Investor-state disputes present essentially a hybrid between public international law and traditional fields of private law, such as contract and property. Relationships between investors and sovereign states come into existence when two or more states agree to a bilateral (or multilateral) investment treaty (BIT), or the provisions which are normally included in a BIT form part of a free trade agreement (FTA). Chapter eleven of the North American Free Trade Agreement (NAFTA), for instance, contains the relevant provisions concerning investor-state disputes in the context of North American investors operating in another NAFTA state. [2] The provisions in NAFTA essentially allow an investor to sue a sovereign state through the International Centre for Settlement of Investment Disputes (ICSID), a branch of the World Bank based in Washington D.C., in the event that its property was expropriated. BITs are ostensibly beneficial to both investors and the signatory states. Investors gain from the legal certainty which the BIT provides in knowing that its property and investments will not be expropriated by the local government without fair compensation. Conversely, the state in which the investment is being made benefits from the influx of foreign direct investment (FDI), which is generally beneficial to its economy. Since the state must abide by the terms of the BIT however, many have criticised these treaties as an affront to national sovereignty.

The case of Pac Rim Cayman LLC v. The Republic of El Salvador involves a Canadian/American company (Pac Rim) in connection with its potential gold mining operations in El Salvador. [3] Pac Rim’s parent company is based in Vancouver, but the subsidiary involved in the dispute with El Salvador is incorporated in Nevada, thus rendering the Dominican Republic – Central America Free Trade Agreement (DR-CAFTA) applicable to the dispute. [4] Like NAFTA, DR-CAFTA requires disputes between investors and states to be resolved through ICSID-run arbitration. Pac Rim claims, inter alia, that it was induced by the El Salvadorian government to invest millions of dollars into exploratory costs for a potential gold mine to be developed in El Dorado, only to later be denied the requisite permits needed to exploit the site. The company also contends that the El Salvadorian government has given preferential treatment to local companies, thus violating substantive provisions of DR-CAFTA. For its part, the El Salvadorian government, as well as numerous civil society organizations supporting its cause, have cited uncertainties related to the company’s environmental impact assessment as the primary reason why permits have not been issued.

The Pac Rim case raises a number of interesting legal and policy issues which cannot entirely be addressed here. However, there are two overarching issues on which I would like to elaborate. The first resembles the question posed in takings (i.e. expropriation) cases in the domestic law context, namely, who should shoulder the loss when the government expropriates property from private individuals? The Fifth Amendment of the United States Constitution states that private property shall not be taken for public use without just compensation. [5] The Supreme Court of the United States has expanded the concept of a taking to include, in certain circumstances, government regulation which deprives owners of specific uses of their property. [6] Canada, on the other hand, has no explicit constitutional requirement for the state to compensate private individuals when property is expropriated. Despite the lack of a constitutional requirement however, the Canadian federal government usually provides compensation when property is expropriated. Is it desirable to have a requirement that the state compensate private individuals when its regulations deprive property owners of certain uses in their land? Or should the public good outweigh the private benefits conferred by property rights in certain circumstances? More importantly, how should these questions be answered in the international setting when foreign property holders are involved?

The second question which needs to be examined is whether investor-state arbitration is the most appropriate means to resolve disputes of this nature. Many of the arguments from groups which side with the El Salvadorian government seem to conflate the substance of the dispute with the arbitration process itself. [7] These criticisms seem to confuse the issue of who should win on the merits (Pac Rim or El Salvador) with whether investor state arbitration is the most appropriate means for resolving the dispute. As for the latter question, what alternatives exist outside of arbitration proceedings? Isn’t a forum where neutral decision-makers with no connection to the case the most appropriate means to resolve disputes of this nature? Without investor-state arbitration, would we return to situation where states would be required to practice self-help to advance economic objectives?

Investor-state arbitration is an emerging area which combines aspects of domestic and international law. The Pac Rim case highlights the complexities of the process, as well as difficulties which arise when political decisions conflict with legal obligations. The decision on the merits will likely be released within the next year; it will almost certainly contribute to the ongoing debate.

[1] Case concerning Reparation for Injuries Suffered in the Service of the United Nations, Advisory Opinion, [1949] ICJ Rep 174.

[2] North American Free Trade Agreement Between the Government of Canada, the Government of Mexico and the Government of the United States, 17 December 1992, Can TS 1994 No 2, 32 ILM 289 (entered into force 1 January 1994) [NAFTA].

[3] Pac Rim Cayman LLC v The Republic of El Salvador (ongoing), ICSID Case No ARB/09/12 (International Centre for Settlement of Investment Disputes).

[4] Dominican Republic – Central American Free Trade Agreement, 28 May 2004, 19 USC § 4011 (2005) [DR-CAFTA].

[5] US Const amend V.

[6] Lucas v South Carolina, 505 US 1003 (1992).

