Free trade agreements can be traced back to the ancient empires which existed before the Common Era.1 However, the heyday of trade expansion came in the nineteenth century when the transport innovations of the industrial revolution, combined with Empire, and an adherence to laissez-faire economics - particularly in Great Britain - opened up enormous trade opportunities across the world.2 An early example of bilateralism, which featured the now-familiar most favoured nation status, was the Cobden-Chavalier agreement of 1860 between Great Britain and France. This led to a series of similar European agreements which created something of a golden era of trade in Europe. Unfortunately this was short-lived; an economic depression in the 1870s ushered in a period of increasing protectionism which was ultimately to lead to great instability and nationalism culminating in a half-century of economic and military conflict in the twentieth century.3 Following World War II, the General Agreement on Tariffs and Trade - the first major multilateral trade agreement and the forerunner of the WTO4 - was created in 1948, having been salvaged from the failed attempt to create an international trade organisation at a conference of states in the Cuban capital in 1947.5
GATT, and later, the WTO, facilitated the growth of the global economy in the later twentieth and twenty-first centuries, and offered an independent dispute settlement service in the form of the WTO’s dispute settlement body and appellate panel. These offered a means of settlement of trade disputes that avoided, initially at least, some of the political and diplomatic hurdles presented by state-state negotiation. However, the WTO seems to have become a victim of its own success. Viviane de Beaufort takes the view that despite its considerable success in attempting to broker agreements between 159 states, progress at the WTO has foundered on: “confrontations between states”; the increasingly complex nature of the negotiations which have moved from concerns with tariffs to complex technical matters such as phytosanitary protection and intellectual property; and the rise of “concerns on sovereignty.” 6 As a result multilateralism on the WTO model has suffered a decline in popularity originating in “a general lack of enthusiasm from states and … WTO governance issues.” 7 Consequently states have moved towards bilateral or multilateral free trade agreements, including the recent so-called Mega-Treaties, brokered without direct input from the WTO. A number of such agreements also contain provisions on investment and these tend to follow established patterns in bilateral investment treaties (BITs), and commonly define the terms for investments between states, make provision for most-favoured nation status, define what is meant by fair and equitable treatment, prohibit expropriation and may even make provision for dispute settlement, which may permit an investor to sue a host state directly.
In recent times, the United States has been particularly active in embracing this model of trade and, since its first free trade agreement with Israel in 1985, is now party to 20 free trade agreements,8 including the North American Free Trade Agreement (NAFTA),9 and the recently concluded Trans-Pacific Partnership (TPP).10 It is also a party to 42 bilateral investment treaties11 as well as 52 trade and investment framework treaties.12 While the use of BITs by the United States may appear impressive it is dwarfed by Germany’s 135 (of which 32 are in force) and the United Kingdom’s 106 (96 in force). In fact, the proliferation of this type of agreement worldwide has been such that the United Nations Conference on Trade and Development puts the current number of BITs at 2948, of which 2317 are in force.13 The proliferation of BITs was near-exponential between 1970 (five agreements) and the peak in 1996 (221 agreements). Since then, the scope for new BITs has declined with only 11 BITs concluded in 2013.14
This increase of BITs and investment chapters in free trade agreements is coupled with a spectacular increase of case load in investor-state dispute settlement (ISDS) fora. The last summary of the case load statistics for the International Centre for the Settlement of Investment Disputes (ICSID) indicated that 52 applications were currently registered. Just a decade earlier, in 2005, the figure was approximately half that (at 27 applications), and in 1995 was a mere three applications.15 In the years 1972 to 1994, ICSID applications totalled only 32; by December 2015 this total had risen to 549. This has occurred against the background of a rise in preference for arbitration generally as evidenced by the growth in other arbitral fora. 16
The reasons for the rise in popularity in BITs and the introduction of investment chapters in free trade agreements, particularly the recent Mega-Treaties are not difficult to find. There are distinct advantages to states in brokering agreements directly and, as Caroline Foster has pointed out, such agreements “encourage and support international commercial private actors’ freedoms to invest, disinvest, repatriate capital, buy and sell goods and services, employ, navigate, exploit communal resources, and take business decisions.”17 As such, both developing and developed states favour investment agreements; developing states, because they facilitate foreign direct investment, and developed states, because they offer an attractive trading platform for private actors - invariably economically important multinational corporations - amongst others, with the introduction of an ISDS mechanism which avoids the diplomatic and political vagaries of state-state settlement‥
However, there are some distinct disadvantages to ISDS. In particular, it permits aggrieved investors to take host states directly to international arbitration; it is not necessarily the case that the investor need first exhaust domestic remedies,18 especially if they consider that seeking such remedies might be futile.19 Once at ICSID, or a similar forum, the nature of the ISDS that follows is profoundly different from normal “private” arbitration, in that one of the parties (the state) is constrained by public interest considerations that do not affect the other. This use of arbitration has been described as “internationalized public law”20 and, in effect, takes the established principles of domestic public law and places them in an international arbitration forum which is not necessarily well suited for the purpose. Arbitration was developed for private investors as a relatively swift alternative to contentious litigation where the remedy was decided according to the dictates of commercial expediency and with a view to maintaining the commercial relationship. The rules of natural justice, due process, stare decisis and the requirements of transparency (i.e. justice being seen to be done) are secondary considerations. Perhaps most controversial is the fact that decisions of ICSID tribunals are not subject to appeal,21 apart from an annulment procedure which can overturn a decision on limited grounds.22 This limitation does not apply to disputes involving non-parties who may take advantage of the ICSID Additional Facility rules; such decisions are subject to appeal.23
The paper will examine just one aspect of ISDS, but one which has profound implications for regulatory sovereignty in nation states. At issue is the question of whether BITs and investment chapters in recent Mega-Treaties permit investors to challenge regulatory decisions on the basis, inter alia, that they amount to a lack of fair and equitable treatment for investors or are tantamount to expropriation of their assets. This is most likely to arise where regulation is based on an interpretation of scientific data (often related to public health or environmental protection) which is susceptible to different regulatory responses. In the European Union such decisions are often predicated on the precautionary principle - which is an important element of European primary law24 - whereas in the United States and Canada, the precautionary principle is viewed with suspicion if not outright hostility.25 Should an arbitral tribunal be tasked with having to decide whether the regulatory decision is a proportionate one, this could embroil it, not so much in an assessment of the scientific evidence per se, but in an assessment of the relative merits of the precautionary principle compared to the cost-benefit approach favoured elsewhere in the world. In other words an assessment of how uncertainty in scientific evidence should best be built into regulatory decision-making. This, in effect, places a tribunal in the position of adjudicating in the public interest, a role normally associated with a fully constituted judiciary. Moreover, its decision, if made according to normal arbitration principles, could have the effect of subjugating national sovereignty to private commercial interest. It might also permit one state to use its private sector investors to “adjust” or “chill” regulation in another. This is certainly a fear among some in the European Parliament as it continues to debate the negotiation of the Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union.26 This paper attempts to assess the reality of that fear.
