Balancing fair and equitable treatment standard and environmental protection in international investment law

Conflicts between the obligation to accord fair and equitable treatment standard under international investment agreements and the exercise of the environmental protection right of the h

HO CHI MINH CITY UNIVERSITY OF LAW FACULTY OF INTERNATIONAL LAW

BACHELOR THESIS School year: 2018 - 2022

Supervisor:

LL.M Nguyen Thi Lan Huong

Ho Chi Minh City – Year 2022

HO CHI MINH CITY UNIVERSITY OF LAW FACULTY OF INTERNATIONAL LAW

BACHELOR THESIS School year: 2018 - 2022

Supervisor:

LL.M Nguyen Thi Lan Huong

Ho Chi Minh City – Year 2022

DECLARATION

I declare that this thesis is the result of my research, which is implemented under the supervision of LL.M Nguyen Thi Lan Huong, ensures honesty, and complies with rules and regarding quotation, the note of references Therefore, I hereby take full responsibility for this declaration

LIST OF ABBREVIATIONS

ASEAN Association of Southeast Asian Nations

CPTPP Comprehensive and Progressive Agreement for Trans-Pacific

Partnership (2018) EVIPA European Union-Vietnam Investment Protection Agreement

2019

FTC Notes Notes of Interpretation of Certain Chapter 11 Provisions of

North American Free Trade Agreement, issued by the Free Trade Commission on 31 July 2001

GATT General Agreement on Tariffs and Trade (1994)

ICSID International Center for Settlement of Investment Disputes IIA International Investment Agreement

NAFTA North American Free Trade Agreement (1993)

OECD Organization for Economic Cooperation and Development RCEP Regional Comprehensive Economic Partnership (2020) VCLT Vienna Convention on the Law of Treaties (1969)

TABLE OF CONTENTS

INTRODUCTION 1

CHAPTER 1 OVERVIEW ON FAIR AND EQUITABLE TREATMENT STANDARD AND ENVIRONMENTAL PROTECTION IN INTERNATIONAL INVESTMENT LAW 10

1.1 Theoretical issues with regard to fair and equitable treatment standard 10

1.1.1 Historical origin and meaning of fair and equitable treatment standard 10

1.1.2 Formulations and interpretation of fair and equitable treatment standard in international investment treaties 14

1.2 Environmental protection right of states 19

1.2.1 Legal basis of environmental protection right of states - right to regulate in the public interest 19

1.2.2 Regulations on environmental protection in international investment treaties 24

1.3 Conflicts between the obligation to accord fair and equitable treatment standard under international investment agreements and the exercise of the environmental protection right of the host state 33

CONCLUSION OF CHAPTER 1 36

CHAPTER 2 FAIR AND EQUITABLE TREATMENT STANDARD AND ENVIRONMENTAL PROTECTION IN INTERNATIONAL INVESTMENT ARBITRATION AND RECOMMENDATIONS FOR VIETNAM 37

2.1 Fair and equitable treatment standard standard and environmental protection in international investment arbitration 37

2.1.1 Different approaches taken by arbitral tribunals in environment-related cases 37

2.1.2 Towards a balanced approach between fair and equitable treatment standard and environmental protection's right of the host state 55

2.2 Recommendations for Vietnam 66

2.2.1 Recommendations regarding investment treaty drafting 71

2.2.2 Recommendations regarding environmental policies and measures 73

CONCLUSION OF CHAPTER 2 76

THESIS CONCLUSION 77

INTRODUCTION

1 Problem statement

In this day and age, the enhancement of environmental protection standards, the progress made in the governance of sustainable development, together with the occurrence of many environmental incidents relating to investment activities have motivated governments to review, amend and update their domestic legal policies so as

to keep them in line with social development requirements In such a context, states can

be placed in a dilemma since at the same time, they have to comply with obligations to

protect foreign investment regulated in international investment agreements (“IIAs”)

Arbitral practice indicates that there are many disputes between the host states and foreign investors arising out of the country’s failure to maintain a favorable legal framework for investment when pursuing their non-commercial objectives.1

The harmony between the state’s objective to attract foreign direct investment

(“FDI”) by affording investment protection and the protection of the environment has long been a matter of considerable concerns in international investment law (“IIL”),

mainly in IIAs and in the process of resolving investor-state disputes To tackle this matter, states begin to review the content of their IIAs in an attempt to ensure both commitments regarding investment protection and sufficient policy space to exercise their sovereign rights concerning environmental issues Typical of such an attitude is the amendment of IIAs’ preamble, the incorporation of general and specific exceptions as well as new methods of regulation on standards of investment protection such as most

favored nation standard, fair and equitable treatment (“FET”) standard and expropriation

clauses.2 Among them, the FET standard is controversial among scholars and has

1 Saverio Di Benedetto, International Investment Law and The Environment, Elgar International Investment Law,

become the most common standard for the resolution of investment disputes in recent years, particularly those involving tensions between an investor’s rights and the state’s regulatory measures.3 This stems from the vague, general and inconsistent regulation of FET provisions in IIAs as well as the broad interpretation of such a standard.4 Following this is the possibilities of different interpretation of the FET standard in arbitral jurisprudence, thus restricting the predictability of the outcome of investor-state disputes A more serious consequence is that states may refrain from adopting legitimate environmental regulations for fear of being challenged (or threatened to challenge) by foreign investors before arbitral tribunals when investors feel that it is difficult to carry

on their business in the host state or that value of their investments has diminished as a result of certain environmental regulations.5

With this situation in mind, the balance between the FET accorded to foreign investors regulated in IIAs and the regulatory power of states to pursue their environmental objectives is an urgent concern Thus, this thesis with the topic

“Balancing fair and equitable treatment standard and environmental protection in international investment law” aims to analyze the FET standard, the environmental

protection rights of states and their relevance in arbitral jurisprudence, thereby providing recommendations for Vietnam

2 Literature review

Many studies on the FET standard and its relations with the environment have been recorded internationally, mostly as part of the comprehensive research on IIL and sustainable development In Vietnam, however, FET standard and environmental protection have not been profoundly researched Existing literature relevant to this issue

3 Suzanne A Spears, “The quest for policy space in a new generation of international investment agreements”,

Journal of International Economic Law, 2010, Vol 13 No 4, p 1052

4 Ying Zhu, “Fair and Equitable Treatment of Foreign Investors in an Era of Sustainable Development”, Natural

Resources Journal, 2018, Volume 58, p 325

5 Satwik Shekhar, ‘Regulatory chill’: Taking right to regulate for a spin, Centre for WTO Studies, 2016, p 5-6

is limited, and where it is available, it pays attention to newly-concluded treaties entered into by Vietnam such as the Comprehensive and Progressive Agreement for Trans-

Pacific Partnership 2018 (“CPTPP”)

2.1 Materials in Vietnamese

● Books/ Textbooks

Trinh Hai Yen, Textbook on International Investment Law, The Truth National

Political Publishing House, Ha Noi, 2017: The textbook provides general knowledge of international investment law The author analyzes the FET standard and its application

in practice in chapter V of the textbook The analysis on environmental protection is merely generally provided in section II Chapter VII of the textbook and its interaction with the FET standard has yet to be mentioned

● Scientific articles/ scientific research

Tran Thang Long, “Áp dụng quy định trường hợp ngoại lệ về môi trường trong pháp luật đầu tư quốc tế và một số so sánh với thực tiễn Việt Nam” (Application of Provision on Environmental Exception in International Investment Law and

Comparisons with Vietnamese Practices), Legislative Studies Journal, 2019, No 4/2019:

The article analyzes environmental exception provisions in IIAs and how they are applied in investment cases Thereby, the author compares them with the situation of Vietnam and offers some recommendations for Vietnam Although the article provides details about environmental protection, the focus of the study is on expropriation instead

of the FET standard

Nguyen Thi Lan Huong, “Liên hệ tiêu chuẩn “đối xử công bằng và thỏa đáng” với mục tiêu bảo vệ môi trường trong CPTPP – Một số đề xuất cho Việt Nam” (The relationship between “Fair and Equitable” and environmental purpose in CPTPP –

Recommendations for Vietnam), Vietnamese Journal of Legal Science, 2019, Volume

06: The author analyzes how the FET standard is variably regulated under international investment treaties and the way it affects the FET interpretation in investment arbitral

tribunal in practice Thereby, the author gives an insight into the relationship between FET standard and environmental protection objectives in CPTPP and offers some recommendations for Vietnam so as to effectively implement environmental protection policies without violating the FET standard in IIAs where Vietnam is a member However, since the scope of the article is limited to provisions under CPTPP, the author exclusively focuses on the FET standard that is linked to the customary international law

