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Minimum Standard in Customary International Law

NAFTA Article 1105 requires host governments to treat foreign investors and investments in accordance with the minimum standard of treatment in international law. The NAFTA Commission issued an interpretation of this provision that clarifies that “international law” refers to customary international law, which is developed by the common practices of countries, and thus does not include treaty law (including provisions contained in the NAFTA other than Article 1105 and other provisions of Chapter 11).[1] There was some debate in the case law regarding whether this constituted an interpretation or an amendment, but the tribunals decided that this did not matter, since they were bound to follow the decision ofthe NAFTA Commission regardless. In contrast to nondiscrimination obligations, Article 1105 is framed in absolute terms. The comparative treatment of other investors is not relevant. Article 1105 establishes a minimum standard, under which a Party may not treat foreign investments worse than this standard irrespective of the manner in which the Party treats other investors and their investments.76

Following the NAFTA Commission interpretation, several NAFTA Chapter 11 tribunals have sought to define the customary international law standard in 1105. The Tribunal in Mondev, for example, emphasized that the application of the customary international law standard does not permit resort to other treaties of the NAFTA parties or other provisions within NAFTA.[2] The ADF Tribunal noted that recourse to customary international law “must be disciplined by being based on State practice and judicial or arbitral case law or other sources of customary or general international law.”[3] The Loewen Tribunal observed: “Manifest injustice in the sense of a lack of due process leading to an outcome which offends a sense of judicial propriety is enough, even if one applies the Interpretation according to its terms.”[4] The NAFTA Tribunal in Waste Management attempted to synthesize the post-interpretation jurisprudence of Article 1105, as:

[T]he minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety—as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack oftransparency and candour in any administrative process.[5]

The Methanex Tribunal found that Article 1105(1) does not preclude governmental differentiations between nationals and aliens; it does not mention discrimination, while Article 1105(2) does mention it. The NAFTA Commission interpretation confirms this: “A determination that there has been a breach of another provision of the NAFTA, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1).” The Methanex Tribunal concluded that, in the absence of a contrary rule of international law binding on the States parties, whether of conventional or customary origin, a State may differentiate in its treatment of nationals and aliens.[6]

As we noted above, in Mobil Investments Canada Inc. & Murphy Oil Corporation v. Canada, the 2004 Guidelines required the investors in offshore petroleum projects to pay for research and development in the Province of Newfoundland and Labrador. The investors alleged breaches of the performance requirement prohibition in NAFTA Article 1106 and the minimum standard of treatment in NAFTA Article 1105. The Tribunal held that the 2004 Guidelines violated Article 1106, but not Article 1105.[7] After reviewing the NAFTA jurisprudence on Article 1105, the Tribunal summarized the standard of treatment as follows:

  • (1) the minimum standard of treatment guaranteed by Article 1105 is that which is reflected in customary international law on the treatment of aliens;
  • (2) the fair and equitable treatment standard in customary international law will be infringed by conduct attributable to a NAFTA party and harmful to a claimant that is arbitrary, grossly unfair, unjust, or idiosyncratic; or is discriminatory and exposes a claimant to sectional or racial prejudice; or involves a lack of due process leading to an outcome which offends judicial propriety.
  • (3) in determining whether that standard has been violated it will be a relevant factor if the treatment is made against the background of
  • (i) clear and explicit representations made by or attributable to the NAFTA host State in order to induce the investment, and
  • (ii) were, by reference to an objective standard, reasonably relied on by the investor, and
  • (iii) were subsequently repudiated by the NAFTA host State.[8]

The Mobil Tribunal explained that customary international law on the treatment of aliens does not require a State to maintain a stable legal and business environment for investments. NAFTA Article 1105 only protects an investor from changes to the rules governing an investment ifthose changes may be characterized as arbitrary or grossly unfair or discriminatory, or otherwise inconsistent with the customary international law standard. Article 1105 does not prevent a public authority from changing the regulatory environment to take account of new policies and needs, even if some of those changes may have far-reaching consequences and effects, and even if they impose significant additional burdens on an investor. Article 1105 does not provide a guarantee against regulatory change or entitle an investor to expect no material changes to the regulatory framework within which an investment is made. Governments can change, and policies and rules can change. The rules of customary international law only protect against egregious behavior and do not require a legal and business environment to be “set in concrete.”[9] Thus, to establish a breach of Article 1105, the Claimants had to establish that (1) clear and explicit representations were made by or attributable to Canada in order to induce the investment, (2) such representations were reasonably relied upon by the Claimants, and

(3) these representations were subsequently repudiated by Canada. However, there was no evidence that Canada made representations that there would not be changes to the regulatory regime and no indication of reliance being placed upon such representations. In particular, there was no promise or representation in the underlying regulatory framework to not change an existing benefits plan or to impose a new plan.[10]

