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Copyright © International Chamber of Commerce (ICC). All rights reserved.
( Source of the document: ICC Digital Library )
by Jeremy K. SharpePartner, Shearman & Sterling; Former Chief of Investment Arbitration, U.S. State Department*
I want to touch briefly on three questions: First, are international investment agreements adequate and appropriate for resolving investment disputes involving important issues concerning the environment, including climate change? Second, how might States improve these agreements to promote environmental protection? Third, what trends can we identify in international investment treaty-making in matters affecting the environment?
First, are these agreements adequate? International investment agreements traditionally have been relatively short and drafted in minimalist terms. Older agreements typically do not define key substantive protections, including “fair and equitable treatment”, or provide significant guidance on when regulatory measures may be expropriatory. Many newer agreements, by contrast, are far more detailed and prescriptive, giving parties and arbitrators greater guidance for interpreting their provisions. Even modern international investment agreements, however, present challenges for resolving investment disputes impacting the environment. Let me touch on three.
First, there is an inherent tension in international investment agreements between a State’s desire to promote and protect foreign investment and the need to preserve adequate regulatory space at home.1 That is, States that conclude international investment agreements want to protect their investors abroad and attract foreign investment at home, but not necessarily at the cost of environmental protection, including mitigating the potentially catastrophic effects of global climate change.
A second issue is that international investment agreements do not clearly tell arbitrators how to resolve this tension, or where to strike the balance between protecting investments and safeguarding other important public policies, such as health, safety and the environment. An OECD study, for instance, found that only 8% of sampled international investment agreements explicitly address environmental issues.2 When treaties do address these issues, they rarely give arbitrators much specific guidance for resolving the tension between protecting foreign investment and preserving regulatory space at home.
Preambular language can guide the interpretation of an international investment agreement,3 but it often is vague and merely hortatory. The preamble to the U.S. model BIT, for instance, affirms the parties’ desire to effectuate the purposes of the agreement “in a manner consistent with the protection of health, safety, and the environment …”. That goal is surely commendable, but how does it affect arbitral decision-making?
Some States have included so-called “right to regulate” clauses in their newer international investment agreements. The 12-country Trans-Pacific Partnership (TPP) provides that:
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, health or other regulatory objectives.4
But if a measure is already “consistent with” the treaty, how much regulatory freedom does this clause actually afford TPP States in practical terms?5
A third issue is that international investment agreements do not tell arbitrators how to evaluate a respondent State’s determinations made under other applicable domestic or international law. Investment tribunals are loath to be seen as second-guessing a government’s decision-making authority6 or intruding into its specialized regulatory domain.7 But arbitrators cannot simply give unquestioned deference to domestic authorities’ decision-making without potentially depriving investors of any real measure of protection.
These three issues contribute to a lack of clarity and predictability in international investment adjudication, increasing costs and risks for investors and States alike. This, in turn, fuels criticism of international investment arbitration, undermining its legitimacy in some quarters.
The recent NAFTA Chapter Eleven award on jurisdiction and liability in Bilcon v Canada illustrates these concerns.8 The American claimants in that case had sought to develop a mining quarry and marine terminal on a sensitive shoreline in Nova Scotia. The project was rejected, following the recommendation of a joint federal and provincial environmental review panel. The panel embraced a concept it called “community core values,” which was not expressly reflected in the applicable Canadian law. The tribunal determined that the joint review panel had departed in fundamental ways from applicable law, had failed to give the claimants reasonable notice of the panel’s methodology, and had upset the legitimate expectations the claimants had formed when they decided to invest in the project. These deficiencies, the tribunal found, violated Canada’s obligations under NAFTA Chapter Eleven.
