The Treatment of Non-Investment Interests in Investor-State Disputes: Challenges for the TAFTA | TTIP Negotiations

Abstract: Current TAFTA | TTIP negotiations are expected to provide US investors with the capacity EU governments through international investment arbitration. This field of international law is experiencing a huge surge, with record numbers of investor-state disputes being filed. However, investment claims brought by investors disadvantaged due to policies promoting the environment (Vattenfall v. Germany), economic equality (Foresti et al v. South Africa), and even the human rights jurisprudence of domestic courts (Chevron v. Ecuador), have dramatically altered perceptions of investment law, and provoked criticisms of bias and of a democratic deficit inherent in this regime. For many host-states facing arbitration, the scope of some current claims was unprecedented at the time of treaty negotiation. This paper seeks to provide an overview of current trends in investment arbitration and of the treatment by tribunals of states’ non-investment law obligations. This analysis will show that in the absence of an express agreement in the treaty to allow host-states to pursue legitimate policy objectives, the TAFTA | TTIP negotiations risk producing an unintended, costly and undemocratic burden on EU member states who may become a target for arbitration claims.

Introduction: Investor-State Dispute Settlement

Current TAFTA | TTIP negotiations are expected to provide US investors with the capacity to sue EU governments through international arbitration.The TAFTA | TTIP negotiating mandate aims to deliver the highest possible level of legal protection for investors, including an ‘effective and state-of-the-art investor-to-state dispute settlement mechanism’.‘State-of-the-art’ is a term rarely heard in descriptions of investor-state dispute settlement (ISDS) to date. International Investment Agreements (IIAs) usually offer a wide range of protections to foreign investors against the actions of states in which they invest. ISDS provisions enable foreign investors to enforce these protections by suing host-states directly at ad-hoc arbitral tribunals, established under the aegis of arbitration centres such as the International Centre for the Settlement of Investment Disputes (ICSID). These mechanisms are particularly attractive because they often allow investors to initiate litigation before an international tribunal without first exhausting remedies available in the host-state. As a result, investors are able to ‘leapfrog’ domestic courts. However, ISDS has been accused of inherent bias towards investors and of a democratic deficit (Choudhury 2008; Sornarajah 2010); of lacking core judicial safeguards of transparency and independence (Brower 2002; Van Harten 2010); and of investing immense power in a small core of professional arbitrators who dominate the ISDS circuit (Eberhardt & Olivet 2012). One recent report labelled ISDS the “world’s worst judicial system” (Khor 2013).

Such criticisms have had little impact on the system’s growth. According to the United Nations Conference on Trade and Development, there are over 3,200 IIAs in existence (UNCTAD 2013a); in 2012, a record 58 ISDS claims were filed and the total number of known treaty-based claims reached 514 (UNCTAD 2013b). This explosion of claims has been driven in part by the wide interpretations given to vague IIA provisions. Investors are protected not just against direct expropriation of their investments by host-states. Regulatory and policy measures taken by host-states that interfere with or impact on foreign investments can amount to ‘indirect expropriation’, or breach standards of ‘fair and equitable treatment’.

Over the past fifteen years, interpretative trends in ISDS jurisprudence have permitted tribunals to review a range of measures, including economic and environmental policies, and measures taken for the protection of human rights (Peterson 2009; Reiner & Schreuer 2009; Sornarajah 2011). One of the objectives of the TAFTA | TTIP mandate is to establish an ISDS mechanism that will not prejudice the right of EU member states to adopt or enforce domestic measures ‘in pursuit of legitimate public policy objectives’. The growing body of ISDS case law therefore provides compelling grounds for ISDS to be treated with the utmost caution. With no system of binding precedent, it is impossible to determine what weight future tribunals will give to previous decisions. However, experiences of investor-state disputes to date show that policies implemented in pursuance of ‘legitimate’ public objectives often have direct or tangential impact on investments, and that such effects can and do give rise to costly litigation before arbitral tribunals.