However, rather than discuss this issue in purely abstract and theoretical terms, an attempt has been made to analyse the possibilities through a real-life and current issue, namely the European Commission’s restriction on the use of neonicotinoid insecticides. Hence this paper will assess what the possibilities might be were an investor to challenge this restriction under the terms of the proposed (though partly hypothetical)27 investment chapter of TTIP and to reach some tentative conclusions on the reality of the threat to regulatory sovereignty in respect of the precautionary principle.
II Investment Chapters and the Balance Between Private and Public Interests in an Environmental Context
The European Commission has been at great pains to reassure concerned parties (including the “European Parliament, Member States, national parliaments and stakeholders”28) that any ISDS arrangements in TTIP will not affect regulatory sovereignty. In its press release in September 2015 on new proposals for an “Investment Court System for TTIP and other EU trade and investment negotiations” it reassured readers that “governments’ right to regulate would be enshrined and guaranteed in the provisions of the trade and investment agreements.”29
The Commission was perhaps well-advised to issue this reassurance since scrutiny of the operation of investment chapters in existing agreements, by analysis of the arbitral decisions that have emerged from them, could lead an analyst to a rather different conclusion. This Part will examine the general nature of the protections for environmental regulatory sovereignty in typical investment agreements, proposed and extant, before examining, in Part III, some of the arbitral decisions which have engaged with these types of provisions.
Modern model investment treaties such as the 2012 U.S. Model BIT30 contain, at least on the face of it, built-in protection of the ability of states to regulate without interference from external investors. For example, Article 12 of the 2012 U.S. Model BIT concerns “Investment and Environment” and makes impermissible any attempts by states to:
waive or otherwise derogate from or offer to waive or otherwise derogate from its environmental laws … in a manner that weakens or reduces the protections afforded in those laws, or fail to effectively enforce those laws through a sustained or recurring course of action or inaction, as an encouragement for the establishment, acquisition, expansion, or retention of an investment in its territory.31
This recognises the well-established fact that weakening environmental regulatory standards can have the effect of distorting trade and seeks to avoid a race to the bottom in terms of environmental protection.32
The 2012 U.S. Model BIT also recognises the sovereignty of states in promulgating environmental regulation. Article 12(5) states that:
Nothing in this Treaty shall be construed to prevent a Party from adopting, maintaining, or enforcing any measure otherwise consistent with this Treaty that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.33
Thus treaties based on the 2012 U.S. Model BIT not only attempt to protect the sovereignty of states in maintaining, adopting and enforcing environmental regulation but also ensure that states do not weaken protection in order to attract investment.
The Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union, concluded in September 2014,34 is viewed by many as presaging the likely final contents of the TTIP and has drawn on existing model BITs (including the 2012 U.S. Model BIT) for many of its provisions.35 CETA makes provision for investment protection36 which is similar to existing model BIT texts, though the investment chapter was significantly modified following legal analysis such that:
Canada and the EU will strengthen the provisions on governments’ right to regulate; move to a permanent, transparent, and institutionalised dispute settlement tribunal; revise the process for the selection of tribunal members, who will adjudicate investor claims; set out more detailed commitments on ethics for all tribunal members; and agree to an appeal system.37
Hence the principal changes to the investment chapter in CETA were to create a bespoke Tribunal and Appellate Tribunal for the purposes of investor-state dispute settlement, including bespoke rules for the appointment of members of the arbitration and appellate tribunals. This is in contrast to the original text of CETA which drew on the existing services of ICSID. The new version makes use of certain of the rules of the ICSID Convention and of the ICSID Secretariat’s services but the arbitration hearings themselves will take place outside the ICSID system. This change was made to assuage some of the concerns, particularly in Europe, over the appointment and independence of ICSID arbitrators and the unavailability of appeal against ICSID arbitration decisions under Article 53(1) of the ICSID Convention.
In terms of CETA’s protection of environmental regulation in state parties’ territories, the investment chapter makes several concessions. Under Section B of CETA (Market Access),38 the following do not constitute a denial of market access for the purposes of investment:
- a measure concerning zoning and planning regulations affecting the development or use of land, or another analogous measure
- a measure seeking to ensure the conservation and protection of natural resources and the environment, including a limitation on the availability, number and scope of concessions granted, and the imposition of a moratorium or ban;39
Similarly, for the purposes of Section D of CETA (Investment Protection),40 which includes the provisions for fair and equitable treatment, compensation, expropriation, transfers and subrogation, 41 a clarification is included at the beginning of the section:
For the purpose of this Chapter, the Parties reaffirm their right to regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals, social or consumer protection or the promotion and protection of cultural diversity.42
The recently agreed TPP uses similar language in its investment chapter in relation to performance requirements:
Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, paragraphs 1(b), 1(c), 1(f), 2(a) and 2(b) shall not be construed to prevent a Party from adopting or maintaining measures, including environmental measures:
- necessary to secure compliance with laws and regulations that are not inconsistent with this Agreement;
- necessary to protect human, animal or plant life or health; or
- related to the conservation of living or non-living exhaustible natural resources.43
In relation to the TPP investment chapter as a whole, a general provision is included in Article 9.15:
Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives.44
The latest text of the investment chapter of the putative TTIP - though evidently incomplete45- is very similar to that of CETA, and also makes provision for a bespoke “Tribunal of First Instance” and a “permanent appeal Tribunal” for investor-state dispute settlement.46 It also contains articles, like CETA, relating to fair and equitable treatment, compensation, direct and indirect expropriation, transfers, subrogation and denial of benefits.47
Very similar protections for important public interest matters are to be found in other, more established, trade agreements such as the North American Free Trade Agreement (NAFTA) and these, unlike the texts of CETA, TTP and TTIP, have been the subject of arbitral decisions. For example, the preamble to NAFTA, inter alia, exhorts the three state parties to “STRENGTHEN the development and enforcement of environmental laws and regulations”48 and Article 1114 relates specifically to the investment chapter of the agreement and states that:
- Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.
- The Parties recognize that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures Accordingly, a Party should not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such measures as an encouragement for the establishment, acquisition, expansion or retention in its territory of an investment of an investor. If a Party considers that another Party has offered such an encouragement, it may request consultations with the other Party and the two Parties shall consult with a view to avoiding any such encouragement.49
On the face of it such provisions should prevent interference with the environmental regulatory sovereignty which states must exercise in the public interest and prevent the dismantling of existing regulation as a means of attracting foreign direct investment. However, the reality has not always reflected these expectations. Some arbitral decisions have suggested that investor interests can, in certain circumstances, outweigh the right of a state to exercise sovereignty. It is to these decisions that we now turn.
III Investor-State Dispute Settlement and the Threat to Environmental Sovereignty
Most ISDS proceedings have taken place under the auspices of the ICSID and a number of these have involved challenges based on attempts - at least on the face of it - to protect the environment or to preserve local sovereignty in respect of activities perceived to be environmentally unacceptable or contrary to local or national public health imperatives.
Perhaps the most controversial of these was the Metalclad arbitration, issued in August 2000 and heard under the Additional Facility rules of the ICSID Convention.50 These rules were applied owing to the fact that Mexico, the state party, was not a party to the ICSID convention but had opted to use ICSID as a forum to determine a dispute relating to the construction and operation of a hazardous waste facility in the La Pedrera valley near Guadalcazar in the State of San Luis Potosi in southern Mexico.51 The arbitration was required to determine whether the Mexican municipal authorities had acted in such a way, in preventing the operation of the site (in response to strong local opposition), as to contravene Articles 1105 and 1110 of the NAFTA which state:
Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.
