To Carve or not to Carve: India’s Investment Treaties Must Look Beyond GATT-Inspired Environmental Carve-Outs to Avoid Regulatory Chill

To Carve or not to Carve: India’s Investment Treaties Must Look Beyond GATT-Inspired Environmental Carve-Outs to Avoid Regulatory Chill

Arijit Sanyal* and Eshan A. Chaturvedi**

Introduction

Environmental and international investment law was a tale of two cities until the onset of climate change. However, the overlaps have visibly increased and conflicted ever since states and international organizations began to address climate change through reforms such as the Paris Agreement and the E.U.’s Green Deal. Notwithstanding the adoption of environmental reforms, implementation has not been smooth due to resistance from investors claiming to be affected by environmental reforms. This resistance has resulted in a rise of Investor-State Dispute Settlement (“ISDS”) claims against states, leading to regulatory chill (¶ 50). Among other measures to limit such claims, states have inserted environmental carve-outs (“carve-outs”) into their respective treaties, inspired by Article XX of the General Agreement on Tariff and Trade (“GATT”), which immunize certain environmental reforms from challenge.

However, GATT-inspired carve-outs have not been effective because ISDS tribunals have continued to hold states responsible for violation of treaty provisions and award compensation to investors—as in Infinito Gold v. Costa Rica and Eco Oro v. Colombia. The ineffectiveness of carve-outs may lead to concerns for countries like India, whose model bilateral investment treaties and free trade agreement investment chapters (“Investment Instruments”) contain similarly worded provisions. Further, India has been engaged in negotiating several new Investment Instruments. However, these developments come when India has undergone several environmental mishaps in the last few years alone.

Thus, the Government of India may contemplate stricter environmental reforms which could encroach upon investments in the energy sector. Against this backdrop, this article discusses why GATT-inspired carve-outs contained in Investment Instruments may no longer be viable. Further, the article proposes a model of carve-out based on Environmental Impact Assessments (“EIA”) which excludes certain claims from the scope of ISDS and makes provision for them to be referred to an alternative mechanism within the framework of the concerned Investment Instrument.

I. Lost Opportunities for GATT-Inspired Carve-Outs

GATT-inspired carve-outs have been put to test in Infinitio Gold and Eco Oro, where claims were initiated for breaches of the Fair and Equitable Treatment (“FET”) standard and other treaty commitments due to environmental measures adopted by Colombia and Costa Rica. Despite attempts by Colombia and Costa Rica, the tribunals did not preclude compensation and stated that the carve-out could not be allowed to operate in a way that overrides treaty provisions dealing with FET.

The carve-out contained under Article 2201(3) of the Canada-Colombia Free Trade Agreement (“Canada-Colombia FTA”) provides that:

 “. . . [N]othing in this Agreement shall be construed to prevent a Party from adopting or enforcing any measure necessary: a) to protect human, animal or plant life…include environmental measures necessary to protect human, animal or plant life and health . . .” (emphasis added).

In Eco Oro, Colombia argued that Article 2201(3) of the Canada-Colombia FTA was meant to exclude measures adopted to address environmental concerns. Colombia therefore urged the tribunal to not grant compensation for measures covered by Article 2201(3). However, the Tribunal observed that the text of Article 2201(3) of the Canada-Colombia FTA did not preclude the payment of compensation for violation of treaty provisions (¶ 367). The Tribunal further observed that if the parties intended to exclude any liability from their actions, the provisions of the respective treaties should have been drafted to reflect this intent (¶¶ 368-369). Consequently, the Eco Oro tribunal concluded that Article 2201(3) was meant to shield environmental measures and that the investors could not ask for restitution. But the provision’s ordinary meaning did not preclude the award of compensation when environmental measures violated FET standards.

This view aligns with that expressed by the Infinitio Gold tribunal, which found that whilst Annex 1, Section III(1) of the Canada-Costa Rica Free Trade Agreement affirmed a state’s right to regulate, it could not be understood to override substantive treaty provisions. Further, the Infinitio Gold tribunal affirmed that exceptions had to be interpreted to balance investor and environmental protection. The abovementioned interpretations indicate that GATT-inspired carve-outs have not been interpreted to exclude compensation for breach of treaty provisions. On the contrary, the abovementioned awards may have created an impression that GATT-inspired carve-outs are meant to bail out states for breach of treaty provisions, whereas the provisions’ real purpose is to exclude certain actions from the scope of ISDS.

II. Have Carve-Outs Hit a Dead-End?

Eco Oro and Infinitio Gold indicate that GATT-inspired carve-outs may not be the most effective way to exclude environmental measures from being targeted by ISDS claims. Moreover, these tribunals have blurred the lines between the defense of necessity and GATT-style carve-outs which are meant to exist on different planes. While necessity as a defense is deployed after a breach has been found, a carve-out[1] aims at excluding ex ante certain actions from substantive treaty provisions. However, the aforementioned interpretation of GATT-inspired carve-outs in Infinitio Gold and Eco Oro has raised concerns about the suitability of carve-outs in new-generation treaties altogether.

Infinitio Gold and Eco Oro alone should not indicate that carve-outs as tools for safeguarding the state’s capacity to protect the environment have hit a dead-end. Rather, they serve to illustrate that GATT-inspired carve-outs such as those contained in Article 5.4 of the Model India Bilateral Investment Treaty (“India Model BIT”) and Article 6.4 of the Investment Cooperation and Facilitation Treaty between Brazil and India (“Brazil-India BIT”) may not be the best way to protect the policy space required for effective environmental reforms. Further, at the time of writing this article, India was negotiating Investment Instruments without much clarity on environment-related provisions therein. Against this backdrop, it may not be practical for the parties involved to continue with GATT-inspired carve-outs.

Considering the emphasis laid by the Infinitio Gold and Eco Oro tribunals on balancing environmental and investor rights, treaty parties should reorient their approach towards carve-outs. In this regard, they should consider carve-outs that exclude environmental measures from the scope of potential ISDS claims and allow investors to present such claims before a separate mechanism within the framework of the respective Investment Instruments.

III. India’s Investment Instruments

At the time of writing this post, India has been negotiating Investment Instruments with the European Union (“E.U.”), United Kingdom (“U.K.”), Sri Lanka, and other countries. Other Investment Instruments have recently been concluded with Brazil, Kyrgyzstan, and Japan. However, these treaties do not contain uniform and effective environmental protection provisions or carve-outs. For Instance, Article 5.4 of the India Model BIT and Article 6.4 of the Brazil-India BIT provide that non-discriminatory measures taken to protect the public interest and further objectives such as protection of environment protection shall not amount to expropriation.

Though differently worded than Article 2201(3) of the Canada-Colombia BIT, Article 5.4 of the India Model BIT and Article 6.4 of the Brazil-India BIT are inspired by Article XX of the GATT. Consequently, they leave room for arbitral tribunals to determine if a measure was non-discriminatory. For instance, Article 6.4 of Brazil-India BIT provides:

Non-discriminatory regulatory measures by a Party or measures or awards by judicial bodies of a Party that are designated and applied to protect legitimate public interest or public purpose objectives such as public health, safety, and the environment shall not constitute expropriation under this Article” (emphasis added).

Similarly, Article 5.4, India Model BIT provides:

“. . . [N]on-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives such as public health, safety, and the environment shall not constitute expropriation” (emphasis added).

Though the two abovementioned provisions are similarly worded, Article 6.4 of the Brazil-India BIT has a broader scope and includes pronouncements of judicial bodies in the host states. This may be a cause of greater concern in India, as the higher judicial bodies have usually taken cognizance of environmental and public health-related issues. This increases the possibility of claims by investors in the event that a judicial pronouncement encroaches upon certain investments. Further, there being no express exclusion of liability, along the lines of what was expressed by the Eco Oro tribunal, such claims (if initiated) are likely to be decided in the favor of the investor.

Further, with tribunals having the power to determine if a measure is non-discriminatory, awards have the potential to restrain judicial, administrative, or legislative measures that impact public policies directed towards the environment (p. 344-45). For instance, many tribunals have adopted broad views in interpreting what actions violate non-discriminatory standards, and have even drawn parallels with different sectors to determine if non-discriminatory standards were violated.[2] In this regard, the tribunal in Occidental Exploration and Production v. Republic of Ecuador observed that while determining if a treatment was non-discriminatory, the analysis could not be limited to the circumstances in one exclusive sector. Thus, even if the government of India implements environmental reforms, it cannot be said that such reforms will be immune from the scrutiny of an ISDS tribunal, as the tribunal may end up drawing parallels between what is discriminatory in the environmental sector with discriminatory actions in other sectors have different thresholds.

Another possible concern with the carve-outs under Article 5.4 of the Model India BIT and Article 6.4 of the Brazil-India BIT is that an ISDS tribunal constituted thereunder will not necessarily be bound by domestic law.[3] Hence, measures taken in furtherance of new or existing domestic environmental legislation may be of little relevance to the tribunal. An overview of the awards discussed above and the subjective nature of investment protection norms demonstrate that their interpretation is largely left to ISDS tribunals, who end up interpreting them inconsistently.[4] In this regard, the risk of facing ISDS claims, and the possibility of having to pay the pecuniary obligations of the award, has the potential to prevent India from implementing ambitious environmental reforms and force it to join a long list of other states who have faced a similar fate.[5] Consequently, GATT-inspired carve-outs may not be the most effective way to deal with possible environmental claims at a time when India plans to roll out environmental reforms.

