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Connection between measure and investment

NAFTA Chapter 11 tribunals have considered the extent to which WTO jurisprudence on the same term in GATT Article XX(g) is relevant to interpret NAFTA Article 1101. The general exception in GATT Article XX(g) permits measures “relating to” the conservation of exhaustible natural resources. GATT and WTO jurisprudence has interpreted “relating to” to mean “primarily aimed at” in this context. In Pope & Talbot v. Canada, Canada contended that a measure could only relate to an investment if it was “primarily directed” at that investment. The tribunal did not reject Canada’s argument that it was insufficient that a measure affects an investor, but did reject the contention that the measure must be primarily directed at the investment.[1] In Methanex v. United States, the Tribunal noted that the WTO interpretation of the term “relating to” in GATT Article XX(g) was quite different from the interpretation in the Pope & Talbot case, which confirms the need to interpret a term in accordance with the particular context, object and purpose.[2]

In Methanex v. United States, California banned the use of methanol as a gasoline additive, for environmental reasons. The United States succeeded in arguing that, as a nondiscriminatory environmental measure, the methanol ban was not a measure “relating to” foreign investment or foreign investors under NAFTA Article 1101. As such, it was not subject to NAFTA Chapter 11 and the tribunal had no jurisdiction to hear the claim. The Methanex Tribunal found that Article 1101(1) requires “something more than the mere effect of a measure on an investor or an investment” and that the term “relating to” requires a “legally significant connection” between a measure and an investor or an investment.[3] Methanex had argued that the California ban was, in fact, intended to harm producers and marketers of methanol. Thus, the question was whether the scientific conclusions which were presented to the Governor were so faulty that the Tribunal could reasonably infer that the science merely provided a convenient excuse for the hidden regulation of methanol producers. However, the scientific and administrative record established clearly that Governor Davis and the California agencies acted with a view to protecting the environmental interests of the citizens of California, and not with the intent to harm foreign methanol producers. Faced with widespread and potentially serious methyl tertiary-butyl ether (MTBE) contamination of its water resources, California ordered a careful assessment of the problem and thereafter responded reasonably to independent findings that large volumes of the state’s ground and surface water had become polluted by MTBE and that preventive measures were called for. Thus, on the facts of this case, there was no legally significant connection between the US measures, Methanex, and its investments. As such, the US measures did not “relate to” Methanex or its investments as required by Article 1101(1).[4]

In contrast to the Methanex case, in S.D. Myers v. Canada, in which Canada introduced a ban on the export of polychlorinated biphenyls (PCBs) to protect the Canadian PCB disposal industry from US competition, the Tribunal concluded that there was no legitimate environmental reason for introducing the ban. While the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal discourages transboundary movements of hazardous wastes and encourages the creation of domestic capacity for their disposal, in this case, it was environmentally preferable to ship hazardous wastes from Central Canada to Ohio than to Canada’s only PCB disposal facility in Alberta, due to Ohio’s much closer proximity. The tribunal held that the requirement in Article 1101 that the import ban relate to S.D. Myers and its investment was “easily satisfied,” because the “specific inspiration for the export ban” was the prospect that S.D. Myers would carry through with its plans to expand its Canadian operations.[5] The S.D. Myers Tribunal also concluded that the applicability of other provisions of the NAFTA, regarding trade in goods or services, was not an obstacle to pursuing an investment claim. The Tribunal considered that, as in WTO law, different NAFTA chapters and provisions could be applied in a cumulative and complementary fashion, as long as there was no conflict in the sense that adherence to one provision would cause a violation of another. In this case, there was no reason why a measure which concerns trade in goods cannot be a measure relating to an investor or an investment.[6]

The S.D. Myers and Methanex cases highlight the importance of scientific evidence regarding the contribution of a particular measure to environmental protection. Gordon and Pohl found 16 treaties (FTAs and BITs) that contain provisions related to the recourse to environmental experts by arbitration tribunals, including NAFTA Article 1133.[7] The clauses in BITs provide:

Without prejudice to the appointment of other kinds of experts where authorized by the applicable arbitration rules, a tribunal, at the request of a disputing party or, unless the disputing parties disapprove, on its own initiative, may appoint one or more experts to report to it in writing on any factual issue concerning environmental, health, safety, or other scientific matters raised by a disputing party in a proceeding, subject to such terms and conditions as the disputing parties may agree.[8]

This is a useful provision to have, given the important role of scientific evidence in environmental cases. However, it is not essential, since the parties have the right to present scientific evidence and tribunals have the right to consider this evidence in their determinations, without the presence of this type of clause.

