International Law on Investment: The Minimum Standard of Treatment

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In the North American Dredging Company case in 1926,the United States-Mexican Claims Commission authoritativelyexpounded the nature and scope of the Calvo Clause.This case involved two legal instruments: a contractbetween a U.S. corporation and the Government of Mexicoand a Treaty between the United States and Mexico establishinga Claims Commission. The contract included aclause (18) whereby the contractor and its employees wouldbe "considered as Mexicans in all matters", would not "enjoyany other rights than those established in favor ofMexicans", and were "consequently deprived of any rightsas aliens". In contrast, the treaty establishing theCommission dispensed with the need to exhaust the localremedies rule. After careful analysis of the Calvo clauseincluded in the contract, the Claims Commission found thatthe investor had waived his right to request diplomatic protectionin any matter arising out of the contract and dismissedthe claim. 10The insistence on subjecting foreign investment solely tothe domestic law of the host State has been adopted andrepeatedly reiterated in the Conferences of AmericanStates, e.g., Washington Conference in 1889. Elements ofthe Calvo doctrine have also been introduced to the lawsand constitutions of several countries in Latin America.These elements of State practice, followed by a sense oflegal obligation, may be evidence of regional customary lawon the treatment of foreign investments in Latin America, aswell as evidence of opposition to the formation of internationalcustom regarding State responsibility for injuries toaliens and of persistent objection to the application of suchcustom to these States.During the last decades, however, the positions in thisdebate have changed considerably. Mexico, a long-timeproponent of the Calvo doctrine, has accepted Chapter XI ofthe NAFTA. Many other countries in Latin America haveentered into bilateral investment treaties (BITs) containingdisciplines and language that also significantly depart fromthe Calvo doctrine. In ironic contrast, in 2002 the U.S.Congress passed the Trade Promotion Authority Actinstructing its trade negotiators to ensure that foreigninvestors are not accorded greater substantive rights thanU.S. nationals. 11 This language is clearly reminiscent ofCalvo, and flows from the greater sensitivities in U.S. federal,State, and local governments affected by NAFTA ChapterXI cases. The impacts of these recent developments, contrastedagainst century-old positions and controversy, areyet to be assessed.on the basis of international law, and in exercising thispower, it heard the Neer and the Roberts cases. The decisionsof the Claims Commission have been regarded asauthoritative formulations of the minimum international lawstandard for treatment of aliens.Paul Neer was a U.S. national murdered by a group of menon his way back from a mine, where he served as superintendent.His wife filed a claim arguing that the Mexicanauthorities had shown unwarranted lack of diligence ininvestigating the murder. The Claims Commission notedthat while the authorities might have acted in a more vigorousand effective way than they did, it was not for an internationaltribunal to decide whether another course of proceduretaken by the local authorities might have been moreeffective. The Claims Commission expressed the minimumstandard in the following terms,[T]he propriety of governmental acts should be put tothe test of international standards, and…. The treatmentof an alien, in order to constitute an internationaldelinquency, should amount to an outrage, to badfaith, to willful neglect of duty, or to an insufficiencyof governmental action so far short of internationalstandards that every reasonable and impartial manwould readily recognize its insufficiency. Whetherthis insufficiency proceeds from deficient executionof an intelligent law or from the fact that the laws ofthe country do not empower the authorities to measureup to international standards is immaterial. 12Roberts was a U.S. national confined for nineteen monthsin a small cell along with thirty or forty other men, with nocleaning or sanitary facilities, no furniture, and no opportunitiesto exercise. The Claims Commission declared thatequality, although relevant in determining the merits of acomplaint of mistreatment of an alien, is not the ultimate testof the propriety of the acts of authorities in the light of internationallaw. Rather, the test is whether aliens are treatedin accordance with ordinary standards of civilization. TheClaims Commission concluded that that the treatment ofRoberts was such as to warrant an indemnity on the groundof cruel and inhumane imprisonment. In the Roberts case,the Claims Commission applied the Neer standard, wherebyevery reasonable and impartial man would readily recognizeoutrage.MST AND TREATIES OF FRIENDSHIP, COMMERCE, ANDNAVIGATIONTHE EARLY CASES IN THE 1920S AS EVIDENCE OF MST INCUSTOMARY LAWDuring the decade of revolutionary activity between 1910and 1920, Mexico experienced great political and social turmoil.After stability returned, Mexico entered into separateclaims agreements with five European States and theUnited States, whose nationals had suffered injuries duringthe previous decade. The United States-MexicoCommission was granted jurisdiction to decide these cases2During the XXth century, the debate whether an internationalcustom providing for a minimum standard of treatmentfor investments evolved in parallel with the conclusion oftreaties establishing distinct legal regimes for the protectionof foreign investment. This overlap between customary lawand conventional law introduces a degree of complexity tothe debate over MST, which calls for examination of friendship,commerce, and navigation (FCN) treaties, the influentialICJ's decision in the ELSI case, and the emergence ofmodern-day bilateral investment treaties (BITs).THE CENTER FOR INTERNATIONAL ENVIRONMENTAL LAW AUGUST, 2003
