“[W]e can’t save the world by playing by the rules, because the rules have to be changed. Everything needs to change, and it has to start today.”

—Greta Thunberg[1]

I. Introduction

The concern over pollution, deforestation, resource depletion, and the world’s warming climate is not a new phenomenon,[2] but inadequate global response over the past several decades has contributed to a looming threat of environmental crisis.[3] Foreign investment, while recognized for its ability to support sustainable development, has played a role in environmental degradation particularly in developing countries, where governments engage in “race to the bottom” policymaking to attract investors to extractive industries.[4] These investments are governed and protected by a transnational legal order comprised of a unique amalgamation of treaty-based “rules” that provide protections to investors and have the potential to detrimentally affect a state’s ability to regulate on behalf of the environment.[5] Frustrated by this perceived impediment to their sovereignty, states have begun to search for ways to change the rules by engaging in a process of treaty reform.

The incorporation of treaty language to preserve a host state’s regulatory capacity is the primary characteristic of a “new generation” of bilateral and multilateral investment treaties between states.[6] This Comment will explore the varied approaches to treaty revisions, identify the largest treaty-based threat to a state’s ability to regulate, and evaluate potential solutions by analogizing to treaty protections for the regulation of taxation matters. Part II will explain the perceived challenges that the transnational legal order, and investor-state dispute settlement in particular, poses to reform efforts. This Part will identify the primary treaty-based roadblocks to a state’s ability to regulate and demonstrate state attempts to circumvent these challenges. Part III will follow by illustrating a means to combat these treaty-based roadblocks through analogy to investment arbitration awards addressing a state’s capacity to regulate on matters of taxation. This Part will underscore the significance of well-defined treaty language and suggest that states engaged in the reform process learn from the lessons presented by the tax sphere. Part IV will then return the focus to environmental disputes and examine the trends in arbitral awards where regulations are not expressly protected by treaty language. Finally, Part V will conclude by addressing potential concerns held by investors and making two related recommendations to host states who want to change the “rules” governing their right to regulate. First, states need to adopt treaty revisions that expressly delineate the preservation of regulatory space. Second, treaty language would be most effective in the form of a carve-out that clearly defines what constitutes an environmental regulation in order to reduce an arbitral tribunal’s discretion on the matter. This Author believes that recent trends in arbitral awards have laid the groundwork for general acceptance of these changes, at least among those who sit on arbitral tribunals.

II. Investor-State Dispute Settlement: Systemic Challenges to Reform

Foreign investment has played a pivotal role in globalizing the economy,[7] necessitating the development of legal mechanisms beyond the national legal framework to provide protection and enhance cooperation among foreign parties.[8] While the foundation of these legal mechanisms was rooted in the need to provide a secure environment for investments faced with adverse treatment in foreign host states,[9] it was not until the 1980s, when states almost universally shifted their focus to attracting foreign investors, that international investment law evolved into the strong source of investor protection that it is today.[10]

Unlike national legal orders, the transnational legal order is not codified in the conventional sense; instead, the legal regime comprises principles of customary international law, international investment agreements (IIAs), and texts with nonbinding force, such as scholarly publications by practicing attorneys in the field.[11] Treaties, or IIAs, provide the vast amount of legal guidance when it comes to international investments, delineating the obligations of signatory states in regard to foreign investors.[12] As there is no single global IIA,[13] the transnational legal framework is primarily composed of bilateral investment treaties (BITs), free trade agreements (FTAs), and some regional trade agreements (RTAs) between states.[14] BITs comprise the largest proportion of IIAs, numbering approximately 2,950 out of 3,320 total IIAs.[15]

While individual IIAs differ in many significant respects, they contain similarities in their structure and their standards of investor protection.[16] Notably, almost all treaties include investor-state arbitration clauses providing access to investor-state dispute settlement (ISDS).[17] A unique feature of the transnational legal system, these clauses allow investors to arbitrate claims against the host state directly.[18] The arbitration is often conducted before an independent tribunal established under the auspices of an arbitral institution such as the International Convention on the Settlement of Investment Disputes (ICSID);[19] the tribunal is responsible for determining whether the host state breached its treaty obligations in a manner that would entitle the investor to compensation.[20] Through application of Article 31 of the Vienna Convention on the Law of Treaties,[21] tribunals exercise a wide degree of discretion in their interpretation of treaty language.[22] This discretion is furthered by the lack of precedent in ISDS as understood in the conventional sense: a tribunal decision does not bind subsequent arbitration awards, although previous decisions based on similar factual circumstances may hold persuasive power.[23] Subject to the IIA in question and the underlying enforcement treaties, the tribunal’s final decision is binding on the parties and not subject to appeal.[24]

With these facets of the ISDS system in mind, Section II.A will examine how issues generated by this legal regime have triggered state responses that generally manifest in one of two ways: (1) exiting the ISDS system or (2) reforming the governing treaty language. The latter response has forced states to confront the broad substantive investment protections that characterize most treaties; the nuances of this confrontation constitute the subject of Section II.B.

A. State Pushback Against the International Investment System

The perception that foreign investment is an “engine for economic growth” has allowed the ISDS system to thrive as governments seek the wealth creation, technological access, and employment that may result from such ventures.[25] Governments continue to enter into IIAs with dispute settlement mechanisms despite uncertainty as to whether such treaties actually contribute to attracting foreign investments to a country.[26] At the same time, scholars have noted the negative effects of foreign investment, including the depletion of natural resources, environmental degradation, the loss of domestic employment, and the inability of the state to regulate on behalf of the public health, safety, and environment.[27] These concerns are expounded by the significant increase in disputes brought by investors against host states in the past twenty years,[28] often resulting in awards granting millions of dollars in compensation for damages.[29] Developing countries are at particular risk of experiencing the pitfalls of hasty entry into IIAs; for example, some countries in Africa—where the majority of capital investment is directed toward the extractive oil, gas, and mining industries[30]—lack the institutions to regulate foreign investment to ensure that funds paid to the government are distributed to the public coffers, rather than the pockets of corrupt officials.[31] The lack of transparency and sound domestic policy in these countries has led, in turn, to costly arbitration disputes.[32]

One acute concern for critics of the ISDS system, and the concern that this Comment will primarily address, is the restriction that treaty obligations pose on the sovereign right of the state to regulate within its borders. This restriction occurs as a result of regulatory disputes, where investors challenge a government regulation due to the regulation’s detrimental effect on foreign investment.[33] According to some scholars, the threat of these types of disputes has led to “regulatory chill,” in which host states pass suboptimal regulations in order to avoid investor-state claims against them.[34] This imposition on a state’s perceived ability to regulate freely is particularly consequential in light of the increasing global focus on sustainable economic development and the environment.[35] Environmental damage, climate change, and the loss of biodiversity have served as the impetus for the emergence of numerous economic cooperation agreements defining environmental protection as a core principle.[36] Due to the prevalence of foreign investment in the upstream oil and gas industries of developing countries,[37] investors play a significant role in contributing to environmental degradation;[38] as a result, a host state’s inability to regulate environmental matters for fear of breaching treaty obligations stands as an increasingly common source of tension between host states and investors.[39] In demonstration of this problem, investors have brought a number of disputes over environmental regulations that resulted in, for example, the suspension or termination of environmental permits or changes to the operational requirements of active projects.[40] The results of such disputes have contributed to what some have labeled a “body of investor-friendly case law,” in which tribunals found that adverse environmental regulations constituted a breach of the state’s obligations to investors.[41]

States seeking to limit their exposure to investor-state arbitration have generally attempted to do so in two ways. First, several countries in Latin America and Southeast Asia have expressed their discontent with the ISDS system by unilaterally terminating their BITs and multilateral IIAs.[42] A United Nations Conference on Trade and Development (UNCTAD) report notes that 24 IIA terminations entered into effect in 2018, and the number of treaty terminations is expected to rise in years to come.[43] These states have attributed their decision to withdraw from the ISDS system to their dissatisfaction with tribunal decisions that lend, in their view, too much weight to investor protections while failing to properly consider the state’s duty to regulate for the public interest.[44] Not coincidentally, however, the South American countries that have decided to withdraw from the system have faced numerous costly arbitration disputes over the years; Venezuela, for example, has faced the third-highest number of ISDS claims for breach of treaty obligations.[45] These disputes and subsequent losses have inevitably harmed these states’ attractiveness as the site of potential investment projects, likely outweighing the benefits of engaging with the ISDS system.[46]

