Good Faith in International Investment Law and Policy Sanja Djajić Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Principle of Good Faith in General International Law: From the Principle to the Rule . . . Good Faith Principle in International Investment Law and Arbitration . . . . . . . . . . . . . . . . . . . . . . . . Good Faith Principle as a Procedural and Substantive Rule at Different Stages of Investment Proceeding: Balancing Function of the Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Article 41(5) of the ICSID Arbitration Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Good Faith at the Preliminary Stage of the Proceedings: Jurisdiction of Tribunal and Admissibility of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Good Faith Argument at the Merits Stage: Balancing Competing Interests . . . . . . . . . . . . . . . . Good Faith Reflected in Damages and Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross-References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3 7 10 10 11 25 32 34 34 Abstract This chapter aims to provide a comprehensive framework for understanding how principle of good faith functions within international investment law in order to outline the roles the good faith plays within the discipline. This assessment covers different conceptualizations of the principle of good faith within the rules, arguments, and arbitral awards, but also the practical advantages it may provide for parties in the course of arbitral proceedings. The offered conceptual framework comprises the evaluation of the principle in general international law and in relation to international investment law and arbitration, overview of substantive and procedural derivatives of the principle, and overall assessment of the function and relevance of the principle in contemporary investment law, policy, and S. Djajić (*) Department for International Law, School of Law, University of Novi Sad, Novi Sad, Serbia e-mail: sdjajic@pf.uns.ac.rs © Springer Nature Singapore Pte Ltd. 2020 J. Chaisse et al. (eds.), Handbook of International Investment Law and Policy, https://doi.org/10.1007/978-981-13-5744-2_115-1 1 2 S. Djajić arbitration. How the good faith principle, within existing procedural concepts and substantive rules, but also as a self-standing standard, may play out is demonstrated by the overview of relevant arbitral jurisprudence and presented through different stages of an arbitral proceeding. States tend to rely on good faith to deny claimants’ rights to seize the tribunal (Article 41(5) of the ICSID Rules), to challenge jurisdiction or admissibility, to limit obligations arising under investment treaties or otherwise employ good faith as a defense in merits, and to minimize or exclude compensation. Claimants primarily rely on good faith as a part of the substantive standard of fair and equitable treatment, to expand interpretation of investment treaties and maximize their chances for compensation. Recent trends demonstrate the inherent balancing function of the good faith principle given that claimants and respondents alike rely on the good faith argument using it both as entitlement and defense, while arbitral tribunals have shown readiness to employ different variants of the good faith principle. Keywords Good faith · Abuse of process · Investment arbitration · Fair and equitable treatment · Legitimate expectations · Jurisdiction and admissibility · Unconscionable conduct · Misrepresentations Introduction The principle of good faith has been omnipresent in international investment law and arbitration.1 It has been frequently employed by all actors in investment arbitration: investors, states, and tribunals.2 There is some preliminary explanation why this is the case: investment arbitration is based on arbitration agreement which per se is ruled by the principles of pacta sunt servanda and good faith. Although the principle of good faith is deeply embedded in international legal scholarship, its application is not without difficulties. However, it is equally difficult to ignore possible practical consequences the principle of good faith may have for the parties and the system of investment protection at all stages of the proceeding. 1 This chapter draws on previous research published as Djajić S (2012) Mapping the good faith in international investment arbitration: assessment of its substantive and procedural value. Zbornik radova PF NS 47(3):207–233 2 “It is difficult to find any international arbitration award not based on, or that does not at least mention, good faith. The omnipresence of good faith does not mean (rather quite the contrary) that it is clearly understood, that we know how to use it, or that we are able to predict how an arbitral tribunal may apply good faith in a particular case.” – Cremades B (2012) Good faith in international arbitration. Am Univ Int Law Rev 27(4):761–789, 761 Good Faith in International Investment Law and Policy 3 Therefore, some preliminary observations on the complex character of the principle are due at the very beginning. Good faith manifests its complex structure through difficulty to define its nature with precision. It habitually dwells between the principle and the rule, between procedure and substance, and between an autonomous and auxiliary norm. Good faith turns out to be applied as such, directly and without any intermediary, or via a set of good faith derivatives. It may serve as a tool for interpretation and as a ground of rights and obligation. It may have relevance at each step of the proceeding finding its footing in a set of arguments based on procedural and substantive rules, being, unlike many other rules in international investment law, equally relevant for both claimants and respondents. Having in mind the complex and multifaceted character of the good faith principle, this article will begin with the brief overview of the principle of good faith in general international law, which will be followed by the analysis of direct and indirect application of the good faith, both in terms of procedure and substance, at different stages of an arbitral proceeding. At each of these steps, good faith principle will be assessed against the preliminary framework provided herein: rule or principle, rule of interpretation or rule of performance, objective or subjective concept, procedure or substance, autonomous or auxiliary norm, good faith as such or a good faith derivative, standard of conduct or obligation of result, and good faith as a sword or a shield. The Principle of Good Faith in General International Law: From the Principle to the Rule Principle of good faith has been recognized in international law having found its place in a number of international treaties and in case law of international courts. Major international treaties, like the UN Charter3 and the Vienna Convention on the Law of Treaties (VCLT),4 expressly incorporate the rule. The International Law Commission Draft Declaration on Rights and Duties of States (1949)5 and UN Declaration on Principles of International Law Concerning Friendly Relations 3 “All Members, in order to ensure to all of them the rights and benefits resulting from membership, shall fulfil in good faith the obligations assumed by them in accordance with the present Charter.” – Charter of the United Nations Art 2(2) 4 Art 26: “Every treaty in force is binding upon the parties to it and must be performed by them in good faith.” Art 31(1): “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” Vienna Convention on the Law of Treaties, opened for signature 22 May 1969, 1155 UNTS 331 (entered into force 27 January 1980), (hereinafter “VCLT”) 5 “Every State has the duty to carry out in good faith its obligations arising from treaties and other sources of international law, and it may not invoke provisions in its constitution or its laws as an excuse for failure to perform this duty.” UNGA, Draft Declaration on Rights and Duties of States, UN Doc A/RES/375(IV) (6 December 1949) Art 13 4 S. Djajić and Cooperation Among States (1970)6 reinforced the good faith as a principle of the UN. There are numerous international agreements which expressly indorse the principle of good faith, such as Article 3.10 of the Understanding on Rules and Procedures Governing Dispute Settlement of the WTO7 or Article 300 of the UN Convention on the Law of the Sea.8 A number of them refer to the corollaries of the principle of good faith, such as the abuse of right or duty of loyal cooperation. For example, Article 17 of the European Convention on Human Rights prohibits the abuse of rights to both States and individuals.9 The same concept of equal distribution of this obligation, even with the exact wording, is to be found in Article 5(1) of the International Covenant on Civil and Political Rights.10 EU law recognizes the duty of sincere and loyal cooperation,11 just another facet of the 6 “The principle that States shall fulfil in good faith the obligations assumed by them in accordance with the Charter: Every State has the duty to fulfil in good faith the obligations assumed by it in accordance with the Charter of the United Nations. Every State has the duty to fulfil in good faith its obligations under the generally recognized principles and rules of international law. Every State has the duty to fulfil in good faith its obligations under international agreements valid under the generally recognized principles and rules of international law.” – UNGA, UN Declaration on Principles of International Law concerning Friendly Relations and Cooperation Among States, UN Doc A/RES/2625 (XXV) (24 October 1970) 7 Art 3.10, Understanding on Rules and Procedures Governing the Settlement of Disputes, Marrakesh Agreement Establishing the World Trade Organization, Annex 2, 1869 U.N.T.S. 401 (opened for signature 15 April 1994, entered into force on 1 January 1995). See Chaisse J (2015) Deconstructing the WTO conformity obligation: a theory of compliance as a process. Fordham J Int Law 38(1):57–98. 8 “States Parties shall fulfil in good faith the obligations assumed under this Convention and shall exercise the rights, jurisdiction and freedoms recognized in this Convention in a manner which would not constitute an abuse of right.” – Art 300 (Good faith and abuse of rights), United Nations Convention on the Law of the Sea, opened for signature 10 December 1982, 1833 U.N.T.S. 397 (entered into force 16 November 1994) 9 “Nothing in this Convention may be interpreted as implying for any State, group or person any right to engage in any activity or perform any act aimed at the destruction of any of the rights and freedoms set forth herein or at their limitation to a greater extent than is provided for in the Convention.” – Art 17 (Prohibition of abuse of rights), European Convention for the Protection of Human Rights and Fundamental Freedoms, opened for signature 4 November 1950, ETS No. 5 (entered into force 3 September 1953), (hereinafter “ECHR” or “European Convention on Human Rights”) 10 “Nothing in the present Covenant may be interpreted as implying for any State, group or person any right to engage in any activity or perform any act aimed at the destruction of any of the rights and freedoms recognized herein or at their limitation to a greater extent than is provided for in the present Covenant.” – Art 5(1), International Covenant on Civil and Political Rights, adopted by the UNGA on16 December 1966, 999 UNTS 171 (entered into force 23 March 1976) (hereinafter “ICCPR”) 11 “Pursuant to the principle of sincere cooperation, the Union and the Member States shall, in full mutual respect, assist each other in carrying out tasks which flow from the Treaties.” – Treaty of the European Union, 2012/C 326/13, Art 4(3) Good Faith in International Investment Law and Policy 5 good faith principle. These provisions demonstrate the underlying rationale of the good faith principle of balancing rights and harmonizing even conflicting interests. While treaty law has its considerable share in shaping and reconfirming the good faith as international legal principle, it can also be argued that the good faith principle is part of customary international law. The Court of Justice of the European Union proceeded to the issue of legitimate expectations from the position that: The principle of good faith, codified by Article 18 of the First Vienna Convention, is a rule of customary international law whose existence is recognized by the International Court of Justice and is therefore binding on the Community. That principle is the corollary in public international law of the principle of protection of legitimate expectations, which forms part of the Community legal order.12 In addition, doctrinal consensus regarding the origin and position of the good faith within formal sources of international law seems to rely mostly on general principles of law (of civilized nations) within the meaning of Article 38(1) of the Statute of International Court of Justice.13 Given the complex character of the good faith principle and variety of formal sources that could possibly serve as a basis for its binding character, it is not surprising that international courts seem to rely on good faith considerations in a variety of ways. While they have been ready to have their say on the principle, they have been more willing to entertain the good faith argument within rules deriving from the good faith principle such as the abuse of right, estoppel, legitimate expectations, or negligence than to directly rely on the good faith as a rule. The International Court of Justice in the Nuclear Tests case refers to good faith as a principle capable of creating the rule on binding unilateral declarations: One of the basic principles governing the creation and performance of legal obligations, whatever their source, is the principle of good faith. Trust and confidence are inherent in international co-operation, in particular in an age when this co-operation in many fields is becoming increasingly essential. Just as the very rule of pacta sunt