Earlier in the week I blogged here about the leaked negotiating text of the investment chapter in the Trans Pacific Partnership (TPP) negotiations. One of the points I noted was that Article 12.6 ties the international minimum standard to customary international law. (Annex 12-B specifies that customary international law ‘results from a general and consistent practice of States that they follow from a sense of legal obligation’. ) Public Citizen has criticized this approach on the basis that arbitrators tend to draw upon prior awards for a definition of custom, rather than engaging in a detailed factual analysis of state practice and the basis for that practice. I tend to agree with Public Citizen that the drafting of this provision, which reflects the US model bilateral investment treaty, leaves a lot to be desired.
For those who do not follow investment treaty issues, it is worth providing some background. It is typical for investment treaties to include clauses requiring that a state hosting an investment (the host state) afford fair and equitable treatment to foreign investors. There are diverging ideas about what fair and equitable treatment (part of the international minimum standard) entails. At one level, there is a debate about whether treaty clauses governing fair and equitable treatment create obligations above and beyond those found in customary international law. Clearly, the draft TPP clause settles this debate in the negative for purposes of that agreement.
At another level, there exists debate about what the customary standard of treatment entails. Older cases from the days of diplomatic protection (when a state would bring a claim on behalf of its nationals) suggest that it is very difficult to establish a violation by the host state. However, some argue that the standard evolves over time and that it is now easier to establish a violation. At one extreme, Neer v Mexico is often cited as the customary standard. In that case it was stated that “the treatment of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to willful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.” At the other extreme, in the claims Philip Morris has brought against Uruguay and Australia, investors argue that any form of unreasonableness in the treatment accorded to them, or a violation of their legitimate expectations, violates the fair and equitable treatment standard. To be clear, these arguments are made first on the basis that the treaties relied on incorporate a standard above and beyond that found in customary international law. However, in the alternative, the argument might be made that customary international law has evolved since Neer v Mexico to hold host states to a more demanding standard of treatment. There is some case law, such as Mondev v United States, to support the theory that the standard may be an evolving one.
Clearly, there is an issue of legal uncertainty here. That uncertainty is likely to benefit investors to the detriment of host states. Investors can threaten or bring claims on the basis of a contested standard and host states are left to make an informed guess about the applicable standard to which they will be held. If the customary standard were clear it would be easy enough to elaborate that standard in the text of the agreement. In this context, one possible explanation for the draft is that the states negotiating the TPP cannot agree on the standard. Another explanation, which is credible given that this clause comes from the US model bilateral investment treaty, is that US firms would prefer ambiguity to clarity.