IV. EIA Carve-Outs

Considering the apprehensions of “regulatory chill”, Indian policymakers should consider broadly worded and strategic carve-outs which exclude certain claims from the ISDS mechanism and provide an alternative forum for a certain class of claims within the treaty framework. In this regard, India may consider adopting a broadly worded carve-out, which excludes certain claims from the scope of ISDS, and directs such claims to an alternative forum within the framework of the Investment Instruments. To promote inter-party collaboration in respect of environmental reforms, the proposed mechanism should consist of representatives nominated by state parties to the respective treaties. Such representatives shall be tasked with the examination of claims concerning environmental measures excluded from the traditional ISDS mechanism.

A possible way to achieve the abovementioned mechanism is by adopting an EIA-based carve-out. This approach balances the interests of states and investors. EIAs have primarily been used for screening investments to assess the potential impact of planned investments in the host state’s territory. However, ex-post EIAs can be deployed for assessing the ongoing impact of investments on the environment. This can aid the mechanism in its assessment of an investor’s claims based on scientific parameters. Additionally, the mechanism could allow claims from host states against certain investments, should the EIAs demonstrate adverse effects on the environment of the host state.

V. The Road Ahead

While the utility of EIA carve-outs can be determined once they are put to the test, their balanced approach makes them more likely to succeed than GATT-inspired carve-outs. First, EIA carve-outs can be brought to life by modifying existing Investment Instruments of India which have a relatively higher focus on environmental protection. For instance, the Comprehensive Economic Partnership Agreement between the Republic of India and Japan (“India-Japan CEPA”) could serve as a basis for the proposed carve-out. Article 8(1) of the India-Japan CEPA acknowledges the right of each state party to establish and regulate environmental policies domestically. Further, Article 99 provides that state parties shall not waive environmental measures for the promotion of investments.

The abovementioned provisions are broad enough to serve as a basis for further amendments to include EIA carve-outs. In this regard, the stakeholders may consider including the requirement for furnishing EIAs by investors. One of the possible ways to implement this can be to impose requirements mirroring environmental obligations contained under Articles 8(1) and 99 of the India-Japan CEPA. Consequentially, the envisioned provision would require state parties to consider EIAs by investors, to assess the viability of certain investments within their territory. Alternatively, EIAs could be mandated under the local environmental protection legislations, which will have to be complied with at the time of investing, and throughout the duration of the investment.

Further, stakeholders should deliberate on the structure of the proposed alternative forum. To ensure fairness and transparency, they may consider having representatives of all the state parties as adjudicators of the proposed forum. Eventually, when a claim captured by the carveout arises, the Investment Instrument shall require the aggrieved party to refer the claim to the proposed forum. Considering the nature of environmental reforms, it may also be of interest to the Government of India to negotiate a two-way mechanism with regard to the proposed forum. Given the involvement of EIAs, the Investment Instrument can provide for host states to refer infringement proceedings against investors before the proposed forum.

The proposed provision would impose greater environmental obligations on investors by requiring them to furnish EIAs concerning their investments. Additionally, should investors have concerns about certain environmental measures, their claims will be referred to the proposed forum. Further, the provision should allow host states to bring claims before the proposed forum based on the EIAs submitted by the investors themselves. Thus, apart from furthering the agenda of climate change, the EIA carve-outs will serve as an additional layer to further intra-governmental cooperation in the field of climate change, a step recently suggested under Recommendation 4 of the Draft Legislative Guide on Investment Dispute Prevention and Mitigation.[6]

Conclusion

Eco Oro and Infinitio Gold have demonstrated why GATT-inspired carve-outs may not be the ideal way to shield India from possible ISDS claims based on its environmental policies. Considering the recent environmental mishaps in India, it is likely that stricter environmental reforms are on the horizon. However, considering that India is negotiating several Investment Instruments at the same time, it may be the right opportunity to put such a provision to test and spearhead the ISDS reform movement in light of climate change.

The proposed carve-out reflects the desired balance required to address environmental issues, as it allows the involvement of all stakeholders under an Investment Instrument (states and investors) equally in the adjudicatory process. The involvement of state representatives in the proposed forum may raise concerns regarding the fairness of the entire process. However, this proposal must be understood in light of climate change—which requires states to meet various obligations to safeguard climate concerns. The success of the proposed mechanism can only be known if becomes a reality. However, given the balanced approach of the carve-outs, this approach has the potential to set the right tone for environmental reforms within ISDS in the global south and inspire similar reforms at a time when some countries have entered a state of regulatory chill.


*Arijit Sanyal is an Associate at Skywards Law, New Delhi with the International Disputes & Litigation Team, and a lawyer qualified to practice in New Delhi. Arijit has acted for clients before the Supreme Court of India, High Court of Delhi and Gujarat, and arbitrations administered on an ad-hoc basis and by the ICC, LMAA, SIAC etc. Besides work, Arijit is a Core Team Member of the Moot Alumni Association of the Vis Moot. Arijit has studied arbitration law at the Arbitration Academy in Paris where his essay on climate change and investment arbitration was awarded the “Laureate of the Academy” prize.
**Eshan A. Chaturvedi is an Associate at Skywards Law with the International Disputes & Litigation Team, and a lawyer qualified to practice in New Delhi. Eshan has acted for clients in a series of domestic and international disputes seated in India as well as the U.K., Singapore and MENA under the ICC and SIAC Rules. Eshan has been involved in advising investors and businesses planning to set up an entity in India. Eshan has studied international law at the Hague Academy for Private International Law.
[1] Aarushi Gupta, Eco Oro v. Columbia: Is GATT Article XX to be Blamed?, 89 Int. J. Arb, Mediation & Disp. Mgmt. 21, 27-28 (2023).
[2] Lu Wang, Non-Discrimination Treatment of State-Owned Enterprise Investors in International Investment Agreements, 31 ICSID Rev. – Foreign Inv. L.J. 45, 54.

[3] U.N. Secretary-General, Paying Polluters: The Catastrophic Consequences of Investor-State Dispute Settlement for Climate and Environment Action and Human Rights, ¶ 33, U.N. Doc. A/78/168 (2023) [Paying Polluters].

[4] Wang, supra note 2.

[5] Paying Polluters, supra note 3 at ¶ 50.

[6] U.N. Commission on International Trade Law, Working Group III, Draft Legislative Guide on Investment Dispute Prevention and Mitigation, U.N. Doc. A/CN.9/WG.III/W.P.228 (2023).


 

The Graduate: The E.U. and its Member States’ Exit from the Energy Charter Treaty

The Graduate: The E.U. and its Member States’ Exit from the Energy Charter Treaty

Marios Tokas*

I. Introduction

At the end of ‘Τhe Graduate,’ the protagonist duo happily sits in the back of the bus together. As the music plays on, the duo starts becoming less and less happy as they think about their future and the repercussions of their actions, since Elaine has just fled her wedding to run out with Benjamin to an uncertain future.

The ending scene of ‘The Graduate’ resembles the situation in the aftermath of the denunciation of the Energy Charter Treaty (ECT) by various E.U. member states (including France, Germany and the Netherlands) and the proposal for a so-called coordinated exit together with the E.U. This move radically differs from the E.U.’s previous stance. The E.U.’s previous position, based on a 2022 agreement in principle, favored the adoption of a ‘modernized’ version of the ECT which purported to reduce the protective scope for ‘climate-dirty’ investors.

The coordinated exit will entail two parts: 1) denunciation of the ECT by the E.U., as a member of the ECT, and of the E.U. member states; and 2) an inter se agreement between the E.U. and its member states intended to terminate the 20-year sunset clause in the ECT concerning existing covered investments.

This move has been met with enthusiasm by climate think-tanks which have been advocating for an exit from the ECT for quite some time, calling the ECT a ‘climate-wrecking treaty.’ However, this enthusiasm has gradually faded as disputes continue to arise, politicians with anti-climate agendas are elected, and many states exploit the climate emergency to pursue a protectionist agenda which includes export controls, restrictions in critical raw materials trade, and nationalizations of investments.

Without getting into the debate over the impact of the ECT on the E.U.’s climate goals and the climate policies of the E.U. member states, it is useful to examine what happens next. No politically viable legal instrument is available to replace the ECT at the moment. Meanwhile, the old ECT remains relevant due to its 20-year sunset clause (Article 47.3 ECT), which extends protection to covered investors and investments for 20 years after a party’s denunciation of the ECT. Any investment made before the end of the withdrawal notification’s one-year notice period is also protected under the sunset clause.

In the present article, I provide some reflections on the legal and policy considerations of the uncertain future of investment arbitration in the E.U. in light of the ECT’s apparent collapse.

II. Reasons for the Coordinated Exit

The first argument in favor of the coordinated exit is that it will ensure legal security and predictability within the E.U. and boost climate change cooperation among the E.U. member states. This argument is premised on the fact that many E.U. member states’ energy and environmental policies have given rise to numerous large investor-state dispute settlement (“ISDS”) claims by E.U. investors. The E.U. has recently ramped up its policy interventions on climate change as part of its Green Deal; new initiatives include mandatory emissions reduction targets, stricter environmental regulations, and subsidies for renewable energy.  The E.U. and its member states want to ensure that the Deal is not derailed by ISDS claims. In other words, the elimination of such claims will prevent regulatory chill that could hamper the carbon neutrality targets set by the bloc.

