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Settling Water Disputes through International Investment Arbitration: When and by What Standards?

In: Chinese Journal of Environmental Law
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Miharu Hirano College of Asia Pacific Studies, Ritsumeikan Asia Pacific University Beppu Japan

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Abstract

The development of water law as environmental law may trigger disputes over investment projects, which could find their way to international investment arbitration. Consequently, domestic water law and administration can be subjected to international scrutiny. This article analyses relevant investment treaty provisions and cases concerning water resources management to examine (i) when water disputes can be submitted to investment arbitration and (ii) what standards tribunals have applied to settle them. It demonstrates that water disputes over investment projects can widely be covered by investment treaties, but they do not automatically turn water resources into legally protected commodities. Investment arbitration is commonly used by foreign investors to challenge the legality of water-related measures adopted by host States under an applicable investment treaty, it can also be used to enforce domestic environmental law. In most controversial cases, arbitral tribunals applied reasoned decision-making and regulatory coherence as emerging global regulatory standards.

1 Introduction

A water crisis is a crisis of governance.1 In response, new policies, legislation and administrative measures have been adopted throughout the world to rationalise water use and promote the protection of the environment and aquatic ecosystems. However, imposing limitations on existing water rights or introducing stricter environmental regulations may adversely impact investment projects.

If an affected project involves a foreign investor whose rights are protected by an investment treaty,2 a water dispute between the foreign investor and the host State acquires an international character. By becoming a party to an investment treaty, a State commits to guarantee a stable and predictable domestic legal framework for foreign investors from the other contracting State investing within its territory. Reforming water laws or introducing changes in environmental regulations may create tensions with such obligations of the host State under the investment treaty. Further, under the standard investor-State dispute settlement (ISDS) mechanism adopted by most investment treaties, a foreign investor, who believes to have suffered damages as a result of a breach of the host State’s treaty obligation, can bring a claim directly against the State to seek compensation through arbitration. Consequently, domestic water law and administration can be subjected to international scrutiny.

Many water disputes over investment projects have found their ways to investment arbitration.3 Before 2015, there were only few publicly known cases – three arbitral decisions4 and two instances where settlement was reached by an agreement between disputing parties.5 Since then, seven additional decisions have been rendered.6

A considerable amount of literature has been published on cases concerning water supply services, with the main concern being how to balance cost recovery for services with the physical and economic accessibility of residents in the service coverage area.7 On the contrary, the implications of investment arbitration on the management of water resources have been underexplored, not to mention the need for a timely study to comprehensively examine recent decisions. The relatively small body of literature in the latter domain consists of research papers and monographs that conducted selected case studies,8 those that examined the potentially expansive application of ‘indirect expropriation’ by tribunals,9 and those that analysed the relationship between investment law and other branches of international law.10 However, little attention has been paid to the implications of ISDS cases on domestic legal reforms, policy changes and regulatory measures related to water resources management, or, in other words, the interface between domestic water law and administration and international investment law.

It is against this backdrop that this article seeks to analyse relevant investment treaty provisions and cases to examine how water disputes have been settled through investment arbitration. It does so with the following two research questions in mind: (i) When can a water dispute be submitted to investment arbitration? (ii) What standards have tribunals applied to settle such disputes?

The analytical perspective of this study is informed by discussions concerning the gradual formation of ‘global regulatory standards’. According to Foster, these standards emanate from States’ substantive obligations under investment treaties and are elaborated through international adjudication, which are relied on by international courts and tribunals to assess the legality of contested regulatory activities of States.11 Through a sector-specific analysis, this paper searches for a common denominator in the water resources management sector.12 Water is a non-substitutable resource for most economic activities and a vital need for sustaining human life. It is also an integral part of nature and ecological systems; therefore, any impact on water resources can have far-reaching consequences. Economic, social and environmental dimensions of water require the management of its competing uses and its preservation to be approached from an integrated perspective. With a better understanding of how these distinctive characters of water are reflected in the standards applied by arbitral tribunals, one can (a) draw lessons and guidance for the further development of domestic water law and administration in compliance with international commitments and standards applied by tribunals and (b) assess the functions and limitations of investment arbitration in reviewing complicated and delicate balancing works done by domestic authorities.

Discussions in this article are threefold. First, it examines the scope of protection provided under investment treaties to foreign investors to identify the circumstances under which the host States’ measures related to water resources can be subjected to international scrutiny. Second, based on a review of relevant cases, it explores the patterns in investment disputes over water resources to identify applicable and contested legal standards. Third, it analyses the contents of the standards applied in relevant investment arbitration cases and draws implications from the analyses.

The scope of this article is limited to the analysis of substantive law – mainly the interpretation and application of rules embodied in investment treaties.13 Important procedural developments, such as the use of experts14 and third-party (amicus curiae) participation,15 are not covered. Although important and relevant, it also refrains from entering into the ongoing debates concerning structural and systemic issues of the current ISDS mechanism.16

2 The Material Scope of Application of Investment Treaties in Relation to Water Resources

This section examines the scope of protection provided under investment treaties to foreign investors to identify the circumstance under which investment disputes over water resources can be brought to investment arbitration.

