taxation measures, extractive industries, and international investment law

As far as foreign investments in the extractive sector are concerned, an important tension exists regarding the use of taxation measures by host states. On the one hand, the latter can seek to attract foreign investments by offering tax holidays or other incentives. ^{Footnote 30} Even though such measures are often considered as having a limited impact on decisions made by foreign investors, it is nonetheless acknowledged that this impact can vary from one sector to another. ^{Footnote 31} On the other hand, mineral-rich countries can be tempted to increase taxes to obtain an economic benefit from extractive activities occurring in their territory. In fact, one of the most important economic benefits for states that accept foreign investments in the extractive sector is the generation of government revenues. ^{Footnote 32} In addition to direct ownership, levies, and royalties, taxes thus play a particular role in ensuring that host states benefit from activities occurring within their territory. ^{Footnote 33} Moreover, as emphasized by UNCTAD, “[t]he evolving balance of bargaining power between [transnational corporations] and host-country governments may explain the dynamics of rent sharing over time and the changes in tax regimes and ownership arrangements in many developing countries.” ^{Footnote 34}

While states must find a balance between attracting foreign companies and collecting revenues, it is worth noting that exceptions for taxation measures are relatively common in IIAs signed by Canada. ^{Footnote 35} More specifically, many of these IIAs contain a provision that generally excludes taxation measures from the scope of application of the obligations imposed on the host state by the agreement, except in some circumstances. Article 2103 of the North American Free Trade Agreement (NAFTA) constitutes an example of this exception. ^{Footnote 36} While the first paragraph of this article mentions that “nothing in this Agreement shall apply to taxation measures,” ^{Footnote 37} subsequent paragraphs provide that taxation measures must still meet specific requirements. Some taxation measures are thus subject to provisions pertaining to national treatment and most-favoured-nation treatment. ^{Footnote 38} Moreover, provisions pertaining to performance requirements and expropriation remain applicable to taxation measures. ^{Footnote 39} However, in regard to expropriation, paragraph 2103(6) provides that a claim that taxation is expropriatory must be submitted by the investor to appropriate competent authorities in each member state at the time the investor gives its notice of intent to submit a claim to arbitration. ^{Footnote 40} The submission of the claim to arbitration can only proceed if the competent authorities do not agree to consider the issue or if they fail to agree that the taxation measure is not expropriatory within a period of six months. A similar review procedure can also be found in the Canadian model for the negotiation of bilateral investment treaties (BITs) that was adopted in 2004 ^{Footnote 41} as well as in several IIAs that have entered into force since NAFTA. ^{Footnote 42}

Overall, since host states can use their tax policy strategically when dealing with firms from the extractive sector, taxation measures are generally subject to distinctive treatment under IIAs. Several authors thus conclude that the adoption of non-discriminatory taxation measures is generally not precluded under international investment law. In fact, it is often emphasized that, unless they produce a confiscatory effect and amount to indirect expropriation, such measures do not conflict with international investment rules and principles. ^{Footnote 43}

the denial of vat refunds and expropriation

It is in this broader context that the tribunal had to assess the legality of a series of measures adopted by Ecuador in the EnCana case. EnCana Corporation submitted a notice of arbitration pursuant to the Agreement between the Government of Canada and the Government of the Republic of Ecuador for the Promotion and Reciprocal Protection of Investments (Canada–Ecuador BIT). ^{Footnote 44} According to the claimant, measures adopted by the tax authorities of Ecuador denied refunds of VAT to two subsidiaries of the investor that were incorporated in Barbados. ^{Footnote 45} While various contracts for exploration and exploitation of oil and gas reserves in Ecuador provided for VAT refunds to these subsidiaries, specific resolutions and amendments to regulations adopted by Ecuador had the opposite effect. ^{Footnote 46} EnCana Corporation thus alleged that these measures violated various provisions of the Canada–Ecuador BIT, including obligations of Ecuador with respect to fair and equitable treatment, national treatment, and expropriation. ^{Footnote 47}

