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The Current Role and Potential of International Investment Law as a Tool for Sustainable Development

International Trade and Investment Law (International and European Law) LL.M University of Amsterdam

Omar Raoul Halden (12131267)

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Abstract: This paper sets out to shed light on the current linkages between international

investment law and sustainable development. Through the exploration of the theoretical connectedness and an increased amalgamation of the two within the investment law system the paper delves into specific new approaches in which investment law is used as an instrument for sustainable development objectives. It concludes by finding that the systemic hurdles to achieving a real paradigmatic harmonization the international investment law regime is mainly reactionary in the way that it adopts the concept of sustainable investment law rather than accepting a more holistic role for which it does have the potential.

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Contents

I. Introduction 4

II. International Investment Law and Sustainable Development 5

I. Sustainable Development as a Goal 5

II. The Link between IIL and Sustainable Development 6 III. A Trend Towards an inclusion of Sustainable Development 10

IV. New Normative Approaches 12

I. Preamble 12

II. Standards of Treatment 15

a) Fair and Equitable Treatment 15

b) Indirect Expropriation 22

III. Investor and Home State Obligations 24

a) SADC 24

b) Brazil 24

c) Civil Liability Principles 25

V. Reflections and Hurdles 26

I. Internal Hurdles 26

II. External Hurdles 26

VI. Conclusion 28

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I. Introduction

A recurring issue concerning the international investment law regime is how to safeguard that through the use of international investment agreements (IIAs),1 both in terms of negotiating new agreements as well through their application, the effects of protecting foreign direct investment (FDI) are positive for the host state.

It has been expressed and expounded, particularly in the 20th century, that foreign direct investment is a tool for development, and thus states interested in development ought to enter into international investment agreements to attract foreign direct investment. However, the notion of ‘development’ has evolved over the last decades and is now interpreted more broadly than simple economic growth, to include sustainable development; a multifaceted understanding of development that is favourable also to the host state’s populations by touching on several socio-economic aspects. Whilst this link exists however, there is currently a lack of effective provisions in IIAs to account for sustainable development; consequently, foreign direct investment does not necessarily contribute to sustainable development. Considering the link, and the impending 2030 SDG targets, there is an increasing imperative to address the constraints to sustainable development imposed by IIAs.

In light of this background and a relative gap in the existing relevant literature, my research question is “what is the role and potential for international investment law to act as a tool for sustainable development?”

I will approach this question through research into the link between sustainable development and the investment regime; I will outline the trend towards including sustainable development clauses in IIAs; development; the current and potential normative approaches for this goal; as well as internal implementation and enforcement and external regime clash hurdles. I will close this paper by concluding that although a move towards an inclusion of sustainable development is upon us it has not yet been adopted into a paradigm of international investment law.

1 This Term Includes Both Bilateral Investment Treaties (Bits) As Well As Treaties With Investment Provisions

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II. International Investment Law and Sustainable Development I. Sustainable Development as a Goal

The meaning of sustainable development remains highly contested. Is it a legal rule, an objective or a process? Does it address primarily the reconciliation between economic development and environmental protection, or should social development, including good governance, human rights and health, be understood as one of its pillars? These questions are beyond the scope of this paper. Rather, this paper assesses the IIA regime against the high standards for achieving sustainable development set out by the UN SDGs.

Sustainable development, as a concept, offers a system where environmental, social and economic interests are balanced. It’s first conception was in the 1987 Brundtland Report2 After

which it was launched more substantively into the field of international law as a concept in the Rio Declaration on Environment and Development 1992.3 With its most recent iteration by way of the United Nations Agenda 2020 for Sustainable development and the sustainable development goals outlined therein, the notion of sustainable development can be seen as the universal paradigm for the international community.4

Throughout the recent reform of the international investment law (IIL) regime, sustainable development has acted somewhat as a guiding principle and a catalyst for change. Sustainable development as a concept related to IIL has been considered, by the UN Conference on Trade and Development (UNCTAD) as the most apt concept though which the international investment law making should be guided.5 Furthermore, the Organization for Economic Co-operation and Development (OECD) as well as the G20, seek to bring their policy options in line with sustainable development and its objectives.6

The concept of sustainable development in reference to foreign investments is the role for international investment law to both maintain political certainty, stimulating foreign investors to act, however without limiting the sovereignty of a state to regulate in relation to matter of environmental and social interest. Furthermore, it is the aim of sustainable development to subject foreign investors to international regulations.

Although the concept of sustainable development increasingly develops, it international legal status remains disputed. So far this has not been satisfactorily clarified by way of international adjudication. Still, the normative value of the concept is uncontested by academics.7 Its impact on the manner in which modern treaties are drafted, concluded and

2 G. Brundtland, Report of the World Commission on Environment and Development: Our Common Future.

(1987) United Nations General Assembly document A/42/427

3 United Nations Rio Declaration on Environment and Development (13 June 1992), 31 I.L.M. 874 (1992). 4 UN General Assembly, Transforming our world: the 2030 Agenda for Sustainable Development, 21 October

2015, A/RES/70/1

5 UNCTAD Investment Policy Framework for Sustainable Development Un Pub.

UNCTAD/Web/Diae/Pcb/2015/3 (Hereinafter IPFSD 2015). Available at Https://Unctad.Org/En/Publicationslibrary/Diaepcb2015d5_En.Pdf> Accessed On 23 April 2019.

6 OECD, ‘2030 Agenda and Development’, available at

https://www.oecd.org/g20/topics/agenda-2030-development/

7 For an overview see. Ellen Hey, ‘Sustainable development, normative development and the legitimacy of

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interpreted evidences this. Sustainable development is thus important in both norm-creation and norm-application.8 The role of IIL to sustainable development seems to be at least twofold. First there is the idea that IIL should be furthered in such a would as to contribute to sustainable development. The second function is one of protection; meaning that IIL should safeguard that measures of states, adopted in light of the furtherance of sustainable development should not be adversely affected by IIAs. IIAs have to be drafted in such a wat that these domestic measures can easily adopted and maintained. These functions will be reiterated often throughout this paper as they are often repeated by policy suggestions as well as by treaty drafters.

II. The Relationship Between IIL and Sustainable Development

To identify and explore how to best link the international investment law regime and sustainable development, it should be established how FDI and development, often phrased as economic growth, relate to each other. Taking into consideration Sustainable Development Goal (SDG) 8 – relating to decent work and economic growth – there is an inherent recognition in that investment is needed for economic growth and that a lack thereof can lead to the erosion of the basic social contract: “that all must share in progress”. 9 Principle 12 of the Rio Declaration similarly recognized that attracting foreign investment through the promotion of an open international economic system is crucial – especially for developing countries – to achieve economic growth. 10 Similar wording is often found in BITs. 11

Furthermore, arbitral tribunals have link the two by holding that a contribution to the economic development of the host state is a criterion in order for foreign conduct to be considered an ‘investment’. 12 Others have seen such a contribution not autonomous but rather implicit through the other criteria that need to be satisfied – the contribution of money/assets, an element of risk, and a certain duration. 13 In this vein, it was more recently compellingly stated that:

[T]he contribution-to-development criterion, on the other hand, would appear instead to reflect the consequences of the first three criteria, bringing little independent content to the inquiry. At the same time, it invites a tribunal to engage

in post hoc evaluation of the business, economic, financial and/or policy

8 Stefanie Schacherer, ‘The CETA Investment Chapter and Sustainable Development: Interpretative Issues’ in

Makane M Mbengue, Stefanie Schacherer (eds.) Foreign Investment Under the Comprehensive Economic and

Trade Agreement (CETA) (Springer, 2018) 207-38.

