(202) 879-3432
(202) 879-3832
September 18, 2001
VIA FACSIMILE
V.V. Veeder, QC
Essex Court Chambers
24 Lincoln’s Inn Fields
London WC2A 3ED
England
Warren Christopher, Esq.
O’Melveny & Myers, LLP
1999 Avenue of the Stars
Los Angeles, California 90067-6035
J. William Rowley, QC
McMillan Binch
Royal Bank Plaza
Suite 3800, South Tower
Toronto, Ontario M5J 2J7
Canada
Re: Methanex Corporation v. United States of America
Gentlemen:
This letter and the enclosed Opinion of Sir Robert Jennings (“Second Jennings Op.”)
(Exhibit 1) are occasioned by the NAFTA Free Trade Commission’s July 31, 2001
“interpretation” of NAFTA Article 1105, which was submitted to the Tribunal by counsel for the
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United States on that same day, together with a letter arguing that the “interpretation” is binding
on this Tribunal.1
The July 31, 2001 “interpretation” of Article 1105 should have no material impact on this
proceeding, for it does not — and cannot — in any way alter the substance of NAFTA’s
investment protections. While the effect of the “interpretation” is not entirely clear, if anything it
confirms that “fair and equitable treatment” and “full protection and security” are part and parcel
of the customary international law standard for the treatment of investors and their investments.
Further, the Free Trade Commission (“FTC”) “interpretation” in no way contradicts the common
sense conclusion that violations of independent treaty provisions may constitute a breach of
Article 1105. The United States will likely argue here — as it has already argued in Loewen —
that because of this “interpretation,” Governor Davis and the State of California were not
required to treat Methanex fairly and equitably or provide appropriate protection, and that the
words “international law” used in Article 1105 do not include any U.S. treaty obligations besides
Article 1105 itself. If that is indeed the United States’ position, then it is, to use Sir Robert
Jennings’ term, “preposterous.” (Second Jennings Op. at 4.) This is so for four reasons, which
we summarize immediately below and expand upon in the sections that follow.
First, the text of NAFTA explicitly requires “fair and equitable treatment” and
“full protection and security” for all NAFTA investments, without exception. It also
explicitly requires treatment in accordance with “international law,” not “customary
international law.” Until such protections are actually deleted from the text of NAFTA
through the formal amendment process required under Article 2202, they must be the
controlling legal principles in this case.
1 The FTC “interpretation” was submitted by the United States to the Tribunal in another ↩
NAFTA case, The Loewen Group, Inc. v. United States. The Second Jennings Opinion was
prepared by Sir Robert for use in both this case and Loewen. Because this Opinion was filed first
in the Loewen case, the record citations within the Opinion often refer to the particular pleadings
filed in Loewen. The substance of the opinion is, of course, equally applicable here. Moreover,
because the United States is likely to take similar positions here to those it has taken in Loewen.
Methanex has cited to several relevant submissions recently filed in that proceeding.
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Second, the actual text of the FTC “interpretation” does not support the meaning
now proffered by the United States. In an apparent attempt to change NAFTA
substantively while disguising it as a mere “interpretation,” the FTC used somewhat
opaque and imprecise language. But the actual language of the “interpretation” identifies
the “fair and equitable treatment” and “full protection and security” standards as part of
the body of customary international law regarding the treatment of investors and their
investments. Similarly, the “interpretation” does not preclude Article 1105 claims based
upon violations of independent treaty obligations.Third, the FTC lacks the power to delete protections from NAFTA or diminish
their scope, because such a change would constitute an amendment to NAFTA, not an
interpretation. NAFTA amendments must follow the procedures set out in Article
2202(2), including, in the case of the United States, the constitutionally mandated
approval of the United States Congress. Those procedures allow parties that benefit from
NAFTA provisions, including investors, to exercise their democratic right to influence
any changes government officials might attempt to impose unilaterally.Fourth, even if the FTC “interpretation” were effective in reducing the scope of
investment rights under Article 1105, NAFTA’s most-favored-nation provision, Article
1103, would still require the United States to accord investments the same independent
protections of “fair and equitable treatment” and “full protection and security,” because
those protections appear in other bilateral investment treaties (“BITs”) to which the
United States is a party, and which have not been subjected to the same sort of
“interpretation” urged by the United States.
This Tribunal’s role thus remains unchanged: Article 1105 requires it to determine,
based on all the relevant facts and circumstances, whether the United States and the State of
California treated Methanex and its investments fairly and equitably, accorded it full protection
and security, and observed all other relevant investment-related treaty obligations that protected
Methanex. If they did not, then the United States is liable.
The Vienna Convention on the Law of Treaties requires that NAFTA be interpreted in
good faith in accordance with the ordinary meaning to be given to its terms in their context and
in the light of its object and purpose. Vienna Convention on the Law of Treaties, U.N. Doc.
A/CONF.39/27 (May 23, 1969), art. 31(1). The NAFTA Tribunal in The Loewen Group Inc., et
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al. v. United States (Juris. Award, Jan. 5, 2001), Case No. ARB(AF)/98/3 (2001) (found in
Claimant Methanex Corporation’s Appendix of Authorities for its Counter-Memorial on
Jurisdiction, Tab 34) has further ruled that NAFTA should be given a “liberal . . . interpretation”
in order to effect the treaty’s purpose of protecting investors and investments. Id. ¶ 53
(discussing the NAFTA term “measures”).
