WTO and FDI
Presentation for Vietnamese Government
Officials
Jaemin Lee
June 30, 2011
1
Order of Presentation
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2
Investment under the WTO Framework
Basic Structure of ISD Procedure
Expropriation Disputes
Litigation Strategy for Defendant
Government
Conclusion
Investment in the WTO
Framework
3
No Meaningful Regulation in the WTO
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4
In the WTO Agreements, there is no
meaningful provision for regulating
investment disputes per se
The TRIM Agreement only deals with
certain investment related to
international goods transaction
It was too difficult to adopt an agreement
on the investment area
No Meaningful Regulation in the WTO

FDI is sometimes related with the
services trade
–

But this only addresses market opening
or national treatment issue
–
5
Mode (3): Commercial Presence
And Investment per se is still not addressed
So, Usually Investment Issues Come Up in
an FTA or BIT

BIT and FTA are treaties where
investment protection and dispute
settlement procedure are extensively
provided for the first time
–
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6
These are bilateral treaties
Consequently, an FTA or BIT usually
provides the first instance where this
particular issue is extensively discussed
Basic Structure of the ISD
Procedure
7
What is Investor-State Dispute
(“ISD”) Settlement Procedure?
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Foreign investors increasingly make investment
in another country (“host state”)
As a result, there are increasing legal disputes,
domestically and internationally, involving
foreign investments
Some of the disputes are between foreign
investors and the governments of host states
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–
8
For instance, a dispute between the Government of
Korea and a U.S. investor
ISD is only applicable to this type of dispute
What is Investor-State Dispute
(“ISD”) Settlement Procedure?
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For a dispute, a foreign investor can always go
to the court of the host state asking for judicial
review
The problem here, however, is that the decision
maker is the opposing party
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9
The judiciary is a branch of the host government
As a result, from the perspective of foreign
investors the fairness problem arises
There has been consensus in the international
community to address this problem
What is Investor-State Dispute
(“ISD”) Settlement Procedure?
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So, a new dispute settlement system has been
adopted by many countries since 1966
–
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Under this system, the foreign investor can now
bring a legal claim to an international
arbitration
–
–
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10
Through bilateral or multilateral treaties
In addition to traditional judicial review
Composed of panelists from third parties
Considered by foreign investors to be more neutral
and reliable
Unique Traits of the ISD Procedure
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11
Departure from the traditional state-to-state
dispute settlement mechanism under
international law
An additional choice available only to the
foreign investor
Applicable only to an investment dispute
Invites new dynamics and considerations
in dealing with this procedure
Positive Aspect of the ISD Procedure (1)
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12
Neutral Forum
Avoid a situation where a disputing party
becomes a decision maker
Minimize appearance or actual
occurrence of unfairness in substance
and procedure in a specific dispute
Select arbitrators from non-parties as
opposed to judges in respective national
courts
Positive Aspect of the ISD Procedure (2)
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13
Investment-Specific Expertise
Parties can select arbitrators familiar with
international legal disputes
Parties can select arbitrators with expertise in
investment disputes specifically
Parties can select arbitrators who are more
familiar with jurisprudence and interpretation
of the terms used in a particular treaty covering
investment
Positive Aspect of the ISD Procedure (3)
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Prompt Solution of a Dispute
ISD procedure allows a relatively prompt solution of an
investment dispute
–