9 Un General Assembly, ‘Transforming Our World : The 2030 Agenda For Sustainable Development’, 21 October

2015, A/Res/70/1, Available At: Https://Sustainabledevelopment.Un.Org/Post2015/Transformingourworld, 14.

10….

11 See E.G. The Preamble Of The 2010 Agreement Between Switzerland And China On The Promotion And

Reciprocal Protection Of Investment.

12 Saipem S.P.A. V. The People's Republic Of Bangladesh, Icsid Case No. Arb/05/07, Decision On Jurisdiction

And Recommendation On Provisional Measures, [99]; Salini Costruttori S.P.A. And Italstrade S.P.A. V. Morocco, Icsid Case No. Arb/00/4, Jurisdiction, [52]

13 Electrabel S.A. V. The Republic Of Hungary, Icsid Case No. Arb/07/19, Decision On Jurisdiction, Applicable

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assessments that prompted the claimant's activities. It would not be appropriate for such a form of second-guessing to drive a tribunal's jurisdictional analysis. 14

Yet the assumption that foreign investment is important for development is evident. This assumption is generally based on a few basic principles. One of these is that through foreign intervention in local chains of production there is an increase in the purchase of local inputs and end products are (at least partially) sold locally as well. 15 This furthermore is also assumed to create job opportunities. Additionally, FDI can lead to increased foreign exchange earnings and it can potentially increase the host state’s export capacity. Another basic principle, and argued to be the strongest theoretical motive for policy implementation aimed at attracting FDI, is the assumption of spillovers in technologies and skills.16

This link between FDI and development, and especially their precise interrelationship is not uncontested. With regard to the spillover effect it is difficult to determine how and where such spillovers occur which creates problems when a country decides to open up its market to ‘all’ investors from the country with which it decided to conclude an IIA. 17 Additionally, it is difficult to calculate the value and quality of spillovers. Taking a step back and looking more broadly at the use of IIAs by developing states to attract FDI with the aim of increasing economic growth or development more generally, such conduct may even result in a ‘race to the bottom’. Often the IIAs negotiated allow little space for regulatory freedom e.g. for labour standards or environmental protection which may run afoul of the substantive standards of protection included. Domestic policy may be tweaked in such ways as to attract the conclusion of an investment agreement (e.g. by lowering corporate tax rates, relaxing labour protection).

18 Investment agreements might aim to lock-in these investment-attracting policies and,

furthermore, constrain the host state’s regulatory freedom in policy making as these may come under scrutiny of the IIA in question. 19 Following this, FDI may not only fail to promote the economic development of the host state, but it may additionally have detrimental impacts on the environment, human rights and labour rights – as well as on the host state’s compliance with obligations in these areas. 20

14 Sgs Societe Generale De Surveillance S.A. V. Paraguay, Icsid Case No. Arb/07/29 , Award, [107]. 15 This Would Apply To Both Goods As Well As Service Markets.

16 M. Blomström, A. Kokko, ‘The Economics Of Foreign Direct Investment Incentives’ (2003) National Bureau

Of Economic Research Working Paper 9489, 3 Http://Www.Nber.Org/Papers/W9489 Accessed 30 March 2019. See Also J. Y. Wang, M. BlomströM, ‘Foreign Investment And Technology Transfer: A Simple Model’ (1992) 36(1) European Economic Review, 137-152 Https://Doi.Org/10.1016/0014-2921(92)90021-N Accessed On 30 March 2019. Here Wang And Blomström Elaborate On The Transfer Of Technology Categorizing Them Into Four Channels, Namely (I) Through Imitation, (Ii) Through Competition, (Iii) Through Skills, And (Iv) Through Linkages Made To International Markets..

17 Ibid. 16.

18 A. Klemm, S. Parys, ‘Empirical Evidence On The Effects Of Tax Incentives’ (2012) 19(3). International Tax

And Public Finance, 393. See, For A More Elaborate Discussion A. T. Guzman, ‘Why Ldcs Sign Treaties That Hurt Them: Explaining The Popularity Of Bilateral Investment Treaties’ (1997) 38 Virginia Journal Of Int’l L. 639.

19 C. Bodea, F. Ye, ‘Bilateral Investment Treaties (Bits): The Global Investment Regime and Income Inequality

In Developing Countries’, 7. Paper Proposed For The 2017 Political Economy Of International Organizations Conference. //Www.Peio.Me/Wp-Content/Uploads/2016/12/Peio10_Paper_56.Pdf

20 T. Gazzini, ‘Bilateral Investment Treaties And

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This paper is not an empirical study aiming at demonstrating the effects of FDI on development but rather uses such previous studies to outline that such a correlation does indeed exist but that it is however contested. I will continue however based on the underlying assumption maintained by states, namely that investment and development do indeed have a beneficial correlation. It is thus unsurprising that in order to attract foreign investments capital-importing states – often least developed countries (LDC) and developing countries – sign IIAs with their capital-exporting states. it is the goal of these IIAs to guarantee certain substantive standards of protection to investors of the home state as well as to positively affect the perception of the host state’s status as a destination for investments. 21 Considering then that roughly two thirds of all IIAs in place (3317 at the time of writing) involve a developing country and around a quarter of them involve an LDC it is clear that IIAs have a profound impact and could also extend this impact considerably on sustainable development. 22

The above however only outlines the rationale behind attracting FDI for development from the perspective of a capital-importing – often assumed to be ‘developing’ states. However, with the recent rise of BITs concluded between ‘developing’ states23, as well as the inclusion of investment chapters in free trade agreements (FTAs) between ‘developed’ states24 the motive behind negotiating IIAs cannot be said to be grounded in the search for development – or at least not to the same extent. 25 Here, the previously outlined motives of seeking a minimization as well as a decentralization of inter-state tension as a result of international investment disputes that would otherwise be dealt with through the laws of diplomatic protection, are much more at the forefront of the rationale. As Pauwelyn recapitulates, IIAs are about constraining powerful home states and limiting host state abuse. 26

Does this mean that it is the wrong regime to look for answers or solutions regarding SD? No, even if the ‘intent’ of IIAs isn’t directly for development, development is still a result of it as well as negative externalities resulting from unsustainable investments and the poor effect that the limited policy space for regulation has on the enforcement of other SD related legislation. There is therefore not only an interest had in SD by the current IIL regime but also a responsibility as it were the same states signing on to these IIAs that concluded the SDGs through the UNGA. Furthermore, traditionally capital-exporting countries have more recently had to additionally see themselves as host countries as well through the inclusion of BITs or TIPs – especially where ISDS is provided for. As such they recognized the potential negative

21 F. Rojid, M. Carmen Vazques, ‘Investment Law and Poverty: Continuing The Debate Through UNCTAD’s

Investment Policy Framework For Sustainable Development’ (2014) 15 Journal Of World Investment & Trade 889, 890.

