1 Introduction
The Articles on the Responsibility of States for Internationally Wrongful Acts (ARSIWA) were intended as the International Law Commission’s (ILC) ‘permanent contribution to general international law’.Footnote 1 As such, the provisions enshrined therein, including the ‘circumstances precluding wrongfulness’ under Part I, Chapter 5, are in principle binding on, and applicable to, all StatesFootnote 2 (generality ratione personae) and apply to the whole field of international obligations of States,Footnote 3 regardless of their content or sourceFootnote 4 (generality ratione materiae). This chapter discusses whether, despite this prima facie general applicability, a responding State may be precluded from invoking the customary defence of countermeasures in the context of an investment dispute. It identifies and assesses four factors potentially affecting the availability of countermeasures in investment arbitration: the jurisdictional constraints of the arbitral tribunal, limitations in the law applicable to the dispute, the interpretation of the investment protection treaty in question, and potential limitations to the scope of application of the defence under customary international law.
The jurisdiction of an arbitral tribunal and the law applicable to the dispute are defined by the claim and the treaty in question. The tribunal’s jurisdiction extends only to rulings on the matters raised by the claimant (non ultra petita), based on interpretation and application of the treaty at hand.Footnote 5 Nonetheless, many investment treaties authorise the tribunal to decide the issues in dispute, not only on the basis of the treaty itself, but also of ‘applicable rules of international law’.Footnote 6
The first task for the tribunal is to determine whether countermeasures are such ‘applicable rules’. This is an interpretative task. The tribunal through interpretation of the investment treaty in question will need to ascertain whether countermeasures as a defence are, explicitly or implicitly, displaced in the context of disputes arising thereunder. For example, the treaty in question may contain rules that constitute lex specialis to the defence of countermeasures under general international law. In such cases, the special provisions prevail over the general, to the extent that they regulate the same subject matter in a different manner.Footnote 7 Moreover, it has been argued that the conferral of substantive, direct rights to investors through investment protection treaties implies the non-applicability of the defence of countermeasures. If countermeasures are taken in response to a prior internationally wrongful act of the investor’s home State, then the defence can only preclude the wrongfulness of a temporary non-performance of obligations owed to such State and not of obligations owed directly to the investor, which would, essentially, be a third party to such dispute. In this context, the tribunal shall also take into consideration any relevant rules of international law applicable between the parties,Footnote 8 such as the rules under customary international law on the protection of aliens and the institution of diplomatic protection, which may inform the content of relevant treaty provisions.
If the defence is, following this interpretative exercise, found to be applicable to an investment dispute, then the arbitral tribunal is further faced with two jurisdictional considerations. Firstly, the application of countermeasures may require examination of rights and obligations that fall, prima facie, outside its subject matter jurisdiction as established in that dispute, or even outside its jurisdictional field in general.Footnote 9 The tribunal would have to determine whether a prior internationally wrongful act has been committed, which would probably constitute a breach of an obligation outside the investment treaty under consideration, and thus, outside the jurisdictional limits of the arbitral tribunal. Secondly, the prior internationally wrongful act would be committed by the State of nationality of the investor and not the investor itself. This raises a Monetary Gold-likeFootnote 10 consideration regarding the personal jurisdiction of the arbitral tribunal, as the author of the act would not be a party to the proceedings.
This chapter addresses the considerations above in two substantive sections. Section 2 provides an overview of the tribunals’ reasoning and the parties’ arguments in the relevant investment case law. All tribunals that have been seized of this matter rejected the arguments of the respondent on the defence of countermeasures but diverged significantly in terms of reasoning. Thus, arbitral tribunals so far have not provided a definite and consistent answer to the applicability of the defence. Section 3 critically assesses the approach of the tribunals to the application of the lex specialis principle, to the nature of investors’ rights under investment protection treaties and to the limits of their jurisdiction ratione materiae and personae. This chapter argues that the defence of countermeasures under customary international law is indeed applicable in the context of investment disputes and that arbitral tribunals have the power to examine all the requirements of the defence in order to rule on its applicability in a given case.
2 Countermeasures in Investment Case Law: The US–Mexico Sugar War and the Ambivalent Arbitral Practice
The defence of countermeasures in the context of investment arbitration was primarily discussed in three North American Free Trade Agreement (NAFTA)-basedFootnote 11 disputes: Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc v Mexico (ADM), Corn Products International, Inc v Mexico (CPI) and Cargill, Inc v Mexico (Cargill).Footnote 12 All three disputes arose in the context of the same broader situation of tension between the US and Mexico, which involved proceedings not only before these arbitral tribunals, discussed in this chapter, but also before the WTO Dispute Settlement SystemFootnote 13 and NAFTA.Footnote 14 The disagreement started with the US imposing measures, which restricted the access of Mexico’s surplus sugar produce to the US market. It further escalated by the subsequent failure of the US to take part in the NAFTA dispute settlement proceedings initiated by Mexico with respect to the market restrictions, by blocking the appointment of panelists contrary to NAFTA Chapter Twenty. Mexico proceeded with a series of measures aiming to protect its domestic sugar industry, including a 20% tax on soft drinks using sweeteners which were primarily used by US companies. In response to the US claims that the tax was in breach of its NAFTA obligations, Mexico invoked the defence of countermeasures under general international law, claiming that the tax was lawfully introduced in response to prior violations by the US of its NAFTA obligations regarding the access of Mexican-produced sugar to the US market and dispute settlement proceedings. Three (redacted) awards were issued on this matter by tribunals constituted under the NAFTA dispute settlement provisions.