As regards conventional law, FCN treaties 13 introduced astandard reference to international law in regards to the protectionof aliens. Many of the FCN Treaties concluded in thelatter half of the XXth century also introduced provisionsgranting jurisdiction to the <strong>International</strong> Court of Justice(ICJ) to adjudicate disputes. Although the earlier FCNtreaties dealt more with the rights of aliens in host States,focusing mainly on procedural due process, the FCNtreaties of the XXth Century contained provisions specific toinvestments, which were later refined into BITs.CASE CONCERNING ELETTRONICA SICULA S.P.A. (ELSI)The ELSI Case was brought before a Chamber of the ICJby the United States for alleged breach of an FCN treatywith Italy, which prohibited "arbitrary and discriminatorymeasures" and provided "constant protection and security"to the person and property of nationals of the other party.The case involved the temporary requisitioning of a foreigncompany by the local major (actions later found unlawful byItalian Courts), who acted to prevent industrial strife at theplant when the company announced its plans for liquidation.Of significance is the fact that many BITs granted jurisdictionto the <strong>International</strong> Centre for the Settlement ofInvestment Disputes (ICSID) for the settlement of disputesbetween the investor and the host State. 18 ICSID resurfacedthe old mixed-claims tribunals and created aninvestor-state arbitral mechanism, 19 which ultimately permitsthe investor to advance whatever arguments on MSTthat will strengthen its claims. In the context of NAFTAChapter XI, some claimants argued, as they had regardingearlier BITs, that "fair and equitable" are additional to orbeyond MST.THE FIRST NAFTA CHAPTER XI AWARDSIn the NAFTA Chapter XI context, the MST is contained inArticle 1105(1), which reads:Each Party shall accord to investments of investorsof another Party treatment in accordance with internationallaw, including fair and equitable treatmentand full protection and security.The first four arbitral tribunals established under NAFTAChapter XI had to grapple with the terms of this provision.The uncertainties involved in this area of the law gave riseto idiosyncratic interpretations and decisions that were atodds with the Parties' understanding of MST and Article1105(1).The ICJ's Chamber held that the "protection and security"must conform to the minimum international standard, andthat reference to "constant protection and security" cannotbe construed as the giving of a warranty that property shallnever in any circumstances be occupied or disturbed. 14Further, the ICJ's Chamber held that unlawfulness in municipallaw did not by itself, and without more, amount to arbitrarinessat international law. The Chamber described arbitrarinessas "willful disregard of due process of law, an actwhich shocks, or at least surprises, a sense of judicial propriety".15 This formulation by the ICJ's Chamber has profoundlyinfluenced the contours of current debates on MST.MST AND BILATERAL INVESTMENT TREATIESBilateral investment treaties (BITs) were entered into forseveral reasons, among which the need to clarify the uncertaintiessurrounding customary law, as well as the expectationsof influencing the development of customary law. Thereferences to the standard of treatment in BITs ranged fromnational treatment, to most-favored nation, to "fair and equitabletreatment". This latter phrase had also been introducedinto the 1948 Havana Charter aimed at establishingan <strong>International</strong> Trade Organization, which served as precedentin subsequent instruments concerning internationalinvestment. 16 Among these, the commentary to 1967 DraftConvention on the Protection of Foreign Property elaboratedby the OECD (never entered into force), which equated"fair and equitable treatment" to MST, reflected the dominantperspective among capital exporting countries. 17AUGUST, 2003AZINIANThe Azinian Tribunal delivered the first award on the meritsunder NAFTA Chapter XI and thus devoted much attentionto first principles. This dispute concerned a 15-yearconcession contract for commercial and industrial wastecollection entered into by the Ayuntamiento (City Council) ofNaucalpán (a heavily industrialized suburb of México City)and DESONA, owned by Robert Azinian et al., U.S.investors. The investor misrepresented its financial andtechnical capacity to perform the contract and ultimatelyfailed to carry it out as stipulated. The Ayuntamiento thenargued that the contract was void for misrepresentation andrescindable for failure of performance, and in any eventannulled the contract. Three levels of Mexican courts heardthe case and confirmed the validity of the Ayuntamiento'sacts.The Azinian Tribunal observed that the claimant's fundamentalcomplaint is the breach of a concession contract andthat NAFTA does not allow investors to seek internationalarbitration for mere contractual breaches. 20 The Tribunalthus examined whether the annulment of the concessioncontract was disallowed by MST or expropriation disciplines.In this line of inquiry, the Tribunal noted that Mexicancourts had upheld the validity of the annulment, and thatunder NAFTA, arbitral tribunals do not exercise appellatejurisdiction. 21The only remaining question, therefore, was whether theMexican court decisions themselves breached MST. 22 TheTribunal first observed that even if Mexican courts werewrong with respect to the invalidity of the concession contract,more was required for an international wrong: theclaimants must show either a denial of justice or a "pretenceof form" to mask a violation of international law. 24 A denialof justice could be pleaded "if the relevant courts refuse toTHE CENTER FOR INTERNATIONAL ENVIRONMENTAL LAW 3
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International Law on Investment: The Minimum Standard of Treatment

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