Investment Agreements & Sustainable Development: The Non-Discrimination Standards
| Author | Marcos Orellana |
| Position | LL.M., S.J.D. is an attorney from Chile, Director of the Human Rights and Environment Program at the Center for International Environmental Law ('CIEL') and Adjunct Faculty at the American University Washington College of Law, where he also serves as an Advisor to Sustainable Development Law & Policy |
| Pages | 3-8 |
SUSTAINABLE DEVELOPMENT LAW & POLICY3
INTRODUCTION
The appro ach of buildin g mutually supp ortive trade,
investment, and environmental regimes finds inspira-
tion in the concept of sustainable development. Indeed,
the World Summit on Sustainable Development recognized that
trade and investment are necessary tools for achieving the goals
of sustainable development.1 Economic activities may contribute
to the progress ive realization of human rights and environmen-
tal protection by fostering economic development, employment,
income generation, and general welfare. This potential contribu-
tion is not automatic, however, as non-sustainable investments, or
unwarranted interpretations of trade and investment disciplines,
may defeat such general welfare goals by exposing the popula-
tion to health risks, causing environmental harm, or reducing the
necessary policy space for sustainable development.
While its exact legal nature and status remain the object of
controversy, at a minimum, sustainable development requires the
integration of environmental issues in de cision-making regard-
ing development and investment projects.2 If sustainable devel-
opment requires the integration of environmental considerations
in t he planning and implemen tation of economic activiti es, it
follows that the re solution of econ omic dis putes co ncerning
health, safety, and environmental (“HSE”) measures should also
be in tegrated into the various fields involved. This process of
integration in dispute settlement places an emphasis on treaty
interpretation and, par ticularly, an emphasis on the principle of
systemic integration codified in the Vienna Convention on the
Law of Treaties.3 In this regard, sustainable development calls
for a process of normative dialogue, and the inter pretive prin-
ciple of systemic integration guides the conversation.
The interpretatio n and application of substantive invest-
ment disciplines carries intense implications for the policy space
available to governments to adopt measures conducive to sus -
tainable development. If compensation by the host government
to t he investor is required for the adoption of such measu res,
“even where regulatory action is taken in a fair and equitable
manner, the potential cost to the governments may well discour-
age desirable or nec essary environmenta l regulati ons.”4 Th is
general issue is particularly relevant in disputes concerning the
relative non-discrimin ation sta ndards of most-favored nation
(“MFN”) treatment and national treatment (“NT”) because nor-
mal regulatory activity hinges on the construct of categories and
distinction s that underlie differentiated approaches and rules
attaching to particular persons, products, substances , economic
sectors, etc.
This paper analyzes key i ssues concerning the scrutiny of
HSE mea sures under the non-discrimination standards. It first
introduces the non-discrimination standards and then examines
the thor ny questions of discriminatory intent and like circum-
stances. The paper argues that the construct of relative non-dis-
crimination standards in investment treaties does not incorporate
“necessity” requirements to justify HSE measures, in contrast
to Article XX of the General Agreement on Tariffs and Trade
(“GATT”) of the World Trade Organization (“WTO”). Instea d,
the relative non-discrimination standards of MFN and NT allow
for HSE considerations in their two core operative elements: “in
like circumstances” and “less favorable treatment.”
THE NON-DISCRIMINATION STANDARDS
The relative non-discriminat ion stan dards p roscribe dis-
crimination on the basis of nationality. They require treatment
no less favorable than that afforded to other national or foreign
investors “in like circumstances.”5 The comparison of the treat-
ment afforded to similarly situated investors becomes the master
key to the operation of the non-discrimination standards.
Given that the comparison process involves determining
which investors are similarly situated, taking into account all rel-
evant circumstances, the operation of the standards is far from a
mechanical application of a mathematical formula. Instead, the
application of the non-discrimination standards calls for abstract
legal reasoning and involves a measure of subjective assessment.
Because of this, there is a degree of uncertainty involved in their
operation, which may affect the policy space available to States.
