International Investment Law and Arbitration, Sustainable Development, and Rio+20: Improving Corporate Institutional And State Governance

Author:Perry E. Wallace
Position:Associate Professor of Law & Director of the JD/MBA Dual Degree Program at the American University Washington College of Law
Pages:22-28
 
CONTENT
22 SUSTAINABLE DEVELOPMENT LAW & POLICY
INTERNATIONAL INVESTMENT LAW AND ARBITRATION,
SUSTAINABLE DEVELOPMENT, AND RIO+20:
IMPROVING CORPORATE INSTITUTIONAL AND
STATE GOVERNANCE
by Perry E. Wallace*
INTRODUCTION
The 2012 United Nations Conference on Sustainable
Development (“Rio+20”) will provide “a historic oppor-
tunity to define pathways to a safer, more equitable,
cleaner, greener and more prosperous world for all.1 Rio+20
comes twenty years after the 1992 Earth Summit in Rio, where
participating governments agreed to several historic accords to
promote a more sustainable environment.2 Subsequent confer-
ences followed suit with more accords aimed at improving and
augmenting preceding commitments.3
One of the most important documents that resulted from
the 1992 Earth Summit was Agenda 21,4 a planning-oriented
framework on redefining economic growth while also promot-
ing social equity and ensuring environmental protections.5 The
United Nations (“UN”) has affirmed and seeks to expand upon
this and similar accords in pursuing its action plan for Rio+20.6
Reflecting upon these past efforts, participants at Rio+20 should
come to the conference wiser than ever in planning to meet the
challenges of sustainable development, which is “development
that meets the needs of the present without compromising the
ability of future generations to meet their own needs.”7 Most
commentators agree that although some of these steps in sus-
tainable development have been “deeply inspiring examples
of progress,” they have also faced setbacks due to challenges
such as food insecurity, biodiversity loss, and climate change.8
Rio+20 seeks to improve this record by creating a consensus
among international governments and institutions on ways to
reduce poverty, promote sustainable jobs, clean energy, and cre-
ate an equitable distribution of resources.9
International investment law and arbitration are increas-
ingly the source of major decisions about national and regional
development policies and practices. Consequentially, emerging
institutions in this field can enable activities that have impacts
on the economic, social, political, and environmental well being
of communities around the world. Not surprisingly, developing
countries and emerging economies, because of their circum-
stances and needs, tend to experience the greatest amount and
intensity of these impacts. At the same time, however, these
nations may also be least able (or inclined, as the case may be) to
strike a just balance and array of benefits and burdens of devel-
opment in their investment agreements with other nations and
with corporate partners. Significantly, this calculus lies at the
heart of the sustainable development concept.
For these reasons, the major actors and institutions in this
arena should be brought together at the Rio+20 conference for
purposes of “secur[ing] … [their] political commitment for sus-
tainable development, reviewing progress and remaining imple-
mentation gaps and assessing new and emerging challenges.”10
This article examines the status of international investment law
and arbitration in the framework and dynamics of sustainable
global development. Specifically, the article highlights the
interrelationship of sustainable development and investment,
the challenges and threats posed to sustainable development by
international investment law and arbitration, and recommends
key issues for discussion at Rio+20. A useful start would be to
make international investment law and arbitration one of the top-
ics for discussion at the June “Corporate Sustainability Forum”
meetings.11 This Forum, which is a collaborative effort intended
to enhance the progress made at the actual Rio+20 conference,12
presents the proverbial “golden opportunity.” Given the dominant
role that business and industry play in the world’s development
activities, in particular through international investment law and
arbitration, other actors such as national governments and non-
governmental organizations should be and will be present be at
the table in these discussions and planning regarding sustainabil-
ity.13 With this beginning step, investment law and arbitration
could become part of a very important process in international
environmental governance, one promising significant benefits
from the intelligent, committed exploration and planning for
sustainable development that will take place at Rio+20.
SUSTAINABLE DEVELOPMENT AND THE
ROLE AND IMPACT OF INVESTMENT
In charting a path toward agreement, the UN has identified
the conference’s objective as “secur[ing] renewed political com-
mitment for sustainable development, reviewing progress and
remaining implementation gaps and assessing new and emerg-
ing challenges.”14 This objective will be pursued “through the
*Perry E. Wallace is an Associate Professor of Law & Director of the JD/MBA
Dual Degree Program at the American University Washington College of Law.
Professor Wallace is a member of the Board of Advisors of the Center for Inter-
national Environmental Law; a member of the Academic Council of the Institute
for Transnational Arbitration; and a member of the WCL Faculty of the Center
on International Commercial Arbitration.