Termination of IIAs may not result in the instantaneous release from treaty-based obligations;[47] as a result, some states have sought to revise existing treaties as a second approach to achieving a better balance between the sovereign right to regulate and the rights of the investor. Referred to as a “new generation of investment policies,”[48] treaties undergoing such revisions have shifted from an exclusive focus on the protection of the investor[49] to a more holistic and progressive focus on sustainability and the host state’s right to regulate.[50] These treaty revisions include limitations on access to ISDS, clarifications of investor rights, and express references to “the protection of health and safety, labour rights, environment or sustainable development in the treaty preamble.”[51] According to an UNCTAD report published in 2019, “The most broadly pursued area of reform is preservation of regulatory space.”[52] The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) reflects this trend with the inclusion of an Environment Chapter. Article 20.3(2) of CPTPP reads: “The Parties recognize the sovereign right of each Party to establish its own levels of domestic environmental protection and its own environmental priorities, and to establish, adopt or modify its environmental laws and policies accordingly.”[53] In the context of environmental protection, states’ efforts to incorporate similar language that expressly conditions investment protection on the host state’s ability to regulate on behalf of the environment has been dubbed a trend toward “green treaty-making.”[54]

While new treaty language has the potential to succeed in reserving more room for the host state to regulate, the implication and reach of reform language varies according to the way in which the language is drafted and incorporated into the treaty.[55] This is especially true in light of the broad scope of treaty-based substantive protection standards, which have the potential to serve as roadblocks to preserving the state’s regulatory space. The next section will delineate the extent of these roadblocks in an effort to frame the magnitude of the challenge faced by treaty reformists.

B. Treaty-Based Roadblocks: The FET Standard

As mentioned above, investors rely on the language of the treaty that governs their investment for protection and recourse to dispute resolution. Treaties contain a number of common protection standards.[56] These standards are formulated as broad obligations on the part of the host state toward the investor, contained within substantive protection clauses such as the most favored nation clause, the fair and equitable treatment clause (FET), and the expropriation clause.[57] The protections afforded by the expropriation and FET clauses in particular have the practical effect of providing investors with the possibility of recovery for a broad range of host state actions that detrimentally affect an investment.[58]

Disputes involving violations of these provisions arise in the regulatory context when the host state’s obligation to honor its commitment under the treaty conflicts with its responsibility to regulate on behalf of the public welfare. This conflict is especially potent where states claim permanent sovereignty over natural resources in their constitutions and attempt to assert this sovereignty in violation of treaty obligations.[59] This Section will discuss why investors are so often able to rely on treaty protections, and the FET standard in particular, when faced with this type of state regulatory action. The analysis will then examine ways that tribunals have attempted to soften their application of the FET standard to resolve the clause’s conflict with the sovereign right to regulate, highlighting the ambiguities in interpretation that remain.

1. FET Standard Requirements.

The FET standard is one of the most popular provisions used by foreign investors to challenge not only regulatory measures,[60] but States’ conduct more generally.[61] Such frequent use is due to the provision’s broad scope: originally introduced to treaties as a safeguard against unfair and unreasonable treatment by host state governments,[62] the standard has since been interpreted to protect against various acts that might “infringe a sense of fairness, equity, and reasonableness concerning investors.”[63] As a result, the standard is often characterized as a catch-all clause that is applicable to many treaty-based arbitration proceedings.[64]

Over the past two decades, the proliferation of cases invoking violation of the FET standard has forced tribunals to assign content to the meaning of “fair and equitable treatment.”[65] Applied to a broad range of circumstances, this jurisprudence defines two specific obligations that arise out of the FET standard: (1) the obligation to provide a stable legal framework and (2) the obligation to protect investors’ legitimate expectations of stability.[66] A conflict thus surfaces between the state’s sovereign right to regulate and the FET standard when regulations passed in the interest of broader regulatory goals shake the stability of the legal framework relied on by investors.[67] For some tribunals, the mere existence of a change to the regulatory environment is enough to constitute a violation of the treaty;[68] however, more recent awards illustrate a possible shift toward granting more deference to a state’s right to regulate.[69]

Awards that have required a host state to compensate investors in the event of a mere alteration to the regulatory environment demonstrate a strict approach to FET interpretation, encapsulated by many of the early tribunal decisions.[70] Two paradigmatic awards from this era, Tecmed v. Mexico and Occidental v. Ecuador I, established the framework for this approach. First, the 2003 Tecmed decision laid down what has become the foundational statement of the FET standard:

The Arbitral Tribunal considers that this provision of the Agreement, in light of the good faith principle established by international law, requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment. . . . The foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any preexisting decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities. The investor also expects the State to use the legal instruments that govern the actions of the investor or the investment in conformity with the function usually assigned to such instruments, and not to deprive the investor of its investment without the required compensation.[71]

The following year, the Occidental I tribunal expanded on this requirement, stating, “[T]here is certainly an obligation not to alter the legal and business environment in which the investment has been made.”[72] Subsequent awards affirming these requirements helped to frame one understanding of the FET provision as an obligation to essentially freeze the law applicable to the investment at the time the investment was procured.[73]

In practice, this strict approach rendered the right to regulate completely subordinate to the investor’s right to enjoy regulatory stability. Other tribunals took note of this disparity, leading to the promotion of a softer FET standard application that took into account the merits of the regulation under review.[74] The Saluka v. Czech Republic tribunal set the tone for this approach, noting a determination of breach under the FET standard requires “a weighing of the Claimant’s legitimate and reasonable expectations on the one hand and the Respondent’s legitimate regulatory interests on the other.”[75] Under this view, an investor’s expectation that the regulatory framework will not change to adversely affect the investment is not protected by the FET provision unless the host state proffers specific promises of regulatory stability at the time of investment.[76] In other words, an investor’s expectation that the FET standard was designed “to ensure the immutability of the legal order” will not be deemed legitimate or reasonable;[77] however, a host state will likely be held accountable for affirmative representations of regulatory stability made to induce the investor into a project.[78]

2. Indeterminate Application.

The less expansive application of the FET standard has allowed tribunals to come closer to achieving the goal of balancing a state’s “undeniable right and privilege to exercise its sovereign legislative power” with the protection of an investor from unreasonable alterations to a host state’s legal framework.[79] Nevertheless, concerns persist over ambiguity in interpretation and the failure of recent arbitral decisions[80] to define the kind of regulatory action that would qualify as a breach.[81]

At the very least, tribunals overall have increasingly recognized that a host state’s right to regulate for the public interest is deserving of protection.[82] This right continues to coexist alongside the popular FET provision, inviting inevitable conflict between the two protections. As differing interpretations of the FET provision illustrate, there is still a level of ambiguity regarding “the extent to which the FET standard disciplines regulatory change.”[83] A tribunal’s ability to distinguish between instances of noncompensable government regulation and breaches of investor protection obligations is further hampered by the fact that such determinations are heavily dependent on a case-by-case, fact-specific analysis.[84] As the consequences of a tribunal’s decision to apply a strict interpretation of the FET standard are significant, the importance of clarifying treaty language is all the more apparent. The next Part will discuss the potential role that such clarifying language can play in limiting the breadth of the FET provision, and will discuss the practical consequences of this language when applied to the state’s right to regulate on matters of taxation.

III. Applying Lessons Learned in the Tax Sphere

The broad discretion with which arbitral tribunals interpret treaty language, coupled with the broad protections afforded to investors by most treaty language, stand as influential factors for states engaged in IIA reform. Tribunals are guided by the language of the treaty;[85] therefore, where rules of compliance are vague, arbitrators are left to specify the rules at their own discretion.[86] In contrast, treaty language that proposes a mandatory and clear-cut rule significantly narrows a tribunal’s discretion.[87] As discussed in Part II, this result has motivated states attempting to restrict impositions on their sovereign right to regulate to incorporate new treaty language that more expressly delineates these regulation protections. The new treaty language has the practical effect of expressing a state’s willingness to facilitate foreign investment while limiting the broad scope of investor protection. These “safeguard provisions”[88] have generally manifested in one of three forms: preambular, exception, and carve-out. The provisions vary in the scope of their application to the treaty and their placement within articles on investor protection or as stand-alone articles,[89] impacting their effectiveness in protecting the state’s right to regulate.

