Margin of Appreciation as an Indicator of Judicial Deference: Is It Applicable to Investment Arbitration?

1. Introduction

In recent years, concern has been growing that States’ regulatory autonomy to adopt public policy policies could be undermined by investment arbitration, as States’ domestic regulations more frequently become the subject of investment arbitration than before. Few would disagree that investment arbitral tribunals should pay a certain degree of deference to such policies adopted by the respondent States,¹ in view of the need to address the concern. However, the question of to what degree deference should be paid remains controversial. While the deference should be paid sufficiently to preserve the autonomy of the respondent States, it should not be excessive to ensure that the arbitrary exercise of the autonomy is not dismissed.

The question became critical in a recent investment arbitration case, Philip Morris v Uruguay, along with the question of whether ‘margin of appreciation’, which has long been applied by the European Court of Human Rights (ECtHR), is applicable to investment arbitration. In this case, the claimants’ claims arose out of Uruguay’s tobacco regulatory measures, which allow the sales of only one variant of cigarettes per brand family and require an increase in the size of graphic health warnings.² The claimants, major tobacco companies, claimed that Uruguay, by taking the measures, was breaching its obligations under an investment agreement with Switzerland,³ including the fair and equitable treatment (FET) obligation.⁴ In response, the respondent sought to justify the measures, by arguing that they were adopted ‘for the single purpose of protecting public health’ and ‘amounted to a reasonable, good faith exercise of Uruguay’s sovereign prerogatives’.⁵

In reviewing the issue of the FET obligation, the tribunal in the case took into consideration the fact that the claims concerned public health regulations. In particular, the tribunal noted that ‘margin of appreciation’ applies to FET claims under investment agreements, at least in contexts such as public health, and that investment arbitral tribunals ‘should pay great deference to governmental judgments of national needs in matters such as the protection of public health.’ [emphasis added]⁶ It also stated, in citing the decision of the tribunal in Electrabel v. Hungary, that ‘respect is due to the “discretionary exercise of a sovereign power, not made irrationally and not exercised in bad faith… involving many complex factors.”‘⁷ The tribunal then dismissed the claimants’ claim of breach of the FET obligation without expounding how the ‘great deference’ affected its conclusion.

In the meantime, one of the arbitrators of the tribunal questioned the applicability of ‘margin of appreciation’ to investment agreements. In his concurring and dissenting opinion, he opined that ‘margin of appreciation’ is ‘a specific legal rule, developed and applied in a particular context’ of the European Convention on Human Rights (ECHR) and ‘cannot properly be transplanted to’ the FET obligation under investment agreements.⁸ According to his view, a provision of the ECHR concerning the protection of private property ‘has been interpreted by the ECtHR to afford a very wide margin of appreciation to governmental authorities with respect to what constitutes “public interest”‘ [emphasis added]⁹ under the provision and there is no textual basis for incorporating such a margin of appreciation into the applicable investment agreement.¹⁰ It should be noted, however, that the dissenting arbitrator shared the view that deference is due to sovereign measures and judgments. He explicitly acknowledged that ‘judgments of national regulatory and legislative authorities are entitled, under the fair and equitable treatment guarantee, to a substantial measure of deference’.¹¹

While the tribunal in Philip Morris v Uruguay is not the first investment arbitral tribunal that explicitly referred to ‘margin of appreciation’, the decision in the case is particularly notable in that the arbitrators unequivocally disagreed over the applicability of ‘margin of appreciation’ to investment arbitration. Moreover, the controversy over the applicability of ‘margin of appreciation’ in Philip Morris v Uruguay has implications that extend beyond this particular case, given the inconsistent application of deferential standards of review in investment arbitration. If margin of appreciation is applicable to investment arbitration, it could bring a unified standard of judicial deference to investment arbitration.

Against this background, this article examines whether ‘margin of appreciation’ is applicable to investment arbitration, and how it could guide investment arbitral tribunals with respect to the degree of judicial deference. For this purpose, firstly, it analyses cases in the ECtHR to clarify how ‘margin of appreciation’ works in the ECtHR. In particular, it discusses whether ‘great deference’, as indicated by the majority, or a ‘very wide margin of appreciation’, as suggested by the dissenting arbitrator, is required in relation to ‘margin of appreciation’ in the ECtHR. Secondly, the article briefly discusses the applicability of ‘margin of appreciation’ outside the ECtHR. It reviews several decisions of the International Court of Justice (ICJ) and United Nations (UN) human rights treaty bodies, and points out that ‘margin of appreciation’ is hardly applied by the ICJ or the UN human rights treaty bodies, though neither is it rejected outright by them. Third and finally, the article considers whether and how ‘margin of appreciation’ could guide investment arbitral tribunals with respect to judicial deference.