Investment treaties usually use the term ‘investment’ to define their scope of guarantees conferred to foreign investors as well as the corresponding obligations owed by contracting States. In procedural terms, ‘investment’ defines the jurisdiction rationae materiae of an arbitral tribunal. Therefore, an analysis of the general meaning of the term can help us clarify the circumstances under which investment arbitration can be used by investors to challenge the legality of domestic measures concerning water resources management. Each treaty has a unique scope of ‘investment’ and it is, hence, crucial to examine general patterns to identify noteworthy practices.17

Many treaties adopt a broad definition of ‘investment’, which includes ‘every kind of asset’. The right to use water granted to an investor by a competent public authority in the form of a permit, license or concession can be independently considered as an ‘investment’.18 In Bayview v Mexico, the Tribunal stated in obiter dictum that the legal rights granted by a competent authority to extract water from rivers for defined periods, in defined amounts and for defined purposes would fall within the definition of ‘property’ in Article 1139(g) of the North American Free Trade Agreement (NAFTA) of 1992.19

‘Investment’ may encompass diverse economic activities, including shareholding in a local subsidiary. For instance, if a mineral water company purchases shares of an existing company in another contracting State to extract natural mineral water in the latter State’s territory, the parent company would be protected under an applicable investment treaty for holding shares of the local subsidiary.20

It is worth noting that investment treaties do not automatically turn water resources into legally protected commodities. The use of water resources only becomes an asset or a property protected by investment treaties when the rights or entitlements are set and granted to investors by competent authorities. The European Union-Canada Comprehensive Economic and Trade Agreement explicitly confirms such scope in its initial provision on the rights and obligations relating to water. It provides that:

  1. The Parties recognise that water in its natural state, including water in lakes, rivers, reservoirs, aquifers and water basins, is not a good or a product. (…)

  2. Each Party has the right to protect and preserve its natural water resources. Nothing in this Agreement obliges a Party to permit the commercial use of water for any purpose, including its withdrawal, extraction or diversion for export in bulk.21

Some treaties limit their scope by imposing additional requirements, providing an exclusive list of protected sectors or simply omitting certain services or resources. For example, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership protects ‘investment agreement’, which is a specifically defined written agreement signed between an authority at the central level of the government and an investment vehicle or an investor from another State Party. Land and water are explicitly excluded from ‘the type of investment agreement with respect to natural resources that a national authority controls (…) for their exploration, extraction, refining, transportation, distribution or sale’.22

Investment treaties protect ‘foreign’ investors, and hence, they do not create rights for investors to receive water from other riparian States sharing the same transboundary basins. In Bayview, American nationals operating farms and irrigation facilities in Texas brought a case against Mexico for an alleged improper diversion of river flows in the tributary of Rio Bravo/Rio Grande. The Tribunal, however, held that the claimants could not rely on the Treaty between the USA and Mexico relating to the Utilization of the Waters of the Colorado and Tijuana Rivers and of the Río Grande of 1944 because the Treaty did not create property rights for American nationals amounting to ‘investments’ under the NAFTA.23 This case, however, needs to be distinguished from other instances where bulk water export licences were granted by a government under its domestic law.24

In sum, the term ‘investment’ in general encompasses foreign investors’ shares of local water businesses or property rights, including ownership of water, the right to use water and any other similar types of legal entitlements or interests held by a foreign investor. When such a right of a foreign investor is infringed by the host State’s measure and the investor brings a claim to arbitration, the water dispute may fall under the jurisdiction of the tribunal.

3 Patterns of Water Disputes Submitted to Investment Arbitration

Despite significant differences in the factual circumstances of each water dispute, some patterns are noticeable when examining how claims and responses are framed to fit investment law thinking. This section categorises water disputes depending on who files the claims and what measures or acts are contested, which are necessary for identifying the standards that arbitral tribunals apply.

Among the four patterns explained below, in the first three, investors brought claims against the host States, while in the last, the host State brought counterclaims against the investors. In the first two patterns, the investors claimed to have suffered financial damages as a result of water protection measures that breached host States’ treaty obligations, whereas in the latter two, arbitration was used to enforce domestic environmental law.

3.1 Disputes over the Amount of Compensation for Expropriated Water-related Property Rights (Pattern 1)

It is a well-established principle of investment law that a State has sovereign rights to expropriate foreign investor-owned property within its territory for public purposes. This right is accompanied by the correlating obligation to make compensation to the property owner.25 Without such a guarantee, foreign investors would be unlikely to invest in another State that has signed an investment treaty to attract foreign investment inflow and promote the effective use of resources.

