Investment Agreements and the Regulatory State: Can Exceptions Clauses Create a Safe Haven for Governments 1 st ANNUAL FORUM OF DEVELOPING COUNTRY INVESTMENT NEGOTIATORS Singapore October, 2007 Investment Agreements and the Regulatory State: Can Exceptions Clauses Create a Safe Haven for Governments 1 st ANNUAL FORUM OF DEVELOPING COUNTRY INVESTMENT NEGOTIATORS Singapore October, 2007 Howard Mann Senior International Law Advisor International Institute for Sustainable Development

Agenda What is the problem discussed in this session? What is the problem discussed in this session? Scope: what do we mean by regulation in this context? Scope: what do we mean by regulation in this context? The nub of the legal problem: investor-state dispute settlement and uncertainty (OK, and incorrectness) The nub of the legal problem: investor-state dispute settlement and uncertainty (OK, and incorrectness) Some responses for greater clarity and certainty Some responses for greater clarity and certainty Final thoughts Final thoughts

What is the problem? Regulation of investors is common feature around the world Regulation of investors is common feature around the world What role do IIAs play in regulating how governments regulate foreign investors? What role do IIAs play in regulating how governments regulate foreign investors? Not a sovereignty issue: Not a sovereignty issue: all international agreements must impact sovereignty or are useless all international agreements must impact sovereignty or are useless Issue is getting the proper balance between the right and duty of governments to regulate and the appropriate protection of foreign investors Issue is getting the proper balance between the right and duty of governments to regulate and the appropriate protection of foreign investors

Scope Regulatory and legislative measures, but what type? Regulatory and legislative measures, but what type? A perfect definition is not possible, some examples A perfect definition is not possible, some examples protect human health from harmful products; protect human health from harmful products; protect the environment from pollutants; protect the environment from pollutants; ensure the conservation of natural resources; ensure the conservation of natural resources; ensure employee health and safety at work; ensure employee health and safety at work; protect and enhance human rights; protect and enhance human rights; protect against criminal activity or activity contrary to public morals; protect against criminal activity or activity contrary to public morals; prevent anti-competitive practices; and prevent anti-competitive practices; and promote consumer knowledge, awareness and protection. promote consumer knowledge, awareness and protection.

Scope What would not be included: What would not be included: effectively transfer private held land to the state for a public purpose, such as building a school, hospital, or ecological park; effectively transfer private held land to the state for a public purpose, such as building a school, hospital, or ecological park; transfer economic activity between actors doing the same thing in the same manner; transfer economic activity between actors doing the same thing in the same manner; measures that are otherwise an abuse of government regulation-making powers to achieve ulterior purposes; or measures that are otherwise an abuse of government regulation-making powers to achieve ulterior purposes; or promoting one business over another. promoting one business over another. Form as a regulation/legislation is not determinative, nature and purpose, bona fides are Form as a regulation/legislation is not determinative, nature and purpose, bona fides are

The Legal Problem: Uncertainty Expropriation provisions are the key issue (+NT, F&E) Expropriation provisions are the key issue (+NT, F&E) Definition of indirect expropriation and “regulatory expropriation” Definition of indirect expropriation and “regulatory expropriation” US doctrine of “regulatory taking” US doctrine of “regulatory taking” Case law diverges: Case law diverges: Metalclad v. Mexico Metalclad v. Mexico Economic impact test Economic impact test Nature and purpose of measure not relevant Nature and purpose of measure not relevant Methanex v. United States Methanex v. United States Under general international law, non-discriminatory regulations are not an expropriation Under general international law, non-discriminatory regulations are not an expropriation “police powers” rule creates bright line in the sand “police powers” rule creates bright line in the sand No clarity, certainty for governments No clarity, certainty for governments leading to possible regulatory chill leading to possible regulatory chill

Some responses: towards clarity and certainty for governments Reinforcing the police powers rule Reinforcing the police powers rule Preamble and objectives provisions Preamble and objectives provisions Use of regulatory measures provisions Use of regulatory measures provisions Recognizing need for ongoing regulation Recognizing need for ongoing regulation Recognizing right/duty to regulate Recognizing right/duty to regulate Limitations on scope of expropriation Limitations on scope of expropriation US: reflects C.I.L.; only in rare instances will a reg. be an expropriation US: reflects C.I.L.; only in rare instances will a reg. be an expropriation Canadian BITs: rare circumstances, such as lack of bona fides Canadian BITs: rare circumstances, such as lack of bona fides Relation to bright line in Methanex case unclear Relation to bright line in Methanex case unclear

Some responses: towards clarity and certainty for governments Other Treaty-based mechanisms Other Treaty-based mechanisms General exclusions through annexes (sectors, measures) General exclusions through annexes (sectors, measures) Investment liberalization session Investment liberalization session Specific exclusions from expropriation provisions Specific exclusions from expropriation provisions Tax, national security Tax, national security General exclusion clauses based on Article XX of GATT General exclusion clauses based on Article XX of GATT Variations on the theme Variations on the theme Some uncertainty on impact in dispute settlement Some uncertainty on impact in dispute settlement Clarity of key terms Clarity of key terms

Final thoughts Uncertainty disadvantages governments Uncertainty disadvantages governments Facility of initiating an investor-state a growing level of awards increases disadvantages of states Facility of initiating an investor-state a growing level of awards increases disadvantages of states Can and does lead to regulatory chill impact Can and does lead to regulatory chill impact Greater certainty can be created, mechanisms exist Greater certainty can be created, mechanisms exist Some need more study, but do exist Some need more study, but do exist Negotiators need to be more aware of need Negotiators need to be more aware of need