No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (“expropriation”), except:
- for a public purpose;
- on a non-discriminatory basis;
- in accordance with due process of law and Article 1105(1); and
- on payment of compensation
In short, the U.S. and Canadian investors in Metalclad were seeking to show that the lack of transparency in the operation of the Mexican regulatory system relating to hazardous waste sites, and the decision of the local municipality to create a nature reserve which included the entire site (thereby rendering it inoperable), amounted to a lack of fair and equitable treatment and to measures tantamount to expropriation.
The decision in relation to Article 1105(1) was based on the fact that there was considerable uncertainty on the part of the Mexican federal, state and municipal authorities as to which of them was in fact responsible for the permitting of hazardous waste facilities.52 Metalclad had legitimately, and in good faith, relied on federal assurances about the legality of the construction and operation of the site. The absence of regulatory clarity, and uncertainty as to practice and procedure at the various levels of governance amounted to a lack of transparency. Given the strength of local opposition53 it is perhaps understandable that the municipal authority so assiduously tried to prevent construction and operation of the plant. Nonetheless, the uncertainty unquestionably affected Metalclad’s ability to make decisions about, and to realise, their investment. The fact that ultimately this uncertainty resulted in an arbitral decision which compensated foreign investors at the expense of local autonomy may be seen as unfortunate, but Metalclad’s treatment was arguably unfair and inequitable treatment by the standards of international law, particularly as they had engaged extensively with domestic procedures in an attempt to resolve the issue before turning to ICSID.
However, aspects of the panel’s comments on the Article 1110 infringement were much more controversial. Much of the decision appeared to follow logically from the Article 1105 finding, on the basis that such a degree of opacity in the regulatory and legal process was not only unfair and inequitable treatment, but on such a serious scale as to qualify also as a measure tantamount to expropriation. However, the panel went further and considered the state governor’s decision to issue an Ecological Decree which encompassed the site as part of the Article 1110 analysis:
… the Tribunal also identifies as a further ground for a finding of expropriation the Ecological Decree issued by the Governor of SLP on September 20, 1997. This Decree covers an area of 188,758 hectares within the “Real de Guadalcazar" that includes the landfill site, and created therein an ecological preserve. This Decree had the effect of barring forever the operation of the landfill.54
The Tribunal need not decide or consider the motivation or intent of the adoption of the Ecological Decree. Indeed, a finding of expropriation on the basis of the Ecological Decree is not essential to the Tribunal’s finding of a violation of NAFTA Article 1110. However, the Tribunal considers that the implementation of the Ecological Decree would, in and of itself, constitute an act tantamount to expropriation.55
This was to attract considerable informed criticism and adverse judicial treatment in the aftermath. Many commentators considered that the Tribunal - which was led by no less a figure than Professor Sir Elihu Lauterpacht, CBE, QC - had construed the term “indirect measures tantamount to expropriation” unacceptably widely and in such a way as to trespass on the legitimate exercise of state sovereignty in environmental matters. Professor Phillipe Sands has characterised the Tribunal as taking “a very broad approach to the definition of expropriation”56 and has written elsewhere that such decisions represent a worrying and retrograde development in the requirement to balance the interests of investment with those of environmental protection.57
The decision received judicial scrutiny at the hands of Judge David F. Tysoe of the Supreme Court of British Columbia.58 He reviewed the reasoning of the Tribunal and concluded that the Metalclad Tribunal had exceeded its jurisdiction when deciding whether the Mexican government had contravened NAFTA Article 1105 ostensibly by importing the concept of transparency into the text of the Article as one of the objectives of the NAFTA. In Tysoe J.’s view the international law concept of fair and equitable treatment does not incorporate the concept of transparency and the Tribunal exceeded its jurisdiction in importing it.59 The question of transparency was thus beyond the scope of the submission to arbitration “because there are no transparency obligations contained in Chapter 11.”60 In relation to Article 1110, Tysoe J. considered that the Tribunal’s Article 1105 analysis had “infected its analysis of Article 1110.”61 Thus since the decision on Article 1105 had improperly taken account of transparency and this was then used as the basis for deciding the Article 1110 issue, this too was beyond the scope of its jurisdiction for the same reason.
Turning to the question of whether the passing of the Eco-Decree amounted to a measure tantamount to expropriation, Tysoe, J. was not able to conclude that the Tribunal had been patently unreasonable in reaching its decision. However, he did conclude that the definition of expropriation used by the Tribunal was “sufficiently broad to include a legitimate rezoning of property by a municipality or other zoning authority.”62 However, given that the definition used was a matter of law, the resulting conclusion was one with which Tysoe J. was “not entitled to interfere under the International CAA.”63
The importance of the Metalclad decision lies partially in its demonstration of the power of arbitral decision-making vis-à-vis sovereign interests and in the potential of international trade law principles to influence the shape and form of local and national regulatory measures.64 However, the subsequent use (or non-use) of the decision in other arbitral disputes serves also to illustrate the unpredictability and relative capriciousness of such decisions and the uncertainty that governments might face in designing and enforcing regulatory measures such that they do not fall foul of investor challenges or attempts to “chill” the regulatory process.
What then, is the legacy of the Metalclad decision on fair and equitable treatment and expropriation, and to what extent has it been followed subsequently by other tribunal panels? This is not such a straightforward question to answer for a number of reasons. Firstly, arbitral tribunals decide each case on the facts before them and the terms of the underlying agreement and hence the common law doctrine of stare decisis is not appropriate. Secondly, there is no requirement for ICSID arbitral awards to be published - and many are not, or are published as excerpts only.65 Thus it is not possible in many cases to find out whether, or the extent to which, the Metalclad interpretation of “tantamount to expropriation” was relied upon. Thirdly, different investment agreements between states take different approaches to fundamental state-investor relations such as most-favoured nation treatment, fair and equitable treatment, expropriation and discrimination. Hence references to previous awards based on NAFTA will, at best, have persuasive authority, but may have none at all.
It is worth noting, however, that not long after the Metalclad decision was issued, the NAFTA rules were altered in respect of the meaning of fair and equitable treatment. The NAFTA Free Trade Commission adopted, on July 31, 2001, a Note of Interpretation entitled “Minimum Standard of Treatment in Accordance with International Law.”66 It states, inter alia, that the interpretation of “ … the concepts of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.” This change may or may not have been passed in response to the Metalclad decision but at any rate should have made such a broad interpretation less likely in the future, at least where NAFTA-based arbitrations are concerned.
