Bridging the Gap between International Investment Law and the Environment 9789462743519, 9789462365872

This book addresses the topical question on how national and international environmental concerns could be adequately in

215 111 3MB

English Pages 540 Year 2015

Report DMCA / Copyright

DOWNLOAD PDF FILE

Recommend Papers

Bridging the Gap between International Investment Law and the Environment
 9789462743519, 9789462365872

  • 0 0 0
  • Like this paper and download? You can publish your own PDF file online for free in a few minutes! Sign Up
File loading please wait...
Citation preview

L e ga l P e r spe c t i ves f or G l oba l C ha l l enges

BRIDGING THE GAP BETWEEN INTERNATIONAL INVESTMENT LAW AND THE ENVIRONMENT

Yulia Levashova Tineke Lambooy Ige Dekker (Eds.)

Bridging the Gap between International Investment Law and the Environment

B RIDGING

THE G AP BETWEEN I NTERNATIONAL I NVESTMENT L AW AND THE E NVIRONMENT

YULIA LEVASHOVA, TINEKE LAMBOOY & IGE DEKKER (EDS.)

Published, sold and distributed by Eleven International Publishing. P.O. Box 85576 2508 CG The Hague The Netherlands Tel.: +31 70 33 070 33 Fax: +31 70 33 070 30 e-mail: [email protected] www.elevenpub.com Sold and distributed in USA and Canada International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213-3786, USA Tel.: 1-800-944-6190 (toll-free) Fax: +1-503-280-8832 [email protected] www.isbs.com Eleven International Publishing is an imprint of Boom uitgevers Den Haag.

ISBN 978-94-6236-587-2 ISBN 978-94-6094-351-9 (E-book) © 2016 The authors | Eleven International Publishing This publication is protected by international copyright law. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. Printed in The Netherlands on FSC paper

TABLE

OF

CONTENTS

List of Abbreviations

ix

List of Contributors

xiii

List of Cases

xv

Acknowledgements

xxix

Foreword Jorge Viñuales

xxxi

Bridging the Gap between International Investment Law and the Environment: Introduction Ige Dekker, Yulia Levashova, Tineke Lambooy and Aikatarini Argyrou Part I

International Investment Law and Environmental Issues: General Perspectives

Innovative Legal Solutions for Investment Law and Sustainable Development Challenges Marie-Claire Cordonier Segger

xxxv

1

1

Protecting the Investor and Protecting the Environment: Conflicting Objectives in International Investment Agreements Anna Joubin-Bret

3

2

Fair and Equitable Treatment and the Protection of the Environment: Recent Trends in Investment Treaties and Investment Cases Yulia Levashova

31

3

Addressing the Procedural Challenges of Environmental Litigation in the Context of Investor-State Arbitration James Harrison

53

4

International Responsibility of the State and International Responsibility of Juridical Persons for Environmental Damage: Where Do We Stand? Andrea Gattini

87

5

v

115

TABLE

OF

Part II

CONTENTS

Integrating Environmental Policies into International Investment Law: Specific Areas

Climate Change Policies and Foreign Investment: Some Salient Legal Issues Alessandra Asteriti

143

6

Bridging the Gap between International Investment Law and the Right of Access to Water Attila Tanzi

145

7

Investment Arbitration in the Nuclear Energy Sector: Environmental Protection versus Investor Protection James Fry and Odysseas Repousis

187

8

Integrating Environmental Law Principles and Objectives in EU Investment Policy: Challenges and Opportunities Angelos Dimopoulos

215

9

The Environmental Sustainability of the EU Investment Policy after Lisbon: Progressive International Law Developments Ottavio Quirico

247

10

Bilateral Investment Treaties from an Ecological Aspect: A Central and Eastern European Approach Marcel Szabó

273

11

289

12

Balancing Foreign Investment Protection and Environmental Protection under South African Bilateral Investment Treaties (BITs) Jim Pfumorodze and Muhammad De Gama

317

Part III

337

Environmental Challenges in Investment Disputes: Case-Studies

13

The Vattenfall v. Germany Disputes: Finding a Balance between Energy Investments and Public Concerns Francesca Romanin Jacur Standards of Our Own: Natural Resources Investment and the Protection of the Environment: Case Study: Oil and Gas Projects in Azerbaijan Felix Zaharia

339

14

vi

357

T ABLE

Foreign Direct Investments in the Mining Industry in Indonesia: Disputes Concerning Environmental Degradation and Pollution Tineke Lambooy, Iman Prihandono and Nurul Barizah

OF

C ONTENTS

15

383

16

Chevron-Texaco v. Ecuador: The Environmental Case within a Claim of Denial of Justice Blanca Gómez de la Torre

441

Part IV

465

Future Outlook

17

Future Outlook: Bridging Gaps between Environment and International Investment Law or Juxtaposing Different Topics? Gabriel Bottini and Martijn Scheltema

vii

467

LIST

OF

ABBREVIATIONS

AASA AAUs AIEs ALBA ANCOM ASEAN BEE BITs BSU CAFTA-DR CARIFORUM CAT CCP CDM CEPE CER CESCR CETA CF(D)I CFREU CFSP CJEU COMESA COP CoW CSR DDI DNAs DOEs ECJ ECOSOC EcPA ECT

Aguas Argentinas S.A Assigned Amounts Units Accredited Independent Entities Alternativa Bolivariana para la América Latina y El Caribe Andean Common Market Association of Southeast Asian Nations Black Economic Empowerment Bilateral Investment Treaties Behörde für Stadtentwicklung und Umwelt Dominican Republic - Central America Free Trade Agreement Forum of the Caribbean Group of African, Caribbean and Pacific States United Nations Convention against Torture Common Commercial Policy Kyoto Protocol – Clean Development Mechanism Corporacion Estatal Petrolera Ecuatoriana Certified Emission Reduction UN Committee on Economic, Social and Cultural Rights Comprehensive Economic and Trade Agreement Common Foreign (Direct) Investment Charter of Fundamental Rights of the European Union Common Foreign and Security Policy Court of Justice of the European Union Common Market for Eastern and Southern Africa Conference of Parties Contract of Work Corporate Social Responsibility Domestic Direct Investment Designated National Authorities Designated Operational Entities European Court of Justice UN Economic and Social Council Economic Partnership Agreements Energy Charter Treaty

ix

LIST

OF

ABBREVIATIONS

EMA EPA ERUs EU F(D)I FDI FET FI FIPAs FiT FTAs FTC GATS GATT GDP IACHR IBA IBRD ICESCR ICJ ICSID IET IFC IIAs ILC ILO IMC IMF IMO IPCC IPFSD ISDS ITIAs ITLOS JI JIEPA JISC JPOI

Environmental Management Act Environmental Protection Agency Emission Reduction Units European Union Foreign (Direct) Investment Foreign Direct Investment Fair and Equitable Treatment Foreign Investment Foreign Investment Protection Agreements Feed-in-Tariffs Free Trade Agreements Free Trade Commission General Agreement on Trade in Services General Agreement on Tariffs and Trade Gross Domestic Product Inter-American Commission on Human Rights International Bar Association International Bank for Reconstruction and Development/Worldbank UN International Covenant on Economic, Social and Cultural Rights International Court of Justice International Centre for the Settlement of Investment Disputes or International Convention for the Settlement of Investment Disputes International Emission Trading International Finance Corporation International Investment Agreements International Law Commission International Labor Organization Inter-Ministerial Committee International Monetary Fund International Maritime Organization Intergovernmental Panel on Climate Change International Policy Framework for Sustainable Development Investor-State Dispute Settlement International Trade and Investment Agreements International Tribunal for the Law of the Sea Joint Implementation Japan-Indonesia Economic Partnership Agreement JI’s Supervisory Committee Johannesburg Plan of Implementation

x

L IST

LDC LPCEP MAI MERCOSUR MFN MPRDA MNCs NAAEC NAFTA NALCA NEPA NGOs NIA NPPs NPT NT OECD PCA PCB PCIJ RICO Act RMUs SA SADC SDNY SEAs SIAs SIOs SOCAR TEU TFEU TTIP TPP UK UAE UN UNCITRAL UNCTAD

OF

A BBREVIATIONS

Least Developed Countries Law for Prevention and Control over the Environmental Pollution Multilateral Agreement on Investment Common Market of Southern Cone Most Favoured Nation Minerals and Petroleum Resources Development Act Multinational Companies North American Agreement on Environmental Cooperation North American Free Trade Agreement North American Labor Cooperation Agreement National Environmental Policy Act Non-Governmental Organizations National Interest Assessment Nuclear Power Plants Treaty on the Non-Proliferation of Nuclear Weapons National Treatment Organisation for Economic Co-operation and Development Permanent Court of Arbitration in The Hague Polychlorinated biphenyl Permanent Court of International Justice Racketeer Influenced and Corrupt Organizations Act Removal Units South Africa Southern African Development Community Southern District Court of New York Strategic Environmental Assessments Sustainability Impact Assessments Specific Investment Obligations State Oil Company of the Azerbaijan Republic Treaty on the European Union Treaty on the Functioning of the European Union Transatlantic Trade and Investment Partnership Trans-Pacific Partnership Agreement United Kingdom United Arab Emirates United Nations United Nations Commission on International Trade Law United Nations Conference on Trade and Development

xi

LIST

OF

ABBREVIATIONS

UNCSD UNECE UNEP UNFCCC UNGA UNHRC VCLT WCED WSSD WTO

United Nations Conference on Sustainable Development United Nations Economic Commission for Europe United Nations Environment Programme United Nations Framework Convention on Climate Change United Nations General Assembly United Nations Human Rights Council Vienna Convention on the Law of Treaties World Commission on the Environment and Development World Summit on Sustainable Development World Trade Organization

xii

LIST

OF

CONTRIBUTORS

Aikaterini Argyrou Alessandra Asteriti Nurul Barizah Gabriel Bottini Marie-Claire Cordonier Segger Ige Dekker Angelos Dimopoulos James D. Fry Andrea Gattini Blanca Gómez de la Torre James Harrison Anna Joubin-Bret Tineke Lambooy Yulia Levashova Muhammad Mustaqeem De Gama Jimcall Pfumorodze Iman Prihandono Ottavio Quirico Odysseas Repousis Francesca Romanin Jacur Martijn Scheltema Marcel Szabó Attila Tanzi Jorge E. Viñuales Felix Zaharia

Utrecht University University of Glasgow AirLangga University, Surabaya University of Buenos Aires International Development Law Organization Utrecht University Queen Mary University of London University of Hong Kong University of Padova Attorney General Office of Ecuador University of Edinburgh Avocat à la Cour Nyenrode Business University and Utrecht University Nyenrode Business University and Utrecht University University of Pretoria University of Botswana AirLangga University, Surabaya University of New England University of Hong Kong University of Milano Erasmus University Pázmány Péter Catholic University of Budapest University of Bologna University of Cambridge Espoo Convention Implementation Committee

xiii

LIST

OF

CASES

PERMANENT COURT

OF INTERNATIONAL JUSTICE

Oscar Chinn (United Kingdom v. Belgium), Judgment of 12 December 1934, 1934 PCIJ, Ser. A/B No. 63. INTERNATIONAL COURT

OF JUSTICE

Application of the Convention for the Prevention and Punishment of the Crime of Genocide (Bosnia-Herzegovina v. Serbia & Montenegro), Judgment of 11 July 1996, 1996 ICJ Rep., p. 595. Armed Activities on the Territory of the Congo (Democratic Republic of Congo v. Uganda 2005), Judgment of 19 December 2005, 2005 ICJ Rep., p. 168. Corfu Channel (United Kingdom v. Albania), Judgment of 9 April 1949 (Merits), 1949 ICJ Rep., p. 4. Gabčikovo-Nagymaros Project (Hungary v. Slovakia), Judgment of 25 September 1997, 1997 ICJ Rep., p. 7. Legality of the Threat or Use of Nuclear Weapons, Advisory Opinion of 8 July 1996, 1996 ICJ Rep., p. 226. Pulp Mills on the River Uruguay (Argentina v. Uruguay), Judgment of 20 April 2010, 2010 ICJ Rep., p. 14. Questions of Interpretation and Application of the 1971 Montreal Convention arising from the Aerial Incident at Lockerbie (Libyan Arab Jamahiriya v. United States of America), Judgment of 27 February 1998 (Preliminary Objections), 1998 ICJ Rep., 115. United States Diplomatic and Consular Staff in Tehran (United States of America v. Iran), Judgment of 24 May 1980, 1980 ICJ Rep., p. 3.

xv

LIST

OF

CASES

EUROPEAN COURT

OF JUSTICE

AETR (Commission v. Council), Case 22/70, Judgment of 31 March 1971, [1971] ECR 263. Arcelor SA v. European Parliament and Council, Case T-16/04, Judgment of 2 March 2010, [2010] ECR II-00211. ArcelorMittal Luxembourg SA v. Commission, and Commission v. ArcelorMittal Luxembourg SA and Others, Joined Cases C-201/09P and C-216/09P, Judgment of 29 March 2011, [2011] ECR I-02239. Commission v. Finland, Case C–118/07, Judgment of 19 November 2009 [2009] ECR I-10889. Commission v. Ireland (‘Mox Plant’), Case C-459/03, Judgment of 30 May 2006, [2006] ECR I-4635. Commission v. Spain, Case C-463/00, Judgment of 13 May 2003, [2003] ECR I-4612. Eugen Schmidberger, Internationale Transporte und Planzüge v. Republik österreich, Case C-112/00, Judgment of 12 June 2003 [2003] ECR I-565. Internationale Handelgesellschaft, Case 11/70, Judgment of 17 December 1970, [1970] ECR 1125. Kadi v. Council and Commission, Case T- 315/01, Judgment of 21 September 2005, [2005] ECR II-3649. Magdalena Vandeweghe and others v. Berufsgenossenschaft für die chemische Industrie, Case 130/73, Judgment of 27 November 1973, [1973] ECR 1329. Plantanol GmbH & Co v. Hauptzollamt Darmstad, Case C-201/08, Judgment of 10 September 2009, [2009] ECR 1-08343. Radio Telefis Eireann (RTE) and Independent Television Publications Ltd (ITP) v. Commission, Joined Cases 241/91P and 242/91P, Judgment of 6 April 1995, [1995] ECR I-743.

xvi

L IST EUROPEAN COURT

OF

OF

C ASES

HUMAN RIGHTS

James et al. v. United Kingdom, Application No. 8793/79, Judgment of 21 February 1986, Serie A, No. 98. INTERNATIONAL CRIMINAL TRIBUNAL

FOR THE FORMER

YUGOSLAVIA

Prosecutor v. Anto Furundžija, Case No. IT-95-17/1, Judgment, Trial Chamber II, 10 December 1998. INTERNATIONAL TRIBUNAL

FOR THE

LAW

OF THE

SEA

Southern Bluefin Tuna cases (New Zealand v. Japan, Australia v. Japan) Provisional Measures, Cases No. 3 & 4, Order of 27 August 1999, [1999] ITLOS Rep. WTO APPELLATE BODY REPORTS Australia – Apples from New Zealand, WT/DS367/AB/R adopted 17 December 2010. Canada – Renewable Energy and Canada – FIT Program, WT/DS412/AB/R and WT/ DS426/AB/R, adopted 24 May 2013. European Communities – Asbestos, WT/DS135/R and Add. 1, Panel Report as modified by the Appellate Body Report WT/DS135/AB/R, adopted 5 April 2001 European Communities – Hormones, WT/DS26/AB/R, adopted 13 February 1998. European Communities –Tariff Preferences, WT/DS246/AB/R, adopted 20 April 2004. Japan – Agricultural Products, WT/DS76/AB/R adopted 19 March 1999. United States – Continued Suspension of Obligations, WT/DS320/AB/R, adopted 14 November 2008. United States – Gambling and Betting Services, WT/DS285/AB/R, adopted 20 April 2005. United States – Lead and Bismuth II, WT/DS138/AB/R, adopted 7 June 2000.

xvii

LIST

OF

CASES

United States – Shrimp, WT/DS58/AB/R, adopted 6 November 1998. United States – Wool Shirts and Blouses, WT/DS33/AB/R, adopted 23 May 1997. US-IRAN CLAIMS TRIBUNAL Amoco International Finance Corporation v. Iran, No. 310-56-3, Award of 14 July 1987, 15 Iran-US CTR 189. Starret Housing Corporation v. Islamic Republic of Iran, No. 314-24-1, Award of 14 August 1987, 4 Iran-US CTR 122. INTERNATIONAL INVESTMENT ARBITRATION AWARDS

AND

DECISIONS

Achmea BV v. Slovak Republic, UNCITRAL, PCA Case No. 2008-13 (formerly Eureko BV v. Slovak Republic), Award on Jurisdiction, Arbitrability and Suspension of 26 October 2010. AES Summit Generation Limited and AES-Tisza Erőmű Kft. v. Hungary, ICSID Case No. ARB/07/22, Award of 23 September 2010. Aguas del Tunari, SA v. Bolivia, ICSID Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction of 21 October 2005. American Manufacturing and Trading, Inc. v. Zaire, ICSID Case N. ARB/93/1, Award of 21 February 1997. Antaris Solar GmbH et al v. the Czech Republic, ECT/UNCITRAL, Notice of Arbitration of 18 May 2013. Apotex Holdings v. United States, ICSID Case No. ARB(AF)/12/11, Procedural Order of 4 March 2013. Archer Daniels Midland Company and Tate & Lyle Ingredients Americas v. Mexico, ICSID Case No ARB(AF)/04/05, Award of 21 November 2007.

xviii

L IST

OF

C ASES

Asian Agricultural Products Limited (AAPL) v. Sri Lanka, ICSID Case No ARB/87/3, Award of 27 June 1990. Azurix Corp. v. Argentina, ICSID, Case No. ARB/01/12, Decision on Jurisdiction of 8 December 2003. Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Award of 14 July 2006. Biloune, et al. v. Ghana, UNCITRAL, Award on Jurisdiction and Liability of 27 October 1989. BIVAC BV v. Paraguay, ICSID Case No. ARB/07/9, Decision on Objections to Jurisdiction of 29 May 2009. Biwater Gauff (Tanzania) Limited v. Tanzania, ICSID Case No. ARB/05/22, Award of 24 July 2008. Cargill, Inc. v. Mexico, NAFTA, ICSID Case No. ARB/AF/05/2, Award 18 September 2009. Chemtura Corporation v. Canada, UNCITRAL, Award of 2 August 2010. Chevron Corporation and Texaco Petroleum Corporation v. Ecuador, PCA Case No. 200923, Procedural Order No. 8, 18 April 2011. Chevron Corporation and Texaco Petroleum Corporation v. Ecuador, PCA Case No. 200923, First Partial Award on Track 1, 17 September 2013. Chevron Corporation and Texaco Petroleum Corporation v. Ecuador, PCA Case No. 200923, Decision on Track 1B, 12 March 2015. Churchill Mining Plc v. Indonesia, ICSID Cases No. ARB/12/14 and 12/40, Decision on Jurisdiction of 24 February 2014. CME v. Czech Republic, UNCITRAL, Partial Award of 13 September 2001. CME v. Czech Republic, UNCITRAL, Final Award of 14 March 2003.

xix

LIST

OF

CASES

CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/08, Award of 12 May 2005. Compañia de Aguas del Aconquija SA and Vivendi Universal SA v. Argentina, ICSID Case No. ARB/97/3, Award of 20 August 2007. Compañia del Desarrollo de Santa Elena SA v. Costa Rica, ICSID Case No. ARB/96/1, Award of 17 February 2000. Continental Casualty Company v. Argentina, ICSID Case No. ARB/03/9, Award of 5 September 2008. Corn Products International, Inc v. Mexico, ICSID Case No. ARB(AF)/04/01, Decision on Responsibility of 15 January 2008. Duke Energy Electroquil Partners & Electroquil SA v. Ecuador, ICSID Case No. ARB/04/ 19, Award of 18 August 2008. Eastern Sugar BV (Netherlands) v. Czech Republic, SCC No. 088/2004, Partial Award of 27 March 2007. El Paso Energy International Company v. Argentina, ICSID Case No. ARB/03/15, Award of 31 October 2011. Emilio Agustín Maffezini v. Spain, ICSID Case No ARB/97/7, Decision on Objections to Jurisdiction of 25 January 2000. Enron Corporation and Ponderosa, LP v. Argentina, ICSID Case No ARB/01/3, Award of 22 May 2007. Ethyl Corporation v. Canada, NAFTA, UNCITRAL, Award on Jurisdiction of 24 June 1998. Eureko BV v. Poland, Ad Hoc Arbitration, Partial Award of 19 August 2005. EVN AG v. Republic of Bulgaria, ICSID Case No. ARB/13/17, Pending, Notice of Arbitration 19 June 2013.

xx

L IST

OF

C ASES

Gami Investments, Inc. v. Mexico, UNCITRAL, Final Award of 15 November 2004. Glamis Gold Ltd. v. United States, UNCITRAL, Award of 8 June 2009. Genin, Eastern Credit Limited, Inc. and A. S. Baltoil v. Estonia, ICSID Case No. ARB/99/2, Award of 25 June 2001. International Thunderbird Gaming Corporation v. Mexico, UNCITRAL, Award of 26 January 2006. Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award 28 March 2011. LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc. v. Argentina, ICSID Case No. ARB/02/1, Decision of Liability of 3 October 2006. Loewen Group, Inc. and Raymond L. Loewen v. United States, ICSID Case No. ARB(AF)/ 98/3 26, Award of 26 June 2003. Marvin Roy Feldman Karpa v. Mexico, ICSID Case No. ARB(AF)/99/1, Award of 16 December 2002. Merrill & Ring Forestry L.P. v. Canada, UNCITRAL, ICSID Administered Case, Award of 31 March 2010. Metalclad Corporation v. Mexico, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000. Methanex Corporation v. United States, UNCITRAL, Final Award on Jurisdiction and Merits of 3 August 2005. Mondev International Ltd. v. United States, ICSID Case No. ARB(AF)/99/2, Award of 11 October 2002. MTD Equity Sdn Bhd and MTD Chile SA v. Chile, ICSID Case No ARB/01/07, Award of 25 May 2004. Naftrac Ltd (Cyprus) v. National Environmental Investment Agency of Ukraine, PCA (Optional Environmental Rules), Award of 4 December 2012.

xxi

LIST

OF

CASES

Nusa Tenggara Partnership B.V. and PT Newmont Nusa Tenggara v. Indonesia, ICSID Case No. ARB/14/15, Order of the Secretary-General Taking Note of the Discontinuance of the Proceeding, 29 August 2014. Nykomb Synergetics Technology Holding AB v. Latvia, SCC Case No 118/2001, Award of 16 December 2003. Occidental Exploration and Production Co v. Ecuador, ICSID Case No ARB/06/11, Final Award of 5 October 2012. Pantechniki SA Contractors & Engineers v. Albania, ICSID Case No. ARB/07/21, Award of 30 July 2009. Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8, Award of 11 September 2007. Paushok and others v. The Government of Mongolia, UNCITRAL, Award on Jurisdiction and Liability of 28 April 2011. Phoenix Action Ltd v. Czech Republic, ICSID Case No. ARB/06/5, Award of 15 April 2009. Piero Foresti, Laura de Carli et al. v. South Africa, ICSID Case No. ARB (AF)/07/1), Award of 4 August 2010. Pope & Talbot Inc. v. The Government of Canada, UNCITRAL, Award on the Merits (Phase 2) of 10 April 2001. Pope & Talbot, Inc. v. Canada, NAFTA, UNCITRAL, Award on Damages of 31 May 2002. Renta 4 S.V.S.A. and others v. Russian Federation, SCC No. 24/2007, Award of 20 July 2012. Revere Copper & Brass, Inc. v. Overseas Private Invest. Corp. (OPIC), American Arbitration Association, Award of 24 August 1978. Robert Azinian and others v. Mexico, ICSID, Case No. ARB (AF)/97/2, Award of 1 November 1999.

xxii

L IST

OF

C ASES

Romak SA v. Uzbekistan, UNCITRAL, PCA Case No. AA280, Award of 26 November 2009. RosInvest v. Russian Federation, SCC Case No 079/2005, Award on Jurisdiction of October 2007. S.D. Myers, Inc. v. Canada, UNCITRAL, Partial Award of 13 November 2000. Saar Papier Vertriebs GmbH v. Poland, UNCITRAL, Award of 16 October 1995. Salini Costruttori S.p.A. and Italstrade S.p.A. v. Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction of 31 July 2001. Saluka Investments BV v. Czech Republic, UNCITRAL, Partial Award of 17 March 2006. Saur International SA v. Argentina, ICSID Case No. ARB/04/4, Decision on Jurisdiction and Liability of 6 June 2012. Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award of 28 September 2007. SGS Société Génerale de Surveillance v. Philippines, ICSID Case No. ARB/02/6, Decision on Objections of 29 January 2004. Siemens A.G. v. Argentina, ICSID Case No. ARB/02/8, Decision on Jurisdiction of 3 August 2004. Southern Pacific Properties (Middle East) Ltd v. Egypt, ICSID Case No. ARB/84/3, Award of 20 May 1992. Suez and others v. Argentina, ICSID Case No. ARB/03/19, Order in Response to a Petition for Transparency and Participation as Amicus Curiae of 19 May 2005. Suez and others. v. Argentina, ICSID Case No. ARB/03/19, Decision on Liability of 30 July 2010. Sugar BV (Netherlands) v. Czech Republic, SCC Case No. 088/2004, Partial Award of 27 March 2007

xxiii

LIST

OF

CASES

Tecmed (Técnicas Medioambientales Tecmed SA) v. Mexico, ICSID Case No. ARB(AF)/ 00/2, Award of 29 May 2003. Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, attached Dissenting Opinion by Prosper Weil of 29 April 2004. Toto Costruzioni Generali S.p.A. v. Lebanon, ICSID Case No. ARB/07/12, Award of 7 June 2012. Vattenfall AB and others v. Germany, ICSID Case No. ARB/09/6, Award of 11 March 2011. Vattenfall AB and others v. Germany, ICSID Case No. ARB/12/12, Decision pursuant to ICSID Arbitration Rule 41(5) of 2 July 2013. Vladimir Berschader and Moïse Berschander v. Russian Federation, SCC Case No. 080/ 2004, Award of 21 April 2006. Waste Management Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3, Award of 30 April 2004. Wena Hotels Ltd v. Egypt, ICSID Case No. ARB/98/4, Award of 8 December 2000. Windstream Energy LLC v. Canada, UNCITRAL, Notice of Intent to Submit a Claim to Arbitration under NAFTA Chapter 11 of 17 October 2012. Windstream Energy LLC v. Canada, UNCITRAL, Procedural Order No. 1 of 16 September 2013. DOMESTIC COURTS Canada Mexico v. Metalclad Corporation, Supreme Court of British Columbia, 2001 BCSC 664, Award of 2 May 2001 Yaiguaje v. Chevron Corporation, 2013 Ontario Court of Appeal 758, Appellate Decision of 17 December 2013.

xxiv

L IST

OF

C ASES

Ecuador Chevron Corp. v. Maria Aguinda et al., Superior Court of Justice of Nueva Loja, Legal complaint for alleged damages of 7 May 2003. Chevron Corp. v. Maria Aguinda et al., Corte Provincial de Justicia de Sucumbios, Lawsuit No. 2003-0002, Lago Agrio Judgment of 14 February 2011. Chevron Corp. v. Maria Aguinda et al., Corte Provincial de Justicia de Sucumbios, Juicio No. 2011-0106, Final Appellate Decision of 3 January 2012. Chevron Corp. v. Maria Aguinda et. al., Corte Suprema de Justicia de la Nacion, Decision on Enforcement of Ecuadorean Judgment of 4 June 2013. Maria Aguinda et al. v. Chevron Corporation, National Court of Justice, No. 174-2012, Award of 12 November 2013.

Indonesia Decision of the Constitutional Court No. 001-021-022/PUU-I/2003 on the constitutional review of Law No. 20 of 2002 on the Electricity Power, 1 December 2004. Decision of the Constitutional Court No. 002/PUU-I/2003 on the review of Law No. 22 of 2001 on Oil and Gas, 15 December 2004. Decision of the Constitutional Court No. 21-22/PUU-V/2007 on the review of the Law No. 25 of 2007 on Investment, 25 March 2008. Decision of the Constitutional Court No. 3/PUU-VIII/2010 on the review of the Law No. 27 of 2007 on Coastal and Small Islands Management, 9 June 2012. Decision of the Constitutional Court No. 36/PUU-X/2012 on the review of Law No. 22 of 2001 on Oil and Gas, 5 November 2012. PT. Ridlatama Tambang Mineral v. The Regent of East Kutai, Four decisions of the Administrative Court of Samarinda No. 31/G/2010/PTUN-SMD, 3 March 2011; No. 32/ G/2010/PTUN-SMD; No. 33/G/2010/PTUN-SMD; and No. 34/G/2010/PTUN-SMD, 3 March 2011.

xxv

LIST

OF

CASES

PT. Ridlatama Tambang Mineral v. The Regent of East Kutai, Four decisions of the Administrative Appeal Court of Jakarta No. 109/B/2011.PT.TUN.JKT, 8 August 2011; No. 110/B/2011.PT.TUN.JKT; No. 111/B/2011.PT.TUN.JKT; and No. 112/B/2011.PT. TUN.JKT, 8 August 2011. PT. Ridlatama Tambang Mineral. Four decisions of the Supreme Court No. 136 PK/ TUN/2012; No. 137 PK/TUN/2012; No. 138PK/TUN/2012; No. 139 PK/TUN/2012. Rasit Rahmat et al. v. PT Newmont Minahasa Raya, Decision of the District Court of South Jakarta No. 586/Pdt.G/2004/PN.Jak.Sel, 5 January 2005. Republic of Indonesia v. PT Newmont Minahasa Raya and Richard B. Ness, Decision of the District Court of Manado No. 284/Pid.B/2005/PN.Mdo, 24 April 2007. State Ministry of Environment v. PT Newmont Minahasa Raya, Decision of the District Court of South Jakarta No. 94/Pdt.G/2005/PN.JKT.Sel, 15 November 2005. Yayasan Wahana Lingkungan Hidup Indonesia v. PT. Freeport Indonesia Company, Decision of the District Court of South Jakarta No. 459/Pdt.G/2000/PN.Jak.Sel, 28 August 2001. Yayasan Wahana Lingkungan Hidup Indonesia v. PT. Newmont Minahasa Raya, Decision of the District Court of South Jakarta No. 548/Pdt.G/2007/PN.Jak.Sel, 18 December 2007. Yayasan Wahana Lingkungan Hidup Indonesia et al., Decision of the Administrative Court of Jakarta No.145/G/2011/PTUN-JKT, 29 July 2011.

South Africa AZAPO v. President of the Republic of South Africa, 1996 (4) SA 671 (CC). Executive Council of the Western Cape Legislature v. President of the Republic of South Africa, 1995 (4) SA 877 (CC). S. v. Makwanyane 1995, (3) SA 391(CC).

xxvi

L IST

OF

C ASES

South Africa Association of Personal Injury Lawyers v. Minister of Health, 2001 (1) SA 833 (CC).

United States Aguinda v. Texaco, SDNY, 945 F. Suppl. 625, 1996. Beanal v. Freeport Mc Moran, US Court of Appeals, 5th Circuit, 29 November 2009. Chevron Corp. v. Donziger, SDNY, 768 F. Supp. 2d 581, 2011. Chevron Corp. v. Donziger, SDNY US Dist. LEXIS 107693, 2012. Chevron Corp. v. Donziger, SDNY, No. 11 Civ. 0691, 2013 US Dist. LEXIS 24086, 2013. Chevron Corp. v. Donziger et al., SDNY, 11 Civ. 0691 (LAK), 2013, 15 March 2013. Chevron Corp. v. Naranjo et al., SDNY 667 F.3d 232, 2012. Chevron Corp. v. Naranjo et al., SDNY, No. 11-1150-cv (L), 2012 Department of Transport. v. Pub. Citizen, US Supreme Court, No. 03-358, 541 U.S. 752, 7 June 2004. Doe v. Unocal, US Court of Appeals, 9th Circuit, 395 F.3d 932, 18 September 2002. Grand River v. Pryor III, US Court of Appeals, 2nd Circuit, No. 03-9179, Decision on Jurisdiction of 28 September 2005. Kiobel v. Royal Dutch Petroleum et al., US Supreme Court, No. 10-1491, 17 April 2013. Massachussetts et al. v. Environmental Protection Agency, US Supreme Court, No. 051120, 549 U.S. 497, 2 April 2007. Sarei et al v. Rio Tinto Plc et al, US Court of Appeals, 9th Circuit, No. 02-56256, 2 April 2007.

xxvii

LIST

OF

CASES

Texaco Inc. v. Maria Aguinda et al., SDNY, No. 93 Civ. 7527, 1994 WL 142006, 1994. Texaco Inc. v. Maria Aguinda et al., SDNY, 175 F.R.D. 50, 1997. Texaco Inc. v. Maria Aguinda et al., SDNY, No. 93 Civ. 7527, No. 94 Civ. 9266, 1999. Yota v. Texaco Inc, 157 F, US Court of Appeals 2nd Circuit, 1998, Nos. 97-9102, 97-9104, 97-9108.

xxviii

ACKNOWLEDGEMENTS This book has its origins in an international conference on ‘Bridging the Gap between International Investment Law and the Environment’, held at the Dutch Ministry of Foreign Affairs in The Hague on 4 and 5 November 2013. The conference was organised under the auspices of the Research Centre for Water, Oceans and Sustainability Law of Utrecht University School of Law and the Center for Sustainability of Nyenrode Business University. A report of the conference, written by Rosalien Diepeveen, Yulia Levashova and Tineke Lambooy was published in the Utrecht Journal of International and European Law 2014.1 The first day of the conference aimed to discuss, from an academic point of view, the main legal issues concerning the relationship between international investment law and the protection of the environment. The second day served as a platform for broader discussions about policy implications of the topical subject. National and international policymakers, experts from several international organisations, arbitrators, lawyers and academics debated in panels about the challenges and dilemmas for the legal and political practice. Various proposals for solutions were presented and discussed. The main part of this publication consists of papers presented and extensively discussed during the first day of the conference. Most of the papers were distributed beforehand among the academic participants. Each author first shortly presented his or her paper, after which a respondent (one of the other authors) gave a prepared first reaction. This was the kick-off of the debate among the authors concerning each paper. Each respondent also exchanged written comments with the author (academic peer review). This formed the starting point for the adaptation of the papers by the authors. This was followed by another round of peer review by the editors of this publication, all in all leading to the final versions of the papers as included in this book. A few chapters are based on papers, which the editors received after the conference but which were included nevertheless because they fitted very well in the general theme of the book. All the chapters went through an extensive peer review process. The editors would like to express their gratitude to Jorge Viñuales for his stimulating contributions to the project and for writing the foreword to the book. We also like to thank the sponsors of the conference: the Dutch Ministry of Infrastructure and the Environment and the Dutch Ministry of Foreign Affairs as well as the law firm Pels

1

R. Diepeveen, Y. Levashova, T. Lambooy, ‘Bridging the Gap between International Investment Law and the Environment’, 30(78) Utrecht Journal of International and European Law 2014, pp. 145-160, http://dx.doi. org/10.5334/ujiel.cj.

xxix

ACKNOWLEDGEMENTS

Rijcken & Droogleever Fortuijn. We are grateful to Kitty van der Heijden, Herman Bavinck, Hugo von Meijenfeldt, Martijn Scheltema, Jaap Spier and Marleen van Rijswick for their creative ideas and other dedicated contributions to the conference and this book. The editors also warm-heartedly thank Aikaterini Argyrou, Peter Morris, Kees Hooft, Rosalien Diepeveen and Lisa Orvini whose patient assistance during the conference, and in the preparation and editing of this book has been indispensable. Last but not least, we greatly appreciate the support given by Boom/Eleven International Publishing, and in particular by mrs Mariska Duindam, the acquisition editor, for taking so much care of the work involved in this publication. Utrecht, May 2015

The Editors

xxx

FOREWORD Jorge Viñuales*

The connection between environmental protection and foreign investment regulation is rapidly becoming a major area of academic and professional interest and, rightly so, as the ongoing transition from brown to green economies will entail substantial levels of regulatory change, the risk most feared by foreign investors.1 The significant increase in the number of investment disputes with environmental components (i.e. relating to environmental markets, having a particular impact on the environment, or involving the application of domestic or international environmental law)2 has, understandably, channelled the attention of observers towards how to create sufficient policy space for environmental considerations ‘within’ investment law. The lines of inquiry most often explored in this regard concern the way investment tribunals have handled (and sometimes mishandled) such considerations in particular cases or the introduction of a variety of environmental clauses in newly concluded investment treaties. The body of literature on these issues is expanding and will continue to do so as more investment disputes with environmental components are brought and decided (some 30 such cases were pending at the time of writing). But such a focus should not prevent us from seeing the fuller picture of this connection. Here, I would like to highlight some other aspects that call for more sustained inquiry. As two distinct areas of regulation, the interactions between investment law and environmental law are not always harmonious. The underlying reasons for such tensions are mostly ‘cultural’, if I may use this word. Legal education in these two areas of law has until recently almost entirely ignored such interactions, contributing to the perception that environmental law has no role to play in the realm of investment law or that investment law is an illegitimate limitation to environmental regulation. Both views are simplistic, to put it mildly, but they reflect a deeper problem with legal education: we package information into branches to facilitate its transmission, and we then forget to unpack them in our research and/or practice. There is, of course, much more to the ‘cultural’ differences

* 1 2

Harold Samuel Professor of Law and Environmental Policy, University of Cambridge. See Multilateral Investment Guarantee Agency, World Investment and Political Risk, World Bank, Washington, DC 2011, p. 20. See J.E. Vinuales, Foreign Investment and the Environment in International Law, Cambridge University Press, Cambridge, 2012, p. 17.

xxxi

FOREWORD

between environmental lawyers and investment lawyers, but a foreword is not the proper place to elaborate on them. Let me therefore remain modestly legal. Much of our work consists of clarifying the operation of the complex arrays of norms that regulate activity. From this perspective, the aforementioned lines of inquiry are insufficient to capture ‘activities’, including investment schemes, which are not ‘framed’ as investment disputes. By way of illustration, the substantial body of decisions and recommendations from human rights and environmental adjudicatory and quasi-adjudicatory bodies (e.g. compliance committees) dealing with investment schemes (foreign or domestic) has received only marginal attention from observers, despite its significance to clarify the environmental legal constraints within which the operation of a foreign investor unfolds. Perhaps more important is the lack of attention paid to the legal optimization of regulatory change, environmental or other, at the domestic level, whether this is to manage the regulatory risk faced by investors or to reduce the litigation risk faced by states. Adjusting investment treaties and the practice of investment tribunals to accommodate environmental considerations is important but overlooks the source of the problem, i.e. the form of regulatory change. Environmental regulatory change should be effected within certain parameters (e.g. proportionality, due process, etc.) and evaluated before the adoption of a measure, particularly when the amount of protected foreign investment in the sector likely to be affected is significant. Such preliminary assessments should be available to inform policy-making at the national and sub-national (territorial subdivisions) levels through appropriate mechanisms. Structuring the domestic policymaking process to take into consideration the impact of investment and environment treaties is a condition for the proper operation of any adjustment to such treaties or to arbitral proceedings. This point has yet to receive sustained analysis. Even in those cases where so-called ‘public law’ approaches to investment regulation have been explored, their main goal has been to provide a comparator for the ‘downstream’ international arbitral process and not to re-structure the ‘upstream’ domestic regulatory process. Last but not least, the connection between investment law and environmental law is not necessarily conflicting in all – or even in most – points. Investment regulation can be used to channel much needed resources towards pro-environmental projects. Classic examples include privatization schemes relating to waste treatment or water distribution or involving the decontamination of sites of formerly state-owned heavy industries. Conversely, environmental law may provide incentives to foreign investors in some areas, as illustrated by the variety of so-called ‘market mechanisms’ ranging from the Kyoto Protocol’s ‘Joint Implementation’ and ‘Clean Development Mechanisms’ to the emerging array of ‘Payments-for-Ecosystem-Services’ schemes or the private sector contributions to some major environmental funds.

xxxii

F OREWORD

It is in this broader context that the project leading to this book can be appreciated. The editors of this volume have deliberately sought to go beyond the initial approach to the relations between investment law and environmental law in order to address some of the questions raised by the other aspects of this connection. Consistent with this goal, the book features contributions not only from investment lawyers but also from environmental, European, and general international lawyers as well as from economists and political scientists. Many of them are practitioners and policy-makers who share their own experience in addressing the connection between investment law and environmental law. These are but some of the reasons why this book is to be commended, and many more come to mind when one gets the benefit of reading individual chapters. Cambridge, 29 January 2014.

xxxiii

BRIDGING THE GAP BETWEEN INTERNATIONAL INVESTMENT LAW AND THE ENVIRONMENT: INTRODUCTION Ige Dekker, Yulia Levashova, Tineke Lambooy, Aikatarini Argyrou*

The central topic of this book is the still underdeveloped integration of environmental needs and policies in international investment law. This problématique constitutes a broad scholarly agenda that for the purpose of this book has been limited to three levels concerning the actual or potential relationship between international investment law and the protection of the environment: general perspectives on that relationship, a deepening of these perspectives in respect of some specific sectors or fields, and specific case studies of investment conflicts with environmental dimensions. The book makes no attempt to be comprehensive. However, it hopes by discussing and analysing a range of legal and policy issues, to stimulate further reflection and research on this topic. The topic of this book is part of the more general subject of the reform of the legal regime for foreign investment. This issue attracts ample attention nowadays; not only from international legal circles1 but also from policy organizations, national and international, governmental and non-governmental,2 and even from the public media. In the first section of this introduction, we will sketch the main points of the reform agenda for international investment law. Next, we will go into the central topic of this book and

*

1

2

Ige Dekker is Professor of International Institutional Law at the School of Law of Utrecht University. Yulia Levashova is a PhD candidate in Law at Utrecht University and a researcher at the Center for Sustainability of Nyenrode Business University. Tineke Lambooy is Professor Corporate Law at Nyenrode Business University and Associate Professor Corporate Social Responsibility (CSR) at the School of Law of Utrecht University. Aikaterini Argyrou is a PhD candidate in Law at Utrecht University and a visiting fellow at Nyenrode Business University. See for a general overview of the discussion K.P. Sauvant, F. Ortino, Improving the International Investment Law and Policy Regime: Options for the Future, Ministry for Foreign Affairs of Finland, 2013. For a recently published and comprehensive handbook, including several contributions on the reform of the legal regime, see M. Bungenberg, J. Griebel, S. Hobe, A. Reinisch (Eds.), International Investment Law, Baden Baden, Nomos, 2015. See, for instance, United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2014, United Nations, New York and Geneva, 2014, New York, Geneva, 2014, pp. 114-124; European Commission, Investment Protection and Investor-to-State Dispute Settlement in EU agreements, European Union, Brussels, 2013; H. Mann, K. von Moltke, L.E. Peterson, A. Cosbey, IISD Model International Agreement on Investment for Sustainable Development, International Institute for Sustainable Development, 2nd ed., 2006; R. van Os, R. Knottnerus, Dutch Bilateral Investment Treaties, A gateway to ‘treaty shopping’ for investment protection by multinational companies, SOMO, Amsterdam 2011.

xxxv

present an outline. Finally, we will summarize some of the findings that in our opinion deserve further attention from academic and policy circles.

1.

1.1

REFORM

OF INTERNATIONAL INVESTMENT

LAW

A Long and Controversial Legal History

The academic and policy discussions concerning reforming international investment law tend to concentrate on the investor-to-state dispute settlement system for the resolution of investment conflicts. However, even the main structures of the legal regime on foreign investments are currently at issue. And that is not for the first time. The protection of foreign investment is a subject with a long and controversial legal history. In particular the discussions concerning the question whether an international or national legal standard should be utilized in judging the expropriation of foreign property are still ongoing. Also, the way in which disputes concerning such actions should be resolved has divided the capital exporting and capital importing states for a long time. Under the umbrella of the general principle of permanent sovereignty over natural resources and economic activities, the discussions in the United Nations in the 1960s and 1970s culminated in a harsh clash between Western developed states and developing states.3 However, from the 1980s onwards, the vigorous ideological debate on the consequences of the permanent sovereignty principle for the treatment of foreign investment moved to the background, along with the United Nations project to establish a new international economic order as a whole.4 Due to a range of factors connected to the increased international political commitment to economic liberalization, the attention of states, developed and developing alike, increasingly focussed on the ability to attract foreign investment. To that end, they brought international law into action to protect foreign investors and their activities, especially against discriminatory and arbitrary treatment, and direct and indirect expropriation, by measures or conduct of the host state.5 Apart from some general concepts and principles of customary international law and a few multilateral institutional treaties, such as the International Convention on the Settlement of Investment Disputes (ICSID), the vast majority of international public regulation is laid 3 4

5

See N.J. Schrijver, Sovereignty over Natural Resources, Cambridge, Cambridge UP, 1997, pp. 82-119, 171201. See T.W. Wälde, ‘A Requiem for the New International Economic Order – the Rise and Fall of Paradigms in International Economic Law’, in G. Hafner (Ed.), Liber Amicorum Professor Ignaz Seidl-Hohenveldern in honour of his 80th birthday, The Hague, Kluwer Law International, 1998, chapter 41. See A. Newcombe, L. Paradell, Law and Practice of Investment Treaties, The Netherlands, Kluwer Law International, 2009, pp. 41-49.

xxxvi

I NTRODUCTION down in more than 3,200 bilateral – and sometimes regional – investment treaties between states.6 Although these treaties do not conform to a common standard, they do have a core of common features.7 Besides a – generally broad – definition of investment, the treaties provide for substantive but rather openly formulated obligations of the host state for the treatment and protection of foreign investments, such as the principles of fair and equitable treatment, non-discrimination, and compensation in case of unlawful (direct and indirect) expropriation. The treaties usually also provide for possibilities for the international settlement of disputes between the state parties to the treaty or – and that is a unique feature within the international legal system – between the investor and the host state. In the case of an alleged breach by the host state of its obligations, via a legislative, executive, or judicial measure, the investor can submit the dispute directly to an ad hoc international arbitration tribunal, to be established under the auspices of, for instance, ICSID. The decision taken by the tribunal is binding on the parties and is, in principle, final.8 Initially, international investment agreements were especially concluded between developed and developing states, i.e. between capital exporting and capital importing states. Gradually, such treaties were also established between developing states within the framework of regional economic integration organizations, like the Andean Common Market (ANCOM), the Common Market of Southern Cone (Mercosur), and the Association of Southeast Asian Nations (ASEAN).9 Furthermore, also developed states concluded such treaties. One example is the North American Free Trade Agreement (NAFTA), concluded between Canada, Mexico, and the United States (1992). NAFTA was also one of the first comprehensive trade agreements which contained an extensive chapter on the protection of investments, including provisions for investor-state arbitration. This was a

6 7

8

9

See for further numbers UNCTAD, World Investment Report 2014, pp. 114-116. For an overview of these common features, see A.F. Lowenfeld, International Economic Law, 2nd ed., Oxford, Oxford UP, 2008, pp. 454-586; Newcombe, Paradell 2009, supra note 5, pp. 65-73; V. Lowe, ‘Changing Dimensions of International Investment Law’, University of Oxford Faculty of Law Legal Studies Research Paper Series, Working Paper No. 4/2007, Oxford, 2007; A. Van Aaken, ‘Fragmentation of International Investment Law: the Case of International Investment Protection’, 17 Finnish Yearbook of International Law 2008, pp. 91-130. See for a comprehensive treatment of the general and specific aspects of international investment treaties Bungenberg et al. (Eds.), supra note 1. International arbitration regimes may allow for a review of awards before national courts at the seat of the arbitration tribunal. For a recent example of a domestic review of an investment dispute, see Hoge Raad der Nederlanden (Supreme Court of the Netherlands), Republic of Ecuador v. Chevron Corporation, 26 September 2014 (ECLI:NL:HR:2014:2837). The Court upheld a substantial decision on compensation decision payable by Ecuador to Chevron, awarded in the case Chevron v. Republic of Ecuador, PCA case no. 2007-2, final award of 31 August 2011. Under Art.52 of the ICSID Convention, a tribunal’s decisions can be challenged before an annulment committee on exceptional grounds, such as that the tribunal has manifestly exceeded its powers or that there has been a serious departure from a fundamental rule of procedure. See L. Johnson, ‘Annulment of ICSID Awards: Recent developments’, International Institute for Sustainable Development, Canada, 2011. Newcombe, Paradell 2009, supra note 5, pp. 50-53.

xxxvii

IGE DEKKER, YULIA LEVASHOVA, TINEKE LAMBOOY, AIKATARINI ARGYROU novelty as far as it applied – among others – between two members of the Organization for Economic Cooperation and Development (OECD).10 Another important international investment agreement is the Energy Charter Treaty of 1994, which covers cooperation concerning investments in the energy sector and contains provisions that are similar to other investment treaties. It is now in force for nearly all European states, the European Union, and Euratom.11 On the basis of these developments, it was thought to be possible to draft a multilateral agreement on investments (MAI) within the OECD. However, the attempt failed in 1998, because of disagreement between the parties about a range of issues, which were partly brought up by non-governmental organizations. These issues included the question on how to balance, on the one hand, the rights of foreign investors with, on the other hand, the rights of states to protect certain public interests, such as “cultural identity, employment, labour standards, human rights, consumer protection and environmental conservation”.12

1.2

New Trends in Policy-Making

Pursuant to the failure to agree on an MAI, the new critical tone with regard to international investment law was set and did not disappear. On the contrary, the criticism has intensified in the last couple of years, partly in response to some remarkable developments in the area of treaty making as well as on the level of dispute settlement. In respect of treaty making, there are two relatively new trends worth mentioning. On the one hand, negotiations are underway about so-called ‘mega-regional’ trade and investment agreements. The proposed Trans-Pacific Partnership (TPP) between inter alia the United States (US), Canada, Chile, Japan, Vietnam, Australia, and New Zealand will probably be the first mega-treaty to be concluded.13 The establishment of the competence of the European Union (EU) on the regulation of foreign direct investment in 2009 provided another boost to mega-treaty negotiations worldwide.14 A draft of the Canadian-EU Comprehensive Economic Trade Agreement (CETA) was published in 2014.15 10 11 12

13 14

15

See . See . N.J. Schrijver, ‘A Multilateral Investment Agreement from a North-South Perspective’, in E.C. Nieuwenhuys, M.M.T.A. Brus (Eds.), Multilateral Regulation of Investment, Leyden, Kluwer Law International, 2001, pp. 17-33. See UNCTAD, World Investment Report, 2014, pp. 118-124. See Treaty on the Functioning of the European Union, Article 207. This competence was introduced by the Lisbon Treaty that entered into force on 1 December 2009. See further A. Dimopoulos, EU Foreign Investment Law, Oxford, Oxford UP, 2011; A. Reinisch, ‘Putting the Pieces Together…an EU Model BIT?’, 15 Journal of World Investment & Trade, 2014, pp. 679-704. For the Consolidated CETA Text, published by both parties on 26 September 2014, see .

xxxviii

I NTRODUCTION

Furthermore, negotiations have commenced between the EU and several other states and groups of states, of which the Transatlantic Trade and Investment Partnership (TTIP) with the United States has attracted very critical media attention.16 Once concluded – and that is certainly not a certainty – these mega-regional agreements will extensively extend the coverage of international investments flows by treaty regimes, in particular between industrialized countries. On the other hand, there is a small but growing number of states – inter alia South Africa, Indonesia, Bolivia, Ecuador, and Venezuela – that have decided to disengage from the international investment treaty regime or at least parts thereof, such as the international dispute settlement system.17 As far as the reasons are made public, these states are very dissatisfied with some of the decisions of international arbitral tribunals, for instance, because these tribunals have interpreted the rights of the investors too extensively, neglected or inadequately addressed the duty of states to protect public interests, and awarded excessive claims. However, the unilateral cancellation of an investment agreement does not preclude that in the future claims against those states will be asserted and dealt with by international arbitral tribunals because an unilateral cancellation usually does not become effective immediately.18 The investor-state dispute settlement system – now generally known under the abbreviation ISDS – is also a controversial and extensively debated issue in the negotiations on the aforementioned mega-regional trade and investment agreements. The European Parliament, for instance, requested a workshop and several studies on the ISDS provisions in the EU’s (draft) international investment agreements,19 and the European Commission held an online public consultation on this subject.20 The reasons are that the number of cases initiated by investors before an international arbitral tribunal on the basis of an international 16 17

18

19

20

See, for instance, Transnational Institute, ‘TTIP, Why the rest of the world should beware’, 20 March 2015, . See, UNCTAD, supra note 13, p. 128. See also D.M. Wick, ‘The Counter Productivity of ICSID Denunciation and Proposals for Change’, 11(2) Journal of International Business & Law, 2012, . See further on this issue – and on other potential pitfalls on this path – F.M. Lavopa, L.E. Barreiros, M.V. Bruno, ‘How to Kill a BIT and Not Die Trying: Legal and Political Challenges of Denouncing or Renegotiating Bilateral Investment Treaties’, 16 Journal of International Economic Law, 2013, pp. 869-891. See European Union, Directorate-General for External Policies of the Union, Investor-State Dispute Settlement Provisions in the EU’s International Investment Agreements, Volume I – Workshop, 01 April 2014, Volume 2 – Studies, Brussels, September 2014. The three – very interesting – studies were written by P.J. Kuijper, ‘Investment protection agreements as instruments of international economic law’; S. Hindelang, ‘Investor-state dispute settlement and alternatives of dispute resolution in international investment law’; and I. Pernice, ‘International investment protection agreements and EU law’. On 19 May 2014, the Dutch Parliament organized a hearing on the EU-US Transatlantic Trade and Investment Partnership; see for the report of this hearing (in Dutch) Tweede Kamer, 2013-2014, Kamerstuk 21501-02, nr. 1396, The Hague, 11 July 2014. European Commission, ‘Online public consultation on investment protection and investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP)’, Report, SWD (2015) 3 final, Brussels, 13 January 2015.

xxxix

IGE DEKKER, YULIA LEVASHOVA, TINEKE LAMBOOY, AIKATARINI ARGYROU investment agreement in the last 15 years has increased spectacularly,21 that the costs of litigating investment treaty claims can be very high, and that tribunals have more than once awarded huge amounts of compensation for damages.22 Although tribunals have decided in favour of the investor in only 30 % of all cases,23 a recently published empirical study concludes that ISDS “seems to favour the ‘haves’ over the ‘have-nots’, making the international investment regime harder on poorer than on richer countries”.24

1.3

The Legal Setting

In the literature, it is generally underlined that any reform of ISDS needs to be considered in the context of the international legal regime of foreign investment as a whole. This legal regime is characterized by some particular features, which distinguishes it from other branches of international law and which has to be taken into account in formulating proposals for its reform.25 Probably the most salient feature is that the investment regime has a greater degree of coherence than one would expect from a regime that is built on a plurality of formal sources and that lacks the coordinating functions of an overarching international organization.26 This legal coherence is shaped by different factors, such as the traditional rules of customary international law on the treatment of aliens; the common rules, principles, and standards of international investment treaties; and the application of the law in practice. The last factor includes only to a certain extent the application of the law by international arbitral tribunals, which, it is said, reflects 21

22

23 24

25

26

See UNCTAD, supra note 13, pp. 124-125. Before 2000, it concerned around 10 cases a year; since 2011, the number of new cases is more than 50 a year. By the end of 2013, the total number of known investment cases was 568; the total number of concluded cases was 274. See S. Hindelang, ‘Investor-State Dispute Settlement and Alternatives of Dispute Resolution in International Investment Law’, in European Union, Directorate-General for External Policies of the Union, Investor-State Dispute Settlement Provisions in the EU’s International Investment Agreements, Volume 2 – Studies, Brussels, September 2014, pp. 109-113; Sauvant, Ortino 2013, supra note 1, pp. 40-42. UNCTAD, supra note 13, pp. 126. Approximately 43 % were decided in favour of the state and approximately 26 % of the cases were settled on a confidential basis. See T. Schultz, C. Dupont, ‘Investment Arbitration: Promoting the Rule of Law or Over-empowering Investors? A Quantitative Empirical Study’, 25 European Journal of International Law, 2014, pp. 1147-1168, at 1147. See the original and inspiring analysis by J. Pauwelyn, ‘At the Edge of Chaos? Foreign Investment Law as A Complex Adaptive System, How It Emerged and How It Can Be Reformed’, Georgetown University Law centre/Graduate Institute of International and Development Studies, 2014, available at SSRN. Compare also Sauvant, Ortino 2013, supra note 1, pp. 51-90. See S.W. Schill, ‘The Multilateralization of International Investment Law: The Emergence of a Multilateral System of Investment Protection on the Basis of Bilateral Treaties’, Society of International Economic Law (SIEL) Online Proceedings Working Paper No. 18/08, 2008; S.W. Schill, ‘W(h)ither Fragmentation? On the Literature and Sociology of International Investment Law’, 22 European Journal of International Law, 2011, pp. 875-908. However, more sceptical, J. Arato, ‘The Margin of Appreciation in International Investment Law’, 54 Virginia Journal of International Law, 2014, pp. 545-578.

xl

I NTRODUCTION the international fragmentation of the regime rather than its coherence.27 Anyway, these multiple and sometimes contradictory ‘faces’ of the international legal investment regime have to be taken into account in the analyses of the necessity of and the possibilities for changing some of its institutional and substantive parts. And, in addition, that holds true a fortiori for any policy implications from such analyses: neither the coherence nor the formal fragmentation in itself promotes the success rate of reform proposals. As far as ISDS is concerned, international legal experts’ criticism is varied.28 For some, ISDS is not only an outdated and ‘neocolonial’ institution but in a globalizing world it is an unacceptable and discriminatory way of solving disputes because it benefits foreign investors above national investors by giving them an extra, international remedy. They recommend abolishing ISDS and substituting it with the settlement of disputes by diplomatic protection, state-to-state arbitration, and above all, domestic courts. However, most international legal experts are generally in favour of maintaining ISDS because of its alleged virtues and advantages.29 ISDS, it is said, contributes to the depoliticization of investment disputes and to the strengthening of the international rule of law by securing one of the oldest principles of international law, namely, that everyone is entitled to a minimum standard of treatment abroad at any given time. From a more practical perspective, they feel that ISDS has proven to be an effective and relatively efficient mechanism for the enforcement of international investment treaties. However important these virtues and advantages may be, these legal experts also underline the organizational and procedural shortcomings of the existing ISDS systems. Therefore, several proposals for the reform of ISDS are analysed and discussed in the literature, such as the proposals to strengthen the position of the states, to introduce a limited form of the ‘exhaustion of local remedies’ rule, to enhance the legitimacy of international arbitrators and the transparency of arbitral proceedings, and to create an appeal facility.30 27

28

29 30

See J. Kurtz, ‘Building Legitimacy through Interpretation in Investor-State Arbitration: On Consistency, Coherence and the Identification of Applicable Law’, University of Melbourne Legal Studies Research Paper No. 670, September 2013. See also Th. Schultz, ‘Against Consistency in Investment Arbitration’, King’s College London Law School Research Paper No. 2013-3, August 2013. See G. Van Harten, Investment Treaty Arbitration and Public International Law, Oxford, Oxford UP, 2007; Won-Mog Choi, ‘The Present and Future of the Investor-State Dispute Settlement Paradigm’, Journal of International Economic Law, 2007, pp. 1-23; A. Roberts, ‘Power and Persuasion in Investment Treaty Interpretation, The Dual Role of States’, 104 American Journal of International Law, 2010, pp. 179-225; B. Kingsbury, S. Schill, ‘Investor-State Arbitration as Governance: Fair and Equitable Treatment, Proportionality and the Emerging Global Administrative Law’, Working Paper No. 09-46, New York University School of Law, New York, 2009, p. 40-50; S. Puig, ‘No Right without a Remedy: Foundations of Investor-State Arbitration’, 35 University of Pennsylvania Journal of International Law, 2014, pp. 829-861; D.H. Karton, ‘Reform of Investor-State Dispute Settlement: Lessons from International Uniform Law’, Research Paper Series 2015-019, Queens University, Faculty of Law, 2015. See, especially, Hindelang, supra note 22, pp. 39-131, at pp. 51-56; J. Weiler, ‘European Hypocrisy: TTIP and ISDS’, 25 European Journal of International Law, 2014, pp. 961-967. See, inter alia, Sauvant, Ortino 2013, supra note 1, pp. 116-125; Hindelang, supra note 22, pp. 59-112.

xli

IGE DEKKER, YULIA LEVASHOVA, TINEKE LAMBOOY, AIKATARINI ARGYROU

However, the problem with the international investment regime from a legal point of view is much broader than the dispute settlement system. Partly as a result of the discussion about the economic utility and the need for foreign investment,31 serious question marks have been placed concerning the foundations of the legal regime which is applicable to foreign investment. First and foremost, the discussion is about the ‘one-sidedness’ of the legal regime of foreign investments, in the sense that the functioning of the regime seems to be predominantly focussed on the protection of the rights of foreign investors at the expense of the protection of other legitimate interests, such as public interests that a state has to take care of.32 In the words of Karsten Nowrot, the existing international legal investment regime does not provide for “a suitable and thus acceptable balance between the legally protected economic interests of foreign investors and the domestic steering capacity or ‘policy space’ of host states to allow the latter to pursue the promotion and protection of other public interest concerns like human rights, the environment as well as additional sustainable development objectives”.33 This conclusion is based on analyses of the substantive provisions of bilateral and regional investment treaties but reflects, at least to a certain degree, also international case law. Arbitral investment tribunals are increasingly wrestling with the determination of the

31 32

33

See for a useful summary of the discussion, Sauvant, Ortino 2013, supra note 1, pp. 33-40. See M. Sornarajah, The International Law on Foreign Investment, 2nd ed., Cambridge, Cambridge UP, 2004, pp. 259-260; Ph. Sands, Principles of International Environmental Law, Cambridge, Cambridge UP, 2003, pp. 1056-1072; P.-M. Dupuy, J.E. Viñuales, ‘Human Rights and Investment Disciplines: Integration in Progress, in Bungenberg et al. (Eds.), International Investment Law, Baden Baden, Nomos, 2015, pp. 17391767; Human Rights Council, Report of the Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporation and Other Business Enterprises: Guiding Principles for Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework, United Nations Document A/HRC/17/31, March 21, 2011. See for (very) critical assessments S. Montt, State Liability in Investment Treaty Arbitration, Global Constitutional and Administrative Law in the BIT Generation, Oxford, Hart, 2009; G. van Harten, D. Schneiderman (Eds.), Public statement on the international investment regime, 31 August 2010, . K. Nowrot, ‘How to Include Environmental Protection, Human Rights and Sustainability in International Investment Law?’, 15 Journal of World Investment & Trade 2014, pp. 612-644, at 613-614. See also B. Stern, ‘The Future of International Investment Law: A Balance between the Protection of Investors and the States’ Capacity to Regulate’, in J.E. Alvarez, K.P. Sauvant (Eds.), The Evolving International Investment Regime, Oxford, Oxford UP, 2011, pp. 174-194. Some experts take a different view and claim that the existing legal regime of international investments generally leaves ample ‘policy space’ for host states to take care of public interests; see, for instance, S.W. Schill, ‘Do Investment Treaties Chill Unilateral State Regulation to Mitigate Climate Change?’, 24 Journal of International Arbitration, 2007, pp. 469-477; and as to the draft EU-Canada CETA by the same author, ‘Editorial: The German Debate on International Investment Law’, 16 Journal of World Investment & Trade, 2015, pp. 1-7. See also R. Moloo, J.M. Jacinto, ‘Standards of Review and Reviewing Standards: Public Interest Regulation in International Investment Law’, Yearbook of International Investment Law and Policy, Oxford UP, 2012.

xlii

I NTRODUCTION

balance between protecting the rights of the foreign investor and securing ample policy space for the host state.34 The question remains on how an adequate balance between the protection of private foreign investment interests and the protection and promotion of public interests can legally be realized. The reference in the preambles of some recently concluded international investment agreements to the purpose and significance of the protection of public interests is a good start but, from a legal point of view, is insufficient for securing the protection of the public interests concerned.35 The same holds true for a treaty provision confirming the host state’s ‘right to regulate’ to secure its policy space; as such, such a provision does not have significant legal relevance because the point is not that the legal existence of the (sovereign) right to regulate is questioned, but the problem is that this right sometimes becomes constrained by the application of international investment treaties in a manner and to an extent which are unacceptable for (host) states.36 Hence, further options have to be considered in order to strengthen the legal capacity of host states to pursue the promotion and protection of public interests, like the protection of human rights, environment, or, more generally, sustainable development. This could be done, for instance, by refining and restricting the rights of foreign investors, by formulating certain obligations for foreign investors, or by explicating certain rights of host states, whether as self-standing provisions or as general or specific exceptions to the rights of investors.37 In the end, it all comes down to the question whether the protection of the rights and interests of foreign investors takes precedence over the rights and interests of the host state and will restrict the policy space of that host state. New guidance for determining the 34

35 36

37

C. Henckels, ‘Balancing Investment Protection and Public Interest: The Role of the Standard of Review and the Importance of Deference in Investor-State Arbitration, 4 Journal of International Dispute Settlement, 2013; A. Roberts, ‘The Next Battleground: Standards of Review in Investment Treaty Arbitration’, 16 International Council for Commercial Arbitration Congress Series, 2011, p. 170; V. Vida, L. Gruszczynski, ‘Standards of Review in International Investment Law and Arbitration: Multilevel Governance and the Commonwealth’, 16 Journal of International Economic Law, 2013, pp. 613-633. See, Nowrot, supra note 33, p. 630; T. Gazzini, ‘Bilateral Investment Treaties and Sustainable Development’, 15 Journal of World Investment & Trade, 2014, pp. 929-963, at 941-944. See, A. Titi, The Right to Regulate in International Investment Law, Baden Baden, Nomos, 2014; Å. Romson, Environmental Policy Space and International Investment Law, Stockholm, Acta Universitatis Stockholmiensis, 2012, pp. 33-37; Nowrot 2014, supra note 33, pp. 631-632. See, F. Ortino, ‘Refining the content and role of investment “rules” and “standards”: A new approach to international investment treaty-making’, 28(1) ICSID Review, 2013; Nowrot 2014, supra note 33, pp. 632643; Gazzini 2014, supra note 35, pp. 944-962. See also the studies on what can be learned from other branches of international law, in particular international trade law: M. Wu, ‘The Scope and Limits of Trade’s Influence in Shaping the Evolving International Investment Regime’, in Z. Douglas, J. Pauwelyn, J. E. Viñuales (Eds.), The Foundations of International Investment Law: Bringing Theory into Practice, Oxford, Oxford UP, 2014, pp. 169-209; D.A. Collins, ‘The Line of Equilibrium: Improving the Legitimacy of Investment Treaty Arbitration through the Application of the WTO’s General Exceptions’, SSRN, 27 August 2014.

xliii

IGE DEKKER, YULIA LEVASHOVA, TINEKE LAMBOOY, AIKATARINI ARGYROU ‘right balance’ between the rights and interests concerned is of importance for foreign investors and the government of the host state in all phases of foreign investment projects. Moreover, in case a conflict cannot be solved at the policy level, such guidance can also assist judges and arbitrators when they have to decide on the dispute. Ideally, such arrangements in international investment law, in order to be effective, have to be coordinated with other international legal regimes which are relevant for the public interests concerned, such as international human rights law and international environmental law. While it is clear how essential such coordination between different branches of international law is for the success of the reform agenda of international investment law, we are all aware of the fact that this goal will be quite difficult to realize in a fragmented international legal order.38

2.

INTERNATIONAL INVESTMENT LAW

AND THE

ENVIRONMENT: A ROADMAP

The integration of environmental needs and policies in international investment law is not the easiest topic, but it is certainly one of the main challenges of the reform agenda.39 It is recognized by states and international organizations as an important policy goal. For some states and organizations, like the European Union and its members, it is even a constitutionally anchored commitment.40 The relation between international investment law and environmental concerns is the subject of a growing number of academic legal and policy analyses,41 sometimes triggered by case law.42 We also point to the attention devoted to the connection between international investment law and the broader concept

38

39

40 41

42

See, J.E. Viñuales, ‘The Environmental Regulation of Foreign Investment Schemes under International Law’, in P.-M. Dupuy, J.E. Viñuales (Eds.), Harnessing Foreign Investment to Promote Environmental Protection: Incentives and Safeguards, Cambridge, Cambridge UP, 2013, pp. 273-320, at 273-275. See, inter alia, World Investment Forum 2014, . For a recent overview, see UNCTAD, World Investment Report 2014, Investing in the SDG’s: An Action Plan, New York, Geneva 2014 (SDGs is the abbreviation for Sustainable Development Goals). See also UNCTAD, Investment Policy Framework for Sustainable Development, New York, Geneva, 2012. See Treaty on European Union, Article 21(3), and Treaty on the Functioning of the European Union, Articles 11, 205, and 207. See further Nowrot 2014, supra note 33, pp. 613-617. See, first of all the legal expert on this topic, J.E. Viñuales, Foreign Investment and the Environment in International Law: An Ambiguous Relationship, Cambridge, Cambridge UP, 2012. See Viñuales 2013, supra note 38, and J.E. Viñuales, ‘Investment Law and Sustainable Development: The Environment breaks into Investment Disputes’, in Bungenberg et al. (Eds.), International Investment Law, Baden Baden, Nomos, 2015, pp. 1714-1738. For one of the first publications on the topic, see Th. Waelde, A. Kolo, ‘Environmental Regulation, Investment Protection and “Regulatory Taking” in International Law’, 50 International and Comparative Law Quarterly, 2001, pp. 811-848. See also M.E. Footer, ‘BITS and Pieces: Social and Environmental Protection in the Regulation of Foreign Investment’, 18 Michigan State Journal of International Law, 2009, pp. 33-64. See also, N. Bernasconi-Osterwalder, L. Johnson (Eds.), International Investment Law and Sustainable Development, Key cases from 2000-2010, International Institute for Sustainable Development, Canada, 2011.

xliv

I NTRODUCTION

of sustainable development, an evolving legal concept which integrates economic development, social development, and environmental protection as interdependent and mutually reinforcing components, taking into account the needs of present and future generations.43 As we remarked in the first section of this introduction, the further integration of environmental concerns in international investment law requires, first of all, law-making or law-amending activities. That is the reason why the perspectives in this book include legal as well as legal-policy approaches. That is done by several authors in various ways, ranging from a predominantly policy analysis of developments in international investment law to legal positivistic analyses of investment case law leading also to recommendations for policy initiatives. The question of how environmental concerns can be further integrated into international investment law is analysed in this publication on three levels. Firstly, on a general and abstract level, i.e. what are the points of interaction between international investment law as such and the protection of the environment? Secondly, what problems are encountered when trying to integrate environmental requirements into the legal investment regime in specific societal sectors or fields? And, thirdly, on a more practical legal and policy level, i.e. what type of concrete conflicts is produced by the tension between protecting foreign investments and retaining the regulatory environmental autonomy of host states? On the basis of these three levels of analysis, the contributions – all written by distinguished scholars and/or legal practitioners – are brought together in three subsequent parts: (1) general perspectives on the relationship between international investment law and the environment, (2) a deepening of these perspectives in respect of some specific areas, and (3) case studies of investment conflicts with an environmental dimension.

2.1

International Investment Law and Environmental Issues: General Perspectives

The first part of the book deals with the general perspectives and comprises five chapters that aim to clarify the complex relations between international investment law and

43

See, inter alia, A. Newcombe, ‘Sustainable Development and Investment Treaty Law’, 8 Journal of World Investment & Trade, 2007, pp. 357-407; K. Gordon, J. Pohl, ‘Environmental Concerns in International Investment Agreements’, OECD Working Papers on International Investment, No. 2011/1, 2011; M. Gehring, A. Newcombe, ‘An Introduction to Sustainable Development in World Investment Law’, in M. C. Cordonier Segger, M.W. Gehring, A. Newcombve (Eds.), Sustainable Development in World Investment Law, Alphen a/d Rijn, Kluwer Law International, 2011, pp. 3-12; A.R. Ziegler, ‘Special Issue: Towards Better BIT’s? – Making International Investment Law Responsive to Sustainable Development Objectives’, 15 Journal of World Investment & Trade, 2014, pp. 803-808.

xlv

IGE DEKKER, YULIA LEVASHOVA, TINEKE LAMBOOY, AIKATARINI ARGYROU

environmental issues. The first contribution, Innovative legal solutions for investment law and sustainable development challenges, written by Marie-Claire Cordonier-Segger, examines how international trade and investment agreements take sustainable development objectives more seriously, both in procedural and substantive provisions. Her survey reveals that substantial progress has been made in recent years and that the innovations in this area are worthy of further analysis and study. In Anna Joubin-Bret’s contribution, Protecting the investor and protecting the environment: conflicting objectives in international investment agreements, she analyses more or less the same legal developments, including the comparison of international trade agreements. Her particular focus is on the conflicting elements in the relationship between international investment agreements and the protection of the environment. She concludes that investment treaties should ensure that they do not contradict or undermine legitimate public policy measures for sustainable development and to that end should give clear priority to the state’s legitimate environmental objectives. The next contribution is by Yulia Levashova – Fair and equitable treatment and the protection of the environment: Recent trends in investment treaties and investment cases. She moves from the general aspects of the interaction between international investment law and environmental law to the specific substantive standard of fair and equitable treatment, one of the most frequently invoked treaty provisions in investor-state arbitration proceedings. The author discusses recent attempts by policymakers to clarify the concept of fair and equitable treatment in treaty clauses in order to raise the threshold of host state liability and to preserve the regulatory autonomy of host states. The author James Harrison’s contribution, Addressing the procedural challenges of environmental litigation in the context of investor-state arbitration, discusses important procedural challenges faced by arbitral tribunals in investment disputes. Harrison’s specific focus is on the role of scientific evidence. In particular, he examines the nature and the sources of such evidence. He discusses the difficulties which tribunals encounter in deciding on disputes where there is no clear scientific evidence. Another procedural challenge which he identifies is the question of to what extent investment tribunals can draw upon relevant decisions of other judicial institutions involved in the settlement of environmental disputes. The final contribution of the first part – International responsibility of the state and international responsibility of juridical persons for environmental damage: where do we stand? – is written by Andrea Gattini. The author stipulates that the classical tools of the international responsibility of states are not very well suited to capturing the complexities and challenges posed by the goal of effective international environmental protection. In addition, the responsibility of private juridical or legal persons, e.g. a company, for environmental damage finds no basis in customary international law. However, this does

xlvi

I NTRODUCTION

not imply that under international law, a legal person enjoys a general licence to pollute the environment. According to Gattini, international treaty law can canalize the responsibility of juridical persons in various ways, as has, for instance, taken place under international investment law.

2.2

Integrating Environmental Policies into International Investment Law: Specific Areas

The second part commences with the contribution by Alessandra Asteriti: Climate change policies and foreign investment: some salient legal issues. Her analysis provides a comparative review of the international investment law regime and the climate change law regime, designating the points of interaction and conflicts between these two. In this chapter, the potentiality for conflicts between investment rules and climate change policy objectives is explored mainly with reference to standards of treatment and indirect expropriation. Such standards are often used in investment arbitration claims to protect sunk costs from climate change-related regulatory interventions. Attila Tanzi continues the discussion with the following contribution: Bridging the gap between international investment law and the right of access to water. He concentrates on the role of the right of access to water in investor-state dispute settlement, and he emphasizes the potential of the so-called harmonizing principle. He argues that when water services are privatized and operated by foreign investors, the international law processes in the field of human rights, the environment, and water constitute an international regulatory setting which is appropriate for enhancing a symmetrical legal relationship between foreign investors and host states. The third contribution in this part concerns the theme of Investment arbitration in the nuclear energy sector: environmental protection versus investor protection, and is written by James Fry and Odysseas Repousis. The authors examine whether foreign investors in the field of nuclear energy, a group which is rather limited in number and comprises both private and public enterprises, benefit from investment treaties to the detriment of the regulatory powers of host states. Starting from the view that the nuclear sector is an example where environmental risks and corresponding changes in the regulation should be anticipated and accepted by investors as a ‘fact of life’, the authors conclude that in this sector, the potential gap between the expectations of investors and the host state’s regulatory power does not have to be bridged since there does not seem to be such an apparent lacuna. The following four chapters in this second part discuss the developments in certain geographical areas. Two of them focus on the EU and its policies on foreign direct investment. Angelos Dimopoulos examines in his chapter, Integrating environmental law principles and objectives in EU investment policy: challenges and opportunities, how

xlvii

IGE DEKKER, YULIA LEVASHOVA, TINEKE LAMBOOY, AIKATARINI ARGYROU environmental protection – an overarching objective of all EU external policies – has infiltrated EU investment policy and practice, and he analyses its implications for international investment law. Although policy has still to be translated into law, the conclusion is that the protection of the environment is likely to become a sustainable development objective of EU investment agreements and thus that EU policy will represent a milestone in the development of international investment law. In the contribution by Ottavio Quirico, The environmental sustainability of the EU Investment Policy after Lisbon: progressive international law developments, the extraordinary position of the EU with regard to the integration of environmental concerns in (forthcoming) international investment treaties is substantiated. Quirico provides a legal analysis of the main constitutional provisions of the EU Treaties and an interpretation of the notion of investment. He argues that, regardless of a restrictive or extensive interpretation of that notion, the EU is fostering a ‘progressive development’ of international law with respect to foreign investments and the basic principle of environmental protection. In Marcel Szabo’s Bilateral investment treaties from an ecological aspect, we move to the position of the Central and Eastern European countries. He addresses the various problems arising from the ongoing validity of intra-EU bilateral investment treaties. He indicates that these treaties limit the regulatory capacities of the Central and Eastern EU members to pursue their public policy goals, including sustainable development and effective protection of the environment. Since the EU is responsible for endorsing changes to existing intra-EU investment treaties, it should develop a model treaty that ensures the possibility of introducing and enforcing environmental regulation on EU host states. In the final chapter of this part, Balancing foreign investment protection and environmental protection under South African bilateral investment treaties, Jimcall Pfumorodze and Mustaqeem da Gama offer an analysis of the investment treaties to which South Africa is (still) a party, and they examine to what extent these treaties afford the government sufficient policy space for the protection of the environment. They conclude that pursuant to the South African Constitution, the South African model for bilateral investment treaties as well as any future treaties must explicitly provide for the integration of environmental protection, e.g. through general and specific exceptions.

2.3

Environmental Challenges in Investment Disputes: Case Studies

The third part of the book comprises four studies on investment conflicts in which environmental issues have become an important part of the conflict. The first one is by Francesca Romanin Jacur: The Vattenfall v. Germany Disputes: finding a balance between energy investments and public concerns. This chapter contains an analysis of the two Vattenfall disputes based on the Energy Charter Treaty. She notices that the first dispute

xlviii

I NTRODUCTION

led to a remarkable change in the policies of the German authorities with regard to public policy concerns. Both disputes share some controversial legal issues, questioning, for instance, the scope of the principle of fair and equitable treatment and the notion of the ‘legitimate expectations’ of foreign investors. Felix Zaharia’s contribution is entitled: Standards of our own: natural resources investment and the protection of the environment: case study: oil and gas projects in Azerbaijan. He examines the design and practice of the still little-known Espoo Convention on Environmental Impact Assessment in a Transboundary Context (1991). The analysis focuses on the Implementation Committee which was established by the Convention. It has special tasks with regard to the assessment of the impact of investment on the environment. Although the rules in this area are mainly procedural, the analysis points to the fact that the dialogue between the parties concerned as prescribed by the Convention also contributes substantively to bridging the gap between international investment law and the environment. The following case study is contributed by Tineke Lambooy, Nurul Barizah, and Iman Prihandono, under the title Foreign direct investment in the mining industry in Indonesia: disputes concerning environmental degradation and pollution. The authors first outline the legal framework that applies to mining activities in Indonesia conducted by foreign investors. Next, an overview is presented of recent collisions between mining companies and local communities regarding environmental pollution and human rights abuses. Underlying these collisions is the government’s conflict of goals. On the one hand, it wishes to facilitate economic growth through attracting and maintaining foreign direct investments. On the other hand, it is the government’s constitutional goal to promote sustainable development and social justice. The authors end their analysis by discussing the declining support for the special legal regimes instigated by bilateral investment treaties and concession agreements. The fourth case study, Chevron-Texaco versus Ecuador: the environmental case within a claim of denial of justice, is provided by Blanca Gomez de la Torre. She discusses the longstanding conflict between Chevron as a foreign investor and a group of Ecuadorean citizens claiming compensation for environmental damage to their region. The author, who is a member of the Attorney-General Office of Ecuador, discusses the history of the conflict and the main legal and political issues. She concludes that the principle of due process should not be exclusively guaranteed to a foreign investor but also to the state and its citizens. The concluding chapter of this edited volume contains a look into the future: Future Outlook: Bridging gaps between the environment and investment law or juxtaposing different topics. It is a contribution by Gabriel Bottini and Martijn Scheltema and provides suggestions to look more deeply into broader stakeholder engagement in order to ensure

xlix

IGE DEKKER, YULIA LEVASHOVA, TINEKE LAMBOOY, AIKATARINI ARGYROU

a balanced and transparent treaty negotiation process, as well as the genuine engagement of affected legal communities in the disputes between the investor and the host state. Their contribution suggests that embedding corporate social responsibility frameworks in the context of international investment agreements should be further explored. In their opinion, this could serve as a useful tool to address environmental concerns in the context of international investment law. Last but not least, their concluding remarks address the challenges in investment arbitration.

3.

CONCLUSION

AND

RECOMMENDATIONS

For the editors, the main conclusions and recommendations of the project can be summarized as follows. Positive interactions: investing in the environment. Investment law and environmental law do not necessarily conflict; in fact, the interaction can be beneficial when capital and resources are provided through investment instruments to support pro-environment projects. This opportunity can be explored in a more structured way. Additionally, environmental laws can provide incentives for ‘green investments’, e.g. the ‘payment for ecosystem services’ schemes. A new-generation of international investment agreements. Provisions on environmental protection are included more often in the so-called ‘new generation’ of international investment treaties. However, from the text of these treaties, it is also evident that the parties to the modern international investment treaties are still struggling to define, to clarify, and to reconcile the relationship between investment protection and environmental protection. In most treaties, provisions to that end are only included in the preamble to the treaty, which has less legal effect than including such provisions in the operative parts of a treaty. In order to secure a better balance between the protection of investments and the environment, international investment treaties should not only refer to the environment in preambular language or by way of vaguely formulated exceptions but rather include substantive provisions on the protection of the environment in the core treaty obligations. European Union policy. The introduction of the European Union (EU) as a new player in international investment rule-making creates a unique opportunity to reconsider of the role of environmental concerns in international investment law. Although it is still very early, it is necessary to assess and regularly evaluate to what extent EU policy goals concerning environmental protection and sustainable development are included in EU investment agreements and achieve their potential. The EU institutions seem to favour either a detailed description of the scope of investment protection provisions in treaties or

l

I NTRODUCTION

the inclusion of a general exception to the right to regulate in treaties. In the latter option, the possibility is afforded to (supra)national regulators to adopt (restrictive) measures which are necessary for realizing public policy objectives. Environmental impact assessment. General international law does not prescribe that states perform an environmental impact assessment in case of allowing (new) projects that potentially have an impact on the environment. Nor does international law specify the scope and content of such environmental impact assessments. The obligation and content of environmental impact assessments is determined by domestic legislation. It is noted that there are significant differences between states as regards the manner in which they evaluate environmental impacts. Regional instruments such as the Espoo Convention could become a tool for harmonizing environmental impact assessments on a global scale, both on international and national levels. Due diligence. States and foreign investors, particularly when providing essential public services, such as water distribution and sanitation, should perform an adequate ‘due diligence’ process before taking any decisions that potentially have an impact on the environment and/or human rights. Practical guidance concerning the process of how to conduct due diligence can be found in international human rights treaties and authoritative soft-law instruments, such as the Ruggie Guiding Principles and the OECD Guidelines for Multinational Enterprises. Fair and equitable treatment. The core investment protection standards, such as fair and equitable treatment, need to be better clarified in the text of investment treaties in order to avoid disagreements in the interpretation of the meaning of such clauses between investors and states. Currently, environmental regulatory measures taken by host states are often challenged by foreign investors on the grounds of a breach of a fair and equitable treatment provision. Clarification of the fair and equitable treatment standard could be done by providing specific treaty-based exceptions for environmental regulations or by specifying concrete forms of conduct that violate this standard. National law. National laws are relevant instruments to be taken into account by arbitral tribunals in deciding on investment disputes that have a connection to the host state environment. A measure taken by a host state aimed at complying with the requirements of national law, which is generally part of the law applicable to the dispute, should not be regarded as a basis for finding host state-liability, unless there is clear evidence of a violation of international law. Conflicting obligations. The decisions of arbitral tribunals generally provide a poor and inadequate analysis of conflicting obligations whenever (national or international) environmental and investment obligations are at stake. It is not always sufficient to provide that the state has to comply with both (thereby in fact disregarding the relevance of the environmental provisions). A comprehensive consideration of the interplay between such

li

IGE DEKKER, YULIA LEVASHOVA, TINEKE LAMBOOY, AIKATARINI ARGYROU

diverging obligations is necessary in order to determine whether or not, on balance, the state has breached its international investment obligations. Procedure. The procedure of calling of witnesses and experts in investment cases should be better regulated in IIAs, because scientific evidence plays a decisive role in determining and evaluating environmental risks. Amicus curiae. It would be recommendable to strengthen the position of amicus curiae submissions in investment cases that involve public interest matters. Tribunals should be encouraged to engage and to communicate with the parties who submit an amicus curiae brief. Their submissions should be given proper weight and be better taken into account in the reasoning of arbitrators. Culture. Conflicts between investment law and environmental law can, to some extent, be explained by ‘cultural differences’ between the practitioners of the two fields of law. Environmental lawyers and investment lawyers have been educated and work in different environments. For a long time, they have ignored that there are interconnections between their two fields of law. A lack of communication between these two types of experts and a lack of knowledge concerning the developments in each other’s fields of expertise have led to misunderstandings. To breach the ‘cultural difference’ between practitioners of investment law and environmental law, it is recommended that the arbitrators, who generally are only trained in commercial law and investment law, also obtain training in general public law and in environmental law.

lii

BIBLIOGRAPHY BOOKS Bungenberg, M., Griebel, J., Hobe, S., Reinisch A., (Eds.), International Investment Law, Baden Baden, Nomos, 2015. Harten, van G., Investment Treaty Arbitration and Public International Law, Oxford: Oxford UP, 2007 Lowenfeld, A., F., International Economic Law, 2nd ed., Oxford: Oxford UP, 2008, pp. 454-586. Montt, S., State Liability in Investment Treaty Arbitration, Global Constitutional and Administrative Law in the BIT Generation, Oxford: Hart Publishing, 2009. Moloo, R., Jacinto, J.M., Standards of Review and Reviewing Standards: Public Interest Regulation in International Investment Law, Yearbook of International Investment Law and Policy, Oxford: Oxford UP, 2012. Newcombe, A., Paradell, L., Law and Practice of Investment Treaties, The Netherlands: Kluwer Law International, 2009, pp. 41-49. Romson, Å., Environmental Policy Space and International Investment Law, Stockholm: Acta Universitatis Stockholmiensis, 2012, pp. 33-37. Sands, P., Principles of International Environmental Law, Cambridge: Cambridge UP, 2003, pp. 1056-1072. Schrijver, N.J., Sovereignty over Natural Resources, Cambridge: Cambridge UP, 1997. Sornarajah, M., The International Law on Foreign Investment, 2nd ed., Cambridge: Cambridge UP, 2004, pp. 259-260. Titi, A., The Right to Regulate in International Investment Law, Baden Baden: Nomos, 2014.

liii

IGE DEKKER, YULIA LEVASHOVA, TINEKE LAMBOOY, AIKATARINI ARGYROU

Articles Arato, J.,‘The Margin of Appreciation in International Investment Law’, 54 Virginia Journal of International Law, 2014, pp. 545-578. Aaken, van A., Fragmentation of International Investment Law: the Case of International Investment Protection’, 17 Finnish Yearbook of International Law 2008, pp. 91-130. Footer, M.E., ‘BITS and Pieces: Social and Environmental Protection in the Regulation of Foreign Investment’, 18 Michigan State Journal of International Law, 2009, pp. 33-64. Gazzini, T., ‘Bilateral Investment Treaties and Sustainable Development’, 15 Journal of World Investment & Trade, 2014, pp. 929-963. Henckels, C., ‘Balancing Investment Protection and the Public Interest: The Role of the Standard of Review and the Importance of Deference in Investor-State Arbitration, 4 Journal of International Dispute Settlement, 2013, pp. 197-215. Johnson, L.,‘Annulment of ICSID Awards: Recent developments’, International Institute for Sustainable Development, Canada, 2011. Lavopa, M., Barreiros, L.E., Bruno, M.V., ‘How to Kill a BIT and Not Die Trying: Legal and Political Challenges of Denouncing or Renegotiating Bilateral Investment Treaties’, 16 Journal of International Economic Law, 2013, pp. 869-891. Newcombe, A.,‘Sustainable Development and Investment Treaty Law’, 8 Journal of World Investment & Trade, 2007, pp. 357-407. Nowrot, K.,‘How to Include Environmental Protection, Human Rights and Sustainability in International Investment Law?’, 15 Journal of World Investment & Trade, 2014, pp. 612-644. Ortino, F., ‘Refining the content and role of investment “rules” and “standards”: A new approach to international investment treaty-making’, 28(1) ICSID Review, 2013. Puig, S., ‘No Right without a Remedy: Foundations of Investor-State Arbitration’, 35 University of Pennsylvania Journal of International Law, 2014, pp. 829-861.

liv

B IBLIOGRAPHY Roberts, A., ‘Power and Persuasion in Investment Treaty Interpretation, The Dual Role of States’, 104 American Journal of International Law, 2010, pp. 179-225. Roberts, A., ‘The Next Battleground: Standards of Review in Investment Treaty Arbitration’, 16 International Council for Commercial Arbitration Congress Series, 2011, p. 170. Schultz, T., Dupont, C., ‘Investment Arbitration: Promoting the Rule of Law or Overempowering Investors? A Quantitative Empirical Study’, 25 European Journal of International Law, 2014, pp. 1147-1168. Schill, S.W., ‘W(h)ither Fragmentation? On the Literature and Sociology of International Investment Law’, 22 European Journal of International Law, 2011, pp. 875-908. Schill, S.W., ‘Do Investment Treaties Chill Unilateral State Regulation to Mitigate Climate Change?’, 24 Journal of International Arbitration, 2007, pp. 469-477. Won-Mog Choi, ‘The Present and Future of the Investor-State Dispute Settlement Paradigm’, 10 (3) Journal of International Economic Law, 2007, pp. 1-23. Vida, V., Gruszczynski, L., ‘Standards of Review in International Investment Law and Arbitration: Multilevel Governance and the Commonwealth’, 16 Journal of International Economic Law, 2013, pp. 613-633. Waelde, T., Kolo, A., ‘Environmental Regulation, Investment Protection and “Regulatory Taking” in International Law’, 50 International and Comparative Law Quarterly, 2001, pp. 811-848. Weiler, T., ‘European Hypocrisy: TTIP and ISDS’, 25 European Journal of International Law, 2014, pp. 961-967. Ziegler, A.R., ‘Special Issue: Towards Better BIT’s? – Making International Investment Law Responsive to Sustainable Development Objectives’, 15 Journal of World Investment & Trade, 2014, pp. 803-808. Contributions in edited books Dupuy, P.-M., Viñuales, J.E., ‘Human Rights and Investment Disciplines: Integration in Progress, in Bungenberg et al. (Eds.), International Investment Law, Baden Baden: Nomos, 2015, pp. 1739- 1767.

lv

IGE DEKKER, YULIA LEVASHOVA, TINEKE LAMBOOY, AIKATARINI ARGYROU Gehring, M., Newcombe, A., ‘An Introduction to Sustainable Development in World Investment Law’, in M. C. Cordonier Segger, M.W. Gehring, A. Newcombve (Eds.), Sustainable Development in World Investment Law, Alphen a/d Rijn, Kluwer Law International, 2011, pp. 3-12. Schrijver, N.J., ‘A Multilateral Investment Agreement from a North-South Perspective’, in E.C. Nieuwen huys, M.M.T.A. Brus (Eds.), Multilateral Regulation of Investment, Leiden: Kluwer Law International, 2001, pp. 17-33. Stern, B., ‘The Future of International Investment Law: A Balance between the Protection of Investors and the States’ Capacity to Regulate’, in J.E. Alvarez, K.P. Sauvant (Eds.), The Evolving International Investment Regime, Oxford: Oxford UP, 2011, pp. 174-194. Viñuales, J. E., ‘The Environmental Regulation of Foreign Investment Schemes under International Law’, in P.-M. Dupuy, J.E. Viñuales (Eds.), Harnessing Foreign Investment to Promote Environmental Protection: Incentives and Safeguards, Cambridge: Cambridge UP, 2013, pp. 273-320. Wälde, T. W., ‘A Requiem for the New International Economic Order – the Rise and Fall of Paradigms in International Economic Law’, in G. Hafner (Ed.), Liber Amicorum Professor Ignaz Seidl-Hohenveldern in honour of his 80th birthday, The Hague, Kluwer Law International, 1998, chapter 41. Wu, M., ‘The Scope and Limits of Trade’s Influence in Shaping the Evolving International Investment Regime’, in Z. Douglas, J. Pauwelyn, J. E. Viñuales (Eds.), The Foundations of International Investment Law: Bringing Theory into Practice, Oxford: Oxford UP, 2014, pp. 169-209.

lvi

Part I International Investment Law and Environmental Issues: General Perspectives

1

INNOVATIVE LEGAL SOLUTIONS INVESTMENT LAW

AND

FOR

SUSTAINABLE

DEVELOPMENT CHALLENGES Marie-Claire Cordonier Segger*

1.1

INTRODUCTION

One of the most significant challenges facing the world community today is the need to increase investment flows to foster sustainable development in developing countries. However, international economic treaties and their regimes hold the potential to foster or frustrate sustainable development, depending on how such accords can take other social and environmental obligations of countries into account. This chapter presents a brief summary of how sustainable development has come to be accepted as a global objective, introducing International Investment Agreements (IIAs) and their key provisions in this context. The chapter then examines how international trade and investment agreements can take sustainable development objectives more seriously, in both procedural and substantive provisions, focusing on recent innovative legal solutions. It briefly surveys how states can use specific provisions related to *

DPhil (Oxon), MEM (Yale), BCL and LLB (McGill), Senior Legal Expert, Sustainable Development, International Development Law Organization; Senior Director, Centre for International Sustainable Development Law; International Professor, University of Chile; Affiliated Fellow, Lauterpacht Centre for International Law, University of Cambridge and Senior Research Associate, United Nations CGIAR Centre for International Forestry Research. Deepest gratitude is expressed to Ms. Kirsten Mikadze, Legal Researcher, CISDL, for her substantive insights and excellent research assistance and also to Dr. Markus W. Gehring, Prof. Andrew Newcombe, Prof. Armand de Mestral, Dr. Kate Miles, Prof. Rodrigo Polanco, and Prof. Stephen Toope for their brilliant ideas, advice, and intellectual collaborations. This chapter draws on M. C. Cordonier Segger, ‘International Law on Sustainable Development’, in D. Armstrong (Ed.), Routledge Handbook of International Law, New York: Routledge, 2009; M. W. Gehring and M. C. Cordonier Segger (Eds.), Sustainable Development in World Trade Law, The Hague: Kluwer Law International, 2005; M. C. Cordonier Segger, ‘Sustainable Development in Regional Trade Agreements’, in L. Bartels and F. Ortino (Eds), Regional Trade Agreements and the WTO Legal System, Oxford: Oxford University Press, 2006; and M. C. Cordonier Segger, ‘Sustainable Development in International Law’, in H. C. Bugge and C. Voigt (Eds.), Sustainable Development in National and International Law, Groningen: Europa Law Publishing, 2008. It also draws on M. C. Cordonier Segger and A. Newcombe, ‘An Integrated Agenda for Sustainable Development in International Investment Law’, and M. C. Cordonier Segger and D. French ‘Governing Investment in Sustainable Development: Investment Mechanisms in Sustainable Development Treaties and Voluntary Instruments’, in M. C. Cordonier Segger, M. Gehring, and A. Newcombe (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011.

3

MARIE-CLAIRE CORDONIER SEGGER

sustainable development in IIAs, including preambular references, exception clauses, treaty reservations, rules governing relationships to other treaties, ‘no lowering of standards’ provisions, and corporate social responsibility provisions. It also considers the contribution of other international investment instruments in response to global sustainable development challenges such as climate change and the degradation of biological resources, focusing on ways to strengthen and implement new obligations.

1.2

INVESTMENT, SUSTAINABLE DEVELOPMENT

AND THE

LAW

As many with concern for environmental degradation and social inclusion have long argued, development means a great deal more than simple economic growth as measured by gross domestic product. Many states have argued for a right to development.1 However, concerns about the environmental costs of current development patterns have also gained currency. Global policy debates have reflected these concerns. Among other significant milestones, in 1987, the World Commission on Environment and Development (WCED) delivered its report to the General Assembly of the United Nations (UNGA), Our Common Future (the Brundtland Report).2 The Brundtland Report defined sustainable development as “[…] development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.3 It notes that: [s]ustainable development is not a fixed state of harmony, but rather a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development, and institutional change are made consistent with future as well as present needs.4 The Brundtland Report also recognized that a “mere increase in flows of capital to developing countries will not necessarily contribute to development […]”.5 Sustainable development refers to country efforts to achieve progress (‘development’), in a way that can be maintained over the long term (‘sustainable’). While there are serious concerns about the potential impact of uncontrolled economic growth, there is also 1

2 3 4 5

Declaration on the Establishment of a New International Economic Order, GA Res. 3201 (S-VI), UN GAOR, UN Doc. A/Res/3201(S-VI) (1974). See also Declaration on the Right to Development, UNGA Res. 41/128, UN GAOR, UN Doc. A/Res/41/128 (1986). World Commission on Environment and Development, Our Common Future, Oxford: Oxford University Press, 1987, p. ix. Id., p. 43. Overview, Report of the World Commission on Environment and Development: Our Common Future, UNGA Doc. A/42/427 Ann. 1987 at para. 30 (emphasis added). Id., at para. 7.

4

1

INNOVATIVE LEGAL SOLUTIONS

FOR INVESTMENT

LAW

AND

SUSTAINABLE DEVELOPMENT

widespread consensus in the international community that foreign direct investment (FDI) is necessary for sustainable development. For instance, Agenda 21, the comprehensive plan developed at the 1992 United Nations Conference on Environment and Development (the Rio Earth Summit), highlighted the critical role investment plays in the ability of developing states to meet basic needs in a sustainable manner.6 The subsequent Monterrey Consensus7 identified the need to mobilize FDI as one of the ‘leading actions’ to achieve the goals of “eradicating poverty, achieving sustained economic growth and promoting sustainable development”.8 A few months later, in the World Summit on Sustainable Development (WSSD), states focused on how best to implement sustainable development in a context of globalization and renewed commitments to international development assistance. The WSSD Johannesburg Plan of Implementation (JPOI) identified “an enabling environment for investment”9 as part of the economic foundation of sustainable development. With regard to investment, in the JPOI the same balance between risk and opportunity is recognized, but there is an even stronger emphasis on the role that private investment could play to foster sustainable development.10 Ten years later, these ideas were emphasized further in the outcomes of the 2012 Rio+20 United Nations Conference on Sustainable Development (UNCSD). The 2012 UNCSD Declaration, entitled The Future We Want, calls for international investment in sustainable agriculture, water, energy, biodiversity, and other sectors and also calls for ‘novel partnership approaches’, noting that “the interplay of development assistance with private investment, trade and new development actors provides new opportunities for aid to leverage private resource flows”.11 In sum, over the past forty years, there has been an extensive policymaking process related to sustainable development, engaging over 195 United Nations (UN) member countries. The UN sought a bridge between developed and developing states in order to resolve serious problems of environmental degradation and a lack of social and economic development. The concept of sustainable development provided that bridge. Foreign investment is seen as one way to support, indeed to provide resources for, the sustainable development that is needed in developing countries.

