I. INTRODUCTION
The freedom of States to determine their own regulatory goals and to implement policies to pursue those goals, while nevertheless complying with their obligations under trade and investment treaties, remains a fundamental question in international economic law.Footnote 1 One key aspect of this freedom is the ability of States to determine the level at which they will pursue permissible regulatory aims. For example, a State may take measures to protect human health against a particular risk and aim to reduce that risk ‘to the maximum extent possible’.Footnote 2 In WTO law, this concept is referred to as the ‘level of protection’ selected by a WTO member. In short, while various disciplines are imposed by the WTO agreements, members retain the right to select their own level of protection for permissible regulatory aims, such as the protection of human health, the environment or public morals.Footnote 3 Any alternative, less trade-restrictive measures proposed by a complainant must ‘preserve for the responding Member its right to achieve its desired level of protection with respect to the objective pursued’.Footnote 4
Various provisions in newer investment treaties, and remarks by investor-State tribunals, provide support for the idea that despite having undertaken investment protection obligations, as in the WTO context, States retain substantial autonomy in selecting which regulatory aims to pursue and the level at which to pursue permissible aims. Less unambiguously, in Opinion 1/17, the Court of Justice of the European Union held that the investor-State tribunals created under the Comprehensive Economic and Trade Agreement between Canada and the European Union (CETA) were not empowered to call into question the level of protection of public interests adopted by European Union (EU) institutions, with the result that CETA's investor-State dispute settlement provisions did not adversely affect the autonomy of the EU legal order.Footnote 5 However, whether the relevant provisions of CETA actually support that proposition is debatable.Footnote 6
If States retain the right to select the desired level of protection for permissible policy aims, this would have major implications for how investment treaties should be interpreted and applied, and for the appropriate role of investor-State tribunals.Footnote 7 Similarly to Michael Ming Du's observation in relation to WTO law, a first key implication would be that all of the obligations imposed by investment treaties would need to be interpreted and applied in light of a State's ability to choose its own level of protection for permissible regulatory aims.Footnote 8 Secondly, the role for international scrutiny by investor-State tribunals would be limited. While tribunals could scrutinise whether the means employed by a State to achieve its desired level of protection comply with investment treaty disciplines, they could not second-guess the level of protection a State pursues for a permissible regulatory aim.Footnote 9 Nevertheless, it must be acknowledged that, as Du argues in the WTO context, the autonomy of States to select the level of protection for permissible regulatory aims, and the disciplines imposed by international agreements on the means by which the chosen level of protection is pursued, ‘are in a constant state of tension’.Footnote 10
This article makes the case that investment treaties should be interpreted in a manner that preserves States’ autonomy to select the desired level of protection for permissible regulatory aims.Footnote 11 It will show that the basis that has been laid within key standards of investment protection for proportionality balancing stricto sensu means there is an increasing potential that investment treaties may be interpreted in ways that undermine a State's ability to pursue a desired level of protection for permissible regulatory aims. This article advocates a partial reorientation of investment law, in which non-discriminatory measures that pursue a permissible regulatory aim (eg the protection of human health or the environment), including at a particular level (eg a policy of zero risk), should not give rise to a breach of treaty, where a State uses the means that involve the least possible restriction of the competing interests protected by relevant investment treaty obligations. This would amount to introducing a greater hierarchy of values than currently exists under most investment treaties, in which legitimate public welfare interests would be given clearer priority over the interest of investment protection. Nevertheless, the article will demonstrate that there is already a basis in newer investment treaties for the idea that public welfare interests, such as the protection of the environment or public health, can at times take priority over investment protection.
This article builds on prior suggestions, in both the WTO and investment treaty contexts, that the balancing techniques employed by adjudicators have a particular relationship with autonomy in setting the level of protection. Proportionality balancing stricto sensu involves weighing the costs and benefits of an impugned measure in all the circumstances and undermines State autonomy in setting the level of protection. Least restrictive means testing takes the regulatory goal pursued by a State as a given, and asks if it could be achieved through means that are less restrictive of other legally protected interests, and this respects domestic autonomy in setting the level of protection.Footnote 12
It is argued that, in the investment treaty context, autonomy in determining the level of protection for permissible regulatory aims is appropriate because investment treaties do not evidence any intention to harmonise domestic regulatory standards and, on the contrary, recognise that States will remain free to pursue a wide range of regulatory goals, subject to some degree of control over the means utilised.Footnote 13 In other words, investment treaties should be understood, like the WTO Agreements, as permitting regulatory diversity.Footnote 14
Nevertheless, under the approach advanced in this article adjudicators would retain a residual role in scrutinising whether a regulatory aim pursued by a State is a permissible one, for example in the context of a particular investment treaty. However, as investment treaties are generally consistent with States pursuing a wide range of policy aims, this stage of the analysis would be limited to excluding measures that predominantly serve impermissible aims, such as protectionist or discriminatory measures. The overall claim of this article, concerning autonomy in setting the level of protection for permissible regulatory aims, is most directly relevant to those investor-State cases that involve a challenge to a State's laws or regulations, as these will typically reflect a particular level of protection the State has pursued for the relevant regulatory aim.Footnote 15 However, this analysis is also relevant for some disputes where an investor challenges more individualised administrative treatment, as, in certain cases, such treatment is based on a particular level of protection that a State has adopted for a permissible regulatory aim, such as the protection of human health or the environment.Footnote 16
The article proceeds as follows. Part II briefly reviews what is meant by the expression ‘level of protection’, to aid a clear understanding for the purposes of the subsequent analysis. Part III considers the concept of State autonomy in setting the level of protection as developed in WTO law, through an examination of the necessity jurisprudence developed across several covered agreements. WTO law is drawn on as a comparator because it provides a rich repository of experience in balancing treaty-protected economic interests (the interest of trade liberalisation), with non-trade interests that are also recognised as legitimate by the relevant agreements. Part IV makes the case that investment treaties are, properly interpreted, consistent with the idea that States retain autonomy to select and implement a desired level of protection for permissible regulatory goals, despite investment treaty obligations constraining the means through which those goals may be pursued. Part V turns to some key areas where further attention is required to protect States’ autonomy in selecting and implementing a desired level of protection for permissible regulatory aims. Specifically, this Part demonstrates that within the fair and equitable treatment (FET) and indirect expropriation standards, recent case law and treaty drafting approaches have established a basis for proportionality balancing stricto sensu, and thus for adjudicators potentially second-guessing a State's chosen level of protection for permissible regulatory aims. It provides suggestions concerning how treaty drafters can address this emerging problem by limiting the FET and indirect expropriation standards to a least restrictive means test. Part VI concludes.
II. DEFINING THE ‘LEVEL OF PROTECTION’
This short Part unpacks what is meant when referring to the level of protection, an understanding of which is crucial for the subsequent analysis. Most commonly, the term ‘level of protection’ refers to the degree to which a particular regulatory aim, recognised as permissible in a particular context (eg by a treaty), is fulfilled.Footnote 17 For example, WTO panels and the Appellate Body (AB) have accepted that the various regulatory aims recognised as permissible by Article XX of the General Agreement on Tariffs and Trade (GATT), Article XIV of the General Agreement on Trade in Services (GATS), and Article 2.2 of the Agreement on Technical Barriers to Trade (TBT Agreement), such as the protection of public health or public morals, can be fulfilled to varying degrees.Footnote 18 Likewise, the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) defines the term ‘appropriate level of sanitary or phytosanitary protection’ as ‘[t]he level of protection deemed appropriate by the Member establishing a sanitary or phytosanitary measure to protect human, animal or plant life or health within its territory’.Footnote 19 A note attached to this definition adds that ‘Many Members otherwise refer to this concept as the “acceptable level of risk”’.Footnote 20 However, as Jeffery Atik highlights, an acceptable level of risk is not the same as the level of protection pursued by a regulator. Rather, the former refers to the degree of residual risk that is left, after mitigation measures have been implemented, whereas the level of protection concerns the extent to which a member chooses to reduce a particular risk.Footnote 21
Another important distinction to appreciate is the difference between a level of protection that may be intended by a regulator when formulating regulatory aims and selecting measures to achieve those aims, and the level of protection actually achieved by a measure. As will be seen, at times, the ‘level of protection’ is used to refer to a particular degree of fulfilment of a legitimate regulatory aim (eg protection of public health) intended by a regulator ex ante. Used in this way, the level of protection is a distinct issue within the broader question of what may constitute a legitimate regulatory aim.