And yet, barely three years after Metalclad arbitration, Mexico found itself back at ICSID facing similar claims of lack of fair and equitable treatment and expropriation relating to another hazardous waste landfill site - this time far to the north-west in the Municipality of Hermosillo, in the State of Sonora in Mexico.67 This time the BIT between Spain and Mexico was the governing instrument and again it was dealt with under the ICSID Additional Facility rules. Notwithstanding the earlier criticism of Metalclad, the tribunal applied a similar analysis to that employed in Metalclad and reached essentially the same conclusions.68
The Metalclad decision arose again in Waste Management Inc, yet another ICSID case involving Mexico.69 This case also involved Article 1105(1) and Article 1110 claims against Mexico, again in the context of waste management, and again where local unrest played a part. The U.S. investor claimed that the failure of municipal authorities in Acapulco properly to cede a waste management concession amounted to “measures tantamount to expropriation.” This had occurred in circumstances where local people had taken great exception to the imposition of new waste collection charges and the dismantling of existing systems (poorly regulated though they were) and had refused to cooperate - or pay. This resulted in the entire scheme becoming economically unviable.
The Waste Management Inc Tribunal did refer to the Metalclad decision, and appeared to acquiesce in Justice Tysoe’s characterisation of the interpretation of tantamount to expropriation as “extremely broad.”70 In the event, the Waste Management Inc Tribunal did not need to engage with this interpretation as it considered that the waste concession had not been a “regulatory taking” (as in Metalclad) but had failed because it was economically unviable from the start. Thus the Metalclad issue could be evaded.
Expropriation also arose in the case of Lucchetti where a conservation order (Decree 258) was placed on an area including a pasta factory owned by an investor based in Chile.71 A follow-up decree (Decree 259), aimed at implementing the first decree stated:
IT IS HEREBY DECREED:
Article 1.- The municipal operating license granted by Municipal Resolution No. 6856-98-MDCH to Lucchetti Perú S.A. for its industrial plant situated at an unnumbered location on Avenida Prolongación Defensores del Morro, 20.5 km along the Panamericana Sur highway, Chorrillos, for the manufacture and sale of pasta is hereby revoked.
Article 2.- The industrial establishment referred to in the preceding article shall be closed and entirely removed; this shall be done within a maximum of twelve months from the day following the publication of this Decree.
Evidently this entirely “closed and … removed” the factory - a clearer example of expropriation would be difficult to imagine. However, given that it was for the purposes of environmental protection (i.e. in the public interest) and appeared nondiscriminatory in the sense that all outlets in that area were similarly affected, it would have been interesting to see how the Tribunal would have approached it. In the event Lucchetti’s claim failed on technical grounds72 and the expropriation issue was never dealt with so we can only speculate on whether the Metalclad approach would have been invoked or not.
In 2012, the Metalclad decision was invoked against Venezuela in Mobil Investment Canada Inc.73 This is referred to not only because of citation of Metalclad but also because one of the arbitrators was Professor Philippe Sands QC, who had previously roundly criticized the Metalclad decision.74 Perhaps unsurprisingly therefore, the Mobil tribunal refused to follow the Metalclad lead in relation to NAFTA Article 1105(1) and in a rather terse paragraph pointed out that the Metalclad decision had been partially set aside by the Supreme Court of British Columbia and further that the Tribunal “is not aware of any subsequent decisions which have followed the approach taken by the Metalclad Tribunal.”75 It seems as if the fair and equitable treatment part of the Metalclad decision at least was by now considered unsound.
However, more recently still, the Metalclad decision was invoked in Gold Reserve Inc.76This is one of many cases77 brought against Venezuela in the wake of the Chávez administration’s endeavours to take back the country from foreign influence in the 2000s until his death in 2013.78 The case involves the alleged failure of the Venezuelan authorities to honour gold mining concessions held by a Canadian parent company. It was not brought under the terms of NAFTA but instead under the 1998 BIT between the Government of Canada and the Government of Venezuela.
In a long and often difficult appraisal,79 the Tribunal eventually turns to the question of fair and equitable treatment80 and invokes the “transparency” analysis used in Metalclad.81 The Metalclad approach was approved without any reservation and certainly no mention of Justice Tysoe’s unfavourable review in the Supreme Court of British Columbia, nor the adjustment to the NAFTA interpretation of the fair and equitable treatment which occurred after the Metalclad decision, nor the comments of the panel members in Mobil & Murphy. This decision in particular demonstrates the uncertainty and volatility that can pervade arbitral decisions.
The Gold Reserve Tribunal also discussed the question of expropriation, and again invoked the Metalclad decision,82 once again without any reservations expressed about the “broadness” of that interpretation. The tribunal went on to award damages to Gold Reserve Inc. in the amount of US$713,032,000.83
Venezuela was also on the receiving end of another huge expropriation award at the end of 2014 in Venezuela Holdings B.V84 Here a group of Dutch parent company investors were awarded in excess of US$1.6b as a result of a “lawful” expropriation by the Venezuelan government which was held not to have been adequately compensated in line with the terms of the Netherlands-Venezuela BIT of 1991.85 This particular award makes no mention at all of the Metalcladdecision.
All these decisions were the result of disputes which went all the way to full assessment of the merits of the parties’ positions and at least each party’s position was fully pleaded. However, there are instances where the threat of ISDS proceedings appear, at least on the face of it, to have resulted in a “chilling” of regulatory measures without the benefit of detailed argument. The use of threatened proceedings to influence the exercise of regulatory sovereignty has caused even more disquiet, not least because it is difficult, if not impossible, to assess the extent of its influence.
One of the starkest examples of this “use” of ISDS is the 1998 Ethylcorpdecision.86 Here Ethylcorp, a group of U.S. investors incorporated in Virginia, objected to the decision of the Canadian government to ban the import of methylcyclopentadienyl manganese tricarbonyl (MMT), a petroleum additive, on the grounds of public health protection.87 This restriction was brought about by the passage of the Manganese-based Fuel Additives Act of 1997.88 The Act proscribed the interstate trade in, or import of, MMT for commercial purposes unless in accordance with an authorisation. However section 5 of the Act specifically forbids the authorisation of MMT for the purposes of addition to petroleum. The effect of the Act, in the view of Ethylcorp, was to deprive it of its business, since their MMT was blended into more that 95% by volume of the petroleum sold in Canada.89 Of course Ethylcorp were not alone in this in the sense that the Act banned the import and use of MMT as a petrol additive for every company operating in Canada. Hence there was no element of discriminatory practice. Nonetheless, Ethylcorp brought proceedings under the UNCITRAL rules alleging a breach of chapter 11 of the NAFTA, including an assertion that the passage of the Act contravened NAFTA rules on national treatment (Article 1102), performance requirements (Article 1106) and expropriation (Article 1110). In the decision on jurisdiction, delivered on June 24, 1998, the tribunal rejected the arguments of the Canadian government that (i) Ethylcorp had failed to observe procedural requirements related to timeliness; and, (ii) that the Act and statements relating to it, were not “measures”, nor were they measures related to “investments” or “investors.” 90 The tribunal went on to claim jurisdiction.