23SPRING 2012
lenses” of the conference’s two themes: 1) a green economy in
the context of sustainable development and poverty eradication;
and 2) the institutional framework for sustainable development.15
Achieving the objective of Rio+20 through these two themes
will require the concerted and collaborative efforts of all stake-
holders in a well-functioning, sustainable world. In addition to
national governments, the UN has also identified “major groups”
that comprise particularly important stakeholders.16 These
major groups include “women, children and youth, indigenous
peoples, non-governmental organisations, local authorities,
workers and trade unions, business and industry, the scientific
and technological community, and farmers.17 In focusing on the
role of business and industry in promoting this initiative, the UN
recognizes that the private sector plays an important role in mov-
ing towards sustainable development, specifically in building a
green economy and to eradicating poverty.18
The UN has also recognized that investments by business
and industry are fundamental to sustainable development. For
example, Agenda 21 describes the central role of international
investments in providing financial assistance for developing
countries:
Investment is critical to the ability of developing
countries to achieve needed economic growth to
improve the welfare of their populations and to meet
their basic needs in a sustainable manner …Sustainable
development requires increased investment, for which
domestic and external financial resources are needed.19
While the pivotal role of investment in fueling development
is generally well established, modern (particularly post-Earth
Summit) formulations of this basic precept often invoke some
expanded notion of “sustainability.” This includes pronounce-
ments by such august bodies as the 2002 World Summit
on Sustainable Development in its Johannesburg Plan of
Implementation (seeking “an enabling environment for invest-
ment”);20 the G8 Heads of State 2009 declaration Responsible
Leadership for a Sustainable Future (“[F]oreign direct invest-
ments …represent an important source of financing and a
driver of [sustainable] economic growth and integration”); and
the 2009 G20 Heads of State declaration on Core Values for
Sustainable Economic Activity (“We … are partners in building
a sustainable and balanced global economy in which the benefits
of economic growth are broadly and equitably shared.”).21 Thus,
the “hard” and “soft” law and policy of sustainability have been
rather thoroughly established and accepted.22
In contrast to sustainable development law and policy, how-
ever, investment law and policy have not been as solicitous to the
notion of sustainable development. The general consensus is that
foreign direct investment is necessary for sustainable develop-
ment.23 However, considerable work remains to guarantee that
the current regulatory framework for international investment
law properly promotes sustainable development.24 As commen-
tators point out:
[I]n international investment law, sustainable development
remains challenging to implement. The challenge is to
ensure that new international and domestic rules that
are being developed to encourage investment by pro-
viding additional protection for investors from capital
exporting States also provide sufficient policy flexibility
and incentives to encourage sustainability.25
As noted above, there has been some difficulty in bringing
the policies and practices of sustainability and investment law
(including arbitration) together.26 The next section describes the
rationale and structure of investment law and the section after
that one elaborates on this problem.
INVESTMENT LAW AND ARBITRATION;
RATIONALE AND STRUCTURE
Foreign investment, in some form or another, “likely dates
back to the days of the pharaohs in Egypt with investment being
made by the state itself or by merchants from Egypt, Phoenicia
and Greece in other countries.”27 Its historical course parallels
that of the history of many civilizations, great and small, and has
often been a fateful element in those histories.28 Fast forward to
modern foreign direct investment (FDI) in the mid-nineteenth
century, two significant phenomena revolutionized methods of
raising and spending capital: rapid technological invention and
the growth of major corporations.29
Thus enabled, foreign companies and their investments
boomed and began contributing to expansive economic growth
and development around the world, including the finance,
construction, and operation of large infrastructure projects. As
this happened, conflicts frequently arose between investors and
either host countries or other internal political forces.30 Often
these major undertakings were interdependent with the welfare
and security of the host country and its citizens, and this at
times sparked nationalist concerns about the dangers of foreign
control.31 Expropriation and other forms of interference with
investments became a major problem. However, the traditional
remedies have proven woefully inadequate, namely resort to
national courts, diplomatic protection, and military force.32
In the great series of initiatives and attempts to develop
solutions to global investment conflicts, international treaties
and contracts providing for specific relevant protections have
emerged as one of the better alternatives, such as dispute resolu-
tion by an independent body. Investment treaties include thou-
sands of bilateral investment treaties (“BITs”) and investment
chapters in broader trade and economic cooperation accords,
began to appear. Numerous well-known frameworks for foreign
investment protection and arbitration of disputes have emerged
by the 1990s. They include:
•฀ BITs฀between฀nations;
•฀ World฀Bank฀Convention฀ on฀the฀ Settlement฀of฀Investment฀
Disputes between States and Nationals of Other States
(“ICSID” Convention or “Washington Convention”);
•฀ International฀Chamber฀ of฀Commerce,฀International฀ Court฀
of Arbitration, Rules of Arbitration;
24 SUSTAINABLE DEVELOPMENT LAW & POLICY
•฀ Inter national฀ Centre฀ for฀ Dispute฀ Resolution฀ (“American฀
Arbitration Association”);
•฀ United฀ Nations฀ Commission฀ on฀ International฀ Trade฀
(“UNCITRAL”) Model Law on International Commercial
Arbitration and UNCITRAL Arbitration Rules;
•฀ North฀American฀Free฀Trade฀Agreement฀(“NAFTA”);
•฀ Energy฀Charter฀Treaty฀(“ECT”);
•฀ Asia-Pacific฀ Economic฀ Cooperation฀ (“APEC”)฀ Non-
Binding Investment Principles; and
•฀ Association฀ of฀ Southeast฀ Asian฀ Nation฀ (“ASEAN”)฀
Framework Agreement on the ASEAN Investment Area.
