Renegotiating acquired rights in the oil and gas industries ......10 Brian Z Tamanaha, On The Rule of Law: History, Politics, Theory (Cambridge University Press 2004); V von Hayek,

Renegotiating acquired rights in the oil and gasindustries: Industry and political cycles meet therule of lawThomas W. Wälde*

1. The issue: Do the instruments of good governance and the rule oflaw have any significance when faced with the force of the energy andresource industries cycles?As we experience a so far sustained upwards trend in the price of petroleum and miner-als,1 governments of producing countries worldwide are engaged in a fundamental revi-sion of the terms under which international investors originally carried out theirinvestment.2 Changes are most extensive in the cases where contracts with host states(or their state enterprises) were negotiated in times of relatively low oil, gas and mineralprices (in particular between 1985 and 1999); in the cases where a fundamental re-orien-tation of a host state’s policy towards foreign and private investment has taken place (egin countries where governments now pursue a policy of anti-Western (in particular anti-USA) resource nationalism); and in the cases where new governments have reversed vis-ibly and significantly the policies of privatization of state-owned operated upstream oiland gas and mining assets carried out in the 1990s. The renegotiation demands are moreacute where the original contracts did not provide for a balanced internal adaptation sys-tem providing, now, a politically acceptable outcome for the host state. Even an internaladjustment system which responds to changes in profitability and mineral rent (eg withrate-of-return-based financial regimes) may not be able to fully accommodate host staterevision demands if its structure reflects unequal bargaining power at the time of nego-tiation. Contracts concluded with quite inexperienced governments, for example newlyindependent petroleum states that emerged after the collapse of the Soviet Union havecome under pressure, in particular if the explosion in oil prices has not led to a

* Dr. iur (Frankfurt), LLM (Harvard), Professor and Jean-Monnet Chair, CEPMLP, University of Dundee; Rechtsanwalt

(Frankfurt) and barrister (Essex Court Chambers/Lincoln’s Inn (London)).This paper is based on presentations at AIPN (Association of International Petroleum Negotiations) meetings in Calgary (May

2006), Houston (June 2007) and the CEPMLP (Centre for Energy, Petroleum and Mineral Law and Policy)/Dundee 30th

Birthday Seminar in London (June 2007). It refers to contributions by Philip Crowson, Peter Cameron and A Elisabeth. Bastida

presented at the CEPMLP 30th birthday seminar and included in the forthcoming book (edited by P Andrews-Speed, Dundee

University Press 2008) arising out of the seminar. Acknowledgments for helpful comments to M Goldhaber, B Tamanaha and

Matthew Stone, for help in editing and finalization to my research assistant, Aloysius Gng and most of all to Tim Martin.1 See, P Stevens in this issue of JWELB; Ph Crowson (2007) cf note above.2 These changes, and the disputes they engender, are reported on an almost daily basis in the Financial Times; OGEL/ENATRES

(Energy, Natural Resources) and TDM/OGEMID. For a review of changes in mineral legislation, cf Bastida (2008, see note

above. T Walde and M Firoozmand are engaged in a study on equilibrium/renegotiation clause legal issues in international oil

and gas development contracts. TDM means <http://www.transnational-dispute-management.com>; OGEL means <http://

www.ogel.org>.

Journal of World Energy Law & Business, 2008, Vol. 1, No. 1 55

� The Author 2008. Published by Oxford University Press on behalf of the AIPN. All rights reserved.

doi:10.1093/jwelb/jwn005

corresponding (and politically visible) increase in government income.3 This is particu-larly so if production in the early years has not been producing substantial governmentincome; in such cases, it looks as if the resource is extracted and given away for free.4 Thisis politically not acceptable and least in an unexpected high-price environment.

The current high point in the resource price cycle facilitates and enables policies ofresource nationalism and re-orientation from private ownership to state control whichwere largely at bay during the low points of the price cycle (mainly from the late1980s to approximately 2000). Resource nationalism has raised its head again. Politicaldemands, often dressed in legal concepts, that were last heard of in the ‘NIEO’ (NewInternational Economic Order) period of the 1970s,5 are now again the common cur-rency of resource nationalism. These include arguments that contracts are only valid rebussic stantibus (ie as long as circumstances remain the same), that governments have a uni-lateral ‘sovereign’ right to revoke or substantially modify contractual terms and that therights of investors acquired since the 1980s under the international investment protectiontreaties are now subject to the overriding jurisdiction of national courts.6 In essence, suchviews posit that acquired rights are subject to the discretion of governments which is notmuch different from saying these are mere ‘political understandings’ devoid of a truly leg-ally binding character. The implication of the view of absolute state sovereignty over such‘state contracts’7 means, in functional and effect terms, that agreements with host states,in particular those with de-facto state control over their national judiciaries, are essen-tially a temporary political understanding. This would be less problematic if there wasa continuous reciprocal exchange. But foreign investment involves an initial capitalinvestment which is only recovered over long periods of time. The host state controls,via regulatory and tax powers, such recovery and the investor is thus exposed as ‘hostage’to host state powers. The whole of international investment law, in particular theories of

3 This can occur if the original contract provides for full cost recovery (sometimes with ‘uplifts’) until the total investment has

been recovered; this mechanism will delay host state income that otherwise would be generated by royalties or a cap on ‘cost oil

recovery’ in production-sharing contracts. One should also bear in mind that the oil price explosion has been followed by a

similarly substantial inflation of petroleum (and mining) development and operating expenditures which reduce income both

to host states and to oil companies in spite of the multiplication of the petroleum price (from about $15 in 1998 to $80 in

2007).4 Such results have come about if the financial regime (tax plus contractual mechanism of cost recovery and production sharing)

are structured in a way that omits or minimizes production-related minimum payments (royalties and quasi-royalties) before

complete cost recovery, eg by cost recovery without annual recovery cap, absence of royalties (or quasi-royalties inherent in

production-sharing arrangements with no annual cap on cost recovery).5 Walde, ‘Revision of transnational investment agreements in the natural resources sector 1’ (1978) 10 Lawyer of the Americas

265; ibid, Requiem for the NIEO in Festschrift Ignaz Seidl-Hohenveldern (1998) 771 (both now available on OGEL & TDM;

both available on TDM: <http://www.transnational-dispute-management.com>). The main instrument is OPEC Resolution

XVI. 90 of 1968 and other international instruments discussed in Walde (1978).6 Prof. Sornarajah is one proponent of the prerogatives of state sovereignty over foreign investors whose career and writings

cover the cycle from the ‘NIEO’ period to today: DM Sornarajah, The International Law on Foreign Investment Cambridge 1994

(2nd edn 2004). UN resolutions 3201 and 3202 of 1974 express this approach most clearly.7 This view has most clearly been expressed in the 1974 resolutions of the UN General Assembly on the ‘New International

Economic Order’ – 3201, 3202 and 3281 – with the claim for exclusive applicability of domestic law and exclusion of recourse

to international (mainly then arbitral) adjudication; it is in the main currently advocated by Prof. Sornarajah, International Law

on Foreign Investment (2nd edn Cambridge UP 2004) 402, 416 et seq who terms the applicability of international standards a

‘transmogrification’.

56 Journal of World Energy Law & Business, 2008, Vol. 1, No. 1

internationalization of applicable law, stabilization clauses, access to international arbitra-tion and most recently and most powerfully investment treaties with direct investor–statearbitration, can be understood as trying to remedy such unilateral exposure of the inves-tor to host state powers after the investment has been made and the ‘hostage’ effect trig-gered (both now available on OGEL (Oil, Gas and Energy Law Intelligence) & TDM(Translational Dispute Management)). Bringing the ‘rule of law’ to such arrangementsmeans to transform them from political understandings subject to the discretion of thehost state8 to contractual promises that can be made effective under a legal system andenforcement procedure outside host state control and therefore credible and more suit-able to be the basis for large-scale, initial capital investment.9

This paper discusses the role of ‘law’ as it faces the political pressures of resourcenationalism supported and financially enabled by the sustained high prices. It questionswhether the concept of the ‘rule of law’ (originated in the Western history and embeddedin its political and social culture)10 has any material meaning in the investor–resourcestate relationship. This concept of the ‘rule of law’ with respect to individual rightsagainst the state is embodied in contracts between the foreign investor with the host stateor with its state enterprises, in specific stabilization agreements and stabilization clauses,in guarantees provided in national investment or petroleum/mineral legislation and inter-nationalized by submission to international arbitration. The notion of the ‘rule of law’also underlies modern treaty-based investment protection practice, which was substan-tially created during the late 1980s in widespread bilateral and multilateral investmenttreaties, such as the over 2500 bilateral investment treaties (BITs), the North-AmericanFree Trade Agreement (NAFTA) or the Energy Charter Treaty (ECT) of 1994 thatincludes 50 plus countries. While one can discuss the different views on the principleof ‘rule of law’, at the core of the principle are the notions that legal rules should be pre-dictable and that acquired rights should be (within parameters set by law) respected.11

One needs to bear in mind that not every change in the significant terms of a long-term resource investment for an investor imposed by government power amounts tosomething that could be qualified as a breach of the rule of law. If all or specific terms(eg in particular tax) have been contractually specified, without an opening to evolvingregulation, then a unilateral change by the government at least suggests a presumptionof breach of the relevant contract. This is even more so if a specific traditionally styled

8 It has rarely been argued that the investor can consider his contracts with the host state not as legally binding, eg walk away

when considered suitable. This view would not make sense for contracts organizing an early initial foreign investment to be

recovered subsequently over a long period of time, but it could make some sense for contracts to provide continuous services to

the host state and its agencies.9 This does not mean that there are other – political and commercial – reasons for host states not to respect such contracts too

easily, eg reputation and the concern not to scare off new investors, cf Walde, ‘Law, contract and reputation in international

business: What works?’ (2002) 2 Bus Law Intl 190–210 (and available from TDM).10 Brian Z Tamanaha, On The Rule of Law: History, Politics, Theory (Cambridge University Press 2004); V von Hayek, The Political

Ideal of the Rule of Law (National Bank of Egypt, Cairo 1955).11 I rely here mainly on the excellent overview of relevant literature by Tamanaha and the seminal study by Friedrich von Hayek

(ibid n 10).

T.W. Walde • Renegotiating acquired rights in the oil and gas industries 57

stabilization clause12 prohibits the application of such changes to a protected foreigninvestor. Some regulatory and fiscal changes may also, under international investmentlaw, contravene a currently debated ‘obligation’ of the host state to maintain the essentialstability of the investment conditions, in particular if the investor can rely here on theconcept of ‘legitimate expectations’13 as part of the obligation to provide ‘fair and equi-table treatment’ even if there is no specific governmental assurance. But regulatory andfiscal changes in areas not covered and constrained by either a contract or an interna-tional law obligation (which may reinforce a national law rule later reversed) are not abreach of law. Most developed producing countries – including the UK,14 the USA orNorway – adjust their tax and regulatory system regularly. Normally, such adjustmentstake into account the relative profitability of the industry (and thus the size of the‘resource rent’ available for taxation15) which is normally quite responsive to the pricelevels. But other factors matter, such as the perceived need to encourage investment inhigh-risk and high-cost exploration (eg North Sea) or in contrast, conservation policiesaimed at long-term sustainability of the industry as well as evolving practices, standardsand political expectations with respect to local benefits, safety or the environment. Insuch cases, companies tend to invest with an expectation that the fiscal and regulatoryregime will be adjusted ‘reasonably and without too much surprise or predatory exploi-tation of tax opportunities. Investors balance the political, fiscal and regulatory risk withthe expected benefit. In such contexts of ‘rule of law’ and reasonable, consultation-basedregulation and taxation specific stabilization instruments are rarely negotiated, relied

12 Traditional stabilization clauses ‘froze’ and declared non-applicable subsequent changes in the covered investment terms (eg in

particular tax). Modern stabilization clauses often provide for an automatic or (re-)negotiated adjustment of contractual terms

to compensate for a change in the regulatory and fiscal regime. They are often labelled ‘equilibrium’ clauses. See, T Walde/G

Ndi, ‘Stabilizing international investment commitments’ (1996) 31 Texas Int’lL J 215–68; more recently the survey of modern

stabilization clause practice in the AIPN 2006 studies by P Cameron and M Maniruzzaman (<http://www.aipn.org>). For an

insightful analysis of equilibrium clauses: KP Berger, ‘Renegotiation and adaptation of international investment contracts – The

role of contract drafters and arbitrators’ (October 2004) 1 TDM, also F Fucci, TDM September 2007. I am working with M

Firoozmand on a more extensive analysis of equilibrium clauses based on expert testimony in – not public – disputes.13 Tecmed v Mexico; Occidental v Ecuador; CMS v Argentina; Saluka v Czech Republic; separate opinion by Walde in Thunderbird v

Mexico (though focusing on specific governmental assurances and ‘comfort’ letters); F Orrego Vicuna, ‘Regulatory authority

and legitimate expectations: Balancing the rights of the state and the individual under international law in a global society’

(2003) 5 Int’l Law FORUM du droit Int’l 188–97(10) (cited in Thunderbird v Mexico); recent article by S Fietta, ‘International

Thunderbird Gaming Corporation v The United Mexican States: An indication of the limits of the ‘‘legitimate expectation’’ basis

of claim under article 1105 of NAFTA?’ (April 2006) 3 TDM; the issue if the concept of legitimate expectations does not cover

only specific representations and assurances by competent government officials, but also the view formed by the investor of the

host state based on domestic law and settled administrative practice and established interpretation is currently being debated in

the Glamis v US NAFTA ch XI case. The US constitutional protections against indirect taking – arguably a significant precedent

for the concept of ‘indirect taking’ under NAFTA art 1110, ECT art 13 and found in most investment treaties uses the concept

of a ‘general’ legitimate expectation, not necessarily based on specific assurances, as part of the indirect expropriation test; T

Walde and A Kolo, ‘Environmental regulation, investment protection and regulatory taking in international Law’ (2001) 50

ICLQ 811–48; Knahr, Indirect Expropriation, on TDM (2007).14 In the UK, there was a ‘comfort letter’ by government in the 1970s suggesting stability of several key conditions for petroleum

development but the legal value of this ‘Varley’ letter was never tested, Daintith–Willoughby–Hill, UK Oil & Gas Law, I-740

cited from Release 11-90 (omitted in the later edition). In modern practice, the ‘Varley assurances’ would be examined from

the perspective of the principle of legitimate expectations. Cf also T Daintith, The Legal Character of Petroleum Licenses: A

Comparative Study (Dundee 1981); Daintith and Gault, ‘Pacta sunt Servanda and the licencing and taxation of North Sea oil

production’ (1977) 8 Cambrian L Rev 27.15 Ross Garnaut and Anthony Clunies-Ross, Taxation of Mineral Rents (Oxford University Press, USA 1983).


upon or invoked in arbitration or litigation. Arbitration is less important to investorsthan it would be in situations of high political risk and politically controlled domesticcourts.16

Legal instruments for investment protection will be deployed, relied upon and invokedin situations where the political risk is seen as high and where such instruments are avail-able in order to mitigate the political risk perception and thus change the risk–rewardbalance to encourage investment. Where the risk is seen as low (ie generally in developedcountries), mechanisms to manage it (stabilization clauses, international arbitration andinvestment protection treaties) are less frequent, less relevant and rarely invoked. Invest-ment protection instruments are most relied upon where they are seen as useful.17 In sit-uations where there is a high political risk and no sufficiently credible investmentprotection available through the domestic judiciary (eg at present in a pronouncedway in Russia, Venezuela or Bolivia), investors have to make their investment decisionon the basis of an unmitigated risk–reward balancing dependent on price, cost and prof-itability forecasting. They will also be pushed to seek recourse in non-legal ways of pro-tecting their investment by linking themselves with powerful domestic powers throughgranting in effect free equity as the price to be paid for political protection, reliance onhome state support and other ways of informal and political management of disputes(largely by corruption). These non-legal ways have a high price; normally much higherthan in a situation where legal methods of investment protection in a rule of law contextcan be effective. They are also often not available to large Western companies subject toanti-bribery regulation and NGO scrutiny.

