There are copious critical issues related to the functioning of the arbitration system for the resolution of disputes concerning international investments. The major problems can be grouped around three main categories, namely the procedural weaknesses of the dispute resolution system, the substantial critical issues of the dispute resolution system, as well as the substantial criticalities related to the “structural” conflict between investor interests and conflicting interests of States related to the protection of relevant public interests.
Let’s start with the analysis of the procedural problems of the dispute resolution system (lack of autonomy and independence of the judges, lack of democratic control over the judges, lack of transparency in the arbitration proceedings).
With regard to these procedural problems relating to the resolution of disputes concerning international investments, it is appropriate to mention first of all the problem of the absence of autonomy and independence of judges, which essentially derives from the rules for their designation under the ICSID Convention.
In fact, in this regulatory framework, the arbitral tribunal is composed of three judges, each one chosen from the two contending parties, while the third is identified by mutual agreement. Such a system generally has the support of most states, as it is perceived as a method of judges’ choice potentially closer to the specific interests of the States involved in the dispute, compared to what would happen in the case of an independent court previously established, for example on the model of the International Court of Justice or, in a different way, by the WTO Appeals Body. Therefore, such a system of choice of judges adopted for the resolution of disputes over international investments entails a high risk that the judges selected by the Parties are chosen precisely on the basis of their lack of independence and in consideration of their already known or apparent closeness or adherence to specific interests or needs of the State concerned in a particular dispute. Therefore, this system seems to be in direct collision with the general principles of law regarding the autonomy and independence of judges with respect to the subject-matter of the dispute [1].
Another problem, closely related to the previous one, concerns the question of the absence of a democratic control on the actions of the judges belonging to the arbitration tribunals called to solve international disputes concerning investments within the system provided for by the ICSID Convention. In this sense, not only the rules on the selection of judges do not allow to ensure their independence and autonomy but, in addition to this, the absence of monitoring mechanisms on the work of the judges makes it impossible to exercise democratic control over their decisions and, more generally, their behaviour in a broad sense.
In fact, in compliance with the ICSID Convention, the only possible solution for the Parties to request the re-examination of a decision by an arbitral tribunal established under the Convention is that of the motion to dismiss on the decision itself.
However, such a remedy is provided for only in specific circumstances and subject to specific conditions [2]. Therefore, we can say that, in this case, we are facing a system that does not allow a democratic control of the work of the judges, although they are empowered to promulgate decisions that have significant consequences for the economies, the citizens and the territory of the countries involved in the dispute.
Following what has already been said, it should be emphasized that a further procedural growth particularly serious regarding the current system of resolution of disputes concerning international investments consists in the substantial absence of transparency of the arbitration proceeding. In fact, the current system is essentially based on the secrecy of both the documents provided by the parties and the proceedings before the arbitral tribunal.
The origin of this secrecy is to be found in the peculiarity of the current arbitration procedure concerning international investments, which finds its genesis in commercial arbitration disputes, which normally concern the definition of conflicts between companies, in which the commercial requirement of secrecy is one of the basic elements of the dispute settlement system.
The desire to transfer many of the principles and rules conceived for commercial arbitration disputes between companies, to the different area of arbitration disputes between States and companies regarding the application of bilateral or multilateral treaties on the promotion of international investments has involved the import of practices, principles and rules that, on the contrary, in the latter context create different difficulties. In this sense we can take as an example the difficulty represented by the aforementioned lack of transparency of the arbitration procedure.
On this point, in fact, the reforms of the rules of procedure of the ICSID of 2006 and of those of the United Nations Commission on International Trade Law (UNCITRAL) of 2010 and 2013 should be mentioned. They were aimed at ensuring a higher degree of transparency of arbitration proceedings concerning international investments[3].
With reference to the substantial critical issues of the dispute resolution system (excessive variability in the interpretation of the principles and rules, due to the absence of an appellate mechanism that could ensure greater consistency in decisions), it must be said that the main criticality of a substantial nature is constituted by the excessive variability in the interpretation of the principles and norms regarding international investments that characterizes the jurisprudence of the arbitration tribunals.
Having as a reference the relevant case-law with regard to the relationship between investment and the environment, the marked increase in disputes decided by the arbitral tribunals regarding international investments and conflicting interests related to environmental protection or more generally to the macro-objective of sustainable development, which has occurred in the last two decades, it showed a strong variability in the interpretation of the most relevant and basic concepts regarding international investments, such as the principle of non-discrimination, the principle of fair treatment of foreigners or the concept of direct and indirect expropriation, which has already been mentioned previously.
