Academic journal article American University Law Review

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

Academic journal article American University Law Review

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

Article excerpt


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. …

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