Unlike GATT, NAFTA Chapter 11 has no general exception for environmental measures that is comparable to GATT Article XX. NAFTA Chapter 3 incorporates GATT Article XX by reference. However, Article XX cannot be invoked to justify a violation of Chapter 11. Instead, Chapter 11 contains two environmental exceptions that are of limited use. Article 1106 contains environmental exceptions that only apply to certain provisions in that article. Article 1114 contains a more general exception for environmental measures, but its scope is limited. We will consider each of these environmental exceptions below. However, the host government can argue that Chapter 11 does not apply to an environmental measure, because the measure does not relate to investors or investments according to Article 1101. Thus, the interpretation and application of Article 1101 is an important part of the analysis of the relationship between environmental law and investment law.

To what extent can WTO jurisprudence regarding the term “relating to” in GATT Article XX(g) be applied to interpret NAFTA Article 1101? On the one hand, the ordinary meaning of the term “relating to” should be the same, since the wording is identical. Moreover, the purpose of the term “relating to” is to determine the nature of the measure, in both GATT Article XX(g) and NAFTA Article 1101. These two factors suggest that the interpretation of this term should not be significantly different and that WTO jurisprudence should be relevant to the interpretation of NAFTA Article 1101. On the other hand, there are significant differences in the contexts of the two provisions. Unlike GATT Article XX(g), NAFTA Article 1101 is not an exception. In addition, to justify a measure in

GATT Article XX(g), the measure must relate to the conservation of exhaustible natural resources, meet a requirement of evenhandedness through the application of restrictions on domestic production or consumption, and the application of the measure must comply with the chapeau of Article XX. There are no comparable requirements in Article 1101. Moreover, while NAFTA incorporated GATT Article XX by reference in Chapter 3, it did not do so in Chapter 11. It would be inappropriate to incorporate this exception through the back door of treaty interpretation, particularly since it would not be subject to the additional requirements of Article XX(g) and the chapeau, whose terms cannot be read into Article 1101.

Nevertheless, a measure that meets the requirements of Article XX(g) is not likely to meet the requirements of Article 1101. That is, if a measure qualifies as a measure relating to conservation of exhaustible natural resources, it is not likely to qualify as a measure relating to investors or investments. For example, if a WTO Member implements its obligations under a multilateral environmental agreement (MEA) on climate change in a nondiscriminatory manner, the measure is likely to comply with GATT Article XX(g) .[9] The same measure is unlikely to meet the requirements of Article 1101, as it was interpreted and applied in Methanex v. United States. The MEA would provide evidence that the measure is an environmental measure, not an investment measure. Of course, a measure could be both an environmental measure and an investment measure. However, the presumption against conflicts in international law would favor an interpretation of Article 1101 that avoids a conflict between the treaty obligations in Chapter 11 and the treaty obligations in the MEA. If the MEA requires the measure and the provisions of Chapter 11 prohibit the measure, there would be a conflict. Similarly, if GATT Article XX(g) permits the measure, then Chapter 11 should too. It is important to note that, in S.D. Myers v. Canada, there was no conflict with the Basel Convention and there was evidence that the government banned the export of PCBs to protect domestic industry, not the environment. Thus, the ruling in that case is consistent with our argument.

A key issue is the legitimacy of the disputed environmental measure. One way to define legitimacy is by asking whether the measure serves the public interest or a private interest. In Methanex, the measure served the former. In S.D. Myers, the measure served the latter. Of course, a measure can simultaneously serve both public and private interests. The real question here is whether the evidence demonstrates bad faith, protectionist intent, or intent to harm foreign investors on the part of the legislator or the judiciary. NAFTA Chapter 11 has been criticized as lacking legitimacy, due to the pressure it places on governments to ensure that laws are consistent with its provisions.[10] However, NAFTA Chapter 11 is far from unique, in a universe of thousands of BITs and dozens of investment chapters in

FTAs. Moreover, as far as environmental regulation is concerned, the legitimacy of environmental measures is the real issue. With respect to climate change regulation, as with other areas ofenvironmental regulation, where national regulation is based on a multilateral agreement, the agreement provides evidence of the legitimacy of the regulation. However, a multilateral agreement is not required to prove legitimacy.

