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Wednesday, December 8, 2010

INVESTMENT AGREEMENTS: POSITIVE AND NEGATIVE IMPACTS ON HOST COUNTRIES. MONGOLIAN PERSPECTIVE


INVESTMENT AGREEMENTS: POSITIVE AND NEGATIVE IMPACTS ON HOST COUNTRIES. MONGOLIAN PERSPECTIVE

                                                                                                                           by: Unentugs Shagdar

2010.10.01. Mongolian National and International Arbitration (MNAC)
 
I would like to draw your attention to the Investment Agreements: Positive and Negative Impacts on Host Countries. Mongolian Perspective.

 Bilateral Investment Treaties
A bilateral investment treaty is an agreement between two countries dealing with the treatment of investment by individuals or companies from either party to the treaty, in the territory of the other party to the treaty setting out from of dispute settlement available to parties when disputes arise between nationals of one party (Home State) and other party (Host State)[1]. The first Bilateral Investment Treaty was signed on 25 November 1959, between Pakistan and Germany, and entered into force on 28 November 1962[2].
In the decades that followed, BITs were the most popular and dominant legal facility for the regulation and protection of foreign investments. Those treaties are characterized by special investment rules of highly sophisticated and elaborate character.
Especially during the 1990s, there was a stark proliferation of BITs. As of 1 January 2002, some 2099 BITs were in force. According to the figures of the UNCTAD World Investment Report 2004, the number of BITs increased fivefold from 450 in 1990, to 2250 in the year 2000. Between 1994 and 1996 in average approximately 200 treaties per annum were concluded. These numbers are impressive since only 450 BITs were concluded in the thirty-one years between 1959 and 1990[3].
The end of the Cold War appears to be the main reason for this proliferation in the 1990s[4]. Additional reasons were the economic stagnation in many developing countries (African and Latin Americans), and the growing realization that encouragement of foreign direct investment would contribute to national welfare and growth in such countries. By the end of 1999, out of the total 1857 BITs, the structure of contracting parties appeared to be as follows[5]: For example
- 737 BITs (ca.38%) were concluded between developed and developing countries – compared with 260 treaties or 68% at the end of 1989;
- 476 BITs (ca.26%) existed between developing countries – compared with 40 treaties or 10% at the end of 1989.
 Effects of Bilateral Investment Treaties
Many of the BITs seem to follow the same pattern and include similar features, although their quality varies. Normally, such BITs regulate important and contentious – tending subjects such as the investment, treatment of foreign investors and investment, expropriation and nationalization, transfers of currency, and the Settlement of Investment Disputes[6].
The effect of BITs must be considered ambivalent. On one hand, experience with BITs suggests that the amount of foreign direct investment flowing to developing countries is largely determined by factors other than investment agreements[7]. In addition, an increasing number of BITs were likely to lead to less transparency and higher operating costs borne on an investor, particularly on small and medium-size enterprises.
On the other hand, where a bilateral investment treaty covers an investment, the specific applicable law will be clear, though there may still be significant room for differences in interpretation of the terms of such bilateral agreement[8].
At least the BIT furnishes investor, depending on size and credibility, is even given the possibility to influence its government in negotiating the BIT achieving more favourable conditions depending on structure and intention of the investment.
If the two countries can use the‘re-discussion’ opportunity to clarify and fine-tune some of the key provisions of the ISDS proceedings, it may in fact contribute to the establishment of the workable and reliable proceedings of investment arbitrations between the two countries in the future. As have been widely observed in recent investment disputes, many investment arbitrations are raised because of the ‘ambiguity’ of the BIT at issue and also determined by the ‘ambiguity’ of the BIT. This phenomenon underscores the importance of having treaty texts as clearly drafted as possible and as practically designed as possible[9].
Furthermore, the ambivalence in the effect of BITs results from the attempt to reach the balance inherent in a foreign investment, a balance which is envisaged by the Home and Host State who are party to a BIT, viz, how to attacking and protect FDI without damaging the host states domestic economies, foreign exchange savings and natural (mining etc.) resources. Resolving this conflict in a counter balancing manner is one major obstacle and aim of BITs.
Bilateral investment treaties always cover future investment; only a few also extend the coverage to investment at the time the treaty was made[10].
Initially, BITs were concluded between a developed and a developing country, usually at the initiative of the developed country. The developed country - typically a capital exporting country - entered into a BIT with a developing country - typically a capital importing country - in order to secure additional and higher standards of legal protection and guarantees for the investments of its firms than those offered under national laws. The developing country, on the other hand, would sign a BIT as one of the elements of a favourable climate to attract foreign investors[11].

