The Standard of National Treatment in the Investor-State Dispute Settlement Practice

The investor-state dispute settlement (ISDS) practice has had a steady growth in recent years and with this rising caseload, a series of issues have arisen. It is a system that prioritizes party autonomy, speed and finality, albeit it faces the issue of contradictory legal reasoning on cases of similar nature. This essay analyses the inconsistencies in ISDS jurisprudence due to engagement with WTO case law in competitive interaction for the determination of a breach of the national treatment standard.

I. Elements of the national treatment standard

The concept of national treatment has been analysed through numerous arbitral decisions yet, in the ISDS context, it has not been embedded in a general legislation for investment arbitration. Accordingly, the absence of this sort has led to an interpretation of this standard through the provisions of Bilateral Investment Treaties (BITs).

The North American Free Trade Agreement (NAFTA) provides that each Party has the obligation to accord to investors of another Party, treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of its investment. Additionally, the OECD Declaration on International and Multinational Enterprises stipulates that investors and investments should receive treatment that is no less favourable than that accorded in like situations to domestic enterprises.

The basic framework to adjudicate claims on national treatment is based on a three-step analysis [Rudolf Dolzer and Christoph Schreuer, Principles of international investment law (OUP Oxford 2012), p.200]. First, a tribunal must determine whether the investors are in like circumstances through a relative class of comparators. The tribunal must then determine whether the treatment accorded to a foreign investor is less favourable than the one enjoyed by domestic investors. Lastly, it must determine the host state’s intent and whether there was a justification for this differentiation. The essay will focus on the first step of the analysis in order to determine whether the competitive interaction between foreign and national investors in ISDS serves as an indicator of breach of the national treatment standard through the determination of the concept of ‘like circumstances’.

II. The engagement of ISDS tribunals with WTO case law and their approach to the concept of ‘like circumstances’ under the standard of national treatment

Policies from the World Trade Organization (WTO) have been observed in the interpretation of ISDS concepts (SD Myers v. Canada, Occidental v. Ecuador, Methanex v. USA). The WTO system remains an authoritative example of a formalized structure of dispute resolution in trade matters [Don Wallace and others, Investor-state arbitration (Oxford University Press 2012), p.400]. However, even if the WTO system provides a relatively efficient established system with a developed jurisprudence on general principles for trade, a differentiation must be made in the interpretation of these policies when applied in a parallel manner in the ISDS setting. It must be noted that WTO policies regulate like products whereas BIT policies regulate like circumstances. This means that while the WTO is concerned with the trade of products, components, raw materials and services between States, BITs regulate conditions and circumstances that arise between an investor and a State. Therefore, the issue of interpretation of ‘like circumstances’ has turned complex when different tribunals have applied WTO case law criteria into the BIT setting.

        A. Occidental v. Ecuador

The case of Occidental v. Ecuador concerned a US owned company which entered in a contract with Petroecuador, a state-owned corporation of Ecuador to undertake the exploration and production of oil in Ecuador. Occidental received a reimbursement of value-added tax (VAT) on purchases required for its activities on a regular basis. This situation changed in 2001 when they were further denied reimbursement as its new contract with Petroecuador provided for a remuneration formula expressed as a percentage of oil production and the VAT refund was already accounted as part of the new formula. It is important to note here that Petroecuador was also denied VAT funds. Occidental claimed an action for breach of national treatment under the US-Ecuador BIT.

The Tribunal in this case considered the obligation under Article II (1) of the US-Ecuador BIT (the Treaty), to treat investments and associated activities “on a basis no less favourable than that accorded in like situations to investment or associated activities of its own nationals or companies, or of nationals or companies of any third country, whichever is the most favourable”. Further, it agreed with Occidental’s position and mentioned that the term ‘in like situations’ cannot be interpreted in a narrow sense because the purpose of national treatment is to protect investors as compared to local products, and this cannot be done exclusively in the sector in which that particular activity is undertaken. The Tribunal then supported its decision through an analysis of national treatment under the WTO. It mentioned that the concept has been interpreted in a narrow manner to like products and thus this view was not pertinent to the issue of the case since the interpretation under the Treaty allows the protection to cover all exporters that share such condition of disadvantage. Here, the Tribunal based its decision under the comparison of WTO jurisprudence to come to the conclusion that a breach of the national treatment standard has taken place without even considering the direct relation of competitiveness of the oil producers within their own sector. The Occidental approach in so far as it suggests an extremely broad definition of likeness, has found only limited support in the arbitral awards [Don Wallace and others, Investor-state arbitration (Oxford University Press 2012), p.408].

      B. Myers v. Canada

In the previous NAFTA context case of SD Myers v. Canada, the Tribunal reached a different and a rather narrow approach to the consideration of the term ‘like circumstances’. Despite the fact that the Tribunal referred to WTO jurisprudence, it also considers other pertinent authorities in the context of ISDS to base their criteria.

This case concerned the imposition of an export ban on a particular type of hazardous waste. The US company established operations in Canada to market its services and formalize contracts for waste remediation services. The processing of waste occurred only when the waste was shipped across the border to the US into the company’s facilities. The claimant contended that the Canadian export ban constituted a form of discrimination under the national treatment standard. In order to consider whether there was a breach of this standard, the Tribunal considered that the term ‘like circumstances’ must take into account the general principles that emerge from the NAFTA context in addition to WTO jurisprudence and the OECD Declaration on International and Multinational Enterprises. In analysing WTO jurisprudence, the Tribunal made reference to the fact that the WTO context allows exceptions under Art. XX of the General Agreement on Tariffs and Trade (GATT) to determine whether discrimination has taken place in the issue of ‘likeness’. However, the Tribunal did not base its decision solely on this jurisprudence. Instead, it considered that the interpretation of the phrase ‘like circumstances’ under the NAFTA context and concluded that the concept of ‘like circumstances’ invites an examination of whether a non-national investor complaining of less favourable treatment is in the same ‘sector as the national investor. Additionally, it took the view that the word ‘sector’ includes the concepts of ‘economic sector’ and ‘business sector’. This conclusion reached by the Tribunal narrows down the concept of ‘like circumstances’ as opposed to the case analysed above and takes into consideration the role of competitive interaction for the determination of ‘likeness’.

III. Conclusion

In light of the two analysed cases above, it is convenient to list the principal issue as follows. The essential basis of comparison between these cases lies on the fact that the Tribunal in SD. Myers v. Canada did not base its decision solely on WTO jurisprudence but instead it crafted its conclusion on the basis of a differentiation between the WTO context, which provides for a general exception clause, and the ISDS context, which does not provide an exception norm. Thus, tribunals must consider other criteria to reach the concept of ‘likeness’ between the two similar circumstances. Furthermore, the analysis of these two perspectives reveals a deep issue on ISDS jurisprudence. Through a breakdown of the tribunal’s reasoning in the two contradictory cases of Occidental v. Ecuador and SD Myers v. Canada, it can be said that the issue is not the engagement of ISDS tribunals with WTO jurisprudence. Invoking WTO jurisprudence in the ISDS context is not the underlying issue but instead the sole use of it as a determining criterion to define a concept such as national treatment in the ISDS context is the problematic part. This is particularly true in the case of Occidental v. Ecuador, where the Tribunal based its decision mainly on a comparison with WTO jurisprudence. Thus, considering the Tribunal’s analysis in SD Myers v. Canada, one could reach the conclusion that even when WTO jurisprudence was referenced, the main consideration stemmed from a wider range of criteria that gave preference to the NAFTA and the BIT’s provisions.