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An Introduction to International Investment Law

Part I (General Overview of Sources of Law); and


Part II (Indonesian Investment Protection)

Theodoor Bakker, FCIArb


Foreign Counsel of Ali Budiardjo, Nugroho, Reksodiputro

For Asian Law Students Association, Local Chapter of University of Indonesia


Depok, 25 October 2016
Presentation Outline

I. General Overview of Sources of Law


II. Indonesian Investment Protection

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

Domestic law;

State contracts;

International Investment Agreements (IIAs), including


Bilateral Investment Treaties (BITs) and Investment
Chapters in Foreign Trade Agreements (FTAs)

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

Domestic Law

Every country has domestic laws governing the


acceptance of foreign investment;
These laws can require that foreign investment be
approved in sensitive sectors or prohibit foreign direct
investment in particular sectors;
These general laws are supplemented by contracts
between the state and a foreign investor (state
contracts), which are used to induce investment;
Indonesia: Law No. 25 of 2007 regarding Investment (to
be explained in Part II)

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

State Contracts

State contracts may be governed by domestic law and


courts, or they may be internationalized through
arbitration clauses and choice of law clauses.
State contracts may also include stabilization clauses,
which:
Prohibit host states from taking certain actions, including
regulatory action (freezing clauses)
Require compensation in the event of certain actions

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

International Investment Agreements (IIAs)

Primarily bilateral (approximately 2,600 BITs regulating


investment relations)
Other than bilateral: regional and multilateral treaties
The function is to protect assets of nationals when
invested abroad
Investors have standing to bring claims against states
under international law
Claims are settled through arbitration (ICSID, UNCITRAL
etc)
Awards are enforced under domestic law

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

Rationales for IIAs

Capital exporting countries seek IIAs to secure the


assets of their nationals, when invested abroad.
IIAs are often sought with countries perceived to have
weak legal systems so that foreign investors can
bypass domestic courts.
For countries hosting foreign investment (host states) an
IIA may make their countries more attractive to foreign
investors.
Many developing countries were also forced to enter IIAs
as a condition precedent for obtaining loans from the
World Bank during the Washington Consensus

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

Bilateral Investment Treaties (As one of Form of IIAs)

What is a BIT?

An agreement between two states establishing the terms, conditions


and protections for investments by one party in the territory of the other
Investors from the contracting states may rely on the protective terms of
the BIT without entering into a further contractual relationship with the
host state
Investors from the contracting states have access to the remedies
specified in the BIT and investors may directly claim for breach by the
host state

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

IIAs involving Indonesia (Source: UNCTAD, 2016)

Bilateral Investment Treaties (BITs)


71 BITs with various other countries, 30 of which are in force.
Treaties with Investment Provisions (TIPs)
17 TIPs. Examples:
- ASEAN Comprehensive Investment Agreement (2009);
- ASEAN-Japan FTA (2008);
- ASEAN-EU Cooperation Agreement (1980).

Investment Related Instruments (IRIs). Examples:


- Doha Declaration;
- New York Convention;
- ICSID Convention;
- General Agreement on Trade in Service (GATS)
- Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS).

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

Standards of Protection Provided Under IIAs

Protection against expropriation or nationalization


Guarantee of Fair and Equitable Treatment
National Treatment
Most-Favored Nation (MFN) Treatment
Compliance with commitments to investors (umbrella
clauses)
Dispute resolution: international arbitration, often under
auspices of International Centre for Settlement of
Investment Disputes (ICSID)

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

1. Expropriation and Nationalization

Typically, it is permissible to expropriate for a public


purpose, provided that the act is non- discriminatory and
compensation is paid.
Different clauses are interpreted in a similar manner.
Two types of expropriation: direct and indirect.
Direct expropriation occurs if title to property is taken or
property is seized physically.
Indirect expropriation: if government action tantamount
or equivalent to expropriation occurs.