Bilateral Investment Treaties signed by Mongolia
Mongolia has concluded the Bilateral Investment Treaties with 43 countries[12] (of which 37 have entered into force) a listed below.

Table  Bilateral Investment Treaty

Reporter
Partner
Date of Signature
Date of entry
into force
1.       
Mongolia
Austria
19-May-01
1-May-02
2.       
Belarus
28-May-01
1-Dec-01
3.       
Belgium and Luxembourg
3-Mar-92
15-Apr-04
4.       
Bulgaria
6-Jun-00
-----
5.       
China
25-Aug-91
1-Nov-93
6.       
Croatia
8-Aug-06
-----
7.       
Cuba
26-Mar-99
18-Oct-00
8.       
Czech Republic
13-Feb-98
7-May-99
9.       
Denmark
13-Mar-95
2-Apr-96
10.   
Egypt
27-Apr-04
25-Jan-05
11.   
Finland
15-May-07
19-Jun-08
12.   
France
8-Nov-91
22-Dec-93
13.   
Germany
26-Jun-91
23-Jun-96
14.   
Hungary
13-Sep-94
6-Mar-96
15.   
India
3-Jan-01
29-Apr-02
16.   
Indonesia
4-Mar-97
13-Apr-99
17.   
Israel
25-Nov-03
2-Sep-04
18.   
Italy
15-Jan-93
1-Sep-95
19.   
Japan
15-Feb-01
24-Mar-02
20.   
Kazakhstan
2-Dec-94
3-Mar-95
21.   
Korea, DPR
10-Nov-03
------
22.   
Korea, Republic of
28-Mar-91
30-Apr-91
23.   
Kuwait
15-Mar-98
1-May-00
24.   
Kyrgyzstan
5-Dec-99
-----
25.   
Laos PDR
3-Mar-94
29-Dec-94
26.   
Lithuania
27-Jun-03
3-May-04
27.   
Malaysia
27-Jul-95
14-Jan-96
28.   
Netherlands
9-Mar-95
1-Jun-96
29.   
Philippines
1-Sep-00
1-Nov-01
30.   
Poland
8-Nov-95
26-Mar-96
31.   
Qatar
29-Nov-07
-----
32.   
Romania
6-Nov-95
15-Aug-96
33.   
Russian Federation
29-Nov-95
26-Feb-06
34.   
Singapore
24-Jul-95
7-Jan-96
35.   
Sweden
20-Oct-03
1-Jun-04
36.   
Switzerland
29-Jan-97
9-Sep-99
37.   
Tajikistan
20-Mar-09
16-Sep-09
38.   
Turkey
16-Mar-98
22-May-00
39.   
Ukraine
5-Nov-92
5-Nov-92
40.   
United Arab Emirates
21-Feb-01
-----
41.   
United Kingdom
4-Oct-91
4-Oct-91
42.   
United States
6-Oct-94
4-Jan-97
43.   
Vietnam
17-Apr-00
13-Dec-01
Source: ICSID and UNCTAD database; Unentugs Shagdar, Mongolian investment legal environment, Seoul National University Press and Yale University Press, 2012.
In the first Bilateral Investment Treaty between Mongolia and Republic of Korea concluded on March 28, 1991, and entered into force on 30 April 1991. Article 9 set forth method of investment disputes between a Contracting Party and an Investor of the Other Contracting Party. It provides that:
“If any dispute cannot be settled within six (6) months from the date either Party requested amicable settlement, it shall, upon request of either the investor or the Contracting Party, be submitted to the International for the Settlement of Investment Disputes established by the Washington Convention of 18 March 1965 on the Settlement of Investment Disputes between States and Nationals of other States, on condition that the Mongolian becomes a party to this Convention".
Until that moment the dispute shall be submitted to conciliation or arbitration procedure  to  be  mutually agreed  upon  on  the  basis  of  the  Washington Convention. Nothing in this Article shall be construed to prevent the parties to the  dispute  from  agreeing  upon  any  other  form  of  arbitration  or  dispute settlement which they mutually prefer and agree best suits their needs.
Article 10 set forth method of disputes between settlements of disputes between the Contracting Parties. It provides that:
 “If a dispute between the Contracting Parties cannot be settled after six (6) months, it shall, upon requests either Contracting Party, be submitted to an arbitral tribunal.”
There  is  no  provision about  the  dispute  between  foreign  investors  and government  of host  state. Article 5 only stipulated that the host state cannot expropriate or nationalize the foreign investment except for the public benefit.
There are similar regulations in the BITs between Mongolia and China[13], United States[14], Netherlands[15], Italy[16], Japan[17], Hungary[18], Indonesia[19], Austria[20].
In BIT between Mongolia and Republic of United States done on January 1997, we can see the foreign investors' direct participation in dispute settlement.
It provides that: Article 6(2) set forth that first the dispute raised between the sides of investor and government of host state, they should try to settle it amicably by means of conciliation, and dispute about compensation of expropriation, if cannot be settled within six months through amicable procedure, the foreign investor can require to settlement the dispute before tribunal established by reference to ICSJD convention proceedings.
Here the provision gave a possibility of enlargement of dispute scope to the compensation of expropriation. This reflected the flexibility and the further enlarge application of the Washington Convention in Mongolia.
In the BIT between Mongolia and Saudi Arabia done on March 21, 1998 was provided that:
“If the dispute cannot be settled in six months according to the measure section 1, the dispute will be submitted to court with jurisdiction of the host country, dispute raise because of amount of compensation of expropriation submitted to arbitration under the ICSID convention done on March 8. 1999
In the BITs between Mongolia and Cuba, India, Laos, Romania, which contracting states of the ICSID Convention, the provision about dispute between the foreign investor and the host country set, forth: “When dispute relates to amount of compensation from expropriation, if any measure failed during one year, either party can ask for arbitration. The Treaty should make their own procedure, they can refer to rules of ICSID and applied law should be law of host state (including rules of conflict), or This Treaty on principle of international law accepted by both states to the Treaty”.
From these provisions we can find Mongolia applies the ICSID mechanism not only to the member states of the ICSID Convention but also to non-member states. At the same time in all these BIT Mongolia guaranteed foreign investors that their investment will not be expropriated or nationalized except for public benefit, and further if the expropriation does happens then the investor will be appropriately compensated.