The arbitrator appointed by Canada, Professor Donald McRae, dissented on these issues. He stated:
What the majority has done is add a further control over environmental review panels. Failure to comply with Canadian law by a review panel now becomes the basis for a NAFTA claim allowing a claimant to bypass the domestic remedy provided for such a departure from Canadian law. This is a significant intrusion into domestic jurisdiction and will create a chill on the operation of environmental review panels. In the past, if they made an error — exceeded their jurisdiction or failed to comply with the law — they would have had their recommendations ignored by the governments to which they were made or overturned on review by a federal court. If the majority view in this case is to be accepted, then the proper application of Canadian law by an environmental review panel will be in the hands of a NAFTA Chapter 11 tribunal, importing a damages remedy that is not available under Canadian law.9
The issue of climate change similarly highlights the challenge of reconciling investor rights with environmental protection. In November 2015, the U.S. Secretary of State rejected TransCanada’s application for a Presidential Permit for the Keystone XL Pipeline. The pipeline reportedly would have carried more than 800,000 barrels of carbon-heavy petroleum daily from the Canadian oil sands to ports in the Gulf of Mexico. U.S. law required the Secretary of State to determine whether the pipeline was in the “national interest” of the United States.10 After years of study, the Secretary of State ultimately concluded that the pipeline was not in the U.S. national interest.11 The “critical factor” underlying Secretary Kerry’s determination was that “moving forward with this project would significantly undermine our ability to continue leading the world in combatting climate change”.12 President Obama concurred with Secretary Kerry, adding:
America is now a global leader when it comes to taking serious action to fight climate change. And frankly, approving this project would have undercut that global leadership. And that’s the biggest risk we face — not acting.13
The United States thus declined to approve the pipeline not simply because it would exacerbate climate change, but because it would undercut the U.S. government’s leadership in combatting climate change. How should investment treaties, and investment tribunals, deal with such issues, where a decision impacting investment affects not only environmental considerations but also a State’s national security and foreign policy interests?14
In light of these challenges, how can States improve international investment agreements to clarify in advance permissible or impermissible State action? Many States, of course, already are actively engaged in this exercise, including by better treaty drafting. Some broad-brush reforms include eliminating procedural rights or substantive protections that are deemed problematic (such as umbrella clauses);15 authorizing “public welfare notices,” to exclude certain claims from arbitration through joint treaty party control;16 and exempting from arbitration certain types of government activities (such as taxation).17 The 12 TPP countries, for instance, have carved out certain tobacco-related disputes from investment arbitration.18 But if States were simply to carve out disputes affecting the environment from BIT protection, it could open up a huge loophole and deprive many investors of substantive rights.
States have many other tools in their toolbox. Let me touch upon three.
First, States can define substantive treaty protections more clearly. Many newer international investment agreements (including U.S. and EU agreements) identify a number of factors that tribunals should look to when deciding whether regulatory conduct constitutes an indirect expropriation.19 These treaties also often clarify that:
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.20
This text gives arbitrators an interpretive steer, confirming that a high level of deference is owed to the State once important limiting criteria have been established.
Similarly, many States have sought to better define the fair and equitable treatment standard. The European Union, for instance, has limited fair and equitable treatment to concepts such as denial of justice, a fundamental breach of due process, targeted discrimination, manifest arbitrariness or abusive treatment.21 Many other States have sought to circumscribe the fair and equitable treatment standard by tying it to the customary international law minimum standard of treatment of aliens.22 The disagreement reflected in the majority and dissenting opinions in Bilcon, however, suggests that additional work may be required to better define the standard under customary international law.
Second, States should clarify how other legal principles or obligations relate to applicable treaty standards. The TPP, for instance, states that a breach of a different provision of the treaty, or of a different treaty, is not thereby a breach of the minimum standard of treatment.23 Conversely, the 2012 U.S. model BIT includes new obligations not to “waive or derogate” from — or fail to “effectively enforce” — domestic laws in order to encourage investment.24 Such provisions help ensure that treaty parties observe their commitments under multilateral agreements, including environmental agreements. Further, they add an additional interpretive steer, directing arbitrators to evaluate investment protections in light of the treaty parties’ stated objective of avoiding a “race to the bottom” when attracting investment.25
Finally, States may wish to clarify the applicability of soft law. Soft law principles are not binding as such, but they offer yet another interpretive steer in international investment agreements. The TPP, for instance, encourages compliance with internationally recognized standards of corporate social responsibility.26 States may wish to expressly incorporate in their agreements other soft law, including principles concerning the environment.