servanda in the law of treaties is based on good faith, so also is the binding character of an international obligation 12 Case T-115/94 Opel Austria GmbH v Council of the European Union [1997] ECR II-43, para. 2 See, e.g., Ziegler AR, Baumgartner J (2015) Good faith as a general principle of (international) law. In: Mitchell AD, Sornarajah M, Voon T (eds) Good faith and international economic law. Oxford University Press, New York, pp. 9–36, 10, Chap 2; Tanzi A (2018) The relevance of the foreign investor’s good faith. In: Gattini A, Tanzi A, Fontanelli F (eds) General principles of law and international investment arbitration. Brill Nijhoff, Leiden/Boston, p 193, Chap 10; Sipiorski E (2020) Introducing good faith in international investment law. Investment claims, Oxford University Press, para 1.03. http://oxia.ouplaw.com, https://oxia.ouplaw.com/view/10.1093/law/ 9780198826446.001.0001/law-9780198826446-chapter-1 13 6 S. Djajić assumed by unilateral declaration. Thus interested States may take cognizance of unilateral declarations and place confidence in them, and are entitled to require that the obligation thus created be respected.14 Although in subsequent cases the ICJ retracted and limited the relevance of the principle by finding that “good faith is not in itself a source of obligation where none would otherwise exist,”15 which could imply that there is no autonomous standing for the good faith principle and thus no remedy for its breach, more recently the ICJ discussed the relevance of abuse of rights, abuse of process, and “clean hands” doctrine as independent grounds for dismissing jurisdiction. The Court opined that “only in exceptional circumstances should the Court reject a claim based on a valid title of jurisdiction on the ground of abuse of process.”16 Although the Court rejected the respondents’ objections against jurisdiction in both of these cases, it did not dismiss them for the absence of the rule but rather for the fact that the threshold that had been set high was not reached. As for the “clean hands” doctrine, the Court seemed unwilling to treat it as an independent basis for dismissing preliminary objection but nevertheless left the door open for this particular good faith argument to be used as a defense on the merits.17 The ICJ also often dealt with good faith argument within the meaning of “good faith negotiations”18 where it was the conduct of parties rather than the content of an obligation that was scrutinized by the Court. It seems that the conduct in good faith 14 Nuclear Tests Case (Australia v. France), Judgment, 20 December 1974, ICJ Reports 1974, p. 268, para. 46 15 Border and Transborder Armed Actions (Nicaragua v. Honduras), Jurisdiction and Admissibility, Judgment, 20 December 1988, ICJ Reports 1988, p. 105, para. 94 16 Immunities and Criminal Proceedings (Equatorial Guinea v. France), Preliminary Objections, Judgment, 6 June 2018, ICJ Reports 2018, p. 336, para. 150; Certain Iranian Assets (Islamic Republic of Iran v. United States of America), Preliminary Objections, Judgment, 13 February 2019, ICJ Reports 2019, p. 42, para. 113 17 “122. Without having to take a position on the ‘clean hands’ doctrine, the Court considers that, even if it were shown that the Applicant’s conduct was not beyond reproach, this would not be sufficient per se to uphold the objection to admissibility raised by the Respondent on the basis of the ‘clean hands’ doctrine (. . .). 123. Such a conclusion is however without prejudice to the question whether the allegations made by the United States, concerning notably Iran’s alleged sponsoring and support of international terrorism and its presumed actions in respect of nuclear non-proliferation and arms trafficking, could, eventually, provide a defence on the merits.” – Certain Iranian Assets (Islamic Republic of Iran v. United States of America), Preliminary Objections, Judgment, 13 February 2019, ICJ Reports 2019, p. 42, paras. 122–123 18 Delimitation of the Maritime Boundary in the Gulf of Maine Area (Canada/United States of America), Judgment, 12 October 1984, ICJ Reports 1984, p. 292, para. 87; Fisheries Jurisdiction (United Kingdom v. Iceland), Merits, Judgment, 25 July 1974, ICJ Reports 1974, pp. 33–34, paras. 78–79; Fisheries Jurisdiction (Federal Republic of Germany v. Iceland), Merits, Judgment, 25 July 1974, I.C.J. Reports 1974, p. 202, para. 69; Nuclear Tests (Australia v. France), Judgment, 20 December 1974, ICJ Reports 1974, p. 268, para. 46; Nuclear Tests (New Zealand v. France), Judgment, 20 December 1974, ICJ Reports 1974, p. 473, para. 49; North Sea Continental Shelf (Federal Republic of Germany/Denmark; Federal Republic of Germany/Netherlands), Judgment, 20 February 1969, ICJ Reports 1969, pp. 46–47, para. 85 Good Faith in International Investment Law and Policy 7 was somehow easier for the Court to translate into directly applicable rules. In a case between FYR Macedonia and Greece over the name of Macedonia, the ICJ set up criteria for good faith standard during negotiations.19 More importantly, the Court was willing to introduce the good faith in the absence of any specific reference to the principle: “although Article 5, paragraph 1, contains no express requirement that the Parties negotiate in good faith, such obligation is implicit under this provision.”20 Without specific directions to the principle of good faith, it may be difficult for any court to fully embrace it. It comes as no surprise that judges and “arbitrators are extraordinarily cautious in their decisions when they must apply the principle of good faith.”21 Nevertheless, as a principle, the good faith serves to prevent and sanction the abuse of the system, as a general corrective even in the absence of direct reference to the principle. Recent trends in jurisprudence of international courts in general, and in investment arbitration in particular, show that the principle finds its way to the formation of autonomous and a directly applicable good faith rule.22 Good Faith Principle in International Investment Law and Arbitration International investment agreements (IIAs) rarely refer directly to the good faith principle although this trend seems to be changing as of recently. For example, Article 8.18(3) of the Comprehensive Economic and Trade Agreement (CETA) between the European Union and Canada23 now expressly provides protection only to legal and good faith investments: “investor may not submit a claim under this Section if the investment has been made through fraudulent misrepresentation, concealment, corruption, or conduct amounting to an abuse of process.” Inclusion of good faith principle and its derivatives directly into international investment agreements seems to be the policy of the EU given that similar provisions can be found in other recent EU IIAs.24 19 Application of the Interim Accord of 13 September 1995 (the former Yugoslav Republic of Macedonia v. Greece), Judgment, 5 December 2011, ICJ Reports 2011, para. 132 20 Ibid., para. 131 21 Cremades B (2012) Good faith in international arbitration. Am Univ Int Law Rev 27(4):761– 789, 786 22 Djajić S (2012) Mapping the good faith in international investment arbitration: assessment of its substantive and procedural value. Zbornik radova PF NS 47(3):207–233, 209 23 Signed on 30 October 2016. Not yet in force. Provisionally applied in part since 21 September 2017, Official Journal of the European Union, L11/23 (14 January 2017) 24 For example, Art 3.27 of the EU-Vietnam Investment Protection Agreement (signed on 30 June 2019, not yet in force) excludes claims made through “fraudulent misrepresentation, concealment, corruption or conduct amounting to an abuse of process,” while Art 4.43 (Anti-circumvention) declines jurisdiction for disputes over investments where ownership restructuring occurred after the dispute had arisen or become foreseeable. The similar provision is to be found in Art 3.7(5) of the EU-Singapore Investment Protection Agreement (signed on 19 October 2018) 8 S. Djajić Given the lack of treaty law sources on good faith leaves its application to other sources and to the discretion of tribunals. Speaking in general terms, there seems to be consensus that good faith principle is applicable as a matter of law despite possible absence of the reference to the rule. Article 42 of the ICSID Convention opens up possibility for application of general international law25 and thereby of the good faith principle as a rule of international law. Several tribunals also referred to the good faith as a matter of international public policy. Within the context of claimants’ obtaining investments and contracts by fraudulent means, at least three investment tribunals26 dismissed the claims as contrary inter alia to the basic notion of international public policy and as such to the principle of good faith.27 The tribunal in World Duty Free v. Kenya defined international public policy as “an international consensus as to universal standards and accepted norms of conduct that must be applied in all fora.”28 With respect to some derivatives of the good faith principle, several tribunals seemed to disagree – in South American Silver v. Bolivia, the tribunal, while agreeing in principle with other tribunals upholding the good faith, still concluded that “clean hands” doctrine is not part of international public policy.29 As a matter of law, there seems to be consensus that good faith certainly is a principle: “It is indisputable, and this Arbitral Tribunal can do no more than confirm it, that the safeguarding of good faith is one of the fundamental principles of international law and the law of investments.”30 Inceysa tribunal, for example, referred to general principles of law within the meaning of Article 38 of the Statute of the International Court of Justice as a formal source for its application.31 How- 25 “The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.” – Convention on the Settlement of Investment Disputes between States and Nationals of Other States, opened for signature 18 March 1965, 575 UNTS 159 (entered into force 14 October 1966), Art 42(1) (hereinafter “ICSID Convention”) 26 Inceysa Vallisoletana S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26, Jurisdiction, Award (2 August 2006), [249] (hereinafter “Inceysa v. El Salvador, Award”); World Duty Free Company Limited v. The Republic of Kenya, ICSID Case No. ARB/00/7, Award (4 October 2006), [139], [179] (hereinafter World Duty Free Company Limited v. Kenya, Award); Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award (27 August 2008), [141]– [143] (hereinafter Plama v. Bulgaria, Award) 27 Plama v. Bulgaria, Award, [144] 28 World Duty Free Company Limited v. Kenya, Award, [139] 29 South American Silver Limited (Bermuda) v. The Plurinational State of Bolivia, UNCITRAL, PCA Case No. 2013-15, Award (22 November 2018), [452]–[453] (hereinafter South American Silver v. Bolivia, Award) 30 Malicorp Limited v. The Arab Republic of Egypt, ICSID Case No. ARB/08/18, Award (7 February 2011), [116] (hereinafter Malicorp v. Egypt, Award) 31 “General principles of law are an autonomous and direct source of International Law, along with international conventions and custom.”- Inceysa v. El Salvador, Award, [226] Good Faith in International Investment Law and Policy 9 ever, there is no such consensus when it comes to discussion whether good faith is also a rule and whether it is only an auxiliary and complementary rule or also a selfstanding rule eligible for autonomous application. While this will be addressed later in relevant sections, within the discussion on different derivatives of the good faith principle, here it will be just briefly presented the general disagreement with the proposition of the self-standing character of the rule. For example, in Mobil Investments v. Canada, the tribunal was of the opinion that “[g]ood faith is pertinent to the manner in which that obligation [pacta sunt servanda] is to be performed; it is not put forward as a free-standing obligation.”32 In Malicorp v. Egypt, the stance was that “the principle fulfils a complementary function; it allows for lacunae in the applicable laws to be filled, and for that law to be clarified by the specific application of existing principles.”33 Tribunal in South American Silver v. Bolivia found that “clean hands” doctrine is not an international legal rule,34 and similarly, in Hulley v. Russia, the tribunal ruled that this doctrine is not a general principle of law within the meaning of Article 38 of the ICJ Statute.35 Some other tribunals took another path and found that good faith has much more strength than argued elsewhere. Just as an illustration, in a famous Phoenix v. Czech Republic, the tribunal relied upon autonomous character and direct applicability of the good faith principle in dismissing investor’s claims for finding investments made contrary to the principle of good faith.36 Therefore, the breach of the principle led directly to dismissing jurisdiction. International investment arbitration has been a busy playground for good faith arguments. Despite asymmetrical architecture of international investment treaties in terms of distribution of rights and obligations between investors as claimants and states as respondents, good faith arguments have been equally shared between them. The good faith thus can serve as the basis both of claim and of defense. Unlike many other investment law rules, this one has the ability to harmonize the system by being equally at the disposal for both parties. In order to illustrate the multiple functions of the good faith in international investment law and arbitration, the following section will show different shapes and derivatives of the good faith throughout an investment proceedings and how it is being employed by both parties at the same stage of the proceedings. 