2. Margin of Appreciation in the ECtHR

A. Margin of Appreciation Itself is not a Rule

This section starts by discussing the nature of margin of appreciation in the ECtHR. When the dissenting arbitrator in Philip Morris v Uruguay rejected the applicability of margin of appreciation to investment arbitration, he opined that margin of appreciation is a ‘legal rule, developed and applied’ in the particular context of the ECtHR and has no basis in investment arbitration.¹² Is margin of appreciation a ‘legal rule’?

In order to answer this question, a distinction has to be made between margin of appreciation and the norm that deference should be accorded to governmental judgments.

With respect to the latter, the ECtHR has explicitly mentioned in a number of cases that the deference requirement is inextricably linked to the nature of the ECHR. Most famously in the case of Handyside v The United Kingdom, the ECtHR noted, with respect to restrictions of freedom of speech for the protection of morals, that the concept of ‘morals varies from time to time and from place to place’ and that, ‘[b]y reason of their direct and continuous contact with the vital forces of their countries, State authorities are in principle in a better position than the international judge to give an opinion on’ whether the restrictions are necessary for the protection of morals.¹³ The ECtHR concluded that it is therefore ‘for the national authorities to make the initial assessment of the reality of the pressing social need implied by the notion of “necessity”‘.¹⁴

More generally, the ECtHR has pronounced that, while the ECHR aims to protect and promote human rights, it also allows interferences with human rights to the extent necessary in light of considerations such as ‘public interest’,¹⁵ ‘national security’,¹⁶ and ‘health or morals’¹⁷ as well as competing interests of other individuals. The ECtHR has further noted that State authorities that are in more direct and continuous contact with local communities than the ECtHR are generally in a better position to make judgments as to what interferences are necessary within their territory, and that therefore it accorded a certain degree of deference to such judgments by State authorities.¹⁸ According to the ECtHR, it has to be State authorities, and not the ECtHR, that strike a delicate balance between human rights and public interest within local communities.¹⁹

Thus, there is a norm, if not a ‘legal rule’, inherently embedded in the ECHR that requires deference in the interpretation and application of terms such as ‘public interest’ and ‘national security’, in accordance with the principle of subsidiarity.²⁰ While Protocol No.15,²¹ which explicitly affirms that the principle of subsidiarity places the ‘primary responsibility to secure the rights and freedoms defined in this Convention and the Protocols thereto’ on the High Contracting Parties has not yet entered into force, the principle has implicitly been incorporated into the text of the ECHR. In particular, Article 1 of the ECHR acknowledges that it is the obligation of the High Contracting Parties to ‘secure to everyone within their jurisdiction the rights and freedoms’, and Article 35(1) confirms a subsidiary role for the ECtHR by requiring the exhaustion of domestic remedies. Moreover, the inherent diversity of interpretations and applications of ‘public interest’ and other relevant terms implies the inappropriateness of the ECtHR supplanting national authorities to make such interpretations and applications.

On the other hand, margin of appreciation itself is not a standalone rule that requires the ECtHR to accord deference to governmental judgments, even though it is often called a ‘doctrine’.²² It is inaccurate to say that margin of appreciation necessarily requires a ‘very wide’ discretion or that it always signifies ‘great deference’, as suggested by the arbitrators in Philip Morris v Uruguay. As the ECtHR’s practice demonstrates, margin of appreciation is ‘wider’²³ or ‘large’²⁴ in some cases, but it can also be ‘limited’²⁵ in other cases. The accordion-like nature of margin of appreciation reflects the fact it is, as such, devoid of norms that would require great or little deference.²⁶ As stated above, it is provisions of the ECHR that require the ECtHR to apply deferential standards of review, and it is these provisions, along with other circumstances, that determine the degree of deference. To put it differently, margin of appreciation is not a ‘legal rule’ but rather a tool to describe various degrees of deference that is implicitly required by the ECHR.

