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Codifying and Expanding 'Methanex'

One of the options for reforming international investment agreements is to limit provisions on “expropriation” and “minimum treatment under international law” by codifying the key finding of the NAFTA tribunal in the Methanex case.  So doing would clarify that the adoption or application of any bona fide and non-discriminatory law or regulation intended to serve a public purpose shall not constitute a violation of an investment agreement or treaty (hereafter, the 'Methanex rule').

So doing would bring some clarity to the concept of “expropriation” in international investment law by limiting it primarily to direct expropriations.  'Indirect,' or regulatory expropriations might quality if they destroyed all or almost all the value of an investment.

This clarification would also bring the concept of “expropriation” in line with the most recent and significant U.S. Supreme Court decision on regulatory takings doctrine, Lingle v. Chevron, 544 U.S. 528 (2005).  The Court, in Lingle, stated that regulatory takings analysis must focus on government actions that are “functionally equivalent to the classic taking in which government directly appropriates private property or ousts the owner from his domain.”

This reform would also resolve a conflict in NAFTA tribunal decisions concerning the correct reading of the expropriation article. The arbitrators in Methanex v. United States interpreted NAFTA’s expropriation rule narrowly,   concluding that: “as a matter of international law, a nondiscriminatory regulation for a public purpose, which is enacted in accordance with due process and which affects…a foreign investor or investment is not deemed expropriatory or compensatory,” unless specific commitments to refrain from regulation were made to the investor.  Methanex v. United States,Final Award, part IV, chapter D, paragraph 7 (2005).  

Such a reform measure might extend the coverage of the Methanex rule to the minimum standard of treatment articles in international investment agreements. Even if future tribunals follow the rule in Methanex in reading the expropriation article, international investment agreements still provide more extensive protection of property rights and more extensive restrictions on government regulation in the public interest than the U.S. Constitution.  This is because many expropriation claims can easily be reframed as minimum treatment claims.

The obligation on parties to international investment agreements to provide a minimum standard of treatment under international law is broadly stated and highly subjective.  And, there is no minimum treatment case comparable to Methanex. Except with respect to issues of procedural due process, it is difficult to predict when a tribunal may decide that a government action has “denied justice” or failed to provide “substantive due process.”

The reform option presented here would, therefore, not only codify Methanex, but also would extend it to cover minimum standard of treatment claims.  

Such a reform, codifying and extending the Methanex rule, could be pursued by a variety of legislative or administrative vehicles, including:

•    Trade Promotion Authority (TPA) legislation;
•    A freestanding bill;
•    A rider to an appropriations bill;
•    An official interpretation of the NAFTA Free Trade Commission or a similar body charged with interpreting investment chapters in other agreements.

There is no rule of precedent at international law. So, the outcome of future cases is unpredictable. Until the language in NAFTA’s investment chapter related to expropriation is clarified, its undefined terms and phrases will mean what an arbitration panel decides that they mean in a particular case.

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