Investor-state arbitration and domestic environmental protection.

• Published date: 01 January 2015
• Author: Slater, Tamara L.
• Date: 01 January 2015

TABLE OF CONTENTS
                INTRODUCTION
                I. INTERNATIONAL AGREEMENTS AND GLOBAL ENVIRONMENTAL
                 PROTECTION
                 A. World Trade and International Investment Agreements
                 B. Investor-State Dispute Settlement (ISDS) Provisions
                 C. International Environmental Protection Measures
                II. THE CHALLENGE OF IMPLEMENTING INTERNATIONAL
                 ENVIRONMENTAL POLICIES THROUGH DISCONNECTED
                 MECHANISMS
                 A. Survey of Arbitration Cases with Environmental Issues
                 B. The Trans-Pacific Partnership
                III. Choosing a Standard: Empowering or Requiring
                 Arbitrators to Consider International Agreements on
                 Environmental Protection
                CONCLUSION
                

INTRODUCTION

There is a long-running debate between environmentalists and advocates of free trade. (1) Environmentalists generally argue that free trade leads to a "race to the bottom" and "pollution havens," wherein the countries with the worst environmental (or other) protections are rewarded. (2) Free trade advocates most often argue that such issues should simply stay out of trade agreements, sometimes adding that freer trade leads to economic gains and increased quality of life, followed by greater environmental and labor protections as citizen expectations change. (3) Both sides, however, are beginning to agree that disputes arising under international trade and investment agreements raise not only commercial issues, but also important questions of public policy. (4)

The above debate provides no clear solution; therefore, a more effective inquiry is to explore whether a country can improve its protections for the environment, given a particular provision of international investment law called Investor-State Dispute Settlement (ISDS). International investment is a distinct area of law from trade, but often overlaps both conceptually and practically. (5) Most criticism of investment agreements arises as one part of a critique implicating all international economic law and is most often framed as trade. (6) Thus, the language of that discourse is applicable here. At the heart of most such criticism is a concern that big corporate entities disproportionately control and benefit from international economic agreements (7) as corporations become larger (8) and more influential in global politics and trade negotiations. (9) This power dynamic is manifested in the implementation of ISDS provisions, which enable foreign investors to file claims against governments (10) in an international arbitration (11) forum, as long as the foreign investor is covered by an International Investment or Free Trade Agreement (12) between the investor's home country and the host country that includes ISDS provisions.

These questions are urgent, especially for those concerned about the environment, in the face of two realities. First, there are two trade agreements currently being negotiated that have the potential to transform the global economic landscape and are likely to include ISDS provisions: The Transatlantic Trade and Investment Partnership (T-TIP) between the European Union and United States, (13) and the Trans-Pacific Partnership (TPP) involving twelve nations of the Asia-Pacific region. (14) Second, there is near universal scientific consensus that climate change is caused in part by humans and that the global community is almost too late to prevent its extreme weather consequences. (15)

Part I of this Note provides a broad introduction to Free Trade Agreements, International Investment Agreements, ISDS provisions, and some ways trade and the environment intersect. Part II evaluates some of the available data regarding trends in free trade agreements and includes a brief discussion of nine specific ISDS disputes with environmental components. (16) Part III provides a number of suggestions for ways to better incorporate into ISDS decision-making more effective methods of evaluating the authenticity of, and ultimately protecting, domestic environmental laws.

I. INTERNATIONAL AGREEMENTS AND GLOBAL ENVIRONMENTAL PROTECTION

A. World Trade and International Investment Agreements

Modern international trade law was codified when twenty-three countries signed the General Agreements on Tariffs and Trade (GATT) on October 30, 1947. (17) GATT was the governing document for international trade from 1947 until December 15, 1993 when GATT contracting parties established the World Trade Organization (WTO), incorporating GATT. (18) Today GATT-WTO has 160 member countries. (19) GATT-WTO policies are based on economic theories that the reduction of trade barriers improves global living conditions. (20) To this end, GATT-WTO provides for uniform trade laws, aid in resolving trade disputes between nations, and facilitation of global trade through other mechanisms. (21) One essential requirement of GATT-WTO is that all members treat other members with "most favored nation" status, which means that the lowest tariff rate one WTO member gives any country is the tariff rate all WTO members must receive. (22)