To sum up, the ECHR, which aims to protect human rights but at the same time recognizes the need for restrictions on those rights to achieve public interest objectives of the society, implicitly acknowledges that judgments as to what restrictions are needed should be made primarily by State authorities that are better cognizant than the ECtHR of various interests and concerns in the society and that a certain degree of deference shall be accorded to their judgment. Margin of appreciation should be considered not as a rule but as a description of the degree of deference that is implicitly provided in certain provisions of the ECHR.²⁷

B. Margin of Appreciation is an Indicator

The fact that margin of appreciation itself is not a rule does not mean that it is of no use. This article argues that margin of appreciation is used by the ECtHR as an indicator of how much deference is required by a given provision of the ECHR under given circumstances. When margin of appreciation is wider, more deference needs to be accorded to States’ judgment. Conversely, when margin of appreciation is narrower, only limited deference needs to be accorded to States’ judgment. While margin of appreciation in itself does not determine the degree of deference, it helps the ECtHR to specify the degree of deference as a scale from ‘wide’ to ‘narrow.’

The ECtHR has developed an extensive jurisprudence that suggests how the breadth of margin of appreciation is determined.²⁸ According to the ECtHR, the breadth of margin of appreciation primarily depends on the ‘nature of the Convention right in issue, its importance for the individual, the nature of the interference and the object pursued by the interference’.²⁹ For example, the margin tends to be narrower where the right at stake is ‘crucial to the individual’s effective enjoyment of intimate or key rights’³⁰ or where ‘a particularly important facet of an individual’s existence or identity is at stake’.³¹ On the other hand, a wide margin tends to be accorded to States’ measures that involve less crucial rights such as property rights.³² With respect to the nature of the interference, the ECtHR stated, for example, that, while a ‘wide margin’ is usually allowed with respect to the non-discrimination obligation under the ECHR,³³ the margin is ‘very narrow’ when a difference in treatment is based exclusively on the ground of nationality.³⁴ Moreover, a wider margin is generally accorded in cases involving interferences that pursue important objects such as national security,³⁵ environmental conservation,³⁶ and the implementation of international obligations.³⁷

In addition, the breadth of margin of appreciation may also depend on the ‘circumstances, the subject matter and the background’ of a case.³⁸ For example, the ECtHR accorded a broader margin of appreciation to regulations of speech in relation to morals³⁹ and commercial matters,⁴⁰ while it allowed only a limited margin to restrictions on political speech⁴¹ or a debate on a matter of public interest.⁴² In some cases, the respondent State was accorded a wider margin of appreciation in view of the lack of consensus on the subject matter which involved the controversial right to end his or her life.⁴³ The ECtHR also found that margin of appreciation is wide when the measures at issue are adopted as an implementation of broader ‘social and economic policies’ that require policy judgment of the State concerned.⁴⁴ The ECtHR also noted that a State should be afforded a wider margin of appreciation with respect to measures that are taken in the process of fundamental changes to its political, legal and economic structure.⁴⁵

In accordance with the breadth of margin of appreciation, the ECtHR modulates the degree of deference that it should accord to States’ measures. For example, when a margin of appreciation is ‘wide’, the ECtHR would not disturb the respondent State’s judgment as to what interference with a right is necessary unless the interference ‘[gave] rise to results which are so anomalous as to render [the measure] unacceptable’⁴⁶ or the judgment is ‘manifestly without reasonable foundation’.⁴⁷ On the other hand, when a margin of appreciation is ‘narrow’ or ‘limited’, the ECtHR ‘examine[s] in scrupulous detail’ whether the interference at issue is proportionate to the legitimate aim pursued.⁴⁸

The usefulness of margin of appreciation is demonstrated by the fact that the ECtHR has been using it for decades, despite lingering scepticism.⁴⁹ At least two reasons can be surmised for its persistent use.

Firstly, the use of margin of appreciation as an indicator is expected to enhance the consistency of the application of deference, at least to some extent. The multitude of factors that are taken into account in the determination of the appropriate deference could obscure how the ECtHR determines what degree of deference it is required to accord. In this regard, margin of appreciation as an indicator helps remove the obscurity by categorizing cases into groups, such as a group of cases where greater deference is due and those where limited deference is needed. In other words, margin of appreciation can help the ECtHR decide an appropriate degree of deference in a consistent manner by improving the transparency of how degrees of deference were determined in past cases.