However, the level of protection intended by a regulator may differ from that achieved by a measure, as implemented. As will be demonstrated below, in some contexts the focus is on the level of protection achieved, for example the extent to which a contested measure, as implemented, reduces a particular risk to human health. Indeed, many would suggest that a State whose measures are being scrutinised should not be permitted to assert a higher level of protection than that achieved by the impugned measures.Footnote 22 A further point to note is that, in practice, regulators often do not determine a desired level of protection prior to selecting regulatory measures.Footnote 23 In these cases, subsequent scrutiny of a State's measures (eg by an international adjudicator) has to focus on the level of protection achieved. The level of protection will be deduced from, and identical to, the measure itself.Footnote 24
III. AUTONOMY IN SETTING THE LEVEL OF PROTECTION IN WTO LAW
This Part analyses the idea, developed in WTO law, that WTO members retain the freedom to select the level at which they will pursue permissible regulatory objectives. This comparative analysis can shed light on areas where investment treaties, and investor-State tribunals, could be more attentive to the right of States to determine and implement their own regulatory goals, including a specific level of protection for permissible regulatory aims. While contextual differences between international trade and investment law must be kept in mind, there is a sound rationale for drawing on WTO law as a comparator, as it provides a rich repository of experience in responding to the challenge of respecting domestic autonomy in setting regulatory aims while nevertheless enforcing treaty disciplines on the means utilised to pursue those aims.Footnote 25 Indeed, some suggest that the challenge facing adjudicators of balancing ‘market values and regulatory ideals’ can produce a deep level of convergence between interpretative approaches in the international trade and investment regimes that is not ‘provision specific’.Footnote 26
While the concept of the ‘level of protection’ has the strongest textual basis in the SPS Agreement, it has also been drawn upon in jurisprudence under the GATT, GATS, and TBT Agreement. In the latter contexts, there is either no or a more limited textual basis for the idea that members have the right to determine the desired level of protection for permissible regulatory aims.Footnote 27 Nevertheless, it is clear that ‘the fundamental principle is the right that WTO Members have to determine the level of protection that they consider appropriate in a given context’.Footnote 28 Thus, Petros Mavroidis observes in relation to the concept of necessity, as developed in GATT Article XX jurisprudence: ‘WTO adjudicating bodies have consistently held that their power of review extends only to means employed. The choice of ends (including the level of enforcement) is the exclusive privilege of WTO members.’Footnote 29
A. GATT Article XX/GATS Article XIV
The concept of the level of protection has been repeatedly drawn upon within the necessity test developed under GATT Article XX(a), (b) and (d) and its GATS equivalents. The necessity analysis under these provisions has been interpreted to require ‘a process of “weighing and balancing” a series of factors, including the importance of the societal interest or value at stake, the contribution of the measure to the objective it pursues, and the trade-restrictiveness of the measure’.Footnote 30 ‘In most cases, a comparison between the challenged measure and possible [less trade-restrictive] alternatives should subsequently be undertaken.’Footnote 31 Although the reference to ‘weighing and balancing’ and the importance of the interests at stake has at times been interpreted as signalling proportionality balancing stricto sensu, most commentators agree that in jurisprudence to date, WTO adjudicators have employed a form of least restrictive means testing, where the regulatory aim pursued by a member has not been questioned, and the importance of the relevant regulatory interests can provide an additional margin of appreciation, which makes it easier for a member to establish that its measures are necessary.Footnote 32
In order to qualify as a genuine alternative, any proposed alternative measure must allow the responding member to achieve its desired level of protection for the relevant policy objective.Footnote 33 For example, in the context of GATT Article XX(a) and GATS Article XIV(a), WTO adjudicators have emphasised that ‘Members have the right to determine the level of protection that they consider appropriate’ in relation to issues of public moral concern.Footnote 34 In the context of GATT Article XX(b), the AB has noted that ‘WTO Members have the right to determine the level of protection of health that they consider appropriate in a given situation’.Footnote 35 Scrutiny instead focuses on whether the measures adopted by a member are necessary to achieve its chosen level of protection, or whether alternative, less trade-restrictive measures could achieve the member's desired level of protection.Footnote 36 Similarly, in the context of GATT Article XX(d), the AB has noted ‘[i]t is not open to doubt that Members … have the right to determine for themselves the level of enforcement of their WTO-consistent laws and regulations’.Footnote 37
Importantly, it is ultimately for a panel or the AB, not the responding member, to determine the level of protection that was pursued by a member.Footnote 38 In this regard, Korea – Beef is a particularly controversial ruling because the AB restated the level of protection that was pursued by Korea at a lower level than that which Korea had claimed.Footnote 39 The GATT Article XX/GATS Article XIV case law is not entirely clear on how the level of protection asserted by a responding member interacts with the level of protection achieved by the impugned measures. Some statements appear to suggest that the level of protection is an aspect of the member's regulatory aim, essentially concerning the level at which a member decides to pursue a particular policy goal, and is analytically separate from the measures adopted to achieve that level of protection.Footnote 40 However, much of the case law suggests that the level of protection is closely related to the contribution that a member's measures make to the relevant policy objective, with any proposed alternative, less trade-restrictive measures needing to ‘make a contribution that is at least equivalent to that’ made by the impugned measures.Footnote 41
This ambiguity in the GATT Article XX/GATS Article XIV necessity jurisprudence, concerning whether the focus is on the level of protection intended ex ante, or the degree of contribution to the relevant aim actually achieved, is a potential weakness of the WTO approach drawn on by this article for comparative inspiration. Nevertheless, the weight of the GATT Article XX/GATS Article XIV necessity jurisprudence focuses on the level of protection achieved by a measure, as implemented, a position that is also clearly endorsed by the necessity jurisprudence under the TBT Agreement, considered next. As will be explained below, this article suggests that in the investment treaty context, the focus should also be on the level of protection achieved by the impugned measure(s).
Another potential difficulty of transplanting the approach found in WTO necessity jurisprudence to the level of protection to the investment treaty context is that, in practice, it can be difficult to pinpoint the level of protection, or degree of fulfilment of a permissible aim, achieved by a measure. This reflects that the goal pursued by a measure can often be stated at different levels of generality, and there may also be a range of possible metrics for measuring the degree to which a measure achieves a particular aim.Footnote 42 While this difficulty with the WTO approach is noteworthy, the case law considered in this subsection and the next (concerning the TBT Agreement) suggests that WTO adjudicators have been able to use the degree to which a measure contributes to a particular aim as a workable benchmark. For example, the AB has observed that to determine the objective of a measure and ‘the effectiveness of’ the respondent's ‘regulatory approach’—ie the level of protection, as implemented—a panel may consider the ‘texts of statutes, legislative history, and pronouncements of government agencies or officials’, as well as ‘the structure and operation of the measure and … contrary evidence proffered by the complaining party’.Footnote 43 Importantly, by referring to contemporaneous evidence, including concerning the operation of a measure, an adjudicator can reduce the potential for the respondent to offer strategic ‘post-hoc rationalizations’, which assert a higher level of protection than was actually pursued, after a dispute arises.Footnote 44 The WTO experience also demonstrates that adjudicators will frequently consider expert evidence to inform their understanding of the level of protection achieved by an impugned measure or a proposed alternative.Footnote 45 Overall, while the approach of the GATT/GATS case law to the issue of autonomy in setting the level of protection is not without difficulty, those difficulties are not so great as to suggest that the concept should not be drawn upon for comparative inspiration in the investment treaty context.