[7] See e.g. Katie Zaunbrecher, “Pac Rim Cayman v. Republic of El Salvador: Confronting Free Trade’s Chilling Effect on Environmental Progress in Latin America” [2010] 33:2 Hous J Int’l L 489; Krista Scheffey, Pac Rim v. El Salvador: the Perils of Free Trade in the Americas” Share the World’s Resources (16 August 2010), online: Share the World’s Resources <www.stwr.org>.

A Public Statement on the International Investment Regime, signed by a group of forty eight academics from around the world, has added, “We have a shared concern for the harm done to the public welfare by the international investment regime, as currently structured, especially its hampering of the ability of governments to act for their people in response to the concerns of human development and environmental sustainability”. [2] It argues, inter alia, that investment treaty arbitrations are unfair and unbalanced,[3] and that states should withdraw from investment treaties.[4] International investment law has even been described by a distinguished academic as “a law of greed”.[5]

Although perhaps somewhat exaggerated, these critiques are certainly not baseless. Several recent developments, most notably the disputes between tobacco giant Philip-Morris and the governments of Australia and Uruguay, indeed demonstrate how foreign investors can abuse the system of international investment law. But, as previously argued in this blog,[6] it could well be that these critics overlook the possibility that this system can also support sustainable development goals.

An alternative perspective of the ‘regulatory chill’

While the above mentioned critics often claim that investment treaty law restricts governments’ regulatory flexibility and their ability to adopt stricter environmental and social laws, it should be noted that similar ‘restrictions’ can also stop governments from reducing their standards on these very issues. For example, in recent investment arbitration a Canadian investor, who invested in an eco-tourism facility in Barbados, argued that Barbados authorities’ failure to enforce environmental laws and commitments, on which he legitimately relied, led to the pollution of his site.[7] The prospect of paying compensation in such cases can ‘chill’ governments’ will to  lower environmental standards, and thus support environmental objectives.

Similar claims can also be made with respect to climate change policies. Investment in low-carbon technologies, for example, often requires governmental support. This is partly due to market distortions like those resulting from high fossil fuels subsidies.[8] Another reason is the immature state of these technologies that often renders them unprofitable in strictly financial terms. Therefore, without state support many investors may choose other, more profitable alternatives. Indeed in order to promote climate-friendly investment, many states have adopted support schemes so as to cover the existing ‘gap’ between the public need for private investment in this field, and the current unprofitability of these technologies.

Investors rely on these governmental support schemes when deciding whether to invest in new low-carbon technologies. Governments’ ability to ‘fulfill their promises’ of support is therefore crucial for investors. When these promises are not kept after an initial heavy investment has been made, investors’ discontent can be understood. Even more troubling, at least from the public’s point of view, is that ‘un-kept promises’ can also discourage investors from making similar investments in the future.[9]

In light of the above, it can be argued that (to use the Guardian’s words) the existence of such a “legal weapon that gives corporations the edge on government”, may not necessarily be a bad thing. Having the option of claiming compensation in cases of governmental ‘betrayal’ can reduce the risks of relying on governmental promises, and encourage investors to invest in low-carbon technologies.

Recent developments:

Lately this present discussion has become a reality. On November 2011 a group of fourteen foreign investors filed a notice of arbitration against the Spanish government (based on the Energy Charter Treaty), following the latter’s substantive cuts in its feed-in tariffs (“FIT”) scheme. The cut in the FIT scheme was made due to the financial hardships Spain is currently facing.[10] The exact legal arguments raised by the foreign investors in this case are unknown to the author,[11] but a legal brief prepared by a certain leading law firm suggests that they may have relied on the “fair and equitable treatment” and “national treatment” standards of protection, as well as on the protection from expropriation, as stipulated by the Energy Charter Treaty.[12]

The Spanish example, however, reveals also the other side of this story. Spain is currently facing a difficult financial crisis. The solar industry, according to several publications, received 2.6 billion Euros in subsidies in 2010 alone,[13] and it is doubtful whether a state in such a condition should be forced to allocate these amounts to, of all things, renewable energy.

On the other hand, it is also discouraging that when facing financial difficulties, environmental causes are too often the first to be sacrificed. It can also be added that while Spain’s admittedly difficult financial situation should perhaps be considered when resolving this dispute, other, less ‘financially challenged’ states, like the UK, are making similar cuts.

In the author’s view, investment treaty law’s role in such cases is not necessarily negative. It provides assurances that in light of the low priority environmental considerations often receive, especially in times of financial turbulence, environmental ‘promises’ may still be respected. This is important for the prospect of green technologies, and for the future of our planet. This, however, is not to say that the system is flawless. Struggling states such as Spain should be allowed some flexibility when facing economic crises. And as demonstrated by several investment awards decided in the past against Argentina, it is possible that many investment treaties are simply not suitable for dealing with these situations. But, and this is important to remember, the arbitrations against Argentina and the mentioned case against Spain involve financial crises of historical proportions. This may not, usually, be the typical case in future claims.

