Part C of this chapter is divided into three sections. The first section introduces the issues surrounding the use of countermeasures in the context of investor-state arbitration. It will highlight the role played by the nature of the investors’ rights in this debate as well as survey NAFTA party submissions made prior to the sweeteners cases on this issue. The second sec- tion presents the inconsistent holdings of the sweeteners tribunals on the issue of countermea- sures and on investor’s rights. The third section analyzes why the inconsistency raises critical systemic issues and is inherent in Chapter 11. It also evaluates the role that party submissions played (or did not play) in the resolution of such issues.
1. CONTeXT AND STATe PARTIeS’ PRIOR SUBMISSIONS
The debate on countermeasures in the sweetener cases was largely resolved in reference to the nature of rights held by investors under IIAs. This question has been the object of discussions before, namely in the context of the drafting of the ILC Articles on State Responsibility for Internationally Wrongful Acts (ILC Articles).161 While the ILC Articles do not regulate the
159. See (n 139) and text attached.
160. See Cargill v Mexico (n 9) [134], [268], [275], [384], [291].
161. ILC, ‘Articles on Responsibility of States for Internationally Wrongful Acts’ in Yearbook International Law Commission, 2001, Volume II, UN Doc A/CN.4/SER.A/2001/Add.1 (Part 2) (ILC Articles).
ways non-state entities can invoke state responsibility, they contain an acknowledgment of the reality that in many treaties the ultimate beneficiaries of state obligations are individuals.162 The Articles, however, do not take a position on the question of whether the primary obliga- tions are owed to the states party to the treaty or to the individuals directly. Crawford had set up in 2002 the parameters of the debate that the tribunals would face in the trio of sweetener cases. He stated:
Taken together, the two paragraphs of Article 33 emphasize the variety of situations that may be involved, and the subtlety of possible interactions between states as legislators and actors and nonstate entities as beneficiaries and claimants. For example, a standard bilateral or regional investment treaty is an interstate agreement, to which individual investors are not privy. It is a matter of interpretation whether the primary obligations (e.g., of fair and equitable treatment) created by such a treaty are owed to qualified investors directly, or only to the other contracting state(s). As the International Court rather unobtrusively held in the La Grand case, an interstate treaty may create individual rights, whether or not they are classified as “human rights.” (…) On the other hand, one might argue that bilateral investment treaties in some sense institu- tionalize and reinforce (rather than replace) the system of diplomatic protection, and that in accordance with the Mavrommatis formula, the rights concerned are those of the state, not the investor.163
After noting that the ILC Articles do not take a position on to whom, the state or the inves- tors, the obligations are owed, Crawford explains that the procedural rights of the investors clearly exist.164 It was the former question, however, on the substantive nature of rights that became the lynchpin of Mexico’s use of the countermeasures defense. In a nutshell, if investors are owed substantive obligations directly (in other words, if they have direct rights under the treaty), countermeasures cannot be used against them.
Notably, neither Canada nor the United States made Article 1128 submissions on counter- measures and their application to Chapter 11. However, both had made their positions known on the nature of rights held by investors in submissions in other cases, on which Mexico relied.
The case that engendered most debate on this issue prior to the sweetener cases is Loewen v. United States.165 The debate arose in the course of the NAFTA proceedings when the Loewen Group Inc. ceased to exist as a business entity and was reorganized following approvals by bank- ruptcy courts in the United States and Canada.166 As a result, the NAFTA claim was assigned to a new Canadian corporation (apparently created for that purpose) but owned and controlled by a U.S. corporation. The question arose as to whether the “continuous nationality” of claims rule under customary international law applied to Chapter 11 and, if so, as of what date it should be
162. James Crawford, ‘The ILC’s articles on responsibility of states for internationally wrongful acts: a retro- spect’ (2002) 96 American Journal of International Law 874, 887–888. See art 33 of the ILC Articles, which provides that Part II (Content of the International Responsibility of a State) ‘is without prejudice to any right, arising from the international responsibility of a State, which may accrue directly to any person or entity other than the State.’ ILC Articles ibid.
163. Crawford ibid 887 (footnotes omitted). It should be noted that Professor Crawford acted on behalf of Mexico in the context of the sweeteners cases.
164. ibid.
165. The Loewen Group, Inc. and Raymond L. Loewen v United States (Award, 26 June 2003) ICSID Case No ARB(AF)/98/3. See Gourgourinis (n 23) 152.