To what extent does the arsenal of risk management tools (eg international commercialand investment arbitration, contract with the state, stabilization clauses and contractualadaptation mechanism) actually work under the pressure of the upwards part of theresource cycle? After each period of resource nationalism, usually associated with anupward cycle, new legal instruments have been designed to cope with the way the politicalrisks materialized in the last cycle. The current tool box of risk management instru-ments18 developed as a response to the widespread nationalizations and coercive renego-tiations of the ‘NIEO’ period in the 1970s and third world rhetoric about the ‘NewInternational Economic Order’. As the recent Stanford General Counsels group con-cluded, these more modern political risk management tools have not been able to preventa widespread breach of contracts in economic emergency situations (Asia 1998 and

16 Though one has to bear in mind that with the advent of the Energy Charter Treaty (ECT), investment from developed market

economies in others is now subject to investor–state arbitration under art 26 of the ECT.17 While there is a fiscal risk (eg periodic changes in petroleum tax in the UK), this is seen as moderate and not in need of

international investment protection tools (though the Energy Charter Treaty is applicable to the EU countries); there is,

though, a risk of unpredictable environmental regulation. There is also a political risk of significantly changing political

attitudes translated into regulation, eg the shift from a priority to mining on the US federal lands to priority to other objectives,

eg very wide and largely self-judging recognition of sacred site claims by indigenous Native American tribes as in the Glamis v

US NAFTA ch XI case (<http://www.naftaclaims.com>).18 Such as self-adaptive resource rent taxes responding to price and thus rate of return changes; stabilization clauses evolving into

‘equilibrium’ clauses allocating the fiscal and related risk to the state enterprise partner or the explosion of investment treaties

with direct investor arbitration rights.


thereafter; Argentina 2002 and thereafter).19 Nor have they been able to provide full pro-tection to international oil companies in countries such as Russia, Venezuela or Boliviawhere reliance on investment protection instruments would have meant a forced, uncom-pensated exit from the country. There would have been a swap of assets governed by newand significantly deteriorated fiscal, regulatory and ownership regimes against litigationclaims, ie the prospects of protracted international arbitral litigation with no assuranceof payment in case of an award for the investor claimant. This overall statement shouldnot be interpreted to mean that the new, three-tier-based investment protection method-ology (national law, contractual mechanisms, international arbitration and treaty-basedarbitration) does not provide protection at all. It simply suggests that it does not providethe full and comprehensive protection for which it was designed for and which someoptimists expected.

A ‘legal sceptic’ (normally specialists from economics, political sciences and interna-tional lawyers in a strongly ‘realist’ tradition)20 would suggest that the law – what lawyersdo, say, formulate and structure – is a mere form and has no substantive effect in con-trolling or influencing the forces of the resource industries, including the politics of hoststates and the political economy in which the industries operate.21 They would suggestthat the written rules – in national law, contracts, international treaties and customaryinternational law from jurisprudence by courts and tribunals – are simply an illusionof security. They serve as a comfort blanket and tranquillizer for corporate management,investors, banks and financial markets. They allow them to accept high-risk investmentsunder the fiction that the law will protect the terms of such investment and thus the risk–reward balance underlying the original investment decision. Legal sceptics suggest thatcontracts and proprietary rights are nothing but pious ‘declarations of intent’ and ‘polit-ical statements’. They are meant to provide false, but willingly accepted, assurances to themany participants. But in the end, they are fully exposed to the vagaries of the host statepolitical process and to the political relations of host and home states. The law, in thisview, is nothing more than an illusion that is a necessary fiction for operations in a highlypoliticized market. Developing (or transition) petro-states do not operate under the ‘ruleof law’. They rather use – in President Putin’s word22 – a ‘dictatorship of law’, ie they usethe law with selective enforcement to ensure no legal right can be safely acquired and all

19 Seth MM Stodder and Ryan J Orr, Understanding Renegotiation and Dispute Resolution Experience in Foreign Infrastructure

Investment, 7(5) October 2006 (Ed.) ‘The Legacy and Lessons of Distressed and Failed Infrastructure Investments in the 1990s’.

Transnational Dispute Management, Special Issue, 4(02) April 2007; T Walde, ‘International treaties and regulatory risk in

infrastructure investment’ (2000) 34 JWT 1–61.20 See for the discussion of realist versus idealist schools Ian Brownlie, Principles of Public International Law (6th edn 2006); Ian

Brownlie, ‘The reality and efficacy of international law’ (1981) 52 BYBIL 1. Akehurst, McDougal, S Myres and W Michael

Reisman International Law in Contemporary Perspective: The Public Order of the World Community (Foundation Press, Mineola,

NY 1981). Philip Bobbitt, The Shield of Achilles (paperback 2003).21 Charles Lipson, Standing Guard, Protecting Foreign Capital in the 19th and 20th Centuries (University of California 1985), in

particular at pp 19–26, 53–65, suggests that the effectiveness of international law rules on investment protection depends on the

main enforcement capability of either a hegemonial power or the concerted support by the major states able to prevail over

challenges.22 President Putin’s doctoral thesis will be published, with an explanatory comment by Klaus and Walde in the Uppsala Yearbook

for East European Law (2008).


rights are exposed to the power of those who control the formal and informal levers ofpower.23 In such countries there is no ‘rule of law’ except in formal terms. Rather, thereis a ‘rule by law’ as those in power impose the appearance of operating in alignment withthe formalities of the law. But in reality, the formalities and the institutions of the law (eg,courts, prosecutors, judicial system, police, tax authorities, etc24) are under the full anddirect control of those with political power over the machinery of the state.

Quite apart from the philosophical differences about the true role of law in the inter-national energy investment, there is also a wider question as to whether it is truly possibleto fix the originally negotiated and desired terms for a long-term relationship – by con-tract, by national law desirous to attract investment or by international treaty. Is thefuture simply unmanageable and a matter of uncertain fate, or can lawyers with theirever-increasing sophistication and complexity of very detailed and indepth ‘documenta-tion’ really freeze the present and fix the future – like playing God? Or is much of the legalwork on such transactions rather a game of creating illusions that satisfy shareholders,financiers, regulators and capital market; but in reality has only a moderate effect. Andthe less so, the more distant the future and the greater the chasm in geography, politicalideology, religion and culture, all exacerbated by the volatilities of the economic andpolitical cycles overshadowing international energy investment?

2. Context of current energy and resource investment disputesThe context of current disputes (in particular in the field of oil, gas and minerals) is in theupwards (and unusually high) phase of the price cycle in the petroleum and miningindustries.25 Similar disputes have been occurring in the energy and infrastructure indus-tries (electricity; water; telecommunications and roads).26 Such disputes are not directlylinked to the upwards cycle in oil, gas and minerals but probably to the ‘political cycle’ ofattitudes towards foreign investment with a reaction towards the privatization policies ofthe 1990s. In those countries with significant petroleum or mining production, re-nation-alization, coercive renegotiation or regulatory and fiscal squeezes on post-privatizationforeign investors should be viewed as politically supported and financially enabled bythe large mineral rents available to the government.27

Investment disputes involve a fundamental change of government and political philos-ophy. A predecessor government did the deal – its successor wants to undo it. It will notbe easy to find a case where a dispute arises between the government in place at the timeof investment and the investor. Such unusual cases might arise out of a change of seniorgovernment personnel, a breakdown of personal relationships, unsuccessful, selective orrefused corruption or a serious change in the external circumstances of an investment.The ‘normal’ situation of an investment dispute is that the terms legislated or agreedupon and stabilized in one form or other (by the way of law, contractual stabilization

23 A Ledeneva, How Russia Really Works – The Informal Practices That Shaped Post-Soviet Politics and Business (Cornell UP 2006).24 Note that extensive documentation on the Yukos case is available on OGEL.25 P Stevens, 1 (2008) JWELB 1; Ph Crowson (2007).26 A good indicator is the summary description of investment disputes under ICSID, see, <http://www.worlbank.org/icsid>.27 See, eg Andy Webb-Vidal, ‘Chavez to nationalize telecoms, power’ Financial Times, 8 January 2007.


clause or a treaty-based stabilization28) are no longer supported and respected by a sub-sequent government. International law (nor most national laws) does not recognize achange of government as a reason to invalidate contractual and similar commitmentsmade by a prior government. The idea is that the government has legitimate powers ofagency that bind the ‘state’ irrespective of who the government of the day is.29

Nevertheless in practice, contractually or otherwise legally fixed investment terms tendto become shaky if a new government takes power. Existing supporters and friends havevacated office and power for adversaries; except if such friendship (often politically inev-itable) is deftly managed and can be transferred to those newly in power, the foreigninvestor will bear the political cost of proximity to the former government. The risk ofregime change for established investors is particularly acute if the new government pur-sues a fundamentally different policy towards private and foreign investment in resourcesseen as strategic; eg oil, gas, energy, mining, infrastructure and telecommunications.30

The Venezuelan ‘apertura’ pre-Chavez thus leads to very large oil, gas and mineral invest-ment; most of which has been taken over or seriously renegotiated by late 2007.31 If thenew government intends to fundamentally reverse its predecessor’s policies on issues suchas investment promotion and privatization (such as Venezuela, Ecuador and Boliviarecently), then the contracts entered into and investments made under the promotionalpolicies and terms of the prior government naturally become the target of the new gov-ernment. This is nothing new. The first Garcia government in Peru reversed its predeces-

28 Stabilization by way of the application of an investment treaty can occur through the ‘umbrella clause’ providing international

law protection and an international arbitral jurisdiction to an investment agreement – T Walde, ‘The umbrella clause in

investment arbitration a comment on original intentions and recent cases’ (2005) 6 J World Invest Trade 183–237; by way of

the application of investment protection law concepts such as ‘fair and equitable treatment’ (now considered to include

protection of legitimate expectations, provision of a predictable regulatory framework as well as ‘denial of justice’ by domestic

courts in case of contractual disputes), as expropriation or indirect expropriation (covering a governmentally coloured

revocation of contractually acquired rights). Such concepts can also apply to stabilization promised to the investor at the time

of the investment by host state law, but abrogated by a subsequent government. Stabilization of investment terms by way of

investment treaties has not as yet been fully and properly appreciated or systematically investigated; it follows from the

application of the main investment treaty disciplines (direct/indirect expropriation of contractual rights); fair and equitable

treatment (including legitimate expectation; denial of justice; protection against unreasonable and discriminatory impairment;

national treatment and possibly ‘constant security and protection’ of investor rights) to significant and unreasonable changes of

the original investment terms (contained in contracts but also the regulatory regime) in recent arbitral jurisprudence, see n 11.29 There is an as yet not well-defined concept that ‘no government can bind its successors’ based on implicit executive powers of

government and the idea that ‘parliament can not bind its successors’, discussed in 1974 in the context of the Jamaican bauxite

levies, cf JT Schmidt, ‘Arbitration under the auspices of the ICSID: Implications of the decision on jurisdiction in

AlcoaMinerals of Jamaica, Inc v Government of Jamaica’ (1976) 17 HarvILJ 90, but in most developed countries that principle is

not applied to contracts signed by the government or at least it is applied with the sanction of compensation in case of

revocation – see the seminal decision of the US Supreme Court in Winstar v US, 116 SCt 2432 (1996).30 What is strategic is not a scientific or economic, but rather a malleable political concept. The French government at one time

saw yoghurt making as strategic when there was talk about a hypothetical take-over tender of the French company Danone.

Sweden argued that protection of its shoe industries pursued an essential national security and military interest: Michael Hahn,

‘Vital interests and the law of GATT: An analysis of GATT’s security exception’ (1991) 12 Mich J Int’lLaw 558. The USA has a

wide concept of what is strategic – it includes modern electronics industry, ports and airlines: Jose Alvarez, ‘Political

protectionism and US international investment obligations in conflict: The hazards of Exon-Florio’ (1989) 30 VaJ Int’l L 2–171.

More recently, in 2007, a Chinese take-over of a US oil company was withdrawn after strong political opposition. Similarly for

a planned take-over of the US port facilities. Note a discussion initiated on the US ‘CFIUS’ process on 31 December 2007 on

OGEMID by Mark Kantor.31 For criticism of the Venezuelan ‘apertura’ cf Bernard Mommer (in 2007 the Venezuelan Deputy Minister of Oil), see n 43.


sor government’s investment promotion policies by coercive renegotiation (with Occi-dental Petroleum) and nationalization (of BELCO petroleum) in 1985. Once in power,a new government will feel compelled by its own opposition rhetoric and campaigninghistory to do something and even more so, to be seen doing something about the muchcriticized friendly relations of its predecessor with foreign investors. This politicaldynamic of government succession leads to a review of contracts and regulatory and fiscalterms. The result of such a review can be a cosmetic revision of such terms for publicconsumption or it can lead to formal investment disputes. The latter is the case wheneither the new government does not have the willpower or political capital to agree toa reasonable settlement with the foreign investor or when the investor does not havethe political skill to negotiate arrangements that both accommodate its own vital interestsand also provide visible negotiating success to the new government. Part of the skill innegotiating host state–investor arrangements was to provide to the investor what itrequired (management control over risk capital invested) while providing to the govern-ment the outward appearances of sovereignty and power. One can view the now prevail-ing production-sharing contract as a legal instrument that satisfies both essential needs ofinvestor and government. Its amazing success is largely due to the fact that it is a suppleand subtle instrument that can satisfy both the substance of the investor’s hard-corerequirements and the appearance of mastery and control that governments need.32

These political pressures against the foreign investor arising out of a change of govern-ment (be it minor or substantial) are exacerbated by the suitability of the ‘foreign’ inves-tor to become the target of host state politics. No country, society or culture exists in theworld where there is not suspicion of foreigners. This is simply human (and in fact ani-mal) nature. The forces that pull humans together to create communities are the samethat create a distinction between ‘we’ and ‘them’. Resentment against the foreigner(which can be at times a distinct national ethnic minority)33 is therefore not only naturaland a constant challenge for foreign investment, but it is also a continuously reshapedweapon in the domestic political struggle. Accusing the government of favoritism towardsforeign investors, with notes of disloyalty and treason to the nation,34 is thus a standardtheme in opposition politics. The charge works best against governments which werecompelled, in the downwards part of the resource cycle and in national economic depres-sion, to pursue an investment promotion policy. It is also likely to have a particularlystrong effect in societies undermined by powerful ethnic and class divisions where theupper classes have a colonial or immigration background and are educationally and cul-turally oriented towards Western states – as is the case for most of Latin America. The

32 N Machmud, The Indonesian Production-Sharing Contract (Kluwer, The Hague 2000); the earlier and seminal study on the

Indonesian production-sharing contract by R Fabrikant is now available on OGEL.33 A Chua, World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability Anchor (NY 2003);

ibid, ‘The privatization–nationalization cycle: The link between markets and ethnicity in developing countries’ (March 1995)

95 Columbia Law Rev 223–303.34 The theme occurs in all societies; but it has perhaps been particularly poignant in Latin America where ‘entregismo’

(capitulation to foreigners) has long been a powerful political theme – see, E Galeano, Open Veins of Latin America: Five

Centuries of Pillage of a Continent (1997).


weakness of internal social cohesion leads to a particular emphasis on nationalism35 andits necessary companion: suspicion bordering on paranoia towards the foreign investor.This is never more so if the foreign investor is extracting non-renewable ‘national’resources to sell abroad.36

It is therefore not remarkable that a change of government leads to action against foreigninvestors even if it is not in the interest of the state to increase its political risk by greatervolatility of economic policies and periodic rejection of foreign investment. Greater ‘matu-rity’ in terms of a diversified economy without dependency on oil or mineral commoditiesand an orderly transition between governments will reduce that risk. However even inmature, diverse economies there is an occasional witch hunt against foreign businessesas the history of foreign corporate take-overs in both the EU and USA demonstrates.37

The absence of an effective rule of law, anchored socially, institutionally and culturally,intensifies the political cycle and undermines the potential to create a more effective ruleof law that respects acquired rights and provides a reasonable governance system.

This deeply seated suspicion and resentment of ‘foreign’ investors does not necessarilyextend to ‘domestic’ investors. Domestic investors may behave similarly to foreign inves-tors or worse, as they are often much less subject to international and home state focus,NGO campaigning, monitoring, standards and guidelines. They are, however, muchmore immune from the suspicion directed towards the foreigner; they also benefit fromdeep roots and networks in the domestic political system. Modern (Western) interna-tional companies have much less scope for bribery and developing deep links with hoststate politicians and civil servants than they may have had in the past, due to the inter-national anti-bribery laws and the constant scrutiny from NGOs38 and financial markets.This does not apply to national entrepreneurs. Their prosperity will have been inextrica-bly linked to those in power. The Russian oligarchs are the best-known case.39 Here, thecontinued existence and effectiveness of property rights is conditioned on good will withthe government and those who dominate it. A number of publicized investment disputeshave highlighted the affiliation between domestic politicians and senior civil servants withdomestic entrepreneurs in competition with international investors.40 Competition ofinternational investors with powerful domestic (public or private) commercial interestswill therefore often end in the defeat of the foreign investor, eg the recent forced transferof majority ownership by Shell, EXXON and BP to Gazprom.41

35 William Easterly, The Elusive Quest for Growth, Economists’ Adventures and Misadventures in the Tropics (MIT Press 2001).36 My defining experience was a 1980s discussion with Peruvian senators who suggested that the then oil price declined was

engineered by the ‘multinationals’ expressly to humiliate Peru.37 For example, the 2006 take-over of ENDESA (Empresa Nacional de Electricidad SA) in Spain or the aborted Chinese take-over

of a US oil company or of the US port facilities by a Dubai company.38 See Bastida (note above) on some of the expectations now raised against multinational companies – one should add that such

expectations in practice are directed at Western companies and do not extend as yet to the large state and private companies

from developing/emerging economies except if they establish a significant presence in Western countries.39 David Hoffman, The Oligarchs, see above.40 Feldman v Mexico (US businessman v Carlos Slim’s businesses); Thunderbird v Mexico (Canadian/US company versus local

gambling entrepreneurs), available from <http://www.naftaclaims.com>.41 The bankruptcy and subsequent acquisition on the cheap by Rosneft of Yukos’ assets is to some extent as well an illustration of

such development as Yukos’ was formally owned by offshore companies and to some extent also materially owned by non-

Russian investors, cf the collection of Yukos-related materials on OGEL.