Such variability can be traced back to various reasons, but, without a doubt, it finds its main cause in the absence of an appeal mechanism of the current system of dispute resolution concerning international investments.
In this sense, the possible presence of an appeal mechanism which, for example, could be inspired by the model of the WTO Appellate Body could certainly contribute positively to the need to ensure greater consistency in decisions regarding international investments and, in the long term, it could allow the development of jurisprudential precedents that act as a point of reference for the decisions of subsequent arbitration tribunals. All this would have the positive effect of making the jurisprudence regarding arbitration investments more consistent and “more predictable” for the member States themselves involved in international disputes, without necessarily leading to the abandonment of the current system based on ad hoc arbitration tribunals, that could remain, with or without corrective measures, as the reference model for the resolution of disputes concerning international investments in the first instance.
Therefore, the eventual and desirable appellate body could be called to act only in the second degree of judgment, on the model of what happens in the context of the WTO [4].
There are also substantial critical issues related to the “structural” conflict between investor interests and conflicting interests of States connected to the protection of significant public interests (the matter of the limits on the regulatory power of States to protect their own relevant public interests).
Therefore, as was also observed in doctrine by Waibel et al, the provisions of bilateral and multilateral investment agreements may sometimes entail a limitation on the regulatory power of States to protect their relevant public interests, to the full advantage of the protection of international investors, in favour of which it is possible in some cases to realize a real phenomenon of “reverse discrimination”, which actually benefits them compared to the corresponding operators of the national companies [5] of a given country.
Starting from these premises, Mann has argued that in this context international investment agreements would become a real Bill of Rights to protect investors, that does not provide adequate responsibilities for them and does not oblige them to contribute to the development of the country or to the protection of public welfare linked to the environmental or social dimension of investments[6]. In reference to this thesis, there is even a doctrine of people like Tienhaara who spoke of a real phenomenon of “expropriation of environmental governance”[7] that would have happened in the last decades, with the consolidation of the rules to protect international investors contained in bilateral or multilateral agreements of investment projects.
Despite the various attempts to define the issue, elaborated by the doctrine in recent years, it is certain that the proliferation of bilateral and multilateral investment agreements, containing relevant rules to protect international investors, often without the counterpart of clear and precise provisions on the extent and limits of the general regulatory power that remains with the states after conclusion of these agreements, has led to a substantial restriction in the context of the freedom of States to regulate the use of their territory in compliance with the protection of the relevant national interests[8].
The relevant national interests, therefore, that can be aimed at the protection of the environment, but also of public health and the preservation of cultural heritage, are all attributable to the more general concept of sustainable development. To better define the question, it is necessary to clarify that the existence of provisions intended to protect the rights of investors in the agreements in question does not in itself prevent, at least in principle, the possibility for the State to continue to legitimately exercise its own regulatory power to protect the relevant public interests related to sustainable development, although it certainly implies a certain limitation in the exercise of the power of state sovereignty.
Therefore, it is undoubtedly excessive to argue that international agreements on investment involve or have led to a real expropriation of the power of regulation of states in the environmental field[9].
In conclusion of what has been said so far, it is however necessary that there be full awareness of the limitations that the legitimate exercise of its sovereign power by the States, to protect its own relevant public interests, suffers and has suffered, and especially in the last decades, precisely in relation to the development of bilateral or multilateral agreements on international investments, increasingly reducing the sphere of action of States in regulating the use of their territory[10].
Analysis of relevant case-law
The relevant jurisprudence on the environment and therefore on sustainable development is largely connected to cases decided in the context of the already described arbitration system for the settlement of investment disputes envisaged by the ICSID Convention of 1965[11]. In this sense, the main topics in this regard are analyzed, in particular, reference is made to the public interest protected by the States and challenged by investors and therefore the multinationals, the discipline of the fair treatment of the investor and the problem concerning the direct or indirect expropriation of the investor, as a result of regulatory or administrative acts implemented by the States for related reasons linked to the protection of their own public interest connected with the protection of the environment or in any case to the macro-objective of sustainable development. In this overall picture, therefore, the different national interests of the States are placed, which can sometimes come into conflict with the interests of the multinational companies that are in their territory.
The concept of sustainable development has been explicitly recognized as an interest worthy of protection starting from the text of some multilateral agreements aimed at promoting international trade and business investment.
