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*Columbia FDI Perspectives*

Perspectives on topical foreign direct investment issues
No. 294  December 28, 2020
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Riccardo Loschi ([log in to unmask])



*Taming the chaos in investment treaty protection*
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* <#m_8369103679917357117__edn1>
by
Federico Ortino** <#m_8369103679917357117__edn2>


In his 2011 Freshfields Lecture, Toby Landau urged the arbitration
community to pay more atention to certain core concerns about
investor-state dispute settlement (ISDS), particularly after an explosion
of cases pushing into ever more sensitive areas of sovereign discretion.
According to Landau, there was nothing in the existing legal framework to
prevent the community from saving investor-state arbitration from itself.[1]
<#m_8369103679917357117__edn3> Among the core concerns he highlighted, the
extent of the substantive protections provided by international investment
agreements (IIAs) remains a crucial one.

Most IIAs concluded until the early 2000s normally grant very broad
substantive protections to foreign investors, including, in particular,
guarantees vis-à-vis host countries’

   - substantial deprivation of a foreign investment’s value (through
   expropriation provisions),
   - unreasonable or arbitrary conduct (mainly through the non-impairment
   and fair-and-equitable-treatment clauses), and
   - breach of investment contracts (through umbrella clauses).[2]
   <#m_8369103679917357117__edn4>

A few treaties even provide for guarantees against regulatory changes
introduced by host countries negatively affecting foreign investments
(through the little-known stabilization clause).[3]
<#m_8369103679917357117__edn5> Despite arbitral practice gradually bringing
some clarity regarding the content of investment-protection guarantees
(i.e., umbrella clauses, full protection and security, indirect
expropriation), there are still three serious shortcomings, mainly
revolving around the content of the fair-and-equitable-treatment clause.

First, while investment tribunals now regularly acknowledge host countries’
right to regulate in the public interest, many tribunals still fail to
recognize appropriately the legal relevance of the public interest in
determining whether a legitimate expectation deserves legal protection.
Under EU law, for example, it is undisputed that, “even if the applicant is
able to prove a prima facie legitimate expectation, this may be defeated if
there is an overriding public interest that trumps the expectation.”[4]
<#m_8369103679917357117__edn6>

Second, several recent decisions, including especially those involving
changes to incentives regimes in the photovoltaic industry, fail to exclude
categorically an interpretation of fair and equitable treatment that
includes an obligation of regulatory stability in the strict sense.
Breaches of a strict stability obligation is premised, crucially, on the
existence of radical changes in the applicable regulatory framework rather
than on the unreasonable or arbitrary nature of the new framework.[5]
<#m_8369103679917357117__edn7>

Third, where investment tribunals have focused on reasonableness-based
guarantees, there is still no clarity regarding the specific reasonableness
test that is employed to review the lawfulness of host countries’ conduct
under IIAs. While some tribunals have employed a (more deferential)
means-ends rationality test, other tribunals have employed a (more
intrusive) proportionality-balancing test.[6] <#m_8369103679917357117__edn8>

It is thus unsurprising (though disquieting for many) that, following the
raft of recent measures undertaken by many governments to face the COVID-19
pandemic, potential IIA claims are being envisaged to remedy any harm
caused to foreign investors.

The time for investment arbitration to save itself may be running out. The
number of policymakers directly addressing these shortcomings is growing
(e.g., India's recent investment policy reforms or the ongoing efforts to
“modernize” the Energy Charter Treaty). However, some countries’ recent
solutions do not appear to enhance legal certainty and ensure that
countries’ right to regulate is subject to appropriate legal restraints.
Among the recent treaty innovations falling short of the mark are:

   - General references to the customary minimum standard of treatment
   (e.g., the Comprehensive and Progressive Agreement for Trans-Pacific
   Partnership’s Article 9.6),


   - Broad “rule-of-law” provisions (e.g., the 2019 Dutch model BIT’s
   Article 5), and
   - Treaty language expressly or implicitly pointing to strict
   proportionality balancing (e.g., the EU-Canada Comprehensive Economic and
   Trade Agreement’s expropriation annex or the US-Mexico-Canada Agreement).