In the event, however, the merits of the claim were never addressed as the Canadian Government instead reached an out of court settlement with Ethylcorp, doubtless owing to lack of confidence that it could win on the merits in another arbitral forum. Though this response cannot be thought of as a classic regulatory chilling in that the provision was promulgated and remained in place after the challenge rather than preventing its genesis in the first place, it does illustrate that even where a public health measure is put in place for entirely bona fide public health reasons supported by sound science, the investor can nevertheless use the threat of arbitration to protect its investment. Further illustration of this tactic, albeit in a different context, can be observed in the campaign by Phillip Morris against plain packaging regulations in Uruguay and Australia.91
Thus there is plenty of precedent for the use of threats of arbitration to control regulation deemed to be economically threatening to an overseas investor. This gives rise to the question of whether regulatory measures adopted to protect public health or the environment in the European Union might potentially be open to challenge under the putative investment chapter of the TTIP by investors based in the U.S. Self-evidently the answer is yes by virtue of the mere existence of the investment chapter. However, there is an added nuance to challenges to environmental measures in the European Union since so many of them are based on the precautionary principle. It is contended that the different perceptions of this principle on both sides of the Atlantic presents an avenue of attack on regulatory measures in the European Union. Challenges to regulatory measures may be undertaken on the basis that the precautionary principle may be a disproportionate and non-scientific response which results in regulation based on fear and irrationality not on sound science.92 It is to this debate that we now turn.
IV The Precautionary Principle - A Brief Background
The precautionary principle is, in essence, the idea that lack of scientific uncertainty about a potentially harmful phenomenon, product or process should not, of itself, be a barrier to the taking of precautionary measures. The origins of the principle are somewhat obscure but it is generally traced back to Swedish and German environmental policies (Vorsorgeprinzip) of the 1970s. It has also been said to have been highly influential at the London Dumping Conference of the International Maritime Organisation in 1972, which gave rise to the Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter (MARPOL) which marked the beginning of the precautionary approach to the disposal of waste at sea.93 Certainly by 1992 the precautionary approach was a significant element of international environmental policy and was prominent in the Declaration of the United Nations Conference on the Environment and Development, 1992 (Rio Conference):
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.94
By 1998, the precautionary principle had become part of the legal order of the European Communities by virtue of the Treaty of Amsterdam 1997, which inserted a new Article 131(2) into the Treaty on European Union; essentially the same text is now incorporated in Article 191 of the Treaty on the Functioning of the European Union which states that:
Union policy on the environment shall aim at a high level of protection taking into account the diversity of situations in the various regions of the Union. It shall be based on the precautionary principle and on the principles that preventive action should be taken, that environmental damage should as a priority be rectified at source and that the polluter should pay.95
Unfortunately the principle itself is not further defined in the Treaty. Some clarification is contained within the official “Communication from the Commission on the precautionary principle” of 200096 which indicates that the principle should be engaged:
… where preliminary objective scientific evaluation, indicates that there are reasonable grounds for concern that the potentially dangerous effects on the environment, human, animal or plant health may be inconsistent with the high level of protection chosen for the Community.97
However, the Communication also points out that
The precautionary principle should be considered within a structured approach to the analysis of risk which comprises three elements: risk assessment, risk management, risk communication.
The precautionary principle is particularly relevant to the management of risk.
The precautionary principle, which is essentially used by decision-makers in the management of risk, should not be confused with the element of caution that scientists apply in their assessment of scientific data.
Recourse to the precautionary principle presupposes that potentially dangerous effects deriving from a phenomenon, product or process have been identified, and that scientific evaluation does not allow the risk to be determined with sufficient certainty.
The implementation of an approach based on the precautionary principle should start with a scientific evaluation, as complete as possible, and where possible, identifying at each stage the degree of scientific uncertainty.98
Thus the operation of the precautionary principle is envisaged as part of a wider risk assessment strategy where there is evidence that the risk exists, but the magnitude of that risk cannot be quantified with certainty. It is perhaps unfortunate that the term “sufficient certainty” in paragraph three of this extract receives no further elaboration particularly as it is in the response to the lack of sufficient certainty by policy and lawmakers that the controversy surrounding the precautionary principle inheres. The literature devoted to the general nature of the precautionary principle, the disagreement about its use, role and implementation across the Atlantic, and its role within trade law is voluminous99 and the difference in transatlantic approaches to the principle is one of the sticking points in the negotiation of the TTIP itself.100
On the whole law- and policy-makers in the United States take a negative view of the precautionary principle101 and this view has affected trade relations between the United States and the European Union in the past where fundamental differences have arisen in the response to unquantified risk. The United States (often joined by Canada, but also frequently supported by Australia, Brazil and New Zealand) has tended to prefer a cost-benefit approach to risk, taking the view that this is a more rational and scientific approach to risk management. The European Union, on the other hand takes a more precautionary approach based, as its foundational treaty requires, on the precautionary principle - a concept seen as irrational, post-enlightenment and risk averse by many in North America.102 In crude terms these two approaches may be thought of as the innocent-until-proven-guilty and guilty-until-proven-innocent models respectively. This difference in views has underpinned the protracted trade disputes between North America and Europe over the licensing of genetically modified organisms103 and the use of growth hormones in beef.104 However, despite the commonly asserted difference in approaches between North America and Europe, which has to some extent been perpetuated above, it is necessary to bear in mind that the situation is far more complex than a simple divergence of opinion across the Atlantic. Bergkamp and Smith’s comprehensive analysis of the approach to precaution between the United States and the European Union is at pains to point out that both jurisdictions have embraced, and continue to embrace, precautionary regulation,105 that the extent of the precaution taken is highly dependent on the issue under discussion,106 and that each jurisdiction is at different stages of development in terms of its sophistication. However, they conclude that Europe, at least in 2013, remained the less sophisticated jurisdiction:
We regard the current EU penchant for indiscriminate use of the precautionary principle - in place of factual support or structured analysis of why it is “worth it” to society to act in the face of uncertainty - as probably a passing phase, reflecting the current lack of sophistication by the European public, national politicians, and judges in making rational risk choices, coupled with aggressive, opportunistic special pleading to take advantage of the current situation by environmental NGOs and some sections of domestic EU industry and agriculture.107
Of course a European may justifiably express some scepticism of this conclusion in the face of U.S. attitudes to the uncertainty relating, for example, to climate change among certain influential members of the U.S. polity who ignore the science altogether in favour of leftist conspiracy theory.108
Whatever the realities of implementation, the difficulties with the precautionary principle as a concept are not scientific in origin. There is general consensus and mutual respect between U.S. and European scientists in relation to the scientific method itself, and hence in relation to the degree of uncertainty associated with a particular phenomenon, product or process. Disagreement emerges in relation to the most appropriate response to the uncertainty. A cost-benefit analysis approach places a higher premium on scientific rationality and regulation should only be imposed where a “significant risk” exists. The preference for this paradigm in the United States has been traced to Supreme Court precedent in the 1980s which “helped to ensure America’s economic and technological advancement and competitiveness during the past several decades”,109 and to the subsequent influence of the Reagan administration (ably led by the Speaker of the House Newt Gingrich) whose chief concern was reducing regulatory burden as part of the “Contract with America” and hence embraced cost-benefit analysis because it tends to generate a higher threshold for the imposition of regulation.110 The precautionary paradigm embraced in Europe, on the other hand, is said to have its origins in postenlightenment European philosophies, particularly those of France and Germany111and to embody ethical and equitable principles derived from Western notions of morality and deontology.112
Hence disagreement over approaches to precaution are disagreements over doctrinal interpretation rather than over science or law as such. It is this that makes regulations based on the precautionary principle peculiarly vulnerable to attack in arbitral proceedings, since arbitrators are asked to rule, not so much on the quality of the science underpinning a regulation or even the act of regulation itself (though this is sometimes challenged), but rather the rationality of the regulatory response to that science. An investor might invite a tribunal to find that a regulatory response is not based on sound science, or is too cautious to be justifiable given the lack of sufficient scientific certainty. As such, it may amount to a lack of fair and equitable treatment, or a measure tantamount to expropriation. Challenges on these grounds under the proposed TTIP are plausible, and the next section uses a hypothetical challenge based on a current EU restriction to analyse the possibilities of success.
