International Law on Investment: The Minimum Standard of Treatment

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entertain a suit, if they subject it to undue delay, or if theyadminister justice in a seriously inadequate way." Pretenceof form 24 would involve showing "the clear and maliciousmisapplication of the law". The Azinian Tribunal found thatthe evidence before it "dispels any shadow over the bonafides of the Mexican judgments".METALCLADThe Mexican government recently was forced to pay a U.S.company, Metalclad, US$16 million based on the refusal toallow Metalclad to operate a hazardous waste facility. Thelocal Municipality of Guadalcazar blocked the operation ofthe facility on an already severely polluted site by denying arequired construction permit, and later the State Governor ofSan Luis de Potosí declared the site an ecological preserve.The Metalclad Tribunal ruled, contrary to the Government ofMexico's interpretation of Mexican law, that the Municipalityexceeded its authority, and found breaches of MST andexpropriation.In finding a breach of MST, the Metalclad Tribunal held thatthe principle of transparency in article 102 of the NAFTAimposed on the central government of any Party a duty toclarify all the relevant legal requirements relating to aninvestment. 25 The Tribunal also observed that an underlyingobjective of NAFTA is to "ensure the successful implementationof investment initiatives". The Tribunal ultimatelyfound that Mexico had failed to ensure a transparent andpredictable framework for Metalclad's investment. 26Paradoxically, in spite of its emphasis on transparency, theTribunal ordered that the proceedings be confidential, subjectonly to disclosures required by applicable external standards,i.e., national law.Subsequently, Mexico sought judicial review of theMetalclad Award in the place of arbitration, BritishColumbia. In May 2001, the Supreme Court of BritishColumbia set aside the findings of the award that related toMST. The court found that the arbitral tribunal, in making itsdecision on the basis of transparency, misstated the applicablelaw on fair and equitable treatment and exceeded itsjurisdiction "because there are no transparency obligationscontained in Chapter XI". 27 On MST, the court also distinguishedMST from conventional law and stated that fair andequitable treatment and full protection and security are twopotential examples of MST, but do not stand on their own asindependent standards. 28 The court ultimately held for theclaimant on the grounds of expropriation, citing the designationof the proposed site as an ecological preserve. 29S.D. MYERSA tribunal applying NAFTA's investment rules upheldanother U.S. investor's challenge to Canada's temporaryban on exports of polychlorinated biphenol (PCB) waste.PCB wastes are covered by the Basel Convention on theTransboundary Movement of Hazardous Wastes and subjectto that agreement's preference for domestic treatment.The tribunal composed by investment experts brushed4aside this preference, applied a "least trade restrictive" testto the Basel Convention, and asserted, without detailedanalysis, that Canada had other, equally effective regulatoryoptions. The tribunal held that the export ban violatedNAFTA's national treatment obligation and the MST.In its discussion on MST, the S.D. Myers Tribunal recognizedthat "when interpreting and applying the 'minimumstandard', a Chapter XI tribunal does not have an openendedmandate to second-guess government decisionmaking".The tribunal also stated that a breach of the MSToccurs only "when it is shown that an investor has beentreated in such an unjust or arbitrary manner that the treatmentrises to the level that is unacceptable from the internationalperspective," and that "this determination must bemade in light of the high measure of deference that internationallaw generally extends to the right of domestic authoritiesto regulate matters within their own borders". 30After articulating the MST in these terms, a majority of theTribunal "determine[d] that on the facts of the particularcase the breach of Article 1102 [on national treatment]essentially establishes a breach of Article 1105 as well". 31One of the members of the S.D. Myers Tribunal dissentedfrom this view, noting that breach of another provision of theNAFTA is not a foundation for a finding of a violation of theMST. 32 This dissent conforms to the FTC's subsequentNote of Interpretation described below, in that a breach ofconventional international norms does not establish abreach of MST.POPE & TALBOTIn May 1996, Canada and the United States signed theSoftwood Lumber Agreement that temporarily settled theirdispute over Canada's alleged subsidization of softwoodlumber. This agreement created, inter alia, a control andquota system restricting the lumber exported to the UnitedStates. The claimant, a U.S. corporation, argued that thesemeasures as applied by Canada constituted breaches of theNAFTA provisions on expropriation, performance requirements,national treatment, and MST. The arbitral tribunaldismissed all these claims, except for one relating to MST,after finding that Canada's conduct during the "verificationreview episode" 33Article 1105. 34denied the fair treatment required byIn its reasoning, the Pope & Talbot Tribunal noted that "thelanguage of article 1105 suggests that those [fairness] elementsare included in the requirements of internationallaw". 35 The Tribunal then observed that "another possibleinterpretation of the presence of the fairness elements inArticle 1105 is that they are additive to the requirements ofinternational law. That is investors under NAFTA are entitledto the international law minimum plus the fairness elements".36To support its interpretation, the Pope & Talbot Tribunalresorted to the U.S. Model BIT of 1987, which, according tothe Tribunal, adopted the "additive character of the fairnessTHE CENTER FOR INTERNATIONAL ENVIRONMENTAL LAW AUGUST, 2003
