5. Protection of investment

The conditions faced by investors, both when they establish and in their on-going operations, are only part of the overall investment environment. The protection of ownership, contracts, intellectual property and other rights extended to investors by domestic legislation, combined with effective enforcement mechanisms, is an important pillar of a sound investment climate. When procedures for making and enforcing contracts are overly bureaucratic and cumbersome, or when contract and other disputes cannot be resolved in a timely and cost-effective manner, investors may restrict their activities and foreign investors may refrain from engaging in the country. As a result, providing protection for investors and offering reliable and efficient enforcement procedures or alternative dispute resolution mechanisms are fundamental for markets to function properly and investors to be confident to place assets.

Uruguay's domestic legal framework provides protection for investors consistent with an open and modern policy regime for investment. This framework reflects the gradual adoption of global best practices and the country's economic opening. As an effective judicial system is an important pre-condition for the promotion of investments and the country's development, Uruguay has also taken a number of steps to streamline the workings of its judiciary, including by rationalising the courts’ network, deploying modern information technologies, and developing tools to ensure the integrity and transparency of the judiciary. Uruguay has also increasingly made available alternative dispute resolution mechanisms for resolving commercial and investment disputes. As a result, the performance of the justice system has improved significantly in recent years.

Rights or procedures established under international law can reinforce or complement guarantees extended to certain investors by domestic legislation. In practice, such rights are often established in investment treaties and associated international arrangements. Although most issues addressed in treaties and multilateral conventions are also covered in domestic legislation, international law based guarantees are not always redundant. Rights established under domestic law can be abrogated or altered by the legislator or authorities of the host state within certain limits, while rights or protections afforded by international law are less at the disposition of the host state, and can only be amended through more onerous procedures. This feature of protections afforded by international law, along with adjudication mechanisms that are more protected from potential interference from host states, contributes to the perception that investment treaties have a role to play in strengthening investor confidence, especially in countries with weak governance. That being said, countries can be successful in attracting international investment without the use of investment treaties.

Protection of ownership and other economic and civil rights has long been enshrined in the Uruguayan legal tradition, dating back to the first Constitution in 1830 (see Annex 3).1 In addition, domestic legislation clearly defines property rights and regulations on acquisition, benefits, and use of property. Laws equally apply to Uruguayan and foreign investors and there is no discriminatory or more favourable treatment of foreign investors. Foreign entities incorporated under Uruguayan law are treated as Uruguayan legal persons and thus may acquire property without restriction. Investors are free to transfer profits abroad and to repatriate any invested capital. Expropriation rules apply equally to domestic and foreign investments.

The right to expropriate is an undisputed prerogative of sovereign states, safeguarding their ability to pursue legitimate interests. In Uruguay, the right of ownership is guaranteed under the Constitution and may be restricted, or acquired, by law, subject to compensation equal to the market value. Ownership rights may be exceptionally restricted for necessity or public interest purposes (Article 32 of the Constitution). In addition, Law 3.958 (enacted on 28 March 1912 and still applicable) provides several additional guarantees regarding expropriation based on national interest: it clarifies the typologies of assets subject to expropriation, the associated conditions and procedures, and the rules for calculating the amount of compensation.

The granting and protection of intellectual property rights (IPRs), e.g. through patents, trademarks, is another important component of any policy aiming at attracting investment. Protection of IP rights also fosters development and innovation: It is widely acknowledged that a well-functioning and balanced IP system is key to promoting innovation and creativity, which are the main drivers of economic development of knowledge-based economies (OECD, 2011; WIPO, 2016). The protection of intellectual property rights also results in better protection of consumers, who buy reliable products, and as such promotes positive contributions by enterprises to consumer interests as recommended by the OECD Guidelines.

In Uruguay, the role of intellectual property as a lever of economic growth and a driver of scientific, cultural and social progress has been recognised by the Constitution. Article 33 establishes that intellectual labour and the rights of authors, inventors, or artists be acknowledged and protected by law. The main legal instruments that define the process for protecting and enforcing IPRs include the Act on Patents and Designs (17.164 of 1999), the Trademark Act (17.011 of 1998), and the Act on Copyrights (9.739 of 1937 and its successive modifications by Act 17.616 of 2003 and 17.805 of 2004. Uruguay is a member of the World Intellectual Property Organisation (WIPO) and a signatory of all the most important international treaties in the field, including the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) under the World Trade Organisation (WTO), the Paris Convention on Industrial Property, the Berne Convention for the Protection of Literary and Artistic Works, the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organisations, both the WCT (WIPO Copyright Treaty) and the WPPT (WIPO Performances and Phonograms Treaty), as well as of the main regional ones (Inter-American Convention on the Rights of the Author in Literary, Scientific and Artistic Works of 1947, Protocol on Uniformity of Powers of Attorney which are to be Utilised Abroad of 1941, and General Inter-American Convention for Trade Mark and Commercial Protection of 1930). In 2019, Uruguayan Parliament also approved the ratification of the Singapore Treaty on the Law on Trademarks of 2006, raising the protection for copyrighted works and related rights from 50 to 70 years.

