Q1.

Overseas Investment Co (OIC), a multinational enterprise with its headquarters in State W, entered into a joint venture with Investment Promotions Facility Ltd (IPF), a stateowned company whose board of directors and principal officers had been appointed by the minister of finance of State X. The joint venture agreement provided that, in the event of any dispute, the dispute would be resolved by arbitration. Additionally, because the law of State X says that foreign investment agreements must be approved by the minister of finance, the minister was present at the signing of the agreement; and after representatives for the two parties put their signatures on the document, the finance minister added the words "approved and ratified" and his own signature. Unfortunately, a dispute did arise, and OIC initiated an arbitration proceeding according to the procedures set out in the joint venture agreement, naming both IPF and State X as parties. State X responded by arguing that the arbitration tribunal has no jurisdiction over State X. Should State X be excused from participating in the arbitration proceeding?

Approval of foreign investment applications

Approval (or disapproval) of an application is usually done by an informal letter.

However, if a foreign investor asks for an incentive from a host State or the foreign investor is asked to make a concession, the arrangement agreed will be set out in a formal investment agreement.

Typically, the investment agreement will be governed by the host State's contract laws.

Any disputes will be resolved in the host State unless the parties agree otherwise.

Arab Republic of Egypt v Southern Pacific Properties, Ltd. et al.

1984 France Court of Appeals of Paris

Southern Pacific Properties (SPP), a Hong Kong company, entered 2 contracts to build and operate a tourist centre near the Giza pyramids.

The first contract was between SPP, the Egyptian General Organization for Tourism and Hotels (EGOTH), an Egyptian state owned corporation, and the Egyptian government represented by the Minister of Tourism who had signed as the representative of the government. This first contract did not provide for arbitration of disputes.

The second contract was between SPP and EGOTH. The Egyptian Minister of Tourism had endorsed this contract with the words "approved, agreed and ratified". This second contract provided for arbitration of disputes.

Following a worldwide campaign opposing the tourist centre, the Egyptian government withdrew its approval.

SPP initiated arbitration against both EGOTH and the Egyptian government.

The Arbitration Tribunal decided that it had jurisdiction over both EGOTH and the Egyptian government. The Tribunal orderedthe Egyptian government to pay SPP damages of US$12.5m plus interest.

Held: Although Egyptian law required that the Minister of Tourism had to approve any agreement relating to tourism, by doing so he was not making the Egyptian government a party to the second contract.

By endorsing the second contract with the words "approved, agreed and ratified", the Tourism Minister was only giving the endorsement required by Egyptian law.

Accordingly, the Arbitration Tribunal had no jurisdiction over the Egyptian government and the damages order against the Egyptian government was set aside.

Q2.

In Nissan Motor Mfg Corp, USA v United States, a Japanese company was required to pay customs duty in a foreign trade zone (FTZ) established in Tennessee. Does this defeat the purpose of a FTZ or free trade zone? Was the case specific to US law or do you think there are principles discussed that could be applied to similar disputes on other jurisdictions?

Nissan Motor Mfg. Corp., USA v US

1989 US Ct. of Appeals

Nissan imported production machinery into the US to be installed and used in its assembly plant that was a FTZ subzone.

The Foreign Trade Zones Act provided that customs tariffs were not payable on goods that were "merchandise" brought into an FTZ subzone for the purpose of being "stored, sold, distributed, graded, cleaned, mixed with foreign or domestic merchandise, or otherwise manipulated, or...manufactured": s3.

The US Customs Service charged Nissan customs tariffs on the machinery as it was not "merchandise" (not for sale).

Nissan argued that the machinery was "merchandise" that entered into a FTZ and so it became subject to customs tariffs only if it was thereafter sent into the customs territory of the US.

Held: The machinery was outside the definition of "merchandise" as it was installed and operated, as opposed to being used for the activities listed in s3 that could be done without making

goods subject to customs tariffs.

Q3.

The Modern Exploration Co (MEC), a firm organised in State P, entered into an investment contract with State Q to explore for and harvest magnesium nodules from the seabed of State Q's continental shelf. MEC agreed to pay State Q US$100 million in advance for this privilege. However, State Q did not inform MEC that State Q would be promulgating certain environmental protection laws within days after signing the investment contract that would make the endeavour so expensive that it would be effectively impossible for MEC to perform. When MEC discovered this, MEC asked State Q to either modify the environmental laws or give MEC back its money. State Q refused. MEC then initiated an arbitration proceeding under the auspices of the ICSID in accordance with the terms of the investment agreement and State Q law. How should the tribunal rule?

Modification of foreign investment agreements

l Investment laws usually provide that any modification to a foreign investment agreement has to be approved by a host State.

l Investment laws and investment agreements usually require the host State to act in "good faith" on requests for modification.

l This is also the rule applied by Courts and tribunals in cases where an investment law or agreement does not set a standard.

