Source: https://www.yalelawjournal.org/forum/democracy-and-legitimacy-in-investor-state-arbitration
Timestamp: 2019-04-20 22:31:18+00:00

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This Essay situates the TransCanada arbitration within the history of investment arbitration, highlighting recent collisions between arbitral regimes and the modern regulatory state. After briefly discussing the history of investment arbitration, we discuss in depth the collision’s most startling fallout so far—the Clayton v. Canada award on liability. Finally, we suggest how the TransCanada tribunal should view the Clayton award.
As the scope of investment arbitration has expanded, so has the conception of the “minimum standard of treatment” by which government actions are judged. In the context of NAFTA arbitrations—in which the litigation over the Keystone XL pipeline will be decided—this shift has been highlighted in a recently concluded dispute, Clayton v. Canada.20The Clayton Award makes apparent the deficit of legitimacy when an ad hoc, international arbitral panel evaluates the conformity of a country’s domestic laws with its treaty obligations. Interestingly, while the majority decision arguably undermines Canadian sovereignty, its language pays constant tribute to the Canadian people’s power to make and pass laws consistent with its values. Clayton is thus not a caricature of neoliberal jurisprudence21: the Award did not simply deny Canada’s power to make laws that interfere with expectations of corporate profit. Instead, it was anxious to accommodate democratic sovereignty at every step. But, we argue below, it failed to do so when it abandoned its commitment to democratic sovereignty in the application of several review standards to the facts.22 Clayton thus shows investment arbitration at an impasse: divided between a minimalist conception in which it merely serves as a buffer for multinational corporations against corrupt government officials, and an expanded role in which it becomes a forum for the recognition of foreign interests in the review of domestic laws.23 In the Essay’s final section, we argue that the TransCanada tribunal should reject the latter approach.
Accordingly, Clayton attempted to follow the interpretation of NAFTA Article 1105 developed in a previous arbitration, Waste Management.39 Under the Waste Management standard, the “minimum standard of fair and equitable treatment is infringed by conduct . . . [that] is arbitrary, grossly unfair, unjust or idiosyncratic . . . or involves a lack of due process leading to an outcome which offends judicial propriety.”40 This standard is more lenient than those adopted by previous NAFTA tribunals, which have traditionally required “egregious” and “outrageous” state action.41 But it is still a strict standard, requiring more than a possible violation of domestic law.
When the Clayton majority applied the Waste Management standard to the facts of the dispute, it did so in a manner that defeated its self-proclaimed respect for domestic sovereignty. The majority declared the JRP findings “arbitrary” because the review panel had not conducted a “likely significant adverse effects after mitigation” analysis, under which potential mitigation of a project’s environmental effects might save an otherwise rejected project.42 The JRP had declined to do so because the proposed project’s effects on the human environment—including on the local fishing and aboriginal populations, which did not meet with any representatives of Bilcon43—were deemed too extreme. In arriving at its decision, the Clayton majority abandoned the other language from Waste Management (i.e. “grossly unfair”) and interpreted “arbitrary” as a mere possible violation of Canadian law.44 Indeed, the Award “simply holds that the applicant was not treated in a manner consistent with Canada’s own laws”45 on the basis of two arbitrators’ interpretation of Canadian law. This forms the sole basis for a finding of an Article 1105 violation.
The Clayton Award will be welcomed by investors who may now claim breaches of laws not yet fully specified by Canadian courts or who allege that Canadian law does not meet an international minimum standard of treatment. However, the Award is inconsistent with the principled respect for democratic sovereignty with which the majority began its analysis. At the conceptual level, the Award claims to uphold the importance of democratic control over national laws, but it strips this commitment of meaning in its actual application to the facts. It seeks to serve two inconsistent goals: upholding a conception of investment arbitration as providing minimal fairness, consistent with democratic sovereignty, and carving out a special privilege for foreign investors to use what may prove favorable versions of domestic law.
The Clayton majority functionally pursued the latter aim despite its forthright anxiety about its own democratic legitimacy. Unlike the majority, the impassioned dissent in Clayton recognized the true significance of the tribunal’s approach: the decision presented “a significant intrusion into domestic jurisdiction” and would “chill” Canadian administrative law.50 It put the “proper application of Canadian law by an environmental review panel . . . in[to] the hands of a NAFTA Chapter 11 tribunal, importing a damages remedy that is not available under Canadian law.”51 By expanding a damages remedy available only to foreign corporate litigants in privatized litigation, the Clayton Award has confirmed the fear that special investor-state dispute mechanisms can undermine democracy and the rule of law.52 Ironically, it does so in spite of the majority’s robust rhetorical support for these very principles.