(“CIL”), which cannot provide a general picture of the link between the FET standard

and environmental objectives

Nguyen Xuan My Hien, “Sự phát triển của tiêu chuẩn đối xử công bằng và thỏa đáng trong hiệp định thương mại tự do thế hệ mới” (The development of the FET

standard in new generation free trade agreements), Vietnamese Journal of Legal Science,

2019, Volume 06: The article analyzes the definition, characteristics, purpose of the FET standard and compares how the FET standard is regulated in traditional IIAs and new generation IIAs, in order to see the attempt of states to address the conflict between the requirement of foreign investor protection and the host state’s sustainable development objective Yet, since the article does not specifically address the environmental objective

of the host state and the focus is on the provisions of the FET standard under the CPTPP, further research on the FET and environmental protection is in need

Ngo Nguyen Thao Vy, “Quy định về quyền bảo vệ môi trường của nhà nước tiếp

nhận đầu tư trong khuôn khổ các hiệp định đầu tư quốc tế - Kiến nghị cho Việt Nam”

(Regulations on environmental protection rights of the host state in international investment treaties - Recommendations for Vietnam), Master thesis, Ho Chi Minh City University of Law, 2018: The thesis analyzes states’ right to protect public interest in general and states’ right to protect the environment in particular through provisions under IIAs and practical case study The thesis also demonstrates recent trends in interpreting the right to protect the public interest of the host state Thereby, some recommendations

for Vietnam are given However, the thesis does not provide in-depth research on environmental protection right in relation to the FET standard

Nguyen Ngoc Mai Thy, “Vấn đề bảo vệ lợi ích công cộng khi giải quyết tranh chấp

giữa quốc gia và nhà đầu tư nước ngoài trong hiệp định đầu tư quốc tế - Kinh nghiệm cho Việt Nam” (The protection of public interest when resolving disputes between the

host states and foreign investors - Recommendations for Vietnam), Master thesis, Ho Chi Minh City University of Law, 2017: In this thesis, a general overview of public interest in international investment law and in international investment arbitration, as well as an assessment of the approach in dealing with public interest matters of the arbitral tribunals through their decisions are provided Thereby, the author analyzes the approach of Vietnam with regard to public interest protection and offers some recommendations However, environmental protection, as an aspect of public interest protection, and its link to the FET standard have not yet been deeply researched

2.2 Materials in foreign language

● Books/ Curricula

Saverio Di Benedetto, International Investment Law and The Environment, Elgar

International Investment Law, 2013: The book clarifies the conflicting relationship between international investment rules and environmental protection It further provides

a critical analysis of case-law arguments and treaty solutions that address the integration

of environmental concerns into IIL Thereby, the book outlines possible scenarios for the evolution of the integrative question More research is needed to elaborate on, in particular, the FET standard and its interaction with environmental protection

● Scientific articles/ scientific research

Ying Zhu, Fair and Equitable Treatment of Foreign Investors in an Era of

Sustainable Development, Natural Resources Journal, 2018, Volume 58: The article

analyzes models adopted by tribunals in crafting the general threshold of the FET standard in environment-related investment cases and examines the tribunals’ diverse

approaches to assessing the FET in such cases Thereby, the article offers recommendations towards an integrated methodology for assessing environmental regulations under the FET Since the article focuses on the analysis in arbitral practice, the theoretical issues have yet to be thoroughly discussed

Federico Ortino, The Obligation of Regulatory Stability in the Fair and Equitable

Treatment Standard: How Far Have We Come?, Journal of International Economic Law,

2018, 21, p 845-865: The article elaborates on the conceptual distinction between 'strict' and 'soft' stability obligations of the host states Through the analysis of the way investment treaty tribunals have applied the FET provision in cases of host states' regulatory change, the author’s main argument is that several recent arbitral tribunals still fail to clearly set out the role of regulatory stability within the FET standard The article focuses on regulatory stability as one element of the FET standard and therefore, the FET standard in general has not been comprehensively researched

Camille Martini, Balancing Investors' Rights with Environmental Protection in International Investment Arbitration: An Assessment of Recent Trends in Investment

Treaty Drafting, International Lawyer, 2017, Volume 50, No 3, p 529 - 583: The article

assesses the differences in the way recent arbitral tribunals have interpreted IIAs' provisions to solve the conflict between investors' rights and states' ability to regulate on environmental matters Then, the environmental protection provisions that states have incorporated in newly drafted IIAs are analyzed, which demonsrates the states’ attempt

to incorporate public concerns directly into the text of their investment agreements However, the study has not yet been deeply researched on the FET standard as a whole but rather focuses on legitimate expectations amongst the several components of the FET standard

Tarcisio Gazzini, Bilateral Investment Treaties and Sustainable Development, The

Journal of World Investment & Trade, 2014, No 15, p 929 - 963: In this article, the

author explores the relationship between foreign investment and sustainable

development Through examining recent treaty practice, the author assesses how States can take full advantage of investment treaties as vehicles for economic development without compromising on the protection of the environment Thus, the article provides a general picture instead of in-depth research on the FET standard and its relation to

environmental protection

Le Thi Ngoc Ha, Vietnam’s International Investment Agreements: Various

Substantive Compatibility Thresholds For Legislative Measures, La Trobe University,

Australia, 2021: The author provides an extensive research of the context of investment protection provisions governing substantive aspects of legislative measures in Vietnam’s IIAs Thereby, the author clarifies substantive requirements and/or qualifications for legislative measures and substantive qualifications for exceptional legislative measures possibly imposed by provisions in Vietnam’s IIAs (including those for FET standard and those for public interests) As the author limits her research objectives to Vietnam’s IIAs, further research on international investment treaties and their links to Vietnamese context is necessary

Dávid Rédli, Limitations to States’ Regulatory Power in International Investment

Arbitration Resulting from Standards of Protection, with a Focus on Fair and Equitable Treatment Standard, Masasryk University, 2016: The thesis provides analysis on

sovereignty of states, the FET standard, as well as how to balance private and public interest in IIL by using the proportionality test The thesis also demonstrates the confining approach and benevolent approach of arbitral tribunal towards states’ right to regulate However, the matter of environmental protection has yet to be fully discussed

in this thesis

3 Purpose of the study

This thesis aims to analyze the relationship between the FET standard and environmental protection in IIL by assessing IIAs’ languages and the evaluation of

international investment arbitration, thereby providing recommendations for improving and balancing the investor protection obligation and the environmental protection right

of states, especially in the context of Vietnam

To accomplish the above purpose, this thesis performs the following tasks:

First, analyze such theoretical issues of the FET standard as its origin, its meaning,

and how it is regulated and interpreted under IIAs Additionally, analyze the basis for the environmental protection right of states and how it is regulated under IIAs

Second, analyze two selected cases to clarify different approaches adopted by

arbitral tribunals in environmental-related cases

Third, offer problem-solving recommendations for a better balance between the

FET standard and environmental protection and link to the current situation in Vietnam

4 Objectives and scope of the study

4.1 Objectives of the study

The regulations and provisions relating to the FET standard and environmental protection in international investment treaties and in investment treaties of which Vietnam is a member, especially those recently concluded including the CPTPP, the

Regional Comprehensive Economic Partnership 2020 (“RCEP”) and the European Union-Vietnam Investment Protection Agreement 2019 (“EVIPA”)

Tribunal approaches towards FET in environmental-related cases resolved by international investment tribunals

4.2 Scope of the study

As to the content, this thesis studies mainly on the basic theoretical issues and practical matters arising from the relationship between the FET standard and environmental protection

As to the space, this thesis analyzes decisions of arbitral tribunals in international investment disputes relating to the FET and environmental protection Additionally,

relevant IIAs’ provisions are under discussion to clarify how states govern this matter in reality

As to the time, this thesis focuses on recent discussions and case studies from 2010 onward

5 Research methodologies

Throughout the thesis, the author will utilize three main research methods: analytical, comparative, and synthetic These research methods are determined not to be set to isolation but in interweavement

The analytical method is conducted in both chapters In chapter 1, this method is used to analyze the basis theoretical issues with regard to both FET standard and environmental protection in IIL In chapter 2 this method is applied in order to point out the problems of the divergent ways taken by arbitral tribunals in cases related to environmental issues

The comparative method is implemented in Chapter 2 for comparing the two different approaches taken by arbitral tribunals to resolve disputes arising from the conflict between investor protection and environmental protection

The synthetic method is used to synthesize analyses and comparisons, thereby providing a general picture of the situation and offering recommendations

