Category Archives: Environment

ISDS AT COP21: ENFORCEMENT OF CLIMATE COMMITMENTS

Globe between two pairs of clasped handsIn a speech in Paris during the COP21 summit, the president of the International Bar Association David Rivkin expressed hope that ISDS could bridge the current enforcement gap in international environmental law.

Specifically, Rivkin highlighted the role of neutral and accessible dispute resolution mechanisms in enforcing commitments and underlying pledges made by state parties to the UNFCCC negotiations. He also noted that the existence of mechanisms for resolving disputes between investors and states is crucial to incentivizing foreign investment in renewable energy.

Noting that the fiercest critics of ISDS tend to focus on the system’s purported chilling effect on a state’s regulatory ambitions, Rivkin explained that this “regulatory chill” relates to the substantive terms of the treaties rather than to ISDS procedure.

Rivkin remarked that in the “new wave” of investment treaties and agreements, “environmental issues are being considered increasingly by states at the outset of drafting investment chapters”. Today, most BITs include some environmental language, and many contain a general reservation of policy space for environmental regulation. Rivkin emphasized that a number of recent BITs have included specific obligations to promote sustainable development, to encourage trade in environmental products, or to facilitate FDI in environmental technologies or eco-labeled goods.

Commenting on these developments, Rivkin noted:

It is clear that we are entering a new era of BITs/FTAs, in which states are delineating more specific obligations in the negotiation of these agreements, both as to standards of investor protection and regulatory autonomy. As we are seeing in the context of TTIP, CETA and TPP, ‘self-calibration’ of the ISDS system is already evident. In the future we may also see more movement in the areas of state counterclaims, which would be particularly relevant for environmental claims.

Rivkin also discussed the recent report by the IBA Task Force on Climate Change Justice and Human Rights, which provides a comprehensive coverage of pro-environment clauses included in investment chapters.

Read the full speech here.

ISDS CASE SUMMARY: Maffezini v. Spain

GaliciaBlogOur next case summary is Emilio Augustin Maffezini v. The Kingdom of Spain (ICSID Case No. ARB/97/7). The summary was prepared based on the award rendered on 9 November 2000.

The claimant was an Argentinian individual who established and invested in a corporation named EAMSA, for the purpose of building a production facility for chemical products in Galicia, Spain. The project was a joint venture with the Sociedad para el Desarrollo Industrial de Galicia(SODIGA), a public-private entity with a mandate to encourage industrial development in Galicia. SODIGA provided the investor with assistance in the form of advice and financing.

The project eventually failed due to surging costs, and the investor filed for arbitration under the Argentina-Spain BIT. The investor claimed (1) that the project failed because SODIGA had given flawed advice underestimating the costs of the project, and (2) that SODIGA was responsible for the additional costs resulting from the Environmental Impact Assessment (EIA) because it had pressured EAMSA to begin construction before the EIA process was finalized. Spain contested the allegations, stating that SODIGA was a private company whose acts were not attributable to the state, and that the investor had assumed any risk relating to the feasibility and profitability of his investment.

On the issue of state attribution, the tribunal found that some of SODIGA’s functions were governmental in nature while others were commercial. Accordingly, the tribunal found that it was necessary to categorize the various acts or omissions giving rise to the dispute. On the investor’s main claim – that SODIGA’s bad advice was responsible for the project’s failure – the tribunal found that even though SODIGA officials had provided certain assistance relating to the project’s costs and returns, that assistance did not amount to a public function attributable to the state. Moreover, the investor was, simply put, responsible for his own investment. The tribunal explained:

“Bilateral Investment Treaties are not insurance policies against bad business judgments. While it is probably true that there were shortcomings in the policies and practices that SODIGA and its sister entities pursued in the here relevant period in Spain, they cannot be deemed to relieve investors of the business risks inherent in any investment.”

The claimant also contended that SODIGA was responsible for the additional costs resulting from the EIA, which lead to the investor’s decision to stop the construction work and call off the project. In this regard, the tribunal concluded that the investor should have known that the project – a chemical plant – would require an EIA. According to the tribunal, the investor had known about the EIA requirement from the beginning of the project, but had tried to minimize it so as to avoid additional costs or technical difficulties.