V The Neonicotinoids Restrictions in the European Union and How They Might Fare under the Proposed TTIP Investment Protection Provisions
An illustrative example of the operation of the precautionary principle in the European Union is to be found in regulations that implement the current partial restriction of the use of a class of chemicals known as the neonicotinoid insecticides (hereinafter neonics). Developed in the 1980s, principally by the chemical companies Bayer, Syngenta and Sumitomo Chemical, the neonics are a class of systemic insecticides (taken up by all parts of the plants to which they are applied), which attack the central nervous systems of pest insects which feed on the plants with fatal effect, but with none of the environmental persistence or high mammalian toxicity associated with the previous pyrethrin, pyrethroid, organophosphate and organochlorine alternatives.113 The background to the imposition of the current restrictions on the use of these chemicals has been fully described elsewhere114 and only a brief summary is necessary here.
Initially, Council Directive 91/444/EEC115 (concerning the placing of plant protection products on the market) made provision for substances to be added to Annex 1 of that directive which listed “Active Substances Authorized for Incorporation in Plant Protection Products.” Subsequent secondary legislation added a number of neonics to this Annex thereby permitting their use in plant products in the European Union.116 However, following accidental releases of these chemicals which resulted in the deaths of bee colonies, the use of the neonics clothianidin, thiamethoxam, imidacloprid and fipronil were subjected to additional risk assessment requirements.117 Subsequent regulatory amendments placed still further restrictions, specifically on the use of three of the more commonly used neonics, clothianidin, thiamethoxam and imidacloprid, as foliar treatments, as soil additives and in seed dressing.118
These restrictions were justified on the basis of a report, commissioned by the European Commission,119 by the European Food Safety Authority which reviewed the evidence on the effect of neonics on bee colonies.120 The evidence suggested that although the normal use of these pesticides was not lethal to bees, there was some evidence that neonics residues have the effect of interfering with the bees’ navigation systems, thereby disorientating them and preventing them from returning to their colonies or from indicating the sources of food to the remainder of the colony even were they able to return. The European Food Safety Authority recommended that further evidence was required in order to establish the magnitude of the risk.121 On this basis the Commission, taking the precautionary approach required by Article 191 of the Treaty on the Functioning of the European Union, and explicitly referred to in EU Regulation (EC) No 1107/2009, recommended restrictions on the use of neonics.
These recommendations were viewed with some equivocation in the member states of the European Union122 and the arable farming community has protested that the restrictions on the application of neonics are significantly adversely affecting their business.123 In 2015 the National Farmers’ Union successfully applied to the UK Government for an emergency lifting of the ban in three eastern counties of England, a move which was unsuccessfully challenged by Friends of the Earth.124Perhaps unsurprisingly the chemical industry has viewed these restrictions as being an overreaction based on flawed field studies.125
The central regulation which introduced these restrictions, EU Regulation (EC) No. 1107/2009, is explicitly based on the precautionary principle.126 Article 1(4) states:
The provisions of this Regulation are underpinned by the precautionary principle in order to ensure that active substances or products placed on the market do not adversely affect human or animal health or the environment. In particular, Member States shall not be prevented from applying the precautionary principle where there is scientific uncertainty as to the risks with regard to human or animal health or the environment posed by the plant protection products to be authorised in their territory.
The question is whether - should the TTIP come into being in anything like its current form - Bayer, Syngenta or Sumitomo could seek to challenge the restriction under the terms of the TTIP draft investment protection section127 on the basis that the restrictions represent a failure to accord fair and equitable treatment or that the restrictions represent an expropriation of property.
A Establishing Standing: Investors, Investments and Covered Investments
Clearly the first requirement is that the said corporations are investors as defined in the TTIP. The current version of the TTIP draft investment chapter published by the EU Commission defines the term “investor” as “a natural person or a juridical person of a Party that seeks to make, is making or has already made an investment in the territory of the other Party.”128 Certainly the corporations would meet this requirement since all have offices in the United States.129 There is certainly no requirement that the nationality of the investor be defined by reference to the domicile of the parent company, though the terms of the investment chapter in the governing treaty would be relevant and could, conceivably, contain such a requirement. However, the chances of such a restrictive trade requirement successfully becoming part of a final investment text are very slim and highly unlikely to be included in the final text of the TTIP. No such requirement appears in the TPP, the CETA or any of the treaties with which the author is familiar. The TPP defines an “investor of a Party [to be] a Party, or a national or an enterprise of a Party, that attempts to make, is making, or has made an investment in the territory of another Party.”130 CETA - likely to be more representative of the final text of TTIP given that the European Union is a party - is more prescriptive and defines an investor as:
… a Party, a natural person or an enterprise of a Party, other than a branch or a representative office, that seeks to make, is making or has made an investment in the territory of the other Party;
For the purposes of this definition, an enterprise of a Party is:
- an enterprise that is constituted or organised under the laws of that Party and has substantial business activities in the territory of that Party; or
- an enterprise that is constituted or organised under the laws of that Party and is directly or indirectly owned or controlled by a natural person of that Party or by an enterprise mentioned under paragraph (a)131
In general arbitral panels have taken a generous view of relationships between subsidiary and parent companies in establishing the existence of “substantial business activities”132 and it is unlikely that the corporations would have any difficulty in establishing their status as U.S. investors for the purposes of the TTIP.
It would then need to be established that the licensing and marketing of neonics in the European Union is a covered investment.
A “covered investment” is “an investment which is owned, directly or indirectly, or controlled, directly or indirectly, by investors of one Party in the territory of the other Party made in accordance with applicable laws …”133 The fact that the imposition of the neonics restrictions would obviously predate the TTIP (should it ever be signed and ratified) would not be a barrier since the definition of “covered investment” includes an investment “whether made before or after the entry into force of this Agreement.”134 Thus the definition of a covered investment would be retrospective and cover all the contentious trade disputes extant at the time of the signing of TTIP (not only the neonics dispute but other, more long-standing ones such as the beef hormones and GMOs disputes).135
An “investment” is defined in the TTIP draft investment protection section as:
… every kind of asset which has the characteristics of an investment, which includes a certain duration and other characteristics such as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include:
- an enterprise;
- shares, stocks and other forms of equity participation in an enterprise;
- bonds, debentures and other debt instruments of an enterprise;
- a loan to an enterprise;
- any other kinds of interest in an enterprise;
- an interest arising from:
- a concession conferred pursuant to domestic law or under a contract, including to search for, cultivate, extract or exploit natural resources,
- a turnkey, construction, production, or revenue-sharing contract, or
- other similar contracts;
- intellectual property rights;
- any other moveable property, tangible or intangible, or immovable property and related rights;
- claims to money or claims to performance under a contract;
For greater certainty, ‘claims to money’ does not include claims to money that arise solely from commercial contracts for the sale of goods or services by a natural person or enterprise in the territory of a Party to a natural person or enterprise in the territory of the other Party, domestic financing of such contracts, or any related order, judgment, or arbitral award.
