The Jean Monnet Program
European Union Jean Monnet Chair
Jean Monnet Working Paper 05/05
Fernando Gonzalez Rojas
The Notion of Discrimination in Article 1102 of NAFTA
NYU School of Law New York, NY 10012
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without permission of the author.
© Fernando Gonzalez Rojas 2005
New York University School of Law
New York, NY 10012
N e w Y o r k U n i v e r s i t y
S c h o o l o f L a w
Jean Monnet Seminar: Advanced Research in the Law and Policy of the EU, NAFTA, and WTO
The Notion of Discrimination in Article 1102 of NAFTA
D i r e c t o r: J o s e p h H. H. W e i l e r
F e r n a n d o G o n z a l e z R o j a s
New York, N.Y.
The Notion of Discrimination in Article 1102 of NAFTA
I. Introduction 6
II. Defining the Type of Discrimination Prohibited by Article 1102 8
II.1. The ‘Objective’ Approach 8
II.1.1. The Absence of a General Exceptions Provision in NAFTA Chapter 11 8
II.1.2. Article 1114 Does Not Provide for a ‘Rule-Exception Regime’ 10
II.1.3. Other Exception-establishing Provisions in NAFTA and GATT Do Not Apply to Investment-related Measures 12
II.2. The “Purpose & Effect” Approach 16
II.2.1. The Purpose: Protectionist Intent 17
II.2.2. The Three-step Procedure of the ‘Effect & Purpose’ Method 19
II.2.3. The Role of the ‘Like Circumstances’ Requirement in the ‘Effect & Purpose’ Method 20
II.2.4. The Notion of Discrimination Under the ‘Effect & Purpose’ Method 22
II.2.5. The Burden of Proving the Subjective Element 22
II.2.6. The Rules of Justification Under the ‘Effect & Purpose’ Method 27
II.2.7. The Effect: Less Favorable Treatment 31
II.2.7.1. Does NAFTA Article 1102 require the ‘most favourable treatment’? 32
II.2.7.2. The threshold of unlawful differential treatment 34
II.2.7.3. The burden of proof in relation to the less favourable treatment 37
II.3. The Alternative Comparator Approach 38
II.3.1 ‘Like Circumstances’ 41
II.3.1.1. Competition as the relevant comparator 43
II.3.1.2. The ‘like products’ standard as the relevant comparator 45
II.3.1.3. The ‘treatment’ determines the relevant comparators 46
II.3.1.4. The national treatment clause v. the non-discrimination principle 51
II.3.1.5. The ‘accordion’ of ‘like circumstances’ 51
II.3.1.6. Whose circumstances? 53
II.3.2 Less Favorable Treatment 55
II.3.3. The Rules of Justification under the ‘Alternative Comparator’ Method 55
II.3.3.1. Reasonable relationship with a reasonable policy 56
II.3.3.2. Consistency with the investment liberalizing objectives of NAFTA 63
III. Conclusions 63
The Notion of Discrimination in Article 1102 of NAFTA
The principle of non-discrimination has long been recognized as part of the corpus of customary international law.1 In its most simple form this principle requires the absence of discrimination.2 Discrimination in general means treating equals in an unequal manner. The principle of non-discrimination is not absolute.3 For centuries it has been accepted that “equality among unequals may be inequitable and that differential treatment may be essential for real equality."4 Therefore, it has been consistently accepted that the principle of non-discrimination, as a rule of international and domestic law, cannot provide for unrestricted equality.5 The implementation of this principle as a rule of law, requires the determination of a category of subjects (the equals) among which certain differentiations (the unequal) must not be made. In many areas of the law, this categorization has been frequently established by treaty.6 In the realm of investment, Article 1102 (National Treatment) of the North Free Trade Agreement (NAFTA)7 is one example of this. As a contractual manifestation of the non-discrimination principle Article, NAFTA does not outlaw all kinds of discrimination, but only that which aims at protectionism. Article 1102 therefore, does not require absolute equality and as I will endeavor to demonstrate in this paper, it allows for the adoption and enforcement of legitimate regulatory distinctions among foreign and domestic investments and investors.
My objective is to identify the ‘notion’ of discrimination prohibited by Article 1102 by describing the different methods of interpretation of this provision, as drawn from the available NAFTA Chapter 11 jurisprudence. This task includes the description of the different steps that may be taken to establish a prima facie violation of Article 1102 and those which must be taken –in the opposite direction– to justify a legitimate measure under each one of these methods (I will call these latter steps the “rules of justification”).
Finally, I do not intend to identify all the different interpretative possibilities that might be applied to Article 1102, but rather only those which have been clearly defined in the published Chapter 11 disputes. In performing this task, my analysis is strongly influenced by similar works relating to Article III of the General Agreement on Tariffs and Trade (GATT).8
II. Defining the Type of Discrimination Prohibited by Article 1102
II.1. The ‘Objective’ Approach
II.1.1. The Absence of a General Exceptions Provision in NAFTA Chapter 11
NAFTA Chapter 11 does not embody a provision, similar to Article XX of GATT, expressly establishing general exceptions to the national treatment clause, nor does it do so for all the substantive disciplines of Chapter 11.
Article 1108, entitled ‘Reservations and Exceptions,’ establishes very specific exceptions to the application of the NAFTA Chapter 11 provisions which do not address the issue of legitimate regulatory measures.9 Does this mean then that the national treatment rule to which the NAFTA Parties subjected themselves is an absolute rule? Or that any other measure that accords differential treatment to foreign investors or their investments, not expressly provided in the very limited list of Article 1108, should be deemed as unlawful even if motivated by a legitimate purpose? If we admit that the proposition that the national treatment rule does not allow the Parties to adopt legitimate regulatory measures is indefensible, where can we find the normative elements to support the opposite view?