A. The Role of Safeguard Provisions

Current IIAs that reference the goal of protecting the right to regulate on behalf of the environment do so most frequently in the preamble of the treaty.[90] Such language placement establishes the state’s overarching objective[91] to protect the environment, and serves to clarify the parties’ intentions when it comes to investment.[92] The 2012 U.S. Model BIT contains one example of such preambular language, declaring the parties’ desire “to achieve these objectives in a manner consistent with the protection of health, safety, and the environment, and the promotion of internationally recognized labor rights.”[93] Some preambles assert the right to regulate more generally, with the intent that such right will encompass policies on behalf of the environment. The China-Australia FTA reflects this trend by reading in part: “Upholding the rights of their governments to regulate in order to meet national policy objectives, and to preserve their flexibility to safeguard public welfare.”[94] Beyond this language, however, the text in both treaty forms does not create substantive legal obligations for the contracting parties and still allows the tribunal the discretion to determine whether the state’s environmental regulation breached other investor protection provisions of the treaty.[95] As a result, the incorporation of regulation protections in the preamble is considered to be “far weaker” language than that included within carve-out and exception provisions.[96]

Recent reforms to IIAs reflect the tendency to reserve the state’s right to regulate (on behalf of the environment or otherwise) in the form of an exception.[97] A typical exception provision notes that public policy regulations will be permitted, subject to the requirement that the regulation is “applied in a nonarbitrary manner and do[es] not constitute disguised restriction to investment.”[98] A number of contemporary agreements that include exceptions do so by incorporating Article XX(b) of the General Agreements on Tariffs and Trade, which permits a contracting party to adopt measures “necessary to protect human, animal or plant life or health,” though “[s]ubject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries . . . or a disguised restriction on international trade.”[99] In some treaties, this language appears as part of the substantive protection clauses and has the effect of limiting the scope of claims involving state regulatory measures.[100] Exceptions in this context serve as an affirmative defense for host states, eliminating their liability for regulations that would otherwise constitute a breach of treaty obligations.[101] Despite the relative strength of this type of provision over preambular language, exceptions also grant tribunals a measure of discretion due to the requirement that regulations are “necessary to achieve a public policy objective.”[102] Such analysis inevitably reflects the arbitrators’ subjective perception of what constitutes necessity.

Carve-outs, also known as exclusions, are treaty provisions that consider certain types of regulations as beyond the purview of the treaty, while identifying certain circumstances in which regulations could fall within the treaty’s scope.[103] The provisions are often written broadly to “exclude application of a treaty to a sector, industry, or activity.”[104] Although sometimes labeled a type of exception, carve-outs differ in that they set out to exclude application of the treaty (in whole or in part) to certain measures from the outset.[105] For example, Article 29.5 of the CPTPP precludes investor claims that challenge regulations targeting the tobacco industry, stating:

A Party may elect to deny the benefits of Section B of Chapter 9 (Investment) with respect to claims challenging a tobacco control measure of the Party. Such a claim shall not be submitted to arbitration under Section B of Chapter 9 (Investment) if a Party has made such an election. If a Party has not elected to deny benefits with respect to such claims by the time of the submission of such a claim to arbitration under Section B of Chapter 9 (Investment), a Party may elect to deny benefits during the proceedings. For greater certainty, if a Party elects to deny benefits with respect to such claims, any such claim shall be dismissed.[106]

Rather than serving as an affirmative defense once the investor has established breach of a treaty obligation, carve-outs serve to deny an arbitral tribunal jurisdiction over the dispute altogether.[107] This type of provision has the strongest potential to protect a state’s right to regulate of the three drafting approaches; nevertheless, it is still subject to tribunal interpretation.

Interpretation of safeguard provisions has been rare in ISDS;[108] nevertheless, it is possible to ascertain how a tribunal may hold in regard to carve-outs for environmental regulations by examining the way in which these provisions have protected a state’s right to regulate on matters of taxation. While advocates for change to the ISDS system generally recognize that taxation is the regulatory sector in which carve-outs have been commonly applied,[109] few, if any, have engaged in analysis of taxation jurisprudence to ascertain potential implications in the environmental context. Section III.B attempts to highlight how arbitral awards in the taxation sphere are particularly important for their ability to demonstrate how carve-outs may come into conflict with, and protect from, the investor-protection clauses discussed in Part II. The Section will examine this jurisprudence and how it relates to continued efforts in investor-state arbitration to determine the proper balance between affording investors protection under the treaty and preserving a host state’s space to regulate.

B. Implications of Carve-Out Language in the Tax Sphere

The ability to tax is a critical element of national sovereignty.[110] While states have been willing to accept international oversight over some types of state conduct for the purpose of attracting foreign investors, they are less likely to do so in regard to matters of taxation.[111] Such reluctance has motivated most states to implement carve-out language that either omits taxation matters from the purview of treaty altogether or restricts the treaty’s application to certain taxes.[112] Most frequently, this language carves out direct taxation on capital and income unless such taxation is expropriatory, and subjects indirect taxation to the requirement that it be nondiscriminatory.[113] This type of carve-out has been characterized as a “matryoshka clause,” meaning that it contains exceptions to the exception.[114] The prevalence of these carve-outs in treaty language has contributed to the growing number of investment awards that deal with the effects of tax measures on foreign investments.[115]

As discussed above, the existence of carve-out language has the practical effect of barring an arbitrator’s authority to consider matters subject to the carve-out, thus denying the tribunal jurisdiction over the matter.[116] Despite this apparent procedural bar, carve-out language has not proven effective at keeping disputes over taxation measures out of ISDS.[117] This result is due in large part to the broad language of carve-outs that fails to define “matters of taxation,” leaving it to the tribunal to examine the legislative process leading to the adoption of a tax measure to determine its nature.[118] Only after determining that the measure in dispute is indeed a “tax” to the tribunal’s discretionary satisfaction will the panel deny itself jurisdiction over the related claims.[119]

In determining whether the VAT refunds fell within the exception for “taxation measures,” the tribunal first noted that the BIT did not define “taxation measures.”[123] Then, at its apparent discretion, the tribunal made several observations about the “normal meaning” of the term, including the requirement that a tax law be “one which imposes a liability on classes of persons to pay money to the State for public purposes,” and is “part of the regime for the imposition of a tax.”[124] Finding these standards satisfied, the tribunal concluded that EnCana’s claim as it related to the VAT refunds was excluded from the scope of the BIT, “subject to the exception for expropriation.”[125]

In contrast to the holding in EnCana, other awards suggest that where a treaty defines “taxation measure” for purposes of the carve-out, the tribunal’s analysis will be guided by significantly less discretion.[126] In Cube Infrastructure Fund v. Spain the claimants alleged, among other things, that Spain’s decision to pass a law creating a “tax on the value of production of electrical energy” (TVPEE) and “levy on the use of continental waters for the production of electrical energy” (Water Levy) breached the state’s obligations to protect their investment in renewable energy facilities.[127] The clause applicable to this dispute carved out taxation measures in terms almost identical to the clause quoted in EnCana; however, the governing article further defined the term “Taxation Measure” in relevant part as “any provision relating to taxes of the domestic law of the Contracting Party.”[128]

In contesting Spain’s argument that the TVPEE and Water Levy constituted taxes, the claimants pointed to a three-pronged test that resembled the EnCana tribunal’s benchmark for what constituted a taxation measure.[129] The tribunal summarily dismissed use of this test and concluded instead that the two measures “had the appearance of being a tax,” and therefore the critical issue in dispute was whether they were “bona fide” taxation measures conducted in good faith.[130] The tribunal also ruled in favor of Spain on this issue, labeling as “flimsy” the claimant’s argument that a tax which has a greater effect on renewable producers is discriminatory and thus incapable of inclusion in the carve-out.[131] Based on these somewhat ambiguous statements, the tribunal upheld Spain’s objection to jurisdiction on the tax claims.[132]

It is important to note that the carve-outs in EnCana and Cube Infrastructure contained exceptions for expropriatory taxation measures, but not for violations of fair and equitable treatment.[133] Indeed, in Cube Infrastructure, the tribunal noted that the carve-out language of the governing ECT Article 21(1) necessarily precluded consideration of whether the tax measures supported a finding that the investor was not treated in a fair and equitable manner, stating: “The Tribunal considers that Article 21(1) ECT requires it to take no account whatever of the impact of Taxation Measures within the meaning of the ECT. It accordingly eliminates the tax and the levy imposed under Law 15/2012 from its considerations.”[134] While FET analysis in that award took place in regard to claims not involving matters of taxation, the tribunal emphasized that the carve-out language required a complete elimination of the tax measures from its consideration.[135]

The Cube Infrastructure award demonstrates that a tribunal’s interpretation of carve-out language is likely to be determinative of whether the regulation is assessed in accordance with FET standards; therefore, the consequences of ambiguity in carve-out language have the potential to be significant. This risk is illuminated in the Burlington v. Ecuador and Murphy v. Ecuador awards, where different tribunals assessed the claims of different investors involving the same regulation.[136] Known as “Law 42,” the regulation at the center of these disputes amended Ecuador’s Hydrocarbon Law to require private investors with production sharing contracts to allocate fifty percent of excess oil sale profits to the State.[137] Approximately eighteen months after the initial enactment, Ecuador issued Decree No. 662, increasing the allocation from fifty to ninety-nine percent.[138] Article X of the governing Ecuador-U.S. BIT included carve-out language for matters of taxation that exempted tax policies from the majority of obligations of the Treaty.[139]

