By Elizabeth Whitsitt
28 April 2009
By the early 1990s, CPI had established itself as a major producer and supplier of HFCS to the soft drink industry in the US and Canada. After NAFTA entered into force, CPI expanded its operations and began producing and supplying HFCS to the Mexican soft drink industry through CPIng.
While HFCS began displacing sugar as a sweetener in the Mexican soft drink industry, Mexico and Mexican sugar producers were in a dispute with the US over access to the United States’ sugar market. Specifically, the Mexican government and Mexican sugar producers argued that the US was restricting the importation of Mexican sugar into the US market in violation of its obligations under NAFTA and certain letters exchanged between both governments attached to NAFTA.
Attempting to resolve this dispute, Mexico invoked the dispute-settlement machinery under Chapter 20 of NAFTA, but was unable to resolve its disagreement with the US. In fact, efforts at dispute resolution under Chapter 20 only exacerbated tensions between the two countries, with Mexico maintaining that the US violated its NAFTA obligations by effectively frustrating the operation of the Chapter 20 mechanism.
Subsequently, Mexico amended its excise tax legislation in 2001. The effect of those amendments was to impose a tax of 20% on any drink which used HFCS as a sweetener.
Asserting that the HFCS tax caused the Mexican soft drink industry to switch from HFCS to sugar cane sweeteners, and thereby destroyed its presence in the market, the claimant commenced arbitral proceedings against Mexico under NAFTA Chapter 11. Specifically, CPI argued that: (i) the HFCS tax violated the national treatment principle under Article 1102; (ii) the effect of the HFCS tax was to condition the receipt of an advantage (i.e. exemption from paying the tax) on the use of Mexican produced sugar cane in violation of Article 1106; and (iii) the HFCS tax was tantamount to an expropriation of CPI’s investment in violation of Article 1110.
While Mexico argued that CPI had failed to establish a breach of any of the Chapter 11 provisions upon which it relied, Mexico’s primary assertion was that the HFCS tax was a countermeasure taken in response to prior violations of the NAFTA by the US. In particular, Mexico referred to the International Law Commission’s Articles on State Responsibility and contended that the status of the HFCS tax as a countermeasure precluded its wrongfulness vis-à-vis the US and the claimant.
In addressing the above arguments, the tribunal first assessed CPI’s claims under Articles 1106 and 1110. Specifically, the tribunal found that CPI failed to establish that the HFCS tax was a performance requirement giving rise to liability under Article 1106. Moreover, the tribunal concluded that the HFCS tax did not rise to the level of an expropriation or a measure tantamount to an expropriation within the meaning of Article 1110. It did find, however, that Mexico violated the national treatment principle in Article 1102 by “fail[ing] to accord CPI, and its investment, treatment no less favourable than that it accorded to its own investors in like circumstances, namely the Mexican sugar producers who were competing for the market in sweeteners for soft drinks.”
Given its finding that the HFCS tax violated Article 1102, the tribunal turned to a discussion of Mexico’s countermeasures defense. In so doing, the tribunal noted “…that, in the context of [a NAFTA Chapter 11] claim, there is no room for a defense based upon the alleged wrongdoing not of the claimant but of its State of nationality…” As a result, the tribunal, in a majority and separate opinion, held that Mexico could not invoke such a defense within the context of an investor-state dispute.
While the attempt to use traditional principles of international law as defenses in investor-state disputes is not new*, this decision reflects the difficulty states often have when attempting to do so. Indeed, it appears that states will have particular difficulty using countermeasures as a defense against claims made by foreign investors.