B. TBT Agreement
The idea that WTO members have the right to determine which policy objectives to pursue, and the level at which to do so, has also informed the necessity test under Article 2.2 of the TBT Agreement.Footnote 46 By way of context, Article 2.2 of the TBT Agreement provides that ‘technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create’, and specifies a non-exhaustive list of ‘legitimate objectives’.Footnote 47 These include ‘national security requirements; the prevention of deceptive practices; protection of human health or safety, animal or plant life or health, or the environment’. The sixth recital in the preamble of the TBT Agreement also states that:
no country should be prevented from taking measures necessary to ensure the quality of its exports, or for the protection of human, animal or plant life or health, of the environment, or for the prevention of deceptive practices, at the levels it considers appropriate, subject to the requirement that they are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on international trade, and are otherwise in accordance with the provisions of this Agreement.Footnote 48
The TBT Agreement does not contain a closed list of legitimate objectives that may justify trade-restrictive measures. WTO adjudicators have held that they must make an independent assessment of whether a member's technical regulation pursues a legitimate objective.Footnote 49 Where the objective pursued by a technical regulation is among those listed in Article 2.2, no further inquiry is required into whether it qualifies as a legitimate objective.Footnote 50 Where the objective pursued is not listed in Article 2.2, WTO adjudicators have considered whether the objective is ‘linked or related to a specific listed objective’, or supported by other parts of the TBT Agreement (specifically the sixth and seventh recitals of the preamble), or whether the legitimate objectives recognised by other WTO agreements provide guidance.Footnote 51 As Andrew Mitchell and Caroline Henckels have argued, in situations where a treaty provision does not specify a closed list of legitimate objectives, an adjudicator's role in relation to the question of whether a measure pursues a legitimate objective should be limited to filtering out ‘exercises of power … that cannot ever justify limiting protected rights and interests’, such as measures that pursue protectionist or discriminatory objectives.Footnote 52 Beyond this, adjudicators would do well to accept that as a general matter ‘states may determine their own legitimate policy objectives’.Footnote 53 It will be suggested below that the approach to this issue under the TBT Agreement is relevant to the investment treaty context because investment treaties typically do not contain a closed list of permissible policy objectives that may justify measures that restrict other treaty-protected interests.
The necessity test in Article 2.2 of the TBT Agreement has been interpreted to require ‘a relational analysis of the trade-restrictiveness of the technical regulation, the degree of contribution that it makes to the achievement of a legitimate objective, and the risks non-fulfilment would create’. This usually requires a comparison with potential alternative measures that would be less trade-restrictive but ‘make an equivalent contribution to the relevant legitimate objective’.Footnote 54 Despite an initial panel interpretation to the contrary,Footnote 55 it is now clear that the focus under Article 2.2 of the TBT Agreement is not on the level at which a member aimed to achieve a permissible objective. ‘Rather, what a panel is required to do, under Article 2.2, is to assess the degree to which a Member's technical regulation, as adopted, written, and applied, contributes to the legitimate objective pursued by that Member.’Footnote 56
In order to determine the degree of contribution achieved by a member's technical regulation, a panel must consider ‘the design, structure, and operation of the technical regulation, as well as … evidence relating to the application of the measure’.Footnote 57 The idea is that ‘a WTO Member, by preparing, adopting, and applying a measure in order to pursue a legitimate objective, articulates either implicitly or explicitly the level at which it seeks to pursue that particular legitimate objective’.Footnote 58 Specifically, the level at which a member chooses to pursue a legitimate objective ‘is usually revealed by the degree of contribution that a technical regulation actually makes to its objective’, although it ‘may also be discernible … through an express provision or statement in the instrument at issue’.Footnote 59 There is a parallel here with the approach seen above in the GATT/GATS context, where the level of protection pursued by a responding member is subject to objective determination, through reference to evidence concerning the structure and operation of a measure (ie, the degree to which it actually achieves a particular objective) and other contextual evidence.Footnote 60
Within the broader necessity test under Article 2.2, any proposed alternative measure must achieve an ‘an equivalent degree of contribution to the relevant legitimate objective’.Footnote 61 The AB has held that the phrase ‘taking account of the risks non-fulfilment would create’ in Article 2.2 cannot lessen the degree of contribution needed for an alternative measure to qualify as equivalent, as this could ‘erode the principle that a member shall not be prevented from pursuing a legitimate objective “at the levels it considers appropriate”’.Footnote 62 Furthermore, the AB has rejected the argument that the phrase ‘taking account of the risks non-fulfilment would create’ provides a ‘basis for taking into account the relative importance of the objective pursued … compared to the importance of other objectives’.Footnote 63 These statements highlight how the necessity test under Article 2.2 of the TBT Agreement has been interpreted so as to preserve WTO members’ ability to choose which regulatory aims to pursue and the level at which to pursue permissible aims.
Ultimately, in the context of Article 2.2 of the TBT Agreement, the focus is on the degree of contribution to the relevant regulatory objective which is actually made by the impugned measures. In contrast, a test utilising the benchmark of the level of protection intended by a regulator ex ante is more deferential to a regulating State as it allows the State to pronounce the desired level of protection and does not reduce that level based on the effectiveness of the measures adopted to achieve it. As will be seen next, such a test is mandated under the SPS Agreement.
C. SPS Agreement
The concept of the appropriate level of protection (ALOP) ‘runs throughout’ the SPS Agreement.Footnote 64 As noted above, the term is defined as ‘[t]he level of protection deemed appropriate by the Member establishing a sanitary or phytosanitary measure to protect human, animal or plant life or health within its territory’.Footnote 65 The concern that the disciplines imposed by the SPS Agreement should not require ‘[m]embers to change their appropriate level of protection of human, animal or plant life or health’ is apparent in the Agreement's preamble, and several of the specific obligations imposed.Footnote 66 As Atik observes, ‘the operative presumption of the SPS Agreement is national autonomy in setting health and food safety targets … [however] the SPS Agreement meaningfully cabins these respective autonomies: not all is permitted’.Footnote 67 For the purposes of this article, the necessity test imposed under Article 5.6 is particularly relevant, which requires that members’ sanitary or phytosanitary (SPS) measures ‘are not more trade-restrictive than required to achieve their appropriate level of … protection, taking into account technical and economic feasibility’.Footnote 68 A footnote clarifies that: ‘a measure is not more trade-restrictive than required unless there is another measure, reasonably available taking into account technical and economic feasibility, that achieves the appropriate level of … protection and is significantly less restrictive to trade’.Footnote 69 As others have noted, the language of Article 5.6 and the associated footnote is arguably more ‘protective of domestic regulatory autonomy compared to the necessary test in GATT Article XX’, because it is explicitly stated that any alternative measure must achieve the member's selected level of protection.Footnote 70 Accordingly, any lowering of the regulatory objective, through a balancing exercise that considers factors such as a measure's trade restrictiveness, the measure's contribution to the relevant regulatory objective or the relative importance of the aim, is explicitly prohibited.Footnote 71
Within Article 5.6 jurisprudence, WTO adjudicators have held that determining the appropriate level of protection ‘is a prerogative’ of the member concerned.Footnote 72 The idea is that the level of protection selected by a member ‘is an objective’ determined ex ante, whereas an SPS measure ‘is an instrument chosen to attain or implement that objective’.Footnote 73 At this point, it is helpful to emphasise a key difference between the necessity test under the SPS Agreement, and the necessity tests under other WTO agreements, considered above. Specifically, as Yury Rovnov has noted:
it is only the SPS Agreement that establishes a separate metric (ALOP) for the different levels (degrees) of achievement of such a policy objective (in this case, protection against SPS risks) and gauges the legality of the covered measures by reference to that metric – which is taken to exist independently of the challenged measure – rather than to the measure itself.Footnote 74
In contrast, as we saw above in relation to the GATT/GATS and TBT necessity jurisprudence, those agreements do not contain a textual basis for a benchmark, such as the ALOP, that is separate from the measure itself. Instead, as we have seen, the concept of the ‘level of protection’ in those contexts is generally understood as the degree to which the relevant measure, as implemented, contributes to the relevant policy aim. In short, in those contexts, it is the level of protection achieved by a measure that serves as the benchmark for necessity, or least restrictive means, testing. Given this difference, the obligation to determine the appropriate level of protection, to enable the application of the disciplines of the SPS Agreement,Footnote 75 is best understood as specific to the SPS context.