The Burlington tribunal relied on international law, including the EnCana decision, to conclude that Law 42 was a tax and thus exempt from the purview of the treaty because it was “(i) a law (ii) that impose[d] a liability on classes of persons (iii) to pay money to the State (iv) for public purposes.”[140] As a result, the tribunal found that it did not have jurisdiction over any of the investor’s nonexpropriation[141] claims that related to Law 42.[142] In contrast, the Murphy tribunal emphasized the importance of considering the way in which Ecuador characterized Law 42 under the domestic tax regime.[143] Analysis of this context included an assessment of the law’s legislative history: the tribunal noted that Law 42 was not enacted in accordance with the Ecuadorian Tax Code and that after its enactment, “high-ranking government officials said that it was not a tax.”[144] In light of these findings, the tribunal determined that Law 42 was not a tax, but rather"a unilateral change by the State to the terms of the [investor] contracts that were governed by the Hydrocarbons Law."[145]

As a result of the inconsistency in the interpretation of Article X and Law 42 among the Burlington and Murphy tribunals, investors in the former case were denied a right to relief for alleged breach of the FET standard, while investors in the latter case were allowed to proceed with their FET claim. The Murphy tribunal applied the softer FET standard to this claim, giving weight to the host state’s right to regulate by noting that “Ecuador was within its sovereign right to react to the significant change in oil prices” by passing Law 42,[146] and concluding that the claimant should have reasonably expected that there would be a government response to this price change.[147] Nevertheless, the tribunal determined that Decree No. 662 “fundamentally change[d] the nature of the [investor’s] participation contract” and violated the obligation under the BIT to accord the claimant’s investment fair and equitable treatment.[148]

Law 42 affected investors across Ecuador’s hydrocarbons industry, resulting in a number of arbitration claims with varying results. For example, the Parenco v. Ecuador tribunal, constituted under the France-Ecuador BIT, concluded that on balance, there was more evidence that Law 42 should be characterized as a tax.[149] In contrast, the Occidental II tribunal, constituted under the U.S.-Ecuador BIT, held that characterization of Law 42 as a tax was “contrary to the plain text of Law 42.”[150] These and the above cases underscore the importance of clear carve-out language that limits the interpretive discretion of tribunals. The cases demonstrate that where there is no set standard for what constitutes a “taxation matter,” and where tribunals vary in the emphasis they place on international and domestic classifications of the regulation at issue, it is difficult to predict whether a regulation will be characterized as a taxation matter excluded from treaty obligations. Additionally, variations in tribunal application of the soft versus strict FET standard further highlight the need for clear treaty language in order to avoid the ambiguity that may accompany FET analysis.

IV. Countering the FET Standard in a World Without Carve-Outs

The preceding Sections identified two sources of ambiguity that underscore the need for clear treaty language: (1) ambiguity in interpretation of carve-out terms such as “taxation matters” and (2) ambiguity in application of the soft versus strict FET standard. While examination of tax arbitrations involving treaty carve-out language is helpful in understanding the problems that arise when treaty drafters incorporate broad language into their carve-outs, such language protecting the state’s right to regulate on behalf of the environment is currently absent from the majority of IIAs and BITs in particular.[151] As countries engage in the process of reforming their treaties, it will be helpful to look to taxation jurisprudence to learn from the problems that arise from broad carve-outs. To better understand the second source of ambiguity, this Part will examine several notable awards that appear to reflect the current trend among tribunals to apply the soft FET standard to disputes involving environmental regulations, reflecting a positive development for host states in a world without environmental carve-outs.

Foreign investors operating under the protection of NAFTA[152] have brought a number of disputes involving environmental measures taken by NAFTA countries.[153] These measures involve various government initiatives, ranging from regulations banning the import and export of hazardous waste to regulations imposing requirements for environmental assessments and approval.[154] Article 1105(1) comprises NAFTA’s equivalent of the FET standard.[155] Entitled “Minimum Standard of Treatment,” the article provides that “each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.”[156] The proliferation of claims brought under this article in the past two decades has resulted in the emergence of an Article 1105 “standard of review” in NAFTA jurisprudence[157] which suggests that Article 1105 is infringed when State conduct is “arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory . . . or involves a lack of due process . . . .”[158] This standard encompasses more than the two obligations commonly associated with FET claims arising out of BITs;[159] however, protection of reasonable expectations stands as a common criterion required under both types of provisions.[160]

Tribunals that have adopted the Article 1105 standard of review have noted that there is “a high threshold for the conduct of a host state to rise to the level of . . . breach”[161] due in large part to the understanding among tribunals that international law extends to domestic authorities the right “to regulate matters within their own borders.”[162] This understanding was expressly recognized by the Clayton tribunal, which noted that when “[m]odern regulatory and social welfare states tackle complex problems,” “[t]he imprudent exercise of discretion or even outright mistakes do not, as a rule, lead to a breach of the international minimum standard.”[163]

Despite such deference, tribunal decisions in the environmental sphere demonstrate that a State will be found to have surpassed the high threshold for breach when an investor reasonably relies on representations made by the government to its detriment. In Clayton for example, the Nova Scotian government made representations that it was supportive of a U.S. investor’s marine quarry project, motivating the investor’s decision to engage in a multi-million dollar regulatory approval process.[164] On arbitrary bases that suggested a lack of due process, Canada and Nova Scotia rejected the project for environmental reasons following an agency review process that the tribunal labeled as “unwinnable from the outset.”[165] As a result, the tribunal found that Canada’s conduct rose to the threshold constituting breach of Article 1105.[166] A paradigmatic example of soft FET standard application, the tribunal in Clayton qualified their award by stating that NAFTA countries are free to adopt laws “that are as demanding as they choose in exercising their sovereign authority”; however, “the mere fact that environmental regulation is involved does not make investor protection inapplicable.”[167]

The result in Clayton and other NAFTA cases is a positive development for states interested in regulating on behalf of the environment; however, states should remain aware that Article 1105 analysis, and FET analysis in general, entails a highly fact-specific inquiry that includes an examination of the political context and events leading up to the regulation.[168] For example, in S.D. Myers, a U.S. waste management company brought a dispute against Canada after the country issued an export ban on PCB, a toxic substance.[169] To determine whether Canada’s issuance of the regulation violated its obligations to the U.S. investor, the tribunal examined correspondence among government officials as well as parliamentary statements made prior to the passage of the export ban.[170] The tribunal concluded based on this examination that while it did not have “an open-ended mandate to second-guess government decision-making,”[171] the record demonstrated that the export ban was not founded on legitimate environmental concerns, but founded instead on a political promise “to protect the Canadian PCB disposal industry from U.S. competition.”[172] This holding demonstrates that whether a governmental action is found to violate the obligation to provide fair and equitable treatment to investors will be at least partially dependent on the political, economic, or other context in which the regulation was passed.[173]

As the above cases demonstrate, there is a trend in NAFTA jurisprudence to analyze FET claims against the heavy counterweight of a state’s right to regulate on behalf of the environment.[174] The Article 1105 standard of review stands for the proposition that government regulations must be particularly egregious and unjust to surpass the high threshold required for breach;[175] such a standard lays the groundwork for the introduction of carve-out language that exempts legitimate environmental regulations from the scope of the treaty obligations. Part III shows that carve-out language has the potential to prevent FET analysis altogether by denying the tribunal jurisdiction to hear an investor’s claims related to environmental regulations; however, treaty language should be clear and should differentiate environmental regulations from other legislative measures in order to avoid the issues that arise under tax regulation disputes.[176] Either way, tax and environmental regulation jurisprudence indicate that assessment of such matters requires a highly fact-intensive inquiry.[177] Ultimately, analysis will reflect the tribunal’s own conclusion as to whether the measure is necessary to achieve the public policy goal.[178]

V. Conclusion: Implications for Treaty Reform Efforts

This Comment recognizes the potential, through the inclusion of strong carve-out treaty language, for host states to further protect their sovereign right to regulate on behalf of the environment. While this potential is good news for host states engaged in the treaty reformation process, some professionals in the field, including prominent arbitrator Charles Brower, have warned about the implications of such treaty reform on the health of the international investment regime in general.[179] On the issue of environmental exceptions and expropriation, Brower noted that “any attempt to lower the traditional customary standards of investment protection . . . based on the nature of the particular public purpose . . . would increase the risk . . . of investing abroad, if not altogether foreclosing foreign investment.”[180]

