Negotiating CARICOM Investment Agreements: State of Play and the Way Forward Fair and Equitable Treatment Alejandro Faya-Rodríguez Consultant, Counsellor-at-law, MJur, MPP Professor of International Law on Foreign Investment Grenada, June 2009

Jamaica-UK BIT (1987) Article 2 Promotion and Protection of Investment 1… 2. Investment of nationals or companies of either Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party…

Article II Grenada-US BIT (1989) 1… 2. Investments shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by international law. Neither Party shall in any way impair by arbitrary and discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investments. Each Party shall observe any obligation it may have entered into with regard to investments. 3-8…

Barbados-Venezuela BIT (1999) ARTICLE 2 Promotion and Protection of Investment 1… 2. Investments of nationals or companies of each Contracting Party shall at all times be accorded fair and equitable treatment in accordance with the rules and principles of international law and shall enjoy full protection and security in the territory of the other Contracting Party…

The concept – origins Treaties on Friendship, Commerce and Navigation (1950’s) Havana Charter (1959) OECD Draft Convention on the Protection on Foreign Property (1967) World Bank Guidelines (1992) BIT’s (1990’s)

The concept – object and purpose Provide for an absolute standard of treatment NT and MFN treatment are not enough Filling in gaps

The concept – meaning? Highly equivocal clause Language matters! Approaches from jurisprudence: 1.self-contained standard of justice and equity 2.linked to the fulfillment of other treaty obligations 3.“autonomous standard” linked to the concept of “legitimate expectations” 4.minimum standard of treatment of aliens under customary international law (CIL)

The concept – a self-contained standard of justice and equity  ex at equo bono clause?  Highly discretionary function  No jurisprudence clearly backing this approach, out of some “suggestions”

The concept – linked to the fulfillment of other obligations A breach of a different obligation may lead to a breach of the FET standard “The absence of a clear rule as to the requirement or not of a municipal construction permit, as well as the absence of any established practice or procedure as to the manner of handling applications for a municipal construction permit, amounts to a failure on the part of Mexico to ensure the transparency required by [NAFTA’s objectives].” Metalclad v Mexico “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 [O]n the facts of this particular case the breach of Article 1102 [national treatment] essentially establishes a breach of Article 1105 as well.” SD Myers v Canada

The concept – autonomous standard linked to legitimate expectations Legitimate, basic or just expectations Stable regulatory framework Good governance Treatment in an even-handed manner Tecmed v Mexico, Eureko v Poland, MTD Equity v Chile, Azurix/Enron/Sempra/CMS/LG&E/Siemens v Argentina, Occidental v Ecuador, Saluka v Czech Republic

The concept – autonomous standard linked to legitimate expectations “The Arbitral Tribunal considers that this provision of the Agreement, in light of the good faith principle established by international law, requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment. The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations…The foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any preexisting decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities...” Tecmed v Mexico

The concept – autonomous standard linked to legitimate expectations “[FET] is an autonomous Treaty standard and must be interpreted, in light of the object and purpose of the Treaty, so as to avoid conduct that clearly provides disincentives to foreign investors. Without undermining its legitimate right to take measures for the protection of the public interest, the State has therefore assumed an obligation to treat a foreign investor’s investment in a way that does not frustrate the investor’s underlying legitimate and reasonable expectations. A foreign investor whose interests are protected under the Treaty is entitled to expect that the [State] will not act in a way that is manifestly inconsistent, non-transparent, unreasonable (i.e. unrelated to some rational policy), or discriminatory (i.e. based on unjustifiable distinctions).” Saluka v Czech Republic

The concept – minimum standard of treatment under CIL “Outrage, bad faith, wilful neglect of duty or an insufficiency of governmental action so far short of international standards that every reasonable and impartial person would readily recognise its insufficiency” Neers Claim (1926)

The concept – minimum standard of treatment under CIL “Case law points to a number of areas across which the notion of an international minimum standard applies. They include: a) the administration of justice in cases involving foreign nationals, usually linked to the notion of denial of justice…; b) the treatment of aliens under detention…; c) full protection and security, which is usually understood as the obligation for the host State to adopt all reasonable measures to physically protect assets and property from threats or attacks which may target particularly foreigners or certain groups of foreigners...; d)... minimum standards have been invoked concerning the way in which expulsion is carried out...” OECD Working Paper 2004/3

