Nationalization, Natural Resources and International Investment Law

Contractual Relationship as a Dynamic Bargaining Process

Junji Nakagawa

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351619301
• Edition: 1
• Topic: Law
• Subtopic: Environmental Law
• Index: Law

Nationalization disputes in natural resources development are among the most disputed issues of international investment law. This book offers a fresh insight into the nature of nationalization disputes in natural resources development and the rules of international investment law governing them by systematically analyzing (1) the content of investment contracts in natural resources development, and (2) the results of nationalization disputes in natural resources development from the perspective of dynamic bargaining theory.

Based on the comprehensive and systematic empirical analyses, the book sheds new light on contractual renegotiation and renewal as a hardly known but practically normal solution of nationalization disputes and presents a set of soft law rules governing contractual renegotiation and renewal.

1
Introduction

Defining the problems and the need for a new analytical framework

Transnational natural resource development,¹ namely development of natural resources by foreign enterprises,² started in the late 19th century. This form of natural resource development grew with the rapid global industrialization and came to occupy a significant status in global natural resource development, in particular through the development of natural resources located in developing countries by multinational enterprises. The study of international law³ has focused on the issue of the lawfulness of the unilateral cancellation by a host country of an agreement that it concluded with a foreign enterprise for the development of natural resources and the nationalization⁴ of the assets of the foreign enterprise.⁵ Unilateral cancellation of agreements for natural resource development and nationalization of the assets of foreign enterprises frequently took place since the 1970s, and its lawfulness became an issue of practical importance. From a theoretical point of view, this issue posed an interesting puzzle of how to characterize the relationship between a host state and a foreign investor under public international law, whose subject has traditionally been laws governing relationship between sovereign states. Moreover, as the North–South confrontation became critical in the post–World War II international politics and international economy, the issue was regarded as among the symbolic issues around which the North and the South confronted.

However, in spite of the accumulation of academic research on this issue against these backgrounds, the study of international law is in a stalemate, in the following two senses. First, conflicting rules are being asserted as general international law on the lawfulness of unilateral cancellation of an agreement for natural resource development, and there seems to be no space for reconciliation between these two. Second, most disputes arising from unilateral cancellation of natural resource development agreement have been settled according to neither of these two conflicting rules. This book aims at overcoming this stalemate of the study of international law on the lawfulness of unilateral cancellation of an agreement for natural resource development from a new perspective, focusing on the analysis of the disputes in the development of subterranean natural resources.⁶ The analysis will start by reviewing past research on the issue and critically analyzing the arguments asserting conflicting rules on the issue.

Section 1 Problems in past research

Section 1.1 Overview of research history

Section 1.1.1 Research history before World War II

Although the development of cross-border subterranean resources began in earnest in the early 1880s, international law started to focus on this topic as far back as after World War I. The nationalization of the oil and mining industries by the Soviet Union towards the end of the war triggered the first peak in unilateral cancellation of agreements by host countries during the interwar period,⁷ and in response thereto, research in international legal studies related to the legality of this type of action was conducted.

To summarize the characteristics of the research at that time, it was argued that these issues were part of a general problem, namely a host country’s obligations under general international law related to the protection of a foreigner’s property rights and state responsibility in the event of a breach of such obligations. Back then, unilateral cancellation of an agreement by a host country was not in itself considered to constitute a direct violation of international law; rather, the generally adopted idea was that it constituted, at most, a problem as to whether there was a violation of international law with respect to infringement on a foreigner’s property rights that occurred as a result of such cancellation. E. Borchard made the following comments, which were representative of the dominant viewpoint, in connection with the requirements for a foreigner’s home country to intervene by exercising its right of diplomatic protection in the event the host country that entered into the contract with the foreigner breached the contract.