From the outset, Ecuador challenged the jurisdiction of the tribunal on the grounds that the claim concerned taxation measures that were excluded from the scope of application of the Canada–Ecuador BIT. ^{Footnote 48} In fact, Article XII of the agreement provides a procedural mechanism that is similar to the one discussed above. ^{Footnote 49} Although the agreement does not generally apply to taxation measures, ^{Footnote 50} Article XII provides that an investor must notify the taxation authorities of each state if it considers that a measure is in breach of an agreement between the investor and the host state and that this breach violates a provision of the Canada–Ecuador BIT. ^{Footnote 51} A similar notification is also mandatory if an investor alleges that a taxation measure is expropriatory. ^{Footnote 52} In both instances, the investor may submit its claim under the investor–state dispute settlement mechanism of the Canada–Ecuador BIT only if the taxation authorities of both states fail to reach a joint determination that the measure is not a breach of the agreement or an expropriation within six months following the notification. ^{Footnote 53}

The tribunal proceeded by confirming that the measures challenged by the claimant were taxation measures that were generally excluded from the application of the Canada–Ecuador BIT. ^{Footnote 54} Therefore, to fall under the jurisdiction of the tribunal, these taxation measures had to be either in breach of an agreement between the investor and the host state or tantamount to an expropriation. ^{Footnote 55} In regard to the first option, the tribunal maintained that a breach of any agreement between the central government authorities of Ecuador and EnCana Corporation was not alleged. ^{Footnote 56} In fact, the relevant contracts were concluded between the investor’s third-state-incorporated subsidiaries and the Ecuadorian state oil company. ^{Footnote 57} By contrast, the investor had properly given notice to the taxation authorities of each state with respect to the alleged expropriatory character of the taxation measures. ^{Footnote 58} Considering that the competent authorities had not reached a joint determination according to which the measures were not expropriatory within the delay provided in the Canada–Ecuador BIT, the tribunal concluded that it had jurisdiction over EnCana Corporation’s claim in relation to the issue of expropriation only. ^{Footnote 59}

When assessing the alleged indirect expropriatory character of the taxation measures, the tribunal analyzed the impact of the measures on the investor’s subsidiaries. ^{Footnote 60} After recalling that a foreign investor cannot legitimately expect that the tax regime will not change in the absence of a specific commitment from the host state, the tribunal emphasized that “it will only be in an extreme case that a tax which is general in its incidence could be judged as equivalent in its effects to an expropriation of the enterprise which is taxed.” ^{Footnote 61} It continued:

The tribunal then split with respect to the assessment of whether the non-payment of VAT refunds constituted a direct expropriation. In general, an investor entitled to a tax refund is likely to claim that non-payment of this specific refund constitutes a direct expropriation of the investment. ^{Footnote 63} In the case at hand, the dissenting arbitrator and the majority of the tribunal agreed that, given the broad definition of investment in the Canada–Ecuador BIT, claims to money held through a third state investor could constitute an investment. ^{Footnote 64} However, according to the dissenting opinion, EnCana Corporation’s entitlement to its investment included the right to an economic return and was embedded in the Canada–Ecuador BIT itself. ^{Footnote 65} After maintaining that “a return is expropriated when adversely affected in a substantial way by a measure or string of measures,” ^{Footnote 66} the dissenting arbitrator therefore took the view that the measures adopted by Ecuador were directly expropriatory. ^{Footnote 67} By contrast, the majority of the tribunal maintained that

After applying these criteria to the facts of the case, the majority of the tribunal rejected the claim that the taxation measures amounted to direct expropriation.

The conclusion reached by the tribunal in the EnCana case is highly relevant given the strategic use of taxation measures by host states to increase economic benefits from extractive activities. At the end of the day, the interpretation offered by the majority of the tribunal in this award demonstrates that the application of taxation measures to these activities will only rarely be considered an expropriation. Although this conclusion is strongly related to the existence of provisions that exclude taxation measures from the application of the Canada–Ecuador BIT and may not speak to IIAs in general, EnCana suggests a relatively high threshold for finding that a taxation measure violates the host state’s obligations under an IIA. ^{Footnote 69} Such an interpretation strengthens the view that a measure by the host state to increase development gains from extractive operations can be consistent with international investment rules and principles, even if it interferes with foreign investors’ interests.

countering negative impacts of extractive activities and international investment law

