{"id":8695,"date":"2021-12-20T19:53:15","date_gmt":"2021-12-20T18:53:15","guid":{"rendered":"https:\/\/cf.iisd.net\/itn\/?p=8695"},"modified":"2024-08-09T18:32:08","modified_gmt":"2024-08-09T16:32:08","slug":"eco-oro-and-the-twilight-of-policy-exceptionalism","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2021\/12\/20\/eco-oro-and-the-twilight-of-policy-exceptionalism\/","title":{"rendered":"Eco Oro and the twilight of policy exceptionalism"},"content":{"rendered":"

This past September, a tribunal in Eco Oro v. Republic of Colombia<\/em> issued its Decision on Jurisdiction, Liability, and Directions on Quantum, a sprawling 400-plus-page decision that produced two dissents and has already triggered a series of debates on the impact of investment law on efforts to protect the environment.[1]<\/sup><\/a><\/p>\n

Among many difficult issues raised in this decision, one stands out as particularly relevant to treaty drafters. In a four-page section, the Eco Oro<\/em> tribunal sweeps aside an environmental exception in the Colombia\u2013Canada Free Trade Agreement (the FTA<\/span>), declaring this provision to be effectively irrelevant in investment arbitration.[2]<\/sup><\/a> In just a few paragraphs, the tribunal decides that a key tool in the long-running effort to rebalance one-sided investment treaties\u2014a \u201cfinal \u2018safety net\u2019 to protect the State\u2019s exercise of regulatory powers,\u201d in the words of the Canadian government\u2014is effectively useless.[3]<\/sup><\/a><\/p>\n

This part of the decision, as other commenters have already noted, is a mess.[4]<\/sup><\/a> And no matter what rationale we imagine was in the arbitrators\u2019 minds, nothing could justify the result. It thus would not be surprising if the eventual award in this case is annulled on the basis of these four pages. We can also hope that the defects in this decision will make other tribunals hesitate to follow Eco Oro<\/em>\u2019s lead.<\/p>\n

Still, we should not marginalize Eco Oro<\/em> itself as a one-off occurrence\u2014a decision gone off the rails. The legal issues mangled in the decision, along with those that the tribunal manages to avoid, raise critical questions about the future of a practice that my co-authors and I have referred to as policy exceptionalism.[5]<\/sup><\/a> We use this term to refer to the common practice of relying on exceptions, like the environmental exception at issue here, to preserve domestic regulatory space in the face of potentially strict investor protections.<\/p>\n

The Eco Oro <\/em>decision highlights many of the problems with policy exceptionalism. Most importantly, it suggests that states cannot, by larding their investment treaties with exceptions and carve-outs, simply avoid reckoning with the fundamental challenges facing the investment treaty system. If the concerns about democracy and regulatory autonomy that have long haunted investment law are to be addressed, states will have to focus on the basic elements of the system they have constructed and not simply tinker around the margins.<\/p>\n

Eco Oro<\/em> background and decision<\/h1>\n

The facts underlying the Eco Oro <\/em>dispute are complex and can be summarized only briefly here.[6]<\/sup><\/a> (Editor\u2019s note:<\/em> for a more detailed description of the case itself and the tribunal\u2019s reasoning, see our award summary<\/a>). The Canadian mining company Eco Oro entered into a concession contract with a Colombian state entity that gave it exploration rights, and also extended a conditional right to exploit the deposits, which was predicated on the company\u2019s ability to obtain regulatory approvals, such as an environmental licence.<\/p>\n

The concession area overlapped to some degree\u2014the exact extent is contested\u2014with the P\u00e1ramo de Santurb\u00e1n, a high-altitude wetland region. P\u00e1ramo regions play an essential role in the water cycle and serve as carbon \u201csinks.\u201d[7]<\/sup><\/a><\/p>\n

