1 Introduction
In 1634, amid waves of bubonic plague, the governor of Ancona suspected that the Venetian consul had spread information detrimental to local commerce. The governor seized the consul’s possessions and banished him ‘under pretence that, contrary to public prohibition, he had caused goods to be unloaded in a time of contagion’.Footnote 1 An imbroglio of infectious disease and economic insecurity thus occasioned the arbitrary treatment of a foreign national and his property. In the realm of diplomatic protection, Emer de Vattel advised that the ‘surest way’ to settle such matters was by ‘commercial treaty’; otherwise, ‘custom is to be the rule’.Footnote 2 Four centuries later, thousands of treaties provide substantive standards and consent to arbitration in the cognate realm of investment protection. But these treaties have not supplanted the customary rule that there is no State responsibility for reasonable regulation of foreign investment. Effectively a presumption derived from territorial sovereignty, this rule has manifested in investment jurisprudence through the police powers doctrine, the right to regulate, and a margin of appreciation. Foregrounding the presumption of reasonable regulation helps to situate these arbitral trends from a generalist perspective and provides the baseline for interpretation of investment treaties in another time of contagion: the COVID-19 pandemic and its economic aftermath.Footnote 3
Section 2 reviews the demand for governments to impose a moratorium on investment treaty arbitration amid the COVID-19 pandemic. Modern treaty practice, however, already recognises the right to regulate as an affirmation of the customary position that each State may reasonably regulate foreign investment without violating international obligations. Section 3 recalls how this regulatory dimension of territorial sovereignty endured throughout the mid-century debate over the standard of compensation for nationalisation and the rise of investment treaty arbitration. The police powers doctrine is singled out as a formulation through which tribunals impose the burden on claimants to prove that a regulatory measure was unreasonable before it may be addressed as an alleged expropriation. By recognising the link between police powers and territorial sovereignty, we may realise the potential scope of the customary presumption of reasonable regulation. Section 4 identifies how this presumption may be integrated in the interpretation of investment treaties, addressing whether modern treaties may operate as leges specialis. Reasonable regulation is nevertheless presumed under the standard of fair and equitable treatment (FET) by determining legitimate expectations in light of the State’s right to regulate or by applying a margin of appreciation. Section 5 reviews classical practice on the treatment of alien property in times of infectious disease and its contemporary lessons for investment treaty arbitration alongside the international health regulations of the World Health Organization (WHO), concluding that it should be very difficult to establish that an investment obligation has been violated by regulatory measures designed to mitigate the chronic character of today’s entwined crises.
2 Treaty and Custom in the COVID-19 Pandemic
From the outset of the COVID-19 pandemic, public health measures threatened to undermine the ordinary conditions for private enterprise; the Spanish government, for example, empowered the Minister of Health to requisition industrial property.Footnote 4 Rapidly, it became apparent that markets could not ‘self-regulate in relation to all conceivable social and economic shocks’, leading to ‘interventions on a scale last seen in World War II’.Footnote 5 Scholars and practitioners published bulletins on whether such measures might trigger obligations to compensate foreign investors.Footnote 6 In light of the mounting crises, however, NGOs called on States to address proactively their exposure to costly claims. The Columbia Center on Sustainable Investment (CCSI), for instance, recommended an immediate moratorium on investment treaty arbitration and a permanent restriction on claims related to ‘measures targeting health, economic, and social dimensions of the pandemic and its effects’.Footnote 7 The proposed moratorium would last until governments had agreed on principles to safeguard ‘good faith recovery efforts’.Footnote 8
CCSI’s proposal was consistent with past demands for States to protect their right to regulate in the public interest.Footnote 9 Yet, the concerns of civil society, like much of the scholarly literature, have concentrated on perceived pitfalls of investment treaties and arbitral institutions rather than the customary foundations for investment regulation.Footnote 10 The intergovernmental reform agenda, moreover, has focused on procedural and institutional aspects of investment treaty arbitration.Footnote 11 In other words, efforts to suspend or recalibrate the practice of investment treaty arbitration have oddly illustrated the normative resilience of substantive investment law,Footnote 12 while overlooking sources of applicable law that reinforce the international lawfulness of health, social, and economic measures. A more constructive intervention than CCSI’s proposed moratorium, therefore, would be to equip vulnerable polities with defence arguments derived from customary international law that might accommodate the dynamic character of regulatory measures amid chronic crises.Footnote 13
While acknowledging that regulatory powers originate in custom, Catharine Titi argues that the right to regulate should be understood narrowly as an express treaty provision permitting a State to regulate in derogation of its commitments.Footnote 14 But one should resist the reflex to rely on treaty exceptions, which reproduces the popular perception that investment obligations normally forbid ambitious regulation.Footnote 15 In reality, the basic aim of CCSI’s moratorium has long formed part of customary international law; by virtue of the police powers doctrine, governments may indeed adopt regulatory measures in good faith without compensating investors.Footnote 16 In modern treaties, moreover, parties have secured the presumptive lawfulness of their regulatory measures not by fashioning an exceptional right under treaty law, but by ‘reaffirm[ing] their right to regulate within their territories to achieve legitimate policy objectives’.Footnote 17 As governments struggle to confront the pandemic and its aftermath, it is timely to review the enduring relevance of custom as the wellspring of investment regulation.
3 Investment Regulation under Customary International Law
To unearth the customary roots of regulatory power, it helps to survey some historical foundations of investment treaty arbitration. Modern standards of treatment, enforceable originally through diplomatic protection, emerged out of transitions from formal empire towards post-colonial independence and from coercive intervention towards peaceful means of dispute settlement.Footnote 18 Digging through juridical strata, three layers underpin the importance of custom in the regulation of foreign investment. First, the mid-century debate over the standard of compensation for nationalisation situates investment treaty arbitration as a relatively recent exception to the customary principle of permanent sovereignty over natural resources (PSNR). Secondly, before and during that debate, the regulatory dimension of territorial sovereignty was reaffirmed through instruments acknowledging the State’s right to regulate and judicial dicta that investors bear the risk of regulatory change. Finally, the police powers doctrine is identified as an expression of territorial sovereignty by which investment tribunals may distinguish non-compensable regulation from compensable expropriation. By recognising the imbrication of police powers and territorial sovereignty, we may appreciate the general application of the customary presumption that reasonable regulation does not engage State responsibility to compensate foreign investors.
3.1 Exceptional Character of Investment Treaty Arbitration
A debate over compensation for nationalisation flared up in the era of decolonisation, framed by newly independent States as a manifestation of their PSNR.Footnote 19 Now a recognised principle of customary international law,Footnote 20 PSNR was a ‘linchpin’ of the movement for a New International Economic Order.Footnote 21 Through the 1974 Charter of Economic Rights and Duties of States (CERDS), the movement sought to fortify the economic content of self-determination by embedding a standard of ‘appropriate compensation’ in domestic jurisdiction.Footnote 22 But an earlier formulation of PSNR in the widely supported General Assembly resolution 1803 included the requirement of compensation ‘in accordance with international law’,Footnote 23 often decoded as ‘prompt, adequate and effective payment’.Footnote 24 Capital-exporting States defended this standard during the drafting of CERDS, opposing its ultimate adoption.Footnote 25 Subsequent awards reaffirmed that nationalisation remained subject to an international standard of compensation and the fundamental principle of pacta sunt servanda.Footnote 26 Indeed, resolution 1803 provided that ‘[f]oreign investment agreements freely entered into by or between sovereign States shall be observed in good faith’;Footnote 27 and that disputes over compensation should be settled ‘through arbitration or international adjudication’.Footnote 28 Consistent with their right of entering into international agreements,Footnote 29 States consented to prospective arbitration of investment disputes under contract, statute, or treaty.Footnote 30 By the 1990s, investment treaty arbitration had emerged as an overgrown exception to the principle of PSNR.Footnote 31 Yet, it must not be overlooked that the nationalisation debate generated a variegated grammar of sovereign rights.Footnote 32 While the right to expropriate is one dimension of sovereignty, its bounds often blur with the State’s right to regulate.Footnote 33
3.2 Regulatory Dimension of Territorial Sovereignty
Regulatory authority over foreign investment is an extension of the State’s plenary competence under customary international law to determine its internal priorities, often formulated as an expression of PSNR or the sovereign right freely to choose and develop an economic system.Footnote 34 Manifestations of regulation, as activities performed à titre de souverain, are often decisive in territorial disputes.Footnote 35 Indeed, the exclusive right to regulate, opined Max Huber in the Island of Palmas case, entails a corollary duty to regulate ‘in a manner corresponding to circumstances’.Footnote 36 This notion of correspondence implies that measures must be reasonable, reflected in contextual gradations of deference.Footnote 37 In Spanish Zone of Morocco Claims, given the State’s duty to maintain social order, responsibility for injury to foreign nationals was engaged only if local authorities acted in manifest abuse of their discretion; that is, beyond a margin of appreciation.Footnote 38 In the North Atlantic Coast Fisheries Case, moreover, Great Britain had a ‘duty of preserving and protecting the fisheries’ in its territorial waters, even though the United States had secured liberties for its nationals to exploit that resource.Footnote 39 British authorities enjoyed ‘the right to make reasonable regulations’ and the burden fell on the United States to prove that its liberties were violated by such measures.Footnote 40 These days, a State’s duty to regulate may be triggered by treaties and customary principles requiring the protection of human rights and the prevention of environmental harm, even beyond its territory.Footnote 41 The basic right and manifold duties to adopt reasonable regulations in the circumstances, however, derive fundamentally from territorial sovereignty over internal affairs, which vastly predates the articulation of PSNR.Footnote 42
In the Oscar Chinn Case, the Permanent Court of Justice held that ‘[f]avourable business conditions and goodwill are transient circumstances, subject to inevitable changes,’ including ‘the general trade depression and the measures taken to combat it’.Footnote 43 Throughout the nationalisation debate, moreover, Third World initiatives to establish an international regulatory regime for multinational corporations were resisted by capital-exporting States, which insisted that regulation was strictly for domestic jurisdiction.Footnote 44 The range of compensable expropriations, therefore, never encompassed any deprivation of property or economic disadvantage resulting merely from taxation, monetary reform, or regulatory measures.Footnote 45 Commentary to the 1967 Organisation for Economic Cooperation and Development (OECD) Draft Convention on the Protection of Foreign Property, for instance, acknowledged ‘the sovereign right of a State, under international law, to deprive owners, including aliens, of property which is within its territory in the pursuit of its political, social or economic ends’ and that to ‘deny such a right would be to … interfere with its powers to regulate’.Footnote 46 The power to regulate may include placing limits on activities, including their wholesale prohibition for legitimate purposes such as environmental protection.Footnote 47 The financial risk of such measures is accordingly borne by foreign nationals.Footnote 48 The customary position that any loss arising from reasonable regulation does not violate international law remains salient in contemporary investment jurisprudence, including through the police powers doctrine.
3.3 Development of the Police Powers Doctrine
While some depict the police powers doctrine as a recent innovation,Footnote 49 others have traced its deeper genealogy.Footnote 50 Derived from the Greek politeia, the notion of police as prudent regulation originated in administrative manuals of France and Germany, later adopted by William Blackstone and Adam Smith.Footnote 51 By the influence of Vattel,Footnote 52 police power as the conceptual basis for public regulation of private property evolved through the United States constitutional law and migrated to Argentina.Footnote 53 On the international stage, the concept featured in significant developments towards property protection: the jurisprudence of mixed claims commissions;Footnote 54 the 1930 Hague Conference;Footnote 55 the 1961 Harvard Draft;Footnote 56 scholarly debates;Footnote 57 the Restatements of Foreign Relations Law;Footnote 58 and the jurisprudence of the Iran-United States Claims Tribunal.Footnote 59 The police powers doctrine then entered investment treaty arbitration to shield measures from claims of indirect expropriation,Footnote 60 including health,Footnote 61 licensing,Footnote 62 environmental,Footnote 63 bankruptcy,Footnote 64 and financial regulation.Footnote 65
For two decades, investment tribunals have recognised the police powers doctrine as custom.Footnote 66 States reiterate that customary status in their submissions as respondents and non-disputing parties.Footnote 67 The resulting decisions, as ‘subsidiary means for the determination of rules of law’,Footnote 68 have further developed the ‘scope, content and conditions’ of police powers.Footnote 69 The doctrine effectively is a screening mechanism between the right to expropriate with compensation and the right to regulate without compensation.Footnote 70 While few treaties refer explicitly to police powers,Footnote 71 many now reflect the content of custom in interpretative annexes.Footnote 72 The Tribunal in Philip Morris v Uruguay rendered a typical formulation in its finding that branding restrictions and health warnings on cigarette packaging did not constitute indirect expropriation of intellectual property: ‘the State’s reasonable bona fide exercise of police powers in such matters as the maintenance of public order, health or morality, excludes compensation even when it causes economic damage to an investor’.Footnote 73
As Jorge Viñuales explained, ‘the lack of public purpose, discrimination, arbitrariness, due process, effects and/or prior specific assurances’ should be understood as ‘considerations of good faith’, which serve not as ‘cumulative requirements’ of the police powers doctrine but rather as ‘indicia guiding a broader assessment of regulatory reasonableness’ by reference to circumstances of the case and the applicable treaty standard.Footnote 74 While the standard of reasonableness gives leeway to arbitral discretion,Footnote 75 tribunals have applied that standard in a broadly deferential manner by requiring the absence of arbitrariness through some link between a rational policy and the adopted measure.Footnote 76
Not to be conflated with its domestic expression,Footnote 77 the police powers doctrine under customary international law is an operative formulation of the regulatory dimension of territorial sovereignty.Footnote 78 This nexus is evident in the Iron Rhine Arbitration, wherein the Netherlands ‘forfeited no more sovereignty than that which is necessary’ for Belgium to exercise it treaty rights and, thus, ‘retain[ed] the police power throughout that area,’ including the power to establish health, safety and environmental standards.Footnote 79 The Tribunal effectively presumed no derogation from territorial sovereignty, albeit conditioned by good faith and reasonableness.Footnote 80 While such presumptions have eroded in some contexts,Footnote 81 reaffirmation of regulatory powers in recent treaties has reinforced a general presumption that ‘investment treaties were never intended to do away with their signatories’ right to regulate’.Footnote 82
3.4 Customary Presumption of Reasonable Regulation
The principled starting point under customary international law, reflected in the police powers doctrine, is to presume that regulation is a reasonable manifestation of territorial sovereignty. ‘Presumptively’, recalled James Crawford, ‘the ordering of persons and assets is an aspect of the domestic jurisdiction of a state and an incident of its territorial sovereignty’.Footnote 83 In the Brewer, Moller and Co Case, moreover, the German-Venezuelan Commission endorsed the ‘uniform presumption of the regularity and validity of all acts of public officials’.Footnote 84 Rosalyn Higgins further referred to a ‘weighty presumption’ when measures are introduced by ‘normal legislative processes of a democratic parliament’.Footnote 85 This presumption’s contemporary relevance was reaffirmed by the partially dissenting arbitrator in Philip Morris v Uruguay, Gary Born, who endorsed: ‘the presumptive lawfulness of governmental authority under customary international law, as well as respect for a state’s sovereignty, particularly with regard to legislative and regulatory judgments regarding its domestic matters’.Footnote 86
Plainly, this presumption would be rebutted if a claimant proved that an impugned regulation was adopted in bad faith.Footnote 87 Several tribunals have also found that a State’s failure to comply with requirements of domestic law prevented its reliance on the police powers doctrine.Footnote 88 But the presumptive character of the police powers doctrine has significant implications for the burden of proof, given the party who asserts must prove.Footnote 89 If the doctrine was pleaded as an exception, tribunals might wrongly require the State to justify its regulatory measures.Footnote 90 In Servier v Poland, however, the Tribunal dismissed the claimant’s submission that the police powers doctrine was an ‘affirmative defence’ for which the respondent had to ‘prove the negative’ by demonstrating ‘an absence of bad faith and discrimination, or the lack of disproportionateness in the measures taken’.Footnote 91 The respondent had shown the domestic legal basis for its decisions not to renew marketing authorisations for pharmaceutical products.Footnote 92 The claimant thus had to prove that those decisions were inconsistent with a legitimate exercise of police powers.Footnote 93 While this burden allocation is surely correct, its basis is not merely evidential but rather reflects the customary presumption that each State is entitled to regulate in the reasonable pursuit of its priorities and may indeed be required to regulate in the circumstances, such as a duty to adopt legislation for the ‘protection of health and life of humans’.Footnote 94
Beyond the context of expropriation, the presumption of reasonable regulation is apparent in other customary rules, foremost the minimum standard of treatment.Footnote 95 The well-known Neer standard provides that ‘an unsatisfactory use of power included in national sovereignty’ amounts to ‘an international delinquency’ when conduct amounts ‘to an outrage, to bad faith, to wilful neglect of duty’ or ‘to an insufficiency so far short of international standards that every reasonable and impartial man would readily recognise its insufficiency’.Footnote 96 This formulation is often adopted to determine the content of the customary minimum standard or the related treaty standard of FET.Footnote 97 In Al Tamimi v Oman, moreover, the Tribunal observed that the ‘high threshold’ for breach of the minimum standard requires a claimant to ‘confront’ the State’s ‘margin of discretion in exercising its police powers to enforce its existing laws’.Footnote 98 Weaving together these strands, we may say there is a general presumption that a State is not responsible for loss suffered by a foreign investor as a result of reasonable regulation.