Even though all three disputes were based on the same factual matrix and the same legal instrument, the three awards have significant differences in terms of reasoning. The proceedings for all three cases took place largely in parallel. The Tribunals in ADM and CPI were unaware of each other’s findings and there are no cross-references between the two awards or engagement with each other’s reasoning. The Tribunal in Cargill received the ADM award during its deliberations along with comments from both sides.Footnote 15 Thus, the Cargill Tribunal had the opportunity to take into consideration the reasoning of the Tribunal in ADM and engage with its findings on the defence of countermeasures.Footnote 16
All disputes were submitted to arbitration pursuant to NAFTA Chapter Eleven,Footnote 17 for alleged violations of, inter alia, the national treatment and expropriation provisions of NAFTA by Mexico.Footnote 18 The kind of claims that may be submitted to investor-State arbitration under Article 1120 NAFTA are specified in Articles 1116 and 1117, which accordingly, along with the application of the claimant, establish the scope of jurisdiction of the arbitral tribunals.Footnote 19 Moreover, the tribunals were constituted under the auspices of the International Centre for Settlement of Investment Disputes (ICSID). Under Article 42(1) ICSID Convention, a tribunal should ‘decide a dispute in accordance with such rules of law as may be agreed by the parties.’Footnote 20 In turn, Article 1131(1) NAFTA provides that ‘[a] Tribunal established under this Section shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law.’ Thus, the parties to NAFTA have agreed that general international law is, in principle, within the law that a NAFTA tribunal may apply in the determination of a dispute before it. The provisions on jurisdiction and applicable law were relevant to the discussion of the tribunals regarding the availability of countermeasures to investment arbitration and their power to examine the customary requirements of the defence.
The present section discusses the relevant analysis of the tribunals in the cases of ADM, CPI and Cargill. It outlines the tribunals’ approach to the application of the lex specialis principle, the customary requirements for successful invocation of countermeasures, the nature of investors’ rights under investment treaties and the limits of their jurisdiction ratione materiae and ratione personae.
2.1 Countermeasures under General International Law and the lex specialis Principle
An arbitral tribunal would, first of all, have to decide whether the customary defence of countermeasures is an ‘applicable rule … of international law’ within the meaning of Article 1131(1) NAFTA. Even if NAFTA empowers, in principle, arbitral tribunals to apply rules of international law that are not explicitly included in the text of NAFTA itself, tribunals must still investigate whether NAFTA contains any rules that constitute lex specialis, and thus, apply to the exclusion of the relevant rules under general international law. The challenge is, first, to identify whether there is indeed a relationship of lex specialis/lex generalis between the two rules and, second, to determine the extent to which the two rules are co-extensive and mutually exclusive. According to the ILC, for the lex specialis to displace the relevant lex generalis, it is not enough that the same subject matter is covered by the two rules, but there must be an actual inconsistency between the two rules – a genuine conflict of norms.Footnote 21 The general rule is displaced only to the extent of the inconsistency with the treaty specific rule, whilst other aspects continue to operate in a residual fashion.Footnote 22 The tribunal in ADM was the only one of the three that discussed the NAFTA applicable law clause, explored the interaction of the defence of countermeasures under general international law with the NAFTA provisions and examined the application of the lex specialis principle in order to discern whether countermeasures can be invoked in the context of a NAFTA Chapter Eleven dispute.
The Tribunal began its analysis by reference to Article 1131(1) NAFTA. Although this provision pertains to the law applicable to the dispute, the Tribunal examined its content to determine whether it has ‘jurisdiction to decide on the validity of the defense’.Footnote 23 This shows the close relationship between the jurisdiction of an adjudicative body and the law that it may apply in the exercise of such jurisdiction. The Tribunal confirmed that Article 1131(1) NAFTA ‘includes the application of rules of customary international law with respect to claimed breaches [of NAFTA provisions]’.Footnote 24 This finding confirms that the Tribunal has, indeed, the power to examine and apply customary international law, including the defences under the general international law on State responsibility, but only in the context of deciding the specific claims of breaches that are properly brought before it on the basis of the relevant jurisdictional clause.
Having established that customary defences are prima facie applicable to the dispute at hand in accordance with the NAFTA applicable law clause, the Tribunal proceeded to examine whether NAFTA otherwise excludes the application of countermeasures. The claimants have argued that NAFTA includes certain provisions that constitute lex specialis to the customary defence of countermeasures, which is, therefore, excluded in accordance with Article 55 ARSIWA.
According to the claimants, NAFTA
Chapters Nineteen and Twenty establish the regime for dispute resolution that governs the ‘existence of an internationally wrongful act’ and the ‘content’ of the international responsibility of the Parties in the event of a breach of their obligations under the NAFTA … In other words, by signing the NAFTA, the Parties have deliberately forgone the residual right to take countermeasures under customary law.Footnote 25
In response to this argument, the Tribunal acknowledged that the NAFTA indeed offers a form of lex specialis to supplement the standards of customary international law on a number of issues such as the treatment of aliens and diplomatic protection.Footnote 26 This ‘express content’Footnote 27 of the NAFTA, which clearly deviates from – or rather, goes beyond – the relevant rules of customary international law, constitutes lex specialis and is applicable to the exclusion of the relevant customary rules. However, according to the Tribunal, customary international law ‘continues to govern all matters not covered’ by the NAFTA provisions. To this end, it found that ‘Chapter Eleven [NAFTA] neither provides nor specifically prohibits the use of countermeasures. Therefore, the question of whether the countermeasures defence is available to the Respondent is not a question of lex specialis, but of customary international law.’Footnote 28 The Tribunal confirmed that the only reference to countermeasures in the NAFTA was as a means of penalty for non-compliance with a decision rendered in a Chapter Twenty State-to-State arbitration.Footnote 29 In that case, no such decision has been rendered. Accordingly, it found that countermeasures can be invoked as a defence in a Chapter Eleven dispute subject to the conditions specified in general international law.Footnote 30 In other words, the silence of Chapter Eleven on the issue of countermeasures was interpreted as implicit acceptance of the relevant rules of general international law.