For these reasons, the tribunal found that Spain could not be held responsible for the investor’s losses.

NGO voices in ISDS

Conference table, microphones and office chairs close-up

Beginning in 2001, a number of different NGOs have been active in ISDS proceedings, most commonly in cases with public interest aspects. This includes cases referring to measures related to for example environmental protection and public health.

NGOs may apply to be “a friend of the court”, or commonly referred to as amicus curiae. This means that the organisation contributes with a written submission to assist the tribunal in the assessment of the claims.

Participation of NGOs was initially found only in ISDS cases brought under the North American Free Trade Agreement (NAFTA). The NAFTA parties have issued a joint statement which essentially says that the NAFTA does not prohibit submission of a non-party, in this case may include NGOs.

Methanex Corp v USA was the first case where the tribunal opened up for NGOs to make written submission, which included environmental organizations and research institutes. In addition, these NGOs also attended the hearing. It was followed by Glamis Gold v. USA, where the tribunal received written submission by, among others, a locally-based Quechan Indian Tribe, whose sacred sites and traditions were affected by the investor’s mining project.

Since then the ICSID Arbitration Rules have been amended to clarify that tribunals have the general authority to allow submissions by an organisation which is not a party in the dispute.

NGOs have participated not only in NAFTA cases. In Biwater Gauff v. Tanzania, the tribunal accepted written submission from NGOs with an expertise in human rights, environmental and good governance issues.

A recent development is the participation of international organization in ISDS proceeding, as shown in Phillip Morris v. Uruguay. In this case, not yet decided, the opinions of the World Health Organization (WHO) and the WHO Framework Convention on Tobacco Control Secretariat will also be heard, based on the ICSID Arbitration Rules.

In a recent development, the UNCITRAL Transparency Rules, in force as of 1 April 2014, provide that tribunal may allow submission from non-disputing parties for matters within the dispute. Read our previous post on this.

 

 

More environmental languages in IIAs

green leaves background in sunny dayInternational investment agreements (“IIAs”) have increasingly addressed environmental concerns related to investment activity.

Based on a survey conducted by the OECD, inclusion of environmental languages in IIAs is becoming more common. The sample in this survey consists of 1,623 international investment agreements, thus covering roughly half of the global investment treaty population.

The first treaty to include environmental language in the sample is the 1985 China – Singapore BIT. In 2008, 89% of newly concluded treaties includes such language. Further, as we have written before, sustainable development is at the heart of the newly-adopted IIAs in 2014 where most of these treaties include a sustainable development-oriented features.

The most common environmental language is a provision which preserves policy space for environmental regulation. For example, Hungary – Russia BIT provides that the agreement does not preclude the application of measures to protect the environment and public health. Another type is a provision which discourages state parties to lower their environmental standards to attract investments.

Some IIAs have referred to international environmental treaties. The Energy Charter Treaty in its preamble specifically recalls the United Nations Framework Convention on Climate Change. The preamble of the new Norwegian BIT draft also recognizes that international environmental treaties are to be interpreted in mutually supportive manner.

Overall, 30 of the 49 countries covered by the survey have included environmental language in at least one of their IIAs. Canada is the country with relatively highest tendencies to include such language (83% of its sample treaties), followed by New Zealand, Japan, the United States and Finland.

 

ISDS in support of climate change mitigation

Environment concept. Glass globe lying on green leaf surfaceThe challenges and future of ISDS was discussed at length recently in Warsaw at an international event organized by Lewiatan Court of Arbitration.

One of the topics addressed was how the investment protection regime can contribute to a better environment. SCC Secretary General Annette Magnusson, who have spoken and written on this topic on several occasions before, addressed the audience on the need for visionary treaty terms in future treaties.

-  If we can combine treaty terms that truly reflect the role played by private investments for a better environment, and the existing enforcement mechanisms of international arbitration, I believe true progress for the environment could be achieved on a global level, Annette Magnusson said.