One of the most mentioned examples in subjects is represented by art. 915 of the NAFTA, contained within the Chapter Nine dedicated to the Standards-Related Measures, which includes sustainable development among the legitimate objectives that States can consider when defining their national policies on the definition of measures, procedures or other technical regulations relating to commercial products. In this sense, art. 915 of the NAFTA, regarding legitimate measures reads as follows:
“legitimate objective includes an objective such as: (a) safety, (b) protection of human, animal or plant life or health, the environment or consumers, including matters relating to quality and identifiability of goods or services, and (c) sustainable development, considering, among other things, where appropriate, fundamental climatic or other geographical factors, technological or infrastructural factors, or scientific justification but does not include the protection of domestic production”.
Instead, with reference to the promotion of energy efficiency initiatives, a precise example of the objective of protecting sustainable development is also found in the Energy Charter Treaty (ECT), in particular in art. 1 (2) of the Protocol “Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects”[12], which aims to promote an efficient energy policy that coincides precisely with the concept of sustainable development, as clearly highlighted in the aforementioned article[13].
Nevertheless, it should be noted that the relevant arbitral jurisprudence of the period under consideration does not contain a direct reference to the main objective of sustainable development, but a reference to the more traditional specific public policy objectives of the States related to the protection of the environment, the protection of public health and, in some cases, the preservation of one’s own cultural heritage.
Having said that, the extreme importance that the concept of sustainable development has now achieved both in general international law cannot be denied, that in particular, in the context of international agreements for the promotion and protection of transnational investments. This concept has the dual significance on the one hand of representing one of the main reference objectives that characterize the promotion of investments in the various countries and on the other to constitute the unifying element of various reasons linked to the protection of the public interests of the State which can justify restrictions on the rights of companies that decide to invest abroad.
For these reasons, the idea of configuring the analysis of the relationship between the protection of international investors and the pursuit of their public interests of the State, as a relationship between the need to promote and protect investments and the pursuit of the objective, can be particularly interesting sustainable development[14].
It is therefore common ground that the analysis of the public interest protected by States, as it emerges from the relevant jurisprudence on investment and the environment, is the first criterion that we will take as a reference for the present analysis work.
One of the very first cases decided by an arbitral tribunal in the ICSID jurisprudence concerning the issue of the relationship between international investments and the environment was the case Metalclad c. Mexico (2000).
In the present case, the public interest on which the regulatory and administrative measures taken by the federal, state and local authorities of Mexico were based concerned the protection of the environment and of the territory in which the international investment in question was located, concerning the management of a facility for the treatment of hazardous waste. In particular, in this case the main behaviours of the Mexican authorities challenged by the foreign investor protected by the provisions of the NAFTA Agreement [15] were primarily represented by the refusal to issue a permit to build the waste treatment plant which is the subject of the international investment in question, which had been denied on several occasions by the Mexican municipality responsible for the territory, as opposed to the provisions of the assent to the investment and the results of the environmental impact assessment conducted by the competent Mexican authorities at the federal level. It must also be added that the investor had also challenged the decree of the Mexican state of San Luis Potosì, that, for reasons related to the protection of the environment, pending the authorization process for the issue of the construction permit for the treatment of hazardous waste subject to the international investment, it had decided to include the site where the project should have been carried out within a newly formed ecological reserve, in order to protect a particular species of cactus, thus depriving the investor of the possibility of exercising his property rights on the site that originated the present case.
Another famous example on the subject is the case Methanex c. Usa (2005). This time the national measure challenged by the foreign investor was the legislation adopted by the State of California regarding additives whose insertion was permitted inside the petrol sold in the territory of the State itself. For this reason, the State of California had adopted a national legislation that banned the MTBE, an additive derived from methanol, which is widely used for the production of petrol. The Methanex company, in fact, did not directly produce MTBE, but instead of methanol, which sold for the most part to MTBE producers.
Thus, the company in question had had significant damage, even if indirectly, as a consequence of the adoption of the Californian legislation. This legislation which had banned MTBE was aimed at satisfying the public interest related to the protection of surface water and groundwater pollution caused by the substance in question.
Therefore, in this last circumstance it concerned a direct intervention to the protection of the environment realized through a normative act of general character, and not through an administrative act addressed to a specific investor, as it could be in the previous cases mentioned. The legal act in question, therefore, had in any case caused specific damages to the Methanex investor, and had therefore been challenged by it before an arbitral tribunal.
The investor first challenged the reasons used by the State of California to support the adoption of its legislative measure, but it also contested that this measure actually aimed to indirectly protect its American domestic ethanol producers, a substance that is commonly used as a substitute for methanol for the production of fuel additives.
