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Investment Policy Blog

As part of States’ efforts to strike a balance in their international investment agreements (IIAs) between the obligations they assume and the rights and policy space they wish to retain, some adjoin annexes to their treaties to protect their ability to take “Non-Conforming Measures” (NCMs). States have generally: used such annexes to make exceptions to non-discrimination obligations, market access restrictions and performance requirements; have included the ability to grandfather in NCMs existing at the time an IIA enters into force; and have provided for the ability to maintain, amend, and enact new NCMs in specifically identified sectors, sub-sectors, activities, or policy areas.

As with general exceptions (e.g., the essential security exception), and other carve-outs (e.g., provisions excluding tax matters from investor-State dispute settlement), the interpretation and application of these annexes safeguarding NCMs have important implications for the scope and effect of the treaty to which they are attached. One recent North American Free Trade Agreement (NAFTA) case, Mobil v. Canada,[1] highlights that issue and raises important questions for States to consider in connection with drafting and relying on their NCMs.

Mobil v. Canada arose out of a regime that the Canadian federal and provincial governments designed in the late 1980s in an attempt to ensure that investment in offshore oil reserves produced long-term benefits for sustainable growth and development in Canada. Specifically, they developed a legal scheme adopted in the 1987 “Accord Act” whereby investors engaging in development of the offshore resources are required by law to make “expenditures … for research and development” (R&D) and “for education and training” (E&T) in the local province.[2]

Canada listed the Accord Act as an NCM in the NAFTA, excepting it from the treaty’s restrictions on performance requirements. The NAFTA also included as a protected NCM “any subordinate measure adopted or maintained under the authority of and consistent with the measure.”[3]

In 2004, Canadian government officials adopted guidelines under the Accord Act that imposed stronger requirements on investors in the offshore oilfields to invest in R&D and E&T. After unsuccessfully challenging those guidelines under Canadian law, the claimants initiated a claim under the NAFTA, arguing that the new guidelines violated the NAFTA’s prohibitions on performance requirements, and that they were not a protected subordinate measure under the treaty’s carve-out for NCMs.

A majority of the tribunal agreed with the claimants and, in so doing, made findings with notable implications for the coverage provided by NCM protections.

First, the majority rejected Canada’s argument that domestic law should govern the question of whether a subordinate measure is “consistent with” a scheduled NCM. Canada explained that its domestic courts had already found that the 2004 guidelines were consistent with and issued under the authority of the Accord Act, and asserted that such judicial holdings should similarly resolve the issue of “consistency” for the purposes of the NAFTA. The majority, however, took the position that a subordinate measure’s consistency with the NCM under domestic law is necessary but not sufficient to save the subordinate measure under the treaty.

The majority of the tribunal reasoned that, under the NAFTA, when assessing the conformity of the subordinate measure with the reserved NCM, it would have to take into account not only the subordinate measure's consistency with the scheduled NCM itself, but also its consistency with other subordinate measures that had been issued pursuant to the scheduled NCM. Applying that test, the majority determined that although the 2004 guidelines may have been consistent with the scheduled NCM (the Accord Act), the 2004 guidelines were not consistent with other less demanding subordinate measures officials had previously issued pursuant to that Act when approving less demanding E&T and R&D commitments for the investment projects. In reaching that conclusion, the majority explained that, although “consistent with” did not mean “no more burdensome than”, the 2004 guidelines imposed obligations on investors that went so far beyond previously issued guidelines and requirements that the 2004 guidelines should be viewed as being inconsistent with the earlier subordinate measures.

Importantly, by adopting that approach, the majority ratcheted down the broad reservations expressly set forth in the NAFTA. That, as well as the majority’s willingness to look beyond domestic law regarding the meaning of “consistency”, represents a potential expansion of liability under investment treaties in a manner unforeseen by States.

Nevertheless, there are elements of the case that may dampen that effect. For one, one of the arbitrators wrote a separate opinion dissenting from the majority’s decision on the NCM, arguably reducing the persuasive force of the majority award. The majority itself also softened the force of its award when it added the caveat that consistency with “other subordinate measures” might not always be required, but that the relevance of other subordinate measures would depend on the facts of the particular case and the requirements of any relevant preexisting subordinate measures. The majority refrained, however, from trying to further dictate when its approach would or would not be appropriate in other disputes.