22Investment Policy Hub, International Investment Agreements Navigator, (Unctad)

Https://Investmentpolicy.Unctad.Org/International-Investment-Agreements Accessed 24 April 2019.

23 UNCTAD, World Investment Report 2011, At 100 (20 Of The 54 Bits Signed In 2010 Were

Between Developing Countries and/or Transition Economies).

24 See for example The CETA or the EUSFTA.

25 J. Pauwelyn, ‘Rational Design or Accidental Evolution? The Emergence of International Investment Law’ In

Z. Douglas, J. Pauwelyn, J. E. Viñuales (Eds.), The Foundations of International Investment Law: Bringing Theory Into Practice (OUP, 2014) 11, 12.

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and restrictive effects of standard IIAs and accordingly reshaped their model BITs to limit the flexibility of substantive standards. Here specifically we seen an aim at aligning standards to those granted domestically thus allowing ample space for policy implementation without violating obligations stemming from the IIAs. 27 (REPHRASE PARA.).

IIAs should be considered a means and not and end for achieving the goals of sustainable development. It is not inherent to them to contribute to economic growth or development. The safety of protection through an IIA will not promise foreign investment28, nor will the absence of such an agreement necessarily prevent foreign investment. 29 As eloquently stated by the

Institute of Investment for Sustainable Development (IISD):

Sustainable development is an investment issue. Capital is needed to alleviate poverty, create jobs, accelerate the clean energy transition and allow for the development of much-needed infrastructure to provide goods and services for all. Foreign direct investment is an important source of that capital. But investment does not come without risks. How can we ensure investments are made responsibly, without harming people, the environment or the local economy? In particular, the IISD examines how the rules and institutions that govern international investment flows can be improved so as to help developing countries, in particular attract the sort of investment that promotes sustainable development. 30

At the core of this thus lies that the quality of FDI is the determinative factor of its effect on development, and the sustainable achievement thereof. This has been repeated by many reports, policy frameworks and model agreements alike. 31 It is in this area that the next part of this paper is situated where the shift towards an inclusion of sustainable development principles will be highlighted.

27 E.G. 2012 US Model BIT, Annex B, Para. 4(B) Which States That “[E]xcept In Rare Circumstances,

Non-Discriminatory Regulatory Actions by A Party That Are Designed And Applied To Protect Legitimate Public Welfare Objectives, Such As Public Health, Safety, And The Environment, Do Not Constitute Indirect Expropriations.”

28 D. Rodick, 'Governance of Trade. As If Development Really Mattered' (UNDP, 2001). Available at

<Https://Drodrik.Scholar.Harvard.Edu/Files/Dani-Rodrik/Files/Global-Governance-Of-Trade.Pdf> Accessed 30 April 2019.

29 As Can Be Discerned From Brazil’s Example

30 IISD, ‘Investment For Sustainable Development’, available at

<Https://Iisd.Org/Topic/Investment-Sustainable-Development> Accessed 20 April 2019.

31 OECD, ‘Development Co-Operation Report 2014: Mobilising Resources For Sustainable Development’

(OECD, 2014) Part II, Ch. 12: Creating An Environment For Investment And Sustainable Development; UNCTAD, Investment Policy Framework For Sustainable Development (2015) (Hereinafter IPFSD 2015), available at <Https://Unctad.Org/En/Publicationslibrary/Diaepcb2015d5_En.Pdf> Accessed 24 April 2019. ); H. Mann, K. Von Moltke, L. E. Peterson, A. Cosbey, IISD Model International Agreement On Investment For

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III. A Trend Towards an inclusion of Sustainable Development

Sustainable development has not traditionally been recognized or considered a component of IIAs. To this date few agreement make explicit mention of the principle, rather they remain silent on the issue. Furthermore, market access has neither been a requirement, regardless of words of liberalization in most preambles aiming at the promotion of foreign investment as well as development.32 IIAs have not been perceived of or used as policy instruments but instead solely as a means for ensuring minimum standards in, what can be seen as a pro-investment protective approach.33

More recently however the principle of sustainable development is becoming an increasingly popular policy objective which – reiterating that traditional ‘first generation’ IIAs were not based on SD justifications – is one of the main justifications for IIA reform.34

More recently however, there has been increase in the cry for reform of the IIA system, if it is to maintain legitimacy. This increasingly sees the paradigm of sustainable development as a concept that must be included and promoted by the system. An emergence, with considerable consistency, of the promotion of the linkage between international investment law and sustainable development has been instigated.35 Although arguably of the backdrop of the IISD’s Model Agreement on Investment for Sustainable Development, many such policy frameworks, most notably UNCTAD’s 2015 International Policy Framework for Sustainable Development36, The Commonwealth Secretariat’s Guide on Integrating Sustainable Development into International Investment Agreements37, and the Southern African Development Community’s (SADC) Model Bilateral Investment Treaty Template with Commentary.38

IIAs are generally more detailed and take into consideration not only the economic environment and structure of the parties, but also their specific needs and policy objectives. This trend in general makes the issue of safeguarding the quality of foreign investment aids SD more immediate as more highly-detailed agreement require more scrutiny and a more bespoke approach to negotiation and drafting in order to ensure the parties’ development

32 H. Mann, ‘Reconceptualizing International Investment Law: Its Role In Sustainable Development’ (2013) 17

Lewis & Clark Law Review 521, 537.

33 G. Sacerdoti, ‘Introduction: The Role Of Foreign Direct Investment In Promoting Development’, In S.

Hindeland, M. Krajewski (Eds.), Shifting Paradigms In International Investment Law: More Balanced, Less

Isolated, Increasingly Diversified, 22.

34 P. Muchlinski, ‘Negotiating New Generation International Investment Agreements: New Sustainable

Development Oriented Initiatives’ In Ibid. (n 26), 43.

35 Mann (N 25), 536.

36 UNCTAD Investment Policy Framework For Sustainable Development Un Pub.

UNCTAD/Web/Diae/Pcb/2015/3 (Hereinafter IPFSD 2015) At

Https://Unctad.Org/En/Publicationslibrary/Diaepcb2015d5_En.Pdf> Accessed On 23 April 2019.

37 J. Anthony Vanduzer, Penelope Simons, Graham Mayeda, Integrating Sustainable Development into

International Investment Agreements: A Guide for Developing Countries (Commonwealth Secretariat, 2012),

(Hereinafter J. A. Vanduzer et al.) available at

https://www.iisd.org/pdf/2012/6th_annual_forum_commonwealth_guide.pdf

38 SADC Model Bilateral Investment Treaty Template with Commentary (2012) available at

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objectives as well as their right to regulate in those areas post-enforcement.39 The consideration of policy goals and the inclusion of SD obligations - which will be elaborated on below – in the creation of a new normative framework aimed at ensuring positive effect from investment and the achievement of the desired and defined sustainable development objectives cannot be attained simply by more accurate IIAs. Beyond this, there will be a need for stronger rules on the behaviour of multinational corporations (MNCs) at a domestic (home state) and potentially international level40 on the one hand, as well as financial and/or economic incentives and the existence of a ‘favourable investment climate’ on the other.41 Some of the examples used in the next part will include wider policy whilst other focus purely on a new type (or ‘generation’) of IIAs and the provisions therein.

