k8·凯发天生赢家·一触即发(中国区)官方网站

Limitations on Compensation in Int'l Investment Arbitration

2021-06-22

外商直接投资（Foreign Direct Investment “FDI”）是当今国际社会之间普遍的经济活动。主权国家之间签订的双边投资协定（Bilateral Investment Treaty “BIT”）在其中既起到桥梁作用，也是投资方（私有投资者）与被投方（东道国政府）划定投资活动中权利义务的框架指引。实践中，受限于地方法律和政治环境的不确定性，投资者可能为了推进投资项目的快速落地、顺利经营，作出违反商业道德或涉嫌违法的行为。但是，双边投资协定通常包含“干净的手”条款（“Clean Hands” Doctrine），即通过行贿而获得的投资项目、投资收益可被东道国依法征收。因此，如果投资者与东道国就投资项目产生争议、申请国际直资争议解决中心（ICSID Arbitration）或其他机构进行仲裁时，投资者的过失、过错程度是仲裁庭衡量其获得东道国赔偿、补偿金额的重要因素。本文梳理国际直资仲裁领域的重要判例，并摘取其中值得借鉴参考的内容。

Foreign direct investment (FDI) refers to capital transactions made by private sectors in foreign states^[1]. Investors engaged in these activities are typically motivated by comparative advantages among different countries, such as tax incentives, access to raw materials, or potentials for new markets. To host state governments, on the other hand, FDI can offer a variety of benefits as well, including growth in economy and imports of technologies^[2]. Over the past two decades, FDI has been a remarkable phenomenon in the international community. Although in the past year, the international community was severely impacted by the COVID-19 pandemic, FDI activities, according to the World Investment Report of 2020 drafted by UNCTAD, the aggregate flow of global FDI was estimated to be 1.5 trillion USD, with more than 100 sovereign states involved^[3].

The unique relationship between foreign investors and host state governments calls for many questions, and disputes frequently arise when investors suffer economic losses as a result of regulations imposed or decisions made by the host state government^[4]. In the particular context of FDI, international arbitration has become a very popular and effective venue for investors to seek compensations of damages against the host state government. There are two reasons. First, compared to litigations in domestic courts, the tribunals of international arbitration provides a neutral forum for parties to present claims, and arbitrators are procedurally selected and appointed upon parties' consents^[5]. Second, institutions that provide arbitrations, such as International Center for Settlement of Investment Dispute (ICSID), or Court of Arbitration of International Chamber of Commerce (ICC), are legally recognized and honored by the majority of United Nation member states, which makes the enforcement of an arbitration award realistic^[6].

This paper covers an important aspect of FDI arbitration: the limitations on compensatory damages sought by foreign investors against host state governments. Specifically, it analyzes scholarly writings as well as precedent arbitration rulings on the subject matter.

A bilateral investment treaty (BIT), or a multilateral trade agreement such as North America Free Trade Agreement(NAFTA), is the foundation of nearly all investor-state arbitration claims^[7]. To investors, a BIT represents an official guarantee of protection and promotion of private investments of the host state government; To host state governments, a BIT outlines the boundaries of substantive and procedural rights of investors from the other state^[8]. When arbitration tribunals make rulings on investor-state disputes, the arbitrators usually consider two factors: the language of the BIT provisions; and the specific situation in which the dispute arose^[9].   

Previous arbitration cases are not binding upon tribunals in the future, regardless of whether the tribunal is initiated through a particular institution or not. However, in the past few decades, the rulings of international tribunals have demonstrated a great degree of consistency on some of the most contested issues, and in the context of investor-state dispute, tribunals often cite prior cases in deciding an immediate case^[10]. Therefore, precedents are of valuable references in addition to interpretations of a BIT and facts of a case.

There are three types of situations in which tribunals have denied, in part or in whole, the remedies sought by investors. First, the investor has engaged in bribery acts in the process of establishing or operating the investment projects; Second, the governmental taking of investments qualifies as a legitimate exercise of state police power; Third, the investor has contributed to the damages incurred.