While investment treaties differ in their specific terms, there
are certain core provisions that are common to most of them.
The following are core commitments that host countries and
foreign investors tend to agree to:
•฀ Fair฀and฀equitable฀treatment/ minimum standard of treatment;
•฀ Full฀protection฀and฀security;
•฀ Compensation฀in฀case฀of฀direct฀or฀indirect฀expropriation;
•฀ National฀treatment฀ (treatment฀no฀less฀ favorable฀ than฀that฀
given to domestic investors);
•฀ Most-favored฀nation฀treatment฀(treatment฀ no฀less฀ favorable฀
than that given to investors from other countries);
•฀ Freedom฀from฀“performance฀ requirements”฀as฀ a฀condition฀
of entry or operation (e.g., requirements to transfer technol-
ogy, to export a portion of production, or to purchase inputs
domestically);
•฀ Free฀transfer฀of฀capital;
•฀ A฀blanket฀obligation,฀or฀“umbrella฀clause,”฀to฀respect฀any฀legal฀
or contractual obligations it may have to the investor; and
•฀ The฀ right฀ to฀ bring฀ arbitration฀ claims฀ against฀ the฀ host฀
country.33
A number of the these protections afforded investors
in investment law, as well as certain aspects of international
investment arbitration, have at times created tensions and con-
flicts for attainment of sustainable development. The next section
analyzes the challenges posed by these rights that directly affect
implementation of sustainable development policies and principles.
INVESTMENT LAW AND ARBITRATION: CHALLENGES
TO SUSTAINABLE DEVELOPMENT
FAIR AND EQUITABLE TREATMENT/MINIMUM STANDARD
OF TREATMENT
The fair and equitable treatment provision is as prominent
as it is controversial in investment agreements. It has been called
a “catch-all” clause, not only because of its breadth but also
because it has often been invoked as the basis of claims where
expropriation, non-discrimination, and other claims could not
fairly be advanced.34 Its broad and opaque language has resulted
arbitral tribunals rendering differing interpretations of its scope
and applicability.35
One example of an interpretation applying a strict, high
standard for host countries can be found in Tecmed vs. Mexico.36
There, the arbitral panel stated that a host country must conduct
itself in such a manner as to “not affect the basic expectations
that were taken into account by the foreign investor to make the
investment” and that is consistent, “free from ambiguity[,] and
totally transparent.”37 On the other hand, various panels appear
to have endorsed a somewhat different standard for this concept.
UNCITRAL opined that the standard should not be applied in a
way that imposes “inappropriate and unrealistic” obligations on
the host country, and that investor expectations should be rea-
sonable and legitimate “in light of the circumstances prevailing
in the host country.38
From a sustainable development perspective, the fair and
equitable treatment clause and the decisions interpreting it have
created uncertainty about how states should apply the concept
and about what would be the outcome of a potential arbitral
claim. Indeed, states fear that the clause “could act as a black box
within which [investment agreements] might contain unwanted
surprises.”39 To the extent a more strict, Tecmed-like standard
applies, developing countries might not have the financial,
technical, and human resources to comply since their regulatory
regimes are, essentially, works-in-progress.40 Furthermore, the
true worry is that the specter of a hefty arbitral award against
it might have a chilling effect on the healthy evolution of that
country’s regulatory evolution — particularly to the extent it
seeks to protect environmental and other similar values in the
public interest.41
Some progress has been made in addressing these concerns
regarding the fair and equitable treatment clause. For example,
several countries have chosen not to include the clause at all,
as exemplified in the investment chapter of the trade agreement
between Singapore and India.42 Others have sought to align
its interpretation with that of the customary international law
“minimum standard” for the treatment of aliens, which sets a
basic floor for country conduct.43 Unfortunately, these measures
have hardly served to add true clarity and certainty to the matter.
Therefore, the challenges for host countries — and for sustain-
able development — continue as there is no definite framework
to guide their conduct.
