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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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

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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

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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

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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

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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 *.

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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.

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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).

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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,

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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

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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.

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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).

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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

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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.

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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.

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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

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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

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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.

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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”.

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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.

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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.

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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.

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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.

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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.

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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

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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

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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.

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17 18

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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.

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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).

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

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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.

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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

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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

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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.

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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

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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.

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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

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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.

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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

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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.

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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

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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.

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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

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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

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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.

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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

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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”.

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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.

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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.

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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

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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.

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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

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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.

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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

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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.

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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.

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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

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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.

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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

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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

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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.

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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.

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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.

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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”.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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 […]”.

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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.

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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

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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.

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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

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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.

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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

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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.

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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.

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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

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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.

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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).

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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).

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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.

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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

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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.

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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.

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‘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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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

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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

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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.

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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

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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

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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

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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.

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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

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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.

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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.

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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.

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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

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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

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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

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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.

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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-

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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.

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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

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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,

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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

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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”.

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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

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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.

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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

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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).

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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

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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.

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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,

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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

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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.

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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

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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).

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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

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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.

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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

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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

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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

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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.

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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

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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.

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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

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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.

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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

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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.

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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

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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”.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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).

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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

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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.

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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).

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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).

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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.

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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.

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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.

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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.

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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).

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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.

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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.

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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.

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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.

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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

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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).

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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”.

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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.

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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,

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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”.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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).

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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

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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.

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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.

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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.

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(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.

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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.

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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.

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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.

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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.

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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

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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.; .

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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.

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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.

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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

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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.

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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.

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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

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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.

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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

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14 15

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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 water would have been collected in a reservoir above the facility and in the morning and evening hours; when the domestic consumption of energy increases, the water would have been released through the Gabčikovo turbines. Since this system would have entailed a huge burden for the

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environment, the parties also agreed upon the construction of a Hungarian barrage, which, however, due to Hungarian concerns, was never built. This is because the Nagymaros barrage that was to be erected on Hungarian territory would have been located in the country’s most beautiful natural site, the Danube Bend, resulting in a furious uproar from the side of citizens and environmental organizations. The legal dispute in the Gabčikovo–Nagymaros case resembles the suits in an investment protection context by virtue of the fact that in its arguments brought before the ICJ, the Slovak party attempted to enforce the entirety of its economic projections on the basis of the original legal construct and legal relationship. However, the ICJ declared that it is the obligation of the state parties to fulfil their commitments in compliance with the rules of international environmental law.52 As a result, the ICJ accepted as a proper implementation of the treaty a system which greatly differed from the plan laid down on the basis of the original economic calculations.53 In its judgment, the ICJ struck a proper balance between the parties’ rightful economic interests, on the one hand, including related projections, and in particular the Slovak party’s expectations regarding the operation of the power plant, on the other hand; in light of the development of international environmental law, it no longer wished to ensure the financial advantages ensuing from the completion of the original plans and the related business construct. Thus, the essence of the judgment is the harmony the states must achieve between the international treaty they have concluded and the general rules of international environmental law.54 International investment protection law experts further underline that the key element of the Gabčikovo–Nagymaros judgment is the principle of prevention. In cases where environmental damage is foreseeable, the state is obliged to find solutions by way of which such harm may be prevented. This may lead to a necessary restructuring of business plans and a possible reduction in expected profits; therefore, the other party must also demonstrate awareness, a trait which international law expects of competent investors. 11.4

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11.4.1

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BITS

The European Union as a Market Leader in the Realm of Investment Law

As previously mentioned, it was a member state of the EU, namely, Germany that concluded the very first investment protection agreement with Pakistan in 1959, which 52 53 54

Id. Secs. 112, 140-141 at pp. 64, 75. Id. Sec. 136 at p. 77. According to Alan Boyle, “[…] monitoring environmental effects is a continuing obligation for the parties under general international law [… and they] have to be taken account for continuing activities as well as for new ones”. See A. Boyle, ‘The Gabčikovo-Nagymaros Case: New Wine Old Bottles?’, Yearbook of International Environmental Law, Vol. 8, 1997, p. 15.

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MARCEL SZABÓ entered into force in 1962.55 According to some, the EU is a global market leader in the realm of BITs.56 Before going into a detailed examination of this finding, it is worth emphasizing that the Lisbon Treaty also makes reference to the global commitment of the EU;57 at the same time, there are no signs that the EU would be conscious of its defining role in relation to the practice of the rest of the world regarding BITs. As is known, many states follow Union law when defining their own legal practice in the same subject.58 The EU – albeit unintentionally – already exerts a great influence on the development of international investment protection law, in particular with regard to the application of the proportionality test in the framework of international investment protection rules.59 As regards the rules related to expropriation – the cornerstone of investment protection agreements – the arbitration court practice has adopted the principle of proportionality reflected in EU law, based on which an expropriation pursuing public goals but going beyond what is necessary in the opinion of the arbitration court; to achieve such goals is to be considered illegal.60 The essence of the provision is therefore that in case the arbitration court finds that the given member state has changed its economic policy in order to achieve certain political goals, the burden of proof is on the state in question, and the court may examine whether the given measure, harming the foreign investor, may be substituted with another measure, which would have served the given state goal but would have caused less harm to the foreign company. In such cases, the arbitration court may find the expropriation to be unjustified, deeming the state measure to be in breach of the principle of fair and equitable treatment.61

11.4.2

New Competences of the EU Following the Lisbon Treaty

The EU has 1,400 treaties with third countries, and the member states of the EU have concluded around 200 treaties with one another in relation to investment 55 56 57 58 59 60

61

1959 Treaty for the Promotion and Protection of Investments, Pak.-F.R.G., 457 UNTS 23. European Commission Communication of 7 July 2010, Towards a comprehensive European international investment policy (COM(2010) 343 final), p. 3. See Art. 21 of the Treaty on the Functioning of the European Union, OJ C 326. M. Bungenberg, ‘Going Global? The EU Common Commercial Policy After Lisbon’, in C. Herrmann & J.P. Terhechte (Eds.), European Yearbook of International Economic Law, Berlin, Springer, 2010, p. 133. X. Han, ‘The Application of the Principle of Proportionality in Tecmed v. Mexico’, Chinese Journal of International Law, Vol. 6, No. 3, 2007, p. 641. According to the European Commission, “[a] clear formulation of the balance between the different interests at stake, such as the protection of investors against unlawful expropriation or the right of each Party to regulate in the public interest, needs to be ensured”. See European Commission (COM(2010) 343 final), supra note 56, p. 9. See C. Henckels, ‘Indirect Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and the Standard of Review in Investor-State Arbitration’, Journal of International Economic Law, Vol. 15, No. 1, 2012, pp. 223-255.

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protection.62 The majority of the investment protection agreements between the member states were concluded in the period when the Central and Eastern European states had not yet joined the EU. The EU underwent a significant change on 1 December 2009; this was the date when the Lisbon Treaty entered into force, amending the Treaty on European Union (TEU) and the former treaty establishing the European Community, now renamed in the Treaty on the Functioning of the European Union (TFEU). The entry into force of the Lisbon Treaty had a great impact on the situation of BITs, since foreign direct investments – i.e. both the regulation of investment protection and the related competence to conclude international treaties63 – became the exclusive competence of the EU by virtue of the provisions of the TFEU.64 It is still too early to assess the effect of the changes brought about by the Lisbon Treaty within the ambit of investment protection in the EU.65 There was a widespread presumption that, in possession of its newly acquired competence, the EU would attempt to bring order into the burgeoning and complicated mass of investment protection treaties – as a subsystem of the international treaties connected to the EU. The EU made clear its intention that in the long run, it is aspiring to elaborate its own set of legal rules with regard to both the liberalization of investment protection rules and the concrete rules of investment protection in the narrower sense, incorporating also investor-state dispute settlement mechanism.66 Already in its ERTA judgment,67 the ECJ made clear that on the basis of its implied external powers, the EU possesses the necessary competences to proceed on the international level, where it had been empowered by the member states to act on the internal level.68 As a consequence, since the regulation of investment protection was placed within the exclusive competence of the EU by the Lisbon Treaty, the EU is also authorized to conclude international agreements related to investment protection. In light of this new exclusive external competence, the EU should further the development of the international system of investment protection towards a more appropriate direction, and, in particular, it should take its own international commitment of promoting human rights, the rule of law, and sustainable development in the framework of its international

62 63 64 65

66 67 68

A.A. Ghouri, ‘Resolving Incompatibilities of Bilateral Investment Treaties of the EU Member States with the EC Treaty: Individual and Collective Options’, European Law Journal, Vol. 16, No. 6, 2010, p. 807. Shan & Zhang 2011, supra note 17, p. 1064. Arts. 206-207 TFEU. A. Dimopoulos, ‘The Common Commercial Policy after Lisbon: Establishing Parallelism between Internal and External Economic Relations?’, Croatian Yearbook of European Law and Policy, Vol. 4, 2008, pp. 101129. See European Commission (COM(2010) 343 final), supra note 56, p. 5. Judgment of 31 March 1971 in Case 22/70, Commission of the European Communities v. Council of the European, [1971] ECR 263. Bungenberg 2010, supra note 58, p. 132.

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MARCEL SZABÓ cooperation into consideration.69 Unfortunately, however, the member states forging the single European legal order are not ready to dismantle the structure of investment protection treaties, not even following the accession of the Central and Eastern European states. Several Eastern member states have announced their plans to terminate their intraEU BITs. In this respect, the Czech Republic played a pioneer role when it announced its intention to terminate all of its BITs with other EU member states in 2005. However, some old EU member states – including Belgium, Germany, the Netherlands, and the United Kingdom – did not agree with the Czech Republic’s approach.70 The BITs of these states with other member states are still in place, notwithstanding the fact that they may reach beyond the legal framework of the EU, often even undermining the common goals by benefiting primarily the Western companies investing in Central and Eastern Europe.71 Although the European Commission underlined that intra-EU BITs granting the right to sue member states at international tribunals discriminate between EU investors from different member states and are in conflict with EU law,72 Western European member states have rejected the European Commission’s proposal to phase out intra-EU BITs.73

11.4.3

The Ambivalent Effects of the BITs Concluded with Developing States

As demonstrated in the first part of the present study, the effects of investment protection treaties on the political systems of developing states are unfortunately quite ambivalent. Because of the principle of indirect expropriation, economically unstable developing states hosting capital-strong Western corporations effectively protected by international law will necessarily be reluctant to introduce comprehensive economic changes, in case these should restrict the room for manoeuvre and in particular the projected profits of multinational companies. At this point, it is worth noting that on the basis of the provisions of the American–Ecuadorian BIT, the company Texaco – the activities of which caused significant environmental damage in Ecuador – could invoke the

69

70

71 72 73

See European Commission (COM(2010) 343 final), supra note 56, p. 9., European Parliament Resolution on the future European international investment policy, 6 April 2011, OJ C 296E, paras. 2, 27-30; Council of the European Union Conclusions on a comprehensive European international investment policy. 3,041st Foreign Affairs Council meeting, 25 October 2010, paras. 1, 3, 16-17. See Italy, Slovenia, and Malta concur with Czech Republic on lack of necessity for intra-EU BITs; Italy– Czech treaty has been terminated, Investment Arbitration Reporter, Vol. 2. No. 13, 6 August 2009; Denmark and Czech Republic working to terminate investment treaty; not all EU member states agree with the Czech view that intra-EU treaties are unnecessary’, Investment Arbitration Reporter, Vol. 2. No. 12, 17 July 2009. Shan & Zhang 2011, supra note 17, p. 1068. European Commission Staff Working Document of 3 February 2012, ‘Capital Movements and Investment in the EU Commission Services Paper on Market Monitoring’, SWD (2012)6 final, pp. 3, 13. Olivet 2013, supra note 13, p. 5.

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investment protection agreement and expressly exclude its liability towards Ecuador in relation to the environmental damage caused.74 Article 205 of the TFEU and Article 21 of the TEU refer to the commitment of the European Union to promote human rights, the rule of law, and sustainable development also by way of contributing to the development of international law. Carsten Nowak however points out that the EU concludes agreements with developing states in pursuit of its own selfish goals, and not at all for the sake of conserving and improving the condition of the environment in such states.75 Although member states have ceded their competence to conclude BITs in the Lisbon Treaty and transferred such competence to the EU, it seems that the economic players have the necessary lobbying power to persuade member states to apply the BITs in both intra-Union relations and their dealings with third states. This gives rise to concerns about the credibility and effectiveness of EU action in fulfilling its international obligations undertaken in the Lisbon Treaty, according to which it shall promote sustainable development on the global level within the framework of cooperation between states. In light of the fact that the achievement of this goal is greatly compromised through the use of BITs, the bitterness expressed by Markus Burgstaller is more than understandable, when he poses the question: may the European Union, an organization committed to promoting sustainable development on the international level, even conclude BITs in its external relations?76 The European Parliament Resolution of 6 April 2011 on the future European international investment policy77 also draws attention to the fact that the EU may not require liberalization commitments in exchange for investment protection treaties beyond a certain point, since these

74

75

76

77

Chevron Corporation and Texaco Petroleum Corporation v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23. Jurisdictional Decision of 27 February 2012. For more information on this case, see Chapter 17, ‘Chevron-Texaco v. Ecuador: The Environmental Case within a Claim of Denial of Justice’, by Blanca Gomez de la Torre in this volume. C. Nowak, ‘Legal Arrangements for the Promotion and Protection of Foreign Investments within the Framework of the EU Association Policy and European Neighbourhood Policy’, in M. Bungenberg et al. (Eds.), International Investment Law and EU Law, European Yearbook of International Economic Law, Special Issue, Berlin, Springer, 2011, p. 106. “The Union shall define and pursue common policies and actions, and shall work for a high degree of cooperation in all fields of international relations, in order to [inter alia] foster the sustainable economic, social and environmental development of developing countries, with the primary aim of eradicating poverty; […] 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; […]. It is unclear, however, to what extent these principles may in effect limit the EU’s competence to conclude investment treaties with third states”. M. Burgstaller, ‘The Future of Bilateral Investment Treaties of EU Member States’, in M. Bungenberg et al. (Eds.), International Investment Law and EU Law, European Yearbook of International Economic Law, Special Issue, Springer, Berlin, 2011, p. 66. European Parliament Resolution on the future European international investment policy, supra note 69, paras. 6, 17, 23-26.

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countries’ right to regulate have been restricted to such a degree that they are not in a position to effectively counteract environmental degradation and social injustice.

11.4.4

Proposal for the Elaboration of a Model EU Bilateral Investment Treaty

In case the EU wishes to retain its nature as a role model in the field of international investment protection agreements and at the same time does not want to do without the respect of private persons and organizations committed to future generations, it would be worthwhile to consider elaborating a model EU BIT comprising the minimum rules78 by way of which the EU may align the system of international investment protection treaties with the principle of sustainable development. Such a minimum rule could be, for example, a concept of expropriation that would not exclude ecologically motivated changes in state policy. A good example may be drawn from the 2005 IISD Model International Agreement on Investment for Sustainable Development. In Article 25, the Model BIT states that: [I]n accordance with customary international law and other general principles of international law, host states have the right to take regulatory or other measures to ensure that development in their territory is consistent with the goals and principles of sustainable development, and with other social and economic policy objectives. […] Bona fide, non-discriminatory measures taken by a Party to comply with its international obligations under other treaties shall not constitute a breach of this Agreement.79 Unfortunately, however, in 2010, the Commission Communication Towards a comprehensive European international investment policy80 made clear that the EU does not wish to elaborate a model BIT agreement, but much rather intends to draw up principles which must be taken into consideration in the course of concluding investment protection agreements. The author of the present study is of the view that the EU has missed a very important opportunity to strike a balance between the interests of environmental protection and the need for global economic development.

78 79 80

F. Ortino & P. Eeckhout, ‘Towards an EU Policy on Foreign Direct Investment’, in A. Biondi et al. (Eds.), EU Law after Lisbon, Oxford University Press, Oxford, 2012, p. 325. H. Mann et al., IISD Model International Agreement on Investment for Sustainable Development, International Institute for Sustainable Development, Winnipeg, 2005, p. 14. “[…] a one-size-fits-all model for investment agreements with 3rd countries would necessarily be neither feasible nor desirable”. European Commission (COM(2010) 343 final), supra note 56, p. 6.

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The Sustainability of Intra-EU BITs

The global situation of investment protection agreements is well illustrated by the approach that the EU has employed towards the BITs concluded between its own member states. Although the European Commission unequivocally stated81 already at the time of the 2004 accession round that there is no room for investment protection agreements between the Western and Eastern member states of the European Union,82 Western European states insist upon upholding these agreements. As the Economic and Financial Committee of the EU underlined, “[m]ost Member States did not share the Commission’s concern in respect of arbitration risks and discriminatory treatment of investors and a clear majority of Member States preferred to maintain the existing agreements”.83 What is particularly surprising is that only a limited discussion of the legal situation of the investment protection treaties took place in the relevant scholarly literature following the entry into force of the Lisbon Treaty. The European Commission has clearly expressed its view that the incompatibility between intra-EU BITs and European Union law would require member states to terminate their intra-EU BITs.84 Some Eastern member states have gone even further by asserting that such incompatibility would lead to automatic termination of intra-EU BITs.85 At the same time, it is evident that the majority of the member states of the EU do not consider the BITs between the member states to be terminated agreements, and the decisions rendered in the cases described below seem to support this assertion. In Eastern Sugar BV (Netherlands) v. The Czech Republic, the claim arose from a new member state’s compliance with EU Common Agricultural Policy rules, prompting Dutch investor Eastern Sugar to claim breach of ‘fair and equitable treatment’ clause.86 The Czech Republic attempted to plead the invalidity of the treaty, arguing that following accession, its BITs with other member states had become inapplicable. The Czech government also argued that the arbitral tribunal did not have jurisdiction, since the

81

82 83 84

85 86

F. Weiss & S. Steiner, ‘The Investment Regime under Art. 207 TFEU: A Legal Conundrum, the Scope of ‘Foreign Direct Investment’ and the Future of Intra-EU BITs’, in F. Baetens (Ed.), Investment Law within International Law: Integrationist Perspectives, Cambridge University Press, Cambridge, 2013, p. 357. C. Soderlund, ‘Intra-EU Investment Protection and the EC Treaty’, Journal of International Arbitration, Vol. 24, 2007, p. 455. See Economic and Financial Committee, Annual EFC Report to the Commission and the Council on the Movement of Capital and the Freedom of Payments, ECFIN/CEFCPE(2008)REP/55806, 2008, p. 5. See EC Letter of 13 January 2006 quoted in Eastern Sugar BV (Netherlands) v. The Czech Republic, supra note 15, para. 119; European Commission Observations of 7 July 2010, quoted in Achmea BV v. The Slovak Republic, UNCITRAL, PCA Case No. 2008-13 (formerly Eureko BV v. The Slovak Republic), Award on Jurisdiction, Arbitrability and Suspension of 26 October 2010, para. 180. See, e.g. the position of the Czech Republic in Eastern Sugar BV (Netherlands) v. The Czech Republic, supra note 15, para. 97. Eastern Sugar BV (Netherlands) v. The Czech Republic, supra note 15, para. 199.

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BIT with the Netherlands had been superseded by EU law and the case should ultimately be decided by the ECJ.87 However, the ad hoc arbitral tribunal established its jurisdiction and rejected the arguments on the basis that there was no policy formulation by the EU on intra-EU BITs88 and the European Commission did not initiate infringement procedures against the member states for failing to terminate intra-EU BITs, which would have been expected if the Czech Republic was correct about incompatibility.89 The arbitration procedure, however, had been instigated before the entry into force of the Lisbon Treaty; therefore, the provisions of the fundamental treaty resulting in the termination of the BITs had not yet entered into force. It is worth noting that the European Commission has still refrained from initiating infringement procedures against member states under Article 258 of the TFEU for upholding their intra-EU BITs.90 This is all the more surprising and unfortunate in light of the Mox Plant case.91 The case related to a Sellafield facility utilizing fuel elements of nuclear reactors, the environmental implications of which prompted Ireland to submit an action against the United Kingdom in the framework of OSPAR arbitration proceedings as well as before the International Tribunal for the Law of the Sea (ITLOS). The outcome of the case depended on the circumstance that the European Commission sued Ireland for an infringement of the principle of loyalty, according to which, the member states of the EU are obliged to settle their disputes arising from EU law before the ECJ.92 Since then, the European Commission has repeatedly argued that the ECJ is the forum to resolve cases related to EU law involving member states, also stressing that intra-EU BITs “can lead to parallel jurisprudence through arbitration procedures on matters covered by EU rules without the Court of Justice of the EU (CJEU) being able to exercise its functions of guardian of the EU legal system”.93 It may be by chance but it is nevertheless peculiar that in case an economic enterprise (investor) ends up in trouble for causing economic risks, then the European Commission – although indirectly – steps up in its defence. In contrast, when a

87 88 89 90

91 92 93

Id. paras. 95-181. Bungenberg 2011, supra note 17, p. 142. Ultimately, the arbitration tribunal ruled in favour of Eastern Sugar and ordered the Czech Republic to pay a compensation of €25.4 million. The European Commission, where it detects a failure to comply with Union law, may initiate the procedure against a member state for failure to fulfil an obligation provided for in Article 258 of the Treaty on the Functioning of the European Union. According to the cited provision, “If the Commission considers that a Member State has failed to fulfil an obligation under the Treaties, it shall deliver a reasoned opinion on the matter after giving the State concerned the opportunity to submit its observations. If the State concerned does not comply with the opinion within the period laid down by the Commission, the latter may bring the matter before the Court of Justice of the European Union”. Judgment of 30 May 2006 in Case C-459/03, European Commission v. Ireland (‘Mox Plant’) [2006], ECR I-4635. Id. paras. 174-175. European Commission Staff Working Document of 3 February 2012, supra note 72, p. 3.

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member state initiates the termination of a BIT due to its limitations on the free disposition of the state over environmental issues, the European Commission does not attribute such significance to this matter to take a similar action. Not even in cases where the parties infringe the very same principle, the principle of loyalty, turning to an extraUnion arbitration forum for the enforcement of their rights guaranteed in the BITs. EU member states that submit their case to interstate arbitration mechanism for the settlement of disputes within the scope of Union law are in breach of Article 344 of the TFEU, whereby “Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein”. Of course, the European Commission can easily find an alibi for such conduct, for, due to the special structure of the BITs, it is not the Western states that sue the Central and Eastern European states before the arbitration courts, but much rather their companies. Therefore, it is formally not the Western European state but its company which disregards the exclusive jurisdiction of the ECJ in resolving disputes between member states that are at least partially covered by EU law – the principle established in the Mox Plant case – and such a company may not be the subject of an infringement procedure initiated by the European Commission. Nevertheless, the Commission laid down that “the arguments in favour of maintaining an investor-state arbitration mechanism for intra-EU BITs are not persuasive from an internal EU law perspective”.94 An investor must address a national court or call upon the Commission to initiate infringement proceeding against the members states which policies were not in line with basic EU law principles. A noteworthy example is the Eureko BV v. The Slovak Republic case,95 where a Dutch health service provider submitted an action against Slovakia, on the grounds that the Slovak government changed its public health policy and sought to reverse liberalization.96 Slovakia pleaded inadmissibility which was dismissed by the arbitration court. The Slovak Republic contested the ruling on dismissal before the Frankfurt Higher Regional Court (‘the Frankfurt Court’), in the hope that the Frankfurt Court would file a request for a preliminary ruling at the ECJ, enabling the ECJ to clarify the relationship between EU law and BITs. Unfortunately, however, the Frankfurt Court dismissed the Slovak motion regarding the request for a preliminary ruling and was of the opinion that Slovakia’s challenge was unfounded as Article 344 of the TFEU only applies to EU member states and cannot be extended to disputes between a private investor and an EU member state. 94

95 96

Achmea BV v. The Slovak Republic, UNCITRAL, PCA Case No. 2008-13 (formerly Eureko BV v. The Slovak Republic), Award on Jurisdiction, Arbitrability and Suspension of 26 October 2010, para. 179 referring to the Observations of the European Commission dated 7 July 2010, para. 29. Id. This complaint led to the opening of an infringement procedure by the European Commission against the Slovak Republic under Article 226 of the EC Treaty that is currently ongoing.

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The Frankfurt Court pointed out that Article 344 of the TFEU should not be applied so as to prevent arbitration tribunals from rendering awards that might be in conflict with EU law. Nevertheless, the Court stressed that these arbitral awards were still subject to control by the national courts of the member states. Consequently, in such proceedings domestic courts were able to make references to the ECJ for a preliminary ruling. With regard to Article 18 of the TFEU on the prohibition of all forms of discrimination on grounds of nationality, the Frankfurt Court found that this could not affect the validity of the treaty’s dispute resolution clause. As invalidity of the arbitration provisions would frustrate the legitimate expectations of investors, Article 18 of the TFEU would rather oblige the host state to extend investment arbitration to investors from all EU member states.97 In regard to this case, the European Commission stated that “Intra-EU BITs amount to an anomaly within the EU internal market […]. Eventually, all intra-EU BITs will have to be terminated”.98 By virtue of the fact that the member states transferred their competence to conclude investment protection agreements to the EU in the Lisbon Treaty, rendering it an exclusive competence of the EU, an international law situation arose according to which the member states ceded a part of their sovereignty for the benefit of another international law entity. As a result, interpreting investment protection treaties under international law, the EU is party to all investment protection agreements of which a member state is a signatory following 1 December 2009. Since under international law no legal entity may conclude a valid international agreement with itself, all agreements that have been concluded by the member states of the EU following 1 December 2009 – even if they relate to overseas territorial units – must be considered agreements concluded by the EU with itself and, as such, must be deemed to have terminated. Ahmad Ali Ghouri argued that in case two EU member states conclude an intra-EU BIT following the entry into force of the Lisbon Treaty, this may be considered a breach of the treaty-making procedure and a modification of the Lisbon Treaty on a bilateral basis; consequently, the BIT would be invalid.99 Of course, the nullity of the treaty would also result from the fact that the states in question no longer possess the competence to conclude international treaties in the given field.100

97

Achmea BV v. The Slovak Republic, UNCITRAL, PCA Case No. 2008-13 (formerly Eureko BV v. The Slovak Republic), Decision of the Frankfurt Higher Regional Court of 10 May 2012, sections II. B. 2, II. B. 4. 98 Id., at paras. 177, 182, referring to the Observations of the European Commission of 7 July 2010, paras. 10, 38. 99 Ghouri 2010, supra note 62, p. 822. See also Judgment of the Court of 6 April 1995 in joined Cases 241/91P and 242/91P, Radio Telefis Eireann (RTE) and Independent Television Publications Ltd (ITP) v. Commission, [1995] ECR I-743 at paras. 72-87. 100 In Art. 207(1) TFEU, the Lisbon Treaty introduced an exclusive EU competence in the field of foreign direct investment.

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CONCLUSION

As demonstrated above, in the course of the adjudication of BIT-related disputes, arbitration courts have established a subsystem of international law in which the general rules of international law do not or barely prevail. The BITs have facilitated the stimulation of the global economy since their very emergence; however, since then, several negative aspects have surfaced that essentially require their due correction under international law. One of the major, currently existing adverse features of BITs is the fact that these treaties and their enforcement have, to some extent, deprived the state of its right to regulate. Depriving states of such rights resulted in their failure to introduce new and beneficial policies furthering social justice and environmental protection. In this regard, there is risk that in deciding investment matters, certain arbitration courts would interpret the introduction of new regulations by states as a violation of fair and equitable treatment standard or as an indirect expropriation. Pursuant to the provisions of the VCLT, in the context of the adjudication of BITs, the arbitration courts should also take into account other state obligations, particularly those which are related to human rights and environmental issues. The Oscar Chinn case highlighted that an extensive interpretation of expropriation pursuant to the case law of arbitration courts dealing with investment law and treaties is not grounded in international law. According to the Gabčikovo–Nagymaros case, it has become evident that in light of the development of environmental law norms, the gradually developed standards should be included in the different international treaties. Consequently, provisions agreed between the parties should be amended in a way which ensures the achievement of contractual aims while guaranteeing the enforcement of environmental provisions. We are witnessing a unique development in the EU legal order. The establishment of BITs is related to the initiative of an EU member state, namely, Germany, and by now these investment protection agreements have become popular worldwide. The EU has retained its position as a market leader regarding BITs, and in the provisions of the Lisbon Treaty, the EU undertook to facilitate the promotion of sustainable development. It may be stated that the current system of BITs is not in accordance with the rightful interest of developing states and states in transition to protect the environment. The present paper argued that it is specifically true with regard to the Central and Eastern European countries, which have benefitted from the opportunities of Western foreign investments, while also being adversely affected by the limitations of the relevant investment treaties on their regulatory powers and also by the potential public policy impacts of investment arbitration. Therefore, the EU is responsible for endorsing changes to the present scheme of BITs. As regards intra-EU BITs, the EU should consistently urge member states to

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terminate the extensive web of intra-EU BITs, in line with its repeated argument that bilateral investment treaties between EU member states are in conflict with EU law and therefore should be phased out. On the global scene, the EU could contribute to the necessary transformation process by developing a Model Bilateral Investment Treaty to amend the currently applicable expropriation concept and at the same time to pursue some of its public policy objectives relating to the protection of the environment, labour standards, consumer protection, and human rights. The future model treaty should indicate 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 concerns. Thus, the Model EU BIT could be an important catalyst for future reform of international investment law, contributing to effective legal development in international law and serving the vision of sustainable development throughout the EU.

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BIBLIOGRAPHY BOOKS Dolzer, R. & Stevens, M., Bilateral Investment Treaties, The Hague: Martinus Nijhoff Publishers,1995. Kulick, A., Global Public Interest in International Investment Law, Cambridge: Cambridge University Press, 2012. Mann, H., et al., IISD Model International Agreement on Investment for Sustainable Development, Winnipeg: International Institute for Sustainable Development, 2005. Newcombe, A. & Paradell, L., Law and Practice of Investment Treaties: Standards of Treatment, The Hague: Kluwer Law International, 2009. OECD, International Investment Law: A Changing Landscape – A Companion Volume to International Investment Perspectives, Paris: OECD Publishing, 2005. Schefer, K.N., International Investment Law: Text, Cases and Materials, Cheltenham – Northampton: Edward Elgar Publishing, 2013. Viñuales, J.E., Foreign Investment and the Environment in International Law, Cambridge: Cambridge University Press, 2012.

ARTICLES Anderer, C.E., ‘Bilateral Investment Treaties and the EU Legal Order: Implications of the Lisbon Treaty’, 35(3) Brooklyn Journal of International Law, 2010. Barklem, C. and Prieto-Ríos, E.A., ‘The Concept of “Indirect Expropriation”, its Appearance in the International System and its Effects in the Regulatory Activity of Governments’, 11(21) Civilizar Ciencias Sociales y Humanas, 2011. Boyle, A., ‘The Gabčikovo-Nagymaros Case: New Wine Old Bottles?’, 8 Yearbook of International Environmental Law, 1997.

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MARCEL SZABÓ Dimopoulos, A., ‘The Common Commercial Policy after Lisbon: Establishing Parallelism between Internal and External Economic Relations?’, 4 Croatian Yearbook of European Law and Policy, 2008. Dumberry, P., ‘Are BITs Representing the “New” Customary International Law in International Investment Law?’, 28(4) Penn State International Law Review, 2010. Elkins, Z., et al., ‘Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000’, University of Illinois Law Review 265, 2008. Ghouri, A.A., ‘Resolving Incompatibilities of Bilateral Investment Treaties of the EU Member States with the EC Treaty: Individual and Collective Options’, 16(6) European Law Journal, 2010. Han, X., ‘The Application of the Principle of Proportionality in Tecmed v. Mexico’, 6(3) Chinese Journal of International Law, 2007. Henckels, C., ‘Indirect Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and the Standard of Review in Investor-State Arbitration’, 15(1) Journal of International Economic Law, 2012. Kishoiyian, B., ‘The Utility of Bilateral Investment Treaties in the Formulation of Customary International Law’, 14 Northwestern Journal of International Law & Business, 1993. Nikièma, S.H., ‘Best Practices: Indirect Discrimination’, International Institute for Sustainable Development, March 2012. Available at: accessed 20 February 2014. Olivet, C., ‘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. Peterson, L.E., ‘Analysis: Tribunal in Grand River v. U.S.A.’, 6 March 2011. Available at: accessed 3 March 2014.

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BIBLIOGRAPHY

Peterson, L.E., ‘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. Rajput, A., ‘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’, 28(2) ICSID Review, 2013. Schill, S.W., ‘The Multilateralization of International Investment Law: Emergence of a Multilateral System of Investment Protection on Bilateral Grounds’, 2(1) Trade, Law and Development, 2010. Schwebel, S.M., ‘The Overwhelming Merits of Bilateral Investment Agreements’, 32 Suffolk Transnational Law Review, 2009. Shan, W. & Zhang, S., ‘The Treaty of Lisbon: Half Way toward a Common Investment Policy’, 21(4) EJIL, 2011. Soderlund, C., ‘Intra-EU Investment Protection and the EC Treaty’, 24 Journal of International Arbitration, 2007. Wisner, R. & Gallus, N., ‘Nationality Requirements in Investor-State Arbitration’, The Journal of World Investment and Trade 942. Available at: accessed 27 February 2014.

CONTRIBUTIONS

IN EDITED BOOKS

Bungenberg, M., ‘Going Global? The EU Common Commercial Policy After Lisbon’, in C. Herrmann & J.P. Terhechte (Eds.), European Yearbook of International Economic Law, Berlin: Springer, 2010. Bungenberg, M., ‘The Politics of the European Union’s Investment Treaty Making’, in T. Broude et al., (Eds.), The Politics of International Economic Law, Cambridge: Cambridge University Press, 2011.

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MARCEL SZABÓ Burgstaller, M., ‘The Future of Bilateral Investment Treaties of EU Member States’, in M. Bungenberg et al., (Eds.), International Investment Law and EU Law, European Yearbook of International Economic Law, Special Issue, Berlin: Springer, 2011. Cremades, B.M. & Cairns, D.J.A., ‘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. Douglas, Z., ‘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: Cambridge University Press, 2013. Nowak, C., ‘Legal Arrangements for the Promotion and Protection of Foreign Investments within the Framework of the EU Association Policy and European Neighbourhood Policy’, in M. Bungenberg et al., (Eds.), International Investment Law and EU Law, European Yearbook of International Economic Law, Special Issue, Berlin: Springer, 2011. Ortino, F. & Eeckhout, P., ‘Towards an EU Policy on Foreign Direct Investment’, in A. Biondi et al., (Eds.), EU Law after Lisbon, Oxford: Oxford University Press, 2012. Weiss F., & Steiner, S., ‘The Investment Regime under Art. 207 TFEU: A Legal Conundrum, the Scope of ‘Foreign Direct Investment’ and the Future of Intra-EU BITs’, in F. Baetens (Ed.), Investment Law within International Law: Integrationist Perspectives, Cambridge: Cambridge University Press, 2013. Yannaca-Small, K., ‘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: Oxford University Press, 2010.

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ENVIRONMENTAL PROTECTION

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SOUTH AFRICAN BILATERAL INVESTMENT TREATIES (BITS) Jim Pfumorodze and Muhammad De Gama*

12.1

INTRODUCTION

One of the most important challenges confronting the international investment law regime today is how to strike a balance between principles regarding the protection and promotion of foreign direct investment (FDI), on the one hand, and principles regarding the protection of society and the need for the state to pursue national developmental objectives, on the other. Tension arises between states’ obligations towards foreign investors and their obligations towards the host state. This tension has been manifested in bilateral investment treaties (BITs). Host countries still need to strike a delicate and complex balance between using BITs for attracting FDI and, at the same time, preserving the flexibility needed for the pursuit of national development objectives. While enhancing the host countries’ investment climate, it is important that BITs do not unduly constrain the degree of flexibility afforded to national policymakers in the pursuit of development or other national policy objectives. This tension has already manifested itself in South Africa (SA) where the state was taken to international arbitration by some foreign investors regarding its broad-based black empowerment laws.1 As a result, SA is currently reviewing its BITs. In 2009, the SA Government initiated a review of BITs entered into by SA since 1994.2 This initial review revealed that the impact of BITs on future SA policies was not critically evaluated by the government at the time of entering into these BITs. Furthermore, it revealed that there are conflicts between the SA BIT regime and the SA Constitution, so a proper legal analysis *

1

2

Jimcall Pfumorodze is a senior lecturer at the Department of Law at the University of Botswana. Muhammad Mustaqeem de Gama is Professor at the University of Pretoria and a director of Legal International Trade and Investment at the Department of Trade and Industry of South Africa. Piero Foresti, Laura de Carli et al. v. Republic of South Africa, ICSID Case No. ARB (AF)/07/1). For a further discussion and analysis of this case, A. Friedman, ‘Flexible Arbitration for the Developing World: Piero Foresti and the Future of Bilateral Investment Treaties in the Global South’, 7 International Law and Management Review, 2010, p.37. See Government Gazette, 7 July 2009 Bilateral Investment Treaty Policy Framework Review, Executive Summary of Government Position Paper.

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was not conducted during the signing of these BITs.3 Consequently, the SA government entered into BITs that were highly in favour of investors without the necessary safeguards to preserve flexibility in a number of critical policy areas like black economic empowerment, the protection of the environment, and advancing the socio-economic rights which are enshrined in the SA Constitution.4 Thus, the BITs which were entered into were not in the long-term interest of SA. The initial review produced a discussion paper which was published to solicit comments from the stakeholders and the general public.5 One aspect of this paper was the micro-policy analysis which sought to assess the impact of obligations undertaken in the SA BITs and to develop a policy framework for the future engagement of investment rules.6 The discussion paper further pointed out that there are conflicts between the SA BITs regime and the SA Constitution. The SA Constitution enshrines socio-economic rights which need to be protected,7 yet the BITs do not provide the policy space to do so. The feedback from the discussion paper led to the adoption of a new approach to foreign investment by the SA government in July 2010.8 The new approach seeks to modernize and to strengthen SA’s investment regime by implementing a series of measures that will ensure that SA remains open to foreign investment. In addition, it should provide adequate security and protection to all investors while preserving the sovereign right of SA to pursue the development of public policy objectives.9 There are five core measures to be undertaken under the new approach. First, an intergovernmental process was proposed so that it explores the establishment of a ‘National Investment Act’ for SA. Second, SA would only enter into BITs in the future on the basis of compelling economic or political reasons. Third, SA would develop a new BIT negotiating template which seeks to balance investors’ and host state’s interest. Fourth, SA would renegotiate its BITs which are ready for review or termination. Furthermore, SA would renegotiate those BITs that have been signed but not yet ratified. Lastly, the new policy established an Inter-Ministerial Committee (IMC) on investment to oversee the implementation of these measures. These measures seek to come up with a

3 4

5 6 7 8 9

South Africa Department of Trade and Industry, Bilateral Investment Treaty Policy Framework Review (June 2009). The 1996 SA Constitution has been dubbed as a transformative constitution which seeks to achieve “largescale, egalitarian social transformation”; see K. Klare, ‘Legal Culture and Transformative Constitutionalism’, 14 South African Journal for Human Rights, 1998, p. 146, at 151. For a description of the legal order of the pre-1994 SA, see AZAPO v. President of the Republic of SA 1996 (4) SA 671 (CC). See J. Maupin, ‘Submission Concerning the Bilateral Investment Treaty Policy Framework Review’, Government Position Paper, 12 August 2009. See Government Gazette, 7 July 2009 Bilateral Investment Treaty Policy Framework Review, Executive Summary of Government Position Paper. See Chapter 2 of the SA Constitution (Bills of Rights, Sections 7-39). Department of Trade and Industry, Republic of South Africa (2010) Policy Statement: The South African Government’s Approach to Future International Investment Treaties, June 2010. Id.

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new institutional and legal framework dealing with foreign investment in a coordinated and coherent manner with the view to aligning SA’s international obligations with its domestic obligations.10 Environmental protection is very important to SA given that its key industries have the capacity to damage the environment. SA’s key economic sectors are the automobile industry, mining, tourism, and information communication technology. The mining sector is estimated to be the fifth largest sector in terms of gross domestic product (GDP) value.11 The nature of the activities in the mining industry poses a huge threat to the environment and so do the activities of the automobile industry. The extraction of minerals has hefty social and environmental costs which need regulation by the government for the benefit of the community in which the industry is situated and for the benefit of the industry’s employees, the healthy status of water, and the preservation of the local biodiversity. This chapter seeks to interrogate the nexus between SA BITs and environmental protection. It examines the extent to which SA BITs afford policy space to the state for the protection of the environment. It will discuss how the pending SA Model BIT may address the need for environmental protection in the new generation of SA BITs. This chapter will then discuss the rationale for BITs and analyse the anatomy of SA BITs, highlighting the nature and extent of environmental protection clauses. Lastly, it will offer suggestions on how the SA Model BIT may enhance the protection of the environment in SA.

12.2

THE RATIONALE

FOR

BITS

There are numerous factors which shaped the development of BITs. One of the main factors relates to the uncertainties and inadequacies of the customary international law of state responsibility for injuries to aliens and their property.12 As a result, developed countries resorted to BITs to improve the protection of investors abroad.13 BITs are perceived to be setting forth necessary guarantees of protection for the investments of their national individuals and corporations in developing countries. They are considered to offer a higher and more reliable protection to foreign investors than the domestic laws,

10 11 12 13

Republic of South Africa Policy Statement: The South African Government’s Approach to Future International Investment Treaties, June 2010, supra note 8. Available at accessed on 7 April 2014. S.M. Schwebel, ‘The Overwhelming Merits of Bilateral Investment Treaties’, 32(2) Suffolk Transactional Law Review, 2008, pp. 263-269. See United Nations Centre on Transnational Corporations, Bilateral Investment Treaties, New York: United Nations, 1988, Doc. No.ST/CTC/65, p. 1.

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administrative regulations, and policies of the host country which are subject to unilateral modification. Harten (2010)14 examined five common justifications for the investment treaty system. First, investment treaties are a means to encourage foreign investment. Second, investment treaties respond to the bias and unreliability of domestic courts by providing for an international dispute settlement mechanism. Third, investment arbitration advances fairness and the rule of law in the resolution of investment disputes. Fourth, investment treaties affirm the sovereignty and bargaining strategies of states, and, lastly, investment treaties were endorsed by a democratic process, based on the analysis of the above factors. Harten, however, recommended that governments should exercise greater care when considering entry into the system or, more likely, the maintenance or renewal of existing treaties and that developing countries should consider options for reform to suit their own developmental objectives. On the other hand, Schwebel (2008)15 pointed out that BITs have overwhelming merits in that they contain substantive standards for the treatment of foreign investment and that they have procedures for the settlement of disputes arising under those treaties. In addition, BITs are made on an ad hoc basis, and so there is flexibility. They can take into account the mutual interests of the parties. They also set clear conflict norms, for example, the standard of protection and state responsibility. BITs have other advantages. They are particularly appropriate for settling international investment issues between developed states and the least developed countries (LDCs), primarily because they provide flexibility for both partners.16 Furthermore, they enable partners to make concessions without compromising their positions on unsettled customary international legal principles. Thus, a signatory to a bilateral treaty can agree to terms which are contrary to positions it has taken regarding customary international law and still not concede that position as to customary international law if it states that the treaty is merely a contractual arrangement with the other signatory and not a representation of an international legal obligation.17 Developed countries and developing countries have a different rationale when entering into a BIT. For developed countries, they seek to protect the foreign investments of their nationals abroad by securing some guarantees from the host state. This would cater for the inequality in customary international law and domestic laws as they can be changed unilaterally. For developing countries, the understanding has been that they could attract 14 15 16 17

G.V. Harten, ‘Five Justifications for Investment Treaties: A Critical Discussion’, 2(1) Trade, Law and Development, Vol. 2:1, 2010, pp. 19-56. Schwebel 2008, supra note 12, pp. 263-269. Id. M.R. Reading, ‘The Bilateral Investment Treaty in ASEAN: A Comparative Analysis’, 42 Duke Law Journal, 1992-1993, p. 679.

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FDI if they offered, inter alia, guarantees of protection to prospective investors, so that they provide for legal stability. However, it should be noted that BITs are only but one factor among many which may influence a foreign investor to invest in a particular developing country. Thus, the mere existence of a bilateral investment treaty will not itself attract an investment.18

12.3

THE NATURE

12.3.1

OF

SA BITS

Background and Context

Prior to 1994, SA did not have any history of negotiating BITs.19 However, in the postapartheid period, SA has entered into at least 42 BITs.20 Towards the independence of SA, it was generally feared that it would embark on a massive nationalization in order to redistribute wealth and address past economic imbalances which were racially biased. The reality, however, showed that the government was committed to the protection and promotion of foreign investment.21 Even though the SA government continued to stimulate foreign investment, this was not done systematically. From 1994 onwards, the government was quick to enter into numerous BITs. Ironically, the terms of the final Constitution were not yet finalized by then. As a result, some of the commitments which were made under the BITs contradict the Constitution. These BITs which were entered into in haste did not leave much room for social policies.22 The situation was also exacerbated by the inexperience of the negotiators who could not fully appreciate the risks which could be poised by the BITs.23 As a result, SA entered into agreements which were more favourable to foreign investors at the expense of the host state. 18

19

20 21 22 23

Other relevant factors are the political stability of the host country, the economic profitability of an initial investment (especially in the mineral sectors), the incentives package, and the selection of new investment arrangements in the form of licensing agreements and management and marketing contracts. The bottom line is that the host country should offer a secure profit-making venture to the foreign investor. It should be noted, however, that SA has an Economic Cooperation and Investment Agreement that was signed with Paraguay in 1974. See M.W. Chow, ‘Discriminatory Equality v Nondiscriminatory inequality: The Legitimacy of SA’s Affirmative Action under International Law’, 24 Connecticut Journal of International Law, 2009, p. 316; U. Kriebaum, ‘Privatizing Human Rights: The Interface between International Investment Protection and Human Rights’, in A. Reinish & U. Kriebaum (Eds.), The Law of International Relations-Liber Amicorum Hanspeter Neuhold, Eleven International Publishing: The Hague, 2007, p. 16. These treaties are available at accessed 4 April 2014. See Chow 2009, supra note 19, p. 316. See L.E. Peterson, ‘South Africa’s Bilateral Investment Treaties: Implications for Development and Human Rights’, (26) Friedrich-Ebert-Stiftung, Dialogue on Globalization, 2006 p. 10. Bilateral Investment Treaty Policy Framework Review (June 2009), supra note 3.

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The SA–United Kingdom and Northern Ireland BIT (SA-UK BIT) was the first to be concluded in the post-apartheid era.24 This BIT was used by SA as the model during the initial years.25 It should be noted that this BIT was concluded before the new Constitution that was finalized in 1996. This also applies to seven other BITs which preceded the Constitution.26 As highlighted above, this led to incongruence between the SA Constitution and the BITs. The SA BITs should be examined in the light of the country’s legal and policy framework. The 1996 SA Constitution has been dubbed as a transformative constitution which seeks to achieve “large-scale, egalitarian social transformation”.27 The SA Constitution is the supreme law of the land, and all laws must conform to it.28 Any law which is inconsistent with it is null and void to the extent of its inconsistency.29 The SA Constitution mandates positive action by the government to promote conditions of equality which seek to address inequality caused by apartheid. All these constitutional commitments and mandates do not comport with the standards of foreign investor protection envisaged in the BITs.30 The 1996 SA Constitution promotes both the equality of opportunity and of the outcome.31 In accordance with its constitutional mandate, the state is expected to perform a redistributive function in areas like access to property,32 land and water reform,33 right to adequate housing,34 rights to healthcare, food and water, social security,35 and education.36 Furthermore, the Constitution allows preferential treatment on procurement in order to empower historically disadvantaged persons.37 24 25 26 27

28

29

30 31 32 33 34 35 36 37

This BIT was signed on 20 September 1994. Peterson 2006, supra note 22, p. 10. These are the ones with Canada, Cuba, France, Germany, Korea, the Netherlands, and Switzerland. The remaining BITs were concluded after the Constitution was finalized. See Klare 1998, supra note 4, p. 146, at 151. For a description of the legal order of the pre-1994 SA, see AZAPO v. President of the Republic of South Africa 1996 (4) SA 671 (CC). See also Dugard 1978, supra note 4. Section 2 of the Constitution gives expression to the principle of constitutional supremacy. It states that the “Constitution is the supreme law of the Republic; law or conduct inconsistent with it is invalid and the obligations imposed by it must be fulfilled”. See also Section 237 of the Constitution which provides that “All constitutional obligations must be performed diligently and without delay”. For cases on this aspect, see AZAPO v. President of the Republic of South Africa 1996 (4) SA 671(CC); S v. Makwanyane 1995 (3) SA 391(CC), Executive Council of the Western Cape Legislature v. President of the Republic of South Africa 1995 (4) SA 877 (CC); and SA Association of Personal Injury Lawyers v. Minister of Health 2001 (1) SA 833 (CC). D. Schneiderman, Constitutionalizing Economic Globalization, Investment Rules and Democracy’s Promise, Cambridge University Press, 2009, p. 246. Id., p. 248. Section 25 (5) of the SA Constitution. Section 25 (8) of the SA Constitution. Section 27 of the SA Constitution. Section 27 of the SA Constitution. Section 28 of the SA Constitution. Section 217 of the SA Constitution.