At times the foreign investor will not be penalized because of their ‘outsider’ status, butbecause they have been associated (or were forced by law of ‘political economy’ of localbusiness to associate) with domestic powers. Foreign investment in energy, resources andinfrastructure by its very nature requires intensive interaction with government anddomestic politics. It is hard to carry out such investments without having to make friendswith those who hold power. When such power fails, deals made with former authorityfigures are inevitably questioned and the investor loses the political and governmentalsupport they need. Except if the investor is deft and lucky enough to engineer a changeof tack and build synergistic relationships with those newly in power. This requires bothan anticipation that current power relationships may not be forever and a degree of dup-licitousness in nurturing a back-channel with the opposition and political alertness interms of restructuring political patronage when power changes; this strategy does notcome easily to large international corporate bureaucracies.

Such dynamics of investment disputes are aggravated as the resource industries’ cycleprogresses. Resource industries, in particular oil and metals, move in cycles.42 These maynot operate in a simple and predictable fashion. They are influenced by other factors suchas wars, financial crises and producing countries’ coordination (OPEC). However, thebasic economic logic is that increases in demand lead over time to higher prices and thenhigher investment and higher production. Higher production over time leads to oversup-ply; oversupply to lower prices, reduced investment and shrinking of supply. On thedemand side, higher prices lead ultimately to a lowering of demand (including greaterresource use efficiency and substitution) while low prices will tend to encourage demandand slow down application of new technologies to reduce energy intensity.

The adaptation of supply and demand to prices tends to be unusually slow in theresource industries. This is perhaps the specific feature of the general demand–supply rulein the field of petroleum and mining. Demand is not very flexible and leads only to someadjustment with a considerable lag of time. The same applies for supply. It takes severalyears, often more than a decade, for new investment to be undertaken through explora-tion, development and start-up of production. New investment is based on – notoriouslyunreliable – forecast of prices, usually based on some averaging out. Existing facilities willcontinue to produce even if at a loss, so long as operating (minus mothballing) cost iscovered by revenues, thus prolonging an excess of production and aggravating the down-ward trend. Operating costs are in these industries comparatively modest in comparisonto the very high capital cost of oil, gas and mining facilities. The special characteristics ofthe resource industries tend to intensify and prolong both the upward and the downwardprice cycles. The politicized, regulated and governmentally influenced nature of theresource industries adds to the specific characteristics of the petroleum and metals’ mar-kets. In oil, the key producers in OPEC try, often successfully, to bring about a concertedpolicy of production control thus lifting or maintaining prices when the market funda-mentals would suggest otherwise.43 This leads to another element: the slowing down of

42 Stevens, JWELB 1 (2008); Crowson (note above).43 This coordination does not always work; it requires as a rule the availability of reserve capacity, ie the capacity to easily increase

production. This capacity appears, in 2007/2008, largely absent except perhaps for Saudi Arabia.


market-based signals. Furthermore, the most important OPEC countries in the MiddleEast, in particular Saudi Arabia and to a lesser extent the Gulf states, have excluded orseriously diminished the role of international oil companies in upstream oil and gasinvestment. This means that high prices do not exercise the same effect of encouragingproduction from existing facilities as they would in a primarily market-based system.The now dominant OPEC country state enterprises (Saudi ARAMCO (Arabian OilCo); NIOC (The National Iranian Oil Company); Sonatrach, et al) and also Norwegian(Statoil), Mexican (Pemex) or Russian (Gazprom and Rosneft) companies do not obeymarket logic as private oil companies do. They instead invest under tight control ofthe countries’ budget authorities and have to take into account the state’s availabilityof or need for finance and the states’ conservation policies. In particular, the oil market(not yet the gas market and much less so the metals’ market) is thus a mixture of market-based and political logic, perhaps reminiscent of the structure of command–control ‘war’economies with elements of market features. With a high oil price and large governmentrevenues, there is little reason to increase production (assuming there was unused capac-ity) or to encourage investment. If investment in replacement capacity is desired, the cap-ital is easily available, with little need for the capital contribution by international oilcompanies; these, anyway, are now in intense competition for acreage with the stateoil companies from China and India which are flushed with money and thus able topay well, to be more accommodating than private companies to more restrictive termsand pursuing a political mandate to increase energy flows to their home countries.44

3. What does this mean for the dynamics of investment disputes?Let us look first at the ‘bottom’ of the resource cycle. At this stage, the host state, typicallydependent on mineral production and export, will earn little revenue as the differencebetween cost and price will be minimal. Royalty (ie percentage of sales’ price)-basedtax regimes will make continuation of production even more prohibitive so that botha reduction of production and mineral rent seriously diminish government income.There is no case for investment by state companies as any revenues that are generated willbe required to sustain the government services built up in a time of high prices. Thedecline of such revenues will not only restrict any state enterprise investment, but will alsolead to a serious stress on the political legitimacy of the government depending on theability to finance political patronage and social services built up in a time of plenty.45

The only sensible policy at this time is to encourage private investment by internationalcompanies and to privatize loss-making state enterprises, often coupled with financialand social austerity programs including a reduction of government expenditures andtaxes. Host state bargaining power is at the low point. Investors ready to invest at the bot-tom of the resource cycle (ie when all the predictions about the future are dire) will have

44 K Kalotay, ‘Multinationals at Bay’ (December 2007) 129 Geneva Post Quarterly 159.45 For a more extensive discussion of the predatory nature of the petro-state resulting in inefficient recycling of rent through

patronage and loss of comparative advantage as the elites will focus on political–economic links rather than on economic

efficiency: R Auty, ‘Rent cycling theory, the resource curse and development policy’ (2007) 11 Developing Alternatives 7–13

and on OGEL.


considerable leverage. Investment promotion means a lowering of tax and of other reg-ulatory burdens combined guarantee that such terms will last. Such guarantees will haveto be credible as the past record of most host states suggests that favorable terms will notlast. Intensive efforts are therefore expended on constructing credible guarantees, throughnational law, investment agreements, stabilization clauses and accession to investmentprotection treaties that are enforced by international adjudication.46

As the resource industries’ cycle gradually – and with considerable time lag – movesupwards, the situation changes. No longer are investment incentives necessary. In theupward phase, governments have extensive liquidity. They have repaid their debt. Thereare ample resources available from now exploding ‘mineral rent’ to finance social andpolitical services and patronage to sustain them in power. They no longer need to expandproduction and can afford the luxury of thinking about conservation of resources for thefuture. There is no inherent limitation on the ability of state enterprises to invest andample capital is available to nationalize – either by purchase, by decree or by coercivepurchase under threat of nationalization by decree. Technology – services, equipmentand project management – can be purchased from service companies.47 The ‘slimming’of oil companies in the late 1980s and early 1990s has fostered a large number of servicecontractors able to provide the needed technological and management services to state oilcompanies; earlier, these services were located inhouse in major private oil companiesand thus not easily available to the state oil companies. International oil companies aredesperate not to lose access to reserves and are thus willing to enter into high-priced dealsto acquire new acreage or to consent to host government demands to renegotiate thedeals, now seen as too favorable, entered into at the low point of the resources’ cycle.They compete with cash-rich enterprises from China and India politically mandated toacquire at whatever cost security of supply in producing countries. The industry cyclereinforces the political cycle. Governments that have salvaged economies in depressionwith austerity, investment promotion and privatization policies48 are now accused of hav-ing yielded to blandishment and bribery by international investors. Their policies are dis-credited and painted as having been executed by governments in the pay of the suspected‘foreignerx’ under suspicious ideological concepts such as capitalism and neo-liberalism.The outcome is either a simple yielding by international companies, anxious to prevent acomplete write-off of their investments (now having a higher value due to higher pricesand thus more able to cope with higher taxes and government takes) or, if there is no netbenefit of maintaining the investment under revised terms, an exit accompanied by usingavailable legal procedures for asserting the legal validity of rights acquired in the earlierphases of the cycle.

Even when the high point of the cycle is reached, there is no stand-still. The nature ofthe cycle is the movement of the wheel. The high point carries the seed for the now

46 World Bank Development Report, 2004, in particular (establishing and enhancing credibility, pp 45, 175).47 Valerie Marcel and John V Mitchell, Oil Titans Brookings Institution Press (2006); cf discussion on Schlumberger’s strategy

provides specialized oil technology to the new major state oil companies discussed on ENATRES, December 2007 (available

from <http://www.ogel.org>).48 For a description of the corresponding ‘Latin American model’ of investment-friendly mining laws cf Bastida (2008, see above).


declining movement of the wheel. When the cycle is in its upper phase, production coststend to increase rapidly as the suppliers of equipment, services and labor face shortageswith no easy and rapid substitution in sight. Eventually demand reacts to high prices bygreater energy/resource efficiency, substitution and ultimately, with quite a time lag, adecline in demand. Supply, on the other hand, is not very elastic and will tend to continuefrom existing facilities well into a declining price and thus accelerates a price decline. Theeconomic cycle reinforces the political cycle. As foreign investors are pushed out and asstate-run enterprises are necessarily inefficient, investment slows down and is less produc-tive. The economic rent (‘mineral rent’) shrinks. Shrinking government revenues thenface bloated and inefficient government services necessary for the political legitimacyof the freely spending regimes sitting on top of the wheel of fortune. Their legitimacyerodes.

Petro-states as a rule have been unable to build up a self-sustaining industrial and eco-nomic base with the mineral rent. They live like ‘rentiers’: spending, to sustain their polit-ical legitimacy, but not investing and modernizing their economies by economic reform.The ‘resource curse’ does its business.49 The focus of maximizing ‘mineral rent’ as themajor objective of producing states as reflected and proposed in the study by BernardMommer – currently Venezuelan Vice-Minister of Petroleum50 does not focus muchon how to spend the money wisely. It simply spends itself. No petro-state has been ableto pursue a consistent and successful policy in freeing itself from dependency on oilincome. This is derived from the logic of oil income and is as a rule not practicallychangeable, whatever be the lecturing by academics, international agencies or NGOs.The more income oil generates, the less pressure there is to diversify. High points inpetroleum prices are therefore rather associated with low points in terms of economicreform and industrial diversification. Furthermore, a high level of oil income reducespressure for political reform as the control over oil income allows those who rule thepetro-state to buy political support. Like all ‘rent’, dependency on unearned oil incomeundermines the potential for true earning power based on work, effort, initiative andingenuity. Petro-states are like rich kids – with the ‘devil creating work for idle hands’.The inevitable decline of oil prices is then not compensated by other income-earning sec-tors, but is likely to provoke political crisis, reversal of state-centered economic policiesand another turn of the wheel of the oil price and political cycle.51 The rentier politicaleconomy of producing states maintains and reinforces their dependency, keeps themfrom respecting acquired investor rights and creates a political cycle of greater volatilityin addition to the price cycle. As respect for acquired rights – contractual, proprietary orcivil – is an essential condition for self-reliant economic growth52 of societies, the price,

49 P Stevens, ‘Resource impact: Curse or blessing? A literature survey’(2003) 9 J Energy Lit 3–42.50 Bernard Mommer, Global Oil and the Nation State (Oxford University Press 2002) and my review article: Bernard Mommer,

‘Governance of oil’ (2002) JENRL.51 There seem to be very few countries which have been able to escape the economic and political cycle of petroleum prices.

Norway is often cited but it is far from certain that Norway has been able to build up a diversified economy. Chile seems to

have established competitive industries during a long period of dependency on copper prices.52 W Bernstein, The Birth of Plenty: How the Prosperity of the Modern World was Created (Mc Graw Hill 2004). Cf also World Bank

Development Report, 2004, see n 46.


political and legal cycles further stunt the development potential of petro-states. All ofthem experience great difficulty to break out of them. Mineral rent – and the focus onit – enslaves rather than liberates producing states.53

It is possible that the current cycle will last longer than the previous cycle because of theunusual explosion of demand from the industrialization and creation of consumer middleclasses in China and India on a massive scale. But speculation about the current cycle isbeyond the remit of this essay. The one forecast that I can make is that the longer the cyclelasts, the more acute will be the implications for host states and investors described here.

4. Types and dynamics of investment disputesNo exhaustive survey of investment (investor–state) disputes has so far been undertakenwhich organizes them according to particular types of disputes. Nor has there been anysystematic analysis of their ‘dynamics’, ie how such disputes emerge and progress.54 Anoverall survey of information available on the ICSID (International Centre for Settlementof Investment Disputes) website (<http://www.worldbank.org/icsid>) provides informa-tion on the country of claimant investor, the respondent country, industry and the overallprogress of the arbitration (from notice of claim, decision on jurisdiction, award on themerits and occasionally settlement or decision on an annulment request). This is there-fore an anecdotal explanation of investment disputes.

These are features one frequently finds:

• Investment disputes almost invariably have to do with a change of government. Dealsarranged with one government (and their people) are no longer accepted and areactively assaulted by the successor government. The foreign investor is at times notthe principal target of the new government’s campaign, but simply a victim in a ven-detta by the new against the old government (or by people in the new governmentagainst people of the old government).

• Structure and content of the investment transaction are rarely if ever ‘perfect’. In almostall cases there is a flaw, a lack of full perfection, detail, specificity and precision in thecontractual documentation which is only identifiable once a dispute arises and legalexpertise is applied to a close scrutiny of the documentation. There may have beenweaknesses in the full compliance of the several contracts, consents and permits withdomestic law (which rarely is very clear). Protective measures in the contract (eg stabil-ization and international arbitration agreements) may not exactly cover the measurestaken subsequently by the government. That is because the original state–investor nego-tiations are based on incomplete and ambiguous language or because the subsequentgovernment has chosen measures to evade coverage by earlier investor-protective

53 For a more extensive discussion of the resource curse in petroleum and mining cf Stevens (1 JWELB) and Bastida, note above.54 There have been extensive writings, in particular case studies and surveys of nationalizations during and at the end of the last

‘NIEO’ cycle, see only: Walde, ‘Revision of transnational investment agreements: Contractual flexibility in natural resources

development’ (1978) 10 Law Am 265 based on the author’s contribution to the 1978 UN study on ‘Transnational Corporations

and World Development’. K Rodman, Sanctity versus Sovereignty, the US and the Nationalization of Natural Resource

Investments (Columbia UP, NY 1988). Charles Lipson, Standing Guard (1985) see n 21.


contractual language. The state may rely on differences between the state and its stateenterprise; the state may intervene by regulation or the state company may rely on reg-ulation by the state to request a renegotiation of the contractual regime. Since mostcommercial operations abroad will involve the use of a chain of holding companies,contractual investment protection is not always carefully thought out in terms of whichcompany in the corporate chain should be covered by which governmental action.Investment protection perhaps should be high on the priority of the negotiators anddrafters, both in government and with the investor, but it is often not the chief concern.The foreign investor may not have extensive experience and that investment may bepart of its first foray abroad. The government promoting new investment (typicallyat the bottom of the cycle) will send out only positive signals so that excessive attentionto the political risk at the tail-end of the investment cycle may appear inappropriate andlikely to poison the relationship. Typically, negotiating blockages are solved by ambig-uous drafting. How this will fare in possible adjudication far in the future is rarely ofgreat interest to the present negotiators and executives. Their reputation at stake isabout ‘getting a deal’ that looks attractive to headquarters, but not how flaws in thestructuring and the drafting of the transaction may become significant 10 years later– an element of ‘moral hazard’ is thus inevitable. It is only recently that the investmenttreaty implications for structuring investment are identified more clearly and start beingtaken into account when investments are organized.55 These are the realities of theinternational investment process. Applying a ‘caveat investor’ principle – as some aca-demics advocate56 – would thus emasculate most investment protection, either by con-tract or by treaty as such benchmarks are far too high to be achieved in the messy realityof practical corporate and commercial life. If only ‘perfect’ investors were to be pro-tected, there would be no need for protection at all.