Returns that are invested shall be treated as investments and any alteration of the form in which assets are invested or reinvested shall not affect their qualification as investments.136
It is submitted that the corporations would have little difficulty in establishing ownership or control of investments in Europe under many of these headings (which are in any case not exhaustive) by virtue of their supply and licensing of insecticides in the European Union. In any event it has been noted elsewhere that “there has been a tendency to extend the meaning of investment in treaties.”137
Article 1 of the TTIP draft investment protection section sets the jurisdictional scope of the section relating to investment protection as including “(i) covered investments, and (ii) investors of a Party in respect of a covered investment as regards any treatment that may affect the operation of such investment.”138Interpretation of the term “any treatment that may affect … investment” by a court or tribunal would probably be undertaken by reference to principles of international investment law, where a measure (such as the neonics restriction) imposed by a government must have a “legally significant connection” to an investor.139 This requirement derives largely from the interpretation of Article 1101 of the NAFTA140and is said to have arisen to limit claims to principal investors only and to prevent ancillary claims by suppliers, subcontractors and so forth.141 Arguably, however, the draft TTIP criteria of “any treatment” by a host Party is far wider than the equivalents in NAFTA, CETA and TPP which relate to “measures … adopted or maintaine”142 and it is submitted that the corporations would have little difficulty in establishing the requisite legal significance since the restrictions imposed by the EU Commission are aimed specifically at neonicotinoid pesticides, Further, it would be open to the corporations to request that a tribunal view their submissions de novo on the basis that previous arbitral decisions have stated that a case-by-case analysis of whether measures (or, presumably, “treatments”) have legal significance for the investors is appropriate.143
Having established standing it would then be necessary for the corporations to establish that the EU Regulations restricting the use of neonics in some way contravenes the investment protection measures guaranteed by Chapter II, section 2 of the TTIP. This section contains provisions relating to investor treatment and protection. Previous arbitration decisions suggest that a challenge to the neonics restrictions are most likely to succeed under the fair and equitable treatment and expropriation provisions.
B Fair and Equitable Treatment
Paragraph 4 further extends the provision:
A Party breaches the obligation of fair and equitable treatment … where a measure or a series of measures constitutes:
- denial ofjustice in criminal, civil or administrative proceedings; or
- fundamental breach of due process, including a fundamental breach of transparency and obstacles to effective access to justice, in judicial and administrative proceedings; or
- manifest arbitrariness; or
- targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief; or
- harassment, coercion, abuse of power or similar bad faith conduct; or
- a breach of any further elements of the fair and equitable treatment obligation adopted by the Parties in accordance with paragraph 3 of this Article.144
The first point to note about this provision is that, unlike the equivalent provision in the NAFTA,146 it makes no reference to international law. Hence, unlike the numerous NAFTA decisions involving fair and equitable treatment which have been constrained to treat it as an element of the minimum standard of treatment doctrine in international trade law,147 the fair and equitable treatment standard in the current version of TTIP may represent “an independent treaty standard that has a distinct and separate meaning from the minimum standard of treatment.”148The question is whether that distinct and separate meaning could be interpreted by a tribunal as imposing higher standards of treatment on host parties than required under international law.
When applying the above fair and equitable treatment obligation, a tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated.145
It is possible that the corporations could argue, based on the uncertainty of the evidence that led to the imposition of the neonics restrictions, that the imposition amounts to manifest arbitrariness.149 Admittedly this would be difficult if solely reliant on demonstrating that the restrictions were capriciously imposed, though counsel for the corporations may get a little further if they attempted to equate arbitrariness with inconsistency, unpredictability and irrationality, thereby appealing to the vast body of opinion that suggests that adherence to the precautionary principle is indeed irrational, unpredictable, anti-scientific and, thus, arbitrary. This argument could be further bolstered by the “legitimate expectation” provision in Article 3, paragraph 4 if it could be argued that the initial inclusion of neonics in Annex 1 of Directive 91/444/EEC and then EU Regulation (EC) No. 1107/2009 amounted to a “specific representation”, which the subsequent restrictions - based as they were on the precautionary principle - “frustrated.”150 In the Bilcon v. Canada arbitration, the Delaware-based investors successfully persuaded the tribunal that a panel charged with assessing the potential environmental effects of a quarrying operation on cetaceans in the adjacent ocean, had overemphasised “community core values” to the detriment of its statutory duty to conduct “a ‘likely significant effects after mitigation’ analysis to the whole range of potential project effects” as required by Canadian law.151 This amounted to a “problematic” and “unique” approach, which, when combined with the inducement to invest, fell below the minimum standard of treatment that the investor was entitled to expect and amounted to a frustration of their expectation vis-à-vis their investment.152 It is suggested that the decision of the EU Commission to propose its own restrictions on the use of neonics, against the background of the failure of the Standing Committee of the Food Chain and Animal Health to reach the required qualified majority, and the equivocation about the quality of the evidence available by the European Food Standards Agency, could also be characterised as a failure to provide fair and equitable treatment. The crucial difference of course between this and the Bilconscenario is that the Commission could point out that their decision was based on the EU legal requirement to operate according to the precautionary principle and to “err on the side of safety.” The counter to that argument is to point to the inherent unpredictability of the implementation of the precautionary principle which could lead to different but equally plausible expectations on both sides as to the most appropriate regulatory response. It is suggested that in the event of intercession by an arbitral tribunal it is by no means certain whose expectation would carry the argument. The tribunal would be asked, in effect, to engage in a proportionality assessment, but without necessarily having to conform to the usual boundaries of that public law principle. In short, the outcome of such an argument is a long way short of a foregone conclusion.
Neither Party shall nationalize or expropriate a covered investment either directly or indirectly through measures having an effect equivalent to nationalisation or expropriation (hereinafter referred to as ‘expropriation’) except:
- for a public purpose;
- under due process of law;
- in a non-discriminatory manner; and
- against payment of prompt, adequate and effective compensation.153
For greater certainty, except in the rare circumstance when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as the protection of public health, safety, environment or public morals, social or consumer protection or promotion and protection of cultural diversity do not constitute indirect expropriations.156
The regulations restricting the use of neonics comply with the criteria in paragraphs (a) to (c) of Article 5, but since (presumably) the corporations have not been compensated in respect of the restrictions on neonics, then the measures could amount to an expropriation of the corporations’ investments under Article 5(d). Since they are clearly not a direct expropriation - not involving “[a] formal transfer of title or outright seizure”157 - then they can only amount to an indirect expropriation as “substantially depriv[ing] the investor of the fundamental attributes of property in its investment, including the right to use, enjoy and dispose of its investment, without formal transfer of title or outright seizure.”158
However, since these measures have clearly been “designed and applied to … the protection of [the] environment,” then they should be safe from attack as indirect expropriation measures, in reliance on Annex 1, paragraph (3) unless it could be shown that the restrictions are “so severe in light of [their] purpose that [they appear] manifestly excessive.” This is potentially the avenue by which the precautionary basis of the measures could be attacked by the investor corporations. Again, the paucity of the evidence of cause and effect between the normal use of neonics and the effect on bee geolocation could be used to argue that the regulatory response is manifestly excessive and hence tantamount to an indirect expropriation.