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Furthermore, Section 24 of the SA Constitution enshrines the environmental law clause. It provides for the right to a healthy environment, and this imposes on the state a duty to actively protect the environment.38 Section 24 (b) constitutionalizes the notion of intergeneration equity by placing a duty on the state to protect the environment for the benefit of both the current and future generations.39 SA is also part to many international environment agreements, and there are numerous statutes dealing with the environment.40 It follows a dualist system in the incorporation of international treaties into the national system. However, a discussion of these instruments is outside the scope of this paper.41 Interestingly, SA is a member of the Southern African Development Community (SADC). The SADC is the successor to the Southern African Development Coordinating Conference (SADCC), established on 1 April 1980. The SADCC was transformed into the SADC on 17 August 1992 in Windhoek, Namibia, where the SADC Treaty was adopted, redefining the basis of cooperation among member states from a loose association into a legally binding arrangement.42 The main objectives of SADC are to achieve development, peace and security, and economic growth, to alleviate poverty, to enhance the standard and quality of life of the peoples of SA, and to support the socially disadvantaged through regional integration, built on democratic principles and equitable and sustainable development.43 The SADC, of which SA is a member, developed a model BIT in 2012. The SADC Model BIT 2012 is not intended to be and is not a legally binding document. Rather, it provides advice to governments that they may consider in any future negotiations they enter into relating to an investment treaty. It also provides an educational tool for officials and may serve as the basis for training sessions for SADC government officials. Each article is accompanied by a commentary after the proposed text. The commentary forms an integral part of the final product. The relevance of the SADC Model BIT 2012 to SA is that SA can use a template for its own Model BIT or in future BIT negotiations.

38 39 40

41

42 43

See M. Kidd, Environmental Law, Juta and Company LTD, Cape Town, 2008. See I. Currie & J. De Waal, The Bill of Rights Handbook, 5th edn, Juta and Company Ltd, Cape Town, 2005. Multilateral environment agreements to which SA has ratified include the Vienna Convention for Protection of the Ozone Layer (1985), the Convention on Biological Diversity (1992), the Convention to Combat Diversification, and the World Heritage Convention concerning the Prevention of Pollution from Ships (1972). For a detailed discussion of these instruments and statutes, see Kidd 2008, supra note 38; see also J. Glazewski, Environmental Law in South Africa, 2nd edn, LexisNexis, Cape Town, 2005; M. van der Linde & L. Ferris, Compendium of South African Environmental Legislation, Pretoria University Law Press, Pretoria, 2010; J. Dugard, International Law A South African Perspective, 4th edn, Juta, Cape Town, 2011. See the SADC website. Available at accessed 7 May 2014. Id.

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The Anatomy of SA BITs

This section explores the anatomy of SA BITs. It discusses the preamble to and the scope and coverage of SA BITs. This is followed by a discussion on the main obligations of the state and foreign investors, respectively. 12.3.2.1 The Preamble The preamble reflects the parties’ intentions and objectives when concluding an agreement. Although the preamble is not legally binding, it constitutes part of the context of an agreement44 and plays a role in guiding the interpretation of treaties where there is ambiguity in the language of SA BITs. The preambles are short and refer mainly to two issues, namely, the desire to “create favourable conditions for greater investment by nationals and companies of one state in the territory of the other state” and the encouragement and reciprocal protection of investments so as to stimulate “individual business initiative and increase prosperity in both states.”45 The reference to developing objectives or public interest is conspicuously absent in SA BITs. Thus, when the BITs are being interpreted in the dispute settlement process, they may not be interpreted in the light of SA’s constitutional and developmental values and goals. As it is, the preambles only emphasize investment promotion, and this buttresses the argument that the primary objective of BITs is to protect investors’ interests. It is suggested that SA should ensure that its preambles encompass the country’s development objectives and constitutional values like environmental protection. SA should introduce more specific language into preambles that emphasize the fact that investment promotion and protection should not undermine other key public values. These values and objectives should be included in the preamble and should be defined accordingly. These include, i.e. sustainable and equitable development, human development, human rights (including economic, social, and cultural rights), poverty alleviation, socio-economic transformation and the promotion of substantive equality, and environmental protection and preservation. 12.3.2.2 The Scope of SA BITs The scope and subject matter of the treaty will depend on the definition of certain key terms. Most SA BITs contain a definition clause that defines concepts such as ‘investment’, ‘nationals’, ‘investor’, and ‘territory’. Like traditional BITs, SA BITs define ‘investment’ in wide, broad, and open-ended terms and follow an asset-based approach.46 It has

44 45 46

Art. 31 of the 1969 Vienna Convention on the Law of Treaties. See the South Africa–UK BIT preamble; see also other BITs. Maupin 2009, supra note 5.

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been said that “the definition of investment must be precisely drafted so as to include only the types of investment which the government decides, after careful deliberation, merit coverage under an international investment agreement”.47 The definition of ‘investment’ which is the subject of the treaties is usually very broad, covering inter alia direct investment, portfolio investment, loans, licences, contracts, and intellectual property. Investors can instigate cases by claiming that their rights to any of these have been violated. One of the most important definitions in a BIT is that of an ‘investor’. The parameters of the BIT and its scope of coverage are determined by the definition of an investor in a BIT. In the definition of an ‘investor’, BITs define this term differently. The definition of an ‘investor’ encompasses both natural and legal persons and also indirect investors.48 This shows that the definition of an investor is very broad and can lead to treaty shopping. ‘Treaty shopping’ refers to the conduct of foreign investors in acquiring the benefits of investment treaties in their actual or planned host state through third countries, through which their investment needs to be routed.49 Although this has not yet happened in SA, the SA–the Netherlands raises this possibility. 12.3.2.3

Obligations of the Host State under SA BITs

12.3.2.3.1 Non-Discrimination All the BITs maintain a prohibition against discriminatory measures generally and more specifically in the form of the most favoured nation (MFN) and national treatment (NT). MFN requires that no contracting party should afford more favourable treatment to the investments of the third party than it affords to the other contracting party. On the other hand, NT requires that no contracting party should afford its national investors more favourable treatment than it affords to the investors (investment) of the other contracting party. The intentions of these standards are to level the playing field between both national and international investors. The language of SA BITs on these provisions is almost the same. However, differences emerge concerning the exceptions to these principles. The bulk of SA BITs allow for only three exceptions. The first one deals with regional integration. The non-discrimination 47 48

49

Id. See Article 1 (b) (iii) of South Africa–the Netherlands BIT (currently terminated) that states “legal persons not constituted under the law of that Contracting Party but controlled, directly or indirectly, by natural persons as defined in (i) or by legal persons as defined in (ii) above”. M. Skinner, C.A. Miles & S. Luttrell, ‘Access and Advantage in Investor-State Arbitration: The Law and Practice of Treaty Shopping’, 3 JWELB 260, 2010. See also R. van Os & R. Knottnerus, ‘Dutch Bilateral Investment Treaties: A Gateway to Treaty Shopping for Investment Protection by Multinational Companies’, SOMO, October 2011. Available at accessed on 7 April 2014.

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principles do not apply to a customs union, free trade area, or common markets. Secondly, they do not apply to international arrangements relating mainly or wholly to taxation. Thirdly, they do not apply to development finance institutions. The SA– Equatorial Guinea BIT raises much interest. In addition to the usual exception to NT, it also added that the MFN and NT may be disregarded where there is a need to safeguard health, public order and security, and environmental protection among other things.50 It is almost modelled along the WTO GATT Article XX exceptions. This is an interesting development since it seeks to give more policy space to the host state where social welfare needs to be considered. It is therefore suggested that SA BITs should allow discrimination where it is necessary to protect the environment. 12.3.2.3.2 Fair and Equitable Treatment All SA BITs contain the fair and equitable treatment clause although it is phrased differently than in other BITs. The majority of these SA BITs use the standard term ‘free and equitable treatment’. However, some require that there should be fair and equitable treatment in accordance with the principles of international law.51 Furthermore, other BITs refer to just and fair treatment.52 One BIT refers to fair treatment only.53 The definitions of these concepts are so flexible that investors are able to claim that their rights are being violated for a wide range of reasons. Fair and equitable treatment is the most frequently pleaded obligation in international investment dispute settlement. The fair and equitable treatment provision has emerged as an outcome-decisive right, eclipsing even the more established protection against expropriation.54 Hence, the breach of the fair and equitable provision has also been pleaded where a state has undertaken some environmental regulations or measures affecting investment. Therefore, there is a need for a specific exclusion of its application to environmental protection measures. Most SA BITs have a stand-alone fair and equitable protection provision.55 Thus, in most SA BITs, the fair and equitable standard is viewed as an autonomous standard, which is not limited to the customary international law minimum standard. For those clauses which refer to international law, the implication is that the fair and equitable standard is a constituent of the international minimum standard and does not require treatment in addition to or beyond customary 50 51 52 53 54

55

SA–Equatorial Guinea BIT. See, for instance, South Africa–Canada BIT, South Africa–Spain BIT, and South Africa–France BIT. See South Africa–Italy BIT and South Africa–Mauritius BIT. South Africa–Iran BIT. C. Mclachlan et al., International Investment Arbitration: Substantive Principle, Oxford University Press, Oxford, 2007, p. 201. The fair and equitable treatment clause is an absolute standard, and this means that it fixes a level of treatment for foreign investors that must be observed by a host state, regardless of how the state treats its nationals. However, the South Africa–Canada BIT refers to international law.

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international law. Consequently, this limits the scope of application of this standard, thereby giving more policy space to the host state. However, there is no case law on this point dealing with SA BITs. 12.3.2.3.3 Full Protection and Security Almost all the SA BITs have this clause. In some BITs, it is phrased as full protection,56 whereas others refer to full and complete protection and safety, or full legal protection or full physical security and protection. This term has been interpreted differently. In the Saluka case, it was said that the clause does not cover “any kind of impairment of an investor’s investment, but to protect more specifically the physical integrity of an investment against interference by use of force”.57 It is noteworthy that even if no force has been used, the seizure of foreign investors’ premises by a host government amounts to a breach of its duty to provide full protection and security.58 Some tribunals have equated the standards of full protection and security with fair and equitable treatment.59 On the other hand, some have insisted that the fair and equitable treatment provision and the full protection and security provision are separate and distinct.60 12.3.2.3.4 Expropriation and Compensation The definition of ‘expropriation’ is very broad; it includes direct expropriation such as takeovers of property but also indirect expropriation including ‘regulatory takings’ or the implementation of new policy measures that affect the potential revenue and profits of the investors. SA BITs prohibit any expropriation of the investments. All SA BITs set at least four requirements which must be met for expropriation to be lawful. First, the expropriation must be for the public interest; secondly, it must be done under the due process of law. Thirdly, it should be on a non-discriminatory basis, and, finally, expropriation must be against payment of prompt, adequate, and fair compensation. SA BITs also protect investors against indirect expropriation. Thus, investors are protected against a host state’s policy that arbitrators may characterize as ‘regulatory expropriate’ on the basis

56 57 58

59

60

South Africa–Zimbabwe BIT. Saluka Investments BV (the Netherlands) v. the Czeck Republic, UNCITRAL, Partial Award of 17 March 2006. See Biwater Gauff (Tanzania) Ltd B v. United Republic of Tanzania, ICSID, Case No. ARB/05/22 Award of 24 July 2008. See also Azurix Corp. v. Argentine Republic, ICSID, Case No. ARB/01/12, Decision on Jurisdiction of 8 December 2003. See Wena Hotels Ltd v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award of 8 December 2000, 6 ICSID reports 89. Occidental Exploration and Production Company v. The Republic of Ecuador, LCIA Case No. UN3467, Award of 1 July 2004, ICSID Reports 59. Id.

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that a law or other measure has reduced the value of an investment.61 Compensation may be required for investors challenging measures that address legitimate public interest concerns. 12.3.2.4 Obligations of Investors in SA BITs SA BITs do not impose any obligations on foreign investors. The recent trend is that BITs require investors to respect the following: human rights, labour rights, environmental obligations, and any other developmental objectives which a host state may pursue.62 Specifically, the SA BITs do not have any environmental clauses. As a result, it is suggested that SA should have an environmental protection clause in its model BIT in line with modern trends. The US Model BIT, 2012, contains several obligations of foreign investors. For instance, Article 12 of the US Model BIT, 2012, deals with investment and the environment. The Article begins by recognizing the importance of environmental laws and policies and multilateral agreements in the protection of the environment.63 It discourages the parties from promoting investment by weakening or reducing the protection afforded in domestic environmental laws.64 In terms of this Article, 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.65 Article 12(4) provides the scope and coverage of environmental law. It provides that the term environmental law refers to statutes or regulations which are primarily meant to protect the environment or to prevent danger to human, animal, or plant life or health. The areas covered include the prevention of pollution, the control of hazardous or toxic chemicals, and the protection or conservation of wild flora and fauna. The clause provides for a dispute settlement mechanism for environmental matters. Each party may make a written request for consultations with the other party regarding any matter relating to investment and the environment. The other party is supposed to

61

62

63

64 65

M. Brunetti, ‘Indirect Expropriation in International Law’, 5(150) International Law FORUM du droit international, 2003; 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’, 11(21) Civilizar Ciencias Sociales y Humanas, 2011, p. 77. See the Southern African Development Community Model BIT (2012) and the US Model BIT (2012). See also Y.S. Ayala, ‘Restoring the Balance in Bilateral Investment Treaties: Incorporating Human Rights Clauses’, Revista de Derecho, Universidad del Norte 32, 2009, pp. 139-161. See Art. 12(1) of the US Model BIT 2012. See M. Brown, ‘US Bilateral Investment Treaties: Recent Developments’, Legal Update 11 June 2012. Available at accessed 17 March 2014. This was released by the Office of the United States Trade Representative on 20 April 2012. For the text of the Model US BIT, see accessed on 17 March 2014. See Art. 12 (2) of the US Model BIT 2012. Id., Art. 12 (3).

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request consultations within 30 days of the receipt of such request. Parties are encouraged to try to come up with a mutually satisfactory resolution.66 The SADC, of which SA is a member, developed a model BIT in 2012. Articles 13-15 of the SADC Model BIT 201267 deal with investment and the environment. Article 13 relates to the environment and a social impact assessment. It provides that investors should comply with environmental and social assessment processes applicable to their proposed investments prior to their establishment in accordance with the domestic laws of the host state.68 These assessments should be conducted in a transparent manner, should be public and accessible for the local communities or other stakeholders who are potentially affected, and should be allowed time to make representations. This Article also provides for the application of the precautionary principle to the environmental impact assessments and to decisions taken on proposed investments.69 In terms of Article 14, entitled ‘environmental management and improvement’, investments or investors are required to maintain an environmental management system which meets relevant international environmental management standards. These plans include emergency response and decommissioning plans, which should be made accessible to the host state and the public. Finally, Article 15 deals with the minimum standards for human rights, environment, and labour. Investors and their investments should be managed or operated in a manner, which is consistent with international obligations, adopted by the host state or the home state, whichever obligations are higher. Thus, this Article sets international agreements as a foundation for the host state and home state conduct even if not fully incorporated into domestic law.70

66 67

68

69

70

Id., Art. 12 (6). The SADC Model BIT states that “the inclusion of any given provision in this document does not mean that every individual state has endorsed it. Each member state will ultimately be responsible for its choice of clauses and the final result of any particular BIT negotiation”. The SADC Model BIT 2012 is not intended to be and is not a legally binding document. Rather, it provides advice to governments that they may consider in any future negotiations they enter relating to an investment treaty. It also provides an educational tool for officials and may serve as the basis for training sessions for SADC government officials. Each article is accompanied by a commentary after the proposed text. The commentary forms an integral part of the final product. However, where the domestic law is insufficient due to the nature and size of the project, the gap may be filled by reference to the International Finance Corporation’s standards or the law applicable to the proposed investment where it to be located in the home state. The precautionary principle is defined in Art. 15 of the Rio Declaration on Environment and Development as follows: “In order to protect the environment, the precautionary approach shall be widely applied by States according to their capabilities. 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”. These obligations are derived expressly from the act or ratification of an agreement by the host state or home state in certain circumstances.

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12.3.2.5

Common Obligations for the Host State and Investors in SA BITs: Dispute Settlement SA BITs embody both a state-to-state dispute resolution mechanism and an investor-tostate dispute resolution mechanism. Where there is a dispute between the contracting parties concerning the interpretation or application of a BIT, and the dispute has not been settled amicably through negotiations, the parties should take the matter to arbitration. A lot of attention has been focused on investor-to-state arbitration. Although SA is not a member of the International Centre for the Settlement of Investment Disputes (ICSID), it consents to the ICSID additional facility in most of its BITs.71 It also leaves room for ad hoc arbitration under the United Nations Commission on International Trade Law (UNCITRAL) rules. Interestingly, some SA BITs provide that the parties may submit the case to a court or administrative tribunal, which has competence in respect of the party to the dispute, thus providing for the possibility to resort to national courts.72 However, this resort to national courts is merely optional and not compulsory, and one can still proceed with the case elsewhere when one is not satisfied by the outcome in the national courts. So there is no requirement for the exhaustion of local remedies. The investor–state dispute resolution mechanism enables investors to bypass domestic courts and sue governments in international tribunals. The Piero Foresti case illustrates this point.73 After 1994, the government issued a series of policies known as ‘Black Economic Empowerment’ (BEE) aimed at expanding the opportunities available to black South Africans. One of these policies/regulations was the Mineral and Petroleum Resources Development Act 2002 (MPRDA) which required that 26 % of companies in the mining industry be owned by ‘historically disadvantaged South Africans’, that the mineral wealth is owned by the state, and that investors are relicensed if they met certain criteria (relating mainly to a commitment to the BEE). In 2007, a number of Italian citizens and Luxembourg-based corporations engaged in mining in SA registered an arbitration request at the ICSID. The request claimed that the MPRDA breached the BIT’s protection from expropriation provision. In November 2009, the investors requested a suspension of the arbitration. Available information suggests that this request was filed soon after the tribunal accepted two petitions for participation by a coalition of nongovernmental organizations and the International Commission of Jurists. In the official proceedings of the case, the claimants argued that they wanted a suspension of the process because an offset agreement had been reached between the operating companies and the SA mining authorities which had brought some partial relief. The authorities had granted them new-order mineral rights 71 72 73

See SA–Italy BIT. See Czech Republic BIT. Piero Foresti case, supra note 1.

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without obliging the claimants to sell 26 % of their shares to historically disadvantaged South Africans. Instead, the operating companies would have to comply with a set of performance requirements. As a result of this request, the case was dismissed on 4 August 2010. The claimants were ordered to pay € 400,000 to the SA Government. This case has implications for the implementation of policies meant to promote national development and equality in SA. The MPRDA was enacted in SA for important public policy reasons and in furtherance of constitutionally mandated goals. These include human rights advancement and in particular the pursuit of substantive equality, sustainable development, environmental protection, and sound and prudent stewardship of the nation’s natural resources. Furthermore, it also caters for the need to proactively redress the apartheid history of exploitative labour practices, forced land deprivations, and discriminatory ownership policies which previously characterized SA’s mining sector for decades.74 Therefore, this case raises important questions concerning, inter alia, the appropriate line between legitimate, non-compensable regulatory action and compensable expropriation under international law. Within the South African context, the question will be whether the government has the policy space to address the socio-economic imbalances which were caused by apartheid without being challenged under relevant BITs. Since foreign investors may resort to lengthy and expensive international arbitration, the government may refrain from enforcing policies meant to promote socioeconomic development.

12.4

TOWARDS

A

NEW SA MODEL BIT

WHICH

PROTECTS

THE

ENVIRONMENT

As indicated in the introduction, SA is in the process of coming up with its first new BIT. Currently, SA is in the process of terminating its old-generation BITs.75 It has already given notice thereof to at least five parties to its BITs, i.e. Belgium–Luxembourg,76 Spain,77 Germany,78 Switzerland,79 and the Netherlands.80 SA is also in the process of

74

75 76 77 78 79 80

For a further discussion of these developmental policies in SA, see Petition for Limited Participation as Non-Disputing Parties in Terms of Art. 41(3), 27, 39, and 35 of the Additional Facility Rules International Centre for Settlement of Investment Disputes, Case No. Arb(Af)/07/01 between Piero Foresti, Laura De Carli et al. and The Republic of South Africa, petitioned by the Centre for Applied Legal Studies (CALS); the Center for International Environmental Law (CIEL); the International Centre for the Legal Protection of Human Rights (INTERIGHTS), and the Legal Resources Centre (LRC). The term old-generation BITs is used to denote all the BITs that the SA government has entered into since independence to the present day before the implementation of the review of the BITs. The notice was given on 7 September 2012, and this was the first BIT party to receive such a notice. On 23 June 2013. On 23 October 2013. On 30 October 2013. On 1 November 2013.

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developing a new Model BIT as well as alternate investment instruments. On 29 October 2013, a draft of the Promotion and Protection of Investment Bill was published for public consultation, and the government is currently working on the SA Model BIT.

12.4.1

Proposals for Environmental Clauses in the SA Model BIT

As highlighted above, the domestic law of SA and its commitments under international environmental agreements set a high level of environmental protection in SA. At the same time, the current generation of SA BITs do not cater for the protection of the environment. The effect of this is that SA may be sued by foreign investors where it takes some environmental measures which have an effect on foreign investment. Thus, there is a need for environmental clauses in future SA BITs. SA is in the process of reviewing its BIT policy and of coming up with a Model BIT. Below is a discussion on how SA may incorporate environmental concerns in its Model BIT. First, the preamble to the Model BIT should refer to environmental protection as a concern to both parties. Secondly, the Model BIT should reserve policy space for environmental regulation for the entire treaty. Thirdly, like the US Model BIT 2012, the SA Model should discourage the parties from promoting investment by weakening or reducing the protections afforded in domestic environmental laws. Each party should retain the right to exercise discretion with respect to regulatory, compliance, investigatory, and prosecutorial matters and to make decisions regarding the allocation of resources. The clause should also provide for a dispute settlement mechanism on environmental matters. Each party may make a written request for consultations with the other party regarding any matter relating to investment and the environment. The other party is supposed to request consultations within thirty days of the receipt of such request. Parties are encouraged to try to come up with a mutually satisfactory resolution. Like the SADC Model BIT, SA BITs should provide for an environment and social impact assessment. These assessments should be conducted in a transparent manner and should be public and accessible to the local communities. Furthermore, investments and investors are required to maintain an environmental management system which meets relevant international environmental management standards. These plans include emergency response and decommissioning plans which should be made accessible to the host state and the public. Concerning a non-discrimination clause, it is therefore suggested that SA BITs should allow discrimination where it is necessary to protect the environment. Therefore, there is a need for the specific clauses that exclude application of environmental protection measures from the scope of violations under fair and equitable treatment. Furthermore,

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performance requirements which require investors to use a particular form of technology to meet generally applicable health, safety, or environmental requirements should not fall under the clause on the prohibition of performance requirements. It is therefore suggested that the new Model BIT stipulates that environmental measures which may be tantamount to indirect expropriation should not be compensable.

12.5

CONCLUSION

This chapter has established that SA BITs do no currently have any environmental protection clauses. Furthermore, these BITs do not contain any obligations for foreign investors. Since SA is in the process of coming up with a Model BIT, it is suggested that this model should contain explicit environmental protection clauses so that the SA government may have the policy space to regulate and implement programmes on environmental protection without the risk of being sued for breaching the BITs. Such environmental protection clauses may be inserted throughout the Model BIT: in the preamble, explicit exceptions, and expropriation and dispute resolution articles. Given that the SA Constitution already has an environmental clause, this may inform what should be included in the Model BIT. Including in every new BIT, an environmental protection clause and other obligations of the foreign investor would give more policy space for SA to implement its socio-economic development programmes. Thus it can be concluded that there is a need for environmental protection clauses in SA BITs.

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BIBLIOGRAPHY BOOKS Currie, I. & Waal, de J., The Bill of Rights Handbook, 5th edn, Cape Town: Juta and Company Ltd, 2005. Dugard, J., International Law: A South African Perspective, 4th edn, Cape Town: Juta and Company Ltd, 2011. Glazewski, J., Environmental Law in South Africa, 2nd edn, Cape Town: LexisNexis, 2005. Kidd, M., Environmental Law, Cape Town: Juta and Company Ltd, 2008. Linde, van der M. & Ferris, L., Compendium of South African Environmental legislation, Pretoria: Pretoria University Law Press, 2010. Mclachlan, C. Shore, L. & Weiniger M., International Investment Arbitration: Substantive Principle, Oxford: Oxford University Press, 2007. Reinish, A. & Krieubam, U., The Law of international Relations: Liber Amicorum Hanspeter Neuhold, Den Haag: Eleven International Publishing, 2007.

ARTICLES Barklem, C. & Prieto-Ríos, E.A., ‘The Concept of “Indirect Expropriation”, its Appearance in the International System and its Effects in the Regulatory Activity of Governments’, 11(21) Civilizar Ciencias Sociales y Humanas, 2011. Chow, M.W., ‘Discriminatory Equality v Non-discriminatory Inequality: The Legitimacy of South Africa’s Affirmative Action under International Law’, 24 Connectium Journal of International Law, 2009. Harten, G.V., ‘Five Justifications for Investment Treaties: A Critical Discussion’, 2 Trade, Law and Development, 2010.

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Klare, K., ‘Legal Culture and Transformative Constitutionalism’, 14 South African Journal for Human Rights, 1998. Reading, M.R., ‘The Bilateral Investment Treaty in ASEAN: A Comparative Analysis’, 42 Duke Law Journal, 1992-1993. Schwebel, S.M., ‘The Overwhelming Merits of Bilateral Investment Treaties’, 32(2) Suffolk Transactional Law Review, 2008.

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Part III Environmental Challenges in Investment Disputes: Case-Studies

13

THE VATTENFALL V. GERMANY DISPUTES: FINDING

A

BALANCE

INVESTMENTS

AND

BETWEEN

ENERGY

PUBLIC CONCERNS

Francesca Romanin Jacur*

13.1

INTRODUCTION

In 2009, Vattenfall AB, a Swedish energy company, which was constructing a coal-fired power plant near Hamburg, brought a case under the Energy Charter Treaty (ECT) against Germany before an arbitral tribunal established according to the procedural rules of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), claiming that German local authorities had violated its rights (i) to fair and equitable treatment (FET) and (ii) not to be subject to indirect expropriation.1 A few years later, in 2012, the same company brought another case against Germany before another ICSID arbitral tribunal for the alleged violation of investment protection obligations arising under the ECT, this time with regard to the decision of the German Parliament to shut down its nuclear power plants on German soil.2 The ECT is a multilateral investment treaty specifically devoted to the protection of investments in the energy sector. Although following the traditional pattern of investment agreements, the ECT is the first treaty of this kind that contains an express reference in its preamble to the climate change regime and other environmental agreements.3 Moreover, Article 19 of the ECT requires state parties to integrate sustainable development considerations when carrying out energy investments and expressly envisages the polluterpays and the precautionary principles.4

* 1 2 3

4

Francesca Romanin Jacur is an adjunct professor at the University of Milan. Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG & Co. KG v. Federal Republic of Germany, ICSID Case No. ARB/09/6 (hereinafter, Vattenfall I). Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG & Co. KG v. Federal Republic of Germany, ICSID Case No. ARB/12/12 (hereinafter, Vattenfall II). ECT, Preamble: “Recalling the United Nations Framework Convention on Climate Change, […] and other international environmental agreements with energy-related aspects; and Recognizing the increasingly urgent need for measures to protect the environment, including the decommissioning of energy installations and waste disposal, and for internationally-agreed objectives and criteria for these purposes […]”. On the ECT and its dispute settlement regime, see T. Roe et al., Settlement of Investment Disputes under the Energy Charter Treaty, Cambridge University Press, Cambridge, 2011.

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These two Vattenfall disputes share some common elements and both target German regulatory measures that have a public policy dimension. This chapter illustrates the particular circumstances of each case and elaborates on the controversial issues raised by them. A central issue in both disputes is the notion and the scope of the obligation to ensure FET and the related concept of the ‘legitimate expectations’ of the investor. We will first specify the content of these broadly termed obligations and then attempt to determine whether these obligations have been breached by the behaviour and acts put in place by the German authorities. The polluter-pays and precautionary principles may play a role when considering disputes with regard to investments entailing a sustainable development and environmental dimension in assessing the legitimacy of the challenged domestic regulatory measures. Furthermore, should an obligation to pay compensation be established, it may be considered whether such principles may be used, together with equitable arguments, as subsidiary criteria to determine and, when necessary, to adequately reduce the amount of compensation. In commenting on these cases, a general caveat has to be made with reference to the fact that the relevant documents are not publicly available.5

13.2

VATTENFALL I: THE CONSTRUCTION PLANT

13.2.1

AND

OPERATION

OF THE

MOORBURG COAL POWER

The Dispute

In the Vattenfall I case, the Swedish investor, the owner of a coal-fired power plant near Hamburg, submitted its ‘Request for Arbitration’ against Germany before an ICSID tribunal on 30 March 2009. The Swedish investor claimed that additional environmental restrictions to reduce the pollution from the plant on Elbe River were imposed after the provisional approval of the project in 2007 and that they constituted a violation of the investor’s right to FET. These measures, implemented by Germany in accordance with the EU Water Framework Directive, allegedly rendered the original project economically unsustainable. From the succession of events as described in the ‘Request for Arbitration’ filed by Vattenfall AB, it emerges that the planning of the Moorburg power plant and the related negotiations between Vattenfall AB and the Hamburg government authorities started in 2004. It appears that the parties tried to maintain a ‘constructive’ and open dialogue in the

5

Our considerations are based on the limited information available, namely, the Request for Arbitration and the Award as agreed by the parties with regard to the first Vattenfall case (Vattenfall I). As for the most recent Vattenfall case (Vattenfall II), no official document is publicly available.

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administrative process to build the dual-block power plant that would “ensure long-term supply of district heating to the city of Hamburg”.6 According to the relevant German laws, the construction and operation of this power plant required a series of permits and authorizations. In the dispute examined here, two permits are particularly relevant: an ‘immission control permit’ and a ‘water permit’, which allows the use of cooling water from the Elbe and its discharge back into the river.7 The issuance of the permits was repeatedly delayed due to a series of events. In the wake of growing climate change concerns, the local civil society actively criticized the construction of new facilities for the production of energy from coal sources.8 These concerns were embraced by the newly elected local Authority for Urban Development and Environment of Hamburg (Behörde für Stadtentwicklung und Umwelt – BSU), which included in its new coalition the Green Party, which was always strongly against the construction of the Moorburg coal power plant because of its negative environmental impacts. Despite the delays in granting the duly requested permits, Vattenfall AB proceeded with the implementation of the various requirements advanced by the BSU and eventually, in September 2008, the water and immission permits were granted. However, according to Vattenfall AB, the permits – in particular the water permit – contained additional unforeseen and unexpected restrictions. In particular, Vattenfall AB claimed that: The effects of these limitations would be so severe that the plant would have to be shut down for days or weeks during summertime. Restrictions of this magnitude had not even been remotely mentioned, discussed or proposed during the administrative procedure.9 According to Vattenfall AB, Germany breached its obligations under Article 10 of the ECT to accord FET,10 because of the delays and of the additional requirements attached

6

7 8

9 10

Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG & Co. KG v. Federal Republic of Germany, ICSID Case No. ARB/09/6, ‘Request for Arbitration’, 30 March 2009, p. 4, accessed 14 March 2013. Id., p. 5. These concerns are pointedly set out in a letter by Greenpeace addressed to the competent local authority, illustrating the shortcomings and the environmental weaknesses of the agreement between Vattenfall AB and the Hamburg authorities and asking for the immediate interruption of the construction of the coal power plant. (Letter of 26 February 2008 by Dr. Verheyen on behalf of Greenpeace and others, available online.) ‘Request for Arbitration’, supra note 6, p. 11, para. 37. ECT, Art. 10(1): “Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal.

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FRANCESCA ROMANIN JACUR to the permits that were finally issued.11 Moreover, Vattenfall AB claimed that the combined effects of these measures were tantamount to an indirect expropriation in violation of Article 13 of the ECT12 and consequently claimed compensation to the amount of € 1.4 billion.13 In March 2010, Vattenfall AB and Germany requested the Tribunal to suspend the proceedings, and in August 2010, the parties reached an agreement for the final and binding resolution of the dispute and the discontinuance of the proceedings. In March 2011, the arbitral tribunal, pursuant to the parties’ request and in accordance with ICSID Arbitration Rule 43(2), unanimously endorsed this agreement in an ‘Award’ on agreed terms.14 The Award envisaged three main conditions to be fulfilled by the parties in order to settle the dispute.15 Firstly, the parties agreed to reach a court settlement agreement that terminated the judicial proceedings between Vattenfall AB and the Free and Hanseatic City of Hamburg before the Hamburgisches Oberverwaltungsgericht (OVG) concerning the issuance of the 2008 water permit (hereinafter the ‘OVG settlement’).16 Secondly, this permit was to be replaced by a ‘modified water use permit’ issued according to the terms originally agreed that were ‘immediately enforceable’.17 Thirdly, the city of Hamburg provided confirmation in writing that Vattenfall AB would be released from undertakings to which it was previously committed “to set up district heating pipelines and to build and operate a discharge cooler at the Moorburg power plant.”18 13.2.2

Comments

The construction of the Moorburg coal power plant attracted harsh opposition from the local community, supported by environmental nongovernmental organizations because

11 12

13 14 15

16 17 18

In no case shall such Investments be accorded treatment less favourable than that required by international law, including treaty obligations […]”. ‘Request for Arbitration’, supra note 6, p. 15. ECT, Art. 13(1): “Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as ‘Expropriation’) except where such Expropriation is: (a) for a purpose which is in the public interest; (b) not discriminatory; (c) carried out under due process of law; and (d) accompanied by the payment of prompt, adequate and effective compensation. Such compensation shall amount to the fair market value of the Investment expropriated at the time immediately before the Expropriation […]”. ‘Request for Arbitration’, supra note 6, p. 24. Vattenfall v. Germany (2009), Award of 11 March 2011, p. 2. The settlement reached by the parties covers the facts related to the dispute, but does not apply to future claims which may arise on the basis of future facts and in relation to the performance of the agreement or of the ‘OVG settlement’. Id., Art. 1(3). Id., Art. 2(a). Id., Art. 2(b). Id., Art. 2(c).

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of its contribution to greenhouse gas emissions in the atmosphere. However, the climate change dimension was not upheld as a legal argument in the arbitration here examined.19 Instead, other controversial environmental issues emerge from the Vattenfall I case. The main substantive environmental concern relates to the ‘watering down’ of the environmental requirements envisaged by German law and deriving from the EU Water Framework Directive. And, in fact, in the Award as agreed by the parties, Germany accepted that it would grant a water permit that sets less stringent environmental conditions, most likely in order to reach a settlement and to avoid paying compensation to the investor. The competence to implement the EU Water Framework Directive is attributed to the Federal States (Länder), and the type of adoption varies from one federal state to another. The competent domestic authorities enjoy a certain degree of discretion with regard to how the obligations set by the EU Water Framework Directive should be interpreted and implemented. While a substantive assessment of the legitimacy of the permit is beyond the objectives of this analysis, because it would require a detailed examination of how the requirements set by the EU Water Framework Directive have been transposed into German law,20 at present, in the absence of claims alleging violations of EU or German law, it may be assumed that the BSU operated within its margin of discretion when modifying the water permit. Moving beyond the substantive aspects, some remarks regarding the procedural aspects of the case should be made. In this regard, Vattenfall AB asserted that the behaviour of the competent German authorities had been inconsistent throughout the plant’s authorization process. Indeed, from the documentation at hand, it seems that the German authorities had given some specific assurances with regard to the granting of the requested permits to Vattenfall AB. According to the Request for Arbitration, the BSU issued a document stating that: According to a provisional assessment of the immission control application there are no obstacles that cannot be removed by covenant that stand in the way of approval. Assessment of the submitted application documents has revealed that from the current point of view it is highly probable that the provisions […] in relation to the proposed plant are met […].21

19 20

21

On German climate change law and policy, see R. Lord et al., Climate Change Liability. Transnational Law and Practice, Cambridge University Press, Cambridge, 2012, p. 376. For a further reference on the implementation of the EU Framework Directive in Germany, see Report from the Commission to the European Parliament and the Council on the Implementation of the Water Framework Directive (2000/60/EC) (Germany), COM (2012) 670 final, 14.12.2012. ‘Request for Arbitration’, supra note 6, para. 23 quoting the text of the permit issued by the BSU.

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FRANCESCA ROMANIN JACUR The situation changed with the election of the ‘greener’ BSU. The newly elected local authority issued permits which were coupled with higher environmental standards that, according to Vattenfall AB, had not been previously discussed in the negotiations with the investor.22 The final revision of the permit occurred in the context of the final award, when the parties agreed to return to the first version of the permit. This movement back and forth in the setting of applicable environmental standards certainly has negative impacts in terms of legal certainty and of the perceived legitimacy of the implementing legislation. Moreover, it may have negative effects on other investors operating in like circumstances, which may claim discrimination in pejus if they are subject to stricter environmental standards compared to the ones applicable to the foreign investor. This issue should be highlighted as remaining extremely problematic. Several arbitral decisions may provide guidance on whether the behaviour of the German authorities might have been declared in breach of the FET standard. The Metalclad case is the first that comes to mind.23 In this case, the US company Metalclad sued Mexico before a North American Free Trade Agreement (NAFTA) arbitral tribunal, contending that Mexico had interfered and precluded the operation of a waste landfill, thereby breaching the obligations to ensure FET and not to commit expropriation. In circumstances that resemble those of the Vattenfall I dispute, the NAFTA tribunal found that in order to respect the FET obligation: […] All relevant legal requirements for the purpose of initiating, completing and successfully operating investments made, or intended to be made, […] should be capable of being readily known to all affected investors of another Party. There should be no room for doubt or uncertainty on such matters. Once the authorities of the central government of any Party […] become aware of any scope for misunderstanding or confusion in this connection, it is their duty to ensure that the correct position is promptly determined and clearly stated so that investors can proceed with all appropriate expedition in the confident belief that they are acting in accordance with all relevant laws.24

22 23 24

Id., p. 11, para. 37. Metalclad Corporation v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000. The Metalclad Tribunal concluded 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” (para. 99).

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The underlying rationale of this statement rests in attributing to the state’s responsibility the inconsistencies and lack of clarity deriving from the interpretation or application of its national laws. Moreover, if the state, by issuing permits, manifests its political and legal support for a certain investment project, it may not bluntly withdraw such support. Thus, echoing a situation similar to the Vattenfall I dispute, the Tribunal in the Tecmed case stated that: The foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any pre-existing 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.25 Indeed, a closely related aspect which could entail a breach of the obligation of the host state to ensure FET is the fact that Germany had given assurances to Vattenfall AB with regard to the viability of the project. Investment tribunals have maintained that if specific assurances have been given by the state to the investor with regard to the implementation of the investment, thereby generating its legitimate expectations, the state may be held liable and is required to pay compensation. In the Biloune et al. v. Ghana case, the investor started constructing a restaurant in Ghana, without having a permit but relying on the representations of a governmentaffiliated entity. A stop-work order was issued after a substantial amount of work had already been completed.26 The award, which was endorsed by the Metalclad decision, recognized that the combination of the behaviour and of the representations of state authorities was a violation of the FET obligation. Another relevant ‘precedent’ is the Revere Copper & Brass, Inc. v. OPIC, where the Tribunal stated that a breach of the FET obligation may depend on: Whether actions taken by a government contrary to and damaging to the economic interests of aliens are in conflict with undertakings and assurances given in good faith to such aliens as an inducement to their making the investments […].27 The same line of reasoning is followed in the Waste Management v. Mexico case, where the tribunal maintained that a relevant aspect to consider when applying the minimum

25 26 27

Tecnicas Medioambientales Tecmed, SA v. United Mexican States, ICSID Case No. ARB (AF)/00/2, Award of 29 May 2003, para. 154. Biloune et al. v. Ghana Investment Centre, Award of 27 October 1989, 95 ILR 183 (1993). Revere Copper & Brass, Inc. v. Overseas Private Invest. Corp., 17 ILM 1321, 1331.

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FRANCESCA ROMANIN JACUR standard of FET is whether “the treatment is in breach of representations made by the host state which were reasonably relied upon by the claimant”.28 These latter two cases were referred to – and their approach was endorsed – by the tribunal in the Methanex v. United States case.29 Although these decisions clearly do not bind other tribunals, their analysis, reasoning, and conclusions provide useful guidance by specifying some of the elements that constitute the backbone of the general standard of FET and may persuade and inform future cases dealing with similar circumstances. In evaluating the state authorities’ behaviour and/or the regulatory acts adopted, consideration should be given to whether these had the intention or the effect of inducing the investor to proceed with its economic activity.30

13.3

VATTENFALL II: THE SHUTDOWN

13.3.1

OF THE

NUCLEAR POWER PLANTS

The Background of the Dispute

The second case between Vattenfall AB and Germany brought before an ICSID tribunal originated with the adoption of the 13th amendment to the Atomic Energy Act by the German Parliament, envisaging the shutting down of all nuclear energy facilities by 2022. The decision – adopted in the aftermath of the Fukushima accident – is the umpteenth outcome of the intensive public debate and controversial alternating political approach with regard to nuclear energy that had been ongoing in Germany for decades. The anti-nuclear movement in Germany dates back to the 1970s and is deeply rooted in the German public opinion. In the last 40 years, the anti-nuclear movements have profoundly influenced the political scene and vice versa. A government coalition in 2001 negotiated with the nuclear industry a gradual withdrawal from nuclear energy. This policy lasted until December 2010 when a new government revised it and allowed longer timelines for the phase-out. It was then swiftly reversed with the adoption of the Energiewende in 2011 ordering the immediate shutdown of eight older reactors, whereas the nine more recent ones were allowed a gradual closure up to 2022.31 28 29 30

31

Waste Management Inc. v. United Mexican States, ICSID Case No. ARB (AF)/00/3, Award of 30 April 2004, para. 98. Methanex Corporation v. United States of America, NAFTA/UNCITRAL, Final Award of the Tribunal on Jurisdiction and Merits, 3 August 2005, Part IV, Chapter D, para. 10. For a thorough review of the relevant jurisprudence and a noteworthy attempt to define more precisely the contours of the FET principle and of the notion of ‘legitimate expectations’, see M. Potestà, ‘Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept’, ICSID Review, Vol. 28, No.1, 2013, pp. 88-122, at 104. For an analysis of the alternating approach of the German nuclear policy, see R. Beveridge & K. Kern, ‘The Energiewende in Germany: Background, Developments and Future Challenges’, in Renewable Energy Law

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Doubts have been advanced with regard to the scientific and safety arguments behind this sudden change in nuclear policy, which can more likely be traced back to political factors, especially since the German Reactor Safety Commission (Reaktorsicherheitkommission) reported in May 2011 that all German reactors were sound and safe.32 Vattenfall participates in three nuclear power plants situated in Germany: Brokdorf,33 Brunsbuttel,34 and Krümmel.35 The first one, Brokdorf is still operating, while the other two were immediately closed in August 2011.36 While the request for arbitration is not publicly accessible, presumably Vattenfall AB demands full compensation and most likely claims a violation of the duty not to indirectly expropriate (Article 13 of the ECT) and to afford FET (Article 10 of the ECT). The exact amount of Vattenfall’s claim for compensation is unknown. Rumours and press reports estimate that the lost investments related to the nuclear power plants would be around € 700 million,37 whereas other sources report that compensable costs would be in the range of € 1.5 billion for the first half of 2011 alone.38 The tribunal was constituted in December 2012 and later reconstituted due to the resignation of one of the arbitrators.39 On 27 September 2013, the claimant submitted its memorial on the merits. The proceedings are still pending.

13.3.2

Comments

A first issue to be addressed is whether the German regulatory measures may be considered as expropriatory or in violation of the FET. According to Article 13 of the ECT, host states may exceptionally resort to expropriation or indirect expropriation if such measures fulfil the following requirements: they should pursue a public interest objective, they should be non-discriminatory and carried out

32 33 34 35 36

37 38 39

and Policy, Vol. 1, 2013, p. 3. N. Bernasconi-Osterwalder & R.T. Hoffman, ‘The German Nuclear Phase-Out Put to the Test in International Investment Arbitration? Background to the new dispute Vattenfall v. Germany (II)’, Briefing Note of June 2012, International Institute for Sustainable Development, p. 2. Available at . Beveridge & Kern 2013, supra note 31, p. 7, noting that “the public debate had outstripped science”. Brokdorf is owned by Vattenfall Europe Nuclear Energy GmbH (20 %) and E.ON Kernkraft GmbH (80 %). Brunsbuttel is owned by Vattenfall Europe Nuclear Energy GmbH (66.6 %) and E.ON Kernkraft GmbH (33.3 %). Krümmel is owned by Vattenfall Europe Nuclear Energy GmbH (50 %) and E.ON Kernkraft GmbH (50 %). Precise data on the date of construction of the plant and the date of its commercial operation and shutdown are found on the website of the World Nuclear Association accessed 31 May 2014. Bernasconi-Osterwalder & Hoffman 2012, supra note 31, p. 3. Report on Nuclear Power in Germany, January 2014 accessed 14 March 2013 (on file with the author). The college is composed of the President, Albert van den Berg, Vaughan Lowe, and Charles Brower.

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FRANCESCA ROMANIN JACUR according to due process, and – last but not least – the affected investor is entitled to receive the payment of ‘prompt, adequate, and effective compensation’, determined on the basis of the fair market value of the investment.40 Furthermore, in the light of the requirements set by Article 10 of the ECT,41 the host state’s regulatory measures should be in line with the standard of FET, i.e. the treatment accorded to foreign investors must be no less favourable than that accorded to domestic investors or investors from other states. In this case, it seems safe to argue that there is no blatant discrimination on the ground of nationality because the German legislation applies indistinctively to national and foreign nuclear energy operators.42 In order to better understand the Vattenfall II case and to be able to determine, on the one hand, the legitimacy of the German legislation and, on the other, the compensation claim by Vattenfall AB, it is important to consider the European and German nuclear regulatory framework. The specific circumstances in which the investment takes place are indeed relevant aspects that should be taken into account by arbitral tribunals when addressing the liability aspects and when determining the amount of compensation in the remedy phase.43 Depending on the specific circumstances of the case, three solutions may be envisaged. Firstly, the state’s revised position may be justified as falling within its regulatory autonomy, especially if the change could have been predictable or in view of the particular importance of the interest protected. A second alternative which gives more weight to the assurances given to the investor may conclude that the latter’s legitimate expectations had been breached and that therefore compensation is due. In the third, and in our opinion preferable, solution, there should be a balancing of the investor’s rights with the public concerns emerging on the part of the state. At the European level, the picture shows that some EU states have banned the production of nuclear energy (for example, Italy and Austria), while others continue such production (notably, France, the Czech Republic, the United Kingdom, and Spain), and others

40 41

42

43

This formulation of the duty to compensate reflects the so-called Hull formula which is commonly found in many bilateral and multilateral investment treaties. ECT, Art. 10.1: “Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment […].” As a matter of fact, the German nuclear power utilities, RWE and E.ON, filed several lawsuits against the government for compensation. In February 2013 the administrative court of Hesse found that the government decision ordering the closure of two plants of RWE was unlawful “because [RWE] had not been consulted and this constituted a substantial procedural error”; available at . J. Viñuales, ‘Foreign Investment and the Environment in International Law: An Ambiguous Relationship’, British Yearbook of International Law, 2009, p. 244, at 327 rightly points out that in practice, the solution depends on the specific circumstances of the case.