There are two relatively old disputes where direct expropriation of water-related property rights was at stake. They demonstrate that water resources protection is not an exception to the general rule and the so-called Hull formula – prompt, adequate and full compensation – should be applied as a compensation standard.

In Santa Elena v Costa Rica, the government of Costa Rica issued a decree to expropriate a large parcel of property rich in water and biodiversity adjacent to a national park. American property owners agreed to the expropriation but contested the amount of compensation. After over 20 years of negotiations and domestic litigations, the parties agreed to submit the case to arbitration.26 The Tribunal confirmed the general rule on expropriation in the following statement: ‘Expropriatory environmental measures – no matter how laudable and beneficial to society as a whole – are (…) similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains.’27 In this case, the common ground between the parties was that the amount of compensation should be based on the principle of full compensation for the fair market value of the property in question.28 The central question to this dispute was not the standard of compensation, but quite specific questions with respect to the date on which the property was expropriated as of which its fair market value was to be assessed as well as the value of the property on that date.29

In AbitibiBowater v Canada, an American investor initiated arbitration proceedings seeking compensation under NAFTA for damages arising out of an act that was passed by the provincial government of Newfoundland and Labrador. The act targeted the investor and cancelled its water use rights among other rights, reverting them to the Crown. In the settlement agreement, the Canadian government agreed to make a payment of the amount representing ‘the fair market value of the company’s rights and assets owned by AbitibiBowater expropriated under the Act’.30

By taking a close look at both cases, one can see that the host States did not contest the expropriatory nature of their measures; thus, in both instances, the central question was the amount of compensation. Also, the expropriatory measures specifically targeted the investors’ properties; neither of the cases demonstrates an example of the exceptional situation of ‘expropriations of a general and impersonal character’.31 In sum, in disputes over direct expropriation of water-related properties, full compensation would be an applicable standard, and the questions would most likely narrow down to the assessment of the fair market value of the expropriated properties.

3.2 Disputes over the Legality of Environmental Regulations Affecting an Investment (Pattern 2)

In most cases concerning water resources, claims were brought to investment arbitration to challenge the legality of governmental regulations related to water that halted the project or significantly devalued the investors’ protected assets, as in Vattenfall v Germany (I), which arose from the construction and operation of a thermal power plant. This dispute concerned delays and the refusal to issue a permit for the use of cooling water out of the Elbe River and the return of such water back to the river.32 Similarly, the delays or the refusal to grant environmental permits for mining,33 quarry construction and operation34 and touristic site development projects35 were contested by investors in other cases. In Methanex v USA, a methanol manufacturer challenged the lawfulness of banning a chemical compound because of the risk of contaminating groundwater.36 Another unique example is Muszynianka v Slovakia, in which a Polish mineral water company contested Slovakia’s amendment to its Constitution that prohibited bulk water export.37

The legality of these measures is assessed under the provisions on indirect expropriation as well as on treatment standards to be afforded to foreign investors and their investments, of which the most important and relevant to this paper is fair and equitable treatment (FET).38 The essence of FET is elusive because of its vague and ambiguous formulations in treaties. Nevertheless, there is an emerging common understanding of the core elements of FET among arbitral tribunals.39

This leads us to the question of whether such a common understanding of tribunals has led to the emergence of global regulatory standards that can be applied in water disputes as a common denominator. An in-depth analysis of the cases is presented in section 4.

3.3 Disputes over the Failure of the Government to Adequately Protect the Aquatic Environment (Pattern 3)

Disputes submitted to investment arbitration are often perceived to involve conflicts between commercial interests and public values. However, it can also be used as a forum to challenge the host State for the failure to take appropriate water protection measures. Allard v Barbados represents such a unique example. In this case, a Canadian national, who had acquired and developed an eco-tourism site in Barbados, brought a claim against Barbados for the failure to take reasonable and necessary environmental protection measures and for contaminating the wetland, thereby destroying the value of his investment.40 Although Mr Allard’s claim failed on factual grounds,41 it illustrates how investment arbitration could be used to enforce the implementation of domestic environmental law.

Applicable standards in such a scenario are the same as those referred to in section 3.2, and further assessment is conducted below in section 4.

3.4 Disputes over the Investor’s Obligations to Protect Water Resources (Pattern 4)

The investment treaty regime serves the purpose of protecting foreign investors’ rights and providing them with a forum through which their complaints against the host State can be addressed. The host State is not deprived of the authority to enforce its domestic law within its territory against foreign investors, and therefore, there is no need in theory for them to use investor-State arbitration for this purpose. However, counterclaims are increasingly invoked by host States as their defensive arguments.42 While the success rate is not high – as the counterclaim is subjected to the wording of an investment treaty invoked by the foreign investor and specific procedural conditions – recent cases have illustrated such possibilities.43