The central body responsible for granting rights and coordinating the national IP rights system in Uruguay is the National Directorate for Industrial Property in the Ministry of Industry, Energy and Mining (MIEM-DNPI). The National Intellectual Property Network responsible for raising awareness about the role of IPRs and promoting the use of existing instruments was established in 2008. The Network groups government institutions, industry associations, and knowledge institutions. Since 2015, MIEM-DNPI has led the Network. Table 5.1 provides an overview of patent and trademark applications in Uruguay in the 2016-18 period.

Business consider that the patent-granting process is sometimes unnecessarily slow in Uruguay. According to WIPO statistics, the delays for first office action and final office decision (120 and 144 months, respectively) are indeed longer than for similar countries such as Costa Rica (54 and 60), Estonia (4.5 and 24.5), or Turkey (3.6 and 17.4). Nonetheless, differences between national legislations, as well as in terms of size and population between Uruguay and its peers, make it difficult to compare the delays in obtaining a registry. To increase efficiency, MIEM-DNPI is using information technologies both for the filing and processing of applications and for the accessibility of its databases (e.g. an online form for filing trademark and patent applications and an online database for trademarks and patents accessible worldwide).

Enforcement rules are the procedural complement of substantive protection. Uruguayan law provides for administrative, civil and criminal sanctions for IPR infringement. The enforcement system is comprised of MIEM-DNPI, the Copyright Council, Customs, prosecutors, the police, and civil and criminal courts. Yet, currently there are no IP specialised courts and civil litigation is resolved by Civil Courts, which translates into longer processing times for civil proceedings (EU, 2018). As elsewhere in the world, enforcement of IPRs is also an ongoing challenge. Trading partners have expressed some concerns with regards to IP enforcement and consider it important to closely monitor developments. The European Commission has included Uruguay in a category of medium-risk countries that also includes Israel, Kuwait, Paraguay, South Africa, and the United Arab Emirates.2 The country is considered a transit gateway for trade in optical, photographic and medical equipment (EC, 2018). The Office of the U.S. Trade Representative (USTR) has acknowledged improvements in the quality of IPRs protection and level of enforcement and removed Uruguay from its Special 301 Watch List in 2006 and from the Notorious Markets Report in 2015. In USTR’s Special 301 List submissions, the Consortium for Common Food Names, HBO Latin America, and the Trademark Working Group all raised some concerns related to Uruguay (USTR, 2018).

Business access to a well-functioning contract enforcement and dispute settlement mechanisms can help increase predictability and certainty in commercial and investment activities. The national justice system has in this regard a fundamental role to play as underlined in a range of policy tools, literature and research, including from the OECD.3 In the case of Uruguay, its efficient functioning – in particular relative to the region – has proven fundamental for the competitiveness and development of the economy.

In Uruguay, judicial power is vested in regular and specialised courts. Regular courts are municipal courts, county courts and the Supreme Court, Uruguay's highest judicial instance. While there are specialised courts for administrative matters and misdemeanours, commercial courts are limited to bankruptcies, settlements and tenders. Higher organisms (the Supreme Court of Justice and the Appeal Tribunals) have adopted the collegiate system and the monocratic system operates the lower organisms (Courts and Peace Courts4), i.e. a court composed of one judge.

The four major codes have been modernised over time. In particular, in 1989 a general procedural code (Código General del Proceso, CGP, Law 15.982) entered into force and marked the transition from a solely written regime to a mostly oral one (Pereira Campos, 2018). The CGP, that rapidly became the continental benchmark, was intended as a unitary code, valid in all justice areas;5 although the labour process became autonomous in 2009 (Law 18.572, amended by Law 18.847). A major reform also occurred in 2013, as Law No. 19.090 intervened to strengthen the principles and institutions of the mixed proceedings by hearings.

The various reforms have achieved, by and large, their objectives. The burden on judges has diminished, the rate of attendance (by judges, lawyers and the parties) has increased, and the duration of civil cases has been reduced over time. Procedures have been simplified and automated using information and communications technology (ICT), resulting in improved public access and transparency. ICT skills have become part of the in-service training curricula of magistrates in support of greater use of electronic communication in litigation and other proceedings.

As a result, the performance of the justice system has improved significantly over time. Uruguay now has rates of case efficiency for civil, commercial, administrative and other cases comparable with best-performing OECD countries. Important progress has also been made in reducing pending cases, which had plagued the judiciary for many years. In just three years (2013-15), the delay in settling first-instance courts in civil, commercial, and enforcement cases was trimmed by almost two months (from 21 initially), but the progress subsequently diminished.