Avoid a state-to-state dispute under the traditional
setting
–
–
14
Real parties’ direct participation in the dispute settlement
mechanism
In the absence of the ISD procedure, if an investment
dispute is not solved, the party against whose investor a
final adverse ruling is issued can still exercise the right of
diplomatic protection
ISD procedure can preempt such a state-to-state dispute
Positive Aspect of the ISD Procedure (4)
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Keeping up with International Standard
Over time, the ISD mechanism has been widely
accepted in the international community
–
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15
Many BITs and FTAs accept this mechanism
At least, in investment disputes, this system
has now become one of common features
As with any other terms of a treaty, a country
can still refuse to accept the system as a
sovereign state, but one can argue doing so
deviates from the general direction
Negative Aspect of the ISD Procedure (1)
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Different Dynamics and Mechanics
This is basically a “1.5 Track”
Unlike traditional disputes between states, a
dispute settlement procedure between a state
and an individual brings different dynamics
and mechanics
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–
–
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16
More aggressive litigation tactic
Harassment litigation
Prolonged litigation with all-out efforts
Less concern for minimum courtesy and mutual
respect as found in a state-to-state dispute
Negative Aspect of the ISD Procedure (2)
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Escalation in Number and Intensity of
Disputes
As a result, the number of disputes is likely to
increase under this system
–
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17
But at this point the statistical data do not
necessarily support this argument
The intensity of disputes can also increase
Although with varying degrees, it is likely to
resemble international litigation between
private parties
Negative Aspect of the ISD Procedure (3)
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18
Host State’s Inherent Defensive Position
Host state can only defend against a claim
brought by a foreign investor
Host state’s government usually does not have
legal expertise in this particular area
Host state’s government usually does not have
financial resources to fully respond to all
allegations in all procedures
Chilling effect problem
Negative Aspect of the ISD Procedure (4)
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19
Judging Internal Policy of a Host State
Increasingly, an investment dispute directly involves the
underlying intent and effect of a national policy of a host
state
It is sometimes doubtful whether, in rendering a
judgment, foreign arbitrators have clear understanding of
a situation of a host state
If an adverse decision is rendered, it is difficult for a host
state to accept it
– For instance, consider a decision from a three man
panel which negates the appropriateness of the host
state’s policy
Negative Aspect of the ISD Procedure (5)
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Political/Diplomatic Repercussion
If a host state loses in a dispute, it has
potential to cause significant political
repercussion domestically
A dispute in a volatile issue can also
cause a bilateral diplomatic problem
–
20
Through a perception that foreign countries
and governments try to change an otherwise
appropriate national policy of the host state
Negative Aspect of the ISD Procedure (6)
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Structural Shortcomings
Comparative disadvantage for some
countries
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21
A majority of internationally renowned
arbitrators in this particular area possesses
background in Anglo-American legal system
Major jurisprudence in this area has been
developed in Anglo-American legal system
Negative Aspect of the ISD Procedure (7)
22

Structural Shortcomings

Lack of Appeal
– Basically, an appeal for a panel’s decision is
not allowed
– An appeal can be permitted only in
exceptional situations
– This is particularly problematic when the
dispute involves complicated issues
– In other words, basically everything depends
upon the “third” arbitrator of a panel
Negative Aspect of the ISD Procedure (8)
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Structural Shortcomings
Small Pool of Experts
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23
The pool of experts is still small in this
particular area (note that this is different
from the ordinary commercial arbitration)
Some experts can play a wide range of roles
in many disputes, representing a host state
in one case, an investor in another case, and
arbitrator in yet another case
Conflict of interest or ethical issues emerge
Implication for the Vietnamese
Government for Future Investment
Disputes
24
Basic Positions of Developed Countries
vis-à-vis Developing Countries (1)
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25
Developed countries identify the ISD Procedure
as one of the key issues in BIT or FTA
negotiations
Developed countries’ positions are based on
their respective experiences in the past
In order to protect their future investors, these
countries are of the view that an ISD procedure
is indispensable
– Also, they prefer a more detailed and specific
provisions in this area
Basic Positions of Developed Countries
vis-à-vis Developing Countries (2)
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26
More fundamentally, developed
countries view developing countries as
regulation-prone states
They possess concern, whether correctly
or not, about the judicial system in
developing countries
So, developed countries regard the ISD
as a safety valve to protect their
companies’ future interest in developing
countries
Implication for the GOV (1)
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Overall, Vietnam may basically agree to
the necessity of the ISD procedure
Nonetheless, it should have concern
regarding following issues:
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27
Possibility of aggravation of the negative
aspects in the Vietnamese context
Lessons from the recent investment disputes
Possibility of interfering with domestic
regulatory power in the Vietnamese context
Implication for the GOV (2)
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28
At this point, it is neither persuasive nor
helpful to argue that the ISD procedure itself is
a problem or fundamentally flawed to accept
The pluses and minuses of the ISD procedure
have been somewhat clearly identified
Therefore, what really matters is not the system
itself; rather, the specific format and contents
to be included
Implication for the GOV (3)
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Following issues need to be checked thoroughly
in any treaty that Vietnam negotiates
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29
Is a reasonable balance achieved between the two
parties?
Does it impose more burden on Vietnam than the
other party?
Does Vietnam’s higher burden, if any, flow from terms
of the agreement or Vietnam’s lagging behind
international standard?
Is there a mechanism that addresses illegitimate
intervention in domestic affairs?
Does the draft provide a workable and reliable
guideline?
Implication for the GOV (4)
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At least in the initial stage, some confusion may
be inevitable
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An overall appreciation of the pluses and
minuses should be taken into account
–
30
This is also a factor to be considered in evaluating a
proposed ISD procedure in an FTA, but this should
not be a decisive one
Korea’s experience in WTO Dispute Settlement
Procedure
Even if the negative aspects are true, they should be
put into perspective with positive aspects as well
Implication for the GOV (5)
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Avoiding this issue will not solve the
problem once and for all
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31
If there is something for which the
Vietnamese government is responsible, the
legal liability will remain there regardless of
the ISD procedure
Vietnamese investors may want to utilize
the ISD mechanism to protect their
interest in other countries
Implication for the GOV (6)
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Even if it accepts the basic feature, it
should make necessary changes in a
treaty text
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32
Even if Vietnam accepts the ISD mechanism
in a particular treaty, it should try to
minimize uncertainties as much as possible
There is limit in this approach, however,
because the ISD procedure by nature
involves uncertainty and flexibility
Expropriation Disputes
33
Expropriation under Int’l Law