• An intelligent way would be for such disputes to be settled early, even after notice ofarbitration has been given. Indeed, in ICC commercial arbitration, most disputes aresettled before the award.57 But settlement of an investment dispute with a new govern-ment out to rescind deals it publicly attacked when it was in opposition is not polit-ically easy. Investors should try to accommodate the public relations exigencies of thenew government keen for a visible and symbolic success of dealing with a foreigninvestor while maintaining the economic substance of the deal. This was very muchthe practice of new petroleum and mineral investment at the end of the last cycleof resource nationalism in the 1980s.58 They can also try to settle by dumping local

55 Cf the Aguas del Tunari-Bolivia jurisdictional decision, available from the ICSID website.56 Peter Muchlinski, ‘‘‘Caveat investor?’’ The relevance of the conduct of the investor under the fair and equitable treatment

standard’ (2006) 55 ICLQ 527–58, 54; contra: MTD v Chile (<http://www.investmentclaims.com>); see also T Walde’s Separate

Opinion in Thunderbird v Mexico, <http://www.naftaclaims.com>.57 Cf Goldsmith/Ingen-Housz, ADR Int’l Bus (2006).58 The first investment contract I helped to negotiate was in 1983 between Guyana and COGEMA. The key was to provide to the

investor the management powers it required while providing to the socialist government of Guyana enough appearance of

government ownership and control. Combining both provided a foundation for a deal.


partners affiliated with the ex-government and accepting new partners with stronglinks to the new government.59 There should be little doubt that settlement of notoverly politicized disputes with new governments is facilitated by bribery and patron-age in favour of people with influence in the new government. That is what essentiallyhappens in many investment disputes that are settled.60 While these are natural andoften successful strategies, they do not sit easily with companies from countries wherethe OECD anti-bribery convention applies, in particular from the US. They are subjectto extensive corporate disclosure, transparency and anti-bribery requirements. Cultur-ally, they are given to litigation to enforce specifically defined rights rather than to anon-US culture of continuously building and nurturing relationships.61

• Governments have particular difficulty settling by negotiation or mediation, when thedispute is visible, politically loaded and involves a foreign investor they had attackedwhen in opposition. There is no political profit to be made out of the settlementand the prospect of international arbitration or litigation means that the responsibilityfor the dispute is passed on to an external institution that can easily serve as a scape-goat in domestic politics. While mediation can often resolve such disputes more effi-ciently and can involve measures to make a settlement politically more acceptable,62 ithas almost never been used in investment disputes. Very few of the ICSID disputeshave ended in settlement.63 Once a dispute ends up in litigation, it is owned by thelitigation professionals. Their interests are not served by settlement or mediation, onlyby litigation.

• Long-term contracts in the oil, gas, mining, energy and utility/infrastructure industriesare particularly susceptible to subsequent action by new governments resulting in aninvestment dispute. In all cases, it is difficult for governments to encourage investmentin the low phase of the cycle. Considerable promotion and concessions (in terms of taxincentives), and investment guarantees are necessary.64 While there may be someinbuilt adaptation mechanisms (eg resource rent tax), such contracts always reflect

59 This is not always easy: Note a current arbitration by the ex-son-in-law of the Uzbek President against its former partner Coca

Cola, TDM/OGEMID archive 2006. In Russia, the politically most skilful oligarchs have successfully migrated from President

Yeltzin’s group to President Putin.60 An examination of the many Russian oil/gas investment disputes will show that the renegotiated deal involves a minority role

for the domestic investor and substitution of earlier oligarch partners with state companies or private entrepreneurs acceptable

to the current Russian government.61 Nabil Antaki, ‘Cultural Diversity and ADR Practices in the World’ in Goldsmith, Pointon and Ingen-Housz (eds), ADR in

Business (2006) 265, 288 et seq.; P Norton, ‘Informal Dispute Settlement Approaches’ in M Moser (ed), Managing Business

Disputes in Today’s China (Kluwer, 2007) 19–44. On similar cultural traditions and conventions against using specific legal

obligation drafting in contracts and litigative approaches towards disputes in Japan: T Cole, Commercial Arbitration in Japan

<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1083371>.62 See. T Walde’s case study, ‘Efficient management of transnational disputes: Mutual gain by mediation or joint loss in litigation’

(2006) 22 Arb Int’l 205–33.63 Mainly Goetz v Burundi where the tribunal used a preliminary award to encourage settlement. (Antoine Goetz and others v

Republic of Burundi (ICSID Case No ARB/95/3)).64 At the end of the last cycle, it was the Chilean Mineral Code and the Chilean investment law which set the model for investment

promotion by creation of individual, protected rights flanked by contractual guarantees of investment stability – see Bastida

(2007); T Walde, ‘Investment policies and investment promotion in the mineral industries’ (1992) 7 ICSID-Rev/FILJ 94–113;

reprinted in Bruce Mc Kern (ed), Transnational Corporations and the Exploitation of Natural Resources, vol 10 of the UN Library

on Transnational Corporations (General Editor: John Dunning) (Routledge, London 1993) 340–63.


the low bargaining power of the government inherent in the low phase of the cycle.When the cycle moves upwards, government leverage changes. Contracts concludedearlier as a result of vigorous and persistent efforts at investment promotion in a dif-ficult market now seem to contain excessive concessions. Inevitably, critics raise cor-ruption, which may or may not have been associated with the deal. The investor’sinvestment has now become a ‘hostage’ of government policy. The heavy capitalinvestment has been sunk; considerable risks (in particular petroleum and mineralexploration) have been taken. A dispute will only develop if such risks have been over-come and if the project – quite against the initial odds – has become successful. Dis-putes about ‘excessive concessions’ by the earlier government do not arise if the projectfailed due to those risks, in particular the high exploration risk characteristic for petro-leum and mineral investment.65 But for successful projects there is an ‘obsolescing bar-gain’. Investments in the areas identified are politically very visible. There isconsiderable political capital to be gained by attacking the ‘foreign’ control over a‘national’ strategic resource. In infrastructure investment, private investors need torecoup their investment in purchasing and upgrading heavily deteriorated public facil-ities by higher usage fees. The public is not used to paying a proper fee for a properservice. So political pressure for government action against the earlier government’sprivatization and investment deals is bound to rise.66 A survey of information oninvestment disputes from ICSID and MIGA (Multilateral Investment GuaranteeAgency) confirms the particularly vulnerable nature of investment in theseindustries.67

To illustrate the nature of recent investment disputes – ie unrelated to the 1970s‘NIEO’ disputes which consisted mainly of formal expropriation and the equivalent can-cellation by government of long-term concessions, the following is a brief summary ofdisputes in the current cycle:

• The 1997 windfall tax on privatized utilities, imposed by the Blair government, cateredto the dissatisfaction of the Labor Party’s left wing with Margaret Thatcher’s privati-zation program. It was a unilateral tax considered confiscatory since it increased theoriginal purchase price in the privatization.68 It did not lead to any major legal chal-lenges. First, there was no treaty enabling direct-investor state arbitration against theUK by the – primarily USA – investors. Energy Charter Treaty investors (who couldhave initiated arbitration) were not involved significantly at the time in UK utilitiesor did not wish to rely on the ECT. Second, there was no unambiguous contractual

65 B Land, ‘Similarities and Differences Between Mining and Petroleum’, OGEL 2007 with a discussion of the magnitude of

exploration risk in petroleum and mining.66 T Walde, ‘International treaties and regulatory risk in infrastructure investment’ (2000) 34 JWT 1–61; the then predicted

disputes have materialized, cf only the Vivendi v Argentina or Aguas del Tunari v Bolivia ICSID disputes (available from <http://

www.worldbank.org/icsid>).67 Cf the three volumes edited by T Moran and G West, International Political Risk Management (World Bank/MIGA 2005).68 Thomas Walde, ‘Renegotiating previous governments’ privatization deals: The 1997 UK windfall tax on utilities and

international law’ (1999) 19 Northwestern J Int’l Law Bus 405–24 (with Abba Kolo).


commitment of the UK to refrain from imposing taxes post-privatization. Third, andperhaps most importantly, the significant tax was considerably less than the profits theoriginal investors made from privatization. It was seen as a relatively reasonable wayfor the government to take a relatively moderate bite into post-privatization profits.The privatized utilities and their shareholders continued to do well and were notdeprived of either ownership, control or the major part of their post-privatizationprofit. The UK windfalls tax may have inspired other post-privatization anti-investoractions but its relative moderation was not copied. Arguably, it was the most successfuland uncontroversial measure directed against utility investors post-privatisation.

• In Nykomb v Latvia,69 the Latvian government had promised by law to pay a special‘double tariff’ to electricity producers using new and environmentally friendly co-gen-eration technology. The double tariff was implemented through an agreement betweenNykomb, a Swedish investor, and Latvenergo, the government-owned electricitymonopoly enterprise. Latvenergo subsequently refused to honour the agreement. Itsinterest was rather to pay much cheaper electricity, in particular from Russian nuclearpower producers across the border. In this – first – Energy Charter Treaty award thetribunal had to grapple with complex issues of umbrella clauses, indirect expropriationand, in particular, the question when a contract breach by a state-owned enterpriseoperating as a monopoly in a politicized and tightly regulated market could be attrib-uted to the government;70 there was also the special question of the relation of theEnergy Charter Treaty’s quasi-attribution norm (art 22) with customary law of attri-bution as formulated by the ILC articles on State enterprises.71 The tribunal awarded(partial) damages to Nykomb for the breach of the contract by Latvenergo; it held thegovernment responsible for Latvenergo’s failure, largely because of the highly regulatedmarket and government ownership and control over Latvenergo. The tribunaleschewed dealing with the issues of the umbrella clause and art 22 ECT but found abreach of the national treatment obligation because Latvenergo had in the end paidthe double tariff to domestic producers, but not to foreign Nykomb. The case raisesissues that are characteristic for long-term energy investment: the dependence of for-eign investors in the sector on government tariff regulation; the privileged, tightly reg-ulated and often monopolistic role of state (or private) electricity distributioncompanies constituting the only viable outlet for power production; and the consider-ations that argued for piercing the corporate veil between state and state-owned utilitycompanies by attribution. The case illustrates issues that are likely to re-occur innumerous energy and public infrastructure disputes which now occur with reactions

69 Published on <http://www.investmentclaims.org>; on TDM; for an extensive case comment: Walde and Hober, ‘The first

energy treaty arbitral award’ (2005) 22 J Int’l Arb 83–105; my expert opinion for Nykomb is available on TDM.70 These questions of attributing state enterprise contract breaches are not as yet fully resolved, cf K Hober’s ILA report

(forthcoming in an OUP book, 2008, edited by Ortino, Muchlinski and Schreuer); N Gallus, ‘State enterprises as organs of the

state and BIT claims’ (2006) 7 JWIT 761. The question is if attribution rules under in particular the ILC articles on State

Responsibility (arts 4, 5 and 8) can be used to consider the breach of a state enterprise of a contract with a significant

governmental (not just commercial) character as a breach ‘by the state’ of a commitment covered by the ‘umbrella clause’.71 This issue has similarities with the relation between an economic emergency clause embodied in an investment treaty and

customary international law on ‘necessity’ which has been the subject of the 2007 annulment decision in CMS v Argentina.


against earlier privatization and with the visible role of foreign investor in politicallysensitive provision of public infrastructure services. Such investments require full costand investment recovery but the users of public services are generally not used to paycost-covering usage charges and expect formal or implicit government subsidies.Moreover, the Nykomb case is so far the first case where the legal security of an envi-ronmental investment incentive was tested. It is therefore a prime example for the useof investment arbitration to further sustainable development by helping to secure thestability of energy efficiency incentives undermined by cheaper electricity imports.

• In 2004–05, Russia destroyed Yukos, a private Russian oil company partly owned byRussian, Yeltzin-area ‘oligarchs’ (in particular M Khodorkovsky) and by minorityUS investors, through a combination of discriminatory and retroactive tax re-assess-ments. Russian authorities accomplished this with large penalties and a rapid, manip-ulated and contrived auction which allowed state company Rosneft to purchase mostof Yukos’ assets at a bargain price.72 Tax practices that were normal, tolerated andaccepted by the Russian tax authorities were invalidated by an unusual abuse of rightconcept in the Russian civil code that disregarded a statute of limitation for such taxre-assessment claims. There are similarities with the UK windfall tax – ie the change ofgovernment, the pursuit of the earlier regime’s favourites and the exploitation ofdomestic resentment against the unexpected profitability of the privatized assets. How-ever, different from the UK, the Russian oligarchs did not acquire the assets through atransparent and non-discriminatory tender process, but in the questionable ‘loan forshares’ deal to support President Yeltzin’s re-election bid.73 Russian oil privatizationswere significantly more profitable than the British ones. Yukos’ chief shareholder hadused Yukos’ funds and networks to support the new President Putin’s opponents. Thisdimension of political opposition linked to economic power acquired through politicallinkages with the former regime was absent in the UK windfall tax situation. Finally,the destruction of Yukos was not based on a transparent and non-discriminatorytax, but on political manipulation of the Russian tax and judicial systems in a way thathas seriously discredited them – and the claim of ‘rule of law’ and respect for propertyrights – in Russia.

• In Duke v Peru,74 the Peruvian government initiated a tax re-assessment on Duke’s pri-vatized electricity generation assets based on two tax minimization practices. One wasbased on a ‘general’ higher general depreciation rule as contrasted with a lower, specificdepreciation rule applied to the former Electro-Peru’s generation assets. The other oneconsisted of invalidating the tax benefits of a corporate merger with modest economicsubstance. The merger helped the company to achieve a higher depreciation because itallowed re-valuation of the corporate assets at the higher market rate. The ICSID case

72 T Walde, ‘Expert opinion for Houston Federal Bankruptcy Court, February 2005 (available on TDM); see further analyses in

the Yukos-section on OGEL & TDM.73 Cf David Hoffman, see above.74 Decision accepting jurisdiction available on <http://www.investmentclaims.org>; award on the merits at the time of writing

not yet available.


is based on a ‘Legal Stabilization Agreement’ obtained by Duke in the course of pur-chasing the privatized assets. Its interpretation is currently before an ICSID tribunalbased on an ICSID arbitration clause in the contract. The Duke case does not havethe heavy political connotations as the Yukos case. But it does reflect the political cycle.The earlier Peruvian government heavily promoted privatization in a time of economicemergency to re-start the economy. It guaranteed legal stability, following the success-ful ‘Chilean’ model to overcome its high political risk rating. The successor govern-ment was influenced by the re-emergence of economic nationalism (after economicrecovery) and resentment against foreign privatization investors. This change in senti-ment towards privatization investors seems to have provided some momentum to thedeployment of taxation rules, in particular the opaque and easily abused principle of‘economic substance over form’.75 This principle, used as well in the destruction ofYukos under the Putin presidency in Russia, allows to question virtually every businesstransaction as tax considerations are likely to be part of any planning for commercialtransactions.

• Venezuela, over the last several years, has forced most or all foreign oil companies toaccept a revision of contract terms (with PDVSA, the state company) which signifi-cantly worsened the ownership and tax position of foreign investors.76 This has beendone under the threat of unilateral legislation and/or expropriation. Similarly, compa-nies in Bolivia have been coerced to accept significantly less favorable terms under thethreat of full nationalization and physical occupation of their operations. In both thecases, foreign investors were seen by the present governments as closely associated withearlier, more pro-investment regimes. The attack on foreign investors was presented asa fundamental reversal of the former governments’ policies. There were also elementsof internal ethnic conflict between the indigenous majorities represented by the newregimes against the ‘white’ upper and middle classes represented by the earlier govern-ments with a traditional ‘Western’ and US orientation. Class and race probably play arole in both the situations. There is also an element of vociferous anti-Americanismpresent in the Venezuelan case.