Boute notes that support schemes and regulatory frameworks for renewable energy projects and GHG emission reduction projects create incentives that aim to stimulate private investment and that low-carbon investors expect to receive public support in accordance with the schemes existing at the time of investing. Thus, the fair and equitable treatment standard could provide a guarantee of protection against changes to the framework the State has created to attract low-carbon investments.[11] The fair and equitable treatment standard also requires a tribunal to weigh the investors’ legitimate expectations against the legitimate regulatory interests of the host State.[12] However, it is not possible to generalize regarding how a particular category of cases would be addressed, since it depends on the specific domestic regulatory framework, the provisions of the specific IIA[13] and the surrounding circumstances of each case. For example, the two NAFTA investment cases regarding Ontario’s FIT program demonstrate how different the facts can be even where they concern the same renewable energy program. Moreover, the Mobil Tribunal’s statement of the standard in customary international law is consistent with the view that States are entitled to maintain their right to regulate, which includes the right to change the regulatory environment. The real question is whether States design and implement the regulatory framework with customary international law on the treatment of aliens in mind and whether an investor’s expectations are justifiable in the circumstances of each case.

In Pulp Mills on the River Uruguay (Argentina v. Uruguay), the Court laid out how customary international environmental law had evolved over time.[14] The Court pointed out that the principle of prevention, as a customary rule, has its origins in the due diligence that is required of a State in its territory. It is “every State’s obligation not to allow knowingly its territory to be used for acts contrary to the rights of other States.”[15] A State is thus obliged to use all the means at its disposal in order to avoid activities which take place in its territory, or in any area under its jurisdiction, causing significant damage to the environment of another State. This obligation “is now part of the corpus of international law relating to the environ- ment.”[16] Moreover, “there are situations in which the parties’ intent upon conclusion of the treaty was, or may be presumed to have been, to give the terms used—or some of them—a meaning or content capable of evolving, not one fixed once and for all, so as to make allowance for, among other things, developments in international law.”[17] As a result, in Pulp Mills on the River Uruguay, the Court found that a provision

has to be interpreted in accordance with a practice, which in recent years has gained so much acceptance among States that it may now be considered a requirement under general international law to undertake an environmental impact assessment where there is a risk that the proposed industrial activity may have a significant adverse impact in a transboundary context, in particular, on a shared resource.[18]

Thus, the International Court of Justice has confirmed that the ongoing development of customary international environmental law has to be taken into account in the interpretation of treaty provisions that are subject to evolutionary interpretation.

NAFTA Article 1105 is subject to evolutionary interpretation.[19] Thus, the minimum standard oftreatment offoreign investors under customary international law has to be interpreted in accordance with evolving customary international environmental law. The obligation to avoid activities causing significant damage to the environment of another State is likely to encompass regulations to address climate change. Thus, legitimate climate change regulation would not be inconsistent with the minimum standard of treatment in NAFTA Article 1105. To conclude otherwise would create a conflict between customary international investment law and customary international environmental law.

  • [1] Mexico v. Metalclad (BCSC) para. 62. 76 Mexico v. Metalclad (BCSC) para. 60.
  • [2] MondevInternationalLtd. v. UnitedStates, ICSID Case No. ARB(AF)/99/2, Award (October 11,2002) paras. 120—1.
  • [3] ADF Group Inc., Award, para. 184.
  • [4] The Loewen Group, Inc. and RaymondL. Loewen v. United States, ICSID Case No. ARB(AF)/98/3, Decision on Hearing of Respondent’s Objection to Competence and Jurisdiction (January 5, 2001)para. 132.
  • [5] Methanex v. United States, Final Award, IV.C.11—12.
  • [6] Methanex v. United States, Final Award, IV.C.14, 17,25.
  • [7] Mobil v. Canada, Liability and Quantum.
  • [8] Mobil v. Canada, Liability and Quantum, para. 152.
  • [9] Mobil v. Canada, Liability and Quantum, para. 153.
  • [10] Mobil v. Canada, Liability and Quantum, paras. 154—9.
  • [11] Boute, “Combatting Climate Change” 637—8.
  • [12] Boute, “Combatting Climate Change” 649.
  • [13] For example, some IIAs contain sanctity of contracts clauses, which aim to guarantee by treatythe respect by the host state for the specific contractual obligations it enters into with investors, whichcould influence the outcome in cases involving contractual claims. Boute, “Combatting Climate Change” 644—7.
  • [14] Pulp Mills on the River Uruguay (Argentina v. Uruguay) paras. 203—19.
  • [15] Corfu Channel (United Kingdom v. Albania) (Merits) ICJ Reports 1949, para. 22.
  • [16] Legality of the Threat or Use of Nuclear Weapons (1996) (Advisory Opinion) ICJ Reports 1996 (I),para. 29.
  • [17] Dispute Regarding Navigational and Related Rights (Costa Rica v. Nicaragua) (2009) (Judgment)para. 64.
  • [18] Pulp Mills on the River Uruguay (Argentina v. Uruguay) (Judgment) para. 204.
  • [19] Mondev v. United States, Award. 2 S.D. Myers v. Canada, Partial Award, paras. 280—8.
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