6 7

8 9 10 11

Agenda 21, Report of the United Nations Conference on Environment and Development, UN Doc. A/CONF.151/26/Rev. 1, 31 ILM 874, 1992, para. 2.23. United Nations, Monterrey Consensus of the International Conference on Financing for Development: The final text of agreements and commitments adopted at the International Conference on Financing for Development, Monterrey, Mexico, 18-22 March 2002. Id., paras. 3, 20. Plan of Implementation of the World Summit on Sustainable Development, UN Doc. A/CONF.199/20, 2002 at para. 4 [JPOI]. Available at: UN accessed 27 March 2014. Id., para. 47. United Nations Conference on Sustainable Development, The Future We Want, A/RES/66/288 at para. 260. Available at: accessed 11 June 2014.

5

MARIE-CLAIRE CORDONIER SEGGER

1.3

SUSTAINABLE DEVELOPMENT

IN THE INVESTMENT

TREATY LANDSCAPE

While FDI entails risks (for investors and also for host states), it also brings important opportunities. States have not agreed on one definition for sustainable development. Rather, they have focused on developing greater global consensus on how to achieve it, signing and ratifying international treaties where necessary, leading to the emergence of the international law on sustainable development. IIAs can potentially be found among these treaties. Indeed, countries emphasize that such investment agreements should take sustainable development objectives into account. This having been recognized, the precise legal character of sustainable development commitments by states remains contested. A detailed analysis of these views and their differing normative consequences is beyond the scope of this chapter, but it can be noted that several key IIAs, particularly those that are part of trade accords, do recognize a common commitment to sustainable development.12 One trend in international trade and investment is the inclusion of procedural and substantive innovations so that trade and investment treaties contribute more directly to sustainable development. Sustainable development has become an overarching objective of the World Trade Organization (WTO) and is explicitly mentioned in the Preamble to the 1994 Marrakesh Agreement Establishing the World Trade Organization (WTO).13 The promotion of sustainable development has also become an objective of a growing number of regional trade and investment liberalization treaties, with substantive provisions and parallel cooperation arrangements set in place to achieve the objective.14 These innovations are important, as international investment law has traditionally reflected a policy of protecting foreign capital from certain types of host state conduct. There remain concerns, however, that the investment protection function of IIAs may impede, discourage, or even prohibit government measures to ensure the sustainable development of natural resources.15 Some commentators have argued that the scope of investment treaty obligations, including indirect expropriation, fair and equitable treatment, national treatment, and most-favoured-nation (MFN) treatment, remains uncertain and that IIA investment tribunal processes favour foreign investors to the detriment of host states, essentially criticizing the process of investor-state arbitration for being non-

12

13 14 15

For example, see 1994 North American Free Trade Agreement, 32 ILM 289 [NAFTA] at Preamble. Most Canadian, United States (US), and Latin American trade and investment treaties make similar commitments. G. P. Sampson, The Role of the World Trade Organization in Global Governance, New York: United Nations University Press, 2001, p. 9. Gehring & Cordonier Segger 2005, supra note *. For examples of such critiques, see the International Institute for Sustainable Development (IISD). Available at: accessed 27 March 2014.

6

1

INNOVATIVE LEGAL SOLUTIONS

FOR INVESTMENT

LAW

AND

SUSTAINABLE DEVELOPMENT

transparent and inaccessible.16 Commentators have also suggested that even if IIAs do not impede government measures taken to ensure sustainable development, they could do more to promote sustainable development.17 The challenge is to craft IIAs that provide FDI promotion and protection, while ensuring sufficient regulatory flexibility to address sustainable development objectives. While there is variation in specific treaty language, most IIAs contain a series of core investment protection provisions.18 IIA preambles regularly refer to creating ‘favourable conditions’ or a ‘stable framework’ for investment and link this framework to economic development.19 IIAs create these favourable conditions by imposing binding obligations on states with respect to their treatment of foreign investment. Widespread criticism of the IIA regime first developed as a result of four controversial and high-profile investment claims under Chapter 11 of the North American Free Trade Agreement (NAFTA): Ethyl v. Canada, Azinian v. Mexico, Metalclad v. Mexico, and Methanex v. United States. These four cases have given rise to considerable controversy regarding Chapter 11 of NAFTA and the IIA regime more generally. On a general level, critics of these international economic law regimes – in particular trade and investment agreements – view them as ‘institutionalizing a disciplinary neoliberalism’ or a global ‘economic constitutionalism’ that subverts democratic decision-making.20 As discussed below, there is a fundamental ideological divide between those who view the IIA network as promoting sustainable development through the provision of a supportive, stable, and predictable framework for investment planning and those who view it as trapping or strangling public sector sustainability measures by imposing inappropriate neoliberal disciplines. Whatever position is taken along the ideological spectrum, the impact of IIAs is by no means academic. The number of investment treaty arbitrations continues to rise, with a near record-breaking 57 known cases launched in 2013.21 Cases to date involve a wide

16

17

18 19 20 21

See F. Marshall & H. Mann, ‘Good Governance and the Rule of Law: Express Rules for Investor-State Arbitrations Required’, IISD, 2006, p. 2. Available at: accessed 27 March 2014. See A. Newcombe, ‘An Introduction to Sustainable Development in World Investment Law’, in Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague, Kluwer Law International, 2010, supra note *. For detailed analysis, see A. Newcombe & L. Paradell, Law and Practice of Investment Treaties, Alphen aan den Rijn: Kluwer Law International, 2009. For example, see the preamble to the 2003 China–Germany BIT. Available at: accessed 27 March 2014. See D. Schneiderman, Constitutionalizing Economic Globalization: Investment Rules and Democracy’s Promise, Cambridge: Cambridge University Press, 2008. The United Nations Conference on Trade and Development, Recent Developments in Investor-State Dispute Settlement (ISDS), IIA Issues Note No 1, April 2014. Available at: accessed 1 June 2014.

7

MARIE-CLAIRE CORDONIER SEGGER

variety of investments, many of which have significant sustainable development impacts. These include investment treaty claims regarding water, gas, and electricity concessions,22 waste concessions,23 waste disposal facilities,24 bans on fuel additives,25 land development projects,26 and fracking moratoriums.27 The combined effect of the protections afforded by the IIA regime, the increasing number of claims, and the potential for large damage awards underlines the importance of assessing the regime from the perspective of sustainable development.

1.4

INNOVATIVE LEGAL SOLUTIONS

IN INTERNATIONAL INVESTMENT

ACCORDS

The integration of social development, environmental protection, and economic growth considerations in all aspects of decision-making is a bedrock principle of sustainable development. At the global level, integration can be viewed as a conceptual framework for sustainable development where decision-making reflects the interdependence of social, economic, financial, and environmental and human rights concerns. Integration may occur functionally between institutions or within institutional programmes. Alternatively, integration may occur at the normative level by the integration of sustainable development considerations into applicable rules or the application of sustainable development principles in judicial reasoning. Innovative legal solutions can be found to integrate social and environmental considerations into the structure of IIAs. The incorporation of sustainable development in IIAs is a relatively recent phenomenon. In the past, most simple investment treaties focused almost uniformly on increasing and promoting investment without consideration of how that investment should occur. Recent treaty practice and jurisprudence suggest that the regime can be adapted to address sustainable development issues, however, and the most modern IIAs have made progress in this respect. Indeed, while addressing sustainable development within the

22

23

24 25 26 27

See CMS Gas Transmission Company v. Republic of Argentina, ICSID Case No. ARB/01/08, Award of 12 May 2005; Compañiá de Aguas del Aconquija SA and Vivendi Universal SA v. The Argentine Republic, ICSID Case No. ARB/97/3, Award of 20 August 2007; Aguas del Tunari, SA v. Republic of Bolivia, ICSID Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction of 21 October 2005; and Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award of 24 July 2008. Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000, and Técnicas Medioambientales Tecmed, SA v. The United Mexican States, ICSID Case No. ARB(AF)/ 00/2, Award of 29 May 2003 [Tecmed]. Tecmed, id.; Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB/00/3, Award of 30 April 2004. Ethyl Corporation v. The Government of Canada, UNCITRAL, Award on Jurisdiction of 24 June 1998. MTD Equity Sdn. Bhd. & MTD Chile SA v. Republic of Chile, ICSID Case No ARB/01/7, Award of 25 May 2004. Lone Pines Resources Inc v. Government of Canada, UNCITRAL, Notice of Intent of 8 November 2012.

8

1

INNOVATIVE LEGAL SOLUTIONS

FOR INVESTMENT

LAW

AND

SUSTAINABLE DEVELOPMENT

corpus of the IIA regime remains a challenge, certain innovations in IIA treaty practice may be assisting. Several types of innovative sustainable development-related provisions have been included in IIAs. It is not yet clear which provisions or procedures will have the most success in helping to address social and environmental considerations in international economic law. Given the complexity of the issues and the interests involved in the foreign investment context, it is likely that no single provision offers a definitive solution. These innovations alone will not necessarily ensure that sustainable development objectives are given more weight by the parties to the IIAs in complying with their obligations or by tribunals in interpreting agreements, as compared to the other relevant objectives of agreements (the promotion and protection of foreign investment, for example). However, they appear likely to contribute to the integration of environmental and social considerations into trade and investment agreements, an important first step towards sustainable development. The rest of this chapter examines several examples of sustainable development-related provisions in international economic agreements to determine how states are defining sustainable development and characterizing its legal status, what provisions and principles they adopt in the treaties to address and integrate environmental and social development concerns,28 and whether state practices both prior to and after treaty signature are affected. Both regional trade agreements with investment provisions and bilateral investment treaties (BITs) are the focus of the discussion, in other words, International Trade and Investment Agreements (ITIAs). Beyond the preambular provisions, which simply recognize sustainable development as part of the object or purpose of an investment agreement, it is possible to divide these ‘integrating’ provisions into three general categories related to their normative function.29 First, there are provisions that seek to help ensure that investment treaties do not unintentionally constrain domestic or international measures taken by states to secure sustainable development. Second, there are provisions which appear to establish parallel social or environmental cooperation to complement more traditional liberalization and investor protection provisions. Third, there are relatively new experiments with provisions to promote more socially responsible, sustainable investments, which will not be explored here, but have been examined in other works.30 To facilitate the negotiation and interpretation of such provisions, furthermore, certain procedural innovations are also gaining currency and can be encouraged in future investment treaty-making and in arbitral tribunals. 28 29 30

See Cordonier Segger 2006, supra note *. Cordonier Segger 2008, supra note *. See Cordonier Segger et al. 2010, supra note *.

9

MARIE-CLAIRE CORDONIER SEGGER

1.4.1

Preambular Commitments to Sustainable Development

Preambles in most ITIAs tend to be short and to highlight three objectives: the treaty parties’ desire to increase economic cooperation, to stimulate economic growth, and to create favourable conditions for investment. In interpreting ITIA obligations, ITIA tribunals have regularly relied on preambles to emphasize the investment protection function of ITIAs.31 The importance of preambular language that is worded in a ‘purposive’ manner can be understood from Article 31(2) of the 1969 Vienna Convention on the Law of Treaties (VCLT), according to which the context and the purpose of a treaty is to be derived inter alia from the treaty’s preamble.32 In light of the different interpretations given to legal terms such as ‘expropriation’, ‘legitimate expectations’, and ‘like circumstances’ and the effects these can have on sustainable development objectives,33 the role that preambular language can fulfil is significant.34 As it stands, commitments to sustainable development are not commonly included in ITIA preambles. If ITIAs are to be used as a vehicle to promote sustainable development, negotiators and drafters could be encouraged to include language to that effect. This is important in ensuring that treaty interpreters have guidance on the overall purpose of the ITIA. The 2003 Canadian Model bilateral investment treaty (BIT) provides one example of preambular language of this nature, stating: Recognizing that the promotion and the protection of investments of investors of one Party in the territory of the other Party will be conducive to the stimulation of mutually beneficial business activity, to the development of economic cooperation between them and to the promotion of sustainable development […]. Another example is the preamble to the 2007 Investment Agreement for the COMESA (Common Market for Eastern and Southern Africa) Common Investment Area, which identifies sustainability as a core objective of the agreement.35 The agreement refers to the “importance of having sustainable economic growth and development” and “the need to 31 32 33 34

35

For example, see Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction of 3 August 2004, at para. 81. Art. 31(2), 1969 Vienna Convention on the Law of Treaties, UNTS 1980, vol. 1155 [VCLT]. For a review of these terms and their relationship to sustainable development, see generally Cordonier Segger et al. 2010, supra note *. M. C. Cordonier Segger & A. Newcombe, ‘An Integrated Agenda for Sustainable Development in International Investment Law’, in Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2010, pp. 101, 126. Common Market for Eastern and Southern Africa, Treaty Establishing the Common Market for Eastern and Southern Africa, 33 ILM 1067 (entered into force 8 December 1994). Available at: COMESA accessed 27 March 2014.

10

1

INNOVATIVE LEGAL SOLUTIONS

FOR INVESTMENT

LAW

AND

SUSTAINABLE DEVELOPMENT

attract higher and sustainable level of direct investment flows in COMESA” and highlights that “the measures agreed upon shall contribute towards the realisation of the Common Market and the achievement of sustainable development in the region”.36 Other IIAs, while not explicitly highlighting a commitment to sustainable development, do raise related health, safety, environmental, and labour issues. The Preamble to the United States (US)-Rwanda ITIA, for example, states that the parties are “Desiring to achieve these objectives in a manner consistent with the protection of health, safety, and the environment, and the promotion of internationally recognised labor rights”.37 In many of the ITIAs signed by states such as Finland, the Netherlands, Japan, and the United States,38 the treaty’s objectives (often economic in nature) are to be achieved without relaxing regulatory standards in fields such as the environment, health, or safety. 1.4.2

Preventing Constraints of Measures for Sustainable Development

Exceptions and reservations to IIA obligations can create ‘windows’ or exemptions from rules where investment obligations might otherwise constrain social and environmental regulators and policymakers. Furthermore, provisions to govern conflicts between international treaties, and to protect states from pressure to lower standards in order to attract investment, might also prevent investment treaties from constraining measures to promote sustainable development. These types of ‘preventive’ provisions are the most common of the various types of innovative provisions currently provided in investment accords. They can provide guidance to domestic authorities and investment tribunals, where new rules are not meant to prevent parties from adopting or implementing legitimate measures on sustainable development. By explicitly incorporating exceptions and reservations, and by including provisions governing conflicts and preventing the lowering of standards, parties clarify the sustainable development balance they seek to strike between foreign investment, the environment, and social development interests. 1.4.2.1 General Exceptions Some ITIAs contain general exceptions, modelled on the general exceptions found in trade agreements such as GATT Article XX, for important sustainable development-

36 37 38

Id., at Preamble. See similar language in the US 2004 Model BIT and the US–Uruguay BIT (2006). See, for example, Finland–Ethiopia BIT (2006), Finland–Armenia BIT (2004), Netherlands–Suriname BIT (2005), Netherlands–Burundi BIT (2007), US–Mozambique BIT (1998), US–Jordan BIT (2003), US– Bahrain BIT (2001), Japan–Korea BIT (2002), and Japan–Vietnam BIT (2003).

11

MARIE-CLAIRE CORDONIER SEGGER

related public policy priorities such as health, the environment, and the conservation of natural resources. This type of general exception provision is not yet common in IIAs.39 A general exception clause invokes both offensive and defensive interests. From an offensive perspective, including a clause such as this might be viewed as weakening investment protection. From the defensive perspective, host state regulators can rely on the general exceptions to justify measures that might otherwise violate investment obligations. 1.4.2.2 Specific Exceptions Given the breadth of ITIA obligations, particularly where the state has undertaken establishment or pre-entry obligations, there are often express exceptions or reservations to specific obligations. From the sustainable development perspective, a number of these may be important, depending on how the host state pursues economic development. For instance, states may exclude specific existing nonconforming measures from ITIA obligations (such as those currently existing for nationality requirements regarding oil and gas licences). States may also exclude government procurement, subsidies, and grants from non-discrimination obligations (national treatment and most-favoured-nation (MFN) treatment). This allows governments to use government procurement, subsidies, and grants to promote the sustainable development of natural resources, for example, encouraging domestic companies to develop innovative pollution abatement technologies. Further, states may limit the application of the ITIA to taxation measures, reserve the right to adopt or maintain preferences provided to aboriginal peoples, reserve the right to adopt or maintain preferences provided to socially or economically disadvantaged minorities, and, with respect to intellectual property rights, provide exceptions for measures taken that are consistent with WTO Agreements. 1.4.2.3 Reservations for Sustainable Development-Related Laws and Policies In addition to general and specific exceptions, particular reservations can offer a more focused method to ensure that particular sustainable development-related regulatory measures, including concerns identified in any impact assessment, are not incidentally disciplined or prevented by new investment rules. While general exceptions provide guidance for future situations, reservations are normally used to address laws and policies that might otherwise conflict with investment rules at the time of the negotiation of a treaty. For example, in the Chile–US Free Trade Agreement (FTA), entire categories of social and environmental regulations are directly designated as ‘reserved’ by the parties.40

39 40

An example of this can be found in the 2003 Canadian Model BIT and the Madagascar–South Africa BIT (2006), Art. 3. See annexes to the agreement. See also Colombia–United Arab Emirates BIT (2010), Art. VIII.

12

1

INNOVATIVE LEGAL SOLUTIONS

FOR INVESTMENT

LAW

AND

SUSTAINABLE DEVELOPMENT

In this way, the parties seek to preserve regulatory flexibility while also securing transparency for firms and others that rely on the investment rules. Second, specific reservations also secure exemptions for measures aimed at ensuring the sustainable management of natural resources, in both the developed and the developing states concerned. For example, both the EU–Chile Sustainability Impact Assessment (SIA) and the US–Chile Environmental Review processes identified fisheries as a major area of potential concern, with regard to both material and normative impacts.41 In the Chile–US FTA, with regard to fisheries, reservations are particularly extensive. In Annex II-CH-10, Chile retains the right to control the activities of foreign fishing, including fish landing, first landing of fish processed at sea, and access to Chilean ports (port privileges), as well as to control the use of beaches, land adjacent to beaches (terrenos de playas), water columns (porciones de agua), and sea-bed lots (fondos marinos) for the issuance of maritime concessions. Other examples include reservations with respect to energy and water.42 Specific reservations are one mechanism used extensively by parties to comprehensive free trade agreements that include investment obligations, to ensure that their commitments do not unduly constrain their ability to regulate in important areas related to sustainable development. There indeed appears to be a direct relationship between the outcome of environmental assessments and SIAs and the decisions of states to include specific reservations in regional agreements. Parties are likely to be utilizing the conclusions of impact assessments to identify sensitive sectors where reservations are needed and integrating these reservations for environmental and social development measures as appropriate. 1.4.2.4

Rules on the Relationships between Environmental, Social, and Economic Treaties When economic, environmental, and social development regimes overlap, there is seldom a direct conflict of obligations. However, trade or investment treaty provisions can appear to specifically forbid or condition the use of measures that are ‘key’ to the effectiveness of an environmental or social development-related treaty. FTAs often have provisions that expressly address the relationship between various agreements. For example, Article 1.3 of the Chile–US FTA on ‘Relation to Other Agreements’ states that: “The Parties affirm their existing rights and obligations with respect to each other under the WTO agreement and other agreements to which both Parties are party”.43 FTAs also commonly provide further guidance on the potential overlap of economic and environmental regimes where

41 42 43

Cordonier Segger 2008, supra note *. See Chile–US FTA (2003), Anns. I and II. Chile–US FTA (2003), Art. 1.3.

13

MARIE-CLAIRE CORDONIER SEGGER

obligations might otherwise conflict. For example, the Chile–US FTA contains the following provision in Article 19.9 on the treaty’s relationship to environmental agreements: “The Parties recognize the importance of multilateral environmental agreements, including the appropriate use of trade measures in such agreements to achieve specific environmental goals […]”. What is significant about this formulation, of course, is that it does not specify whether the parties are referring to agreements to which they are both parties or to agreements where only one is a party. Such a provision, while perhaps not offering a clear solution to the problem of overlaps or conflicts, might indeed guide a tribunal faced with a claim that the actions of one party to the treaty, taken in order to comply with the trade measures in a multilateral environmental agreement (MEA), are somehow illegitimate or inappropriate. Several general observations can be made with respect to these ‘potential regime overlap’ provisions in international economic agreements. First, where constraints are not intended by the parties, it seems reasonable that provisions should directly address potential overlaps and clarify which regime will have precedence. If an investment treaty seeks to achieve a sustainable development purpose, it may be helpful to include a specific statement that clarifies that the investment rules are subject to, or are not to be considered as incompatible with, other agreements. If such a statement were included, according to customary rules of treaty law enshrined in the VCLT,44 the provisions of the other treaties would prevail in the event of actual conflicts. In a limited way, this approach precludes measures taken under these accords from the purview of investment disciplines and provides greater stability to all treaty regimes. Such provisions were included in the NAFTA where Article 104 states that in the event of ‘inconsistency’ between the NAFTA and multilateral environmental agreement (MEA) obligations, the latter shall prevail to the extent of the inconsistency, with a caveat with regard to instrument choice, specifying three pre-existing MEAs and providing for others in an ‘open-ended’ Annex. They also appear in the Canada–Chile FTA in Articles A-03 and A-04 and the Canada–Costa Rica FTA in Articles I.3 and I.4, both of which include comprehensive investment chapters. Essentially, this approach provides a commitment to other important priorities and regimes. Such provisions might become tools for the ‘reconciliation’ of norms, if they developed cooperative agendas on sustainable development issues over time. 1.4.2.5 Commitments Not to Lower Standards to Attract Investment A final type of provision to mitigate or avoid sustainable development impacts from a free trade or investment agreement involves the inclusion of specific commitments not to use lower environmental standards as a way of securing competitive advantages, in order to 44

VCLT, supra note 32. See also J. Pauwelyn, Conflict of Norms in Public International Law: How WTO Law Relates to Other Rules of International Law, New York: Cambridge University Press, 2003.

14

1

INNOVATIVE LEGAL SOLUTIONS

FOR INVESTMENT

LAW

AND

SUSTAINABLE DEVELOPMENT

avoid the so-called ‘race to the bottom’ phenomenon. Concerns have been raised that regulators from developing states, especially, might be tempted to weaken environmental standards to secure investment and that industries might play different host states against each other.45 To address this, investment agreements can include provisions highlighting that it is inappropriate to encourage trade or investment by weakening or reducing the protections afforded in domestic environmental laws. Such provisions seek to ensure that parties do not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such laws in a manner that weakens or reduces the protection afforded in those laws as an encouragement for trade with the other party or as an encouragement for the establishment, acquisition, expansion, or retention of an investment in its territory.46 Alongside the NAFTA and other ITIAs signed by the NAFTA parties, economic accords that contain such provisions include the Trans-Pacific Strategic Economic Partnership, in which the parties agree that “it is inappropriate to relax, or fail to enforce or administer, their environment laws and regulations to encourage trade and investment”.47 These provisions are clearly aimed at preventing strategic distortions of trade and investment flows, such as the creation of so-called pollution havens.

1.4.3

Provisions to Establish Complementary Social or Environmental Cooperation

Even where a ‘pollution haven’ effect is found to exist and empirical studies have found either a lowering of standards or a lack of enforcement, this phenomenon might be related more to a lack of capacity than strategic intent.48 As the Organisation for 45 46

47

48

K. R. Gray, ‘Foreign Direct Investment and Environmental Impacts – Is the Debate Over?’, 11 (3) RECIEL, 2002, p. 306. US–Australia FTA (2005), Art. 19.2.2; Chile–US FTA (2003), Art. 19.2.2; the similar clause in the US– Jordan FTA (2001), Art. 5.1 applies only to trade. See OECD, Environment and Regional Trade Agreements, OECD, Washington DC, 2007. Environment Cooperation Agreement among the Parties to the Trans-Pacific Strategic Economic Partnership, Art. 2.5. Available at: accessed 27 March 2014. A. Cosbey et al., ‘Investment and Sustainable Development’, Winnipeg: IISD, 2004. See also A. B. Jaffe et al., ‘Environmental Regulation and the Competitiveness of US Manufacturing: What Does the Evidence Tell Us?’, 33 J. Econ. Literature, 1995, pp. 132-163; P. Low & A. Yeats, ‘Do Dirty Industries Migrate?’, in P. Low (Ed.), International Trade and Environment, World Bank Discussion Paper No. 159, 1992; J. A. Tobey, ‘The Effects of Domestic Environmental Policies on Patterns of World Trade: An Empirical Test’, 43(2) Kyklos, 1990, pp. 191-209; V. D. McConnell & R. M. Schwab, ‘The Impact of Environmental Regulation on Industry Location Decisions: The Motor Vehicle Industry’, 66 (1) Land Econs., 1990, pp. 67-81; R. E. B. Lucas et al., ‘Economic Development, Environmental Regulation, and International Migration of Toxic Industrial Pollution: 1960-1988’ in P. Low (Ed.), International Trade and Environment, World Bank Discussion Paper No. 159, 1992, pp. 67-86; N. Birdsall & D. Wheeler, ‘Trade Policy and Industrial Pollution in Latin America: Where Are the Pollution Havens?’, 2(1) J. Env’t & Development, 1993, pp. 137-149; and G. A. Eskeland & A. E. Harrison, ‘Moving to Greener Pastures? Multinationals and the Pollution Haven Hypothesis’, World Bank Policy Research Working Paper No. 1744, World Bank, Washington, 1997.

15

MARIE-CLAIRE CORDONIER SEGGER

Economic Co-operation and Development (OECD) has noted, civil, administrative, and criminal enforcement of environmental laws also requires strong institutions, trained judiciary, dedicated financial resources, and qualified personnel – attributes which developing states often lack.49 Therefore, cooperation and capacity-building mechanisms appear as essential complements to this type of commitment. Indeed, in several ITIAs, states also commit to undertake ‘complementary’ social and environmental cooperation.50 These ‘complementary mechanisms’ are established in parallel environmental and social agreements/chapters which can create new institutions for social and environmental cooperation, commit to design and carry out common social and environmental work programmes, and may even include complaint processes to encourage the implementation of labour and environment laws. As noted by the OECD,51 approaches to environmental cooperation parallel to trade and investment treaties vary significantly. An early model for this approach involved states negotiating quite separate side agreements that establish new social and environmental institutions and set up ways that other parties and civil society can make claims if they believe that an unfair competitive advantage is being accrued through the nonenforcement of labour or environment laws. The environmental side agreements to these treaties explicitly recognize sustainable development as an objective and establish new collaborative ventures related to capacity building, information exchange, and other forms of cooperation. These mechanisms were originally pioneered by Canada, the United States, and Mexico in the NAFTA. Relatively strong commitments to investment liberalization and investor protection, similar in scope and operation to the provisions of most BITs, are found in Chapter 11 of the NAFTA. However, the NAFTA was signed together with a parallel North American Agreement on Environmental Cooperation (NAAEC) and a parallel North American Labour Cooperation Agreement (NALCA), which were meant to complement the primarily economic treaty. Most free trade agreements involving Canada since the NAFTA, including the Canada–Costa Rica FTA52 and the

49 50

51 52

OECD 2007, supra note 46, p. 108. Id.; IISD, Environment and Trade: A Handbook, United Nations Environment Programme & International Institute for Sustainable Development, 2005. Available at: IISD accessed 27 March 2014; R. Buchanan & R. Chaparro, ‘International Institutions and Transnational Advocacy: The Case of the North American Agreement on Labour Cooperation’, CLPE Research Paper 22/2008, 2008. Available at: accessed 27 March 2014. OECD 2007, supra note 46, p. 13. Agreement on Environmental Cooperation between the Government of Canada and the Government of the Republic of Costa Rica, 23 April 2001, (entered into force 1 November 2002). Available at: accessed 27 March 2014.

16

1

INNOVATIVE LEGAL SOLUTIONS

FOR INVESTMENT

LAW

AND

SUSTAINABLE DEVELOPMENT

Canada–Chile FTA,53 also contain commitments on investment and are accompanied by parallel ‘environmental side agreements’ and ‘labour side agreements’. The Chile–US FTA provides a more recent illustration of a similar but distinct approach. The Chile–US FTA, in Chapter 10, provides for the strong protection of investors and the liberalization of investment, similar in scope and terms to the NAFTA Chapter 11 and other IIAs. Essentially, the parties negotiated labour and environmental provisions within the trade treaty (either distributed throughout the treaty or compiled in specific chapters with related annexes) and also concluded separate parallel ‘side agreements’ with new cooperative institutions and work programmes to address common priorities in these areas.54 In Chapter 19 of the Chile–US FTA, the Environmental Chapter, sustainable development is identified as one of the main objectives, where parties commit “to collaboratively promote the optimal use of resources in accordance with the objective of sustainable development” as well as to strengthen the enforcement of domestic environmental laws and to provide a framework for environmental collaboration. In the Chile–US FTA, like other US and Canadian trade agreements modelled on the NAFTA, parties agreed to provisions which permit them to have access to the free trade agreement’s dispute settlement mechanisms for the nonenforcement of environmental laws, with penalties as monetary assessments rather than trade sanctions.55 This commitment is supplemented by the establishment of public submission mechanisms to promote the enforcement of environmental laws, also found in the NAAEC,56 the Canada–Chile Agreement for Environmental Cooperation,57 and US–Central America–Dominican Republic Environmental Cooperation Agreement.58 Public submission procedures may result in improved environmental protection.59 As noted by the OECD study, these mechanisms are “pioneering from the international legal perspective, in that they focus not on the state’s compliance with international legal obligations, but rather on its

53

54 55

56 57 58

59

Canada–Chile Agreement on Environmental Cooperation (CCAEC), 5 December 1996 (entered into force 5 July 1997). Available at: accessed 27 March 2014. H. Corbin, ‘The Proposed United States-Chile Free Trade Agreement: Reconciling Free Trade and Environmental Protection’, 14 Colorado Journal of International Environmental Law and Policy 119, 2003. A. De Mestral, ‘NAFTA Dispute Settlement: Creative Experience or Confusion?’, in L. Bartels & F. Ortino (Eds.), Regional Trade Agreements and the WTO Legal System, Oxford: Oxford University Press, 2007, pp. 359, 377. North America Agreement on Environmental Cooperation, 14 September 1993 (entered into force 1 January 1994) 32 ILM 1480. Canada–Chile Agreement on Environmental Cooperation, supra note 53. Agreement among the Governments of Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and the United States of America on Environmental Cooperation, 18 February 2005 (entered into force 1 January 2009) [for the last party Costa Rica]. Available at: accessed 27 March 2014. OECD 2007, supra note 46, pp. 118-131.

17

MARIE-CLAIRE CORDONIER SEGGER enforcement of purely domestic law”.60 They strengthen the environmental regulatory regime of the agreement’s trading parties and level the playing field for competing industries by ensuring that, at a minimum, the environmental laws on the books are effectively enforced.61 In Article 19.5 of the Chile–US FTA, the parties “recognize the importance of strengthening capacity to protect the environment and promote sustainable development in concert with strengthening trade and investment relations between them” and agree to undertake specific cooperative projects.62 Further, the parallel 2003 Chile–US Environmental Cooperation Agreement63 begins by “reaffirming that economic development, social development and environmental protection are interdependent and mutually reinforcing components of sustainable development” and “considering the necessity of augmenting institutional, professional and scientific capacity to achieve this objective for the well-being of present and future generations” and then details further mechanisms to implement cooperation between the parties, including the creation of an Environmental Affairs Council that sets priorities for joint cooperation in biennial work programmes. Sustainable development is highlighted as a purpose of the environmental chapters and the parallel environmental accords and is clearly identified with economic, environmental, and social development elements. This said, in spite of the commitment made in the US Trade Promotion Act that equivalent provisions will be set up for trade, the environment, and labour in any US Trade Agreement,64 as noted in the OECD study, the environmental cooperation accord “establishes a framework for co-operation that is significantly less detailed than the one foreseen in the trade agreement”.65 Such arrangements are also part of the Peru–US Trade Promotion Agreement,66 the Colombia–US FTA,67 the Canada–Peru FTA,68 and the Canada–Colombia FTA69, among others. Adequate financing is a crucial element in the implementation of such cooperative activities. Nevertheless, few side agreements on the environment specifically address

60 61 62 63 64 65 66 67 68 69

Id., at p. 119. De Mestral 2007, supra note 55. Chile–US FTA (2003), Art. 19.5. Chile–US Agreement on Environmental Cooperation, 17 June 2003, online: US Department of State. Available at: accessed 27 March 2014. Trade Act of 2002, 107 P.L. 210; 116 Stat. 933; 2002 Enacted H.R. 3009; 107 Enacted H.R. 3009. Available at: accessed 27 March 2014. OECD 2007, supra note 46, p. 93. See Peru–US Trade Promotion Agreement (2006), Ch. 18 (entered into force 1 February 2009). See Colombia–US Trade Promotion Agreement (2006), Ch. 18 (entered into force 15 May 2012). Canada–Peru FTA (2008), Art. 1701 (entered into force 1 August 2009). Preamble to the Agreement on the Environment between Canada and the Republic of Colombia, signed 21 November 2008, as a side agreement to the Canada–Colombia Free Trade Agreement (entered into force 15 August 2011). Available at: accessed 27 March 2014.

18

1

INNOVATIVE LEGAL SOLUTIONS

FOR INVESTMENT

LAW

AND

SUSTAINABLE DEVELOPMENT

financial issues. When they do, it is generally in an open-ended way.70 As one example, the Canada–Costa Rica FTA provides that funding for the cooperative activities agreed by the parties will be determined on a case-by-case basis.

1.5

SUSTAINABILITY CHANGES

IN THE

PROCESS

OF

IIA RULE-MAKING

AND

ARBITRATION

A final note is important. As is clear from the discussions above, most innovative sustainable development provisions have been pioneered in IIAs that, to a large part, fall outside what may be considered the traditional practice in this field. They are exceptions, not the rule, in investment treaties. In most cases where such innovations were adopted by parties, procedural innovations were also very much in play. In particular, as discussed further below, parties have conducted embryonic environmental reviews, environmental assessments, and sustainability impact assessments of investment agreements, prior to signing the accords, and appear to be including some of these innovations in response to the concerns raised in these processes.71 In addition, during the negotiation of IIAs, some parties are undertaking consultations among domestic authorities responsible for environment and development policy and even setting in place innovative procedures for inter-agency collaboration in the negotiation and implementation of new investment treaties. And in the implementation of IIAs, as mentioned above, parties are jointly undertaking information exchange, capacity building, and other collaborative activities with support from both international agencies and domestic authorities. This cooperation and the resulting improvements in both information levels, technological capability and human capacity, can promote greater understanding of development and environment challenges faced by investors and by domestic policy makers, influencing the way that IIAs are implemented and invoking greater sensitivity to social and environmental concerns related to investment.72 Furthermore, treaty negotiators and arbitrators are increasingly willing to consider accepting amicus curiae briefs, consulting experts from relevant fields of social or environmental knowledge, and other procedural innovations in the practice of investor-state arbitration.73 Such procedural innovations could be extremely important and might prove invaluable for future investment treaty negotiation

70 71 72

73

OECD 2007, supra note 46, p. 86. See M. Gehring, ‘Impact Assessments of Investment Treaties’, in Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2010. See A. Joubin-Bret, M. E. Rey, & J. Weber, ‘International Investment Law and Development’, in Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2010. See N. Bernasconi-Osterwalder, ‘Transparency and Amicus Curiae in ICSID Arbitrations’, in Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2010.

19

MARIE-CLAIRE CORDONIER SEGGER

processes and future arbitral tribunals, to take advantage of new opportunities to demonstrate how investment agreements can foster more sustainable development. One of the most relevant procedural questions involves whether treaty negotiators have access to impartial and relevant data. It is understood that FDI can bring social, economic, and environmental benefits to countries and can have a positive impact on such issues as income growth, modernization, employment, and productivity.74 However, the exact scenarios and impacts that might result from the liberalization and promotion of investment between two particular parties, or two regions, are often unknown or poorly understood. While great quantities of scientific studies might exist, quite simply, no one has specifically looked at the question of “what would happen if investment and trade increased tenfold in this particular sector”, from a social and environmental perspective. Without this information, and resulting careful treaty crafting to enhance benefits and flank or minimize risks, ITIAs – and by extension other IIAs – may well frustrate sustainable development objectives, creating conflicts between the commercial, social, and environmental goals.75 Moreover, well-drafted agreements can achieve more than their inherent goals. For example, trade and investment agreements can, at least potentially, also support and promote responses to climate change, or poverty eradication objectives. One way to avoid potential conflicts, on the one hand, and promote possible synergies, on the other, is the use of impact assessment (IA) mechanisms.76 To ensure that potential ITIA provisions can be identified which respond to the economic, social, and environmental circumstances of each accord, many developed and developing countries now undertake ex ante or ongoing environmental, developmental, human rights or sustainability impact assessments and reviews of trade liberalization policies and draft treaties. Indeed, the use of IA mechanisms has increased in recent years. A brief overview of the approaches to impact assessment mechanisms applied by Canada, the United States, and the European Union (EU), among others, for free trade agreements and for ITIAs, is helpful in this regard.77 IA mechanisms can be found at both the domestic and international levels: On the national level, domestic environmental planning and often social (health, gender, and human rights) laws and standards often require the impact assessment of major economic development projects and policies. On the international level, a growing number of trade and investment negotiations include requirements for assessing the impact that negotiated agreements might have on sustainable development. 74

75 76 77

OECD, Committee on International Investment and Multinational Enterprises, Foreign Direct Investment for Development: Maximising benefits, minimising costs, Paris: OECD, 2002. Available at: accessed 27 March 2014. For a review of the potential conflicts, see Cordonier Segger et al. 2010, supra note *. For a more detailed review of this topic, see Gehring 2010, supra note 71. For a more detailed review, see id., pp.156-168.

20

1

INNOVATIVE LEGAL SOLUTIONS

FOR INVESTMENT

LAW

AND

SUSTAINABLE DEVELOPMENT

Indeed, countries increasingly adopt mandates to require such reviews and assessments. In the United States, Executive Order 13141, Environmental Review of Trade Agreements (November 1999) – later embodied in the Trade Act 2002 – and the Guidelines for Implementation of Executive Order 13141 (December 2000) establish the process for the assessment of environmental factors in the development of trade agreements by way of an environmental review. Similarly, in Canada, the 1999 Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals and the 2001 Framework for Conducting Environmental Assessment of Trade Negotiations together require federal governments to undertake strategic environmental assessments (SEAs) that analyse the environmental impacts of policy, plan, and programme proposals and lay out the guidelines for doing so. The EU goes even further in what it terms SIAs. The SIA process is even more comprehensive in its analysis, as it also requires an examination of the social and economic aspects and impacts. All three programmes involve an initial scoping exercise, where all possible impacts and mitigation measures are considered, and all include a public consultation element, which allows members of the public to become involved in the process, including the scoping process, so that all possible effects and the opinions of the public are taken into account at an early stage. For example, as part of the negotiations of the Canada–European Union Comprehensive Economic and Trade Agreement (CETA), SIAs were prepared so as to assess the impact of both international trade and investment on economic, social, and environmental issues.78 Trade and investment treaty IAs are a process of decision-making, based on comprehensive independent studies in which scenarios of the potential impacts of negotiated treaties are carefully assessed. In the past, for trade agreements and ITIAs, the focus of these mechanisms was limited to the environmental effects. Such assessments are known as environmental IAs, environmental reviews, or environmental assessments.79 Currently, however, the scope of IAs has expanded. For example, some impact assessments are specifically designed to review the impact of international trade or foreign investments on human rights.80 More widely, and in accordance with the ‘holistic’ concept of sustainable

78

79 80

See a report commissioned by the European Commission, ‘A Trade SIA Relating to the Negotiation of a Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada’, Final Report, June 2011. Available at: accessed 27 March 2014. On investment, see p. 337. Cordonier Segger 2008, supra note *. For a detailed review, see J. Harrison & A. Goller, ‘Trade and Human Rights: What does “Impact Assessment” Have to Offer?’, 8(4) Human Rights Law Review 567, 2008. An example of impact assessment for foreign investment, see Rights & Democracy, Human Right Impact Assessments for Foreign Investment Projects: Learning from Community Experience in the Philippines, Tibet, the Democratic Republic of Congo, Argentina, and Peru, Montreal: Rights & Democracy, 2007. Available at: accessed 27 March 2014.

21

MARIE-CLAIRE CORDONIER SEGGER development,81 some IA mechanisms attempt to provide a fuller picture by assessing the economic, environmental, and social implications of investment and trade agreements.82 For example, the EU Commission Handbook for Trade Sustainability Impact Assessments proposes the examination of such issues as energy use, poverty, gender equality, external debt, public health, living conditions, access to education, labour standards, unemployment, and more.83 IAs of trade agreements often follow four steps.84 First (1) is the ‘screening and scoping’ phase. At this stage the relevant issues are framed, and the measures that are most likely to impact the environment (or broader issues in the case of SIAs) are identified. This step often includes expert meetings and public consultations. The next step (2) is the initial review. In this phase the potential impact of the negotiated agreement (or more accurately, of the measures identified in the first step) on the environment (or on issues such as social well-being, in the case of SIAs) is identified. The scope of this examination varies from one mechanism to another. While in certain countries only local effects are examined (Canada, for example), in other jurisdictions transboundary and global effects are also assessed (the EU, for example). Following the initial review, a preliminary assessment (3) is often published. The purpose of this review is to inform the negotiators about the projected impacts of trade liberalization in the identified areas. Lastly, an ex post final report (4) is prepared following the conclusion of the negotiations and after the final text of the agreement has been concluded. The final report outlines how certain negotiating positions might have changed due to the content of the preliminary assessment, as well as the trade-offs and balances made between economic liberalization and environmental protection. Though not as thorough as the EU and North American provisions, other countries also have similar measures in place to ensure that the impacts of trade measures are considered upfront and inform the negotiation process. For example, New Zealand requires a national interest assessment (NIA) for all treaties to which New Zealand may become a party. This assessment must consider the environmental, economic, social, and cultural

81

82 83 84

The EU Commission’s ‘Impact Assessment Guidelines’ indeed mention that one of the objectives of impact assessments is to ensure coherence and consistency with the EU’s sustainable development strategies. See, in European Commission, Impact Assessment Guidelines, 15 January 2009, SEC (2009) 92, p. 6. Available at: accessed 27 March 2014. Cordonier Segger 2008, supra note *. European Commission, Handbook for Trade Sustainability Impact Assessment, 2006, pp. 52-56. Available at: accessed 27 March 2014. The exact classification varies between one jurisdiction to another. However, in essence these stages are mostly similar. For example, for the EU classification of these stages, see the European Commission, supra note 83, pp. 12, 17-19. For a more detailed review of the classification proposed in this paper, see Gehring 2010, supra note 71, pp. 154-155.

22

1

INNOVATIVE LEGAL SOLUTIONS

FOR INVESTMENT

LAW

AND

SUSTAINABLE DEVELOPMENT

impacts of the proposed treaty.85 Japan’s Ministry of the Environment commissioned a study to investigate the environmental impact assessment methods that would be applied during Japan’s FTA negotiation process. It bases its Guidelines on Environmental Impact Assessment of Economic Partnership Agreements and FTAs in Japan on the results of this study.86 Japan has also collaborated with Korea’s Ministry of Environment to conduct case studies on hypothetical trade agreements and in 2005 held a Joint Expert Seminar on Methods for the Assessment of Environmental Impacts by Free Trade Agreements in Japan.87 Ultimately, the results of these assessments can be useful, as they assist negotiators to identify the areas where preventive, cooperative, or enhancement initiatives could be useful to promote climate-change objectives in a trade or investment treaty. Such IAs can promote sustainable development goals in several ways. As has been seen in numerous trade, treaty, and ITIA negotiations, IAs allow negotiators to identify aspects of agreements that require mitigation or enhancement measures, in order to achieve the fullest benefits of the economic cooperation.88 By assessing the economic, environmental, and social impacts of potential measures, decision-makers have a better idea of the advantages and disadvantages of each proposed negotiating position (and eventual treaty provision). IAs allow decision-makers to fully understand the synergies between the different fields and how one policy can support another. Alternatively, by addressing more than just environmental or economic aspects, IAs equip decision-makers with better tools to perform any trade-offs which are necessary in places where the promotion of one policy inherently frustrates the goals of another. Lastly, where the public is effectively invited to take part in this process, IAs also increase the democratic legitimacy and the quality of negotiated agreements. These assessments also have the potential to identify areas where domestic law and policy reform are needed and can help to shape the reforms by providing timely guidance. As they have already been for ITIAs, these benefits might all be available to decision-makers negotiating other IIAs, such as BITs, through the adoption of an IIA SIA methodology and mandate.

85 86

87 88

New Zealand Parliamentary Standing Order 383. Available at: accessed 27 March 2014. See Guidelines on Environmental Impact Assessment of Economic Partnership Agreements and Free Trade Agreements in Japan, Ministry of the Environment, Government of Japan. Available at: accessed 27 March 2014. OECD 2007, supra note 46, pp. 43-44. For a detailed review of SIAs, see Gehring 2010, supra note 71, p. 145.

23

MARIE-CLAIRE CORDONIER SEGGER

1.6

SUSTAINABLE DEVELOPMENT TREATY RULES: CONFLICTS

OR

COHERENCE

WITH

IIAS?

Sustainable development regimes are, likely, mainly complementary to investment treaties. In most cases, the Specific Investment Obligations (SIOs) used by these regimes may privilege certain technologies or economic sectors, but do not discriminate between investors based on their nationalities. However, some may indeed prescribe SIOs that could overlap with IIAs in certain situations. Essentially, certain aspects of IIAs can contribute to the success of the SIOs in other sustainable development treaties and instruments, while other commitments in IIAs might well prove to become challenges for these mechanisms.89 First, in terms of the elements of IIAs that can contribute to the success of other sustainable development instruments, commitments on fair and equitable treatment90 can be seen as protective of new investments in projects and regimes that are amenable to and in favour of sustainable development and its related undertakings. These commitments focus on creating a positive, stable regulatory structure in which the investments can exist and function. This can help to ensure long-term regulatory stability for the sustainable investment projects undertaken through such investments, for instance, renewable energy projects promoted and supported by the Kyoto Protocol Clean Development Mechanism, or sustainable agriculture projects established to respond to commitments in the FAO Seed Treaty. If an IIA can communicate greater stability of regulatory structures, it may also serve to give these investors’ confidence regarding the feasibility and commercial functioning of their investments. However, when states adopt measures that encourage sustainable development-related investment in accordance with their international commitments, current investors in unsustainable projects may argue that they are being penalized.91 This becomes particularly problematic if the unsustainable investors attempt to claim that they are facing discrimination, due to the adoption of new criminal or regulatory measures to change behaviours in sectors which face high environmental or social risks and uncertainties.92 Another variant on this problem might occur if investors in non-sustainable projects attempt to claim that they are being in some way excluded from a more profitable sustainable development-related project or regime.93

89 90 91 92 93

With gratitude to Professor Kate Miles, Faculty of Law, University of Sydney, for her insights and comments on this subject. See K. Miles, ‘International Investment Law and Climate Change: Issues in the Transition to a Low Carbon World’, Society of International Economic Law, Inaugural Conference, Geneva, 15-17 July, 2008, p. 14. Id. Id. Id.

24

1

INNOVATIVE LEGAL SOLUTIONS

FOR INVESTMENT

LAW

AND

SUSTAINABLE DEVELOPMENT

The primary method of evaluating the relationship between sustainable development and IIAs in terms of investments and investors is through the arbitral bodies interpreting the IIAs themselves. The insular nature of most investment arbitrations, and the lack of appellate jurisdiction to ensure greater synergy with public international law, means that the potential of conflict between standard investment norms and the achievement of overriding public goods cannot be taken for granted. It is not yet clear whether a sustainable investment and an unsustainable investment could really be considered to be ‘in like circumstances’ by investment law, incurring non-discrimination obligations. If such an investment was found to be ‘in like circumstances’, it would also be important to carefully interpret provisions on ‘fair and equitable treatment’ in this context. In addition, however, if SIOs required new national laws to be set in place to discourage unsustainable technologies or sectors, there could be challenges based on agreed ‘stabilization clauses’ in some BITs, particularly if new laws were set in place in a non-transparent manner by the governments in question.

1.7

CONCLUSIONS

AND

FUTURE DIRECTIONS

FOR

RESEARCH

As noted by Boyle and Freestone, “even if there is no legal obligation to develop sustainably, there may nevertheless be, through incremental development, law ‘in the field of sustainable development’”.94 States are implementing a growing body of international treaty law on sustainable development, and it is not legally meaningless when states commit to sustainable development in a treaty or international legal process. Rather, a commitment to sustainable development involves an obligation to seek a balance between sometimes conflicting economic, environmental, and social priorities in the development process, in the interests of future generations. This balance can be promoted through procedures and substantive obligations that differ depending on the economic relationship of the parties, the prevailing social and ecological conditions, the treaty instrument itself, and even each area of law and policy that is disciplined. A great deal of progress has been made in recent years. Innovations in this area are worthy of careful study and analysis and perhaps of wider adoption. Turning to the future, international investment law on sustainable development is defining new rights and duties among states. The challenge for future legal scholarship, negotiations, and implementation will be to strengthen this global commitment in the field of investment law, in the interest of a common future. 94

A. Boyle & D. Freestone, International Law and Sustainable Development: Past Achievements and Future Challenges, Oxford University Press, 1999, p. 17 citing P. Sands, ‘International Law in the Field of Sustainable Development: Emerging Legal Principles’, in W. Lang (Ed.), Sustainable Development and International Law, London: Graham & Trotman/M. Nijhoff, 1994.

25

MARIE-CLAIRE CORDONIER SEGGER

One path involves the negotiation or amendment of existing or future ITIAs to reflect social and environmental concerns. This chapter has simply provided a brief survey of certain illustrative provisions in such agreements which have shown some degree of promise in supporting and channelling investment flows towards more sustainable development. More legal research is needed in this area, focusing on important questions which remain largely unaddressed in the current literature. Future law and policy research can investigate the international sustainable development mechanisms that have been most effective in shaping investment flows, further illuminating any lessons learned that might be applied in other treaty regimes where more progress is needed in financing and encouraging investment into different sectors of the economy in a sustainable manner.

26

BIBLIOGRAPHY BOOKS Boyle, A. & Freestone, D., International Law and Sustainable Development: Past Achievements and Future Challenges, Oxford: Oxford University Press, 1999, p. 17 citing P. Sands, ‘International Law in the Field of Sustainable Development: Emerging Legal Principles’, in W. Lang (Ed.), Sustainable Development and International Law, London: Graham & Trotman / M. Nijhoff, 1994. Cordonier Segger, M.C. et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011. Gehring, M.W. & Cordonier Segger, M.C. (Eds.), Sustainable Development in World Trade Law, The Hague: Kluwer Law International, 2005. Newcombe, A. & Paradell, L., Law and Practice of Investment Treaties, Alphen aan den Rijn: Klewer Law International, 2009. Pauwelyn, J., Conflict of Norms in Public International Law: How WTO Law Relates to Other Rules of International Law, New York: Cambridge University Press, 2003. Sampson, G.P., The Role of the World Trade Organization in Global Governance, New York: United Nations University Press, 2001, p. 9. Schneiderman, D., Constitutionalizing Economic Globalization: Investment Rules and Democracy’s Promise, Cambridge: Cambridge University Press, 2008. World Commission on Environment and Development, Our Common Future, Oxford: Oxford University Press, 1987, p. ix.

ARTICLES Birdsall, N. &Wheeler, D., ‘Trade Policy and Industrial Pollution in Latin America: Where Are the Pollution Havens?’ 2(1) J. Env’t & Development, 1993.

27

MARIE-CLAIRE CORDONIER SEGGER Buchanan, R. & Chaparro, R., ‘International Institutions and Transnational Advocacy: The Case of the North American Agreement on Labour Cooperation’ CLPE Research Paper 22/2008, 2008. Available at: SSRN: accessed 27 March 2014. Corbin, H., ‘The Proposed United States-Chile Free Trade Agreement: Reconciling Free Trade and Environmental Protection’, 14 Colorado Journal of International Environmental Law and Policy 119, 2003. Cosbey A. et al., ‘Investment and Sustainable Development’, Winnipeg: IISD, 2004. Eskeland, G.A. & Harrison, A.E., ‘Moving to Greener Pastures? Multinationals and the Pollution Haven Hypothesis’, World Bank Policy Research Working Paper No. 1744, World Bank, Washington, 1997. Gray, K.R., ‘Foreign Direct Investment and Environmental Impacts – Is the Debate Over?’ 11 (3) RECIEL, 2002. Harrison, J. & Goller, A., ‘Trade and Human Rights: What does “Impact Assessment” Have to Offer?’, 8 (4) Human Rights Law Review, 2008. Jaffe, A.B. et al., ‘Environmental Regulation and the Competitiveness of US Manufacturing: What Does the Evidence Tell Us?’ 33 J. Econ. Literature, 1995. Lucas, R.E.B. et al., ‘Economic Development, Environmental Regulation, and International Migration of Toxic Industrial Pollution: 1960-1988’, in P. Low (Ed.), International Trade and Environment, World Bank Discussion Paper No. 159, 1992. Marshall, F. & Mann, H., ‘Good Governance and the Rule of Law: Express Rules for Investor-State Arbitrations Required’, IISD, 2006 at p. 2. Available at: accessed 27 March 2014. McConnell, V.D. & Schwab, R.M., ‘The Impact of Environmental Regulation on Industry Location Decisions: The Motor Vehicle Industry’, 66 (1) Land Econs., 1990. Miles, K., ‘International Investment Law and Climate Change: Issues in the Transition to a Low Carbon World’, Society of International Economic Law, Inaugural Conference, Geneva, 15 – 17 July 2008.

28

1

BIBLIOGRAPHY

Tobey, J.A., ‘The Effects of Domestic Environmental Policies on Patterns of World Trade: An Empirical Test’, 43(2) Kyklos, 1990.

CONTRIBUTIONS

IN EDITED BOOKS

Bernasconi-Osterwalder, N., ‘Transparency and Amicus Curiae in ICSID Arbitrations’, in M.C. Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011. Cordonier Segger, M.C., ‘Sustainable Development in Regional Trade Agreements’, in L. Bartels & F. Ortino (Eds.), Regional Trade Agreements and the WTO Legal System, Oxford: Oxford University Press, 2006. Cordonier Segger, M.C., ‘Sustainable Development in International Law’, in H.C. Bugge & C. Voigt (Eds.), Sustainable Development in National and International Law, Groningen: Europa Law Publishing, 2008. Cordonier Segger, M.C., ‘International Law on Sustainable Development’, in D. Armstrong (Ed.), Routledge Handbook of International Law, New York: Routledge, 2009. Cordonier Segger, M.C. & French, D., ‘Governing Investment in Sustainable Development: Investment Mechanisms in Sustainable Development Treaties and Voluntary Instruments’, in M.C. Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011. Cordonier Segger, M.C. & Newcombe, A., ‘An Integrated Agenda for Sustainable Development in International Investment Law’, in M.C. Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011. De Mestral, A., ‘NAFTA Dispute Settlement: Creative Experience or Confusion?’, in L. Bartels & F. Ortino (Eds.), Regional Trade Agreements and the WTO Legal System, Oxford: Oxford University Press, 2007. Gehring, M., ‘Impact Assessments of Investment Treaties’, in M.C. Cordonier Segger et al., (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011.

29

MARIE-CLAIRE CORDONIER SEGGER Joubin-Bret, A. et al., ‘International Investment Law and Development’, in M.C. Cordonier Segger et al., (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011. Low, P. & Yeats, A., ‘Do Dirty Industries Migrate?’, in P. Low (Ed.), International Trade and Environment, World Bank Discussion Paper No. 159, 1992. Newcombe, A., ‘An Introduction to Sustainable Development in World Investment Law’, in M.C. Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011.

30

2

PROTECTING THE IN

THE

INVESTOR

AND

PROTECTING

ENVIRONMENT: CONFLICTING OBJECTIVES

INTERNATIONAL INVESTMENT AGREEMENTS

Anna Joubin-Bret*

2.1

INTRODUCTION

While environmental protection has been identified early on as possibly conflicting with the international trade agenda and the liberalization of trade flows, historically international investment instruments have not dealt with environmental issues until recently. By focusing exclusively on investment protection, early investment treaties have not dealt with the potential and inherent conflict between investment promotion and protection on the one hand and a stronger role of the government in regulating environmental matters on the other. International investment policies and instruments promoting and protecting investment have evolved considerably in the last decade. And so has their relationship with environmental issues. It is this evolution that this chapter will describe and analyse before drawing conclusions as to the way forward. In line with early investment policies, early bilateral investment treaties (BITs) based on the Abs-Shawcross Draft Convention on Investment Abroad,1 Asian-African Legal Consultative Committee: Revised Draft of Model Agreement for Promotion and Protection of Investments, 2 or Draft Convention on the Protection of Foreign Property (Organisation

*

1

2

Avocat à la Cour, Paris (France). Former Senior Legal Advisor – UNCTAD. The author gratefully acknowledges comments by Mark Clodfelter, Cristian Rodriguez Chiffelle, Andrea Saldarriaga, Colette van der Ven, and Aikaterini Argyrou. United Nations Conference on Trade and Development (UNCTAD), The Abs-Shawcross Draft Convention on Investment Abroad, International Investment Instruments: A Compendium, Non-Governmental Instruments, Vol. V. Available at: accessed 6 June 2014. United Nations Conference on Trade and Development, Asian-African Legal Consultative Committee: Revised Draft of Model Agreement for Promotion and Protection of Investments, A Compendium Vol. XIV, p. 115. Available at: < http://unctad.org/Sections/dite/iia/docs/compendium/en/62%20volume%203. pdf> accessed 6 June 2014.

31

ANNA JOUBIN-BRET for Economic Co-operation and Development)3 focused exclusively on the protection of foreign investors and their property through provisions on expropriation, fair and equitable treatment (FET), full protection and security, transfer of funds and provisions of national treatment, and most-favoured-nation (MFN) treatment. In the mid-1990s, a new generation of investment protection and liberalization agreements based on the North American Free Trade Agreements (NAFTA) emerged.4 These agreements were developed learning from disputes arising between foreign investors and the NAFTA countries. Simultaneously to liberalization disciplines, the agreements also incorporated the clarification of language which caters for the state’s right to regulate for public purpose, including the adoption of measures to protect the environment.5 This new generation of treaties timidly addressed environmental issues and particularly the obligation not to lower environmental standards as an incentive to attract foreign investment. However, only in the mid-2000s, a ‘new generation of investment policies’ has emerged that go beyond the quantitative promotion and protection of investment flows and seeks to foster investment that has a positive impact on economic and social development and that does not harm the environment.6 These policies have, however, not found their way into International Investment Agreements (IIA) language as yet, and most recent treaties are still struggling to reconcile two seemingly contradictory objectives: the protection of the foreign investor and the protection of the environment. A number of claims and cases have been brought under BITs and other investment treaties generating controversy about the respective obligations of environment protection that befall states as part of their role as regulators and the obligations undertaken under IIAs to protect investors against any kind of interference with their investments. These investor-state disputes, which have been brought by foreign investors, challenging measures taken by states to protect the environment, such as measures to ban export of hazardous waste, measures to prohibit manufacturing of toxic products, measures to cancel investment authorizations

3

4

5

6

United Nations Conference on Trade and Development, 1967 Draft Convention on the Protection of Foreign Property, Organisation for Economic Co-operation and Development, Paris, 16 October 1967, A Compendium, Vol. XIV, p. 113. North American Free Trade Agreement Implementation Act, SC 1993, c 44; for the NAFTA inspired agreements, see M. F. Houde et al., ‘The Interaction Between Investment and Services Chapters in Selected Regional Trade Agreements’, OECD Trade Policy Working Paper No. 55, COM/DAF/INV/TD(2006)40/ Final, 19 June 2007. Available at: accessed 10 June 2014. United Nations Conference on Trade and Development (UNCTAD), ‘World Investment Report 2012: Towards a New Generation of Investment Policies’, New York and Geneva: United Nations, 2012, pp. 101102. Available at: accessed 6 June 2014. Id. See also United Nations Conference on Trade and Development (UNCTAD), ‘Investment Policy Framework for Sustainable Development: Towards a New Generation of Investment Policies’, New York and Geneva: United Nations, 2012.

32

2

PROTECTING

THE INVESTOR AND

PROTECTING

THE

ENVIRONMENT: CONFLICTING OBJECTIVES

and building permits in environmentally sensitive and protected areas, and measures to order investors to repair environmental damage as part of an extractive project, illustrate this inherent tension.7 IIAs are economic instruments that aim to attract foreign direct investment (FDI) in order to spur economic growth and development in the host country. By engaging in IIAs, countries liberalize the entry conditions and the operation of FDI in host states and protect established investment. The integration of environmental protection into FDI policies can play an important role in achieving the overarching objectives, i.e. inclusive growth and sustainable development, which are reflected in ‘new generation’ IIAs.8 Recent IIAs have become increasingly mindful of the potential clash with environmental issues catering specifically for the state’s right to regulate to protect the environment. To achieve this objective, IIAs are using various treaty-making techniques to include environmental protection into their main objectives, mainly in preambular language. Some exclude environmental regulation from the scope of the treaty or provide for broad exceptions to cover a state’s right to regulate on human, animal, plant health, and life.9 IIAs have, however, not gone all the way to include substantive provisions on the protection of the environment into the core treaty obligations. It is only in treaties with a broader scope, such as free trade agreements (FTAs) or economic partnership agreements (EcPAs) that environmental provisions, mainly in the form of cooperation, feature

7

8

9

Methanex Corporation v. United States of America, UNCITRAL, Final Award of the Tribunal on Jurisdiction and Merits of 3 August 2005 (Methanex, a Canadian methanol producer, initiated arbitrations against the United States’ ban of MTBE gasoline additives); Chemtura Corporation v. Government of Canada, UNCITRAL, Award of 2 August 2010 (Chemtura, a US agricultural chemicals manufacturer, challenged a pesticide regulation by a Canadian agency); and S. D. Myers, Inc., v. Government of Canada, UNCITRAL, Partial Awards of 13 November 2000 and of 21 October 2002; see also in the same case the Final Award (concerning the apportionment of costs between the Disputing Parties) of 30 December 2002 (SD Myers, a United States (US) hazardous waste management company, submitted a claim against Canada’s export ban on PCB, a toxic chemical) and Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG v. Federal Republic of Germany, ICSID Case No. ARB/09/6, Award of 11 March 2011 (Vattenfall, a Swedish energy company, filed a complaint against restrictions on the use of river water and delays in the issuance of related permits imposed by a German local authority on a coal-fired power plant under construction near a river). United Nations Conference on Trade and Development, ‘World Investment Report 2013: Global Value Chains: Investment and Trade for Development’, New York and Geneva: United Nations, 2013, pp. 102103. See also UNCTAD, ‘World Investment Report 2012’, supra note 5, pp. 99-102. See UNCTAD, ‘Investment Policy Framework for Sustainable Development 2012’, supra note 6, pp. 39-42. Examples of exception clauses can be found in Canadian Foreign Investment Promotion and Protection Agreements (FIPAs). Canada-Jordan FIPA (2009), Canada-Latvia FIPA (2011), Canada-Peru FIPA (2007), and Canada-Romania FIPA (2011). Available at: accessed 6 June 2014. Exception clauses can be also found in the Southern African Development Community Model Bilateral Investment Treaty. The template is available at: accessed 7 June 2014.

33

ANNA JOUBIN-BRET

distinctly. They are regulated in separate chapters and not in the chapters setting rules for investment promotion, liberalization, and protection.10 With the development of ‘new generation’ investment policies,11 states are placing sustainable development and thereby also the protection of the environment at the heart of investment policies. As is stated in the United Nations Conference on Trade and Development’s Investment Policy Framework for Sustainable Development (UNCTAD IPFSD): These ‘new generation’ investment policies are characterized by (i) a recognition of the role of foreign investment as a primary driver of economic growth and development and the consequent realization that investment policies are a central part of development strategies; and (ii) a desire to pursue sustainable development through responsible investment, placing social and environmental goals on the same footing as economic growth and development objectives and (iii) a shared recognition of the need to promote responsible investment as a cornerstone of economic growth and job creation […].12 This report and the Organisation for Economic Co-operation and Development (OECD) Policy Framework for Investment,13 like several other recent policy initiatives, elaborate on guiding principles that address the central role of sustainable development in national economic policies as well as in international instruments. Such guiding principles reflect best practices at the international level, in so far as they seek consistency among policies and balance of interests, placing sustainable development concerns at the heart of investment policies and seeking to bridge the gap between environment and foreign investment. The chapter will discuss how this can be achieved without reviving the inherent tension between the protection of investors and their investment and the protection of the environment in which they operate. This chapter will first identify, as a background to the discussion, the way protection of the environment has found its way into broader sustainable development objectives. It will briefly look into the potential impact of FDI on environmental protection goals both negative and positive (Section 2.2). It will then seek to identify the inherent tension between protection of investors under IIAs and the state’s right or even duty to regulate for public interest to protect the environment and illustrate it by reviewing disputes brought under trade and investment agreements based on 10 11 12 13

See, e.g., the EU-Korea FTA 2011. Available at: accessed 6 June 2014. UNCTAD, ‘Investment Policy Framework for Sustainable Development 2012’, supra note 6, pp. 3-6. Id., UNCTAD, ‘Investment Policy Framework for Sustainable Development 2012’, supra note 6, pp. 5-6 (original emphasis). OECD Policy Framework for Investment, OECD, Paris, 2006. Available at: accessed 6 June 2014.

34

2

PROTECTING

THE INVESTOR AND

PROTECTING

THE

ENVIRONMENT: CONFLICTING OBJECTIVES

environmental measures taken by the state (Section 2.3). Forth, it will analyse the way in which recent IIAs have dealt with the possible clash between environmental protection and investment protection objectives and point to approaches taken by recent treaties to bridge this gap (Section 2.4). Finally, this chapter will offer some concluding remarks on the way IIAs can address and possibly avoid the potential tension between conflicting obligations to protect the environment and to protect the foreign investor. It will also provide concluding remarks on the ways IIAs can ensure greater coherence between two indissociable components of economic development while remaining coherent with their role and objective, i.e. to promote and protect investment and not to regulate on environmental matters that are best dealt with environmental treaties and frameworks. ENVIRONMENT, SUSTAINABLE DEVELOPMENT,

2.2

AND

FOREIGN DIRECT INVESTMENT

The last two decades have highlighted the strong interconnection between environmental protection and sustainable economic development, with environmental protection featuring as a pillar of sustainable development.14 Global issues such as climate change, depletion of natural resources, food crisis and access to water, among others, have been recognized by states within a broader objective of sustainable economic growth, and against the background of global financial and economic crisis. While progress in setting global rules to protect the environment is slow and difficult, globalization of environmental concerns and best practices in regulating environmental issues have attracted greater attention at the international level. It has also greatly benefited from the fast and steady progress of technology developed by enterprises and researchers in environmental protection and green technologies.

2.2.1

Environmental Protection and Sustainable Development

Environment protection is at the heart of sustainable development strategies and policies in industrialized and developing countries alike.15 In fact, since the last decade, the quest

14

15

For further academic discussion, see T. Walde & A. Kolo, ‘Environmental Regulation, Investment Protection and “Regulatory Taking” in International Law’, 50 International and Comparative Law Quarterly, 2001, pp. 811-848. See also J. M. Wagner, ‘International Investment, Expropriation and Environmental Protection’, 29 Golden Gate U.L. Rev. 465, 1999. General Assembly (GA) Report of the United Nations Conference on Environment and Development (Rio de Janeiro, 3-14 June 1992) A/CONF.151/26 (Vol. IV) 28 September 1992, New York: United Nations; United Nations Sustainable Development, United Nations Conference on Environment and Development, Rio de Janeiro, Brazil, 3-14 June 1992, Agenda 21. Available at: accessed 7 June 2014. J. Butlin, ‘Our Common Future’, World commission on environment and development, London: Oxford University Press, 1987, p. 383, 1 J. Int.

35

ANNA JOUBIN-BRET

for achieving sustainable development has become one of the most shared policy goals across countries and political systems. The role of states and governmental policies in regulating these issues has been reaffirmed and strengthened either through domestic regulation or through environmental cooperation with a network of environmental treaties.16 Having identified environmental protection together with economic and social development as the core pillars of sustainable development, the interlinkage between environmental protection and economic development is reaffirmed in international economic policies. Environmental issues have found their way into core international principles for economic development and into international law through numerous treaties and declarations of international organizations. Among them are the early economic cooperation instruments referring to environmental protection as a core principle that include the UN Millennium Development Goals calling for a Global Partnership for Development17 and the Monterrey Consensus of the UN Conference on Financing for Development of 2002.18 The Johannesburg Plan of Implementation19 concluded on September 2002 that was built on the Rio Declaration; explicitly established the link between sustainable development goals and social, economic, and environmental goals; and stated that they could not be pursued independently.20 The OECD Guidelines for Multinational

16

17

18

19

20

Dev., pp. 284-287. World Summit on Sustainable Development, Johannesburg Declaration on Sustainable Development, A/CONF.199/20, United Nations, 2002. See also D. Swanson et al., ‘National Strategies for Sustainable Development Challenges: Approaches and Innovations in Strategic and Co-ordinated Action: A 19-Country Study’, IISD. Available at: accessed 7 June 2014. See the 1992 United Nations Framework Convention on Climate Change; 1998 Kyoto Protocol to the United Nations Framework Convention on Climate Change; 1998 United Nations Economic Commission for Europe (UNECE), Convention on Access to Information, Public Participation in Decision-Making, and Access to Justice in Environmental Matters (Aarhus Convention), 25 June 1998; and United Nations Economic Commission for Europe (UNECE), 1992 Convention on the Protection and Use of Transboundary Watercourses and International Lakes (Water Convention), 17 March 1992. GA Res. 55/2, United Nations Millennium Declaration, A/Res/55/2, 18 September 2000; CA Reports of the Secretary General, Implementation of the United Nations Millennium Declaration, A/59/282, A/58/323, A 57/270, 2002-2004; GA Res. 65/1, Keeping the promise: united to achieve the Millennium Development Goals, A/Res/65/1, 19 October 2010. Financing for development – Monterrey Consensus of the International Conference on Financing for Development: the final text of agreements and commitments adopted at the International Conference on Financing for Development, Monterrey, Mexico, 18-22 March 2002, New York: United Nations Department of Public Information, 2003. The Rio Declaration and the Agenda 21 did not focus on economic development. World Summit on Sustainable Development and United Nations, Johannesburg Declaration on Sustainable Development and Plan of Implementation of the World Summit on Sustainable Development: the final text of agreements negotiated by governments at the World Summit on Sustainable Development, 26 August-4 September 2002, Johannesburg, South Africa. New York: United Nations Department of Public Information, 2003. See UNCTAD, ‘Investment Policy Framework for Sustainable Development 2012’, supra note 6, p. 10.

36

2

PROTECTING

THE INVESTOR AND

PROTECTING

THE

ENVIRONMENT: CONFLICTING OBJECTIVES

Enterprises21 further emphasized this link, as did the OECD Policy Framework for Investment22 and the UNCTAD principles contained in the IPFSD, the World Bank Guidelines, and 2012 International Chamber of Commerce (ICC) Guidelines for International Investment.23 Protection of the environment is also the subject of international economic cooperation between developing and industrialized countries. For example, protection of the environment is the subject of specific obligations and undertakings of contracting parties in FTAs and EcPAs, starting historically with provisions that require states not to derogate from or not to relax their own environmental laws to obtain larger shares of FDI. These agreements, e.g. the EU-South Korea Free Trade Agreement,24 generally include elaborate environmental cooperation mechanisms, with the goal of fostering environmental economic cooperation. Also, the latest IIA negotiated by the European Union (EU) with Canada and the shared understanding between the EU and the United States for a Transatlantic Trade and Investment Partnership (TTIP) agreement are worth noting. In the content of this agreement with the United States, the EU favours a specific chapter on ‘sustainable development’ (including environmental and labour provisions),25 and the United States

21 22

23

24 25

OECD Guidelines on Multinational Enterprises 2011, Chapter VI: ‘Environment’. Available at: accessed 7 June 2014. 2012 ICC Guidelines for International Investment. Available at: accessed 7 June 2014; see also K. Gordon & J. Pohl, ‘Environmental Concerns in International Investment Agreements: A Survey’, OECD Working Papers on International Investment, No. 2011/1, OECD Investment Division, 2011. Available at: accessed 7 June 2014. OECD, Globalisation and the Environment: Perspectives from OECD and Dynamic Non-Member Economies, OECD Publishing, 1998. N. Mabey & R. McNally, ‘Foreign Investment and the Environment: From Pollution Havens to Sustainable Development’, WWF-UK Report, August 1999. Available at: accessed 7 June 2014. See P. Utting (Ed.), The Greening of Business in Developing Countries, London: Zed Books/UNRISD, 2002. D. Hunter & S. Porter, ‘International Environmental Law and Foreign Direct Investment’, in D. Bradlow & A. Escher (Eds.), Legal Aspects of Foreign Direct Investment, The Hague: Kluwer Law International, 1999, p. 161. See H. Gleckman, ‘Transnational Corporations Strategic Responses to Sustainable Development’, Green Globe Yearbook, 1995, p. 93. D. Levy & P. Newell (Eds.), The Business of Global Environmental Governance, MIT Press, 2005. EU-South Korea FTA (2011). Available at:< http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/? uri=OJ:L:2011:127:FULL&from=EN> accessed 1 February 2015. The EU Commission set out the parameters of the EU investment policy which proposes to retain the core of existing approaches but indicates that investment agreements should be consistent with other policies “including policies on the protection of the environment, decent work, health and safety at work, consumer protection, cultural diversity, development policy and competition policy”. It is further echoed by the European Parliament which calls for the inclusion of social and environmental standards into the negotiations; see European Commission Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee, and the Committee of the Regions: Towards a comprehensive European international investment policy, COM (2010) 343, 7 July 2010, p. 9. European Parliament, Resolution on the future European international investment policy, (2010/2203(INI)), 6 April 2011, paras. 11-35.

37

ANNA JOUBIN-BRET

establishes a number of binding environmental commitments subject to dispute settlement provisions.

2.2.2

FDI: Economic Growth and Environment

At the same time, the role of FDI as an engine for economic growth has been reaffirmed. Policymakers have gained a better understanding of the role of FDI to stimulate economic growth but also, more recently, of the role FDI can play in promoting sustainable development. They have identified the interconnection between FDI policies and environmental protection, in order to address the potential negative impact of FDI on the environment and encourage a positive impact.26 The positive impact of FDI on finance for development, wealth creation, economic growth and employment, access to technologies, and moving economies up the global value chain is recognized while, at the same time, governments, enterprises, and civil society undertake assessments of the negative impact of private investment on exhaustion of natural resources, pollution, public health, and safety issues, as will be illustrated below. The impact of foreign investment on the protection of the environment has been perceived differently in connection with different types of FDI and different aspects of environmental protection. Investment in natural resources, also called resource-seeking investment, has been traditionally the bulk of investment projects in a number of developing economies.27 The number of claims arising from natural resource projects is also by far the most important among investor-state claims. Many tensions between investors and the host state have been generated by mining and oil exploration projects. The most publicized example is the Chevron saga concerning the disastrous impact of oil exploration in the Amazon region in Ecuador and the Shell saga in Nigeria.28 Negative impact on the environment is generally stronger in extractive industries than in other sectors of the economy and comes as a corollary of natural resource-seeking FDI.29 The 26

27 28

29

For further academic discussion, see M. C. Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011. See also A. van Aaken & T. A. Lehmann, ‘Sustainable Development: Developing a New Conceptual Framework’, in R. Echandi & P. Sauvé (Eds.), Prospects in International Investment Law and Policy, Cambridge: Cambridge University Press, 2013, pp. 317-339. M. Sornarajah, The International Law on Foreign Investment, 3rd edn, Cambridge: Cambridge University Press, 2010. See Chapter 16, Chevron-Texaco v. Ecuador: The Environmental Case within a Claim of Denial of Justice by Blanca Gomez de la Torre in this volume. See Chevron Corporation and Texaco Petroleum Corporation v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23, First Partial Award on Track I of 17 September 2013. See for the cases Kiobel v. Shell and Wiwa v. Shell the information available at: accessed 1 July 2014. For further reading on typology and determinants of FDI, see UNCTAD, ‘World Investment Report 1998: Trends and Determinants’, New York and Geneva: United Nations, 1998.

38

2

PROTECTING

THE INVESTOR AND

PROTECTING

THE

ENVIRONMENT: CONFLICTING OBJECTIVES

impact on the environment of FDI projects in mining, exploration, and exploitation of natural resources, energy, and forestry is negative. Impacts include depletion of exhaustible natural resources, loss of biodiversity, and environmental damages resulting from mining and exploration (pollution of water, destruction of habitat, greenhouse gas emissions, etc.). Collateral damages can also come from intensive agriculture and agribusiness projects, which engage in deforestation, use of pesticides and modified materials, exhaustion of agricultural land, and diversion of water resources with large-scale irrigation projects. Investment in transportation and infrastructure projects but also in tourism and real estate development has generated tensions between potential investors and authorities concerned with the protection of natural reserves, endangered species, or the quality of drinking water. In these cases, contrary to the extractive industries projects, the tension with investors often materializes when the authorities refuse to grant a licence or a permit for environmental reasons.

2.3

THE INHERENT TENSION PROTECTION

BETWEEN

ENVIRONMENTAL PROTECTION

AND INVESTMENT

Three areas of tension have been identified over the years, in treaty practice and then by disputes arising from environmental measures taken by the state and challenged by foreign investors alleging violations on investment protection. The most important clash between environmental protection by the state and investment protection, as it befalls the state under investment treaties, stems from the negative impact investment projects can have on the environment and the duty of the state to regulate these projects for environmental reasons, thereby changing the conditions and regulations and sometimes closing down a project or requesting that the investor repairs the damage to the environment. In practice, most of the problems and disputes occur because of the following reasons: Firstly, there is a growing interconnection between trade and investment issues and stronger liberalization provisions in IIAs.30 Secondly, another clash between environmental protection and investment protection will happen when the state authorities refuse to grant authorizations, permits, and licences to operate to foreign investors in projects where environmental protection is at stake.31 Given the focus of investment treaties on the protection of established investment, these refusals to grant or to continue authorization will possibly frustrate the

30 31

It is interesting to keep the trade disputes in mind when analysing investor-state disputes based on environmental issues. See supra note 8 the cases: Methanex Corporation v. United States of America; Chemtura Corporation v. Government of Canada; S. D. Myers, Inc., v. Government of Canada; Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG v. Federal Republic of Germany.

39

ANNA JOUBIN-BRET

investor’s expectations but without occasioning damage since the investment has not yet taken place. This tension is also likely to be exacerbated with the practice of environmental screening of projects as part of the entry approval. This issue will be discussed in Subsection 2.3.2. Thirdly, the ‘pollution haven scenario’ has been repeatedly debated as a possible area where investment treaties can play a role in order to prevent possible environmental dumping and to ensure that lowering environmental standards does not occur as a means to compete for investment projects. This matter will be discussed in Subsection 2.3.3.

2.3.1

The State’s Right to Regulate for Public Purpose

The first and foremost clash between environmental protection and investment protection stems from the negative impact some FDI-related projects have on the environment and the need for states to take measures of general application to regulate this negative impact on the environment. This potential clash between environmental protection and commitments to protect investors is reflected in the state’s right (or duty) to regulate in order to provide for environmental protection and ensure public health and safety. As a consequence of the potential negative impact of FDI on the environment, the importance of the state’s role in the protection of the environment has increased and so has the tension with the rights of foreign investors. While investors generally look for a stable and predictable regulatory environment regarding the conditions that govern entry and operation of their investment(s), governments often take measures regulating the environmental impact of investment projects at the entry and after their ‘establishment’. A number of investment cases have arisen under the NAFTA that involved environmental measures taken by the NAFTA countries.32 Investors under the NAFTA have the right to challenge such environmental measures through the Investor-State Dispute Settlement (ISDS) mechanism of the treaty. Several environmental cases under the NAFTA, Ethyl v. Canada (1997), S. D. Myers v. Canada (1998), Metalclad v. Mexico (1997), Methanex v. US (1999), and more recently the Glamis Gold case (2009),33 32

33

NAFTA is a free trade agreement with an investment chapter concluded between three partner countries: the United States, Canada, and Mexico. Chapter 11 on foreign investment of NAFTA establishes a mechanism for the settlement of investment disputes between investors and NAFTA partners. On investor-state dispute cases related to environmental and social issues, see M. E. Footer, ‘Bits and Pieces: Social and Environmental Protection in the Regulation of Foreign Investment’, 18(1) Michigan State Journal of International Law, 2009, pp. 28-58. Methanex Corporation v. United States of America, UNCITRAL, Final Award of the Tribunal on Jurisdiction and Merits of 3 August 2005; S. D. Myers, Inc., v. Government of Canada, UNCITRAL, Partial Awards of 13 November 2000 and of 21 October 2002; Ethyl Corporation v. The Government of Canada, UNCITRAL, Award on Jurisdiction of 24 June 1998; Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB (AF)/97/1, Award of 30 August 2000; Glamis Gold Ltd. v. United States of America,

40

2

PROTECTING

THE INVESTOR AND

PROTECTING

THE

ENVIRONMENT: CONFLICTING OBJECTIVES

illustrate the close connection between environmental measures taken by states and a claim for breach of protection under the investment treaty. A number of NAFTA cases mentioned above have originated from measures taken explicitly or indirectly by states to protect the environment. Several of these cases address a denial of permit or authorization of the project on environmental grounds. Metalclad v. Mexico34 is one of such examples. In this case the company has been denied a construction permit by Mexico, because of negative consequences for the environment and health issues, related to the construction of the hazardous waste landfill.35 In the recent Vattenfall v. Germany case, initiated under the Energy Treaty Charter,36 the decision by the German Government to stop the construction of atomic power stations has served as a basis for initiation of investment arbitration by Vattenfall. Another set of investment cases is based on changes introduced in the operational conditions of an investment or a project by environmental regulation, either in one ‘go’ or through an accumulation of measures that is then challenged by claimants as creeping expropriation.37 Enacting environmental measures has also been challenged as a change in the ‘legitimate expectations’ of the investor, therefore constituting a violation of FET.38 Cases have also arisen in the context of state contracts and concessions agreements relating to environmental projects. A number of cases are based on claims of unlawful termination of contracts, enacting environmental measures putting an unjustified burden on foreign investors.39

34 35 36

37

38

39

UNCITRAL, Award of 8 June 2009. The full text of the awards in the cases cited above can be found on the webpage of the ITA. Id., Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB (AF)/97/1, Award of 30 August 2000. Id. Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG & Co. KG v. Federal Republic of Germany, ICSID Case No. ARB/12/12. For more information on this case, see Chapter 13, The “Vattenfall Disputes” and Their Implications for Sustainable Development by F. Romanin Jacur in this volume. The example of such case is the first claim of Vattenfall against Germany initiated in 2009. In this case, Vattenfall, which was constructing a coal-fired power plant near Hamburg region, brought a case under the Energy Treaty Charter for violation of a non-expropriation provision and a fair and equitable treatment clause. The company claimed that additional environmental restrictions to diminish pollution imposed by the government violated the investors’ rights under the treaty and these measures tantamount to an indirect expropriation. See Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG v. Federal Republic of Germany, ICSID Case No. ARB/09/6, Award of 11 March 2011. See Técnicas Medioambientales Tecmed, SA v. The United Mexican States, ICSID Case No ARB (AF)/00/2, Award of 29 May 2003. In this case, the company has claimed the violation of fair and equitable treatment due to the denial by the government the renewal of a licence to operate a hazardous landfill by a company. The government motivated this decision by the fact that the site has not been properly maintained and its further development had negative effects for the environment and health. See, e.g., Técnicas Medioambientales Tecmed SA v. The United Mexican States, ICSID Case No. ARB (AF)/ 00/2, Award of 29 May 2003.

41

ANNA JOUBIN-BRET

2.3.2

Environmental Screening

Another area of tension stems from the practice (called for by the UNCTAD IPFSD)40 to require environmental impact assessments of investment projects before authorizing, approving, registering, or granting permits to investors. Screening of projects on the basis of their environmental impact is arguably a positive development as it generates greater sensitivity to environmental concerns and prevents negative impact of the project. However, caution is required as such assessment may lead to arbitrariness and discrimination or even a way to ‘pick and choose’ FDI through environmental requirements. Although it may not be bad per se to be more selective about those investment projects that deserve specific protection and attention and those that do not, it is in essence contrary to the non-discrimination provisions of IIAs as they are drafted to date.41 Such problems can be anticipated particularly when several agencies and line ministries are involved in the approval or granting of a permit. Foreign investors may experience this as a non-transparent and subjective decision-making process regarding environmental licensing that might generate problems and lead to investment disputes.

2.3.3

The Lowering of Environmental Standards to Attract FDI

The third area of tension is based on the assumption that environmental protection regulation in host countries of FDI is generally less stringent than in the investor’s country of origin and that heavily polluting industries, for instance, may be attracted to locate their investments into countries where environmental standards are lower in order to lower their operational costs. The 1990s had their ‘pollution haven hypothesis’ where investors would seek to reduce production costs by locating their investment into ‘low’standards host countries with a low level of environmental regulation while maintaining access to ‘high’-standards markets. Nowadays the phenomenon is commonly known as carbon leakage, whereby investors in countries with severe carbon regulations relocate to countries with low levels of carbon.42 Under this hypothesis, there is fear that with the liberalization of investment rules and an increased competition for FDI, host states may decide to lower their environmental standards or chose not to adopt desired standards in order to attract investment from companies from industrialized countries with high carbon regulation standards. The resulting distortion in competition could result in

40 41 42

UNCTAD, ‘Investment Policy Framework for Sustainable Development 2012’, supra note 6, p. 33. Unless the protection of the environment is a specific exception to non-discrimination or admitted by an investment tribunal as a legitimate reason for discriminating, like in the international trading system. D. Freestone & C. Streck (Eds.), Legal Aspects of Carbon Trading: Kyoto, Copenhagen, and beyond, Oxford: Oxford University Press, 2009 (emphasis added).

42

2

PROTECTING

THE INVESTOR AND

PROTECTING

THE

ENVIRONMENT: CONFLICTING OBJECTIVES

environmental dumping, which could severely impact the protection of the environmental standards. Two consequences from this hypothesis are translated into investment rule-making: at the intergovernmental level, the above-mentioned commitment by contracting parties not to lower their environmental standards to attract investment43 (basically, not to engage in environmental dumping to attract investment projects). As far as investors and investment projects are concerned, also regulations and commitments may require investors to abide by international best practices, including through the use of environmentally friendly technologies for production and management of their projects, even in the absence of more stringent requirements of domestic laws in the host country of their investment. It is important to note however, as do policymakers, that FDI projects can also come with a positive impact on the protection of the environment and become a driver for green and sustainable development. A more recent and positive impact of FDI on the protection of the environment is the extent to which FDI can contribute to the development of green technologies, environmentally sound projects and climate change issues, and the synergies between investment policies of the host state and FDI projects that will contribute to environmental protection.44 Over the previous decades, technology transfer was an important objective of developing countries investment policies. The same holds true today, specifically with regard to green or environmentally friendly technologies. The way IIAs will address this possible positive contribute and encourage projects that actually protect the environment or transfer of green technologies is a challenge that differs however from the previous ones, in so far as it requires to take a positive approach and broaden the protection and promotion role of the treaty, as opposed to an approach that limits and restricts the protection afforded under the treaty to protect the state’s right to regulate for environmental reasons. The inherent tension and the possible conflict between protecting the environment and protecting FDI, as well as the possible negative impact FDI projects can have on the protection of the environment, are illustrated in the recent generation of IIAs. IIAs are dealing with this possible conflict carefully, essentially by excluding the state’s actions taken to protect the environment from the measures that can be challenged by investors. Most IIAs use the technique of exceptions or carveouts and by doing so avoid entering into substantive regulation of environmental issues that are best dealt with in specific

43

44

OECD, Negotiating Group on the Multilateral Agreement on Investment (MAI): The Multilateral Agreement on Investment, DAFFE/MAI(98)7/REV1, 22 April 1998, Treatment of Investors and Investment III: Not Lowering Standards (Labour and Environment), pp. 53-54 (emphasis added). See UNCTAD, ‘World Investment Report 2010: Investing in a Low-Carbon Economy’, New York and Geneva: United Nations, 2010, pp. 85-88.

43

ANNA JOUBIN-BRET

international agreements. The following section will begin by reviewing the early IIAs that did not address environmental protection and follow with a review of the features of the most recent IIAs that include protection of the environment as part and parcel of their core objective to promote sustainable development through FDI. ENVIRONMENTAL PROTECTION

2.4

IN

IIAS

As economic instruments aiming at the promotion and protection of investment, IIAs have evolved over the last decade to reflect the growing awareness of the interconnection between broader environmental concerns and sustainable economic development.45 This evolution takes place against the background that early IIAs generally do not make any reference to environmental protection objectives. When at all, they make a reference to the environment, and address the issue in general terms, primarily in the preamble or general provisions. These references are typically expressed in hortatory language, often in the form of mere ‘string references’, where the environment is simply mentioned along with other concerns or broader objectives such as economic cooperation between the countries. Two factors have contributed to putting environmental issues on the front burner of IIAs and ensuring that in their latest generation of agreements, protection of the environment is expressly addressed: firstly, the general awareness of the role of environmental regulation and protection in economic law, particularly with regard to the international trading system and the relevance of the GATT Article XX exception, and, secondly, a number of environment-related investment disputes, some of which have caught the attention of the public at large and have circulated among non-governmental organizations (NGOs) and other stakeholders before reaching civil society at large, the most notable example being the Chevron v. Ecuador saga.46 These two factors are illustrated in the new US template on investment. The 2012 US Model BIT incorporates a dedicated article on environment and investment.47

2.4.1

Environment in Recent IIA Practice

Since the early 1990s, with the proliferation of FTAs and a new generation of BITs, environmental issues have been addressed in IIAs in different ways. Interestingly, more 45 46 47

United Nations Conference on Trade and Development, ‘Environment’, New York and Geneva: United Nations, 2001, pp. 74-81. See the chapter of Poppa and Argyrou and the chapter of Blanca Gomez de la Torre in this book. US Model BIT 2012. Available at: accessed 7 June 2014.

44

2

PROTECTING

THE INVESTOR AND

PROTECTING

THE

ENVIRONMENT: CONFLICTING OBJECTIVES

recent IIAs either explicitly address the need to protect the environment or mention it as part of sustainable development.48 With the notable exception of the 2012 US Model BIT,49 BITs generally do not address the environment in an explicit way, either by promoting or protecting investment in environmentally sound or green projects. In spite of calls for more comprehensive or binding language on environmental issues, treaty negotiators have been careful to stick to the limited scope of investment agreements and not to overload the investment agenda with broader environmental concerns. They have generally addressed potential tension by reaffirming the state’s right to regulate, including for environmental purposes, and by including environmental concerns into the global agenda of investment for pursuing sustainable economic development.50 A stronger approach where the state’s right to regulate is a full-fledged exception to the treaty protection and can be invoked as a defence by the state has found its way into recent model treaties and investment agreements, such as the Association of Southeast Asian Nations Comprehensive Investment Agreement (ASEAN CIA). Reference is made to the general exception in Article 17.51

48

49

50

51

Early comprehensive investment treaties have followed the GATT approach. The NAFTA under Arts. 1114 provides that “Nothing in Chapter Eleven on Investment shall be construed to prevent a Party from adopting, maintaining or enforcing any measures otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns”. Similar to the approach taken in the GATT, the right to regulate for environmental purposes is recognized as long as it is consistent with the investment chapter. US Model BIT 2012, Art. 12 Investment and Environment. In this provision it is stated that “it is inappropriate to encourage investment by weakening or reducing the protections afforded in domestic environmental laws. Accordingly, each Party shall ensure that it does not waive or otherwise derogate from or offer to waive or otherwise derogate from its environmental laws”. This model adopted a mandatory language using shall ensure in comparison to shall strive pertinent to the suggestive language in the 2004 US Model BIT. The accent is also placed on the recognition of environmental agreements including multilateral agreements to which both contracting states are parties. Id. Additionally, the approach taken by the United States in the model treaty of 2012 is to include a remark into the substantive investment protection provision on expropriation and to provide that “except in rare circumstances […]”. Asian Nations Comprehensive Investment Agreement, Art. 17, General Exceptions: “1. Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between Member States or their investors where like conditions prevail, or a disguised restriction on investors of any other Member State and their investments, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member State of measures: (a) necessary to protect public morals or to maintain public order; 12 (b) necessary to protect human, animal or plant life or health; (c) necessary to secure compliance with laws or regulations which are not inconsistent with this Agreement, including those relating to: (i) the prevention of deceptive and fraudulent practices to deal with the effects of a default on a contract; (ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts; (iii) safety; (d) aimed at ensuring the equitable or effective 13 imposition or collection of direct taxes in respect of investments or investors of any Member State; (e) imposed for the protection of national treasures of artistic, historic or archaeological value; (f) relating to the conservation of

45

ANNA JOUBIN-BRET

The most used approach in IIAs remains the reference in the preamble or in general provisions of the treaty to the goal of achieving sustainable development or protecting the environment. The hortatory language has however become more focused in recent treaties. Hortatory language is still found in preambles or general provisions of BITs that specifically identify protection of the environment as part of sustainable development. Reference is made in IIAs to the goal of achieving sustainable economic development, including through appropriate environmental and social policies.52 This link between environmental standards, sustainable development, and FDI has been distilled in the generation of investment treaties that have followed the Multilateral Agreement on Investment (MAI) negotiations in the late 1990s and the first decade of 2010. Very few of the recent treaties omit a reference to environmental protection altogether.53 However, the approach that is taken to include a reference to the environment as an overarching objective does not constitute an outright exception or clarification of the hierarchy of norms. It is still for an arbitral tribunal to decide whether the state had the right to breach provisions of the investment treaty and whether the investor’s rights to protection and compensation are secondary to the broader objectives of sustainable development. At the same time, other international economic instruments also address the link between sustainable development, the environment, and activities by multinational companies and foreign investors.54 This is, for example, the case of the OECD Guidelines for Multinational Enterprises 2011 in their General Policies55 that identify a role for multinational enterprises that should: “[…] Contribute to economic, social and environmental progress with a view to achieving sustainable development”.56 While constituting guidelines for multinational companies

52

53 54

55 56

exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption”. A detailed example highlighting the connection between the environment, sustainable development, and FDI was discussed during the OECD Multilateral Agreement on Investment (MAI) negotiations, where the following preambular language was proposed: “Recognizing that investment, as an engine of economic growth, can play a key role in ensuring that economic growth is sustainable, when accompanied by appropriate environmental and labor policies; […] Re-affirming their commitment to the Rio Declaration on Environment and Development and Agenda 21 and the Program for its Further Implementation including the principles of the polluter pays and the precautionary approach; and resolving to implement this Agreement in a manner consistent with sustainable development and with environmental protection and conservation”. OECD, Negotiating Group on the Multilateral Agreement on Investment (MAI): The Multilateral Agreement on Investment, DAFFE/MAI (98)7/REV1, 22 April 1998, Preamble, pp. 7-9. Gordon & Pohl 2011, supra note 23. P. T. Muchlinski, The Multinational Enterprise & the Law, Oxford: Oxford University Press, 2007, Chapter 14: Environmental Issues. See also S. Chaudhuri & U. Mukhopadhyay, ‘Foreign Direct Investment, Environmentally Sound Technology and Informal Sector’, 31 Economic Modelling, 2013, pp. 206-213. OECD Guidelines on Multinational Enterprises 2011, General Policies II, supra note 22. Id., General Policies II (1), p. 19.

46

2

PROTECTING

THE INVESTOR AND

PROTECTING

THE

ENVIRONMENT: CONFLICTING OBJECTIVES

investing abroad, the guidelines have not yet found their way into investment protection provisions of the treaty per se, particularly into the dispute settlement mechanism as a condition or an obligation on investors. The link between protection of the environment and sustainable development is made in investment treaties, and both objectives are united into the goal for FDI to contribute to sustainable economic and social development. One of the approaches is to specifically identify environmental protection as an area where the contracting states will retain the right to regulate for public purpose. The role of states and their duty to regulate for the preservation of the environment is reaffirmed in numerous recent treaties, either through strong exception language or through language which identifies the right to regulate directly or requires that the measures be otherwise consistent with the substantive protection provisions of the treaty. Recent BITs and FTAs have taken the more radical approaches and chosen to carve out environmental regulation with broader worded exceptions and permit public policy measure, otherwise inconsistent with the treaty, to be taken to preserve the environment provided, however, that these measures are applied in a nonarbitrary manner and do not constitute disguised restrictions to investment. The ASEAN CIA and the Energy Charter Treaty are illustrations of this trend.57 Also, in the substantive investment protection clauses such as in the provision that deals with expropriation, some recent treaties have implemented significant changes in limiting the scope of this clause in regard to environmental activities of states. In the 2004 US Model Treaty, the 2012 US Model Treaty and subsequent investment chapters in FTAs concluded by the United States have indicated that certain measures of states directed at public welfare can be exempted from the scope of expropriatory activities under the treaty. Specifically, these treaties provide in the Annex on Indirect Expropriation, whereby: Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare 57

The ASEAN CIA states in its Art. 17 on General Exception a GATT-type exception adapted to investment issues: “Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between Member States or their investors where like conditions prevail, or a disguised restriction on investors of any other Member State and their investments, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member State of measures: [...] (b) necessary to protect human, animal or plant life or health […] (f) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption”. In Art. 18 of the Energy Charter Treaty, it provides that “Each state continues to hold in particular the rights to decide the geographical areas which in its Area to be made available for exploration and development of its energy resources, the optimization of their recovery and the rate at which they may be depleted or otherwise exploited, […] and to regulate the environmental and safety aspects of such exploration, development and reclamation within its Area”.

47

ANNA JOUBIN-BRET

objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.58 The protection of environment and national environmental laws and regulations can be safeguarded via reference that often made in traditional BITs stating that investments should be made “in accordance with the laws and regulations” of the host country. This reference clearly includes environmental regulation and conformity with environmental standards of the host state among the conditions for an investment to be protected under the investment treaty. References such as the one made by Costa Rica in the BIT with the Netherlands (Article 10) that covered investments are investment made in accordance with the laws and regulations of the host country, which includes “its laws and regulations on the environment” are not needed, at least in the authors opinion as it is clear that the laws and regulations of the host country are all laws and regulations and include environmental laws. This provision caters for the priority given by Costa Rica to environmentally sound projects in line with the development of their ecotourism industry. These provisions do, however, reinforce the message that, indeed, the environmental regulations of the host country form an integral part of the requirements for an investment to benefit from the advantageous status of protected investment and resort to international dispute settlement.