EXPROPRIATION
States may legally take possession and ownership of
property lying within their jurisdiction under certain circum-
stances.44 Historically, the taking of an investor’s property by
a host country was one of the main reasons for the creation of
protective investment regimes.45 The central issue in these cases
is whether the state has “expropriated” the property such that it
must compensate the investor for the taking.46
Although some investment treaties do not make this distinction,
expropriations can be classified as “direct” and “indirect.”47
Direct expropriation takes the form of a physical taking of own-
ership of property (such as the nationalization of a company by
a state), whereas indirect (including regulatory) expropriation,
usually referring to a state’s interference in one’s enjoyment
of the benefits of property even without a physical taking, is a
more complex and elusive concept.48 The definition and scope
of indirect expropriation is important to achievement of sustain-
able development. Thus, where the state engages in regulatory
25SPRING 2012
activity to protect the environment or the public welfare, that
state may well implement its laws much more restrictively under
a broad definition of indirect expropriation.49 That is, the threat
and expense of an expropriation could diminish the political will
of the state to regulate assertively.50
Tribunals have applied different methods in analyzing the
applicability of the indirect expropriation concept. For example,
the “sole effect” approach looks at the end result of the govern-
ment’s measure on the investor and not at the purpose for which
the measure was intended.51 An example of this approach can be
found in the case Waste Management v. United Mexican States,52
where the arbitral tribunal rejected a claim of expropriation by
a waste disposal services company based on the reasoning that
the “effect” of governmental action was not to cause an indirect
expropriation.53 Notwithstanding that particular outcome, how-
ever, it could be problematic from a sustainable development
standpoint to have a test that does not allow consideration of a
governmental purpose for expropriation, which could include
environmental regulation.54 Thus circumstances where the “sole
effect” test is applied can constrict a government’s ability to pro-
mote beneficial environmental regulation.
The “purpose” or “proportionality” approach requires a
comparison of the benefits of a government’s expropriation
action with the negative impact, or burden, on the investor.
For example, in the Tecmed case, the tribunal determined that
purpose of a governmental denial of a hazardous waste facil-
ity license (which was ostensibly for environmental protection
purposes but was actually due to social and political pressures)
outweighed the burden on the investor, and ordered Tecmed
to completely shut down the plant.55 This is in contrast with
Metalclad Corporation v. United Mexican States, where the arbi-
tral tribunal found that Mexico had, through the environmental
regulatory acts of a local municipality, effectively expropriated
the property of a U.S. investor that had secured all required per-
mits from Mexican federal authorities to construct and operate
a hazardous waste facility.56 Ironically, although the parties all
agreed that the “purposes” test would apply, the tribunal com-
pletely ignored this mutual agreement, stating that it “need not
decide or consider the motivation or intent of the adoption of the
Ecological Decree.”57
Another concept that may come into play in regulatory
expropriation cases is that of “police powers.” In Methanex v.
United States, an executive order by the governor of California
required that gasoline additive methyl tertiary butyl ether
(“MTBE”) be removed from gasoline by the end of 2002.58
Methanex was the Canadian parent of a U.S. subsidiary and a
producer of MTBE.59 Methanex commenced an arbitration pro-
ceeding against the United States on July 2, 1999, charging that
this order and related measures were tantamount to an expro-
priation of that investment under Article 1110 of NAFTA.60 The
tribunal rejected Methanex’s claim and provided the following
explanation:
[A]s 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 govern-
ment to the then putative foreign investor contemplating
investment that the government would refrain from
such regulation.61
Thus, the police powers “carve-out” holds some promise
as a basis for defending sustainable development regulatory
measures.62 However, much of the implementation of this carve-
out depends on the nature of the facts and the government’s
approach to regulation. Obviously, sound policies that are fairly
applied are more likely to yield positive results in the event of
a challenge. These would be particularly important elements,
given the relatively difficult task of defining what is an indirect
expropriation.
It is worth noting that some countries have restricted the
scope of this concept and provided factors to be considered in
determining the existence of indirect expropriation. Prominent
examples are the Canadian and American Model Acts; the 2009
ASEAN Comprehensive Investment Agreement); the 2007
Investment Agreement for the COMESA Common Investment
Area (“COMESA CCIA”); the 2008 Austrian Model Investment
Treaty and subsequent treaties that have imitated them.63 These
are examples that not only improve the law generally, but reflect
some willingness on the part of states to provide at least for the
possibility of progressive sustainable development measures.
