In September 2022, the Institute for Transnational Arbitration (ITA) and the Latin American Association of Arbitration (ALARB) held a workshop titled Environmental vs. Investment Protection: Are They Mutually Exclusive? One panel—“What have we learned from recent investment cases in which environmental issues were at the center stage?”—focused on Latin American investment arbitration cases in the environmental field and highlighted how tribunals have balanced the protections granted to investors under investment treaties against environmental policies of states.1See Sarah Rouach, Are Environmental and Investment Protection Mutually Exclusive? Report of the ITA-ALARB Americas Workshop, KLUWER ARB. BLOG (Oct. 31, 2022), https://arbitrationblog.kluwerarbitration.com/2022/10/31/are-environmental-and-investment-protection-mutually-exclusive-report-of-the-ita-alarb-americas-workshop/ (covering the ITA-ALARB Americas Workshop).1 The conversation was moderated by Sebastian Wuschka (Of Counsel at Luther in Hamburg, Germany) and the panelists were John A. Terry (Partner at Tory’s in Toronto, Canada), Ana Maria Ordoñez (Head of International Investment Disputes at the National Legal Defense Agency of the State in Bogotá, Colombia), and Abby Cohen Smutny (Partner at White & Case in Washington D.C., USA). The panel considered various cases, including Eco Oro Minerals Corp v. Colombia2Eco Oro Minerals Corp. v. Republic of Colom., ICSID Case No. ARB/16/41, Decision on Jurisdiction, Liability and Directions on Quantum (Sept. 9, 2021).2 and Infinito Gold Ltd v. Costa Rica,3Infinito Gold Ltd. v. Republic of Costa Rica, ICSID Case No. ARB/14/5, Decision on Jurisdiction (Dec. 4, 2017).3 as examples of recent tribunal decisions showing a consistent trend in the analysis of issues related to environmental and investment protections.
This article considers the arguments made by the panelists and analyses the trends on treaty interpretation when environmental issues are at the center stage. First, the article begins by discussing Eco Oro as a trend against environmental carve-outs. Then, the article explores the concept of just compensation and tribunals’ interpretation in the environmental context. Next, the article explores the general criticisms of environmental protections through the Eco Oro case. Finally, the author offers suggestions and questions for further research.
Eco Oro as a Trend Against Carve-Outs
When dealing with the interpretation of investment treaties and environmental exceptions, the question is often whether the language regarding environmental measures is a treaty “carve out,” and if so, are the contested environmental measures still subject to investment-treaty protections? A carve-out would allow a state to “exempt an entire policy area or sector from the scope of a treaty,” thereby precluding an investor from invoking treaty protections.1Caroline Henckels, Should Investment Treaties Contain Public Policy Exceptions?, 59 B.C. L REV. 2825, 2828 (2018).1
In at least two cases, tribunals have determined that these environmental clauses do not constitute a carve-out. In Infinito Gold Ltd v. Costa Rica,2Infinito Gold, ¶¶ 349-52.2 the tribunal considered the following clause in the Canada-Costa Rica bilateral investment treaty (BIT):
Nothing in this Agreement shall be construed to prevent a Contracting Party from adopting, maintaining, or enforcing any measure otherwise consistent with this Agreement that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.
The tribunal concluded that according to “the ordinary meaning of the text and context in light of the treaty’s object and purpose,”3See Vienna Convention on the Law of Treaties, May 23, 1969, art. 31, 1155 U.N.T.S. 331. 3 the provision was not a carveâout from the BIT’s protections, but rather a reaffirmation of the State’s right to regulate.4Infinito Gold, ¶¶ 350-52.4 The tribunal reasoned that the mere inclusion of an environmental protection provision did not provide exemption for just compensation.