32 Mobil Investment Canada v. Government of Canada, ICSID Case No. ARB/15/6, Jurisdiction and Admissibility, Decision (13 July 2018), [169] 33 Malicorp v. Egypt, Award [116] 34 South American Silver v. Bolivia, Award [453] 35 Hulley Enterprises Limited (Cyprus) v. The Russian Federation, UNCITRAL, PCA Case No. 2005-03/AA 226, Final Award (18 July 2014), [1357]–[1363] (hereinafter “Hulley v. Russia, Final Award”) 36 Phoenix Action Ltd. v. The Czech Republic, ICSID Case No. ARB/06/6, Award (15 April 2009) [106], [113] (hereinafter “Phoenix v. The Czech Republic, Award”) 10 S. Djajić Good Faith Principle as a Procedural and Substantive Rule at Different Stages of Investment Proceeding: Balancing Function of the Principle Balancing and harmonizing function of the good faith principle, which potentially serves the system and as such all parties to the proceeding, was aptly described by the Inceysa tribunal: “Good faith is a supreme principle, which governs legal relations in all of their aspects and content. . .”37 According to Ponce and Cevallos, the good faith contributed to the investor-state dispute settlement (ISDS) system playing field being level.38 It is indeed a benefit of the principle of good faith that it can be applied equally to investors and states, to claimants and respondents. Its scope of application and multiple forms in which it can be applied will be illustrated through different stages of an investment proceeding that should testify to the practical relevance of the good faith principle. Article 41(5) of the ICSID Arbitration Rules Article 41(5) of the 2006 ICSID Arbitration Rules provides for a summary procedure designed for dismissal of claims manifestly without legal merit. Due to a short deadline for challenging the claim on this particular ground (30 days from the constitution of the tribunal), some tribunals refer to Article 41(5) challenge as a “pre-preliminary objection.”39 This rule is equally applicable to requests for annulment and revision. It is being understood that this challenge exists to prevent frivolous claims as early as possible and thereby to prevent the abuse of the system. As it addresses prima facie legal merit, it follows that it can arguably involve both issues of jurisdiction and merits. According to De Brabandere, Article 41(5) is emanation of the principle of good faith and abuse of process.40 To date, 33 decisions and awards were rendered on the basis of Article 41(5) objections.41 Although not all of these decisions are publicly available, it has been 37 Inceysa v. El Salvador, Award, [230] Ponce JE, Cevallos RA (2016) Good faith in investment arbitration. Transnatl Dispute Manag 13 (5):1–36, 35. www.transnational-dispute-management.com/article.asp?key¼2388 39 Global Trading Resource Corp. and Globex International, Inc. v. Ukraine, ICSID Case No. ARB/ 09/11, Respondent’s Objection under Rule 41(5) of the ICSID Arbitration Rules, Decision (1 December 2010) [34] 40 “The principles of ‘good faith’ and ‘abuse of process’ in assessing the submissions of investment treaty claims have often been used in these cases, essentially to avoid abuses of the direct access to investment arbitration. Both principles are increasingly taking a prominent role in investment arbitration.” De Brabandere E (2012) The ICSID Rule on Early Dismissal of Unmeritorious Investment Treaty Claims: Preserving the Integrity of ICSID Arbitration. Manchester J Int Econ Law (9)1: 23–44, 24 (references omitted) 41 ICSID, Decisions on Manifest Lack of Merit. https://icsid.worldbank.org/en/Pages/Process/Deci sions-on-Manifest-Lack-of-Legal-Merit.aspx 38 Good Faith in International Investment Law and Policy 11 known that objections of “manifest lack of legal merit” were successful in at least five cases and partially in one. It is arguable that this very provision represents the emanation of good faith even if it may not be directly invoked or upheld in each particular case. However, in some of the known cases, the issue of “manifest lack of legal merit” turned on the good faith. In Rachel Grynberg et al. v. Grenada,42 respondent argued inter alia that claimants’ second attempt at the ICSID was the abuse of process. After their contractual claim was dismissed, the claimants gave it another try with a treaty-based claim. The second tribunal found that the claim was an attempt to re-litigate the issue already decided by a previous ICSID tribunal, so attempt to avoid the decision that was final under Article 53 of the ICSID Convention made such claim “manifestly without legal merit.” Article 41(5) operationalizes the good faith principle and abuse of process by providing respondents with an effective remedy against frivolous or otherwise abusive claims. Despite a high threshold for proving “unmeritorious” claims so early in the course of an investment proceedings, there is still some procedural advantage for respondent states since they have a procedural option to remove the case at the very beginning and thereby save both time and resources. Good Faith at the Preliminary Stage of the Proceedings: Jurisdiction of Tribunal and Admissibility of Claim Given that preliminary objections are raised by respondent states, it follows that reliance on the good faith argument for challenging jurisdiction of the tribunal or admissibility of the claim places the principle of good faith in the hands of respondents. To that end, good faith can indeed play a principal or supportive role, either through one of the good faith derivatives or simply as a complementary argument. Investment protection is usually conditioned by the fulfillment of several criteria set forth in applicable IIAs and other applicable treaties (e.g., ICSID Convention if the arbitration is conducted in ICSID arbitration). These criteria are very often similar and there is tendency of converging interpretation of identical or similar provisions, but there is also a question whether there are generally applicable criteria which are not necessarily spelled out in applicable treaties. All these considerations can sometimes involve different aspects of good faith. For the purpose of discussion on jurisdiction and admissibility, good faith can be relevant for either interpreting or complementing existing requirements relevant for the consent of the state to arbitrate under applicable international agreements or for a variety of reasons relevant for the admissibility of the claim. Here we shall explore the most common preliminary issues which are in close connection with the good faith principle. 42 Rachel S Grynberg, Stephen M Grynberg, Miriam Z Grynberg, and RSM Production Corporation v. Grenada, ICSID Case No. ARB/10/6, Respondent’s Objection under Rule 41(5) of the ICSID Arbitration Rules, Decision (10 December 2010) 12 S. Djajić Requirement of Legality and Good Faith If investment is made in violation of the host state laws and regulations, this can in turn imply that such investment is without protection granted by applicable IIAs. It can also be argued that providing an illegal investment with international legal protection would run contrary to the principle of good faith because per definition such investments cannot be treated as good faith investments. The legality requirement (admission clause) is a common standard in IIAs. When this requirement is set forth in applicable treaties, with the purpose to exclude unlawful investments from the states’ obligations to protect,43 respondent states get certain leverage in investment proceedings and usually raise this issue at the preliminary stage with argument that tribunals do not have jurisdiction over unlawful investments or that a claim based on violation of domestic law are mala fide investments deprived of international protection. Advantage of admission clauses is to exclude investments made in violation of the host state laws and regulations, and in this respect, these clauses fall to be assessed as preliminary issues with preliminary objections as a procedural tool. However, post-investment illegality does not affect jurisdiction of investment tribunals.44 Arguments of illegality usually involve charges of corruptive practices or fraudulent behavior and if proven correct will strip the investment off the protection and investment tribunal off jurisdiction.45 Legality requirement in relation to good faith can turn into several procedural impediments. For example, if applicable IIA expressly provides for an admission clause, i.e., if it requires investment to be made legally, respondent’s argument against illegal investment is capable of removing the claim as incompatible with the IIA but is usually accompanied by the good faith argument implying that pursuing claim based on an illegal investment runs against the principle of good faith. In such cases, the good faith principle is complementary but still a useful argument because it points to the rationale of international investment protection system. There are additional questions like whether a good faith can be read into the domestic legality requirement and whether a good faith can be applied as a selfstanding standard even in absence of an admission clause. Is dishonesty, independently of domestic legality requirement, capable of removing protection and thereby jurisdiction of the tribunal? The investment tribunals seem to have divergent views on this point. 43 Joubin-Bret A (2008) Admission and establishment in the Context of Investment protection. In: Reinisch A (ed) Standards of investment protection. Oxford University Press, Oxford, pp 9–28, 27 44 Khan Resources Inc., Khan Resources B.V., CAUC Holding Company Ltd. v. The Government of Mongolia, MonAtom LLC, An Arbitration under the Founding Agreement for the Creation of a Company with Limited Liability, the Energy Charter Treaty, the Foreign Investment Law of Mongolia, UNCITRAL, PCA Case No. 2011–09, Jurisdiction, Decision (25 July 2012), [380]– [385] (hereinafter “Khan Resources v. Mongolia, Decision”) 45 Yackee JW (2012) Investment treaties and investor corruption: an emerging defense for host states. Va J Int Law 52(3):723–745 Good Faith in International Investment Law and Policy 13 For example, the Inceysa v. El Salvador tribunal found it lacked jurisdiction due to the breach of good faith on behalf of the investor. It seems that the Inceysa tribunal applied good faith as an autonomous standard: [g]eneral principles of law are an autonomous and direct source of International Law, along with international conventions and custom. (. . .) Based on the above, we analyze the Inceysa’s investment in light of the general principles of law, which the Arbitral Tribunal considers to be applicable to the case. (. . .) Good faith is a supreme principle, which governs legal relations in all of their aspects and content. (. . .) The conduct mentioned above constitutes an obvious violation of the principle of good faith that must prevail in any legal relationship. (. . .) By falsifying the facts, Inceysa violated the principle of good faith from the time it made its investment and, therefore, it did not make it in accordance with Salvadoran law. Faced with this situation, this tribunal can only declare its incompetence to hear Inceysa’s complaint, since its investment cannot benefit from the protection of the BIT.46 Several tribunals followed the suit. In World Duty Free v. Kenya and Fraport v. Philippines, the tribunals accepted the proposition that corruptive practices leave the investment without protection, as such practices run contrary to international and transnational public policy47 or admission clause in the applicable BIT affecting jurisdiction ratione materiae.48 There are also cases which upheld the rule according to which investments made in bad faith or in violation of host state laws would not deserve protection of international law although preliminary objections were ultimately dismissed. In Khan Resources v. Mongolia, the tribunal rejected the preliminary objection based on claim that post-investment breach of local laws affected jurisdiction, but nevertheless upheld in principle the rule that investments made in bad faith would not pass the preliminary stage even when the applicable treaty does not contain admission clause, as the case is with the Energy Charter Treaty (ECT): An investor who has obtained its investment in the host state only by acting in bad faith or in violation of the laws of the host state, has brought him or herself within the scope of application of the ECT only as a result of his wrongful acts. Such an investor should not be allowed to benefit as a result, in accordance with the maxim nemo auditur propriam turpitudinem allegans.49 46 Inceysa v. El Salvador, Award, [226], [229]–[230], [237], [239] World Duty Free Company Limited v Kenya, Award, [157] 48 Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/03/25, Award (16 August 2007) (hereinafter “Fraport v. Philippines, Award”) 49 Khan Resources v. Mongolia, Decision, [383]. The similar position was undertaken by the tribunal in the Hulley v. Russia, one of the Yukos cases. There the tribunal ruled that although the ECT does not have clause with legality requirement, there still exists obligation of making legal and bona fide investment in order to gain protection of the ECT (Hulley v. Russia, Final Award, [1352]). The tribunal also found that such implicit good faith and legality requirement do not extend to the performance but only to making of an investment. – Ibid., [1354]–[1356] 47 14 S. Djajić Cortec v. Kenya tribunal also upheld the principle that only investments made in good faith deserve protection but on the facts it found that charges of bribery, corruption, or other forms of bad faith of the investor had not been proven “on a balance of probabilities.”50 The similar was the position of Getma International et al v. Guinea where the principle was upheld51 but the claim of corruption failed to succeed on evidence. In addition to bribery and corruption, investment tribunals were faced with other claims of illegality together with bad faith. These claims can involve the lack of permits52 or fraudulent behavior in making an investment. In Hamester v. Ghana, the tribunal discussed allegations of fraud in initiation of the investment. Although