Methanex v. United States
Methanex Corp. v. United States of America, UNCITRAL
(Originally published in 2011 in International Investment Law and Sustainable Development: Key cases from 2000–2010; republished on this website on October 18, 2018. Read more here.)
Decision and awards available at https://www.italaw.com/cases/683
Amicus curiae, corruption, environmental measures, expropriation, fair and equitable treatment/minimum international standards of treatment, legitimate expectations, like circumstances, public hearings, reference to other bodies/principles of law, transparency
Statement of Claim: 3 December 1999
Constitution of Tribunal: 18 May 2000
Decision on Acceptance of Amicus Curiae: 15 January 2001
Partial Award on Jurisdiction: 7 August 2002
Final Award: 3 August 2005
Mr. V. V. Veeder (president)
Mr. Wiliam F. Rowley (claimant appointee)
Prof. W. Michael Reisman (respondent appointee, replacing Warren Christopher, who had resigned)
Forum and applicable procedural rules
International Centre for Settlement of Investment Disputes (ICSID)
United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules
North American Free Trade Agreement (NAFTA), Chapter Eleven, Investment
Alleged treaty violations
- Fair and equitable treatment/minimum international standards of treatment
- National treatment
Other legal issues raised
- Interpretation—reference to other bodies/principles of law
- Procedure—amicus curiae participation
1.0 Case Summary
1.1 Factual background
Methanex Corporation (“Methanex”) is a Canadian-based manufacturer of methanol, an ingredient in a gasoline additive commonly called MTBE (methyl tert-butyl ether). Methanex does not manufacture the MTBE itself; however, a significant percentage of the methanol it produces was used in the making of MTBE. Methanex was a leading maker of methanol for the American market, but some 47 per cent of the market was supplied by domestic U.S. companies.
The facts giving rise to the dispute are summarized very briefly here. Aer concerns raised by environmental groups and noted in expert studies, the state of California banned the use of MTBE as a gasoline additive because it was polluting surface water and groundwater in the state. Methanex argued, however, that the state imposed the ban due to a political deal with a rival company that makes ethanol, a substitute for methanol and MTBE as a gasoline additive. Methanex did not allege any violation of U.S. law, but argued that the ethanol producer, Archer Daniels Midland (ADM), had used political donations to improperly influence the decision of Governor Davis of California in a manner that breached the protections of foreign investors under Chapter Eleven of NAFTA in favour of domestic producers of ethanol. Methanex also argued that California had and should have used alternative approaches less damaging to Methanex’s investment, including stopping gasoline leakage by requiring repair or replacement of underground storage tanks.
1.2 Summary of legal issues and decisions
Methanex alleged that the ban on MTBE constituted a breach of three obligations on the host state under NAFTA’s Chapter Eleven: (1) the national treatment obligation in Article 1102 of NAFTA, which requires a NAFTA party to accord foreign investors “treatment no less favorable” than that it accords, “in like circumstances,” domestic investors in the host state; (2) the obligation to accord minimum international standards of treatment to protected investors, including fair and equitable treatment, as per Article 1105 of NAFTA; and (3) the obligation not to take measures tantamount to expropriation without paying compensation, in accordance with Article 1110 of NAFTA.
The Tribunal rejected each of these arguments, finding in favour of the United States on each claim. In addition, the Methanex decision was the first published decision in which the Tribunal awarded full costs to the defending state party following the final award in its favour.
2.0 Select Legal Issues
2.1 Transparency and amicus curiae
Methanex made an important contribution to the issue of public access to international investor–state arbitrations. On 25 August 2000, the International Institute for Sustainable Development (IISD) submitted the first recorded petition for access to the investor–state proceedings as an amicus curiae. At the same time, IISD sought access to the parties’ pleadings and to the oral hearings. The IISD petition was shortly followed by a second petition from other, American-based, non-governmental organizations (NGOs).
Following a round of submissions by the litigating parties, Canada and Mexico as NAFTA parties, and the groups who had filed the two amicus curiae petitions, the Tribunal issued a decision in January 2001 declaring that it had the jurisdiction to accept amicus curiae submissions and indicating its intent to do so when the merits phase was reached. (At the time, the arbitration was in its preliminary jurisdiction phase.) This historic ruling has since been applied and followed in multiple international investment arbitration proceedings.