Conclusion:

The prospects for the UN ‘green-economy’ vision depends on the successful fusion between private commercial interests and public environmental and social goals. Providing the private sector with the ability to efficiently claim compensation from states that do not live up to their environmental commitments, does not conflict with this vision. This is especially true in the case of low-carbon technologies, in which the private sector’s involvement is crucial.

Those criticizing the investment regime should continue to do so. This system, like many others, is not perfect. At the same time the benefits of this system should not be overlooked, especially when the voices calling for its revision grow ever-louder.

[2] Public Statement on the International Investment Regime, 31 August 2010, online: Osgood <http://www.osgoode.yorku.ca/public_statement/documents/Public%20Statement.pdf> [Public Statement].

[3] Public Statement, supra note 10 at para 8.  These critiques mostly claim that investment treaties represent only the commercial interests of foreign investors, and ignore public interests of states.

[4] Public Statement, supra note 10 at para 14.

[5] M. Sornarajah, ‘A Law for Need or a Law for Greed?: Restoring the Lost Law in the International

Law of Foreign Investment’, Int. Environ. Agreements 123 (2006): 329 [Sornarajah, ‘A Law for Need or a Law for Greed?] at 331.

[6] “Environmental exceptions in the future EU investment policy. Perhaps more than meets the eye?”, Legal Frontiers, June 10.

[7] Peter A. Allard v. The Government of Barbados, (Notice of Dispute) 8 September, 2009 online: Graemehall <http://graemehall.com/legal/papers/BIT-Complaint.pdf> [Allard].

[8] Ben Sills, “Fossil Fuel Subsidies Six Times More Than Renewable Energy”,  Bloomberg, 9 November 2011, online: Bloomberg <http://www.bloomberg.com/news/2011-11-09/fossil-fuels-got-more-aid-than-clean-energy-iea.html>.

[9] In a statement made by the UK Solar Trade Association following the U.K. government’s decision to modify its FIT scheme it was argued: “Such deep cuts to the tariff would kill the UK solar industry stone dead.” The UK Renewable Energy Association has added: “The renewables industry is really not confident at all. These changes undermine confidence across all energy-related investments, even CCS [carbon capture and storage] and nuclear, as we need to be confident that the government will honour their commitments and not chop and change.” See Uk Parliament Briefing Paper, Elena Ares, Oliver Hawkins and Paul Bolton, Science and Environmental Section, “Feed-in Tariffs: Solar PV”, online: UK Parliament <www.parliament.uk/briefing-papers/SN06112.pdf> at 14, and Damian Carrington, Feed-in tariff cuts ‘will kill solar industry stone dead’”, The Guardian, 31 October 2011, online: The Guardian <http://www.guardian.co.uk/environment/2011/oct/31/feed-in-tariff-cuts-industry>.

[10] Tim Webb, “Spain’s financial crisis claims another victim: the solar power industry” The Guardian, 30 March 2011, online: The Guardian <http://www.guardian.co.uk/world/2011/mar/30/new-europe-spain-solar-power>. Please note that other states, like the U.K., have also modified their FIT schemes for similar reasons. In the U.K. these measures were legally challenged (successfully, for the moment) by solar industry. See Energy Efficiency News, “High court rules UK government’s solar feed-in-tariff cuts are illegal”, 22 December, 2011, Energy Efficiency News, online: <http://www.energyefficiencynews.com/i/4745/>.

[11] To the best of the author’s knowledge, these have not been published yet.

[12] See a brief prepared by Freshfields Bruckhaus Deringer, “Tariff changes for photovoltaic solar power in Spain” March 2011, online: <http://www.freshfields.com/publications/pdfs/2011/mar11/29871.pdf>.

[13] Tim Webb, “Spain’s financial crisis claims another victim: the solar power industry” The Guardian, 30 March 2011, online: The Guardian <http://www.guardian.co.uk/world/2011/mar/30/new-europe-spain-solar-power>.

At present, it seems that the EU Parliament aspires to push forward an innovative approach, in line with (and perhaps even further than) policies already applied by countries like Canada, under which exceptions for sustainable development goals are included.[1] This is mostly the result of concerns about “regulatory chill”, which are often mentioned by scholars (and recently also by policy makers)[2] who wish to maintain states’ flexibility to regulate future policies with respect to the protection of the environment, health, human-rights, etc. Indeed, it has been reported that Uruguay intended to relax its proposal for new anti-smoking laws following Philip Morris’ threats of investor-state litigation.[3] Similar concerns seem to have led policy makers and civil society organizations in Australia and New-Zealand to object to the inclusion of the investor-state mechanism in their investment agreements (most notably in the Trans-Pacific Partnership Agreement).[4]

But things are not so simple. The aim of these general exceptions is often to promote sustainable development goals by making states ‘untouchable’ when it comes to the regulation of these important issues. However, the exclusion of such topics from the general standards of protection afforded for foreign investors, can be damaging to the same policies that these same countries are attempting to protect. One interesting example is the case of climate change-friendly technologies.