The full speech is available here.

Read more about ISDS and sustainable development:

Environment Needs Visionary Treaty Drafting

Climate Change Justice Calls for Enhanced Legal Regimes

Investment Law Reform and Sustainable Development

Case Summary No. 7

Blue chemical cans all over. Outdoors on chemical plant.We continue our series of case summaries with SD Myers v. Canada, a NAFTA dispute decided under the UNCITRAL arbitration rules. The summary is based on the facts as described in the three separate awards rendered by the arbitral tribunal between November 2000 and December 2002.

S.D. Myers, Inc. (“SDMI”) is a United States corporation that processes and disposes of polychlorinated biphenyl (“PCB”), an environmentally hazardous chemical compound used in electronics manufacturing. SDMI created a Canadian affiliate with the aim of soliciting orders for the destruction of Canadian PCBs at its U.S. facility. The U.S. had banned the import of PCB from Canada in 1980, but granted SDMI an exception in 1995. Promptly after SDMI had been granted permission from the U.S. government to import PCB waste from Canada, Canada issued an order prohibiting the export of PCB waste to the U.S. The prohibition was in effect for approximately 16 months.

SDMI filed claims against Canada under the UNCITRAL Rules in October 1998, alleging that Canada’s ban on the export of PCB waste had violated several provisions of Chapter 11 of NAFTA. SDMI claimed that it had suffered economic harm to its investment through interference with its operations, lost contracts and opportunities in Canada. Canada maintained that the ban had been motivated by environmental concerns.

In its first partial award, on liability only, the tribunal found for the investor with respect to its Article 1102 and 1105 claims, holding that Canada had violated NAFTA’s national treatment and minimum standard of treatment provisions. According to the tribunal, the evidence showed that Canada’s ban on PCB export was not driven by environmental concerns, as asserted by Canada, but intended primarily to protect the Canadian PCB disposal industry from U.S. competition. The investor’s claims regarding expropriation and performance requirements were dismissed. Canada challenged the award in its own federal court, on the grounds that the tribunal had exceeded its jurisdiction and that the award was against Canadian public policy. The court dismissed the challenge.

The tribunal issued two subsequent awards, on damages and costs, respectively. On damages, the tribunal reasoned that the investor may only be compensated for harm proximately caused by the breach of the specific NAFTA provision. According to this principle, indirect harm such as loss of opportunity or a damaged reputation are too remote to warrant compensation. The tribunal thus awarded SDMI damages of CAN$ 6 million, a fraction of the US$ 70 million claimed by the investor. 

Case Summary No. 5

GlamisGold

The ISDS blog continues with another case which reflects the interplay between international investment law and environmental protection. This was a central issue in our fifth case, Glamis Gold Ltd. v. the United States of America. The summary is prepared based on the facts as described in the award rendered in June 2009.

The investor was planning to mine gold in California through open-pit mining techniques. California adopted several measures, among others requiring the investor to conduct complete backfilling of the pits for environmental protection reasons.

The new measure did not impede the development of the mining project, however, according to the investor, it impacted the level of anticipated profits. The investor claimed, among others, that the measure constituted an expropriation of its investment.

After conducting a thorough analysis, the tribunal found that the project still had a great value even after the extra costs caused by California’s backfilling requirements. Therefore, in the tribunal’s view, the measure did not cause a sufficient economic impact to constitute an expropriation. The tribunal dismissed all claims by the investor and ordered the investor to pay two-third of the arbitration costs.

The tribunal accepted at least three amicus curiae in this case, one by a coalition of non-governmental organization, one by a business association and one by the locally-based tribe whose sacred sites were affected by the proposed mining project.

 

Seminar report: ISDS – A Way Forward

AndrinaSeminariumImage2red3BloggThe SCC, in cooperation with the Association of International Arbitration and Brussels Diplomatic Academy of Vrije Universiteit Brussels organized a seminar, ISDS: Away Forward in Brussels, on 27 May 2015. The speakers were arbitration practitioners from Sweden, Belgium and France, including SCC Legal Counsels and representatives from the International Bar Association Subcommittee on Investment Arbitration. Read the full programme here.