2.5

CONCLUSION

By way of conclusion, the author will develop her views that investment treaties should remain limited in their scope to address investment issues only. They should not become instruments regulating environmental issues, nor do they constitute the right framework to place obligations on investors in relation to environmental protections. What investment treaties could and should do, however, is to ensure that they do not contradict or undermine legitimate public policy measures taken to protect the environment and that they do not protect or promote projects that are contrary to the primary goal of ensuring sustainable development that includes the protection of the environment. Investment treaties should give clear priority to the state’s legitimate environmental objectives and should acknowledge that environmental regulation as dealt with domestic or international principles and rules, take precedent over investment promotion and protection, or at a minimum constitute a clear exception to a right to compensation or reparation on the part of the investor. There are ways to reconcile investment protection and environment protection in IIAs.

58

2004 US Model BIT, Ann. B about Expropriation (4) (b). Available at: accessed 8 June 2014.

48

2

PROTECTING

THE INVESTOR AND

PROTECTING

THE

ENVIRONMENT: CONFLICTING OBJECTIVES

At the heart of the concept of sustainable development, the protection and sustainable use of natural resources features prominently in the objectives of a new generation of investment policies and translates into investment regulation. It is not yet clear in international investment instruments, or at least the consequences are not clearly dealt with in IIAs. Policymakers at the domestic and international levels and civil society at large are paying attention to the way investment projects and broader environmental protection goals interact in order to avoid negative impact of these projects on the environment. It is fair to say that while for many years IIAs have been largely silent about environmental issues, investment treaties nowadays pay attention to the quality of investment projects and to the requirement to meet environmental rules and regulations and to ensure that investments protected under IIAs do not harm the environment. Treaty provisions and architecture ensure that investment rules will not frustrate the host countries’ efforts to protect the environment. This can be done by spelling out the objective of environmentally sound investment in the preamble or the scope of the treaty, by excluding environmental regulations altogether from the scope of protection of the treaty, in a way it is done for taxation or other economic issues. It can also be done by reaffirming the state’s right to regulate for public purpose, including for environmental protection, and ensuring that this right is not challenged by investors or if so, does not generate compensation. At the same time, investment treaty negotiators have resisted the temptation to bring binding and substantive environmental rules and provisions into investment treaties. Both as a technical instrument and as a policy tool, IIAs are definitely not the priority instrument in which to deal with environmental issues. It is in the best interest of both contracting parties and negotiators not to confuse the role and the scope of investment instruments and not to use them for purposes that are not coherent with their role and objectives that are, and should remain, focused and limited. It comes to mind here that while questioning the effective impact and role of IIAs on FDI flows, it would seem rather contradictory to assign these IIAs with a positive role in attracting or fostering environmentally friendly FDI. It is important however to ensure investment rules do not frustrate host countries’ efforts to protect the environment and international cooperation on environmental issues. It is also important to leave to the development of new technologies to further promote investments that are mindful and even protective of the environment at large. IIAs can provide for a framework to encourage the transfer of clean technology and environmentally sound management practices to host countries, which could contribute to development objectives but should not, by doing so, water down or relax the core investment protection standards, creating confusion and unpredictability in the application and interpretation.

49

BIBLIOGRAPHY BOOKS Cordonier Segger, M.C. et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011. Freestone, D. & Streck, C. (Eds.), Legal Aspects of Carbon Trading, Kyoto: Copenhagen, and beyond, Oxford: Oxford University Press, 2009. Levy, D. & Newell, P. (Eds.), The Business of Global Environmental Governance, MIT Press, 2005. Muchlinski, P.T., The Multinational Enterprise & the Law, Oxford: Oxford University Press, 2007. OECD, Globalisation and the Environment: Perspectives from OECD and Dynamic Non-Member Economies, OECD Publishing, 1998. Sornarajah, M., The International Law on Foreign Investment, 3rd edn, Cambridge: Cambridge University Press, 2010. Utting, P. (Ed.), The Greening of Business in Developing Countries, London: Zed Books/ UNRISD, 2002. Wiers, J., Trade and Environment in the EC and the WTO: A Legal Analysis, Groningen: Europa Law Publishing, 2003.

ARTICLES Aaken, van A., & Lehmann, T.A., ‘Sustainable Development: Developing a New Conceptual Framework’, in R. Echandi & P. Sauvé (Eds.), Prospects in International Investment Law and Policy, Cambridge: Cambridge University Press 2013.

50

2

BIBLIOGRAPHY

Butlin, J., ‘Our Common Future’, World Commission on Environment and Development, London: Oxford University Press, 1987, p. 383, 1 J. Int. Dev. Chaudhuri, S., & Mukhopadhyay, U., ‘Foreign Direct Investment, Environmentally Sound Technology and Informal Sector’, 31 Economic Modelling, 2013. Footer, M.E., ‘Bits and Pieces: Social and Environmental Protection in the Regulation of Foreign Investment’, 18(1) Michigan State Journal of International Law, 2009. Gleckman, H., ‘Transnational Corporations Strategic Responses to Sustainable Development’, Green Globe Yearbook, 1995. Gordon, K. & Pohl, J., ‘Environmental Concerns in International Investment Agreements: A Survey’, OECD Working Papers on International Investment, No. 2011/1, OECD Investment Division, 2011. Available at: accessed 7 June 2014. Houde, M.F. et al., ‘The Interaction Between Investment and Services Chapters in Selected Regional Trade Agreements’, OECD Trade Policy Working Paper No. 55, COM/DAF/INV/TD(2006)40/Final, 19 June 2007. Available at: accessed 10 June 2014. Waelde, T. & Kolo, A., ‘Environmental Regulation, Investment Protection and “Regulatory Taking” in International Law’, 50 International and Comparative Law Quarterly, 2001. Wagner, M.J., ‘International Investment, Expropriation and Environmental Protection’, 29 Golden Gate U.L. Rev. 465, 1999.

CONTRIBUTIONS

IN EDITED BOOKS

Hunter, D. & Porter, S., ‘International Environmental Law and Foreign Direct Investment’, in D. Bradlow, and A. Escher (Eds.), Legal Aspects of Foreign Direct Investment, The Hague: Kluwer Law International, 1999.

51

3

FAIR

AND

EQUITABLE TREATMENT

PROTECTION AND

ENVIRONMENT:

OF THE

RECENT TRENDS

IN

AND THE

INVESTMENT TREATIES

INVESTMENT CASES

Yulia Levashova*

3.1

INTRODUCTION

In the last decade, international investment law has undergone a significant transformation. The catalysts driving the transformation can be observed working on three different yet interconnected levels: (1) policy, (2) treaty- drafting, and (3) jurisprudence. These three catalysts will be addressed below. On a policy level, legal issues concerning international investment treaties have become prominent on the agenda of states and international bodies, such as the United Nations Conference on Trade and Development (UNCTAD)1 and the Organization for Economic Cooperation and Development (OECD).2 Environmental considerations are becoming more and more integrated into domestic investment policies and hence in a ‘new generation’ of International Investment Agreements (IIAs).3 New investment practices can be traced to the European Union (EU) domain, where environmental protection is an * 1

2

3

Yulia Levashova is a PhD candidate at Utrecht University and a researcher at the Center for Sustainability of Nyenrode Business University. Investment law and policy is now one of the main areas of the work of the United Nations Conference on Trade and Development (UNCTAD), the UN agency that deals with a broad spectrum of development issues. The Organization for Economic Cooperation and Development (OECD) has been working on issues of foreign investments for a very long time. This international organization has developed tools, statistical analyses, and policy documents dealing with the investment regime. It puts efforts into developing mechanisms for aligning noneconomic aspects of development with international investment law issues. For more information, visit , accessed on 3 May 2014. UNCTAD World Investment Report 2012: Towards a New generation of Investment Policies, UNCTAD/ WIR/2012, 5 July 2012, see , accessed on 10 June 2014. See also OECD Working paper, Environmental Concerns in International Investment Agreements: A Survey, by Kathryn Gordon and Joachim Pohl, No. 2011/1. In this paper, based on an empirical survey, the authors indicate that the inclusion of environmental language in IIAs has become more common. In 2005, the proportion of newly concluded treaties with environmental concerns passed the threshold of 50 % of new treaties concluded in a given year, , accessed on 10 June 2014.

53

YULIA LEVASHOVA

important goal of all the EU’s (external) policies, which can also be observed in current investment and trade treaty negotiations.4 Individual states have recently also devoted specific attention to an evaluation of their investment policies from the angle of noneconomic concerns. Examples are South Africa and Indonesia. They are currently in the process of reforming their foreign direct investment (FDI) framework. This will be discussed in detail in two of the contributions to this book.5 Overall, states have become more aware of the necessity not only to protect foreign investors but also to secure their right to regulate, including the protection of the environment.6 The growing awareness of this problem is to a large extent the result of the increased pressure on states from non-governmental and intergovernmental organizations.7 Climate change, the loss of biodiversity, and the overexploitation of resources have raised environmental issues to the level of important policy concerns.8 Recurring instances of corporate environmental misconduct in host states involving foreign investors are leading some states9

4

5

6

7

8

9

For an explanation of this process and recent examples of treaties being negotiated by the EU, see Chapter 9, Integrating Environmental Law Principles and Objectives in the EU Investment Policy: Challenges and Opportunities by A. Dimopolous; Chapter 10, Environmental Sustainability of the EU Common (Direct) Investment Policy: Systematic Considerations in Light of the Lisbon Treaty by O. Quirico and Chapter 11, Bilateral Investment Treaties from an Ecological Aspect: A Central and Eastern European Approach by M. Szabo in this volume. See about this development Chapter 12: J. Pfumodoze and M. de Gama, Balancing Foreign Investment Protection and Environmental Protection under South African Bilateral Investment Treaties and Chapter 15: T. Lambooy, I. Prihandono and N. Barizah, Foreign Direct Investments in the Mining Industry in Indonesia: Disputes Concerning Environmental Degradation and Pollution. See the UNCTAD World Investment Report 2013, p. 102, that observes that states currently tend to craft their IIAs in line with sustainable development objectives and with enough space for regulatory activities in the interest of public welfare. There are a few influential organizations aiming at reforming the traditional framework of IIAs by integrating noneconomic objectives. The most prominent initiatives have been developed by the International Institute for Sustainable Development (IISD) and UNCTAD. In 2005, the IISD developed the IISD Model International Agreement on Investment for Sustainable Development, which is meant as a policy tool for treaty negotiators. In 2012, UNCTAD developed the Investment Policy Framework for Sustainable Development that put ‘sustainable development’ at the core of this tool. UNCTAD, Investment Policy Framework for Sustainable Development, 2012, , accessed on 12 April 2015. For example, see the programme of the European Commission on Environment and Economics which includes different initiatives to integrate environmental protection issues into economic activities, such as market-based instruments (MBI), environmental taxes, tradable permit systems, or targeted subsidies. For more information, see , accessed on 3 May 2014. The example is Ecuador. The sequence of cases involving Chevron and Ecuador continues to be litigated in courts around the world and investment tribunals. The example of cases in Ecuador: Chevron Corp. v. Maria Aguinda et al., Sucumbios Provincial Court of Justice, Lago Agrio Judgment of 14 February 2011. See also the final judgment of the Ecuadorean Appellate Court, Chevron Corp. v. Maria Aguinda et al., Sucumbios Provincial Court of Justice, Final Appellate Judgment, 2012. Examples of investment cases: Chevron Corporation and Texaco Petroleum Corporation v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23, First Partial Award on Track I of 17 September 2013. Chevron Corporation and Texaco Petroleum Corporation v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23 and other

54

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

to urge for the inclusion of environmental provisions in their investment agreements.10 On a treaty-drafting level, the dynamics of treaty-drafting practice have gone through different stages over the years. After a slow start, with only a few hundred investment agreements at the beginning of the 1990s, the number of IIAs has rapidly proliferated, reaching a total of 3,196 by the end of 2012.11 The largest proportion of IIAs are the socalled bilateral investment treaties (BITs), negotiated and concluded between two states. In 2012, there were 2,187 such agreements.12 Lately, however, more and more states are showing a preference for negotiating multilateral and in particular regional agreements instead of bilateral treaties.13 The recent policy of the EU member states is an example of this trend. Particularly after 2009, the new EU competence concerning FDI paved the way for the negotiation of new trade agreements with investment chapters or separate investment agreements on behalf of all EU member states.14 Current negotiations with Canada, the United States, India, Singapore, Japan, and Morocco are the first agreements that will introduce a new standard of common European investment protection.15 On a jurisprudential level, investment law has been influenced by an escalation in the number of investor-state disputes brought before international tribunals, which grew from only 6 known cases in 1995 to 226 cases at the end of 200516 and to a total of 568

10

11 12 13 14

15 16

decisions. For more information on this conflict, see Chapter 16:, Chevron–Texaco v. Ecuador: The Environmental Case within a Claim of Denial of Justice by B. Gomez de la Torre in this volume. Specifically Latin American states have been dissatisfied with the legal regime for foreign investments, experiencing environmental damage caused by foreign investors operating in their countries. For example, in 2013, Ecuador announced the establishment of a Commission to audit the majority of its BITs. The main reason for Ecuador’s backlash against investment treaty arbitration is the proliferation of arbitral proceedings against it. Well-discussed court and arbitral proceedings against Ecuador by Chevron involved a major environmental disaster that occurred in the Ecuadorian region. Earlier, Ecuador withdrew from the ICSID Convention. See Newsbrief Allen & Overy, Ecuador establishes Commission to audit its Bilateral Investment Treaties, 2013, , accessed on 3 May 2014. On the Chevron v. Ecuador dispute, see Chapter 16, The Environmental Case within a Claim of Denial of Justice by B. Gomez de la Torre in this volume. UNCTAD World Investment Report 2013: Global Value Chain: Investment and Trade for Development, p. 10. Id., p. 9. UNCTAD World Investment Report 2013, supra note 11. In its 2013 Report, UNCTAD indicates that by 2013, at least 110 countries were involved in 22 regional investment negotiations, p. 20. See the comprehensive information on this matter on the website of the European Commission, Bilateral Investment Dialogues and Trade Agreements, , accessed on 2 May 2014. For more on this issue, see Chapter 9 , Integrating Environmental Law Principles and Objectives in the EU Investment Policy: Challenges and Opportunities by A. Dimopolous in this volume. UNCTAD Bilateral Investment Treaties 1995-2006: Trend in Investment Rulemaking, 2007, p. 1, , accessed on 10 April 2015.

55

YULIA LEVASHOVA known disputes in 2013.17 An increasing number of cases over the years have generated a wave of new types of issues that are not only related to the economic and financial side of investments but also involve environmental dimensions. Matters concerning the impact of the activities of foreign investors on the environment of host states as well as host states’ measures directed at protecting the local environment have become part of investment arbitration discussions.18 The current developments in investment policy-making, treaty-drafting, and jurisprudential processes have affected the emerging relationship between international investment law and the environment. This relationship is still at an early stage, but certain elements thereof have already come to the surface. The increasing integration of environmental law and policy into economic legal instruments such as investment treaties indicates the effort of policymakers to strengthen and to integrate environmental regulations into investment agreements. These efforts can be observed in changes to the contents of investment treaties, namely, the more frequent references to the environment in the investment treaties in preambular paragraphs, general and specific exceptions for environmental laws and policies, and the amendment of core investment protection standards. Examples of such core protection standards are the fair and equitable treatment standard, the most-favoured nation clause and the regulation of the conditions for direct or indirect expropriation.19 These substantive investment protection provisions are found in most investment treaties and comprise the most important pillars of investment safeguarding principles. One of the most important but also one of the most contentious investment protection standards is the obligation to provide fair and equitable treatment (FET) to foreign investors.20 This standard of treatment is usually characterized by its openness and has sometimes been referred to as a ‘catch-all clause’ due to the fact that investors have invoked this clause in a variety of situations, in addition to or when more specific claims

17 18

19

20

UNCTAD, Recent Developments in Investor-State Dispute Settlement (ISDS), 1 April 2014, p. 1, , accessed 4 April 2015. See J. Vinuales, Foreign Investment and the Environment in International Law, Cambridge University Press, 2012, p. 17. In analysing investment disputes, Vinuales underlines the challenges related to the qualification of the dispute as ‘environmental’ or ‘environment related’. Investment disputes are very complex and usually contain multilayers of issues with which they are dealing. Therefore, each specific dispute should be discussed individually with all the facts being taken into account. Nevertheless, the situations where environmental elements have played a role can be classified. For example, US Model BITs of 2004 and 2012 clarified the provision on indirect expropriation by exempting certain measures of states directed at public welfare from the scope of expropriatory activities under the treaty; see US Model BIT 2004 and US Model BIT 2012, Annex B about Expropriation (4) (b). Available at and , accessed on 2 May 2015. M. Paparinskis, The International Minimum Standard and Fair and Equitable Treatment, Oxford University Press, 2013, p. 4.

56

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

of expropriation or non-discrimination were not successful. The problem of the FET obligation in relation to environmental regulations is usually seen through the prism of the legal conflicting dimension of investment and the environment.21 Some of the disputes involving FET violations concern conflicts between the host states’ obligation to honour the commitments under investment agreements, on the one side, and their responsibility to regulate and to protect the public welfare interest, including the environment, on the other.22 However, this contribution will look at the FET clause from a different angle, by discussing the efforts of policymakers to reconcile the legal regime of investment and noneconomic regulations in this specific clause. The author will discuss the attempts of policymakers to amend and to clarify the formulation of FET clauses so as to raise the threshold of host state liability and to preserve the regulatory autonomy of host states. To that end, this chapter will focus on recent treaty making and policy transformations to reform the FET standard, reflected in some of the new generation of IIAs. The implications of some states’ initiatives to reform and to redefine the content and meaning of the FET norm, so as to restrict its scope and to allow the legitimate regulatory measures of states, will be evaluated from the perspective of developments in investment jurisprudence. This chapter is structured as follows. Section 3.2 concisely discusses the definition and the most important variations of the FET standard in investment treaty-drafting and jurisprudential practice. Section 3.3 outlines five policy options for the formulation of the FET clause in the new generation of investment agreements, as these were proposed by the UNCTAD International Policy Framework for Sustainable Development (IPFSD). These options aim to clarify the definition of the FET standard with the purpose of including some of the public policy concerns within the scope of this provision. One such option is to link the FET obligation to customary international law. In particular, this approach will be evaluated in Section 3.4 by assessing the implications for the interpretation of such an FET standard in investment cases. The specific focus is on the practice within the North American Free Trade Agreement (NAFTA) in which the FET standard makes an explicit reference to customary international law. Furthermore, the author will discuss a few examples of states that have followed this approach with the goal, among other things, of 21 22

S. Di Benedetto, International Investment Law and the Environment, Elgar International Investment Law, 2013, p. 104. Usually, changes in legislation and the introduction of new legal requirements, e.g. the environmental permits accompanied by additional measures, such as a lack of transparency, can lead to a breach of the legitimate expectations of the investor and hence to a violation of the FET provision. See, for example, Tecmed v. Mexico, Case No ARB AF/00/2, final award 29 May 2003 (the subject matter related to renewal of the licence to operate a hazardous landfill); SD Myers v. Mexico, NAFTA case, UNCUTRAL Rules, partial award 13 November 2000 (the subject matter related to the closure of the border for a hazardous substance); Metaclad v. Mexico, ICSID Case No ARB (AF)/97/1, final award 30 August 2000 (the subject matter related to a permit to operate a hazardous landfill).

57

YULIA LEVASHOVA

securing its regulatory activities in the public interest. Concluding remarks are offered in Section 3.6. THE FAIR

3.2

3.2.1

AND

EQUITABLE TREATMENT STANDARD

IN INVESTMENT

TREATIES

Formulations

For a long time, the FET clause was a mysterious standard as arbitral tribunals had never addressed it before the late 1990s.23 However, since its first application in the American Manufacturing & Trading Inc. v. Democratic Republic of Congo award in 1997,24 the FET clause has been invoked by investors in almost all investment cases.25 The reason for this popularity lies in the notion that the FET standard has a broader scope in comparison with other substantive protection clauses.26 Despite early references to the concept of the FET norm in several – legally nonbinding – international instruments,27 it has only found prominence and become established as a legal norm in modern IIAs and specifically in a network of BITs.28 The original objective of including an FET clause in IIAs was to safeguard foreign investors against unfair and unreasonable conduct by a host state that might manifest itself in a range of situations.29 Despite appearing to be a straightforward goal at first sight, the FET provision is one of the most disputed clauses in international investment law. Being an openly formulated standard of investment protection, the provision has proved to be problematic for arbitrators, who are still struggling to define and to provide a specific normative content 23 24 25 26 27

28 29

The rule of fair and equitable treatment is not novel as a legal norm and had already appeared in the Havana Charter for the International Trade Organization of 1948, which, however, never entered into force. See American Manufacturing & Trading Inc. v. Democratic Republic of Congo, ICSID ARB/93/1, Final Award, 21 February 1997. UNCTAD, Fair and Equitable Treatment, UNCTAD Series on Issues on International Investment Agreements II, A Sequel, 2012. R. Dolzer, ‘Fair and Equitable Treatment: Today’s Contours’, Transnational Dispute Management, March 2014. A reference to fair and equitable treatment appeared in a few early multinational agreements that nevertheless did not impose direct obligations on host states. The examples are the Havana Charter for the Establishment of an International Trade Organization, 1948 (did not come into effect), which in Article 11 (2) refers to “just and equitable treatment for the enterprise, skills, capitals arts and technology brought from one member country to another”; the Convention Establishing the Multilateral Investment Guarantee Agency (MIGA) was submitted to the International Bank for Reconstruction and Development in October 1985 and entered into effect on 12 April 1988. Article 12 (d) of MIGA states that the conditions in the host country should include “the availability of fair and equitable treatment and legal protection for the investment”. OECD, Fair and Equitable Treatment in International Investment Law, Working Papers on International Investment, 2003/2004, p. 5. Examples of this type of conduct might vary from a change in legislation by the host state, which affects investments to the revocation of a licence for developing an investment project.

58

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

to this standard in order to apply it in concrete investment disputes.30 The lack of clarity regarding the meaning of the FET clause relates to the legal nature of this standard. The FET clause is formulated in several ways in investment agreements. The UNCTAD study on this standard distinguishes the following ways in which the FET clause appears in investment treaties: (1) an unqualified obligation to accord FET, (2) a link of the FET obligation to international law, (3) a link of the FET obligation to a minimum standard of treatment of aliens under customary international law, and (4) the FET obligation with an additional substantive content such as the denial of justice.31 The discussion on what the FET concept essentially entails necessitates an examination of the way in which the formulation is specifically drafted. As the UNCTAD study shows, states have not been consistent in constructing the FET clause. Primarily, states have chosen two options for formulating the FET standard. In some instances, states have opted for including a reference to customary international law; in other cases, they have opted for specifically including a self-standing FET standard. Ample scholarly work has been dedicated to the controversy regarding the various approaches identified in the UNCTAD report.32 Therefore, this chapter will not focus on the opinions exchanged in this debate but instead address the consequences deriving from the variations in the formulation of an FET provision in a certain treaty. In terms of the formulation, the basic difference between a self-standing treaty clause and a reference to the international customary (minimum) standard of treatment can be explained as follows: (i) An unqualified or self-standing FET clause contains no references to a minimum standard under international law and provides no specific criteria as to when fair and equitable treatment should be afforded. It relies on the notion that state conduct has to be interpreted on the basis of an assessment of whether the actions of the state were ‘fair’ and ‘equitable’ in each specific circumstance.33 In most of the European BITs, this approach has been employed.34 For example, in the German Model BIT, the FET clause has been formulated as follows: “each Contracting State shall in its territory in every case accord 30 31 32

33 34

See Genin, Eastern Credit Limited, Inc., and A. S. Baltoil v. Republic of Estonia, ICSID Case No. ARB/99/2, Award, 25 June, 2001. The tribunal stated that “the exact content of this standard is not clear”. For a detailed analysis of these four categories, see the study by the UNCTAD, Fair and Equitable Treatment, UNCTAD Series on Issues on International Investment Agreements II, A Sequel, 2012, p. 17. See R. Klager, Fair and Equitable Treatment in ‘International Investment Law’, Cambridge Studies in International and Comparative Law, 2012, p. 48; M. Paparisnkins, The International Minimum Standard and Fair and Equitable Treatment, Oxford University Press, 2013, p. 83; A. Newcombe, L. Paradell, Law and Practice of Investment Treaties: Standards of Treatment, Kluwer Law International, 2009, p. 233. S. Vasciannie, The Fair and Equitable Treatment Standard in International Investment Law and Practice, BYIL, Vol. 70, 1999, pp. 99-164. See the majority of Bilateral Investment Treaties negotiated by Germany, by the Netherlands, by France, by Belgium-Luxembourg, etc., , accessed on 9 June 2014. Also see S. Hjaccesse, Securing High Investment Protection for EU Investors A Review of EU Member states

59

YULIA LEVASHOVA

investments by investors of the other Contracting State fair and equitable treatment as well as full protection under this Treaty”.35 (ii) An FET clause linked to (the minimum standard) under customary international law is drafted differently. In investment agreements that state that the fair and equitable treatment is to be afforded ‘in accordance with international law’, the drafters intended to include customary principles of international law in their agreement, including but not limited to the minimum standard under customary international law. In other types of agreements, especially in NAFTA and the IIAs negotiated by North American countries, the text of the FET clause specifically refers to the minimum standard of treatment under customary international law and states that the FET standard has to be interpreted as part of such a minimum standard.36 The concept of an international minimum standard of treatment of aliens was developed over a century ago.37 In its contemporary reading, it has been referred to as a norm of customary international law regulating the treatment of aliens “by providing for a minimum set of principles which states, regardless of their domestic legislation and practices, must respect when dealing with foreign nationals and their property”.38 The minimum standard became prominent through the work of international claims commissions39 and specifically through the interpretation in the landmark Neer case, decided by the US–Mexico Claims Commission in 1926, which has been referred to in more recent decisions.40 In this case, the US–Mexico Claims Commission concluded that in order for a state’s action to be classified as a violation of the minimum treatment standard, it “should amount to an outrage, to bad faith, to willful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every

35

36

37 38 39 40

Model BITs. Transnational Dispute Management , Vol. 9, Issue 3, April 2012, , accessed on 2 March 2015. Model BIT of the Federal Republic of Germany concerning Encouragement and Reciprocal Protection of Investments, 2008, Federal Ministry for Economics and Technology, Article 2, , accessed on 10 April 2015. The US in its modern IIAs incorporated the concept of the minimum standard under customary international law (discussed in Section 3.3.3 of this chapter). Also Canadian Foreign Investment Protection Agreements usually contain the reference to customary international law or to the principles of international law. Some of the new Mexican BITs also contain a reference to the minimum standard under customary international law; see Mexico–Belarus BIT, 2008 (entered into force in 2009); the Mexico–China BIT, 2008 (entered into force in 2009). M. Paparinskins, The International Minimum Standard and Fair and Equitable Treatment, Oxford Monographs in International Law Series, Oxford, 31 January 2013, p. 20. OECD Directorate for Financial and Enterprise Affairs. Working Papers on International Investment. Number 2004/3. Fair and Equitable Treatment Standard in International Investment Law. September 2004. E. M. Borchard, The Diplomatic Protection of Citizens Abroad or the Law of International Claims, New York: The Banks Law Publishing Company, 1922. Glaims Gold v. United States, para. 499; Robert J. Frank v. United Mexican States, NAFTA, 1999.

60

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

reasonable and impartial man would readily recognize its insufficiency”.41 Since this decision, the practice of tribunals has evolved and most tribunals have indicated that the thoughts on what constitutes unfair treatment of investors have changed. Investment jurisprudence, interpreting the customary minimum standard, has primarily taken the ‘historic-evolutionary approach’, underlying the importance of the high threshold set by the Neer case, at the same time emphasizing the evolutionary character of the minimum standard.42 A problematic issue with regard to the FET formulation is that neither a broadly formulated autonomous FET clause nor an FET clause linked to the international minimum standard provides clarity with regard to what this rule exactly entails. On the one hand, the view of some commentators is that the international minimum standard, in contrast to a self-contained clause, is more restrictive in nature and, consequently, a tribunal has in those cases limited options regarding its interpretation.43 This argument proceeds with the presumption that fair and equitable treatment in the context of the minimum standard clause sets a higher threshold as to what can be considered unfair and inequitable treatment. Specifically in the NAFTA context, most of the tribunals set a relatively high threshold that needs to be surpassed before a host state’s conduct can be considered a violation of the minimum standard. However, it should be noted that NAFTA tribunals are limited by the binding ‘Notes of Interpretation’ of Certain Chapter 11 Provisions adopted by the Free Trade Commission (FTC Notes).44 They provide guidance, which restricts the interpretation of this concept by tribunals. The reason for adopting the FTC Notes and the impact that they have on the interpretation of the FET standard by arbitrators will be discussed in further detail in Section 3.3.3. On the other hand, the view of some commentators is that an FET clause in a treaty that does not refer to international law or customary international law might lead to far41

42

43 44

LFH Neer and P. Neer (USA) v. United Mexican States, United States–Mexico Claims Commission, Decision of 15 October 1926, in Reports of International Arbitral Awards (United Nations, 2006), Vol. IV, p. 60, at. pp. 61-62. R. Dolzer, A. von Walter, ‘Fair and Equitable Treatment – Lines of Jurisprudence on Customary Law’, in F. Ortino, L. Liberti, A. Shepperd, Warner (Eds.), Investment Treaty Law: Current Issues Volume II, British Institute for Comparative Law, 2007, p. 113. Among the cases that accepted the ‘historic-evolutionary approach’ are Pope & Talbot Inc. v. The Government of Canada, Final Merits Award of 10 April 2001 (UNCITRAL Rules); Mondev International Ltd. v. United States, Award of 11 October 2002, ICSID Case No. ARB (AF)/99/2, 2003; Cargill, Inc. v. United Mexican States, NAFTA, ICSID, ARB/AF/05/2, Award 18 September 2009; Merrill & Ring Forestry L.P. v. Canada, ICSID Award, 31 May 2010 (UNCITRAL Rules); Loewen Group, Inc. and Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3, Award 26 June 2003. See, K. Yannaca-Small, Fair and Equitable Treatment in Arbitration under International Investment Agreements: A Guide to the Key Issues, Oxford University Press, 2011, p. 388. North American Free Trade Agreement Notes of Interpretation of Certain Chapter 11 Provisions NAFTA Free Trade Commission, 31 July 2001, , accessed on 12 June 2014.

61

YULIA LEVASHOVA

reaching interpretations by tribunals, establishing a lower liability threshold for state conduct, in comparison to what the minimum standard generally requires for establishing host state liability. A lack of a concrete meaning of the independent FET clause, as summarized by the UNCTAD, “do[es] not connote a clear set of legal prescriptions and are [is] open to subjective interpretations”.45 Hence, this broad interpretation of a selfstanding FET clause by arbitrators is frequently criticized by host states and scholars as the effect is that of threatening the autonomy of host states, in particular as it concerns host states’ governmental actions directed at improving public welfare.46

3.2.2

Dimensions

The above introduction to the divergent standpoints concerning the interpretation of the FET clause can only partially capture the dichotomy between the different interpretations of the FET clause in practice and the consequences thereof. In fact, in analysing investment practice concerning the application of the FET standard as part of customary international law or as an independent treaty clause, it is interesting to note that sometimes the manner in which the clause has been formulated seems to be irrelevant.47 Reference is made to recent arbitral awards, specifically those discussing the FET clause in the context of the minimum standard. In Merrill & Ring Forestry L.P. v. Canada, the position taken by the tribunal was that the self-standing FET clause had already become customary international law and essentially “the name of the standard does not really matter”.48 The tribunal further emphasized that what is important is that the standard

45 46

47

48

UNCTAD, Investment Policy Framework for Sustainable Development, supra note 7, p. 51. In Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, the ICSID tribunal adopted a very broad interpretation of the FET clause, stating that treatment “requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment. The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulation”, para. 154; see . Since the Tecmed decision, a number of tribunals (Occidental v. Ecuador 2004; MTD v. Chile, 2004 (the Tecmed reasoning was explicitly applied to this case; see para. 115); LG&E v. Argentina; PSEG Global v. Turkey; Duke v. Ecuador, and others) have extensively referred to the reasoning in this award and have continued the Tecmed legacy. Critical remarks on the application of the FET clause therefore continue. See, for example, M. Sornarajah in Expert Opinion, in El Paso Energy International Co v. Argentine Republic, ICSID Case ARB-03-15, Award 31 October 2011. This view is also supported by S. Schill, Fair and Equitable Treatment under Investment Treaties as an Embodiment of the Rule of Law, International Law and Justice Working Papers 2006/6; also see Klager 2012, supra note 32. Merrill & Ring Forestry L.P. v. Canada, ICSID Award, 31 May 2010 (UNCITRAL Rules), para. 210.

62

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

protects against different types of acts of states that might infringe a sense of fairness, equity, and reasonableness concerning investors. Specifically, the FET standard has to be applied to the facts of the case in order to determine its exact meaning.49 As will be elaborated upon further, tribunals either interpreting a self-standing FET standard under BITs or interpreting the minimum standard under the NAFTA tend to develop and to follow a practical definition of the FET provision that includes a list of examples of state behaviour that would violate the FET standard. By doing so, tribunals avoid abstract discussions on the origins of the FET standard. Recently, another argument has entered the discussion on the FET standard, that is the regulatory power of host states aiming at improving public welfare. Certainly, the debate on sovereign powers in the context of international investment law is not new;50 however, the question regarding the scope of the FET standard and the extent to which arbitrators can review the policies and laws of host states created for the purpose of public welfare remains unsettled. This question is specifically relevant considering that the obligation to afford FET is not restricted to the economic sphere, but extends to all subject matters, including to the environmental policies of states, which may adversely affect investments.51 Investment conflicts with an environmental dimension are often based on a state’s refusal to grant or to renew certain permits or to authorize certain actions by an investor, because of a threat of pollution or harm to environmental resources and the health of the population.52 These complex cases, including noneconomic interests, despite factual differences, have one common denominator. 49 50

51 52

Id., para, 210-215. See N. Schrijver, The Changing Nature of State Sovereignty, British Year Book of International Law, vol. 70, 1999, pp. 65-98; N. Schrijver, Sovereignty over Natural Resources: Balancing Rights and Duties, Cambridge University Press: Cambridge, 2008, pp. 278; I. Seidl-Hohenveldern, International Economic Law, Kluwer Law International, 1999, pp. 19-23; I. Alvik, Contracting with Sovereignty: State Contracts and International Arbitration, Hart Publishing, Oxford and Portland, 2011, pp. 238-273. Occidental Exploration and Prod. Co. v. Republic of Ecuador (UNCITRAL), Award 1 July 2004; also see R. Dolzer 2007, supra note 42. In Metalclad, after a long history of negotiation with the Mexican government, a US company was denied a construction permit to operate a hazardous landfill due to health and environmental concerns. The tribunal concluded in this case that “Mexico failed to ensure a transparent and predictable framework for Metalclad’s business planning and investment. The totality of these circumstances demonstrates a lack of orderly process and timely disposition in relation to an investor of a Party acting in the expectation that it would be treated fairly and justly in accordance with the NAFTA”. Metalclad Corp v. Mexico, ICSID Case No. ARB (AF)/97/1, Award 30 August 2000, para. 99. In SD Myers v. Canada, the case involved a discussion on polychlorinated biphenyl (PCB), an environmentally hazardous chemical compound, used by the US Corporation SD Myers in some of its operations. After PCB was recognized as a dangerous substance to health and the environment worldwide, Canada took a number of measures to ban this substance including the prohibition on exports of PCB to the United States. SD Myers Inc. v. Canada (UNCITRAL), First Partial Award 13 November 2000. In Tecmed, the issue was a denial to renew a licence to operate a hazardous landfill by a company. The government justified this decision due to the fact that the site had not been properly maintained and its further development had negative effects for the environment and health. See Tecnicas Medioambientales, Tecmed SA v. Mexico, ICSID Case No. ARB (AF)/002/2, Award 29 May 2003.

63

YULIA LEVASHOVA

All of these cases encompass the conflicting dimension of the interconnection between investment protection rules and the environment, previously discussed in the introduction. The dilemma surfaced because the stability of the legal framework relied upon by investors and protected through legitimate expectations is shaken by adaptions or changes to this legal framework in the interest of the host state’s broader noneconomic goals. In the case of environmental concerns, a change of circumstances is rather predictable. With the progress in environmental science and the prominence of sustainable and ecological governance, new knowledge on the protection of the environment motivates states to change their policies.53 At the same time, the legal framework of investment agreements is defined by the key goal set in the preambles to virtually all agreements “to protect and to promote investors and investments”. This pinpoints one of the problematic notions reflected in the original drafting of IIAs, namely, the absence of legal provisions that aim to clarify the investors’ obligations with respect to the environmental regulation and other noneconomic obligations that in some cases might be conflicting. In some recent awards, tribunals have attempted to clarify the conflicting dimension of public policy and investor protection by emphasizing the need to balance the legitimate expectations of investors and the state’s legitimate regulatory interests.54 Arbitral tribunals in a number of cases have acknowledged states’ right to regulate,55 at the same time emphasizing that this right should be within the boundaries of international obligations under IIAs. The extent of these boundaries, however, has not been clarified by the tribunals. Academic experts have provided a range of solutions for bridging the conflicting dimensions of introducing new environmental regulations or enforcing existing environmental

53

54

55

For example, in the SD Myers case, the Canadian government adopted restrictive measures after the discovery of the hazardous effects of polychlorinated biphenyl (PCB) transported by the investor, SD Myers Inc. v. Canada (UNCITRAL), First Partial Award 13 November 2000. Saluka Investments B.V. v. Czech Republic (UNCITRAL), 15 ICSID Rep. 274. Partial Award 17 March 2006, at para. 306; Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8, Award 11 September 2007, para. 57. See ADC Affiliate Ltd. and Others v. Hungary, ICSID Case No. ARB/03/16, Award 2 October 2006, In para. 423, the tribunal states: “It is the Tribunal’s understanding of the basic international law principles that while a sovereign State possesses the inherent right to regulate its domestic affairs, the exercise of such right is not unlimited and must have its boundaries. As rightly pointed out by the Claimants, the rule of law, which includes treaty obligations, provides such boundaries. Therefore, when a State enters into a bilateral investment treaty like the one in this case, it becomes bound by it and the investment-protection obligations it undertook therein must be honoured rather than be ignored by a later argument of the State’s right to regulate”; in MTD v. Chile, in para. 99, the tribunal came to the similar conclusion stating that “thus, by entering into the BIT, the Contracting Parties did not limit the exercise of their authority under their national laws or policies except to the extent that this exercise would contravene obligations undertaken in the BIT itself”, MTD Equity Sdn. Bhd. And MTD Chile SA v. Chile, ICSID Case No. ARB/01/7, Award 25 May 2004.

64

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

norms on the one hand and investment protection on the other hand. Specifically, two approaches can be mentioned. One, from the jurisprudential perspective, is reflected in a clarification of the interpretation technique of the tribunals. The second approach, from a policy and a treaty-drafting perspective, concerns the attempts to amend the IIAs and include specific clauses on noneconomic matters, such as environmental concerns. Section 3.3 will look at the newly proposed treaty-drafting methods to remodel the FET clause. This could help host states to clarify the content of the FET obligation in the investment agreements to which they are a party. It also has an impact on the level of discretion available to arbitral tribunals to decide on the interpretation of this standard. FAIR

3.3

3.3.1

AND

EQUITABLE TREATMENT

AND THE

RIGHT

TO

REGULATE

Clarifying the Fair and Equitable Treatment Standard

One of the impressive efforts to assist policymakers in clarifying the FET standard to allow more flexibility regarding public policies was presented in 2012 by the United Nations Conference on Trade and Development (UNCTAD) in the International Policy Framework for Sustainable Development (IPFSD).56 This section will explain the proposal to reform the FET standard offered by this policy framework, thereby specifically focusing on one of the proposed options to link the FET treatment with the minimum standard under customary international law. The IPFSD was published in 2012. This document consists of a set of eleven core principles for investment policymaking,57 guidelines for national policies, and specific guidance for policymakers discussing all stages of the drafting process and specific provisions of IIAs. This framework has been developed on the basis of continuous research that indicated the emergence of a ‘new generation’ of investment policies in which the objectives of sustainable development have a prominent role. To help systematically integrate different dimensions of sustainable development, including environmental regulations, into investment laws and policies, the IPFSD proposes a set of options, which are available for policymakers. In the text of the IPFSD, it is provided that this document “is neither legally binding nor a voluntary undertaking between states”.58 It offers expert guidance by an intergovernmental body, “leaving national policymakers free to ‘adapt and adopt’ as appropriate”.59

56 57 58 59

UNCTAD, International Policy Framework for Sustainable Development, supra note 7, 2012. The examples of the core principles include policy coherence, balanced rights and obligations, the right to regulate, dynamic policymaking, and others, supra note 7. UNCTAD, Investment Policy Framework for Sustainable Development, supra note 7, p. 8. UNCTAD, Investment Policy Framework for Sustainable Development, supra note 7, p. 65.

65

YULIA LEVASHOVA

The IPFSD proposes specific options for national governments for the negotiation of investment agreements offering various choices for each provision, including the FET clause. It is argued in the IPFSD document that the FET clause has to be clarified: the “use of the FET to protect investors’ legitimate expectations can indirectly restrict countries’ ability to change investment-related policies or to introduce new policies – including those for the public good – that may have a negative impact on individual foreign investors”.60 The IPFSD document discusses a number of options to clarify the meaning of the FET standard in order to enhance sustainable development. The following choices are offered to treaty drafters:61 (1) to make an unqualified commitment in the treaty to treat foreign investors/investments ‘fairly and equitably’ (with an explanation of the problems arising out of such a formulation);62 (2) to qualify the FET standard in the treaty by reference to (a) the minimum standard of treatment under customary international law or to (b) international law or principles of international law; (3) to include an exhaustive list of state obligations in the FET clause (e.g. avoiding to deny justice in judicial or administrative proceedings, to treat investors in a manifestly arbitrary manner, to flagrantly violate due process, to infringe investors’ legitimate expectations based on investment-inducing representations or measures); (4) to provide interpretative guidance to tribunals (e.g. it can state that the FET clause does not preclude the contracting states from adopting good faith regulatory measures that pursue legitimate objectives; the country’s level of development is relevant in the determination of the FET breach; a breach of another provision of the IIA or another agreement cannot establish a claim for a breach of the FET clause; and the importance of the investor’s conduct is relevant in determining the breach of FET); and (5) to omit the FET clause. Each of these options deserves a thorough analysis. However, this chapter has limited its scope to further examine option 2 – that is, to make a reference to customary international law. According to the IPFSD, this option can be beneficial, because “it

60

61 62

UNCTAD, Investment Policy Framework for Sustainable Development, supra note 7, p. 43. For further UNCTAD analysis of fair and equitable clause, see UNCTAD, Fair and Equitable Treatment, UNCTAD Series on Issues on International Investment Agreements II, A Sequel, 2012. UNCTAD, Investment Policy Framework for Sustainable Development, supra note 7, p. 51. UNCTAD, Investment Policy Framework for Sustainable Development, supra note 7, p. 51. It indicates that through inclusion an unqualified formulation of an FET, “country provides maximum protection for investors but also risks posing limits on its policy space, raising its exposure to foreign investor’s claims and resulting financial liabilities”.

66

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

may raise the threshold of state liability and help to preserve the state’s ability to adapt public policies”.63 But the document also emphasizes the possible pitfalls of this method. Specifically it underlines that the content of the minimum standard under customary international law is still unclear. The next section of this chapter investigates the implementation and the interpretation of the customary international law approach in IIAs vis-à-vis a self-contained FET formulation. The section primarily discusses the FET standard under the NAFTA. At the present time, the NAFTA definition of the FET norm linked to customary international law and its jurisprudence presents one of the main pillars of the understanding of customary international law in this context.64 The NAFTA approach has been followed by some states codifying the customary law position in their BITs. Among these states is the United States that followed the NAFTA approach in its Model BIT of 2004, its Model BIT of 2012, and in the new generation of US BITs. A Canadian Model BIT of 2004,65 some Chinese BITs,66 and various FTAs67 have also explicitly linked the FET standard to customary international law. These treaties followed the contours of the IPFSD proposal with the objective that the FET standard preserves a contracting state’s ability to adopt regulation in the public interest, inter alia by including a definition of the FET obligation linked to the minimum standard under customary international law. Avoiding the historical discussion on the international minimum standard, this chapter discusses the contemporary NAFTA definition of the FET concept, which has been followed in other countries’ BITs and FTAs, and the interpretation of this definition by tribunals. The goal of discussing this is to generate a set of observations on the question of to what extent formulating an FET clause linked to customary international law, as suggested by the IPFSD, has the potential to allow host states to implement public interest regulations and hence to raise the threshold of host state liability.

63 64

65 66 67

UNCTAD, Investment Policy Framework for Sustainable Development, supra note 7, p. 51. R. Dolzer and A. von Walter, ‘Fair and Equitable Treatment – Lines of Jurisprudence on Customary Law’, in F. Ortino, L. Liberti, A. Sheppard, Warner (Eds.), Investment Treaty Law: Current Issues II, British Institute for International and Comparative Law, p. 100. Canada’s Foreign Investment Protection and Promotion Agreement (FIPAs), 2004, , accessed on 10 April 2015. China-Mexico BIT (entry into force in 2009), Article 5, , accessed on 10 April 2015. Dominican Republic and Central America FTA (entry into force between 2006 and 2009 for different party states), Chapter 10 Investment, Article 10.5, , accessed on 10 April 2015; Agreement establishing the ASEAN–Australia–New Zealand Free Trade Area, Chapter 11 Investment, Article 6. The Agreement entered into force in 2010, only for Cambodia and Laos in 2011 and for Indonesia in 2012, , accessed on 10 April 2015; Trans-Pacific Partnership Agreement (TPP) - Investment chapter - version 20 January 2015, Transnational Dispute Management, Mart 2015.

67

YULIA LEVASHOVA

3.3.2

Linking the FET to Customary International Law

The contemporary formulation of the minimum standard under customary international law found in modern IIAs, such as in the US Models of 2004 and 2012, has been primarily inspired by the FET clause in the NAFTA and its subsequent interpretation in FTC Notes. The NAFTA was adopted in 1994, but the actual NAFTA clarification of the FET standard did not appear before 2001 when the Free Trade Commission adopted its FTC Notes.68 The FTC Notes were the response by the NAFTA parties to an – according to them incorrect – interpretation of the FET standard by tribunals in several of the earlier NAFTA awards, which will be discussed below in Section 3.3.3. The issuance of these Notes gave contours to the definition of a minimum standard by imposing certain limitations on its content and emphasizing that the FET standard does not require treatment in addition to or beyond what is required by the customary international law minimum standard of aliens.69 At the same time, non-NAFTA tribunals have interpreted FET clauses in their own way, primarily by defining FET as an independent self-contained treaty standard and by expanding this standard with new elements, such as the obligation to respect the ‘legitimate expectations of investors’ and to ensure ‘a stable and predictable business and legal framework’, which will be discussed in Section 3.3.3. To better understand the formulation of the FET linked to customary international law clarified by NAFTA tribunals, it is instrumental to recap the developments leading to the drafting of the FTC Notes.

3.3.3

NAFTA Approach towards Fair and Equitable Treatment

Chapter 11 of NAFTA states in Article 1105 (‘Minimum Standard of Treatment’) 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”.70 This provision was elucidated in 2001, when the FTC Notes were published, clarifying the minimum standard.71 These Notes have a binding

68

69 70 71

North American Free Trade Agreement Notes of Interpretation of Certain Chapter 11 Provisions NAFTA Free Trade Commission, 31 July 2001, , accessed on 12 June 2014. North American Free Trade Agreement Notes of Interpretation of Certain Chapter 11 Provisions NAFTA Free Trade Commission, 31 July 2001, A (2). North Free Trade Agreement, Chapter 11: Investment, Services and Related Matters, Article 1105, , accessed on 8 April 2014. Supra note 69.

68

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

character on tribunals pursuant to Article 1131 (2) of the NAFTA.72 The FTC Notes provide: “Minimum Standard of Treatment in Accordance with International Law: 1. Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party. 2. The concepts of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens. 3. A determination that there has been a breach of another provision of the NAFTA, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1).”73 The FTC Notes can be considered a direct reaction to three NAFTA awards: Metalclad v. Mexico,74 S.D. Myers v. Canada,75 and Pope & Talbot v. Canada.76 These cases awakened the controversy regarding the meaning of the minimum standard and caused alarm among the NAFTA member states regarding the implications of the interpretation of this standard by tribunals, and its impact on the regulatory powers of states. These three decisions brought a group of issues to the surface that were later addressed in the FTC Notes.77 The tribunals in all three cases attempted to provide clarification to the meaning of the minimum standard under customary international law by either (1) offering an expansive interpretation of the minimum standard under customary international law that goes beyond international treaty law (Pope & Talbot v. Canada);78 (2) employing a conventional norm, found in trade law, namely, the principle of transparency, to establish a violation of the FET standard in

72 73

74 75 76 77

78

Article 1131 (2) of NAFTA states that “An interpretation by the Commission of a provision of this Agreement shall be binding on a Tribunal established under this Section”. North American Free Trade Agreement Notes of Interpretation of Certain Chapter 11 Provisions NAFTA Free Trade Commission, 31 July 2001, , accessed on 12 June 2014. Metalclad v. The United Mexican States, ICSID Case No. ARB (AF)/97/1, Award of 30 August 2000. S.D. Myers, Inc. v. Government (UNCITRAL), Award of November 2000. Pope & Talbot Inc. v. The Government of Canada (UNCITRAL), Award on the Merits, Phase 2, April 2001. North American Free Trade Agreement Notes of Interpretation of Certain Chapter Eleven Provisions, NAFTA Free Trade Commission, July 2001, , accessed on 12 June 2014. Supra note 76.

69

YULIA LEVASHOVA the context of the minimum standard (Metalclad v. Mexico);79 or (3) extending the breach of one provision of the NAFTA to a violation of another standard (S.D. Myers v. Canada).80 Furthermore, all three cases were concerned with the regulatory activities of states. Specifically, in the cases of Metalclad v. Mexico and S.D. Myers v. Canada, the environmental measures of host states had become a part of the investment arbitration discussions. In Metalclad, after a long history of negotiation with the Mexican government, the US-based company was denied a construction permit to operate a hazardous landfill due to health and environmental concerns in the region. In SD Myers v. Canada, a US-based company challenged the ban on the export of polychlorinated biphenyl (PCB), an environmentally hazardous chemical compound, used by a US-based company in some of its operations. After PCB was recognized as a dangerous substance to health and the environment worldwide, Canada took a number of measures to ban this substance including the prohibition of exports of PCB to the United States.81 After the FTC Notes were issued, they clearly tied the FET standard under the NAFTA to customary international law. Despite the fact that the FTC Notes provided a certain degree of clarity regarding the limitations of an FET standard linked to customary international law, the FTC Notes did not offer a definition of the standard. Disagreement on the definition therefore remains an important issue observed in investment jurisprudence and scholarly work. Even though it was observed by several tribunals that a discussion on the content of the minimum standard vis-à-vis a self-contained clause is irrelevant when applied to specific facts of the case,82 the review of investment cases shows that some differences can be detected between these two FET standards, in particular when the tribunals assess state measures. In Section 3.4, these findings will be elaborated. 79 80 81

82

Supra note 74. Supra note 75. In both cases, damages were awarded to the investors. The environmental issues pertinent to these disputes provoked campaigns by US-based NGOs that pointed to flaws in investment arbitration including (i) the private selection procedure for arbitrators, (ii) the lack of transparency in the investment procedure based on secrecy, and (iii) the possible discouragement of host states to adopt or to maintain the law and to improve public policies because of the threat of high compensation awarded by tribunals. Additionally, environmental groups warned the US government against possible future threats to US environmental laws initiated by companies on the basis of trade and investment agreements. These campaigns persuaded some US politicians to take a stance in early 2000 and to start a discussion on limiting the scope of investment protection in future treaties. See J. Attik, ‘Legitimacy, Transparency and NGO Participation in the NAFTA’, Chapter 11 Process in T. Weiler (Ed.), NAFTA Investment Law and Arbitration: Past Issues, Current Practice, Future Prospects, Transnational Publishers, 2004 and J. Kerry Vows Trade Revisions to protect U.S. Environmental Rules, Environmental Policy Alert, 2002, . Saluka BV v. Czech Republic, Partial Award, March 2006, para. 291.

70

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

NAFTA is not a singular example of the incorporation of an FET standard with a reference to customary international law. A number of states, attempting to restrict the definition of the FET standard, have followed this approach. Section 3.3.4 will examine examples of treaty-drafting practice that embedded the customary law approach.

3.3.4

Impact of the FTC Notes on BITs and FTAs

The definition of the international minimum standard adopted in the FTC Notes was explicitly transposed into the text of some BITs and Free Trade Agreements (FTAs). The United States is one of the states that adopted the international customary law approach towards FET in the 2004 US Model BIT, the US BITs concluded after 2004, and the 2012 US Model BIT. Article 5 of the 2004 and 2012 US Models BITs is entitled ‘Minimum Standard of Treatment’. It provides: “1. Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. 2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments. The concepts of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights. The obligation in paragraph 1 to provide: (a) ‘fair and equitable treatment’ includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world.”83 Finally, paragraph 3 of Article 5 of both US Model BITs underlines that a breach of any other provision of the BIT or of a separate international agreement does not mean a breach of this clause. An essential part of the FET definition in Article 5 of both US models is that treatment afforded to investors, including fair and equitable treatment, should be in accordance with customary international law. Annex A of both models clarifies that customary international law “results from general and consistent practice of states that they follow from a sense of legal obligation”.84 This definition was explicitly inserted to restate the 83 84

US Model BIT 2004 and US Model BIT 2012, Article 5 Minimum Standard of Treatment, para. 1-2. Annex A, Model 2004 and 2012.

71

YULIA LEVASHOVA

position of the United States regarding the origin of the fair and equitable treatment standard and to remind tribunals of two elements of customary international law: state practice and opinio juris. The discussion on the constituting elements of customary international law became specifically relevant in the context of the NAFTA case Loewen v. US.85 This case was decided just before the adoption of the 2004 US Model. In Loewen, the Canadian claimant raised the argument that a large network of BITs represented ‘state practice’ and gave rise to norms of customary international law that were breached by the United States. The United States argued the opposite and emphasized that the conclusion of BITs cannot be considered a ‘state practice’ that states follow from a sense of legal obligation, but rather that BITs represent lex specialis that applies only between the contracting parties and cannot generate general rules of custom. Hence, the goal of Annex A was to codify the US view that the obligation to afford fair and equitable treatment reflects a norm of customary international law and that this view differs from any FET standard (in other treaties) that constitutes a self-standing clause. Traditionally, the United States and Canada employed the FET standard with a reference to customary international law.86 However, since the discussion on the right to regulate became a prominent topic in international investment law, also other states (outside the NAFTA domain) have reformed their investment agreements, including the FET clauses.87 For example, some of the Chinese88 and Australian BITs89 now include a reference to customary international law, as formulated in NAFTA and in the US Model BITs. A variety of FTAs, such as the Dominican Republic and Central America FTA (also referred to as CAFTA),90 the ASEAN–Australia–New Zealand FTA,91 and the draft Trans-Pacific Partnership Agreement (TPP),92 follow a similar approach. These examples

85 86 87 88 89 90

91

92

Loewen Group, Inc. and Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3, Award 26 June 2003. Canada Model on Foreign Investment Protection Agreement (FIPA), 2004, Article 5, , accessed on 10 April 2015. See UNCTAD World Investment Report 2013, supra note 11. The report indicated that more states are keen to reform their BITs and IIAs in order to secure the right to regulate in their treaties. China–Mexico BIT, (entry into force in 2009), Article 5, , accessed on 10 April 2015. Australia–Mexico BIT (entry into force 2007), Article 4 and protocol Article 4, , accessed on 10 April 2015. Dominican Republic and Central America FTA (entry into force between 2006 and 2009 for different party states), Chapter 10 Investment, Article 10.5, , accessed on 10 April 2015. Agreement establishing the ASEAN–Australia–New Zealand Free Trade Area, Chapter 11 Investment, Article 6. Agreement entered into force in 2010, only for Cambodia and Laos in 2011 and for Indonesia in 2012, , accessed on 10 April 2015. Trans-Pacific Partnership Agreement (TPP) – Investment chapter – version 20 January 2015, Transnational Dispute Management, Mart 2015.

72

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

indicate that referring to customary international law in FET clauses has also become relevant for states other than the NAFTA state parties. The FTC Notes on interpretation has been transposed by some states into their treaties, indicating their agreement with this definition and sending a clear signal that tribunals should restrict the interpretation of the FET clause. However, the relevance of the FTC Notes can only be analysed in depth on the basis of the relevant decisions of investment tribunals. INTERPRETATION BY TRIBUNALS INTERNATIONAL LAW

3.4

OF A

FET STANDARD THAT IS LINKED

TO

CUSTOMARY

NAFTA, by linking the FET standard to the customary international law, became a main source of interpretation of the customary international law approach. As explained above, even though the FTC Notes provide some clarity regarding the international minimum standard, the content of the rule was not defined therein. It was left to NAFTA tribunals to fill in the content of the FET standard with a reference to customary international law. For more than 10 years, NAFTA tribunals have been shaping the concept of the minimum standard in their rulings. Based on this jurisprudential practice, two trends have emerged: first, the evolving character of the international minimum standard, emphasized by all NAFTA tribunals, and second, the attempt to create a workable definition of unacceptable state conduct leading to a violation of the FET obligation under article 1105 of the NAFTA. These two trends need to be discussed in order to provide indications regarding the threshold set by NAFTA with respect to the regulatory activities of states. This will be compared with the interpretation by other tribunals, which have applied a self-standing FET standard.

3.4.1

The Evolutionary Character of Customary International Law

With regard to the first trend, it is important to understand that almost all NAFTA tribunals agree with the evolutionary character of customary international law, briefly discussed in Section 3.2.1. This position was very well articulated in the 2003 ADF tribunal, which proposed to move away from the Neer definition, indicating that “customary international law is not frozen in time and the minimum standard does evolve”.93 This formulation was repeated in almost all subsequent awards. With a few exceptions, such as the Glamis award,94 the NAFTA tribunals agreed that ‘outrageous’ treatment 93 94

ADF Group v. US, ICSID Case No. ARB (AF)/00/1 (NAFTA), Final award, 9 January 2003, para. 179. Glamis Gold Ltd. v. United States, June 8 2009.

73

YULIA LEVASHOVA

referred to in Neer case is no longer applicable in contemporary reality. The very recent NAFTA tribunal in the Bilcon v. Canada case emphasized that “today’s minimum standard is broader than that defined in the Neer case and its progeny. Specifically this standard provides for the fair and equitable treatment of alien investors within the confines of reasonableness.”95 Furthermore, in investment practice, the perception of what can nowadays be considered as unfair treatment has also been shaped by external factors such as the current economic conditions and the contemporary needs of investors.96 Nevertheless, NAFTA tribunals still stress that even though international customary law has evolved the threshold for finding a violation of the standard remains high. This point has been emphasized in all NAFTA decisions since the adoption of the FTC Notes. Certainly, there are variations among NAFTA decisions regarding the extent of the evolution of customary international law with respect to the FET standard. However, the general trend for cases that concern state regulations in the field of public concerns, such as aimed at improving health and the environment, is to apply a high threshold for establishing a violation of the FET clause in assessing state actions. The tribunals weigh the public interest against the interests of an investor. One of the examples is the Thunderbird decision from 2006. The tribunal in this case defined acts that would give rise to a breach of the minimum standard of treatment as those that in the context of factual circumstances amount “to a gross denial of justice or manifest arbitrariness falling below acceptable international standards”.97 In this case, the NAFTA tribunal had to decide whether the closure of gambling facilities by Mexico for the purpose of promoting public morals constituted a breach of the FET clause in the NAFTA, among other violations. The tribunal did not question the Mexican regulation to close gambling facilities, clearly stressing that the goal of Article 1105 of NAFTA is to assess whether regulatory and administrative conduct breaches Article 1105 and not to

95 96

97

Bilcon of Delaware et al. v. Government of Canada, Permanent Court of Arbitration (PCA) Case No. 200904, Award on Jurisdiction and Liability, 17 March 2015, para. 435. It should be noted that the Neer case deals not with the treatment of investors, but with the physical security of a foreigner. In Mondev v. United States, the tribunal explicitly pointed out that the Neer standard does not depict modern customary international law by stating that “the Neer case (…) concerned not the treatment of foreign investment as such but the physical security of the alien. Moreover the specific issue in Neer was that of Mexico’s responsibility for failure to carry out an effective police investigation into the killing of a United States citizen by a number of armed men who were not even alleged to be acting under the control or at the instigation of Mexico. (…) There is insufficient cause for assuming that provisions of bilateral investment treaties, and of NAFTA, while incorporating the Neer principle in respect of the duty of protection against acts of private parties affecting the physical security of aliens are confined to the Neer standard of outrageous treatment where the issue is the treatment of foreign investment by the State itself”. Mondev International Limited v. United States, ICSID Case No ARB(AF)/99/2, Award of October 2002, para. 115, , accessed on 10 June 2014. International Thunderbird Gaming Corporation v. Mexico, Award, IIC 136 (2006), Ad Hoc Tribunal (UNCITRAL Arbitration Rules), 26 January 2006, para. 194.

74

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

review the lawfulness of national policymakers.98 The tribunal adopted the view that “Mexico has in this context a wide regulatory ‘space’ for regulation; in the regulation of the gambling industry, governments have a particularly wide scope of regulation reflecting national views on public morals”.99Assessing the effect of the Mexican conduct on the investor, the tribunal applied a high threshold concerning the state’s actions. The tribunal stated that the acts of the Mexican government would rise to a breach of the minimum standard of treatment, if, when weighed against the factual background, these actions would “amount to ‘gross denial of justice’ and ‘manifest arbitrariness’”.100 The Mexican conduct did not reach this high threshold. According to the tribunal, the administrative irregularities of the Mexican authorities towards the investor were “not grave enough to shock a sense of judicial propriety” and rise to a breach of the minimum standard of treatment under NAFTA.101 In two recent awards, Chemtura v. Canada (2010)102 and Apotex v. US (2014),103 that, among other factors, involved public health and environmental concerns, both tribunals ruled in favour of the state. The public interest was explicitly taken into account by both panels. In the Chemtura v. Canada case, a chemical company had complained that the flawed and delayed review and refusal of the registration of a pesticide called lindane by the Canadian government had violated the right of fair and equitable treatment of the company.104 The tribunal started its analysis by stating that it is not its role to question the actions of states, specifically if a specialized state agency believes that the pesticide in question (lindane) is dangerous.105 Nevertheless, the tribunal underlined the serious health and environmental concerns regarding lindane, detected in other countries.106 Also, the tribunal noted that lindane was included on the list of chemicals designated for elimination under the Stockholm Convention on Persistent Organic Pollutants or POPS in 2009.107 The tribunal took into account the international obligations of Canada under the Aarhus Convention, which concurred with Canada’s conduct. This contributed to the tribunal’s conclusion as to the rightfulness of Canada’s actions to conduct a review.

98 99 100 101 102 103 104 105 106 107

Thunderbird v. Mexico, supra note 97, para. 127. Thunderbird v. Mexico, supra note 97, para. 127. Thunderbird v. Mexico, supra note 97, para. 194. Thunderbird v. Mexico, supra note 97, para. 200. Chemtura Corporation v. Canada, Award, IIC 451, (2010), Ad Hoc Tribunal (UNCITRAL Arbitration Rules), 2 August 2010. Apotex Inc. v. United States, Award (ICSID Case No. ARB(AF)/12/1), under Chapter 11 of NAFTA, 25 August 2014. Chemtura Corporation v. Canada, supra note 102, para. 93. Chemtura Corporation v. Canada, supra note 102, para. 134. Chemtura Corporation v. Canada, supra note 102, para. 135. Chemtura Corporation v. Canada, supra note 102, para. 136.

75

YULIA LEVASHOVA

In Apotex v. US, the Canadian pharmaceutical companies Apotex Holding and Apotex Inc108 disputed the United States’ regulatory action that affected imports of drug products manufactured in facilities located in Canada.109 With respect to the right to regulate, the tribunal stressed the importance of public health concerns, stating that “the decisions by NAFTA and other international tribunals110 emphasize the need for international tribunals to recognize the special roles and responsibilities of regulatory bodies charged with protecting public health and other important public interests”.111 The tribunal noted, however, that other decisions were not binding for this tribunal but again underlined that these other decisions indicate “the need for international tribunals to exercise caution in cases involving a state regulator’s exercise of discretion, particularly in sensitive areas involving protection of public health and the well-being of patients”.112 The goal of discussing the three cases above was not to generalize the entire NAFTA jurisprudence, but nevertheless to illustrate in which way NAFTA tribunals, which are bound by the FTC Notes, apply the FET clause.

3.4.2

Creating a Workable Definition of Unacceptable State Conduct

The second trend, mentioned in the introduction to this section, is the attempt by NAFTA tribunals to specify the standard of review to determine whether state action violates Article 1105 of the NAFTA. In 2004, the tribunal in Waste Management v. Mexico (Waste Management II)113 attempted to create a specific definition in the form of a list of unacceptable state conduct. The Waste Management II decision, summarizing the general discussion on the international minimum standard in previous awards, arrived at the following definition: “Taken together, the S.D. Myers, Mondev, ADF and Loewen cases suggest that the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a 108 Apotex US – the investor that indirectly owned and controlled Apotex – Holding, a Canadian investor in the generic pharmaceutical industry. Also, Apotex Inc, operating several facilities in Canada, is an investor under NAFTA that is indirectly owned by Apotex Holdings. 109 Apotex v. US, supra note 103, paras. 1.51 and 1.52. 110 Specifically, the Apotex tribunal referred to the Thunderbird v. Mexico award and the Chemtura v. Canada award. 111 Apotex v. US, supra note 103, para. 9.37. 112 Apotex v. US, supra note 103, para. 9.37. 113 Waste Management, Inc. v. United Mexican States (“Number 2”), ICSID Case No. ARB(AF)/00/3, Final Award, 30 April 2004.

76

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

lack of due process leading to an outcome which offends judicial propriety— as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process. In applying this standard it is relevant that the treatment is in breach of representations made by the host State which were reasonably relied on by the claimant.”114 The Waste Management II’ s formula was adopted as a practical solution for several tribunals to specify and fill in the open contours of the international minimum standard. Not all subsequent NAFTA tribunals have followed the Waste Management II dictum, resisting to embrace the specific formulation of the international minimum standard.115 However, various subsequent NAFTA tribunals and sometimes non-NAFTA tribunals have followed this definition and explicitly applied the Waste Management II formula to the facts of the case.116 This movement indicates that to some extent there is partial consensus among NAFTA tribunals regarding the level of review that a state’s measures have to be judged against in investment cases. Also, similar to non-NAFTA jurisprudence, which will be discussed below, the list of unacceptable state behaviour formulated in Waste Management II shows the tendency of tribunals to avoid discussions on theory of the FET and the identification of concrete situations that would constitute violations under the FET standard. The Waste Management II formulation sets a relatively high threshold for NAFTA tribunals to decide that for activities of a host state that violate the FET standard, which might be a practical solution for tribunals to deal with this difficult concept; it might also lead to the expansion of the FET standard in the context of NAFTA tribunals, as has happened outside of NAFTA jurisdiction.117 This expansion is explained below. In BITs investment cases, the tendency of tribunals was to interpret the unqualified FET standard in a broad way, specifically, by relying on the legitimate expectations of the

114 Ibid, Waste Management v. Mexico, para. 98. 115 GAMI Investment v. Mexico, NAFTA case, UNCITRAL Arbitration Rules, final award 15 November 2004; Methanex v. US, NAFTA case, UNCITRAL Arbitration Rules, final award on jurisdiction and merits, 3 August 2005. 116 Railroad Development Corporation v. Guatemala, ICSID Case ARB/07/23, Award, 29 June 2012. In para. 219 the tribunal states “regarding the content of the standard, the Tribunal refers to and adopts the conclusion reached by the Tribunal in Waste Management II in considering NAFTA Article 1105 standard of review (…).”; Perenco Ecaudor Ltd. v. Ecuador, ICSID 2014, para. 877; Bilcon of Delaware et al v. Government of Canada, Permanent Court of Arbitration (PCA) Case No. 2009-04, Award on Jurisdiction and Liability, 17 March 2015, para. 427. 117 Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, ICSID Case No. ARB (AF)/00/2, Final Award, 29 May 2003; Occidental v. Ecuador 2004; MTD v. Chile, 2004 (the Tecmed reasoning was explicitly applied to this case; see para. 115); LG&E v. Argentina; PSEG Global v. Turkey; Duke v. Ecuador.

77

YULIA LEVASHOVA investor.118 The most prominent example of an expansive definition of the FET standard in BITs cases is the Tecmed v. Mexico decision of 2003.119 This frequently cited120 but also criticized decision121 has listed the obligations of host state towards investor, relying on foreign investor’s expectations as the source of the host state’s obligations.122 A famous quote from Tecmed award provides that an investor expects that a host state should “act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulation”.123 In contrast to the formula of the Waste Management II decision, which mentioned “arbitrary, grossly unfair, unjust or idiosyncratic, discriminatory” host state conduct, the tribunal in Tecmed v. Mexico adopted an encompassing definition of a state’s behaviour that has been referred to as a programme of “good governance that no state in the world is capable guaranteeing at all times”124 or “a description of perfect public regulation in a perfect world, to which all states should aspire but very (if any) will ever attain”.125 It should be noted, however, that outside of NAFTA, the Tecmed dictum has not been the only interpretative model for the FET standard. In cases such as Saluka Investments B.V.

118 R. Dolzer, ‘Fair and Equitable Treatment: Today’s Contours’, Transnational Dispute Management, March 2014,p. 14. 119 Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, ICSID Case No. ARB (AF)/00/2, Final Award, 29 May 2003. 120 A. Bjorklund, Yearbook on International Investment Law and Policy 2012-2013, Oxford University Press, 2014, p. 155, “Tecmed v. Mexico continues to be one of the most often mentioned passages regarding the scope of legitimate expectations as an element of the FET standard”. Examples where the Tecmed definition of legitimate expectations has been adopted, among others, can be found in in LG&E v. the Argentine Republic, ICSID case No ARB/02/1, decision on liability, 2006, para. 127; Occidental v. Ecuador, LCIA Case No. UN3467, final award 1 July 2004, para. 185; O and L v. Slovakia, Ad hoc UNCITRAL Arbitration Rules, IIC 541, final award 2012, para. 222; Duke Energy v. Ecuador, ICSID Case No. ARB/04/19, final award 18 August 2008, para. 339. 121 MTD Equity Sdn. Bhd. And MTD Chile SA v. Republic of Chile (ICSID case No. ARB/01/7), Decision on Annulment (21 March 2007). The Annulment Committee in MTD v. Chile questioned certain aspects of the Tecmed decision, specifically its reasoning on legitimate expectations, para. 67. 122 Reliance on the expectations of an investor as the source of the host state’s obligations has been criticized by MTD v. Chile annulment decision (see: note 119). As was stated in MTD v. Chile, in para. 67 “the obligations of the host state towards foreign investor derive from the terms of the applicable investment treaty and from any set of expectations investors may have or claim to have”. 123 Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, ICSID Case No. ARB (AF)/00/2, Final Award, 29 May 2003. Para. 154. 124 El Paso Energy International v. the Argentine Republic, ICSID case, No ARB/03/15, final award 31 October 2011, para. 342. 125 Z. Douglas, Nothing if not Critical for Investment Treaty Arbitration, Occidental, Eureko and Methanex, Arbitration International 22, 27-51, 2006.

78

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

v. Czech Republic126 and Parkerings-Compagniet AS v. Republic of Lithuania,127 the tribunals adopted a more balanced approach, attempting to balance legitimate expectations of investors and public measures. In Saluka, the tribunal accentuated the state’s right to exercise its legislative powers and “the right to enact modify or cancel a law at its own discretion”.128 Both cases have also been followed by subsequent tribunals as an example of an appropriate standard for reviewing a state’s decisions.129

3.5

REFLECTIONS ON THE OPTION INTERNATIONAL LAW

TO

LINK

THE

FET STANDARD

WITH

CUSTOMARY

In this chapter, the question has been examined whether formulating an FET clause by referring to customary international law offers a solution to address the lack of clarity in an unqualified FET standard. The second question discussed was to what extent such an approach indeed raises the threshold of state liability for a breach of the FET standard. After having assessed various interpretations of FET standards – standard with a reference to customary international law as well as an unqualified standard – a few observations can be offered. The first observation: The explanation of the meaning of the FET standard as has evolved in the context of the NAFTA since the issuance of the binding FCT Notes on Interpretation suggests that, at least in several cases, a relatively high threshold applies in the review of state conduct and state regulations. As recent NAFTA case law concerning environmental issues suggests, the tribunals are mindful of the right to regulate and the (limited) extent of their authority to review state decisions. In the Chemtura v Canada award and the Apotex v US award, the tribunal emphasized that the role “of a Chapter 11 tribunal is not to second-guess the correctness of a science-based decision-making of highly specialized national regulatory agencies”.130 It can be seen that the interpretation of an FET standard that refers to customary international law continues to develop with each NAFTA decision. The second observation regarding FET linked to customary international law relates to its evolutionary development and growing consensus regarding its workable and practical definition. Similar to investment jurisprudence outside of NAFTA, the tendency is to 126 127 128 129

Saluka Investments B.V. v. Czech Republic, (PCA Case), Partial Award, 17 March 2006. Parkerings-Compagniet AS v. Republic of Lithuania, (ICSID Case No. ARB/05/8), 11 September 2007. Saluka Investments B.V. v. Czech Republic, supra note 126, para. 324. EDF Ltd. v. Romania, ICSID Case No. ARB/05/13, final award 8 October 2009, para. 218; Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/06, decision on remaining issues of jurisdiction and liability 12 September 2014, para. 560; Joseph Charles Lemire v. Ukraine, ICSID Case No ARB/06/18, decision on jurisdiction and liability 14 January 2010, para. 285. 130 Chemtura v. Canada, supra note 102, para. 134.

79

YULIA LEVASHOVA

avoid theoretical discussions on the FET standard and to adopt a practical toolkit of unacceptable state conduct that can be observed in both NAFTA and non-NAFTA decisions. Numerous NAFTA and non-NAFTA decisions have adopted the Waste Management II formula concerning an international minimum standard. It indicates a growing understanding among numerous tribunals of the threshold that should be used in assessing conduct of state vis-à-vis the investor in modern times. The arbitrators in the Railroad tribunal assessed the Waste Management II standard of review and indicated that this definition “precisely integrates the accumulated analysis of prior NAFTA tribunals and reflects a balanced description of the minimum standard of treatment.”131 The most recent investment practice shows that the definition adopted by the Waste Management II tribunal has been frequently applied by non-NAFTA tribunals, even when the applicable treaty contained no reference to customary international law.132 With caution in generalizing this trend, it still indicates some consensus among tribunals regarding the threshold that a state’s conduct must exceed in order to breach the FET, which in fact aligns with the minimum standard of treatment interpreted by NAFTA tribunals. At the same time, thoughtfulness should be exercised regarding acknowledging the evolution of the international minimum standard and its expansion towards similar FET standards developed outside of the NAFTA jurisprudence. There is a tendency for arbitrators, bound by an explicit reference to customary international law, to draw from previous awards, both NAFTA and non-NAFTA awards, rather than themselves establishing limits to the norms that are prescribed by customary international law. Even though arbitral awards do not constitute state practice, many tribunals, by relying, for example, on the Waste Management II definition, have emphasized the ‘efficiency’ of this approach.133 The third observation: It follows, that the network of BITs and the interpretation of the FET standard by non-NAFTA tribunals have impacted on the contemporary

131 Railroad Development Corporation v. Guatemala, ICSID Case, ARB-07-23, Award, 29 June 2012, para. 219. 132 Perenco Ecuador Ltd. v. Ecuador, ICSID 2014, para. 877. The Tribunal explicitly referred to the definition of Waste Management II in its deliberations, using this approach in deciding on state liability. In Biwater v. Tanzania, in para. 597, the tribunal quoted the Waste Management II standard, applying to the factual context of the case; in Hochtief AG v. Argentine Republic, ICSID Case No. ARB/07.31, decision on liability, 29 December 2014, in para. 219, the tribunal stated that “the threshold for a treaty breach set by Waste Management II is representative (…) and agrees that this is the proper approach”; Rumeli v. Kazakhstan, ICSID Case No ARB/05/16, final award 29 July 2008, in para. 609, defining the applicable standard where the tribunal applied a part of the definition from Waste Management II “the State’s conduct cannot be arbitrary, grossly unfair, unjust, idiosyncratic”. 133 Decisions of arbitral tribunals do not constitute state practice; see International Law Commission, Commission of Formation of Customary (General) International Law, Final Report of the Committee (London Conference 2000) 40. Support for this statement, see: Railroad v. Guatemala, supra note 131, para 217.

80

3

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

understanding of the international minimum standard by NAFTA tribunals. The concept of legitimate expectations is clearly becoming a part of an unqualified FET standard, as well as of the FET standard linked to customary international law. The latest decision by a NAFTA tribunal, that is, in Bilcon v. Canada, applied the standard articulated in Waste Management II. It primarily based its analysis on assessing the legitimate expectations of the investor.134 In this respect, the conclusions of some tribunals that the evolutionary norm of FET under customary international law in investment jurisprudence and a treaty-based unqualified FET standard are in fact the same standard, is a valid point. At the same time, despite the fact that the shift towards convergence between the two standards can be observed, it is to be noted that the FET standard formulated as an unqualified clause has developed far more expansively in the BITs jurisprudence. This is especially the case in awards in which the tribunal referred to the Tecmed dictum, allowing simply unfair state conduct or a change in the legal or political environment to rise to the level of a breach of an FET standard. Not being bound by the FCT Notes of NAFTA, such tribunals have primarily relied upon the interpretation of the FET standard as being a conventional norm, developing an expansive ‘list approach’ codifying various situations of ‘unfair’ behaviour by states, hence qualifying such behaviour as a violation of the FET clause in the BIT concerned. The fourth observation: In the framework of the discussion on the legitimacy of the international investment regime, many states took initiatives to reform their BITs, including the FET clause. The question in this regard is whether customary international law can be a suitable approach for the negotiation of new IIAs. Some states have already positively replied to that, incorporating the NAFTA definition in their BITs and FTAs, as illustrated above in Section 3.3. The Trans-Pacific Partnership Agreement (TPP) is one of the most significant agreements that are currently being negotiated. In its draft version, an explicit reference to customary international law in respect of the FET standard has been incorporated.135 Other states that are drafting a new Model BIT are more sceptical concerning an FET clause linked to customary international law. A consultation document on the current negotiations of the Transatlantic Trade and Investment Partnership (TTIP) Agreement136 contains the position shared by many states and scholars. It is emphasized that the content of the international minimum standard is still unclear and that the interpretation thereof has “resulted in a wide range of differing arbitral tribunal decisions on what is or is not covered by customary international law, and has not 134 Bilcon of Delaware et al. v. Government of Canada, para. 448. 135 Trans-Pacific Partnership Agreement (TPP) – Investment chapter – version 20 January 2015, Article II.6 Minimum Standard, Transnational Dispute Management, Mart 2015. 136 European Commission, Information on Transatlantic Trade and Investment Partnership (TTIP) Agreement, Latest Documents, , accessed 10 April 2015.

81

YULIA LEVASHOVA brought the desired greater clarity to the definition of the standard”.137 This statement reflects the current reality, especially in terms of the inconsistent practice of tribunals outside of the NAFTA domain. However, so far, non-NAFTA tribunals have had no opportunity to interpret an explicit provision of the FET norm linked to customary international law as incorporated in the new US BITs. Non-NAFTA tribunals have mostly engaged in lengthy discussions regarding the nature of the FET standard when their task was to interpret the FET provision with a reference to the general rules of international law on treaty interpretation. An exception is the decision of the investment tribunal in the Railroad Development Corporation v Guatemala case of 2012, where the tribunal applied Article 10.5 on minimum standard of the CAFTA.138 CAFTA adopted an elaborated FET standard such as the one in the US Model of 2004 and 2012. Even though the tribunal in this case adopted an evolutionary approach towards the international minimum standard, it was criticized by commentators due the tribunal’s approach to establish a violation of the FET standard.139 Despite the fact that the contemporary formulation of the international minimum standard in treaties still triggers controversies, it also offers advantages, as it is now more clearly defined now and it raises the bar for unfair state conduct to a higher level, that is, in comparison to treaties that contain a self-contained FET clauses. As arbitrator the Nikken in its dissenting opinion in AWG v Argentine has stated: “interpretation of [the] minimum standard and its importance cannot be underestimated when it comes to defining the FET. In fact, not any other states gave any statement regarding the meaning of FET that contrasts with the minimum standard”.140

137 European Commission, Public consultation on modalities for investment protection and ISDS in TTIP, 2014, p. 5, , accessed on 12 April 2015. 138 Railroad Development Corporation v. Guatemala, ICSID Case, ARB-07-23, Award, 29 June 2012. 139 This decision has been specifically criticized regarding the tribunal’s approach to identify the relevant standard of the FET norm linked to customary international law. The main controversy arose from the fact that the respondent states, Guatemala and three CAFTA Parties (the United States, El Salvador, and Honduras), made submissions to the case, by arguing that the claimant had the burden of showing the relevant standard under customary international law through consistent state practice and opinio juris. These states argued that the reference to the earlier arbitral awards was insufficient for establishing the breach of an international minimum standard. The tribunal did not concur with the states’ submissions, primarily relying on the Waste Management II standard in evaluating the violation of FET, without collecting evidence of state practice and opinio juris. See M. Porterfield, A Distinction Without a Difference? The Interpretation of Fair and Equitable Treatment Under Customary International Law by Investment Tribunals, Investment Treaty News, International Institute for Sustainable Development, 2013, , accessed on 10 April 2015 and O. Garcia-Bolivar, Railroad Development Corporation v. Republic of Guatemala, First CAFTA Award on Merits, ICSID Review 28(1), 27-32, 2013. 140 AWG Group Ltd. v. The Argentine Republic (UNCITRAL), Decision on Liability 30 July 2010, Dissenting Opinion, para. 7.

82

3

3.6

FAIR

AND

EQUITABLE TREATMENT

AND THE

PROTECTION

OF THE

ENVIRONMENT

CONCLUSION

There is no doubt that international investment law and environmental law interconnect in various ways. This interaction has been marked by developments on three different although intersecting levels: (1) policy, (2) treaty drafting, and (3) jurisprudence. The growing effort of policymakers to strengthen and integrate environmental regulations into investment agreements indicates the importance attributed to environmental governance in the context of economic policies. This development can also be observed in the attempt by states to reform the texts of investment agreements by clarifying or amending substantive protection clauses such as the FET standard. The scope and the content of the FET clause has been one of the most disputed issues in the field of investment law. The implications of this clause on the regulatory activities of states have acquired special interest among academics, practitioners, and international bodies. Recently, the UNCTAD International Policy Framework for Sustainable Development has outlined five policy options for the formulation of the FET standard in the new generation of investment agreements. The option to connect the FET obligation with customary international law has been seen as one of the tools that could help states to clarify the definition of the FET norm and to include some of the public policy concerns within the scope of this provision. In the NAFTA this approach is followed, and some states, such as the United States, have also applied this approach in their BITs. In the context of NAFTA, the evolutionary definition of the international minimum standard has been applied by NAFTA tribunals since the issuance of the binding FCT Notes on Interpretation of 2001. In most of these cases, this seems to have led to a relatively high threshold in reviewing state conduct and state regulations. Taking an evolutionary approach and similar to BIT tribunals, NAFTA tribunals have developed their own practical formula of unacceptable state conduct, as exemplified by the Waste Management II tribunal. This definition has subsequently been adopted by many NAFTA tribunals and some non-NAFTA tribunals, indicating the acceptance of applying relatively high standards when reviewing state actions in order to decide on an investor’s claim alleging a breach of the FET standard. The problem, however, is that the reliance of NAFTA tribunals on definitions of FET developed by earlier NAFTA awards can potentially lead to a similar expansion of the FET standard, which has happened outside of the NAFTA jurisprudence. From the perspective of states, treaty-drafting practice exemplifies that a significant number of states agree that the definition of an FET standard with a reference to customary international law should be included in investment treaties. An indication of such an acceptance is the draft text of Trans-Pacific Partnership Agreement, negotiated between 12 states, which includes an explicit reference to customary international law

83

YULIA LEVASHOVA

with regard to the FET standard. It is possible to assume that by incorporating a better defined provision on FET as the one found in the US 2004 and 2012 Models in new IIAs, states will provide a clear signal of the restrictive interpretation of this provision with regard to state regulations for tribunals. It is possible but unlikely that tribunals facing such provisions would ignore the intentions of states to restrict the application of FET, specifically for public interest concerns.

84

BIBLIOGRAPHY BOOKS I. Alvik, Contracting with Sovereignty: State Contracts and International Arbitration, Hart Publishing, Oxford and Portland, 2011. J. Attik, Legitimacy, Transparency and NGO Participation in the NAFTA, Chapter 11 Process in T. Weiler (Ed.), NAFTA Investment Law and Arbitration: Past Issues, Current Practice, Future Prospects, Transnational Publishers, 2004. S. Di Benedetto, International Investment Law and the Environment, Elgar International Investment Law, 2013. R. Dolzer, A. von Walter, ‘Fair and Equitable Treatment – Lines of Jurisprudence on Customary Law’, in F. Ortino, L. Liberti, A. Shepperd, Warner (Eds.), Investment Treaty Law: Current Issues Volume II, British Institute for Comparative Law, 2007. R. Klager, Fair and Equitable Treatment in ‘International Investment Law’, Cambridge Studies in International and Comparative Law, Cambridge, 2012. A. Newcombe, L. Paradell, Law and Practice of Investment Treaties: Standards of Treatment, Kluwer Law International, 2009. M. Paparinskis, The International Minimum Standard and Fair and Equitable Treatment, Oxford University Press, 2013. N. Schrijver, The Changing Nature of State Sovereignty, British Year Book of International Law, Vol. 70, 1999. N. Schrijver, Sovereignty over Natural Resources: Balancing Rights and Duties, Cambridge University Press, Cambridge, 2008. I. Seidl-Hohenveldern, International Economic Law, Kluwer Law International, 1999. J. Vinuales, Foreign Investment and the Environment in International Law, Cambridge University Press, 2012.

85

YULIA LEVASHOVA

K. Yannaca-Small, Fair and Equitable Treatment in Arbitration under International Investment Agreements: A Guide to the Key Issues, Oxford University Press, 2011.

ARTICLES R. Dolzer, ‘Fair and Equitable Treatment: Today’s Contours’, Transnational Dispute Management, March 2014. Z. Douglas, ‘Nothing if not Critical for Investment Treaty Arbitration: Occidental, Eureko and Methanex’, Arbitration International 22, 2006. O. Garcia-Bolivar, ‘Railroad Development Corporation v. Republic of Guatemala, First CAFTA Award on Merits’, 28(1) ICSID Review, 27-32, 2013. S. Hjaccesse, ‘Securing High Investment Protection for EU Investors. A Review of EU Member states Model BITs’, 9(3) Transnational Dispute Management, April 2012

86

4

ADDRESSING OF

THE

PROCEDURAL CHALLENGES

ENVIRONMENTAL LITIGATION

CONTEXT

OF

IN THE

INVESTOR-STATE ARBITRATION

James Harrison*

4.1

INTRODUCTION

Over the past few years, we have witnessed a boom in litigation taking place under international investment treaties.1 As part of this trend, there have also been an increasing number of investment treaty disputes that touch upon the ability of host states to take measures to protect the environment or the health of their citizens. These cases sometimes require arbitrators to make decisions on both the existence of a threat to public health or the environment and the appropriateness of the response measures taken by the state. Inevitably, such cases raise complex questions of science and policy. This chapter will look at the way in which environmental issues can arise in investor-state litigation, as well as some of the procedural challenges that face arbitral tribunals in such disputes. The chapter will start by considering the definition of an environmental dispute before turning to two key challenges that arise in this type of litigation. Firstly, it will consider the role of scientific evidence in environmental disputes. It will examine the nature and sources of such evidence, as well as the difficulties for tribunals in deciding disputes where there is no clear scientific evidence. In this latter context, it will be suggested that states may rely upon the precautionary approach to justify their measures, and the chapter will consider the effect of this concept for investor-state disputes. Secondly, the chapter will consider the role that various non-governmental organizations (NGOs), communities, and other groups with an interest in environmental protection may play in investor-state arbitration and the mechanisms for them to participate effectively in proceedings. It will discuss both the value of NGO participation in environmental disputes and the limits. *

1

Lecturer in International Law, University of Edinburgh School of Law. Email: [email protected]. The author would like to thank Justine Bendel and Madlen Buchbauer for their valuable research assistance in preparing this chapter. He would also like to thank the reviewers and conference participants for valuable comments on a previous draft of the chapter. At the end of 2012, there were 514 known investor-state arbitrations; see United Nations Conference on Trade and Development, Recent Developments in Investor-State Dispute Settlement, May 2013, p. 2.

87

JAMES HARRISON

The chapter will review the relevant investment treaties and investor-state arbitral awards to determine how tribunals have addressed these issues. It will be seen that international investment law has evolved mechanisms to take into account the challenges of environmental litigation. However, the chapter will also consider the potential for investment tribunals to draw upon relevant decisions of other international courts and tribunals involved in the settlement of environmental disputes, arguing that there is the potential for a cross-fertilization of judicial decision-making in this area.

4.2

THE NATURE

OF

ENVIRONMENTAL ISSUES

IN INVESTMENT

DISPUTES

Although many commentators have noted a rise in international environmental disputes,2 there is no common definition of this term.3 Whilst some commentators focus on the nature of the rules applied by a court or tribunal,4 this is perhaps too narrow because it does not take into account disputes under international rules that do not directly purport to address environmental matters, but which nevertheless have implications for environmental protection.5 Indeed, as has been recognized elsewhere, “most ‘environmental disputes’ raise many other legal issues, even if they also involve environmental law”.6 A better approach is therefore to concentrate on the underlying problems to which the rules are being applied.7 This is certainly the case if many of the investment disputes with environmental elements are to fall within the category of international environmental disputes. Very few investment treaties make any mention of environmental protection,8 yet there are nevertheless a number of disputes which raise environmental issues.9 The majority of ‘investment and

2

3 4

5 6 7 8

9

D. French, ‘Environmental Dispute Settlement: The First (Hesitant) Signs of Spring’, Hague Yearbook of International Law, Vol. 19, 2006, p. 1. See T. Stephens, International Courts and Environmental Protection, Cambridge University Press, Cambridge, 2009. A. Boyle & J. Harrison, ‘Judicial Settlement of International Environmental Disputes: Current Problems’, Journal of International Dispute Settlement, Vol. 4, 2013, p. 247. See, e.g., E. Hey, Reflections on an International Environmental Court, Kluwer Law International, The Hague, 2000, p. 3: “an international environmental dispute is a dispute that involves what is generally considered to be an environmental treaty […]”. Boyle & Harrison 2013, supra note 3, p. 249. Id., p. 249, giving examples of the Case concerning the Gabčíkovo-Nagymaros Project and the Case concerning Pulp Mills on the River Uruguay. See, e.g., R. Bilder, ‘Settlement of Disputes in the Field of International Law of the Environment’, Recueil des Cours, Vol. 144, 1975-I, p. 153. Some states have started to include environmental provisions in their investment treaties; see United Nations Conference on Trade and Development, International Investment Rule-Making: Stocktaking, Challenges and Ways Forward, UNCTAD Series on International Investment Policies for Development, 2008, pp. 72-73. See J. Viñuales, Foreign Investment and the Environment in International Law, Cambridge University Press, Cambridge, 2012, pp. 17-23.

88

4

ADDRESSING

THE

PROCEDURAL CHALLENGES

OF

ENVIRONMENTAL LITIGATION

environment’ disputes arise when a government or public body takes measures, either legislative or administrative, on alleged environmental grounds, and those measures are challenged by an investor under investment rules found in international investment agreements.10 For example, in Methanex v. United States of America, a Mexican company challenged a Californian ban on the fuel additive known as ‘MTBE’, which was considered to pose a significant risk to the environment because of leakage from underground tanks into groundwater and drinking water. It was alleged by the investor that the ban was not an appropriate response to this risk and that the evidence of environmental harm did not support this action.11 In particular, it was suggested that the scientific report commissioned by the Californian authorities was “a deeply flawed and inadequate foundation for the US measures”.12 The measures were challenged under various provisions of Chapter XI of the North American Free Trade Agreement (NAFTA). This is just one example of several investment cases where disagreements over the evidence of environmental harm or the appropriateness of a regulatory response have led to claims by investors under investment treaties.13 The environmental issues in these cases are usually part of the factual background of the case. It follows that there are few opportunities for investment treaty tribunals to interpret and apply rules directly relating to environmental protection. Indeed, the narrow jurisdiction of tribunals, often focused on ‘investment disputes’, means that other potential environmental aspects of the dispute between the investor and the state may be excluded from consideration.14 Nevertheless, there are two particular elements that often come to the fore – questions of scientific and expert evidence, on the one hand, and representation of the public interest, on the other. As will be seen below, these are issues that are common in environmental disputes before many international courts and tribunals. 10

11

12 13

14

Viñuales includes within his definition of environmental disputes not only cases involving activities impacting upon the environment and cases involving the application of domestic/international environmental law but also claims relating to environmental markets, Viñuales 2012, supra note 9, p. 17. Methanex Corporation v. The United States of America [hereinafter Methanex v. United States], UNCITRAL Arbitration, Final Award of the Tribunal on Jurisdiction and Merits of 3 August 2005, Part II, Chapter D, particularly paras. 24-25. Id., Methanex v. United States, Part III, Chapter A, para. 37. Other relevant cases include Chemtura Corporation v. The Government of Canada (Chemtura v. Canada), UNCITRAL, Award of 2 August 2010; S. D. Myers, Inc., v. The Government of Canada (S. D. Myers v. Canada), UNCITRAL, Partial Award of 13 November 2000; Técnicas Medioambientales Tecmed SA v. The United Mexican States (Tecmed v. Mexico), ICSID Case No. ARB(AF)/00/2, Award of 29 May 2003; and Metalclad Corporation v. The United States of Mexico (Metalclad v. Mexico), Case No. ARB (AF)/97/1, Award of 30 August 2000. Indeed, tribunals have taken the view that allegations of non-compliance by investors with the environmental laws of a state cannot be raised as a counterclaim in proceedings brought under a BIT; see Paushok and others v. The Government of Mongolia, ad hoc UNCITRAL Arbitration, Award on Jurisdiction and Liability of 28 April 2011, para. 694.

89

JAMES HARRISON

4.3

CROSS-FERTILIZATION

IN INTERNATIONAL

ENVIRONMENTAL LITIGATION

It has been suggested by some authors that investment treaty arbitration represents “a revolutionary development in international adjudication”,15 and therefore, it may be asked whether it is appropriate to take into account principles and procedures developed by international courts and tribunals involved in different fields of international law. It is true that the system of investment treaty arbitration opens up states to direct challenge by non-state actors in a way that is unusual in the context of public international law, which remains to a large extent a system designed for interstate disputes. Moreover, there is little doubt that certain aspects of investment treaty arbitration have been influenced by concepts found in international commercial arbitration.16 Nevertheless, international investment law should certainly not be considered as a ‘self-contained regime’,17 impervious to the influence of relevant principles of public international law. After all, the instruments on which investment treaty tribunals are established derive their validity from public international law,18 and it is within this framework that they must be interpreted and applied, a fact recognized by most arbitral tribunals.19 Indeed, the issues faced by investment tribunals when dealing with environmental questions are very similar to the issues faced by other international courts and tribunals addressing environmental disputes. Given the open-ended nature of many investment treaties and arbitral rules of procedure, arbitral tribunals often have a large degree of discretion in addressing procedural issues, in the absence of an explicit agreement of the parties.20 In exercising such discretion, the decisions of other international courts and tribunals involved in similar cases would seem to be an appropriate place to look for guidance on relevant principles. There is a strong argument that such cross-fertilization between decisions of various international courts and tribunals is already prevalent,

15 16 17

18

19 20

G. van Harten, Investment Treaty Arbitration and Public Law, Oxford University Press, Oxford, 2006, p. 4. See, e.g., Z. Douglas, ‘The Hybrid Foundations of International Investment Arbitration’, British Yearbook of International Law, Vol. 74, 2003, p. 151. Report of the International Law Commission, ‘Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law’, Document A/CN.4/L.682, 13 April 2006, paras. 123-137. See also C. Foster, ‘Adjudication, Arbitration and the Turn to Public Law “Standards of Review”: Putting the Precautionary Principle in the Crucible’, Journal of International Dispute Settlement, Vol. 3, 2012, pp. 525558 at p. 527. See, e.g., Methanex v. United States, Final Award, Part II, Chapter B, supra note 11, para. 15. See, e.g., UNCITRAL Arbitration Rules, 2010, Art. 17(1): “Subject to these Rules, the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, provided that the parties are treated with equality and that at an appropriate stage of the proceedings each party is given a reasonable opportunity of presenting its case. The arbitral tribunal, in exercising its discretion, shall conduct the proceedings so as to avoid unnecessary delay and expense and to provide a fair and efficient process for resolving the parties’ dispute”; ICSID Arbitration Rules, 2006, Rule 19: “The Tribunal shall make the orders required for the conduct of the proceeding”.

90

4

ADDRESSING

THE

PROCEDURAL CHALLENGES

OF

ENVIRONMENTAL LITIGATION

particularly in the environmental context.21 Thus, cross-fertilization should be expected and encouraged in the context of investment treaty arbitration, despite its hybrid foundations. Indeed, cross-fertilization is a two-way process. Whilst investment treaty tribunals can be influenced by the decisions of other international courts and tribunals, arbitral awards under investment treaties can also inform decision-making in other judicial forums. SCIENTIFIC EVIDENCE

4.4

IN

ENVIRONMENTAL DISPUTES

As noted above, environmental disputes often involve questions of fact concerning whether or not a risk to the environment or human health exists. Therefore, the parties turn to science in order to demonstrate the existence or not of such a risk. The heavy reliance on scientific evidence in environmental disputes raises a number of interrelated issues, which will be addressed below. Firstly, there are questions concerning the sources of scientific evidence. Should an investment treaty tribunal rely exclusively on evidence provided by the parties or should they bring in their own scientific expertise in order to assist them in settling the dispute? Secondly, there is a question concerning the weight to be given to scientific evidence, particularly when there are conflicting views or uncertainty in the available scientific data. The chapter will therefore discuss the burden and standard of proof to be met by litigants, as well as the potential role that the precautionary approach can play in this regard.

4.4.1

Sources of Scientific Evidence

A common challenge faced by courts and tribunals in environmental disputes is the need to deal with scientific evidence relating to the existence of environmental harm or a threat of environmental harm. Thus, in order to determine whether environmental measures taken by states are compatible with international investment law, arbitral tribunals are often called upon to determine whether the measures taken by the state are necessary or proportionate to the threat of environmental harm.22 In turn, such decisions can only be made on the basis of evidence of the nature of the environmental threat and the link between the measure and the threat. 21

22

P. Sands, ‘Sustainable Development: Treaty, Custom and the Cross-Fertilization of International Law’, in A. Boyle & D. Freestone (Eds.), International Law and Sustainable Development, Oxford University Press, Oxford,1999, pp. 39-60; J. Harrison, ‘Reflections on the Role of International Courts and Tribunals in the Settlement of Environmental Disputes and the Development of International Environmental Law’, Journal of Environmental Law, Vol. 25, 2013, pp. 501-514. See Tecmed v. Mexico, supra note 13, para. 122.