Secondly and more importantly, margin of appreciation enhances the legitimacy of the ECtHR, especially in the eyes of the Contracting States to the ECHR. While the ECtHR shall ‘ensure the observance of the engagements undertaken by the High Contracting Parties in the Convention and the Protocols thereto’⁵⁰ as a guardian of human rights, it cannot be ignorant of the fact that it is regarded cautiously by its creators, ie the Contracting States, as a potential threat to the States’ regulatory autonomy and democracy. In order for the ECtHR to preserve its legitimacy, it must assure the Contracting States that it accords deference to States’ judgment as to the necessity of interferences with human rights in accordance with the principle of subsidiarity.⁵¹ Thus, the ECtHR uses margin of appreciation to indicate clearly its awareness of its subsidiary role in deciding what interference with human rights is necessary.

Finally, it should be noted that the fact that the ECtHR is required to pay deference does not mean that the ECtHR is required to ‘abdicate its power of review’.⁵² Instead, deference in relation to margin of appreciation means that while the ECtHR shall refrain from substituting its own judgment for that of State authorities in balancing between the human rights of an individual and competing private and public rights and interests, it still has to review whether a ‘fair balance’ is being struck by the authorities.⁵³ Moreover, in examining the necessity of a general measure, the ECtHR recently insisted the importance of the ‘quality of the parliamentary and judicial review of the necessity of the measure’ in the determination of the breadth of margin.⁵⁴ This implies that, while the ECtHR is willing to ‘defer to the reasoned and thoughtful assessment by national authorities’ itself, it still examines the procedural dimension of the assessment.⁵⁵

Whether there are similar reasons to justify the use of margin of appreciation in investment arbitration will be discussed in Section 4.

3. Margin of Appreciation outside the ECtHR

Margin of appreciation has rarely been explicitly acknowledged by international courts and tribunals other than the ECtHR. This section reviews some decisions of the ICJ and UN human rights treaty bodies, and considers reasons for the lack of such a practice.

A. Margin of Appreciation has been neither Acknowledged nor Rejected by the ICJ

The ICJ has never explicitly acknowledged the applicability of margin of appreciation. One of the reasons may be that margin of appreciation had never been raised by any disputing parties until the Whaling case.⁵⁶

In Whaling, the issue was whether special permits granted by the respondent to take whales were ‘for purposes of scientific research within the meaning of Article VIII, paragraph 1’ of the International Convention for the Regulation of Whaling.⁵⁷ The respondent argued that the State issuing the special permits was ‘in the best position to evaluate a programme intended for purposes of scientific research’ and that ‘[i]n this regard it enjoys discretion, which could be defined as a “margin of appreciation”‘.⁵⁸ While the ICJ admitted that Article VIII gave ‘discretion’ to the State ‘to reject the request for a special permit or to specify the conditions under which a permit will be granted’, it rejected the respondent’s argument by stating that ‘whether the killing, taking and treating of whales pursuant to a requested special permit is for purposes of scientific research cannot depend simply on that State’s perception’.⁵⁹

Despite the fact that the ICJ rejected the respondent’s contention in Whaling, the finding should not be considered as a rejection of the applicability of margin of appreciation to ICJ cases in general.⁶⁰ Instead, it merely suggests that the State issuing the permits is not the sole judge of whether a certain activity is for purposes of scientific research and that the State’s judgment as to the purposes of the activity shall be subject to review by the ICJ.⁶¹ In this regard, it should be recalled that the ECtHR repeatedly confirms that margin of appreciation does not deprive the ECtHR of the power of review. Thus, the ICJ’s findings in Whaling are not inconsistent with the approach of the ECtHR.

Moreover, it is doubtful that the discretion that the respondent in Whaling alleged to have can properly be regarded as equivalent to the deference accorded by the ECtHR in relation to margin of appreciation. As pointed out in the previous section, the deference is paid by the ECtHR because the ECHR acknowledges that judgment as to what restrictions on human rights are needed requires a good understanding of various interests and concerns in the society, and that therefore such judgment should primarily be made by State authorities that are in more direct and continuous contact with that society. In the meantime, a factual determination as to whether a certain activity is for the purpose of scientific research, as reviewed in the Whaling case, does not directly involve interests and concerns within the society,⁶² but rather requires an objective assessment of relevant facts as to what constitutes ‘scientific research’.