This leads to the second main argument for an exit: after the Achmea and Komstroy judgements from the Court of Justice of the European Union, and the decisions of several E.U. domestic courts, any new intra-E.U. claims would now be incompatible with E.U. law. Despite these proclamations, all but one arbitral tribunal have rejected all jurisdictional objections based on the various intra-E.U. allegations. Investors simply enforce their intra-E.U. awards in other jurisdictions. Indeed, investors have traditionally had no issue in resorting to U.S. courts to enforce intra-E.U. claims, aside from one recent and heavily criticized exception, and have also enforced awards in the U.K. and Australia. With the coordinated exit, the E.U. and its member states want to ensure that no new claims will be made.

The last argument in favor of the coordinated exit is the desire to avoid claims from carbon-intense industries. Even if these claims fail at the merits stage, they have significant costs. The costs of the proceedings have frequently angered E.U. member states.

III. Much Ado About Nothing?

However, the real question lies in whether the coordinated exit can in fact achieve these three objectives.

A. Application of the Coordinated Exit in the Intra-E.U. regime: Uncertainty Remains

The legal effects of the coordinated exit are twofold. First, the exit will be considered an inter se modification of the ECT under Article 41 of the Vienna Convention on the Law Treaties (“VCLT”) with regards to the ECT sunset clause. Second, the exit will be considered a withdrawal from the ECT (in light of VCLT Article 54 and ECT Article 47) for the rest of the ECT’s provisions. The second effect is not contested. By contrast, the effects of an inter se modification to the sunset clause have stirred substantial debate.

The first legal question is whether the inter se modification would be in accordance with Article 41 of the VCLT. Article 41 introduces two requirements:

  • The modification should “not affect the enjoyment by the other parties of their rights under the treaty or the performance of their obligations” (VCLT Article 41(b)(i));
  • The modification should “not relate to a provision, derogation from which is incompatible with the effective execution of the object and purpose of the treaty as a whole” (VCLT Article 41(b)(ii)).

Academic discourse on whether the inter se modification would meet these criteria remains divided.

An additional lingering issue lies in the operation of ECT Article 16. This provision prohibits the conclusion of a subsequent agreement by parties to the ECT concerning the subject matter of investment protection (ECT Part III) and dispute settlement (ECT Part V) that is less favorable for the covered investors than the protections conferred by the ECT. Several investment tribunals have confirmed that an inter se agreement between E.U. member states cannot restrict access to dispute settlement for investors in intra-E.U. cases. However, ECT Article 16 does not apply to sunset clauses: the sunset provision, ECT Article 47, is not situated in Parts III or V of the ECT.

Still, arbitral tribunals have reiterated that ECT Article 16 evinces an intent by the ECT’s parties to preserve the rights of investors and investments to access dispute settlement—a major plank of the Treaty. Therefore, restrictions such as the removal of the sunset clause could be considered “incompatible with the effective execution of the object and purpose” of the ECT, contrary to VCLT Article 41.  It cannot be taken for granted that tribunals will consistently side for or against view. As long as inconsistency will persist, investors will keep bringing claims.

While the coordinated exit is unlikely to prevent investors from pursuing ECT claims in the coming years, legal uncertainty will remain. This is particularly due to the absence of a mandated consistent approach among investment treaty tribunals. In addition, various factors such as the relevance of the law of the seat may play a crucial role in reaching divergent conclusions. For instance, the Green Power v. Spain tribunal, when accepting the intra-E.U. objection, placed considerable importance on the fact that the law of the seat for a Stockholm Chamber of Commerce (“SCC”) arbitration and the applicable law was Swedish law, which recognizes the primacy of E.U. law. To the contrary, ICSID arbitration is ‘delocalized’ (i.e. there is no ‘seat’); thus, the analysis of the Green Power tribunal is not transposable, as demonstrated by a recent decision.

Hence, the inter se modification, at least prima facie, does not ‘remedy’ the dissatisfaction of the E.U. member states with the intra-E.U. claims. Claims will continue to be submitted at the intra-E.U. level, since as previously explained, investment tribunals remain largely unaffected by the Achmea or Komstroy decisions and the coordinated exit will not necessarily nullify the sunset clause. Tribunals are generally not persuaded by the arguments of primacy of E.U. law over the ECT, and tend to dismiss the relevance of E.U. law in establishing jurisdiction— especially in ICSID arbitrations. Even a recent SCC award recently rejected the intra-E.U. objection, despite the respondent’s reliance on Green Power.

The only real disincentive for claims seems to be legal actions taken in the domestic courts of E.U. member states to ensure non-enforcement. However, as previously mentioned, non-E.U. jurisdictions still remain an option for enforcement.

Further, most intra-E.U. claims raised under the ECT were submitted by renewable energy investors and related to governmental incentives granted and then revoked by E.U. member states. Thus, the goal of avoiding intra-E.U. claims does not necessarily go hand in hand with the promotion of decarbonization. It can hardly be argued that providing additional procedural avenues for costly renewable energy investors would interfere with the E.U. Green Deal.

B. The Coordinated Exit does not Stop Extra-E.U. Claims

In case of a coordinated exit, the ECT sunset clause remains in place and effective between the E.U./member states and third parties. Specifically, the coordinated exit will only apply between the E.U. and member states that have signed up for the exit, leaving third parties’ rights and obligations unaffected.

A few authors argue that the sunset clause could be set aside by virtue of a ‘fundamental change of circumstances’ argument. However, the legal standard to invoke this defense is rather high. Article 62 of the VCLT, which sets out the fundamental change of circumstances standard, has been consistently interpreted by international courts and tribunals, including the International Court of Justice (ICJ). The defense requires the cumulative fulfilment of strict conditions. Notably, the change should be ‘fundamental’ to the circumstances that constituted the essential basis of the consent of the parties to be bound by the treaty. Moreover, the change’s impact must drastically transform the scope of the obligations that are still to be performed under the treaty. The ICJ in Gabčíkovo-Nagymaros denied that progress in environmental knowledge and the emergence of new norms in international environmental law constituted a fundamental change of circumstances. Generally, the ICJ has reiterated that the stability of treaty relations requires that Article 62 VCLT be applied only in exceptional cases.

For these reasons, a fundamental change of circumstances defense by the E.U. and its member states before investment treaty tribunals would likely fail. At a minimum, the defense will not yield a consistent outcome. In other words, the goal of reducing the costs related to arbitral proceedings by preventing the filing of new claims will not be met, even if a very genuine and convincing argument can be made with regards to the fundamental change of circumstances.

The power of the ECT sunset clause means that the ECT will continue to protect dirtyinvestments made by third-country investors in the E.U. (and vice versa) for 20 years. Thus, any alleged regulatory chill will continue to occur, especially given the fact that Switzerland and Japan remain parties to the ECT. At the same time, the decision by the U.K. to exit the ECT means that existing U.K. investments in the E.U. will be protected until 2045. Indeed, the 20-year sunset clause will continue to protect existing investments unless the U.K. agrees with the E.U. and its member states to join the coordinated exit, which seems to be a politically difficult decision post-Brexit. Additionally, ISDS mechanisms may see increased use given the World Trade Organization system deadlock, because ISDS provides an effective and enforceable alternative to challenge the E.U.’s trade-restrictive climate measures. Recently, a national court reiterated that extra-E.U. ISDS cases are compatible with E.U. law.

C. Exporting E.U.-Dirty Industries and Losing the ‘Climate Champion’ Role

The rest of the ECT parties will likely be stuck in a treaty that has been considered by think-tanks as ‘climate wrecking’ in the meantime. This outcome is far from positive. Many ECT members, who already lack ambition on climate change, will be regulated by the old ECT. It is hard to see how the ECT parties will agree on a modernization without the pivotal role of the E.U. The European Commission recently admitted how important it would be for the E.U. and its member states not to block the modernization of the ECT.

Non-modernization of the ECT provides incentives for E.U. investors to invest abroad and escape the E.U.’s tight regulatory environment, furthering the carbon leakage the E.U. is desperately trying to avoid with measures like its carbon border adjustment mechanism (“CBAM”). Simultaneously, E.U. investors will likely re-structure their investments through third countries to benefit from investment treaty protection. They could use an intermediate company in another ECT country (such as Switzerland), or even through states that have comprehensive BITs with E.U. member states (like the UAE and Singapore).

Even if the CBAM or other climate change measures ensure that ‘dirty’ investors will not export back to the E.U., these investors will seek other markets. However, climate change is a global negative externality. Even if the E.U. becomes climate-neutral, the issue will persist. In addition, E.U. investors will have an additional incentive to submit their ISDS claims as soon as possible due to the 20-year sunset clause.

In light of these potential developments, it becomes clear that the coordinated exit does not address the concerns of the E.U. in relation to its Green Deal goals and plan for carbon neutrality. There is little evidence that the ECT ever stood in the way of the E.U. and its member states’ more ambitious policies. At the same time, the need for further cooperation on climate matters exists mostly with respect to non-E.U. countries, especially considering new regulations linked with climate change such as CBAM. The E.U. has been trying to build its role as climate champion; however, at the most crucial time, it has elected to exit the discussion. The exit leaves significant fossil fuel extracting countries stuck with the allegedly ‘climate wrecking’ agreement.