91

JAMES HARRISON

The arbitration rules commonly used in investor-state arbitration generally allow for the production of both written and oral evidence,23 and it is up to the parties to decide what type of evidence they present. However, in complex environmental cases involving scientific evidence, the presentation of oral witnesses may be helpful in explaining key issues to the tribunal, particularly as this allows questions to be asked of the experts, thereby testing its credibility, an important element of the judicial process to which we will return below. Indeed, it is common in investment litigation for the parties to call witnesses to give evidence before the tribunal.24 It is also possible that arbitral tribunals may also compel the parties to produce evidence that they consider necessary to decide the case. This may be done at the request of one of the parties, often in the form of a discovery process.25 Alternatively, it may in some circumstances be demanded by the tribunal proprio motu.26 The procedure for the calling of witnesses and experts is not usually regulated in detail in treaties or arbitral rules. It is, however, addressed by the International Bar Association (IBA) Rules on the Taking of Evidence, which may be selected by the parties as a basis for the handling of such issues27 or alternatively used by a tribunal as guidance.28 Further guidance may also be gleaned from the practice of other international judicial bodies engaged in similar decision-making processes. Whether a tribunal should rely solely upon evidence presented by the parties in these types of cases is also an important issue that has been raised in recent international environmental litigation. Indeed, party-appointed experts will usually give evidence that is as far as possible favourable to their own side. The tribunal then has to decide which experts it finds more credible. As noted by one author: [f]or an international court or tribunal, the evolution of a very large volume of partisan evidence will always be a challenge. The court must sift out the scientific issues, assess the quality and reliability of the evidence relevant to each issue and seek to reach findings accurately reflecting the state of current scientific knowledge.29

23 24 25

26 27 28

29

ICSID Arbitration Rules, Rules 34-37; UNCITRAL Arbitration Rules, Rules 17(3), 27-29. See, e.g., Tecmed v. Mexico, para. 27; Metalclad v. Mexico, p. 25, supra note 13. G. Carvajal Isunza & F. Gonzalez Rojas, ‘Evidentiary Issues in NAFTA Chapter 11 Arbitration: Searching for the Truth between States and Investors’, in T. Weiler (Ed.), NAFTA Investment Law and Arbitration, Martinus Nijhoff Publishers, Leiden, 2004, pp. 288-289. See in particular ICSID Arbitration Rules, Rule 34(2). See, e.g., Methanex v. United States, Final Award, Part II, Chapter B, supra note 11, para. 10. See, e.g., Windstream Energy LLC v. Government of Canada, UNCITRAL, Procedural Order No. 1, 16 September 2013, para. 4.2: “the Tribunal may seek guidance from, but shall not be bound by, the 2010 IBA Rules on the Taking of Evidence in International Arbitration […]”. C. Foster, Science and the Precautionary Principle, Cambridge University Press, Cambridge, 2011, p. 80.

92

4

ADDRESSING

THE

PROCEDURAL CHALLENGES

OF

ENVIRONMENTAL LITIGATION

One solution adopted in the IBA Rules on the Taking of Evidence is to allow the tribunal to order the party-appointed experts to meet and attempt to reach an agreement on the issues within the scope of their written expert reports. According to the Rules, the partyappointed experts “shall record in writing any such issues on which they reach agreement [and] any remaining areas of disagreement and the reasons therefore”.30 The advantage of this approach is that it may help to minimize the controversies that arise from conflicting expert reports. However, it does not guarantee that all issues will be settled and tribunals may have to have recourse to additional mechanisms to deal with this issue. An alternative approach is that arbitral tribunals pay particular attention to reports and findings of international bodies drawn to their attention by a party.31 The point about this type of evidence is that it comes from sources independent of the parties and therefore contesting the conclusions of such reports is likely to be difficult.32 Thus, in Chemtura v. Canada, the Tribunal drew attention to the fact that action had been taken to restrict the use of the pesticide lindane at the international level, including through the 1998 Aarhus Protocol on Persistent Organic Pollutants to the 1979 United Nations Economic Commission for Europe (UNECE) Convention on Long-Range Transboundary Air Pollution.33 This international practice thus supported the Canadian position that the pesticide in question posed a hazard to the environment. Another way in which a tribunal can address this issue is through the appointment of its own experts to assist in the evaluation of the evidence. Whether this is possible will depend in part upon the procedural rules governing the arbitration. Sometimes, this issue is addressed by investment treaties themselves. For example, the Korean-United States (US) Free Trade Agreement (FTA) provides that: Without prejudice to the appointment of other kinds of experts where authorized by the applicable arbitration rules, a tribunal, at the request of a disputing party or, unless the disputing parties disapprove, on its own initiative, may appoint one or more experts to report to it in writing on any factual issue concerning environmental, health, safety, or other scientific matters raised by a disputing party in a proceeding, subject to such terms and conditions as the disputing parties may agree.34 30 31

32 33 34

IBA Rules on the Taking of Evidence, 2010, Art. 6(4). A. Riddell & B. Plant, Evidence before the International Court of Justice, British Institute of International and Comparative Law, London, 2007, pp. 237-240, 364; K. Del Mar, ‘Weight of Evidence Generated through Intra-Institutional Fact-Finding before the ICJ’, Journal of International Dispute Settlement, Vol. 2, 2011, p. 393. Although not impossible: see Advisory Opinion on the Accordance with International Law of the Unilateral Declaration of Independence with Respect to Kosovo, 2010, ICJ Rep. 403, para. 52. Chemtura Corporation v. Canada, supra note 13, para. 135. Korea-United States Free Trade Agreement (FTA), Art. 11.24.

93

JAMES HARRISON

More often, investment treaties do not contain this type of provision and therefore we must look to the applicable arbitral rules that govern the proceedings. The United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules (2010) explicitly allow for the Tribunal to appoint one or more independent experts to “report to it in writing, on specific issues to be determined by the arbitral tribunal”.35 The rules also specify the procedure for the appointment of such experts and the presentation of their evidence to the Tribunal, allowing the parties to interrogate the expert at oral hearings, if necessary.36 In contrast, the International Centre for Settlement of Investment Disputes (ICSID) Arbitration Rules are silent on the question of the appointment of independent experts by the Tribunal. However, this is arguably still possible using the residual powers to regulate the proceedings.37 Moreover, this position is supported by the Administrative and Financial Regulations, which provide for the payment of “witnesses and experts summoned at the initiative of a Commission, Tribunal or Committee, and not of one of the parties”.38 There are certain advantages to this approach. As has been argued by Foster: [a]n investigative procedure led by the court or tribunal, or a process where the experts are brought together for discussion before the court or tribunal, may better enable the court or tribunal to build up a solid and coherent understanding of the science.39 It is the decision of the Tribunal whether or not to appoint its own experts, but it is a matter that can certainly affect the legitimacy of the final decision. In the Pulp Mills Case, several judges were highly critical of the court’s refusal to appoint its own experts, as it could have done under Article 50 of the Statute of the International Court of Justice (ICJ). In their joint dissenting opinion, Judges Simma and Al-Khasawneh suggested that “the Court has evaluated the scientific evidence brought before it by the Parties in ways that we consider flawed methodologically.”40 What the joint dissenting opinion of Judges Simma and Al-Khasawneh also flagged up is the desirability for international courts and tribunals to look for examples of ‘best practice’ of other judicial bodies in order to inform their decision-making.41 This is an explicit example of the potential for cross-fertilization in

35 36 37 38 39 40

41

UNCITRAL Arbitration Rules, Art. 29(1). Id., Art. 29(5). ICSID Convention, Art. 44. The issue is addressed in Article 6 of the IBA Rules on the Taking of Evidence. ICSID Administrative and Financial Regulations, Regulation 14(2)(b). Foster 2011, supra note 29, pp. 101-102. Case concerning Pulp Mills on the River Uruguay, Joint Dissenting Opinion of Judges Simma and AlKhasawneh, para. 2. They continued that “the Court on its own is not in a position to assess and weigh complex scientific evidence of the type presented by the Parties […]”; id., para. 4. Id., para. 16.

94

4

ADDRESSING

THE

PROCEDURAL CHALLENGES

OF

ENVIRONMENTAL LITIGATION

this area. Such good practice may not only guide decisions on mechanisms to be adopted but also on the details of the rules and procedures to be applied. Judges Simma and AlKhasawneh make particular reference to procedures used by World Trade Organization (WTO) dispute settlement organs and in the Iron Rhine arbitration.42 Reference to the practices of other courts and tribunals not only provides good practice to guide the decision-making process but may also offer insights into particular legal issues that may arise. For instance, the WTO dispute settlement organs have also grappled with the requirements of due process for the appointment of independent experts.43 In particular, the WTO Appellate Body has emphasized that experts must be ‘independent and impartial’; taking into account information disclosed by the experts themselves and information presented by the parties, it is the role of judicial bodies to determine “whether there is an objective basis to conclude that an expert’s independence or impartiality is likely to be affected or there are justifiable doubts about that expert’s independence or impartiality”.44 Furthermore, the Appellate Body stressed that qualifications and expertise are themselves not a sufficient guarantee of independence and impartiality: [a]n expert could be very qualified and knowledgeable and yet his or her appointment could give rise to concerns about his or her impartiality or independence, because of that expert’s institutional affiliation or for other reasons.45 This case law potentially assists other international courts and tribunals, including investment treaty tribunals, to address similar problems. Whilst independent experts may be able to assist courts and tribunals in fulfilling their fact-finding functions, there are also pitfalls inherent in this approach. Firstly, it must be recognized that the appointment of independent experts adds to the cost and length of the proceedings. It takes time to appoint experts and to agree upon their terms of reference. Experts must also be paid for their services. This is a particularly important consideration in investor-state arbitration, given that it is the parties to the litigation that bear the entire financial burden of the arbitration. Indeed, this issue is

42 43

44 45

Id., paras. 15-16. Appellate Report United States – Continued Suspension of Obligations, adopted 19 September 2008, WT/ DS320/AB/R, para. 436; see also Appellate Report EC – Hormones, adopted 16 January 1998, WT/DS26/ AB/R, para. 148. Id., para. 454. Id., para. 459. The Appellate Body continued to find that appointing Drs Boisseau and Boobis, who had previously been involved with JECFA, had infringed the EC’s due process rights, and compromised the Panel’s ability to act as an independent adjudicator. In the opinion of the Appellate Body, this in itself was a reason to invalidate the findings of the Panel, regardless of other errors committed by the Panel.

95

JAMES HARRISON

acerbated in arbitration involving a developing country, which may already struggle to afford to defend an investment claim. Whilst there are some financial resources available to support developing countries involved in international litigation,46 they are limited. Thus, arbitral tribunals may have to be more cautious in appointing independent experts compared to permanent international courts and tribunals. This is a matter that will have to be decided on a case-by-case basis, depending upon the centrality of the scientific evidence to settling the dispute. Secondly, a tribunal, which relies on its own experts, risks handing the decision over to those experts.47 This may not be tolerable to the parties, who have specifically chosen the arbitrators to decide the dispute.48 This means that arbitrators may exercise more caution in appointing experts than other dispute settlement bodies. Thirdly, the use of independent experts also has the potential to change the nature of the proceedings, from an adversarial contest where one party bears the burden of proving the facts underpinning its claim to an investigative process where the court or tribunal is concerned with establishing the facts. The same can be true if the tribunal independently requires the parties to furnish evidence that has not been requested by the other party, a possibility that has been highlighted above. Recognizing this potential pitfall, the WTO Appellate Body again provides useful guidance to other international courts and tribunals, warning dispute settlement panels against using their fact-finding authority to find in favour of a complainant that has not itself established a prima facie case to support its claims.49 Thus, the WTO Appellate Body made clear that the appointment of independent experts should only be used to understand and evaluate the credibility of evidence submitted by the parties. Another mechanism available to tribunals to gather information in environmental disputes is the use of site visits. This is a relatively rare phenomenon in international litigation,50 but one that may be of use in cases involving threats to particular habitats

46

47 48

49

50

See, e.g., the Financial Assistance Fund established by the Administrative Council of the Permanent Court of Arbitration (date unavailable). Available at: accessed 4 February 2014. Riddell & Plant 2007, supra note 31, p. 334. The parties to a dispute will often be consulted over the appointment of experts, although their objections may be overridden by the tribunal; see, e.g., Panel Report United States – Continued Suspension of Obligations, adopted at 31 March 2008, WT/DS320/R, para. 7.85. Appellate Report Japan – Agricultural Products, adopted 22 February 1999, WT/DS76/AB/R, paras. 129130. See also the view of the WTO Panel in EC – Asbestos where it says “information provided by the experts consulted by the Panel […] can under no circumstances be used by a panel to rule in favour of a party which has not established a prima facie case based on specific legal claims or pleas asserted by it”; Panel Report EC – Asbestos, adopted 18 September 2000, WT/DS135/R, para. 8.81. See, e.g., Order of 5 February 1997, in the Case concerning the Gabčíkovo-Nagymaros Project, 1997 ICJ Rep. 3; Indus Waters Kishenganga Arbitration (Pakistan v. India), PCA, Partial Award of 18 February 2013.

96

4

ADDRESSING

THE

PROCEDURAL CHALLENGES

OF

ENVIRONMENTAL LITIGATION

or ecosystems. Site visits allow the members of the tribunal to witness at first hand the potential effects of an activity on the environment. The ICSID Convention and Arbitration Rules expressly provide for the possibility of site visits.51 Whilst there is no explicit provision in the UNCITRAL Arbitration Rules, this may be presumably undertaken by a tribunal with the agreement of the parties to the dispute.52 As evidence obtained during such a site visit will be taken into account by the tribunal in determining the case, it is therefore important that any visit must also conform to requirements of due process. It is up to the tribunal to regulate the conditions for the visit in advance. This is another issue where previous decisions of international courts and tribunals may be used as guidance by investment tribunals. For example, in the Kishenganga Arbitration, the Arbitral Tribunal determined that whereas in presentations of an objective, technical nature could be made by the parties during the site visit in the case, “legal issues or arguments should not be discussed at any point during such presentations”.53 It would also seem to be vital that all members of the tribunal take part in site visits so that they all have the benefit of the experience and they can draw their own conclusions.54

4.4.2

Evidential Rules

It is obviously up to the tribunal to make a determination on the facts that are before it.55 However, it must be appreciated that it is not necessarily the role of the court or tribunal to establish definitively whether or not there has been environmental harm in any particular case. Rather, the court or tribunal is required to determine whether the parties have adduced sufficient evidence to support their claims. This requires an appreciation of the evidential rules that are applicable to investor-state arbitration proceedings and how they may influence the litigation. Firstly, it is necessary to determine which party has to prove the existence of certain facts. In theory, this is a relatively straightforward issue. The general rule in international

51 52 53 54

55

ICSID Convention, Article 43(b); ICSID Arbitration Rules, Rule 34(2) (b). ‘Inspection’ is an available means of taking evidence in the IBA Rules on the Taking of Evidence, Rule 7. Procedural Order No. 3, para. 5.1, reproduced in Indus Waters Kishenganga Arbitration, Partial Award of 19 February 2013, para. 36. This may not always be the case, however. In the Kishenganga Arbitration, only two members of the tribunal took part in the second site visit, whilst other members of the tribunal were invited to view the photos and videos of the visit taken by the Secretariat; Indus Waters Kishenganga Arbitration, Partial Award, para. 81. It is not entirely clear from the award why the second visit was organized in this manner. Case concerning Pulp Mills on the River Uruguay, para. 168: “in keeping with its practice, the Court will make its own determination of the facts, on the basis of the evidence presented to it […]”.

97

JAMES HARRISON

litigation is that the burden of proof falls upon the party alleging a particular claim or fact. This principle has been consistently applied by all varieties of international courts and tribunals,56 and it is also explicit in some arbitration rules.57 As investment arbitrations are concerned with the determination of claims made by the investor against the state, it could be generally said that the investor must bear the burden of proving that there has been a violation of the rules by the state. In practice, however, this is an issue that is rarely explicitly addressed by tribunals.58 Furthermore, in many environmental-related claims, it may be that the burden of proof shifts to the state, when it seeks to demonstrate that a measure that is otherwise expropriatory or discriminatory is justified by the environmental aims that it pursues. This may depend upon the precise structure of the rules59 and whether doctrines such as police powers are considered to be an integral part of the investment rules or a defence to be invoked by the state. For example, in Tecmed v. Mexico, the Tribunal first found that, “as far as the effects of [the measure] are concerned, the decision could be treated as an expropriation under Article 5(1) of the Agreement.”60 However, it immediately went on to consider whether the measure could nevertheless be justified by the police powers doctrine.61 In doing so, it did not explicitly deal with the burden of proof and therefore it is not clear whether the burden shifted to the respondent state at this stage.62 However, one possible interpretation of the police powers doctrine is that it is considered a defence, which must be proven by the state invoking it.63

56

57 58

59 60 61 62

63

Case concerning Pulp Mills on the River Uruguay, para. 162; Appellate Report United States – Wool Shirts and Blouses, adopted 15 April 1997, WT/DS33/AB/R, p. 14. For an analysis of the relevant case law and different possible interpretations of the burden of proof, see C. Foster, ‘Burden of Proof in International Courts and Tribunals’, Australian Yearbook of International Law, Vol. 29, 2010, p. 27. UNCITRAL Arbitration Rules, Art. 27(1): “Each party shall have the burden of proving the facts relied on to support its claim or defence”. Chemtura Corporation v. Canada, para. 137: “the burden of proving these facts rests on the Claimant, in accordance with well-established principles on the burden of proof […]”. Note that this case did not concern a direct challenge to the scientific basis of the measure, but rather a claim that the procedure was irregular. The tribunal itself notes that “the position of the Claimant as to whether lindane itself presents unacceptable health and environmental risks is somewhat ambiguous”; id., para. 133. See Appellate Report EC – Tariff Preferences, adopted 7 April 2004, WT/DS246/AB/R, para. 87. Tecmed v. Mexico, supra note 13, para. 117. Id., para. 119. Id., para. 127. On the facts, the tribunal considered the evidence to be clear: “according to the evidence submitted in this arbitration proceeding, it is irrefutable that there were factors other than compliance or non-compliance by Cytrar with the Permit’s conditions or the Mexican environmental protection laws and that such factors had a decisive effect in the decision to deny the Permit’s renewal”. See, e.g., Viñuales 2012, supra note 9, pp. 366 et seq.

98

4

ADDRESSING

THE

PROCEDURAL CHALLENGES

OF

ENVIRONMENTAL LITIGATION

The burden of proof would certainly shift to the respondent state where that state relied upon one of the increasing numbers of environmental or health exceptions found in modern investment treaties.64 There is no doubt that such provisions are considered as a defence to investment claims and therefore the burden of proof is on the party invoking the defence. Aside from determining the burden of proof, it is also important to take into account the standard of proof to be applied, as this will dictate when the burden of proof has been met. This is another issue that is almost never explicitly addressed in investment treaties or arbitration rules or explained by arbitral tribunals.65 The issue is made more complex by the fact that the standard of proof can vary from case to case depending upon the particular context and the allegations being made.66 Yet, it would seem that, in the context of investor-state arbitration, the investor has a significant hurdle to overcome in order to demonstrate that environmental measures are contrary to investment rules because they are not justified by sufficient scientific evidence. This is because tribunals have broadly recognized that states have a large degree of “due deference […] when defining the issues that affect its public policy or the interests of society as a whole, as well as the actions that will be implemented to protect such values”.67 It is suggested that the deference afforded to states not only relates to the types of measures that may be taken in response to an environmental risk but also to the sources of scientific evidence that may be relied upon in determining that risk. This reflects the position taken by the WTO Appellate Body when it said that: [i]n most cases, responsible and representative governments tend to base their legislative and administrative measures on ‘mainstream’ scientific opinion. In other cases, equally responsible and representative governments may act in good faith on the basis of what, at a given time, may be a divergent opinion coming from qualified and respected sources. By itself, this does not necessarily signal the absence of a reasonable relationship between the […] 64

65

66 67

United Nations Conference on Trade and Development, International Investment Rule-Making: Stocktaking, Challenges and Ways Forward, UNCTAD Series on International Investment Policies for Development, 2008, pp. 72-73. Y. Fukunaga, ‘Standard of Review and “Scientific Truths” in the WTO Dispute Settlement System and Investment Arbitration’, Journal of International Dispute Settlement, Vol. 3, 2012, pp. 559-576, at 570. See however Chemtura Corporation v. Canada, para. 137. See case concerning Pulp Mills on the River Uruguay, Separate Opinion of Judge Greenwood, paras. 25-26. Tecmed v. Mexico, supra note 13, para. 122. For a more sceptical view of applying a margin of appreciation to investor-state arbitration, see Renta 4 v. Russian Federation, Arbitration Institute of the Stockholm Chamber of Commerce, Award of 20 July 2012, para. 22. At the same time, it must be understood that the tribunal was concerned with distinguishing the proceedings under the investment treaty from parallel proceedings brought under the European Convention on Human Rights.

99

JAMES HARRISON

measure and the [science], especially where the risk involved is life-threatening in character and is perceived to constitute a clear and imminent threat to public health and safety.68 Indeed, the need for deference to the scientific evidence produced by a state is also supported by the precautionary approach. The most commonly cited version of this concept is found in Principle 15 of the Rio Declaration, which provides “where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation”. The precautionary approach may apply both when there is divergent scientific opinion and simply when there is a lack of scientific evidence supporting the existence of a risk. This latter scenario is raised in at least one pending investment arbitration where investors allege that measures taken by the state are not justified by any scientific evidence. Thus, in Lone Pine Resources v. Canada, the investor alleges that a moratorium on so-called fracking in the St. Laurence River Basin was adopted by the Government of Quebec “without any explanation or justification – scientific or otherwise”.69 Similar issues arise in another pending arbitration concerning a moratorium on freshwater wind farms adopted by the Government of Ontario.70 In the latter case, the Government of Canada expressly invokes in its preliminary statement of defence the “uncertainty with respect to the impacts of freshwater offshore wind power” as a reason that “it could not responsibly allow any such project to proceed.”71 The precautionary approach clearly affects the relevance of scientific evidence that can be presented to a tribunal. Today, it is generally accepted that the precautionary approach has some legal status,72 although the precise effects of the concept remain unclear.73 This is in part because there has been little convergence towards a common definition of the 68 69 70 71

72 73

Appellate Report EC – Hormones, adopted 16 January 1998, WT/DS26/AB/R, para. 194. Lone Pine Resources Inc v. The Government of Canada, Notice of Intent to Submit a Claim to Arbitration under Chapter 11 of the North American Free Trade Agreement, 8 November 2012, para. 38. Windstream Energy LLC v. Government of Canada, UNCITRAL, Notice of Intent to Submit a Claim to Arbitration under NAFTA Chapter 11, 17 October 2012. Windstream Energy LLC v. Government of Canada, UNCITRAL, Preliminary Statement of Canada, para. 40. The statement also asserts “Ontario adopted a cautious approach in the face of uncertainty with respect to potential health, safety and environmental consequences of freshwater offshore wind development in the Great Lakes. Article 1105 does not give a mandate to second-guess such legitimate exercises of regulatory authority. To the contrary, international law affords governments a high measure of deference with respect to such decision-making”. Birnie, Boyle, and Redgwell argue that it is a general principle of law; P. Birnie et al., International Law and the Environment, 3rd edn, Oxford University Press, Oxford, 2009, pp. 162-163. See the comments on the Appellate Body in EC – Hormones, para 123: “The status of the precautionary principle in international law continues to be the subject of debate among academics, law practitioners, regulators and judges. The precautionary principle is regarded by some as having crystallized into a general

100

4

ADDRESSING

THE

PROCEDURAL CHALLENGES

OF

ENVIRONMENTAL LITIGATION

precautionary approach, particularly in legal instruments.74 Nevertheless, if it is invoked in investment arbitration, it is an issue that will have to be clarified. It is doubtful that the precautionary approach, at least as a general principle, reverses the burden of proof.75 Indeed, the ICJ appears to have ruled out this interpretation in its decision in the Pulp Mills Case.76 However, there would appear to be little doubt that the precautionary approach affects the standard of proof to be met by the state in justifying environmental measures.77 It would follow from this understanding of the precautionary approach that it is not sufficient for an investor to point to a lack of scientific evidence or divergent scientific opinions when challenging an environmental measure. Indeed, the tribunal in Chemtura v. Canada went as far to say that “it is not for the Tribunal to judge the correctness or adequacy of the scientific results […]”.78 Yet, it does not follow that the precautionary approach offers states a carte blanche to do whatever they want. Recent case law of other international courts and tribunals may assist investment tribunals in giving some concrete content to the precautionary approach and determining its limits. Some such clarification can be found in the 2011 Advisory Opinion of the Seabed Disputes Chamber of the International Tribunal for the Law of the Sea, which states: [The precautionary approach] applies in situations where scientific evidence concerning the scope and potential negative impact of the activity in question is insufficient but where there are plausible indications of potential risks.79

74 75 76

77 78 79

principle of customary international environmental law. Whether it has been widely accepted by Members as a principle of general or customary international law appears less than clear. We consider, however, that it is unnecessary, and probably imprudent, for the Appellate Body in this appeal to take a position on this important, but abstract, question. We note that the Panel itself did not make any definitive finding with regard to the status of the precautionary principle in international law and that the precautionary principle, at least outside the field of international environmental law, still awaits authoritative formulation”. For a summary of the debate, see M. Schroeder, ‘Precautionary Approach/Principle’, Max Planck Encyclopaedia of Public International Law, Online Edition, August 2009; Birnie et al. 2009, supra note 72, pp. 159-164. World Commission on the Ethics of Scientific Knowledge and Technology, The Precautionary Principle, March 2005, p. 12. See, e.g., Foster 2011, supra note 29, p. 240, arguing that this issue must be decided on a case-by-case basis; Foster 2012, supra note 18, p. 532. Case concerning Pulp Mills on the River Uruguay, para. 164: “while a precautionary approach may be relevant in the interpretation and application of the provisions of the Statute, it does not follow that it operates as a reversal of the burden of proof”. Birnie et al. 2009, supra note 72, p. 160. Chemtura Corporation v. Canada, para. 153, see also para. 134. Seabed Disputes Chamber of the International Tribunal for the Law of the Sea, Advisory Opinion on the Responsibilities of Sponsoring States, 1 February 2011, para. 131.

101

JAMES HARRISON

In other words, whilst scientific proof of an environmental threat is not necessary, some plausible information concerning the existence of a risk is required. As explained elsewhere: [s]ome form of scientific analysis is mandatory; a mere fantasy or crude speculation is not enough to trigger the [precautionary approach]. Grounds for concerns that can trigger the [precautionary approach] are limited to those concerns that are plausible or scientifically tenable.80 It follows that there is scope for an investor to challenge whether evidence presented by the state is plausible or truly scientific in nature. The question of what is a ‘qualified and respected source’ of scientific evidence is ultimately a question that must be determined by a tribunal itself. Yet, this is a limited undertaking. Again, the jurisprudence of other international courts and tribunals may assist investment tribunals to navigate an appropriate course through the waters of scientific uncertainty. The issue has been addressed in most detail by the WTO Appellate Body which has explained: Although the scientific basis need not represent the majority view within the scientific community, it must nevertheless have the necessary scientific and methodological rigour to be considered reputable science. In other words, while the correctness of the views need not have been accepted by the broader scientific community, the views must be considered to be legitimate science according to the standards of the relevant scientific community. A panel should also assess whether the reasoning articulated on the basis of the scientific evidence is objective and coherent.81 It follows that the standards to be used in such a determination are those of the “relevant scientific community.”82 It is clear that the purpose of consulting experts in such

80

81 82

World Commission on the Ethics of Scientific Knowledge and Technology, The Precautionary Principle, p. 13. The Report adds, “the hypothesis that an activity can cause harm should be consistent with background knowledge and theories. If a hypothesis requires one to reject widely accepted scientific theories and facts, then is it not plausible […]”; id., p. 15. Appellate Report United States – Continued Suspension of Obligations, para. 591. Appellate Report Australia – Apples from New Zealand, adopted 17 December 2010, WT/DS367/AB/R, paras. 220-221.

102

4

ADDRESSING

THE

PROCEDURAL CHALLENGES

OF

ENVIRONMENTAL LITIGATION

circumstances is not to identify whether the science is correct. After all, it is increasingly accepted that ‘science does not deliver certainty’.83 Rather, the task of the tribunal is to assess whether the science is legitimate.84 Although it did not rely explicitly upon the precautionary approach, this appears to have been the approach taken by the Tribunal in Methanex v. United States, when it noted that “whilst it is possible for other scientists and researchers to disagree in good faith with certain of its methodologies”, the scientific report relied upon by the United States nevertheless represented a “serious, objective and scientific approach to a complex problem”.85 In that particular case, the Tribunal relied upon expert evidence put forward by the parties and tested under cross-examination. Yet, this is an area where appointing independent experts may also be useful in determining whether or not the evidence is indeed objective. Where there is some legitimate scientific uncertainty, it means that a tribunal’s attention will often shift to a consideration of procedural factors involved in preparing and implementing a measure. In other words, “it means that [a dispute settlement body] should examine whether the respondent reached the claimed ‘truth’ through an objective, coherent and reasonable process”.86 Thus, in Chemtura v. Canada, the Tribunal’s analysis focused on whether the procedure for carrying out the review of the banned pesticide was carried out in a fair and unbiased manner. This understanding of the precautionary approach still leaves scope for a tribunal to police the improper invocation of the precautionary approach by a state which has no plausible concerns that trigger its application. Tecmed v. Mexico would appear to be such a case. The Tribunal in that arbitration essentially found that there was no scientific rationale for the measure, despite 83

84

85 86

J. Ravetz, ‘Pluralistic Uncertainty Management’, September 2003, Available at: accessed 10 February 2014. Ravetz continues, “the new organizing theme for the conduct of science in the policy domain is ‘debate’. This is a recognition that policy issues, even those including science, are not merely uncertain but also complex. That is, there is a plurality of legitimate perspectives, not reducible to a single dominant ‘correct’ view. The task for science is not to achieve a truth to which all must subscribe, but to establish a basis for negotiation in good faith”. Appellate Report United States – Continued Suspension of Obligations, para. 592: “The panel may seek the experts’ assistance in order to identify the scientific basis of the SPS measure and to verify that this scientific basis comes from a qualified and respected source, irrespective of whether it represents minority or majority scientific views. It may also rely on the experts to review whether the reasoning articulated on the basis of the scientific evidence is objective and coherent, and whether the particular conclusions drawn by the Member assessing the risk find sufficient support in the evidence. The experts may also be consulted on the relationship between the risk assessment and the SPS measure in order to assist the panel in determining whether the risk assessment ‘sufficiently warrants’ the SPS measure. The consultations with the experts, however, should not seek to test whether the experts would have done a risk assessment in the same way and would have reached the same conclusions as the risk assessor. In other words, the assistance of the experts is constrained by the kind of review that the panel is required to undertake”. See also Fukunaga 2012, supra note 65, p. 567. Methanex v. United States, Final Award, Part III, Chapter A, supra note 11, para. 101. Fukunaga 2012, supra note 65, p. 568.

103

JAMES HARRISON claims to the contrary by the state.87 Thus, even the precautionary approach would not have provided a defence for Mexico in those circumstances. It could also be argued that the precautionary approach only justifies provisional measures and it implies that further scientific evidence must be gathered.88 Thus, the precautionary approach is not an excuse to do nothing. As the WTO Appellate Body has explained: The ‘insufficiency’ of the scientific evidence is not a perennial state, but rather a transitory one, which lasts only until such time as the imposing Member procures the additional scientific evidence which allows the performance of a more objective assessment of risk.89 It follows that a lack of scientific evidence may at best only justify a provisional ban on a particular activity. As a result, in cases of significant scientific uncertainty, a complete ban, without any further steps to gather additional information, may be a sign that a state is acting in bad faith and its measures are unjustified.

4.5

COMMUNITY INTEREST

IN

ENVIRONMENTAL DISPUTES

Another feature of environmental disputes is that they often involve situations which are of interest to other actors apart from the actual parties to the case. Despite the fact that international litigation has been traditionally limited to states, this is an issue on which there have been substantial developments over the past decade. In particular, NGOs and community groups have demonstrated a significant interest in litigation in which environmental measures are at stake. One reason for this development is that environmental disputes often raise issues of public interest and the decision of a court or tribunal will be subject to the scrutiny of a large number of actors. The trend towards the increasing participation of other actors in litigation has even extended to international investment treaty arbitration, despite its connection to the closed world of international commercial arbitration.90 Whereas the ICSID Arbitration

87

88 89 90

Tecmed v. Mexico, supra note 13, para. 127: “according to the evidence submitted in this arbitration proceeding, it is irrefutable that there were factors other than compliance or non-compliance by Cytrar with the Permit’s conditions or the Mexican environmental protection laws and that such factors had a decisive effect in the decision to deny the Permit’s renewal […]”. See, e.g., A. Gillespie, ‘The Precautionary Principle in the Twenty-First Century: A Case Study of Noise Pollution’, International Journal of Marine and Coastal Law, Vol. 22, 2007, pp. 78-79. Appellate Report United States – Continued Suspension of Obligations, para. 679. For a previous review, see J. Harrison, ‘Recent Developments to Promote Transparency and Public Participation in Investment Treaty Arbitration’, L’Observateur des Nations Unies, Vol. 29, 2010, pp. 119137.

104

4

ADDRESSING

THE

PROCEDURAL CHALLENGES

OF

ENVIRONMENTAL LITIGATION

Rules and UNCITRAL Arbitration Rules were originally silent on this matter, they have both been amended to explicitly allow tribunals to consider submissions from nondisputing parties.91 Even tribunals acting under previous versions of these rules have exercised their residual power to regulate the arbitral procedure to allow the participation of amicus curiae, at least in the written phase of the proceedings.92 In doing so, it is interesting to note that tribunals have explicitly drawn upon the practice of other international courts and tribunals.93 This is not a one-way street, however. One argument against the acceptance of amicus briefs is that it may open the floodgates and impose an unsustainable burden on the court or tribunal,94 as well as a significant financial burden on the parties.95 This may be particularly relevant in the context of investor-state arbitration, where, as noted above, it is the parties that pay all of the costs of the arbitration. This factor has to be taken into account by tribunals. At the same time, there are ways in which the burdens of permitting amicus curiae participation can be addressed.96 Indeed, the new rules explicitly set criteria against which applications to participate as amicus curiae should be judged.97 Both the ICSID Rules and the UNCITRAL Rules require not only that the potential non-disputing party has a significant ‘interest’ in the dispute98 but also that the non-disputing party submission would assist the tribunal in the determination of a factual or legal issue related to the proceeding by bringing a perspective, particular knowledge, or insight that is different from that of the disputing parties.99 Indeed, tribunals have used these criteria 91 92

93 94 95

96

97

98 99

ICSID Arbitration Rules, Rule 37(2); UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration (2013), Rule 4. Suez and others v. Argentine Republic, ICSID Case No. ARB/03/19, para. 9; Methanex v. United States, Dec. of the Tribunal on Petitions from Third Persons to Intervene as ‘Amici Curiae’, 15 January 2001, para. 31. The Methanex decision was handed down before the Statement of the NAFTA Free Trade Commission on Non-Disputing Parties of 7 October 2003. Id., paras. 31-34. Y. Ronen, ‘Participation of Non-State Actors in ICJ Proceedings’, Law and Practice of International Courts and Tribunals, Vol. 11, 2012, p. 110. United Nations Conference on Trade and Development, International Investment Rule-Making: Stocktaking, Challenges and Ways Forward, UNCTAD Series on International Investment Policies for Development, 2008, pp. 73-74. See Methanex v. United States, Dec. of the Tribunal on Petitions from Third Persons to Intervene as ‘Amici Curiae’, para. 37, envisaging the adoption of “procedures whereby any burden in meeting written submissions from a Petitioner was mitigated or extinguished”. Although, as noted by the tribunal in one recent case, “Article 41(3) [of the Arbitration (AF) Rules (which is almost identical to Article 37(3) of the ICSID Arbitration Rules)] does not contain an exhaustive list of criteria […] and therefore the Tribunal is free to address ‘other things’ for the purpose of arriving at a decision”; Apotex Holdings v. The United States of America, ICSID Case No. ARB(AF)/12/11, Procedural Order on the Participation of the Applicant, Mr Barry Appleton, as a Non-Disputing Party, 4 March 2013, para. 26. On the interpretation of this phrase, see id., para. 38: “the applicant needs to show that he has more than a ‘general’ interest in the proceeding”. ICSID Arbitration Rules, Rule 37(2)(a); UNCITRAL Transparency Rules, Art. 4(3)(b).

105

JAMES HARRISON

to prevent the participation of amicus curiae, particularly when opposed by one or both parties to the dispute. For example, in Chevron and Texaco v. Ecuador, the Tribunal denied an application by Fundación Pachamama and the International Institute for Sustainable Development (IISD) to submit written arguments during the jurisdictional phase of the dispute, particularly noting that “the issues to be decided are primarily legal and have already been extensively addressed by the Parties’ submissions”.100 The attitude of the Tribunal in this case suggests a restrictive approach towards the acceptance of amicus curiae briefs, particularly at the jurisdictional phase of the proceedings. However, amicus curiae may have a more important role to play in the merits stage of environmental disputes, where the appropriateness of a measure taken by a state is often a question to be addressed by the tribunal. Tribunals in this situation are sometimes required to carry out some sort of weighing and balancing test to determine whether the measures taken by the state are proportionate to the risks that existed. Yet, some commentators have questioned whether it is appropriate to put such judgments into the hands of arbitrators, given that it involves balancing different values.101 It is precisely in this situation that the involvement of community groups and other representatives of civil society may prove a useful input to the arbitral process, by reflecting a broader range of views on the value to be attached to environmental protection vis-à-vis investment protection. Yet, it is important to understand the role that amici are playing in this context. As the tribunal in Methanex highlighted, “amici are not experts; such third persons are advocates (in the non-pejorative sense) and not ‘independent’ in that they advance a particular case to a tribunal”.102 Thus, the inclusion of information from amicus curiae is not a substitute for expert evidence. Rather, amici are involved to ensure that all relevant voices have been heard in the arbitration process. In other words, the involvement of interested actors increases the legitimacy of the decision because “the public is more likely to accept the outcome of the process if they participated in it, or even had

100 Chevron and Texaco v. Ecuador, ad hoc arbitration under UNCITRAL Arbitration Rules, PCA Case No. 2009-23, Procedural Order No. 8, 18 April 2011, para. 18. See also Apotex v. The United States of America, ICSID Case No. ARB(AF)/12/1, Procedural Order on the Participation of the Applicant, BNM, as a NonDisputing Party, 4 March 2013. 101 For a discussion of the pros and cons of proportionality in international litigation, see, e.g., M. Andenas & S. Zleptnig, ‘Proportionality: WTO Law in Comparative Perspective’, Texas International Law Journal, Vol. 42, 2007, p. 371. More generally, see, e.g., C. N. Brower & S. W. Schill, ‘Is Arbitration a Threat or a Boon to the Legitimacy of International Investment Law?’, Chinese Journal of International Law, Vol. 9, 2008-2009, p. 471. 102 Methanex v. United States, Dec. of the Tribunal on Petitions from Third Persons to Intervene as ‘Amici Curiae’, para. 38.

106

4

ADDRESSING

THE

PROCEDURAL CHALLENGES

OF

ENVIRONMENTAL LITIGATION

the right to participate in it.”103 This role of ensuring the legitimacy of the process through the involvement of non-disputing parties has been stressed by several investment tribunals.104 Even if amici are permitted to participate in arbitral proceedings, it must also be recognized that there are limits on their ability to influence the process. In particular, it must be understood that amici curiae are not actually parties to the case. There are a number of consequences that stem from this fact. Firstly, it means that the information presented need not be taken into account by the tribunal in the same way as information presented by parties. The WTO Appellate Body has said in this context that “it is particularly within the province and the authority of a panel to determine the need for information and advice in a specific case, to ascertain the acceptability and relevancy of information or advice received, and to decide what weight to ascribe to that information or advice or to conclude that no weight at all should be given to what has been received.”105 The same reasoning applies to investment treaty arbitration. It follows that tribunals do not have an obligation to make reference to arguments put forward by amicus curiae.106 At the same time, failure to do so may undermine any attempt to increase the legitimacy of decision-making. It is therefore important that tribunals do reflect the arguments of amici when they are relevant. A second limitation on the role of amicus curiae is that they do not have the same rights in the proceedings as the parties. For instance, they may not be permitted to have access to all of the pleadings of the litigating parties, if those materials have not otherwise been released. In Suez and others v. Argentina, the organizations which had filed for leave to submit amicus curiae briefs also requested the Tribunal: [t]o be given timely, sufficient, and unrestricted access to the documents produced during the course of the arbitration in order to focus their amicus 103 J. Delaney & D. Barstow Magraw, ‘Procedural Transparency’, in P. Muchlinski et al. (Eds.), Oxford Handbook of International Investment Law, Oxford, Oxford University Press, 2008, p. 780. 104 See, e.g., Suez and others v. Argentine Republic, ICSID Case No. ARB/03/19, Order in Response to a Petition for Transparency and Participation as Amicus Curiae, 19 May 2005, para. 22: “[p]ublic acceptance of the legitimacy of international arbitral processes, particularly when they involve states and matters of public interest, is strengthened by increased openness and increased knowledge as to how these processes function”; Methanex v. United States, Dec. of the Tribunal on Petitions from Third Persons to Intervene as ‘Amici Curiae’, para. 49: “the Chapter 11 arbitral process could benefit from being perceived as more open or transparent; or conversely harmed if seen as unduly secretive”. 105 Appellate Report United States – Shrimp, adopted 6 November 1998, WT/DS58/AB/R, para. 104 (original emphasis). 106 Indeed, there are a number of cases where the WTO dispute settlement organs have allowed the submission of amicus briefs but “have not found it necessary to take the two amicus curiae briefs filed into account in rendering [the] decision”; Appellate Report United States – Imposition of Countervailing Duties on Certain Hot-Rolled Lead and Bismuth Carbon Steel Products Originating in the United Kingdom, adopted 7 June 2000, WT/DS138/AB/R, para. 42.

107

JAMES HARRISON

submission on the questions most pertinent to the case. Alternatively, in the event that the Tribunal would reject such request, the Petitioners asked that they be granted access to the Parties’ pleadings.107 The Tribunal accepted that “as a general proposition, an amicus curiae must have sufficient information on the subject matter of the dispute”.108 Yet, the Tribunal rejected their request, finding that “in the present case, the Petitioners have sufficient information, even without being granted access to the arbitration record”.109 In this context, the Tribunal stressed that the role of an amicus curiae is not to challenge arguments or evidence put forward by the parties but rather “to provide their perspective, expertise, and arguments to help the court”.110 This conclusion was echoed in Biwater Gauff (Tanzania) Ltd v. Tanzania where petitioners were also denied access to documents by the tribunal.111 Such decisions potentially limit the effectiveness of amici. A different approach was taken in the case of Piero Foresti and others v. South Africa where the Tribunal decided that also allowing several NGOs to act as non-disputing parties: The non-disputing parties must be allowed access to those papers submitted to the Tribunal by the Parties that are necessary to enable the [non-disputing parties] to focus their submissions upon the issues arising in the case and to see what positions the Parties have taken on those issues. The [parties] must also be given adequate opportunity to prepare and deliver their submissions in sufficient time before the hearing for the Parties to be able to respond to those submissions.112 This approach prioritizes the promotion of effective participation by amicus curiae. When consent is given, however, it is clear that the non-disputing parties must also be bound by any confidentiality order of the tribunal restricting access to the documents in order to preserve the integrity of the arbitration process. A more significant limitation is that non-disputing parties are generally only able to make written submissions, often with strict page limits set by the tribunal. They cannot

107 Suez and others v. Argentine Republic, para. 7. 108 Id., para. 24. 109 Id. See also Methanex v. United States, Dec. of the Tribunal on Petitions from Third Persons to Intervene as ‘Amici Curiae’, para. 46. 110 Suez and others v. Argentine Republic, para. 25. 111 Biwater Gauff (Tanzania) Ltd v. Tanzania, paras. 64-65. 112 Piero Foresti, Laura de Carli et al. v. Republic of South Africa, ICSID Case No. ARB(AF)/07/1, Letter from the Tribunal of 5 October 2009.

108

4

ADDRESSING

THE

PROCEDURAL CHALLENGES

OF

ENVIRONMENTAL LITIGATION

necessarily attend the hearings if those hearings are not otherwise open to the public.113 Indeed, requests to attend the hearings have been consistently denied if any one of the disputing parties objects.114 Nevertheless, it does not follow that the Tribunal cannot interact with amici curiae if it is considered appropriate or necessary. In Biwater Gauff (Tanzania) Ltd v. Tanzania, the Tribunal expressly: [reserved] the right to ask the Petitioners specific questions in relation to their written submissions, and to request the filing of further written submissions and/or documents or other evidence, which might assist in better understanding the Petitioners’ position.115 Such an approach allows the non-disputing parties to play a more integral role in the process, rather than simply making a one-off submission. It also demonstrates how tribunals may approach this issue creatively by utilizing their broad powers of discretion to regulate the proceedings. Indeed, it is arguable that investment tribunals have led the way in innovations on this issue and other international courts and tribunals could usefully learn from their practices.

4.6

CONCLUSION

This chapter has discussed a number of procedural challenges that investment tribunals face when dealing with disputes involving environmental issues. In the first place, the chapter considered the role and sources of scientific evidence in environmental disputes, concluding that international courts and tribunals, including investment arbitrators, will often not be willing to second-guess the science relied upon by states to justify their public policy measures. It is only in the rare cases when the information presented by states is either non-existent or patently unscientific that tribunals will play a more active role in investigating the scientific basis of measures. Such deference is supported by the precautionary approach, although, as the chapter points out, this concept still requires some plausible information supporting a regulatory intervention, and it may only justify provisional measures whilst additional scientific evidence is gathered by the state. Secondly, the chapter discussed the increasing role of amicus curiae in investment arbitration and the role that they can play in health and environmental disputes. Often, the 113 At the same time, there is a trend in many investment treaties to mandate public hearings; see, e.g., KoreaUnited States Free Trade Agreement, Art. 11.20; Canada-Colombia Bilateral Investment Treaty, Art. 831. 114 See, e.g., Chevron Corporation and Texaco Corporation v. Ecuador, Procedural Order No. 8, 18 April 2011, para. 5. 115 Biwater Gauff (Tanzania) Ltd v. Tanzania, para. 72.

109

JAMES HARRISON

involvement of non-disputing parties may simply be a way of increasing the legitimacy of tribunals involved in the complex balancing processes that are inherent in the application of many investment rules and standards. Amici can introduce arguments that reflect the broad public interest in the protection of the environment, ensuring that proper weight is given to this value in the balancing process. Yet, this function is undermined if tribunals do not reflect such arguments in their reasoning. Therefore, tribunals should be encouraged to engage more thoroughly with amici curiae when they are admitted into the process. Several investment tribunals have engaged with these procedural challenges when deciding ‘investment and environment’ disputes. Yet, many of the issues discussed in this chapter have not been explicitly addressed in detail by investment tribunals. It is for this reason that decisions of the ICJ and the WTO Appellate Body, inter alia, have been widely cited throughout this chapter as a source of good practice and reasoning that can be utilized in the context of investment treaty arbitration. Clearly such decisions are not binding on investment treaty tribunals. In some cases, principles and practices may have to be adapted to the particular context of a dispute, taking into account some of the differences in an ad hoc arbitral process. Nevertheless, these other judicial decisions can provide persuasive authority, and they can contribute to the development of the law if invoked by counsel and arbitrators.116 Equally, decisions of investment tribunals may also be used for this purpose by other international courts and tribunals faced with similar challenges in environmental litigation, demonstrating that cross-fertilization works in both directions.

116 On the importance of counsel and arbitrators in developing international investment law, see, e.g., J. W. Salacuse, ‘The Emerging Global Regime for Investment’, Harvard International Law Journal, Vol. 51, 2010, p. 465.

110

BIBLIOGRAPHY BOOKS Birnie, P. et al., International Law and the Environment, 3rd edn, Oxford: Oxford University Press, 2009. Foster, C., Science and the Precautionary Principle, Cambridge: Cambridge University Press, 2011. Harten, van G., Investment Treaty Arbitration and Public Law, Oxford: Oxford University Press, 2006. Hey, E., Reflections on an Environmental Court, The Hague: Kluwer Law International, 2000. Plant, B. & Riddell, A., Evidence before the International Court of Justice, London: British Institute of International and Comparative Law, 2007. Stephens, T., International Courts and Environmental Protection, Cambridge: Cambridge University Press, 2009. Viñuales, J., Foreign Investment and the Environment in International Law, Cambridge: Cambridge University Press, 2012.

ARTICLES Andenas, M. & Zleptnig, S., ‘Proportionality: WTO Law in Comparative Perpsective’, 42 Texas International Law Journal, 2007. Bilder, R., ‘Settlement of Disputes in the Field of International Law of the Environment’, 144 Receuil des Cours, 1975–I. Boyle, A. & Harrison, J., ‘Judicial Settlement of International Environmental Disputes: Current Problems’, 4 Journal of International Dispute Settlement, 2013.

111

JAMES HARRISON Brower, C.N. & Schill, S.W., ‘Is Arbitration a Threat or a Boon to the Legitimacy of International Investment Law?’, 9 Chinese Journal of International Law, 2008-2009. Del Mar, K., ‘Weight of Evidence Generated through Intra-Institutional Fact-Finding before the ICJ’, 2 Journal of International Dispute Settlement, 2011. Douglas, Z., ‘The Hybrid Foundations of International Investment Arbitration’, 74 British Yearbook of International Law, 2003. Foster, C., ‘Adjudication, Arbitration and the Turn to Public Law “Standards of Review”: Putting the Precautionary Principle in the Crucible’, 3 Journal of International Dispute Settlement, 2012. French, D., ‘Environmental Dispute Settlement: The First (Hesitant) Signs of Spring’, 19 Hague Yearbook of International Law, 2006. Fukunaga, Y., ‘Standard of Review and “Scientific Truths” in the WTO Dispute Settlement System and Investment Arbitration’, 3 Journal of International Dispute Settlement, 2012. Gillespie, A., ‘The Precautionary Principle in the Twenty-First Century: A Case Study of Noise Pollution’, 22 International Journal of Marine and Coastal Law, 2007. Harrison, J., ‘Recent Developments to Promote Transparency and Public Participation in Investment Treaty Arbitration’, 29 L’Observateur des Nations Unies, 2010. Harrison, J., ‘Reflections on the Role of International Courts and Tribunals in the Settlement of Environmental Disputes and the Development of International Environmental Law’, 25 Journal of Environmental Law, 2013. Ronen, Y., ‘Participation of Non-State Actors in ICJ Proceedings’, 11 Law and Practice of International Courts and Tribunals, 2012. Salacuse, J.W., ‘The Emerging Global Regime for Investment’, 51 Harvard International Law Journal, 2010. Schroeder, M., ‘Precautionary Approach/Principle’, in Max Planck Encyclopedia of Public International Law, On-Line Edition, August 2009.

112

4

CONTRIBUTIONS

BIBLIOGRAPHY

IN EDITED BOOKS

Carvajal Isunza, G. & Gonzalez Rojas, F., ‘Evidentiary Issues in NAFTA Chapter 11 Arbitration: Searching for the Truth between States and Investors’, in T. Weiler (Ed.), NAFTA Investment Law and Arbitration, Leiden: Martinus Nijhoff Publishers, 2004. Delaney, J. & Barstow Magraw, D., ‘Procedural Transparency’, in P. Muchlinski et al. (Eds.), Oxford Handbook of International Investment Law, Oxford: Oxford University Press, 2008. Sands, P., ‘Sustainable Development: Treaty, Custom and the Cross-Fertilization of International Law’, in A. Boyle & D. Freestone (Eds.), International Law and Sustainable Development, Oxford: Oxford University Press, 1999.

113

5

INTERNATIONAL RESPONSIBILITY AND

OF THE

INTERNATIONAL RESPONSIBILITY

JURIDICAL PERSONS

FOR

STATE

OF

ENVIRONMENTAL

DAMAGE: WHERE DO WE STAND? Andrea Gattini*

5.1

THE INTERNATIONAL RESPONSIBILITY

OF THE

STATE

FOR

ENVIRONMENTAL DAMAGE

International responsibility for environmental damage confronts us with a paradox. There are few fields in international law literature which have been more debated in the last few decades and on which there is less practice to build upon. Whereas other issues have made giant strides, such as the international criminal responsibility of individuals or more recently the multifaceted issues of the responsibility of international organizations, it seems that the developments concerning the issue of environmental responsibility have come to a standstill. The reasons for this may be multifarious. On a positive note, one could raise the argument that the main objective of international environmental law is forward looking, i.e. to induce compliance with ever more ambitious protective standards. Therefore, a backward-looking approach such as that of international responsibility with its inevitable stress on past wrongs would not be useful and would be counterproductive at the same time.1 It is true that the different compliance mechanisms established by many universal and regional environmental treaties do not exclude the possibility to apply the general rules of international responsibility.2 Still, it remains the case that the systematic

* 1

2

Andrea Gattini is Professor of International Law, Law School of the University of Padua (Italy). See J. Brunnée, ‘International Legal Accountability through the Lens of the Law of State Responsibility’, 36 Netherlands Yearbook of International Law, 2007, p. 21; F. Francioni, ‘Dispute Avoidance in International Environmental Law’, in A. Kiss et al. (Eds.), Economic Globalisation and Compliance with International Environmental Agreements, The Hague, Kluwer 2003, p. 231. For a general overview of the whole issue, see R. Wolfrum, ‘Means of Compliance with and Enforcement of International Environmental Law’, Recueil des cours de l’ Académie de droit international, Vol. 272, 1998, p. 9. On this issue, see L. Pineschi, ‘Non-Compliance Procedures and the Law of State Responsibility’, in T. Treves et al. (Eds.), Non-Compliance Procedures and Mechanisms and the Effectiveness of International Environmental Agreements, The Hague, T.M.C. Asser Press, 2009, p. 483, at 490.

115

ANDREA GATTINI avoidance of the classical tools of international responsibility,3 even in situations in which they would appear to be justified,4 is but another facet of the simple truth that states are both extremely reluctant to assume clear-cut obligations when dealing with environmental issues and all too indulgent when another fellow state does not live up to its obligations. The main reason for this ‘conspiracy of inaction’5 is of course the fear of the tu quoque argument and the fear of establishing a precedent that could be turned against that same state in the future.6 One of the greatest experts in international environmental law acknowledges in a recent study that even after four decades of the evolution and expansion of this field, one of its basic characteristics is the persistence of an initial tension, i.e. “the confined mindset through which governments still approach environmental problems”.7 Despite all the remarkable and, concerning certain aspects, copious development of international environmental law in the last few decades, the customary law quality of the main tenets remains quite vague.8 This is true for the cardinal ‘no harm’ principle, or

3

4

5 6

7

8

A notable exception is the 1989 Basel Convention on the Transboundary Movements of Hazardous Wastes and Their Disposal, whose Preamble at para. 15 reads as follows: “States are responsible for the fulfilment of their international obligations concerning the protection of human health and protection and preservation of the environment, and are liable in accordance with international law”. Text of the Convention in International Legal Materials Vol. 28, 1989, p. 649. However, also this Convention has been backed up by the creation of an Implementation and Compliance Committee, whose role, however, is difficult to test in the absence of practice; see A. Fodella, ‘Mechanism for Promoting Implementation and Compliance with the 1989 Basel Convention on the Transboundary Movements of Hazardous Wastes and Their Disposal’, in T. Treves et al. (Eds.), 2009, supra note 2, p. 33. It is striking that in the framework of the 1985 Vienna Convention on Substances that Deplete the Ozone Layer, as implemented by the 1987 Montreal Protocol (text in International Legal Materials Vol. 26, 1987, 1150), in all cases of non-compliance, no state party has ever been sanctioned by having its rights and privileges suspended, although the Convention provides for a relatively robust dispute settlement mechanism; see F. Romanin Jacur, ‘The Non-Compliance Procedure of the 1987 Montreal Protocol to the 1985 Vienna Convention on Substances that Deplete the Ozone Layer’, in T. Treves et al., (Eds.), Non-Compliance Procedures and Mechanisms and the Effectiveness of International Environmental Agreements, The Hague, T.M.C. Asser Press, 2009, p. 11, at 31. The poignant expression by R. Bratspies, ‘State Responsibility for Human-Induced Environmental Disasters’, 55 German Yearbook Int’l Law, 2012, p. 175, at 212. This state of affairs does not seem to have been substantially modified in the last 25 years. See B. Conforti, ‘Do States Really Accept Responsibility for Environmental Damages?’, in F. Francioni & T. Scovazzi (Eds.), International Responsibility for Environmental Harm, London, Dordrecht, Nijhoff, 1991, p. 179. See P. M. Dupuy, ‘International Environmental Law: Looking at the Past to Shape the Future’, in P. M. Dupuy & J. Viñuales (Eds.), Harnessing Foreign Investment to Promote Environmental Protection, Cambridge, Cambridge University Press, 2013, p. 9, at 18. See P. M. Dupuy, ‘Formation of Customary International Law and General Principles’, in D. Bodansky et al. (Eds.), The Oxford Handbook of International Environmental Law, Oxford, Oxford University Press, 2007, p. 449, who, however, attenuates the structural weakness of international customary environmental law by denying a difference in the law-making process in this field in comparison to other areas of international law (at 454). See, however, U. Beyerlin, ‘Different Types of Norms in International Environmental Law’, in Bodansky et al. (Eds.), 2007, p. 425, for whom “very few of the norms alleged to be legal principles in fact deserve this label” (at 439).

116

5

INTERNATIONAL RESPONSIBILITY

FOR

ENVIRONMENTAL DAMAGE

in its classic Latin formula sic utere tuo ut alienum non laedas. Enshrined in Principle 21 of the United Nations (UN) Stockholm Declaration on Human Environment of 1972, the principle is just the logical consequence of two fundamental pillars of the entire international legal system: the principle of the sovereign equality of states and the principle of non-intervention in the internal affairs of a state.9 Yet, the crux of the principle is that it is framed as an obligation of result, although it is certainly not.10 Nobody can reasonably conceive that a state forbids individuals under its jurisdiction from carrying out perfectly lawful activities, for the only reason that they might cause damage. Only exceptionally may states agree to forbid some ultrahazardous activities, such as the dumping of nuclear waste in the marine environment, and even there a treaty obligation was necessary.11 Nonetheless, the ‘no harm’ principle is clearly an obligation to prevent and as such an obligation of means. But, here again, theoretical difficulties arise. Article 14(3) of the 2001 ILC Articles on the International Responsibility of States for Wrongful Acts is unmistakable in saying that the breach of an obligation to prevent occurs when the event occurs. Undoubtedly, this rule is unpalatable under certain circumstances. If the purpose of the obligation is exactly that one should do all that is possible and reasonable to hinder the occurrence of a certain event, a state cannot remain idle and adopt a fatalistic mood concerning the course of events. The obligation to prevent is an obligation of due diligence. But again, besides the difficulties of specifying the obligations of due diligence, to which we will soon return, this perspective has a major drawback. To blame the state for the (not necessarily malicious but) surely reckless or at least imprudent conduct which led to the realization of the damage may have a useful dissuasive function for the future. Yet, it remains entangled in a post facto perspective, thus missing the main target, which is that of efficient environmental protection, hence the tendency in international legal literature to revert the perspective and to detail more and more specific procedural as well as substantial obligations to be performed ex ante. However, it may be wondered to which extent one may arbitrarily separate certain obligations, by labelling them obligations of due diligence, for the purpose of holding the state responsible, even when the apprehended result did not occur.12 The International Court of Justice (ICJ) has warned of a too extensive retrogression of the tempus delicti commissi, by holding in the Gabcikovo-Nagymaros Project case of 1997 that “the conduct prior to that act [i.e. the wrongful act] which is of a preparatory character

9 10 11 12

See among many others Bratspies 2012, supra note 5, p. 183. For a different opinion, see Beyerlin 2007, supra note 8, p. 439. See IMO Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matters, 13.11.1972, Ann. I. For such an attempt, see among others P. M. Dupuy, ‘Reviewing the difficulties of codification: on Ago’s classification of obligations of means and obligations of result in relation to state responsibility’, 10 European Journal of International Law, 1999, p. 366, at 384.

117

ANDREA GATTINI […] does not qualify as a wrongful act”.13 Admittedly, the case concerned a wilful wrongful act such as the unilateral diversion of the waters of an international river, but the same reasoning holds true in all those cases in which the damage is the result of a lack of prevention with regard to a potentially dangerous but in itself lawful conduct attributable to state and non-state actors. In addition to this general caveat, one should be aware of the difficulties in carving out specific due diligence obligations from the general obligation to prevent. The ICJ had to deal with this issue in its very first case, that of the Corfu Channel in 1949. Albania was found responsible for having permitted the use of its territory which had caused damage to another state. In particular the Albanian government had omitted to inform foreign ships of the presence of mines (which had possibly been laid by Yugoslavia) in its territorial waters. The ICJ found that “nothing was attempted”14 by the Albanian authorities in order to prevent the damage. The ICJ’s decision is frequently referred to as the leading case with regard to environmental issues, since it is the first international case in which the principle of neminem laedere was clearly affirmed.15 However, it is not by chance that the ICJ reached the conclusion on Albanian responsibility for the whole damage suffered by the United Kingdom (UK), only through the device of switching from a general obligation to prevent to the more specific and positive obligation to inform. Moreover, it is not by chance that the ICJ could eventually affirm the existence de lege lata of such an obligation only by referring to ‘elementary considerations of humanity’. If this concept found its place in positive international humanitarian law from at least 1907, one can surmise that its acceptance in international environmental law would still encounter some resistance today. From 1949 onwards the ICJ on various occasions used the concept of due diligence in relation to obligations to prevent,16 but indeed, until now, the ICJ has never specified what a duty of prevention actually implies.17 It has been maintained that the concept of 13 14 15

16

17

Gabčíkovo-Nagymaros Project (Hungary/Slovakia), Judgment of 25 September 1997, 1997 ICJ Rep., p. 9, at 54, para. 79. Corfu Channel (United Kingdom v. Albania), Judgment of 9 April 1949, 1949 ICJ Rep., p. 4, at 23 (Merits). See A. Nollkaemper, ‘Issues of Shared Responsibility before the International Court of Justice’, in E. Rieter & H. de Waele (Eds.), Evolving Principles of International Law: Studies in Honour of Karel C. Wellens, Leiden, Nijhoff, 2011, p. 199; M. Fitzmaurice, The International Court of Justice and International Environmental Law’, in C. Tams & J. Sloan (Eds.), The Development of International Law by the International Court of Justice, Oxford, Oxford University Press, 2013, p. 353, at 355. See Armed Activities on the Territory of the Congo (Democratic Republic of Congo v. Uganda), Judgment of 19 December 2005, 2005 ICJ Rep.; Application of the Convention for the Prevention and Repression of Genocide (Bosnia-Herzegovina v. Federal Republic of Yugoslavia), Judgment of 11 July 1996, 1996 ICJ Rep. (Serbia and Montenegro). For a better and more in-depth analysis of the scope of an obligation of due diligence, see the Advisory Opinion of 1 February 2011, rendered by the Seabed Dispute Chamber of the International Tribunal for the Law of the Sea (ITLOS) on Responsibilities and Obligations of States Sponsoring Persons and Entities with Respect to Activities in the Area, reproduced in International Legal Materials, Vol. 50, 2011, p. 458. The task

118

5

INTERNATIONAL RESPONSIBILITY

FOR

ENVIRONMENTAL DAMAGE

due diligence was used by the ICJ in the Advisory Opinion on the Legality of the Threat or Use of Nuclear Weapons in 1996, where it spoke of the “general obligation of States to ensure that activities within their jurisdiction and control respect the environment of other states or of areas beyond national control”.18 If this is true, the ICJ showed its reluctance to give more flesh to the obligation by limiting itself one year later to a mere repetition of the same formula in the Gabčíkovo-Nagymaros Project case, a bilateral dispute in which the issues at stake were much more concrete. In that case the ICJ limited itself to entrusting the parties with the care to envisage a joint operational regime in order to ensure the achievement of the objectives of the bilateral 1977 treaty, through a common utilization of shared water resources in a rational and equitable manner.19 Some authors go even further in their criticism and argue that, by choosing to frame the general obligation of territorial states as a duty ‘to respect’, instead of one of ‘not causing damage,’ the ICJ signalled its unwillingness to view the principle of due diligence as a rule of international law, but rather as a principle of equity.20 Possibly aware of this risk, the ICJ endeavoured to better substantiate the due diligence principle in the more recent Pulp Mills case of 2010. It specified that an obligation to act with due diligence: [e]ntails not only the adoption of appropriate rules and measures, but also a certain level of vigilance in their enforcement and the exercise of administrative control applicable to public and private operators, such as the monitoring of activities undertaken by such operators.21 Once again the ICJ managed to avoid the murky task of probing the effectiveness of the definition by the evaluation of concrete facts and circumstances, because it found that the two parties had undertaken such a duty of vigilance by only acting through the Uruguay River Commission, which had been established by the two parties in 1975. In order to somewhat counterbalance this sobering scenario, it must however be said that environmental issues are a prime example, and on the whole a reasonably successful one, of the tendency to reinforce the protection of the primary rule by detailing the general

18 19 20

21

of the Seabed Dispute Chamber was made easier by the fact that Ann. III, Art. 4, para. 4 of the 1982 UN Convention on the Law of the Sea takes care to specify to some extent the content of the obligation of due diligence on the part of the sponsoring state. For an appraisal of the advisory opinion, see R. Rayfuse, ‘Differentiating the Common? The Responsibilities and Obligations of States Sponsoring Deep Seabed Mining Activities in the Area’, 54 German Yearbook Int’l Law, 2011, p. 459. Legality of the Threat or Use of Nuclear Weapons, Advisory Opinion of 8 July 1996, 1996 ICJ Rep., para. 29. Gabčíkovo-Nagymaros Project, supra note 13, p. 78, para. 140. T. Koivurova, ‘What is the Principle of Due Diligence?’, in J. Petman & J. Klabbers (Eds.), Nordic Cosmopolitanism: Essays in International Law for Martti Koskenniemi, Leiden, Martinus Nijhoff, 2003, p. 341, at 346. Pulp Mills on the River Uruguay (Argentina v. Uruguay), Judgment of 20 April 2010, 2010 ICJ Rep., p. 14, at 79, para. 197.

119

ANDREA GATTINI obligation to prevent with obligations of ‘specific conduct’. The best known examples are the obligation to proceed to an environmental impact assessment and the obligation to provide information on the risks attached to a certain dangerous activity. With regard to the former, the ICJ in the Pulp Mills case of 2010 has clearly stated the customary international law nature of an Environmental Impact Assessment (EIA) “where there is a risk that the proposed industrial activity may have a significant adverse impact in a transboundary context, in particular, on a shared resource”.22 With regard to the latter, it is striking that at the very same time in which the UN General Assembly (UNGA) endorsed the 1972 Stockholm Declaration of the UN Conference on the Human Environment (UNCHE), it also adopted a resolution stressing the duty of states to inform each other in order to give full expression to Principles 21 and 22 of the Declaration.23 Although the normativity of the obligations, expressed in these principles, is sometimes linked to the precautionary principle,24 it is still a matter of debate to what extent the precautionary principle may be relied upon as such, in order either to create due diligence obligations25 or even to dictate a specific course of conduct.26 As there is much debate, we can conclude that there is no consensus on the legal status of this principle, if not on its content. The bottom line is expressed in Principle 15 of the 1992 Rio Declaration on Environment and Development: “Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost effective measures to prevent environmental degradation”. It is obvious that such formulation leaves states with the amplest leeway, and its only purpose seems to be that of excluding the possibility for states to claim a circumstance precluding wrongfulness along the lines of a fortuitous event in an attempt to escape their responsibility. A similar doubt as to the existence de lege lata under customary international law may be expressed with regard to other principles, which are usually drawn from the more general

22 23

24

25 26

Id., Pulp Mills on the River Uruguay, para. 101. See UNGA Res. 2995 (XXVII) of 15 December 1972 on Cooperation between States in the Field of the Environment. Principle 21 provides that “States have, in accordance with the Charter of the United Nations and the principles of international law, the sovereign right to exploit their own resources pursuant to their own environmental policies, and the responsibility to ensure that activities within their jurisdiction or control do not cause damage to the environment of other States or of areas beyond the limits of national jurisdiction”. Principle 22 provides that “States shall cooperate to develop further the international law regarding liability and compensation for the victims of pollution and other environmental damage caused by activities within the jurisdiction or control of such States to areas beyond their jurisdiction”. For a recent attempt in this direction, see Y. Tanaka, ‘Reflections on Time Elements in the International Law of the Environment’, 73 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht, 2013, p. 139, at 165. For such a link, see ITLOS’s Order of 27 August 1999 in the Southern Bluefin Tuna cases (New Zealand v. Japan, Australia v. Japan), ITLOS Reports 1999, p. 274, at para. 77. For this negative conclusion, see Beyerlin 2007, supra note 8, p. 441; Dupuy 2007, supra note 8, p. 452; J. Wiener, ‘Precaution’, in Bodansky et al. (Eds.), 2007 supra note 8, pp. 597, 607.

120

5

INTERNATIONAL RESPONSIBILITY

FOR

ENVIRONMENTAL DAMAGE

‘no harm’ principle. This is true in particular for the concept of the ‘polluter pays’. This has been defined in Principle 16 of the 1992 Rio Declaration: National authorities should endeavour to promote the internalization of environmental costs and the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution with due regard to the public interest and without distorting international trade and investment. We will later see the limitations of this principle in the context of corporate responsibility. But it is already at the state responsibility level that the normative character of the principle is dubious. No diplomatic or judicial practice exists in this regard, and in legal literature, it has been observed that the hortatory language of Principle 16 is sufficient evidence that a considerable number of states may still have objections to apply the norm at an interstate level.27 The awareness of the inappropriateness of detailing too many obligations, whose basis in customary international law is dubious, is possibly one of the reasons why states refrain from utilizing the tools of state international responsibility in environmental issues, opting for a soft law approach, where cooperation and incentives to comply are the preferred methods. This choice is recommended. However, it is less justified whenever states accept that they are bound by certain treaties. With some notable exceptions, it seems that environmental treaties are expressly designed to leave states with a wide margin for manoeuvre. It is a fact that, with three notable exceptions, virtually all universal or regional environmental treaties do not provide for a compulsory judicial mechanism of settlement dispute and prefer more flexible compliance procedures.28 This is the reason why the most radical experts suggest a new strategy, on a parallel track with the sometimes too timid development of international environmental law as promoted by international organizations. The permissibility of domestic unilateral legislative or executive tools is very much discussed in international legal literature, and such a trend is obviously prone to give rise to disputes,29 but it is true that, in the long run, it could 27

28

29

See P. Sands, Principles of International Environmental Law, 2nd edn, Cambridge University Press, Cambridge, 2003, p. 231; Beyerlin 2007, supra note 8, p. 441; P. Birnie et al., , International Law and the Environment, 3rd edn, Oxford University Press, Oxford, 2009, p. 322. See T. Treves, ‘The Settlement of Disputes and Non-Compliance Procedures’, in T. Treves et al. (Eds.), NonCompliance Procedures and Mechanisms and the Effectiveness of International Environmental Agreements, The Hague, T.M.C. Asser Press, 2009 , p. 499, at 500. For an unabashed pleading of unilateralism in environmental issues, see D. Bodansky, ‘What’s so Bad about Unilateral Action to Protect the Environment?’, 11 European Journal Int’l Law, 2000, p. 339. For a far more balanced approach, see L. Boisson de Chazournes, ‘Unilateralism and Environmental Protection: Issues of Perception and Reality of Issues’, Non-Compliance Procedures and Mechanisms and the Effectiveness of International Environmental Agreements, The Hague, T.M.C. Asser Press, p. 315. For a recent example

121

ANDREA GATTINI

prove to be one of the most effective strategies to globally enhance the level of environmental protection and not just as the implementation of standards agreed upon in international forums. Principle 11 of the 1992 Rio Declaration possibly hints in this direction by stressing the importance that “states shall enact effective environmental legislation”. The thrust of this endeavour is unfortunately, but predictably, watered down by the reference in the same Principle 11 to the fact that “environmental standards, management objectives and priorities should reflect the environment and developmental context to which they apply”. Still, this perspective could also be helpful in clarifying the international responsibility of states in relation to the responsibility of private actors for environmental damage. States’ failure to properly regulate private activities in the field is one of the main causes that lead private actors to adopt choices which are conducive to environmental damage.30 At last, a few words on an alternative, which includes the shift of the focus from the international responsibility of states to the issue of liability for injurious consequences of acts not prohibited by international law. This alternative for some time in the 1970s and 1980s had been cherished by the UNGA. The International Law Commission (ILC) entered the codification exercise in 1978 under the leadership of Special Rapporteur Quentin-Baxter, and later Barboza, but after almost 20 years of inconclusive studies and scathing criticism in legal literature,31 the ILC finally decided to reconsider the whole topic and to reframe it in terms of the primary rules of (the duty of) prevention, so ruefully coming back to the more solid, if arid, shores of international responsibility. The Draft Articles of 2001 on the prevention of transboundary harm arising from hazardous activities32 were accompanied five years later by a second set of principles on liability,33 in which the misconception of codification again resurfaced. Not surprisingly, besides quite general and mostly hortatory statements, the ILC was not able to find any rule specifically addressing the issue of strict liability. The reason for this, as we will soon see, is that such a regime simply does not exist under international customary law and that under treaty law, states are extremely attentive not to become entangled in the civil liability regimes they agree upon.

30

31 32 33

of EU unilateralism in climate change policy, see A. Gattini, ‘Between Splendid Isolation and Tentative Imperialism: The EU’s Extension of its Emission Trading Scheme to International Aviation and the ECJ’s Judgment in the ATA case’, 61 Int’l & Comp. Law Quarterly, 2012, p. 977. See Bratspies 2012, supra note 5, p. 206; P. Sands, ‘Environmental Protection in the Twenty-First century: Sustainable Development and International Law’, in R. Revesz et al. (Eds.), Environmental Law, The Economy and Sustainable Development, Cambridge, Cambridge University Press, 2011, p. 369, at 387. See among many A. Boyle, ‘State Responsibility and Liability for Injurious Consequences of Acts Not prohibited by International Law: A Necessary Distinction?’, 39 Int’l & Comp. Law Quarterly, 1990, p. 1. See Report of the ILC on the work of its fifty-third session, ILC Yb 2001, Vol. II Part Two, p. 144. See Report of the ILC on the work of its fifty-eighth session, A/61/10, 2006, Chapter 5, paras. 51-67.

122

5

5.2

INTERNATIONAL RESPONSIBILITY

THE INTERNATIONAL RESPONSIBILITY

OF JURIDICAL

FOR

ENVIRONMENTAL DAMAGE

PERSONS

The fact that in the last few decades international law has developed concepts and rules relating to the international criminal responsibility of individuals with regard to certain crimes, where the quality of the author as a state organ is irrelevant, such as the case of genocide or other crimes against humanity, has not yet induced international law doctrine to conceive a general theoretical framework in which to place the international responsibility of juridical persons for environmental damage. The main reason why it is difficult to envisage a general framework of the international responsibility of the individual, or even of a hypothesis of shared responsibility between states and individuals, is the uncertain state of the law on the issue of the direct accountability of individuals for violations of customary international law, besides the already mentioned and wellcircumscribed instances of individual criminal responsibility. This issue is particularly relevant in the field of environmental law, because most, if not all, of the activities which may lead to environmental damage may be performed indifferently by private or public entities. The structure of international law, and in particular the structure of the secondary norms of international law dealing with international responsibility, is based on an interstate relationship and is therefore not well suited to capture the various aspects of the issue.34 As is well known, an intense debate is taking place on the issue of the responsibility of corporations under customary international law for violations of human rights, either directly or for aiding and abetting such violations by host states. To clear the field of any possible misunderstanding, it must be noted that by the international responsibility of corporations, we are only referring to the possibility that they may be considered the direct addressees of obligations arising from general international law. With no objections, on the contrary, there is the possibility that through treaties states may assume an obligation to adopt in their domestic legal systems sanctioning measures against corporations for a certain form of conduct.35 On the point of the attribution of responsibility to corporations for environmental damage under general international law, it is fair to say that official statements are quite generic and ambiguous at best, doctrinal views widely diverge, and national case law is extremely scant.36

34

35

36

On this see R. Maljean-Dubois, ‘The Applicability of International Environmental Law to Private Enterprises’, in Dupuy & Viñuales (Eds.), Harnessing Foreign Investment to Promote Environmental Protection, Cambridge, Cambridge University Press, 2013, p. 69. For a clarification of the issue, see Y. Kerbrat, ‘La Responsabilité des Enterprises peut-elle etre Engagée pour des Violations du Droit International?’, in H. Gherari & Y. Kebrat (Eds.), L’ Entreprise dans la Société Internationale, Paris, Pedone, 2010, p. 93, at 100. See Maljean-Dubois 2013, supra note 34, p. 78 with further references.

123

ANDREA GATTINI The circuitous and ‘gluey’ developments of the concept of the “corporate responsibility to respect” can be nicely traced in UN debates. In the 1999 UN Global Compact, the principles of corporate responsibility were assumed on a purely voluntary basis; in 2003 the UN Sub-Commission on the Promotion and Protection of Human Rights came up with a breakthrough by adopting, without having been requested, a set of Draft Norms on the ‘Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights’. Principle 1 of the Draft Norms reads: States have the primary responsibility to promote, secure the fulfillment of, respect, ensure respect of and protect human rights recognized in international as well as national law, including ensuring that transnational corporations and other business enterprises respect human rights. Within their respective spheres of activity and influence, transnational corporations and other business enterprises have the obligation to promote, secure the fulfillment of, respect, ensure respect of and protect human rights recognized in international as well as national law, including the rights and interests of indigenous peoples and other vulnerable groups.37 The attempt was halted and rebuffed a year later by the UN Economic and Social Council (ECOSOC), which confirmed Resolution 116/2004 of the UN Commission on Human Rights to the effect that the document issued by the UN Sub-Commission had not been requested by the Commission on Human Rights and “as a draft proposal, had no legal standing, and that the Sub-Commission should not perform any monitoring function in that regard”.38 The task of establishing a framework on the issue of ‘Business and Human Rights’ was put on a new track and entrusted to a Special Representative, a US specialist on commercial law, Professor John Ruggie. Finally in 2011, the UN Human Rights Council (UNHRC) endorsed the Guiding Principles issued by Ruggie.39 In Point 3 of the Resolution, the UNHRC: Commends the Special Representative for developing and raising awareness about the Framework based on three overarching principles of the duty of the State to protect against human rights abuses by, or involving, transnational corporations and other business enterprises, the corporate 37

38 39

Res. 16/003, E/CN.4/Sub.2/2003/12/Rev.2, Norms on the responsibilities of transnational corporations and other business enterprises with regard to human rights. Available at: accessed 11 June 2014. ECOSOC, Res. 279/2004. Human Rights Council, Human rights and transnational corporations and other business enterprises, A/HRC/RES17/4, 6 June 2011.

124

5

INTERNATIONAL RESPONSIBILITY

FOR

ENVIRONMENTAL DAMAGE

responsibility to respect all human rights, and the need for access to effective remedies, including through appropriate judicial or non-judicial mechanisms. In the commentary to Principle 11 of the Guiding Principles, Special Representative Ruggie shrewdly avoided the basic question of the applicability of international law with regard to corporate behaviour by the following terms: The responsibility to respect human rights is a global standard of expected conduct for all business enterprises wherever they operate. It exists independently of States’ abilities and/or willingness to fulfill their own human rights obligations, and does not diminish those obligations. And it exists over and above compliance with national laws and regulations protecting human rights. One cannot fail to admire the Special Representative workmanship in leaving legal concepts, which one would naively think would constitute the core of the entire exercise, in a state of total opacity. This remark, of course, is not intended to minimize the UN’s achievement.40 As has been poignantly observed, ‘soft regulation’ does not necessarily imply ‘soft implementation’, and there are already some judicial indications, mainly from the United States, that enterprises could be held accountable for their voluntary commitments in the field of Corporate Social Responsibility.41 An interesting experiment is that of the OECD Guidelines for Multinational Enterprises, reviewed in 2011. The conflict resolution procedure concerning compliance by corporations of these Guidelines is based on the creation of National Contact Points in the adhering countries. Any ‘interested party’ may address itself to a National Contact Point in case of a corporation’s non-observance of the Guidelines.42 Another interesting trend is set by the World Bank through its Inspection Panel. In the last 20 years, the International Bank for Reconstruction and Development (IBRD) has been developing a policy by which its lending to states, directly or through the International Finance Corporation (IFC), must satisfy certain requirements, compatible 40

41

42

For thorough criticism of the underlying philosophy and the intended blurring of the ‘is’ and the ‘ought’ of the Guiding Principles, see however S. Deva & D. Bilchitz (Eds.), Human Rights Obligations of Business Beyond the Corporate Responsibility to Respect?, Cambridge, Cambridge University Press, 2013; and with specific reference to environmental standards, see E. Morgera, ‘From corporate social responsibility to accountability mechanisms’, in Dupuy & Viñuales (Eds.), Harnessing Foreign Investment to Promote Environmental Protection, Cambridge, Cambridge University Press, 2013, p. 321, at 331. See Maljean-Dubois, in Dupuy & Viñuales (Eds.), Harnessing Foreign Investment to Promote Environmental Protection, Cambridge, Cambridge University Press, 2013, p. 91. See also A. Bonfanti, Imprese Multinazionali, Diritti Umani ed Ambiente, Giuffrè, Milan, 2012, p. 228. See among others Bonfanti 2012, supra note 41, p. 195.

125

ANDREA GATTINI

with the overarching goal of sustainable development and specifically with environmental protection and indigenous rights. To that end the IBRD and the IFC, respectively, issued Operational Policies and Performance Standards.43 One of the major handicaps of the system, however, is that the Inspection Panel and the Compliance Advisor/Ombudsman may only ascertain the failure of the IBRD’s organs to comply with their own lending standards and are not allowed to directly address the failures by the recipients of the lending, be they states or private corporations. This, together with the formally nonbinding nature of the findings, makes the whole exercise, with some notable exceptions, quite ineffective. However, the crux of the whole matter lies in the dire discrepancy between doctrine and practice on the existence of non-customary international obligations for juridical persons with regard to human rights generally and more specifically with environmental protection. As was predictable, not even the recent case before the United States’ Supreme Court (hereinafter ‘the Court’), Kiobel v. Royal Dutch Shell, helped to clarify matters, since the Court opted to decide the case on the different and indeed logically preceding issue of the jurisdictional scope of the Alien Tort Statute.44 The amicus curiae briefs in the Kiobel case show how radically divergent the opinions on the matter are. On the one side, the amici of the respondents were adamant in maintaining that customary international law does not attribute direct liability to corporations, with the hardly rebuttable argument that this is so even in the two fields – international criminal law and international human rights law – in which international law has moved towards international individual responsibility.45 On the other side, the amici of the petitioners maintained that, if the defendant was right, even the celebrated Filartiga v. Pena-Irala case, in which a former Uruguayan police officer was held civilly liable for acts of torture, should have been rejected by the Court of Appeals for the Second Circuit in 1980.46 This observation unwittingly strikes at the core of matters. Indeed, from the strict viewpoint of positive international law prevailing at that time, that case could have been dismissed altogether. This overly formalistic view, however, would fail to grasp the dynamic dimension of the creation of international law. Just four years after Filartiga the United Nations Convention against Torture (CAT) was adopted by the UNGA, and under its Article 14, each state pledges itself to ensure civil redress for the victim against the individual torturer. The fact that it

43

44 45 46

See L. Boisson de Chazournes, ‘The World Bank Inspection Panel: About Public Participation and Dispute Settlement’, in T. Treves (Ed.), Civil Society, International Courts and Compliance Bodies, The Hague, Asser Press 2005, p. 187. See Kiobel v. Royal Dutch Petroleum et al., United States Supreme Court No. 10-1491, decided on 17 April 2013. See, for example, the Brief of the Governments of the United Kingdom of Great Britain and Northern Ireland and the Kingdom of the Netherlands, as amici curiae in support of the respondents, p. 13. See Brief of amici curiae International Law scholars in support of petitioners, p. 15.

126

5

INTERNATIONAL RESPONSIBILITY

FOR

ENVIRONMENTAL DAMAGE

took only two and half years for the CAT to come into force and that it has by now been ratified by 153 states all over the world is evidence that the idea underlying the CAT was already shared by a vast number of states at the time of Filartiga. The same cannot be said with regard to the responsibility of corporations for whichever violation of human and environmental rights. As the UK and the Dutch Governments made very clear in their amicus curiae brief in the Kiobel case, one should not mistake the existence of the principle of corporate civil responsibility under domestic law as evidence of an analogous principle under international law.47 In this regard, the position of states is unmistakably negative, and the creative role of some domestic courts cannot simply substitute the almost total lack of state practice and opinio juris. To date, there has been virtually no case, with the exception of a single case to which we will soon return to, in which a national court has held a corporation liable for environmental damage by applying customary international law. In most cases the plaintiffs themselves have preferred to frame their claim mainly, if not exclusively, in terms of a violation of human rights, such as torture and murder, so unwittingly admitting that a cause of action based on responsibility for environmental damage would have no prospect of success.48 A number of cases in which the issue was raised were settled extrajudicially.49 In some cases the courts have explicitly denied either the existence of specific international customary rules50 or their applicability with regard to corporations.51

47 48

49

50

51

See UK and NL Brief, supra note 45. Paradigmatic in this sense are Doe v. Unocal,, decided by the US Court of Appeals for the 9th Circuit on 18 Sept. 2002, in which the cause of action were crimes against humanity committed by the organs of a mining company in Myanmar, and Sarei v. Rio Tinto (eventually dismissed by the US Court of Appeals for the 9th Circuit in July 2013, following the Supreme Court’s Kiobel decision), in which the cause of action upheld by the Court of Appeals for the 9th Circuit in 2006 was complicity by a mining company in genocide and in war crimes committed by the Government of Papua New Guinea. On the issue, see N. L. Bridgeman, ‘Human Rights Litigation under the ACTA as a Proxy for Environmental Claims’, 6 Yale Human Rights and Development Law Journal, 2003, p. 1. See also K. Jaeger, ‘Environmental Claims under the Alien Tort Statute’, 28 Berkeley Journal of International Law, 2010, p. 519. For instance, the Unocal case, in which in 2002 the US Court of Appeals for the 9th Circuit had reversed the decision by the District Court to dismiss the claim in part (395 Fd 3rd 932). In December 2004 the parties reached an amicable settlement. In Beanal v. Freeport Mc Moran, the US Court of Appeals for the 5th Circuit, on 29 Nov. 1999, by affirming the dismissal of the claim by the Eastern District Court of Louisiana, held that the plaintiffs had failed to identify practices that amounted to international environmental torts, besides appealing to abstract rights such as the ‘polluter pays’, precaution, the proximity of the danger, etc., “which do not constitute international torts for which there is universal consensus in the community as to their binding status and their content”. The origin of the damage was an open pit copper and coal mine in Indonesia which had caused significant harm to the residents. In the same case of Beanal v. Freeport Mc Moran, the Eastern District Court of Louisiana had held that the Alien Tort Statute may also refer to environmental torts, but that private corporations could be bound by such norms only by virtue of a treaty. In Sarei v. Rio Tinto, the Central District Court of California in July 2002 had held that with regard to the part of the claim dealing with environmental damages, only violations of the UN Convention on the Law of the Sea were cognizable as a cause of action against corporations.

127

ANDREA GATTINI

The most celebrated but actually the only case in which a foreign corporation was ordered to pay a substantial sum for violations of international norms protecting the environment is the Lago Agrio litigation saga. The case deserves some consideration. In 1993 a group of Ecuador Secoya indigenous peoples brought a claim against Texaco before a US District Court under the Alien Tort Statute for the environmental disaster that the US corporation had caused to their native habitat in the Amazonian Forest through its oil drilling activities which had lasted from 1964 to 1992. In 1996 the Southern District Court of New York (SDNY), following an objection by the defendant, dismissed the claim on the basis of forum non conveniens,52 and two years later, the Court of Appeals for the Second Circuit affirmed the decision, but subject to the condition that Texaco agreed to submit to the jurisdiction of Ecuador’s courts and waive defences based on statutes of limitation.53 This was done, but Chevron, which by that time had succeeded Texaco, argued that the process in Ecuador was not fair. Chevron asserted that in 1995 there had been a settlement between Texaco and Ecuador in which Texaco committed itself to invest $ 40 million in remediation projects in the area, and the Ecuadorean government released Texaco from any further liability. Chevron’s main argument was that the environmental damage actually suffered by the indigenous population had subsequently been caused by Petroecuador, the state-owned company which had succeeded Texaco in the exploitation of the oil fields. Nevertheless, on 11 February 2011, the Superior Court of Nueva Loja, in the person of Judge Nicolas Zambrano, ordered Chevron to pay $ 18.2 billion, half of which was punitive damages, and the decision was confirmed on appeal by the Provincial Court of Justice of Sucumbios on 3 January 2012. On 12 November 2013, the Ecuadorean Supreme Court confirmed the judgement, but cancelled the punitive damages which are not recognized in Ecuadorean civil proceedings. Apart from a civil suit against the lawyer of the claimants, whom Chevron accuses of having partially bribed and partially intimidated the Ecuadorean judge,54 Chevron’s defensive strategy has followed a double track. On the one side, Chevron asked a District Court in New York to forbid the execution of the Ecuadorean decision, not only on US territory but worldwide, which the District Court did, without taking notice of the fact that such an order is doomed to be ineffective abroad. More interesting, though, was Chevron’s second move to strive for international arbitration under the US-Ecuador bilateral investment treaty (BIT) on Investment Protection of 1997. Chevron laments the excessive length of the process and the lack of due process, as violations of Article II (7) of

52 53 54

Aguinda v. Texaco, 945 F. Suppl. 625 (SDNY 1996). Yota v. Texaco, 157 F. 3rd 153 (2nd Circuit 1998). The civil suit was introduced under the Racketeer Influence and Corruption Organizations Act; see Chevron v. Donziger, 11-00691, SDNY. The decision by the District Court on 4 March 2014 was in favour of Chevron.

128

5

INTERNATIONAL RESPONSIBILITY

FOR

ENVIRONMENTAL DAMAGE

the BIT, which provides for “effective means of asserting claims and enforcing rights” to the citizens of both parties. The Arbitral Tribunal established in The Hague at the Permanent Court of Arbitration (PCA) issued a partial award on the merits on 30 March 2010, and on 25 January 2012, in the first interim award on interim measures, the Tribunal ordered the Republic of Ecuador to take all measures at its disposal to suspend or cause to be suspended the enforcement or recognition within and outside of Ecuador of any judgement against Chevron. However, the Ecuadorean Sucumbios Provincial Court in two decisions of February and March 2012 refused to comply with the PCA Interim Awards, with the argument, inter alia, that Texaco/Chevron had breached customary international law principles arising from ius cogens and that no determination by a BIT tribunal can overcome the national courts’ obligation to enforce international human rights principles such as those at stake in this case. Recent attempts by the plaintiffs to have Judge Zambrano’s decision enforced abroad, for instance, in Canada and in Argentina, have been rejected. At the same time in a much publicized move, the legal representative of the plaintiffs made a request for precautionary measures to the Inter-American Commission on Human Rights (IACHR) against Ecuador in order to compel it to use all available means to secure the execution of the judgement. On 17 September 2013, the PCA issued a partial award on Track I of the complex litigation, dealing with the interpretation and the legal effect of the 1995 Texaco/Ecuador agreement, and unanimously reached the conclusion that the Release Agreement does not extend its effect to any environmental claim made by an individual for personal harm, but that it does preclude any ‘diffuse’ claim for environmental damage. The Lago Agrio litigation saga, which is far from having reached a conclusion, is a paramount example of the danger that legitimate environmental concerns may more or less inadvertently drift into a hopeless political battlefield. Even conceding that the case is an extreme one, not lastly because of the virulent anti-US attitude of the Ecuadorean government in power, it remains true that this precedent does not forebode well for the creation of a common understanding of the role of domestic courts when developing customary international law in environmental issues. An apparently more promising path would be to encourage the courts of the home state of the corporation to assume jurisdiction in cases of transnational environmental damage, starting from the presumption of the higher environmental standards which are applicable. We will limit our investigation to civil claims, even if the venue of criminal jurisdiction, albeit less discussed, should not be overlooked altogether.55 Two observations are appropriate at the outset. The first is that such a solution of civil litigation in the 55

See W. Kaleck & M. Saage-Maass, ‘Corporate Accountability for Human Rights Violations Amounting to International Crimes: The Status Quo and Its Challenges’, International Journal of Criminal Justice, 2010, p. 715.

129

ANDREA GATTINI

corporation’s home state, even if permissible, would surely not be mandated under present international law.56 The second is that this solution is not without its own pitfalls. In the first place, the home state court would need to assume jurisdiction, an issue which is far from being evident given the fact that the operations at issue would often be attributable to an affiliated corporation of the controlling parent corporation, which is heading the group. The affiliated corporation has a distinct legal personality.57 Through the application of its conflict rules, the court could well end up by applying the law of the territorial state.58 The decision of the home state courts to extraterritorially apply also its own environmental standards and norms as a matter of public policy59 could, under certain conditions, engender a dispute with the host state, in all those cases in which the corporation operated with the specific agreement of the host government. Not surprisingly there is virtually no instance in which this bold step has been taken. One such case could have been the OK Tedi case in Australia. In 1995 the Superior Court of the State of Victoria affirmed jurisdiction in a case brought by residents of Papua New Guinea against OK Tedi Mining Ltd., a mining corporation incorporated in Papua New Guinea, and against the controlling corporation BHP Billiton, incorporated in Australia.60 A delicate aspect of the case was that OK Tedi Mining Ltd. had operated with the full agreement and support of the Papuan authorities. Yet the issue was not put to the test, because in the same year (1996), BHP Billiton entered into an extrajudicial settlement with the plaintiffs. Some years later the plaintiffs sued BHP Billiton in Australia again for breaching the terms of the settlement.61 Subsequently BHP Billiton sold the majority of the equity shares in the OK Tedi Ltd., which held the mining site to the Papuan Government, and entered into a new agreement with the local population, by which the corporation was permitted to further exploit the mine and was released from any liability. In 2007 some indigenous groups, which had not participated in the deal, sued BHP Billiton, but this

56

57

58

59 60 61

For a divergent view, see Bonfanti 2012, supra note 41, p. 133, who unconvincingly relies on the duty of state cooperation to bring to an end a grave violation of a peremptory norm of international law according to Article 41, para. 1 of the ILC Articles on State Responsibility. On the difficulty of piercing the corporate veil in our context, see P. I. Blumberg, ‘Accountability of Multinational Corporations: The Barriers Presented by Concepts of the Corporate Juridical Entity’, Hastings Int’l & Comp. Law Review, 2001, p. 297. See, for instance, the discipline of EU Regulation 864/2007, OJ. L 199/40, on the law applicable to noncontractual obligations (Rome II). According to Art. 7 (Environmental damage), the applicable law is that of the state where the damage occurred, which is the general rule under Art. 4, para.1, but the claimant may opt for the law of the state where the event giving rise to the damage occurred. In our case both criteria lead to the law of the territorial state. Id., Art. 16 EU Reg. 864/2007, ‘Overriding mandatory provisions’. Dagi and others v. BHP and OTML, Victorian Supreme Court, 22 September 1995. Available at: accessed 3 February 2014. In 2000 BHP was sued for breaching the terms of the settlement; see relevant information at Business & Human Rights: accessed 3 February 2015.

130

5

INTERNATIONAL RESPONSIBILITY

FOR

ENVIRONMENTAL DAMAGE

time, significantly, before the Papuan courts. At the time of writing, the case is still pending.62

5.3

INTERACTION

BETWEEN THE

OF JURIDICAL

PERSONS

RESPONSIBILITY

OF THE

STATE

AND THE

RESPONSIBILITY

In the previous part, dealing with the responsibility of the state, we did not distinguish between the responsibility of the territorial state, where the damaging activity of the juridical person is taking place, and the responsibility of the home state of such a juridical person. The responsibility of the host state will typically be a responsibility for omission, i.e. for not having adopted all the necessary measures which could have averted the damage caused by the juridical person (e.g. by implementing environmental law norms and enforcing them). Far more difficult, however, is to assert responsibility for active conduct, since, as a rule, the juridical person may not be considered to be an organ of that state and neither can complicity between the two be envisaged. The responsibility of the home state seems, at first sight, to be a more promising path,63 but this also leads to a dead end. Apart from some extreme and highly hypothetical circumstances, as a rule, the home state does not exercise nor is deemed to exercise that degree of control and direction over its national corporations abroad which would allow the concept of a de facto organ to be invoked, in order to attribute the activities of the latter to the state in question.64 At most, the wrongful act of the home state would again be omissive conduct, i.e. a lack of control over the activities of its corporations in general, but it is debatable if any such obligation exists de lege lata. At a deeper level of analysis, a major stumbling block in order to envisage a general framework in order to situate the responsibility of juridical persons, alongside that of states, is the difficulty in sensing the respective content of the obligations and the limits of the two kinds of responsibility. The ILC undoubtedly deluded some expectations for not having so far taken any opportunity to specify the possible interactions of state and individual responsibility. The reference here specifically relates to the already mentioned codification of the prevention of transboundary harm from hazardous activities (Draft Principles of 2001) and the subsequent codification of the allocation of loss in the case of

62 63

64

See the information available at accessed 11 June 2014. This venue was particularly studied by F. Francioni, ‘Alternative Perspectives on International Responsibility for Human Rights Violations by Multinational Corporations’, in K. Benedek et al., (Eds.), Economic Globalization and Human Rights, Cambridge, Cambridge University Press 2007, p. 260. See R. McCorquodale & P. C. Simons, ‘Responsibility beyond Borders: State Responsibility for Extraterritorial Violations by Corporations of International Human Rights Law’, Modern Law Review, 2007, p. 608.

131

ANDREA GATTINI

transboundary harm arising out of hazardous activities (Draft Principles of 2006). With regard to the latter, Article 4 on ‘Prompt and adequate compensation’ specifies in its paragraph 2 that the measures of compensation foreseen by the state of origin “should include the imposition of liability on the operator or, where appropriate, other person or entity”. Such liability should not require proof of fault. In the words of the ILC, the state of origin “means the State in the territory or otherwise under jurisdiction or control of which the hazardous activity is carried out”,65 whereas the definition of an operator “is based on a factual determination as to who has use, control, and direction of the object at the relevant time.”66 In the commentary to the Article, the ILC limits itself to observing that the imposition of the primary liability on the operator, and not on the state of origin, “is widely accepted in international treaty regimes and in national law and practice.”67 This is surely true, but nowhere in the Draft Principles or in the commentaries thereto is there any attempt to specify whether the operator’s liability finds its origin in international or in domestic law, or to link the two kinds of liability/responsibility in whatever form. We only find a passing remark under the introductory general comment to the effect that “the attachment of primary liability on the operator […] does not in any way absolve the State from discharging its own duties of prevention under international law.”68 In defence of the ILC, it must be admitted that, as we have seen, apart from to some extent dubious corollaries of the ‘no harm’ principle, especially the ‘polluter pays’, there is very little if any guidance in international customary law with regard to responsibility for environmental damage. Moreover, and with the partial exception of compensation for nuclear damage, even under treaty law states are very attentive not to become entangled in any liability scheme, from which the step to responsibility could be more easily made. For instance, in all compensation funds for oil pollution damage envisaged by the International Maritime Organization (IMO) from 1971 to 1992 to 2003, the liable parties have been extended from shipowners to oil receivers, but not further to flag states or importing states. Even the compensation scheme for nuclear damage leaves much to be desired.69 As is well known, the limitation of liability in the 1960 OECD Paris Convention was soon superseded by the 1963 Brussels Convention, as further revised in 1982, providing for a three-tier compensation level including the contribution of the states. On the contrary the ‘International Atomic Energy Agency’ (IAEA) system is still stuck in

65 66 67 68 69

ILC Report on the work of its fifty-eighth session (UN GAOR A/61/10), 2006, Commentary on Art. 4, p. 134. Id., p. 139. Id., p. 155. Id., p. 113. See D. Hanschel, ‘Prevention, Preparedness and Assistance Concerning Nuclear Accidents – Effective International Legal Framework or Patchwork?’, 55 German Yearbook Int’l Law, 2012, p. 217.