As Eco Oro\u2019s operations were gearing up, Colombian authorities were engaged in an ongoing political struggle over how to balance multiple imperatives.[8]<\/sup><\/a> There was a perceived need to foster investment in the mining sector, which could bolster employment, support the local economy, and trigger further investments in infrastructure. But there were also significant concerns about environmental protection and the preservation of the P\u00e1ramo. This conflict involved domestic constituencies including local and national officials, conservation advocates, mine workers, and city residents concerned about clean water. Over the course of the dispute, the debate involved all branches of government, including the courts and multiple administrative agencies.<\/p>\n

At the centre of this dispute were ongoing efforts to draw firm and agreed-upon borders around the P\u00e1ramo de Santurb\u00e1n and other wetlands in the country. A series of laws, regulations, and court decisions prevented mining companies from exploiting minerals within the P\u00e1ramo regions. According to a 2007 study, more than half of Eco Oro\u2019s concession overlapped with the P\u00e1ramo, but this study was not initially treated as definitive. Eco Oro argued that a more precise delimitation would show only minimal overlap and would allow the project to proceed.<\/p>\n

The final delimitation of the P\u00e1ramo was continually delayed, leaving Eco Oro\u2019s rights in the region uncertain. In 2014, Colombian environmental authorities issued a resolution that adopted the boundaries established in the 2007 study, confirming a nearly 55% overlap between the concession area and the P\u00e1ramo. This set into motion a chain of events that led to Eco Oro initiating an arbitration against Colombia under the FTA in 2016, alleging that Colombia, by its actions and inactions, had breached the minimum standard of treatment (MST) and expropriated its investment.<\/p>\n

In the meantime, the boundaries of the region continue to be uncertain. A 2017 ruling by the Colombian Constitutional Court invalidated the 2014 resolution, finding that there had been a lack of public consultation in adopting those boundaries. As of the date of the award, authorities had not rendered a final delimitation of the P\u00e1ramo de Santurb\u00e1n.<\/p>\n

The proceedings before the arbitral tribunal\u2014which consisted of Horacio A. Grigera Na\u00f3n, Philippe Sands, and Juliet Blanch as tribunal president\u2014resulted in a fractured opinion. A 2\u20131 majority composed of Blanch and Sands held that Colombia\u2019s actions did not amount to an indirect expropriation, emphasizing that the state\u2019s measures were non-discriminatory, pursued a genuine public welfare objective, were in good faith, and were designed to protect the environment. But a different 2\u20131 majority composed of Blanch and Grigera Na\u00f3n determined that Colombia had nonetheless breached the MST. This aspect of the decision emphasized that Colombia had been inconsistent by sending mixed signals to Eco Oro about the viability of its project, failing to ensure a stable business environment. The tribunal described the situation as one of \u201carbitrary vacillation and inaction\u201d with respect to the delimitation of the P\u00e1ramo.[9]<\/sup><\/a><\/p>\n

The decision held over the issue of damages to another stage of the proceedings, and it remains uncertain how much, if any, compensation will be awarded to Eco Oro.<\/p>\n

Mishandling the environmental exception<\/h1>\n

In order to determine that Colombia was liable to Eco Oro, the tribunal had to address the environmental exception in Article 2201(3) of the FTA. This exception provides that nothing in the FTA\u2019s investment chapter \u201cshall be construed to prevent a Party from adopting or enforcing measures necessary\u201d to protect the environment, provided that such measures do not amount to arbitrary discrimination or a disguised restraint on trade or investment.<\/p>\n

This exception is modelled after a similar \u201cgeneral exceptions\u201d provision in Article XX of the General Agreement on Tariffs and Trade, and similar provisions are found in many investment and trade treaties worldwide. Under such provisions, tribunals and trade panels generally ask three questions. First, does the state measure at issue pursue one of the listed aims (here, environmental protection)? Second, is the measure \u201cnecessary\u201d to pursue those aims? And, third, does the state measure nonetheless amount to arbitrary discrimination or a disguised restraint on trade?[10]<\/sup><\/a><\/p>\n