One possibility –explored later–, is to identify the limits of the national treatment exigency in the language of Article 1102 itself. Another option is to try to find express support for an exception regime in the body of NAFTA or even in the provisions contained in different treaties. Some controversy has arisen in relation to this option.10 In this subsection we will explore whether there are indeed provisions contained in Chapter 11, other parts of NAFTA or GATT which may be used to develop such a regime.
II.1.2. Article 1114 Does Not Provide for a ‘Rule-Exception Regime’
Article 1114 of NAFTA establishes:
Article 1114: Environmental Measures
1. Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.
2. The Parties recognize that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. Accordingly, a Party should not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such measures as an encouragement for the establishment, acquisition, expansion or retention in its territory of an investment of an investor. If a Party considers that another Party has offered such an encouragement, it may request consultations with the other Party and the two Parties shall consult with a view to avoiding any such encouragement.
Does the inclusion of this provision in Chapter 11 mean that legitimate regulatory measures are allowed only when they address environmental concerns? In any event, did the Parties intend this provision to function as a general exception to the Parties’ obligations under Chapter 11, at least in relation to environmental measures? The language of Article 1114 seems to suggest something different. The inclusion of the expression “otherwise consistent with this Chapter” apparently precludes any possibility that this provision may be opposable as a true environmental exception to the application of Article 1102 or any other substantial provision in Chapter 11. The use of terms such as “inappropriate” vis-à-vis ‘unlawful’ or ‘illegal,’ or “should not waive” instead of ‘shall not’ seems to reinforce this idea.
In the disputes publicly known, no serious attempt has been made to argue based on Article 1114, that a measure should be exempted from the national treatment rule. On the contrary, investors have clearly expressed their view that Article 1114 does not establish any exception to the obligations of the Parties under Chapter 11.11
In any event, even if Article 1114 established a general exception for environmental measures, this would be insufficient to preserve the regulatory autonomy of the Parties in all the other non-environment related areas.
Therefore, Article 1114 of NAFTA does not provide sufficient normative basis to implement a method of interpretation of Article 1102 that would allow the Parties to justify their legitimate regulatory measures as exceptions to the national treatment principle.
II.1.3. Other Exception-establishing Provisions in NAFTA and GATT Do Not Apply to Investment-related Measures
NAFTA Article 2101 entitled “General Exceptions” contained in Chapter 21 (Exceptions), expressly calls for the applicability of Article XX of GATT to several parts of NAFTA and makes express reference also to the adoption or enforcement by any Party of measures “necessary to secure compliance with laws or regulations … including those relating to health and safety and consumer protection.”
Paragraph 1 of Article 2101 establishes
Article 2101: General Exceptions
1. For purposes of:
(a) Part Two (Trade in Goods), except to the extent that a provision of that Part applies to services or investment, and
(b) Part Three (Technical Barriers to Trade), except to the extent that a provision of that Part applies to services,
GATT Article XX and its interpretative notes, or any equivalent provision of a successor agreement to which all Parties are party, are incorporated into and made part of this Agreement.
The Parties understand that the measures referred to in GATT Article XX(b) include environmental measures necessary to protect human, animal or plant life or health, and that GATT Article XX(g) applies to measures relating to the conservation of living and non-living exhaustible natural resources (emphasis added).
Although a plain reading of this provision would lead us to conclude that Article XX of GATT does not apply to investment related measures, the language used in this paragraph seems to leave some room for doubt. For example, does the fact that paragraph 1(a) refers to “services or investment” and paragraph 1(b) refers only to services mean that measures that affect –or apply to – investors or their investments and that take the form of technical barriers to trade (e.g. a ban on the importation of PCB’s such as in the S.D. Myers case) may be justified through Article XX of GATT? This confusion may explain why some investors have felt the necessity to argue as part of their pleadings the non-applicability of Article XX or that if Article XX is applicable, that it would be for the Parties to prove that their measures are strictly justified under one of the exceptions enunciated therein.12
Paragraph 2 of Article 2101 on the other hand establishes:
2. Provided that such measures are not applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on trade between the Parties, nothing in:
(a) Part Two (Trade in Goods), to the extent that a provision of that Part applies to services,
(b) Part Three (Technical Barriers to Trade), to the extent that a provision of that Part applies to services,
(c) Chapter Twelve (Cross-Border Trade in Services), and
(d) Chapter Thirteen (Telecommunications),
shall be construed to prevent the adoption or enforcement by any Party of measures necessary to secure compliance with laws or regulations that are not inconsistent with the provisions of this Agreement, including those relating to health and safety and consumer protection.
This provision also raises several questions. Should this paragraph be interpreted as implying that the adoption or enforcement of measures relating to health and safety and consumer protection is permissible only in relation to trade in goods, technical barriers to trade, cross-border trade in services and telecommunications? This extreme conclusion seems hard to accept. Why did the Parties not consider it appropriate to include Chapter 11 measures in this paragraph? Was it because they considered that a similar result in relation to measures affecting investment could be achieved by other means?
Other provisions of NAFTA establish exceptions to the application of specific obligations or define language that if applied to Chapter 11, would be of great significance. For example, Article 915 of NAFTA defines ‘legitimate objective’ for the purposes of Chapter 9 (Standards-related Measures).13 The question here is whether these provisions may be seen as part of the context of Article 1102 and other disciplines in NAFTA Chapter 11 and therefore arguably influence their interpretation. This possibility seems rather remote.
In the first place, even if these provisions were taken, for interpretative purposes, as part of the context of the Chapter 11 disciplines, it is unclear whether their interpretative influence could rise to the level of true exceptions to the applicability of the national treatment clause or other Chapter 11 obligations. The rules of interpretation of Article 31 of the Vienna Convention on the Law of Treaties do not seem to provide support for such a proposition.
