TPP in Focus: Recent NAFTA investment award demonstrates need for reform in TPP

Mar 27, 2015

This blog post is part of a series about the Trans-Pacific Partnership trade agreement.

Last week, an investment tribunal established under the investor-state dispute settlement (ISDS) mechanism of the North American Free Trade Agreement (NAFTA) issued an award in Bilcon v. Canada.  The tribunal ruled in favor of a U.S. investor who had challenged the Canadian government’s decision to deny an environmental permit to establish a rock quarry in Nova Scotia. 

What is most striking about the award is that the panel interpreted the vague “minimum standard of treatment” (MST) obligation in a manner that is clearly inconsistent with how the U.S. government has repeatedly argued the obligation should be interpreted. This panel interpretation will require governments to compensate foreign investors whenever an ISDS tribunal finds the government’s action was merely “arbitrary.”  To date, U.S. negotiators have been unwilling to seek a clarification of the MST obligation in the TPP negotiations, as reflected in the recently leaked TPP investment chapter and the 2012 U.S. model Bilateral Investment TreatyBilcon and other recent ISDS disputes vividly demonstrate the need to do so.  More generally, these disputes illustrate that the status quo on investment and ISDS is not acceptable.  The system is in need of serious reforms.  

What Is the “Minimum Standard of Treatment”?

Both NAFTA and the recently leaked TPP investment chapter require the government parties to provide one another’s investors with a “minimum standard of treatment,” including “fair and equitable treatment.”  A tribunal is supposed to determine what constitutes “fair and equitable treatment” by examining the “general and consistent practices of States that they follow from a sense of legal obligation” – which makes up “customary international law.”

Several years ago, a tribunal in Glamis Gold correctly found that the investor bears the burden of proving what is required under customary international law.  It further found that the investor had failed to establish that the standard was different from the standard articulated in the Neer case from 1926:  the minimum standard of treatment is violated if the actions of a government “amount to an outrage, to bad faith, to willful neglect of duty, or to an insufficiency of government action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.”

But the tribunal in Bilcon did not examine the “general and consistent practice of States.”   Instead, it relied on what other tribunals believed to be “fair and equitable” treatment.   And, unlike in Glamis Gold, it did not state that the conduct needed to be “outrageous” or “egregious”. Instead, it found that any “arbitrary” action by a government constitutes a denial of “fair and equitable” treatment – and therefore any action that the tribunal believes is not consistent with that country’s law is a breach of the “minimum standard of treatment.”

The Bilcon Decision Contradicts the U.S. Government’s Understanding of MST

In a number of critical respects, the Bilcon award is inconsistent with the U.S. Government’s position on what the MST obligation means.  The following describes the position the U.S. Government articulated in the Glamis Gold case and compares that position to what the majority of the tribunal said in the Bilcon case.

The Bilcon case should therefore serve as a wake-up call.  U.S. negotiators in TPP should propose that the TPP investment chapter be amended in a manner consistent with what the U.S. Government has argued in ISDS cases – but that the most recent NAFTA tribunal has rejected.  Glamis Gold is the gold standard on the meaning of the MST obligation, and it should be incorporated into the TPP text.

The need to clarify the MST obligation is just one significant reform that is needed for the TPP investment chapter.  Others can be found in the Path Forward to an Effective Agreement and described in another recent TPP in Focus investment blog.

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