Mexico has in the past agreed that the phrase “fair and equitable treatment” is to be given
its ordinary meaning, and that Article 1105 therefore incorporates ordinary requirements of
fairness and equity. See, e.g., Azinian v. Mexico, Mex. Counter-Mem. ¶¶ 248-49. Before the
Azinian NAFTA Tribunal, Mexico — like Methanex in this matter — urged that “[t]he ordinary
meaning of the word ‘fair’ is ‘just, unbiased, equitable; in accordance with the rules’ and that the
ordinary meaning of the word ‘equitable’ is ‘fair and just.’”2 Id. ¶ 250. Mexico made the same
argument in Metalclad v. Mexico (Metalclad, Counter-Mem. ¶¶ 834-36), and the Metalclad
Tribunal agreed. See Metalclad (Award of Aug. 30, 2000) ¶ 101 (holding “that Metalclad was
not treated fairly or equitably under the NAFTA and succeeds on its claim under Article 1105”).
The United States cannot credibly argue, as it did at the recent jurisdictional hearing in
this case, that the concept of “fair and equitable” treatment is too “unknown” or “subjective” to
be given its ordinary meaning, or that it requires any post hoc “interpretation.” (Tr. at 173:10; id.
at 248:4-10.) The “fair and equitable” standard is, as discussed below, an intrinsic part of
international law and, indeed, United States law. See, e.g., U.S. v. Sears, Roebuck and Co., 778
F.2d 810, 816-17 (D.C. Cir. 1985) (Ginsburg, J.) (finding promise modifying contract with U.S.
government concerning antidumping duties to be “fair and equitable;” rejecting other U.S.
government argument as “hardly rational”); Restatement (Second) of Contracts § 89 (1981)
(same); 5 U.S.C. § 2301 (2001) (“All employees and applicants for employment should receive
fair and equitable treatment”); 7 U.S.C. § 2279a (2001) (“Fair and equitable treatment of
2 Dictionaries define “fair” as “[f]ree from bias, fraud, or injustice; equitable, legitimate,” ↩
and they define “equitable” as “[c]haracterized by equity or fairness . . . . That is in accordance
with equity; fair, just, reasonable.” V The Oxford English Dictionary, 67, 357 (2d ed. 1989).
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socially disadvantaged producers”); 19 U.S.C. § 2411 (2001) (U.S. Trade Representative to take
action if foreign countries deny U.S. entities “fair and equitable” opportunities). While the fair
and equitable standard may not be reducible to a single formulation applicable to every set of
circumstances, the standard is routinely applied by international and U.S. judges in a variety of
different contexts. There is no reason why this Tribunal cannot apply the same standard to the
California measures.
Furthermore, “fair and equitable treatment” is hardly the only legal concept that defies
simplistic characterization. “Due process,” “duress” and “negligence” are only three examples
of the multitude of legal rules that rely on evolving notions of fairness, balancing of equities, and
generally accepted standards of reasonableness. The fact that such standards are dependent upon
the facts of each particular set of circumstances does not make them “unknown” or overly
“subjective,” does not render such rules any less binding, and does not mean they should be
given anything other than their ordinary meaning.
Indeed, the FTC statement does not attempt in any way to alter this international law
requirement that the Tribunal give “fair and equitable treatment” and “full protection and
security” their ordinary meaning. Nor does the “interpretation” purport to change these ordinary
meanings, but rather shows that those guarantees are part of customary international law, as is
also discussed below. Thus, applying the ordinary meaning of Article 1105, California was
required to accord Methanex’s investments “fair and equitable treatment” and “full protection
and security.” (See also Second Jennings Op. at 3-4.)
Similarly, the Tribunal must give the Article 1105 term “international law” its ordinary
meaning. The phrase “international law” normally includes both customary and conventional
(i.e., treaty) law. Indeed, according to the International Court of Justice, treaty obligations are
the primary source of “international law.” See Stat. of I.C.J., art. 38(1)(a) (placing “international
conventions, whether general or particular” at the top of a list of sources of international law).
Accordingly, the NAFTA text on its face requires that NAFTA States accord to NAFTA
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investments the protections of both customary and conventional international law, i.e.,
independent treaty obligations that are binding on the NAFTA parties.
In fact, the word “customary” was actually deleted from one of the negotiating texts of
NAFTA. Mr. Guillermo Aguilar Alvarez, one of the principal Chapter 11 negotiators for
Mexico, recalls that one of the proposed versions of what became Article 1105 or its equivalent
used the phrase “customary international law.” (The United States almost certainly has a copy of
this text; however, it has chosen to withhold it from this Tribunal). When Mexico resisted the
use of the term “customary,” the United States negotiators pointed out that deleting the word
would expand the coverage of Article 1105 by bringing in other legal obligations, including
independent treaty obligations between or among the NAFTA Parties. Mexico had no objection
to incorporating such obligations into Article 1105, and the three countries eventually agreed to
the present text of NAFTA Article 1105. Mr. Aguilar Alvarez has publicly taken this position
concerning the scope of Article 1105 (see Exhibit 2) and will provide a formal statement to the
Tribunal if requested.3
Accordingly, applicable rules of treaty interpretation require this Tribunal to give the
phrases “fair and equitable” and “international law” their ordinary meaning. To the extent that
the FTC “interpretation” is inconsistent with these meanings, it is irrelevant and ineffective.