As noted earlier, extractive industries’ activities can result in environmental harms and other negative impacts for the communities located near those activities. It is clear that the environmental impacts of these projects vary according to the type of minerals extracted, the technology used, the scale of the extraction, the location of the projects, the geological structures, and the techniques of extraction. ^{Footnote 75} Nevertheless, there are several impacts that are commonly related to these operations. For example, UNCTAD highlights that such activities can lead to acid mine drainage, surface and groundwater pollution, soil contamination, landslides due to collapse of waste and tailing dumps, oil spills, flaring of excess gas, and deforestation. ^{Footnote 76} As summarized by Hevina Dashwood, “[t]he very severe and long-lasting nature of pollution problems associated with mining increases the financial burden of environmental responsibility.” ^{Footnote 77}

With respect to impacts on communities near or in which extractive firms operate, concerns such as human rights violations, use and management of land, relocation of people, loss of land, and loss of livelihoods must be mentioned. ^{Footnote 78} What is more, in the aforementioned study of the negative impacts of extractive activities near or within indigenous communities, the Special Rapporteur on the rights of indigenous peoples highlights the particularly vulnerable position of such communities that are affected by mining activities. ^{Footnote 79} According to this study, most indigenous peoples and non-governmental organizations perceive that the minimum or short-term benefits related to extractive operations are often outweighed by their adverse effects on the environment and culture of indigenous communities. ^{Footnote 80}

While the regulatory framework of the host state can be designed and implemented to reduce the negative environmental and social impacts resulting from the extractive sector’s activities, ^{Footnote 81} regulatory measures that interfere with foreign investments can also lead to investor claims. This gives rise to a key critique that is often levelled against IIAs. In particular, international investment law tends not to match the protections accorded to foreign investors with obligations, either on host states or foreign investors, with respect to the impacts of the latter’s conduct. ^{Footnote 82} Furthermore, several authors argue that tribunals have often refused to fully consider negative impacts caused by foreign investors’ activities when analyzing the consistency of the measures adopted by the host state with international investment rules and principles. ^{Footnote 83}

Although an analysis of the various instances in which these issues have been avoided by international investment tribunals is beyond the scope of this article, it is worth noting that the approach chosen by the arbitrators in Glamis Gold fits this observation squarely. While emphasizing that they were aware of the broader context in which they had to analyze the foreign investor’s claim, the Glamis Gold arbitrators stated their understanding of their task in the following terms:

The express reluctance to take into account environmental and indigenous rights issues is intrinsically related to the law that can be applied by arbitral tribunals. In international investment treaty arbitration, the primary source of applicable law remains the provisions of the IIA. ^{Footnote 85} If these provisions do not refer to any responsibilities of foreign investors, one cannot expect the negative impacts related to such actors’ activities to play a central role in the reasoning of the tribunal. The analysis thus mostly focuses on the extent to which the measures adopted by the host state frustrate the investor’s interests. ^{Footnote 86} Yet this does not necessarily imply that a host state’s measures aimed at countering negative impacts of a foreign investor’s activities on its environment or its population are necessarily inconsistent with the provisions of the IIA. In fact, the tribunal in the Glamis Gold case ultimately dismissed the investor’s claim. It therefore becomes relevant to analyze more thoroughly the reasoning of the tribunal in assessing the consistency of the measures with respect to expropriation and fair and equitable treatment.

interference with property rights as the threshold test for expropriation

As far as expropriation is concerned, Glamis Gold maintained that the administrative and legislative actions taken by the US federal government and the government of California constituted a violation of the United States’ obligations under Article 1110 of NAFTA. ^{Footnote 87} According to this article, a direct or an indirect expropriation must be made for a public purpose, on a non-discriminatory basis, in accordance with the due process of law and the minimum standard of treatment and on payment of compensation by the host state. ^{Footnote 88} In order to assess the conformity of a regulatory measure with this provision, the tribunal emphasized that the determinative test is the degree of interference with property rights. ^{Footnote 89} More specifically, the inquiry has to focus mainly on the severity of the economic impact of the measure adopted by the host state and the duration of that impact. ^{Footnote 90}

With regard to the evaluation of the proposed mining project by the US federal government and agencies, the tribunal decided that the actions of the host state did not constitute an expropriation. Although the US Secretary of the Interior initially denied approval of the project in January 2001, ^{Footnote 91} this decision was formally rescinded in October 2001 and the proposed project was reconsidered. ^{Footnote 92} While the initial denial had a considerable economic impact on the investment, it was of a limited duration and did not sufficiently interfere with the investor’s property rights to amount to an expropriation.