Ordinarily, a panel adjudicating a claim under Article 5.6 is ‘expected to accord weight to the respondent's articulation of its appropriate level of protection’, particularly where it ‘was specified in advance of the adoption of the SPS measure … with sufficient precision, and where it has been consistently expressed by the responding Member’.Footnote 76 However, similar to what has been seen above in relation to other WTO agreements, in the SPS context, a panel does not have to completely defer to the respondent's characterisation of its appropriate level of protection and must determine this on the basis of the totality of the record.Footnote 77 Additionally, where a member has not determined its appropriate level of protection, or has not done so with sufficient precision, the AB has accepted that the appropriate level of protection can be inferred ‘on the basis of the level of protection reflected in the SPS measure actually applied’.Footnote 78 To succeed with a claim under Article 5.6 of the SPS Agreement, a complainant has to advance scientific evidence to establish a prima facie case that its proposed alternative measure would meet the regulating member's selected level of protection.Footnote 79 For cases where a member has determined its level of protection with sufficient clarity prior to adopting an SPS measure, the benchmark that proposed alternative measures must meet is the level of protection selected by the member, not that achieved by its measure.Footnote 80
Rovnov has highlighted that in practice both WTO panels, and WTO members themselves, have expressed the chosen ALOP in broad and imprecise qualitative formulations, which are similar across SPS disputes (eg a ‘high’ or ‘very high’ level of protection).Footnote 81 Schebesta and Sinopoli similarly note that in many SPS disputes the ALOP is only defined in vague terms and has to be induced, at least partly, from the SPS measure applied.Footnote 82 In short, the experience in the SPS case law has been that the ALOP is an imprecise concept, and members often refrain from clearly articulating their selected ALOP, despite the obligation to do so.Footnote 83 While it is important to acknowledge these difficulties with the ALOP concept, they would not necessarily arise in the same way, or to the same extent, in the investment treaty context. This is because, unlike the SPS Agreement, investment treaties do not create a benchmark of the ALOP that is separate from the challenged measure(s), nor impose an obligation on States to determine ex ante the level of protection that is desired. Accordingly, in the investment treaty context, similar to the GATT/GATS and TBT case law considered above, the focus should be on the level of protection, or degree of contribution to the relevant aim, achieved by the impugned measure(s), which would serve as the benchmark that proposed alternative measures must meet. While this does not remove the difficulties, discussed above, around pinpointing the level of protection that a measure, as implemented, achieves,Footnote 84 it suggests that the difficulties arising in the SPS context, with its focus on the ALOP as a benchmark separate from the measure itself, are distinct.
D. Summarising the Lessons from WTO Law
This analysis of the level of protection in WTO law offers several lessons for how the ability of States to select and implement a particular level of protection for permissible regulatory aims could be better protected in the investment treaty regime. Above all, WTO members’ autonomy in deciding the level at which to pursue permissible regulatory aims has informed how key WTO disciplines and exceptions have been interpreted and applied. Contextual interpretation has played a key role in this regard.Footnote 85 A good example is the frequent reference to the sixth recital in the preamble of the TBT Agreement when interpreting the necessity test under Article 2.2 of that Agreement. In investment law, where the relevant treaties generally do not specify a limited range of permissible regulatory objectives and, as will be shown, there is a growing body of treaty provisions aimed at safeguarding regulatory autonomy, the starting point should also be substantial deference towards a State's own choice of which regulatory objectives to pursue, and the level at which to pursue those aims.Footnote 86
Importantly, host State autonomy in selecting regulatory aims, including a particular level of protection, also needs to inform the interpretation of key treaty disciplines.Footnote 87 In this regard, WTO necessity jurisprudence, analysed above, offers certain insights, because it has avoided undermining members’ choice of regulatory aims, while still placing meaningful restrictions on the means selected to achieve those objectives.Footnote 88 As has been seen, WTO necessity jurisprudence employs a least-restrictive means test, and has avoided engaging in proportionality balancing stricto sensu, whereby the regulatory goal pursued by a member could be directly weighed against, and downgraded in light of, the competing treaty-protected interest of trade liberalisation. In this respect, the requirement that any proposed alternative measure must make an equivalent contribution to the relevant regulatory aim is a crucial feature of the necessity jurisprudence.
Nevertheless, significant constraints are placed on how members may pursue their chosen regulatory aims. As seen above, WTO provisions frequently require that members use the least trade-restrictive means reasonably available.Footnote 89 Other related provisions, which have not been the focus of this article, require that the measures themselves, or the manner in which they are applied, are non-discriminatory.Footnote 90 Through these features, WTO law endorses a hierarchy of values, whereby non-trade regulatory aims recognised as legitimate within a particular covered agreement can take priority over the interest of trade liberalisation, so long as the specified conditions for pursuing such non-trade aims are complied with.Footnote 91
In the next Part, it will be demonstrated that there is already a significant textual basis in newer investment treaties for the proposition that the treaty parties retain the right to determine which regulatory objectives to pursue and the level at which to pursue permissible aims. The challenge is mostly one of better integrating this idea into the interpretation and application of investment protection standards. It is suggested that the requirement to construe investment protection obligations in their full context, having regard to the competing interest of regulatory autonomy, can be taken significantly further yet. In particular, investment treaties and jurisprudence could be reoriented towards a similar balance to that seen in the WTO context, whereby so long as a State pursues a permissible regulatory aim and uses the means to achieve that aim that involve the least possible restriction of the competing interests protected by relevant investment treaty obligations, a treaty breach should not be found.Footnote 92
At this point, it can simply be noted that this is not the orientation that has always been adopted, even in recent treaties or arbitral awards. Rather, as will be shown, within the key standards of FET and the protection against indirect expropriation, both adjudicators and treaty drafters have laid a clear basis for proportionality balancing stricto sensu, which could involve prioritising the interest of investment protection over the regulatory aim pursued by a State, even where the least restrictive means have been utilised. A core claim of the following parts is that this opening for proportionality balancing stricto sensu must be reconsidered, if investment treaties are to be construed in a manner that respects State autonomy to determine the level at which to pursue permissible regulatory aims.
IV. INVESTMENT TREATIES ARE CONSISTENT WITH STATE AUTONOMY IN SETTING THE LEVEL OF PROTECTION FOR PERMISSIBLE REGULATORY AIMS
This Part argues that investment treaties are, properly interpreted, consistent with the idea that States retain autonomy to determine the level at which to pursue permissible regulatory aims. While investment treaties constrain the means through which States may pursue their selected policy aims, it will be suggested that they are largely not concerned with limiting what those policy goals may be. Although only a subset of the provisions considered in this Part explicitly address the treaty parties’ autonomy to determine the level of protection for certain permissible regulatory aims (eg environmental or labour protection), collectively the effect of the provisions considered is significant. The provisions discussed signal to adjudicators that investment protection is not the only concern of investment treaties, and at times evidence an intention to give priority to competing regulatory aims.Footnote 93 The provisions analysed in this Part provide a textual hook through which investment adjudicators could give greater effect to host State autonomy in pursuing a desired level of protection for permissible regulatory aims. Accordingly, while this claim concerning States’ autonomy to determine the level of protection amounts to an extension of existing trends, it has a significant basis in existing investment treaties and case law. This Part has three subsections: first, it considers several different categories of investment treaty provisions that provide textual support for this claim, before considering arbitral interpretations that have recognised the autonomy retained by States to determine which regulatory aims to pursue. Finally, it is explained why this argument holds even in relation to older investment treaties, which do not contain textual references to a wider range of non-economic interests.