Needless to say, the ICJ is required to apply deferential standards of review under different circumstances for different reasons.⁶³ For example, an objective assessment by State authorities as to what constitutes ‘scientific research’ as stated above may be worthy of a certain degree of deference in light of divergent scientific opinions regarding this question. However, the degree of deference that is accorded in light of the divergence of scientific opinions is not identical to the degree of deference that is accorded in light of State authorities’ proximity to the society. Using the term margin of appreciation, which is specifically used as an indicator of judicial reference as required by the principle of subsidiarity, to denote deference under other circumstances would undermine its significance.⁶⁴

Finally, it should be noted that the above analysis does not mean that margin of appreciation will never be applicable to ICJ cases. If rules of international law that involve the assessment of rights and concerns within a society are invoked in future ICJ cases, the ICJ may find it useful to use margin of appreciation as an indicator to show the appropriate degree of deference. In this regard, it is noticeable that human rights issues, which would require such assessment, have been raised in the ICJ more frequently in recent years than in the past, and the ICJ has recently been faced with the question of whether restrictions on human rights are justified under human rights treaties.⁶⁵ The ICJ might use margin of appreciation in the future to indicate its awareness of its subsidiary role in deciding what interference with human rights is necessary.⁶⁶

B. Margin of Appreciation has Rarely been Acknowledged by UN Human Rights Treaty Bodies

Given the fact that the subject and nature of UN human rights treaties is highly similar, if not identical, to that of the ECHR and that, similar to the ECtHR, the UN human rights treaty bodies, in reviewing individual communications, frequently face the question of whether governmental restrictions on human rights are justified in light of the need to protect competing rights and public interest, it is natural to consider that margin of appreciation can be used as a useful indicator to show the appropriate level of deference to be paid by these treaty bodies.

However, in practice, margin of appreciation is rarely used by these bodies. For example, the Human Rights Committee (HRC) has never explicitly acknowledged that margin of appreciation is accorded to States under the International Covenant on Civil and Political Rights (ICCPR).⁶⁷ In particular, in its General Comment No.34, the HRC states, concerning freedoms of opinion and expression under Article 19 of the ICCPR, that ‘the scope of this freedom is not to be assessed by reference to a “margin of appreciation”’ and that ‘a State party, in any given case, must demonstrate in specific fashion the precise nature of the threat to [the rights or reputations of others, national security, public order, or public health or morals] that has caused it to restrict freedom of expression’. [footnotes omitted, emphasis added].⁶⁸ The statement seems to indicate the HRC’s reluctance not only to use margin of appreciation but also to accord deference to States’ judgment as to what restrictions on freedom of expression are necessary.

There are only a handful of decisions where the UN human rights treaty bodies explicitly referred to margin of appreciation. For example, in examining whether reasonable accommodation is provided to persons with disabilities in the workplace in accordance with Articles 5 and 27 of the Convention on the Rights of Persons with Disabilities, the Committee on the Rights of Persons with Disabilities noted that ‘State parties enjoy a certain margin of appreciation’ when assessing the reasonableness and proportionality of accommodation measures.⁶⁹ In addition, in a communication involving an alleged violation of Article 11(2)(b) of the Convention on the Elimination of All Forms of Discrimination against Women, which requires States Parties to ‘take appropriate measures’ to ‘introduce maternity leave with pay or with comparable social benefits without loss of former employment, seniority or social allowances’, the Committee on the Elimination of Discrimination against Women noted that States Parties have ‘a certain margin of appreciation’ with regard to the implementation of the provision,⁷⁰ although it eventually found that the State Party concerned failed to fulfil its obligations.⁷¹ Until today, these decisions remain exceptional and fall short of developing into sustained practice.

It has to be noted, though, that the lack of explicit use of margin of appreciation does not necessarily mean that the UN human rights treaty bodies conduct a more rigorous review of States’ restrictions than the ECtHR without according any deference to the Contracting Parties.⁷² In fact, a study shows that there have been ‘relatively few instances where the HRC and the ECtHR have clearly differed’ on the interpretation of corresponding provisions of the respective instruments.⁷³ In particular, human rights treaty bodies generally and almost uniformly accord deference to fact findings made by national authorities of the State Parties. For example, with respect to the obligation under Article 2 of the ICCPR not to extradite, deport, expel, or otherwise remove a person from their territory, where there are substantial grounds for believing that there is a real risk of irreparable harm, the HRC stated that ‘generally speaking, it is for the organs of States parties to the Covenant to review or evaluate facts and evidence in order to determine whether such a risk exists’.⁷⁴ On other occasions, the HRC also noted that the HRC ‘is not a fourth instance competent to reevaluate findings of fact or reevaluate the application of domestic legislation, unless it can be ascertained that the proceedings before the domestic courts were arbitrary or amounted to a denial of justice’.⁷⁵ Moreover, the General Comment on the Implementation of Article 3 of the Convention in the Context of Article 22, adopted by the Committee Against Torture, stated that, considering that the Committee ‘is not an appellate, a quasi-judicial or an administrative body, but rather a monitoring body created by the States parties themselves with declaratory powers only,… [c]onsiderable weight will be given, in exercising the Committee’s jurisdiction pursuant to article 3 of the Convention, to findings of fact that are made by organs of the State party concerned.’⁷⁶

