The article tackles the question of how far should investment tribunals go in reviewing the reasonableness of host state conduct. Based on an evolutionary interpretation of the preamble of international investment treaties and focusing on the principle of integration as the key element of the concept of sustainable development, the article's main argument is that investment tribunals should avoid a review based on proportionality stricto sensu or cost-benefit balancing.
1 See the International Law Commission (ILC) Articles on Responsibility of States for Internationally Wrongful Acts, UN Doc. A/RES/56/83 (2002), Annex, Art. 4.
2 1991 Netherlands-Czech Republic BIT, Art. 3(1); Energy Charter Treaty, Art. 10(1). See Newcombe and Paradell, Law and Practice of Investment Treaties (2009), 298.
3 Norway-Lithuania BIT, Art. III.
4 See K. Vandevelde, Bilateral Investment Treaties: History, Policy, and Interpretation (2010), Ch. 5. Investment treaty provisions have also been interpreted to include certain procedural reasonableness requirements such as transparency, procedural propriety and due process. See R. Dolzer and C. Schreuer, Principles of International Investment Law (2012), 145.
5 Saluka v. Czech Republic, Award, 17 March 2006, para. 309.
6 AAPL v. Sri Lanka, Award, 27 June 1990, para. 85(B).
7 Glamis Gold v. USA, Award, 8 June 2009, para. 627.
8 Newcombe and Paradell, supra note 2, at 358.
9 Corten, O., ‘The notion of “reasonable” in international law: legal discourse, reason and contradictions’, (1999) 48 International and Comparative Law Quarterly 613 , at 623.
10 There may even be a less intrusive test that more simply requires that the conduct under review be aimed at a legitimate public policy, or in other words, that the conduct adopted be a good faith attempt at addressing a specific legitimate policy concern. In international investment law, this is often linked with the prohibition of arbitrariness (in customary international law) and with so called self-judging clauses.
11 Among the vast scholarship on the topic see J. Schwarze, European Administrative Law (1992); Andenas, M. and Zleptnig, S., ‘Proportionality: WTO Law in Comparative Perspective’, (2007) 42 Texas International Law Journal 371 ; Barak, A., ‘Proportionality and Principled Balancing’, (2010) 3 Law & Ethics of Human Rights 1 .
12 See, e.g., Pope & Talbot v. Canada, Award on the Merits of Phase 2, 10 April 2001, paras. 123, 125 and 128. The tribunal examined the host state conduct under Art. 1105 NAFTA and found that, ‘the approach taken by Canada was a reasonable response to the difficulty with which it had to deal and cannot be-characterized as unfair or inequitable’. See also Chemtura v. Canada, Award, 2 August 2010, para. 266. The tribunal rejected the claim of indirect expropriation under Art. 1110 NAFTA in part because ‘the measures challenged by the claimant constituted a valid exercise of the Respondent's police powers [and specifically since the domestic regulatory authority] took measures within its mandate, in a non-discriminatory manner, motivated by the increasing awareness of the dangers presented by lindane for human health and the environment’.
13 Tecmed v. Mexico, Award, 29 May 2003, para. 122. See Kingsbury, B. and Schill, S., ‘Public Law Concepts to Balance Investors’ Rights with State Regulatory Actions in the Public Interest—The Concept of Proportionality’, in Schill, S. (ed.), International Investment Law and Comparative Public Law (2010), 76 , at 89–98; Asteriti, A., ‘Regulatory expropriation claims in international investment arbitrations’, in Byorklund, A. (ed.), Yearbook of International Investment Law and Policy 2012–2013 (2014).
14 Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. Argentina, Decision on Liability, 30 July 2010, para. 147. See further J. Bonnitcha, Substantive Protection under Investment Treaties: A Legal and Economic Analysis (2014), at 260 et seq. The author identifies two interpretative approaches within the ‘balancing structure’ employed by arbitral tribunals in order to determine the existence of an indirect expropriation.