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

Indirect Expropriation (1)

Investors of a contracting party shall not deprived of their


investments nor subject to measures having effect equivalent
to such deprivation;
Not like the direct, but have the same effect;
Step 1 Is there substantial/ significant interference with the
investment? Government has substantial interference:
Control of the investment
Duration of interference: permanent or temporary?
Management
Interference in terms of overall investment or a distinct part
Whether state has taken proceeds

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

Indirect Expropriation (2)

Step 2 Other factors for consideration


If substantial / significant interference does exist
consider:
The character of a measure. Does the measure has the
character of expropriation?
The reasonable expectations of the investor, e.g.: relating to the
issuance of licenses.
Proportionality to the objective in light of interference with
property rights
Whether a measure is a valid exercise of sovereign police
powers to regulate in the public interest

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

2. Fair and Equitable Treatment

FET clauses differ significantly in their terms and


interpretation.
Some clauses import a standard from customary
international law.
Other clauses set out an autonomous treaty-based
standard of treatment.
Treaty based standards tend to protect investments and
investors to a greater degree than custom (although
there is a debate about whether the customary standard
has evolved).

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

Customary International Law

Customary rules are particularly significant where the relations between


the host state and investor are not subject to investment treaty;

Where certain treaties are being applied to a particular investment dispute,


these treaties often do not regulate all specific questions arising in the
particular dispute. Thus, in cases of gap, investment treaty rules are
supplemented by rules of customary law;

In addition, certain investment treaties explicitly refer to international


customary law. Article 1105(1) of the NAFTA (regarding minimum standard
of treatment) provides that Each 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.

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

International Minimum Standard

Neer claim The treatment of an alien, in order to constitute an


international delinquency, should amount to an outrage, to bad faith, to
willful neglect of duty, or to an insufficiency of government action so
far short of international standards that every reasonable and impartial
man would readily recognize its insufficiency.

Glamis an act must be sufficiently egregious and shocking a gross


denial of justice, manifest arbitrariness, blatant unfairness, a complete
lack of due process, evident discrimination, or a manifest lack of
reasonsso as to fall below accepted international standards.

Others argue that the international minimum standard has evolved over
time and is converging with the autonomous standard.

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

3. National Treatment

National treatment clauses typically protect investments


and investors from treatment less favorably than
domestic investors or investments in like circumstances.
A different approach is taken to national treatment under
WTO law.
Like circumstances involves analysis of
1. Who the investors / investments are to compare?
2. Whether there is a justification for the less favorable
treatment?

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

4. Most-Favored Nation (MFN) Clause

Typically, MFN clauses prohibit less favorable treatment of investors


or investments than investors or investments from the territory of a
third state.
MFN clauses are often invoked to require higher standards of
treatment found in other bilateral treaties to which a host state is a
party.
Issues: many BITs do not include general exception. No exception,
no police power for the nation.
How to clean up the existing BITs?
- Multinational agreement: extends the foreign investor protection
- More countries that are bound under multinational agreements

Ali Budiardjo, Nugroho, Reksodiputro


I. General Overview of Sources of Law

5. Umbrella Clauses

Umbrella clauses require host states to respect


commitments made to investors.
These clauses make contracts and other commitments
part of the applicable law of the arbitration.

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection
A. Indonesian Law No. 25 of 2007 regarding
Investment (Investment Law)

Gateway Requirements

Investors can be foreign (or domestic) individuals or business


entities (Art. 1(4) Investment Law)

Investments means direct investments in all sectors in the


territory of the Republic of Indonesia. Indirect and portfolio
investments are specifically excluded (Art. 2 Investment Law)

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection
Investment Law
Protection: Favourable Investment Conditions

Investment Law admits direct foreign investment


Principles of legal certainty and transparency acknowledged (Art
3(a-b) and 4(2)(b) Investment Law)
Government of Indonesia (GoI) to adopt major investment
policies:
- to encourage creation of a national business climate conducive to
investments in order to strengthen the competitiveness of the
national economy;
- to expedite the increase of investments (Art. 4(1) Investment Law)

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection
Investment Law
Protection: Fair and Equitable Treatment (FET)

The Investment Law broadly applies principles of fairness


throughout the foreword and the legislative body,

The principle of efficiency in justice is elucidated to emphasise


its role in promoting a fair forum for investment

Equitable treatment of foreign investment acknowledged (Art.