2.2 The Nature of Investors’ Rights under Investment Protection Treaties
The arbitral tribunals were faced with an additional question in deciding the applicability of the customary defence of countermeasures to disputes under Chapter Eleven NAFTA. A responding State would invoke the defence of countermeasure as a response to a prior internationally wrongful act by the State of nationality of the investor. Nonetheless, that State is not a party to the dispute. It is rather the investor, a private individual, that takes part in the proceedings under Chapter Eleven. The tribunals discussed the nature of investors’ rights under Chapter Eleven and whether such nature affects the applicability of the defence of countermeasures under general international law to investor-State disputes.
The claimants argued that investors under Chapter Eleven NAFTA
are vested with direct independent rights and … are immune from the legal relationship between the Member States. The investor’s cause of action is grounded upon substantive investment obligations which are owed to it directly. A breach of these obligations does not therefore amount to a breach of an inter-state obligation; thus the general rules of state responsibility – including those regarding the circumstances precluding wrongfulness – cannot be presumed.Footnote 31
In other words, countermeasures cannot be invoked as a defence to justify non-performance of obligations under Chapter Eleven, because such obligations are owed to the investors directly and not their State of nationality. According to this argument, the investor is a third party to the dispute between its State of nationality and the responding host State.
Mexico, on the other hand, argued that obligations under NAFTA, including Chapter Eleven, are owed only to the State of the investors’ nationality. According to this line of argument, investors are either ‘stepping into the shoes and asserting the rights of their home State’ when initiating arbitration (derivative theory) or are ‘vested only with an exceptional procedural right to claim State responsibility’ (intermediate theory).Footnote 32 The relevant substantive obligations remain always inter-State, and thus, the defence of countermeasures can be properly invoked against the State of nationality for prior internationally wrongful acts that it has committed.
Indeed, under customary international law, countermeasures ‘must be directed against’ a State which is the author of the internationally wrongful act.Footnote 33 Accordingly, the wrongfulness of an act taken as countermeasure is precluded only with respect to obligations owed to the responsible State and not obligations owed to another party.Footnote 34 On the other hand, as stipulated in the ILC Commentary to Article 49 ARSIWA, a countermeasure can affect the interests of third parties as an ‘indirect or collateral effect’.Footnote 35 Thus, it must be determined whether an investor under NAFTA ‘has rights of its own, distinct from those of the State of its nationality, or merely interests.’Footnote 36
In ADM, the Tribunal sided with the view that investment rights are derivative and thus countermeasures can indeed be invoked as a defence by the responding State as they do not affect ‘individual substantive rights’.Footnote 37 It found that
the proper interpretation of the NAFTA does not substantiate that investors have individual rights as alleged by the Claimants. Nor is the nature of investors’ rights under Chapter Eleven comparable with the protections conferred by human rights treaties. Chapter Eleven may share … with human rights treaties the possibility of granting to non-State actors a procedural right to invoke the responsibility of a sovereign State before an international dispute settlement body. But the fundamental difference between Chapter Eleven of the NAFTA and human rights treaties in this regard is … that Chapter Eleven does not provide individual substantive rights for investors, but rather complements the promotion and protection standards of the rules regarding the protection of aliens under customary international law.Footnote 38
According to the Tribunal, the substantive obligations under Chapter Eleven remain inter-State providing the standards by which the conduct of the NAFTA Party towards the investor will be assessed in the arbitration.Footnote 39 These substantive obligations cannot be waived by the investors.Footnote 40 They are binding by virtue of the agreement between the State parties to the treaty. Moreover, according to the Tribunal, these obligations are complemented by customary international law to the extent that it is not displaced by the lex specialis of the treaty.Footnote 41 On the contrary, the right of investors to trigger arbitration against the host State is a purely procedural one.Footnote 42 Investors are given the ‘exceptional right of action through arbitration that would not otherwise exist under international law’Footnote 43 and it is a right that they may choose to exercise or waive, at their own discretion. When an investor files a request for arbitration, it accepts a standing offer by the host State and creates a direct legal relationship in the form of an arbitration agreement.Footnote 44 This is the only direct relationship under international law. The relationship between the State of nationality and the host State remains unchanged.
