Howard Mann Senior International Law Advisor International Institute for Sustainable Development

1. Investment Agreements and the Regulatory State:Can Exceptions Clauses Create a Safe Haven for Governments1st ANNUAL FORUM OF DEVELOPING COUNTRYINVESTMENT NEGOTIATORSSingaporeOctober, 2007 Howard Mann Senior International Law Advisor International Institute for Sustainable Development www.iisd.org/investment

2. Agenda • What is the problem discussed in this session? • Scope: what do we mean by regulation in this context? • The nub of the legal problem: investor-state dispute settlement and uncertainty (OK, and incorrectness) • Some responses for greater clarity and certainty • Final thoughts

3. What is the problem? • Regulation of investors is common feature around the world • What role do IIAs play in regulating how governments regulate foreign investors? • Not a sovereignty issue: • all international agreements must impact sovereignty or are useless • Issue is getting the proper balance between the right and duty of governments to regulate and the appropriate protection of foreign investors

4. Scope • Regulatory and legislative measures, but what type? • A perfect definition is not possible, some examples • protect human health from harmful products; • protect the environment from pollutants; • ensure the conservation of natural resources; • ensure employee health and safety at work; • protect and enhance human rights; • protect against criminal activity or activity contrary to public morals; • prevent anti-competitive practices; and • promote consumer knowledge, awareness and protection.

5. Scope • What would not be included: • effectively transfer private held land to the state for a public purpose, such as building a school, hospital, or ecological park; • transfer economic activity between actors doing the same thing in the same manner; • measures that are otherwise an abuse of government regulation-making powers to achieve ulterior purposes; or • promoting one business over another. • Form as a regulation/legislation is not determinative, nature and purpose, bona fides are

6. The Legal Problem: Uncertainty • Expropriation provisions are the key issue (+NT, F&E) • Definition of indirect expropriation and “regulatory expropriation” • US doctrine of “regulatory taking” • Case law diverges: • Metalclad v. Mexico • Economic impact test • Nature and purpose of measure not relevant • Methanex v. United States • Under general international law, non-discriminatory regulations are not an expropriation • “police powers” rule creates bright line in the sand • No clarity, certainty for governments • leading to possible regulatory chill

7. Some responses: towards clarity and certainty for governments • Reinforcing the police powers rule • Preamble and objectives provisions • Use of regulatory measures provisions • Recognizing need for ongoing regulation • Recognizing right/duty to regulate • Limitations on scope of expropriation • US: reflects C.I.L.; only in rare instances will a reg. be an expropriation • Canadian BITs: rare circumstances, such as lack of bona fides • Relation to bright line in Methanex case unclear

8. Some responses: towards clarity and certainty for governments • Other Treaty-based mechanisms • General exclusions through annexes (sectors, measures) • Investment liberalization session • Specific exclusions from expropriation provisions • Tax, national security • General exclusion clauses based on Article XX of GATT • Variations on the theme • Some uncertainty on impact in dispute settlement • Clarity of key terms

9. Final thoughts • Uncertainty disadvantages governments • Facility of initiating an investor-state a growing level of awards increases disadvantages of states • Can and does lead to regulatory chill impact • Greater certainty can be created, mechanisms exist • Some need more study, but do exist • Negotiators need to be more aware of need