4(2)(a) and Art. 6 Investment Law)

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection
Investment Law
Protection: National Treatment

Non-discriminatory service treatment between domestic


investors and foreign investors (Art. 3(1)(d) Investment Law)

However, some provisions expressly apply to foreign investors,


who are defined as foreign nationals, foreign business entities,
and/or foreign governments that invest within Indonesian territory
- Closure of business fields for foreign investors (Art. 12(2)
Investment Law);

- Provision of facilities (Art. 23(3) Investment Law)

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection
Investment Law
Protection: Most Favoured Nation (MFN)

Non-discriminatory service treatment between investors of one


foreign country and investors of another foreign country (Art.
3(1)(d) Investment Law)

Equitable treatment precludes the GoI from according more


favourable treatment to certain investors based on their country
of origin

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection
Investment Law
Protection: Freedom to Transfer Funds

Investors are granted the right to transfer and repatriate in


foreign currencies funds of various origin, i.e. capital, profits,
bank interest, dividend, and other income, funds that are needed
for investment financing, etc. (Art. 8 Investment Law)

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection
Investment Law
Protection: Expropriation and Compensation

GoI is prohibited from taking measures to nationalize or expropriate


the propriety rights of investors, unless provided by law (Art. 7(1)
Investment Law)
Market value compensation established in accordance with the
internationally accepted methods adopted by an independent
appraiser named by the Parties (Art. 7(2) Elucidation Investment
Law)
Arbitration provision: if both parties fail to reach an agreement of
compensation or damages... the settlement thereof shall go to
arbitration (Art. 7(3) Investment Law)

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection
Investment Law
Alternative Dispute Resolution

Settlement of dispute through international arbitration as agreed


between parties (Art. 32(4) Investment Law). Written agreement
is not specifically required

Indonesia and the Netherlands have ratified the Washington


Convention: arbitration through ICSID

However, the Washington Convention requires written consent


between the parties regarding international arbitration

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

B. Indonesian BITs with Other Countries

71 BITs with various other countries, 30 of which are in force (United


Nations Conference on Trade and Development or UNCTAD)

The terms of BITs with Indonesia usually provide for:


- Fair & equitable treatment of investors/investments;
- Most favorable treatment in certain areas;
- Free transfer of investment funds and profits;
- Protection from expropriation;
- Alternative dispute resolution.

Example: BIT between Australia and Indonesia (AI BIT), entry into
force: 29 July 1993.

Ali Budiardjo, Nugroho, Reksodiputro


AI BIT
Gateway Requirements (Art. 1(1) AI BIT)

Investor: nationals of one Contracting Party (i.e.: Australia, Indonesia).


Nationals: natural persons, legal persons
Investment: every kind of asset invested in the territory of the other
Contracting Party in conformity with the laws and regulations, including
but not exclusively:
(a) movable and immovable property as well as rights such as mortgages, privileges, and
guarantees and any other rights in rem in respect of every kind of asset;
(b) rights derived from shares, bonds or any other form of interest in companies or joint-
ventures of the other Contracting Party;
(c) claims to money or to any performance having a financial value;
(d) rights in the field of intellectual property, technical processes, goodwill and know how;
(e) business concessions and other rights conferred by law or under contract including
concessions to natural resources such as concessions to prospect explore, extract
and win natural resources.

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection
AI BIT
Promotion and Protection (Art 2 of AI BIT)

The AI BIT obliges the GoI to admit Australian investment and to


encourage and promote investments in its territory by investors of the
other Contracting Party within the framework of the nations laws,
regulations and investment policies;
The BIT does not prevent an investor of one Party from taking
advantage of the provisions of any applicable law, regulation or policy of
the other Contracting Party which are more favorable than the
provisions of the BIT.

