International Investment Agreements

Nature of IIAs Two types Investors sue host State Bilateral Investment Treaties Chapters in Free Trade Agreements Investors sue host State Rights of foreign investors Right of State to regulate Quality of jurisprudence creates uncertainty Paucity of environmental provisions means Potential conflicts between foreign investment protection and environmental protection Risk of litigation and compensation to foreign investors for climate change regulation

Relation to WTO law Similar concepts and terminology Same rules of interpretation (VCLT) Same sources of international law IIA tribunals may consider WTO jurisprudence (‘judicial decisions’ per Art. 38 ICJ Statute) Measures can violate obligations in both BUT WTO: obligation to comply, no liability IIA: significant award of damages

WTO versus IIA forum Some States may decline to litigate where private actors will not (eg tobacco cases) Litigation may proceed on both fronts Mexico soda tax cases: USA, Archer Daniels Midland, Corn Products International, Cargill Australia plain packaging cases: Cuba, Dominican Republic, Honduras, Ukraine, Philip Morris Asia Canada renewable energy cases: EU, Japan, Mesa Power Group (no contract), Windstream Energy (onshore vs offshore wind energy)

Scope

Principal IIA obligations (1) non-discrimination (MFN and national treatment) (2) minimum standard of fair and equitable treatment for foreign investors (3) obligation to pay compensation for expropriation BUT only if IIA applies to the measure.

Does IIA apply in a specific case? Which climate change ‘measures’ might be the subject of claims under IIAs? What types of ‘investments’ are covered? Is environmental regulation a measure ‘relating to’ foreign investments or foreign investors?

Climate change measures Mitigation: carbon taxes, emissions trading schemes, border tax adjustments, carbon labels, standards, clean energy subsidies, other infrastructure projects (energy, carbon sequestration) Adaptation: zoning bylaws, infrastructure projects such as flood barriers

Investments Foreign ownership/control Salini test: investor’s contributions; duration of performance; existence of operational risks; contribution to economic development of host state Contractual claims/rights Intellectual property rights/compulsory licenses

Connection between measure and investment Climate change measures may be subject to IIAs if: the measures relate to foreign investments or foreign investors the substance or procedural aspects of measures violate specific IIA obligations BUT not where based on (preliminary) scientific evidence non-discriminatory design & application

Methanex v United States NAFTA Article 1101 ‘relating to’ requires a ‘legally significant connection’ between a measure and an investor or an investment. Non-discriminatory environmental measure did not ‘relate to’ foreign investment or investors. Measure applied regardless of nationality. Scientific and administrative record established environmental purpose. Tribunal had no jurisdiction to hear the claim.

S. D. Myers v Canada Canadian ban on export of PCBs to protect the Canadian PCB disposal industry from US competition. Ban ‘relates to’ S. D. Myers and its investment. No legitimate environmental reason for ban. Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal discourages transboundary movements of hazardous wastes. In this case it was environmentally preferable to ship hazardous wastes from Central Canada to Ohio than to Canada’s only PCB disposal facility in Alberta, due to Ohio’s much closer proximity.

Methanex and S.D. Myers Host government can argue that an environmental measure does not relate to investors or investments. Requires scientific evidence regarding contribution of measure to environmental protection. Public interest or a private interest? MEA may be relevant if specific obligation. GATT Article XX jurisprudence may be relevant to some extent.

NAFTA: limited scope of environmental exceptions No general exception, so real issue is legitimacy of environmental measure. IIAs do not negate right of States to regulate climate change in public interest. Article 1106: limited exception for domestic content requirements, preferences for domestic goods, services Article 1114: pollution havens

Non-discrimination

Non-discrimination obligations: MFN and national treatment ‘Less favorable treatment’ (LFT) of investors and investments in ‘like circumstances’. Use different likeness criteria for goods producers and service providers? Should test focus on competitive relationship between different investors and investments? Are differences in the impact on climate change relevant to determine ‘like circumstances’? Take into account PPMs to determine likeness? Legitimate regulatory distinction test for LFT?

S. D. Myers v Canada ‘like circumstances’ ‘Like circumstances’ must take into account: whether the foreign and national investors are in the same economic or business sector and circumstances that would justify governmental regulations that treat them differently in order to protect the public interest. Comparators provided same PCB disposal services and were competitors, so ‘like’. Focus on competition is consistent with WTO.

S. D. Myers v Canada ‘less favorable treatment’ Does effect of measure create a disproportionate benefit for nationals over non-nationals? Does measure, on its face, appear to favor nationals over non-nationals? Protectionist intent relevant if measure produces an adverse effect on the foreign complainant. Legitimate environmental goal, consistent with policy objectives of the Basel Convention. BUT Canada could have taken alternative measures to achieve this objective that would have been consistent with NAFTA. Is this reading in the GATT Article XX necessity test?