Let me conclude with a few words about future trends. We have seen a fundamental change in treaty-making in recent years. Today’s international investment agreements tend to be very different from those concluded a generation ago. There are at least three key reasons for this shift. First, experience. Most States today have first-hand experience acting as a respondent in investment arbitration. Some 700 investment disputes already have been brought against more than 100 States.27 Facing investor claims has prompted many States to negotiate international investment agreements to provide a better balance between State and investor interests.
Second, there is enhanced visibility in investment disputes, as arbitration pleadings and awards are readily accessible and increasingly made public. This gives States greater insight into how substantive standards and procedural rules have been pleaded and decided under their own, and other States’, international investment agreements.
Third, State interests have grown more complex, as the global economy is no longer as neatly divided between capital-importing and capital-exporting States. An increasing number of States have both foreign investors and domestic prerogatives to protect. These States want to ensure strong protections for their investors abroad, while retaining sufficient flexibility and authority to regulate in the public interest at home.
Given the increasing convergence of experience, visibility and interests, States are better able to agree on appropriate reform of their international investment agreements. With these reforms, States can mitigate many of the current concerns regarding the legitimacy of international investment arbitration and ensure that investment arbitration remains an effective — and fair – means for resolving international investment disputes, including those that impact that environment. Clearly, though, much work remains to be done.
The views expressed are personal and may not reflect those of the U .S. government or the U.S. Department of State.
See eg P. Sands, “Litigating Environmental Disputes: Courts, Tribunals and the Progressive Development of International Environmental Law”, in Law of the Sea, Environmental Law and Settlement of Disputes: Liber Amicorum Judge Thomas A. Mensah (T. Ndiaye and R. Wolfrum eds., Brill, 2007); C. Beharry & M. Kuritzky, “Going Green: Managing the Environment Through International Investment Arbitration”, 30 Am. U. Int’l L. Rev. 383 (2015).
K. Gordon & J. Pohl, “Environmental Concerns in International Investment Agreements: A Survey”, OECD Working Papers on International Investment 2011/01, p. 8 (2011).
Vienna Convention on the Law of Treaties, art. 31(2) (“The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes”.).
Trans-Pacific Partnership (TPP), article 9.16.
But see Adel A Hamadi Al Tamimi v Sultanate of Oman, ICSID Case No ARB/11/33, Award (3 November 2015) paras 387-89 (observing that Article 10.10 of the US-Oman FTA “provides a forceful protection of the right of either State Party to adopt, maintain or enforce any measure to ensure that investment is ‘undertaken in a manner sensitive to environmental concerns’, provided it is not otherwise inconsistent with the express provisions of Chapter 10”).
See eg SD Myers, Inc.v Government of Canada, Partial Award, para. 261 (13 November 2000) (“When interpreting and applying the ‘minimum standard’, a Chapter 11 tribunal does not have an open-ended mandate to second-guess government decision-making. Governments have to make many potentially controversial choices. In doing so, they may appear to have made mistakes, to have misjudged the facts, proceeded on the basis of a misguided economic or sociological theory, placed too much emphasis on some social values over others and adopted solutions that are ultimately ineffective or counterproductive. The ordinary remedy, if there were one, for errors in modern governments is through internal political and legal processes, including elections”.).