4 Integrating Custom through Investment Treaty Interpretation
This chapter has thus far bracketed the matter of how custom forms a part of applicable law in investment treaty arbitration. Most investment treaties require disputes to be determined in accordance with the treaty simpliciter or alongside rules of international law.Footnote 99 No treaty is a ‘self-contained closed legal system’; however, each must be ‘envisaged within a wider juridical context’ through the integration of ‘rules from other sources’.Footnote 100 This section explores how the police powers doctrine has been incorporated in arbitral reasoning through the principle of systemic integration, which permits the customary presumption of reasonable regulation to be taken into account generally in treaty interpretation. Modern treaties include bespoke protection of the State’s regulatory powers, which could operate as leges specialis. Arbitral recognition of the State’s right to regulate and a margin of appreciation, however, hints at the tacit integration of the customary presumption within the FET standard.
4.1 Systemic Integration of the Customary Presumption
One way of bringing custom into the interpretative process is by referencing a customary concept as the ‘ordinary meaning’ under Art 31(1) or as a ‘special meaning … the parties so intended’ under Art 31(4) of the Vienna Convention on the Law of Treaties (VCLT).Footnote 101 But, consider the obligation not to ‘take any measures depriving, directly or indirectly, investors … of their investments’.Footnote 102 The ordinary meaning of ‘measures’ is ‘wide enough to cover any act’ and ‘imposes no particular limit on their material content or on the aim pursued thereby’.Footnote 103 In Saluka v Czech Republic, however, the Tribunal considered that ‘the concept of deprivation’ allowed for integration of the ‘customary international law notion that a deprivation can be justified if it results from the exercise of regulatory actions aimed at the maintenance of public order’.Footnote 104 The Tribunal in El Paso v Argentina similarly interpreted an expropriation standard in light of custom, requiring the claimant to show that ‘general regulations are unreasonable, that is, arbitrary, discriminatory, disproportionate or otherwise unfair’ before determining whether they neutralised property rights to constitute indirect expropriation.Footnote 105 Rather than direct reference to custom, these tribunals interpreted the obligation in light of the distinction between compensable expropriation and non-compensable regulation embodied in the police powers doctrine, which served as an organising principle around which to structure the applicable standard and burden of proof.
The principle of systemic integration applied in Saluka and El Paso is the chief means by which the customary presumption of reasonable regulation may be incorporated in arbitral practice.Footnote 106 Under Art 31(3)(c) of the VCLT, an interpreter must take into account, together with context, ‘any relevant rules of international law applicable in the relations between the parties’, including customary rules.Footnote 107 But tribunals seldom formulate precisely the rule, its relevance, or its applicability between the parties.Footnote 108 For clarity, therefore, the presumption of reasonable regulation may be formulated as the rule that there is no State responsibility to compensate for reasonable regulation of foreign investment. The elastic element of reasonableness might provoke the complaint that norms of investment law are too nebulous to qualify as custom.Footnote 109 But the ‘inchoate character’ of a rule is ‘by no means fatal to its legal character’ so long as it generates ‘an adequate apparatus of precise principles’.Footnote 110 Investment treaty arbitration may well serve as that apparatus, transforming the customary criterion of reasonableness into determinate standards of review.Footnote 111 Tribunals need not address the elements of opinio juris and concordant practice, in any event, when investment disputes tend to concern the evolving content of custom rather than its formation.Footnote 112 Moreover, the presumption of reasonable regulation is a well-established expression of territorial sovereignty, for which general practice accepted as law is axiomatic. As a customary rule, therefore, it is applicable in relations among all States and would doubtless be relevant to any investment treaty standard.Footnote 113
4.2 Investment Treaties as Leges Specialis
The chapeau of Art 31(3) of the VCLT provides that an interpreter must take into account any relevant rules ‘together with the context’. Some argue that the sparse context of investment obligations supports the operation of investment treaties as leges specialis in respect of the police powers doctrine.Footnote 114 This view might support the ‘sole effect’ approach to indirect expropriation, which focuses on the deprivation caused by a measure regardless of regulatory intent.Footnote 115 But ‘the persistence of the regulatory powers of the host State is not the accidental result of the failure of investment treaties to eliminate them’, observed Vaughan Lowe; such powers remain ‘an essential element of the permanent sovereignty of each State over its economy’.Footnote 116
Given the reaffirmation of the right to regulate in modern treaties, the context of investment treaty standards should generally permit systemic integration of the customary rule that there is no State responsibility for reasonable regulation.Footnote 117 In Bear Creek v Peru, however, the Tribunal held that an express provision for general exceptions – modelled on Art XX of the General Agreement on Tariffs and Trade (GATT) – was ‘an exclusive list’ precluding the application of ‘other exceptions from general international law’, including ‘the police powers exception [sic]’.Footnote 118 The provision stated that ‘nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures necessary … to protect human, animal or plant life or health’.Footnote 119 While these terms arguably imply a presumption in favour of such measures, the Tribunal imposed the burden of proving their necessity on the respondent.Footnote 120 That treaty exception, therefore, should not have precluded the presumptive operation of the police powers doctrine, given a lex generalis and a lex specialis should have the same character as either a device limiting the scope of a treaty obligation (by distinguishing a regulatory measure from an alleged expropriation) or an affirmative defence (for which a State bears the burden).Footnote 121
Another ground on which the Bear Creek Tribunal excluded the police powers doctrine was the ‘very detailed provisions’ on expropriation.Footnote 122 An interpretative annex materially provided:
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.Footnote 123
Yet, these terms reflect custom, incorporating typical indicia of police powers and imposing upon claimants the burden of proving such measures are disproportionate.Footnote 124 Indeed, in Eco Oro v Colombia, the Tribunal held that an identical annex did not exclude but rather ‘reflect[ed] the more general doctrine of police powers in customary international law’, such that ‘awards on the police powers doctrine … may provide some guidance (by analogy)’ in ‘interpreting and applying the provisions’.Footnote 125 By entering investment treaties, States may well agree to transform the customary presumption into a more determinate test by specifying factors that arbitrators must address in their assessment of a measure’s proportionality in light of its purpose.Footnote 126 While an interpretative annex could thus operate as lex specialis in regard to indirect expropriation, the customary presumption would remain relevant in the interpretation of other standards, including full protection and securityFootnote 127 and protection against unreasonable and discriminatory measures.Footnote 128 Let us now consider the most frequently violated of all investment obligations.Footnote 129
4.3 Tacit Integration Through Fair and Equitable Treatment
The FET standard has long been criticised for arbitral expansion beyond textual warrant.Footnote 130 Tribunals adopted the framework of legitimate expectations, for instance, to determine whether a State acted unfairly.Footnote 131 Modern treaties have since narrowed the notion of FET to the customary minimum standard and thus the circumstances in which interference with expectations may violate investment obligations.Footnote 132 It is through the framework of legitimate expectations, however, that we witness further expression of the customary presumption of reasonable regulation as alpha and omega of the FET standard in the respective guises of the right to regulate and a margin of appreciation.
To establish that an expectation has been defeated, tribunals typically require a claimant to prove three interlocking elements: an unfulfilled commitment; reliance when the investment was made; and reasonableness of that reliance, allied to the first element where the commitment was implicit.Footnote 133 In El Paso, the Tribunal held that there can be ‘no legitimate expectation for anyone that the legal framework will remain unchanged in the face of an extremely severe economic crisis’.Footnote 134 Seldom do tribunals spell out the customary roots of such reasoning, treating the State’s regulatory authority as a matter of fact rather than a legal presumption. In Suez v Argentina, however, the Tribunal recognised that the police powers doctrine and the State’s right to regulate under the FET standard were in fact ‘duplicative’ inquiries.Footnote 135 In other words, each inquiry is a reformulation of the customary presumption tailored to a different standard.Footnote 136 Acknowledging the common source of the police powers doctrine and the right to regulate helps us better to understand the customary drivers of arbitral convergence on contextual inquiries into the reasonableness of government conduct, regardless of the applicable treaty standard.Footnote 137
An emerging consensus that the FET standard preserves the State’s right to regulate was complicated by disputes regarding fiscally prudent adjustments to renewable energy incentives.Footnote 138 The jurisprudence divided into ‘two schools of thought’ as to whether legislative regimes constituted specific commitments that guaranteed tariffs would not change.Footnote 139 Arguments based on the State’s right to regulate ‘miss the point’, quipped the majority in Greentech v Italy, when there were ‘repeated and precise assurances to specific investors’ that tariffs would remain fixed for two years.Footnote 140 In RREEF v Spain, however, the majority recalled that the absence of an express reference to the State’s right to regulate under the Energy Charter Treaty did not mean it was excluded from applicable law.Footnote 141 As a matter of principle, ‘an international obligation imposing on the State to waive or decline to exercise its regulatory power cannot be presumed’ absent an ‘unequivocal’ commitment; ‘more so when it faces a serious crisis’.Footnote 142 In the majority’s view, ‘there can be no doubt that States enjoy a margin of appreciation in public international law’.Footnote 143
The margin of appreciation is an established principle of the European Court of Human Rights (ECtHR) that has been adopted by several tribunals applying the FET standard.Footnote 144 The majority in Philip Morris v Uruguay held that such a margin required ‘great deference to governmental judgments of national needs in matters such as the protection of public health’.Footnote 145 Due to the complexity of scientific and policy assessments, the ‘sole inquiry’ was whether the measures were adopted with ‘manifest lack of reasons’ or ‘in bad faith’.Footnote 146 Partially dissenting arbitrator Born believed such a margin was ‘neither mandated nor permitted’ under international law, finding instead that treaty and custom required a ‘minimum level of rationality and proportionality’.Footnote 147 Yet, the concept may be viewed as another iteration of the customary presumption that Born himself endorsed.Footnote 148 A margin of appreciation serves as the final layer of deference in determining the reasonableness or proportionality of regulatory measures,Footnote 149 reflecting the epistemic advantage of local authorities and their relative proximity to mechanisms of accountability.Footnote 150 These practical and normative factors assumed real significance in the COVID-19 pandemic, which transpired as ‘a collection of national epidemics’ shaped by interwoven social and biological factors.Footnote 151
5 Reasonable Regulation in a Pandemic
Since the outbreak of COVID-19, the Bischoff Case has become a salient authority.Footnote 152 In 1898, Caracas police detained the carriage of a foreign national, which they supposed to have transported persons infected with smallpox. The police had acted on false information and eventually offered to return the carriage. Reflecting the customary presumption of reasonable regulation, the German-Venezuelan Commission held: ‘Certainly during an epidemic of an infectious disease there can be no liability for the reasonable exercise of police power, even though a mistake is made.’Footnote 153 This final section fleshes out that prescient dictum by reviewing the classical practice on diplomatic protection in times of contagion and its contemporary lessons for investment treaty arbitration, highlighting how tribunals may interpret treaty standards in light of another codification of reasonable regulation – the proportionality inquiry under Art 43 of the International Health Regulations (IHR).Footnote 154 The inherent limits of the IHR, however, mean that many claims arising from the COVID-19 pandemic and its economic aftermath should be resolved by integrating the customary presumption of reasonable regulation through the police powers doctrine, the right to regulate, or a margin of appreciation.
5.1 Classical Practice
The eminent digests contain a cluster of cases in which the British Foreign Office and the United States Department of State held that injury to property during an epidemic did not entitle a foreign national to compensation. In 1875, the destruction of property by Turkish authorities to combat plague entitled British nationals to compensation only if local subjects were compensated.Footnote 155 Similarly, in 1894, Brazilian authorities destroyed the watermelon crop of the US nationals to prevent the spread of cholera.Footnote 156 The State Department found such measures were ‘justified under the circumstances’ and accepted the Brazilian view that any claims must go before local courts.Footnote 157 The apparent standard of national treatment reflected the ubiquity of epidemics and the reciprocal need to maintain discretion without hypocrisy.Footnote 158 There was nevertheless a reasonableness requirement. In the 1893 case of Lavarello, Italy was awarded partial indemnity of a trader’s travelling expenses and spoilage of his merchandise because Cape Verdean sanitary authorities had exceeded their powers and arbitrarily withdrew an initial order permitting him to unload.Footnote 159 In Bischoff, moreover, the State was ‘liable for damages for the detention of the property for an unreasonable length of time and injuries to the same during that period’.Footnote 160 The unlawful conduct of injured foreigners was also a relevant factor in the reasonableness inquiry.Footnote 161
The limits of reasonable regulation in the time of cholera were well articulated in the 1861 case of the Azorian, a British vessel that was ordered by local authorities in Tenerife to perform quarantine despite its clean bill of health upon departure. The Queen’s Advocate complained:
The fact of the ‘Azorian’ (alone) being treated in this unjust manner without any bonâ fide reason, and whilst free communication was taking place between London and all Parts of Spain, by land and sea, is so unreasonable, and primâ facie indefensible, that the mere assertion of the technical legal power of the Board of Health to do as it did will not satisfy the British Government.Footnote 162
There had been no ‘symptom of disease on board during the voyage’; Spain did not even pretend that the ‘arbitrary and unjustifiable’ quarantine measure was ‘necessary to prevent infection, or that it was done in every (or any) other case’.Footnote 163 In a neglected passage of his leading monograph, Martins Paparinskis addressed the Azorian as an exemplary case of the distinction between compensable and non-compensable measures in State practice of the nineteenth century.Footnote 164 He accordingly adopted the Azorian case as a yardstick of classical customary law in his assessment of the modern jurisprudence on property rights in the ECtHRFootnote 165 and the Inter-American Court of Human Rights,Footnote 166 which he further linked to the formulation of arbitrariness by the International Court of Justice in the ELSI caseFootnote 167 and arbitral interpretation of the FET standard in Saluka.Footnote 168 Following the grain of the Azorian case, Paparinskis believed these authorities point towards a consistent method of examining regulatory measures that are alleged to have breached international law: deference to ‘the legitimacy of the purpose and means chosen to pursue it as such (unless they are entirely indefensible)’ coupled with ‘formal and procedural safeguards against abuse in their implementation (the absence of which permits a more critical engagement with the ends and means)’.Footnote 169
Tracing the classical practice concerning past pandemics through to modern customary law, therefore, strengthens the presumption of reasonable regulation; rebutted when a claimant proves that government conduct was unreasonable because, for instance, requirements of domestic law were arbitrarily applied, discriminatory, or knowingly violated.Footnote 170 A mid-century study observed that State responsibility would be engaged only ‘if health or quarantine regulations are imposed not bona fide to protect public health, but with the real, though unavowed, purpose of ruining a foreign trader’.Footnote 171 As Born would later put it, each State ‘possesses broad and unquestioned sovereign powers to protect the health of its population’.Footnote 172 As a further corollary of territorial sovereignty, however, Hersch Lauterpacht (in his work for the United Nations Secretariat) underscored each State’s ‘obligation to take measures both of a preventive nature and of active co-operation with other States against the spread of disease and epidemics’.Footnote 173 The pioneering instance of such cooperation was the 1851 International Sanitary Conference of a dozen European States on the ‘standardization of quarantine regulations’,Footnote 174 followed by six conferences before the first binding convention on infectious disease.Footnote 175 The World Health Assembly, composed of WHO Members, is the contemporary forum for intergovernmental cooperation, authorised to adopt regulations ‘designed to prevent the international spread of disease’.Footnote 176 Given that there are 196 parties to the IHR, it is highly likely that a tribunal would take into account any relevant rules in investment treaty claims arising from the COVID-19 pandemic, notably the restriction on additional health measures.