Moreover, in a previous decision, a NAFTA panel expressed the view that in the absence of an express reference in the treaty, no general or specific exceptions may be opposed to the national treatment rule:
The applicability of Chapter Nine of NAFTA to this proceeding has been discussed in the Services section, supra. It is sufficient to note here that Chapter Nine does not apply to measures affecting investment, and there is no provision of Chapter Nine that could be read as either incorporating or overriding the national treatment obligation for investment. Similarly, the general exceptions contained in Article 2101(2) apply only to trade in goods (Part Two), technical barriers to trade (Part Three), cross-border trade in services (Chapter Twelve) and telecommunications (Chapter Thirteen), and thus cannot affect the U.S. obligations under Chapter Eleven (footnote omitted).14
Therefore, there seems to be no textual support to sustain that the Parties intended to establish a set of measures or categories of measures similar to those of Article XX in GATT which would operate as exceptions to the application of the national treatment clause to preserve their regulatory autonomy powers. Consequently, the ‘general rule-exception’ method of interpretation (objective) that may be used to allow legitimate measures in the context of Article III of GATT does not appear to be suitable for the interpretation of Article 1102 of NAFTA. And if we are to persist in our conviction that the notion of discrimination prohibited in Article 1102 does not entail a total renunciation of such a regulatory capacity other methods of interpretations must be explored.
II.2. The “Purpose & Effect” Approach
The language of Article 1102 makes no express reference to any intention test as a necessary component of a breach of the national treatment clause. Article 1102 of NAFTA, contrary to GATT Article III, does not include an expression similar to “as to afford protection” that might indicate the necessity to prove a protectionist intent. The structure of Article 1102 seems to call instead for the application of a two-step objective standard; determining (i) whether foreign investors or their investments have been accorded less favorable treatment in relation to domestic investors or investments, and (ii) whether the domestic and foreign investors or investments were in like circumstances. In other words, it seems that for a violation of Article 1102 to be proved, it is necessary to demonstrate that the application of a measure upon an objectively identifiable context, namely, investors or investments in like circumstances, produces the effect, objectively identifiable as well, of according less favorable treatment to foreign investors or their investments. Once both objective situations have been verified, there is a violation to Article 1102, regardless of whether the intention of the Party applying such measure was protectionist or not.
Not infrequently however, discussion about intent is present in the disputes involving the application of Article 1102 of NAFTA. Some claimants have endeavored to prove the existence of a subjective element, consisting of the aim of economically protecting nationals. The same subjective component has sometimes been required by tribunals in order to declare the existence of a breach of Article 1102. The panel in S.D. Myers for instance, expressly recognized that “intent is important” when deciding on an alleged violation of Article 1102.15 But when does ‘intent’ become relevant in the analysis of an Article 1102 claim? Where in the language of this provision is there a plea for proving the purpose, motive or intent of the Party taking the measure? What is the exact content of this ‘intent’? When drafting Article 1102, was the intention of the Parties to rely on an inquiry of real purpose of their governments to distinguish between legitimate and unlawful discrimination? How can the will of a Party be proved, especially in the case of disguised protectionism? Does the investor bear the burden of proving this intent? Or is it the Party who must offer evidence that its measure is motivated by something different to protectionism? We will address these questions in the following pages.
II.2.1. The Purpose: Protectionist Intent
As we noted above, a reasonable understanding of Article 1102 should lead us to conclude that this provision does not prohibit every action that results in less favorable treatment for foreign investors or their investments; but rather, that what Article 1102 really outlaws is protectionism in the realm of investment. As one commentator noted “a Chapter 11 panel must focus on whether there is sufficient evidence of economic protectionism (or, conversely, whether a State interest unrelated to economic protectionism may be found).”16
Protectionism under the ‘effect and purpose’ doctrine means according less favorable treatment to foreign investors or their investments, primarily as a result of their nationality. Therefore, this method of interpretation looks for two things: evidence of differential treatment between foreign and domestic investors or investments in like circumstances –what is called discrimination–17 and evidence that this differentiation is motivated by the nationality of the investors or investments involved.18
As the panel in Marvin Feldman stated: “[i]t is clear that the concept of national treatment as embodied in NAFTA and similar agreements is designed to prevent discrimination on the basis of nationality or ‘by reason of nationality’ (emphasis added).”19
II.2.2. The Three-step Procedure of the ‘Effect & Purpose’ Method
The ‘effect and purpose’ method finds explicit support for its objective component –less favorable treatment– in the language of Article 1102 itself. This provision however, does not expressly require that the difference in treatment must be motivated by the nationality of the investor or investment. One distinctive characteristic of this method is that it does not use the ‘like circumstances’ requirement to support its position that a breach of Article 1102 requires a measure motivated by the nationality of the investors or investments. Rather, the ‘effect and purpose’ method considers that the combination of the two elements present in the wording of Article 1102, ‘less favorable treatment’ and ‘like circumstances’, gives rise to a presumption that the measure is motivated by the nationality of the investors or investments affected.
In the words of the Marvin Feldman tribunal:
[I]t is not self-evident, as the Respondent argues, that any departure from national treatment must be explicitly shown to be the result of the investor’s nationality. There is no such language in Article 1102. Rather, Article 1102 by its terms suggests that it is sufficient to show less favorable treatment for the foreign investor than for domestic investors in like circumstances. In this instance, the evidence on the record demonstrates that there is only one U.S. citizen/investor, the Claimant, that alleges a violation of national treatment under NAFTA Article 1102, and at least one domestic investor (Mr. Poblano) who has been treated more favorably. For practical as well as legal reasons, the Tribunal is prepared to assume that the differential treatment is a result of the Claimant’s nationality, at least in the absence of any evidence to the contrary (emphasis added and references to the transcript omitted).
