1 WTO and FDI Presentation for Vietnamese Government Officials Jaemin Lee June 30, 2011.

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WTO and FDI

Presentation for Vietnamese Government Officials

Jaemin LeeJune 30, 2011

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Order of Presentation

Investment under the WTO Framework Basic Structure of ISD Procedure Expropriation Disputes Litigation Strategy for Defendant

Government Conclusion

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Investment in the WTO Framework

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No Meaningful Regulation in the WTO

In the WTO Agreements, there is no meaningful provision for regulating investment disputes per se

The TRIM Agreement only deals with certain investment related to international goods transaction

It was too difficult to adopt an agreement on the investment area

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No Meaningful Regulation in the WTO

FDI is sometimes related with the services trade– Mode (3): Commercial Presence

But this only addresses market opening or national treatment issue– And Investment per se is still not addressed

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So, Usually Investment Issues Come Up in an FTA or BIT

BIT and FTA are treaties where investment protection and dispute settlement procedure are extensively provided for the first time– These are bilateral treaties

Consequently, an FTA or BIT usually provides the first instance where this particular issue is extensively discussed

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Basic Structure of the ISD Procedure

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What is Investor-State Dispute (“ISD”) Settlement Procedure?

Foreign investors increasingly make investment in another country (“host state”)

As a result, there are increasing legal disputes, domestically and internationally, involving foreign investments

Some of the disputes are between foreign investors and the governments of host states– For instance, a dispute between the Government of

Korea and a U.S. investor – ISD is only applicable to this type of dispute

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For a dispute, a foreign investor can always go to the court of the host state asking for judicial review

The problem here, however, is that the decision maker is the opposing party– The judiciary is a branch of the host government

As a result, from the perspective of foreign investors the fairness problem arises

There has been consensus in the international community to address this problem

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So, a new dispute settlement system has been

adopted by many countries since 1966 – Through bilateral or multilateral treaties

Under this system, the foreign investor can now bring a legal claim to an international arbitration– In addition to traditional judicial review– Composed of panelists from third parties– Considered by foreign investors to be more neutral

and reliable

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Unique Traits of the ISD Procedure

Departure from the traditional state-to-state dispute settlement mechanism under international law

An additional choice available only to the foreign investor

Applicable only to an investment dispute

Invites new dynamics and considerations in dealing with this procedure

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Positive Aspect of the ISD Procedure (1)

Neutral Forum Avoid a situation where a disputing

party becomes a decision maker Minimize appearance or actual

occurrence of unfairness in substance and procedure in a specific dispute

Select arbitrators from non-parties as opposed to judges in respective national courts

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Investment-Specific Expertise Parties can select arbitrators familiar with

international legal disputes Parties can select arbitrators with expertise in

investment disputes specifically Parties can select arbitrators who are more

familiar with jurisprudence and interpretation of the terms used in a particular treaty covering investment

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Prompt Solution of a Dispute ISD procedure allows a relatively prompt solution of an

investment dispute– Real parties’ direct participation in the dispute settlement

mechanism Avoid a state-to-state dispute under the traditional

setting– In the absence of the ISD procedure, if an investment

dispute is not solved, the party against whose investor a final adverse ruling is issued can still exercise the right of diplomatic protection

– ISD procedure can preempt such a state-to-state dispute

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Keeping up with International Standard Over time, the ISD mechanism has been widely

accepted in the international community– Many BITs and FTAs accept this mechanism

At least, in investment disputes, this system has now become one of common features

As with any other terms of a treaty, a country can still refuse to accept the system as a sovereign state, but one can argue doing so deviates from the general direction

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Negative Aspect of the ISD Procedure (1)

Different Dynamics and Mechanics This is basically a “1.5 Track” Unlike traditional disputes between states, a

dispute settlement procedure between a state and an individual brings different dynamics and mechanics– More aggressive litigation tactic– Harassment litigation– Prolonged litigation with all-out efforts– Less concern for minimum courtesy and mutual

respect as found in a state-to-state dispute

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Escalation in Number and Intensity of Disputes