Burlington v Ecuador and Perenco v Ecuador, both arising from disputes over contracts to explore and exploit two oil blocks, are the first examples of successful cases.44 In these cases, compensation was sought by the host State against investors for land pollution and groundwater contamination, which breached Ecuador’s environmental law.45 These cases indicate that the standards used to assess the legality of investors’ conducts are mainly anchored on the domestic law of the host State and contracts signed between the host State and an investor or its investment vehicle.46

4 Emerging Global Regulatory Standards in Water-related Cases

The second pattern of water disputes submitted to investment arbitration (explained in the previous section) raises an important and controversial question on the standards against which the legality of domestic authorities is evaluated. This section demonstrates that a legitimate policy objective to protect water resources is not constrained by investment treaty obligations but host States must ensure their decision-making is backed by sufficient grounds (4.1). It also analyses how arbitral tribunals have applied relevant standards to the mode of implementing water-related measures by focusing on the function of regulatory coherence (4.2).

4.1 Reasoned Decision-making as a Standard to Demonstrate the Legitimacy of Policy Objectives

Generally applicable treaty standards do not constrain the policy discretion of States to pursue legitimate public interest objectives; therefore, the host States are free to adopt policies, legislation and regulations that safeguard and promote public interests, even if an explicit language on environmental protection is absent in an applicable investment treaty.47

Arbitral awards have recognised measures that protect water resources as legitimate policy objectives. As stated by the Muszynianka Tribunal, ‘[e]nvironmental preservation, public health, and seeking to regulate the use of natural resources in an informed and optimal fashion all represent core State functions and thus legitimate policy objectives.’ The Tribunal added that ‘[t]he regulation of the use of natural resources is a self-standing sovereign prerogative that is not necessarily correlated with the level of availability of the natural resource at issue.’48 Some measures that the tribunals have recognised as legitimate policy objectives include the constitutional prohibition of water exports,49 legislation on the prevention of surface or groundwater contamination,50 and legal frameworks for the preservation of aquatic ecosystems, including wetlands of domestic and international importance.51

Recent tribunals have been expressive about their avoidance of interference with domestic policy space and the regulatory autonomy of a host State. Illustratively, in Clayton/Bilcon v Canada, the Tribunal made a clear statement that an investment tribunal ‘must be sensitive to the need to avoid “regulatory chill”, including with respect to protection of the environment.’52 It further reiterated that ‘under NAFTA, lawmakers in Canada and the other NAFTA parties can set environmental standards as demanding and broad as they wish and can vest in various administrative bodies whatever mandates they wish.’53

Arguably, finding a legitimate policy objective does not preclude the application of FET provisions, as tribunals have held that disproportionate measures may amount to the violation of FET. However, conducting an evaluation of proportionality stricto sensu for weighing the significance of the purpose pursued by a State measure against its effects on an investor’s rights or interests has been found to be controversial. This approach is highly contested given its inherent indeterminacy, leaving arbitrators with far too wide discretion.54 As a result, tribunals exercise restraint and only apply a loose test. To cite one example of such a test, ‘proportionality stricto sensu would be lacking when a measure imposes an excessive burden on an investor’s rights in relation to the aim of the measure.’55

In practice, it would be extremely difficult to establish an ‘excessive burden’ on an investor against the protection of water resources. For instance, it is hard to imagine how wetlands such as Páramo ecosystems in Eco Oro v Colombia, which was recognised by the Tribunal as forming ‘the so-called “pearl necklace” along the Andean Mountains’ that play ‘a central role in maintaining biodiversity, premised on a unique capacity to absorb and restore water’,56 can be overridden by any kind of commercial interests. Similarly, in Aven v Costa Rica, the Tribunal acknowledged that ‘the protection of wetlands is a key objective sought by all civilized nations’, citing the Ramsar Convention on Wetlands of International Importance Especially as Waterfowl Habitat (1971) and the Convention on Biological Diversity (1992).57 In Muszynianka, the Tribunal went on to make a sweeping statement that ‘[t]he vital importance of this non-renewable resource cannot be overstated, especially in an era of alarming climate change’.58

As seen above, there is strong evidence indicating that the protection of water resources is considered to be a legitimate policy objective not constrained by the investment treaty regime. However, questions arise when investors challenge the genuineness of the government’s intention and claim that some measures are protectionism in disguise. This would necessitate the tribunal to go through an extensive examination of public records and scientific evidence to evaluate the bases of a contested governmental measure. As a result, the host State would be required to present their reasons for backing its decisions.

In Muszynianka, arbitrators disagreed on the evaluation of statements made by the minister responsible for the constitutional amendment proposal for banning water export. The majority of the Tribunal stated that ‘when a particular actor voices a distinct and perhaps arguably improper purpose, it does not mean that such motive is reflective of the State’s intention’, especially in the process of legislation.59 However, the dissenting arbitrator was of the opinion that an exception found in the amendment which allowed exports of industrially packaged water products reflected – based on the recorded statements – a separate policy of economic nationalism and industrial growth.60 As this case demonstrates, there is currently no agreed standard on how strictly a host State’s intention should be assessed.

