Customary Environmental Law in Investment Arbitrations: Can the Systemic Integration Principle Offer a Guidance?

Environmental treaty obligations are regularly invoked by investment tribunals; statistically, from 2012 to 2015, environmental considerations were invoked 65 times (Marisi, Chapter 2). Albeit such invocations are a stretch from being concluded as a uniform practice throughout investment arbitration proceedings, there has been a clear increase in the interactions between environmental law and investment arbitration. Though there are several ways of bringing environmental treaty norms into play, the present submission seeks to argue that the ‘forgotten’ way – the rule of systemic integration – has a potential place in investment arbitrations in order to bring in also customary environmental law (‘CEL’) norms. However, its operation is impeded by certain factors.

Section 1: Methods of Integrating Environmental Norms in the Context of International Investment Arbitrations

Firstly, one prominent method of bringing environmental treaty norms into the ambit of investment arbitrations may stem from references to other international law instruments, containing environmental rules, through the applicable law clause provisions of bilateral investment treaties (‘BIT’). For example, in SD Myers v. Canada (paras. 213-214) the tribunal took account of the correlation between the North American Free Trade Agreement (‘NAFTA’) and other treaties, including the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal.

Second, references to environmental law in the operative part of agreements became more popular in the recently adopted set of bilateral investment treaties (‘BITs’). Almost every BIT concluded in the past decade contains provisions against lowering domestic environmental legislation standards in order to promote investments or preventing exemption of certain regulatory measures aimed at protecting the environment from constituting indirect expropriation (Investment Policy Hub, 2020). While analysis of such types of BITs suggests the preventing of facilitation of the regime of local laws, the obligations of a state can be read into it as a part of the regime applicable on its territory, and allow a state to bring in international environmental law (predominantly as a defence).

Thirdly, and pertinently, some scholars suggest the possibility of interpreting a BIT with third-parties investment agreements, applying the rules of interpretation under Articles 31-32 of the Vienna Convention on the Law of Treaties (‘VCLT’). Among them, one of the unexplored options is the rule of systemic integration under Article 31(3)(c) of the VCLT.

Section 2: Principle of Systemic Integration

Article 31(3)(c) of the VCLT provides that “[a]ny relevant rules of international law applicable in the relations between the parties” should be taken into account for the interpretation together with the context. First, Article 31(3)(c) of the VCLT refers to ‘rules’ of international law, excluding other guiding instruments. Second, the rules of international law should be ‘relevant’ and ‘applicable’. Third, the provision does not contain a temporal element on the relevant and applicable rules (McLachlan, p. 290-291).

The International Law Commission (‘ILC’) in its study on the fragmentation of international law concluded that the provision of Article 31(3)(c) can be explained in more precise words: what is relevant for interpretation are “material sources external to the treaty”, which are comprised of treaties, general principles of law and custom. What is of particular importance in the ILC study on fragmentation, is the determination, where the application of a custom is relevant to the interpretation under Article 31(3)(c). Such situations include unclear and open-textured treaty-provisions; situations when the terms which have an established definition or meaning in customary law are used in the treaty; or when the treaty is silent on the applicable law (paras. 18, 20).

Subsection 1: Systemic Integration in International Investment Arbitrations

In international investment law, where the starting point of reference (together with an investment agreement) is a BIT, systemic integration is required when a treaty provision is vague, or the treaty itself is silent on the matter (S.D. Myers, Inc. v. Government of Canada, para. 310; Loewen Group, Inc. and Raymond L. Loewen v. the United States of America, para. 226). However, where obligations under a BIT contradict obligations embodied in other sources of law, tribunals tend to, albeit inconsistently, examine such obligations (Hirsch, p. 173-174). With regard to customary international law (‘CIL’), it is important to note that in cases where a customary rule contradicts the provision of an investment treaty, some examples in the jurisprudence suggest that the latter applies, save for customary rules having the status of jus cogens norms (AES Corporation v. The Argentine Republic, para. 23).

The application of the principle of systemic integration is dependent on the three-stage process: identification of the rule, ascertainment of its relevance, and applicability to relations between the parties (Simma, p. 585). In comparison to investment tribunals, in World Trade Organisation disputes approached these requirements restrictively, applying only international law rules binding all parties to the treaty (Petersmann, p. 177). In general, investment tribunals generally do not engage into such considerations, weighing the applicability of Article 31(3)(c) of the VCLT and their jurisdiction. The list of examples where systemic integration was invoked in investment arbitration is extensive; however, the rule to be brought through interpretation is rarely a CIL, and predominantly a treaty provision.

While potentially the rule of systemic integration is available in adequately drawing CIL norms, including CEL rules, into investment arbitration proceedings, such an option is not without its inherent difficulties.