these allegations were not proven, the tribunal ruled that good faith is relevant for jurisdiction53: An investment will not be protected if it has been created in violation of national or international principles of good faith; by way of corruption, fraud, or deceitful conduct; or if its creation itself constitutes a misuse of the system of international investment protection under the ICSID Convention. It will also not be protected if it is made in violation of the host State’s law (. . .) These are general principles that exist independently of specific language to this effect in the Treaty.54 Misrepresentations regarding the ownership of the investment equally raise the issue of legality and good faith. Such misrepresentations were discussed in two similar and connected cases, Europe Cement v. Turkey55 and Cementownia v. 50 Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v. Republic of Kenya, ICSID Case No. ARB/15/29, Award (22 October 2018), [308] 51 “Le Tribunal arbitral est d’accord avec la Défenderesse que seuls les investissements légaux et réalisés dans la bonne foi sont à protéger par l’arbitrage CIRDI et que le Tribunal arbitral doit se déclarer incompétent s’il apparaît que l’investissement a été fait frauduleusement ou à la suite de corruption.” – Getma International, NCT Necotrans, Getma International Investissements, NCT Infrastructure & Logistique c. La Republique de Guinee, ICSID Case No. ARB/11/29, Award (16 August 2016), [174] 52 In Mamidoil v. Albania, the tribunal extensively discussed whether the claimant applied for and was granted a set of necessary permits in order to assess whether there was a legal and bona fide investment. The Mamidoil tribunal upheld the principle that only legal and good faith investments were covered by the applicable treaties (BIT, ECT). Although it did find that majority of necessary permits were neither applied for nor granted, it still found that these illegalities did not make the whole investment illegal to the extent that would leave it without the protection of the applicable agreements. The tribunal implied that such illegality was not finally settled because the Respondent State did not sanction the construction without permits timely and still offered negotiations to resolve the issue. See Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Republic of Albania, ICSID Case No. ARB/11/24, Award (30 March 2015), [289], [359], [492]–[495] 53 Gustav F W Hamester GmbH & Co KG v. Republic of Ghana, ICSID Case No. ARB/07/24, Award (18 June 2010), [129] 54 Ibid., [122]–[123] 55 Europe Cement Investment & Trade SA v. Turkey, ICSID Case No. ARB (AF)/07/2, Award (13 August 2009) (hereinafter “Europe Cement v. Turkey, Award”) Good Faith in International Investment Law and Policy 15 Turkey,56 which actually involved the businesses of the same family, and were decided within weeks. Misrepresentation consisted in presentation of false documents and information and thereby represented the false assertion of ownership of an investment. The tribunal in Europe Cement v. Turkey dismissed the case for lack of jurisdiction, and good faith played the major role to that end: In the present case, there was in fact no investment at all, at least at the relevant time, and the lack of good faith is in the assertion of an investment on the basis of documents that according to the evidence presented were not authentic. The Claimant asserted jurisdiction on the basis of a claim to ownership of shares, which the uncontradicted evidence before the Tribunal suggests was false. Such a claim cannot be said to have been made in good faith.57 In Cementownia, the claimants failed to produce original share certificates evidencing its shareholdings, submitted inconsistent evidence, and engaged in procedural misconduct. As there was no evidence of investment, just like in Europe Cement, and that the award in Europe Cement had already been adopted, claimants in Cementownia moved to request decision for the lack of jurisdiction without prejudice. However, the tribunal refused the claim and made an additional step in safeguarding the good faith principle – it dismissed the case with prejudice not only for the failure of claimants to prove ownership or control of the investment but also because “the Claimant’s claim is fraudulent and was brought in bad faith.”58 The good faith principle here serves as the sole ratio decidendi in the operative part of the award even in the absence of any express legality requirement in the applicable ECT. The Cementownia tribunal placed good faith principle on a new level, and its application resulted in a decision with res judicata effect preventing claimants to pursue their claim ever again.59 However, there were tribunals which rejected the application of the good faith principle as implied condition for legality. In Saba Fakes v. Turkey, the tribunal refused to follow the proposition that the good faith requirement is an implied term of Article 25(1) of the ICSID Convention.60 Metal-Tech v. Uzbekistan followed this 56 Cementownia “Nowa Huta” SA v. Republic of Turkey, ICSID Case No. ARB (AF)/06/2, Award (17 September 2009 (hereinafter “Cementownia v. Turkey, Award”) 57 Europe Cement v. Turkey, Award [175] 58 Cementownia v. Turkey, Award [179] 59 Ibid., [162] 60 “Likewise, the principles of good faith and legality cannot be incorporated into the definition of Article 25(1) of the ICSID Convention without doing violence to the language of the ICSID Convention: an investment might be “legal” or “illegal,” made in “good faith” or not, it nonetheless remains an investment. The expressions “legal investment” or “investment made in good faith” are not pleonasms, and the expressions “illegal investment” or “investment made in bad faith” are not oxymorons. While a treaty should be interpreted and applied in good faith, this is a general requirement under treaty law, from which an additional criterion of “good faith” for the definition of investments, which was not contemplated by the text of the ICSID Convention, cannot be derived.” – Saba Fakes v. Republic of Turkey, ICSID Case No. ARB/07/20, Award (14 July 2010) [112]–[113] 16 S. Djajić rationale and held that good faith is not an element of the objective definition of investment under Article 25(1) the ICSID Convention.61 Similarly, in Bear Creek v. Peru, the tribunal refused to imply the condition of a good faith investment in applicable IIA: “the Tribunal does not consider that the alleged good faith of the investor is a further condition under the FTA for the jurisdiction of the Tribunal.”62 Tribunals have had different approaches as to how to incorporate the rule of good faith within the legality requirement. Good faith of an investment, standing alone or in conjunction with domestic legality, has usually been framed as issue of jurisdiction: ratione voluntatis,63 ratione materiae,64 just jurisdiction,65 or as a genuine bar to jurisdiction for fraudulent claims.66 Given that legality requirement subsuming the good faith principle is related to the definition of the covered investments, it makes sense to have this requirement entertained as a jurisdictional issue. However, the potential of good faith exceeds the framework of jurisdiction, even for preliminary stage of the proceedings as will be illustrated in the following sections. Abuse of Process and Investment Treaty System: Investment Restructuring, Nationality Requirement, and Parallel Proceedings Good faith as a preliminary issue that has been mostly in focus is whether the claimant is entitled to seek international protection under applicable treaties even if all formal conditions are met at the time the proceedings are launched. In other words, if formal conditions were secured only to gain access to international protection that would otherwise be unavailable, is the engineering of formal conditions contrary to the principle of good faith? Are investment tribunals empowered to conduct judicial review of the right to access investment treaty system beyond textual and formal requirements? Difference between legality requirement and abuse of process lies in the fact that in the first case, the investment is made in violation of domestic law and/or good faith which consequently denies the lawfulness of international protection, while in the second case, there is no illegality per se, and transactions may have legal effect under domestic law, but the issue is whether the intent behind transactions reveals the abuse of the system. In other words, the question is whether there could be international illegality despite domestic lawfulness. The function of good faith principle here is to prevent the abuse of the system. Sometimes it is referred to as the abuse of investment treaty system, abuse of right, or abuse of process, but in reality all these terms refer to the same phenomenon. As 61 Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award (4 October 2013), [126]–[127] 62 Bear Creek Mining Corporation v. Republic of Peru, ICSID Case No. ARB/14/21, Award (30 November 2017), [321] 63 Inceysa v. El Salvador, Award, [144] 64 Fraport v. Philippines, Award, [401] 65 Europe Cement v. Turkey, Award, [145] 66 Cementownia v. Turkey, Award [179] Good Faith in International Investment Law and Policy 17 defined by Ceretelli, “the legal notion of abuse of right is based on two pillars: the formal entitlement of the acting subject and the improper purpose achieved through the material conduct.”67 The abuse of right or of international investment treaty system is usually invoked in relation to mala fide restructuring of an investment, abuse of foreign nationality, or conducting parallel proceedings for essentially the same claim. Such an abuse of process is concomitant to the so-called “treaty shopping” phenomenon.68 Investment or corporate restructuring denotes the change of nationality of the investor with a view of gaining protection of a particular treaty, which is a common practice and as such is not illegal. However, if the restructuring is done for the sole purpose of gaining the access to arbitration, which was foreclosed or less promising under the original nationality, and only after the breach has been in place or foreseeable, such a maneuver can amount to abuse and thereby represent the breach of the good faith principle. Given that the good faith is a principle, it follows that it is embedded in the investment protection system which should be protected from the abuse. Therefore, the main question is when the corporate or investment restructuring amounts to the abuse of process and how such an abuse affects access to arbitration. For the discussion here, it is relevant to see how the good faith works in terms of substantive and procedural rules and how tribunals process the principle of good faith through the abuse of process. The landmark case here is the Phoenix v. Czech Republic where the tribunal denied jurisdiction on the basis of the abuse of the system of international ICSID investment arbitration. The manipulation was conducted through a rearrangement of assets within a family that included the transfer of ownership over two Czech companies to a new company Phoenix Ltd. established in Israel only after the Czech companies had already been embroiled in a series of domestic proceedings. The ICSID tribunal did not have difficulty to find that there was an abuse of corporate structure of Phoenix which was set up solely for the purpose of gaining access to international protection under Israel-Czech BIT. The Phoenix decision is relevant not only for finding that diversity of nationalities is not necessarily a natural consequence of doing business globally but also because the principle of good faith was applied as autonomous standard69 and as an independent condition for jurisdiction: 67 Ceretelli C (2020) Abuse of process: an impossible dialogue between ICJ and ICSID tribunals? J Int Dispute Settlement 11(1):47–68, 77 68 See, e.g., Chaisse J (2015) The issue of treaty shopping in international law of foreign investment – structuring (and restructuring) of investments to gain access to investment agreements. Hastings Bus Law Rev 11(2):225–306. 