(A) contract claim cannot give rise to the diplomatic interposition of the government unless, after an exhaustion of local remedies, there has been a denial of justice, or some flagrant violation of international law.⁸

Based on this viewpoint, the debate about the lawfulness of unilateral cancellation of an agreement by a host country was not addressed as an independent topic and was limited to being addressed as an aspect of the principles under general international law related to the protection of a foreigner’s property rights. At that time, scholarly opinions and official views of Western capitalist industrial countries advocated that the principles of general international law were as follows: the measures had to be based on public interest (public purpose doctrine); the measures did not distinguish the treatment of local entities and foreign entities engaged in the same business (doctrine of nondiscrimination); and the measures had to involve adequate, effective, and prompt compensation (doctrine of compensation). In contrast, an opposing position centered around the theories and government views of the Soviet Union, which had been the first to conduct nationalizations, and Latin American countries that rejected all or some of these principles or otherwise diminished their efficacy by refusing any compensation obligations under general international law or by reserving the rights of the host state to decide how to apply the public purpose doctrine or the doctrine of compensation. Consequently, the debate continued along parallel lines.

The background to the Conference for the Codification of International Law held by the League of Nations in 1930 directly demonstrated the conflict in the then-current positions. The Conference listed “The Responsibility of States for Damage Caused in Their Territory to the Person or Property of Foreigners” among the topics for codification, and a committee comprising representatives from 42 countries was commissioned to draft a treaty proposal. However, the committee members could not reach an agreement, so the codification was a failure.⁹ The issues of contention covered a broad range during the deliberations, but among them, the conflict was severe regarding the principle of international standards and the principle of equality for foreigners and nationals as related to the nature of the obligations under general international law for a state to bear responsibility regarding the treatment of foreigners.¹⁰ Notwithstanding that the topic was at the level of general basic principles, the Conference’s failure clearly showed the conflict between the then-current positions regarding the legality of unilateral cancellation of an agreement by a host country.

Section 1.1.2 Research history after World War II

Nationalization of the Anglo-Iranian Oil Company by Iran (in 1951) after World War II triggered another peak (much larger than the interwar peak) in unilateral cancellation of agreements by host countries.¹¹ International law studies were also inspired by this event and led to new developments. While in capitalist industrial countries the majority view basically continued asserting the principles of the interwar theories and the positions of the governments of Western capitalist industrial countries,¹² some called for imposing even stricter restrictions overall on breaches of agreements by host states, not limited to unilateral cancellation of agreements. The argument that stands out among all others was made by A. Verdross.

Verdross argued that, among the agreements between states and foreign enterprises, agreements (a representative example thereof is an agreement executed to develop natural resources) satisfying a requirement that both parties negotiated them on an equal footing (inter pares) would be legally binding pursuant to a general principle of law, that is, “pacta sunt servanda,” without needing to establish a legally binding foundation under the order of national law or that of international law, and regarded as a third category of agreements or quasi-international agreements.¹³ In addition, Verdross argued that if a host state that breached the provisions of these types of agreements made changes to or cancelled such agreements unilaterally (including not only unilateral cancellation of agreements but also unilateral revisions to such agreements), the host state would be responsible due to its relationship with the foreign entity, based on the host country’s breach of the agreement in itself, and not the infringement of the property right of the foreign enterprise that arose as a result of the unilateral action.¹⁴

Next, P. Weil argued for the internationalization of agreements. According to Weil, so-called economic development agreements, of which agreements to develop natural resources are representative and which have substantial significance for a host state’s economic development, are the new components of international law that are distinct from treaties, as agreements with their legally binding force under the international legal order.¹⁵ A foreign enterprise, party to such agreement, may be acknowledged as a subject of international law on a limited basis, only in relation to the interpretation, application, and implementation of the agreement; if the host state revises or cancels the agreement unilaterally, the host state will directly be liable to the foreign enterprise.¹⁶

Verdross’s and Weil’s positions differed in their theoretical reasoning in relation to the basis of legally binding force of the agreements, but they had the following three points in common: (1) the subject of the breach of agreements should generally not be limited to unilateral cancellation of agreements but should also include unilateral revisions thereto; (2) the issue should not be based on the infringement of property rights that arose as a result of the unilateral action – the breach of the agreement by the host country is problematic in itself; and (3) the problem should be based on not the responsibility of the host state sought by the foreign enterprise’s home state (state responsibility under traditional international law), but rather what the host state’s responsibility should be based on the relationship with respect to the foreign enterprise.