Similarly, in Eco Oro Minerals Corp. v. Colombia,5Eco Oro, Decision on Jurisdiction, Liability and Directions on Quantum, (Sept. 9, 2021).5 the tribunal interpreted the environmental provision6Canada-Colombia FTA Article 2201(3): (3) For the purposes of Chapter Eight (Investment), subject to the requirement that such measures are not applied in a manner that constitute arbitrary or unjustifiable discrimination between investment or between investors, or a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures necessary: (a) To protect human, animal or plant life or health, which the Parties understand to include environmental measures necessary to protect human, animal or plant life and health. (b) To ensure compliance with laws and regulations that are not inconsistent with this Agreement; or (c) For the conservation of living or non-living exhaustible natural resources. 6 as not being a carve-out and further stated that “there is no provision in Article 2201(3) permitting such action to be taken without just compensation.”7Eco Oro, ¶ 829.7 The Eco Oro tribunal highlighted the importance of express stipulations, stating that if the intention of the parties was to exempt the State from liability, the “Contracting Parties would have not left such an important provision of non-liability to be implied.”8Id.8 The Eco Oro tribunal pointed to Annex 811(2)(b)9Canada-Colombia Free Trade Agreement, Annex 811(2)(b), in force Nov. 21, 2008, https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/colombia-colombie/fta-ale/background-contexte.aspx?lang=eng.9 —which lists some instances where environmental measures could be considered direct expropriation, thereby entitling an investor to compensation—as justification for its reasoning that Article 2201(3) could not be interpreted as a stand-alone environmental exception that would relieve the State from liability.11But see Roopa Mathews & Dilbert Devitre, New Generation Investment Treaties and Environmental Exceptions: A Case Study of Treaty Interpretation in Eco Oro Minerals Corp. v. Colombia, KLUWER ARB. BLOG (Apr. 11, 2022), https://arbitrationblog.kluwerarbitration.com/2022/04/11/new-generation-investment-treaties-and-environmental-exceptions-a-case-study-of-treaty-interpretation-in-eco-oro-minerals-corp-v-colombia/ (stating that this interpretation is at odds with the generally accepted interpretation of Article XX of GATT).11
Thus, as made clear in Eco Oro, unless states carefully draft their environmental clauses to have strong wording or include express stipulations, tribunals will likely have sufficient justification to interpret environmental clauses outside of the context of a carve-out.12HENCKELS, supra note 4, at 2843-2844 (explaining that not including strong language of exceptions gives the impression that those provisions are “simply copy-pasting exceptions from previous investment agreements” and that is why the terminology is general and tribunals end up having divergent interpretations); see also id. at 2843 (stating that “exceptions may be the preferrable way to frame the substantive obligations in such a way as to provide greater clarity about the types of government action that are permitted and proscribed”).12
Interpreting Just Compensation
There is a general belief that states facing an investment-treaty arbitration tribunal will lose most of their environmental claims and be forced to compensate investors for expropriating their investments.1Jimena Sierra, Is the Arbitral Award in the Eco Oro v. Colombia Dispute “Bad Law”?, AFRONOMICS LAW (Nov. 11, 2021), https://www.afronomicslaw.org/category/analysis/arbitral-award-eco-oro-v-colombia-dispute-bad-law; CEO, FOE & TNI, Golden Profits Undermine People’s Right to Clean Water: Eco Oro vs. Colombia, BILATERALS.ORG (Apr. 2021), https://www.bilaterals.org/?eco-oro-vs-colombia-goldenprofits#:~:text=Eco%20Oro%20vs.%20Colombia%3A%20Golden%20profits%20undermine%20people%E2%80%99s,mining%20Issue%3A%20environment%20by%20CEO%2C%20FOE%20%26%20TNI.1 While both tribunals in Eco Oro and Infinito Gold decided that the State was not exempt from liability, their analyses extended beyond expropriation and into the realm of Fair and Equitable Treatment (“FET”)2Eco Oro, ¶¶ 699-700.2 and Minimum Standard of Treatment (“MST”)3Id. ¶¶ 700, 701.3 obligations, indicating that the environmental clauses are not themselves the harbingers of compensation.