Future IIAs should instead clearly identify (a) certain principles of good
governance that feature in most public law systems, such as legality,
procedural fairness and substantive reasonableness; and (b) the applicable
standard of review, including both the nature and intensity of review.[7]
<#m_8369103679917357117__edn9> For example, IIAs should guarantee host
countries’ right to determine their own levels of protection of a public
interest, as is true in WTO law and was recognized by the EU Court of
Justice in Opinion 1/17
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.

These reforms should be addressed in a multilateral forum. However, unlike
ISDS procedures, reforms of substantive investment protections are taking
place at national or regional levels only. Accordingly, these various,
parallel reforms may end up being partial in scope, or simply not produce
much additional coherence and consistency. Extending UNCITRAL Working Group
III’s mandate beyond ISDS reform has been suggested, but there appears to
be very little appetite for it, yet.

Thus, when it comes to a core aspect of the investment treaty system,
investment protection, policy-makers find themselves between a rock and a
hard place: investment tribunals’ shortcomings as described above, on one
side, and the politically arduous multilateral mountain to climb, on the
other side. Something will have to give.

------------------------------

* <#m_8369103679917357117__ednref1> *The **Columbia FDI Perspectives** are
a forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. **Columbia FDI Perspectives **(ISSN 2158-3579) is a
peer-reviewed series.*

** <#m_8369103679917357117__ednref2> Federico Ortino (
[log in to unmask]) is Professor of International Economic Law at
King’s College London. The author wishes to thank George Bermann, Lukas
Siegenthaler and Lukas Stifter for their helpful peer reviews.

[1] <#m_8369103679917357117__ednref3> Alison Ross, “Freshfields lecture
2011: saving investment arbitration from itself,” *GAR*, vol. 6 (2011).

[2] <#m_8369103679917357117__ednref4> Federico Ortino, *The Origin and
Evolution of Investment Treaty Standards: Stability, Value, and
Reasonableness* (Oxford: OUP, 2019).

[3] <#m_8369103679917357117__ednref5> Ortino, pp. 14-20; also Tarcisio
Gazzini, “Beware of freezing clauses in international investment
agreements,” *Columbia FDI Perspectives*, no. 191 (Jan. 16, 2017).
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[4] <#m_8369103679917357117__ednref6> Paul Craig, *EU Administrative Law*
(Oxford: OUP, 2012), p. 584.

[5] <#m_8369103679917357117__ednref7> Ortino, pp. 33–43.

[6] <#m_8369103679917357117__ednref8> Ortino, pp. 127–152.

[7] <#m_8369103679917357117__ednref9> See, Federico Ortino, “The investment
treaty system as judicial review,” *ARIA, *vol. 24 (2013), pp. 437 et seq.



*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Federico Ortino, ‘Taming the chaos in investment
treaty protections,’ Columbia FDI Perspectives No. 294, December 28, 2020.
Reprinted with permission from the Columbia Center on Sustainable
Investment (**www.ccsi.columbia.edu*
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*Karl P. Sauvant, PhD*


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"An Inventory of Concrete Measures to Facilitate the Flow of Sustainable
FDI: What? Why? How?", "Note on the Costs and Financing of an Advisory
Centre on International Investment Law", "Insulating a WTO Investment
Facilitation Framework from ISDS", "Enabling the Full Participation of
Developing Countries in Negotiating a WTO Investment Facilitation
Framework", "Advancing Sustainable Development by Facilitating Sustainable
FDI, Promoting CSR, Designating Recognized Sustainable Investors, and
Giving Home Countries a Role", "Making FDI more Sustainable", "The Case for
an Advisory Centre on International Investment Law", "An Advisory Centre on
International Investment Law: Key Features", "The Potential Value-added of
a Multilateral Framework on Investment Facilitation for Development",
"International Investment Facilitation: By Whom and for What?" are available
at https://ssrn.com/author=2461782 .

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