Not only the plain text of NAFTA, but even the actual language of the FTC
“interpretation” supports Claimant’s position with regard to Article 1105. The relevant text of
Article 1105 states:
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.
In pertinent part, the FTC “interpretation” states:
[Page 7]
Id., ¶¶ B(1-3).
In adopting this “interpretation,” the FTC did not state that investments are no longer
entitled to fair and equitable treatment and full protection and security. It also did not state that
independent treaty violations can never constitute a violation of Article 1105. The FTC
interpretation avoids such straightforward language, almost certainly because it recognized that a
clear statement of such an intent would always be seen as an improper amendment of Article
1105. Instead, the FTC used a linguistic formulation that, if carefully parsed, recognizes that the
protections of “fair and equitable treatment” and “full protection and security” are part of
customary international law. Likewise, the formulation does not preclude a finding that a
violation of an independent treaty obligation may also, in appropriate circumstances, constitute
an Article 1105 violation. In other words, the FTC interpretation’s actual language is consistent
with Claimant’s position in this case.
Paragraph 1 of the FTC “interpretation” identifies Article 1105(1) — which expressly
includes the terms “fair and equitable treatment” and “full protection and security” — as the
“customary international law minimum standard of treatment of aliens.” Similarly, Professor
3 Mr. Aguilar Alvarez has been retained as one of Methanex’s experts in this matter. ↩
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Greenwood, a U.S. expert in the Loewen case, has agreed that the requirements of “fair and
equitable treatment” and “full protection and security” are part of customary international law.
See Loewen, Second Greenwood Op. at 39, submitted as an attachment to the U.S. Rejoinder of
August 27, 2001 (referring to “the requirements of ‘fair and equitable treatment’ and ‘full
protection and security’” as “part of the customary international law on the treatment of aliens”)
(relevant portions attached as Exhibit 3). Both statements thus acknowledge the prominent role
these standards play in customary international law.
At the jurisdictional hearing, the United States admitted that “the international minimum
standard is not a standard frozen in the 1920s. It is an evolving standard. It is one that, like other
rules of international law, evolves through state practice.” (Tr. at 514:12-15.) This is as it
should be: “Customary international law,” according to the Restatement (Third) of Foreign
Relations Law § 102(2) (1986), “results from a general and consistent practice of states followed
by them from a sense of legal obligation.”
The practice necessary to create customary law may be of
comparatively short duration, but under Subsection (2) it must be
“general and consistent.” A practice can be general even if it is not
universally followed; there is no precise formula to indicate how
widespread a practice must be, but it should reflect wide
acceptance among the states particularly involved in the relevant
activity.
Id., cmt. b (emphasis added).4
Treaty provisions are the most powerful evidence of the sort of State practice that evolves
into customary international law. See id., cmt. i (“International agreements constitute practice of
states and as such can contribute to the growth of customary law . . .”); see also I. Brownlie,
Principles of Public International Law 12 (5th ed. 1998) (noting that where treaties reflect an
“explicit acceptance” of a rule by a large number of States, they possess a “strong law-creating
4 See also id., cmt. e (“The practice of states in a regional or other special grouping may ↩
create ‘regional,’ ‘special,’ or ‘particular’ customary law for those states inter se.”).
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effect at least as great as the general practice considered sufficient to support a customary rule.”);
Vienna Convention, art. 38 (recognizing that “a rule set forth in a treaty [may] becom[e] binding
upon a third State as a customary rule of international law, recognized as such”). Provisions
such as those found in the bilateral investment treaties may become part of customary
international law when “there is a wide network of similar bilateral arrangements.” Restatement,
supra, § 101, cmt. d; see id. § 102, cmt. i (“[a] wide network of similar bilateral arrangements on
a subject may constitute practice and also result in customary law.”). As former U.S. State
Department Legal Advisor Davis R. Robinson has stated:
The emphasis in the establishment of new customary law should be
on actual state practice . . . . States have shown their real practice
by establishing a network of international treaties. . . . Of more
recent significance is the emergence of a new type of treaty, the
bilateral investment treaty (BIT). . . . They [the BITs] reflect
actual state practice . . . .
D. Robinson, Expropriation in the Restatement (Revised), 78 Am. J. Int’l L. 176, 177-78 (1984).5
Similarly, provisions of “multilateral agreements may come to be [customary international] law”
where they are “widely-accepted” and “not rejected by a significant number of important states.”
Restatement, supra, § 102, cmt i.
The “fair and equitable treatment” and “full protection and security” standards are now so
commonly used in bilateral and multilateral investment treaties that they have become part of the
customary international law protecting aliens and their investments. Approximately 1,800
bilateral investment treaties are now in place, covering some 170 countries. See A. Parra,
Applicable Substantive Law in ICSID Arbitrations Initiated Under Investment Treaties, ICSID
News, Vol. 17, No. 2 (Fall 2000) found at http://www.worldbank.org/icsid/news/n-17-2-5.htm
5 See also F.A. Mann, British Treaties for the Promotion and Protection of Investments, ↩
52 British Y.B. Int’l Law [1981] 241, 249 (1982) (“The importance of the [BITs and their
predecessor Friendship, Commerce and Navigation (“FCN”) treaties] lies in the contribution they
make to the development of customary international law, in their being a source of law. . . .