It is worth noting that the tribunal does not say that the subjective element is not needed for a violation to be proved, but rather that it can be presumed. This method of interpretation therefore, calls for a three-step procedure to establish a violation of Article 1102. First, a demonstration that there are foreign and domestic investments in like circumstances. Second, proof that they have been accorded differential treatment. And third, a failure to rebut the presumption thereby generated that the motive of the measure is the nationality of the foreign investors or investments involved.20
It is important to emphasize that according to this method, the analysis of the motivation of the Parties is one actually calling for the determination of a subjective element. As the arbitrators in Marvin Feldman sustained:
Also, as the Respondent argues, if the motives for the government’s actions should not be examined, there is effectively no way for the Claimant or this Tribunal to make the subjective determination that the discriminatory action of the government is a result of the Claimant’s nationality, again in the absence of credible evidence from the Respondent or a different motivation. If Article 1102 violations are limited to those where there is explicit (presumably de jure) discrimination against foreigners, e.g., through a law that treats foreign investors and domestic investors differently, it would greatly limit the effectiveness of the national treatment concept in protecting foreign investors.21
II.2.3. The Role of the ‘Like Circumstances’ Requirement in the ‘Effect & Purpose’ Method
This method seems to perceive the ‘like circumstances’ analysis and the ‘motivation’ analysis as two separated, although somehow related, matters. For this reason, for the Marvin Feldman tribunal, “which domestic investors, if any, are in ‘like circumstances’ with the foreign investor” and “the extent to which differential treatment must be demonstrated to be a result of the foreign investor’s nationality”22 are two different questions.
Therefore, under this method, it is legally possible for a Party to accord less favorable treatment to foreign investors in relation to domestic investors in like circumstances, and yet be in compliance with Article 1102, if it proves that the difference in treatment is not motivated by the difference in nationality.
Hence, an interpretation of Article 1102 based on this method, may use very broad criteria to determine whether two or more investors are in like circumstances. Categories as generic as those proposed by the Organisation for Economic Co-operation and Development (OECD)23 –and followed by some tribunals–24 such as ‘sector’ may be sufficient under this method to identify investors or investments in like circumstances. The ultimate ‘filter’ to distinguish between unlawful and legitimate measures will reside not in the like circumstances analysis, but in the capacity of the Parties to demonstrate that their measures are not motivated by the investors’ nationality.
II.2.4. The Notion of Discrimination Under the ‘Effect & Purpose’ Method
According to the ‘effect and purpose’ method the notion of discrimination prohibited by Article 1102 is the discrimination motivated by the nationality of the investors or the investments. Discrimination here takes a very ordinary meaning. The most ordinary notion of discrimination implies distinguishing among otherwise undistinguishable things. Under the ‘effect and purpose’ doctrine discrimination means making differences between potentially non-discernable investors. The requirement of like circumstances then simply provides a very flexible basis for the logical construction of discrimination: as long as there is a not absolutely unreasonable set of criteria under which two investors or investments may be considered in like circumstances, even if very remotely, the requirement of like circumstances will be satisfied.
II.2.5. The Burden of Proving the Subjective Element
As we noted above, under the ‘effect and purpose’ method, once the investor has established a prima facie case of discrimination, the burden of proving that the measure is not motivated by the nationality of the investors lies on the respondent. The panel in Marvin Feldman explained the convenience of this procedural solution:
More generally, requiring a foreign investor to prove that discrimination is based on his nationality could be an insurmountable burden to the Claimant, as that information may only be available to the government. It would be virtually impossible for any claimant to meet the burden of demonstrating that a government’s motivation for discrimination is nationality rather than some other reason.25
If this is true why has the investor in Methanex been left with the entire burden of proving that the aim of the Government of California when adopting the ban on methyl tertiary butyl ether (MTBE) was to protect Methanex’s domestic competitors?26 Does this decision not conflict with reasoning and outcome of the Marvin Feldman tribunal’s award?
A possible answer to this question and a solution for these apparently conflicting positions is that the presumption identified by the tribunal in Marvin Feldman does not find its normative support in Article 1102 only but rather that it is the result of the combined effect of several provisions of NAFTA Chapter 11 or at least of Article 1101 and Article 1102.
Indeed, the tribunal in Methanex found itself without jurisdiction to adjudicate on the matter27 because there was no “legally significant connection” between the investor and the measures taken by the Party,28 as required by the expression “relating to” contained in Article 1101 of NAFTA.29 According to the tribunal, the measure was directed to those who produced and commercialized MTBE and not to their methanol suppliers, such as Methanex.
Methanex contended that the phrase “relating to” should be interpreted broadly, in light of liberalizing objectives of NAFTA Chapter 11.30 According to Methanex, the threshold provided by Article 1101(1) means nothing more than “affecting.”31 On the other hand, the United States argued that “relating to” means that “there must be a legally significant connection between the measure and the investor or the investment.”32 Using its prerogatives under Article 1128 of NAFTA, Mexico intervened in this dispute and expressed that:
Mexico agrees with the position of the United States, and disagrees with Methanex’s contention that measures that merely “affect” investors or investments are covered by Chapter Eleven… The phrase “relating to” must be given its distinct meaning, particularly in light of the how [sic] the NAFTA and other international trade agreements distinguish between the terms “relating to” and “affect” ….
