Investor-Community Conflicts in Investor-State Dispute Settlement: Rethinking "Reasonable Expectations" and Expecting More from Investors

69 Am. U. L. Rev. 105 (2019).

* Professor of Law, Lewis & Clark Law School. I wish to thank the participants at the 2018 annual meeting of the Environmental Law and Sustainability Section of the Academy of Legal Studies in Business at which an early version of this Article was presented, as well as the participants in the Lewis & Clark Law School Faculty Colloquium Series in which a later version was presented. Special thanks to Michael C. Blumm, Lydia Loren, Thomas Schoenbaum, Shalanda Baker, Frédéric Gilles Sourgens, and Timothy Webster for detailed comments and suggestions. I am also grateful to Wendy Hitchcock, Elizabeth Schmitt, Saskia Mooy, Brittaney Bones, Trevor Eisele, Alison Roth, Arpan Banerjee, and John Mayer for their valuable research assistance.

Within the fraught field of investor-state dispute settlement, no cases are more controversial than those in which an investor seeks damages for the cancellation of a project following an outcry by local communities over potential environmental or social impacts. Tribunals have almost always ruled for the investor in these cases, typically reasoning that the cancellation frustrated the investor’s “reasonable” or “legitimate” expectations. This Article argues that tribunals have often overlooked or downplayed factors that should limit investors’ expectations when undertaking high-impact projects, including specific aspects of domestic environmental law and the host state’s international human rights and environmental obligations. The Article also examines factors beyond investor expectations that may be relevant to liability or quantum in such cases, including local remedies and emerging standards of conduct with which investors should be expected to comply. Finally, the Article shows that the proposed interpretive framework is consistent with the texts of investment treaties and their underlying rationales and could address a number of concerns that threaten these treaties’ long-term viability.

Introduction

Investment treaties and investor-state dispute settlement (ISDS) have generated tremendous controversy in recent years. Both are regularly denounced as dire threats to national sovereignty and the ability of governments to protect their citizens and the environment from the excesses of multinational enterprises.¹ No cases have drawn more scorn than those in which foreign investors have challenged regulatory measures adopted by host states in the public interest.² Within that genre of dispute, a specific strain has emerged that is perhaps most controversial of all: cases in which the investor seeks damages from the host state for having canceled a development project following an outcry by local communities who feared that the project would contaminate their water supplies, destroy their sacred sites, threaten endangered plants or wildlife, or wreak other serious harm.³ I will refer to these cases herein as “Community Conflict Cases.”

The investor invariably contends that state authorities initially authorized or encouraged its project, inducing the investor to commit its capital, before suddenly reversing course in response to community pressure.⁴ When arbitral tribunals have reached the merits of these claims, they have almost always ruled in the investor’s favor—usually on the reasoning that the host state’s reversal frustrated the investor’s “reasonable” or “legitimate” expectations.⁵ These decisions have contributed to the legitimacy crisis facing investment treaties and ISDS and the resulting calls to radically transform them or even scrap them altogether.⁶ This Article will contend, however, that a few adjustments to the analytical framework employed by tribunals under existing ISDS mechanisms when interpreting existing treaties can strike a more effective balance between investor rights, human rights, and environmental protection—all while remaining faithful to treaties’ texts and purposes.

The proposed adjustments target the notion of reasonable or legitimate expectations, which tribunals routinely view as central to their analyses when adjudicating some of the most popular treaty claims: expropriation, fair and equitable treatment (FET), and minimum standard of treatment (MST).⁷ This Article will argue that tribunals cannot properly evaluate investor expectations without giving due attention to several factors that are frequently overlooked or glossed over. It also identifies issues beyond investor expectations that may be relevant to liability or quantum, but that are likewise often neglected—including conduct that should reasonably be expected from investors. Specifically, this Article recommends that tribunals incorporate the following five guidelines into their analyses in Community Conflict Cases.

First, tribunals should identify and give effect to aspects of domestic law that may limit investor expectations. In some cases, tribunals have either ignored potentially relevant domestic law or given it scant attention. Notably, in the case of large-scale projects like those typically at issue in Community Conflict Cases, any approvals sought by an investor will often be contingent upon an environmental impact assessment (EIA) and stakeholder consultations, with decision-makers having discretion to deny the proposal if the results of these processes are not favorable.⁸ In addition, domestic law may give decision-makers the power to revoke authorizations if actual impacts exceed those anticipated or if the investor violates applicable regulations.⁹ The risk of such a denial or revocation should necessarily inform, and limit, the investor’s expectations. Nevertheless, tribunals in some Community Conflict Cases have faulted host states for denying proposals based on concerns that arose in EIAs and stakeholder consultations¹⁰ or have dismissed as irrelevant aspects of domestic law that might have justified revoking a permit.¹¹

Second, tribunals should generally accord significant deference to host state authorities when they interpret and apply their own law, as when determining whether or not conditions for any approval were satisfied or grounds existed to revoke an approval.¹² In some Community Conflict Cases, tribunals have purported to show such deference, but were in fact quick to reject determinations by state authorities that were adverse to the investor, even as they accepted without scrutiny prior statements or findings that were favorable.¹³ When faced with conflicting findings on the same subject matter, a rule of thumb that would serve tribunals well is to show greater deference to state authorities when they take action that has the potential to protect against threats to the public or the environment, as compared to when authorities could be concealing or downplaying such threats.¹⁴

Third, tribunals should consider whether local remedies were reasonably available to the investor that could have corrected any asserted error in the application of domestic law that operated to the investor’s detriment. If such remedies were available and the investor failed to pursue them, the claim may be defective on the merits.¹⁵

Fourth, the tribunal should confirm that the investor’s purported expectations were compatible with international law, including the host state’s binding obligations under human rights instruments and international environmental law.¹⁶ Tribunals in Community Conflicts Cases usually have declined to examine in any depth the host state’s non-investment obligations.¹⁷ Yet if the state violated its international obligations when making commitments to the investor, and the investor knew or should have known of this violation, then the investor arguably cannot reasonably expect to enforce those commitments.¹⁸ While it is relatively rare that commitments to an investor will violate the host state’s international obligations, there have been Community Conflict Cases in which the investor claimed a reasonable expectation to engage in activity that may well have implicated such a violation.¹⁹

Fifth, tribunals should recognize that investors engaged in high-impact activities must be mindful of a risk of community conflict, and expect that, to avoid such conflict, they may need to take any number of steps whether or not required by law.²⁰ Such steps may include reasonable measures to mitigate project impacts, engage with affected communities, and share benefits with them.²¹ Any investor who neglects to employ these measures may have only itself to blame for any resulting social conflict or at least be partly at fault—a factor that could warrant a reduction in damages.²²

If applied consistently going forward, the foregoing guidelines have the potential to alleviate some of the concerns that are driving public opinion against investment treaties and ISDS, while still ensuring investors protection against conduct that can properly be characterized as arbitrary, discriminatory, bad faith, or expropriatory.²³ While this framework would not eliminate altogether the need for further reform in international investment law, it could serve as a useful bridge before treaties are re-drafted or other more elaborate measures are adopted. There is a pressing need for such a ready-made solution because investor-community conflicts arise with regularity and several pending ISDS proceedings have arisen from such conflicts²⁴—disputes that present a prime opportunity to apply the proposed framework.

The discussion will proceed as follows. Part I will explain the potential relevance of investor expectations and how this concept has been applied in a sample of Community Conflict Cases to date. Part II will develop in detail the guidelines described above and show how they could have made a difference in particular cases. Part III will identify circumstances in which respondent states could be found liable, despite the application of the proposed guidelines, and seek to demonstrate that the outcomes contemplated by the proposal would be fully consistent with the rationales underlying investment treaties.

I. The Notion of “Reasonable Expectations” and Its Application in Community Conflict Cases

The significance that tribunals routinely assign to investor expectations is sometimes cited as evidence of a pro-investor bias within ISDS: an inherent tendency to uphold investor prerogatives at the expense of state regulatory responsibilities and the public interest.²⁵ As the discussion below will reveal, however, tribunals have valid reasons for seeking to ascertain what the investor reasonably expected when it made its investment. When tribunals reach questionable results, it is not because they made this basic inquiry, but because they may not have considered everything that should have informed the investor’s expectations or focused on investor expectations to the exclusion of other relevant factors.

Section I.A will explain the relevance of investor expectations to some of the most common claims asserted in ISDS: expropriation, FET and MST. Section I.B will then summarize a set of Community Conflict Cases decided on the merits to date, highlighting how the tribunals applied the notion as well as other issues that tribunals ignored or quickly dismissed, but which might have warranted different outcomes.

A. The Relevance of Investor Expectations

Many investment treaties explicitly refer to investor expectations as a factor to be considered when evaluating expropriation claims. For example, the Canada-Peru Free Trade Agreement (FTA), at issue in the Bear Creek Mining Corp. v. Republic of Peru²⁶ case discussed below, provides: “The determination of whether a measure or series of measures of a Party constitutes an indirect expropriation requires a case-by-case, fact-based inquiry that considers . . . the extent to which the measure or series of measures interferes with distinct, reasonable investment-backed expectations[.]”²⁷ The treaty also identifies two other factors as relevant to the analysis: the character of the measure and the measure’s economic impact.²⁸

These three factors were derived from U.S. takings jurisprudence, and ISDS tribunals often employ them even when the relevant treaty does not expressly refer to them.²⁹ The rationale behind the reasonable investment-backed expectations criterion is that if someone made an investment in reliance on an established regulatory framework or on governmental assurances, then it may not be fair for the state to change the rules after the fact to the investor’s detriment.³⁰ The second criterion—the character of the measure—examines whether the state was seeking to advance an important public purpose in restricting the investor’s activities, such as preventing a nuisance.³¹ The final criterion—economic impact—aims to limit takings claims to property owners who experienced a serious financial loss.³²

ISDS tribunals frequently also examine the investor’s expectations when adjudicating FET or MST claims. To understand why, one must consider the nature of these standards.

