A state may enter into an investment agreement with an investor160 when the latter envisages making an investment.161 A contract and rights relating thereto are assets that can be expropriated.162 Investment contracts are binding on a state because of the maxim pacta sunt servanda.163 Like BITs, TIPs and investment laws of host states, investment contracts may provide for an investor to refer an investor-state dispute to ISDS. As a result, 16.8 percent of ICSID arbitration cases opened up to 30 June 2017
No. ARB04/6) Award of 19 November 2009 at para 283, 376; Tecnicas Medioambienta Tecmed S.A v The United Mexican States (ICSID Case No. ARB (AF)/00/2) of 29 May 2003 (Tecmed) at para 201; Wena Hotels Limited v Arab Republic of Egypt (ICSID Case No. ARB/98/4) Award of 8 December 2000 at para 131 and 134.
159 Bernhard Von Pezold at para 521. The annulment of this award was pending at the time
of writing.
160 Or a state may contract with an investment (i.e. the entity that will hold an investment),
depending on the circumstances and provisions of the applicable regulatory instrument.
161 For a discussion of international investment contracts see Dumberry P “International
Investment Contracts” in Gazzini T and Brabandere E (eds) International Investment Law: The Sources of Rights and Obligations (Martinus Nijhoff Publishers Leiden 2012) at 215-243; Von Walter A “Investor-State Contracts in the Context of International Investment Law” in Bungenberg M et al (eds) International Investment Law: A Handbook at 80-92; Salacuse The Law of Investment Treaties at 60-62.
162 See for example Azurix at 112 para 314; Biwater Gauff at para 453; Emmis International
Holding, B.V and Emmis Radio Operating, B.V and Mem Maygar Electronic Media Kereskedelmi Es Szolgaltato KFT. V Hungary (ICSID Case No. ARB/12/2) Award of 16 April 2014 at para 163, 221; White Industries Australia v The Republic of India (Ad hoc UNCITRAL Tribunal) Final Award of 30 November 2011; Southern Pacific Properties (Middle East) Limited v Arab Republic of Egypt (ICSID Case No. ARB/84/3) Award 20 May 1992 para 164-165; Vivendi award of 2010 at para 7.5.4, 7.5.5 – 7.5.34; Schreuer C (2005) “The Concept of Expropriation under the ECT and other Investment Protection Treaties” at para 65 http://www.univie.ac.at/intlaw/pdf/csunpublpaper_3.pdf (Date of use: 20 October 2017).
163 Desert Line Projects at para157. This principle is in line with Article 26 of the Vienna
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were based on consent to ISDS provided in investment contracts.164 It is also noteworthy that the arbitral award of USD 935 million made in Al-Khafira v Libya was based on breach of contract.165
However, unlike with breach of treaty, breach of an investment contract by a state does not automatically amount to an internationally wrongful act.166 Something additional is required to elevate breach of contract to the international plane, as explained below. An investor faced with a breach of a contract by a host state must first exhaust local remedies, if any are provided for in a contract or the internal law of the host state.167 Only if the alleged breach of contract is followed by the denial of justice in the host state, if the breach of contract amounts to breach of a treaty, if the contract is protected by an umbrella clause in a treaty,168 or if a state acted in its jus imperii capacity when it
164 International Centre for Settlement of Investment Disputes “The ICSID Caseload
Statistics”, Issue 2017-2 at 10
https://icsid.worldbank.org/en/Documents/resources/ICSID%20Web%20Stats%202017- 2%20(English)%20Final.pdf (Date of use: 10 March 2018).
165 Mohamed Abdulmohsen Al-Kharafi and Sons Co. Kuwaiti Company v The Government of
The State of Libya and Others (PCA Case No. 2011-09) Award on Merits of 2 March 2015. An earlier decision of 2004 that was also based on breach of contract by a state is Ceskoslovenska Obchodni Banka, A.S. v Slovak Republic (ICSID Case No. ARB/97/4) Decision of the Tribunal on Objections to Jurisdiction of 24 May 1999 (CSOB).
166 Abaclat and Others (Case Formerly known as Giovanna A Beccara And Others) v The
Argentine Republic (ICSID Case No. ARB/07/05) Decision on Jurisdiction and Admissibility of 4 August 2011 para 316; Biwater Gauff at para 457; SGS Société Générale de Surveillance S.A. v Republic of the Philippines (ICSID Case No. ARB/02/6) Decision on Jurisdiction of 29 January 2004 at para 161; United Nations (International Law Commission) “ARSIWA” Commentary at 41 para 6 http://legal.un.org/ilc/sessions/53/ (Date of use: 02 October 2017).
167 The decision in Vivendi Universal S.A. v. Argentine Republic (ICSID Case No. ARB/97/3)
Decision on Annulment of 10 August 2010 at para 96 entails that a dispute regarding breach of contract must first be resolved according to the internal law of the host state.