Scientific evidence is important in providing the ground for a contested measure. Such evidence, however, need not lead to a single conclusion. It is not uncommon in water resources management that scientists and researchers disagree in good faith with certain methodologies, analyses and conclusions. For this reason, in Methanex, the Tribunal did not assess the validity of the scientific research itself; instead, it looked into the process through which such research was conducted, including whether researchers were independent and the research outcomes were subjected to scientific review.61 Importantly, tribunals have also recognised that the precautionary principle existing under domestic and international law can be applied by States in taking measures to protect water resources and aquatic ecosystems.62

Lessons from these cases show that to strengthen their case, public authorities, with the support of stakeholders at large, should ensure reasoned decision-making and implementation of new water policies, legislation or administrative measures by following legally required procedures, by basing decisions on reasonable and credible economic evaluation and scientific research and by gaining public understanding.

4.2 Regulatory Coherence in the Implementation of Water-related Measures

Questions on the legitimacy of a water policy and the appropriateness of its concrete implementation measures can be separated. It is the latter that raises insurmountable challenges in investment disputes over water resources. This article identifies regulatory coherence as an important standard applied in water-related investment arbitration cases.

Reasonable treatment under the FET standard and indirect expropriation requires that the measure in question be adopted ‘for’ the legitimate public policy objectives. Foster labels this requirement as ‘regulatory coherence’ whereby tribunals assess the reasonable correlation between the act of the host State and the legitimate policy objective.63

The standard of review adopted by tribunals is not a high one, and they pay deference to the choices States make when deciding how to implement policy objectives. The Muszynianka Tribunal held that ‘the relevant criterion for the reasonable connection test is whether the State measure represents a “potentially effective mean” to address the declared public purpose, or whether it is “at least capable of furthering” such purpose.’64 In this case, the Tribunal found that the constitutional amendment prohibiting bulk water exports, with the exception of bottled water trade, was reasonable for discouraging water exports, controlling groundwater resources and carrying out safety and hygienic tests in relation to the production of mineral water.65

The host States’ obligations to respect the legitimate expectations of investors are also frequently relied on by tribunals as a test reflected in FET and minimum standard of treatment provisions. Similarly, under indirect expropriation, the police power doctrine cannot be invoked if investment-backed expectations are betrayed. Legitimate expectations can be formed when an investor, when making an investment, relies on assurances given by the host State that are specifically addressed to the investor on specific contents.66

Such expectations were found in Clayton/Bilcon v Canada, which concerned a proposed quarry and marine terminal project in the Bay of Fundy that is situated around an important habitat for plant and marine life. The Tribunal found a breach of the FET provision since the investors were encouraged to engage in a regulatory approval process for the project with the belief of possible success.67 Likewise, in Eco Oro, the majority Tribunal found a breach of FET for legitimate expectations that Colombia would ensure a predictable commercial framework for business planning and investment, which was betrayed by inconsistent regulations imposed by different authorities.68 However, it should be noted that the dissenting arbitrator criticised the majority view for a lack of ‘quasi-contractual’ relationship in this case.69 It should be added that an investor cannot legitimately expect that the host State will refrain from introducing any bona fide measures aimed at protecting its water resources to avoid interference with investment projects.70 Moreover, investors must undertake their own due diligence before relying on any encouragement or support given by the government in making their investments.71

‘New generation’ investment treaties tend to include a provision on environmental exception. However, when a host State is found to be in breach of an obligation of the applicable investment treaty, the general exceptions clause found in the same Treaty cannot preclude the duty of the host State to pay compensation. In Eco Oro, Colombia invoked Article 2201(3) of the Canada-Colombia Free Trade Agreement (FTA) as a defence on the merits. The Tribunal, while admitting that a State can adopt or enforce environmental measures ‘necessary to protect human, animal or plant life’ or measures ‘[f]or the conservation of (…) exhaustible natural resources’ pursuant to the Article ‘without finding itself in breach of the FTA’, it held that ‘this does not prevent an investor claiming under Chapter Eight that such a measure entitles it to the payment of compensation.’72

5 Conclusion

Water law reforms and environmental regulations adopted for (re-)balancing competing demands for water resources and their conservation may trigger disputes over investment projects, which could find their way to international investment arbitration. This article analysed relevant investment treaty provisions and ISDS cases to examine (i) when such disputes can be submitted to investment arbitration and (ii) what standards arbitrators apply to settle them. Section 2 demonstrated that water disputes over investment projects can widely be covered by investment treaties, but such protection does not extend to the natural state of water resources without any attached entitlements.