Here, the answers to the first and third questions were relatively clear. The tribunal had agreed that the state measures at issue served the purpose of environmental protection, and that they were non-discriminatory and affected domestic companies as well as foreign investors.[11]<\/sup><\/a> It could be expected, then, that the decision would turn on whether the state\u2019s measures\u2014and perhaps its \u201cvacillation and inaction\u201d\u2014were \u201cnecessary\u201d to protect the environment.<\/p>\n

But that is not what happened. Instead, the tribunal waved away the exception altogether, deciding that, even if the exception applies to a measure, \u201cthis does not prevent an investor claiming \u2026 that such a measure entitles it to the payment of compensation.\u201d[12]<\/sup><\/a> In other words, the tribunal said, while \u201cthe State cannot be prohibited from adopting or enforcing an environmental measure in accordance with Article 2201(3), [the Tribunal] cannot accept \u2026 that in such circumstances payment of compensation is not required.\u201d[13]<\/sup><\/a><\/p>\n

There is a great deal wrong with the tribunal\u2019s reasoning here, but it suffices here to note that the tribunal has failed to identify the source of this compensation obligation. Setting aside the special case of an expropriation, a state is liable to compensate an investor only if it has breached<\/em> an international legal obligation. Exceptions clauses like this one are specifically designed to preclude that finding of breach\u2014something the Eco Oro <\/em>decision appears to recognize when it states that the exception provides that a party may adopt a measure within its scope \u201cwithout finding itself in breach<\/em> of the FTA.\u201d[14]<\/sup><\/a> But if the state has not breached the FTA, then it shouldn\u2019t owe compensation. The tribunal does not explain why it finds otherwise.<\/p>\n

Whatever the tribunal\u2019s reason, the result is an ineffective exceptions provision. Wolfgang Alschner and Kun Hui have previously described general exceptions clauses like this one as \u201cmissing in action,\u201d noting that in many cases states fail to raise the exception or pursue the defence inconsistently.[15]<\/sup><\/a> In Eco Oro<\/em>, by contrast, there was no question that the exception was in play. This exception was not \u201cmissing in action\u201d; it was simply obliterated.<\/p>\n

Is the \u201croad not taken\u201d even worth travelling?<\/h1>\n

It may be tempting to shrug off the implications of Eco Oro <\/em>for the drafting and structure of investment treaties. The decision on the environmental exception is a mistake, after all, but it need not be repeated. However, the tribunal\u2019s failure to consider the environmental exception allowed it to gloss over several defects that, once revealed, suggest that these provisions are not much of a safety net and may even be dangerous. There are at least three reasons for this.<\/p>\n

First, as noted above, a proper application of the exception would have focused attention on whether the state\u2019s measures were \u201cnecessary\u201d for the state\u2019s aims of environmental protection. The word \u201cnecessary\u201d has many possible meanings, but this requirement has the potential to imply a far stricter standard than would otherwise apply in an investment treaty. Even the most adventurous articulations of the fair and equitable treatment standard, for example, do not typically require that measures be \u201cnecessary\u201d to their desired aims. By adopting this standard in an exception, states may be signalling that they are willing to accept a far greater degree of scrutiny than would otherwise be appropriate.[16]<\/sup><\/a><\/p>\n

Second, these exceptions are borrowed from trade law, and may be ill-equipped to deal with the messy reality of investment disputes. Trade disputes are brought between governments and tend to involve measures of general application, such as tariffs or regulatory schemes. Investment disputes concern a particular investor and tend to arise in a complex factual context involving a long-running relationship between the investor and state authorities. In this respect, the violations found in the Eco Oro <\/em>case, which blend allegations of state action, inaction, inconsistent treatment, and instability, are typical.<\/p>\n

In a complex context like this, it becomes difficult to identify the \u201cmeasure\u201d that must be \u201cnecessary\u201d to reap the benefit of the exception. Is it the state\u2019s efforts to prevent mining in environmentally sensitive areas? Is it the ongoing but sluggish and incomplete process to delineate where those wetlands are? Or must the state prove that its \u201carbitrary vacillation\u201d toward Eco Oro\u2019s project was somehow \u201cnecessary\u201d for environmental protection? If the latter, it is hard to see how the exception provides any additional security at all.<\/p>\n