The challenge was therefore in reference to the application of the concept of “similar circumstances” (like circumstances)[16] in which the different parties would have to compete with each other for evidence that there was a violation of the principle of national treatment.
The arbitral tribunal, in the present case, argued that it was not necessary to refer to the findings of the interpretation of that concept in the context of international trade law, where this concept is widely used, but it was instead necessary to proceed to an interpretation of another type.
The arbitral tribunal in question decided that the producers of methanol and ethanol, although producing substances that could potentially be substituted for some uses, such as that of additives for gasolines, were not found in similar circumstances between them.
In particular, the arbitral tribunal, in reference to similar circumstances, established the following:
“Like circumstances: The starting point for Methanex’s analysis of Article 1102 is the proposition that Article 1102 does not require that investment be identical merely that the two investors or investments be in “like circumstances”. On this basis, it is irrelevant that Methanex is in identical circumstances with other US methanol producers and that is not in identical circumstances with US ethanol producers. The sole question is whether Methanex is, as it claims, in like circumstances with US ethanol producers”[17] .
Therefore, interpreting the concept of similar circumstances as reported above, the arbitral tribunal concluded that:
“For all these reasons, the Tribunal decides that Methanex’s claim under Article 1102 fails, for, without regard to the question of causation, the California MTBE ban did not differentiate between foreign and domestic MTBE producers; nor, if it is relevant, did it differentiate between foreign and domestic methanol producers”.
At the basis of another relevant case, Glamis Gold c. USA (2009), instead emerges the interest for the protection of the territory, the environment and cultural heritage, aimed at the objective of adequately preserving the peculiar characteristics of a territory in which there was a direct investment in the extraction of gold in the State of California.
Well, the controversy arose from a decision by the State of California that, by modifying the relevant legislation previously in force, had decided to oblige the company in question to conduct much more expensive gold mining systems, in order to protect in a more appropriate way the environmental and cultural characteristics of the territory in which gold was extracted. For example, the ban on the opencast extraction of gold was envisaged together with the imposition of the obligation to proceed with the complete refurbishment of the site after the excavation activity was carried out.
It is therefore clear that in this situation the interest in the protection of the environment was strictly connected to the cultural and religious needs linked to the protection of the ancestral traditions of the Native American peoples, who had from time immemorial practiced religious and cultural activities in those territories.
This case undoubtedly demonstrates the various reasons that may underlie the protection of a public interest of the state, which must certainly be protected from the perspective of pursuing the goal of sustainable development, even if in some cases they are in complete contrast with the interests of the multinational companies that make investments in these territories.
One last case, Perkerings c. Lituania (2007), constitutes a very important precedent in this area. It originates from an administrative decision of the Municipality of Vilnius, in Lithuania, who had decided to terminate an agreement with the foreign investor who won a tendering procedure for the building of an underground car park inside the historic town centre (the area of the Old Town of Vilnius was protected, by the way, by the UNESCO Convention on World Cultural and Natural Heritage, 1972).
The decision of the Vilnius municipality, which was challenged by the company that owned the investment, was based on the objective of protecting the historical and archaeological interest of the site, as well as on the protection of the environment, in relation to a historical centre of particular value. In other words, the area near the Vilnius Cathedral, which could have suffered the most serious and irreparable damage from the realization of the work envisaged by the call for tenders, was taken into consideration.
Therefore, in this last case, we can relate to a particular situation, in which the element of protection of cultural and archaeological heritage is prevailing, but it is closely linked to the requirements of environmental protection in a more general sense.
So, as we have seen, in many different circumstances, the public interests of the States linked to the general concept of sustainable development come into conflict with the interests of international investors, protected in any case by international agreements that safeguard foreign investments in case of improper practices by States. There is a balancing of opposing interests, often difficult to define and which, in some cases, requires a long process to arrive at a final decision, but which is nevertheless necessary in order to protect the different interests involved.
For this purpose, the criterion of the fair treatment of the investor must be taken as a reference point (Fair and Equitable Treatment – FET) and its application in international jurisprudence on environmental protection, sustainable development and investment. The jurisprudence under examination concerns the application of two categories in particular, that is, with reference to the NAFTA Agreement [18] and bilateral investment agreements.
An interesting interpretation of the criterion of fair treatment of the investor is certainly that provided by the international arbitral tribunal in the case Parkerings c. Lituania[19], noting that the violation of this criterion can lead to State behaviours that have the effect of frustrating the legitimate expectations of the international investor.