6 Thesis structure

This thesis is structured in two chapters as follows:

Chapter 1 Overview on FET standard and environmental protection in international investment law

Chapter 2 FET standard and environmental protection in international investment arbitration and recommendations for Vietnam

CHAPTER 1 OVERVIEW ON FAIR AND EQUITABLE TREATMENT STANDARD AND ENVIRONMENTAL PROTECTION IN INTERNATIONAL

INVESTMENT LAW

This Chapter will introduce the FET standard with regard to its historical origin, meaning, as well as how the standard is formulated under international investment treaties and variously interpreted This Chapter will also analyze the environmental protection right of states in respect of the legal basis for states to exercise their right to protect the environment and how matters of the environment is regulated under IIAs Accordingly, conflicts between the obligation to follow the FET standard under IIAs and the exercise of the environmental protection right of the host state will subsequently be demonstrated

1.1 Theoretical issues with regard to fair and equitable treatment standard

1.1.1 Historical origin and meaning of fair and equitable treatment standard

The obligation to provide “fair and equitable treatment” is often stated, together with other standards, as part of the protection due to foreign direct investment by host countries It is an “absolute”, “non-contingent” standard of treatment whose exact meaning has to be determined, by reference to specific circumstances of each case, as opposed to the “relative” standards embodied in “national treatment” and “most favored nation” principles, which have recourse to the treatment accorded to other investment to define the required treatment.6

As to its historical origin, the concept of FET is not new but has appeared in international documents for some time An early version of the FET standard appeared

in Article 11(2) of the Havana Charter for the establishment of an International Trade

6 OECD, “Fair and Equitable Treatment Standard in International Investment Law”, OECD Working Papers on

International Investment, 2004, 2004/03, p 2

Organization in 1948, assuring “just and equitable treatment for the enterprise, skills, capital, arts and technology brought from one Member country to another.”7

Although the Havana Charter failed to enter into force, this early model of the FET standard was subsequently incorporated into certain United States Friendship, Commerce and Navigation Treaties (FCN Treaties), with a reference either to

“equitable” treatment or to “fair and equitable” treatment.8 The first use of the FET clause in the IIA context can be traced back to Article I of the Draft Convention on

Investments Abroad proposed by Hermann Abs and Lord Shawcross in 1959: “Each

Party shall at all times ensure fair and equitable treatment to the property of the nationals of the other Parties…” Following this, the 1967 Organization for Economic

Cooperation and Development (“OECD”) Draft Convention on the Protection of

Foreign Property also included a FET clause along similar lines.9 It is important to note here that the Draft OECD Convention was used by most OECD countries as the basis for their IIA negotiations By referring to the OECD model and using it systematically, they are also referring to this standard as defined by the Draft Convention of 1967

Nowadays, almost all modern bilateral investment treaties (“BITs”) and multilateral

IIAs include FET clauses.10 Even some Asian and Latin American countries that traditionally favored the use of national treatment rather than the FET standard for a better control of foreign investments, have incorporated FET clauses into their BITs.11

As to its meaning, although most investment protection agreements require that investments and investors covered receive “fair and equitable” treatment, there is no

7 Havana Charter for an International Trade Organization, U.N Doc E/Conf 2178, art 11(2)(a)(i) (Mar 24, 1948)

8 For example, Article I(1) of the 1954 United States-Germany FCN Treaty reads: “Each Party shall at all times accord fair and equitable treatment to the nationals and companies of the other Party and to their property, enterprises and other interests.”

9 Article 1(a) of the 1967 OECD Draft Convention on the Protection of Foreign Property provides: “Each Party

shall at all times ensure fair and equitable treatment to the property of the nationals of the other Parties.”

10 August Reinisch and Christoph Schreuer, International Protection of Investments: The Substantive Standards,

Cambridge University Press, 2020, p 259

11 Ying Zhu, supra note 4, p 323

general agreement on the precise meaning of this standard According to the Concise Oxford Dictionary, the word “fair” is defined as “just, unbiased, equitable, in accordance with rules”.12 Meanwhile, “Equity” is a word related to the idea of equilibrium defined

as “a state of physical balance”.13 A noticeable question that has been raised is whether the FET standard actually contains two independent standards, namely “fair” and

“equitable” In practice, it is generally assumed that “fair and equitable” must be considered to represent “a single, unified standard”.14 What is more, in many agreements – especially in Spanish and French language treaties – the phrase appears as “just and equitable treatment” instead of “fair and equitable treatment”.15 A few BITs also refer to

‘equitable and reasonable’ treatment.16 However, these variations have been generally viewed as insignificant and can be used interchangeably with the term “fair and equitable”.17 Based on a plain meaning of the words, “fair and equitable” treatment requires “an attitude to governance based on an unbiased set of rules that should be applied with a view to doing justice to all interested parties that may be affected by a State’s decision in question, including the host State’s population at large”.18

Many of the substantive investment protection standards seem to have been intentionally drafted in vague terms in order to conceal differing perceptions on the value

12 The Concise Oxford Dictionary of Current English, Eighth edition, Clarendon Press, Oxford University Press,

1990, p 420

13 The Concise Oxford Dictionary of Current English, Eighth edition, Clarendon Press, Oxford University Press,

1990, p 396

14 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, Oxford University Press,

2012, p 123; August Reinisch and Christoph Schreuer, supra note 10, p 276

15 For example, Article IV.1 Spain–Mexico BIT (2006): “Cada parte contratante otorgará a las inversiones de

inversores de la otra parte contratante, trato acorde con el derecho internacional consuetudinario, incluido trato justo y equitativo, así como protección y seguridad plenas”

16 For example, Article III Norway–Lithuania BIT (1992) provides that each contracting party shall promote and encourage in its territory investments of investors of the other contracting party and accept such investments in

accordance with its laws and regulations and accord them equitable and reasonable treatment and protection

17 August Reinisch and Christoph Schreuer, supra note 10, p 261; UNCTAD, Fair and equitable treatment - A sequel, Series on Issues in International Investment Agreements II, 2012, p 20

18 UNCTAD, supra note 17, p 7

of investment protection.19 Similarly, the term “fair and equitable treatment” appears as

a vaguely and generally formulated standard However, it is arguable that the FET standard has an inherent nature of vagueness and generality on purpose It derives from the FET standard's very function, which is to address acts and occurrences that do not come under the purview of particular standards but are nevertheless considered to be at odds with the BIT's goal of protecting and promoting foreign investment.20

A considerable number of arbitral awards have gone a long way towards identifying the precise meaning of this rather vague and generally formulated standard through judicial practice A tribunal may limit its attention to one FET standard criterion that applies to the case in order to accomplish this A rising number of tribunals, however, have taken on the more extensive duty of presenting a list of elements that, taken together, may constitute the full scope of the FET standard.21 For the first time, the

“list approach” was employed in Tecmed v Mexico22 The Tribunal in this case held that the FET requires the host state to protect “basic expectations” that were taken into account by the foreign investor to make the investment; to act in a “consistent”, “free from ambiguity”, “totally transparent” manner so that the foreign investor may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations Further, the FET, according to the Tribunal, requires the host state to act in a way without arbitrarily revoking any preexisting decisions or permits issued by the State that were relied upon by the investor

to assume its commitments as well as to plan and launch its commercial and business

19 Roland Klager, ‘Fair and Equitable Treatment’ in International Investment Law, Cambridge University Press,

activities, and use the legal instruments that govern the actions of the investor or the investment in conformity with the function usually assigned to such instruments, and not

to deprive the investor of its investment without the required compensation It bears

emphasis that the Tecmed Award has been and continues to be the award that arbitral

jurisprudence cites the most, clearly having more weight than other attempts to approach the standard.23

1.1.2 Formulations and interpretation of fair and equitable treatment standard in international investment treaties

It is noticeable that there has been no uniform formulation of the FET clause among investment treaties.24 In fact, the language of the FET clause differs significantly among treaties Some treaties simply require “fair and equitable treatment” without any reference to international law or any further criteria FET clauses of this type are referred

to as unqualified, autonomous or self-standing FET standard An example can be seen

in Article 3 of Belgium - Luxembourg Economic Union-Tajikistan BIT (2009): “All

investments made by investors of one Contracting Party shall enjoy a fair and equitable treatment in the territory of the other Contracting Party” Some treaties link the FET

standard to general international law For instance, Article 3(2) of Croatia-Oman BIT