elements". Ironically, the United States stated to the Pope &Talbot arbitration that whatever the meaning of BITs, thedrafters of NAFTA Chapter XI "excluded any possible conclusionthat the parties were diverging from the customary37international law concept of fair and equitable treatment".After the S.D. Myers Award, the United States again submittedthat a finding of a violation of Article 1105 must be basedon a demonstrated failure to meet the fair and equitablerequirements of international law. 38 The tribunal dismissedthe U.S. views, which were also shared in Mexico's submissions,after observing that the United States had not offered"evidence to the Tribunal that the NAFTA parties intended toreject the additive character of the BITs!" 39 The UnitedStates reacted by noting that Pope & Talbot Tribunal'sassertion that the "fair and equitable treatment standard isadditive to the customary international law was poorly reasonedand unpersuasive". 40THE FTC INTERPRETATIVE NOTENAFTA Chapter XI contains a safeguard --Article 1131(2)-- that allows the Parties to retain some control over the interpretationsof the Chapter. This mechanism of control wasperceived to be necessary in case the ad hoc arbitral tribunalsmisconstrued the applicable law, and the first threeawards interpreting the law on MST confirmed the necessityfor this provision. (This is not to say, however, that amechanism for appeal, with jurisdiction to review the meritsof the case, would not have further contributed to ensuringthat arbiters accurately apply the NAFTA).Article 1131(2) provides that "[A]n interpretation of the[Free Trade] Commission of a provision of this Agreementshall be binding on a Tribunal established under thisSection". Under this authority, on July 31, 2001, the TradeMinisters of Canada, the United States, and Mexico (theFree Trade Commission or FTC) issued a Note ofInterpretation of Article 1105. The FTC clarified and reaffirmedthat:• Article 1105(1) prescribes the customary internationallaw minimum standard of treatment of aliens;• The concepts of "fair and equitable treatment" and "fullprotection and security" do not require treatment in addition to or beyond customary international law; and,• A breach of other provisions of NAFTA or of separateinternational agreements do not establish that there hasbeen a breach of Article 1105(1).This was a clear attempt by the FTC to curtail extensivelybroad interpretations. Investors immediately challenged thisinterpretive note arguing, inter alia, that it amounted not toan interpretation but to an amendment and that the notewas a bad-faith effort to influence ongoing litigation.Subsequent arbitral awards have entertained these arguments,but have not departed from the FTC's binding interpretation.SUBSEQUENT PRACTICE UNDER NAFTAIn the light of the FTC's binding interpretation, arbitral tribunalshave sought to unveil the content of the customarylaw minimum standard of treatment. As explained above,the traditional Neer standard was that a State was held tofall below the minimum international threshold if its treatmentto foreigners amounted to an outrage, to bad faith, towillful neglect of duty, or to an insufficiency of governmentalaction so far short of international standards that every reasonableand impartial man would readily recognize its insufficiency.The Mondev, ADF, and Loewen awards, describedbelow, specifically addressed whether this standard continuedto be the applicable customary law.MONDEVThe Mondev case concerned a dispute heard by theCourts of Massachusetts between a Canadian real estatedeveloper on one side, and the city of Boston and theBoston Redevelopment Agency on the other. On Mondev'scontract claims, the Massachusetts Supreme Judicial Courtruled that Mondev failed to establish an actual breach of thecontract, and on Mondev's claim of tortious interference withcontractual relations, the Court ruled that the agency wasimmune from suit under the Massachusetts Torts ClaimsAct. After the Court denied Mondev's petition for rehearing,and after the U.S. Supreme Court denied Mondev's petitionfor certiorari, the Canadian investor brought claims for lossand damage pursuant NAFTA Chapter XI and ICSID'sAdditional Facility rules. The Mondev Tribunal ultimatelydismissed all claims, on what the tribunal described as"rather technical grounds".The Mondev Tribunal thus dealt with claims of denial of justice,which required elucidating the content of customarylaw on MST in investment treaties. The tribunal observedthat "both the substantive and procedural rights of the individualin international law have undergone considerabledevelopment", 41 and that the concordant practice apparentin the 2000 plus BITs in force around the world "will necessarilyhave influenced the content of rules governing thetreatment of foreign investment in current internationallaw". 42 Under this light, the Tribunal reasoned that "what isunfair or inequitable need not equate with the outrageous oregregious", and in particular that, "a State may treat foreigninvestment unfairly and inequitably without necessarily actingin bad faith". 43Having abandoned the Neer standard as the applicablelaw on MST, 44 the Mondev Tribunal set out to articulate thetest for evaluating whether a judicial action meets the internationallaw standard. In this sphere of issues, the MondevTribunal regarded the ICJ Chamber's focus on "judicial propriety"in ELSI as a useful criterion in the context of denialof justice. It followed this line of reasoning to express its teston MST:AUGUST, 2003THE CENTER FOR INTERNATIONAL ENVIRONMENTAL LAW 5
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International Law on Investment: The Minimum Standard of Treatment

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