Third, the different remedial contexts of the trade and investment regimes also make exceptions less well-suited to the latter. In trade law, remedies are prospective, and the losing party in a trade dispute is expected to bring their measures into compliance going forward. As Rob Howse has noted, this means that states can sometimes comply by tightening <\/em>their regulatory regimes after losing a trade case, by eliminating loopholes or discriminatory carve-outs, for example.[17]<\/sup><\/a> In investment law, by contrast, an adverse award is the end of the line: an investor then holds an unqualified right to be compensated.<\/p>\n

The diverging structure has radically different implications for a provision like the general exception. If Eco Oro<\/em> were a trade case, Colombia might cure its vacillation and inaction by completing the delimitation of the P\u00e1ramo, even if the final borders effectively render Eco Oro\u2019s mining concession worthless. That action might then be successfully defended in a subsequent proceeding as \u201cnecessary\u201d to protect the P\u00e1ramo. In investment arbitration, by contrast, the state loses if it doesn\u2019t get the measure right the first time, and then the investor holds all the cards.<\/p>\n

The twilight of exceptionalism?<\/h1>\n

As the Eco Oro<\/em> case proceeds to its next phase, it is unclear what will become of policy exceptionalism in investment treaties. In 2018, Alschner and Hui observed a steadily growing trend of states including GATT<\/span>-like public policy exceptions in their investment treaties.[18]<\/sup><\/a> This practice was supported by a raft of scholarship that seemed to reflexively treat the exception as a boon for states seeking greater flexibility and regulatory space.<\/p>\n

Today, the picture is perhaps less clear. Notably, while this case was pending, Canada released its new model investment protection agreement, which does not rely on public policy exceptions in favour of other tools for ensuring flexibility.[19]<\/sup><\/a> This move, while seemingly prescient given the ruling in Eco Oro<\/em>, may have come too late. At this point, all states are intractably exposed to the argument that they knew how to incorporate additional flexibility for environmental measures, and that they chose not to.<\/p>\n

If states genuinely want to re-strike the balance between investor protection and important policies such as environmental stewardship and public health, they cannot avoid rethinking the underlying structure of investment treaties. Here, too, Eco Oro <\/em>suggests a path forward. This was a case in which everyone agreed the regulations at issue were non-discriminatory, that there was no direct taking of the investment, and that the country\u2019s courts remained open and indeed were actively involved in attempting to address the matter.[20]<\/sup><\/a><\/p>\n

Why, in a case like this that affects many domestic and foreign interests, should some foreign investors have privileged access to a special public international law remedy? This is the urgent question facing the reform of investment law. And it is not likely to be answered by another round of increasingly elaborate exceptions, carve-outs, and clarifications.[21]<\/sup><\/a><\/p>\n

Author<\/h1>\n

J. Benton Heath<\/strong> is an assistant professor of law at Temple University Beasley School of Law in Philadelphia<\/p>\n

Notes<\/h1>\n

[1]<\/a> Eco Oro Minerals Corp. v. Republic of Colombia<\/em>, ICSID<\/span> Case No. ARB\/16\/41, Decision on Jurisdiction, Liability, and Quantum (Sept. 9, 2021) (\u201cEco Oro v. Colombia<\/em>\u201d).<\/p>\n

[2]<\/a> Id.<\/em> \u00b6\u00b6 826\u2013837.<\/p>\n

[3]<\/a> Non-Disputing Party Submission of Canada, \u00b6 20, Eco Oro v. Colombia<\/em> (Feb. 27, 2020).<\/p>\n

[4]<\/a> See, for example, Simson, C. (2021). Critics take aim at \u2018dead wrong\u2019 decision in Colombia case. Law360<\/em>. https:\/\/www.law360.com\/articles\/1437954\/critics-take-aim-at-dead-wrong-decision-in-colombia-case<\/a>; Trew, S. (2021). The false hopes and empty promises of investment treaty modernization. The Monitor<\/em>. https:\/\/monitormag.ca\/articles\/the-false-hopes-and-empty-promises-of-investment-treaty-modernization<\/a>.<\/p>\n