However, the deference that human rights treaty bodies accord to fact findings by national authorities cannot be equated with the deference that the ECtHR accords to governmental judgments in relation to margin of appreciation. As discussed above, the ECtHR uses margin of appreciation to indicate its awareness of its subsidiary role in deciding what interference with human rights is necessary in view of the fact that States are in more direct and continuous contact with local communities than the ECtHR is and generally in a better position to make judgments as to what interferences are necessary within their territory. It also uses margin of appreciation to indicate the degrees of deference that are determined by the provisions of the ECHR and other relevant circumstances. The non-use of margin of appreciation by the UN human rights treaty bodies signifies the lack of recognition of their subsidiary role in determining the necessity of interferences with human rights.

The non-use of margin of appreciation by the UN human rights treaty bodies can be explained by several reasons. First of all, given the relatively limited impact of decisions made by the UN human rights treaty bodies on the domestic law and policies of the Contracting Parties,⁷⁷ the legitimacy deficit that these bodies face may not be as serious as that which has been plaguing the ECtHR. Moreover, a pressing concern for the UN human rights treaty bodies is the insufficient implementation of their views and recommendations by State authorities rather than excessive review by these treaty bodies. The use of margin of appreciation could risk exacerbating the perception that the treaty bodies do not review State authorities’ measures with sufficient rigor. Finally, it is also notable that the nature of domestic authorities that are subject to review by the UN human rights treaties is different from that in the ECtHR. While the ECtHR reviews predominantly the acts of democratic states, which commit to protecting human rights, the UN human rights treaty bodies review many non-democratic states with weak records of compliance with relevant human rights treaties.⁷⁸ In contrast to the ECtHR, it may be considered that domestic organs are not necessarily better suited to making judgments as to the necessity of interference with human rights.⁷⁹

4. Margin of Appreciation in Investment Arbitration

A. Margin of Appreciation can be Applied in Investment Arbitration

There are a few investment arbitral tribunals that have taken the view that margin of appreciation cannot be applied in investment arbitration, by stating that margin of appreciation has no legal basis in applicable investment agreements or customary international law.⁸⁰ These tribunals apparently presume that margin of appreciation itself is a rule whose legal basis has to be found in applicable law. However, the previous sections of this article have pointed out that margin of appreciation, as used by the ECtHR, is rather a description of the deference that is inherently required by the ECHR. What has to be asked is not whether margin of appreciation has a legal basis in investment agreements but whether there is a norm under investment agreements that requires investment arbitral tribunals to accord deference to governmental judgment as to the necessity of interferences with investors’ rights. If such a norm exists under investment law, margin of appreciation can be used as an indicator of deference.⁸¹

In this regard, investment arbitral tribunals widely endorse that investment agreements implicitly require them to apply deferential standards of review. Most notably, the tribunal in SD Myers v Canada, in determining whether there was a violation of the FET under the North American Free Trade Agreement (NAFTA), pointed out that the ‘determination must be made in the light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders’.⁸² Although the decision did not explicitly mention the principle of subsidiarity, the broadly defined deference implies the recognition of a norm under general international law that investment arbitral tribunals should play a subsidiary role in reviewing regulatory determinations.⁸³ The decision on deference in SD Myers v Canada has been followed by subsequent investment arbitral tribunals both under NAFTA and non-NAFTA investment agreements.