Despite this very positive element of the Tribunal’s decision, the balance of the petitioners’ requests was rejected. Against the opposition of Methanex, the Tribunal did not permit open hearings or issue an order enabling access to documents. Nonetheless, the United States released all the pleadings pursuant to its domestic law on freedom of information, allowing the civil society organizations to obtain the materials and setting a precedent for future NAFTA-based cases. In addition, following a change in Methanex’s counsel and a further request by IISD in its final amicus submission, the Tribunal did permit open hearings with the consent of both parties, broadcasting the proceedings live to members of the public on a closed-circuit television system.
2.2 National treatment and state discretion to distinguish between investors for environmental or other public purposes
Methanex was a major test of the meaning and scope of Article 1102 of NAFTA on national treatment. The key issue was the meaning of the phrase “in like circumstances,” which defines the scope for comparison of domestic and foreign investors under Article 1102, because a NAFTA investor can only seek “no less favorable” treatment when compared to domestic investors (or other foreign investors under the most favoured nation treatment clause) with which it is in like circumstances.
The previous NAFTA case of S.D. Myers v. Canada also had faced this issue and had taken a very broad competitive business approach to assessing “likeness,” so that businesses loosely in competition with one another were seen as “in like circumstances.” This approach drew on jurisprudence under the General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO) Agreements relating to the “like products” test used in disputes dealing with trade in goods. In Methanex, however, the Tribunal expressly rejected the general appropriateness of directly applying trade law concepts to investment law obligations, opting instead for a much narrower and more refined approach in which it required a comparison to other existing domestic investments in the same situation. Pursuant to that approach, Methanex was not entitled to be compared to a manufacturer of any gasoline additive, but only to U.S.-based manufacturers of methanol. Here, California’s treatment of Methanex was identical to its treatment of U.S.-based methanol producers.
The Tribunal did go on, however, to note that even a broader assessment would still lead to the same finding because methanol and ethanol had different chemical, environmental and other factors. The implication accompanying this finding is that the purposes behind challenged regulatory measures can also be examined to determine “like circumstances.” Thus, if company A were producing a product or emissions that were environmentally harmful and that company B was not producing, companies A and B could be distinguished from each other on this basis.
This approach taken by the Tribunal in Methanex provided a much less expansive view of the national treatment obligation than was seen in the S.D. Myers case, thus leaving governments broader domestic policy space to tailor regulations to the specific circumstances of investors or sub-sectors of business activity based on actual need and policy goals rather than on artificial barriers in trade or investment agreements.
2.3 Minimum international standards of treatment: Narrowing the scope of the obligation
Methanex had two major lines of argument to support its claim regarding the breach of NAFTA’s Article 1105. The first was the discrimination claim advanced under Article 1102 of NAFTA and discussed above. The second was, essentially, that the inappropriate influence of ADM over the decision- making process was akin to corruption (although no illegal act was claimed under U.S. law), led to arbitrary decision-making and deprived Methanex of fair and equitable treatment.
As regards the first issue, the Tribunal dismissed it on the basis that no discrimination had been found. It noted, however, that a finding of discrimination was not necessarily equivalent to a finding of a breach of the minimum standards of treatment, including fair and equitable treatment. This was again inconsistent with and narrower than other decisions in international investment law, which had sought to apply the fair and equitable standard as equivalent to a non-discrimination standard. The Methanex Tribunal declared that discrimination between domestic and foreign investors is not, in itself, a breach of any standard in customary international law.
On the second issue, the Tribunal suggested that if the acts of California had been motivated by corruption of government officials, this could indeed amount to a breach of the minimum international standards in violation of NAFTA and customary international law. The Tribunal embarked on an extensive review of the facts adduced by Methanex, employing an evidentiary burden that allowed Methanex and the Tribunal to draw logical inferences from the proven facts. The Tribunal labelled this a “connect the dots” approach, given that it would be virtually impossible to adduce direct evidence of corruption; however, after its extensive review of the evidence, the Tribunal found no pattern from which corruption could be adduced or inferred. Thus, on the evidence, no claim for a breach of fair and equitable treatment was supportable.
This part of the award is important, as it sets an approach and standard for determining how corruption in this or other circumstances may be adjudicated in an arbitration where subpoena power is generally lacking.
This is of great significance when the issue is one of corruption in the making or attaining of an investment in the first place through the use of bribes or other incentives from the investor to government officials, an issue that continues to arise with all too much regularity in foreign investment situations.