Clayton has significant parallels with the TransCanada litigation. Both involve the denial of a permit for a large infrastructure project by an administrative agency that determined that the project passed particular quantitative environmental impact tests but nonetheless had to be rejected on other policy grounds. Like the use of “community core values” by the JRP in Clayton, the State Department’s use of the U.N. Climate Change talks to justify the Keystone XL permit denial is unique, but far from unforeseeable. The relevant Executive Order grants the State Department broad authority to deny permits not in the “national interest.”53 Moreover, the State Department’s role in the U.S. government provides a substantial clue that its view of the “national interest” might include managing foreign relations to enable global collective action on climate change.
To those readers unfamiliar with the operation of investor-state arbitration, it may seem strange to charge an ad hoc tribunal with deciding the legality of the State Department’s actions under the U.S. Constitution or an Executive Order. But TransCanada can point to a growing body of investment arbitration awards that base violations of investors’ legitimate expectations on interpretations of domestic law. By making a constitutional argument, TransCanada seeks to focus the tribunal on an exercise of constitutional interpretation, rather than on the State Department’s broad and well-known power to reject permits inconsistent with the “national interest,”59 or on the obvious risk that the pipeline would be rejected on other grounds.
The use of ad hoc tribunals to judge constitutional matters appears to be the unfortunate next step in an increasingly intrusive jurisprudence of investment arbitration. Instead of deepening the mistake made in Clayton, we believe the tribunal considering the Keystone XL litigation should hew to the spirit of older NAFTA Chapter 11 cases in deciding the Article 1105 fair and equitable treatment claim.60 The tribunal should ask itself whether the State Department’s denial of the permit was egregious, outrageous, or completely unforeseeable. This is the relevant question, and no answer should assume that states must rely only on policy considerations that have already been fully and formally elaborated in domestic statutes and legal decisions.61 Such an assumption would limit states to using yesterday’s solutions for tomorrow’s problems. By declining to go down that route, the TransCanada tribunal can resurrect the deference to democracy given merely rhetorical effect in Clayton.
The authors are, respectively, J.D. Candidate, Yale Law School, and Associate Professor of Law, Yale Law School. They are grateful to Johanna Lorenzo, Murilo Lubambo, Georgios Dimitropoulos, and David Schneiderman for comments and criticisms.
Preferred Citation: Cory Adkins & David Grewal, Democracy and Legitmacy in Investor-State Arbitration, 126 Yale L.J. F. 57 (2016), http://www.yalelawjournal.org/forum/democracy-and-legitimacy-in-investor-state-arbitration.
Id. at 2-3; see also cases cited infra notes 13–17.
See infra discussion accompanying notes 33-42.
See Kumm, supra note 6, at 6.
See Award, supra note 20, ¶ 323.
See infra discussion accompanying notes 53-58.
Award, supra note 20, ¶ 738 (emphasis added).
Waste Management, supra note 32, ¶ 98.
Award, supra note 20, ¶¶ 36, 434.
Dissent, supra note 24, ¶ 25.
Award, supra note 20, ¶ 602.
Nova Scotia Env’t Act, S.N.S. 1994-5, c.1, sec. (3)(v)(i).
Canadian Envt’l. Assessment Act, S.C. 1992, c. 37.
See, e.g., Award, supra note 20, ¶ 573.
Dissent, supra note 24, ¶ 48.
See Exec. Order No. 13,337, 69 Fed. Reg. 25,299 (May 5, 2004).
Notice, supra note 1, ¶¶ 51-60.
Complaint, supra note 55, ¶ 69.
Exec. Order No. 13,337, 69 Fed. Reg. 25,299 (May 5, 2004).
Notice of Intent To Submit a Claim to Arbitration Under Chapter 11 of the North American Free Trade Agreement, TransCanada Corp. (Jan. 6, 2016), http://www.keystone-xl.com/wp-content/uploads/2016/01/TransCanada-Notice-of-Intent-January-6-2016.pdf [http://perma.cc/2WUT-LY4S] [hereinafter Notice] (Chapter 11 is NAFTA’s investment chapter, which provides rights and remedies for investors in NAFTA countries; it represents the first major merger of an investment agreement with a free trade area).
Dep’t of State, Record of Decision and National Interest Determination: TransCanada Keystone Pipeline, L.P. Application for Presidential Permit (2015), http://keystonepipeline-xl.state.gov/documents/organization/249450.pdf [http://perma.cc/KKE5-TNZV].