A. Investment Treaty Provisions Supporting State Autonomy to Determine Regulatory Aims, including Levels of Protection
One category of provisions that are directly relevant to the claim being made concerning States’ autonomy to determine the level of protection are provisions which affirm that the treaty parties, despite undertaking investment protection obligations, retain the right to regulate. Such a provision first appeared in Article 1114(1) of the North American Free Trade Agreement (NAFTA), which provides: ‘Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.’Footnote 94 Similar provisions have been routinely used by a range of States over the last 15 years.Footnote 95
Increasingly, right to regulate provisions extend beyond the environmental regulation of investment activity to cover a non-exhaustive list of legitimate regulatory objectives.Footnote 96 Due to the ‘otherwise consistent’ qualification, such provisions have widely been viewed as ‘self-cancelling’,Footnote 97 although some commentators have advanced alternative interpretations.Footnote 98 However, an analogy can be drawn with the sixth preambular recital to the TBT Agreement, considered above, which is also prefaced by a qualification of measures that are ‘otherwise in accordance with the provisions of this Agreement’, but which has been interpreted as providing context that has shaped how the disciplines contained in that Agreement are construed.Footnote 99 Furthermore, recent case law interpreting right to regulate provisions suggests that even provisions including the ‘otherwise consistent’ qualifier can have a significant effect on how investment treaties are construed, essentially by serving as interpretative context that underscores the margin of appreciation to be afforded to State measures pursuing permissible regulatory aims.Footnote 100
A particular form of right to regulate provisions is found in the recent Model BITs of the Belgium–Luxembourg Economic Union (BLEU), Canada, Colombia, the Netherlands and the Slovak Republic, and recent investment treaties concluded by the EU, Colombia, Hungary and the United Arab Emirates (UAE). With some variations, these clauses clarify that the provisions of the relevant agreement do not affect the right of the parties to regulate through measures to achieve a range of legitimate policy objectives, and omit the ‘otherwise consistent’ qualifier.Footnote 101 Such provisions still do not provide an unambiguous basis for the parties to adopt measures inconsistent with other obligations contained in the relevant treaties, and are most likely to serve as interpretative context that would inform the construction of investment protection obligations.Footnote 102 Nevertheless, by omitting the ‘otherwise consistent’ qualification, such provisions provide an even stronger basis for the claim that investment treaties, although constraining the means though which regulatory aims may be pursued, are intended to leave States with wide discretion to determine which aims to pursue, including selecting a particular level of protection for permissible aims.
Another element of contemporary investment treaties that supports this claim is the common preambular language concerning regulatory autonomy and levels of protection. For example, preambular language often reaffirms the treaty parties’ right to regulate,Footnote 103 or records the parties’ intention to reconcile trade and investment policies with high levels of environmental protection,Footnote 104 or the parties’ agreement that the economic development objectives of the treaty can be achieved without relaxing health, safety, or environmental standards.Footnote 105 Such language suggests that the object and purpose of the treaty is to preserve, rather than to undermine, the parties’ right to regulate.Footnote 106 Ultimately, preambular language serves as interpretative context that may influence how other treaty obligations (eg investment protection standards) are construed.Footnote 107
A related and increasingly common feature of investment treaties that provides significant textual support for the claim being made are provisions recognising the treaty parties’ right to determine and implement their own levels of environmental or labour protection.Footnote 108 Such provisions have been routinely included in the environment or sustainable development chapters or side agreements of FTAs since NAFTA, including those concluded by the United StatesFootnote 109 and the European Union.Footnote 110 Numerous BITs concluded by the BLEU from 2004 onwards contain provisions that recognise ‘the right of each Contracting Party to establish its own levels of domestic environmental protection and environmental development policies and priorities, and to adopt or modify accordingly its environmental legislation’.Footnote 111 While the drafting intention appears to be that such provisions would only be subject to consultations between the treaty parties,Footnote 112 such provisions would provide interpretative context when interpreting and applying the investment protection obligations contained in the relevant treaties.Footnote 113
The equivalent provision in the 2019 Model BIT of the BLEU, which may serve as a basis for renegotiating its significant stock of investment treaties, contains notably stronger wording. This provision, entitled ‘Right to Regulate and Levels of Protection’, states:
Nothing in this Agreement shall in any way be construed as limiting the right of a Contracting Party or any of their competent authorities to determine its sustainable development policies and priorities, to establish its own levels of domestic environmental and labour protection, and to adopt or modify its relevant laws and policies accordingly, consistently with the internationally recognised standards and agreements.Footnote 114
The language here moves closer to constituting a true exception or defence (‘Nothing in this Agreement shall in any way be construed as limiting’) rather than necessarily being limited to providing interpretative context.Footnote 115 Consistently with this characterisation, the provision is qualified by the fact that it only covers conduct consistent ‘with the internationally recognised standards and agreements’, and the Parties ‘shall not apply labour and environmental domestic laws in a manner that would constitute a disguised restriction of investment or an unjustified discrimination’.Footnote 116 For present purposes, the key point is that this category of provisions provides a textual basis for the claim that investment treaties are intended to preserve the treaty parties’ right to determine which policy aims to pursue, including the right to select and implement a specific level of protection for permissible aims, such as environmental or labour protection. While such provisions are currently only found in a relatively small number of investment treaties, it is conceivable that future investment treaties, or a future statute of a multilateral investment court, could provide that the treaty preserves the parties’ right to determine their own level of protection for permissible regulatory aims.Footnote 117
Another aspect of recent investment treaties that is supportive of the claim being made is that there is little sign of States using investment treaties to require parties to implement the same level of protection for permissible regulatory aims. Rather, while newer treaties contain an increasing number of references to sustainable development issues, such provisions are largely focused on preserving domestic regulatory autonomy,Footnote 118 although they do impose some outer limits on the parties’ right to regulate in certain areas (typically environmental and labour protection).Footnote 119
For example, so-called non-regression provisions, whereby the treaty parties recognise that it is inappropriate to lower the level of protection provided by their environmental or labour laws in order encourage trade or investment,Footnote 120 at most prevent a State regressing from its current level of protection, but only for the purposes outlined.Footnote 121 Accordingly, such provisions are reconcilable with the above-mentioned common provision recognising each party's right to determine its own level of environmental or labour protection.Footnote 122
Other provisions that impose an obligation on the treaty parties to pursue high levels of environmental protection, or to strive to improve their existing levels of protection, often include hortatory or imprecise language, which weakens the obligation.Footnote 123 Even where such provisions are more definitive, they simply require the treaty parties to ensure that their laws provide for high levels of environmental and labour protection, rather than requiring all treaty parties to adopt the same level of protection, or the same laws and policies.Footnote 124
Finally, right to regulate provisions that qualify the parties’ right to set their own level of protection, by stating that this right must be exercised in a manner consistent with a party's multilateral environmental or labour commitments,Footnote 125 do not represent an agenda of harmonisation, because the referenced multilateral commitments generally leave States with substantial discretion concerning their domestic standards.Footnote 126
In summary, the provisions analysed in the preceding three paragraphs do not evidence an intention to require treaty parties to adopt the same levels of environmental or labour protection, or the same laws and policies, although they do place some outer limits on States’ right to regulate in these areas.
Finally, the increasingly widespread use of WTO-style general exceptions provisions in investment treatiesFootnote 127 also provides some support for the argument that investment treaties should be interpreted as preserving a State's ability to determine its own level of protection for permissible regulatory aims. The significance of general exceptions provisions is that they either remove regulatory conduct falling within the provision from the scope of the treaty obligations or immunise otherwise treaty-inconsistent conduct.Footnote 128 Accordingly, they can be understood as an attempt by States to preserve their ability to pursue a range of recognised legitimate policy aims, despite having undertaken investment treaty obligations that constrain the means through which such aims may be pursued.
Furthermore, as seen in Part III, WTO necessity jurisprudence under GATT Article XX/GATS Article XIV has for 20 years explicitly recognised that WTO members retain the prerogative to set the desired level of protection for permissible regulatory aims.Footnote 129 Accordingly, an argument can be made that States, by including in their investment treaties exceptions modelled on GATT Article XX/GATS Article XIV, intend to transpose this aspect of regulatory autonomy into the investment treaty context.Footnote 130 In sum, there is a case for interpreting WTO-style general exceptions provisions in investment treaties in light of WTO necessity jurisprudence, including the case law's emphasis on preserving States’ ability to determine the desired level of protection for permissible regulatory aims.Footnote 131 This subsection has demonstrated why the overall claim being made concerning States’ autonomy to determine the level of protection for permissible regulatory aims is the correct approach when interpreting more recent investment treaties.