Article 1101 also should be interpreted in a manner that is consistent with customary international law. In Maffezini v. Spain, Spain’s application of environmental impact assessment requirements was held to be consistent with the bilateral investment treaty between Argentina and Spain. The Tribunal noted that “the environmental impact assessment procedure is basic for the adequate protection of the environment and the application of appropriate preventive measures . . . not only under Spanish and EEC law, but also increasingly so under international law.”[11] The Claimant had sought compensation for the additional costs resulting from the environmental impact assessment, claiming that it had been pressured to go ahead with the investment before that process was finalized. The Tribunal found that both Mr. Maffezini and his employees were aware that the project required an environmental impact assessment. Spain had done no more than insist on the strict observance of the European Economic Community (EEC) and Spanish law applicable to the industry in question. Therefore, the Tribunal held that Spain could not be held responsible for the decisions taken by the Claimant with regard to the environmental impact assessment. Furthermore, Spain’s action was fully consistent with Article 2(1) of the Argentina-Spain Bilateral Investment Treaty, which calls for the promotion of investment in compliance with national legislation.[12] While the provision of the investment treaty in this case was different from NAFTA Article 1101(1), the same logic applies under the latter, since an environmental requirement that applies in general to industries, regardless of whether they are national or foreign investment, is not a measure relating to investment. In addition, while the environmental law in this case was national and regional, the same logic should apply where the source of the environmental law is international. In Pulp Mills on the River Uruguay (Argentina v. Uruguay), the International Court of Justice held that environmental impact assessment is required under customary international law.[13] Were customary international law the source of the environmental impact assessment requirement, the conclusion should be the same.

The term “relating to” in Article 1101 should be subject to evolutionary interpretation and be interpreted to exclude legitimate climate change regulation from the scope of application of international investment agreements. In USShrimp, the WTO Appellate Body held that the definition of measures relating to “exhaustible natural resources” in GATT Article XX(g) is subject to evolutionary interpretation.[14] As noted above, one must be cautious about importing interpretations from trade law to investment law. However, when the issue is whether a measure relates to environmental protection or to investment, NAFTA Article 1101 and GATT Article XX(g) are addressing the same kind of question. It is the evolution of international environmental law that requires evolutionary interpretation of GATT Article XX(g). The same should be true for NAFTA Article 1101.

One could argue that Article 1101 is not intended to avoid or to resolve conflicts between investment law and environmental law. Rather, such conflicts should be resolved according to the specific environmental exceptions in Articles 1106 and 1114. However, the limited scope of those environmental exceptions mean that many legitimate environmental measures would not be subject to those exceptions. In such a case, one way to avoid the conflict would be through the interpretation and application of Article 1101. Moreover, Article 1114 supports the view that legitimate environmental regulation is beyond the scope of Chapter 11, by confirming the right of parties to protect the environment and recognizing that, far from discouraging environmental regulation, Chapter 11 discourages the relaxation of environmental regulation in order to attract investment.

Article 1114 provides as follows:

Article 1114. Environmental Measures

  • 1. 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 concerns.
  • 2. The Parties recognize that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. Accordingly, a Party should not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such measures as an encouragement for the establishment, acquisition, expansion or retention in its territory of an investment of an investor. If a Party considers that another Party has offered such an encouragement, it may request consultations with the other Party and the two Parties shall consult with a view to avoiding any such encouragement.

In Metalclad v. Mexico, Metalclad invested in a hazardous waste plant. The Mexican state of San Luis Potosi declared the area where the plant was located to be an ecological zone, which prevented Metalclad from operating the plant. Both the NAFTA tribunal and the British Columbia Supreme Court held that this ecological decree was a measure equivalent to expropriation that required Mexico to pay compensation. Mexico raised Article 1114(1) as a defense. The Tribunal rejected this argument because Mexico had taken steps to satisfy itself that Metalclad’s investment would be undertaken in a manner consistent with and sensitive to environmental concerns, through an agreement with Metalclad and federal permits.[15] On judicial review, the BCSC held that this conclusion was not unreasonable.[16]

The ruling in the Metalclad case suggests that Article 1114(1) can only justify environmental regulations that are in force prior to an investment being made. Many existing investments could be affected by future climate change regulation. If one accepts the reasoning in Metalclad and in Methanex, such post-investment regulations would not be subject to NAFTA Chapter 11 because they do not relate to investment and thus would not have to be justified under Article 1114(1) in any event.