Several questions are relevant to the inte rpretation of non-
discrimi nation standards through a sustainable developm ent
lens. For example: what is the meaning of “less favorable treat-
ment,” and is it established by disparate impact alone? Does the
meaning of “in like circumstances” allow authorities to differen-
tiate among investors and/or investments on account of the dis-
similar HSE threats posed by different substances, pro duction
processes, geographical conditions, etc? If so, does like circum-
stances operate as an element of the non-discrimination stan-
INVESTMENT AGREEMENTS & SUSTAINABLE DEVELOPMENT:
THE NON-DISCRIMINATION STANDARDS
by Marcos Orellana*
* M arcos A. Orellana, LL.M., S. J.D. is an attorney from Ch ile, Director of
the Hum an Rights and Environment Program at the Center for International
Environmental Law (“CI EL”) and Adjunct Faculty at the American University
Washington College of Law, where he also serves as an Advisor to Sustainable
Development Law & Policy. Elements of this article are based on prior works,
including: Marcos Orellana, Science, Risk and Uncertainty: Public Health Mea-
sures and Investment Discipline s, in NEW A SPECTS OF INTERNATIONAL INVESTMENT
LAW 671 Phillippe Kahn & Thomas Wälde eds., HAGUE ACAD. OF INT’L LAW, 2007.
SPRING 2011 4
dards, or as an exception, which would transpose the necessity
test of trade law into the investment regime?
This paper addresses the non -discrimination st andards of
MFN and NT together, since t he focus of analysis is their rela-
tion to HSE measures. In trade law, by contrast, national treat-
ment rationales are not necessarily relevant to the interpretation
of MFN disciplines,6 as MFN and “n on-discriminatio n” are
not necessarily synonymous.7 While differences between MFN
and n ational treatment may be warranted in the trad e regime,
in the investment arena, both MFN and NT operate within the
border with respect to largely similar issues. Both the Occiden-
tal case and the Cross Border Trucking case (examined below)
have approached their analysis unde r the assumption that both
the MFN a nd NT standards are synonymous, in the investment
context.
DISCRIMINATORY PURPOSE
Actual p roof of discri minatory int ent is generally not
required as an element of discrimination.8 This does not mean
that the purpose of an HSE me asure i s ir relevant, however.
Account of pu rpose allows for proper consi deration of the per-
spectives of both the investor and the State, including the public
interest underlying HSE measures, and thus overcomes unidirec-
tional interpre tations that consider investment obligations from
the sole vantage point of the investor.9 Moreover, the purpose of
the challenged measure is relevant since less favorable treatment
is not established by disparate impact alone. In practice, national
treatment claims arguing that any treatment that differentially
affects a foreign investor, even if th e difference is not attribut-
able to considerations of nationality, have not been successful.10
If these claim s were decided oth erwise, the State would find
itself unable to regulate in the public interest, wit h respect to
processes or substances in a market dominated by foreign inves-
tors, without risking international liability, given that HSE mea-
sures would inevitably affect economic operators differently.
But how can tribunals determine the real purpose behind a
measure? And, how should tribunals address situations of mixed
intent, i.e., situations where a legitimate HSE objective co-exists
with an impermissible motive? The difficulties involved in iden-
tifying regulatory purpose are compounded in the modern regu-
latory State, where legislatures and administrations respond to a
number of often-competing intere sts, and where so much eco-
nomic and social activity is highly regulated. In light of the fact
that States are hardly mo nolithic entities, t he determination of
protectionist purpose may become a formidable challenge to a
discrimination claim or defense. The Methanex Tribunal, hear-
ing an arbitration involving groundwater contamination in Cali-
fornia, aptly expressed the problem:
In particular, decrees and regulations may be the prod-
uct of compromi ses and the bal ancing of competing
interests by a variety of political actors. As a result, it
may be difficult to identify a single or predominant pur-
pose unde rlying a particular meas ure. Where a single
governmental actor is motivated by an improper pur-
pose, it does not necessarily follow that the motive can
be attributed to the entire government. Much if not all
will depend on the evidential materials adduced in the
particular case.11
Several observations may be warranted in respect to the
difficulti es involved in identifyin g and proving intent. First,
although in international law States may be said to express but
one voic e, democracies in practice respond to different, of ten
competing, political interests. This political feature of dem oc-
racy is not to be condemned, especially when international law
recognizes that democracy, human rights, and development are
“interdependent and mutually reinforcing.”12 It may well be that
different purposes co-exist and explain why a given measure was
adopted.
