The Nature of Investor’s Rights under Investment Treaties: A Rejoinder to Martins Paparinskis

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Editor’s note: This is the final installment in the discussion begun last week of Martins Paparinskis’s EJIL article, “Investment Treaty Arbitration and the (New) Law of State Responsibility“.

Martins’ reply to my comments on his EJIL article highlights a number of challenging issues regarding the ongoing debate over the direct or derivative nature of investors’ rights under international investment agreements (IIAs). To summarize our disagreement: Martins, on the one hand, views the derivative rights approach “as only one of a number of plausible ways of articulating international law arguments about investment law”; on the other, I remain strongly reluctant towards this polyphony of plausible  articulations, and rather find that the direct rights model is unconvincing.

Martins questions, first, whether the practice of NAFTA Parties indeed favours the derivative model; second, whether international law provides for causality (or even correlation) between the nature of obligations under treaties and the nature of rights derived thereunder; and, third, whether indeed the HICEE v Slovakia award explicitly adopts the derivative rights model. By way of rejoinder to Martins’ reply, I will address the first point separately, and the second and third points jointly.

The practice of the NAFTA Parties and the derivative model

In my comments to Martins’ article, I examined pleadings and submissions by NAFTA Parties, in the context of Chapter Eleven disputes, regarding the direct/derivative rights debate, and I argued that the derivative rights model “finds firm support, at least in the NAFTA context”. From the outset, I had clarified that while “any relevant practice by NAFTA parties is stricto sensu limited to and relevant for the four corners of NAFTA”, and while State practice (pleadings and submissions by States Parties to IIAs) outside NAFTA on this specific issue is lacking, the NAFTA experience may indeed constitute “a first indication” (that is, a preliminary one) in favour of the derivative model in general.

Thus, I agree with Martins’ point that NAFTA practice cannot be extrapolated incautiously to other investment treaties. What I am far more reluctant to accept at face value, though, is his argument that “[b]ut of course, NAFTA reflects the inter-State perspective more strongly than most investment protection treaties”. The language of the myriad of IIAs is not uniform, so that there exist instruments where the very formulation of their provisions may not always leave room for a finding in favour of the ‘direct rights’ model (see also, Parlett, at 108-109). Moreover, NAFTA may (or should) indeed be considered as a strange animal. Nevertheless I feel that Martins’ later reference to EnCana v Ecuador [128] offers only limited support for his argument that most investment protection treaties are less influenced by the inter-State perspective than is NAFTA.

To illustrate, the EnCana Tribunal, when referring to “NAFTA’s apparent co-mingling of diplomatic protection concepts with investor-State claims”, provided the example of paragraph 5 of Article 1136 (“Finality and Enforcement of an Award”) NAFTA, which permits the NAFTA Parties to request the establishment of a panel under Article 2008 NAFTA should another NAFTA Party fail to abide by or comply with a final award. Paragraph 6 of Article 1136 further clarifies that enforcement of an arbitration award under the ICSID Convention, the New York Convention or the InterAmerican Convention, would in any event take place “regardless of whether proceedings have been taken under paragraph 5.”

One would then, first, note that Article 1136(5) NAFTA is not per se a unique or unprecedented provision, as the EnCana Tribunal implied. Almost identical clauses appear, for instance, in the 2012 US Model BIT (Article 34(8)), and the 2004 Canadian Model BIT (Article 45(5)). Second, the inter-State perspective reflected in Article 1136(5) NAFTA also permeates Article 64 of the ICSID Convention and the State-to-State dispute settlement clauses found in most IIAs (see the relevant UNCTAD study). For, all of those provisions provide for the inter-State resolution of disputes regarding a sovereign’s interpretation or application of the treaty, which would encompass a failure to abide by and comply with investment arbitral awards. Hence, it is not at all obvious that NAFTA’s inter-State perspective is absent in investment law more broadly, relying solely on the EnCana Tribunal’s reasoning.

Second, Martins questions whether, in the first place, “NAFTA’s practice is as favourable to the derivative model” as I suggest. His first (and, indeed, correct) point is that two out of three NAFTA Tribunals rejected the argument that countermeasures could operate as a circumstance precluding the wrongfulness of Mexico’s breaches of NAFTA Chapter Eleven, basing that conclusion on the direct character of rights enjoyed by foreign investors thereunder (see my chapter, pp. 161-168). Investment tribunals frequently reach different conclusions when interpreting and applying the same IIA. Further, arbitral practice directly addressing the character of rights under IIAs comprises only the above three instances, and it would be unwise to draw more general conclusions on a limited numerical basis alone. This is a point on which both Martins and I appear to agree, and thus it would make little sense to delve into it further.