Contrary to the foregoing, while the Soviet Union and Latin American countries’ interwar position has been continued in developing countries and socialist countries, the thinking acknowledging the legality of a unilateral cancellation of an agreement by a host state under general international law pursuant to a new legal construction appears to be gaining ground for a targeted limited scope, namely transnational development of natural resources. The concept of permanent sovereignty over natural resources (abbreviated to “permanent sovereignty”), which has taken form and developed mainly through an accumulation of resolutions by the General Assembly of the United Nations, defined unilateral cancellation of an agreement by a host state as being the host state’s exercising of its permanent sovereignty and therefore lawful measures based on the basic principles of international law. Simultaneously, the concept of permanent sovereignty raised the possibility of there being no room for a foreign enterprise or its home state to initiate claims based on the violation of international law in view of the acknowledged lawfulness of the unilateral cancellation of an agreement; including the principles that (1) any dispute arising from the unilateral cancellation would be finally resolved by the host state’s domestic court and that (2) the host state would have the final, exclusive discretionary power over the compensation amount and the payment method.¹⁷

Section 1.1.3 Problems of the current research

In view of the preceding, the following three positions are currently asserted with respect to the issue as to the lawfulness of a unilateral cancellation by a host state of an agreement to develop natural resources under international law: (1) the position that certain restrictions should be imposed pursuant to traditional rules of international law, including a host state’s state responsibility related to respecting the property rights of foreigners; (2) the position based on the issue of a host state’s responsibility for a breach of agreement due to its relationship with the foreign enterprise; and (3) the position that, as a general rule, denies a host state’s liability under international law pursuant to the permanent sovereignty concept. These three positions are in direct conflict with one another. On a separate note, as mentioned at the beginning of this chapter, it can only be said that the impasse reached by this conflict has a double meaning. First, the positions argue mutually exclusive principles regarding the same subject measures, unilateral cancellation of agreements by a host state, and a resolution to this conflict is currently unforeseeable. The problem, however, lies not only in the fact that the principles are in conflict with each other. An even more serious issue is that a theoretical framework for properly understanding the situation wherein both sides assert mutually exclusive principles and contend that their position is legal under general international law and for clarifying the legal significance thereof has not yet been established.¹⁸

Second, an even more serious problem is that the majority of the dispute settlements do not follow any of the conflicting positions. In other words, for the most part, none of the positions were used as guidelines in actual dispute settlements. According to the author’s knowledge, although there have been 243 cases to date where a host country unilaterally breached an agreement,¹⁹ among these, there were only 227 cases where the content of the final dispute settlement could be ascertained. From these 227 cases, the disputes for 175 cases (almost 80 percent) were finally resolved by the agreement being revised after negotiations between the parties, the host state and the foreign enterprise, and a new cooperative relationship was established as a result. These types of settlement of nationalization disputes by revising agreements did not assert any of the principles based on any of the conflicting positions.

Section 1.2 Reasons behind the impasse and finding a way beyond it

What are the reasons for the conventional positions related to the legality of a unilateral cancellation of an agreement by a host country under international law to have reached a dual-meaning impasse? Furthermore, what actions are necessary to find a way beyond this impasse?

Section 1.2.1 First action to overcome the impasse

The first aspect of the impasse is, in short, identifying the reasons for not being able to find a way beyond the impasse based on a clear theoretical foundation, namely: (1) the inherent theoretical reasons and actual reasons behind transnational development of natural resources; and (2) the general reasons related to demonstrating the lawfulness of the principles under general international law.

To start, as the inherent reasons in this field, theoretically, the legal relationship between the parties in cross-border development of natural resources presents the phenomenological distinction of being unable to apply fully the traditional precepts of either international law or national law, when the dual theory is presumed. Transnational development of natural resources is a relatively new field, and in this regard, the business for development of natural resources is managed as joint ventures based on agreements between a host state and a foreign enterprise. Considering this situation in a conventional sense, it is difficult to apply either the international law system or that of national law comprehensively and exclusively. This fact is distinctly shown...