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(Finland and Poland) have recently entered into nuclear energy production. In such a mixed context, it seems safe to say that there is no single European policy on nuclear energy. As for the national dimension, it has already been shown that the nuclear debate in Germany occupied centre stage for many years as a highly controversial political issue. This instability was pushed to a breaking point with the tremendous impact of the Fukushima accident on public opinion. Against this background, in the aftermath of this terrible event, the German legislator intervened by taking a clear-cut position against the production of nuclear energy on German soil. In a similar situation characterized by divergent and highly alternating policies on nuclear energy, it is expected that a prudent investor would adopt certain caution in estimating the feasibility and the risk of the investment.44 This context requires an approach that takes into account and adequately balances both the investor’s legitimate expectations and the domestic regulation’s objective and scope in terms of legitimacy and proportionality.45 Applied to the context of the remedy phase of the dispute here examined, we argue that this flexibility may take the form of equitable considerations in determining the amount of compensation due to the investor. Due to the particular context in which the German legislation has been adopted, the reference to the ‘fair market value’ should be adjusted so as to take into account equitable considerations that weigh the special political factors of the case as well as, when relevant, other environmental, health, and safety aspects. With regard to equitable arguments, these were considered in the Azurix v. Argentina case. Here, the tribunal determined the amount of compensation taking as a benchmark the evaluation of what an independent and well-informed third party would have been willing to pay and further added that this third party should have been aware of the unstable situation surrounding the investment at stake.46 A similar reasoning was also

44

45

46

The Methanex (cf. supra note 29) and the Glamis Gold Tribunals (Glamis Gold v. United States of America, NAFTA/UNCITRAL, Award of 8 June 2009, para. 767) held that the socio-economic context and the sensibility for environmental concerns influence the scope and content of the investor’s expectations with regard to regulatory changes, in particular in the legal system of ‘developed’ countries. Similarly, Potestà 2013, supra note 30, p. 119, stresses that “[…] Expectations have to be analyzed in concreto in order to determine whether the investor has acted with due diligence and thus can be said to hold the expectations in the relevant circumstances” (original emphasis added). T. Wälde & B. Sabahi, ‘Compensation, Damages, and Valuation’, in P. Muchlinski, F. Ortino & C. Schreuer (Eds.), The Oxford Handbook of International Investment Law, Oxford University Press, Oxford, 2008, p. 1049, at 1089 state that “Legitimate expectation does not lead automatically to a claim, but rather sets the stage for a balancing process between the investor’s legitimate expectation and the state’s legitimate needs to develop its policies”. See also S. De Benedetto, International Investment Law and the Environment, Edward Elgar, Cheltenham, 2013, p. 107, who proposes to reconcile the investor’s and the state’s legitimate positions by recurring to an ‘integrative’ interpretation of the concept of legitimate expectation that takes into account the public interest objectives of domestic regulatory measures. Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Award of 14 July 2006, paras. 426-429.

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adopted in the AMT v. Zaire case, where the tribunal stated that relevant elements to be taken into account were “the existing conditions of the country”.47 Moreover, as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and which affects, inter alia, a foreign investment, is not deemed expropriatory and compensable unless specific commitments had been given to the foreign investor that the government would refrain from such regulation. As a matter of fact, since there is no access to this information, it is difficult to determine whether Vattenfall AB is claiming a violation of the FET on the basis of some specific assurances or formal commitments or rather because the investor has relied on the ‘stability’ of the German legal system as a whole.48 In the Vattenfall II case, it may be argued that even if Germany were found to have breached its investment protection commitments, the recognition of full compensation would be inappropriate.49 Indeed, delicate cases require particular consideration for the broader political, social, and economic context, whose developments have a direct influence on the investor-state relationship. In addition to these equitable considerations, the precautionary and polluter-pays principles50 may be used as interpretative and evaluation parameters against which the amount of compensation should be determined. While in other investment treaties these principles are not expressly envisaged and may only be considered if they are recognized as being of a customary nature, their express reference in the ECT allows their immediate consideration.51 The key environmental provision of the ECT is Article 19(1)(a): (1) In pursuit of sustainable development […], each Contracting Party shall strive to minimize in an economically efficient manner harmful Environmental Impacts occurring either within or outside its Area from all 47 48 49

50

51

American Manufacturing and Trading, Inc. v. Zaire, ICSID Case No. ARB/93/1, Award of 21 February 1997, para. 7.13. Potestà 2013, supra note 30, p. 108, refers to the different manifestations of will by governments and to the different implications these may have with regard to a breach of the FET obligation. Wälde & Sabahi 2008, supra note 45, p. 1080. The authors argue that full compensation with regard to indirect expropriation or regulatory takings may result in overcompensation and suggest that “Probably, the proper course is to reduce full compensation (or enhance partial compensation) by taking into account the relative legitimacy of the state’s regulation (intention, good faith, legitimate purposes pursued, proportionality of measure and purpose) on one hand and the investor’s special hardship (disappointment of legitimate expectation on property; good faith efforts to come to a solution; […]) on the other”. The polluter pays principle finds its roots in the Rio Declaration which provides that “National authorities should endeavor 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”. It may be argued that these principles could be applied to the Vattenfall cases as part of EU law, as these principles are recognized in the Treaty on the Functioning of the European Union (TFEU) by Art. 191(2).

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operations within the Energy Cycle in its Area, taking proper account of safety. In doing so each Contracting Party shall act in a Cost-Effective manner. In its policies and actions each Contracting Party shall strive to take precautionary measures to prevent or minimize environmental degradation. The Contracting Parties agree that the polluter in the Areas of Contracting Parties, should, in principle, bear the cost of pollution, including transboundary pollution, with due regard to the public interest and without distorting Investment in the Energy Cycle or international trade. Contracting Parties shall accordingly: (a) take account of environmental considerations throughout the formulation and implementation of their energy policies; […]. It is important to highlight that this provision recognizes sustainable development as a legitimate objective to be pursued by the contracting states and it acknowledges that in pursuit of this goal, particular consideration should be given to safety issues. Another noteworthy element of this provision is the endorsement of the precautionary approach and of the polluter-pays principle in the management of energy investments. Most notably, Article 19 expressly refers to the need to take safety matters properly into account and endorses a comprehensive and integrated definition of “environmental impact”, which remarkably includes “human health and safety, flora, fauna, soil, air, water, climate, landscape and historical monuments or other physical structures or the interactions among these factors”.52 Although Article 19 uses rather generic wording and envisages ‘soft’ and conditional environmental obligations and therefore does not envisage directly enforceable commitments upon states parties, it may serve to guide the interpreter (or an arbitrator) when deciding on the application of other treaty provisions, such as the FET and the expropriatory obligation.53 Moreover, as attentively remarked by Professor Ishikawa, these principles may serve as “a theoretical basis for the reduction of compensation” in environmentally related

52 53

ECT, Art. 19(3)(b). It should be highlighted that Art. 19(2) envisages a special ‘weaker’ dispute settlement mechanism for interstate disputes on environmental matters by stating that “At the request of one or more Contracting Parties, disputes concerning the application or interpretation of provisions of this Article shall, to the extent that arrangements for the consideration of such disputes do not exist in other appropriate international fora, be reviewed by the Charter Conference aiming at a solution”. Nonetheless, it seems safe to argue that Art. 19 may be used as an interpretative tool in investor-state disputes. Scepticism in this regard is expressed by C. Shine, ‘Environmental Protection Under the Energy Charter Treaty’, in T. Wälde (Ed.), The Energy Charter Treaty: an East-West Gateway for Investment and Trade, Kluwer Law International, London, 1996, pp. 520546, at 537, who holds that “Although there is nothing in principle to prevent Article 19 from being cited in proceedings related to other disputes, this would seem unlikely in practice”.

351

FRANCESCA ROMANIN JACUR investments.54 Furthermore, the combined application of the polluter-pays principle in light of the precautionary principle would require “a potential polluter to share the burden associated with the risk of future environmental degradation, and such a burden includes the precautionary measures the host state adopts in order to avoid or reduce the risk”.55 It is not the purpose of this article to deal with the nature, likelihood, and seriousness of nuclear risks. Suffice it to note, however, that notwithstanding the safeguards put in place, nuclear plants may still be considered as hazardous activities and, as a consequence, states should enjoy a certain margin of appreciation in deciding on the risks they are willing to take. Therefore, a state in pursuing the objective of minimizing the risk of environmental degradation and of other harmful effects, including health and safety, could legitimately intervene and order the phasing out of nuclear facilities. The Vattenfall II case is an interesting test case that may show how a balance can be found in the remedy phase of an investor-state dispute between the interests of foreign investors and national regulatory measures for public interest purposes. While Vattenfall AB is the only foreign investor affected by the Energiewende decision, other German companies, such as E.ON and RWE which own nuclear plants, have also been equally affected and are suing the German government before the domestic courts. Claims for compensation are made for the shutdown of the nuclear plants and for the tax on nuclear fuel, which was suspended in 2011 and later (in January 2013) declared unconstitutional by the Hamburg Tax Court.56 In February 2013, the administrative court of Hesse found that the government decision to close one of the nuclear plants, the Biblis B plant, was unlawful. In January 2014, the Supreme Administrative Court endorsed this ruling. The claims for damages are still pending.57 It will be interesting to see how the arbitral tribunal will decide the Vattenfall II dispute, to what extent deference will be adopted in relation to the factual and legal evaluations made by the German judiciary, and whether the foreign investor will be treated more

54

55 56 57

T. Ishikawa, ‘The Role of International Environmental Principles in Investment Treaty Arbitration: Precautionary and Polluter Pays Principles and Partial Compensation’, in A. Bonfanti et al. (Eds.), Natural Resources Grabbing: An International Law Perspective Leiden-Boston: Brill-Nijhoff, 2015 (forthcoming). On the relevance of environmental considerations in determining compensation, see also Viñuales 2009, supra note 42, p. 329 recognizing that “[…] environmental considerations could indeed affect the reasoning of a tribunal regarding the assessment of compensation. Technically, tribunals have considerable room for manoeuvre in selecting the appropriate standard of compensation and even when they retain the fairmarket-value approach, either for expropriation or for other breaches, they still have considerable leeway in deciding which valuation techniques are the most appropriate to calculate such value”. Ishikawa (forthcoming), supra note 54, p. 16. RWE and E.ON were refunded €74 million and €96 million, respectively. See Report on Nuclear Power in Germany, January 2014 (). Id.

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favourably compared to its German peers.58 Furthermore, should the Energiewende be declared unconstitutional, Parliament would have to legislate again and accordingly revise the nuclear phase-out and the investment tribunal might be able to take such developments into consideration.

13.4

CONCLUDING REMARKS

In an attempt to draw a parallel between the two Vattenfall cases, a careful look should be given at the attitude of the German administrative authorities (in Vattenfall I) and of the German Parliament (in Vattenfall II) and at their ‘changes of mind’ with regard to, respectively, the issuance of the water permit and the phase-out of nuclear energy production, only a few months after an opposite decision had been announced. A first consideration is that a ‘change of mind’ by the host state with regard to a certain issue, previously agreed to, could not result in damage to the investor if this change is not justified by a correspondent change in circumstances that are relevant and inherent to the issue at stake. In the first case here considered what seems troublesome is that the reasons behind the additional requirements attached to the water permits appear to be based on political grounds rather than on legal ones: if the stricter requirements were mandatory under German law, as part of the implementing legislation of the EU Water Framework Directive, the competent authority should have imposed them earlier in the authorization process. Alternatively, if the setting of the additional requirements fell within the discretionary power of the authorities, such a ‘change of mind’ cannot be justified, unless new scientific findings or other unforeseen events require more stringent environmental safeguards. In other words, in Vattenfall I, it seems that the regulatory change is mainly due to a political change in the decision-making authority, while the environmental aspects of the matter remained unaltered. In this case, it may be argued that the state should bear responsibility for the inconsistent behaviour of its organs and that such a ‘change of mind’ may not be used to justify the breach of an obligation arising from an international treaty towards a foreign investor. Some nuances should be introduced if the ‘change of mind’ is based on new scientific findings relating to an environmental or health matter or other kinds of relevant developments, such as a radical change of circumstances, which were not – and could not have been – previously known to the state.

58

Bernasconi-Osterwalder & Hoffmann 2012, supra note 31, p. 8, consider that Vattenfall should be ‘better off’ compared to the German investors due to the additional legal protection granted by the ECT.

353

FRANCESCA ROMANIN JACUR In the Vattenfall II case, the ‘change of mind’ is an effect of the change in the perception of nuclear energy by the German public opinion due to an event which had a worldwide impact. In this latter case, some flexibility may be used to adequately balance the investor’s rights with the new concerns emerging on the part of the host state. Such a balancing should mainly operate concerning the amount of compensation eventually recognized in favour of the investor and should take into due consideration the causes underlying the regulatory change, the public interest protected and the state’s behaviour in pursuing it. Furthermore, the specific circumstances characterizing the investment are of particular importance, i.e. the time when the investment was made and the economic return on the investment on the basis of the commercial operation of the plant and of its expected lifetime. According to official data, Vattenfall’s nuclear plants, Brunsbüttel and Krümmel, respectively, started their commercial operations in 1977 and in 1984. According to the 2001 legal framework, their operation was scheduled to last, respectively, until 2009 and 2016; only later, with the 2010 agreements, they have been allowed to operate until 2018 and 2030.59 While the regulatory regime applicable to the plants has changed over the decades, what is the pertinent moment in time when the legitimate expectations of Vattenfall AB protected under the FET obligation should be determined? In our view, in principle, the relevant moment should be the time when the investment was made.60 Further consideration might be given to subsequent events only if they have encouraged new investments related to the previous ones and thereby engendered new expectations.

59 60

I am particularly grateful to Dr. Giuseppe Sammarco of the ENI Foundation ‘Enrico Mattei’ for providing data and valuable insights on these aspects. This issue is different, although related, to the relevant date at which the valuation of the investment should be made in a case of expropriation. Note that also for this purpose, Wälde & Sabahi suggest that: “A possible solution could be not to focus on an exact point in time, but rather to average out the relevant market-based and risk-based values over a time period, starting from when the first serious warnings came about and ending when the formal decision was taken”. Cf. Wälde & Sabahi 2008, supra note 45, p. 1081.

354

BIBLIOGRAPHY BOOKS De Benedetto, S., International Investment Law and the Environment, Cheltenham: Edward Elgar Publishing, 2013. Roe, T. et al., Settlement of Investment Disputes under the Energy Charter Treaty, Cambridge: Cambridge University Press, 2011.

ARTICLES Bernasconi-Osterwalder, N. & Hoffman, 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 of June 2012, International Institute for Sustainable Development. Beveridge, R. & Kern, K., ‘The Energiewende in Germany: Background, Developments and Future Challenges’, 1 Renewable Energy Law and Policy, 2013. Potestà, M., ‘Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept’, 28(1) ICSID Review, 2013. Viñuales, J., ‘Foreign Investment and the Environment in International Law: An Ambiguous Relationship’, British Yearbook of International Law, 2009.

CONTRIBUTIONS

IN EDITED BOOKS

Ishikawa T., ‘The Role of International Environmental Principles in Investment Treaty Arbitration: Precautionary and Polluter Pays Principles and Partial Compensation’, in A. Bonfanti et al., (Eds.), Natural Resources Grabbing: an International Law Perspective, Leiden-Boston: Brill-Nijhoff, 2015 (forthcoming).

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FRANCESCA ROMANIN JACUR Shine, C., ‘Environmental Protection under the Energy Charter Treaty’, in T. Wälde (Ed.), The Energy Charter Treaty: An East-West Gateway for Investment and Trade, London: Kluwer Law International, 1996. Wälde, T. & Sabahi, B., ‘Compensation, Damages, and Valuation’, in P. Muchlinski et al. (Eds.), The Oxford Handbook of International Investment Law, Oxford: Oxford University Press, 2008.

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STANDARDS

OF

OUR OWN: NATURAL

RESOURCES INVESTMENT PROTECTION STUDY: OIL

OF THE AND

AND THE

ENVIRONMENT: CASE

GAS PROJECTS

IN

AZERBAIJAN

Felix Zaharia*

14.1

INTRODUCTION

An inquiry into the practice of the Espoo Convention Implementation Committee1 concerning cases of state compliance with the provisions of the Espoo Convention2 brings valuable information as to possible ways of bridging the gap between international investment law and the environment. Of course, such a statement, coming from somebody serving in the Committee might very well be seen as being biased, as it puts the organ of the Espoo Convention entrusted with the monitoring of state compliance at the very forefront of a debate that this book tries to delineate. Clearly, the Espoo Convention Implementation Committee (hereinafter ‘the Implementation Committee’) is not the only organ to deal with issues pertaining to international investment and the protection of the environment. It is, however, the only one that analyses specific investments and their impact on the environment. Although its perspective on the protection of the environment is a procedural one,3 in practice, the procedural and substantive issues related to the impact of an investment on the environment have been very difficult to separate. It is thus very difficult to ascertain, when

*

1

2 3

Vice-Chair of the Espoo Convention Implementation Committee Diplomat at the Directorate for International Law and Treaties, Ministry of Foreign Affairs of Romania. The views presented cannot be attributed to the Ministry of Foreign Affairs of Romania or the Espoo Convention Implementation Committee. I am grateful for the support and feedback on the Espoo Convention and the Implementation Committee to Wendy Jacobs, Shaun Goho, and Seth Hoedl. More information about the compliance issues the Implementation Committee has addressed or is now addressing can be found at accessed 3 May 2014. Convention on Environmental Impact Assessment in a Transboundary Context, Espoo, 25 February 1991. Phoebe Okowa remarked in 1996 that “the proliferation of treaty instruments requiring States not so much to prevent environmental harm as to observe a number of discrete procedures before permitting the conduct of activities which may cause such harm”. P.N. Okowa, ‘Procedural Obligations in International Environmental Agreements’, (67) British Yearbook of International Law, 1996, p. 275.

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reading the Implementation Committee’s findings and recommendations on specific cases, whether it is confining itself to purely procedural issues. Before proceeding with the presentation and analysis of the situations encountered in the practice of the Implementation Committee that are relevant for the topic of this book, a presentation of the Espoo Convention and its Implementation Committee is needed, in order to create a proper framework for the discussion. While the Implementation Committee itself and its landmark findings and recommendations concerning the Bystroe Canal4 have been analysed at different points in time by several authors,5 its functions, activity, and results are not very familiar to many experts in the field of international investment law nor for that matter to international environmental law specialists. The reasons for this are many, but it should be underlined that the practice of the Implementation Committee has expanded rather slowly since its creation. The last two to three years, however, have seen the Implementation Committee drafting findings and recommendations on more compliance issues than ever. The main example of this case study uses one of the last draft findings and recommendations of the Implementation Committee in an effort to present the gap between international investment law and international environmental law as seen by the Implementation Committee and to identify a possible solution to bridge the gap. This example concerns the submission made on 31 August 2011 by Armenia before the Implementation Committee, having concerns about Azerbaijan’s compliance with its obligations under the Espoo Convention with respect to six oil and gas projects developed in Azerbaijan and the subsequent investigation by the curator and by the Committee into the projects listed in Armenia’s submission.6

4

5

6

The case concerns the building, by Ukraine, of a navigation canal in a Danube Delta, a protected area under several international conventions. Romania considered that this project had a significant adverse transboundary environmental impact on its territory. Because Ukraine disagreed with this, the Romanian authorities called on international environmental bodies to settle the dispute. An inquiry commission under the Espoo Convention determined that the project had an impact, the Espoo Convention Implementation Committee found Ukraine in non-compliance with its obligations under the Convention, and the Meeting of the Parties issued a caution to Ukraine. T. Treves et al., Non-Compliance Procedures and Mechanisms and the Effectiveness of International Environmental Agreements, The Hague, T.M.C. Asser Press, 2009; T. Koivurova, ‘The Convention on Environmental Impact Assessment in a Transboundary Context’, in G. Ulfstein et al. (Eds.), Making Treaties Work, Cambridge, Cambridge University Press, 2007, p. 219; M. Koyano, ‘The Significance of the Convention on Environmental Impact Assessment in Transboundary Context (Espoo Convention), in International environmental law: examining the implications of the Danube Delta Case’, 26 (4) Impact Assessment and Project Appraisal, 2008, p. 299; M. Koyano, ‘Effective Implementation of International Environmental Agreements: Learning Lessons from the Danube Delta Conflict’, in T. Komori & K. Wellens (Eds.), Public Interest Rules of International Law. Towards Effective Implementation, Farnham, Ashgate Publishing Limited, 2009. Information available at accessed 27 December 2013.

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The perspective has thus changed. We are used to looking at the gap from the investment perspective and trying to bridge it with the materials that investment law provides. But, as this paper shows, it is possible to see the gap from an international environmental law perspective and to try to bridge it with a different set of materials, those provided by this field of international law.

14.2

THE ESPOO CONVENTION

14.2.1

Brief Presentation

The Espoo Convention7 has been considered as “one of the most progressive multilateral agreements in international environmental law”.8 The Convention’s first stated goal is to “enhance international cooperation in assessing environmental impact in particular in a transboundary context”.9 The central element of the Espoo Convention is the environmental impact assessment procedure, which is to be conducted at an early stage in the decision-making process in order to give explicit consideration to environmental factors by all decision-makers at the relevant administrative levels. The other goal, equally important, is to minimize any significant adverse impact when making the final decisions.10 The main element of the Espoo Convention is nevertheless the procedure and not the substance of the activities to which it applies.11 The Espoo Convention attempts to integrate the requirements of the transboundary environmental impact assessment into the domestic assessment procedure. It provides

7

8 9 10 11

The Convention on Environmental Impact Assessment in a Transboundary Context (1989 UNTS 309) was adopted on 25 February 1991 in Espoo, Finland, and remained open for signature at the UN Headquarters in New York until 2 September 1991. The Convention entered into force in 1997. It was negotiated and adopted under the auspices of the UN Economic Commission for Europe, a regional body of the UN and, as a consequence, only members of the Commission, or states having consultative status with the Commission, were able to sign, ratify, and join the Convention. During the second session of the Meeting of the Parties to the Convention, Decision (‘Dec.’) II/14 was adopted in order to open the Convention for accession by other state members of the UN. The amendment to the Convention contained in Dec. II/14 has not yet entered into force. Art. 14, para. 4, of the Espoo Convention requires three quarters of the parties to the Convention to ratify an amendment before it enters into force. This requirement has proved to be impossible to satisfy, at least until now. Therefore, currently, only members of the UN Economic Commission for Europe can become parties to the Convention. Within the Commission, the Convention has been widely ratified. The number of parties currently stands at 45. Moreover, the Protocol on Strategic Environmental Assessment to the Espoo Convention contains a specific provision, allowing all UN members to accede. Koyano 2008, supra note 5, p. 299. Convention on Environmental Impact Assessment in a Transboundary Context, preambular para. 3. The preamble to the Espoo Convention refers to ‘environmentally sound decisions’. See Convention on Environmental Impact Assessment in a Transboundary Context, preambular para. 7. Koyano 2008, supra note 5, p. 300.

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FELIX ZAHARIA two elements that have to be satisfied for conducting the transboundary procedure.12 First, the Convention lists, in Appendix I,13 the activities14 to which the provisions of the Convention then apply when these activities are likely to cause a significant adverse impact.15 The determination of a significant adverse impact is made in accordance with the general criteria provided in Appendix III.16 The Espoo Convention also sets specific requirements in relation to the procedure: it has to permit public participation and prepare the environmental impact assessment documentation in accordance with the requirements of Appendix II.17 The main actors in the procedure are the ‘party of origin’ and the ‘affected party’.18 The party of origin has the obligation to conduct a transboundary environmental impact assessment procedure before taking a decision to authorize or undertake a proposed activity listed in Appendix I that is likely to cause a significant adverse transboundary impact. The parties can agree to conduct the procedure even in relation to projects that are not listed in Appendix I, provided that such projects may cause a significant adverse transboundary impact.19

14.2.2

The Transboundary Environmental Impact Assessment Procedure

The procedure, as envisaged by the Espoo Convention, is a succession of standardized steps that begin by way of a notification transmitted by the party of origin to the affected party/parties when a proposed activity is going to be authorized or undertaken on its territory.20 The deadline for transmitting the notification is no later than when the public of the party of origin are informed about the proposed activity.21 The Espoo Convention also prescribes the general contents of the notification, but these are de minimis requirements, and the parties can include additional information in their notifications. After receiving the notification, an affected party is required to answer within a reasonable deadline set by the party of origin.22 If the affected party indicates that it does not 12 13 14 15 16 17 18 19 20 21 22

A compromise formula which was found following negotiations between the American and the European delegations. In accordance with Art. 10, the appendices form an integral part of the Espoo Convention. They provide guidance to the parties implementing the Convention, in order not to make arbitrary determinations. In the work of the Committee, the term ‘activities’ is used interchangeably with ‘projects’. The Appendix lists several oil and gas activities, such as ‘crude oil refineries’ (1), ‘large-diameter oil and gas pipelines’, (8) and ‘offshore hydrocarbon production’ (15). App. III refers to size, location, and effects. Convention on Environmental Impact Assessment in a Transboundary Context, Art. 2, para. 2. There can be more than one affected party, for example, in the case of nuclear projects. Convention on Environmental Impact Assessment in a Transboundary Context, Art. 2, paras. 3, 5. Id., para. 4. Convention on Environmental Impact Assessment in a Transboundary Context, Art. 3, para. 1. Id., para. 3. The parties can agree to extend the deadline.

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want to participate in the procedure or if it does not answer, the party of origin can halt the transboundary environmental impact assessment procedure and continue only with its domestic procedure. If, on the other hand, the notified party (the affected party) demonstrates its wish to participate in the procedure, the party of origin has the obligation to provide additional detailed information about its domestic procedure, as well as about the proposed activity itself.23 The party of origin is entitled, under the Espoo Convention, to ask the affected party to provide it with reasonably obtainable information relating to the potentially affected environment under the jurisdiction of the affected party, in order to prepare the environmental impact assessment documentation.24 Both parties have the obligation to ensure that the public of the affected party is provided with the opportunity to make comments or objections concerning the proposed activity or the documentation.25 The Espoo Convention also contains, in Appendix II, de minimis requirements for the environmental impact assessment documentation, creating a standard for the nature and the form of the environmental impact assessment.26 The party of origin can, of course, include additional information in the documentation. Once finalized, the documentation has to be submitted to the competent authorities and to the public of the affected party. Both the competent authorities and the public of the affected party are entitled to comment on the documentation within a reasonable time set by the party of origin.27 At the same time, in accordance with the provisions of the Espoo Convention, and based on the environmental impact assessment documentation, the parties need to enter into consultations concerning the potential transboundary impact of the proposed activity and measures to reduce or eliminate its impact.28 When taking the final decision concerning the project, the party of origin has to take into consideration29 the conclusions of its environmental impact assessment, the comments received from the authorities and the public of the party of origin, as well as the results of the consultations conducted with the affected party.30 After taking the decision, the party of origin must transmit it, together with the reasons and considerations on which it was based, to the affected party.31

23 24 25 26 27 28 29 30 31

Id., para. 5. Id., para. 6. Id., para. 8. Okowa 1996, supra note 3, p. 286. Convention on Environmental Impact Assessment in a Transboundary Context, Art. 4. Id., Art. 5. The Convention provides in Art. 6 paragraph 1 that “[...] due account is taken [....]”. Convention on Environmental Impact Assessment in a Transboundary Context, Art. 6 para. 1. Id., para. 2.

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The transmittal of the final decision generally ends the transboundary environmental impact assessment procedure. However, if additional relevant information becomes available after the final decision has been transmitted, but before the actual work begins, the party of origin has to inform the affected party and, if requested, engage in additional consultations.32 The parties can also agree on a post-project analysis. This includes the surveillance of the activity while being implemented in order to determine any possible adverse transboundary impact.33 Appendix V contains several objectives that should be achieved in the postproject analysis, such as monitoring compliance with the conditions set out in the authorization or approval (the final decision) of the activity. The Espoo Convention also regulates the situation where affected parties are not notified by the party of origin and thus contains a tool for the former to guard their interests.34 The parties first have to enter into discussions, and when no agreement can be reached, any of the parties35 may submit the question concerning the likelihood of a significant adverse transboundary impact to an inquiry commission.36 The inquiry procedure is regulated by the provisions of Appendix IV.37 The commission has to present its final opinion within four months from the date of its establishment.38 The final opinion of the inquiry commission has to be based on accepted scientific principles.39

14.3

UNDERSTANDING

THE

CONVENTION

The regime created by the Espoo Convention can be better understood by making a brief digression to look at how the law of the environmental impact assessment has evolved internationally outside the Espoo Convention and how it functions domestically.

32 33 34 35 36 37

38

39

Convention on Environmental Impact Assessment in a Transboundary Context, Art. 6, para. 3. Convention on Environmental Impact Assessment in a Transboundary Context, Art. 7. Okowa 1996, supra note 3, p. 286. However it is generally expected that the party alleging that there is a significant adverse transboundary impact will be the most interested party in this method of settling the dispute. Convention on Environmental Impact Assessment in a Transboundary Context, Art. 3, para. 7. The commission consists of three members, who are scientific or technical experts, of which two are appointed by the parties to the dispute, and the third one, the president of the commission, is appointed by the two already selected members. If these two experts cannot reach an agreement, the president of the commission is designated by the Executive Secretary of the UN Economic Commission for Europe. The parties have to bear the expenses of the inquiry commission in equal shares. App. IV para. 13 provides that “[t]he inquiry commission shall present its final opinion within two months of the date on which it was established unless it finds it necessary to extend this time limit for a period which should not exceed two months”. App. IV, para. 14.

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The Pulp Mills Case

In its recent Pulp Mills on the River Uruguay (Argentina v. Uruguay) judgment,40 the International Court of Justice (ICJ) acknowledged that: […] it may now be considered a requirement under general international law to undertake an environmental impact assessment 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.41 The ICJ added, however, that “general international law [does not] specify the scope and content of an environmental impact assessment”.42 The ICJ thus rejected the Argentinian contention43 that the requirements of the Espoo Convention, together with those specified by the soft-law instruments in the field of the environment, such as the 1987 Goals and Principles of Environmental Impact Assessment of the United Nations Environment Programme44 or the International Finance Corporation Operational Policy 4.01,45 had given substance to the obligation to conduct a transboundary impact assessment. The ICJ emphasized that “Argentina and Uruguay [were] not parties to the Espoo Convention”.46 As a consequence, it was the view of the ICJ that: It is for each State to determine in its domestic legislation or in the authorization process for the project, the specific content of the environmental impact assessment required in each case, having regard to the nature and magnitude of the proposed development and its likely adverse impact on the environment as well as to the need to exercise due diligence in conducting such an assessment.47 The ICJ also laid down two of the conditions for conducting a proper transboundary environmental impact assessment. The assessment should be done “prior to the implementation of a project”48 and “once operations have started and, where necessary,

40 41 42 43 44 45 46 47 48

Pulp Mills on the River Uruguay (Argentina v. Uruguay), Judgment of 20 April 2010, 2010 ICJ Rep. 14. Id., p. 83, para. 204. Id., p. 83, para. 205. Id., p. 82, para. 203. UNEP, Goals and Principles of Environmental Impact Assessment, UN Doc. WG.152/4 Ann. (25 December 1987). International Finance Corporation, Operational Policies: Environmental Assessment, OP 4.01 (October 1998). Pulp Mills on the River Uruguay, supra note 40, p. 83, para. 205. Id. Id.

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throughout the life of a project continuous monitoring of its effects on the environment shall be undertaken”.49 This case provides a good introduction to the Espoo Convention, a Convention that seems to be not only unique50 but also highly regarded by other states, so as to be invoked before the ICJ, even by states that are not parties to it. What can be inferred from the way the ICJ has dealt with the issue of the international law obligation to conduct an environmental impact assessment where there is a risk that a proposed activity may have a significant adverse impact in a transboundary context? First, that such an obligation does exist under general international law and that all states have to include a special section in their environmental impact assessments to deal with the possible significant transboundary adverse impacts. Second, that these assessments must be conducted before the implementation of actual projects, i.e. at the stage of the ‘proposed activity’, in order to satisfy the requirements of the no-harm principle.51 Third, that general international law does not prescribe the content of the environmental impact assessment, which is for the domestic legislative or administrative process to determine. Finally, that once a project is implemented, its effects on the environment should be continuously monitored. The Espoo Convention lies at the intersection between two important bodies of law, one domestic, the law of environmental impact assessment, and one international, the law of international responsibility/liability for transboundary environmental harm. The domestic law of environmental impact assessment was pioneered in the USA fairly recently (as was the case with much of domestic or international environmental law) with the enactment, on 1 January 1970, of the National Environmental Policy Act (NEPA).52 NEPA served as a landmark not only for the USA, but also for the rest of the world, first at the national level53 and later internationally, where it has been developed by international organizations and international financial institutions.54

49 50

51

52 53 54

Id. Other multilateral environmental agreements contain environmental impact assessment provisions, but they are restricted to one or two articles. There are current efforts to adopt specific protocols to these agreements, in order to regulate extensively the transboundary environmental impact assessment procedures, as in the case of the Framework Convention for the Protection of the Marine Environment of the Caspian Sea, 4 November 2003, . See Interim Secretariat, Protocol on Environmental Impact Assessment in a Transboundary Context to the Framework Convention for the Protection of the Marine Environment of the Caspian Sea, TC/COP4/3, 18 September 2012. T. Koivurova, ‘Could the Espoo Convention Become a Global Regime for Environmental Impact Assessment and Strategic Environmental Impact Assessment?’, in R. Warner & S. Marsden (Eds.), Transboundary Environmental Governance: Inland, Coastal and Marine Perspectives, Ashgate, 2012, p. 328. National Environmental Policy Act, 42 USC. paras. 4321-4370. A. Hironaka, ‘The Globalization of Environmental Protection: The Case of Environmental Impact Assessment’, 43(1) Int’l J. Comp. Sociology, 2002, p. 65. Koivurova 2012, supra note 51, p. 325.

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The Domestic Law of Environmental Impact Assessment

The domestic law of environmental impact assessment is designed to ensure that decision-makers understand the ‘environmental consequences of their decisions’.55 Thus, when taking a specific decision – for example, the authorization of a project – government officials should be able to refer to a legal instrument that contains an assessment of the environmental impacts of that project56 and perhaps also conditions for minimizing these impacts. Even when it does not result in substantive mandates, the environmental impact assessment process is thought to improve environmental decision-making in two ways: First, [i]t ensures that the agency, in reaching its decision, will have available, and will carefully consider, detailed information concerning significant environmental impacts. Second, it guarantees that the relevant information will be made available to the larger audience that may also play a role in both the decision-making process and the implementation of that decision.57 The environmental impact assessment is a multistep process. In his treatise on the international law of environmental impact assessment, Professor Neil Craik identifies the following elements of the procedure: (1) screening, (2) scoping, (3) impact analysis and report preparation, (4) public and agency participation, (5) the final decision, and (6) follow-up.58 At the screening phase, the legislation usually provides criteria for identifying projects for which an environmental assessment must be completed. These criteria can take the form of a list of projects for which an environmental impact assessment is mandatory.59 It can also be a significance threshold, which means that only projects that may have a significant environmental impact are subject to “the requirements of preparing an environmental impact analysis”.60 The project would be screened through these two lenses, to see whether the environmental impact assessment procedure is applicable or not. Next, in the scoping phase, the environmental authority, sometimes together with the developer of the proposed project, identifies the aspects of the project that need detailed investigation. Environmental science is extremely complex, and scientifically assessing all

55 56 57 58 59 60

N. Craik, The International Law of Environmental Impact Assessment: Process, Substance and Integration, Cambridge University Press, Cambridge, 2008, p. 25. The information is provided both by scientists, through the environmental impact assessment studies/ documentation, and by the public, through public participation. Dep’t of Transp. v. Pub. Citizen, 541 US 752, 768 (2004). Craik 2008, supra note 55, p. 27. This is the so-called European approach. This is the so-called US approach. See Craik 2008, supra note 55, p. 27.

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possible impacts is inefficient. Based on their knowledge and experience, the authority and the project developer usually have an idea of what the significant impacts might be. After this phase – which narrows the scope of the environmental research – the project developer undertakes a detailed analysis of the project from an environmental perspective, focusing on the possible impacts identified at the scoping stage. The goal of this analysis is to eliminate or mitigate any impacts, and for this reason, the developer also needs to look at alternatives to the proposed action. The next stage, called ‘the soul’61 of the environmental impact assessment process, involves the active participation of the public that may be affected by the project, whose opinions have to be heard, whose questions have to be answered, and whose concerns need to be addressed. After the environmental report has been completed, and the public has had the opportunity to comment thereon, the administrator makes a final decision regarding the project. The environmental authority can either authorize or reject the project. In authorizing the project, it has considerable leeway, because as can be seen from the presentation above, the law of environmental impact assessment is essentially procedural. Thus, a final decision does not have to strictly follow the conclusions of the assessment or of the public consultations.62 If the authority allows for the project to proceed, then it should provide for some postproject monitoring, in order to be able to intervene in case of other impacts not foreseen at the scoping or impact analysis stages. This is a bird’s-eye view of the law of environmental impact assessment. There are two important issues that have to be kept in mind from this brief description. First, the environmental impact assessment rules are mainly procedural, and second, the environmental impact assessment process builds on a constant dialogue between the environmental authority, the project developer, and the public. This dialogue, which includes, in the transboundary environmental impact assessment, the dialogue between the states in question, is essential in the implementation of the Espoo Convention. One challenge in integrating foreign countries into the domestic environmental impact assessment procedure is that states have different domestic procedures for evaluating environmental impacts.63 Within the UN Economic Commission for Europe (UNECE), there is a great difference between the European Union or European Union-inspired procedures for environmental impact assessment and those enacted based on the model used by the former Soviet Union. The Implementation Committee of the Espoo Convention is currently trying to find a solution to address this difference. 61 62 63

Id. Id. Koivurova 2012, supra note 51, p. 326.

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THE ESPOO CONVENTION IMPLEMENTATION COMMITTEE64

There is still a certain level of controversy regarding the status of the Espoo Convention Implementation Committee, because the Espoo Convention does not contain provisions concerning the establishment of such a body. The Meeting of the Parties tried to overcome the lack of express treaty provisions and, based on article 11, paragraph 2 (f) of the Convention,65 established, during its second session, the Implementation Committee.66 The parties were nevertheless aware that because of the nonbinding character of the decisions taken by the Meeting of the Parties and the potentially difficult cases the Implementation Committee was supposed to deal with, the whole mechanism could be challenged.67 As a consequence, in 2004 during the third session of the Meeting of the Parties, a second amendment to the Espoo Convention was adopted, providing for the creation of a compliance procedure. However, this amendment has not yet entered into force. At the third session of the Meeting of the Parties, states decided to thoroughly revise the structure and functions of the Implementation Committee and the procedure for reviewing compliance,68 and this decision has not been amended since then. The Implementation Committee is also guided in its work by the more detailed provisions of its operating rules, also adopted by the Meeting of the Parties.

14.4.1

The Structure of the Implementation Committee

The Implementation Committee is made up of parties to the Espoo Convention, and not of independent experts. It consists of eight parties, nominated by parties to Espoo Convention that are, in turn, elected by the Meeting of the Parties. Each of the eight parties appoints a member of the Implementation Committee.69 The parties can 64

65 66 67

68 69

Because there is no practice of the Committee concerning the implementation of the Protocol on Strategic Environmental Assessment, this memorandum does not deal with the minor changes made to the structure and functions of the Implementation Committee in order to be able to deal with this instrument as well. According to this provision, parties may “[c]onsider and undertake any additional action that may be required for the achievement of the purposes of [the] Convention”. Meeting of the Parties to the Convention on Environmental Impact Assessment in a Transboundary Context, Dec. II/4 Review of Compliance, Report of the second meeting, ECE/MP.EIA/4, p. 73. E. Fasoli, ‘Procedures and Mechanisms for Review of Compliance under the 1991 Espoo Convention on Environmental Impact Assessment in a Transboundary Context and its 2003 Protocol on Strategic Environmental Assessment’, in Treves et al. (Eds.), 2009, p. 184. See supra note 66, p. 49. This decision was later reviewed and, currently, the Implementation Committee functions in accordance with Dec. III/2. Parties have the freedom to appoint whoever they want, including persons from academia or from the private sector. See Fasoli 2009, supra note 67, p. 190.

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withdraw the appointment of their member and appoint another one. The members are elected for two terms,70 and half of the Implementation Committee is renewed every term. Members may be re-elected only once.71 Members are expected to participate in every meeting of the Implementation Committee, and, when they cannot participate, the party that nominated them has to provide a suitable replacement. All members, including the replacements, have to ensure the confidentiality of information.72 The maintenance of confidentiality is not the only responsibility of the members of the Implementation Committee. They also have to avoid direct or indirect conflicts of interest with respect to any matter that is under consideration by the Implementation Committee. When faced with a conflict, a member should not participate in the elaboration and adoption of a finding or recommendation of the Implementation Committee in relation to that matter. Under this rule, a member nominated by the country that is the party of origin for a project under review cannot participate in the review of that project.73 The Implementation Committee elects its own Chair and Vice-Chair. Although the operating rules refer specifically to one Chair and one Vice-Chair, the current practice of the Implementation Committee is to elect as many Vice-Chairs as it sees fit.74 The Implementation Committee meets at least once a year. As the workload of the Implementation Committee has increased over the years, it currently meets two to three times a year.

14.4.2

The Implementation Committee’s Functions

In furtherance of the objective to assist parties to comply fully with their obligations under the Espoo Convention, the Implementation Committee can evaluate the compliance of any party to the Espoo Convention, in accordance with its specific procedures, the so-called individual non-compliance cases.75 The Implementation Committee also reviews the reports provided by the parties concerning their implementation of the

70 71 72 73 74

75

In accordance with Dec, III/2, a ‘term’ means “the period that begins at the end of one meeting of the Parties and ends at the end of the next meeting of the Parties”. Dec. III/2, para. 1. Rule 4 of the operating rules. Rule 5 of the operating rules. The Committee elected three Vice-Chairs during its 22nd session. See Implementation Committee, Report on the twenty-second session, ECE/MP.EIA/IC/2011/6, 4 October 2011. Following the resignation of one of the Vice-Chairs, there are currently two Vice-Chairs (the representative of Romania as the first Vice-Chair and the representative of Spain as the second). The representative of Slovenia is the current Chair of the Implementation Committee. Fasoli 2009, supra note 67, p. 191.

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provisions of the Implementation Convention, in the process of ensuring general compliance.76 The Committee reports on these activities to the Meeting of the Parties.

14.4.3

The Principles under which the Committee Acts

As stated above, the objective of the Implementation Committee is to assist parties in complying with their obligations under the Espoo Convention. The determination of non-compliance is only incidental in the process of assistance and not a goal in itself.77 Moreover, Decision III/2 clearly indicates that the procedure before the Implementation Committee is ‘assistance oriented’.78 Even if some parties seem to perceive the procedure before the Implementation Committee as being adversarial, especially when the members of the Implementation Committee hear the representatives of the parties concerning certain submissions, the Implementation Committee has always taken care to emphasize that its procedure is non-adversarial, in accordance with paragraph 14 of Decision III/2.

14.4.4

The Committee’s Procedures

The Implementation Committee can act in two situations. Either a party makes a submission concerning its or another party’s compliance with the provisions of the Espoo Convention or the Implementation Committee itself identifies a possible case of noncompliance during its investigation of a submission or during its information gathering. The latter situation is called the ‘committee initiative’.79 Decision III/2 allows the Implementation Committee to gather the information it needs from a number of sources. Thus, the Implementation Committee can request further information from the parties; it can undertake – only at the invitation of the parties80 – site visits; it can review any information forwarded by the secretariat concerning compliance with the Convention; it can use the services of scientific experts; and it can request technical advice or consult other sources.81 The use of scientific experts by the Implementation Committee deserves some brief comments. Decision III/2 provides that the Implementation Committee may seek the

76 77 78 79 80 81

Dec. III/2, para. 4. Fasoli 2009, supra note 67, p. 187. It is very tempting for the Committee to see itself as a judicial organ handing out definitive decisions, but this is not what the Meeting of the Parties intended. Dec. III/2, para. 14. Id., paras. 5 and 6. These parties exercise their prerogatives as territorial sovereigns. Dec. III/2, para. 7.

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services of scientific experts and other technical advice in order to discharge its functions.82 This has been used more prominently in an investigation concerning Armenia, where the secretariat, in consultation with the Chair, contracted a consultant to provide technical advice “to review the Armenian current and draft legislation on environmental impact assessment in more detail”.83 In its report to the Meeting of the Parties, the Implementation Committee acknowledged that the “report of the consultant […] formed the main basis of the Committee’s deliberations”.84 While the Implementation Committee has shown itself willing to make use of scientific experts, no matter has appeared yet before the Committee concerning the weight it should give to conflicting scientific evidence. One can only speculate that when such a situation arises, the Implementation Committee, because of its composition (legal and technical), will be able to correctly decide based on its own expertise. 14.4.4.1 Submission As mentioned above, only parties can bring submissions concerning the compliance of other parties or in relation to their own compliance.85 To date, no party has made a submission concerning its own compliance with the provisions of the Convention.86 Parties have been more inclined to bring before the Implementation Committee submissions concerning the non-compliance of other parties to the Espoo Convention. Decision III/2 provides that when a party has concerns about another party’s compliance with its obligations under the Espoo Convention, it can address the secretariat in writing, thereby mentioning its concerns and including any corroborating information. This submission has to be forwarded by the secretariat to the Committee and to the party whose compliance is being questioned.87 14.4.4.2 Committee Initiative The Implementation Committee has a range of sources of information that it can use to assess whether parties are complying with the provisions of the Espoo Convention. When it finds a possible situation of non-compliance, Decision III/2 allows it to request the parties to provide additional information about the matter. On the basis of the information available

82 83 84 85 86

87

Id., para. 7(d). Report of the Implementation Committee on its 13th meeting, ECE/MP.EIA/2008/2, p. 2. Report of the Meeting of the Parties on its 4th meeting, ECE/MP.EIA/10, p. 97. Fasoli 2009, supra note 67, p. 193. However, the possibility remains and, in accordance with Dec. III/2, a party that concludes that it is unable to comply fully with its obligations under the Convention can bring a submission before the Committee. This submission, also called a self-referral, has to be addressed to the secretariat in writing and explain, in particular, the specific circumstances that the party considers to be the causes of its non-compliance. Dec. III/2, para. 5(b). Id., para. 5 (a).

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to it, and of that provided by the party concerned, the Committee can, similar to the submissions procedure, conduct hearings and issue findings and recommendations.88 14.5

CASE STUDY: OIL

AND

GAS PROJECTS

IN

AZERBAIJAN

On 31 August 2011, the Ministry of Nature Protection of the Republic of Armenia made a submission expressing concerns about Azerbaijan’s compliance with obligations under the Espoo Convention with respect to all major oil and gas projects developed in Azerbaijan during the last 10 to 15 years. The submission referred to the Azeri-ChiragGuneshli offshore oil project, the Shah-Deniz 1 and 2 offshore gas projects, and all major pipelines, the Baku-Novorossiysk oil pipeline, the Baku-Tbilisi-Ceyhan oil pipeline, and the South Caucasus (Baku-Tbilisi-Erzurum) gas pipeline. In its submission, Armenia argued that all the projects were listed in Appendix I to the Convention and were likely to cause a significant transboundary impact on the territory of Armenia. According to Armenia, Azerbaijan was in non-compliance with the Espoo Convention because it had not notified Armenia about the development of these projects.89 The submission was followed, at the request of the secretariat of the Espoo Convention, in accordance with paragraph 5(a) of the appendix to Decision III/2, by a reply from Azerbaijan and then by additional information from both Armenia and Azerbaijan.90 Both parties also participated on 26 November 2012 in hearings before the Committee.91

88 89

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Id., para. 6. Armenia’s submission is available at accessed 28 December 2013. Armenia also argued that Azerbaijan was in non-compliance with the requirements under other articles of the Espoo Convention. See Report of the Implementation Committee on its 28th session, ECE/MP.EIA/IC/ 2013/4, 1 November 2013, para. 12 (hereinafter IC28). See Azerbaijan’s reply at accessed 28 December 2013 and its additional information at accessed 28 December 2013. Armenia’s additional information is available at accessed 28 December 2013. Armenia and Azerbaijan also provided answers to the additional questions asked, in writing, by the Committee. They are available at accessed 28 December 2013 and at accessed 28 December 2013. See Report of the Implementation Committee on its 26th session, ECE/MP.EIA/IC/2012/6, 19 December 2012, paras. 3 and 9.