What is indeed more interesting is Martins’ second point: he argues that NAFTA Parties’ pleadings and obiter dicta in earlier NAFTA cases should be given less normative weight, since the US and Canada did not reiterate or repeat their earlier expressed derivative rights view in the investment claims against Mexico, or did not somehow negatively react to the derivative approach’s rejection by two out of three NAFTA tribunals. Martins hence emphasizes that “the real test for acceptance of a principle is whether it is accepted – or at least accepted in general terms and distinguished for the particular instance – when it does not favour the particular actor”. I will have to part ways with Martins on this issue. It is one thing to doubt whether the said pleadings and obiter dicta are sufficient in terms of the requirements of Article 31(3)(b) VCLT, regarding the activeness and consistency of the practice involved, as well as the actual establishment of agreement of the parties regarding a given interpretation (see Villiger, at 431-432). Still, it is quite another thing to argue that pleadings and obiter dicta in earlier cases do not in fact intimately relate to the interests of the actor concerned regarding the interpretation of a treaty under which it would prospectively operate either as home or host State of an investor. Article 1128 NAFTA permits a non-disputing NAFTA Party to make submissions to an arbitral tribunal precisely to safeguard such interests. The NAFTA Free Trade Commission is similarly designed to safeguard ongoing State interests by creating a forum in which the Parties may raise and resolve matters of present and future concern. The treaty’s establishment of such institutional mechanisms for the airing and resolution of the ongoing interests and concerns of the NAFTA Parties reveals an intent that such interests should be given due consideration. That includes NAFTA Parties’ submissions on the derivative character of Chapter Eleven rights.

The Tribunal’s reasoning in HICEE v Slovakia and the reciprocal character of obligations under IIAs

Martins argues that the HICEE v Slovakia Tribunal’s reasoning in paragraphs 139-140 of the Partial Award was not intended to and does not endorse the derivative rights model. I disagree. In paragraph 140, the Tribunal analysed whether it would be unfair to the investor if the Tribunal took into account, in interpreting the treaty, an official Dutch document (the Dutch Explanatory Notes) which recorded The Netherlands’ acceptance of the request of its treaty counterparty, to exclude sub-subsidiaries from the scope of the treaty’s protections. While the Tribunal did consider any possible unfairness to the investor of basing its treaty interpretation on that extrinsic document, that consideration was “always subject to the primary proposition […] that a treaty can have only one authentic meaning” (para. 139). This “one authentic meaning” of the BIT was the one dictated by taking into account the formal public position of The Netherlands at the time of ratification, which Slovakia relied upon and thus rendered opposable to the Netherlands at the level of State-to State dispute settlement. Under Article 10 of the BIT, the decision of a tribunal in inter-State proceedings “shall be final and binding” on both Contracting Parties to the BIT. By virtue of this res judicata effect at the interstate level, the Dutch Explanatory Notes would be also derivatively opposable to Dutch investors at the level of investor-State dispute settlement [137, 139]. In other words, Dutch investors could not claim more than their home State, since they would be “claiming derivatively” through the rights procured for them by The Netherlands. This is exactly what I find hard to reconcile with the direct rights approach.

Lastly, the argument by Martins that “international law shows no necessary causality or even correlation between nature of obligations and nature of rights” is well delivered, but I would still point to the ILC’s works on the law of treaties which in my eyes condition that proposition. The second paragraph of Article 33 (‘Treaties involving benefits for private individuals or juristic entities’) of the draft articles on the law of treaties presented by the Third Special Rapporteur, Sir Gerald Fitzmaurice in its Fourth Report on the Law of Treaties (at 49, 79) states:

‘The provisions of the preceding paragraph [pacta sunt servanda regarding treaties which provide for rights, interests or benefits to be enjoyed by pri­vate individuals] do not affect the discretionary power of a State or Government to waive, compound or forgo rights, interests, benefits or advantages enjoyed by its nationals under a treaty to which it is a party. Private individuals and juristic entities may also, in so far as they are con­cerned, waive, compound or forgo rights, interests, benefits or advantages, reserved or accruing to them under or by reason of a treaty. Such action can­not, however, deprive their State or Government, as a party to the treaty, of the right to claim or insist on full performance of it.’ (emphasis added)

These principles were excluded from later drafts, only because they were determined to be implicit for the purposes of codifying the law of treaties (with their express statement more appropriately reserved for the context of State responsibility: see, Third Report on the Law of Treaties, by Sir Humphrey Waldock, at 46-47). These principles, properly read in the light of Fitzmaurice’s distinction between reciprocal treaties and treaties of the integral/interdependent type, demonstrate that, even if individual rights are derived under investment treaties (themselves being reciprocal), the contracting States would remain the treaties’ masters. Martins’ article (fn. 154) takes note of Fitzmaurice’s view and refers to the distinction drawn elsewhere by Fitzmaurice between treaty-derived benefits for individuals and rights under international law belonging solely to the State. However, Fitzmaurice’s commentary to Article 33(2) also includes cases where individual rights are concerned, i.e. “where there has been an injury not merely to some individual, but also separately to the State itself, apart from the prejudice caused to it in the person of its national” (at 79). Accordingly, the only exception to the power of each State to unilaterally waive, compound or forgo individual rights enjoyed by its nationals would appear to be found in the case of human rights treaties, exactly because in this case, “States do not have any interests of their own” ([1951] ICJ Rep 15, at 23). Thus, it is the reciprocal character of obligations under investment treaties that renders the direct rights approach, to the extent it is modelled on the human rights paradigm, unconvincing.

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