In such cases, issues of mixed intent will introduce severe
tensions between economic and HSE considerations. In this
regard, onc e evidence reveals the existence of HSE risks, the
parallel presence of illi cit protectionist intent in some govern-
mental organ s hould not ipso facto ren der a measure illegal.
If HSE risks are real, then the HSE protective purpose should
in p rinciple prevail over other purposes, given the para mount
importance of safeguarding health, safety, and the environment.
Second, HSE measures cannot be presumed to be discrimi-
natory. On the contrary, where national authorities have applied
due process and based their findings of risks and determination
of the level of protection on the basis of available scientific evi-
dence, the specificity of HSE measures warrants qualified defer-
ence. It is for the claimant to prove discriminatory treatment, and
not in cumbent upon the government to demonstrate its public
purpose. That said, the “smell test,” discussed below, the uncer-
tainties as to the location of the threshold involved in making a
prima facie case, and the dangers of negative inferences should
lead cautio us governments to be forthcoming in adducing evi-
dence demonstrating the legitimacy of their HSE measures.
With regard to the evidence underlying a HSE measure, the
country of origin of the scientific evidence is not necessarily a
material reason for either accepting or rejecting it.13 The origin
of the scientific evidence cannot sustain a presumption of dis-
criminatory intent becau se if it could, then most governments
would risk attracting international responsibility for their efforts
in asses sing risks. Fur thermore, the level of detail or specific-
ity required of the scientific evidence underlying HSE measures
needs to take into account real world considerations and the sub-
stantial costs involved in producing a science-based analysis of
the ri sks presented by the multi ple substances, processes, and
activities that interact in society. The burden on developing coun-
tries of producing tailored and specific scientific studies, in light
of their limited budget for scientific research and more pressing
priorities such as sanitation and food security, illustrates the ten-
sions surrounding the role of science in investment law.14
Third, in facing the challenges involved in determining pro-
tectionist intent, especially when consid ering facia lly neutral
measures, tribunals are often tempted to adopt a “smell-test.”15
The d egree of circumstantial evid ence pointing to protectio n-
ist intent may acquire a critical role, especially where dire ct
evidence is unavailable. Thus, cl aimants will be d rawn to
5SUSTAINABLE DEVELOPMENT LAW & POLICY
statements from different interests groups active in the political
arena, figures on the expected benefits accruing to competitors
in the marketplace, statements and memos from public officials,
and any ot her piece of evidence that may serve to raise doubts
as to t he legitimacy of purpose. In S.D. Myers, which involved
a ba n on the export of hazardous PCB waste from Canada to
the United States, the “smoking gun” tactic proved effective in
convincing the tribunal that at stake was n ot a legitimate HSE
measure, but rather a sham cover for protectionist purposes.16 In
the Methanex case, the claimant even hired a private investigator
to inspect the garbage of ethanol lobbying firms and to trespass
into their offices.17
Fourth, resort to consistency and nece ssity could also pro-
vide indirect evidence of govern mental i ntent. Su ch indire ct
evidence, however, only offers limited assistance because of the
specific nature of HSE measures as well as the absence of actual
obligations for consistency or necessity. Most often governments
regulate in response to public perception of threats as they arise,
and as scientific progress reveals what were until then “invisible”
risks. Also, sustainable development calls for adaptive manage-
ment and evolving nor ms in order to incorporate new scientific
insights and lessons learned regarding the operation and effec-
tiveness of legal tools. Thus , requiring overall con sistency in
levels of protection and attaching liability for failure to achieve
consistency would have the law operate in fictitious conditions.
