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Introduction
In the last two decades of the 20th century, great changes have taken place in
policies and legal structures relating to foreign investment. The rapid changes in
foreign investment have found their expression in numerous bilateral and
multilateral investment treaties. The proliferation of such instruments has direct
impacts on national sovereignty, federalism, and states’ ability to regulate in
areas such as environmental protection and human health. In the past, foreign
investment was largely regulated domestically. In general, the only international
rules that applied to some aspects of foreign investment were rules of customary
international law, and their application was purely exceptional. With the adoption
of bilateral investment treaties beginning in the 1980s, an international legal
framework started to emerge.1 Both developed and developing countries were
eager to negotiate investment rules in order to further transnational investment.
Because domestic laws and policies can be changed unilaterally, while bilateral
and multilateral rights and obligations cannot, industrialized countries have
preferred to rely on treaties as a more stable basis for their companies wishing to
invest abroad. Developing and countries in transition on the other hand hope to
attract foreign investment through the granting of extensive investor protection in
treaties. They believe that the existence of an investment treaty will influence an
investor in its choice whether or not to invest and that an increase in foreign
investment will contribute to rapid economic development.2
Until now, more than 2000 bilateral investment treaties (BITs) have been
concluded across the world. The number of investment treaties increased rapidly
over the past 20 years, with a speeding pace in the past five years.3
It is a well recognized rule in international law that the property of aliens cannot
be taken, whether for public purposes or not, without adequate compensation.
Two decades ago, the disputes before the courts and the discussions in
academic literature focused mainly on the standard of compensation and
measuring of expropriated value. The divergent views of the developed and
1
Osterwalder, N. B. (2003). International Legal Framework on Foreign Investment. , pp. 2-3. Retrieved
July 20, 2007, from http://www.ciel.org/Publications/Presentation_Kiev_Final%2021May03.pdf.
2
Ibid.
3
For a list of bilateral investment treaties and related information, see
http://www.worldbank.org/icisid/treaties/intro.htm.
1
developing countries raised issues regarding the formation and evolution of
customary law. Today, the more positive attitude of countries around the world
toward foreign investment and the proliferation of bilateral treaties and other
investment agreements requiring prompt, adequate and effective compensation
for expropriation of foreign investments have largely deprived that debate of
practical significance for foreign investors.4
This wording does not require that actual expropriation occur, merely actions
“tantamount to … expropriation.” Thus, environmental or social regulations could
be considered tantamount to expropriation under this definition. Indeed, in
several NAFTA cases, governments have been found liable for environmental
regulations. Though NAFTA does not have the authority to prohibit governments
from creating such regulations, it can force them to compensate the aggrieved
party. This can give multinational corporations a great deal of leverage over
foreign nations (Been and Beauvais 2003). In fact, investment treaties like
NAFTA are one of the few, if not the only, mechanisms by which individuals and
private corporations may sue and gain compensation from foreign, sovereign
nations. The negotiations for the now-defunct Multilateral Agreement on
Investment (MAI), and the current negotiations for the Free Trade Area of the
Americas (FTAA) have both included expropriation clauses similar to the one in
NAFTA (Geiger 2002, Wiltse 2003). Many environmentalists and advocates of
national sovereignty fear that enacting such expropriation clauses will further
harm countries’ abilities to enact legislation to protect the health of their citizens
and ecosystems as they see fit.8
The following two cases provide an insight into the aspects that tribunals have in
determining whether there has been an indirect expropriation of a private
investment. Although not explicitly stated in the text of Article 1110 of NAFTA.
8
Op. Cit Osterwalder, N. B. (2003).pp. 5.
9
Edsall, R. D. (n.d.). INDIRECT EXPROPRIATION UNDER NAFTA AND DR-CAFTA: POTENTIAL
INCONSISTENCIES IN THE TREATMENT OF STATE PUBLIC WELFARE REGULATIONS. Boston
University School of Law BOSTON UNIVERSITY LAW REVIEW, Vol. 86:931, pp. 940. Retrieved July 18,
2007, from http://www.bu.edu/law/central/jd/organizations/journals/bulr/documents/EDSALL.pdf.
10
International Centre for Settlement of Investment Disputes, Case No. ARB (AF)/97/1 Metalclad
Corporation vs United Mexico States, Par. 32-35.
3
landfill. Despite local resistance to the project, Metalclad began building in May
1994.11
On the basis of the municipal government’s actions, Metalclad filed a claim under
Chapter 11 of NAFTA alleging, inter alia, that the government’s interference with
operation of the landfill constituted a “measure tantamount to expropriation.”17
According to the tribunal, expropriation under NAFTA includes not only open,
deliberate and acknowledged takings of property, such as outright seizure or
formal or obligatory transfer of title in favor of the host State, but also covert or
incidental interference with the use of property which has the effect of depriving
the owner, in whole or in significant part, of the use or reasonably-to-be-expected
economic benefit of property even if not necessarily to the obvious benefit of the
host State.18
11
Ibid. Metalclad, Par. 37-38.
12
Ibid. Metalclad, Par. 40.
13
Ibid. Metalclad, Par. 41.
