|Free Trade Area of the Americas - FTAA||
|(Continuation of Summary)
1. Types of Payments
All the bilateral investment treaties and trade arrangements, with the exception of Caricom, examined in the Compendium require the host country to guarantee to investors of the other Contracting Party the free transfer of funds related to investments. Although almost all treaties (the exceptions being Barbados-Venezuela and Panama-U.S. BITs) define in great detail which types of payments shall be included in the transfer clause, most treaties emphasize that the guarantee of transfers of funds is not limited to this list. Three types of payments are generally always included in the definition of transfers of funds that shall be guaranteed: returns (profits, interests, dividends, and other current incomes); repayments of loans; and proceeds of the total or partial liquidation of an investment. 28 In addition, other types of payments are often listed, for example: additional contributions to capital for the maintenance or development of an investment; bonuses and honoraria; wages and other remuneration accruing to a citizen of the other Contracting Party; compensation or indemnification; and payments arising out of an investment dispute.
2. Convertibility, Exchange Rates, and Time of Transfer
Most treaties stipulate that transfers shall be effected in a convertible currency. Some treaties specify that it could be the currency in which the investment was made or any other convertible currency. 29 U.S. BITs use the following terminology: transfers shall be made in a freely usable currency. With respect to the exchange rate, treaties generally state that transfers shall be made at the normal rate applicable on the date of the transfer. The Argentina-Chile BIT says that the exchange rate shall be equivalent to the most favorable exchange rate, while other treaties (Bolivia-Peru, Brazil-Chile, Brazil-Venezuela, Chile-Venezuela, Ecuador-Paraguay, Panama-U.S., Paraguay-Peru and Peru-Venezuela) do not mention anything about the exchange rate.
Almost all treaties stress that transfers shall be effected without delay, the exceptions being the Bolivia-Ecuador and Panama-U.S. bilateral investment treaties. Some treaties define the concept "without delay," which means the “normal time” necessary to fulfill the formalities with respect to the transfer. This "normal time" shall not exceed 30 days (Bolivia-Chile, Chile-El Salvador, Chile-Nicaragua, Chile-Panama, Chile-Paraguay, Chile-Uruguay), 60 days (Chile-Ecuador, Chile-Costa Rica, Chile-Honduras, Ecuador-El Salvador), one month (Chile-Guatemala), two months (Argentina-Chile, Argentina-Costa Rica, Chile-Venezuela), three months (Costa Rica-Paraguay) or six months (Brazil-Chile).
Some treaties allow for limitations or exceptions to transfers and state that transfers shall be in accordance with the laws and regulations of the Contracting Party. The first U.S. BITs state that notwithstanding the provisions of the Treaty, either Party may maintain laws and regulations requiring reports of currency transfers, and imposing income taxes by such means as a withholding tax applicable to dividends or other transfers. Furthermore, either Party may protect the rights of creditors, or ensure the satisfaction of judgments in adjudicatory proceedings, through the equitable, nondiscriminatory and good faith application of its law. The most recent U.S. bilateral investment treaties (Trinidad and Tobago-United States, Honduras-United States, Nicaragua-United States and Bolivia-United States) and the Group of Three stipulate that a Party may prevent a transfer through the equitable, non-discriminatory and good faith application of its laws relating to bankruptcy, insolvency or the protection of the rights of creditors; issuing, trading or dealing in securities; criminal or penal offenses; or ensuring compliance with orders or judgments in adjudicatory proceedings. The Canadian BITs add a fifth element to this list: reports of transfers of currency or other monetary instruments, while the Costa Rica-Mexico and Mexico-Nicaragua FTAs include a sixth element: establishment of the instruments or mechanisms necessary to ensure the payment of taxes on income by such means as the retention of dividends or other charges. The Salvadorian BITs with Argentina and Peru do not include the second element but add unfulfillment of tax and labor obligations to this list. NAFTA, and the Bolivia-Mexico, Canada-Chile, and Chile-Mexico FTAs have provisions similar to the Canadian BITs. In the Canada-Chile and Chile-Mexico FTAs, Chile reserves the right to maintain requirements and adopt measures for the purpose of preserving the stability of its currency. 30 Finally, in the BITs signed by Chile, transfers of capital are restricted for a period of one year.
The free trade agreements between Bolivia and Mexico, Costa Rica and Mexico, Mexico and Nicaragua; the Group of Three; the Central America-Dominican Republic FTA; as well as some bilateral investment treaties (Argentina-El Salvador, Argentina-Mexico, Colombia-Peru, Costa Rica-Paraguay, Costa Rica-Venezuela, and El-Salvador-Peru) state that the Contracting Parties could establish restrictions with respect to the free transfer of payments related to an investment in the case of balance-of-payments difficulties. Most treaties stipulate that these restrictions shall be exercised for a limited period of time in an equitable way, in good faith and in a non-discriminatory manner.