166. ibid [220].
applied.167 During the debate on the effect of the assignment, claimants argued that Chapter 11 creates private, substantive rights in the nature of a “chose in action.”168 These rights were sepa- rate and distinct from the rights of the parties to NAFTA.169 As a chose in action, the claim is personal property owned by Loewen and not by any state.170 Thus, it is freely assignable.171
In support of arguments that the continuous nationality of claims rule under customary international law still applied, both the United States and Mexico argued that the investor’s right to claim under Section B of Chapter 11 did not “alter the interpretation of the Treaty’s substantive rights and obligations, which exist at the international plane between States inter se.”172 Mexico made the point that without Section B of NAFTA, the right of redress for the breach of obligations would belong to the states (under Chapter 20 [state-state dispute settlement] and at customary international law).173 In support it referred to the Nottebohm case, which in turn cited the Mavrommatis case’s oft-cited passage to the effect that “by taking up the case of one of its subjects and by resorting to diplomatic action or international judicial proceedings on its behalf, a State is in reality asserting its own rights … ”174
In its analysis, the tribunal noted that a private lawyer might “well puzzle” over the dis- appearance of a vested claim as a result of an assignment. However, it concluded that such a reaction would be “misplaced” since Chapter 11 claims have quite a different character.175 It stated: “[t] he two forms of process, and the rights which they enforce, have nothing in com- mon. There is no warrant for transferring rules derived from private law into a field of inter- national law where claimants are permitted for convenience to enforce what are in origin the rights of the Party states.”176
In other Chapter 11 cases, Canada made arguments regarding the nature of rights held by investors in line with the positions of the United States and Mexico. For example, in Methanex, Canada submitted in its Article 1128 submission that:
When interpreting the NAFTA, tribunals should recall that the NAFTA is a treaty among three Parties, namely the sovereign states of (…). The obligations undertaken by the three Parties, including those under NAFTA Chapter Eleven obligations, are owed by the Parties to one another and are subject to the dispute settlement procedures in NAFTA Chapter Twenty. They are not owed directly to individual investors. Nor do investors derive any rights from obligations owed to the Party of which they are nationals.177
167. ibid [225]–[239]. In the end, the tribunal determined that the rule applied to the date of rendering of the award and as a result, it no longer had jurisdiction to decide the claim.
168. See Loewen v United States (Response of the Loewen Group, Inc. to the Article 1128 submissions of Canada and Mexico on matters of jurisdiction and competence, 19 July 2002) [5] –[18].
169. ibid [8] –[12].
170. ibid [17].
171. ibid [17]–[18].
172. See Loewen v United States (Mexico Article 1128 submission, 2 July 2002) [28], cited in approval by the United States in its Response (Response of the United States of America to the June 27 and July 2, 2002 submis- sions of the governments of Canada and Mexico pursuant to NAFTA Article 1128), 19 July 2002, 8.
173. Loewen v United States, Mexico submission (n 172) [30].
174. Cited at ibid.
175. Loewen v United States (n 165) [231]–[233].
176. ibid [233].
177. Methanex v United States (Second Submission of Canada pursuant to NAFTA Article 1128, 30 April 2001) [9] .
The same submission was made in the Feldman case.178 Similar arguments were made by Canada in the context of set-aside requests made in the S.D. Myers and Metalclad cases.179
As noted, however, the interaction of countermeasures with Chapter 11 was never addressed by NAFTA parties. Nor is the question of interaction answered by the ILC Articles themselves.
According to Article 49, “[a] n injured State may only take countermeasures against a State which is responsible for an internationally wrongful act in order to induce that State to comply with its obligations under Part two [Content of the international Responsibility of a State].”180 The Commentary emphasizes that the effect of countermeasures in precluding wrongfulness is relative: that is, countermeasures against one state do not preclude wrongfulness against a third state which is also owed international obligations.181 It adds:
This does not mean that countermeasures may not incidentally affect the position of third States or indeed other third parties. (…) If they have no individual rights in the matter they cannot complain. The same is true if, as a consequence of suspension of a trade agreement, trade with the responsible State is affected and one or more companies lose business or even go bankrupt.
Such indirect or collateral effects cannot be entirely avoided.182
Thus, such became the terms of the enquiry. Do investors under NAFTA Chapter 11 have
“individual rights” separate or independent from those of the state? Are investors “third parties”
to the state-state relationship under the treaty? Are investors merely unfortunate bystanders that must accept the collateral effect of the customary international law doctrine because they are not owed international obligations?
2. SWeeTeNeR TRIBUNALS HOLDINgS
The three tribunals agreed that investors had rights accruing to them under NAFTA Chapter 11.
However, agreement on the nature of those rights was not to be. The ADM tribunal ruled that investors had a procedural right to take action under NAFTA but not individual substantive rights or independent rights from those of the state parties.183 The CPI tribunal ruled that the investors had substantive rights, separate and distinct from those of the state.184 The Cargill tribunal ruled that it was not fruitful to determine whether the investor’s rights were “proce- dural” or “substantive”; what matters is that investors act upon and benefit from the obliga- tions set forth in Chapter 11 for that purpose.185 As a result, the ADM tribunal found that the countermeasure defense could apply to a NAFTA Chapter 11 claim, while the CPI and Cargill
178. Feldman v Mexico (Second Submission of Canada pursuant to Article 1128, 28 June 2001) [8] .
179. See Attorney General of Canada v S.D. Myers, Memorandum of Fact and Law of the Applicant (n 117) [79]
and Mexico v Metalclad, (Outline of Argument of Intervener Attorney General of Canada, 16 February 2001) [8] .