39Sacerdoti (N 26).

40 Although Some International Rules Exist On The Behavior Of Mncs (See E.G. The Un Guiding Principles Of

Business And Human Rights (2011)) These Are Not In And Of Themselves Binding Legal Obligations. The Extent To Which Those Exist Is Very Limited And Not The Aim Of This Paper To Explore. On An Elaboration Of The Extraterritorial Adjudication Of Mnc Misconduct Abroad See The Application Of The Alien Tort Statute (Us) As Applied In Kiobel V Royal Dutch Petroleum, 569 U.S. 108 (2013).

41 C. Biau, M. Pfister, ‘Creating An Environment For Investment

And Sustainable Development’, In Development Co-Operation Report 2014 Mobilising Resources For

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IV. New Normative Approaches

Against the background of this shift comprehensive frameworks, policy inclusions, draft treaties, and more tangibly, new IIAs have been designed. These seek to place SD at the core of the of a seemingly inevitable reform of IIAs. Substantive provisions will need recalibration to better serve this wider purpose and furthermore new rights and obligations have to be included in order for there to be an actual shift within the regime of international investment law.

The remainder of this chapter will analyse the suggested and actual changes for and of new IIAs as well as policy ideas around new provisions aimed at serving the SD agenda. It will also consider potential solutions to current, controversial interpretations of certain standards of protection.

I. Preambles

Parties’ sovereign right to regulate, potentially specifically in the field of sustainable development, may be expressly recognized and upheld in the preambles of IIAs. At this point, it is vital to consider the role of preambles to understand how they can be better used in light of sustainable development objectives. The Vienna Convention on the Law of Treaties sets out in article 31(1) that treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.42 According to the second paragraph the preamble should be read into the term ‘context’ for the purposes of treaty interpretation.43 Thus, it is conclusive that preambles can

be used for the interpretation of treaties considering both the text and context stage, as well as at the object and purpose stage.44

Generally, it can be said that Tribunals have not said all that much about preambles as a basis on which to interpret the subsequent provisions in a BIT – or at the least nothing uncontestably clear. Note, for example, the different conclusions reached by the tribunals in SGS v. Philippines45 and LG&E v Argentina46 on the one hand and Saluka v Czech Republic47 on the other. The former two tribunals held that a stable investment environment and investment protection can be the only object and purpose in discerned from the preamble. The latter, in turn, calls for a balanced interpretation since an interpretation which exaggerates the protection to be accorded to foreign investments may undermine the overall aim of extending and intensifying the parties’ mutual economic relations.48

42 Vienna Convention On Law Of Treaties, 1969, Art. 31(1). 43 Ibid. Art. 31(2).

44 Wakgari Kebeta Djigsa, ‘The Adequacy Of Ethiopia’s Bilateral Investment Treaties In Protecting The

Environment: Race To The Bottom’ (2017) 6 Haramaya Law Review 67, 76

45 Sgs Société Générale De Surveillance V. Republic Of The Philippines, Icsid Case No. Arb/02/6, Decision Of

The Tribunal On Objections To Jurisdiction, [116].

46 Lg&E Energy Corp, Lg&E Capital Corp, And Lg&E International, Inc V Argentine Republic, Icsid Case No

Arb/02/1, Decision On Liability (2006) [124]

47 Saluka Investments Bv V The Czech Republic, Uncitral, Partial Award (2008) [298 - 300]. 48 Jeswald W. Salacuse, The Law Of Investment Treaties (Oup 2nd Ed., 2015) 163.

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Moreover however, Tribunals rely on preambles to justify expansive interpretations of investor protections. For instance, in SGS v. Philippines, the tribunal, relying on the preamble of the applicable 1997 Philippines-Switzerland BIT, stated that:

“The BIT is a treaty for the promotion and reciprocal protection of investments. According to the preamble it is intended …to create and maintain favourable conditions for investments by investors of one Contracting Party in the territory of the other…. It is legitimate to resolve uncertainties in its interpretation so as to favour the protection of covered investments.49

These interpretations make preambles key for solidifying alternative objectives pursued by the parties such as sustainable development objectives and to ensure that these will be taking into account by Tribunals in their interpretative efforts aimed at finding the object and purpose of the treaty or the way in which they inform other substantive provisions such as the fair and equitable treatment (FET) standard.

Considering UNCTAD’s IPFSD, several different approaches to preamble design are proposed, ranging from the most investor-friendly, to those providing most flexibility to the host state.50 The first policy option essentially maintains the standard wording of IIA preambles demonstrating the parties’ intention of creating and maintaining favourable conditions for investments and strengthening cooperation. The second option, using new formulations, proposes that in addition to the more traditional IIA objectives, emphasize should be put on attracting responsible investments that fosters sustainable development. Third, the IPFSD proposes the inclusion of a clarification that the objective of investment protection does not override states’ national development objectives and the right to regulate in the public interest including with respect to certain policy goals such as: “sustainable development; the protection of human rights; labour and/or environmental standards; and corporate social responsibility and good governance”.51 Through such wording interpretation efforts by some tribunals of other substantive provisions can be read in light of these sentences and afford broader regulatory space – similar to a statement of non-interference – and not purely read the IIA as an instrument to attract and protect quantitative investments.

As mentioned before, the value of a Treaty’s preamble is not clear-cut however the objective of regulatory space is normatively strongest in the fourth policy option for an IIA Preamble which proposes that the parties indicate that:

“the promotion and protection of investments should be pursued in compliance with the Parties’ obligations under international law including in particular their obligations with respect to human rights, labour rights, and protection of the environment”52

49 SGS Société Générale de Surveillance V. Republic of The Philippines, ICSID Case No. Arb/02/6, Decision Of

The Tribunal On Objections To Jurisdiction, [116].

50 UNCTAD Also Notes That The Policy Options Proposed Can Possibly Be Combined.

51 UNCTAD Investment Policy Framework For Sustainable Development Un Pub.

UNCTAD/Web/Diae/Pcb/2015/3 (Hereinafter IPFSD 2015) At

Https://Unctad.Org/En/Publicationslibrary/Diaepcb2015d5_En.Pdf> Accessed On 23 April 2019.

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This denotes the language of a stronger spirit towards compliance, most similar to a positive obligation – which in light of preambular interpretation can be interpreted as a commitment and intention by the contracting parties.

Similarly acknowledging a need for preamble reform are the suggestions of the Commonwealth Secretariat Guide.53 Although the Guide presents a more comprehensive policy model than the IPFSD, it similarly sees no inherent contradiction between the objectives of increasing foreign investments and sustainable development, as long as the former is read in light of the latter.54 The proposes preamble recognizes the important role of two key

elements in achieving this objective: “co-operation among the host state, the home state and investors, and the existence of favourable conditions for investment”.55 Beyond this the model preamble outlines other values inherent in a commitment to sustainable development and which are to inform interpretation of the parties’ obligations, namely: “the protection of health, safety and the environment; the promotion and protection of internationally and domestically recognised human rights; labour rights; the rights of indigenous peoples; the commitment of the parties to democracy; the rule of law; and the parties’ determination to prevent and combat corruption and to promote corporate social responsibility.”