States that disagree with the Mobil majority's interpretation and application of the NAFTA's NCM provisions may wish to consider both issuing interpretive statements to clarify their understanding of how to approach such provisions in similar treaties, and using modified language in future agreements. These steps are consistent with the growing trend of governments to take steps to reduce uncertainty regarding the scope and meaning of their IIAs. While – in contrast to more infamous clauses such as the “fair and equitable treatment” requirement and essential security exception – there are not yet many cases dealing with the scope and meaning of NCMs, Mobil is an early signal of the issues that may increasingly arise regarding these treaty provisions that States can proactively address.

See also IPFSD on clauses on country specific reservations to:

The author would like to thank John Rennie, Lisa Sachs and Perrine Toledano for their assistance with this piece.

[1] Mobil Investments Canada Inc. & Murphy Oil Corporation v. Canada, ICSID Case No. ARB(AF)/07/4.

[2] Mobil Investments Canada Inc. & Murphy Oil Corporation v. Canada, ICSID Case No. ARB(AF)/07/4, Decision on Liability and on Principles of Quantum, 22 May 2012, para. 37 (citing the Accord Act, section 45).

[3] North American Free Trade Agreement, 32 International Legal Materials 289, Annex I, 2(f)(ii), (1993).

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Alexandre Genest [ University of Ottawa ] Posted on 12 September 2013, at 5:54 PM

Thank you Lise for your great Featured Discussion piece which puts the spotlight on the complexity and far-reaching policy implications of how to apply reservations within international investment agreements (“IIAs”) such as the North American Free Trade Agreement (“NAFTA”). As this constitutes a highly technical arbitral award, I wanted to take the opportunity to dissect the Majority's reasoning.

The Majority in the Mobil v. Canada investment arbitration decided that revised research and development (R&D) requirements embedded in “Benefits Plans”, which constituted “matters of considerable national interest”, "significance and sensitivity", (Mobil Investments Canada Inc. and Murphy Oil Corporation v. Government of Canada (2012), ICSID Case No. ARB(AF)/07/4, Partial Dissenting Opinion, Professor Philippe Sands Q.C. (May 17, 2012) [Mobil Dissent], paras 5, 7.) breached NAFTA Article 1106 (Performance Requirements) and could not benefit from a reservation specifically adopted for such measures under NAFTA Article 1108.

In doing so, the Majority rendered a controversial award in two main respects. First, the Majority award of the Tribunal reduced policy space by seriously curtailing a host State’s ability to use regulatory flexibility provided by reservations to treaty provisions. Second, the Majority award of the Tribunal reduced consistency and predictability of international investment law by developing a complex analytical approach to assessing the validity of subordinate measures under reservations.

Before going any further, here are the two provisions key to the Mobil v. Canada award that I will be discussing below:

NAFTA Article 1108(1)(c) reads as follows: "1. Articles 1102, 1103, 1106 and 1107 do not apply to: (…) (c) an amendment to any non-conforming measure referred to in subparagraph (a) to the extent that the amendment does not decrease the conformity of the measure" (…)

NAFTA Annex I, paragraph (2)(f)(ii) reads as follows: "(f) A measure cited in the Measures element of a reservation (…) (ii) includes any subordinate measure adopted or maintained under the authority of and consistent with the measure"

(1) How did the Majority award of the Tribunal reduce policy space of host States?

a) By creating a second one-way ratchet provision: new subordinate measures must fall within the scope resulting from the non-conforming measure and prior subordinate measures

In a prescient analysis dating back to 2006, UNCTAD had characterized NAFTA Article 1108(1)(c) as a “ratchet” provision having the effect of increasing a State Party’s treaty commitments toward liberalization by automatically reducing its reservations in accordance with regulatory changes that lessen the scope of a reservation. UNCTAD warned that such ratchet provisions “may deprive host countries of flexibility that they may not wish to see locked-in (and open to challenge) under international law”. (UNCTAD, “Preserving Flexibility in International Investment Agreements: the Use of Reservations”, in UNCTAD Series on International Investment Policies for Development, UN Doc UNCTAD/ITE/IIT/2005/8 (2006), p. 19 and FN 5, p. 35.)