The significance of this distinction to Chapter Eleven tribunals is that measures that “relat[e] to” investors or investments have a closer degree of connection than measures that merely “affect” them. Under the GATT jurisprudence, the test adopted for the measure to be found to be “relating to” was that of being “primarily aimed at”. The test adopted for the purposes of Article 1101 must reflect the NAFTA drafters’ intent to require a more direct nexus between the measure and the investor or its investment than mere effect, as evidenced by the text’s considered use of “relating to” (emphasis added and footnotes omitted).33
The panel decided that the “phrase ‘relating to’ in Article 1101(1) NAFTA signifies something more than the mere effect of a measure on an investor or an investment and that it requires a legally significant connection.”34 The panel never clearly explained what the exact meaning of ‘legally significant connection’ is but, drawing from its comments on the Pope & Talbot decision, it apparently means something more than ‘affect’ but something less than ‘primarily directed.’35
The disputing parties agreed however that “[i]f the purpose of the measure is an intent to harm foreign owned investors or investments on the basis of nationality, then the measure relates to the foreign-owned investor or investment” (emphasis added).36 Based on this agreement, the panel decided that in order for Methanex to have a valid claim under Chapter 11, it had to submit new fresh pleadings along with all the evidence aimed at demonstrating such an intention.37
What conclusion should we draw from this decisions? How does the operation of Article 1101 affect that of Article 1102? Are the decisions of the panels in Marvin Feldman and Methanex on the allocation of the burden of proof inconsistent? One commentator believes that:
[O]ne should not conclude that just because Methanex appears to have been told that to succeed in its claim it must prove the existence of discriminatory intent behind California's measures, that all future claimants will be required to do the same…. Methanex finds itself in this position because it and the USA agreed that if such specific intent existed to harm Methanex or firms like it, Methanex would meet the test of the measure "relating to" its investment, as required under Article 1101. For most investors, meeting the Article 1101 threshold is automatic….38
Shall we then conclude that in cases where a measure directly affecting foreign investors or their investments results in less favorable treatment for them in relation to similarly situated (in like circumstances) domestic investors or investments, the burden of proving a non-nationality related intent is for the Party? And that if one of the elements of this equation changes so does the burden of proof? In other words, that the presumption upon which the Marvin Feldman tribunal rests its decision is the result not only of the combination of the normative elements embodied in Article 1102 but also of the ‘synergy’ provided by passing the Article 1101 threshold?
Even if we were to accept, as the referred commentator does, that both the agreement of the parties and the tribunal’s decision based on it in Methanex lack practical relevance, from the doctrinal observational stand point, it is of some significance to determine how the conjoint operation of Articles 1101 and 1102 works. Is it sound to say for example, that the less direct the measure is, the greater the need to prove less favorable treatment? How does the ‘relating to’ and ‘like circumstances requirement’ relate to each other? If strong evidence of discrimination motivated by nationality may ‘patch-up’ a deficient claim under Article 1101, is the same effect in the opposite direction possible as well?
We can anticipate at least some debate as to the practical effects of this decision. In its latest communication on the merits to the tribunal, Methanex contended “to the extent that an intent requirement exists under Article 1101, it is the United States, not Methanex, that bears the burden of proving that California, in violating national treatment standards, had no intent to discriminate or act in an arbitrary manner.”39 Is this position sound?
II.2.6. The Rules of Justification Under the ‘Effect & Purpose’ Method
If under the ‘effect and purpose’ method it is for the Parties to demonstrate that their measures are not motivated by the nationality of the investors involved, then how can they discharge this burden? Is it sufficient to prove that their measure was motivated by whatever other reason as long as it is not nationality? What exactly does ‘motivated by nationality’ mean? Does it mean xenophobic hatred? If so, does it have to be a kind of animosity officially embraced by the government or are the personal prejudices of the decision makers what matters? What if the measure is not motivated by arborescence towards foreigners but by the economic or political benefits resulting from discriminating against them? Is there any difference for the purposes of Article 1102?
In its collateral participation in the Loewen dispute, Mexico asserted:
[W]hen applying the national treatment rule, the only relevant issue of status is the investor’s nationality. In other words, discrimination based on race or economic class cannot constitute a breach of Article 1102, even if the affected person happens to be a non-national (bolds in italics in the original).40
Does this mean that under the ‘effect and purpose’ doctrine a Party may justify its conduct on the basis of ‘naked’ racism for example? Is there a set of ‘legitimate motivations’ for the Parties to adopt a measure? Or should we conclude that legitimate measures are all those which are not motivated by the nationality of the investor?
The position advanced by Mexico and by the United States, respondent in this dispute, was finally adopted by the tribunal which declared that:
We agree also with Professor Bilder when he says that Article 1102 is directed only to nationality-based discrimination and that it proscribes only demonstrable and significant indications of bias and prejudice on the basis of nationality, of a nature and consequence likely to have affected the outcome of the trial (emphasis added).41
In this decision, should we interpret “bias and prejudice on the basis of nationality” as meaning xenophobic intent? Such an interpretation somehow sounds inconsistent with the object and purposes of NAFTA in general and with those of Article 1102 itself. As we stated above, the national treatment clause in Chapter 11 is concerned with outlawing protectionism and not with promoting equality in the world. On the other hand, it is hard to conceive that a measure entirely motivated by xenophobic feelings that creates a competitive disadvantage for foreign investors would not violate Article 1102, even if their enforcers are completely unaware that they are thereby favoring their nationals.