The tribunal then thoroughly analyzed the economic impact of the regulations adopted by California with respect to backfilling of the extraction sites. According to Glamis Gold’s evaluation, while the initial economic value of the proposed mining project was US $49.1 million, the enactment of the backfilling measures had transformed this number into a loss of US $8.9 million. ^{Footnote 93} After assessing various factors that were likely to influence the value of the investment (that is, the cost of backfilling, the weight to be given to each pit from the project, the price of gold, financial insurance, and the discount rate to be applied), ^{Footnote 94} the tribunal adjusted the investor’s evaluation and concluded that the post-backfilling valuation of the project exceeded US $20 million. ^{Footnote 95} As a result, the tribunal decided that “the California backfilling measures did not result in a radical diminution in the value of the [p]roject” and that “the remaining value of the [p]roject would be sufficiently positive to warrant dismissal of the Claimant’s claim for expropriation.” ^{Footnote 96}

Whether a downward economic impact of US $29.1 million — that is, 59.3 percent of the total initial investment value — does not constitute a “radical diminution” of the value of the investment is arguable. However, as emphasized by Jordan Kahn, the primary question that arises from this award is what remaining value will be considered sufficient to permit the conclusion that the host state did not violate its obligations in regard to expropriation. ^{Footnote 97} While this amount is likely to depend upon the circumstances of each case, the conclusion of the tribunal in Glamis Gold nonetheless suggests that respondent states should focus, in their defence, on the residual value of foreign investments that are affected by regulatory measures. ^{Footnote 98} Ultimately, it has been suggested that the regulatory takings analysis undertaken by the tribunal is a clear expression of the host state’s ability to regulate the activities of foreign investors without fear of compensatory awards. ^{Footnote 99}

In light of the tribunal’s reasoning, regulatory actions taken by the host state to limit the negative impacts related to extractive firms’ operations can be adopted without constituting an expropriation under international investment law. This interpretation is also in line with the conclusions of the tribunal in EnCana insofar as a relatively high threshold is applied to determine whether a measure amounts to expropriation. Regardless of the purpose that underlies the measures adopted, a host state must ultimately ensure that the foreign investor retains a certain control over its investment. As long as the measures do not prevent the investor from operating its investment for a long period of time, this case suggests that environmental and social measures pertaining to extractive activities are unlikely to constitute an expropriation under international investment law.

legitimate expectations, arbitrary measures, and fair and equitable treatment

In addition to the investor’s claim pertaining to expropriation, Glamis Gold argued that the measures adopted by the federal and the California state governments were in violation of the United States’ obligations to accord fair and equitable treatment to foreign investments. ^{Footnote 100} According to Article 1105 of NAFTA, “[e]ach Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.” ^{Footnote 101} Given the relatively vague terms of this provision, the tribunal chose to define the precise scope of the minimum standard of treatment under customary international law in order to establish whether the measures adopted by the host state were in breach of that obligation. ^{Footnote 102}

The investor submitted that the international minimum standard of treatment is an evolving standard requiring that the host state protect legitimate expectations and provide protection from arbitrary measures. ^{Footnote 103} In order to assess this proposition, the tribunal chose to use the standard established in the Neer v Mexico ^{Footnote 104} decision as a starting point. ^{Footnote 105} Therefore, the tribunal emphasized that the content of the minimum standard of treatment includes protection against an outrage, bad faith, a wilful neglect of duty, or an insufficiency of governmental action. ^{Footnote 106} Although the tribunal accepted that there may be evolution in what can be considered as outrageous, ^{Footnote 107} it found that the claimant had failed to establish that customary international law has moved beyond the minimum standard of treatment as defined in the Neer decision. ^{Footnote 108} In its final disposition with respect to the scope of fair and equitable treatment, the tribunal nonetheless concluded that a breach of the minimum standard of treatment “may be exhibited by a ‘gross denial of justice or manifest arbitrariness falling below acceptable international standards;’ or the creation by the State of objective expectations in order to induce investment and the subsequent repudiation of those expectations.” ^{Footnote 109}