(2004) provides: “Investments or returns of investors of either Contracting Party in the

territory of the other Contracting Party shall be accorded fair and equitable treatment

in accordance with international law and provisions of this Agreement” Some treaties

equate the FET standard to the minimum standard of treatment (“MST”) in CIL MST

is a set of CIL norms that governs the treatment of aliens.25 Accordingly, the MST asserts

a level of protection for aliens, below which the treatment provided for by the host state

23 Rudolf Dolzer, “Fair and Equitable Treatment: Today’s Contours”, Santa Clara Journal of International Law,

must not fall.26 States, regardless of their legislation and practices, must respect these norms when dealing with foreign nationals and their property For example, under

Article 1105(1) of the 1993 North American Free Trade Agreement (“NAFTA”) -

Minimum Standard of Treatment, each Party committed to “accord to investments of

investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security”.27 Other treaties list specific examples of infringement of the FET standard This is a way of being more precise about the content of the FET obligation and more predictable in its implementation and subsequent interpretation For instance, Article 11(2)(a) of Association of Southeast

Asian Nations (“ASEAN”) Comprehensive Investment Agreement (2009) stipulates:

“fair and equitable treatment requires each Member State not to deny justice in any legal or administrative proceedings in accordance with the principle of due process”

The variations in treaty language may impact the interpretation of the FET clause

In particular, the degree of generality or specificity of the wording will affect the scope

of discretion offered to an interpreting body, whether a government official, agency or

an arbitral tribunal Considerable debate has surrounded the question of whether FET should be interpreted as an autonomous treaty standard or as the MST in CIL In cases where IIAs specifically link the FET standard to the MST in CIL, it is relatively easy since the tribunals tend to follow the original text of the treaty and equate FET to MST, although the exact threshold of the MST needs to be further defined.28 For instance, the NAFTA jurisprudence, after the issuance of the Notes of Interpretation of Certain

Chapter 11 Provisions of North American Free Trade Agreement (“FTC Notes”)29 that explicitly states that the FET clause reflects the MST, consistently equated the FET

26 Roland Klager, supra note 19, p 48

27 In 2001, the Free Trade Commission under the NAFTA issued its binding Notes of Interpretation (the FTC

Notes), stating that “Article 1105(1) prescribes the customary international law minimum standard of treatment of

aliens as the minimum standard of treatment to be afforded to investments of investors of another Party.”

28 Ying Zhu, supra note 4, p 325

29 NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions, July 31, 2001

standard with the MST requirement It is demonstrated in Chemtura v Canada where the Tribunal stated: “…It is not disputed that the Tribunal must interpret the scope of

Article 1105 in accordance with the FTC Note… the Tribunal notes that it is not disputed that the scope of Article 1105 of NAFTA must be determined by reference to customary international law…”.30 On the other hand, some treaties do not refer the FET standard

to the MST standard in CIL In such cases, the tribunals have adopted two different approaches

The first approach is to interpret the FET clause as a self-standing treaty standard different from the MST The most important guideline for the interpretation of treaties

is contained in Article 31(1) Vienna Convention on the Law of Treaties (1969)

(“VCLT”) which provides: “A 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” As to the ordinary meaning of the term, as has been

presented in section 1.1.1 of this thesis and supported by some tribunals31, the broadness and vagueness of the term make it hard to find an accurate definition by reference to a dictionary Therefore, the contexts of the FET clause and the objective of the investment treaty has a significant influence on the interpretation of definition of the FET “Context” specifically relates to the entire text as well as the preamble and annexes of a treaty.32 In

30 Chemtura Corporation v Government of Canada, UNCITRAL, Award, 2 August 2010, paras 120-121

31 For example, the Tribunal in Saluka v Czech Republic stated: “The ordinary meaning of the FET standard can

only be defined by terms of almost equal vagueness” (Saluka Investments B.V v The Czech Republic, UNCITRAL,

Partial Award, 17 March 2006, para 296); or the Tribunal in Lemire observed: “An inquiry into the ordinary

meaning of the expression FET treatment does not clarify the meaning of the concept FET is a term of art, and any effort to decipher the ordinary meaning of the words used only leads to analogous terms of almost equal vagueness” (Joseph Charles Lemire v Ukraine, International Center for Settlement of Investment Disputes

(“ICSID”) Case No ARB(AF)/98/1, Decision on Jurisdiction and Liability, 14 January 2010, para 258)

regard to the treaty’s object and purpose, reference is frequently made to the aim of IIAs

to “promote and protect foreign investments”, as is often evident in the titles of IIAs or their preambles.33

By referring to Article 31 VCLT, however, the tribunals have adopted different interpretation methods Some tribunals have tended to interpret the objective of investment protection excessively, resulting in a one-sided interpretation of the FET and over-protection of foreign investors.34 Other tribunals, though taking into account the preamble, held that the purpose of promoting foreign investments should be interpreted

in a way that balances the foreign investor’s protection and the host state’s right of regulatory change.35 In this vein, interpreting the unqualified FET standard as delinked from CIL leaves a wide margin of discretion to arbitrators Thus, the simple unqualified formulation may result in a low liability threshold and incur a risk for state legitimate regulatory action to be found in breach of it where the state’s conduct in question is considered to be simply unfair towards the investor.36

The second approach is an autonomous interpretation of the FET standard that it

“is not different from” or “is not materially different from” the MST in CIL However,

33 August Reinisch and Christoph Schreuer, supra note 10, p 287

34 For instance, the Tribunal in MTD v Chile held that as regards the object and purpose of the BIT, the Tribunal

refers to its Preamble where the parties state their desire “to create favorable conditions for investments by investors

of one Contracting Party in the territory of the other Contracting Party”, and the recognition of “the need to protect investments by investors of both Contracting Parties and to stimulate the flow of investments and individual business initiative with a view to the economic prosperity of both Contracting Parties” Hence, in terms of the BIT, FET should be understood to be treatment in an even-handed and just manner, conducive to fostering the promotion

of foreign investment Its terms are framed as a pro-active statement –“to promote”, “to create”, “to stimulate”- rather than prescriptions for a passive behavior of the State or avoidance of prejudicial conduct to the investors

(MTD Equity Sdn Bhd and MTD Chile S.A v Republic of Chile, ICSID Case No ARB/01/7, Award, 25 May

2004, para 113)

35 For instance, the Saluka tribunal held that the protection of foreign investments is not the sole aim of the Treaty,

but rather a necessary element alongside the overall aim of encouraging foreign investment and extending and intensifying the parties’ economic relations That in turn calls for a balanced approach to the interpretation of the Treaty’s substantive provisions for the protection of investments, since an interpretation which exaggerates the protection to be accorded to foreign investments may serve to dissuade host States from admitting foreign investments and so undermine the overall aim of extending and intensifying the parties’ mutual economic relations

(Saluka Investments B.V v The Czech Republic, UNCITRAL, Partial Award, 17 March 2006, para 300

36 UNCTAD, supra note 17, p 22

the specific meaning of the concept of MST is still rather indeterminate The most cited

expression of the MST is found in the Neer case.37 Specifically, in its decision, the

Commission stated: “ 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…” Accordingly,

it gives a rough idea of a high threshold that the challenged governmental conduct has

to meet for a breach to be established.38

There have been heated debates over the question of whether the MST has evolved

since the Neer case Some tribunals insisted that the FET standard is equal to the Neer

standard that requires an infringement of foreign investor’s rights to be outrageous or egregious to amount to a violation of MST.39 On the contrary, some tribunals have noted

that the MST has evolved from the Neer standard and a violation of the FET standard

does not need to be outrageous or egregious.40 It is remarkable that, while tribunals noting that MST can evolve, hardly none have attempted to explain in further detail how the MST may have ev and what form it is thought to have at this time.41 In this respect,

in a NAFTA case, although the United States (and the other NAFTA members) apparently accepted the MST of being able to evolve and not being “frozen in time”, it

37 L F H Neer and Pauline Neer (U.S.A.) v United Mexican States, Decision, 15 October 1926

38 UNCTAD, supra note 17, p 46

39 For instance, In Glamis Gold v USA, the tribunal held that the MST has been “ effectively frozen at the 1926

conception of egregiousness due to the difficulty in proving a change in custom” It further held that although

situations may be more varied and complicated today than in the 1920s, the level of scrutiny is the same The

fundamentals of the Neer standard thus still apply today, (Glamis Gold, Ltd v The United States of America,

UNCITRAL, Award, 8 June 2009, paras 604 - 616)