Moreover, what if the less favorable treatment is the result of an individual’s personal prejudices but not an official policy? Let us think for example of the case in which a judge renders a completely unlawful decision resulting in denial of justice, based on his or her own xenophobic sentiments. This should not matter under the rules of state responsibility as long as such an individual formally or de facto exerts public power. However, when the tribunal in Mondev ‘incidentally’ expressed its opinion on the validity of the claimant’s arguments on the merits, it seemed to have disregarded the claimant’s allegations on discrimination based on Boston official’s remarks indicating anti-Canadian animus –officials suggesting that Mondev go back to Canada– because of lack of evidence of ‘systemic bias.’42
On this same issue, the tribunal in Mondev made the following statement:
In any event, the statements in question were all made well before NAFTA’s entry into force…. Moreover there were reasons, independent of LPA’s Canadian parentage, for the positions taken by the City and BRA in relation to the Tripartite Contract. It does not matter for the purposes of Article 1102 whether those reasons were or were not discreditable, or whether they involved an intention to breach or assist in the breach of a contract. The Tribunal does not think they were discriminatory, and this conclusion is supported by the City’s and BRA’s subsequent treatment of Campeau, also a Canadian corporation. As Mondev itself stressed, Campeau rather rapidly obtained the various permissions required for its Boston Crossing project…. One reason Campeau had no difficulty in obtaining BRA’s consent for the project – and it may be the crucial reason – was that it was prepared to pay the market price for the Hayward Parcel, unlike Mondev, which understandably was willing to pay no more than the Tripartite Agreement specified…. In the circumstances these allegations of breaches of Article 1102 would clearly fail on the merits.43
The tribunal seemed to acknowledge that the Government of Boston mistreated the claimant in order to obtain an economic benefit. The panel apparently also considered this situation irrelevant under Article 1102. In the opinion of one commentator, the tribunal believed the Government of Boston acted in breach of the contract “not out of anti-Canadian bias, but out of a desire to receive greater compensation for the property than allowed by the option price in the Agreement.”44 What if the economic advantage of mistreating Mondev would not have been directly for the government, but for the domestic economy in general? What if the advantage was not economical but political? Would that type of discrimination be irrelevant under Article 1102 as well? Taking the facts dealt with by the tribunal, but reducing the universe of investors to one national and one foreigner, would discrimination against the latter that produces, such as in the Mondev case, an economic benefit for the government, violate Article 1102?
As we can see, the ‘effect and purpose’ method of interpretation of Article 1102 poses many questions that have not been clarified by the existent jurisprudence. Some of these questions are the result of certain ‘flaws’ of this interpretative method and may be dissipated by using an alternative one, as we will discuss in section II.3. But now, let us briefly discuss the second element of this method: the effect.
II.2.7. The Effect: Less Favorable Treatment
While the requirement of a specific intent is not expressly contained in Article 1102 of NAFTA, this provision does make clear reference to a particular effect that the measure must produce: less favorable treatment. The very denomination of the ‘effect and purpose’ method suggests the existence of a material manifestation of the measure in the world.
As the tribunal in S.D. Myers highlighted:
The existence of an intent to favour nationals over non-nationals would not give rise to a breach of Chapter 1102 of the NAFTA if the measure in question were to produced [sic] no adverse effect on the non-national complainant. The word “treatment” suggests that practical impact is required to produce a breach of Article 1102, not merely a motive or intent that is in violation of Chapter 11… (emphasis added).45
Under the ‘effect and purpose’ method, the ‘less favorable treatment’ component serves two purposes, it is the objective element in the formula ‘effect plus intent equals violation’; and at the same time, it provides evidential support for the development of a presumption of intent. Establishing the existence of a ‘less favorable treatment’ therefore, under the ‘effect and purpose’ method may come before or after proving intent, depending on the need to demonstrate the latter through a presumption.
However, what does ‘less favorable treatment’ exactly mean? Does it mean the best or the most favorable treatment in the jurisdiction? Does Article 1102 of NAFTA contain something similar to a ‘most favored investor’ clause? And if it does, does any departure from that level of treatment give rise to a violation of Article 1102?
II.2.7.1. Does NAFTA Article 1102 require the ‘most favourable treatment’?
As acknowledged by the Marvin Feldman tribunal:
NAFTA is on its face unclear as to whether the foreign investor must be treated in the most favorable manner provided for any domestic investor, or only with regard to the treatment generally accorded to domestic investors, or even the least favorably treated domestic investor. There is no “most-favored investor” provision in Chapter 11, parallel to the most favored nation provision in Article 1103, that suggests that a foreign investor must be treated no less favorably than the most favorably treated national investor, if there are other national investors that are treated less favorably, that is, in the same manner as the foreign investor. At the same time, there is no language in Article 1102 that states that the foreign investor must receive treatment equal to that provided to the most favorably treated domestic investor, if there are multiple domestic investors receiving differing treatment by the respondent government (bolds in italics in the original).46
The tribunal in this opportunity declined to decide on this particular matter, arguing that “in the absence of evidence to this effect presented by Mexico – the only party in a position to provide such information – the Tribunal need[ed] not decide whether Article 1102 requires treatment equivalent to the best treatment provided to any domestic investors” (emphasis in the original).47
Prior to this decision, the panel in Pope & Talbot determined that although Article 1102(3) –that establishes that less favorable “treatment means treatment no less favorable than the most favorable treatment”– applies to states and provinces only,48 it may provide interpretative bases for the proposition that ‘less favorable treatment’ in Article 1102(1) and 1102(2) also means “treatment no less favorable than the most favorable treatment.”49
The tribunal determined that accepting that ‘less favorable treatment’ means something less than the most favorable treatment would lead to the rather bizarre conclusion that the drafters of NAFTA intended to “restrain states and provinces more vigorously than the NAFTA Parties themselves.”50
Therefore, the panel interpreted: (i) “the treatment required by Articles 1102(1) and 1102(2), on the one hand, and 1102(3) on the other, to be identical, save for the limitations to states and provinces”; (ii) “both standards to mean the right to treatment equivalent to the ‘best’ treatment accorded to domestic investors or investments in like circumstances”; and that (iii) “‘no less favorable’ means equivalent to, not better or worse than, the best treatment accorded to the comparator.”51
As a matter of fact, recent Chapter 11 claims show that investors have consistently adopted the position that the treatment they are entitled to is nothing else but the best available in the relevant jurisdiction.52
II.2.7.2. The threshold of unlawful differential treatment
Now we turn to the question whether Article 1102 incorporates a minimis exception for the prohibition of differential treatment. Even the minimal differential treatment between foreign investors and their domestic most favored counterparts is sufficient to trigger a violation of Article 1102?