5.2 Current Prognosis
Two broad categories of regulatory response to the COVID-19 pandemic might give rise to an investment treaty claim: overreach and underreach.Footnote 177 Given the fear of regulatory chill animating CCSI’s proposed moratorium,Footnote 178 responsibility for alleged overreach has been our focus in this chapter.Footnote 179 It is nevertheless worth observing how the IHR sets both a floor and a ceiling for internationally lawful health measures. Parties are required to share information with WHO so the Director-General may determine whether an extraordinary event constitutes a ‘public health emergency of international concern’ (PHEIC),Footnote 180 posing ‘a public health risk to other States through the international spread of disease’ and ‘potentially requir[ing] a coordinated international response’.Footnote 181 Subject to procedural requirements,Footnote 182 the Director-General issues ‘temporary recommendations’, which may include ‘health measures’ to be implemented by a party experiencing the PHEIC or by other parties ‘without delay’ and ‘in a transparent and non-discriminatory manner’.Footnote 183 The obligation to implement recommended health measures thus serves as the regulatory floor.Footnote 184 Reflecting ‘the principles of international law’, however, the IHR reaffirms ‘the sovereign right to legislate and to implement legislation in pursuance of their health policies’ while ‘uphold[ing] the purpose’ of the IHR.Footnote 185 That purpose is, in a word, proportionality: the IHR were designed not merely ‘to prevent, protect against, control and provide a public health response to the international spread of disease’ but to do so in ways that are ‘commensurate with and restricted to public health risks’ and ‘avoid unnecessary interference with international traffic and trade’.Footnote 186
Elaborating upon the ceiling of proportionality, Art 43(1) provides that the IHR ‘shall not preclude’ parties from implementing ‘additional health measures’ in accordance with their domestic law and international obligations in order to achieve a ‘greater level of health protection than WHO recommendations’. Additional health measures, however, ‘shall not be more restrictive of international traffic and not more invasive or intrusive to persons than reasonably available alternatives that would achieve the appropriate level of health protection’. In determining whether to implement additional health measures, parties are required by Art 43(2) to base their determinations upon scientific principles; available scientific evidence of a risk to human health, or where such evidence is insufficient, the available information including from WHO and other relevant inter-governmental organisations and international bodies; and any available specific guidance or advice from the WHO. The IHR also must be implemented ‘with full respect for the dignity, human rights and fundamental freedoms of persons’.Footnote 187
Article 43 of the IHR bears a striking resemblance to Art 5.6 of the SPS Agreement,Footnote 188 under which a complaining member of the World Trade Organization (WTO) must establish that there is a reasonably available measure that achieves the responding member’s appropriate level of sanitary or phytosanitary protection and is significantly less restrictive to trade.Footnote 189 Without digressing into how WTO law should inform its interpretation,Footnote 190 it suffices to note that Art 43 of the IHR could be considered more relevant than custom in the interpretation of investment treaty standards.Footnote 191 Like the interpretative annex on indirect expropriation in Bear Creek and Eco Oro, the proportionality inquiry under Art 43 of the IHR is the applicable lex specialis for the regulation of infectious disease, setting a floor of recommendations and a ceiling of proportionality.Footnote 192 If WHO were to advance this position in an amicus brief,Footnote 193 a tribunal may be persuaded that the IHR determine the parameters of reasonable regulation during a PHEIC.Footnote 194
Yet there are limits to the relevance of the IHR. As defined under Art 1.1, ‘health measure’ means ‘procedures applied to prevent the spread of disease or contamination’, but excludes ‘law enforcement or security measures’. Restrictions on additional health measures are determined by reference to temporary recommendations during a PHEIC, which expire automatically after three months unless extended.Footnote 195 The proportionality inquiry under Art 43, moreover, balances additional health measures against restrictions on ‘international traffic’, defined under Art 1.1 as ‘the movement of persons, baggage, cargo, containers, conveyances, goods or postal parcels across an international border, including international trade’. This definition notably excludes cross-border flows of capital and financial instruments, let alone assets owned by foreign investors within a State’s territory; the IHR does even not cover the same subject matter as investment treaty arbitration.Footnote 196 Given these temporal and material limitations, the proportionality inquiry under Art 43 has minimal relevance for claims arising from the full gamut of regulatory responses to the social and economic disruptions caused by the COVID-19 pandemic.
In addition to the inbuilt limits of the IHR, it is important to recall that the principle of systemic integration is directed to the interpretation of investment treaties, not to the application of conflicting rules.Footnote 197 While the IHR may take general priority over custom in the regulation of infectious disease, an investment treaty is the product of (usually) bilateral negotiation in respect of investment promotion and protection, which may be considered a lex specialis in respect of the multilateral IHR.Footnote 198 Modern investment treaties increasingly make express provision for health measures and future treaties could actively seek to harness private capital towards public health goals through specialised mechanisms for settling health-related investment disputes.Footnote 199 In general, however, the proportionality inquiry under Art 43 of the IHR may be considered in certain claims arising from health measures during a PHEIC, but it does not supplant the customary presumption of reasonable regulation defended throughout this chapter and its manifestations in investment jurisprudence: the police powers doctrine, the right to regulate, and a margin of appreciation.
From its microscopic origin, the COVID-19 pandemic has spawned planetary crises of a social, economic, and fiscal character. Yet the State remains the locus of regulatory power in an international legal system founded on the rights and duties of territorial sovereignty. While all States are equal in their sovereignty, the asymmetric impact of the pandemic has exposed unequal institutional capacities. Past tribunals have accommodated local circumstances in determining the reasonableness of government conduct; ‘the heritage of the past as well as the overwhelming necessities of the present and future’.Footnote 200 In Philip Morris v Uruguay, the majority was satisfied that the FET standard did not ‘preclude governments from enacting novel rules’, even if these were ‘in advance of international practice’, provided they had ‘some rational basis’ and were ‘not discriminatory’.Footnote 201 Conversely, the Tribunal in Genin v Estonia found that procedures adopted by a central bank that fell short of ‘generally accepted banking and regulatory practice’ did not violate the FET standard in light of Estonia’s transition status and ‘the emergence of state institutions responsible for overseeing and regulating areas of activity perhaps previously unknown’.Footnote 202 Such factors must likewise inform how a diligent investor would reasonably expect governments to address the economic recession and social dislocation caused by the COVID-19 pandemic.Footnote 203 It should be very difficult for claimants to rebut the customary presumption of reasonable regulation without clear evidence of bad faith or discriminatory treatment, more so when threats to human rights convert the State’s right to regulate into a duty to regulate.Footnote 204
6 Conclusion
At the time of writing, the annulment committee in Tethyan Copper Company v Pakistan found that enforcement of an award of USD 5.9 billion would not compromise the ‘capacity to respond promptly and effectively to a pandemic’ despite Pakistan’s reliance on loans from the International Monetary Fund ‘to address the economic impact of the COVID-19 shock’.Footnote 205 If the committee’s insouciance were reflected in an award on the merits, that would surely provoke more calls for a moratorium or broader exceptions to investment treaty arbitration. The police powers doctrine, the right to regulate, and a margin of appreciation, however, are all examples of an ostensibly ‘new jurisprudence’ focused on finding ‘space for flexibility within the primary rules themselves’.Footnote 206 The customary presumption of reasonable regulation, as a longstanding expression of territorial sovereignty, is the underlying driver of these doctrines. While Art 43 of the IHR may have some relevance in determining the proportionality of health measures during a PHEIC, the economic aftermath of the pandemic presents a broader opportunity for governments, counsel and arbitrators to revive the general rule that there is no State responsibility for reasonable regulation of foreign investment. Investment treaty arbitration, rather than acting as an unmitigated constraint on regulatory powers, may both guard against arbitrary treatment by governments and transform the ambitious measures of successful respondents into lasting legal principle in the face of overbearing investors.
1 Introduction
In 2016, Nigeria and Morocco signed a Bilateral Investment Treaty (BIT), which mandated that the foreign investor conduct an Environmental Impact Assessment (EIA) in accordance with domestic law and that both the foreign investor and the host State apply the precautionary principle to the investment.Footnote 1 The BIT also required that foreign investors comply with the international environmental obligations of the host State while operating the investment.Footnote 2 This treaty follows upon the heels of several other regional model international investment frameworks which require similar obligations.Footnote 3 BITs rarely impose obligations of conduct on foreign investors, given that they are not considered a means of economic regulation,Footnote 4 and their primary objective is the promotion and protection of investments. However, these treaties represent a new paradigm in investment treaty drafting. They try to hold foreign investors accountable for potential violations of domestic and international environmental norms. Further, both the precautionary principle and EIA are rules of customary international law.Footnote 5 Their inclusion in BITs gives rise to two pertinent issues.
First, though the precautionary principle and EIA are recognised as rules of Customary International Law (CIL), their status as CIL has been highly debated because they are, in essence, rules of procedure, and their form and content vary from jurisdiction to jurisdiction.Footnote 6 Therefore, for these rules to create binding obligations upon foreign investors, the host State must have first recognised these rules as CIL. This recognition may happen through domestic law or the ratification of an international treaty or even any other action of the host State which demonstrates acceptance of the rule.
Second, are foreign investors, most of whom are private multinational corporations, directly bound by these rules because of their inclusion in a BIT? Multinational Corporations as non-state actors are not considered to be subjects of international lawFootnote 7 and, while Investor-State Dispute Settlement (ISDS) tribunals have recognised that they need to operate the investment and act in accordance with the domestic and international environmental obligations of the host State, they have been reluctant to recognise that foreign investors may have any direct environmental obligations with the host State.Footnote 8
To discuss these issues, this chapter will be divided into three parts. The first part will briefly document how the international investment law regime has evolved from an isolated regime, focusing only on investment promotion and protection, to a regime which is trying to take investor responsibility into account. The second part of this chapter will discuss the incorporation of the precautionary principle and EIA as investor obligations into BITs, with reference to their status as CIL. It will correspondingly examine how these rules may bind the foreign investor if the host State has recognised them as CIL.
While the BITs analysed in this chapter seek to impose obligations on foreign investors, they also require the host State to apply some of these rules in conjunction with the foreign investors. Therefore, the third part of this chapter will be divided into two sections. It will first discuss how the inclusion of these rules of customary international environmental law in investment treaties will affect host States and whether host States can be held accountable by foreign investors for not implementing the precautionary principle or following EIA procedures.
The second part will discuss the decisions of investor-State arbitral tribunals towards the international environmental obligations of foreign investors as non-State actors. It will argue that while the inclusion of environmental rules in investment treaties is a welcome step towards ensuring investor responsibility, tribunals are not yet ready to acknowledge that foreign investors have responsibility towards the host State unless such obligations are a part of general international law or incorporated in domestic law.Footnote 9 It will also situate these decisions within the systemic reluctance of public international law frameworks to impose international environmental obligations on non-State actors such as multinational corporations. Most international efforts to regulate the environmental obligations of multinational corporations place the onus on State parties to create obligations of compliance, rather than create any direct obligation.Footnote 10
2 A Brief History of Environmental Regulation in Investment Treaties
The first BITs focused solely on investment promotion and protection, following a capital exporting model, which sought to protect investments in new nations and former colonies from nationalisation.Footnote 11 Initially, only a handful of BITs were signed between developed and developing nations, in part because of resistance from the New International Economic Order (NIEO) movement and the Permanent Sovereignty over Natural Resources (PSNR) resolution.Footnote 12 It was only in the early 1990s that certain States began signing investment treaties, following the collapse of the Soviet Union and the realisation that foreign capital was needed for economic development.Footnote 13
By the early 2000s, States had begun challenging the legitimacy of BITs, arguing that they were a restraint on the sovereign regulatory power of the host State, especially since the threat of investment arbitration could prove costly to developing host States – the concept of ‘regulatory chill’.Footnote 14 The signing of the North American Free Trade Agreement (NAFTA) in 1994, led to developed economies like the US and Canada finding themselves as respondents in investment treaty arbitration, because domestic environmental regulation was often challenged by foreign investors.Footnote 15 Many erstwhile capital importing States became exporters of capital and several BITs were signed between developing countries.Footnote 16 These reasons contributed to States’ rethinking of the regulatory scope of BITs, beginning with the model US and Canada BITs of 2004 and 2006 respectively.Footnote 17 These BITs contained Exception Clauses and Non-Precluded Measures to regulate the investment, a common component of most BITs today.Footnote 18
Since then, BITs have continued the trend of allowing the host State to regulate the investment. However, it is rare to see BITs impose obligations of environmental conduct on investors and host States. Countries use IIAs to attract foreign investment and as observed recently, it does not appear likely that express investor obligations of conduct will be included in investment treaties in the immediate future, since they may serve as deterrent to the signing of investment treaties and investors may shy away from making investments.Footnote 19
Admittedly, the BIT models being discussed in this chapter are a unique exception to BIT drafting practices, envisaging that both investors and host States will play a role in the environmental management of the investment. While the treaty drafting language does not have precedent, the objective of this chapter is to give an overview of the investor obligations enshrined in these treaties so that their implications from both the perspective of investors and host States can be understood.
3 Integrating Customary International Environmental Law in Investment Treaties
3.1 Treaty Drafting Practices
Over the past decade or so, several regional model investment treaties have tried to integrate the EIA and the precautionary principles as investor obligations. The clauses in the Nigeria–Morocco BIT are based on similar clauses from other model treaties as well the International Institute for Sustainable Development Model BIT.Footnote 20 In addition, the African Union in 2016 produced the Draft Pan African Investment Code, a comprehensive document which seeks to protect the environment through investor obligations and promote investment protection in the African continent.Footnote 21 However, are these obligations couched in terms which make them directly binding on foreign investors or is their enforceability dependent on domestic law or the host State’s international environmental obligations?
Article 14(1) of the Nigeria–Morocco BIT mandates ‘that investors or the investment shall comply with environmental assessment screening and assessment processes applicable to their proposed investments prior to their establishment as required by the laws of the host state or home state, whichever is more rigorous’.Footnote 22 Article 14(3) states that
investors, their investments, and host state authorities shall apply the precautionary principle to their environmental impact assessment and to decisions taken in relation to a proposed investment, including any necessary mitigation [sic] or alternative approaches of the precautionary principle by investors and investments shall be described in the environmental impact assessment they undertake.Footnote 23
Article 18(3) states that ‘[i]nvestors and investments shall not manage or operate the investments in a manner that circumvents international environmental, labour and human rights obligations to which the host state and/or home state are parties’.Footnote 24
These clauses are almost identical to the corresponding clauses of the International Institute of Sustainable Development (IISD) Model Investment Agreement. Article 12(a) of the IISD Model Agreement provides for investors to comply with the EIA processes of the home State or the host State, whichever is more rigorous.Footnote 25 The only addition is that Article 12(a) calls for the parties to adopt a minimum standard of EIA at their first meeting and comply with these standards on all occasions. Likewise, Article 12(d) requires investors to apply the precautionary principle to their investments.Footnote 26 Article 14(d) is identical to Article 18(3) of the Nigeria–Morocco BIT.Footnote 27
While the South African Development Community (SADC) Model BIT also adopts identical language to the Nigeria–Morocco BIT and SADC Model BIT, it goes a step ahead and prescribes the International Finance Corporation’s (IFC) performance standards on environmental and social impact assessments as an alternative to home State and host State laws.Footnote 28 Likewise, the Economic Committee of West African States (ECOWAS) Common Investment Code also adopts the precautionary principle and EIA as investor obligations but only mandates the investor to undertake an EIA and social impact assessment of proposed business activities and investments with respect to natural environment and the local population in the relevant jurisdiction. It also only mandates the investor to apply the precautionary principle to the EIA or social impact assessment, including any mitigating approaches.Footnote 29
Finally, the Pan African Investment Code (PAIC) does not mention the precautionary principle but simply mandates the investor to conduct an EIA.Footnote 30 However, the Nigeria–Morocco BIT, IISD Model Investment Agreement, ECOWAS Common Investment Code and the PAIC incorporate these obligations to try and hold the investor accountable for the violation of environmental norms; they do not, however, prescribe any standard to be followed for the implementation of the precautionary principle and EIA. In the absence of a domestic law incorporating EIA or the precautionary principle, these investor obligations may be rendered nugatory. Moreover, even if the investor must act in accordance with the host State’s international obligations, which may include the host State’s recognised rules of CIL, it will be difficult for the investor to implement these rules in the absence of domestic law. It is only the SADC Model BIT which expressly prescribes the IFC standards in absence of rigorous domestic standards.Footnote 31 However, the adoption of these standards is subject to an agreement between the investor and host State. Therefore, does the inclusion of these CIL obligations in BITs have any real significance for investor obligations, or are they just window dressing without any real effect? The next subsection, which discusses the customary nature of the precautionary principle and EIA, will try to answer this question.
3.2 Customary International Law Status of the Precautionary Principle and Environmental Impact Assessment and Their Relevance as Investor Obligations
3.2.1 The Precautionary Principle
The Precautionary Principle was first incorporated into international environmental agreements in the 1980s, though precautionary thinking had been present in domestic environmental policy.Footnote 32 The basic underlying idea behind this concept is that the lack of scientific certainty about the actual or potential effects of an activity must not prevent States from taking appropriate measures.Footnote 33 The most accepted formulation of the precautionary principle is in the Rio Declaration. Principle 15 states that:
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.Footnote 34
The precautionary principle is not so much a principle, as it is a rule or a standard.Footnote 35 This dichotomy marks a controversy regarding its actual status as a rule of customary international law. Though it has been included in several transboundary environmental treaties, all of which reflect the approach echoed in the Rio Declaration, its status as a CIL rule has been debated.Footnote 36 The debate surrounding its normative content also has a spillover effect in its application, as is it a rule that obligates a State to act irrespective of scientific uncertainty. Does such a spillover, therefore, shift the burden of proof to the proponent of a project (ie, the investor), or is it simply a standard which States may include in its domestic laws and policies, with varying environmental standards and thresholds?Footnote 37
There is one school of thought which argues that it is CIL, simply, based on the frequency of its inclusion in multilateral treaties and declarations, while another school of thought argues that it is not customary international law since actual State practice is difficult to prove empirically.Footnote 38 This is the classic rule vs standard dialectic.Footnote 39 CIL is often difficult to prove and depends upon whether widespread State practice (and corresponding opinio juris) can be established.Footnote 40 This grey area has not been resolved by the decisions of several international courts and tribunals, which have adopted what may be called a precautionary approach, where they have been reluctant to recognise the principle as CIL. This reluctance stems from the fact that while international treaties may enshrine the rule, its application, form and content differs across jurisdictions, which poses a challenge in establishing definitive State practice.