15 Saluka v. Czech Republic, Award, 17 March 2006, para. 306.
16 Electrabel v. Hungary, Award, 25 November 2015, para. 179. See also Micula et al. v. Romania, Award, 11 December 2013, para. 525. ‘[F]or a state's conduct to be reasonable, it is not sufficient that it be related to a rational policy; it is also necessary that, in the implementation of that policy, the state's acts have been appropriately tailored to the pursuit of that rational policy with due regard for the consequences imposed on investors.’
17 See Kläger, R., ‘“Fair and Equitable Treatment” and Sustainable Development’, in Cordonier Segger, M., Gehring, M. and Newcombe, A. (eds.), Sustainable Development in World Investment Law (2011), at 259.
18 See Sweet, A. Stone, ‘Investor-State Arbitration: Proportionality's New Frontier’, (2010) 4 Law and Ethics of Human Rights 47 ; Kingsbury and Schill, supra note 13, 76; Kriebaum, U., ‘Regulatory Takings: Balancing the Interests of the Investor and the State’, (2007) 8 Journal of World Investment and Trade 717 .
19 Ranjan, P., ‘Using the Public Law Concept of Proportionality to Balance Investment Protection with Regulation in International Investment Law: A Critical Appraisal’, (2014) 3 Cambridge Journal of International and Comparative Law 853 , at 862. See also C. Henckels, Proportionality and Deference in Investor-State Arbitration: Balancing Investment Protection and Regulatory Autonomy (2016), at 164–8.
20 B. Pirker, ‘Seeing the Forest without the Trees – The Doubtful Case for Proportionality Analysis in International Investment Arbitration’, (2011) SSRN, at 8.
21 See the customary general rule of treaty interpretation as codified in the 1969 Vienna Convention on the Law of Treaties, 1980 UNTS 332, Art. 31 (VCLT).
22 I borrow in this context the distinction between ‘object’ and ‘purpose’ put forward by Buffard, I. and Zemanek, K., ‘The “Object and Purpose” of a Treaty: An Enigma?’, (1998) 3 Austrian Review of International and European Law 311 , at 326. ‘The object of a treaty is the instrument for the achievement of the treaty's purpose.’ See further Ortino, F., ‘Investment Treaty System as Judicial Review’, (2013) 24 (3) American Review of International Arbitration 437 .
23 For example, tribunals have relied on the object and purpose of the investment treaty in interpreting the ‘fair and equitable treatment’ clause and the so-called ‘umbrella’ clause as well as the notion of ‘investment’ for purposes of determining the subject matter jurisdiction of ICSID tribunals.
24 R. Gardiner, Treaty Interpretation (2008), 192.
25 Azurix v. the Argentine Republic, Award, 14 July 2006, para. 372.
26 LG&E v. the Argentine Republic, Decision on Liability, 3 October 2006, para. 124
27 Buffard and Zemanek, supra note 22, at 326.
28 Ibid., at 332. ‘If “purpose” were the only guiding principle for interpretation, unfettered teleology would be possible and the treaty provisions actually agreed upon might become more or less irrelevant as long as the conduct of the parties achieved the aim of the treaty. By joining “object” to the guiding principle, the provisions of the treaty are linked to its aim and the conduct of the parties for achieving the aim is confined to the rights and obligations established by the treaty provisions. Interpreting a treaty in the light of its object and purpose is thus a more restricted variant of teleological interpretation.’
29 The preamble to the 1959 Germany-Pakistan BIT reads as follows: ‘DESIRING to intensify economic co-operation between the two States, INTENDING to create favourable conditions for investments by nationals and companies of either State in the territory of the other State, and RECOGNIZING that an understanding reached between the two States is likely to promote investment, encourage private industrial and financial enterprise and to increase the prosperity of both the States, HAVE AGREED AS FOLLOWS . . .’. The preamble to the 2009 Germany-Pakistan BIT reads as follows: ‘Desiring to intensify economic co-operation between both States, Intending to create favourable conditions for investments by investors of either State in the territory of the other State, Recognizing that the encouragement and protection of such investments can stimulate private business initiative and increase the prosperity of both Contracting States, Have agreed as follows . . .’.