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The Implementation Committee finalized its draft findings and recommendations concerning Armenia’s submission at its 28th session (12-14 September 2013). The Implementation Committee concluded92 that Azerbaijan had not been in non-compliance with the Espoo Convention in respect of the projects mentioned by Armenia93 and encouraged Azerbaijan to continue monitoring and submitting monitoring reports to Armenia as well as to continue improving the legal, administrative and other measures in order to attain full compliance with the Espoo Convention. This submission raised some very interesting issues for the Implementation Committee, such as the determination of the final decision,94 the evaluation of the likelihood of a transboundary adverse environmental impact, or, very importantly, the application of the Convention by two parties having no diplomatic relations, in fact, almost no relations at all. But it also provided an opportunity for the Committee to address a possible gap between major natural resource investment and the protection of the environment. It is a matter of interpretation whether the Committee actually addressed this gap, but the following sections will argue that at least it tried to do so.

14.5.1

The Gap and the Bridge

In its reply and the additional information provided, Azerbaijan contended that, with the exception of the South Caucasus Pipeline, the final decisions, a crucial element in establishing whether the Convention had to be applied, had been taken before the Convention had entered into force for Azerbaijan.95 Therefore, Azerbaijan had no obligation to notify Armenia. As the final decisions, Azerbaijan identified inter alia the production and sharing agreements concluded by the State Oil Company of the Azerbaijan Republic (SOCAR) with several major oil companies.96 According to Azerbaijan, all

92 93

94 95 96

See IC28, para. 78. The Committee more or less agreed with Azerbaijan’s contention that because of the geographical conditions, the territory of Armenia was not likely to be affected by the oil and gas activities conducted by Azerbaijan. According to the Committee: “[…] in the absence of a contrary determination by an inquiry commission established under article 3, paragraph 7, of the Convention, the physical characteristics of the offshore oil projects and their location warrant the conclusion that a significant adverse transboundary impact can be excluded”. See IC28, para. 76. According to the Committee, the final decision is the one that “in real terms set[s] the environmental conditions for implementing the activity”. See ECE/MP.EIA/10, Dec. IV/2, Ann. I, para. 61. IC28, para. 15. Id., para. 16.

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agreements contained “appropriate extensive provisions on further development of rules and policies in regard to the sustainable protection of environment”.97 The Implementation Committee disagreed with Azerbaijan in respect of the determination of the final decisions and concluded that even if: [T]he alleged final decisions mentioned by Azerbaijan set some environmental conditions for implementing the activities, the fact that they were taken before the EIA procedures were conducted, meant that they should not be considered as final decisions in accordance with article 6 of the Convention.98 Nevertheless, Azerbaijan’s reference to the production and sharing agreements required the curator to undertake an evaluation of these agreements, and this is where the Implementation Committee found the gap. It was for the very first time the Implementation Committee had to deal not only with domestic legislation exclusively but also with investment law instruments, such as the agreements mentioned above.

14.5.2

Azerbaijan’s Production and Sharing Agreements

Azerbaijan referred to two production-sharing agreements, the Agreement on the Joint Development and Production Sharing for the Azeri and Chirag Fields and the Deep Water Portion of the Guneshli Field in the Azerbaijan Sector of the Caspian Sea (ACG PSA), signed on 20 September 1994,99 and the Agreement on the Exploration, Development, and Production Sharing for the Shah Deniz Prospective Area in the Azerbaijan Sector of the Caspian Sea, signed on 4 June 1996.100 Both agreements had been ratified by the Azerbaijan Parliament (Milli Majlis) in December 1994 and on 17 October 1996, respectively.101 The effect of ratified production-sharing agreements under the Constitution of Azerbaijan is unclear, but it seems that they override the provisions of domestic legislation. They follow an already established practice of concluding foreign investment 97 98

Id. IC28, para. 56. The Committee also recalled an earlier opinion according to which “[t]he final decision should provide a summary of the comments received pursuant to article 3, paragraph 8, and article 4, paragraph 2, and the outcome of the consultations as referred to in article 5, and should describe how they and the outcome of the environmental impact assessment had been incorporated or otherwise addressed in the final decision, in the light of the reasonable alternatives described in the environmental impact assessment”. See ECE/MP.EIA/IC/2010/2, para. 40. 99 Available at accessed 28 December 2013. 100 Available at accessed 28 December 2013. 101 IC28, paras. 26 and 31.

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FELIX ZAHARIA treaties that under domestic law are “akin to international treaties”,102 even if, for example, according to Paragraph 23.3, in the event of a dispute, the parties to the Agreement will apply the principles of contractual interpretation under Azerbaijan and English law. Paragraph 23.1 of the same Agreement clearly provides that it “shall be subject to the international legal principle of pacta sunt servanda (agreements must be observed)”. For the Committee’s evaluation, the relevant article of the ACG PSA was article XXVI on the environmental protection of safety, especially paragraphs 26.1 and 26.3. Paragraph 26.1 (environmental standards) provides: Contractor shall conduct the Petroleum Operations in a diligent, safe and efficient manner in accordance with generally accepted international Petroleum industry standards and shall take all reasonable actions in accordance with said standards to minimize any potential disturbance to the general environment, including without limitation the surface, subsurface, sea, air, lakes, rivers, animal life, plant life, crops, other natural resources and property. The order of priority for actions shall be the protection of life, environment and property. Paragraph 26.3 (compliance) provides: Contractor shall comply with present and future Azerbaijani laws or regulations of general applicability with respect to public health, safety and protection and restoration of the environment, to the extent that such laws and regulations are no more stringent than the then current international Petroleum industry standards and practices being at the date of execution of this Contract those shown in Appendix IX, with which Contractor shall comply. If Appendix IX specifies more than one standard with respect to a matter, Contractor will use the standard most appropriate relative to the ecosystem of the Caspian Sea. In the event any regional or multi-governmental authority having jurisdiction enacts or promulgates environmental standards relating to the Contract Area, the Parties will discuss the possible impact thereof on the project […]. The relevant article (26 – Environmental protection and safety) of the Shah Deniz PSA contains similar provisions, although an evolution can be seen in the way the environmental standards paragraph (26.1) has been drafted. Thus, paragraph 26.1 provides: 102 M. Sornarajah, The International Law on Foreign Investment, 3rd edn, Cambridge University Press, Cambridge, 2010, p. 62. V. Iuga, ‘Constructia unui sistem fiscal pentru industria extractiva de hidrocarburi - variabile si optiuni’. Available at www.contributors.ro/economie/constructia-unui-sistem-fiscalpentru-industria-extractiva-de-hidrocarburi-–-variabile-si-optiuni/>, accessed 29 December 2013.

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Contractor shall develop jointly with SOCAR and the State Committee of the Azerbaijan Republic on Ecology and Control over the Use of Natural Resources ‘SCE’ safety and environmental protection standards and practices appropriate for the regulation of Petroleum Operations. The safety and environmental protection standards shall take account of the specific environmental characteristics of the Caspian Sea and draw, as appropriate, on (i) international Petroleum industry standards and experience with their implementation in exploration and production operations in other parts of the world and (ii) existing Azerbaijan safety and environmental legislation […]. The redrafting of the environmental standards paragraph also made it necessary to redraft the paragraph concerning compliance (26.4) in the Shah Deniz PSA: Contractor shall comply with present and future Azerbaijani laws or regulations of general applicability with respect to public health, safety and protection and restoration of the environment, to the extent that such laws and regulations are no more stringent than the Environmental Standards. In the event any regional or multi-governmental authority having jurisdiction enacts or promulgates environmental standards relating to the Contract Area, the Parties will discuss the possible impact thereof on the project […] (emphasis added). Understanding the role that this type of agreement plays in regulating the exploration and exploitation of oil and gas resources is useful in interpreting the provisions mentioned above. 14.5.2.1 Production and Sharing Agreements A legal regime regulating the exploration and exploitation of oil and gas resources in a particular country can be designed following several models. Under a concessionary regime, which is the most widely used, the state grants the investor, under a contract or a licence, the right to develop an oil or gas resource.103 It is important to note that under this regime, the state sets the environmental conditions for the project and can amend them unilaterally.104 The state can also enter into contracts with companies that will develop the resource on behalf of the state for a certain price. This is the least used model because the state practically bears all the risks.105 As in the previous model, the state sets the environmental conditions. 103 I. Paliashvili, ‘The Concept of Production Sharing’. Available at accessed 29 December 2013. 104 Iuga, supra note 102. 105 E. Gusilov, ‘Doing Business in Russian Energy: The Experience of Production Sharing Agreements’, May 2011, p. 18. Available at accessed 28 December 2013.

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Because of the higher risks involved, stemming generally from immature legislative frameworks in countries lacking the financial means for developing their oil and gas resources, states conclude with investor production and sharing agreements that regulate the key conditions for carrying out the investment, including the environmental conditions applicable to that particular investment.106 14.5.2.2 The ACG and Shah Deniz PSAs’ Environmental Terms107 In both PSAs, the international petroleum industry standards are the main elements for regulating the environmental conditions for conducting the offshore oil and gas activities in the Azerbaijan sector of the Caspian Sea. Practically, the two agreements carve out a special regime concerning the environmental rules applicable to the two investments, outside the general environmental legislation of Azerbaijan. This special regime centres, as mentioned above, on the ‘generally accepted international Petroleum industry standards’ as identified by the 1994 ACG PSA and the ‘environmental protection standards’ which should be identified, according to the 1996 Shah Deniz PSA, using the “international Petroleum industry standards and experience with their implementation in exploration and production operations in other parts of the world”. Azerbaijani laws and regulations have a specific place within this regime, a place that might be seen as secondary, at least in the ACG PSA. This agreement expressly indicates that the investor: Shall comply with present and future Azerbaijani laws or regulations [...] with respect to [...] restoration of the environment, to the extent that such laws and regulations are no more stringent that the then current international Petroleum industry standards and practices [...]. It has long been acknowledged that the use of “international Petroleum industry standards” phrase is ambiguous,108 because it is very difficult to find these ‘generally accepted’ standards. There is a multitude of standards, but also guidelines, best practices, and other documents on this matter, issued by industry associations, such as the American Petroleum Institute or the International Association of Oil and Gas Producers to name just the most influential; the World Bank; and major environmental nongovernmental organizations, such as the International Union for the Conservation of Nature. Identifying

106 The current analysis does not deal with the actual content of the international Petroleum industry standards as compared with the ones contained in the legislation of Azerbaijan or some other legislation. It simply tries to show the legal position of the international Petroleum industry standards in relation to Azerbaijan’s and international rules. 107 K. Tienhaara, ‘Foreign Investment Contracts in the Oil & Gas Sector: A Survey of Environmentally Relevant Clauses’, 11(3) Sustainable Development Law & Policy, 2011, p. 16. 108 Art. 26. 1 Shah Deniz PSA.

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the ‘generally accepted’ ones, outside general and vague statements, seems to be a daunting task. As remarked above, the Shah Deniz PSA takes a slightly different approach towards the Azerbaijani laws and regulations which are used, together with the international petroleum industry standards, in drawing up the environmental standards applicable to the investment. However, until such environmental standards are drawn up, the investor will apply a list of standards and practices provided for in the agreement.109 What about the international rules? Azerbaijan is, and since concluding the two PSAs has become, a party to numerous international environmental conventions, among which the Espoo Convention. There is a gap between the way parties (Azerbaijan-SOCAR and the investors) to the PSAs have decided to regulate the environmental conditions of the oil and gas investments in the Caspian Sea and the international rules pertaining to the preservation of the environment, which are also binding on Azerbaijan. The parties were nevertheless aware of this gap and provided a way of bridging it. Thus, according to the provisions of the two agreements, the parties have to discuss the implications of newly enacted international environmental standards. It can thus be said that the parties have agreed to bridge the gap bilaterally by entering into a dialogue and trying to find solutions that would accommodate both the interests of the investor as well as the international obligations of the Republic of Azerbaijan. Regardless of the results of the dialogue between Azerbaijan and the oil and gas investors, Azerbaijan will remain bound by its international obligations and, therefore, a new, this time international, means of building a bridge between Azerbaijan’s legitimate wish to develop its natural resources with the help of foreign investors and its international environmental obligations will have to be found. This is what the Committee has tried to do.

14.5.3

The International Bridge

When analysing Azerbaijan’s compliance with the provisions of the Espoo Convention, the Implementation Committee took note of Azerbaijan’s statements that both the environmental impact assessments and the post-project research had concluded that there was no likelihood of a significant adverse transboundary impact and had identified no transboundary effects.110 The Committee was nevertheless aware that all environmental documentation had been prepared by investors and that this documentation had been reviewed only by the authorities of Azerbaijan and not the authorities of potentially affected parties to the Espoo Convention. The Implementation Committee was also aware

109 IC28, paras. 18 and 19. 110 Id.

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of the general characteristics of the environmental impact assessment system as applied in the former Soviet Union countries as well as of the fact that Azerbaijan did not have clear rules on an environmental impact assessment. The presentation made by the Implementation Committee is illustrative of this: [U]nder the ‘OVOS/expertiza’ system the developer has the duty to prepare the EIA and all other necessary project-related documentation, and to submit the finalized one to the relevant authorities. The authorities review the documentation to ensure that it complies with the requirements of national legislation. If the documentation does not comply, the authorities ask the developer to revise it and resubmit it. If the authorities consider that the documentation fulfills the requirements of national legislation, they endorse the documentation which then constitutes the substantial part of the final decision.111 For this reason, the Implementation Committee seemed to consider that dialogue and communication could be the best, and possibly only, way to approach a possible gap between Azerbaijan’s investment contracts, such as the PSAs and the international rules on the protection of the environment. The first such dialogue had been opened when Armenia brought its submission before the Implementation Committee which decided to also look into its merits, despite proposals for the matter to be deferred to an inquiry commission. Under this dialogue, the Implementation Committee concluded that Azerbaijan had not breached the provisions of the Convention. The Implementation Committee also opened a second dialogue, this time with Kazakhstan, a party to the Convention, in relation to the same projects and in accordance with its powers to gather information.112 The Implementation Committee tried to establish whether the authorities of Kazakhstan shared Azerbaijan’s view that the activities undertaken in the Caspian Sea had no impact on the territory of Kazakhstan. For this reason, the Implementation Committee asked Kazakhstan whether it had been informed about the two projects and whether it considered that there was a likelihood for a significant adverse transboundary environmental impact on its territory from the projects implemented in the Azerbaijan sector of the Caspian Sea. Azerbaijan was also asked to clarify whether it could exclude a significant adverse transboundary environmental impact from its projects.113 It is important to note that while the Implementation Committee has not directly assessed the international petroleum standards against the Espoo Convention and 111 Report of the Implementation Committee on its twenty-seventh session, ECE/MP.EIA/IC/2013/2, 15 April 2013, footnote 5 at p. 14. 112 IC28, para. 10 113 Id.

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its subsequent rules, by opening the dialogues mentioned above, it has indirectly made an assessment of their conformity with the standards of the Espoo Convention. Fortunately, for Azerbaijan, the Committee found that its practice, based on the international petroleum standards, had complied with the Espoo Convention. What would have happened if the Implementation Committee had found, to the contrary, a case of non-compliance and thus, indirectly, against the international petroleum standards? As mentioned above, the PSAs themselves provide for a procedure for settling such cases. The parties would have probably entered into discussions concerning the impact on the implementation of the agreements of this possible Committee determination.

14.6

CONCLUSION

When looking at major natural resource investments and their relation with the environment, we have been accustomed to seeing international environmental bodies as somewhat passive presences which try to generally regulate the environmental standards and seldom make attempts to judge investments that negatively impact the environment. The example above shows that this is not or is no longer the case. International environmental bodies can have an active role and try to identify and implement possible bridges between investments and natural resources. Even these bridges are soft, and we have seen that the Espoo Convention Implementation Committee has identified dialogue and communication as a means of building a bridge between investment law and the environment; they are specific tools which are available to environmental bodies and which prove to be successful in many instances.

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BIBLIOGRAPHY BOOKS Craik, N., The International Law of Environmental Impact Assessment: Process, Substance and Integration, Cambridge: Cambridge University Press, 2008. Sornarajah, M., The International Law on Foreign Investment, Cambridge: Cambridge University Press, 2010. Treves, T. et al. (Eds.), Non-compliance Procedures and Mechanisms and the Effectiveness of International Environmental Agreements, The Hague: T.M.C. Asser Press, 2009.

ARTICLES Gusilov, E., ‘Doing Business in Russian Energy: The Experience of Production Sharing Agreements’. Available at . Hironaka, A., ‘The Globalization of Environmental Protection: The Case of Environmental Impact Assessment’, 43(1) Int’l J. Comp. Sociology, 2002. Iuga, V., ‘Constructia Unui Sistem Fiscal Pentru Industria Extractiva de Hidrocarburi Variabile si Optiuni’. Available at . Koyano, M., ‘The Significance of the Convention on Environmental Impact Assessment in Transboundary Context (Espoo Convention) in International Environmental Law: Examining the Implications of the Danube Delta Case’, 26(4) Impact Assessment and Project Appraisal, 2008. Okowa, P.N., ‘Procedural Obligations in International Environmental Agreements’, 67 British Yearbook of International Law, 1996. Paliashvili, I., ‘The Concept of Production Sharing’, Available at .

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Tienhaara, K., ‘Foreign Investment Contracts in the Oil & Gas Sector: A Survey of Environmentally Relevant Clauses’, 11(3) Sustainable Development Law & Policy, 2011.

CONTRIBUTIONS

IN EDITED BOOKS

Fasoli, E., ‘Procedures and Mechanisms for Review of Compliance under the 1991 Espoo Convention on Environmental Impact Assessment in a Transboundary Context and its 2003 Protocol on Strategic Environmental Assessment’, 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. Koivurova, T., ‘The Convention on Environmental Impact Assessment in a Transboundary Context’, in G. Ulfstein et al. (Eds.), Making Treaties Work, Cambridge: Cambridge University Press, 2007. Koivurova, T., ‘Could the Espoo Convention Become a Global Regime for Environmental Impact Assessment and Strategic Environmental Impact Assessment?’, in R. Warner & S. Marsden (Eds.), Transboundary Environmental Governance: Inland, Coastal and Marine Perspectives, Farnham: Ashgate Publishing Limited, 2012. Koyano, M., ‘Effective Implementation of International Environmental Agreements: Learning Lessons from the Danube Delta Conflict’, in T. Komori & K. Wellens (Eds.), Public Interest Rules of International Law. Towards Effective Implementation, Farnham: Ashgate Publishing Limited, 2009.

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INDONESIA: DISPUTES

CONCERNING ENVIRONMENTAL DEGRADATION AND

POLLUTION

Tineke Lambooy, Iman Prihandono, Nurul Barizah*

Theme: Difficulties in imposing Indonesian environmental and mining legislation upon foreign investors contribute to a declining support for the special legal regime instated by bilateral investment treaties as the Indonesian government has to fulfil its constitutional task to realize sustainable development and social justice. 15.1

INTRODUCTION

Indonesia has a fast growing population (>250 million) and is the fourth most populous country in the world (after China, India, and the US). Indonesia ranks 15th in the world when it comes to land mass. Indonesia occupies position 15 on the list of carbon dioxide emissions from consumption of energy.1 Annual economic growth is high: 5.76% on average during the 2012-2014 time period,2 thereby outperforming its regional neighbours during the global financial crisis. Despite the steady growth figures, the government still struggles with many topics such as reducing poverty and unemployment, putting an end to the unequal resource distribution among regions, and halting corruption.3

*

1

2 3

Prof. Dr. Tineke Lambooy LL.M. (Nyenrode Business University/Utrecht University), Dr. Iman Prihandono LL.M., and Dr. Nurul Barizah LL.M. (Universitas Airlangga). The authors are grateful to Koen Bovend’Eerdt for assisting them with the final part of the research and checking all the data. They also thank the editors, Dr. Felix Zaharia for their constructive peer review comments and Kees Hooft, LL.M., for the English editing. The research for this chapter ended by mid May 2015. The World Factbook ‘Indonesia’ (The World Factbook, 30 April 2015) and , accessed 10 May 2015. Ibid. Indonesia ranked 107th out of 175 countries on the Transparency International ‘Corruption Perceptions Index 2014: Results’ (Transparency International), , accessed 10 May 2015. See for an overview of problems in the field of corruption in Indonesia Henk Addink, Shinta Augustina, Tineke Lambooy, Aikaterini Argyrou, Yuliandri and Saldi Isra (eds), Eradicating Corruption in Indonesia: Legal Developments and Inter-disciplinary Approaches (Konstitusi Press, 2015) (forthcoming).

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During the last decade, the government made many economic advances, introducing significant reforms in the financial sector, including tax and customs reforms and capital market development.4 It has a fiscal deficit below 3% and, until the summer of 2013, low rates of inflation. National income is based on agriculture (14.2%), industry (45.5%), and services (40.3%).5 In view of the heavy industrial component, the Indonesian government considers foreign direct investments (FDIs) crucial to economic development. Part of the FDIs is directed at the mining sector. Notwithstanding the fact that Indonesia has an elaborate set of environmental and mining laws which stipulate good environmental practices, as well as laws which impose Corporate Social Responsibility (CSR) specifically on investors in the mining sector, many mining companies still cause severe environmental degradation. Recently, more and more conflicts between mining companies and local communities have come to light, in which the latter claim that the environmental impact negatively affects their livelihood (see section 15.4). These conflicts are the focal point of this chapter. The authors will demonstrate that the special legal regimes instated by Contracts of Work (concession agreements, hereinafter ‘CoWs’) and Bilateral Investment Treaties (BITs), according to which foreign investors can bring any dispute with the Indonesian authorities to an international (investment) arbitration tribunal, are one of the reasons why the Indonesian government struggles with imposing environmental and mining legislation upon foreign investors. At the same time, however, the Indonesian government has to live up to its Constitutional task to promote sustainable development and social justice and thus to prevent environmental degradation and conflicts with communities. In Indonesia, the basic standards for living together, applicable to all – government, companies (including foreign investors) and communities – are captured in the Pancasila,6 which is the official philosophical foundation of the Indonesian state, and the Indonesian Constitution.7 Both the Pancasila and the Constitution oblige the government to promote sustainable development and social justice. The conflicts in the mining sector raise the question how the government can ensure that FDIs also align with these goals. Another challenge for the government is finding appropriate ways to solve existing and future disputes with multinational mining companies with regard to their environmental and social performance in Indonesia, especially when local communities and non-governmental organizations (NGOs) are involved. Regarding solutions found through settlements, the question has been posed on how transparent the processes and outcomes are. With respect to disputes that are dealt with through legal proceedings, the question

4 5 6 7

Indonesia: Economic and Development Strategy Handbook (volume 1 strategic information and programs, 2013 edn, International Business Publications, 2013), 15. The World Factbook, ‘Field listing: GDP – composition, by sector of origin’ (The World Factbook, 2014) , accessed 23 May 2015. For the full text of the Pancasila, see , accessed 23 May 2015. Indonesian Constitution 1945, Article 33(3).

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has been put forward whether it is justifiable that foreign investors have an additional litigation option at their disposal as compared with Indonesian companies. That is, pursuant to CoWs and BITs, FDIs have an additional legal mechanism through international (investment) arbitration in which they can contest the rejection of a licence or the enforcement upon them of (new) environmental legislation.8 The recent conflicts, which will be discussed in section 15.4, concerning FDIs in the mining industry have led to a declining support for this special legal regime. This will be analysed in section 15.6. The agitation culminated in a change of the perspective with which the Indonesian Government regards its rights and obligations under BITs. The first visibly step is the recent termination by the Indonesian Government of the BIT between Indonesia and the Netherlands.9 In this chapter, the authors will provide insights into several major recent conflicts caused by FDIs in the mining sector in Indonesia and will examine these conflicts in the context of the Indonesian government’s constitutional task to promote sustainable development and social justice. The chapter will end with an update on recent policy decisions by the government concerning FDIs prompted by the developments presented in this chapter. Reading Guideline In section 15.2, to set the scene, the authors will discuss some economic data concerning the mining sector in Indonesia: what share of the gross domestic product (GDP) is accounted for by the mining sector and to what extent does this sector rely on foreign investors? In section 15.3, the reader will be informed about the legal environment in which international investors in the mining sector have to operate in Indonesia. The authors outline which BITs and other international trade agreements – relevant for FDIs in mining – have been concluded by the Indonesian government and examine whether they contain clauses concerning the environmental and social responsibility of foreign investors. Furthermore, an account will be given of pertinent Indonesian environmental and mining laws and of CSR norms applicable to investors in the mining sector. Section 15.4 contains the particulars of several conflicts with mining companies owned by multinational companies (MNCs). Where relevant, references are made to the 8

9

This will be illustrated in this chapter and is also the subject of some of the other chapters of this book, see e.g., Chapter 13, ‘The “Vattenfall Disputes” and their implications for sustainable development’ by Francesca Romanin Jacur; Chapter 16, ‘Chevron-Texaco v. Ecuador: The Environmental Case within a Claim of Denial of Justice’ by Blanca Gomez de la Torre; Chapter 12, ‘Balancing Foreign Investment Protection and Environmental Protection under South African Bilateral Investment Treaties’ by Jimcall Pfumorodze and M.M. Da Gama. ‘Termination Bilateral Investment Treaty’ (Netherlands Embassy in Jakarta, Indonesia), , accessed 10 May 2015.

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environmental and mining legislation set out in section 15.3. In one situation, the mining licences were revoked, which led to the submission of a multi-billion dollar claim against the Indonesian government in international investment arbitration proceedings by the foreign parent company of the mining company in question (see the Churchill case).10 Other disputes were solved through settlement procedures between the company and the government (e.g., Newmont case).11 The authors wish to find out to what extent local communities benefit from such settlements. In section 15.5, the authors analyse the Pancasila and the constitutional task of the Indonesian government to realize sustainable development and to make every effort for an equitable distribution of wealth obtained from exploiting natural resources. In section 15.6, the insights gained by discussing the mining conflicts (section 15.4) will be held against the overarching task of the Indonesian Government as set out in section 15.5, with the purpose to examine if FDIs in mining contribute to social justice and sustainable development. The findings are also put in the perspective of the economic data provided in section 15.2. In section 15.7, some recent political developments in Indonesia in the field of international investment treaties will be addressed. The section also contains the concluding comments.

15.2

FDIS

IN

MINING OPERATIONS

IN INDONESIA

In the first quarter of 2015, FDIs accounted for 65.9% of total investments in Indonesia (in all sectors), while domestic direct investments (DDI) constituted 34.1%.12 This is a small decline compared to the first quarter of 2014 where the numbers were 67.5% and 32.5%, respectively. Nevertheless, total FDIs have increased steadily from the first quarter of 2010 (USD 2,832 billion) to the first quarter of 2015 (USD 6.568 billion).13 Mining, as we shall see later on in this section, drew in most investments (12% of both FDIs and

10

11

12

13

PT. Ridlatama Tambang Mineral v. The Regent of East Kutai, Decisions of the Administrative Court of Samarinda No. 31/G/2010/PTUN-SMD, 3 March 2011, p. 87; No. 32/G/2010/PTUN-SMD; No. 33/G/2010/ PTUN-SMD; and No. 34/G/2010/PTUN-SMD, 3 March 2011. 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. Republic of Indonesia v. PT Newmont Minahasa Raya and Richard B. Ness, Decision of the District Court of Manado Case No. 284/Pid.B/2005/PN. Mdo, 24 April 2007. 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, para. 3.12. Indonesia Investment Coordinating Board, ‘Domestic and Foreign Direct Investment Realization in Quarter I (January-March) 2015’, 28 April 2015, , accessed 11 May 2015. The figures of this source are used throughout this paragraph. Total FDIs in quarter 1 of 2015 were IDR 82.1 trillion and IDR 35.4 trillion in quarter 1 of 2010. The exchange rate used is that of the Revised State Budget 2015 (USD 1=IDR 12,500).

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DDIs). Other sectors which attracted a sizeable portion of FDIs are (i) metal, machinery, and the electronics industry (11.7% or USD 0.8 billion); (ii) food crops and plantation (9.1% or 0.6 USD billion); (iii) transport equipment and other transport industry (8.9% or USD 0.6 billion); and (iv) the food industry (8.1% or USD 0.5 billion). In the first quarter of 2015, there were eight locations which attracted over USD 300 million worth of total FDIs: West Java, East Kalimantan, Banten, the Special Territory of Jakarta, West Kalimantan, Central Sulawesi, East Java, and North Sumatra.14 In the recent FDI inflows in Indonesia, eight countries participated substantially: Singapore (USD 1,235 million), Japan (USD 1,208 million), South Korea (USD 634 million), the United Kingdom (USD 580 million),15 the United States (USD 292 million), Malaysia (USD 287 million), the Netherlands (USD 239 million), and China (including Hong Kong) (USD 222 million). Indonesia has become an attractive destination for FDIs because of its rich natural resources, steady economic growth, safe settings for living, and cheap labour.16 The country’s mining production mainly consists of coal, copper, gold, tin, and nickel, which resources are found throughout the Indonesian archipelago (see the Indonesian Mining Areas Map of 2011 in Figure 15.1). Indonesia is a significant player in the global mining industry; in fact, it is one of the world’s largest producers of coal.17 As mining operations require substantial amounts of capital as well as specific technical know-how, Indonesia’s extractive industries have been mostly dominated by MNCs; almost 75% of all mining concessions have been granted to foreign investors.18 Figure 15.2 from the Indonesia Investment Coordinating Board shows that of all investments realized in the first quarter of 2015 (i.e., both FDIs and DDIs), 12.0% was invested in the mining sector. Of FDIs alone, 17.3% of the investments were made in the mining sector, making it the sector which attracted most FDIs (a grand total of USD 1.1 billion). The percentage of FDIs invested in the mining sector has fluctuated somewhat over the last five years: 2010 (13.6%; USD 2.2 billion), 2011 (18.6%; USD 3.6 billion), 2012 (17.3%; USD 4.2 billion), 2013 (16.8%; USD 4.8 billion), and 2014 (16.4%; USD 4.7 billion), although it continually hovers around 15% of total FDIs.19

14 15 16

17 18

19

Indonesia Investment Coordinating Board (n. 12). The figures of this source are used throughout this paragraph. This includes the FDIs of the British Virgin Islands (USD 223 million). Compare the key decision criteria for FDIs presented in Table 3 in Jennifer McKay and Balbir Bhasin, ‘Mining Law and Policy in Indonesia: Issues in Current Practice That Need Reform’, 19(4), Journal of Energy & Natural Resources, 2001, 329. Ibid. Siswono Yudho Husodo, ‘Pelembagaan Nilai-nilai Pancasila Dalam Perspektif Ekonomi dan Kesejahteraan dalam Dinamika Dunia Aktual’ (Kongres Pancasila IV: Strategi Pelembagaan Nilai-nilai Pancasila Dalam Menegakkan Konstitutionalitas Indonesia, Jogyakarta, 2012), 110. Indonesia Investment Coordinating Board (n. 12). The numbers for 2010, 2011, 2012, 2013, and 2014 are for the entire year, whereas numbers for 2015 are only for the first quarter.

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Figure 15.120 Indonesia Mining Areas Map

20

PricewaterhouseCoopers, ‘Mining in Indonesia Investment and Taxation Guide’, May 2014, , accessed 11 May 2015.

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The relative share of mining’s contribution to the Indonesian national income (gross domestic product (GDP)) decreased from 11.81% in 2012 to 11.29% in 2013 and to 10.49% in 2014. For a comparison, the two main contributors to the Indonesian GDP from 2012 to 2014 are the manufacturing sector followed by agricultural sector. Manufacturing contributed 23.96% in 2012, 23.69% in 2013, and 23.71% in 2014. Agriculture contributed 14.50% in 2012, 14.42% in 2013, and 14.33% in 2014.21 These figures show that the contribution of mining to the GDP remains significant. However, its contribution to Indonesia’s economy has been decreasing gradually in the last three years. Several studies conclude that the FDI inflows have brought benefits to the Indonesian economy. FDI inflows have contributed to Indonesia’s accelerating export of goods,22 created more jobs,23 increased productivity, and facilitated technology spill-over.24 However, it has also been held that although the mining activities of MNCs in Indonesia positively contribute to figures on FDI inflows and GDP, they negatively affect the natural capital of Indonesia, i.e., the environment, and cause harm to the social, cultural, and economic lives of local communities.25 The increasing level of FDI inflows in the mining sector during the last two decades26 has led to a number of disputes between MNCs, communities, and (local) governments, sometimes resulting in violent conflicts. In section 15.4, this will be illustrated by depicting a number of major and recent disputes.

21

22 23

24

25

26

Central Bureau of Statistic Indonesia, ‘Percentage Distribution of Gross Domestic Product at Current Market Prices By Industrial Origin, 2000-2014’, , accessed 11 May 2015. Organisation for Economic Co-operation and Development (OECD), OECD Investment Policy Reviews Indonesia 2010 (OECD Publishing 2010), 59. Robert E. Lipsey, Fredrik Sjöholm, and Jing Sun, ‘Foreign Ownership and Employment Growth in Indonesian Manufacturing’, 2010, National Bureau of Economic Research Working Paper 15936, 14, accessed 28 April 2015. Magnus Blomström and Fredrik Sjöholm, ‘Technology Transfer and Spillovers: Does Local Participation With Multinationals Matter?’ 43 European Economic Review, 1999, 915, 922. See also Sadayuki Takii and Eric D. Ramstetter, ‘Multinational Presence and Labor Productivity Differentials in Indonesian Manufacturing 1975-2001’, 2005, The International Centre for the Study of East Asian Development Working Paper Series Vol. 2004-15, 22, , accessed on 28 April 2015. ‘Indonesia Breaks New Record in FDI Realization’, The Jakarta Post (Jakarta, 22 January 2013), , accessed 28 April 2015; Linda Yulisman, ‘FDI Rises to $19b Amid Global Woes’, The Jakarta Post (Jakarta, 20 January 2012), , accessed 28 April 2015. OECD, ‘FDI in figures’ (OECD April 2013), , accessed 11 May 2015); World Bank, ‘Foreign direct investment, net inflows (BoP, current US$)’ (World Bank), , accessed 11May 2015.

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Figure 15.227 Indonesia Investment Coordinating Board, ‘Domestic and Foreign Direct Investment Realization in Quarter I (January-March) 2015

15.3

LAWS AND POLICIES IN INDONESIA REGARDING RELATIONSHIPS INVOLVED IN MINING

15.3.1

WITH

FOREIGN INVESTORS

Current Status of Indonesian BITs and FTAs

Over the years, Indonesia has signed over 71 BITs.28 Of the eight countries mentioned in section 15.2 that invest substantially in Indonesia, Indonesia has entered into BITs with six of them: Singapore (2005),29 The Netherlands (1995),30 China (1995),31 South Korea (1991),32

27 28 29 30 31

32

Indonesia Investment Coordinating Board (n. 12). UNCTAD, ‘Investment Policy Hub, International Investment Agreements Navigator’, , accessed 11 May 2015. Agreement on the Promotion and Protection of Investments, Singapore-Indonesia, signed 16 February 2005, . Agreement on Promotion and Protection of Investment Netherlands-Indonesia, signed 6 April 1994, entered into force 1 July 1995, . Agreement between the Government of the Republic of Indonesia and the Government of the People’s Republic of China on the Promotion and Protection of Investments, signed 18 November 1994, entered into force 1 April 1995, . Agreement between the Government of the Republic of Korea and the Government of the Republic of Indonesia concerning the Protection and Promotion of Investments, signed 16 February 1991, entered into force 10 March 1994, .

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United Kingdom (1977),33 and Malaysia (1999).34 In order to explain the type of protection that a BIT offers to foreign investors, the Indonesian-Netherlands BIT is taken as an example. This BIT contains many provisions to protect investors. The BIT states, for example, that its aim is to provide foreign investors with ‘fair and equitable treatment’ prohibiting ‘unreasonable or discriminatory’ measures, according ‘full protection and security’, treating investors the same as other domestic and foreign investors, as well as prohibiting ‘unlawful expropriation’.35 Another important provision of the BIT is the so-called umbrella clause, which obliges Indonesia to observe any obligation it may have entered into with regard to investments of nationals of the Netherlands.36 The BIT also includes a guarantee of the ability to transfer any freely convertible currency payments relating to an investment without restriction or delay. In addition, the Indonesia-Netherlands BIT allows investors to directly submit a dispute against the State parties before an International Centre for Settlement of Investment Disputes (ICSID) arbitral tribunal.37 As mining activities usually have a substantial impact on the local environment and local communities, it is crucial to analyse the text of the six BITs which were entered into by Indonesia and the countries that invest substantially in Indonesia in order to find out in which way the treaty text aligns investor protection with protection of the environment and communities. The authors’ examination revealed that none of them contains specific provisions obliging investors to comply with human rights norms and to ensure environmental protection.38 Hence, it can be concluded that these BITs fall in the category of the so-called first-generation BITs – treaties that fail to integrate investor protection with environmental and human rights protection (see the categorisation in Chapter 1, ‘Innovative legal solutions for investment law and sustainable development challenges’, by Marie-Claire Cordonier Segger in this volume). The US is also one of the main contributors of FDIs in Indonesia. The protection of US investments in Indonesia takes place mainly through the 1967 US-Indonesia Agreement 33

34

35

36 37 38

Agreement for the Promotion and Protection of Investments, United Kingdom and Northern IrelandIndonesia, signed 27 April 1976, entered into force 24 March 1977, . Agreement between the government of Malaysia and the government of the Republic of Indonesia for the promotion and protection of investments, signed 22 January 1994, entered into force 27 October 1999, . Articles 2, 3, and 5 of the Agreement on Promotion and Protection of Investment Netherlands-Indonesia (n. 30). See also Chadbourne & Parke LLP, ‘Indonesia Gives Notice: Foreign Investors to Lose Treaty Protection’, 24 April 2014, , accessed 20 May 2015, 2. Article 3(4) of the Agreement on Promotion and Protection of Investment Netherlands-Indonesia (n. 30). Article 9(4) of the Agreement on Promotion and Protection of Investment Netherlands-Indonesia (n. 30). Nor do these BITs contain so-called exceptions or carve-outs that limit the investment protection offered by them in favour of policy space for the government. See the examples of such provisions discussed in Chapter 1, ‘Innovative Legal Solutions for Investment Law and Sustainable Development Challenges’, by Marie-Claire Cordonier Segger in this volume.

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TINEKE LAMBOOY, IMAN PRIHANDONO, NURUL BARIZAH Relating to Investment Guaranties.39 This Agreement contains general provisions on investment protection, but most investors’ rights and obligations are specified through special agreements concluded between the Indonesian government and the individual US-based company. In the mining sector, for example, the Indonesian government has signed a number of CoWs, including mining concession agreements.40 Given the private character of such CoWs, it is difficult to inspect whether they include provisions on human rights and environmental protection. With Japan, another major investor in Indonesia, an economic partnership agreement has been entered into in 2008, i.e., the Japan-Indonesia Economic Partnership Agreement (JIEPA). The JIEPA covers investment issues.41 This Agreement provides, very generally, an obligation concerning the protection of human rights and the environment in relation to foreign investments. In Article 74 of the JIEPA, it is stated “that each Party should not waive or otherwise derogate from such environmental measures as an encouragement for establishment, acquisition or expansion of investments in its Area.”42 Apart from bilateral investment and trade agreements, Indonesia is also a party to a number of regional and multilateral investment and/or free trade agreements (FTA). These include the ASEAN Comprehensive Investment Agreement (ACIA),43 the ASEAN-China FTA44 the ASEAN-Australia-New Zealand FTA,45 and the ASEAN-Korea FTA.46 The authors point out that none of these International Investment Agreements (IIAs) and FTAs contain specific obligations concerning human rights or environmental protection in relation to investment activities. However, it is noteworthy that the ACIA includes an exemption clause which states that nothing in the ACIA agreement prevents a

39 40 41 42 43

44

45 46

Agreement Relating to Investment Guaranties, US-Indonesia, signed 7 January 1967, entered into force 22 August 1967. Hadin Muhjad, ‘Renegosiasi Susah Dilakukan’ (‘It is Difficult to Renegotiate’) (2011) 11(5) Desain Hukum 12. Agreement for an Economic Partnership, Japan-Indonesia, signed 20 August 2007, entered into force 1 July 2008, . Japan-Indonesia Economic Partnership Agreement (JIEPA), Article 74 on Environmental Measures. ASEAN Comprehensive Investment Agreement (ACIA), signed 26 February 2009, . Framework on Economic Co-operation and to establish an ASEAN-China Free Trade Area (entered into force 6 November 2001). See also Agreement on Investment of the Framework Agreement of the Comprehensive Economic Cooperation between ASEAN and PRC, signed 15 August 2009, . Agreement establishing the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA), . Agreement of Investment Under the Framework Agreement on Comprehensive Economic Cooperation Among the Governments of the Member Countries of the Association of Southeast Asian Nations and the Republic of Korea, signed 2 June 2009, .

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contracting party from applying any measures necessary to protect human, animal, or plant life or health.47 In general, environmental and human rights protection has not (yet) become an integral part of Indonesia’s BITs, IIAs, and FTAs. These agreements lag behind the latest developments in treaty-drafting practice. For example, major capital-exporting countries and regions such as the US, Canada, and the EU incorporate in their new Model BITs, IIAs, FTAs, and EU investment agreements, provisions on human rights and environmental protection.48 South Africa changed its model BIT in order to incorporate sustainable development goals and to retain the right to regulate.49 Another example of an innovative approach is the BIT between the Netherlands and the United Arab Emirates, signed in November 2013, in which reference is made to the OECD Guidelines for Multinational Enterprises.50 It is an interesting regulatory move to refer to these Guidelines in a BIT, as they specify CSR norms for investors from OECD countries for their outward investments. The effectiveness of these new developments has however not yet been tested in depth.

15.3.2

The Legal Framework of CSR in Indonesia

The Indonesian Constitution, the highest source of law in Indonesia, dictates that “the organisation of the national economy shall be based on economic democracy that upholds the principles of solidarity, efficiency along with fairness, sustainability, keeping the environment in perspective, [and] self-sufficiency, […].”51 To (re)shape the national economy in the wake of the Suharto era (in Indonesia indicated as the ‘reformasi’ period),

47

48

49

50

51

See ACIA, Article 17(b) General Exceptions (n. 43). However, it has been argued that this clause may be insufficient to cover the broad spectrum of environment and human rights damages that may be caused by trade and investment activities. See Hing Vutha and Hossein Jalilian, ‘Environmental Impacts of the ASEAN-China Free Trade Agreement on the Greater Mekong Sub-Region’, 2008, . See also Marc Proksch, ‘International Investment Agreements (IIAs) Issues and Considerations for ASEAN’ (First ASEAN-OECD Investment Policy Conference Jakarta 18-19 November 2010), . See Chapter 1, ‘Innovative legal solutions for investment law and sustainable development challenges’, by Marie-Claire Cordonier (n. 38). See also Chapter 3, ‘Fair and Equitable Treatment and the Protection of the Environment: Recent Trends in Investment Treaties and Investment Cases’, by Yulia Levashova in this volume. See Chapter 12, ‘Balancing foreign investment protection and environmental protection under South African Bilateral Investment Treaties’, by Jimcall Pfumorodze and M.M. Da Gama in this volume (n. 8). See also Jorge E. Vinuales, ‘Foreword’ to his volume. Article 2(3) of the Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the United Arab Emirates states that “each Contracting Party shall promote as far as possible and in accordance with their domestic laws the application of the OECD Guidelines for Multinational Enterprises to the extent that is not contrary to their domestic laws.” Indonesian Constitution 1945, Article 33(4).

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the Indonesian House of Representatives introduced social and environmental responsibilities for companies and investors (‘CSR’) in three laws: the Investment Law,52 the Limited Liability Company Law,53 and the State-Owned Enterprises Law.54 The goals of these three laws are identical: to institutionalize CSR in the laws of Indonesia. Nevertheless, the way in which CSR is regulated in the Investment Law (section 15.3.2.1) and the Limited Liability Company Law (section 15.3.2.2) is distinct and will be discussed in detail below. Basically, these Acts oblige companies to embed CSR in their core business activities. The State-Owned Enterprises Law will not be discussed, because it deals with CSR in a different manner, i.e., it stipulates that state-owned enterprises initiate community development projects (which is different from the obligation to integrate CSR in the core activities). Moreover, the research discussed in this chapter focuses on FDIs (i.e., investment through foreign companies), thus excluding activities conducted by stateowned enterprises. 15.3.2.1 Investment Law No. 25/2007 (the ‘Investment Law’) The Elucidation Commentary (i.e., the legislative history) to the Investment Law stipulates that “investment must become part of the national economic organisation and [must be used] to increase sustainable national economic growth.”55 Investment is defined as any kind of investing activity by both domestic and foreign investors within the territory of Indonesia.56 The law applies to any investment in any sector,57 whether or not the investor is a foreign/domestic natural person or foreign/domestic legal person. Sukmono distinguishes between four CSR obligations that are laid down in the Investment Law, next to the investor’s general obligations.58 The first of these is a “communitycentric corporate social responsibility”59 as laid down in Article 15(b) of the Investment Law, according to which investors are obliged to create a harmonious and balanced relationship in accordance with the environment, values, norms, and the culture of the 52 53 54 55 56

57 58

59

Investment Law No. 25/2007 (Investment Law). Limited Liability Company Law No. 40/2007 (Company Law). State-Owned Enterprises Law No. 19/2003. Elucidation Commentary concerning Investment Law, 2. Investment Law, Article 1. Prior to the 2007 Investment Law, there were two investment laws: one which applied to foreign investors and one which applied to domestic investors. To comply with the national treatment principles laid down in the various World Trade Organization agreements, one Investment Law was adopted, applying to both foreign and domestic investors. See A.F. Sukmono, ‘The Legal Framework of CSR in Indonesia’, in Tineke Lambooy, Afifah Kusumadara, Aikaterini Argyrou & Milda Istiqomah (Eds.), CSR in Indonesia: Legislative Developments and Case Studies, Konstitusi Press, 2013, 49-50. Investment Law, Article 12. Investment Law, Article 15 states that every investor is required to (i) apply the principles of good corporate management; (ii) draft reports on the investment activity and submit them to the Coordinating Investment Board; (iii) respect the cultural traditions of the communities around the location of the investment business activity; and (iv) comply with all of the rules of law. Sukmono (n. 56), 54.

