IIAs and the right to regulate

ViennaOctober 12, 2015

INVESTMENT POLICY AND PROMOTION WEEK

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Framing the issue

• Since when is regulation a right to be claimed?

• Regulation is a sovereign duty, a legitimate response to market failure or the democratic expression of collective preferences

• Should host states not be held acountable for their regulatory conduct?

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Framing the issue

• The right to regulate has, not surprisingly, always been recognized in international treaty making

• But two sources of growing concern:

– The «inland» migration of rule-making has heightened civil society concerns that trade and investment law could unduly constrain the regulatory autonomy of host states

– Heightened judicial activism under IIAs targeting sensitive regulatory matters

• Fears are often expressed that IIAs generally, and ISDS in particular, can induce a regulatory chill – Plain packaging regulation as the poster child: exception or norm?

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The Proliferation of Disputes

Framing the issue

• The right to regulate has, not surprisingly, always been recognized in international treaty making

• But two sources of growing concern:

– The «inland» migration of rule-making has heightened civil society concerns that trade and investment law could unduly constrain the regulatory autonomy of host states

– Heightened judicial activism under IIAs targeting sensitive regulatory matters

• Fears are often expressed that IIAs generally, and ISDS in particular, can induce a regulatory chill – Plain packaging regulation as the poster child: exception or norm?

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Key considerations

• The right to regulate is not granted by trade and investment agreements

• Rather, it is a basic attribute of sovereignty under international law

• Yet states routinely accept voluntary curbs on their domestic regulatory sovereignty when these are deemed to be in the public interest

• The key challenge in investment law and policy is to find an acceptable balance between the right of states to regulate and the need to protect investors

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Two facets of the right to regulate

• The right to regulate foreign investment with a view to promoting domestic development priorities and linkages between foreign firms and domestic suppliers or to limit market contestability– Trade and investment law may or may not constrain domestic policy

space (e.g. “hard” prohibition on performance requirements but “soft” [weak] [non-existent] disciplines on investment incentives; the right to schedule non-conforming [discriminatory] measures)

• The right to regulate to protect public welfare from the possible negative impacts, both individual and cumulative, of foreign and domestic investments – A presumption of non-discriminatory regulatory responses to market

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Key considerations

• Trade and investment law are not about the why of regulation, which is a sovereign prerogative, but rather the how

• NT, MFN, FET: all aim at non-discriminatory temperance and proportionality in securing compliance with domestic regulatory objectives

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Supporting case law

• Saluka Investments B.V. vs. The Czech Republic (2006)

– “It is now established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare”.

• Methanex vs. United States (2005) – “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 affects, inter alia, 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 government would refrain from such regulation.”

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US BIT language (2012)

• Found in provisions dealing with indirect expropriation (regulatory takings)

– “Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.”

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ACIA (ASEAN)

“Non-discriminatory measures of a Member State that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute an expropriation of the type referred to in sub-paragraph 2(b)” [on indirect expropriation].

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CETA (Canada-EU)

• The CETA preamble states that theagreement does not “restrict theParties’ right to pursue justifiedobjectives for the public good”.

• Furthermore, numerous exceptionsare found in the draft agreement thatrestrict the investment protectionprovisions.

• For instance, while the freemovement of capital is protected,host States can maintain restrictionson capital flows when faced withbalance of payments disequilibria.

• The non-discrimination requirementcan also be restricted to protectcertain interests. This includes theprotection of public security andorder, public morals and health,animals, or plants.

• Numerous provisions apply infinancial services to protectinvestors, regulate payment flowsand cross-border financial services,and to safeguard the stability of thefinancial system.

• An intergovernmental financialservices committee serves as a filterto decide whether an ISDS complaintcan be rejected in reference to thisexception.

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Further evidence of adaptive change

• CETA limits the scope of MFN to substantive and not procedural obligations; clarifies the scope of the fair and equitable treatment principle (FET)

• CETA and the EU Singapore EPA both feature provisions aimed at ensuring that companies cannot be compensated just because their profits have been reduced through the effects of regulations enacted for a public policy objective

• Filtering mechanisms and the “loser pays” principle to reduce the likelihood of frivolous claims

• TPP language limiting the right of Parties to invoke ISDS to challenge public health measures relating to tobacco

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The right to regulate in TTIP (EC proposal)

Article 2. Investment and regulatory measures/objectives

1. The provisions of this section shall not affect the right of the Parties to regulate within their territories through measures necessary to achieve legitimate policy objectives, such as the protection of public health, safety, environment or public morals, social or consumer protection or promotion and protection of cultural diversity.

2. For greater certainty, the provisions of this section shall not be interpreted as a commitment from a Party that it will not change the legal and regulatory framework, including in a manner that may negatively affect the operation of covered investments or the investor’s expectations of profits.

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Domestic regulation in services trade agreements (incl. Mode 3 trade)

• Broad public service carve-out: services supplied in the exercise of governmental authority

• General exceptions: for measures relating to human, animal and plant life and health, public morals, public order

• Immunity from prosecution by reserving non-conforming measures from the scope of treaty provisions (both existing and future measures and sectors)

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Needed?

• A necessity test aimed at ensuring that legitimate (non-discriminatory) regulatory aims and the means to achieve them are proportional (no more burensome than necessary) nor disguised restrictions to trade and investment.

• Such disciplines exist in trade law for goods (TBT and SPS) but not in services (including therefore for Mode 3).

• Under investment law, the FET principle and provisions on indirect expopriation play this role:– For example, the U.S. investment model contains a clause that

exempts government action done in the name of “legitimate public welfare objectives” that are non-discriminatory in character

– Key question: do we need to clarify when FET is or is not provided, so as to reduce the risk of interpretative ambiguity?

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FET clarification: EC proposal

• A Party breaches the obligation of fair and equitable treatment where a measure or a series of measures constitutes:

(a) denial of justice in criminal, civil or administrative proceedings; or

(b) fundamental breach of due process, including a fundamental breach of transparency and obstacles to effective access to justice, in judicial and administrative proceedings; or

(c) manifest arbitrariness; or

(d) targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief; or

(e) harassment, coercion, abuse of power or similar bad faith conduct;

(f) a breach of any further elements of the fair and equitable treatment obligation adopted by the Parties in accordance with paragraph 3 of this Article.

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THANK YOU

All questions to Robert[o], please!!

Pierre Sauvé

pierre.sauve@wti.org

www.wti.org

INVESTMENT POLICY AND PROMOTION WEEK

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