By contrast, the tribunals in CPI and Cargill took a very different approach to this issue. They found that rights under Chapter Eleven NAFTA are not merely procedural.Footnote 45 Rather ‘NAFTA confers upon investors substantive rights separate and distinct from those of the State of which they are nationals.’Footnote 46 The Tribunal in CPI put emphasis on the interpretation of the relevant treaty provisions. It held that individuals and corporations can also hold rights under international law and that when such rights are said to be derived from a treaty ‘the question will be whether the text of the treaty reveals an intention to confer rights not only upon the Parties thereto but also upon individuals and/or corporations.’Footnote 47 In the case of NAFTA, the Tribunal found that the parties’ intention was to confer substantive rights directly upon investors.Footnote 48 This was, according to the Tribunal, evident from the language of the treaty and from the fact that procedural rights are also conferred upon the investors.Footnote 49 The Tribunal observed that ‘[t]he 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.’Footnote 50
Further to this textual interpretation of NAFTA, the Tribunal in CPI referred to the rights of aliens under customary international law. It argued that ‘the notion that in diplomatic protection cases the State was asserting a right of its own’ was just a fiction, which was only necessary because procedurally individuals could not bring an international claim.Footnote 51 It further argued that this fiction did not reflect the substantive reality, something that is evident ‘not only in the juristic writing but also in various rules of law surrounding diplomatic protection claims’ such as the rule on exhaustion of local remedies and the doctrine of continuing nationality.Footnote 52 According to the Tribunal, if the rights were rights of the State itself, then there wouldn’t be a requirement to bring a case first before domestic courts, as is the case with other international obligations owed directly to the State. Similarly, if an injury to the national is a violation of the rights of the State, then the victim’s nationality after the date of the injury would not be of legal relevance. Thus, the Tribunal implies that even under customary international law, the substantive rights of investors are essentially direct. Accordingly, the investor ‘is a third party in any dispute between its own State and another NAFTA Party and a countermeasure taken by that other State against the State of nationality of the investor cannot deprive that investor of its rights.’Footnote 53
The Tribunal in Cargill provided a different reasoning in support of its finding that investors’ rights under NAFTA are substantive. It drew a distinction between those rights and diplomatic protection under general international law. According to the Tribunal, ‘in the case of diplomatic espousal … the claim is owned by the espousing State and the espousing State is the named party. Moreover, the operative paragraph of the resulting award reciting the decision of the tribunal names the espousing State, and not the national’.Footnote 54 Conversely, in the case of investment arbitration under NAFTA Chapter Eleven, the investor itself initiates proceedings, is the named party to such proceedings and is named in the dispositive of the award.Footnote 55 The Tribunal held that the origin of the rights should not be confused with the holder of the rights: ‘That the origin of individual rights may be found in the act of a sovereign, or in the joint act of sovereigns, does not negate the existence of the rights conferred’.Footnote 56 It thus concluded that countermeasures cannot afford a defence in respect of a claim asserted under Chapter Eleven by a national of the allegedly offending State.Footnote 57
2.3 The Customary Requirements for a Lawful Countermeasure and the Jurisdictional Limits of Arbitral Tribunals
The tribunals in their analysis regarded Articles 22 and 49–53 ARSIWA ‘as an authoritative statement of customary international law on countermeasures’.Footnote 58 Article 49 ARSIWA provides that an injured State may take countermeasures, in the form of limited and temporary non-performance of international obligations, against a State which is responsible for an internationally wrongful act, in order to induce compliance of that State with its international obligations. Article 51 ARSIWA further provides the requirement of proportionality, ie, that the effects of the countermeasure must be commensurate with the injury suffered taking into account the gravity of the internationally wrongful act and the rights in question. The tribunals also referred to the findings of the International Court of Justice (ICJ) in Gabčikovo-Nagymaros,Footnote 59 which establishes the same criteria as those codified by the ILC.Footnote 60 The analysis of the tribunals implies acceptance of these criteria as part of the customary law on countermeasures.Footnote 61
The first requirement under customary international law, ie the existence of a prior internationally wrongful act, is also the most interesting in the context of investor-State dispute settlement (ISDS). The arbitral tribunals would have to determine whether such a prior breach has taken place in order to rule on the applicability of the defence. This raises important jurisdictional questions in cases where this prior breach is outside the limits of the tribunal’s subject matter jurisdiction.
First of all, as confirmed by the Tribunal in CPI, ‘the requirement of a prior violation of international law is an absolute precondition of the right to take countermeasures’.Footnote 62 Mexico had argued that to succeed in its countermeasures defence under customary international law, it did not need to prove that the US had indeed violated its obligations but rather that at the time of taking the countermeasure and while it was in place, it had ‘a genuine belief that it had a reasonable prospect of succeeding in establishing that the United States was in breach, should that question come before a competent tribunal.’Footnote 63 Accordingly, the Tribunal would not need exceed the limits of its jurisdiction as it could decide on whether Mexico had such genuine belief without examination of the actions of the US per se. The Tribunal rejected this argument as an attempt by Mexico to ‘square the circle’, confirming that the jurisdictional concern cannot be easily avoided.Footnote 64
The Tribunal in ADM found on this matter that it ‘has no jurisdiction to decide whether the United States breached any of its international obligations under Chapter Three or Chapter Twenty of the NAFTA.’Footnote 65 The Tribunal recalled that it was established under Chapter Eleven for the settlement of an investment dispute, comprising allegations of violations by the respondent of Articles 1102, 1106 and 1110 NAFTA. Thus, it had no jurisdiction to decide whether the US breached any of its international obligations complained by Mexico, since those were prescribed under NAFTA Chapters Three, Seven and Twenty.Footnote 66 Mexico argued that the jurisdiction of the Tribunal entailed the power to examine its argument on countermeasures as this was invoked as a defence precluding its international responsibility,Footnote 67 but the Tribunal rejected this line of reasoning.
Interestingly, the Tribunal found that it had jurisdiction to examine the rest of the customary requirements of countermeasures. It stipulated that ‘[b]oth parties agree that the Tribunal has jurisdiction to decide any defense under Chapter Eleven, including a countermeasures defense’.Footnote 68 Thus, the Tribunal acknowledged the nature of countermeasures as a defence and its jurisdiction to rule on applicable defences but still found that its power does not extend to all the customary requirements of such defence. Accordingly, the Tribunal proceeded to examine whether Mexico’s tax measure was taken in response to the alleged US violations, aimed at inducing the US to comply with the NAFTA obligations that it has allegedly breached and was proportionate to such aim, without first establishing that a prior internationally wrongful act has taken place. It found that Mexico’s measure did not meet these requirements and rejected the countermeasures defence on that basis, thereby circumventing the jurisdictional considerations.
The Tribunal in CPI reached a similar conclusion regarding the limits of its jurisdiction. In an obiter dictum,Footnote 69 it held that it would not have the jurisdiction to determine whether Mexico’s allegations against the US were well-founded or not, because ‘the United States is not a party to these proceedings and the Tribunal does not have jurisdiction to determine whether any provision of the NAFTA falling outside Chapter XI has been violated’.Footnote 70 The Tribunal here raises not only the issue of jurisdiction ratione materiae, discussed in ADM, but also a concern regarding the limits of its personal jurisdiction. It makes a Monetary Gold-like argument,Footnote 71 implying that it may not determine the legal interests of a non-party to the dispute (the US) without its consent.Footnote 72
3 Evaluating the Tribunals’ Approach: Treaty Interpretation, Customary Law and General Principles of International Adjudication
It becomes evident from the analysis above that tribunals have adopted opposing views on issues crucial to the applicability of the customary defence of countermeasures to investor-State disputes. Despite the inconsistencies, through their reasoning and analysis we can identify the main questions and opposing arguments regarding the applicability of defence. This section evaluates the tribunals’ reasoning and discusses the availability of countermeasures to responding States in ISDS in view of the customary rules of treaty interpretation, the lex specialis principle and general principles of international adjudication.
