Joe Tirado* 
Garrigues, London

​Cristóbal Sarralde*
Garrigues, Santiago de Chile​​​​​​​

During the last few years we have seen how several countries in Latin America have suffered social, political and economic crisis, which were only made worse by the Covid-19 pandemic. This upheaval has led these countries to undertake political and legal changes that have generated uncertainty in the market, especially among foreign investors who are concerned about the possibility that their investments could be affected both physically as well as legally. 

In 2021 Colombia saw violent demonstrations due to social unease which resulted in damage to the country’s infrastructure. In Peru mining activities were severely impacted by workers unions’ protests. Both these situations posed a real risk of material danger to foreign investments. 

As for potential legal threats, both Mexico and Chile have undertaken steps to modify their respective political constitutions and, in general, their legal systems in relation to several production activities, which in turn could legally affect investments. In the case of Mexico, during the last few years a series of constitutional reforms have been approved. Last year, the President of Mexico promoted many legal reforms as well as a constitutional reform project to radically modify the power generation sector, with all the effects that implies regarding foreign investments. Chile is also in the process of redrafting its constitution. The Constitutional Convention elected for this purpose has recently presented a draft constitution which contains modifications to, among others, property rights, natural resources and environmental regulations. 

Faced with such changing circumstances, among many others currently taking place in the region, the so called "Full Protection and Security Standard” contained in most free trade agreements and bilateral investment treaties (“BITs”) becomes of greater relevance and importance.

What is the Full Protection and Security Standard? 

The Full Protection and Security Standard obligates the host State to take all the necessary measures to protect the security of the investments made by a foreign investor. 

The protection relates not only to acts or conduct that may result from the actions of state bodies, but also from the actions of non-state actors, including private parties. These actions may include civil disturbance, violence or use of force where the damage can be inflicted by either private parties, or a state force, such as the army or the police. 
Although the treaties that include this principle use several formulations, such as those that refer to “total”, “full and complete”, “(more) constant” or “continuing” security and protection, arbitration tribunals have held that these semantic variations do not change the interpretation that must be given to this standard. 

Regarding the level of diligence expected of the State in enforcing this standard, arbitral jurisprudence does not impose a strict standard of responsibility. Instead, one must evaluate if the State acted with the due diligence to prevent the damage, for the purpose of fully complying with its obligations of protection and security. 

Scope of the Full Protection and Security Standard 

The scope of application of the Full Protection and Security Standard remains controversial. The traditional understanding was that the scope of application was limited to the physical damage of investments only. Recent cases, however, indicate that the standard has evolved – at least in the eyes of some tribunals– to include a guarantee of protection and legal and regulatory stability. 

The main cases in this area are Asian Agricultural Products Limited v. Democratic Socialist Republic of Sri Lanka (“AAPL v. Sri Lanka”, ICSID case N° ARB/87/3) and Azurix Corp. v. Argentine Republic (“Azurix”, ICSID case N° ARB/01/12), which offer a useful perspective through which to examine the evolution of the Full Protection and Security Standard. 

AAPL v. Sri Lanka was the first case to consider the scope of the Full Protection and Security Standard in the award issued in 1990. The claim in AAPL v. Sri Lanka was based on the investment made by AAPL, a Sri Lankan producer of shrimp. After AAPL’s investment, the government security forces destroyed the shrimping farm of the producer during a military action against the local rebels that were allegedly operating in the farm or close to it. AAPL claimed that during this security operation it suffered the total loss of its investment and requested USD 8 million in damages due to the violation of the Full Protection and Security Standard of the United Kingdom and Sri Lanka BIT. 

Aside from the divergent factual accounts of what happened, AAPL and Sri Lanka also had different interpretations of the Full Protection and Security Standard of the BIT. AAPL argued that the obligation of Full Protection and Security under the treaty implied a “strict or absolute responsibility”. Sri Lanka adopted a decidedly different position, arguing that the standard “requires the due diligence by the States and a reasonable justification for any destruction of property, but does not impose a strict responsibility”. 

In AAPL, the Tribunal concluded that the Full Protection and Security Standard was not equivalent to a standard of objective responsibility, but only required due diligence on behalf of the State. In this sense, applying the Full Protection and Security Standard, the Tribunal held that the key question was not who destroyed the property, but whether the State was capable of preventing the destruction. The Tribunal held that: 

• “The adjudication of the State’s responsibility has to be undertaken by determining whether governmental forces were capable, under the prevailing circumstances, to provide adequate protection that could have prevented the destructions from taking place totally or partially”. (Section 85(d) of the award- ICSID Review page 563).