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local community.60 The second CSR obligation is an “environmental-centric responsibility,”61 which obliges investors to preserve the environment.62 The third is a “remedycentric responsibility”63obliging investors who invest in non-renewable resources to allocate funds for the recovery of the operating areas which fulfil the standard of environmental worthiness.64 The last CSR obligation which can be found in the Investment Law is the obligation “for investors to develop partnerships with SMEs and cooperatives.”65 15.3.2.2 Limited Liability Company Law No. 40/2007 (the ‘Company Law’) The preambular provisions of the Company Law stipulate that the national economy needs to be supported by strong economic institutions in order to create prosperity for the community, thereby implementing the principles of community, fair, efficiency, sustainability, environmental awareness, independence, and safeguards for a balanced progress and national economic unity.66 This legislative goal is further elaborated in Article 74 of the Company Law, which requires limited liability companies67 that are operating directly or indirectly in the field of natural resources68 to undertake CSR.69 Companies operating directly in the field of natural resources are those companies whose business concerns the managing and exploiting of natural resources, such as mining companies. Companies operating indirectly in the field of natural resources are those that do not manage or exploit natural resources themselves but whose business activities have an impact on the functional capacity of natural resources.70 The Company Law explains that CSR entails a company’s commitment to participate in sustainable economic development, to increase the quality of life and the quality of the environment. Such participation is of value to the company itself, the local community,

60 61 62 63 64 65 66 67

68

69 70

Elucidation Commentary concerning Investment Law, 16. Sukmono (n. 56), 54. Investment Law, Article 16. Sukmono (n. 56), 54-55. Investment Law, Article 17. Sukmono (n. 56), 55. Company Law, preambular consideration (a). The definition of limited liability company is given in Article 1(1) of the Company Law: “a legal entity constitutes a capital alliance, established based on an agreement, in order to conduct business activities with the Company’s Authorized Capital divided into shares and which satisfies the requirements as stipulated in this Law, and it implementation regulations.” Foreign or domestic limited liability companies which engage in investment activities within Indonesia are also subject to the obligations set out in the Investment Law, particularly the obligation to create a harmonious and balanced relationship in accordance with the environment, values, norms, and the culture of the local community, as set out in Article 15(b) of the Investment Law. Limited Liability Company Law, Article 74(1). Elucidation Commentary of the Company Law, Article 74.

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TINEKE LAMBOOY, IMAN PRIHANDONO, NURUL BARIZAH and the society in general.71 Companies directly or indirectly engaged in the business of natural resources must allocate funds (‘budget’) for embedding CSR and fulfilling their obligations in that respect.72 The costs associated with CSR are to be accounted for as corporate costs.73 Companies which fail to perform their CSR obligations are subject to (administrative) sanctions provided for under the related prevailing laws and regulations.74 The Company Law indicates that the sanctions stated in the Investment Law apply.75 In addition, according to Article 66(2)(c) of the Company Law, the board of directors of limited liability companies is obliged “to provide a report describing the implementation of CSR together with the annual report of the company.”76 The concretization of the corporate CSR obligations stated in the Company Law are elaborated on in Government Regulation No. 47/2012.77 It exceeds the scope of this chapter to go into the details thereof.78

15.3.3

Environmental and Mining Licences in Indonesia

In Indonesia, various environmental laws and specific mining laws apply to mining activities. This is regardless of whether the activities are conducted by Indonesian companies or foreign companies. These laws cover the subsequent stages of mining activities: exploration, exploitation, and post-exploitation. In order to have a better grasp of the disputes that will be discussed in section 15.4, an overview of the pertinent legislation is provided in this sub-section.

71 72 73 74 75

76 77

78

Limited Liability Company Law No. 40/2007, Article 1(3). Company Law, Article 74(2). Sukmono (n. 56), 57. Ibid., 58. Investment Law, Article 34 specifies the following (administrative) sanctions: (i) a written warning, (ii) a business restriction, (iii) a suspension of business and/or investment facility, or (iv) a revocation of the business license and/or investment facility. Sukmono (n. 56), 58. Governmental Regulation No. 47/2012 concerning Social and Environmental Responsibility of Limited Liability Companies. This Regulation was introduced pursuant to Article 74(4) of the Company Law which states that the obligations set out in Article 74 shall be further regulated in a Government Regulation. Reference is made to Tineke Lambooy, Afifah Kusumadara, Aikaterini Argyrou & Milda Istiqomah, CSR in Indonesia: Legislative Developments and Case Studies, Konstitusi Press, 2013, in particular to Chapter 3, ‘Investment Law: The implementation of CSR in Indonesian laws and the Indonesian Bilateral Investment Treaties: A Lack of Coherency?’, by Kurratu Aini and Yulia Levashova in this volume; Chapter 6, ‘The Legal Principles of (C)ESR of Mining Companies as a New Paradigm in Indonesia’, by Indah Dwi Qurbani and Milda Istiqomah, in this volume; and Chapter 7, ‘CSR Due Diligence in the Context of Merger and Acquisition Transactions of Mining Companies in Indonesia’, by Listi Witanni, in this volume.

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15.3.3.1

Act No. 32/2009 on Environmental Protection and Management (the ‘Environmental Act’)79 The Environmental Act requires a business and/or an activity which has a substantial impact on the environment80 to conduct an environmental impact analysis (EIA) (Analisis Mengenai Dampak Lingkungan or ‘Amdal’)81 and to produce an EIA report.82 This must be done prior to the start of a project. The EIA report is to be formulated by the initiators of the business plan (i.e., the company/the investor), thereby involving communities by providing complete and transparent information, by notifying communities prior to execution of the business plan, and by letting communities raise objections.83 The EIA report is to be examined by an EIA appraisal commission.84 Based on the result of the EIA appraisal commission, the relevant authority decides on the environmental feasibility of the project.85 For businesses that fall outside the scope of application of the EIA requirement,86 the competent authorities decide whether they need to implement an Environmental Management-Monitoring Effort (EMME) (Upaya Pengelolaan Lingkungan Hidup dan Upaya Pemantauan Lingkungan Hidup or ‘UKL-UPL’).87 This effort is not appraised by a commission. Typically, businesses at the exploration stage require an EMME, while this does not suffice for businesses at the exploitation stage, because stricter norms apply to the latter.

79

80 81

82

83 84 85 86 87

Law No. 32 of 2009 regarding Environmental Protection and Management dated 3rd October 2009, entered into force on 3rd October 2009, State Gazette of the Republic of Indonesia of 2009 No. 140, Supplementary State Gazette of the Republic Indonesia Number 5059 (Environmental Act). Whether or not a business and/or an activity has a substantial impact on the environment can be determined in accordance with the criteria set out in Article 22(2) of the Environmental Act. Environmental Act, Article 23, stipulates that the requirements to do an Amdal and to formulate an Amdal document apply to mining activities with regard to the exploitation of natural resources (either renewable or non-renewable); processes and activities that potentially cause environmental pollution and/or damage as well as the squandering and degradation of natural resources; processes and activities that could potentially result in influencing the natural, artificial, and socio-cultural environment; processes and activities that could influence the conservation of conserved areas containing natural resources and/or cultural reserves; the introduction of plants, animals, and micro-organisms; the production and utilization of biological and non-biological substances; activities which are of high-risk and/or influence state defence; the application of technology predicted to have great potential to influence the environment. The Amdal document contains, according to Article 25 of the Environmental Act, (i) a study on the impact of the business plan; (ii) an evaluation of the activities around the location of the business plan; (iii) a public recommendation, input, and response to the business plan; (iv) an estimate of the coverage and important characteristics if the business plan is in fact executed; (v) a holistic evaluation of the occurring impact in order to determine the environmental (un)feasibility; and (vi) an environmental management and monitoring plan. Environmental Act, Article 26: Communities consist of (i) affected communities, (ii) environmental activists, and (iii) parties affected by decisions in the Amdal process. Ibid., Article 29. Ibid., Article 31. Ibid., Article 23. Ibid., Article 36.

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Businesses which are obliged to conduct either an EIA or an EMME require an environmental permit issued by the competent authority.88 This permit is a prerequisite to obtain other business permits such as an operating licence or a construction licence.89 Another important provision of the Environmental Act is the one regarding environmental audits. These audits are to be carried out by the government if the project concerns (i) an environmentally high-risk business and/or activity90 or (ii) a business and/or activity which is in breach of or disobeys the law.91 Act No. 4/2009 Regarding Mineral and Coal Mining (the ‘Mining Act’)92 The Mining Act came into force in 2009 and provides a new legal framework for mining companies, which is called the ‘licence-based system’. This new system replaces the CoW system (referred to in section 15.3.1). However, existing CoWs will remain valid up to the lapse of their contractual term. They may be converted into licence-based activities provided that they follow the prescribed licence application process.93 The central government can designate certain areas as mining zones where mining operations may be carried out. In determining the mining zones, the government is to take into account the suggestions of the regional government and must consult with the National Parliament.94 In general, there are two types of mining licences which a foreign investor must obtain from the Minister of Energy and Mineral Resources95 in order to be allowed to commence mining operations. These are (i) a licence to conduct mining operation in a particular mining zone and (ii) a business permit for exploration and/or production of mining activities. The mining zone licence, in addition to the abovementioned environmental licences (see section 15.3.3.1), must first be obtained before a mining company can apply for an exploration and/or production permit. According to the Mining Act, holders of a (special) mining business licence are obligated to implement, prior to the mining of mineral and/or coal, (i) a management and monitoring plan for the mining environment covering reclamation and post-mining 15.3.3.2

88 89 90 91 92 93 94 95

Ibid., Article 37. Ibid., Article 40(1) Elucidation Commentary concerning the Environmental Act, 3a. Ibid., Article 49(1)(a). Ibid., Article 49(1)(b). Law No. 4 of 2009 regarding Mineral and Coal Mining, State Gazette of the Republic of Indonesia of 2009 Number 4, Supplementary State Gazette of the Republic of Indonesia Number 4959 (the Mining Act). Mining Act, Article 169. Ibid., Article 14. Government Regulation No. 23 of 2010 on Mining and Coal Operation (as amended by Government Regulation No. 24 of 2012), Article 6, para. 3b.

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activities or plans,96 (ii) efforts illustrating that the holder is careful and not wasteful of mineral and coal resources,97 (iii) a management strategy concerning the treatment of the waste of the mining activities until it meets the environmental quality standards for disposal into the environment,98 and (iv) post-mining deposit funds.99 15.3.3.3 The Deforestation Moratorium In 2011, a Presidential Decree entered into force100 which introduced a two-year moratorium on the issuance of new forestry permits in peat lands (traditionally sources of coal) and certain natural forest areas in order to reduce carbon emissions and deforestation. This moratorium was renewed in 2013 by a new decree.101 The moratoria do not apply to permits that have been approved by the Ministry of Forestry or to projects which fulfil vital functions (e.g., oil, gas, and electricity). 15.3.3.4

Government Regulation No. 78/2010 regarding Reclamation and PostMining (‘Reclamation and Post-Mining Regulation’)102 The objective of the Reclamation and Post-Mining Regulation is to achieve a better mining environment, management, and protection through the performance of reclamation and/or post-mining on terrains disturbed by mining activities by holders of (special) mining business licences for production or exploration purposes.103 The four main elements which this regulation intends to regulate are (i) the formulation of reclamation and/or post-mining plans,104 (ii) the approval of these plans by the competent authority,105(iii) the funding and carrying out of the plans by holders of (special) mining business licenses,106 and (iv) the provision of alternative means to carry out the plan in case of non-performance by the licence holders. 96 97 98 99

100 101 102

103 104 105 106

Mining Act, Article 96(c). Ibid., Article 96(d). Ibid., Article 96(e). According to the Mining Act, Article 100(1), the holders of mining licences have to make available guaranteed funds. These funds are used for reclamation and post-mining (i.e., restore the land to its approximate original or usable condition). Presidential Decree No. 10/2011. Presidential Decree No. 6/2013. Government Regulation No. 78 of 2010 regarding Reclamation and Post-Mining, dated 20 December 2010, entered into force on 20 December 2010, State Gazette of the Republic of Indonesia of 2010 Number 138, Supplementary State Gazette of the Republic of Indonesia Number 5172 (the Reclamation and Post-Mining Regulation). Article 5 states in particular that “before carrying out exploration activities, holders of an Exploration licence and Exploitation licence are obligated to compile reclamation plans based on documentation of the living environment in accordance with provisions of statutory regulations in the aspect of protection and management of the living environment” (Reclamation and Post-Mining Regulation). The Reclamation and Post-Mining Regulation, Articles 2, 3, and 4. Ibid., Articles 5 through 12. Ibid., Articles 13 through 18. Ibid., Articles 19 through 43.

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The Reclamation and Post-Mining Regulation obliges holders of (special) mining business licences to return reclaimed land to the rightful party.107 This obligation can be postponed if the land is still used for mining.

15.3.4

Ownership of Mining Companies

Not only are the rich mineral resources in Indonesia attractive to MNCs, certain recent legislative amendments concerning the ownership of mining companies have also made investments in mining activities more appealing to foreign investors. Traditionally, foreign investors could only invest in the mining industry in Indonesia through a joint venture with an Indonesian partner or the government.108 Pursuant to the amendments, foreign investors are now allowed to buy and own the shares in an Indonesian company which holds or has acquired an exploration and production mining permit (‘mining company’), provided that the foreign investor strictly follows certain divestment rules.109 Pursuant to Government Regulation No. 23 of 2010, as amended by Government Regulation No. 24 of 2012, a minimum of 51% of the foreign company’s share in the Indonesian mining company must be gradually divested to ‘Indonesian Participants’. The divestment process has to follow the following steps: (a) 20% must be transferred in the sixth year after starting the production; (b) 30%, in the seventh year; (c) 37%, in the eighth year; (d) 44%, in the ninth year; and (e) 51%, in the 10th year.110 According to Regulation of the Ministry of Energy and Mineral Resources No. 27 of 2013 on the Procedures of Pricing for Divestment, the central government has the first priority right to acquire a share in the mining company in the divestment process, followed by the regional governments, and then the State-Owned Company (Badan Usaha Milik Negara or BUMN) and the Local Government-Owned Company (Badan Usaha Milik Daerah or BUMD), and the last option to buy the divested shares is given to domestic companies.111

107 Ibid., Article 47. 108 Law No. 11 of 1967 on General Rules in Mining, Article 12 (as amended by Law No. 4 of 2009 on Mineral and Coal Mining). 109 Government Regulation No. 23 of 2010 on Mining and Coal Operation (as amended by Government Regulation No. 24 of 2012), Article 97(1). 110 Government Regulation No. 23 of 2010 on Mining and Coal Operation (as amended by Government Regulation No. 24 of 2012), Article 97. 111 Regulation of the Ministry of Energy and Mineral Resources No. 27 of 2013 on the Procedures of Pricing for Divestment and the Change of Investment Structure in Mining and Coal, Article 5.

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Regulatory Changes Concerning the Export of Raw Ores

In contrast to the legislative amendment mentioned in section 15.3.4, which was positively received by foreign investors, certain other regulatory changes have not been appreciated by foreign investors. Since 2014, mining companies have to comply with the obligation to process and refine mineral ores before exporting them (sometimes referred to as the ‘mineral ore export ban’). Pursuant to the Mining Act and Government Regulation No. 23 of 2010, companies which hold a mining permit for production operations and companies which conduct mining operations based on a CoW must process their mineral ore in local refinery facilities.112 This law implemented the Indonesian government’s policy to increase the value of Indonesian mineral products for export, to create new jobs, and to increase the national income.113 The local processing obligation became effective as of 12 January 2014. In order to create a disincentive for mining companies to export raw minerals, the Indonesian Ministry of Finance issued Regulation No. 6/PMK.011 of 2014, which imposes export taxes on the export of copper, iron, ilmenite, titanium, manganese, lead, and zinc concentrates.114 Mining companies are (only) allowed to export their semiprocessed mineral concentrates if they pay a progressive tax over the export value. This tax ranges from 20% to 25% for the 2014 fiscal year and gradually increases to 50% in 2015 and will increase again up to 60% by 2016. The legislation outlined in this section 15.3.5 has led to various conflicts with foreign mining companies (see further section 15.4). Another legislative change that impacts foreign investors is the following: in 2013, the Minister of Energy and Mineral Resources passed Regulation No. 28 of 2013, which restricts foreign participation in tenders for mining licences to areas which are greater than 5,000 hectares in size. The Regulation prescribes that only district-owned, stateowned, and national companies are allowed to obtain an IUP mining licence for mining areas smaller than 5,000 hectares.115

112 Mining Act, Article 170. 113 Eludication Commentary to Article 103 of the Mining Act. 114 Annex of the Ministry of Finance Regulation No. 6/PMK.011 of 2014, , accessed 19 May 2015. 115 Dakka Sirait, Fandy Adhitya, and Ali Mardi, ‘New Rules for Mining Tenders’ (PwC Indonesia Energy, Utilities & Mining Newsflash, November 2013), , accessed 20 May 2015, 5.

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15.4

DISPUTES RELATING

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Introduction to the Cases

In this section, a synopsis is presented of several recent FDI cases in the mining sector that concern human rights abuses and environmental pollution and/or degradation. The selection of these cases is based on the magnitude of the problems and the abundant media coverage which they received. The purpose of presenting them is to offer an insight in the variety of conflicts caused by or related to FDI in mining. First, it needs to be explained on which type of information the case synopses are based. In Indonesia, it is difficult to obtain the text of lower court decisions, as these decisions are usually not made available online. The Supreme Court has recently started to publish decisions online, however, many decisions are not yet available in this way. Information concerning lower court decisions becomes known through journalists who attend court sessions and write about the cases in local newspapers. Those newspaper articles can be traced online. A similar accessibility problem exists concerning environmental and mining licences; even though the withdrawal or issuance of a mining or environmental licence by the authorities is usually published in a national newspaper, the content of such a decision, i.e., the conditions and the environmental requirements linked to the issuance or withdrawal, is not. Likewise, it is difficult to obtain the text of CoWs agreed upon between the Indonesian government and a foreign investor, because these are generally not published. Sometimes, (part of) the content can be examined because the CoW has been subjected to litigation and has become public through court or arbitral tribunal documents. Consequently, where no direct legal sources could be accessed to examine the background and facts of any conflict presented in this section, the authors had to rely on secondary sources such as reports from NGOs and governmental organizations, academic case studies, the websites of mining companies, and newspaper articles. Generally, the information contained in such reports and articles is based on site visits conducted by the authors thereof. Second, to offer an indication of the mining activities in Indonesia and the companies/ investors involved, Figure 15.3 provides an overview of all local operating companies that were active in this sector in 2011.116

116 McKay and Bhasin (n. 16).

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Figure 15.3 Mineral Prospects and Mining Activities in Indonesia117

117 B.N. Wahju, Chairman of Indonesian Mining Association, ‘Indonesian mining industry in the period of transition, between 1997-2001’, p. 6 (paper presented at the International Convention, Trade Show Investors Exchange, Prospectors & Developers Association of Canada (PDAC), Toronto, Canada, March 10-13, 2002), , accessed 9 July 2015.

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In section 15.4.2, it will be demonstrated that conflicts between communities and foreign mining operations have occurred and still occur everywhere in the Indonesian archipelago: West Papua, Kalimantan, Maluku, Sulawesi, and Nusa Tenggara. The authors do not aim to provide a full overview of all mining conflicts in Indonesia. They selected those cases which have been often discussed in the academic literature and the press as this contributed to the collection of objective information. Then, in section 15.4.3, the legal disputes in which the US investor, Newmont Corporation, is or was involved related to its mining business in Indonesia will be analysed. This is followed in section 15.4.4 by an exposé about a recent conflict which resulted in villagers and students setting fire, in 2013, to the local authority building in Bima, the capital of the island of East Sumbawa in the province of West Nusa Tenggara. In section 15.4.5, a discussion is presented concerning the disputes in which the UK firm, Churchill Mining PLC, is involved, including international investment arbitration proceedings. As the case is still pending at the moment of writing this chapter, not all relevant case materials are yet available.

15.4.2

Conflicts in West Papua, Kalimantan, Maluku, and Sulawesi

15.4.2.1 PT Freeport Indonesia – West Papua PT Freeport Indonesia (PTFI) has been accused of violating human rights in West Papua (previously named Irian Jaya) since it began to operate its mines there in 1973. PTFI is a subsidiary of Freeport-McMoRan Copper & Gold Inc., a US-based copper and gold mining giant.118 In 1995, the Indonesian government granted a mining concession to PTFI for a new area. This area covered more than 1.3 million hectares119 and was located in forest and protected forest areas. According to various sources, as will be explained in this section, the mining operations of PTFI have affected the human rights of the local inhabitants in several ways. Because of the opening of the mining sites, the indigenous Amungme tribes were forced to relocate from their original residence in the highland to a lowland area. They were kept away from Tembagapura, a mining town established by PTFI.120 118 Freeport-McMoRan Copper & Gold Inc. (Freeport-McMoRan) holds the majority of shares in PTFI (90.64%). The other shareholder is the Government of Indonesia (9.36%). 119 In 1995, Rio Tinto PLC (a British/Australian mining company) provided funding to allow FreeportMcMoRan to increase its mining production. In return, Rio Tinto holds 16.5% of shares in FreeportMcMoRan. 120 Chris Ballard, ‘Human Rights and the Mining Sector in Indonesia: A Baseline Study’, International Institute for Environment and Development, 2001, accessed 22 May 2015, 24-25.

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Another impact of PTFI mining activities concerns the massive environmental degradation. PTFI used the Aghawagon-Otomona-Ajkwa River system to transport tailings, allegedly without a waste disposal permit.121 The use of this highland river system not only contaminated the water with hazardous substances but also destroyed ecosystem functions of the river. An environmental audit conducted by the US-based environmental consultancy firm Parametrix revealed that the disposed tailings consist of a material that is capable of generating acid harmful to aquatic life.122 In the lowland, the disposal of tailings into the Ajkwa Estuary caused the death of vegetation and sensitive aquatic species.123 Consequently, the livelihood of the members of the indigenous Komoro tribe who use this estuary as their vital hunting and fishing ground is affected.124 In the mean time, PTFI claims on its website that it is committed to engage in good environmental management, holds an ISO 14001 certification, and has a comprehensive program to monitor the acid mine drainage and other environmental risks.125 PTFI’s mining activities had and have an effect on the traditional cultural and spiritual rights of local communities. The Ertsberg and Grasberg – now mine sites – are culturally and ritually important for the Amungme tribe.126 Furthermore, PTFI continuously dumped its overburdens (rock waste) into Wanagon Lake, which is a sacred lake for the Amungme tribe.127 This practice led to the Walhi vs. Freeport case.128 A claim was filed by the NGO Wahana Lingkungan Hidup Indonesia (WALHI, Friends of the Earth Indonesia or the Indonesian Forum on the Environment) following the landslide accident which caused the death of four people on 14 May 2000. The accident occurred in Wanagon Lake where PTFI discharged waste materials. WALHI claimed that the landslide was caused by the poor environmental management of PTFI and because PTFI had failed to set up a pre-warning system. On 27 July 2000, WALHI alleged that PTFI had violated Law No. 23 of 1997 on the Environmental Management by providing incorrect and misleading information

121 Ibid. 122 ‘Kerusakan Lingkungan yang Ditimbulkan Freeport Parah’, Antara News, 26 January 2006, , accessed 15 April 2015. 123 Ibid. 124 NGO Wahana Lingkungan Hidup Indonesia, ‘The Environmental Impacts of Freeport-Rio Tinto’s Copper and Gold Mining Operation in Papua’, Jakarta, 2006, , accessed 23 May 2015, 63. 125 Rozik B. Soetjipto, ‘Environmental Policy’, http://ptfi.co.id/en/csr/freeport-in-environment/environmentalpolicy, accessed 22 May 2015. 126 Ballard (n. 120), 30. 127 Ibid. 128 ‘Freeport Indonesia Digugat oleh Walhi’ Hukumonline, 22 August 2000, , accessed 22 May 2015. See WALHI, homepage , accessed 17 June 2015.

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about its environmental management. WALHI claimed that PTFI had violated the law and requested that the court issue an order to the defendant to make public apologies in several national and international newspapers and TV and radio stations for 10 days.129 The District Court of South Jakarta found that PTFI had violated Article 6(2) of Law No. 23 of 1997 on the Environmental Management by providing the public with incorrect information. PTFI had violated the law by announcing that no evidence existed that the landslide accident may have caused harm to human health and that there was no possible long-term impact to the environment.130 Although the court decision garnered appreciation from many NGOs, the judgment remained far from what was expected. The court only focused on the obligation of PTFI to provide correct and precise information regarding environmental conditions following the accident. According to the NGOs, the court had failed to consider PTFI’s more general obligation to provide correct and precise information about its environmental management in Wanagon Lake (i.e., also concerning the period before the accident had taken place). In fact, this was the main claim of the plaintiff – that the defendant had been giving incorrect information about the dumping of rock wastes, which in turn had caused the accident. Unfortunately, the court provided no explanation in the judgment why it decided to disregard this particular issue. One possible reason is that if the court had considered the issue, it might have been forced to opine on the question whether PTFI could continue to deposit its toxic and rock wastes into Wanagon Lake. No appeal has been instated in this case. Besides the abovementioned issues, it has been argued by NGOs that the pollution could be considered a violation of Article 4(5) of Law No. 7 of 2004 on Water Resources valid at the time131 and that PTFI has failed to communicate important documents such as EIA studies and independent external audit reports.132 15.4.2.2 PT Kelian Equatorial Mining – East Kalimantan Local communities have submitted many complaints about the environmental and social impacts of the gold mining activities by PT Kelian Equatorial Mining (PTKEM) in Kalimantan. PTKEM operated a gold mine between 1995 and 2004. At that time, PTKEM was a subsidiary of the Australia-based mining giant Rio Tinto (holding 90% of PTKEM shares).133 129 Ibid, i.e. ‘Freeport Indonesia Digugat oleh Walhi’ Hukumonline. 130 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), 51-52. 131 Law No. 7/2004 on Water Resources, , accessed 22 May 2015. 132 See section 15.3.3.1. 133 PTKEM indicates that it is “A member of Rio Tinto.” See PT. Kelian Equatorial Mining, ‘Social & Environmental Report 2002’ (Sustainable Solutions Global 2002), , accessed 22 May 2015.

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The mine was located in an area of 286,233 hectares of rain forest in Kelian, East Kalimantan. The communities asserted that PTKEM’s mining operations caused forest destruction and polluted the Kelian River due to acid rock drainage.134 Furthermore, the communities could no longer conduct agro-forestry activities and farm their traditional lands because they were now in the PTKEM’s mining area. Besides the loss of livelihoods, there were also allegations of human rights abuses. In the period from April to June 2000, local people and mine workers protested against these injustices. Hundreds of indigenous Dayak villagers set up blockades, preventing supplies of lime (used to treat acid waste) and diesel fuel oil getting through to the mine site. The company had to suspend operations.135 Community leaders were imprisoned for several weeks for ‘initiating a blockade’.136 These protests reflected the anger of the local communities built up over the years. Two years earlier, in 1998, an agreement had been concluded between PTKEM and a local community organization known as LKMTL. The organization LKMTL was established through a community meeting of 2,000 people. The agreement was the result of the community demands which were presented at annual shareholders’ meetings of PTKEM in London and Melbourne. PTKEM’s parent company, Rio Tinto, and WALHI were also parties to the agreement. In this agreement, PTKEM had committed itself to negotiate solutions for the identified injustices, inter alia, to provide compensation for land, human rights abuses by mining staff and security personnel, and pollution and to discuss the mine closure plans. The negotiations ended in a deadlock in April 2000. According to the communities, “PTKEM has not been genuinely committed to settle the issues and demands raised by the people. The company has only paid lip service to various activities, such as community development projects, recruitment of local workers, environmental management and mine closure plans as a form of propaganda.”137 Subsequently, PTKEM settled the issues with a government-backed team of a local head of the district. However, he had no mandate from most of the local residents and grassroots organizations. WALHI announced its withdrawal from the negotiations in October 2000 on the grounds that “Rio Tinto had sought to split the community for its

134 Pius Erick Nyompe, ‘Indonesia Case Study: The Closure of the Kelian Gold Mine and the Role of the Business Partnership for Development/World Bank’ (Meeting on Indigenous Peoples, Extractive Industries and the World Bank, Oxford, 15 April 2003), , 2.The perspective of the company can be found in Rio Tinto, ‘Why Human Rights Matter’, January 2013, , accessed 22 May 2015, 82. 135 Ibid. 136 Ibid. 137 Ibid.

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own advantage, had misled and insulted LKMTL and were not genuinely committed to the terms and spirit of the original agreement.”138 Another NGO, the international NGO CorpWatch, also examined the activities of Rio Tinto and, in particular, the activities of its subsidiary PTKEM in Keliam, between July 2000 – when Rio Tinto signed up to the UN Global Compact Initiative139 – and July 2001. CorpWatch reported human rights abuses and environmental destruction by PTKEM and concluded that the company violated Principle 1 (“support and respect the protection of international human rights with in their sphere of influence”) and Principle 8 (“undertake initiatives to promote greater environmental responsibility”) of the Global Compact.140 CorpWatch also referred to an investigation by the Indonesian Government’s National Human Rights Commission of allegations of abuses at the Keliam mine.141 The Commission’s report revealed that “the Indonesian military and company security forcibly evicted traditional miners, burned down villages, and arrested and detained protestors since the mine opened. Local people have systematically lost homes, lands, gardens, fruit trees, forest resources, family graves and the right to mine for gold in the river.”142 Moreover, incidents of sexual harassment, rape, and violence against local Dayak women committed by senior company staff were reported.143 As regards compliance with environmental norms, CorpWatch referred to a WALHI report which stated that the company’s operations affected the health of the surrounding community. It declared that the “company produces over 14 tons of gold per year using the cyanide heap-leaching process which produces contaminated tailings. The tailings are 138 In a letter to Rio Tinto and PTKEM, dated 19th March 2003, LKMTL states that “neither company has responded to repeated requests to supply a copy of the company’s mining contract at Kelian; neither have they responded to the suggestion that there should be an independent expert to monitor pollution levels both now and after mine closure. The companies have not agreed to requests to rehabilitate the minesite by filling in pits and lakes left by excavation. Moreover, they have not explained, as requested by LKMTL, what RT’s responsibilities are for various problems that might arise after the mine closes.” A copy of this letter was given to Rio Tinto’s chairman, Sir Robert Wilson, after the London Annual General Meeting of shareholders. See Down to Earth ‘Rio Tinto Blasted Three Continents’, May 2003, , accessed 5 May 2015. See for more information about environmental and social impact by the mining industry in Indonesia and concerning the attempts to solve conflicts: Asia-Pacific Civil Society Statement of Withdrawal from the Extractive Industries Review Process, 27 April 2003; the Oxford Declaration by indigenous representatives, , accessed 25 May 2015. 139 Danny Kennedy, ‘Rio Tinto; Global Compact Violator; PT Kelian, A Case Study of Global Operations’, CorpWatch, 13 July 2001, , accessed 14 April 2015. 140 Ibid. 141 Phil Mattera, ‘Rio Tinto: Global Compact Violator’, CorpWatch, 13 July 2001, , accessed 22 May 2015. 142 Emily E. Harwell and Owen J. Lynch, ‘Whose Resources, Whose Common Good, Towards a New Paradigm of Environmental Justice and the National Interest in Indonesia’ (The Center for International Environmental Law, January 2002), , accessed 14 April 2015, 67 143 Ibid.

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held in a dam and treated in a polishing pond near the Kelian River. Water from the polishing pond pours into the river through an outlet. The company claims that the water is clean while the community says that people cannot drink or bathe in the water because it causes skin lesions and stomach aches.”144 In respect of the post-mining obligations, WALHI alleged that PTKEM ignored its obligation to restore 450 acres of the mine pit and dump sites into their original forested condition. In response, the company claimed technical difficulties.145 WALHI, however, pointed to the unjust mine closure procedure, which did not take community concerns adequately into account and failed to provide basic information to the communities.146 The CorpWatch report also referred to the environmental policy of PTKEM’s parent company, Rio Tinto, which declared that it is committed to mining operations that minimally affect the environment: “We will maintain high standards in environmental protection while complying with Indonesian and International environmental legislation.”147 In its 2013 annual report, Rio Tinto claimed that it had made compensation payments as a settlement for the human rights abuses committed during the operation of PTKEM. However, the authors could not find any information on the amount of the compensation and to whom the compensation was provided.148 Another Indonesian NGO, Jarigan Advokasi Tambang (JATAM, the Indonesian Mining Advocacy Network) claimed that PTKEM consistently manipulated environmental reports,149 whereas an Australian NGO, the Mineral Policy Institute, asserted that Rio Tinto violated environmental standards in its overseas operations.150 In sum, there are various reports which contain information suggesting that PTKEM did not properly comply with the Indonesian mining, environmental, and other applicable laws such as waste management laws, coastal areas laws, and sea laws during the process of applying for the mining licence, when conducting the mining operations, and 144 Ibid. 145 Down to Earth (n. 138). 146 WALHI’s critique of the company’s mining interests in Kalimantan, Sulawesi, and West Papua, included in the report by WALHI and Friends of the Earth (2003), ´Undermining Indonesia: Adverse Social and Environmental Impacts of Rio Tinto’s Mining Operations in Indonesia´, , accessed 5 May 2015, covers four Rio Tinto interests in Indonesia: Kelian, Kaltim Prima, Freeport, and Poboya. WALHI says that the PTKEM would have dumped 100 million tons of waste rock into the environment by the end of its operations. It accuses the company of circumventing and violating Indonesian environmental regulations and highlights concerns over the use of cyanide and acid rock drainage. The report also outlines the history of human rights abuses at the Kelian mine, which includes forced eviction of local people by the military and the police. At least 444 families were displaced from their settlements without any prior informed consent. See also , accessed 5 May 2015. 147 Danny Kennedy (n. 139). 148 Rio Tinto (n. 134), 83. 149 See JATAM, homepage , accessed 17 June 2015. 150 Danny Kennedy (n. 139).

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TINEKE LAMBOOY, IMAN PRIHANDONO, NURUL BARIZAH thereafter (see section 15.3.3).151 Usually, the requirements for granting the licence are included in the licence documents. It seems, however, that in practice, during the period of operations, government authorities do not adequately ensure and monitor whether the company fulfils the licence requirements. In this case, various sources also contend that there was a lack of transparency in the legal procedure and outcome of granting the mining licence. 15.4.2.3 PT Nusa Halmahera Minerals – North Maluku The third case concerns the operation of an open pit gold mining project in North Halmahera, North Maluku by PT Nusa Halmahera Minerals (PTNHM).152 PTNHM is a subsidiary of Newcrest Mining Ltd., an Australia-based company, which holds 75% of the shares in PTNHM. The other shareholder in PTNHM is PT Aneka Tambang, an Indonesian state-owned company, which holds 25% of the shares.153 It has been stressed that PTNHM’s activities took place in indigenous forest land and in protected forest areas and that they affected the livelihood of the indigenous communities, caused environmental damages and polluted Kao Bay.154 For instance, a report of the Association of Adat Community (Aliansi Masyarakat Adat Nusantara or AMAN) stated that in 2010, 2011, and 2012, the tailing pipe of the company collapsed, causing sewage to flow into the Kao Bay.155 As a result, the river and sea water became polluted and the ecosystems were damaged. The Research Institute of Agriculture in Indonesia discovered mercury and cyanide contamination of local fish species.156 The Hoana 151 Such as Act. No 41 of 1999 on Forestry Principals, as amended by Act No. 19 of 2004; Act No. 5 of 1990 on Conservation of Biological Resources and its Ecosystem; Act No. 7 of 2004 on Water Resources; Act No. 32 of 2009 on Protection and Management of Environment; Government Regulation No. 27 of 2012 on Environmental Permits; Act No. 39 of 1999 on Human Rights; Act No. 41 of 2009 on Protection of Agricultural Land for Food Sustainability; Act No. 12 of 2005 on the Ratification of International Covenant on Civil and political Rights and Act No. 11 of 2005 on the Ratification of Covenant on Economic and Cultural Rights; Act No. 11 of 1967 on Provisions of General Mining Principles, Act No. 41 of 2009 on Mineral and Coal Mining. 152 For the company website, see . 153 According to the Newcrest website , in December 2012, Newcrest completed the sale of a 7.5% interest in PTNHM to PT Aneka Tambang (Antam), an ASX and Jakarta Stock Exchange-listed company, for market value, reducing Newcrest’s interest in PTNHM to 75% (down from 82.5%) and increasing Antam’s interest to 25% (up from 17.5%). 154 ‘Kao Bay’s Fishermen Lost Their Sources of Incomes’ (‘Nelayan Teluk Kao Kehilangan Mata Pencaharian’), Kompas, Jakarta, 11 April 2011, , accessed 23 May 2015. 155 Sapariah Saturi, ‘PT Nusa Halmahera Mineral diLaporkan ke KLH, ESDM dan KOMNAS HAM’ (‘PT Nusa Halmahera Mineral Reported to KLH, ESDM and KOMNAS HAM’), Mongabay, 3 January 2014, , accessed 14 April 2015. 156 Domu Simbolon, Silvanus Maxwel Simange, and Sri Yulina Wulandari, ‘Kandungan Merkuri dan Sianida pada Ikan yang Tertangkap dari Teluk Kao, Halmahera Utara’ (‘the Content of Mercuryand Cyanide in Fish Caught in Kaoy Bay, North Halmahera’), 15(3) Indonesian Journal of Marine Sciences, 2010, 126; see

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Capping indigenous and local communities now fear to use shrimp, scallops, and other fish,157 and their traditional form of life is at risk.158 In its examination of the above occurrences, AMAN found that PTNHM had ignored various environmental requirements such as completing an EIA (see section 15.3.3) and setting up a proper ‘waste processing unit’ (Indonesian term: UPL). The company had also failed to comply with the requirements of Environmental Act and Government Regulation No. 74 of 2001 on Hazardous and Toxic Management. The UPL was not operated properly, and liquid waste containing hazardous and toxic materials were dumped or leaked into the environment.159 Moreover, PTNHM had not disclosed material information in relation to its operations: when the tailings pipeline leaked, PTNHM should have informed the public in accordance with section 35 of Government Regulation No. 74 of 2001 on Hazardous and Toxic Management.160 In sum, it was claimed that PTNHM had failed to fulfil various obligations imposed by several Indonesian environmental and mining laws.161 As a result, there has been a strong demand from the local communities for the revocation of PTNHM’s mining permit by the government.162 On 17 December 2013, a mass demonstration was organized by the Kao Teluk Salvation Front, demanding that the government revoke PTNHM’s permit, audit PTNHM transparently, and enforce legal sanctions.163

157 158

159 160

161

162

163

also Edward, ‘Pengamatan Kadar Merkuri di Perairan Teluk Kao (Halmahera) dan Perairan Anggai (pulau Obi), Maluku Utara’, (‘Observation of Mercury Level in Kao Bay Water and Anggai Water’), 12(2) Makara Sains, 2008, 97. Ibid. ‘Teluk Kao Tercembar Limbah Tambang, Belasan Warga Idap Penyakit Aneh’ (‘Kao Bay Contaminated by Mine Waste, Dozens of Residents Suffer Strange Disease’), National Geographic, 11 December 2013, http:// nationalgeographic.co.id/berita/2013/12/teluk-kao-tercemar-limbah-tambang-belasan-warga-idap-penyakitaneh, accessed 14 April 2015. Ibid. Article 35 of Government Regulation No. 74 of 2001 on Hazardous and Toxic Management states the following: ‘‘(1) the community preserves the rights to obtain information on the efforts of controlling the living environmental impacts resulting from B3 management activities; (2) the information as contemplated in paragraph (1) shall be provided by the person responsible for B3 management activities; (3) the provision of information as contemplated in paragraph (2) can be delivered through print media, electronic media and or announcement board.’’ Such as the obligations pursuant to Act No. 27 of 2007 on Management of Coastal Areas and Small Islands, Act No. 7 of 2004 on Water Resources, Act No. 32 of 2009 on Protection and Management of Environment, Government Regulation No. 27 of 2012 on Environmental Permits, Act No. 11 of 2005 on the Ratification of the Covenant on Economic and Cultural Rights, Act No. 31 on Fishery, and Act No. 41 on Forestry. Abdulran Jafar, ‘Teluk Kao Polluted, Indigenous Community Urges Government to Revoke Permit from PT. NHM Gold’ AMAN, 2013, , accessed on 23 May 2015. Ibid.

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TINEKE LAMBOOY, IMAN PRIHANDONO, NURUL BARIZAH 15.4.2.4 PT Vale Indonesia Tbk – Sulawesi The fourth case regards the operation by PT Vale Indonesia Tbk (PTVI) of an open-pit nickel mine in Sorowako on the island of Sulawesi. PTVI is formerly known as PT International Nickel Indonesia Tbk. (PTINCO), a foreign investment joint venture company.164 PTVI is presently a publicly listed company and a subsidiary of Vale Canada Limited, a Canadian company based in Toronto, which holds 60% of the shares in PTVI.165 Vale Canada Limited itself is a subsidiary of Vale S.A., a public company based in Brazil. Besides the 60% of the PTVI shares held by Vale Canada Limited, 20% of the PTVI shares are owned by Sumitomo Corporation, a Japanese company. The remainder of the PTVI shares is publicly owned. The Sorowako nickel mine has been in operation for more than 40 years (since 1968). A CoW was signed between PTINCO and the Indonesian government for a 30-year period (1978 to 2008), which allowed PTINCO to explore and develop minerals in an area of 66,000 km2.166 The CoW was modified and extended in 1996 for another 30-year period (until 2025).167 PTVI has been accused of destroying indigenous forest and protected forest areas, thereby affecting the livelihood of local communities.168 Serious concerns regarding environmental contamination of soil and water bodies and other human rights violations have also been communicated. A particular example concerns the Vale’s golf course. The indigenous Karonsi’e Dongi “now live along a fence that borders Vale’s golf course. This golf course and mining related buildings have replaced what used to be agricultural land of the Karonsi’e Dongi. It also has covered their graveyard.”169 Because of mining activities in protected forest area, four PTVI executives were brought before the criminal court. However, in October 2011, the District Court of Malili

164 S.W. Marcuson, J. Hooper, R.C. Osborne, K. Chow, and J. Burchell, ‘Our history in Indonesia’, E&MJ Engineering and Mining Journal, 2009, , accessed 5 May 2015. 165 ‘About Vale, PT Vale Indonesia TbK’, , accessed 5 May 2015. 166 Marcuson et al. (n. 164). Ibid. ‘Our History in Indonesia’, E&MJ Engineering and Mining Journal, 1968, , accessed 5 May 2015. 167 Ibid. 168 Ridwan Max Sijabat, ‘Inco Denies Contract and Environmental Violations’, The Jakarta Post, Jakarta, 22 August 2011, , accessed 24 May 2015. The impact on the local and regional population has been significant. In 1971, the village of Sorowako had a population of several hundred people which rapidly expanded as construction commenced. In 2008, the 11 local communities had grown to 219,000 people, and the company and contractor employees numbered some 7,000; see Marcuson et al. (n. 164). 169 Mining Watch Canada, ‘Focus on Mining Giant Vale at World Social Forum’, 5 January 2010, , accessed 5 May 2015.

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acquitted the PTVI executives.170 Nevertheless, in 2013, the Indonesia Mining and Energy Studies urged the police to investigate PTVI’s managing director for allegedly illegal mining activities in protected forest areas.171 The NGO FORBES, that is the United People’s Forum of the Morowali Regency (Forum Rakyat Bersatu), reported this case to the Central Sulawesi police.172 In addition, an investigation has been initiated regarding illegal logging by PTVI. It is postulated that other criminal behaviour such as failure to pay taxes and royalties has occurred.173

15.4.3

Newmont Cases in Indonesia

15.4.3.1 PT Newmont Minahasa Raya – Sulawesi PT Newmont Minahasa Raya (PTNMR) operated an open-pit gold mine in Minahasa District, Sulawesi. PTNMR is a subsidiary of Newmont Mining Corporation, a US-based mining company, which holds 80% of the PTNMR shares. PT Tanjung Serapung holds the remaining 20%.174 The mining activity started in 1996 and ceased in 2001. In managing its mining waste, PTNMR used the so-called sub-sea tailing disposal (STD) method. With this method, tailings are transported through a pipeline for their final disposal in the sea at a depth of 82 meters. It is estimated that PTNMR disposed 2,000 tons of waste per day, and a total of 4 million tons of waste since 1996, into the Buyat Bay.175

170 ‘Inco Sambut Baik Putusan Pengadilan Malili’ (‘Inco Welcomes the Verdict of Malili District Court’), ANTARANews, 5 October 2011, , accessed 5 May 2015. 171 ‘Polisi didesak untuk Memeriksa Presiden PT Vale Indonesia’ (‘Policy Urged to Examine the President of PT Vale Indonesia’), Kabar Rakyat, Berdikari Online, 18 September 2013, , accessed 14 April 2015. See also Etal Douw and Fhay Hadi, ‘Jika Modal Berkuasa, Rakyatpun terabaikan; Kasus Pertambangan di Morowali’, Jatam Sulteng, 28 October 2013, , accessed 14 April 2015. 172 Wardi Bania and Christoperl Paino, ‘Setahun Lebih dilaporkan Lakukan Perambakan Hutan Lindung, Hingga Kini PT Vale Belum ditindak’, Mongabay, 20 March 2015, , accessed 14 April 2015. 173 Ibid. 174 See the Newmont Mining website for more information, . 175 Robert Moran, Amanda Reichelt-Brushett, and Roy Young, ‘Out of Sight, Out of Mine: Ocean Dumping of Mine Wastes’, 22(2) World Watch Magazine, 2009, 30; UNHCR, ‘Environmental Rights Report, Human Rights and the Environment Materials for the 61st Session for the United Nations Commission on Human Rights’ (Geneva, 14 March-22 April 2005) (2005), UN Doc E/CN.4/2005/135, 57; see also ‘Hasil Penelitian TIM terpadu dan Sikap Pemerintah Terhadap Pencemaran Teluk Buyat Minahasa Selatan’, Kemenerian Lingkungan Hidup, 15 December 2004, , accessed 24 May 2014.

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The use of the STD method has eventually led to allegations against PTNMR for polluting the Buyat Bay and destroying the marine ecosystem, resulting in a significant decrease of marine catch – the vital source of food and income for the local communities. Furthermore, there were health problems reported by the local communities, including strange skin rashes, tumours, and other diseases. An investigation by the government revealed that the level of arsenic and mercury in fish in Buyat Bay posed a health risk if consumed, particularly by children.176 Likewise, another investigation jointly conducted by the government, university scientists, and NGO representatives divulged high levels of arsenic and mercury in the seabed sediment.177 PTNMR denied all of these allegations and findings and conducted its own investigation. Their studies concluded that no pollution was found in Buyat Bay.178 Several counter-studies conducted by the LIPI and BAPEDAL study teams of the University of Sam Ratulangi and the Centre for Environmental Impact Control (Pusarpedal) of the Ministry of Environment did not find the thermocline layer of tailings disposal sites undertaken by PTNMR in the Buyat Bay.179 They concluded that PTNMR had not met the legal requirements regarding the placement of tailings in the Buyat Bay.180 In relation to the Buyat Bay pollution, various claims have been filed against PTNMR. In 2005 and 2007, two cases were instigated by the Indonesian Government and an NGO, claiming violations of environmental laws.181 These cases will be discussed in more detail below. An earlier case was instated by the local government and concerned the payment of taxes by PTNMR for the extraction of stone, gravel, and sand (1999).182 Furthermore, 176 WALHI, ‘Buyat Bay Is Polluted and a Risk to the Community: Highlights of the Official Joint Investigation of Buyat Bay’, 9 November 2004, , accessed 24 May 2015. 177 Down to Earth, ‘New Pollution Study Corners Newmont’, November 2004, , accessed 24 May 2015; see also ‘Dirty Gold, Buyat Bay, Indonesia’ (No dirty gold, 2014), , accessed 9 June 2014. 178 PT Newmont Nusa Tenggara, ‘Independent Team Concludes Buyat Bay Is Not Polluted’, 13 May 2012, , accessed 10 May 2015. 179 Eko Sasmito, ‘Tindak Pidana dan Tanggung Korporasi di Bidang Lingkungan Hidup’ (‘Criminal Conduct and the Corporate Responsibility in Environmental Issue’), . 180 Down to Earth (n. 177), accessed 6 June 2015. 181 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. Republic of Indonesia v. PT Newmont Minahasa Raya and Richard B. Ness, Decision of the District Court of Manado Case No. 284/Pid.B/2005/PN. Mdo, 24 April 2007. 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, para. 3.12. 182 Pemerintah Daerah Minahasa v. PT. Newmont Minahasa Raya. In accordance with Regional Regulation No. 7 of 1998 on the Taxation of Mining Activities on Materials Category-C, the local government insisted that PTNMR pay USD 2.8 million in taxes for the extraction of stone, gravel, and sand, which the company (had) used for building roads for the mining operations. PTNMR argued that it had no obligation to pay the taxes, because all of its obligations were regulated in the 1986 CoW and that the CoW did not contain such

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in 2005, Buyat residents claimed damages in a civil court case. It was withdrawn following an out-of-court settlement between PTNMR and three Buyat residents.183 WALHI had also started a civil case against PTNMR but failed in holding PTNMR liable for polluting the Buyat Bay (2007). The court opined that the evidence was insufficient to prove that pollution had taken place.184 State Ministry of Environment v. PT. Newmont Minahasa Raya (2005) In the State Ministry of Environment v. PT. Newmont Minahasa Raya case, the State Ministry alleged that PTNMR’s mining activities had polluted Buyat Bay and that the defendant must be held liable based on the strict liability principle.185 The case was first dismissed by the court on the ground of lack of jurisdiction; the court decided that pursuant to the CoW, all disputes between the government and PTNMR must be submitted to an international arbitral tribunal (according to the UNCITRAL rules).186

183 184

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186

an obligation. Furthermore, PTNMR stated that the regional regulation was enacted in 1998 and could not be applied retrospectively to PTNMR. The local government had also requested the Court to issue a provisional decision ordering PTNMR to shut down its mining activities, pending the final decision of the case. This was granted. Subsequently, PTNMR executives met with the Secretary General of the Supreme Court and later also with some members of parliament. Next, as an extraordinary intervention, the Supreme Court ordered the District Court by letter to delay the execution of its provisional decision. Various politicians and businessmen praised the Chief Justice’s intervention for effectively restoring the confidence of foreign investors. Eventually, the parties went through an out-of-court settlement, in which PTNMR agreed to pay USD 500,000. See about this case: Donna K. Woodward, ‘Newmont: Tax Peace at Any Price?’, The Jakarta Post, Jakarta, 24 April 2000, , accessed 24 May 2015; ‘Presdir PT NMR: Tuntutan Retribusi Tak Legal’, Kompas, Jakarta, 13 April 2000, , accessed 24 May 2015; Provisional Decision No. 131/Pdt.G/1999/PN.Tdo, 22 January 2000; A. Priyanto, ‘Tarik Ulur Pengelolaan Pertambangan di Era Otonomi Daerah’, Hukumonline, 2001, , accessed 24 May 2015; ‘Supreme Court Orders Delay in Newmont Mine Closure’, The Jakarta Post, Jakarta, 14 April 2000, , accessed 24 May 2015; ‘Newmont Reaches Out-of-Court Settlement’, The Jakarta Post, Jakarta, 20 April 2000, , accessed 24 May 2015. 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. 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. See also ‘LSM Lingkungan Kecam Putusan Newmont’ (‘Environment NGO Slams Newmont Decision’), Hukumonline, 25 April 2007, , accessed 14 April 2015. ‘KLH Menggunakan Dalil Strict Liability Dalam Gugatan terhadap Newmont’, Hukumonline, 12 April 2005, , accessed 24 May 2015. ‘RI-Newmont Damai, Aktivis Lingkungan Mengecam’, Hukumonline, 26 February 2006, , accessed 24 May 2015.

