International Investment
Agreements
Nature of IIAs
• Two types
– Bilateral Investment Treaties
– Chapters in Free Trade Agreements
• Investors sue host State
– Rights of foreign investors
– Right of State to regulate
– Quality of jurisprudence creates uncertainty
• Paucity of environmental provisions means
– Potential conflicts between foreign investment
protection and environmental protection
– Risk of litigation and compensation to foreign
investors for climate change regulation
Relation to WTO law
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Similar concepts and terminology
Same rules of interpretation (VCLT)
Same sources of international law
IIA tribunals may consider WTO jurisprudence
(‘judicial decisions’ per Art. 38 ICJ Statute)
• Measures can violate obligations in both BUT
– WTO: obligation to comply, no liability
– IIA: significant award of damages
WTO versus IIA forum
• Some States may decline to litigate where
private actors will not (eg tobacco cases)
• Litigation may proceed on both fronts
• Mexico soda tax cases: USA, Archer Daniels
Midland, Corn Products International, Cargill
• Australia plain packaging cases: Cuba,
Dominican Republic, Honduras, Ukraine, Philip
Morris Asia
• Canada renewable energy cases: EU, Japan,
Mesa Power Group (no contract), Windstream
Energy (onshore vs offshore wind energy)
Scope
Principal IIA obligations
(1) non-discrimination (MFN and national
treatment)
(2) minimum standard of fair and equitable
treatment for foreign investors
(3) obligation to pay compensation for
expropriation
BUT only if IIA applies to the measure.
Does IIA apply in a specific case?
• Which climate change ‘measures’ might be
the subject of claims under IIAs?
• What types of ‘investments’ are covered?
• Is environmental regulation a measure
‘relating to’ foreign investments or foreign
investors?
Climate change measures
• Mitigation: carbon taxes, emissions
trading schemes, border tax adjustments,
carbon labels, standards, clean energy
subsidies, other infrastructure projects
(energy, carbon sequestration)
• Adaptation: zoning bylaws, infrastructure
projects such as flood barriers
Investments
• Foreign ownership/control
• Salini test: investor’s contributions;
duration of performance; existence of
operational risks; contribution to economic
development of host state
• Contractual claims/rights
• Intellectual property rights/compulsory
licenses
Connection between
measure and investment
• Climate change measures may be subject
to IIAs if:
– the measures relate to foreign investments or
foreign investors
– the substance or procedural aspects of
measures violate specific IIA obligations
• BUT not where
– based on (preliminary) scientific evidence
– non-discriminatory design & application
Methanex v United States
• NAFTA Article 1101 ‘relating to’ requires a
‘legally significant connection’ between a
measure and an investor or an investment.
• Non-discriminatory environmental measure did
not ‘relate to’ foreign investment or investors.
• Measure applied regardless of nationality.
• Scientific and administrative record established
environmental purpose.
• Tribunal had no jurisdiction to hear the claim.
S. D. Myers v Canada
• Canadian ban on export of PCBs to protect the
Canadian PCB disposal industry from US competition.
• Ban ‘relates to’ S. D. Myers and its investment.
• No legitimate environmental reason for ban.
• Basel Convention on the Control of Transboundary
Movements of Hazardous Wastes and Their Disposal
discourages transboundary movements of hazardous
wastes.
• In this case it was environmentally preferable to ship
hazardous wastes from Central Canada to Ohio than to
Canada’s only PCB disposal facility in Alberta, due to
Ohio’s much closer proximity.
Methanex and S.D. Myers
• Host government can argue that an
environmental measure does not relate to
investors or investments.
• Requires scientific evidence regarding
contribution of measure to environmental
protection.
• Public interest or a private interest?
• MEA may be relevant if specific obligation.
• GATT Article XX jurisprudence may be relevant
to some extent.
NAFTA: limited scope of
environmental exceptions
• No general exception, so real issue is
legitimacy of environmental measure.
• IIAs do not negate right of States to
regulate climate change in public interest.
• Article 1106: limited exception for domestic
content requirements, preferences for
domestic goods, services
• Article 1114: pollution havens
Non-discrimination
Non-discrimination obligations:
MFN and national treatment
• ‘Less favorable treatment’ (LFT) of investors and
investments in ‘like circumstances’.
• Use different likeness criteria for goods
producers and service providers?
• Should test focus on competitive relationship
between different investors and investments?
• Are differences in the impact on climate change
relevant to determine ‘like circumstances’?
• Take into account PPMs to determine likeness?
• Legitimate regulatory distinction test for LFT?
S. D. Myers v Canada
‘like circumstances’
• ‘Like circumstances’ must take into account:
– whether the foreign and national investors are in the
same economic or business sector and
– circumstances that would justify governmental
regulations that treat them differently in order to
protect the public interest.
• Comparators provided same PCB disposal
services and were competitors, so ‘like’.
• Focus on competition is consistent with WTO.
S. D. Myers v Canada
‘less favorable treatment’
• Does effect of measure create a disproportionate benefit
for nationals over non-nationals?
• Does measure, on its face, appear to favor nationals
over non-nationals?
• Protectionist intent relevant if measure produces an
adverse effect on the foreign complainant.
• Legitimate environmental goal, consistent with policy
objectives of the Basel Convention.
• BUT Canada could have taken alternative measures to
achieve this objective that would have been consistent
with NAFTA.
• Is this reading in the GATT Article XX necessity test?
