law, including concessions to search for, extract and exploit natural resources.

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faith 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’. However, because the definition of investment in dictionaries are very broad because there is no recognized definition of

‘investment’ in investment treaty law, and this leaves room for the parties to interpret it.69

Adding to this, by thusly interpreting the term ‘investment’, the agreement still includes

‘every type of it (investment)’. However, with that said, it would probably be difficult to completely remove a form of investment listed in the illustrative list. Although not being binding, it would be difficult to argue that it was not in some form the original intention of the parties to include that item. However it is also possible to imagine tribunals giving the state parties some leeway due to the broad original definition and due to these lists are in fact not binding. To conclude, it seems possible to interpret this type of definition to limit scope, albeit exactly how far this can be done is uncertain.

3.2 Broad asset-based definitions specifying substantive investment characteristics as well as illustrative forms

A second method to defining investment combines a broad asset-based definition together with certain substantive characteristics. An investment is therefore defined as ‘an asset that has the characteristics of an investment’. As with the previous definition of investment this also includes a non-exhaustive list of forms that such an asset can take.70

This method is used in Article 1 of the 2005 United Stated of America-Uruguay BIT which specifies that an asset needs to have the characteristics of an investment:

‘commitment of capital, or other resources, the expectation of gain or profit and the, or the assumption of risk’ (see Box II).71 This is then followed by a list of forms of an investment can take. Because the text references a non-exhaustive list of investment characteristics, this implies that other traditional characteristics of investment may also have to be satisfied for an asset to be covered by the treaty.72 This definition is used to distinguish investments from and exclude transactions of a more ordinary and short-term

69 Consulting the Oxford English Dictionary ‘investment’ in this context is defined as: [t]he use of money, esp. revenue from trading, to purchase goods for further trade; an instance of this or ‘[t]he use of money or capital to purchase an asset or assets (such as property, stocks, bonds, etcetera) , in the expectation of earning income or profit over time’.

71 Treaty between the United Stated of America and the Oriental Republic of Uruguay Concerning the Encouragement of Reciprocal protection of investment (4 November 2005).

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character; this is based on the belief that long term investments add to a country’s development to a higher degree than short-term investments.73

The benefit of applying substantive investment characteristics are that the parties to the treaty have the possibility to limit the scope of ‘investment’ in a less restrictive manner than by a fixed list definition, which may, as, with the open list definition, be advantageous considering new methods of investments as the field of investments develops. This type of definition also lets the parties define the frame and method giving tribunals a guide for how to approach the question. The disadvantage of adopting objective criteria is that these might just pass the buck along, i.e. it is still up to the tribunal to decide how much capital needs to be committed, what the minimum size of a company is, and how investment risk is to be addressed.74

Because this definition as well includes ‘every type of investment’ and an illustrative list, interpreting this definition is similar to interpreting the preceding definition. This definition however differs from the preceding in that is contains the substantive investment criteria. These characteristics are also open for interpretation which gives the opportunity for the state parties to further define these. How this can be done will be further discussed in the next chapter.

74 Scope and Definition, p. 115.

BOX 2

‘investment’ means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment. Including such characteristic as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.

(a) an enterprise;

(b) Shares, stock and other forms of equity participation in an enterprise;

(c) Bonds, debentures, other debt instruments, and loans;

(d) Futures, options, and other derivatives;

(e) Turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts;

(f) Intellectual property rights;

(g) Licenses authorization, permits, and similar rights conferred pursuant to domestic law;

and

(h) Other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, and pledges.

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3.3 Asset-based definitions with an exhaustive list of investment forms

Contrary to the previous categories, this definition includes an exhaustive list of assets that are covered by the treaty. An example of such a ‘closed list’ definition of investment is the Canadian model BIT of 2004 (see Box 3). Although this method of defining

‘investment’ limits the forms of investment to those listed, the definition is usually broad enough to include all the major investment forms currently employed by investors. To this definition can be added clarifications and exclusions ensuring that assets lacking traditional characteristics required by the treaty will not be protected. 75 Hence, the purpose of choosing this method of defining investment is to be in control of which types investments are covered by the treaty. This might be a reason why an UNCTAD study noted that, among newer treaties, this approach is an emerging trend.76

Applying a closed list definition therefore has the advantage of offering a broad but finite list of covered assets and giving specific definitions of assets so as to make clear which assets are covered and which are not.77 By including or excluding certain financial actions of investment such as pre-investment expenditures, minority shareholders, indirect investments, etcetera, the parties can themselves precisely specify the scope of the treaty. This will also be easier to do as the corpus of investment treaty law develops.

The main disadvantage of the asset-based definition with an exhaustive list is the rigidity of the definition. If the parties of the treaty are unhappy with how they have interpreted a treaty, as case law develops, and therefore wish to change the interpretation this might have to be done by negotiating an amendment. This is because the original will of the parties have already been interpreted, if the parties wishes to agree on something that differs from that original will, this would constitute a new agreement.

Considering that the fixed-list is meant to be a complete list of the included investment types it is difficult to argue that the definition should include additional, or for that matter fewer, forms of investment than those listed. Hence, when interpreting this definition the parties seems to be limited to define the listed investment types by defining them more thoroughly or agreeing on special requirements for an asset to be covered.

However, because of the limited scope of this definition to start with this type of definition, there is less of a need to clarify and limit it.

76 UNCTAD, Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking (2007), p. 7-12.

77 Scope and Definition, p. 34.

Interpreting the Term ‘Investment’ in International Investment Law by Subsequent Agreements

Department of Law Spring Term 2020

Master’s Thesis in International Investment Treaty Law 30 ECTS