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Balancing the unbalanced relationship: How good purpose cannot shoulder the weight of bad manner


by Tan-Phat Le and Hoang-Thai Hy Nguyen**

Note, views expressed are those of the authors and do not necessarily represent the views of ILA Canada


The international investment agreement (IIA) system, which comprises bilateral investment treaties (BITs) and regional free trade agreements (FTAs) containing investment chapters, is the framework for the protection, promotion, and liberalization of cross-border investments. The current dominant anti-international investment agreements (anti-IIA) movement is concerned that allegedly excessive protection of foreign investors undermines the host State’s right to regulate. Nevertheless, according to Professor Alan O. Sykes, this system was first born with the rationale of fighting the host State's opportunistic behaviour. If IIA provisions are designed to achieve such a purpose, why should we oppose them? This blog post will show that, even in cases relating to environmental concerns, it is necessary to keep an eye focused on the good faith of the host state. Subjecting investors to legal or contractual limbo, where they are caught between stages unclear what will happen next, may be a sign of the host state’s bad faith. IIAs can support greater legal and contractual predictability and stability in the investment environment. Is it arbitral tribunal pro-investor bias, or are we under the availability bias?


Indeed, as in Merrill & Ring, the tribunal concluded that “today’s minimum standard is broader than that defined in the Neer case and its progeny” and “the standard protects against all such acts or behaviour that might infringe a sense of fairness, equity and reasonableness.” Leaving investors in limbo is arbitrary, which constitutes a lack of good faith (even if lacking bad intent) since delays impose financial costs on investors, no matter whether such delays are related or not to a contractual obligation. Even in the next-generation IIAs claiming to restore the balance between host state – foreign investor, there is still a focus on the prohibition of arbitrariness.


In practice, as illustrated by the debatable case Windstream v. Canada, while the respondent country invoked the environment protection exception clause, the arbitral panel found that the Ontario government could have done more to finalize the regulatory framework and reactivate Windstream's Feed-in tariff (FiT) contract or  exclude offshore wind from the power plan altogether and definitively terminate the contract with the investor. The provincial government had vacillated indecisively causing economic loss to the investor. This hesitation was costly. The Government of Canada found in breach of its FET obligation, according to the NAFTA Article 1105, was responsible for compensating Windstream for $25,182,900 (CAD) in damages and $2,912,432 CAD in dispute-related expenses. In the case of Windstream, little scientific study had taken place, and “Windstream was kept in the dark as to the evolving policy position of the Government” (para.376 of the Award). Thus, it was not reasonable to leave Windstream in limbo for such a long time. Following similar reasoning, the arbitral tribunal in Eco Oro vs. Colombia stated that excessive delays created legal uncertainty, thus violating investment disciplines under the FET provision in Article 805 of the Canada-Colombia FTA.


The arbitral decision in Metalclad v. Mexico,  was criticized by some as being pro-investor at the expense of the interests of the host state. However, this "bad reputation" can be repudiated by a closer look into the facts. As Edmund Kwaw has pointed out, Metalclad even accepted to carry out activities for community benefits, such as investing in medical examination and treatment for San Luis Potosi (SLP) people. In cooperation with SLP State University, they conducted a study that found that waste landfills do not seriously affect the health of the area’s inhabitants. Whereas the investor did show his good faith, the inadequate coordination between the Mexican federal and provincial government led to the Tribunal’s finding of the failure on the part of Mexico to ensure the transparency required by NAFTA, thus breaching its obligation under the FET provision in Article 1105(1).


It is interesting that  Metalclad v. Mexico, this classic case from the early years of investor-state-dispute settlement (ISDS), and a much more recent case like Windstream vs. Canada  share striking similarities: both are criticized for favouring the investor at the expense of the public interest and both involve capricious/undue process measures by the host State. Similarly, in Ethyl vs. Canada, Canada’s decision was open to critical doubts about the real purpose of its measure, for lacking certainty of its scientific proof, and suggestions of lobbying by interest groups, including car manufacturers, who asserted that the substance MMT would damage the emissions diagnostics and control equipment in cars.