The type of language found in NAFTA Article 1114(1) is the most common category of environmental provision language, appearing in 82 of the 1623 treaties surveyed by Gordon and Pohl. For example, the Netherlands-Costa Rica BIT (1999) provides:

The provisions of this Agreement shall, from the date of entry into force thereof, apply to all investments made, whether before or after its entry into force, by investors of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and regulations of the latter Contracting Party, including its laws and regulations on labour and environment.

In 49 of the treaties surveyed, provisions discourage lowering environmental regulation for the purpose of attracting investment, in the same manner as NAFTA Article 1114(2). This type of provision was inserted to address concerns that FTAs would lead to the creation of “pollution havens”—countries that would loosen environmental regulations in order to attract investment. These types of provisions generally are not legally enforceable. For example, NAFTA Article 1114(2) merely provides that the countries “should not” relax environmental standards (as opposed to the mandatory “shall not”), and the only consequence of doing so is an obligation to discuss the matter should another country request consultations. This leaves countries free to change environmental regulations.

Another argument regarding the right of States to regulate climate change is found in Article 1112(1), which states: “In the event of any inconsistency between this Chapter and another Chapter, the other Chapter shall prevail to the extent of the inconsistency.” NAFTA Article 2101 incorporates the general exceptions of GATT Article XX for the purposes of provision regarding trade in goods and technical barriers to trade. WTO jurisprudence has held that WTO Members have the right, under GATT Article XX(b), to determine the level of environmental and health protection that they consider appropriate.[17] Similarly, NAFTA Article 712 confirms the same right with respect to sanitary and phytosanitary measures, as does the WTO Agreement on Sanitary and Phytosanitary Measures. It is possible for the same measure to violate both WTO provisions and NAFTA Chapter 11 provisions. In the case of the former, the right to regulate is confirmed in the treaty texts and the jurisprudence. It would be inconsistent to restrict the same right to regulate by making it subject to the obligations in Chapter 11 and the rights of investors to receive compensation.

However, this argument might be countered by arguing that the NAFTA parties incorporated a modified version of the relevant GATT Article XX exceptions in Article 1106 and that this indicates their intention to limit the right to regulate environmental issues to the matters addressed in this article. However, one could argue that Article 1106 merely clarifies that its specific obligations are not intended to impair the right of States to regulate environmental protection and that this clarification was not necessary in the case of the preexisting customary international investment law reflected in Article 1105 (which can be resolved in accordance with customary international law) or the nondiscrimination obligations in Articles 1102, 1103 and 1104 (which prohibit discrimination rather than environmental regulation per se). Below, we discuss Article 1106, followed by Articles 1102, 1103, 1104, and 1105.

Gordon and Pohl found several BITs that incorporate general provisions, based on the language of GATT Article XX or based on security interests and sanitary and phytosanitary concerns.[18] Their paper sets out several examples, but we will only mention one of each category here:

Provided that such measures are not applied in a discriminatory or arbitrary manner or do not constitute a disguised restriction on foreign investment, nothing in this Agreement shall be construed to prevent a Contracting Party from adopting measures to maintain public order, or to protect public health and safety, including environmental measures necessary to protect human, animal or plant life.[19]

Nothing in this Agreement precludes the host Contracting Party from taking, in accordance with its laws applied reasonably and on a non-discriminatory basis, measures necessary for the protection of its own essential security interests or for the prevention of diseases or pests.[20]

The first example incorporates language from the chapeau and paragraph (b) of GATT Article XX, inter alia. However, the language is adapted to the investment context. Thus, while WTO jurisprudence would be relevant to its interpretation, the differences in terms and context would have to be taken into account. The second example does not borrow as much from GATT Article XX, but does incorporate the a necessity test that also is used in GATT Article XX(b). While WTO jurisprudence would be relevant to the interpretation of the term “necessary,” the differences in the context, object, and purpose would have to be taken into account. In both examples, the use of GATT language is helpful to avoid conflicts or inconsistencies between WTO law and international investment law.