Finally, regarding legal uncertainty and arbitral costs, it appears that denouncing the ECT might ironically also remove one of the more familiar tools we have for managing energy transactions—one that states can monitor, comprehend, and modernize, and one that the public can access. Moving away from the ECT and towards, for example, state contracts and concessions—or even worse, state contracts with stabilization clauses, would favour private contractual obligations, that would provide less policy space than the rules set in investment treaties. Indeed, investment contracts are more problematic than international agreements in terms of transparency and bargaining power, as local politics play an even bigger influence over their terms and conclusion.

IV. Conclusion

In my view, the coordinated exit as outlined above fails to address the goal of reducing ISDS cases that could potentially derail the green transition and is akin to burying our heads in the sand. A coordinated exit will not make the ECT’s climate issues disappear. The ripple effects of the E.U.’s exit will probably lead to a stagnation in climate change discussions and policies in many smaller ECT countries. The rise of geostrategic policies including nationalization of critical raw materials supply chains will likely require the return of the traditional investment law protections that are taken as given. Major oil-producing countries that previously demonstrated active interest in joining the modernized ECT, such as Nigeria, have lost interest after the E.U. announced its plans to exit. A better option would be for the E.U. to push for a more favorable ECT, even with fewer countries. The modernized ECT should include enforceable climate change obligations, exclude intra-E.U. claims, and introduce new procedural rules (e.g., security for costs to avoid frivolous claims) and modernized substantive obligations.

A modernized ECT could ensure a ‘reverse regulatory chill’: it could ensure support towards decarbonization which will not wither or change easily due to changes in the political landscape. States would not renege on the treaty’s climate change commitments without exposing themselves to arbitration proceedings. Ahead of the 2024 elections, the potential rise to power of climate change skeptic politicians in many countries constitutes a significant source of uncertainty on green transition plans. Binding legal provisions can ensure legal stability and predictability that is a conditio sine qua non for investments investment in green technologies and industries.

The various proposals by climate think-tanks presume that states will cooperate and agree on financing and capacity-building mechanisms. As many elections since the mid-2010s have demonstrated, a country’s support towards climate neutrality cannot be taken for granted. At the same time, the need for consensus for any change incentivizes any capital-exporting country to never denounce ECT in order to ensure that its investors have the capacity to sue.

What comes next? We have to wait for the sequel!


Marios Tokas* is a Teaching Assistant and PhD Candidate at the Geneva Graduate Institute (marios.tokas@graduateinstitute.ch). He would like to thank Michail Dekastros and Natalia Mouzoula for their comments and constant support, as well as the HILJ editorial team for their comments.


Cover image credit

Brushing Legal Boundaries: About the Intersection of Law and Art in a Candid Interview with Professor Bullard

Brushing Legal Boundaries: About the Intersection of Law and Art in a Candid Interview with Professor Bullard

Editors’ Note: As part of the HILJ-HIALSA Collaboration on International Arbitration, HIALSA staff interviewed a series of eminent international arbitration practitioners about their experiences in the field and their approaches to international law. The following interview with Professor Alfredo Bullard is the first in this collection. 

“Art, in various forms, contributes significantly to a lawyer’s life. It enhances performance, encourages creative thinking, and, most importantly, allows for a deeper connection with the narratives inherent in legal cases. It helps us to be much better lawyers.”

Professor Bullard

*Professor Alfredo Bullard is the founding partner of Bullard Falla Ezcurra+ (2000) and the partner in charge of the Madrid office. He is a member of the Court of the London Court of International Arbitration and a former member of the International Chamber of Commerce Court of Arbitration. Professor Bullard has appeared as either arbitrator, counsel, or legal expert in more than 300 international arbitrations, and was President of the commission that drafted the Peruvian Arbitration Law. He is also a Professor of Law at Pontificia Universidad Católica del Perú and has written and taught on issues in international arbitration around the world. Professor Bullard holds a law degree from Pontificia Universidad Católica del Perú and a LL.M. from Yale Law School. 

HIALSA: Let’s begin by exploring your professional journey into law. How did you become passionate about law? Were there specific mentors who played a pivotal role in shaping your career?

Prof. Bullard: Law wasn’t my initial passion. When I encountered law in vocational tests, I emphatically declared that it was the last thing I’d pursue. My initial aspiration was to study literature and to become a writer. It was my father who, with pragmatic wisdom, convinced me that writers don’t necessarily study literature and that becoming a lawyer will allow me to traverse diverse domains. As I delved into law, my initial perceptions transformed. The rigid formality I once perceived gave way to an appreciation for its interdisciplinary facets and its ability to connect various disciplines. 

HIALSA: Transitioning to arbitration, how did your interest in this field unfold?

Prof. Bullard: It’s a story similar to the one that explains why I became a lawyer. Initially, arbitration didn’t capture my interest. In fact, during my law studies, it seemed nonexistent, almost like science fiction. My perspective underwent a significant shift thanks to my colleague, Fernando Cantuarias. He pursued his LL.M. at Yale before me and strongly recommended that I take Professor Michael Reisman’s class on International Arbitration. Despite not listening to his suggestion, I became passionate about arbitration after witnessing Professor Cantuarias’ unwavering dedication to the field. I collaborated with him on Peru’s second Arbitration Law and took advantage of some of the things he knew. As I delved into it, I discovered that I enjoyed arbitration because it allowed me to understand the practical problems behind each case and to delve into other areas of law. Consequently, in the realm of arbitration, I assumed roles as both a litigant and an arbitrator.

HIALSA: You have a diverse professional and academic background as a professor, lawyer, and arbitrator. Do you find one role more personally fulfilling than the others? 

Prof. Bullard: All of these roles mutually enrich each other, offering unique perspectives. If compelled to choose, my preference would lean towards my role as a professor. Teaching is not just a professional endeavor for me; it is a natural calling. Our firm has a distinctive approach, seamlessly integrating academic activities into our professional practices. This commitment involves turning academic endeavors into professionally viable ventures. I firmly believe that teaching is a reciprocal process, imparting knowledge to students while enhancing my own understanding of legal concepts.

HIALSA: At the end of 2022, Bullard Falla Ezcurra + opened its offices in Madrid. Could you share insights into the journey, and your vision for the future of the firm?

Prof. Bullard: The decision to establish our own law firm was driven by a desire to break away from the conventional firm structure. While my previous experiences in other firms provided valuable lessons, I was attracted to a model that allowed for greater flexibility and innovation. The journey involved navigating challenges associated with unconventional approaches in a field often characterized by rigidity.

Our firm offers distinctive interdisciplinary approaches, with a mission centered around creating a professional environment that seamlessly integrates scholarly pursuits. We have consciously invested in initiatives that some firms might deem unconventional, such as staging plays or writing books. The goal is to transform the legal profession into more than just a career but also a source of fulfillment and happiness for our team.

Looking to the future, we anticipate our firm’s continued growth and international presence, providing services that compete with those offered by international firms. This vision led us to establish a presence in Madrid, competing in a more open market with clients not necessarily tied to Peru or Spain. We position ourselves as smaller competitors to large North American or European firms, offering advantages such as our emphasis on interdisciplinary approaches.

HIALSA: We have heard of your passion for travel and theater. How do these personal passions contribute to both your personal and professional life?

Prof. Bullard: Traveling is more than a leisure activity for me; it serves as a source of diverse perspectives that enrich both personal and professional aspects. My recent visit to Africa not only altered my perception of nature but also challenged preconceived notions. Similarly, travel experiences in Singapore and Cambodia left a lasting impact. Living in Europe has further provided an immersive experience in rich cultural diversity. Thus, exposing myself to different legal systems and cultures during my travels has been invaluable and has complimented my work with a deep appreciation for diverse perspectives. 

In my professional life, integrating art, particularly theater techniques, into legal education has been particularly rewarding. For instance, I collaborate with theater directors while preparing my students for arbitration moot court competitions. Law has also allowed me to write plays, such as “El Monstruo de Armendariz,” a play about a murder case and “La Apelación de Shylock”, a continuation of “The Merchant of Venice,” co-written with Professor Giovanni Priori. Currently, I’m working on another play called “El Señor de los Milagros” based on a real trial. 

I truly believe that art, in various forms, contributes significantly to a lawyer’s life. It enhances performance, encourages creative thinking, and, most importantly, allows for a deeper connection with the narratives inherent in legal cases. It helps us to be much better lawyers. 

HIALSA: In your view, what are the most pressing challenges currently facing lawyers and the legal profession? 

Prof. Bullard: I believe a technological revolution is imminent, and only a select few lawyers will navigate it successfully. The world is changing rapidly, prompting a critical examination and swift modification of the decision-making processes.

It’s not just a question of whether advancements like artificial intelligence, new technologies, communication methods, or data processing systems will entail substantial change. Instead, I see it as a paradigm shift. As I discussed in a recent conference, we’re not merely asking if artificial intelligence will replace arbitrators; it will redefine the work we traditionally did through arbitration. The resolution of disputes will take a different form and adapting to this change will be a significant challenge.

HIALSA: Do you have any important advice for students starting law school or those pursuing graduate-level studies in law?