It should be noted that the creation of legitimate expectations can only occur as a result of explicit reassurances previously provided by the state authorities to the investor, enough to make believe that the legislation in force at the time of the decision to make an international investment would not have been subject to any subsequent modification. In any case, such premises or assurances can not be implicitly assumed, but must have been explicitly provided by the public authorities of the State and must be documented by the investor in support of their specific application in order to be able to prove an actual violation of the criterion of fair treatment of the investor upon the host State authority for the investment.
The arbitral tribunal therefore held that there was no clause for the stabilization of agreements between the state of Lithuania and the international investor, and that, furthermore, there was no evidence that Lithuania had given the investing company no specific explicit or implicit reassurance that the relevant legislation would not subsequently change.
In this sense, the concept of due diligence comes into play, since the arbitral tribunal, in the controversy under examination, observed that since Lithuania is a country with economy in transition, any change in the regulatory framework for the investment in question should have been considered more than possible, if not almost certainly feasible, by a company operating an international investment which therefore had to be able to correctly implement its duty of care to prevent possible economic damage related to changes in the regulatory framework related to the investment.
A final criterion to analyze and which deserves special attention is the one related to the direct or indirect expropriation regulation with reference to the international investor, which may occur as a result of regulatory or administrative acts put in place by the national authorities for reasons that may concern the particular protection destined to its own public interest.
In the past most of the disputes related to international investments concerned cases of direct expropriation with the consequent obligation to compensate for the damage caused to the investor, but the most recent disputes are related to situations in which the behaviour of the States towards foreign investors makes arise issues that may be considered in the order of indirect expropriation, in particular it can be said that they interfere, substantially, with the exercise of a right of ownership of the international investor and the consequent economic damage resulting from such behaviour.
It should be noted, however, that the inspection of the judge of cases of indirect expropriation of the foreign investor is certainly not easy to define, especially if considered in strict connection with the criterion of fair treatment of the investor. The two cases that integrate the violation of the two criteria are quite similar and the delimitation of the respective areas of application seems to be reduced sometimes to an assessment of the intensity of the degree of interference that a certain behaviour of the State, where an investment is actually located, realizes towards the international investor.
A first case that is frequently cited in the matter of direct or indirect expropriation of the investor, and which we can analyze is Metalclad c. Mexico, in which the arbitral tribunal found that the denial of permission to build by the competent Mexican municipality, in addition to representing an infringement in the criterion of fair treatment of the investor, as already mentioned above, also constituted a measure of expropriation by of the competent national authorities of Mexico against the investor.
The arbitral tribunal, in this case, carried out a real test to verify whether or not there was a phenomenon of expropriation. However, this test was particularly restrictive with reference to the margin of the residual regulatory power for the States towards international investors.
In fact, the test mainly evaluates the economic impact of the measure adopted by the national authorities of the State, without taking into due consideration the aims of the state intervention. The Court affirmed the following:
“Thus, expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonable-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State”.
Part of the scientific literature has defined this test related to the economic impact as a doctrine of effects only, the so-called “sole effects doctrine”, this is because it focuses essentially on the effects of the state measure in question, without carefully considering the aims underlying the action of the State, which acts to protect relevant national interests.
According to the aforementioned test, therefore, the expropriation can be configured not only with the adoption of measures that openly and deliberately constitute a requisitioning of ownership by the State, for example obliging the formal transfer of ownership to the State, but also with reference to all types of measures that cause indirect and incidental interference with the use of the property, which has the effect of depriving, in substance or in part, of the possibility of the use or economic benefit deriving from the exploitation of property that would reasonably be expected, even in cases where it does not subsequently result in an effective benefit for the state.
In the case in question, the court also considered that the adoption of the ecological decree that identified a safety zone in the area including the site where the economic activity related to the investment should have been carried out, constituted in substance a further and independent reason for expropriation, on the basis of Article 1110 of the NAFTA Agreement.
In such an overall picture it was not even necessary to analyse the intent or reason behind the adoption of the so-called ecological decree, as it was nevertheless a measure equivalent to an expropriation.
The court, therefore, stated:
“The Tribunal need not to decide or consider the motivation or intent of the adoption of the Ecological Decree. Indeed, a finding of expropriation on the basis of the Ecological Decree is not essential to the Tribunal’s finding of a violation of NAFTA Article 1110. However, the Tribunal’s finding of a violation of NAFTA Article 1110. However, the Tribunal considers that the implementation of the Ecological Decree would, in and of itself. Constitute an act tantamount to expropriation”[20].