69 “The importance of the Phoenix decision lies in its application of the sole international legal principle of ‘good faith’ outside the formal context of the question whether the investment was in accordance with the national laws of the host State.” – De Brabandere E (2012) ‘Good Faith’, ‘Abuse of Process’, and the initiation of investment treaty claims. J Int Dispute Settlement 3(3):609636, 625 18 S. Djajić In the Tribunal’s view, States cannot be deemed to offer access to the ICSID dispute settlement mechanism to investments not made in good faith. The protection of international investment arbitration cannot be granted if such protection would run contrary to the general principles of international law, among which the principle of good faith is of utmost importance.70 Tribunal is concerned here with the international principle of good faith as applied to the international arbitration mechanism of ICSID. The Tribunal has to prevent an abuse of the system of international investment protection under the ICSID Convention, in ensuring that only investments that are made in compliance with the international principle of good faith and do not attempt to misuse the system are protected.71 Phoenix decision certainly left its mark and opened the door for application of the good faith principle against malevolent corporate restructuring aimed at gaining access to international protection system. Therefore, despite the fact that applicable treaties are silent on pre-arbitration maneuvers, which per se may be perfectly legal, tribunals still have decided not to be blind for legal fictions thus created. ST-AD v. Bulgaria72 tribunal followed the script of the Phoenix award as circumstances were quite similar. After the ST-AD v. Bulgaria tribunal had established that the main purpose for the acquisition of the shares by the claimant was to open the possibility for a recourse to international arbitration, where the acquisition took place following the events giving rise to the alleged breach of the applicable IIA, the tribunal concluded that this was investment made in bad faith. The tribunal concluded that this attempt of manufacturing jurisdiction represents “manipulation of the international arbitral mechanism”73 and consequently denied jurisdiction on the basis of abuse of rights.74 As to the powers of the tribunal to protect good faith principle, the tribunal opined: It is the duty of the Tribunal not to protect such an abusive manipulation of the system of international investment protection. It is indeed the Tribunal’s view that to accept jurisdiction in this case would go against the basic objectives underlying bilateral investment treaties.75 In Gremcitel v. Peru,76 the tribunal equally sanctioned mala fide restructuring as an abuse of process finding that the tribunal was precluded from exercising jurisdiction over the dispute. The similar rationales also led the tribunal in Philip Morris v. Australia case to find claims inadmissible precluding the tribunal to exercise jurisdiction. Here the reasoning clarified the conditions for an abuse of rights: “the 70 Phoenix v The Czech Republic, Award, [106] Ibid., [113] 72 ST-AD GmbH (Germany) v. The Republic of Bulgaria, UNCITRAL, PCA Case No. 2011-06 (STBG), Award on Jurisdiction (18 July 2013) (hereinafter “ST-AD v. Bulgaria, Award on Jurisdiction”) 73 Ibid., [422] 74 Ibid., [431] (operative part of the Award) 75 Ibid., [423] 76 Renée Rose Levy and Gremcitel S.A. v. Peru, ICSID Case No. ARB/11/17, Award (9 January 2015) 71 Good Faith in International Investment Law and Policy 19 Tribunal cannot but conclude that the initiation of this arbitration constitutes an abuse of rights, as the corporate restructuring by which the Claimant acquired the Australian subsidiaries occurred at a time when there was a reasonable prospect that the dispute would materialise and as it was carried out for the principal, if not sole, purpose of gaining Treaty protection.”77 In Transglobal Green v. Panama, jurisdiction was denied on the ground of “abuse of the investment treaty system.”78 The abuse of process within international investment system has taken root and gained the status of autonomous concept. However, for the abuse of process to be applicable, certain conditions need to be met: timing of restructuring that occurs after the dispute had already come into existence or become foreseeable and that such restructuring was undertaken with the main or sole purpose of gaining access to international arbitration.79 In other words, it seems that restructuring for getting better international protection before any dispute or breach is in view is perfectly a legitimate action of investors and will not be penalized by investment tribunals. This was exactly the rationale of Mobil v. Venezuela80 where it was found that reorganization and change of nationality with the purpose of getting access to all benefits of another BIT was legitimate and cannot lead to deprivation of protection provided by the BIT.81 The same line of reasoning was adopted by a number of tribunals which ultimately upheld jurisdiction having found that restructurings were not performed mala fide (Pac Rim v. El Salvador,82 Tidewater v. Venezuela,83 Conoco Phillips v. Venezuela,84 Cervin Investissements v. Costa Rica85). 77 Philip Morris Asia Ltd. v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012– 12, Award on Jurisdiction and Admissibility (17 December 2015) [588] 78 Transglobal Green Energy de Panama, SA v The Republic of Panama, ICSID Case No ARB/12/ 28, Award (2 June 2016) 79 Ceretelli C (2020) Abuse of process: an impossible dialogue between ICJ and ICSID tribunals? J Int Dispute Settlement 11(1):47–68, at 54–55 80 Mobil Corporation, Venezuela Holdings, B.V., Mobil Cerro Negro Holding, Ltd., Mobil Venezolana de Petróleos Holdings, Inc., Mobil Cerro Negro, Ltd., and Mobil Venezolana de Petróleos, Inc., ICSID Case No. ARB/07/27, Decision on Jurisdiction (10 June 2010) (hereinafter “Mobil v. Venezuela, Decision on Jurisdiction”) 81 “As stated by the Claimants, the aim of the restructuring of their investments in Venezuela through a Dutch holding was to protect those investments against breaches of their rights by the Venezuelan authorities by gaining access to ICSID arbitration through the BIT. The Tribunal considers that this was a perfectly legitimate goal as far as it concerned future disputes.” – Mobil v. Venezuela, Decision on Jurisdiction, [204] 82 Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on Jurisdictional Objections (1 June 2012) 83 Tidewater Inc., Tidewater Investment SRL, Tidewater Caribe, C.A., Twenty Grand Offshore, L.L. C., Point Marine, L.L.C., Twenty Grand Marine Service, L.L.C., Jackson Marine, L.L.C. and Zapata Gulf Marine Operators, L.L.C. v. The Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Decision on Jurisdiction (8 February 2013) 84 ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V., and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and Merits (3 September 2013) 85 Cervin Investissements SA & Rhone Investissements SA v Republic of Costa Rica, ICSID Case No. ARB/13/2, Decision on Jurisdiction (15 December 2014) 20 S. Djajić These fine distinctions leave tribunals with task to scrutinize the timing of restructuring and motives for the choice of particular IIA. Every restructuring and change of nationality in the course of an investment does give rise to concerns and should trigger scrutiny by the tribunal. Differences between the two groups of cases seem to be factual since all tribunals unequivocally confirmed the autonomous and binding character of doctrine of abuse of process for assessing jurisdiction and admissibility of claims.86 All previous cases examined the abuse of rights/process from the perspective of change of nationality regardless of whether the change (restructuring) was from nationality of the host state to foreign nationality or from one foreign nationality to another. The change per se was not illegal, but the purpose behind this maneuver was found to be contrary to good faith. There seems to be room for another discussion on good faith within the same framework: are national investors allowed to internationalize their investments and thereby obtain international protection that otherwise would be even theoretically unavailable? It is common knowledge that organizing a company in another jurisdiction is not insurmountable impediment. As explained by Gaillard: “The permissive terms of investment treaties and the relatively low costs of incorporating a subsidiary abroad or migrating to another jurisdiction has enabled some companies to push the boundaries of legitimate investment protection in the event of a dispute with a host State.”87 Although national investors-turned international are likely to be banned from investment arbitration if they make such reorganization after the dispute has arisen, the question here is different: why would national investors be allowed to create artificial link with another jurisdiction, where no effective seat, place of business, or economic activity exists. Does not such maneuver raise suspicion at least in terms of motives and good faith? This issue was raised alone or in combination with the requirements generally applicable for the abuse of process doctrine. As for the first scenario, such challenge was raised in Tokios Tokel_es v. Ukraine,88 Rompetrol v. Romania,89 and TSA Spectrum v. Argentina.90 The issue was whether the system of international 86 There seems to be difference among the tribunals whether it is the jurisdiction that is being denied (jurisdictional issue) or that jurisdiction exists, but the tribunal is precluded to exercise it (admissibility issue). While this discussion may not have much practical relevance, it still can be useful to note opinion of the Pac Rim tribunal on the issue: “the Tribunal has noted that the Respondent’s jurisdictional objection based on Abuse of Process by the Claimant does not, in legal theory, operate as a bar to the existence of the Tribunal’s jurisdiction; but, rather, as a bar to the exercise of that jurisdiction, necessarily assuming jurisdiction to exist.” – Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on Jurisdictional Objections (1 June 2012), [2.10] 87 Gaillard E (2017) Abuse of process in international arbitration. ICSID Rev 32(1):17–37, 30 88 Tokios Tokel_es v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction (29 April 2004) (hereinafter “Tokios Tokel_es v. Ukraine, Decision on Jurisdiction”) 89 The Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Decision on Jurisdiction and Admissibility (18 April 2008) (hereinafter “Rompetrol v. Romania, Decision on Jurisdiction and Admissibility”) 90 TSA Spectrum de Argentina S.A. v. Argentine Republic, ICSID Case No. ARB/05/5, Award (19 December 2008) Good Faith in International Investment Law and Policy 21 protection that aims at securing inflow of foreign investments in return for legal security by host states is meant to be available to national investors, too. In Tokios Tokel_es, Ukraine challenged the right of the Lithuanian company to bring the case because it was wholly owned by Ukrainian nationals who would not enjoy the BIT protection and access to the ICSID system. As Article 25 of the ICSID Convention provides protection only to foreign investors, it follows that the claimant was not a “genuine” investor. Ukraine requested the tribunal to pierce the corporate veil, establish the abuse of legal personality, and deny jurisdiction. The tribunal opted for the textual approach to the terms of the BIT and declined to impose restrictions not expressly agreed upon.91 The tribunal relied on the fact that the claimant company had been established six years before the BIT entered into force.92 The rationale was thus similar to decisions on the abuse of process which relied on the timing of restructuring, but the main question remained unanswered – whether the system is open for national investors and whether the issue of abuse could also arise in this context. The presiding arbitrator dissented from the majority decision and employed good faith argumentation: “What is decisive in our case is the simple, straightforward, objective fact that the dispute before this ICSID Tribunal is not between the Ukrainian State and a foreign investor but between the Ukrainian State and an Ukrainian investor—and to such a relationship and to such a dispute the ICSID Convention was not meant to apply and does not apply.”93 Several other tribunals followed the same rationale.94 For example, the Rompetrol v. Romania tribunal shared the similar formalistic approach and refused to decline jurisdiction for the lack of effective foreign nationality: “[t]he Tribunal accordingly finds that neither corporate control, effective seat, nor origin of capital has any part to play in the ascertainment of nationality under The Netherlands-Romania BIT, and that the Claimant qualifies as an investor entitled to invoke the jurisdiction of this Tribunal by virtue of Article 1(b)(ii) of the BIT.”95 The tribunal equally rejected another Romania’s good faith argument according to which the Romanian nationals were abusing the system in order to force Romania to terminate criminal investigations against owners of the claimant. This would not be the last case with such 91 “This method of defining corporate nationality is consistent with modern BIT practice and satisfies the objective requirements of Article 25 of the Convention. We find no basis in the BIT or the Convention to set aside the Contracting Parties’ agreed definition of corporate nationality with respect to investors of either party in favor of a test based on the nationality of the controlling shareholders. While some tribunals have taken a distinctive approach, we do not believe that arbitrators should read in to BITs limitations not found in the text nor evident from negotiating history sources.” – Tokios Tokel_es v. Ukraine, Decision on Jurisdiction [52] 92 Ibid., [56] 93 Dissenting opinion of Prosper Weil, [21] (emphasis original) – Tokios Tokel_es v. Ukraine, Decision on Jurisdiction 94 Aguas del Tunari SA v. Bolivia ICSID Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction (21 October 2005); ADC v. Hungary, ICSID Case No. ARB/03/16, Award (2 October 2006); Saluka v. Czech Republic, UNCITRAL, PCA Case No. 2001-04, Partial Award (17 March 2006) 95 Rompetrol v. Romania, Decision on Jurisdiction and Admissibility [110] 22 S. Djajić approach.96 In the absence of strict exclusion clauses regarding the nationality of investor or denial of benefits clause, the tribunals were willing to accept formal foreign nationality as valid even when national investors continued to have the host state nationality as the effective one in terms of ownership, place of business, and main economic activity.97 However, in TSA Spectrum v. Argentina, the tribunal turned the tide and reached for object and purpose of the applicable IIA to define who is entitled to the ICSID procedural mechanism. The TSA Spectrum tribunal pierced the corporate veil in order to establish the real and effective control that turned out to be with the national of the host state, which ultimately prevented the claimant to benefit from the ICSID protection on the basis of Article 25 of the ICSID Convention. Notably good faith and abuse of process were not expressly relied upon by the tribunal as it conservatively used the teleological approach to exclude the benefits of the applicable IIA for host state nationals. These cases illustrate that discussion was about the legal relevance of the principle of good faith and existence of the rule that could potentially bar nationals of the host state to be ultimate beneficiaries of the system which does not seem to be established for this particular purpose. All tribunals showed reluctance. Even in TSA Spectrum v. Argentina, the good faith reference