Prof. Bullard: Approach the study of law by maintaining a certain separation from it. While lawyers often develop a profound attachment to the law, it’s crucial to recognize its relativity and evolving nature. The essence of a proficient lawyer lies not only in their knowledge of the law but in understanding that law is a system regulating behaviors, with different competing rules. A skilled lawyer excels in reading, explaining, and understanding the law to achieve broader objectives—ensuring justice, making their client successful, and more.

A notable example is arbitration, the fastest-growing dispute resolution system. Its detachment from strict legal norms is evident in a study by the ICC, revealing that only 33% of awards issued under ICC rules cited relevant applicable law. In 70% of cases, the focus was on interpreting the contract itself. This shift underscores the importance of understanding contracts, which appears to be more crucial than a deep knowledge of the governing law.

HIALSA: If you had to identify an essential characteristic of a good lawyer, what would it be?

Prof. Bullard: Empathy. This characteristic emerges as a fundamental pillar for a lawyer and is rarely found in legal professionals. Understanding different perspectives is essential to achieve persuasion and make narratives relatable. Being empathetic with the other party contributes to increased persuasiveness because the court understands that you are trying to collaborate and contribute to resolving the dispute.

Empathy operates at every level—whether as a boss, witness, expert witness, lawyer, litigator, or arbitrator. Placing oneself in the other’s shoes makes a lot of sense because the essence of the law is nothing else than regulating human conduct.


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The Political and Legal Ambiguities of the Multilateral Security Support Mission Authorized for Haiti

The Political and Legal Ambiguities of the Multilateral Security Support Mission Authorized for Haiti

Moise Jean*

Introduction

Almost a year after the Haitian government requested an international force to deal with gang violence, the United Nations Security Council adopted a resolution under Chapter VII of the United Nations Charter authorizing the formation and deployment of a Multinational Security Support (MSS) mission. This resolution came at a time when public opinion was beginning to question the inaction of the international community, and even its responsibility to protect, in situations such as this, where the state is incapable of ensuring the protection of its own population.

The resolution contains some particularly encouraging aspects: it requires the Mission to carry out its mandate in strict compliance with international law; it commits the Mission to guarantee respect for fundamental human rights, to protect children, and to prevent sexual and gender-based violence and exploitation; and it provides for the establishment of a complaint mechanism. In the event of allegations of misconduct, the Mission is required to conduct investigations and, if necessary, determine who is responsible. The resolution also requests member states participating in the MSS to adopt appropriate wastewater management and other environmental controls to guard against the introduction and spread of water-borne diseases, in accordance with the “World Health Organization’s 2001 report on water quality guidelines.”

These aspects are encouraging because international military interventions are at a high risk of violating international law, whether it be the risk of misuse of the mandate or the risk of human rights violations. In Haiti, U.N. peacekeepers were accused of human rights violations, sexual exploitation, and being responsible for the cholera epidemic that claimed thousands of victims. The formal inclusion of these provisions in the resolution is therefore a commendable initiative: it should help to dissuade the states involved and could contribute to the conduct of operations on a basis closer to the rule of law.

Beyond these positive prospects, however, the resolution raises several fundamental issues by authorizing the creation and deployment of an international military force whose legal nature is ambiguous. As we shall see, this ambiguity may have a negative impact on the smooth running and effectiveness of the authorized operation and may generate difficulties in the event of responsibility for any violations of international obligations.

I. A New Kind of Mission

The Mission to be deployed in Haiti is neither a collective security mission nor a U.N. peacekeeping mission. Although it is based on Chapter VII of the Charter, the resolution does not mention the precise article that is being invoked for authorization of the Mission. The authorized intervention, like many others before it, will not be carried out under the authority of the Security Council. It is therefore not a collective security mission. Similarly, it cannot be described as a peacekeeping mission, since the link between these types of operations and the United Nations is clear from their names––which is not the case for the Mission in question. The international force to be deployed in Haiti is therefore akin to what the doctrine calls an “authorized operation,” as was the case in Korea in 1950, Iraq in 1991, and Libya in 2011. The only difference is that, in those cases, the operation was imposed. Here, it was requested.

There are, however, distinctive features of the Mission that set it apart from authorized operations.  First, there is the question of its mandate. According to the resolution, the Mission is to “provid[e] operational support to the Haitian National Police, including building its capacity through the planning and conduct of joint security support operations.” It must also “provid[e] support[] to the Haitian National Police[] for the provision of security for critical infrastructure sites and transit locations.” In other words, it is not a direct intervention force, with a clear mission to restore security in Haiti. Rather, its mission would be to support the Haitian police in their efforts to combat crime and insecurity. The multinational force would carry out its operations in complementarity with, or even under the leadership of, the police.

This is a new feature in the history of operations authorized by the Security Council. In principle, operations authorized under Chapter VII of the Charter are intended to intervene directly to pacify a situation threatening international peace and security. They do not have to act as a complement to a national force. They are operations that are justified by a peace-threatening situation, requiring emergency military intervention to maintain or restore peace. This is their raison d’être. By deciding that the authorized operation should be carried out in conjunction with the local police, the Security Council is breaking new ground.

What’s more, and this is even more curious, the resolution asks those in charge of the Mission (Kenya, or possibly another state that would take the lead), in coordination with the Haitian government, to communicate to the Security Council information concerning “the goals of the mission and the end result sought, the rules of engagement” prior to the deployment of forces on the ground. In clear terms, this means that it is the participating states, in consultation with the Haitian authorities, who will define the Mission’s operational and final objectives.

This is unprecedented. Never before in the history of the United Nations has an authorized operation had to define its own objectives, never mind in cooperation with the authorities of the state in which it is intervening. In principle, it is up to the Security Council to define the objectives of the mandate, and to monitor and supervise its execution. It cannot delegate this power to a third party. Nor does the Council need the approval of the state concerned to determine the objectives of the mandate of an authorized operation adopted under Chapter VII of the Charter, even if it is the state that requests it. In the latter case, the Council may, if it sees fit, authorize the state concerned to participate simply as an observer in meetings of the “steering committee” for the operation, as was the case with Albania in 1997 (S/1997/362, par. 7). But the state’s participation is not decisive, still less in defining the terms of the mandate. The Security Council is therefore setting a new precedent. No previous resolution adopted in connection with the creation and deployment of a coercive international military operation contains provisions of this kind.

As a result, the nature of the Mission in Haiti is ambiguous. It is an authorized operation created under Chapter VII of the Charter, even though its main characteristics diverge from this type of mission. In reality, it is a U.N. peacekeeping operation created under the umbrella of an authorized operation. Almost all its features, from the question of operational support for the national police to the involvement of the government in determining objectives and rules of engagement, are peacekeeping in nature. It is a hybrid mission combining elements of the collective security system (Chapter VII) and the peacekeeping system but ultimately establishing an institution with an uncertain legal status, that is, a mission which in practice clearly does not fit into any of the categories of institutionalized international military intervention hitherto known.

Because of these legal uncertainties, the MSS Mission is not without its political and legal concerns.

II. Political Issues: The Question of Mission’s Effectiveness

Established on foundations as unstable as they are superficial, the operation authorized in Haiti is undoubtedly fragile. This shortcoming could undermine its effectiveness. It is hard to understand why the Security Council should so lightly authorize an international mission that will mobilize so many resources in a country that is only asking for real support from the international community to solve its problems. One of the consequences of the ambiguities in the Mission’s mandate will be that any disagreement between the operations directorate and the Haitian police or authorities will paralyze their actions. The Haitian government undoubtedly has its own agenda, its own understanding of the problems, and its own solutions. The countries involved also have their own. Compromises will have to be made every time. Will this compromise always be possible? At this stage, it is hard to say.

In the meantime, suffice it to say that while this kind of arrangement, which seems to take Haiti’s sovereignty and independence into account, is not a bad thing in itself, it is something to be wary of. We would be surprised if the Mission were effective in such circumstances. But more fundamentally, there is a risk of disempowerment. For, in the end, it will be easy for those in charge of the Mission to point to the fact that cooperation with the Haitian authorities has not worked well to justify a lack or even an absence of results. What’s more, when Security Council resolutions authorizing a mission are ambiguous, the states involved tend to interpret them for their own benefit, for example by considering their mission accomplished and withdrawing their troops, particularly if they have suffered losses on the ground, as was the case in Somalia.

The vagueness identified in the definition of the mandate of the operation authorized in Haiti can have another, even more devastating consequence: misuse of the Mission. Indeed, in this type of operation, there is always a risk of deviation or instrumentalization. However, the risk becomes even greater when the resolution authorizing its implementation does not sufficiently clarify the mandate, does not clearly spell out what is authorized and what is not, and does not precisely delimit the scope of the intervention. In Libya, for example, Resolution 1973 (2011) did not authorize the overthrow of the Libyan government, contrary to what actually happened. Intervention forces have interpreted it broadly. The lack of precision in these parameters in the resolution adopted on October 2 could lead to a deviation from the mandate of the operation authorized in Haiti, which would ultimately be a disservice to the population we are supposed to be helping.