The parallel between Bilateral Investment Treaties (“BITs”)
and the Ag reement o n Sanita ry and Phytosanit ary Mea sures
(“SPS”)18 of the WTO illust rates the different roles of harmo-
nization and consistency r equirements in the trade and invest-
ment regimes. The protection of health in a society via sanitary
measures that impede market ac cess for goods that pose SPS
risks will normally impose costs on other countries; to address
this situation and secure market access to foreign goods, the SPS
Agreement pursues har monization of standards and even pre-
sumes conformity when international standards are utilized.19
Investors and their investments, by contrast, are fully immersed
in the diversity of national and local regula tory requirements,
and it would have been quite far-reaching indeed if international
investment agreements (“IIAs”) pursued har monization of HSE
standards across legal cultures an d across differing levels of
development.
With respect to ne cessity requirements, could less-trade
restrictive alter natives provide indirect evidence of protecti on-
ist intent? In addressing this question, it must first be noted that
the prerogative of countries to establish their levels of protection
stems fro m their sovereignty, expressed in constitutiona l man-
dates to safeguard fundamental rights and to protect the popula-
tion, inter a lia, from HSE risks and that these duties cannot be
surrendered or abandoned.20 Second, countries are not obligated
to justify their measures on the basis of necessity, absent explicit,
conventional commitments to that effect. Third, any inquir y on
less-trade restrictive alternatives should consider that reasonably
available measures should achieve the same level of protection,
involve the same regulatory costs, and restrict trade significantly
less. Fourth, the textual differences between the SPS Agree-
ment, which explicitly refers to necessity,21 on the one hand, and
non-discrimination disciplines in investment agreements, which
do not usually include such requiremen t, on the other, must be
given effect.
Fifth and perhaps decisively, in WTO law the remedy for a
measure that offends the less-trade restrictive standard is ces-
sation, i.e., removal of the offending meas ure and adoption of
the reasonably available less-trade restrictive measure.22 By con-
trast, investment treaties contemplate monetary damages as the
remedy of choice, which highlights the need to avoid automatic
transposition o f trade law into the investment field. Thus, less-
trade restrictive criteria as indirect evidence is of limited value
and could not by itself render sufficient light on illicit motive.
Therefore, arbitral tribun als inclined to employ less -trade
restrictive criteria as indirect evi dence shoul d be careful not
to transfo rm them into a substantive ne cessity requirement. In
claims involving trade and investment issues, the importation of
a necessity test could involve investment arbitr ation adjudicat-
ing trade law claims, in excess of jurisdiction. Further, importing
a necessity t est into the non-discrimination standards in invest-
ment law would intrude much further into the regulatory auton-
omy of host States and potentially “lead to odd results.”23
Finally, with respect to “less favorable treatment,” the pur-
pose of a science-based HSE measure should prevail over NT
or MFN claims, including de facto discrimination. A claiman t
alleging disguised protectionism in HSE mea sures will need
to submit compelling evidence proving that th e scienc e is a
sham, that no HSE risk exists, or that the government is operat-
ing solely for protectionist purpo ses. Admittedly, this is a h igh
threshold. Still, the alternative could allow successful challenges
to legitimate HSE measures, thereby compromising the abilities
of governments to fulfill their environment al and human rights
obligations.
LIKE CIRCUMSTANCES AND NON-DISCRIMINATION
As the UN International Law Commission obser ved, even
absent explicit reference to “like circumstances” or “like situa-
tions,” such comparative context is implicit in the essence of the
MFN clause.24 The operation of “like circumstances” is not an
easy task , however, given the elasticity of the terms and, thus,
its ability to cast too wide or too narrow a net, depending on the
level of abstraction or detail.