NATIONAL TREATMENT
At first blush, the national treatment obligation for host
countries to treat domestic and foreign investors the same seems
rather simple and direct. A typical example is Article 3 of the
2004 U.S. Model Bilateral Investment Treaty:
Article 3: National Treatment
1. Each Party shall accord to investors of the other
Party treatment no less favorable than that it accords,
in like circumstances, to its own investors with respect
to the establishment, acquisition, expansion, manage-
ment, conduct, operation, and sale or other disposition
of investments in its territory.64
This non-discrimination provision, however, is more
complex than might appear. Among other things, the deter-
mination of what are “like circumstances” can vary. Such a
determination is important because it directly bears on how free
governments are to differentiate between foreign and domestic
entities.65 For example, a broad interpretation of the term allows
a tribunal to consider the circumstances of more foreign and
domestic investors to be “like,” and thus captures a broader variety
of regulations with which to take issue.66 This broad interpre-
tation, however, would limit a state’s ability to apply different
rules to foreign companies — perhaps even if the difference is
26 SUSTAINABLE DEVELOPMENT LAW & POLICY
grounded in a legitimate public purpose.67 Thus, some commen-
tators have expressed the concern that:
[A] distinct leaning towards expansive interpretations
has been detected within the reasoning of arbitral
awards in investor-State disputes, the effect of which
is to create standards of protection that go well beyond
shielding investors from arbitrary or bad conduct,
and instead operate as a form of insurance against the
impact of future legitimate public welfare regulation.68
In the arbitral partial award of S.D. Myers, Inc. v. Canada,
the tribunal observed that the “phrase ‘like circumstances’ is
open to a wide variety of interpretations in the abstract and in
the context of a particular dispute.”69 There, the tribunal found
that Canada had violated its national treatment obligations under
the investment chapter of NAFTA (or “Article 1102”) when it
made certain decisions purportedly to protect the environment.70
The American company claimant, SDMI, had established a sub-
sidiary in Canada to export a certain hazardous waste product
(“PCBs”) into the United States for remediation at its Ohio
facilities.71 SDMI enjoyed a competitive advantage over both
American and Canadian competition because of its low prices
and expertise.72
Although the tribunal’s decision in favor of the American
investor was disappointing to environmentalists, the case may
have a few positive features. The tribunal was fully willing to
consider a wide range of pertinent elements and policies —
including a favorable embrace of the NAFTA environmental
“side agreement” and other relevant environmental measures
— and not merely a more narrow range of just commercial
considerations.73 Even in the absence of a stare decisis principle
in arbitration, the tribunal’s willingness to acknowledge such a
range of considerations should be noted for further efforts to
encourage greater awareness and inclusion of such an approach
in future arbitral deliberations.74
Additionally, one should consider other factors that may
have tipped the balance in favor of the investor, such as the
dealings between the principal Canadian competitor and the
Canadian government as well as the particular way the govern-
ment handled this matter.75 Looking at those facts, one could
reasonably query whether the tribunal members may have dis-
cerned some impropriety — or perhaps even collusive behavior
that suggested discrimination. Canada, in fact, may have come
within the prescription of Pope & Talbot v. Canada, which stated
that a government’s differential treatment violates its national
treatment obligation, unless it established a rational nexus
between this treatment and government policies that do not dis-
criminate between foreign or domestic companies or violate the
spirit and objectives of NAFTA.76
The point for consideration here is whether some aspects
of S.D. Myers provide any insight in its analysis that, on a more
favorable set of facts and circumstances, a court might yield a
decision more supportive of sustainable development. In light
of some of the difficulties inherent in the analysis of national
treatment provisions, some countries have specifically inserted
relevant reservations and limitations in their treaties. This
includes such approaches as placing exceptions allowing more
favorable treatment for certain persons, groups, or industries.77
The potential benefit of this approach is that the deliberative
process for consideration of it would be open and democratic
more so than an arbitral proceeding,78 thus providing opportuni-
ties for public participation and advocacy — again, more so than
exists in an arbitral proceeding.
MOST-FAVORED NATION TREATMENT
Like national treatment, most-favored nation (“MFN”)
treatment is a non-discrimination obligation, although a MFN
obligation applies to prevent more favorable treatment to other
foreign states and their investors. This is an example of such a
provision taken from the investment chapter (“Chapter 10”) of
the Dominican Republic-Central America-United States Free
Trade Agreement:
Article 10.4: Most-Favored-Nation Treatment
1. Each Party shall accord to investors of another Party
treatment no less favorable than that it accords, in like
circumstances, to investors of any other Party or of any
non-Party with respect to the establishment, acquisi-
tion, expansion, management, conduct, operation, and
sale or other disposition of investments in its territory.79
Like national treatment, the “like circumstances” language
in the MFN obligation not only provides a qualifying effect but
also introduces interpretive challenges. One of the most recent
challenges in the MFN investment area is the phenomenon
whereby investors may seek to “import” rights against host
states based on other investment treaties.80 Perhaps the best-
known case is Maffezini v. Spain, in which the tribunal allowed
an Argentinean investor claimant, based on the MFN clause of
the Spain-Argentina BIT, to avail himself of dispute resolution
provision of the Spain-Chile BIT.81 The Maffezini decision,
as well as others like it, has been the source of some concern.