Overall, in international and regional comparison, the judicial system in Uruguay typically ranks well above average. The results from the World Justice Project have been mentioned already. In another report by the Barómetro de las Américas (Proyecto de Opinión Pública de América Latina, Lapop), Uruguay is the country in Latin America where the trust in the judiciary is the highest.6 Still, despite one of the strongest positions in the region (only after Costa Rica with 49%), in 2018 only 39% of the population had trust in the judiciary. Likewise, according to the World Bank's Doing Business report, contract enforcement in domestic courts is an area where Uruguay fares modestly, ranking 100th out of 190 economies, due in particular to bad scores for court automation (1, versus 2.3 in OECD countries) and court structure and proceedings (2, versus 3.6) (World Bank, 2018a). Finally, perception surveys among the population reflect a preoccupation with growing levels of insecurity and criminal activity, which may place further demands on the judicial system (Corporación Latinobarómetro, 2018).

Encouraging out-of-court settlements has been another priority of the Uruguayan government (Poder Judicial, 2004). Alternative dispute resolution (ADR) schemes have been seen by the authorities as an additional tool to cope with the under-performing judiciary, in particular with regards to small-value commercial cases. Different voluntary mediation or conciliation schemes cover all domains, including commercial, employment, and administrative disputes. The track-record of ADR mechanisms is relatively positive, in particular with the creation of 17 Centros de Mediación (six in Montevideo, of which one is specialised in under-age criminal offenders, and 11 in Ciudad de la Costa, Las Piedras, Pando, Florida, Maldonado, San José de Mayo, Salto, Paysandú, Guichón, Rocha, and Mercedes).

Uruguay has long recognised the institution of arbitration as a valid dispute resolution mechanism in its general procedural legislation.7 The International Procedural Law Treaty was approved in 1889, when Montevideo hosted the first South American Arbitration Congress. In 2018, the Permanent Arbitration Court signed an agreement to make Uruguay one of its host countries.

The 1988 procedural code (the General Procedure Code or “GPC”) included a specific chapter on arbitration and 2013 amendments brought a number of improvements to the field of commercial arbitration.8 Congress passed the Arbitration Act (Nº 19.636) in mid-2018, almost 14 years after the Executive first sent a draft bill. The Act largely incorporates the 1985 UNCITRAL Model Law on International Commercial Arbitration, with some adjustments that reflect the country’s procedural regulations, long-standing judicial practices and private international law principles. The Act applies, as such, to disputes with an international element – i.e. those where at least one of the parties is a foreign person or legal entity –if the seat is in Uruguay. In addition to domestic arbitration, the Act addresses recognition and enforcement of arbitration rulings, jurisdictional matters and procedures. Once an arbitration decision has been reached, the decision is executed by court order. Arbitration rulings have the force of a final judgment, but can be appealed.

The Center for Mediation and Arbitration-the Court for International Arbitration for MERCOSUR (Centro de Conciliación y Arbitraje, Corte de Arbitraje Internacional para el MERCOSUR, CCA-CAI) is the main arbitration institution in Uruguay. It is managed by the Montevideo Trade Exchange and was established in 1853. Arbitration proceedings at CCA-CAI are governed by the 1958 New York Convention, the 1975 Convención Interamericana sobre Arbitraje Comercial Internacional (CIDIP-I) and the 1979 Convención Interamericana sobre Eficacia Extraterritorial de las Sentencias y Laudos Arbitrales Extranjeros (CIDIP-II), as well as the 1998 MERCOSUR agreements.9 In addition, the legal basis for mediation has long been established in the Uruguayan Constitution.10

Mediation can be conducted in all regular and specialised first and second instance courts in all stages of the proceedings, including during the appeal proceedings. Mediation can also be carried out outside of courts by various mediation centres established at professional associations. Mediation with selected mediators can be conducted outside of these centres. Mediation is initiated on a proposal by one party involved in a dispute accepted by the other party, by a joint motion of both parties, or a proposal by a third party (e.g. a judge in a court proceeding). The procedure for completing mediation is flexible (i.e. according to the Uruguayan authorities, no formal time limits apply upon receipt of the acceptation of the proposal for its launch).

Despite the ample availability of out-of-court methods of dispute resolution, in practice arbitration is primarily used by large companies in international disputes. As far as mediation is concerned, its use in commercial and civil matters also falls short of expectations. While dealing with a different sets of disputes – principally complaints of the civil society against business– the establishment of an NCP (discussed in Chapter 8) can also support the strengthening of an out-of-court mediation and settlement system.

Like many countries in the world, Uruguay has taken on international obligations to offer foreign investors specific treatment in international investment agreements (referred to as investment treaties or IIAs), most often in the form of bilateral investment treaties (BITs).11 These treaties provide stand-alone protections and guarantees to covered investors, in addition to and independently from protections afforded by domestic law. Investment treaties grant these protections only for covered foreign investors as defined in each individual treaty. Domestic investors are in principle not covered by this regime, unless they structure their investment in a fashion that makes them appear as foreign-owned for the purpose of the treaty.