III. Legal Issues: The Question of U.N. Responsibility

Because of these essential ambiguities, the MSS Mission also raises the fundamental legal concern of responsibility. This is an important issue, given the risks of violations of international law, in particular international humanitarian law and human rights law, during the military intervention. This is especially so in a country like Haiti, where the question of U.N. responsibility has been the subject of debate in the recent past, even though there was not a shadow of a doubt as to whether the mission responsible for the illicit acts (MINUSTAH) belonged to the United Nations. The situation therefore becomes very worrying when the intervening mission is one whose legal nature is not very clear.

And with good reason: according to the United Nations, a distinction must be made between operations authorized by the United Nations and carried out under national or regional command and control, and U.N. operations carried out under their command and control, when assessing imputability to the United Nations (A/CN.4/637/Add.1, p. 10). In the case of U.N. operations, there are two hypotheses to be considered. First, if the operations were carried out jointly by a U.N. force and a force under national command and control, such as the U.N. Operation in Somalia II (UNOSOM II) and the U.S.-led Rapid Reaction Force in Somalia, the conduct of the troops would be attributed to the entity exercising operational command and control. Second, if the operations were carried out by peacekeeping forces, as was the case with U.N. Stabilization Mission in Haiti (MINUSTAH), the Secretary-General considers that, given these forces’ status as subsidiary organs of the United Nations, the conduct would be attributed to the United Nations.

On the other hand, when it comes to operations authorized by the Security Council, as is the case with the Mission to be deployed in Haiti, the United Nations declines all responsibility. According to the venerable organization, international responsibility for operations authorized by the Security Council under Chapter VII of the Charter and conducted under national or regional command and control lies with the state or states conducting the operations in question (A/CN.4/637/Add.1, p. 10). This was the case, for example, in Somalia during Operation Restore Hope, when a car accident occurred. The United Nations declined responsibility on the grounds that the person involved in the accident was working for Operation Restore Hope and not for the UNOSOM. According to the United Nations, the troops of the Unified Task Force were not under its command.

A priori, this should not pose any particular problem if, once established, the responsibility of the state or states could be called into question without any particular difficulties. In practice, however, there is no room for optimism. In most of the authorized operations in which international obligations have been violated and lawsuits brought against the states concerned, the latter have constantly tried to absolve themselves of responsibility by insisting on the central role of the Security Council, and ultimately on the responsibility of the United Nations. This was the case, for example, with the appeals against Kosovo Force (KFOR). While for the plaintiffs, KFOR’s actions or omissions could not be attributed to the United Nations, for the targeted states, on the contrary, KFOR’s actions were indeed attributable to the United Nations. Moreover, both international and national judges have so far refused to rule on the conduct of multinational forces. This creates a gap between the principle of state responsibility for acts committed during an authorized operation and the actual implementation of their responsibility for said acts.

Hence the importance of clarifying the legal nature of the Mission. As already mentioned, the Mission to be deployed in Haiti has the appearance of a U.N. mission in terms of its characteristics, but it is officially an authorized operation. This means, therefore, that the United Nations will not be held responsible for any misadventures that may occur during operations. They automatically rule out any possibility of linking any illicit acts to them.  This is an important legal issue, particularly in a country where the United Nations has shirked its responsibility for damage committed by an international force that was its own. The Haitian government, politicians, and civil society need to be aware of this aspect of the issue.

Conclusion

Ultimately, the authorization of the international military force is not a bad thing, given the situation in Haiti. The Haitians could not take it anymore. Even the intellectuals and other actors traditionally opposed to any international military intervention were for the most part in favor or almost in favor of military intervention, subject to certain conditions. However, the mission that has been set up has shortcomings in its design that leave us perplexed and questioning. Finally, the main, if not the only real virtue of the resolution adopted by the Security Council lies in the fact that it commits the intervening states to act within the framework of the law. It remains to be seen whether this rare virtue will enable the mission to succeed in its challenge, that is, to set an example, bring peace to Haiti, and enable the Haitian people to resume the normal course of their lives, not only for the duration of the operation but beyond.

*Moise Jean is a postdoctoral researcher at the University of Geneva, in the Department of International Law and Organization. He is very grateful to Jacob Libby for his very thoughtful comments and edits.

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Craving Climate Carveouts

Craving Climate Carveouts

Ariq Hatibie*

Introduction

The international system of investor-state dispute settlement (“ISDS”) is increasingly scrutinized for the challenges it poses to climate change mitigation efforts. Policies such as carbon taxes, fossil fuel bans, and nationalization are vulnerable to expropriation claims by investors, raising the costs and risks of the energy transition. I evaluate a proposed solution to make ISDS greener: the climate carveout. This treaty provision preserves regulatory capacity by stating that certain investments are not protected or that states can lawfully take specific measures based on the purpose of protecting the environment.

I argue that the literature overestimates the benefits of this reform. Even if states can include such carveouts in their international investment agreements (“IIAs”), investors possess procedural and substantive doctrinal tools to circumvent them. First, tribunals have used interpretive doctrines to hold that, while the measure is not per se illegal, states must still compensate the investor. Second, investors can exploit most-favored-nation (“MFN”) clauses to import more favorable treatment from other treaties to diminish the carveout’s effect. Finally, investors can forum shop to leverage other more favorable IIAs. The doctrinal and systemic features of ISDS combine to stymie the benefits of climate carveouts.

I. Introducing Climate Carveouts: Two Types

Climate carveouts come in two forms. First, they could exclude investments (e.g., in fossil fuels) from protection. Past examples in tobacco control include provisions that say, “[n]o claim may be brought under [this section] in respect of a tobacco control measure of a Party.” Hence, an investment-based carveout excises the investments from a tribunal’s jurisdiction ratione materiae. In contrast, a purpose-based carveout preserves a state’s right to take certain measures that protect the environment, enabling a merits-based defense. Such a provision could affirm the “right to regulate … to achieve legitimate policy objectives, such as the protection of … the environment …”

Climate carveouts have seen some success. Al-Tamimi v. Oman concerned revoking a mining company’s license for failing to get operational permits and other environmental violations. The U.S.-Oman Free Trade Agreement contained a clause the tribunal interpreted to “reserve a significant margin of discretion to themselves in the application and enforcement of their respective environmental laws.” Not only did the provision articulate the “right” to enforce environmental laws, but Article 17.2.1(a) provided that “neither party shall fail to enforce its environmental laws” (emphasis added), indicating a duty to protect the environment despite the agreement’s focus on free trade. The tribunal used this provision to interpret whether Oman had violated the treaty obligation to accord investors a minimum standard of treatment. Using Article 17.2.1 to inform its reading, the tribunal acknowledged that it must be “guided by the forceful defence of environmental regulation and protection provided in the express language of the treaty.” Al Tamimi demonstrates that inserting environmental clauses in IIAs can empower greener regulations.

II. Critiquing Climate Carveouts: An Optimistic Over-Estimation

Despite the above success, three features of the ISDS system mitigate the impact of climate carveouts: [A] interpretive clear statement rules that enshrine a duty to compensate, [B] MFN provisions that allow investors to import stronger investor protection provisions from other investment treaties, and [C] leveraging the flexibility of the global investment system to forum shop.

A. Circumventing the Carveout through Clear Statement Rules

One challenge to carveouts is articulating clear statement rules, as exemplified by Eco Oro v. Colombia. There, Colombia deprived an investor’s mining rights by declaring the relevant area an environmental zone. The Canada-Colombia IIA provided a carveout saying, “nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing … environmental measures necessary to protect human, animal or plant life and health,” and “the conservation of living or non-living exhaustible natural resources.” Although both Colombia and Canada confirmed that this carveout intended to protect environmental measures, and although the language stated that “nothing” would prevent a party from regulating to protect the environment, the tribunal nevertheless stated that “there is no provision in Article 2201(3) permitting such action to be taken without the payment of compensation.” (emphases added). The investors prevailed because the treaty failed to explicitly deny the investor compensation: states can regulate to protect the environment—they just have to pay for it. In other words, the tribunal elucidated a clear statement rule, a presumption of the duty to compensate. As commentators have noted, tribunals “are well capable of creating interpretive deadlocks by convenient or erroneous readings of relevant provisions.” The tribunal’s clear statement rule imposes negotiating costs on states. Indeed, the judgment itself will likely place similarly worded agreements in investor crosshairs, and given that such language is common in, e.g., all of Canada’s newer trade agreements, one wonders whether negotiating those carveouts was worth the trouble.

Given that international investment law, and international law generally, does not contain rules of binding precedent, investors can try their luck even if precedents like Al-Tamimi v. Oman exist. Investors will likely take the risk because of the gargantuan monetary awards available. In Eco Oro, the investors sought a USD $350 million judgment, although the tribunal postponed actual quantification for a later date.  Even if investor success is unlikely, the enormous potential reward renders the expected payoff worth it. This risk of arbitration continues to deter states from enacting environmental protections.

B. Using MFN Provisions to Import Looser Environmental Protections

Eco Oro demonstrates a circumvention method internal to the IIA. Another move is to use an MFN clause, which enables the investor to import more favorable treatment from other treaties into the one currently being applied (known as the “basic” treaty). A clause could read, “[n]either Contracting State shall subject investments in its territory … to treatment less favourable than it accords … to investments of investors of any third State.” MFN clauses are justified on the basis that investors from one country should not receive worse treatment than those of other countries. Using an MFN clause involves identifying another treaty with weaker environmental provisions and importing them to the present dispute. So far, investors have failed to use MFN to expand jurisdiction over the types of protected investments within a treaty. Hence, investment-based carveouts that remove fossil fuels from investment protection will likely not be affected. Rather, MFN clauses apply to the substantive treatment accorded to investments, which may affect carveouts that preserve the right to impose environmental regulations.