[T]hese treaties establish and accept and thus enlarge the force of traditional conceptions.”).
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(visited Sept. 14, 2001). “Nearly all recent BITs require that investments and investors covered
under the treaty receive ‘fair and equitable treatment. . . .”6 R. Dolzer & M. Stevens, Bilateral
Investment Treaties 58 (1995) (emphasis added). Similarly, numerous multilateral treaties in
North America, South America, Africa, Asia, and Europe have also adopted the “fair and
equitable treatment” requirement. These multilateral treaties include NAFTA, the Fourth ACP-
EEC Convention (Lomé IV),7 the ASEAN Treaty,8 the Colonia Protocol of MERCOSUR (the
Southern Common Market) (as well as the Investment Protocol applicable to non-MERCOSUR
States),9 COMESA (the Common Market for Eastern and Southern Africa),10 and the Energy
Charter Treaty among European States.11 Through this blanket of bilateral and multilateral
investment treaties, the “fair and equitable treatment” requirement has been adopted by
6 See also M. Khalil, Treatment of Foreign Investment in Bilateral Investment Treaties, ↩
Table C, 233, 237, in I. Shihata, Legal Treatment of Foreign Investments, “The World Bank
Guidelines” (1993) (92% of all BITs contained a “fair and equitable treatment” provision).
7 ACP-EEC Convention (Lome IV), Article 258(b) (1989) (requiring “fair and equitable ↩
treatment” be accorded to investors), found in 29 International Legal Materials 809, 864 (1990).
8 Agreement Among the Governments of Brunei Darussalam, the Republic of Indonesia, ↩
Malaysia, the Republic of the Philippines, the Republic of Singapore and the Kingdom of
Thailand for the Promotion and Protection of Investments (the ASEAN Treaty), Articles 3(2) and
4(1) & (2) (“General Obligations” and “Treatment”) (1987) (requiring “fair and equitable
treatment” and “full protection and security”), found in P. Davidson, Trading Arrangements in
the Pacific Rim: ASEAN and APEC, Booklet I.B.12.a, at 3-4 (1996).
9 Colonia Protocol on Reciprocal Promotion and Protection of Investments within ↩
MERCOSUR, Article 3(1) (1994) (requiring “en todo momento un tratamiento justo y
equitativo”) found in UNCTAD, International Investment Instruments: A Compendium (1996),
vol. II, 513, 515, and Protocol on Promotion and Protection of Investments coming from States
not parties to MERCOSUR (1994) (same) found in id. at 527, 530.
10 Treaty Establishing the Common Market for Eastern and Southern Africa (COMESA), ↩
Article 159(1)(a) (1993) (requiring “fair and equitable treatment” for investors), found in 33
International Legal Materials 1067, 1107(1994).
11 Energy Charter Treaty among European States, Article 10(1) (requiring “fair and ↩
equitable treatment” and “most constant protection and security”), found in International
Investment Instruments, supra, vol. II, 540, 555.
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approximately 160 nations and many of their territories, including virtually every major trading
and investing state on earth. (See Map of States Which are Signatories to a Bilateral or
Multilateral Treaty Which Includes a “Fair and Equitable” Provision, attached as Exhibit 4.)
The “full protection and security” requirement has also been given widespread
acceptance: “[T]he majority of BITs subscribe to common standards” including “fair and
equitable treatment” and “full protection and security.” Dolzer & Stevens, supra, at 58
(emphasis added).
In sum, not only are the “fair and equitable treatment” and “full protection and security”
standards part of both NAFTA and conventional international law, the near-universal adoption of
these investment protections shows that they are now principles of customary international law
as well. The FTC’s “interpretation” and the U.S. expert Professor Greenwood’s Opinion are
merely the latest recognitions of this development.
Even if “fair and equitable treatment” and “full protection and security” had not become,
through their nearly universal adoption, independent requirements of customary international
law, it is nonetheless indisputable that customary international law has always incorporated
concepts of equity, fairness, due process, and appropriate protection. The concepts of fairness
and equity lie at the heart of international law and legal systems around the world, and are
applied on a daily basis by judges and arbitrators in both common-law and civil-law systems.
See, e.g., North Sea Continental Shelf, 1969 I.C.J. 3, 48; Case Concerning the Barcelona
Traction, Light and Power Co. (Belg. v. Spain), Preliminary Objections, 1964 I.C.J. 6, 62-63 &
32 (1964) (op. of Koo, J.). Judge Hudson, in his separate concurring opinion in Diversion of
Water from the Meuse, concluded that “principles of equity have long been considered to
constitute a part of international law, and as such they have often been applied by international
tribunals.” Diversion of Water from the Meuse (Neth. v. Belg.) 1937 P.C.I.J. (ser. A/B) No. 70,
at 76 (June 28). And Judge Sir Gerald Fitzmaurice concluded in his separate opinion in
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Barcelona Traction that “[d]eciding a case on the basis of the rules of equity, that are part of the
general system of law applicable, is something quite different from giving a decision ex aequo et
bono.” Barcelona Traction, 1970 I.C.J. 3, 85 (Feb. 5).
Similarly, “it is generally accepted that international law requires a minimum of fairness
in the treatment of foreigners and foreign investment.” Dolzer & Stevens, supra, at 58. For
example, U.S. expert Professor Greenwood recently accepted that “customary international law”
requires States “to maintain and make available to aliens, a fair and effective system of justice.”