The primary responsibility of State authorities and the subsidiary role of investment arbitral tribunals regarding public policy determinations have been explicitly confirmed by recently concluded investment agreements. For example, a paragraph in the Preamble of the Comprehensive Economic and Trade Agreement (CETA) between the European Union (EU) and Canada states that the provisions of the CETA ‘preserve the right of the Parties to regulate within their territories and the Parties’ flexibility to achieve legitimate policy objectives, such as public health, safety, environment, public morals and the promotion and protection of cultural diversity’.⁸⁴ Moreover, Paragraph 3(b) of Annex 9-B of the Trans-Pacific Partnership (TPP) Agreement provides that ‘[n]on-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations, except in rare circumstances’ (footnote omitted). It can be deduced from this paragraph that investment arbitral tribunals are required not to interfere with public policy determinations by State authorities ‘except in rare circumstances’.⁸⁵

In the meantime, there are also a few other tribunals that have denied the applicability of margin of appreciation to investment arbitration, by questioning the appropriateness of drawing an analogy between human rights treaties and investment agreements.⁸⁶ It appears that these decisions are based on the presumption that, while human rights treaties protect various human rights that inherently need to be balanced in light of the competing rights of others as well as public interest, investment agreements exclusively protect the rights of foreign investors, without regard for other rights and interests.

However, this presumption is not shared by many investment arbitral tribunals, particularly recent ones. For example, it has become widely accepted that the FET obligation under investment agreements does not protect ‘every expectation of an investor’ regarding its investment⁸⁷ but only protects expectations that ‘rise to the level of legitimacy and reasonableness in light of the circumstances’ and in consideration of ‘the host State’s legitimate right… to regulate domestic matters in the public interest’.⁸⁸ In relation to indirect expropriation, many investment arbitral tribunals endorse ‘the principle that a State does not commit an expropriation and is thus not liable to pay compensation to a dispossessed alien investor when it adopts general regulations that are “commonly accepted as within the police power of States”‘.⁸⁹ These findings suggest that while investment agreements aim to protect and promote foreign investors’ rights, they also allow the rights to be circumscribed, to a certain extent, in light of other competing rights and public interest within States.⁹⁰

Given that the contours of foreign investors’ rights are defined by investment agreements in light of public interest within States, judgment as to the extent to which foreign investors’ rights shall be protected under investment agreements inevitably requires the assessment of various interests and concerns within the society. In other words, investment agreements presume that a delicate balance needs to be struck between the rights of foreign investors and public interest such as human rights, the environment, and public health.⁹¹ Furthermore, as State authorities are in more direct and continuous contact with local communities than investment arbitral tribunals, the former is generally in a better position to assess various interests and concerns within the communities. It is exactly for this reason that many recent investment arbitral tribunals acknowledge that judgments as to what extent foreign investors’ rights may be circumscribed in light of public interest should be made primarily by State authorities and that a certain degree of deference shall be accorded to their judgments.⁹² On the basis of the analogy between the ECHR and investment agreements, it can be concluded that margin of appreciation, as applied in the ECtHR, is applicable to investment arbitration.

B. Should Margin of Appreciation be Used in Investment Arbitration?

The above analysis leaves an important question unanswered: should margin of appreciation be used in investment arbitration?

On one hand, the use of margin of appreciation by investment arbitral tribunals is beneficial because it could change the perception that investment arbitration unduly favours foreign investors’ economic interests to the detriment of the respondent States’ regulatory autonomy to adopt public interest policies.⁹³ Regardless of the accuracy of the perception, it has provoked the harsh criticism that investment arbitration lacks legitimacy because it does not properly take into account the importance of public interest in the respondent States. Investment arbitral tribunals could address the criticism by using margin of appreciation, thereby conveying a clear message to these critics that a more balanced approach is taken in investment arbitration. Moreover, margin of appreciation can help investment arbitral tribunals apply deferential standards of review in a consistent and coherent manner.⁹⁴ While it is gradually accepted that investment arbitral tribunals are required by investment agreements to accord a certain degree of deference, to what degree the deference should be accorded under given circumstances remains unclear.⁹⁵ Margin of appreciation could be used to clarify this if a sufficient number of decisions are accumulated to suggest how the breadth of margin of appreciation is determined.