On substance, investment treaties typically guarantee covered investments relative treatment standards of non-discrimination – most prominently most-favoured nation (MFN) treatment and national treatment (NT) – as well as absolute standards such as protection against “expropriation without compensation” and “fair and equitable treatment” (FET), which do not necessarily have equivalents in protections offered under domestic law. Furthermore, investment treaties typically give covered investors access to investor-state dispute settlement (ISDS) mechanisms to seek damages in cases where they claim the host state has infringed any of these rights; again, domestic law does not typically provide for damages beyond very narrowly defined situations, while it is the default remedy in almost all investment treaties.12

The reasons why States have concluded such investment treaties since the late 1950s are debated as part of a recent broad reconsideration of these arrangements in some countries. It is generally held that one of the main reasons that motivated certain countries to conclude investment treaties was their hope to attract foreign investment; capital exporting countries are thought to value these treaties among others to provide additional protections to enterprises operating from their soil – assumptions that are increasingly questioned by a growing strand of empirical literature on the drivers of investment treaty proliferation.13 Uruguay’s past investment treaty policies and practice are in many respects similar to what is observed in many other countries in the world.

Uruguay started concluding investment treaties after its return to democracy in 1985. Within around 30 years, between 1987 and 2019, Uruguay concluded BITs or Preferential Trade Agreements (PTAs) with investment chapters with 34 jurisdictions, predominantly during the second half of the 1980s and in the 1990s. Since then the negotiations strategy has changed – a prior analysis of the country’s commercial objectives and investors’ interests are taken into account before negotiations are being launched. As such, this has resulted in a more selective and gradual process of negotiations. In particular, Uruguay’s more recent negotiations focused on adding treaties with large Asian economies and replacing some older treaties.

In addition to bilateral agreements, Uruguay signed the Intra-MERCOSUR Investment Protocol on Cooperation and Facilitation with its MERCOSUR partners Argentina, Brazil and Paraguay in 2017; the Protocol was not in force for Uruguay and Brazil as of January 2020. Also, treaties between the four MERCOSUR members and the European Union as well as with the EFTA Members were successfully concluded in 2019. These agreements include provisions on market access, trade and sustainable development, transparency, intellectual property; and investment liberalisation issues are treated within the services and establishment chapters

As a result of these developments, Uruguay had investment treaty relationships with 32 jurisdictions in effect as of mid-November 2019 (see Figure 5.2).

Uruguay has concluded investment treaties with a broad variety of partners on all continents, including large and small and advanced and developing economies. This has led to sizable coverage of its inward and outward FDI stock: as of mid-November 2019, around 65% of Uruguay’s inward and 60% of its outward stock were covered by a treaty in force (see Figure 5.3). Three treaties, all concluded around 1990 and one successfully revised in 201014, cover relationships in which sizable foreign direct investment – inward and outward – takes place: for inward FDI stock, these are the treaties with Spain and Chile, while the treaties with Spain and the Netherlands cover the bulk of Uruguay’s outward FDI stock. The entry into force of the MERCOSUR agreement would add significant coverage of FDI, given the importance of the investment relationship with Uruguay’s neighbours Argentina and Brazil.15

Government documents reveal that over two decades beginning in the mid-1990s, Uruguay had harboured ambitions – or was approached by other countries – to conclude a much broader network of treaties.16 Had these plans fully materialised, it would have almost doubled the number of Uruguay’s treaty relationships. The Uruguayan government has stated in the course of this review that it was open to add additional treaties to expand and diversify the sources of its inward FDI. In this context, it is important to consider as potential treaty partners countries that, by virtue of geographical and business considerations, offer realistic prospects of flourishing inward investment.

Uruguay has made its IIAs or related Protocols available to treaty users both through a specific ministerial website and through the official gazette website in Spanish language.17 The websites feature official information on the existence of investment treaties, additional protocols, and their in-force status. However, no consolidated version of amended treaties is currently made available, and for countries with which Uruguay has more than one treaty, the relationship among those treaties is not clearly established.

Uruguay’s BITs testify to the fast pace at which Uruguay concluded its earlier investment agreements in the 1990s. Such earlier treaties show many of the features associated with “first-generation” treaties concluded by many countries globally in the 1990s, notably a lack of clarity of the meaning of key provisions, absence of rules that most would consider to be essential and that are ubiquitous in a domestic law context, and generous protections favourable to covered investors. At the time, there were serious limitations on the governments’ capacity to anticipate the implications and the future interpretation of treaty language.

When agreeing on the treaties, Uruguay has generally accepted the treaty models of its partners, according to information that Uruguayan authorities provided in the course of this review. This approach is common across smaller or emerging economies but can led to some heterogeneity in treaty designs and provisions. Diversity of provisions in IIAs tends to broaden countries’ exposure to claims, especially in connection with unspecified most favoured nation (MFN) provisions as currently interpreted by many arbitral tribunals. As Uruguay’s treaties systematically grant MFN and many treaties do not specify how MFN is to be interpreted and applied, arbitral tribunals are likely to allow investors to use a treaty that contains the provisions that are most favourable to its specific situation and claim. In this scenario, diversity of treaty provisions tends to harm a defendant state.18 Most recently, Uruguay has proposed treaty language to its negotiating partners (e.g. China, New Zealand and Colombia) and is ensuring that its key interests are reflected in the negotiated treaty language.