In the Bilcon case - one of the few arbitral cases where the precautionary principle was at issue - the investors argued that the environmental assessment panel had: used “a distorted precautionary principle”159; “an improperly expansive precautionary principle”160; of “applying] a patently incorrect definition [of the precautionary principle].”161 Paradoxically though, the investors here were arguing that the panel had demanded too high a level of scientific certainty “to prove that the project would not cause any environmental damage, rather than recognising that uncertainty may be inevitable [and] cannot paralyze a project.”162 In other words the investors’ view of the precautionary principle was that scientific uncertainty should not stand in the way of granting permission for an activity - a reversal of the conventional application of the principle, certainly as it would be applied in the European Union. However the tribunal itself chose not to address this issue directly and the words “precautionary principle” appear nowhere - not even in allusory terms - in the justification for their final decision.163 This avoidance of the issue is not explained but it would not be surprising if the arbitrators chose to evade the issue altogether - given its indeterminacy - where other, less contentious grounds for the decision existed.
… the Tribunal’s view that under NAFTA, lawmakers in Canada and the other NAFTA parties can set environmental standards as demanding and broad as they wish and can vest in various administrative bodies whatever mandates they wish. Errors, even substantial errors, in applying national laws do not generally, let alone automatically, rise to the level of international responsibility vis-à-vis foreign investors. The trigger for international responsibility in this particular case was the very specific set of facts that were presented, tested and established through an extensive litigation process.
the arbitrary, capricious, and illegal revocation of the Enterprise’s valuable right to mine for oil and gas under the St. Lawrence River by the Government of Quebec without due process, without compensation, and with no cognizable public purpose.167
This was in response to Quebec’s imposition of a moratorium on fracking - a precautionary measure with many counterparts in Europe.
D The Environment Chapter in the TTIP
The Parties acknowledge that where there are threats of serious or irreversible damage, the lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation.170
This apparent protection for the precautionary principle suggests a model of precaution much closer to the North American cost-benefit approach171 than the EU notion of precaution which underpins the neonics restrictions. The requirements for either “serious” or “irreversible” damage closely reflects the text of Principle 15 of the Rio Declaration,172 with no apparent concession to the more precautionary approach commonly referenced in European law.173 Should the same text appear in the TTIP (assuming the negotiations do reach a conclusion), it is suggested that they would not necessarily protect the Commission’s regulatory precautions on neonics since it is eminently possible to argue that the threat posed by neonics - based on the available evidence - is neither serious nor irreversible.
E Influence of the EU Commission’s Proposed Independent Arbitral Tribunal
One of the most controversial aspects of the TTIP negotiations over the investment chapter is the perception that unaccountable arbitrators in investment-state disputes will be in a position to dictate to sovereign states over matters which have traditionally been considered the sole preserve of national regulatory authorities or legislators. To address this concern the European Commission has issued - as part of the draft investment services document - proposals for the setting up of an independent arbitral tribunal and appeal tribunal for Europe.174 These proposals are closely modelled on the WTO Appellate body and it is hoped175 that this will address the criticisms raised in the past,176 the “fundamental lack of trust”177 in arbitral tribunal decisions, and in particular the vexed questions of lack of legal training,178 independence,179 the lack of avenues for appeal,180 and the lack of transparency.181
However, whilst these measures (in the perhaps unlikely event that they are accepted by the United States) will doubtless improve the quality and legitimacy of arbitral decisions, it is questionable whether they would affect an assessment of the precautionary principle in any substantive sense. The tribunal will still be an investment arbitration tribunal rather than a court of general jurisdiction and, as such, will be principally bound by the TTIP text. Despite its more “legitimate” credentials the new tribunal will still be required to straddle the uncomfortable divide between private and public law imperatives (in a way that is not required of the WTO panels on which it is modelled) and make compromises between them - in short, no different to the exercise undertaken by existing ICSID and UNCITRAL tribunals.
As already discussed, what is known of the TTIP text already offers ample potential for challenges to regulations based on the precautionary principle. This potential, it is suggested, will not be materially affected by the make-up or procedures of the tribunal panel itself.
As this paper was being completed, the TTIP negotiations entered their 15th round182against the backdrop of recent demonstrations in Germany against both TTIP and CETA.183 The EU Commission will no doubt be even more conscious of the need to reassure European citizens that TTIP will not undermine national sovereignty - a message that has assumed even greater importance since the citizens of the United Kingdom voted in favour of “Brexit” in a referendum in July 2016. The “Leave” campaign in Britain made much of the need to “regain sovereignty” from the European Union,184 so that questions of national sovereignty are now, more than ever at the forefront of politicians’ minds in the EU.
Where environmental sovereignty is concerned the text of the TTIP includes, at first sight, quite strongly worded provisions to permit nation states to maintain and enhance environmental protection. However, very similar provisions to these appear in other investment and trade agreements but they have not necessarily prevented investors from seeking compensation for the loss of their investment (or the value of it) as a result of local, regional or national measures designed to protect the environment or public health. Such claims have invariably been based on the fair and equitable treatment principle and/or on the basis that the measures represent measures tantamount to (indirect) exropriation. It is also the case that such claims do not necessarily need to reach the merits stage in order to bring about the desired effect as illustrated in the Ethyl Corp decision discussed above.
The current text of the TTIP does not suggest that it is likely to be significantly more resilient to such claims than many of its forbears. In fact, given that so much of the regulation in environmental matters and public health in the European Union is based on a version of the precautionary principle which is far more “precautionary” than envisaged in principle 15 of the Rio Declaration, investor claims which seek to attack its rationality are probably more likely.
Of course the final version of the TTIP may contain explicit protection for the precautionary principle, but, if this merely repeats the provision in CETA, then it is unlikely to prevent claims based on equivocal scientific evidence such as the restrictions currently in place for neonicotinoid pesticides. Moreover, the provision of a bespoke tribunal and appeal system within TTIP may not necessarily make claims founded on the irrationality of regulatory responses to the precautionary principle any less plausible or any more likely to fail.
Investment protection agreements have the potential to enhance environmental protection if they encourage greater transparency of regulation by the host state so that the investor is certain about the regulatory environment into which they are entering and know the risks. However, the approach of investment tribunal panels themselves needs to change in order to take a broader view of purposes of arbitration in an era of climate change, loss of biodiversity and the need to preserve ecosystem services. It can no longer be appropriate merely to consider the private property rights of investors as the primary consideration. The public interest in environmental quality and the need to adapt to environmental pressures by sovereign authorities must play a greater part. In the long run this is in the interests of investors also. However, it is the elected sovereign authorities who must be permitted the final word in how this is brought about rather than corporate entities who primary purpose is the generation of profit.