See eg Chemtura Corp.v Government of Canada, Award, para. 123 (2 August 2010) (“In assessing whether the treatment afforded to the Claimant’s investment was in accordance with the international minimum standard, the Tribunal must take into account all the circumstances, including the fact that certain agencies manage highly specialized domains involving scientific and public policy determinations. This is not an abstract assessment circumscribed by a legal doctrine about the margin of appreciation of specialized regulatory agencies. It is an assessment that must be conducted in concreto”.).
William Ralph Clayton et al. and Bilcon of Delaware Inc v Government of Canada, UNCITRAL, PCA Case No 2009-04, Award on Jurisdiction and Liability (17 March 2015).
William Ralph Clayton et al and Bilcon of Delaware Inc v Government of Canada, UNCITRAL, PCA Case No 2009-04, Dissenting Opinion of Professor Donald McRae, para. 48 (10 March 2015).
See Executive Order 13337: Issuance of Permits With Respect to Certain Energy-Related Facilities and Land Transportation Crossings on the International Boundaries of the United States (30 April 2004) (“[I]f the Secretary of State finds that issuance of a permit to the applicant would serve the national interest, the Secretary shall prepare a permit, in such form and with such terms and conditions as the national interest may in the Secretary’s judgment require …”.).
“Keystone XL Pipeline Permit Determination”, Press Statement of Secretary of State John Kerry (6 Nov. 2015), available at http://www.state.gov/secretary/remarks/2015/11/249249.htm (“After a thorough review of the record, including extensive analysis conducted by the State Department, I have determined that the national interest of the United States would be best served by denying TransCanada a presidential permit for the Keystone XL pipeline. President Obama agrees with this determination and the eight federal agencies consulted under Executive Order 13337 have accepted it”.).
Office of the Press Secretary, The White House, Statement by the President on the Keystone XL Pipeline (6 November 2015), available at https://www.whitehouse.gov/the-press-office/2015/11/06/statement-president-keystone-xl-pipeline.
The United States’ denial of the permit has prompted an investment dispute. See TransCanada Corp. et al. v Government of the United States of America, Request for Arbitration, paras. 60, 62 (June 24, 2016) (arguing that the United States denied the permit based on “perceptions and symbolism” rather than on “actual or anticipated impact on the environment”).
See UNCTAD, “Taking Stock of IIA Reform”, IIA Issues Note, Annex Tables 1-5 (Mar. 2016) (reporting that many States have eliminated umbrella clauses from their recent international investment agreements).
See Free Trade Agreement Between the Government of Australia and the Government of the People’s Republic of China, arts. 9.11, 9.18.
See eg Model Text for the Indian Bilateral Investment Treaty, art. 2.6 (“This Treaty shall not apply to … (iv) any taxation Measure …”).
Trans-Pacific Patnership, art. 29(5) (“A Party may elect to deny the benefits of Section B of Chapter 9 (Investment) with respect to claims challenging a tobacco control measure of the Party. Such a claim shall not be submitted to arbitration under Section B of Chapter 9 (Investment) if a Party has made such an election”.)
See eg 2012 U.S. Model BIT, annex B (“The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers, among other factors: (i) the economic impact of the government action …; (ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and (iii) the character of the government action”.).
See eg Comprehensive Economic and Trade Agreement (EU-Canada), art. 8.10.2.
These States include the Parties to NAFTA, DR-CAFTA, and the Trans-Pacific Partnership.
Trans-Pacific Partnership , art. 9.6(3) (“Minimum Standard of Treatment”). This derives from the NAFTA Free Trade Commission’s July 31, 2001 Note of Interpretation of Certain Chapter 11 Provisions, available at http://www.state.gov/documents/organization/38790.pdf.
2012 U.S. Model BIT, art. 12 (Investment and Environment) and 13 (Investment and Labor).
See eg L.M. Caplan & J.K. Sharpe, “United States” in C. Brown ed., Commentaries on Selected Model Investment Treaties (Oxford 2013).
Trans-Pacific Partnership, art. 9.17 (Corporate Social Responsibility)
See UNCTAD, World Investment Report 2016, p. 104.