The tribunal then analyzed the arguments of both parties according to its definition of the scope of the fair and equitable treatment standard protected under Article 1105 of NAFTA. With regard to the host state’s analysis of the proposed mining project, the tribunal concluded that none of the actions of the federal government was arbitrary and that the host state had not taken any steps that would have created legitimate expectations for the investor. ^{Footnote 110} With respect to the time spent by the various authorities to conduct that analysis, it is particularly interesting to note that the tribunal held that any delay was justified by the complexity of the issues at stake and by the numerous parties that had an interest in the matter. ^{Footnote 111}

A similar conclusion was reached with respect to the legislation and regulations adopted by the government of California. Glamis Gold argued that these measures specifically targeted the investor’s mining project, that their adoption occasioned undue surprise, and that they were arbitrary. ^{Footnote 112} While acknowledging that the project was in the mind of the individuals who designed the legislation and the regulations, ^{Footnote 113} the tribunal found that the measures were potentially applicable to other extractive sites. ^{Footnote 114} Furthermore, the tribunal emphasized that the host state had not created any objective expectations in order to induce the investment. ^{Footnote 115} The measures adopted by the California state government could thus not be considered to be violating legitimate expectations within the meaning of Article 1105. ^{Footnote 116} Finally, considering that there was a reasonable connection between the harm related to the foreign investor’s activities and the remedy imposed by the measures adopted, the tribunal concluded that such measures were not arbitrary. ^{Footnote 117}

The tribunal’s analysis with respect to the evolution of the minimum standard of treatment under customary international law has been criticized. ^{Footnote 118} Considering that previous tribunals constituted under NAFTA had already emphasized the evolving character of this standard, it is rather surprising that the tribunal in Glamis Gold found that the investor had the burden of proof to demonstrate any change of customary international law in this regard. ^{Footnote 119} It must be noted that subsequent tribunals have not followed this narrow interpretation of fair and equitable treatment. ^{Footnote 120} However, while it is true that the tribunal in Glamis Gold could have relied on a definition of the minimum standard of treatment that went beyond that applied in the Neer decision, it must be emphasized that it ultimately assessed the creation of legitimate expectations and the arbitrariness of the measures. ^{Footnote 121} At the end of the day, Glamis Gold is thus consistent with other decisions in which tribunals have considered the protection of legitimate expectations as a key element of fair and equitable treatment. ^{Footnote 122}

It must also be noted that the broader arbitral jurisprudence may appear to be inconsistent with respect to the legality of a regulatory change in light of the host state’s obligation to protect legitimate expectations. On the one hand, changes to the legal framework under which the foreign investor has been operating can constitute a violation of the obligation to protect the investor’s legitimate expectations. For example, in a dispute between a US extractive company and Ecuador, the tribunal found that the requirement of stability and predictability under international law encompassed “an obligation not to alter the legal and business environment in which the investment has been made.” ^{Footnote 123} On the other hand, other tribunals have sought to strike a balance between the foreign investor’s legitimate expectations of stability and the host state’s capacity to exercise its sovereign power to legislate. ^{Footnote 124} In the context of NAFTA, such an example can be found in Merrill & Ring Forestry L.P. v Canada:

When considering these different examples, it appears that the key element in determining whether a regulatory change violates a foreign investor’s legitimate expectations relates to the state’s conduct in adapting the legal framework. This crucial aspect was identified by the tribunal in International Thunderbird Gaming Corporation v Mexico in the following terms:

Therefore, as summarized by Rudolf Dolzer and Christoph Schreuer, “[t]he investor’s legitimate expectations are based on the host state’s legal framework and on any undertakings and representations made explicitly or implicitly by the host state.” ^{Footnote 127} As a result, one cannot conclude that the protection of the foreign investor’s legitimate expectations necessarily prevents the adoption of regulatory measures to protect the local environment and community. As long as regulatory changes do not contradict legitimate expectations induced by the host state and do not amount to manifest arbitrariness, the decision reached in Glamis Gold suggests that such measures can be consistent with international investment law.