As a result, the number of disputes is likely to increase under this system– But at this point the statistical data do not

necessarily support this argument The intensity of disputes can also increase Although with varying degrees, it is likely to

resemble international litigation between private parties

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Host State’s Inherent Defensive Position Host state can only defend against a claim

brought by a foreign investor Host state’s government usually does not

have legal expertise in this particular area Host state’s government usually does not

have financial resources to fully respond to all allegations in all procedures

Chilling effect problem

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Judging Internal Policy of a Host State Increasingly, an investment dispute directly involves

the underlying intent and effect of a national policy of a host state

It is sometimes doubtful whether, in rendering a judgment, foreign arbitrators have clear understanding of a situation of a host state

If an adverse decision is rendered, it is difficult for a host state to accept it– For instance, consider a decision from a three man

panel which negates the appropriateness of the host state’s policy

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Political/Diplomatic Repercussion If a host state loses in a dispute, it has

potential to cause significant political repercussion domestically

A dispute in a volatile issue can also cause a bilateral diplomatic problem– Through a perception that foreign countries

and governments try to change an otherwise appropriate national policy of the host state

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Structural Shortcomings Comparative disadvantage for some

countries– A majority of internationally renowned

arbitrators in this particular area possesses background in Anglo-American legal system

– Major jurisprudence in this area has been developed in Anglo-American legal system

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Structural Shortcomings Lack of Appeal

– Basically, an appeal for a panel’s decision is not allowed

– An appeal can be permitted only in exceptional situations

– This is particularly problematic when the dispute involves complicated issues

– In other words, basically everything depends upon the “third” arbitrator of a panel

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Structural Shortcomings Small Pool of Experts

– The pool of experts is still small in this particular area (note that this is different from the ordinary commercial arbitration)

– Some experts can play a wide range of roles in many disputes, representing a host state in one case, an investor in another case, and arbitrator in yet another case

– Conflict of interest or ethical issues emerge

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Implication for the Vietnamese Government for Future Investment Disputes

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Basic Positions of Developed Countries vis-à-vis Developing Countries (1)

Developed countries identify the ISD Procedure as one of the key issues in BIT or FTA negotiations

Developed countries’ positions are based on their respective experiences in the past

In order to protect their future investors, these countries are of the view that an ISD procedure is indispensable– Also, they prefer a more detailed and

specific provisions in this area

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Basic Positions of Developed Countries vis-à-vis Developing Countries (2)

More fundamentally, developed countries view developing countries as regulation-prone states

They possess concern, whether correctly or not, about the judicial system in developing countries

So, developed countries regard the ISD as a safety valve to protect their companies’ future interest in developing countries

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Implication for the GOV (1)

Overall, Vietnam may basically agree to the necessity of the ISD procedure

Nonetheless, it should have concern regarding following issues:– Possibility of aggravation of the negative

aspects in the Vietnamese context– Lessons from the recent investment

disputes– Possibility of interfering with domestic

regulatory power in the Vietnamese context

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At this point, it is neither persuasive nor helpful to argue that the ISD procedure itself is a problem or fundamentally flawed to accept

The pluses and minuses of the ISD procedure have been somewhat clearly identified

Therefore, what really matters is not the system itself; rather, the specific format and contents to be included

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Following issues need to be checked thoroughly in any treaty that Vietnam negotiates– Is a reasonable balance achieved between the two

parties?– Does it impose more burden on Vietnam than the

other party?– Does Vietnam’s higher burden, if any, flow from terms

of the agreement or Vietnam’s lagging behind international standard?

– Is there a mechanism that addresses illegitimate intervention in domestic affairs?

– Does the draft provide a workable and reliable guideline?

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At least in the initial stage, some confusion may be inevitable– This is also a factor to be considered in evaluating a

proposed ISD procedure in an FTA, but this should not be a decisive one

– Korea’s experience in WTO Dispute Settlement Procedure

An overall appreciation of the pluses and minuses should be taken into account– Even if the negative aspects are true, they should

be put into perspective with positive aspects as well

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Avoiding this issue will not solve the problem once and for all– If there is something for which the

Vietnamese government is responsible, the legal liability will remain there regardless of the ISD procedure

Vietnamese investors may want to utilize the ISD mechanism to protect their interest in other countries

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Even if it accepts the basic feature, it should make necessary changes in a treaty text– Even if Vietnam accepts the ISD

mechanism in a particular treaty, it should try to minimize uncertainties as much as possible

There is limit in this approach, however, because the ISD procedure by nature involves uncertainty and flexibility

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Expropriation Disputes

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Expropriation under Int’l Law

Expropriation is legal under international law as long as the following requirements are met:– For public purpose– With non-discrimination principle– With appropriate compensation– Protection of state assets of other states

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Expropriation under Int’l Law

Direct expropriation is becoming rare and indirect expropriation is surging these days

Indirect expropriation is a hybrid located between expropriation and legitimate government regulation

Highly complex disputes ensue

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Indirect Expropriation (1)

One particular issue that magnifies the problems of the ISD procedure is the concept so-called “indirect expropriation.”