When investors are found to have engaged in bribery acts for the purpose of procuring investment projects, tribunals will dismiss the case on admissibility or jurisdiction, because bribery is an internationally condemned behavior, and once such illegality is ascertained, tribunals do not have jurisdiction over the dispute anymore, and investor's claim will be rejected^[11]. The admissibility issue originates from general principle of international law, and in the particular context of FDI, virtually all BITs include a "clean hands" provision that requires any investment "made in accordance with ...(host state's)...  laws and regulations" under its definition of "protected investments"^[12].

However, the "clean hands" requirement presents two perplexed situation. First, if an investor have engaged in bribery acts, there will always be at least one other party involved, and usually that party is a member from the host state government. In World Duty Free v. Kenya, for example, the party who accepted the bribe from the investor was a top-level governmental official - the president of Kenya^[13]. But as the respondent of the case, the Republic of Kenya went away unpunished; the investor, on the other hand, was denied all of its compensations claims. The investor in World Duty Freeinitiated a construction project in The Republic of Kenya in early 1990s, but before the investor finished the construction, the government unilaterally terminated the contract, and the investor was unable to realize the profits. When the investor brought claims before ICSID, the State used "clean hands" provision as a defense and it rendered the investment of World Duty Free unprotected under the contract^[14]. Similarly, in Metal Tech v. Uzbekistan, the investor submitted request for arbitration before ICSID after the investments were in effect taken by a municipality of Uzbekistan, but the State raised "clean hands" defense under the Israel-Uzbekistan BIT, that the investor was not entitled to any compensation as the substantive investment came from briberies. The tribunal eventually dismissed the case on jurisdiction, because the investor could not provide a reasonable explanation for the payments made to a governmental agency during the first three years of the investments^[15]. In other cases where corruptions are alleged, the investors were similarly disadvantageous because very likely they would be barred from getting compensated, regardless of the fact that respondents were equally blamable for corruption, or even soliciting bribes^[16].

The second puzzling issue presented by "clean hands" provisions is the proof problem. When respondent states raise bribery allegations, the ICSID tribunals usually approach the issue on a case-by-case basis to determine whether respondent states have met the standard of proof, and there were instances where tribunals recognized the unique difficulty in proving corruption due to the fact that briberies are intentionally concealed for obvious reasons^[17]. The ICC tribunals, on the other hand, have applied more frequently a standard of "clear and convincing evidence"^[18]. Although there is no international consensus on the proof standard applicable, respondent states rarely succeed in having claims dismissed when the tribunals apply the higher standard of proof^[19]. One reason for tribunals to adopt the higher standard of proof is the balance of probability and equal treatments of the parties^[20]. When a host state government cannot meet a standard of proof proportionate to the gravity of its allegations of "unclean hands", it should not be excused of its liability^[21]. In other words, investors cannot claim any recovery or compensation for lost investment when they are found with bribery acts, but the burden of proving such illegal acts rests on the respondent.

In addition to corruption and bribery, a state's legitimate exercise of its police power does not automatically give rise to investment claims, even if the state's police power materially frustrates the investments and causes economic damages to the investor.

Investor-state tribunals recognize and acknowledge the use of state police power, and under a limited number of circumstances, the state is not obligated to pay compensation. In Methanex v. United States, the investor was prohibited from continuing the use of a gasoline additive after a new legislation was passed^[22]. The tribunal in Methanex took into consideration the state's authority in regulating matters concerning serious environmental risks, and denied investor any recovery^[23]. Similarly in Tecmed v. Mexico, the tribunal applied the police power standard. The ruling was in favor of the investor Tecmed Medioambientales, but it was determined this way because the respondent state's regulatory activities did not constitute a legitimate exercise of police power: instead of protecting the environment from hazardous waste, the government nullified several landfill construction project for political purposes^[24].