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The State Ministry of Environment appealed to the High Court. The persistence of the government to pursue this case probably caused PTNMR to make a settlement offer to pay USD 30 million for community development projects and scientific observation in the Buyat Bay area.187 Unfortunately, the authors could not find any sources confirming payment of the agreed amount nor information about the allocation of the funds. Hence, no conclusions can be drawn about the extent to which local communities have profited from the settlement agreement. Republic of Indonesia v. PT. Newmont Minahasa Raya and Richard B. Ness (2007) In the case of Republic of Indonesia v. PT. Newmont Minahasa Raya and Richard B. Ness, the Indonesian Government brought criminal charges against PTNMR, its director Ness, and other executives for polluting Buyat Bay. After an investigation by the Indonesian police, the prosecutor charged PTNMR and Ness with multiple criminal offences under Law No. 23 of 1997 on the Environment. PTNMR faced Indonesian rupiah (IDR) 1 billion in fines for restoring the environmental damages and Ness faced up to 10 years in jail and an IDR 500 million fine.188 In the indictment, the prosecutor accused PTNMR and Ness of illegally dumping toxic waste and placing tailings above the minimum depth.189 The court, however, concluded that the prosecutor did not sufficiently establish the guilt of PTNMR and Ness and it did not assess whether the legality of the dumping of tailings.190 There are indications that the US Government exerted pressure on PTNMR to prepare an exit strategy. Newmont, the parent company of PTNMR, is a US-based MNC. Following the arrest of several PTNMR executives by the police, the US Embassy in Jakarta released a press statement. It criticized the detention as inappropriate and warned that this incident could harm the investment climate in Indonesia.191 A few days later, the US Ambassador to Indonesia held a meeting with the Indonesian President and the Chief of 187 Ibid. 188 ‘Kasus Pidana NMR Saksi Ahli Bicara tentang Asas Subsidiaritas’, Hukumonline, 15 July 2006, , accessed 24 May 2015. 189 ‘Newmont Menyangkal Telah Melakukan Polusi Teluk Buyat’, Hukumonline, 5 September 2006, , accessed 24 May 2015. 190 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. See also ´Terapkan Asas Subsidiaritas PN Manado Bebaskan PT NMR dan Richard Ness´, Hukumonline, 25 April 2007, , accessed 24 May 2015. As in this case the allegation relating to the pollution was a criminal allegation, the court could only examine whether the placements of the tailings had caused pollution. The court could not judge about the legality of the dumping of the tailings (PTNMR had a licence to place tailing in Buyat Bay). 191 Sari P. Setiogi and Fabiola Desy Unidjaja, ‘U.S. Criticizes Arrest of Newmont Executives’, The Jakarta Post, Jakarta, 25 September 2004, , accessed 24 May 2015.

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the Police, in which he expressed his concern about the arrest of US nationals and urged that the detainees be released as soon as possible.192 In addition, another US Ambassador stated in an official press conference that the lack of legal certainty is a major problem for Indonesia in attracting foreign business. He cautioned that the prosecution of the PTNMR executives was setting a bad example.193 These events may have influenced the outcome of the case; following the US Embassy intervention, the court decided that the prosecutor’s evidence was invalid and unreliable.194 The court also based the acquittal on the ‘subsidiary principle’ under Law No. 23 of 1997 on the Environment.195 According to this principle, criminal measures can only be applied if administrative and civil law measures have failed to prevent the violation from continuing and to restore the damages that have been incurred.196 Environmental regulations are essentially administrative in nature. However, various legal commentators questioned the court’s application of the subsidiary principle in this case. They criticized the prosecutor for the way he dealt with the case.197 Although the prosecutor declared that he would appeal the judgment, this case was never taken to the Higher Court (the next forum in Indonesia). 15.4.3.2 PT Newmont Nusa Tenggara – Sumbawa PT Newmont Nusa Tenggara (PTNNT) operates copper and gold mining projects on the islands of Lombok and Sumbawa (West Nusa Tenggara Province). PTNNT is a joint venture company that is owned by the US-based MNC Newmont Mining Corporation, the Japanese MNC Sumitomo Corporation (Sumitomo), and some other shareholders.198 Newmont and Sumitomo serve as operators of PTNNT’s mines. 192 Abdul Khalik and Fabiola Desy Unidjaja, ‘U.S. Asks for Release of Newmont Staff’, The Jakarta Post, Jakarta, 28 September 2004, , accessed 24 May 2015. 193 Abdul Khalik, ‘No Investment without Big Changes: U.S. Envoy’, The Jakarta Post, Jakarta, 23 November 2006, , accessed 24 May 2015. 194 ‘Terapkan Asas Subsidiaritas PN Manado Bebaskan PT NMR dan Richard Ness’ (n. 190). 195 Law No. 23 of 1997 on Environmental Management, Articles 41-46. 196 Takdir Rahmadi, ‘Perkembangan Hukum Lingkungan di Indonesia’ (‘The Development of Indonesian Environmental Law’), Mahkamahagung, 13 August 2014, , accessed 24 May 2015. The author, Takdir Rahmadi (a Supreme Court judge), posits that this subsidiary principle or also called the ultimum remedium principle was ineffective to prevent environmental pollution. Therefore, the new Indonesian environmental law (Law No. 32 of 2009 on the Environment Protection and Management) does not contain this principle. 197 ‘Newmont Menyangkal Telah Melakukan Polusi Teluk Buyat’ (n. 189). 198 PTNNT is a joint venture company that is owned for 56% by Nusa Tenggara Partnership B.V. (a vehicle company established under the law of Netherlands), which in its turn is owned by Newmont Mining Corporation and Nusa Tenggara Mining Corporation of Japan. Seven percent of NTPBV’s stake in PTNNT was possibly divested to the Government of Indonesia through purchase by an agency of the Ministry of Finance. In 2011, the Government of Indonesia, through its official body, indicated that it held a 7% share

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The mining concession of PTNNT covers more than 96,400 hectares of land. These include protected forest areas in the Dodo Rinti District on the island of Sumbawa. PTNNT uses the STD method for its tailings disposal (see also section 15.4.3.1). It is estimated that PTNNT disposes approximately 12,000 tons of tailings each day into the seabed of Senunu Bay at the North coast of Sumbawa.199 Since 2006, local communities have continuously expressed their resistance against the mining activities of PTNNT.200 They argue that the mining operations produce environmental damages which affect their livelihoods. One problem is that the destruction of forests leads to a decreased water supply, which causes difficulties for the farmers to grow crops and cultivate rice. The PTNNT mining activities also prevent the local population from collecting foodstuffs, such as honey, candlenut, and palm sugar.201 In addition, a decrease in fish catch has been blamed on the dumping of tailings in Senunu Bay. In response, PTNNT argued that its STD system is safe for the environment and that it has obtained government permits to use this system.202 In 2011, the West Sumbawa Regency expressed its intention to discontinue the STD permit of PTNNT.203 However, the licence was renewed. Several NGOs filed claims before the Administrative Court of Jakarta,204 requesting the court to declare that the

199

200 201

202

203

204

in PTNNT. Other shareholders of PTNNT are PT Multi Daerah Bersaing (24%; PT MDB is owned by PT Multi Capital and PT Daerah Maju Bersaing, a joint company owned by the province of Nusa Tenggara Barat, and the kabupatens of Sumbawa Barat and Sumbawa), the Indonesian mining company PT Pukuafu Indah (17.8%) and the investment company PT Indonesia Masbaga Investama (2.2%). The company’s shareholders list is available at , accessed 5 May 2015. The amount of tailings disposed by PTNNT is 60 times higher than that of PTNMR’s tailings, see Down to Earth, ‘FDI: Still Inflicting Damage on Communities’, May 2006, , accessed 24 May 2015. H. Salim H.S and Idrus Abdullah, ‘Penyelesaian Sengketa Tambang; Study Kasus antara Masyarakat Samawa dengan Pt. Newmont Nusa Tenggara’, 24(3) Jurnal Mimbar Hukum, 2012. Tracy Glynn, ‘STD Toolkit: Indonesia Case Studies’ (Project Underground and Mining Watch Canada, 2002), . See also ‘Free the Detained and Stop the Shootings and Repression of People Who Oppose Mining in an Indonesian Protected Forest’, Mines and Communities, 17 April 2006, , accessed 21 October 2013. ‘Fact Sheet on Tailing’, PT Newmont Nusa Tenggara, 2014, , accessed 24 May 2015. See also in regard of Buyat Bay: ‘Independent Team Concludes Buyat Bay Is Not Polluted’, PT Newmont Nusa Tenggara, 13 May 2012, , accessed 5 May 2015. Rangga D. Fadillah and Panca Nugraha, ‘Newmont Banned from Dumping Into Sea’, The Jakarta Post, Jakarta, 5 May 2011, . See also Direktori Putusan Mahkamah Agung Republik Indonesia, Putusan No. 145/G/2011/PTUN-JKT, , accessed 14 April 2015; see also ‘Keputusan Majelis Hakim PTTUN Jakarta Tentang Ijin Tailing PT. Newmont Nusa Tenggara’, Kementerian Linkungan Hidup, 3 April 2011, , accessed 14 April 2015. Yayasan Wahana Lingkungan Hidup Indonesia et al., Case Register No.145/G/2011/PTUN-JKT.

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permit of PTNNT to use STD205 did not comply with the Indonesian Biodiversity Strategy and Action Plan 2003-2020 (an official national document which clearly states that STD will be prohibited as of 2004)206 and that, therefore, the STD permit was to be revoked. However, the court decided that the government had followed all legal procedures in renewing the STD permit to continue the disposal of tailings into Senunu Bay. Yet another conflict came up because of the new legislation which limits the export of ores (see section 15.3.5). Since 2000, under a CoW, PTNNT also operated a gold and copper mine in the Batu Hijau area, on the South-West coast of Sumbawa.207 Pursuant to the new legislation, PTNNT – like all mining companies in Indonesia – was obliged to conduct the smelting process of the ores in Indonesia rather than to export the raw materials. PTNNT disagreed and initiated international investment arbitration proceedings against the Republic of Indonesia before an ICSID arbitral tribunal. Its principal claim entailed that the amended legislation and the subsequent obligations were in conflict with the terms of its CoW, as they implied a complete stop on copper and gold production on the Batu Hijau location. In August of 2014, PTNNT withdrew its arbitral claim after the Indonesian Government and PTNTT concluded a memorandum of understanding.208 This memorandum modified the CoW and resulted in a new permit to export copper concentrate for PTNTT. In 2013, JATAM asserted in a press release that the presence of PTNNT has failed to contribute to the reduction of poverty in the mining area.209 JATAM pointed out that West Nusa Tenggara Province is one of the poorest provinces with as much as 21.55% of the population still living in poverty.210 According to the NGO, people have always been deceived by the “sweet promises” of PTNNT regarding community development projects

205 Decision of the State Minister of Environment No. 92 of 2011 on Sub-sea Tailing Disposal Permit for PT. Newmont Nusa Tenggara, Batu Hijau Project. 206 The Indonesia National Development Planning Agency, Indonesian Biodiversity Strategy and Action Plan: National Document, 2003 (on file with the authors). 207 See PT Newmont Nusa Tenggara’s website, , accessed 5 May 2015. 208 PTNNTannounced that it has concluded a “Memorandum of Understanding to participate in a process with PT Freeport Indonesia designed to lead towards the development of a smelter.” PTNNT also signed conditional concentrate supply agreements with two Indonesian companies that publicly announced plans to build their own copper smelters in the country, see ‘PTNNT Discontinues and Withdraws Arbitration Claim’, PT Newmont Nusa Tenggara, 26 August 2014, , accessed 5 May 2015. 209 ‘PT Newmont Nusa Tenggara, Pembawa Kerusakan Lingkungan dan Kemiskinan’, JATAM, 26 August 2013, , accessed 14 April 2015. 210 Mario Kulas, ‘Ternyata Pertambangan Tidak Mampu Mensejahterakan Rakyat NTB’, Kompasiana, 31 August 2011, , accessed 14 April 2015.

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15.4.4

PT Sumber Mineral Nusantara – The Bima Case – Sumbawa

Learning from the negative impacts of mining activities, Indonesian citizens have become more open in showing their resistance. The most recent case concerns the mining activities of PT Sumber Mineral Nusantara (PTSMN) on Sumbawa.214 PTSMN was/is an Indonesian subsidiary-joint venture company of Arc Exploration Limited, an Australian-listed MNC.215 In 2010, PTSMN obtained a mining permit from the local government to conduct gold mining operations in an area covering 24,980 hectares, located in three districts: Lambu, Sape, and Langgudu on Sumbawa.216 It is argued that the granting of the mining licence failed to satisfy the requirement of a public consultation process.217 Residents of Bima, the capital of East Sumbawa, have for nearly a year demanded that Bima’s Regent (the local governmental authority) revoke the licence.218

211 ‘PT Newmont Nusa Tenggara, Pembawa Kerusakan Lingkungan dan Kemiskinan’, JATAM, 26 August 2013, , accessed 14 April 2015. 212 Ibid. 213 Ibid. 214 Mining Permit No. 188/45/357/004/2010. 215 Olivia Rondonuwu, Reza Thaher, and Heru Asprihanto, ‘Indonesia Confirms Revocation of Sumber Mineral/Arc Exploration JV Exploration Permit’, Mineweb, 26 January 2012, , accessed 5 May 2015. 216 ‘Two Dead as Police Fire into Protesters in Bima’, The Jakarta Post, Jakartam, 26 December 2011, . 217 Public consultation based on the principles of free, prior informed consent (PIC) is a fundamental element to fulfil the principles of responsible mining which has also been endorsed by the International Council on Mining and Methal (ICMM). See on this case Bill Sullivan, ‘Bima Riot and Requested Revocation of PT Sumber Mineral Nusantara’s Mining License – A Case Study in How Not to Handle Mining Dispute’, Mitraismining, , accessed 16 April 2015. 218 Rondonuwu et al. (n. 215).

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On 24 December 2011, after several years of voicing their resistance, hundreds of farmers and fishermen from the three districts gathered to protest against the opening of the mining project by PTSMN.219 They argued that the mining operations would negatively affect their farming and fishing activities, since mining operations on other parts of the island caused drought of farmland and pollution of the sea.220 When the protesters occupied the Sape Seaport, the police forces tried to disperse the crowd, which led to a clash. Two villagers died, and nine others were in critical condition. After this deadly incident, protests against the PTSMN mining plan continued.221 According to police and local media, on 26 January 2012, thousands of people rioted to demonstrate against the company’s gold exploration plan, which they claim will damage their land and livelihoods.222 They set fire to offices of the Bima Regency and several buildings burned down.223 After this incident, the Bima Regency revoked the mining concession licence.224 The Indonesian Government announced on the same date in January 2012 that it would revoke PTSMN’s exploration permit.225

15.4.5

The Churchill Case – Kalimantan

In 2008, Churchill Mining Plc. (Churchill), a UK-based MNC, acquired 75% of shares in Ridlatama Group (this group includes PT Ridlatama Tambang Minerals, PT Ridlatama Trade Powerindo, PT Investmine Nusa Persada, and PT Investama Resources).226 Ridlatama Group secured a coal mining concession from the local government in Kalimantan for an area of about 35,000 hectares, which is believed to contain the seventh-largest coal reserves in the world. 219 ‘Bima Protesters Shot from Close Range’, The Jakarta Post, Jakarta, 28 December 2011, , accessed 24 May 2015. 220 ‘Human Rights Body Says Three People Died in Bima Incident’, The Jakarta Post, Jakarta, 26 December 2011, , accessed 24 May 2015. 221 Andriani Salam Kusni and JJ. Kusni, ‘Siaran Pers Tragedi Bima Berdarah’, Jurnal Toddoppuli, 24 December 2011, , accessed 14 April 2015; see also ‘Stop Activity for Mining Slaughtering in Bima, Solidarity for Civilians’, Jatam, 24 December 2011, , accessed 15 April 2015. 222 Rondonuwu et al. (n. 215). 223 ‘Kapolri Siap Usut Pembakaran Kantor Bupati di Bima’, Kompas, Jakarta, 26 January 2012, , accessed 15 April 2015. 224 Rangga D. Fadillah, ‘Bima Regent Revokes Permit for Troubled Firm’, The Jakarta Post, Jakarta, 27 January 2012, , accessed 24 May 2015. 225 Rononuwu et al. (n. 215). 226 Churchill Mining Plc, Annual General Meeting 2011 (2011), , accessed 10 May 2015.

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In 2010, the local government of the East Kutai Regency revoked four coal mining licences of Ridlatama Group, because various regulations were violated. According to the audit conducted by the Financial Audit Board of Indonesia in 2010, the four coal mining licences were illegal because the number codes listed on the licences were not registered.227 However, the main reason for the revocation was the following: the concession was located in a protected forest area, in which case the approval from the Ministry of Forestry is required for carrying out mining operations.228 In response to the revocation, Ridlatama Group filed four law suits before the Administrative Court of Samarinda, requesting the annulment of the administrative decisions of the East Kutai Regency.229 The court rejected the claims and ruled in favour of the government. In one of the cases, the court decided that the government has the full authority to evaluate and correct its administrative decisions. This is consistent with the principle of spontaneous annulment (spontane vernietiging). Ridlatama Group appealed the four decisions to the Administrative Appeal Court of Jakarta, but the result remained the same.230 Likewise, the Supreme Court upheld these decisions.231 After having lost the cases in the Indonesian courts, Churchill – acting as the majority shareholder of Ridlatama Group – submitted a letter to the President of Indonesia, seeking for an amicable settlement.232 Apparently, the government did not respond 227 East Kutai Regent Decision No. 540.1/K.443/HK/V/2010 on the Revocation of Mining Permit No. 188.4.45/ 118/HK/III/2009 to PT. Ridlatama Tambang Mineral. See also Hendarsyah Tarmizi, ‘Churchill’s Legal Suit Sends Negative Signal to Investors’, The Jakarta Post, Jakarta, 4 July 2012, , accessed 24 May 2015; Raras Cahyani, ‘East Kutai May File Criminal Charges Againt Churchill, Jakarta Post, Jakarta, 5 March 2014, , accessed 15 April 2014; ‘Britain’s Churchill Mining vs Ridlatama; Ridlatama Grant Case Settled, Churchill Mining Operation Is Illegal’, ACN Newswire, 15 January 2013, , accessed 24 May 2015. 228 ‘Churchill Mired in Imbroglio’, The Jakarta Post, Jakarta, 4 July 2012, , accessed 24 May 2015. See also ‘Britain’s Churchill Mining vs Ridlatama: Ridlatama Grant Case Settled, Churchill Mining Operation Is Illegal’ (n. 227). See also Article 5 of the Ministry of Forestry Regulation No. P.16/Menhut-II/2014 on the Guideline to the Use of Forestry Area. 229 PT. Ridlatama Tambang Mineral v. The Regent of East Kutai, Decisions of the Administrative Court of Samarinda No. 31/G/2010/PTUN-SMD, 3 March 2011, p. 87; No. 32/G/2010/PTUN-SMD; No. 33/G/2010/ PTUN-SMD; and No. 34/G/2010/PTUN-SMD, 3 March 2011. 230 PT. Ridlatama Tambang Mineral v. The Regent of East Kutai, 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. 231 Decisions of the Supreme Court No. 136 PK/TUN/2012; No. 137 PK/TUN/2012; No. 138 PK/TUN/2012; and No. 139 PK/TUN/2012. See also ‘Britain’s Churchill Mining vs Ridlatama: Ridlatama Grant Case Settled, Churchill Mining Operation Is Illegal’ (n. 227). 232 Sara Schonhardt, ‘British Mining Firm Sues Indonesia for Asset Seizure’, New York Times, New York, 6 June 2012, , accessed 16 April 2015.

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favourably to this request.233 Eventually, Churchill submitted a claim with the ICSID for arbitration against the Government of Indonesia. Churchill argued that the Indonesian Government had breached its obligations under the BIT between the UK and Indonesia.234 The MNC alleged that the revocation of several mining licences held by Churchill’s subsidiary constituted a failure of the Indonesian Government to provide protection to Churchill as a foreign investor. Churchill seeks an amount of USD 1.8 billion in compensation for its potential loss (of future income).235 In February 2014, the international investment arbitration tribunal issued an interlocutory judgment confirming that it has jurisdiction to examine the dispute.236

15.5

THE GOVERNMENTAL TASK

TO

REALIZE SOCIAL JUSTICE

AND

SUSTAINABLE DEVELOPMENT

In the presentation of the mining disputes in section 15.4, various types of conflicts were discussed: (i) collisions between communities and mining companies because of human rights abuses and environmental pollution conducted by mining companies; (ii) local unrest because the government was considered to not sufficiently enforce environmental laws, mining laws, and nature protection laws and regulations upon the mining companies; (iii) matters where the government did not succeed in creating transparent settlement processes with mining companies; and last but not least, (iv) international investment arbitration claims filed by mining companies against the government based on provisions in CoWs or BITs with the purpose to contest the rejection of a mining licence or to fight new mining regulations. The examples of conflicts with communities raise the question whether mining in general, and FDIs in the mining sector in particular, contribute to the overarching goals of the Indonesian Government – to realize social justice and sustainable development. In this section, the authors will discuss the standard(s) for the Indonesian Government as

233 Churchill Mining PLC., Request for Legal Protection No. 028/CHL-RI1/IV/2012, 20 April 2012, . 234 Agreement for the Promotion and Protection of Investments, United Kingdom and Northern IrelandIndonesia, signed 27 April 1976, entered into force 24 March 1977, . 235 International Centre for Settlement of Investment Disputes, Churchill Mining (the Claimant) v. Republic of Indonesia (the Respondent), ICSID Case No. ARB/12/14/ and 12/40 at , accessed on 15 April 2015. Rabby Pramudatama, ‘Govt Gets Ready for $1.8b Suit’, The Jakarta Post, 5 July 2012, . Rabby Pramudatama, ‘Govt Appoints Senior Lawyers for Churchill Arbitration’, The Jakarta Post, 9 August 2012, . 236 International Centre for Settlement of Investment Disputes, Churchill Mining Plc v. Republic of Indonesia, 24 February 2014, .

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provided in the Pancasila and the Indonesian Constitution. As part of the analysis, relevant Constitutional Court’s decisions are also addressed.237 The Pancasila contains five principles which represent the fundamental norms of the Indonesian legal system.238 It constitutes the spirit of the 1945 Constitution of Indonesia (hereinafter ‘the Constitution’). The Pancasila and the Constitution are inseparably linked and intertwined. Principle 5 of the Pancasila calls for the “the equitable spread of welfare to the entire population, not in a static but in a dynamic and progressive way. This means that all the country’s natural resources and the national potentials should be utilized for the greatest possible good and happiness of the people. Social justice implies protection of the weak [...]. Protection should prevent wilful treatment by the strong and ensure the rule of justice.”239 The element of social justice is also laid down in Article 33(3) of the Constitution. This article provides that “[t]he land, the water and the natural resources within shall be controlled by the State and shall be used for the maximum prosperity of the people.”240 As these terms are open norms, the concepts have been regularly contested in the Indonesian Constitutional Court. In particular, issues which relate to the exploitation of natural resources by MNCs and the rights of the citizens to also reap benefits from this exploitation have been brought before the court. The first issue regards the government’s power to control the use of natural resources. In its constitutional review of Law No. 20 of 2002 on the Electricity Power (2004), the Constitutional Court defined the meaning of the words “controlled by the State” in Article 33(3) of the Constitution. According to the Court, the control of the State of natural resources means more than in the context of ownership as known in the legal concept of private law. The Constitutional Court was of the opinion that the power of the State to control the use of natural resources must be exercised in several ways: (a) to establish policy (beleid), (b) to take care (bestuursdaad), (c) to regulate (regelendaad), (d) to manage (beheersdaad), and (e) to supervise (toezichthoudensdaad).241

237 The Constitutional Court is the only body in Indonesia which has the authority to interpret the Constitution. 238 Jimly Asshiddiqie, ‘Membudayakan Nilai-nilai Pancasila dan Kaedah-kaedah Undang-undang Dasar Negera RI Tahun 1945’, Kongres Pancasila III, Surabaya, 1 June 2011. Asshiddiqie posits that the Pancasila can be regarded as the spirit that lives in the body of the Constitution. 239 See also Principle 2 of the Pancasila (‘Just and Civilized Humanity’) which states inter alia that the Indonesian people do not tolerate physical or spiritual oppression, and Principle 3 ( ‘a Democracy Guided by the Inner Wisdom in the Unanimity Arising Out of Deliberations Amongst Representatives’) which holds that democracy calls for decision-making through deliberations to reach a consensus. For the full text of the Pancasila, see . 240 Indonesian Constitution 1945, Article 33(3). 241 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, 334.

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In a subsequent decision, concerning the constitutional review of Law No. 22 of 2001 on Oil and Gas (2004), the Constitutional Court further explained four of the abovementioned five elements. First, in exercising its power to “take care”, the government may issue and revoke licences, permits, and concessions. Second, the power to “regulate” may be performed through cooperation with the legislative branch in enacting legislation or through government regulation. Third, the “management” power may be exercised by the government through ownership of company shares or direct involvement in the board of directors in state-owned and government-linked companies. Finally, the power to “supervise” must be used to ensure that the natural resources are utilized in such a way as to maximize the prosperity of the people of Indonesia.242 Furthermore, in 2008, in its constitutional review of the Investment Law (i.e., Law No. 25/ 2007 on Investment; see section 15.3.2), the Constitutional Court asserted that the government’s control of natural resources must be exercised in a manner that respects, protects, and fulfils the economic and social rights of the people of Indonesia.243 The second issue regarding the Indonesian State’s power to control natural resources is how to rank the abovementioned five elements of authority. In 2012, the Constitutional Court determined in its constitutional review of Law No. 22 of 2001 on Oil and Gas that the most important element in the government’s power to control is to exercise the “power to manage” through direct involvement in the exploration and exploitation of natural resources, because these two processes are key to the prosperity of the people. This is followed by the “power to set policy” and to “taking care” of the use of natural resources. Finally, the “power to regulate” and “to supervise” are ranked lowest.244 In this way, the decisions of the Constitutional Court determine in large part how the government must exercise its power in controlling the use of natural resources in order to act in accordance with the abovementioned principle 5 of the Pancasila and Article 33(3) of the Constitution. However, another important question is yet to be answered: in which way can the exercise of these powers maximize the prosperity of the people of Indonesia? Although the Constitutional Court has explained what the constitutional duty of the government entails in relation to the use of natural resources, the implementation of the 2012 judgment remains challenging. Nevertheless, this decision provides a legal tool and creates an opportunity for all Indonesian citizens and NGOs to directly challenge and influence the government’s conduct in managing the use of natural resources. This 242 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, 209. 243 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, para. 3.9. 244 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, para. 3.12.

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decision in particular may therefore be used as a legitimate cause of action in suing the government when it fails to conform to the Constitutional Court’s decision, e.g., when environmental and mining legislation are insufficiently enforced upon mining companies. The standard for testing the effectiveness is provided in another decision of 2012, i.e., the constitutional review of Law No. 27 of 2007 on Coastal and Small Islands Management. In this case, the Constitutional Court introduced a standard to determine whether or not the control of natural resources by the government has resulted in the maximum prosperity of the people of Indonesia. This standard consists of four elements: 1. the benefit of natural resources for the public, 2. the level of equal spread of the benefit of natural resources for the public, 3. the level of public participation in determining the use of natural resources, and 4. the respect of the traditional rights on the use of natural resources.245 In sum, according to the Constitutional Court’s interpretation, the Pancasila and the Constitution mandate the Indonesian Government to exercise five powers in relation to the use of natural resources. However, in exercising these powers, the government has to take into account four standards to ensure that the use of natural resources will result in the maximum prosperity of the Indonesian people.

15.6

ANALYSIS OF THE CONFLICTS DEVELOPMENT

IN THE

CONTEXT

OF

SOCIAL JUSTICE

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SUSTAINABLE

In section 15.4, the authors presented various examples of conflicts in relation to mining activities conducted by MNCs. Local communities claimed that the mining activities led to human rights abuses246; destruction of the environment247; environmental pollution248; loss of housing, traditional grounds, and rights249; loss of possibilities to generate an income from living in the forest or from fishing (due to destruction of the forest and to the contamination of the water sources and the sea)250; and social injustice (because the 245 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, para. 3.15.8. 246 See section 15.4.2.1 on PT Freeport Indonesia and section 15.4.2.4 on PT Vale Indonesia. 247 See section 15.4.2.2 on PT Kelian Equatorial Mining, section 15.4.2.3 on PT Nusa Halmahera, section 15.4.2.1 on PT Freeport Indonesia, section 15.4.2.4 on PT Vale Indonesia, section 15.4.3.2 on PT Newmont Nusa Tenggara, and section 15.4.4 on PT Sumber Mineral Nusantara. 248 See section 15.4.2.3 on PT Nusa Halmahera, section 15.4.2.1 on PT Freeport Indonesia, section 15.4.2.4 on PT Vale Indonesia, section 15.4.3.1 on PT Newmont Minahasa Raya, section 15.4.3.2 on PT Newmont Nusa Tenggara and section 15.4.4 on PT Sumber Mineral Nusantara. 249 See section 15.4.2.4 on PT Vale Indonesia. 250 See section 15.4.2.3 on PT Nusa Halmahera.

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local people did not profit from the incomes generated by the mining activity and because they were not adequately heard in the preliminary, in the exploitation, nor in the postexploitation phase).251 All of these complaints indicate that the local communities suffer from mining activities and do not profit from them, as was promised. Apparently, the government – in issuing licences and permits for mining activities – does not (yet) comply with the four standards explicated by the Constitutional Court (see section 15.5). Moreover, when a mining company submits complaints to the government concerning, for instance, a revocation or non-issuance of a licence, or regarding new environmental or mining legislation, the government usually enters into negotiations with such a company.252 Several of the disputes discussed in section 15.4 were solved through an out-of-court settlement between the company and the government. This meant, in almost every case thus far, that the mining company could continue their projects (except in the Bima case). Sometimes, a promise was made that a development fund for the local communities would be established by the mining company. The authors tried to find out how the funds have been allocated and used but did not succeed therein due to the fact that these agreements and reports are not made public and the companies in question do not provide information about them. All the cases indicate the lack of transparency, on the one hand, regarding the companies’ activities and, on the other hand, regarding the governmental documents and deals concluded in the mining sector. Still, the question remains to what extent the four standards underlined by the Constitutional Court are complied with by the authorities who take the decision(s). The events in the two Newmont cases discussed in section 15.4.3 illustrate that the government and the courts were concerned about the risk of losing FDIs. Both feared that any perceived lack of providing protection to foreign investors may cause FDI outflows.253 Commentators stated that the courts and government authorities have been influenced by foreign parent companies when deciding these cases. The Newmont cases show that environmental protection is sometimes compromised in Indonesia in favour of allowing mining activities and concomitant FDIs. In addition, traditional ways of living of local communities are not always deemed sufficiently important to stop mining activities in the area. The authors also point at the situation in the Buyat Bay: the Government of Indonesia was not successful in its claims against PTNMR for polluting the Buyat Bay (see section

251 See section 15.4.2.2 on PT Kelian Equatorial Mining. 252 Ibid. 253 ‘Government Regrets Court Order to Shut Newmont Mine’, The Jakarta Post, 11 April 2000, , accessed 15 May 2015.

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15.4.3.1). Pursuant to the applicable concession agreement, disputes between the government and PTNMR had to be settled through an international investment arbitration mechanism. The government found itself between a rock and a hard place: either it was to be subjected to the caprice of this MNC or to take the risk of losing the case before an international investment arbitration tribunal. This may have been the reason why the government accepted PTNMR’s settlement offer to pay USD 30 million for a community development fund rather than pursuing this case. The government was also confronted by a dilemma when asked to revoke the renewal of the sub-marine tailing disposal permit for PTNNT (see section 15.4.3.2). The concession agreement limited the government’s power to change applicable laws and regulations during the lifetime of the concession. If the government were to change the law and prohibit the use of STD, PTNNT could have filed an investor-state arbitration claim before an international investment arbitration tribunal. In fact, Churchill254 and PTNNT255 have submitted claims for damages against the government before ICSID tribunals. These companies claimed that they have the right to have their claim judged by international arbiters pursuant to a BIT or specific provisions in their CoW(s). Their claims pertained to the rejection of a permit (Churchill; see section 15.4.5) and the new legislation on ores (PTNNT; see section 15.3.5). This implies that MNCs have an additional way of fighting Indonesian environmental and mining legislation – an extra way in comparison with domestic companies. The amounts claimed by MNCs in international investment arbitration proceedings are high: USD 1.8 billion in the case of Churchill. When such an amount is contrasted with the contribution of FDIs in the mining sector to the Indonesian national income, the question emerges whether it is economically sensible for the Indonesian Government (and the local communities) to stimulate FDIs in mining through allowing additional legal protection based on BITs, FTAs, and CoWs to MNCs. Suppose that two or three claims by MNCs in the same range as the Churchill claim (USD 1.8 billion) would be submitted and awarded by an international investment arbitration tribunal. In that case, the total annual income that the Indonesian state receives from FDIs in mining sector has gone astray (e.g., total FDIs in the mining sector accounted for USD 2.2 billion in 2010, USD 3.6 billion in 2011, USD 4.2 billion in 2012, USD 4.8 billion in 2013, and USD 4.7 billion in 2014; see section 15.2).

254 Italaw, Churchill Mining PLC and Planet Mining Pty Ltd v. Republic of Indonesia, Decision on Jurisdiction (Churchill Mining Plc), , accessed 14 May 2015. 255 Italaw, Nusa Tenggara Partnership B.V. and PT Newmont Nusa Tenggara v. Republic of Indonesia, ICSID Case No. ARB/14/15, , accessed 14 May 2015. This claim has been withdrawn as was explained in section 15.4.

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MNCs that are active in the Indonesian mining sector can usually make use of the option of international dispute resolution. Some MNCs work on the basis of the old regime, i.e. on the basis of a CoW, the contractual terms of which provide for the option of international (investment) arbitration. Other investors can file for international investment arbitration pursuant to BITs, IIAs or FTAs, which protect their investments in Indonesia. The country has concluded many BITs, IIAs and FTAs (see section 15.3.1). The chances are that more claims will arise due to the increase in international investment arbitration worldwide.256 Furthermore, it should be taken into account that the current Indonesian Government is investing substantially in the enforcement of environmental and mining legislation and in the fighting of all forms of corruption.257 This means that corporate non-compliance of environmental or mining regulations will be detected earlier. It can be supposed that MNCs will look for other ways to avoid (strict) compliance with environmental and mining laws, such as by starting, or threatening to commence, international investment arbitration proceedings against the Indonesian Government. Reference is made to the case studies concerning Vattenfall and Ecuador in this volume, in which cases MNCs pressure host states to deviate from applying local laws.258 The most recent cases indicate a change in the Indonesian Government’s attitude of prioritizing the promotion of FDIs and the protection of foreign investors at the expense of ensuring environmental protection and realizing sustainable development. The Bima case (PTNNT; section 15.4.3.2) shows that the local government, after a long time, eventually listened to the demands of the local villagers, farmers, and fishermen and revoked all new mining permits. Another interesting feature of this case is that the local communities were aware of the negative environmental and social impact of other mines in the region.259 This was the reason that they urged the local government not to allow any mining activities in the region. Similarly, the Churchill case proves that the (central) government is more confident in facing a legal dispute against an MNC and in taking a firmer position in upholding environmental legislation. The government has prepared itself for defending its position against Churchill before the international investment arbitral tribunal.

256 UNCTAD, ‘Recent Developments in Investor-State Dispute Settlement (ISDS)’, April 2014, , accessed 6 June 2015. See also Levashova (n. 48). 257 Henk Addink et al. (n. 3). 258 Jacur (n. 8) and Blanca Gomez de la Torre (n. 8). 259 These protests were the latest example of demonstrations by local citizens in Indonesia’s fast growing economy against foreign-owned companies they fear will exploit the country’s natural resources at their expense.

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The Churchill case is an example of the trend that environment protection has now become an issue in international investment-related disputes. One lesson learnt from analysing these conflicts against the backdrop of the governmental tasks to ensure social justice and sustainable development is that the government has to deal with conflicting interests and that this apparently is a great challenge as MNCs can be very persuasive when they insist on pursuing certain mining practices.260 But as the Indonesian economy grows and the amount of FDI inflows increases,261 the government may change its strategy in responding to the pressure exerted by MNCs. The Churchill case is a first sign that the Indonesian Government takes a more firm approach towards foreign investors. Another lesson learnt is that the government seems to apply different standards. On the one hand, the government avoids conflicts with foreign investors which entered into CoWs before 1999 (when the ‘reformasi’ took place). This attitude applies to disputes concerning the concession agreements with Freeport in West Papua, Newmont in Minahasa, and Newmont in Sumbawa. On the other hand, the government’s attitude towards ‘post-reformasi’ mining concession agreements (Kontrak Karya) holders and mining licences holders differs significantly. In the latter era, the authority to grant concessions and licences has been conferred to the local governments, as we observed in the Bima and Churchill cases. Apparently, the central government is yet more willing to share a (financial) risk of losing a case in an international investment arbitral tribunal with the local government. The application of double standards and the hesitation of the government to be firm on compliance of environmental norms by mining companies do not give a clear signal to the Indonesian population that the government aims to ensure sustainable development. Human rights of local citizens and the environment are often neglected to keep FDIs and its investors in Indonesia.262 MNCs take advantage of this situation. In fact, both the Pancasila and Article 33 of the Constitution provide guidance for the government when dealing with the use and allocation of Indonesian natural resources. The Constitution

260 Reference is made to Atilla Tanzi’s argument in Chapter 7, ‘Bridging the Gap between International Investment Law and the Right to Access to Water’ in this volume. Tanzi discusses international investment arbitration cases regarding water disputes between the government and the investor. He argues that these cases affirm that adequate due diligence must be exercised by both parties to ensure compliance with human rights and environmental laws. 261 UNCTAD, ‘World Investment Report 2011’, 26 July 2011, , accessed 20 May 2015, 189. See also Indonesia Investment Coordinating Board, ‘The Domestic and Foreign Direct Investment Realisation Quarter IV and January-December 2012 BKPM’, 22 January 2014, , accessed 20 May 2015, 5-6. 262 Reference is made to the various reports referenced in section 15.4 when discussing the collisions between mining companies and local communities.

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mandates that natural resources must be used to maximize the prosperity of all citizens. The wording of the Pancasila and the Constitution, however, are of an open nature. The Constitutional Court has explained what these open norms mean by giving its interpretation. The Constitutional Court decided in the Electricity case that Article 33 of the Constitution mandates the State to exercise direct control over the country’s natural resources (see section 15.5). This control is implemented in a number of ways: (1) to set a policy, (2) to taking care, (3) to regulate, (4) to manage, and (5) to supervise. In the Oil and Gas case, the Constitutional Court determined that the direct management of the use of natural resources is the most important aspect (see section 15.5). Direct management implies that the government is to be actively involved in the mining operations and cannot leave a large autonomy to (foreign) investors in deciding how to run a mine. The analysis of the disputes in section 15.4 revealed, however, that generally, the government is not actively involved in the mining operations. The local and central governments leave the decisions on how to conduct the operations to the mining company and, in fact, the foreign investor. Also, the conflicts exemplify that the (local) government hesitates to strictly enforce applicable environmental and mining legislation and to firmly supervise compliance of environmental conditions under which the licences were issued, including post-mining obligations. According to local communities and various (NGO) reports, such enforcement and supervision is completely inadequate. This is in contrast to the control that the government must exert pursuant to its constitutional tasks, which includes setting appropriate policies and taking proper care of the natural resources, supported by regulation and supervision (Oil and Gas case).

15.7

RECENT POLITICAL DEVELOPMENTS CONCERNING INDONESIAN BITS COMMENTS

AND

CONCLUDING

Indonesia is one of the G-20’s fastest growing economies. FDIs in the Indonesian mining industry constitute part of this growth. The government facilitates these FDIs through agreeing to special legal regimes in so-called CoWs or BITs. These regimes provide extra protection to foreign investors by allowing them to submit disputes to international investment arbitration tribunals. Recently, however, collisions between international mining companies and local communities regarding environmental pollution and human rights abuses have come to light. Underlying these collisions is a conflict of governmental goals. On the one hand, the government aims to facilitate economic growth through stimulating FDIs. On the other hand, it is the government’s constitutional goal to establish sustainable development and social justice (Pancasila), and foreign investments also need to be in line with this goal.

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This chapter attempted to find out what the challenges are to canalize FDIs in the mining sector in such a way that the environment and the local communities are not adversely affected. A first step was to set out the Indonesian institutional framework applicable to (foreign) investments in mining. This was followed by an analysis of the major recent collisions between mining companies and local communities and disputes with the government about the implementation of the environmental and mining laws. Next, the authors held the claims of local communities concerning social injustice and loss of livelihoods due to the mining companies’ activities against the constitutional task of the government to ensure social justice and sustainable development. Section 15.6 discussed the lessons learnt. One of the lessons learnt is that the rules provided by the Constitutional Court regarding the management of natural resources govern the conduct of both central and local governments when issuing an executive decision relating to mining operations (see sections 15.5 and 15.6). It is the task of the Indonesian Government to make sure that these norms are also included in CoWs and mining licences. It is also the task of the Indonesian Government to negotiate the international investment treaties and trade agreements to which it is a party, in such a way that they allow the government to fulfil its constitutional duties. International investment and trade treaties can be drafted in such a way that it will be able for a host government, such as Indonesia, to protect local communities and the environment, and to guarantee social justice, even in situations where foreign investors are active. An alternative for the Indonesian Government is to decide not to offer any special legal protection to foreign investors and to treat them as regular domestic investors.263 An example of this option is the decision of the Indonesian Government to terminate the BIT with the Netherlands. However, it appears not so easy to immediately realize the desired effect of discontinuing the international investment arbitration litigation option for foreign investors. The reason is the following. In March 2014, the Netherlands Ministry of Foreign Affairs announced that the Indonesian Government had given notice of termination of the BIT with the Netherlands by July 2015.264 The Dutch Government indicated that – according to the BIT – a ‘sunset period’ of 15 years applies before the BIT officially comes to an end.265 This means that the existing protection of foreign investments in Indonesia will continue to apply to

263 E.g., South Africa seems to follow this course. See Pfumorodze and M.M. Da Gama (n. 8). 264 Clifford Chance, ‘Alternative Investment Protection Strategies for Indonesia’, 11 April 2014, , accessed 20 May 2015, 1. Chadbourne & Parke LLP (n. 35). 265 Clifford Chance (n. 264).

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investments made prior to the 1st of July 2015 for a period of 15 years, i.e., until the 1st of July 2030.266 One reason for the Indonesian authorities not to extend the Indonesian-Netherlands BIT may have been the annoyance which they experienced about the BIT claims brought forward by foreign investors, the most important example of this being the previously described Churchill case.267 For the future, they wish to prevent that BITs can lead to these situations. Many MNCs have incorporated a subsidiary in the Netherlands (among other for tax reasons), and hence such MNCs can profit from the many BITs concluded by the Netherlands. An underlying, and perhaps more fundamental, reason is that the Indonesian Government announced that it will evaluate its position in respect of all IIAs. In particular, the government intends to scrutinize the additional legal protection offered by BITs to foreign investors and their Indonesian joint ventures or subsidiary companies. This is still to be officially confirmed by the Indonesian authorities.268 The government’s new stance towards FDIs and BITs can be seen as an attempt to balance its conflicting tasks in seeking to protect the public interest as well as the rights of (foreign) investors.269 Prima facie, this new stance seems unfavourable for Indonesia’s ability to attract more FDIs. However, it also provides for a number of potential benefits. First of all, it gives Indonesia momentum to renegotiate better BITs – BITs that not only protect foreign investor’s interest but also grant the government the policy space to protect and to ensure public policy goals and interests, such as environmental, labour, and human rights protection. Second, this stance may open the way for the inclusion of such protective international standards (e.g., environmental and human rights standards) with which every investor should comply. Perhaps, Indonesia can use as a source of inspiration the example of the Netherlands-United Arab Emirates BIT, which was signed in November 2013.270 As indicated in section 15.3.1, this BIT contains a specific reference to the OECD Guidelines on Multinational Enterprises, an international standard 266 Clifford Chance (n. 264), 1; Chadbourne & Clarke LLP (n. 35), 4; Ashurst Singapore, ‘Indonesia Terminates Indonesia-Netherlands BIT’, April 2014, , accessed 20 May 2015. 267 Ashurst Singapore (n. 266); Chadbourne & Parke LLP (n. 35), 3. 268 Clifford Chance (n. 264), 1. See also Berwin Leighton Paisner, ‘International Arbitration: The End of the Line for Indonesia’s Bilateral Investment Treaties?’, 14 April 2014, , accessed 20 May 2015. 269 Ben Bland and Shawn Donnan, ‘Indonesia to Terminate More than 60 Bilateral Investment Treaties’, Financial Times, London, 26 March 2014, , accessed 20 May 2015. 270 Loyens & Loeff, ‘The United Arab Emirates and the Netherlands Sign a Bilateral Investment Agreement’, 26 November 2013, , accessed 20 May 2015. However, this BIT is not a perfect example as it still allows for indirect investors to benefit from this BIT. In addition, this BIT has an Unqualified and Fair and Equitable Treatment clause. Reference is also made to other interesting examples: new model Indian Model BIT (still a draft), the US Model Bit. Also, there are nowadays a number of investment treaties which directly refer to

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endorsed by the OECD member countries which imposes CSR responsibilities on companies, in particular concerning their investments abroad. The authors also refer to the contributions of Marie-Claire Cordonier and Yulia Levashova in this volume. These authors provide examples of the various ways in which several investment treaties and trade agreements have embedded environment protection.

