MECO and Others vs. Montpelier - Case Study Example

MECO and others vs. Montpelier Introduction Two Bilateral Investment Treaties (BITs) are applicable to the disputes filed by Ackerman, MECO and PECO as foreign investors in Montpelier. One of the BITs is between Montpelier and Atlantis and the other is between Montpelier and Pacifica. The claims against Montpelier arise out of the host government’s decision to forfeit agreements for the sale of its utilities company to PECO and subsequently to MECO. PECO is a company incorporated under the laws of Pacific, although it maintains its main offices in Atlantis. Arthur Ackerman of Atlantis has controlling interest in PECO. The BIT between Montpelier and Atlantis as well as between Montpelier and Pacifica is relevant to the resolution of the disputes filed by each of the parties. Although MECO is incorporated under the laws of Montpelier, it is not a domestic investor as its subscriber is PECO and ultimately Ackerman, both of whom are foreign investors (Convention on the Settlement of Investment Disputes Between States and Nationals of Other States 1966, Art. 25(2)(b)). There are two primary questions for consideration. The first question is whether or not the foreign investors under the BITs were accorded fair and equitable treatment and or national treatment pursuant to the relevant BITs and customary international law. The second question is whether or not Montpelier’s defense challenging the jurisdiction of the arbitration panel is valid having regard to the applicable and relevant provisions of the two BITs. Fair and Equitable Treatment and National Treatment Article 4(1) of the BIT between Montpelier and Atlantis speaks to fair and equitable treatment to the extent that each of the states shall extend to the other “fair and equitable treatment,” as well as “full protection and security” in their respective territories. The contracting states also pledge not to unreasonably or discriminatorily take measures that impair the “management, maintenance, use, enjoyment, extension, or disposal” of the other’s national’s investments. Article 4(2) also imposes a duty upon the contracting states to accord foreign investors the same treatment accorded domestic investors. This is known as the national treatment doctrine. National treatment standards are included as a means of conferring upon foreign investors the same degree of protection accorded national or domestic investors in the host country (Subedi 2008, 57). Article 3 of the BIT between Montpelier and Pacifica contains the exact same standards for national treatment and fair and equitable treatment. The question is therefore whether or not Montpreleier breached its obligations under the two applicable BITs with respect to its fair and equitable treatment and national treatment obligations. Looking to the facts of the case for discussion, it would appear that PECO acquired 30 percent of the Montpelier’s utility company and MECO in anticipation of acquiring the remaining 70 percent invested $20 million in upgrading the utility company. Also MECO’s holds PECO’s stock. However, national uprising against the modernization tactics orchestrated by MECO’s investment, Montpelier responded declaring Montpelier in a state of emergency. Emergency measures included the prohibition of ownership in utilities by foreigners or the prohibition of stock ownership by an foreign controlled entity. MECO who has sold its stock at a substantially reduced rate can claim damages for those losses. PECO and Ackerman stakeholders of MECO ultimately have a vested interest in the same claim. The duty to accord investors from the other state fair and equitable treatment has evolved to confer upon the contracting states to a BIT a duty to act in good faith and in a manner consistent with international concepts of justice. The United Nations Conference on Trade and Development on the Latest Developments in Investor-State Dispute Settlement, 2008 noted the potential for the broad construction of the definition and application of fair and equitable treatment (United Nations Conference on Trade and Development 2008, 4). For instance in a dispute under a BIT between Argentina and Germany the arbitration tribunal stated that the upon a plain construction of the terms “fair” and “equitable” within the context and goals of the BIT, the terms would impose upon the states a duty to treat foreign investors “in an even-handed and just manner” (United Nations Conference on Trade and Development 2008, 4). The fair and equitable treatment standard was also required to be ascertained by reference to the desire to promote and protect foreign investments. Moreover, the arbitration tribunal denied that the concept that the state’s conduct would have to amount to bad faith or be such that it amounted to malicious intent was necessary. Such a requirement would defeat the purpose of the BIT in the first place. Ultimately the arbitration tribunal concluded that the conduct complained of must be such that it fell short of transparency and was therefore inconsistent with the concept of good faith (United Nations Conference on Trade and Development 2008, 4). The cases studied by the UN in its 2008 report on foreign investments offers some guidance as to how the arbitration panel in the Montpelier case should determine the complainants’ dispute. The UN’s 2008 report identified a variety of interpretive approaches to what amounts to fair and equitable treatment. Some tribunals reportedly emphasized consistency of law on the part of the host state. This consistency would necessarily mean that the host state have a stable, consistent and predictable legal regime that would have been consistent with the foreign investor’s reasonable expectations. The foreign investor would normally form these expectations prior to making the investment in the host state (United Nations Conference on