• Both the governments’ economic nationalist policies reflect the upper phase of theresource industry’s cycle and the corresponding political cycle. The Venezuelan casedisplays traits of a Socialist and state-oriented attitude – or ‘war economy’ – towardsactivities in the dominant oil and gas sector. Most companies have accepted the rene-gotiated terms on the premise that it is better to continue to have a smaller share in themore profitable petroleum assets than being left with a combination of full exit and acompensation claim requiring protracted international arbitration under availablecontractual or BIT-based arbitration with no guarantee of compliance with an award.However, some companies with assets that are less profitable are resorting to arbitra-tion with the hope that a subsequent government, in the downwards cycle, may be

75 Cf T Walde/A Kolo, ‘Investor–state disputes: The interface between treaty-based international investment protection and fiscal

sovereignty’ 35 Intertax 424–48.76 Discussion and news items on the TDM/OGEMID archive follow in great detail the path of the Venezuelan interaction with

foreign oil companies. For a background history of the Venezuelan oil concession history: B. Mommer, see nn 32, 51.


willing to come to a settlement and pay on an eventual arbitral award.77 Experience inother cases, eg the Libyan nationalizations of the 1970s and the Peruvian expropria-tions in the mid-1980s, illustrates that when the political and economic cycle movesdownwards and investment promotion comes back on the agenda, old disputes withopen claims get settled. Should oil prices decline and the coercively renegotiated con-tracts no longer be economically viable, then such a strategy might recommend itself.Should the companies which have accepted renegotiation develop second thoughtsover the wisdom of such acquiescence, the legal issues raised by the companies willbe that coercive renegotiation is a breach of the ‘fair and equitable’ treatment stan-dard78 as opposed to the claim by governments that companies ‘freely’ waived anyright arising before the renegotiation out of applicable treaty obligations of the hoststates.

Glamis v US79 is not related to privatization but shows another perspective of the inter-ventionism of western countries into the natural resources industry. It essentially con-cerns the US Federal and California administrative and regulatory action to preventdevelopment of a gold mine asserted by the adjacent Quechan Native American tribeto be in conflict with spiritual pathways and sacred sites in the California desert. The Cal-ifornia action was undertaken with the express purpose of preventing the mine, but jus-tified as environmental measures imposing an intentionally prohibitive, novel andunexpected reclamation requirement. The Glamis case is indicative of modern trends.The traditional priority of mining in land-use decision-making under mining laws isbeing revised in favor of indigenous people80 (with the idea that not the state, but theforeign investor should sacrifice its rights for such protection). The state intervenes inthe high-risk phase between exploration and mine development, ie after the investorhas assumed the significance and natural resources characteristic and unique explorationrisk, with a regulatory innovation. The case illustrates that the mineral industries are nowbeing exposed to a higher risk in both developed and many developing countries due to arising popular sentiment against it. Pro-indigenous and anti-gold-mining sentiments coa-lesce in cases like this; this changes the political and regulatory equation relevant to theindustry. It illustrates the growing risk of the lack of ‘social acceptance’ of oil, gas andmineral extraction; an activity that may have intense, but very localized, effects that posevery little widespread environmental issues compared to most of the hydrocarbon-basedenergy consumption. Developed economies cannot therefore necessarily claim to offer

77 As of September 2007, EXXON has filed a notice of arbitration with the ICSID against Venezuela; CONOCO and TOTAL are

reportedly still considering this step.78 Note, inter alia, the discussion in the CME v Czech Republic; Siemens v Argentina, CMS v Argentina, PSEG v Turkey and Saluka v

Czech Republic awards, <http://www.investmentclaims.com>; D Vagts, ‘Coercion and foreign investment rearrangements’

(1978) 72 AJIL 1, 7. The distinction between ‘free’ renegotiation in a context of bargaining power and under the shadow of

leverage by both parties on one hand and ‘coercive’ renegotiation under the threat of government action is difficult to draw,

both in international law, in comparative contract law and therefore also in international investment law.79 Available from <http://www.naftaclaims.com>; note in particular statement of claim, US Counter-memorial, reply and the US

Rejoinder. T Walde’s expert opinion in this case is presently not public.80 Bastida (see note above).


greater protection of acquired rights. To the contrary, they may offer a model of how toundo acquired rights by stealth through the deployment of regulation and tax rules, butalso in the even better camouflaged ways of enforcement. Such regulatory and adminis-trative practices can, at face value, be made to appear innocuous and legitimate butachieve the same effect than the cruder instruments of confiscation, expropriation andnationalization used in the past primarily in developing countries. This suggests thatthe future of international investment law will be much concerned with formal expropri-ation as with the impact of regulatory measures on the proper functioning of propertyrights.81

The Glamis case involved changes of government and government policy. The disputehad to do with a change of popular attitudes that reflected itself in a change of regulation,administration and interpretation of open-ended clauses. The claim was raised underNAFTA ch XI, in particular under art 1110 that deals with ‘indirect expropriation’.The US defense reflects the normal instinct of state respondents by emphasizing full expo-sure of property rights to government regulation, even when there is an unexpectedchange. While the US argument is formulated as if the issue were an ‘indirect taking’under the US constitutional law, it reflects a very statist view of individual property rights(under the cover of ecological, cultural and religious rights’ advocacy) which can easily beadopted by other authoritarian, statist or socialist governments in investor–state arbitra-tion. This has already happened as the US arguments have already been relied on in thedefense of a Latin American government against a US privatization investor.82 The Gla-mis v US case illustrates that the issue of property rights versus regulatory change is notjust an issue for developing or ex-socialist countries but cuts through the relationshipsbetween private investors and regulating states throughout the world.83

A recent complex of disputes, which is not public, originated in the significant oil priceincreases and resulting – in the eyes of the host state – in ‘windfall’ for the investor, aninternational oil company. Whatever the oil price, the major share of the ‘petroleum rent’is captured under most fiscal regimes by the host state. This is simply a consequence ofhigh marginal tax rates (up to 90% and more) achieved by a combination of incometax, royalty or quasi-royalties implicit in production-sharing arrangements with a cost-recovery cap, production-sharing percentages and windfall-tax add-ons (such as a rate-of-return-based resource rent tax). Nevertheless, an investment project that was consid-ered economically feasible by the investor on the basis of a 15 US $ per barrel price willgenerate a substantial return to the oil company at 100 US $ per barrel – even if most of

81 T Walde and A Kolo, ‘Environmental regulation, investment protection and regulatory taking’ in international law’ (2001) 50

ICLQ 811.82 M Bond, The Americanization of Carlos Calvo, TDM 2007.83 Lipson, 1985 pp 4–6, points out correctly that the concept of property is not static but fluid, reflecting the evolution in

attitudes, policy and law on the relation between the owners of proprietary rights and the state. The more authoritarian or

communitarian, the greater the perceived legitimacy of intervening in the use of property rights; Merill/Smith, ‘What happened

to property in law and economics’ (2001) 111 Yale LJ 357.


the excess over 15 US $ per barrel is taxed away and even if the capital and the operatingcosts have inflated substantially.

In this dispute scenario, two distinct though linked issues can be identified. First, thestate company (party to a production-sharing contract) was subject to a change in itsown status, that shifted income generated by the upstream oil project from the state com-pany to the state. Second, a new special windfall tax was imposed – not dissimilar to hoststate behaviour in developed countries with substantial upstream oil and gas production.The first issue leads to the question of how an ‘equilibrium’ clause in the Production-Shar-ing Agreement should be interpreted. Can the state enterprise rely on the equilibrium clause(the specific language and contractual context evidently controlling the interpretation) ifincome is simply shifted from the state enterprise (legally separate but politically and closelyintegrated with the state) to the state? There is no arbitral precedent for that question. Mostdiscussion of stabilization clauses (the equilibrium clause being a modern version of it) ismerely descriptive. Prof. Berger in a recent article briefly identifies the issue.84 The solutionhas to come from the analogous application of the extensive jurisprudence available on theright of state enterprises to invoke force majeure clauses when they intervene.85 Most of thewell-known precedent cases deal with disruption in the performance of a sales contract bygovernment prohibition on or revocation of licenses. This situation is quite different fromthe invocation of a reciprocal equilibrium clause in a long-term upstream petroleum pro-duction-sharing contract, perhaps conceptualized as a sui generic form of contract includ-ing elements of joint venture, long-term services, management and financing contracts, andalso with elements of a public concession. The analogy can be corroborated by reference tointernational soft-law instruments on harmonization – eg the Unidroit Rules of Interna-tional Contracts,86 from a comparative private and arbitral law perspective and from aninternational law perspective by application of the ILC rules on State Responsibility, in par-ticular arts 4, 5 and 8 to state enterprises.87 One can reach the same result both from aninternational commercial law perspective as from an international law perspective appliedto the task of contract interpretation; from a legal and theoretical point of view, the inter-esting feature of this dispute is the argument for parallel application (and debate) of bothcomparative contract law as indicated in soft-law international harmonization instruments(such as the Unidroit and related model rules) and public international law instrumentssuch as the influential ILC articles on state responsibility or the analogous reference tothe Vienna Convention on Treaties.88

84 KH Berger, ‘Renegotiation and adaptation of international investment contracts: The role of contract drafters and arbitrators’

(2003) Vanderbilt J Transnatl L, at 1347 et seq; available from OGEL.85 Boeckstiegel, Der Staat als Vertragspartner auslaendischer Privatunternehmen (1973) 59–73; ibid, The legal rules applicable in

international commercial arbitration involving states or state-controlled enterprises, in ICC, 60 Years ICC Arb (1984) 117–76.86 Michael Bonell, The UNIDROIT Principles in Practice. International Caselaw and Bibliography on the UNIDROIT Principles of

International Commercial Contracts (2nd edn Transnational Publishers, Inc, Irvington, NY 2006).87 Crawford and James, The International Law Commission’s Articles on State Responsibility (Cambridge University Press,

Cambridge 2002) 112–13.88 I have explained in more detail the concept of interpreting upstream oil and gas contracts both from a comparative commercial

contract and an international law perspective (the latter capturing the public-law dimension and the involvement of the state in

a foreign investment agreement) in my contribution on ‘International Energy Arbitration’ for the Leading Arbitrators’ Guide (2nd

edn Juris Publishers 2008) L Newman and R Hill (eds).


The second leg of this overall dispute raises the question if the imposition, by the state,of a new additional petroleum tax can be shifted, via the equilibrium clause now operat-ing more as a stabilization clause, to the state enterprise. Stabilization clauses haveevolved from simple and legally questionable ‘freezing clauses’89 to a much more modernand subtle instrument whereby the state enterprise, as a party to the production-sharing(or similar) contract, assumes the risk of government action affecting the contractualequilibrium and thus compensates the foreign partner for a change in the fiscal param-eters of the contract.90 A new tax not contemplated in the original deal is arguably themajor political/fiscal risk against which traditional stabilization clauses and modern sta-bilization by renegotiation or equilibrium clauses were meant to provide contractual pro-tection. The specific interpretation of such strategic clauses is usually difficult. Typicallythere will be ambiguities not spelled out, often intentionally, in negotiation and drafting.There is also the issue as to what extent concepts of national law, comparative law orauthoritative soft law (eg Unidroit rules) should influence the application of specific con-tract clauses. On the one hand, the specific contract language should be seen as a specialrule which can provide a solution that is different from generally applicable and dispos-itive national law. On the other hand, it is natural to look at national law, comparativeand soft law and at the particular negotiating context to clarify the scope of an ambiguousand open-ended contract clause. In the English legal tradition, arguments based on nego-tiating history are discouraged. International tribunals will, however, often be influencedby arts 31 and 32 of the Vienna Convention which, even if not directly applicable to com-mercial contracts or ‘state contracts’ relating to a foreign investment, express best aninternational consensus on the interpretation methodology. Under the Vienna Conven-tion, the history of negotiation can be relied upon, but only as a secondary source.91

An issue that arises frequently in emerging production-sharing contract disputes is themeaning of ‘equilibrium’. Equilibrium could be understood as a iustum pretium in termsof an equitable relation between the contributions by both sides; a substantial rise in

89 Weil, Prosper, Les clauses de stabilisation ou d’intangibilite inserees dans les accords de developpement economique, Melanges

Offerts a Charles Rousseau: La Communaute Internationale Paris Editions A Pedone (1974) 301–28.90 This development – responsive to criticism that the ‘freezing clauses’ contravened national sovereignty – seems to have taken

off in the 1980s and was first analyzed in: T Walde and G Ndi, ‘Stabilising international investment commitments’ (1996) 31

Tex Int’lLJ 215. The AIPN commissioned, in 2006, two studies by Profs. Cameron and Maniruzzaman which provide much

more detail on the modern practice of stabilization clauses as a combination of stabilization of particular elements of the fiscal

and regular regime implemented by a host state or state enterprise obligation to re-establish the original equilibrium,

automatically or by criteria-guided renegotiation, in case of a host state originated significant change of such circumstances.

For a careful analysis of the issues raised by such combined stabilization/renegotiation clauses: Piero Bernardini, ‘The

renegotiation of investment contracts’ (1998) 13 FILJ 411, 416 and in this issue of JWELB.91 Reference to the negotiation history is not infrequent in international investment awards, see, Occidental v Ecuador. Is there a

distinction between more public international law oriented ‘investment awards’ as compared to commercial arbitral awards? If

so, can one qualify investor–state (enterprise) production-sharing and related contracts as exclusively ‘commercial’ contracts or

should they be seen as a hybrid of commercial contracts with elements of a ‘state’, ‘governmental’ or ‘investment’ agreement?

The more a governmental dimension is accepted, the stronger the argument to rely in litigation on principles developed in

public international law and in particular in investment arbitral jurisprudence. Prof. Dolzer has in particular emphasized the

public international investment law dimension of investment-related contracts: see, Dolzer, Fair and equitable treatment

standard (2005) Int Lawyer; ibid, Concept of Investment (2005) Essay for Feliciano; ‘BITs impact on domestic administrative

law’ (2005) NYU Jl Int Law Politics; also: Charles Leben, La theorie du contrat d’etat, in Recueil des Cours (Nijhoff, Leiden

2004) 201–386.


profitability due to much higher oil prices could with this perspective in mind mean that theparties – and ultimately a tribunal – have to determine what the ‘equitable’ sharing shouldbe, ie how the unexpected rise in petroleum rent should be shared. This, as in any attempt todefine ‘equilibrium’, requires taking account of the risks originally taken by the parties. Inupstream oil and gas development, that is the risk of unsuccessful exploration, higher thanexpected costs, serious decline of oil prices and perhaps political insecurity. Equilibrium canfurther be understood as the simple maintenance of the ‘original’ deal, with any governmentmeasure changing that original deal being viewed as a compensable distortion.

But some PSCs qualify the ‘equilibrium’ as ‘normal’. This raises the question whetherthe recent prolonged oil price, and thus profitability increase, is ‘normal’, ie presumablywithin the perspective of the original negotiators or whether ‘normal’ makes a referenceto external influences on the contract. Equilibrium could also be conceptualized as theratio of sharing the petroleum rent agreed in the original PSC. This means that percent-age should be maintained, if need be by compensation, if external events (such as unex-pected oil price developments upwards or downwards) or more internal events (such asgovernment tax measures) modify that percentage. Finally, it could be understood in aprocedural rather than material way as to how the parties would have agreed had theytaken the current price increase into account as a possible part of the future’s scenario.But, one can not take the ‘high oil price’ scenario as the only possibility – it needs tobe balanced by lower oil price scenarios and the occurrence of negative explorationand other risks. Such an equilibrium analysis might well suggest that the contract the par-ties originally negotiated is the contract they would have negotiated had they thoughtabout the current high oil price scenario (which they probably have). Equilibrium ishence a fluid and slippery concept that reminds – and perhaps links – to how compar-ative law handles a fundamental change in a contract’s underlying circumstances. Com-parative law has no uniform understanding. English legal culture takes a very restrictiveview while civil law systems (at least in theory and in practice, probably only for an eco-nomic crisis) take a more extensive view.92

To conclude: While it is possible to identify legal concepts and authoritative principlesto use for interpretation of equilibrium and similar stabilization clauses, it is not possibleto come up with a general solution without a very detailed, indepth analysis of the par-ticular equilibrium clause in its very particular contractual, regulatory, fiscal, industry andnegotiating context. There is little if any arbitral jurisprudence because what there is tendsto be confidential and parties may well investigate and sometimes test in pre-arbitral pro-ceedings the relative strength of their legal position. However, this will be simply a start-ing point for a commercial renegotiation serving one or both parties better than afull-fledged and protracted arbitral litigation. That does not mean that the legal issuesare without commercial significance but rather that they are one factor of workingtogether out of which a renegotiated new arrangement arises.

92 A Kolo/T Walde, ‘Renegotiation and contract adaptation in international investment projects – applicable legal principles and

industry practices’ (2000) 1 J World Invest 5–59; more recent reference: F Fucci, Hardship and changed circumstances:

Grounds for adjustment or non-performance of contracts: Practical considerations in (September 2007) International

Infrastructure Investment and Finance, TDM.