30 See G. Van Harten, Investment Treaty Arbitration and Public Law (2007), 140.
31 United States Import Prohibition of Certain Shrimp and Shrimp Products, Appellate Body Report, WT/DS58/AB/R, 12 October 1998, para. 17.
32 See, e.g., Tokios Tokeles, Decision on Jurisdiction, 29 April 2004, para. 85. ‘[T]he object and purpose of the BIT is to provide broad protection for investors and their investments.’ See also Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16), Decision on Jurisdiction, 11 May 2005, para. 142. ‘. . .[T]he clear intention was to provide full protection for investors’. For a more ‘enlightened’ view see Lemire v. Ukraine, Decision on Jurisdiction and Liability, 14 January 2010, paras. 272–3.
33 Gardiner, supra note 24, at 196–9.
34 See, e.g., 1961 Switzerland-Tunisia BIT, ‘Reconnaissant qu'une protection contractuelle de ces investissements est susceptible de stimuler l'initiative économique privée et d'augmenter la prospérité des deux nations’; 1965 Belgium/Luxembourg-Morocco BIT, ‘Recognizing that the contractual protection of investments is likely to stimulate private economic initiative and increase prosperity’; 1975 United Kingdom-Egypt BIT, ‘Recognising that the encouragement and reciprocal protection under international agreement of such investments will be conducive to the stimulation of business initiative and will increase prosperity in both States’; 1985 Italy-Tunisia BIT, ‘Désireuses de renforcer leurs relations économiques et d'intensifier la coopération entre les deux pays en vue de favoriser leur développement; Convaincues qu'une protection des investissements en vertu d'un accord bilatéral est susceptible de stimuler l'initiative économique privée et d'accroitre la prospérité des deux pays’; 1979 Netherlands-Senegal BIT, ‘Reconnaissant que l'encouragement de ces investissements est susceptible de stimuler l'initiative économique et d'augmenter la prospérité des deux nations’, although most of the Dutch BITs in those early years, referred to ‘mutual benefits’ instead of ‘prosperity’. See 1965 Netherlands-Cameroon BIT: ‘animés du désir de raffermir leurs liens d'amitié traditionnels, de développer et d'intensifier leurs relations économiques sur la base de l’égalité et des avantages réciproques, sont convenus des dispositions suivantes’.
35 See W. Rostow, The Process of Economic Growth (1952); A. Lewis, The Theory of Economic Growth (1955); S. Kuznets, Modern Economic Growth (1966).
36 K. Ruddle and D. Rondinelli, Transforming Natural Resources for Human Development: A Resource Systems Framework for Development Policy (1983), Ch. 4.
37 D. Kapur, J. Lewis and R. Webb, The World Bank: Its First Half Century (1997), Vol. I, at 115: ‘Such measures would be temporary palliatives, at the expense of savings and productive investment; direct and immediate attacks on mass poverty would only squander limited national resources.’
38 Ruddle and Rondinelli, supra note 36, citing United Nations, Report of the United Nations Conference on the Human Environment Stockholm 1972 (UN Doc. A/CONF. 48/14).
39 1976 France-Malta BIT, ‘Recognising that encouragement and contractual protection of such investments are apt to stimulate the transfer of capital and technology between both nations in the interest of their economic development’; 1977 Japan-Egypt BIT, ‘Recognizing that the encouragement and reciprocal protection of investment will stimulate the flow of capital and technology for the benefit of the economies of the two countries’; 1983 United States of America-Senegal BIT, ‘Recognizing that agreement upon the treatment to be accorded such investment will stimulate the flow of private capital and the economic development of both Parties’.
40 Equally, the great majority of all investment treaties emphasize in their preamble the contracting parties’ desire to intensify economic co-operation between them.
41 Vandevelde, K., ‘The Economics of Bilateral Investment Treaties’, (2000) 41 (2) Harvard International Law Journal 469, at 471 . Cf. UNCTAD, Bilateral Investment Treaties in the Mid-1990s (Geneva, 1998) at 29–31.