Some of the most central provisions that determine Uruguay’s exposure to treaty-based claims and the balance between investor protection and the right to regulate include the “fair and equitable” treatment (FET) clause and the design of investor-state dispute settlement mechanism included in its IIAs.

Fair and equitable treatment is at the centre of investment treaty claims and treaty policy; it has been invoked in a great number of cases, and tribunals have often found a breach of this standard.19 Provisions providing generally for FET have been considered or applied by tribunals in a broad range of claims and there have been widely different interpretations by some arbitral tribunals. Some interpretations of FET are seen as having a significant impact on the right to regulate.20

Almost all Uruguayan treaties provide FET to covered foreign investors, the Intra-MERCOSUR Protocol, not yet in force for Uruguay, being the exception.

Up to 2003, Uruguay’s treaties included unspecified clauses, i.e. clauses without any further clarifications or conditions attached, while in the following period a majority of treaties refer to a more specific standard. Uruguay’s recent treaties tend to clarify the original intent of the contracting parties, either by linking FET to the minimum standard of treatment under customary international law, as in the Mexico-Uruguay FTA (2003), or by expressly defining the standard’s content through a list of elements, as for example in Korea-Uruguay BIT (2009). This latter design of FET clauses echoes a growing trend to specify FET provisions in treaties (see Box 5.1 for more details).

Given the centrality of FET to many investor claims and the uncertainty of its meaning, combined with the unspecified design in many of Uruguay’s treaties, clarification of government intent could improve predictability for both governments and investors for the treaties that contain unspecified FET clauses. Uruguay may wish to clarify the scope of the FET clause with its treaty partners, including through a renegotiation or amendment; indeed, Uruguayan authorities consulted in this Review confirmed this has been the stance of the government. Yet, it is subject to the willingness to negotiate and eventual approval of the partner country, with which Uruguay wishes to enter an agreement.

Starting in treaties concluded in the 1970s, mechanisms were included for covered investors to bring claims directly against host governments – ISDS mechanisms – for alleged violations of treaty obligations. Such mechanisms had become a near-universal feature of investment treaties by the late 1980s, and OECD research shows that well over 90% of the current global IIA stock provides access to ISDS (Pohl et al., 2012).

With the exceptions of treaties concluded with Saudi Arabia and with its MERCOSUR partners, Uruguay’s treaties contain an ISDS mechanism that offers investor-state arbitration (ISA) in addition to or as an alternative to domestic remedies. ISA generally involves ad hoc arbitration tribunals selected for each case in an approach derived from international commercial arbitration (Gaukrodger and Gordon, 2012). The disputing parties and arbitration institutions can be involved in the process to select arbitrators. The emphasis is on finality and there are no appeals; arbitrators’ decisions are subject only to very limited review.

Proponents of ISA contend that it provides a forum to settle disputes that is independent from both the host state and the investor. However, ISA has been increasingly challenged in recent years for reasons related to the dominance of private lawyers in the pool of investment arbitrators, concerns about inconsistent outcomes, and alleged conflicts of interest and economic incentives among arbitrators and arbitration institutions (Gaukrodger and Gordon, 2012: 43, 58; Gaukrodger, 2017).

Despite some improvement over time, ISA mechanisms in investment treaties are typically barely regulated (Pohl et al., 2012: 39; Gaukrodger and Gordon, 2012) – in stark contrast to procedural rules observed in domestic adjudication in advanced systems of law. Some issues that the treaty does not explicitly address may be regulated by the arbitration rules, but as rules designed for commercial disputes between private parties, they may need adjustment in light of the nature of investment claims. Other issues remain unregulated if the treaties refrain from doing so. For example, in the absence of treaty provisions, ISDS is often rather opaque and lacks a statute of limitations.

When compared to the global average, Uruguay’s treaties feature somewhat greater regulatory depth of conditions for and procedures of ISDS. This may reflect the situation that, being a small economy, Uruguay is often a “rules-taker” from larger and more developed negotiating partners, from which it wishes to attract investment. There is, however, a degree of divergence in ISDS provisions within Uruguay’s treaty set. For example, only a quarter of Uruguay’s 32 treaties which currently provide for ISA have statutes of limitation – clauses that prevent that claims can be brought long after alleged treaty breaches. Statutes of limitation are standard in domestic law systems and have become more and more common in IIAs concluded since 2005. In addition, only 23 of Uruguay’s treaties specify on which legal basis tribunals decide cases brought before them, but do not establish a consistent list.