The NAFTA story - FET provision Article 1105 Minimum Standard of Treatment 1.Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security. 2.…

The NAFTA story “first generation” cases Breach of a supposedly transparency obligation = breach of FET Metalclad v Mexico (2000) Breach of TN = breach of FET SD Myers v Canada (2000) FET = minimum standard under CIL plus the “fairness elements” Pope&Talbot v Canada (2001)

The NAFTA story FTC Interpretation (July 2001) 1. Article 1105 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party. 2. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens. 3. 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 NAFTA story “second generation” cases  No violation found after the interpretation  Mondev v USA (2002), UPS v Canada (2002), ADF v USA (2003), Loewen v USA (2003), Waste Management II v Mexico (2004), Gami v Mexico (2004), Methanex v USA (2005), Thundebird v Mexico (2006)

The NAFTA story “second generation” cases “Article 1105(1) did not give a NAFTA Tribunal unfettered discretion to decide for itself, on a subjective basis, what was ‘fair’ or ‘equitable’ in the circumstances of each particular case... the Tribunal is bound by the minimum standard as established in State practice and in the jurisprudence of arbitral tribunals. It may not simply adopt its own idiosyncratic standard of what is ‘fair’ or ‘equitable’ without reference to established sources of law.” Mondev v USA (2002)

The NAFTA story “second generation” cases “…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 of transparency and candour in an administrative process...” Waste Management II v Mexico (2004)

The NAFTA story “second generation” cases “...something more than simple illegality or lack of authority under the domestic law of a State is necessary to render an act or measure inconsistent with the customary international law requirement of Article 1105(1)”. ADF Group v USA (2003) “...whether the conduct of the trial amounted to a breach of municipal law as well as international law is not for us to determine. A NAFTA claim cannot be converted into an appeal against the decisions of municipal courts”. Loewen v USA (2003) “…a gross denial of justice or manifest arbitrariness falling below acceptable international standards”. Thunderbird v Mexico (2006)

The NAFTA story “second generation” cases – addressing the absence of “any relevant State practice to support its contention that States are obligated under international law to provide a transparent and predictable framework for foreign investment.” pp – addressing the absence of “of any customary international law rule requiring States to regulate in such a manner – or refrain from regulating – so as to avoid upsetting foreign investors’ settled expectations with respect to their investments.” pp US Counter-Memorial in Glamis Gold v. USA, Sept. 19, 2006

CIL – why it matters High degree of predictability, because the CIL represents general practice of States and opinio juris Basic content defined (e.g. denial of justice, due process) Even though the content of the CIL may be subject of discussion: It requires evidence It sets forth a high threshold It does not cover all areas It evolves gradually and slowly

CIL – why it matters “……the minimum standard of “fair and equitable treatment” may in fact provide no more than “minimal” protection. Consequently, in order to violate that standard, States’ conduct may have to display a relatively higher degree of inappropriateness…investors’ protection by the “fair and equitable treatment” standard is meant to be a guarantee providing a positive incentive for foreign investors. Consequently, in order to violate the standard, it may be sufficient that States’ conduct displays a relatively lower degree of inappropriateness”. “Whichever the difference between the customary and the treaty standards may be, this Tribunal has to limit itself to the interpretation of the “fair and equitable treatment” standard as embodied in Article 3.1 of the Treaty. That Article omits any express reference to the customary minimum standard…This clearly points to the autonomous character of a “fair and equitable treatment” standard…” Saluka v Czech Republic (2006)

T&T-Mexico BIT (2007) Article 5 Minimum Standard of Treatment 1. Each Contracting Party shall accord to investments of investors of the other Contracting Party treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. 2. For greater certainty: (a) the concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens; and (b) a determination that there has been a breach of another provision of this Agreement, or of a separate international Agreement, does not establish that there has been a breach of this Article.

Conclusions 1.The manner on which FET is defined in the treaty does not affect the ability of the latter to foster investment 2.On the other hand, it may weaken or facilitate greatly the legal defense of the State in the context of a particular claim 3.FET is the most used provision by investors when they submit a claim 4.Need to keep track of other experiences such as that of the NAFTA and use them for the benefit of negotiations 5.Tying the FET standard to the CIL = GOOD PRACTICE

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