The Commonwealth Secretariat Guide’s model preamble furthermore makes specific reference to the right of involved parties to regulate to achieve their development objectives.56 The intention of such a comprehensive outline is that any potential carve-outs, exceptions or reservations aimed at the preserving the host state’s right to regulate will not be interpreted narrowly. In this sense, the authors take lessons from the narrow interpretations given by tribunals, as mentioned above.57

Slightly more novel is the preamble proposed in the 2005 IISD Model International Agreement on Investment for Sustainable Development58 which introduces the principle of sustainable investments. In its preamble, it expresses somewhat of a definition of sustainable development, considering it to mean: “development that meets the needs of the present without compromising the ability of future generations to meet their own needs, [being informed by] the contribution of the 1992 Rio Declaration […], the 2002 World Summit on Sustainable Development and the Millennium Development Goals.”5960 It further recognizes the critical value of promoting sustainable investments for the development of both national and global

53 J. Anthony Vanduzer, Penelope Simons, Graham Mayeda, Integrating Sustainable Development Into

International Investment Agreements: A Guide For Developing Countries (Commonwealth Secretariat, 2012)

(Hereinafter J. A. Vanduzer Et Al.), 49.

54 Muchlinski (n 27), 46

55 J. A. Vanduzer Et Al., Supra (n 45), 49. 56 Ibid.

57 See For Example Sgs Société Générale De Surveillance V. Republic Of The Philippines, Supra (n 50) [116] 58 Howard Mann, Konrad Von Moltke, Luke E. Peterson, Aaron Cosbey, Iisd Model International Agreement On

Investment For Sustainable Development (International Institute For Sustainable Development, 2005).

(Hereinafter H. Mann Et Al.)

59 Ibid, 1.

60 Considering That An Evolutionary Approach To The Term “Sustainable Development” Is Only Fitting, The

Expressions Of The United Nations In Their Sdg Can Be Considered As Included In The Iisd’s 2005 Formulation Of The Term.

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economies, as well as for achieving national and global objectives of sustainable development.61

The policy options for preamble design outlined above are currently overridingly used in the conclusion of new IIAs. Out of the 29 new IIAs signed in 201862 25 include the protection of health and safety, labour rights, the environment or sustainable development in their preambles.63 Such a shift will aid to reorient the interpretation of preambles, making it a more balanced approach requiring greater recognition of ongoing state rights, responsibilities and obligations even where investor rights remain to be protected. Considering the current inclination of some tribunals to continue interpreting these rights expansively based on earlier preambular language,64 this shift has potentially significant impacts.65

II. Standards of Treatment a) Fair and Equitable Treatment

The fair and equitable treatment (FET) standard is considered one of the quintessential pillars of investment protection under international law. Supporting this statement is the inclusion of the standard in most all IIAs, as well as being one of the most often invocated standards in investment disputes. In 2016, the amount of IIAs omitting the inclusion of an FET clause was 3 out of 41 signed agreements.66 At least on the surface we can preliminarily conclude that a general consensus exists as to the importance admitted to this standard.

Such consensus, however, does not exists in the manner of reference to FET in IIA clauses. There is not a single formulation of the standard. Broadly, the standard entails the requirement of the host state to provide the investments, or its returns, of a foreign investor fair and equitable treatment. This does not provide a straightforward definition open to arbitral interpretation. As such, dependent on the specific treaty, the standard may be unqualified, making it free-standing or even juxtaposing it with other standards such as FST,67 or qualified, linking it to customary international law and the minimum standard of treatment (MST)68 or

61 H. Mann, Supra (n 50), 1.

62 40 Were Signed In Total But The Selected 29 Were The Ones To Which The Text Was Available. See For An

Elaboration: UNCTAD IIA Issue Note, ‘Taking Stock Of Iia Reform: Recent Developments’ (Unctad, June 2019) Issue 3 Available At <Https://Unctad.Org/En/Publicationslibrary/Diaepcbinf2019d5_En.Pdf>

63 Ibid.

64 See For Example Kardassopoulos V. Republic Of Georgia, Icsid Case No. Arb/07/15, Award, [431–33]. 65 H Mann, Supra (n 25) 537.

66 ‘Investment Policy Hub’ UNCTAD <

Https://Investmentpolicy.Unctad.Org/International-Investment-Agreements/Iia-Mapping> Accessed 20 June 2019.

67 See E.G. The Treaty Between The Federal Republic Of Germany And (…) Concerning The Encouragement

And Reciprocal Protection Of Investments, Article 2(2). Available At <Https://Www.Italaw.Com/Sites/Default/Files/Archive/Ita1025.Pdf> Accessed On 20 June 2019.

68 See E.G. The Agreement Between The Government Of The United Arab Emirates And The Government Of

The United Mexican States On The Promotion And The Reciprocal Protection Of Investments (Signed 19 January 2016, Entered Into Force 25 January 2018), Article 4(1-2). Available At

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to general principles of international law.69 Although the latter options provide a more narrow interpretation than an unqualified inclusion of the standard, they have not necessarily lead to change in the broad interpretation given to the standard by arbitral tribunals.70 The ‘general’

nature of the standard – to treat foreign investments fairly and equitably – is inherently ambiguous and has led to, what has been critiqued as, overly broad and inconsistent interpretations.

Recent scholars have compiled what they considered the content and scope of FET and, as one may guess, came to different conclusions. For example, Bonnitcha’s approach to the matter defined FET as including (1) legitimate expectations, (2) procedural aspects, (3) examination of substantive justification, (4) discrimination.71 According to Dolzer and Schreuer, FET is seen as protecting (1) stability and legitimate expectations, (2) transparency, (3) compliance with contractual obligations, (4) procedural propriety and due process, (5) good faith, and (6) freedom from coercion and harassment.72 The most traditional account of FET

can be seen in Paparinskis´s work, who divides the content of the standard into (1) administration of justice and (2) protection of property, which further includes arbitrariness, due process, transparency, discrimination, good faith, expectations.73 The consistent inclusion in all these endeavours is the protection of legitimate expectations.74 Case law demonstrates that the notion of legitimate expectations are often employed as if they were a core principle of the FET standard75, or even as the overarching framework through which FET should be seen.76

In practice this puts onerous restrictions on the regulatory sovereignty of host states which threatens sustainable development objectives. This has heavily impacted host states as under the notion of legitimate expectations and FET arbitral tribunal can potentially consider all state conduct, regardless of the related policy area.77

New approaches aimed at minimizing the vagueness of FET, addressing and resolving the concerns around legitimates expectations of investors, and as a result reinstate state sovereignty to regulate in the public interest have made a surge in recently concluded IIAs. These new approaches are outlined and based on the IPFSD which recommends the following policy

69 See E.G. Agreement Between Japan And Ukraine For The Promotion And Protection Of Investment (Signed 5

February 2015, Entered Into Force 26 November 2016), Article 6(1). Available At

Https://Investmentpolicy.Unctad.Org/International-Investment-Agreements/Treaty-Files/3324/Download

70 Roland Kläger, ‘Revising Treatment Standards – Fair And Equitable Treatment In Light Of Sustainable

Development’ In Hindeland And Krajewski, Supra (n 26), 66

71 Jonathan Bonnitcha, Substantive Protection Under Investment Treaties: A Legal And Economic Analysis (Cup,

2014), 164.