In the Southern Bluefin Tuna case, New Zealand and Australia filed for provisional measures restraining Japan from unilaterally designing and undertaking an experimental fishing programme.Footnote 41 Both New Zealand and Australia requested that the parties act consistently in accordance with the precautionary principle.Footnote 42 In their decision, the Tribunal did not expressly mention the precautionary principle, but stated that even though they could not conclusively assess the scientific evidence presented by the parties, further measures must be taken to preserve the rights of the parties and to avert further deterioration of Bluefin Tuna and that the parties must act with prudence and caution to ensure that effective conservation measures are taken.Footnote 43
Though the Tribunal did not expressly mention the precautionary principle, several separate opinions clarified the approach of the Tribunal, lending clarity to the application of the precautionary principle. Judge Laing stated that adopting an approach (sic), rather than a principle, appropriately imports a certain degree of flexibility and tends, though not dispositively, to underscore reticence about making pronouncements about desirable normative structures.Footnote 44 Judge Treves, while regretting that the precautionary principle was not expressly stated in the order of the Tribunal, underscored the importance of the Tribunal adopting a precautionary approach even though it was reluctant in taking a position whether it was a binding position of international law. Observing that the measures prescribed by the Tribunal aimed at stopping the deterioration of the Southern Bluefin tuna stock, it was essential that the Tribunal adopt a precautionary approach since there was scientific uncertainty whether the situation of the stock had improved.Footnote 45 In fact, he equated the notion of precaution with ‘caution’, an aspect inherent in the very notion of precautionary measures.Footnote 46
Reinforcing this approach, in the EC Asbestos dispute, the WTO Appellate body adopted a precautionary approach, stating that member States have the undisputed right to determine the level of health protection they deem appropriate and that Canada, the proponent of the exports, would have to prove that their ‘controlled use’ alternative would achieve the same level of protection.Footnote 47 In the Nuclear Tests case, the separate dissenting opinions of Judges Weeramantry and Palmer supported the idea of the Precautionary Principle being a rule of customary international law relating to the environment.Footnote 48 In the EC-Hormones dispute, the WTO Appellate Body, while noting that the Precautionary Principle did not override the treaty obligation of Article 5.7 of the WTO Agreement on Sanitary and Phytosanitary Standards to base measures on a risk assessment, noted that it would be unnecessary to take a position on whether the precautionary principle had been authoritatively formulated as a general principle of customary international law, since ‘responsible, representative governments commonly act from perspectives of prudence and caution where risks are irreversible…’.Footnote 49
3.2.2 Environmental Impact Assessment
Like the Precautionary Principle, the status of EIA as customary international law is not established. While it may be argued that it is custom in a transboundary context, given the number of treaties and tribunal decisions which stress its importance,Footnote 50 it is not referred to in a transnational context to the treaties discussed in this chapter. Rather, the reference to EIA will be within the domestic context. Still, it has been observed that human rights law has greatly expanded through the adoption of wide-ranging international conventions, even with the typical difficulty in establishing a practice based customary law.Footnote 51 Since many of these conventions have been ratified by almost all States, it is argued that the norms embodied in those conventions are binding on non-parties, leading to a customary law of human rights.Footnote 52 It might be argued that even though an EIA has been recognised as customary in a transboundary context, it has developed as a customary norm of international environmental law, where the rule of conducting an impact assessment is customary rather than the context in which it is undertaken.
It is evident that while the customary status of the precautionary principle as rule per se is debated, courts and tribunals appear to treat the precautionary approach as customary. What is the significance of this approach for BITs? It could be argued that by placing the onus of applying the precautionary principle in the context of an EIA on the investor and the host State, a BIT is trying to adopt a precautionary approach, giving credence to what may be termed a customary approach instead of customary rule. The significance of this inclusion cannot be underestimated. BITs, which have traditionally only obligated host States to protect the investment, could now require environmental cooperation between the investor and host State. The inclusion of these CIL rules in BITs also promotes the host State’s right to regulate the investment, though of course, domestic frameworks or standards would have to be adopted to give effect to these rules creating investor obligations.Footnote 53
While these treaties try to ensure that the host State regulates the investment in accordance with its international legal obligations and places affirmative obligations of conduct on the investor, it remains to be seen whether and how investor-State dispute settlement tribunals may interpret these clauses and agree with the objectives of such inclusion. This question is discussed in the following section.
4 The Interpretation of Environmental Obligations by Investor-State Arbitration Tribunals
While the precautionary principle and EIA clauses in the treaties discussed above have not yet been interpreted by any investor-State arbitration tribunal, they have implications for investors and host States alike. This section examines the jurisprudence of investor-State arbitration tribunals, which discuss the host State’s environmental obligations towards foreign investors – both substantive and procedural. Subsequently, it will discuss the approach of tribunals towards the environmental obligations of foreign investors.
4.1 Procedural Implications for Host States
Foreign investors have often challenged the procedures used by the host State to apply the precautionary principle to the investment or to challenge the EIA methodology employed by the host State to assess the investment.Footnote 54 Consequently, tribunals have adjudicated on the legitimacy of application of these procedural rules. Investors have also argued that host State’s neglect of the environment has led to a diminishment of value of the investment. These decisions are discussed below.
The BilconFootnote 55 decision concerned the denial of a permit to conduct mining activities in Nova Scotia following the recommendation of an environmental joint review panel (JRP). On the grounds of procedural fairness, the majority of the tribunal concluded that the review panel had acted in breach of Canadian environmental law, which amounted to a breach of the international minimum standard of treatment. The Tribunal held that it was a serious breach of the law on procedural fairness that Bilcon was denied reasonable notice of the ‘community core values’ standard of the environmental JRP as well as a chance to seek clarification and respond to it.Footnote 56 The Tribunal emphasised that while legislatures could adopt rigorous and comprehensive environmental regulations, including assessments, those regulations had to be actually implemented and carried out.Footnote 57
The Bilcon award highlights the importance of an effective and transparent impact assessment procedure prior to the establishment of the investment and could work as a call to host States to incorporate such clauses into BITs, in order to ensure stability and transparency of investment projects.Footnote 58 Such impact assessment mechanisms, along with adopting a precautionary approach, could include public participation in the form of information sharing and consultation which would increase the likelihood of potential impacts, the disclosure of all alternatives and the reasons for rejection of certain alternatives based on a measure of accountability.Footnote 59
In Allard v Barbados, the claimant claimed that the host State failed to take the necessary environmental protection measures and contributed to the contamination of the claimant’s eco-tourism site.Footnote 60 These actions violated the FET and expropriation standards of the investment.Footnote 61 While the Tribunal noted that the host State was not responsible for the contamination of the eco-tourism site, and therefore, the terms of the BIT were not violated,Footnote 62 it did note that the claimant bought the land for economic development even before submitting an environmental management plan or conducting an EIA, against the warnings of State officials.Footnote 63
The decisions in these awards may be relevant to scenarios where both the investor and the host State have the responsibility of ensuring the environmental viability of a project. The Nigeria–Morocco BIT and the African model treaties, which create such a scenario, do not explain what they mean by these clauses. Nonetheless, some educated guesses can be made as to potential interpretative implications that may arise with respect to these clauses.
First, procedurally speaking, the host State will be bound to be transparent with the investor about environmental screening procedures. Moreover, if a host State alleges that an investor is responsible for environmental degradation, the host State cannot evade responsibility if proper procedures have not been followed or if a project has been approved even without environmental sanction. Therefore, the host State may share liability with a foreign investor for environmental degradation.
Second, an investor cannot argue that environmental procedures were not informed or that the host State did not follow due procedures and that action of the host State led to a diminishment in the economic value of the investment. A joint reading of the obligations in the Nigeria–Morocco BIT, the ECOWAS treaty, and the SADC Model and to some extent, the PAIC, emphasise that the obligation to conduct an EIA employing the precautionary approach is on the investor, in conjunction with the host State and that there is a certain duty of responsibility.Footnote 64
4.2 Investor-State Arbitration and Investor Obligations
BITs do not expressly impose environmental obligations of conduct on foreign investors, whether in accordance with domestic law or international law. Consequently, tribunals have rarely had a chance to expound upon investor obligations from a general international law perspective. The limited jurisprudence on investor obligations usually involves counterclaims. However, even these instances have been marked by a reluctance on the part of tribunals to expressly recognise investor obligations unless they are treaty obligations or a general principle of international law.Footnote 65 In general, tribunals have also been reluctant to recognise human rights defences raised by host states.Footnote 66
Both the Nigeria–Morocco BIT and the SADC Model Treaty recognise the domestic and international environmental obligations of foreign investors. However, international environmental treaties do not impose any obligations on non-State actors and, while domestic law may place a precautionary burden of proof on a private actor, the onus to apply the principle and decide is on a State party.Footnote 67 Therefore, to what extent would clauses that mandate that foreign investor conduct an EIA and apply the precautionary principle, in accordance with the international legal obligations of the host State, have credence before an investor-State arbitration tribunal? Further, would such tribunals be willing to hold foreign investors liable in accordance with international law? The following analysis discusses the jurisprudence on investor obligations to answer this question.
In Aven v Costa Rica, the respondent claimed that the suspension of the claimant’s real estate project was in pursuit of legitimate environmental interests protected under the Central America-Dominican Republic Free Trade Agreement (DR-CAFTA)Footnote 68 and in accordance with Costa Rica’s domestic and international environmental obligations.Footnote 69 The respondent also argued that sound and efficient measures to protect the environment is key to the implementation of the treaty.Footnote 70 Chapter 17 of the DR-CAFTA expressly reserved space for environmental issues.Footnote 71 While making these arguments, the respondent maintained that neither the treaty nor the customary international law exonerates the claimants from complying with Costa Rica’s framework for the protection of the environment.Footnote 72 However, the respondent did not emphasise which rule of customary international law applied to the claimants.Footnote 73
One of the respondent’s key contentions was that the burden of proof was reversed on the party allegedly causing the risk of harm, that is, the claimant had the burden of disclosing to the host State, the existence of protected wetlands and forests on the construction site.Footnote 74 The respondent tied this obligation to the precautionary principle, recognised in its domestic biodiversity law which provided that ‘the burden of proof … shall correspond to whom requests the approval, the permit, or the access to biodiversity, or who is accused of having caused environmental harm’.Footnote 75 The respondent linked these obligations in its domestic law to its international obligations under the Ramsar and Biodiversity Conventions.Footnote 76
The Tribunal sided with the respondent and found that the claimant had a duty to advise the environmental authorities in matters that affect any impact to the environment, and to evidence that no adverse impact was to occur as a result of the development, and that this duty arose under domestic law.Footnote 77 Therefore, the burden of proof was with the claimant when applying for a permit to demonstrate the absence of non-permitted pollution, degradation or affectation.Footnote 78 A pertinent question arises from this ruling, relevant to our central analysis.
First, the Tribunal did not hold the claimant responsible in accordance with international law or the precautionary principle, per se, but rather in accordance with domestic law which incorporated the precautionary approach. The claimant had a duty under the domestic biodiversity law to advise the competent authority in matters that affect any impact to the environment and to evidence that no adverse impact was to occur as a result of the development.Footnote 79
Therefore, even if a BIT does say that a foreign investor must apply the precautionary principle and conduct an EIA, the tribunal will be bound to decide in accordance with the domestic law of that State, rather than an absolute rule, even if that rule is embodied in the treaty. This approach again gives rise to the rule vs standard dialectic. Even if the BIT states that the investor must operate the investment in accordance with the host State’s international obligations and apply the precautionary principle, the application of such rule will happen in accordance with domestic law, even if the host state has ratified environmental treaties which imbibe the precautionary approach.Footnote 80 It is, therefore, difficult to gauge the efficacy of the investor obligations in the Nigeria–Morocco BIT and draft PAIC from a purely international law perspective, even more so since these BITs are not in force.
Tribunals have also been reluctant to import investor obligations into investment treaties unless the treaty expressly mentions obligations.Footnote 81 In the Aven dispute, the host State also filed a counterclaim alleging that the claimant was responsible for environmental damage. Though the Tribunal recognised that the claimant was bound by the environmental measures taken by the host State under the DR-CAFTA, it observed that the treaty did not place any direct affirmative obligation on foreign investors.Footnote 82 Of course, an arbitral tribunal’s ruling may differ regarding a treaty which expressly places obligations on the investor. In such cases, as the model treaties discussed in this chapter suggest, in the absence of a domestic legal framework the question of being held liable in accordance with international law would arise.Footnote 83
The Urbaser v Argentina dispute is more relevant in the context of discussing the relationship between human rights treaties and the international investment law regime. However, the reasoning employed by the Tribunal is of some significance to understanding how the rules of international environmental law within investment treaties may apply to foreign investors.
In their counterclaim, Argentina argued that they suffered damage since the claimant failed to make the necessary level of investment, which would have guaranteed the human right to water and sanitation.Footnote 84 Their position was that under the concession contract and applicable regulatory framework, the claimants assumed investment obligations, which gave rise to bonafide expectations that the investment would be made and guarantee the human rights to water and sanitation. By failing to make these investments, the claimants violated the principles of good faith and pacta sunt servanda recognised by both Argentina and international law.Footnote 85 The claimant, on the other hand, argued that it was Argentina’s regulatory actions which prevented them from making the investment and that the Argentine Republic should be the true guarantor of human rights, and not a private party.Footnote 86 The investor also argued that the treaty did not place any express obligations on the investor and, therefore, the counterclaim of the host State faced the insurmountable challenge of being presented in the context of a BIT which did not create obligations for the investor or subject the investor to the rules of Argentine or international law.Footnote 87 While Argentina agreed that the responsibility of the investor originated under international law per se, through the concession framework, it argued that the Universal Declaration on Human Rights placed obligations on private parties and had achieved the status of customary international law.Footnote 88
In making its decision whether the investor had any positive obligation to guarantee human rights, the Tribunal referred to the dispute resolution clause of the Spain–Argentina BIT, which stated that disputes had to be decided in accordance with the general principles of international law. Using this clause as a steppingstone to further its arguments, the Tribunal ruled that a BIT cannot be an isolated, asymmetric set of rules, which only focuses on investment protection.Footnote 89 However, this is where the Tribunal showed a reluctance to read and express human rights obligation upon the investor within the treaty. The guarantee of human rights should be borne solely by the State, and the investor had a duty to ensure that its operations did not obstruct the host State from fulfilling its human rights obligations.Footnote 90 For such an obligation to exist, it should be part of another treaty or represent a principle of general international law.Footnote 91
The precautionary principle and EIA are not substantive rights. Rather within the international and transnational context, they are procedurally binding on State parties in terms of application and implementation. If the reasoning of the Urbaser Tribunal were to be followed, there is no international treaty obligation, or any general principal of international law independent of the investment treaty, which obligates private investors to implement these obligations. Therefore, it seems unlikely that tribunals would budge from their narrow stance on the international law-based obligations of investors. This reluctance stems not only from the ambiguity surrounding the international environmental obligations of non-State actors but also whether arbitrators will accept the validity of a treaty which directly imposes international obligations on investors. Irrespective of their status in general international law, most treaties only mandate that investors act in accordance with domestic law and even these obligations rarely extent to obligations of conduct.Footnote 92
The question of whether international obligations can be imposed on non-State actors or not remains unanswered. The next section explores this question from the wider perspective of those frameworks which try to impose environmental and human rights obligations on multinational corporations. It situates this discussion within the unique conception of international investment law, a regime which gives international rights to foreign investors but does not impose liabilities upon them.