For example, the first bilateral investment treaty with investor-state dispute settlement (ISDS) was the Treaty for the Promotion and Protection of Investments, Ger.-Pak., art. 11, ¶ 2, Nov. 25, 1959, 457 U.N.T.S. 24 (entered into force Nov. 28, 1962).
Andrew Newcomb & Lluís Paradell, Law and Practice of Investment Treaties § 1.5 (2009). Diplomatic protection differs crucially from investor-state dispute resolution in that diplomatic protection involved states bringing claims on behalf of their injured nationals. Investment arbitration may represent a delegation of this power to the injured nationals, thereby privatizing this aspect of foreign relations, or a coexisting remedial scheme. See Anthea Roberts, State-to-State Investment Treaty Arbitration: A Hybrid Theory of Independent Rights and Shared Interpretive Authority, 55 Harv. Int’l. L.J. 1, 1-3 (2014); cf. Opinion with Respect to Jurisdiction of W. Michael Reisman, Ecuador v. United States, Case No. 2012-05, 20-21 (Perm. Ct. Arb. Apr. 24, 2012), http://pcacases.com/web/sendAttach/582 [http://perma.cc/8KMU-6Z5G] (arguing for a “two-track” regime with sovereign-to-sovereign and investor-state dispute settlement).
See Mattias Kumm, An Empire of Capital? Transatlantic Investment Protection as the Institutionalization of Unjustified Privilege, 4 Eur. Soc’y Int’l L. Reflections 1, 2-4 (2015).
In the past few decades, the number of bilateral investment treaties has exploded, increasing from 457 in 1990 to 2,926 at the time of publication. See International Investment Agreements Navigator (Advanced Search), United Nations Conf. on Trade & Dev., http://investmentpolicyhub.unctad.org/IIA [http://perma.cc/6G9P-5Y9X].
For a fuller discussion of this reversal, see Anthea Roberts, Triangular Treaties: The Extent and Limits of Investment Treaty Rights, 56 Harv. Int’l L.J. 353, 358-62 (2015).
Table of Foreign Investor-State Cases and Claims Under NAFTA and Other U.S. “Trade” Deals, Pub. Citizen (June 2015), http://www.citizen.org/documents/investor-state-chart.pdf [http://perma.cc/M5YC-7CX3].
Phillip Morris Asia Ltd. v. Australia, Case No. 2012-12, Award on Jurisdiction and Admissibility (Perm. Ct. Arb. 2015), http://www.italaw.com/sites/default/files/case-documents/italaw7303_0.pdf [http://perma.cc/Y4TX-VQR4]. The decision will be published pending redaction of confidential information.
Lise Johnson, Lisa Sachs & Jeffrey Sachs, Investor-State Dispute Settlement, Public Interest and U.S. Domestic Law, Colum. Ctr. on Sustainable Inv. 5 (May 2015), http://ccsi.columbia.edu/files/2015/05/Investor-State-Dispute-Settlement-Public-Interest-and-U.S.-Domestic-Law-FINAL-May-19-8.pdf [http://perma.cc/3DZ6-AGDA].
Glamis Gold, Ltd. v. United States, Award (NAFTA Ch. 11 Arb. Trib. 2009), http://www.state.gov/documents/organization/125798.pdf [http://perma.cc/QDW3-GKZR]; Lone Pine Res. Inc. v. Gov’t of Can., ICSID Case No. UNCT/15/2, Claimant’s Memorial (Apr. 10, 2015), http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC5878_En&caseId=C4406 [http://perma.cc/7HFD-NGBA].
Vattenfall AB v. Fed. Republic of Ger., ICSID Case No. ARB/09/6, Award (Mar. 11, 2011), http://www.italaw.com/sites/default/files/case-documents/ita0890.pdf [http://perma.cc/K3RX-PZ25].
Occidental Petroleum Corp. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award (Oct. 5, 2012), http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC2672_En&caseId=C80 [http://perma.cc/3KUA-VA8G].
Eli Lilly & Co. v. Gov’t of Can., ICSID Case No. UNCT/14/2, Claimant’s Memorial (Sept. 29, 2014), http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC4983_En&caseId=C3544 [http://perma.cc/MX8W-XTK7].
Abaclat et al. v. Argentine Republic, ICSID Case No. ARB 07/5, Decision on Admissibility and Jurisdiction, ¶¶ 8-10 (Aug. 4, 2011), http://www.italaw.com/sites/default/files/case-documents/ita0236.pdf [http://perma.cc/2MUD-XPG5].