The majority of State practice is consistent with the view that international investment agreements do not negate the right to regulate climate change, since the overwhelming majority of IIAs do not incorporate explicit exceptions to preserve the right to regulate in the public interest. The term “relating to” (and similar terminology) can be interpreted and applied to exclude bona fide environmental regulation from the applications of such agreements. The fact that some recent agreements have incorporated environmental exceptions, some using the language of GATT Article XX, should not be viewed as an indication that other international investment agreements restrict governments’ right to regulate in the public interest. Rather, the incorporation of such exceptions should be viewed as a clarification or a codification of existing customary international law, possibly in response to the unpredictability of international investment tribunals, or to public concern that these agreements were not addressing environmental concerns explicitly or possibly to avoid conflicts or inconsistencies between WTO law and international investment law. Thus, there are many reasons for incorporating this type ofprovision that do not suggest that such provisions are essential to preserve the right to regulate climate change and other matters of public interest.

  • [1] Pope & Talbot Inc. v. The Government of Canada, UNCITRAL (2000) (Award in relation toPreliminary Motion by Government of Canada to dismiss the claim because it falls outside the scopeand coverage of NAFTA Chapter 11 “measures relating to investment” motion) 33—4 (accessed April 9, 2013).
  • [2] Methanex Corporation v. United States, NAFTA/UNCITRAL, Partial Award (August 7, 2002).
  • [3] Methanex v. United States, Partial Award, para. 4.
  • [4] Methanex v. United States, Final Award, paras. 19—20, 22.
  • [5] S.D. Myers v. The Government of Canada, UNCITRAL, Partial Award (November 13, 2000)para. 234.
  • [6] S.D. Myers v. Canada, Partial Award, paras. 292—4.
  • [7] Gordon and Pohl, “Environmental Concerns in International Investment Agreements” 22.
  • [8] Canada—Jordan BIT (2009); Canada—Peru BIT (2006); Mexico—United Kingdom BIT (2006);United States—Rwanda BIT (2008); United States—Uruguay BIT (2005); US Model BIT (2004) art.32; Canada Model BIT (2004) art. 42.
  • [9] Bradly J. Condon, Environmental Sovereignty and the WTO: Trade Sanctions and InternationalLaw (Transnational Publishers, Ardsley NY 2006) ch. 7.
  • [10] Jose E. Alvarez, “Critical Theory and The North American Free Trade Agreement’s ChapterEleven” (1997) 28 University of Miami Inter-American Law Review 303; Charles H. Brower, II,“Structure, Legitimacy, and NAFTA’s Investment Chapter” (2003) 36 Vanderbilt Journal of Transnational Law 37; Jeffery Atik, “Repenser NAFTA Chapter 11: A Catalogue of Legitimacy Critiques”(2003) 3 Asper Review of International Business and Trade Law 215.
  • [11] Maffezini v. Spain, Award para. 67. 42 Maffezini v. Spain, Award paras. 65-71.
  • [12] 43 Pulp Mills on the River Uruguay (Argentina v. Uruguay) (2010) (Judgment) ICJ Reports 2010
  • [13] paras. 203-19.
  • [14] Appellate Body Report, US—Shrimp, WT/DS58/AB/R, adopted November 6, 1998.
  • [15] Metalclad Corporation v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award (August30, 2000), (2002) 5 ICSID Rep. 212; a similar case, for which a decision had not been issued at thetime of writing, is Abengoa, S.A. y COFIDES, S.A. v. United Mexican States, ICSID Case No. ARB(AF)/09/2, Hearing on Merits (June 2012); Katia Fach Gomez, “ICSID Claim by Spanish Companiesagainst Mexico over the Center for the Integral Management of Industrial Resources” (2010) (accessed March 13, 2013).
  • [16] Mexico v. Metalclad Corporation 2001 BCSC 664 para. 104.
  • [17] Appellate Body Reports, European Communities—Measures Affecting Asbestos and Asbestos—ContainingProducts (EC—Asbestos), WT/DS135/AB/R, adopted April 5, 2001; Brazil—Measures Affecting Imports ofRetreaded Tyres (Brazil—Retreaded Tyres), WT/DS332/AB/R, adopted December 17, 2007.
  • [18] Gordon and Pohl, “Environmental Concerns in International Investment Agreements” 17—18.
  • [19] Canada—Egypt BIT (1996); Canada—El Salvador BIT (1999); Canada—Lebanon BIT (1997);Canada—Panama BIT (1996); Canada—Philippines BIT (1995); Canada—South Africa BIT (1995);Canada—Thailand BIT (1997); Canada—Trinidad and Tobago BIT (1995).
  • [20] Australia—India BIT (1999).
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