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NAFTA tribunal considers fair and equitable treatment
Practical Law Legal Update 1-502-0785 (Approx. 4 pages)
NAFTA tribunal considers fair and equitable treatment
by Anna Kirk, Joanne Greenaway and Ruth Byrne, Herbert Smith LLP
| Law stated as at 21 Apr 2010 • International, USA |
An update on Merrill & Ring Forestry LP v Canada (UNCITRAL, ICSID Administered Case (NAFTA)), in which a NAFTA tribunal considered the ambit of the fair and equitable treatment standard.
Speedread
In Merrill & Ring Forestry LP v Canada (UNCITRAL, ICSID Administered Case (NAFTA)), the tribunal considered claims by a US investor in the British Columbia logging industry that Canada had breached various provisions of the North American Free Trade Agreement (NAFTA), including Article 1105(1), which covers fair and equitable treatment.
The tribunal rejected the claims. In doing so, it held that:
- The fair and equitable treatment standard in NAFTA was not a free-standing obligation under international law, but part of customary law.
- The standard could be examined in two "tracks": the first track concerned treatment in the context of due process of law, denial of justice and physical mistreatment, and the second track concerned treatment in the context of business, trade and investment.
- While the first track required treatment of the sort identified in Neer v Mexico 4 R Int'l Arb Awards (Oct 15 1926) (namely, outrageous or shocking treatment), the second track was broader and did not require shocking or egregious action by a state.
- The minimum standard under customary international law was an evolving standard which protected aliens against all acts which might infringe a sense of fairness, equality and reasonableness.
The decision adds to the debate on the scope of the fair and equitable treatment standard. The tribunal's conclusion that today's minimum standard of treatment is broader than that in Neer contrasts with the tribunal's view in Glamis Gold v USA (a 2009 NAFTA decision), that minimum standards of treatment have not evolved since Neer.
Background
Article 1105(1) of the North American Free Trade Agreement (NAFTA) states that:
"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".
International investment law draws a distinction between a stand-alone standard of fair and equitable treatment, which depends on the particular wording of the treaty, and a "customary international law minimum standard of treatment", a universally applicable customary standard. In Neer v Mexico 4 R Int'l Arb Awards (Oct 15 1926), it was held that a breach of that standard required conduct "so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency".
The NAFTA Free Trade Commission Notes of Interpretation of July 31 2001 state that Article 1105(1) 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. Further, it states that the concept of fair and equitable treatment does not require treatment beyond that required by the customary international law minimum standard of treatment.
For a detailed discussion, see Practice note, Fair and equitable treatment.
Facts
The claimant, Merrill & Ring, was a US investor in the British Columbia logging industry. It complained that:
- The federal regime regulating the claimant was administered in a non-transparent manner.
- Although aware that it was occurring, Canada took no active steps to remedy the unfair practice of blockmailing (whereby domestic log processers in British Columbia make a low offer for the logs, forcing the producer to sell below the export price).
- To exclude unfair barriers to trade, the same standards and exemptions should apply to those operating on provincial land (currently governed by provincial regulations), as well as those operating on federal land (who are governed by federal regulations).
- Certain regulations amounted to expropriation as they substituted government control for the investor's control of critical parts of the business, therefore depriving the claimant of the ability to enter into international export contracts.
- The requirements of cutting, sorting and scaling logs were designed to accord a preference to local mills.
As such, the claimant argued that Canada had breached the following NAFTA provisions:
- Unfair treatment (Article 1102).
- Performance requirements (Article 1106).
- Expropriation (Article 1110(1)).
- Fair and equitable treatment (Article 1105(1)).
Decision
The tribunal dismissed the claims for breach of the provisions on unfair treatment, performance requirements and expropriation. It also dismissed the claim for fair and equitable treatment, on the basis that the claimant had not incurred any damage.
The tribunal rejected the claimant's allegation under NAFTA Article 1102 (unfair treatment) that it should be judged on the same basis as those governed by provincial regulations. There was no unfair treatment as the claimant had been treated in the same manner as Canadian nationals operating on federal land, and therefore subject to federal regulation.
The tribunal further rejected the claimant's submission of barriers to trade under Article 1106, as the effects of the barriers to trade caused by the federal regime were "incidental". The tribunal did, however, state that when each of the incidental effects were aggregated, a more substantial problem might result, which should be judged under the heading of fair and equitable treatment.
The tribunal dismissed the allegation that the federal regulation (and its application by Canada) amounted to expropriation as the claimant maintained control over its business at all times.
Fair and equitable treatment standard
In relation to the alleged breach of the fair and equitable treatment standard, the tribunal held that:
- The Free Trade Commission Notes of Interpretation of July 31 2001 did not establish fair and equitable treatment as a free-standing obligation under international law, but as part of customary law.
- The standard of fair and equitable treatment could be examined in two "tracks":
- the first track concerned treatment in the context of due process of law, denial of justice and physical mistreatment; and
- the second track concerned treatment in the context of business, trade and investments.
- The first track tended towards a minimum standard for fair and equitable treatment as set out in the Neer case (and subsequent cases following that decision), although the tribunal acknowledged another line of authority that emphasised fair treatment to nationals and foreigners alike.
- The second track was broader than the Neer case and there was no requirement that the state action be shocking or egregious. The standard was based on customary international law, which was an evolving standard and which protected aliens against all such acts or behaviour that might infringe a sense of fairness, equality and reasonableness (as relevant to the factual circumstances of the case).
- The fair and equitable treatment of foreign investors operates within the confines of reasonableness. The protection does not go beyond that required by customary law; nor, however, should such treatment fall short of the customary law standard.
The tribunal did not reach a conclusion as to whether a breach of the standard had occurred, as it found that no damage had been incurred in any case.
Comment
As the tribunal noted, there is still a broad and unsettled discussion about the applicable law in relation to the fair and equitable treatment standard. This decision confirms that the standard as applied under Article 1105(1) of NAFTA derives from customary international law which constitutes the minimum standard of treatment (and that there is no obligation to go beyond this standard).
However, the decision advances the debate by suggesting that two tracks exist in the application of the fair and equitable standard. In particular, its conclusion that today's minimum standard of treatment is broader than that in Neer (except in cases of due process and safety) contrasts with the tribunal's view in Glamis Gold v USA, that minimum standards of treatment have not evolved significantly since Neer, although perceptions of what might be "sufficiently egregious" or "shocking" may have changed (see Legal update, Glamis Gold: full report).