5 The Environmental Liability of Foreign Investors as Non-State Actors – An International Law Perspective
The tribunals in the Urbaser and Aven counterclaims made similar observations that ‘it can no longer be admitted that companies operating internationally are immune from becoming subjects of international law’.Footnote 93 This observation was because several international instruments encouraged non-State actors to observe human rights and environmental obligations and investment treaties themselves expected investors to abide by host State measures to protect the environment. However, this is where the buck stopped, and the tribunals were unable to express themselves any further on the issue of the environmental liability of foreign investors. This limitation arose because general principles of international law do not recognise the international environmental liabilities of non-State actors. Indeed, while there are several soft law efforts to draft human rights codes for transnational multinational corporations like the ‘UN Draft Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights’, the ‘Guiding Principles on Business and Human Rights’ and the ‘Third Draft of the Open Ended Intergovernmental Working Group (OEIGWG)’, these instruments place the onus of regulation and enforcement on State parties and do not consider, in-depth, environmental obligations.Footnote 94
There are historic and economic factors which have given investors, as private non-State actors, certain rights in international law to have their investments protected and file claims against States for a decrease in the value of the investment,Footnote 95 but they have not been imposed with reciprocal obligations. While a discussion on this dichotomy remains beyond the scope of this chapter, it is important to try and understand what the nature of environmental obligations imposed on foreign investors by the Nigeria–Morocco BIT and the PAIC are.
To that extent, do these BITs try to equate foreign investors and State parties with the same obligations? Or is there a greater burden on State parties to ensure the compliance of these norms along with cooperation and participation of the investor? The answer is, perhaps, the latter. The obligation to conduct an EIA applying the precautionary principle, and to follow the international environmental obligations of the host State, would be in conjunction with the independent obligation of the host State to ensure that its investment is in accordance with its domestic and international legal obligations. It is difficult to imagine a scenario where these obligations could be construed as being imposed solely on investors.
It will be useful to take inspiration from Alvarez’ idea that international lawyers should spend their time addressing which rules may apply to corporations, rather than thinking about whether corporations are subjects of international law or not.Footnote 96 While acknowledging that corporations do have international responsibilities, he cautions that these responsibilities cannot be the same as those of State parties simply because corporations are not the equivalent of States or natural persons.Footnote 97 Therefore, a tribunal will not agree that an investor has the responsibility of ensuring the human right to water, but can agree that the investor has the responsibility of ensuring that the precautionary approach is followed while conducting an EIA, provided there are binding legal frameworks which provide for such obligations. International law does not directly hold multinational corporations responsible for human rights violations and, therefore, the drafters of investment treaties must align the obligations of conduct they place on foreign investors with their domestic legal frameworks, ensuring that their international legal obligations have been assimilated into those domestic legislations applicable to foreign investors.
6 Conclusion
Many of the treaties discussed in this chapter have not yet come into force and, in fact, the PAIC has been relegated to the status of a policy document.Footnote 98 However, the unique aspect of these treaties is that they adopt a precautionary approach and mandate both investor and host State to assess the environmental impact of an investment with caution. In fact, the customary status of the precautionary approach is further legitimised with its integration in investment treaties. Though these environment CIL rules may bind only State parties, their inclusion in non-environmental treaties could be a step towards ensuring that State parties clearly delineate procedures for their implementation.
The reader may possibly think that this chapter started on an optimistic note, with its highlighting of the integration of customary international environmental law in investment treaties and its exploration of the possibilities of crafting investor obligations. However, it ends on a slightly pessimistic note, concluding that the efficacy of these obligations would primarily depend on domestic law mechanisms and by simply including these obligations in a treaty, even if they are CIL, is not enough. However, it is hoped that these treaties, and this chapter, mark the beginning of trying to find a solution to a problem that has plagued the study of international investment law for the past few years.
1 Introduction
The growing number of investor-State arbitrations shed a light on the role of customary international law in the context of remedies. In virtually every arbitral award based on international investment treaties, when tribunals find that respondent States have violated their obligations, stemming from the underlying treaties, they make explicit reference to the Chorzów Factory judgment. They find that the principle that an award should ‘wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed’ reflects customary international law. Sometimes, additional reference is made to the Draft Articles on Responsibility of States for Internationally Wrongful Acts (ILC Articles) to confirm that the calculations which follow are rooted in customary international law. This is commonly repeated, but often no detailed analysis follows. Instead, tribunals simply proceed to calculate compensation guided by the principle that a methodology should be applied which does not result in a ‘speculative’ outcome.
This chapter analyses some of the issues which arise in this context. First, what is the real meaning of references to the Chorzów Factory judgment in virtually every investment arbitral award? Is customary international law helpful in determining remedies, or is it merely a shortcut which allows the tribunals to proceed to compensation calculations? Second, why are references to remedies other than compensation, which are available under customary international law, so rare in investor-State arbitrations?Footnote 1 Is there a place for restitution or declaratory awards in international investment law? Third, what are the differences between the consequences of lawful expropriation and the consequences of treaty breaches in the light of customary international law?
The issues discussed in this chapter are particularly visible in disputes concerning renewable energy and early-stage mining projects, both of which fall within a broad definition of the natural resources sector. Therefore, the final part of this chapter concerns the methodologies available for calculations of compensation for treaty breaches, explained by way of examples of disputes concerning the flagged industries.
2 The Chorzów Factory Judgment as the Textualisation of Customary International Law
In its judgment, issued on 13 September 1928, the Permanent Court of International Justice (PCIJ) observed as follows:
The essential principle contained in the actual notion of an illegal act – a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals – is that reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it – such are the principles which should serve to determine the amount of compensation due for an act contrary to international law.Footnote 2
Even back in 1928, this principle was ‘established by international practice’.Footnote 3 Thus, the first pre-requisite (usus) for considering it as customary international law has been met. In 1987, the US–Iran Claims Tribunal noted that ‘in spite of the fact that it is nearly sixty years old, this judgment is widely regarded as the most authoritative exposition of the principles applicable in this field, and is still valid today’.Footnote 4 It has been confirmed on uncountable occasions since then.Footnote 5 Thus, the second condition, opinio juris sive necessitatis, has also been met.Footnote 6 In the context of investor-State disputes, States not only commonly adopt this position but also enforce and recognise arbitral awards rendered on this basis as final and binding.
The Chorzów Factory principle is reflected in the ILC Articles.Footnote 7 Even though the ILC Articles ‘seek to formulate, by way of codification and progressive development, the basic rules of international law concerning the responsibility of States for their internationally wrongful acts’, their respective provisions codify, not progressively develop, the principle reflected in the Chorzów Factory judgment.Footnote 8
The ILC Articles precisely define that Part Two thereof (which includes remedies) ‘does not apply to obligations of reparation to the extent that these arise towards or are invoked by a person or entity other than a State’.Footnote 9 This ‘is without prejudice to any right, arising from the international responsibility of a State, which may accrue directly to any person or entity other than a State’.Footnote 10 Despite that, they have been continuously referred to in investor-State arbitrations.Footnote 11 Depending on how one assesses the nature of investors’ rights under investment treaties, they are applicable either directly or mutatis mutandis. One possible theoretical approach is that investment treaties create investors’ own substantive and procedural rights (being States’ obligations towards investors, which would allow for Part Two of the ILC Articles being applied only mutatis mutandis).Footnote 12 Another possible approach is that investment treaties create procedural rights which can be applied to trigger arbitral proceedings related to alleged breaches of obligations owed to the State of the investor’s nationality (being obligations owed to the other contracting State, and not to the investors themselves, which would allow for Part Two of the ILC Articles being applied directly).Footnote 13
The Chorzów Factory judgment is frequently referred to by arbitral tribunals in cases based on investment treaties.Footnote 14 The tribunals consider the Chorzów Factory judgment as reflecting customary international law and, therefore, playing a pivotal role in determining remedies available in investor-State arbitrations. Even though the starting point for determining the remedies available in each case is always the text of the applicable investment treaty,Footnote 15 most treaties remain silent on the issue of remedies for their breach, although a few exceptions exist.Footnote 16 Thus, customary international law becomes relevant, as it governs issues that are not regulated in an applicable international treaty.Footnote 17
The Chorzów Factory principle ‘is precise, strict, and unchangeable as a principle, but flexible and useful in a myriad of different scenarios’.Footnote 18 Its biggest advantage sometimes turns out to be its disadvantage – tribunals have frequently failed to sufficiently analyse the application of this customary international law rule. Instead, they often tend to take a ‘shortcut’ and proceed to calculation of compensation, simply observing that this is ‘consistent with the principles set forth’ in the Chorzów Factory judgment.Footnote 19
3 Restitution as the Primary Remedy
Under the Chorzów Factory principle, restitution is the default remedy for violations of a State’s international obligations.Footnote 20 Only when restitution ‘is not possible’ should the ‘payment of a sum corresponding to the value which a restitution in kind would bear’ be awarded.Footnote 21 This is re-affirmed in Article 36(1) of the ILC Articles, according to which a State responsible for an internationally wrongful act ‘is under an obligation to compensate for the damage caused thereby, insofar as such damage is not made good by restitution’.
Therefore, under customary international law, the broad concept of ‘reparation’ is divided into three subcategories: restitution, compensation and satisfaction, each being a different type of remedy. Restitution is a default remedy and a primary obligation of a State which violates an investment treaty.Footnote 22 However, sometimes full reparation may only be achieved by combining different forms of reparation.Footnote 23
From a theoretical perspective, the possibility of arbitral tribunals awarding restitution in investor-State disputes has been recognised for many years.Footnote 24 This theoretical possibility has been confirmed as available in investor-State arbitrations.Footnote 25 In light of the above, it may be surprising that investor-State arbitral awards almost always comprise a compensation payment.Footnote 26 Only sometimes does this result from a particular substantive law being applicable to the dispute.Footnote 27 Typically, investment treaties do not address remedies at all, so they also do not preclude the possibility of restitution.
Most probably, the main reason for tribunals paying insufficient attention to restitution is the way in which claims are framed. Claimants have the right to choose which form of remedies they seek.Footnote 28 The way in which claims are framed binds the tribunals, which cannot go beyond the remedies sought by the claimants.Footnote 29 It is rare in practice for investors to seek remedies other than compensation.Footnote 30 It was rightly commented that ‘the ultimate goal of the claimant in an investment treaty arbitration is almost always the payment of compensation for the harm it believes it has suffered at a host State’s hands’.Footnote 31
Recent awards rendered against Spain suggest that this approach may be revisited in practice. In Eiser v Spain, Masdar v Spain, Antin v Spain, RREEF v Spain, RWE v Spain, PV Investors v Spain and Watkins v Spain, the claimants primarily sought restitution and only asked for compensation if restitution was not awarded.Footnote 32 None of the tribunals in these cases declined the theoretical possibility of awarding restitution.Footnote 33 However, each tribunal arrived at the conclusion that restitution was inappropriate on the facts of the particular case.
Such an approach seems to be justified in the Spanish saga cases, which concern alleged violations of investment treaties arising due to changes in the general regulatory framework. Restitution can be replaced by compensation not only where restitution is ‘not possible’ (as expressly stated in the Chorzów Factory judgment and recognised in Art 35 of the ILC Articles), but also if restitution is ‘unavailable’ or ‘inadequate’.Footnote 34
It would be either impossible, or at least extremely difficult, to comply with an award which ordered the restitution of previously applicable laws and regulations.Footnote 35 Moreover, the Tribunals in Eiser v Spain, Antin v Spain and Watkins v Spain observed that ordering restitution could give rise to doubts as to the permissibility of limiting State sovereignty.Footnote 36 The Tribunal in Masdar v Spain concluded that it could ‘unduly burden’ the respondent’s ‘legislative and regulatory autonomy’.Footnote 37 The Tribunal in RWE v Spain observed that the case was ‘plainly not an appropriate case for restitution’, as it involved regulations ‘generally applicable across a very important sector in Spain’ and restitution ‘would obviously involve a burden to the Respondent out of all proportion’.Footnote 38
The ‘sovereignty concern’ is well founded in the context of treaty violations caused by changes to generally applicable regulatory frameworks, as happened in the Spanish saga cases. It is less justified in cases concerning treaty breaches targeting a specific, individual investor. In such cases, the approach adopted by Energy Charter Treaty (ECT), North American Free Trade Agreement (NAFTA) and the United States Mexico Canada Agreement (USMCA) provide useful guidance on how to mitigate the sovereignty concern related to restitution by ordering that the respondent ‘may pay monetary damages and any applicable interest in lieu of restitution’.Footnote 39 This solution is not a deviation from the Chorzów Factory principle.Footnote 40 Arbitral tribunals have the possibility to adopt a similar approach in investment disputes based on investment treaties other than ECT, NAFTA or USMCA. This is certainly so if the claimant presents an explicit request for such relief. However, even if a claimant’s request is framed in a traditional manner – ie, it requests restitution and, only if restitution is impossible, compensation as an alternative – this opens the door for the tribunal to order restitution with the possibility to pay compensation in lieu of restitution.
Alternatively, tribunals can award restitution, stipulate a time limit within which it must materialise and proceed to ordering compensation only if the respondent fails to perform the specific obligation imposed upon it. Although no publicly available arbitral award reveals that this theoretical possibility has already been applied in practice, an analogy can be made from some tribunals’ approach of deferring a decision on compensation to await both parties’ initiative to provide a joint experts’ report, whilst at the same time securing an alternative scenario if the parties cannot or do not wish to reach an agreement.Footnote 41
Restitution may occur alongside compensation, not merely as an alternative.Footnote 42 With respect to an income-generating business, a return of the asset alone would not fully compensate the investor, as it would not compensate the income lost by that business in the intervening period.Footnote 43 In such a case, restitution should take place ‘in combination’ with compensation, as explicitly stated in Article 34 of the ILC Articles.Footnote 44 Only then is the principle of full reparation met.Footnote 45 Similarly, restitution should take place ‘in combination’ with compensation if an expropriated asset has lost its value since it was taken away. Otherwise, the claimant would be in a worse position if the asset were returned to him than if he received compensation.Footnote 46
4 No Place for Declaratory-Only Awards
Satisfaction is a third type of remedy available for the violation of treaty obligations. This remedy comes into play insofar as the injury ‘cannot be made good by restitution or compensation’.Footnote 47 In this sense, an award itself, which declares the wrongfulness of State actions, can constitute satisfaction – a form of reparation.Footnote 48
This remedy has little, if any, relevance in investor-State disputes. First, no investor would ever decide to commence costly arbitral proceedings solely to achieve this purpose. Therefore, a declaratory-only award by itself would be considered a ‘paper victory’ and a de facto loss, rather than one which results in meaningful reparation being granted.
Second, the award must be made public if the claimant is to receive satisfaction within the above meaning. Many arbitral awards remain unpublished, notwithstanding a certain tendency towards transparency.Footnote 49 The fact that an award will remain confidential would require an arbitral tribunal to order the State to issue ‘an acknowledgement of the breach, an expression of regret, a formal apology or another appropriate modality’, rather than simply issuing an award which declares that certain treaty provisions were infringed.Footnote 50
Although theoretically possible, there is nothing in the public domain to suggest that a claim has ever been framed in that manner, ie requesting exclusively declaratory relief.Footnote 51 Claimants invariably request declaratory relief in conjunction with compensation (and sometimes restitution).Footnote 52
5 Compensation for Lawful Expropriation
When looking at compensation, it is important to differentiate between lawful expropriation and violations of investment treaties, including unlawful expropriation.Footnote 53
Expropriation as such is not prohibited under general international law.Footnote 54 On the contrary, States have a right to expropriate alien property.Footnote 55 Investment treaties do not alter this situation. In fact, most explicitly reaffirm States’ right to expropriate. They do, however, define the conditions which must be met by expropriatory action before it will comply with States’ international obligations. The standard conditions of lawful expropriation include the existence of a public purpose, non-discrimination, due process and ‘prompt, adequate and effective compensation’Footnote 56 (or similar wording having the same meaning).Footnote 57 The last condition is typically accompanied by a determination of the valuation date and applicable interest rate.Footnote 58
The most essential element in defining compensation – adequate – is linked with the objective value of the expropriated investment, which is equated with its ‘fair market value’.Footnote 59 The fair market value is understood as reflecting ‘the price at which a willing buyer would buy, and a willing seller would sell, no party being under any type of duress and both parties having good information about all relevant circumstances involved in the purchase’.Footnote 60 ‘Effective’ means that compensation must be ‘fully realizable’, whilst ‘prompt’ means ‘paid without delay’.Footnote 61
The above is not, however, a remedy for an internationally wrongful act.Footnote 62 The applicable legal principles differ between compensation, as one of the conditions of lawful expropriation, and compensation, as a remedy for unlawful expropriation.Footnote 63
In this context, a question arises whether a failure to fulfil this condition of lawful expropriation (ie the condition of paying ‘prompt, adequate and effective compensation’) by itself means that the expropriation becomes unlawful. Many tribunals have ruled in favour of this approach.Footnote 64 Others have decided that non-fulfilment of the compensation prerequisite does not, by itself, render the expropriation unlawful.Footnote 65 However, the latter cases concerned situations where the respondent States accepted their obligation to pay compensation, but the parties were unable to agree on the amounts due. The Tribunal in Tidewater v Venezuela found that this was ‘not a case where the State took assets without any offer of compensation. The record does not demonstrate a refusal on the part of the State to pay compensation. Rather, it discloses that the Parties were unable to agree on the basis or the process by which such compensation would be calculated and paid’.Footnote 66 Similarly, in Venezuela Holdings v Venezuela the negotiations on compensation took place and the respondent State ‘made proposals during those negotiations’.Footnote 67 This allows the conclusion that expropriation should be considered as legal if all other conditions have been met (aside from the payment of compensation) and the respondent State has made ‘a good faith effort to comply with the compensation requirement’ (even if unsuccessfully).Footnote 68 If, on the other hand, the respondent State declines to pay any compensation at all, the failure to fulfil this condition suffices to consider the expropriation unlawful. In line with the above, any indirect expropriation would always amount to unlawful expropriation, as it is not compensated and involves no attempt to negotiate the amount of compensation payable.