Indeed, investors have invoked MFN clauses to bypass carveouts in other subject areas. In CMS v. Argentina, the investors sought to avoid a clause providing that “[t]his Treaty shall not preclude the application … of measures necessary for …  the protection of its own essential security interests,” under Article IX of the Treaty. They argued that because other treaties do not contain a similar “essential security interests” clause, the tribunal should treat the immediate Treaty as also lacking a clause. The tribunal rejected this reasoning, but only because an absence of carveouts in other treaties does not trigger the applicability of the MFN. If a similar clause does exist but with better treatment, the tribunal was open to considering its importation.

Consider a carveout in Treaty A, modeled on CETA, that preserves “right to regulate … to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals . . . ,” including a clarification specifically protecting the withdrawal of subsidies. Treaty B contains a similar “legitimate policy objectives” provision for public health and morals but without the environment. An investor could argue that both clauses deal with the same question: what counts as a “legitimate policy objective”? The absence of “environment” in Treaty B’s clause would suggest that for some nationals, the environment is not a legitimate objective, but for the other nationals affected by Treaty A, the environment is. Arguably, investors in similar circumstances are treated differently simply by virtue of a different nationality, potentially violating the MFN principle.

MFN clauses can account for more precise variations in protection: another treaty may specify that some environmental measures (e.g., withdrawal of subsidies) are protected but not others (e.g., expropriation of fuel investments). Another treaty might emphasize the duty to compensate. When negotiating carveouts, states may have to re-negotiate MFN clauses or pay attention to their entire inventory of treaties to minimize the importation of investment-protective clauses.

C. Finding Favorable Forums

Another investor strategy is exploiting the ISDS regime’s slipperiness to shop for a forum with more favorable protections. The tobacco carveouts provide a salient example. During negotiations of multilateral agreements, civil society organizations pressed governments to include carveouts for tobacco control, such as in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. However, states still belonged to other bilateral agreements, all of which could be used to forum shop. For example, while an Australian investor in Vietnam could not exploit the multilateral treaty to take Vietnam to arbitration, a bilateral treaty could still give them a cause of action. Pendas and Mathison observe that tobacco investors could use forty other investment agreements between the states parties to keep the arbitration door open.

In addition, investors can use an IIA with another country as long as they fulfill the personal jurisdiction requirements. If the corporation has a subsidiary or co-shareholder with a different nationality, it can launch a parallel claim to get another shot at the goal. If it cannot find another IIA, it can even restructure to find a country with more favorable investment protections, such as when the investor in Pac Rim v. El Salvador changed their seat of incorporation from the Cayman Islands to the United States to avail themselves of the Central American Free Trade Agreement. In practice, the “abuse of process” doctrine limits egregious instances of this forum shopping, particularly when the company restructures immediately before a foreseeable regulatory change. However, the strategic pathways for movement make corporations, especially transnational ones, difficult to tame. Thus, investors can forum shop in three ways: moving from the multilateral to the bilateral (or vice versa), across treaties, and across jurisdictions. The suppleness of the ISDS regime mitigates the impact of climate carveouts.

Conclusion

Despite the attraction of bolstering the treaty language to defend against arbitration claims, the above features diminish the effect of climate carveouts. First, investors can persuade the tribunal to interpret the treaty text through clear statement rules, as Eco Oro v. Colombia demonstrates. Second, investors can exploit MFN provisions to import more favorable rules from other treaties. Finally, investors can shop for the ideal forum by moving from the multilateral to the bilateral plane or restructuring to take advantage of other IIAs. Even if states can renegotiate treaty provisions to buttress against doctrinal moves, systematic features of the ISDS system will continue to grant protection. If investors can slip and slide through that system, the effect of carveouts, or the cost of making them effective, is not so rosy.

*Ariq Hatibie is a 3L at Harvard Law School broadly interested in public international law, including investment law and human rights. He holds an M.Sc. in Global Governance and Diplomacy from the University of Oxford and a B.A. in Global Affairs from Yale University.

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A Global Standard Setter for Virtual Currencies:  A Case for Strengthening International Financial Law

A Global Standard Setter for Virtual Currencies: A Case for Strengthening International Financial Law

Juan Carlos Portilla*

Introduction

Because a paradigm shift is currently underway in the international monetary system, international financial regulators should establish a global standard setter for virtual currencies (“VCs”). This article will refer to such an entity as the Global Agency for the Virtual Currency Economy (“GAVCE”). Two monetary ecosystems coexist today. The first ecosystem involves central banks and depository institutions that supply economies with fiat currency; the second includes VCs. VCs emerged in 2009 “as a means of defiance against a financial system in crisis and ‘captured’ by state regulation and private agents.” For some, VCs inspire a level of confidence that money managed by central authorities might not sustain. Nevertheless, the rise of VCs also implicates important risks including market manipulation and financial crime—and governments across the globe are struggling to regulate VCs because of their disintermediated technological constitution.

Although the European Union agreed in June 2023 on a provisional version of the Markets in Crypto Assets framework, and while some scholars in the United States are making the case for self-regulation in the VC industry, this article argues for some form of global governance intervention in case these or other mechanisms fail. Regulations must protect VC consumers from market failure, asymmetric information, and negative externalities. Yet, most countries have not taken any regulatory action on VCs, creating significant regulatory gaps. According to the World Economic Forum, regulatory systems governing VCs are “fragmented, ineffective, and, in some countries nonexistent.” Because there is no harmonized global regulatory governance for VCs, criminal enterprises can engage in regulatory arbitrage across nations to commit financial crimes, such as the financing of terrorism and money laundering. Therefore, international financial law should establish a GAVCE to regulate VCs.

This article draws upon the interdisciplinary dialogue between international law (“IL”) and international relations (“IR”) scholarship to make the case for a GAVCE. In Part I, the article introduces blockchain technologies and the VC ecosystem. Part II outlines emerging risks related to VCs and discusses matters of law related to the establishment of a GAVCE. Finally, Part III discusses the politics that would emerge while establishing global governance for VCs, which implicate regulatory capture theories and the role of time as an analytical variable, in the rule-making process.

I. Introducing Blockchain

VCs are peer-to-peer electronic cash systems that use blockchain technology to operate without the need for intermediaries (banks). According to a memorandum by presumed Bitcoin creator Satoshi Nakamoto, the peer-to-peer nature of VCs “allows online payments to transfer directly from one party to another without routing through a financial institution.” Blockchain technology, in turn, gathers information (a ledger for transactions) into “blocks” that hold it. Blocks have storage capacities; ledgers for transactions are placed into a block until it is filled. Once a block is filled, it is then closed and immediately linked to the previously filled block. This process forms a chain of information (a “blockchain”), whose blocks are linked through cryptography, creating a peer-to-peer electronic cash system. Thus, VCs “are distributed, open-source, math-based peer-to-peer virtual currencies” that can operate with no central bank involvement, no intermediaries, and no government oversight.

VCs are different from fiat currencies, e-money, and central bank digital currencies (“CBDCs”). While fiat currency is the paper money of a country that is designated to be its legal tender, and accepted as a medium of exchange, VCs are digital representations of value that can be digitally traded, and they are typically neither issued nor guaranteed by governments. VCs are also different from e-money, which digitally represents fiat currency and is utilized to electronically transfer the value denominated in fiat currency. Although some countries have used blockchain technology to issue CBDCs, like the digital yuan of China, CBDCs do not fully encapsulate all of the attractive features of VCs, such as anonymity, decentralization, and governance. While central banks that issue CBDCs decide on the rules governing those CBDCs, the users of VCs control VC networks by making consensus-based decisions. 

The VC Ecosystem

Several specific VCs—including Bitcoin and Ethereum—are well-known to the public. Bitcoins, which are convertible units of account composed of unique strings of letters and numbers constituting units of the currency, are decentralized in nature. Since individual users are willing to pay for Bitcoins and other VCs, they have value in the marketplace. Ethereum, Ripple, Litecoin, and Dashcoin came after Bitcoin and utilize a similar form of blockchain technology. Stablecoins, in turn, are VCs backed by fiat currencies, like the U.S. dollar, or commodities, like gold. Tether, for example, is the largest stablecoin by market capitalization and its value is pegged to the U.S. dollar.

Several different actors make up the VC market. The supply side of the VC market consists of exchange firms, such as Binance. Supply-side firms also include administrators, miners, and wallet providers. Exchangers, for a commission, trade VCs for other VCs—or for precious metals or fiat currencies. Administrators are individuals or legal entities that issue VCs, write rules for the use of VCs, maintain central payment ledgers, and redeem VCs. Miners act as market makers; they use computer systems to verify transactions by adding them to the blockchain. VC wallets hold, store, and transfer VCs (examples of wallet providers include Multibit or Coinbase). Finally, users compose the demand side of the VC market. Users exercise their freedom of choice to select VCs and they generally buy VCs for payment or investment needs.