Photo by Rainforest Action Network (CC BY-NC 2.0)

Regulatory Chill 

Even when ISDS claims are unsuccessful, there is widespread concern that the vast cost of defending ISDS cases may deter states from pursuing future policy goals or taking regulatory measures that may have a potential impact on foreign investors – often described as “regulatory chill”. Investors have made claims of up to USD$114 billion, and 2012 saw the highest ever award for an ISDS claim, of USD$1.77 billion (UNCTAD 2013a).

In Piero Foresti v. South Africa (ICSID Case No. ARB(AF)/07/1), South Africa was sued by European investors who claimed to be disadvantaged by economic policies aimed at redressing the enduring legacy of apartheid. The resulting settlement effectively exempted the investors from the legislation and landed South Africa with a legal bill of over €5 million (Brickhill & Du Plessis 2011). In 2009, the energy company Vattenfall initiated ICSID proceedings to challenge Germany’s new environmental regulations on coal-fired power stations, claiming over €1.4 billion in compensation. Germany was persuaded to water down the regulations, and Vattenfall are now suing Germany again over its atomic energy policy (Bernasconi-Osterwalder & Hoffmann 2012). In 2011, Ecuadorian courts ordered Chevron to pay USD$18 billion in compensation for damage to the environment and public health. In response, Chevron are suing Ecuador, claiming that the judgment breaches their protection under the US-Ecuador Bilateral Investment Treaty (Johnson 2012).

Such cases raise serious concerns not only about the ability of states to maintain domestic regulatory space, but also about the accountability of foreign investors for the damage they cause in their investment operations.

Public Purpose Measures

Most IIAs provide for general ‘public purpose’ exceptions to the protections offered to foreign investors. However, these have often proven an insufficient safeguard. When they are invoked, there is continuing legal uncertainty as to how a ‘public purpose’ effects the level of compensation payable, whether compensation is payable at all, and even whether states have the right to determine what their own public interests are.

In Methanex v. United States (UNCITRAL, Final Award 3 August 2005), investors challenged a ban on the manufacture of an environmentally harmful gasoline additive. The tribunal found that if a regulatory measure is for a public purpose and non-discriminatory, the state should not have to pay compensation unless the investors’ ‘legitimate expectations’ are frustrated – that is, if the state reneges on prior guarantees made to the investor.

However, other tribunals have found the ‘public purpose’ to be wholly irrelevant to the question of compensation. In Metalclad v. Mexico (ICSID Case No. ARB(AF)/97/1), the motivations behind a decree to establish an ecological reserve were regarded as peripheral to the effect of the decree on the company’s property. The tribunal ordered Mexico to pay the company USD$16 million in compensation. In the Vivendi v. Argentina litigation (ICSID Case No. ARB/97/3) – one of more than forty investment claims initiated against Argentina in the wake of the 2001-2002 financial crisis – Argentina argued that it had to take actions against investors to ensure the availability of water to the population. The tribunal ruled that the actions amounted to unlawful expropriation, irrespective of any public purpose. In Tecmed v. Mexico (ICSID Case No. ARB(AF)/00/2), the tribunal found that public opposition to a controversial landfill site, and related health and environmental concerns, did not justify the measures taken. The tribunal did allow Mexico “due deference” to determine whether the matter was truly in the public interest, but then weighed this interest against the investors’ legitimate expectations.

The ‘Margin of Appreciation’ Doctrine

Burke-White and von Staden (2010) argue that states should always be entitled to find their own balance between IIA obligations and other public policy considerations, as they are better suited than international arbitrators to determine what measures are in the ‘public interest’. This deference – known as the “margin of appreciation” doctrine – is not assured in ISDS cases and has had a mixed reception to date.

In Biwater v. Tanzania (ICSID Case No. ARB/05/22), which concerned the operation and supply of water services in Dar Es Salaam, Tanzania requested a margin of appreciation, but this was implicitly rejected; the tribunal found no public purpose to justify Tanzania’s interference with the investor’s property. Conflicting opinions were given in two further cases arising from emergency measures taken by Argentina in response to the financial crisis. The tribunal in Continental Casualty v. Argentina (ICSID Case No. ARB/03/9) accepted that the doctrine was an established principle of investment treaty arbitration; arbitrators in Siemens v. Argentina (ICSID Case No. ARB/02/8) however found no support for the principle in the treaty or customary international law.