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Protections Provided under AI BIT

1. Fair and Equitable Treatment (Article II, Para 2)


The AI BIT states that the Contracting Parties undertake:
to ensure fair and equitable treatment of investments;
Shall accord within its territory protection and security to investments and
shall not impair the management, maintenance, use, enjoyment or disposal
of investments.

2. Most Favored Nation (Article IV)


The Contracting Parties must treat investments or returns in its territory on a
basis no less favorable than that accorded to investments or returns of
investors of any third country;

Neither Party shall subject investors of the other Party to treatment less
favorable than that which it accords to investors of any third country (as
regards their management, use, enjoyment or disposal of investments or
returns, or any other activities associated with investments)

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Protections Provided under AI BIT

3. Compensation for Losses (Article V);


Compensation (or restitution, indemnification or other settlement) for
losses owing to war or other armed conflict, revolution, a state of
national emergency, revolt, insurrection, riot or other similar event in its
territory, no less favorable than that which it accords to investors of any
third country.

4. Freedom to Transfer Funds (Article VII)


Guarantee for transfer of funds
Transfer to be made:
- In a freely convertible currency;
- Without restriction;
- Without delay.

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Protections Provided under AI BIT

5. Protection from Expropriation and Compensation (Article VI of AI BIT)

Nationals shall not be directly or indirectly deprived of their investments not


shall their investments be subjected to nationalization, expropriation or any
measure with the equivalent effect of nationalization or expropriation
Exceptions, expropriation measures:
Taken for a public purpose related to the States internal needs under due
process of law
That are not discriminatory
That are not contrary to any undertaking given by the expropriator

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Protections Provided under AI BIT

5. Protection from Expropriation and Compensation (continued)


Compensation is calculated based on market value of the investment
immediately before the expropriation or impending expropriation
became public knowledge;

Where that value cannot be readily ascertained, the compensation


shall be determined in accordance with generally recognized
principles of valuation and equitable principles

Compensation is full, prompt, effective and made without delay.

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Settlement of Dispute Resolution (Article XI)

Seek to resolve through consultations and negotiations;


Submission of disputes:
- Competent judicial or administrative body of the Contracting Parties;
- to the International Centre for the Settlement of Investment Disputes
(ICSID")
If not contracting parties to ICSID Convention, submit it to arbitration under
the Arbitration Rules of the United Nations Commission on International
Trade Law (UNCITRAL);
The Contracting Parties shall consent in writing within 45 days of receiving
such a request from the investor;
If the parties to the dispute cannot agree whether conciliation or arbitration
is the more appropriate procedure, the investor affected shall have the right
to choose.

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Indonesian BITs

GoI intends not to renew its BITs which expired with other countries,
e.g.: with the Netherlands on 1 July 2015, France on 29 April 2015,
Italy on 25 June 2015, Switzerland on 9 April 2016);

Purported reason:
High profile cases in UNCITRAL arbitration, such as cases involving
(i) Karaha Bodas and Pertamina, (ii) Himpurna and PT PLN, (iii) PT
Newmont Nusa Tenggara against the GoI) and ICSID arbitration
(pending: claims submitted by Churchill Mining Plc of the UK and
Planet Mining Pty Ltd of Australia);

The GoI is preparing its new model BIT (published in UNCTAD


website)

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Post-Termination of BITs

Following termination, all new investments cannot rely on the


BIT protections;

Sunset provision: BITs generally continue to apply to all


investments made prior to date of termination for a further period
(10 or 15 years) from the date of effective termination;

Investments made or restructured prior to date of termination are


also protected under the BIT (and may also benefit from the
sunset provision).

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection
C. Other Regional/ Multilateral Treaties
(e.g.: ASEAN Comprehensive Investment Agreement)

Example: ASEAN Comprehensive Investment


Agreement;
Parties: ASEAN Member States (Indonesia, Malaysia,,
Singapore, Philippines, Thailand, Brunei, Cambodia,
Lao, Myanmar, and Vietnam);

In force since 29 March 2012.