The development and the transfer of technology for the abatement of climate change can be described as nothing short of crucial. This has been recognised in a line of international agreements, including the 2007 Bali Action Plan, in which technology was mentioned as one of the central issues to be addressed  by the international community (alongside adaptation, mitigation, long-termed cooperative action and finance), and the recent 2010 Cancun Agreements where it was decided to “accelerate action” with respect to technology development and transfer, and to establish the Technology Mechanism, which includes the Technology Executive Committee, the Climate Technology Centre and Network.

As a series of studies and international documents show, without the active involvement of the private sector, sufficient technological development and transfer is unlikely to occur. Unfortunately, the market alone does not supply the private sector with adequate incentives to invest in climate-friendly technologies. The barriers mentioned in this respect include inter alia financial risks, policy risks (including political and regulatory risks) and low returns. The protection offered to foreign investors by international investment agreements and the provision of investor-state arbitration is very important in this respect, as it reduces some of the risk involved in such investment in a foreign country. Indeed investment treaties are designed for this very purpose. Simply put, enforcement of such a protection reduces risks and consequently encourages investment. It can therefore be argued that excluding fields such as the protection of the environment from investment agreements can actually damage the development and transfer of climate-friendly technologies.

But while the reasons for providing strong incentives to the private sector in this respect are clear, there is more to this picture. The climate change challenge is characterised by lack of scientific certainty. What seems a solid solution one day, can be described as a problem soon after.[5] Further, the necessity to apply the best possible technologies coupled with the fast rate at which technologies change, may imply that long-term stability can actually mean unwanted stagnation.

It is clear then, that policy makers are faced with some difficult choices. But while it is possible that the field of international investment law can be in conflict with the promotion of sustainable development goals, it is nevertheless questionable whether the simplistic use of exceptions is the best pro-sustainable development solution for this problem. Perhaps, what is needed is the development of a more sophisticated mechanism that will be able to fully balance this multilayered and complex situation.

[2] Claims brought by foreign investors, if successful, can result in the payment of heavy compensation and costly legal expenses. The ”regulatory chill” refers to the possibility that such expenses ‘chill’ states from applying their legitimate police powers and inhibit the regulation of fields such as the protection of the environment, health, human rights, etc.

[3] See in Rory Carroll, “Uruguay bows to pressure over anti-smoking law amendments”, guardian.co.uk, 27 July 2010, online: The Guardian <http://www.guardian.co.uk/world/2010/jul/27/uruguay-tobacco-smoking-philip-morris>.

[4] See <http://www.iareporter.com/articles/20110414>; and an “Open Letter to the Prime Ministers of Australia and New Zealand” <http://tppwatch.org/news-video-audio/media/letter-nz-australia-pms/>.

[5] See for example, ethical and environmental issues caused by the bio-fuels industry.  See online: BBC <http://www.bbc.co.uk/news/uk-13056862>.

Economists project that China will soon become Africa’s largest trading partner with trade figures set to hit a record high of more than $100 billion in 2010. The International Monetary Fund recently predicted that growth for Sub-Saharan Africa, which typically includes 47 countries (excluding North Africa), should reach 5% this year, up from an earlier prediction of 4.5%.[1] In 2011, it said, growth could rise to 5.5%.[2] Increased trade with China is a significant contributor to this better-than-expected growth. A key indicator of the new strategic trade partnership between Africa and China was the high-profile visit of President Jacob Zuma of South Africa, Africa’s emerging economy, to Beijing this past August. He travelled with a delegation of almost 400 business executives and 11 Cabinet members. The two nations signed a number of Memorandums of Understanding to deepen and broaden trade in strategic sectors such as mineral resources, environmental management, and transport infrastructure. More importantly, the two leaders pledged to step up legislative cooperation to cement the China-SA bilateral strategic partnership.

However, many scholars have raised concerns as to whether African countries have the necessary legal and regulatory institutions to deal with this influx of Chinese investment. In a recent online debate held by The Economist Online, George Ayittey, a renowned Ghanaian economist at the American University in Washington asserted that the nature of the Chinese deals bother him.[3] Such deals tend to be secured through secrecy, bribery, payment of kickbacks and building presidential palaces. Judicial weakness and underdeveloped regulatory regimes are central to these concerns. Particularly troubling is the recent news that on the 15th October 2010, 11 miners, whilst protesting low wages and poor working conditions at the Collum Coal Mine in southern Zambia, were shot by their Chinese managers. This questions whether domestic labour laws are robust enough to protect the rights of Zambian and other African workers. Many are also sceptical as to whether the Zambian judicial system can withstand political pressure from the executive branch not to severely punish the valuable Chinese investors.  In addition to this incident, in 2005 an explosion at a copper plant owned by China Nonferrous Metal Mining Group killed 46 miners.  This tragedy raised concerns about the ability of African safety regulatory regimes to mitigate operational risks and to protect the environment – especially in extractive industries. Critics claim China has taken advantage of the snail-paced rate of institutional reform, weak judicial systems and poor safety enforcement in African countries.