On this issue the interpretations provided by the Chapter 11 panels have been ambiguous. We may identify three different positions that identify three different levels of ‘less favorable treatment’ for an Article 1102 violation to arise.
The first position maintains that any difference in treatment may amount to a violation of the national treatment clause. Even more, they consider that in fact no real negative impact is necessary. This position was adopted by the NAFTA Chapter 20 panel interpreting Articles 1102 and 1102 of NAFTA in the The Matter of Cross-Border Trucking Services. Drawing analogies with the GATT-WTO jurisprudence, the panel determined that “it is well-established that parties may challenge measures mandating action inconsistent with the GATT regardless of whether the measures have actually taken effect.”53
Based on this premise the tribunal decided:
Because the United States expressly prohibits the above mentioned investment, this Panel finds such prohibitions as inconsistent with NAFTA, even if Mexico cannot identify a particular Mexican national or nationals that have been rejected. A blanket refusal to permit a person of Mexico to establish an enterprise in the United States to provide truck services for the transportation of international cargo between points in the United States is, on its face, less favorable than the treatment accorded to U.S. truck service providers in like circumstances, and is contrary to Article 1102. Where there have been direct violations of NAFTA, as in this case, there is no requirement for the Panel to make a finding that benefits have been nullified or impaired; it is sufficient to find that the U.S. measures are inconsistent with NAFTA.54
Should this decision be interpreted as admitting that a violation of Article 1102 requires no treatment at all? Shall we derive from this passage that the minimal difference in treatment, even if nominal or hypothetical is sufficient to find a breach of Article 1102? Or should we conclude that this passage is in fact unrelated to the minimis exception issue, since it leaves open the question of how unfavorable the treatment must be –even if it is only reflected ‘in letter’– in order to trigger a violation?
A second position maintains that for a violation to arise the foreign investors or investments have to experience actual negative impacts. This position was adopted for example by the Loewen tribunal’s award. The panel in this case determined:
For there to be denial of national treatment, de jure or de facto discrimination (i.e., the according of less favourable treatment) by a Party against a foreign investment or against a foreign investor in respect of its investment must be proven. Proof of mere intention to discriminate does not establish a breach of Article 1102. The Tribunal must determine whether the treatment accorded resulted in actual discrimination (emphasis added).55
This decision however, also leaves the minimis exception question unresolved, because even if Article 1102 requires an unfavourable treatment actually reflected in the facts, there is still uncertainty as to how unequal this treatment must be.
Finally, a third position claims that not only does the measure have to produce actual effects upon the investor or the investments, but also that this effect has to reach a certain level of egregiousness. This was the view of the panel in S.D. Myers:
The Tribunal takes the view that, in assessing whether a measure is contrary to a national treatment norm, the following factors should be taken into account:
whether the practical effect of the measure is to create a disproportionate benefit for nationals over non nationals; (emphasis added)56
As we mentioned earlier, the panel in Mondev disregarded some evidence on discrimination essentially because it was not persuaded that they had a relevant impact in the outcome of the dispute. Some commentators have identified the decisions in S.D. Myers57 and Mondev58 as two examples of a position requiring “a high threshold of impropriety before international liability will attach to state conduct.”
In the same direction, in a passage of the Loewen decision already commented, the arbitrators considered that Article 1102 forbids “only demonstrable and significant indications of bias and prejudice” (emphasis added).59
II.2.7.3. The burden of proof in relation to the less favourable treatment
Being part of the process of proving protectionist intent, the burden of producing evidence as to the existence of less favorable treatment should be borne primarily by the claimant.
Confirming this supposition, the tribunal in ADF Group considered that the evidence provided by the investor in relation to the existence of less favorable treatment was “scant” and that therefore, the investor “did not sustain its burden” of proving less favorable treatment vis-à-vis similarly situated domestic steel fabricators.60
Consistently, the panel in Marvin Feldman, relying again on its powers to draw presumptions, determined that the claimant had the burden of proving only a prima facie case that its investment had been treated in a less favorable manner than several Mexican owned cigarette resellers. On this basis, the tribunal also decided that Respondent “failed to introduce any credible evidence into the record to rebut that presumption.”61
II.3. The Alternative Comparator Approach
Notwithstanding the frequent reference to the issue of intent in the publicly known Chapter 11 disputes, some experts consider that in order to prove a violation of NAFTA Article 1102, a claimant must demonstrate that a measure has accorded differential treatment to competing domestic and foreign investors or investments, “regardless of whether there was any intent on the part of the Government to provide less favorable treatment because the investor or investment was foreign (or, conversely, to provide better treatment to a local competitor because it is local).”62
Indeed, there is a method of interpretation of Article 1102 that allegedly –we will further discuss the accuracy of this view– does not require any specific intent on the part of the government adopting the measure. This method limits its interpretative tools to the normative elements expressly established in Article 1102: ‘less favorable treatment’ and ‘like circumstances.’ The differences between this method and the ‘effect and purpose’ approach are subtle and frequently elusive –as evidenced by some shifting from one to another in the available jurisprudence.
The core difference between these two methods lies on the steps that one needs to take to establish a violation. Whereas the ‘effect and purpose’ method comprises three steps, the third being the establishment of a specific motivation (discriminate on the basis of nationality), the ‘alternative comparator’ method requires only two steps in the following order: (i) proving that the foreign investor or investment is in like circumstances with domestic investors or investments, and (ii) that the former has received less favorable treatment than the latter.