40 For instance, the Tribunal in Mondev v USA stated: “…To the modern eye, what is unfair or inequitable need

not equate with the outrageous or the egregious In particular, a State may treat foreign investment unfairly and inequitably without necessarily acting in bad faith” and “ It would be surprising if present-day investment treaty practice were to be interpreted as meaning no more than the Neer Tribunal (in a very different context) meant in 1927” (Mondev International Ltd v United States of America, ICSID Case No ARB(AF)/99/2, Award, 11 October

2022, paras 116-117)

41 Roland Klager, supra note 19, p 76

is stressed that the threshold remains high.42

In short, it can be observed that although the FET standard can be found in practically all modern BITs and multilateral IIAs, its exact meaning remains rather unclear The way the standard is incorporated also varies among treaties, which has significantly affected its interpretation The threshold for FET violation can be either high or low depending on each interpretation approach and has to be assessed on a case-by-case basis

1.2 Environmental protection right of states

1.2.1 Legal basis of environmental protection right of states - right to regulate

in the public interest

In international law, concerns regarding preservation of the environment relevant

to the international community or public of the States have become more and more influential Thus, it is of great importance to analyze the legal basis for states’ exercise

of their right to protect the environment in the context of international investment First of all, it is worth noting that the environment is an area of a broader concept named “public interest” At this point, the concept of “public interest” needs to be clarified Public interest denotes an interest of society as a whole, i.e an interest that goes beyond the interest of the individual or of mere factions.43 The expression of the

“public interest” doctrine in treaties and rules of CIL appears under many other names such as common good, community interest, and public purpose.44 Overall, all of the terms demonstrate the idea of the interest of the whole society, which distinguishes it from the interest of an individual Be that as it may, public interest and private interest

42 ADF Group Inc v United States of America, ICSID Case No ARB (AF)/00/1, Award, 9 January 2003, para

179

43 Alexander J Bělohlávek, “Public Policy and Public Interest in International Law and EU Law”, Czech Yearbook

of International Law, Juris Publishing, Inc., 2012, p 120 - 121

44 Tran Viet Dung and Nguyen Ngoc Mai Thy, "Lợi ích công cộng" trong luật đầu tư quốc tế - thực tiễn giải quyết tranh chấp quốc tế và một số đề xuất cho Việt Nam (“Public interest” in international investment law - international

arbitral practice and suggestions for Vietnam), Vietnamese Journal of Legal Sciences, 2019, 01(122)

are not opposing or irreconcilable To some extent, public interest contains private interest, while private interest demonstrates public interest However, under certain circumstances, it is necessary to restrict private interest and make it consistent with public interest, in other to protect the private interest of every individual in the whole society.45 In the context of IIL, public interest is a concern towards all people in the involved states so that the investment does not cause harm to any individual but rather benefits all, or at least some of them.46

There is not a uniform definition of public interest It is an indeterminate legal term since the term’s meaning changes depending on circumstances of its usage.47 According

to current CIL and treaty law, states are free to determine what is in public interest.48

Thus, public interest varies among nations and states In some nations or states, the majority of the people may have certain health issues, which may differ with people of other countries where cultural preservation is their major concern Accordingly, not all areas of public interest, but only those areas having a fundamental impact for the functioning of the state and protection of its citizens’ rights will be relevant.49 It is noticeable that a commonly cited area of public interest in IIL is the environment, which

is demonstrated in both treaties50 and through arbitral practice51

45 Qinglin Zhang, On Public Interest in International Investment Agreements, Law School of Wuhan University,

2013, p 10

46 Mohamed Aboubakr and Abdullah Alhabeeb Almahjoub, “The Balance between the Public Interest and Investor

Protection”, Kilaw Journal, 2019, Volume 7, Issue 4, Ser No 28, p 119

47 Alexander J Bělohlávek, “Public Policy and Public Interest in International Law and EU Law”, Czech Yearbook

of International Law, Juris Publishing, Inc., 2012, p 125

48 Dávid Rédli, Limitations to States’ Regulatory Power in International Investment Arbitration Resulting from

Standards of Protection, with a Focus on Fair and Equitable Treatment Standard, Masasryk University, 2016, p

24

49 Ibid, p 23

50 See Article 3.1 Cabo Verde - Hungary BIT (2019); Article 5 BLEU - Kosovo BIT (2010); Article 11.1 Colombia

- Turkey BIT (2014); Article 8.18(1)(d) Peru-Australia FTA (2018)

51 See Eco Oro Minerals Corp v Republic of Colombia, ICSID Case No ARB/16/41, Decision on Jurisdiction, Liability and Directions on Quantum, 9 September 2021, paras 637 - 642; Vigotop Limited v Republic of Hungary,

ICSID Case No ARB/11/22, Award, 4 August 2011, paras 440 - 441

Public interest is one of the most common exceptions or defenses used by States Against an investor’s claims for breach of treaty standards of protections (e.g., FET) regulated under the IIAs, states may invoke a defense on the basis of protecting their public interest.52 Moreover, according to Black Law dictionary, besides “the universal interest of the public to be recognized and protected”, public interest also covers

“something in which the public as a whole has a stake, especially an interest that justifies governmental regulation”.53 In this vein, public interest is also used to restrict the government’s “arbitrary” authority in some cases, commonly the case where states encourage investment by lowering the protection of public interest.54

Besides “public interest”, IIAs frequently recognise other terms such as “public policy” or “public order” as exceptions to obligations to protect foreign investment of states.55 Public interest, public policy and public order all refer to the values and interests

of the whole society and thus, there are some public interests recognized by the state as interests protected by public order or public policy However, these terms are not interchangeable Public order or public policy has a stricter range of application and higher validity as encroachment on its protected core values can imperil the law and social order of the state Meanwhile, an infringement of public interest can adversely affect the community, but not as serious as the infringement of public order or public

52 For instance, Article 10.2 of the 2016 Slovakia–Iran IIA provides: “Recognizing the right of each Contracting

Party to establish its own level of environmental protection and its own sustainable development policies and priorities, and to adopt or modify its environmental laws and regulations, each Contracting Party shall ensure that its laws and regulations provide for appropriate levels of environmental protection and shall strive to continue to improve those laws and regulations.”

53 Bryan A Garner et al Black’s law Dictionary, 9th edition, West Publishing Co., 2004, p 1266

54 For instance, Article 10.1 of the 2016 Slovakia–Iran IIA provides a good illustration of this objective: “The

Contracting Parties recognize that it is inappropriate to encourage investment by relaxing labor, public health, safety or environmental measures They shall not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such measures as an encouragement for the establish- ment, acquisition, expansion or retention in their territories, of an investment.”

55 c, Quy định về quyền bảo vệ môi trường của nhà nước tiếp nhận đầu tư trong khuôn khổ các hiệp định đầu tư

quốc tế - Kiến nghị cho Việt Nam (Regulations on environmental protection rights of the host state in international

investment treaties - Recommendations for Vietnam), Ho Chi Minh City University of Law, 2018, p 13 - 14

Additionally, it is noticeable that in case treaty provisions do not explicitly mention the State’s right to regulate in the public interest, an arbitral tribunal can still assess the public interest doctrine invoked by the state as a justification for their measures Some authors assert that arbitral tribunals may consider public interest review through their

56 Nguyen Ngoc Mai Thy, Vấn đề bảo vệ lợi ích công cộng khi giải quyết tranh chấp giữa quốc gia và nhà đầu tư

nước ngoài trong hiệp định đầu tư quốc tế - Kinh nghiệm cho Việt Nam (The protection of public interest when

resolving disputes between the host states and foreign investors - Recommendations for Vietnam), Ho Chi Minh City University of Law, 2017, p 17

57 James Crawford, Brownlie’s Principles of Public International Law (8th edition), Oxford University Press, 2012,

p 624; Ben Mostafa, “The Sole Effects Doctrine, Police Powers and Indirect Expropriation under International

Law”, Australian International Law Journal, 2008, Volume 15, p 269

58 Vaughan Lowe, “Regulation or Expropriation?”, Current Legal Problems, Oxford University Press, 2002, Vol

55, Issue 1, p 447 See also Saluka Investments B.V v The Czech Republic, UNCITRAL, Partial Award, 17 March

2006, para 306; LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc v Argentine Republic, ICSID Case No ARB/02/1, Award, 25 July 2007, para 195; Tecnicas Medioambientales Tecnicas Medioambientales Tecmed S.A v United Mexican States, ICSID Case No ARB(AF)/00/2, Award, 29 May 2003, para 115