comparing measures challenged in glamis gold and gold reserve

In order to better understand the extent to which host states can adopt measures to protect the local environment and communities in which extractive activities are conducted by foreign investors, it is worth emphasizing the reasons that led the tribunal in Gold Reserve to conclude that such measures were illegal. In fact, the respondent state in Gold Reserve also relied heavily on the negative environmental impacts resulting from the investor’s mining projects to justify the measures it adopted. ^{Footnote 128}

Paradoxically, the tribunal in Gold Reserve appeared to be more open to consideration of environmental harms related to extractive activities than that in Glamis Gold. While the tribunal in the latter case avowedly refused to make statements pertaining to environmental regulation, ^{Footnote 129} the tribunal in Gold Reserve explicitly adopted a totally different approach. Indeed, it summarized the need to consider both environmental regulation and international investment obligations in the following terms:

When assessing the legality of the measures adopted by the host states in light of fair and equitable treatment provisions, the conclusions reached by these two tribunals are strikingly different. In a way that mirrors the analysis conducted by the tribunal in Glamis Gold, the tribunal in Gold Reserve underscored the central role of the investor’s legitimate expectations in assessing the fair and equitable character of the treatment granted by the host state to the foreign investment. ^{Footnote 131} However, while the tribunal in Glamis Gold explicitly relied on the standard defined in the Neer decision, the tribunal in Gold Reserve posited “that public international law principles have evolved since the Neer case and that the standard today is broader than that defined in the Neer case on which Respondent relies.” ^{Footnote 132}

While the tribunal in Glamis Gold concluded that the environmental and social measures adopted by the host state were not arbitrary and did not violate legitimate expectations of the investor, the findings of the tribunal in Gold Reserve were unequivocally different. However, this difference of outcome is attributable to more than the application of different standards by the tribunals to assess the violation of fair and equitable treatment. Rather, such a difference is strongly related to the process by which environmental concerns were addressed by the host state. Considering the previous approval of required studies and the issuance of permits by the respondent state, the tribunal noted that Gold Reserve “had therefore good reasons to rely on the continuing validity of its mining titles and rights and an expectation that it would obtain the required authorization to start the exploitation of the concessions.” ^{Footnote 133} In fact, the tribunal in Gold Reserve concluded that the “real reason” behind the adoption of such measures “was not (or not only) the serious concerns over the environmental impacts of the [mining project].” ^{Footnote 134} It found that the respondent state’s failure to provide the required authorization, while reinforcing Gold Reserve’s expectation that such an authorization would be forthcoming, “amounted to conduct evidencing (through acts and omissions) a lack of transparency, consistency and good faith in dealing with an investor.” ^{Footnote 135} A similar breach of the investor’s legitimate expectations was found by the tribunal with respect to certifications of compliance that were delivered by the respondent state. ^{Footnote 136} Contrasting the conclusions of Glamis Gold and Gold Reserve thus suggests that, as long as negative environmental and social impacts related to extractive activities are addressed transparently, according to due process rights and in a way that does not contradict legitimate expectations induced by the host state, measures relating to such impacts remain in line with international investment rules and principles.

In sum, the very nature of mining operations can undoubtedly disturb the environment and populations living near the extractive sites. In the case of Glamis Gold, although the tribunal avowedly limited its analysis to consistency of the measures with international investment rules and principles, it ultimately dismissed the investor’s claim. Delays related to assessment of the project and regulatory measures that required the backfilling of extractive sites did not breach the obligations of the host state in terms of expropriation and fair and equitable treatment. Even though the tribunal in Gold Reserve concluded that the measures adopted by the host state breached the obligation of Venezuela to accord fair and equitable treatment to the foreign investor, the decision reached in Glamis Gold provides considerable support for the notion that host states can design and implement measures that address the environmental and social impacts of proposed extractive projects.

extractive contracts and international investment law

As mentioned in the introduction to this article, investments in the extractive sector evolve in an environment that is influenced by the international investment legal framework. Within these broader rules and principles, foreign investments in the extractive sector, in particular, have historically involved the negotiation of more specific investment contracts. ^{Footnote 139} In fact, the contractual relations between the foreign investor and the host state play a crucial role in establishing the rights and obligations of each party when conducting exploration and exploitation activities related to the resources that are found in a specific territory. ^{Footnote 140} To put it differently, these contracts act as pivotal legal instruments governing the day-to-day activities of investor firms and the measures that may be adopted by the state with respect to international investments.