Section 3 categorised water disputes that have so far been submitted to investment arbitration into four patterns and identified various standards that tribunals have applied for their settlement, namely full compensation for directly expropriated water-related properties (Pattern 1), standards emanating from substantive provisions used to scrutinise regulatory exercises of authorities in managing water resources (Patterns 2 and 3) and domestic environmental law and regulations (Pattern 4). In most cases, investors challenge the legality of domestic water law or administrative measures, but the investment treaty regime does not need to be seen by environmental lawyers from a defensive position only. ISDS can also be used by a foreign investor as a tool to challenge the host State’s measures that are environmentally retrogressive (Pattern 3). In addition, a host State can file a counterclaim, if an applicable investment treaty permits, to seek compensation from the investor for causing environmental damages (Pattern 4).

Section 4 analysed in depth the cases belonging to Pattern 2. While concerns over pressure coming from the international mechanism designed to protect commercial interests are understandable, arbitral decisions demonstrate that investment treaty obligations do not interfere with legitimate policy objectives to protect and conserve a clean and healthy aquatic environment. Rather, these obligations are interpreted and applied by tribunals to review whether the measures in question were designed or implemented in an abusive manner that unjustifiably caused damages to the interests of foreign investors.73 Because water permeates through different economic sectors and administrative boundaries, water disputes can easily arise from policy and regulatory inconsistencies caused by insufficient institutional coordination among policymakers, governmental institutions with different mandates, and regulatory agencies. Investment arbitration is able to articulate cracks in domestic water governance by applying standards of reasoned decision-making and regulatory coherence among others. At the same time, it is suggested that when applying vague and ambiguous provisions of investment treaties to water disputes, tribunals restrain themselves from excessively intruding into domestic policy space by adhering to these emerging global regulatory standards.

Acknowledgement

This work was supported by the JSPS KAKENHI Grant Number 18J00138 and 21K13198.

1

UN World Water Assessment Programme, The United Nations World Water Development Report: Water for People, Water for Life, UNESCO & Berghahn Books, 2003, 528.

2

In this article, the term ‘investment treaty’ is used broadly to describe not only bilateral investment treaties (BITs) and multilateral investment treaties but also free trade agreements with an investment chapter. There are over 3,200 treaties of this kind. See UNCTAD Investment Policy Hub <https://investmentpolicy.unctad.org/international-investment-agreements>.

3

The cases can be obtained from the Investment Treaty Arbitration <www.italaw.com> or Jus Mundi <jusmundi.com>.

4

Compañia del Desarrollo de Santa Elena SA (CDSE) v Costa Rica, ICSID Case No ARB/96/1, Final Award (17 February 2000) (L Yves FORTIER, Elihu LAUTERPACHT, Prosper WEIL); Methanex Corporation v USA, UNCITRAL (1976), Final Award of the Tribunal on Jurisdiction and Merits (3 August 2005) (J William F ROWLEY, W Michael REISMAN, VV VEEDER); Bayview Irrigation District et al v Mexico, ICSID Case No ARB(AF)/05/1, Award (19 June 2007) (Vaughan LOWE, Edwin MEESE III, Ignacio GÓMEZ-PALACIO).

5

AbitibiBowater Inc v Canada, ICSID Case No UNCT/10/1, Consent Award (15 December 2010); Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG v Germany, ICSID Case No ARB/09/6, Request for Arbitration (30 March 2009); ibid, Award (11 March 2011).

6

William Ralph Clayton et al and Bilcon of Delaware Inc v Canada, PCA Case No 2009-04, Award on Jurisdiction and Liability (17 March 2015) (Bruno SIMMA, Donald MCRAE, Bryan SCHWARTZ); Peter A Allard v Barbados, PCA Case No 2012-06, Award (27 June 2016) (Gavan GRIFFITH, Andrew NEWCOMBE, Michael REISMAN); Burlington Resources Inc v Ecuador, ICSID Case No ARB/08/5, Decision on Counterclaims (7 February 2017) (Gabrielle KAUFMANN-KOHLER, Stephen DRYMER, Brigitte STERN); Perenco Ecuador Ltd v Ecuador, ICSID Case No ARB/08/6, Decision on Perenco’s Application for Dismissal of Ecuador’s Counterclaims (18 August 2017) (Peter TOMKA, Neil KAPLAN, J Christopher THOMAS); ibid, Award (27 September 2019); David R Aven et al v Costa Rica, ICSID Case No UNCT/15/3, Award (28 September 2018) (Eduardo SIQUEIROS T, C Mark BAKER, Pedro NIKKEN); Muszynianka Spółka z Ograniczoną Odpowiedzialnością v Slovakia, UNCITRAL (1976), PCA Case No 2017-08, Award (7 October 2020) (Gabrielle KAUFMANN-KOHLER, Robert G VOLTERRA, J Christopher THOMAS); Eco Oro Minerals Corp v Colombia, ICSID Case No ARB/16/41, Decision on Jurisdiction, Liability and Directions on Quantum (9 September 2021) (Juliet BLANCH, Horacio A GRIGERA NAÓN, Philippe SANDS).