This practice of “cherry-picking” arbitration rights is seen by
some as distorting the treaty negotiation process and introducing
much greater uncertainty in the obligations host countries owe to
investors.82 For this reason, a number of tribunals have rejected
investor requests for similar treatment.83 Some states have taken
steps to preclude the practice, in some instances by exclud-
ing MFN clauses entirely, and in others by drafting in specific
exceptions or limitations.84
PERFORMANCE REQUIREMENTS
Host countries attach performance requirements as a
pre-condition to a business’s establishment, operation, or enjoy-
ment of an opportunity or privilege to invest in a host state.
Performance requirements can also be offered as significant
incentives rather than as mandatory obligations.85 They may
relate to sales, production, percentage of ownership by host
nationals, transfer of technology, domestic purchases, local
hiring, etc.86 Structurally, investment treaties take varying
27SPRING 2012
approaches to incorporating performance requirements, such as
not mentioning them in some instances or specifically addressing
them in others.87 While most treaties do not mention this topic,
member states of the World Trade Organization (WTO) do
include performance requirements and are limited by the struc-
tures that the WTO Agreement on Trade-Related Investment
Measures (TRIMS) imposes on a number of types of perfor-
mance requirements.88
Notwithstanding TRIMS, states have the legal right to strike
a wide range of bargains, such as affirming the applicability of
TRIMS, rejecting some or all of its strictures, or even adding to
them.89 From a sustainable development perspective, a state that
preserved its right in an investment treaty to require the transfer
of technology can avail itself of the kinds of environmental tech-
nology that would accelerate its progress in attaining sustainable
development goals.90 This perspective also applies to various
other relevant standards, such as those concerning research and
development.91
UMBRELLA CLAUSES, STABILIZATION CLAUSES,
AND THEIR INTERPLAY
To understand the umbrella clause, it is useful to pose this
question: can an investor, in arbitration proceedings brought
based on the terms of an investment treaty, also make claims
for violations of a specific investment contract? The following is
an example of an umbrella clause, taken from the US-Argentina
Treaty: “Each Party shall observe any obligation it may have
entered into with regard to investments.92
Tribunals have answered the question in various ways, rang-
ing from limited acceptance of the right to make a contract claim
only upon clear and convincing evidence of mutual consent in the
contract to do so, to a broader acceptance of the of the contract
claim itself as transformed into a treaty claim.93 Importantly,
however an umbrella clause may come to be included in treaty
arbitration, it may have considerable implications.94 An umbrella
clause provides an investor the estimable machinery of interna-
tional investment arbitration to enforce contract claims, which
might themselves obligate the state under a range of domestic
legislative, contractual, and treaty measures.95 This can cut both
ways for sustainable development purposes. Whether such a
clause expands or contracts the public space available for a state
to promote sustainable development depends directly on what
obligations and duties are incorporated through that clause.
Stabilization clauses in investment contracts may (1)
“freeze” the law of a host state throughout the duration of a contract;
(2) provide for “economic equilibrium” by requiring investors to
comply with new laws, but providing compensation for compli-
ance costs; or (3) include some “hybrid” form of the first two.96
Obviously, such a clause could thwart the evolution of environ-
mental and other sustainable development regulations. Further,
in regard to actual treaty rights, stabilization clauses could
alter or diminish the police powers of the state to regulate and
help frame, and thus weaken, the “legitimate expectations” that
undergird the fair and equitable treatment obligation.97 Finally,
the combination of umbrella and stabilization clauses poses a
particular concern for any true progress in achieving sustainable
development.
INTERNATIONAL INVESTMENT ARBITRATION
International investment arbitration is crucial to investment
treaty and contract regimes, as arbitral tribunals resolve disputes
and questions between states and investors about the applicabil-
ity of those investment measures. Given the significant nature of
the kinds of projects involved, their interrelation with the gov-
ernance of the host countries involved, as well as the numerous
challenges posed to efficacious interpretation of treaty provi-
sions as discussed herein, one can begin to appreciate the gravity
of the tasks placed before the arbitrators in these disputes.