Most investment treaties include a provision in which the host state commits to provide FET to covered investors or their investments.³³ In some treaties, the provision refers to FET in isolation, while in others it refers to FET “in accordance with international law,” or equates FET with the “minimum standard of treatment” or MST.³⁴ The MST refers to a basic floor for states’ treatment of aliens under customary international law, below which states may not go without incurring international responsibility.³⁵

When the treaty does not expressly link FET with international law, FET is often viewed as an autonomous concept. Under this reading, the host state will violate the treaty if it fails to treat the investor fairly and equitably, whether or not that treatment violates the MST.³⁶ Tribunals employing this interpretation have identified a number of ways the host state can violate the FET standard, including failing to act with due process, discriminating against the investor, operating in a non-transparent manner, or frustrating the investor’s “reasonable” or “legitimate” expectations.³⁷ For example, in Tecnicas Medioambientales Tecmed, S.A. v. United Mexican States³⁸—a Community Conflict Case summarized below—the tribunal asserted that FET precludes the host state from undermining “the basic expectations that were taken into account by the foreign investor to make the investment.”³⁹

While the content of the MST is unsettled, it is often viewed more restrictively than FET as a stand-alone standard.⁴⁰ Several tribunals have asserted that the host state will violate the MST only if its conduct is “egregious and shocking,” as where it commits “a gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons.”⁴¹ Others have characterized the MST as having evolved in recent decades, such that host state conduct no longer needed be outrageous or shocking to violate it; merely being unfair or unreasonable could suffice.⁴² There is wide agreement, however, that one way the host state could violate the MST would be to frustrate an investor’s reasonable or legitimate expectations.⁴³ Some tribunals have considered a wide range of state conduct as potentially giving rise to such expectations,⁴⁴ while others have restricted the inquiry to specific commitments or assurances that the host state may have offered to induce the investment.⁴⁵ Under any of these approaches, however, at least some state conduct can give rise to reasonable expectations.

It must be acknowledged that some states have disputed that the MST encompasses a notion of reasonable expectations, asserting an absence of state practice and opinio juris in support of this concept.⁴⁶ Nevertheless, even these states have acknowledged that if a host state makes specific assurances to an investor and later abrogates them, the state’s conduct could violate the MST—and have at times couched this concept in terms of reasonable expectations.⁴⁷

This Article therefore assumes the potential relevance of investor expectations to expropriation, FET, and MST claims. It proceeds to consider how the concept has been applied in Community Conflict Cases, and how tribunals could enhance their application of the concept—as well as other aspects of their analytical framework—going forward.

B. Representative Community Conflict Cases

The following is a summary of five Community Conflict Cases, presented in chronological order. Two can be thought of as companion cases of a sort because they both involve hazardous waste facilities in Mexico: Tecmed and Abengoa.⁴⁸ The other cases involve a proposed gold mine in the United States (Glamis),⁴⁹ a proposed quarry and marine terminal in Canada (Clayton),⁵⁰ and a proposed silver mine in Peru (Bear Creek).⁵¹ While these arbitrations are by no means the total corpus of Community Conflict Cases, they are particularly relevant because the tribunals reached the merits of the treaty claims and applied a notion of reasonable or legitimate expectations.

1. Tecmed v. United Mexican States

The claimant in this case, Tecmed, was a Spanish company that acquired a hazardous waste landfill in Mexico near the municipality of Hermosillo.⁵² Despite the dangerous nature of the materials to be transported through the city on the way to the landfill where it would be stored, there is no indication in the award that Tecmed engaged with the community or sought to ascertain public attitudes toward the project before making the acquisition. According to Tecmed, it relied on the fact that the government issued the necessary permits for the facility and the facility had already been operating for some time.⁵³ It is notable, however, that once taking over the landfill, Tecmed’s local subsidiary, Cytrar, began accepting new types of waste and adopted new practices—including trucking hazardous waste through the city in open bags—which generated instant controversy.⁵⁴

Under pressure from community members, federal authorities inspected Cytrar’s operations, found violations of a number of environmental regulations, and imposed fines.⁵⁵ Cytrar purported to address the violations, but later inspections found further violations, and authorities imposed new fines.⁵⁶ Before long, community opposition to the landfill became “widespread and aggressive.”⁵⁷ A local NGO filed a complaint against Cytrar for environmental crimes,⁵⁸ and protestors marched to the landfill and began a blockade that lasted for months.⁵⁹

When Cytrar’s operating permit was up for review, a federal agency found that Cytrar had committed numerous additional legal violations beyond those already sanctioned⁶⁰ and declined to renew the permit.⁶¹ Federal authorities considered allowing Cytrar to build a new facility in a different location, but ultimately rejected that possibility.⁶²

In response to these events, Tecmed launched an arbitration against Mexico under the 1995 Spain-Mexico Bilateral Investment Treaty (BIT).⁶³ The tribunal ruled in Tecmed’s favor, finding that the withdrawal of Cytrar’s permit constituted an expropriation and a denial of FET. The tribunal rested its holding on the notion that, by issuing the necessary permits, federal authorities had given Tecmed the legitimate expectation that Cytrar would be able to operate the landfill indefinitely.⁶⁴ The tribunal asserted that Cytrar’s violations of environmental regulations did not justify closing the landfill and that the real motivation for the closure had been “community pressure.”⁶⁵ The tribunal deemed it significant that when federal authorities had previously found Cytrar in violation of environmental regulations, they had merely imposed fines.⁶⁶ The tribunal also placed emphasis on prior statements by federal authorities asserting that the landfill did not pose a serious threat.⁶⁷

2. Glamis Gold v. United States

Glamis, a Canadian company, sought to develop a gold mine on federal land in southeastern California.⁶⁸ Glamis invested several million dollars to acquire the mining rights, carry out exploratory work, and pursue environmental permits.⁶⁹ Glamis would later contend that it was induced to make these investments because the applicable regulatory framework gave it a reasonable expectation that it would be able to exploit its mining rights.⁷⁰ As in Tecmed, however, the claimant’s narrative overlooked risks associated with the project, including a trend toward increasing regulation in the mining sector⁷¹ and opposition from a local Native American tribe.⁷²

The project was located within the California Desert Conservation Area (CDCA), which Congress had designated for protection because it was environmentally sensitive and featured important cultural and archaeological resources.⁷³ The federal Bureau of Land Management (BLM) authorized Glamis to undertake exploratory work at the site, and Glamis determined that there was enough gold to make the project profitable.⁷⁴ Glamis drafted a plan of operations, which called for excavating three large open pits and constructing associated processing facilities, where Glamis would separate the gold from waste rock through a cyanide heap-leach process.⁷⁵ When finished, Glamis would only partially backfill the open pits.⁷⁶

Federal regulations allowed for mining in the CDCA, but only if it could be conducted without “unnecessary or undue degradation” (UUD).⁷⁷ Moreover, any operations would have to comply with state and federal laws, including those on air and water quality, wildlife and plant habitat, and cultural resources.⁷⁸ In addition, federal legislation required BLM to conduct an EIA prior to approving the proposal⁷⁹ and to consider potential effects on items of cultural or religious significance to Native American tribes.⁸⁰ Finally, because the project fell within the ancestral lands of the Quechan Tribe, BLM was required to consult the Tribe and take its views into account.⁸¹

The ensuing impact assessment revealed that the land surrounding the project featured extensive cultural resources, including ancient pictographs, tool deposits, and trails—all of which were sacred to the Quechan.⁸² The trails were part of a larger network known as the Trail of Dreams, which played a vital role in Quechan history and cosmology.⁸³ BLM determined during the impact assessment process that the mine would destroy fifty-five Native American traditional historic properties that were eligible for listing in the National Register of Historic Places.⁸⁴ In addition, there would be significant, unavoidable impact on the ability of the Quechan to travel along the Trail of Dreams and conduct traditional religious activities.⁸⁵ BLM determined further that because Glamis did not intend to completely backfill the open pits, the project would result in “unavoidable adverse impacts to visual quality in this substantially undisturbed landscape.”⁸⁶ In light of these anticipated impacts, the Quechan Tribe expressed strong opposition to the mine during consultations.⁸⁷ There is no indication in the award that Glamis engaged with the Tribe before making its investments or that the company offered it any economic benefits to help compensate for the mine’s adverse effects.

Based on the results of the impact assessment and input from the Quechan and the general public, BLM determined that Glamis’ proposal would cause UUD and rejected Glamis’ proposal.⁸⁸ Glamis brought a lawsuit challenging that decision, contending that BLM had misapplied the UUD standard.⁸⁹ While the case was pending, a new Secretary of the Interior—appointed by President George W. Bush—directed BLM to reconsider its decision.⁹⁰ Yet, before BLM could do so, the State of California took action in response to the Quechan Tribe’s concerns about the project that effectively precluded approval of Glamis’s proposal.⁹¹ Specifically, the state enacted legislation prohibiting the approval of any hardrock surface mining operation in California located near a Native American sacred site, unless the pits would be backfilled and graded to the approximate original contours of the land.⁹² Glamis contended that the new requirements would make the project financially infeasible and abandoned the venture.⁹³

Glamis initiated arbitration under the investment chapter of the North American Free Trade Agreement (NAFTA),⁹⁴ alleging that the backfilling legislation and failure to approve Glamis’s proposal constituted an expropriation and violated the MST.⁹⁵ The tribunal rejected both claims, making this a rare Community Conflict Case to go against the investor on liability.

The tribunal denied the expropriation claim on the ground that the actions by state and federal authorities had not deprived Glamis of its mining rights or even rendered the project unprofitable. In the tribunal’s view, Glamis could still carry out the project profitably; it would simply have to engage in additional mitigations that would make the project less profitable.⁹⁶

On the MST claim, the tribunal accepted that the investor’s reasonable expectations could be relevant in determining whether or not a violation occurred. The tribunal contended, however, that the investor’s expectations would be relevant only if the host state had created those expectations through conduct designed to induce the investment—as where it offered a specific assurance or commitment to the investor.⁹⁷ The tribunal observed that U.S. authorities had made no representations to Glamis about the way in which the relevant legal standard would be interpreted or encouraged Glamis to persist with its efforts.⁹⁸ Moreover, the tribunal asserted that if Glamis believed that BLM’s interpretation of the UUD standard was incorrect, the proper venue for its challenge was domestic court—not treaty arbitration.⁹⁹ As for the state backfilling legislation, the tribunal found that it did not violate any reasonable expectations because mining in California was a highly regulated activity, and state authorities had offered no specific assurance that they would not adopt further regulations.¹⁰⁰

3. Abengoa v. United Mexican States

As in Tecmed, the claimants in this case were Spanish companies that sought to build a hazardous waste facility in Mexico—this time near the municipality of Zimapán. The investors enjoyed initial governmental support for their project from all levels of government.¹⁰¹ Once again, however, the investors seem to have ignored clear warning signs about the social viability of the project.