Trade and Development 2008, 4). The main question for the arbitration tribunal are therefore whether or not Montpelier acted in good faith when they passed the laws outlawing ownership by foreigners of utilities. Another important question for the tribunal is whether or not MECO, PECO and Ackner had reasonable expectations prior to making their investments in the utility company that the laws of Montpelier would remain consistent with those existing at the time of making their investments. Based on the fact that MECO lent $20 million to the utility company to upgrade its facilities and said funds were accepted and applied, it would have been entirely reasonable for MECO and by extension its stakeholders, PECO and Ackner to expect consistency of laws. In this regard, the arbitration panel, by applying the good faith interpretation of the fair and equitable treatment standard should find in favor of the complainants. The wider question is therefore whether or not the government of Montpelier acted in good faith or in a manner that was reasonable. In order for the tribunal to adequately address this question they are required to strike a fair balance between the needs and expectations of the local population and the needs and expectations of the foreign investors. As stated by the tribunal in Noble Ventures, Inc v Romania ISCID Case No. Arb/01/11 [2005] treaties are required to be interpreted in “good faith in accordance with the ordinary meaning” of its terms and conditions and the context in which they appear taking account of the treaty’s purpose (Noble Ventures, Inc v Romania ISCID Case No. Arb/01/11 [2005] 61). The BIT in the Noble Ventures Inc. case required that Romania “provide” Noble “with treatment in accordance with international law” (Noble Ventures, Inc v Romania ISCID Case No. Arb/01/11 [2005] ).The commitment required that Romania act in good faith, “accord fair treatment and avoid arbitrary and discriminatory” treatment in the regulation of Noble’s investments in Romania (Noble Ventures, Inc v Romania ISCID Case No. Arb/01/11 [2005] 61). The Noble tribunal ruled that ultimately this commitment was tantamount to the obligation to provide fair and equitable treatment within the context of the BIT between Noble and Romania. In this regard, the duty to accord fair and equitable treatment meant that the host government was under a specific duty to “provide full protection and security” and an obligation not to take “arbitrary and discriminatory” action as well as a responsibility to comply with “contractual obligations towards investors” (Noble Ventures, Inc v Romania ISCID Case No. Arb/01/11 [2005] 61). In this case, Noble’s complaint followed a national crisis that resulted in the Romanian government’s expropriation of private property. The bank in which Noble’s investment were deposited had been confiscated by the government. In doing so the government failed to respond to Noble’s request to reschedule its debts. As a result Noble was not in a position to meet its financial obligations and could not satisfy liens held by the government controlled Romanian bank which had been recalled against Noble via the courts (Noble Ventures, Inc v Romania ISCID Case No. Arb/01/11 [2005] 61). The tribunal however took account of all the circumstances of the case and ruled that the government in not responding to Noble’s request to reschedule its debts had not acted contrary to good faith within the scope of its obligation to treat Noble in accordance with fair and equitable standards. The fact is, the Romanian government had a number of bank employees to take into consideration and that was a reasonable priority. Moreover, taking actions in the courts did not offend the concept of fair and equitable treatment particularly since the standard as provide for in the treaty required that Romania not act in a discriminating and arbitrary manner. In the circumstances and in the context of the case, Romania had not acted in a manner contrary to the standard of fair and equitable treatment(Noble Ventures, Inc v Romania ISCID Case No. Arb/01/11 [2005] 61). The facts of the case for discussion are similar to the facts of the case in Noble. In both cases the government failed to protect the foreign investor, and both cases the government took action in response to a national crisis that ultimately caused the foreign investors to incur losses relative to their investments. However there is a salient difference of facts. In the Noble case, the host government actions were entirely non-discriminatory in that it applied to both foreign investors and nationals. In the case for discussion, the government’s legislative action is entirely discriminatory as it favors nationals over foreigners and such action only occurred after MECO via its stakeholders invested in Montpelier’s utilities’ company. Ultimately, it is incumbent on the tribunal to take both an objective and subjective approach to the fair and equitable treatment standard as well as the national treatment standard. As Schill (2006) explains, the BIT requires that a subjective approach be taken with regard to the facts and circumstances of a particular case (4). At the same time tribunals are required to apply an objective assessment of the standard of fair and equitable treatment by reference to the goals and intentions of the treaty (Schill 2006, 4). In International Thunderbird Gaming Corporation v The United Mexican States (Jan 2006) a NAFTA tribunal interpreted the relevant BIT fair and equitable standard to be no different from the minimum standard at international customary law. By taking this approach, the NAFTA tribunal took the position that in accordance with customary international law determining whether or not the minimum standard was breached required an assessment of the facts and circumstances of the case. Only then can the adjudicating authority determine whether or not the government’s conduct when looked at by reference to the special facts and circumstances are such that they can be deemed a “gross denial of justice or manifest arbitrariness” to the extent that the conduct falls “below acceptable international standards.”