The so-called “social license to operate” is a novel concept aimed at providing increased security to foreign investment, in particular in the Latin American region. Traditionally, states have had broad power to determine their actions based on their sovereign power. This power is exercised by the twin legal institutions of ius imperium and public order. Such state powers have been recognised in international investment agreements, through which states undertake not to adopt measures that they would otherwise be entitled to, according to their domestic legal systems.
The notion of state sovereignty is not diluted and does not disappear by virtue of those international instruments; rather, it simply “relaxes”. In particular, international investment agreements provide for exceptions under which the state protection granted to investors and their investment is “suspended” for reasons of national public interest. Common law refers to these exceptional cases as “Non-precluded Measures Provisions”, while the French doctrine calls them “Les Dérogations conventionelles.” The underlying grounds for non-precluded measures are based on, among other criteria, national security, international peace and security, public order, public health, public morality, and situations of urgency or need, that justify the exercise of the state’s “police power.”
In addition to the above-mentioned concepts, various international investment law authors have proposed recently the concept of a “social license to operate.” This “social license to operate” refers to the approval of a given investment project by the community of the “impact area” where the project will be implemented, as well as by other stakeholders, in a manner that could affect the viability of the project. In other words, the social license to operate could be defined as the extent to which the investor is required to meet social expectations even when such requirements are not explicitly mandated by law. While there is discussion about the origins of such an idea, its theoretical basis aligns itself with the concept of the “social contract” and the consequent political legitimacy of the operations undertaken. This reasoning was considered, for example, by the Minerals Council of Australia:
“Simply defined the ‘social license to operate’ is an unwritten social contract. Unless a company earns that license, and maintains it on the basis of good performance on the ground, and community trust, there will undoubtedly be negative implications.”
(Minerals Council of Australia, 2005, Enduring Value – The Australian Minerals Industry Framework for Sustainable Development, page 2.)
There is, therefore a clear contrast between the social license and the state license: while the social license is an intangible and unwritten requirement (and “asset”) that cannot be granted by civil, political or legal authorities, the “state license” is an amalgam of legal permits and authorisations granted by the authorities for the implementation of a given investment project. The social license to operate appears to be inserted in the so-called public interest of the state, as its role is to safeguard citizen claims whose ultimate protection pertains to the state. In that sense, citizen requests stemming from the notion of a social license to operate could legitimately motivate the exercise of the state’s police power.
When applied to the international dispute resolution field, the application of these concepts would provide quite new and controversial scenarios, particularly in arbitration disputes between investors and host countries. In fact, to date there is no uniformity in the criteria used by arbitrators to decide between the legitimate commercial aims of investors and the genuine public interest of states in a given investment project.
There was a reluctance to discuss the issue in the first International Centre for Settlement of Investment Disputes (ICSID) case where reference to public interest was made, Soabi v Senegal, where the arbitral tribunal held that it was not its role to ensure the observance of the state’s public policy.
Later arbitral awards have been more prone to consider the relevance of the state public welfare in international investment law disputes. For example, in 2003, in Tecmed S.A. v Mexico, although the arbitral tribunal ruled an expropriation existed, it also considered that the state’s exercise of its sovereign powers within the framework of its police power may cause economic damage to those subject to its powers as administrator, without entitling them to any compensation whatsoever.
Similarly, in LG&E v Argentina in 2006, the arbitral tribunal stated that the state has the right to adopt measures having a social or general welfare purpose. However:
“… the measure must be accepted without any imposition of liability, except in cases where the state’s action is obviously disproportionate to the need being addressed”.
Notwithstanding these considerations, there are arbitration decisions which curtail the attention to a public interest in the investment context. For instance, in MTD Equity v Chile, the investor sued the state for having denied the re-zoning of an area when an authorisation of the investment had already been issued. The arbitral tribunal found that the state was not obliged to re-zone (especially considering alleged environmental reasons) and that the single authorisation of the investment by the state was not a broad authorisation, but the beginning of a process for obtaining the other necessary government permits and licenses. In spite of such reasoning, the arbitral tribunal found that the state acted unfairly and inequitably by authorising an investment that could not have taken place in the proposed terms, based on the existing urban policies.
In another case, Metalclad v México, the investor sued the Mexican government for the alleged breach of the North American Free Trade Agreement (NAFTA), when a Mexican municipal government denied permission to build a toxic waste repository based on the risks posed to public health. The arbitral tribunal upheld the claim by considering, among other criteria, that Mexico failed to ensure a transparent and predictable investment framework. However, the tribunal examined neither the matter of the possible effects on public health, nor the opposition of the local population to the project.
More arbitral decisions on the balance between the protection of investors’ interest and the safeguard of states’ public order are expected. For example, the pending award in the case Renco Group Inc. v The Republic of Peru, in which Doe Run sued Peru for an alleged indirect expropriation that would have taken place when the state sought to be considered as the main creditor of the firm in an insolvency proceeding. The state, on its part, alleges that Doe Run incurred breaches of domestic environmental law.
In summary, the current discordance between the “state license” and the “social license to operate” pivots around the existing concept of “public interest” in international investment arbitration. This conundrum is particularly relevant in Latin American countries which host international extractive industries. Opposition by local communities to such projects, in spite of all government authorisations having been issued for a given investment project in these countries, has had a significant impact, which finds its ultimate expression in unfinished and even cancelled projects. It is here where the issue of the “social license to operate” acquires vital importance, and calls for attention from all stakeholders involved, clearly including arbitrators and arbitration counsel.
It is imperative to continue analysing and studying the real implications of the requirement of a “social license to operate” in the context of international investment agreements and disputes, and in this area, Latin American countries have rich experience to lead this dialogue. We hope that this conversation will continue in order to provide further guarantees to foreign investment and investors, in harmony with the legitimate interests of the recipient states and the affected local communities.