B. Investor-State Case Law Supporting State Autonomy to Determine Regulatory Aims, including Levels of Protection
This subsection addresses case law that provides varying degrees of support for this claim. In short, as in the WTO context, investment law adjudicators have often recognised that investment treaties discipline the means employed by States, while leaving States largely free to determine regulatory ends.
SD Myers v Canada is an influential early award that provides direct support for this proposition. In this case, having regard to the preamble of NAFTA, and the environmental side agreement to NAFTA, the North American Agreement on Environmental Cooperation, the Tribunal held that ‘specific provisions of the NAFTA should be interpreted in light of’ several principles. These principles included that: ‘Parties have the right to establish high levels of environmental protection. They are not obliged to compromise their standards merely to satisfy the political or economic interests of other states’, and that ‘where a state can achieve its chosen level of environmental protection through a variety of equally effective and reasonable means, it is obliged to adopt the alternative that is most consistent with open trade’.Footnote 132 These principles informed the Tribunal's finding regarding a breach of the national treatment standard: while Canada's aim of maintaining domestic facilities for processing certain kinds of hazardous waste was permissible, there were other means, consistent with NAFTA, for achieving this goal.Footnote 133 In a separate opinion, Arbitrator Schwartz further observed that ‘dispute settling bodies have found that states are free to set high standards. A dispute settling body has no authority to hold public safety and welfare measures invalid merely because they strike that body as being unreasonably demanding’, and a breach would require a finding that a Party had a less restrictive means reasonably available to achieve its chosen level of protection.Footnote 134
Bilcon v Canada is a controversial award that highlights that while the parties to investment treaties retain wide discretion in selecting regulatory objectives, investment treaties impose substantial constraints on how States may pursue their chosen aims. The majority concluded that a domestic environmental review panel had fundamentally departed from its mandate under Canadian law when assessing and denying environmental approval for the investor's project, and in doing so breached the international minimum standard, as well as the national treatment standard.Footnote 135 Notably, despite this finding, it stressed that ‘NAFTA parties can set environmental standards as demanding and broad as they wish’. In justifying this conclusion, the Tribunal highlighted the reference in NAFTA's preamble to the Parties’ desire to ‘strengthen the development and enforcement of environmental laws and regulations’ and ‘promote sustainable development’.Footnote 136
Muszynianka spółka z ograniczoną odpowiedzialnością v Slovak Republic is a recent Award that highlights the extent to which investment treaties leave States free to pursue a wide range of policy aims, despite imposing restrictions on the means that may be used. Notably, this was a case decided under the Poland–Slovak Republic BIT, which unlike NAFTA or other more recent investment treaties considered above, does not include a right to regulate provision nor any provisions addressing policy concerns besides investment protection. The claimant argued that the Slovak Republic's adoption of a constitutional amendment, which prohibited the cross-border transport of non-bottled water, violated the BIT.
In determining whether the constitutional amendment complied with the reasonableness strand of the FET standard, the Tribunal began by emphasising that ‘Investment treaty arbitration tribunals owe deference to States in determining what serves as a legitimate public purpose … the presumption is that State conduct seeks to attain a legitimate common good’.Footnote 137 Applying this approach to the case at hand, the Tribunal found that ‘Environmental preservation, public health, and seeking to regulate the use of natural resources in an informed and optimal fashion all represent core State functions and thus legitimate policy objectives’.Footnote 138 Significantly, the Tribunal also accepted that ‘States need not wait for their natural resources to be at risk or depleted to take action. Precautionary measures are more than appropriate with respect to vital resources such as water.’Footnote 139 Subsequently, in scrutinising whether the impugned measures had a reasonable relationship to these legitimate public purposes, the Tribunal emphasised that ‘it is not the role of an arbitral tribunal to “weigh the wisdom of legislation” … arbitral tribunals must pay deference to the choices States make when deciding how to implement policy objectives’.Footnote 140
Overall, these remarks suggest that even older-style investment treaties are correctly interpreted as preserving States’ autonomy to determine which regulatory aims to pursue. While the case does not squarely address autonomy concerning the level at which to pursue permissible aims, the remarks of the Tribunal, particularly regarding the permissibility of precautionary action, suggest that investment treaties should be interpreted as preserving this aspect of regulatory autonomy.
C. Does the Argument Hold for Older Investment Treaties?
As many of the provisions considered above are only found in investment treaties concluded in the last 15 years or so, it might be wondered whether the approach advocated for in this article is similarly applicable to older investment treaties. Such older treaties typically only refer, in their preambles, to aims of economic growth or prosperity, and their substantive provisions are limited to issues of investment protection.Footnote 141 Nevertheless, there are several reasons why the claim remains applicable to older investment treaties, despite their not having the same explicit textual basis to support an interpretation favouring State autonomy in setting the level of protection for permissible regulatory aims.
First, the right to regulate matters falling within a State's domestic jurisdiction, of which autonomy to determine the level of protection is a part, is an inherent aspect of sovereignty.Footnote 142 While investment treaties clearly place constraints on the manner in which the right to regulate is exercised, they ‘were never intended to do away with their signatories’ right to regulate’.Footnote 143 Perhaps the best evidence of this is that tribunals have frequently interpreted the investment protections contained in older treaties in light of the regulatory powers retained by States, despite there being little in the text of these treaties that explicitly preserves regulatory space. The Muszynianka spółka z ograniczoną odpowiedzialnością v Slovak Republic Award, discussed above, is a recent example of this. Another example is the widespread acceptance over the last 15 years of a police powers doctrine within case law concerning indirect expropriation, again almost entirely under older treaties that do not address the relationship between indirect expropriation and other regulatory aims.Footnote 144
Seen in this light, the suggestion that investment treaties should be interpreted as preserving States’ autonomy to determine the level at which to pursue permissible regulatory aims amounts to an application of interpretative approaches that have already been adopted by a significant number of tribunals under older treaties.
Second, as Federico Ortino has argued, the purpose of older investment treaties, where the preamble only refers to economic development or prosperity, can be interpreted in an evolutionary manner to encompass the broader and more balanced notion of sustainable development.Footnote 145 This, in turn, has direct implications for State autonomy in setting the level of protection, because the concept of sustainable development leaves States with substantial discretion to determine ‘the appropriate balance between [the partially conflicting interests of] economic growth, environmental protection and social development’.Footnote 146
Overall, this Part has made the case that investment treaties are, properly interpreted, consistent with the idea that States retain autonomy to determine the desired level of protection for permissible regulatory aims. The next Part will demonstrate that this has direct implications for the balancing techniques that should be utilised by adjudicators, and, accordingly, for certain clarifications that States, as treaty drafters, should adopt.
V. IMPLICATIONS FOR OPERATIONALISING HOST STATE AUTONOMY IN SELECTING THE LEVEL OF PROTECTION: AGAINST PROPORTIONALITY BALANCING STRICTO SENSU
This Part addresses a key area where investment treaties and arbitral jurisprudence can be refined to minimise the potential for adjudicatory second-guessing of the regulatory aims that States choose to pursue, including a specific level of protection for a regulatory aim. It suggests that treaty drafters should remove the basis that currently exists, within the FET and indirect expropriation standards, for direct balancing of the regulatory interests furthered by a State measure against the measure's impact on protected investments.
As Henckels and Ortino, among others, have previously argued in the investment treaty context, where a proportionality-based test extends beyond considering whether a measure is necessary, to asking whether the costs of a measure outweigh, or are disproportionate to, the regulatory benefits of the measure, a State's ability to decide which regulatory goals to pursue is undermined. In contrast, adjudicatory scrutiny that does not go beyond the necessity, or least restrictive means, stage of analysis, avoids putting into question the regulatory aim pursued by a State, and confines itself to scrutinising the means utilised for pursuing the desired regulatory aim.Footnote 147 This was a key lesson emerging from the analysis of WTO necessity jurisprudence in Part III, which has, despite some ambiguities, been limited to a least-restrictive means test, and has avoided second-guessing the regulatory objectives pursued by WTO members, including the level of protection pursued by a member.