Notwithstanding the challenges that inhere in the invest-
ment treaties and contracts themselves, international investment
arbitration itself has given rise to significant questions and con-
troversies. The following list identifies major areas of concern
and criticism, particularly as raised by advocates in the environ-
mental and human rights communities:
•฀ Exclusion฀ of฀ preliminar y฀ requirements฀ to฀ exhaust฀local฀
remedies, while avoiding potential problems of unfairness
to the investor, diminishes valuable opportunities for the
development and nurturing of legal institutions and the rule
of law, particularly in developing countries;98
•฀ Arbitrators฀may฀have฀ “perverse฀ incentives’฀to฀ encourage฀
arbitrations and conflicts of interest that compromise their
judgments and decisions;
•฀ They฀ may฀ be฀ tempted฀ to฀ encourage฀ investor฀claims,฀ for฀
example, by deciding overwhelmingly in favor of investors
or by broadly interpreting their jurisdiction to make claims;
•฀ They฀ often฀ serve฀ as฀ arbitrators฀ in฀ some฀ cases฀ and฀ legal฀
counsel in other cases (and their law firms may specialize in
arbitration matters)99
•฀ The฀parties฀ to฀ the฀ arbitration฀ typically฀ each฀ choose฀ one฀
arbitrator, raising questions about arbitrator impartiality and
independence;100
•฀ The฀mechanisms฀for฀choosing฀arbitrators฀ has฀resulted฀in฀an฀
elite and narrow coterie of persons, and the lack of diversity
— whether of gender, ethnicity, geography, culture, ideology
or race — impairs their ability to decide cases properly and
justly in an increasingly complex world with increasingly
myriad stakeholders in the outcome of arbitral cases;101
•฀ There฀are฀limited฀mechanisms฀for฀challenging฀arbitral฀awards,฀
and often errors of law or fact cannot be corrected;102
•฀ Arbitral฀decisions฀can฀be฀highly฀inconsistent,฀and฀there฀is฀no฀
binding rule of precedent or meaningful appeals process to
lend consistency to them;103
•฀ Access฀to฀information฀about฀arbitrations฀is฀typically฀limited,฀
and much information is unavailable to the public;104
•฀ Public฀participation฀ in฀ arbitrations฀ is฀ very฀ limited,฀ usually฀
being confined to the acceptance of amicus curiae briefs by
outside parties. The limitation is most consequential where a
host state lacks the political will to act properly in the public
interest, yields to the often-superior “bargaining power” of a
more powerful state or company, or is simply corrupt.105
28 SUSTAINABLE DEVELOPMENT LAW & POLICY
While this list does not purport to be exhaustive, it provides
a sense of the tone of the growing debate about the nature and
effects of international arbitration. Advocates of sustainable
development and other causes seeking social and economic
justice are active participants in that debate.
CONCLUSION
The Corporate Sustainability Forum is being held in
conjunction with Rio+20, and its objectives are to strengthen the
business contribution to sustainable development globally —
seeking to bring greater scale to responsible business practices,
to advance and diffuse sustainable innovation, and to stimulate
broader collaboration between companies, governments, civil
society and the UN.106
This article has discussed the dynamics between sustainable
development and international investment law and arbitration.
Modern phenomena, including the powerful march of economic
globalization, have vested international law and arbitration with
unprecedented power to affect and shape international develop-
ment. If that development is to be “sustainable,” it will not hap-
pen by accident, or by continued isolation of the stakeholders
in their own worlds, but through concerted, collaborative action
by all affected interests. Beginning with participation in the
Corporate Sustainability Forum, and continuing into Rio+20,
those responsible for the creation and implementation of these
investment institutions should grasp this special opportunity to
address and overcome challenges, including those presented in
this article.
Endnotes: International Investment Law and Arbitration,
Sustainable Development, and Rio+20: Improving Corporate Institutional
and State Governance
1 See United Nations, THE FUTURE WE WANT 5 (Sept. 2011),
http://www.un.org/en/sustainablefuture/pdf/conf_brochure.pdf.
2 See United Nations Conference on Environment and Development, Rio de
Janeiro, Braz., June 3-14, 1992, Rio Declaration on Environment and Development,
U.N. Doc. A/CONF.151/26/Rev.1 (Vol. I), Annex I (Aug. 12, 1992), http://www.
unesco.org/education/information/nfsunesco/pdf/RIO_E.PDF.
3 See United Nations, The History of Sustainable Development in the United
Nations, UNCSD2012.ORG (2011), http://www.uncsd2012.org/rio20/history.
html (setting out UN sustainable development initiatives and accords occurring
both before and after the Earth Summit).
4 INTERNATIONAL UNION FOR CONSERVATION OF NATURE AND NATURAL
RESOURCES COMMISSION ON ENVIRONMENTAL LAW, AGENDA 21: EARTHS ACTION
PLAN §38.1 (Nicholas A. Robinson ed., 1993), http://www.un.org/esa/sustdev/
documents/agenda21/english/Agenda21.pdf (hereinafter AGENDA 21].