II. Emerging Risks

Emerging risks related to VCs include consumer panic, market manipulation, and financial crime. Confidence is a bedrock principle of the modern financial system. Unlike traditional financial products (such as savings accounts), Bitcoin and other VCs are presently uninsurable—which undermines investor confidence and heightens the risk of consumer panic. When an individual in the United States deposits money with a bank in a single ownership capacity, he or she has access to up to U.S. $250,000 at the Federal Deposit Insurance Corporation (“FDIC”) if the bank fails for the U.S. dollar is backed by the full faith and credit of the U.S. government. In contrast, government deposit insurance is not available for VCs because they are not regulated or backed by any government. Additionally, the price history of VCs demonstrates that the VC market may in fact be a speculative bubble. Bitcoin investors can manipulate its price; for example, media coverage of Bitcoin or fake news associated with Bitcoin can induce individuals who have not previously traded Bitcoin to invest in it for the first time. In the absence of a central government authority backing the value of Bitcoin, Bitcoin investors could lose their shirts, were Bitcoin to fail.

According to Nobel Prize-winning economist Joseph Stiglitz, VCs are also often used for illicit purposes such as tax evasion. According to the Financial Action Task Force (“FATF”), money launderers, terrorist financiers, and sanctions evaders use VCs as a powerful tool for financial crime endeavors, outside the reach of law enforcement. Indeed, bad actors can and often do use technology and Bitcoin to pursue chaos and perpetrate financial crimes. One example is the May 2017 WannaCry ransomware attack, in which a worm component exploited vulnerabilities in the widely used Microsoft Windows operating system. Ultimately, the cyberattack cost eight billion US dollars in damages. The criminals behind the attack demanded payment in Bitcoin because they have easy access to VC service providers around the world.

III. Global Governance for VC

Multiple instruments, including but not limited to treaties, may be used to create a GAVCE. Traditionally, states have been the primary source for the creation of international organizations (“IOs”), particularly by way of international treaties. Examples of this approach include the International Monetary Fund Articles of Agreement. Nevertheless, many legitimate and powerful IOs have also originated outside of the treaty process. These IOs, with more innovative institutional designs, have increasingly found their way into the international legal order. For example, the central bank governors of the G-10 countries established, without a treaty, the Basel Committee on Banking Supervision (“BCBS”)—the primary global standard setter for the prudential regulation of banks. Likewise, the International Organization of Securities Commissions (“IOSCO”)—the international body recognized as the global standard setter for securities—is not a treaty organization but rather a not-for-profit legal entity incorporated under a private act in Quebec, sanctioned by the Quebec National Assembly. FATF—the global money laundering and terrorist financing watchdog—is similarly not a treaty-based international organization but rather a task force composed of member states who fund FATF on a temporary basis for the achievement of specific mandates. Decentralized government agencies, under the control of the executive branch of national governments, can also form IOs; in 1995, a network of national financial intelligence units established the Egmont Group, which provides a platform to exchange financial intelligence to combat financial crime. In sum, there are multiple legal instruments besides treaties available to create a GAVCE.

Considering the above, domestic regulatory agencies should establish GAVCE outside the treaty-based model, which involves a slow and politically costly ratification journey. Although the establishment of GACVE outside the treaty process may face concerns related to legitimacy or a perceived democratic deficit, a more efficient approach here is warranted because of the urgency of the issuance of global VC regulations as well as the widely recognized success of other non-treaty based IOs like IOSCO.

The proposed GAVCE should also have the capability to influence relations amongst states, market agents within the virtual currency economy, and multilateral financial institutions. GAVCE should build power and influence from the inside out to affect the behavior of states when regulating VCs; to achieve this, domestic regulatory agencies should delegate certain law-making capabilities to GAVCE to regulate VCs. This act of delegation upon GAVCE is feasible because IOs can be explicitly empowered to make international law through a delegated law-making process, which is best explained under the principal-agent theory, mainly associated with corporate law. The principal-agent theory can be applied to the relationship between state actors and global standard setters under international law. According to Ian Johnstone of the Fletcher School of Law and Diplomacy at Tufts University, the simplest form of delegation exists in this context when states explicitly grant authority to IOs, because it is typically fairly straightforward to identify the agent, the principals, and the powers that the principals have conferred.

Although this type of delegation to GAVCE may face criticism related to a loss of sovereignty or the risk of capture by special interests, several distinct benefits of delegation outweigh those concerns. First, the delegation at issue will be limited in scope—exclusively to the world of VCs. As such, there is no significant incursion on state sovereignty. A second benefit of delegation is the standardization of norms across jurisdictions to avert regulatory arbitrage and mitigate financial crime. As previously stated, current regulatory systems governing VCs are fragmented, ineffective, and often nonexistent. Third, there is currently a dire need for regulatory experts to develop technical skills related to the various complex features of VCs, blockchain, and exchangers. The development of such expertise through the proposed GAVCE would in turn help the international community to sow the seeds for a good governance model for the VC market. Under this good governance approach, global crypto policymakers would make decisions, through the proposed GAVCE, based on data and widely accepted methodologies to protect the virtual currency economy from the risks outlined above.

Another way to reduce the risks of delegation and institutional capture is for GAVCE to issue soft law rather than hard law. International law is more than just a formalistic set of black-letter rules; a more pluralistic conception of international law, embraced by many scholars today, also considers soft law, which is formally non-binding but habitually obeyed. According to Shaffer and Pollack, states do not always only favor the hard law model when making international law and instead often adopt the soft law approach, as a design choice. Although the concept of soft law may be problematic to legal positivists because it suggests a continuum between political and legal commitments, functionalist scholars argue that soft law norms offer several advantages over hard law, including 1) greater flexibility for states to cope with uncertainty, 2) greater opportunity for states to gain expertise over time through information sharing and deliberation, and 3) lower negotiation costs. In this context, hard law does not provide states with the necessary flexibility to deal with the uncertainties of VCs, because VCs are an emerging, ever-changing technology. Soft law will better accommodate the shifting nature of VCs.

Politics of International Corporate Capture

Concerns about international corporate capture may play a significant role in the establishment of a GAVCE, as corporate capture could materially affect the substantive outcomes of GAVCE’s eventual regulations. Institutional theory, regulatory capture, and the role of time as an analytical variable are all key topics that capture the attention of scholars when analyzing global financial rule-making processes. The politics that revolved around BCBS while it began to regulate international banking set a precedent that leaders should consider in the process of regulating VCs. Indeed, there are different sets of conditions that result in captured regulation, which serves narrow vested interests, versus common interest regulation, which serves the broader public interest.

Indeed, global VC regulators would not be immune to the risk of regulatory capture by self-interested actors and powerful interest groups. If VC firms were to capture GAVCE’s rulemaking, they might pursue policies that would be contrary to the public interest. One hypothetical example to illustrate the risk of VC capture would be a rule allowing the issuers of stablecoins to use an algorithm-based system to maintain their peg to the U.S. dollar instead of a system of cash reserves. History proves that such a rule would have costly effects; TerraUSD—a U.S. dollar stablecoin that sparked a crisis in VC markets in 2022—used an algorithm-based system rather than cash reserves to maintain its peg to the dollar, causing it to lose its price peg during a crisis of liquidity in early 2022.  During this crisis, investors expected to be able to cash out the stablecoin for one U.S. dollar at any point, but ultimately were not able to when TerraUSD lost its price peg. The TerraUSD meltdown caused losses of $300 billion across the broader VC market.

To prevent corporate capture and scenarios like the above, scholars have presented theoretical frameworks that emphasize the importance of timing and sequencing in determining rulemaking outcomes in global finance. For instance, a close examination of Basel Committee deliberation records and other key documents provides strong evidence that the first movers in the Basel process, namely powerful international banks, played a key role in determining the Committee’s outcomes. Domestic regulatory agencies should carefully consider time and sequencing to prevent large VC groups from arriving at the decision-making table well before others. The first-mover advantage cannot be part of the regulatory process for VCs. In addition, transparency around lobbying and the establishment of a “cooling off” period after serving in the private sector can prevent powerful VC firms from capturing GAVCE’s rulemaking.

Conclusion

So far, VCs have largely escaped from the regulatory grasp of national governments. Because there is no harmonized regulatory governance regime in place, VCs are often used for illicit purposes. International law must regulate VCs to strengthen the governance of the overarching global financial architecture. Multiple instruments, including treaties and non-treaty mechanisms, are available to create a GAVCE that can issue soft law to regulate VCs. Nevertheless, non-state actors may also pose regulatory capture risks concerning the global VC rule-making process. Global policymakers should take careful measures to avert regulatory capture if they decide to establish a global standard setter for VCs.


*Juan Carlos Portilla is an International Financial Law Professor at Sabana University School of Law (Colombia) & Anti-Corporate Crime Law Professor at the ITAM Law School (Mexico), an ACAMS Speaker, a Legal Consultant and a Compliance Professional at several different global financial institutions including the Central American Bank for Economic Integration (Honduras), Santander Securities LLC, Raymond James Financial Services Inc., Wise Ltd (a fintech company), and Wells Fargo NA. Juan Carlos is a lawyer with a LL.B. degree from Sabana Law School, Colombia. He earned a master’s degree in international law from the Fletcher School of Law and Diplomacy, Tufts University, and completed the Program on Negotiation and Dispute Resolution course at the Harvard Law School.


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