Methanex v United States
appropriate comparator
• Given the existence of domestic methanol
producers, they were the appropriate point
of comparison, not ethanol producers.
• Methanex did not receive less favorable
treatment than the identical domestic
comparators, producing methanol.
• Tribunal did not need to determine how to
interpret the term ‘like circumstances’.
NAFTA Article 1202 (services)
‘like circumstances’
• US-Mexico Trucking Services panel accepted
differential treatment for legitimate regulatory
objectives related to safety as valid factor, BUT:
– differential treatment should be no greater than
necessary for legitimate regulatory reasons &
– treatment should be equivalent to treatment accorded
to domestic service providers.
• Similar to S. D. Myers ‘less favorable treatment’
• Similar to WTO ‘legitimate regulatory distinction’
Feldman v Mexico
• ‘[T]he concept of discrimination has been
defined to imply unreasonable distinctions
between foreign and domestic investors in like
circumstances.’
• Would distinctions based on carbon footprint be
reasonable where investors are otherwise in like
circumstances?
• Would differential treatment based on different
GHG emissions meet legitimate regulatory
distinctions test and not be less favorable
treatment?
Nykomb v Latvia
• National treatment in Energy Charter Treaty.
• Latvia interfered with right of foreign investor to
benefit from subsidy for renewable energy.
• Latvia continued to support low-carbon
installations operated by domestic investors.
• Nykomb operating in comparable conditions.
• i.e. no legitimate regulatory distinction.
Fair and equitable treatment
Minimum Standard in Customary
International Law
Minimum Standard in Customary
International Law
• Fair and equitable treatment standard
• NAFTA requires minimum standard of
treatment in ‘international law’
• NAFTA Commission interpretation:
‘international law’ refers to customary
international law
• i.e. does not include treaty law
• Comparative treatment of other investors
is not relevant.
Minimum Standard in Customary
International Law
• ADF tribunal: ‘must be…based on State
practice and judicial or arbitral case law or
other sources of customary or general
international law’
• Loewen tribunal: ‘Manifest injustice in the
sense of a lack of due process leading to
an outcome which offends a sense of
judicial propriety is enough’
Minimum Standard in Customary
International Law
• Methanex tribunal: does not preclude
differentiations between nationals and
aliens
• Mobil tribunal:
– does not require a State to maintain a stable
legal and business environment for
investments.
– does not provide a guarantee against
regulatory change
– only protects against egregious behavior
Mobil v Canada
Representations
Claimants had to establish that:
(1) clear and explicit representations were
made by or attributable to Canada in order
to induce the investment,
(2) such representations were reasonably
relied upon by the Claimants, and
(3) these representations were subsequently
repudiated
Fair and equitable treatment
• Could this provide a guarantee of
protection against changes to the
framework the State has created to attract
low-carbon investments?
• How to weigh the investors’ legitimate
expectations against the legitimate
regulatory interests of the host state?
Right to regulate
• Right to regulate includes right to change
the regulatory environment.
• Real issue is whether States design and
implement the regulatory framework with
customary international law on the
treatment of aliens in mind and whether an
investor’s expectations are justifiable in
the circumstances of each case.
Pulp Mills on the River Uruguay
(Argentina v. Uruguay)
• It is ‘every State’s obligation not to allow
knowingly its territory to be used for acts
contrary to the rights of other States’.
• A State is thus obliged to use all the
means at its disposal in order to avoid
activities which take place in its territory, or
in any area under its jurisdiction, causing
significant damage to the environment of
another State.
Evolving customary international
environmental law
• Minimum standard of treatment of foreign
investors under customary international
law has to be interpreted in accordance
with evolving customary international
environmental law.
• Legitimate climate change regulation
should not be inconsistent with the
minimum standard of treatment.
Expropriation
Compensation for expropriation and
measures tantamount to expropriation
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NAFTA requirements:
compensation at fair market value
made for a public purpose
non-discriminatory and
in accordance with due process and
mininum standard of treatment for aliens
S. D. Myers v Canada
‘expropriation’
• Must be interpreted in light of state
practice, treaties and international judicial
interpretations
• Regulatory action usually not expropriation
• Expropriations involve deprivation of
ownership rights
• Also lasting removal of owner’s ability to
make use of its economic rights
Types of government actions that
may constitute expropriation
(1) taking title to property, in whole or in part
(2) without transfer of title, use of police,
administrative or legal powers to:
– take control of operation of an investment or
– shut the investor out of its rights of control and
ownership
(3) creeping expropriation
(4) [controversial] diminution of economic
value due to public interest regulation???
Lawful regulation is not
expropriation
• Compensation is not required where:
– economic injury results from bona fide
regulation within police powers of a State
– economic loss from nondiscriminatory action
to protect the public interest
• BUT once an expropriation has taken
place, compensation is due even if it is for
an environmental purpose.
Compensable property interests
• Investor’s access to foreign market
– Pope & Talbot Inc. v Canada (lumber export
tax)
– Cargill v Mexico (soda sales tax)
• Goodwill and market share not basis for
expropriation claim, but count for valuation
Conclusion
Rights of Investors versus
Right to Regulate
• Draw the line on a case-by-case basis
• Bona fide climate change regulation should take
precedence over investors’ rights
• Protect foreign investors from unfair or arbitrary
treatment: capital, know-how, technology
• In bigger markets
– investors tolerate more regulatory risk
– there are more GHG emissions
– so favor climate change regulation in these