Loewen, Second Greenwood Op. at 35 (emphasis added).
NAFTA tribunals, in the process of defining the precise content of Article 1105, have
likewise noted the long-standing place held by the principles of fairness and equity in customary
international law. The S.D. Myers Tribunal concluded that the “fair and equitable” standard
“imports into the NAFTA the international law requirements of due process, economic rights,
obligations of good faith and natural justice.” S.D. Myers v. Canada (Partial Award Nov. 13,
2000), ¶ 134; see also Daniel M. Price, Investment, Sovereignty and Justice: Arbitration Under
NAFTA Chapter Eleven, 23 Hastings Int’l & Comp. L. Rev. 421, 423 (2000) (fair and equitable
treatment is designed “to ensure a certain baseline level of protection that would require
governments to act fairly, in good faith, and transparently in their relations with foreign
investors.”) (transcript of speech); id. at 424 (“The fair and equitable treatment standard is
closely aligned with, and overlaps, certain fundamental principles of international law —
including transparency, procedural fairness, and the duty of good faith — from which other,
more specific rules emanate.”).12
The S.D. Myers Tribunal recognized that the fair and equitable standard incorporates the
anti-discrimination principle of customary international law. S.D. Myers, supra, ¶ 266. Mexico
12 Like Mr. Aguilar Alvarez on behalf of Mexico, supra, Mr. Price was one of the U.S. ↩
officials who negotiated Chapter 11 of NAFTA, which gives his understanding of Chapter 11’s
provisions particular relevancy.
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has, in its past NAFTA submissions, agreed that Article 1105 includes the principle of non-
discrimination:
The concept of fair and equitable treatment is not precisely
defined. It offers a general point of departure in formulating an
argument that the foreign investor has not been well treated by
reason of discriminatory or other unfair measures being taken
against its interests.
Metalclad, Mex. Outline of Argument ¶ 526 (quoting P. Muchlinski, Multinational Enterprises
and the Law ¶ 2.3.1 (1995)); see also Metalclad, Mex. Counter-Mem. ¶ 841. Canada has
accepted this concept as well, at least implicitly: In S.D. Myers, Canada argued that because the
challenged measures were not discriminatory, they were perforce fair and equitable. S.D. Myers,
Statement of Defense ¶ 47. The “fair and equitable treatment” requirement “connotes the
principle of non-discrimination and proportionality in the treatment of foreign investors.”
Muchlinski, supra, ¶ 2.3.1. Moreover, the “general principles of law recognized by civilized
nations” are an important source of “international law,” Stat. of I.C.J., art. 38(1)(c), and every
leading nation has prohibited invidious discrimination against foreigners. Indeed, “[t]he rule
against discrimination . . . involves a principle which does not seem to have been challenged in
any country or at any time.” F.A. Mann, Studies in International Law 476 (1973).
In fact, the United States Supreme Court has repeatedly and expressly confirmed that
equitable principles such as estoppel, clean hands, and fair dealing have long been part of
international law. See First Nat’l City Bank v. Banco Para El Comercio Exterior de Cuba, 462
U.S. 611, 613, 622 (1983). In that case, the U.S. Supreme Court, “[a]pplying principles of equity
common to international law and federal common law,” and taking into account considerations
of “‘fair dealing’” and “the rights of third parties under international law,” refused to recognize
the corporate separateness of a Cuban trading company because the result would have been
unjust. Id. at 628-34. Similarly, in National City Bank of New York v. Republic of China, 348
U.S. 356 (1955), the U.S. Supreme Court concluded that sovereign immunity, a principle of
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customary international law,13 was “not absolute, and that considerations of fair play must be
taken into account in its application.” Id. at 364. Accordingly, it held that “it seems only fair to
subject a foreign sovereign” to set-off liability. Id. at 363.
There is thus no question that customary international law has long included the
principles of fairness, equity, and due process, which are similar or in many respects identical to
the Article 1105 requirements of “fair and equitable treatment” and “full protection and
security.”
Furthermore, the FTC “interpretation” provides little clarification regarding when
independent treaty violations may also constitute Article 1105 violations. The “interpretation”
simply states that a violation of another provision of NAFTA or of a provision of another treaty
does not “establish” a violation of Article 1105. It in no way suggests, however, that Party
conduct violating another provision of NAFTA or another treaty cannot also constitute treatment
that violates Article 1105. (See Second Jennings Op. at 4.) As explained above, it was the
original intent of the Parties negotiating NAFTA that Article 1105 would include the protections
of both customary and conventional (i.e., treaty) international law. (See Exhibit 2.) Thus, the
“interpretation,” taken on its own terms, does not preclude Article 1105 claims based on
violations of other treaty obligations.
It bears noting that the FTC did not adopt any of the relatively extreme litigating
positions taken by the United States in this case. The United States has argued that the
international “minimum standard” does not forbid misconduct that merely violates the allegedly
“subjective” standards of fairness and equity. (Tr. at 248:4-10 (Mr. Legum on behalf of the
United States asserting that “[a]llowing three individuals to make such decisions based only on
13 “The immunity of a state from the jurisdiction of the courts of another state is an ↩
undisputed principle of customary international law.” Restatement, supra, Ch. 5, “Immunity of
States from Jurisdiction,” Introductory Note.