[5]<\/a> Arato, J., Claussen, K., & Benton Heath, J. (2020). The perils of pandemic exceptionalism. American Journal of International <\/em>Law, 114<\/em>(14), 627\u2013636.<\/p>\n

[6]<\/a> See also Bohmer, L. (2021). Analysis: Arbitrators in Eco Oro v. Colombia environmental mining ban dispute disagree on police powers and scope of minimum standard of treatment in Canada-Colombia FTA; majority finds MST breach, and decides that general exceptions do not relieve Colombia from its duty to pay compensation. Investment Arbitration Reporter<\/em>.<\/p>\n

https:\/\/www.iareporter.com\/articles\/analysis-arbitrators-in-eco-oro-v-colombia-environmental-mining-ban-dispute-disagree-on-police-powers-and-scope-of-minimum-standard-of-treatment-in-canada-colombia-fta-majority-finds-mst-breach-an\/<\/a>.<\/p>\n

[7]<\/a> Eco Oro v. Colombia<\/em>, \u00b6 648.<\/p>\n

[8]<\/a> Cotula, L. (2020). Investment disputes from below: Whose rights matter?<\/em> International Institute For Environmental Development. https:\/\/www.iied.org\/investment-disputes-below-whose-rights-matter<\/a>.<\/p>\n

[9]<\/a> Eco Oro v. Colombia<\/em>, \u00b6 821.<\/p>\n

[10]<\/a> See, for example, Panel Report, United States \u2013 Standards for Reformulated and Conventional Gasoline<\/em>, at 38, WTO<\/span> Doc. WT\/DS2\/R (Jan. 29, 1996).<\/p>\n

[11]<\/a> Eco Oro v. Colombia<\/em>, \u00b6\u00b6 636\u2013640.<\/p>\n

[12]<\/a> Id.<\/em> \u00b6 830.<\/p>\n

[13]<\/a> Id.<\/em> \u00b6 836.<\/p>\n

[14]<\/a> Id.<\/em> \u00b6 830 (emphasis added).<\/p>\n

[15]<\/a> Alschner, W., & Hui, K. (2019). Missing in action: General public policy exceptions in investment treaties<\/em>. In L. Sachs, J. Coleman, & L. Johnson (Eds.), Yearbook of International Investment Law And Policy 2018,<\/em> https:\/\/papers.ssrn.com\/sol3\/papers.cfm?abstract_id=3237053<\/a>.<\/p>\n

[16]<\/a> See generally Mitchell, A. D., Munro, J., Voon, T. (2018). Importing WTO general exceptions into international investment agreements. In L. Sachs, J. Coleman, & L. Johnson (Eds.), Yearbook of International Investment Law And Policy 2017.<\/em><\/p>\n

[17]<\/a> Howse, R. (2016). The World Trade Organization 20 years on: Global governance by judiciary. European Journal of International Law<\/em>, 27<\/em>(1), 9\u201377.<\/p>\n

[18]<\/a> Alschner & Hui, supra <\/em>note 15.<\/p>\n

[19]<\/a> See 2021 Model Foreign Investment Protection Agreement, https:\/\/www.international.gc.ca\/trade-commerce\/trade-agreements-accords-commerciaux\/agr-acc\/fipa-apie\/2021_model_fipa-2021_modele_apie.aspx?lang=eng<\/a>.<\/p>\n

[20]<\/a> See Eco Oro v. Colombia<\/em>, Partial Dissent of Professor Philippe Sands QC, \u00b6 23.<\/p>\n

[21]<\/a> Cf. <\/em>Tzouvala, N. (2020). Review of the book World trade and investment law reimagined<\/em> (A. Santos, C. Thomas, & D. Trubek, Eds. 2019). European Journal of International Law<\/em>, 31<\/em>(3), 1166\u20131170.<\/p>\n