Notwithstanding the above reservations, the China-Africa story is not all doom and gloom. For example, consider the perceived negative relationship between Chinese investment and good governance. Against prevailing conventional wisdom, there is no evidence that Chinese companies are more attracted to dictatorially run, conflict-ridden African nations. Certainly, the examples of Gabon and Sudan amongst others are used to exemplify the negative effects. Nevertheless, the Chinese also heavily invest in countries like Mauritius, Ghana, Botswana and South Africa, which are beacons of good governance on the continent. In regard to addressing institutional weaknesses, many African governments are beginning to use international mechanisms that can assist in mitigating their institutional shortcomings and enhance transparency.  For instance, approximately 20 African countries are seeking candidacy in the Extractive Industries Transparency Initiative (EITI). The EITI requires that governments publish what they have received in the form of revenues, royalties, and other payments from extractive companies; and companies publish what they have paid to governments.

To conclude, African countries have long been neglected as viable trading partners by many Western countries (beyond the oil industry).  The Chinese have engaged beyond oil and minerals (although these constitute a large part of their African investments), trading in equipment and machinery for construction and building telecommunications infrastructure which are helping pull Africa into the 21st century. In fact, China’s single largest investment on the continent is the purchase of a 20% stake in South African Standard Bank. While it is undeniable that Chinese companies must improve labour conditions, transparency and safety standards, ultimately it is the responsibility of African governments to grow strong institutions that deal effectively with the externalities of the vast Chinese investment.

[2] Ibid.

[3] The Economist: Africa and China. http://www.economist.com/debate/days/view/465 (Accessed on Nov 2 2010)

The report follows the Ontario Legislature’s unanimous approval of a private member’s resolution calling on the province to review existing reporting requirements and issuers’ compliance.

The resolution asked the OSC to undertake a broad consultation in order to “establish best practice corporate social responsibility…and environmental, social and governance…reporting standards”. In response, the OSC – supported by the Hennick Centre for Business and Law at York University – convened a multi-stakeholder roundtable and held various consultations with interested parties.

The reporting of material environmental, social and governance (ESG) information should be viewed as an integral part of a businesses’ overall risk management strategy. With this information, shareholders are in a better position to assess financial risks and to allocate capital to firms best suited to mitigate these risks. Disclosure also encourages stakeholder dialogue. This dialogue, over time, informs internal decision-making and provides a critical framework for identifying both risks and opportunities. This, in turn, can drive performance, enhance an organization’s reputation and strengthen the core elements of its relationships with stakeholders.

A range of international studies, including reports by the Asset Management Working Group of the United Nations Environment Programme Finance Initiative, have put forth persuasive evidence that such information may impact long and short-term shareholder value – and is thus material to investors.

Stakeholders are certainly seeking this information. Last October, a coalition of investors (representing CDN $79.6 billion in assets under management), environmental groups and lawyers petitioned the OSC to pursue several actions aimed at increasing mandatory disclosure of climate change-related risks in securities filings.

This is not the first time the OSC has entered into the ESG reporting sphere and the results have been controversial. In 2008, it released Staff Notice 51-716 which found that many issuers were providing “insufficient” boilerplate articulations of environmental liabilities, with little to no analysis. While the reaction to the OSC’s findings from particular quarters was hostile, the reality is the OSC did not create new disclosure burdens for Canadian organizations. On the contrary, the legal requirement to report material ESG information already exists. The reality, however, is many companies are not living up to their obligations.

In its report to the minister, the OSC makes two key recommendations. First, that the OSC should conduct further continuous disclosure reviews (such as 51-716) in order to assess corporate compliance; in particular, in the area of governance. Second, that it should continue to provide educational outreach to issuers including additional guidance on existing environmental disclosure requirements.

Both recommendations are sound and represent important steps in the right direction. Compliance reviews are valuable, especially when they present illustrations of successful disclosures. Publishing these examples can assist other companies in compiling their filings and actively validates the disclosure of the cited issuer. Many business people do not realize how ESG information can materially affect the value of a company, so educational outreach is clearly needed.

The report makes it clear that the OSC is not proposing new disclosure provisions. Existing requirements are seen as generally adequate and comparable to those in other countries.

While I agree that sufficient legal basis currently exists to require the disclosure of material ESG information, there is also room for improvement in the law.

For example, current provisions require public companies to report on any social or environmental policies that are fundamental to operations, including policies on human rights and the communities where the issuer conducts business. If, however, no such policies exist, the issuer is not obliged to disclose that fact or to explain the reasons for the omission. Contrast this with U.K. law. Under the U.K. Companies Act 2006, if the prescribed information is not revealed (including policies on environmental, labour and social/community issues), there must be an explicit statement of what has been omitted.