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their subjective and intuitive sense of what is fair or equitable would, we submit, be an
extraordinary relinquishment of state sovereignty. It is one that cannot lightly be presumed and
cannot be inferred from the text of 1105(1).”).) The United States has argued that Article 1105
— in the context of this case — does nothing more than prohibit the same uncompensated
expropriations independently barred under Article 1110. (See U.S. Mem. at 46.) And the United
States has argued that Article 1105 requires none of the following: good faith,14 non-
discrimination,15 and transparency.16 Compare Price, supra, at 423, 424 (one of Chapter 11’s
negotiators asserting that “[t]he fair and equitable treatment standard is closely aligned with, and
overlaps” the customary international law principles of “transparency, procedural fairness, and
the duty of good faith”). The United States has asserted that violations of independent treaty
obligations, such as the World Trade Organization treaties, cannot constitute violations of Article
1105. (U.S. Reply Mem. at 32.).
14 See Tr. at 251: 2-8 (Mr. Legum on behalf of the United States: “There is no obligation ↩
of good faith that applies to the treatment of property of aliens in international law that could
serve as a foundation for a claim under Article 1105(1).”); see also U.S. Reply Mem. of April 12,
2001, at 30 (“no customary international law obligation of ‘good faith’ or ‘reasonableness’
applies to the subject California measures”); U.S. Rejoinder Mem. of June 27, 2001, at 25-28.
15 See Tr. at 251: 13-14 (Mr. Legum on behalf of the United States, asserting with regard ↩
to the non-discrimination principle of customary international law “that it does not make sense to
read such a prohibition in Article 1105(1).”); see U.S. Reply Mem. at 29 (“no general customary
international law prohibition of nationality-based discrimination is incorporated into Article
1105(1)”); id. at 33-35; U.S. Rejoinder Mem. at 28-29.
16 See Tr. at 256:15 to 257:1 (Mr. Legum on behalf of the United States, asserting that ↩
because the principle of transparency “is based exclusively on provisions elsewhere in the
NAFTA and in the general agreement on tariffs and trade,” which are not “specifically identified
in Articles 1116(1) and 1117(1),” it is “not incorporated into Article 1105(1)”); see U.S.
Rejoinder Mem. at 31 (“Article 1105(1) does not impose transparency or other procedural
requirements”); id. at 33 (“there is no general requirement of ‘transparency’ in customary
international law. . . . customary international law imposes no constraints on the process by
which executive and legislative measures of general applicability . . . are adopted”).
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The United States has also taken the position in this case — and has asserted the
agreement of Canada and Mexico on the point — that the phrase “relate to” in Article 1101, used
to define the scope of Chapter 11, requires a “legally significant connection between the
complained of measures and the specific investor who is the claimant, or its investment.” (U.S.
Reply Mem. at 44; see also U.S. Rejoinder Mem. at 45 (“the requirement that the measures at
issue ‘relate to’ the claimant investor or its investments cannot be satisfied in the absence of a
legally significant connection”); id. at 46 (“all three NAFTA Parties have observed [that] the
term ‘relating to’ in Article 1101(1) may not properly be interpreted to mean merely
‘affecting’”); Tr. at 315-18; id. at 528-29; U.S. Post-Hearing Subm. of 7/20/01 at 2-3.)
Prior to the FTC’s July 31, 2001 “interpretation,” all of these extreme U.S. litigating
positions were already on record, but the FTC adopted none of them. The FTC “interpretation”
is completely silent on the alleged “agreement” by the Parties that Article 1101’s “relate to”
language means “legally significant connection.” It does not adopt the restrictive understanding
of the international minimum standard that has been urged by the United States; for example, it
nowhere suggests that Article 1105 protects only against uncompensated expropriations, or that
this article allows investments to be treated “unfairly.” Rather, it simply asserts that NAFTA’s
“fair and equitable treatment” and “full protection and security” requirements are part of that
customary international law minimum standard. And the “interpretation” merely states that a
breach of an independent treaty obligation does not “establish,” per se, an Article 1105 violation.
The only fair inference, therefore, is that the members of the FTC could not or would not
accede to the United States’ litigating positions with respect to the meaning of “relate to” in
Article 110117 or the substantive content of Article 1105. This failure to support the United
States seriously undermines its positions.
17 Methanex submits that it would be extremely appropriate for the Tribunal to draw such ↩
an inference, despite the existence of the superficial “closing provision” of the FTC’s
interpretation, which states that “[t]he adoption by the Free Trade Commission of this or any
[Page 17]
As noted above, while the meaning of the FTC “interpretation” is not entirely clear, it
appears that it was intended to change NAFTA, not merely to “clarify” or “interpret” it. Thus,
the United States has strongly suggested in its most recent (August 27, 2001) pleading in the
Loewen case that the FTC interpretation effectively changed NAFTA by eliminating the overly
“subjective and intuitive”18 requirements of fair and equitable treatment and full protection and
security. See, e.g., Loewen, U.S. Rejoinder at 144-47; Loewen, Second Greenwood Op. at 40.
Moreover, the U.S. Trade Representative (and member of the FTC), Robert Zoellick, has
essentially claimed that the FTC’s July 31, 2001 action changed the scope of NAFTA.