One is struck by the eerie similarity between UNCTAD’s depiction of one-way ratchet provisions and the application of reservations made by the Tribunal’s Majority. However, the Majority of the Tribunal in Mobil amplified the liberalizing feedback loop by restricting the scope of new subordinate measures (“NSMs”) to that delineated by prior subordinate measures, thus converting NAFTA Annex I, paragraph (2)(f)(ii) into a second one-way ratchet provision. Here is how the Majority accomplished this.

Touching upon the suggestion by Lise for States to make known their position on the use of reservations notably by issuing interpretive statements, it is interesting to note that despite being invited by the Tribunal to do so, both Mexico and the United States declined to make submissions to the Tribunal as to whether the term “measure”, as used at the opening of NAFTA Annex I, paragraph 2(f)(ii), included only the existing non-conforming measure (“NCM”) identified in Canada 's Schedule to Annex I, or whether it also included prior subordinate measures. (Mobil Majority, paras 318-319.)

The Majority of the Tribunal ultimately decided that based on its ordinary meaning the term “measure” included subordinate measures, which meant that consistency of a NSM should be evaluated not only against the NCM, but also against any subordinate measures prior to the NSM. This finding significantly reduced the scope of the reservation initially provided in favor of the NCM. (Mobil Majority, paras 309-310, 315, 317, 324-327.)

b) By transforming the consistency test into a non-decreasing conformity test

Under NAFTA Article 1108(1)(c), an amendment to a NCM must not “decrease the conformity” of the NCM in order to benefit from the reservation to NAFTA provisions, while a new subordinate measure (“NSM”) must be adopted "under the authority of and consistent with" the NCM. Despite acknowledging the distinctiveness of each criterion (Mobil Investments Canada Inc. and Murphy Oil Corporation v. Government of Canada (2012), ICSID Case No. ARB(AF)/07/4, Decision on Liability and Principles of Quantum (May 22, 2012) [Mobil Majority], paras 305-307), the Majority of the Tribunal unduly construed the “consistency” test applicable to subordinate measures (mentioned in NAFTA Annex I, paragraph (2)(f)(ii)) in a way nearly identical to the “non-decreasing conformity” test applicable to amendments (mentioned in NAFTA Article 1108(1)(c)). The Majority proceeded in such fashion out of fear that State Parties might circumvent the seemingly more demanding test for amendments by adopting subordinate measures instead. (Mobil Majority, para 341)

The Majority reformulated the consistency test as "whether the new measures enlarge [or unduly expand] the non-conforming features of the reservation." (Mobil Majority, 336, 341, 411.) In doing so, the Majority inordinately distanced the consistency test from the ordinary meaning of "consistent".

The Majority formulated its consistency test as follows: "whether the changes are imposing such additional burdens that are of an inhospitable, inharmonious, incompatible, contradictory nature, and are otherwise inconsistent with the existing legal framework." (Mobil Majority, para 394) The Majority thus created a consistency test detached from the NCM and instead evaluated the consistency of the NSM by comparison with the legal framework that applied to the investment projects prior to the NSM. (Mobil Majority, paras 333, 336, 338, 380, 410) In other words, the NSM must not "alter the legal framework in a fundamental manner" in order to remain "consistent with" the measure, that is to say the legal framework previously applicable to the relevant investments. (Mobil Majority, para 410) According to Dissenting Arbitrator Philippe Sands, the concept of “legal framework was “plucked out of the air” (Mobil Dissent para 28) and there exists “a world of difference between “the measure” and “the legal framework”. (Mobil Dissent, para 28) By conflating these two expressions, the Majority discarded the ordinary meaning of the the term “the measure” as used in NAFTA Annex I, paragraph (2)(f)(ii)) (Mobil Dissent, para 31)

The Majority seems to suggest that only the “character” of burdens imposed by NCMs and NSMs (as opposed to their weight) can vary, (Mobil Majority, para 339) despite that the three NAFTA Parties (Canada, Mexico and the United States) agreed that a NSM “could impose some additional and/or more onerous commitments than those that were imposed by the earlier measure." (Mobil Majority, paras 374, 400)