6 Remedies Available for Treaty Breaches
As noted above, compensation for lawful expropriation is linked with the ‘fair market value’ of the expropriated object, typically with the valuation date set immediately prior to expropriation and increased by the applicable interest rate. If an expropriation does not meet the conditions of being lawful, it should not have taken place at all. In such a situation, reparation should ‘wipe out’ all of its consequences. The principle of full reparation rooted in customary international law does not provide any guidelines on how to determine the financial situation of the victim of a treaty breach.Footnote 69
The aim is to put the claimant in the same situation as it would have been ‘but for’ the breach. In the first place, this may justify restitution in kind, as noted above. In the context of compensation, there are two vital differences between the compensation calculated as a condition for lawful expropriation and the compensation calculated as a remedy for unlawful expropriation. These relate to: (i) the date of valuation and (ii) the possibility to use ex post information during the calculation.Footnote 70
As noted earlier, compensation for lawful expropriation is typically calculated on the basis of the fair market value shortly prior to the time at which the asset was taken. Calculating compensation for unlawful expropriation offers more flexibility. It allows the same date to be chosen as would apply in the case of lawful expropriation (ie immediately prior to the taking), but it offers an alternative – ie the date of the award.Footnote 71 This is in line with the principle of putting the claimants in the situation they would have been in ‘but for’ the breach. The PCIJ itself noted in the Chorzów Factory judgment that compensation
is not necessarily limited to the value of the undertaking at the moment of dispossession, plus interest to the day of payment. This limitation would only be admissible if the Polish Government had had the right to expropriate, and if its wrongful act consisted merely in not having paid to the two Companies the just price of what was expropriated.Footnote 72
In the words of the US–Iran Claims Tribunal in Phillips Petroleum v Iran, the difference is – apart from restitution – ‘whether compensation can be awarded for any increase in the value of the property between the date of the taking and the date of the judicial or arbitral decision awarding compensation’.Footnote 73
Another difference is the possibility to make use of ex post information – ie information which became available only after the expropriation took place. In the case of lawful expropriations, calculations are based on data available at the moment just prior to the taking, which reflects ‘the price at which a willing buyer would buy, and a willing seller would sell’ with the knowledge they would have actually had on the valuation date.Footnote 74 Customary international law allows a different approach – ie relying on any available information, including ex post knowledge.Footnote 75 The ‘only subsequent known factors relevant to value which are not to be relied on are those attributable to the illegality itself’.Footnote 76
These differences can result in higher amounts of compensation when compared to compensation for lawful expropriation. As was summarised by the Tribunal in Quiborax v Bolivia: ‘This is easily explained by a reference to restitution: damages stand in lieu of restitution which would take place just following the award or judgment. It is also easy to understand if one keeps in mind that what must be repaired is the actual harm done, as opposed to the value of the asset when taken.’Footnote 77 This may become relevant in practice. For example, with respect to unlawfully taking a mining concession, it would not be surprising if, at the moment of taking, the deposit estimations suggest that a specific amount of mineral resource exists, but subsequently the deposit turns out to be larger, thereby increasing the amount of due compensation.
At the same time, these differences should not result in a lower compensation for unlawful expropriation than for lawful expropriation. It is possible for an expropriated investment to lose its value between the expropriation date and the date of the award. If this occurs, compensation for lawful and unlawful expropriation should be calculated on the same basis, ie based on the value of the asset at the time of expropriation, plus interest.Footnote 78 This is in line with customary international law, which provides that restitution – if possible – should be awarded together with compensation for any loss which is not covered by restitution. If compensation is the only remedy available, the claimant is entitled to compensation ‘in the amount of the asset’s higher value’ between the expropriation date and the date of the award. This is because the State which violated international law bears ‘the risk of unanticipated events decreasing the value of an expropriated asset over that time period’, not the individual who suffered the loss.Footnote 79
An important differentiation in this context arises with respect to a division between unlawful expropriation and other treaty breaches. It goes without saying that the Chorzów Factory principle finds application to all violations of investment treaties’ provisions, not solely unlawful expropriation.Footnote 80
In this context, restitution could play a more important role in the future.Footnote 81 In terms of compensation, if violations of multiple standards are found, typically, tribunals consider it sufficient to calculate compensation for unlawful expropriation as covering the whole loss suffered.Footnote 82 This is in line with the Chorzów Factory principle, which requires that no overcompensation takes place.Footnote 83 It results from a pragmatic approach: typically, other breaches would result in a compensation award of equal or less value than the compensation due in the case of unlawful expropriation.Footnote 84
7 Methodologies of Calculating Compensation in the Light of the Chorzów Factory Principle
Within the legal framework discussed above, when calculating compensation tribunals must decide which methodology to apply. In each case, the choice of methodology is fact dependent. In the words of the Tribunal in Antin v Spain: ‘there are no right or wrong valuation methods, but different methods that are appropriate depending on the specific circumstances of the case’.Footnote 85 Whichever methodology is applied, typically, compensation ‘cannot be determined with mechanical precision’.Footnote 86 What matters is that the arbitrators are comfortable that the methodology applied is not ‘speculative’.Footnote 87 Reluctance towards a speculative outcome is one of the key factors which influences arbitrators when choosing the methodology for calculating compensation.
Keeping in mind the above, it is possible to make a few general comments on the methodologies typically available in investor-State arbitrations. From a theoretical perspective, they can be divided into two classifications: (i) backward-looking and (ii) forward-looking.Footnote 88
Probably the most common backward-looking methodology considers the amounts actually invested (‘sunk costs’) and seeks to return this amount to the investor. The advantage of this methodology is that the outcome is based on actual figures, which avoids any speculation.Footnote 89 The disadvantage is that it does not compensate for lost profits.Footnote 90 As such, it does not place the claimant in a situation in which it would have been ‘but for’ the treaty breach, as required by customary international law. No reasonable investor decides to undertake an investment with the sole purpose of receiving back the amount it originally invested after a period of time.
This shortcoming is partially cured by ordering pre-award interest.Footnote 91 This is envisaged by Art. 38 of the ILC Articles, which states that interest may be ‘necessary in order to ensure full reparation’.Footnote 92 Pre-award interest ‘should compensate a claimant for the deprivation of money owed to it between the date of the harm suffered and the award’.Footnote 93 The economic rationale behind interest is to reflect the ‘cost of money that a lender is willing to be paid to part with his money for a given period of time’.Footnote 94 Pre-award interest, therefore, brings ‘past losses […] to present value’ and compensates for loss stemming from the fact that the investors were not ‘in possession of the funds’ to which they were entitled and they had ‘either to borrow funds at a cost or were deprived of the opportunity of investing these funds at a profit’.Footnote 95 As such, it reflects the time value of money and the decreasing purchasing power of money over time. It does not compensate investors for the fact that they did not obtain a profit from the investment.Footnote 96
For the above reason, ‘sunk costs’ can be used as a ‘reality check’ of the outcome reached by applying other methodologies.Footnote 97 They can serve as the primary methodology only if forward-looking ones are unavailable in a particular case. The two most common forward-looking methodologies are: (i) income based and (ii) market based.Footnote 98
Income-based methodology, also known as the Discounted Cash Flow (DCF) method, calculates the present value of an investment’s anticipated future cash-flows during its useful life.Footnote 99 As such, it provides for a fair market value of a ‘going concern’.Footnote 100 It aims at compensating lost profits which the investment was supposed to generate, but was unable to because of the treaty breach.Footnote 101 Application of this method requires the ability to forecast future earnings.
Market-based methodology determines the value of an investment by comparing it to similar investments traded on the open market. Whilst DCF ‘computes the present value of the business’s future earnings’ directly, the market-based approach does so indirectly ‘because it incorporates market values of comparable businesses’.Footnote 102 Application of this method requires the existence of comparable transactions (concerning similar projects or companies, if an investment is implemented through a special purpose vehicle having one asset).Footnote 103
Forward-looking methods are commonly applied in business reality, outside the context of litigation.Footnote 104 For example, they are recognised in industry standards for valuating mineral properties.Footnote 105 They are based on market indicators. Thus, even though they represent a degree of subjectivity and uncertainty, this in itself should not preclude their application.Footnote 106
8 The Curious Case of the Natural Resources Sector
Investor-State arbitration case law reveals the reluctance of arbitral tribunals to apply forward-looking valuation methods to early-stage projects, particularly those which have not yet started to generate any income. With respect to such projects tribunals tend to consider the DCF method as ‘too speculative and uncertain’,Footnote 107 ‘unattractive and speculative’,Footnote 108 requiring ‘too many unsubstantiated assumptions’ and being ‘overly speculative’,Footnote 109 requiring an investment to be ‘a going concern with a proven record of profitability’.Footnote 110 The tendency with respect to comparable transactions is to consider them as ‘not sufficiently comparable’Footnote 111 or to find that they do not ‘support a clear conclusion’ regarding comparability.Footnote 112 Instead, tribunals prefer to look at the amounts actually invested (‘sunk costs’)Footnote 113 or other backward-looking methods, such as offers actually received in the past to acquire the relevant investment.Footnote 114
In cases where tribunals have decided not to apply the DCF method to early-stage mining projects, they did not preclude the use of the method per se, but merely decided that it was not applicable to the facts of the given case.Footnote 115 Rightly so, as the methodology itself is in line with the Chorzów Factory principle.
There are examples to show that the DCF method can also be applied in disputes concerning early-stage mining projects. In Tethyan v Pakistan case, the Tribunal awarded compensation based on a ‘modern DCF’. It observed that, among other matters,
the question whether a DCF method (or a similar income-based valuation methodology) can be applied to value a project which has not yet become operational depends strongly on the circumstances of the individual case. The first key question is whether, based on the evidence before it, the Tribunal is convinced that in the absence of Respondent’s breaches, the project would have become operational and would also have become profitable. The second key question is whether the Tribunal is convinced that it can, with reasonable confidence, determine the amount of these profits based on the inputs provided by the Parties’ experts for this calculation […].Footnote 116
Both prerequisites were met in the case. The Tribunal in Crystallex v Venezuela observed, in the context of a gold mine project which had not commenced production, that:
the Claimant has established the fact of future profitability, as it had completed the exploration phase, the size of the deposits had been established, the value can be determined based on market prices, and the costs are well known in the industry and can be estimated with a sufficient degree of certainty. […] In this case only forward-looking methodologies aimed at calculating lost profits are appropriate in order to determine the fair market value of Crystallex’s investment.Footnote 117
This is in line with standard industry practices such as CIMVal Standards and Guidelines 2003. Also, the Tribunal in Gold Reserve v Venezuela, where the experts for both parties used the DCF method, applied it to non-production property.Footnote 118
This case law reveals that the DCF method can indeed be applied to early-stage mining projects.Footnote 119 Relevant factors in the fact-assessment include whether a sufficient degree of certainty has been achieved regarding projections of future profitability (such as knowledge of the size of the mineral deposit,Footnote 120 predictability of price fluctuations strengthened by resource typeFootnote 121 and reliable mining cashflow analysis prepared prior to the dispute having arisen),Footnote 122 combined with the claimant’s standing (such as a historical record of financial performance,Footnote 123 whether it has a demonstrated commitment and capacity – both financial and organisational – to progress to the production stage).Footnote 124
These observations find support in the Spanish saga case law, concerning investments in the renewable energy sector (which is considered to fall within the field of natural resources).Footnote 125 In most of these cases, when tribunals found that the underlying investment treaty had been infringed, they decided to apply the DCF method.Footnote 126 The tribunals did not consider it too speculative. The lifetime of the investments (power plants) was foreseeable. This can be compared to the expected lifetime of a mine and the production period of a particular deposit. The commodity price (electricity) was foreseeable. This can be compared to the commodity price of natural resources such as gold, copper or gas.Footnote 127 Developing projects in both fields requires large, upfront investments.Footnote 128
In the renewable energy sector, an important element allowing for DCF calculations was the highly regulated nature of the industry, minimising the expected fluctuations of future cash flows. In the words of the Tribunal in Novenergia v Spain, the DCF method ‘is considered particularly suitable for valuating income-streams that are regulated (as opposed to unregulated business that is more exposed to market fluctuations)’.Footnote 129 Thus, the DCF method was applied not only to ‘going concerns’, but also to investments which began generating income shortly prior to the respondent’s regulatory changes, which violated the investment treaty.Footnote 130 This is a major difference between mining and renewable energy disputes. Whereas mining disputes also concern a highly-regulated industry, this factor is not related to State subsidies and, therefore, has limited impact on future cash flows.
9 Conclusions
The Chorzów Factory principle reflects customary international law governing remedies for treaty breaches. As such, it applies to violations of international investment treaties. It entitles claimants in investor-State arbitrations to seek restitution prior to compensation or satisfaction.
Claimants have a right to choose the remedy they wish to seek. If claimants seek restitution, tribunals have the power to award it, unless this is explicitly precluded by the underlying treaty or is impossible (or at least inadequate) due to the facts of a particular case. Restitution was considered as inadequate in the Spanish saga cases, which concerned treaty violations resulting from the adoption of new laws and regulations. Ordering restitution in this context was considered as potentially limiting State sovereignty. Tribunals can award restitution with the possibility to pay compensation in lieu of restitution, to overcome similar concerns in cases concerning individually applied measures.
A declaratory-only award is considered as a ‘paper victory’ and the de facto loss of the case, rather than as having obtained satisfaction, a meaningful form of reparation. Such an award is disproportionate when compared to the costs of arbitral proceedings and its significance is undermined by the confidentiality of the bulk of investor-State arbitral awards.
In practice, claimants rarely consider any remedy other than compensation. The Chorzów Factory principle seems to be used by claimants as a shortcut to proceed to calculating compensation. There is nothing reproachable in this, and the precise manner in which claims are framed is binding on tribunals, which cannot go beyond the remedies sought by the claimants. This explains, however, the reasons why remedies other than compensation – restitution and satisfaction, available under customary international law – are only occasionally considered in investor-State arbitrations.
With respect to compensation, differences exist between compensation for lawful expropriation (compensation is a prerequisite of any lawful expropriation) and compensation as a remedy for unlawful expropriation. The latter can be higher, as it can be calculated as of the date of the award and it can make use of ex post information. This understanding of the customary international law governing compensation appears to be already settled in investor-State arbitral case law.
There is no infallible approach to choosing the methodology for calculating compensation for treaty breaches. However, the choice of forward-looking (income-based) methods is generally available in cases concerning all sectors of the economy, including in disputes concerning early-stage mining projects and renewable energy power plants. There are identifiable patterns in the case law, showing that (i) in principle, arbitral tribunals are reluctant to apply forward-looking valuation methods to early-stage projects, particularly those which have not begun to generate any income, but (ii) if a number of factual elements exist, this initial reluctance can be overturned. This U-turn is easier in renewable energy disputes than in mining disputes, because the highly-regulated nature of the renewable energy industry is closely related to State subsidies, which allow the expected fluctuations of future cash flows to be minimised.
1 Introduction
The intellectual movement of Third World Approaches to International Law (TWAIL) is now a well-established strand of critical thought within the international legal discourse. At its core, TWAIL unveils the hierarchical nature of the international legal system and undertakes critical investigations which unearth power relationships within the international community.Footnote 1 While nowadays some may argue that the term TWAIL or the reference to third world States is anachronistic, it is important to understand that TWAIL is not a reference to a particular geographical constellation in international law. This is all the more so if we consider that States traditionally grouped under the ‘third world’ heading have since changed the political, economic or social traits that originally earned them this categorisation.Footnote 2 Rather, TWAIL represents a perspective which is ‘critical of the universalizing mission and occidental authority of Eurocentric international legal scholarship and practice’,Footnote 3 and is not necessarily tied to a geographical Statist space. This reflects first the non-homogeneous ideological make-up of States traditionally considered as belonging to the third world, as well as the fact that nowadays one may often find the wretched and the dispossessed among societies traditionally considered to be part of the Global North. Thus, members of the TWAIL intellectual movement may not always share a geographical space and yet be united in ‘a sensibility and a political orientation’.Footnote 4
Historically, there have been different ways that TWAIL scholars have chosen to engage with international law, varying from complete denunciations of the system to more constructive attempts to deploy existing legal structures with a view to enacting change.Footnote 5 In this chapter, I will sketch out a discussion of customary international law (CIL) interpretation as an example of constructive engagement with international investment law (IIL) from a TWAIL perspective. I will build on the existing TWAIL scholarship, which has engaged in criticism of IIL as a regime and of the theory of CIL as a source of international law (Section 2). Having outlined the existing critique, I will turn to a discussion of CIL interpretation as a potential tool for reconciling some of the harsh, but merited, criticism coming from the TWAIL perspective with a continued engagement with and reliance on international (investment) law.