However, this concept expressed by the arbitral tribunal seems to confuse the real moment of assessment of the legitimacy of a normative or administrative act of the State aimed at protecting one’s own public interest by ascertaining the possible damages suffered by the international investor which consequently entails a compensation obligation.
Thus, such an interpretation could considerably reduce the margin of appreciation granted to state authorities with negative implications, with the consequence that most of the national measures adopted to protect the public interests of the States could be considered in any case as acts of expropriation with reference to international investments. From this point of view, the numerous criticisms received by the test on the economic impact adopted by the arbitral tribunal in the case appear justified Metalclad c. Mexico, and it should be added that in other subsequent decisions, other arbitral tribunals, called to rule on the same subject, have adopted completely opposite guidelines, one of them the case Methanex c. USA.
In fact, in this decision the arbitration tribunal in applying the NAFTA Agreement, or similar rules contained in bilateral investment treaties, did not use the economic impact test, but adopted a definitely more balanced approach in order to achieve the balancing all the opposing interests, and thus safeguarded both the interests of the States regarding the protection of their relevant public interests, and the interests and legitimate expectations of international investors to protect their property rights.
The latter approach adopted by the court in the Methanex case c. Usa has been defined in the scientific literature as “doctrine of police powers” of the state, the so-called “police powers doctrine”[21].
In accordance with this doctrine, the State has a large margin of appreciation, or in any case it remains quite free to exercise its regulatory activity in good faith in pursuing legitimate public interests belonging to a State that protects its citizens and the public welfare.
The expropriation must therefore be limited only in cases where the national authorities of the State had given specific assurances to the international investor, and that no subsequent regulations would be adopted to limit all or part of its property rights on the places to be invested. In this case it would be legitimate to speak of expropriation with a consequent obligation of compensation for the defaulting State to protect the legitimate expectations of the investor.
Precisely on this point, in the case Methanex x. Use, the arbitral tribunal observed that:
“As a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which effects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the governemnt would refrain from such regulation”[22].
It can be pointed out, however, that it is in the case of Methanex c. USA, both in the previous case Metalclad c. Mexico both has a phenomenon of expropriation and therefore a consequent obligation to compensate for the damage suffered by the international investor, whenever it is possible to prove that the investor has acted on the basis of legitimate expectations based on specific promises or in any case reassurances given by the competent authorities of the State prepared for this purpose, promises according to which there would have been no subsequent regulation capable of limiting the exercise of the investor’s right to property on the same places as the investment.
Other relevant jurisprudence, even if partially different, can be deduced from the different interpretation of the concept of expropriation followed by the arbitral tribunal in the case, already seen above, Tecmed c. Mexico.
In this case, the court assessed whether there was a phenomenon of expropriation on the basis of a double test. In fact, the effects of the state measure in question are to be verified in advance. Only later, if such a measure proves capable of neutralizing or permanently and irreversibly eliminating the economic value of the use, enjoyment or possibility of disposing of its assets and rights on the part of the international investor, we would be faced with a case of expropriation with the consequent obligation of state compensation against the investor.
In fact, the decision of the arbitral tribunal is particularly clear and adopted in these terms:
“The measures adopted by State, whether regulatory or not, are an indirect de facto expropriation if they are irreversible and permanent and if the assets or rights subject to such measures have been affected in such a way that “…any form of exploitation thereof…”has disapperared; i.e. the economic value of the use, enjoyment or disposition of the assets or rights affected by the administrative action or decision have been neutralized or destroyed”[23].
Therefore, only if the national measure in question is a potential expropriation measure, then the proportionality of the measure should be assessed against the public interest pursued, and obviously considering the protection of the investment envisaged according to the rules of the international investment agreements.
In this regard, the arbitral tribunal of this case has ruled as follows:
“After establishing that regulatory actions and measures will not be initially excluded from the definition of expropriatory actes, in addition to the negative financial impact of such actions or measures, the Arbitral Tribunal will consider, in order to determine if they are to be characterized as expropriatory, wheather such actions or measures are proportional to the public interest presumably protected thereby and to the protection legally granted to investment, taking into account that the significance of such impact has a key role upon deciding the proportionality”[24].
Therefore, in the case of the double test proposed by the latter arbitral tribunal, the effects of the measure must first be assessed, and then the proportionality criterion should be applied, on the basis of which a circumstance of expropriation can be configured only if the negative effects of this measure against the investor are not proportional to the public benefit resulting from the adoption of the measure in question and the protection afforded by the law to international investments.