Brower’s prediction about a future where foreign investment must succumb to the environmental interests of a state appears dire; however, investors should be aware that they are not without recourse to additional protections. As an initial matter, it should be emphasized that this Comment is not promoting the development of rules that would grant states “self-judging discretion” to deviate from their obligations to investors.[181] For example, labeling a state action an “environmental regulation” will not suffice to deny the tribunal jurisdiction over a claim: a tribunal will first analyze “the existence of a rational policy; and the reasonableness of the act in relation to that policy.”[182] This relates to the requirement that a regulation be “bona fide”; “actions that are taken only under the guise of a taxation [or environmental measure], but in reality aim to achieve an entirely unrelated purpose” will not be accepted by arbitral tribunals as falling within a treaty’s carve-out.[183] If a tribunal determines that a regulation does not fall within a treaty’s carve-out, the FET standard provides strong protections to investors with legitimate expectations of regulatory stability, particularly where a state has made an assurance or promise of such stability.[184]

Outside of treaty protections, investors will find additional protection from adverse regulatory change in the stabilization clause[185] of an investment contract, as such clauses have the potential to render carve-out clauses completely inapplicable.[186] The clause operates by “freezing” the law in force on the date which conclusion of the contract occurs.[187] Stabilization clauses have added to the perceived one-sidedness of investment arbitration.[188] Nevertheless, they remain a viable form of protection for investors who can convince host states to sign an investment contract.[189]

Regardless of the involvement of an investment contract, this Comment illustrates how engaging in treaty reform has the potential to more appropriately balance a host state’s sovereign right to regulate with investor rights to investment protection. As tribunals attempt to strike the proper balance, clear carve-out language is necessary to reduce tribunal discretion, and consequently increase consistency in awards concerning environmental regulations. Engaging in this type of reform will improve the efficacy of investor-state arbitration by increasing predictability in dispute resolution for both host states and investors. Tribunals have demonstrated a tendency to consider the host state’s sovereign right to regulate, signaling that the ISDS system is ripe for a change that better reflects the range of issues the globalized economy faces today, including the increasingly prevalent issue of environmental degradation. A number of countries have already begun to lay this foundation, serving as the catalyst for a new generation of treaties; nevertheless, the expanse of existing IIAs reflects the need for continued efforts to reform.

Sophia Sepúlveda Harms

1. Greta Thunberg, Climate Change Activist, 2019 & 2020 Nobel Laureate Nominee, The Disarming Case to Act Right Now on Climate Change, TEDxStockholm (Nov. 2018), https://www.ted.com/talks/greta_thunberg_school_strike_for_climate_save_the_world_by_changing_the_rules?language=en [https://perma.cc/XD2E-X636].

2. See generally U.N. Conference on the Human Environment, Report of the U.N. Conference on the Human Environment, U.N. Doc. A/CONF.48/14/Rev.1 (June 5–16, 1972); U.N. Conference on Environment and Development, Rio Declaration on Environment and Development, U.N. Doc. A/CONF.151/26/Rev.1 (Vol. I), annex I (Aug. 12, 1992).

3. U.N. Climate Change Secretariat, Climate Action and Support Trends 2019, at iii (Aug. 9, 2019), https://unfccc.int/sites/default/files/resource/Climate_Action_Support_Trends_2019.pdf [https://perma.cc/U3CH-CWNR] (“[C]limate change is now an existential threat and the greatest challenge facing this generation. It is abundantly clear that business as usual is no longer good enough.”).

4. Zachary Sweebe, Shades of Green: Health, Safety, and Environmental Protections in China’s International Investment Agreements, U. Pa. J. Int’l L. (Apr. 16, 2017) [hereinafter Shades of Green], http://pennjil.com/shades-of-green-health-safety-and-environmental-protections-in-chinas-international-investment-agreements/ [https://perma.cc/995E-3L83] (“Even today, the overwhelming majority of [foreign direct investment] flows to least-developed States remain devoted to natural resource extraction, a ‘race to the bottom’ practice which does little to promote long-term economic development while frequently compromising the host State’s regulatory sovereignty and endangering its health, safety and local environment, all in pursuit of greater and more secure home State investment returns.”).

5. See infra notes 56–59 and accompanying text.

6. U.N. Conference on Trade and Development, Investment Policy Framework for Sustainable Development, 6, 17, U.N. Doc. UNCTAD/DIAE/PCB/2015/5 (2015) [hereinafter Investment Policy Framework].

7. Press Release, World Trade Organization, Foreign Direct Investment Seen as Primary Motor of Globalization, Says WTO Director-General (Feb. 13, 1996), https://www.wto.org/english/news_e/pres96_e/pr042_e.htm [https://perma.cc/8ABA-HS6B].

8. Stephan W. Schill, Multilateralizing Investment Treaties Through Most-Favored-Nation Clauses, 27 Berkeley J. Int’l L. 496, 518–19 (2009).

9. Maximilian Clasmeier, Arbitral Awards as Investments: Treaty Interpretation and the Dynamics of International Investment Law § 2.04 (Julian D.M. Lew ed., 2017).

10. Ige Dekker et al., Bridging the Gap Between International Investment Law and the Environment: Introduction, at xxxv–xxxvi (Yulia Levashova et al. eds., 2015) [hereinafter Bridging the Gap]; Andrew Newcombe & Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment 15–18 ( 2009) (noting that prior to the 1980s, disagreements among capital importing and capital exporting states regarding the applicable legal standard of treatment of foreigners was the major focus among parties developing the international investment law regime).

11. See generally Christopher Greenwood, Sources of International Law: An Introduction (2008), https://legal.un.org/avl/pdf/ls/greenwood_outline.pdf [https://perma.cc/E39L-4RKD].

12. Bridging the Gap, supra note 10, at xxxvi–xxxvii.

13. Thomas Wälde, National Tax Measures Affecting Foreign Investors Under the Discipline of International Investment Treaties, in 102 The American Society of International law: Proceedings of the 102nd Annual Meeting 55, 57 (2008).

14. Julien Chaisse, The Treaty Shopping Practice: Corporate Structuring and Restructuring to Gain Access to Investment Treaties and Arbitration, 11 Hastings Bus. L.J. 225, 230–31 (2015). Notable FTAs and RTAs include the North America Free Trade Agreement (NAFTA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Central American-Dominican Republic Free Trade Agreement (CAFTA-DR), and the EU-Japan RTA. See generally Brock R. Williams, Cong. Rsch. Serv., R45198, Bilateral and Regional Trade Agreements: Issues for Congress (2018).

15. U.N. Conference on Trade and Development, IIA Issues Note: Recent Developments in the International Investment Regime, 2, U.N. Doc. UNCTAD/DIAE/PCB/INF/2018/1 (May 2018) [hereinafter Recent Developments].

16. See Bridging the Gap, supra note 10, at xxxvii.

17. Vera Korzun, The Right to Regulate in Investor-State Arbitration: Slicing and Dicing Regulatory Carve-Outs, 50 Vand. J. Transnat’l L. 355, 366 (2017). The U.N. Conference on Trade and Development numbers treaties with ISDS provisions at 2,442 out of 2,576 total mapped treaties. Mapping of IIA Content, U.N. Conf. on Trade & Dev., https://investmentpolicy.unctad.org/international-investment-agreements/iia-mapping#section-103 [https://perma.cc/65L7-JPV5] (last visited Nov. 7, 2020) (click “Select mapped treaty elements”; then select “Investor-State Dispute Settlement (ISDS)”; then select “ISDS Included: Yes”; then select “Search”).

18. Clasmeier, supra note 9, at § 2.04(B).

19. Investment treaties also commonly include the option for investors to conduct ad hoc proceedings under the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL). Tom Cummins & Ben Giaretta, Investment Treaty Arbitration, in Dispute Resolution in the Energy Sector: The Practitioner’s Handbook 225, 240 (Ronnie King ed., 2012).

20. Bridging the Gap, supra note 10, at xxxvii.

21. Vienna Convention on the Law of Treaties art. 31(1), May 23, 1969, 1155 U.N.T.S. 331 (“A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.”).

22. Shades of Green, supra note 4.

23. Clasmeier, supra note 9, at § 2.04(B).

24. Bridging the Gap, supra note 10, at xxxvii*.*

25. Anna Joubin-Bret, Protecting the Investor and Protecting the Environment: Conflicting Objectives in International Investment Agreements, in Bridging the Gap Between International Investment Law and the Environment 31, 38 (Yulia Levashova et al. eds., 2015).

26. Tarcisio Gazzini, Bilateral Investment Treaties and Sustainable Development, 15 J. World Inv. & Trade 929, 934 (2014).

27. Joubin-Bret, supra note 25, at 38–39; Chaisse, supra note 14, at 232.

28. See U.N. Conference on Trade and Development, IIA Issues Note: Fact Sheet on Investor-State Dispute Settlement Cases in 2018, 1 fig.1, U.N. Doc. UNCTAD/DIAE/PCB/INF/2019/4 (May 2019).