This Part demonstrates that regulators can have no such confidence in the investment treaty context, where the two most commonly invoked standards, FET and the protection against indirect expropriation, are both increasingly being interpreted in ways that provide for proportionality balancing stricto sensu, and, accordingly, for adjudicators potentially second-guessing States’ regulatory goals. Certain treaty-drafting clarifications to the two standards, intended to safeguard regulatory space, have also, counterproductively, provided a clear basis for proportionality balancing stricto sensu, and thus the potential downgrading of States’ regulatory aims.
Until relatively recently only a handful of investment treaty awards had endorsed the proposition that the FET standard includes a free-standing requirement that a State's measures must be proportionate, taking into account the regulatory aim pursued and the impact on protected investments.Footnote 148 However, in recent years, and mostly in the context of the numerous disputes concerning European States’ changes to renewable energy subsidies, several tribunals have endorsed such a requirement in order to satisfy the FET standard.Footnote 149 In contrast, one tribunal in the renewables cases has—correctly, it is suggested—questioned whether a free-standing requirement of proportionality forms part of the FET standard, particularly where general legislative measures are at issue.Footnote 150
Some tribunals in renewable energy disputes have also suggested that proportionality is a relevant consideration when applying the stability and legitimate expectations components of FET.Footnote 151 For example, numerous tribunals have held that changes made to a regulatory regime designed to attract investors to a sector must not be disproportionate, having regard to the regulatory aim pursued by the changes and the burden placed on investors who have reasonably relied on the prior regulatory scheme when investing.Footnote 152 A requirement to avoid disproportionality when altering a regulatory regime that has been relied on by investors is significantly less wide-ranging than a requirement that all State conduct must be proportionate to the regulatory aim pursued in order to comply with the FET standard.Footnote 153
At the level of treaty drafting, a range of responses could limit the role for proportionality balancing stricto sensu, and potential second-guessing of States’ regulatory aims, within the FET standard. One option would be to omit any reference to FET, and to the extent that treaty drafters wish to reaffirm protections contained in the international minimum standard, such as the protection against denial of justice, to specify these elements in an exhaustive manner.Footnote 154 This drafting strategy may remove the basis for the link that has been established by arbitral interpretations between a reference to FET and concepts such as proportionality or an absence of disproportionality. Another option used in some recent treaties is to retain a reference to FET but to specify its contents exhaustively.Footnote 155
Whether this approach will be successful in preventing States’ regulatory aims from being second-guessed remains to be seen. If States provide for FET, they could attempt to preclude strict balancing, for example by providing that a measure will only breach the FET standard where an alternative measure, which would make an equivalent contribution to the relevant regulatory aim but be less restrictive of the interests protected by the FET standard, was reasonably available to the State.Footnote 156 As was shown in Part III, requiring a complainant to identify an alternative measure that was reasonably available and would make an equivalent contribution to the relevant regulatory aim, but be less restrictive of the competing treaty-protected interest of trade liberalisation, has been a key method by which WTO jurisprudence has preserved members’ regulatory autonomy.
The protection against indirect expropriation has also been interpreted by arbitral tribunals in a manner that provides a strong basis for proportionality balancing stricto sensu. Specifically, in distinguishing non-compensable exercises of a State's police powers from indirect expropriations that must be compensated, tribunals have increasingly referred to a requirement that, in order to fall within the police powers exception, a measure must be proportionate to the public interest pursued, taking account of the impact on protected investments.Footnote 157
One of the starkest examples is PL Holdings v Poland, where the Tribunal considered the proportionality of measures adopted by a banking regulator purportedly to address wrongdoing by the claimant, by asking whether the measures satisfied the tests of suitability, necessity and, finally, not being ‘excessive in that its advantages are outweighed by its disadvantages’.Footnote 158 Another oft-cited example is Tecmed v Mexico, where the Tribunal, in determining whether Mexico's conduct constituted an indirect expropriation, noted that it had to consider:
whether such actions or measures are proportional to the public interest presumably protected thereby and to the protection legally granted to investments … There must be a reasonable relationship of proportionality between the charge or weight imposed to the foreign investor and the aim sought to be realised by any expropriatory measure.Footnote 159
Significantly, the Tribunal proceeded to weigh the public interest pursued by the decision to deny the renewal of the operating permit for the claimant's hazardous waste facility against the impact on the claimant's investment. Within this exercise, the Tribunal emphasised that the public opposition to the landfill's location, which it determined was the real reason for the non-renewal of the permit, was not massive, and could not justify the decision to prevent the facility being operated.Footnote 160
Engaging in this kind of balancing exercise is controversial because it involves ‘placing the competing interests on a scale [namely the regulatory aim pursued by a State and the interests protected by relevant investment treaty protections] and effectively determining whether one takes precedence over another’.Footnote 161 In contrast, under a necessity test, so long as the regulatory aim pursued by a State was a permissible one, adjudicators would not be permitted to second-guess that aim and would be limited to asking whether there were alternative, reasonably available means for achieving the goal that were less restrictive of the competing interests protected by relevant investment treaty obligations. As was seen in Part III, the WTO necessity jurisprudence has, despite some ambiguities, generally amounted to a least-restrictive means test. Importantly, despite the references to ‘weighing and balancing’, WTO adjudicators have avoided directly balancing the public interest pursued by a measure against its trade restrictiveness, whereby the regulatory aim pursued by a member could be downgraded. Investment tribunals can learn from this jurisprudence, by avoiding direct balancing of the regulatory benefits of a measure against its impact on protected investments.
Treaty drafting over the past 15 years in relation to protection against indirect expropriation has also, and problematically, introduced an explicit basis for balancing of the public interest pursued by a measure against the measure's impact on protected investments or even a particular claimant investor. This has occurred within the expropriation annexes that first appeared in the United States and Canadian model investment treaties of 2004, to provide further guidance on the distinction between indirect expropriations and non-compensable regulatory measures, which have since been drawn upon with some modifications by a wide range of States.
When providing for a police powers exception, by excluding non-discriminatory regulatory conduct from constituting an indirect expropriation ‘except in rare circumstances’, several States have repeatedly utilised language that either refers to proportionality or disproportionality, or which is prone to be interpreted as permitting proportionality balancing stricto sensu.
For example, South Korea has included the following language in many of its investment treaties of the last decade:
Except in rare circumstances, such as, for example, when an action or a series of actions is extremely severe or disproportionate in light of its purpose or effect, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, the environment, and real estate price stabilization … do not constitute indirect expropriations.Footnote 162
In defining such ‘rare circumstances’, this provision instructs adjudicators to consider whether a measure is ‘disproportionate in light of its purpose or effect’. This would most likely involve weighing the benefits to be secured by a measure, perhaps in light of an assessment of the relative importance of the relevant regulatory aim, against the effect of the measure on the claimant's investment. This interpretation is confirmed by other parts of the annex, which clarify that, in determining whether a measure constitutes an indirect expropriation, consideration must be given to ‘the economic impact of the government action’, ‘the extent to which the government action interferes with distinct, reasonable investment-backed expectations’, and:
the character of the government action, including its objectives and context. Relevant considerations could include whether the government action imposes a special sacrifice on the particular investor or investment that exceeds what the investor or investment should be expected to endure for the public interest.Footnote 163
In several of its treaties South Korea has expanded on this wording by referring to ‘whether the investor bears a disproportionate burden’.Footnote 164
These features of the relevant annexes leave no doubt that, in making the case-by-case determination of whether a measure constitutes an indirect expropriation, or should be covered by the language indicating that non-discriminatory regulatory actions are generally not indirect expropriations, adjudicators are being instructed to weigh the regulatory objectives furthered by the impugned measure against the burden imposed on the complainant investor.Footnote 165 There is nothing in these provisions that would prevent an adjudicator from determining a measure to be ‘extremely severe or wdisproportionate’, and thus to constitute an indirect expropriation, even where the measure passes a least-restrictive means test. Relatedly, the provision leaves open the possibility that adjudicators might find that an alternative measure, making a lesser contribution to the selected regulatory aim but involving a lesser burden on the claimant investor, could have been utilised by the State.