132

5

INTERNATIONAL RESPONSIBILITY

FOR

ENVIRONMENTAL DAMAGE

the 1963 Vienna Convention on Civil Liability for Nuclear Damage with its liability limit of $ 5 million per accident, since the 1997 Convention on Supplementary Compensation for Nuclear Damage, which would bring the liability regimes on a par with that of the OECD, involving the liability of host states, has not yet entered into force, having been ratified by only four states to date. That does not mean, of course, that a partition of responsibility cannot be found under domestic legislation. To the extent that several domestic statutes demonstrate similar features in the handling of problems and solutions, there would be some space to re-enter the realm of international law through the device of general principles of law. An interesting example could be the one offered by space law. Article VI of the Outer Space Treaty of 1967 provides in its first sentence that: States parties to the Treaty shall bear international responsibility for national activities in outer space, including the moon and other celestial bodies, whether such activities are carried out by governmental agencies or by non-governmental entities, and for assuring that national activities are carried out in conformity with the provisions set forth in the present Treaty. As has been rightly observed in the legal literature, this Article is interesting for two different features.70 The first is that it imposes direct responsibility on the state for everything which is done by non-governmental entities. The second is that the Article specifically prescribes the obligations of the state in relation to the activities of such nongovernmental entities, namely, ‘authorization and continuing supervision’. This being the state of international law on the matter, nothing excludes national legislations from envisaging different solutions. A survey of major domestic legislations on space activities shows that appropriate insurance or other financial guarantees by private operators are a common requirement in order to be granted a licence, and indemnification clauses for the sums states might be asked to pay under the 1972 Convention on International Liability for Damage Caused by Space Objects (Liability Convention) are usually provided for.71

70

71

B. Cheng, ‘Revisited: International Responsibility, National Activities, and the Appropriate State’, 27 Journal of Space Law, 1998, p. 529. Art. VI of the Outer Space Treaty, however, leaves a margin of doubt concerning a central question, namely, the identification of the ‘appropriate state’, which is deemed to perform the obligations mentioned. Bin Cheng comes to the convincing conclusion that as Art. VII of the Convention under the heading of ‘liability of the launching state’ provides for the joint liability of potentially four different states for damage caused by special objects (i.e. the state that launches or procures the launching, or from whose territory or facility the object is launched), thus analogically Art. VI under ‘appropriate state’ means at the same time the state of registry of the space object operated by the individuals, the state of nationality of the individuals involved, and the state under whose jurisdiction the individuals operate. See A. Kerrest de Rozavel & F. G. von der Dunk, ‘Liability and Insurance in the Context of National Authorization’, in F. G. von der Dunk (Ed.), National Space Legislation in Europe: Issues of Authorisation of

133

ANDREA GATTINI

There is no practice as yet, but it would be interesting to see how a case in which a civil action is brought by the victim directly against the private operator before a domestic court would be dealt with, as is allowed for by Article XI (2) of the Liability Convention,72 and at the same time, the responsible state (or one of the responsible states) is involved in the interstate Claims Commission envisaged under Articles XIV-XX of the said Liability Convention. From the previous remarks, however, one should not draw the wrong conclusion that under present international law, a juridical person enjoys a general licence to pollute the environment as it likes. We have already mentioned the various means by which international treaty law can canalize the civil responsibility of juridical persons or even that non-binding international ‘soft’ law may more generally discipline their activities. Another interesting development is taking place in international investment law. As has rightly been highlighted in the doctrine, the fact that the jurisdiction of international investment tribunals is more and more based on BITs, and the fact that the cause of action for the individual claim is a treaty-based right, must lead to a different understanding of the nature of the dispute between a private investor and the host state, from a merely contractual to a public law tort paradigm.73 This shift of paradigm may have potentially dramatic consequences in assessing the respective rights and interests between the investor and the host state. This does not go so far as to hold the investor itself responsible, or to deprive it of the ‘full security and protection’ that it deserves, but it does lead to a better balance of the respective positions. Despite any stabilization clauses which may be contained in the contract or in the BIT, the compliance of the host state with internationally ever more demanding environmental standards cannot be viewed by the arbitrators as a breach of the ‘fair and equitable treatment’ or a violation of the ‘legitimate expectations’ of the investor. This is surely the case where the investor has committed itself through a voluntary code of conduct to respect a certain level of environmental standards. But this also holds true in general terms. If purely domestic environmental measures could to some extent be seen as suspicious, i.e. as a form of disguised protectionism, internationally authorized or even required measures, on the contrary, should be taken into account by international arbitrators at the

72

73

Private Space Activities in the Light of Developments in European Space Cooperation, Leiden-Boston, Nijhoff, 2011, p. 125. Art. XI, para. 2 of the 1972 Convention on International Liability for Damage Caused by Space Objects reads: “Nothing in this Convention shall prevent a State, or natural or juridical persons it may represent, from pursuing a claim in the courts or administrative tribunals or agencies of a launching State”. See Z. Douglas, ‘The Enforcement of Environmental Norms in Investment Treaty Arbitration’, in Dupuy & Viñuales (Eds.), Harnessing Foreign Investment to Promote Environmental Protection, Cambridge, Cambridge University Press, 2013, p. 415, at 421. Z. Douglas, The International Law of Investment Claims, Oxford University Press, Oxford, 2009, p. 35.

134

5

INTERNATIONAL RESPONSIBILITY

FOR

ENVIRONMENTAL DAMAGE

same level as the international law norms protecting the investment.74 The vagaries of international arbitral decisions in this respect are to be attributed more to a lack of sensitivity by the individual arbitrators than to a lack of appropriate technical tools to reach a balanced conclusion. This does not mean, however, that mere reliance on an international environmental treaty should always tip the balance in favour of the state. A case in point is S. D. Myers v. Canada,75 in which Canada had based its defence on its obligations emanating from the 1989 Basel Convention on the Control of Transboundary Movements of Hazardous Wastes, a convention which Article 1104 NAFTA expressly deems to be prevalent. The Tribunal came to the conclusion that Canada’s defence was preposterous and was motivated by the desire to protect domestic industries.76 Taking environmental concerns into account in international investment arbitration conceals significant yet unexplored potentialities. For instance, in legal literature the question has been explored whether a state may advance a defence, or even a counterclaim against the investor, by relying on an international environmental norm even when such a norm has not yet been implemented in the domestic legal system of the host state.77 Another interesting observation is that environmental protection does not play a unidirectional role. Nothing forbids an investor from basing its claim, either directly or indirectly according to the terms used in the BIT, on the failure by the host state to comply with its environmental obligations either under international or domestic law.78

5.4

CONCLUSIONS

When writing some years ago on the state of international environmental law, Pierre Marie Dupuy soberly observed: “Indeed, with the exception of human rights, there is probably no other field within the domain of public international law in which the distance between the academic literature and the actual practice of sovereign states is decreasing so slowly.”79 Yet, the comparison with human rights law is somehow misleading. Whereas the awareness of the protection and promotion of fundamental human rights has by now pervaded the political discourse on a global scale, the cause of the 74

75 76 77 78 79

See J. Viñuales, ‘The Environmental Regulation of Foreign Investment Schemes under International Law’, in Dupuy & Viñuales (Eds.), Harnessing Foreign Investment to Promote Environmental Protection, Cambridge, Cambridge University Press, 2013, p. 273, at 275, for the remark that investment arbitrators often overlook the possible normative conflict between the two branches of international law and tend to solve it as a legitimacy conflict between domestic and international law. S. D. Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award of 13 November 2000. The Tribunal noted that “The evidence established that Canada’s policy was based to a very great extent by the desire and intent to protect and promote the market share of [Canadian] enterprises”, para. 162. See Douglas 2013, supra note 7, p. 435. Id., p. 424. Dupuy 2007, supra note 8, p. 453.

135

ANDREA GATTINI

protection and promotion of the environment is still far from having reached a similar status. The link between human and environmental rights is still in its infancy,80 and international institutions are still captivated by the mantra of ‘sustainable development’, an even more arguable oxymoron. The most perceptive and lucid experts have already for some time been warning that without an urgent and radical change of paradigm, which implies a change of mentality and habits penetrating through all layers of society, the effects of anthropogenic global warming will lead humanity in just a couple of decades towards the final catastrophe. The sophisticated and intricate web of rules, principles, standards, incentives, soft enforcement mechanisms, liability regimes, and similia which build the fragile scaffolding of contemporary international environmental law will then be swept away, with all the other remains of human vanity.

80

See the ECHR jurisprudence, which, from Lopez Ostra v. Spain in 1997 onwards, due to a lack of an express disposition is still obliged to mainly hinge upon Art. 8 on respect for private and family life, together with Arts. 1 (the right to life), 6 (the right to a fair hearing), 10 (the right to information), and Art. 1 Prot. 1 (the right to property). At the UN level the link between human rights and the environment has been officially addressed for the first time in a joint report entitled ‘Human Rights and the Environment’, issued by the Office of the High Commissioner for Human Rights and the United Nations Environmental Project on the occasion of the 2012 Rio + 20 Conference on Human Development. Available at: accessed 11 June 2014.

136

BIBLIOGRAPHY BOOKS Birnie, P. et al., International Law and the Environment, 3rd edn, Oxford: Oxford University Press, 2009. Bonfanti, A., Imprese Multinazionali, Diritti Umani ed Ambiente, Milan: Giuffrè, 2012. Deva, S. & Bilchitz, D. (Eds.), Human Rights Obligations of Business- Beyond the Corporate Responsibility to Respect? Cambridge: Cambridge University Press, 2013. Douglas, Z., The International Law of Investment Claims, Oxford: Oxford University Press, 2009. Dupuy, P.M., ‘International Environmental Law: Looking at the Past to Shape the Future’, in P.M. Dupuy & J. Viñuales (Eds.), Harnessing Foreign Investment to promote Environmental Protection, Cambridge: Cambridge University Press, 2013. Sands, P., Principles of International Environmental Law, 2nd edn, Cambridge: Cambridge University Press, 2003.

ARTICLES Blumberg, P.I., ‘Accountability of Multinational Corporations: The Barriers Presented by Concepts of the Corporate Juridical Entity’, Hastings Int’l & Comp. Law Review, 2001. Bodansky, D., ‘What’s So bad about Unilateral Action to Protect the Environment?’, 11 European Journal Int’l Law, 2000. Boisson de Chazournes, L., ‘Unilateralism and Environmental Protection: Issues of Perception and Reality of Issues’, European Journal Int’l Law, 2000. Boyle, A., ‘State Responsibility and Liability for Injurious Consequences of Acts Not Prohibited by International Law: A Necessary Distinction?’, 39 Int’l & Comp. Law Quarterly, 1990.

137

ANDREA GATTINI Bratspies, R., ‘State Responsibility for Human-Induced Environmental Disasters’, 55 German Yearbook Int’l Law, 2012. Bridgeman, N.L., ‘Human Rights Litigation under the ACTA as a Proxy for Environmental Claims’, 6 Yale Human Rights and Development Law Journal, 2003. Brunnée, J., ‘International Legal Accountability through the Lens of the Law of State Responsibility’, 36 Netherlands Yearbook of International Law, 2007. Cheng, B., ‘Revisited: International Responsibility, National Activities, and the Appropriate State’, 27 Journal of Space Law, 1998. Dupuy, P.M., ‘Reviewing the Difficulties of Codification: On Ago’s Classification of Obligations of Means and Obligations of Result in Relation to State Responsibility’, 10 European Journal of International Law, 1999. Gattini, A., ‘Between Splendid Isolation and Tentative Imperialism: The EU’s Extension of Its Emission Trading Scheme to International Aviation and the ECJ’s Judgment in the ATA Case’, 61 Int’l & Comp. Law Quarterly, 2012. Hanschel, D., ‘Prevention, Preparedness and Assistance Concerning Nuclear Accidents Effective International Legal Framework or Patchwork?’, 55 German Yearbook Int’l Law, 2012. Jaeger, K., ‘Environmental Claims under the Alien Tort Statute’, 28 Berkeley Journal of International Law, 2010. Kaleck, W. & Saage-Maass, M., ‘Corporate Accountability for Human Rights Violations Amounting to International Crimes: The Status Quo and Its Challenges’, International Journal of Criminal Justice, 2010. McCorquodale, R. & Simons, P.C., ‘Responsibility Beyond Borders: State Responsibility for Extraterritorial Violations by Corporations of International Human Rights Law’, Modern Law Review, 2007. Rayfuse, R., ‘Differentiating the Common? The Responsibilities and Obligations of States Sponsoring Deep Seabed Mining Activities in the Area’, 54 German Yearbook Int’l Law, 2011.

138

5

BIBLIOGRAPHY

Tanaka, Y., ‘Reflections on Time Elements in the International Law of the Environment’, 73 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht, 2013. Wolfrum, R., ‘Means of Compliance with and Enforcement of International Environmental Law’, 272 Recueil des cours de l’ Académie de droit international, 1998.

CONTRIBUTIONS

IN EDITED BOOKS

Beyerlin, U., ‘Different Types of Norms in International Environmental Law’, in D. Bodansky et al. (Eds.), The Oxford Handbook of International Environmental Law, Oxford: Oxford University Press, 2007. Boisson de Chazournes, L., ‘The World Bank Inspection Panel: About Public Participation and Dispute Settlement’, in T. Treves (Ed.), Civil Society, International Courts and Compliance Bodies, The Hague: Asser Press, 2005. Conforti, B., ‘Do States Really Accept Responsibility for Environmental Damages?’, in F. Francioni and T. Scovazzi (Eds.), International Responsibility for Environmental Harm, London-Dordrecht: Nijhoff, 1991. Douglas, Z., ‘The Enforcement of Environmental Norms in Investment Treaty Arbitration’, in P.M. Dupuy & J. Viñuales (Eds.), Harnessing Foreign Investment to Promote Environmental Protection, Cambridge: Cambridge University Press, 2013. Dupuy, P.M., ‘Formation of Customary International Law and General Principles’, in D. Bodansky et al. (Eds.), The Oxford Handbook of International Environmental Law, Oxford: Oxford University Press, 2007. Fitzmaurice, M., ‘The International Court of Justice and International Environmental Law’, in C. Tams & J. Sloan (Eds.), The Development of International Law by the International Court of Justice, Oxford: Oxford University Press, 2013. Fodella, A., ‘Mechanism for Promoting Implementation and Compliance with the 1989 Basel Convention on the Transboundary Movements of Hazardous Wastes and Their Disposal’, in T. Treves et al. (Eds.), Non-Compliance Procedures and Mechanisms and the Effectiveness of International Environmental Agreements, The Hague: T.M.C. Asser Press, 2009.

139

ANDREA GATTINI Francioni, F., ‘Dispute Avoidance in International Environmental Law’, in A. Kiss et al. (Eds.), Economic Globalisation and Compliance with International Environmental Agreements, The Hague: Kluwer, 2003. Francioni, F., ‘Alternative Perspectives on International Responsibility for Human Rights Violations by Multinational Corporations’, in K. Benedek et al. (Eds.), Economic Globalization and Human Rights, Cambridge: Cambridge University Press, 2007. Kerbrat, Y., ‘La responsabilité des enterprises peut-elle etre engagée pour des violations du droit international ?’, in H. Gherari & Y. Kebrat (Eds.), L’ Entreprise dans la Société Internationale, Paris: Pedone, 2010. Kerrest de Rozavel, A. & Dunk, von der F.G., ‘Liability and Insurance in the Context of National Authorization’, in F.G. von der Dunk (Ed.), National Space Legislation in Europe: Issues of Authorisation of Private Space Activities in the Light of Developments in European Space Cooperation, Leiden-Boston: Nijhoff, 2011. Koivurova, T., ‘What is the Principle of Due Diligence?’, in J. Petman & J. Klabbers (Eds.), Nordic Cosmopolitanism: Essays in International Law for Martti Koskenniemi, Leiden: Martinus Nijhoff, 2003. Maljean-Dubois, R., ‘The Applicability of International Environmental Law to Private Enterprises’, in P.M. Dupuy & J. Viñuales (Eds.), Harnessing Foreign Investment to promote Environmental Protection, Cambridge: Cambridge University Press, 2013. Morgera, E., ‘From Corporate Social Responsibility to Accountability Mechanisms’, in P. M. Dupuy & J. Viñuales (Eds.), Harnessing Foreign Investment to promote Environmental Protection, Cambridge: Cambridge University Press, 2013. Nollkaemper, A., ‘Issues of Shared Responsibility before the International Court of Justice’, in E. Rieter & H. de Waele (Eds.), Evolving Principles of International Law: Studies in Honour of Karel C. Wellens, Leiden: Nijhoff, 2011. Pineschi, L., ‘Non-Compliance Procedures and the Law of State Responsibility’, in T. Treves et al., (Eds.), Non-Compliance Procedures and Mechanisms and the Effectiveness of International Environmental Agreements, The Hague: T.M.C. Asser Press, 2009.

140

5

BIBLIOGRAPHY

Romanin Jacur, F., ‘The Non-Compliance Procedure of the 1987 Montreal Protocol to the 1985 Vienna Convention on Substances that Deplete the Ozone Layer’, in T. Treves et al. (Eds.), Non-Compliance Procedures and Mechanisms and the Effectiveness of International Environmental Agreements, The Hague: T.M.C. Asser Press, 2009. Sands, P., ‘Environmental Protection in the Twenty-First Century: Sustainable Development and International Law’, in R. Revesz et al. (Eds.), Environmental Law, The Economy and Sustainable Development, Cambridge: Cambridge University Press, 2011. Treves, T., ‘The Settlement of Disputes and Non-Compliance Procedures’, in T. Treves et al. (Eds.), Non-Compliance Procedures and Mechanisms and the Effectiveness of International Environmental Agreements, The Hague: T.M.C. Asser Press, 2009. Viñuales, J., ‘The Environmental Regulation of Foreign Investment Schemes under International Law’, in P.M. Dupuy and J. Viñuales (Eds.), Harnessing Foreign Investment to promote Environmental Protection, Cambridge: Cambridge University Press, 2013. Wiener, J., ‘Precaution’, in D. Bodansky et al. (Eds.), The Oxford Handbook of International Environmental Law, Oxford: Oxford University Press, 2007.

141

Part II Integrating Environmental Policies into International Investment Law: Specific Areas

6

CLIMATE CHANGE POLICIES

AND

FOREIGN

INVESTMENT: SOME SALIENT LEGAL ISSUES Alessandra Asteriti*

6.1

INTRODUCTION

Climate change has arisen as the most pressing global challenge of our time. In the post1989 economic consensus based on market mechanisms and eschewing command and control regulation, the concerted global response to this problem has taken the form of flexibility mechanisms harnessing the market in order to steer development towards a low-carbon economy.1 From this perspective, the flow of foreign investment towards developing countries – and in 2012 for the first time, investment flows to developing countries surpassed those between developed countries2 – can be one of the most effective tools to pursue an environmentally sustainable and climate-friendly economic development. The legal response to climate change, exemplified by the measures contained in the Kyoto Protocol – Clean Development Mechanism (CDM), Joint Implementation (JI), and International Emissions Trading (IET) – is designed to harness foreign investment for sustainable development and emission reduction projects by providing economic incentives for the transition to a low-carbon economy. On the downside, the mechanisms, when employed within global value chains for the production of consumption goods for developed countries’ markets, can be used to offshore emissions from developed to developing and least developed countries without achieving an overall reduction in carbon emissions. As these countries do not have emission reduction targets, any failure down the chain of production in projects started under the aegis of the CDM might result in a net increase of emissions (so-called carbon leakage).3

* 1 2 3

University of Glasgow. Many thanks to Angelos Dimopoulos for his attentive and insightful comments. I am not intending to overstate the level of consensus on the strategy to be adopted to tackle climate change, given the important absences from this consensus, i.e. the United States and China. At 52 % of the total; see United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2013, United Nations Publications, New York, 2013, p. 12. Id., UNCTAD 2013, p. 164. UNCTAD’s World Investment Report 2010 focussed on investment in a lowcarbon economy. For CDM governance and related issues, see C. Streck, ‘Expectations and Reality of the Clean Development Mechanism: A Climate Finance Instrument between Accusation and Aspirations’, in R.B. Stewart et al. (Eds.), Climate Finance: Regulatory and Funding Strategies for Climate Change and Global Development, New York, New York University Press, 2009, p. 67.

145

ALESSANDRA ASTERITI

The picture from within the investment regime is equally mixed. Traditionally, the investment regime has been instrumental in reducing the regulatory risk for foreign investors, for example, protection against the ratcheting up of environmental standards to the detriment of investors engaged in highly polluting and/or carbon-intensive sectors such as mining and extractive industries.4 Numerous investment arbitrations have concerned environmental measures, especially under the umbrella of the North American Free Trade Agreement (NAFTA).5 The rise of ‘environmental’ arbitrations has functioned as a catalyst for changes within the investment regime towards diversification, clarification, and hybridization.6 In fact, the latest UNCTAD Investment Report confirms the trend towards the inclusion of ‘sustainable-development-friendly provisions’ in International Investment Agreements (IIAs), via the insertion of clauses concerning environmental, labour, and human rights measures.7 Additionally, IIA renegotiations

4

5

6

7

In theory, host states retain control over the admission of foreign investors and investment, therefore being able to screen out investors keen to pursuit non-climate-friendly investments; however, several countries adopt preadmission rights in their model treaties (for example, the United States), and it is an open question if those rights can be imported via the MFN clause into the basic treaty. Ethyl Corporation v. Canada, UNCITRAL, Award on Jurisdiction of 24 June 1998; Compañia del Desarrollo de Santa Elena, SA v. Republic of Costa Rica, ICSID Case No. ARB/96/1, Award, 17 February 2000; Metalclad Corporation v. United Mexican States, ICSID Case ARB(AF)/97/1, Final Award of 30 August 2000; S.D. Meyers, Inc. v. Government of Canada, UNCITRAL, Partial Award of 13 November 2000; Pope & Talbot, Inc. v. the Government of Canada, UNCITRAL, Damages Award of 31 May 2002; Tecmed, SA v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award of 29 May 2003. The awards issued from the mid-2000s reflect a more careful attitude towards public interest concerns; see Waste Management Inc. v. The United Mexican States, ICSID Case No. ARB/00/3, Award of 30 April 2004; Methanex Corp. v. United States of America, UNCITRAL, Final Award on Jurisdiction and Merits of 3 August 2005; ParkeringsCompagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8, Award of 11 September 2007; Glamis Gold Ltd. v. United States of America, UNCITRAL, Award of 8 June 2009; Chemtura Corporation v. Canada, UNCITRAL, Award of 2 August 2010. By these I mean the introduction of clauses in IIAs that deal with non-investment matters, such as labour, human rights, and environmental provisions. The clauses take the form of exceptions, carveouts, balancing, and soft-law obligations. UNCTAD 2013, supra note 2, p. 102. A few instruments even refer specifically to climate change: the 1994 Energy Charter Treaty in its Preamble recalls the UNFCCC, the Convention on Long-Range Transboundary Air Pollution, and other environmental agreements with energy-related aspects (Art. 19, on Environmental Aspects, does not explicitly mention climate change or emission reductions); the 2003 ECOWAS Energy Protocol does not mention climate change in the Preamble, but it is closely modelled on the Energy Charter Treaty for all substantive aspects; the 2009 Japan and Switzerland Free Trade Agreement also states in its Preamble as follows: “Determined, in implementing this Agreement, to seek to preserve and protect the environment, to promote the optimal use of natural resources in accordance with the objective of sustainable development and to adequately address the challenge of climate change”. In its Art. 9(1), the FTA also enjoins parties to “encourage trade and dissemination of environmental products and environment-related services in order to facilitate access to technologies and products that support the environmental protection and development goals, such as improved sanitation, pollution prevention, sustainable promotion of renewable energy and climate-change-related goals”. While the article is not contained within the investment chapter of the FTA, it does mention environmental services, the on-site provision of which constitutes an example of investment. The dearth of explicit references to climate change can partly be explained with the respective ‘age’ of the two bodies of legal materials, with the IIAs displaying an average

146

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

and denunciations have been triggered by the perceived lack of regulatory space for states tied by IIAs’ obligations.8 While this limitation of regulatory capability can impede the state’s ability to improve its environmental regulation, equally it can stifle the relaxation of the regulatory framework to reduce costly environmental and climate change commitments.9 As detailed later in the chapter, a whole series of measures, such as tariff reductions for renewable energy, has been the victim of the new economic climate after the financial meltdown in the late 2000s. In this instance, IIAs have been used not as a shield against environmental regulation, but rather as a sword to demand that host states honour the financial incentives tied to environmental regulation – often in the framework of the Kyoto Protocol.10 That investors might employ IIAs to protect climate-friendly investments from non-commercial regulatory risk is certainly not noteworthy per se – the ‘legitimate expectations’ doctrine and contractual stabilization clauses11 are designed to deal with this sort of risk – and yet, in the quest for legitimacy of the investment regime, this has been presented as another added value.12 From this synergic perspective, IIAs are

8

9

10

11

12

age much higher than the rise of climate change as an issue of legal significance. Nonetheless, it is noticeable that even a very recent instrument, such as the new model Belgium BIT, which contains significant environmental provisions, does not contain any explicit reference to climate change. Available at accessed 31 May 2014. South Africa has denounced several of its IIAs, as have some Latin American countries, which have also denounced the ICSID Convention; Australia has eliminated the investor-state dispute clauses from its FTA with the United States. The costs associated to stricter environmental standards are compounded when the state has implemented a programme of subsidies in order to attract foreign ‘green investment’. See, for example, G. Marata et al., Renewable Energy Incentives in the United States and Spain: Different Paths – Same Destination?’, Journal of Energy and Natural Resources, Vol. 28, 2010, p. 481. The relaxation of the environmental standards in the post-2008 climate is accompanied by a higher incidence of environmental violations; see UNCTAD 2013, supra note 2, p. 162. Of course, in order to benefit from the protection of the applicable IIA, the tribunal will have to find that, for example, emission reduction units or certified emission reduction units qualify as investments and are therefore covered by the IIA (it is however well established in investment jurisprudence that contractual rights are capable of being expropriated, at least since Starrett Housing Corporation v. Islamic Republic of Iran, 4, Iran-US CTR 122, 156-57 (1983) and Amoco International Finance Corporation v. Iran, Award No 310-56-3 of 14 July 1987, 15 Iran-US CTR 189-289; see J. Morgan, ‘Carbon Trading Under the Kyoto Protocol: Risks and Opportunities for Investors’, Fordham Environmental Law Review, Vol. 18, 2006, p. 151. For a more recent case where the Tribunal was also willing to ‘unbundle’ the contractual rights from the totality of the investment, see Eureko BV v. Republic of Poland, UNCITRAL, Partial Award of 19 August 2005. The stabilization of regulatory arrangements in a concession contract might be elevated to an international obligation by the umbrella clause in the applicable IIA; the issue is contentious and unresolved. For its import in the context of climate change investment arbitrations, see A. Boute, ‘Combating Climate Change through Investment Arbitration,’ Fordham International Law Journal, Vol. 35, 2012, pp. 644 et seq. At the very least, stabilization clauses can be taken as proof of explicit commitments by the host state engendering legitimate investment-backed expectations as the basis of a valid FET or indirect expropriation claim. See, for example, Boute 2012, supra note 11.

147

ALESSANDRA ASTERITI presented as providing a further layer of protection of ‘green investors’, against loosening/ reducing the support mechanisms used to attract low-carbon investments. Despite this synergic potential, conflicts arising by regime intersection have attracted more attention.13 The conflicts can be on a purely international plane, whereby climate change legal obligations enshrined in the 1992 United Nations Framework Convention on Climate Change (UNFCCC), its 1997 Kyoto Protocol (and the 2012 Doha Amendment), conflict with the obligations contained in IIAs. International law possesses several tools, from interpretation to general rules of conflict resolution and specific conflict clauses in the applicable IIAs, to deal with these conflicts.14 Host states’ domestic climate change measures might also conflict with international investment obligations. While these measures are often ultimately derived from an international source (including Article 2 Kyoto), nonetheless international law deals with mixed (international–domestic) conflicts differently.15 Their treatment is also reflective of the superior status of international obligations vis-à-vis domestic law, as expressed in Article 27 of the Vienna Convention on the Law of Treaties (VCLT).16 However, the relationship between international and mixed conflicts is more problematic than the straightforward application of Article 27 might imply, involving conflict rules governing the relationship between norms belonging to different legal regimes (international/ domestic), the direct enforceability of international norms in monist systems versus the legal architecture of dualist systems, and finally, the peculiarity of the investment regime, conferring locus standi to investors to vindicate a breach of an international treaty.17

13

14

15

16

17

In this chapter, as in much of the available literature, the focus is on the conflicts generated within the investment regime, which, as a consequence of its sophisticated system of dispute resolution, is more likely to have to deal with them and better equipped to do so. An example is Art. 104 of the NAFTA, which sets up a specific conflict rule with respect to certain international environmental agreements, to the effect that “in the event of any inconsistency between [the NAFTA] and the specific trade obligations set out in [follows list of environmental agreements] such obligations shall prevail to the extent of the inconsistency […]”; to note that, first, only ‘trade obligations’ contained in the environmental treaties prevail over the NAFTA (as an example, one could think of the carbon-trading provisions in the Kyoto Protocol, which are however not covered by the exception) and, second, where there is a choice of measures to comply with their environmental obligations, the least inconsistent with the NAFTA have to be adopted. J. Viñuales, Foreign Investment and the Environment in International Law, Cambridge University Press, Cambridge, 2012, pp. 28 et seq., adopts the nomenclature of ‘normative’ and ‘legitimacy’ conflicts to distinguish between the two. I find this terminology somewhat misleading, and I prefer to refer to all conflicts as normative, with the difference between purely international (conflicts of international obligations) and mixed (international v. domestic). Titled ‘Internal Law and Observance of Treaties’, the article states as follows: “A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty. This rule is without prejudice to article 46”. (Provisions of Internal Law Regarding Competence to Conclude Treaties.) With all the difficulties resulting by the classification of the investors as possessing rights or simply privileges.

148

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

Nonetheless, domestic measures can be internationalized, e.g. via the ‘police powers doctrine’ or the incorporation of provisions on environmental (and labour, health, etc.) standards, in order to preserve the policy space necessary to implement progressive environmental legislation without breaching international investment commitments. To this extent, such clauses might be instrumental in alleviating the tension between investment protection and climate change policies.18 Further, explicit exceptions and carveouts for environmental measures to mitigate and adapt to climate change can be incorporated into IIAs.19 Ultimately, however, it is up to states, in their role as party litigants, to link their domestic measures and their international obligations.20 In this chapter, the potentiality for conflict will be explored mainly with reference to standards of treatment and indirect expropriation as used in investment arbitration claims to protect sunk costs from climate change-related regulatory intervention. The chapter reviews the conflict resolution techniques already available in international law to conclude, however, that the solution is at least partially political. The chapter is structured as follows: Section 6.1 as Introduction. Section 6.2 briefly reviews the investment regime, with particular focus on the substantive issues of standards of treatment and indirect expropriation provisions. Section 6.3 equally provides a brief review of the climate change regime. Section 6.4 deals with the potential synergies between the two regimes, with a subsection dedicated to recent investment arbitrations where climate change issues were at stake. The largest section of the chapter, Section 6.5, is dedicated to the conflict resolution techniques for the composition of normative, interregime conflicts. These include the classic rules of hierarchy, temporality, and specificity, the contribution of interpretative strategies, and finally, the inclusion of specific exceptions, clarifications, and carveouts in the relevant treaties, with particular reference to the substantive protections discussed in Section 6.2, i.e. standards of treatment and indirect expropriation. Finally, Section 6.6 offers some concluding remarks.

18

19

20

These clauses, which can also be conceptualized as ‘balancing’ clauses (as opposed to the specific carveouts or scoping clauses mentioned below), find early expression in Art. 1114(2) NAFTA and were originally designed to avoid social dumping, and the ‘race to the bottom’ phenomenon that the competitive advantage provided by laxer environmental and social standards could provide to less strictly regulated countries. See, for example, Art. 8(1) of the IISD Model BIT: “Consistent with the right of states to regulate and the customary international law principles on police powers, bona fide, non-discriminatory regulatory measures taken by a Party that are designed and applied to protect or enhance legitimate public welfare objectives, such as public health, safety and the environment, do not constitute an indirect expropriation under this Article” (emphasis added). This has been done rarely, with mixed results. The SPP Tribunal was willing to consider the international dimension of Egypt’s domestic measures, lowering the quantum of compensation as a result; see Southern Pacific Properties (Middle East) Ltd v. Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award of 20 May 1992, ICSID Review – Foreign Investment Law Journal, 1993, p. 328.

149

ALESSANDRA ASTERITI

6.2

THE INVESTMENT REGIME

By the end of 2012, more than 3,196 IIAs were in place, including more than 2,800 bilateral investment treaties (BITs), of which about 76 % had entered into force.21 This web of agreements ties host states to a uniform standard of treatment of foreign investors, including protection against uncompensated expropriation, non-discrimination, and international standing of investors for breaches of protected treaty rights via the Investor–State Dispute Settlement (ISDS) system.22 The substantive obligations form a cluster of norms considered applicable generally, reducing the function of the agreements as bilateral reciprocal instruments while retaining the bilateral basis of the enforcement structure. The procedural framework of investment arbitration has been universally recognized as a sui generis system allowing standing to natural or legal persons against host states in a commercial law-inspired setting and guaranteeing compensatory damages, enforceable internationally, thanks to the widespread acceptance of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The process of delocalization of the investor–state relationship and the internationalization of its legal framework has not been easy or uncontroversial. The development of IIAs, and the accompanying differentiation of the investment law regime, has been followed by a self-aware recognition of its fragmentation potential, either in a critical spirit or as a stepping stone towards proposals for integration.23 The recent state-directed thrust towards clarifications and limitations of IIAs’ obligations has been accompanied by other trends, often pulling in opposite directions: the legitimacy deficit of the ISDS system has been acknowledged,24 resulting in a quest for legitimacy claiming to pursue ‘system21

22

23 24

UNCTAD 2013, supra note 2, p. x. While the rate at which new treaties have been signed has decreased compared to the upward trends of the late 1990s/early 2000s, bilateral and regional Free Trade Agreements (FTAs), Economic Partnership Agreements (EcPAs), or Comprehensive Economic and Trade Agreements (CETAs) containing investment provisions have become more popular, countering the downward trend affecting IIAs; see UNCTAD, Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking, United Nations Publications, New York, 2007, Introduction. Throughout this chapter, the term IIAs will be adopted to refer both to the traditional bilateral investment treaties (BITs) and to negotiated investment chapters within more comprehensive economic agreements. As noted above, in the literature and in treaty practice, these agreements go under different names, including bilateral investment treaties (BITs) and international investment agreements (IIAs), the second one being more inclusive and the one adopted throughout this chapter. A distinction is necessary between the ‘physiological’ differentiation of the legal system and its ‘pathological’ fragmentation, even if this too can be a matter of (political) perspective. This trend is evidenced in the treaty practice, i.e. the denunciations of IIAs by Latin American countries and South Africa, amongst others (and latterly Indonesia), and the elimination of ISDS from recently negotiated treaties (Australia); policy discussions, see, for example, the recently published opinion piece by the influential conservative think-tank Cato Institute (‘A Compromise to Advance the Trade Agenda: Purge Negotiations of Investor-State Dispute Settlement’. Available at ). Finally, even Germany has recently argued for the exclusion of the ISDS system to be excluded from negotiations on the EU-US

150

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

internal’ solutions;25 shades of constitutionalization have been identified, resulting in attempts at the systematization of the regime as well as critical readings and warnings against this stealth process of constitutionalization taking place without a demos of reference.26 Investment tribunals have played a crucial role in championing a self-contained and insular view of IIAs as instruments dedicated to the protection of investors’ interests against states’ regulatory powers.27 Far from being the necessary and only interpretation allowed by the language of the treaties, the ‘splendid isolationism’ of much investment jurisprudence is a political choice of investment tribunals.28 As a consequence of their expansive interpretations in favorem investors, more explicit limitations and clarifications have been inserted by contracting states, ex abundanti cautela, in order to steer tribunals’ interpretative approach. Equally, the often repeated assertion that IIAs do not provide for any investors’ duties – either presented as a fact or voiced as a criticism – does not bear close scrutiny. In fact, most IIAs, especially the older ones, contain provisions on compliance with domestic law, sometimes as a criterion for admission, in general as a treaty translation of the customary rule, having the effect of making the provisions enforceable under the treaty.29 This provides the crucial link between the domestic measure and the

25 26

27

28

29

Trade and Investment Partnership; see Christian Tams’ comments in ; all websites accessed 31 May 2014. In the scholarly literature, see, amongst the rising number of titles, M. Waibel et al., The Backlash against Investment Arbitration, Kluwer Law International, Alphen aan den Rijn, 2010 and also sources at note 26. S. Schill, ‘Deference in Investment Treaty Arbitration: Re-Conceptualizing the Standard of Review through Comparative Public Law’, Journal of International Dispute Settlement, Vol. 3, No. 3, 2012, p. 577. See, for example S. Gill, ‘Constitutionalizing Inequality and the Clash of Globalizations’, International Studies Review, Vol. 4, No. 2, 2002, p. 47; G. van Harten, Investment Treaty Arbitration and Public Law, Oxford University Press, Oxford, 2007; David Schneiderman, Constitutionalizing Economic Globalization, Cambridge University Press, Cambridge, 2008. An example is given by the Metalclad Tribunal, in a case in which the submissions by both parties were replete with references to environmental obligations (and where the applicable instrument, the NAFTA, explicitly mentions non-investment obligations in its Preamble); the Tribunal quoted the Preamble only to the effect that “The Parties to NAFTA specifically agreed to ‘Ensure a predictable commercial framework for business planning and investment’”. See Metalclad Corporation v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Final Award of 30 August 2000, para. 88. See the opposite approach taken by the Tribunal in Asian Agricultural Products Ltd v. Sri Lanka, ICSID Case No. ARB/87/3, Award of 27 June 1990, para. 21: “[…] it should be noted that the Bilateral Investment Treaty is not a self-contained closed legal system limited to provide for substantive material rules of direct applicability, but it has to be envisaged within a wider juridical context in which rules from other source are integrated through implied incorporation methods, or by direct reference to certain supplementary rules, whether of international law character or of domestic law nature”. This approach, much more respectful of the international legal framework in which the IIA is immersed, is not unusual for the time, but was conveniently overlooked in more recent times. References to state sovereignty and respect of domestic laws are more common in BITs between developing countries, more sensitive to post-colonial sovereignty claims. An example in the Egypt-Nigeria BIT, accessed 31 May 2014.

151

ALESSANDRA ASTERITI

treaty, internationalizing the investor’s duty of compliance with domestic law out-with the purview of Article 27 VCLT, which concerns the state’s obligation not to breach its international obligations in the exercise of its domestic powers.

6.2.1

Standards of Treatment

The cardinal non-discrimination principle of international trade law, the most-favourednation (MFN) standard is incorporated into most investment treaties and has been since the friendship, commerce, and navigation treaties that constitute their immediate predecessors.30 In general terms, the function of the standard is to equalize treatment, creating a level playing field between foreign investors31 and contextually ratcheting up towards higher standards of protection.32 This is done by guaranteeing that whatever treatment granted to a foreign investor will be extended to other investors and that more favourable commitments made in successive IIAs will be extended to investors covered by previous treaties.33 In other words, the clause can be used to challenge the treatment of another investor in concreto (e.g. where preferential tariffs are granted) or in abstracto (e. g. to argue that access to ISDS without exhaustion of domestic remedies available in a third-party treaty should be incorporated in the basic treaty).34 The national treatment standard, originating in the customary rules on the treatment of aliens, is also included in most investment treaties, often accompanying the MFN standard.35 In its customary incarnation, this standard prohibited preferential treatment of foreigners, being essentially a limiting standard. In the translation from customary to treaty law, the national standard of treatment has been reconceptualized as a classic non-

30

31 32

33 34 35

UNCTAD, Most-Favoured-Nation Treatment, United Nations Publications, New York, 1999. For a recent brief review of the standard, see also P. Acconci, ‘Most-Favoured-Nation Treatment,’ in P. Muchlinski et al. (Eds.), The Oxford Handbook of International Investment Law, Oxford, Oxford University Press, 2008, p. 363. See the ILC Draft Articles on Most-Favoured-Nation Clauses, with Commentary, Yearbook of the International Law Commission, 1978, vol. II, Part Two; Report of the Working Group on Most-FavouredNation Clauses, A/CN.4/L.719 20 July 2007; M. Matsushita, T. Schoenbaum & P. Mavroidis (Eds.), The World Trade Organization. Law, Practice and Policy, Oxford, Oxford University Press, 2003, p. 143. See Schill 2012, supra note 25, p. 123. Schill 2009; S. Schill, ‘Multilateralizing Investment Treaties through Most-Favoured-Nation Clauses’, Berkeley Journal of International Law, Vol. 27, 2009, p. 496. The first investment treaty arbitration in which this principle was affirmed was Asian Agricultural Products Limited (AAPL) v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/87/3, Award of 27 June 1990, para. 54. See Berschader v. Russia, SCC Case No. 080/2004, Award of 21 April 2006, para. 179; RosInvest v. Russian Federation, SCC Case No. V079/2005, Award on Jurisdiction of 5 October 2007, para. 40. As done by the Maffezini Tribunal, see Emilio Augustín Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7, Dec. of the Tribunal on Objections to Jurisdiction of 25 January 2000. For the content of the standard in trade law and its relationship with the investment law version, see N. DiMascio and J. Pauwelyn, ‘Nondiscrimination in Trade and Investment Treaties: Worlds Apart or Two Sides of the Same Coin?’, AJIL, Vol. 102, No. 1, 2008, p. 48.

152

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

discrimination enabling provision, to the effect that the treatment should be ‘same as’ or ‘no less favourable than’ that granted to nationals.36 While national treatment of ‘like products’ is a crucial element of trade law, in the traditionally unequal economic and legal conditions of home and host countries in an investment relationship, the value of national treatment is inversely proportional to quality of the host country’s normative environment for investment rules, while it is precisely this differential to make the host country attractive to foreign investors for non-investment (environment, labour, etc) norms. Consequently, national treatment claims are relatively rare beyond the exceptional case of the NAFTA, where countries with a relatively homogenous regulatory environment compete for investments.37 The fair and equitable treatment (FET) standard provides a robust, if not clearly defined, tool for the protection for investors.38 Its relationship with the international minimum standard in customary international law39 has provoked disagreements between states and investors and resulted in conflicting tribunal awards, with some arguing for its selfstanding, autonomous nature as a treaty-based standard and others insisting on its linkage with the less-demanding customary law standard.40 The Tecmed Tribunal’s definition has been quoted approvingly by academics and relied upon by other tribunals.41 An important element of the definition is the legitimate expectations of the 36

37 38

39 40

41

The ‘upward thrust’ of treaty-based national treatment is evident in its formulation, whereby, for example, Art. 1102(3) NAFTA clarifies that foreign investors are entitled to ‘the most favourable treatment’ granted to domestic investors in like circumstances. To this extent, a comparison between the classic customary notion of the standard and its modern treaty version could be considered inappropriate; see T. Weiler, Saving Oscar Chin [sic]: Non-Discrimination in International Investment Law’, in N. Horn & S.M. Kröll (Eds.), Arbitrating Foreign Investment Disputes, The Hague, Kluwer Law International, 2004, p. 159. On this case, see also H. Lauterpacht, The Development of International Law by the International Court, Cambridge, Cambridge University Press Reprint, 1996, p. 262. See DiMascio and Pauwelyn 2008, supra note 35, pp. 48-49. OECD, Fair and Equitable Treatment Standard in International Investment Law, OECD Working Papers on International Investment, No. 2004/3, OECD Publishing, Paris, 2004; F. Ortino et al. (Eds.), Investment Treaty Law – Current Issues II, London, British Institute of International and Comparative Law, 2007; I. Tudor, The Fair and Equitable Treatment Standard in the International Law of Foreign Investment, Oxford University Press, Oxford, 2008; K. Yannaca-Small, ‘Fair and Equitable Treatment Standard: Recent Developments’, in A. Reinisch (Ed.), Standards of Investment Protection, Oxford University Press, Oxford, 2008, p. 111; C. McLachlan et al. (Eds.), International Investment Arbitration – Substantive Principles, Oxford, Oxford University Press, 2008, Part III.7; M. Paparinskis, The International Minimum Standard and Fair and Equitable Treatment, Oxford University Press, Oxford, 2013. Already established in the OECD Draft Convention on the Protection of Foreign Property of 1967, 13-15, and confirmed in Art. 1105 of the NAFTA. The customary standard is adopted in the NAFTA, following the binding interpretation by the Free Trade Commission, ; the same approach is taken in the recently agreed Canada-EU Comprehensive Economic and Trade Agreement (CETA); for a summary (from the Canadian perspective), see ; all accessed 31 May 2014. Eureko BV v. Republic of Poland, UNCITRAL/PCA Case No. 2008-13, Partial Award of 19 August 2005, para. 235; Occidental Exploration and Production Co v. Republic of Ecuador, ICSID Case No. ARB/06/11,

153

ALESSANDRA ASTERITI investor,42 which can turn out to be the crucial element of a successful claim against climate change policies, for example, a reduction of the public support provided to CDM projects or other support schemes for renewable energy relied upon by foreign investors to obtain financing.43

6.2.2

Indirect Expropriation

Protection against uncompensated expropriation constitutes the cornerstone of international investment law; however, while the rules on direct expropriation are clear, indirect interference with property rights has been met with a considerable degree of normative uncertainty.44 The police power doctrine allows measures having the effect of a direct expropriation – for example, certain general welfare measures, taxation, forfeiture for crimes, etc. – not to attract the duty to pay compensation;45 therefore, the issue has long been recognized as one of the delimitations between bona fide governmental intervention not requiring payment of compensation and regulatory measures for which it is recognized that it would be unjust to burden only some property owners for measures

42

43 44 45

Final Award of 1 July 2004, para. 185; MTD Equity Sdn Bhd and MTD Chile SA v. Republic of Chile, ICSID Case No. ARB/01/7, Award of 25 May 2004, para. 114. Another influential articulation of the standard, not as demanding as the Tecmed one, was provided by the Tribunal in Waste Management v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Award of 30 April 2004, para. 98. “[...] [the FET standard], in light of the good faith principle established by international law, requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment. The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations. [...] The foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any preexisting decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities”. Técnicas Medioambientales Tecmed, SA v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award of 29 May 2003, para. 154. See D. de Jager & M. Rathmann, Policy Instrument Design to Reduce Financing Costs in Renewable Energy Technology Projects, Ecofys, Utrecht, 2008. The literature on the subject is vast, and it is not necessary to review it in this context; see UNCTAD’s recent report, Expropriation. A Sequel, United Nations Publications, New York, 2012. The police power doctrine has a national as well as an international dimension, referring either to the nature and scope of governmental powers or to the extent of legitimate regulatory interference with foreignowned property. G. Aldrich, ‘What Constitutes a Compensable Taking of Property? The Decisions of the Iran-United States Claims Tribunal’, AJIL, Vol. 88, 1984, p. 609; R. Dolzer and C. Schreuer, Principles of International Investment Law, Oxford University Press, Oxford, 2008, p. 91; see also Third Restatement, Foreign Relations Laws of the United States, Washington American Law Institute, Washington D.C., 1987, para. 712(g): “A state is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within the police powers of states, if it is non-discriminatory”.

154

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

enacted in pursuance of the general interest. The extent of non-compensable regulation is contentious especially vis-à-vis foreign property owners, as it is generally agreed that they might be affected more severely by expropriatory measures, at the same time not being in the position to influence them through the political system.46 The dichotomy between harm prevention and benefit extraction can be used to draw the line between non-compensable regulation and compensable regulatory expropriation, whereby measures that prevent or remedy a public harm are not compensable, regardless of the loss affecting the property owner, while measures that aim to extract a public benefit are compensable.47 Therefore, police powers cannot be justified on public purpose considerations alone, and there would be no simple ‘environmental purpose’ excluding compensation; instead, regulation against dangerous pollutants will not be compensable, while rezoning an area as an environmental preserve would probably fall on the side of compensable regulation. In this case, climate change regulation seems more likely to fall on the non-compensable side of the regulatory expropriation dichotomy.

6.3

THE CLIMATE CHANGE REGIME

The Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) was released in four parts between September 2013 and November 2014; the first part, dealing with the physical science, was considered by the IPCC on 23-26 September 2013 and officially released on 30 September 2013.48 The report confirmed the increasing certainty within the scientific community that climate change, defined as the increase in the atmospheric concentration of greenhouse gases and upward increase in global average temperatures, is mainly due to human activity since pre-industrial times. The UNFCCC, 46

47

48

L. Kissam & E. Leach, ‘Sovereign Expropriation of Property and Abrogation of State Contracts’, Fordham Law Review, Vol. 28, 1959, p. 214 (discussing nationalization measures, but the comment is equally applicable to indirect or regulatory expropriation). See R. Higgins, ‘The Taking of Property by the State: Recent Developments in International Law’, Recueil des Cours, Vol. 176, 1982 for the international dimension; F. I. Michelman, ‘Property, Utility and Fairness: Comments on the Ethical Foundations of “Just Compensation” Law’, Harvard Law Review, Vol. 80, 1967, p. 1165, for the US constitutional dimension. In this case, obviously the definition of the measure becomes essential; also to be noted that equally important is the qualification of the property as an ‘investment’ for the purpose of the application of the IIA; see M.C. Cordonnier Segger & M. Gehring, ‘Trade and Investment Implications of Carbon Trading for Sustainable Development,’ in D. Freestone & C. Streck (Eds.), Legal Aspects of Carbon Trading, Oxford, Oxford University Press, 2009, p. 95. For the distinction between harm and benefit, see Michelman 1967, supra note 46, p. 1239: “The true office of the harm prevention/benefit extraction dichotomy is […] to help us decide whether a potential occasion of compensation exists at all”. The Summary for Policymakers of Working Group I was released on 27 September 2013; accessed 31 May 2014. The United Nations Climate Change Conference concluded in Warsaw on 23 November 2013 with mixed results; see accessed 31 May 2014.

155

ALESSANDRA ASTERITI

signed in 1992 and entered into force in 1994, constitutes the first concerted legal response to the problem of climate change and its global repercussions.49 Through its Kyoto Protocol, entered into force in 2005, the framework adopted by the parties aimed to achieve a reduction of emissions by Annex I (developed) countries to a level 5 % below the measured 1990 emissions by the year 2012.50 This is not the place to discuss the successes – few – and failures, many, at the policy level, but only to assess the legal feasibility of the instruments and tools of the UNFCCC + Kyoto Protocol framework. In this section, the main ‘flexibility mechanisms’ contained in the Kyoto Protocol will be reviewed, before considering their relationship with the investment regime. The Kyoto Protocol (hereinafter also ‘the Protocol’) provides three market-based mechanisms for the reduction of emissions.51 In addition, the Protocol explicitly obliges its parties to pursue emissions reduction through national policies and measures.52 Both domestic and international actions through international cooperation, via the mechanisms specifically set up by the Protocol, have implications for investment policies and obligations under IIAs. In contrast with ‘purely’ domestic policies, the obligations contained in the Protocol provide an ‘international umbrella’ for climate change domestic measures; the crucial element is the linkage between the domestic measure and the Protocol and where the burden of proof falls in establishing that link. Independently

49 50

51

52

1992 United Nations Framework Convention on Climate Change, 1771 UNTS 107. Kyoto Protocol to the United Nations Framework Convention on Climate Change, (1998) 37 International Legal Materials 22. The Doha Amendment to the Kyoto Protocol, adopted in December 2012, amends Art. 3 of the Protocol in the following fashion: “The Parties included in Annex I shall, individually or jointly, ensure that their aggregate anthropogenic carbon dioxide equivalent emissions of the greenhouse gases listed in Annex A do not exceed their assigned amounts, calculated pursuant to their quantified emission limitation and reduction commitments inscribed in the third column of the table contained in Annex B and in accordance with the provisions of this Article, with a view to reducing their overall emissions of such gases by at least 18 per cent below 1990 levels in the commitment period 2013 to 2020”. Following the 2010 Cancún Conference of the Parties (COP), Reducing Emissions from Deforestation and Forest Degradation (REDD) policies have been included in the UNFCCC framework and the Kyoto Protocol. Since the ratification of the UNFCCC, other multilateral, regional, and bilateral instruments on climate change have been agreed. Most of them establish a series of soft-law obligations, with the significant difference of the EU’s Framework of Action. At G8 level, following the 2005 Gleneagles summit, the G8 countries issued the communiqué ‘Climate Change, Energy and Sustainable Development’, undertaking to take further action to “enhance private investment and transfer of technologies […] , support a market-led approach to encouraging energy efficiency […] and remove barriers to direct investment […]”. Document available at ; at the bilateral level, several agreements have been signed, mostly establishing a series of non-binding obligations; see, for example, the US-China 2009 Memorandum of Understanding to Enhance Cooperation on Climate Change, Energy, and the Environment between the Government of the United States and the Government of the People’s Republic of China, 18 July 2009; finally, at EU level, the EU Emission Trading Scheme (ETS) commenced in 2005, following Council Directive 2003/87 of the European Parliament and of the Council (13 October 2003) and Council Directive 2004/101 (13 November 2004).

156

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

taken emissions reduction regulation might breach an IIA’s obligation; in this case, the burden will be on the state to prove that the measure is in compliance with the Protocol even if it falls outside one of the flexible mechanisms (for example, under Article 2).53 Article 2 enjoins the parties to “implement and/or further elaborate policies and measures in accordance with […] national circumstances […]”, in accordance with the principle of “common but differentiated responsibilities and respective capabilities” (Article 3(1) UNFCCC). Amongst the suggested policies, the promotion of renewable energy, the phase out of incentives and subsidies for carbon-heavy industries, and the regulation of waste management facilities for the reduction of methane emissions might detrimentally impact on foreign investors. Regional arrangements, such as the obligations contained in the European Union Emissions Trading System, are also allowed.54 Article 3(1) UNFCCC imposes a softer obligation (“shall strive to implement policies and measures […] in such a way as to minimize adverse effects […]”) to minimize the impact of climate change measures on, amongst others, trade and the economy of other parties, especially developing countries. A textual interpretation of this article would not seem to include possible adverse effects on foreign investors within its scope. Article 3(1) enjoins the parties to “[…] individually or jointly, ensure that their aggregate anthropogenic carbon dioxide equivalent emissions of greenhouse gases listed in Annex A do not exceed their assigned amounts […]”. Finally, Article 10 provides a comprehensive list of commitments that shall be undertaken by the parties in accordance with Article 4 UNFCCC.55 Joint action can take place according to three main mechanisms. Article 17 allows Annex B parties to engage in emission trading in order to fulfil their obligations under Article 3 – i.e. keeping within the limit of emissions of greenhouse gases as per Annex A.56 Annex B parties with unused Assigned Amount Units (AAUs) can trade them with countries that

53

54

55

56

Art. 2 UNFCCC states the objective of the Convention, i.e. “[…]to achieve, in accordance with the relevant provisions of the Convention, stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”. The emission reduction strategy is based on the cap-and-trade model; see Climate Action, Emissions Trading System (EU ETS), European Commission, accessed 31 May 2014. For the purpose of the interface with the investment regime, of particular relevance is Art. 10(c), dealing with international cooperation: “[All Parties shall] Cooperate in the promotion of effective modalities for the development, application and diffusion of, and take all practicable steps to promote, facilitate and finance, as appropriate, the transfer of, or access to, environmentally sound technologies, know-how, practices and processes pertinent to climate change, in particular to developing countries, including the formulation of policies and programmes for the effective transfer of environmentally sound technologies that are publicly owned or in the public domain and the creation of an enabling environment for the private sector, to promote and enhance the transfer of, and access to, environmentally sound technologies […]”. Ann. B lists the parties to the Protocol that have agreed a quantified limitation or reduction commitment.

157

ALESSANDRA ASTERITI

have surpassed their targets. This carbon trading mechanism allows developed countries to buy their way out of increased emissions by purchasing AAUs from countries that have not used up their allowed emissions. Other units that are considered tradable commodities are Removal Units (RMUs); credits that are absorbed in carbon sinks, typically in land use and forestry projects (Article 3(3)); and the credits generated in investment projects under the umbrella of the Protocol covered in Article 6 and Article 20. The underlying principle of the emission trading system is that the mechanisms have to accomplish an ‘additional reduction’ (Article 12(5)(c) and Article 6(1)(b)) that would not have otherwise occurred; the linkage with the investment regime is provided by the option to involve private parties in JI projects (Article 6(3)) and in CDM projects (Article 12(9)). Article 12 sets up the CDM, whereby Annex I parties can implement energy reduction projects in non-Annex I parties (developing countries) and earn saleable Certified Emission Reduction (CER) credits, with each CER equivalent to 1 tonne CO2 and computable towards the reduction targets. The trade-off is in emission reduction credits for developed countries and low-carbon technologies for developing countries. The CDM is subject to the authority of the Conference of the Parties (COP) and is directly supervised by an executive board. The projects are supervised, from registration to request of CER credits, by Designated Operational Entities (DOEs), domestic legal entities, or accredited international organizations. The projects also need to be approved by the Designated National Authorities (DNAs), which are ultimately overseen by the CDM Executive Board. The third flexible mechanism, set up in Article 6 of the Protocol, is the JI, whereby Annex I parties can trade emission reduction units (ERUs), each equivalent to 1 tonne CO2, resulting from emission reduction projects in other Annex I countries. Contrary to the CDM, which is by default subject to the international supervision of the Executive Board, JI projects can follow two separate tracks, depending on the outcome of their eligibility procedure. In the Track I procedure, projects that fulfil all eligibility requirements are independently verified by the Annex I host state to certify the additionality of reductions; the host state then issues the ERUs by converting AAUs. In the Track II procedure, countries that do not satisfy all eligibility requirements are supervised by the JI’s Supervisory Committee (JISC), which appoints accredited independent entities (AIEs) tasked with approving the project and issuing the ERUs.

6.4

SYNERGIES

Three main synergic opportunities arise between the climate change and investment regimes: climate finance, whereby foreign investment is directed towards the low-carbon economy (this is often supported by significant public support in the form of subsidies,

158

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

Feed-in Tariffs (FiTs), etc.);57 technology transfer from developed to developing countries; and, from a legal perspective, investment arbitrations to protect green investments’ sunk costs from detrimental changes in the regulatory framework. When discussing the synergic potential of the investment and climate change regimes, it is crucial to distinguish between normative and policy aspects, particularly because the investment regime does not have sustainable development as its stated goal. Investment protection is, to a considerable extent, value-neutral and it extends to ‘unsustainable’ development, unless a policy decision is taken to provide preferential treatment to climate-friendly or green investment.58 I have argued elsewhere that normative and goal diversity can be taken as useful criteria to recognize otherness, where by normative diversity, I intend “the non-coincidence between the rules and principles underpinning two (or more) particular legal systems or regimes [...]” and by goal diversity, “the divergence of goals [intended as] a matter of political and/or policy choices”.59 From this perspective, while the climate change and investment regimes do exhibit a certain amount of goal convergence, albeit not planned – to the extent that the investment regime is designed to protect investments be they ‘green’ or ‘brown’ – they share only a limited amount of normative convergence, with mostly dissimilar legal instruments at their disposal in order to ensure compliance and enforcement of their obligations.60 Their goal convergence is exemplified by the reliance on investment as an enabling tool in

57

58 59

60

See, for example, the 2009 Copenhagen Accord at the 15th Conference of the Parties (COP) of the UNFCCC, UNFCCC Dec. 2/CP.15, 18 December 2009, paras. 5 and 8, and the Cancún Agreements at the 16th COP, UNFCCC Draft Dec. 1/CP.16, 10 December 2010. Following the Copenhagen Accord, the UN Secretary General established the High-Level Advisory Group on Climate Change Financing (AGGF) in February 2010, which published its first report on 5 November 2010, Available at accessed 31 May 2014. Feed-in Tariff (FiT) programmes protect investment in green energy generation by guaranteeing access to the energy grid and payments for the total of the energy generated through long-term contracts. Green certificates are issued to energy suppliers for units of energy from renewable sources. A minimum quota is required, under penalty of fines, but certificates in excess of the established amount can be traded. These support schemes are adopted in the European Union under their Climate Action Plan; see accessed 31 May 2014. See also Commission of the European Communities, The Renewable Energy Progress Report: Commission Report in Accordance with Article 3 of Directive 2001/77/EC, Article 4(2) of Directive 2003/30/EC and on the Implementation of the EU Biomass Action Plan, COM (2009) 192 Final, at paras. 6-7, and the Commission of the European Communities, Communication on the Support of Electricity from Renewable Energy Sources, COM 92005) 627 Final, at paras. 4-5. This raises separate issues of the litigation risk of this shift, i.e. the possibility that investors in polluting industries raise a claim under the standards of treatment provisions of the IIA for discriminatory treatment. A. Asteriti, ‘Waiting for the Environmentalists: Environmental Language in Investment Treaties,’ in R. Hofmann & C.J. Tams (Eds.), International Investment Law and Its Others, Baden-Baden, Nomos, 2012, pp. 123-124. Of course, normative diversity is also at the basis of normative conflicts, discussed in Section 6.5. The political reasons underpinning this choice are beyond the scope of this chapter; equally, there is no space here to analyse the implications of the choices of legal enforcement regimes.

159

ALESSANDRA ASTERITI climate finance or the choice of market mechanisms to further development goals.61 As for their normative divergence, the role of dispute settlement – crucial in the investment regime, absent in the climate change regime – can be taken as a symbol of the different role of the legal tools to ensure compliance and substantiation of the goals of the regimes. In fact, the introduction of more robust administrative law mechanisms and processes to protect the interests of the private investors involved in CDM projects has been advocated, in a move designed to increase the normative convergence of the regimes.62 The flexibility mechanisms of the Kyoto Protocol, and especially the CDM, introduced by Article 12, have been compared to a ‘new-generation IIA’.63 In effect, Article 12 provides a mechanism for the participation of ‘private entities’, i.e. foreign investors in low-carbon industries, geared to sustainable development in non-Annex I parties. While it is an exaggeration to liken the Kyoto Protocol to an IIA such as the Energy Charter Treaty (ECT), which covers the energy sector and tangentially climate change issues, it can confidently be affirmed that the flexibility mechanisms of the Kyoto Protocol concretize the ‘promotion of foreign investment’ often listed as a goal in IIAs.64 The role of the CDM in promoting foreign investment – a goal traditionally badly served by IIAs – is ultimately the outcome of the binding obligation on Annex A parties to reduce their emissions via the flexibility mechanisms of the Kyoto Protocol, and it should not be forgotten that IIAs contain no comparable investment promotion obligations. Equally, while the only restriction in scope of application in IIAs is that investments be ‘foreign’,65 the Kyoto Protocol

61

62

63 64

65

The examples show that the goal convergence is one-directional, i.e., it is the climate change regime to converge towards investment as the medium to concretize its goals, rather than the investment regime to converge towards climate-friendly investments. C. Streck & J. Lin, ‘Making Markets Work: A Review of CDM Performance and the Need for Reform’, EJIL, Vol. 19, No. 2, 2008, p. 409. Of course, there is a crucial difference in the redress mechanisms designed to protect foreign investors against host states’ injurious treatment through a system of international adjudication, and the advocated international review mechanisms against the decisions of the CDM Executive Board (EB), in itself a supranational review body. In fact, Streck and Lin provide a comparative analysis of the CDM EB with the targeted sanctions system implemented by the United Nations Security Council and the global anti-doping regime enforced by the Global Anti-Doping Agency, a body set up by the International Olympic Committee. F. Marshall et al., Climate Change and International Investment Agreements: Obstacles or opportunities?, IISD, Winnipeg, 2010, p. 12. See, for example, the Preamble of the ICSID Convention, “Considering the need of international cooperation for economic development [...]”. The potential for inclusion of ‘sustainable development’ by progressive interpretation is patent; Christoph Schreuer notes how “Any concept of economic development [...] should not be restricted to measurable contributions to GDP but should also include development of human potential, political and social development and the protection of the local and global environment”. C. Schreuer, The ICSID Convention: A Commentary, 2nd edn, Cambridge University Press, Cambridge, 2009, p. 134. With the well-known problems in establishing nationality; see Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Dissenting Opinion by Prosper Weil (attached to the Decision on Jurisdiction of 29 April 2004).

160

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

concerns exclusively investments guaranteeing a reduction of carbon emissions, coupled with the requirement of additionality of reductions and several procedural criteria.66

6.4.1

Legal Synergies: Recent Investment Arbitrations

A series of recent cases shows how investors in the low-carbon economy can use investment arbitration strategically to protect their investments against detrimental regulatory changes. Under the NAFTA umbrella, Canada has been the respondent in a series of claims arising from changes in the regulatory framework on energy production. In the Mesa claim, the company complained that the FiT programme under the Green Energy and Green Economy Act was applied in an arbitrary and discriminatory fashion.67 The same FiT policies have been challenged by Japan and the EU as a breach of Article 2.1 of the Agreement on Trade-Related Investment Measures (TRIMs Agreement), Articles 3.1(b) and 3.2 of the Agreement on Subsidies and Countervailing Measures (SMS Agreement), and Article III:4 of the GATT 1994; both the Panel and the Appellate Body found the measures to be inconsistent with the TRIMs Agreement and the GATT and recommended that Canada brings its measures into conformity.68 Canada did not rely on the environmental exception in Article XX GATT, invoking instead Article III:8(a) to argue that: [...] The laws and requirements that create and implement the FIT Programme are laws and requirements that govern the procurement of renewable electricity for the governmental purpose of securing an electricity supply for Ontario consumers from clean sources, and not with a view to commercial resale or with a view to use in the production of goods for commercial sale.69 However, its defence was not accepted by the Panel and AB Reports and leaves an open question on the defensive strategy that will be adopted in the investment arbitration. If

66

67

68

69

For a summary, see recently F. Baetens, ‘Foreign Investment Law and Climate Change: Legal Conflicts Arising from Implementing the Kyoto Protocol through Private Investment’, Sustainable Development Law on Climate Change Legal Working Paper Series, IDLO, Rome, 2010. The Feed-in Tariff programme, as implemented by the government of the province of Ontario, guaranteed a minimum price for electricity produced from certain forms of renewable energy, provided the technology complied with a ‘minimum required domestic contents level’; see Mesa Power Group LLC v. Government of Canada, UNCITRAL, Notice of Arbitration of 4 October 2011. Appellate Report Canada – Certain Measures Affecting the Renewable Energy Generation Sector, adopted 6 May 2013, WT/DS412/AB/R; Appellate Report Canada – Measures Relating to the Feed-in Tariff Program, adopted 6 May 2013, WT/DS426/AB/R. AB Report, para 1.10.

161

ALESSANDRA ASTERITI

the Outline of Potential Issues released by the Canadian Trade Law Bureau is any indication, Canada will invoke the exception in Articles 1108(7) and 1108(8), without prejudice to its main argument that the FiT selection programme did not cause the investor to suffer any damage.70 Another claim arising from the FiT programme has been presented by Windstream Energy in connection to a contract for an offshore wind energy facility. In it, the investor claimed that the province of Ontario had breached several NAFTA obligations by deferring the approval of the project while developing a comprehensive regulatory framework for offshore wind energy generation, particularly for freshwater projects such as the one planned by the investor.71 Canada, in its response to the Notice of Arbitration, noted that its regulatory intervention was dictated by its need to reduce carbon emissions by eliminating coal-fired electricity generation by 2014; however, it made no reference to any binding international obligations, such as those deriving from Article 2 of the Kyoto Protocol.72 Finally, in another recently submitted statement of claim under the NAFTA, Mercer, the owner and operator of a pulp mill and biomass-based electricity generation facility – which the company asserts is a carbon-neutral energy provider – claimed that the government of Canada treated its company in a discriminatory manner, for not letting it purchase low-cost power available to other pulp mills, including those that were also net producers of energy.73 The ECT has also been invoked in several arbitrations involving renewable energy programmes. After the Spanish Parliament approved a law cutting subsidies for green energy technology, a consortium of investors in the solar thermal industry registered a claim for the retroactive reduction of the FiT structure.74 In another arbitration, an

70

71 72

73

74

Mesa Power Group LLC v. Government of Canada, Outline of Potential Issues, 31 July 2012. Available at accessed 31 May 2014. Windstream Energy LLC v. Government of Canada, UNCITRAL, Notice of Arbitration, 28 January 2013. Available at < http://italaw.com/cases/1585>. Windstream Energy LLC v. Government of Canada, UNCITRAL, Canada’s Response to the Notice of Arbitration, 26 April 2013. Available at . Mercer International Inc v. Government of Canada, Notice of Intent to Submit a Claim to Arbitration, 26 January 2012. Available at accessed 31 January 2015. The PV Investors v. Spain, ECT/UNCITRAL, case registered in November 2011, not publicly available. See also R.A. Nathanson, ‘The Revocation of Clean-Energy Investment Economic-Support Systems as Indirect Expropriations Post-Nykomb: A Spanish Case Analysis’, Iowa Law Review, Vol. 98, 2013, p. 863, with a comprehensive review of the Spanish legislative framework. A new claim was registered in May 2013 for a similar rollback programme in the Czech Republic: Antaris Solar GmbH et al. v. the Czech Republic, ECT/ UNCITRAL, case registered 18 May 2013, not publicly available. Finally, the newest addition to ISDS arbitrations under the ECT, EVN AG v. Republic of Bulgaria, ICSID Case No. ARB/13/17, registered on 19 July 2013, has arisen in connection to renewable energy provision by this Austrian investor in Bulgaria. The

162

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

investor in the energy market claimed that Latvia breached the anti-discrimination, FET treatment, and expropriation clauses of the ECT by refusing to pay an agreed double tariff for the production of electricity and heat from natural gas in a cogeneration plant designed to improve the country’s ecological situation.75 The Tribunal accepted the investor’s claim that the treatment had been discriminatory, as other energy cogeneration plants had been paid the double tariff, and that the respondent had not discharged the burden of proving that the other energy suppliers were not comparable to the investor.76 Finally, in the recently decided Naftrac arbitration, the investor sought $ 185 million in compensation from Ukraine’s National Environmental Investment Agency in connection with the performance of a Collateral Custody Agreement signed by Naftrac, the Agency, and Fortis Intertrust; the claimant also averred that it had not been granted all the emission reduction units of greenhouse gases which it had been due under Ukraine’s obligations arising from the UNFCCC and the Kyoto Protocol; the Tribunal, established under the Permanent Court of Arbitration’s Optional Rules for Arbitration of Disputes Relating to Natural Resources and/or the Environment, dismissed the monetary claims on the alleged financial losses and arbitral expenses but awarded partially to the claimant on the transfer of the emission reduction units.77 Support schemes under the EU’s climate change programmes are also susceptible to reduction, potentially resulting in litigation.78 In the Plantanol case, the claim was ultimately defeated because of the explicit leeway given to states by the applicable EU Directive to modify the support schemes to avoid overcompensation and arguably also because of the higher standard applied by the Court of Justice of the EU (CJEU) in legitimate expectations-based claims.79 A year later, in the Arcelor case, where the

75

76 77

78 79

case details are not publicly available, but there are news of the arbitration in the Bulgarian News Agency’s website. Available at accessed 31 January 2015. Nykomb Synergetics Technology Holding AB v. Republic of Latvia, SCC Case No. 118/2001, Award of 16 December 2003. Latvia’s 1995 Law on the Regulation of Entrepreneurial Activity in Energetics guaranteed the payment of a double tariff for energy produced from renewables or from low-capacity cogeneration plants; the investor initiated the claim as a consequence of the repeal of this law in 1998 and the adoption of the new Energy Law with a different tariff structure. Id., Nykomb Award, para. 4.3.2. Naftrac Ltd v. National Environmental Investment Agency (Ukraine), PCA Arbitration (Optional Environmental Rules), 4 December 2012; details of the case in (in Ukrainian) and in (in English) accessed 31 May 2014. Judgment of 10 September 2009 in Case C-201/08, Plantanol GmbH & Co v. Hauptzollamt Darmstadt, [2009] ECR 1-08343. See also Boute 2012, supra note 11, p. 640.

163

ALESSANDRA ASTERITI

investor again challenged the application of the EU ETS as a breach of its fundamental rights under EU law, the General Court established that: […] although the right to property and the freedom to pursue an economic activity form part of the general principles of Community law, those principles do not constitute absolute prerogatives, but must be viewed in relation to their social function. Consequently, the exercise of the right to property and the right to pursue a trade or profession freely may be restricted, provided that those restrictions in fact correspond to objectives of general interest pursued by the Community and that they do not constitute, […], a disproportionate and intolerable interference which infringes upon the very substance of the rights guaranteed.80 As an interim conclusion on the synergic possibilities of investment arbitration, it is important to clarify that these cases do not prove any preference or bias of investment tribunals towards green investment. Further questions arise from the solutions proposed in this chapter, such as the relationship between the level of protection of green investment in arbitrations where the applicable instruments contains a carveout provision for environmental measures; the possibility to further restrict IIAs to cover only green, or sustainable, investments; and, in that case, the role of tribunals in ascertaining if the applicable criteria are satisfied. Not all of these questions can be answered satisfactorily at the current status of development of investment law, and some speculative assumptions need to be made, to be tested, as always in this case, in the context of actual disputes.

6.5

CONFLICTS

The tension between climate change and investment obligations can result in actual conflicts. Necessary or inherent conflicts – between obligations, rather than between obligations and rights – will always result in a breach, whereby a state is not capable to abide by obligation ‘A’ without breaching obligation ‘B’.81 Treaty law, as codified in the VCLT, provides a series of tools for determining which obligation has priority of

80

81

Judgment of 2 March 2010 in Case T-16/04, Arcelor SA v. European Parliament and Council of the European Union, [2010] ECR II-nyr, para. 153; the judgment was confirmed on appeal by the ECJ on 29 March 2011. See Judgment of the Court (Grand Chamber) of 29 March 2011 in C-201/09 P ArcelorMittal Luxembourg SA v. European Commission and in C-216/09 P European Commission v. ArcelorMittal Luxembourg SA and Others [2011] ECR I-02239. J. Pauwelyn, Conflicts of Norms in Public International Law, Cambridge University Press, Cambridge, 2003, pp. 272-273.

164

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

application:82 1) hierarchy (lex superior),83 2) temporality (lex prior or lex posterior), and 3) specificity (lex specialis).84

6.5.1

Hierarchy

So far, normative hierarchy has not been raised explicitly in an investment dispute by either claimants or defendants; however, the Phoenix Tribunal, dealing with a jurisdictional objection centring on the meaning of ‘investment’, added an obiter dictum to the effect that: […] nobody would suggest that ICSID protection should be granted to investments made in violation of the most fundamental rules of protection of human rights, like investments made in pursuance of torture or genocide or in support of slavery or trafficking of human organs.85 This statement raises interesting questions on the status of certain fundamental norms of international environmental law, which pertain to the greater debate on the criteria for identification of peremptory norms. Some environmental norms have been said to enjoy ius cogens status, but this can be considered only speculative at this stage and has not received acceptance beyond the academic community.86 In any event, the Phoenix Tribunal was rather more concerned with the denial of treaty protection to an investment

82 83

84

85 86

1969 Vienna Convention on the Law of Treaties, 1155 UNTS 331, Art. 30. On norms classification for the purpose of hierarchical order, see D. Shelton, ‘Normative Hierarchy in International Law’, AJIL, Vol. 100, 2006, p. 291, and P. Weil, ‘Towards a Relative Normativity in International Law?’, AJIL, Vol. 77, 1983, p. 413. The debate on the constitutionalization of international law in this sense is only tangentially relevant; for it, see J. Klabbers et al., The Constitutionalization of International Law, Oxford University Press, Oxford, 2009, and G. Teubner, Constitutional Fragments: Societal Constitutionalism and Globalization, Oxford University Press, Oxford, 2012. The literature on peremptory norms, or ius cogens, is considerable; see lately A. Orakhelashvili, Peremptory Norms in International Law, Oxford University Press, Oxford, 2006. In the case law, see first Prosecutor v. Anto Furundžija, Judgment, Case No. IT-95-17/1, Trial Chamber II, 10 December 1998, [2002] 121 ILR 260 para. 153. International Law Commission (ILC), Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law, Report of the Study Group of the International Law Commission, finalized by Martti Koskenniemi, A/CN. 4/L. 682, 2006, para. 412. If specific savings clauses are included in the applicable treaty, tribunals can have recourse to those. Phoenix Action Ltd v. Czech Republic, ICSID Case No. ARB/06/5, Award of 15 April 2009, para. 78. E.M. Kornicker Uhlmann, ‘State Community Interests, Jus Cogens and the Protection of the Global Environment: Developing Criteria for Peremptory Norms’, Georgetown International Environmental Law Review, Vol. 11, 1998-1999, p. 101. The ILC, in its Draft Articles on State Responsibility, lists, as norms ‘clearly accepted and recognized’ as of peremptory character, ‘prohibitions of aggression, genocide, slavery, racial discrimination, crimes against humanity and torture, and the right to self-determination’. Records of the General Assembly, Fifty-sixth Session, A/56/10, 283-284.

165

ALESSANDRA ASTERITI

made in violation of a peremptory norm, a circumstance not too different from a normal jurisdictional objection for investments made in violation to the host state’s domestic law, in analogy to ordre public or public policy arguments.87 A ius cogens exception to the validity of a treaty does not concern the behaviour of a particular investor – for example, the use of slave labour – or the interpretation of the treaty language to cover a particular investment, as noted by the Phoenix Tribunal, but more fundamentally, raises issues of validity of the treaty against an existing or emerging peremptory norms. This eventuality is even less likely to occur than the violation by an investor of a peremptory norm of international law, depriving him of the protection of a (valid) investment treaty. In other words, it would be quite difficult to envisage an IIA conflicting with a peremptory norm or concluded with the purpose of violating such a norm.

6.5.2

Temporality

If norms in two different treaties are both legal and valid, yet they cannot be applied at the same time – if, in other words, they require the state to perform both ‘A’ and ‘non-A’ – there is a genuine conflict. In order to establish priority of application of two valid norms, their temporal sequence can be taken into consideration, according to the maxim lex posterior derogat [legi] priori. Article 30(3) VCLT reflects some elements of this maxim, establishing a presumption of priority of the later agreement, which can be rebutted if it can be established that the intent of the parties did not match the presumption.88 The determining factor, and the bone of contention, is of course the ‘same subject matter’ clause in the Article, to be applied restrictively, as proposed in the traveaux préparatoires of the Vienna Conference89 or more widely, as advocated by the ILC report.90 While it is not acceptable to reduce the requirement to a matter of classification, to the extent that

87 88

89

90

The opposability of these norms directly on the investors is a different matter, unless they are also translated into domestic legislation. A rebutted presumption based on the clear intent of the parties is different from the application of the opposite maxim (lex prior) based on the respect of the fundamental principle of pacta sunt servanda. See also ILC, 2006, pp. 122 et seq. It might be the case that a contractual law approach to IIAs might militate in favour of the application of the lex prior rule, while a public law paradigm will point to the lex posterior as the correct gauge of states’ intent. This has interesting repercussions in the meta-conflict between conflict rules, to the extent that IIAs tend to belong to the contractual type of treaty more than environmental treaties (including on climate change), normally of a multilateral type and belonging more clearly to a public law paradigm. See United Nations Conference on the Law of Treaties: Second Session, Vienna 9 April-22 May 1960: Official Records: Summary Records of the Plenary Meetings and the Meetings of the Committee of the Whole, A/CONF.39/C.1/SR.86: 222. See also J.B. Mus, ‘Conflicts between Treaties in International Law’, Netherlands International Law Review, Vol. XLV, 1998, p. 208. An excessively restrictive interpretation was also adopted by the Eureko Tribunal, para. 258. Section B generally and para. 254 with specific reference to Art. 30 of the VCLT.

166

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

any taxonomy is subjective and arbitrary, nevertheless, if two treaties patently belong to the same regime, a strong presumption of applicability of Article 30 can be made and temporality sequencing is potentially dispositive for the application of the treaty. Clearly, the overlap between treaties with different subject matters, concluded over time and containing no conflict resolution clauses or conflicting or ambiguous ones, remains a distinct possibility. Inter-regime conflicts, or conflicts between treaties amongst different parties,91 cannot easily be tackled by a technical rule such as the lex posterior; rather, the rule becomes subordinated to other criteria, such as the distinction between ‘integral’ and ‘reciprocal’ obligations. In an inter-regime conflict between environmental and investment treaties, the first will be a multilateral ‘integral’ treaty and the second a bilateral ‘reciprocal’ treaty. Already in 1966, the ILC acknowledged that integral treaty obligations are better disposed via the law of state responsibility rules.92 Recent ‘mixed’ agreements, combining investment, trade, and social goals, are more likely to contain expressed conflict clauses, as the NAFTA on which they are modelled. If there are no expressed provisions, as per Article 30(1), the issue of compatibility is dealt with provision by provision; this might be relevant for the application of the ‘subject matter’ criterion, whereby the provisions, rather than the treaty as a whole, have to share the same subject matter.

6.5.3

Specificity

The VCLT does not contain a provision on lex specialis, the other important conflict rule based on the principle of specificity (as between general law and an interpretation or exception to it or between two special provisions).93 There is an obvious overlap between the temporality and specificity,94 as a special provision will inevitably be successive to the

91 92

93 94

It is likely that successive treaties between different parties are also straggling between different regimes. Report of the ILC to the General Assembly on its 18th Session, A/6309/Rev I (1966) Vol II Yearbook of the International Law Commission 169, 217, para. 13; see also O. Corten & P. Klein, The Vienna Conventions on the Law of Treaties – A Commentary, Oxford University Press, Oxford, 2011, p. 772; J. Klabbers, ‘Beyond the Vienna Convention: Conflicting Treaty Provisions’, in E. Cannizzaro (Ed.), The Law of Treaties Beyond the Vienna Convention, Oxford University Press, Oxford, 2011, p. 195. See ILC 2006, paras. 47 et seq. For a case in which the relationship between the two principle was considered by the court, see the Lockerbie Cases, Questions of Interpretation and Application of the 1971 Montreal Convention arising from the Aerial Incident at Lockerbie (Libyan Arab Jamahiriya v. United States of America), Judgment of 27 February 1998, 1998 ICJ Rep., p. 115 (Preliminary Objections); Questions of Interpretation and Application of the 1971 Montreal Convention arising from the Aerial Incident ut Lockerbie (Libyan Arab Jamahiriya v. United Kingdom), Judgment of 27 February 1998, 1998 ICJ Rep., p. 9 (Preliminary Objections); see also Pauwelyn 2003, supra note 81, pp. 385 et seq, especially at p. 396: “The […] lex specialis principle is only really put to the test in case it is not at the same time the lex posterior”.

167

ALESSANDRA ASTERITI general norm it applies or provides the exception for.95 This is not to say that the lex specialis rule is subject to the lex posterior rule.96 However, while the lex specialis rule allows an ‘informal hierarchy’97 in which the norm that is disapplied remains valid, the temporality rule results in the loss of validity of the overruled norm, at least in the relation between the parties to both norms. Furthermore, the relational character of the general/ special distinction does not allow for the application of the lex specialis rule for the resolution of a potential conflict, its usefulness as an interpretative principle notwithstanding. 98 The ILC goes as far as to say that this principle “cannot be meaningfully codified”.99 At a high level of generality, any norm can be conceptualized as special in relation to its normative background and as general in application. To this effect, lex specialis seems at its most useful and relevant the closer to the normative ground it is. On the other hand, the risk is then that either the principle collapses into the lex posterior one or it is reduced to a principle of legal logic rather than a specific method of conflict resolution. This is especially so as long as one attributes to the rule the double function of distinguishing between general and particular in a cumulative as well as in an exclusionary way, for example, in Article 55 (Lex Specialis) of the ILC’s Draft Articles on State Responsibility.100 The status as informal hierarchical rule enjoyed by lex specialis begs the question of how exactly it is supposed to function as a conflict rule between international law norms that do not share the same subject matter. The most straightforward application of the rule is in the context of two related treaties, one of which is of a more general nature and the other more specific: for example, a treaty implementing the obligations set out in the ‘framework’ treaty or a treaty that sets out in more detail the general terms of a previous agreement.101 The lex specialis rule has been especially relevant in the context of the attribution and invocation of state responsibility and, in investment treaty arbitrations, with countermeasures.102 This application of the rule is germane to the acceptance of a heightened lex

95

Pauwelyn 2003, supra note 81, p. 396, also notes the exceptional nature of this occurrence but does provide a couple of examples, both concerning not two treaties, but two declarations and a treaty and a declaration. Equally interesting is the application of the principle for the resolution of a conflict between two norms contained in the same instrument (or more realistically, a series or related instruments, such as the WTO Agreement). 96 This is particularly relevant if the lex specialis is also lex prior: see Pauwelyn 2003, supra note 81, pp. 405 et seq. 97 ILC 2006, para. 85. 98 Id., para.112. 99 Id., para. 119. 100 International Law Commission, Report on the Work of its Fifty-third Session, Official Records of the General Assembly, Fifty-Sixth Session, Supplement No. 10 (A/56/10), p. 58. 101 Such as in the case of the UNFCCC and its Kyoto Protocol. 102 M. Paparinskis, ‘Investment Arbitration and the Law of Countermeasures’, BYIL, Vol. 79, 2009, p. 264.

168

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

specialis form establishing ‘self-contained regimes’ with their own independent rules of state responsibility, of which the investment regime constitutes a classic example.103 Nonetheless, the permanence of general rules of international law as fallback rules seems equally uncontentious. Under a less-demanding reading of lex specialis regimes as an ‘interlinked series of primary and secondary rules’, these regimes share an ethos but remain open to interpretation under general international law.104 The uncontested assertion that IIAs constitute lex specialis with respect to general international law – as illustrated most forcefully by the debate on the relationship between the treaty and customary international minimum/FET standard – does not take us very far in solving a conflict where compliance with a treaty norm in the IIA results in a breach of an environmental treaty, or vice versa; this leaves unresolved the issue of conflict resolution by application of the lex specialis rule, as these regimes cannot be considered closed legal circuits impervious to other legal obligations, even if they have been treated as such by several tribunals. The complex theoretical edifice of conflict rules jars with the rarity of normative conflicts in international adjudication, including investment arbitration.105 The fact that conflicts are not picked up by investment tribunals can result from preventive action by host states not passing measures carrying a substantial litigation risk (the dreaded ‘regulatory chill’), as much as prove that the risk of normative conflicts is statistically insignificant. Certainly, it is not unlikely that a command-and-control measure under Article 2 of the Kyoto Protocol might directly conflict with an investment obligation.106 As for the

103 In the sense suggested by the Commentary to Art. 55 of the ILC’s Draft Articles on State Responsibility, see para. 5 in Official Records of the General Assembly, Fifty-sixth Session, Supplement No 10 (A/56/10), 2001, pp. 358-359. Opposite positions on the nature of the investment regime in this regard have been taken by Z. Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’, BYIL, Vol. 74, 2003, p. 151 and C. Leben, ‘La Responsabilité Internationale de l’État sur le Fondement des traits de Promotion et de Protection de l’Investissements’, Annuaire Français de Droit International, Vol. 50, 2004, p. 683. Equally, two NAFTA tribunals came to conflicting conclusions with regard to the availability of countermeasures to NAFTA Parties; see Archer Daniels Midland Company and Tate & Lyle Ingredients Americas v. United Mexican States, ICSID Case No. ARB(AF)/04/05, Award of 21 November 2007; and Corn Products International, Inc v. United Mexican States, ICSID Case No. ARB(AF)/04/01, Dec. on Responsibility of 15 January 2008. 104 ILC 2006, paras. 88 et seq. The term ‘self-contained’ with reference to a system of rules is attributed to the PCIJ in the SS Wimbledon Case, PCIJ, Ser A, No 1, at 23. See also the ICJ in Case concerning the United States Diplomatic and Consular Staff in Tehran (United States of America v. Iran), Judgment of 24 May 1980, 1980 ICJ Rep., p 41, para. 86. The ILC suggested to replace the use of the misleading term ‘selfcontained regime’ with the more appropriate ‘special regime’, with reference either to a special system of secondary rules or to a more integrated system of primary and secondary rules. A third, even wider definition of such a regime as equivalent to ‘branches’ of international law such as trade, environment, etc., is not advisable either. On self-contained regimes and the rules on state responsibility, see also B. Simma and D. Pulkowski, ‘Of Planets and the Universe: Self-contained Regimes in International Law’, EJIL, Vol. 17, 2006, p. 483. 105 ILC 2006, para. 41. 106 Some examples of potentially conflicting domestic measures are given in Section 6.3.

169

ALESSANDRA ASTERITI

exceptions and carveout clauses dealt in the second part of the chapter, arguably the most efficient solution for normative conflicts between international obligations is by of conflict clauses in the treaties.107 IIAs contain two kinds of conflict clauses: the first kind is proper conflict clauses, establishing a hierarchy of application, and the second kind is not a conflict clause as such, limiting its scope to the enhancement of mutual supportiveness between obligations.108 To this extent, this latter kind is similar to the ‘balancing clauses’ contained in IIA at least since the NAFTA, also referred to as ‘maintenance of standards’ clauses.109 While ‘mutual supportiveness’ clauses are aimed at international obligations, balancing clauses help rebalance the relationship between the right to regulate domestically and the duty to comply with the IIA. Equally, the above-mentioned pure conflict clauses find their correspondent in the ‘police powers’ exception clauses (or other forms of carveout and/or exception clauses as those allowing environmental performance requirements). However, a too-strict categorization of the clauses around this taxonomy does not reflect the reality of treaty drafting, as there are examples of mixed clauses – supportiveness and balancing or international and domestic – neither does it reflect the reality of arbitral practice, whereby what is constructed as an argument around normative conflict by the respondent might be reframed as decision based on mutual supportiveness by the tribunal.

6.5.4

Interim Conclusions on Conflicts

The potential conflicts resulting from the interface between climate change policies and investment commitments can result in the phenomenon of ‘regulatory chill’, whereby states refrain from implementing environmental measures that might be challenged in investment arbitration, resulting in costly awards and legal costs.110 While the actual import of the phenomenon is difficult to quantify – as always when one tries to quantify an absence – it is undoubtable that states are equally likely to assess and try to mitigate the

107 Their success is highly dependent from the clarity of their language, as they are subject to the interpretation of tribunals and therefore open to the usual interpretative issues. 108 The importance of mutual supportiveness, underpinning the basic presumption against conflict, has been recognized widely. Additionally, the residual character of Art. 30 VCLT, whereby specific provisions on compatibility in the applicable treaty would prevail, was recognized by the United Nations Conference on the Law of Treaties, Official Records, Second Session, 91st Meeting (Waldock). 109 See M.C. Cordonnier Segger, Innovative Legal Solutions for Investment Law and Sustainable Development Challenges, in this volume, p. 10. 110 For a sceptical view, see S. Schill, ‘Do Investment Treaties Chill Unilateral State Regulation to Mitigate Climate Change?’, Journal of International Arbitration, Vol. 24, 2007, p. 469; more accepting, H. Mann & K. von Moltke, NAFTA’s Chapter 11 and the Environment: Addressing the Impacts of Investor-State Process on the Environment, IISD Working Paper 1999, accessed 30 March 2014.

170

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

litigation risk of their regulatory actions as investors are to assess and mitigate the regulatory risk of their investments. The assessment of the litigation risk resulting from the implementation of climate change policies is in fact equally crucial to both parties. This assessment has to take into account the existence of an IIA between the interested parties and the level of autonomy in decision-making for the climate change regulatory framework. As already noted, regulation can take the form of domestic measures, Kyoto mechanisms with limited international involvement, such as JI Track I, or with more robust international supervision, such as JI Track II and CDM projects. The risk level will vary according to the form of regulatory intervention: CDM and JI Track II projects, for example, present a low litigation risk, as international institutional involvement reduces the ability of the host state to interfere with the execution of the project.111 Conversely, the higher level of host states’ involvement in JI projects will not necessarily increase the risk of litigation, except under the ECT, as the Annex I countries participating in JI projects do not normally share IIAs amongst themselves (with the noted exception of the ECT). The regulatory baseline of the host state is also relevant, but this is to be taken as a universal criterion for the assessment of regulatory risk, insofar as a less developed regulatory framework is more susceptible to change in order to reach international standard, while the smaller adjustments necessary to keep a well-developed framework up to date should be less detrimental (and more predictable) to foreign investors.

6.5.5

Interpretation

The first tool available to investment tribunals dealing with a potential conflict is interpretation. In investment disputes, if the home state of the investor and the host state (and third state parties, where these exist) agree to a particular interpretation, tribunals have to take this into account as an authoritative interpretation of the applicable treaty.112 The lack of coincidence between parties to the proceedings and parties to the treaty – and the impossibility for investors, as parties to the proceedings but not to the treaty, to participate fully in the forensic interpretation – raises difficult questions of conflicts of

111 By reducing the risk of host state’s interference with the approval of the projects and the issuance of CERs and ERUs. The risk is not completely eliminated as states might influence the decision-making process at the level of the Designated National Authorities and Designated Operational Entities. Risk abatement via the introduction of administrative review mechanisms has been advocated by Streck & Lin, 2008, supra note 62, p. 409. 112 One should note that the obligation imposed by Art. 31(3) is less demanding than the ‘shall be interpreted’ language adopted in Arts. 31(1) and (2). See also the joint interpretative statement issued by the Netherlands and the Czech Republic in CME Czech Republic BV v. Czech Republic, UNCITRAL, Final Award of 14 March 2003, paras. 87-93.

171

ALESSANDRA ASTERITI

interest, for the host state, and detrimental reliance or frustration of legitimate expectations, for the investor, which are tangentially relevant to the issue of clarification of the import of environmental obligations, including on climate change and on the investors, where these are not spelled out clearly in the IIA. Specifically, it is an open question to what extent due diligence by the potential investor has to include an assessment of noninvestment international treaties and their applicability in a potential investment dispute, which is heavily dependent on the interpretative approach of tribunals and the possibility of authoritative interpretations by states, resulting in the incorporation of these noninvestment instruments in the interpretative work of the tribunals. A tool for the reduction of the interpretative power of tribunals is the introduction of clauses on binding interpretations by the treaty parties, on the model of Article 1131(2) of the NAFTA; this type of clause has been introduced also in the recently concluded EU–Canada Comprehensive Economic and Trade Agreement (CETA), maybe signifying a new phase in the claw back of powers within the investment regime.113 The argument for evolutionary interpretation of international law seems particularly apposite for regimes, such as environmental and climate change law, that are rapidly developing in response to improved technological and scientific knowledge and the demands posed on the environment by economic development and population growth. However, arguments in support of systemic integration as the default tool in treaty interpretation might jar with the function of treaties as lex specialis engendering expectations of stability. In other words, if amongst the functions of treaties is that of derogating from general international law, a fortiori the more the latter departs from the former, the more the former should be read in its original context.114 An excessive reliance on ‘systemic integration’ as an hermeneutical tool fails to account for alternative interpretative techniques legitimately employed by tribunals, less receptive to the need to harmonize treaty provisions beyond the jurisdictional limits of the investment regime. Its relevance in investment arbitrations will still be decided on a case-by-case basis, depending on the attitude of tribunals to interpretation, the law applicable to the dispute, the presence or not of conventional environmental norms that have to be considered by tribunals as part of their interpretative work as per Article 31(3)(c), and the applicability of savings or conflict clauses. It is important therefore not to overstate the role of systemic integration and not to view it “as a sort of master key enabling the systemic integration of

113 See European Commission, Investment Protection and Investor-to-State Dispute Settlement in EU Agreements, November 2013. Available at accessed 28 April 2014. 114 See also T. Wälde, ‘Interpreting Investment Treaties: Experiences and Examples’, in C. Binder et al. (Eds.), International Investment Law for the 21st Century, Oxford, Oxford University Press, 2009, pp. 769 et seq.

172

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

otherwise disparate legal regimes”.115 Interpretation is symbiotically dependent to conflict resolution, but dependency is not the same as interchangeability. A tribunal interpreting an IIA together with the relevant (and applicable in the relation between the parties) rules of international law is not empowered to modify the treaty rules, but simply to apply the treaty rules so that the presumption of compliance is respected.116 IIAs often contain applicable law clauses, e.g. Article 10(4) of the Syria–Cyprus BIT, which directs tribunals to “settle the dispute in accordance with the provisions of this Agreement, applied laws of the hosting country and the applicable rules and principles of international law”.117 These clauses put investment tribunals under a stronger obligation, as far as concerns the application of other norms of international law not contained in the treaty, than that encapsulated in Article 31(3)(c), which instructs courts merely to “take [them] into account” in their interpretative work. Consequently, in deciding the dispute, investment tribunals are under an obligation to apply the VCLT in their interpretative work and to apply any relevant rules and principles of international law. Therefore, non-investment rules have two potential entry points: the first, aiding the tribunal in its interpretative work of the IIA and the second, remaining applicable to the dispute in the means accorded by the IIA or, as the case may be, by the International Centre for Settlement of Investment Disputes (ICSID) Convention or the investment contract.

6.5.6

Exceptions: Standards of Treatment

Non-investment obligations, such as climate change policies implemented in compliance with the UNFCCC regime, can be incorporated into the IIAs by way of exceptions and clarifications; for standards of treatment, it seems an established treaty practice to include exceptions for the comparative standards, but less so for the absolute standards. In fact, the FET standard is normally spelled out to be applicable ‘at all times’; consequently, any regulatory space is more likely to be created through the exercise of the appropriate balancing and proportionality analysis, unless and until comprehensive modification of 115 As rightly noted by B. Simma & T. Kill, ‘Harmonizing Investment Protection and International Human Rights: First Steps Towards a Methodology’, in Binder et al. (Eds.), International Investment Law for the 21st Century, Oxford, Oxford University Press, 2009, supra note 114, p. 694. 116 See also RosInvest v. Russia, SCC Case No. 079/2005, Award on Jurisdiction of 1 October 2007, para. 39: “‘Applicable in the relations between the parties’ must be taken as a reference to rules of international law that condition the performance of the specific rights and obligations stipulated in the treaty – or else it would amount to a general licence to override the treaty terms that would be quite incompatible with the general spirit of the Vienna Convention as a whole”. 117 Agreement between the Government of the Republic of Cyprus and the Government of the Syrian Arab Republic on the Promotion and Reciprocal Protection of Investments, 44952 UNTS 1, 37. For disputes under the institutional umbrella of the ICSID Convention, if there is no applicable law clause in the IIA, Art. 42 of the Convention applies.