Expropriation is legal under
international law as long as the following
requirements are met:
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For public purpose
With non-discrimination principle
With appropriate compensation
Protection of state assets of other states
Expropriation under Int’l Law
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35
Direct expropriation is becoming rare
and indirect expropriation is surging
these days
Indirect expropriation is a hybrid located
between expropriation and legitimate
government regulation
Highly complex disputes ensue
Indirect Expropriation (1)
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One particular issue that magnifies the
problems of the ISD procedure is the concept
so-called “indirect expropriation.”
Expropriation under international law covers
both direct and indirect expropriation
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36
Direct expropriation means a host state’s seizure of
title of the property right
Indirect expropriation occurs when a host state’s
measure, in all respects, is equivalent to direct
expropriation even without formal transfer of title
Indirect Expropriation (2)
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Whether direct or indirect, all expropriations
require an adequate compensation under
international law
The problem is all governmental measures
almost always brings someone who benefits
from them and who loses business because of
them
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37
The dividing line between a meager negative effect and
indirect expropriation sometimes is not entirely clear
and case-specific
Indirect Expropriation (3)
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Furthermore, an inquiry by a panel in indirect
expropriation requires an analysis on the
underlying intent, actual effect and background
of the measure adopted by the host state
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38
A losing host state is not expected to accept the
conclusion when it is different from its own
When combined with the ISD procedure,
therefore, this may be particularly intrusive to
the state sovereignty
Indirect Expropriation (4)
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However, the current jurisprudence attempts to
distinguish a mere negative effect and indirect
expropriation
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39
Indirect expropriation is found only in exceptional
situations
The fact that a foreign investor loses money as a
result of a host state government’s policy does not
elevate the measure to indirect expropriation
It should be “tantamount to” expropriation or a
disguised measure to circumvent the expropriation
Indirect Expropriation (5)
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Furthermore, recent FTAs tend to specifically
lay out situations that do not constitute
indirect expropriation
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For instance, a non-discriminatory measures adopted
to achieve the legitimate objectives in environment,
health or safety are specifically stipulated as not
constituting indirect expropriation
Creates a safe haven
This categorical carve-out reduces the possibility of
illegitimate expansion of the concept of indirect
expropriation
Indirect Expropriation (6)
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Overall, it may be true that an indirect
expropriation reviewed in the ISD procedure
creates uncertainty and confusion in specific
cases
The safest way would be to eliminate the ISD
procedure, indirect expropriation, or both,
altogether from the FTA, but this is not
practical
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41
Does not fit with international standard
Unlikely that other countries would accept it
Not sure whether it serves a country’s long term
interest
Indirect Expropriation (7)
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42
Although a certain level of uncertainty is
involved, it is not proper to denounce the ISD
and indirect expropriation per se
The key issue should be whether procedural
and substantive requirements are installed in
an FTA to manage the risks thus posed
Trying to find a water-tight mechanism with
absolute certainty will not be feasible, at least
in this particular area
Litigation Strategy for the
Defendant Government
43
Designation of Government Agency in
Charge of This Issue
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44
It is recommendable that a government
designates or establishes an agency in
charge of investment disputes
An investment disputes will be an all-out
effort by a plaintiff, so the defendant
government should also mobilize its
resources effectively
This agency needs to coordinate work
with other government agencies
Preventive Analysis in Adopting
Legislation and Regulation
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45
It is recommendable that a government
conducts a preventive analysis when it
plans to adopt a legislation or regulation
Prior discussion to prevent an
unintended effect will help the defendant
government in an actual litigation
One word or phrase could change the
outcome when there is an actual
litigation
Training of Government Officials and
Attorneys
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46
It is recommendable that a government
initiates training of its officials and
attorneys to deal with these disputes
A government may hire private attorneys,
but they can only play some limited roles
Government officials and attorneys need
to understand basic features of
international law and jurisprudence of
key trading partners
Taking an Aggressive Approach Rather
Than Passive Approach
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47
It is recommendable that a government
takes an aggressive approach when it
comes to investment disputes
Taking an appeasement strategy would
not help in the long run
An all-out effort in a particular dispute
would minimize the number of future
litigation
Conclusion
48
Managing Investment Disputes is Crucial
for Vietnam’s Future Development
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49
As more foreign investment flows into
Vietnam, there will be more investment
disputes
Vietnam needs to contemplate on longterm strategies to deal with investment
disputes
Vietnam is recommended to take a more
realistic and aggressive approach in
architecting and managing this system