In addition, current provisions ask Canadian issuers to describe steps taken to implement any social policies. However, they do not require an evaluation of their success. Again, the Canadian instrument is out of step with the U.K. equivalent, which requires consideration of the policies’ effectiveness.

Moving away from the law to a process level, when regulators conduct periodic reviews of continuous disclosure and identify problems, these problems are brought to the issuer’s attention via a comment letter. The letter asks the issuer to address the error or to submit a reply explaining why corrective action is not necessary. If a resolution cannot be reached, enforcement action is considered. In the U.S., the Government Accountability Office recently recommended that all comment letters, and the responses of issuers, be made fully available to the public in the form of a searchable electronic database. The Securities and Exchange Commission complied.

In Ontario, only a summary of the deficiency is made available, as well as the issuer’s post-correction press release. Posting actual comment letters, and any response, would help ensure that investors, the public and other companies fully understand the substance and conclusions of regulatory continuous disclosure reviews and would assist civil society and academia in conducting more meaningful reviews and evaluations of corporate disclosure.

These are but a few examples of enhancements that, while modest, would strengthen the current disclosure landscape and bring Canada in line with emerging best practices in comparable jurisdictions. I would hope that the minister of finance will consider these, and other suggestions made by relevant stakeholders, in deciding the future direction of sustainability reporting.

Unlike the World Trade Organization’s (WTO) dispute settlement system, however, the substantive and procedural law applicable to investment disputes is not formalized in a manner analogous to the WTO Dispute Settlement Understanding (DSU).  Instead, international investment arbitration is a mixed system; one that is fragmented and that “sits uneasily between public international law jurisdictions and domestic judicial systems”.[3]

Perhaps this uncomfortable mélange is a necessary characteristic that ensures the dispute resolution process is “neutral and effective”.[4] The existence of such a “broad network of interrelated rights”, however, creates a “patchwork”.[5] As Susan D. Franck notes:

“[…] decisions about issues with economic and political consequences are resolved in private before different sets of individuals who can and do come to conflicting decisions on the same points of law”.[6]

This patchwork creates uncertainty about the meaning of investment treaty rights in public international law,[7] which is evidenced by inconsistencies in investor-state arbitral jurisprudence[8] – and there is no single body empowered to resolve the inevitable inconsistencies that result.[9]

So where do we go from here?  For international investors, does this make investor-state arbitration as a dispute settlement mechanism a “risky” choice?[10]

This debate quickly shifts toward finding a solution to these unsightly inconsistencies.  Should an appellate review system be established?  Should confidentiality be stripped from arbitral awards to increase transparency?[11] Less focus is placed, however, on the causes of this inconsistency.

Certain sources of conflicting jurisprudence are systemic and necessary, such as the ad hoc nature of investment arbitration.[12] Others may result from the correctable errors of arbitral panels.  For example, the notion of National Treatment – the “counterpart in international trade law of the Biblical injunction to “love thy neighbour as thyself” ”[13] – exists in both the WTO and investment treaty law.  The WTO DSU has been construed as “a lodestar in charting the desired evolution of the system of investor-state arbitration”,[14] and this perspective creates a tendency for investment arbitrators to draw on WTO jurisprudence.[15]

The concept of National Treatment in investment treaties, however, is similar though not identical to the form it takes in the WTO Agreements.  By extension, the reasoning of WTO panels or of the WTO Appellate Body cannot be directly applied to investor-state disputes.

This issue is one of many that begs for attention.  Before we start sculpting solutions to the inevitable inconsistencies generated by international investor-state arbitration, we must focus our attention on the causes.

[2] Ibid.

[3] Ibid. at 578.

[4] Ibid.

[5] Susan D. Franck, “The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions” (2005) 73 Fordam L. Rev. 1521 at 1523.

[6] Ibid. at 1522.

[7] Ibid. at 1523.

[8] See for example Jürgen Kurtz’s examination of Occidental v. Ecuador and Methanex v. USA in “The Use and Abuse of WTO Law in Investor-State Arbitration: Competition and its Discontents” (2009) 20(3) The European Journal of International Law 749.

[9] Supra note 5 at 1522.

[10] Frank Spoorenberg & Jorge E. Viñuales, “Conflicting Decisions in International  Arbitration” (2009) 8 The Law and Practice of International Courts and Tribunals 91 at 92.

[11] Jürgen Kurtz, “The Use and Abuse of WTO Law in Investor-State Arbitration:  Competition and its Discontents” (2009) 20(3) The European Journal of International Law 749 at 751.

[12] For example, the application of different sets of laws in different jurisdictions by different arbitral panels will necessarily result in a certain – and arguably tolerable – level of inconsistency.