For instance, the Eco Oro tribunal concluded that the legitimate expectations under the BIT were frustrated,4Eco Oro, ¶¶ 543-46.4 that Colombia delayed the regulatory licenses5Id. ¶¶ 546-51.5 and the delimitation of El Paramo of San Turban,6Id. ¶¶ 555-56.6 and that the process was not transparent or predictable.7Id. ¶¶ 576-77.7 In other words, the Eco Oro tribunal concluded that Colombia’s measures were not implemented in good faith and those actions violated the MST obligations under the treaty.8Id.8
With regards to just compensation, the Eco Oro tribunal discussed the police powers doctrine. Citing Saluka v. Czech Republic, the tribunal stated:
It is now established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare.9See id. ¶ 627; see also Saluka Inv. v. Czech., PCA Case No. 2001-04, Partial Award, ¶¶ 255-275 (Mar. 17, 2006); Técnicas Medioambientales Tecmed S.A v. Mex., ICSID Case No. ARB(AF)/00/2, Award, ¶ 122 (May 29, 2003).9
The Eco Oro tribunal described three approaches that tribunals use to analyze whether a state’s expropriation constitutes a proper exercise of their police powers or whether it requires just compensation. The first approach is two-fold: the tribunal 1) determines whether there was an indirect or direct expropriation, and 2) asks whether the exception applies.10See Eco Oro, ¶ 627 (citing Methanex Corp. v. U.S., NAFTA CH. 11 ARB. TRIB., Final Award of the Tribunal on Jurisdiction and Merits, ¶ 653 (Aug. 3, 2005); see also Saluka Inv., Partial Award, ¶ 654; WNC Factoring Ltd. v. Czech., PCA Case No. 2014-34, Award, ¶ 656 (Feb. 22, 2017), as taking this approach).10 The second approach considers 1) whether there has been a substantial deprivation, and 2) whether the measures at issue were an exercise of the state police power.11Eco Oro, ¶ 627 (explaining that this approach was followed in Tecmed, Award, ¶ 658).11 Finally, the third approach asks the tribunal to evaluate all the relevant facts and then reach a decision on whether the relevant measures constitute expropriation or a proper exercise of the state’s police power.12See Marfin Inv. Group. V. Republic of Cyprus, ICSID Case No. ARB/13/27, Award, ¶¶ 1031-1126 (July 26, 2018).12
However, some commentators believe that a state’s right to regulate and properly utilize their police powers, in the context of environmental issues, should not be on equal footing as investors’ rights but that it should be subordinate. The commentators find that the Eco Oro tribunal’s decision to interpret state and investor rights on equal footing “show[s] their lack of sensitivity”13SIERRA, supra note 15.13 to the importance of environmental issues.14Id.14 In David Aven v. Costa Rica the tribunal held the rights of investor subordinate to the state’s right to utilize their police powers in the context of environmental concerns. The tribunal stated that “this subordination is not absolute . . . it requires that the action by the States Parties . . . to act in line with principles of international law, which require acting in good faith.”15See David Aven et al. v. Republic of Costa Rica, Case No. UNCT/15/3, Final Award, ¶ 412 (Sept. 18, 2018).15
Further, there is no question that the tribunals recognize the right of a state to regulate and expropriate if they deem it necessary.16See Eco Oro, ¶ 640 (discussing the generally accepted police power and the right to regulate in regard to environmental protections. Here, the tribunal did recognize that the environmental regulations was non-discriminatory because it was applied all across in the same way); see also id. (partially dissenting, Dr. Grigera Naón) (alluding to the principle of pacta sunt servanda, the weighing and balancing of interest, and explaining international concepts of expropriation including mutatis mutandis).16 In fact, the Eco Oro tribunal stated that “Colombia's contention that the State parties agreed to subordinate investment protection to environmental preservation in the FTA is wrong. Both ideals are mutually supportive, neither is subordinate to the other. They must be applied