A balanced approach requires avoiding one-sided considerations to fight against opportunistic behaviours


Some authors consider BITs as a zero-sum game, reflecting a prisoner's dilemma. The reality is not quite so pessimistic. There is still a great possibility that this game is deer hunting, benefiting both sides. In this perspective, the IIAs system should aim to fight against opportunistic behaviors of both sides, for example, contractual limbo or time inconsistency on the part of the host state and overinvestment on the part of the investor. From a global administrative law perspective, governance failures are essentially due to the lack of an adequate limit on abuses of power.


In the Bilcon v. Canada case, Canada was sued again (after the Windstream case) because of its burdensome Environmental and Social Impact Assessment procedures. Windstream's frustration with the ongoing scientific research and fear of consequential regulations had led to a violation of Due process obligation in FET standards. Some authors believe that the arbitral tribunal supports the neoliberal economic regime,  favoring foreign investors rather than the public interest and environmental concerns. This view was recently emphasized in an opinion by a group of experts in response to the OECD Public Consultation on Investment Treaties and Climate Change.


Such a view is questionable. Even in the name of core interests such as environmental protection or human rights, the host State must still ensure that its measures are in good faith. In Spain saga cases, even regarding taxation measures, arbitral tribunals do not apply tax carve-out clauses to mala fide measures. Rather, they look beyond the label to verify whether tax measures comply with the protection standard.


Limbo is not only in developed countries, as in the case of Canada and Spain. It also exists in developing countries. A case study of Renewable energy regulation in Vietnam is relevant to our discussion on the bad manners regulation, even though the country has not yet faced an ISDS claim in this sector. To achieve its sustainable development goals, Vietnam has implemented several policies, including the FiT price program, to encourage foreign investment in developing renewable energy projects in the country. However, this policy only applies if the grid-connected wind power facility begins commercial operation before November 1, 2021, and is in effect for 20 years starting from that date. Due to the lack of legal framework and technical requirements for offshore wind power projects, investors in this sector face many difficulties in catching up with the commercial operation date. According to a domestic study, local governments with the potential to develop wind power are still passive in supporting investors. 


The total capacity of renewable power projects missing from the schedule is more than 4,600 MW. Nearly 2,100 MW of 34 transitional projects have completed construction and testing. These projects are not entitled to preferential prices (FIT prices) for 20 years. They must instead negotiate electricity prices according to the electricity generation price framework issued earlier this year by the Ministry of Industry and Trade, with prices 20-30% lower than the previously promised electricity price.


Even  as a unitary StateVietnam had uneven coordination between central and local state agencies, an issue mentioned in many studies, such as this most recent book chapter. This gap increases the risk of incapacity to adopt a unified policy, which in turn extends the delay to the detriment of foreign investors. As demonstrated by one commentator, the lack of specific policies has resulted in case-by-case licensing decisions, which is a burdensome and time-consuming process.


Conclusion

 

The legitimacy of a normative system is enhanced by its force of persuasion. To obtain shared understanding, the IIAs need to be read through a “both sides” lens. This balanced approach requires us to address the “remaining half story”, that is ensuring the good faith of the host state. One of the objectives of an IIA is to combat the opportunistic behaviors of a host state, “the classic bait and switch” analyzed in München vs. Spain. A good purpose cannot merely justify a bad measure of a host state. A balanced approach calls for the removal of persistent inappropriate assumptions, such as IIAs offering a blank check for investors. On the contrary, the limbo problem addressed in these cases is often due to the common dynamic of weak cooperation and coordination between central and regional/local governments.

 

**A note about the authors


Tan-Phat Le is a Ph.D. Candidate in international investment law at the University of Montreal. He is also a member of the ILA Canada, the Quebec Society of International Law, and the Henri- Capitant Vietnam Association.



Hoang-Thai Hy Nguyen is a Lecturer at the International Law Faculty of Ho Chi Minh City University of Law. He was a Research Fellow at Lausanne University and a Henri- Capitant Vietnam Association member.

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