The application of non-discrimination standards raises dif-
ficulties where, as a result of local environment al conditions or
the structure of a specific market, the operator that is treated or
affected differently by the HSE measure is also a foreign inves-
tor. A hypothetical example presented by the United States Trade
Representative in the context of the failed Multilateral A gree-
ment on Investment (“MAI”) clarifies the point:
One concern which was raised was the possibility that
measures entirely consistent w ith MFN and nati onal
treatment may pr ovide differing treatment to investors
depending on the particular circumstance. For example,
6SPRING 2011
a foreign investor whose investment is si tuated on a
wetland may legi timately be treated differently than
another foreign or domestic investor due to the loca-
tion of the investment, rather than the nationality of the
investor. To address this issue, we included language in
our proposal that would clarify the MAI’s definition of
“in like circumstances,” in order to ensure that legiti-
mate environmental measures will not be challenged
purely on the grounds of such differential treatment.25
The application of the non-discrimination standards to HSE
measures raise at least two intertwined questions concerning the
operation of the phrase “in like ci rcumstances.” First, whether
like circumstances operates as an exception to non-discrimina-
tion dis ciplines or alt ernatively as an operative element of the
MFN and NT standards. Second, whet her like circumstances
refer only to operators in the same economic sector or whether
it includes other differentiating criteria. In addition to these two
questions , it remains open to question whether like ci rcum-
stances could otherwise safeguard HSE measures that by design
differentiate between investors on the basis of nationality.
LIKE CIRCUMSTANCES: AN OPERATIVE ELEMENT OR AN
EXCEPTION?
Investment jurispr udence is divid ed as to whether “like
circumstances” constitutes an operative element of the non-dis-
crimination standards or an exception that could justify differen-
tial treatment on policy grounds. Analysis of the Cross-Border
Trucking case, concer ning U. S. re strictions on cross-bor der
trucking services as well as restrictions on Mexican investment
in the U.S. trucking industry, is useful in approaching this issThe
NT and MFN issues before the Cross-Border Trucking NAFTA
Chapter 20 Arbi tral Panel turned on the meaning and scope of
the phrase “in like circumstances.”26 The Arbitral Panel sought
guidance from other agreements that use similar language, such
as the Canada-U.S. FTA. As the Panel noted, this agreement con-
tains an exception to NT in services trade,27 where “the differ-
ence in treatment is no greater than that necessary for pr udential,
fiduciary, health and safety, or consumer protection reasons,” and
explicitly imposes the burden of satisfying the exception on the
party accor ding different treatment.28 The Panel then observed
that the phrase “like cir cumstances” may properly include dif-
ferential treatment, under the conditions specified in the Canada-
U.S. FTA.29
Upon this reading of “ like circumstanc es” and under the
light of NAFTA’s trad e liber alization objectives,30 the Panel
reached the conclusion that the “in like circumstances” language
constitutes an excep tion to the non-discri mination discip lines
and should th us be interpreted nar rowly.31 The Panel explained
that “differential treatment should be no greater than necessary
for legiti mate regulatory reasons such as safety, and that such
different treatment be equivalent to the treatme nt accorded to
domestic service providers.”32
The Cross-Border Trucking Pane l’s analysis highlights the
difficulties involved in the operation of non-discrimination disci-
plines. In particular, the Panel’s reading of “like circumstances”
as an exception to differ ential treatme nt could serve to avoid
unreaso nable results, con sidering that NAFTA’s investm ent
chapter does not exp licitly cont ain pru dential exc eptions f or
the protection of health, safety, and the environment that could
justify departure from its substantive obligations, unlike trade in
goods and services.33
Other NAFTA arbitr al tribu nals have confronted similar
issues and adopted a similar rationale in the context of national
treatment. The S.D. Myers Tribunal, for example, noted that the
“assessment of like circumstances must also take into account
circumstances that would justify governmental regulation that
treat them differently in order to protect the public interest.”34
In a sim ilar juri sprudential vein, the Parkering Tribunal
considered environmental criteria in its application of the non-
discriminati on standards. 35 This case involved parking works
and operations within the old city of Vilnius, Lithuania, which
was protected by the UNESCO Convention concerning the Pro-
tection of the World Cultural and Natural Heritage.36 The inves-
tor cl aimed that o ther parking works and operations had been
treated differently.37 The Parker ing Tribun al applied a binar y
construct to the non-d iscrimination standard: it compared cer-
tain economi c operators, on the one hand, and it examined the
policy u nderlying the differential treatment, on the other.38 In
this reading, the non-discrimination standard implicitly incorpo-
rates an exception for meas ures justified by l egitimate govern-
mental policies.