42 World Business Council on Sustainable Development (WBCSD), available at www.wbcsd.org/. The link between international investment law and sustainable development has been the subject of several recent scholarly works including: Newcombe, A., ‘Sustainable Development and Investment Treaty Law’, (2007) 8 Journal of World Investment & Trade ; M. Cordonier Segger, M. Gehring and A. Newcombe (eds.), Sustainable Development in World Investment Law (2011); H. Kong and K. Wroth (eds.), NAFTA and Sustainable Development: The History, Experience, and Prospects for Reforms (2015).
43 J. Van Duzer, P. Simons and G. Mayeda, Integrating Sustainable Development into International Investment Agreements (2013), 21, citing Gallagher, K. and Zarsky, L., ‘No Miracle Drug: Foreign Direct Investment and Sustainable Development’, in Zarsky, L. (ed.) International Investment for Sustainable Development: Balancing Rights and Rewards (2005).
44 See the various studies in K. Sauvant and L. Sachs (eds.), The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows (2009).
45 Ruger, J., ‘The Changing Role of the World Bank in Global Health’, (2005) 95 (1) American Journal of Public Health , at 69
46 T. Soubbotina, Beyond Economic Growth: An Introduction to Sustainable Development (2004), 123.
47 See generally A. Sen, Development as Freedom (2000); Faundez, J., ‘Rule of Law or Washington Consensus: The Evolution of the World Bank's Approach to Legal and Judicial Reform’, in Perry-Kesaris, A. (ed.), Law in the Pursuit of Development (2010), 180–201 .
48 Cordonier Segger, Gehring and Newcombe, supra note 42.
49 C. Voigt, Sustainable Development as a Principle of International Law (2009), 18–19.
50 See Gabčikovo-Nagymaros Project (Hungary/Slovakia), Separate Opinion of Vice-President Weeramantry,  ICJ Rep. 88, at 95.
51 K. Gordon, J. Pohl and M. Bouchard, Investment Treaty Law, Sustainable Development and Responsible Business Conduct: A Fact Finding Survey, OECD Working Papers on International Investment (2014/01), 9–10.
52 Ibid., at 11.
53 Ibid., at 15. These preambles make it clear that investment promotion and protection need to respect other key public policy objectives including the protection of health, safety, the environment and consumers, or the promotion of internationally recognized labour rights. See UNCTAD, Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking (2007), 4.
54 See the 2012 Canada-China BIT. Also, see the preamble of the 2014 draft Canada-European Union Comprehensive Economic and Trade Agreement (CETA), which notes in part as follows: ‘REAFFIRMING their commitment to promote sustainable development and the development of international trade in such a way as to contribute to sustainable development in its economic, social and environmental dimensions; DETERMINED to implement this Agreement in a manner consistent with the enhancement of the levels of labour and environmental protection and the enforcement of their labour and environmental laws and policies, building on their international commitments on labour and environment matters; . . . RECOGNIZING the importance of international security, democracy, human rights and the rule of law for the development of international trade and economic cooperation’. See also the EU-Cariforum Economic Partnership Agreement.
55 UNCTAD, 2012 World Investment Report: Towards a New Generation of Investment Policies (2012), 97 et seq. See also the practical handbook produced by the Commonwealth Secretariat to help enable developing countries to design international investment agreements that support their development needs. J. Van Duzer et al., Integrating Sustainable Development into International Investment Agreements: A Guide for Developing Country Negotiators (2013).
56 See Cordonier Segger, M. and Newcombe, A., ‘An Integrated Agenda for Sustainable Development in International Investment Law’, in Cordonier Segger, M., Gehring, M. and Newcombe, A. (eds.), Sustainable Development in World Investment Law, (2011), 101 et seq.
57 Gordon, Pohl and Bouchard, supra note 51, at 12. ‘This attests to the strong “legacy” effects in the treaty production process. In other words, older approaches to treaty practice live on in older treaties that have not been renegotiated, presumably due to the high cost of treaty renegotiation, and that are still in force due to the length of their validity periods.’
58 Legal Consequences for States of the Continued Presence of South Africa in Namibia (South West Africa) notwithstanding Security Council Resolution 276, Advisory Opinion of 21 June 1971,  ICJ Rep. 16, at 31, para. 53.