First, relying on the example of the minimum standard of treatment of aliens (MST) – one of the oldest customary rules of the international investment regime – I will argue that interpretation plays a crucial role in the construction of customary rules and is central to their evolution and continued existence (Section 3). Having established this, I will move to my final argument as to how this awareness of the function of interpretation in CIL can help us constructively engage with IIL from a TWAIL perspective (Section 4). Here, I will outline strategies for interpretation which may be deployed from the TWAIL perspective in order to address the perceived problems in the regime of IIL. Put differently, I will argue that the awareness of what interpretation is and how it functions in CIL opens up new avenues for addressing problems within both particular customary rules and, more generally, international (investment) law. It is at the stage of interpretation of customary rules that particular criticism can be raised and potentially resolved. In this sense, interpretation is a tool that may be utilised to address and potentially improve upon problematic rationales underlying the rule or the larger system in which it operates. While this presents great emancipatory potential with regard to argumentative strategies that may be developed, it also has its limitations. An evaluation of the limitations of the argument as well as some summary observations are thus addressed in the conclusion (Section 5).
2 The Criticism of Customary International Investment Law from the TWAIL Perspective
It is not surprising to observe that TWAIL scholarship is very critical of the regime of IIL. The TWAIL intellectual tradition in international law originates from decolonisation. It is a school of thought which perceives the international legal system as one built on power disparity, exploitation, and unequal relations. On this understanding, international law as a system reflects the interests of powerful States, and these interests are deployed through various legal doctrines including the doctrine of CIL. Here CIL is considered problematic both generally as a category in the sources doctrine,Footnote 6 and more specifically on the level of individual customary rules.Footnote 7 These problems of CIL are set in the wider historical context which links the development of international law to the colonial encounter between European States and the violently colonised non-European world.Footnote 8 It is thus not surprising to find particularly strong criticism among TWAIL scholars aimed at the system of IIL, and the (customary) rules contained therein.Footnote 9
Historically, one of the strongest concerted TWAIL efforts at both criticising and reforming the international economic legal order was the New International Economic Order (NIEO).Footnote 10 This was an initiative of Third World States aided by TWAIL scholars aimed at reforming regimes such as the IIL via a concentrated legislative effort at the United Nations General Assembly. The initiative concerned a reformation of key areas such as foreign direct investment, the rules of nationalisation and expropriation, the criteria applied to compensation, and the fora for dispute settlement in this area.Footnote 11 While highly ambitious, this initiative was met with little success. Pushback from Western States as well as various complex forms of financial domination deployed in the international system undermined the reformative effort, and the battle for a NIEO was largely lost.Footnote 12 The limited success of the NIEO has spurred what some have called a second generationFootnote 13 of TWAIL scholars, more disenchanted with international law, and focused on uncovering its continuously hegemonic traits. It is among this scholarship that much of the criticism of the contemporary IIL system can be found.
A central trait of this criticism revolves around the underlying rationale of IIL. The assumption upon which IIL is constructed is that foreign investment is so essential to economic development that its operation must be facilitated by near absolute protection of the foreign investment/investor.Footnote 14 This assumption, however, remains contested among critical scholars, as case studies demonstrate that foreign investment can be hugely exploitative and damaging to host economies.Footnote 15 This has led Sornarajah to observe that while the potential of foreign investment to aid development must be recognised, the absolute protection of investment in international law enables ‘the instrumentalism of free market fundamentalism’ to fragment international law ‘without paying heed to prescriptions of law relating to the environment, human rights or labour standards’.Footnote 16 Similarly, Odumosu has demonstrated that in the context of investment dispute settlement, this overwhelming focus on investment protection has all but erased legitimate grievances of local populations affected by investments, and also significantly restricted the extent to which host States might balance the protection of foreign investment with the protection of other local interests.Footnote 17
The criticism of the underlying rationale of IIL often goes hand in hand with a critique of its historical origin, as well that of specific customary rules operating in the system. For instance, Kelly traces the customary MST to early natural law doctrines on the freedom of commerce and the rights to hospitality and sociability of Vittoria and Grotius, developed to legitimise the extension of the European colonial empires and the exploitation of peoples and resources encountered in the process.Footnote 18 Similarly, Anghie unpacks the relationship between State responsibility and the customary MST to demonstrate that Western States re-established colonial relationships of power with former colonies through what was ostensibly neutral international law.Footnote 19 Thus, while the formal process of decolonisation got rid of colonial empires, legal doctrines formed in the colonial period survive today and perpetuate problematic logics in the contemporary context of international law. On this point, Pahuja persuasively demonstrates that in moments when the Third World attempted to dispute existing structures in international law (such as with the NIEO), this was met with a response by the First World, which claimed the universality of values so as to discredit attempted alternatives.Footnote 20
A related criticism here is the structure of dispute settlement inIIL. Scholars have pointed out the asymmetry inherent in the fact that while foreign investors may bring suit against host States, the opposite is not true.Footnote 21 Moreover, the rationale inherent in many BITs, trade agreements, and customary rules automatically puts host States on the defensive should there be an attempt to limit foreign investment in favour of the protection of local environment or peoples.Footnote 22 The obvious counter-argument here is that States willingly admit foreign investment by signing BITs or trade agreements, thereby subjecting themselves also to potential dispute settlement and the application of (customary) investment law. However, this argument potentially neglects the larger socio-economic context in which this ‘willingness’ takes place. Moreover, often political elites in States which conclude foreign investment agreements do not, in fact, represent or purport to protect the rights of some local populations, and thus, the asymmetry grows. Investment dispute settlement treats the State as a unitary entity, and as such, the interests of different local communities which might be differently affected by a particular foreign investment project are all subsumed under it.Footnote 23
Having briefly outlined the lines of criticism levelled at customary IIL from the TWAIL perspective, I now turn to a discussion of CIL interpretation as the next step in the argument.
3 The Interpretation of Customary International Investment Law
This section first outlines more generally the nature and role of interpretation in the context of customary international law, before turning to the more concrete example of the customary MST as an illustration of these more general observations.
3.1 What Constitutes Interpretation of Customary International Law
Legal interpretation is the process of determining the scope and content of legal rules. It can be distinguished from rule-identification, which is the act of establishing whether a legal rule exists. Thus, interpretation is the process of discerning or clarifying the meaning of an existing legal rule, and takes place when a general rule is applied to particular facts.
CIL interpretation is the process that takes place after a customary rule has been identified. Once a rule of CIL is identified for the first time through an assessment of State practice and opinio juris, its existence is not restricted to the moment where it was identified for the first time; rather it is a continuous one. When the same rule is invoked in subsequent cases before the same or a different judicial body, the judicial body does not usually go into the exercise of re-establishing that the rule in question is a customary one by reassessing State practice and opinio juris.Footnote 24 Instead, the rule is interpreted within the given legal and factual context of the new case at hand. Moreover, outside of the dispute-settlement context, a customary rule does not only exist in the isolated moments when it is identified for the purposes of a particular case. Rather, its existence in the complex of international legal relations is also a continuous one. In this sense, interpretation allows us to account for the continued existence and operation of a customary rule. Within the timeline of existence of a CIL rule, interpretation takes place after the periods of formation and identification of the rule.Footnote 25 Identification yields a general rule of CIL, based on an inductive analysis of State practice and opinio juris.Footnote 26 It is important to note that a form of interpretive reasoning may also take place at this stage, in the sense of assessment of the relevant practice and opinio juris. The identification exercise includes choices in the selection of certain custom-formative practices over others in order to infer the general rule, as well as the choices in how we describe these practices which lead to the identification of the rule.Footnote 27 The reasoning employed in these choices and descriptions is by necessity interpretative. However, this is not an interpretation of a customary rule because this rule has not been confirmed to exist yet. Rather, what happens at the stage of identification is an evaluation of the evidence of State practice and opinio juris in order to assess whether they qualify for the purposes of establishing a customary rule and whether they in fact point to the existence of a customary rule.Footnote 28 Some scholars do employ the term ‘interpretation’ to also refer to the reasoning that takes place at the stage of identification.Footnote 29 However, a distinction must be maintained between what might be labeled as interpretation at the stage of identification and what is interpretation in the strict sense of an existing CIL rule. This is because these two operations are substantively different with respect to both their content and their outcome. The reasoning employed at identification is concerned with questions about the relevance and weight to be given to evidence of State practice and opinio juris, and the outcome of this reasoning is a binary one – a CIL rule is either determined to exist or it is not. The reasoning employed in interpretation is concerned with the determination of the content of the CIL rule and how this rule applies to the case at hand, and this reasoning may have a variety of outcomes depending on the rule being interpreted and the legal and factual circumstances it is being interpreted in. It is only by distinguishing these two operations that we may adequately capture the fact that the interpretation manifests differently in the context of CIL, that it is subject to a different methodology than that of identification, and it performs specific functions.
A related consideration in this context is who interprets. Formally, international law does not allocate interpretive authority with a single entity. Depending on the circumstances, interpretive authority may lie with a court, a State, or even a non-governmental entity.Footnote 30 All these actors together form the epistemic community of international law, and as such contribute broadly to the way legal rules are interpreted.Footnote 31 Nevertheless, judicial interpretation holds a prominent role in international law.Footnote 32 In the subsequent discussion I focus on judicial interpretation for two reasons. First, because in the practice of international law, questions of interpretation tend to arise in the context of disputes and be formulated with a judge or arbitrator in mind.Footnote 33 Put differently, the bulk of the judicial role in international law consists of interpretation.Footnote 34 In this regard, and without prejudice to the interpretation of CIL by other actors, examples of CIL interpretation are most likely to be found in the jurisprudence of courts and tribunals. Second, because in international law judicial decisions possess what has aptly been described as a ‘centrifugal normative force’ – other international legal actors tend to follow judicial reasoning, and judicial decisions can be ‘substantively constitutive’ of international law.Footnote 35 ‘That normative effect is exacerbated when dealing with unwritten sources of law, in particular customary international law […]: there is no balancing between the text, its authors, and the interpreter in such situations, and the certainty of judicial reasoning holds and intrinsic appeal’.Footnote 36
An examination of jurisprudence dealing with the interpretation of CIL indicates that interpretation performs two important functions in the continued existence of customary rules – a constructive/concretising function and an evolutive function.Footnote 37 The constructive/concretising function refers to the fact that interpretation is the process through which the content of general customary rules is fleshed out and specified. Customary rules are often formulated in broad terms, and require precisely the act of interpretation to arrive at more concrete findings of their content.Footnote 38 In this sense, it is through interpretation that we arrive at more specific sub-elements of a general customary rule, or more specific sub-obligations that flow from it. Merkouris also refers to this as the collapsing function of interpretation.Footnote 39 The evolutive function of interpretation refers to the fact that interpretation is crucial in the continued existence of CIL rules, and their adaptation to new developments of fact or law. Contrary to some views, customary rules are not static legal rules which have no place in modern legal systems.Footnote 40 Rather, customary rules are by their nature dynamic because they move together with the community from whose conduct they emerge. As such, they require interpretation in order to be able to respond to emerging new circumstances.Footnote 41 For an illustration of these two functions relevant to our present discussion, let us briefly consider the example of the customary MST.
3.2 The Interpretation of the Customary MST and the Functions of CIL Interpretation
The customary status of MST is uncontested, and support for this may be found widely among States, tribunals, and scholarly writings. What is, however, in question is its precise content.Footnote 42 As argued above, customary rules necessarily come in a general format, and the MST is one among many examples which confirms this. This is certainly both a virtue and a vice of custom. The generality of customary rules makes them particularly fit to answer to a variety of circumstances, and thus regulate a variety of situations that may arise in international law. In a scenario where multiple legal regimes might interact or bind different actors differently, general customary rules present a least common denominator of legal obligation. In the context of the MST, its customary status means that obligations flowing from it apply to all States, including those that may not have entered into any bilateral investment treaties (BITs), and may also be invoked by any foreign investor irrespective of whether or not their State of origin has entered into a BIT with the State where they’ve made an investment.Footnote 43 Moreover, in new legal situations not covered by conventional rules, customary law may prove a source of regulation that can be extended by analogy.Footnote 44 This is arguably what indeed happened with the customary MST, which had originally broadly applied to the treatment of aliens and was later also extended to the property of aliens as well as their investments. At the same time, the generality of customary rules also leads to vagueness, and this is a challenge to the legal certainty and predictability that actors might desire in particular legal scenarios or in international law more generally. The customary MST has indeed been criticised for its vagueness, its inability to provide clear standards for behaviour, and even its ‘normative weakness’.Footnote 45
Historically, the formulation of the MST is traced back to a 1910 address by the American Secretary of State, Elihu Root, who expressed the view that an international standard is necessary in order to guarantee appropriate treatment by host countries to the nationals of another country.Footnote 46 Root’s formulation, however, was quite vague, and did not in fact provide for a more concrete content of the standard beyond a claim that such a standard existed and was recognised by civilised countries.Footnote 47 A more concrete expression of the content of the MST is ascribed to the US–Mexico Claims Commission in its Neer award.Footnote 48 Much like the formulation expressed by Secretary Root, however, the Neer award did not express the MST with the protection of foreign investments or property in view. Rather, it was concerned with the more specific scenario of alleged failure to investigate the murder of an alien, and the more general standard of denial of justice in the context of treatment of aliens.Footnote 49 Thus, while Neer is considered the classical starting point of MST, both States and tribunals have recognised that MST is not frozen in time to this formulation.Footnote 50 The shift from a more general standard of denial of justice to the more specific rationale of protection of foreign investment and property is not insignificant. As Paparinskis aptly demonstrates in his genealogy of the standard, in post-World War 2 discussions of the MST there is a marked ‘shift of the paradigm that the standard was meant to regulate’, including now a focus on property and the personality of the foreign investor.Footnote 51 This focus on the protection of property rights and protection of foreign investment is the primary area of application of the MST today.Footnote 52
TWAIL scholarship has offered its own take on why this shift occurred.Footnote 53 What we are more concerned with for the purposes of this section is how these changes in perspective were operationalised in the standard by means of interpretation. As the upcoming discussion will demonstrate, while the customary MST was initially expressed in general terms, its content in the context of investment law has been made more concrete and specific through interpretation by various investment tribunals. Moreover, it is also through interpretation that the MST has evolved over time.