5 THE FUTURE WE WANT at 2.
6 United Nations, The Future We Want — zero draft of the outcome document,
http://www.uncsd2012.org/rio20/futurewewant.html [hereinafter Zero Draft].
7 U.N. World Comm’n on Env’t & Dev., Report of the World Commission
on Environment and Development: Our Common Future; Annex 1: Summary
of Proposed Legal Principles for Environmental Protection and Sustainable
Development Adopted by the WCED Experts on Group Environmental Law,
U.N. Doc. A/42/427 (Aug. 4, 1987), http://www.un-documents.net/a42-427.htm.
8 See Zero Draft, supra note 5, at ¶10-16; Implementation of Agenda 21, the
Programme for the Further Implementation of Agenda 21 and the outcomes
of the World Summit on Sustainable Development, G.A. Res. 64/236, U.N.
Doc. A/RES/64/236 (Mar. 31, 2010), http://www.uncsd2012.org/files/OD/
ARES64236E.pdf.
9 Id. at 2.
10 U.N. Secretary General, Objectives and Themes of the United Nations
Conference on Sustainable Development, p.3, U.N. Doc. A/CONF.216/
PC/7 (Dec. 22, 2010), http://www.uncsd2012.org/rio20/content/documents/
N1070657.pdf.
11 Innovation and Collaboration for the Future We Want, RIO+20 CORPORATE
SUSTAINABILITY FORUM, http://csf.compact4rio.org/events/rio-20-corporate-
sustainability-forum/custom-125-251b87a2deaa4e56a3e00ca1d66e5bfd.aspx
(last visited Apr. 18, 2012).
12 See United Nations Global Compact, Corporate Sustainability Forum, RIO+
CORPORATE SUSTAINABILITY FORUM, http://csf.compact4rio.org/events/rio-20-
corporate-sustainability-forum/custom-121-251b87a2deaa4e56a3e00ca
1d66e5bfd.aspx (last visited May 10, 2012) (“With over 2,000 expected
participants, the Rio+20 Corporate Sustainability Forum will give business
and investors an opportunity to meet with governments, local authorities, civil
society and UN entities in dozens of highly focused workshops and thematic
sessions linked to the Rio+20 agenda.”).
13 Markus Gehring & Andrew Newcombe, An Introduction to Sustainable
Development in World Investment Law, in SUSTAINABLE DEVELOPMENT IN WORLD
INVESTMENT LAW 6, 9 (Marie-Claire Cordonier Segger, Markus W. Gehring,
& Andrew Newcombe eds., 2011).
14 U.N. Secretary General, Objectives and Themes of the United Nations
Conference on Sustainable Development, p.3, U.N. Doc. A/CONF.216/PC/7
(Dec. 22, 2010), http://www.un-documents.net/ ocf-a1.htm [hereinafter Our
Common Future].
15 Id.
16 Zero Draft, supra note 5, at ¶17-20.
17 Id. at ¶17.
18 Id. at ¶19.
19 AGENDA 21, supra note 4, at ¶2.23.
20 Plan of Implementation of the World Summit on Sustainable Development,
Sept. 4, 2002, U.N. Doc. A/Conf.199/20, Annex I, Ch. XI, http://www.un.org/
esa/sustdev/documents/WSSD_POI_PD/English/WSSD_PlanImpl.pdf.
21 G8 Ministers, Responsible Leadership for a Sustainable Future ¶49 (2009),
http://www.g8italia2009.it/static/G8_Allegato/G8_Declaration_08_07_09
_final,0.pdf; G20 Heads of State, Core Values for Sustainable Economic
Activity (2009), http://www.reuters.com/article/2009/09/25/us-g20-
communique-annex-sb-idUSTRE58O6W520090925.
22 Marie-Claire Cordonier Segger, The Role of International Forums in
the Advancement of Sustainable Development, SUSTAINABLE DEV. L. & POLY,
Fall 2009, at 4.
23 Markus Gehring & Andrew Newcombe, supra note 9.
24 Id.
25 Id. at 6.
26 Id.
27 A Brief History of Foreign Investment, in FOREIGN INVESTMENT DISPUTES 2
(R. Doak Bishop, James Crawford, & W. Michael Reisman eds., 2005).
28 Id.
29 Id.
30 Id.
31 Id.
32 Id. at 3.
33 Nathalie Bernasconi-Osterwalder et al., Investment Treatment Treaties
& Why They Matter to Sustainable Development, INTERNATIONAL INSTITUTE
FOR SUSTAINABLE DEVELOPMENT (2012), http://www.iisd.org/pdf/2011/
investment_treaties_why_they_matter_sd.pdf [hereinafter IISD].
34 Id. at 17.
continued on page 55