14
Ibid. Metalclad, Par.42.
15
Ibid. Metalclad, Par. 50.
16
Ibid. Metalclad, Par. 59.
17
Ibid. Metalclad, Par.72.
18
Ibid. Metalclad, Par 103.
19
Ibid. Metalclad, Par 104.
4
denying the local construction permit were, in part, environmental, it found as a
matter of law that the Mexican federal government had exclusive authority to
permit hazardous waste landfills, and that the municipal government had
therefore acted outside the scope of its authority. These measures, taken
together with the representations of the Mexican federal government, on which
Metalclad relied, and the absence of a timely, orderly or substantive basis for the
denial by the Municipality of the local construction permit, amount to an indirect
expropriation.20
California argued that banning MTBE was necessary because the additive is
contaminating drinking water supplies, and is therefore posing a significant risk to
human health and safety, and the environment. Methanex argued in its original
submission that the ineffective regulation and non-enforcement of domestic
environmental laws, including the U.S. Clean Water Act, is responsible for the
presence of MTBE in California water supplies. The company argued that the
ban is tantamount to an expropriation of the company’s investment and thus a
violation of NAFTA's Article 1110; was enacted in breach of the national
treatment obligation in Article 1102 of NAFTA; and was also in breach of the
minimum international standards of treatment obligations in Article 1105 of
NAFTA. It was seeking almost $1 billion in compensation from the United
States.22
20
Ibid. Metalclad, Par 107.
21
Mann, H. (2005). The Final Decision in Methanex v. United States: Some New Wine in Some New
Bottles. IISD (International Institute for Sustainable Development), pp. 4. Retrieved July 20, 2007, from
http://www.iisd.org/pdf/2005/commentary_methanex.pdf
22
Ibid.
23
Ibid. pp. 6
5
The Methanex Tribunal rejected this approach. In its place, it took an approach
much more akin to a classic police powers24 approach under international law.
The Tribunal made notes which clarifies carefully the type of measure that this is
not a direct expropriation or a creeping expropriation, and that there was no
transfer of title or other transfer of assets from Methanex to the US or anyone
else. Thus, this measure fell into the category of a measure tantamount to
expropriation. The Tribunal then stated that:
The same reasoning is then found a few paragraphs later where the Tribunal
states that “From the standpoint of international law, the California ban was a
lawful regulation and not an expropriation.”26
Differ from the Methanex case, the tribunal in Metalclad determined that the
government acts constituted measures “tantamount to expropriation” under
Article 1110. In that case, the investor had already purchased land for landfill
site, relying on the representations by the federal government that all the
required permits had been filed and that the local permit would be required by
the federal authorities. The decision there turned on both the significant
economic impact on the private investor and the reasonable reliance of the
investor on representations made by the Mexican government.
24
Police power is an old international law term for what we would now call regulatory measures
by a state to protect or enhance the public welfare. The full scope of police powers has, arguably,
never been firmly established in international law. Op.Cit. Mann, H. pp. 6
25
Final Award, Part IV, Chapter D, para 7.
26
Ibid. Para 15.
27
Op. Cit. Edsall pp. 19
6
The main difference in the case of Metalclad and Methanex is that the investor in
Metalclad relied substantially on the Mexican government’s promises with regard
to federal, state, and local permits. Furthermore, the municipality agreed to some
stage to Metalclad’s land fill construction, since they waited over a year to deny
the permit and never once attempted to disrupt the building process. Therefore
the problem was in the (political) inconsistency of the Mexican government in
giving permit to its investor, which resulted a costly administrative to the Mexican
government.
However, Methanex did not rely on explicit governmental statements that the
gasoline additive industry would not be regulated. Methanex should have known
that such an industry will be subject to environmental regulation(s). Therefore
there was no national treatment infringement in this case, because the ban
regulation enacted by the state of California was destined to protect the public as
stated in the exception to expropriate article 1110 (a) NAFTA agreement which is
public purpose. Thus, methanol banning by the state of California is also apply to
domestic enterprise in California with the same industry, for that reason the state
of California did not discriminate.
To summing up, Article 1110 of NAFTA disallows not only physical takings of
private property, but also indirect takings and “measure[s] tantamount to
expropriation. Resolving disputes arising under this and other provisions of
Chapter 11, Articles 1116 and 1117 set up a process by which private investors
of one party may bring an arbitration legal action against another party to the
treaty. The expropriation clause has still created argument in International
investment law, where the inconsistency could lead to problems for both investor
and host countries. Investor nations are wish to have clear standards in the
interests of their private investors, so that investors can be sure the host country
will treat their foreign investors the same as treating their domestic investors.
Private investors who fear that the host nation will attempt to gradually
nationalize their property will be less likely to invest. Equally, host nations have
an interest in set up clear treaty guidelines so that they can avoid needless legal
action from private investors.
This two edge blade investment mechanism can hurt and create dilemma for
both parties. Concerning the foreign investor side, their business is just a
regulation away from making an exit from the host country uncompensated. For
the hosting country, an inflexible style of regulating law can make them a less
attractive nation to invest with.