7

Cases and the existing literature are analysed in Miharu HIRANO and Shotaro HAMAMOTO, ‘Is Investment Arbitration Inimical to the Human Right to Water?: The Re-Examination of Arbitral Decisions on Water Services’ in Julien CHAISSE (ed), Charting the Water Regulatory Future: Issues, Challenges and Directions, Edward Elgar, 2017, 145–166. For the most recent development, see Flavia MARISI, ‘Skating on Thin Ice: The Human Right to Water in Investor-State Dispute Settlement’ (in this issue).

8

Aline BAILLAT, ‘International Investment Agreements and Water Resources Management’ in Julien CHAISSE (ed), The Regulation of the Global Water Services Market, Cambridge University Press, 2017, 91–111; Laurence BOISSON DE CHAZOURNES, Fresh Water in International Law (2nd ed) Oxford University Press, 2021, 120–133.

9

Ana Maria DAZA-CLARK, International Investment Law and Water Resources Management: An Appraisal of Indirect Expropriation, Brill/Nijhoff, 2016; Nathalie BERNASCONI-OSTERWALDER and Edith BROWN WEISS, ‘International Investment Rules and Water: Learning from the NAFTA Experience’ in Edith BROWN WEISS, Laurence BOISSON DE CHAZOURNES and Nathalie BERNASCONI-OSTERWALDER (eds), Fresh Water and International Economic Law, Oxford University Press, 2005, 263–288.

10

Ursula KRIEBAUM, ‘Water and Investment’ in Kate MILES (ed), Research Handbook on Environment and Investment Law, Edward Elgar, 2019, 69–106; Jorge E VIÑUALES, Foreign Investment and the Environment in International Law, Cambridge University Press, 2012, ch 7. On transboundary water projects and their relationship to investment law, see Ana Maria DAZA-CLARK, ‘Enforcing Transboundary Water Obligations Through Investment Treaty Arbitration: China, Laos and the Mekong River’ (2020) 29 RECIEL 442; Alistair RIEU-CLARKE, ‘Transboundary Hydropower Projects Seen Through the Lens of Three International Legal Regimes – Foreign Investment, Environmental Protection and Human Rights’ (2015) 1 IJWG 27.

11

Caroline E FOSTER, Global Regulatory Standards in Environmental and Health Disputes: Regulatory Coherence, Due Regard, and Due Diligence, Oxford University Press, 2021, 2–9.

12

Concerning the benefits of a sector-specific approach in the field of water resources management, see DAZA-CLARK (n 9) 7, 14, 199–206. See also Julien CHAISSE, ‘Introduction’ in Julien CHAISSE (ed), The Regulation of the Global Water Services Market, Cambridge University Press, 2017, 1–23.

13

For the analysis of investment contracts, see Hilmer J BOSCH and Joyeeta GUPTA, ‘Water Property Rights in Investor-State Contracts on Extractive Activities, Affects Water Governance: An Empirical Assessment of 80 Contracts in Africa and Asia’ (2022) 31 RECIEL 295.

14

See eg Makane Moïse MBENGUE and Rukmini DAS, Use of Experts in International Freshwater Disputes: A Critical Assessment, Brill, 2019, 62–78.

15

See eg Huiping CHEN, ‘The Role of Amicus Curiae in Implementing the Human Right to Water in the Context of International Investment Law’ (2020) 29 RECIEL 454.

16

See discussions at the UNCITRAL Working Group III on Investor-State Dispute Settlement Reform <https://uncitral.un.org/en/working_groups/3/investor-state>.

17

Jeswald W SALACUSE, The Law of Investment Treaties (3rd ed) Oxford University Press, 2021, 205–220.

18

DAZA-CLARK (n 9) ch 7.

19

Bayview (n 4) [110]–[111].

20

Muszynianka (n 6) [285]–[295].

21

Comprehensive Economic and Trade Agreement between Canada, of the One Part, and the European Union and its Member States, of the Other Part [2017] L 11/23, Article 1.9.

22

Comprehensive and Progressive Agreement for Trans-Pacific Partnership [2018] Article 9.1 <www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-in-force /cptpp>.

23

Bayview (n 4) [121].

24

Sun Belt, a US investor, sought compensation from Canada for an alleged breach of the NAFTA by the government of British Columbia for imposing a moratorium on new water export licenses in a discriminatory manner. The settlement of this case is unknown. Sun Belt Water Inc v Canada, Notice of the Intent to Submit a Claim to Arbitration (27 November 1998).

25

SALACUSE (n 17) 71–78.

26

Background of the case is explained in Charles H BROWER and Jarrod WONG, ‘General Valuation Principles: The Case of Santa Elena’ in Todd WEILER (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, Cameron May, 2005, 747–775.

27

CDSE (n 4) [72].

28

ibid [70], [73].

29

ibid [73].

30

AbitibiBowater (n 5) Settlement Agreement [5].