72 Rudolf Dolzer, Christoph Schreuer, Principles Of International Investment Law (2nd Ed. Oup, 2012), 142-60. 73 Martins Paparinskis, The International Minimum Standard And Fair And Equitable Treatment (Oup, 2013)

181-259.

74 Josef Ostřanský, ‘An Exercise In Equivocation: A Critique Of Legitimate Expectations As A General Principle

Of Law Under The Fair And Equitable Treatment Standard’ In Andrea Gattini, Attila Tanzi, Filippo Fontanelli (Eds.) General Principles Of Law And International Investment Arbitration (Brill, Nijhoff 2018).

75 See For Example The Following Cases: Lg&E V. Argentina, Supra (n 46) [127]; Técnicas Medioambientales

Tecmed, S.A. V. The United Mexican States, Icsid Case No. Arb (Af)/00/2, Award, (2003) [154]; Toto Costruzioni Generali S.P.A. V. The Republic Of Lebanon, Icsid Case No. Arb/07/12, Award, (2012) [224].

76 J Ostřanský, Supra (n 74), 3.

77 Rudolf Dolzer, ‘The Impact Of International Investment Treaties On Domestic Administrative Law’ (2005) 37

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options, once again ranging from the most investor-friendly, to those providing most flexibility to the host state: (i) Provide an unqualified commitment to treat foreign investors/investments “fairly and equitably”; (ii) qualify the FET standard by reference to MST under customary international law (MST/CIL); (iii) clarify or replace FET with an exhaustive list of state obligations; (iv) clarify FET with a view to give interpretative guidance to tribunals; (v) Reduce FET to a political commitment; (vi) omit the FET clause.78 Substantially, these same options are provided by the Commonwealth Secretariat’s Guide.79 Below this paper will consider these options discuss their potential to aid the objectives of sustainable development. The first option is traditionally the most predominantly used form of FET and exists in most of today’s IIAs. Neither policy frameworks suggest this option and rather use it to problematize FET. Considering its problems laid out above, it has been critiqued for providing maximum protection to investors at the cost of limiting host state policy space.80 This critique is

reverberated in both the IPFSD as well as in the Commonwealth Secretariat’s Guide stating that such a clause would, in case of the introduction of sustainable development policies by a state, see that state be potentially liable by adversely affecting the legitimate expectations of the foreign investor.81 This is accurate as arbitral jurisprudence has shown that stability in the overall legal framework82 is part of what will be considered the legitimate expectation and as such changes therein would potentially lead to FET violations.83

This form of FET clause, however, remains the most predominantly used form and as such will continue to be relied on in, and interpreted by, tribunals. Even new IIAs continue to make reference to such a clause. See, for example, the 2009 Belgium-Luxembourg Economic Union – Tajikistan BIT which in, Article 3(1), plainly states that “[a]ll investments made by investors of one Contracting Party shall enjoy a fair and equitable treatment in the territory of the other Contracting Party”.84

It has however been suggested that contrary to popular critique, unqualified FET clauses do not necessarily go against the aim of promoting sustainable development through the adoption of domestic policy. Kläger argues that although Article 31(3)(c) of the VCLT, allowing for the establishment of systemic linkages, applies to all kinds of conventional clauses, vague general clauses are particularly pliable to act as “gateways for the integration of arguments based on norms of other spheres of the international legal system”.85 It has always been acknowledged that FET, as (quasi) international law, has a linkage to international law.86

78 IPFSD 2015, Supra (n 51), 97-98.

79 J. A. Vanduzer Et Al., Supra (n 45), 147-152.

80 See E.G. Michele Potestà, ‘Legitimate Expectations In Investment Treaty Law: Understanding The Roots And

The Limits Of A Controversial Concept’ (2013) 28 Icsid Review 88. Available At <Http://Icsidreview.Oxfordjournals.Org/Content/28/1/88.Full.Pdf+Html>

81 Ipfsd 2015, Supra (n 51), 97; J. A. Vanduzer Et Al., Supra (n 45),

82 As Well As In The Administrative Conduct Of The Host State And In The Contractual Relationship Between

The Investor And The State

83 Roland Kläger, ‘Fair and Equitable Treatment’ In International Investment Law’ (Cup, 2011), 169-174. 84 Agreement Between The Belgium-Luxembourg Economic Union, on the one hand, and The Republic of

Tajikistan, on the other hand, on the Reciprocal Promotion and Protection Of Investments (signed 12 February 2009, not yet in force), Article 3(1).

85 R Kläger, Supra (n 83), 110-112. 86 Ibid, 17-18.

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Thus, an integrative construction of FET, even if unqualified, would guarantee that arbitral tribunals acknowledge the standard’ link with other social and legal developments, such as regulatory sovereignty and sustainable development objectives, and safeguard that their decisions rest on a more holistic argumentative foundation.87

The second policy option, linking FET to MST/CIL is seen as having the potential of raising the potential for state liability and as such also preserve regulatory freedom more strongly than an unqualified clause. This option is intended to deal with ambiguity of an unqualified FET clause, as well as increase the threshold for liability which has often been ascribed to it.

However, the definition and scope of MST/CIL is also far from clear. Traditionally, the oft-cited Neer decision is considered to sets out the core contents as well as the threshold for violations for an FET clause linked to MST/CIL. It states that:

“The treatment of an alien, in order to constitute an international

delinquency, should amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency”88

It has been said that from this statement, although not unequivocally clear, it can be discerned that the threshold of protection is set out “in abstract but distinct terms”.89 Recent tribunals have however held that neither bad faith, nor intent are necessary to establish a breach of FET. As Kläger argues, what we are left with then is the standard of a reasonable and impartial man, and while this helps to understand FET, the Neer decision’s formulation is inadequate to properly illustrate what ‘fair and equitable treatment’ entails as neither that term nor the notion of reasonableness and impartiality can be clearly defined.90

As to the potential of FET by reference to MST/CIL to set a higher threshold for host state liability, case law also remains unclear and unpredictable. What is the current status of customary international law has did evolved since the Neer decision? Furthermore, question remain regarding the status of FET as part of customary international law itself, creating somewhat of a legal tautology. Recently, Schreurer stated that:

“The motive behind the insistence that FET is identical with the minimum standard under customary international law is evidently to minimize its practical impact. But the effect of this insistence may well be the opposite[…]. Dolzer has pointed out that the more likely consequence will be to accelerate the development of customary law through the practice on FET clauses in treaties.”

87 Ibid. 110

88 Lfh Neer And Pauline Neer (United States) V Mexico (1926) 4 Report Of International Arbitral Awards 60, 61–

62.

89 Rudolf Dolzer, ‘Fair And Equitable Treatment: A Key Standard In Investment Treaties’ (2005) 39 The

International Lawyer 87, 93.