3.1 The Lex Specialis Principle: Revisiting the Interaction of Countermeasures with Investment Protection Treaties
As discussed in Section 2, only the Tribunal in ADM examined how the defence of countermeasures under customary international law interacts with the NAFTA provisions and whether it is displaced by a lex specialis. The analysis in ADM confirms, in the first place, the applicability by default of the general international law on State responsibility, including the circumstances precluding wrongfulness, to treaty-based claims. The Tribunal’s analysis on the issue of lex specialis suggests that the absence of explicit derogation must be regarded as a continuation, or rather, an implicit acceptance of the existing rules under general international law. The silence of NAFTA on the issue of countermeasures as a defence was interpreted as implicit acceptance of its applicability to disputes arising thereunder.
This approach is in line with the general ‘presumption against normative conflict’ in international law.Footnote 73 As explained by the Arbitral Tribunal in the Georges Pinson case:
Toute convention internationale doit être réputée s’en référer tacitement au droit international commun, pour toutes les questions qu’elle ne résout pas elle-même en termes exprès et d’une façon différente.Footnote 74
The ICJ has also adopted the same approach on the applicability of general international law to treaty claims. In the case of ELSI, the ICJ Chamber discussed whether the customary rule of exhaustion of local remedies for the exercise of diplomatic protection was applicable, even though the compromissory clause in question made no reference to such prerequisite for submission of a dispute to the Court. It held that it was ‘unable to accept that an important principle of customary international law should be held to have been tacitly dispensed with, in the absence of any words making clear an intention to do so’.Footnote 75 Nonetheless, the Court admitted that the parties could indeed deviate from the customary rule. As Sir Frank Berman points out ‘[a]s a matter of abstract logic, it is perfectly conceivable that a pair of Contracting States might wish to displace the general law in their mutual relations; very often that is the whole purpose of a bilateral treaty.’Footnote 76 The Court suggested, however, through its reasoning, that this should be clearly discernible from the text of the treaty and cannot be presumed. The Tribunal in ADM seems to adopt the same approach. General international law, including the defence of countermeasures, applies by default to all international disputes, subject to the application of the lex specialis principle, which dictates that a special provision shall prevail, to the extent that it clearly derogates from general international law. Thus, the premise of the Tribunal’s reasoning in ADM is consistent with the customary rules of interpretation and the lex specialis principle. Chapter Eleven NAFTA does not seem to preclude the applicability of countermeasures to disputes arising thereunder.
Nevertheless, Chapter Twenty NAFTA establishes a lex specialis that displaces at least some countermeasures: those in response to violations of NAFTA itself. As evidenced also by the Tribunal’s reasoning in ADM, countermeasures in international law have a ‘dual’ character, which is already reflected in their double appearance in both Articles 22 and 49 to 54 ARSIWA: they constitute a means of implementing international responsibility and at the same time a defence against a claim of breach.Footnote 77 NAFTA indeed specifies the means by which international responsibility may be implemented for breaches of its own provisions by one of its parties. In such cases the parties may resort to the dispute settlement provisions of the NAFTA as well as the provisions on suspension of benefits (‘countermeasures’ under NAFTA aiming to induce compliance with a panel decision).Footnote 78 These provisions constitute lex specialis with respect to some countermeasures: those in response to a prior breach of the same treaty. The do not, however, preclude all countermeasures.Footnote 79 If, for example, the respondent argued that non-performance of its NAFTA obligations was in response to prior violations of another State party in the field of human rights or environmental protection, this scenario would not be covered by the dispute settlement or the suspension of benefits provisions of the NAFTA, and thus, it wouldn’t be governed by the lex specialis. Lex specialis prevails over the relevant lex generalis only to the extent that the two rules are co-extensive and in genuine conflict.Footnote 80 Aspects of the lex generalis that are not derogated from continue to apply by default in the relations between the parties.
The Tribunal referred to the provisions on countermeasures under Chapter Twenty and stipulated that since there has been no panel decision under Chapter Twenty the provisions on suspension of benefits were inapplicable. But it did not acknowledge that the dispute settlement arrangements under Article 2004 NAFTA establish a compulsory procedure that displaces other unilateral means for the implementation of responsibility with respect to NAFTA violations. Article 2004 provides that ‘the dispute settlement provisions of this Chapter shall apply with respect to the avoidance or settlement of all disputes between the Parties regarding the interpretation or application of this Agreement or wherever a Party considers that an actual or proposed measure of another Party is or would be inconsistent with the obligations of this Agreement …’.Footnote 81 Unilateral countermeasures in the form of suspension of obligations under another NAFTA chapter in order to induce compliance with NAFTA Chapter Twenty are incompatible with this provision.