In addition to the determination of the applicable law and the choice of forum for dispute resolution, ^{Footnote 141} aspects that are usually addressed in an extractive contract include the rules that are applicable to the transfer of profits made by the investor, the royalties to be paid to exploit the resources, as well as certain requirements with respect to the creation of jobs, training, and the use of domestic materials. ^{Footnote 142} Although they are often expressed in relatively broad terms that merely call upon the investor to respect the existing regulatory framework within the host state, some clauses of these extractive contracts can also be used to address environmental and social concerns of the host state. ^{Footnote 143} In sum, contracts concluded with foreign extractive firms can be used as a primary tool to ensure the generation of mutual gains from extractive activities for both the investor and the host state. ^{Footnote 144}

The question of foreign investors’ contractual obligations does not seem to be the primary focus of international investment law. In fact, when discussions regarding contractual obligations arise, they often tend to address the controversial question of the host state’s international responsibility for the non-fulfilment of contractual obligations. ^{Footnote 145} Several commentators thus address the inclusion of umbrella clauses in IIAs, which ensure the observance of obligations that the host state has previously undertaken vis-à-vis the investor. ^{Footnote 146} As summarized by Andrew Newcombe and Lluís Paradell, “[t]he clause … enshrines the principle of ‘pacta sunt servanda,’ a cornerstone of the legal security of economic transactions and the basis for contract law in national and international law.” ^{Footnote 147} In other words, international treaty arbitration relies on the recognition, implicit or explicit, that respect for this principle must be applied in international investment disputes. ^{Footnote 148}

Relying on this recognition of the pacta sunt servanda principle, one can advance that it also has implications for the contractual obligations that are undertaken by the investor vis-à-vis the host state. In other words, when a foreign investor claims that a measure adopted by the host state violates the protections that are accorded in an IIA, it may be argued that any contractual relations between the host state and the investor must be taken into account by the international investment tribunal. As a host state usually enters into a contractual relation with a foreign extractive company to delimit the responsibilities of each party, these obligations thus become relevant to deciding the outcome of an investor’s claim under the applicable IIA.

host state’s measures and investor’s contractual obligations

It is against this background that the decision reached by the tribunal in Vannessa Ventures must be analyzed. Before examining the tribunal’s reasoning in this case, some clarifications pertaining to the contractual relationship that existed between the host state and the foreign investor are worth noting. An initial shareholders’ agreement was signed between Placer Dome Incorporated — through a subsidiary company in Venezuela — and Corporación Venezolana de Guayana (CVG), a state agency of the host state. ^{Footnote 149} Both entities agreed to form the Minera Las Cristinas CA (MINCA), a Venezuelan company that was supposed to explore and produce gold on the host state’s territory. ^{Footnote 150} According to the shareholders’ agreement that constituted MINCA, both parties agreed to refrain from assigning their rights or delegating their duties to a third party without first obtaining the prior written consent of the other party. ^{Footnote 151} A work contract was then signed between CVG and MINCA with respect to the exploration, development, and exploitation of mineral resources. ^{Footnote 152} This work contract, as well as subsequent agreements between the parties, included similar clauses with respect to the delegation of duties to third parties. ^{Footnote 153} However, when a fall in gold prices affected the profitability of the project, ^{Footnote 154} Placer Dome sold its shares in MINCA to Vannessa Ventures for a total of US $50 without first obtaining the consent of CVG. ^{Footnote 155} As a result, CVG notified MINCA of the termination of the work contract and took physical possession of the site. ^{Footnote 156}

While one dissenting member of the tribunal was of the opinion that the claim could have been dismissed on the ground that the tribunal had no jurisdiction over an investment that was not made in good faith, ^{Footnote 157} the tribunal unanimously agreed that none of the measures adopted by the host state amounted to a breach of the Canada–Venezuela BIT. ^{Footnote 158} When assessing the treatment of the investment by the host state, the tribunal emphasized that the acquisition of Vannessa Ventures’s interests in MINCA was incompatible with the legal relationship existing between Placer Dome and Venezuela. ^{Footnote 159} The measures adopted by the host state were thus justified by Placer Dome’s breach of contractual obligations, from which Vannessa Ventures’s legal interests were derived.