While it is true that under the ‘effect and purpose’ method the third step is established prima facie by proving the first two elements, the third step is, as we have noted above, an independent element which theoretically may be rebutted without disproving the other two. On the other hand, the ‘alternative comparator’ approach uses the ‘like circumstances’ requirement to avoid the question of intent. When applying this method, the disputing parties and the arbitrators analyze all the variables (circumstances) that may place two or more investors or investments in the same category.
This approach is based on the premise that two objects may be similar or dissimilar depending on the comparator used to make such an assessment. Therefore, the users of this method believe that by observing the comparators that a Party used to determine that foreign and domestic investors belonged to different categories and that consequently they deserved different treatments, it is possible to conclude whether the measure is protectionist or not.
Therefore, the ‘alternative comparator’ method uses the like circumstances analysis to distinguish between legitimate and protectionist measures. Presented with a situation where differential treatment has been accorded to apparently similarly situated investors or investments, it poses the following question: nationality let alone, is there any other comparator (alternative comparator) under which these investors or investments belong to different categories and which may justify the differentiation in treatment?
What we call here the ‘alternative comparator’ approach –using the language of previous studies on GATT Article III–63 was first enunciated in the NAFTA context by the Pope & Talbot tribunal as follows:
In one respect, this approach echoes the suggestion by Canada that Article 1102 prohibits treatment that discriminates on the basis of the foreign investment’s nationality. The other NAFTA Parties have taken the same position. However, the tribunal believes that the approach proposed by the NAFTA Parties would tend to excuse discrimination that is not facially directed at foreign owned investments. A formulation focusing on the like circumstances question, on the other hand, will require addressing any difference in treatment, demanding that it be justified by showing that it bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign owned investments (emphasis added).64
Although the language used by the panel might be confusing, especially without the guidance provided by the context of the entire decision, it contains all the elements of the ‘alternative comparator’ approach, as envisaged by this tribunal. We will discuss these elements in the following pages. By now, it is sufficient to highlight that a radical difference between this decision and the Marvin Feldman award is that the arbitrators in Pope & Talbot consider that the question whether the measure was “motivated by preference of domestic over foreign owned investments” resides in that of whether such investments were in like circumstances.
II.3.1 ‘Like Circumstances’
As we have indicated before, there is some support to sustain that two or more investors or investments are in like circumstances if they operate in the same sector.65 We mentioned earlier as well, that this blatantly broad comparator was adopted by the tribunals in S.D. Myers and Pope & Talbot as the foundation for their analyses in relation to the ‘like circumstances’ question.66
As to the exact meaning of the word sector for the purposes of Article 1102 of NAFTA, the panel in S.D. Myers took the view that “the word ‘sector’ has a wide connotation that includes the concepts of ‘economic sector’ and ‘business sector’.”67
Both tribunals seemed however, to accept that the use of ‘sector’ as the relevant comparator was merely “a first step,”68 suggesting that the use of other comparator or comparators –presumably more specific– would follow. The tribunal in S.D. Myers for instance declared:
The Tribunal considers that the interpretation of the phrase “like circumstances” in Article 1102 must take into account the general principles that emerge from the legal context of the NAFTA, including both its concern with the environment and the need to avoid trade distortions that are not justified by environmental concerns. The assessment of “like circumstances” must also take into account circumstances that would justify governmental regulations that treat them differently in order to protect the public interest…” (emphasis added).69
Notwithstanding such a policy-sensitive remark, and having admitted that there existed a legitimate environmental purpose for the measure,70 it seems that the tribunals decided the ‘like circumstances’ question based exclusively on an economically-oriented comparator:
From the business perspective, it is clear that SDMI and Myers Canada were in “like circumstances” with Canadian operators such as Chem-Security and Cintec. They all were engaged in providing PCB waste remediation services. SDMI was in a position to attract customers that might otherwise have gone to the Canadian operators because it could offer more favourable prices and because it had extensive experience and credibility. It was precisely because SDMI was in a position to take business away from its Canadian competitors that Chem-Security and Cintec lobbied the Minister of the Environment to ban exports when the U.S. authorities opened the border (emphasis added).71
The problem is that whereas the use of the comparator ‘sector’ has been uniformly accepted, there is much uncertainty as to what other comparators should be brought to the discussion of ‘like circumstances.’ How deep must a tribunal go in the consideration of more specific comparators? More interestingly, when and why should they do it? The problematic related to the limitation of the regulatory autonomy of the NAFTA Parties, resides in the answer to these questions.
II.3.1.1. Competition as the relevant comparator
Some have interpreted the S.D. Myers decision as establishing that if two or more investors or their investments compete for the same business, they are in “like circumstances.”72 Strongly relying on GATT-WTO jurisprudence, Methanex argued that Article 1102 provides equality of competitive conditions for foreign investments in relation to domestic investments. In its reply to Mexico’s and Canada’s Article 1128 interventions Methanex contended that “the fact that the investments compete directly should be a deciding factor because the NAFTA was drafted to promote equality of competition between foreign and domestic investments.”73
It seems clear that if we were to adopt Methanex’s view, some legitimate distinctions between foreign and domestic investors or investments would contravene Article 1102, conclusion that we should again deny for being unreasonable.
Moreover, some panels have adopted different approaches privileging other comparators over competition, when making their conclusions on the ‘like circumstances’ question. The Loewen tribunal for example, determined that –as we will further explain– the claimants and the O’Keefe family’s companies, claimants’ American competitors, were not in like circumstances.74 In the same manner, the tribunal in Marvin Feldman determined that the claimant was in like circumstances with Mexican cigarette resellers, but not in relation to Mexican cigarette producers, although all of them were potential competitors in the cigarettes exportation business.75