Early mentions of the MST as a customary rule relevant in the context of investment protection can be found in the reasoning of the ICJ in the ELSI case. Here, the court acknowledged that the relevant treaty standard of treatment ‘must conform to the minimum international standard’,Footnote 54 and found that this minimum standard includes the element of ‘denial of procedural justice’.Footnote 55 The reasoning of the ICJ with regard to the denial of procedural justice as an element of the customary MST has been referenced by various investment tribunals similarly faced with the need to specify the content of the general customary standard. For instance, in its award in respect of damages, the Pope and Talbot Tribunal relied on the reasoning in ELSI when seeking to define the arbitrariness requisite for a finding of denial of justice as part of the MST.Footnote 56 In Mondev International Ltd, this reference was part of a broader interpretation of the customary MST. Here, the Tribunal began by decoupling the customary MST in the context of investment protection from the minimum standard broadly outlined in Neer.Footnote 57 It then proceeded to interpret the customary MST evolutively so as to account for changes of law that have taken place in the broader legal environment in which the rule operates.Footnote 58 While this may, at first glance, seem expansive, it is interesting to note that the Tribunal also acknowledged the limitations of its interpretive power, and professed to remain within the limits posed by the customary MST.Footnote 59 After examining the relevant legal developments in the period since Neer, the Mondev Tribunal came to the conclusion that under the customary MST investments are entitled to fair and equitable treatment and full protection and security.Footnote 60 Having outlined the content of the customary MST in this way, the Tribunal went on to examine the applicable standard of denial of justice which would render treatment unfair or inequitable. Here it relied, among other, on the reasoning of the ICJ with respect to the nature of arbitrariness as a denial of justice, and accepted the ICJ definition of arbitrary conduct ‘as that which displays a willful disregard of due process of law, … which shocks, or at least surprises, a sense of judicial propriety’.Footnote 61 In addition to the ICJ’s reasoning in ELSI, the Mondev Tribunal also relied on the Azinian Tribunal for an even more detailed interpretation of denial of justice, thus also accepting into its definition elements such as refusal to entertain a suit, undue delay, inadequate administration of justice and malicious misapplication of the law.Footnote 62
I flag this cross-reference to the reasoning of other tribunals because it is illustrative of the role of judicial interpretation in the construction of both customary rules more generally and the customary MST more specifically. In light of the general nature of CIL, it is not at all surprising that courts will borrow from each other when interpreting rules in pari materia. What is noteworthy in this cross-referencing is that the interpretive reasoning does not remain limited to the particular case, but carries over to subsequent cases as well. It is attached to the rule beyond the context of the specific case in that it has specified the content which is now considered to be an expression of the rule. In this sense, interpretation affects the content of the customary rule more generally as it exists continuously in international law. We may similarly observe this in the reasoning of the Loewen Group Inc Tribunal, which relied on the reasoning in Pope & Talbot, ELSI and Mondev to elucidate what would constitute arbitrariness amounting to a denial of justice in breach of the customary MST.Footnote 63 The constructive role of interpretation is illustrated perhaps most strongly by the reasoning of the Tribunal in Waste Management. Here, having surveyed the previous jurisprudence of a number of investment tribunals, the Waste Management Tribunal arrived at the following finding:
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 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.Footnote 64
The Tribunal here comes up with a very specific definition of the customary MST as a set of concrete elements and obligations. I would argue that this kind of construction of the customary MST, as a general rule made up of various specific legal sub-obligations, is a product of interpretation. This is certainly not an entirely novel observation, as several authors have made similar claims as to the ‘umbrella-like’ character of MST.Footnote 65 Building on their observations, I would merely argue more specifically that it is through interpretation particularly that the content of the general customary MST was developed and concretised. Why this is important is because this act of concretisation through interpretation does not remain restricted to the case at hand, but carries over to reasoning in subsequent cases both before the same tribunal and others that might follow it. Thus, we may envisage a general customary rule in case A whose content gets concretised through interpretation to contain element A1, where that element is carried over to the subsequent case B. Should further concretisation through interpretation take place in case B, whereby the customary rule is found to also contain element B1, elements A1 and B1 would now carry over to subsequent case C, and so on. In this way, interpretation affects the content of general customary rules not only for purposes of one specific case but also throughout the continuous existence of that customary rule overall and generally in international law. That this transcends adjudication becomes evident when we consider that often States rely on earlier judicial reasoning to argue the content of customary rules in subsequent cases. Thus, this constructive function of interpretation finds its way into State practice as well, thereby penetrating the very process of custom-creation by States.Footnote 66
While this brief analysis of case law demonstrates how the customary MST has evolved and been constructed through judicial interpretation, this trend has not gone without criticism. For one, scholars have noted that this form of development of the standard through a case-by-case application is not coherent and may lead to discrepancies in the way the standard is applied and enforced.Footnote 67 Furthermore, scholars have criticised this expansion through interpretation for developing investment protection obligations which arguably do not flow from the customary standard or the conduct of States.Footnote 68 For instance, several awards have read into the standard a requirement for a stable and predictable regulatory environment owed to investors,Footnote 69 which does not necessarily flow from the customary MST.Footnote 70 Similarly, and relying on the conviction that the customary MST should be interpreted evolutively,Footnote 71 the Bilcon Tribunal also found that the standard requires a ‘fair opportunity for review’ to be extended to the investor,Footnote 72 which once again is not obvious from the customary MST. On this critical note, it has also been observed that in the context of NAFTA proceedings there is a conflation of the customary MST with the treaty standard enshrined in Article 1105 NAFTA.Footnote 73 Thus, tribunals often make interpretive findings concerning the customary MST by relying on the treaty standard and relevant rules for treaty interpretation, which is problematic.Footnote 74 Nevertheless, it has been observed that the content of the standard is likely to continue being ‘created through the dispute-settlement process’,Footnote 75 and no universal international codification or clarification effort seems imminent.Footnote 76 Bearing these observations in mind, let us now turn to a discussion of how these traits of interpretation in the context of CIL rules may be conducive to a TWAIL engagement with customary IIL.
4 A TWAIL Approach to the Interpretation of Customary International Investment Law
In outlining a potential TWAIL approach to the interpretation of customary international investment law, I join the chorus of critical scholars who have taken the proverbial good with the bad in attempting to devise critique without dismissing international law as a whole. This, I believe, reflects what Sundhya Pahuja has aptly named a ‘critical faith’ – maintaining faith in international law despite firmly comprehending its problematic complicity with power.Footnote 77 At the centre of such an engagement with international law lies the need to deconstruct international law’s claim to universality in order to trace problematic elements and potentially resolve them. This entails recognising ‘both the contingency of any value put forth as universal and the frame of reference supporting the universal claim’.Footnote 78 This I would argue is a task that can be achieved at the stage of interpretation. With this in mind, this section outlines three potential strategies which rely on the constructive and evolutive functions of interpretation in the context of CIL. These strategies represent modes of engagement with customary international investment law from the TWAIL perspective which rely on interpretation in order to draw out and address the problems inherent in the law, without dismissing the system as a whole. They represent what Georges Abi Saab has humorously dubbed ‘operating behind enemy lines’ – a mode of engagement with problematic aspects of international law premised on the understanding that it is better to attempt change from within than from outside.Footnote 79
One might question the value of engaging with international investment law from a TWAIL perspective in this ‘internal’ way. The benefit of this kind of engagement lies in the opportunity to engage familiar professional language that is intelligible to the broader ‘target audience’ (courts, lawyers, States, scholars). Moreover, it also lies in the power to speak and be heard that comes from remaining within an arena of discussion rather than abandoning it.Footnote 80 This type of TWAIL engagement with international law capitalises on the existing structures in order to deploy what might be considered a subversive argument aimed at the amelioration of perceived biases. At the same time, it is important to acknowledge that professionals participating in international legal argumentation have a responsibility of maintaining what has been dubbed a ‘methodological honesty’ in their development of arguments concerning the content and purpose of international legal rules. The persuasiveness of any legal argument depends upon maintaining the idea of international law as a formal system according to which answers to legal questions can be derived from sources and principles whose validity depends on the internal logic of the system.Footnote 81 In this sense, the interpretive strategies suggested below are not attempts to argue in bad faith or misrepresent existing legal rules. Rather, the objective is to explore avenues of argumentation that promote the interpretation of customary rules in a way that accounts for their historically problematic origin and promotes their re-construction in a manner consistent with contemporary developments and values in the broader system.
The interpretive strategies suggested below are informed, amongst others, by the regime bias approach (alternatively also called the regime bias critique) developed by TWAIL scholars engaged with the various legal regimes of international economic governance.Footnote 82 The regime bias approach is aimed at uncovering how rules of the legal regimes making up the international economic order are constructed in a way that disempowers particular members of the system, inconsistently with the ‘liberal promise of even-handedness’.Footnote 83 This approach looks particularly at the way rules of international trade, commerce, and investment are construed, and identifies a differential manner in which the rules are interpreted and applied when the interests of the Third World are at stake.Footnote 84 Some of the main insights of the regime bias approach include the observation that international law is not a neutral and objective set of rules but rather an instrument employed in the context of power relations, and the finding that international institutions may interpret and apply international law in ways that are systemically biased against Third World interests.Footnote 85 For instance, using the example of the Dabhol investment arbitration before the International Chamber of Commerce (ICC), Van Harten argues that the ICC construed its role broadly to include not only arbitration on the basis of the pertinent investment contract but also what was in effect a review of domestic regulatory choices and a disciplining of constituencies in the Third World.Footnote 86 While the main contribution of the regime bias approach is critical, scholars have also used its rationale to propose reform within the international investment regime. For example, Hippolyte advocates for Third World countries to develop their own BIT models, which would focus on modes of investment attuned to their particular concerns, or to establish alternative regional investment arbitration centres.Footnote 87 Similarly, Odumosu flags mechanisms within investment arbitration proceedings such as the amicus curiae brief or public interest arguments, which may be a way for subaltern voices to be heard and considered in the otherwise insular investment proceedings.Footnote 88
The regime bias approach is instructive because it demonstrates the inherent plasticity of legal rules, which becomes apparent at the stage of interpretation. It counters the image of a stable and neutral international investment law regime and reveals some of the biases which are woven into rules during the act of interpretation. Thus, the regime bias approach does not only shed light on certain problematic rationales operating in the investment law regime but also flags interpretation as a viable ‘entry point’ for TWAIL counter-arguments and resistance. Bearing in mind that throughout the analysis in this chapter I have focused on judicial interpretation and the function of interpretation in the dispute settlement context, the strategies sketched below are focused primarily on interpretation in dispute settlement and operate differently depending on one’s positionality in the process.Footnote 89 In this sense, they are also differentially suitable for different actors who might want to engage with international law from the TWAIL perspective.
The first possible strategy in the context of CIL interpretation is advancing evolutive interpretative claims which push for a reconsideration of the rule’s content in light of factual or legal changes in the broader normative environment in which the rule operates. Depending on the rule in question, this would entail different argumentative strategies. For instance, when advancing an evolutive interpretative claim for the customary MST, this type of engagement consists of answering two connected questions: (i) can an argument be made that there is a need to interpret the rule dynamically in order to capture a change in the legal environment in which the rule operates? and (ii) are there competing rationales that may be taken in consideration and affect the interpretation of the rule accordingly? In relation to the first question, in the context of the customary MST, it has been argued persuasively that given the generality of the rule the elements which form part of its content are inherently dynamic and as such require evolutive interpretation.Footnote 90 Claims for evolutive interpretation may thus persuasively be made any time it can be shown that there is a need to interpret the rule dynamically in order to capture a change in the relevant standards or normative environment in which the rule operates. Answering question two entails, as a first step, recognising and stating plainly the rationale that the customary MST is driven by. This rule is largely focused on the protection of foreign investment, premised in turn on the ideology of economic development. Recognising this enables us to situate the historical development of the rule and understand how it has come to be what it is today. Having done that, we are able to evaluate how the rule plays out in the modern context, and which claims regarding its evolution are likely to work. Are there competing rationales – such as, for instance, the protection of the environment or human rights – that may be taken into consideration and that affect the interpretation of the rule accordingly? These may be found in other regimes as relevant treaty rules applicable between the parties, or in competing customary rules which have developed later than the customary MST and afford protection to, for instance, the environment or indigenous peoples. Interpretation entails, amongst other things, a balancing exercise,Footnote 91 and as such, it is capable of striking a balance between the rationale of economic development and these competing interests and competing rationales.
In the context of this strategy of engagement, interpretation functions as a sort of controlled ‘arguing space’ wherein competing argumentative strategies are deployed. This strategy is suited to TWAIL advocates and practitioners participating in relevant litigation. The limits here are of course the forum in which one attempts to advance evolutive interpretative claims, as well as the instructions of the party one is representing. For example, with respect to the limitation posed by the forum, it has been observed that certain formats of investment arbitration, such as ICSID arbitration, are inherently tilted in favour of the protection of foreign investors.Footnote 92 Thus, attempting to argue for evolutive interpretation, which balances the protection of investors with the protection of say the environment or indigenous groups, may not always be successful. With respect to the limitation posed by the party one is representing, it has been observed that the arguments deployed by, for instance, counsel representing States are limited in scope and content by the previous consultations and instructions of their client.Footnote 93 In this regard, any TWAIL arguments advanced by counsel on behalf of a State would be limited accordingly. Another relevant consideration here is that sometimes strategic engagement with litigation in this way may lead to adverse effects if the proposed interpretation is not accepted by courts.Footnote 94 Thus, for instance, an unsuccessful argument for evolutive interpretation may lead to a consolidation of the undesirable content of the rule.
An alternative to this strategy would be the strategy of arguing for a restrictive interpretation of a CIL rule. In the context of the customary MST, this would entail arguing for a stringent customary standard of treatment which has a high threshold of breach. This may involve similar argumentative strategies to the ones described above, only deployed in the ‘opposite direction’. More specifically, it may involve argumentative strategies which hark back to the older Neer standard and early investment arbitration which maintained it, arguing for a limitation of the customary standard to the high threshold described therein. These argumentative strategies may rely on exo-legal findings which show that expanding investment protection in the past has been to the detriment of local communities, and has potentially violated standards of environmental protection, or human and labour rights.Footnote 95 In this context, they may argue that a stringent customary standard, coupled with a balancing exercise, which considers rationales such as public policy or the protection of the local environment or communities, yields a narrow interpretation of the customary MST and the rights and protections extended to the investor. Alternatively, they may rely on a doctrinal positivist argument arguing that the expansion of the customary MST through interpretation is illegitimate and inconsistent with State practice. In this regard, it has been argued, for instance, that arguments which attempt to draw a uniform standard from widespread investment treaties as a form of State practice are unsubstantiated because while these treaties are many in number, their content as to the treatment of investors is varied and fails the uniformity requirement for CIL.Footnote 96 This strategy may be particularly fit for TWAIL advocates or governmental advisors who are representing or advising States.
A final strategy in the context of CIL interpretation is what I would call ‘interpreting against the grain’. This strategy consists of devising innovative arguments as to the (re)interpretation of general customary rules, with a view to forwarding a new rationality previously unexplored in the rule.Footnote 97 In this context, one can rely on existing CIL doctrine more generally and the customary MST more specifically and utilise some of its inherent plasticityFootnote 98 to argue for a possible remoulding of the content. Interpretation here opens a sort of ‘reasoning space’ in which the problematic origin of a rule can be scrutinised and interpretive arguments deployed to resolve it. Can certain past practices and rationalities withstand modern scrutiny when placed against contemporary values espoused in the system? This is one of the central questions that may be asked when an older general customary rule such as the MST is being interpreted in the modern context. The resulting answer is a normative argument which might claim that the protection of investment to the detriment of the environment or human wellbeing is incompatible with contemporary values. A similarly plausible argument in this vein would be that the unitary notion of Statehood inherent in the construction of the investor-State relationship is incompatible with the heterogeneous make-up of States, which often comprise of different communities with varying interests.Footnote 99 This strategy would best fit a TWAIL scholar who develops their argument from the position of scholarship.Footnote 100 On this point, an important caveat is that ‘the authority of scholars is not an institutional, procedural, or social one, but purely an epistemic one’.Footnote 101 The authority of interpretative arguments developed by scholars is limited accordingly.
This strategy may also be suited to an NGO or grassroot movement which has been granted the right to appear as amicus curiae in the context of an investment arbitration. For instance, in the context of ICSID proceedings, pursuant to Rule 37(2) of the Rules of Procedure for Arbitration Proceedings, a non-disputing party may be granted a right to intervene in the proceedings. This kind of intervention is meant to ‘assist the Tribunal in the determination of 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’.Footnote 102 Similar provision for non-disputing party intervention is made in the context of NAFTA proceedings.Footnote 103 This represents the opportunity to inject subaltern voices into the proceedings when their interests are otherwise not represented by the State. Using the tool of a non-disputing party intervention, actors may put forward interpretive arguments which highlight the asymmetry inherent in the investor-State relationship, and the adverse effects this has to the rights and interests of local communities. This strategy is of course limited by the tribunal’s willingness to grant standing to non-disputing parties, as well as the scope of such participation.Footnote 104 For instance, the Glamis Gold Tribunal allowed the Quechan Indian Nation to submit their views as a non-disputing party because it felt that the submission would not cause an undue burden or delay.Footnote 105 On the other hand, the Pezold Tribunal rejected indigenous participation on the reasoning that the rights of indigenous communities fell outside of the scope of the dispute and that allowing for such participation may unfairly prejudice the claimant (investor).Footnote 106 Moreover, it has been argued that even if such participation is granted, the extent to which an investment tribunal would seriously consider the interests of subaltern communities is limited.Footnote 107
A tangential opportunity to the one described here is in the training and education activities undertaken by a TWAIL scholar. For instance, in response to TWAIL scholarship, which has called for a conceptual change in the CIL doctrine, d’Aspremont has argued that a more fruitful avenue to pursue this change would be in the early stages of legal education, by targeting the production of ideas and beliefs about customary international law. The objective here would be to use the malleability of the CIL doctrine to empower scholars and practitioners of the periphery to develop persuasive subversive arguments.Footnote 108
5 Concluding Observations
This chapter has presented an idea for a constructive TWAIL approach to the interpretation of customary international investment law. This idea reflects the view that while there is a lot of relevant and legitimate criticism against the existing system of international investment law, desired change cannot be achieved if one completely dismisses the existing system. Thus, I have sketched out the so-called interpretative strategies which rely on existing structures in international law in order to affect systemic change. The argument developed here is an attempt to reconcile some of the harsh but merited TWAIL criticism with a continued engagement with the existing system of international law.
This argument also has its limitations. First, the conclusions reached in Section 3 with respect to the constructive function of interpretation in the context of the customary MST are preliminary, insofar as they were reached on the basis of a small exploratory sample of investment arbitration cases. In this sense, the conclusions can and should be tested on a broader sample of cases, as well as through examples of other customary rules.Footnote 109 Second, as the discussion in Section 4 illustrates, the strategies for interpretation as potentially deployed from the TWAIL perspective are limited by the role and position of the actor who is trying to deploy them. Finally, the strategies proposed here cannot address all the criticism levelled from the TWAIL perspective. The proposals made in Section 4 are limited to issues which arise, may be argued, and potentially resolved at the stage of interpretation.
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