National security as well as economic stability are legitimate state interests as well, and when a state government invokes police power under these circumstances, it can deprive private property or contractual rights of foreign investors without paying compensation^[25]. In CMS Gas v. Argentina, the state government terminated the contract with the investor for national economic emergency reasons^[26]. The tribunal ruled that the investor was entitled to compensations, but it was mainly because the host state government could not justify the more favorable treatments it accorded to other investors during the same economic crisis^[27]. In FDI arbitrations, tribunals have rarely challenged the authority of a sovereign state, but they have placed emphasis on the fair and equitable standard when the police power or regulatory activities are in question^[28]. Similar principles apply to claims involving national security issues as well. For example, member states of The Organization for Economic Cooperation and Development (OECD) are all subject to scrutiny when they invoke the "essential security interest" in the treaty to impose regulations restrictive to foreign investors^[29]. Up to date, investor-state cases with national security matters are rare, but scholars around the globe have started extensive discussions about the competing principles as well as complications associated with private investments and the security of states^[30].

The last type of limitation on remedies is investors' contribution to damages. It consists of two parts: investor's negligence in the process of investment, and investor's failure to mitigate damages after the dispute.   

The principle that remedies are barred when investors themselves have contributed to the damages comes from "ex turpi causa non oritur actio", i.e. one cannot seek remedy to damages resulted from one's own fault^[31].  In the context of FDI arbitration, similar to "unclean hands" provisions, host state governments oftentimes use investors' contribution to damage as a defense to limit remedies^[32]. Most notably in Alex Genin v. Estonia, the investor suffered a large number of financial loss in a series of banking transactions with a state-operated bank. When the dispute was submitted to ICSID, the tribunal took investor's lack of due diligence during the transactions into account^[33]. In particular, the tribunal applied a "reasonable investor" standard and determined that the investor's business practice was "unprofessional and careless" in the banking industry. As a result, the tribunal denied all the claims made and the investor assumed all the responsibilities of loss^[34]. The situation in MTD v. Chile revolves around investor's own conduct and its effects on available remedies as well, but the pertinent question became whether the investor was entitled to all or partial compensation^[35]. In MTD, the investor took on several building projects in a local area of Chile, and although the national government granted permission for the investor to commence, the constructions could not continue due to local authorities' disapproval^[36]. The tribunal carefully considered and agreed with the fair and equitable treatment claim made by the investor, but it weighed in the due diligence argument of the respondent^[37]. Eventually, the proposed amount of compensation to be issued to the investor was reduced by 50%^[38]. The tribunal found that the executives of MTD was "inconsiderate" to ignore or neglect potential non-compliance of Chilean urban regulations, and attributed half of the loss to the investor^[39].

Investors' lack of effort in mitigation can also limit the amount of remedies, and most BITs specify certain obligations of the investor in this regard. For example, in Maffezini v. Spain, the respondent relied upon the "exhaustion of local remedies" provision set forth in the Argentina-Spain BIT and argued that the investor had not satisfied this requirement yet^[40]. Occasionally, the language in provisions of BITs suggest a mandatory nature, and investors have to comply with certain procedural requirements before seeking remedies through international arbitration^[41]. Some scholars agree with placing a duty to mitigate damages on investors, while others believe that such requirement is burdensome and totally unnecessary, and this issue is still highly debated in the field of FDI^[42]. In addition, tribunals can deny claims for remedies when respondent states are able to demonstrate alternatives pursuable to investors. In Ford Aerospace v. United States, the Iran-U.S. Claims Tribunal provided an extended discussion on the duty to mitigate; and the arbitrators denied Ford of its remedies, because they found no actual economic damages to the investment other than a few legal barriers which could be easily bypassed by the investor^[43].

FDI arbitration as well as many other forms of international ADRs are emerging areas in the legal profession, and the oldest arbitration rulings are still within recent 50 years. More importantly, with the passage of the a number of bilateral or multilateral agreements such as TPP and RECP, the field of FDI arbitration will embrace a brand new era. This paper outlines one important aspect in investor-state dispute at the current stage, but many other issues and complications will surface very soon. Future researches can be dedicated to issues such as FDI and carbon tax, investment and political risks, or intellectual property protections and remedies, etc.

本文作者：

指导合伙人：