Investment Agreements and the Investment Agreements and the Regulatory State:Regulatory State:

Can Exceptions Clauses Create a Safe Can Exceptions Clauses Create a Safe Haven for GovernmentsHaven for Governments

11stst ANNUAL FORUM OF DEVELOPING COUNTRY ANNUAL FORUM OF DEVELOPING COUNTRY

INVESTMENT NEGOTIATORSINVESTMENT NEGOTIATORS SingaporeSingapore

October, 2007October, 2007

Howard MannHoward MannSenior International Law AdvisorSenior International Law Advisor

International Institute for Sustainable International Institute for Sustainable DevelopmentDevelopment

www.iisd.orgwww.iisd.org/investment/investment

AgendaAgenda What is the problem discussed in What is the problem discussed in

this sessionthis session?? Scope: what do we mean by Scope: what do we mean by

regulation in this context?regulation in this context? The nub of the legal problem: The nub of the legal problem:

investor-state dispute settlement investor-state dispute settlement and uncertainty (OK, and and uncertainty (OK, and incorrectness)incorrectness)

Some responses for greater clarity Some responses for greater clarity and certaintyand certainty

Final thoughtsFinal thoughts

What is the problem?What is the problem? Regulation of investors is common Regulation of investors is common

feature around the worldfeature around the world What role do IIAs play in regulating how What role do IIAs play in regulating how

governments regulate foreign investors?governments regulate foreign investors? Not a sovereignty issue: Not a sovereignty issue:

all international agreements must impact all international agreements must impact sovereignty or are uselesssovereignty or are useless

Issue is getting the proper balance between Issue is getting the proper balance between the right and duty of governments to the right and duty of governments to regulate and the appropriate protection of regulate and the appropriate protection of foreign investorsforeign investors

ScopeScope Regulatory and legislative measures, but Regulatory and legislative measures, but

what type?what type? A perfect definition is not possible, some A perfect definition is not possible, some

examplesexamples protect human health from harmful products;protect human health from harmful products; protect the environment from pollutants;protect the environment from pollutants; ensure the conservation of natural resources;ensure the conservation of natural resources; ensure employee health and safety at work;ensure employee health and safety at work; protect and enhance human rights;protect and enhance human rights; protect against criminal activity or activity protect against criminal activity or activity

contrary to public morals;contrary to public morals; prevent anti-competitive practices; andprevent anti-competitive practices; and promote consumer knowledge, awareness promote consumer knowledge, awareness

and protection.and protection.

ScopeScope What would not be included:What would not be included:

effectively transfer private held land to the effectively transfer private held land to the state for a public purpose, such as building a state for a public purpose, such as building a school, hospital, or ecological park;school, hospital, or ecological park;

transfer economic activity between actors transfer economic activity between actors doing the same thing in the same manner; doing the same thing in the same manner;

measures that are otherwise an abuse of measures that are otherwise an abuse of government regulation-making powers to government regulation-making powers to achieve ulterior purposes; orachieve ulterior purposes; or

promoting one business over another.promoting one business over another. Form as a regulation/legislation is not Form as a regulation/legislation is not

determinative, nature and purpose, determinative, nature and purpose, bona bona fidesfides are are

The Legal Problem: The Legal Problem: UncertaintyUncertainty Expropriation provisions are the key issue (+NT, Expropriation provisions are the key issue (+NT,

F&E)F&E) Definition of indirect expropriation and Definition of indirect expropriation and

“regulatory expropriation”“regulatory expropriation” US doctrine of “regulatory taking”US doctrine of “regulatory taking”

Case law diverges:Case law diverges: Metalclad v. Mexico Metalclad v. Mexico

Economic impact testEconomic impact test Nature and purpose of measure not relevantNature and purpose of measure not relevant

Methanex v. United StatesMethanex v. United States Under general international law, non-discriminatory Under general international law, non-discriminatory

regulations are not an expropriationregulations are not an expropriation ““police powers” rule creates bright line in the sandpolice powers” rule creates bright line in the sand

No clarity, certainty for governments No clarity, certainty for governments leading to possible regulatory chillleading to possible regulatory chill

Some responses: towards Some responses: towards clarity and certainty for clarity and certainty for

governmentsgovernments Reinforcing the police powers ruleReinforcing the police powers rule

Preamble and objectives provisionsPreamble and objectives provisions Use of regulatory measures provisionsUse of regulatory measures provisions

Recognizing need for ongoing regulationRecognizing need for ongoing regulation Recognizing right/duty to regulateRecognizing right/duty to regulate

Limitations on scope of expropriationLimitations on scope of expropriation US: reflects C.I.L.; only in rare instances US: reflects C.I.L.; only in rare instances

will a reg. be an expropriation will a reg. be an expropriation Canadian BITs: rare circumstances, such as Canadian BITs: rare circumstances, such as

lack of lack of bona fidesbona fides Relation to bright line in Methanex Relation to bright line in Methanex

case unclearcase unclear

Some responses: towards Some responses: towards clarity and certainty for clarity and certainty for

governmentsgovernments Other Treaty-based mechanismsOther Treaty-based mechanisms

General exclusions through annexes General exclusions through annexes (sectors, measures)(sectors, measures) Investment liberalization sessionInvestment liberalization session

Specific exclusions from expropriation Specific exclusions from expropriation provisionsprovisions Tax, national securityTax, national security

General exclusion clauses based on Article General exclusion clauses based on Article XX of GATTXX of GATT Variations on the themeVariations on the theme Some uncertainty on impact in dispute settlementSome uncertainty on impact in dispute settlement

Clarity of key termsClarity of key terms

Final thoughtsFinal thoughts

Uncertainty disadvantages governmentsUncertainty disadvantages governments Facility of initiating an investor-state a Facility of initiating an investor-state a

growing level of awards increases growing level of awards increases disadvantages of statesdisadvantages of states

Can and does lead to regulatory chill Can and does lead to regulatory chill impactimpact

Greater certainty can be created, Greater certainty can be created, mechanisms existmechanisms exist

Some need more study, but do existSome need more study, but do exist Negotiators need to be more aware of Negotiators need to be more aware of

needneed