Although the award does not mention it, other sources indicate that there were several communities in close proximity to the proposed hazardous waste plant. These reportedly included multiple villages of indigenous Otomi people,¹⁰² one of which was only 500 meters from the site.¹⁰³ It has been alleged that these communities were not consulted about the plant, and that when they learned of it—after its construction was already underway—they were alarmed.¹⁰⁴ Community members were concerned in particular that the hazardous waste would leach into the soil and contaminate local water sources, that toxic clouds could be carried to them on air currents, and that the plant could be vulnerable to earthquakes in light of a nearby geological fault.¹⁰⁵

It is not clear to what extent governmental authorities took these potential dangers into account when vetting the project; the award does not mention any specific community concerns or even the existence of indigenous villages in the area. In fact, the award says nothing about the impact assessment process, other than to explain that specialists hired by the investors’ subsidiary, SDS, “carried out technical studies of the location” and submitted the results to a federal agency in Mexico,¹⁰⁶ which promptly issued an Environmental Impact Authorization.¹⁰⁷ There is also no indication that SDS engaged with local communities to educate them about the project before settling on the site. The award notes that SDS made presentations to unspecified local residents, but not until after construction was already underway.¹⁰⁸

When local citizens finally learned about the plant, an opposition movement quickly developed.¹⁰⁹ Concerned citizens established a protest camp in front of Zimapán City Hall, blockaded local roads, and organized other large demonstrations in Zimapán and Mexico City, some of which turned violent.¹¹⁰ Seeking to diffuse the conflict, federal authorities proposed that an independent body conduct a study to evaluate the project’s environmental soundness, and that SDS suspend work in the meantime—which protest leaders endorsed.¹¹¹ Yet SDS continued building the plant and no independent study materialized, so protests continued.¹¹²

Federal authorities eventually sent troops to remove protestors so that the plant could be completed.¹¹³ These authorities also sought to assuage community concerns by stating publicly that the plant complied with applicable regulations and did not threaten the environment or the local population.¹¹⁴ The municipality eventually issued an operating permit for the plant, which soon began receiving hazardous waste.¹¹⁵

The opposition movement continued, and local residents voted leaders of the movement onto the city council.¹¹⁶ The new councilors again called for an independent impact assessment, but still no such study occurred.¹¹⁷ The council initiated an administrative proceeding against SDS and ultimately found that there had been irregularities in the EIA and other aspects of the approval process and that SDS had violated environmental regulations while operating the plant. The council revoked the plant’s operating permit on those grounds.¹¹⁸

The investors initiated arbitration under the 2006 Spain-Mexico BIT,¹¹⁹ and the tribunal found that Mexico had committed both an expropriation¹²⁰ and a denial of FET.¹²¹ The tribunal rested its conclusion for both claims on the notion of legitimate expectations.¹²² Specifically, the tribunal reasoned that the investors acquired a legitimate expectation that they would be able to operate the plant indefinitely because governmental authorities had authorized the project, and the federal government “confirmed on repeated occasions its support for the project and its belief that the Plant was being built and operated in a perfectly regular manner.”¹²³ The tribunal dismissed the environmental concerns raised about the plant, asserting that protest leaders had manufactured those concerns to get themselves voted into municipal office.¹²⁴ The tribunal suggested that if these leaders’ concerns had been genuine, they would have conducted an independent impact assessment after they took office.¹²⁵ Nowhere did the tribunal explain how the municipality could have paid for such a study or why SDS did not offer to pay for it given the study’s potential to assuage community concerns.

In fact, the tribunal did not acknowledge SDS’s failure to fund the proposed independent study even when addressing Mexico’s argument that the investors were negligent in handling community relations and therefore bore at least partial responsibility for their own losses.¹²⁶ The tribunal rejected that argument out of hand. According to the arbitrators, the conflict had been inevitable given the bad faith of protest leaders, and Mexico was in no position to fault SDS’s community relations efforts when Mexican law did not require SDS to do more.¹²⁷

Another issue the tribunal does not seem to have considered is whether the hazardous waste plant was compatible with Mexico’s international human rights and environmental obligations. This omission is conspicuous because while the plant was being constructed, local Otomi communities reportedly asserted that the government’s approval of the plant without consulting them violated their international human rights.¹²⁸ This contention is one that should be taken seriously because Mexico is a party to multiple binding international agreements that recognize a right on the part of indigenous peoples, like the Otomi, to prior consultation under some circumstances. In particular, an instrument known as ILO Convention No. 169 provides that governments must consult indigenous peoples whenever contemplating administrative measures—like the permitting of a hazardous waste plant—that may affect them directly.¹²⁹ In addition, the Inter-American Court of Human Rights (IACHR) has interpreted the American Convention on Human Rights¹³⁰ as requiring not only that the state engage in prior consultations with affected indigenous peoples, but that in some contexts it refrain from approving a development project if the affected peoples do not give their free, prior, and informed consent (FPIC).¹³¹ It appears, however, that the tribunal did not consider it necessary to inquire into whether Mexican authorities complied with these international obligations when authorizing the plant, or whether those authorities would have committed further violations by allowing the plant to continue operating.

4. Clayton v. Canada

The claimants in this case were a U.S. company, Bilcon, and its owners, the Clayton family, who sought to build an aggregate quarry and marine terminal in Digby Neck, Nova Scotia.¹³² The investors contended that they were enticed to pursue this project by promotional material issued by Nova Scotia touting the province’s potential for mining and quarries,¹³³ and by expressions of enthusiasm by provincial officials when they first raised the possibility of carrying out a project in Digby Neck.¹³⁴ However, it was undisputed that provincial and federal authorities made clear to the investors early on that any approval would be subject to the outcome of an EIA.¹³⁵

When the claimants applied for approval, these authorities decided to carry out a comprehensive form of impact assessment known as Joint Review Panel or JRP.¹³⁶ The authorities charged the JRP—an independent committee of experts—with determining the environmental effects of the project and measures that might mitigate any significant adverse environmental effects.¹³⁷ Consistent with applicable law, the agreement establishing the JRP defined “environmental effects” to include not only changes in the physical environment, but also any change that such an effect may have on health and socio-economic conditions; physical and cultural heritage; the current use of lands and resources for traditional purposes by aboriginal persons; or items of historical, archaeological, paleontological, or architectural significance.¹³⁸

The investors contended that they spent millions of dollars conducting studies and engaging with the JRP during the ensuing EIA process.¹³⁹ It is striking, however, that the investors do not appear to have made any effort to gauge community attitudes before submitting their proposal and triggering this expensive process. Moreover, even after the process began, it appears that the investors did little to educate the community about the proposal and address its concerns—being described by many residents as “dismissive” of their concerns.¹⁴⁰

Yet the concerns were substantial. Community members feared the impacts of blasting and marine traffic on whales, salmon, and other aquatic wildlife—all of which were a draw for the area’s burgeoning tourism industry.¹⁴¹ Some worried that the quarry’s operations would draw too much water from the local river, adversely affecting fish populations, and that blasting would harm the quality of drinking water.¹⁴² Moreover, Digby Neck was a rural area with no existing industrial operations, and many residents anticipated that establishing such a facility would change the area’s character, deter tourists from visiting, and set Digby Neck on a trajectory toward increasing industrialization.¹⁴³ In addition, the area and its surrounding waters had long been used by aboriginal groups for traditional purposes, and it was unclear how the project would affect those uses.¹⁴⁴

These concerns resulted in a flood of letters to provincial and federal authorities urging the rejection of the proposal and similar impassioned entreaties by participants in public hearings.¹⁴⁵ The project also had its supporters,¹⁴⁶ but the JRP perceived the weight of public opinion as substantially against the project.¹⁴⁷

Ultimately the JRP determined that the project would likely cause significant adverse environmental effects that could not be justified and recommended that the proposal be rejected.¹⁴⁸ The JRP based this conclusion on a number of factors, including its perception that the economic benefits from the project would be relatively modest while the burdens would be significant.¹⁴⁹ In the JRP’s view, such burdens would include adverse effects on the physical environment, including “threats to . . . marine mammals, fish, birds and rare plant species,” and the “possible alteration or destruction of a coastal wetland (fen).”¹⁵⁰ The JRP also identified social burdens that could result, including “reduction of groundwater quantity, altered air quality, and lower property values.”¹⁵¹ The JRP went on to assert that “the most striking burden” would be an adverse effect on “community core values,” which it defined to include a commitment of the Digby Neck community to “a living connection with traditional lifestyles, harmony with the environment, combined with a strong sense of stewardship as a way of life.”¹⁵² According to the JRP, the project would introduce a significant and irreversible change to Digby Neck, which would affect the community’s core values.¹⁵³ The JRP added that these changes would be so substantial as to constitute “a Significant Adverse Environmental Effect that cannot be mitigated.”¹⁵⁴ Provincial and federal authorities thereafter adopted the JRP’s recommendation and rejected the proposal.¹⁵⁵

The claimants initiated arbitration against Canada under NAFTA, contending that the denial of their proposal violated the treaty’s MST and anti-discrimination provisions.¹⁵⁶ A majority of the tribunal ruled in the claimants’ favor, although one arbitrator, Professor Donald McRae, dissented.

On the MST claim, the majority rested its finding of breach on the notion of reasonable expectations.¹⁵⁷ The majority credited the claimants’ assertion that they reasonably expected the impact assessment to have a “scientific and technical focus,”¹⁵⁸ limited to determining the project’s “environmental soundness,”¹⁵⁹ whereas the JRP focused on whether the project was consistent with the community’s core values.¹⁶⁰ This, the majority asserted, effectively gave the community a veto over the proposal.¹⁶¹ In addition, the majority asserted that the JRP failed to consider mitigation measures that could have addressed the adverse environmental effects.¹⁶²

The majority also held that Canadian authorities discriminated against the claimants by subjecting their proposal to more rigorous scrutiny than they applied to other proposed projects.¹⁶³ The majority deemed these other projects comparable to the claimants’ even though they had not generated significant community opposition.¹⁶⁴

In his dissent, Professor McRae disputed that the JRP had applied a standard that was manifestly inconsistent with applicable law.¹⁶⁵ He noted that the JRP had grounded its comments about adverse effects on community core values in impacts that were plainly proper for the JRP to consider, including socio-economic impacts such as those on air and water quality, fishing, and quality of life.¹⁶⁶ He also noted that the JRP justified its decision not to recommend mitigation measures on its perception that the effects of the project could not be mitigated.¹⁶⁷ Moreover, Professor McRae faulted the claimants for deficient community engagement, suggesting that if they “had been successful . . . in assuaging the concerns of the community and the JRP about the socioeconomic impact of the Project on the community, perhaps in modifying its proposal, perhaps in providing greater economic benefits, the recommendation might have been different.”¹⁶⁸ Finally, he observed that if there were any errors in the standard employed in the review process, the claimants could have challenged the decision before Canadian courts.¹⁶⁹

5. Bear Creek Mining v. Republic of Peru

The claimant in this case was Bear Creek, a Canadian company that sought to develop a silver mine in the Puno region of Peru near the border with Bolivia.¹⁷⁰ As in other Community Conflict Cases, Bear Creek secured initial support for the project from governmental authorities, but its plans were ultimately doomed by a lack of support from local communities.