59 Mohamed Aboubakr and Abdullah Alhabeeb Almahjoub, “The Balance between the Public Interest and Investor

Protection”, Kilaw Journal, 2019, Volume 7, Issue 4, Ser No 28, p 121

60 Inga Martinkute, “Right to Regulate in the Public Interest: Treaty Practice”, Jus Mundi,

https://jusmundi.com/en/document/wiki/en-right-to-regulate-in-the-public-interest (last accessed 25/5/2022)

reliance on past arbitral decisions where treaties have not incorporated public interest exceptions.61 In arbitral practice, some tribunals have relied on CIL as well For instance,

in Feldman v Mexico, the Tribunal observed: “Governments must be free to act in the

broader public interest through protection of the environment, new or modified tax regimes, the granting or withdrawal of government subsidies, reductions or increases in tariff levels, imposition of zoning restrictions and the like Reasonable governmental regulation of this type cannot be achieved if any business that is adversely affected may seek compensation, and it is safe to say that CIL recognizes this.”62

Although CIL as well as express treaty provisions allow States to regulate in the public interest, tribunals have confirmed that this right is not absolute and the State must respect their international obligations in relevant IIAs.63 However, there is no set formula

to assess the legitimacy of the State’s regulatory measure Some tribunals have engaged

in a proportionality analysis to balance investors' rights under the investment agreement with the host State’s sovereign right to implement public interest reforms.64 Other

tribunals have held that the State’s conduct should be bona fide and not “manifestly

violate the requirements of consistency, transparency, even-handedness and

non-61 Abdulkadir Gülçür, “The Necessity, Public Interest, and Proportionality in International Investment Law: A

Comparative Analysis”, University of Baltimore Journal of International Law, Volume 6, Issue 2, p 240; Alison Giest, “Interpreting Public Interest Provisions in International Investment Treaties”, Chicago Journal of

International Law, 2017, Volume 18, Number 1, p 328

62 Marvin Roy Feldman Karpa v United Mexican States, ICSID Case No ARB(AF)/99/1, Award, 16 December

2002, para 103

63 For instance, in SunReserve v Italy, the Tribunal held that the FET obligation requires all relevant circumstances

to be considered in a case, the objectives of creating a stable, transparent and favorable legal framework for

investments are required to be balanced against the host State's right to regulate (SunReserve Luxco Holdings SRL

v Italy, SCC Case No 132/2016, Final Award, 25 March 2020, para 685)

64 For instance, in Eskosol v Italy, when assessing whether there is a violation of the FET obligation, the Tribunal

accepts in principle that part of assessing compliance with the FET standard is determining whether State measures were disproportionate, in the sense of imposing burdens on foreign investment that went far beyond what was

reasonably necessary to achieve good faith public interest goals (Eskosol S.p.A in liquidazione v Italian Republic,

ICSID Case No ARB/15/50, Award, 4 September 2020, para 410) Regarding the proportionality analysis, it will

be discussed in detail in section 2.1.2 of this Thesis

discrimination”;65 and that the State should not “unreasonably or inequitably exercise its legislative power”.66

1.2.2 Regulations on environmental protection in international investment treaties

Early BITs concluded since Germany and Pakistan entered into the first BIT in

1959 usually did not mention a state’s right to regulate explicitly The sole focus of the early BITs is on investment protection and thus, might have created an impression of the absolute rights and protections accorded to the investments that were not limited by other considerations such as public interest.67 In arbitral practice, tribunals frequently found that they lack jurisdiction or facts to address complaints other than those related to investment’s operation.68 However, the tide towards an affirmative protection of the State regulatory space in IIAs began to appear in 2004 with the promulgation of the US new model BIT, paving the way for a ‘‘new generation’’ of BITs.69 Specifically, in respect of environmental protection, treaty drafting practice broadly reflect four main

65 For instance, in Merrill & Ring v Canada, in assessing whether Canada’s application of log export regime

breached the MST of aliens, the Tribunal held that it would be hard to see the imposition of such a discriminatory policy in respect of foreign investors as sufficiently reprehensible to amount to a breach of a MST

non-(Merrill & Ring Forestry L.P v The Government of Canada, ICSID Case No UNCT/07/1, Award, 31 March 2010, para 236); see more at Riccardo Loschi and Fakhruddin Valika, Public Interest, Jus Mundi, https://jusmundi.com/en/document/wiki/en-public-interest (last accessed 27/5/2022)

66 For instance, in Parkerings v Lithuania, when assessing whether Lithuania frustrated Parkerings' legitimate

expectation, the Tribunal held that as a matter of fact, any businessman or investor knows that laws will evolve over time What is prohibited however is for a State to act unfairly, unreasonably or inequitably in the exercise of

its legislative power (Parkerings-Compagniet AS v Republic of Lithuania, ICSID Case No ARB/05/8, Award, 11

September 2007, para 332)

67 Inga Martinkute, “Right to Regulate in the Public Interest: Treaty Practice”, Jus Mundi,

https://jusmundi.com/en/document/wiki/en-right-to-regulate-in-the-public-interest (last accessed 25/5/2022)

68 For instance, in Biloune and Marine Drive Complex Ltd v Ghana, the Tribunal found that the Tribunal’s

competence is limited to commercial disputes arising under a contract entered into in the context of Ghana’s Investment Code As noted, the Government agreed to arbitrate only disputes "in respect of’ the foreign investment Thus, other matters —however compelling the claim or wrongful the alleged act—are outside the Tribunal’s

jurisdiction (Antoine Biloune and Marine Drive Complex Ltd v Ghana Investments Centre and the Government

of Ghana, Ad hoc Arbitration, Award on Jurisdiction and Liability , 27 October 1989, para 61)

69 John Beechey and Antony Crockett, New Generation of Bilateral Investment Treaties: Consensus or Divergence?

in Contemporary Issues in International Arbitration and Mediation, Matinus Nijhoff Publishers, 2008, p 5 See more at UNCTAD, Investor–state dispute settlement and impact on investment rulemaking, 2007, p 71 In this

Paper, UNCTAD has identified five main features of the new generation treaties, among which is the clarification that investment protection should not be pursued at the expense of other public policy objectives

methods of environmental references, each demonstrating the distinct policy goals of the contracting parties: (1) Preambular references; (2) Clauses reaffirming the host states’ right to regulate; and (3) “Not lowering standard” provisions and (4) General exceptions.70

❖ Preambular references

Preambular language is one of the most frequently observed categories of environmental references.71 However, a broad range of concerns have been included in

IIAs' preambles First, environmental preambular references may attempt to harmonize

the protection and promotion of foreign investments as a main objective of IIAs with environmental protection and conservation For instance, in NAFTA, its preamble

contains the following sentence: "Undertake each of the preceding in a manner

consistent with environmental protection and conservation; …strengthen the development and enforcement of environmental regulation." Second, preambular

references may express a concern regarding the lowering of environmental standards to attract foreign investment The Netherland's 2004 Model BIT, for instance, provides that

"Considering that these objectives can be achieved without compromising health, safety and environmental measures of general application." Third, many IIAs provide in their

preamble for a reference to the concept of “sustainable development”72, which is commonly intertwined with the term “environment”.73 The concept of sustainable development is argued to help reconcile the objectives of business with the rest of society, as well as of states at different levels of development by uniting and

70 Camille Martini, “Balancing Investors' Rights with Environmental Protection in International Investment

Arbitration: An Assessment of Recent Trends in Investment Treaty Drafting”, International Lawyer, 2017, Volume

50, No 3, p 559

71 Ibid, p 559

72 Sustainable development is defined as a normative principle which entails an obligation to manage natural, economic and social resources with a view to meet the needs of the present generation, and guarantee the ability of

future generations to meet their own in all dimensions (See Satwik Shekhar, supra note 5, p 2)

73 Magali Garin Respaut, “Environmental Issues in ISDS”, Jus Mundi,

https://jusmundi.com/en/document/wiki/en-environmental-issues-in-isds (last accessed 23/6/2022)

accommodating economic growth, social development and environmental protection under one umbrella.74 An example is the 2008 Australia-Chile Free Trade Agreement

(“FTA”), which contains an investment chapter, stipulates in its preamble that the two

countries are "resolved to implement this Agreement in a manner consistent with

sustainable development and environmental protection and conservation." Additionally,

a few IIAs contain a reference to international environmental agreements in their preamble Norway's 2015 Model BIT, for instance, states in its preamble that the parties

"recognize that the provisions of this agreement and provisions of international agreements relating to the environment shall be interpreted in a mutually supportive manner."