The SwePol dispute93 concerned the contractual arrangements (including price andtrade directions) in an electricity interconnector between the two leading state-ownedelectricity enterprises in Sweden and Poland. Essential assumptions (namely domesticprices and power requirements in Poland) had undergone a substantial change sincethe contracts were concluded. The contracts were no longer viable for the Polish PSE(Polskie Sieci Elektroenergetyczne). On the face of it, the contracts were specific and clear,with little or no ambiguity. However, the dispute involved a number of other actors – thePolish and Swedish regulators, a Swedish electricity network operator, equipment suppli-ers and the EU Commission. The three regulatory regimes were not clear on their rulesand they were in a state of change. Both countries had joined the EU after the contractswere concluded so that EU competition law, in particular the rules on essential facilitiessuch as electricity interconnectors, came into play. Both the state companies wanted toavoid litigation and arbitration, which would have involved considerable cost, risk anddelay and shut down the interconnector operations for an indefinite period. As a resultof mediation, the renegotiated agreements provided them with considerable mutualprofit potential. Both parties had serious risks to manage. The Polish side ran the riskof a massive award against it which might have bankrupted it. The Swedish side riskedthe questioning of the original contracts under EU competition law, the difficulties ofenforcing an award in Poland against a strategic Polish state company and political inter-vention by governments, regulators and the EU Commission. This dispute demonstratesthe power of pro-active, commercially oriented mediation. It also illustrates how difficultit is to achieve ever-lasting and legally binding contractual commitments in developedcountries when competition law casts a shadow on the sanctity of a contract.

Argentina has a history of encouraging large public infrastructure and energy invest-ments; but also of repudiating deals made by earlier governments, often under the pressureof economic crisis and concomitant political and ideological re-alignment. Default on debtand revocation of concession contracts has a history of two centuries; possibly, a cyclefrom investment promotion to investment taking roughly equivalent to a generation, ie25–35 years, can be identified.94 In 1958, it revoked the ‘Frondizi’ petroleum contracts.In the 1990s, it reversed policy and introduced far-reaching privatization. After 2002, fol-lowing a largely home-made economic crisis, it unilaterally cancelled contractual commit-ments with foreign investors raising the defense of ‘economic necessity’. Numerous ICSIDcases based on Argentine BITs are ongoing, with some awards ruling against Argentina.95

93 See, T Walde’s case study, ‘Efficient management of transnational disputes: Mutual gain by mediation or joint loss in litigation’

(2006) 22 Arb Int’l 205–33.94 Ch Lipson, see n 21 (1985) 17, 100 and 211.95 CMS v Argentina; Siemens v Argentina et al; note: <http://www.worldbank.org/icsid>; on the necessity concept: see, eg

August Reinisch, ‘Necessity in international investment arbitration – An unnecessary split of opinions in recent ICSID cases?

Comments on CMS v Argentina and LG&E v Argentina’ (December 2006) 3(05) TDM; Stephan Schill, ‘From Calvo to CMS:

Burying an international law legacy? Argentina’s currency reform in the face of investment protection: The ICSID case CMS v

Argentina’ (April 2006) 3(02) TDM; Kolo/Walde, ‘Capital Control Restrictions and International Investment Treaties’ in Peter

Muchlinski, Federico Ortino, Christoph Schreuer (eds), Oxford Handbook of International Investment Law (OUP 2008,

forthcoming).


Argentina has not yet paid compensation as required by ICSID awards already rendered. Ithas, however, settled with some investors ready to relinquish their ICSID/BIT claims – as ithas settled with many, though not all, foreign bondholders.96 One can expect that all theinvestor claims will eventually be settled, with some give and take. The ICSID award pro-vides leverage to the claimant investor while the difficulty to collect the award providesleverage to Argentina. This occurred with the famous Libyan awards of the 1970s, whichin the end were settled by little publicized payments by Libya.97

In two other non-public disputes, one before a domestic tax court and the other beforean international tribunal, the issue was the application of a production-sharing contract’saccounting and tax-related rules. The interaction between the provisions of a PSC and therules of governmental tax regulation is always complex. There are conceptual difficultieson how the provision of a contract between two parties should impact on the way a taxrule is applied. If the PSC is with a state company, then the stabilization clause (frequentlynow an equilibrium clause) will often allocate the risk and burden of new regulation tothe state company. In the domestic tax case, the tax authorities questioned the overheadclaimed by a foreign oil company as part of the cost recovery that is typically allowedunder a PSC. At issue was the interpretation of the ‘Accounting Rules Annex’ of thePSA. The company, relying on an international comparative survey of overhead rulesin PSAs and petroleum legislation as well as OECD soft-law tax instruments, was ableto persuade the domestic tax court that its overhead charge was not excessive but inaccordance with the international practice.

In the other, more difficult, case in front of the international arbitration tribunal, twostrategic cost items were at issue. First, could the money spent by the foreign oil companyto ‘carry’ the state oil company through part of the exploration phase be claimed as arecoverable cost under the PSC and factored into the calculation of a resource-renttax. Second, could an internal accounting provision made for offshore decommissioningat the end of the project be equally factored into the calculation of the resource rent tax.The difficulty was that the future liability (ie offshore decommissioning) was certain.However, the company had only made an internal accounting provision for a ‘sinkingfund’ gradually accumulating the necessary amounts and had not separated such an inter-nal ‘provision’ into a separate, external escrow account, even though that at the time ofthe future decommissioning there would be no more production income to allow an off-setting of the decommissioning costs. The tribunal accepted the state company ‘carry’ (iemonies that represented something akin to the cost of purchase of the participation) aspart of the cost recovery and calculation of the additional profits tax, but refused toaccept the decommissioning internal ‘provision’ as a cost recovery item since the com-pany had not lost control over the accumulated monies. Both the disputes appear toinvolve very technical tax issues. But they also represent the tax authorities’ greater scru-tiny and pressure for income exercised through an interpretation which is more favour-

96 There is one bondholder mass claim against Argentina before an ICSID tribunal.97 Doak Bishop, ‘International arbitration of petroleum disputes: The development of a ‘‘Lex Petrolea’’’ (1998) 23 YB Com Arb

1131.


able to the state. As sensitive issues in such contracts are often left intentionally or byoversight ambiguous, interpretation of ambiguous provisions is the tax authorities’method to gradually tighten the tax screws without resorting to an overt breach of thecontract or exercise of tax powers outside the contract. The other instrument, already dis-cussed, is reliance on the unlimited potential of general anti-avoidance and ‘economicsubstance over form’ concepts to disregard any transaction accompanied by a tax optimi-zation intention.98

What does this survey of recent investment and related disputes indicate for the ques-tion of the effectiveness of property and contract rights of foreign investors protectedunder contractual and international treaty instruments? First, it is evident that there isno absolute security. Contractual instruments such as stabilization and equilibriumclauses, and also investment protection treaties, have not been able to fulfil completelytheir original promise and investors’ (and capital markets’) expectations.99 The manyinstruments invented and negotiated in the 1980s and 1990s to make fiscal regimes moreflexible and self-adaptive in response to changing economic conditions – resource renttax, additional profits tax, flexible price-related royalties – have not been able to avoidinvestor–producer state disputes in a time of constant high oil and metal prices. The eco-nomic and political dynamics of the oil and metal price cycle, and the related politicalcycle in producer states between investment promotion and regulatory and fiscal squeezeson foreign investment have often proved stronger than such legal instruments. Final judg-ment has not been determined on the conflict-avoidance capacity of such instruments.Perhaps they have helped to avoid or mitigate some disputes, or to channel them intoa discussion on the proper functioning of such self-adaptive instruments. It is alsopossible (and would require empirical research) that contracts containing flexible rate-of-return tax mechanisms and contractual equilibrium and renegotiation clauses havebeen able to weather the pressures from the economic and political mineral industrycycles better than contracts without such mechanisms.

There are results emerging from this cycle:

• First, with respect to the politicization of investment disputes: Home states of investorshave not, different from occasions in the past, intervened militarily or politicallyagainst expropriating states. This was very much the intention behind the internationalinvestment treaty system (including ICSID and MIGA).100 But even a modern treaty-based investment dispute might be re-politicised if the host state refuses to complywith an award (indeed that is the rule under art 27 of the ICSID Convention). Thatrequires that the home state of the investor has ‘political capital’ to expend on politicalintervention post-award (and wishes to expend it in favour of an investor).

98 G Cooper (ed), Tax Avoidance and the Rule of Law (1997).99 R Orr, Investment in Foreign Infrastructure: The Legacy and Lessons of Legal-Contractual Failure: A Background Paper for the

2nd General Counsel’s Roundtable, Stanford University, 10–11 February 2006 published in TDM 2007 (special issue on

infrastructure).100 IFI Shihata, ‘Towards a greater depoliticization of investment disputes: The roles of ICSID and MIGA’ (1986) 1 ICSID Rev –

FILJ 1.


• Second, many more countries (including Western countries under NAFTA, BITs andthe Energy Charter Treaty) have participated in commercial or treaty-based arbitrationrather than – as Libya did in the 1970s – withdrawing altogether from the internationalsystem.101 At present, withdrawal has only been initiated by Bolivia and, partially byEcuador, though one would expect Venezuela to follow. Withdrawal from interna-tional investment treaties will conspicuously mark a host state on its willingness to par-ticipate in international economic transactions and constitutes a self-initiated‘blacklisting’. This may be feasible for a petroleum or mineral producing state in a per-iod of high commodity prices but its effect – as the history of the last cycle shows – islikely to be disadvantageous for the host state once the price peak is past. New regimesfollowing at the bottom of the cycle are likely to consider an international re-engage-ment. All these suggest that the main issue to watch is the duration of the current peakof the cycle.

• Third, many disputes are settled, either under the shadow of international arbitration,during arbitration or after an award.102 The right to initiate international arbitration,under contract or treaty, provides the investor with not negligible leverage, meant tocounterbalance the leverage the host state possesses arising out of its dual role as con-tract party and regulator. A settlement is not likely to mirror exactly what the awardordered or the most likely outcome of arbitration. But it takes place on the basis ofthe ongoing commercial interests of the investors and the host state’s political exigen-cies, including its reluctance to be branded as a ‘rogue state’ exiting from the interna-tional system of adjudication by non-participation or visible non-compliance. Theprospect of international arbitration and the existence of an award do not always resultin full compliance by the respondent state. But these factors build leverage for investorsas opposed to other factors that build leverage for the host state (ie hostage effect,obsolescent deal, high oil and metal prices and resultant high profitability of contin-uing the investment, host state control of fiscal and regulatory levers).103

101 Though there are at present not very clear or consistent signals from Venezuela, Ecuador and possibly Argentina about

withdrawal at least from ICSID and BITs – or the persistent non-ratification of the Energy Charter Treaty by Russia (and

Norway). The continuing absence of Russia from the ECT is a significant impediment to its originally intended scope and

impact; Michael Goldhaber suggested to me that this could be similar to the non-accession of the USA to the Latin American

Convention of Human Rights. Ecuador has notified ICSID in December 2007 of its intention to exclude petroleum and mining

disputes under art 25(4) of the ICSID convention;. Bolivia has denounced, under art 71, the convention. These acts will have an

effect for future disputes; the effect for disputes that arose prior to these partial or full withdrawals from the ICSID convention

is far less certain. Cf <http://www.worldbank.org/icsid>.102 It seems that investment treaty awards are as a rule complied with by the new East European states after accession to the EU.

But the compliance boundary may be situated at the border between the EU and the former Soviet Union states, in particular

Russia.103 One should perhaps add that settlement is most difficult in and during investment dispute litigation as politicians will often

make ill considered public statements about the ‘certainty of victory’ and civil servants are extremely risk averse – and will often

rather prefer an expensive award by an external third party (such as a tribunal or court) rather than a much cheaper settlement

for which they have to accept responsibility, T Walde, ‘Efficient management of transnational disputes: Mutual gain by

mediation or joint loss in litigation’ (2006) 22 Arb Int’l 205–33.


5. Rights, rules and procedures cannot resist the forces of the cycle –But they can proceduralize conflict and make the inevitable changesmore palatableThis survey of investment disputes suggests neither a markedly ‘realist’ conclusion, ie thelaw is simply a tool in relationships characterized exclusively by power and is changed orgiven up when the power relationship changes, nor a strong ‘idealist’ position, ie thatpower bends in the end to the virtue and legitimacy of the law. When there are significantshifts in power (and ideology), existing contract and property rights104 are exposed tooften severe pressure. But in today’s world, they tend to operate as an element of the rene-gotiation process. They provide some leverage with governments’ counter-leverage. Rene-gotiation – or ‘exit’ negotiation for compensation – takes place ‘under the shadow’105 ofpossible legal recourse, its costs, risks and consequences for the state and investor.106 Evena government keen on renegotiation will usually want to be seen to carry out the rene-gotiation in an acceptable form, eg by obtaining a voluntary consent such as the relin-quishment by BP and Shell of their majority shares in large upstream oil projects inRussia under environmental enforcement pressure.107 Legal rights have a tendency tore-emerge after the ‘top’ of a cycle. The Libyan concession disputes in the 1970s led tothree awards which Libya did not comply with. But the disputes were discreetly settledlater by cash payments. Similarly, the contract cancellations under President Garcia’s firstgovernment in Peru in the 1980s were compensated by the subsequent government underPresident Fujimori as part of its overall economic reform. Frequently, arbitral awards(rarely public in commercial arbitration) will lead to a new round of renegotiation whereeach party has assets to contribute: The investor has the legitimacy and legal formalityconfirmed by an arbitral award, the government has its willingness to abstain from amore confrontational and unilateral approach. Legal determinations – by contract, bytreaty, by customary international law and most of all by arbitral awards – provide ‘mark-ers’ and ‘magnetic points’.108 They also provide ‘chips’ for renegotiation and often set theagenda of a renegotiation.

A legal proceeding, best exemplified in a long arbitration proceeding, takes a lot oftime. There is a pre-arbitral phase which may sometimes lead to a settlement underthe shadow of an impending arbitration request. There is the formal ‘notice of arbitra-tion’ setting in motion the process. Then follows the setting up of the tribunal with aninitial procedural hearing and sometimes a jurisdictional phase resulted in the tribunalaccepting or rejecting its jurisdiction. The ‘merits’ phase alone can take years; it maybe bifurcated with a separate ‘damages’ phase. The award may go through a challengeand annulment procedure before it is ready for efforts to enforce it, mainly by trying

104 John Gault has suggested an inclusion of other human or social rights. However, the focus in this paper has been on the

investor’s core property rights. See J Gault, ‘The price of oil’ (2007) 5(2) OGEL, April.105 R Mnookin and L Kornhauser, ‘Bargaining in the shadow of the law’ (1979) 88 Yale LJ 950.106 Note her an (anonymous) OGEMID posting in September 2007 from an experienced practitioner on the use of the investment

arbitration option in settlement negotiations.107 Note discussion, in 2007, on OGEMID with reporting by the Financial Times.108 Richard Shell, Bargaining for Advantage: Negotiation Strategies for Reasonable People (2nd edn 2006).


to identify and seize non-sovereign assets of the government located in other jurisdic-tions. These procedural steps may take five years or more. The costs required to raisea claim and defend against it may go into the tens of millions,109 with the litigation com-munity as the main beneficiary. Even for winning claimants, these procedures are oftennot worth the effort.110 But such procedures have a pacifying function. They go on for-ever while the political and personal passions at the root of a dispute rarely survive for along time. By the time a dispute moves into its end phases, the principal individual actorswill often have gone. Their successors have to sort out the consequences of earlier gov-ernment actions which later, in the light of more dispassionate examination and the var-ious longer-term implications and reputation of the host state, do not seem so just andnecessary as it appeared when the incriminated action was undertaken. Long litigationdrains the parties’ interest, energies and resources. Typically, a successor governmentcan more easily come to a settlement; blaming the cost of the settlement on the ineptnessof its predecessor. Similarly, corporate managements will have moved on and will want –after an accounting write off has taken place years ago – to end a never-ending litigation.

Legal rules have an effect; but not as much as those hoped for, initially expected andpublicly stated. Perhaps one can describe the function of law as one of ‘smoothing’ thespikes of volatility between the investor and the host state at the top end of the economicand political cycle. They slow down the state’s exploitation of dramatically increased bar-gaining power. They provide material to build new deals in a new architecture once themain pressure for a radical change in the relationship has evaporated. They also provide aprocedure to impose costs on both sides for an exit of the investor from the country andso encourage both parties (and in particular, the politicians and the corporate executivesin place towards the end of a dispute) to arrange the exit in a more civilized fashion incontrast with a rapid, violent and non-compensated expulsion. The cycle is not ‘neu-tered’. But its effect is smoothed, proceduralized and delayed, with an agreed upon rea-sonable settlement often at the very end. This is a similar process to high-value divorceswhere a settlement is usually reached, but only after a long, intense and costly litigationwhen the original high passions have subsided by the course of time, the expense ofmoney and by exhaustion with never-ending and in the endless exciting legal procedures.