Following what is generally accepted in international law, the BITs signed within the Western Hemisphere, Mercosur, and all the free trade agreements mentioned in this Compendium prohibit the expropriation of investments except when certain conditions are met. These agreements typically require that expropriations be done for a public purpose, in accordance with the law and on payment of compensation. The Compendium includes information on the way the different agreements deal with the definition of covered expropriatory measures and the conditions they require for the expropriation to be legal.
1. Definition of Expropriatory Measures
Treaties use broad language and refer to either expropriation or nationalization (or to both), without differentiating between them. The most common formulation refers to “expropriation, nationalization or measures which have a similar effect.” In general, the U.S. BITs refer to “expropriation or nationalization (directly or indirectly through measures tantamount to expropriation or nationalization)” and only in one case (Haiti-United States BIT) add an illustrative list of such measures including: levying of taxation, the compulsory sale of all or part of an investment, or the impairment or deprivation of its management, control or economic value. In all cases the language is broad and allows for coverage of so-called “creeping” or “indirect” expropriations, that is, measures having the same effect to expropriation or nationalization.
a) Public Purpose and Non-Discrimination
All BITs, free trade agreements and Mercosur include a provision according to which an expropriation can only be made for a “public purpose.” Some treaties add expressions such as: “national interest,” “public use,” “public interest,” “public benefit,” “social interest” or, “national security.” Notwithstanding the fact that “public purpose” is difficult to define in precise terms, there is a general consensus that a State can only adopt expropriatory measures when there is a collective interest that justifies it, and not only based on a personal or individual motivation.
Virtually all the aforementioned agreements stipulate that the expropriating State shall not discriminate when undertaking an expropriation. These provisions reiterate the general principle of non-discrimination deriving from the MFN and national treatment clauses included in those agreements.
b) Due Process of Law and Judicial Review
Typically agreements require that expropriations be undertaken under due process of law. Although it could be argued that the standard of due process includes access to judicial review, most agreements include an express requirement to that effect.
All bilateral investment treaties, free trade agreements and Mercosur require that expropriations be done against compensation. Regarding the standard for this compensation, most agreements use the Hull formula, according to which compensation should be “prompt, adequate and effective.” 31 In very few cases, other expressions such as “just compensation” and “duly compensated” are used.
In relation to the value of the expropriated investment, most treaties use the term “market value” or “fair market value,” while others use expressions such as “genuine value” or “fair price” immediately before the expropriatory action was taken or became known, thus protecting the investor from the reduction in value that may result as a consequence of the expropriation. Agreements also stipulate that compensation shall include interests and, in most cases, specify that it should be calculated at a normal commercial rate from the date of expropriation.
In general, agreements include the requirement that payments be fully realizable, freely transferable and made without delay. In some cases, they add that compensation should be transferable at the prevailing market rate of exchange on the date of expropriation. In most cases, however, exchange rates are not dealt with in the context of expropriation. Instead, general transfer provisions are applicable.
Following traditional treaty practice, provisions for the settlement of disputes between Contracting Parties are included in both bilateral investment treaties and in regional trade arrangements containing provisions on investment.
In the case of all free trade agreements mentioned in this Compendium, disputes between Contracting Parties fall under the general dispute settlement mechanisms included in these agreements which are based on consultation and, failing resolution through consultation, panel review. In the Andean Group, state-to-state disputes are referred to the Andean Court of Justice. The Colonia Protocol provides for resolution of disputes concerning its interpretation or application through the disputes settlement procedures established in the Brasilia Protocol of December 17, 1991. When disputes involve a third state, the Buenos Aires Protocol refers them to ad hoc arbitration.
All bilateral investment treaties provide for disputes between States concerning the interpretation or application of the treaty to be submitted, at the request of either Party, to ad hoc arbitral tribunals. Arbitration, however, has to be preceded by consultations. All BITs require that disputes shall, whenever possible, be settled amicably through consultations or diplomatic channels. There are differences only in the time period BITs allow for the dispute to be solved through consultations before it is submitted to arbitration procedures. This time period varies between three, six and 12 months, while in some cases no limit is defined.