was avoided although it must have been in the back of arbitrators’ minds. It may come as a surprise that there is a such strong restraint to rule on the abuse of foreign “corporation of convenience” by host state nationals when the rationale of the system as explained in cases regarding the abuse of process through restructuring could work equally well even for pre-dispute nationality swaps aimed at internationalization of investments. Several tribunals were ready to make an extra step in preventing the abuse of the system, and such step could also be based on good faith considerations for piercing the foreign corporate veil and for examining the legitimacy of foreign shell companies. Some of the findings of these tribunals are actually quite apposite: “The Tribunal has to ensure that the BIT mechanism does not protect investments that it was not designed to protect, that is, domestic investments disguised as international investments or domestic disputes repackaged as international disputes for the sole purpose of gaining access to international arbitration.”98 Abuse of process within international investment arbitration may arise in relation to “multiplication of arbitral proceedings in order to maximize chances for success.”99 Complex investments are usually organized through corporate chains linked to several jurisdictions which opens up possibility of using several applicable IIAs and thereby different dispute settlement options. Diverse options which may be at disposal for 96 E.g. KT Asia Investment Group BV v Kazakhstan, ICSID Case No. ARB/09/8, Award (17 October 2013) 97 Mera Investment Fund Limited v. Republic of Serbia, ICSID Case No. ARB/17/2, Decision on Jurisdiction (30 November 2018), [153]–[154] 98 ST-AD v. Bulgaria, Award on Jurisdiction [423] 99 Gaillard E (2017) Abuse of process in international arbitration. ICSID Rev 32(1):17–37, 23 Good Faith in International Investment Law and Policy 23 direct and indirect investors may be put into operation simultaneously, where each case will be seemingly different due to different IIAs and formally different claimants but would actually represent the same dispute. If such tactics is being employed abusively, in order to enhance probability of securing the relief, the good faith principle could come into play to remedy the potential distortion of the system. It seems that the trend of parallel arbitrations has picked up the pace in investment arbitration recently, but it is not without some history. Lauder v. Czech Republic and CME v. Czech Republic represent landmark example of parallel proceedings pursued under different IIAs for essentially the same dispute. After the CME’s investment in the Czech Republic failed, two cases were launched simultaneously, by CME itself under the Dutch-Czech BIT and by Ronald Lauder, the owner of CME, under the USA-Czech BIT. The compensation sought was in each case for the same conduct of the Czech Republic and on the basis of the same facts – interference of the media agency with the television broadcaster owned by CME. However, this multi-arbitration strategy was not qualified as abuse of process by either tribunal.100 Although the investor failed in one of these cases, this fact did not diminish the success in the other where his company obtained full compensation. This is a good illustration of all advantages opened by multiple options for forum shopping especially when they are all put into operation simultaneously. The issue of abuse was also raised in two cases discussed above (Europe Cement v. Turkey and Cementownia v. Turkey) as the claimants were held and controlled by the same family. While the claims in both arbitrations were dismissed on different good faith grounds, for failure to prove the existence of an investment, the abuse of process in launching multiple proceedings was also an imminent issue that the Cementownia tribunal addressed with a formal declaration preventing the claimant from filing the claim before other international jurisdictions.101 As of recently, there seems to be at least acknowledgment that launching several proceedings to resolve the same dispute could potentially be abusive and as such inadmissible. In Ampal v. Egypt, the tribunal cautiously conceded that “double pursuit of the same claim in respect of the same interest” could be the abuse of process. However, at the same time, the tribunal found that abuse of process did not 100 “174. Even assuming that the doctrine of abuse of process could find application here, the Arbitral Tribunal is the only forum with jurisdiction to hear Mr. Lauder’s claims based on the Treaty. The existence of numerous parallel proceedings does in no way affect the Arbitral Tribunal’s authority and effectiveness, and does not undermine the Parties’ rights. On the contrary, the present proceedings are the only place where the Parties’ rights under the Treaty can be protected. 175. Therefore, the Arbitral Tribunal holds that the seeking of the same remedies in a different fora does not preclude it from having jurisdiction in the present proceedings.” - Ronald S. Lauder v. The Czech Republic, UNCITRAL, Final Award (3 September 2001) [174]–[174] CME Czech Republic B.V. v. The Czech Republic, UNCITRAL, Partial Award (13 September 2001) [412] 101 Cementownia v. Turkey, Award [162] 24 S. Djajić involve the bad faith of the claimants.102 The remedy for this “good faith” abuse of process was the invitation of the tribunal to the claimants to continue pursuit of the contested claim in that ICSID arbitration or to make their choice by the set deadline.103 Claimants then requested the extension of time before definitively making such an election in order “to obtain confirmation from the UNCITRAL tribunal that it has decided to dismiss all of Egypt’s objections to jurisdiction and admissibility.”104 The extension was indeed granted, and after the concurrent UNCITAL tribunal confirmed jurisdiction, the claimants elected the ICSID arbitration with respect to the claim identified as concurrently pursued. Interestingly, the UNCITRAL tribunal issued certificate to confirm the withdrawal of the disputed claim.105 Solution for the potentially abusive parallel proceedings was beneficial for the claimants, but its beneficial effects for the investment treaty system are in doubt. In the most recent case, the things have changed dramatically by denying admissibility to duplicative proceedings. In Orascom v. Algeria, the controlling shareholder caused two of its subsidiaries in the chain to bring different arbitrations under different IIAs, while the third arbitration was initiated in his own name, all in relation to the same dispute. The Orascom tribunal dismissed the claim as inadmissible on the ground of abuse of process: [T]he Claimant availed itself of the existence of various treaties at different levels of the vertical corporate chain using its rights to treaty arbitration and substantive protection in a manner that conflicts with the purposes of such rights and of investment treaties. For the Tribunal, this conduct must be viewed as an abuse of the system of investment protection, which constitutes a further ground for the inadmissibility of the Claimant’s claims and precludes the Tribunal from exercising its jurisdiction over this dispute.106 The relevance of Orascom award in upholding yet another derivative of the good faith principle within admissibility criteria can hardly be overstated. Manipulative multiplication of arbitrations launched for essentially the same harm may have several negative repercussions not only for the system but also for states where 102 “In the Tribunal’s opinion, while the same party in interest might reasonably seek to protect its claim in two fora where the jurisdiction of each tribunal is unclear, once jurisdiction is otherwise confirmed, it would crystallize in an abuse of process for in substance the same claim is to be pursued on the merits before two tribunals. However, the Tribunal wishes to make it very clear that this resulting abuse of process is in no way tainted by bad faith on the part of the Claimants as alleged by the Respondent. It is merely the result of the factual situation that would arise were two claims to be pursued before different investment tribunals in respect of the same tranche of the same investment.” – Ampal-American Israel Corporation and others v. Arab Republic of Egypt, ICSID Case No. ARB/12/11, Decision on Jurisdiction (1 February 2016) [331] 103 Ibid., [339], [346e] 104 Ampal-American Israel Corporation and others v. Arab Republic of Egypt, ICSID Case No. ARB/12/11, Decision on Liability and Heads of Loss (21 February 2017) [11] 105 Ibid., [22] 106 Orascom TMT Investments S.à r.l. v. People’s Democratic Republic of Algeria, ICSID Case No. ARB/12/35, Final Award (31 May 2017), [545] Good Faith in International Investment Law and Policy 25 substantive time and resources are necessarily at stake. Here the tribunal upheld the autonomous character of the abuse of process in relation to parallel proceedings which now serves as a separate inadmissibility ground. Departing from the rationale of Lauder and CME cases and in reference to them, the Orascom tribunal clearly articulated how and why good faith considerations can be engaged in arbitral decision-making: Moreover, it cannot be denied that in the fifteen years that have followed those cases, the investment treaty jurisprudence has evolved, including on the application of the principle of abuse of rights (or abuse of process), as was recalled above. The resort to such principle has allowed tribunals to apply investment treaties in such a manner as to avoid consequences unforeseen by their drafters and at odds with the very purposes underlying the conclusion of those treaties.107 Good Faith Argument at the Merits Stage: Balancing Competing Interests Ponce and Cevallos rightly argued: “In investment arbitration, good faith is a fundamental element, for a variety of reasons. To begin with, the principle permeates into every aspect of the relationship between a foreign investor and a host State. . .”108 Merits stage of an investment proceedings well illustrates this point. Arguments relying on this principle seem to be equally shared by both claimants and respondents in relation to substantive obligations and procedural matters. Needless to say, the main principle of treaty interpretation envisaged in Article 31(1) of the Vienna Convention of the Law of Treaties (1969) mandates interpretation in good faith. Interpretative function of the good faith principle is considered to be one of its most important functions in international investment law. According to Emily Sipiorski, “The principle of good faith allows the treaty to be expressed and applied in light of a broader, contextual focus.”109 There are several interpretative functions of the good faith: gap-filling, legitimizing/balancing, and connecting function.110 Its balancing function is manifested not only in frequent references to the principle by both parties but also in the ability of the good faith to serve both as entitlement and limitation. Also, application of good faith at this stage of the proceeding “allows the possibility of avoiding all-or-nothing outcome scenarios.”111 In this section, the 107 Ibid., [547] Ponce JE, Cevallos RA (2016) Good faith in investment arbitration. Transnatl Dispute Manage 13(5): 1–36, 35. www.transnational-dispute-management.com/article.asp?key¼2388 109 Sipiorski E (2020) Introducing good faith in international investment law. Investment claims. Oxford University Press, [1.41]. http://oxia.ouplaw.com https://oxia.ouplaw.com/view/10.1093/ law/9780198826446.001.0001/law-9780198826446-chapter-1 110 Ibid., [1.42]–[1.48] 111 Tanzi A (2018) The relevance of the foreign investor’s good faith. In: Gattini A, Tanzi A, Fontanelli F (eds) General principles of law and international investment arbitration. Brill Nijhoff, Leiden/Boston, p 211, Chap 10 108 26 S. Djajić good faith principle balancing function will be illustrated through substantive and procedural norms applied at the merits stage. Good Faith as a Substantive Rule of International Investment Law Complexity and diversification of the good faith as a substantive principle is manifested within substantive guarantees of IIAs in general and in the fair and equitable treatment (FET) in particular. Good faith will be mostly discussed within the substantive guarantees of IIAs and as a possible ground of state responsibility. This asymmetry is at odds with the balancing function of the good faith principle, but still some authors use the good faith to justify its use for interpretation of host state obligations.112 Most notably, it is the fair and equitable treatment standard that is most often connected with the good faith principle.113 A number of investment tribunals shared this view and incorporated the good faith principle within the FET standard.114 Here the good faith represents entitlement within a standard clause of IIAs. Good faith may be understood as a general obligation of the host state under the FET standard.115 Draguyev identifies several fact patterns that investment tribunals qualified as bad faith conduct in breach of FET: political engineering, conspiracy, abuse of power, denial of justice, coercion and harassment, and corruption.116 There are several derivatives of the substantive good faith obligations of states, primarily 112 “In part, this emphasis on good faith reflects the fundamental significance of the concept for the understanding of all obligations in international law. More specifically, however, the subject matter of the field itself may direct tribunals to apply the principle, in view of the long-term relationship in which the investor provides most of the required resources at the outset of the project expecting to receive a fair return in a stable relationship within the legal order of the host state thereafter. The financial long-term risk of the investor finds its legal corollary in the protection of good faith without which investment flows would be hampered.” Dolzer R, Schreuer C (2008) Principles of international investment law. Oxford University Press, Oxford, 5 113 Dolzer R (2005) Fair and equitable treatment: a key standard in investment treaties. Int Lawyer 39(1):87–106, 90 114 MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award (25 May 2004), [109]; Siemens A.G. v. the Argentine Republic, ICSID Case No. ARB/02/8, Award (6 February 2007), [308]; Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16, Award (28 September 2007) [297]; Waguih Elie George Siag and Clorinda Vecchi v. The Arab Republic of Egypt, ICSID Case No. ARB/05/15, Award (1 June 2009), [450] (hereinafter: “Siag and Vecchi v. Egypt, Award”); Ioan Micula, Viorel Micula, S.C. European Food S.A, S. C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No ARB/05/20, Award (11 December 2013) [831]–[834]; Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, Award (8 December 2016), [621] (hereinafter: “Urbaser et al. v. Argentina, Award”). See Qian X (2020) Rethinking judicial discretion in international adjudication. Conn J Int Law 35(2):251–310. 