180. ILC Articles (n 161) art 49.
181. See Commentary on art 49, 130 [4] available at <http://legal.un.org/ilc/texts/instruments/english/
commentaries/9_6_2001.pdf>.
182. ibid [5] .
183. ADM v Mexico (n 7) [168]–[173].
184. CPI v Mexico (n 8) [167].
185. Cargill v Mexico (n 9) [426].
tribunal ruled that the defense was not applicable. It is useful to review each award in order to fully grasp the extent of the disagreements and the role played by state party submissions.186
a. ADM and the “Intermediate Theory” of Investor Rights
In ADM, the majority of the tribunal held that since NAFTA Chapter 11 did not refer to counter- measures (as opposed to Chapter 20—State to State Dispute Settlement—which provides for them), the default regime under customary international law applies.187 As such, “[c] ountermeasures may constitute a valid defence against a breach of Chapter 11 insofar as the respondent State proves that the measure in question meets each of the conditions required by customary international law, as applied to the facts of the case.”188 It then set four cumulative conditions which, after analysis, it found Mexico had not met.189 The question most relevant for our purpose was the following: Did the tax impair “individual substantive rights of the Claimants”? In order to answer this question, the tribunal proceeded to a detailed analysis of the question of “independent rights.”
The majority in ADM adopted the “intermediate theory” of investor rights, wherein the investor holds procedural rights but the substantive rights belong only to the states.190 This theory sits between the traditional derivative theory of rights (according to which the investor is really stepping into the shoes of the state when it makes a claim and asserting state rights) and the direct theory of rights (according to which a separate legal relationship exists between the investor and the host state).191
The majority appeared to reject the derivative theory with an acknowledgment that inter- national law may confer direct rights on individuals (e.g., foreign investment protection, human rights or environmental protection). However, it drew a distinction between treaty rights related to investment and human rights that may share a procedural dimension but remain fundamentally different substantively: “Chapter 11 does not provide individual sub- stantive rights for investors, but rather complements the promotion and protection standards of the rules regarding the protection of aliens under customary international law.”192 Thus, it also rejected the direct rights theory.
For the tribunal, Chapter 11 provides two separate sets of obligations: the substantive obli- gations (of Section A) that remain inter-state and the procedural obligations (of Section B) that the state owes the investors (as secondary right holders). As a result, the investor can waive its procedural rights but not waive the rights under Section A.193
186. See also the comparison provided in Gourgourinis (n 23); Gonzalez (n 23); Paparinskis, ‘Investment arbitration and the law of countermeasures (n 23); Calamita (n 23); Kurtz (n 23).
187. ADM v Mexico (n 7) [120]–[122].
188. ibid [121].
189. ibid [127]–[180]. In particular, see para 128 where the tribunal acknowledged that it did not have jurisdic- tion to decide whether the United States was in breach of its international obligations under NAFTA. However, since other conditions were not met, it did not need to consider Mexico’s request for a stay of proceedings (ibid 133).
190. ibid [163].
191. ibid [161]–[163], [169].
192. ibid [171]. The comparison with human rights is relevant since ‘fundamental human rights’ are obliga- tions not affected by countermeasures (see ILC Articles (n 161) art 50(b)). However, the tribunal does not make this link explicitly.