In addition, about half (24) of Uruguay’s treaties that provide for ISA offer investors two or even three (the Mexico-Uruguay BIT (1999)) different arbitration fora to choose from. This generous offer allows investors to bring claims under rules that are most beneficial for their specific case. In particular, most of Uruguay’s treaties offer access to both ICSID and ad hoc tribunals under UNCITRAL rules, which have different regimes in relation to the composition of tribunals, transparency and enforcement.21

Uruguay has some practical experience with treaty-use as a base of investor claims; by mid-November 2019, six claims against Uruguay based on an investment treaty had become known, with the first known claim against Uruguay being filed in 1998. Two treaty claims involving Uruguayan investors against Uruguay’s treaty partners – Ecuador and recently Venezuela – are publicly known.

Uruguay has so far been relatively successful in defending against claims. Even before ISDS claims have arisen, the government reports to have reflected on possible changes to its IIA negotiation strategy and treaty language to limit undue exposure to ISDS claims’ risk. This reflection, together with a high IIA coverage of potential sources of FDI reached by Uruguay, has led to slower negotiation pace of new treaties in the recent years, described earlier.

Uruguay has a rich past history of reforming its judiciary and a good success rate to bring these reforms into concrete results. The authorities have notably actively worked on the reduction of court backlogs, on digitalisation of the courts and on judicial integrity and professionalism. Overall the changes to the judicial framework go in the right direction: the performance of the justice system has improved significantly and most recent business surveys indicate that the judiciary is perceived as one of the biggest assets when it comes to business conditions in Uruguay compared to other countries in the region.

Against this background, efforts to facilitate arbitration and mediation as mechanisms to settle disputes with the overall purpose of unburdening the judiciary in Uruguay are welcome.

To further improve its dispute settlement mechanisms, Uruguay could consider establishing institutional dispute avoidance mechanisms, such as offering ombudsman services to investors to try to resolve problems before they lead to disputes. Experiences in countries such as Ukraine, which has been operating a Business Ombudsman Council since 2014, or Korea, with its Foreign Investment Ombudsman, suggest that alternative processes may have a potentially powerful role to play (Nicolas et al., 2013; Wehrlé, 2015).

First, such mechanisms can be a stopgap measure to compensate for the shortcomings of the judiciary, and can address issues at an early stage before they become a dispute. They further have the scope to provide quick solutions to companies’ grievances by providing businesses with a direct line of communication with a public authority at a high level, by mitigating fears of retaliation by allowing them to report these to an institution that is independent from the agencies they complain about, and by empowering them to become partners with public authorities in advancing their rights and business interests through their involvement in the dispute resolution process. The common denominator among such mechanisms is that they act as redress mechanisms. Their main purpose is to find resolutions of grievances outside the judicial process for reasons such as time and cost saving, informality, and a desire to avoid confrontation (Wehrlé, 2015).

Such mechanisms, which wish to serve the purpose of offering a less formal and quicker way of resolving disputes, should nevertheless not be seen as a substitute for a well-functioning national judiciary (OECD, 2015). While high burdens and backlogs may be reduced through measures aimed at speeding up the resolution of small disputes and the usage of alternative case resolution, a more efficient judiciary can only be achieved by addressing a number of inter-related components such as further simplifying and rationalising regulations dealing with procedural and administrative matters; providing more intensive training for judges in emerging areas of law; improving further the administration of courts; etc. Reforming the judiciary is a challenging undertaking for many governments, including for other middle-income emerging economies.

Uruguay’s current investment treaties cover a substantial share of inward and outward investment to and from Uruguay. This scenario entails exposure to potential claims, especially given that the bulk of the treaty-protected stock is covered by Uruguay’s older treaties that follow outdated design features with unspecific clauses, and are diverse in design and language. To better balance investor protection with the government’s right to regulate, Uruguay could pursue several courses of action.

International practice shows that investment protection standards in older IIAs have often been relatively vague. This vagueness gives investment arbitrators broad discretion to interpret and thereby determine the scope of protection they provide. Many provisions in Uruguay’s IIAs – beyond those discussed in some greater detail here – lack specific language to indicate government intent as to their scope and meaning. The government has confirmed that increasing clarity, specificity and consistency in treaty language is its policy objective, and is reflected in its negotiation strategy. Far from signing new treaties, such treaties are negotiated – and the reflection that underpins this process partially explains the slowdown in entering new treaties.

More specific language in investment protection provisions would lead to increased predictability and thereby benefit both investors and governments. The specifications reflect policy choices and also play a crucial role in the quest for balance between investor protection and governments’ right to regulate. In some cases, the specifications may affect the degree of protection for covered foreign investors. Policy-makers need to carefully consider the costs and benefits of these choices, and their potential impact on foreign investors and domestic investors, as well as on the host state’s legitimate regulatory interests and its exposure to investment claims.

Uruguay has a recent and, for the moment, short history of amending its treaties, and the two amendments (with the Czech Republic and Romania) appear to have been suggested by Uruguay’s treaty partners to prepare their EU Membership. These amendments have not led to a more homogeneous treaty set, nor did they bring into place designs that would today be considered sound treaty policy. None of the amendments addressed shortcomings in ISDS provisions or clarified the scope of what FET treatment requires, for instance. The replacement of the treaty with Australia will remedy the situation for this relationship. In turn, the coexistence of the two vastly different treaties in the relationship with Mexico brings exposure without commensurate benefits for Uruguay or Mexico.