It bears emphasising that it is not only South Korea which had adopted such an approach. For example, several investment treaties concluded by the Association of Southeast Asian Nations (ASEAN) refer, in the paragraph of the expropriation annex concerning ‘the character of the government action’, to ‘whether the action is disproportionate to the public purpose’ pursued.Footnote 166 Australia's FTAs with Indonesia and Malaysia also contain the same wording.Footnote 167 Similarly, some newer Chinese investment treaties, when considering ‘the character and purpose of a measure’, refer to whether the measure ‘was proportionate to its purpose’.Footnote 168 A handful of other recent investment treaties, in provisions excluding non-discriminatory regulatory measures from constituting indirect expropriation, also refer to measures that are ‘disproportionate’ to the regulatory purpose pursued.Footnote 169
As is more widely known, the equivalent paragraph in recent investment treaties concluded by the EU provides:
except in the rare circumstance when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations.Footnote 170
The reference to the ‘impact of a measure’ appears to require consideration of the impact of a measure on the particular claimant investor.Footnote 171 As Ortino has highlighted, the annex does not make it clear whether adjudicators should employ a necessity test, (eg whether the impugned measure involves the lowest possible burden on protected investments to achieve the relevant policy aim) or some form of cost–benefit analysis, which, for example, asks if the impact on a claimant investor is ‘manifestly excessive’ in light of the regulatory aim pursued.Footnote 172 There is a risk that a non-discriminatory measure pursuing what a tribunal considered to be a relatively unimportant purpose and which placed a heavy burden on a claimant investor, might be classified as ‘manifestly excessive’, (and thus as an indirect expropriation), even where no alternative measure involving a lesser restriction of the treaty-protected interest of investment protection was reasonably available.Footnote 173
The lessons to be learnt for drafting provisions concerning indirect expropriation are as follows. First, if States do not intend that the regulatory purpose of a measure should be directly weighed against, and potentially downgraded in light of, the competing interest of investment protection, they should make this clear. For example, expropriation annexes could make it clear that if a measure is to be considered ‘manifestly excessive’ or ‘extremely severe and disproportionate’, the tribunal must be able to identify an alternative measure which was reasonably available, would have made an equivalent regulatory contribution, and been significantly less restrictive of the treaty-protected interest of investment protection.Footnote 174
Another approach is that found in more recent Canadian investment treaties, which specify that the ‘rare circumstances’ in which a non-discriminatory measure designed and applied to protect a legitimate regulatory objective can constitute indirect expropriation refers to situations ‘when a measure … is so severe in the light of its purpose that it cannot be reasonably viewed as having been adopted in good faith’.Footnote 175 This wording suggests that only measures that ‘cannot be reasonably viewed as having been adopted in good faith’ could amount to ‘rare circumstances’, and thus constitute indirect expropriation. This may mean that there is no real scope for weighing the regulatory interests furthered by a measure against the interest of investment protection, unless it is determined that the measure ‘cannot be reasonably viewed as having been adopted in good faith’. Canada advanced such an interpretation in a recent non-disputing party submission in the Eco Oro v Colombia dispute under the Canada–Colombia FTA, submitting that such wording ‘reflects the deference given to States in their determination of the level of protection they seek to achieve and the regulatory choices to achieve these objectives’.Footnote 176
Another more clear-cut option, which has occasionally been used by some States in the last 10–15 years, is to remove ‘except in rare circumstances’ altogether, leaving the less qualified guidance that: ‘Non-discriminatory regulatory actions by a Party that are designed and applied to achieve legitimate public welfare objectives, such as the protection of public health, safety, and the environment do not constitute [indirect] expropriation.’Footnote 177 Such provisions introduce a clearer hierarchy of values, according to which legitimate public welfare objectives take priority over the interest of investment protection, subject to a limited form of scrutiny of the means employed to achieve such objectives. Importantly, this approach removes any textual basis for directly weighing the regulatory benefits secured by a measure against its impact on protected investments.
This Part has suggested that proportionality balancing stricto sensu within the FET and indirect expropriation standards, which involves weighing the regulatory benefits secured by a measure against its impact on protected investments (or even a particular claimant investor), has the potential to undermine State autonomy in determining which regulatory aims to pursue. Proposals have been made, partly inspired by the earlier analysis of necessity jurisprudence in WTO law, for replacing it with a least-restrictive means test. This would reorient investment law by making the choice of regulatory aims, and the level at which to pursue such aims, largely non-reviewable. Adjudicatory scrutiny of the means employed does not undermine States’ autonomy in selecting regulatory ends in the same way.
VI. CONCLUSION
The pace of reforms in the investment treaty regime in recent years leaves little doubt that many States remain concerned about its impact on their regulatory space, and options once viewed as marginal, such as widespread exit from investment treaties, are increasingly on the table. Against this backdrop, this article has analysed one foundational idea that has often been touched on but not fully explored: namely, that despite undertaking investment protection obligations, States retain autonomy to select which regulatory aims to pursue, and, crucially, the level at which to pursue permissible aims. Giving effect to this idea, which finds support in a range of provisions in newer investment treaties, will require rethinking how investment protection obligations are construed. In particular, there is an increasing need to allow in some circumstances a State's broader public-welfare interests to take priority over investment protection.
A core claim of this article is that proportionality balancing stricto sensu has no place in a setting where States retain the ability to determine and implement their desired level of protection for permissible regulatory goals. Accordingly, this article has made proposals for how the key investment treaty standards of FET and the protection against indirect expropriation could be reoriented to reflect a least-restrictive means test. These proposals can inform arbitral approaches under most existing investment treaties, which do not require tribunals to engage in proportionality balancing stricto sensu. WTO necessity jurisprudence provides an inspiration for this, as it has a wealth of experience in balancing treaty-protected interests of trade liberalisation with competing public welfare interests. Moreover, it has managed to achieve a desirable compromise between States retaining the ability to pursue their desired level of protection for permissible regulatory aims, whilst being subject to significant disciplines regarding the means utilised. While there are some difficulties with the approach, within WTO jurisprudence, to the concept of the level of protection, these are not so significant as to suggest that the concept should not be drawn upon for inspiration in the investment treaty context.
For some, this will still give too much priority to investment protection, since permissible, and often pressing, public welfare interests would have to be achieved though means involving the least possible restriction of the competing interests protected by relevant investment treaty obligations.Footnote 178 The requirement that alternative measures must be reasonably available and make an equivalent contribution to achieving the State's regulatory aim, combined with a degree of deference in making these assessments, as is practised in WTO necessity jurisprudence, can address this concern to some extent.Footnote 179 An alternative, which would preserve State autonomy in setting the level of protection and address concerns about the potentially intrusive nature of necessity testing, would be to reconceive investment treaty standards so that they only require a State's measures to be non-discriminatory and have a rational connection to a permissible policy aim.Footnote 180
Another more fundamental objection to any form of balancing exercise, including a necessity test, in the investment treaty regime is that due to the lack of standing afforded to other actors affected by foreign investment activities (eg local communities), such third party interests are not adequately represented and thus not taken into account.Footnote 181 While there is substance in this objection, investor-State arbitration, or standing investor-State tribunals, are likely to remain with us in some form for the foreseeable future.Footnote 182 Accordingly, there is a pressing need to offer an interpretation of key investment protection standards that better protects the ability of States to determine and implement their own regulatory priorities, including levels of protection. Moreover, even in a system that afforded standing to other affected actors (eg local communities), or a system that only permitted State–State dispute settlement, the question of States’ autonomy to determine and implement a desired level of protection for permissible regulatory aims would still arise.
Some might be concerned that these proposals would downgrade or relativise investment protections traditionally understood as absolute (eg FET and the protection against indirect expropriation). However, it must be remembered that these standards have increasingly been construed in ways that take account of the regulatory competences retained by States. In addition, investment treaties are increasingly drafted in ways that make it clear that investment protection is not their only concern, nor necessarily the interest that is to be given priority where trade-offs are required. It is suggested that the proposals made in this article show that investment law can be reoriented to respect States’ autonomy to determine the level at which to pursue permissible regulatory aims.