193. ADM v Mexico (n 7) [172]–[174], [177].
Notably, to support its position, the tribunal referred to the submissions of the NAFTA parties in other cases.194 It stated: “The position of the NAFTA Parties in their intervention in other Chapter Eleven proceedings—pursuant to Article 1128 of the NAFTA—reveals indeed the Member States’ view that investors do not enjoy individual substantive rights under Chapter Eleven; and that the rights under Section A are therefore inter-state rather than direct individual rights of investors.”195 It cited the United States’ arguments in Loewen, Canada’s submissions in the Metalclad set-aside proceedings, and Canada’s submissions in Methanex.196 Mexico had also in its pleadings referred to the Loewen award, but the majority did not refer to it in its decision.197
One of the arbitrators, Arthur W. Rovine, disagreed with the majority on this point and authored a forty-two page concurring opinion on issues of independent investor rights, dip- lomatic protection, and countermeasures.198 His opinion was that NAFTA Chapter 11 inves- tor rights to remedies belong to the investor and not to the state.199 As such, they cannot be suspended or eliminated by countermeasures taken against the state of the investor. To him, it did not matter whether these rights are qualified as “direct and substantive” or “deriva- tive and procedural”—even though he believed them to be substantive.200 To him, the right to a legal remedy or the right to legal redress is a substantive right.201 The arbitrator relied on the ILC Articles and Commentaries to conclude that investors’ rights under NAFTA are “third-party rights” and not merely “third-party interests.”202
Rovine explained that “investors may be thought of as third-party beneficiary of NAFTA, and the rights and obligations the NAFTA State Parties owe to each other include the recognition and enforcement of investor rights to legal redress for breach of Chapter Eleven.”203 He also rejected Mexico’s argument that investors, under Chapter 11, are effectively in a better position than states under Article 20. To him, they were rather in a different and separate position because they hold third-party rights. The remedies of Chapter 11 are not the same as the remedies provided for states under Chapter 20. He added: “[a] nd of course NAFTA investors are third parties to Chapter Twenty Disputes between the States Parties.”204
In rejecting Mexico’s arguments, Rovine was not moved by the submissions made by the three NAFTA parties in other cases on the derivative nature of the investors’ rights. He noted that none of those submissions concerned countermeasures and that in the specific case at hand neither Canada nor the United States filed submissions under Article 1128 despite having been invited to do so by the tribunal.205
194. ibid [175]–[176].
195. ibid [176].
196. ibid.
197. ibid [167].
198. See Archer Daniels Midland Co. & Tate & Lyle Ingredients Americas, Inc. v Mexico (Concurring Opinion of Arthur W Rovine: Issues of independent investor rights, diplomatic protection and countermeasures, 20 September 2007) ICSID Case No ARB(AF)/04/05.
199. ibid 1.
200. ibid 1.
201. ibid [47]–[48].
202. ibid [5] –[9]. See also [55]–[59], [77], [79]–[83]. For a discussion of ILC Articles 50 and 33, see [11]–[14].
203. ibid [51].
204. ibid [58].
205. ibid [19]–[20].
In sum, his conclusion is exactly opposite to the ADM majority’s on the nature of rights and the applicability of countermeasures. Notably, the one issue not addressed by Rovine but impor- tant to the majority’s decision was the question of waiver and whether an investor could waive its substantive rights.
b. CPI and the Direct and Substantive Theory of Rights
In the CPI case, the tribunal concluded that the doctrine of countermeasures did not apply to NAFTA Chapter 11. The majority held: “A central purpose of Chapter XI of the NAFTA was to remove such claims from the inter-State plane and to ensure that investors could assert rights directly against a host State. The tribunal considers that, in the context of such a claim, there is no room for a defence based upon the alleged wrongdoing not of the claimant but of its State of nationality, which is not a party to the proceedings.”206
This determination, as in ADM, depended on the nature of rights held by investors and obli- gations arising under Chapter 11.207 One arbitrator, Andreas F. Lowenfeld, agreed that counter- measures did not apply but was unhappy with the treatment given to the issue by the majority. He believed the majority’s opinion “loses sight of and distorts the essence of investor-State arbitration under NAFTA, ICSID, and a mass of Bilateral Investment Treaties and Free Trade Agreements.”208
The majority analyzed the nature of the rights held by investors, and concluded they were substantive rights, separate and distinct from those of the state.209 The tribunal cited Article 49 of the ILC Articles and its Commentary210 to draw the distinction between third party rights and interests. If investors have such rights, then the countermeasures defense cannot apply against them.211 The tribunal then answered specific arguments of Mexico related to the procedural nature of the rights, the Loewen award, and the subsequent practice of NAFTA parties.
On the substantive versus procedural nature of the rights, the tribunal held that the text of the treaty revealed the parties’ intention clearly:
In the case of Chapter XI of the NAFTA, the Tribunal considers that the intention of the Parties was to confer substantive rights directly upon investors. That follows from the language used and is confirmed by the fact that Chapter XI confers procedural rights upon them. The notion that Chapter XI conferred upon investors a right, in their own name and for their own benefit, to institute proceedings to enforce rights which were not theirs but were solely the property of the State of their nationality is counterintuitive.212
The tribunal explained that the necessary fiction operating in the realm of diplomatic protection—that the state is asserting a right of its own when in reality it is acting on behalf of a national—does not need to be continued in cases where investors have been granted the
206. CPI v Mexico (n 8) [161].
207. ibid [162].
208. Corn Products International, Inc. v Mexico (Separate Opinion of Andreas F. Lowenfeld, 15 January 2008) ICSID Case No ARB(AF)/04/01 [6] .
209. CPI v Mexico (n 8) [167].
210. See (n 180–181) and text attached.
211. CPI v Mexico (n 8) [163]–[165], [176].
212. ibid [169].