There is, however, an exception to the most favored nation requirement that was written into the GATT-WTO regime from the very start. GATT Article XXIV states that, within certain limitations, "[T]he provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area ..." (23) This Note focuses on the Free Trade Agreements that effectively allow for such preferential treatment among a small number of countries (24) and deals specifically with issues of foreign investment, called International Investment Agreements (IIAs). (25)

This is not a minor exception to GATT-WTO rules. As of June 15, 2014, 585 regional trade agreements had been reported to the WTO, with 379 in force." (26) As of 2012, there were nearly 3,200 Bilateral Investment Treaties (BITs). (27) The popularity of these agreements likely reflects the challenges inherent in consensus decision-making among 160 nations. (28) Over the last few decades, many of the multi-national free trade agreements have sparked major protests by activists concerned with labor rights, environmental sustainability, exploitation of developing nations, and other social issues. (29)

B. Investor-State Dispute Settlement (ISDS) Provisions

The theory behind a trans-national system for dispute resolution is that it is better equipped to equitably resolve an investor's dispute with a state than the state's own domestic court system. Investors often fear political influence, incompetence, or "home town justice" in domestic court systems. (30) Much of this fear is based in reality. There are ineffective, inefficient, or corrupt domestic judicial systems that discourage foreign direct investment. (31) The predictability of trade rights and investment opportunities can also cause barriers to investment given that investors often work in many different countries and thus many different legal systems. (32)

There is, however, value and historical precedent for relying more heavily on domestic judicial systems than is the practice today. (33) Furthermore, there are numerous flaws in the international arbitration system that include its largely ad hoc structure, reliance on private firms and lawyers, (34) and failure to successfully consider non-investment factors even when the trade agreement provides for the protection of human rights at issue. (35)

ISDS provisions have grown more controversial over the last few years (36) as the number of disputes under ISDS have increased dramatically. (37) The number of disputes settled in favor of investors has also risen in recent years. As of the end of 2012, 244 disputes had been resolved through arbitration under various ISDS provisions with approximately 42% decided in favor of the state, 31% decided in favor of the investor, and 27% settled, typically on confidential terms. (38) In 2012, however, 12 out of 17 decisions, 71%, rendered on the merits accepted--in part or in full--the claims of the investors. (39)

Drafters of trade agreements and individual commercial contracts can choose to bring disputes under an ISDS in numerous forums. (40) The most commonly used forum is the International Centre for Settlement of Investment Disputes (ICSID), a non-profit arm of the World Bank. (41) The second most commonly used forum is the United Nations Commission on International Trade Law (UNCITRAL). (42) Each forum has its own set of rules, amendable by contract, but they generally follow the same pattern. Most arbitrations are an "ad hoc process" where the arbitrators "are private agents, typically practicing international lawyers, or professors of international law" selected and approved by the parties. (43) These individuals often represent clients as attorneys in other disputes at the same tribunals. (44)

The primary criticisms of ISDS provisions can be broken down into three categories. The first is that these provisions seem to give greater power to foreign investors than nations, by permitting investors to file claims against governments. (45) ISDS provisions usually provide a distinct forum in which foreign investors, not governments, can bring a dispute. (46) This power shift is also evident in how investors seek to avoid use of domestic courts for settling such disputes if at all possible, even in instances when the investment agreement requires utilization of the domestic system first. (47) Investors can challenge not only alleged violations of customary international law and investment contracts, but even domestic laws of the host State. (48) Thus, ISDS provisions allow for largely domestic issues to be brought in front of a non-judicial arbitration panel instead of in domestic courts, even though the case is ultimately ruling on how a domestic law relates to the trade agreement.

The second category that critics focus on is structural failures within the arbitration system. In 2012, the Corporate Europe Observatory and the Transnational Institute came out with a report that evaluated bias within...