173

ALESSANDRA ASTERITI the language of the treaties is undertaken.118 Older IIAs already contained exception clauses to the relative standard of treatment protections; the European-style IIAs tend to include explicit limitations, while the North American model offers the ‘in like circumstances’ clause as a “de facto public policy justification mechanism”.119 One of the most progressive interpretations of the MFN clause was given by the Parkerings Tribunal.120 Parkerings had argued discrimination with respect to another company, Pinus Proprius, in the concession of a licence for the construction of a parking lot in the city of Vilnius. Both parking lots were planned in the Old Town of Vilnius, a UNESCOdesignated area. However, the project proposed by Parkerings was much more intrusive and several cultural agencies had expressed their disapproval.121 The Tribunal took these circumstances into account when it concluded that the potential negative impact of Parkerings’ projected parking lot on historical preservation and environmental protection rendered it ‘not similar’ to the project of its competitor. By adopting this interpretation of the ‘in like circumstances’ provision, the Tribunal opened the door for interpreting environmental obligations into the anti-discrimination clauses in investment treaty as a legitimate tool for differential treatment.122 It has been argued elsewhere that the approach of the Parkerings Tribunal is the correct one in cases involving climate change measures as well.123 However, in the absence of a doctrine of precedent in investment arbitration, there is no certainty for states that they will not be found in breach of their IIA’s standard of treatment of obligation for climate change regulation that impacts negatively on the foreign investor. This is the reason why a clause such as Article 5(e) of the International Institute for Sustainable Development (IISD) Model BIT is a desirable

118 See the proposal to attribute this balancing function to the ‘equitable’ element of the standard, C. McLachlan, L. Shore & M. Weiniger (Eds.), International Investment Arbitration – Substantive Principles, Oxford, Oxford University Press, 2009, p. 206: “The inclusion of the reference to equitable treatment also provides a means by which an appropriate balance may be struck between the protection of the investor and the public interest which the host State may properly seek to protect in the light of the particular circumstances then prevailing”. 119 F. Ortino, ‘Non-Discriminatory Treatment in Investment Disputes,’ in P.M. Dupuy et al. (Eds.), Human Rights in International Investment Law and Arbitration, Oxford, Oxford University Press, 2009, p. 360. Already in 1985, the OECD wrote that “As regards the expression ‘in like situations’ […] [t]he Committee also agreed that more general considerations, such as the policy objectives of Member countries in various fields, could be taken into account in order to define the circumstances in which comparison between foreign-controlled and domestic enterprises is permissible inasmuch as those objectives are not contrary to the principle of National Treatment”; OECD, International Investment and Multinational Enterprises: National Treatment of Foreign Controlled Enterprises, OECD Publications, Paris, 1985, p. 17. 120 Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8, Award of 11 September 2007. 121 Id., para. 388 of the award. 122 As noted by OECD 1985, supra note 120, p. 17. 123 Marshall et al. 2010, supra note 63, p. 37.

174

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

.

addition.124 There are a few examples in newer IIAs, such as the 2007 Azerbaijan–Croatia BIT,125 and the 2007 Investment Agreement for the Common Market for Eastern and Southern Africa (COMESA).126 Similar clarifications, taking the form of veritable exemption or carveouts, can be inserted for absolute standards such as the FET; the 2005 China– Madagascar BIT contains the following provision in its Article 2 – Just and Equitable Treatment: “Measures taken for security, public order and public health or morality and the protection of the environment, will not be considered breaches”. The peculiarity of the MFN treatment standard – not only guaranteeing that the most favourable treatment given to a third investor is also extended to any other investor but also importing the relevant most favourable treatment clause into the basic treaty127 – makes it a powerful tool in the hands of investors keen to mitigate their regulatory risk. To this extent, MFN clauses, long recognized as having a harmonizing function within the investment regime, can have a gate-keeping function between regimes, preventing the application of non-investment obligations where a more orthodox provision, i.e. less innovative and integrative, exists. The limiting clauses mentioned above provide a relative protection for states differentiating between investors on the basis of the regulatory environment in which they act (for example, differentiating between users of climatefriendly technology and users of traditional carbon-dependent technology); in the absence of these clauses, the viability of the climate change policies will depend on the approach taken by tribunals. In this case, states might want to consider if it is not better to avoid inserting environmental provisions in IIAs and open themselves to the risk of claims based on the MFN clause; alternatively, states might want to reduce the power of 124 Restricting the application of the ‘in like circumstances’ provision; see IISD Model International Agreement on Investment for Sustainable Development. Available at accessed 31 May 2014. The article has been adopted, mutatis mutandis, by the COMESA Parties; see Art. 17, at footnote 127. 125 Art. 4(2)(ii) – Treatment of Investment: “[…] for greater certainty, the concept of ‘in like circumstances’ requires an overall examination, on a case by case basis, of all the circumstances of an investment, including, inter alia: its effects upon the local, regional or national environment […]”. 126 Art. 17: “1. Subject to Article 18 [Exceptions to National Treatment and Other Obligations], each Member State shall accord to COMESA investors and their investments treatment no less favourable than the treatment it accords, in like circumstance, to its own investors and to their investments with respect to the establishment, acquisition, expansion, management, operation and disposition of investments in its territory.2. For greater certainty, references to ‘like circumstances’ in paragraph 1 of this Article requires an overall examination on a case by case basis of all the circumstances of an investment including, inter alia: (a) its effects on third persons and the local community; (b) its effects on the local, regional or national environment, including the cumulative effects of all investments within a jurisdiction on the environment; (c) the sector the investor is in; (d) the aim of the measure concerned; (e) the regulatory process generally applied in relation to the measure concerned; and (f) other factors directly relating to the investment or investor in relation to the measure concerned; and the examination shall not be limited to or be biased towards any one factor”. 127 And in the case of the ECT, entitling investors to the most favourable treatment offered in past and future third IIAs (Art. 16), making this a potentially very powerful tool.

175

ALESSANDRA ASTERITI

the MFN clause itself, either by eliminating it altogether or by qualifying it to exclude certain provisions from its purview.128 A clause of this type will shield regional environmental agreements (for example, JI projects) that might guarantee preferential rates to the parties of the agreement, rather than prevent circumvention of environmental clauses on the basis of the MFN clause. Nonetheless, it is not impossible to suggest that they could be adapted in the direction of limiting the MFN treatment strictly to investment matters and to the exclusion of non-investment provisions that might be also present in the IIA. In the case of national treatment clauses, the introduction of exceptions is less problematic, as this standard contains the comparative element, but not the circumventing one. There are several examples of IIAs limiting the application of national treatment in conjunction with exceptions derived from domestic legislation where issues are measures dictated by, amongst others, environmental policy.129 As noted, the – understandable, especially on a procedural reading of the clause – lack of exceptions in FET standard clauses requires that public policy considerations be included by tribunals contextually to their fact-based analysis of the claim rather than as a matter of interpretation and application of the treaty language. In the Maffezini arbitration, the Tribunal properly balanced the environmental considerations in its assessment of the claim.130 The parties’ submissions are not available, and, from the summary given in the 128 Already the 1991 Hungary–Thailand BIT provides in Art. 5 as follows: “The provisions of this Agreement relative to the grant of treatment not less favourable than that accorded to the nationals or companies of either Contracting Party or of any third State shall not be construed so as to oblige one Contracting Party to extend to the nationals or companies of the other Contracting Party the benefit of any treatment, preference or privileges which may be extended by the former Contracting Party by virtue of: [...] (c) any arrangement with a third country or countries in the same geographical area designed to promote regional cooperation in the economic, social, labour, environmental, industrial or monetary fields within the framework of specific projects”. A similar clause is also included in the 1992 Singapore–Vietnam BIT, the 1995 Singapore–Pakistan BIT, and the 2000 Mauritius–Singapore BIT. 129 For example, Art. 3(3) of the 1995 Sweden–Russia BIT provides as follows: “Each Contracting Party may have in its legislation limited exceptions to national treatment provided for in Paragraph (2) of this Article. Any new exception will not apply to investments made in its territory by investors of the Other Contracting Party before the entry into force of such an exception, except when the exception is necessitated for the purpose of the maintenance of defence, national security and public order, protection of the environment, morality and public health”. 130 Emilio Agustín Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7, Dec. of the Tribunal on Objections to Jurisdiction of 25 January 2000. Emilio Agustín Maffezini was an Argentinian investor planning to establish a chemical plant in Galicia through his locally incorporated enterprise, EAMSA. He obtained a loan and a buyout agreement for the share owned by them from the local agency for industrial development (SODIGA), both at a preferential rate. Mr. Maffezini was also able to obtain several subsidies from the Spanish government. The implementation of the project and construction were delayed and then stopped due to financial difficulties, including a further financing of EAMSA by Mr. Maffezini via a transfer of funds, the circumstances of which were contested. Contextually, the investor was also requested to comply with an environmental impact assessment (EIA), equally contested in the dispute. After the failure of the negotiations over the cancellation of the company’s debts in exchange for its remaining assets, the investor instituted ICSID proceedings on 19 July 1997, contending that 1) SODIGA was a public entity and therefore its actions, as detailed in the following points, were attributable to Spain; 2) SODIGA had

176

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

award, it is not possible to ascertain how detailed these allegations were with respect to the obligations contained in the Spain–Argentina BIT; however, it is noteworthy that the Tribunal referred to the relevant articles of the treaty only at the close of its considerations of the claim.131 That is how we can surmise that the contested transfer of funds from the investor’s bank account was vitiated by a lack of transparency, in violation of FET standard obligations contained in Article 4(1) of the BIT, confirming that the Tribunal considered transparency as an element of the FET standard, as more explicitly and comprehensively argued by the Tecmed and Metalclad Tribunals several years later.132 Equally, it might be surmised that the other claims raised by the investor will have fallen under the same heading, as breaches of the FET standard.133 The Tribunal placed a lot of emphasis on the constitutional status of the applicable environmental legislation and its international pedigree – and in this, gave a good example of how to provide the necessary linkage between the two in case of a potential conflict – contextually arguing that the governmental action was ‘fully consistent’ with Article 2(1) of the BIT, stating that foreign investments are presumed to be in compliance with national legislation (therefore extending the reach of this clause to the entire life of the investment). It remains however unclear if the Tribunal would have found a breach of the FET standard had the respondent failed in its procedural obligations; in that event, it seems that the Tribunal would have applied a more exacting standard, along the lines of the customary criteria, as it noted that ‘ignorance of the law is no defence’, apparently not submitting the contested measures to the same standard of transparency to which the transfer of funds was subjected. This is an important distinction, whereby legislative measures of general application are presumed not to be in breach of the FET standard on substantive grounds, whereas targeted, non-legislative, or administrative measures are subjected to a more searching analysis and a stricter standard of review.

misrepresented the total cost of the project; 3) EAMSA had been pressured into investing in the project before the implications of the EIA were known, resulting in increased costs for which SODIGA should be held liable; and 4) the financing of EAMSA through transfer of funds from the investor’s private account had not been authorized by him and therefore was irregular. 131 Para. 83 of the award. 132 Técnicas Medioambientales Tecmed, SA v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award of 29 May 2003, para. 154; Metaclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000, paras. 75-76 and 99. 133 However, the Tribunal considered the actual acts attributable to SODIGA in its sovereign capacity, rather than commercial one, to be breaches of Art. 3(1) of the BIT, i.e. the obligation to protect the investment. Contextually to the discussion on the question of attribution of SODIGA’s actions to the government of Spain, the Tribunal found it apposite to add that “[…] the Tribunal must emphasize that Bilateral Investment Treaties are not insurance policies against bad business judgments”. While this is a reminder of the duties to conduct the proper due diligence in assessing the business risk, it is not too much of a stretch to interpret this to include environmental regulatory risk, also in view of the discussion, immediately following, on the EIA procedure.

177

ALESSANDRA ASTERITI

6.5.7

Clarifications and Carveouts: Indirect Expropriation

The approach taken by international investment tribunals in nonarbitrary regulatory intervention has not always been consistent, given the already mentioned difficulties in drawing the line between non-compensable regulation or exercise of police powers and compensable regulatory intervention; overall, two approaches have emerged, the ‘sole effect’ and the ‘effect and purpose’.134 The clearest articulation in investment case law of the sole effect doctrine is the often quoted statement of the Metalclad Tribunal: [...] expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.135 The more holistic ‘effect and purpose’ doctrine is recognizable in the SD Myers Tribunal’s assertion that: [...] a tribunal [should] look at the substance of what has occurred and not only at form. A tribunal should not be deterred by technical or facial considerations from reaching a conclusion that an expropriation or conduct tantamount to an expropriation has occurred. It must look at the real interests involved and the purpose and effect of the government measure [emphasis added].136 The same approach was taken by the Methanex Tribunal137 and by the Saluka Tribunal, which gave probably the clearest definition of the police powers doctrine as applied to

134 Rudolf Dolzer introduced the term ‘sole effects’ to describe this interpretation of indirect takings in investment law (also Starrett Housing Corporation v. Islamic Republic of Iran (1983) Iran-USCTR 122, 154): R. Dolzer & F. Bloch, ‘Indirect Expropriation: Conceptual Realignments?’, International Law FORUM du Droit International, Vol. 5, No. 3, 2005, 155. See also McLachlan et al. 2008, supra note 38, p. 287; L.Y. Fortier & S.L. Drymer, ‘Indirect Expropriation in the Law of International Investment: I Know it when I See it, or Caveat Investor’, Asia Pacific Law Review, Vol. 13, 2005, p. 79; Higgins 1982. A partial use of the proportionality analysis familiar from European constitutional traditions, is recognizable in the approach taken by the Tecmed Tribunal; see Técnicas Medioambientales Tecmed, SA v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award of 29 May 2003, para. 122. 135 Metalclad Corporation v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000, para. 103. 136 S.D. Myers, Inc. v. Government of Canada, para. 285. 137 Methanex v. The United States of America, NAFTA/UNCITRAL, Final Award of 3 August 2005, Part IV – Chapter D – para. 7.

178

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

indirect or regulatory expropriation, with the effect of a carveout of the measures from the purview of the expropriation clause.138 From a sustainable development and climatefriendly perspective, the dangers of adopting the strict ‘effect only’ approach are selfevident.139 However, even the more accommodating ‘effect and purpose approach’ leaves some troubling questions open. The Methanex Tribunal stated: Methanex entered a political economy in which it was widely known, if not notorious, that governmental environmental and health protection institutions at the federal and state level, operating under the vigilant eyes of the media, interested corporations, non-governmental organizations and a politically active electorate, continuously monitored the use and impact of chemical compounds and commonly prohibited or restricted the use of some of those compounds for environmental and/or health reasons. Indeed, the very market for MTBE in the United States was the result of precisely this regulatory process.140 In other words, the Tribunal tied the legitimate expectations of the investor to the normative environment in California; therefore, the Tribunal argued that, lacking some expressed commitment from the authorities, the investor should have predicted changes in the regulatory environment in response to environmental and/or health reasons and could not construe an actionable claim for compensable expropriation on these grounds.141 The logical reverse side to this argument is that a laxer environmental regulation might engender the opposite expectations in the investor, improving his chances of a successful challenge for regulatory expropriation. Yet it is precisely this sort of regulatory environment, not the highly developed and sophisticated environmental

138 Saluka Investments BV v. The Czech Republic, UNCITRAL, Partial Award of 17 March 2006, para. 255: “It is now established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare”. See also Chemtura Corporation v. Government of Canada, UNCITRAL, Award of 2 August 2010. 139 The strict application of the sole effect criteria could cast a very wide net over bona fide regulation, restricting the policy space necessary for climate change regulation. See also Judge Tysoe’s comments in the judicial review proceedings of the Metalclad Award, The United Mexican States v. Metalclad Corporation, In the Supreme Court of British Columbia, 2 May 2001 (2001 BCSC 664) and its analysis in A. Prujiner, ‘L’expropriation, l’ALENA et l’affaire Metalclad, International Law FORUM du droit international, Vol. 5, 2003, p. 205. 140 Methanex v. The United States of America, Part IV – Chapter D – para. 10. 141 Not that the claimant did, as it argued instead breaches of due process, including officials’ corruption and protectionist policies disguised as environmental policies. To this extent, the Tribunal is answering a question that had not been asked. For a discussion of this case, see also A. Asteriti, ‘Metalclad, Methanex and Chemtura: 10 Years of Environmental Issues in NAFTA Investment Arbitrations’, Transnational Dispute Management, Vol. 9, No. 3, 2012, p. 8.

179

ALESSANDRA ASTERITI

legislative framework of California, to be in dire need of updating. The double-effect restrictions imposed by the Methanex Tribunal by the ‘specific commitments’ exception and the ‘regulatory environment’ limitations invite caution in considering this award as good practice for the reconciliation of investors’ regulatory risk management and states’ sustainable development and climate change policies’ furtherance. In conclusion, the most promising tool is a clearly worded carveout police powers provision, modelled on the 2012 US Model BIT clause, possibly including sustainable development and climate change as one of its objectives.142 This normative approach has to take into account that carveout clauses might be used by states to the detriment of green investors – in fact, any clause that excludes the application of the treaty to governmental measures carries this risk of shielding potentially detrimental measures from the reach of investment tribunals, i.e. the sort of measures impugned in climate change investment litigation so far. The risk might be mitigated either by way of an exception modelled on the Canadian Model BIT language in the expropriation Annex (basically, the ‘except in rare circumstances’ provision)143 or through a robust application of the legitimate expectations doctrine to protect the investor from changes in a regulatory framework agreed under the relevant climate change domestic legislation or regional/international agreements.

6.6

CONCLUDING REMARKS Troposphere, whatever. I told you before I’m not a scientist. That’s why I don’t want to have to deal with global warming, to tell you the truth. Justice Antonin Scalia

In a seminal case in front of the US Supreme Court, a group of cities and states petitioned the Environmental Protection Agency (EPA) to enforce climate change regulation to mitigate and prevent the effects of global warming.144 The Court remanded the issue to the EPA to justify its refusal to regulate. Justice Scalia’s robust dissent is encapsulated in the remark quoted above, answering Massachusetts’ Assistant Attorney General’s

142 Ann. B(4)(b): ‘Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations. 143 See the 2009 Canada–Jordan BIT’s Ann. B.13(1)(c) – Expropriation: “[…] (c) Except in rare circumstances, such as when a measure or series of measures is so severe in the light of its purpose that it cannot be reasonably viewed as having been adopted and applied in good faith, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriation”. 144 Massachusetts et al. v. Environmental Protection Agency et al., 549 US 497 (2007).

180

6

CLIMATE CHANGE POLICIES

AND

FOREIGN INVESTMENT

correction of his reference to the stratosphere – instead of the correct troposphere. I have noted throughout this chapter that there are several ways in which the investment regime, one substantiation of the law that Justice Scalia wants to be blinded to the problematic of global warming, can foster, rather than hinder, climate change regulation. Amongst these, two can be listed here: 1) IIAs’ provisions can be amended in order to allow for better balancing of potentially conflicting commitments and 2) new dedicated provisions can be inserted, such as general exception clauses more clearly singling out environmental and climate change exceptions to the investment protection commitments or carveout/scoping clauses to exclude certain regulatory measures from the purview of the IIAs. The analysis conducted in the chapter evidences the multiple functions that investment law can fulfil, acting in concert with climate change policies or providing a convenient shield for investors in more carbon-intensive industries. Systemic integration and interpretation, amendments, and clarifications can steer investment law in the direction of a more climate-friendly framework. The choice, however, is political.

181

BIBLIOGRAPHY BOOKS Corten, O. & Klein, P., The Vienna Conventions on the Law of Treaties – A Commentary, Oxford: Oxford University Press, 2011. De Jager, D. & Rathmann, M., Policy Instrument Design to Reduce Financing Costs in Renewable Energy Technology Projects, Utrecht: Ecofys, 2008. Dolzer, R. & Schreuer, C., Principles of International Investment Law, Oxford: Oxford University Press, 2008. Harten, van G., Investment Treaty Arbitration and Public Law, Oxford: Oxford University Press, 2007. Klabbers, J. et al. The Constitutionalization of International Law, Oxford: Oxford University Press, 2009. Lauterpacht, H., The Development of International Law by the International Court, Cambridge: Cambridge University Press Reprint, 1996. Matsushita, M. et al. (Eds.), The World Trade Organization. Law, Practice and Policy, Oxford: Oxford University Press, 2003. McLachlan, C. et al. (Eds.), International Investment Arbitration – Substantive Principles, Oxford: Oxford University Press, 2008. Orakhelashvili, A., Peremptory Norms in International Law, Oxford: Oxford University Press, 2006. Ortino, F. et al. (Eds.), Investment Treaty Law – Current Issues II, London: British Institute of International and Comparative Law, 2007. Paparinskis, M., The International Minimum Standard and Fair and Equitable Treatment, Oxford: Oxford University Press, 2013.

182

6

BIBLIOGRAPHY

Pauwelyn, J., Conflicts of Norms in Public International Law, Cambridge: Cambridge University Press, 2003. Schneiderman, D., Constitutionalizing Economic Globalization, Cambridge: Cambridge University Press, 2008. Schreuer, C., The ICSID Convention: A Commentary, 2nd edn, Cambridge: Cambridge University Press, 2009. Teubner, G., Constitutional Fragments: Societal Constitutionalism and Globalization, Oxford: Oxford University Press, 2012. Tudor, I., The Fair and Equitable Treatment Standard in the International Law of Foreign Investment, Oxford: Oxford University Press, 2008. Viñuales, J., Foreign Investment and the Environment in International Law, Cambridge: Cambridge University Press, 2012. Waibel, M. et al., The Backlash against Investment Arbitration, Alphen aan den Rijn: Kluwer Law International, 2010.

ARTICLES Asteriti, A., ‘Metalclad, Methanex and Chemtura: 10 Years of Environmental Issues in NAFTA Investment Arbitrations,’ 9(3) Transnational Dispute Management, 2012. Baetens, F., Foreign Investment Law and Climate Change: Legal Conflicts Arising from Implementing the Kyoto Protocol through Private Investment, Sustainable Development Law on Climate Change, Legal Working Paper Series, IDLO: Rome, 2010. Boute, A., ‘Combating Climate Change through Investment Arbitration,’ 35 Fordham International Law Journal, 2012. DiMascio, N. &. Pauwelyn, J., ‘Nondiscrimination in Trade and Investment Treaties: Worlds Apart or Two Sides of the Same Coin?’, 102(1) American Journal of International Law, 2008.

183

ALESSANDRA ASTERITI Dolzer, R. & Bloch, F., ‘Indirect Expropriation: Conceptual Realignments?’, 5(3) International Law FORUM du Droit International, 2005. Fortier, L.Y. & Drymer, S.L., ‘Indirect Expropriation in the Law of International Investment: I Know it when I See it, or Caveat Investor,’ 19 ICSID Review – Foreign Investment Law Journal, 2004. Gill, S., ‘Constitutionalizing Inequality and the Clash of Globalizations,’ 4(2) International Studies Review, 2002. Higgins, R., ‘The Taking of Property by the State: Recent Developments in International Law,’ 176 Recueil des Cours,The Hague: Brill, 1982. Kissam, L. & Leach, E., ‘Sovereign Expropriation of Property and Abrogation of State Contracts’, 28 Fordham Law Review, 1959. Mann, H. & Moltke, von K., ‘NAFTA’s Chapter 11 and the Environment: Addressing the Impacts of Investor-State Process on the Environment’, IISD Working Paper, IISD: Winnipeg, 2002. Marata, G. et al., ‘Renewable Energy Incentives in the United States and Spain: Different Paths – Same Destination?,’ 28 Journal of Energy and Natural Resources, 2010. Marshall, F. et al.,Climate Change and International Investment Agreements: Obstacles or opportunities?, Winnipeg: IISD, 2010. Michelman, F.I., ‘Property, Utility and Fairness: Comments on the Ethical Foundations of “Just Compensation Law”’, 80 Harvard Law Review, 1967. Morgan, J., ‘Carbon Trading Under the Kyoto Protocol: Risks and Opportunities for Investors’, 18 Fordham Environmental Law Review, 2006. Mus, J.B., ‘Conflicts between Treaties in International Law’, 45(2) Netherlands International Law Review, 1998. Nathanson, R.A., ‘The Revocation of Clean-Energy Investment Economic-Support Systems as Indirect Expropriations Post-Nykomb: A Spanish Case Analysis,’ 98 Iowa Law Review, 2013.

184

6

BIBLIOGRAPHY

Paparinskis, M., ‘Investment Arbitration and the Law of Countermeasures’, 79 British Yearbook of International Law, 2009. Prujiner, A., ‘L’expropriation, l’ALENA et l’affaire Metalclad’, 5 International Law FORUM du droit international, 2003. Schill, S., ‘Do Investment Treaties Chill Unilateral State Regulation to Mitigate Climate Change?’, 24(4) Journal of International Arbitration, 2007. Schill, S., ‘Multilateralizing Investment Treaties through Most-Favoured-Nation Clauses,’ 27 Berkeley Journal of International Law, 2009. Schill, S., ‘Deference in Investment Treaty Arbitration: Re-Conceptualizing the Standard of Review Through Comparative Public Law’, 3(3) Journal of International Dispute Settlement, 2012. Simma, B. & Pulkowski, D., ‘Of Planets and the Universe: Self-contained Regimes in International Law,’ 17 European Journal of International Law, 2006. Streck, C. & Lin, J., ‘Making Markets Work: A Review of CDM Performance and the Need for Reform,’ 19(2) European Journal of Iinternational Law, 2008.

CONTRIBUTIONS

IN EDITED BOOKS

Acconci, P., ‘Most-Favoured-Nation Treatment’, in P. Muchlinski et al. (Eds.), The Oxford Handbook of International Investment Law, Oxford: Oxford University Press, 2008. Asteriti, A., ‘Waiting for the Environmentalists: Environmental Language in Investment Treaties’, in R. Hofmann, & C.J. Tams (Eds.), International Investment Law and Its Others, Baden-Baden: Nomos, 2012. Cordonier Segger, M. C. & Gehring, M., ‘Trade and Investment Implications of Carbon Trading for Sustainable Development’, in D. Freestone & C. Streck (Eds.), Legal Aspects of Carbon Trading, Oxford: Oxford University Press, 2009. Klabbers, J., ‘Beyond the Vienna Convention: Conflicting Treaty Provisions’, in E. Cannizzaro (Ed.), The Law of Treaties Beyond the Vienna Convention, Oxford: Oxford University Press, 2011.

185

ALESSANDRA ASTERITI Ortino, F., ‘Non-Discriminatory Treatment in Investment Disputes’, in P. M. Dupuy et al., Human Rights in International Investment Law and Arbitration, Oxford: Oxford University Press, 2009. Simma, B. & Kill, T., ‘Harmonizing Investment Protection and International Human Rights: First Steps towards a Methodology’, in C. Binder et al. (Eds.), International Investment Law for the 21st Century, Oxford: Oxford University Press, 2009. Streck, C., ‘Expectations and Reality of the Clean Development Mechanism: A Climate Finance Instrument between Accusation and Aspirations’, in R. B. Stewart et al. (Eds.), Climate Finance: Regulatory and Funding Strategies for Climate Change and Global Development, New York: New York University Press, 2009. Wälde, T., ‘Interpreting Investment Treaties: Experiences and Examples’, in C. Binder et al. (Eds.), International Investment Law for the 21st Century, Oxford: Oxford University Press, 2009. Weiler, T., ‘Saving Oscar Chin: Non-Discrimination in International Investment Law’, in N. Horn, & S.M. Kröll (Eds.), Arbitrating Foreign Investment Disputes, The Hague: Kluwer Law International, 2004. Yannaca-Small, K., ‘Fair and Equitable Treatment Standard: Recent Developments’, in A. Reinisch (Ed.), Standards of Investment Protection, Oxford: Oxford University Press, 2008.

186

7

BRIDGING

THE

GAP

INVESTMENT LAW TO

BETWEEN

AND THE

INTERNATIONAL

RIGHT

OF

ACCESS

WATER

Attila Tanzi*

7.1

INTRODUCTORY REMARKS: BETWEEN FRAGMENTATION INVESTMENT LAW PERSPECTIVE

AND

HARMONIZATION

FROM AN

The focus of the present contribution, in line with that of the present volume, is on the relationship between different sets of rules, notably between the body of international investment law and that of human rights related to environmental values, with specific regard to the right of access to water. The present analysis aims primarily at emphasizing the potential on the topic under consideration of the harmonization principle as it has been advocated by the International Law Commission (ILC) in its study on the issue of the ‘fragmentation’ of international law, according to which “when several norms bear on a single issue they should, to the extent possible, be interpreted so as to give rise to a single set of compatible obligations”.1 Building on previous research by the present author, this chapter will address the topic at issue mainly from the perspective of the international investment law process. Accordingly, this chapter will consider the contents and context of the right of access to water under international law with a view to setting the basic environmental human rights terms of reference of the present research. Therefore, the interpretation and application of the right to water before international human rights courts, even when in connection with investment-related disputes, will not be addressed.2

* 1 2

Attila M. Tanzi, PhD, is the Chair of International Law, University of Bologna, Implementation Committee, UNECE Water Convention. International Law Commission, ‘Report on its 58th Session’, 1 May-9 June; 3 July-11 August 2006, UN Doc. A/61/10 (2006), at 408 (Report on Fragmentation). See on this point, amongst others, P. M. Dupuy et al. (Eds.), Human Rights in International Investment Law and Arbitration, Oxford University Press, Oxford, 2009; B. Simma & T. Kill, ‘Harmonizing Investment Protection and International Human Rights. First Step towards a Methodology’, in C. Binder et al. (Eds.), International Investment Law for the 21st Century, Oxford University Press, Oxford, 2009, pp. 678-707; and A. Tanzi, ‘Reducing the Gap between International Investment Law and Human Rights Law in International Investment Arbitration?’, Latin American Journal of International Trade Law, Vol. 1, No. 2, 2013, pp. 299-311.

187

ATTILA TANZI

7.2

ON THE HUMAN RIGHT DIMENSION OF THE RIGHT INTERCONNECTIONS WITH ENVIRONMENTAL LAW

OF

ACCESS

TO

WATER

AND THE

It is well known that no explicit enunciation of the right of access to water is to be found in global human rights conventions, with special regard to the two 1966 United Nations (UN) Covenants. In 2002 the UN Committee on Economic, Cultural and Social Rights (CESCR), in its General Comment No. 15,3 maintained that the right to an adequate standard of living and the right to health – respectively codified in Articles 11 and 12 of the 1966 UN International Covenant on Economic, Social and Cultural Rights (ICESCR) – both encompass the right to water as a basic human right, therefore, only implicitly.4 Later, human rights diplomacy focused further on the right to water leading to the adoption in 2008 of Resolution 7/22 by the UN Human Rights Council (UNHRC), which spells out the autonomous obligation for governments to take appropriate measures to ensure access to safe drinking water and sanitation for their population.5 In 2010 the UN General Assembly (UNGA), by Resolution 64/292,6 solemnly declared “the right to safe

3

4

5 6

CESCR, ‘General Comment No. 15. The right to water (Articles 11 and 12 of the ICESCR)’, UN Doc. E/C12/2002/11, 20 January 2003. See, in support of its findings and reasoning, C. M. Peter, ‘Promotion of Standard of Living’, Max Planck Encyclopedia of Public International Law, 2009. See contra S. Tully, ‘A Human Right to Access to Water? A Critique of General Comment No. 15’, Netherlands Quarterly of Human Rights, Vol. 23, No. 1, 2005, pp. 35-63. See in general, amongst others, K. Bourquain, Freshwater Access from a Human Rights Perspective: A Challenge to International Water and Human Rights Law, Martinus Nijhoff Publishers, 2008; J. Gupta, R. Ahlers, & L. Ahmed, ‘The Human Right to Water: Moving towards Consensus in a Fragmented World’, Review of European Community & International Environmental Law, Vol. 19, No. 3, 2010, pp. 294-305; A. J. Kirschner, ‘The Human Right to Water and Sanitation’, Max Planck Yearbook of United Nations law, Vol. 15, 2011, pp. 445-487; O. McIntyre, ‘Emergence of the Human Right to Water in an Era of Globalization and its Implications for International Investment Law’, in J. Addicot et al. (Eds.), Globalization, International Law and Human Rights, Oxford University Press, New Delhi, 2012, pp. 147-176; I. T. Winkler, The Human Right to Water: Significance, Legal Status and Implications for Water Allocation, Hart Publishing, Oxford, 2012; and S. L. Murthy, ‘The Human Right(s) to Water and Sanitation: History, Meaning, and the Controversy over Privatization’, Berkeley Journal of International Law, Vol. 31, 2013, pp. 89-149. In particular, “[a]rticle 11, paragraph 1, of the Covenant specifies a number of rights emanating from, and indispensable for, the realization of the right to an adequate standard of living including adequate food, clothing and housing. […] The right to water clearly falls within the category of guarantees essential for securing an adequate standard of living, particularly since it is one of the most fundamental conditions for survival” (General Comment No. 15, supra note 3, para. 3). Similar reasoning has been applied in relation to the right to health, particularly in General Comment No. 14, ‘The right to the highest attainable standard of health (Article 12 of the ICESCR)’, UN Doc. E/C.12/2000/4, 11 August 2000. UN Human Rights Council Res. 7/22, ‘Human rights and access to safe drinking water and sanitation’, 28 March 2008, para. 4. GA Res. 64/292, ‘The human right to water and sanitation’, 3 August 2010. While Res. 7/22 was adopted by consensus in the UN Human Rights Council, the acceleration of the process within the General Assembly which led to the adoption of Res. 64/292 ‘left behind’ 41 delegations that abstained when it came to voting. Speculation on the impact of the above twists and turns of diplomacy on the legally binding nature of the right to water per se and its contents probably accounts for the fact that, later in the same year, the UN Human Rights Council felt the need to adopt another Res. 15/9 emphasizing that “the human right to safe

188

7

INTERNATIONAL INVESTMENT LAW

AND

ACCESS

TO

WATER

and clean drinking water and sanitation as a human right that is essential for the full enjoyment of life and all human rights.”7 While the latter two instruments focus on the enunciation of the human right in point rather than on its contents, the latter can be said to have been authoritatively assessed ex ante in General Comment No. 15 by identifying the minimum core obligations for states in this area. In particular, one is to emphasize the obligation “to ensure access to the minimum essential amount of water that is sufficient and safe for personal and domestic uses to prevent diseases,”8 as well as “to take measures to prevent, treat and control diseases linked to water, in particular ensuring access to adequate sanitation.”9 Special attention is given to the obligation of ensuring the right under consideration “on a nondiscriminatory basis, especially for disadvantaged and marginalized groups,”10 as well as to the obligation “to adopt relatively low-cost targeted water programmes to protect vulnerable and marginal groups.”11 Indeed, “[w]hen the normative content of the right to water [under the ICESCR] is applied to the obligation of states parties, a process is set in motion, which facilitates identification of violations of the right to water.”12 In light of the above, one may be surprised by the comment according to which “an overall clearer recognition of the human right to water as a legally binding human right would certainly be of great help […] for the investment arbitrators”.13 In fact, for the purposes of the present chapter, it is to be noted that, irrespective of the diplomatic skirmishes within the context of human rights international policy, the problems of the application of the right to water in international investment arbitration have never derived from doubts about its legally binding force, or its normative contents. On the contrary, as will be further shown

7 8 9 10 11 12 13

drinking water and sanitation is derived from the right to an adequate standard of living and inextricably related to the right to the highest attainable standard of physical and mental health” (UN Human Rights Council Res.15/9, 30 September 2010). GA Res. 64/292, ‘The human right to water and sanitation’, 3 August 2010, para. 1. General Comment No. 15, supra note 3, para. 37 (a). Id., para. 37(i). Id., para. 37(b) Id., para. 37(h). Id., para. 39. P. Thielbörger, ‘The Human Right to Water Versus Investor Rights: Double-Dilemma or Pseudo Conflict?’, in Dupuy et al. (Eds.), Human Rights in International Investment Law and Arbitration, Oxford University Press, Oxford, 2009, p. 509 et seq. Indeed, there is no denying that, particularly prior to the 2010 general enunciation of the human rights dimension of the right in question by the UNGA, the critics of the point at issue were not marginal. For example, following a subtly different reasoning from that of Thielbörger, though leading to similar considerations, Professor Malgosia Fitzmaurice stated that “States are under no obligation to give an immediate effect to [the] right [in question]”; see M. Fitzmaurice, ‘The Human Right to Water’, Fordham Environmental Law Review, Vol. 18, 2007, pp. 537-585, p. 541. See also A. Tanzi, ‘Public Interest Concerns in International Investment Arbitration in the Water Services Sector’, in T. Treves et al. (Eds.), International Investment Law and Common Concerns, Routledge, Oxford, 2013, pp. 308-324. However, as will be indicated below, what counts most for the purposes of the present chapter, international investment case law has never rejected the human rights dimension of the right of access to water.

189

ATTILA TANZI

below, international investment case law has never questioned the human rights nature of the right in question nor its contents. In line with the scope of the overall research of which the present volume is the end product, it is to be emphasized how the right to water is intertwined with the body of environmental rights. Indeed, the right to water is representative of that category of human rights that have been ‘greened’. That is particularly so in relation to the integration between the right at issue and the rights to an adequate standard of living and to health spelt out in Articles 11 and 12 of the CESCR already referred to. Such connections, as they have been derived from human rights instruments,14 are likewise to be found in major international environmental instruments. Suffice to recall Principle 1 of the Stockholm Declaration of 1972,15 the 1990 General Assembly Resolution on the “Need to ensure a healthy environment for the wellbeing of individuals”,16 or Principle 1 of the Rio Declaration.17 At the regional level, one may recall Article 11 of the 1988 Inter-American Protocol of San Salvador which upholds “[…] the right to a healthy environment and to have access to basic public services”.18 This provision is particularly germane to the attempt to connect environmental law with investment law since a large part of foreign direct investment is directed towards public services, amongst which water services appear to be amongst the most essential. It is to be noted that, also within the thick thread of international investment treaties, provisions referring to health protection or to the well-being of the population of the host state are often associated with the protection of the environment.19 To that end, most 14 15

16 17

18 19

Id. 1972 UN Conference on Human Environment, Principle 1: “Man has the fundamental right to freedom, equality and adequate conditions of life, in an environment of a quality that permits a life of dignity and well-being, and he bears a solemn responsibility to protect and improve the environment for present and future generations. […]”. GA Res. 45/94, 14 December 1990. It expressly “[r]ecognizes that all individuals are entitled to live in an environment adequate for their health and well-being […]”. 1992 Rio Declaration on Environment and Development, Principle 1: “Human beings are at the centre of concerns for sustainable development. They are entitled to a healthy and productive life in harmony with nature”. 1988 Additional Protocol to the American Convention on Human Rights in the Area of Economic, Social and Cultural Rights, 28 ILM 156 (1989). See, amongst others, NAFTA Art. 1114 on ‘Environmental Measures’: “1. Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. 2. The Parties recognize that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures”. Similarly, the US Model BIT2012, Preamble, after “[r]ecognizing the importance of providing effective means of asserting claims and enforcing rights with respect to investment under national law as well as through international arbitration”, stresses the importance to “achieve these objectives in a manner consistent with the protection of health, safety, and the environment […]”. Also worth noting is Art. 12 on ‘Investment and Environment’ according to which “1. The Parties recognize that their respective environmental laws and policies, and multilateral environmental agreements to which they are both party, play an important role in protecting the environment”. Along the same lines, Art. 99 of the Japan-Philippines Economic Partnership Agreement

190

7

INTERNATIONAL INVESTMENT LAW

AND

ACCESS

TO

WATER

exemplary is the Energy Charter Treaty, whose Article 19(3)(b) clearly defines the scope of environmental impact so as to encompass “any effect caused by a given activity on the environment, including human health and safety, flora, fauna, soil, air, water, climate, landscape […]”.20 Connections between health protection, the well-being of the population, and the protection of the environment and investment – mostly under the concept of sustainable development – also appear in many relevant instruments of a soft-law nature geared towards self-regulation by foreign investors.21 Based on previous research by the present author, it appears that state practice and arbitration case law on foreign investment protection tend to address human rights issues and environmental protection on the same footing.

20 21

2008 provides as follows: “1. Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination against the other Party, or a disguised restriction on investments of investors of the other Party in the Area of a Party, nothing in this Chapter […] shall be construed to prevent a Party from adopting or enforcing measures: (a) necessary to protect human, animal or plant life or health; 2. The Parties recognize that it is inappropriate to encourage investment by weakening or reducing the protections afforded in domestic environmental laws. Accordingly, each Party shall ensure that it does not waive or otherwise derogate from or offer to waive or otherwise derogate from its environmental laws in a manner that weakens or reduces the protections afforded in those laws, or fail to effectively enforce those laws through a sustained or recurring course of action or inaction, as an encouragement for the establishment, acquisition, expansion, or retention of an investment in its territory. 3. The Parties recognize that each Party retains the right to exercise discretion with respect to regulatory, compliance, investigatory, and prosecutorial matters, and to make decisions regarding the allocation of resources to enforcement with respect to other environmental matters determined to have higher priorities. Accordingly, the Parties understand that a Party is in compliance with paragraph 2 where a course of action or inaction reflects a reasonable exercise of such discretion, or results from a bona fide decision regarding the allocation of resources”. Energy Charter Treaty 1994, 2080 UNTS 95. See, in particular, UN Economic and Social Council, ‘Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with regard to Human Rights’, UN Doc E/CN.4/Sub.2/2003/ 12/rev.2, 26 August 2003, which provides at operative para. 12 that “[t]ransnational corporations and other business enterprises shall respect economic, social and cultural rights as well as civil and political rights and contribute to their realization, in particular the rights to development, adequate food and drinking water, the highest attainable standard of physical and mental health, adequate housing”. See also the UN Global Compact (announced by the then Secretary-General Kofi Annan at the Economic Global Forum of Davos on 31 January 1999 and officially launched in New York on 26 July 2000), Available at: accessed 11 February 2014; the Report of the Special Rapporteur, Hadji Guissé, on the guidelines for the realization of the right to drinking water supply and sanitation (UN Doc. E/CN.4/Sub.2/ 2005/25, 11 July 2005); the OECD Principles for Private Sector Participation in Infrastructure, 2007, Available at: accessed 11 February 2014; the 2011 OECD Guidelines for Multinational Enterprises, Available at: accessed 11 February 2014; and the Report of the Special Representative of the Secretary-General, John Ruggie, ‘Principles for responsible contracts: integrating the management of human rights risks into Stateinvestor contract negotiations: guidance for negotiators’, UN Doc. A/HRC/17/31, 21 March 2011. See the commentaries on previous versions of this Report by F. Marrella, ‘On the Changing Structure of International Investment Law: the Human Right to Water and ICSID Arbitration’, International Community Law Review, Vol. 12, No. 3, 2010, p. 345.

191

ATTILA TANZI

7.3

ON THE ‘QUALIFIED NEUTRALITY’ PRIVATIZATION

OF INTERNATIONAL

LAW

OVER THE ISSUE OF

General Comment No. 15 on the right to water in relation to Articles 11 and 12 of the ICESCR enunciates, in its opening paragraph, that “[w]ater is a limited natural resource and a public good fundamental for life and health […].”22 This passage could be taken to fuel the debate over the compatibility between the ‘public good’ connotation, on the one hand, and the economic relevance of water, on the other, hence questioning the admissibility of the privatization of water services.23 Based on the relevant international human rights instruments, on the one hand, and on those pertaining to international water law, on the other, the attitude of international law on the above issue is a neutral one. Namely, under international law states and their substate entities are free to have water services operated either directly by state-owned companies or through private operators. The legal basis for that is to be found in the very essence of international law, which is made up of rules addressed to sovereign states as legal units. Accordingly, states are the subjects ultimately responsible to meet the standards of due diligence required by the relevant international obligations through the conduct of their organs. That is so irrespective of whether water services are operated by state or private entities under their jurisdiction. In case of state operated services, the state will be directly responsible under international law for the conduct of its state and substate entities and organs.24 On the other hand, in the most frequent case in which water services are operated by private companies, the state will be accountable for the conduct of its organs in charge of prevention and monitoring functions aimed at ensuring that activities under its jurisdiction will be in compliance with international legal requirements. Under both circumstances, the state will be legally accountable as to whether its different organs live up to the relevant international regulatory standards. This contention is corroborated by the due diligence nature – as it will be further elaborated upon below – of the relevant instruments of both human rights law and international water law 22 23

24

General Comment No. 15, supra note 3, para. 1. See, recently, I. E. Kornfeld, ‘Water: A Public Good or a Commodity?’, Proceedings of the Annual MeetingAmerican Society of International Law, Vol. 106, 2012, pp. 49-52. See also A. Gaughran, ‘Business and Human Rights and the Right to Water’, Proceedings of the Annual Meeting- American Society of International Law, Vol. 106, 2012, pp. 52-55. According to the international rules on attribution to the state of the conduct of its organs, as codified by the International Law Commission, endorsed by the General Assembly in 2001, “[t]he conduct of any State organ shall be considered an act of that State under international law, whether the organ exercises legislative, executive, judicial or any other functions, whatever position it holds in the organization of the State, and whatever its character as an organ of the central Government or of a territorial unit of the State. […] An organ includes any person or entity which has that status in accordance with the internal law of the State” (Art. 4, ‘Conduct of organs of a State’ of the GA Res. 56/83, ‘Responsibility of States for Internationally Wrongful Acts’, 12 December 2001).

192

7

INTERNATIONAL INVESTMENT LAW

AND

ACCESS

TO

WATER

referred to above, with special regard to the United Nations Economic Commission for Europe (UNECE) Protocol on Water and Health 1996. As to human rights instruments, it is well to recall that General Comment No. 15 explicitly envisages the circumstance in which water services may be operated by private entities. In that case, the General Comment No. 15 places special emphasis on the “obligation to protect”, whereby states have the duty to “prevent [the separate entities in charge of water supply and sanitation, whether public or private] from compromising equal, affordable, and physical access to sufficient, safe and acceptable water”.25 It added that: [t]o prevent such abuses an effective regulatory system must be established, in conformity with the Covenant and this General Comment, which includes independent monitoring, genuine public participation and imposition of penalties for non-compliance.26 This approach is even more explicitly stated by General Comment No. 15 when stating that “[a]ny payment for water services has to be based on the principle of equity, ensuring that these services, whether privately or publicly provided, are affordable for all, including socially disadvantaged groups”.27 The same approach is confirmed under the general regulatory regime under the UNECE Protocol on Water and Health (hereinafter ‘the Protocol’) in relation to the general obligation for states parties to take “all appropriate measures” in order to achieve the results required by its provisions, with special regard to that of ensuring an adequate supply of safe water and sanitation. The basic rationale of the Protocol which is relevant to the point in question is to be found in the general enunciation, according to which, under Article 5 on ‘Principles and Approaches’, “[w]ater has social, economic and environmental values and should therefore be managed so as to realize the most acceptable and sustainable combination of those values”.28 It is to be noted that, while under the above enunciation the social values rank first, before economic and environmental ones, when stating that the “[e]fficient use of water should be promoted through economic instruments and public awareness”,29 the Protocol remains neutral as to whether such economic instruments should be public or private. This approach is confirmed by the Protocol when, amongst the objects of public awareness to be promoted, it indicates “[t]he rights and entitlements to water and corresponding obligations under private and public law of natural and legal persons and institutions, 25 26 27 28

29

General Comment No. 15, supra note 3, para. 24. Id. Id., para. 27 (emphasis added). Protocol on Water and Health 1999 to the Convention on the Protection and Use of Transboundary Watercourses and International Lakes 1992, Art. 5, let. G. Available at: accessed 10 June 2014. Id., Art. 5, let. d.

193

ATTILA TANZI whether in the public sector or the private sector […]”.30 The above arguments in favour of the freedom of states to choose amongst a wide spectrum of formulas for arranging water services, including private operators, have been further corroborated by the findings of the UN Independent Expert on the Issue of Human Rights Obligations Related to Access to Safe Drinking Water and Sanitation.31

7.3.1

On the Due Diligence Character of the State Obligations in the Field of the Right of Access to Water

Still taking Articles 11 and 12 of the ICESCR as a basic reference for the assessment of the contents of the right to water, their ‘progressive’ nature is corroborated by the well-known chapeau of the ICESCR set out in Article 2 (1), whereby each state party is “to take steps to the maximum of its available resources with a view to achieving progressively the full realization of the rights recognized in the […] Covenant by all appropriate means […]”,32 as well as from the wording of the individual relevant provisions of the ICESCR. Similar considerations apply to the language of the UNECE Protocol on Water and Health. Its Article 4 provides as follows: 1. The Parties shall take all appropriate measures to prevent, control and reduce water-related disease […]. 2. The Parties shall, in particular, take all appropriate measures for the purpose of ensuring: (a) Adequate supplies of wholesome drinking water which is free from […] substances which […] constitute a potential danger to human health […]; (b) Adequate sanitation of a standard which sufficiently protects human health and the environment; […].33 In line with the above, Article 6, on ‘Targets and Target Dates’, provides that “[i]n order to achieve the objective of this Protocol, the Parties shall pursue the aims of: (a) Access to drinking water for everyone; (b) Provision of sanitation for everyone […]”.34 Against the above language, one may feel tempted to raise the argument that “States are under no obligation to give an immediate effect to [the] right [in question]”.35 In legal jargon this

30 31

32 33 34 35

Id., Art. 9, para. 1, let. b (emphasis added). See her report, UN Doc. A/HRC/15/31, 21 June 2010, particularly at para. 4. In the same direction, see also, amongst others, J. Budds & G. McGranahan, ‘Are the Debates on Water Privatization Missing the Point? Experiences from Africa, Asia, and Latin America’, Environment and Urbanization, Vol. 15, No. 2, 2003, pp. 87-144. 1966 International Covenant on Economic, Social and Cultural Rights, 6 ILM 360 (1967), Art. 2 para. 1. 1992 Protocol on Water and Health 1999 to the Convention on the Protection and Use of Transboundary Watercourses and International Lakes, Art. 4. Id., Art. 6 (emphasis added). Fitzmaurice 2007, supra note 13, p. 541.

194

7

INTERNATIONAL INVESTMENT LAW

AND

ACCESS

TO

WATER

would mean that the right of access to water under international law would not be of a self-executing nature. Namely, where a state party does not appropriately grant everyone on its territory the right of access to water, it would not be automatically in breach of an international obligation. Accordingly, an individual victim of such a conduct would not be entitled to bring a case before a domestic or an internationally competent court. This argument should be qualified to the effect that it would hold true only to the extent that a lack of access to an adequate amount of safe water would occur despite all appropriate action and efforts having been undertaken by the state in question in order to supply an adequate quantity and quality of water. That is to say that, under the present state of international law, the obligation for states corresponding to the human right to water is one of due diligence.36 This view is corroborated by the wording of the provisions in question, by legal literature,37 and by interpretative practice. When referring to due diligence obligations, even as opposed to absolute obligations, one should not lose sight of the fact that, as such, the obligations in question involve an articulated duty of care subject to being complied with or breached. Hence, they can be said to be immediately enforceable, in the sense that the states parties have to appropriately discharge their duty of care from the time when the obligations in point enter into force for them. It is arguable that the margins of flexibility of the content of the due diligence obligation under discussion are becoming increasingly stricter through the merger of the developments within both international water law and Human Rights law. Already in General Comment No. 3 of 1990, the Committee of the ICESCR, addressing the issue of the progressive nature of the provisions in question underlined that this feature “should not be misinterpreted as depriving the obligation of meaningful content”.38 In fact, it is

36

37

38

See in general, R. P. Barnidge, Jr., ‘The Due Diligence Principle under International Law’, International Community Law Review, Vol. 8, No. 1, 2006, pp. 81-121. Obviously, the due diligence nature of certain international law obligations, particularly some within the body of human rights law and those of harm preention in environmental law, largely differs from due diligence under domestic investment and contract law; see T. E. Lambooy, ‘Corporate due diligence as a tool to respect human rights’, Netherlands Quarterly of Human Rights (NQHR), Vol. 28, No. 3, 2010, pp. 404-448. See S. C. McCaffrey, ‘A Human Right to Water: Domestic and International Implications’, The Georgetown International Environmental Law Review, Vol. 5, No. 1, 1992, pp. 12 et seq. and the authorities quoted therein. General Comment No. 3. The nature of States parties’ obligations’, UN Doc. E/1991/23, Fifth session, 1990, para. 9. That of due diligence is not an oddly peculiar characteristic which applies to few human rights rules, but to an increasing genre of international obligations cross-cutting a wide range of sectors of international law (see Barnidge, supra note 36). Having specific regard to environmental law, Professor Pisillo-Mazzeschi recalls that “many agreements contain a special clause, in which the States pledge themselves to take ‘all appropriate measures’ or to make ‘appropriate efforts to control and reduce sources of pollution in the area or in the space concerned’. […] It is clear that such agreements do not establish the strict obligation not to pollute (obligation of result), but only the obligation to ‘endeavour’ under the due diligence rule to prevent, control and reduce pollution. For this reason the breach of such obligation involves responsibility for fault (rectius: for lack of due diligence)” (R. Pisillo-Mazzeschi, ‘Forms of International Responsibility for

195

ATTILA TANZI contended that the ICESCR “imposes various obligations that are of immediate effect”.39 On that score, it singled out the undertaking in Article 2 (1), “to take steps” in order to stress that “while the full realization of the relevant rights may be achieved progressively, steps toward that goal must be taken within a reasonably short time after the Covenant’s entry into force […]”.40 While under Article 2 (1) the level of due diligence may appear to be softened by the reference to the availability in each given state of the necessary resources, such an impression is appropriately redressed by General Comment No. 3 in the following terms: In order for a State party to attribute its failure to meet at least its minimum core obligations to a lack of available resources it must demonstrate that every effort has been made to use all resources that are at its disposition in an effort to satisfy, as a matter of priority, those minimum obligations.41 On the water law side, the due diligence standards aimed at ensuring an adequate quantity and quality of water and sanitation appear to be fairly detailed under the UNECE Protocol. Indeed, the general obligation to “take all appropriate measures to prevent, reduce, control and reduce water-related disease […]” set out in Article 4 is complemented by a detailed host of policy and legal and technical parameters articulated from paragraphs (2) to (9). Further parameters of this kind are to be found in Article 5, including the obligation to follow the precautionary principle, as well as that of giving special attention to the protection of people who are particularly vulnerable and disadvantaged members of the population. Article 6(2) provides for the compulsory establishment of targets for the standards and levels of performance that need to be achieved or maintained for a high level of protection against water-related disease. Most importantly, after laying down a rather detailed set of technical parameters for the establishment of the targets in question, paragraph (3) of the Article considerably reduces the margins of flexibility inherent in the progressive approach of the Protocol by stating that “[w]ithin two years of becoming a Party, each Party shall establish and publish targets referred to in paragraph 2 of this article, and target dates for achieving them”.42 Furthermore, under paragraph (4), it is provided that “[w]here a long process of implementation is foreseen for the achievement of a target, intermediate or phased targets shall be set”.43 To the same

39 40 41 42 43

Environmental Harm’, in F. Francioni & T. Scovazzi (Eds.), International Responsibility for Environmental Harm, London, Graham, & Trotman, 1991, p. 19). General Comment No. 3, supra note 38, para. 1. Id., para. 2. Id., para. 10. 1992 Protocol on Water and Health 1999 to the Convention on the Protection and Use of Transboundary Watercourses and International Lakes, Art. 6, para. 3. Id., Art. 6, para. 4.

196

7

INTERNATIONAL INVESTMENT LAW

AND

ACCESS

TO

WATER

end, one should highlight the most stringent obligations in the Protocol that provide for compulsory national “legal and institutional arrangements for monitoring” the high due diligence standards set out in the same instrument, particularly in Article 6(5) (c and d).

7.4

THE TENTATIVE EVOLUTION OF INTERNATIONAL ARBITRATION CASE LAW TOWARDS COMPATIBILITY BETWEEN THE TWO BODIES OF LAW UNDER CONSIDERATION

The fact that, until recently, international investment arbitration case law has scarcely taken into consideration the international human rights obligations of host states when pertinent to a given case may be due to the reluctance on the part of defendant states to rely on similar defences. Indeed, the risk could be that such defences could substantiate claims against the same host states based on human rights grounds before their national courts, as well as before international human rights courts.44 Nonetheless, over the last decade, indications may be detected from international investment arbitration case law recognizing the human rights dimension of certain rights, such as the right to water, at least implicitly. This may be argued to have been the case even when such a recognition was not explicit in the reasoning of a given award.45 A number of awards have been referred to as exemplary of such a jurisprudential approach with regard to water services, amongst other services in the area of public utilities. One such case has been identified in the International Centre for Settlement of Investment Disputes (ICSID) award in Biwater in which the facts complained of consisted of a number of restrictive measures against a foreign company alleged by the latter to amount to expropriation.46 The tribunal found for the plaintiff stating that the conduct of the Republic of Tanzania, including the unilateral termination of the lease contract with the foreign provider, was in breach of the fair and equitable treatment obligations under the relevant bilateral investment treaty (BIT), that it also violated the obligations to provide the foreign investor with protection and security, that it was unreasonable and discriminatory, and that it cumulatively amounted to expropriation.47 The fact that the defendant state had not invoked its international engagements in the field of human 44

45

46 47

On the other hand, already a 2003 UN report on the subject under consideration advocated that states involved in investment disputes would put forward arguments based on human rights obligations in order “to secure interpretations of investment agreements and tribunal decisions that take into account the wider legal and social context” (UN Economic and Social Council, ‘Human Rights, Trade and Investment, Report of the High Commissioner for Human Rights’, UN Doc. E/CN.4/Sub.2/2003/9, 2 July 2003, para. 55). See A. Tanzi, ‘On Balancing Foreign Investment Interests with Public Interests in Recent Arbitration Case Law in the Public Utilities Sector’, The Law and Practice of International Courts and Tribunals, Vol. 11, 2012, p. 52 et seq. and Tanzi 2013, supra note 13. Biwater Gauff (Tanzania) Limited v. United Republic of Tanzania, ICSID Case No ARB/05/22, Award of 24 July 2008. See the operative award, id., para. 814.

197

ATTILA TANZI

rights as constituent parameters of the public interest pursued by the measures complained of may have been amongst the reasons why the arbitrators did not expressly refer in their ratio decidendi to human rights considerations pertinent to the disputed facts. Nonetheless, it is to be noted how, by way of an obiter dictum, the tribunal felt the need to emphasize that “[w]ater and sanitation services are vitally important, and the Republic [of Tanzania] has more than a right to protect such services in a case of a crisis: it has a moral and perhaps even a legal obligation to do so”.48 It is also in the light of such a statement that the present author has argued that it may have been possible, if not probable, that the recognition by the tribunal of the human rights obligations in question could have been one of the factors that led it to dismiss the claimant’s request for compensation, next to finding that, even if wrongful, the conduct of Tanzania did not cause any loss or damage for the foreign company.49 This interpretative approach has been followed elsewhere in legal literature50 with respect to investment case law on water services, with special regard to the Azurix case.51 In order to explain the possible reasons for that tribunal to award compensation of $ 165 million instead of the $ 570 claimed by the applicant, or in Compañía de Aguas52 to award the payment by Argentina of $ 99 million instead of the claimed $ 380, one may assume that human rights considerations pertaining to the right to water may have been an implicit factor behind the mitigated decisions on compensation against host states. This is far from having been proved and, therefore, it remains an assumption open for debate.53 A significant change in investment case law towards a direct consideration of the human right at issue in relation to investment obligations was marked by the arbitral decision in Suez in 2010.54 This approach seemed to have been confirmed two years later in Saur, but only formally and with no apparent impact on its actual decision.55 In both cases, similar to previous investment disputes over water services, the claimants had invoked a violation of the prohibition of expropriation, of the obligation to give full 48 49 50 51

52 53 54 55

Id., para. 434. Id., paras. 807 et seq. Thielbörger 2009, supra note 13, pp. 487, 498. Azurix Corp. v. Argentina Republic, ICSID Case No. ARB/01/12, Award of 14 July 2006, 14 ICSID Reports 367 et seq. (2009). The tribunal concluded that the measures adopted by the Government did not constitute an illicit expropriation, referring also to the ECHR (Casos James and al. v. United Kingdom (Proceeding 8793/79), 21 February 1986, Reports of Judgments and Decisions. Series A N 98), which affirmed that the legality of a governmental measure aimed at pursuing a public interest must meet the requirement of proportionality between means and aims. See also the LG&E case, LG&E Energy Corp., LG&E Capital Corp., and LG&E International Corp. v. Argentina Republic, ICSID Case No. ARB/02/1, Decision on Liability of 3 October 2006, 21 ICSID Review 269 et seq. (2006). Compañía de Aguas del Aconquija SA and Vivendi Universal SA v. Argentina Republic, ICSID Case No. ARB/97/3, Award of 20 August 2007. Tanzi 2012, supra note 45, p. 52 et seq. Suez and others v. Argentine Republic, ICSID case ARB/03/19, Decision on Liability of 30 July 2010. Tanzi 2012, supra note 45, p. 52.

198

7

INTERNATIONAL INVESTMENT LAW

AND

ACCESS

TO

WATER

protection and security to the investment in question, and of the obligation of fair and equitable treatment under the relevant BITs arising out of a host of governmental measures adopted by Argentina, from the freezing of tariffs to the termination of the concession contract.56 In Suez, the tribunal upheld only the claim on the breach of the obligation of fair and equitable treatment.57 There, Argentina had put forward the argument of the human rights nature of the right to water as if the latter could constitute a circumstance precluding the wrongfulness of the governmental measures in breach of its investment obligations. Basically, Argentina argued that such measures were necessary for it to comply with its human rights obligations concerning access to water.58 This argument proved self-defeating, not only because the measures adopted were not the only means for Argentina to meet its international human rights obligations, while the state of necessity customary rule, as codified in the most restrictive terms by the International Law Commission (ILC), requires that a given conduct which is in breach of an international obligation should have no alternatives under the given circumstances for it to be ‘excused’.59 The tribunal stressed that there were alternative measures to the ones complained of, with special regard to the possibility for the Argentine competent authorities to set off the increase in tariffs for water services, namely, by providing subsidies for the disadvantaged groups of the population.60 Furthermore, and most importantly for the purposes of the present chapter, upholding the Argentine argument would have been tantamount to maintaining the incompatibility between the two bodies of law in question while making the international investment obligations subservient to those stemming from international human rights law. Despite its rejection by the tribunal, this argument prompted the arbitrators to make important statements of principle. In particular, the award emphasized that “human rights obligations and […] investment treaty obligations are not inconsistent, contradictory, or mutually exclusive [accordingly] Argentina could have respected both types of obligations”.61 Nonetheless, one has the impression that this statement was not fully brought to fruition by the tribunal in its decision, with special regard to the claim of expropriation. Indeed, the tribunal looked for the possibility of a balanced interpretation of the two different branches of international law in question in connection with the claim of a breach of fair and equitable treatment explicitly through a contextual interpretation of the relevant BITs.

56 57 58 59 60 61

Suez case, supra note 54, para. 127. Id., para. 276. Id., paras. 249 et seq. Id., para. 265. Id., para. 254. Suez case, supra note 54, para. 276.

199

ATTILA TANZI

The award appropriately referred to Article 31(1), of the Vienna Convention of the Law of the Treaties (VCLT), according to which the provisions of a treaty must be interpreted ‘in the light of its object and purpose’, concluding that the purpose of the three BITs applicable to the case was not limited to the protection of foreign investment but would also “pursue the broader goals of heightened economic cooperation between the two States concerned with a view toward achieving increased economic prosperity or development”.62 The tribunal also felt the need to stress that “in interpreting the meaning of fair and equitable treatment [… it] must balance the legitimate and reasonable expectations of the Claimants with Argentina’s right to regulate the provision of a vital public service”.63 Nonetheless, the arbitrators concluded that the measures adopted by Argentina had breached the obligation of fair and equitable treatment in relation to “Argentina’s persistent and rigid refusal to revise the tariff in accordance with the Concession Contract and the regulatory framework”.64 The tribunal did not avoid considering the legitimate concern of the host state about its obligations to afford access to water to its population. In that respect, the award suggested that Argentina could have balanced such obligations and those deriving from the relevant BITs by adopting alternative measures that would be compatible with the regulatory framework of the concession contract. In particular, as already alluded to, the tribunal suggested that “[…] to protect the poor from increased tariffs […] it might have allowed tariff increases for other consumers while applying a social tariff or a subsidy to the poor, a solution clearly permitted by the regulatory framework”.65 One would certainly subscribe to the above reasoning as an appropriate legal framework for the host state for balancing and meeting, at its own cost, both its investment and human rights obligations, subject to the test of a case-specific application. According to this approach, the appropriateness of the degree in the increase of the tariffs should be proportionate to the quality of the service provided by the foreign investor. It is regrettable that the Saur award did not refer to Article 31(3)(c), VCLT, according to which a treaty should be interpreted taking into account “any relevant rules of international law applicable in the relations between the parties”, hence also those on economic and social human rights. The reason for this choice by the tribunal could not be based on the consideration that the claimants were not, and could not be, parties to the relevant human rights treaties. It is easily arguable that the relevant BITs should be

62 63 64 65

Id., para. 218. Id., para. 236. Id., para. 238. Id., para. 235.

200

7

INTERNATIONAL INVESTMENT LAW

AND

ACCESS

TO

WATER

interpreted and applied taking into account all the international rules applicable to the relations between the host state and the state of nationality of the claimants. Still on the fair and equitable treatment claim, the award addressed the issue of the termination of the concession contract by the Argentine authorities, finding that the latter had not constituted a breach of the relevant BITs66 on various grounds. Some of them are especially relevant for the purposes of the present chapter. Indeed, the arbitrators considered Argentina’s arguments relating both to the management of the basic public services and to the environmental protection concerns. Firstly, the tribunal addressed the Argentine argument according to which it “had a responsibility to assure the continuation of a public service that was vital to the health and well-being of its population”67 in relation to the intention which had been expressed by the foreign investors (Aguas Argentinas SA – hereinafter ‘AASA’) to abandon the concession. The tribunal considered that “AASA’s request [to abandon the Concession] may have been a factor in prompting Argentina’s decision to […] terminate the Concession”,68 also stressing that Argentina “had the ultimate responsibility to provide vital water and waste water services to the population [while] it was not then in a position to actually assume operational responsibility for those services”.69 Thus, Argentina’s original refusal to terminate the concession upon the proposal to that effect by the applicants was considered by the tribunal to be justified, since “it was not beyond the realm of possibility from Argentina’s perspective that the Claimants might abruptly quit the country, leaving an unprepared Argentine government to provide a basic service to nearly ten million people in a large metropolitan area”.70 Secondly, the tribunal gave serious consideration to the argument invoked by Argentina that pollution was detectable in the water provided by the foreign operator as a possible justification for the termination of the concession contract in the context of the allegation by the applicants of the breach of the standards of fair and equitable treatment under the applicable BIT. Indeed, the tribunal concluded in the sense of the lawfulness of the Argentine termination of the concession – obviously, only from an international standpoint – also taking into account evidence of indications concerning the presence of dangerous nitrates in the water.71 The award tackled the claim on expropriation finding for the respondent state with less explicit reference to its human rights obligations than it did with respect to the claim on the alleged breach of the fair and equitable treatment claim. Firstly, the tribunal found 66 67 68 69 70 71

Id., paras. 146-157. Id., para. 202. Id., para. 245. Id. Id. Id., para. 246.

201

ATTILA TANZI that even if the governmental measures complained of72 had diminished the value of the investment, they did not amount to expropriation.73 This finding was based on the assessed proportionality between the benefit to the public interest and the adverse effect on the foreign investor deriving from the measures complained of, in line with the ICSID precedents in the gas supply cases of CME,74 CMS,75 and LG&E.76 Two years later, in Saur – already referred to as a similar, if not identical, case – the tribunal started from the same general assumption of the compatibility between the two sets of investment and human rights obligations, in the sense that they are both operative for the host state,77 but reached different conclusions. While both decisions rejected the claim that the host state had denied full protection and security to the foreign investment and both found for the claimant on the claim of a breach of fair and equitable treatment, in Saur the tribunal found for the claimant also on the claim of expropriation, while Suez did not. Most importantly, it is to be noted that in Saur the public interest concerns of the host state appear to have been given less consideration. The present author has previously considered these two decisions on a par with each other for both considering the two bodies of law under consideration as mutually compatible in principle, but treating them as separate one from the other.78 By way of rectification, while this is certainly true of Suez, the above analysis shows that the same does not apply to Suez. From the perspective of the need for an harmonized interpretation and application of different rules bearing on the same subject matter, it does not seem to forebode well that, after some timid but significant progressive signals in the field under consideration, international investment case law, like in Saur, showed a retrogressive attitude treating the two sets of rules in question in absolute separation, one from the other, simply restating the obvious, to the effect that the host state is to comply with them both, namely, with its investment obligations vis-à-vis the foreign investor and with human rights law vis-à-vis its population. There is no denying that host states are equally bound by both sets of obligations. While this is self-evident before an investment tribunal with respect to investment law, the same holds true with respect to human rights obligations. This also holds true with specific regard to the right of access to water and sanitation also 72 73 74 75 76 77 78

Id., para. 43. Id. CME Czech Republic BV v. Czech Republic, UNCITRAL, Partial Award of 13 September 2001, para. 322, 9 ICSID Reports 121 et seq. (2006). CMS Gas Transmission Company v. Republic of Argentina, ICSID Case No. ARB/01/08, Award of 12 May 2005, para. 260, 44 ILM 1205 et seq. (2005). LG&E case, supra note 51, para. 189. Saur International v. Argentine Republic, ICSID Case No. ARB/04/4, Decision on Jurisdiction and Liability of 6 June 2012, para. 331. Tanzi 2013, supra note 13, p. 308 et seq.

202

7

INTERNATIONAL INVESTMENT LAW

AND

ACCESS

TO

WATER

when water services are privately operated since, as it appears from the above authoritative statements in General Comment No. 15, also under those circumstances, the state bears the ultimate responsibility that all appropriate measures are taken to equitably ensure access to water and sanitation to its population.79 However, it seems as if focusing on the sheer compatibility between the two bodies of law at issue has diverted the attention from the more substantive question of the impact of human rights obligations on the interpretation and application of investment rules. So far, apart from the timid exception detected in Suez, and possibly also in Biwater, either no consideration has been given to human rights concerns by investment tribunals, or, whenever attention has been given to the matter, this may have been done tacitly, the latter view being open to speculation. Be that as it may, irrespective of the final findings of investment tribunals in each given case – whether in favour of the foreign investor, or against – one may note a significant dearth of legal reasoning. This appears to fall within the class of those ‘egregious failures’ in the legal reasoning of international investment case law singled out by Federico Ortino.80 Indeed, it is arguable that an appropriately ‘integrated’ treaty interpretation of BITs – combining the principles of good faith, due diligence, proportionality, and reciprocity – could make up for the lamentable lack of legal reasoning in investment arbitration while enhancing its legitimacy, without necessarily upsetting the judicial policy balance with a bias for host states. FURTHER INSTRUMENTS AND REASONING FOR A SHIFT FROM ‘COMPATIBILITY SEPARATION’ TO ‘COMPATIBILITY THROUGH INTEGRATION’

7.5

7.5.1

IN

A Legal Framework for a Symmetrical Balance between the Legitimate Expectations of Foreign Investors and Those of Host States

So far, international investment arbitration has basically applied the principle of proportionality to the relationship between the adverse effect on the foreign investment, on the one hand, and the benefits for the public interest deriving from the regulatory measures complained of, on the other.81 It is arguable that an appropriate application of the

79 80 81

Id. F. Ortino, ‘Legal Reasoning of International Investment Tribunals: A Typology of Egregious Failures’, Journal of International Dispute Settlement, Vol. 3, No. 1, 2012, pp. 31-52. See the case law, especially in the gas supply cases of S. D. Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award of 13 November 2000, 40 ILM 1408 (2001), paras. 281; CME Czech Republic BV v. Czech Republic, supra note 74, paras. 326, 330; Técnicas Medioambientales Tecmed, SA v. United Mexican States, CSID Case No. ARB(AF)/00/2, Award of 29 May 2003, para. 115, 19 ICSID Review 158 et

203

ATTILA TANZI

principle of proportionality should also encompass the relationship between the degree of compliance with the basic principles of due diligence on the protection of public interests, including environmental ones, on the part of the host state, as well as of the corporate actor. This approach to the principle of proportionality combined with that of reciprocity is grounded on the articulation of the principle of good faith in relation to the ancillary principles of legitimate expectations and due diligence. One preliminary issue in this area may concern the applicability of the above principles by way of reciprocity to an asymmetric relationship, such as the one between a sovereign state and a foreign private investor. One could question the international legal grounds for evaluating the conduct of a foreign private operator by the yardstick of the human rights obligations undertaken by the state at the international level, while foreign private operators at the most may, on a voluntary basis, feel under a moral pressure to comply with soft-law transnational codes of conduct.82 However, it should be clear that here it is not a question of the interpretation and application of human rights rules in order to assess the lawfulness or wrongfulness of the conduct of foreign private investors, for the question remains that of assessing the legality of the state measures complained of in any given case. For that purpose, it is arguable that the international obligations in force for the host state that are germane to the public service operated by the foreign investor – usually of a human rights character – represent an important part of the political, social, economic, and regulatory local environment the knowledge of which should be essential to the formation of the legitimate expectations of the foreign investor.

82

seq. (2004); CMS Gas Transmission Company v. Republic of Argentina, supra note 75, para. 260; Methanex Corp. v. United States of America, NAFTA case, Final Award on Jurisdiction and Merits of 3 August 2005, Part IV, Chapter D, para. 7, 44 ILM 1345 (2005); Saluka v. Czech Republic, UNCITRAL case, Partial Award of 17 March 2006, para. 262; Azurix Corp. v. Argentina Republic, supra note 51, para. 310; LG&E Energy Corp./LG&E Capital Corp./LG&E International Inc. v. Argentine Republic, supra note 51, para. 189; Continental Casualty Company v. Argentine Republic, ICSID Case No. ARB/03/9, Award of 5 September 2008, para. 227; and Glamis Gold Ltd. v. United States of America, UNCITRAL, Award of 8 June 2009, para. 356. See in general B. Kingsbury & S. W. Schill, ‘Public Law Concepts to Balance Investors’ Rights with State Regulatory Actions in the Public Interest – The Concept of Proportionality’, in S. W. Schill (Ed.), International Investment Law and Comparative Public Law, Oxford University Press, Oxford, 2010, p. 75, and J. Krommendijk & J. Morijn, ‘“Proportional” by What Measure(S)? Balancing Investor Interests and Human Rights by Way of Applying the Proportionality Principle in Investor-State Arbitration’, in Dupuy et al. (Eds.), Human Rights in International Investment Law and Arbitration, Oxford University Press, Oxford, 2009, pp. 422-450. On the appropriateness of upgrading the normative force of such instruments, see S. D. Murphy, ‘Taking Multinational Corporate Codes to the Next Level’, Columbia Journal of Transnational Law, Vol. 43, 2005, p. 389. On the applicability of public international law human rights obligations to private corporations, see S. R. Ratner, ‘Corporations and Human Rights: A Theory of Legal Responsibility’, Yale Law Journal, Vol. 111, 2001, p. 443. See also A. Bonfanti, Imprese Multinazionali, Diritti Umani e Ambiente. Profili di Diritto Internazionale Pubblico e Privato, Milan, Giuffè, 2012.

204

7

INTERNATIONAL INVESTMENT LAW

AND

ACCESS

TO

WATER

Since that of the legitimate expectations of the foreign investor is a relevant factor in order to substantiate its rights,83 the same should hold true in order to limit such rights when its expectations are neither legitimate nor complete or based on negligence. Indeed, in Biwater, the tribunal when assessing “whether the host State breached specific representations the investor reasonably relied on” and, recalling Saluka,84 appropriately emphasized that “[t]he question is not what the investor would prefer to have happened, or even what the investor subjectively expected to happen, but what the investor was objectively entitled to expect”.85 To that end, it stressed that “all relevant circumstances, including the governing municipal law, should be considered in determining what was objectively reasonable [including] the economic and other circumstances generally prevailing in Tanzania.”86 Amongst such circumstances it would only be reasonable to include the human rights obligations of the host state pertaining to public utilities in which the foreign investor would engage.87

7.5.2

Its Implementation through the Principles of Proportionality, Good Faith, and Due Diligence in a Dispute Prevention and a Dispute Settlement Perspective

The above reasoning inevitably aims at placing the claimant foreign private investor and respondent host state on an equal footing. While the need for a symmetrical approach between the disputing parties is a matter of course from a procedural standpoint on the basis of the well-established ‘equality of arms’ principle,88 it is appropriate that the same substantive principles should be equally applied to both disputing parties. As shown above, the international state obligations pertaining to the right to water are of a due diligence nature in the sense that the state has to do its utmost to ensure the fulfilment of the right in question.89 In particular, when water services are operated by

83

84 85 86 87 88

89

Tecmed, supra note 81, para. 154. See, amongst others, S. Fietta, ‘Expropriation and the Fair and Equitable Standard: The Developing Role of Investors’ Expectations’, Journal of International Arbitration, Vol. 23, 2006, p. 375. Saluka case, supra note 81, para. 304. Biwater, supra note 46, para. 566 (emphasis added). Id. Tanzi 2012, supra note 45, p. 52. See C. Schreuer et al. (Eds.), Commentary to the ICSID Convention, 2nd edn, Cambridge University Press, Cambridge, 2009, pp. 672-707 (comment on Art. 44 – Rules of Procedure), and T. Waelde, ‘“Equality of Arms” in Investment Arbitration: Procedural Challenges’, in K. Yannaca-Small (Ed.), Arbitration Under International Investment Agreements: A Guide to the Key Issues, Oxford University Press, Oxford, 2010, pp. 161-188. Id.

205

ATTILA TANZI

private operators, the host state is bound to take all appropriate preventive, monitoring, and, if need be, enforcement measures concerning private enterprises with a view to ensuring the fulfilment of the right in question.90 While from the standpoint of the foreign investor, knowledge of such due diligence obligations binding upon the host state are essential for an objective assessment of its legitimate expectations,91 it is to be assumed that the principle of good faith is a general principle which should be applicable to both the host state and the foreign investor alike. This should hold well in their position as claimant and defendant and, consequently, also in relation to the legal assessment of their conduct prior to the arising of the dispute, from the beginning of their relationship. Practical guidance on the determination of the contents of the due diligence conduct to be followed by states and foreign investors, particularly when providing essential public services, such as water distribution and sanitation, may be found in a host of international human rights treaties and authoritative soft-law instruments. As to the former, suffice to recall the 1966 ICESCR92 and the Additional Protocol to the American Convention on Human Rights in the Area of Economic, Social and Cultural Rights (Protocol of San Salvador).93 One may mention the General Comments of the ICESCR established under the above Covenant;94 the UN Global Compact;95 the Report of the Special Rapporteur, Hadji Guissé, on the guidelines for the realization of the right to drinking water supply and sanitation;96 the Principles for Private Sector Participation in Infrastructure of the Organisation for Economic Co-operation and Development (OECD),97 expressly referring to the OECD Guidelines for Multinational Enterprises, in order to complement its guideline function;98 and the Report of the Special Representative of the Secretary-General, John Ruggie, on the issue of human rights and transnational corporations and other business enterprises, “Principles for responsible contracts: integrating the management of human rights risks into State-investor contract negotiations: guidance for negotiators”.99

90 91 92

93 94 95 96 97 98 99

Id. See, especially, the relevant statements in General Comment No. 15, supra note 3. Supra notes 36 and 38. 1966 International Covenant on Economic, Social and Cultural Rights, 6 ILM 360 (1967). See, in particular, General Comment No. 14, supra note 4; General Comment No. 15, supra note 3; and General Comment No. 16, ‘The equal right of men and women to the enjoyment of all economic, social and cultural rights (Art. 3 of the ICESCR), UN Doc E/C.12/2005/4, 11 August 2005. 1988 Additional Protocol to the American Convention on Human Rights in the Area of Economic, Social and Cultural Rights, 28 ILM 156 (1989). See, in particular, General Comment No. 14, supra note 4; General Comment No. 15, supra note 3; and General Comment No. 16, supra note 92. See supra note 21. Id. Id. Id. Id.

206

7

INTERNATIONAL INVESTMENT LAW

AND

ACCESS

TO

WATER

As to the instruments adopted at the intergovernmental level, their internationally legally binding force for the states that have taken part in the process of their adoption may be derived through good faith which is an international general principle of law.100 As such, the latter applies as a source of international law on a par with, if not above, any other international customary rule, at least for the fact that it has been appropriately considered as a constitutional principle of international law, as much as of any system of law.101 When similar instruments are not of an intergovernmental nature, they may be taken as authoritative terms of reference by the private investor and the host state in their mutual relationship, while it will be for investment tribunals to consider them as guidance in their reasoning against the facts of each given case within the legal framework of the applicable investment treaty and the relevant internationally codified interpretative and substantive rules and principles.102 If human rights concerns come into play as relevant standards in the reasoning of investment tribunals in the above-described terms, this will increasingly draw the attention of the international business community on the importance of abiding by such standards at the pre-contractual and contractual levels.103 This may sensibly contribute to dispute prevention in this area and to reducing the policy grounds for questioning the legitimacy of future investment case law.

100 As clearly illustrated by the late Professor Schachter, “[w]hen States enter into a non-legal commitment, they generally assume a political (or moral) obligation to carry it out in good faith. Other States concerned have reason to expect such compliance and to rely on it. What we must deduce from this is that the nonbinding declarations that express political or moral commitments are governed by the general principle of good faith. Inasmuch as good faith is an accepted general principle of international law, it is appropriate to apply it to such commitments. There is no reason for distinguishing the legal meaning of ‘good faith’ from a supposed political meaning of that concept. Whether called legal or political, its meaning is essentially the same. A significant legal consequence of the ‘good faith’ principle is that a party which committed itself in good faith to a course of conduct or to recognition of a legal situation would be stopped from acting inconsistently with its commitment or position [...]”, O. Schachter, ‘Non-Conventional Concerted Acts’, in M. Bedjaoui (Ed.), International Law: Achievements and Prospects, UNESCO, Paris, 1991, p. 267. 101 For a general overview of the principle of good faith in such constitutional terms, R. Kolb, La bonne foi en droit International public, Presses Universitaires de France, Paris, 2000. 102 With specific regard to the General Comments to provisions of the above-mentioned Covenant by the Committee on Economic, Social and Cultural Rights, Judge Simma straightforwardly observed that “while the reading of the obligations on States parties as developed by the Covenant Committee is not legally binding per se, it does express the understanding of these obligations reached after careful consideration by the body possessing the highest authority to do so. In my view, if an investment tribunal confronted with a Covenant matter neglected to consider these pronouncements, its reasoning with regard to that matter would be insufficient - with all the consequences attached to this default” (B. Simma, ‘Foreign Investment Arbitration. A Place for Human Rights?’, International and Comparative Law Quarterly, Vol. 60, 2011, pp. 590-591). 103 This would correspond to the ‘second entry point for human rights into the international investment regime’ also advocated by Judge Simma (supra note 102, pp. 592 et seq.). For practical indications on the above, see also Tanzi 2012, supra note 45, pp. 67-73.

207

ATTILA TANZI

7.6

CONCLUDING REMARKS

By way of summing up, from the above reasoning and authorities, one may single out few specific points and draw some general conclusions. Firstly and foremost, it appears that the human rights dimension of the right of access to water and its legally binding force have never been questioned by international investment case law. On the contrary, the latter provides significant elements of practice enhancing the degree of general recognition of the right to water. Indeed, even when its human rights dimension has been disregarded, or not adequately taken into consideration, by an arbitration decision, this was never due to doubts about its legal status. Secondly, the legal findings pertaining to the right of access to water and sanitation within the investment law context appear to apply on the same footing as other human rights, whether ‘greened’ or not. Thirdly, states are internationally responsible for the fulfilment of the right of access to water and sanitation under a set of international obligations of a primarily due diligence nature. Accordingly, and fourthly, while states may exercise their sovereign freedom of choice as to the means to comply with their due diligence obligations under consideration – including by contracting out the operation of water services to private investors – they remain ultimately legally accountable for the compliance of the obligations in question. Fifthly, and lastly, when water services are privatized and operated by foreign investors, the international law processes in the fields of human rights, environment, and water – encompassing intergovernmental and non-governmental soft-law instruments, including on corporate social responsibility – make up an international regulatory setting which is appropriate for enhancing a more balanced legal relationship between foreign investors and host states. Such a regulatory setting, its knowledge and awareness by all actors involved would (a) provide important policy guidance for host states in shaping their policy and administrative action, (b) contribute to rendering more appropriate and realistic the foreign investors’ expectations about the local socio-economic and legal scenarios under international standards, and (c) offer an authoritative ground to arbitrators for assessing the lawfulness, or not, of the state’s regulatory measures adopted in the pursuit of the public interest bearing on foreign investment in the public utilities sector. To that end, such a regulatory setting would provide concrete substance to the principle of proportionality, not only between the benefits for the public interest and the constraints on foreign investors but also between the degree of compliance with clearer due diligence standards by both host states and the foreign investors also in terms of reciprocity.104

104 See also P. Muchlinski, ‘“Caveat Investor”? The Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard’, International and Comparative Law Quarterly, Vol. 55, No. 3, 2006, p. 547.

208

7

INTERNATIONAL INVESTMENT LAW

AND

ACCESS

TO

WATER

The above reasoning is geared towards a balanced legal relationship between foreign investors and host states, avoiding placing the due diligence burden entirely on either the foreign investor on the basis of a pro-public interest bias or the host state on the basis of the opposite interpretative attitude. According to the proposed reasoning, whenever a public utility service – with special regard to water services – is operated by a foreign investor and falls short of the basic human rights standards, the arbitrators will have to consider at the same time, and to balance, the degree of compliance with due diligence standards in the field by both the host state and the foreign operator. While the counterbalancing effect of this approach with respect of any alleged pro-investor bias is self-evident, at the same time, sight should not be lost of the fact that the same approach is based on the international legal premise that “promoting and upholding human rights is primarily the responsibility of governments”.105 That is to say that, under the principles of good faith, proportionality, and reciprocity, if, for example, the private operator’s conduct patently fell short of the standards under consideration without infringing upon the domestic regulatory framework – including the concession contract – the international wrongfulness of the host state’s remedial measures pursuing the public interest that were at variance with the standards of treatment under the BIT could be presumed. Indeed, in such a case, the lack of care by the local public administration, or possibly even by the central authorities of the host state in the elaboration of the regulatory framework applicable to the case in question, could be presumed, save for proof to the contrary. It may be hoped that, in the future, arbitration panels will pay more attention to all the pertinent international instruments in the field of water services, and public utilities in general, in the assessment of the degree of compliance with due diligence obligations by host states, as well as by foreign enterprises.106

105 Id. 106 The instruments under discussion seem to have given substance to the appropriate indications timely put forward by Peter Muchlinski in 2006 to the effect that “[t]he proper way forward, for the development of the jurisprudence on investor conduct, is to apply concepts of good faith and responsible business practice that are already well understood in national laws and practices, as well as in business custom” (Muchlinski 2006, supra note 104, p. 556).

209

BIBLIOGRAPHY BOOKS Bonfanti, A., Imprese Multinazionali, Diritti Umani e Ambiente: Profili di Diritto Internazionale Pubblico e Privato, Milano: Giuffè, 2012. Bourquain, K., Freshwater Access from a Human Rights Perspective: A Challenge to International Water and Human Rights Law, The Netherlands: Martinus Nijhoff Publishers, 2008. Dupuy, P.M. et al. (Eds.), Human Rights in International Investment Law and Arbitration, Oxford: Oxford University Press, 2009. Kolb, R., La Bonne foi en Droit International Public, Paris: Presses Universitaires de France, 2000. Schreuer, C. et al. (Eds.), Commentary to the ICSID Convention, 2nd edn, Cambridge: Cambridge University Press, 2009. Winkler, I.T., The Human Right to Water: Significance, Legal Status and Implications for Water Allocation, Oxford: Hart Publishing, 2012.

ARTICLES Barnidge, R.P., Jr., ‘The Due Diligence Principle under International Law’, 8(1) International Community Law Review, 2006. Budds, J. & Mc Granahan, G., ‘Are the Debates on Water Privatization Missing the Point? Experiences from Africa, Asia and Latin America’, 15(2) Environment and Urbanization, 2003. Fietta, S., ‘Expropriation and the Fair and Equitable Standard: The Developing Role of Investors’ Expectations’, 23 Journal of International Arbitration, 2006.

210

7

BIBLIOGRAPHY

Fitzmaurice, M., ‘The Human Right to Water’, 18 Fordham Environmental Law Review, 2007, pp. 537-585. Gaughran, A., ‘Business and Human Rights and the Right to Water’, 106 Proceedings of the Annual Meeting (American Society of International Law), 2012. Gupta, J. et al. ‘The Human Right to Water: Moving Towards Consensus in a Fragmented World’, 19(3) Review of European Community & International Environmental Law, 2010. Kirschner, A.J., ‘The Human Right to Water and Sanitation’, 15 Max Planck Yearbook of United Nations Law, 2011. Kornfeld, I.E., ‘Water: A Public Good or a Commodity?’, 106 Proceedings of the Annual Meeting American Society of International Law, 2012. Marrella, F., ‘On the Changing Structure of International Investment Law: the Human Right to Water and ICSID Arbitration’, 12(3) International Community Law Review, 2010. McCaffrey, S.C., ‘A Human Right to Water: Domestic and International Implications’, 5(1) The Georgetown International Environmental Law Review, 1992. Muchlinski, P., ‘“Caveat Investor”? The Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard’, 55(3) International and Comparative Law Quarterly, 2006. Murphy, S.D., ‘Taking Multinational Corporate Codes to the Next Level’, 43 Columbia Journal of Transnational Law, 2005. Murthy, S.L., ‘The Human Right(s) to Water and Sanitation: History, Meaning and the Controversy Over-Privatization’, 31 Berkeley Journal of International Law, 2013. Ortino, F., ‘Legal Reasoning of International Investment Tribunals: A Typology of Egregious Failures’, 3(1) Journal of International Dispute Settlement, 2012. Peter, C.M., ‘Promotion of Standard of Living’, Max Planck Encyclopedia of Public International Law, 2009.

211

ATTILA TANZI Ratner, S.R., ‘Corporations and Human Rights: A Theory of Legal Responsibility’, 111 Yale Law Journal, 2001. Simma, B., ‘Foreign Investment Arbitration. A Place for Human Rights?’, 60 International and Comparative Law Quarterly, 2011. Tanzi, A., ‘On Balancing Foreign Investment Interests with Public Interests in Recent Arbitration Case Law in the Public Utilities Sector’, 11 The Law and Practice of International Courts and Tribunals, 2012. Tanzi, A., ‘Reducing the Gap between International Investment Law and Human Rights Law in International Investment Arbitration?’, 1(2) Latin American Journal of International Trade Law, 2013. Tully, S., ‘A Human Right to Access to Water? A Critique of General Comment No. 15’, 23(1) Netherlands Quarterly of Human Rights, 2005.

CONTRIBUTIONS

IN EDITED BOOKS

Kingsbury, B. & Schill, S.W., ‘Public Law Concepts to Balance Investors’ Rights with State Regulatory Actions in the Public Interest - The Concept of Proportionality’, in S.W. Schill (Ed.), International Investment Law and Comparative Public Law, Oxford: Oxford University Press, 2010. Krommendijk, J. & Morijn, J., ‘“Proportional” by What Measure(S)? Balancing Investor Interests and Human Rights by Way of Applying the Proportionality Principle in Investor-State Arbitration’, in P.M. Dupuy et al. (Eds.), Human Rights in International Investment Law and Arbitration, Oxford: Oxford University Press, 2009. McIntyre, O., ‘Emergence of the Human Right to Water in an Era of Globalization and Its Implications for International Investment Law’, in J. Addicot et al. (Eds.), Globalization, International Law and Human Rights, Oxford: Oxford University Press, 2012. Pisillo-Mazzeschi, R., ‘Forms of International Responsibility for Environmental Harm’, in F. Francioni & T. Scovazzi (Eds.), International Responsibility for Environmental Harm, London: Graham & Trotman, 1991.

212

7

BIBLIOGRAPHY

Schachter, O., ‘Non-Conventional Concerted Acts’, in M. Bedjaoui (Ed.), International Law: Achievements and Prospects, Paris: UNESCO, 1991. Simma, B. & Kill, T., ‘Harmonizing Investment Protection and International Human Rights. First Step towards a Methodology’, in C. Binder et al. (Eds.), International Investment Law for the 21st Century, Oxford: Oxford University Press, 2009. Tanzi, A., ‘Public Interest Concerns in International Investment Arbitration in the Water Services Sector’, in T. Treves et al. (Eds.), International Investment Law and Common Concerns, Oxford: Routledge, 2013. Thielbörger, P., ‘The Human Right to Water Versus Investor Rights: Double-Dilemma or Pseudo Conflict?’, in P.M. Dupuy et al. (Eds.), Human Rights in International Investment Law and Arbitration, Oxford: Oxford University Press, 2009. Waelde, T., ‘Equality of Arms in Investment Arbitration: Procedural Challenges’, in K. Yannaca-Small (Ed.), Arbitration under International Investment Agreements: A Guide to the Key Issues, Oxford: Oxford University Press, 2010.

213

8

INVESTMENT ARBITRATION

IN THE

NUCLEAR

ENERGY SECTOR: ENVIRONMENTAL PROTECTION VERSUS

INVESTOR PROTECTION

James Fry and Odysseas Repousis*

8.1

INTRODUCTION

Foreign capital involvement in the nuclear energy industry has grown in recent years,1 even after Germany and Switzerland decided to proceed with a general nuclear energy phase-out after the Fukushima Daiichi nuclear disaster in 2011.2 A unique characteristic of this field is that it continues to be dominated by state-owned enterprises, which now act as foreign investors, as opposed to mere national energy utilities. Therefore, the group of foreign investors that appears to be emerging in the field of nuclear energy is limited in number and lacks homogeneity, since it comprises both private and public enterprises acting as foreign investors. This development creates the need to examine how, if at all, this group of investors could benefit from the existing grid of investment treaties to the detriment of the host state’s regulatory powers.3 In particular, the question arises whether investment treaties preserve or weaken the power of host states to regulate their nuclear energy sector in order to safeguard their environmental interests, especially when specific exception clauses that allow for such regulation are not found in the relevant investment treaties.4 This chapter addresses this question, with the conclusion being that investment *

1 2

3

4

Dr. Fry is an Associate Professor of Law at the University of Hong Kong Faculty of Law, and Visiting Associate Professor of International Law at the Fletcher School of Law and Diplomacy of Tufts University. Mr. Repousis is a Research Assistant and Ph.D. student at the University of Hong Kong Faculty of Law, Hong Kong SAR. M.E. Stern & M.M. Stern, ‘Does Nuclear Power Have a Future?’ 32 Utah Envtl. L. Rev., 2012, p. 436. See L. Kramm, ‘The German Nuclear Phase-out after Fukushima: A Peculiar Path or an Example for Others’, Renewable Energy Law and Policy Review, 2012, pp. 251-262; S. Glomsrød et al., ‘Energy Market Impacts of Nuclear Power Phase-Out Policies’, 1 CICERO Working Paper, 2013, p. 5. See generally P. Muchlinski, ‘Corporate Social Responsibility’, in P. Muchlinski et al. (Ed.), The Oxford Handbook of International Investment Law, Oxford University Press, Oxford, 2008, pp. 662-673 (providing general considerations on environmental law issues that relate to international investment law); M. Sornarajah, The Settlement of Foreign Investment Disputes, Kluwer Law International, The Hague, 2000, pp. 362-364; International Bureau of The PCA (Ed.), International Investments and Protection of the Environment, Kluwer Law International, The Hague, 2000 (same). See J. Salacuse, The Law of Investment Treaties, Oxford University Press, Oxford, 2009, pp. 340-349 (explaining the meaning of general exceptions).

215

JAMES FRY & ODYSSEAS REPOUSIS

treaties have the potential power to weaken the regulatory powers of a state in the nuclear energy field. With regard to state-owned enterprises acting as foreign investors in the nuclear energy field, this chapter does not address the issues that may arise for these particular investors, but merely recognizes that this is another factor that needs to be taken into consideration, especially when considering the standing of these investors under the International Centre for the Settlement of Investment Disputes (ICSID) Convention.5 This chapter is divided into four sections, including this brief introduction. Section 8.2 examines whether the exception clauses found in investment treaties can cover disputes that arise in the nuclear energy sector, with specific weight being given to investment treaties entered into by nuclear energy states,6 as well as by states that possess nuclear power plants.7 More specifically, this section sheds light on the nature and bearing of exception clauses, particularly when they explicitly refer to the nuclear energy sector. Section 8.3 explores the potential conflict between international investment law, international environmental law, and nuclear-related treaties in order to understand the impact of these treaties on the host state’s regulatory powers in the nuclear energy sector. This section then delves deeper into the substantive rights given to investors under investment treaties in order to assess the circumstances under which environmental protection regulations of the nuclear energy industry potentially would breach these rights. Section 8.4 provides a short conclusion and summarizes the findings of this chapter with regard to the potential power of investment treaties to weaken the regulatory powers of a state in the nuclear energy field. As a general remark, it must be noted that the scope of this chapter is limited to studying how international environmental law and nuclear energy law conflict with and complement each other within the context of international investment in cases other than emergency measures taken in response to nuclear energy disasters and accidents. In

5

6

7

See L. Backer, ‘Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, StateOwned Enterprises and the Chinese Experience’, 19 Transnational Law and Contemporary Problems, 2010, p. 3 et seq. (providing a discussion of these issues); M. Feldman, ‘The Standing of State-Owned Entities under Investment Treaties’, in K. Sauvant (Ed.), Yearbook on International Investment Law and Policy 2010–2011, Oxford University Press, New York, 2011, p. 615 et seq. The nuclear-weapon states under the Treaty on the Non-Proliferation of Nuclear Weapons (NPT) are the United States (US), the United Kingdom (UK), Russia, China, and France. Non-NPT nuclear powers are India, Pakistan, and North Korea. NATO nuclear-weapon-sharing states are Belgium, Germany, Italy, the Netherlands, and Turkey. The USA, France, Japan, and Russia possess more than 25 nuclear power plants, with the USA currently possessing 104 plants. Ukraine, the UK, China, Canada, India, and South Korea follow with between 11 and 25 nuclear power plants. The countries that possess one to ten nuclear power plants are (in descending order) Sweden, Germany, Spain, Belgium, Czech Republic, Switzerland, Slovakia, Hungary, Finland, Pakistan, Mexico, Bulgaria, Brazil, Romania, South Africa, Argentina, Slovenia, the Netherlands, Iran, and Armenia. See IAEA, Nuclear Power Reactors in the World, IAEA, Vienna, 2013, pp. 10-11.

216

8

INVESTMENT ARBITRATION

IN THE

NUCLEAR ENERGY SECTOR

addition, this chapter is an extension and expansion of the corresponding author’s earlier work that addressed the possibility and challenges of using legal methods of resolution with such politically sensitive disputes as nuclear non-proliferation disputes.8

8.2

INVESTMENT TREATIES

AND THE

REGULATION

OF THE

NUCLEAR ENERGY SECTOR

The nuclear energy sector is a highly regulated and politically sensitive area. The question that this section seeks to answer is whether investment treaties pose limits to the ability of a state to regulate its nuclear energy sector. In order to answer this question, this section focuses on investment treaties concluded by nuclear power states and states that possess nuclear power plants. Since there certainly is an overlap between nuclear power states and states that possess nuclear power plants, this section examines these groups of states together and collectively refers to them as nuclear energy states. To a certain degree, reference also is made to the Energy Charter Treaty (ECT), which has been ratified by some of the states that possess nuclear power plants and so has been invoked in some of the investor-state cases that are connected to the nuclear energy industry.9 This section’s focus on nuclear energy states is based on two reasons. The first is that investment disputes in the nuclear energy industry are more likely to occur in these states, although this cannot be determinative, as investment disputes also may arise in states that are now developing their nuclear energy market, such as the United Arab Emirates (UAE).10 The second reason is that these groups of states already had an established nuclear energy industry when they concluded the majority of their investment treaties, and it originally was believed that it would be particularly interesting to examine whether they have inserted specific exception provisions that directly refer to the nuclear energy industry. In short, this section describes both general and specific exception provisions that appear in investment treaties concluded between the above states, with the aim of highlighting how they can impact a state’s regulatory powers in the nuclear energy industry.