When Bear Creek first discovered silver, it faced two major threshold obstacles. First, the site was located within the Aymara-Lupaca Reserve Area, which the state had declared off-limits to mining to protect its biodiversity and cultural heritage.¹⁷¹ The area featured rare flora and fauna and was home to numerous Aymara indigenous communities, who followed a traditional lifestyle centered on subsistence agriculture and herding.¹⁷² Second, Peruvian law provided that a foreign company could not acquire mining rights near the border without a declaration of “public necessity.”¹⁷³ Bear Creek overcame both of these obstacles when it convinced the state to “resize” the Reserve Area to exclude the mining site¹⁷⁴ and to issue the required decree of public necessity.¹⁷⁵ The state had a financial incentive to take both actions because it stood to derive substantial royalties and tax revenues from the project.¹⁷⁶

Thereafter, Bear Creek undertook exploratory work at the site with authorization from Peruvian authorities.¹⁷⁷ Encouraged by the results, Bear Creek sought to develop the mine for production.¹⁷⁸ To do so, however, Bear Creek would have to enter into land-use agreements with the communities and families who owned or occupied the land where the project would occur¹⁷⁹ and would also need further governmental authorizations.¹⁸⁰

Before Bear Creek could secure those authorizations, Peruvian law required it to conduct an Environmental and Social Impact Assessment (ESIA) and submit the same to Peruvian authorities for review and approval.¹⁸¹ Bear Creek did so, but the government identified a number of deficiencies in the ESIA and did not approve it.¹⁸² In addition, Peruvian law required mining developers to engage in consultations with all communities likely to be affected.¹⁸³ In fact, special consultation rules applied in this instance because the affected communities were indigenous. In such cases, developers had to engage in consultations with a view toward entering into agreements with the affected communities, which should confer a share of benefits and provide for the protection of their cultural heritage.¹⁸⁴ Peru had adopted these requirements to implement ILO Convention No. 169.¹⁸⁵

Bear Creek would later contend that Peruvian law merely required it to consult with the relevant communities; it did not actually have to secure their consent.¹⁸⁶ Peru disputed this, asserting that community consent was a de facto requirement for any project,¹⁸⁷ but that a legal requirement existed in this case by virtue of ILO Convention No. 169 because the project would affect indigenous communities.¹⁸⁸ Curiously, Peru failed to make another argument as to why these communities’ consent was required: the fact that Peru, like Mexico, is a party to the American Convention.¹⁸⁹ As noted previously, the IACHR has interpreted the American Convention as requiring FPIC when a development project would have a serious adverse effect on an indigenous community’s lands, resources, or way of life.¹⁹⁰

That this may have been such a project was attested to by an amicus brief submitted by a Peruvian NGO and human rights attorney (the “Amici”).¹⁹¹ According to the Amici, local Aymara communities had a spiritual bond with their territory and believed that the earth and local mountains—which they considered deities—would be harmed by the mine.¹⁹² Some were alarmed that the mine would draw excessive water from local sources upon which they, their livestock, and rare wildlife depended.¹⁹³ Some also feared that those water sources would be contaminated by hazardous chemicals.¹⁹⁴

In any event, Bear Creek did engage in some community consultations, but Peru and Amici characterized the company’s efforts as grossly inadequate. Bear Creek allegedly excluded key stakeholders, choosing to focus only on communities closest to the mine.¹⁹⁵ Bear Creek also allegedly made highly technical presentations in Spanish, although most locals were Aymara speakers and could not understand the accompanying (poor) translation.¹⁹⁶ Some community members also criticized Bear Creek for not taking their concerns seriously.¹⁹⁷

Bear Creek managed to secure support from some stakeholders after offering them economic benefits in the form of jobs and payments for land use.¹⁹⁸ Yet the company offered few or no such benefits to others within the project’s area of impact.¹⁹⁹ Moreover, even some to whom Bear Creek did offer benefits declined to support the mine²⁰⁰—including landowners who would need to sign land-use agreements for the project to proceed.²⁰¹

In time, a broad-based opposition movement developed against the mine.²⁰² The movement began with peaceful protests but escalated into strikes, roadblocks, and violent confrontations, which “paralyzed all the southern area of Puno.”²⁰³

According to Bear Creek, Peruvian officials assured the company during this time that its mining rights would be respected and that there were “no legal grounds to rescind legally granted concessions.”²⁰⁴ Nevertheless, Peruvian authorities eventually decided that the only way to diffuse the crisis was to meet protesters’ demands.²⁰⁵ These included revocation of the declaration of public necessity and Bear Creek’s associated mining rights and a moratorium on further mining in the area.²⁰⁶ The state accordingly took these actions.²⁰⁷

Bear Creek challenged the state’s decision before a Peruvian court, which eventually ruled that it had been unlawful for the state to completely revoke the company’s rights.²⁰⁸ Nevertheless, Bear Creek abandoned domestic proceedings when Peru appealed that ruling,²⁰⁹ in order to pursue arbitration against Peru under the Canada-Peru FTA before the treaty’s limitation period expired.²¹⁰

Bear Creek contended in the ensuing treaty arbitration that the revocation of its mining rights constituted an expropriation and violated the MST.²¹¹ The tribunal ruled in Bear Creek’s favor on expropriation, reasoning that Peru gave Bear Creek the “distinct, reasonable expectation” that it would be able to develop the mine by issuing the declaration of public necessity and authorizing the initial exploratory activity.²¹² The tribunal declined to reach the MST claim because it would not provide any further relief.²¹³

Peru argued that Bear Creek’s recovery should be precluded or reduced because ILO Convention No. 169 required community consent for the mine, and the company’s outreach efforts had been deficient.²¹⁴ The majority rejected these arguments. It asserted that the human rights of indigenous communities were beside the point because “ILO Convention 169 imposes direct obligations only on States.”²¹⁵ In addition, the majority echoed the tribunal in Abengoa in finding that it would be inappropriate to fault Bear Creek’s engagement efforts because Peru had not required Bear Creek to take any specific further steps.²¹⁶

One member of the tribunal, Philippe Sands, dissented in part. He asserted that a company like Bear Creek should be mindful of the human rights of communities in places where it invests, even if not directly bound by the relevant human rights instruments.²¹⁷He also concluded that Bear Creek made inadequate efforts to consult with communities and share benefits with them, as contemplated by ILO Convention No. 169.²¹⁸ He would therefore have held that Bear Creek bore partial responsibility for the conflict and reduced its damages by half.²¹⁹ Nevertheless, he agreed that the revocation of Bear Creek’s mining rights constituted an expropriation.²²⁰ According to Professor Sands, a more appropriate course would have been to suspend the mining rights rather than revoke them outright, leaving room for further consultations.²²¹

II. Proposed Guidelines for Evaluating Investor Expectations and Identifying What Is Reasonable to Expect from Investors

As Section I.B showed, claimants in Community Conflict Cases typically contend that they invested in reliance on “reasonable” or “legitimate” expectations that they derived either from host state assurances or authorizations or from a regulatory framework that they perceived as favorable to them.²²² As examined below, however, investors’ expectations in this regard may not always be objectively reasonable, and for reasons that tribunals do not always consider. Moreover, there may be other relevant factors apart from investor expectations—including investor misconduct or steps the investor needed to take to ripen any potential treaty claim—which could defeat the claim on the merits or warrant a reduction in damages.²²³

The sections that follow propose five guidelines to be employed by tribunals in Community Conflict Cases, each of which is designed to assist in determining whether asserted expectations were reasonable or identifying failings of the investor that may be relevant to liability or quantum.

A. Giving Effect to Aspects of Domestic Law that Limit Investor Expectations

In all of the cases discussed in Section I.B, the claimants contended that they reasonably expected host state authorities to approve their project or, if already approved, allow them to carry it out indefinitely. And in all of those cases but Glamis, the tribunal agreed. Yet arguments of this nature may not be tenable if the approvals on which the asserted expectations were based were not certain to be granted or were subject to potential revocation under domestic law.

It is true that investment treaties establish independent standards and thus a host state may breach a treaty even if its actions were justified under domestic law.²²⁴ Nevertheless, domestic law may be relevant to determining whether or not a treaty breach occurred.²²⁵ Domestic law is relevant in particular to ascertaining the nature and scope of the investor’s property rights and any requirements or restrictions on the investor’s activities that it should reasonably have anticipated.²²⁶ Notably, for large-scale projects like those typically at issue in Community Conflict Cases, any required approval will often depend on an EIA and stakeholder consultation, so the investor may never secure the property rights it seeks or the permission needed to exercise them if the results of these processes are not favorable.²²⁷ Moreover, any approval may be subject to revocation if actual impacts exceed those anticipated or represented by the investor, or if the investor violates the law while operating the project. Aspects of domestic law like these may thus deserve significant attention in Community Conflicts Cases, although—as will be seen—they do not always receive it.

1. Governmental approvals are often contingent on impact assessment or stakeholder consultation, the outcomes of which may be inherently uncertain

In recent decades, more than 100 countries have adopted binding legal requirements for governmental authorities to conduct an EIA prior to approving any projects or other activities that may have a significant environmental impact.²²⁸ The required assessment is generally not limited to impacts on the physical environment; social and cultural impacts must be examined as well, at least if they flow from effects on the physical environment.²²⁹ For example, as previously noted, the Canadian law at issue in Clayton called for governmental decision makers to consider potential changes to local health and socio-economic conditions, physical and cultural heritage, the current use of lands and resources for traditional purposes by aboriginal persons, or items of historical, archaeological, paleontological, or architectural significance.²³⁰ Federal law in the United States likewise calls for agencies to consider a broad range of social and cultural impacts.²³¹

Many EIA regimes also contemplate some form of public participation.²³² This enables local communities to assist in identifying effects they are likely to experience and express their views about the proposal.²³³ For example, when U.S. federal agencies are preparing an environmental impact statement (EIS), they are required to notify interested parties about the proposal, make a draft EIS available for public comment, hold public hearings, and consider and respond to comments received.²³⁴ In addition, when a project is likely to affect a Native American tribe, agencies must engage in meaningful consultations with the tribe.²³⁵ Similar requirements for public participation exist under Canadian law, which explains the outpouring of local opposition noted by the JRP in Clayton.²³⁶

While EIA regimes merely prescribe procedures that authorities must follow rather than impose any substantive outcome, the results of the EIA process will often influence the project’s prospects for approval.²³⁷ When governmental agencies reject proposals to carry out a project, they will often explicitly base the decision on public opposition or on anticipated adverse impacts on local communities or on the physical environment.²³⁸

Indeed, in some cases the results of the impact assessment may legally preclude the government from approving the project. For example, the regulatory framework applicable to the project at issue in Glamis prohibited BLM from approving a plan of operations if it would result in UUD.²³⁹ This standard has been interpreted to preclude BLM from approving projects that would violate state or federal laws,²⁴⁰ would cause impacts not reasonably incident to the proposed activity,²⁴¹ or would cause excessive environmental degradation.²⁴² Hence, if the impact assessment revealed that the project would cause effects within one of these categories, BLM could not validly approve it.²⁴³

If decisionmakers may deny an approval based on the outcome of an impact assessment or stakeholder consultations, then before these processes play out the investor should be aware that its ambitions may not be realized, and thus it may not have an actionable “expectation.”²⁴⁴ Hypothetically, the host state could guarantee to the investor that it will either issue the necessary approval or compensate the investor for any expenses incurred in connection with these processes. In such an event, the investor may well have a viable claim of reasonable expectations: a possibility recognized by the tribunal in Glamis.²⁴⁵ Yet no such guarantees were alleged in Bear Creek or Clayton and still the tribunals found that the claimants made their investments in reliance on reasonable expectations acquired before impact assessment and stakeholder consultations.