[13] Aaditya Matoo, “National Treatment in the GATS” (1997) 31(1) Journal of World Trade Law 107 at 107.

[14] Supra note 11 at 750.

[15] Ibid.

The investor-state dispute resolution process has been a long standing target for critics. Many of these critics concentrate on the lack of transparency demonstrated in the system; Indeed investor-state dispute resolution proceedings are often held in a confidential manner, where not only the public cannot follow or participate in the proceedings, but also, at least on some occasions, viewing the awards granted in these disputes is not permitted. The importance of such a webcast therefore lies first and foremost in the enhanced transparency it provides. It is, after all, only fair that the public be allowed (and able) to follow any legal proceedings in which tax payers’ money is on the line. Furthermore, investment disputes in the past have dealt with important issues such as the supply of drinking water, the enlargement of nature reserves, the disposal of toxic waste and the regulation of polluting gasoline additives. The public’s interest in following these legal proceedings is obvious.

It is important to note however, that as the proverb says, one swallow doesn’t make a summer. First, this is merely one case. Whether it will become a ‘trend’ is yet to be seen. Secondly, the specific webcasted proceedings were governed by the Dominican Republic – Central American Free Trade Agreement (CAFTA-DR), a rather unique agreement[3] in which Article 10.21 stipulates that hearings shall be open to the public. Most investment agreements do not include such provisions. Furthermore, it could also be argued that the novelty of this case is purely technological, as the instruction to conduct open hearings is not new in itself.

There is however, some level of importance in this new development. First, the legal text of the CAFTA-DR (like the text existing in the U.S. and Canada model treaties) is ‘passive’ by nature: the hearings need only be ‘open to the public’. Nothing in this text’s language requires the parties to actively ‘deliver’ the hearings to the public’s homes. An active approach, such as the one presented by the parties to the Pac Rim Cayman dispute, does not only passively permit the public to attend the hearings, but also actively makes the hearings readily accessible to the general public, wherever it may be. The parties’ decision to allow such an active approach could possibly serve as precedence, a creation of a new standard with regard to transparency in investment disputes, one that others may decide to adopt in future disputes.

Secondly, introducing states to such a possibility may lead to the future adoption of ‘active’ transparency obligations in international investment treaties. If the usage of webcasting technology becomes an accepted ‘trend’, receives positive feedback from the public and can be easily (and cheaply) implemented, states may choose to include similar requirements in their future investment treaties.

Thirdly, the use of such technology by international investment tribunals might help to improve the somewhat damaged reputation of the investor-state dispute resolution system. While it is not clear how many people are likely to actually use this newly acquired possibility (it would be interesting to know how many people actually listened to these 12 hours of recorded legal proceedings), having the option to do so remains crucial. As mentioned above, the field of international investment law is under heavy criticism. Many consider it to be a closed, western, commercially oriented system. Some even named it “the law of greed”.[4] Several states have denounced the ICSID convention (Bolivia, Ecuador), while others may intend to do so (Venezuela). Besides its above mentioned effects, the use of online streaming could serve in this respect as a ‘PR tool’, a visible step toward the alleviation of these critiques. The public image of the investor-state dispute resolution system would only gain from such a trend, and so would the legitimacy of this system.

There seems little doubt that adopting the webcasts technology in investment disputes can, at least potentially, bring about some benefits. It is important to note, however, that increasing the system’s publicity could also be used in order to create political pressure upon both arbitrators and parties.[5] State parties, for example, can engage public opinion to bring pressure on arbitrators in environmental cases. This, in the long term, would create unfavourable investment climate.

By webcasting an investment dispute to the open public, the investor-state dispute resolution system is distancing itself from the closed and secretive reputation it has gained. It will be interesting to see the full effects this change will carry – whether this enhanced publicity will be used in order to politicize disputes, whether it will affect the system’s reputation and legitimacy, or whether it will have no influence at all. After all, who in his right mind would like to watch 12 hours of legal proceedings?

[2] Though some technical problems currently exist. See online: ICSID http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=OpenPage&PageType=AnnouncementsFrame&FromPage=Announcements&pageName=Announcement60

[3] Similar provisions can be found in Article 19 of the Norwegian Draft Model BIT, Article 38 of the Canadian Model BIT, Article 29 of the U.S.A Model BIT.

[4] M. Sornarajah, “A Law for Need or a Law for Greed?: Restoring the Lost Law in the International Law of Foreign Investment” (2006) 123 Int. Environ. Agreements 329.

[5] See concerns made in this respect by Ives Fortier, “Investment Protection and the Rule of Law: Change or Decline?” Lecture given by L. Yves Fortier on March 17th 2009 at the British Institute of International and Comparative Law, online: ICCA <http://www.arbitration-icca.org/media/0/12392785460140/0732_001.pdf>at 15.