(International Thunderbird Gaming Corporation v The United Mexican States (Jan 2006)). In the International Thunderbird case, it was determined that the Mexican officials had not acted arbitrarily since the complainants were accorded opportunities to contest the conduct complained of via official action. However, in the case for discussion, no such opportunity was accorded the complainants as the government simply passed legislative acts outlawing the ownership of utilities by foreigners. This is particularly arbitrary and contrary to minimum standards of justice under international law because the legislative provisions were retroactive and as such amounted to an arbitrary forfeiture of property. In other words, having acquired an interest in the utility company, MECO and its stakeholders were forced to surrender that property at a loss In Loewen Group, Inc and Raymond L. Loewen v United States of America Case No. ARB(AF)/98/3 Washington, (2003) took a far more definite approach to the application of customary international law. In this case the tribunal emphatically stated that the principle of fair and equitable treatment together with the principle of full protection and security” are obligations “only to the extent that they are recognized by customary international law” (Loewen Group, Inc and Raymond L. Loewen v United States of America 2003). The arbitration tribunal went on to consider whether or not there was a breach of customary international law in the context of the minimum standard to the extent that the conduct complained of amounted to a denial of justice. To this end, the arbitration tribunal stated that it was of the opinion that denial of justice is: Manifest injustice in the sense of a lack of due process leading to an outcome which offends a sense of judicial propriety is enough, even if one applies the Interpretation according to its terms (Loewen Group, Inc and Raymond L. Loewen v United States of America 2003). According to the Loewen arbitral tribunal the proper test, was delineated in the case of Mondev International Ltd. v United States of America ICSID Case No. ARB (AF)/99/2, Award October 11, 2002. In the Mondey case the test was defined as ascertaining whether or not on an international level “and having regard to generally accepted standards of the administration of justice” an adjudicating authority could reasonably find that, on the facts and in the circumstances have found that there was a manifest injustice (Loewen Group, Inc and Raymond L. Loewen v United States of America ). It was then necessary to determine if the conduct complained of, was without a doubt “improper and discreditable” to the extent that the investment was not provided with fair and equitable treatment (Loewen Group, Inc and Raymond L. Loewen v United States of America 2003). In applying the test in Loewen to the facts of the case for discussion the question for the tribunal is whether or not the legislative provisions passed by the Montpelier government were such that they could be regarded as improper and discreditable. Based on the specific facts and circumstances of the case, the retroactive effect appears for the most part to be improper. However, given the national crisis that occurred and the fact that there was enough violence for the government to declare a state of emergency, the conduct cannot be reasonably characterized as discreditable. Some valuable guidance can be gleaned from the arbitration tribunal’s decision in United Mexican States v Metalclad Corporation 2001 BCSC 664. In this case, it was held that the minimum standard principle is necessary because it is indeed possible that governments “might treat an investor in a harsh, injurious and unjust manner” (United Mexican States v Metalclad Corporation 2001). However, such mal-treatment may not be regarded as discriminatory in cases where governments are treating their own citizens the same way (United Mexican States v Metalclad Corporation 2001). This is not the case in the facts of the Montpelier case. In fact, the government of Montpelier is overtly treating foreign investors in a discriminatory manner by explicitly denying foreigners the right to own stock in utilities companies after the acquisition of that stock. Whether or not the government of Montpelier would or have taken similar action against the interest and security of its own investors is not revealed by the facts provided. Assuming that no such action has ever been taken against the interest and security of domestic investors, the Montpelier government acted in an entirely discriminatory manner. After all is said in done however, Montpelier’s sovereignty is a relevant factor. In S.D. Myers Inc. v Canada 2000-2002 NAFTA, the tribunal stressed that in determining whether or not the foreign investor was accorded fair and equitable treatment it is necessary to determine whether not the investor was treated in an “unjust or arbitrary manner” that is “unacceptable from the international perspective” (S.D. Myers Inc. v Canada 2000-2002 NAFTA) However, determining whether or not the conduct was unjust or arbitrary, express consideration must be given to concepts of sovereignty under international law (S.D. Myers Inc. v Canada 2000-2002 NAFTA). Based on the authorities cited the tribunal can dismiss the claims under the concept of fair and equitable treatment since, there were special facts and circumstances giving rise to the government’s action. However, the severity of the conduct was such that it did not accord security and protection to the foreign investors. Article 6 of the of the BIT between Montpelier and Atlantis is