8 9

10

See generally J.D. Fry, Legal Resolution of Nuclear Non-Proliferation Disputes, Cambridge University Press, Cambridge, 2013. The relevant cases are Limited liability company AMTO (Latvia) v. Ukraine, SCC Case No. 080/2005, Final Award of 26 March 2008 (hereinafter Amto v. Ukraine); Hrvatska Elektropriveda, d.d. (HEP) (Croatia) v. Republic of Slovenia, ICSID Case No. ARB/05/24, Decision on the Treaty interpretation issue and Individual Opinion of 12 June 2009 (hereinafter HEP v. Slovenia); Vattenfall AB and others (Sweden) v. Federal Republic of Germany, ICSID Case No. ARB/12/12 (hereinafter Vattenfall II v. Germany). See also Remington Worldwide Limited v. Ukraine, SCC, Final Award of 28 April 2011 (not public). This case was filed under the ECT, and its factual background is connected to Amto v. Ukraine. See A. Astapov, ‘General Policy of Ukraine Towards Arbitration’, in Association for International Arbitration (Ed.), Arbitration in the CIS Countries: Current Issues, Maklu, Antwerp-Apeldoorn-Portland, 2012, pp. 63-64. See V. Mulvey, ‘United Arab Emirates: Change and Challenge - Nuclear Power Making its Way to the UAE’, International Energy Law Review, Vol. 2, 2011, p. 29.

217

JAMES FRY & ODYSSEAS REPOUSIS

8.2.1

Exception Provisions in Investment Treaties of the Nuclear Energy States

Before reviewing the references that investment treaties of nuclear energy states make to environmental protection measures and measures directly related to the nuclear energy industry, some general remarks need to be taken into consideration. In particular, references to environmental protection measures did not appear in investment treaties until recently.11 Environmental protection measures usually take the form of general language that refers to environmental concerns or otherwise discourages the contracting parties from relaxing environmental regulation in order to attract investment.12 Another category of provisions reserves space for environmental regulation, yet it often is limited to specific issues and with regard to specific rights contained in an investment treaty.13 Some investment treaties clarify that non-discriminatory environmental protection regulation cannot be seen as ‘indirect expropriation’.14 However, mere references to environmental concerns may not always provide firm guidance, and the reservation of regulatory ‘space’ for environmental protection measures acts as an exception that needs to be further examined, particularly in light of disputes connected to the nuclear energy sector. Furthermore, investment treaties sometimes also contain security exceptions, which presumably can cover security measures taken in order to protect the environment.15 These security exceptions may justify responsive safety measures taken by host states in the nuclear energy industry even though they can have a severe impact on foreign investments. However, as more fully explained below, security exceptions are treated differently than mere environmental or nuclear-related exceptions.16 A prominent example is the practice of the US that construes investment treaties as not precluding measures that a party considers necessary “for the fulfilment of its obligations with respect to [...] the protection of its own essential security interests”.17 In this regard, it is asked whether security exceptions such as the one just referred to are identical to the customary international law necessity defence or whether they constitute a distinct

11

12 13 14 15

16 17

See K. Gordon & J. Pohl, ‘Environmental Concerns in International Investment Agreements: The “New Era” has Commenced, but Harmonization Still Appears Far Off’, in K.P. Sauvant & J. Reimer (Eds.), FDI Issues in International Investment, 2nd edn, Vale Columbia Center on Sustainable International Investment, 2012, p. 152. See UNCTAD, Environment, United Nations, New York and Geneva, 2001, pp. 22-36. See K. Gordon & J. Pohl, ‘Environmental Concerns in International Investment Agreements: A Survey’, OECD Working Papers on International Investment No. 2011/1, Paris, 2011, p. 8. Id. See W. Burke-White & A. Von Staden, ‘Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties’, 48 Virginia Journal of International Law, 2008, p. 307 et seq. (providing an elaborate analysis of security exceptions). See D. Desierto, Necessity and National Emergency Clauses: Sovereignty in Modern Treaty Interpretation, Martinus Nijhoff, Leiden and Boston, 2012, pp. 9-17, 145-150. See, e.g., Art. 18 (2), US 2012 Model BIT.

218

8

INVESTMENT ARBITRATION

IN THE

NUCLEAR ENERGY SECTOR

investment treaty exception, as investor–state jurisprudence seems to suggest.18 If the latter view is adopted, it must be asked whether security exceptions may overlap with environmental or nuclear-related exceptions that also are included in these treaties.19 Taking into account these introductory remarks, the remainder of this subsection examines the exceptions that presumably can justify environmental regulations in the nuclear energy field and are inserted in the investment treaties of nuclear energy states. A review of the investment treaties concluded by the above states reveals that they vary significantly with regard to the inclusion of environmental or nuclear-related exceptions, however general or special. Some of these investment treaties contain general environmental exceptions, while others do not contain such exceptions at all. On the other hand, some investment treaties provide both for environmental exceptions and specific exceptions for the nuclear energy sector. For example, the French 2006 Model BIT and the Indian 2003 Model BIT contain no exceptions that potentially could justify environmental regulations either in a general manner or in connection to the nuclear energy field.20 Conversely, the US 2012 Model BIT and the latest investment treaties entered into by the US contain ample provisions that refer to the environment. First, there exists general language that refers to environmental concerns and that discourages the contracting parties from relaxing environmental regulation in order to attract investment.21 Second, regulatory space is reserved for environmental regulation. For example, Article 12 of the US 2012 Model BIT provides: Nothing in this Treaty shall be construed to prevent a Party from adopting, maintaining, or enforcing any measure otherwise consistent with this Treaty that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.22

18

19 20

21

22

See, e.g., CMS Gas Transmission Company v. Republic of Argentina, ICSID Case No. ARB/01/8, Decision of the ad hoc Committee on the Application for Annulment of the Argentine Republic (English) of 25 September 2007, paras. 119 et seq.; C. Binder, ‘Necessity Exceptions, the Argentine Crisis and Legitimacy Concerns: Or the Benefits of a Public International Law Approach to Investment Arbitration’, in T. Treves et al., (Ed.), Foreign Investment, International Law and Common Concerns, Routledge, London and New York, 2014, pp. 72-77. See Desierto 2012, supra note 16, p. 159, nn. 53-54. See German 2008 Model BIT; UK 2008 Model BIT. See also C. Brown & A. Sheppard, United Kingdom, in C. Brown (Ed.), Commentaries on Selected Model Investment Treaties, Oxford University Press, Oxford, 2013, pp.740-742. See Art. 12, US 2012 Model BIT. See also Art. 1114(2), NAFTA (“The Parties that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. [...]”); Art. 12(1), USRwanda BIT. See Art. 12 (5), US 2012 Model BIT. See also Art. 1114(1), NAFTA; Art. 10.12, Chile–US FTA; Art. 12(2), US–Rwanda BIT.

219

JAMES FRY & ODYSSEAS REPOUSIS

Other treaties entered into by the US include provisions that specifically stipulate the “right of each Party to establish its own levels of environmental protection and its own environmental development priorities”.23 Moreover, specific non-conforming measures that tend to cover the nuclear energy sector have started to appear. For example, the Korea–US Free Trade Agreement (FTA) provides that specific rights do not apply to the ‘atomic energy industry’.24 However, these non-conforming measures do not refer to expropriation.25 With regard to expropriation, another exception has started to appear: Except in rare circumstances, such as […] when an action or a series of actions is extremely severe or disproportionate in light of its purpose or effect, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, [and] the environment [...] do not constitute indirect expropriations.26 Subsection 8.2.2 of this chapter examines the exact meaning and impact of the latter clause and also contrasts treaty practice of the US with that of France, India, and Germany, which do not include any exceptions, however general or specific to environmental measures or to the regulation of the nuclear energy industry. In addition to the treaties concluded by the US, general language with regard to environmental concerns and references to the regulatory ‘space’ of states also appears in investment treaties of Japan, China, Korea, Canada, and Belgium and Luxembourg.27 In particular, in treaties entered into by Canada, a specific exception usually appears: Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Contracting Party from adopting or maintaining measures, including environmental measures:...necessary to protect human, animal or plant life or health.28

23 24 25 26 27

28

Art. 20.1, Korea-US FTA. See Art. 11.12 and Ann. II (Korea – p. 15), Korea–US FTA. They basically refer to national treatment, most-favoured-nation treatment, and specific performance requirements. See Ann. 11-B(3)(b), Korea–US FTA. See Art. 21, Japan–Vietnam BIT; Art. 23, Japan–China–Korea Trilateral Investment Treaty; Art. 5(3), Belgian/Luxembourg 2002 Model BIT; Art. XVII(3), Canada–Panama Foreign Investment Protection Agreement (FIPA). See, e.g., Art. XVII(3), Canada–Panama FIPA; Art. 23.02(3), Canada–Panama FTA. See also C. Lévesque & A. Newcombe, ‘Canada’, in C. Brown (Ed.), Commentaries on Selected Model Investment Treaties, Oxford University Press, Oxford, 2013, pp. 87-91.

220

8

INVESTMENT ARBITRATION

IN THE

NUCLEAR ENERGY SECTOR

This exception resembles that found in Article XX of the General Agreement on Tariffs and Trade (GATT),29 although it currently exists in only a small percentage of investment treaties.30 Apart from general references to the environment and GATT-like exceptions, more specific references to the nuclear energy field have appeared, as the example of the Korea–US FTA alluded to above shows. Furthermore, Japan and Korea appear to insert specific non-conforming measures that cover the nuclear energy industry in the sense of excluding specific standards from the nuclear energy field, such as the national-treatment and most-favoured-nation (MFN) treatment standards.31 However, again, these nonconforming measures do not apply to expropriation,32 which nevertheless is sometimes supplemented by specific exceptions connected to the environment. For example, the China–New Zealand FTA provides that “measures taken in the exercise of a state’s regulatory powers as may be reasonably justified in the protection of the public welfare, including public health, safety and the environment, shall not constitute an indirect expropriation”.33 This provision resembles the exception referred to above with regard to the Korea–US FTA, and as explained in Subsection 8.2.2 below, it should be contrasted to GATT-like exceptions, which unlike the former do not explicitly refer to expropriation. Furthermore, sometimes even more elaborate provisions are provided, such as the specific requirements set by the Canada–Panama FTA for the qualification of an investor in the nuclear energy industry.34 Finally, other references to the non-proliferation of nuclear weapons seem not to be relevant for the present examination inasmuch as they focus on non-peaceful uses of nuclear energy.35 Given the above examination of the investment

29

30

31 32 33 34 35

See Art. XX, GATT; Art. XIV, General Agreement on Trade in Services (GATS). Article 200 of the China– New Zealand FTA incorporated by reference both Article XX GATT and Article XIV GATS, clarifying that environmental measures fall within the measures that a party can employ. See Art. 200(2), China–New Zealand FTA. See also Art. 16, China–Association of Southeast Asian Nations (ASEAN) Agreement on Investment (modelled after Art. XX GATT). See A. Newcombe, ‘General Exceptions in International Investment Agreements’, in M.C. Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, Kluwer Law International, The Hague, 2011, pp. 356-360; A. Newcombe & L. Paradell, Law and Practice of Investment Treaties: Standards of Treatment, Kluwer Law International, The Hague, 2009, pp. 483, 499-502; B. Legum & I. Petculescu, ‘GATT Article XX and International Investment Law’, in R. Echandi & P. Sauvé (Eds.), Prospects in International Investment Law and Policy, Cambridge University Press, Cambridge, 2013, p. 340; S.P. Subedi, International Investment Law: Reconciling Policy and Principle, Hart Publishing, Oxford and Portland, 2008, pp. 185-187. See Ann. I, Japan–Vietnam BIT; Ann. I, Korea–Japan BIT. See Newcombe 2011, supra note 30, p. 357; Newcombe & Paradell 2009, supra note 30, p. 482. Ann. 13(5), China–New Zealand FTA; Ann. 9, China–Peru FTA. In order to qualify as an investor in Cameco Limited (formerly Eldorado Nuclear Limited), 15 % is required for any non-resident natural person or 25 % in the aggregate. See Ann. I, Canada–Panama FTA. Art. 10(4), Canada 2004 Model BIT; Art. 18(1)(a)(ii), China–Japan–Korea Trilateral Investment Treaty; Art. 17(b)(i), China–ASEAN Agreement on Investment.

221

JAMES FRY & ODYSSEAS REPOUSIS

treaties concluded by nuclear power states and states that possess nuclear power plants, it also is interesting to briefly look at the ECT, which has been ratified by a considerable number of these states.36 8.2.2

Exceptions in the Energy Charter Treaty

Similar to some of the treaties signed by nuclear energy states, the ECT contains general provisions that refer to the environment.37 This prominent sectoral agreement is delimited to disputes arising or connected to the energy sector and also provides for investor– state arbitration.38 Its focus on providing a multilateral framework for energy cooperation and protection of investments in the energy field has led Maja Stanivukovic to note that it “represents a comprehensive legal instrument [...] worth looking into in search of answers for better regulation of and avoidance of any disputes arising from foreign investment in the nuclear energy sector”.39 In particular, Article 19 provides that “each Contracting Party shall strive to minimize in an economically efficient manner harmful Environmental Impacts occurring either within or outside its Area from all operations within the Energy Cycle in its Area, taking proper account of safety”.40 Other examples of this general language contain provisions that refer to the minimization of harmful environmental impacts,41 as well as to the point that the contracting parties must “strive to take precautionary measures to prevent or minimize environmental degradation”.42 These provisions potentially could apply to the nuclear energy sector, yet it should be noted that 36

37

38

39

40

41 42

For example, France, Japan, and the UK have ratified this treaty. See Energy Charter, Members and Observers. Available at accessed 27 June 2014 (providing a list of all of the signatories). See T. Wälde, ‘Introductory Note - Treaties and Agreements: European Energy Charter Conference: Final Act, Energy Charter Treaty, Decisions and Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects’, 34 International Legal Materials, 1995, p. 360 et seq.; S. Elshihabi, ‘The Difficulty behind Securing Sector-Specific Investment Establishment Rights: The Case Of The Energy Charter Treaty’, 35 International Lawyer, 2001, pp. 143-145; A. Falsafi, ‘Regional Trade And Investment Agreements: Liberalizing Investment In A Preferential Climate’, Syracuse Journal of International Law and Commerce, Vol. 36, 2008-2009, pp. 63-66; L. Reed & L. Martinez, ‘The Energy Charter Treaty: An Overview’, ILSA Journal of International and Comparative Law, Vol. 14, 2007-2008, pp. 415-427. See Parts III and V, ECT. Other issues addressed by this treaty are energy transit, trade of energy materials and products, environmental protection, and energy efficiency. See Falsafi 2008-2009, supra note 37, pp. 6366. See M. Stanivukovic, ‘State-Investor Disputes Connected To Foreign Investments In The Nuclear Energy Sector: A Review Of The Two Cases Arising Under The Energy Charter Treaty’, Zbornik Radova Vol. 45, 2011, pp. 253-256. Art. 19(1), ECT. The ‘Energy Cycle’ is defined broadly so as to include even the ‘treatment and disposal of wastes’, which can presumably be nuclear energy wastes. See Art. 19(3)(a), ECT. Likewise, ‘environmental impacts’ are carved out broadly so as to include all aspects of effects on human, animal or plant life. See Art. 19(3)(b), ECT. See Art. 19(1), ECT. Id.

222

8

INVESTMENT ARBITRATION

IN THE

NUCLEAR ENERGY SECTOR

general references to the protection of the environment do not necessarily impose or set a specific framework for environmental protection measures. It is rather the domestic legal order that sets the environmental standards that foreign investors should follow.43 Apart from these provisions, the ECT emphasizes that the contracting parties are not precluded “from adopting or enforcing any measure (i) necessary to protect human, animal or plant life or health”,44 provided that “no such measure shall constitute a disguised restriction on Economic Activity in the Energy Sector, or arbitrary or unjustifiable discrimination between Contracting Parties or between Investors or other interested persons of Contracting Parties” and provided that these measures shall not nullify or impair any benefit reasonably expected under the ECT “to an extent greater than is strictly necessary to the stated end”.45 This provision is similar to the GATT Article XX exceptions referred to above. However, the ECT indicates that this exception provision does not apply with regard to expropriation and compensation for losses incurred by investors in emergency situations.46 This reference is important as it may determine the impact of this exception provision, as the following subsection explains.

8.2.3

Restating or Enhancing Environmental Regulation through Exception Provisions?

This section starts by summarizing the provisions that can play an active role in regulating the nuclear energy industry by reason of environmental concerns. These provisions can be classified into five categories. First, there is general language that refers to environmental concerns and that discourages the contracting parties from relaxing environmental regulation in order to attract investment.47 Second, other provisions reserve space for environmental regulation by indicating that this kind of regulation is not prohibited, provided that it is consistent with the investment treaty involved.48 Third, some treaties dictate that specific standards such as the national treatment standard and specific performance requirements do not apply with regard to the nuclear energy industry. However, these non-conforming measures do not refer to the provisions that protect against expropriation.49 Fourth, some investment treaties employ exceptions similar to GATT Article XX, which allows for environmental measures “necessary to 43 44 45 46 47 48 49

See Energy Charter Secretariat, The Energy Charter Treaty: A Reader’s Guide, p. 38. Available at accessed 27 June 2014. Art. 24(2)(b)(i), ECT. Id. Art. 24(2) in fine. See id. Art. 24(1). See Art. 12, US 2012 Model BIT; Art. 1114(2), NAFTA; Art. 19(1), ECT. See, e.g., Art. 12(5), US 2012 Model BIT. See Ann. I, Japan–Vietnam BIT; Ann. I, Korea–Japan BIT.

223

JAMES FRY & ODYSSEAS REPOUSIS protect human, animal or plant life or health” provided that they “are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment”.50 Finally, some treaties elaborate on the notion of indirect expropriation, indicating that “non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, [and] the environment [...] do not constitute indirect expropriations”.51 This section also explores the relationship of the above provisions with nonprecluded measures such as those inserted in US investment treaties. As already noted, non-precluded measures refer to measures employed by a party for the protection “of its own essential security interests,”52 which can include environmental concerns. In order to understand the impact of these types of provisions, the reader is reminded of the notion of police powers and the very power of a state to regulate being an inherent power that stems from state sovereignty. Traditionally, ‘police powers’ refer to issues of public order, health or public morals.53 Therefore, it can be said that specific exceptions that allow for environmental regulation avoid any uncertainties that can be created with regard to environmental measures.54 However, a number of commentators assert that the regulatory powers of a state cannot but logically extend to environmental measures, as the notion of sovereignty points directly to the ability of a state to protect its “territory from environmental harm”.55 If this is to be accepted, the question then becomes whether the exception provisions found above are somehow different from the inherent regulatory powers that a state logically possesses as well as whether they clarify or restrain the boundaries of environmental regulation.56 States such as the US and Canada take the position that all of these provisions do not extend the current customary international law standards and that they only “accurately and exhaustively state existing customary law to which BITs explicitly or implicitly refer”.57 If this is correct, then general language that refers to environmental concerns and the 50 51 52 53

54 55

56

57

See, e.g., Art. XVII(3), Canada–Panama FIPA; Art. 23.02(3), Canada–Panama FTA. See, e.g., Ann. 11-B, Korea–US FTA. Art. 18(2), US 2012 Model BIT. S. Robert-Cuendet, Droits de l’Investisseur Etranger et Protection de l’Environnement : Contribution à l’Analyse de l’Expropriation Indirecte, Martinus Nijhoff, Leiden, Boston, 2010, p. 256, nn. 2-4; Legum & Petculescu 2013, supra note 30, p. 351. See Muchlinski 2008, supra note 3, pp. 662, 672; UNCTAD 2001, supra note 12, pp. 24-25. Sornarajah 2000, supra note 3, p. 110; T. Walde & A. Kolko, ‘Environmental Regulation, Investment Protection and Regulatory Taking in International Law’, 50 ICLQ, 2001, p. 811 et seq.; Subedi 2008, supra note 30, p. 166; Robert-Cuendet 2010, supra note 53, p. 256. See A. Romson, ‘International Investment Law and the Environment’, in Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, Kluwer Law International, The Hague, 2011, supra note 30, p. 45. M. Paparinskis, ‘Regulatory Expropriation and Sustainable Development’, in Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, Kluwer Law International, The Hague, 2011, supra note 30, pp. 323-324.

224

8

INVESTMENT ARBITRATION

IN THE

NUCLEAR ENERGY SECTOR

reservation of regulatory ‘space’ for environmental purposes appears not to significantly alter what is considered to fall within the regulatory powers of a state. Therefore, the first and second types of provisions referred to above basically act as a clarification of customary international law. With regard to the third type that refers to the exclusion of the nuclear energy industry from specific standards such as national treatment, the situation appears to be different. In this case, there exists a specific exclusion of the application of some treaty rights to the nuclear energy sector. This means that an investor in the nuclear energy field cannot invoke an alleged breach of these rights, since the parties have specifically excluded them. This is completely different with regard to the fourth type listed above, which refers to exceptions that are similar to GATT Article XX. These exceptions justify environmental measures under the stringent test that they are necessary to protect human, animal or plant life or health and provided that they are not discriminatory and that they do not cover any form of protectionism. Therefore, the difference between the third and fourth type lies in the fact that in the case of the former, even if an investor is treated arbitrarily or discriminatorily, a breach of the specifically excluded rights cannot be justified. In contrast, exceptions that resemble GATT Article XX come into play when a right is applicable – and not exempted – to the dispute in question. However, the impact of exceptions resembling GATT Article XX is not completely clear. In particular, it is not clear whether they act as mere restatements of the current customary international law or whether they add to it. Moreover, when such exceptions are examined with regard to substantive rights, it is unclear whether they add any further elements to their examination, whether they merely clarify them or whether they come into play at a later stage if a breach of a substantive right is found.58 A serious defect that impacts any determination is that states that include such exceptions in their investment treaties do not have consistent treaty practice, since they sometimes insert such exceptions while in other instances refrain from including such provisions.59 In the context of environmental protection measures, it must be further asked whether exceptions that resemble GATT Article XX are enough to render such measures noncompensable. Particularly for the notion of expropriation, this last question is closely connected to the fifth type listed at the beginning of this section, which points to specific provisions inserted in investment treaties that contain GATT-like language and specifically refer to the notion of indirect expropriation. While this fifth type is examined below with regard to the substantive protections, it is important to provide some more observations concerning these sorts of exceptions.

58 59

See Newcombe 2011, supra note 30, pp. 367-368. See id., p. 360, n. 18.

225

JAMES FRY & ODYSSEAS REPOUSIS

An exception that resembles a GATT Article XX exception comprises two elements. The first is that the measures taken must be necessary to protect human, animal or plant life or health. The second is that the measure also should qualify under the so-called chapeau of this provision, which requires that such measures should not be applied arbitrarily or in an unjustifiable manner and also should not constitute a disguised restriction on investment.60 These exceptions should be interpreted narrowly and by drawing guidance from the jurisprudence of the World Trade Organization (WTO), with the burden of proof for the justification of such exceptions being on the state invoking the exception.61 The ECT adds to these elements that the measures at stake must not nullify or impair any benefit reasonably expected under the ECT “to an extent greater than is strictly necessary to the stated end”,62 and it specifically states that the exception does not apply to expropriation.63 However, investment treaties do not usually exempt expropriation from the scope of general exceptions such as the ones found in the ECT, and it often is contested whether non-compensable expropriation is possible.64 In particular, there are exceptions modelled after Article XX of the GATT and do not refer to expropriation (the fourth type discussed above); there is the exception of the ECT that resembles the previous category but explicitly exempts expropriation from its scope; and lastly, there are exceptions that utilize the language employed by Article XX of the GATT in order to further define what does not constitute an indirect expropriation (the fifth type discussed above). These differences may create doubts as to whether an environmental protection measure taken in conformity with a GATT-like exception would justify non-compensation for the breach of the substantive rights provided in an investment treaty and whether this justification also would extend to expropriation.65 For these reasons, it appears that, with regard to the nuclear energy sector, environmental measures that potentially could justify a higher degree of regulation cannot easily be justified by recourse to the environmental exceptions included in the investment treaties of nuclear energy states. The case is

60

61

62 63 64 65

See C. Lévesque, ‘The Inclusion of GATT Article XX Exceptions in IIAs: A Potentially Risky Policy’, in R. Echandi & P. Sauvé (Eds.), Prospects in International Investment Law and Policy, Cambridge University Press, Cambridge, 2013, p. 365. See J.E. Viñuales, ‘The Environmental Regulation of Foreign Investment Schemes under International Law’, in P.M. Dupuy & J.E. Viñuales (Eds.), Harnessing Foreign Investment to Promote Environmental Protection, Cambridge University Press, Cambridge, 2013, p. 286; Newcombe & Paradell 2009, supra note 30, p. 502. Art. 24 (2) in fine, ECT. See Art. 24(1), ECT. See Lévesque 2013, supra note 60, p. 368. See Legum & Petculescu 2013, supra note 30, p. 362. See A. Newcombe, ‘The Boundaries of Regulatory Expropriation in International Law’, in P. Kahn & T. Wälde (Eds.), New Aspects of International Investment Law, Martinus Nijhoff Publishers, the Netherlands, 2007, p. 417; See, e.g., Marvin Roy Feldman Karpa v. United Mexican States, ICSID Case No. ARB(AF)/99/1, Award of 16 December 2002, para. 103; S. Montt, State Liability in Investment Treaty Arbitration: Global Constitutional and Administrative Law in the BIT Generation, Hart Publishing, Oxford and Portland, 2009, pp. 279-280.

226

8

INVESTMENT ARBITRATION

IN THE

NUCLEAR ENERGY SECTOR

certainly different with regard to the specific non-conforming measures that sometimes are included in the investment treaties of the above states. As previously seen, when non-conforming measures with regard to the nuclear energy sector are included, host states enjoy a higher degree of regulatory autonomy in the nuclear energy sector. However, this regulatory space only refers to specific performance requirements and to the standards of national and MFN treatment and does not affect the obligations and potential breach of other standards, such as that of expropriation, which remains in full. Finally, another issue that was raised earlier and that needs to be addressed is whether security exceptions add to the powers of states to regulate their nuclear energy sector. Yet another issue that is particularly relevant is whether there exists an overlap between security exceptions and specific exceptions that refer to the environment. With regard to the first issue, it is recalled that security exceptions can be interpreted to encapsulate environmental concerns.66 Thus, when an investment treaty only contains security exceptions, it can be asserted that environmental regulations imposed in the nuclear energy sector also can find justification in these exceptions. However, again, this enters the somewhat circular discussion on whether such exceptions add to the inherent regulatory powers that a state has, and it may even create a clash of views as to whether security exceptions differ from the security defence under customary international law.67 In the case of investment treaties that contain both security and environmental exceptions, at first sight, it would seem more consistent to first turn to those exceptions that specifically refer to the environment in an analysis of the potential justification of the measures by reference to exception provisions. That way, security exceptions – which do not expressly refer to the environment – would come second in the above analysis. Nevertheless, the specific circumstances of the events giving rise to the measures adopted in the nuclear energy industry should be taken into consideration. For example, after the Fukushima Daiichi disaster, China, Hong Kong, Taiwan and Korea adopted food import bans against Japan.68 However, Japan fights these measures in the WTO, arguing that contaminated products cannot be traded in Japan and that there are no novel scientific findings that indicate the need for new risk and radiation control assessments.69 This case principally involves public health instead of environmental concerns, yet it indicates how specific circumstances could affect the relationship between specific GATT-like exceptions and security exceptions, if of course both were inserted into an investment treaty. For example, if a Japanese investor filed a claim against Hong Kong and if an investment 66 67 68

69

See Desierto 2012, supra note 16, p. 159, nn. 53-54. See Binder 2014, supra note 18, pp. 72-77. See World Trade Organization, Committee on Sanitary and Phytosanitary Measures, Specific Trade Concerns, Note By The Secretariat, G/SPS/GEN/204/Rev.14, 4 March 2014, pp. 39, 59, 66-71, 75. Available at accessed 27 June 2014. See id., p. 83.

227

JAMES FRY & ODYSSEAS REPOUSIS

treaty between these jurisdictions provided for a GATT-like exception and a security exception, it could be argued that the food import bans by Hong Kong would better be justified with reference to the security exception rather than the former exception. This basically would mean that security exceptions would prevail in those cases where the principal rationale of the imposition of a measure is to respond to an emergency situation. The above determinations should not be taken as definite. Rather, it should be accepted that there can be overlap between security exceptions and other exceptions, which in any case need to be tested against their power to add to the regulatory powers of a state. Taking all the above considerations into account, the next section examines the regulatory powers of states to enact environment-led regulations that can affect the rights of foreign investors in their nuclear energy industry through the perspective of environmental and nuclear-related treaties. SAFEGUARDING

8.3

THE

ENVIRONMENT

AND THE

LIMITS

OF

NUCLEAR ENERGY REGULATION

This section examines the limits of the regulation of the nuclear energy industry by reason of environmental concerns. This section examines whether specific conflicts can arise between international investment treaties and international treaties relating to the environment and to nuclear energy law.

8.3.1

Potential Conflicts between Investment, Environmental and Nuclear-Related Treaties

Similar to environmental treaties, nuclear-related treaties appear to be more concerned with the regulation of the nuclear energy sector with regard to nuclear emergencies.70 In particular, nuclear-related treaties refer to the liability for potential nuclear accidents as well as to international responses to nuclear incidents, to the non-proliferation of nuclear weapons, to the transport and safety of nuclear materials and to the management of radioactive waste and spent fuel.71 Furthermore, the Nuclear Non-Proliferation Treaty (NPT) recognizes the right of states to pursue peaceful uses of nuclear energy,72 although it does not provide any guidance as to political changes that can affect previous decisions 70 71

72

See Subedi 2008, supra note 30, p. 165. See generally D.H. Joyner, Interpreting The Nuclear Non-Proliferation Treaty, Oxford University Press, Oxford, 2011; S. Tromans, Nuclear Law: The Law Applying to Nuclear Installations and Radioactive Substances in its Historic Context, Hart Publishing, Oxford, 2010. See Art. IV, NPT. See also D.H. Joyner, ‘Nuclear Power Plant Financing Post-Fukushima, and International Investment Law’, Journal of World Energy Law & Business, Vol. 7, 2014, pp. 69, 81-82.

228

8

INVESTMENT ARBITRATION

IN THE

NUCLEAR ENERGY SECTOR

towards electricity production from nuclear power plants. In this regard, nuclear-related treaties appear to provide little guidance with reference to regulatory interference not related to emergency situations, such as the political choice to phase-out existing nuclear power plants. Moreover, for the reasons stated above, it also is unlikely that principles of international environmental law could justify such regulatory interference in the nuclear energy sector. However, in those cases where the obligations imposed by nuclear-related treaties or by international environmental law would be potentially applicable, it is not entirely clear whether these obligations would prevail over the obligations enshrined in international investment agreements. This can be explained by stating that international law is not providing stable interpretative tools for the resolution of conflicts between special regimes of international law73 and that conflict clauses, such as those found in the North American Free Trade Agreement (NAFTA), rarely appear in investment treaties.74 In fact, this issue has long been identified as one of fragmentation and focuses on the difficulties associated with the application of conflict clauses such as the lex posterior and lex specialis principles in order to resolve conflicts between different branches or special regimes of international law.75 In this regard, it can be asked whether the exception clauses that were examined already in this chapter can act as conflict clauses in favour of environmental measures imposed by states.76 If these were accepted, it presumably would refer to the discussion of conflicts between branches or specialized regimes of international law.77 However, as alluded to above, regulatory measures imposed in the nuclear energy field by reason of environmental concerns are most likely to be enacted at the domestic level. This does not necessarily preclude the relevance of international environmental agreements and nuclear-related treaties. In fact, the domestic measures imposed might be taken in conformity with the obligations assumed under international

73

74

75

76 77

See J. Kammerhofer, ‘The Theory of Norm Conflict Solutions in International Investment Law’, in Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, Kluwer Law International, The Hague, 2011, supra note 30, p. 81 et seq. (discussing the conflicts between international investment law and international environmental law); S. Di Benedetto, International Investment Law and the Environment, Edward Elgar, Cheltenham and Northampton, 2013, pp. 210-225 (same). See Art. 104, NAFTA that lists specific environmental treaties that prevail over the NAFTA. See also Ann. 104.1, NAFTA. See also Muchlinski et al. 2008, supra note 2, p. 672; S.D. Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award of 13 November 2000, para. 215 (hereinafter S.D. Myers v. Canada). See Fragmentation of International Law: Difficulties Arising from The Diversification and Expansion of International Law Report of the Study Group of the International Law Commission, Finalized by Martti Koskenniemi, UN Doc. A/CN.4/L.682, 13 April 2006, at 20 et seq.; A. Fischer-Lescano & G. Teubner, ‘Regime-Collisions: The Vain Search for Legal Unity in the Fragmentation of Global Law’, Michigan Journal of International Law, Vol. 25, 2004, p. 1010; A. Marschik, ‘Too Much Order? The Impact of Special Secondary Norms on the Unity and Efficacy of the International Legal System’, European Journal of International Law, Vol. 9, 1998, pp. 212-214. See Viñuales 2013, supra note 61, p. 286. See R. Michaels & J. Pauwelyn, ‘Conflict of Norms or Conflict of Laws?: Different Techniques in the Fragmentation of Public International Law’, Duke J. Comp. & Int’l L., Vol. 22, 2011-2012, p. 349 et seq.

229

JAMES FRY & ODYSSEAS REPOUSIS

treaties. This leads to two outcomes. First, it is not always easy to demarcate the exact scope of the international obligation from that imposed by the domestic regulation.78 For example, in the Vattenfall I case, which involved a dispute over a coal-fired plant, Germany alleged that its environmental protection measures were merely an application of EU environmental law regulations.79 Second, as the alleged breach of investment treaty rights usually targets the domestic regulation, international arbitral tribunals tend to deal with these conflicts as between a domestic measure and an international investment obligation.80 That way, the issue does not take the form of a conflict between branches of international law, here environmental, nuclear and investment law. This is apparent in investment cases that are not related to the nuclear energy sector, which clarify the second point raised above. For example, in PMA v. Australia, the investor challenges Australia’s plain packaging of tobacco policy (at the domestic level), while Australia is trying to justify this measure by recourse to the World Health Organization (WHO) Framework Convention on Tobacco Control (at the international level).81 In these cases where a domestic measure is justified by reference to international environmental obligations, Jorge Viñuales points out that this domestic measure is more likely to be given more weight, although a formal link between the domestic measure and the international obligation might not exist.82 It can be further asked whether investment treaties should be interpreted against the backdrop of the various environmental and nuclear-related treaties, especially with regard to regulatory measures imposed in the nuclear energy industry. A method that can lead to such a holistic examination is enshrined in Article 31 of the Vienna Convention on the Law of the Treaties (VCLT) and particularly in the principle of systemic integration.83 As this holistic examination may not always be accepted, it is interesting to see its exact impact in this context. Muthucumaraswamy Sornarajah points out that environmental and human rights standards can be read into investment treaties “as exceptions relating to health and welfare” or as “obligations in general international law” that, once in conflict

78

79

80 81

82 83

See F. Baetens, ‘The Kyoto Protocol in Investor-State Arbitration: Reconciling Climate Change and Investment Protection Objectives’, in Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, Kluwer Law International, The Hague, 2011, supra note 30, pp. 709-710. The case eventually was settled in favour of the investor. See Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG & Co. KG (Sweden) v. Federal Republic of Germany, ICSID Case No. ARB/09/6, Award of 11 March 2011; Romson 2011, supra note 56, p. 41. See Viñuales 2013, supra note 61, p. 276. See Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12, Philip Morris Asia Ltd’s Notice of Arbitration of 21 November 2011, paras. 4.7-4.13; Australia’s Response to the Notice of Arbitration of 21 December 2011, paras. 5, 16, and 38. See also Chemtura Corporation v. Government of Canada, UNCITRAL, Award of 2 August 2010; Viñuales 2013, supra note 61, pp. 233-236, 287-290 (providing a thorough analysis of investment cases that raise such issues). See Viñuales 2013, supra note 61, pp. 278, 287, 292. See Art. 31(3)(c), VCLT. See also Baetens 2011, supra note 78, p. 709.

230

8

INVESTMENT ARBITRATION

IN THE

NUCLEAR ENERGY SECTOR

with the obligations of an investment treaty, have to be reconciled “in an appropriate manner”.84 However, it is not entirely clear whether such an “appropriate manner” is able to reduce compensation or render a measure non-compensable even when it is adopted in a discriminatory manner.85 Taking the above into account, the following section addresses the questions raised thus far with regard to the substantive obligations of investment treaties vis-à-vis the powers of a state to regulate its nuclear energy sector by reason of environmental concerns.

8.3.2

A Merits Consideration as a Gap-Filling Appraisal?

This section seeks to establish the limits of regulatory interference in the nuclear energy industry by indicating how this sensitive sector can affect the finding of a breach of the substantive rights provided under investment treaties. This is done with the assumption that no exception clauses exist, as this can highlight how, if at all, the latter provisions add to the analysis of the substantive rights provided in an investment treaty and subsequently how they can modify the regulatory interference of a state in the nuclear energy field. 8.3.2.1 National Treatment and Most-Favoured-Nation Treatment In investment treaties, the standards of national and MFN treatment often are interpreted in light of the rights accorded to nationals or other investors ‘in like circumstances’.86 In this regard, a crucial issue that may arise is whether the nuclear energy sector is in ‘like circumstances’ with any other sector that is connected to the production of electricity. In particular, it may be questioned whether electricity production from nuclear power plants, from coal-fired plants or from plants that use renewable resources are in ‘like circumstances’. If such differentiation between these sectors can be justified, with reference to environmental concerns, for example, this can certainly limit the potential grounds for recourse against a specific regulation imposed on the nuclear energy industry by invoking relative standards of treatment, such as the national treatment standard. Indeed, international arbitral tribunals have interpreted these rights by indicating that differential treatment is justified if there is a legitimate policy rationale.87 However, this policy objective will be legitimate if it is not discriminatory or arbitrary since the basic

84 85

86 87

Sornarajah 2000, supra note 3, p. 472. See also Viñuales 2013, supra note 61, p. 275. See, e.g., Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt, ICSID Case No. ARB/ 84/3, Award on the Merits of 20 May 1992, para. 191 (deciding in favour of non-compensation inasmuch as the World Heritage Convention would be temporally applicable, implying that this would be a violation of international law that prevailed over the investment treaty). See, e.g., Art. 1102(1), NAFTA (“Each Party shall accord to investors of another Party treatment no less favourable than it accords, in like circumstances [...]”). See Newcombe & Paradell 2009, supra note 30, p. 505.

231

JAMES FRY & ODYSSEAS REPOUSIS

protection of these standards is the prohibition against discrimination based on nationality.88 Therefore, exceptions even in the form of GATT Article XX do not appear to add any more elements to these standards. They merely indicate that an environmental regulation in the nuclear energy field would violate these standards if it were discriminatory, since it would not satisfy the chapeau requirements of such an exception clause.89 However, this does not necessarily limit the regulatory powers of a state. Adherence to non-discrimination based on nationality should be regarded as a high standard, and as in the Vattenfall II case, if a state chooses to abandon nuclear energy power for environmental protection reasons, this will most likely be done in an outright manner, affecting both domestic and foreign investors. If an environmental measure is applied based on nationality, then its very necessity easily can be questioned, and it would probably violate domestic regulations associated with antitrust law, among others. Certainly, the national treatment standard also can be violated even if the environmental measure is applied in a general manner, although this would in principle not be related to the environmental measure per se. For example, it should be recalled that state-owned enterprises play a dominant role in the nuclear energy field, and governments that have ownership interests in nuclear power corporations sometimes assist these corporations by infusing them “with capital in order to provide [...] [them] with the funds” to perform their operations.90 In the case of environmental measures of a general character, the latter practice of equity infusions, depending on the involvement of foreign investors and the specific commitments made in investment treaties, potentially would violate the national treatment standard, although the environmental measure per se would not. However, the non-conforming measures that were found in some investment treaties of states that possess nuclear power plants may be significant with regard to the regulatory powers of a state and may lead to different conclusions even when environmental measures in the nuclear energy industry take on a general character. These nonconforming measures exclude the nuclear energy industry from the application of, among others, national treatment and specific performance requirements.91 This means that an investor cannot seek recourse for a breach of these rights even if they are enacted discriminatorily, as they are rights whose application is excluded from the nuclear energy field. In this regard, it appears that the regulatory powers of a nuclear energy state are 88

89 90

91

See Legum & Petculescu 2013, supra note 30, pp. 352, 355; Sornarajah 2000, supra note 3, p. 111; J. Kurtz, ‘National Treatment, Foreign Investment and Regulatory Autonomy: The Search for Protectionism or Something More?’, in P. Kahn & T. Wälde (Ed.), New Aspects of International Investment Law, Martinus Nijhoff Publishers, the Netherlands, 2007, p. 311 et seq. See, e.g. S.D. Myers v. Canada, supra note 74, para. 298. This example was discussed in the oral proceedings the ADF v. United States case, which did not concern a dispute in the nuclear energy sector. See ADF Group Inc. v. United States, ICSID Case No. ARB (AF)/00/1, Hearing Transcript of 16 April 2002, p. 419. See Ann. I, Japan-–Vietnam BIT; Ann. I, Korea–Japan BIT.

232

8

INVESTMENT ARBITRATION

IN THE

NUCLEAR ENERGY SECTOR

enhanced, and the limits of its regulatory interference will be measured with reference to other investment treaty standards that are not included in the non-conforming-measures provisions. These mainly are the ‘fair and equitable treatment’ (FET) standard and the protection against expropriation, with the following section focusing on the FET standard. 8.3.2.2 The ‘Fair-and-Equitable-Treatment’ Standard The FET standard is a key provision in almost every investment treaty.92 Katia YannacaSmall notes that this standard is a “mystifying legal term” whose only certain element is that it is an absolute standard that “states the treatment to be accorded in terms which have their own normative content, through their exact meaning”, and unlike the national and MFN standards discussed above, it “has to be determined by reference to specific circumstances of application.”93 In particular, investment tribunals have been divided in the interpretation of this standard that sometimes has an “invasive character” and appears to take “over other investment protection standards” like “the obligation for non-arbitrariness and non-discrimination.”94 Furthermore, the FET standard, apart from protecting against arbitrary and discriminatory conduct, also has been interpreted as protecting against the lack of due process and procedural propriety.95 This standard has been found to include the protection of foreign investors’ expectations as to the predictability and the stable character of the legal and regulatory framework of the host state (legitimate expectations),96 as well as to “foreseeability in rule making”.97 Based on the above elements that the FET standard appears to encompass, it becomes apparent that a non-arbitrary or non-discriminatory environmental measure imposed in the nuclear energy field would most likely not breach the FET standard.98 Therefore, exception clauses again do not add anything to this analysis, since the state’s regulatory prerogative for environmental protection is justified even by the core analysis of the FET

92 93

94 95

96 97 98

See, e.g. Art. 10(1), ECT. K. Yannaca-Small, ‘Fair and Equitable Treatment Standard: Recent Developments,’ in A. Reinisch (Ed.), Standards of Investment Promotion, Oxford University Press, Oxford, 2008, p. 111. See also K. YannacaSmall, ‘The Fair and Equitable Treatment Standard’, in K. Yannaca-Small (Ed.), Arbitration under International Investment Agreements: A Guide to the Key Issues, Oxford University Press, Oxford, 2010, p. 385 et seq. Yannaca-Small 2008, supra note 93, p. 112. See Legum & Petculescu 2013, supra note 30 , p. 354, n. 32; A. Crockett, ‘Stabilisation Clauses and Sustainable Development: Drafting for the Future’, in C. Brown & K. Miles (Eds.), Evolution in Investment Treaty Law and Arbitration, Cambridge University Press, Cambridge, 2011, p. 536. See Legum & Petculescu 2013, supra note 30, p. 355. See, e.g. Enron Corporation and Ponderosa Assets, LP v. Argentine Republic, ICSID Case No ARB/01/3, Award of 22 May 2007, para. 260. A. Romson, Environmental Policy Space and International Investment Law, Acta Universitatis Stockholmiensis, Stockholm, 2012, p. 190. See Gami Investments, Inc. v. The Government of the United Mexican States, UNCITRAL, Final Award of 15 November 2004, para. 114; Pope & Talbot Inc. v. The Government of Canada, UNCITRAL, Award on the Merits of Phase 2 of 10 April 2001, para. 78.

233

JAMES FRY & ODYSSEAS REPOUSIS

standard, provided that its non-arbitrary and non-discriminatory requirements are fulfilled. However, as already stated, the FET standard encapsulates many more standards than merely that of non-arbitrariness and non-discrimination, and it also needs to be recalled that it is not a relative standard but an absolute one that is examined and applied on a case-by-case basis.99 For example, a non-discriminatory cancellation of operation licences that were previously granted to investors for the operation of nuclear power plants most probably will not affect the nonarbitrary and non-discriminatory elements of the FET standard; yet given the specificities of each case, it is likely that it will affect other elements of this standard such as that of the legitimate expectations of the investors. These legitimate expectations that form part of the FET standard appear to overlap with the identical element of legitimate expectations that also exists in the standard of nonexpropriation but unlike the latter do not require the existence of a taking in order to justify a breach of the FET standard.100 Therefore, the element of legitimate expectations suggests that when a measure is justifiable and also non-discriminatory, it may nevertheless breach the FET standard if it is found to breach past undertakings made with respect to an investor’s investment. In this case, the core of this standard appears to reduce the regulatory ‘space’ of the state, particularly when the state seeks to impose new environmental protection measures in the nuclear energy industry, but it nevertheless will have to face past undertakings. This case also may refer to the elevation of contractual breaches to treaty breaches or to the expropriatory effect of the cancellation of contracts, which is examined in the next subsection. For breach of the FET standard by reference to its legitimate expectations element, it must be noted that an exception clause, particularly a GATT-like one, probably could clarify (when read in conjunction with this standard) that even when past undertakings exist, the measure is justified if it seeks to protect “human, animal or plant life or health” and is not discriminatory.101 However, it might not be necessary to reach this type of analysis. International arbitral tribunals have pointed out that the legitimate expectations of investors should include an “industry’s regular patterns”,102 as well as “the political, socioeconomic, cultural and historical conditions prevailing in the host State”.103 These factors can be significant in the context of the nuclear energy sector. Indeed, the nuclear energy field is a sector surrounded by 99 See Yannaca-Small 2008, supra note 93, pp. 396-407. 100 See A. Von Walter, ‘The Investor’s Expectations in International Investment Arbitration’, in A. Reinisch & C. Knahr (Eds.), International Investment Law in Context, Eleven International Publishing, The Netherlands, 2008, pp. 179-184. 101 See Legum & Petculescu 2013, supra note 30, p. 356. 102 LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc .v. Argentine Republic, ICSID Case No. ARB/02/1, Decision of Liability of 3 October 2006, para. 130; Glamis Gold, Ltd. v. The United States of America, UNCITRAL, Award of 8 June 2009, para. 767. 103 Duke Energy Electroquil Partners & Electroquil SA v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award of 18 August 2008, para. 340.

234

8

INVESTMENT ARBITRATION

IN THE

NUCLEAR ENERGY SECTOR

public sensitivities, with regard to “inter alia safety, environmental and public health concerns”,104 which cannot but be viewed as regular patterns of this industry. As the tribunal in Methanex put it, there was no legitimate expectation there since: Methanex entered a political economy in which it was widely known, if not notorious, that governmental environmental and health protection institutions at the federal and state level, operating under the vigilant eyes of the media, interested corporations, non-governmental organizations and a politically active electorate, continuously monitored the use and impact of chemical compounds and commonly prohibited or restricted the use of some of those compounds for environmental and/or health reasons.105 Similarly, in the Vattenfall II case, Germany decided in 2002 that it would gradually depart from nuclear power energy.106 The interesting element in this case is that in 2010 an extension was granted to the nuclear power plants, which was nonetheless cancelled a few months later in 2011. While some commentators would argue that this situation cannot correspond to a legitimate expectation,107 such considerations will need to be examined in the wider context of the nuclear energy industry. In this regard, and given the specificities that may exist in some states, it can be argued that the regular pattern of the nuclear energy industry is most likely similar. Certainly, it is a highly regulated sector,108 and it will no doubt raise political debates, especially in the post-Fukushima era. Moreover, it is a highly subsidized area. For example, nuclear energy has been heavily subsidized in Germany for decades, not to mention indirect subsidies, such as tax concessions.109 These factors suggest that regulatory interference by reason of environmental concerns in the nuclear energy industry most likely will be hard to be seen as an unexpected interference that breaches an investor’s legitimate expectations. In fact, there is nothing to contravene the fact that “environmental obligations would normally be part 104 Joyner 2014, supra note 72, p. 93 (emphasis added). 105 Methanex Corporation v. United States of America, NAFTA/UNCITRAL, Final Award of the Tribunal on Jurisdiction and Merits of 3 August 2005, Part IV, Chapter D, para. 9 (Methanex v. United States). This dictum refers to the legitimate expectations with regard to expropriation, although its relevance is apparent since, as it was earlier referred to, expropriation and the FET standard both contain the element of legitimate expectations. 106 See A. Bradbrook et al. (Eds.), The Law of Energy for Sustainable Development, Cambridge University Press, Cambridge, 2005, pp. 374-375. 107 See N. Bernasconi-Osterwalder & R.T. Hoffmann, ‘The German Nuclear Phase-Out Put to the Test in International Investment Arbitration? Background to the New Dispute Vattenfall v. Germany (II)’, June 2012, Briefing Note, IISD, p. 10. Available at accessed 27 June 2014. 108 See M. Newbery & S. Pollock, ‘Rebirth of Nuclear Power in the UK’, International Energy Law Review, Vol. 3, 2008, p. 66 (providing information about the UK). 109 See Bradbrook et al. 2005, supra note 106, p. 374.

235

JAMES FRY & ODYSSEAS REPOUSIS of an investor’s business risk” in a highly regulated environment,110 as is the nuclear energy industry. Furthermore, the essence of an investor’s legitimate expectation will have to be proven by reference to “an explicit promise or guaranty from the host State” or at least it would have to flow implicitly from the “assurances or representation” made by the host state that “the investor took into account in making the investment”.111 This, again, would be hard to show, yet it can be further questioned whether the FET standard allows investors to more actively challenge the necessity of an imposed obligation. As a rule, states enjoy wide discretion as to how they carry out their policies by regulation or administrative conduct.112 However, as GATT-like exceptions indicate, a measure sometimes will be examined restrictively – for example, by seeking to identify whether the measure taken was ‘necessary’ and whether there was no other ‘less restrictive’ measure that could equally address environmental concerns.113 This is a concept that is not unknown in domestic law, and it seems to always be examined in light of the particular circumstances relating to a specific case. The mere fact that an investment treaty allows for an investor to submit the examination of this issue to an international arbitral tribunal should not necessarily be seen as restricting the regulatory powers of a state. In sum, it may be concluded from the above analysis that the FET standard does not fundamentally restrict a state’s regulatory prerogatives to implement environmental measures in the nuclear energy field.

8.4

CONCLUSION

This chapter has sought to shed light on the potential of investment treaties to affect the regulation of the nuclear energy sector by reason of environmental concerns. The reasons set forth for each aspect that was analysed in this chapter show that international investment law and investor–state arbitration cannot be seen as safeguarding environmental protection and international environmental law. The mere fact that international investment agreements provide direct recourse to an international forum should not be exaggerated. The nuclear energy sector is an example of where environmental regulation cannot be seen as an ‘anomaly’ or as an unjustified or unexpected risk, but rather should be seen as ‘a fact of life’ that cannot be ignored.114

110 Viñuales 2013, supra note 61, p. 300. 111 Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8, Award of 11 September 2007, para. 331. 112 See International Thunderbird Gaming Corporation v. The United Mexican States, UNCITRAL, Award of 26 January 2006, para. 127. 113 Romson 2011, supra note 56, p. 41. 114 See Viñuales 2013, supra note 61, pp. 317-318 (using these phrases but in a wider context).

236

8

INVESTMENT ARBITRATION

IN THE

NUCLEAR ENERGY SECTOR

This chapter provided five insights. First, it showed that both environmental and nuclearrelated treaties should be taken into account when dealing with investor–state disputes in the nuclear energy sector. Second, this chapter shed light on the potential group of investors that can bring claims under investment treaties and the form that such disputes can take. Third, this chapter examined the impact that exception clauses may have in widening the powers of nuclear energy states to regulate their nuclear energy industry by the adoption of environmental measures. Fourth, the same issue was addressed with reference to the obligations undertaken under various environmental and nuclear-related treaties, with this chapter also providing an overview of the potential conflicts that can arise between investment law, environmental law, and nuclear energy law. Finally, substantive rights, such as the national-treatment standard and the fair-and-equitabletreatment standard, also were examined in light of their potential breach by the imposition of environmental measures in the nuclear energy sector. This aspect allowed for a more complete analysis of the principal issue that this chapter set out to discuss – namely, the complex relationship between investment law, environmental law and nuclear energy law. In sum, the findings of this chapter reveal that a gap between the protection of the environment and international investment law does not have to be bridged in the nuclear energy sector since there seems to be no such apparent lacuna. As Srikanth Hariharan has stated, “The world has always viewed nuclear energy with fear and fascination”.115 It rests upon a measured and unprejudiced international arbitral tribunal to not turn a blind eye to the role of environmental measures in the nuclear energy sector and to avoid monistic views by employing sophisticated, multifaceted reasoning that accepts the sophisticated relationship between investment law, environmental law, and nuclear energy law.

115 S. Hariharan, ‘Nuclear Safety, Liability and Non-Proliferation: A Legal Insight’, International Energy Law Review, Vol. 3, 2012, p. 108.

237

BIBLIOGRAPHY BOOKS Bradbrook, A., et al. (Eds.), The Law of Energy for Sustainable Development, Cambridge: Cambridge University Press, 2005. Desierto, D., Necessity and National Emergency Clauses: Sovereignty in Modern Treaty Interpretation, Leiden and Boston: Martinus Nijhoff, 2012. Di Benedetto, S., International Investment Law and the Environment, Cheltenham and Northampton: Edward Elgar, 2013. Fry, J.D., Legal Resolution of Nuclear Non-Proliferation Disputes, Cambridge: Cambridge University Press, 2013. Hinteregger, M. (Ed.), Environmental Liability and Ecological Damage in European Law, Cambridge: Cambridge University Press, 2008. Joyner, D.H., Interpreting the Nuclear Non-Proliferation Treaty, Oxford: Oxford University Press, 2011. Kiss, A. & Shelton, D., Guide to International Environmental Law, Leiden and Boston: Martinus Nijhoff Publishers, 2007 Kiss, A. & Shelton, D., International Environmental Law, New York: Transnational Publishers, 2004. Kulick, A., Global Public Interest in International Investment Law, Cambridge: Cambridge University Press, 2012. Lowenfeld, A., International Economic Law, New York: Oxford University Press, 2008. Lyster, R. & Bradbrook, A., Energy Law and the Environment, Cambridge and New York: Cambridge University Press, 2006.

238

8

BIBLIOGRAPHY

Montt, S., State Liability in Investment Treaty Arbitration: Global Constitutional and Administrative Law in the BIT Generation, Oxford and Portland: Hart Publishing, 2009. Muchlinski, P. et al. (Eds.), The Oxford Handbook of International Investment Law, Oxford: Oxford University Press, 2008. Newcombe, A. & Paradell, L., Law and Practice of Investment Treaties: Standards of Treatment, The Hague: Kluwer Law International, 2009. PCA (Ed.), International Investments and Protection of the Environment, The Hague: Kluwer Law International, 2000. Puvimanasinghe, S. F., Foreign Investment, Human Rights and the Environment, LeidenBoston: Martinus Nijhoff Publishers, 2007. Robert-Cuendet, S., Droits de l’Investisseur Etranger et Protection de l’Environnement: Contribution à l’Analyse de l’Expropriation Indirecte, Leiden and Boston: Martinus Nijhoff, 2010. Romson, A., Environmental Policy Space and International Investment Law, Stockholm: Acta Universitatis Stockholmiensis, 2012. Salacuse, J., The Law of Investment Treaties, Oxford: Oxford University Press, 2009. Sands, P. et al., Principles of International Environmental Law, 3rd edn, Cambridge and New York: Cambridge University Press, 2012. Sornarajah, M., The International Law on Foreign Investment, Cambridge: Cambridge University Press, 2010. Sornarajah, M., The Settlement of Foreign Investment Disputes, The Hague: Kluwer Law International, 2000. Subedi, S.P., International Investment Law: Reconciling Policy and Principle, Oxford and Portland: Hart Publishing, 2008. Tromans, S., Nuclear Law: The Law Applying to Nuclear Installations and Radioactive Substances in Its Historic Context, Oxford: Hart Publishing, 2010.

239

JAMES FRY & ODYSSEAS REPOUSIS

Viñuales, J.E., Foreign Investment and the Environment in International Law, Cambridge: Cambridge University Press, 2012. Zedalis, R.J., International Energy Law: Rules Governing Future Exploration, Exploitation, and Use of Renewable Resources, Aldershot, Hants, England: Ashgate/Dartmouth, 2000.

ARTICLES Backer, L., ‘Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, State-owned Enterprises and the Chinese Experience’, 19 Transnational Law and Contemporary Problems 3, 2010. Ben-Moshe, S. et al., ‘Financing the Nuclear Renaissance: The Benefits and Potential Pitfalls of Federal & State Government Subsidies and the Future of Nuclear Power In California’, 30 Energy L. J. 499, 2009. Bernasconi-Osterwalder, N. & Hoffmann, R. T., ‘The German Nuclear Phase-Out Put to the Test in International Investment Arbitration? Background to the new dispute Vattenfall v. Germany (II)’, Briefing Note, IISD, 2012. Available at: . Blazey, P., ‘Will China’s 12th Five Year Plan Allow for Sufficient Nuclear Power to Support Its Booming Economy in the Next Twenty Years?’, 21 Pac. Rim L. & Pol’y J. 461, 2012. Blythe J. & Tonuk N., ‘Turkey: Turkish Energy Sector Round-Up’, 8 International Energy Law Review 258, 2010. Blythe, J.W., ‘Turkey: Fuel - Nuclear Energy’, 5 International Energy Law Review 155, 2008. Burke-White, W. & Staden, von A., ‘Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties’, 48 Virginia Journal of International Law 307, 2008. De Angelis, L. & Celotto A., ‘The Legal Feasibility of Nuclear Energy in Italy’, 3 International Energy Law Review 74, 2008.

240

8

BIBLIOGRAPHY

Elshihabi, S., ‘The Difficulty Behind Securing Sector-Specific Investment Establishment Rights: The Case of the Energy Charter Treaty’, 35 International Lawyer 137, 2001. Falsafi, A., ‘Regional Trade and Investment Agreements: Liberalizing Investment in a Preferential Climate’, 36 Syracuse Journal of International Law and Commerce 43, 20082009. Fischer-Lescano, A. & Teubner, G., ‘Regime-Collisions: The Vain Search for Legal Unity in the Fragmentation of Global Law’, 25 Michigan Journal of International Law 999, 2004. Forzelius, J. & Borresen, M., ‘Sweden: Energy Sector - Nuclear Power (Case Comment)’, 10 International Energy Law and Taxation Review N17, 2000. Frye, R. M. Jr., ‘The Current “Nuclear Renaissance” in the United States, Its Underlying Reasons, and Its Potential Pitfalls’, 29 Energy L. J. 281, 2008. Glomsrød, S. et al., ‘Energy Market Impacts of Nuclear Power Phase-Out Policies’, 1 CICERO Working Paper 1, 2013. Gordon, K. & Pohl, J., ‘Environmental Concerns in International Investment Agreements: A Survey’, 1 OECD Working Papers on International Investment 1, 2011. Hakkarainen, P. & Fjaestad, M., ‘Diverging Nuclear Energy Paths: Swedish and Finnish Reactions to the German Energiewende’, 2012 Renewable Energy Law and Policy Review 234, 2012. Hariharan, S., ‘Nuclear Safety, Liability and Non-Proliferation: A Legal Insight’, 3 International Energy Law Review 108, 2012. Joyner, D., ‘Nuclear Power Plant Financing Post-Fukushima, and International Investment Law’, forthcoming, Journal of World Energy Law & Business 2014. Available at: . Kramm, L., ‘The German Nuclear Phase-out after Fukushima: A Peculiar Path or an Example for Others’, 2012 Renewable Energy Law and Policy Review 251, 2012. Kuhne, G., ‘The Implementation of the Gas Directive in Germany’, 10 International Energy Law and Taxation Review 241, 2000.

241

JAMES FRY & ODYSSEAS REPOUSIS Mamay, A., ‘The Future of Nuclear Energy in Canada’, 3 International Energy Law Review 77, 2008. Marschik, A., ‘Too Much Order? The Impact of Special Secondary Norms on the Unity and Efficacy of the International Legal System’, 9 European Journal of International Law 212, 1998. McGee-Osborne, C. et al., ‘Turkey’s Plans for a Civil Nuclear Industry’, 6 International Energy Law Review 205, 2008. Michaels, R. & Pauwelyn, J., ‘Conflict of Norms or Conflict of Laws?: Different Techniques in the Fragmentation of Public International Law’, 22 Duke Journal of Comparative and International Law 349, 2011-2012. Mulvey, V., ‘United Arab Emirates: Change and Challenge - Nuclear Power Making its Way to the UAE’, 2 International Energy Law Review 29, 2011. Newbery, M. & Pollock, S., ‘Rebirth of Nuclear Power in the UK’, 3 International Energy Law Review 66, 2008. Newbery, M. & Pollock S., ‘Rebirth of Nuclear Power in the UK’, 3 International Energy Law Review 66, 2008. Osaka, E., ‘Corporate Liability, Government Liability, and the Fukushima Nuclear Disaster’, 21 Pac. Rim L. & Pol’y J. 433, 2012. Ozkan, A.F., ‘Towards a Fully Liberalised Turkish Electricity Market: Progress and Problems’, 3 International Energy Law Review 101, 2011. Reed, L. & Martinez, L., ‘The Energy Charter Treaty: An Overview’, 14 ILSA Journal of International and Comparative Law 405, 2007-2008. Sohn, L.B. & Baxter, R.R., ‘Draft Convention on the International Legal Responsibility of States for Injuries to Aliens’, 55 American Journal of International Law 545, 1961. Stanivukovic, M., ‘State-Investor Disputes Connected to Foreign Investments in the Nuclear Energy Sector: A Review of the Two Cases Arising Under the Energy Charter Treaty’, 45 Zbornik Radova 253, 2011.

242

8

BIBLIOGRAPHY

Stern, M.E. & Stern, M.M., ‘Does Nuclear Power Have a Future?’, 32 Utah Envtl. L. Rev. 436, 2012. Wälde, T. & Kolko, A., ‘Environmental Regulation, Investment Protection and Regulatory Taking in International Law’, 50 International and Comparative Law Quarterly 811, 2001. Wälde, T., ‘Introductory Note - Treaties and Agreements: European Energy Charter Conference: Final Act, Energy Charter Treaty, Decisions and Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects’, 34 International Legal Materials 360, 1995.

CONTRIBUTIONS

IN EDITED BOOKS

Astapov, A.,‘General Policy of Ukraine towards Arbitration’, in Association for International Arbitration (Ed.), Arbitration in the CIS Countries: Current Issues, Antwerp-Apeldoorn-Portland: Maklu, 2012. Baetens, F., ‘The Kyoto Protocol in Investor-State Arbitration: Reconciling Climate Change and Investment Protection Objectives’, in M.C. Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011. Binder, C., ‘Necessity Exceptions, the Argentine Crisis and Legitimacy Concerns: Or the Benefits of a Public International Law Approach to Investment Arbitration’, in T. Treves et al. (Ed.), Foreign Investment, International Law and Common Concerns, London and New York: Routledge, 2014. Brower, C.N. & Hellbeck, E.R., ‘The Implications of National and International Environmental Obligations for Foreign Investment Protection Standards, Including Valuation: A Report from the Front Lines’, in PCA (Ed.), International Investments and Protection of the Environment, The Hague: Kluwer Law International, 2001. Brown, C. & Sheppard A., ‘United Kingdom’, in C. Brown (Ed.), Commentaries on Selected Model Investment Treaties, Oxford: Oxford University Press, 2013. Burgstaller, M., ‘Sovereign Wealth Funds and International Investment Law’, in C. Brown & K. Miles (Eds.), Evolution in Investment Treaty Law and Arbitration, Cambridge: Cambridge University Press, 2011.

243

JAMES FRY & ODYSSEAS REPOUSIS Cordonier Segger, M.C. & Newcombe, A., ‘An Integrated Agenda for Sustainable Development in International Investment Law’, in M.C. Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011. Crockett, A., ‘Stabilisation Clauses and Sustainable Development: Drafting for the Future’, in C. Brown & K. Miles (Eds.), Evolution in Investment Treaty Law and Arbitration, Cambridge: Cambridge University Press, 2011. Feldman, M., ‘The Standing of State-Owned Entities under Investment Treaties’, in K. Sauvant (Ed.), Yearbook on International Investment Law and Policy 2010–2011, New York: Oxford University Press, New York, 2011. Gordon, K. & Pohl, J., ‘Environmental Concerns in International Investment Agreements: The “New Era” has Commenced, but Harmonization still Appears Far Off’, in K. P. Sauvant & J. Reimer (Eds.), FDI Issues in International Investment, Columbia University: Vale Columbia Center on Sustainable International Investment, 2012. Kammerhofer, J., ‘The Theory of Norm Conflict Solutions in International Investment Law’, in M.C. Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011. Kurtz, J., ‘National Treatment, Foreign Investment and Regulatory Autonomy: The Search for Protectionism or Something More?’, in P. Kahn & T. Wälde (Eds.), New Aspects of International Investment Law, The Netherlands: Martinus Nijhoff Publishers, 2007. Legum, B. & Petculescu, I., ‘GATT Article XX and International Investment Law’, in R. Echandi & P. Sauvé (Eds.), Prospects in International Investment Law and Policy, Cambridge: Cambridge University Press, 2013. Lévesque, C. & Newcombe A., ‘Canada’, in C. Brown (Ed.), Commentaries on Selected Model Investment Treaties, Oxford: Oxford University Press, 2013. Lévesque, C., ‘The Inclusion of GATT Article XX Exceptions in IIAs: A Potentially Risky Policy’, in R. Echandi & P. Sauvé (Eds.), Prospects in International Investment Law and Policy, Cambridge: Cambridge University Press, 2013.

244

8

BIBLIOGRAPHY

Miroudot, S. & Ragoussis, A., ‘Actors in the International Investment Scenario: Objectives, Performance and Advantages of Affiliates of State-Owned Enterprises and Sovereign Wealth Funds’, in R. Echandi & P. Sauvé (Eds.), Prospects in International Investment Law and Policy, Cambridge: Cambridge University Press, 2013. Muchlinski, P., ‘Corporate Social Responsibility’, in P. Muchlinski, et al. (Eds.), The Oxford Handbook of International Investment Law, Oxford: Oxford University Press, 2008, pp. 637-690. Newcombe, A., ‘The Boundaries of Regulatory Expropriation in International Law’, in P. Kahn & T. Wälde (Eds.), New Aspects of International Investment Law, The Netherlands: Martinus Nijhoff Publishers, 2007. Newcombe, A., ‘General Exceptions in International Investment Agreements’, in M.C. Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International , 2011. Paparinskis, M., ‘Regulatory Expropriation and Sustainable Development’, in M.C. Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011.. Paulsson, J. & Douglas, Z., ‘Indirect Expropriation in Investment Treaty Arbitrations’, in N. Horn & S. Kröll (Eds.), Arbitrating Foreign Investment Disputes, The Hague: Kluwer Law International, 2004. Reinisch, A., ‘Expropriation’, in P. Muchlinski, et al., (Eds.), The Oxford Handbook of International Investment Law, Oxford: Oxford University Press, 2008. Romson, A., ‘International Investment Law and the Environment’, in M.C. Cordonier Segger et al. (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011. Skovgaard Poulsen, L.N., ‘Investment Treaties and the Globalisation of State Capitalism: Opportunities and Constraints for Host States’, in R. Echandi & P. Sauvé (Eds.), Prospects in International Investment Law and Policy, Cambridge: Cambridge University Press, 2013.

245

JAMES FRY & ODYSSEAS REPOUSIS Tienhaara, K., ‘Regulatory Chill and the Threat of Arbitration: A View from Political Science’, in C. Brown & K. Miles (Eds.), Evolution in Investment Treaty Law and Arbitration, Cambridge: Cambridge University Press, 2011. Viñuales, J.E., ‘The Environmental Regulation of Foreign Investment Schemes under International Law’, in P.M. Dupuy & J.E. Viñuales (Eds.), Harnessing Foreign Investment to Promote Environmental Protection, Cambridge: Cambridge University Press, 2013. Walter, von A. ‘The Investor’s Expectations in International Investment Arbitration’, in A. Reinisch & C. Knahr (Eds.), International Investment Law in Context, The Netherlands: Eleven International Publishing, 2008. Wälde, T. ‘International Disciplines on National Environmental Regulation: With Particular Focus on Multilateral Investment Treaties’, in PCA (Ed.), International Investments and Protection of the Environment, The Hague: Kluwer Law International, 2001. Yannaca-Small, K., ‘Fair and Equitable Treatment Standard: Recent Developments’, in A. Reinisch (Ed.), Standards of Investment Promotion, Oxford: Oxford University Press, 2008. Yannaca-Small, K., ‘The Fair and Equitable Treatment Standard’, in K. Yannaca-Small (Ed.), Arbitration under International Investment Agreements: A Guide to the Key Issues, Oxford: Oxford University Press, 2010.

246

9

INTEGRATING ENVIRONMENTAL LAW PRINCIPLES AND

OBJECTIVES

CHALLENGES

AND

IN

EU INVESTMENT POLICY:

OPPORTUNITIES

Angelos Dimopoulos*

9.1

INTRODUCTION

The role that environmental concerns can play in international investment law depends not only on new policy approaches to investment protection and the scope, goals, and nature of investment law but also on the change in the international players involved in international rule making. Since 2009, when the Lisbon Treaty entered into force and endowed the European Union (EU) with exclusive competence over Foreign Direct Investment (FDI), the EU has emerged as a new international actor in the field of foreign investment. The introduction of EU competence over FDI in Article 207 of the Treaty on the Functioning of the European Union (TFEU) generated broad discussions regarding the scope of the ‘new’ EU competence and how it affects member states’ foreign investment policies and in particular their bilateral investment treaties (BITs).1 Within this framework, the European Commission has clarified from the beginning its aim to transform the EU into the main player in the field of foreign investment, gradually taking over foreign investment policy from EU member states.2 Considering that member state BITs account for more than 1,400 BITs, which is slightly less than half of all existing BITs

*

1

2

Dr Angelos Dimopoulos, Lecturer in Law, Queen Mary, University of London. The author may be contacted at [email protected]. The author would like to thank Berend Jan Drijber and the participants at the conference ‘Bridging the Gap between International Investment Law and the Environment’ for their useful comments. Art. 207 of the Treaty on the Functioning of the European Union (TFEU). The Lisbon Treaty amends the TFEU and the TEU. Text of TFEU can be found at , accessed on 3 March 2015. Text of TEU can be found at , accessed on 10 March 2015. Commission, Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions: Towards a comprehensive European international investment policy, (‘Investment Policy Communication’) Brussels 7.7.2010, COM (2010) 343 accessed 6 February 2014.

247

ANGELOS DIMOPOULOS worldwide,3 and that the EU intends to eventually substitute them, it becomes imminently apparent how the EU can shape the future of international investment law. Of course, the development of an EU investment policy is not uncontroversial, as the emergence of an EU investment policy meets a number of legal, political, and practical challenges. First of all, the very existence of an EU investment policy depends on the specific delineation of the scope of EU competence over foreign investment, not only under Article 207 TFEU but also under other provisions of the EU treaties. Without entering into a detailed analysis of the scope of EU competence in the field of foreign investment in general,4 it is sufficient for the purposes of this chapter to indicate that it is still unclear whether and to what extent the EU can develop on its own a fully autonomous investment policy and replace member states’ BITs. In light of the ambiguity of the scope of EU competences, the smooth transition from member states’ investment policies to EU investment policy presents a second key challenge for the success of EU investment policy.5 The existence of more than 1,200 BITs concluded by member states with third countries indicates the significant body of international norms on foreign investment which future EU agreements have to replace. In order to address these concerns, the EU has taken action by setting up a general framework regarding existing and future member states’ BITs, in order to ensure legal certainty until their replacement by EU agreements. After two years of negotiations, Regulation 1219/2012 was adopted, which establishes “a transitional regime for BITs between Member States and third countries”.6 Although the Regulation presents a positive step towards the emergence of an EU investment policy, it still leaves a number of questions open regarding the future involvement of member states in investment policy. Last but not least, the successful materialization of EU investment policy rests on the clear demarcation of the roles of the EU and its member states in investment policy-making. The Commission has taken initiatives in that direction, especially regarding dispute settlement under future EU investment agreements. The Regulation proposal “establishing a framework for managing financial responsibility linked to investor-state dispute settlement tribunals established by international 3 4

5

6

UNCTAD, ‘World Investment Report 2012: Towards a new generation of investment policies’ (2012) accessed 6 February 2013. On the author’s views regarding the scope of EU competence over foreign investment, see A. Dimopoulos, EU Foreign Investment Law, Oxford University Press, Oxford, 2011, Chapter 2. See also Chapter 10, The Environmental Sustainability of the EU Common (Direct) Investment Policy after Lisbon: Progressive International Law Developments by O. Quirico in this volume. S. Woolcock & J. Kleinheisterkamp, ‘The EU Approach to International Investment Policy after the Lisbon Treaty’, Study Directorate General for External Policies of the Union, October 2010, p. 6 accessed 2 May 2014. Regulation (EU) No. 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between member states and third countries, OJ 2012, L 351/40, accessed 6 February 2014.

248

9

INTEGRATING ENVIRONMENTAL LAW PRINCIPLES

AND

OBJECTIVES

IN

EU INVESTMENT POLICY

agreements to which the European Union is party” presents a first important step towards demarcating the management of future EU investment agreements and the roles assigned to the EU and its member states.7 In tackling these ‘internal’ challenges, the EU seems eager to proceed with the development of a new, fully fledged investment policy and to conclude a new generation of investment agreements. The emergence of EU investment policy has generated broad discussions regarding not only the scope of this ‘new’ EU competence but more importantly the content and objectives of the future EU investment policy and EU international agreements, which can influence the future of international investment law. Whether the EU will promote the insertion of more traditional BIT-oriented provisions, similar to those found in existing member states’ BITs; whether it will follow other international investment treaty models, like the North American Free Trade Agreement (NAFTA); or whether it will develop its own model are fundamental questions that will shape the international regulation of foreign investment. In identifying the direction and objectives of its future investment policy, the EU also has to take into consideration the new ‘constitutional’ objectives of EU external relations, which attempt to integrate investment policy within the framework of the EU’s external relations. Within this framework, the role that environmental protection principles and objectives play in the formation of EU investment policy merits particular attention. As explained in previous chapters,8 there are new emerging approaches as to how environmental concerns can be integrated in international investment agreements. This trend is all the more relevant for the EU, where, as will be explained below, environmental protection is an overarching objective of all EU (external) policies that is infiltrated in all EU policies. This is also reflected in practice in the field of investment policy where the EU, following current practices, seems to be mindful of environmental concerns and aims to integrate them into investment agreements. In this respect, this contribution examines how environmental concerns are integrated in EU investment policy and practice and what its implications may be for international investment law. To do so, this chapter starts with an investigation of the legal framework provided in the EU Treaties and in particular Article 21 of the Treaty of the European Union (TEU) and Articles 206-207 of TFEU as to the objectives of EU investment policy. It assesses whether and to what extent the protection of the environment presents an

7

8

Commission, Proposal for a Regulation of the EP and of the Council establishing a framework for managing financial responsibility linked to investor-state dispute settlement tribunals established by international agreements to which the European Union is a party, COM (2012) 335 final, 21 June 2012, accessed 6 February 2014. See Chapter 1, Innovative Legal Solutions for Investment Law and Sustainable Development Challenges by Marie-Claire Cordonier Segger and Chapter 6, Climate Change Policies and Foreign Investment: Some Salient Legal Issues by A. Asteriti in this volume.

249

ANGELOS DIMOPOULOS

objective that EU investment policy should pursue and the value that EU treaties attribute to environmental protection for balancing investment liberalization objectives. Within this framework, the role that EU policymakers have decided to confer to environmental protection within EU investment policy is thereafter examined. Taking into consideration the legal instruments and policy documents issued by EU institutions, this part focuses on the different aspirations of EU institutions, focusing on the Commission,9 the Council,10 and the European Parliament11 regarding the objectives of investment policy and how they are likely to be compromised into EU investment policy. Thirdly, this chapter deals with the latest developments as to the level of protection to be granted to protected investors and the related issue of balancing environmental protection and investment protection in future EU agreements. Specific attention is given to the negotiating mandates for the chapters on investment protection in the EU Free Trade Agreements (FTAs) with Canada, India, and Singapore,12 which offer indications as to the possible basic elements of the future chapters on investment protection. Finally, some concluding remarks are made regarding how EU investment policy can shape the future of international investment agreements and offer a new role for environmental concerns, which guarantees a high level of environmental protection without diluting the standards of investment protection that present the driver and main objective of international investment law.

9.2

THE LEGAL FRAMEWORK ON THE OBJECTIVES ENVIRONMENTAL PROTECTION

OF

EU INVESTMENT POLICY

AND THE

ROLE

FOR

In order to assess how environmental concerns infiltrate EU investment policy, it is necessary to consider, firstly, whether and in what way the EU Treaties favour such policy orientation. This is so, since the objectives of EU investment policy are, like any other EU policy, founded on primary EU law. According to the principle of attribution,13 the scope and exercise of EU competences is directly linked with the pursuance of the specific

9 10

11

12

13

Commission, ‘Investment Policy Communication’, COM (2010) 343 final, pp. 2-3, supra note 2. Council of the European Union, ‘Conclusions on a comprehensive European international investment policy’, 3041st Foreign Affairs Council Meeting, Luxemburg, 25 October 2010. Available at accessed 6 February 2014. European Parliament, Resolution of 6 April 2011 on the future European international investment policy, 2010/2203(INI) (‘Investment Policy Res.’), OJ C 296E. Available at accessed 6 February 2014. The Council of the European Union approving the negotiating mandates for investment protection chapters in free trade agreements of the EU with Canada, India, and Singapore; see ‘EU-Canada (CETA), India and Singapore FTAs - EC negotiating mandate on investment (2011)’ (bilaterals.org, 15 September 2011). Available at accessed 6 February 2014. Article 5 TEU provides that “the Union shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein”.

250

9

INTEGRATING ENVIRONMENTAL LAW PRINCIPLES

AND

OBJECTIVES

IN

EU INVESTMENT POLICY

objectives set out in the founding Treaties.14 Building upon the principle of attribution, the EU Treaties provide the general objectives which EU action should serve when the EU is taking action in a particular policy field. In addition to the objectives mentioned in specific policy fields, the EU Treaties provide for principles and objectives that are pertinent to the entire field of EU external relations. Articles 3(5) TEU and 21 TEU provide a common framework for EU external action, thus subjecting all fields of EU external action, including investment policy, to the same common values, principles, and objectives. Therefore, it is within the context set up by primary EU law rules that EU institutions formulate the policy goals of EU investment policy.

9.2.1

The Objectives of Liberalization and Competitiveness

In that respect, the EU’s Common Commercial Policy (EU CCP) has a prominent role. Article 207 TFEU, which grants competence to the EU over FDI, has so far been widely used as the key provision on which EU investment policy relies15 and has been the main legal basis for the adoption of EU foreign investment-related legislation.16 Even though the exact powers that are conferred to the EU under Article 207 TFEU are still controversial,17 the value of the EU CCP for determining the goals of EU investment policy is still very important. The EU CCP has been traditionally used as the main tool for propelling EU external economic policy priorities, extending in many instances beyond pure trade considerations.18 Bearing in mind the importance of the EU CCP, it may be expected that it is the most clearly defined EU policy in terms of the principles it adheres to and the objectives it pursues. However, the TFEU is to a large extent silent; Articles 206 and 207 TFEU provide that the EU CCP is “based on uniform principles” and “aims to contribute to the harmonious development of world trade, the progressive abolition of restrictions on international trade and the lowering of standards”. Hence, the TFEU identifies uniformity and liberalization as the guiding principles and objectives determining the exercise of

14 15 16

17 18

K. Lenaerts & E. de Smijter, ‘The European Union as an Actor under International Law’, Yearbook of European Law, Vol. 19, 2000, p. 95. EU institutions rely heavily on Art. 207 TFEU as the main legal basis for EU investment policy. See ‘Investment Policy Communication’, supra note 2, p. 1 and ‘Investment Policy Res.’, supra note 11, rec. A. Article 207 TFEU is the sole legal basis which is used for the adoption of Regulation 1219/2012 on grandfathering member state BITs, while the Regulation Proposal on financial responsibility (supra note 6) should be based on both Art. 207 TFEU and Art. 63 TFEU with regard to portfolio investments. See supra note 4. For example, the EU CCP had been used as a legal basis for the conclusion of the Energy Star Agreement which concerns the coordination of energy-efficient labelling programmes for office equipment, thus pursuing an environmental protection objective as well.

251

ANGELOS DIMOPOULOS Union powers in the field.19 Without entering into a discussion of what uniformity and liberalization require,20 it is only worth pointing out that Article 206 TFEU does not impose an obligation of equal treatment for third-country investors and neither does it oblige the Union to proceed with the unilateral liberalization of FDI conditions, similar to the internal market objectives. A careful reading of Article 206 TFEU indicates that the Union is committed to contributing to the gradual liberalization of FDI allowing the EU political organs to determine whether, when, and to what extent liberalizing measures advance the Union interest in the best way. However, the margin of appreciation given to Union institutions is limited, as the Lisbon Treaty appears to oblige them to avoid taking any restrictive measures that affect the existing level of liberalization. Indeed, the value attributed to liberalization is reflected in EU investment policy documents. Market openness in the EU and in third countries is a key goal, aiming to ensure openness for attracting investment in the EU and to promote the openness of third countries’ markets to accommodate the interests of EU investors. Moreover, the importance attributed to liberalization becomes obvious from the prioritization of future negotiations and partnerships with countries that have the highest potential to promote EU competitiveness interests.21 Consequently, it seems that by placing emphasis on liberalization, the EU CCP does not attach any particular role to environmental concerns. Although market access and liberalization may seem different from the traditional objectives of investment protection, still they lie far from introducing nonmarket objectives at the core of EU investment policy.

9.2.2

The Objective of Environmental Protection

Nevertheless, the emphasis on market liberalization does not mean that other policy objectives are not relevant for EU investment policy. The EU treaties insist on policy coherence and consistency, which are now explicitly recognized in Article 7 TFEU22 and are reiterated in Article 21(3)(2) TEU with regard to EU external relations.23 The demand

19 20

21

22 23

On the objectives of the EU CCP, see M. Cremona, ‘The External Dimension of the Internal Market’ in C. Barnard & J. Scott (Eds.), The Law of the Single European Market, Hart Publishing, 2002, pp. 354-384. On the author’s view on this topic, see A. Dimopoulos, ‘The Effects of the Lisbon Treaty on the Principles and Objectives of the Common Commercial Policy’, European Foreign Affairs Review, Vol. 15, No. 2, 2010, p. 153. See ‘Investment Policy Communication’, supra note 2, pp. 6-7; Council, ‘Conclusions on a comprehensive European international investment policy’, supra note 10, paras. 6-7, 13; see also Woolcock & Kleinheisterkamp 2010, supra note 5, pp. 20-30. Article 7 TFEU provides that “The Union shall ensure consistency between its policies and activities, taking all of its objectives into account and in accordance with the principle of conferral of powers”. The principles of consistency and coherence are fundamental for the broader framework of EU external relations, in particular for EU action in the field of the Common Foreign and Security Policy. See S. Nutall,

252

9

INTEGRATING ENVIRONMENTAL LAW PRINCIPLES

AND

OBJECTIVES

IN

EU INVESTMENT POLICY

for policy coherence becomes even stronger in light of Articles 3(5) TEU and 21 TEU, which create a common framework for EU external action, subjecting all external policy fields, including the EU CCP and investment, to the same common values, principles, and objectives. Based on Article 3(5) TEU, Article 21 TEU provides the principles on which external action is based and the objectives it pursues, thus creating a ‘quasi-constitutional’ framework of EU external action. These provisions offer a clear list of legitimate objectives and how they should be pursued in the framework of the EU CCP.24 Within this framework, paragraph 2(f) of Article 21 TEU renders environmental protection a significant objective of all EU external action, thus including investment policy.25 The recognition of environmental protection as a general objective of EU external action that the Union shall pursue (emphasis added) suggests that this objective of EU external action is not only aspirational, but the Union is obliged to act within the framework it creates. Its mandatory nature is softened, however, by its broad formulation.26 The Union is only required to ‘help develop’ environmental protection measures, thus leaving a great degree of discretion to EU institutions to assess when, whether, and how environmental protection objectives can be pursued.27 The integration of environmental protection objectives in EU investment policy is not only reflected in the general objectives of EU external action under Article 21 TEU but is further significantly enhanced in Article 11 TFEU, which enshrines the principle of environmental policy integration.28 Since the Treaty of Amsterdam,29 environmental policy has gained a significant position as the only horizontal, cross-cutting EU policy that is pertinent and has to be taken into consideration in all other EU policy fields. Since

24 25

26 27 28

29

‘Coherence and Consistency’, in C. Hill & M. Smith (Eds.), International Relations and the European Union, Oxford University Press, 2005, p. 91; C. Tietje, ‘The Concept of Coherence in the Treaty on European Union and the Common Foreign and Security Policy’, European Foreign Affairs Review, Vol. 2, No. 2, 1997, p. 211; P. Gauttier, ‘Horizontal Coherence and the External Competences of the European Union’, European Law Journal, Vol. 10, 2004, p. 23; R. Wessel, ‘The Inside Looking Out: Consistency and Delimitation in EU External Relations’, Common Market Law Review, Vol. 37, 2000, p. 1135. See Dimopoulos 2010, supra note 20, p. 160. Art. 21(2)(f) TEU provides that EU external action shall “help develop international measures to preserve and improve the quality of the environment and the sustainable management of global natural resources, in order to ensure sustainable development”. Article 21(2) TEU. M. Cremona, ‘A Constitutional Basis for Effective External Action? An Assessment of the Provisions on EU External Action in the Constitutional Treaty’, EUI Working Paper Law No. 2006/30, pp. 5-6. Art. 11 TFEU provides that “Environmental protection requirements must be integrated into the definition and implementation of the Union’s policies and activities, in particular with a view to promoting sustainable development”. On the role of Art. 11 TFEU in EU external relations, see G. Marin Duran & E. Morgera, ‘Towards Environmental Integration in EC External Relations? A comparative analysis of selected Association Agreements’, Yearbook of European Environmental Law, Vol. 6, 2006, p. 179. Treaty of Amsterdam amending the Treaty on European Union, the Treaties establishing the European Communities and certain related acts, signed in Amsterdam on 2 October 1997.

253

ANGELOS DIMOPOULOS

the Lisbon Treaty, environmental protection has found its way into Article 37 of the Charter of Fundamental Rights of the European Union (CFREU).30 This elevation of environmental protection to a fundamental right and its placement under the ‘solidarity’ provisions indicates the increased significance that environmental protection enjoys as an overarching objective of all EU policies. Within this framework, the Lisbon Treaty has contributed to crystallizing the objectives of environmental protection in EU external policies. Article 3(5) TFEU explicitly mentions that “In its relations with the wider world, the Union shall […] contribute to the sustainable development of the Earth”, thus broadening the objective from the sustainable development of the Union to the sustainable development of the Earth.31 This evolution is important not only because it highlights the obligations of the EU under international environmental law but also because it provides a strong legal basis for externalizing the objectives of EU environmental law in the EU’s relations with the wider world. At the same time, the Lisbon Treaty effectively indicated the priorities of EU environmental policy by focusing on climate change: “Union policy on the environment shall contribute to […] promoting measures at international level to deal with regional or worldwide environmental problems, and in particular combating climate change.”32 Of course, Articles 11 TFEU and 37 of the CFREU like other policy integration provisions call for the ‘environmental mainstreaming’33 of all policies that are likely to affect the environment, thus covering EU investment policy, to the extent that investment protection or liberalization impacts on the environment. In that respect, these provisions formally recognize that other EU measures may have an environmental dimension, in fact requiring the specific consideration and the systemic integration of the environmental protection objectives provided in Article 191 TFEU in other fields of EU action. Although Article 11 TFEU does not oblige EU institutions to enter into a balancing of environmental protection objectives with other objectives that are legitimately pursued, it obliges them to take environmental protection goals into account for the formation of other EU policies, including EU investment policy.34

30

31

32 33 34

Art. 37 of the CFREU provides that “A high level of environmental protection and the improvement of the quality of the environment must be integrated into the policies of the Union and ensured in accordance with the principle of sustainable development”. Charter of Fundamental Rights of the European Union, 200/C/364/01, 2000. For an account of EU environmental policy after the Lisbon Treaty, see D. Benson & A. Jordan, ‘A Grand Bargain or an “Incomplete Contract”? European Union Environmental Policy after the Lisbon Treaty’, European Energy and Environmental Law Review, Vol. 17, No. 5, 2008, p. 280. Art. 191(1) TFEU (emphasis added). G. Marin Duran, Development-based Differentiation in the European Community’s External Trade Policy: Selected Issues under Community and International Trade Law, EUI Theses, Florence 2008, p. 66. Id., pp. 67-68.

254

9

INTEGRATING ENVIRONMENTAL LAW PRINCIPLES

AND

OBJECTIVES

IN

EU INVESTMENT POLICY

To sum up, the EU treaties strengthen the commitment of the EU towards gradual FDI liberalization in the framework of the EU CCP. At the same time, they signal the transformation of EU action in the field of foreign investment into an integrated part of EU external relations, characterized by common values that guarantee unity and consistency in the exercise of Union powers. Primary law requires EU investment policy to be primarily pursuing the market-oriented objectives of competitiveness and liberalization. Nevertheless, nonmarket objectives are also required to play a crucial role. Among them, environmental protection has a special position, which binds EU institutions to conduct an environmental mainstreaming of its investment policy and to utilize the EU investment policy to help develop environmental protection objectives and in particular to combat climate change. Considering the strengthening of the commitment to liberalization in the framework of the EU CCP, the emphasis placed on environmental protection as a cross-cutting policy objective that is also pertinent to investment policy may not be as far-reaching as is actually envisaged. First of all, the broad degree of discretion offered to EU institutions in determining when and to what extent further liberalization contributes to the Union interest enables EU institutions to prioritize liberalization over environmental protection goals under the EU’s investment policy. At the same time, the broad reference as to how environmental protection can be pursued through EU policies grants significant discretion to EU institutions to decide whether EU investment policy should be actively contributing to the pursuance of EU environmental policy goals or merely avoid any conflicts. In that respect, it will be virtually impossible to challenge any EU investment agreements on the ground that they fall short of promoting high environmental standards. Secondly, it is important to highlight that not all EU institutions are equally involved in the exercise of the EU’s policy discretion. As argued in the next section, EU political institutions have different visions as to how environmental protection can be balanced against investment protection. On the one hand, the Commission and in particular the member states are keen to retain the high standards of investment protection, while on the other, the European Parliament seems to favour environmental protection over investment protection. Considering that it is the Commission and the Member States which are in charge of the negotiation of EU investment agreements, it could be expected that the European Parliament’s aspirations may be sidestepped. However, there is a safeguard in that EU investment policy should at least guarantee the coherence and consistency of EU external action and to take into consideration any adverse effects it may have on environmental protection.

9.3

ENVIRONMENTAL PROTECTION

AS AN

OBJECTIVE

OF

EU INVESTMENT POLICY

The requirement of primary EU law to take noneconomic objectives, including environmental protection, into consideration in the design of EU investment policy is reflected in

255

ANGELOS DIMOPOULOS

practice. The development of EU investment policy so far showcases the willingness of EU institutions to integrate investment objectives with broader EU external relations objectives, including environmental protection. More specifically, environmental concerns are pertinent to EU investment policy in two ways: first, environmental protection arises as a legitimate objective for which the countries that are parties to an investment agreement retain the right to regulate;35 second, the promotion of environmentally friendly investments becomes an autonomous objective, aiming to contribute to the sustainable development of investment-recipient countries.36 Nevertheless, EU investment policy still lacks a clear and coherent approach on these two matters, as EU institutions have different visions regarding the role of non-trade objectives in EU investment policy.

9.3.1

Environmental Protection and the Right to Regulate

The importance to be attributed to the right to regulate, and consequently environmental protection, in EU investment policy becomes originally evident from the main policy objectives that EU investment policy should pursue. The Commission and the Council have made it quite explicit that the main objective of EU investment policy is to promote competitiveness through the liberalization of investment conditions and secure high standards of investment protection.37 The Commission emphasizes the importance of increasing the attractiveness of the EU as a destination for foreign investment,38 while it provides equal, or even greater, consideration to the interests of European investors underlining the objectives of market openness.39 At the same time, the Commission recognizes the importance of investment protection norms and investor-state arbitration for guaranteeing an environment favourable to foreign investment.40 In that regard, the

35

36 37 38

39 40

On environmental protection and the right to regulate see the following chapters in this volume: Chapter 6, Climate Change Policies and Foreign Investment: Some Salient Legal Issues by A. Asteriti; Chapter 2, Protecting the Investor and Protecting the Environment: Conflicting Objectives in International Investment Agreements? by A. Joubin-Bret and Chapter 1, Innovative Legal Solutions for Investment Law and Sustainable Development Challenges by M. Cordonier-Segger. These objectives pertain to investment-recipient countries that can be EU countries as well as non-EU countries. Investment agreements are based on reciprocity. See ‘Investment Policy Communication’, supra note 2, pp. 3-4; Woolcock & Kleinheisterkamp 2010, supra note 5, p. 17. Commission, Communication from the Commission to the Council, the European Parliament the European Economic and Social Committee and the Committee of the Regions: ‘Global Europe: Competing in the World: A Contribution to the EU’s Growth and Job Strategy’, COM (2006) 567, Brussels, 4.10.2006, p. 4. See ‘Investment Policy Communication’, supra note 2, p. 3; Woolcock & Kleinheisterkamp 2010, supra note 5, pp. 16-17. See ‘Investment Policy Communication’, supra note 2, pp. 4, 6.

256

9

INTEGRATING ENVIRONMENTAL LAW PRINCIPLES

AND

OBJECTIVES

IN

EU INVESTMENT POLICY

Commission seems to advocate that EU investment policy should be based on member states’ best practices, so that EU agreements are capable of achieving better results than the results that have been obtained or could have been obtained individually by member states.41 Bearing in mind the investor-friendly orientation of EU investment policy, the Commission recognizes that EU investment policy has to “continue to allow the Union, and the Member States to adopt and enforce measures necessary to pursue public policy objectives”.42 Within the broader contours of the EU CCP, the Commission recognizes that EU action shall lead to ‘inclusive growth’, thus fostering consumers’ economic interests without, however, affecting labour, safety, health, environmental, and other standards.43 In that regard, the protection of the environment arises as the first regulatory interest that merits particular attention. Nevertheless, the Commission is rather silent as to how such regulatory objectives should be pursued and how they impact on the level of investment protection. The question of a proper balance between investment protection objectives and public policy considerations is particularly delicate. More specifically, it remains uncertain how the EU should attempt to define absolute standards of treatment in its investment agreements and in particular the standard of Fair and Equitable Treatment (FET) as well as any exceptions to indirect expropriation. A conservative approach towards the right to regulate is also taken by the Council and the member states. Similar to the Commission, EU member states are keen on retaining existing practices by member states’ BITs, thus reserving a similar role for the right to regulate.44 On the other hand, the European Parliament emphasizes the importance of securing benefits from inward investments, indicating the importance of guaranteeing the right of host states to regulate, in particular in sensitive sectors.45 The European Parliament makes an explicit reference to the protection of the environment, among other public policy goals, as a legitimate reason for curving exceptions from investment protection.46 In that respect, the European Parliament seems to depart from the best practices of member states’ BITs, aiming to promote a different and arguably less investor-friendly approach. More specifically, according to the European Parliament, future EU investment 41 42 43

44 45 46

Id., p. 6. Id., p. 9. Commission, Communication from the Commission to the Council, the European Parliament The European Economic and Social Committee and the Committee of the Regions ‘Trade, Growth and World Affairs: Trade Policy as a core component of the EU’s 2020 strategy’, COM (2010) 612, Brussels, 9.11.2010, p. 8; see Commission Staff Working Paper, ‘The External Dimension of the Single Market Review’, COM (2007) 1519, Brussels 20.11.2007, p. 7. See ‘Conclusions on a comprehensive European international investment policy’, supra note 10, p. 17. ‘Investment Policy Res.’, supra note 11, paras. 6, 23-26. Id., para. 25.

257

ANGELOS DIMOPOULOS

agreements should include a limited FET standard, with an express linkage to customary international law. At the same time, the formulation of protection against direct and indirect expropriation in BITs should balance in a clear and fair manner public welfare objectives and investors’ interests.47 In fact, the Parliament insists that EU investment agreements include specific clauses on the right of contracting parties to regulate in the public interest.48 Consequently, it becomes obvious that EU institutions involved in investment law decision-making have different visions as to how environmental protection as an expression of the right to regulate can be balanced against investment protection. On the one hand, the Commission and in particular the member states are keen to retain the high standards of investment protection. Similar to existing BITs, provision considerations regarding the right to regulate are not explicitly part of treaty language, but they are expected to be taken into consideration by investment tribunals when they interpret and apply the FET and the indirect expropriation provisions of BITs.49 In fact, since adhering to member states’ best practices is an objective which is emphasized by the Commission and the Council, this could imply that, when negotiating new investment agreements, the EU has to offer a level of protection to EU investors that is above or at least equivalent to the overall level of protection granted by existing member states’ BITs to EU investors. Considering that it is the Commission and the member states which are in charge of the negotiation of EU investment agreements, it could be expected that the Parliament’s aspirations may be sidestepped. Nevertheless, such considerations do undermine the value of the approach advocated by the European Parliament. Regardless of whether an autonomous recognition of the right to regulate would actually result in limiting the level of protection offered to EU investors abroad or whether it would contribute to excluding environmental legislation from future legal challenges, the fact remains that primary EU law and all EU institutions, including the Commission and the Council, recognize the need for an appropriate balance between investment protection and public policy objectives. In fact, when following member states’ ‘best practices’, EU institutions are expected to retain BITs’ practices that are ‘best’ to achieve the objectives of EU investment policy. As was already discussed, the objectives of EU investment policy do not coincide entirely with the objectives of member states BITs: investment protection is a key objective, yet not the only one, since environmental

47 48 49

See ‘Investment Policy Res.’, supra note 11, paras. 19, 25-27. Id., para. 25. See, for example, El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/ 03/15, Award, 31 October 2011, pp. 233-243, 350-358, and 364-374; Toto Costruzioni Generali S.p.A. v. The Republic of Lebanon, ICSID Case No.ARB/07/12, Award of 7 June 2012, pp. 150-166 and 242-246.