115 “[B]ad faith acts of States comprise an autonomous type of per se violation of the ‘fair and equitable treatment’ standard under various international law instruments.” – Draguyev D (2014) Bad faith conduct of states in violation of the ‘fair and equitable treatment’ standard in international investment law and arbitration. J Int Dispute Settlement 5(2):273–305, 273 116 Ibid., 285–300 Good Faith in International Investment Law and Policy 27 obligation to respect investor’s legitimate expectations. IIAs do not expressly incorporate the concept of legitimate expectations, but nevertheless it has been firmly established as one of the protective mechanisms and actionable privileges of foreign investors. As it assumes reliance, either in general manner or with respect to more particular assurances and promises, the concept of legitimate expectations clearly rests on honesty, mutual trust, respect, and loyalty. Several tribunals upheld the connection between the legitimate expectations and good faith117 that was met with some criticism.118 Broad range of commitments and types of state conduct can fall within the ambit of legitimate expectations, from contractual commitments, more or less general unilateral representations, to right to a stable regulatory framework.119 One of the questions is whether a legal standard, such as FET, can be served well by “the most general principle” to make the FET standard readily and predictably applicable.120 Another question is whether good faith, and legitimate expectations as its corollary, permit constitution of obligations without quid pro quo which is inherent to its balancing function. This intrinsically harmonizing function of good faith means that expectations cannot be assessed solely on the basis of subjective perceptions of investors121 imposing far-reaching obligations for host states. In other words, legitimate expectations and fair and equitable treatment necessarily need counterbalancing which indeed may take several forms. 117 Tecnicas Medioambientales Tecmed v. United Mexican States, ICSID Case No. ARB (AF)/00/2, Award (29 May 2003) [153]; Saluka Investments B.V. (the Netherlands) v. Czech Republic, UNCITRAL, PCA, Partial Award (17 March 2006) [301]–[302]; International Thunderbird Gaming Corporation v. United Mexican States, NAFTA/UNCITRAL, Award (26 January 2006) [147]; Total S.A. v. Argentina, ICSID Case No. ARB/04/1, Decision on Liability (27 December 2010), [111]; Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award (22 September 2014), [576] 118 “The good faith origin does not provide a credible explanation of the term ‘legitimate expectations’.” – Sornarajah M (2015) Resistance and change in the international law on foreign investment. Cambridge University Press, Cambridge, 260 119 See Potestà M (2013) Legitimate expectations in investment treaty law: understanding the roots and the limits of a controversial concept. ICSID Rev 28(1):88–122 120 “Good faith is, of course, of great systemic importance in international law, but that does not mean that assertions about the existence of principles or rules derived from it have to be accepted without satisfying the usual law-making criteria, or that such assertions have to be preferred over principles or rules that have satisfied those criteria.” Paparinskis M (2015) Good faith and fair and equitable treatment in international investment law. In: Mitchell AD, Sornarajah M, Voon T (eds) Good faith and international economic law. Oxford University Press, New York, p. 171, Chap 7 121 “Legitimate expectations cannot be solely the subjective expectations of the investor. They must be examined as the expectations at the time the investment is made, as they may be deduced from all the circumstances of the case, due regard being paid to the host State’s power to regulate its economic life in the public interest.” – EDF (Services) Ltd v. Romania, ICSID Case No ARB/05/ 13, Award (8 October 2009), [219] 28 S. Djajić Balancing competing interests has taken different forms and rationales. For example, for some the very notion of legitimate expectations and FET assumes intra-norm balancing – expectations can be assessed only in relation to and in return of state’s expectations, taking into account certain margin of flexibility and particular circumstances122 including economic and political environment in developing countries and countries in transition.123 Without such considerations, “[s]ometimes, the description of what FET implies looks like a programme of good governance that no State in the world is capable of guaranteeing at all times.”124 Consideration of inherent or intra-norm reciprocity has been a slow trend with varying results but still represents a welcoming dynamic of the legitimate expectations concept as it encapsulates the very balancing nature of the good faith principle. Another counterbalancing instrument is the application of good faith as an autonomous defense which may possibly outweigh the unlawfulness of the measure: “legitimate governmental policies may exonerate a State from liability for FET breaches.”125 For example, in GAMI v. Mexico, the tribunal formulated the following principle: “Proof of a good faith effort by the Government to achieve the objectives of its laws and regulations may counter-balance instances of disregard of legal or regulatory requirements.”126 Good faith can also function as a more proactive autonomous defense when respondent state relies on abuse of process, clean hands doctrine, misrepresentations, or inconsistent behavior of the investor to challenge the claim and oppose the decision in favor of the investor. As Muchlinski explains: “Thus it is said that the person who comes to equity must do equity and that the person who comes to equity must come with clean hands. The conduct of the claimant is central to the application of equitable principles.”127 Good faith strategy for dismissing claims was successful for states in several cases in relation to unconscionable conduct and 122 “The host State is not required to elevate the interests of the investor above all other considerations, and the application of the FET standard allows for a balancing or weighing exercise by the State and the determination of a breach of the FET standard must be made in the light of the high measure of deference which international law generally extends to the right of national authorities to regulate matters within their own borders.” – Antaris Solar GmbH and Dr. Michael Göde v. Czech Republic, PCA Case No. 2014-01, Award (2 May 2018), [360(9)] 123 For a detailed overview of arbitral practice regarding the relevance of socio-political circumstances and economic crisis in developing countries and countries in transition in relation to their responsibility under the FET standard, see Islam R (2018) The fair and equitable treatment (FET) standard in international investment arbitration – developing countries in context. Springer Nature, Singapore, pp 99–167 124 El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Award (31 October 2011), [342] 125 Draguyev D (2014) Bad faith conduct of states in violation of the ‘fair and equitable treatment’ standard in international investment law and arbitration. J Int Dispute Settlement 5(2):273–305, 284 126 GAMI Investments Inc. v. Mexico, UNCITRAL, Final Award (15 November 2004), [97] 127 Muchlinski P (2006) ‘Caveat investor’? The relevance of the conduct of the investor under the fair and equitable treatment standard. Int Comp Law Q 55(3):527–557, 532 Good Faith in International Investment Law and Policy 29 misrepresentations of investor.128 In Plama v. Bulgaria, the case was dismissed for reasons that echo rationale of Phoenix v. Czech Republic regarding the good faith investments, with difference that in the former case this issue was resolved only at the merits stage on the basis of misrepresentations and bad faith.129 Yet another good faith defense strategy can be based on the argument that contractual arrangements that led to investment arbitration were in fact frustrated by claimant – defense here is based on the argument that termination or non-performance of contract was justified and thus undertaken in good faith.130 The most significant example of an autonomous defense based on investor’s misconduct for removing the responsibility for the established breach of the FET is Al-Warraq v. Indonesia case.131 The tribunal dismissed preliminary objection based on clean hands doctrine, found that Indonesia breached obligation to provide fair and equitable treatment, only to follow with finding that the claimant breached his obligations arising under Article 9 of the OIC Agreement132 by which he had deprived himself of the right to pursue FET claim.133 In addition, clean hands doctrine separately precluded any award of damages.134 This case is remarkable for several reasons. First, the breach of FET was the result of violation of international human rights of the claimant in the course of criminal investigations (FET itself was introduced to the OIC Agreement via MFN clause). Then, an investor was found to be in breach of international obligation established by an international agreement. Finally, good faith argument here played out as autonomous international obligation, but this time of an investor. Interestingly, the tribunal established two 128 Robert Azinian, Kenneth Davitian, & Ellen Baca v. The United Mexican States, ICSID Case No. ARB(AF)/97/2, Award (1 November 1999), [104], [121]–[122]; Alex Genin Eastern Credit Limited, Inc. and A.S. Baltoil v. The Republic of Estonia, ICSID Case No. ARB/99/2, Award (25 June 2001), [380] 129 Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award (27 August 2008), [135], [145]–[146] 130 Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Award (27 August 2009), [301]–[315], [461]; Malicorp Limited v. The Arab Republic of Egypt, ICSID Case No. ARB/08/18, Award (7 February 2011); Urbaser et al. v. Argentina, Award [1005] 131 Hesham Talaat M. Al-Warraq v. Republic of Indonesia, UNCITRAL, Final Award (15 December 2014) (hereinafter: “Al-Warraq v. Indonesia, Final Award”) 132 “The investor shall be bound by the laws and regulations in force in the host state and shall refrain from all acts that may disturb public order or morals or that may be prejudicial to the public interest. He is also to refrain from exercising restrictive practices and from trying to achieve gains through unlawful means.” – Article 9 of the Agreement on Promotion, Protection and Guarantee of Investments among Member States of the Organisation of the Islamic Conference (opened for signature 5 June 1981, entered into force 23 September 1986) 133 Al-Warraq v. Indonesia, Final Award, [645]–[648] 134 Ibid., [654]. See Beharry CL, Méndez Bräutigam E (2020) Damages and valuation in international investment arbitration. In: Chaisse J, Choukroune L, Jusoh S (eds) Handbook of international investment law and policy. Springer, Singapore 30 S. Djajić distinct breaches of the agreement but the latter outweighed the former,135 so the role of good faith as a defense had its full force. Still, this case needs to be taken in its context and arguably Article 9 manufactured the final result of the case. However, this obligation might have remained just a cursory declaration of investors’ general obligation to comply with national law of the host State had not the tribunal raised it to actionable right for the respondent state for which the remedy was the preclusion of FET claim. Therefore, such express recognition of international obligations of investors can be seen as significant and beneficial for rebalancing investment obligations.136 Good faith was discussed outside the FET standard, for example, with respect to “taxation measure,” a carve-out clause in Article 21 of the Energy Charter Treaty (ECT).137 The question raised in ECT cases was not only what state fiscal and taxation measures should fall under this clause but also whether only so-called “good faith” taxation measures could trigger the application of this escape clause. For example, in Yukos v. Russia case, the tribunal held that taxation measures were rather mala fide138 and thus susceptible for tribunal’s scrutiny under substantive provisions of applicable treaty. Other tribunals, like Isoflux v. Spain, ruled that there is a presumption that taxation measures are applied bona fide.139 In the same vain, in Belenergia v. Italy, the tribunal did not find that taxation measure was introduced in breach of good faith.140 In this type of cases, the standard of “good faith” was engaged as interpretative tool for clarifying the carve-out clause in Article 21 of the ECT. Good Faith as a Rule of Procedure and Evidence In the course of arbitral proceedings, it is not uncommon that parties and their legal representatives engage in a number of procedural tactics in order to gain advantage and hinder preparations of the opponent: “One might loosely refer to this conduct as ‘abusive’, such conduct should be properly characterized as a violation of due 135 “The Tribunal concludes that, although it has been established that the Claimant did not receive fair and equitable treatment, as set out in paragraphs 555 to 603 above however, by virtue of Article 9 of the OIC Agreement the Claimant is prevented from pursuing his claim for fair and equitable treatment.” – Ibid., [648] 136 Newcombe A, Marcoux J-M (2015) Hesham Talaat M. Al-Warraq v Republic of Indonesia: imposing international obligations on foreign investors. ICSID Rev 30(3):525–532 137 Article 21(1): Except as otherwise provided in this Article, nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties. In the event of any inconsistency between this Article and any other provision of the Treaty, this Article shall prevail to the extent of the inconsistency. 