6. The ‘rule of law’: Primarily a concept of Western culture?The preceding analysis has shown that investor rights – based on contract, property orinternational investment treaty – are not as strong as investors believe and as are pre-sented to the financial markets. Neither are they, in terms of real, not just legal and for-mal, effect non-existent. In essence, they provide some degree of leverage in the on going

109 For example, the PSEG v Turkey electricity concession dispute: Each party had costs of over 10 M US $, the tribunal close to one

million – with an award for claimant of about 9 million.110 Even winning claimants – eg the Metalclad chief executive – have voiced their dissatisfaction with the length, costs and

complexities of the process. On the other hand, ‘informal’ approaches have led visibly to a much more rapid conclusion of a

dispute, eg the resolution of a dispute in favour of claimant by the Ukrainian Supreme Court after a politically well-connected

businessman acquired the investment, with the price apparently connected to his ability to influence the Court, see the

discussion on the OGEMID archive and J Coe, Towards and complementary use of conciliation in Investor–State Disputes,

manuscript 2007, note above.


bargaining under the pressure of the economic and political foreign investment cycle. Theleverage appears more modest at the peak of the cycle, but re-asserts itself much morestrongly after the cycle has definitively turned downwards; then, payment of compensa-tion, compliance with prior arbitral awards and settlement of the dispute moves onto theagenda of, normally, new governments tasked with managing economic crisis. This con-clusion does not sit easily with the approach to the ‘rule of law’111 propagated by inter-national development institutions, primarily the World Bank, over the last 15 years.112

Nor does it provide much comfort for a more universal human rights position (of whichthe protection of property rights is a sometimes unloved sibling or cousin).

From the historical evidence available, it appears that the ‘rule of law’ or ‘Rec-htsstaatlichkeit’ is associated closely with the long-term economic development, prosper-ity and establishment of modern governance in (at least) Western developed countries.113

In Western history, those societies which had a strong system of law with effective respectfor rights based on contract (loans) and property were in the end politically and econom-ically more successful than those societies which were unable to honour property anddebt.114 It is for these reasons, and also the influences of modern institutional economics,emphasizing the importance of institutions and the rule of law for economic develop-ment,115 that the World Bank and its associated development economics communitiesdiscovered the importance of law and institutions in the mid-1990s after it had becomeclear that just introducing markets in the former Communist societies was not enough tomake them function as they do in Western countries.116 The jury is still out on the ques-tion whether the ‘rule of law’ is primarily a foundation concept of developed Westernsocieties and does therefore possibly not have a ‘universal’ function or if it will becomea fundamental concept underlying economic and political development in countries witha significantly different history as their economic development matures and increases interms of level and quality.117

111 Brian Z Tamanaha (2004) see n 10; World Bank Development Report (2004) see n 46.112 Note in particular the contributions by I Shihata, DWebb, B Metzger and C Gray in Seidman/Seidman and Walde (eds), in

Making Development Work: Legislative Reform for Institutional Transformation and Good Governance (Kluwer 1999); Roberto

Danino, ‘Making the most of international investment agreements: A common agenda’ (April 2006) 3(02) TDM; World Bank

Development Report (2004): ‘A Better Investment Climate for Everyone’ 77 et seq; 175 et seq, 260.113 W Bernstein, Birth of Plenty: How the Prosperity of the Modern World was Established (McGraw-Hill 2004).114 W Bernstein, ibid n 113 at p 375; also T Walde, ‘The umbrella clause in investment arbitration: A comment on original

intentions and recent cases’ (2005) 6 J World Invest Trade 183–237.115 North and C Douglass, Institutions, Institutional Change and Economic Performance (Cambridge University Press, Cambridge

1990). Dieter Schmidtchen/Hans-Joerg Schmidt-Trenz, ‘New institutional economics of international transactions, constitu-

tional uncertainty and the creation of institutions in foreign trade as exemplified by the multinational firm’ in (1990) 9

Jahrbuch fuer Neue Politische Oekonomie 1.116 Jim Gunderson and T Walde called attention to the relative ‘emptiness’ of simple legislative transplants in ‘transition’ societies

as early as 1994: Legislative reform in transition economies in (April 1994) 43 ICLQ 347–79; also: The end of Transition: An

institutional interpretation of Energy Sector Reform in Eastern Europe and the CIS, MOST 11, 91–108 (2001) (with C. v

Hirschhausen); Joseph Stiglitz and Karla Hoff, ‘The transition from communism: A diagrammatic exposition of obstacles to the

demand for the rule of law’ (December 2006) 3(05) TDM; cf also the international development bank authored contributions

in Seidman/Seidman/Walde, see n 112.117 For a view that suggests that modern international law embodies the universality of civil and human rights and Western rule of

law concepts: D Mungello, The Great Encounter of China and the West 1500–1800 (2007).


There are two possibilities to this argument: Either the ‘rule of law’ is primarily a cul-tural construct of Western culture as reflected in the discussion of ‘human rights’ or it is aset of values that will be fully adopted throughout the world.118 The first way – whichcorresponds to the universal claim of Western culture (‘mission civilisatrice’) that isreflected in mainstream governmental and non-governmental positions, academic writ-ing and the mission statements by international organization dominated by Westerncountries,119 is that the ‘rule of law’ is an inevitable foundational element of any societythat will develop towards prosperity and civilization. The emphasis on Western notionsof human rights, pushed by Western-sponsored and dominated NGOs and the anti-cor-ruption movement (most visibly led by ‘Transparency International’), is part of thisbroad stream of ‘rule of law’ movement. Legally, this belief finds expression in numerousstatements of international law, most recently in art 5 (2) of the 2004 US model BIT:120

‘fair and equitable treatment’ includes the obligation not to deny justice in criminal,civil or administrative adjudicatory proceedings in accordance with the principle ofdue process embodied in the principal legal systems of the world;

or art 38(1)(c) of the Statute of the International Court of Justice with its reference (asbeing part of international law) to ‘The general principles of law recognized by civilizednations’.

The consequence of this view is that the ‘rule of law’ is viewed as the necessary andinevitable direction for non-Western countries, in particular should they wish to achieveprosperity and a similar quality of governance as Western societies. History is, in a quiteHegelian way, seen as moving into a particular direction – towards an ‘‘end of history’’,121

with increasing universality of the ‘rule of law’ concept. Prosperity and civilized gover-nance cannot be achieved outside this path. While there will be hiccups on the way,the ultimate direction for the world is clear. While secular, a certain religious quality witha universal claim cannot be denied.122 Such a quasi-religious meaning is not what theWorld Bank sponsored development experts have consciously in mind, but then it is unli-kely to ever have been thought through fully.

There is a contrasting view. Here, the ‘rule of law’ is not an absolutely mandatory part ofthe development path of all countries. Perhaps it has been essential, or at least it has beenassociated with economic and political development of Western societies, particularly inEurope and North America. But it is very much part of the Western cultural and legal

118 Manfred Nowak, Introduction to the international, human rights regime; H Steiner/Ph Alston, International human rights in

context (2000); M Nowak, Introduction to the international human rights regime (2004).119 This is the (Western) modern missionary movement pushing a predominantly secular religious approach, cf N Chanda, ‘Bound

together: How traders, preachers, adventurers and warriors shaped globalization’ (2007) Yale 105 et seq; the equally committed,

though currently more violent, proponents of political Islam naturally question the ‘universal’ character of the Western notion

of human rights and democracy.120 There is no authoritative definition of what are the ‘principal legal systems of the world’ or the ‘civilized nations’; nevertheless,

the historical root and current bias are towards ‘Western’ and developed legal systems, rather than the law of authoritarian

petro-states or Sharia law.121 Francis Fukuyama, The End of History and the Last Man (Harper Perennial 1993).122 Cf N Chanda, see n 119; M Burleigh, Earthly powers, religion and politics (2005).


tradition, originated in classic Greek and Roman history, carried through the middle agesand developed under the impulse of reformation, enlightenment, the industrial revolutionof the nineteenth century and reinforced by the reaction to the wars and horrors of bothNazism and Communism in the nineteenth century.123 This deeply rooted cultural tradi-tion spanning more than 2,500 years is absent, for example, in China.124 China, as mostEast Asian societies, does not have a strong tradition of the ‘rule of law’ understood as pro-tection of rights acquired by individuals against the state and other people. In Chinese his-tory, ‘legalism’ rather connotes a not successful effort by the state of imposing acommand–control society. Confucian tradition places emphasis on developing a social,more communitarian consensus rather than emphasis on assertion and enforcement ofindividual rights based on property and contract.125 Nor has the concept of the ‘rule oflaw’ ever been deeply rooted, apart from its formalities, in Russia.126 President Putin’s doc-toral dissertation127 does not appreciate the role of the ‘rule of law’ in terms of protectionof individual rights against the state and each other, but rather the use by the state of law torule society (‘dictatorship of law’).128 Its basic tenet is the dominance of the state (ie thosewho control the machinery of state) over the for Russian strategic energy and resourcesindustries. While not conceptualized by Putin, the idea is that rights are provisional rights,exercised by individuals under the control of the state and in full obedience with the state’swishes. This concept can be seen as underlying the destruction of Yukos through a com-prehensive and coordinated manipulation of the judicial and tax administration by thePresident because Yukos and its main shareholders no longer operated with full obedienceto the state’s orders and wishes.129 The effectiveness of property rights in Russia as in otherpost-Communist countries seems to be provisional, temporary and transitory and condi-tional upon the pleasure of the rulers of each country. The private owner is viewed as akind of ‘trustee’ for the community, with such trustee rights of control being easily takenaway if such an ‘owner’ no longer acts in the interests of the community. This is not so farfrom other communitarian (including ecological) concepts of property rights, includingpossibly Mediaeval (and to some extent still persisting in the teaching of the CatholicChurch), Islamic and ecological theories of property rights.130 The ‘rule of law’ that is

123 Cf Bobbitt (2004); Tamanaha (2004) see above.124 N Antaki, see n 51; P Norton, see n 51.125 Nabil Antaki, ‘Cultural Diversity and ADR Practices in the World’ in Goldsmith, Pointon and Ingen-Housz (eds), ADR in seq

(2006) 265, 288.126 Walde/Gunderson (1994) see n 116.127 Summarized in V Putin ‘Mineralno-syrievie resursy v strategii razvitiya rossiyskoy eknomiki’, SPb (St. Petersburg), January 1999

(Zapiski Gornogo Instituta); ‘The Mineral and Raw Material Resources in the Strategy for the Development of the Russian

Economy’; V Putin, Strategitsheskoe planirovanie vosproisvodstva mineralno-syrievoi basy regiona v usloviakh formirovania

rynotshnych otnoshenii (St. Petersburg 1997); ‘‘The Strategic Planning for the Reproduction of the Regional Mineral and Raw,

Material Resources Basis under the Conditions of the Formation of Market Relations’’. President Putin’s thesis is being

published, in 2008, in the Uppsala Yearbook of East European Law.128 Jeffrey Kahn, Federalism, Democratization, and the Rule of Law in Russia (Oxford University Press, Oxford 2002).129 A close reading of the US 2007 Rejoinder in the Glamis v US case shows remarkable parallels in the proposition that property

rights are and should be subject to changing political preferences expressed in the state’s regulatory action.130 Michael Graf, ‘Application of takings law to the regulation of unpatented mining claims’ (1997) 24 Ecology LQ 57; Jacques Le

Goff, Medieval Civilization (Blackwell Publishing 1990); ibid, Your Money or your Life, Economy and Religion in the Middle Ages

(1990).


widely advocated as a universally valid concept or target is primarily a product of the Prot-estant Western tradition.131

Not even Japan – widely seen as part of the Western group of developing countriesgrouped in the OECD – possesses any strong tradition of the ‘rule of law’ in the senseof strong individual rights enforceable by impartial judicial procedures both againstthe state and against others.132 Neither the law nor its profession had over the long periodof Japanese history any particular importance. Reportedly, professional lawyers werebanned through a long period of Japanese history and formal legal processes have no par-ticular strength or following in today’s modern Japanese society.

The ‘Rule of Law’ can therefore be seen as an aspect of Western society which may havecontributed to its strength. It is not excluded that given those advantages other societieswill join and use elements of the Western ‘rule of law’ concept. But they are likely to dothis more for short-term advantages expected than because of a firmly rooted long his-torical tradition. While the forms and outer appearances of Western legalism have beentransplanted to many countries in the colonial era and may have taken root in some largecountries (eg India) and to some extent in Latin America and parts of English-speakingAfrica, it is difficult to say if it is only the form or the substance of Western rule of lawwhich these societies have adopted. The severe and pervasive shortcomings – as comparedto an ideal notion of ‘rule of law’ – one finds throughout the developing and post-Communist countries outside the European (and largely non-Orthodox Christian)cultural heritage suggest there is still a significant difference between formal and substan-tive-material adoption of the Western ‘rule of law’ concept.133

The current disregard by petro-states for acquired investor rights under their own,unstable national law may therefore not be compatible with the Western tradition of ‘ruleof law’. But it can be inscribed into non-Western traditions of state and societal domi-nance over individual rights. Petro-states are not homogeneous societies. Western tradi-tions of law tend to find a following with the middle and upper middle classes, ie thosewho benefit and who are culturally more affiliated with Western culture than with theindigenous poor. Poor people may find benefit and sympathy with a more substantiverule of law, as it is likely to provide more protection and a more solid foundation for theircommercial and entrepreneurial potential.134 Russian oligarchs – as all people who sud-denly got rich – have developed sympathies for ‘rule of law’ once they had moved fromthe acquisition of assets to their protection. Petro-states tend to have a relatively short-term outlook. The rulers and those who support them (poor, military and the state’spatronage retainers) will look towards their survival both materially (ie from increasedmineral rent)135 and ideologically and politically (ie from reliance on anti-foreigner sen-timent with nationalism to prop up ethnically and class divided societies). Squeezing the

131 Tamanaha (2004), see n 10 at p 39 et seq.132 N Antaki, see nn 52, 126.133 Jan Paulsson, Enclaves of Justice The Rule of Law Conference, University of Richmond, School of Law, 12 April 2007, TDM

2007.134 Hernando de Soto, El Otro Sendero (1992).135 This is really the main focus and concern of Bernard Mommer’s work – maximization of instant petroleum rent, rather than

investing it for sustainability, Mommer (2002) see n 50.


foreigner when the economic cycle allows it will tend to reinforce more cynicalapproaches by domestic and foreign businesses to the state, eg reliance on bribery andpolitical patronage rather than on independent commercial effort and competition. Soci-eties that respect rights and exploit temporary leverage in the resource industry cycle arelikely to acquire less mineral rent available for instant political use and consumption, butthey may be more able to develop the entrepreneurial potential, both with domestic andforeign investors.136 But it still remains to be seen if a Western concept of ‘rule of law’ canbring about such wealth-generating effects in societies where it is grafted than rooted.137

Perhaps China, currently looking as a world economic power of the future, will discoverthe advantages an international (and national) system of ‘rule of law’ will bring it once itrealizes that legal and formal procedures for protecting investment abroad can de-polit-icize investment disputes, reduce transaction costs and make international investmentmore predictable and stable.

7. International protection of investor rights: The grand experiment ofanchoring western ‘rule of law’ by way of international law andadjudicationOne of the revolutions in international law – not as yet fully appreciated outside theinternational investment arbitration community138 – is the full advent of modern invest-ment arbitration. Investment disputes adjudicated by claims commissions set up by twogovernments for claims of nationals of one country against governmental misconduct inthe other have been a feature for over 200 years.139 Arbitral tribunals have been estab-lished by arbitration agreement for hundreds of years, usually as part of a concessionor related contract.140 The truly novel development has been the use of bilateral and afew multilateral (ECT, NAFTA) investment agreements to establish a unilateral right offoreign investors to arbitrate against host state governments on the basis of a limitedset of ‘investment disciplines’ (treatment obligations; claims) – such as direct and indirectexpropriation; fair and equitable treatment; national and most favored nation treatment;and observance of commitments (‘umbrella clause’) and repatriation of earnings guaran-tee.141 Bilateral investment treaties (BITs) had been negotiated by Germany with

136 The gist of my review of Bernard Mommer’s 2002 book cited above.137 Prof. Tamanaha pointed out that the disregard for the law can also be found in the USA in the 19th century (2004) 72 see n 10.