The inclusion of the environment or sustainable development in the preamble can

offer several advantages Firstly, the preamble is an integral part of the treaty and plays

an important role in treaty interpretation.75 Where there is relevant language in the preamble, tribunals have a tendency to weigh the public interest more carefully.76

Secondly, references to the environment also encourage the interpreter to take into

account the relevant international rules related to the environment under Article 31(3)(c) VCLT.77 Finally, investment tribunals may also consider preambles in order to assess

the legitimate expectations of foreign investors Yet, in exercising its regulatory powers, the host state must respect the expectations that foreign investors may have legitimately built on the basis of promises, undertakings, declarations and representations made

74 Suzanne A Spears, supra note 3, p 1070-1071

75 According to article 31(2) of the VCLT, the preamble provides context for interpretation and may provide background on the object and purpose of the treaty

76 Alison Giest, supra note 61, p 338

77 Article 31(3)(c) is part of Article 31 of the VCLT, which together with Article 32, form a CIL rule of

interpretation of treaties Article 31(1) provides that: “A 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.” After a definition of the term “context” in Article 31(2), Article 31(3) states that: “There shall be taken into account, together with the context any relevant rules of international law applicable in the relations between the parties.”

explicitly or implicitly by the authorities of the host state, in relation to the establishment and management of the investment.78

Be that as it may, it is doubtful that IIAs' preambles play such roles in practice This is because preambles do not contain obligations for the parties.79 Although most tribunals have acknowledged the interpretative function of preambles supported by the VCLT, their impact has been limited due to tribunals' restrictive interpretation Some tribunals even expressed caution against giving too much weight to preambular language.80

❖ Clauses reaffirming the host states’ right to regulate

Turning to IIAs’ substantial provisions engaging with environment concerns, the first highlighted category of clauses is those seeking to reaffirm the host states’ right to regulate In fact, this type of reference to environmental concerns is the oldest and still the most frequent form of environmental texts observed in the IIA sample.81 However, several variations in the wording of such provisions have been observed

Firstly, such “right to regulate” clauses can be declaratory in nature For instance,

Article 9.16 of the CPTPP, modeled after Article 1114 NAFTA, reads as follows:

“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." While

78 Tarcisio Gazzini, Interpretation of International Investment Treaties, Bloomsbury Publishing, 2016, p 45

79 For instance, in Bayindir v Pakistan, the Tribunal held that it is doubtful that in the absence of a specific provision

in the BIT itself, the sole text of the preamble constitutes a sufficient basis for a self-standing fair and equitable

treatment obligation under the BIT (Bayindir Insaat Turizm Ticaret Ve Sanayi A.S v Islamic Republic of Pakistan

(I), ICSID Case No ARB/03/29, Decision on Jurisdiction, 14 November 2005, para 230)

80 For instance, in Plama v Bulgeria, it is held that the Tribunal is mindful of Sir Ian Sinclair’s warning of the risk

that the placing of undue emphasis on the “object and purpose” of a treaty [in the Preamble] will encourage teleological methods of interpretation which, in some of its more extreme forms, will even deny the relevance of

the intentions of the parties (Plama Consortium Limited v Republic of Bulgaria, ICSID Case No ARB/03/24,

Decision on Jurisdiction, 8 February 2005, para 193)

81 Kathryn Gordon, Joachim Pohl, “Environmental Concerns in International Investment Agreements: A Survey”,

OECD Working Papers on International Investment, OECD Publishing, 2011, p 14

signaling some receptiveness to public interest concerns, the impact of such a clause is limited since according to its wording, if an environmental regulation is inconsistent with investor rights enshrined in the IIA, then it is not within the state’s authority to regulate

at the expense of investment.82 Furthermore, such a clause does not provide arbitrators with any guidance to address the relevant issue at stake, which is how to weigh public interest arguments against investors' rights Specifically, in arbitral jurisprudence, environmental measures are normally implemented by states at the domestic level and thus, from the perspective of the tribunal, is not the substantive law of the case but rather

a fact to be considered.83 In this vein, this formulation of “right-to-regulate” clauses appears inefficient in safeguarding policy space and instead, even subordinates it to the investment protections otherwise granted by the treaty.84

Secondly, such “right to regulate” clauses can take the form of obligations For

instance, the Belgium-Luxembourg Economic Union (BLEU) - Mauritius BIT (2005)

provides for explicit environmental obligations: “each Contracting Party shall strive to

ensure that its legislation provides for high levels of environmental protection and shall strive to continue to improve this legislation.” Again, this clause involves standards of

environmental protection of domestic rather than international law.85 Additionally, this type of language does not support a state defense before an arbitral tribunal that a violation of an investor's right should be excused or wiped out because of an alleged obligation to "strive to continue to improve its legislation."86

All in all, the above mentioned clauses indicates domestic standards of environmental protection instead of signing up to international standards.87 Subject to

82 Alison Giest, supra note 61, p 337

83 Camille Martini, supra note 70, p 569

84 Ibid

85 Andreas Kulick, Global Public Interest in International Investment Law, Cambridge University Press, 2012, p

71

86 Camille Martini, supra note 70, p 571

87 Andreas Kulick, supra note 85, p 70

domestic legislation, the level of environmental protection thereby can be set at a very high or a very low threshold This also means that in case of conflict with international law, particularly treaty rights of investors, the latter prevails over domestic environmental law.88 Therefore, when articles reaffirming the host state's right to regulate fall short of elevating the nature or standing of environmental regulations, imbalances within IIAs regarding the protection of host countries' public interest could not be mitigated by this means

❖ “Not lowering standard” provisions

“Not lowering standard” provisions can take the form of either clauses that discourage states from lowering their own environmental standards or a "hierarchy of norm" clauses providing guidance in case of inconsistency among a state's international obligations under international environmental law.89 As regards the former, it aims at promoting a continuous enhancement of the domestic environmental framework of the parties, or at least, preventing contracting parties from relaxing their own environmental standards in order to attract foreign investment Article 12(2) of the US 2012 Model BIT,

for instance, provides: “The Parties recognize that it is inappropriate to encourage

investment by weakening or reducing the protections afforded in domestic environmental laws Accordingly, each Party shall ensure that it does not 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.” The wording of the provision must be emphasized The

modal “shall” clearly indicate the binding character of the underlying obligation, which

88 Ibid

89 Camille Martini, supra note 70, p 571-573

is more stringent than other text such as "shall strive to ensure" or “should”.90 This type

of provision has certain advantages.91 Firstly, by accepting them, the contracting parties

are required to refrain from using their regulatory powers to enact less demanding

standards than the bottom limit set out Secondly, they prevent the establishment by

foreign investors of illegitimate expectations on the adoption of less stringent measures Further, foreign investors are discouraged from seeking or putting pressure on states for the adoption of such measures However, normally, these provisions do not fall within the scope of the dispute settlement mechanism since IIAs have frequently linked "not to relax" clauses to consultation mechanisms92, thus illustrating the "soft" character of this type of provision.93

As regards the latter form of “not lowering standard” - a recourse to a hierarchy of norm, an example can be found in Article 1114(2) NAFTA.94 Although such provisions could allow “values and norms external to investment regimes”95 to play a role in investment arbitration, the arbitral tribunal is not likely to identify a material inconsistency between the requirements of an international environmental agreement

90 An example of the "shall strive to ensure" formula can be found in Article 5(2) of the BLEU Luxembourg Economic Union) - Tajikistan BIT (2009); an example of the “should” formula can be found in Article 1114(2) of NAFTA

(Belgium-91 Tarcisio Gazzini, “Bilateral Investment Treaties and Sustainable Development”, The Journal of World

Investment & Trade, 2014, No 15, p 946

92 For instance, Article 1114(2) NAFTA provides that if a Party considers that another Party has offered such an encouragement [of investment by relaxing domestic health, safety or environmental measures], it may request consultations with the other Party and the two Parties shall consult with a view to avoiding any such encouragement

93 Camille Martini, supra note 70, p 572

94 For instance, Article 104(1) NAFTA provides that:

“1 In the event of any inconsistency between this Agreement and the specific trade obligations set out in:

a) the Convention on International Trade in Endangered Species of Wild Fauna and Flora, done at Washington, March 3, 1973, as amended June 22, 1979,

b) the Montreal Protocol on Substances that Deplete the Ozone Layer, done at Montreal, September 16, 1987, as amended June 29, 1990,

c) the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, done at Basel, March 22, 1989, on its entry into force for Canada, Mexico and the United States, or

d) the agreements set out in Annex 104.1,

such obligations shall prevail to the extent of the inconsistency, provided that where a Party has a choice among equally effective and reasonably available means of complying with such obligations, the Party chooses the alternative that is the least inconsistent with the other provisions of this Agreement.”