Typically, BITs set some rules for the constitution of the ad hoc tribunal. They generally provide that each Party appoint an arbitrator, usually within a two-month period. These arbitrators are required to select a national of a third State to serve as Chairman of the tribunal within a period that varies from 30 days to two, three or five months depending on the treaty, although a two-month period seems the most used formulation. The treaties also include procedures in those cases where agreement regarding appointments cannot be reached or other circumstances prevent the tribunal from being constituted.
Some general procedures to be followed by the arbitration tribunal are normally included in the agreement. The provisions in this regard state that decisions of the tribunal shall be taken by a majority of votes, be final and binding on both Parties. Apart from these basic indications, BITs leave it to the tribunal itself to determine its own procedures. Bilateral investment treaties entered into by the United States refer to UNCITRAL arbitration rules when agreement on procedures cannot be reached.
In most cases, BITs included in the Compendium do not set time limits for the arbitration tribunal to render its decision. In the case of U.S. bilateral investment treaties, provisions along the following lines are included to set a time limit for the decision to be rendered: “Unless otherwise agreed, all submissions shall be made and all hearings shall be completed within six months of the date of selection of the third arbitrator, and the arbitral panel shall render its decisions within two months of the date of the final submissions or the date of the closing of the hearings, whichever is later.”
Finally, some treaties include a reference to the law arbitral tribunals are to apply. The typical provision states that the arbitral tribunal shall decide in accordance with the provisions of the Agreement and the principles of international law.
All bilateral investment treaties, free trade agreements and Mercosur include separate provisions dealing with disputes between a Contracting Party and an investor, generally known as investment disputes. All treaties provide for arbitration as a means for the settlement of this type of dispute. This constitutes a departure from traditional treaty practice in this field where no such mechanism was provided. Thus, a foreign investor was limited to bringing claim against the host state in a domestic court or having its home state assume his claim against the host state (diplomatic protection).
All of the aforementioned agreements include a reference to a specific institutional arbitration mechanism in contrast with what is normally found in relation to disputes between Contracting Parties where they are referred to ad hoc arbitral tribunals without pre-established procedures. They refer to arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) or under ICSID Additional Facility Rules where either the host or home State of the foreign investor is not an ICSID Contracting Party. 32 Following what is increasingly the practice in modern investment treaties, most agreements include alternative forms of arbitration. This might prove particularly relevant where ICSID arbitration is unavailable due to jurisdictional constraints. The vast majority refer to arbitration under UNCITRAL rules. 33 Only in the case of the Haiti-United States BIT reference is made to arbitration under the International Chamber of Commerce (ICC).
Most treaties require that the investor and the host state seek to solve the dispute amicably through consultations and negotiations before submitting it to arbitration. In some cases a certain period of time has to elapse before the dispute can be submitted to arbitration (three, six or 18 months, depending on the treaty).
A number of treaties, including U.S. BITs, provide for arbitration only if the investor has not first had recourse to local courts. At the same time, recourse to arbitration precludes recourse to local courts. A number of BITs signed between Latin American countries include the same principle (“fork-in-the-road”) and state that election by the investor of either international arbitration or domestic remedies “shall be final.”
28 Argentina-Jamaica, Barbados-Venezuela, Colombia-Peru and Panama-United States do not list repayments of loans, while Barbados-Venezuela and Panama-United States do not specify proceeds of the total or partial liquidation of an investment.
29 The five currencies recognized by the International Monetary Fund as freely usable are the US dollar, German mark, Japanese yen, pound sterling and French franc.
30 These measures are explained in Annex G-09.1 of the Canada-Chile FTA and Annex 9-10 of the Chile-Mexico FTA.
31 This standard was formulated by U.S. Secretary of State Cordell Hull who declared in 1938, in correspondence to the Government of Mexico, that “under every rule of law and equity, no government is entitled to expropriate private property, for whatever purpose without provisions for prompt, adequate and effective payment thereof.” See Rudolph Dolzer, New Foundations of the Law of Expropriation of Alien Property, 75 American Journal of International Law 553 (1981).
32 The ICSID Convention came into force in 1966. See ICSID Doc. 15, ICSID Basic Documents (Jan. 1985). See ICSID Additional Facility for the Administration of Conciliation, Arbitration and Fact-Finding Proceedings, ICSID Doc. 11, 1979.
33 U.N. Commission on International Trade Law, Decision on UNCITRAL Rules, U.N. Doc. A/CN.9/IX/CRP.4/Add.1, amended by U.N. Doc. A/CN.9/SR.178 (1976).
* This report was prepared by the Organization of American States, Trade Unit at the request of the Free Trade Area of the Americas Negotiating Group on Investment and does not necessarily represent the opinions of the OAS or its Member States.
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