59 United States Import Prohibition of Certain Shrimp and Shrimp Products, Appellate Body Report, WT/DS58/AB/R, 12 October 1998, para. 130.
60 Arato, J., ‘Subsequent Practice and Evolutive Interpretation: Techniques of Treaty Interpretation over Time and Their Diverse Consequences’, (2010) 9 (3) The Law and Practice of International Courts and Tribunals 443 , at 468; E. Bjorge, The Evolutionary Interpretation of Treaties (2014), 9.
61 Dispute regarding Navigational and Related Rights (Costa Rica v. Nicaragua), Judgment of 13 July 2009,  ICJ Rep. 213, at 243, para. 66.
63 Arato, supra note 60, at 467.
64 WorldNet Dictionary, available at wordnetweb.princeton.edu/perl/webwn.
65 A. Stevenson and M. Waite, Concise Oxford English Dictionary: Luxury Edition (2011), 1153.
66 Oxford English Dictionary, ‘development’, available at www.oed.com.
67 H. Van den Berg, Economic Growth and Development (2014), at 28. ‘The complexity of the process of economic development and its interactions with our greater social and natural environments requires us to move beyond the familiar economic relationships studied by orthodox, or mainstream, economics. Gaining an understanding of our complex human existence is a difficult task. To be successful, we need to formally recognize the interdependence of social and natural phenomena. And, we need to adopt an efficient method for increasing our knowledge about this complex reality. The perspective we take in this textbook is called holism, our approach to economic modeling is heterodox, and our method of analysis seeks to follow the steps of the scientific method.’ Ibid., at 29.
68 N. Schrijver, The Evolution of Sustainable Development in International Law: Inception, Meaning and Status (2008), 366–74.
69 T. Soubbotina, Beyond Economic Growth: An Introduction to Sustainable Development (2004), 9.
70 P. Sands, Principles of International Economic Law (2003), 263. On the principle of integration as a ‘fundamental component of sustainable development’, see International Law Association (ILA), Report of the ILA Committee on International Law and Sustainable Development (2006), 468–522.
71 ‘Sustainable development is development that meets the needs of the present, without compromising the ability of future generations to meet their own needs.’
72 D. Tladi, Sustainable Development In International Law: An Analysis of Key Enviro-economic Instruments (2007), 74.
73 Ibid., at 75.
74 See the definition of sustainable development provided by the Development Education Program (DEP) of the World Bank Institute (WBI), available at www.worldbank.org/depweb/english/sd.html. The WBI is the learning arm of the World Bank.
76 Johannesburg Declaration on Sustainable Development, in Report of the World Summit on Sustainable Development, A/CONF. 199/20 (2002), para. 5 (emphasis added).
77 See Lydgate, E., ‘Sustainable Development in the WTO: from Mutual Supportiveness to Balancing’, (2012) 11 (4) World Trade Review 621, at 628–32.
78 A. Boyle and D. Freestone, International Law and Sustainable Development: Past Achievements and Future Challenges (1999), 17–18. On the role of sustainable development as an interstitial norm, see Lowe, V., ‘Sustainable Development and Unsustainable Arguments’, in Boyle, A. and Freestone, D., International Law and Sustainable Development: Past Achievements and Future Challenges (1999).
79 M. Cordonier Segger and A. Khalfan, Sustainable Development Law: Principles, Practices, and Prospects (2004), 104. Lawyers have referred to this dichotomy by contrasting ‘obligations of means’ with ‘obligations of result’.
80 Ibid., at 104–8.
81 Hickman, T., ‘The reasonableness principle: Reassessing its place in the public sphere’, (2004) Cambridge Law Journal 166 .
82 Morrone, A., ‘Constitutional Adjudication and the Principle of Reasonableness’, in Bongiovanni, G., Sartor, G. and Valentini, C. (eds.), Reasonableness and the Law (2009). In the context of private international law, see A. Lowenfeld, International Litigation and the Quest for Reasonableness (1996).