Given Uruguay’s investment treaty features, Uruguay might wish to consider reviewing its existing agreements to ensure that they reflect government intent and sound practices emerging in recent treaty policy. Review and renegotiation of investment treaties takes time, as Uruguay will have experienced during the review of some of its treaties. Also, the option to terminate treaties is not available at all times, as investment treaties’ clauses on their temporal validity often place limits on exit (see Box 5.2).

About a third of Uruguay’s treaties contain a design of the temporal validity that delay possibilities for unilateral exit from the treaty, a proportion that corresponds roughly to the prevalence of this feature in the global sample. This delay results from automatic extensions for fixed periods. Uruguay is bound by at least one treaty until 2029, and even if it wanted to unilaterally withdraw from the IIA system at the earliest possible occasion, effects of its past treaty policy could bind Uruguay until 2045 (Figure 5.5).

Unilateral exit from treaties is not the only option to address perceived shortcomings. Possibilities for exit may, however, influence how amendments or agreed exits can be negotiated. Uruguay may want, hence, to consider whether the current design of its temporal validity provisions serve its interests and consider adjusting its treaty policy in the context of amendments or renegotiation of existing treaties or in negotiations of future treaties.

Lastly, IIAs are starting to contain language or specific provisions aiming to promote and ensure responsible business conduct (RBC), discussed in more detail in Chapter 9. For example, a survey of treaty provisions in over 2000 IIAs shows that while only 12% of the surveyed IIAs contain references to RBC and/or sustainable development, the frequency of inclusion increases rapidly (OECD, 2014). Broadly speaking, treaties make reference to RBC and sustainable development standards in 9 distinct categories, including preamble references, clauses that discourage lowering standards or require compliance with domestic law, and obligations to have specific legislation in place. Countries differ in their approaches to inclusion of references to RBC, and it is an evolving practice in Uruguay as well (see Box 5.3 and Chapter 9 for a wider discussion of RBC policies in Uruguay).

References

Corporación Latinobarómetro (2018), Informe 2018.

EC (2018), Report on the protection and enforcement of intellectual property rights in third Countries, SWD(2018) 47 final, European Commission.

Gaukrodger, D. (2017), “Adjudicator Compensation Systems and Investor-State Dispute Settlement”, OECD Working Papers on International Investment, No. 2017/05, OECD Publishing, Paris, https://doi.org/10.1787/c2890bd5-en.

Gaukrodger, D. and K. Gordon (2012), "Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community", OECD Working Papers on International Investment, No. 2012/03, OECD Publishing, Paris, https://doi.org/10.1787/5k46b1r85j6f-en.

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Notes

← 1. Initially the right to private property was described as “sacred and unlimited”, with unspecified exceptions for “public usage”; in 1918, the “public utility” provision was added, which is much broader than “out of necessity”; and in 1934, the term “sacred” was dropped.

← 2. Priority countries are China (1), Argentina, India, Indonesia, Russia, Turkey and Ukraine (2) and Brazil, Ecuador, Malaysia, Mexico, Philippines, Thailand and the United States (3).

← 3. See e.g., the OECD Policy Framework for Investment: 2015 Edition, OECD Publishing, Paris, 2015, and "The Economics of Civil Justice: New Cross-Country Data and Empirics", OECD Economics Department Working Papers, No. 1060, August 2013, ECO/WKP(2013)52.

← 4. In Montevideo, the peace court is called conciliation court.

← 5. El nuevo proceso por audiencias se aplicó a las materias civil, comercial, laboral, familia, arrendamientos, tributario, contencioso de reparación patrimonial contra el Estado, inconstitucionalidad de la ley, etc. 1

← 6. Data kindly provided by Elizabeth J. Zechmeister, Director, Latin American Public Opinion Project (LAPOP), Vanderbilt University.

← 7. Noiana Marigo, María Julia Milesi, Santiago Gatica, María Paz Lestido (Freshfields Bruckhaus Deringer), “Tailwind for Arbitration in Uruguay: the Model Law Finally Reaches Safe Harbor”, www.arbitrationblog.kluwerarbitration.com/2018/10/28/tailwind-arbitration-uruguay-model-law-finally-reaches-safe-harbor, October 28, 2018.