The tribunal in Chemtura v. Canada (UNCITRAL, Final Award 2 August 2010) also rejected the margin of appreciation doctrine, on the grounds that such an assessment is too abstract. However, arbitrators recognised that the environmental regulations objected to by investors were implemented in order to meet Canada’s environmental treaty obligations. These international obligations, along with other factors, led the tribunal to rule that no compensation was payable.

Conflicting Obligations under International Law

With few exceptions such as Chemtura, tribunals have generally avoided looking at states’ other international legal obligations and have confined themselves to settling disputes by reference to the relevant IIA alone. Indeed, persisting uncertainty concerning the applicability of non-investment law, such as human rights law, in investor-state disputes has often prompted observers to eagerly anticipate forthcoming arbitral awards (such as Biwater, Vivendi, Piero Foresti) in the hope that they might finally shed light on this issue. But over the past ten years such rulings have repeatedly failed to materialize, due either to out-of-court settlements between the parties, or tribunals’ tactical avoidance of the issue.

As a result, the fact that measures taken by a state are motivated by a public purpose which is enshrined in international human rights law is still no guarantee that a tribunal will find the measures to be lawful within the terms of the dispute. In the ‘Biwater and Vivendi‘ cases, both governments and petitioning NGOs sought to highlight that the host-state population’s right to water is a human right. Although these arguments received cursory attention in the awards, in neither case did the existence of an international human rights obligation significantly affect the tribunals’ findings.

In two ICSID cases against Hungary, the EU Commission submitted petitions arguing that Hungary’s actions were taken in order to comply with EU competition law. In Electrabel v. Hungary (ICSID Case No. ARB/07/19), the tribunal explicitly rejected that it was under any obligation to interpret the relevant investment law in light of the state’s other duties under international law.

More concerning still is the ongoing case of Border Timbers / Bernhard von Pezold and others v. Zimbabwe (conjoined ICSID Cases No. ARB/10/15 and ARB/10/25). In 2012, indigenous communities living on lands which are central to the dispute asked the tribunal to consider their rights under international law. The tribunal rejected the applicability of human rights law, because neither state nor investors had mentioned the issue. Peterson (2012) notes that this approach encourages states and investors to mutually contract-out of their international human rights obligations; as long as neither party raises such issues, ISDS tribunals may simply turn a blind eye.

Conclusion: Challenges, and Opportunities

The current treatment of non-investment interests by arbitral tribunals gives rise to many conc erns. Any hasty inclusion of ISDS provisions in TAFTA | TTIP may therefore risk producing an unintended, costly and undemocratic burden on EU states. In the absence of explicit and comprehensive treaty provisions that enable host-states to pursue legitimate policy objectives, prior ISDS cases suggest that the progressive realisation of environmental, economic or human rights policies can become a target for arbitration claims. For many, the scope of such claims was unprecedented at the time of previous IIA negotiations.

The occasion of the TAFTA | TTIP negotiations might however provide an opportunity to address such criticisms, and to effect much needed changes in ISDS. Indeed, the ‘Statement of the European Union and the United States on Shared Principles for International Investment’ expresses commitments not only to preserve the authority of states to regulate in the public interest, but also to increase transparency and public participation, and encourage responsible business conduct (European Commission 2012). Clearly, replicating the standard provisions of IIAs currently in force will not achieve such goals. But careful drafting of TAFTA | TTIP investment provisions could make a significant contribution to the evolution of international investment law in these areas. To date, limited avenues for public participation in investor-state disputes have failed to have any significant impact on ISDS awards (Blackaby & Richard 2010; Cross & Schliemann Radbruch 2013). And major developments in the field of corporate social responsibility – such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises – have largely failed to coalesce into enforceable legal standards, either in ISDS or other fora (Mann 2008; Muchlinski 2008). Given the projected increase in investment that the TAFTA | TTIP is expected to produce, the inclusion of ISDS provisions is likely to eventually result in a significant body of case law. If it does, the raising of such standards might have a welcome impact on future trends in investment law, beyond the treaty itself.

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