consistently.”17Id. ¶¶ 547-550 (emphasis added).17 The tribunal in Eco Oro highlighted that Colombia applied their measures in a non-discriminatory way because the measures were applied to all of the interested parties equally.18Id. ¶¶ 641-642.18 However, the Colombian government, when balancing the competing interest of the environment and economic rights of private persons, did decide to either relocate or compensate the artisanal miners and local populations affected by the measures,19See id. ¶ 641 (indicating that the Colombian government understood that they had to compensate the affected parties for stripping away their rights).19 but no offer of compensation or relocation was made to Eco Oro, making clear that Colombia’s treatment was not a bona fide use of police power.20Eco Oro, ¶¶ 641-643 (referencing some of the legal comments and decisions from local courts). For example, the Eco Oro tribunal refers to a decision of the Constitutional Court of Colombia to demonstrate that the highest court in Colombia concluded that an affected holder of a mining title, such as Eco Oro, had a right to seek compensation from the State. Id. Similarly, the Eco Oro tribunal refers to Advisory Opinion 2233 of the Council of State of Colombia to show that it was the Council’s belief that an investor could bring an action against the government before the administrative courts claiming a violation of private contractual rights. However, by submitting the dispute to arbitration, Eco Oro waived its right to litigate in local courts so these local court decisions were just persuasive for the arbitral tribunal.20
As a final remark, the tribunal ordered Colombia to pay the investor just compensation because Colombia frustrated the legitimate expectations of the investor under the treaty and under international law by making assurances that the project would be supported.21See id. ¶ 689 (“For example, Eco Oro says that President Santos expressed his support at a meeting Eco Oro attended with him and his Chief of Staff in February 2016 during which he encouraged Eco Oro to apply for its environmental license as soon as possible so that the Project could be showcased as a post Páramo delimitation success story. Whilst the only evidence of what was apparently said by President Santos was given by Mr. Moseley Williams, it was not denied that this meeting took place. Indeed, two years before Concession 3452 was executed, the Vetas-California Mining District was created to attract foreign mining investment”); see also id. ¶ 690 (“The Project was designated both a PIN and a PINE at various times to enable Eco Oro to receive special support to move the Project forward, as publicly confirmed by the then Minister of Mines, Mr. Gonzalez . . . in the context of Colombia’s efforts to attract foreign mining investment”).21 Thus, while the tribunal recognized the environmental impact of exploiting the Páramo Santurbán, it reasoned that just compensation was a “fair outcome that preserves a broad discretion for Colombia to regulate the environment whilst affording reparation in connection with the destruction of the acquired rights of Eco Oro.”22See Eco Oro, ¶ 527 (observing that a state can rely on rules of customary international law, opinio juris, and decisions of international tribunals to prove an MST violation).22
General Criticisms of Environmental Protections through Eco Oro
As noted above, environmental clauses are generally not considered “carve-outs.” In fact, tribunals often analyze them in tandem with expropriation provisions in consideration of just compensation. In Eco Oro, Colombia was still liable for compensation because, while Article 2201(3) of the Canada-Colombia Free Trade Agreement (FTA) allowed the regulation and effectuation of measures to protect the “human, animal, or plant life and health, provided that such measures are not arbitrary or unjustifiably discriminatory between investment,”1Canada-Colombia FTA, supra note 12, at art. 2201(3).1 there was no mention of exempting the State from paying just compensation.