Methanex v United States appropriate comparator Given the existence of domestic methanol producers, they were the appropriate point of comparison, not ethanol producers. Methanex did not receive less favorable treatment than the identical domestic comparators, producing methanol. Tribunal did not need to determine how to interpret the term ‘like circumstances’.

NAFTA Article 1202 (services) ‘like circumstances’ US-Mexico Trucking Services panel accepted differential treatment for legitimate regulatory objectives related to safety as valid factor, BUT: differential treatment should be no greater than necessary for legitimate regulatory reasons & treatment should be equivalent to treatment accorded to domestic service providers. Similar to S. D. Myers ‘less favorable treatment’ Similar to WTO ‘legitimate regulatory distinction’

Feldman v Mexico ‘[T]he concept of discrimination has been defined to imply unreasonable distinctions between foreign and domestic investors in like circumstances.’ Would distinctions based on carbon footprint be reasonable where investors are otherwise in like circumstances? Would differential treatment based on different GHG emissions meet legitimate regulatory distinctions test and not be less favorable treatment?

Nykomb v Latvia National treatment in Energy Charter Treaty. Latvia interfered with right of foreign investor to benefit from subsidy for renewable energy. Latvia continued to support low-carbon installations operated by domestic investors. Nykomb operating in comparable conditions. i.e. no legitimate regulatory distinction.

Fair and equitable treatment Minimum Standard in Customary International Law

Minimum Standard in Customary International Law Fair and equitable treatment standard NAFTA requires minimum standard of treatment in ‘international law’ NAFTA Commission interpretation: ‘international law’ refers to customary international law i.e. does not include treaty law Comparative treatment of other investors is not relevant.

Minimum Standard in Customary International Law ADF tribunal: ‘must be…based on State practice and judicial or arbitral case law or other sources of customary or general international law’ Loewen tribunal: ‘Manifest injustice in the sense of a lack of due process leading to an outcome which offends a sense of judicial propriety is enough’

Minimum Standard in Customary International Law Methanex tribunal: does not preclude differentiations between nationals and aliens Mobil tribunal: does not require a State to maintain a stable legal and business environment for investments. does not provide a guarantee against regulatory change only protects against egregious behavior

Mobil v Canada Representations Claimants had to establish that: (1) clear and explicit representations were made by or attributable to Canada in order to induce the investment, (2) such representations were reasonably relied upon by the Claimants, and (3) these representations were subsequently repudiated

Fair and equitable treatment Could this provide a guarantee of protection against changes to the framework the State has created to attract low-carbon investments? How to weigh the investors’ legitimate expectations against the legitimate regulatory interests of the host state?

Right to regulate Right to regulate includes right to change the regulatory environment. Real issue is whether States design and implement the regulatory framework with customary international law on the treatment of aliens in mind and whether an investor’s expectations are justifiable in the circumstances of each case.

Pulp Mills on the River Uruguay (Argentina v. Uruguay) It is ‘every State’s obligation not to allow knowingly its territory to be used for acts contrary to the rights of other States’. A State is thus obliged to use all the means at its disposal in order to avoid activities which take place in its territory, or in any area under its jurisdiction, causing significant damage to the environment of another State.

Evolving customary international environmental law Minimum standard of treatment of foreign investors under customary international law has to be interpreted in accordance with evolving customary international environmental law. Legitimate climate change regulation should not be inconsistent with the minimum standard of treatment.

Expropriation

Compensation for expropriation and measures tantamount to expropriation NAFTA requirements: compensation at fair market value made for a public purpose non-discriminatory and in accordance with due process and mininum standard of treatment for aliens

S. D. Myers v Canada ‘expropriation’ Must be interpreted in light of state practice, treaties and international judicial interpretations Regulatory action usually not expropriation Expropriations involve deprivation of ownership rights Also lasting removal of owner’s ability to make use of its economic rights

Types of government actions that may constitute expropriation (1) taking title to property, in whole or in part (2) without transfer of title, use of police, administrative or legal powers to: take control of operation of an investment or shut the investor out of its rights of control and ownership (3) creeping expropriation (4) [controversial] diminution of economic value due to public interest regulation???

Lawful regulation is not expropriation Compensation is not required where: economic injury results from bona fide regulation within police powers of a State economic loss from nondiscriminatory action to protect the public interest BUT once an expropriation has taken place, compensation is due even if it is for an environmental purpose.

Compensable property interests Investor’s access to foreign market Pope & Talbot Inc. v Canada (lumber export tax) Cargill v Mexico (soda sales tax) Goodwill and market share not basis for expropriation claim, but count for valuation

Conclusion

Rights of Investors versus Right to Regulate Draw the line on a case-by-case basis Bona fide climate change regulation should take precedence over investors’ rights Protect foreign investors from unfair or arbitrary treatment: capital, know-how, technology In bigger markets investors tolerate more regulatory risk there are more GHG emissions so favor climate change regulation in these