Multilateral International Conventions
Multilateral investment rules are scattered among different legal instruments[21]. Such rules can be part of bilateral treaties, regional investment treaties, multilateral treaties or even the Agreement. Together, they form an international investment framework[22].
The most sophisticated and advanced level and compendium of binding multilateral investment rules would be the agreement. In fact, certain binding multilateral investment rules were already negotiated and adopted during recent decades. However, these rules are limited to certain issues (such as Natural Resources), scattered within an agreement predominantly dealing with other matters[23] (e.g. the agreement on Trade-Related Intellectually Property Rights, the TRIPS Agreement, or the Global Agreement on Trade in Services, the GATS Agreement, or of non-binding character.
The difficulties in negotiating the agreement are evident not only from the high number of negotiating parties, but many other circumstances, for example, the increased number of issues to be debated and possible changes in government policy of those parties[24].
More participating parties, depending on their economical situation and interest, mean a greater amount of diverting stances and an unevenly balanced emphasis on various investment topics. The greater number of parties increases the likelihood of frustrating and time-consuming changes in negotiation policies and even failure of negotiations as seen most recently with MAI and Doha-Round negotiations. Nevertheless, such an extended negotiation forum also has decisive advantages that will be introduced later[25].
As of 2003, multilateral investment rules existed within twenty-eight legal instruments[26]. They complement the content of the already existing melting pot of rules contained in bilateral and regional investment agreements. Fifteen of these multilateral instruments were of non-binding character and three had not been adopted yet. Three of the adopted instruments only had model status. One binding instrument was not adopted yet. Thus, nine multilateral instruments were actually both adopted and of binding character. The adopted and binding instruments (including adopted models) –which do not have the complete content as the contemplated agreements have-were:
·         The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Award (adopted in 1958);
·         The World Bank Convention on the Settlement of Investment Disputes between States and Nationals of the States (adopted in 1965);
·         The Model of Arbitration Rules of the United Nations Commission on International Trade Law (adopted in 1976);
·         The United Nations Model Double Taxation Convention between Developed and Developing Countries (adopted in 2000);
·         The World Bank Convention Establishing the Multilateral Investment Guarantee Agency (adopted in 1985);
·         The Permanent Court of Arbitration Optional Rules for Arbitrating Disputes between two Parties of which only one is a State (adopted in 1993);
·         The Agreement on Trade-Related Investment Measures (adopted in 1994);
·         The General Agreement on Trade in Services (adopted in 1994);
·         The Agreement on Trade-Related Aspects of Intellectual Property Rights (adopted in 1994);
·         The World Trade Organization’s Fourth Protocol to the General Agreement on Trade in Services on Basic Telecommunications Services (adopted in 1997);
·         The World Trade Organization’s Fifth Protocol to the General Agreement on Trade in Services on Financial Services (adopted in 1997).
A closer look at these instruments reveals three elements (or developments), which are rather striking.
First, seven of the twelve instruments originate in the 1990s, but before that time period only one instrument was adopted. As already explained above with regard to regional investment treaties, this proliferation seems to have been mainly caused by the end of the Cold War period and the succeeding accelerating international investment activities that followed. Such development also negates the argument that the high increase of bilateral treaties in the 1990s makes multilateral investment rules superfluous.
Secondly, the adopted legal instruments and models for multilateral and models for multilateral investment rules seem to belong predominantly to three forums – the United Nations (particularly UNCTAD[27]), the WTO and the World Bank. These forums have been dealing with investment issues on a less intensive basis since their existence. Thus, it must be acknowledged that these forums have the greatest competencies and are most experienced in negotiating, adopting and even enforcing such rules. This assessment may lead to the conclusion that these forums are also the best candidates for negotiating and hosting the Agreement.
And finally, six, hence fifty percent, of the aforementioned multilateral binding instruments were adopted within the framework of the WTO, emphasizing that the WTO can be considered the most favoured and advanced multilateral forum for (binding) multilateral investment rules[28]. Although, these WTO rules are limited in scope and sector, their existence alone, in a forum that has 151 Member States (August 2007), must be seen as success and a potentially solid basis for further for negotiations.