29. U.N. Conference on Trade and Development, IIA Issues Note: Review of ISDS Decisions in 2018: Selected IIA Reform Issues, 2 box 1, U.N. Doc. UNCTAD/DIAE/PCR/INF/2019/6 (July 2019) (“Ten awards of damages were rendered in 2018, ranging from approx. $3.2 million (Gavrilovic v. Croatia) to$2 billion (Unión Fenosa v. Egypt).”).

30. Sadaff Habib, Impact of Foreign Direct Investment on Arbitration in Africa, Kluwer Arb. Blog (Mar. 27, 2018), http://arbitrationblog.kluwerarbitration.com/2018/03/27/impact-foreign-direct-investment-arbitration-africa/ [https://perma.cc/HM8A-VH73].

31. Carter Ctr., A State Affair: Privatizing Congo’s Copper Sector 3, 8 (2017), https://www.cartercenter.org/resources/pdfs/news/peace_publications/democracy/congo-report-carter-center-nov-2017.pdf [https://perma.cc/PWE4-K6J3] (“Poor governance has allowed the [DRC’s] largest state-owned mining company, Gécamines, to engage in opaque mining deals that fail to serve the public interest.”).

32. Id. at 38; see also U.N. Econ. Comm’n for Africa, Investment Policies and Bilateral Investment Treaties in Africa: Implications for Regional Integration, at IX–XI (2016), https://www.uneca.org/sites/default/files/PublicationFiles/eng_investment_landscaping_study.pdf [https://perma.cc/C2TJ-KY4W] (“African countries have been involved in 111 investment dispute cases, or roughly one-fifth of all documented, treaty-based cases between 1972 and 2014.”).

33. Korzun, supra note 17, at 380.

34. Id. at 383.

35. Joubin-Bret, supra note 25, at 35–36.

36. Gazzini, supra note 26, at 931; Yulia Levashova, Fair and Equitable Treatment and the Protection of the Environment: Recent Trends in Investment Treaties and Investment Cases, in Bridging the Gap Between International Investment Law and the Environment 53, 54 (Yulia Levashova et al. eds., 2015).

37. U.N. Conference on Trade and Development, World Investment Report 1998: Trends and Determinants, 184–85, U.N. Doc. UNCTAD/WIR/1998 (Aug. 1998) (“Perhaps more than in other developing regions, natural resource extraction plays an important role in FDI in Africa . . . .”).

38. The investor-state relationship in extractive industries is commonly governed by a production sharing agreement (PSA) between the foreign investor and national oil and gas company. States have attempted to hold investors accountable for environmental damage by including provisions within these PSAs that require investors to abide by domestic environmental laws as well as international petroleum industry standards for the protection of the environment. See Petroleum Agreement Between Government of Guyana, Exxon Mobil, CNOOC Nexen and Hess, Art. 28 (Oct. 7, 2016), https://gyeiti.org/wp-content/uploads/Petroleum-Agreement-Oct-7-2016.pdf [https://perma.cc/FM49-NY49].

39. Joubin-Bret, supra note 25, at 40.

40. Id. at 41.

41. Olga Boltenko, Hong Kong’s Role in Contemporary Treaty-Making Practice, Treaty-Based Environmental Carve-Outs, Hong Kong Law. (June 2018), http://www.hk-lawyer.org/content/hong-kong’s-role-contemporary-treaty-making-practice-treaty-based-environmental-carve-outs [https://perma.cc/HM6N-RKEQ] (citing to the awards in S.D. Myers v. Canada and Santa Elena v. Costa Rica). But see Charles N. Brower & Sadie Blanchard, What’s in a Meme? The Truth About Investor-State Arbitration: Why It Need Not, and Must Not, Be Repossessed by States, 52 Colum. J. Transnat’l L. 689, 725–26 (2014) (“As against . . . bald assertions that investment tribunals are pro-polluter, a review of actual arbitral awards reveals great respect for environmental protection efforts and national policy discretion.”).

42. See Bridging the Gap, supra note 10, at xxxix*.*

43. U.N. Conference on Trade and Development, IIA Issues Note: Taking Stock of IIA Reform: Recent Developments, 7, U.N. Doc. UNCTAD/DIAE/PCB/INF/2019/5 (June 2019) [hereinafter Taking Stock of IIA Reform].

44. Bridging the Gap, supra note 10, at xxxix*.*

45. Investment Dispute Settlement Navigator, U.N. Conf. on Trade & Dev., https://investmentpolicy.unctad.org/investment-dispute-settlement?id=228&name=venezuela-bolivarianrepublic-of [https://perma.cc/63FU-2KQ5] (Dec. 31, 2019) (click “Country,” sort by “Cases as Respondent State”) (noting that Venezuela has appeared as the respondent host state in 51 cases, following only Spain’s appearance in 52 cases and Argentina’s appearance in 62 cases); see also Ecuador Terminates 16 Investment Treaties, Transnat’l Inst. (May 18, 2017), https://www.tni.org/en/article/ecuador-terminates-16-investment-treaties [https://perma.cc/FK5U-S7DV] (“In 2014, Ecuador was fifth in the world in terms of investment protection arbitration cases; today it is in tenth place . . . . A total of \$21.2 billion dollars has been demanded as compensation from Ecuador by corporations for supposed violation of investment protection agreements.”).

46. Brower & Blanchard, supra note 41, at 762.

47. Taking Stock of IIA Reform, supra note 43, at 7.

48. Investment Policy Framework, supra note 6, at 16.

49. Joubin-Bret, supra note 25, at 31–32 (noting that early BITs “focused exclusively on the protection of foreign investors and their property”).

50. See Shades of Green, supra note 4.

51. Recent Developments, supra note 15, at 4.

52. Taking Stock of IIA Reform, supra note 43, at 2.

53. Comprehensive and Progressive Agreement for Trans-Pacific Partnership, ch. 20, art. 20.3(2) Mar. 8–Dec. 30, 2018, [2018] A.T.S. 23 [hereinafter CPTPP] (incorporating, by reference, the provisions from the Trans-Pacific Partnership).

54. Boltenko, supra note 41.

55. See id.

56. Clasmeier, supra note 9, at § 2.02.

57. Timothy J. Tyler & Richard D. Deutsch, Protecting Energy Projects from Political Risk by Treaty Planning, 8 Energy Litig. J., Spring 2009, at 1.

58. See Karsten Nowrot, How to Include Environmental Protection, Human Rights and Sustainability in International Investment Law, 15 J. World Inv. & Trade 612, 621–22 (2014).

59. See Richard D. Deutsch, Freezing Time in a Contractual Bottle: Is It Time to Reconsider Freezing Clauses in International Energy Contracts?, 65 Rocky Mtn. Min. L. Inst., 2019, at § 9A.03[1][b][ii]; Constitucíon de la República del Ecuador Oct. 20, 2008, art. 408, http://pdba.georgetown.edu/Constitutions/Ecuador/english08.html [https://perma.cc/CB46-UTSH] (“Nonrenewable natural resources and, in general, products coming from the ground, mineral and petroleum deposits . . . are the unalienable property of the State, immune from seizure and not subject to a statute of limitations.”).

60. See Bridging the Gap, supra note 10, at li.

61. U.N. Conference on Trade and Development, Fair and Equitable Treatment: Series on Issues in International Investment Agreements II, at 39, U.N. Doc. UNCTAD/DIAE/IA/2011/5 (2012).

62. Levashova, supra note 36, at 58.

63. Id. at 62– 63.

64. Id. at 56.

65. See Rudolf Dolzer & Christoph Schreuer, Principles of International Investment Law 130 (2d ed. 2012).

66. Federico Ortino, The Obligation of Regulatory Stability in the Fair and Equitable Treatment Standard: How Far Have We Come?, 21 J. Int’l Econ. L. 845, 860 (2018).

67. See Levashova, supra note 36, at 64.

68. See, e.g., Occidental Petroleum Corp. v. Republic of Ecuador (Occidental I), LCIA Case No. UN3467, Award, London Court of International Arbitration [London Ct. Int’l Arb.], ¶ 191 (July 1, 2004), https://www.italaw.com/sites/default/files/case-documents/ita0571.pdf [https://perma.cc/F9X5-R3JA].

69. Ortino, supra note 66, at 857.

70. Id.

71. Tecnicas Medioambientales Tecmed S.A. v. United Mexican States (Tecmed), ICSID Case No. ARB(AF)/00/2, Award, ¶ 154 (May 29, 2003), 10 ICSID Rep. 134 (2006) (emphasis added).