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91Consequently, tribunals have decided the former question in the affirmative, creating

ambiguity in what the actual difference between FET and MST/CIL is, and more strongly, that there exists no material difference.92

What is then the threshold that should apply? Both extremely high thresholds, relying on the wording of the Neer decision (except for the explicit requirement of bad faith and intent)93, as well as low thresholds, relying on an existence of a customary rule of FET (which is broadly considered to mean an infringement on fairness, equity and reasonableness) have been employed.94

This policy option, as such, does not provide any certainty as to allowing host states more regulatory leeway before infringing upon the foreign investor’s FET protection. Furthermore, it seems that maturity of IIL rather than an application of strict, obstinate thresholds – even if they are high – is the way forward for a system that is more instrumental in aiding the goals of sustainable development.

The third policy option sees the use of an exhaustive list with specific obligations instead of a general FET clause.95 The value of an exhaustive list is that it lets negotiators decide the scope of FET allowing for an exclusion of particular elements thereof. Of main benefit to the host state would be omitting or limiting the notion of legitimate expectations understood under FET.96 The value of this policy option is thus completely contingent on the negotiating parties, and thus also their bargaining power. It could potentially lead to nothing else than a broken down unqualified FET clause. See for example Article 9 of the 2019 Dutch Model BIT. In the second paragraph they provide the following list:

a) “Denial of justice in criminal, civil or administrative proceedings;

b) Fundamental breach of due process, including a fundamental breach of transparency, in judicial and administrative proceedings;

c) Manifest arbitrariness;

d) Direct or targeted indirect discrimination on wrongful grounds, such as gender, race, nationality, sexual orientation or religious belief;

e) Abusive treatment of investors such as harassment, coercion, abuse of power, corrupt practices or similar bad faith conduct; or

f) A breach of any further elements of the fair and equitable treatment obligation adopted by the Contracting Parties in accordance with paragraph 3 of this Article”97

91 Christoph Schreuer, ‘Fair and Equitable Treatment’ in Anne K. Hoffmann (ed.), Protection of Foreign

Investments Through Modern Treaty Arbitration: Diversity and Harmonisation (2010) 34 ASA Special Series

125, 131.

92 See E.G. Biwater Gauff (Tanzania) Ltd. V. United Republic Of Tanzania, Icsid Case No Arb/05/22, Award

(2008), [592]; Saluka V. Czech Republic, Supra (n 47), Partial Award (2006), [291].

93 See E.G. Glamis Gold, Ltd. V. The United States Of America, Uncitral, Award (2009) [616]; Waste

Management, Inc. V. United Mexican States, Icsid Case No Arb(Af)L00/3, Award (2003), [98]; Cargill, Incorporated V. United Mexican States, Icsid Case No Arb(Af)/05/2, Award (2009), [282].

94 See E.G. Merrill And Ring Forestry L.P. V. Canada, Icsid Case No. Unct/07/1, Award (2010), [210-14]. 95 J. A. Vanduzer Et Al., Supra (n 45), 149; IPFSD 2015, , Supra (n 51), 98

96 See e.g. J Ostřanský, Supra (n 74).

97 Agreement on reciprocal promotion and protection of investments between (…) and the Kingdom of the

Netherlands (adopted 28 March 2019), Article 9(2). Available at <https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/5832/download>.

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Furthermore, paragraphs 4 and 5 state that:

“(4) When applying paragraph 2 […], a Tribunal may take into account whether a Contracting Party made a specific representation […] to induce an investment that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain that investment, but that the Contracting Party subsequently frustrated. (5) When a Contracting Party has entered into a written commitment with investors of the other Contracting Party regarding a specific investment, that Contracting Party shall not, either itself or through an entity exercising governmental authority, breach the said commitment through the exercise of governmental authority in a way that causes loss or damage to the investor or its investment.”98

This provision now effectively acts as an umbrella clause, bringing contractual obligations to the international stage. The wording of the article accordingly broadens the already elusive understanding of what constitutes FET in customary international law.99 Furthermore, questions remain as to whether tribunals might rely on the full scope of FET even where these are omitted from the treaty text based on the potential customary status of the specific element. This could be done through the interpretative guidance given in Article 31(3)(c) of the VCLT, in a similar vein as through which sustainable development objectives can be linked to FET,100 which allows for the consideration of other relevant rules of international law. As stated in the Commonwealth Secretariat’s Guide itself, the introduction of new terms may obfuscate the clause further and create more uncertainty.

The fourth policy option proposed by the IPFSD is to clarify the FET clause, with a view to give interpretative guidance to arbitral tribunals.101 This creative option is specific to the

IPFSD and not provided by the Commonwealth Secretariat Guide nor other draft agreements. The IPFSD proposes the following inclusions: (i) the FET standard includes an obligation not to deny justice in criminal, civil or administrative proceeding; (ii) a breach of another provision of the IIA or of another international agreement cannot establish a claim for breach of the clause; and (iii) the FET clause does not preclude states from adopting good faith regulatory or other measures that pursue legitimate policy objectives.102

The first point is a contemporary element of what is understood under FET and is often included in clauses that incorporate an exhaustive list.103 It is a reflection of the more recent iteration of the standard.104 Although it omits many of the other listed element as under the previous policy option, it is unclear whether tribunals by way of CIL will not be a be able to read into the wording other elements of FET.

98 Ibid. Articles 9(4-5).

99 Bart-Jaap Verbeek, Roeline Knottnerus, ‘The 2018 Draft Dutch Model BIT: A Critical Assessment’ IISD (30

July 2018) available at https://www.iisd.org/itn/2018/07/30/the-2018-draft-dutch-model-bit-a-critical-assessment-bart-jaap-verbeek-and-roeline-knottnerus/.

100 See R Kläger, Supra (n 82), 110. 101 IPFSD 2015, supra (n …), 98. 102 Ibid.

103 See for example, Comprehensive Economic and Trade Agreement (CETA) Between Canada The European

Union (signed 30 October 2016, not yet entered into force), Article 8.10(2)(a)

104 Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, ICSID Case No ARB/03/29

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The second option seems to practically run afoul of the earlier mentioned wording of Article 31(3)(c). Although it should not be assumed to do so it is difficult to see a strict application of this provision as many arguments applicable to the whether or not the FET standard has been breached also apply to other substantive provisions, such as expropriation or full protection and security clauses – and vice versa – and cannot be completely isolated from one another.