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Protection Provided Under ACIA

1. National treatment
Investors must be treated in the same way as local investors
ASEAN Member States can make reservations relating to national treatment
(Art. 9 ACIA)
Indonesia made 35 reservations, i.e.:
- National treatment may not apply to any measures affecting land, property and
natural resources associated with land, including acquisition, ownership and
lease of land and property;
- Foreign investor investing in Indonesia must take the form of an Indonesian
limited liability company (Perseroan Terbatas or PT);
- Divestment requirement

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Protection Provided Under ACIA

2. Most Favoured Nation (MFN)


ASEAN investors are to be treated no less favourably than investors from outside the
ASEAN bloc (Art. 5(2) ACIA).

3. Freedom to Transfer Funds


Investor may freely and without delay conduct transfers relating to its investments into and out
of the territory of the ASEAN Member State where its investment is located;
Transfers can be made in a freely usable currency at the market rate of exchange at the time
of transfer;
In exceptional cases, ASEAN Member State may prevent or delay transfer of funds or impose
restrictions on any capital restrictions as a temporal measure (Art. 13 ACIA).

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Protection Provided Under ACIA

4. Protection: Expropriation and Compensation


Expropriation only if for public purposes, in a non-discrminatory
manner, effected investors provided with prompt, adequate and
effective compensation, in accordance with due process of law
An ASEAN Member State that expropriates an investment (either
directly or indirectly) is required to provide proper compensation to
the affected investor (Art. 14 ACIA)
The ACIA contains special rules for the qualification of a measure as
an indirect (or creeping) expropriation (Annex 2 ACIA)

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Protection Provided Under ACIA

4. Protection: Expropriation and Compensation (continued)


Compensation must meet the following criteria:
- Payment without delay;
- Payment of fair market value of the expropriated investment immediately
before or at the time when the expropriation was publicly announced or
occurred;
- Not reflect any change in value because the intended expropriation had
become known earlier;
- Fully realisable and freely transferable between ASEAN Member States

Exceptions, i.e. expropriation in accordance with domestic laws

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Protection Provided Under ACIA

5. Protection: Additional
Other non-discrimination measures (Art. 8 ACIA)
- ASEAN investors allowed to elect senior management, irrespective
of their nationalities, to manage their investments in ASEAN (Art. 8
ACIA);
- ASEAN Member States prohibited from imposing any performance
requirement (incorporation by reference of WTO Agreement on
Trade-Related Investment Measures or TRIMS)

Compensation in cases of war or strife (Art. 12 ACIA)

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

General Exceptions

General exceptions which permit ASEAN Member States to take measures


necessary to protect certain public interests
Necessary to protect public morals or to maintain public order
Necessary to protect human, animal or plant life or health
Necessary to secure compliance with laws or regulations which are not
inconsistent with the ACIA
Aimed at ensuring the equitable or effective imposition or collection of direct
taxes in respect of investments or investors of any ASEAN Member State
Imposed for the protection of national treasures of artistic,historic or
archeological value (Art. 17 ACIA)

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Dispute Resolution

ACIA provides a range of investor-state dispute resolution options


Alternative dispute resolution (mediation, conciliation, consultation
and negotiation)
National courts
International arbitration, including:
- Arbitration at the International Centre for Settlement of Investment
Disputes (ICSID), provided that host state is an ICSID member;
- Ad hoc arbitration under the Arbitration Rules of the UN Commission on
International Trade Law;
- Other agreed rules.

Ali Budiardjo, Nugroho, Reksodiputro


II. Indonesian Investment Protection

Other Multilateral Instruments

Multilateral Investment Treaties / Economic Partnership Agreements


(EPAs):
Indonesia-Japan Economic Partnership Agreement (in force since 2007)
Australia-New Zealand-ASEAN Free Trade Agreement (AANZFTA) (signed
in February 2009)
Indonesia-EU Partnership and Co-operation Agreement (PCA) (signed in
November 2009, Parties are now working towards a Comprehensive
Economic Partnership Agreement (CEPA))
Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-
CEPA) (negotiations commenced in Jakarta in September 2012).

Ali Budiardjo, Nugroho, Reksodiputro

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