As will be recalled, in Bear Creek, the tribunal asserted that the Peruvian government gave Bear Creek the reasonable expectation that it would be able to develop the mine for production by issuing the decree of public necessity and authorizing initial exploratory activity.²⁴⁶ In reaching this conclusion, the tribunal did not explain how Bear Creek could have had such an expectation even though separate governmental approvals were required for the production phase, and any such approvals were subject to both an EIA and mandatory stakeholder consultations.²⁴⁷ Accordingly, if Peruvian authorities had not guaranteed any particular result, it would seem that Bear Creek should have understood that the outcome was not assured.

In Clayton, the majority held that the claimants reasonably expected that the environmental review process would have a “scientific and technical focus”²⁴⁸ and would be limited to determining the project’s “environmental soundness”²⁴⁹ without an emphasis on “community core values.”²⁵⁰ The majority failed to recognize, however, that the statutory framework gave responsible authorities discretion in evaluating whether or not to approve the project in light of whatever effects the EIA identified—whether biophysical, social, or cultural in nature.²⁵¹ Moreover, these authorities were required to take into account input from the public when making the necessary judgment about whether or not the project’s impacts would be justified.²⁵² Accordingly, unless the authorities had somehow guaranteed a positive result—which was not alleged—the claimants should have known that the outcome was uncertain and that social impacts and stakeholder attitudes could influence the result.

Any claim of reasonable expectations early on in the review process may be even more far-fetched if domestic law precludes the approval of the project absent consent by local stakeholders. For example, in the Philippines, certain types of projects may not take place on the lands of an indigenous people unless the people has given its consent.²⁵³ Peru contended in the Bear Creek arbitration that a similar consent requirement existed for projects affecting indigenous communities in that country.²⁵⁴ Oddly, however, the tribunal did not squarely address this argument.²⁵⁵ Instead, it focused on whether or not the claimant did all it needed to do by way of community “outreach”—that is, the process of seeking community consent.²⁵⁶ The majority asserted in particular that the “[c]laimant could take it for granted to have complied with all legal requirements with regard to its outreach to the local communities” because Peru had not required the claimants to take specific further steps in that regard.²⁵⁷ These comments miss the mark. If a local consent requirement existed—rather than merely a requirement to seek consent—and such consent had not been obtained by the time Bear Creek made its investment, then it is not clear how Bear Creek could possibly have had a reasonable expectation that it would be able to develop the mine for production.

Furthermore, if the relevant land or resources are owned by particular individuals or groups, their consent may be required before the project can go forward even if there is no consent requirement for all affected communities.²⁵⁸ This was another issue raised by Peru in Bear Creek, and the claimant did not deny that the landowners’ consent was required and that it had failed to obtain it.²⁵⁹ For the tribunal to find that the claimant nevertheless had a reasonable expectation to carry out the project is curious.

2. Domestic law may contemplate the revocation of rights or authorizations as a result of unanticipated impacts or legal violations

When a government has approved a project and the investor has made expenditures in reliance, the investor may well acquire vested rights under domestic law, such that a subsequent restriction on its activities would require compensation.²⁶⁰ Yet, under some circumstances, a governmental authorization may be subject to withdrawal or suspension without compensation.²⁶¹ Notably, domestic law may provide for the revocation or suspension of a permit if the project’s impacts turn out to be more severe than was originally anticipated or than was represented by the investor,²⁶² or if the permit holder violates the terms of the permit or applicable law while carrying out the project.²⁶³ Indeed, a permit holder in violation of applicable law may be subject to sanction even if state authorities had purported to confirm the lawfulness of its activities. In the United States, for example, the federal government generally cannot be estopped from enforcing the law—or required to pay compensation if it does so—even if its agents have previously represented to the party asserting estoppel that the party was in compliance with the law.²⁶⁴ Such estoppel will certainly not lie against the government if the party knew that its activities were unlawful.²⁶⁵

Rith Energy, Inc. v. United States²⁶⁶ provides an example of a measure that was justified under domestic law and did not require compensation. The plaintiff, Rith, held coal mining leases.²⁶⁷ To secure a mining permit, Rith had to submit an assessment of the probable hydrologic consequences of mining in the area, supported by soil test results.²⁶⁸ This was designed to ensure compliance with the Surface Mining Control and Reclamation Act (SMCRA),²⁶⁹ which seeks to reduce the risk of acid mine drainage (AMD), a phenomenon that can result in toxic materials reaching groundwater.²⁷⁰ Rith presented results purporting to show that the sampled materials were of low acidity and that the surrounding soils had buffering capabilities, suggesting a low risk of AMD.²⁷¹ The relevant agency accordingly issued Rith a permit.²⁷² Years later, however, the agency received public complaints about the mine and conducted its own tests.²⁷³ These contradicted the results submitted by Rith, so the agency suspended the permit.²⁷⁴ When Rith challenged this as a taking, the court held that Rith had no reasonable expectation to mine under circumstances that posed a danger to the public and should have known that any authorization was subject to compliance with SMCRA.²⁷⁵

The same logic can potentially be applied to treaty claims based on the revocation of a governmental approval. Namely, an investor should reasonably expect that it will have to conduct itself in accordance with domestic law or face the loss of its rights.²⁷⁶ Indeed, ISDS tribunals have widely recognized that the good faith, non-discriminatory enforcement of domestic regulations does not violate international law—at least if the penalties are proportionate to the offense.²⁷⁷

A recent arbitral award in Aven v. Costa Rica²⁷⁸ illustrates how this reasoning can be applied in a Community Conflict Case. In that case, a group of investors sought to develop a hotel and residential complex on the Pacific Coast of Costa Rica.²⁷⁹ They applied for and obtained the necessary governmental approvals, including environmental viability and construction permits, and began developing the property and marketing it.²⁸⁰ However, the claimants failed to disclose in their application the possibility that there were protected wetlands on the property.²⁸¹ After the claimants began construction work, local residents complained that wetlands were being destroyed and the government ultimately suspended the permits.²⁸² The tribunal determined that under Costa Rican law a permit applicant has the burden to disclose the existence of wetlands to the relevant authorities,²⁸³ and that the claimants’ failure to do so in this instance justified the suspension of the permits, thereby precluding a finding of treaty breach.²⁸⁴ The tribunal was unconvinced by the claimants’ assertion that they could reasonably rely on the government to identify the wetlands or on the fact that the government had issued the necessary permits.²⁸⁵

By contrast, the tribunals in both Tecmed and Abengoa dismissed out of hand attempts by state authorities to justify permit withdrawals based on asserted violations by the claimants of domestic law.²⁸⁶ In both cases, the relevant authority concluded that the investor’s subsidiary had violated environmental regulations, which constituted grounds under Mexican law for the permit to be withdrawn.²⁸⁷ Each tribunal determined that the relevant authority’s decision was misguided—and constituted a treaty breach—without even inquiring into what remedies Mexican law provided for infractions of the nature alleged. In fact, each tribunal asserted that it was ultimately irrelevant whether the decisions to withdraw approvals had been proper under Mexican law because the investor had reasonably relied on federal authorities’ initial inaction as well as on past assertions by these authorities that the facility did not pose a threat to public safety or the environment.²⁸⁸

Such a reliance argument may have some merit if the facilities at issue were truly in compliance with applicable law, or the investors had no reason to believe otherwise. But if the investors knew or should have known that the facilities were violating the law, and that withdrawal of their permits was available as a remedy for such a violation, then reliance on prior state assertions may not have beenjustified. ISDS tribunals should give states considerable leeway to correct their own errors and use their police powers to address violations without facing liability when they do so.²⁸⁹ One way to extend such leeway is to avoid entertaining claims founded in notions of reasonable reliance by investors who knew or should have known that they were violating the law.

B. Showing Deference to Host State Applications of Domestic Law, Particularly When a Decision Protects Against Potential Threats to the Public or the Environment

As the preceding discussion revealed, an investor may not have a credible argument that its reasonable expectations were frustrated by adverse state action if grounds existed under domestic law for the state to take the action in question. However, to apply that principle the tribunal must first accept the state’s conclusion that the measure was justified under domestic law. The discussion that follows will contend that tribunals should generally defer to the state in this regard absent evidence of bad faith or manifest error—particularly when the state was acting to prevent threats to public safety or the environment.