In ADM, Mexico invoked the defence of countermeasures under general international law with respect to the US breaches of NAFTA itself. In principle, this situation would indeed be regulated by the lex specialis, ie, the NAFTA provisions on State-to-State dispute settlement. The Tribunal introduced an artificial distinction between different chapters of the same instrument and stipulated that only in Chapter Twenty we find any reference to countermeasures, whilst the dispute at hand was brought before it under Chapter Eleven.Footnote 82 However, this argument, on its own, is not convincing. In principle, any grievances against the State of nationality of the investor for alleged breaches of the NAFTA are subject to the dispute settlement provisions of Chapter Twenty and cannot be presented before a Chapter Eleven tribunal through the defence of countermeasures. This approach is in line with the principle of effective interpretation:Footnote 83 the tribunal should not read a treaty in a manner that leads its provisions (in this case, the dispute settlement provisions under Chapter Twenty) to redundancy or inefficiency.Footnote 84
The Tribunal’s findings in ADM were probably motivated, albeit implicitly, by another factual aspect of the dispute. As the respondent submitted before the Tribunal, the means described in NAFTA Chapter Twenty for implementing the international responsibility of the US were not available to Mexico, as the US had blocked Mexico’s access to a NAFTA panel.Footnote 85 This very fact constituted one of the breaches of NAFTA complained of by Mexico. Therefore, neither the dispute settlement nor the countermeasures’ provisions under NAFTA were actually available to Mexico in that case. In the words of Mexico, ‘a State party cannot be bound by a lex specialis that has proved impossible to invoke’.Footnote 86 The Tribunal, through its findings, seems to implicitly side with this argument. This approach can also be justified on the basis of general principles of international law. The principle of law expressed in the maxim ex iniuria jus non oritur dictates that unlawful conduct cannot modify the law applicable in the relations between the parties, or, in other words, that States should not benefit from their own wrong.Footnote 87
3.2 The Question of Independent Rights: Revisiting the Power of Host States to Suspend Investors’ Rights in Response to Conduct of Their Home State
Regarding the nature of the rights of investors, the analysis of the tribunals, discussed above, is twofold. In the first instance it seems that they interpret the NAFTA to discern whether the rights enshrined therein are directly ascribed to the investor or derivative of the inter-State relationship. Through this first limb of analysis, they seem to suggest that the issue of the nature of investors’ rights is not a theoretical question to be determined in abstracto. As it has been pointed out by Paparinskis,
the nature of the rights is not an abstract and irrebutable a priori proposition, and as a rule of jus dispositivum is open to amendment or reinterpretation, in particular through subsequent agreement and practice. … The nature of investors’ rights may at least in principle differ in different investment treaty rules, having important consequences for the applicability of countermeasures.Footnote 88
However, the second part of their reasoning traces the nature of investors’ rights back to customary international law. For example, the analysis in ADM suggests that investment treaties are simply an extension of the customary rules regarding the protection of aliens, which are already binding on all States. According to the Tribunal, although the institution of diplomatic protection is displaced by the establishment of a different dispute settlement mechanism for the implementation of responsibility under investment treaties, the nature of the substantive obligations regarding the protection of aliens, that already existed under customary international law, remains unaffected by the addition of further obligations in investment treaties. Although the Tribunal did not expressly characterise it as such, its reasoning was in essence an interpretation of the obligations under NAFTA in view of relevant rules of customary international law. The Tribunal in CPI, although it reached a different conclusion, followed a similar approach. First, it offered an interpretation of the NAFTA and argued that it confers direct rights to the investors. Then, it further buttressed this argument by recourse to customary international law. According to the Tribunal, evidence suggests that even under the traditional institution of diplomatic protection, where the State is the one bringing the investor’s claim to the international plane, the rights are in reality owned by the investor. Accordingly, the NAFTA provisions, read in light of customary international law, suggest that investors’ rights are independent from their home State. In Cargill, the Tribunal had recourse to the customary law on diplomatic protection in the context of an a contrario argument. It argued that diplomatic protection is diametrically different to contemporary investment arbitration and that such differences lead to the conclusion that today investors’ rights under investment treaties are direct, whereas under customary international law and the rule on diplomatic protection, they remained tied to the State of nationality.
It emerges from the above that all three tribunals are using the same evidence relating to the protection of aliens and the institution of diplomatic protection under customary international law, but reach very different interpretative results. It becomes evident that there is a lack of methodology in the deductive reasoning of tribunals which leads to conflicting conclusions and inconsistencies in terms of reasoning.
In evaluating the evidence and arguments raised in the three cases above, there is nothing to suggest that the rights of investors are detached from their State of nationality. The default applicability of customary international law, discussed in the previous sub-section, suggests that substantive obligations assumed by States under investment treaties are simply in addition to the existing customary obligations and they do not alter their scope and nature if such change is not explicitly provided for. Thus, only the procedural aspects of implementation of international responsibility are affected by current investment treaties that provide for investor-State arbitration without the involvement of the State of nationality.
Moreover, under customary international law, obligations assumed by States which have individuals are beneficiaries and are considered non-derogable are listed in Article 50 ARSIWA as obligations that cannot be affected by countermeasures. The tribunals failed to provide evidence that such list under customary international law has been expanded and also failed to take this list into consideration in interpreting the provisions of the investment treaty in question.
Lastly, other provisions that are typically included in investment protection treaties further suggest that the protection of investors is not immune from changes in the relationship between the host State and the State of nationality. Most pertinently, the ‘security exception’, which is included in a number of bilateral and multilateral investment protection treaties, including NAFTA,Footnote 89 often stipulates, among others, that nothing in the text of the agreement should be construed ‘to prevent any Party from taking any actions that it considers necessary for the protection of its essential security interests … taken in time of war or other emergency in international relations’.Footnote 90 It becomes evident that under this clause, an emergency in the relations between the home State of the investor and the host State would justify the taking of measures that are prima facie incompatible with the obligations of the host State under the investment agreement. In other words, through no fault of its own, the investor may have to suffer the consequences of the deterioration of the relations between the two States to the extent that the essential security interests of the host state are at risk. Countermeasures taken in response to a prior internationally wrongful act of the State of nationality of an investor may affect the interests of the latter in a similar fashion.