Subsection 2: Limitations

As highlighted by various commentators, the approach of investment tribunals towards the application of international law rules is seen as reluctant and sporadic – a phenomenon of which is explainable by both legal and policy considerations (Hirsch, p. 154). The application of systemic integration was argued to have a negative effect on investment arbitrations: for example, while investment law was considered to be a dynamic area, application of the rules of CIL through systemic integration would preclude its development and modernisation (Wälde, p. 769-770).

Another limitation, which may undermine the willingness of investment tribunals to apply Article 31(3)(c) of the VCLT is the lack of clarity of CEL norms. Custom in investment law is both limited and contested; it is essentially true where the custom itself is not solidly recognised. Although some CEL rules obtain more clarity with time, their indeterminate character contributes to the unwillingness of investment tribunals to engage in vague discussions, while being restricted by strict provisions on jurisdiction.

Section 3: Lessons from State-to-State Arbitrations

Instructively, the systemic integration rule has been invoked by tribunals to bring in the CEL rules to interpret bilateral instruments applicable between the parties. However, successful examples pertain to the area of inter-state arbitration as opposed to investor- / state-to-state investment arbitration. In this regard, two cases deserve particular attention.

In the Iron Rhine Arbitration, the tribunal was called to decide on the issue of the renewal and maintenance of the Iron Rhine railway, which was felt into disuse after World War II. The tribunal invoked rules of interpretation under Articles 31 and 32 of the VCLT, reflecting CIL, and including the systemic integration. Because of Article 31(3)(c) of the VCLT, the tribunal concluded that international environmental law is relevant to the dispute. At the same time, it highlighted the unclarity of the status of norms within the field and questioned, what norms and principles contributed to the establishment of CEL. The tribunal did not make an attempt to solve the controversy by stating that in “all of these categories ‘environment’ is broadly referred to as including air, water, land, flora and fauna, natural ecosystems and sites, human health and safety, and climate. The emerging principles, whatever their current status, make reference to conservation, management, notions of prevention and of sustainable development, and protection for future generations” (para. 58).

At least two conclusions can be deduced. The tribunal invoked CEL to the interpretation of a treaty that had been concluded in 1839. Principles of environmental protection were unlikely to be found in the treaties of that time, and CEL had not yet emerged from them. Unsurprisingly, and rightfully, the tribunal followed the reasoning in the Gabčíkovo-Nagymaros case. Moreover, the tribunal did not engage in the long discussion on the status of the norms as CEL; nevertheless, notwithstanding their characterisation, it found that the requirement exists to implement environmental considerations in complex development activities, and acknowledged the applicability of the concept of sustainable development in the case.

The reasoning was followed eight years later in Indus Waters Kishenganga Arbitration. The dispute concerned an alleged violation of various provisions of the Indus Waters Treaty (1960) following the construction of sophisticated hydroelectric projects by the Republic of India. The tribunal, first, confirmed a temporal effect of the principles of international environmental law, which should apply, inter alia, to treaties preceding the development of that area of law; thus, confirming the implicit finding of Iron Rhine Arbitration. Second, the tribunal paid attention to India’s attempt to preserve the minimum environmental flow downstream and concluded that the parties were aware that the projects should be developed and operated with sustainable development principle in mind (paras. 452, 454). Unfortunately, the tribunal did not explain nor make clear the way in which it makes references to CEL norms (i.e., no reference was made to Article 31(3)(c) of the VCLT). Nevertheless, this arbitration provides a valuable example of a progressive approach in the application of international environmental law.

Conclusion

It follows that reference to CIL norms similar to other tribunals case law (for example, of the International Court of Justice) serves the idea of reconciling obligations lying in different planes. Such an approach, arguably, exists in investment disputes in general. With regard to environmental obligations, the practice of bringing in CEL through systemic integration is (still) regrettably insufficient.

Despite the emerging sensitivity to environmental concerns, the tribunals are reluctant to rely on CEL through the principle of systemic integration. While the examples of inter-state disputes mentioned above reveal the possibility of invoking systemic integration in order to bring in CEL norms, investment tribunals approach is more cautious. It may be explained by limitations to their jurisdiction under BITs provisions or fear to elaborate and rule on matters of international law without sufficient clarity, which can hardly lead to harmonisation.

Given the complexity of the principle of systemic integration and ambiguity of the rules of CEL, it is far more likely that the development of international investment law will be focused on amending the provisions of the BITs in order to include environmental considerations rather than on having recourse to interpretation through Article 31(3)(c) of the VCLT.

* The topic was presented by the author at the American Society of International Law Midyear Meeting on 30 October 2020.

Kseniia Soloveva holds an Advanced LL.M. in Public International Law from the Universiteit Leiden.

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