The third point most actively supports the adoption of sustainable development goals as it specifically states the scope of regulatory freedom. It however does not necessarily broaden this scope and neither does it provide an explanation of what goals are ‘legitimate’ which still remains to be interpreted by the tribunal. If sustainable development objectives are however mentioned in other provisions or the preamble it is likely that the regulatory measure will not be deemed to violate the FET clause. This would further be the case if the host state in question keeps a high standard for sustainable development concerns.105

The final policy option proposes the omission of any form of FET clause. This option is provided in both the IPFSD, the Commonwealth Secretariat’s Guide, has also – through an amendment – been adopted by the SADC Investment Protocol.106 Such a radical option is intended to reduce the host states’ exposure to claims. Omitting an FET clause would be in stark contrast with the dominant IIA practice and would cause for concern in capital-exporting states as to the existence of a favourable investment environment. The effect of regulatory freedom might not be as vast as it might seem since claims can potentially be brought under different clauses – as illustrated by the interconnectedness of the substantive provisions above. Furthermore, the inclusion of an MFN clause would still allow a tribunal to apply an FET if provided for in another IIA of that state. This was specifically mentioned in Bayindir v Pakistan where the tribunal stated that the fact that in the treaty at issue FET was only mentioned in the preamble, which one could consider as an intention not to include the standard, was not persuasive enough to rule out the “importing of an FET obligation through the MFN clause” which was included.107 The same could count for the protection of legitimate expectations of foreign investors. In effect the omission might just lead to shift in grounds for claims.

The value of the above options, and draft arrangements/guides in general is that they raise awareness about where the red flags lie between FET and sustainable development and help future drafters to take this into account and eventually lead to more informed and overall ‘better’ treaty-drafting.

If, however we consider the specific objective of the individual options, issues are quickly identified which might hinder FET being either understood more clearly. As Kläger states: “the amendment of treaty language usually leads to the replacement or overlaying of

105 See for example, Methanex Corp. v. United States of America, UNCITRAL, Award (2005), [9] of Part IV -

Chapter D.

106 Agreement Amending Annex 1 (Co-Operation on Investment) of The Protocol on Finance and Investment

(signed 31 August 2016, not yet entered into force).

107 Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29)

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fair and equitable treatment with other general terms that are equally open to interpretation and subjective judgment.”108

In a similar vein, it can be concluded that the attempts at increasing the threshold for host state liability is incredibly burdensome because of the vagueness surrounding FET, as well as any reference to MST/CIL and whether the former is not already part of CIL.

One solution to this, as elaborated on by Kingsbury and Schill, is the use of a proportionality test employed to balance between the interests of foreign investors and conflicting policy interests.109 Such an approach has already been used by some tribunals110, and an inclusion or perhaps specific linkage made in treaties might generalize this making it more likely that tribunals will decide in favour of sustainable development objectives pursued by states.

b) Indirect Expropriation

The risk of expropriation has been a major stimulus for a comprehensive development of international investment agreements. This started with the creation of international rules regarding the expropriation by capital exporting states, but this also led to controversy about the scope of obligations that states held in respect of foreign investors.111 The overriding concern can be identified as surrounding the ‘regulatory takings’ which do not amount to either nationalization nor full expropriation, but rather those which are deemed indirect expropriations. Arbitral tribunals have struggled with defining a line between non-compensable regulatory conduct and non-compensable indirect expropriation.112 This is often formulated in IIAs as measures “tantamount to”, or “equivalent to” expropriation.113 Such

formulations have often been restrictively interpreted as to not expand the scope of expropriation. The aim of such a clause is rather meant to include de facto expropriations that do not occur in form.114 It has been stated as being “functionally equivalent” to expropriation since “[t]he primary meaning of the word ‘tantamount’ given by the Oxford English Dictionary is ‘equivalent.’ Both words require a Tribunal to look at the substance of what has occurred and not only at form […] [S]omething that is ‘equivalent’ to something else cannot logically encompass more”.115

108 R Kläger, Supra, (n 70), 79.

109 Benedict Kingsbury, Stephan W. Schill, ‘Public Law Concepts to Balance Investors’ Rights with State

Regulatory Actions in the Public Interest – The Concept of Proportionality’ in Benedict Kingsbury, Stephan W. Schill (eds.) International Investment Law and Comparative Public Law (OUP 2010) 78.

110 Saluka v Czech Republic, supra (n 47) [304].

111 See for an elaboration, Charles Lipson, Standing Guard : Protecting Foreign Capital in the Nineteenth and

Twentieth Centuries (Berkeley (Cal.), University of California Press, 1985).

112 See e.g. Saluka v Czech Republic, supra (n 47), [293].

113 See e.g. Agreement Between Japan and the Islamic Republic of Iran on Reciprocal Promotion and Protection

of Investment (signed 5 February 2016, entered into force 26 April 2017), Article 8(1) available at <https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/3578/download>

114 S.D. Myers, Inc. v. Government of Canada, UNCITRAL, First Partial Award (2000), [285].

115 ibid. [286]; see also, Marvin Roy Feldman Karpa v. United Mexican States, ICSID Case No ARB(AF)/99/1

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Based on state practice as well as on arbitral awards, UNCTAD outlined the criteria of indirect expropriation as follows: (i) an act attributable to the state; (ii) interference with property rights or other protected legal interests; (iii) of such degree that the relevant rights or interests lose all or most of their value or the owner is deprived of control over investment; (iv) even though the owner retains the legal title or remains in physical possession.116 Some tribunals have given a broad interpretation to this standard of protection (which on face value seems justified and objectively sound) which can be a restriction on the furtherance of sustainable development objectives as legitimate measures taken by states in the public interest have been deemed inconsequential to the existence of indirect expropriation if their effects are as outlined above. In Metalclad v Mexico the tribunal stated that it

“need not decide or consider the motivation or intent of the adoption of the Ecological Decree […]the Tribunal considers that the implementation of the Ecological Decree would, in and of itself, constitute an act tantamount to expropriation.”117

However, the majority of arbitral tribunals would also consider the purpose of the measure and apply the ‘police power’ doctrine when deciding on whether an imposed measure warrants compensation to the investor under the standard of indirect expropriation.118 This doctrine recognizes a state’s power to restrict private property rights without compensation, when in pursuance of legitimate objectives. Following this, it is not merely the effect of a measure that matters in finding a breach of indirect expropriation, instead, the effect of the measure must be balanced with purpose for which it was employed – a proportionality test.119

Several attempts at limiting the effects of interpretations such as in Metalclad v Mexico, have been outlined in the IPFSD as well as in the Commonwealth Secretariat’s Guide. Instead these look to safeguard and ensure the consideration of legitimate policy objectives by including clauses which state e.g.:

“Investments shall not be nationalised or expropriated in the territory of any State Party except for a public purpose, under due process of law, on a non-discriminatory basis and subject to the payment of fair and adequate compensation.”120

Such a measure however is very broad and might not grant the clarity it aims to provide. The limitations to ‘public purpose’ are limited and will not be read as narrowly as stated there since the standard will still be interpreted by reference to customary international law. However, such a clause, especially if sustainable development objectives are explicitly stated, does demonstrate the commitment of the state to this purpose and which, (i) will in the least make a tribunal lean towards using proportionality rather than a strict application of e.g. Metalclad;(ii) will affect the tribunal’s understanding of the specific legitimate expectation of the investor to include certain public policy measures, and (ii) will more likely see measures taken in light of this objective fall within the notion of a ‘legitimate objective’.

116 UNCTAD, ‘Expropriation: A Sequel’ (2012) UNCTAD Series on Issues in International Investment

Agreements II, 12.

117 Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award (2000), [111]. 118 Rudolf Dolzer, ‘Indirect Expropriation: New Developments?’ (2002) 11 NYU Environmental Law Journal 64,

79.

119 Kingsbury and Schill, supra (n 106), 90-1.

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