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Investment Arbitration under the Energy Charter Treaty in the light of new NAFTA Precedents: Towards a Global Code of Conduct for Economic Regulation
1) Introduction: Investment Arbitration as an Emerging Key Discipline on Governmental Regulation in the Global Economy
The purpose of this chapter is rather straight-forward. It seeks to provide a “snap shot” of the state of international law with regard to a particularly interesting, and rapidly evolving, subject: investor-state arbitration. The focus of this chapter, naturally, is on investor-state arbitration in the Energy Charter Treaty (ECT), although the state of the law is such that jurisprudence from other sources will be used to flesh out exactly what we perceive are, and might be, the important issues emerging in the relatively young area of investment arbitration under the ECT. Before discussing the various procedural and substantive issues which are mostly likely to be of interest to the reader, we will set out some of the basic themes, or perhaps trends, in international law which have shaped the landscape of investment arbitration, or which have been shaped by it. The paper will highlight the contest between diverging paradigms on investment arbitration: The model of private, international commercial arbitration versus the view of public, transparent and externally accountable international quasi-judicial review of national regulatory action or the competition between a primarily public international law, conventional and state-oriented view versus a primarily commercial, arbitral and non-state understanding highlighting the sanctity of property and contract rather than extensive sovereign prerogative in regulatory intervention or highlighting rather a strict, literal construction of the powers of states to set up, abolish and modify international economic treaties versus the more traditional and diplomats view treaties as instruments under the unfettered control of – only – states.
If the global economy is to function as a machine to produce prosperity and civilisation for at the least the majority of its citizens, the discipline of law must be placed upon each of its major actors, including governments, businesses and even non-governmental political organisations (NGO’s). Legal disciplines have been developed in the areas of trade, investment, finance and the environment. Human rights (including protection of property rights) are currently coalescing into new discipline and corporate governance (and then perhaps NGO accountability) may follow. Formal law, mainly through the instrument of international treaties, co-exists with a large array of non-law regulation – such as internal corporate rules, industry-wide and professional (semi-) voluntary codes and technical standards[3]. Perhaps there is a new version of traditional international customary law emerging which would incorporate state and non-state practices combined with the principles of treaties and non-treaty legal or “soft-law” standards[4]. The major modern economic regimes (particularly the GATT/WTO, NAFTA, Energy Charter Treaty and the large number of bilateral investment treaties are at present garnering the lion’s share of attention for their apparently superior levels of effectiveness.
Traditionally, the enforcement of international norms was left exclusively in the hands of inter-governmental diplomatic forums, backed as necessary by more formal legal mechanisms such as inter-state arbitration. This state of affairs reflected the traditional understanding of international public law as a law between states, for states, by states. It still informs the approach and mind-set of conventional international public lawyers towards this new topic. This meant that an aggrieved investor needed to get home state support which was not always forthcoming. Rarely, the interests of the investor in solving his problem coincided with those of the home state. The home state’s foreign affairs agencies were not interested in having their inter-state relationship affected by private companies. Even if they took up such cases, their strategy and legal argument were influenced by much wider-ranging considerations; this, naturally, weakened the effectiveness of the diplomatic recourse.
With a renewed drive towards economic globalisation, the relative retreat of the state and the increasing role of markets in providing public goods and economic growth[5], a fundamental trend has emerged: International obligations are now developed for the benefit of, and sometimes for the enforcement by, non-state actors. International economic law which suffered a comprehensive “nationalisation” in the 19th and 20th century, both in the form of its instruments and in the approach, attitude and concepts towards international economic law is now in the process of extensive re-privatisation or de-nationalisation[6]. This development, effected through economic treaty regimes, establishes a quasi-constitutional international framework of rights held by individuals as against the actions of national and subnational governments and their agents[7]. The developments in the economic sphere mirror those taking place in the areas of international environmental law and international human rights[8].
Whereas the regime of economic rights established under the WTO does not provide for a privately operated system of dispute settlement[9], it establishes a comprehensive framework to safeguard the interests of almost all forms of economic activity. Moreover, as will be described further later, at least one WTO Panel has already commented upon how many WTO obligations, by their very nature, have an “indirect effect” on the legal systems of WTO Members, whereby the obligation to proactively meet WTO obligations can be seen as generating a direct benefit for affected individuals, although not a direct right to prosecute those interests, which are generated by WTO provisions, in the domestic context. By contrast, modern international investment treaties do provide a binding and individualised form of dispute settlement, largely drawing on the available forms, procedures and institutions of commercial arbitration model,[10] although they provide a less-detailed framework governing government measures affecting a potentially more limited range of economic activities. While there is undoubtedly a convergence of international trade and investment law, there remains still a significant distinction: Trading is – mainly – a much more short-term interaction between a foreign trader and a national economy; investment implies – mainly – a much more long-term exposure of capital and efforts to on-going risks of government regulation and political, regulatory and administrative volatility.
Nonetheless, through these special arbitral mechanisms, foreign investors can litigate directly against governments for breaches of specifically denominated obligations of international law, based upon treaty obligations which grant consent to arbitration (and without the need for a specific arbitral agreement between the would be disputants). Litigation takes place before ad hoc arbitral tribunals which are both independent and international in their constitution. Investors claim full compensation for any losses suffered as a result of the treatment that precipitated a breach of any obligation contained within the relevant investment treaty. Individualised dispute settlement is a feature of many, if not most, recent bilateral and multilateral investment protection instruments, including the NAFTA (between the US, Mexico and Canada), the (as yet not ratified) Mercosur Colonia protocol on investment protection, the aborted 1998 Multilateral Agreement on Investment (MAI) and the 1994 Energy Charter Treaty.
It is at first sight perhaps difficult to understand why governments would voluntarily limit their sovereignty by submitting to such processes of arbitration-enforced discipline. One must realise, however, that by accepting such external, politically less malleable, disciplines, a country gains in many ways. Acceptance of such disciplines can bolster a country’s reputation for good governance, thereby lowering perceived political risks for investors and enhancing its ability to participate and benefit fully from the global economy[11]. Governments who fail to accept such disciplines can be regarded as higher-risk environments and may accordingly be penalised in the risk calculus that is undertaken by businesses prior to the making of investments abroad. Risk rating of countries – reflected in lending rates rates, political risk ratings, corruption and governance ratings, financing and aid conditionalities – expresses the markets’ response to country conditions and governmental policies. The credibility of governments current and future promises depends on tangible evidence of submission to external accountability. Governments – and companies – are treated quite alike by the markets. Any evidence of bad governance and avoidance of external accountability is, perhaps more than ever, triggering a run away from a country’s economy or a corporations’s business. Finance is closely linked to good-governance. This is why the principles advanced during the “New International Economic Order” movement – permanent sovereignty as ius cogens, exclusive jurisdiction of domestic courts and law – imply that governments are something like “minors” without full legal capacity (i.e. international persons without sufficient credibility or the ability to participate effectively, and in a mature way, in the global economy). The state that refuses to contract effectively (by means of specific arbitral agreements or general investment treaties) may be regarded as the equivalent of the light-headed juvenile who needs protection from its own foolhardy actions, rather than as a serious player on the world stage. Joining the club of multilateral economic treaties therefore implies some degree of maturity, self- and externally anchored discipline. A 21st century version of the 19th century of the club of “civilised nations” may well have emerged, though under a different labels related to contemporary notions of proper governance.
Acceptance of external disciplines can also be seen as a simple matter of reciprocity – in exchange for the benefit of convincing a trading partner to submit to it as well. Finally, submitting to such external disciplines provides governments with a defence against domestic pressure groups – including both domestic business lobbies and ideological interest groups – which can capture the domestic regulatory machinery and manoeuvre it for their own benefit (often generating sub-optimal economic result for the country in question and hindering the wealth-creating potential of the global economy)[12]. It is therefore not surprising that policies of economic reform and modernisation in transition or developing countries go hand in hand with the acceptance of external disciplines contained within multilateral treaties. The European Union’s history of economic integration by legally enforced external disciplines is perhaps the best illustration of the interaction between international economic integration, economic modernisation and the existence of a supra-national body of law and adjudication. External constraints also provide some element of stability for economic reform against the volatilities of domestic politics as they impose a straitjacket on short-term regulatory volatility and make escape from previously established rules a much more complex, slow and compromise-based process. They dampen the potential for regulatory excess triggered by fickle domestic agitation. International economic law regimes are also one of the most useful instruments that can be placed in the hands of an economic modernisation body, in order to implement its reform policies domestically – using compliance procedures as an instrument of policy reform[13] or against alliances between protectionist lobbies and unaccountable bureaucracies.
Recognition of the value of these arbitration mechanisms is not always instantaneous. It may take decades for businesses and for the legal profession to fully recognise the potential in investor-state arbitration. Misunderstandings of the mechanism, how it works and its implications still abound with NGOs and even governments. Government agencies are often not fully aware of the implications of binding arbitration as a result of their country’s accession to a bilateral or multilateral treaty (neither before the accession nor after accession has become effective)[14]. Knowledge of investment arbitration as a serious risk is unlikely to spread rapidly within a bureaucracy; the ratification process is as a rule under-informed of the litigation risk involved with multilateral or bilateral investment treaties. The treaty promoters have an incentive to downplay this risk, and they are as a rule separated from those government agencies which cause the risk by misconduct towards investors. They may accordingly be very surprised when their agenda is challenged one day by the treat of arbitral litigation from without; a threat that can be rendered against their ministry, regulatory agency, state enterprise or province even though an explicit individual arbitration agreement has never been signed.
Familiarity with new forms of investment arbitration can take some time to establish. For example, although the NAFTA was ratified in 1994, it was not until very recently that cases began to be brought on a more regular basis by a slowly expanding claimants’ bar.[15] Similarly, while the World Bank’s ICSID Convention was established in 1965, arbitration there only took off only after a lapse of at least three decades after the facility was established.[16] Among the large number of current ICSID cases, many are now based on jurisdiction established by way of investment treaty, and no longer by way of individualised arbitral agreement[17]. With the Energy Charter Treaty (signed in 1994, with provisional application, and rendered fully effective with 30 ratifications in 1998), arbitrations only appeared to begin after 2000.[18]
There is no doctrine of stare decisis in international economic law, although it would be inaccurate to claim that cases decided by respected arbitration tribunals (and not overwhelmingly rejected in authoritative literature) would not have considerable influence on future tribunals. This phenomenon of persuasion will likely be even more apparent when a particular decision is cited with approval by a subsequent tribunal, generating even further authority for subsequent cases. Similar to all judges, arbitrators have an innate understanding of the need to position themselves in the mainstream of the thinking taking place within their profession and amongst their academic peers. Arbitrators, even more than judges, will therefore tend to “go with the flow” if one can be clearly identified. An arbitrator that is seen as the “odd case” outside a dominant, self-referencing trend is unlikely to appear again. Placing oneself within a collegial continuity is therefore a condition for continuing practice of guild membership. An investment jurisprudence is at present emerging rapidly – perhaps too easily in view of the sometimes significant legal differences between the various treaties underlying the cases. The result of these trends may well be a burgeoning “common law” of international trade and investment protection, where different tribunals work separately, but somewhat symbiotically, to articulate the meaning of treaty obligations which share similar, if not identical, language. The awards made by tribunals articulating the meaning of Bilateral Investment Treaties, ICSID clauses, and NAFTA provisions can therefore be expected to have a notable influence on the interpretation of the language of the ECT.[19]
Of course, this new (or in some cases, rediscovered) arbitration mechanism holds value not only in the cases in which it is actively engaged. Its very existence can be used as a lever for business-government bargaining “under the shadow” of an investment treaty. It is now becoming, or will certainly have to become, standard practice among government (and corporate) legal advisers to examine the prospective application of Treaty-based investment arbitration when dealing with investment disputes. Such early scrutiny will hopefully lead to the resolution of many disputes before they reach arbitration. One problem illustrated by several recent cases is that legal responsibility under such treaties falls upon the central government, even though disputes often originate in subnational entities, such as provinces of federal states, independent regulatory agencies or state-owned or privileged enterprises over which the government has limited legal and political influence. Subnational entities can thus can easily become involved in an investment dispute for which responsibility may be passed upwards to a central government with little prior involvement.[20] In cases where the subnational entity carries little of the arbitration risk, or its regulators are not made sufficiently aware of their country’s international obligations, the effectiveness of the investor-state arbitration facility may be significantly reduced. There is here an asymmetry between risk for and control over investment disputes that disrupts the economic and political efficiency of investment arbitration. The right way would be to associate the relevant subnational authorities in the negotiation of investment treaties and in the conduct of investment arbitration, but also to develop intra-state procedures to allocating risk, cost and blame directly on the subnational entities responsible for a dispute. The Argentine infrastructure cases – Lanco, Aconquija – indicate that this has not yet occurred: Provincial politics and resistance against federal policies caused costs which the federal government has ultimately to assume. The long Enron-Dabhol story is similar[21].
Investor-state arbitration should accordingly be seen as a relatively potent instrument of “good governance” because it assists in making governmental bureaucracies (whose tendencies frequently verge toward non-transparency, unfettered discretion and economically inefficient collusion with domestic pressure groups) accountable before independent, impartial and international institutions. It fits well into the modern tendency of international law to create powers of enforcement directly with non-state actors and complements newly acquired and much advocated litigation rights of individuals and NGOs in human rights and environmental situations[22].
Moreover, because investor-state arbitration is a process whose engagement is dictated by the claimant on its own behalf (rather than by “home government” sponsorship and espousal of an individual’s claim by working through diplomatic or state-to-state dispute-settlement channels), the process is considerably more promising for the future of international norm-development. This is because there will likely be much less need for claimants’ counsel to “pull their punches” as can be the case when potential claims are raised within the context of state-to-state dispute-settlement. Here, counsel representing governments are forever mindful of how “too broad” (or too good) an argument made in one case might precipitate a future case in which the he or she will be forced to defend. This special prudence is very visible in WTO litigation (in particular by the US and EU, present in most WTO cases)[23]. An investor plaintiff, on the other hand, should have few compunctions about deploying any argument or precedent that might further its cause.
Art. 26 ECT Investment Arbitration
Institutional Background
While NAFTA and bilateral investment treaty obligations apply to government measures affecting a broader range of economic activity and sectors, and have been used more often, Art. 26 of the Energy Charter Treaty (ECT) is an excellent illustration of the kind of mechanism and substantive obligations that have spurred this modern trend towards the establishment of normative disciplines on government behaviour. The ECT is a multilateral investment treaty between countries in the EU, Eastern Europe and the former USSR (as well as Japan and Australia, although not the USA).[24] It is based upon the declaratory “European Energy Charter” of 1991 and signed in 1994. Its primary purpose is to enhance investment, trade and transit in the energy sector by providing investment security, by facilitating transit and helping to introduce liberalising market-economy features into the post-Soviet economies. There are also more programmatic sections of the ECT concerning environment and competition law. It should accordingly be seen as an instrument for economic modernisation in the transition countries, although the obligations it contains are borne equally by all parties to it. Membership in the ECT enhances the markets’ view of member states’ credibility and political risk.
Only Russia and Norway seem to have bucked the trend toward ratification of the ECT, which has been in effect since 1998. Nonetheless, because of the innovative feature of Art. 45(1) of the ECT, which provides for provisional application, investor-state arbitration may be equally applicable to Russian and Norwegian measures affecting investments in their respective energy sectors. While the issue merits more in-depth discussion, countries which have signed, but not ratified, may still find their measures subjected to investor-state arbitration.[25]
While the ECT also includes state-to-state methods of dispute settlement governing measures affecting energy sector transit[26], trade, tax and (Art. 27) inter-state arbitration, we will focus on Art. 26, which exclusively concerns investor-state arbitration. Art. 26 adopts, and expands upon, the substantive obligations that can be found in most of the approximately 2000 BITs currently in force, as well as NAFTA Chapter 11. Investors from one member state with investments in the territory of another[27] can sue that second state when measures affecting their investment(s) breach one of the key disciplines listed in Art. 26 and they suffer a loss as a result. At their choice, they may seek compensation for such breaches before an arbitral tribunal operating under the ICSID Rules (including the ICSID Additional Facility), the Stockholm Chamber of Arbitration Rules, or through ad-hoc arbitration based upon the UNCITRAL rules. No further arbitral agreement is necessary; the treaty bestows the arbitration right directly upon foreign treaty investors. The state’s consent is contained within the provision and is unconditional and irrevocable. While the method uses the forms of commercial arbitration, there are essential differences: The arbitration is not to cover any commercial dispute arising out of the relationship, but only the alleged breach of the limited canon of specific investment disciplines in part III of the ECT. Also, it is an asymmetric right: Only Treaty investors can invoke the arbitration facility, not states. There are good reasons for these distinctions and they do not reflect a one-sided balance of power as a simplistic analysis might suggest, but it not just a normal case of using commercial arbitration for disputes arising out of state – company relationships.
Procedural and Institutional Issues
Given its relative youth, procedural issues arising out of Article 26 have yet to be raised before, or addressed by, tribunals. One can expect that both procedural and jurisdictional questions could occupy a considerable amount of litigants’ time in early cases. Recent BIT and NAFTA practice (such as recent ICSID cases such as Aconquija, LANCO or Azinian) provides an indication of what kinds of issues might arise, and how they might be addressed by tribunals – but it is crucial to recall that treaty language and structure will differ in these areas, and thus reliance on de facto precedent may be a particularly risky venture in this area. NAFTA and BIT cases are just as more likely to provide a view of the kinds of institutional issues which will be likely to arise if ECT investment arbitration becomes similarly as commonplace.
Arbitration Status and the Potential for Award Review
An important preliminary question that must be addressed is the status of any given investment arbitration. Arbitrations held pursuant to BITs, the ECT and the NAFTA must be held in a 1958 New York Convention state and will be considered of a “commercial” nature under this Convention. The purpose of this kind of treaty language is to ground the arbitration in the firmament of international law, and thereby effectively limit domestic judicial review of any award made by a would be tribunal to the strictest of circumstances. Such circumstances normally include proof of fraud or bias on the part of a tribunal member, or some other fundamental failure of procedural justice.[28] It is also customary that such reviews will be limited strictly to final determinations of such tribunals, rather than interlocutory matters such as procedural orders.[29]
One needs to bear in mind, however, that the public and political nature of the matters which are normally the subject of investor-state arbitration is very likely to make governments increasingly reluctant to accept such awards without further questioning. This is particularly so in states such as the US, Canada and Mexico which have little experience and readiness to see their actions judged by an international court. For example, the Government of Canada has gone so far as to make applications to its Federal Court to review both preliminary awards containing findings of liability and even orders by tribunals concerning issues such as the situs of arbitration or disclosure of documents subject to the in camera provisions of arbitration rules.[30]
EU countries, with their decades of exposure to the European Court of Justice and the European Court of Human rights, may be marginally more accepting of external accountability imposed through investor-state arbitration (although one might argue that an ad hoc international tribunal is not particularly comparable to an established institution such as the ECJ)[31]. The tendency towards attempting to impose a higher degree of local judicial scrutiny to arbitral awards is also likely to be based upon an argument that there is little “quality control” of ad hoc investment tribunals. While it would be wholly unfair to suggest that any of the arbitrators who have been selected to preside over any of the recent NAFTA or BIT cases (which have proceeded under either ICSID or UNCITRAL rules) were in any way lacking in terms of ability or experience, the existence of a standing roster and institutionalised, international appeal system has much to commend to it. For example, the existence of an Appeals Body in the WTO dispute process has gone a long way to legitimise the WTO dispute settlement process, and the evolution of international economic law norms generally. In cases where both the home and host states in an investment dispute are parties to the ICSID Convention, an established annulment mechanism exists, but for arbitrations proceeding under ICSID Additional Facility and UNCITRAL rules (as provided in ECT Art. 26 (4)), the only avenue is domestic judicial review based upon the standards provided for any commercial arbitration award.
It is an open question as to whether either the Stockholm Chamber of Commerce (or similar institutions not provided for in the ECT, such as the London Court of International Arbitration or the ICC Court of Arbitration) would be considered as providing the level of “quality control” required to satisfy critics. Given that the issue is really one of perception of award and process quality, rather than any actual deficiency (unless one asks the opinion of losing counsel in any given case), it is possible that no mechanism will be seen as sufficient that is not established under the relevant treaty itself. In this regard, it is interesting to note that as the countries of the Americas inch slowly towards agreement on a Free Trade Agreement of the Americas, the idea of establishing an Appellate Tribunal for trade and investment disputes has been mooted on more than one occasion.
Forks in the Road: The Question of Multiple Proceedings
Neither the NAFTA nor the ECT nor most modern BITs require the “exhaustion of local remedies” as a precursor to an arbitration.[32] However, the relationship between Treaty-based arbitration and jurisdictional clauses in individual investor-state agreements remains somewhat unclear. For example, the ICSID tribunal in Aguas del Aconquija first affirmed that there was no need to exhaust domestic remedies, but nonetheless required the investor to resort to the jurisdiction of a local administrative tribunal as stipulated in a concession contract under which the investment was made.
This highly questionable ruling would effectively allow governments to thwart the immediate and direct jurisdiction of an arbitration tribunal established under an investment treaty by using its superior bargaining power in negotiations with individual investors to insert the traditional “Calvo” clause into all specific investment agreements. Treaty-based arbitration tribunals would accordingly be relegated to the uneasy role of quasi-appellate court (reviewing the judgement of a local court for compliance with treaty disciplines, rather than reviewing the actions of the government itself for compliance with treaty disciplines). Such a result would be severely constraining, particularly given that the purpose of all modern investment treaties is to allow the investor immediate recourse to the Treaty’s substantive rules and dispute settlement procedures. Few investment treaties contain any explicit language that would suggest such a result (although see, e.g. ECT Art. 26 (3)(b)(i) ECT). The decision of the tribunal in LANCO appears to uphold this principle of immediate recourse, no matter what jurisdiction may be asserted by domestic courts, unless otherwise required under the applicable treaty provisions.
There is no doubt that the concept of state responsibility, under the treaties and international customary law, includes actions by the judiciary. A judicial process or decision can be the subject of an investment claim, if it or its effects are adjudged to have fallen below international standards.[33] In cases where the decision or process of a local court is called into question before an international tribunal (normally under the international law rubric of “denials of justice”), arbitral tribunals are not actually asked to hear an appeal of the local court’s decision, but by putting the decision or the procedures of the local court to the test of international standards, the investor is practically asked to meet a stringent threshold of review. The height of this threshold can be seen in the NAFTA Tribunal’s decision in the case of Azinian v. Mexico, where recourse to international arbitration did not take place until after the investor had failed in its appeal of a contractual dispute before Mexican courts.[34]
Investment arbitration is no alternative for the application of normal procedures in exclusively commercial disputes (whether before national courts or through contractual arbitration). The goal of investment treaties is to provide a remedy for governmental misconduct according to enumerated disciplines, but not to provide an alternative forum for what are in essence commercial disputes between a private party (which can style itself as an investor) and its governmental client. Because the ECT defines investment in a very extensive way (under paragraphs 6, 7 & 8 of Article 1), contract-based claims for performance by a governmental party could be covered. In contrast, while NAFTA Article 1139 provides a similarly wide definition of investment as well, it specifically excludes “claims for money that arise solely out of… commercial contracts for the sale of goods or services…”
Of course, it may be noted that ECT Art. 10:1 (last sentence) does impose a duty upon state members to “observe any obligations entered into with an investor or an investment of an investor.” One might therefore be led to conclude that treaty arbitration is available for all disputes between investors and states concerning non-compliance with commercial contract provisions. We are of the opinion that this interpretation is unnecessarily broad, and would in fact run counter to the overall purpose of the ECT. This obligation is likely limited to cases involving commitments made by governments and their delegated agents with respect to the exercise of sovereign authority (such as tax, regulatory, or tariff-setting powers), although one cannot rule out cases in which governmental authority is improperly used to breach contractual commitments and/or frustrate the process of obtaining local relief. Such cases would fall under the kinds of “denial of justice” cases recognised in the Azinian award and in many other cases. Denials of justice can be found in the manifest and serious malfunctioning of a country’s system of justice to the detriment of the foreign investor, and would include egregious cases of discrimination by national courts against the investor.
The question of whether domestic and international proceedings can be undertaken simultaneously appears fairly well-settled under the NAFTA, and by extension most BITs based upon the US Model. NAFTA Article 1121 requires both the Investor and its Investment (if it takes the form of a legal person under the laws of the host state) to waive their rights to seek compensation locally in order to proceed with international arbitration. Two tribunals have further noted that the very act of brining an investment claim can be taken as a constructive waiver of the ability to simultaneously proceed domestically in search of the same relief.[35] Another NAFTA Tribunal, in Waste Management v. Mexico dismissed the claim of an investor who was found to have failed to provide a clear and unequivocal waiver of its right to pursue the matter before local administrative tribunals.
Complicating this jurisprudence, however, is the fact that NAFTA Article 1121 also provides that such waivers need not include attempts to seek “injunctive, declaratory or other extraordinary relief, not involving the payment of damages” before a domestic court or tribunal. This exception would suggest that a claimant before a NAFTA tribunal could not be deemed to have constructively waived all rights to certain forms of relief from other adjudicators, even though such adjudication would involve determinations made based possibly upon the same evidence and therefore the same facts. In absence of such language, however, it would appear that the rule of thumb for non-NAFTA investment cases will be that a “fork in the road” generally does exist for would be claimants (subject to claims by that claimant that the alternate form of adjudication fell below international standards such that it constituted a denial of justice for which the treaty would hold a possible remedy). [36]
Interestingly enough, ECT Art. 26:2 may provide just such an exception to this general rule. It indicates that investors may submit disputes arising under the treaty to international arbitration; “any applicable, previously agreed dispute settlement procedure” or to the domestic courts or administrative tribunals of the host state. Art. 36:3(b)(i) clarifies this “non-fork” approach by identifying the ECT members in an annex who will not consent to international arbitration if one of the other options has already been chosen. This limiting provision may indicate that ECT member states assumed that – absent any limiting language – a would be claimant would not be required to choose among these options in pursuit of a remedy. It may also indicate, however, that ECT members were merely concerned about an investor having multiple, consequential bites at the dispute settlement apple – rather than multiple, simultaneous bites.
The latter interpretation may be more preferable for both textual and policy reasons. First, ECT Art. 26(2) lists the dispute settlement options with the conjunction “or” (rather than “and”), suggesting that a choice must be made. Second, contemplation of multiple adjudications concerning the same facts risks the possibility of contradictory conclusions – not based on differences in applicable law, but in differences in determination of the relevant facts. In cases where it is at least possible for the claimant to proceed down multiple avenues for dispute settlement based upon one set of facts (such as in cases involving ECT Art. 26:2), principles of litispendence and judicial economy would – at the very least – favour a stay of proceedings by an international tribunal until the earlier proceedings had run their course.
If contractual arbitration is initiated by either the government or the investor under a specific investment agreement (rather than an applicable treaty or under domestic laws), thought should certainly be given to avoiding duplication and the risk of inconsistent awards. A contractual arbitration tribunal is not an organ of the state (as is a national court) and it is suggested that if the contractual arbitration tribunal operates under the same legal assumptions as a treaty-based tribunal would do (i.e. the same international law standards), then there is no need at all for a duplicative proceeding under the treaty, even if the treaty would appear to permit consequential pursuit of the same claim in multiple for a (such as under ECT Art. 26:2). The principles of res iudicata and judicial economy would suggest such a result – provided always that the subject-matter of contractual arbitration is the same as treaty-based arbitration and that the contractual arbitral tribunal applies the same rules, including the treaty. The difficulty in applying general principles of civil procedure is that the subjects of the dispute before domestic courts, contract- and Treaty-based arbitrations tend to be related, but not absolutely identical. This is particularly so in the case of Treaty-arbitration with its reference to a limited and exclusive canon of investment disciplines only. The dispute, here, is much more limited in scope and law applicable than the dispute before courts or contract arbitration. It would help if courts and contract arbitral tribunal would apply – by way of direct or indirect effect – the Treaty rules as well[37]. If they would, a stronger case for litispendence and res iudicata could be made.
Waiver of Treaty protection
A similar issue that has not yet been explored in arbitral jurisprudence to date, at least explicitly, is whether treaty protection can be waived. Lately, governments in the CIS have reportedly required investors to sign an explicit waiver of Treaty arbitration – a practice that would be identical to the much older (and increasingly forsaken) Latin American practice of requiring investors to sign a “Calvo-clause” (i.e. a contractually stipulated submission to exclusive domestic jurisdiction and a waiver of diplomatic protection). The issue has been discussed in the context of relations between traditional Calvo-clauses and more recent US BITs.[38] One can adopt an analogy to international commercial arbitration (which would appear to make sense, given that this analogy is often used to fit Treaty arbitration into pre-existing models of arbitration agreements and regimes of enforcement), seeing the Treaty as establishing a third-party beneficiary system that is capable of waiver by the beneficiary (i.e. the investor). One could also see in the Treaty’s arbitration provision an irrevocable offer by the state which is converted into an arbitration agreement upon its acceptance by the investor. In such cases, a waiver could be considered as valid, where the investor is determined to be estopped from accepting the unilateral offer because of its contractual promise not to do so. However, this approach not only ignores the practical realities of bargaining with a state, but also appears intellectually unsatisfactory because it does serious harm to the goals of universal investment protection envisaged in investment treaties.
The system of investment protection established by these treaties is not really meant to bestow a merely “private” right upon individual investors. It bestows a general obligation upon governments, to arbitrate disputes in accordance with the rules of the applicable treaty, that generates a legitimate interest which can be shared by all individual investors (past, present or future. Only in so doing can the treaty truly satisfy the goal of generating favourable investment conditions. This goal would be utterly thwarted if governments could, as a condition for granting access, have investors waive the one treaty right which transforms a regime of international rules from flowery text into a binding, enforceable commitment. Surely governments which attempted to evade their commitment to arbitrate through the imposition of new Calvo clauses could be seen as acting contra factum proprium and in bad faith – by attempting to reap the general benefits of signing investment treaties (in terms of reciprocity and reputation) without having to face up to the regulation and potential scrutiny that such treaties clearly entail. Such concerns only grow when one considers the effective bargaining power of the state to be able to extract such waivers from individual investors[39]. Accordingly, we suggest that the analogies to international commercial arbitration and the offer/acceptance model to explain operation of Treaty-based investment arbitration have their limits; a proper analogy is perhaps better with judicial review of administrative acts in national law. The use of arbitration terminology and established arbitration instruments should not lead to a wholesale adoption of the arbitration model for this novel discipline of private pursuit of rights under international treaties.
It should be recalled, however, that ECT Art. 26:3(a)(i) does allow those countries which subscribed to annex ID, to avoid ECT arbitration if the investor has chosen to submit the dispute to a domestic or contract-based jurisdiction. Nevertheless, this carefully constructed mechanism permits the investor decide at the onset of a dispute which of the fora available it wishes to select. More problematic are contract provisions which declare a national jurisdiction (e.g. Argentine administrative court)[40] as exlusively competent to decide on all disputes, or, as in one of those cases, the core of the dispute, namely the interpretation of the here pertinent concession contract. That leads us to the as yet unsolved relationship between Treaty-arbitration on one hand, domestic courts and contract-based arbitration on the other. If a country could by way of national law or contract provisions effectively exclude Treaty arbitration, then the situation is identical to a waiver. For the reasons already discussed, that should not be acceptable. Treaty arbitration would then serve merely as a quasi-appeals procedure against such national or contractual procedures, albeit on the very limited grounds of the listed investment disciplines only. The two ICSID cases in this field do not seem to constitute contrary authority: In the LANCO case, the tribunal assumed jurisdiction in spite of the available jurisdiction of the federal Argentine administrative tribunal. In the Lyonnaise des Eaux/Aconquija award, the tribunal did not allow Treaty arbitration to go forward as it considered the provincial administrative tribunal as exclusively competent to decide on the interpretation of the concession contract; but it did recognise the eventual right of the investor to recourse to Treaty arbitration with the complaint that the administrative tribunal’s decision were contrary to the Treaty’s investment disciplines.[41]
Part IV of the ECT: State Responsibility and other Provisions Affecting the Investment Disciplines of part III
Given the broad language of the ECT and the current state of international law governing issues of state responsibility,[42] Art. 26 claims are not limited to measures imposed by central governments, but also to the measures of subnational authorities, state agencies and enterprises. Many recent infrastructure cases have been about alleged misconduct by provincial or municipal authorities following privatisation of such services. Recent ICSID cases[43] have followed – at least in theory[44] - the generally accepted principle that subnational entities (such as regulatory agencies or federated provinces) form an integral part of the “state” which is responsible under international law. This may be more problematic for such state-owned enterprises which are not under the direct operational control of the government and which pursue predominantly a commercial logic. But the ECT, with some borrowing from Art. XVII GATT and NAFTA Art. 1503[45] has what appears the strictest system: States “shall ensure” that any state enterprises shall conduct its activities .. in a manner consistent with the (justiciable) obligations of the state. It is difficult to read anything else into this formulation than strict liability – not due diligence based – of the state for the conduct of its state enterprises; an assumption of strict liability for part III disciplines is confirmed by Art. 22 (2) where the state is under the presumably lower-level obligation not to encourage or require state enterprises to breach the non-justiciable obligations outside part III of the Treaty. Member states can accordingly be seen as providing a financial guarantee, enforceable by arbitration, for damages caused to the investor by non-compliant conduct of their independent regulatory agencies, state enterprises, subnational governments, municipal authorities, the national judiciary and even their competition authorities (through Art. 22, 23). This guarantee most likely goes so far as to ensure compliance with the enumerated disciplines by state enterprises and possibly also by private companies which hold “special” or “exclusive” privileges or some other kind of delegated governmental authority[46]. There is one issue, though, which remains: Art. 26 only allows arbitration for the disciplines listed in part III of the Treaty – but Arts. 22, 23 are outside part III. Does it mean that the strict liability of the central government for actions by subnational entities falls outside the scope of Art. 26 investment arbitration? We suggest that the answer should be “no.” Arts, 22 and 23 do not create a new obligation; they merely confirm the pre-existing responsibility of the state for its subdivisions, including those with autonomy. The specific responsibility of the state flows from the disciplines in part III of the ECT justiciable under Art. 26. Art. 22 and 23 do not add new primary disciplines which are not justiciable under Art. 26 – such as the many obligations with respect to transit, environment, competition in other parts of the Treaty, but just clarify pre-existing state responsibility. Art. 22 and 23 and therefore in the same class as all other “miscellaneous” provisions in part IV of the Treaty which clarify and sometimes modify the application of the investment disciplines in part III[47].
As the relevant disciplines have to be interpreted and applied in a manner that gives full effect to the ECT’s very explicit goals of liberalisation and investment promotion and protection, Art. 26 arbitration promises the potential to subject virtually any measure of economic regulation in the energy sector – including abuse of dominant economic power by state-supported private companies (e.g. national or regional energy transport monopolies), access questions, tariffing, competition law and other areas of economic and fiscal regulation – to a compensatory regime of rather complete state responsibility. Much of the interpretative debate currently involving the relationship between NAFTA Chapter 11 and other NAFTA provisions (such as the state enterprise and designated monopoly provisions in NAFTA Chapter 15 which are included as arbitrable under NAFTA Art. 1116) or other fundamental international economic law norms (such as transparency, which is formulated in NAFTA Chapter XVIII and arguably is to inform any interpretation of the NAFTA’s interpretative purposes under Art. 102) is relevant to ECT Art. 26 arbitration. Nonetheless, there are many issues which will require some elaboration in future cases, such as: the impact of ECT provisions relating to sovereignty (Art. 18), transit (Art. 7), the environment (Art. 19), transparency (Art. 20) and the exceptions (Art. 24) to the full scope of arbitral enforcement of the investment protection part III of the Treaty.
The ECT was negotiated and concluded in some haste, and so major issues remain unresolved[48]. For example, the relationship between contractual arbitration, domestic litigation and Treaty-based arbitration has not yet been settled (supra). There are issues of litispendence to be clarified as well as the applicability of both national and international law to disputes arising (under Art. 26 (6), national law can be chosen with designation of the ICSID Rules). Similarly, while the focus on a unilateral right of the investor to have a government measure scrutinised for breach with one of the listed investment disciplines only underpins the Treaty, it may be difficult to retain such limitation when governmental counter-claims are raised. While the Treaty tribunal is not empowered to decide on such counter-claims formally, it seems difficult to keep counter-claims out of the range of examination as they could impact on the legitimacy of the investor’s claim. It may therefore be difficult, in practice, to maintain the Treaty’s focus on scrutiny of government conduct only on the selected disciplines of part III of the Treaty. The ultimate scope of the Treaty’s innovative and far-reaching investment arbitration provisions can obviously only emerge after extensive testing. So far, only one ECT case has become public (AES v. Hungary, with ICSID, settled), although there have certainly been cases in which the ECT was invoked in government-company negotiations (for example, in one case, a pipeline investor reportedly asserted that subsequent to privatisation the government was in breach of its duties to respect private property and its privatisation commitments). One new case is pending.
This dearth of case law is not surprising. The ECT became effective only in 1998. Both the treaty and the new investment arbitration mechanism have not become widely known to the European legal profession. There may also be a greater reluctance to litigate against the government in Europe and the East than in North America, partly for cultural reasons and partly for the risk of government retaliation (an impression perhaps abetted by the final merits award of the Tribunal in Pope & Talbot v. Canada, in which it was concluded that Canadian officials breached the obligation to provide “fair and equitable treatment” by launching an arbitrary and unreasonable audit of the investment shortly after the investor launched its claim).[49] Nonetheless, the stream of new NAFTA claims which has become more widely known and is currently being discussed in Europe will probably provide both the necessary interpretative precedents and the practical encouragement to “test out” the possibly more expansive arbitral mechanism provided in ECT Art. 26.
Convergence of Trade and Investment Law
An important development in many of the earliest NAFTA cases, which should be of considerable interest within the ECT context, is that the measures at issue have been primarily aimed at regulating the trade in goods, but have nonetheless been found to have had an impact on investors and their investments, and have therefore been made subject to investor-state arbitration. Rather than being concerned more exclusively with the classical issue of expropriation in international law, many of these cases can be seen as re-characterisations of what would otherwise be considered trade-in-goods claims which questioning the propriety of economic regulation. Given the lack of access to international trade dispute settlement mechanisms normally suffered by non-state actors, it should not come as a surprise that investors have found a way to access their remedies through another route.
For example, in the claims made against Canada by Ethyl Corporation[50], S.D. Myers, Inc. and Pope & Talbot, Inc., the claim made against Mexico by Waste Management Corporation, and the claims made against the United States by Methanex Corporation, the measures in question could also be seen as falling with the ambit of the NAFTA’s trade-in-goods provisions, in addition to its investment provisions. Spurred on by early successes before NAFTA tribunals, and by WTO Appellate Body decisions in cases such as Canada – Periodicals and European Communities -- Bananas, which suggest that there is no reason why measure which affects trade in one form cannot affect trade in another form (and thus be subject to multiple disciplines under the WTO Agreement) North American trade lawyers are slowly coming to the realisation that investor-state arbitration may provide a far more effective remedy for their clients than merely working on convincing their home governments of the merits of their claim of the merits of their case. The issue, so far, is open.
What some see as the “lex specialis” nature of the WTO and its procedure for settling trade dispute, and the inability, so far, of the WTO rules gaining “direct effect” either in the US or the EU[51] may prevent arbitration tribunals from substituting for a currently non-existing trade complaint facility available directly to private traders. Such an extension of the investment arbitration mechanism may stretch its political acceptability. This does not mean that breaches of investment treaties which are also breaches of trade treaties can not be litigated under their investment protection aspect by investment arbitral tribunals. It merely means that one can expect tribunals to tread carefully in determining whether a set of facts which appear to clearly breach a WTO obligation also breaches an investment treaty obligation.
Specific Justiciable Investment Disciplines
Under the ECT regime, an investor is limited to the disciplines contained within Part III of the Treaty, containing its investment protection. Non-compliance with other specific obligations (contained within the ECT’s transit, environment, competition law, and trade provisions) are excluded from investment arbitration,[52] leaving their adjudication to the much weaker inter-governmental dispute management mechanisms of the treaty (unless the measures at issue can also be seen as violating the disciplines that are covered in Part III, for example government action affecting transit investment).
The specific disciplines enumerated in part III of the ECT are:
It is arguable, although not tested, that a claim may be brought under Art. 26 for the breach of “soft law” obligations, such as the “shall endeavour” obligation not to discriminate against would-be investors (i.e. the requirement to guarantee “free access”). Another example might include the obligations contained within the as yet unfinished “Supplementary Treaty” (which are meant to provide more detailed rules for issues of non-discriminatory free access and privatisation).[58] However, given the breadth of the definition of protected “investment” under Art. 1 (6), it is not inconceivable that there may be little practical difference in the distinction between pre- and post-investment protection. In other words, the hard obligations of the ECT’s post-investment provisions may well be extended in litigation to include the pre-investment phase, though with due account of the softer nature of the pre-investment obligations.[59]
The International Minimum Standard: A traditional concept from less civilised times – or a modern standard of good governance?
The most interesting substantive law development in the early NAFTA cases has been the re-emergence of the “fair and equitable” standard, frequently identified with the historical “minimum standard” of international law, as a cause of action. One needs, however, to be somewhat cautious about arriving at an automatic identification. As a general rule, investment treaties do not refer to a term such as “international minimum standard” in the same manner as it was understood in much older writings on investment protection.[60] The normal terms used are “fair and equitable”, “most constant security and protection” and the novel term in the ECT and some US BITs, which prohibits “unreasonable impairment” of the investment. We suggest that the right approach is not to allow oneself to become too entangled in historical controversies about the minimum standard, but rather to follow general principles of treaty interpretation in applying the relevant provisions to the facts of a given case. This approach requires interpretation of the treaty terms in their prevailing literal meaning, supported by the context and purpose of the treaty.
Notions of “fair and equitable”, “constant protection” or “avoidance of unreasonable impairment” cannot be understood in the sense the minimum standard was discussed in the 19th century (relying on then prevailing standards of good governance), but rather must be read with the prevailing standards of good governance today.[61] This means that one must take into account the decades of international treaty practice, authoritative soft-law instruments and state practice which have evolved since at least the Second World War as indicative of today’s good-governance standards.[62] The intriguing possibility is that current state practice – part of customary international law if “opinio iuris sive necessitatis” (the latter is often forgotten)[63] – will, first, consist of the cumulative effect of bilateral and multilateral investment treaties. However, in a more realistic and modern understanding, evidence of such practice will also emerge out of the common features of state regulatory practice, including regulatory codes of conduct adopted and monitored through regional bodies such as the APEC and OECD or quasi-public and semi-legal forms of self-regulation, often formulated in global or regional forums, such as for example the EU Madrid and Florence process of energy regulators’ coordination).[64] Principles of common regulatory practice evolving may include, for example, a principle of “cost reflexivity”, i.e. that tariffs for transit and access to natural monopolies should reflect costs and exclude monopoly rent, that regulatory intervention should respect the principles of least-restrictiveness and be based on a solid scientific basis. Finally, in line with the contemporary re-emergence of non-state actors as significant contributors towards customary law, their rule-forming and rule-expressing instruments – voluntary codes, formal corporate or industry-wide standards – increasingly co-shape relevant international customary law.
All of this reflects and indicates modern good-governance standards to which the “fair and equitable[65]”, “no unreasonable impairment of investment” and “constant protection and security” language refer. These standards do not only take in the “classic” focus on central governments, but the increasing range of autonomous and semi-autonomous actors, including sometimes private actors with a public function. These actors now play key roles in regulation of economic activity and have become increasingly an important target of treaty-based investment disciplines.
Tribunals have so far construed this obligation, which is contained within NAFTA Art. 1105(1) – as, though arguably more extensively, in Art. 10 (1) ECT- in a way that is appears intended to give full effect to the liberalising objectives and purposes of the NAFTA (which are actually as explicitly stated as they have been in the ECT preamble).[66] It is generally accepted that the purpose of a provision such as NAFTA Article 1105 is “to provide a basic and general standard which is detached from the host State's domestic law.”[67] This was the conclusion arrived at by the Mexican Claims Commission in: Hopkins (United States of America) v. United Mexican States, in which it was stated that measures affecting foreigners and their investments will be held to international law standards as a minimum standard of treatment, even if their application results in better treatment being provided to the foreigner than is available under domestic law.[68]
The NAFTA formulation of this obligation requires “treatment in accordance with international law, including fair and equitable treatment and full protection and security” which is less detailed than the version contained within Article 10 (1) of the ECT, providing:
- “shall enjoy the most constant protection and security and no contracting party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal”[69]
So how does a government provide an investment with treatment that is in accordance with “international law?” Article 38 of the Statute of the International Court of Justice is often regarded as the definitive statement about the substance of “international law”. It refers to custom[70], international legal principles and international treaties as valid sources of international law, noting that the decisions of international tribunals and highly qualified publicists may also be considered as secondary sources. Whereas ECT Art. 10 (1) clearly indicates that international treaty obligations will be included among those obligations for which a government actor will be held responsible through operation of the MFN-principle, the NAFTA version is less clear.
The issue, therefore, is to what extent such Treaty reference to “international law” allows the complainant to import not only customary international law, but also specific Treaty rules in the particular investment treaty, in other investment treaties, in other economic treaties or from the wide world of international law. Some selection is clearly necessary. The normal procedure is to identify rules which are meant to bestow rights, or at least specific benefits, to the particular investor while leaving out rules which were clearly meant only to operate in an inter-state context. The Tribunal in S.D. Myers, Inc. and Canada was the first to receive arguments that, as a matter of logic and simple construction of the treaty text, “treatment in accordance with international law” must include treatment in accordance with treaty obligations. NAFTA governments are obligated to honour their treaty obligations under the pacta sunt servanda rule of international law, an expression of the fundamental international law principle of good faith. Many treaty obligations, such as those contained within the various WTO Agreements, were designed particularly with the treatment of private sector actors (such as foreign investors) in mind. This was a conclusion reached by the WTO panel in United States – Sections 301-310 of the Trade Act of 1974:[71]
7.77 Trade is conducted most often and increasingly by private operators. It is through improved conditions for these private operators that Members benefit from WTO disciplines. The denial of benefits to a Member which flows from a breach is often indirect and results from the impact of the breach on the market place and the activities of individuals within it...
7.81 ... In treaties which concern only the relations between States, State responsibility is incurred only when an actual violation takes place. By contrast, in a treaty the benefits of which depend in part on the activity of individual operators the legislation itself may be construed as a breach, since the mere existence of legislation could have an appreciable "chilling effect" on the economic activities of individuals.
7.85 In this sense, Article III:2 is not only a promise not to discriminate in a specific case, but is also designed to give certain guarantees to the market place and the operators within it that discriminatory taxes will not be imposed. For the reasons given above, any ambivalence in GATT panel jurisprudence as to whether a risk of discrimination can constitute a violation should, in our view, be resolved in favour of our reading.
The international obligations contained in the various WTO Agreements are fundamentally related to the interests of private actors who depend upon the stability and security that these rules are designed to offer. While they may be entered into by states, they are designed for the benefit of these private actors, including foreign investors. Accordingly, it should come as no surprise that a NAFTA investor might be entitled to seek compensation for government behaviour that violates one of these treaty obligations and harms its investment as a result. NAFTA Article 1105 requires treatment in accordance with “international law.” International law is generally acknowledged to include treaty, custom and principles. If a NAFTA government’s measure violates a particular WTO obligation, it has not only violated its treaty obligation in relation to the harmed foreign investment; it has also violated the international law principle of good faith by not honouring its WTO obligation.
A majority of the Myers Tribunal appears to have recognised this logic, in stating:
The Tribunal considers that a breach of Article 1105 occurs only when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective. That 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. The determination must also take into account any specific rules of international law that are applicable to the case.
In some cases, the breach of a rule of international law by a host Party may not be decisive in determining that a foreign investor has been denied "fair and equitable treatment", but the fact that a host Party has breached a rule of international law that is specifically designed to protect investors will tend to weigh heavily in favour of finding a breach of Article 1105.[72]
With this obiter dicta, the Myers Tribunal did not say that any breach of a WTO obligation constitutes a breach of Article 1105. Instead, it suggested that a finding of breach of a WTO rule intended to benefit private businesses could be considered relevant by a Tribunal called upon to consider whether Article 1105 standard of “fair and equitable treatment” has been breached by the same course of conduct that constituted the WTO breach. The Majority’s reasoning is not particularly clear on this point, and its finding that Canada’s treatment of the investment was so discriminatory that it not only constituted a violation of NAFTA Article 1102, but NAFTA Article 1105 as well,[73] does not shed any further light on the matter. For the ECT, such reasoning applies as well, in particular as the MFN-comparison called for in Art. 10 (1) explicitly refers to “international law, including treaty obligations”. The question, here, is if “treaty obligations” mean only obligations from similar investment treaties, or if the scope for comparison is larger by covering as well trade and other economic treaties. The latter argument has considerable validity, if such obligations in other economic treaties are intended to generate benefits for private commercial operators in the role of investors (even if they simultaneously, as should be normal, also operate in the role of trader).
Nonetheless, even the hint that the NAFTA Parties may have (at least in their opinion) inadvertently agreed to be bound to keeping all of their treaty promises through investor-state arbitration under the NAFTA was apparently too much for the trade bureaucrats in each country to bear. They accordingly had their Ministers agree, on July 31, 2001, on what they assuredly hope will be a binding “interpretation” of NAFTA Article 1105 that would not only forbid its use to enforce a WTO obligation directly through NAFTA arbitration but would also limit its meaning to the “minimum standard of treatment of aliens” that has been available under customary international law for centuries[74].
To date, no NAFTA tribunal has been willing to fully rely on this interpretation, e,g, in terms of accepting the “egregious” or “outrageous” language as a penultimate statement of the standard of treatment (or perhaps better conceived of as the threshold of just how “bad” treatment has to be to generate a finding of liability). The NAFTA Parties’ now newly asserted “low” minimum standard seems to be based on a single case from a single chamber of the US—Mexican Claims Tribunal (which is over 70 years old and was not adopted, nor effectively applied, in any other case before that tribunal).
Numerous tribunals are currently considering arguments as to exactly “how binding” the NAFTA Ministers’ statement on the interpretation of NAFTA Article 1105(1) will be on their work, and whether – in any event – the customary law minimum standard has nonetheless stood still for the past seven decades.[75] An “interpretation” can by itself not change the clear meaning of a Treaty, though it provides considerable (though not all-controlling) authority in cases where the text of a treaty is ambiguous. An interpretative agreement made by the parties subsequent to the conclusion of a treaty is a factor “to be taken into account” (Art. 31 Vienna Convention on Treaties)[76]. We suggest that this is here a case where traditional public international law approaches would emphasise the power of state parties to modify the substance of an agreement post-conclusion under the guise of agreed interpretation (and GATT practice provides many examples for this). On the other hand, an approach coming rather from commercial arbitration would tend to emphasise the formal elements of certainty and predictability so relevant for the protection of contract and property of investors; a commercial and more non-state approach would therefore, in all likelihood, rather emphasise the need for rather literal interpretation, and the limits of subsequent control of the Treaty-making governments over the treaty they have made, in particular as investors may have legitimately confided in the reasonably clear formulations of the Treaty text, obtained direct rights from the treaty and made risky investments relying on the Treaty. Allowing state parties wide rights to re-jig the substance of the treaty by a subsequent interpretative agreement would then undermine the treaty’s key emphasis on investment security, reliability, transparency and private rights.
An “international minimum standard” does not mean that much either. The term itself evokes memories of the heaven of unrestrained bureaucratic power of the 19th and early 20th century which modern investment treaties intend to replace with modern, stable and legally protected investment protection rights. The progress in legal expectations of good governance, human rights and governmental accountability has been momentous since the end of WW II. Such progress has again accelerated since the end of the Cold War. The standard therefore needs to be specified, and cases from the 1930s will have much less relevance than contemporary notions of good governance, state practice and accepted custom. In other words, referral to the “minimum standard” is not a referral to a standard congealing the expectations at a specific point in the distant past, but rather a standard referring to contemporary expectations for governance in the global economy[77].
So far, only one of nine tribunal members (who dissented on a finding of liability under Art. 1105 in the Myers case), has accepted that this is the appropriate standard. In fact, already one tribunal has concluded that it appears that if such an interpretation were intended by the Parties in July 2001, it could only be construed as an amendment to the text based upon a proper interpretation of what the Parties must have meant when the NAFTA was signed in 1993. This Tribunal, hearing the claim of Pope & Talbot, Inc. against Canada, has nonetheless concluded that even if the appropriate standard to be applied under NAFTA Article 1105 requires a tribunal to conclude whether a reasonable person would be “outraged” or find the state conduct in question “egregious” the facts before it would satisfy such a threshold.
The point to be made here is that “reasonableness” “egregiousness” “arbitrariness” and “unfairness” are all concepts that rest to a certain degree on the eye of the beholder. Using the above-mentioned history of state practice as a guide, one cannot help but conclude that the content of the “minimum standard” – now present in over two thousand different treaties, and perhaps countless specific investment contracts – is most likely out of the hands of any particular state or states to decide. In this regard, it would nonetheless be useful to note that the wording of ECT Art. 10 (1) leaves government lawyers with much less “wiggle room” than their NAFTA counterparts, as it explicitly provides that treatment in accordance with “international law” includes treaty obligations.
Of perhaps even greater interest, accordingly, are the questions of whether the breach of a specific treaty obligation can be directly actionable under a provision such as NAFTA Art. 1105(1) or ECT Art. 10(1), and whether a consistent and cogent jurisprudence will develop concerning the application of the “fair and equitable treatment” standard which can be found in most investment treaties, including the NAFTA and ECT. The standard has become so ubiquitous that a debate has developed over whether it has passed into customary international law (although it is not clear whether it would be considered as a “stand alone” concept or as an “update” on the minimum standard of treatment of aliens described above). So far, of the three NAFTA tribunals that have been asked to consider the application of Article 1105, two have largely restricted themselves to findings based upon the “fair and equitable treatment” standard. When the Pope & Talbot Tribunal had a second chance to consider the standard, in its damages award, it suggested that a customary international law quickening may indeed have taken place with respect to this standard, although it did not base its award on this point.
In its earlier award on liability, the Pope & Talbot Tribunal concluded that the “fair and equitable treatment” standard was an “additive” concept that was not actually “included” in the treatment that Article 1105 indicated must be provided under international law. It came to this conclusion based upon an analysis of various BIT’s, which often require “fair and equitable treatment” in addition to whatever treatment is required under international law. The Tribunal’s reasoning was that the NAFTA Parties could not have possibly intended to agree to a “minimum” standard provision that would provide other investors with potentially better treatment under all of the BIT’s to which one of the NAFTA Parties was a member.[78] With its damages award, the Tribunal stood by this finding, although it took pains to note that the issue was insignificant given that the conduct of the Canadian government officials in that case breached any standard of “fair and equitable treatment” (additive or otherwise).
If one accordingly ignores minor controversy implied in the Pope Tribunal’s “additive” analysis and concentrates upon its actual application of the fair and equitable treatment standard, it appears that the Tribunal was fairly conservative in its approach. It clearly rejected the minimalist approach advocated by the NAFTA Parties as “doing violence” to the fair and equitable treatment standard that appears in hundreds of international investment treaties,[79] but it did not outline a wide-ranging analysis of just how high a standard NAFTA governments could be expected to meet.
The Tribunal did not draw any conclusions that would suggest that “substantive fairness” is an element of the “fair and equitable treatment” standard. It did not to do so even though its award included a finding that explicitly acknowledged the inequitable manner in which the investment was treated under Canada’s regime, and in spite of the fact that the standard explicitly includes “equitable” treatment.[80] It is accordingly apparent that – at least for this Tribunal – the “fair and equitable treatment” standard is limited in application to issues of procedural fairness only. On this ground, the Tribunal described a course of conduct managed by a Canadian official that it did consider to constitute a violation of the standard by Canada. In fact, the Tribunal appeared to surmise that this official’s conduct possibly constituted a form of retaliation or punishment for the investor having brought its case.
Almost immediately after Pope filed its arbitration claim, this official commenced an audit process for which he was unsure he had the necessary authority, but asserted that he did. He made arbitrary demands upon the investor and investment to submit to his process on his terms, and rejected offers of compromise. He repeatedly threatened to advise his minister to revoke all or part of the investment’s entitlement to export quotas (which formed the basis of its viability as a going concern). Finally, even though a hearing was held by the NAFTA tribunal in which it was concluded that the audit process was “seriously flawed” and “not a reliable basis for further action,” the official quietly recommended to his minister that the investment’s quota should be reduced – based upon misleading information about the investor and its investment (including an unsubstantiated implication of possible fraud).[81] Given that the “reasonable person” of 2002 is likely not the same creature as her 1927 counterpart, given current practice and expectations regarding good governance, the Tribunal accordingly found (in its second go-round) that the kind of “regulatory combat” it saw, rather than the “cooperation” one would expect to see, would “shock” and “outrage” every “reasonable Canadian.”
For its part, the Metalclad Tribunal was presented with an equally egregious set of facts, which it considered under the fair and equitable standard (which it appeared to consider as included in the treatment required under international law). [82] In coming to this conclusion, the Tribunal observed the customary international law rules of treaty interpretation recalled in Articles 26 and 31 of the Vienna Convention on the Law of Treaties.[83] In observing these rules of interpretation, the Tribunal acknowledged that it needed to interpret NAFTA Articles 1105 and 1110 in good faith, in accordance with the ordinary meaning of their terms in their proper context, and in light of the NAFTA’s objects and purposes.[84]
The Metalclad Tribunal first noted that one of the objectives contained within NAFTA Article 102(1) was to “increase substantially investment opportunities in the territories of the Parties.” [85] Its consideration of this objective appears to have been elaborated specifically in consideration of the transparency principle, as required under NAFTA Article 102(1).[86] The Tribunal had been called upon to determine whether an US investment in Mexico had been treated in a fair and equitable manner concerning the considerable number of years that it had endured sparring with state and local officials who prevented Metalclad from being able to operate its established investment notwithstanding the fact that it had received all the necessary federal and state permits to proceed, in addition to repeated assurances from federal Mexican officials.
The Tribunal made a number of findings concerning how Mexico breached the fair and equitable treatment standard, starting with the simple fact that there appeared to be “no clear rule” as to whether a municipal permit was ever required under Mexican law. It further determined that there was no established practice or procedure governing permit applications at any rate. These omissions, the tribunal concluded, amounted “to a failure on the part of Mexico to ensure the transparency required by [the] NAFTA.”[87]
The Tribunal also appears to have concluded that when the NAFTA Parties wrote in NAFTA Article 102(2) that the Agreement’s objectives were to be elaborated by principles and rules such as transparency, and that those objectives were to be used to enlighten the Tribunal’s interpretation of NAFTA provisions such as Article 1105, it only made sense to determine that a lack of transparency could be considered within the context of what “fair and equitable treatment” means. The Tribunal did not completely explain itself in this regard, however. Perhaps it believed that because it had recalled the customary international law rules of treaty interpretation, and outlined the relevant objectives and principles contained within NAFTA Article 102(1), it was obvious that a failure to regulate transparently could be considered relevant for evaluation of the “fair and equitable treatment” standard in NAFTA Article 1105[88].
Regardless of what the Tribunal was thinking, what it did next was lay out a series of examples of government conduct that it concluded breached the international law standard of fair and equitable treatment that it determined was contained within NAFTA Article 1105. First, the Tribunal concluded that Metalclad was led by federal officials to believe that it did not require the municipal construction permit first required, and later refused, by local officials. It further concluded that Metalclad relied upon the advice it received from federal officials, to its detriment. Regardless of whether the advice that Metalclad received was correct, the Tribunal appears to have concluded that a failure to address such detrimental reliance constituted a breach of fair and equitable treatment under international law.[89] The Tribunal further appeared to conclude the near-total lack of transparency that characterised the long, confusing and painful process that Metalclad was forced to endure in order to run its business made Metalclad’s detrimental reliance particularly critical and damaging.[90]
Third, the Tribunal found that local officials were not even convinced that they had the authority to effectively override the permits issued by state and federal officials, although they issued a “stop work” order anyway.[91] In addition, the Tribunal concluded that the Municipality failed to provide Metalclad with any notice or opportunity to be heard at the meeting during which its thirteen-month-old construction permit was considered and refused.[92] The Tribunal further concluded that the Municipality’s decision to deny Metalclad’s permit was based upon irrelevant and/or improper considerations, and that it was denied without the provision of satisfactory reasons for decision.[93] As a result, the Tribunal wrote:
The actions of the Municipality following its denial of the municipal construction permit, coupled with the procedural and substantive deficiencies of the denial, support the Tribunal’s finding, for the reasons stated above, that the Municipality’s insistence upon and denial of the construction permit was improper.[94]
It is not clear from this finding whether the Tribunal was concluding that any one of these deficiencies could conceivably constitute a breach of the fair and equitable treatment standard or whether it was necessary for many (or all) of them to be present for a breach to occur. It would appear that in this case the Tribunal concluded that it was the cumulative effect of these deficiencies that constituted a denial of fair and equitable treatment. Nonetheless, it also appears that the Tribunal considered this ‘cumulative’ finding to be separate and apart from its finding that Mexico’s failure “to ensure a transparent and predictable framework for Metalclad’s business planning and investment” also constituted a breach of NAFTA Article 1105.[95] One needs also to appreciate that the tribunal did not only identify a continuous sequence of serious breaches of transparency rules and a misleading of the investor as to applicable permitting requirements, but that the investor had relied on governmental representations and committed considerable risk capital for establishing its operations. The element of unwarranted disappointment of investment-backed, legitimate and government-induced expectations gives much more weight to the cumulative effect of the various breaches of good-governance standards. Such application of the “fair and equitable” standard is not very far from criteria used to establish “regulatory taking”, with the emphasis on widespread equitable principle to protect investment that has been built on legitimate expectations against action by government which suddenly reverses gears and thus destroys the economic value of such investment.
Breach of Commitment
The Energy Charter Treaty, unlike the NAFTA, includes as a specific separate investment discipline the duty to “observe any obligations it has entered into with an investor.” (Art. 10(1))[96]. While “pacta sunt servanda” is arguably a principle of international law, and thus enters into NAFTA rules by reference to such principles, the distinct mention in the ECT – similar to a number of recent BITs (including the not yet ratified US-Russia Treaty) – must place a particular emphasis on “sanctity of contract”. There is as yet no arbitral decision available to clarify the application of the clause. The article can be read as countering earlier arguments, based on an extensive understanding of sovereignty, according to which states always have the right to abrogate contracts they have concluded. It could also be read as taking a similar position in favour of the sometimes contested legal effect of “stabilisation clauses.”[97] This discipline must therefore be seen as preventing governments from using sovereign authority (i.e. governmental and regulatory powers) to abrogate agreements or to refuse compliance with such agreements. The clause does not prevent a government arguing commercial law reasons (force majeure; impossibility; frustration etc) against such contracts, but it is the reliance on governmental powers that constitutes a breach of this Art. 10 (1) obligation. If domestic courts, for example, rely on commercial law exceptions to free a government from its contractual obligations, then a Treaty-based arbitral tribunal has to review such judicial decisions to ensure the dependence of national courts on its government does not lead it to stretch commercial-law excuses for non-performances beyond what is normally acceptable under the applicable law. The clause could further mean that Treaty tribunals are competent to decide over disputes where the investor alleges that the government, for non-commercial reasons and beyond the excuses available under the applicable contract law, abrogates or otherwise refuses to comply with the contract, although one would do well to contemplate the earlier discussion of cases such as Azinian (even though the NAFTA does not appear contain a similarly detailed obligation), before apprehending the full extent of this ECT obligation.
An obligation to be observed by the government need not only be based on a typical formal written contract signed by the investor and a governmental entity. Legally binding agreements can also be based – as the ICSID Pyramids cases and the NAFTA Metalclad case have shown[98] - on unilateral promises made by the government in investment promotion documentation or national investment laws and accepted by the investor. An agreement can be based on tacit understandings – provided they can be construed as incorporating a “meeting of the minds” with the intention to create a legally binding obligation. Negotiations with governments about regulatory conduct with respect to infrastructure investors, for example on access to facilities, import and export rules, regulated tariffs, can amount to a legally binding and thus protected agreement if the external signals given by the government are of such nature that a reasonable investor can rely on them as a formal commitment. Declarations by ministers, press communiqués and similar instruments combined with a reasonably reliance-based investment by the investor can therefore constitute an agreement under Art. 10 (1). It is up to the government to protest if it sees that an investor is ready to make an investment of risk capital based, reasonably and legitimately, on such trust. The issue here is, as in the application of “fair and reasonable treatment” (supra) and regulatory taking (infra) the responsibility of government to respect investment-backed legitimate expectations it has created.
Regulatory Taking
Both NAFTA and the ECT protect against expropriation not only in its traditional shape of a formal taking, but also in its newer forms of regulation or other government measure which in its impact is “tantamount” to expropriation(Art. 1110 NAFTA) or “equivalent” to nationalisation (Art. 13 (1) ECT[99]. The issue of regulatory and other actions which undermine the functioning of the property right or destroy its economic value without that a formal transfer of title takes place, has already been dealt with in several cases of the US-Iram claims tribunal[100], in jurisprudence of the European Court of Human Rights and in cases before US courts relating to the Fifth Amendment. The distinction between lawful exercise of economic police powers circumscribing the rights of property owners [101] and a “regulatory taking”[102] requiring compensation is far more difficult than the determination of a formal expropriation. Legitimate restrictions on the use of property have to be weighed against the intensity of the impact, the compliance with rules on non-discrimination, least-restrictiveness, proportionality and the “special sacrifice” (“Sonderopfer”) the investor is asked to make for the common good. As the jurisprudence of the US courts and the European Court of Human Rights illustrates, it is as a rule only when legitimate, investment-backed expectations are disappointed by an unpredictable and massive interference into the normal functioning of property rights that a “regulatory taking”, and an obligation to pay compensation, are determined.
While “regulatory taking” has regularly been raised in plaintiff’s advocacy in NAFTA cases[103], the arbitral tribunals have been careful not get entangled in this legal minefield where subtle distinctions and balancing is required. The Metalclad-tribunal, though, rested its case not only on breach of the “fair and equitable” treatment standard, but also on the qualification of s measure by the state governor as “tantamount to expropriation”; the governor had proclaimed by regulation an “ecological zone protecting cactus plants” to keep the lawfully authorised waste disposal plant from operating. Interestingly, this part of the Metalclad-tribunal’s reasoning was not set aside by the Vancouver judge from whom annulment of the award was sought by Mexico.
“Regulatory taking” – i.e. a measure “tantamount” or “equivalent” to expropriation, will therefore regularly appear on the menu of investment arbitration. It is one of the several disciplines with which modern treaties seek to impose good-governance rules on economic regulation. It requires sophisticated and in-depth economic analysis of the measure, its justifications, available alternatives, the consultative process leading up to the measure and the economic impact on the normal functioning of the investment. This is why arbitral tribunals will often prefer, for reasons of procedural economy and to enhance immunity from criticism, other standards which are simpler to handle and less exposed to criticism. But the regulatory taking notion incorporates an idea which is very similar to the other disciplines: that governments who create legitimate expectations leading an investor to assume the risk of investment, can not just turn around and by regulatory measure undo the conditions which are essential for the normal functioning of the investor and in the continued existence of which the investor, legitimately, confided[104].
Discrimination
The principle of non-discrimination takes the form of two treaty standards: national treatment and most favoured nation (MFN) treatment. The national treatment and MFN treatment standards have each had a long history in international economic law. They can be found in most trade and investment agreements and have received the lion’s share of international judicial consideration. NAFTA Art. 1104 requires that the better of the national treatment or MFN treatment standards be granted when available. This means that investors and their investments are entitled to the best level of treatment provided to either their domestic competitor(s) under Art. 1102, or to any foreign competitor(s), under Art. 1103. The ECT version, contained within Art. 10(3), similarly requires that the most favourable treatment provided to a local competitor, or to any other foreign competitor, be provided to the investor.
The meaning of the terms “national treatment” and “MFN treatment” has been canvassed in a number of GATT and WTO Panel reports, as well as in WTO Appellate Body decisions . The most frequently considered concept reflected in these standards is contained within the GATT, in Art. III. Article III:4 provides an expression of the treatment standard that most closely applies to the wording of ECT Art. 10(3):
The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.
While the GATT is limited to regulating measures affecting trade in goods, the principles it expresses are capable of wider application. In this regard, there are now provisions recalling both the national treatment and MFN treatment standards in the General Agreement on Trade in Services, the WTO Agreement on the Trade-Related Aspects of Intellectual Property and the WTO Agreement on Technical Barriers to Trade. The basic standards remain unchanged in each of these applications, and therefore the interpretation given to these provisions by WTO panels should be applicable within the NAFTA context.
In a nutshell, the national treatment and MFN treatment standards guarantee that an equality of competitive opportunities should exist between similarly situated commercial competitors. Accordingly, when a good, service provider or investment is treated less favourably than a competitor without a legitimate reason, the principle will have been violated. The analysis of these comparative treatment standards can thus be segregated into two primary elements: the determination of “likeness” (involving definition of the relevant market and applicable legal regime) and a comparative evaluation of “treatment.”
(a) Like Circumstances
Unlike its NAFTA counterparts, ECT Art. 10(3) does not contain any specific reference to the investors which are the subject of the comparison as being “like” or operating in “like circumstances.” This omission is likely of little consequence. The basic principle behind any non-discrimination provision is a comparison of apples and apples, not apples and oranges – because the goal is to ensure effective equality of competitive opportunity among private actors.
Two NAFTA tribunals have given awards under NAFTA Art. 1102 that appear to have acknowledged that the primary question of “likeness” involves identification of the relevant competitors and the relevant market. The Myers tribunal began its analysis by identifying the competitors of the investor and its investment in the Canadian market, noting that these domestic industry players must have been operating in like circumstances with the investor/investment because they were so frightened of competition that they lobbied intensely to ensure that the measure would be imposed. The Pope tribunal also stated that “the first step” in determining like circumstances is to ascertain with whom the investor or its investment must be compared based upon participation in the same economic or business sector.
However, both tribunals also made it clear that they would retain considerable discretion to consider what other political and legal aspects of “circumstances” within which these investors/investments competed, and within which the measure would be relevant to determining whether a breach of NAFTA Art. 1102 had in fact occurred. This decision can be equated somewhat with the approach adopted by the WTO Appellate Body in Japan -- Taxes on Alcoholic Beverages, where it stated:
The concept of “likeness” is a relative one that evokes the image of an accordion. The accordion of “likeness” stretches and squeezes in different places as different provisions of the WTO Agreement are applied. The width of the accordion in any one of those places must be determined by the particular provision in which the term “like” is encountered as well as by the context and the circumstances that prevail in any given case to which that provision may apply.
The Myers tribunal determined that the international legal context within which NAFTA Art. 1102 operated required it to consider the “like circumstances” issue as a potential exemption for measures that might provide investors/investments with less favourable treatment. In other words, the tribunal wanted to confirm that “there were no ‘unlike circumstances’ that warranted differential and adverse treatment,” particularly those related to the web of international environmental agreements to which Canada was a party. The Myers tribunal decided that, since Canada’s environmental policy excuses for imposing its measure upon the investor and investment were unwarranted, a breach of Art. 1102 had indeed occurred.
For its part, however, the Pope & Talbot tribunal used the “like circumstances exemption” to deny the investor and investment recovery under NAFTA Art. 1102. The tribunal determined that if a NAFTA Party could provide sufficient justification for how a measure provided unequal treatment to an investor or investment, vis-à-vis their domestic competitors, such treatment could be excused with a finding of differential circumstances. Rather than focussing strictly on whether or not a NAFTA party intended to discriminate with its measure, the tribunal would ask whether the unequal treatment could be:
justified by showing that it bears a reasonable relationship to rational policies not motivated by preference of domestic or foreign owned investments. That is, once a difference in treatment between a domestic and a foreign-owned investment is discerned, the question becomes, are they in like circumstances? It is in answering that question that the issue of discrimination may arise.
In other words, the Pope tribunal essentially adopted a three-part test for national treatment:
(1) define the relevant market;
(2) determine whether there has been “treatment less favourable”; and, if so,
(3) require the NAFTA Party to provide proof that its measure was justified on some reasonable policy grounds.
The first and third parts of the test reflect the question of like circumstances, where likeness is considered in definition of the relevant market (i.e. identifying the investor/investment’s competition) and “circumstances” refers to the policy environment in which the measure operates. This test differs somewhat from the GATT likeness analysis, which has historically been limited rather strictly to a list of factors employed for the identification of competing goods, but has more recently been expanded to include consideration of the relative risks inherent in their use.
This difference has been justified by at least one NAFTA tribunal as being necessary to address the lack of a general exception provision applicable to NAFTA arts. 1103 and 1102. By contrast, GATT arts. I and III are subject to the general GATT exemption clause, Art. XX (which provides that even though a measure may violate a substantive obligation, it may be justified under certain specified policy grounds so long as it is not applied in an arbitrary or discriminatory manner). By contrast, the ECT contains Arts. 18(2) and 19, which provide a detailed exposition of a member’s sovereign right to regulate in the interests of the environment (albeit subject to the disciplines of good governance). It is accordingly submitted that an ECT tribunal would be more than justified to take a wide range of environmental policy concerns into account when determining what the appropriate class of competitors with the investor should be (i.e. those for whom the same effective level of regulatory treatment should rightfully apply). That being said, Tribunals will nonetheless need to take care to ensure that in performing their likeness analysis that their acceptance of a government’s environmental policy justification does not become little more than acceptance of proof of the government’s lack of discriminatory intent. To do so would convert ECT Art. 10(3) into a prohibition against only de jure discrimination, rather than a prohibition against any measure that is unjustifiably discriminatory in result.
(b) Treatment No Less Favourable
The phrase “treatment no less favourable” is a common GATT/WTO concept which has been interpreted to require countries to allow equal competition between goods in a country. As stated in United States -- Section 337 of the Tariff Act of 1930:
The words treatment no less favourable in paragraph 4 call for effective equality of opportunities for imported products in respect of the application of laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products. This clearly sets a minimum permissible standard as a basis . . . . The purpose of the Article III:2, dealing with internal taxes and other internal charges, is to protect “expectation on the competitive relationship between imported and domestic products”.
In order to prevent discrimination, the WTO approach to the national treatment and MFN standards has focused upon obtaining the kind of circumstances in which no discrimination can exist, rather than attempting to seek out discriminatory intent. If foreign products or businesses are provided with an effective equality of competitive opportunities, it will be unnecessary to second guess the actual motives of governments and their officials (which can be a difficult undertaking at the best of times). As noted by the Pope tribunal in its Final Merits Award, the obligation to provide “treatment no less favourable” means providing the best treatment available to any other competing investor or investment, regardless of whether a balance of foreign or domestically-owned investors or investments are receiving the same lesser level of treatment:
Accordingly, the Tribunal interprets the treatment required by Articles 1102(1) and 1102(2) on the one hand, and 1102(3) on the other, to be identical, save for the limitations to states and provinces. The Tribunal also interprets both standards to mean the right to treatment equivalent to the “best” treatment accorded to domestic investors or investments in like circumstances. The tribunal thus concludes that “no less favourable” means equivalent to, not better or worse than, the best treatment accorded to the compared with competitor.
In the absence of the recently fashioned “like circumstances exemption,” arguments over the meaning of providing “treatment less favourable” would be of much more importance to the disputing parties. This is because investors would be able to obtain compensation for losses suffered as a result of receiving less favourable treatment so long as they could demonstrate that they were operating in like circumstances with whomever else was receiving more favourable treatment. If tribunals continue to assert their right to determine whether there are legitimate excuses for the differences in treatment claimed between competitors, it will be less crucial to argue that no differences in treatment exist.
Looking forward, questions will remain as to whether the discretion that at least two NAFTA tribunals have appropriated for themselves -- to determine whether a justification exists for discrepancies in treatment -- will dilute the quality of the NAFTA’s national treatment and MFN treatment obligations. Instead of ensuring that foreign investors are provided with the equality of competitive opportunities that would ensure freedom from discrimination, injudicious use of this discretion could subject investors and investments to less favourable treatment whenever a NAFTA government can provide sufficient evidence that it did not intend to discriminate, whatever its reasons may have been. It is suggested that a similar approach will likely be taken under the ECT, and so a similar admonition may be in order.
Defense of Governmental Action by Reference to International (Environmental) Treaties
Environmental issues have been present in several NAFTA proceedings[105]. Given that protection of the environment plays such a large role in the discourse of developed countries, it is normal and inevitable that this principle and its associates (sustainable development; precautionary principle) play an important role in investment arbitration – usually to defend state regulatory action. This role is likely to increase. Environmental reasons have to some extent contributed to the MAI collapse in 1998; NGOs are vigorous opponents of (some forms) of globalisation and investment arbitration is often associated with economic globalisation. The problem is, naturally, to distinguish between “legitimate” reliance on solid environmental reasons for regulation, on one hand and a mere use of environmental protection, as a moral-high-ground principle, to disguise protectionism, an issue that has played as well a role in the European Court of Justice’s control over national economic regulation[106] and recent WTO cases[107]. The problem is that while the environment is sometimes used purely as a cloak for protectionist discrimination, there will be other situations, e.g. in societies with high environmental standards, where discrimination against foreign imports associated with lower environmental standards is both truly environmentalist and protectionist at the same time. This issue is therefore most likely to come up in cases where the incriminated regulation hits a foreign investor in its trading practices.
In the available NAFTA cases, there has, so far, never been a case where an environmental regulation was considered a breach of the investment disciplines by itself – usually, discriminatory (Myers, Ethyl) or expropriatory (Metalclad) conduct was clearly discriminatory or bad practice, with environmental justification of a mere superficial character. In Myers, there was evidence that the US company’s operations (shipping hazardous waste to a plant close to the border) was environmentally preferable to shipping such waste to a Canadian plant much farther away. In Metalclad, the “ecological cactus reserve” appeared as a contrived way to penalise a foreign investor who had for whatever reasons (but not environmental) fallen out with or not been able to develop a relationship that was profitable for the provincial authorities.
We can not develop a full theory for dealing with the “environmental” or “treaty obligation” defense here exhaustively, but some suggestions are offered:
First, environmental regulation is the proper duty of government, but it needs to respect the usual constraints of investment treaties. Just because something is labelled “environmental” does not allow a government to override normal Treaty rules. The environment is not helped by being misused to justify what otherwise would not be justifiable. The foreign investor should not be made to contribute more than nationals to environmental objectives, e.g. by being subject to more stringent rules and more rigorous enforcement. The key to investment promotion is a reasonable safeguard against unexpected regulatory surprises, and this includes springing an environmental trap on a hitherto unsuspecting investor. Also, perfectly legitimate environmental regulation may be the equivalent of an expropriatory taking. While this may be justified and necessary, it does not exonerate the government from paying compensation if the conditions for a “taking” are established[108].
Second, the question is if a particular government regulation or other forms of conduct can be legitimated because such conduct is mandated by international (environmental) treaties. The first question is if and to what extent the relevant investment treaty’s disciplines (e.g. ECT, NAFTA, BITs) on a government need to be modified by the existence of other, possibly conflicting, environmental treaties. The question has been discussed in large detail in particular for the relationship of the WTO to multilateral environmental agreements[109]. In our view, the right solution is to pursue an interpretative strategy of reciprocal consistency, i.e. to interpret the economic and the environmental treaty to minimise conflict and enhance consistency. Governments which, for example, seriously (and without ulterior protectionist motive) implement in a reasonable way a multilateral environmental treaty will hardly breach the “fair and equitable” standard – except if the way they use the treaty’s open-ended interpretative and discretionary range breaches the individual elements of this modern good-governance standard. Environmental treaties usually leave a large leeway for interpretation and implementation. Such implementation can easily be used to pursue discriminatory or other xenophobic sentiments. The environmental treaty, therefore, has also to be constructed in light of the obligations imposed by the investment treaty. Given the open-endedness typical of environmental treaties, such interpretation aiming at reciprocal consistency should not be that difficult. One needs, as in all cases of regulation, be wary of the use and misuse of “captured” treaty-making, i.e. when treaty-making and treaty-application is instrumentalised for essentially protectionist and anti-competitive purposes.
While it is hard to see how a proper application of an environmental treaty can get into conflict with the “fair and equitable” and similar standards (e.g. “no unreasonable impairment of the use of the investment, Art. 10 (1) ECT), there may be cases when the implementation of an environmental treaty results in a regulatory taking requiring compensation, e.g. when a hotel operation in a Treaty-based biological protection zone is prohibited. Again, the use of the principles of necessity, proportionality, non-discrimination and least restrictiveness will often result in mutual compatibility as the environmental Treaty legitimates state regulatory action, but such action needs again to meet the investment treaty’s good-governance standards. But in the extreme case that Treaty application requires, without a way out, a regulatory taking, then the compensation provision applies – much as in the case of legitimate domestic – not Treaty-compelled – environmental regulation when an individual property owner is asked to sacrifice his property for the benefit of interests of the community at large (“Sonderopfer”). Just because the action is based on an environmental treaty does not obviate the application of normal rules of protection of property, be they in the form of national constitutional law or their equivalent in an international investment treaty.
Environnmental treaties – as recognised environmental standards and guidelines – therefore do play a legitimate role in the interpretation of investment treaties without that the difficult question of which treaty is lex specialis needs to be resolved – both treaty types matter and should influence each other. But environmental treaties should not be misused to justify protectionist policies or to justify regulatory misconduct. Most if not all legitimate environmental purposes can be achieved perfectly within the good-governance framework of modern investment treaties.
Third-Party Intervention in Investment Arbitration and Transparency[110]
Investment arbitration has come in for a lot of criticism, in particular by NGOs, for what is perceived to be a threat to sovereignty granted to already-too-powerful international corporations, and a secretive, and therefore non-democratic, process. The first target of the NGO-campaign against investment arbitration took place with regard to the Multilateral Agreement on Investment.