It would ap pear at first si ght that this for mula could avoid
excessive outcomes by taking into account HSE conside rations
to justify differential treatment. However, the practical effect of
such reading reduces the policy space available to governments,
as the meaning of “like circumstances” is narrowed down by the
IIA’s economic objectives. Such a narrow reading of the object
and purpose of IIAs risks fr ustrating mutually supportive trade
and environment regimes, as the legitimacy of public pol icy
goals is solely or predominantly evaluated through the lens of the
investment liberalization goals. Moreover, by defining the pur-
pose of investment agreements as tools for protecting investors,
all doubts and ambiguities are resolved in the investors’ favor. To
overcome this apparent lack of balance, IIAs should be appreci-
ated as instruments for sustainable development—embracing its
three pillars: economic, social, and environment—and properly
placed in the broader international law universe.
The r eading of “like circumstances ” as an exception al so
suffers from defic iencies rela ting to scope an d the burden o f
proof. In regards to the bur den of proof, the interpretation that
treats “like circumstances” as an exception requires the respon-
dent government to justify its regulations, relieving the applicant
of establishin g relevant, material facts and proving all the ele -
ments of its claim.39 Then in regards to scope, the “exceptional”
formulation of “in like circumstances” hinges on “necessity”
considerations, where arbitral tribunals run the risk of second-
guessing government regulat ors by testing potentially available
least tr ade restrictive mea sures against i nvest ment liberalizing
objectives. The deficienc ies of such “exceptiona l” readings are
7SUSTAINABLE DEVELOPMENT LAW & POLICY
amplified by the complexity and dynamism of market structures,
as well as by evolving scientific knowledge and changing social
preferences in the modern regulatory State.
Instead, in the investment context, “like circumst ances”
should be read in light of its role as the key operative element
of the non-discrim ination standar ds, rather than as a defens e,
exception, or justi fication against MFN or NT obligations. In
such role, “like circumstances” does not involve presumptions,
narrow interpretations, or transfers in the burden of proof. Simi-
larly, such reading does not transpose the WTO nec essity test
into the operation of investment non-discrimination disciplines.
As an operative elemen t of the sta ndard, t he “ like cir-
cumstances” test requires the identification of all relevant cir-
cumstances that serve to distinguish among for eign investors,
including HSE consi derations. In that co ntext, as clarified by
the Organization for Economic Co-operation and Development
(“OECD”), analysis of conditions of competition in specific eco-
nomic sectors provide a point of departure, but neither exhaust
the task of establishing the category of actors that should be com-
pared, nor the policy objectives that can be taken into account to
define relevant parameters for comparison.40 It appears that the
objective relevance of the circumstances for each specific c ase
seems t o be the correct sta ndard of ref erence,41 including cir-
cumstances pertaining to HSE risks. Particu lar circumstances
with respect to HSE issues should constitute a valid basis for dis-
tinguishing among otherwise similar investments or investors.42
Reading “like circu mstances” as an ope rative element of
the NT and MFN standards would do greater justice to the text
and co ntext of IIAs and would have posi tive syste mic effects.
This r eading would not presume di scrimination in the face of
differen tial treatmen t or effects. Furt hermore, this r eading
would also avoid a mech anical transposition of WTO law and
jurisprudence into IIAs, both of which are different treaties with
different parties, h istory, p ractice, text and context, structure,
obligations, and remedies, thereby also avoiding the application
of a good s analysis, or a s ervices analy sis, to investmen t
matters. Finally, the s cope of like circumstances would not be
narrowed by the sole c onsideration of trade and investment
objectives, thereby contributing to building mutually supportive
environment and investment regimes.
The GAMI Tribunal c onfirmed the role of policy consider-
ations in the determination of “likeness,” and not as an “excep-
tion” to non-discrimination disciplines:
The Arbitral Tribunal ha s n ot b een persuaded that
GAM’s circumstances were demonst rably s o “li ke”
those of no n-expropriat ed mill owners that it was
wrong to treat GAM differently. The Government may
have been clumsy in its analysis of the relevant criteria
for the cutoff line between candidates and non-candi-
dates for expropriat ion. Its understanding of corporate
finance may have been defici ent. But ineffectiveness
is not discrimination. The arbitr ators are satisfied that
a reason exists for the measure which was not itself
discriminatory. That measure was plausibly connected
with a legitimate goal of policy (ensuring that the sugar
industry was in th e hands of solvent enter prises) and
was applied neither in a discriminatory manner nor as a
disguised barrier to equal opportunity.43
Following th e reasoning of the GAMI Award, differen tial
treatment based on HSE considerat ions would not be on the
basis of natio nality, b ut on the basi s of legitimate r egulatory
objectives. This rational e app lies w ith p articular force with
respect to HSE measures of general application. But what about
HSE measures that call for differential treatment on the basis of
the nationality of the investor?