← 8. They included the express recognition, for the first time, of the kompetenz-kompetenz principle (art. 475.2), regulation on preliminary measures granted by a court before arbitration is commenced (art. 488) and the inclusion of some additional grounds for the annulment of an award (art. 499). However, under the GPC, which is still applicable to domestic arbitration in Uruguay, an arbitration clause is not sufficient to submit a dispute to arbitration, and a submission agreement (or compromise) is required once a dispute has arisen. If one of the parties refuses to execute a submission agreement, the other party can request specific performance to a judicial court. This pitfall, coupled with the fact that it is relatively inexpensive to submit a dispute to Uruguayan courts, has traditionally undermined the appeal of arbitration as a dispute resolution mechanism for Uruguayan parties. Other aspects of the GPC’s provisions on arbitration are also troublesome. For example, arbitrators must ensure that the parties had a chance to conciliate the dispute before commencing the arbitration proceeding (art. 490). Failure to do so could cause subsequent proceedings to be void. Moreover, by default arbitration proceedings will be decided ex aequo et bono unless the parties expressly state in the submission agreement that the dispute will be decided by the application of the law (art. 477).

← 9. Acuerdos sobre Arbitraje Comercial Internacional (CMC/Decs. 3 y 4/98); Acuerdo sobre Arbitraje Comercial Internacional entre el Mercosur, Bolivia y Chile (CMC/Dec. 4/98); and Acuerdo sobre Arbitraje Comercial Internacional del Mercosur (CMC/Dec. 3/98).

← 10. The 1830 Constitution already provided that judges could seek conciliation of lawsuits that a party intends to begin with some exceptions (Art. 107). With some minor changes, this provision has been maintained in more recent versions of the Constitution, including the current one, which states that no suit in a civil matter may be brought without first showing that settlement has been attempted before a Justice of the Peace, save for those exceptions established (Art. 255).

← 11. The term IIA covers both stand-alone treaties and investment chapters in broader free trade agreements.

← 12. See for more details on this and other differences between domestic systems and the treatment under investment treaties Gaukrodger, D. and K. Gordon (2012), “Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community”, OECD Working Papers on International Investment, No. 2012/03, https://doi.org/10.1787/5k46b1r85j6f-en.

← 13. Pohl, J. (2018), “Societal benefits and costs of International Investment Agreements: A critical review of aspects and available empirical evidence”, OECD Working Papers on International Investment, No. 2018/01, www.oe.cd/2ff.

← 14. The treaty with Chile was renegotiated in 2009, and signed in 2010. It is an example of a treaty originally signed in 1990s that Uruguay successfully renegotiated to provide greater clarity, transparency and precision in treaty language.

← 15. The coverage is assessed based on FDI stock data (2017 or, where 2017 data was unavailable, data of preceding years, giving preference to more recent data, based on data released by OECD and IMF) and IIAs in force in November 2019. For several reasons, reported FDI stock data is not a valid measure for assets that benefit from treaty protections (see Pohl, J. (2018), “Societal benefits and costs of International Investment Agreements: A critical review of aspects and available empirical evidence”, OECD Working Papers on International Investment, No. 2018/01, www.oe.cd/2ff for details) and available data does not allow to determine ultimate ownership of assets. The proportions of FDI stock data may nonetheless serve as a rough approximation of stock held by immediate investing country to illustrate features and outcomes of Uruguay’s past investment treaty policies.

← 16. See, e.g. the document made available online by the Ministry of Economy and Finance: www.mef.gub.uy/innovaportal/file/5328/1/proteccion_de_inversiones.pdf

← 17. A list of authoritative treaty texts in Spanish can be retrieved from the website of the Ministry of Economy (specifically Asesoría de Política Comercial, APC), available at: http://www.apc.mef.gub.uy/726/3/areas/acuerdos-de-inversiones.html

← 18. A number of arbitral tribunals, beginning with Maffezini v. Spain, Case No. ARB/97/7, have interpreted the MFN clause in a fashion that allowed claimants to import substantive treaty standards from other treaties concluded by the respondent country, despite vigorous objections of such interpretation by certain countries, especially NAFTA-countries. Treaties concluded by the European Union, among others, now clarify the meaning of MFN clauses explicitly, e.g. CETA art. 8.7(4). See OECD (2018), “Background information on treaty shopping” in: Treaty shopping and tools for treaty reform – Agenda and Conference material

← 19. According to case analysis covering the period 1997–mid-2019 and made publicly available by UNCTAD, out of 582 cases for which data on alleged breaches was available, investors worldwide have invoked the standard in 482 claims, or 82%, and tribunals have found a breach in 134 cases.

← 20. See Gaukrodger, D. (2017), “Addressing the balance of interests in investment treaties: The limitation of fair and equitable treatment provisions to the minimum standard of treatment under customary international law”, OECD Working Papers on International Investment, No. 2017/03, https://doi.org/10.1787/0a62034b-en.

← 21. The international community has developed specific institutions and rules to enforce arbitration awards. Uruguay has adhered to the New York Convention and is a contracting state to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) which has over 150 state parties. The ICSID Convention addresses both the arbitral proceedings and the enforcement of awards rendered under these proceedings. The recognition and enforcement of ICSID awards is governed by the ICSID Convention itself rather than the New York Convention. The ICSID regime is thus more self-contained in this respect. In particular, ICSID awards cannot be reviewed by national courts of the country in which their enforcement is sought. In contrast, the New York Convention permits national courts to refuse the enforcement of awards for, inter alia, reasons of public policy.

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