CSR or have a separate chapter on CSR, such as Canada-Senegal BIT 2014, Canada-Nigeria BIT 2014, Japan-Uruguay BIT 2015.

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Vutha, H. & Jalilian, H., ‘Environmental Impacts of the ASEAN-China Free Trade Agreement on the Greater Mekong Sub-Region’ (International Institute for Sustainable Development), 2008, Contributions in edited books Sukmono, A.F., ‘The Legal Framework of CSR in Indonesia’, in T. Lambooy, A. Kusumadara, A. Argyrou & M. Istiqomah (eds), CSR in Indonesia: Legislative Developments and Case Studies, Indonesia: Konstitusi Press, 2013. Reports Ballard, C., ‘Human Rights and the Mining Sector in Indonesia: A Baseline Study’, International Institute for Environment and Development, 2001. Central Bureau of Statistic Indonesia, ‘Percentage Distribution of Gross Domestic Product at Current Market Prices By Industrial Origin, 2000-2014’, . Central Bureau of Statistic Indonesia, ‘Pertumbuhan Ekonomi Indonesia: Berita Resmi Statistik No.16/02/Th. XVII’, 5 February 2014, . Indonesia Investment Coordinating Board, ‘Foreign Direct Investment Realization by Country Q 2 2011’, 2011, . Indonesia Investment Coordinating Board, ‘The Domestic and Foreign Direct Investment Realisation Quarter IV and January-December 2012 BKPM’, 22 January 2014, . Organisation for Economic Co-operation and Development, ‘OECD Investment Policy Reviews: Indonesia 2010’, OECD Publishing, 2010. PriceWaterhouseCoopers, ‘Mining in Indonesia Investment and Taxation Guide’, May 2011, .

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TINEKE LAMBOOY, IMAN PRIHANDONO, NURUL BARIZAH Project Underground and Mining Watch Canada, ‘STD Toolkit: Indonesia Case Studies’, 2002, . Sirait, D., Adhitya, F., & Mardi, A., ‘New Rules for Mining Tenders’ (PwC Indonesia Energy, Utilities & Mining Newsflash, November 2013), . Summit Level Group of Developing Countries Group of Fifteen, ‘A Survey of Foreign Direct Investment in G-15 Countries’, 2010, . The Indonesia National Development Planning Agency, ‘Indonesian Biodiversity Strategy and Action Plan: National Document’, 2003, . The World Bank, ‘Indonesia Economic Quarterly: Current Challenges, Future Potential’, June 2011 . The World Factbook, ‘Field listing: GDP – composition, by sector of origin’ (The World Factbook, 2014) . The World Factbook, ‘Indonesia’ (The World Factbook, 30 April 2015) and . Transparency International ‘Corruption Perceptions Index 2014: Results’ (Transparency International), . UNCTAD, ‘Investment Policy Hub, International Investment Agreements Navigator’, . UNCTAD, ‘Recent Developments in Investor-State Dispute Settlement (ISDS)’, April 2014, . UNCTAD, ‘World Investment Report 2011’, 26 July 2011, .

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Wahana Lingkungan Hidup Indonesia, ‘The Environmental Impacts of Freeport-Rio Tinto’s Copper and Gold Mining Operation in Papua’, Wahana Lingkungan Hidup Indonesia, 2006. Wahju, B.N., ‘Indonesian mining industry in the period of transition, between 19972001’ (paper presented at the International Convention, Trade Show Investors Exchange, Prospectors & Developers Association of Canada (PDAC), Toronto, Canada, March 1013, 2002), . WALHI, ‘Buyat Bay Is Polluted and a Risk to the Community: Highlights of the Official Joint Investigation of Buyat Bay’, 9 November 2004, . World Bank, ‘Foreign direct investment, net inflows (BoP, current US$)’ (World Bank), .

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OF

WITHIN A

CLAIM

OF

JUSTICE

Blanca Gómez de la Torre*

16.1

INTRODUCTION

This chapter aims to inform the international community about the complexities of the case between Ecuador and Chevron. This case is not a simple one. Its roots lie deep within the history of oil exploration and exploitation in Ecuador along with its accompanying environmental and social damages. The ‘battle’ between Chevron and Ecuador has a long history. Many years have been spent in long-standing litigation, arbitration proceedings, media publications, lobbying, and other activities related to the case. The different layers of litigation in various jurisdictions, i.e. Ecuador, the United States (US), Canada, Brazil, and Argentina, as well as the parallel arbitration proceedings in the Netherlands, make this case particularly complex.1 However, the complexity in the debate at hand is not only a legal one. The case has environmental, social, economic, health, political, and media implications; it is difficult to think of another case that has all these different and parallel layers. This chapter seeks to discuss certain aspects of the case at hand, without aiming to make a complete analysis of this case, since that would require a three-volume book of several hundred pages each. This chapter will particularly make a case on how core arguments put forward by Chevron are unwarranted. The claims of Chevron that will be scrutinized are those related to the applicability of the US-Ecuador bilateral investment treaty (BIT) of 1997 and to the alleged denial of justice put forward by Chevron. Section 16.2 of this chapter briefly presents the historical background of the case, commencing with the ‘Concession Agreement’ signed in 1964, the ‘Settlement Agreement’ signed in 1995, and

*

1

Dr. Blanca Gomez de la Torre is director of the International Affairs and Arbitration Unit, AttorneyGeneral Office, Republic of Ecuador. The author would like to express her gratitude to Cristy Cedillo, Aikaterini Argyrou, and Daniela Palacios for providing valuable assistance and comments for the finalization of the chapter. About the complexity of this particular case, see C. Whytock, ‘The Chevron-Ecuador Case: Three Dimensions of Complexity in Transnational Dispute Resolution’, American Society of International Law Procedure, 2012, 426 ss.

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the ‘Final Release’ signed in 1998. It also exposes the actions filed in 1993 in the US District Court for the Southern District of New York (SDNY) and the later actions, which commenced in 2003 in the provincial courts of Lago Agrio. This section then discusses the currently pending arbitration in the Permanent Court of Arbitration in the Hague (PCA) commenced by Chevron on 23 September 2009, in which Chevron claims denial of justice.2 Section 16.3 makes a case for the lack of jurisdiction of the arbitration tribunal to handle the Chevron-Ecuador case on the basis of the nonretroactive application of the USEcuador BIT of 1997. It is argued that there is no investment to be protected because the concession agreement, in which concession rights were granted to Texpet, had expired in 1992, five years prior to the entry in force of the BIT. Section 16.4 analyses Chevron’s claim against Ecuador about the denial of justice. It is argued that Chevron’s allegations are unfounded because it had access to the Ecuadorean courts, and its claims had been heard in accordance with Ecuadorean laws and the Constitution. Section 16.5 of the chapter comprises an analysis of the financial consequences for Ecuador resulting from the various allegations of Chevron against Ecuador. It is highlighted that investors, such as Chevron, are no longer the weak party that is in need of protection in the context of international investment. Multinational enterprises often have more financial power than the states where they invest. Historically, state-investor arbitration was conceived as an alternative dispute resolution mechanism aiming to grant an expeditious, independent, and impartial procedure.3 Unfortunately, the case of the Chevron v. Ecuador saga displays that investment arbitration has become a struggle of economic strength. The party with the larger resources can afford to take the case to arbitration and, additionally, to raise its claim in political and media forums to which smaller economic players do not have access.4

2 3 4

Chevron Corporation and Texaco Petroleum Corporation v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23, Notice of Arbitration of 23 September 2009. R. Dolzer & C. Schreuer, Principles of International Investment Law, 1st edn, Oxford University Press, 2008, p. 221. See also the studies conducted by S.D. Franck, ‘Empirically Evaluating Claims about Investment Treaty Arbitration’, North Carolina Law Review, Vol. 86, 2007, pp. 26-33, 66-70. See also for the critic on Franck’s conclusions, K.P. Gallagher & E. Shrestha, ‘Investment Treaty Arbitration and Developing Countries: A re Appraisal’, GDAE Working Paper No. 11-01, 2011, pp. 7-10. Available at accessed 1 May 2014.

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CHEVRON-TEXACO V. ECUADOR: THE ENVIRONMENTAL CASE

HISTORICAL BACKGROUND

The dispute between the state of Ecuador and Chevron has its origins in the 1964 Concession Agreement between the Government of Ecuador and Texaco Petroleum Company (Texpet).5 Through this concession agreement, Texpet was allowed to explore and exploit the oil reserves of Ecuador in the area provided by the contract. In 1973, a new concession agreement was signed (the ‘1973 Concession Agreement’), on this occasion between Texpet and its co-concessionaire, Gulf Oil, for the exploration and extraction rights in the assigned region. The 1973 Concession Agreement expired according to its own terms in 1992, at which time Texpet ceased to have any investment in Ecuador. In 1993, just months after Texpet’s concession rights expired, a group of indigenous Ecuadorean citizens from the Amazon region filed a lawsuit against Texaco in the Southern District Court of New York (SDNY).6 After 10 years, the SDNY and the Court of Appeals for the Second Circuit dismissed the case based on the ‘conflict of laws’ doctrine of forum non-conveniens.7 The courts expressly recognized that Ecuadorean courts constituted an adequate alternative forum.8 To obtain a dismissal of the New York case, Texaco, and later its legal successor, Chevron, had to prove to the US courts that the Ecuadorean courts were independent, impartial, and competent to hear and adjudicate the dispute.9 Texaco also agreed to accept that any judgement rendered by the Ecuadorean courts is subject only to the defences that it may assert in any enforcement action under the Uniform Foreign Money-Judgment Recognition Act.10 While the Ecuadorean citizens and Texaco were litigating their case before the US courts, in 1995, the Minister of Energy of the Republic of Ecuador together with the state-owned 5

6 7

8

9

10

Chevron acquired Texaco through a holding company. Chevron is the only owner of the holding company, and the latter is the only owner of Texaco. Therefore, when reference is made to Chevron, it includes the rights and obligations that Chevron holds as the owner of Texaco. Maria Aguinda et al. v. Texaco Inc., SDNY, Complaint of 1993. Available at accessed 1 May 2014. Forum non conveniens (FNC) is a common law doctrine which aims to find the most appropriate court to litigate the case. The purpose of FNC “[…] is concerned not only with resolving a conflict of courts – an essentially public-law purpose – but with doing justice to the parties by ensuring that the most appropriate court hears the case”. (See T. Hartley, International Commercial Litigation, 3rd edn, Cambridge University Press, Cambridge, 2011, p. 205.) Maria Aguinda et al. v. Texaco Inc., SDNY, No. 93 Civ. 7527, 1994 WL 142006, 1994; Aguinda et.al. v. Texaco, Inc., 945 F.Supp.625, SDNY, 1996, Maria Aguinda et al. v. Texaco Inc., Court of Appeals 2nd Circ., Final Judgment of 2002, pp. 3, 14. The SDNY finally dismissed the Aguinda lawsuit on the grounds of the doctrine of forum non conveniens. Specifically, Chevron had to prove that Ecuador is an adequate alternative forum upon balancing private and public interest; see Maria Aguinda et al. v. Texaco Inc., Gabriel Ashanga Jota et al. v. Texaco Inc., No. 93 CIV. 7527, 94 CIV. 9266, Opinion and Order of 30 May 2001, para. 3. Id., paras. 3-4. See the Uniform Foreign Money-Judgment Recognition Act 1986. Under this Act, the only way to stop any enforcement is to prove that the judgement was obtained by fraud.

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oil company Corporacion Estatal Petrolera Ecuatoriana (CEPE, later on named ‘Petroecuador’) executed a settlement agreement with Texpet (the ‘1995 Settlement Agreement’). Under this agreement, Texpet undertook the obligation to perform certain environmental remediation activities within the concession area in order to clean up polluted areas. The environmental remediation activities were described in detail in the settlement agreement, which identified the scope of the remedial work for Texpet, designating also particular sites for remediation in the concession area. The 1995 Settlement Agreement also included a liberation clause, by which the Ministry of Energy and Petroecuador released Texpet from certain identified claims between the parties. Upon Texpet’s alleged remediation of the designated sites in 1998, the Ministry of Energy signed with Texpet a final release agreement (the ‘1998 Release Agreement’). The Release Agreement was signed after Texpet’s alleged compliance with the mandatory remediation work ordered in the 1995 Settlement Agreement.11 In October 2001, Texaco – including its subsidiary company Texpet – was acquired by US-based multinational oil company Chevron Corporation. In 2003, less than a year after the jurisdiction was declined by the courts of New York, and as contemplated by the forum non conveniens dismissal, the same group of Ecuadoreans filed a comparable suit in a court in Lago Agrio, Ecuador.12 After nearly eight years of litigation in Ecuador, on 14 February 2011, the Lago Agrio court rendered a judgment ordering Chevron (as the legal successor of Texaco and Texpet) to pay more than $ 9 billion to clean up and restore the affected region, plus an equal amount as punitive damages, in a total judgment of approximately $19 billion.13 Eight years after Chevron and Texaco merged, in September 2009, approximately 18 months before the Lago Agrio court rendered its decision, Chevron and Texaco filed an investment arbitration claim14 against Ecuador in the PCA under the US-Ecuador BIT.15 While the nature of the allegations has changed over time, the current core of the arbitral claim is denial of justice. According to the Chevron arbitration claims, the Ecuadorean courts failed to afford Chevron in a due process and instead allegedly participated in a

11 12 13 14 15

These documents have been filed as exhibits in the PCA arbitration process as C-023 (‘1995 Settlement Agreement’) and C-053 (‘1998 Release Agreement’). Maria Aguinda et al. v. Chevron Corp., Sucumbios Provincial Court of Justice, Legal complaint for alleged damages of 2003. See Maria Aguinda et al. v. Chevron Corp., Case No. 002-2003, Super. Ct. of Nueva Loja, Decision of 14 February 2011. Chevron Corporation and Texaco Petroleum Corporation v. The Republic of Ecuador, PCA, Case No. 200923, Notice of Arbitration of 23 September 2009. Treaty between the United States of America and the Republic of Ecuador concerning the Encouragement and Reciprocal Protection of Investments, 1997. Available at accessed 2 May 2014.

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fraudulent conspiracy against Chevron.16 In these proceedings, Chevron and Texpet sought, among other things, the following relief: A declaration that, in accordance with the 1995, 1996, and 1998 settlement and release from liability agreements, the plaintiffs have no legal or general responsibilities for the adverse effects on the environment, which include but are not limited to any purported legal liability for the adverse effect on human health, the ecosystem, indigenous cultures, infrastructure or any legal liability for unlawful earnings, liability or obligations whatsoever to perform any environmental remediation originated in the former consortium, jointly owned by Texpet and Ecuador, or according to the 1973 Concession Agreement that has already expired between Texpet and Ecuador. A declaration that Ecuador has violated the 1995, 1996 and 1998 Settlement and Release Agreements by and among the US and Ecuador, including its obligations to grant a fair and equitable treatment, full protection and certainty, an effective means of exercising rights, non-arbitrary treatment, non-discriminatory treatment and observe the obligations contracted by Ecuador according to investment contracts. A declaration that in accordance with the treaty and applicable international law, Chevron is not legally responsible for any judgment issued in the Lago Agrio litigation. A declaration that Ecuador has committed a denial of justice according to customary international law.17 On 12 November 2013, the National Court of Ecuador (‘National Court’), which is the highest court in Ecuador, rendered a final judgment.18 The National Court agreed with Chevron that the first-instance court’s award on punitive damages was not well founded. Under Ecuadorean law, there is no legal basis to order the payment of punitive damages or to request the losing party to publicly apologize. According to the judgment, punitive damages go beyond the requirement of the law to repair the damage caused. Consequently, since there are no regulations applicable to this case, the court cannot go beyond its powers and order something that has not been provided for within the law. The National Court revoked the order to pay punitive damages and reduced the amount awarded against Chevron by half.19 16 17 18

See Chevron’s letter to the PCA, 4 January 2012. Available at accessed 2 May 2014. See also Chevron Corp. v. The Republic of Ecuador, PCA, Case No. 2009-23, Notice of Arbitration of 23 September 2009, as well as the Claimants’ Supplemental Memorial on the Merits of 20 March 2012. See Maria Aguinda et al. v. Chevron Corporation, National Court of Justice, No. 174-2012, Award of 12 November 2013. Available at accessed 21 March 2014.

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INTERNATIONAL INVESTMENT LAW PROCEEDINGS: CHEVRON V. ECUADOR

In 1997, the BIT between Ecuador and the United States came into force. The temporary scope of the treaty established that the BIT would only be applied to investments existing at the time of its entry into force as well as to investments made or acquired thereafter.20 Ecuador has disputed jurisdiction of the PCA by invoking the nonretroactivity clause of the BIT, arguing that the dispute concerns an investment that predated and had been terminated prior to the BIT. This argument was not accepted by the PCA which analysed the broad definition of investment as provided by the BIT. The PCA found that the 1995 Settlement Agreement and 1998 Release Agreement extended the existence of Texaco’s investment in Ecuador. According to the PCA, although Texaco left in 1992, the fact that Texaco had pending obligations in Ecuador meant that its investment still existed. It is the PCA’s conclusion that (i) the 1995 Settlement Agreement, which included a contract for implementing environmental remedial work, and subsequently (ii) a release from such obligations, liability, and claims as stated in the Final Release signed in 1998 (when the BIT was already in force) relate to Texaco’s original investment. According to the PCA, the rights and obligations contained in these agreements are directly linked to Texaco’s investment, and, consequently, the investment’s life span was prolonged and still existed at the time when the BIT entered into force. Therefore, the investment was considered to fall under the protection of the BIT. According to the Government of Ecuador, investment tribunals lack jurisdiction over an investment dispute that pertains to an investment that ceased prior to the entry into force of the BIT. Texaco left Ecuador in 1992; the BIT was signed in 1994 and entered into force in 1997 – five years after Texaco took away all of its assets and left the country. It is Ecuador’s position that the BIT did not intend to cover investments that did not exist at the time when the BIT entered into force or was signed for that purpose. The object and purpose of the BIT was to encourage direct foreign investment21 or, as stated in the letter of submission from the US Department of State: This Treaty will assist Ecuador in its efforts to develop its economy by creating conditions more favorable for U.S. private investment, helping to

19 20

21

Id., pp. 130-133. In accordance with Art. XVII (1) of the Ecuador-US BIT: “1. This Treaty shall enter into force thirty days after the date of exchange of instruments of ratification. It shall remain in force for a period of ten years and shall continue in force unless terminated in accordance with paragraph 2 of this Article. It shall apply to investments existing at the time of entry into force as well as to investments made or acquired thereafter”. In that sense, the BIT covered investments existing at the date when the BIT entered into force and the investments made thereafter. Ecuador-US BIT (1997), Preamble. Available at accessed 8 April 2014.

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attract such investment and, thus, strengthening the development of the private sector.22 The PCA found that: [I]n the Tribunal’s view, that investment did not terminate in 1992 (upon that Concession Agreement’s ending) because there is a close and inextricable link between Texpet’s 1973 Concession Agreement and the 1995 Settlement Agreement. Without the former, the latter would not have come into existence. It is also plain from the text of both the 1973 Concession Agreement (especially section 46) and the 1995 Settlement Agreement that the latter must be read with the earlier concession agreement and the Consortium´s activities thereunder: the 1995 Settlement Agreement crossrefers repeatedly to the 1973 Concession Agreement […].23 In any case, despite all efforts, the PCA found it had jurisdiction to hear the case since, according to the arbitrators, the investment continued in existence. Although, it has not taken a position regarding whether Chevron can be considered a direct investor. As mentioned earlier, it is the PCA’s position that the agreements which were signed in 1995 and 1998 prolonged the duration of Texaco’s investment in Ecuador, regardless of the fact that the company left the country in 1992. Ecuador still contests this interpretation and it has been clearly stated in the ‘set aside’ request filed by Ecuador, early in 2014 at the PCA.24

16.3.1

Non-Existence of the Investment to Be Protected by the BIT

The position of Ecuador is as follows. Through the 1964 Concession Agreement and as a party to the 1973 Concession Agreement, Texpet undoubtedly had an investment in the hydrocarbons sector in Ecuador. However, this investment was voluntarily terminated in 1992, five years prior to the entry into force of the BIT. Since then, neither Texpet nor Chevron has carried out any business or maintained any asset in the hydrocarbon sector in Ecuador or any other sector. A period of 17 years has elapsed since Texpet’s voluntary abandonment of its investment in Ecuador and the beginning of the current ‘investment dispute’ in 2009. It is not 22 23 24

Ecuador-US BIT (1997), Letter of Submittal, para. 3. Chevron Corp. v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23, Third Interim Award on Jurisdiction and Admissibility of 27 February 2012, Part IV, p. 5. Respondent Track 2 Supplemental Counter-Memorial on the Merits of the Republic of Ecuador, November 2014, Chevron v Ecuador (UNCITRAL), PCA Case No. 2009-23, 2009.

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reasonable to conclude that Texpet’s (or Chevron’s) investment in Ecuador’s hydrocarbon sector continued between 1993 and 2003 when they were defending the Aguinda litigation in New York.25 Neither Chevron nor Texaco can properly predicate their arbitral claims on Texpet’s previous investment in Ecuador. Contrary to Chevron’s argument, the 1995 Settlement Agreement and the 1998 Release Agreement were stand-alone agreements that did not purport to and did not amend or extend the 1964 Concession Agreement. On the contrary, the 1995 Settlement Agreement and the 1998 Release Agreement were executed years after the 1973 Concession Agreement terminated by its own terms.26 Texpet instead negotiated and entered into these agreements simply to resolve potential breach of contract claims that afterwards have been considered by the Republic of Ecuador. According to Chevron, the 1964 Concession Agreement, terminated in 1992, continued its existence because of a series of future actions undertaken by Texaco: (1) Texaco was litigating the Aguinda case in the SDNY, which commenced in 1993; (2) Texaco and the Ministry of Energy signed the 1995 Settlement Agreement and the 1998 Release Agreement; and (3) the case was brought anew by Aguinda to the courts of Lago Agrio, thereby ‘forcing’ Chevron (as the legal successor of Texaco) to litigate this case in Ecuador up until 2009 when the arbitration was filed.27 All these circumstances were brought forward by Chevron, in order to argue that the investment was still in existence when the arbitration proceedings were commenced. Ecuador sees this differently. In the PCA dispute, Ecuador argued the following. The precise terms to which Texpet had agreed in the 1995 Settlement Agreement and the 1998 Release Agreement were for ‘compensation’ and ‘remediation’ of the ‘negative effects’ and other damages to the environment of the ‘Oriente’ region in exchange for certain releases of liability.28 Neither the expenditures29 that Texpet incurred in order to effectuate the compensatory and remedial measures required under the agreements nor the limited releases of liabilities that Texpet received in exchange constitute or can be considered as ‘investments’. It is Ecuador’s position that none of the agreements and none of the rights 25

26 27

28

29

According to Chevron: “[t]his dispute arose shortly after the Lago Agrio Litigation was commenced in 2003”. Chevron Corp. v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23, Notice of Arbitration of 23 September 2009. See also Chevron Corp. v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23, Third Interim Award on Jurisdiction and Admissibility of 27 February 2012, para. 1.11. Available at accessed 5 June 2014. Id., paras. 4.15-4.17. See Chevron Corp. v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23, Claimants Countermemorial on Jurisdiction of 23 September 2009, paras. 32, 34, 229 and 235. Available at accessed 3 June 2014. Republic of Ecuador, Ministry of Energy and Mining, ‘Contract for implementing of environmental remedial work and release from obligations, liability and claims’ of 23 March 1995, Art. II.31. Available at accessed 8 April 2014. Id., Art. 5.2.

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and obligations thereunder bear the intrinsic economic traits that characterize an investment within the meaning of Article I of the Ecuador-US BIT.30 After 1992, neither Chevron nor Texpet committed any resources to the economy of Ecuador aimed at commencing productive economic activity nor did either incur expenditures in the expectation of generating commercial profit or upon the assumption of commercial risk. A legal right in isolation is not sufficient to establish an investment. To constitute an investment, that right must exhibit the inherent economic characteristics of an investment. In this regard “the economic materialization of an investment requires the commitment of resources to the economy of the host state by the claimant entailing the assumption of risk in expectation of a commercial return”.31 The economic characteristics of an investment are as follows: “the term ‘investment’ […] has an inherent meaning […] entailing a contribution that extends over a certain period of time and that involves some risk”.32 To determine whether an ‘investment’ exists under the Salini test, tribunals examine a series of factors, including (1) a contribution of funds or other assets having economic value, (2) a certain duration, (3) an expectation of profit, (4) an element of risk, and (5) a contribution to the host state’s development.33 While the Salini test was originally developed to determine the existence of an ‘investment’ under Article 25 of the ICSID Convention, it articulates several inherent economic components understood to characterize any treaty-protected investment. It is ‘the opentextured nature’ of the term ‘investment’ in investment treaties (like the operative BIT here) that “preserves the ordinary meaning of the term ‘investment’ and therefore its consistency with the characteristics that must be attributed to the same term as employed in Article 25 of the ICSID Convention”.34 The clarifications of the definition of ‘investment’ set forth in the 2004 US BIT Model likewise confirm that the term ‘investment’ has always been understood to require intertwined legal and economic components. This definition is later replicated in the 2012 US BIT Model. The 2004 US BIT Model as well as the US-Ecuador BIT expressly clarifies the tautological definition of ‘investment’ as it was also contained in earlier US BITs too. The definition of investment states: [M]ean every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics 30 31 32 33 34

Art. I, Ecuador-US BIT (1997). Pantechniki SA Contractors & Engineers v. The Republic of Albania, ICSID Case No. ARB/07/21, Award of 30 July 2009, para. 36. Romak SA v. The Republic of Uzbekistan, UNCITRAL, PCA Case No. AA280, Award of 26 November 2009, para. 207. Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, 2004, para. 52. Z. Douglas, The International Law of Investment Claims, Cambridge University Press, Cambridge, 2009, pp. 26-29, 150-157, 161-232, 272-277, 386-393.

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as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.35 In my opinion, the 1995 Settlement Agreement and 1998 Release Agreement have none of these characteristics.

16.3.2

The Nature of the Settlement and Release Agreements

In the 1995 Settlement Agreement and 1998 Release Agreement between Texpet, Petroecuador, and the Ministry of Energy, the Ministry appears as a ‘contractual party’. These agreements by law and by their own terms can affect only the contracting parties. In Ecuadorean law, no rule empowers the state to contractually represent third parties such as its residents. The state cannot contractually commit or limit their rights.36 Although Chevron takes a different position, it is clear that the 1995 Settlement Agreement and the 1998 Release Agreement apply only to the Ministry of Energy and Petroecuador and not

35

36

The definition found in the US-Ecuador BIT differs from the definition found in the 2004 US Model BIT. US-Ecuador BIT: “(a) ‘investment’ means every kind of investment in the territory of one Party owned or controlled directly or indirectly by nationals or companies of the other Party, such as equity, debt, and service and investment contracts; and includes: (i) tangible and intangible property, including rights, such as mortgages, liens and pledges; (ii) a company or shares of stock or other interests in a company or interests in the assets thereof; (iii) a claim to money or a claim to performance having economic value, and associated with an investment; (iv) intellectual property which includes, inter alia, rights relating to: literary and artistic works, including sound recordings; inventions in all fields of human endeavor; industrial designs; semiconductor mask works; trade secrets, know-how, and confidential business information; and trademarks, service marks, and trade names; and (v) any right conferred by law or contract, and any license and permits pursuant to law”. The 2004 US Model BIT defines: “‘investment’ means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include: (a) an enterprise; (b) shares, stock, and other forms of equity participation in an enterprise; (c) bonds, debentures, other debt instruments, and loans; (d) futures, options, and other derivatives; (e) turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts; (f) intellectual property rights; (g) licenses, authorizations, permits, and similar rights conferred pursuant to domestic law; and (h) other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges”. According to Article 1561 of the Ecuadorean Civil Code, a contract legally executed is law between the parties. Consequently, a contract signed between two parties can only create rights and obligations for those two parties and cannot affect third parties: “Article 1561 Civil Code of Ecuador: All contracts adopted according to law are legally binding to the parties who agreed to it, and they cannot become invalidated unless there is a mutual consensus among the contracting parties to do so or there are legal circumstances that would lead to such invalidation”. Unofficial author’s translation. Also, in accordance with Art. 2349 of the Civil Code, only the person holding the right is authorized to transact over those rights: “Article 2349 Civil Code of Ecuador: Only the person who holds the right to dispose of an asset can dispose of it in a transaction”. Unofficial author’s translation.

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to the third parties37 So-called collective or diffuse rights38 remained untouched by both the agreements. If a violation of a collective or diffuse right occurs, any group that has been harmed can request the remediation of any damage caused.39 As a matter of fact, the National Court in Ecuador on 12 November 2013 ruled that ‘collective/diffuse’ rights were not, and could not have been, settled under the 1995 Settlement Agreement.40 On this matter, the PCA reached a completely different decision. It followed Chevron’s argumentation and (i) ruled that Article 19.2 of the Ecuadorean Constitution, which guarantees its citizens the right to a clean environment, constitutes a ‘collective/diffuse’ right and (ii) that the right had been settled by the Government of Ecuador under the 1995 Settlement Agreement.41 However, Ecuador’s opinion is that at the time of the 1995 Settlement Agreement, Article 19 was found in the Constitution under a section entitled Rights of the Individual. As the National Court recently reasoned in its ruling,42 it would have made no sense and would have been contrary to Ecuadorean law, for the Government of Ecuador to take away its citizens’ rights under Article 19 of the Ecuadorean Constitution of 197843 enforced at the time, where the ordinary defendant in such a claim is the Government of Ecuador itself. In the Ecuadorean legal system, like in many legal systems, it has long been the case that a judicial decision binds only the parties to the dispute. In that sense, a settlement agreement, under the applicable Ecuadorean law, binds only the parties to that agreement. The reason for this is that it would be unfair to bind a third party that did not have the right to

37

38

39 40 41 42 43

‘Contract for implementing of environmental remedial work and release from obligations, liability and claims’, see supra note 11, p. 3: “The scope of the Environmental Remedial Work to be undertaken by TexPet to discharge all of its legal and contractual obligations and liability Environmental Impacts arising out of the Consortium’s operations has been determined and agreed to by TexPet, the Ministry of Energy or in this Contract […]”. According to the Ecuadorean Civil Code, a party can only transact the right and obligations he or she holds, but it cannot engage the rights and obligations of third parties. See supra note 36. Collective rights can either mean (i) standing to bring a collective action to vindicate individual rights or (ii) a right vested in a particular group of people. Native title over land is an example of a collective right in the sense of (ii): no individual in the group has property in the land because title is vested in the indigenous group only. The “right to live in an environment free of pollution” in Art. 19.2 of the Constitution of the Republic of Ecuador 1978 is an individual right that can be vindicated in a collective action. See National Court of Justice Award Case No. 174-2012, supra note 18, p. 204. Id., pp. 204-205. It must be kept in mind that any decision rendered by the arbitral tribunal is only binding in the Ecuador v. Chevron Corp. and Texpet relationship. See supra notes 20 and 21. Constitution of the Republic of Ecuador, 1978. “Article 19 (9) on the Rights of Individuals: Every person has […] the right to file complaints and requests to governmental entities, albeit never on behalf of the entire population, and to receive pertinent answer and remedy within a reasonable timeframe and according to the law”. Unofficial author’s translation. Available at accessed 3 June 2014.

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defend itself in legal proceedings or which did not have an opportunity to negotiate the terms of a settlement agreement.

16.3.3

Contradictory Arbitral Awards with Domestic Legal System

In the arbitration, Chevron requested the PCA to order a suspension of the Ecuadorean judgment. Indeed, the PCA issued an interim award, ordering the Ecuadorean state to take all measures necessary to suspend or cause the suspension of the enforcement or recognition, within both Ecuadorean and foreign courts, of the Lago Agrio judgment. However, as the author will explain in this section, Ecuadorean law carefully prescribes the mechanics and effects of the litigation process. There is no provision under Ecuadorean law that permits external interference in private-party litigation.44 The implications of the interim award are even more serious. According to Ecuadorean law (within the limits provided in the same law), a party can request a stay of the enforcement of a judgment by posting a bond to ensure that the appeal filed by the losing party is not vexatious or unfounded with the sole purpose of delaying its compliance with the judgment to affect the other party.45 With that in mind, Chevron itself had the legal right to post a bond pending further appeal. Chevron chose not to do so ignoring the Ecuadorean regulations.46 In my opinion the PCA interim award has failed to defer to the state’s domestic law and the legal processes afforded to the litigants appearing in the state’s courts. The generally 44

45

46

Acts contrary to the Constitution are devoid of any legal effect according to Art. 424 of the Constitution of the Republic of Ecuador. Consequently, the constitution is the supreme norm and prevails over any other norm in the legal system. The norms and acts of public authority shall maintain compliance with Constitutional provisions, otherwise shall have no legal effect. State acts precluding the exercise of a right are unconstitutional. In this respect, Art. 11 (8) second paragraph stipulates that any action or omission of regressive character intended to diminish, obstruct, or unjustly nullify the exercise of a person’s rights shall be deemed unconstitutional. A Caución is a bond requested by law by which the party requesting the National Court to review the ruling ensures that no harm will come to the winning party. This bond aims to ensure compliance with the ruling even if the National Court reaches a different decision. The value of the bond is established by the court. There is no clear practice as to how this amount is established; nevertheless, values in some provinces have been considerably low. Even though Chevron had the opportunity to ask for it, they did not do it. Ecuadorean Law on Cassation Appeal, Art. 11: “BOND ‐ Except as provided in the preceding Article, the appellant filing an extraordinary [cassation] appeal may request that enforcement of the judgment or order on appeal be stayed by posting a bond in an amount sufficient to cover the estimated damage that the opposing party may suffer as a result of the delayed enforcement of such order or judgment. The amount of the bond shall be determined by the competent judge or court within three days at the time a decision is rendered whereby the extraordinary appeal to a court of cassation is admitted, or an appeal thereto upon dismissal is granted. If the bond is posted within three days following notice of such decision, the enforcement of the relevant judgment or order shall be stayed. Otherwise, [the judgment or order] shall be enforced, provided, however, that this shall not preclude the further prosecution of the extraordinary [cassation] appeal”.

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recognized principle of the independence of the powers of the state is at jeopardy with this award. The PCA has asked the executive branch of the state to exert influence on the other powers of the state, namely on the judicial branch. Asking a country to violate the core principle on which its whole legal structure has been established, amounts to a breach of its national law and can undermine the country and its structure. Suspending the enforcement of the judgment, pursuant to the PCA’s Interim Awards, would require an Ecuadorean court to violate its own procedural law.47 In broad terms, in all cases filed under Ecuadorean law, litigants are entitled to expect that their procedural rights enshrined in the law will be respected by the courts. This expectation is entrenched by the Ecuadorean Constitution of 1978 and by the human right to equality before the law.48 A court does not adhere to the principle of equality before the law, if it denies a party the right to something that is guaranteed under the standing procedural law (i.e. the right to enforce a final and binding judgment) on a basis that is not provided by that same procedural law. It is difficult to imagine how a court in any jurisdiction adhering to the rule of law would adopt that course even if it was confronted with an order to do so by an international tribunal. No state official can satisfy the PCA interim awards on provisional measures because it would violate Ecuadorean laws and expose himself or herself to criminal penalties.49 47

48

49

In accordance with Art. 168 of the Ecuadorean Constitution, the administration of justice and the judicial branch entities will be independent from any internal or external influence; the violation of this principle will amount to administrative, civil, and criminal responsibility in accordance with the law: “Article 168 The administration of justice shall apply the following principles: 1. Entities of the judiciary shall function both internally and externally with independency. Any violation to this principle shall lead to liability under the relevant administrative, civil and criminal law. 2. The judiciary shall be vested with administrative, economic and financial autonomy. 3. In order to protect its jurisdictional integrity, only the judiciary may undertake the implementation of administrative justice, and other State entities may only assume such a role in the specific cases recognized by the Constitution. 4. Access to justice shall be free of charge. The law shall indicate the framework of procedural expenses. 5. At all stages, trials and resolutions shall be public, except in the cases explicitly established by law. 6. The substantiation of judicial processes, regardless of the branch of the law, instance or stage, shall always be conducted through the oral system, according to the principles of closeness in time, direct communication between the parties, and demand-driven procedure”. Unofficial author’s translation. Right to Equal Treatment and Protection. Art. 3 of the Constitution of the Republic of Ecuador: “The fundamental duties of the State are: 1. To guarantee without any discrimination, the effective enjoyment of rights under the Constitution and international instruments”. Art. 24. Right to Equal Protection: “All persons are equal before the law. Consequently, they are entitled, without discrimination, to equal protection of the law”. Right to Free Access to Justice and Equal Treatment Art. 75: “All people have the right to free access to justice […]. Failure to comply with a judicial decision shall be punishable by law”. Art 8. paras. 2 and 3 of the Organic Law of the Judiciary, Principle of Responsibility of the State and State Officials: “No State Power, organ, or authority may interfere with the exercise of duties and authorities of the Judiciary. Any violation of this principle shall carry administrative, civil and/or criminal liability, under law”. Art. 45 of the Organic Law of the General Comptroller’s Office: “Negligent administrative liability. – Negligent administrative liability of authorities, officers, and public servants of State’s institutions shall be established […] on the failure of the powers, functions, duties and obligations incumbent upon their tenure or contractual provisions, […].3. Permitting the violation of the law, specific rules issued by State’s

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The Ecuadorean state’s defence has consistently objected to Chevron’s requests for such relief on these bases and has more recently requested a reconsideration of the relevant PCA award. That application is currently (by June 2014) pending before the PCA.

16.4

THE DENIAL

OF JUSTICE

ALLEGATION

Since its inception, the principle of denial of justice is aimed at ensuring that aliens have a remedy in the event that justice has not been served and due process has not been afforded. Procedural fairness is also a guarantee under this principle. Consequently, government and judicial authorities must ensure respect for the rule of law when dealing with both nationals and aliens. The failure of a justice system to respect procedural fairness could give rise to a denial of justice.50 The denial of justice is a concept that has its origins in medieval times and is still actively debated and discussed today. One of the major concerns in denial of justice cases is the lack of a clear definition of the term. As early as 1938, a denial of justice was seen by Alwyn Freeman as “one of the most poorly elucidated concepts of international law”,51 and after 75 years, that has not changed. Denial of justice is a legal concept that seems simple and yet is complex, since it encompasses objective and subjective elements which are not always easy to analyse. Several international instruments have also identified fundamental rights and principles associated with due process. The Universal Declaration of Human Rights (UDHR) in Article 10 provides “Everybody is entitled in full equality to a fair and public hearing by an independent and impartial tribunal, in the determination of his rights and obligations and of any criminal charge against him”.52 Article 6 of the European Convention on Human Rights (ECHR) likewise establishes that everybody is entitled to a fair and public hearing.53 Similarly, Article 8 of the American

50 51 52 53

institutions, or generally binding rules issued by competent authority, including those concerning the performance of each tenure”. Art. 46: “Sanction for administrative offenses. ‐ [T]he officers, authorities, officials and other public servants of the State’s institutions, […] who incur in one or more of the grounds of negligent administrative liability […], shall be fined with one to twenty minimum wage salaries […] without prejudice to civil and criminal liability that might arise, according to the seriousness of the misconduct, and can also be removed from office in accordance with the law”. Art. 277 of the Ecuadorean Criminal Code: “Authorities perverting the course of justice shall be punished with one to five years imprisonment: 4. ‐ Public employees of any kind who, […] refuse or delay to provide cooperation or assistance within the sphere of their powers, for the administration of justice or any need for public service”. J.W. Salacuse, The Law of Investment Treaties, 1st edn, Oxford University Press, Oxford, 2009, pp. 86-125. Quoted in J. Paulsson, Denial of Justice in International Law, 1st paperback edn, Cambridge University Press, 2010, p. 2 (emphasis added). Universal Declaration of Human Rights, GA Res. 217 A (III), 10 December 1948. European Convention on Human Rights, as amended by Protocol Nos. 11 and 14 supplemented by Protocol Nos. 1, 4, 6, 7, 12, and 13. Art. 6 the right to a fair trial: “1. In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing

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Convention of Human Rights (ACHR) guarantees access to a fair trial and the right to have a case tried by a competent, independent, and impartial tribunal or judge as provided by the law.54 In international investment arbitration, procedural propriety and due process are also relied upon to allege a breach of fair and equitable treatment (FET)55 included as a standard of protection in almost all investment treaties, whether bilateral,56 trilateral,57 or

54

55 56

57

within a reasonable time by an independent and impartial tribunal established by law. Judgment shall be pronounced publicly but the press and public may be excluded from all or part of the trial in the interests of morals, public order or national security in a democratic society, where the interests of juveniles or the protection of the private life of the parties so require, or to the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice. 2. Everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law. 3. Everyone charged with a criminal offence has the following minimum rights: (a) to be informed promptly, in a language which he understands and in detail, of the nature and cause of the accusation against him; (b) to have adequate time and facilities for the preparation of his defence; (c) to defend himself in person or through legal assistance of his own choosing or, if he has not sufficient means to pay for legal assistance, to be given it free when the interests of justice so require; (d) to examine or have examined witnesses against him and to obtain the attendance and examination of witnesses on his behalf under the same conditions as witnesses against him; (e) to have the free assistance of an interpreter if he cannot understand or speak the language used in court”. Art. 8 the right to a fair trial of the ACHR, Pact of San Jose, Costa Rica: “1. Every person has the right to a hearing, with due guarantees and within a reasonable time, by a competent, independent, and impartial tribunal, previously established by law, in the substantiation of any accusation of a criminal nature made against him or for the determination of his rights and obligations of a civil, labor, fiscal, or any other nature. 2. Every person accused of a criminal offence has the right to be presumed innocent so long as his guilt has not been proven according to law. During the proceedings, every person is entitled, with full equality, to the following minimum guarantees: a. the right of the accused to be assisted without charge by a translator or interpreter, if he does not understand or does not speak the language of the tribunal or court; b. prior notification in detail to the accused of the charges against him; c. adequate time and means for the preparation of his defence; d. the right of the accused to defend himself personally or to be assisted by legal counsel of his own choosing, and to communicate freely and privately with his counsel; e. the inalienable right to be assisted by counsel provided by the state, paid or not as the domestic law provides, if the accused does not defend himself personally or engage his own counsel within the time period established by law; f. the right of the defence to examine witnesses present in the court and to obtain the appearance, as witnesses, of experts or other persons who may throw light on the facts; g. the right not to be compelled to be a witness against himself or to plead guilty; and h. the right to appeal the judgment to a higher court. 3. A confession of guilt by the accused shall be valid only if it is made without coercion of any kind. 4. An accused person acquitted by a non-appealable judgment shall not be subjected to a new trial for the same cause. 5. Criminal proceedings shall be public, except insofar as may be necessary to protect the interests of justice”. Dolzer & Schreuer 2008, supra note 3, p. 142. See Art. 5 of the 2012 US Model Bilateral Investment Treaty. See also Art. 2 of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Ecuador for the Promotion and Protection of Investments signed on 10 May 1994. See also Art. 5 of the Canadian Model Bilateral Investment Treaty. See also Art. 3 of the 2007 Colombian Model Bilateral Investment Treaty. See Art. 11 of the Association of Southeast Asian Nations Comprehensive Investment Agreement. Available at accessed 8 April 2014.

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multilateral.58 The inclusion of denial of justice within the standard of FET does not assist either in the clarification of the definition of this principle or in the establishment of its scope. One intricate concept incorporated into another that is equally vague and complex fails to provide clarity. In his book Denial of Justice in International Law, Professor Jan Paulsson identifies the existence of two types of denial of justice: formal and substantive. The first refers to procedural violations, i.e. time-limit violations, a lack of independence on the part of the authorities, and a rejection of the claim due to minor procedural mistakes.59 A substantive denial of justice can occur when the alien has been denied his/her “[…] right to a correct and uniform interpretation of the law, but also the emblematic right to a decision free of ‘arbitrariness’”.60 Some scholars recognized three different meanings of this principle: broad, narrow, and intermediate. The ‘broad’ approach interprets a denial of justice in an extensive way that includes all wrongful acts executed by the state against the alien and ensures absolute state responsibility. The second ‘narrow’ application is restrictively constructed and refers exclusively to the direct intention of government or judicial authorities to affect the alien in question. The third definition, the ‘intermediate’ approach, is linked to the improper administration of justice. It includes a denial of access to the courts, inadequate procedures,61 and any violation of due process. The understanding of a denial of justice has been largely debated in the field of international investment law, not only as a doctrine but also in multiple cases. To the extent that “[…] current international jurisprudence concerning denial of justice has found a particular expression in the field of foreign investment, perhaps more notably so than in the law of human rights”.62 In Azinian v. Mexico,63 for example, the tribunal found that a denial of justice occurs when the courts refuse to entertain the claim, when there is undue delay in the administration of justice, and when justice has been served in a seriously inadequate manner or a malicious application of the law. In Lowen v. USA,64 the tribunal found that there is a denial of justice when there is “[m] anifest injustice in the sense of a lack of due process leading to an outcome which offends

58

59 60 61 62 63 64

See Art. 1105 of the North American Free Trade Agreement (NAFTA). See also Art. 5 of the Agreement among the Government of Japan, the Government of the Republic of Korea and the Government of the People’s Republic of China signed in May 2012 for the Promotion, Facilitation and Protection of Investment. Paulsson 2010, supra note 51, pp. 11-12. Id., p. 12. Dolzer & Schreuer 2008, supra note 3, pp. 162-166. Paulsson 2010, supra note 51, p. 8. Robert Azinian, Kenneth Davitian, and Ellen Baca v. The United Mexican States, ICSID, Case No. ARB (AF)/97/2, Award of 1 November 1999, para. 102. The Loewen Group, Inc. and Raymond L. Loewen v. United States of America, ICSID, Case No. ARB(AF)/ 98/3 26, Award of 26 June 2003, para. 132.

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a sense of judicial propriety”.65 Although the importance of due process is indisputable, the reference to ‘a sense of judicial propriety’ is of course inherently subjective and open to interpretation. Moreover, one must always keep in mind that an error of law by a national court or an incorrect finding of fact by an administrate authority would not constitute a denial of justice.66 Pursuant to relevant case law, the threshold for finding denial of justice seems to be high. The scope of the obligation imposed on states under an intermediate approach of this standard of treatment is to guarantee that an alien has access to justice and procedural fairness, while the proceedings take place in a national court. According to this approach, the application of this standard should not go beyond ensuring access to justice and procedural fairness. In international investment law, it is difficult to predict what definition of denial of justice will be applied by the tribunal. Hence, the state has no other option than to try to prove that all its actions have been in accordance with national and international standards of justice and that its rulings have complied with such regulations. Investors must also be diligent and knowledgeable concerning the rules, the regulations, and the system in place in the country where they are investing. One must not forget that the courts of each state have the prerogative and duty to interpret their state’s regulations and laws; it is not within the nature of international arbitration or the scope of the arbitral tribunal’s mandate to decide whether or not a national court has correctly applied its national law and to question the validity of any judgment rendered by a national court. As mentioned by Professors Dolzer and Schreuer: Concerning the outcome of a case before a local court, it is clear that an investment tribunal will not act as an appeals mechanism and will not decide whether the court was in error or whether one view of the law or the other would be preferable. Nevertheless, a line will have to be drawn between an ordinary error and a gross miscarriage of justice, which no longer may be considered as an exercise of the rule of law.67 In any case, if a mistake occurs, the judicial system itself is afforded the discretion to redress such an error; it is not within the powers of the arbitral tribunal to do so in the first instance. In that sense, in regard of the case Pantechniki SA Contractors & Engineers

65

66 67

International Institute for Sustainable Development, ‘New Generation of Investment Policies for Sustainable Development’. Available at accessed 3 June 2014. Dolzer & Schreuer 2008, supra note 3, p. 165. Id.