31

One may argue that a less strict compensation standard could be applied when the property rights were subjected to ‘expropriations of a general and impersonal character’ if it could be established that the measure constitutes the exercise of the peoples’ right to economic self-determination. However, such argument would go beyond the scale of water law reforms. See Shotaro HAMAMOTO, ‘Compensation Standards and Permanent Sovereignty over Natural Resources’ in Marc BUNGENBERG and Stephan HOBE (eds), Permanent Sovereignty over Natural Resources, Springer, 2015, 141–154.

32

Vattenfall, Request (n 5) [13]–[45]. In this case, settlement was reached between the investors and the host State. See Vattenfall, Award (n 5) 5 (Article 2).

33

Eco Oro (n 6). Cf Pac Rim Cayman LLC v El Salvador, ICSID Case No ARB/09/12, Final Award (14 October 2016). In this case, water pollution and health risks were raised by El Salvador, but the Tribunal did not reach this question.

34

Clayton/Bilcon (n 6) [5].

35

Aven (n 6) [6].

36

Methanex (n 4) [I-Preface-1].

37

Muszynianka (n 6) [76], [83]–[84].

38

For example, the Eco Oro Tribunal did not find a breach of indirect expropriation but did so for the FET standard. Eco Oro (n 6) [804]–[805].

39

SALACUSE (n 17) 294ff.

40

Allard (n 6) [3].

41

ibid [139], [166]–[167].

42

Maxi SCHERER, Stuart BRUCE and Juliane RESCHKE, ‘Environmental Counterclaims in Investment Treaty Arbitration’ (2021) 36 ICSID Review 413; Diane A DESIERTO, ‘Environmental Protection in International Investment Arbitration: From Defences to Counterclaims’ in Edgardo SOBENES, Sarah MEAD and Benjamin SAMSON (eds), The Environment Through the Lens of International Courts and Tribunals, TMC Asser Press, 2022, 325–349.

43

Aven (n 6) [719]–[747] (rejecting on the procedural grounds). See also Urbaser SA and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v Argentina, ICSID Case No ARB/07/26, Award (8 December 2016) (Andreas BUCHER, Pedro J MARTÍNEZ-FRAGA, Campbell MCLACHLAN) [1143]–[1155].

44

Burlington (n 6) [60]–[62]; Perenco, Decision (n 6) [34]–[35]; Perenco, Award (n 6) [1023(b)].

45

Burlington (n 6) [72]–[74]; Perenco, Decision (n 6) [65]–[114].

46

Cf Urbaser (n 43) [1213].

47

In the context of indirect expropriation, such discretion is known as the police powers doctrine. Methanex (n 4) [IV-D-7]; Eco Oro (n 6) [635]; see also Philip Morris Brand Sàrl, Philip Morris Products SA and Abal Hermanos SA v Uruguay, ICSID Case No ARB/10/7, Award (8 July 2016) (Piero BERNARDINI, Gary BORN, James CRAWFORD) [291]–[301].

48

Muszynianka (n 6) [550]–[551].

49

ibid.

50

Methanex (n 4) [II-D-1]-[II-D-8].

51

Aven (n 6) [417]–[418]; Eco Oro (n 6) [86], [636]–[637].

52

Clayton/Bilcon (n 6) [737].

53

ibid [738].

54

FOSTER (n 11) 248–249.

55

Muszynianka (n 6) [574]. In Aven (n 6), Eco Oro (n 6) and Methanex (n 4), proportionality stricto sensu was not applied.

56

Eco Oro (n 6) [86].

57

Aven (n 6) [417]–[418].

58

Muszynianka (n 6) [575].

59

ibid [555].

60

Muszynianka (n 6) Partial Dissenting Opinion (Robert G VOLTERRA) [21]–[94].

61

Methanex (n 4) [III-A-51].

62

Aven (n 6) [443]–[444]; Eco Oro (n 6) [460], [644], [654], [683], [811]; Muszynianka (n 6) [553].

63

FOSTER (n 11) 221–243. Foster also lists ‘due regard’ and ‘due diligence’ as global regulatory standards, but this article limits the analysis to the most important standard for the water sector.

64

Muszynianka (n 6) [557] (footnotes omitted) (citing Philip Morris (n 47) [306]).

65

ibid [559]–[565].

66

Allard (n 6) [194]; Muszynianka (n 6) [461]–[462].

67

Clayton/Bilcon (n 6) [445]–[454].

68

Eco Oro (n 6) [830].

69

Eco Oro (n 6) Partial Dissent (Philippe SANDS) [12]–[18].

70

Methanex (n 4) [IV-D-4].

71

Aven (n 6) [449], [552]; Eco Oro (n 6) [681]–[682], [750]–[751].

72

Eco Oro (n 6) [830]; see also Aven (n 6) [412]–[415]. The finding in Eco Oro leaves some uncertainties as it appears to transform the obligation to pay compensation as a form of reparation under the secondary rule (the law of State responsibility) into the obligation under the primary rule (the treaty).

73

The same assessment is reached for arbitration cases concerning water services. See HIRANO and HAMAMOTO (n 7).

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