72. Occidental I, LCIA Case No. UN3467, Award, ¶ 191.

73. Ortino, supra note 66, at 849– 850 (“According to one view, the FET provision requires strict regulatory stability, thus, the mere existence of a change in the regulatory framework applicable to the investment is . . . a violation.”) (emphasis added).

74. Id. at 849.

75. Saluka v. Czech Republic, Partial Award, ¶ 306 (Mar. 17, 2006), 15 ICSID Rep. 274 (2010).

76. Ortino, supra note 66, at 856.

77. See El Paso Energy Int’l Co. v. Argentine Republic, ICSID Case No. ARB/03/15, Award, ¶¶ 367–68 (Oct. 31, 2011), https://www.italaw.com/sites/default/files/case-documents/ita0270.pdf [https://perma.cc/6QZP-9VUA].

78. See CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Award, ¶ 277 (May 12, 2005), 14 ICSID Rep. 158 (2009) (“It is not a question of whether the legal framework might need to be frozen as it can always evolve and be adapted to changing circumstances, but neither is it a question of whether the framework can be dispensed with altogether when specific commitments to the contrary have been made.”).

79. See Parkerings-Compaginet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8, Award, ¶ 332 (Sept. 11, 2007), https://www.italaw.com/sites/default/files/case-documents/ita0619.pdf [https://perma.cc/8NAQ-FMNS].

80. For example, in the Antaris v. Czech Republic Award, a claimant alleged breach of the Energy Charter Treaty (ECT) and the Germany-Czech Republic BIT’s FET provisions after the host state modified its incentive regime in the solar energy sector. The tribunal analyzed the claim by referring to thirteen general propositions on FET standard interpretation, some of which emanated from awards considered to be in direct opposition to one another (such as Tecmed and Saluka). While the tribunal did note that its decision was not based on all of the propositions, it did not expressly clarify upon which of the potentially conflicting awards it ultimately relied. See Antaris & Göde v. The Czech Republic, PCA Case No. 2014-01, Award, ¶¶ 262–65, 360, 363 (May 2, 2018), https://www.italaw.com/sites/default/files/case-documents/italaw9809.pdf [https://perma.cc/8UZ3-NYWQ].

81. Ortino, supra note 66, at 847, 858.

82. Id. at 863.

83. Id. at 847.

84. Korzun, supra note 17, at 380.

85. See Christoph Schreuer, Diversity and Harmonization of Treaty Interpretation in Investment Arbitration, in Treaty interpretation and the Vienna Convention on the Law of Treaties: 30 Years on 129, 129–30 (Malgosia Fitzmaurice et al. eds., 2010).

86. Andrés Rigo Sureda, Investment Treaty Arbitration: Judging Under Uncertainty 9 (2012).

87. Shades of Green, supra note 4.

88. Korzun, supra note 17, at 387.

89. Id. at 388.

90. Joubin-Bret, supra note 25, at 46.

91. See id.

92. See Shades of Green, supra note 4.

93. 2012 U.S. Model Bilateral Investment Treaty, pmbl. (emphasis added), https://ustr.gov/sites/default/files/BIT text for ACIEP Meeting.pdf [https://perma.cc/A2WK-D9KT].

94. Free Trade Agreement, Austl.-China, pmbl., June 17, 2015, [2015] A.T.S. 15.

95. Joubin-Bret, supra note 25, at 46.

96. Shades of Green, supra note 4.

97. Korzun, supra note 17, at 387–89.

98. Joubin-Bret, supra note 25, at 47; see also 2012 U.S. Model Bilateral Investment Treaty, supra note 93, art. 8(3)(c).

99. See A Sustainability Toolkit for Trade Negotiators: Trade and Investment as Vehicles for Achieving the 2030 Sustainable Development Agenda, Int’l Inst. for Sustainable Dev., https://www.iisd.org/toolkits/sustainability-toolkit-for-trade-negotiators/3-environmental-provisions/3-6-environmental-exceptions/#jump [https://perma.cc/B3NP-5QG8] (last visited Nov. 7, 2020); General Agreement on Tariffs and Trade art. XX(b), Oct. 30, 1947, 61 Stat. pt. 5, 55 U.N.T.S. 194; Comprehensive Economic and Trade Agreement, Can.-Eur., art. 28.3(1), Oct. 30, 2016, 2017 O.J. (L 11) 23, 182 (Eur.).

100. Joubin-Bret, supra note 25, at 47–48.

101. Korzun, supra note 17, at 379–80.

102. Id. at 391.

103. See Daniel Uribe & Manuel F. Montes, Building a Mirage: The Effectiveness of Tax Carve-Out Provisions in International Investment Agreements, 14 S. Ctr. Inv. Pol’y Brief 1–2, 8 (2019).

104. Korzun, supra note 17, at 395.

105. Id. at 394–95.

106. CPTPP, supra note 53, ch. 29, art. 29.5 (emphasis added).

107. Korzun, supra note 17, at 387–88, 394–95.

108. Id. at 397.

109. Joubin-Bret, supra note 25, at 49.

110. Wälde, supra note 13, at 55.

111. Murphy Expl. & Prod. Co. Int’l v. Republic of Ecuador, PCA Case No. 2012-16, Partial Final Award, ¶ 165 (May 6, 2016), https://www.italaw.com/sites/default/files/case-documents/italaw7489_0.pdf [https://perma.cc/4YCN-DL8E].

112. Id.

113. Wälde, supra note 13, at 57.

114. Uribe & Montes, supra note 103, at 2 box 1.

115. Id. at 1, 8.

116. William W. Park, Arbitrability and Tax, in Arbitrability: International and Comparative Perspectives, 179, 180 n.4 (Loukas A. Mistelis & Stavros L. Brekoulakis eds., 2008).

117. Claire Provost, Taxes on Trial: How Trade Deals Threaten Tax Justice, Glob. Just. Now 1, 5, 9–10 (Feb. 2016), https://www.globaljustice.org.uk/sites/default/files/files/resources/taxes-on-trial-how-trade-deals-threaten-tax-justice-global-justice-now.pdf [https://perma.cc/8E8G-ASTW] (listing forty-two tax-related cases in ISDS, twenty-eight of which were based on BITs that included tax carve-out language).

118. Uribe & Montes, supra note 103, at 6.

119. See Burlington Res. Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Jurisdiction, ¶ 124 (June 2, 2010), https://www.italaw.com/sites/default/files/case-documents/ita0106.pdf [https://perma.cc/E2CS-5J8P].

120. EnCana Corp. v. Republic of Ecuador, LCIA Case No. UN3481, Award, ¶ 82 (Feb. 3, 2006), https://www.italaw.com/sites/default/files/case-documents/ita0285_0.pdf [https://perma.cc/ATE9-B5MK].

121. Id. ¶¶ 133–34.

122. Id. ¶ 108.

123. Id. ¶¶ 140–41.

124. Id. ¶ 142.

125. Id. ¶¶ 143, 149, 168.

126. Cube Infrastructure Fund SICAV v. Kingdom of Spain, ICSID Case No. ARB/15/20, Decision on Jurisdiction, Liability and Partial Decision on Quantum, ¶¶ 203, 209, 221, 233 (Feb. 19, 2019), https://www.italaw.com/sites/default/files/case-documents/italaw10692.pdf [https://perma.cc/T43C-U32G].

127. Id. ¶¶ 205, 215–16, 219.

128. Compare id. ¶ 203, with EnCana, LCIA Case No. UN3481, Award, ¶ 108.

129. Cube Infrastructure, ICSID Case No. ARB/15/20, Decision on Jurisdiction, ¶ 229.

130. Id. ¶¶ 221, 230.

131. Id. ¶¶ 216–17, 224–25.

132. Id. ¶ 233.

133. EnCana, LCIA Case No. UN3481, Award, ¶¶ 108–09; Cube Infrastructure, ICSID Case No. ARB/15/20, Decision on Jurisdiction, ¶¶ 203, 206.

134. Cube Infrastructure, ICSID Case No. ARB/15/20, Decision on Jurisdiction, ¶ 362.

135. Id.

136. See Burlington Res. Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Jurisdiction, ¶¶ 53, 95–96 (June 2, 2010), https://www.italaw.com/sites/default/files/case-documents/ita0106.pdf [https://perma.cc/VP5V-QJ9J]; Murphy v. Republic of Ecuador, Partial Final Award, ¶¶ 4–5 (May 6, 2016), https://www.italaw.com/sites/default/files/case-documents/italaw7489_0.pdf [https://perma.cc/Q35F-UTC9].