Multilateral International Conventions in Mongolia
As of October 24 1994 the Mongolia has adopted the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Award[29]. The major catalyst for the development of an international arbitration regime was the adoption of New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. The New York Convention continues to set standard requirements for a successful international arbitration process[30].
The convention provides for international recognition of agreements and awards by national courts. The success of the Convention is well illustrated by three factors. First, over 147 countries are party to the Convention[31].
Secondly, for purpose of interpreting and applying the New York Convention, it is now common for the courts of one country to look to the decisions of other foreign national courts to see how specific provisions have been interpreted and applied. While these national court decisions are not automatically binding, such applications of the development if international arbitration practice and law which is increasingly of significant influence on parties, arbitrators and national courts, regardless of nationality.
Thirdly, and this follows from the above two points, it is now generally accepted that agreements to arbitrate and arbitration awards will be enforced by the courts of most countries which are party to the New York Convention. Upholding arbitration agreements and awards is an absolute prerequisite if international arbitration is to succeed and the New York Convention has provided the framework for this success.
The New York Convention was followed by a series of Bilateral  and Multilateral Conventions. They had varied purposes and were directed generally to different areas of international business. None of these conventions, with the exception of the ICSID Convention, have achieved anything like the level of success of the New York Convention.
There are number of international and regional conventions related to arbitration. These include the European Convention on International Commercial Arbitration 1961, Washington Convention on the Settlement of Investment Disputes between States and National of other States 1965, European Convention Providing a Uniform law on Arbitration 1966, Settlement by Arbitration of Civil Law Disputes Resulting From Economic Scientific and Technical Co-operation 1972, Inter-American Convention on International Commercial Arbitration 1975, MERCOSUR Agreement in International Commercial Arbitration 1998, Amman Arab Convention on Commercial Arbitration 1987, Treaty establishing OHADA, 1993.
After a long time of consideration and along with domestic situation and international economic environment improvement, Mongolia signed the ICSID Convention on May 28, 1996[32].
Once Mongolia ratified the ICSID Convention, Mongolia made such notification to the Centre that pursuant to Article 1(2) of the Convention, the Centre shall be to provide facilities for conciliation and arbitration of investment disputes between Contracting States and nationals of other Contracting States.
From then on, foreign investors can apply the mechanism of the ICSID Convention for claim of compensation resulting from expropriation and nationalization against Mongolian government.