258

9

INTEGRATING ENVIRONMENTAL LAW PRINCIPLES

AND

OBJECTIVES

IN

EU INVESTMENT POLICY

protection and public policy are, among others, important objectives of EU investment policy. In that respect, an alternative way to promote a high level of investment protection, while recognizing an important role for the right to regulate, would be to draw linkages with ‘internal’ EU law rules on the right to regulate. For example, drafting EU investment agreements and in particular their provisions on expropriation and FET in due regard of internal standards, such as those found under the CFREU, would not only establish a more appropriate balance between investment protection and the right to regulate but would also contribute to legal certainty, since the possibility of conflict between legitimate EU actions that violate international investment treaty rules would be minimalized.50

9.3.2

Environmental Protection and the Development of Investment-Recipient Countries

The second way in which environmental protection is pertinent to EU investment policy concerns the promotion of environmental protection standards in investment-recipient countries. In line with the demands of primary EU law, the sustainable development objectives of EU investment policy are recognized by the Commission and more prominently by the Parliament. Although the Commission is primarily concerned with guaranteeing benefits for the EU and its investors, it also underlines, albeit only to a limited extent, the importance of market openness and competitiveness for the sustainable development of third countries.51 According to the Commission, development considerations only seem to be relevant when the proposed measures promote EU competitiveness and the interests of European investors. For example, in the field of regulatory cooperation, the Commission underlines the need for technical assistance to be given to developing countries in order to advance structural reforms and the creation of an institutional environment favourable for foreign investment, encouraging, for example, the training of foreign regulators.52 Within this framework, it is worth pointing out, firstly, that the recognition of the right to regulate serves also the sustainable development needs of investment-recipient countries. Ascribing to the goals of social justice and cohesion and the protection of consumers’ 50

51

52

On the compatibility of future EU investment agreements with the CFREU, see A. Dimopoulos, ‘The Compatibility of Future EU Investment Agreements with EU Law’, Legal Issues of Economic Integration, Vol. 39, No. 4, 2012, p. 447. On the role of development objectives in EU economic policy, see P. Cardwell & D. French, ‘Liberalizing Investment in the CARIDORUM-EU Economic Partnership Agreement: EU Priorities, Regional Agendas and Developmental Hegemony’, in M.C. Cordonier-Segger, M. Gehring & A. Newcombe (Eds.), Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011, pp. 445-446. ‘Investment Policy Communication’, supra note 2, p. 9.

259

ANGELOS DIMOPOULOS

economic interests, EU investment policy aims to incorporate exceptions and limitations to investment liberalization and protection that serve public policy interests. Hence, the public policy goals served by the investment provisions of EU investment agreements not only aim to ‘shield’ the European internal market and EU nationals, but they also have a strong development dimension. They can contribute equally to the protection of public interests in third countries, which can be threatened by the use of the treaties by European investors in order to enter into and operate in their market. More importantly, the Commission emphasizes the need for linkages between foreign investment and international standards. It fosters the global convergence of minimum regulatory standards that can promote economic and social development in third countries, placing specific emphasis on environmental standards.53 In that respect, the Commission seems to draw inspiration from other international investment agreements,54 aiming to integrate clauses that prevent the watering down of environmental legislation in order to attract investment. In addition to the maintenance of environmental standards, the Commission integrates environmental protection into EU investment policy via the promotion of environmentally friendly investments. Focusing on the OECD Guidelines for Multinational Enterprises, as ‘an important instrument to help balance the rights and responsibilities of investors’, the Commission seems to prioritize the development of nonbinding standards of corporate social responsibility. In that respect, EU investment policy is indirectly linked to the broader development objective of promoting democracy and the rule of law, as well as respect for human rights, thus contributing to coherence with EU development and human rights policy. A similar stance, albeit less explicit, is promoted by the member states. The Council emphasizes that ‘in keeping with existing practices by Member States’ the European policy in investment matters should be guided by principles such as the rule of law, human rights, and sustainable development. Nevertheless, the Council avoids making any reference to the OECD Guidelines for Multinational Enterprises. The Council makes it clear that “the main focus of international investment agreements should continue to be effective and ambitious investment protection and market access”.55 On the other hand, the European Parliament stresses the development aspects of the future EU investment policy proposing more audacious solutions. In its Resolution, the European Parliament emphasizes not only the need to encourage the maintenance of

53 54

55

Woolcock & Kleinheisterkamp 2010, supra note 5, pp. 50-51. See, for example, Art. 12 (Investment and Environment) of the US BIT model of 2012; Art. 5 (Environment) of the Belgium-Luxembourg-United Arab Emirates BIT (2004); Art. 5 (Environment) of the Belgium-Luxembourg-Ethiopia BIT (2006). See ‘Conclusions on a comprehensive European international investment policy’, supra note 10, para. 16.

260

9

INTEGRATING ENVIRONMENTAL LAW PRINCIPLES

AND

OBJECTIVES

IN

EU INVESTMENT POLICY

environmental standards and the promotion of responsible investments but requires the inclusion of legally binding clauses in investment agreements, which could be effective in preventing recipient countries from lowering their standards.56 In addition, the European Parliament not only ‘strongly supports’ the inclusion of a reference to the OECD Guidelines for Multinational Enterprises57 but is also pondering whether it is necessary to create legally binding obligations so that foreign investors respect human rights and anticorruption standards.58 Despite the explicit recognition of the sustainable development objectives of EU investment policy, the Commission and the Council seem to grant them only a secondary role. The Commission and the Council aim primarily to ensure better treatment for EU investors abroad, still believing in the traditional idea that by providing high standards of protection for foreign investors, BITs have the further effect of generally promoting the rule of law and indirectly fostering the economic, social, and environmental development of the investment-recipient country.59 Besides, even when they endorse environmental protection measures, such as minimum regulatory standards or the OECD guidelines, they aim primarily to ensure better treatment for EU investors abroad and to maintain high internal standards, rather than to contribute to the sustainable development of the investment-recipient country. In contrast, the European Parliament’s stance towards the future EU investment policy reflects a more progressive approach which contributes to coherence in EU external relations. Linking foreign investment with development, it aims to set limits to the rights of foreign investors and create new obligations for them, bringing more balance between the objectives envisaged by international investment law and EU external relations in theory and in practice. For example, the European Parliament emphasizes the need to provide support to developing countries in order to strengthen their productivity, to encourage the transfer of technology, and to promote FDI in areas other than natural resources, thus boosting local economic development while protecting the environment.60 Nevertheless, the pursuance of such a wide development-oriented EU investment policy may pragmatically not be the most appropriate policy choice. As the Parliament emphasizes, the Commission should “bear in mind the lessons learnt on a multilateral, plurilateral and bilateral level, in particular regarding the failure of OECD negotiations on a

56 57 58 59

60

See ‘Investment Policy Res.’, supra note 11, para. 28. Id., para. 27. Id., para. 37. In this respect, see R. Echandi, ‘What do Developing Countries Expect from the International Investment Regime?’, in J.E. Alvarez & K.P. Sauvant (Eds.), The Evolving International Investment Regime: Expectations, Realities, Options, New York: Oxford University Press, 2011, pp. 13-14. See ‘Investment Policy Res.’, supra note 11, paras. 38-39.

261

ANGELOS DIMOPOULOS Multilateral Agreement on Investment”.61 Considering that the Multilateral Agreement on Investment (MAI) failed (also) because of the high expectations created that an investment instrument would incorporate and address noneconomic objectives, if the European Parliament’s approach was fully endorsed, then the EU may face difficulties in convincing third countries to conclude investment agreements. Besides, the existence of fragile links between investment and environmental protection does not necessarily lead to the pursuance of conflicting policies. Nevertheless, the lack of conflicts does not necessarily mean mutual promotion and support of investment and environmental policies. Bearing in mind the broad discretion enjoyed by EU institutions, the promotion of economic objectives giving less prominence to sustainable development considerations may be more realistic in light of the post-financial crisis global economic and political situation.

9.4

INTEGRATING ENVIRONMENTAL PROTECTION

IN

EU INVESTMENT AGREEMENTS

In order to implement the political and treaty-mandated objectives of EU investment policy, the Council authorized the Commission in September 2011 to negotiate investment chapters to be included in the EU FTAs with Canada, India, and Singapore.62 The negotiation and future conclusion of these investment agreements present a great challenge but also a significant opportunity for the EU to crystallize its policy approach and to showcase how it intends to translate its investment policy objectives into treaty law. Of course, as no agreement has been signed so far nor are there any official negotiating texts available, the following analysis aims to sketch the policy options that are available and to assess the threats and opportunities that they raise as regards the introduction of environmental concerns into future EU investment agreements. The choice of the third countries with which the EU has started negotiations is already revealing the policy preferences of the EU. As the Commission had already indicated in its Communication, actual trade and investment flows are important determinants for EU investment negotiations. By recognizing the growth prospects and potential of other markets, the Commission highlights that “the Union should go where its investors would like to go”, while the ‘robustness’ of investor protection and the existence of a certain and sound environment are an important determinant of priority countries for future

61 62

Id., para. 8. The Council of the European Union approving the negotiating mandates for investment protection chapters in free trade agreements of the EU with Canada, India, and Singapore, see ‘EU-Canada (CETA), India and Singapore FTAs - EC negotiating mandate on investment (2011)’ (bilaterals.org, 15 September 2011) accessed 6 February 2014.

262

9

INTEGRATING ENVIRONMENTAL LAW PRINCIPLES

AND

OBJECTIVES

IN

EU INVESTMENT POLICY

negotiations.63 As a result, it becomes obvious that the Commission places greater emphasis on investment liberalization than investment protection. By prioritizing countries where a sufficient investment protection environment exists, the Commission highlights the importance of market openness as the main goal of EU investment policy. Along similar lines, the Council emphasizes the importance of the economic climate, market potential, and strategic importance for the EU as the main determinants for EU investment negotiations.64 In that regard, the EU departs from traditional member states’ BITs, which dealt only with investment protection and focuses equally on both investment liberalization and protection. This new approach, which will be confirmed in practice in the agreements with Canada and Singapore, is also very significant for determining the role of environmental concerns in future EU investment agreements. Taking into consideration that the EU has concluded a significant number of FTAs including a chapter on investment liberalization,65 the EU can draw on its own past practices so as to introduce new provisions regarding both the right to regulate, as well as sustainable development. Taking into consideration international rule making, the EU has plenty of options when devising the appropriate role for environmental concerns in EU investment agreements. 9.4.1

The Right to Regulate and Public Policy Exceptions

Considering the political willingness of all EU institutions to protect the right to regulate, to a greater or lesser extent as discussed above, it is very much expected that future EU investment agreements will expressly safeguard the right of contracting parties to regulate in the public interest. However, there are at least four possible means to protect the right to regulate under discussion at the EU level. The first option is to continue with existing member state BITs’ practices that do not include any direct reference to the right to regulate. As current arbitral practice demonstrates, when the investment-recipient state’s legislative measures are at stake, many tribunals have followed a balanced interpretation of the FET standard and the indirect expropriation provision. Many tribunals take into account the proportionality and reasonableness of the legislative measures challenged, so that, when judged as legitimate, proportionate, reasonable, and non-discriminatory, national regulatory measures do not give rise to compensation in favour of foreign investors.66 63 64 65 66

See ‘Investment Policy Communication’, supra note 2, pp. 4, 6. ‘Conclusions on a comprehensive European international investment policy’, supra note 10, para. 12. See ‘Investment Policy Res.’, supra note 11, para. 36. For a detailed analysis of all pre-Lisbon investment chapters of EU FTAs, see Dimopoulos 2011, supra note 4, Chapter 3. See in particular Chapter 7, Bridging the Gap between International Investment Law and the Right to Access to Water by Attila Tanzi in this volume.

263

ANGELOS DIMOPOULOS

Nevertheless, the continuation of existing member states’ practices seems highly unlikely. Relying only on this interpretative approach to standards of treatment of investment does not offer any guidance to arbitral tribunals as to the degree of deference that they should grant national legislators for adopting measures serving public policy goals. The number of cases when tribunals granted protection to foreign investors’ expectations without any consideration of the reasons for which the challenged regulatory measures were taken indicates the dangers of this approach.67 In any case, the clear and explicit reference to the right to regulate by all EU institutions renders this option politically improbable. A second option available to the EU is to make a preambular reference to the right of the signatory parties to regulate. In that regard, the EU could draw inspiration from its existing FTAs, such as the EU-Korea FTA, where it is provided that the parties recognize their right “to take measures necessary to achieve legitimate public policy objectives on the basis of the level of protection that they deem appropriate, provided that such measures do not constitute a means of unjustifiable discrimination or a disguised restriction on international trade, as reflected in this Agreement”.68 This provision is clearly modelled on the chapeau of Article XX of the General Agreement on Tariffs and Trade (GATT), reflecting WTO case law on the necessity test for the application of the general exception of Article XX.69 Such recognition of the right to regulate as an objective of EU investment agreements with a specific normative content could have important implications for the recognition of environmental concerns. According to public international law, the objectives of international treaties establish a relevant context for the interpretation of the other provisions of the treaty,70 hence FET and expropriation provisions as well. In that respect, the recognition of the right to regulate as a general preambular objective of EU investment agreements may influence the interpretation of the FET and the expropriation provisions of EU investment agreements, irrespective of which form they take, by requiring a necessity test to be conducted. But even if that were the case, the mere

67

68 69 70

See, for instance, CMS Gas Transmission Company v. Republic of Argentina, ICSID Case No. ARB/01/8, Award of 12 May 2005, at paras. 274-5 and 280; LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc v. The Argentine Republic, ICSID Case No. ARB/02/1, Award of 25 July 2007, at paras. 121-39; Sempra Energy International v. The Argentine Republic, ICSID Case No. ARB/02/16, Award of 28 September 2007, at paras. 298 and 303-4; Enron Corporation and Ponderosa Assets, L.P v. The Argentine Republic, ICSID Case No. ARB/01/3, Award of 22 May 2007, at paras. 259-68. Preamble to the Free Trade Agreement between the European Union and its member states, on the one part, and the Republic of Korea, on the other part, 2010. See inter alia, Appellate Report United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, adopted 7 April 2005, WT/DS285/AB/R, at paras. 306-8. Art. 31(1) of the Vienna Convention on the Law of Treaties (VCLT) states that “[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”.

264

9

INTEGRATING ENVIRONMENTAL LAW PRINCIPLES

AND

OBJECTIVES

IN

EU INVESTMENT POLICY

reference to the right to regulate in the preamble could exacerbate problems of legal uncertainty, due to the contested and ambiguous legally binding nature of the provision. A third option that is available to the EU is to include detailed provisions on indirect expropriation and the FET standard, including interpretative notes emphasizing the parties’ right to regulate in the public interest. This approach has been followed by the NAFTA parties and other countries (such as Singapore) in order to give arbitrators some guidance on the balancing between investors’ protection and the right of parties to regulate in the public interest when they interpret and apply the absolute standards of protection.71 In drafting these provisions, EU institutions could draw inspiration from the provisions of the CFREU. Article 17 of the CFREU provides for a right to property, determining the conditions under which the deprivation and limitation of private property rights are allowed. In that respect, a general provision that non-discriminatory and transparent measures that aim to achieve legitimate public policy objectives, including among others the protection of the environment, do not amount to indirect expropriation, as long as they are proportionate, would sufficiently clarify the rules on expropriation, protect the right to regulate, and achieve coherence with the CFREU. Despite the obvious advantages of such an approach, it could be argued that it would not significantly add to existing practice. Under NAFTA, the issue of balancing investment protection and environmental as well as other public policy objectives seems to be rather a matter of the interpretation and application of treaty rules, rather than a matter connected with the drafting of clauses.72 Therefore, it could be argued that the added value of such an approach would be rather minimal. Finally, a fourth option that is available for EU investment agreements is to render the right to regulate the object of an exception clause of a general character. Following the demands of the European Parliament, EU investment agreements may introduce the right to regulate as a general exception and limitation to the rights conferred to foreign investors. In that respect, the EU could draw inspiration from the FTAs it has concluded with Korea, Peru, and Colombia; the Forum of the Caribbean Group of African, Caribbean, and Pacific (ACP) States (CARIFORUM), Chile, and Mexico; and in particular Articles 7.50, 225, 135, and 27 thereof, which provide for a general exception to the application of the trade and investment provisions. These provisions allow the parties to adopt proportionate and nonarbitrary measures that are necessary to protect and secure public morals; the public order; human, animal, or plant life or health; exhaustible natural

71

72

For instance, see Art. 5 (Minimum Standard of Treatment) and Art. 6 (Expropriation and Compensation) 2012 US model BIT and the interpretative notes contained in Ann. A and B; Art. 13 2004 Canadian model BIT and the interpretative note included in Ann. B.13(1). J. Viñuales, Foreign Investment and the Environment in International Law, Cambridge University Press, Cambridge, 2012, pp. 324-330.

265

ANGELOS DIMOPOULOS

resources; national cultural treasures; and other public policy objectives. Adopting similar wording to the GATT Article XX, EU investment agreements could extend the scope of that exception to investment provisions, thus allowing the parties to invoke its application for derogating from rules on foreign investment. Although the use of such a broad exception would enable environmental policy concerns to be exempted from investment regulation, its broad use covering all aspects of investment regulation could be potentially problematic.73 Although general exception clauses have been extensively used in trade agreements, their use in investment agreements has always been very limited. For example, the investment chapter of the Energy Charter Treaty includes a general exception provision in Article 24, but this clause does not cover investment expropriation. In that respect, a better alternative would be a provision identifying the right to regulate as an autonomous right rather than a broad exception. A clause worded similar to the terms of Article 268 of the EU FTA with Peru and Colombia74 or Article 7.1(4) of the EUKorea FTA, which provides that “[…] each Party retains the right to regulate and to introduce new regulations to meet legitimate policy objectives”, could be envisaged. Consequently, EU investment agreements could anchor the right to regulate in an investment-specific chapter, distancing themselves from the World Trade Organization (WTO) and trade rules that are not always suitable for investment regulation. Of course, it is possible that the investment chapters currently under negotiation with Canada and Singapore will include some or all of the above-mentioned options. In deciding which option would be ultimately chosen, the negotiating leverage of the parties is decisive. Considering that the second and fourth options reflect EU practice while the third option coincides with the investment treaty-making practice of Canada and Singapore, the choice between them depends ultimately on the influence that the parties can exert in drafting the final text of the agreement.

9.4.2

Maintenance of Standards and the Behaviour of Investors

Turning to environmental concerns as a means to promote the sustainable development of the investment-recipient country, again previous EU experiences, coupled with international practice, can be used to materialize the objectives of EU investment policy.

73

74

On this topic, see A. Newcombe, ‘The Use of General Exceptions in IIAs: Increasing Legitimacy or Uncertainty?’, in A. DeMestal & C. Levesque (Eds.), Improving International Investment Agreements, Routledge, 2013, pp. 267-283. Trade Agreement between the European Union and its member states, on the one part, and Colombia and Peru, on the other part, 2012.

266

9

INTEGRATING ENVIRONMENTAL LAW PRINCIPLES

AND

OBJECTIVES

IN

EU INVESTMENT POLICY

First of all, the pursuance of environmental protection can be pursued through the adoption of provisions on minimum standards. In that respect, the EPA with the Forum of the Caribbean Group of African, Caribbean, and Pacific (ACP) States (CARIFORUM) and the FTAs with Korea, Peru, and Colombia are unique and can serve as a model for the development of future EU investment agreements. These agreements include innovative provisions on the promotion of international environmental rules and the maintenance of domestic environmental standards, as they establish legally binding commitments for the parties to incorporate minimum international standards and retain their labour, health, environmental, and cultural standards.75 Building upon current BITs’ provisions that concern the relation between foreign investment and environmental standards,76 the provisions on the maintenance of standards oblige the parties to take all appropriate measures so as to ensure that foreign investment activity conforms to environmental standards. Without imposing direct obligations on private individuals, which would be controversial under investment law,77 these EU FTAs are carefully drafted so as to introduce basic limits on foreign investment activity. More specifically, Article 72 of the EPA with the CARIFORUM states obliges the parties to take ‘measures as may be necessary to ensure’ that international environmental obligations arising from agreements signed by the parties are not breached by investors’ activities. The use of imperative language emphasizes that the EPA not only recognizes the right of the parties to pursue policies that ensure these standards, but it also imposes an obligation on them to take the appropriate and necessary measures. The FTAs with Korea, and Colombia and Peru adopt a more elaborate approach, placing similar obligations on the parties under the broader framework of the relation between trade and sustainable development. Recognizing that “economic development, social development and environmental protection are interdependent”,78 they stress the obligation of both parties to adopt high levels for protecting environmental standards. Articles 13.4 and 13.5 of the FTA with Korea and Article 279 of the FTA with Peru and Colombia reaffirm the commitments of the parties under international environmental agreements and the obligation of the parties to effectively implement them and express the willingness of the parties to cooperate further in order to promote internationally set environmental goals. In that respect, the FTA with Peru and Colombia goes a step further as regards the protection of endangered species, biological diversity, and climate change, in that it

75 76 77

78

J. Vandenberghe, ‘On Carrots and Sticks: The Social Dimension of EU Trade Policy’, EFA Rev., Vol. 13, 2008, pp. 561, 578-579. For example, Arts. 12 and 13 of the US Model BIT and Art. 1114 of the NAFTA. O. De Schutter, ‘The Challenge of Imposing Human Rights Norms on Corporate Actors’, in O. De Schutter (Ed.), Transnational Corporations and Human Rights, Hart publishing: Oxford and Portland, Oregon, 2006, pp. 1-43. Art. 13.1. (2) of the FTA with Korea.

267

ANGELOS DIMOPOULOS

integrates specific international obligations of the parties in the FTA and sets additional goals for the further cooperation of the parties in these fields.79 The protection of international environmental standards is complemented by provisions requiring the maintenance of existing, national environmental standards. The EPA with the CARIFORUM states and the FTAs with Korea, Peru and Colombia provide that the parties shall ensure that FDI is not encouraged by lowering domestic environmental standards or laws.80 Even though similar provisions are found in a significant number of investment agreements, such as Article 1114 NAFTA, these EU FTAs present significant innovations. They adopt clearer and much stronger wording, as they do not provide an appeal to the parties’ ‘best efforts’, but oblige them to avoid lowering their national standards.81 Last but not least, EU investment agreements are likely to include ‘best endeavours’ clauses on corporate social responsibility, possibly making a reference to the OECD Guidelines for Multinational Enterprises.82 Although the mandate of the Council to the Commission does not make any reference to investors’ responsibilities or to the OECD Guidelines, the insistence by the Commission and the Parliament and the favourable stance from Canada and Singapore may result in their inclusion in the EU investment agreements with these countries. Such clauses could be worded in similar terms to the clauses already found in some recent international investment treaties. For example, inspiration can be drawn from the new Article of the Canadian Model BIT, which requires that: Each Party should encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate internationally recognized standards of corporate social responsibility in their practices and internal policies, such as statements of principle that have been endorsed or are supported by the Parties.83 79

80 81 82

83

See Arts. 272, 273, and 275 of the FTA with Peru and Colombia which focuses on the parties’ obligations under the Convention on International Trade in Endangered Species of Wild Fauna and Flora signed on 3 March 1973 (CITES), the Cartagena Protocol on Biosafety adopted on 29 January 2000 (CBD) and the Kyoto Protocol to the United Nations Framework Convention on Climate Change adopted on 11 December 1997. Art. 73 of the EPA with the CARIFORUM states and Articles 13.7 and 277 of the FTAs with Korea and Peru and Colombia, respectively. For example, contrary to Art. 1114 NAFTA which uses words such as ‘it is inappropriate’ and ‘should not’, the EPA and the FTA include the term ‘shall’. See Vandenberghe 2008, supra note 75, pp. 561, 575-576. Voluntary codes of corporate social responsibility are present in, for example, the UN Code of Conduct for Transnational Corporations (1986) and the OECD Guidelines for Multinational Corporations (1972 as amended in 2001 & 2011). For a discussion of voluntary codes, see F. McLeay, ‘Corporate Codes of Conduct and the Human Rights Accountability of Transnational Corporations: a Small Piece of a Larger Puzzle’, in De Schutter 2006 (Ed.), supra note 77, pp. 219-241. Art. 16 of the 2012 Canadian Model BIT.

268

9

INTEGRATING ENVIRONMENTAL LAW PRINCIPLES

AND

OBJECTIVES

IN

EU INVESTMENT POLICY

Finally, although it is highly unlikely, EU investment agreements may even go as far as to introduce legally binding provisions that integrate principles of corporate social responsibility (CSR) that, until now, have been adopted by investors on a voluntary basis.84 Consequently, it seems that EU investment agreements present a new generation of international investment agreements, paying more attention to sustainable development objectives in comparison to member state BITs. The EU is very likely to introduce an improved NAFTA model as regards the promotion of environmental standards, in the sense that specific environmental protection obligations are fully integrated in the agreements, requiring from host states and, indirectly from investors, to respect them and promote them further. At the same time, it could be argued that these provisions cannot fully address the public policy concerns of investment-recipient states and their societies. They do not include the proper mechanisms for ensuring that civil society can effectively raise development concerns, which has to rely on home or host state action. If the provisions on the maintenance of standards are breached, the persons who are directly affected are not provided with any means for demanding the enforcement of these provisions; as such violations may be economically beneficial for both the investmentrecipient state and the foreign investors. Besides, the adoption of such standards may be economically burdensome for certain developing countries and instead of contributing to their development, may actually impede economic progress.

9.5

CONCLUDING REMARKS

The introduction of the EU as a new player in international investment rule making creates a unique opportunity for a reconsideration of the role of environmental concerns in international investment law. The potential for the renegotiation of more than 1,200 BITs enables the EU to set a new agenda in investment treaty making. Although it is still very early to assess whether EU investment agreements achieve their potential, the EU treaties, the policy goals of EU institutions, and EU past practice provide sufficient elements to sketch the margins within which environmental concerns will be part of EU investment policy. In that respect, environmental protection presents a policy goal that EU investment policy cannot neglect. Contrary to member states’ BITs, where environmental concerns were only indirectly addressed, the EU is obliged under the EU treaties to set up an investment policy that is coherent with EU external relations objectives that underlines

84

For an example of legally binding obligations on investors that could be found in IIAs, see IISD Model International Agreement on Investment for Sustainable, Arts. 11-18, Available at accessed 2 May 2014.

269

ANGELOS DIMOPOULOS

and addresses the linkages between different policy fields. Although market access and protection are undeniably the primary goals of EU investment policy, non-trade values, including the protection of the environment, come to play a very significant role. More specifically, environmental concerns are public policy reasons that justify the adoption of regulatory measures on behalf of the host state that do not violate investors’ rights. The scope and content of the right to regulate and the exceptions to FET and the expropriation provisions under future EU investment agreements will indicate the degree of adherence of the EU to a balance between investment objectives and public policy considerations. In that regard, EU institutions seem to favour either a detailed determination of the scope of investment protection provisions or the inclusion of a general exception to the right to regulate, granting the possibility to (supra)national regulators to adopt restrictive measures that are justified under certain public policy objectives. Secondly, environmental protection is likely to become a sustainable development objective of EU investment agreements. Taking into consideration the demands of primary law for coherence and consistency, the promotion of (international) environmental standards and of environmentally friendly investments are explicit goals of EU investment policy according to the Commission and the European Parliament. The innovative provisions that a number of recent EU FTAs include on environmental standards and investors’ behaviour represent a precedent that the EU is willing to integrate in its future investment agreements. Of course, only when EU investment agreements are adopted, it will be possible to assess whether these EU policy goals are translated into law. Of course, one may argue that the EU is not doing enough to balance environmental concerns with investment protection. Considering national preferences and public policies as exceptions to investment protection minimizes the discretion enjoyed by national governments to determine and pursue their national regulatory interests, subjecting them to the scrutiny of dispute settlement bodies in accordance with investment protection norms. Moreover, EU investment policy does not address the criticism raised against other investment agreements that they exclude affected stakeholders from dispute settlement. Nevertheless, such criticism underestimates the framework within which EU investment policy is born. Considering the hostile institutional framework, where the replacement of member states’ investment policies is viewed with suspicion and hesitation, alongside the traditional investment protection-oriented nature of international investment law, EU investment policy presents a significant milestone in international investment policy: it makes it clear that environmental protection objectives are also the objectives of investment policy and, building on past experiences, offer new tools for implementing them in investment treaties.

270

BIBLIOGRAPHY BOOKS Dimopoulos, A., EU Foreign Investment Law, Oxford: Oxford University Press, 2011. Viñuales, J., Foreign Investment and the Environment in International Law, Cambridge: Cambridge University Press, 2012. ARTICLES Benson, D. & Jordan, A., ‘A Grand Bargain or an “Incomplete Contract”? European Union Environmental Policy after the Lisbon Treaty’, 17(5) European Energy and Environmental Law Review, 2008. Cremona, M., ‘A Constitutional Basis for Effective External Action? An Assessment of the Provisions on EU External Action in the Constitutional Treaty’, EUI Working Paper Law No. 2006/30. Dimopoulos, Α., ‘The Effects of the Lisbon Treaty on the Principles and Objectives of the Common Commercial Policy’, 15(2) European Foreign Affairs Review, 2010. Dimopoulos, A., ‘The compatibility of future EU investment agreements with EU law’, 39(4) Legal Issues of Economic Integration, 2012. Gauttier, P., ‘Horizontal Coherence and the External Competences of the European Union’, 10 European Law Journal, 2004. Lenaerts, Κ. & Smijter, de E., ‘The European Union as an Actor under International Law’, 19 Yearbook of European Law, 2000. Marin Duran, G., ‘Development-based Differentiation in the European Community’s External Trade Policy: Selected Issues under Community and International Trade Law’, EUI Thesis, Florence 2008. Marin Duran, G. & Morgera, E., ‘Towards Environmental Integration in EC External Relations? A Comparative Analysis of Selected Association Agreements’, 6 Yearbook of European Environmental Law, 2006. 271

ANGELOS DIMOPOULOS Tietje, C., ‘The Concept of Coherence in the Treaty on European Union and the Common Foreign and Security Policy’, 2(2) European Foreign Affairs Review, 1997. Vandenberghe, J., ‘On Carrots and Sticks: The Social Dimension of EU Trade Policy’, 13 EFA Rev., 2008. Wessel, R., ‘The Inside Looking Out: Consistency and Delimitation in EU External Relations’, 37 Common Market Law Review, 2000.

CONTRIBUTIONS

IN EDITED BOOKS

Cardwell, P. & French, D., ‘Liberalizing Investment in the CARIDORUM-EU Economic Partnership Agreement: EU Priorities, Regional Agendas and Developmental Hegemony’, in M.C. Cordonier-Segger et al., (Eds.) Sustainable Development in World Investment Law, The Hague: Kluwer Law International, 2011. Cremona, M., ‘The External Dimension of the Internal Market’, in C. Barnard & J. Scott (Eds.) The Law of the Single European Market, Hart Publishing, 2002. Echandi, R., ‘What do Developing Countries Expect from the International Investment Regime?’, in J.E. Alvarez & K.P. Sauvant (Eds.), The Evolving International Investment Regime: Expectations, Realities, Options, New York: Oxford University Press, 2011. McLeay, F., ‘Corporate Codes of Conduct and the Human Rights Accountability of Transnational Corporations: a Small Piece of a Larger Puzzle’, in O. De Schutter (Ed.), Transnational Corporations and Human Rights, Oxford, Portland, Oregon: Hart publishing, 2006. Newcombe, A., ‘The Use of General Exceptions in IIAs: Increasing Legitimacy or Uncertainty?’, in A. DeMestal & C. Levesque (Eds.) Improving International Investment Agreements, Routledge, 2013. Nutall, S., ‘Coherence and Consistency’, in C. Hill & M. Smith (Eds.), International Relations and the European Union, Oxford University Press, 2005. De Schutter, O. ‘The Challenge of Imposing Human Rights Norms on Corporate Actors’, in O. De Schutter (Ed.), Transnational Corporations and Human Rights, Oxford, Portland, Oregon: Hart publishing 2006.

272

10

THE ENVIRONMENTAL SUSTAINABILITY EU INVESTMENT POLICY

AFTER

OF THE

LISBON:

PROGRESSIVE INTERNATIONAL LAW DEVELOPMENTS Ottavio Quirico*

10.1

INTRODUCTION

Some of the most relevant reforms introduced in the European Union (EU) by the Lisbon Treaty concern the area of foreign investment (FI).1 In particular, foreign direct investment (FDI) is now included in the common commercial policy (CCP) under Articles 206 and 207 of the Treaty on the Functioning of the European Union (TFEU), shaping trade relations with non-EU countries.2 Because of its impact on foreign business and production, FDI, which is dominated by large multinational enterprises, is a double-edged sword with respect to sustainable development and environmental protection.3 On the one hand, FDI is perceived as a potential threat to the environment, especially in less-developed countries. In fact, it might entail the exploitation of land and raw materials and facilitate consumption growth in external markets, thus increasing environmental pollution. On the other hand, FDI can contribute to improving the state of the environment, especially by implementing clean

* 1

2

3

Senior Lecturer, School of Law, University of New England, NSW, Australia. E-mail: [email protected]/ [email protected]. The word ‘investment’ is used in the sense of a ‘non-commercial and non-purely speculative transaction’; see A. Reinisch, ‘The EU on the Investment Path – Quo Vadis Europe? The Future of EU BITs and Other Investment Agreements’, SSRN Research Paper, 2013, p. 26. ‘Foreign direct investment’ usually refers to direct investment in the business of a company operating in a different country. This notion is exclusive of passive investment in securities of another country, such as stocks and bonds, but the difference is blurred; see OECD, ‘Benchmark Definition of Foreign Direct Investment’, 2008, p. 17, and section 10.5.1 below. A. Dimopoulos, ‘The Effects of the Lisbon Treaty on the Principles and Objectives of the Common Commercial Policy’, 15 EFARev 2010, p. 153; M. Smith, ‘The EU’s Commercial Policy: between Coherence and Fragmentation’, 8 Journal of European Public Policy 2001, p. 787. The concept of ‘sustainable development’ is understood as ‘development that meets the needs of the present without compromising the ability of future generations’, entailing an equitable and environmentally sustainable international economy (World Commission on Environment and Development, Our Common Future, Report A/42/427, 1987, Chapter 2: Sustainable Development, para. 27).

273

OTTAVIO QUIRICO technology, in particular renewable energy.4 Furthermore, investors’ activity may determine environmentally friendly changes in foreign consumption patterns. This is all the more true within the context of globally integrated markets.5 This chapter takes stock of the inclusion of the notion of FDI within the EU CCP after the entry into force of the Lisbon Treaty. In light of this premise, the chapter explores the environmental sustainability of the common foreign (direct) investment (CF(D)I) policy based on a systemic analysis of relevant provisions of fundamental EU law sources, in particular, the Treaty on European Union (TEU), the TFEU, and the Charter of Fundamental Rights of the European Union (CFREU).6

10.2

RESHAPING

THE

RELATIONSHIP

BETWEEN

EU FDI

AND

CCP

Since 1957, it has proved difficult to define the scope of the CCP, and the related allocation of competences between the European Community and its member states was problematic. Within this context, FDI was an area of shared competence, giving member states freedom to negotiate bilateral investment treaties (BITs).7

4 5

6 7

OCO, FDI in Renewable Energy: a Promising Decade Ahead, 2012, p. 4. OECD, supra note 1, p. 14; UN, ‘The Transition to a Green Economy: Benefits, Challenges and Risks from a Sustainable Development Perspective’, Report, 2010, pp. 10-13. See also M.V. Gehring & A. Kent, International Investment Law within International Law – Integrationist Perspectives, Cambridge, Cambridge University Press, 2013, p. 187; J. Witkowska, ‘Foreign Direct Investment and Sustainable Development in the New EU Member States: Environmental Aspects’, 3 Comparative Economic Research 2012, p. 7. The adjective ‘direct’ is in brackets when a specific regulatory framework can also apply to indirect investment. Prior to the entry into force of the Lisbon Treaty, the EC tried to expand its competence over international investment, within the context of shared competence. In particular, the EC started to negotiate ambitious investment agreements, such as the EC–Chile Association Agreement, which seeks to grant full national treatment to natural and legal persons with regard to market access and post-market access and provides for advanced environmental protection; see the 2002 Agreement Establishing an Association between the EC and Its Member States, of the One Part, and the Republic of Chile, of the Other Part, OJ L352, 30/12/ 2002, p. 3, in particular, Arts. 1, 28, and 55(d). The EC/EU also outlined a neighbourhood policy aiming to create a Pan-Euro-Mediterranean market including investment obligations; see B. Gavin, ‘Trade and Investment in the Wider Europe: EU Neighbourhood Policy for Enhanced Regional Integration’, 4 Journal of World Investment 2003, p. 902. Moreover, in 2006, the European Council adopted the minimum platform on investment for EU free trade agreements (MPoI), which seeks to create a basis for a unitary EC/EU investment policy, by providing a uniform negotiation proposal for international trade agreements; see the Draft Minimum Platform on Investment for EU Free Trade Agreements – Remarks, 28 July 2006; N. Maydell, ‘The European Community’s Minimum Platform on Investment or the Trojan Horse of Investment Competence’, in A. Reinisch & C. Knahr (Eds.), International Investment Law in Context, The Hague, Eleven International Publishing, 2007, p. 75. Some cases recently brought by the Commission before the European Court of Justice also witness the effort to establish EC/EU competence on foreign investment. For instance, in 2004, the Commission notified Austria, Finland, Sweden, and Denmark that some of their preaccession extra-EC BITs might hinder the application of restrictive measures on free movement of capital exceptionally decided by the Council of Ministers and thus requested their modification. Whereas Denmark

274

10

THE ENVIRONMENTAL SUSTAINABILITY

OF THE

EU INVESTMENT POLICY

AFTER

LISBON

After the Lisbon Treaty, FDI is fully encompassed by the CCP. More specifically, Article 206 of the TFEU places FDI within the context of specific CCP objectives, that is, the establishment of an internal customs union and the harmonious development of world trade. Moreover, Article 207 of the TFEU contextualizes FDI within the general principles governing the CCP, besides trade in goods and services as well as commercial aspects of intellectual property. More generally, after Lisbon, the different aspects of the EU foreign policy and external relations are systemically collected under the new heading of the ‘Union’s External Action’, which includes the policy areas covered by Title V of the TEU and Part V of the TFEU. Save the Common Foreign and Security Policy (CFSP) (Title V of the TEU), the other external policies, that is, CCP (Articles 206 and 207 of the TFEU),8 cooperation with third countries and humanitarian aid (Articles 208-214 of the TFEU), restrictive measures (Article 215 of the TFEU), international agreements (Articles 216-219 of the TFEU), relations with third countries and international organizations (Articles 220 and 221 of the TFEU), and the solidarity clause (Article 222 of the TFEU), are included in Part V of the TFEU.9 Within this framework, Article 1(3) of the TEU explicitly provides that ‘the Union shall ensure consistency between the different areas of its external action and between these and its other policies’. Furthermore, Article 205 of the TFEU provides that the EU external policies, including CCP and FDI, shall be guided by the principles and objectives laid down in the TEU general provisions on the Union’s external action.

10.3

THE OBJECTIVES

OF THE

EU CFDI POLICY

Being included in the CCP, FDI is subject to two types of principles and objectives, respectively, under Article 206 of the TFEU – based on former Article 131(1) of the Treaty Establishing the European Community (TEC) – which defines specific trade policy

8 9

complied with the request, the Commission started actions for non-compliance against Sweden, Austria, and Finland before the ECJ, which delivered verdicts favourable to the Commission under Art. 307 of the TEC (see, for instance, the Judgment of 19 November 2009 in Case C–118/07, Commission v. Finland (2009), ECR I-10889). Arts. 206 and 207 of the TFEU amend former Arts. 131(1) and 133 of the Treaty Establishing the European Community (TEC). This is a relevant change from the pre-Lisbon situation, whereby Title V of the TEU dealt with the Common Foreign and Security Policy, whereas the TEC embodied Part 3 – Title IX, Common Commercial Policy, Title XX, Development Cooperation, and Title XXI, Economic, Financial, and Technical Cooperation with Third Countries.

275

OTTAVIO QUIRICO

objectives, and Articles 21 of the TEU and 205 of the TFEU, which define the general objectives and principles of the Union’s external action.10 Article 206 of the TFEU confirms the pre-Lisbon trade policy objectives, comprising the harmonious development of world trade, the progressive abolition of restrictions on international trade, and the lowering of customs and other barriers. In addition, Article 206 of the TFEU introduces the abolition of restrictions on foreign direct investment, which complements the extension of the CCP to foreign direct investment under Article 207(1) of the TFEU. This trade liberalization policy is reminiscent of the original purpose of the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs).11 Moreover, the TFEU wording, referring to the ‘progressive abolition of restrictions on international trade and on foreign direct investment’, indicates that the process should be a gradual one, and thus the objectives of Article 206 of the TFEU echo those of the World Trade Organization (WTO).12 As to general objectives, FDI is now subjected to the same principles as all EU external acts, including human rights, good governance, environmental protection, and sustainable development. Therefore, in carrying out its FDI policy, the EU must balance trade liberalization and fundamental rights on a mutually reinforcing basis. This approach replicates on the global scene the effort to balance economics and fundamental rights that animates the European Court of Justice (ECJ) in the internal market, within the context of the ‘wider world’ EU policy specified in Article 3(5) of the TEU.13 In fact, based on Article 207(1) of the TFEU, FDI shall be conducted ‘in the context of the principles and objectives of the Union’s external actions’, and under Article 205 of the TFEU, all external 10

11

12

13

See European Parliament, Resolution on the Future European International Investment Policy, 2010/ 2203(INI), 6 April 2011, para. 4; Council of the European Union, ‘Conclusions on a Comprehensive European International Investment Policy’, 3041st Foreign Affairs Council Meeting, Luxemburg, 25 October 2010, para. 17. The Preamble to the GATT provides for the ‘substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis’. See also the Preamble to the GATS and TRIPs Agreement. The Preamble to the Marrakesh Agreement Establishing the WTO mentions the ‘[...] substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations [...]’. Under the Lisbon Treaty, the addressees and legal nature of specific trade policy objectives differ from the TEC. In fact, first the TEC addressed member states, whereas Art. 206 of the TFEU refers to the EU as a unitary person. Secondly, under Arts. 206 and 207(1) of the TFEU gradual trade liberalization is a binding objective (Art. 206 of the TFEU provides that ‘the EU shall contribute, in the common interest, to the harmonious development of world trade, the progressive abolition of restrictions on international trade and on foreign direct investment, and the lowering of customs and other barriers’), whereas under Art. 131(1) of the TEC, this was a simple aspiration (‘Member States aim to contribute, in the common interest, to the harmonious development of world trade, the progressive abolition of restrictions on international trade and the lowering of customs barriers’). From the Judgment of 17 December in Case 11/70, Internationale Handelgesellschaft (1970), ECR 1125 onwards.

276

10

THE ENVIRONMENTAL SUSTAINABILITY

OF THE

EU INVESTMENT POLICY

AFTER

LISBON

policies ‘shall be guided by the principles, pursue the objectives and be conducted in accordance with the general provisions laid down in Chapter 1, Title V of the Treaty on European Union’, which projects on the international scene the values that internally inspired European integration, in particular under Article 21 of the TEU.

10.4

THE PROMINENT ROLE

OF

ENVIRONMENTAL SUSTAINABILITY

IN THE

EU CF(D)I POLICY

Article 21 of the TEU sets out a catalogue of general principles and objectives guiding the external action of the EU. On the one hand, this rule refers to first- and secondgeneration fundamental rights, that is, ‘democracy, the rule of law, universality and indivisibility of human rights and fundamental freedoms, respect for human dignity, equality and solidarity, and respect for the United Nations Charter and international law’.14 This is a highly innovative approach with respect to classical investment and trade agreements, in particular those encompassed by the WTO umbrella. On the other hand, Article 21 refers to third-generation fundamental rights, specifically the economic, social, and environmental growth of developing countries, eradication of poverty, progressive liberalization of international trade, and sustainable development (Article 21 (2)(d), (f) and (h) of the TEU).15 In this regard, the EU rejoins the objectives of the WTO, given that the Preamble to the Marrakech Agreement mentions sustainable development, the protection and preservation of the environment, and the concerns of developing countries. Article 21(2)(d) of the TEU provides that the EU fosters ‘the sustainable economic, social and environmental development of developing countries, with the primary aim of eradicating poverty’.16 Thus, this norm defines, inter alia, the sustainability of the EU F(D)I policy vis-à-vis developing countries. More generally, Article 21(2)(f) of the TEU provides that the EU shall ‘help develop international measures to preserve and improve the quality of the environment and the sustainable management of global natural resources, in order to ensure sustainable development’.17 Finally, Article 21(2)(h) of the TEU compels the EU to ‘promote an international system based on stronger multilateral cooperation and good global governance’.18 This provision reaffirms, although in more general terms, the EU commitment to (environmentally) sustainable international policies. In light of the first paragraph of Article 21 of the TEU, the EU pursues such

14 15 16 17 18

Art. 21(1) of the TFEU. See European Parliament, supra note 10, paras. 25 and 27. See also Dimopoulos, supra note 2, p. 169. Emphasis added. Emphasis added. Emphasis added.

277

OTTAVIO QUIRICO

(environmentally) sustainable strategies in its external relations in a cooperative way, in particular with regard to F(D)I.19 Although Article 21(2) of the TEU speaks of ‘policies, actions and values’, it must be read in conjunction with Article 21(1), which mentions ‘human rights’, ‘fundamental freedoms’, and their ‘indivisibility and universality’. This language is therefore compulsory. Consistently with this approach, the Preamble to the TEU, which has general application, acknowledges the EU commitment to ‘sustainable development’ and ‘environmental protection’. Moreover, Article 3 of the TEU mentions the necessity of achieving the ‘sustainable development of Europe […] and a high level of protection and improvement of the quality of the environment’.20 Since this provision is included in Title I (Common Provisions) of the TEU, it also applies to the EU F(D)I policy. By broadening the analysis to other EU law sources, Article 11 of the TFEU provides that ‘Environmental protection requirements must be integrated into the definition and implementation of the Union’s policies and activities, in particular with a view to promoting sustainable development’.21 Given that it is embedded in Part I (Principles), Title II (Provisions Having General Application) of the TFEU, Article 11 also applies to the EU F(D)I policy and thus complements Article 21 of the TEU.22 In light of the fact that there is no hierarchical difference between the TEU and the TFEU, Articles 3 and 21 of the TEU and Article 11 of the TFEU have equal ranking. These general provisions are spelled out in more detail in Article 191, Title XX (Environment) of the TFEU, which provides: Union policy on the environment shall contribute to ... preserving, protecting and improving the quality of the environment, protecting human health, prudent and rational utilisation of natural resources, promoting measures at international level to deal with regional or worldwide environmental problems, and in particular combating climate change.23 This rule applies to all EU policies, including F(D)I. In fact, it does not exclusively address the Directorate-General for the Environment or Climate Action, but rather the environmental policy of the EU as such, which is trans-sectoral under Article 11 of the TFEU.

19

20 21 22 23

See Directorate-General for External Policies, The EU Approach to International Investment Policy after the Lisbon Treaty, 2010, p. 13; Committee on International Trade, Report on the Future European Investment Policy, 2011, paras. 27-30. By placing FDI within the larger framework of fundamental rights, the Lisbon Treaty sticks to the fundamental rights policy undertaken by the Treaties of Amsterdam and Nice. Emphasis added. Emphasis added. See Directorate-General for External Policies, supra note 19, pp. 50-51. Emphasis added.

278

10

THE ENVIRONMENTAL SUSTAINABILITY

OF THE

EU INVESTMENT POLICY

AFTER

LISBON

Even more significantly, Article 37 of the CFREU (Environmental Protection) provides: A high level of environmental protection and the improvement of the quality of the environment must be integrated into the policies of the Union and ensured in accordance with the principle of sustainable development.24 Substantively, this provision is a ‘twin’ of Article 11 of the TEU and makes it definitely clear that all EU policies, and thus necessarily F(D)I, must respect the principles of environmental protection and sustainable development. Article 37 is particularly important because, since it is embedded in the CFREU, it is likely to raise environmental protection and sustainable development to the rank of a basic, or quasi-constitutional, right and thus a duty of the EU.25 Indeed, although it is mostly acknowledged that Article 37 of the CFREU permits the recognition of environmental protection as a principle,26 it is also recognized that this provision sets out an EU obligation to protect the environment in implementing its policies.27 This does not necessarily entail a superior ranking for such a duty, because Article 6(1) of the TEU provides that the CFREU has the same legal value as the TEU and the TFEU.28 However, the high status conferred upon environmental protection by Article 37 of the CFREU means that environmental protection must be at least balanced against liberalization principles, especially within the framework of Articles 206 and 207 of the TFEU. Finally, other sources may help to determine the ranking of sustainable development and environmental protection within the context of EU legal obligations. First, environmental protection might be regarded as a fundamental principle of EU law, possibly inferred from domestic constitutions, in light of the ECJ case law.29 Secondly, the European Parliament goes so far as to prioritize environmental commitments over trade liberalization and holds that ‘obligations and objectives under MEAs, such as the UN Framework Convention on Climate Change, and other UN institutions (FAO, ILO, IMO) must

24 25 26

27 28

29

Emphasis added. See P. Craig, ‘Formal and Substantive Conceptions of the Rule of Law: an Analytical Framework’, in R. Bellamy (Ed.), The Rule of Law and the Separation of Powers, Ashgate, Aldershot, 2005, p. 95. G. Marín Durán & E. Morgera, ‘Commentary on Article 37 of the EU Charter of Fundamental Rights – Environmental Protection’, in S. Peers et al. (Eds.), Commentary on the EU Charter of Fundamental Rights, Oxford, Hart, 2013, A and D-III. Id. This is nevertheless problematic with respect to Arts. 51(1), 52(2), and 53 of the CFREU, which provide that the Charter is only binding upon EU institutions and member states implementing EU acts and must be consistent with the EU founding treaties. See, for instance, ECJ, Judgment of 12 June 2003 in Case C-11200, Eugen Schmidberger, Internationale Transporte und Planzüge v. Republik Österreich (2003), ECR I-565, para. 71.

279

OTTAVIO QUIRICO take precedence over the narrow interpretation of trade rules’.30 This seems to outline an environmentally synergic approach to the so-called question of ‘inter-institutional interaction’.31

10.5

IMPLEMENTING SUSTAINABLE F(D)I

10.5.1

Exclusive EU Competence and Improved Role of the European Parliament in FDI Agreements

As regards the division of competences between the EU and its member states, under Article 3(1)(e) of the TFEU, the EU shall have exclusive competence as to FDI. This means that only the Union may act in the field, whereas member states can only act externally if they are so empowered by the Union (Article 2(1) of the TFEU). Therefore, member states will no longer be able to conclude their own FDI treaties, unless they are so empowered by the EU. From an internal point of view, the EU has parallel exclusive competence for the implementation of external FDI agreements,32 and thus states can only act when they implement the Union’s acts, in particular EU directives (Article 207(2) of the TFEU). The clarification of the division of competences between the EU and its member states should facilitate the implementation of the EU commitment to environmentally sustainable development.33 In this respect, with regard to F(D)I, it is significant that the new EU competence entails that existing member states’ BITs signed prior to the entry into force of the Lisbon Treaty remain in force only if a member state notifies the Commission of its intention to maintain them in force or to permit them to enter into force.34 Furthermore, 30

31 32 33

34

Res. 2010/2103 INI on International Trade Policy in the Context of Climate Change Imperatives, p. 8, para. 11. Along the same lines, see Art. 104 of the North American Free Trade Agreement (NAFTA). But see Council of the European Union, Conclusions, para. 16. See Gehring & Kent, supra note 5, pp. 187 et seq. J. Klabbers, ‘The EU and International Law – Personality, Capacity, Powers’, ; Summaries of EU Legislation – International Agreements, , accessed 27 April 2015. However, according to a restrictive view, the EU would only have procedural competence to negotiate and conclude agreements in the FDI area (negotiation competence), excluding a competence to contract substantive obligations. In other words, under Art. 207 of the TFEU, the EU would only have ‘negotiation competence’, so that the Commission would have the right to find a minimum common denominator and speak ‘on behalf of’ the member states, which would nonetheless retain competence on FDI and act unanimously. If an agreement cannot be found among member states, the Commission should thus negotiate a commitment that allows national differentiation; see L. Mola, Which Role for the EU in the Development of International Investment Law?, Society of International Economic Law Inaugural Conference, Geneva, 15-17 July 2008, para. 3.2. Art. 2 of Regulation (EU) No. 1219/2012 of the European Parliament and of the Council of 12 December 2012 Establishing Transitional Arrangements for Bilateral Investment Agreements between Member States and Third Countries, OJ L351/40, 20/12/2012.

280

10

THE ENVIRONMENTAL SUSTAINABILITY

OF THE

EU INVESTMENT POLICY

AFTER

LISBON

these treaties only remain in force until an EU bilateral investment agreement repeals them.35 Concerning the decision-making process, external EU FDI treaty-making procedures still basically follow the pre-Lisbon scheme.36 This takes place under Article 218 of the TFEU, which has a general scope, and Article 207(3)(2) of the TFEU, which specifically concerns the CCP, including FDI. The Commission thus continues to negotiate international trade agreements upon authorization by the Council, which is entitled to conclude them. Some changes have nevertheless occurred. In particular, procedural amendments have been introduced in the decision-making procedures of the Council and Parliament in CFDI matters. Although under the first limb of Article 207(4) of the TFEU the Council still decides, by qualified majority, on the negotiation and conclusion of international agreements, the second and third limb of Article 207(4) of the TFEU provide for exceptions. In particular, besides exceptions due to basic state services such as culture and health specified in the third limb of Article 207(4), the TFEU requires unanimity in the negotiation and conclusion of agreements regarding FDI, when FDI includes provisions for which unanimity is requested in internal decisions (Article 207(4), second limb of the TFEU). Externally, the European Parliament earns a right to information and consultation with regard to the negotiation of FDI agreements. In fact, according to Article 207(3)(2) of the TFEU, the Commission shall consult with a special committee appointed by the Council – the former ‘Committee’, now the ‘Trade Policy Committee’ – and report to both the Committee and the European Parliament on negotiating progress. This makes parliamentary information binding, whereas prior to Lisbon, such a practice was only informal.37

35

36

37

Art. 3 of Regulation (EU) No. 1219/2012. The rules of the 1969 and 1986 Vienna Conventions on the Law of Treaties (VCLTs) further help to determine how subsequent EU investment treaties replace previous member states’ BITs. Basically, when the EU enters into BITs, or Free Trade Agreements (FTAs) including an investment chapter, with third countries through the exercise of the new FDI competence under Art. 3 (1)(e) of the TFEU, the matter shall be governed by Art. 59 (Termination or Suspension of the Operation of a Treaty Implied by Conclusion of a Later Treaty) and Art. 30 (Application of Successive Treaties relating to the Same Subject-matter) of the VCLTs. Before the entry into force of the Lisbon Treaty, the external action of the EC in the FDI area started with the European Commission proposing to open negotiations in CCP matters and making recommendations to the Council, which in turn authorized the Commission to negotiate and outline negotiation directives. The Commission then conducted negotiations in consultation with a special committee, which was appointed by the Council and included member states’ representatives. After the conclusion of the negotiation phase, the Council adopted a decision authorizing the signing of the agreement, which was also ratified by the member states, if mixed. It is thus clear that the European Parliament basically played no role in the negotiation and conclusion of international trade agreements. In fact, the Commission had no obligation to consult with the Parliament, although, in practice, the Commission informed the Parliament based on inter-institutional arrangements (Art. 133 of the TEC). See European Parliament, supra note 10, paras. 4 and 40.

281

OTTAVIO QUIRICO

The improved role of the European Parliament, which is historically supportive of fundamental rights, should increase the possibility that human rights are embedded in future FDI agreements. Such a procedural improvement complements substantive provisions requiring that FDI measures are consistent with fundamental obligations provided for in Article 21 of the TEU, in particular as to environmental sustainability. In fact, although environmental sustainability was initially not embedded in the EC Treaties, the European Parliament has traditionally gained a reputation as a champion of environmental interests by providing an access point for those excluded from decision-making and a voice for green political parties.38 Furthermore, the European Parliament played an important role in the development of environmental policies under Article 130(r)-(t) of the TEC – now Articles 192-3 of the TFEU – as amended by the Single European Act in 1986. Indeed, this provision vested the Council with the power to legislate in environmental matters, but deciding unanimously and in consultation with the European Parliament.39 The matter is nevertheless controversial since, according to some scholars, the enhanced role of the Parliament has reduced its green credentials, so much so that this institution now appears less willing to adopt green provisions.40

10.5.2

An Uncertain Division of Competences in FI Agreements

The FDI area is not clear-cut, which makes the extent of related EU regulatory power uncertain.41 A first issue concerns the extension of EU exclusive FDI power to investment protection. Indeed, since investment protection is not expressly mentioned in Article 207 of the TFEU, the notion of ‘foreign direct investment’ could be narrowly read as only referring to investment liberalization and trade (market-access measures, that is, liberalization measures), thus excluding investment protection (post-market access measures, that is, non-liberalization measures) from exclusive EU competence.42 As a consequence, mixed competence would apply to investment protection. However, in this regard, it is mainly assumed that Article 207 of the TFEU encompasses not only investment liberalization but also investment protection, covering all major aspects of a typical BIT, that is, market admission, capital transfer, post-admission treatment, performance requirements, free

38 39 40 41 42

J.H. Meyer, ‘Green Activism. The European Parliament’s Environmental Committee Promoting a European Environmental Policy in the 1970s’, 17 Journal of European Integration History 2011, pp. 73 et seq. See E. Orlando, The Evolution of EU Policy and Law in the Environmental Field: Achievements and Current Challenges, Trans-world Working Paper, 2013, p. 4. C. Burns & N. Carter, ‘Is Codecision Good for the Environment?’, 58 Political Studies 2010, pp. 128-142. See Reinisch, supra note 1, pp. 2-5. Id., p. 4.

282

10

THE ENVIRONMENTAL SUSTAINABILITY

OF THE

EU INVESTMENT POLICY

AFTER

LISBON

movement of key personnel, expropriation, and investor–state dispute settlement.43 Such a comprehensive approach is based on two main arguments. First, it is difficult to make a clear distinction between market-access and post-market-access measures. For instance, a significant increase in company income tax, which may be considered a post-admission investment measure, has relevant implications for potential investors in the process of deciding whether or not to invest in the state taking that measure. Therefore, also measures that apparently do not aim to liberalize foreign direct investment, for instance, expropriation and compensation rules, are part of the investment regime that helps to reduce FDI restrictions. In fact, these measures can encourage or discourage investment in foreign business. Secondly, the aim of the CCP is not confined to trade liberalization, so that, by being now included within the CCP, FDI should be interpreted as covering not only investment liberalization measures, that is, market-access measures, but also investment protection.44 By applying an extensive notion of FDI, the EU is vested with the exclusive power to renegotiate investment protection agreements concluded prior to the entry into force of the Lisbon Treaty. Furthermore, investment protection is fully submitted to general substantive and procedural EU principles on environmental sustainability, in the same way as investment liberalization. Otherwise, EU substantive environmental principles, which are not limited to FDI, would still apply to investment protection, but procedural rules on the enhanced role of the Parliament under Article 207 of the TFEU would not. A second issue concerns the regulation of portfolio investment. In fact, the EC/EU, the International Monetary Fund (IMF), and the Organisation for Economic Co-operation and Development (OECD) define FDI based on a ‘direct, stable, and long-lasting link’ between investor and investment abroad.45 The same approach has been followed by the ECJ under former Article 57(2) of the TEC – now Article 64(2) of the TFEU.46 Based on 43

44 45

46

See European Parliament, supra note 10, paras. 15 and 19; Council of the European Union, supra note 10, para. 14; European Commission, Towards a Comprehensive European International Investment Policy, COM(2010)343 final, p. 5. See also the EU Negotiating Mandates on an Investment Protection Chapter in the Negotiation of Comprehensive Trade Agreements with Canada, India, and Singapore (12 September 2011) , accessed 27 April 2015. See W. Shn & S. Zhang, ‘The Treaty of Lisbon: Half Way toward a Common Investment Policy’, 21 EJIL 2010, p. 1064. See OECD, supra note 1, p. 17: ‘Direct investment is a category of cross-border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor. The motivation of the direct investor is a strategic long-term relationship with the direct investment enterprise to ensure a significant degree of influence by the direct investor in the management of the direct investment enterprise’. See also Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty, OJ L 178, 08/07/1988; European Commission, supra note 43, p. 2. The ECJ interpreted the expression ‘direct investment’ as ‘investment of all kinds by natural persons or commercial, industrial or financial undertakings, and which serve to establish or to maintain lasting and

283

OTTAVIO QUIRICO

this approach, portfolio investment activities such as short-term loans and passive investment in securities cannot be considered to be encompassed by the notion of FDI under the EU CCP.47 Therefore, the question arises as to whether or not the EU has an implicit exclusive power to regulate portfolio investment. Whereas the European Commission and Parliament have taken a positive stance on this question,48 member states and the European Council have taken a negative approach.49 The latter interpretation leads to a split, which entails that the Union is exclusively competent concerning those aspects of international agreements that relate to FDI. Instead, also member states retain competence on portfolio investment, so that related obligations should still be contracted by means of mixed agreements. As a consequence, although portfolio agreements would still be subject to general EU principles on environmental sustainability, which are not limited to FDI, procedural rules on the enhanced role of the European Parliament under Article 207 of the TFEU would not apply.

10.6

ONGOING EU F(D)I NEGOTIATIONS

Currently, the EU is negotiating comprehensive trade agreements, including an investment chapter, with Canada, Singapore, and India. These negotiations provide an example of the extent to which environmental protection can be implemented in EU F(D)I. Indeed, in ongoing negotiations, the EU commits to seeking environmental sustainability and not derogating from this standard to attract investment.50 This permits a preliminary assessment of how the EU progressive environmental policy will be concretely integrated in the different regulatory phases and aspects of F(D)I, for instance, with respect to equitable treatment, expropriation, and corporate social responsibility (CSR).

47 48

49

50

direct links between the person providing the capital and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity’ (emphasis added); see the Judgment of 13 May 2003 in Case C-463/00, Commission of the European Communities v. Kingdom of Spain (2003), ECR I-4612; European Commission, supra note 43, p. 3. Reinisch, supra note 1, p. 21. European Commission, Proposal for a Regulation of the European Parliament and of the Council Establishing a Framework for Managing Financial Responsibility Linked to Investor-State Dispute Settlement Tribunals Established by International Agreements to which the European Union is Party, 21 July 2012 COM(2012) 335, p. 3; European Parliament, supra note 10, paras. D, 11, and 12; Committee on International Trade, supra note 19, para. 11. German Constitutional Court, Lisbon Treaty Judgment, BVerfG, 2 BvE 2/08, 30 June 2009, para. 379; EU Negotiating Mandates (Canada, India, and Singapore) (12 September 2011) , accessed 27 April 2015. Ibid.; .

284

10

THE ENVIRONMENTAL SUSTAINABILITY

OF THE

EU INVESTMENT POLICY

AFTER

LISBON

In particular, the EU–Canada Comprehensive Economic and Trade Agreement (CETA) addresses the EU outward and inward investment flows with Canada, which amount to around 5 % of the overall EU member states’ investment flux.51 With regard to environmental sustainability, CETA envisages resorting to environmental impact assessments, conservation policies, and the sustainable use of natural resources, including forests, fisheries, and the facilitation of FDI concerning goods and services of particular relevance to climate change mitigation.52 Furthermore, CETA includes a commitment to cooperate in these matters in international fora such as the WTO, the OECD, the United Nations Environment Programme (UNEP), and bodies created to implement multilateral environmental agreements.53 In principle, under CETA environmental duties complement investment obligations.54 Overall, besides the ‘carve-out’ model, CETA exploits an inclusive technique in applying the EU general principles on environmental sustainability to F(D)I. Following the scheme of Article 12 of the US Model BIT, the inclusive approach emerges in the reinforcement of the contracting parties’ right to regulate F(D)I by addressing environmental concerns through effective, transparent, non-arbitrary, non-discriminatory, and non-disguisedly restrictive measures, including CSR practices.55 The ‘carve-out’ model emerges in nondiscriminatory environmental exceptions to the liberalized and protective F(D)I regime, following the WTO-GATT Article XX and GATS Article XIV scheme.56 More specifically, CETA ensures that non-discriminatory, good-faith measures protecting the environment do not constitute indirect expropriation.57 CETA also includes targeted implementation and dispute settlement provisions dealing with environmental clauses.58

51 52

53 54 55 56 57 58

See the Draft Text of the CETA as consolidated on 25/9/2014, available at: , accessed 27 April 2015. CETA, Draft Text, Trade and Sustainable Development, Art.1 and Trade and Environment, Arts. X.5, X.9, X.10 and X.11. See also CETA, Opening New Markets in Europe, 2013, Part 6, Environment, ; CETA, Technical Summary of Final Negotiated Outcomes, 2013, pp. 25-26, , all websites accessed 27 April 2015. CETA, Draft Text, Regulatory Cooperation, Trade and Sustainable Development, Article 3, Trade and Environment, Art. X.12. CETA, Draft Text, Investment, Art. X.4. CETA, Draft Text, Trade and Sustainable Development, Arts. 2 and 3, Trade and Environment, Arts. X.3, X.4, X.5-X.9. CETA, Draft Text, Trade and Environment, Art. X.3. See also CETA, Technical Summary, supra note 52, p. 22. CETA, Draft Text, Investment, Art. X.11. See also CETA, Technical Summary, supra note 52, p. 14; Directorate-General for External Policies, supra note 19, p. 14. CETA, Draft Text, Investment, Art. X.17, Trade and Environment, Art. X.16 and Dispute Resolution. See also CETA, Technical Summary, supra note 52, p. 22.

285

OTTAVIO QUIRICO

Specific environmental provisions embedded in the CETA should prevent excessive regulatory discretion by the contracting parties. This reduces possible asymmetries in relation to the environmental impact of the EU’s inward and outward investment flows, owing to poor regulation in state partners. Carbon leakage is a clear example, whereby lenient climate mitigation regulation attracts investment in carbon-intensive production.59 This framework is all the more remarkable in light of the difficulties raised by the search for a balance between green standards and international investment agreements, especially within the context of climate change.60

10.7

CONCLUSION

Compared to the current status of treaty and customary international law, the EU CFI policy is progressive, with regard to the general principles of environmental sustainability and their practical implementation. Within the normative context provided for in Articles 3 of the TEU, 11 of the TFEU, and 37 of the CFREU, environmental sustainability has the potential to outweigh the imperatives of trade liberalization. The idea of a sustainable CFI policy is particularly fostered via the subjection of the EU CCP to the principle of environmental sustainability specified in Article 21 of the TEU and the thorough inclusion of FDI within the CCP. However, general EU obligations on environmental sustainability do not apply exclusively to FDI. Therefore, even a restrictive interpretation of the notion of FDI would not exclude the application of substantive general EU law environmental principles to post-market-access investment measures and portfolio investment. Ultimately, a synergic approach to the relationship between F(D)I and environmental protection seems to emerge in the negotiation of EU investment treaties through both the ‘carve-out’ and ‘inclusive’ models. This might foster a progressive development of international law, which still does not clearly recognise the right to a healthy environment.

59 60

Directorate-General for External Policies, supra note 19, p. 51. See Gehring & Kent, supra note 5, p. 187. See also Vattenfall AB and Others v. Federal Republic of Germany, ICSID Case No. ARB/09/6; Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/ 12/12.

286

BIBLIOGRAPHY BOOKS Gehring, M.V. & Kent, A., International Investment Law within International Law – Integrationist Perspectives, Cambridge: Cambridge University Press, 2013.

ARTICLES Burns, C. & Carter, N., ‘Is Codecision Good for the Environment?’, 58 Political Studies, 2010. Dimopoulos, A., ‘The Effects of the Lisbon Treaty on the Principles and Objectives of the Common Commercial Policy’, 15 EFARev, 2010. Gavin, B., ‘Trade and Investment in the Wider Europe: EU Neighbourhood Policy for Enhanced Regional Integration’, 4 Journal of World Investment, 2003. Klabbers, J., ‘The EU and International Law – Personality, Capacity, Powers’, available at: . Meyer, J.H., ‘Green Activism. The European Parliament’s Environmental Committee Promoting a European Environmental Policy in the 1970s’, 17 Journal of European Integration History, 2011. Mola, L., ‘Which Role for the EU in the Development of International Investment Law?’, Geneva: Society of International Economic Law Inaugural Conference, 2008. Orlando, E., ‘The Evolution of EU Policy and Law in the Environmental Field: Achievements and Current Challenges’, Trans-world Working Paper, 2013. Reinisch, A., ‘The EU on the Investment Path – Quo Vadis Europe? The Future of EU BITs and Other Investment Agreements’, SSRN Research Paper, 2013, available at: .

287

OTTAVIO QUIRICO Shn, W. & Zhang, S., ‘The Treaty of Lisbon: Half Way toward a Common Investment Policy’, 21 EJIL, 2010. Smith, M., ‘The EU’s Commercial Policy: between Coherence and Fragmentation’, 8 Journal of European Public Policy, 2001. Witkowska, J., ‘Foreign Direct Investment and Sustainable Development in the New EU Member States: Environmental Aspects’, 3 Comparative Economic Research, 2012.

CONTRIBUTION

IN EDITED BOOKS

Craig, P. ‘Formal and Substantive Conceptions of the Rule of Law: an Analytical Framework’, in R. Bellamy (Ed.), The Rule of Law and the Separation of Powers, Aldershot: Ashgate, 2005. Marín Durán, G. & Morgera, E. ‘Commentary on Article 37 of the EU Charter of Fundamental Rights – Environmental Protection’, in S. Peers et al. (Eds.), Commentary on the EU Charter of Fundamental Rights, Oxford: Hart Publishing, 2013. Maydell, N., ‘The European Community’s Minimum Platform on Investment or the Trojan Horse of Investment Competence’, in A. Reinisch & C. Knahr (Eds.), International Investment Law in Context, The Hague: Eleven International Publishing, 2007.

288

11

BILATERAL INVESTMENT TREATIES

FROM AN

ECOLOGICAL ASPECT: A CENTRAL

AND

EASTERN EUROPEAN APPROACH Marcel Szabó*

11.1

INTRODUCTION

Direct capital investments provide the lifeblood of world trade according to Bernardo M. Cremades and David J.A. Cairns.1 This statement is substantiated by the fact that in 2007, the year preceding the latest economic crisis, a total of € 1,500 billion in capital was moved globally in the form of direct capital investment.2 Although the very first investment protection treaty was concluded by a member state of the European Union (EU) in 1959 between Germany and Pakistan, the true renaissance of these agreements was in the Reagan Era, when the American administration provided significant political support for the conclusion of investment protection agreements between the United States (US) and developing nations.3 Following the collapse of the Soviet centrally planned economy and its awakening from its long winter sleep, Central and Eastern Europe strove towards reintegration into the international economic and political community with great ambitions. The system of direct capital investments became an effective instrument in this process also in this region. Central and Eastern Europe was so successful in this regard that 73 % of the direct capital investments targeting Europe in 2000 were directed towards states in this region.4 As such, Central and Eastern European states were faced with both the opportunities of foreign investment and the policy constraints brought about by bilateral investment agreements (BIT) connected to them. *

1

2 3 4

Marcel Szabó is Chair of the Department for European Law at the Pázmány Péter Catholic University of Budapest, Faculty of Law. He is Ombudsman for Future Generations in Hungary and Editor-in-Chief of the Hungarian Yearbook of International Law and European Law. B.M. Cremades & D.J.A. Cairns, ‘Contract and Treaty Claims and Choice of Forum in Foreign Investment Disputes’, in N. Horn & S. Kroll (Eds.), Arbitrating Foreign Investment Disputes: Procedural and Substantive Legal Aspects, The Hague, Kluwer Law International, 2004, p. 325. United Nations Conference on Trade and Development, ‘World Investment Report 2009: Transnational Corporations, Agricultural Production and Development’, United Nations, New York, Geneva, 2009. Z. Elkins et al., ‘Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000’, University of Illinois Law Review, 265, 2008, p. 271. Eurostat, Acceding countries still attractive for foreign direct investment: 1997-2001 data, Statistics in Focus, Brussels, theme 2-51/2003, p. 6.

289

MARCEL SZABÓ

In the following section, the paper will discuss the development as well as the international law and EU law aspects of BITs, with particular attention to the effect BITs exert on sustainability policies in transition countries, such as Central and Eastern European states. The author argues that the current system of BITs is not in accordance with the rightful interest of developing states to protect the environment, in particular due to the ambiguous concept of expropriation in BITs. The possibility for businesses to resort to expropriation clauses included in BITs may either result in a ‘regulatory chill’ on the side of national governments or compensation claims of disillusioned investors. The present paper proposes that the EU take the lead in developing a model treaty which ensures the possibility of environmental regulation and at the same time amends the currently applicable expropriation concept. Moreover, the model treaty should make clear that EU law is the applicable law allowing for the interpretation of investment protection issues in a wider context and for also taking into consideration human rights and environmental law. In the course of my analysis, I shall invoke certain provisions of the Vienna Convention on the Law of the Treaties (VCLT) as well as the primary law of the EU, citing various relevant arbitration court cases and judgments of the European Court of Justice (ECJ) interpreting such provisions in investment cases.

11.2

FUNDAMENTAL ISSUES EUROPEAN STATES

11.2.1

OF

BITS

AND

THEIR RECEPTION

IN

CENTRAL

AND

EASTERN

BITs as a Recent Phenomenon in International Investment Law

BITs are international agreements between two countries setting forth substantive standards for the protection of foreign investment and procedures for dispute settlement.5 The basic rationale behind BITs was the benevolent idea that international capital investments involving significant capital serve the interest of both industrialized and developing nations at the same time, and the elaboration of this type of agreement rested on the low degree of trust vested in the legal systems of developing nations.6 Industrialized countries aimed at drawing up a system which ensured complete stability for their enterprises and investments under all possible circumstances in the developing nations and, if necessary, their unrestricted exit. In the practice of BITs, several legal institutions were established to further the purpose of investment protection. The principle of

5 6

S.M. Schwebel, ‘The Overwhelming Merits of Bilateral Investment Agreements’, Suffolk Transnational Law Review, Vol. 32, 2009, p. 263. C. Barklem & E.A. Prieto-Ríos, ‘The Concept of “Indirect Expropriation”, its Appearance in the International System and its Effects in the Regulatory Activity of Governments’, Civilizar Ciencias Sociales y Humanas, Vol. 11, No. 21, 2011, p. 77 et seq.

290

11

BILATERAL INVESTMENT TREATIES

FROM AN

ECOLOGICAL ASPECT

national treatment, the most favoured nation (MFN) principle, and the principle of fair and equitable treatment (FET) guaranteed the stability of investments, while the special interpretation of the expropriation clause protected foreign investors from sudden changes in the economic policy of the host country.7 Finally, the free transfer of capital clause provided for an unrestricted exit route for companies in case of emergency. Among the most important provisions of the BITs, the arbitration clause assumes a prominent place, since it enables the injured investor to directly sue the host state before an international court of arbitration, claiming an infringement on the side of the said state.8 The extraordinary international success of investment protection agreements may be explained by the highly effective legal institutions developed under their framework. The most important players forging the success of investment protection treaties in the last few decades were the International Centre for Settlement of Investment Disputes (ICSID)9 and the United Nations Commission on International Trade Law (UNCITRAL),10 both of which are arbitration tribunals. The FET rule was developed in a way that it covered not only conscious and deliberate state actions which are detrimental to the business interests of the individual economic actors but extended also to those changes in state policy which compromised a given company’s economic or business projections and resulted in a loss of profit – these events were also interpreted in accordance with the interest of the enterprises as incidents of indirect expropriation.11 BITs however constitute a serious restriction for the signatory states in implementing necessary policy reforms, in particular in the field of the protection of the environment. While the prerequisites of achieving sustainable development and effective protection of the environment constantly evolve, BITs and related jurisprudence do not follow suit. It must be emphasized that environmental protection in the 21st century has moved way beyond simply striving towards the protection of individual species. Although such work remains indispensable, environmental protection must permeate the approach implemented in all policy sectors and must be integrated into the most important policy strategies, such as the energy strategy, the waste management strategy, and the water management strategy, in order to ensure a sustainable future for the states. Shifts in

7 8 9 10 11

C.E. Anderer, ‘Bilateral Investment Treaties and the EU Legal Order: Implications of the Lisbon Treaty’, Brooklyn Journal of International Law, Vol. 35, No. 3, 2010, p. 859. A. Newcombe & L. Paradell, Law and Practice of Investment Treaties: Standards of Treatment, Kluwer Law International, The Hague, 2009, pp. 44-46. 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 17 UST. 1270, 575, UNTS. 159. The United Nations Commission on International Trade Law (UNCITRAL) was established by the General Assembly in 1966 by Resolution 2205(XXI) of 17 December 1966. K. Yannaca-Small, ‘Indirect Expropriation and the Right to Regulate: How to Draw the Line?’, in K. Yannaca-Small (Ed.), Arbitration Under International Investment Agreements: A Guide to the Key Issues, Oxford University Press, Oxford, 2010, p. 445, et seq.

291

MARCEL SZABÓ

strategy, however, will inevitably affect the material interests of the companies operating in the given state, and international instruments guaranteeing incredible damage awards to companies disillusioned with their business prospects in the light of the changes effected in the host state’s economic policy constitute significant impediments to a successful reorientation of policy.12

11.2.2

The Practice of Bilateral Investment Treaties in Central and Eastern Europe

With the accession of Central and Eastern European states to the EU, several former third-country BITs became intra-EU BITs; in February 2011, there were altogether 176 such agreements within the EU. It is worth noting that Central and Eastern European states were sued before arbitration courts in connection with BITs much more often than Western states. While Western European states only proceeded as respondents in a total of seven cases by 2013, Central and Eastern European states were sued in 77 cases.13 It is even more important that 65 % of arbitration proceedings were initiated by Western European states’ companies against Central and Eastern European states.14 In this regard, it is important to note that Central and Eastern European states presumably considered the BITs concluded with the Western European states as transitional agreements with due regard to the fact that the legal institution itself could be traced back to the uncertainties inherent in the developing states’ legal systems and the low degree of trust vested therein. Consequently, we may presume that with their accession to the EU, the leaders of the Central and Eastern European states considered these agreements to be futile. This may be substantiated by the fact that several states, such as the Czech Republic15 and Hungary,16 proposed the termination of the BITs concluded with the Western European states

12

13

14 15

16

Z. Douglas, ‘The enforcement of environmental norms in investment treaty arbitration’, in P.M. Dupuy & J. E. Viñuales (Eds.), Harnessing Foreign Investment to Promote Environmental Protection: Incentives and Safeguards, Cambridge University Press, Cambridge, 2013, pp. 418-419. C. Olivet, ‘A Test for European Solidarity-The case of Intra-EU Bilateral Investment Treaties’, Transnational Institute, January 2013, p. 3. Available at accessed 26 February 2014. Id. See, e.g. Eastern Sugar BV (Netherlands) v. The Czech Republic, SCC Case No. 088/2004, Partial Award of 27 March 2007, paras. 95-181. In Eastern Sugar, the tribunal refused the Czech Republic’s argument that its BITs with other EU Members had become inapplicable following its accession. Other cases, such as R.J. Binder v. The Czech Republic, Saluka v. The Czech Republic, and Micula v. Romania have also touched upon similar issues. In 2007, Hungary terminated its BIT with Israel and the year 2008 saw the termination of the BIT between Hungary and Italy. See United Nations Conference on Trade and Development, ‘Recent Developments in International Investment Agreements (2008-June 2009)’, IIA Monitor No. 3, 2009, p. 5. Available at accessed 27 February 2014.

292

11

BILATERAL INVESTMENT TREATIES

FROM AN

ECOLOGICAL ASPECT

following their accession to the EU. However, numerous Western European states demonstrated a reserved stance towards such Central and Eastern European initiatives.17 Following the conclusion of the Central and Eastern European BITs, numerous Western European small- and medium-sized enterprises entered Central and Eastern Europe. Interestingly, the most capital-strong businesses may be found in the field of energy, gas, and water supply services, in particular in countries like Slovenia, the Czech Republic, and Hungary. The investors themselves are often Western European state-owned companies such as the French Suez water management company, which made significant water supply and sanitation investments in Hungary. Investments made in Central and Eastern European countries in the so-called strategic sectors gave rise to repercussions since many were of the opinion – and not without good reason – that the economic conduct of such companies may easily influence state policy.18 The main reason for the success of the BITs lies in their ability to protect the interests of major economic investors even in cases where the host states intend to implement significant economic corrections and shifts in strategy. However, BITs may effectively hamper policy reforms by restricting the government’s room for manoeuvre to measures falling beyond the extremely wide scope of the concept of expropriation. As such, BITs – as a special international regime operating between the member states of the EU – constitute a legal obstacle to necessary reforms, in particular in the field of sustainability and environmental protection. This impediment is particularly burdensome for Central and Eastern European states eager for both foreign investment and structural reforms.

11.3

BILATERAL INVESTMENT TREATIES

11.3.1

AND INTERNATIONAL

LAW

The Role of General International Law in the Interpretation and Application of Bilateral Investment Treaties

One of the most important topoi of international law literature is the fragmentation of international law, i.e. its splintering into smaller subsystems, which tend to overlap and go 17

18

M. Bungenberg, ‘The Politics of the European Union’s Investment Treaty Making’, in T. Broude & M.L. Busch & A. Porges (Eds.), The Politics of International Economic Law, Cambridge University Press, Cambridge, 2011, p. 142. See also W. Shan & S. Zhang, ‘The Treaty of Lisbon: Half Way toward a Common Investment Policy’, EJIL, Vol. 21, No. 4, 2011, p. 1056. See, e.g. L.E. Peterson, ‘Hungary Prevails in First of Three Energy Charter (ECT) Arbitrations over Power Pricing Disputes: Arbitrators Affirm that “Politics” is not a Dirty Word’, Investment Arbitration Reporter, 28 September 2010. Available at accessed 21 February 2014; A. Rajput, ‘AES Summit Generation Limited and AES-Tisza Erömü Kft v. Hungary: The Scope of ad hoc Committee Review for Manifest Excess of Powers and Failure to State Reasons’, ICSID Review, Vol. 28, No. 2, 2013, pp. 273-278.

293

MARCEL SZABÓ against the effective implementation of global rules.19 The fragmentation of international law has commenced in the past half century when international law, as a tool dedicated to the regulation of formal diplomacy, has expanded to deal with the most varied kinds of international activities, from trade to environmental protection and from human rights to scientific and technological cooperation. New multilateral institutions, regional and universal, have been set up in the fields of commerce, culture, security, and development. This expansion has taken place in an uncoordinated fashion, within specific regional or functional groups of states. The focus has been on solving specific problems rather than attaining general, law-like regulation. What once appeared to be governed by ‘general international law’ has become the field of operation for such specialist systems as ‘trade law’, ‘human rights law’, ‘environmental law’, ‘European law’, and even such highly specialized forms of knowledge as ‘investment law’ – each possessing their own principles and institutions. The Conclusions of the Study Group on the Fragmentation of International Law specifically addresses the problem of the fragmentation of international law expressly referring to ‘special (self-contained) regimes’ and their relationship to the general rules of international law.20 In relation to BITs, we do not encounter spectacular declarations stipulating that such agreements form a separate subsystem of international law. At the same time, it is safe to say that the arbiters of the BIT arbitration courts are primarily selected from among the members of the national commercial arbitration fora, and the professional socialization of such arbiters is characterized by a strong focus on treaty provisions and the ensuing contractual relationships.21 Some arbiters are more inclined to disregard the general legal context, restricting their solution to the parties’ dispute to the fine details of the concrete underlying contract. In some cases, members of the arbitration court may even go against Article 31 (3)22 on the interpretation of treaties set forth under the VCLT.23 For instance, in the Tokios Tokeles v. Ukraine case, the president of the tribunal, Professor Prosper

19 20

21 22

23

J.E. Viñuales, Foreign Investment and the Environment in International Law, Cambridge University Press, Cambridge, 2012, p. 134, et seq. Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law. Report of the Study Group of the International Law Commission, A/CN.4/L.702, 18 July 2006. Available at accessed 26 February 2014. Rules of Arbitration of the International Chamber of Commerce in force as from 1 January 2012; ICC Publication 865-0 ENG, Articles 13-14. Article 31 (3) of Vienna Convention on the Law of Treaties provides that “There shall be taken into account, together with the context: (a) Any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; (b) Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; (c) Any relevant rules of international law applicable in the relations between the parties”. (1969 Vienna Convention on the Law of Treaties, United Nations, p. 340). 1969 Vienna Convention on the Law of Treaties, UNTS 1155, p. 331.

294

11

BILATERAL INVESTMENT TREATIES

FROM AN

ECOLOGICAL ASPECT

Weil, highlighted that according to Article 31(3) of the VCLT, the ICSID Convention must be interpreted “in the light of its object and purpose”.24 Nevertheless, his opinion was dissented; Weil believed that his dissent was vital to preserve the ‘integrity’ of the ICSID Convention25 and that the majority decision might jeopardize the future of the institution and put its success at risk.26 Furthermore, the arbitral award in the Grand River v. USA case27 is notable for not touching upon the role of Article 31(3)(c) of the VCLT, which provides that interpretations shall take account of any relevant rules of international law applicable in the relations between the parties.28 Pursuant to Article 31 of the VCLT, in the course of the interpretation of a treaty, not only the treaty itself but the respective international law context must also be taken into consideration in its entirety, i.e. other treaties concluded between the same signatories concerning the same or a similar subject, as well as other relevant norms binding the signatory states. This notwithstanding, even the most prominent scholars assessing this issue on a theoretical level only point to the fact that the general principles of law and customary international law constitute the international norms that must be taken into account along with the treaty provisions and only on the basis of the so-called global public interest theory allowing for taking into consideration legitimate goals reaching beyond the specific scope of the BIT in question.29 Unfortunately, however, it must also be noted that the members of the arbitration court often refrain from examining international treaty norms even in cases where one of the parties bases its claim on such rules. Suffice it to refer to the Santa Elena v. Costa Rica case30 in this context, which regarded an American investment targeting the magnificent natural environment located on the Pacific shoreline of Costa Rica.31 The case concerned the expropriation of the property of the investors by Costa Rica inter alia32 on the basis of the provisions of the Convention on Biological

24 25 26

27 28 29 30 31 32

Tokios Tokeles v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction of 29 April 2004. Id., para. 25. R. Wisner & N. Gallus, ‘Nationality Requirements in Investor-State Arbitration’, The Journal of World Investment and Trade, p. 942. Available at accessed 27 February 2014. Grand River v. USAI, ICSID Case No. ARB/03-9179, Decision on Jurisdiction of 28 September 2005. L.E. Peterson, ‘Analysis: Tribunal in Grand River v. U.S.A.’, 6 March 2011. Available at accessed 3 March 2014. A. Kulick, Global Public Interest in International Investment Law, Cambridge University Press, Cambridge, 2012, p. 77, et seq. Compania del Desarrollo de Santa Elena SA v. Republic of Costa Rica, ICSID Arbitration Tribunal, No. ARB/96/1, Final Award of 17 February 2000. Kulick 2012, supra note 29, p. 240. Costa Rica referred to several other international environmental agreements, including the Convention Concerning the Protection of the World Natural and Cultural Heritage, the Ramsar Convention on Wetlands of International Importance especially as Waterfowl Habitat, and the Central American Regional Convention for the Management and Conservation of the Natural Forest Ecosystems and the Development of Forest Plantations.

295

MARCEL SZABÓ Diversity,33 according to which the conservation of extraordinary and unique natural treasures as well as environmental diversity is the responsibility of the state parties.34 Although such an expropriation runs counter to investors’ interests, it may be justified by legitimate environmental considerations as set forth under binding international law. In the following section, I shall analyse and compare the customary international law concept of expropriation with the wide concept of expropriation elaborated in the framework of BIT arbitration proceedings in order to shed light on the ambiguities resulting from the latter concept.

11.3.2

The Expropriation Clause in Light of Customary International Law

In the framework of the BITs, a theory of expropriation was gradually affirmed by the international community, which stands in contrast to the general concept of expropriation under customary international law. It is well established that customary international law makes expropriation possible provided that the investment is expropriated for a public purpose, as provided by law, in a non-discriminatory manner and with compensation.35 According to the rules of customary international law, compensation is not required where economic injury results from a bona fide non-discriminatory regulation pertaining to the police powers of the state.36 A state measure is deemed discriminatory if it is taken with the intention to harm the foreign investor to favour national companies, resulting in an actual injury to the aggrieved party.37 BITs generally do not define what constitutes an expropriation – they make an express reference to ‘expropriation’ and add the language ‘any other action that has equivalent effects’ without establishing which measures, actions, or conduct would constitute acts ‘tantamount to expropriation’.38 However, in the course of the elaboration of BITs, the concept of expropriation was successfully expanded to encompass all state measures that result in a material loss on the side of the investor protected by the agreement, with due consideration to the economic strategy previously pursued by the state and the business plan and prospective profit determined by the investor on the basis of such policy.39 In many cases, a shift in 33 34 35 36 37 38 39

1992 Convention on Biological Diversity, [1993] ATS 32/1760 UNTS 79/31 ILM 818 (1992). Id., Arts. 8-9. OECD, ‘International Investment Law: A Changing Landscape – A Companion Volume to International Investment Perspectives’, OECD Publishing, Paris, 2005, p. 46. R. Dolzer & M. Stevens, Bilateral Investment Treaties, Martinus Nijhoff Publishers, The Hague, 1995, p. 5. Id., p. 98. Sempra Energy International v. The Argentine Republic, ICSID Case No. ARB/02/16, Award of 28 September 2007, para. 185. S.H. Nikièma, ‘Best Practices: Indirect Discrimination’, International Institute for Sustainable Development, March 2012. Available at accessed 20 February 2014.

296

11

BILATERAL INVESTMENT TREATIES

FROM AN

ECOLOGICAL ASPECT

economic strategy with in particular an emphasis on the protection of the environment would be so costly for developing states that, with due consideration to the special clauses enshrined in the BITs, policy reorientation necessary for the protection of the environment seems to be out of reach for developing states. The international arbitrary practice has not yet developed a common unified approach having regard to the interpretation of expropriation cases in respect of investment disputes. In some cases, it was recognized that under international law, states are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare.40 Nevertheless, the new international legal interpretative concept in relation to expropriations is very harmful from the perspective of state measures concerning environmental protection and social justice, because it does not distinguish whether the consequences of damages were caused by a lawful or unlawful measure. Under this concept, the aims pursued by the amended state policy are deemed irrelevant. If the state measure in question causes harm to the economic participant and this was not sufficiently predictable for the investor, then the majority of the arbitration courts tend to accept the damage claim of the investor as lawful in accordance with the ‘sole effect doctrine’.41 Consequently, adjudicating damage claims does not depend on whether the harm was caused due to legal–political changes pursuing environmental considerations or due to other unjustified reasons. Obviously, irrespective of the businessfriendly approach of the arbitration courts, their decisions could not be declared unlawful or unjustified as the majority of the decisions recognized that governments have the right to protect,42 inter alia, the environment, human health, and safety and social policies without requiring compensation for any incidental deprivation of foreign property.43 Suffice it to highlight the decision regarding Hungarian energy suppliers44 in which the arbitration court accepted that the Hungarian State had capped energy prices.45 As states may contract out of customary international legal norms, BITs represent lex specialis between state parties “designed to create a mutual regime of investment 40 41 42 43

44 45

See, e.g. Saluka Investments BV (The Netherlands) v. Czech Republic, UNCITRAL, Partial Award of 17 March 2006, para. 255. K.N. Schefer, International Investment Law: Text, Cases and Materials, Edward Elgar Publishing, Cheltenham – Northampton, 2013, pp. 208-209. OECD 2005, supra note 35, p. 51, et seq. The UNCTAD’s 2007 report on the trends in investment law concludes that “a growing number of countries emphasize in the BITs that investment protection made must not be pursued at the expense of other legitimate public concerns” (emphasis added). See United Nations Conference on Trade and Development, Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking, United Nations, New York – Geneva, 2007. AES Summit Generation Limited and AES-Tisza Erőmű Kft. v. Republic of Hungary, ICSID Arbitration Tribunal, No. ARB/07/22, Award of 23 September 2010. Olivet 2013, supra note 13, p. 4.

297

MARCEL SZABÓ protection”.46 Nevertheless, today the number of BITs is so overwhelming and their scope so comprehensive that a new debate has arisen in the scholarly literature about the role of such treaties in the establishment and entrenchment of customary international law.47 Besides the 1969 VCLT, the relevant case law of the Permanent Court of International Justice (PCIJ) and the International Court of Justice (ICJ) in The Hague may also yield insights for the assessment of international rules related to investment protection treaties. The relevance of the case law of these international courts lies in the fact that they put a greater emphasis on the legal context in the assessment of specific investment disputes, resulting in a more balanced approach in managing the dichotomy of investors’ economic interests and legitimate state policy objectives. Finally, the case law of the above-mentioned courts may ferment investment arbitration, for in the course of the ‘multilateralization’ of investment law, arbitration courts occasionally refer to precedents of other fora.48

11.3.3

A Balanced Approach to Investment Disputes

In the following section, I shall briefly analyse two cases where the PCIJ and the ICJ, respectively, arrived at a balanced decision on investment disputes by taking into account the specific context of the investment, the states’ regulatory rights, the general principles of international law, and the development of a subsystem of international law: international environmental law. Both judgments reveal a wider approach to investment disputes, taking into due consideration the relevant rules of international law falling beyond the strict confines of the investment in question. 11.3.3.1

The Judgment of the Permanent Court of International Justice in the Oscar Chinn Case The first case related to the jurisprudence of the Permanent Court of International Justice (PCIJ) regarded a dispute between the United Kingdom (UK) and Belgium in the Oscar Chinn case.49 Oscar Chinn was a transport entrepreneur rendering airborne transfer services in the Belgian Congo. Belgium pursued a development policy for the benefit of the Belgian Congo, which entailed significant financial incentives for the market penetration of Belgian companies in Congo. As a result of this policy, Oscar Chinn’s company 46 47 48 49

B. Kishoiyian, ‘The Utility of Bilateral Investment Treaties in the Formulation of Customary International Law’, Northwestern Journal of International Law & Business, Vol. 14, 1993, p. 329. For a detailed discussion, see P. Dumberry, ‘Are BITs Representing the ‘New’ Customary International Law in International Investment Law?’, Penn State International Law Review, Vol. 28, No. 4, 2010, pp. 675-701. Cf. S.W. Schill, ‘The Multilateralization of International Investment Law: Emergence of a Multilateral System of Investment Protection on Bilateral Grounds’, Trade, Law and Development, Vol. 2, No. 1, 2010. Oscar Chinn (United Kingdom v. Belgium), 1934 PCIJ (Ser. A/B) No. 63, Judgment of 12 December 1934.

298

11

BILATERAL INVESTMENT TREATIES

FROM AN

ECOLOGICAL ASPECT

became bankrupt, since it could not compete with the businesses enjoying the substantial state subsidies granted by Belgium to its own companies. Oscar Chinn turned to his own state, the United Kingdom, for support and submitted a claim, which – until today – provides the basis for the majority of contemporary arbitration proceedings, namely, that the entrepreneur expects compensation from the state that compromised the foreign company’s business plan and calculations through implementing a change in economic policy. In its judgment, the PCIJ made it clear that there were no international law rules in place which would oblige Belgium to leave its economic policy unchanged in order to guarantee the economic success of Oscar Chinn’s enterprise. Of course, the judgments of the PCIJ are not precedents, and the ICJ is not bound by the case law of its legal predecessor. At the same time, it may be stated that in its judgments, the ICJ makes significant use of the legal findings of its predecessor, the PCIJ. As a result, we have no reason to presume that the legal findings rendered in the Oscar Chinn case no longer hold water under international law. Therefore, we may state that, in general, states are in no way obliged to tailor their economic policy to suit the business aspirations of foreign entrepreneurs and that such changes in policy may not affect the economic projections of such investors. All these assertions remain valid even in the broad framework established under the investment protection agreements designed for the benefit of economic ventures. In accordance with the PCIJ’s judgment and the general principles of international law, host states have the right to pursue their own development objectives and priorities. Based on the above, the reincorporation of public international law into investment protection agreements would contribute to achieving a healthy balance, where companies could not prevent less affluent states from reorientating their social and political strategies to include special concepts adopted within the ambit of environmental protection. 11.3.3.2

The Judgment of the International Court of Justice in the Gabčikovo– Nagymaros Case The Gabčikovo–Nagymaros judgment50 rendered by the ICJ provides further testimony of the relevance of the rules of international law in the field of investment protection. The Gabčikovo–Nagymaros investment plan was based on a joint investment treaty concluded between the Czechoslovak Republic and the People’s Republic of Hungary on 16 September 1977.51 The agreement aimed at the completion of a common barrage for the

50 51

Case Concerning the Gabčikovo–Nagymaros Project (Hungary v. Slovakia), Judgment of 25 September 1997, 1997 ICJ Rep. 7, 37 ILM (1998). Treaty between the Hungarian People’s Republic and the Czechoslovak People’s Republic concerning the construction and operation of the Gabčikovo–Nagymaros System of Locks, 16 September 1977.

299

MARCEL SZABÓ

development of the socialist economies on the basis of the guidelines issued by the Council for Mutual Economic Assistance, the international reconciliation body of socialist centrally planned economies. Since economic investments are rarely the object of interstate agreements, the pride and joy of the socialist planned economy and the ensuing legal dispute before the ICJ serve as a perfect backdrop for a further analysis of the general provision of public international law related to investment protection. Although the agreement concluded by the two states lacked the usual elements of investment protection treaties, neither the legal dispute nor the underlying legal situation differs markedly from those of investment protection disputes. By way of the barrage investment, the two states strove towards the completion of a long-standing investment, through which they wished to exert lasting influence on their investments made in the neighbouring country. Both states invested significant capital for the realization of the economic investment, and the agreement concluded between them established a special contractual regime governing the rights and obligations necessary for the operation of the joint enterprise. Furthermore, the joint investment treaty established an independent dispute settlement mechanism. The proceedings in the legal dispute were also related to the conventional practice of international arbitration procedures, since in the given case, the starting point was that one of the parties was interested in the complete realization of the investment, while the other party was of the opinion that due to the material change in circumstances, the system set forth under the original treaty could not be maintained and the ensuing rights and obligations were no longer enforceable. In order to place the judgment of the ICJ in the context of investment protection, it is worth briefly recalling the main elements of the international dispute. In 1977, Czechoslovakia and Hungary agreed on the construction of a common barrage, as a result of which, two power plants would have been built on the section of the Danube between Bratislava and Budapest. The first barrage would have been built in Gabčikovo, 30 km below Bratislava, following the construction of a concrete side channel by way of which a significant volume of the river’s water would have been redirected from the original Danube basin to Slovak territory, near Gabčikovo, to drive the turbines generating energy for the joint venture of the two states. After driving the turbines near Gabčikovo, the redirected water would have been released into the original basin of the Danube. A hundred kilometres further down at Nagymaros, in Hungary, another barrage would have been erected, also for the purpose of generating electricity; however, its main purpose would have been to balance the volatile water level resulting from the operation of the Gabčikovo facility. The Gabčikovo plant would have operated, namely, in peak mode, meaning that the