More specifically, the investor claimed that the actions taken by the host state amounted to an expropriation. After stressing that Placer Dome had to work with CVG in order to find a mutually acceptable new investor, the tribunal noted that the failure of the initial investor to meet this contractual obligation provided a “legitimate basis” for terminating the work contract. ^{Footnote 160} Furthermore, after referring to the International Law Commission’s Draft Articles on Responsibility of States for Internationally Wrongful Acts, ^{Footnote 161} the tribunal stated the following:

Given that Vannessa Ventures failed to demonstrate that the measures adopted by the host state were more than legitimate contractual responses, ^{Footnote 163} the tribunal dismissed the claim. ^{Footnote 164}

When analyzing the investor’s claim pertaining to the obligation of the host state to accord fair and equitable treatment and full protection and security, the tribunal emphasized that the threshold that must be met remained relatively high. Despite the different possible formulations of the content of these standards, and in light of the contractual framework that provided the obligations of the parties for the conduct of the extractive operations, the tribunal concluded that the measures adopted by Venezuela did not violate the host state’s obligations in this regard. ^{Footnote 165} Despite some delays regarding Vannessa Ventures’s attempts to access Venezuelan courts, the tribunal concluded the following: “The question is not whether the host State legal system is performing as efficiently as it ideally could: it is whether it is performing so badly as to violate treaty obligations to accord fair and equitable treatment and full protection and security.” ^{Footnote 166}

consideration of investor obligations in gold reserve

While the foreign investor’s contractual obligations played a decisive role in Vannessa Ventures in assessing whether the measures adopted by Venezuela breached the latter’s obligations pertaining to expropriation, other investor obligations were considered by the tribunal in Gold Reserve. In particular, provisions of mining titles and mining law obliging the investor to commence exploitation were relied upon extensively by the respondent state to justify the termination of mining concessions. ^{Footnote 167} Since Gold Reserve failed to comply with these obligations, this element was considered by the tribunal in assessing whether the termination of mining concessions could be considered an expropriation under international investment law. ^{Footnote 168}

From the outset, the tribunal in Gold Reserve emphasized that “to be able to be considered an expropriation, there must have been an exercise of sovereign authority, not just a contractual termination.” ^{Footnote 169} In order to determine whether the termination of the concessions was expropriatory, the tribunal also stressed that the key issue was to assess the extent to which the reasons that led to this termination were well founded. ^{Footnote 170} The tribunal concluded that “the nature of the breach by Claimant (failure to exploit within the required timeframe) was such that termination on this ground could not be said to be merely ‘pretextual’ [and that] the reasons given by Respondent for terminating the Concessions were sufficiently well founded that the terminations cannot be considered as a form of expropriation under international law.” ^{Footnote 171}

Although the investment dispute in Gold Reserve was ultimately decided in favour of the foreign investor, one must recall that this decision was based on several breaches of the fair and equitable treatment obligation owed by the host state to the investor. When it came to expropriation, the tribunal relied on Gold Reserve’s obligations regarding its extractive activities to determine that the termination of the mining concessions did not constitute a violation of the expropriation provisions found in the Canada–Venezuela BIT. In other words, in a way that mirrors the consideration of the foreign investor’s contractual obligations in assessing the expropriatory character of a host state’s measures by the tribunal in Vannessa Ventures, the analysis of the tribunal in Gold Reserve also takes the investor’s obligations into account.

Vannessa Ventures clearly demonstrates the relevance of the investor’s contractual obligations vis-à-vis the host state — a prominent feature of the relationship between a host state and a foreign investor in the extractive sector — when a tribunal assesses the legality of measures that interfere with foreign investments. Despite the considerable negative impact that the measures adopted by the host state had on the value of the investment, the tribunal was ultimately guided by the contractual relationship. As Vannessa Ventures obtained its legal interests through a breach of a contractual obligation by Placer Dome, Venezuela was able to adopt specific measures to the extent that these would have been expected in a normal contractual relationship. What is more, Gold Reserve suggests a similar conclusion when it comes to other obligations that must be observed by the investor. As long as the measures adopted by the host state can be justified by the failure of the investor to meet its obligations, these cases suggest that arbitral tribunals are unlikely to consider these measures to be expropriatory.