Governmental measure s impleme nting mu ltilateral envi-
ronmental agreements (“MEAs”) may we ll have i mplications
for the NT and MFN standards in IIAs.44 For example, an MEA
allowing performance requirements to transfer environmentally
sound tec hnology might place greater burd ens on a foreign as
compared to domestic investors, and environment al contr ols
arising out of the Clean Development Mechanism establishe d
under the Kyoto Protocol may require countries to discriminate
between different categories of investors on the basis of nation-
ality.45 In these situations, is the phrase “in like circumstances”
broad enough to safegu ard nationality-bas ed di scrimination
based on an MEA?
Markedly, the Pope & Talbot Tribunal presented a “like cir-
cumstances” formulation that purports t o go beyond discrimi-
nation on the basis of nationality: “[a] formulation focusing on
the like circumsta nces question, on the oth er hand, will require
addressing any difference in treatmen t, demandin g that it b e
justified by showing that it bears a reasonable relationship to
rational po licies not motivated by preference of domestic over
foreign owned investments.”46 Fur ther, the Pope & Talbot Tribu-
nal explicitly noted that differences i n treatment will presump-
tively violate the non-discrim ination standards, “unless they
have a reasonable nexus to rational government policies that (1)
do n ot distinguish, on their face or de facto, between foreign
owned and domestic companies, and (2) do not otherwise unduly
undermine the investment liberalizing objectives of NAFTA.”47
According to this reading, “in like circumstances” can safe-
guard HSE measures expressing rational government policies
but not if HSE measures, by design, distinguish between inves-
tors on the basis of nationality. Thus, under this construct, MEA-
based requirements would fail the non-discrimination test.
This solution may not contribute to mutual supportiveness
between investment law and inte rnational environmental law
because it could frustrate th e objectives of MEAs. Thre e alter-
native options provide for a solution whereby the MEA-based,
nationality requirement can co-exist with the non-discrimina-
tion standards. First, “in like c ircumstances” could consider
the fact that the HSE measure is ba sed on an MEA . Second, a
conflict of norms analysis could apply to the conflict between
the investment norm and the MEA nor m, giving priority to the
MEA obligation on account of the lex specialis principle. Third,
general exceptions f or HSE measures, where available, cou ld
safeguard nati onality-based distinctions effected by HSE mea-
sures pursuant to MEAs. These three options would not frustrate
the objectives of investment law because the nationali ty-based
8SPRING 2011
distinctions would not be arbitrary or a disguise for an imper mis-
sible motive. Further, their rational basis and legitim ate policy
goals are underscored by the fact that they have been established
by the international community in an inter national treaty—the
MEA—seeking solutions to global HSE risks.