The Majority concluded that taken alone neither a mere change in methodology, (Mobil Majority, para 398) nor a requirement for additional spending would not breach the consistency test, (Mobil Majority, para 400) and that there existed no “no statutory bright line test” for additional spending. (Mobil Majority, para 401)
However, the Majority decided that the combination of additional spending requirements, new reporting and pre-authorization requirements, and a new funding mechanism amounted to “a substantial adjustment to the regulatory framework” which amounted to a fundamentally different kind of regulatory oversight (Mobil Majority, paras 398, 404) whose additional burden tripped the requisite consistency threshold (Mobil Majority, para 410). The NSM imposed "quantitatively and qualitatively different, and more burdensome" requirements (Mobil Majority, para 409) which substantially expanded the measures that breached NAFTA Article 1106(1). (Mobil Majority, para 401) Dissenting, Prof. Philippe Sands considered that a NSM can impose additional burdens in comparison to prior subordinate measures. (Mobil Dissent, para 24.)

c) By overdrawing the NAFTA’s objectives and casting a gloom over the specific objectives of reservations

The Majority failed to assign appropriate weight to the specific purpose of provisions on reservations such as NAFTA Annex I, paragraph (2)(f)(ii) as opposed to the purposes of NAFTA as a whole. Canada argued that NAFTA Annex I, paragraph (2)(f)(ii) served the purpose of preserving “‘flexibility for the NAFTA Parties in sensitive areas through effective reservations.’” (Mobil Majority, para 323) The Tribunal acknowledged this purpose, but seems to have grounded its reasoning almost exclusively on the overarching purposes of the NAFTA as embedded in NAFTA Article 102, including eliminating barriers to trade, facilitating cross-border movement of goods and services and increasing investment opportunities. (Mobil Majority, para 340)

In doing so, the Majority did not appear to heed the arbitral Tribunal’s approach in ADF v. The United States (ADF Group Inc. v. United States of America, ICSID Case No. ARB (AF)/00/1, Award (January 9, 2003), para 147). Dealing with reservations under the NAFTA, the ADF Tribunal cautioned against relying too heavily on NAFTA’s general objectives and cited NAFTA Article 102(1) to the effect that the specific rules and principles of the NAFTA elaborate NAFTA’s objectives more specifically and act as lex specialis compared to NAFTA’s overarching objectives, which act as lex generali.

(2) How did the Majority award of the Tribunal reduce consistency and predictability of international investment law?

The Majority dismissed the notion that the consistency of a NSM should be tested only against the NCM as resulting "in a superficial and partial examination of the legal system." (Mobil Majority, para 334) In spite of its praiseworthy willingness to tackle complexity head on, the Majority will likely be remembered more for its nonchalant attitude before adopting a methodology fraught with an escalating complexity and unpredictability. The Majority acknowledged "not being troubled by, the implication that consistency, as well as authority, could be evaluated by reference to a different mix of measures". (Mobil Majority, para 335) The Majority acknowledged that its approach entailed holding State Parties accountable under the NAFTA to an evolving legal and regulatory framework that would include subordinate measures significantly different from the measures initially covered by the reservations. (Mobil Majority, para 338)

One aspect of this increased complexity stems from the lack of obligation for State Parties to provide any information with respect to subordinate measures. There is therefore no way for investors to ascertain which subordinate measures that breach the NAFTA are nevertheless validated thanks to reservations, which reinforces the impression that NAFTA Parties intended for authority and consistency to be evaluated by reference to the NCM and not the NCM plus subordinate measures prior to the NSM. (Mobil Dissent, paras 11, 36.)

The Majority added an additional layer of complexity by deciding that the consistency of the NSM is to be evaluated against prior subordinate measures, but the authority under which the NSM was adopted is to be evaluated against the NCM itself. (Mobil Majority, paras, 330, 332) In his dissent, Prof. Philippe Sands considered that authority and consistency should result from applying the same standard. (Mobil Dissent, paras 22, 34-35.)

Lise ends her Featured Discussion piece by suggesting that States fine-tune their approach toward reservations. An additional chilling scenario that stems from the Majority award consists of host States having to establish and consult a register of non-conforming measures and subordinate measures for each reservation and ensuring preliminary compliance of every new subordinate measure with the totality of such measures.

Alexandre Genest
Part-Time Professor / Professeur à temps partiel
PhD Researcher in Law / Chercheur doctorant
Vanier Canada Scholar /Boursier Vanier Canada
Université d'Ottawa / University of Ottawa
Ancien Élève de l'ÉNA (CIL - Promo. Rousseau)
Master en Affaires publiques, Université Paris-Dauphine
Avocat, Barreau du Québec
LL.B., Université de Montréal

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