95 Saverio Di Benedetto, supra note 1, p 134

and the substantive standards under the IIA, but rather to read them in a harmonious manner.96

❖ General exceptions

Modeled on Article XX of the General Agreement on Tariffs and Trade 1994

(“GATT”) from international trade law97, general exception clauses aim at allowing states to retain policy space in limited subject areas provided that the measures are non-discriminatory and are not used as disguised restrictions on investment or trade.98 It is worth noting at the outset that the text of most general exceptions provisions refers typically to “measures which are necessary” to protect those public interests and not to

“measures that the States parties consider as being necessary” This term emphasizes that such exceptions are not "self-judging," which means that it is not states but rather other methods of review, notably by arbitral tribunals that can assess whether the measures are necessary.99 The trend in IIA drafting also shows that general exception clauses used in IIAs borrow the same closed list of exceptions of Article XX GATT.100 Notably, in virtually all IIAs, general exceptions provisions cover those State measures relating to (1) the protection of human, animal or plant life or health, and (2) the conservation of

96 For instance, in S.D.Myers v Canada, the Tribunal considers that the legal context of Article 1102 includes the

various provisions of NAFTA, its companion agreement the North American Agreement on Environmental Cooperation (NAAEC), and principles that are affirmed by the NAAEC (including those of the Rio declaration) The principles that emerge from that context, to repeat, are as follows: [ ] Environmental protection and economic

development can and should be mutually supportive." (emphasis added), (S.D Myers, Inc v Government of

Canada, UNCITRAL, Partial Award, 13 November 2000, para 247) See more at Camille Martini, supra note 70,

footnote 249; Saverio Di Benedetto, supra note 1, p 137

97 The 1947 GATT, which was incorporated in the 1994 GATT at the time of the creation of the WTO

98 For instance, Article 10(1) of the Canada 2004 Model BIT provides that:

"1 Subject to the requirement that such measures are not applied in a manner that would constitute arbitrary or unjustifiable discrimination between investments or between investors, or a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures necessary:(a) to protect human, animal or plant life or health;(b) to ensure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement; or (c) for the conservation of living or non-living exhaustible natural resources."

99 Yannick Radi, Rules and Practices of International Investment Law and Arbitration, Cambridge University

Press, 2020, p 196

100 Camille Martini, supra note 70, p 578

exhaustible natural resources A few treaties even limit the scope of the measures covered by the general exceptions provision to these two series of public interest.101 Logical as it may seem, the use of general exceptions in IIAs contains certain

issues First, it is argued that a regulatory measure that meets the requirement of a general

exception provision could rarely violate the FET given the threshold required by the clause.102 As a consequence, the tribunal would not need to apply the exception, unless

the FET is interpreted by the tribunal as requiring a higher threshold Second, that the

list of general exceptions have worked well in the context of trading of goods does not mean that they would also function well in the international investment framework This stems from the differences between the two mechanisms Under international trade

regime, the World Trade Organization (“WTO”) Appellate Body, with its function to

harmonize the interpretation of subsequent awards, has developed a proven two-step analysis103 to determine the applicability of Article XX GATT Meanwhile, in the current international investment framework, given the fragmentation and variety of instruments

to resolve investor-state disputes, as well as the fact that there is no appeal mechanism within the international investment law framework, it is doubtful that general exception provisions would be applied consistently and coherently by arbitral tribunals.104

To sum up, the legal basis of the environmental protection right of states lies in their right to regulate in the public interest, which is widely recognized in CIL and regulated under investment treaties However, under IIAs, the environmental protection

101 An example can be seen at Article 5(1) of the Rwanda–Turkey BIT (2016)

102 Camille Martini, supra note 70, p 580; Andrew Newcombe and Lluis Paradell, Law and Practice of Investment

Treaties: Standards of Treatment, Kluwer Law International, 2009, p 505 (The authors stress that under the general

exception, "the conduct in question would have to be (i) necessary to meet one of the three enumerated exception (i.e that there was no other alternative that would reasonably meet the policy objective); (ii) not have been applied

in a manner that would constitute arbitrary or unjustifiable discrimination; and (iii) not constitute a disguised restriction on international trade or investment.")

103 The two-step analysis provides that the measure must fall within one of the enumerated exceptions (a)-(g) and

satisfy the introductory section of Article XX (also referred to as the "chapeau") See for instance, U.S - Import

Prohibition Of Certain Shrimp and Shrimp Products, WTO Doc WT/DS58/AB/R, Appellate Body Report, 12

October 1998

104 Camille Martini, supra note 70, p 581

right is demonstrated through various forms of treaty languages Such variations have generated different effects to the exercise of the state’s right to protect the environment

in practice

1.3 Conflicts between the obligation to accord fair and equitable treatment standard under international investment agreements and the exercise of the environmental protection right of the host state

It is worth noting at the outset that while IIAs are undoubtedly negotiated to protect investors, they also create an environment for the development of host countries by way

of attracting and benefitting from investment Thus, they are not meant to protect investors to the detriment of the host country's economy and population.105 The environmental protection right of states, though widely recognized by scholars and tribunals, is hesitantly employed by states to protect public interest The reason for it lies

in the conflict between the exercise of such right of the host state and their obligation to follow the FET standard under IIAs Specifically, the vague nature and inconsistent interpretation of the FET standard as well as the current method of incorporating environmental concerns into IIAs have generated fear for the host state

Firstly, it is argued that the FET standard may be used by foreign investors as a

“strategic offensive threat” to legitimate governmental regulationn instead of a

“defensive protection” against government abuse, leading to a restraint of regulators to take steps they believe need to protect the environment.106 Moreover, arbitral practice indicates that tribunals are signalling to investors that investment treaties can be used to challenge regulatory change, although not all claims will succeed.107 Thus, investment

105 UNCTAD, supra note 17, p 91

106 Ying Zhu, supra note 4, p 327

107 One of many examples of how investors are picking up these signals is Eli Lilly v Canada, a dispute in which

the investor is challenging rulings of Canadian courts interpreting Canadian intellectual property law, arguing that those judicial decisions improperly changed the host country’s legal regime in violation of the investor’s legitimate

expectations (Eli Lilly and Company v The Government of Canada, UNCITRAL, ICSID Case No UNCT/14/2,

Notice of Arbitration, 12 September 2013, paras 82 - 84)

treaties are being used not merely as instruments for foreign investors to protect themselves against outrageous and discriminatory conduct by host states, but to expand the rights that investors have, in a way that makes the risk of regulatory change shift from the investor to the government.108

Secondly, significant powers of interpretation accorded to arbitral tribunals under

IIAs are also problematic Tribunals are not guaranteed to follow a consistent approach

in the application and interpretation of the FET obligation.109 On the one hand, some commentators have criticized the FET standard for its partiality, arguing that the FET standard has been interpreted with a strong bias for foreign investors, without duly considering the interests of other stakeholders such as local governments, communities,

or the environment.110 On the other hand, some scholars are cautious about the environmental exemption in IIAs, pointing out that a state's measure in the name of environmental protection defense may serve as a disguise for motives of political or protectionist objectives.111

Thirdly, arbitral practice indicates that the reliance on the “public interest” defense,

as well as the use of exception provisions under IIAs solely is insufficient to ensure the right to protect the environment of the host state The crux of the matter is that current IIAs provide neither the priority nature of applying the exception provision nor specific criteria to identify the “seriousness” extent to which the host state can employ exception

108 Lise Johnson and Oleksandr Volkov, “State Liability for Regulatory Change: How International Investment

Rules are Overriding Domestic Law”, Investment Treaty News, liability-for-regulatory-change-how-international-investment-rules-are-overriding-domestic-law/#_ftn2 (last accessed 03/6/2022)

https://www.iisd.org/itn/en/2014/01/06/state-109 For instance, the Tribunal in CMS v Argentina rejected Argentina’s “necessity” defense However, in LG&E v

Argentina, the Tribunal accepted “necessity” as defense in the same crisis There were incoherent arbitral awards

for the same regulatory measures (see more at CMS Gas Transmission Co v Republic of Argentina, ICSID Case

No ARB/01/8, Award, 12 May 2005; LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc v

Argentine Republic, ICSID Case No ARB/02/1, Award, 25 July 2007)

110 For instance, see J Roman Picherack, “The Expanding Scope of the Fair and Equitable Treatment Standard:

Have Recent Tribunals Gone Too Far?”, The Journal of World Investment and Trade, 2008, p 287 - 288

111 For instance, see David A Gantz, “Potential conflicts between investor rights and environmental regulation

under NAFTA's chapter 11”, The George Washington International Law Review, Washington, 2001, Vol 33, Iss

3/4, p 655 - 656