According to press accounts, Mr. Zoellick has stated that the FTC’s action “shows” that the
Parties, when it comes to the terms of NAFTA, are “‘not frozen on these issues,’” and that “the
action shows that ‘NAFTA [is] an active, growing, evolving structure.’” E. Alden, International
Economy — NAFTA deal changed to curb companies, Financial Times, Aug. 1, 2001. As the
title of the Financial Times story suggests, press accounts have similarly construed that portion
of the FTC “interpretation” dealing with Article 1105 as changing, not merely interpreting, the
provisions of NAFTA. Furthermore, the press accounts suggest that the “interpretation” was
aimed at this proceeding, and was intended to “rein in” this Tribunal:
Methanex, the world’s largest producer of methanol, wants almost
Dollars 1bn from the US government.
In a tale of political intrigue and malfeasance, the Canadian
company claims that Gray Davis, governor of California, banned
the use of a methanol-based petrol additive in 1999 as a favour to
future interpretation shall not be construed as indicating an absence of agreement among the
NAFTA Parties about other matters of interpretation of the Agreement.”
18 Loewen, U.S. Rejoinder at 144, 145 (relevant portions attached as Exhibit 5). The ↩
United States has also referred to these protections as “subjective and intuitive” in this case. (Tr.
at 248:4-10.)
[Page 18]
Archer Daniels Midland, the agribusiness giant that produces
ethanol, a rival additive.The case is the most explosive one to appear before the
controversial tribunals set up under the North American Free Trade
Agreement, before which companies can sue any of the three Nafta
governments directly if they believe their investments have been
wrongfully expropriated.The procedure, known as Chapter 11, was seen as a model of
investor protection when it was negotiated, but has become the
most contentious element of the agreement. Trade critics argue
that Chapter 11 has given corporations a powerful tool to override
national regulations, threatening the sovereign right of
governments to protect consumers and the environment.This week, however, the three governments decided to change the
rules. Trade ministers from the U.S., Canada and Mexico agreed
to rein in the tribunals by issuing a binding interpretation that will
sharply narrow their ability to decide against the governments.In particular, the ministers have directed the panels to interpret
narrowly clauses requiring “fair and equitable” treatment and “full
protection and security.”
International Economy — Pressure eased on NAFTA governments over investor protection,
Financial Times, Aug. 2, 2001 (emphasis added).
It is clear that some parts of the United States government are unhappy with those
NAFTA protections, and that the U.S. is thus considering making future investment treaties
much narrower. For example, the United States is considering proposals to delete the fair and
equitable and full protection and security protections from the text of the Free Trade Agreement
of the Americas (“FTAA”) — a treaty now being negotiated that would extend much of NAFTA
to the American Southern Hemisphere. (See Letter of 8/30/01 to U.S. Trade Representative
Robert B. Zoellick at 2, attached as Exhibit 6.) These proposed changes to the FTAA suggest
that the real goal of the United States in orchestrating the FTC “interpretation” of Article 1105
was to eliminate retroactively the protections of “fair and equitable treatment” and “full
[Page 19]
protection and security” expressly provided by NAFTA. However, the proposed FTAA changes
also confirm that the only legally valid method of eliminating those NAFTA protections is
through a formal amendment that actually deletes the pertinent treaty language from NAFTA.
If the FTC “interpretation” is a disguised attempt to eliminate the express protections of
Article 1105, including the protections of independent treaty obligations, then it is quite clearly
an amendment of NAFTA, not a mere interpretation. A critical distinction between
interpretation and amendment is that “interpretation” simply pronounces the meaning of a text as
it always was, while “amendment” changes the meaning of a treaty’s terms. See [1964] II Y.B.
Int’l Law Comm. 5, 55 (where subsequent practice in respect of a treaty “br[ings] about a change
or development in the meaning of the treaty through a revision of its terms,” that change may
only be recognized “as an agreed revision but not as an interpretation of its original terms”)
(emphasis in original). Deleting NAFTA’s express investment protections would be a drastic
revision, and a substantial amendment to NAFTA.
Yet the FTC has no power of amendment or modification. See NAFTA Article 2001(2)
& (3). It has only the power to “interpret” the provisions of NAFTA. See NAFTA Articles
1131(2); 2001(2)(c). In contrast, Article 2202(2), which deals with amendments, provides that
“[w]hen so agreed, and approved in accordance with the applicable legal procedures of each
Party, a modification or addition shall constitute an integral part of this Agreement.”
This political process for changing NAFTA ensures that the rights of all affected parties
will be respected. NAFTA, like many investment treaties, creates explicit protections for
investors and their investments and allows them to control the prosecution of investment disputes
arising from a Party’s alleged breach of Chapter 11 guarantees. These rights can only be
curtailed by the full exercise of the amendment process, involving the constitutional processes of
all three countries, and not through a determination by the executive branches of the U.S.,
Mexico, and Canada that they wish to alter the scope of the investment protections in the treaty.
This Tribunal should protect the distinction between amendment and interpretation so that
[Page 20]
private parties that are not represented in the FTC discussions, and that are therefore unable to
exercise democratic input into an amending process, are not deprived of vested rights.