1. Tribunals should generally defer to state authorities when interpreting and applying their own law

The proposition that international courts or tribunals should show deference to host state authorities is widely accepted.²⁹⁰ As the tribunal in S.D. Meyers²⁹¹ asserted, a “tribunal does not have an open-ended mandate to second-guess government decision-making,”²⁹² and therefore, the tribunal’s “determination must be made in the light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders.”²⁹³ It is also often said that tribunals should not purport to act as courts of appeals on matters of domestic law²⁹⁴ and should instead afford states a margin of appreciation in interpreting their own law.²⁹⁵

Tribunals vary in how they characterize the appropriate standard of review, but some have said that they would require “convincing and decisive evidence”²⁹⁶ or “clear and compelling evidence”²⁹⁷ that host state findings were misguided. Others have indicated that they would respect host state determinations so long as they are plausible, made in good faith, and not manifestly erroneous.²⁹⁸ Moreover, it is well-settled that states are entitled to a presumption in proceedings before international courts or tribunals that they acted in good faith.²⁹⁹

Deference of this sort toward state authorities can be justified on several grounds. To begin, state authorities generally have more familiarity with their own law and are in the best position to interpret it.³⁰⁰ State authorities are also closer to the underlying facts than an international tribunal and may have greater expertise in any relevant scientific or technical issues.³⁰¹ In addition, showing deference is consistent with the dignity due to host states as sovereigns within their own borders and tends to promote the legitimacy of the court or tribunal among states and their publics.³⁰²

While most tribunals accept the need to show deference in principle, the extent to which they do so in practice is sometimes dubious. Several of the tribunals in Community Conflict Cases discussed above in Section I.B recited some version of the above mantras about deference but proceeded to reject state determinations rather lightly—at least when the determinations were adverse to the claimants. For example, the majority in Clayton endorsed the language in S.D. Meyers, calling for a “high measure of deference” toward host state authorities when regulating within their own borders³⁰³ and asserted that “mere error in legal or factual analysis” would not warrant a finding of treaty breach.³⁰⁴ Yet this did not stop the majority from substituting its own judgment for that of the JRP and Canadian authorities regarding how to interpret the legal standard for an EIA under Canadian law. Notably, the majority characterized the JRP’s interpretation of the standard as a fundamental departure from Canadian law,³⁰⁵ despite the evidence discussed above in Section II.A.1 that the interpretation was solidly grounded in the relevant statute.³⁰⁶

2. When deciding which of conflicting host state decisions to credit, tribunals should be mindful of the values at stake and the host state incentives behind each decision

When tribunals have rejected findings by host state authorities, they have sometimes done so in part because those authorities—or other authorities at a different level of government—had previously taken a contrary position. As noted previously, the tribunals in Tecmed and Abengoa based their conclusions in part on the fact that that federal authorities had previously found that the facilities at issue did not pose serious environmental or safety threats.³⁰⁷

These tribunals thus gave priority to certain governmental findings over others. Namely, they credited those that were favorable to the investor and rejected those that were adverse: an approach that feeds into the perception that ISDS is biased in favor of investors.³⁰⁸ The tribunals did not explain why they did so, but it is possible they felt that the statements favorable to the investor were more reliable because they were against the state’s interest in the arbitration. This reasoning is not always viable, however. State authorities may have good reasons for changing their views, for example if new facts or evidence emerge suggesting that their initial findings were erroneous or incomplete.³⁰⁹ Further, a different governmental agency may examine the matter and discover that the reality is contrary to what another agency suggested. If the investor knew the true state of affairs, it may not be credible to claim that it was grossly unfair, manifestly arbitrary, or otherwise internationally wrongful for the state to correct itself.

The tribunal in Abengoa may also have reasoned that findings or assertions by federal authorities should trump those by municipal authorities. The truth is, however, that findings by municipal authorities may be more reliable in some instances because they are closer to the facts on the ground and may be more in tune with impacts on local stakeholders or the environment and less influenced by the financial incentives that can lead higher authorities to overlook impacts.³¹⁰

Accordingly, tribunals faced with conflicting host state findings should not automatically credit one finding over the other simply because of when it was made or which authority made it. In such situations, the tribunal should undertake its own independent examination of the facts and law and reach its own conclusions. While some deference to host state authorities may be warranted, tribunals should modulate the degree of deference they provide to particular decisions depending on the context in which each was made and the values or risks at stake in each decision.

The idea that the degree of deference accorded to governmental measures should vary depending on the context is by no means a novel one. Courts in many legal systems apply an exacting standard of review for measures that target fundamental rights or vulnerable groups, but a deferential one when evaluating measures designed to protect public health, safety, or the environment (which do not place special burdens on vulnerable rights or groups).³¹¹ Similar reasoning would suggest that tribunals in Community Conflict Cases should show considerable deference when reviewing decisions to withhold, revoke, or suspend a governmental approval based on perceived environmental or social threats. Conversely, decisions may warrant little or no deference if there is a risk that, by adopting it, the state was ignoring or facilitating such threats or otherwise infringing important rights—such as an indigenous community’s right to prior consultation or consent.³¹²

Tribunals should be mindful that host states may have strong incentives to downplay risks associated with development projects and that these incentives can continue after a conflict has arisen between the investor and the local community—or even after the treaty arbitration has been filed. After all, if governmental authorities previously approved a project and purported to confirm that it complied with all applicable laws and regulations, it could be very damaging politically to recognize later that their prior findings were erroneous. The authorities would effectively be conceding that they failed in their most fundamental responsibilities and put the public or the environment at risk. For the tribunal to credit assertions by state authorities in such a context, without scrutiny, would be no less of a failure of responsibility—particularly if some other governmental entity has made a different finding.

To be sure, even when significant deference is due to a governmental decision, the tribunal must still exercise independence. Were tribunals too deferential, host states would be free to take whatever action against foreign investments they desired, so long as they cloaked it in the guise of environmental protection or public safety.³¹³ Tribunals have arguably struck the right balance when holding that they will respect a state determination entitled to deference so long as it was made in good faith and was not manifestly erroneous.³¹⁴ It similarly makes sense for tribunals to insist on clear and convincing evidence for any asserted basis to reject such a determination—beyond the fact that state authorities at some point expressed a different view.

C. The Potential Relevance of Local Remedies

Even if the tribunal concludes that a decision by state authorities was erroneous and contrary to the investor’s reasonable expectations, it does not automatically follow that a treaty breach has occurred. As I have argued elsewhere,³¹⁵ and as several tribunals have held,³¹⁶ if a mechanism exists under domestic law to have that decision reviewed and reversed without undue delay or expense, then the host state’s treatment of the investment has not necessarily frustrated reasonable expectations or otherwise fallen below international standards.

Investment treaties can be, and increasingly are, drafted to require the pursuit of local remedies for a specified period of time.³¹⁷ Yet even if there is no such requirement as a procedural matter certain claims may properly be viewed as defective on the merits absent a reasonable effort to pursue local remedies.³¹⁸ This proposition is most widely accepted for claims challenging judicial decisions because denial of justice has traditionally been viewed as having a substantive exhaustion element.³¹⁹ Nevertheless, the same reasoning can apply equally to claims challenging administrative decisions—such as the denial or withdrawal of a permit—provided the decision is readily subject to review and reversal.³²⁰

In some cases, however, it may not be feasible to pursue local remedies. The prospects for securing redress may be remote, and the investor may be facing financial pressure that makes delay in the filing of treaty arbitration impracticable.³²¹ In addition, some treaties require the investor to initiate treaty arbitration within a limited period of time and waive local remedies as a condition for proceeding to arbitration. For example, in Bear Creek, the investor made an initial effort to pursue local remedies—and even managed to secure a ruling in its favor from the court of first instance—but had to abandon that effort while an appeal was pending in order to commence treaty arbitration within the limitation period.³²² By contrast, in Clayton, the investors made no effort to pursue local remedies despite the fact that NAFTA gave the investors three years to pursue local remedies before filing a treaty claim,³²³ and Canadian law provided for judicial review of the challenged decision.³²⁴ The dissenting arbitrator found that this failure to seek judicial review rendered the claims fatally defective,³²⁵ but the majority simply ignored the issue of local remedies.

D. Confirming that the Investor’s Expectations Were Compatible with the Host State’s Non-Investment International Obligations

Even if the host state frustrated expectations of the investor that were reasonable from a domestic law perspective, that does not necessarily mean the investor should prevail on its treaty claims. The tribunal should also confirm that the investor’s asserted expectations were reasonable from an international law perspective, particularly in light of the host state’s human rights and environmental obligations.

It is increasingly recognized that investment treaties should be read in harmony with the host state’s non-investment international obligations.³²⁶ Support for this idea can be found in Article 31(3)(c) of the Vienna Convention on the Law of Treaties (VCLT),³²⁷ which calls for treaties to be interpreted in the light of “relevant rules of international law applicable in the relations between the parties,”—which may include human rights or environmental principles.³²⁸

As discussed in greater detail below, one way tribunals can harmonize the host state’s investment and non-investment obligations is to hold that it is not reasonable for the investor to rely on host state conduct that the investor knows, or should know, is contrary to the state’s non-investment obligations. Moreover, if the investor purports to secure rights that are inconsistent with the host state’s international obligations, the tribunal could treat the act as contrary to international public policy and dismiss the case on that basis.

1. If commitments offered to an investor inherently conflict with the host state’s international obligations, the investor cannot reasonably rely on them

Notwithstanding the growing body of jurisprudence and scholarship calling for human rights and environmental principles to inform the interpretation of investment treaty standards, tribunals in most Community Conflict Cases have either made no mention of such obligations or asserted that they are effectively irrelevant for their purposes. For example, in Bear Creek, the majority asserted that whatever the content of Peru’s human rights obligations, those obligations were for Peru to comply with—not the investor—and the investor could rely on the legal framework established by Peru and any rights that Peru conferred on the investor.³²⁹

Other tribunals have effectively sidestepped arguments about human rights or environmental obligations by asserting that the host state can avoid any conflict with these obligations by compensating the investor for any failure to satisfy commitments previously made to the investor.³³⁰ In other words, if the host state decided that something it had authorized the investor to do would violate human rights or environmental norms, the state could disallow the activity but pay the investor compensation.³³¹

It is not difficult to see the appeal of this approach. After all, it seems to allow the host state to uphold all of its obligations and relieves tribunals from having to determine the scope and content of the host state’s human rights and environmental obligations—subjects with which many of the business lawyers who sit on ISDS panels are bound to feel uncomfortable.³³² Moreover, in some cases the reasoning is perfectly viable. Take, for example, Suez v. Argentina.³³³ In that case, the host state promised the operator of a water utility that it could charge certain rates or tariffs to users of the system, with the understanding that the utility may be “directed by the government to provide free or subsidized services to certain classes of consumers,” in which case “payment for them was to be made from the National Treasury.”³³⁴ Argentina later refused to allow the investor to charge the agreed tariffs, asserting that they were too high for certain consumers and would unduly restrict access to water, thereby infringing the human right to water.³³⁵ The tribunal pointed out that the state could avoid any infringement of human rights by subsidizing the services of low-income consumers as explicitly contemplated in the contract, or otherwise compensating the investor.³³⁶

Nevertheless, in some cases a commitment made to the investor would inherently violate human rights, and no financial intervention by the state would avoid or erase the violation. For example, a host state could not authorize an investor to mine or dispose of hazardous waste in a manner that would cause serious contamination of local water supplies without violating its human rights obligations.³³⁷ And no payment of compensation (whether to the investor or to local citizens) could eliminate the inherent incompatibility between what the investor was authorized to do and the state’s international obligations.

Moreover, there are strong policy arguments against requiring a state to compensate an investor in such situations. First, the host state—particularly in a developing country—may not have the resources necessary to compensate the investor, and if the state had to do so it may be deterred from taking action to protect human rights or the environment.³³⁸ The state may simply pretend that there is no pollution taking place and suppress any local opposition that arises. Second, for an ISDS tribunal to award compensation would be rightly perceived by many as rewarding the investor for undertaking a project that was inherently incompatible with human rights and further undermine the legitimacy of investment treaties and ISDS.

A preferable approach may be to recognize that the investor could not reasonably have expected to engage in conduct that was contrary to the host state’s international obligations and therefore reject the claim on the merits—at least to the extent the claim relied on “reasonable expectations.”