On the other hand, however, the use of margin of appreciation by investment arbitral tribunals also entails the risk of inviting the criticism that the tribunals accord excessive deference to States’ judgment, thereby ending up dismissing arbitrary exercise of regulatory power by States. Although such criticism is unfounded because margin of appreciation does not necessarily signify great deference, the prevalent misconception of margin of appreciation as signifying great deference may not easily be corrected. In addition, it may be argued that, unlike the ECtHR, the ad hoc nature of investment arbitration prevents the formation of consistent precedent on how the degree of deference is determined and makes it difficult for margin of appreciation to function as an indicator of deference.⁹⁶ While it should not be discarded that precedent has been formed on a number of issues in investment arbitration, thereby ensuring consistency in investment arbitration jurisprudence,⁹⁷ it is not undeniable that it would take considerable time for investment arbitration decisions to be accumulated into precedent equivalent to that in the ECtHR.

In fact, several investment arbitral tribunals that have used margin of appreciation did not properly explicate what the term means and how it can be used by investment arbitral tribunals.⁹⁸ For example, some tribunals used margin of appreciation simply to signify judicial deference in general.⁹⁹ However, judicial deference may be accorded to the respondent States not only in situations involving judgment of States as to the necessity of interferences with rights of foreign investors but also in other situations, and margin of appreciation may be applied in the former situations. Using margin of appreciation interchangeably with judicial deference in general would prevent the proper application of the term.¹⁰⁰ Moreover, it should also be pointed out that margin of appreciation has mostly been used in investment arbitration to indicate the ‘significant’¹⁰¹ or ‘wide’¹⁰² discretion of States, and has never been declared ‘narrow’ or ‘limited’. While investment arbitration primarily involves the property rights of foreign investors, margin of appreciation may well vary depending on various circumstances such as the nature and object of the interferences and the backgrounds of the cases. The lack of analysis by past tribunals on how the breadth of margin of appreciation can be determined has exacerbated the misunderstanding that margin of appreciation always signifies great deference.

Overall, despite the applicability to investment arbitration and its potential usefulness, margin of appreciation has not been properly used as an indicator of deference in investment arbitration.

5. Conclusion

This article first points out that the ECtHR is required, in accordance with the principle of subsidiarity, to accord deference to States’ judgment as to what interferences with human rights are necessary, in light of the fact that State authorities are in more direct and continuous contact with local communities and generally in a better position to assess various interests and concerns within the communities. It then argues that margin of appreciation applied in the ECtHR is not a rule in itself but rather an indicator of deference, the degree of which varies depending on the nature of the protected human rights and other circumstances.

Turning to investment arbitration, it draws an analogy between investment agreements and human rights treaties, particularly the ECHR, in that both aim to protect certain private rights, while at the same time both justify interferences with the rights to the extent necessary to protect public interest within States. Moreover, it points out that investment arbitral tribunals are required by investment agreements to accord deference to States’ judgment as to what interferences with foreign investors’ rights are justified, in light of the subsidiary role of the tribunals. It concludes that margin of appreciation can be used as an indicator of deference in investment arbitration.

Margin of appreciation is occasionally misunderstood by investment arbitrators as a legal rule that requires international tribunals to accord ‘great deference’ to States.¹⁰³ In reality, it is used by the ECtHR as an indicator of deference that can be wider or narrower like an accordion. Moreover, the criticism that margin of appreciation does not have a legal basis in investment agreements¹⁰⁴ is not well-founded, because margin of appreciation simply describes the deferential standards of review that are inextricably embedded in the agreements. As such, the use of margin of appreciation by investment arbitral tribunals does not modify the rights and obligations provided under the agreements. It should also be insisted that States’ judgment as to the necessity of interferences with investors’ rights is subject to review by tribunals even when a wider margin of appreciation is accorded. The use of margin of appreciation does not and should not mean the abdication of tribunals’ power of review under any circumstances.

This article also notes the difficulty in using margin of appreciation in a coherent manner and developing consistent jurisprudence on the degree of deference, equivalent to that in the ECtHR, in investment arbitration. Thus, it leaves open the question of whether margin of appreciation should be used as an indicator of deference in investment arbitration. For the time being, suffice it recall the ancient wisdom that a journey of a thousand miles begins with a single step. Understanding the term correctly would be the first step.

This research is supported by JSPS KAKENHI Grant Number 15K03145. An earlier version of the article, entitled ‘Margin of Appreciation and Judicial Deference in Investment Arbitration’, was presented at the Midyear Meeting of the American Society of International Law in 2017. The author is grateful for useful comments from Professor Julian Arato and other participants of the Meeting. I am particularly indebted to Judge Charles N. Brower for his valuable advice and suggestions. Of course, all views and errors are mine alone.

Footnotes