Adam R. Pomeroy, Penn Central After 35 Years: A Three Part Balancing Test or a One Strike Rule, 22 Fed Cir. B.J. 677, 698 (2012).
See Susan D. Franck, The ICSID Effect? Considering Potential Variations in Arbitration Awards, 51 Va. J. Int’l L. 825, 852 (2011). The comparison between domestic regulatory takings and expropriation is a rough one, given the different contexts.
See, e.g., Clayton v. Government of Canada, Award on Jurisdiction and Liability, Case No. 2009-04, ¶¶ 601-602 (Perm. Ct. Arb. 2015), http://www.pcacases.com/web/sendAttach/1287 [http://perma.cc/WXB8-WL89] [hereinafter Award].
Clayton v. Government of Canada, Case No. 2009-04, Dissenting Opinion of Professor Donald McRae, ¶¶ 22-26 (Perm. Ct. Arb. 2015), http://www.pcacases.com/web/sendAttach/1288 [http://perma.cc/N68F-95EF] [hereinafter Dissent].
John DeMings, Bilcon Wins NAFTA Dispute Over Digby Neck Quarry, Digby CountyCourier (Mar. 21, 2015), http://www.digbycourier.ca/News/Regional/2015-03-21/article-4085504/Bilcon-wins-NAFTA-dispute-over-Digby-Neck-quarry/1 [http://perma.cc/QSU5-JJWX]The Clayton tribunal has not yet rendered a damages award.
Id. ¶ 400 (quoting Mobil Investments Canada Inc. v. Canada, ICSID Case No. ARB(AF)/07/04, Decision on Liability and on Principles of Quantum, ¶¶ 152-53 (May 22, 2012)).
Id. ¶ 715. (“[T]he emphasis on ‘community core values’ raises the serious question of whether the project would have received more favorable treatment if the investor had not been foreign.”).
Waste Management, Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3, Award, ¶¶ 98-99 (Apr. 30, 2004), http://www.italaw.com/sites/default/files/case-documents/ita0900.pdf [http://perma.cc/4AFS-DAYV] [hereinafter Waste Management]. Here the Clayton tribunal, operating under the UNCITRAL rules, cited to an award under ICSID rules. Such cross-pollination is not uncommon.
Awards under the UNCITRAL rules—like Clayton—can be set aside under certain circumstances. Awards under the ICSID rules—like TransCanada will be—can be set aside only under very limited circumstances.
See Letter from Judith Resnik, Professor of Law, Yale Law Sch., et al., to Mitch McConnell, Senate Majority Leader, U.S. Congress (Apr. 30, 2015), http://www.washingtonpost.com/r/2010-2019/WashingtonPost/2015/04/30/Editorial-Opinion/Graphics/oppose_ISDS_Letter.pdf [http://perma.cc/5XZU-Z22L].
Id. at sec. 2. (emphasis added). Likewise, when Lee Clark, Member of Parliament and Parliamentary Secretary to the Minister of the Environment, introduced the bill in Parliamentary debate in 1992, he emphasized the bill’s broad coverage: it would “make environmental factors equal partners . . . with social and economic concerns.” House of Commons Debates, 34th Parl., 3rd Sess., vol. 7, at 8373 (Mar. 17, 1992) (statement of Lee Clark, Member, Parliament) (emphasis added), http://parl.canadiana.ca/view/oop.debates_HOC3403_07/299?r=0&s=1 [http://perma.cc/VQ6E-SKQL].
TransCanada Keystone Pipeline, LP v. John Kerry, Complaint, Case 4:16-cv-00036 (S.D. Tex. filed Jan. 6, 2016) [hereinafter Complaint]That TransCanada has chosen to file an additional civil claim in U.S. District Court casts some doubt on the premise of investment arbitration—that domestic courts cannot be trusted to treat foreign investors fairly. See David Schneiderman, Listening to Investors (and Others): Audi Alteram Partem and the Future of International Investment Law (unpublished article) (on file with authors).
Strategic considerations, like the desire to legitimate ISDS to Canadians or Americans during the course of treaty negotiations, may influence the tribunal in either direction. See David Schneiderman, Judicial Politics and International Investment Arbitration: Seeking an Explanation for Conflicting Outcomes, 30 Nw. J. Int’l L. & Bus. 383, 404-06 (2010).
Cf. Saluka Inv. BV (Neth.) v. Czech Republic, Partial Award, ¶ 305 (UNCITRAL 2006) (“No investor may reasonably expect that the circumstances prevailing at the time the investment is made remain totally unchanged.”).

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