83 L. Woolf et al., De Smith's Judicial Review (2013), 594. However, it has been recognized that behind the vague Wednesbury formulation one can find several distinct tenets and principles falling under the following categories: (a) unreasonable process including decisions based on considerations which have been accorded manifestly inappropriate weight; decisions which are apparently illogical or arbitrary; uncertain decisions; decisions supported by inadequate or incomprehensible reasons; decisions supported by inadequate evidence or which are made on the basis of a material mistake or disregard of fact; (b) violation of constitutional principles including the rule of law and formal and substantive equality; and (c) oppressive decisions including those decisions that are unnecessarily or excessively onerous. Ibid., at 594 et seq.
84 J. Schwarze, European Administrative Law (2006).
85 For example, on the overlap between reasonableness and proportionality in English law, see Woolf et al., supra note 83, at 633–4. Within the broader European context, see E. Ellis (ed.), The Principle of Proportionality in the Laws of Europe (1999); N. Emiliou, The Principle of Proportionality in European Law: A Comparative Study (1996).
86 See, e.g., the ‘rational relation test’ under United States constitutional law or the ‘means/end test’ applied by WTO dispute settlement bodies under Art. XX GATT.
87 Stone Sweet, A. and Mathews, J., ‘Proportionality Balancing and Global Constitutionalism’, (2008) 47 Columbia Journal of Transnational Law 73 .
88 M. Cartabia, ‘I principi di ragionevolezza e proporzionalità nella giurisprudenza costituzionale italiana’, Conferenza trilaterale delle Corte costituzionali italiana, portoghese e spagnola, Roma, Palazzo della Consulta 24-26 ottobre 2013 (emphasizing how the Italian Constitutional Court employs the various proportionality prongs under its reasonableness review without, however, a clear orderly systematization).
89 Jans, J., ‘Proportionality Revisited’, (2000) 27 Legal Issues of Economic Integration 239, at 241 .
90 Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, Appellate Body Reports WT/DS161/AB/R and WT/DS169/AB/R, circulated 11 December 2000, adopted 10 January 2001, para. 176. For a more sceptical assessment see Fontanelli, F., ‘Necessity Killed the GATT - Art XX GATT and the Misleading Rhetoric about “Weighing and Balancing”’, (2012/2013) 5 European Journal of Legal Studies 36 .
91 See Regan, D., ‘The Meaning of “Necessary” in GATT Article XX and GATS Article XIV: The Myth of Cost-Benefit Balancing’, (2007) 6 World Trade Review 347 .
92 For an (interesting) example of such express specification, see the Annex B on Expropriation of the 2012 United States model BIT: ‘[t]he determination of whether an action . . . in a specific fact situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers, among other factors: (i) the economic impact of the government action . . . (ii) extent of interference with distinct, reasonable investment-backed expectations; and (iii) the character of the government action.’
93 See C. Henckels, Proportionality and Deference in Investor-State Arbitration: Balancing Investment Protection and Regulatory Autonomy (2016), Ch. 3.
94 See L. Gruszczynski and W. Werner (eds.), Deference in International Courts and Tribunals: Standard of Review and Margin of Appreciation (2014).
95 See K. Sauvant and F. Ortino, Improving the International Investment Law and Policy Regime: Options for the Future (2013).
96 The 2012 Statement on Shared Principles for International Investment by the European Union (EU) and the United States.
97 See EU draft proposal of September 2015, Investment Chapter, Art. 2(1).
98 See EU draft proposal of November 2015, Annex on Expropriation. For a critical comment on the latter see F. Ortino, ‘Defining Indirect Expropriation: The TTIP Approach and the (Elusive) Search for “Greater Certainty”’, 43 Legal Issues of Economic Integration (forthcoming).
* King's College London [email@example.com]. The author would like to thank Danai Azaria, Jansen Calamita, David Caron, Kate Miles, Alex Mills, Martins Paparinskis, Mona Pinchis, Lauge Poulsen, Joanne Scott, Taylor St-John, Lorenzo Zucca, and the participants in the Centre of Transnational Legal Studies Fall 2014 Colloquium Series seminar for their very useful comments.
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