IN LIKE CIRCUMSTANCES & THE RELEVANT COMPARATORS
Then on the question of the determination of relevant com-
parators for the operati on of the “like circumstances” test, the
Occidental case, involving di scrimination claims by an oil pro-
ducer against the application of Ecuadorean tax law, provides a
platform for analysis.48 The key issue before the tribunal turned
on the meaning of “in like situations.”49 Occidental argued that
“in like sit uations” did not refer to companies in the same sec-
tor of activity, such as oil producers, but to companies that were
engaged in exports , even i f encompassing different sectors.50
Occidental further argued that a number of companies involved
in the export of flowers, mining, seafood products, lumber,
bananas, and Africa n palm oil were entitled to receive Val ue
Added Tax (“VAT”) refunds and continuously enjoyed that ben-
efit.51 Ecuador responded that “in like circumstances” could not
extend to sectors other than oil producers because the whole pur-
pose of the VAT refund policy was to ensure that the conditions
of competitio n were not changed.52 Ecuador further noted that
with respect to VAT refunds, all oil producers were treated alike,
including the national State oil company, Petroecuador.53
The Occidental Tribunal found in favor of the claimant
on t he basis of thin reasoning and doubtful propositions, two
of which will be noted her e. First, the Tribunal noted that “the
purpose of national tre atment is to pr otect investors as com-
pared to local producers, and this cannot be done by addressing
exclusively the sector in which that particular activity is under-
taken.”54 Such formulation is problematic, not leas t because it
neglects the essence of non-discrimination principles in securing
equal access to opportunity, particularly in respect to the condi-
tions of competition.55 Further, the public interest implications
of such an unbalanced reading are readily apparent, including
with respect to HSE measures, as governments will differentiate
among different sectors for entirely legitimate reasons.56
A more ba lanced approach to non-discrimina tion has been
elaborated by the OECD, a forum convening the most heavily
regulated States in the world, in the context of the 19 76 Dec-
laration on Inter national Investment and Multinational E nter-
prises.57 In its 1993 interpretation of the NT standard included in
the 1976 Declaration, the OECD observed that:
As regards the exp ression “in like situa tions”, the
compar ison between for eign-contro lled enterpr ises
established in a Member country and domestic enter-
prises in that Member country is valid only if it is made
between firms operating in the same sector. . . . More
general considerations, such as the policy obj ectives
of Me mber countries, could be taken into account to
define the circumstances in which comparison between
foreign-controlled and domestic enterprises is p ermis-
sible inasmuch as those obje ctives are not contrary to
the principle of National Treatment.58
A sec ond doubtful proposition un derlying the Occidental
Tribunal’s extremely broad reading of “in like situations” relates
to the linkages between disparate treatment and protection ism.
The Occidental Tribunal noted that it was “co nvinced” that
Occidental’s less favorable treatme nt, i.e., the fact that unlike
flower exporters it was denied VAT refunds, was not the result
of discriminatory intent.59 Without more, this statement equates
disparate impact with discrimination, and this interpretation dra-
matically compromises a government’s ability to regulate in the
public interest , including by way of di fferential an d incremen-
tal policy approaches.60 In this regard, it may be useful to recall
the attempt by the Chair of the OECD’s Multilateral Agreement
on Investment Negotiating Group to put together a package of
proposals to address member States’ concerns on the impact on
regulatory autonomy of the NT and MFN standards:61
The fact that a measure applied by a government has a
different effect on an investment or investor of another
Party would not in itself ren der the measure inc onsis-
tent with national treatment and most favoured nation
treatment. The objective of “in like circumstances” is to
permit the consideration of all relevant circumstance s,
including those relating to a f oreign investor and i ts
investments, in deciding to which domestic or third
country investors an d investments they should appro-
priately be compared.62
This approach is mor e nuanced and recognizes both th e
close link between discrimination and equal opportunity. It also
recognizes the fact that a government may treat economic opera-
tors differently for entirely legitimate policy reasons.
CONCLUSION
The operation of the relative non-discrimination standards
can penetrate deeply into the regulatory sphere of the State, since
they requi re the State to adduce a coherent explanation of t he
relevant categories and distinctions underlying the content and
scope of application of an internal measure. Policy rationales
for disparate treatment can involve a number of public interest
regulations, including with respect to the environment, health,
and sa fety. In this regard, interpreting “in like circumstances”
as an operative element of the non-discrimination standards in
IIAs that acc ounts for all relevant circumstances relating to the
investment, rath er than as a narrow excep tion that transf ers to
the State the burden of justifying its policy preferences, contrib-
utes to preserving the policy space nec essary for the exercise
of government al authority i n respect of health, safety, and the
environment. Thus, the interpretation of “in like circumstances”
as an o perative e lement o f the non-discr imination standards
ultimately contributes to building channels of dialogue between
legal regimes relevant to sustainable development.
Endnotes: Investment Agreements & Sustainable Development
on page 35