168 An umbrella clause is a treaty provision in terms whereof state parties agree to
honour their contractual obligations towards investors, default of which renders breach of a contract to be breach of treaty. For a definition, history and application of an umbrella clause see Sinclair AC “The Origins of the Umbrella Clause in the International Law of Investment Protection” in Reinisch (ed) Classics in International Investment Law Vol I
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committed the breach,169 will the breach create an international responsibility for a host state.170 In such an event, ICSID or other international arbitration, or other remedies such as diplomatic protection can in qualifying instances be brought.171
The same facts that found an alleged breach of contract may also found a claim for breach of a treaty.172 Whether breach of a contract also amounts to a breach of treaty or not depends on the facts of each case. As the tribunal in Vivendi v Argentine held, a state may commit a breach of the treaty without breaching a contract, and vice versa.173 The fact that an alleged breach is the result of a state having exercised a contractual right or remedy does not exclude the fact that such conduct could be a breach of a treaty or an expropriation.174 Furthermore, where as a result of an alleged breach an investor
(Edward Elgar Cheltenham 2014) at 619-642; Salacuse The Law of Investment Treaties at 271-283. The first umbrella clause was contained in the Germany-Pakistan BIT of 1959 (Sinclair “The Origins of the Umbrella Clause in the International Law of Investment Protection” at 641). The first tribunal to consider an umbrella clause was Fedax N.V. v The Republic of Venezuela (ICSID Case No. ARB/96/3) Decision of the Tribunal on Objections to Jurisdiction of 11 July 1997.
169 Schreuer “The Concept of Expropriation under the ECT and other Investment Protection
Treaties” at 24 para 65-77 http://www.univie.ac.at/intlaw/pdf/csunpublpaper_3.pdf (Date of use: 20 October 2017).
170 United Nations (International Law Commission) “ARSIWA Commentary at 41(6)
http://legal.un.org/ilc/sessions/53/ (Date of use: 02 October 2017). For examples of denial of justice see United Nations Conference on Trade and Development “Fair and Equitable Treatment”, UNCTAD Series on Issues in International Investment Agreements II (United Nations New York and Geneva 2012) at 80-81
http://unctad.org/en/Docs/unctaddiaeia2011d5_en.pdf (Date of use: 20 October 2017). In the SADC context see Mike Campbell at 26-41. In Biwater Gauff the tribunal held that denial of justice need not be proved before the breach of contract can amount to expropriation. The tribunal said that it must first be determined whether a state acted as an ordinary party to a contract, or whether it used its powers as a sovereign (at para 458).
171 Booysen H Principles of International Trade Law As A Monistic System 1st ed Revised
Reprint (Interlegal Monument Park South Africa 2007) at 506.
172 Bandiyir at para 148.
173 Vivendi (Decision on Annulment) at para 95-96.
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has a right of recourse against a host state in terms of both a treaty and a contract, it may pursue its rights in terms of the treaty, in addition to those in terms of a contract.175 Even when an investor has elected to pursue its remedies in terms of a contract, it still has the right to pursue those in terms of the treaty, and can abandon the former.176 Where it is alleged that breach of a contract is also a breach of a treaty, it must be shown that the host state concerned acted as a sovereign (‘puissance publique’), and not as an ordinary party to a commercial transaction, when it committed the alleged act.177
Breach of contract entails that a host state must pay compensation for the consequences thereof.178 Breach refers to breach in the general sense of the failure, neglect or refusal by a host state to adhere to an agreement.
Whether or not a contract was breached is assessed in terms of the internal law of the relevant host state, not international law.179 Thus where a contract was breached, and the breach amounts to a breach of an international obligation as discussed above, then
the military to force Bandiyir from the construction site, alleging that this was a termination of contract and not expropriation.
175 Bandiyir at para 167.
176 This is what the claimant did in Bandiyir, and the tribunal found that it was not an abuse
of process (at para 171-173).
177 Azurix at para 53; Biwater Gauff para 492, 494, 500 para 106; para 502; Impregilo
S.p.a v Islamic Republic of Pakistan (ICSID Case No. ARB/03/3) Decision on Jurisdiction of 22 April 2005, confirmed in Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC B.V. v Republic of Paraguay (ICSID Case No. ARB/07/9) Further
Decision on Jurisdiction of 9 October 2012 at para 211, 241-242; Mr Frank Charles Araf v Republic of Moldova (ICSID case No. ARB/11/23) Award of 8 April 2013 at para 536; Tulip Real Estate at para 354-356; Schreuer “The Concept of Expropriation under the ECT and other Investment Protection Treaties” para 66
http://www.univie.ac.at/intlaw/pdf/csunpublpaper_3.pdf (Date of use: 20 October 2017).
178 Booysen Principles of International Trade Law as a Monistic System at 508. 179 Vivendi (Decision on Annulment) at para 96.
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the consequences of the breach will follow the rule of international law to the effect that reparation is payable.180