The following hypothetical illustrates the point with particular starkness. Imagine that the host state promised the investor that it would exterminate all citizens in the vicinity of a mine or allow the investor’s private security forces to do so, in order to avoid potential resistance to the investor’s activities. In such a case, there would be an inherent conflict between what the host state promised and its human rights obligations, and the investor clearly could not reasonably expect the host state to follow through on its promise because such an act would constitute a jus cogens violation.³³⁹ If the investor sought to recover damages in ISDS for the failure to fulfill this promise, one would hope the tribunal would have no hesitation finding the promise unenforceable under international law and award no compensation.³⁴⁰

Yet there does not appear to be any good reason to limit this principle to jus cogens norms. If rights conferred by the host state under domestic law were contrary to any international obligations of the host state, and the investor knew or should have known that this was so, then the investor arguably could not reasonably have expected to enforce those rights. This should come as no surprise to investors because treaty claims are often premised on the notion that international law trumps domestic law when the two conflict.³⁴¹ Just as a host state cannot rely on its own law to avoid its international commitments,³⁴² so too an investor may not be able to rely on acts of the host state—or rights conferred under the internal law of the host state—that violate international law.

Moreover, even if there are other theories on which the investor could prevail apart from “reasonable expectations”—such as if the host state discriminated against the investor or formally nationalized certain of the investor’s rights—it may be appropriate to take the human rights or environmental implications of the project into account when determining the amount of compensation due.³⁴³ For example, if the investor’s mining rights could not be exercised without the consent of affected indigenous communities under human rights law, then those mining rights may not be as valuable as they would be if subject to no such restriction.

To see how the above principles could make a difference in Community Conflict Cases, consider Abengoa and Bear Creek. In both of those cases, the claimants contended that they reasonably expected to be able to operate their projects on or near lands occupied by indigenous communities, even though those communities had not given their consent.³⁴⁴ This was despite the fact that both host states were both parties to the American Convention, which the IACHR has interpreted as requiring FPIC when a project could have a serious adverse effect on an indigenous community’s lands, resources, or way of life.³⁴⁵ The awards in Abengoa and Bear Creek do not examine in detail what impacts the projects at issue could have had on local indigenous communities. But if the potential impacts rose to the level where FPIC was required, then it may have been impossible to square the investors’ asserted expectations with the host states’ international obligations, and it may have affected the value of whatever rights they did hold.

A similar scenario was at issue in South American Silver v. Bolivia, a recently decided case arising from a mining project that the host state canceled due to opposition by local indigenous communities.³⁴⁶ In contrast to Abengoa and Bear Creek, the tribunal found that the investor could not reasonably expect to carry out the project at issue in light of the social conflict.³⁴⁷ Nevertheless, the tribunal upheld the expropriation claim, concluding that the host state could not revoke the investor’s mining rights without paying compensation.³⁴⁸ The tribunal at no point acknowledged that the host state was a party to the American Convention³⁴⁹ or sought to ascertain whether local communities’ FPIC would have been required for the project to go forward: factors which could have been treated as relevant to whether or not the revocation was justified or at least in determining the amount of compensation.

Another example is presented by the pending case of Infinito Gold v. Costa Rica.³⁵⁰ The claimant contends in that case that Costa Rica authorized it to develop a gold mine in a remote region near the San Juan River that forms the border with Nicaragua, but revoked the approval after an outpouring of social opposition.³⁵¹ Opponents asserted that the mine presented serious environmental threats and would have violated Costa Rica’s international obligations, particularly in light of a risk that toxic chemicals would contaminate the San Juan River and harm endangered species.³⁵² While these risks may have been exaggerated, if the mine truly could not have been operated profitably without causing transboundary harm in violation of international environmental law,³⁵³ then arguably, the investor could not reasonably have expected to develop the mine and invested at its own risk.

2. Securing rights contrary to international law is potentially against international public policy

If an investor has purported to secure rights that it knows to be contrary to the host state’s international obligations, not only should its claim potentially fail on the merits for a lack of “reasonable expectations,” but the claim may properly be treated as inadmissible because the investor violated international public policy.

Several tribunals have dismissed claims after concluding that the investors had “unclean hands” because they had committed fraud, corruption, or some other illegality.³⁵⁴ A number have characterized the misconduct as a violation of international public policy or ordre public, which the arbitrators viewed as depriving them of jurisdiction or rendering the claims inadmissible.³⁵⁵

It may not be a stretch to extend the above reasoning to some situations in which the investor claims to have secured a right to engage in conduct that would violate the host state’s human rights or environmental obligations. The act of seeking such rights—potentially while promising a flow of taxes, royalties, or other economic benefits to the state—may be no less repugnant to international public policy than bribing a host state official.

E. Holding the Claimant Accountable for Mismanaging Stakeholder Relations and Other Forms of Contributory Fault

If the tribunal finds, despite applying the foregoing guidelines, that the host state violated its treaty obligations by canceling the investor’s project, one further step would still be needed before calculating damages. Namely, the tribunal should consider whether the investor contributed to its losses, as by failing to undertake sufficient due diligence before investing, not engaging adequately with local stakeholders, or committing misconduct while carrying out the project. In that event, a reduction in recovery may be appropriate.

1. The principle of contributory fault

Under international law, as under many domestic legal systems, if a party has contributed to the losses for which it seeks redress, the award may be reduced in proportion to the claimant’s contribution.³⁵⁶ This principle is expressed in Article 39 of the International Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts (“ILC Articles”): “In determination of reparation, account shall be taken of the contribution to the injury by wilful or negligent action or omission of the injured State or any person or entity in relation to whom reparation is sought.”³⁵⁷

Several ISDS tribunals have recognized the principle of contributory fault and have reduced damages on this basis. Some have faulted the investor in particular for undertaking an inadequate risk assessment before investing.³⁵⁸ Others have reduced from the award any amounts expended by the investor that were excessive and imprudent in light of risks facing the investment.³⁵⁹ Still others have reduced damages for misconduct that made the investor vulnerable to adverse host state action—such as tax evasion schemes³⁶⁰ or acts taken without a required governmental authorization³⁶¹—even if the tribunal did not view the misconduct as justifying the measures that the state took in response.

2. Application of the principle in Community Conflict Cases

Similar reasoning could readily be applied to reduce damages in Community Conflict Cases in appropriate circumstances, although several tribunals have declined to do so to date. Notably, the tribunals in Tecmed and Clayton did not even discuss contributory fault, while the tribunals in Abengoa, Bear Creek, and South American Silver recognized the principle but found that no reduction was warranted.

In language subsequently endorsed by the majority in Bear Creek,³⁶² the tribunal in Abengoa articulated the standard for contributory fault as follows:

For the international responsibility of a State to be excluded or diminished based on the investor’s omission or fault, it is necessary not only to prove said omission or fault, but also to establish a causal nexus between the [omission or fault] and the harm suffered. In other words, for the argument to succeed, it would be necessary to have evidence that, if a social communication program had been carried out from [when the Claimants first invested] in a timely manner, there would not have been the events that [later] led to the loss of the Claimants’ investment.³⁶³

Neither of those two tribunals deemed this standard satisfied on the facts before it. The tribunal in Abengoa felt that it was inappropriate to fault the claimants for the quality of their community engagement given that Mexican law did not impose any specific obligations on the claimants in that regard.³⁶⁴ The tribunal added that, in its view, the community conflict was inevitable due to the “aggressive and deceitful campaign” waged by the plant’s critics.³⁶⁵ The majority in Bear Creek similarly reasoned that even if the investor had been deficient in community outreach, the state had not required the investor to do more, and so those failings could not justify a reduction in damages.³⁶⁶

It is worth considering, however, whether these tribunals’ approach to contributory fault was unduly restrictive. One point of concern is that these tribunals seemed to focus exclusively on the quality of the investor’s “social communication program,” despite the fact that this is only one of many areas in which investor fault may arise. Even if the investor was competent in communicating with the community after making its investment, it may have neglected to conduct adequate due diligence before investing, including in ascertaining the community’s attitude toward the proposal and how difficult it would be to secure a social license.³⁶⁷ In addition, the investor may have failed to offer the community a share of benefits that was reasonable under the circumstances. Alternatively, the investor may have engaged in misconduct that undermined its relations with local communities or governmental authorities even if its approach to “communication” was reasonable. For example, if the investor violated environmental regulations or terms of its permit—as in Tecmed³⁶⁸—this may have fueled criticisms of the project and negated what would otherwise have been adequate engagement efforts. By the same token, the misconduct may have invited scrutiny by state authorities, prompting these authorities to take action that they might not otherwise have taken. The tribunals in Abengoa and Bear Creek did not expressly consider these potential forms of contributory fault.

Second, the standard articulated by the tribunals in Abengoa and Bear Creek seems to require a causal connection between the investor’s fault and the loss of the investment. Yet the investor’s fault may contribute to losses even if it does not trigger the outright cancelation of the project. Notably, the investor may have committed more capital than a prudent investor would have invested after clear warning signs emerged about the project’s prospects. In the same vein, missteps by the investor in community relations may have necessitated efforts and expenditures (by way of damage control) that would otherwise not have been required. For example, in Copper Mesa Petroleum v. Ecuador,³⁶⁹ the tribunal found that the claimant responded inappropriately to “provocations” by project opponents, including using mace and other forms of physical force,³⁷⁰ thereby generating ill-will among the local population and making it more difficult to secure community support.³⁷¹ This, the tribunal felt, warranted a thirty percent reduction in damages.³⁷² By contrast, the tribunals in Abengoa and Bear Creek at no point considered whether the claimants’ fault may have exacerbated their losses, even if that fault was not—in the tribunals’ view—what ultimately caused the state to withdraw the permits.³⁷³

Third, the tribunals in Abengoa and Bear Creek focused on whether the claimants did all they were legally required to do to engage with local communities. This limitation, too, is artificial. Basic business sense calls for investors to do whatever they reasonably can to minimize risk exposure, and the fact that certain steps may not be legally mandated does not diminish their importance. Professor Sands made a similar point in his dissent in Bear Creek when advocating for a fifty percent reduction in damages.³⁷⁴

Rather than limiting the inquiry to domestic legal requirements, tribunals may find it instructive to consider how the investor’s conduct sizes up against relevant international standards, such as the OECD Guidelines for Multinational Enterprises,³⁷⁵ UN Guiding Principles on Business and Human Rights,³⁷⁶ and international financial institutions’ environmental and social standards.³⁷⁷ All of these call for companies to conduct pre-investment due diligence and impact assessment, follow prescribed steps to monitor and mitigate impacts, and engage in particular ways with local stakeholders—whether or not required to do so by domestic law.³⁷⁸ Some financial institution standards go further and establish additional safeguards for indigenous peoples, including an FPIC requirement and an obligation to share economic benefits with affected communities.³⁷⁹ Compliance with standards like these not only promotes respect for human rights and environmental protection, but also reduces the investor’s own risk.³⁸⁰ Consequently, in some cases a failure to take steps contemplated by international standards could be construed as contributory fault, even if compliance would have been wholly voluntary.