The double test thus shows a rather assertive approach to the state, which allows a wide margin of appreciation in the exercise of his “police powers”, with the aim of pursuing relevant public interests. In this system of evaluation the investor’s rights appear decidedly limited, even if in the present case examined, Tecmed c. Mexico, in the concrete application of this double test, the arbitral tribunal considered that the decision adopted by the Mexican federal authority for the protection of the environment aimed at denying the renewal of the permit for the management of the waste landfill towards the plaintiff was constituted, in fact, a measure capable of neutralizing the value of the investment and therefore falling within the first case of the double test concerning the effects. In this sense, the arbitral tribunal found that the damage caused to the international investor by adopting the measure in question was not proportional to the satisfaction of the public interests pursued by the Mexican federal authority, which concentrated essentially on forms of public health protection and environmental protection.
It was clear, therefore, an effective expropriation of the international investment of the case, with consequent obligation of compensation by Mexico towards the investor.
Another decision, with the use of the double test, was made by the arbitral tribunal in the case Glamis Gold c. USA.
In this ruling, it was stated, in particular, that the determination of expropriation had to be based on a double test, which however deviates, even if in part, from that used in the previous case analysed. In fact, in the double test adopted by the latter court, the first element to be evaluated consists in the economic impact caused to the investor by the national measure, if any, challenged. The second element of the test, however, must analyze the determination of the purpose and the main characteristics of the measure adopted by the national authorities and concerning the higher public interest to be safeguarded.
The evaluation of the court must therefore be aimed at determining whether the measure adopted by the national authorities falls within the case of the measure with expropriation purposes or in the case of measures that effectively allow an adjustment of the major public interest that the state must protect.
In the present case, the arbitration panel, especially considering the application of the criterion relating to the economic impact on investment, noted that in the expropriation circumstances, ie those which are analyzed, the test requires an assessment of the degree of interference that the national measure adopted has caused the international investment in question. Therefore, this interference should be particularly serious and capable of configuring a type of indirect expropriation of the investment, being the international investor deprived of the right to economically significant use of his investment.
However, on the basis of Article 1110 of the NAFTA Agreement, it should be noted that the mere restriction on the property rights of investors caused by the adoption of national measures aimed at protecting a public interest does not constitute measures of indirect expropriation if they do not, in any case, deprive substantially the investor the opportunity to exercise their property rights. The requisites to be evaluated are therefore substantially two: in the first place the severity of the economic impact of the state measure of the case, and, secondly, the duration of the effects of this measure in relation to the different types of investment. In this sense, it is appropriate to report what was decided by the arbitral tribunal in the latter case Glamis Gold c. USA, which was expressed in this way:
“In the case of an indirect taking or an act tantamount to expropriation such as by a regulatory taking, however, the threshold examination is an inquiry as to the degree of the interference with the property right. This often dispositive inquiry involves two questions: the severity of the economic impact and the duration of that impact”.
And again, the following:
“Several NAFTA tribunals agree on the extent of interference that must occur for the finding of an expropriation, phrasing the test in one istance as, “the affected property must be impaired to such an extent that it must be seen as ‘taken’”; and in onther instance as, “the test is whether that interference is sufficiently restrictive to support a conclusion that the property has been ‘taken’ from the owner.” Therefore, a panel’s analysis should begin with determining whether the economic impact of the complained of measures is sufficient to potentially constitute a taking at all: “[I]t must first be determined if the Claimant was radically deprived of the economical use and enjoyment of its investments, as if the rights related thereto…had ceased to exist.” The Tribunal agrees with these statements and thus begins its analysis of whether a violation of Article 1110 of the NAFTA has occured by determining whether the federal and California measures “substantially impair[ed] the investor’s economic rights, i.e. ownership, use, enjoyment or management of the business, by rendering them useless. Mere restrictions on the property rights do not constitute takings”[25]
Therefore, it can be said that the arbitral tribunal has held that if there is no appreciable decrease in the levels of profit that the investor could legitimately expect from his investment, as a consequence there cannot be a specific case of expropriation to the detriment of the investor.
On the subject of expropriation, it is also worth mentioning the case Biwater c. Tanzania, in which the arbitral tribunal invested in the dispute considered that for the determination of expropriation two elements of fundamental importance connected with the behavior actually received by the State must be evaluated. First of all, the court verified the reasons for the exercise of the legislative and administrative power exercised by the State, and in particular if the State acted in the exercise of its sovereign power and otherwise in the exercise of a more properly contractual power [26].