2.4 Expropriation: Applying the customary international law police powers rule to protect laws and regulations, with a caveat
The Methanex award, in relation to expropriation, is best seen in comparison to the Metalclad v. Mexico award on this issue. Recall that Metalclad preceded the Methanex award by five years, igniting the debate on the meaning and scope of measures tantamount to expropriation and whether this concept of indirect expropriations could include any regulatory measure that had a significant economic impact on the investor, regardless of the measure’s motivation.
The Methanex Tribunal rejected the Metalclad approach, opting instead for a more traditional understanding of the international law on expropriation as inherently not including measures taken by governments in the exercise of their customary police powers. Although it did not use those exact words, the Tribunal held:
But as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation. (Part IV, Chapter D, page 4, para. 7)
Taking this passage in its parts, the first part restates the notion that normal regulations, even if they have an impact on an investor, are not an expropriation when taken in a bona fide manner. The purpose and effect of the measure thus must be considered in determining whether it is, ab initio, a measure tantamount to an expropriation or an indirect expropriation. The ruling makes a clear point: such measures are not an expropriation, direct or otherwise, and therefore do not require compensation to be paid (as opposed to a notion advanced by some that regulatory measures to protect the environment, human health, etc., should be seen as expropriatory if they have a significant economic impact on an investor, but the amount of compensation may be adjusted depending on the purpose behind it). This interpretation is critical to preserving regulatory space for governments in the face of investment treaty provisions on expropriation and puts Methanex into considerable contrast with Metalclad in terms of its analytical starting point.
The one point on which Methanexand Metalclad align, however, arises from the caveat that forms the final part of the paragraph noted above. This is the notion that a measure that is inconsistent with a previous promise by a potential host government not to take that measure can amount to an expropriation even if, absent the promise, it would not otherwise do so. In this case, however, the Tribunal noted not only that no such guarantees were given, but also that California is an active jurisdiction on environmental matters, often leading in environmental legislation.
Importantly, the MethanexTribunal’s reasoning rejects any general notion that prohibitions on indirect expropriation or on measures tantamount to expropriation require or imply some form of regulatory standstill obligation. Rather, the Tribunal noted that, seen in its fuller context, California was a jurisdiction well known for being a front-runner on environmental matters, and that all investors in California should anticipate that its activities, if found to be detrimental to the environment, would become the subject of public debate and regulation. The Tribunal also noted the complex and very public nature of law-making in California, with its engagement of multiple stakeholders. The decision’s emphasis on the predictability of regulatory change is again a critical re-enforcement of the need to balance investor rights with the realities of government rights and responsibilities to respond to and protect the public welfare.
Nevertheless, the decision remains problematic from a sustainable development perspective, due to its description of the expropriation standard as one where the presence or absence of a specific commitment or promise by a host government entity may be determinative. The problem is that such commitments are almost never made by developed countries, but are often included in investment contracts or agreements between foreign investors and developing country host states.As a result, the needed policy space found in the Methanexaward’s approach may become easily constrained under the investment treaty if a contract includes a provision not to regulate in that manner. Because such provisions almost always come from developing country governments, which are often most in need of future policy space, it is likely that under the Methanex approach many developing countries will not have the policy space that most developed countries enjoy.
Moreover, although here this notion regarding the importance of a commitment or promise comes into play in the Tribunal’s understanding of expropriation, an analogous principle can be seen in other cases’ descriptions of requirements for protecting investors’ “legitimate expectations” as an aspect of the fair and equitable treatment standard (see, e.g., Parkerings v. Lithuania). In practice, it is submitted that this approach creates a serious issue for the equal application of international law—in particular, international investment law—between developed and developing countries. Taking the Metalclad and Methanex cases on expropriation and, e.g., the Parkeringsand Tecmed v. Mexico cases on fair and equitable treatment, we see two different, largely irreconcilable approaches to each of these issues. A state cannot be sure which will be applied, as it will depend on the predilections of the arbitral tribunal and, in particular, the presiding arbitrator. If a government breaches a commitment it has made regarding its future regulatory actions (or inactions), however, under both approaches, a finding of expropriation on the one hand, or fair and equitable treatment on the other hand, is available.
 This summary is based on the reasons found in Part IV, Chapter B, of the Final Award.
 The tribunal in S.D. Myers addressed the issue of “like circumstances” in its Partial Award, dated 13 November 2000. The Partial Award, as well as other decisions and awards issued in S.D. Myers, is available at https://www.italaw.com/cases/969
 Based on Part IV, Chapter C, of the Final Award.
 Drawn from Part III, Chapter IIIB, of the Final Award.
 See A. Shemberg (2009), Stabilization Clauses and Human Rights.