The Tribunal concluded that the Government forces should have taken additional measures to protect the physical integrity of AAPL’s investment, and that their breach generated the responsibility of the State. The Tribunal also held that Sri Lanka had: 

• “[v]iolated its due diligence obligation which requires undertaking all the possible measures that could be reasonably expected to prevent the eventual occurrence of killings and property destruction”. (Section 85 (b) of the award- ICSID Review page 562).

In the 2006 Azurix decision the Tribunal ruled for the first time that the Full Protection and Security Standard extended further than only physical security. Through its reasoned and extensive analysis the Tribunal held that the standard also covered legal security and certainty. 

Azurix was an American company that won a bid for a 30-year concession to distribute drinking water and provide sewage water treatment in the Province of Buenos Aires. Azurix claimed that in the years after the award of the concession, the Province took a number of measures that damaged their investment. Those measures included interfering with the tariff system in such a way that the claimant could not increase its earnings; breaching its obligation of completing the required infrastructure repairs to provide the service, which caused an outburst of algae; incentivizing clients to refuse to pay their water bills; and, finally, rescinding the concession based on a an alleged lack of purveyance of services after Azurix’s affiliate in Argentina was forced to declare bankruptcy. 

Although Azurix did not directly claim that Argentina had breached the Full Protection and Security Standard, it claimed Argentina’s breach of providing a stable legal and regulatory environment. 

The Tribunal in Azurix considered that a stable legal and regulatory environment was included within the scope of the Full Protection and Security Standard and found that the standard extended further than physical protection and could be infringed even if there is no physical violence or damages. It held as follows:

• “(…) full protection and security was understood to go beyond protection and security ensured by the police. It is not only a matter of physical security; the stability afforded by a secure investment environment is as important from an investor’s point of view. (…) when the terms ‘protection and security’ are qualified by ‘full’ and no other adjective or explanation, they extend, in their ordinary meaning, the content of this standard beyond physical security”. (Section 408 of the award, page 146)

Many tribunals have later adopted the reasoning contained in Azurix, when they have ruled that the Full Protection and Security Standard extends to the protection against damages that are not only physical but also legal, such as lack of legal stability. 

For instance, in 2008 the Tribunal in Biwater v. Tanzania (ICSID case N° ARB/05/22), held:

• “The Arbitral Tribunal adheres to the Azurix holding that when the terms ‘protection’ and ‘security’ are qualified by ‘full’, the content of the standard may extend to matters other than physical security. It implies a State’s guarantee of stability in a secure environment, both physical, commercial and legal. It would in the Arbitral Tribunal’s view be unduly artificial to confine the notion of “full security” only to one aspect of security, particularly in light of the use of this term in a BIT, directed at the protection of commercial and financial investments”. (Section 729 of the award, page 216)

The Tribunal in Frontier Petroleum Services Ltd. v. The Czech Republic (UNCITRAL case, award dated November 12th, 2010), which also cited the Azurix decision, reached a similar conclusion, clarifying that the standard includes legal security which means a stable legal framework for foreign investment as well as effective means of reparation in the event that an investment is damaged. It held that:

• “(…) it is apparent that the duty of protection and security extends to providing a legal framework that offers legal protection to investors -including both substantive provisions to protect investments and appropriate procedures that enable investors to vindicate their rights”. (Section 263 of the award, page 88).

And, in 2007 the Tribunal in Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic (“Vivendi”, ICSID case number ARB/97/3) also reached a general conclusion that extends the Full Protection and Security Standard further than the plain physical security:

• “Thus protection and full security (sometimes full protection and security) can apply to more than physical security of an investor or its property, because either could be subject to harassment without being physically harmed or seized”. (Section 7.4.17 of the award, page 208-209).

Concluding comments

Although tribunals have maintained the criteria that independent from how the Full Protection and Security Standard is formulated in the treaties within which it is contained, the responsibility of the States is not strict, but rather what must be assessed is whether they have complied with the due diligence to protect the investments. We have seen how the scope of the standard has evolved to cover physical damage to investment as well as legal stability and certainty. It will remain to be seen whether the legislative changes described above in place like Mexico and Chile or the social upheavals seen in Peru and Colombia, for example, may form the basis for more breach of the Full Protection and Security Standard claims in the future.
 

* Joe Tirado is a Partner and Co-Head of International Arbitration and ADR based in London. Cristóbal Sarralde is a Principal Associate based in Santiago de Chile.