137. Burlington, ICSID Case No. ARB/08/5, Decision on Jurisdiction, ¶¶ 38–40, 45–52 (determining that Ecuador’s additional participation was calculated as follows: (1) examine the monthly average selling price of a barrel of oil at the time of its production (the “Currently Prevailing Price”), (2) examine the monthly average selling price of a barrel of oil at the time the production sharing contract was executed (the “Reference Price”), and (3) if the Currently Prevailing Price exceeds the Reference Price, the contractor must allocate 50% of that excess to the State for each barrel of oil).

138. Id. ¶ 48–50, 52.

139. Id. ¶ 123.

140. Id. ¶¶ 164­–66.

141. See id. ¶ 123 (exempting expropriation claims from the taxation carve-out).

142. Id. ¶ 249.

143. Murphy Expl. & Prod. Co. v. Republic of Ecuador, PCA Case No. 2012-16, Partial Final Award, ¶ 161, https://www.italaw.com/sites/default/files/case-documents/italaw7489_0.pdf [https://perma.cc/ATR9-QRUU].

144. Id. ¶¶ 168–70.

145. Id. ¶ 190.

146. Id. ¶ 276.

147. Id. ¶ 280.

148. Id. ¶¶ 125, 281–82.

149. Parenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Decision on Remaining Issues of Jurisdiction and on Liability, ¶ 377 (Sept. 12, 2014), https://www.italaw.com/sites/default/files/case-documents/italaw4003.pdf [https://perma.cc/U7PH-RSGK].

150. Occidental Petroleum Corp. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award, ¶ 495 (Oct. 5, 2012), https://www.italaw.com/sites/default/files/case-documents/italaw1094.pdf [https://perma.cc/4YEY-95RR].

151. Joubin-Bret, supra note 25, at 45.

153. Joubin-Bret, supra note 25, at 40.

154. See S.D. Myers, Inc. v. Canada, UNCITRAL report A/69/17, Partial Award, ¶¶ 131–32 (Ad Hoc Tribunal UNCITRAL 2000), https://www.italaw.com/sites/default/files/case-documents/ita0747.pdf [https://perma.cc/Q9JJ-9WF5]; Clayton v. Canada, PCA Case No. 2009-04, Award on Jurisdiction and Liability, ¶ 472 (Mar. 17, 2015), https://www.italaw.com/sites/default/files/case-documents/italaw4212.pdf [https://perma.cc/4TPZ-DAU6].

155. S.D. Myers, UNCITRAL report A/69/17, Partial Award, ¶ 259.

156. Id. ¶ 258.

157. Waste Mgmt., Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Award, ¶ 98 (Apr. 30, 2004); Methanex Corp. v. United States, Final Award of the Tribunal on Jurisdiction and Merits, ¶ 7 (Aug. 3, 2005); S.D. Myers, UNCITRAL report A/69/17, Partial Award, ¶ 134.

158. Waste Mgmt., ICSID Case No. ARB(AF)/00/3, Award, ¶ 98.

159. See supra Section II.B.

160. Waste Mgmt., ICSID Case No. ARB(AF)/00/3, Award, ¶ 98.

161. Clayton v. Canada, PCA Case No. 2009-04, Award on Jurisdiction and Liability, ¶ 444 (Mar. 17, 2015), https://www.italaw.com/sites/default/files/case-documents/italaw4212.pdf [https://perma.cc/2Q2Q-EN2Z]; Mesa Power Grp., LLC v. Canada, PCA Case No. 2012-17, Award, ¶ 504 (Mar. 24, 2016), https://www.italaw.com/sites/default/files/case-documents/italaw7240.pdf [https://perma.cc/AKU3-FLQ9].

162. Waste Mgmt., ICSID Case No. ARB(AF)/00/3, Award, ¶ 94.

163. Clayton, PCA Case No. 2009-04, Award on Jurisdiction and Liability, ¶ 437.

164. Id. ¶¶ 453, 462, 468.

165. Id. ¶¶ 387, 453, 591.

166. Id. ¶ 594.

167. Id. ¶¶ 597–98.

168. See Waste Mgmt., Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3, Award, ¶¶ 98–99 (Apr. 30, 2004) (“[T]he standard is to some extent a flexible one which must be adapted to the circumstances of each case”).

169. See generally S.D. Myers, Inc. v. Canada, UNCITRAL report, A/69/17, Partial Award, ¶¶ 88–195 (Nov. 13, 2000), https://www.italaw.com/sites/default/files/case-documents/ita0747.pdf [https://perma.cc/7PYE-GCHK].

170. Id. ¶¶ 164–95.

171. Id. ¶ 261.

172. Id. ¶¶ 194–95.

173. See Waste Mgmt., ICSID Case No. ARB(AF)/00/3, Award, ¶ 101 (noting of Mexico’s financial crisis and its effect on Mexico’s ability to fulfill its financial obligations).

174. Levashova, supra note 36, at 77.

175. Clayton v. Canada, PCA Case No. 2009-04, Award on Jurisdiction and Liability, ¶ 400 (Mar. 17, 2005), https://www.italaw.com/sites/default/files/case-documents/italaw4212.pdf [https://perma.cc/L424-U7GU].

176. Uribe & Montes , supra note 103, at 8 (noting that “[c]larifying the language on what constitutes a tax matter, and differentiating it from other legislative measures,” could prevent tribunals from applying the FET standard to a particular regulation).

177. Park, supra note 116, at 180.

178. Korzun, supra note 17, at 392.

179. Boltenko, supra note 41.

180. Charles N. Brower & Eckhard R. Hellbeck, The Implications of National and International Environmental Obligations for Foreign Investment Protection Standards, Including Valuation: A Report From the Front Lines, in International Investments and Protection of the Environment: The Role of Dispute Resolution Mechanisms 19, 21 (Int’l Bureau of the Permanent Ct. of Arb. ed., 2001).

181. Brower & Blanchard, supra note 41, at 765 (criticizing proposals that seek to politicize arbitrator appointments, restrict the scope of arbitrator authority, and grant states wide discretion to abandon their investor protection obligations).

182. See, e.g., Micula v. Romania, ICSID Case No. ARB/05/20, Award, ¶ 525 (Dec. 11, 2013), https://www.italaw.com/sites/default/files/case-documents/italaw3036.pdf [https://perma.cc/6VHS-MPLW]; Clayton v. Canada, PCA Case No. 2009-04, Award on Jurisdiction and Liability, ¶ 597 (Mar. 17, 2015), https://www.italaw.com/sites/default/files/case-documents/italaw4212.pdf [https://perma.cc/85SS-PLFY].

183. Yukos Universal Ltd. (Isle of Man) v. Russ., PCA Case No. AA 227, Final Award, ¶ 1407 (July 18, 2014), https://www.italaw.com/sites/default/files/case-documents/italaw3279.pdf [https://perma.cc/38LW-BH4J].

184. Micula, ICSID Case No. ARB/05/20, Award, ¶¶ 668–71.

185. Generally speaking, a stabilization clause is a risk allocation tool found in private contracts between an investor and the state that is “designed to increase the predictability of the regulatory environment in which the investor will be operating.” Annalise Nelson, Investments in the Deep Freeze? Stabilization Clauses in Investment Contracts, Kluwer Arb. Blog (Nov. 9, 2011), http://arbitrationblog.kluwerarbitration.com/2011/11/09/investments-in-the-deep-freeze-stabilization-clauses-in-investment-contracts/?print=print&doing_wp_cron=1598803068.7637689113616943359375 [https://perma.cc/7F77-YSQK]. The “freezing clause,” also known as the “classic approach,” resembles the requirements of strict FET analysis in that it exempts an investment from the application of new laws either in entirety or in certain regulatory fields. Katja Gehne & Romulo Brillo, Stabilization Clauses in International Investment Law: Beyond Balancing and Fair and Equitable Treatment, Transnat’l Econ. L. Rsch. Ctr., Mar. 2017, at 2, 7.

186. . Uribe & Montes , supra note 103, at 8.

187. Gehne & Brillo, supra note 185, at 7.

188. See Andrew Newcombe, Sustainable Development and Investment Law, 8 J. of World Inv. & Trade 357, 358, 365–66 (2007) (noting the perception that investment treaties are “an extraordinary attack on governments’ ability to regulate in the public interest”). While an in-depth discussion of the scope of stabilization clauses is beyond the focus of this Comment, the chilling effect that such language may have on a host state’s right to regulate is notable. Such clauses cannot prevent governments from regulating in the public interest; however, regulatory measures determined to be adverse to an investment will trigger a requirement for compensation that may be significant for the developing country to which these clauses primarily target. As a result, host states concerned with their right to regulate on matters of the environment, taxation, or otherwise should attempt to reject stabilization language that will operate to freeze the regulatory framework when signing a private investment contract. See Gehne & Brillo, supra note 185, at 11, 15.

189. Deutsch, supra note 59, § 9A.03[2][b].