138 Yukos Universal Limited (Isle of Man) v. The Russian Federation, PCA Case No. AA 227, Final Award (18 July 2014), [1404] 139 Isolux Infrastructure Netherlands, B.V. v. Kingdom of Spain, SCC Case No. V2013/153, Award (17 July 2016), [739] 140 Belenergia S.A. v. Italian Republic, ICSID Case No. ARB/15/40, Award (6 August 2019), [376]– [379] Good Faith in International Investment Law and Policy 31 process and can be remedied under existing procedural rules.”141 Abusive tactics, such as submission of massive irrelevant evidence, unreasonably burdening documents requests (“fishing expeditions”), failure to comply with procedural orders, unsolicited pleadings and requests, delays, and similar maneuvers, can be addressed through rules of procedure but also against the duty of bona fide conduct in the course of a proceeding. IBA Rules on the Taking of Evidence in International Arbitration142 provide remedies for failure to comply with the principle of good faith in relation to evidence. The preamble of the IBA Rules requires the taking of evidence be conducted in good faith, reasonably and timely.143 Failure to comply with the good faith requirement may, at the discretion of a tribunal, result in sanctions envisaged in Articles 9.5., 9.6., and 9.7., which provide for assignment of costs of arbitration including costs arising in connection with the taking of evidence (Article 9.7.)144 and the rule of adverse inference (Articles 9.5. and 9.6.).145 In several cases, tribunals noted the procedural misconduct or even the abuse of procedure in relation to non-evidentiary matters. In ST-AD v. Bulgaria, the tribunal clarified two different concepts of procedural abuse: “Abuse of process can be divided into two categories, including the major or substantial issue of systemic abuse and the more minor one of procedural abuse.”146 As for the second one, which is discussed here, the tribunal found abusive behavior in the conduct of the proceeding which consisted of dilatory pleadings, contradictory statements, and inappropriate negative allegations against legal representatives of the other party.147 Unsuccessful party was charged with abusive behavior which was only a contributing factor in allocation of costs of arbitration. 141 Gaillard E (2017) Abuse of process in international arbitration. ICSID Rev 32(1):17–37, 18 IBA Rules on the Taking of Evidence in International Arbitration. International Bar Association. Adopted by a resolution of the IBA Council 29 May 2010 143 “The taking of evidence shall be conducted on the principles that each Party shall act in good faith and be entitled to know, reasonably in advance of any Evidentiary Hearing or any fact or merits determination, the evidence on which the other Parties rely.” – Ibid., Preamble 144 “If the Arbitral Tribunal determines that a Party has failed to conduct itself in good faith in the taking of evidence, the Arbitral Tribunal may, in addition to any other measures available under these Rules, take such failure into account in its assignment of the costs of the arbitration, including costs arising out of or in connection with the taking of evidence.” – Ibid., Article 9(7) 145 “If a Party fails without satisfactory explanation to produce any Document requested in a Request to Produce to which it has not objected in due time or fails to produce any Document ordered to be produced by the Arbitral Tribunal, the Arbitral Tribunal may infer that such document would be adverse to the interests of that Party.” – Ibid., Article 9(5) “If a Party fails without satisfactory explanation to make available any other relevant evidence, including testimony, sought by one Party to which the Party to whom the request was addressed has not objected in due time or fails to make available any evidence, including testimony, ordered by the Arbitral Tribunal to be produced, the Arbitral Tribunal may infer that such evidence would be adverse to the interests of that Party.” – Ibid., Article 9(6) 146 ST-AD v. Bulgaria, Award on Jurisdiction, [404] 147 Ibid., [427]–[429] 142 32 S. Djajić Abusive procedural tactics can be handled by tribunals with procedural rules and discretionary power they generally have in handling procedure. It may also be the case that failure to follow certain procedural and evidentiary rules gets sanctioned under a variety of different headings of good faith. For example, false documents or manipulation with evidence of an investment will more likely be penalised with decision on inadmissibility of the claim that will equally sanction the abusive tactics. Good Faith Reflected in Damages and Costs Once the breach of good faith is established, there should be an easy equation – adoption of remedies to undo the breach. Here the good faith considerations do not seem to differ from general considerations in assessing damages and ordering monetary compensation for any other breach. However, the question here is whether there should be a special consideration at work given the specific nature of good faith or, more precisely, whether bad faith calls for application of different principles for the assessment of damages. Could equitable considerations or certain discretion in choice of remedies or method for valuation of damages be appropriate (or acceptable) when good faith breach is at stake?148 Also, is it possible that some lack of good faith or procedural tactics of the successful party may affect the amount of compensation awarded?149 Several tribunals did refer to these considerations in assessing or adjusting quantum either within discussion on bad faith, moral damages, or some specific non-monetary remedies perceived as more appropriate to redress the wrong. If circumstances leading to breach are grave and extremely serious, they indeed can be related to bad faith and calculated within the amount of damages or addressed through still rare instance of moral damages.150 In Al-Warraq v. Indonesia, the tribunal refused to award damages on account of the doctrine of clean hands, due 148 “The possibility to resort to equity could enable the arbitrators to adjust the quantum of equity in light of the peculiar features of the case, such as the intensity of the State’s violation, or the fact that it acted in good faith or bad faith, or the fact that the State has been enriched by it, or the conditions of the host State’s economy.” – Crespi Reghizzi Z (2018) General rules and principles on state responsibility and damages in investment arbitration: some critical issues. In: Gattini A, Tanzi A, Fontanelli F (eds) General principles of law and international investment arbitration. Brill Nijhoff, Leiden/Boston, p 193, Chap 4 (references omitted) 149 “Ascertainment of the investor’s good faith and the investment’s legality informs the tribunal’s determinations regarding its own jurisdiction, the claim’s admissibility, the State’s liability and the quantum of compensation.” – Tanzi A (2018) The relevance of the foreign investor’s good faith. In: Gattini A, Tanzi A, Fontanelli F (eds) General principles of law and international investment arbitration. Brill Nijhoff, Leiden/Boston, p 63, Chap 10 150 E.g., Desert Line Projects LLC v. Republic of Yemen, ICSID Case No. ARB/05/17, Award (6 February 2008) Good Faith in International Investment Law and Policy 33 to investor’s breach of his international obligations.151 In Cementownia v. Turkey, the tribunal declined jurisdiction, but it also issued a separate declaration that was supposed to serve as a bar to future frivolous claims of the same investor.152 In Renco v. Peru, the tribunal upheld the preliminary objection of the respondent based on a failure of the claimant to comply with a formal waiver requirement. However, the tribunal expressed concern that a possible abuse of rights could arise if Peru argued in any future proceedings that claimant’s claims were time barred – it made a recommendation on how to possibly avoid future abuse of rights.153 In MTD v. Chile, the tribunal halved the damages to be awarded on the ground of contributory fault of the claimant and his business decisions.154 However, the tribunal in Siag and Vecchi v. Egypt expressly rejected the proposition to award punitive damages because they are not, by their nature, compensatory and are a matter of controversy in international law.155 Although there are examples manifesting the understanding that bad faith of either party may be calculated within award on damages,156 jurisprudence does not seem to be quite settled. Regarding the costs of arbitration, when a good faith or abuse of rights argument turns out to be successful, tribunals tend to make reference to this finding and order costs against unsuccessful party.157 What also counts is the conduct of the parties in the course of proceedings which tribunals regularly assess before making a final decision on allocation of costs, so good faith as a rule of procedure and evidence here seems to have a considerable weight.158 151 Al-Warraq v. Indonesia, Final Award, [645]. See Nadakavukaren Schefer K (2020) Crime in international investment arbitration. In: Chaisse J, Choukroune L, Jusoh S (eds) Handbook of international investment law and policy. Springer, Singapore 152 Cementownia v. Turkey, Award, [162] 153 “While this Tribunal cannot prevent Peru from exercising in the future what it then considers to be its legal rights, the Tribunal can, and it does, admonish Peru to bear in mind, if that scenario should arise, Renco’s submission that Peru’s conduct with respect to its late raising of the waiver objection constitutes an abuse of rights.” – The Renco Group Inc. v. Republic of Peru, UNCITRAL, UNCT/13/1, Partial Award on Jurisdiction (15 July 2016), [188] 154 MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award (25 May 2004), [242]–[243] 155 Siag and Vecchi v. Egypt, Award [545] 156 Les Laboratoires Servier, S.A.A., Biofarma, S.A.S., Arts et Techniques du Progres S.A.S. v. Republic of Poland, UNCITRAL, Award (14 February 2012), [642], [645] 157 E.g. Phoenix v The Czech Republic, Award, [151]–[152]; Europe Cement v. Turkey, Award, [182]–[186]; Cementownia v. Turkey, Award, [175]–[178]; Rachel S Grynberg, Stephen M Grynberg, Miriam Z Grynberg, and RSM Production Corporation v. Grenada, ICSID Case No. ARB/10/6, Respondent’s Objection under Rule 41(5) of the ICSID Arbitration Rules, Decision (10 December 2010), [8.34]–[8.36]; Renée Rose Levy and Gremcitel S.A. v. Peru, ICSID Case No. ARB/11/17, Award (9 January 2015), [201] 158 In Cortec v. Kenya the respondent prevailed with its objection based on illegality of an investment but was not awarded full arbitration costs partly because of its conduct in the proceedings. – Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v. Republic of Kenya, ICSID Case No. ARB/15/29, Award (22 October 2018), [388]–[401] 34 S. Djajić Conclusion Good faith is one the most important principles of any legal system, so its relevance for international investment law is hardly surprising. However, frequent reliance on good faith, its conceptualization and dynamics, provide evidence of its significant influence within the discipline. Its adaptability to the architecture of investment arbitration has given the good faith many functions for all participants, investors and states alike, in terms of both substantive and procedural rules, relevant at every stage of the proceedings. Good faith amply demonstrates its intrinsically balancing and harmonizing function given that both claimants and respondents equally rely on the good faith. However, this trend needs to be cautiously lauded given the risks that an overreaching principle such as the good faith may carry with it when applied without refinement or reference to other rules. Good faith should not serve as a shorthand for judgments of first impression, for broad discretionary powers, or for introducing rules contrary to express consent of the parties – even the good faith principle needs to be applied bona fide. However, good faith has proven that it is capable of remedying strict formalism in protecting a system as a whole. Good faith is both instructive and corrective; it is equally the principle and the rule. All these features may explain the striking frequency and a remarkable variety of good faith in international investment law. Cross-References ▶ Applicable Law in Investment Arbitration ▶ Corruption in Investor-State Arbitration: Balancing the Scale of Culpability ▶ Definition of Investor and Investment in International Investment Agreement ▶ Emerging Practice on Investor Diligence: Jurisdiction, Admissibility, and Merits ▶ General International Law and International Investment Law: Regime Interactions ▶ Inclusion of Investor Obligations and Corporate Accountability Provisions in Investment Agreements ▶ Jurisdictional Objections and Defenses (Ratione Personae, Ratione Materiae, and Ratione Temporis) ▶ Legitimate Expectations in Investment Treaty Law: Concept and Scope of Application ▶ The Concept of Investment: Investment Treaties, National Investment Legislations, and the Washington Convention ▶ The Standard of Fair and Equitable Treatment in the Investor-State Dispute Settlement Practice