The historical background of ISDS was explained, and how the mechanism was established under the ICSID Convention as a response to inefficient diplomatic protection to foreign investors. The discussion continued with the currently-debated issue, ISDS and environmental protection. SCC presented research findings that the number of ISDS cases where investors brought a claim because of environmental regulation is small. The findings from these cases support a conclusion that arbitral tribunals have not questioned the power of government to regulate for environmental protection.

In addition, some procedural aspects of ISDS were addressed, particularly transparency and public participation. The speakers emphasized that this is in fact not a new development, as tribunals have supported transparency and public participation to an increasing extent in the past decade. A new procedural development of ISDS, emergency arbitrator, was also discussed.

A speaker reminded that when discussing reform of the system, public opinion should always be taken into account.  It is important to ensure that the democratic values are preserved. The International Bar Association (IBA) is working on a project to bring together opinions from different stakeholders in ISDS. The ambition is to address the criticisms surrounding ISDS and to propose improvements of the system, when needed.

IBA has also recently published a statement, addressing facts of ISDS.

The dynamic and forward-looking discussion from the participants were much appreciated. More discussions will follow ahead to preserve the rule of law and ISDS.

Who are the investors?

Investors from a wide range of industries and company sizes have resorted to ISDS to enforce States’ obligations under international investment agreement.

As a recent study concluded that in general ISDS cases are concentrated in sectors like electricity and mining.

ISDS however have not only been used by investors from those sectors. From sustainable development perspective, ISDS has shown the potential to protect investment in climate change mitigation efforts. In the past three years, renewable energy investors such as wind power and solar power investors have brought claims to ISDS alleging, among others, breach of host government’s specific commitment regarding incentives for their investments.

Further, an investor who owns an environmental sanctuary have also recently brought a claim to ISDS, arguing that the host government has failed to enforce its own environmental law which harms the sanctuary.

In addition, many other investors are represented in ISDS, from producers of biscuit, ice cream and paper to eco-tourism businesses. For example, the investor in paper business brought a case arising from government’s ban to import a certain raw material, contrary to a previous authorization that the investor was allowed to do so.

The above has shown that ISDS as an efficient dispute resolution is important not only for rule of law but also for the functioning of the global economy. Foreign investors who have obtained specific promises from a government with regards to their investment, typically in the form of government contracts or permit for certain period, may enforce this promise through ISDS, as an international neutral venue.

Small and medium size enterprises benefit from ISDS procedural efficiency; it is usually faster and less costly compared to proceedings in domestic court.The importance of ISDS for SMEs is also confirmed by an OECD survey according to which 22% of ISDS claimants are either individuals or very small corporations with limited foreign operations. Extremely large multinationals only account for 8% of the claimants in the survey.

2014: A Strong Year for New Investment Protection Regimes

sustainabledevA lot of new development took place last year in the investment protection regime. This is demonstrated for example by a yearly report from the United Nations Conference on Trade and Development (UNCTAD), which summarizes statistics and development surrounding the regime and ISDS.

States, to a large extent, continue to display interest and trust in the investment protection regime. This year’s finding shows that States have concluded 27 international investment agreements (IIAs), which means one every other week.

Sustainable development is at the heart of the newly-adopted IIAs. Most treaties concluded in 2014 include sustainable-development oriented features, for examples by preserving regulatory space for public policies of host countries and discouraging parties to relax environmental standards in order to attract foreign investments.

States maintain control in investment treaty-making and the design of ISDS provisions. In parallel to the adoption of new IIAs, 45 countries are revising their model Bilateral Investment Treaties. New model agreements have been concluded, notably by Brazil and India. This trend may also open up opportunities to include carefully-drafted investment protection in the IIA in support of sustainable development.

The total number of known ISDS claims decreased in 2014, from 54 cases in 2012 and 59 cases in 2013 to 42 cases last year.