Yet Mike Bakunin, who recently left SOAR to establish a sister branch in Rivière Ouest (Manitoba) with a more awesome acronym, claims that these groups don’t just advocate violence. “For those who think that anarchists are just about chaos and firebombing, that’s not the case. Groups like FFFC Ottawa give the rest of us a bad name – we can actually engage with the issues as well as anyone. Now obviously the summit will be focusing on economic and financial matters, so we think that we can best get our message across if we zero in on those issues as well. It’s hard to convey complex messages like that with firebombs…not impossible though.”

As an example, Mike points to the debate over a proposed international bank tax. Although countries including Britain and the U.S. were initially pushing for a tax on banks to pay for bailouts when they became necessary, countries whose banks never needed to be bailed out such as Australia, Brazil, and Japan – with Canada leading the way – opposed the idea. Now as an alternative the Canadian government is proposing an idea called “embedded contingent capital” (ECC); essentially bonds issued by banks which would automatically convert into shares in times of crisis, providing instant extra capital. Finance Minister Jim Flaherty and Julie Dickson, the head of the Office of the Superintendent of Financial Institutions (OSFI), have recently been touting the merits of ECC. “The problem,” Mike says, “is that because there’s so much uncertainty about what would trigger the conversion, buyers of the bonds will demand a hefty risk premium which may end up costing the banks more than the tax would have. Plus, in a time of crisis, the conversion of the bonds might scare away other investors and exacerbate capital flight. So I think we have to fight ‘the man’ on this – even if ‘the man’ is Julie Dickson.”

It’s clear that ECC won’t be the only financial reform discussed at the summit. Reform of the Basel Accords – international banking regulations – will be a major focus. The Basel Committee on Banking Supervision (BCBS), based at the headquarters of the Bank for International Settlements in Basel, Switzerland, is composed of representatives of the central banks of developed and emerging market countries. It was created in 1974 in an effort to harmonize banking regulations across borders. Agreements among BCBS member states – called the Basel Accords – were negotiated by national leaders, finance ministers, and central bank governors. These agreements do not operate like treaties in the normal sense, with each country signing and ratifying them, but rather are intended as an international standard that national bank regulators can use when creating their domestic regulations. Implementation is left to each country’s discretion, but most regulators do in fact implement the accords (95 national regulators have committed to implementing the most recent accord by 2015). They aren’t applied uniformly however, since national regulators may include local variations on the rules.

The first agreement, now called Basel I, was agreed in 1988. It was designed around the concept of minimum capital requirements: the minimum amount of cash banks have to keep on hand relative to their total assets (loans they are owed). Basel I created 5 categories of assets based on risk level, and required banks to keep capital equal to 8% of the assets, weighted according to risk. It was implemented by BCBS member states by 1992. The second accord, Basel II, was agreed in 2004, and served to “upgrade” the original accord, creating a three-pillar structure. The first added nuance to the capital requirements of Basel I, distinguishing between three different categories of risk. The second gave new tools to regulators to better review compliance with capital requirements. The third pillar promoted market discipline in order to foster stability and predictability. Negotiations for Basel III were undertaken in response to the recent global financial crisis, and the G20 summits are a key part of the process. Proposed changes to Basel II include: revising the categories of capital (tiers) to improve transparency, strengthening risk coverage requirements, introducing a leverage ratio to supplement the risk rules, requiring the creation of capital buffers to promote counter-cyclicality, and a minimum liquidity standard for international banks. G20 finance ministers see the eventual implementation of Basel III as inevitable.

Mike believes it’s crucial for the protestors to have their voice heard while the Basel negotiations proceed in Toronto. “In pushing for a stateless society, we have to make the most of times when the different parts of the machine – government and big corporations and banks – turn on one another. First they’ll fight about international regulations, and then the next step is complete mutual annihilation. Basically what I’m saying is that we want the most stringent risk coverage and capitalization rules possible.”

The challenge for the collectivist anarchists is ensuring that they have a clear position on every financial reform issue, lest they appear to the public as an incoherent rabble. “Right now at our meetings we’re trying to hammer out what stance we’ll take on phase 2 of the International Accounting Standards Board’s new Financial Reporting Standards, and their impact on the life insurance industry.” Finance Minister Flaherty has supported Canadian life insurers in their appeal to the board for an exemption from the new rule. “On the one hand, big corporations shouldn’t be exempt from accounting best practices, but on the other hand these new rules would definitely create a lot of volatility for insurers– particularly with regard to long-term products. So I guess we’re not sure if this is a step forwards or backwards in the march to the destruction of the state. We hope to have decided by next week.”

Despite the complexity of the negotiations, Mike is confident his group’s nuanced message will get across to the public and to world leaders. “I’m optimistic. We’ll print out our arguments in an executive summary, and see if we can submit if for consideration by the delegates.”

Asked if there was a backup plan for conveying their opinions, Mike considers: “…probably firebombs.”

THE FIRE REPRESENTS EMBEDDED CONTINGENT CAPITAL