It may also be instructive to compare the investor’s conduct to that of other companies who manage to carry out comparable projects without social conflict. For example, it is increasingly common for project developers to negotiate agreements with local communities before undertaking large-scale projects that will affect them, in order to minimize the risk of conflict and maximize prospects for securing governmental approvals.³⁸¹ These agreements typically provide for the developer to mitigate impacts of concern to the community and give the community a share of economic benefits in exchange for its support for the project.³⁸² The failure to offer terms to local communities that compare favorably to those that have helped avoid conflicts in similar contexts could amount to negligence. Fault may also attach if the investor fails to negotiate such agreements in good faith—with duly representative community leadership—in accordance with procedural safeguards that will promote the agreement’s legitimacy in the community.³⁸³

The tribunal in South American Silver also declined to reduce its award on the basis of contributory fault, but on different reasoning.³⁸⁴ That tribunal found that the investor contributed to the social crisis that led to the cancelation of its project³⁸⁵ and that Bolivia was within its rights to revoke the investor’s mining concession, but also determined that Bolivia breached the treaty by failing to offer compensation.³⁸⁶ The tribunal rejected Bolivia’s argument that the award should be reduced for contributory fault, reasoning that the failure to offer compensation was an act of Bolivia that was in no way attributable to the investor.³⁸⁷ This conclusion is perplexing, because for purposes of contributory fault the issue is not whether the host state’s treaty breach was attributable to the investor, but whether—assuming a breach by the host state has been established—the investor’s fault contributed materially to its damages.³⁸⁸ Hence, if the investor negligently failed to take steps that could have minimized conflict with local communities and prevented the resulting revocation of its concession or at least reduced its expenses, arguably the investor should not have recovered as much as it would have if it had been blameless. It is not clear why it would be necessary to show that the investor somehow caused Bolivia’s refusal to pay compensation before a reduction in the award could occur.

III. The Proposed Guidelines Leave Ample Room for State Liability and Are Consistent with the Object and Purpose of Investment Treaties

Having examined in Part II a series of guidelines that could preclude or reduce recoveries in Community Conflict Cases, it is worth considering how much room would be left for host states to incur liability and whether or not this would be consistent with the goals investment treaties are designed to achieve. As explained below, there are a multitude of scenarios in which such liability could result, and the outcomes contemplated by the guidelines would be fully consistent with the rationales underlying investment treaties.

A. Scenarios that May Properly Give Rise to State Liability in Community Conflict Cases

Investment treaties vary in the investor protections they articulate, and some include exception provisions or carve-outs that could defeat claims that would otherwise be viable.³⁸⁹ Nevertheless, it is possible to identify a multitude of scenarios in which host states could incur liability under investment treaties in Community Conflict Cases without running afoul of the guidelines set forth in Part II—subject to a potential reduction in damages for contributory fault in appropriate cases. The examples provided below are intended to be illustrative rather than exhaustive.

One way a host state could be found liable would be if it made a specific commitment to the investor and failed to comply with the same—assuming the commitment was consistent with the state’s non-investment international obligations. For example, the host state might promise the investor that if it did not issue a required approval it would compensate the investor for any expenses incurred during the review process. Reneging on such a commitment could violate a variety of treaty provisions,³⁹⁰ and so long as the investor did not seek to induce a violation of the state’s international obligations, nothing should preclude the commitment’s enforcement.

Liability could also arise if the host state revoked an approval previously granted to the investor based on purported risks to public safety or the environment, when no such risks actually existed or were greatly exaggerated. As noted above in Section II.B.1, the tribunal should generally defer to host state determinations on matters of domestic law, but it need not do so if the host state’s findings were manifestly erroneous or made in bad faith. An example of evidence that might tend to show the state’s bad faith in such a situation would be if the host state promptly began operating the project in its own right under similar conditions or allowed another company to do so.³⁹¹

Indeed, host state liability might attach even if the project did pose genuine environmental or social threats, but the threats were attributable to actions of the host state or a third party rather than to the investor. Notably, state authorities might be tempted in some cases to blame the investor for their own failings or those of state-owned enterprises which put local communities at risk unnecessarily.³⁹² Similarly, the state might blame the investor for a failure to deliver promised benefits to a community that the state itself or community leaders misappropriated through no fault of the investor.³⁹³

Another scenario in which the investor might prevail would be if the host state revoked the investor’s rights when there was still a reasonable chance that the investor could demonstrate that the project could be undertaken without undue risks or otherwise secure community support. For example, in Bear Creek, Professor Sands faulted Peru for revoking the investor’s mining rights rather than suspending them and allowing further impact assessment and community consultation after a cooling off period.³⁹⁴

A few other host state liability scenarios warrant mention. In particular, the host state might incur liability if it applied its laws to the claimant’s project more strictly than it did to a comparable project operated by host state nationals or third-country nationals;³⁹⁵ if it subjected the investor to a serious lack of due process or a denial of justice when the investor sought to challenge a denial or revocation of an approval in a domestic forum;³⁹⁶ or if local citizens who opposed the investor’s activities used physical force against the investment and the state was not sufficiently diligent in providing police protection.³⁹⁷

B. The Proposed Interpretive Framework Encourages Investment Flows and Good Governance

As the foregoing examples show, there would still be substantial room for a host state to be found liable in a Community Conflict Case under the proposed guidelines. As examined below, there would have to be such room in order for the guidelines to be consistent with investment treaties’ object and purpose. At the same time, there must be significant limits to host state liability, and I would submit that the proposed guidelines strike an appropriate balance.

As a starting point for this discussion, it should be noted that VCLT Article 31 provides for considering the treaty’s object and purpose as a primary means for interpreting its meaning.³⁹⁸ Tribunals typically seek to ascertain the treaty’s goals in this regard from the language of the treaty itself, and especially from its preamble.³⁹⁹

Countries may enter into investment treaties for any number of reasons, but treaties’ preambles typically announce as a key goal the promotion of investment flows between the signatories.⁴⁰⁰ Essentially, the hope is that the treaty will encourage companies from one country to invest in the territory of the other because the ISDS mechanism could allow them to recover damages if the host state were to treat them in a manner that was internationally wrongful.⁴⁰¹

Another rationale often articulated for these treaties is that they promote good governance.⁴⁰² The idea is that host states will be encouraged to follow the rule of law, make known in advance the rules that the investor is expected to follow, provide investors with due process, and refrain from discrimination, lest they incur liability.⁴⁰³ At the same time, investment treaties are not intended to abrogate the basic responsibility of the host state to regulate in the public interest, and good governance means more than acting predictably toward foreign investors. It also means, inter alia, being responsive to those most directly affected by governmental actions and otherwise protecting the public and the environment.⁴⁰⁴

The guidelines proposed herein are fully consistent with the twin goals of promoting investment flows and encouraging good governance. They do so by ensuring that investors are protected against conduct that is arbitrary, discriminatory, in bad faith, or expropriatory—as well as ensuring access to a functioning system of justice and reasonable police protection—while still giving the state wide space to protect its population and the environment.

Some might contend that the guidelines would screen out too many cases or result in anemic recoveries, thereby deterring investors from undertaking large-scale projects that may attract controversy. The truth is, however, that investors could readily protect themselves by employing common-sense safeguards. If they did so, they would not need to rely on investment treaties except for the most serious forms of maladministration.

To begin, the investor could undertake pre-investment due diligence. Among other things, the investor should seek to ascertain applicable requirements under domestic law and the scope of the host state’s human rights and environmental obligations, including whether or not community consent would be required for the project. The investor could also engage early on with both governmental and community representatives to ascertain their receptivity to the proposal. At this stage, the investor could seek to negotiate contractual terms with the host state providing for the investor to receive compensation for its expenditures during the review process if, at the end of the day, the project did not go forward for no fault of the investor. If the investor decided to proceed, it could carry out a rigorous impact assessment consistent with international standards. It could also consult with affected communities to educate them about the proposal more thoroughly, address any concerns they may have, and offer them a share of benefits commensurate with the impacts they will experience. If successful at achieving community buy-in, the investor could sign contracts with those communities and ensure that they are faithfully implemented. Alternatively, if the state has established other means for delivering benefits to local communities, the investor should seek to ensure, before moving forward, that these arrangements are satisfactory to community stakeholders and likely to deliver the promised benefits.⁴⁰⁵ If and when the state approved the project, the investor could scrupulously comply with domestic laws and regulations, as well as with any agreements it may have signed, and give the state no reason to act against it. If the investor did all or even much of this it would keep its risk exposure within manageable bounds.

What the investor could not do is ignore local communities and engage exclusively with governmental authorities when seeking to operate a hazardous waste facility, mine, or other high-impact project. Nor could the investor presume itself entitled to carry out such a project so long as it goes through the motions of impact assessment and stakeholder consultation. Equally untenable would be the assumption that, so long as it convinces a state authority to sign off on its plans, the project’s safety and environmental soundness—and the investor’s own diligence—may never subsequently be questioned.

Conclusion

The discussion above has shown that Community Conflict Cases decided on the merits to date have largely fed into the prevailing narrative that investment treaties and ISDS are biased in favor of investors, unduly restrain states in the exercise of their regulatory prerogatives, and conflict with host state sovereignty. It has also argued, however, that a few adjustments to the analytical framework employed in these cases could strike a better balance between investor rights, human rights, and environmental protection.

Under the guidelines proposed herein, host states would be encouraged to behave honestly and justly toward investors because they could face significant potential liability if they did not. Companies could rest assured when investing that they would have an avenue for redress should they experience serious mistreatment at the hands of the host state—at least so long as their own hands were clean when they sought it. For just as states would be encouraged to meet an international minimum standard, so too would investors. Investors would be incentivized to conduct due diligence and commonsense risk management whenever embarking on a large-scale venture among a vulnerable population. They would have every reason to respect the human rights of local stakeholders in the places where they operated. It would be incumbent upon them to protect the environment to the extent feasible, and to refrain at all costs from any activities that could cause transboundary harm, threaten endangered species, or otherwise violate the host state’s international environmental obligations. And investors would be well-advised to respect host state laws and avoid corruption. In short, investors would need to hold themselves to the same standards of fairness and equity to which they might one day seek to hold the state.

Investor-Community Conflicts in Investor-State Dispute Settlement: Rethinking "Reasonable Expectations" and Expecting More from Investors

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