Wintershall AG et al. v Govt. of Qatar

1981 Ad Hoc Tribunal

Qatar entered into an oil Exploration and Production Sharing Agreement (EPSA) with 5 foreign companies.

The EPSA granted the foreign companies the exclusive right to explore, drill, and produce petroleum in a defined area offshore from Qatar. The EPSA also contained provisions allowing it to be terminated by Qatar if time limits were not met.

The foreign companies did not find oil, but had not been allowed by Qatar to explore and drill in an area called "Structure A" due to a border dispute between Qatar and Bahrain.

An alternative proposal relating to natural gas production was put to Qatar, but this was not accepted based on a lack of economic feasibility.

Qatar therefore terminated the EPSA.

The foreign companies argued that Qatar had breached the EPSA and expropriated their rights by:

denying them permission to explore for oil in "Structure A"; and

failing to agree to the natural gas production proposal they had put.

Held: Qatar's termination of the EPSA was ineffective as the foreign companies had yet to be allowed to explore and drill "Structure A", and Qatar had failed to inform them of the border dispute with Bahrain. The companies were entitled to explore and drill "Structure A" once Qatar settled its dispute with Bahrain.

In regard to the natural gas production proposal, Qatar had negotiated in "good faith" and had no duty to accept the proposal. Qatar's rejection of the proposal was justified under normal commercial practice in that it did not believe the proposal was economically viable.

Q4

Turnip Company, a multinational enterprise headquartered in State T, ordered its subsidiary in State R, the Radish Company, to close and to declare itself bankrupt. The Radish Company did so. However, Radish Company did not give its employees adequate notice of its closing, and its assets were inadequate for funding the termination payments due the employees under State R law. In the bankruptcy proceeding, the employees asked the bankruptcy tribunal to order Turnip Company to fund the termination payments that Radish Company owed them. In support of this, the employees introduced evidence establishing that Turnip Company had known for some time that Radish Company was an unprofitable subsidiary and would have to be closed; and that, in anticipation of this, Turnip Company had taken assets belonging to Radish Company out of State R so that they would be unavailable at the time of the bankruptcy liquidation. How should the tribunal rule?

Protection of subsidiaries

Several States provide some protection for subsidiaries from the disadvantageous decisions of their parent company.

These provisions are intended to preserve the capital basis and financial viability of the subsidiary.

Some States, like Germany, treat the parent and subsidiary like a combined company, requiring the parent to compensate the subsidiary for any disadvantageous effects of its decisions.

Q5

The Loewen Company (Loewen) is a Canadian-based company that has invested in more than 1,100 funeral homes across Canada and the United States (US). Its aim was to buy up as many funeral homes as possible so that it could boost prices charged and its profit. O'Keefe ran a local funeral business in Mississippi US and sued Loewen in Mississippi state Court alleging that Loewen had committed unlawful anti-competitive acts intended to drive O'Keefe out of business. At the trial, both O'Keefe's legal counsel and the trial judge made repeated references to Loewen's Canadian nationality, made suggestions that Loewen did business only with white people, and made appeals to class-based prejudice. The Mississippi jury upheld O'Keefe's claim and rendered a verdict of $500 million against Loewen. The trial judge was African-American and so too were 8 of the 12 jurors. Loewen appealed the jury verdict to a higher court but wanted to be exempt from posting a bond of 125% of the damages owed ($625 million), which bond posting was common practice in US state Courts. Loewen's request to be exempt from the rule was rejected and an appeal by Loewen against the rejection was dismissed by the Mississippi Supreme Court. Rather than post the large bond or pursue other legal avenues, Loewen reached a settlement with O'Keefe for approximately $150 million, ie 30% of the jury verdict. Loewen then filed suit against the US in ICSID relying on Chapter Eleven of the North American Free Trade Agreement claiming that the bond requirement effectively forced Loewen to settle and denied its right to appeal, which was a violation of Art 1105(1) that provides: "Each party shall accord to investments of investors of another party treatment in accordance with international law, including fair and equitable treatment ...". Loewen seeks $725m in compensation from the US for the violation of its rights as an investor. Note: A lack of due process leading to an outcome which offends a sense of judicial propriety is enough for "manifest injustice" under international law. How should the ICSID tribunal rule?

FOREIGN INVESTMENT DISPUTE RESOLUTION

Topics

1966 Convention on the settlement of investment disputes between States and nationals of other States

International Centre for the Settlement of Investment Disputes (ICSID)

1966 Convention on the settlement of investment disputes between States and nationals of other States

Also known as the "ICSID Convention" or the "Washington Convention" and sponsored by the World Bank.

Purpose of the ICSID Convention is to encourage private investment in underdeveloped countries.

Provides a mechanism for resolving investment disputes between an investor and the State of investment.

An exception to the traditional notion of International Law which does not give rights to individuals.