very instructive. It provides that no measures shall be taken against the investment of the other state’s investors unless that action is “non discriminatory” and “under due process of laws” and that “compensation shall be made for effective and adequate compensation”. The BIT between Montpelier and Pacifica is more general in that Article 2 merely instructs protection of the investors of one contracting state in the other. Broadly, this provision requires some form of compensatory damages. However, since both BITs can be used by either of the complainants, Article 6 will apply to each of the parties. In this regard, the arbitral tribunal would likely award compensatory damages to the parties particularly since MECO, to the detriment of its stakeholders which are PECO and Ackner, were forced to sell their existing stock at a loss. Jurisdiction By virtue of Article 9(1) of the BIT between Montpelier and Atlantis any and all disputes arising between the contracting parties over the interpretation and application of the provisions in the BIT are required to be settled by diplomatic measure. Only after those attempts have not reached a settlement within 6 months can the parties resort to arbitration. Article 12 of the BIT between Montpelier and Pacifica contains a vastly similar provision, providing that disputes be negotiated by virtue of diplomacy. If after the lapse of a reasonable time, the parties may resort to arbitration. In determining whether or not the arbitral tribunal has jurisdiction over the matter, it will have to first consider whether or not diplomatic negotiations took place and whether or not those efforts failed. In the case of the BIT between Montpelier and Atlantis, if 6 months have elapsed and diplomatic negotiations have taken place but failed, then the arbitral tribunal does have jurisdiction over the matter. In the case of the BIT between Montpelier and Pacifica if diplomatic negotiations took place and after a reasonable time, no resolution was arrived at the arbitral tribunal has jurisdiction over the matter. There is no guidance in the BIT between Montpelier and Pacifica as to what would amount to a reasonable time. However, since both BITs can be used reliance can be had on the BIT between Montpelier and Atlantis. In this regard, the time which is fixed at 6 months can be applied. On the facts of the case, there is no indication that there was an attempt to negotiate the dispute diplomatically. In any event, owing to the national crisis and the fact that Montpelier was characterized as existing in a state of emergency, it is entirely unlikely that MECO, Ackner, or PECO via government representatives from either Atlantis or Pacifica could have successfully engaged in diplomatic negotiations with a country in such a crisis. Moreover, there was nothing to negotiate as Montpelier took what can be described as unilateral action which left no room for negotiations. After the legislation was passed without reference to the investors or their home states, there was nothing to negotiate outside of compensatory damages. For all intents and purposes, there have been no negotiations and it is entirely unlikely that there would have been one if the complainants had requested negotiations. If negotiations were ongoing, or aborted by the arbitration application, Montpelier would have successfully challenged the arbitration panel’s jurisdiction to determine the merits of the dispute on the grounds that the parties have been negotiating “their settlement in the shadow of the arbitration” (Klaus 2006, 435). The worse that can happen is that the arbitration panel may instruct the parties to attempt negotiation via diplomatic channels and can adjourn the matter sine die. In other words, the arbitration panel may adjourn the case without fixing a date to allow the parties to negotiate a settlement. If the matter is not resolved within six months, the arbitration panel can resume the hearing and make an award in accordance with the principles enunciated above. As for PECO, although it is a domestic company, it is wholly owned by foreigners and is therefore covered by Article 25(2)(b) of the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States 1966. Therefore, Montpelier will ultimately have to submit to the jurisdiction of the arbitral panel unless a satisfactory agreement is arrived at in the course of diplomatic negotiations. However, if too much time has passed since the enactment of the legislation forfeiting the property of the complainants it is quite possible that the arbitration panel may assume jurisdiction over the matter immediately. Bibliography Convention on the Settlement of Investment Disputes Between States and Nationals of Other States 1966. International Thunderbird Gaming Corporation v The United Mexican States (Jan 2006) http://www.naftaclaims.com/Disputes/Mexico/Thunderbird/Thunderbird_Award.pdf (Accessed May 14, 2010). Klaus. B. Private Dispute Resolution in International Business: Negotiation, Mediation and Arbitration. Kluwer Law International, 2006. Loewen Group, Inc and Raymond L. Loewen v United States of America Case No. ARB(AF)/98/3 Washington, (2003). Noble Ventures, Inc v Romania ISCID Case No. Arb/01/11 [2005], 61. Schill. S. “Fair and Equitable Treatment Under Investment Treaties as an Embodiment of the Rule of Law.”Institute for International Law and Justice Working Paper 2006/6 NYU Law School, 2006: 1-39. S.D. Myers Inc. v Canada 2000-2002 NAFTA http://www.biicl.org/files/3921_2002_sd_myers_v_canada.pdf (Accessed May 14, 2010). Subedi, S. International Investment Law: Reconciling Policy and Principle. Oxford University Press, 2008. United Nations Conference on Trade and Development. ‘Latest Developments in Investor-State Dispute Settlement.’ (2008) International Investment Agreements Monitor No. 1, Geneva United Mexican States v Metalclad Corporation 2001 BCSC 664. Read More