3.3 Countermeasures as a Response to a Prior Internationally Wrongful Act: Revisiting the Limits of Arbitral Tribunals’ Subject Matter and Personal Jurisdiction
As seen in the analysis of the case law above, the arbitral tribunals that have been seized with the issue of the applicability of countermeasures in investment disputes so far have taken a restrictive approach to the limits of their subject matter and personal jurisdiction. They require that the indispensable incidental matter which arises in the context of an applicable defence, ie, the existence of a prior internationally wrongful act in the case of countermeasures, would also fall within their scope of jurisdiction if it was brought before them as an independent claim, in order to proceed to its examination. This essentially means that very few countermeasures, if any at all, could properly be examined by an arbitral tribunal: those that consist of the non-performance of obligations arising under the same investment treaty.
The WTO adjudicative bodies have also taken a similar approach to this issue. In the case of Mexico – Soft Drinks, which was adjudicated in the context of the same broader US-Mexico dispute, the panel and Appellate Body argued that their jurisdiction ratione materiae does not entail the power to examine a prior internationally wrongful act that constitutes violation of rules other than the WTO covered agreements. According to the AB, WTO adjudicative bodies cannot ‘become adjudicators of non-WTO disputes’, as this is not their function as intended by the DSU.Footnote 91
This approach introduces a Monetary Gold-like consideration with regards to jurisdiction ratione materiae.Footnote 92 The arbitral tribunals examined above, as well as the WTO adjudicative bodies, seem to suggest that ‘to adjudicate upon the international responsibility of [a State] without its consent [on that particular matter] would run counter to a well-established principle of international law … namely, that [an adjudicative body] can only exercise jurisdiction over a State with its consent.’Footnote 93
In the case of ISDS, we are also faced with a more traditional Monetary Gold-like consideration: the investor’s State of nationality, who is the author of the alleged internationally wrongful act, is absent from the proceedings. This raises a problem regarding the scope of the arbitral tribunal’s jurisdiction ratione personae, as it is called to discuss the international responsibility of a non-participating State.
3.3.1 The Case for an Expansive Approach to the Jurisdiction of Arbitral Tribunals: The Approach of the ICJ
In its 2020 International Civil Aviation Organisation (ICAO) Council judgments,Footnote 94 the ICJ expressly endorsed an expansive approach to the jurisdiction of adjudicative bodies in the context of applicable defences. The applicants (Saudi Arabia, Bahrain, United Arab Emirates and Egypt, also known as ‘the Quartet’) challenged the decision of the ICAO Council to uphold its jurisdiction over Qatar’s claims relating to the Quartet’s aviation restrictions against Qatar-registered aircrafts. The Quartet had argued that the ‘ICAO Council lacked jurisdiction under the Chicago Convention since the real issue in dispute between the Parties involved matters extending beyond the scope of that instrument, including whether the aviation restrictions could be characterised as lawful countermeasures under international law’.Footnote 95 The Council rejected this preliminary objection. The respondents instituted an appeal from the Council’s decision on jurisdiction before the ICJ under Article 84 of the Chicago Convention. The ICJ, in its judgment, found that the ICAO Council did not err in rejecting the Quartet’s assertion and rejected the applicant’s grounds of appeal.
In its judgment, the Court stipulated that ‘the integrity of the Council’s dispute settlement function would not be affected if the Council examined issues outside matters of civil aviation for the exclusive purpose of deciding a dispute which falls within its jurisdiction … Therefore, a possible need for the ICAO Council to consider issues falling outside the scope of the Chicago Convention solely in order to settle a disagreement relating to the interpretation or application of the Chicago Convention would not render the application submitting that disagreement to it inadmissible.’Footnote 96 In other words, the ICJ confirmed that the ICAO Council’s jurisdiction entails the power to decide an indispensable incidental matter in the context of the defence of countermeasures in order to discharge its function under the Chicago Convention.
The findings of the Court in 2020 are in line with previous jurisprudence. The PCIJ, already in 1927, famously pronounced in Factory at Chorzów that ‘reparation … is the indispensable complement of a failure to apply a convention … Differences relating to reparations … are consequently differences relating to its application’.Footnote 97 The power of an adjudicative body to examine a defence along with all issues indispensable to determine its applicability in the case before it follows from the ‘principle that jurisdiction to determine a breach implies jurisdiction to award compensation’,Footnote 98 or more generally, to rule on the content of a State’s international responsibility. The applicability of a defence under the law of State responsibility determines whether the responding State bears international responsibility and the ensuing consequences. Thus, incidental findings in the context of a respondent’s defence are indispensable for the adjudicative body to exercise its function.
This approach is also in line with the principle elaborated by the ICJ in the Nuclear Tests case. The Court confirmed that an adjudicative body ‘is fully empowered to make whatever findings may be necessary’ in order ‘to ensure that the exercise of its jurisdiction over the merits, if and when established, shall not be frustrated’ and ‘to provide for the orderly settlement of all matters in dispute’.Footnote 99 Accordingly, the competence of an adjudicative body to examine all indispensable incidental issues in the context of an applicable defence is part of its inherent powers deriving from its ‘mere existence … as a judicial organ established by the consent of States, and is conferred upon it in order that its basic judicial functions may be safeguarded.’Footnote 100
Importantly, the approach of the ICJ suggests that the limited or specialised jurisdictional field of an adjudicative body, ie, the general class of cases in respect of which it exercises and is entitled to exercise its functions,Footnote 101 does not affect the power to rule on such indispensable incidental issues in the context of defences. The function of an international adjudicative body, regardless of its character as general (such as the ICJ, which may, in principle and subject to the parties’ consent, exercise jurisdiction over all issues of international law, as outlined in Article 36 its Statute) or specialised (such as an investment arbitral tribunal or the WTO panels and Appellate Body), is to decide the case that is brought before it in accordance with its statute and rules of procedure. To discharge this function, it may need to examine rights and obligations that are necessarily implicated by the main claim before it. The findings of the ICJ in the 2020 ICAO Council case discussed above clearly support this argument. The ICJ confirmed that the ICAO Council, a specialised dispute settlement body, has the power to examine indispensable incidental issues for the purpose of deciding a case properly brought before it.Footnote 102
Moreover, the argument that courts of general competence can have an expansive understanding of their jurisdiction whereas specialised courts should exercise self-restraint seems to imply, essentially, a difference in the competency, adequacy or suitability of such court to determine a wider spectrum of issues under international law. Naturally, the competency of the court can only be assessed by reference to its members. In other words, this argument seems to imply that the judges (and not the court) are in one case more ‘competent’ to determine all issues of international law than in the other. In international dispute settlement, as we know it today, this assumption cannot be easily substantiated. Although the professional and academic backgrounds of arbitrators vary, we cannot disregard the fact that several of them are highly specialised in general public international law and have even served as judges in other international adjudicative fora.Footnote 103 When broader matters of international law are implicated in the dispute in question, the arbitral panel should comprise individuals that possess the necessary knowledge. This is a matter that relates to the selection of arbitrators in any given case.