Some critics of the Eco Oro decision mention that the tribunal did not consider the joint interpretation submission made by Canada.2See MATHEWS & DEVITRE, supra note 13. Panelist Ordoñez opined that joint interpretations should be binding or given a degree of weight on the International Investor-State Dispute Settlement (“ISDS”) tribunals, and in this case, the tribunal did not give any weight to Canada’s statement.2 In its submission, Canada agreed with Colombia’s interpretation, arguing that when a State seeks to apply an environmental protection, it does not have to pay just compensation.3Id.3
Another notable criticism resulting from the Eco Oro decision concerns inconsistent interpretations when it comes to environmental clauses. Indeed, the working sessions of United Nations Commission on International Trade Law (UNCITRAL) Working Group III has also addressed the issue of treaty interpretation inconsistency, as discussed further below.4U.N.G.A, 39TH Sess., 3rd plen. mtg. at 2-5, U.N. Doc. A/CN.9/WG.111.WP.191 (Jan. 17, 2020).4
Further, some commentators argue that the Eco Oro tribunal erred in its interpretation by not following the “generally accepted interpretation of Article XX of the [General Agreements on Tariffs and Trade (GATT)].”5See MATHEWS & DEVITRE, supra note 13 (noting that the general interpretation in other cases have been that the rights of investors are subordinate to the right of the States to ensure that investment are carried out in a manner sensitive to environmental concerns). 5 However, while the GATT provisions, namely Article XX,6See General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S. 194, art XX (“General Exceptions: Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: . . . (b) necessary to protect human, animal or plant life or health; . . . (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption; . . .”).6 was utilized as guidance to draft the environmental exception in the Canada-Colombia FTA, the GATT article is guidance and meant to apply only in non-investment, state-v.-state cases. Thus, while the GATT articles can be persuasive when drafting environmental exceptions, the Eco Oro tribunal was not bound to this interpretation.
While there are still challenges in balancing the interests of the state and foreign investors when it comes to environmental exceptions, there have been suggestions for better treaty drafting to avoid inconsistent interpretation.
For instance, UNCITRAL Working Group III1U.N.G.A, supra note 40, at 2.1 suggested that parties and tribunals should create methods to ensure that treaties are interpreted following the party’s intention. In particular, Working Group III suggested “the development and use of treaty provisions on unilateral, joint or multilateral interpretative declarations, guidance to arbitral tribunals on the meaning of certain terms and standards, binding interpretations of the underlying investment treaty obligation and the establishment of joint committees or commissions on treaty interpretation.”2Id.2
Further, there has been some discussion of the “new generation BITs” that refer to treaties that have been drafted to address interpretation issues. Those “Model Treaties” are focusing on corporate responsibility issues, limiting compensation, and including clear express provisions for exceptions. The Morocco Model Investment Treaty,3Morocco Model Bilateral Inv. Treaty, INVEST. POL’Y (June 2019), https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/5895/download.3 for example, includes a clause expressly indicating the right of the State to expropriate for the public interest but also includes, in the same article, factors to consider in determining whether a measure amounts to indirect expropriation.
Finally, the possibility of allowing counterclaims and or utilizing the ICSID Rule 48 (Ancillary Claims)4ICSID Rules of Procedure For Arbitration Proceedings, Rule 48 (July 28, 2022) (“Rule 48 Ancillary Claims (1) Unless the parties agree otherwise, a party may file an incidental or additional claim or a counterclaim (4 requires further inquiry. An ancillary claim can be appropriate for a party to raise if there is a claim that arises directly out of the same subject matter as the main dispute, covered by the parties’ consent to arbitration and falls within the jurisdiction of the Centre of the ICSID Convention.5Id.5 The possibility to raise such counterclaims would allow states to reclaim their procedural rights to a fair defense and compensation from investors. For instance, in the Eco Oro case, Colombia, under this article, could have been able to demand compensation from Eco Oro if it had been established that there was a violation of national or international norms regarding human rights and environmental protections. However, the scope of consent and jurisdiction of ICSID would have to be interpreted broadly.6Maria Jose Alarcon, ICSID Reform: Balancing the Scales?, KLUWER ARB. BLOG (Jan. 28, 2022), http://arbitrationblog.kluwerarbitration.com/2022/01/28/icsid-reform-balancing-the-scales/6 Thus, while this approach merits consideration, the effectiveness of the ancillary claims are yet to be determined and analyzed in practice.