On June 29, 2012, a tribunal of the International Centre for the Settlement of Investment Disputes (ICSID) handed down the first award under the investor-state arbitration provisions of the U.S.-Dominican Republic-Central America Free Trade Agreement (CAFTA). The tribunal ruled in favor of a U.S.-based railroad company that Guatemala had violated the minimum standard of treatment that it was required to provide to foreign investors under CAFTA. In so doing, the tribunal embraced and adopted an investor-favorable definition of the frequently hotlydebated concept of “fair and equitable treatment” under the minimum standard of treatment.
The case, Railroad Development Corporation (RDC) v. Republic of Guatemala, ICSID Case No. ARB/07/23, arose from the Government of Guatemala’s award of a 50- year concession (“usufruct”) to claimant RDC in 1997 to revive, operate and develop the state-owned national railway system. After RDC had successfully revived and operated the railway for a number of years, disputes arose between the parties over Guatemala’s failure to remove squatters from the railway line and to make agreed payments to a railway trust fund, as well as over RDC’s alleged contractual obligation to invest in and reopen the railway’s Pacific corridor. These disputes in turn led the President of Guatemala to issue an executive decree in 2006 stating that the usufruct contract allowing RDC to use the state-owned rolling stock and railway equipment was “lesivo” or “harmful to the interests of the state” based upon alleged technical illegalities in the contract’s execution and ratification by the Government. The lesivo declaration was issued after RDC refused to give into the Government’s demands that RDC renegotiate or surrender several of its key economic and legal rights under the usufruct contracts.
The lesivo declaration caused RDC’s railway business to collapse due to the environment of commercial and political uncertainty it created with the railway’s customers and potential business partners. RDC was ultimately forced to shut down its operations in Guatemala in the fall of 2007. RDC brought its ICSID claim against Guatemala in 2007, alleging breaches of CAFTA’s foreign investment protections, including the “minimum standard of treatment,” which requires each CAFTA state party to provide, among other things, “fair and equitable treatment” to investors of the other CAFTA parties.
“Fair and equitable treatment,” is not clearly defined in CAFTA or, for that matter, in any of the other U.S. trade agreements, including the North America Free Trade Agreement (NAFTA). As a result, the scope and content of this standard have been the subject of much dispute and debate in investor-state arbitration jurisprudence over the years, with claimant-investors arguing that fair and equitable treatment is a standard that continues to evolve under customary international law in favor of broader and increased protections for foreign investors, while respondent states argue that fair and equitable treatment provides only a minimal floor of protection to foreign investors that has not evolved or expanded since the concept was first recognized under international law in the early-20th Century.
In RDC, the tribunal was faced with a similar debate between RDC and Guatemala over the scope and content of fair and equitable treatment, and it ruled largely in RDC’s favor. The tribunal rejected the arguments of Guatemala and other non-disputing CAFTA parties (El Salvador and Honduras) that fair and equitable treatment under the customary international law minimum standard of treatment is a narrow, minimal standard that has remained largely static since the early-20th Century and, therefore, does not protect foreign investors from, among other things, arbitrary actions by the state, nor does it encompass the concepts of transparency or the investor’s reasonable reliance on representations made by the host state.
Instead, the RDC tribunal adopted in full the conclusion reached in Waste Management, Inc. v. United Mexican States II, a 2004 NAFTA decision. In Waste Management II, the tribunal held that fair and equitable treatment under customary international law is an evolving standard that is infringed by state conduct that is “arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety – as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candor in an administrative process.” Further, “[i]n applying this standard, it is relevant that the treatment is in breach of representations made by the host State which were reasonably relied on by the claimant.”
Applying the Waste Management II standard, the RDC tribunal held that Guatemala’s treatment of RDC through the lesivo declaration and related actions had been “arbitrary, grossly unfair [and] unjust,” in violation of the fair and equitable treatment to investors of the other parties. In particular, the tribunal found that Guatemala used the “lesivo remedy . . . under a cloak of formal correctness allegedly in defense of the rule of law, [but] in fact for exacting concessions [from RDC] unrelated to the finding of lesivo.”
Although rulings by investor-state tribunals are not considered binding legal precedents on future tribunals, the RDC tribunal’s well-reasoned adoption of the Waste Management II standard for fair and equitable treatment will likely be highly influential on future CAFTA and NAFTA tribunals and will almost certainly be embraced and relied upon by future investor claimants seeking to prove violations of fair and equitable treatment under those agreements, as well as by future claimants under other recent U.S. free trade and trade promotion agreements.1
The RDC v. Guatemala Award is available at http://icsid.worldbank.org/ICSID/Index.jsp.