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v. the Republic of Albania,68 Professor Jan Paulsson emphasized that a violation of the principle of denial of justice does not occur until “a reasonable opportunity to correct aberrant judicial conduct has been given to the system as a whole”.69 Paulsson rejected the claimants’ claims since they decided not to try the case before Albania’s Supreme Court. In doing so, “[…] Paulsson found that the Claimants had not given the Albanian legal system an adequate opportunity to address the failures of its lower courts”.70 Consequently, no breach was found.71 In Chevron v. Ecuador, Chevron raised a claim arguing an alleged denial of justice. This premature claim was filed before the Ecuadorean legal system itself had the opportunity to amend any possible error committed by the lower courts. It is hard to understand how a premature claim commenced in 2009 can amount to a denial of justice. On 12 November 2013, the National Court issued its decision.72 Furthermore, on 23 December 2013, Chevron filed an Acción Extraordinaria de Protección at the National Court due to an alleged violation of Chevron’s constitutional rights (including due process). Also, under Ecuadorian law, Chevron may file a complaint under the Collusion Protection Act to air its allegations of fraud and corruption. Chevron has chosen not to pursue this remedy – although is still available – which as matter of international law, bars their fraud and corruption claims in arbitration and is thus fatal to their denial of justice claim. I sustain that Chevron had access to the Ecuadorean courts and that its claims have been heard in accordance with Ecuadorean laws and the Constitution. For a denial of justice to occur, one must allow the judicial system as a whole to intervene and, when necessary, to rectify the errors of the lower courts; it is a hierarchical system. So therefore, simply by not waiting for the final ruling of the Ecuadorean courts, Chevron’s arguments on denial of justice are moot and premature. It is urgent for lawyers, tribunals, and the international community to provide clarity concerning the definition of denial of justice claims, taking into consideration differences in the legal system of states and other relevant factors. In consequence just as states may not deny justice to others, so too justice may not be denied to states. 16.5

REPERCUSSIONS

OF INTERNATIONAL INVESTMENT

ARBITRATION

It has often been observed in international relations that the weak parties seek the protection of the law, while the strong do not need to be punctilious about its observance. 68 69

70 71 72

Pantechniki SA Contractors & Engineers v. The Republic of Albania, supra note 31. Id., para. 96. See also D. Vis-Dunbar, ‘Pantechniki S.A. Contractors & Engineers v. The Republic of Albania: Fork-in-the-road provision partially bars claim by Greek investor’, 2 September 2009. Available at accessed 3 June 2014. Id. Id. See National Court of Justice Award Case No. 174-2012, supra note 18.

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As Solon of Athens said: “Laws are spiders’ webs: If some poor creature comes up against them, it is caught; but a bigger one can break through and get away”.73 The original belief was that the state was the powerful party and that in order to compensate the lack of balance between the parties, the investor needed protection. This made sense at the time but circumstances have changed. It is no longer the case that the state (with a few exceptions) enjoys institutional advantages in international arbitration. According to a study carried out in 2000 by Sarah Anderson and John Cavanagh of the Institute for Policy Studies, out of the top 100 largest economies in the world, 51 were corporations and 49 were states.74 This shows how the scale tends to lean towards the power of private sector and no longer towards states. If we compare the Republic of Ecuador to its arbitration adversary, this is what we can find: Table 16.1 2012 Economy overview of Chevron and Ecuador Chevron Corporation

Republic of Ecuador

Economy – 2012 (US$ million)

Economy – 2012 (US$ millions)

Net profits

$ 26,179

General state budget

$ 26,109

Sales and other revenues

$ 230,590

Accumulated exports (US $ million)

$ 18,444

Capital and exploratory expenses

$ 34,229

Public investment

$ 11,118

Cash produced by operating activities

$ 38,812

Exports crude oil

$ 12,711

As we can see, the financial power of Chevron exceeds the financial resources of the state of Ecuador. In investment arbitration cases, many multinational corporations often can devote substantially more to their legal teams than states. In 2012, alone Chevron enjoyed net profits of $ 26,179 million. Such amount of profits exceeds Ecuador’s entire state budget ($ 26,109 million), which is devoted to its citizens’ health, education, security, and

73 74

Paulsson 2010, supra note 51, p. 20. S. Anderson & J. Cavanagh of the Institute for Policy Studies in their Report on the Top 200: Raise of Global Corporate Power, released in December 2000. Available at accessed 3 June 2014.

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infrastructural needs.75 For a company, spending substantial resources is a business judgment: should we spend this amount of money on legal fees to obtain even larger rewards? A state, which is always a respondent in state-investor arbitration, necessarily adopts a different analysis, because every penny that goes out of its budget for arbitration comes at the expense of the public good. What is worse is that large multinational companies know that they enjoy this advantage. One lobbyist working for Chevron mentioned in an interview to Newsweek that “We can’t let little countries screw around with big companies like this – companies that have made big investments around the world”.76 This situation emphasizes an urgent need for traditional standards to adapt to the current reality where not only an investor can be denied justice but also the state. In the Chevron v. Ecuador case, Ecuador has been confronted with the risk of being rendered defenceless not only during current proceedings but also due to the lack of an adequate process which can be followed in case of a breach of an investment agreement. Investors can choose to have their disputes resolved either by the national courts or by an international tribunal. States do not have this power of choice and thus are left in an arena that many do not find hospitable to their circumstances. 16.5.1

Access to Resources

It is no secret that the costs of international arbitration, commercial or investment, have increased in the past few years. Institutions (when applicable), arbitrator/s, lawyers, experts, document production, travel expenses, etc., have heavily impacted the amount of resources needed to adequately pursue or defend international arbitral claims. A greater problem arises, however, when the resources available to one party are seriously disproportionate to those of its adversary. Since its origin, international arbitration has aimed to strike a balance between two parties that are unequal by definition. Unfortunately, what began as a mechanism for dispute resolution, aiming to grant equal rights and obligations to the parties, evolved into a system, where the scale currently often favours the investors. This lack of balance adversely affects the state’s interests given that the system presumes that states have unlimited resources. In the case filed by Chevron against the Republic of Ecuador, the disparity in the parties’ respective resources is obvious. Ecuador’s limited access to resources affects its capacity to be able to adequately reply to the arsenal of lawyers, experts, document production, document requests, press, and more. 75 76

Source: Central Bank of Ecuador. M. Isikoff, ‘A $18 Billion Problem’ (Newsweek, 26 July 2008) quoted in Hartley 2011, supra note 7, p. 309.

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While all these proceedings have been taking place nationally and internationally, Ecuador has been forced to utilize enormous amounts of financial and human resources. Nevertheless, despite all efforts, the assets available are not nearly enough to compete with the funds which Chevron-Texaco are utilizing in these proceedings. For example, in addition to the arbitration, the Government of Ecuador has been obliged to answer to many discovery actions commenced by Chevron-Texaco in the US courts and to initiate some discovery actions of its own to obtain evidence for the arbitration. In that regard, section 1782 of title 28 of the US Code is a federal law that allows litigants who are parties to legal proceedings outside of the United States to appear before a US Court to obtain evidence for use in a process outside of the United States.77 Table 16.2 Number of actions filed by the parties under Section 1782 of title 28 of the US Code78 Chevron

Ecuador

Actions

25

14

Jurisdiction

19

6

Total

44

20

As can be seen in this chart, Chevron has filed more than double the amount of actions under Section 1782 actions in the United States. All these requests imply a need to hire lawyers and experts. In lawyers’ fees, from April 2010 to April 2011, Chevron paid Gibson Dunn approximately $ 30.6 million for litigating its 28 U.S.C. § 1782 actions,79 and from December 2008 until November 2011, it paid Jones Day approximately $ 38.08 million for legal work related to the Lago Agrio litigation in Ecuador.80 Furthermore, Chevron-Texaco has built a large team with unlimited financial and human resources of more than 150 lawyers.81 These

77 78 79 80 81

28 U.S. Code § 1782. Information provided by Chevron in the RICO Case and based on the research conducted by the Procuraduria General del Estado of Ecuador regarding its own files. See Declaration of Verónica Jones on 5 March 2012. See Declaration of Louise Hecket on 5 March 2012. Chevron’s Appendix to its Privilege Log (Exhibit C) filed in the RICO action. See, for example, Covington & Burling LLP (counsel for Ricardo Reis Veiga); Enrique Armijo, Jason Criss, Thomas (“TL”) Cubbage, Emily Holness, Natalie MacLean Leino, and AlanVinegrad.Donoso & Donoso Asociados (counsel for Ricardo Reis Veiga and Rodrigo Pérez Pallares); Jaime Rodrigo Donoso, Emiliano Javier Donoso Vinueza, and David E. Rivas Vinueza.Rivero Mestre LLP (counsel for Rodrigo Pérez Pallares); Paula Aguila, Leigh-Ann Buchanan, Claudia Colon, Carolina Cruz, Paul Dans, Catherine Grieve, Mariely Letona, Aylia Licor, Andrea De Lima, Alex Lorido, Jorge A. Mestre, Ana Muñoz, Consuelo De La Ossa, Victor Pelaez, Daniel Pelugyai, Andres Rivero, Adria Rodriguez, Alan Rolnick, Charlene Seda, Will Silcott, Alicia Torres, Rafaela

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values do not include the costs assumed by Chevron on the BIT litigation against Ecuador, lobbyists and media campaigns. In contrast, during the 2008 – 2011 period, Ecuador only spent $ 25 million. It is necessary to consider that those funds belong to the public, it is public money that otherwise could have been spent to satisfy the needs of Ecuador´s population, e.g. in education or welfare. Taking this information into consideration, Ecuador simply cannot fully compete with the legal ‘machinery’ Chevron-Texaco is employing against Ecuador.

16.6

CONCLUSIONS

The case between Ecuador and Chevron is not new; it has been debated in all kinds of forums, litigated in courts around the world and arbitrated before several arbitral tribunals, without mentioning the media arguments and the lobbyists’ interventions. Moreover, there is no certainty as to when this case will come to an end. Texpet invested in Ecuador through a concession agreement signed in 1964, after several corporate decisions taken by Texaco and the state-owned company CEPE (later named Petroecuador). The consortium explored and exploited oil until 1992, the year in which Texpet removed all its assets and personnel from Ecuador. In 1993, a group of citizens from the area where Texpet carried out its activities filed a claim at the SDNY for cleaning up polluted areas. Meanwhile, in 1995 and 1998, two agreements were signed between Texpet and the Ministry of Energy, releasing Texaco from its duty to remedy those areas which were polluted because of the oil exploitation. Texpet, however, had carried out mediocre work and had left several instances of environmental, social, and health damage in the various concerned areas. Nevertheless, the company thought that it was immune from any further action brought by the local people who suffered from the negative impact of Texaco’s activities. In 2002, the SDNY decided that it was not the adequate forum to try the case and that the claimants should go to Ecuador. In 2003, Aguinda et al. commenced proceedings in Lago Agrio. While the case was still pending in Ecuador, Chevron (now the owner of Texaco) commenced arbitration against Ecuador in 2009 based on the USEcuador BIT, which came into force on 11 May 1997. Chevron alleged that a claim could be brought under the BIT because the investment, which was made in 1964, continued in existence during the 1995 and 1998 settlement agreements and the case brought by Aguinda et al. in 2003. In deciding on the jurisdiction question, the PCA ignored the fact that Texaco left Ecuador in 1992, almost five years before the BIT entered into force. The PCA adopted an extremely broad interpretation of the definition of ‘an investment’. The PCA found that

Vianna, Erimar Von Der Osten, and Charlie Whorton.Williams & Connolly LLP (counsel for Ricardo Reis Veiga); Kevin Baine, Robert Cary, Peter Kahn, Christopher Looney, Beth Stewart, and Brendan Sullivan.

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the link between the concession agreement, the settlement agreements, and the case brought by the citizens constituted a sufficient connection on which it could decide that the investment still existed regardless of the form it had now taken. In the author’s opinion, this broad interpretation opens the door for claims to be brought irresponsibly, without considering their negative consequences for developing states. Chevron brought a claim against Ecuador, claiming denial of justice. Proceedings were commenced in 2009 without awaiting the decision of the highest Ecuadorean Court, i.e. without granting the Ecuadorean legal system the opportunity to amend any possible errors by the lower courts. This investment arbitration was commenced prematurely and the arguments presented by Chevron are ill founded. On 12 November 2013, the National Court of Ecuador rendered its decision, and the fact that it was only partially favourable to Chevron does not mean that it was an erroneous decision or that it had violated Chevron’s rights. Moreover, an action is currently pending before the Constitutional Court of Ecuador, due to alleged constitutional violations committed by the Ecuadorean courts during the development of the case.82 This supports Ecuador’s arguments that Chevron had access to the courts and that its claims were heard and decided upon; furthermore, it proves that Chevron’s claims were filed prematurely before the international arbitration court without granting the national legal system an opportunity to run its course. Consequently, Ecuador argues that all of Chevron’s claims are meritless. As discussed above,83 justice can be considered denied when the national courts refuse to entertain a case, when there is undue delay in the administration of justice, when justice has been served in a seriously inadequate manner, or when there has been a malicious application of the law.84 However, I have pointed out in this chapter, denial of justice can also affect a state. I have referred to situations such as what happens when an investment arbitration tribunal refuses to provide an answer to the requirements of the state? Or when the tribunal takes several weeks to reply to an ‘urgent’ request by the state? Or when the tribunal responds promptly to an investor’s application but fails to decide on similar applications by the state over a period of some years? Or when the tribunal has prejudged a case or has summarily dismissed a state’s response? The author concludes that there is no one who can judge such an action and that in the case Chevron v. Ecuador, Ecuador believes that it has not been fairly treated by the PCA. The principle of due process aims to ensure that justice is served. This should not be exclusively guaranteed to the investor but to the state as well. The rights of both the investor and the state ought to be respected. Just as the investor has the right to be heard and fully present its case, so too must the state be afforded these same rights. 82 83 84

Action filed on 23 December 2013. See supra p. 4. Robert Azinian, Kenneth Davitian, and Ellen Baca v. The United Mexican States, supra note 63, para.102.

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BIBLIOGRAPHY BOOKS Dolzer, R. & Schereuer, C., Principles of International Investment Law, 1st edn, Oxford: Oxford University Press, 2008. Hartley, T., International Commercial Litigation, 3rd edn, Cambridge: Cambridge University Press, 2011. Paulsson, J., Denial of Justice in International Law, 1st edn, Cambridge: Cambridge University Press, 2010. Salacusse, J. W., The Law of Investment Treaties, 1st edn, Oxford University Press, 2009.

ARTICLES Vis-Dunbar, D., ‘Pantechniki S.A. Contractors & Engineers v. The Republic of Albania: Fork-in-the-road provision partially bars claim by Greek investor’, IISD, 2 September 2009. Available at: .

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Part IV Future Outlook

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AND

INVESTMENT LAW

BETWEEN

INTERNATIONAL

OR

JUXTAPOSING DIFFERENT

TOPICS? Gabriel Bottini and Martijn Scheltema*

17.1

INTRODUCTION

In this concluding chapter, we elaborate on the outlook of the relationship between international investment law and the environment. We start by analysing general legal approaches, such as the recent paradigm shift in the objectives of International Investment Agreements (IIAs) and the complications that arise in connection with integrating environmental concerns in IIAs. This chapter then focuses on the involvement of relevant stakeholders in implementing environmental issues in IIAs. It is suggested that a broader stakeholder engagement may be required to ensure a balanced and transparent treaty negotiation process, as well as genuine engagement of affected communities in the resolution of disputes between the investor and the host state. Further, this contribution discusses whether corporate social responsibility (CSR) frameworks can be a useful tool in addressing environmental concerns in the context of international investment law. Reference is then made to the complexity arising from the attempt to integrate environmental norms into international investment law. International investment law traditionally focuses on investment promotion and protection. These are the main goals, which are reflected in investment agreements and decisions of arbitral tribunals. We note that in arbitral decisions, the environmental norms, which are incorporated in the new generation of IIAs, as will be elaborated hereinafter, often have not been taken into consideration. Indeed, whether environmental rules and concerns have real impact in investment practice depends, on a large extent, on the way in which they are considered (or not) by investment tribunals. Therefore, this chapter concludes with an analysis of the role of environmental issues in the decisions of investment tribunals and of the topics that merit further consideration in this respect.

*

Gabriel Bottini is an arbitrator and advisor on issues of international law and international litigation; he is Adjunct Professor of Public International Law at the University of Buenos Aires. Martijn Scheltema holds the chair of Enforcement Issues in Private Law at the School of Law of Erasmus University in Rotterdam.

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17.2

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INTERNATIONAL INVESTMENT AGREEMENTS ENVIRONMENT/HUMAN RIGHTS

17.2.1

AND THE

PROTECTION

OF THE

Paradigm Shift

One of the important objectives of IIAs is the protection of investors’ interests.1 Many of the foregoing contributions elucidate that this objective, at least in some recent IIAs, has been supplemented by public policy objectives, such as the protection of the environment and human rights. This raises the question whether IIAs are the proper tools to bridge the gap between international investment law and the environment (as well as other issues such as human rights, which might be related to environmental concerns) and whether future IIAs will develop into instruments to protect investments as well as the environment (and human rights). Some considerations suggest that integrating environmental objectives in IIAs might be useful. As most people would agree, environmental issues (as well as human rights) can no longer be ignored in connection with investments. Furthermore, sustainability, which prominently includes environmental issues, is important for long-term business operations. Not surprisingly, the United Nations Conference on Trade and Development (UNCTAD) Investment Policy Framework for Sustainable Development (IPFSD), which has been described in the contributions of Levashova and Joubin-Bret, suggests, amongst other things, the inclusion of non-economic concerns in IIAs. The insertion of environmental objectives in IIAs, by way of clarifications, exceptions, or carveout clauses,2 can assist states in promoting related public interest objectives. Additionally, it can prevent foreign investors from bringing legal actions against a host state in order to circumvent national environmental law, administrative decisions, or judgments of national courts. The absence of environment-friendly clauses in IIAs can make it challenging for states to demonstrate the importance of environmental considerations in the context of a specific investment dispute; and it hampers states to progressively develop their national regulations on environmental protection, particularly if their investment agreements include some kind of stabilization clause. Stabilization clauses are seen as “freezing” the law applicable to the investment, thereby complicating subsequent changes in environmental norms and standards. The threat of potential

1

2

Of course, treaties in this field generally seek to “maintain a careful balance between the interests of investors and those of host States”. See the Report of the Executive Directors on the ICSID Convention, para. 13. For definition of these categories of clauses, please see Chapter 1, ‘Innovative legal solutions for investment law and sustainable development challenges’, by Marie-Claire Cordonier Segger and Chapter 8, ‘Investment Arbitration in the Nuclear Energy Sector: Environmental Protection versus Investor Protection’ by James Fry and Odysseas G. Repousis in this volume.

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disputes leading to (expensive) investment arbitration makes governments afraid to implement higher environmental standards or otherwise take measures to protect the environment. Furthermore, recent history has demonstrated that final judgments of national courts on environmental damage are successfully contested in investment arbitrations or in national courts of the investor’s home state.3 The result of this might be that the affected parties are unable to enforce a final judgment (rendered in the host state) dealing with environmental damage, against assets of the investor outside the host state.4 A further problem is that IIAs without explicit environmental objectives might encourage developing countries not to further develop their environmental norms or fail to actively enforce them, in order to attract investments or because of the just-mentioned threat of or involvement in (rather costly) investment arbitrations. The case study that focuses on Indonesia by Lambooy, Prihandono, and Barizah is a good example of the challenges faced by developing countries in the field of FDI, in light of environmental considerations. This is also shown by Joubin-Bret through the example of carbon leakage to countries with lower environmental standards. As Asteriti points out, it is questionable whether investors’ expectations are dependent on the local regulatory environment. In considering whether to invest or not, investors are usually influenced to a much larger extent by, for example, expectations of profitability in a certain region, the availability of certain scarce natural resources, and synergies with other activities already performed or to be performed. However, the above-mentioned problem might not be salient in case international environmental obligations and supervision, for example, in respect of reducing carbon emissions, are imposed on the host state in treaties on carbon emission aside from investment obligations. Thus, international obligations arising from an IIA might collide with the provisions of other treaties (e.g. on carbon emission). An interesting exposé is provided by Asteriti on this topic. As Asteriti indicates, three main tools are available for the resolution of such conflicts of obligations under international law: 1) hierarchy (lex superior), 2) temporality (lex prior or lex posterior), and 3) specificity (lex specialis). IIAs do not have a higher ranking than environmental obligations. In certain instances, it may be possible to argue that international environmental obligations are more specific (as long as the environment is concerned) and should prevail (although this mays still give rise to international responsibility issues under an IIA). Therefore, a solution for developing countries might be to engage in regional treaties on environmental protection, to the extent that specific 3 4

See, e.g. the Lago Agrio case (Chevron v. Ecuador) discussed in 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. Id., the Lago Agrio case.

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environmental norms that meet their purposes do not exist on the global level. Developing and developed countries might also seek regional collaboration to strengthen their environmental demands, as well as consider becoming parties to instruments such as the Espoo Convention on Environmental Impact Assessment in a Transboundary Context. Furthermore, Asteriti contends that IIAs should not result in non-compliance with human rights obligations or with the public order of the host state either. Although environmental protection issues do not always generate pressing public order problems, they might raise human rights issues. If so, this might be a way to overcome the lack of sufficient policy space under IIAs to address environmental issues. However, investment arbitrations might still be initiated, as investors may question whether the human rights issues indeed prevent compliance with IIAs. The foregoing tends to show that it is important to include environmental (and human rights) concerns in IIAs. This is reflected by Guiding Principle 9 of the United Nations Guiding Principles on Business and Human Rights (UN DOC A/HRC/17/31), which addresses the need for states to maintain an adequate domestic policy space on human rights issues when signing investment treaties or contracts. As developing countries face greater social and economic needs than developed countries, they might have a greater need for this policy space. This can be achieved through the inclusion of specific environmental concerns and more general sustainable development goals in IIAs that ultimately will, as Joubin-Bret suggests, support the implementation of new environmental (clean) technology and environmentally sound management practices by host states. Not surprisingly, UNCTAD’s IPFSD (i) explicitly recognizes the role of foreign investment as a primary driver of economic growth and development as well as the pivotal role of investment policies for development; (ii) expresses 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) advertises a shared recognition of the need to promote responsible investment as a cornerstone of economic growth and job creation.5 The foregoing is clearly recognized by parties negotiating IIAs, and the trend at the moment is towards addressing environmental concerns in IIAs. If environmental provisions are not included in IIAs, environmental protection (by international law through IIAs) has significantly less chances of becoming an influential factor in international investment law.

5

See Chapter 2, Protecting the Investor and Protecting the Environment: Conflicting Objectives in International Investment Agreements?’, by Anna Joubin-Bret in this volume

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Environmental Norms/Standards in International Investment Agreements?

The question remains whether environmental concerns should be dealt with either by including substantive environmental rules/norms in the text of the IIAs themselves or by qualifying, for example, indirect expropriation and fair and equitable treatment provisions or through the inclusion of explicit exceptions or carveouts for governmental environmental regulation. The answer depends on the objectives IIAs should aim at. Should the substantive rules/norms in the text of IIAs contribute to environmental protection? Or should the text of IIAs just include rules/norms limited to investor protection, perhaps only with clarifications, exceptions, or carveouts for environmental rules/norms? Countries take different angles on this topic. As Pfumorodze and Da Gama describe, Article 12 of the United States (US) Model BIT (2012) reflects the importance of environmental laws and policies as well as multilateral agreements on environmental protection.6 It discourages states from promoting investments by weakening domestic environmental laws. Furthermore, each party retains its policy space in connection with environmental regulatory, compliance, and enforcement issues, as well as in connection with decisions on the allocation of resources. As Dimopoulos explains, in turn, the EU favours either a more precise scope of application for IIAs (that does not affect the host states’ ability to adopt environmental regulations) or general exceptions providing the right to regulate on environmental issues. This imports a trend towards not including stand-alone environmental rules in the IIAs themselves, leaving environmental regulation to the host states, but to rely on clarifications, exceptions, or carveouts. These clarifications, exceptions, or carveouts might prevent constraints on social and environmental regulators and policymakers. They may also provide the flexibility needed. If, on the other hand, environmental norms are implemented in the IIAs themselves, these norms are not easily altered. In order to assure the flexibility needed by the host state to adapt its environmental norms, clarifications will still be needed. Views on the usefulness of exceptions or carveouts in IIAs to address environmental concerns are far from unanimous. General exceptions appear to be useful, but they are generally interpreted narrowly vis-à-vis investment protection by arbitrators. This, as Cordonier-Segger explains, sometimes results in parallel chapters in side agreements on environmental or social cooperation between contracting states. Specific carveouts or clarifications might also be helpful regarding more specific environmental issues. However, some tribunals have taken the position that when the interpretation of provisions in IIAs is not clear, these provisions should be interpreted in favour of investors in 6

Art. 12, US Model BIT (2012). Available at accessed 17 July 2014.

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order to reach the objective of investor protection.7 Obviously, this does not mean that environmental concerns are unimportant, but that contracting parties have to be careful in drafting and implementing exceptions, clarifications, and carve-outs in IIAs in connection with environmental issues. Although IIAs, as is elaborated in the foregoing, play an important role in addressing environmental concerns, they are not the “silver bullet” in connection with improving the global environment. At best, they involve clarifications, exceptions, or carveouts in connection with environmental concerns and do not set clear rules on how to handle the environmental and other public interest issues. For example, an IIA might include an exception or carveout for regulations on greenhouse gas emissions without, however, regulating these emissions. As long as the host state does not adhere or refuses to adapt national standards to treaties on the mitigation of climate change, the IIA will not contribute by itself to the reduction of greenhouse gas emissions. Moreover, as Gattini explains, state responsibility for environmental damage is not easily established, and no general international framework exists for environmental damage caused by individuals. Therefore, liability for environmental damage will not be a strong driver for the improvement of the environment in the near future either. Hence, a holistic environmental approach is required, which involves the adaptation of IIAs, but it is not limited to these treaties. A closer collaboration between environmental governmental institutions and those negotiating investment provisions is required on the national, regional, and global level in order to improve environmental standards. This requires a change in the majority of the current policies, a better understanding of environmental standards (including through training of arbitrators as well as policymakers), and the engagement of environmental expertise in the drafting process of IIAs. Furthermore, an assessment of the environmental impact of envisaged new investments following a future IIAs might be useful before concluding this treaty.

17.2.3

Stakeholder Engagement and International Investment Agreements

A topic related to the foregoing is stakeholder engagement in connection with drafting (model) IIAs. It is admitted that the aforementioned holistic approach involves thorough stakeholder engagement in the drafting process. The scope of this stakeholder engagement should not be limited to governmental environmental organizations and investors. It should be a multi-stakeholder process, which is, for example, conducted in the United States, unlike, for example, the Netherlands, which has only engaged the business sector

7

See, e.g., SGS Société Génerale de Surveillance v. Republic of the Philippines, ICSID Case No. ARB/02/6, Award of 29 January 2004, para. 116.

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in the drafting process of its model IIA. Engaging relevant stakeholders (not only in the drafting process of model IIAs but also in the process of drafting IIAs) in the home and host states improves the chances of stakeholders to articulate their social and/or environmental concerns. The more the relevant stakeholders are given a voice (amongst whom are the people arguably affected and non-governmental organizations (NGOs)) and the more the home and host states (as well as the investors) are willing to address these concerns, the greater the positive social and environmental impact an IIA may have. Obviously, stakeholder engagement is a time-consuming process. However, it might prevent future social and environmental disputes, which can be time-consuming and costly for all parties, as litigation in national courts and investment arbitration cases show. Therefore, multi-stakeholder consultation processes should be (and in some instances already are) initiated in connection with the drafting process of model IIAs. That said, the multi-stakeholder approach should not be limited to the drafting process of model IIAs. Many national environmental standards require, for example, environmental impact assessments and guarantee funds to make up for environmental impacts. Environmental impact assessments might require stakeholder engagement at the local level. Obviously, local environmental disputes require stakeholder engagement at the local level too. To date, IIAs limit stakeholder engagement to (national or international) environmental regulation or domestic authorities. However, the aforementioned holistic approach might change this in the (near) future. IIAs might be a good platform to implement rules/standards on local stakeholder engagement regarding environmental and social issues, also in connection with possible disputes at the local level. If the state parties have implemented proper procedures, the IIA could simply refer to those rules. If not, a more elaborated approach in the IIA might be needed. In this connection, reference may be made to the global principles of administrative law which, amongst other things, entail best practices on stakeholder engagement and other initiatives on stakeholder engagement.

17.2.4

Referral to International Corporate Social Responsibility (CSR) Frameworks Next to Governmental Regulation?

To date, the debate on including social and environmental concerns/norms/standards in IIAs has been generally confined to social and environmental norms established by treaties or national regulation. However, the environmental and human rights spheres are broader than this and involve codes of conduct, standards, and frameworks, which do not originate solely from national governments and are not legally binding in the traditional sense. Well-known examples are the aforementioned UN Guiding Principles on Business and Human Rights and the Organisation for Economic Co-operation and

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Development (OECD) Guidelines for Multinational Enterprises.8 Other international frameworks entail reporting requirements on social and environmental performance, such as the Global Reporting Initiative.9 These frameworks have an impact on national or regional regulation. For example, nowadays, the European Commission puts great emphasis on these frameworks in the CSR policy and is still hesitant to adopt European regulation in this area (other than regulation in the field of corporate nonfinancial reporting).10 The question arises whether these frameworks should be part of the environmental and social concerns/rules/standards implemented in IIAs. Some considerations suggest that they should be. Obviously, it is not sufficient to implement clarifications, exceptions, or carveouts in IIAs in connection with these frameworks if governments desire the investor to adhere to these norms, as these frameworks are not legally binding per se. Therefore, IIAs might be used to render these CSR standards binding on investors. If governments at the global level disagree on certain environmental standards, addressing them in IIAs (in connection with national regulation or international treaties) might not contribute much to the improvement of the global environmental situation. Conversely, adherence to the aforementioned international CSR standards might improve the practice of complying with environmental standards without any international governmental agreement on those standards. However, especially host states might consider the CSR standards developed by “western” NGOs or multi-stakeholder initiatives (including “western” governments) as “western” standards (which hamper their development) and oppose referring to these frameworks in IIAs. These standards might, for example, not be in compliance with their national legislation or might favour “western” business in the view of these countries.11 Notwithstanding this, as the number and importance of the aforementioned international CSR frameworks (especially the multi-stakeholder initiatives which involve governments, businesses, and NGOs) increases, a reference to these international CSR frameworks in IIAs becomes unavoidable in connection with environmental concerns in the future. However, to date, the environmental effectiveness of these

8

9 10

11

See the Human Rights Council, ‘Guiding Principles on Business and Human Rights: Implementing the United Nations Protect, Respect and Remedy Framework: Report of the Special Representative of the Secretary General on the Issue of Human Rights and Transnational Corporations and Other Business Enterprises’, A/HRC/17/31, 21 March 2011. See also the OECD Guidelines on Multinational Enterprises 2011. Available at accessed 7 June 2014. See the Global Reporting Initiative. Available at accessed 16 July 2014. Communication from the Commission on a renewed EU strategy 2011-14 for Corporate Social Responsibility of 25 October 2011, COM (2011) 681, pp. 5, 9, 10. Available at accessed 16 July 2014. See, e.g. M. Scheltema, ‘Assessing Effectiveness of International Private Regulation in the CSR Arena’, Richmond Journal of Global Law and Business, Vol. 2, 2014, p. 305.

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frameworks is scarcely assessed and, therefore, the question as to which effective framework should be implemented in IIAs remains unanswered.12 The best way to implement these frameworks in IIAs also remains unclear.13 These issues definitely need to be further researched in the future. The foregoing has focussed on substantive norms in connection with environmental issues and the possibilities and necessity of implementing them in IIAs. However, it is also important to examine how environmental concerns are dealt with by investment tribunals. The following section addresses this topic.

17.3

ENVIRONMENTAL ISSUES

IN THE

DECISIONS

OF INVESTMENT

TRIBUNALS

International investment tribunals occasionally dealt with issues connected to the protection of the environment since the early years of modern investment arbitration. The extent to which environmental concerns have had a concrete impact on the final decision on liability and damages, however, is less clear. This is probably also true with respect to other public interest issues, such as human rights. As regards environmental concerns, two relatively early cases of the modern era illustrate this point.

17.3.1

Metalclad v. Mexico

In the well-known Metalclad case, the claimant alleged that Mexico had interfered with the “development and operation of a hazardous waste landfill”.14 This was said to constitute a breach of the North American Free Trade Agreement (NAFTA) provisions on the international law minimum standard of treatment and fair and equitable treatment (FET) (Article 1105) and on expropriation (Article 1110).15 In 1990, the Federal Government of Mexico had authorized the construction and operation of a transfer station for hazardous waste and later granted a federal permit to Metalclad for the construction of the hazardous waste landfill, in whose vicinity 800 people lived.16 The State of San Luis 12 13

14 15 16

Id., Scheltema 2014, p. 277 et seq. Currently, some IIAs and trade agreements refer to CSR standards. For example, see EU-Colombia-Peru Free Trade Agreement 2010 (signed); the China-Japan-Republic of Korea investment agreement, 2012 (signed). Other examples exist as well. For example, the European Union has adopted legislation in connection with illegal deforestation which refers to CSR standards as a means to show the required due diligence. See Art. 4 of Council Regulation 995/2010, Laying Down the Obligations of Operators Who Place Timber and Timber Products on the Market, Art. 4, 2010 O.J. (L295) 23. Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000, para. 1. Id. See also the North American Free Trade Agreement Implementation Act, SC 1993, c 44, Art. 1105 and Art. 1110. Id., Metalclad Corporation v. The United Mexican States, supra note 14, paras. 28-29.

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Potosi subsequently granted a state land use permit for the landfill’s construction,17 which was opposed by the municipality of Guadalcazar due to the absence of a municipal construction permit.18 The landfill’s construction was, nonetheless, finished in March 1995.19 In September 1997, an Ecological Decree was issued by the federal government including the landfill’s site within a “Natural Area”; Metalclad argued this Decree “effectively and permanently precluded the operation of the landfill”.20 The tribunal stated that the dispute had to be decided in accordance with NAFTA and the applicable rules of international law.21 However, the tribunal’s interpretation of Mexican law turned out to be instrumental for the decision.22 Although the parties’ expert evidence on the issue was conflicting,23 the tribunal found that “as to hazardous waste evaluations and assessments, the federal authority’s jurisdiction was controlling and the authority of the municipality only extended to appropriate construction considerations”.24 Thus, according to the tribunal: [T]he denial of the permit by the Municipality by reference to environmental impact considerations in the case of what was basically a hazardous waste disposal landfill, was improper, as was the municipality’s denial of the permit for any reason other than those related to the physical construction or defects in the site.25 This finding – together with certain actions by the municipality following its denial of the municipal construction permit26 – was the main basis for the tribunal’s conclusion that Mexico had breached NAFTA Articles 1105 and 1110.27 In analysing the expropriation claim, the tribunal added that the municipality acted ultra vires when denying “the local construction permit in part because of the Municipality’s perception of the adverse environmental effects of the hazardous waste landfill and the geological unsuitability of the landfill site”.28 The tribunal also found “as a further ground

17 18 19 20 21 22 23 24 25 26 27 28

Id., para. 31. Id., para. 40. Id., para. 45. Id., para. 59. Id., para. 70. Id., paras. 81-86. Id., para. 81. Id., para. 86. Id. Id., paras. 99-101. Id., paras. 101, 104. Id., para. 106.

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for a finding of expropriation the Ecological Decree”.29 The environmental reasons that led to the adoption of the Ecological Decree had no place here: The Tribunal need not decide or consider the motivation or intent of the adoption of the Ecological Decree. Indeed, a finding of expropriation on the basis of the Ecological Decree is not essential to the Tribunal’s finding of a violation of NAFTA Article 1110. However, the Tribunal considers that the implementation of the Ecological Decree would, in and of itself, constitute an act tantamount to expropriation.30 Even leaving aside the tribunal’s disregard of NAFTA Article 111431 and its controversial extensive reading of the treaty standards,32 it may be asked whether, had the tribunal accorded a more prominent role to environmental issues, the outcome would have been different. The decision does not seem to question that ‘the municipality’s perception of the adverse environmental effects’ was genuine. Further, the decision was mainly based upon a contested issue of Mexican law relating to the scope of local governments’ powers, despite the fact that only international law provisions were referred to as the applicable law.33 It is not inconceivable that environmental considerations, which have gained more and more recognition in international law,34 could have led to a finding that the municipality’s actions – based upon genuine environmental concerns but perhaps not warranted in terms of the latter’s national law powers – had not, at least per se, breached international law. Similarly, as to the Ecological Decree, there seems to be no compelling reason why its environmental motivations must be wholly disregarded, for instance, for

29 30 31

32 33 34

Id., para. 109. Id., para. 111. Id., para. 98 (“[The conclusion that the Municipality’s insistence upon and denial of the construction permit was improper] is not affected by NAFTA Article 1114, which permits a Party to ensure that investment activity is undertaken in a manner sensitive to environmental concerns”). On the fair and equitable treatment standard, see id., para. 99; on the expropriation concept, see id., para. 103. Id., para. 70. As already noted, Art. 1114 of NAFTA expressly recognizes the need to take into account environmental concerns. This provision, which is entitled “Environmental Measures”, reads as follows: “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. Accordingly, a Party should not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such measures as an encouragement for the establishment, acquisition, expansion or retention in its territory of an investment of an investor. If a Party considers that another Party has offered such an encouragement, it may request consultations with the other Party and the two Parties shall consult with a view to avoiding any such encouragement”.

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purposes of determining whether it was a regulatory measure (giving way to no right to compensation) or an indirect expropriation.

17.3.2

Companía del Desarrollo de Santa Elena v. Costa Rica

The Santa Elena case involved a direct expropriation by Costa Rica of a property owned by a Costa Rican corporation, whose majority shareholders were US citizens.35 The claimant did not contest the expropriation itself but only the compensation offered by Costa Rica,36 the latter being the “sole issue” in the case.37 This issue was to be determined, applying the international law “principles and rules governing compensation”.38 In this case, it was “common ground between the parties, and the Tribunal agree [d], that the compensation to be paid should be based upon the fair market value of the Property calculated by reference to its ‘highest and best use’”.39 Relevant for present purposes, the tribunal then observed: While an expropriation or taking for environmental reasons may be classified as a taking for a public purpose, and thus may be legitimate, the fact that the Property was taken for this reason does not affect either the nature or the measure of the compensation to be paid for the taking. That is, the purpose of protecting the environment for which the Property was taken does not alter the legal character of the taking for which adequate compensation must be paid. The international source of the obligation to protect the environment makes no difference.40 The Tribunal’s reference to an international obligation to protect the environment is noteworthy. But, as in Metalclad, the fact that the state’s measure sought to protect the

35 36 37 38 39 40

Compañía del Desarrollo de Santa Elena, SA v. The Republic of Costa Rica, ICSID Case No. ARB/96/1, Award of 17 February 2000, paras. 1-3. Id., para. 19. Id., para. 56. Id., para. 67. Id., para. 70. Id., para. 71 (footnote omitted). See also id., para. 72 (“Expropriatory environmental measures—no matter how laudable and beneficial to society as a whole – are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains”). Interestingly, in the valuation section, the award transcribes a famous paragraph of the decision of the Iran-US Claims Tribunal in the Tippets case. Id., para. 77. This paragraph in Tippets is usually cited for the proposition that the government’s intent is irrelevant in an expropriation case. However, the paragraph does not say that the state’s intent is not relevant, but that it is ‘less important than the effects of the measure on the owner’. See id.

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environment made no difference either in terms of the obligation to compensate or as to the amount of compensation owed. The latter was to be defined according to “the principle of full compensation for the fair market value of the property, i.e., what a willing buyer would pay to a willing seller”.41 In fact, the valuation section of the award confers no relevance to the environmental reasons behind the expropriation.42 However, even beyond the principle of “full compensation” coupled with the “fair market value” concept, the tribunal noted that there was disagreement between the parties “as to the value of the Property derived by applying that principle”.43 The question then arises whether the environmental goals of a certain state measure may not be considered, even in the application of the general concepts of full compensation and fair market value, in order to determine the precise value of the affected property.

17.3.3

Further Developments in the Jurisprudence

The record of subsequent investment tribunals dealing with environmental or other public interest issues appears to be mixed. In Tecmed – another case against Mexico dealing with environmental issues and with “a controlled landfill of hazardous industrial waste”44 – the claim referred basically to damages arising from the rejection of the application to renew the authorization to operate the landfill.45 In interpreting the Mexico-Spain BIT’s provision on expropriation, the Tecmed Tribunal found: [N]o principle stating that regulatory administrative actions are per se excluded from the scope of the Agreement, even if they are beneficial to society as a whole—such as environmental protection—, particularly if the negative economic impact of such actions on the financial position of the investor is sufficient to neutralize in full the value, or economic or commercial use of its investment without receiving any compensation whatsoever.46 The Tecmed Tribunal, however, went on to analyse whether the measures in question were “proportional to the public interest presumably protected thereby and to the

41 42 43 44 45 46

Id., para. 73 (emphasis added). Id., paras. 75-95. Id., para. 74. Técnicas Medioambientales Tecmed SA v. The United Mexican States, ICSID Case No. ARB (AF)/00/2, Award of 29 May 2003, para. 35. Id., para. 39. Id., para. 121.

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protection legally granted to investments”.47 In the end, however, it noted that the nonrenewal had been mainly based on “sociopolitical concerns” rather than on environmental considerations.48 The tribunal drew a distinction between environmental considerations and community groups’ opposition to the hazardous waste landfill, given its proximity to an urban centre.49 This distinction appears questionable in the opinion of the authors. Interestingly, however, the tribunal found that it could “consider general equitable principles when setting the compensation owed to the Claimant, without thereby assuming the role of an arbitrator ex aequo et bono”.50 Further, the tribunal stated that, for purposes of establishing the market value of the investment, it would take into account inter alia “the existence of community pressure against the location of the landfill at its current place and that such pressures and the location would have jeopardized the operations of the landfill in the long run”.51 Certain subsequent decisions appeared somewhat more open to acknowledge the legitimate interest of state authorities and other interested parties in the protection of the environment. In Methanex, the claimant argued that a ban by the State of California on the sale and use of the gasoline additive known as “MTBE” breached the US obligations under NAFTA Articles 1102, 1105, and 1110.52 The tribunal referred in general to the fact that Methanex had entered into an economy where environmental issues were closely monitored and regulated.53 And although the environmental aspects of the case were not material to the decision on the merits,54 they did have an impact on a jurisdictional point. The tribunal found that the relevant US authorities had “acted with a view to protecting the environmental interests of the citizens of California, and not with the intent to harm foreign methanol producers”.55 This was one of the reasons upon which the tribunal concluded that the measures in question did not “relate to” Methanex or its investments in the terms of NAFTA Article 1101(1).56 As a general matter, nonetheless, one is hard-pressed to find several instances in which environmental issues57 had a decisive and concrete impact on the resolution of

47 48 49 50 51 52 53 54 55 56 57

Id., para. 122. Id., paras. 129-130. Id., para. 140. Id., para. 190 (emphasis added). Id., para. 193 (emphasis added). Methanex Corporation v. United States of America, UNCITRAL, Final Award of the Tribunal on Jurisdiction and Merits of 3 August 2005, Part I, Preface, paras. 1, 4. Id., Part IV, Chapter D, para. 9. See id., Part IV, Chapters B, C, and D. Id., Part IV, Chapter E, para. 20. Id., para. 22. The same is true with regard to the closely connected issue of human rights. Further, tribunals have expressly denied the relevance of human rights even in circumstances in which their relevance was at least arguable. See CMS Gas Transmission Company v. The Argentine Republic, ICSID Case No. ARB/01/8,

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FUTURE OUTLOOK: BRIDGING GAPS

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investment arbitrations. This state of affairs, however, may change in the not too distant future. For one thing, some of the treaty developments discussed in the previous section should, in the medium term, have an impact on investment tribunals’ decisions. And as investment arbitration continues to grow, the interconnections with other areas of international law, including environmental law and human rights law, become inevitable (and desirable). Some of the issues that would merit further development in this respect include: (i) The relevance of national laws on the environment in the resolution of investment disputes. In investment arbitration, national laws are often part of the applicable law and should not, therefore, be considered as a fact.58 To the extent that a certain state measure has been adopted pursuant to a domestic law that seeks to protect the environment, this should weigh heavily in deciding, for example, whether this measure breaches the FET standard. In other words, tribunals should have due regard to national law. A measure taken to comply with this laws’ requirements, which is generally part of the law applicable to the dispute, should not form the basis of a finding of liability, unless there is a clear showing of a violation of international law. (ii) The relevance of treaties and customary law (and general principles of law) imposing obligations on states to protect the environment. Whenever international environmental and investment obligations are at stake in an investment dispute, it may not always suffice to simply say that the state has to comply with both (thereby in fact discarding the relevance of the environmental provisions). A more detailed consideration of the interplay between the different international obligations will often be warranted, in order to determine whether or not, on balance, the state has breached its investment obligations. (iii) Investment tribunals have often paid lip service to the notion that the existence of genuine public interest issues involved is relevant in distinguishing between a noncompensable regulation and an indirect expropriation. But, as noted, instances of a concrete impact of such issues on the resolution of liability and damages issues are not numerous. (iv) Finally, there is the delicate issue of the amount of compensation due in case of expropriation. Without attempting to even start to consider this issue here, an area for further development is whether genuine “environmental” reasons may not have a role to play in this field. Even under the principle of adequate compensation (or similar

58

Award of 12 May 2005, paras. 121 and 211 (stating that there was “no question of affecting fundamental human rights when considering the issues disputed by the parties”, and at the same time that there was “broad agreement on the fact that Argentina [had been] affected by a deep crisis of an economic, social and political nature”). J. Crawford, ‘Treaty and Contract in Investment Arbitration’, TDM 1, 2009, pp. 352-353. Available at accessed 7 March 2014.

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language, depending on the specific treaty), tribunals always have to take decisions on valuation issues (such as the method of calculating damages, the date of valuation, the interest rate, etc.) that may have a significant impact on the amount of compensation. There would seem to be no reason why, as a matter of principle, tribunals should not take into account the expropriation’s environmental motivations in deciding these valuation issues.

17.4

CONCLUSION

As discussed above, a paradigm shift seems to have taken place in connection with environmental issues and IIAs. Next to investor protection, the environment (as well as other fundamental public interest issues) is gaining importance. However, addressing these issues in IIAs is rather complicated in terms of ways to implement them. Moreover, it is not always clear which environmental norms apply and, if they conflict with each other, which one prevails. These norms might be set forth by national legislation, treaties, or international private or hybrid organizations. Furthermore, the interests of other stakeholders (aside from the investor and the home and host states) are by and large not implemented in IIAs, although some stakeholder consultation takes place in the preparatory phase of model IIAs, for example, in the United States. If environmental issues are addressed in IIAs, internalizing these interests gains importance, also in connection with disputes arising under IIAs. Several investment arbitrations illustrate the importance that, in theory, environmental concerns have in connection with IIAs and investment disputes. However, cases in which environmental issues had a decisive and concrete impact on the resolution of investment arbitrations remain scarce. Therefore, several issues would deserve further development to encourage the impact of environmental issues in investment arbitrations, amongst others (i) the relevance of national laws on the environment in the resolution of investment disputes, (ii) the relevance of treaties and customary law (and general principles of law) imposing obligations on states to protect the environment, (iii) the relevance of a genuine public interest issue in distinguishing between a non-compensable regulation and an indirect expropriation, and (iv) the issue of the amount of compensation due in case of an expropriation related to genuine environmental concerns.

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BIBLIOGRAPHY ARTICLES Crawford, J., “Treaty and Contract in Investment Arbitration”, TDM 1, 2009. Available at: accessed 7 March 2014. Scheltema, M., “Assessing Effectiveness of International Private Regulation in the CSR Arena”, 2 Richmond Journal of Global Law and Business, 2014.

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