[1] Unentugs Shagdar, Investment Agreements: Positive and Negative Impacts on Host Countries. Mongolian Perspective, The National Arbitration Journal, Mongolian National Arbitration Press; Ulaanbaatar, 2010;
 [2]Marcus Peter, Multilateral Rules on Cross-Border Investment and the World Trade OrganizationNomos-Verlagsgesellschaft, Baden-Baden, Germany (2009), p.44
 Rudolf Dolizer and ChristophSchreuer, Principles of International Investment Law, Oxford University Press, (2008) p.46
[3] UNCTAD, World Investment Report, World Investment report, United Nations, New York  (2004) 8. Nougayrede,D., Binding States: a Commentary on State Contracts and Investment Treaties, Business Law International, volume 6 (Sept, 2005) No.3, p. 372-395
[4] Unentugs Shagdar, Mongolian investment legal environment, Seoul National University Press and Yale University Press, 2012.
[5]Hamilton,C.A. and P.I.Rochweger, Trade and Investment: Foreign Direct Investment Through Bilateral and Multilateral Treaties, New York International Law Review, volume 18, (2010), No.6
[6]Supra note 30, p.47
[7]UNCTAD, World Investment Report 2004, United Nations, New York (2004) xvii.
[8]Beveridge,F.C. and E.M.Graham, Needed: New international rules for foreign direct investment under international investment law –Towards international disciplines, Juris Publishing, Manchester University Press (200) p.1-237
[9][In many countries, the ISDS mechanism has become one of the most important issues in any BIT discussion and negotiation.] See: Professor Jaemin Lee, Back on the Negotiating Table Again? –Recalibrating Provisions of the Korea-U.S. FTA ISDS Proceedings through a Prospective “Amendment”, Meiji University, October 25, 2013., Seoul National University Law Foundation, 2014/7 (2014), at 198.
[10]Karl,J., On the way to Multilateral investment rules – Some recent policy issues, Foreign investment law review journal, volume 19 (2003) issue 2, 1-29
[11]UNCTAD, Bilateral Investment treaties 1959-1999, United Nations, New York and Geneva, (2000) p.1
[12] ICSID and UNCTAD database,  Full list of Bilateral Investment Agreements concluded, 1 June 2013, Available at: http://unctad.org/Sections/dite_pcbb/docs/bits_mongolia.pdf; and  https://icsid.worldbank.org/ICSID/
[13] China-Mongolian BIT, 1993, Art 8. Available at: http://www.mongolchamber.mn; www.unentogs.blogspot.com
[14]US-Mongolian BIT, 1997, Art 6. Available at: http://www.mongolchamber.mn; www.unentogs.blogspot.com
[15]Netherlands-Mongolian BIT, 1996, Art I. Available at: http://www.mongolchamber.mn;
[16] Italian-Mongolian BIT, 1997, Art 9, Art IO. Available at: http://www.mongolchamber.mn;
[17]Japan-Mongolian BIT, 2002, Art IO. Available at: http://www.mongolchamber.mn;
[18]Hungary-Mongolian BIT, 1995, Art 8. Available at: http://www.mongolchamber.mn;
[19]Indonesia-Mongolian BIT, 1999, Art 8. Available at: http://www.mongolchamber.mn;
[20]Austria-Mongolian BIT, 2002, Art 8, Art 9. Available at: http://www.mongolchamber.mn;

[21]Vocke,M. Investment implications of selected WTO Agreements and the Proposed Multilateral Agreement on Investment, IMF Working paper, volume 60 (1997) p.32
[22] Wallace, C.D., The Legal Environment for a Multilateral Framework on Investment and the Potential Role of the WTO, Journal of WTO, volume 3 (2002), No.2 p.289
[23]Dattu,R. A Journey from Havana to Paris: the Fifty Year Quest for the elusive Multilateral agreement on investment, Fordham international law journal, volume 24 (2000) p.275
[24]Malanczuk,P. State to State and Investor to State dispute Settlement in the OECD Draft Multilateral Investment agreement, in Multilateral Regulation of investment, eds.E.C.Nieuwenhuys and M.M.T.A. Brus, Kluwer law international Hague (2001) p.137
[25]Marcus Peter, Multilateral Rules on Cross-Border Investment and the World Trade OrganizationNomos-Verlagsgesellschaft, Baden-Baden, Germany (2009), p.53
[26]World Investment Report 2003, 208. Such instruments either are resolution of the UN General Assembly and UN codes of conduct, conventions and guidelines of the World Bank, one ILO declaration, and diverse WTO Agreements and related protocols. 
[27]Seid,S.H. Global Regulation of Foreign Direct Investment, Ashgate Publishing Limited, Burlington (2002) p.1-276.
[28]Dattu,R. A Journey from Havana to Paris: the Fifty Year Quest for the elusive Multilateral agreement on investment, Fordham international law journal, volume 24 (2000) p.315; Supra note 38; Brittan,L. Building on the Singapore Ministeral: Trade, Investment and Competition, in The Urugay Round and Beyond: Essays in Honour of Arthur Dunkel, edJ.Bhagwati, Springer Verlag, Berlin (1998) p.265-277
[29] UNCITRAL’s database, Available at: http://www.uncitral.org/uncitral
[31] The International Trade Centre's (ITC) database, New York Arbitration Convention, List of Contracting States, Available at: http://www.newyorkconvention.org/contracting-states/list-of-contracting-states
[32] ICSID’s database, List of contracting states and other signatories of the convention ,as of April 11, 2014, Available at: