This memorandum* is the result of a request submitted by an organization [hereinafter the "Client"] to the Trade and Investment Law Clinic at the Graduate Institute of International and Development Studies. The Client requested an examination of three areas of the North America Free Trade Agreement [hereinafter "NAFTA"] jurisprudence, based on an analysis of the publicly available documents.
The three subject areas examined are the standard practice concerning the establishment of violations of the Fair and Equitable/Minimum Standard of Treatment [hereinafter "FET/MST"], the standard practice concerning the Expropriation of Rights and Contracts, and the standard practice concerning the standard of compensation and determination of damages for violations of FET/MST.
The arguments of the Parties in the North America Free Trade Agreement NAFTA context are often exportable, since NAFTA as a whole, and in particular the standard for FET/MST and expropriation, are informed by general international law.
First, with regard to the standard practice concerning the FET obligations, the analysis of the submissions revealed five main points of disagreement between the investor and respondent states:
- The scope of NAFTA Article 1105: whether FET/MST is equivalent to the customary international law minimum standard of treatment;
- The content of the minimum standard of treatment in NAFTA Article 1105;
- The threshold for finding a violation of FET/MST;
- The issue of whether the standard encompasses an obligation not to frustrate the investor‘s legitimate expectations;
- The question of whether the standard includes an obligation of transparency and non- discrimination.
The analysis of Parties‘ position reveal a strong consensus on the idea that NAFTA article 1105 is equivalent to the customary international law [hereinafter "CIL"] MST. It also revealed that the concept of 'fair and equitable treatment‘ and 'full protection and security‘ the MST encompasses do not go beyond but rather are subsumed by the customary standard. The United States even goes further and claims that generally, the FET is the equivalent of the CIL MST of aliens.
With regard to the content of the standard, the United States argues strongly that the MST is an overarching standard including a set of definite customary obligations. In their arguments – albeit formulated in less vigorous terms – the other two Parties seem to agree with this idea.
Moreover, all Parties agree that the threshold for finding a violation of the standard‘s obligations remains high. Canada and the United States argue that it does not contain an obligation to protect the investor‘s legitimate expectations and that there is no self-standing obligation of transparency and general prohibition against discrimination.
Further, Canada and the United States contend that the MST does not contain an obligation to respect the legitimate expectations of the investor. Without mentionning expectations, Mexico argues that the MST obligation cannot be seen as keeping the State from exercising its regulatory activity.
Finally, Canada and the United States agree that there is no requirement that States do not act in a discriminatory manner and with lack of transparency. Mexico‘s position seems to diverge from those of the other NAFTA Parties on this question.
In regard to the second submitted question, the Expropriation of Rights and Contracts, the submissions revealed six major issues:
- The definition of covered investments; that is, which investments are capable of being expropriated under Article 1110 of the NAFTA;
- The test for indirect expropriation;
- The regulatory/police power exclusion;
- The parameters of "reasonable expectations";
- The circumstances under which a breach of contract may be elevated to a treaty claim;
- The applicable law for the determination of contract and property
In the NAFTA, "investment" is defined by Article 1139, which the Parties agree is a broad but exhaustive list of protected investments. The major debate surrounds intangible "rights" such as goodwill, market share, market access and customer base. The NAFTA Parties agree that intangibles that are not vested are not protected investments under NAFTA Chapter Eleven or international law.
Another contentious issue in the area of expropriation in rights and contracts surrounds the proper test for indirect expropriations. The Parties vary in their proposed analytical approach; Canada and Mexico endorse the same test, while the United States promulgates a variant approach. The Parties agree, however, that the deprivation required for an action or measure to amount to an expropriation must be "substantial," so as to render the investment "useless" or "valueless," and that mere interference or threat of interference is not sufficient for a finding of expropriation.
Article 1110 contains an important carve-out; there will not be a finding of expropriation if a State takes an action for a public purpose, in a non-discriminatory manner, in accordance with due process of the law and Article 1105 (fair and equitable treatment), and, if necessary, upon payment of compensation. This is referred to as a State‘s "regulatory power" or "police power." States must be able to pass domestic legislation and regulations in their normal sovereign function that may have an adverse effect on an investment without triggering liability under international law. The issue lies in determining under which circumstances a State is and may properly exercise it regulatory/police power, and when it is a compensable or illegal expropriation. The Parties agree that the exercise of this power involves regulations in the "public interest" or for a "public purpose," which they argue entail regulations aimed at the public safety, health and the environment. The Parties arguments on this standard are a reflection of their belief of the customary international law of the matter.
Part of the regulatory/police power analysis involves a discussion of the reasonable expectations of the investor. Generally, the Parties agree that an investor‘s reasonable expectations must be formed against the backdrop of the historical, regulatory and industry- specific context, and that, absent specific representations to that effect, an investor cannot reasonably expect that its industry will not be subject to legislation or regulation. The Parties differ in regard to the context in which they address reasonable expectations, however; the United States considers it to be part of the test for indirect expropriation, whereas Canada and Mexico see it as a factor to be considered when determining whether there was a proper exercise of the regulatory/police power on the part of the State.
In regard to whether an investor can bring a claim for breach of contract before a NAFTA tribunal, the State Parties agree that a simple breach of contract claim cannot be a violation of international law. Instead, there must be a supplemental element present that elevates it to the international plane. Canada and Mexico argue that this additional element includes an expropriatory act; Mexico further feels that a denial of justice would constitute the requisite "additional element." The United States agrees with Mexico in this regard, and also submits that a pretence of form to achieve an internationally wrongful end would elevate a breach of contract claim.
A related issue is the law applicable to the determination and classification of property and contract rights. The Parties agree that the governing law is municipal law to determine whether property rights have been acquired. Canada further considers that this principle reflects general international law.
Regarding the standard of compensation and determination of damages for violations of the FET/MST obligations, this memorandum examines:
- The contentions of the NAFTA Parties about what should be compensated for breaches of FET/MST obligations;
- The NAFTA Parties‟ contentions as to the need of a link of causality between the wrongful acts and the damages claimed;
- The NAFTA Parties suggestions in terms of interests as a formula of compensation;
- The methods for determining compensation for FET/MST
Regarding what should be compensated for breaches of FET/MST obligations, there appears to be agreement among the NAFTA Parties that, in the absence of discrimination that also constitutes indirect expropriation or is tantamount to expropriation, a claimant is not entitled to the full market value of the investment which is granted by NAFTA. To this end, all NAFTA Parties approve and endorse the findings of the Feldman Tribunal. Also, there appears to be agreement among the Parties in that reparation must, as far as possible, wipe-out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed. This is the principle established in Chorzów Factory.
As to the issue of causality, there appears to be certain agreement between Canada and Mexico about the fact that in order to recover damages for a breach of NAFTA Article 1105, a claimant must first and foremost prove that the breach is the "but for" legal and factual cause of the damages in question. There is no public allegation of the United States in this regard. The reason for that may possibly be that none of the NAFTA cases where the United States has been the respondent has arrived to the step of damages. Regarding interests, there are not many arguments available. There are some isolated conclusions of Canada and Mexico regarding this issue, but no public submission on behalf of the United States. Finally, the same situation presents itself with regard to the methods for determining compensation. There are only a few isolated conclusions of Mexico and the United States, whereas Canada did not make any specific argument in this regard.