Finally, if the FTC’s “interpretation” is understood as an attempt to change the scope of
Article 1105 retroactively, serious questions would arise as to whether the NAFTA Parties have
interpreted Article 1105 “in good faith” by changing its originally-intended meaning in the midst
of litigation. See Vienna Convention art. 31(1). Indeed, such an action should be viewed as an
attempt by a party to an arbitration to “rein in” the Tribunal, and to impose upon it a change to
the principal disputed terms to the benefit of that party. Such an action would usurp the function
and authority of the Tribunal in the midst of an arbitral process that was designed to protect the
rights of investors — rights enshrined in a treaty and accepted by the Parties. Coming at this late
stage of the proceedings, retroactive amendment by fiat would be a breach of the most
elementary notions of due process, and would be utterly incompatible with the regime of
independent, impartial arbitration that the Parties themselves created in NAFTA Chapter 11.
As Sir Robert Jennings puts it:
It would be wrong to discuss these three-Party ‘interpretations’ of
what have become key words of this arbitration, without protesting
the impropriety of the three governments making such an
intervention well into the process of arbitration, not only after the
benefit of seeing the written pleadings of the parties but also
virtually prompted by them. In the present case, without even
asking for leave, one of the actual Parties to the arbitration has
quite evidently organized a démarch intended to apply pressure on
the tribunal to find in a certain direction by amending the treaty to
curtail investor protections. This is surely against the most
elementary rules of the due process of justice. The phrase due
process is itself of United States origin and has become
international (see NAFTA Article 1110) because the United States
has for so long been regarded as the guardian of due process. It is
very sad to see this present betrayal of principles of which the
United States has long been the revered author and practitioner.
(Second Jennings Op. at 4-5.)
[Page 21]
Even if the FTC had the power to amend NAFTA and restrict its protections (which it of
course does not), and even if the FTC statement actually has that effect (which it does not
actually purport to do), Methanex would still be entitled to the free-standing protections of “fair
and equitable treatment” and “full protection and security” through the application of NAFTA’s
most-favored-nation provision, Article 1103. That Article states:
1. Each Party shall accord to investors of another Party treatment
no less favorable than that it accords, in like circumstances, to
investors of any other Party or of a non-Party with respect to the
establishment, acquisition, expansion, management, conduct,
operation, and sale or other disposition of investments.2. Each Party shall accord to investments of investors of another
Party treatment no less favorable than that it accords, in like
circumstances, to investments of investors of any other Party or of
a non-Party with respect to the establishment, acquisition,
expansion, management, conduct, operation, and sale or other
disposition of investments.
NAFTA art. 1103(1)-(2) (emphasis added). Under the explicit terms of Article 1103, Methanex
is entitled to treatment no less favorable than that the United States accords to any other foreign
investor, NAFTA or otherwise.
Several bilateral investment treaties to which the United States is a party guarantee other
countries’ investments “full protection and security” and “fair and equitable treatment,” without
the limits that the United States insists the FTC “interpretation” imposes. For example, the
bilateral investment treaty between the United States and Argentina provides:
Investment 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.
[Page 22]
Treaty with Argentina Concerning the Reciprocal Encouragement and Protection of Investment,
Nov. 14, 1991, Art. II (2)(a). Similarly, the bilateral investment treaty between the United States
and Tunisia provides that:
Investment shall at all times be accorded fair and equitable
treatment and shall enjoy full protection and security and shall in
no case be accorded treatment less than that required by
international law.
Treaty with Tunisia Concerning the Reciprocal Encouragement and Protection of Investment,
May 15, 1990, Art. II(3), entered into force, Feb. 7, 1993.19 Thus, to the extent that the investors
of, e.g., Argentina and Tunisia are entitled to “fair and equitable treatment” and “full protection
and security” under treaty provisions that by their terms provide protection beyond the
customary international minimum standard, Canadian (and Mexican) investors are entitled to the
same treatment under NAFTA’s most-favored-nation provision.
Accordingly, taking the FTC’s “interpretation” of Article 1105 at face value, this
Tribunal’s role is unchanged. Article 1105 expressly requires “fair and equitable treatment” and
“full protection and security,” and all the protections of both conventional and customary
international law. The FTC simply lacks the power to reduce or narrow these protections.
Therefore, this Tribunal — now, as before — must determine, based on all the facts and
19 Nowhere in the Letters of Transmittal or Letters of Submittal for these two bilateral ↩
investment treaties did the United States identify the “fair and equitable treatment” or “full
protection and security” standards as limited to customary international law, or as incorporating
only the international minimum standard. In fact, the United States construed these provisions
just as Methanex does:
The treaty is fully consistent with U.S. policy toward international
investment. A specific tenet, reflected in this treaty, is that U.S.
investment abroad and foreign investment in the United States
should receive fair, equitable, and nondiscriminatory treatment.
Treaty with Argentina, supra, Letter of Transmittal from President George H.W. Bush to Senate
of the United States, Jan. 19, 1993.
[Page 23]
circumstances, whether the United States and California accorded Claimant’s investments fair
and equitable treatment and full protection and security, and whether California’s actions
otherwise violated international law, giving those terms their ordinary meaning. This is the only
conceivable, good-faith understanding of the text of Article 1105 and of the FTC’s July 31, 2001
interpretation of that article.
Respectfully submitted,
/s/
Christopher F. Dugan
/s/
James A. Wilderotter
Counsel for Claimant
Methanex Corporation
Enclosures
cc: Mark Clodfelter, Esq.
Barton Legum, Esq.
Margrete Stevens, Esq.
WA:1262763v5