Expropriation under international law covers both direct and indirect expropriation– Direct expropriation means a host state’s seizure of

title of the property right– Indirect expropriation occurs when a host state’s

measure, in all respects, is equivalent to direct expropriation even without formal transfer of title

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Whether direct or indirect, all expropriations require an adequate compensation under international law

The problem is all governmental measures almost always brings someone who benefits from them and who loses business because of them– The dividing line between a meager negative effect

and indirect expropriation sometimes is not entirely clear and case-specific

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Furthermore, an inquiry by a panel in indirect expropriation requires an analysis on the underlying intent, actual effect and background of the measure adopted by the host state– A losing host state is not expected to accept the

conclusion when it is different from its own When combined with the ISD procedure,

therefore, this may be particularly intrusive to the state sovereignty

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However, the current jurisprudence attempts to distinguish a mere negative effect and indirect expropriation– Indirect expropriation is found only in exceptional

situations– The fact that a foreign investor loses money as a

result of a host state government’s policy does not elevate the measure to indirect expropriation

– It should be “tantamount to” expropriation or a disguised measure to circumvent the expropriation

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Furthermore, recent FTAs tend to specifically lay out situations that do not constitute indirect expropriation – For instance, a non-discriminatory measures

adopted to achieve the legitimate objectives in environment, health or safety are specifically stipulated as not constituting indirect expropriation

– Creates a safe haven– This categorical carve-out reduces the possibility of

illegitimate expansion of the concept of indirect expropriation

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Overall, it may be true that an indirect expropriation reviewed in the ISD procedure creates uncertainty and confusion in specific cases

The safest way would be to eliminate the ISD procedure, indirect expropriation, or both, altogether from the FTA, but this is not practical– Does not fit with international standard– Unlikely that other countries would accept it– Not sure whether it serves a country’s long term

interest

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Although a certain level of uncertainty is involved, it is not proper to denounce the ISD and indirect expropriation per se

The key issue should be whether procedural and substantive requirements are installed in an FTA to manage the risks thus posed

Trying to find a water-tight mechanism with absolute certainty will not be feasible, at least in this particular area

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Litigation Strategy for the Defendant Government

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Designation of Government Agency in Charge of This Issue

It is recommendable that a government designates or establishes an agency in charge of investment disputes

An investment disputes will be an all-out effort by a plaintiff, so the defendant government should also mobilize its resources effectively

This agency needs to coordinate work with other government agencies

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Preventive Analysis in Adopting Legislation and Regulation

It is recommendable that a government conducts a preventive analysis when it plans to adopt a legislation or regulation

Prior discussion to prevent an unintended effect will help the defendant government in an actual litigation

One word or phrase could change the outcome when there is an actual litigation

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Training of Government Officials and Attorneys

It is recommendable that a government initiates training of its officials and attorneys to deal with these disputes

A government may hire private attorneys, but they can only play some limited roles

Government officials and attorneys need to understand basic features of international law and jurisprudence of key trading partners

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Taking an Aggressive Approach Rather Than Passive Approach

It is recommendable that a government takes an aggressive approach when it comes to investment disputes

Taking an appeasement strategy would not help in the long run

An all-out effort in a particular dispute would minimize the number of future litigation

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Conclusion

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Managing Investment Disputes is Crucial for Vietnam’s Future Development

As more foreign investment flows into Vietnam, there will be more investment disputes

Vietnam needs to contemplate on long-term strategies to deal with investment disputes

Vietnam is recommended to take a more realistic and aggressive approach in architecting and managing this system

1 WTO and FDI Presentation for Vietnamese Government Officials Jaemin Lee June 30, 2011.

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Transcript of 1 WTO and FDI Presentation for Vietnamese Government Officials Jaemin Lee June 30, 2011.