Secondly, the tribunal examined whether the conduct of the State was liable to cause certain effects that unreasonably deprive investors of their rights of ownership on the site and therefore the investment in question.
Therefore, the court in this case has highlighted the actual existence of a situation of indirect expropriation, caused by an unreasonable deprivation of rights in the hands of investors, depriving them of their property rights.
This passage of the decision is of particular interest:
“The Arbitral Tribunal recognises that many tribunals in other cases have tested governmental conduct in the context of indirect expropriation claims by reference to the effect of relevant acts, rather than the intention behind tehem. In general terms, a substancial deprivation of rights, for at least a meaningful period of time, is required. The required level of interference with rights has been variously described as “unreasonable”; “an interference that renders rights so useless that they must be deemed to have been expropriated”; “an interference that deprives the investor of fundamental rights of ownership”; “an interference that makes rights practically useless”; “an interference sufficiently restrictive to warrant a conclusion that the property has been ‘taken”; “an interference that makes any form of exploitation of the property disappear”; an interference such that the property can no longer be put to reasonable use”[27].
The court with this passage determined, therefore, the existence of a case of indirect expropriation conducted by the State towards the investor, focusing in particular on the breach of contractual obligations, referring in this case, to the violation committed by the State and related to the resolution of contractual arrangements made in the investment in question.
Bibliography
BOYLE-FREESTONE, International Law and Sustainable Development. Past Achievements and Future Challanges, Oxford, 1999.
BROWNLIE, Principles of Public International Law, 7a ed., Oxford, 2008.
CONFORTI, Diritto internazionale, X edizione, Napoli, 2014.
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MONTINI-ORLANDO, Balancing climate change mitigation and environmental protection interests in the EU Directive on carbon capture and storage, 2012.
YAMIN, Climate Change and Carbon Markets. A Handbook of Emissions Reduction Mechanisms, Earthscan, Londra, 2005.
Jurisprudence
International Court of Justice, 5 February 1970, Barcelona Traction Light and Power Ltd., Belgium c. Spain.
Arbitration Court, Glamis Gold, Ltd. v. The United States of America, ICSID, June 8, 2009. International Thunderbird Gaming Corporation v. The United Mexican States, ICSID, January 26, 2006.
Arbitration Court, Methanex Corporation v. The United Mexican States, ICSID, 30 August 2000, ARB (AF) / 97/1.
Arbitration Court, Parkerings-Compagniet A.S. v. Republic of Lithuania, ICSID, 11 September 2007, ARB / 05/8.
Arbitration Court, Suez Sociedad General de Aguas de Barcelona, S.A. and Vivendi Universal, S.A. v. Argentine Republic, ICSID, July 30th 2010.
Arbitration Court, Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, ICSID, 29 May 2003, ARB (AF) / 00/2.
Council of State, sect. VI, sentence of 22 September 2014, n. 4775.
Council of State, sect. VI, ruling 10 March 2014, n. 1144.
Council of State, ruling 26 March 2013, n. 1674.
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[15] NORTH AMERICAN FREE TRADE AGREEMENT, accordo nordamericano di libero scambio fra USA, Canada e Messico entrato in vigore il 1° gennaio 1994. Tale Accordo ha istituito la più vasta zona di libero scambio nel mondo, interessando, al momento della sua creazione, 370 milioni di persone. Il suo obiettivo è l’eliminazione delle barriere al commercio e all’investimento fra i paesi membri, al fine di rafforzarne la crescita economica e di creare nuovi posti di lavoro. I tre paesi firmatari hanno inoltre stipulato due accordi complementari e integrativi del NAFTA, il North American Agreement on Labour Cooperation (NAALC) e il North American Agreement for Environmental Cooperation (NAAEC).
[16] S. P. SUBEDI, International Investment Law.
[17] Methanex Corporation c. United States of America, International Arbitration Under Chapter 11 of the NAFTA and the UNCITRAL Arbitration Rules.
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[24] Tecmed c. Mexico, Int’l Centre for Settlement of Investment Disputes, ICSID Case No. ARB (AF)/00/2, Award, 43 I.L.M. 133 (2004).
[25] Glamis Gold c. USA.
[26] “Biwater Gauff (Tanzania) Ltd. / United Republic of Tanzania”, ICSID, 2008 ARB/05/22.
[27] “Biwater Gauff (Tanzania) Ltd. / United Republic of Tanzania”.