This may suggest that in a broader time-scale, disregard for the rule of law could be a transitory phase in a sudden onrush of

economic development.138 The distinctive functions and features of investment arbitration are not even recognized within the international commercial

arbitration community that widely.139 The most recent ones: The Iran–US Claims Tribunal and the UN Claims Commission, cf Brower-Brueschke (1998).140 On their jurisprudence: Doak Bishop, Lex petrolea see n 97; extensive reference to 19th and 20th century claims commissions:

Jan Paulsson, Denial of Justice in International Law (Cambridge University Press 2005); Brower–Brueschke, Iran–US Claims

Tribunal (1998).141 T Walde, New Aspects of International Investment Law, published by Hague Academy of International Law Report (with

Philippe Kahn), Nijhoff Publishers, Leiden, 2006; Weiler (ed), NAFTA Investment Law and Arbitration (2004) and Weiler (ed)

International Investment Law and Arbitration (2005); Bishop, Crawford and Reisman (eds), Foreign Investment Disputes

(Kluwer 2005); Rubins and Kinsella, International Investment, Political Risk and Dispute Solution (2005); McLachlan, Shore,

Weiniger and Mistelis, International Investment Arbitration (2007); both Unctad and the OECD survey the main developments

in a series of studies – <http://www.oecd.org> and <http://www.unctad.org>.


developing countries since 1958. But they took off as a result of the ‘NIEO’ (New Inter-national Economic Order) demands of the Third World embodied in a number of con-troversial UN General Assembly Resolutions (3201, 3202, 3281 of 1974). A relevant factorfor the promotion of the arbitral solution – over the solution of settling investment dis-putes by standing international courts – has been the failure of the International Court ofJustice to provide effective solutions to investment protection issues as illustrated by theBarcelona Traction (Belgium v Spain) and ELSI (US v Italy) cases,142 and also a long tra-dition of arbitration between host states and investors on the basis of specific arbitrationagreements. What treaty arbitration does is in essence to replace the need to negotiate aspecific arbitration agreement by a general, standing offer of the host state to consent toarbitration with investors eligible under the treaty.

Since the 1980s, investment treaties (bilateral and multilateral) provide increasingly fora direct ‘consent’ by the host state to arbitration by the investor. The host state ‘consent’is contained in the treaty and the investor perfects the ‘arbitration agreement’ with thenotification of its request for arbitration to the host state. Two seminal arbitral awards– SPP v Egypt and AAPL v Sri Lanka143 – confirmed that a host state’s direct consentcould be contained in a national investment law and in an investment treaty. Privateinvestors – until then not considered the subject of international law – could hence lit-igate, on an (almost) equal level with host states. Since the late 1990s, there have beenover 200 investment disputes,144 most before the World Bank’s ICSID, and also beforeother arbitral institutions or under ad-hoc Uncitral procedures.145 An increasingly densejurisprudence has since developed which provides specificity to the usually quite open-ended treaty provisions and which serves as influential and persuasive precedent innew cases. This is helped by the fact that both final awards and proceedings are increas-ingly publicly accessible. The over 2,500 bilateral investment treaties, the effect of themultilateral treaties (the ECT, for example, has an effect equivalent to about 1,200 trea-ties), the over 5,000 other international investment instruments,146 around 200 publicinvestment awards and increasingly extensive professional and scholarly comment arein the process of creating a consistent body of international investment law that is farmore deep and specific than the vague and controversial notions earlier advocated as cus-tomary international law.

Investment treaties provide a third level of protection of investor’ rights – afternational (relatively easily changeable) legislation on level 1 and contractual stabilizationand contractual arbitration clauses on level 2. They are part of the legal instruments avail-able to convert contracts with host states from rather ‘political understandings’ to, at leastto some extent, more legally affected contracts. Without access to international arbitra-tion, either by contract or treaty, contracts with host states with political control over

142 Barcelona Traction (Belgium v Spain), 1970 ICJ Rep 3; the case should be read before the excellent factual history of the case by

John Brooks, on TDM; ELSI (US v Italy) 1989 ECJ Rep 14 (1989).143 32 ILM 933 (1993); 86 AJIL (1992) 371.144 J. Commission, Precedent, on TDM (2007).145 R Walck, Investment arbitration update as of 31 December 2007 finds that about 50% of new ICSID submissions relate to

energy, available on OGEL (2008).146 Information from Unctad, <http://www.unctad.org>.


their national judiciaries may appear legally binding, but are in effect closer to non-bind-ing political understandings. There are few significant countries that have not engaged ininvestment treaties (notably Brazil147). Of the major petroleum producers, Russia standsout as it has refused to ratify the Energy Charter Treaty. It also seems to refuse to complywith BIT awards. Venezuela148 is trying to exit from its treaty obligations (which is noteasy and cannot be done at short notice). It is also not certain (as is the case for Argen-tina) that it will comply with awards. Even OPEC countries have entered into manyinvestment treaties.149 These treaties do not provide free access (as is the principle underthe US BITs)150 but only protect investment that has been undertaken. As the MiddleEastern OPEC countries tend to be restrictive with foreign investment, investment trea-ties only have limited relevance. This may change with respect to OPEC countries thathave admitted foreign energy investment, in particular with respect to natural gas anddownstream activities. It will also change as the ‘sovereign wealth funds’ fed by oil incomeare compelled to seek investment opportunities abroad.

Investment treaties can be seen as providing an international and external ‘discipline’on host state conduct. This can be explained, similar to the theory of WTO obligations,as disciplines on member states in providing a counter-weight to protectionist and xeno-phobic tendencies.151 They therefore provide support for the ‘rule of law’ protecting exist-ing investor rights against subsequent government conduct. They impose litigation riskand cost on governments and therefore support a ‘rule of law’ approach rather than a ‘sov-ereignty’-based policy. Investment Treaties are a counter-weight against the pressures ofthe resources cycle and the cyclical political economy of foreign investment in developingcountries. Their restriction of sovereignty is often criticized – not only both from a statistand a nationalist perspective dominant at the high point of the cycle in the petro-states,but also by Western NGOs who are otherwise quite enthusiastic over the restrictions onsovereignty by international law instruments in their preferred areas (eg human rights,environment and indigenous people). There is no doubt that international treaties restrictfull and unfettered regulatory and governmental sovereignty. It is their very purpose as isany international law-based obligation of states. It is widely recognized that internationallaw-based disciplines have helped the astounding explosion of prosperity throughout theworld by international trade and its widespread eradication of poverty in the largest devel-oping countries. It has also been at the root of the European Union’s prosperity and peacefor the past half century. It is therefore difficult to understand why for some critics this well

147 Also North Korea; one should perhaps mention that China is one of the major BIT signatories and so is India. Information on

BIT parties best available from <http://www.unctad.org>. Chinese companies have also considered using available BITs in an

investment dispute against EcuadorITN Newsletter 30 November 2007 at p 5 (available from <http://www.iisd.org>).148 Also – at least at present – Bolivia and Ecuador.149 Cf T Walde’s study for OPEC on ‘OPEC and Energy Charter Treaty’, on OGEL. There is also an Inter-Arab Investment Court,

Cf W Benhamida, ‘The first Arab investment court decision’ (2006) 7 JWIT 699; Latin American governments created

something similar in the Colonia Protocol to the Mercosur agreement; but it has not (and probably will not be) ratified, with

movement apparently rather towards a standing judicial organ, cf C Leathley, International Dispute Resolution in Latin America

(Kluwer, 2007) 162, 163.150 But note a forthcoming study by Walid Benhamida and myself on the justiciability of art 10 ECT pre-investment rights; also the

report by Anna Joubin-Bret for the ILA Foreign Investment Law Committee.151 Walde, with further references, in Report for the Hague Academy (2006) see n 141.


functioning system should not be appropriate for developing countries that have a greaterneed for prosperity, peace and external order.152

Investment treaties can also be seen as an engine for good governance.153 Governanceis widely seen as one of the major reasons for under-development. This view is largelyidentical with the position that the ‘rule of law’ is essential for development. Treaties helpto enhance the respect for investor rights. While they do not serve domestic investorsdirectly (though investment jurisprudence increasingly allows access to investment arbi-tration to domestic investors by way of offshore corporate vehicles),154 they tend to pushgovernments towards international standards in their interaction with businesses.155 Thealternative to adjudication by international tribunals is essentially the deployment ofexternal power (eg pressure by powerful home states), corruption or reliance on domesticpower (eg patronage and crony capitalist relations between domestic investors andforeign partners). There is ample experience that the absence of effective internationaljudicial remedies leads in countries with weak judiciaries (ie most developing andpost-Communist countries) to politicization and judicial corruption. The new interna-tional investment law based on extensive treaty coverage thus represents a projectionof the ‘rule of law’ concept in the Western legal tradition to the global economy.

Investment treaties should be viewed as one element in the emerging governanceregime for the global economy. Nation states evolve into modern ‘market states’156 whichintegrate and lead the global economy. They compete with each other. They build aninternational governance regime in trade, finance, environment, human rights and invest-ment to enable the global economy to function efficiently. The debate about internationaldisciplines restricting national sovereignty represents a conflict between the emergingtypes of ‘market state’ and the former model of ‘nation state’. The nation state modelmay evolve and gradually become obsolete with the world’s leading developed marketsocieties, but in petro-states the former model of the nation state still guides politicaland military leaders. The market state model is open while the nation state and petro-state model is defensive and seeks to avoid competition through control over its resource

152 See, T Walde, ‘Investment arbitration and sustainable development: Good intentions – Or effective results?’ in J Gupta (ed),

International Environmental Agreements (2006) 459–66.153 This is acknowledged by the most recent Unctad study investor–state dispute settlement and impact on investment rulemaking,

2008 (available from <http://www.unctad.org>) at p 93: ‘‘increased ISDS may motivate host states to improve domestic

administrative practices and laws’’.154 Tokios Tokeles v Ukraine; Wena v Egypt; Champion Trading v Egypt; cf also Aguas del Tunari v Bolivia.155 The argument by Ginsburg that international arbitration reduces pressure on host state courts to enhance their quality is

untenable: not empirically founded, ignoring evidence of domestic governance improvement under pressure by investment

treaties and not aware of the impact of competition between courts. There is no evidence that countries which have not

accepted international disciplines (say North Korea and now increasingly Russia) have as a result experienced a growth in the

quality of their judicial governance, see T Ginsburg, ‘International substitutus for domestic institutions: Bilateral investment

treaties and governance’ (2005) in 25 Int’l Rev L Econ 107. The experience with international human rights law (of which

investment arbitration should be seen as part – cf art 1 of the Additional Protocol to the European Convention on Human

Rights) is the same as with investment awards: That they exercise pressure on host states (through the legal professional,

domestic courts and middle class demands for better civil rights) to improve their performance in this respect. This has most

recently been well documented by M Goldhaber’s, A People’s history of the European Court of Human Rights (Rutgers University

Press 2007).156 See the concept developed by Philip Bobbitt, The Shield of Achilles (Knopf 2002).


endowments. Relying on resource endowments is an indicator of economic and politicalunder-development, brought on by the rich mineral rent itself. Petro-states, in their rollercoaster ride up and down the cycle, have to be ideologically wedded to resource nation-alism. It helps to maximize the rent when the going is good and to keep the state togetherwhen the downward ride begins. International discipline – as a strong domestic ‘rule oflaw’ – undermines the authoritarian grip of those in power over their society. Acceptanceof international discipline, on the other hand, may provide short-term penalties, butlonger-term incentives. Essentially, it enhances the stability of government policy, inthe end both towards domestic and foreign investors; simultaneously, it reduces the polit-ical risk rating and thus increases the attractiveness to international markets. For a petro-state, this is the only escape from despondent dependency on petroleum export.

It is too early to conclude that all governments – Western countries (including theUSA which itself has difficulties with international ‘rule of law’), ex-socialist petro-states,Asian emerging economies – will be truly ready to accept international disciplines whichrun counter to their need to project a nationalistic, xenophobic and anti-liberal politicalideology. This is not limited to investment treaties. The progress of the WTO regime isexcruciatingly slow and resulting obligations full of national reservations. Apart from theEU, there is no other serious, legally and institutionalized economic integration. ASEAN,the Andean Pact, Mercosur and the former Soviet Union have not been able to instituteserious and effective international disciplines. It is mainly power plays that dominate pol-itics in those regions rather than serious economic and political integration undertaken ina legal form. Finally, nobody knows to what extent the emerging new economic power-houses, mainly China and India, will participate in the creation of a legal order for theglobal economy. Order and its emphasis on legal procedures and concepts has a signifi-cant debt to the Western legal and cultural tradition. This tradition is absent, in particularin the case of China. The question is if the benefits of an international rule of law are soobvious that China will join and both accept the disciplines and contribute to its spreador if China will seek to develop ways of arranging its international economic relationsmore in tune with its own non-legal and Confucian culture. At the moment, it appearsthat China will rather act like Japan – become a player to test the waters, but not anenthusiastic one.157

8. ConclusionThis paper has tested the instruments reflective of the ‘rule of law’ concept in the Westerntradition with respect to their ability to withstand the pressures of the price cycle of theresource industries and the related political economy cycle in countries which are signif-icant producers of petroleum and minerals. If it is correct that such instruments contrib-ute to economic development and prosperity by reinforcing the domestic rule of law withexternal and international disciplines, then their ability to smooth and temper the storms

157 The increasing acceptance of, or even push for, by China for BITs could support the view that China finds instruments of the

rule of law in international investment increasingly suitable for protecting its own rapidly growing foreign investment.


of the resource and foreign investment cycle should contribute in the longer term togreater prosperity wherever internal and external rule of law grows solid roots. But thisis not the end of the story. The last two decades have seen an astounding eradicationof poverty in the developing countries, mainly China and India. One can question ifthe Chinese economic development required adherence to a Western ‘rule of law’ con-cept, but China has entered and accepted the international trade law pillar by accessionto the WTO; it has also signed numerous investment protection treaties and developed atleast a rudimentary system of property and contract rights. As China becomes a signifi-cant home state in the resource industries, the potential of such treaties to protectChinese resource investment abroad will be tested.158

The question for the energy and mineral industries is whether this rush to prosperityand dramatic eradication of poverty (arguably the most extensive the world has ever seen)is sustainable. With prosperity extending to larger and larger number of people, the pres-sure on sustainability grows.159 It is widely believed that there is a detrimental change inthe world’s climate induced by current energy consumption. If prosperity furtherincreases – and all point into this direction with only pockets in Africa and Asia leftout – these pressures can only increase. There is therefore a serious contradiction betweenclassic World Bank and NGO rhetoric on poverty eradication and the new concern overclimate change, largely attributed to the consumption of hydrocarbons. Both issues leadseparate lives, with very little serious intellectual effort to appreciate properly the conse-quences of further advances towards global, widespread prosperity. It is politically futileto suggest that the US citizens should live and consume energy like the world’s poor; butit is equally futile to expect that the newly prosperous Chinese and Indians will not wantto live like Americans. While it is certainly commendable to push energy efficiency andnon-hydrocarbon energy, from newly expanding nuclear to non-conventional and renew-able energy, it is nevertheless under current developments, in particular in the emergingcountries, hard to envision greater prosperity without substantially larger CO2 emissions.This circle has not been squared yet. If one is serious about the risks from climate change,then calling for continued poverty eradication makes no sense. It recalls the collapsingsocieties Jared Diamond has so vividly examined. They collapsed because the dominantbelief systems, culture, habits and institutions could not cope with an overuse of availablenatural resources.160 One can suggest that for the sake of global survival it is necessary tore-think both the priority of poverty eradication, and at the same time questioning thelife-habits of those who have achieved prosperity, without at the same time denigratingthe quest for technological innovation for a more sustainable system of energy

158 A strong argument for entry into and alignment with the prevailing system of international investment protection is made by

Schill, ‘The new generation of investment treaties of the People’s Republic of China’ (2007) 15 Cardozo J Int’l Comp Law 73

113–16.159 The same applies to the pressure to manage the challenge of energy security which grows in the major consuming countries the

more as existing resources (eg oil and gas in the USA or the UK, not to speak of the almost totally energy-import-dependent

countries such as Japan or most of the EU and in particular China and India), see P Cameron, note above. S Haghighi, Energy

Security: The External Legal Relations of the EU with Major Oil and Gas Producing Countries (Hart 2007).160 Jared Diamond, Collapse, How Societies Choose to Fail or Survive (Penguin 2005).


production and consumption. This quest leads us beyond the issues of rights, rules, prop-erty and contract in collision with the political economy of petro-states, but it is equallylikely that no civilized way can be found to cope with the climate risks of energy withoutworking with a system of law, rights and markets.161

161 T Walde, ‘Investment Arbitration and Sustainable Development: Good Intentions – or Effective Results?’ in J Gupta (ed),

International Environmental Agreements (2006) 459–66; ibid, International Institutional Arrangements Bundling the Forces –

But How?: Lead Paper for 2004 Bonn Renewable Energy Conference (with Achim Steiner and A Bradbrook); E Sussmann, The

Energy Charter Treaty’s Investor Protection Provisions Overview: Potential to Foster Solutions to Global Warming and

Promote Sustainable Development.


Documents

Renegotiating acquired rights in the oil and gas industries ......10 Brian Z Tamanaha, On The Rule of Law: History, Politics, Theory (Cambridge University Press 2004); V von Hayek,