3.3.2 Countermeasures vs Counterclaims
The tribunals’ narrow approach to jurisdiction ratione materiae brings to mind the requirements for the admissibility of counter-claims.Footnote 104 Article 46 of the ICSID Convention provides that ‘except as the parties otherwise agree, the Tribunal shall, if requested by a party, determine any incidental or additional claims or counter-claims arising directly out of the subject matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre.’
Indeed, there is a reasonable analogy to be drawn between the requirements on the admissibility of a counterclaim and an adjudicative body’s jurisdiction to examine the defence of countermeasures. Given that countermeasures are a lawful reaction to a prior internationally wrongful act, a responding State can always claim that its action was in response to the wrongful act of the applicant regardless of whether the court or tribunal would be able to rule on the wrongfulness of such act as an independent claim or counterclaim. This could constitute a back door for entertaining claims that would otherwise be inadmissible.
However, in the case of countermeasures, the respondent will not have an independent verdict on the actions of the applicant. The court’s finding of a prior breach will only constitute part of its reasoning to determine the case brought before it by the applicant. This was clearly stipulated by the ICJ in the 2020 ICAO Council judgment: incidental findings are made by an adjudicative body ‘for the exclusive purpose of deciding a dispute which falls within its jurisdiction’.Footnote 105 As Judge Higgins conceded in her, otherwise very critical, separate opinion to the Oil Platforms judgment, the non ultra petita rule ‘does not operate to preclude the Court from dealing with certain other matters “in the reasoning of its Judgment, should it deem this necessary or desirable”’.Footnote 106
Moreover, an incidental finding would normally not appear in the judgment’s dispositif.Footnote 107 The findings of an adjudicative body may still be an authoritative affirmation of the applicant’s wrongdoing but incidental findings dependent on the principal claim in the dispute cannot generate any rights to remedies. This is a key difference which suggests that Monetary Gold-like considerations and analogies with the rules on counterclaims are misplaced.
4 Concluding Remarks
Economic restrictions, or the threat thereof, have always been a core foreign policy tool,Footnote 108 used to enforce international rules, react to illegality, prevent conflict, respond to emerging or current crises or exert pressure towards a change in policy or activity. To the extent that such restrictions are, prima facie, inconsistent with a State’s international obligations, and not lawful (yet unfriendly) acts of retorsion, their imposition must be justified on the basis of an applicable defence, or it will prompt the consequences of international responsibility.Footnote 109 It is thus essential to clarify whether and under what conditions, restrictions that affect the rights of foreign investors are allowed under the provisions of current investment protection treaties and customary international law.
Given the importance of foreign investment for both the destination and the origin State in terms of economic growth and productivity, and the prime role of investment protection commitments in the bilateral relations of States, the imposition of restrictions affecting the rights of foreign investors can be a powerful tool for the enforcement of the international rule of law. The defence of countermeasures under customary international law recognises the right of States to react to a breach of international obligations by temporarily suspending its own obligations towards the responsible State in order to induce compliance with international law. This chapter discussed whether this customary defence can be invoked in the context of relevant arbitral proceedings in order to preclude the wrongfulness of restrictions that are prima facie contrary to a State’s investment protection obligations. In other words, it aimed to clarify whether suspension of investment protection can be used as a tool to exert pressure on a State that violates international law.
This chapter demonstrated that the defence of countermeasures under general international law is applicable by default to investment disputes, unless interpretation of the investment treaty in question suggests otherwise. On the nature of investors’ rights, on which much ink has been spilled in the academic literature, it was argued that they are not detached from the inter-State relations of the home and the host State. Customary international law on the protection of aliens and the institution of diplomatic protection informs the content of current investment treaties and suggests that the protections enshrined therein are an extension of such customary law, complemented by a procedural right to initiate proceedings without the involvement of the State of nationality. The text and context of investment treaties provides further support to this argument. Lastly, this chapter demonstrated that the power of an adjudicative body to rule on all indispensable incidental matters that arise in the context of an applicable defence is inherent. Findings on such incidental matters form part of the reasoning of the tribunal and have no independent legal force. Thus, the limited scope of an arbitral tribunal’s subject matter jurisdiction and the absence of the State of nationality of the investor from the proceedings do not preclude the examination of the defence of countermeasures.
In view of the above, this chapter concludes that the customary defence of countermeasures is indeed available to responding States in international investment proceedings. A host State is entitled under general international law to react to another State’s breach of an international obligation by temporarily suspending its protection of the latter’s investors within its territory, in accordance with the requirements for a lawful countermeasure under customary international law. Such countermeasures can be a powerful arrow in the quiver of States that can be used to ensure the effective implementation of international responsibility.
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