{"id":16010,"date":"2025-01-27T19:30:59","date_gmt":"2025-01-27T18:30:59","guid":{"rendered":"https:\/\/stg.itn.iisd.org\/?p=16010"},"modified":"2025-04-30T14:52:05","modified_gmt":"2025-04-30T12:52:05","slug":"alicia-grace-united-mexican-states-vasiliki-dritsa","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2025\/01\/27\/alicia-grace-united-mexican-states-vasiliki-dritsa\/","title":{"rendered":"Tribunal in oil platform dispute applies dominant and effective nationality test to conclude that claimants lacked standing for reflective losses claims under NAFTA"},"content":{"rendered":"

Alicia Grace and others v. United Mexican States<\/em>, ICSID<\/span> Case No. UNCT\/18\/4<\/a>, Award, August 19, 2024<\/strong><\/h2>\n

Summary<\/strong><\/h3>\n

Mexico has attained a favourable outcome in the arbitration case of Alicia Grace et al. v. United Mexican States<\/em>, administered by ICSID under the UNCITRAL<\/span> rules. The tribunal dismissed the case due to lack of jurisdiction and standing, unanimously holding that NAFTA<\/span>\u2019s Article 1116 does not extend to claims for reflective losses. Notably, it placed considerable emphasis on the subsequent practices and interpretations adopted by all three NAFTA parties on this matter, concluding that NAFTA differentiated between the mechanisms to initiate arbitral proceedings under Articles 1116 and 1117 (i.e., the latter permitting claims by an investor on behalf of an enterprise). Consequently, the tribunal ruled that the majority of claimants lacked standing as they invoked Article 1116 concerning losses sustained by Mexican entities in which they held investments, not by themselves. Notwithstanding the fact that two claimants submitted their respective claims in accordance with Article 1117, the tribunal declined jurisdiction, stating that NAFTA prohibits claims brought by dual nationals whose dominant and effective nationality aligns with that of the respondent state, as is the case here.<\/p>\n

Background of the dispute<\/strong><\/h3>\n

The case involved 27 investors (U.S. nationals, corporations, and two dual Mexican\u2013U.S. citizens) holding 43% of Integradora Oro Negro (ION), a Mexican company owning offshore platforms through five Singaporean vehicles, leased to its subsidiary, Perforadora Oro Negro (PON), which serviced PEMEX, Mexico\u2019s state-owned petroleum entity. From 2013 to 2015, PON and PEMEX signed five leases with daily rates of USD 130,000 to USD 161,000. After a global oil price drop, PEMEX amended contracts to USD 116,000 in 2016 while suspending two leases. By March 2017, PEMEX ceased all payments, prompting PON, ION, and subsidiaries to seek bankruptcy protection, leading bondholders to demand repayment. In October 2017, PEMEX announced plans to terminate all contracts, which claimants argued was unlawful under Mexican law. They asserted PEMEX\u2019s actions were retaliatory, stemming from their refusal to comply with bribery requests and alleged collusion with bondholders to drive Oro Negro into insolvency and seize control of the drilling rigs. The claimants contended that the aforementioned measures, which involved rate reductions and contract termination, violated transparency obligations as well as their legitimate expectations due to arbitrary and discriminatory conduct, thereby infringing NAFTA\u2019s Article 1105(1) on FET<\/span>. They also claimed that Mexico\u2019s actions effectively constituted indirect expropriation of their shares in Oro Negro, seeking USD 270 million in compensation. During the arbitration, the tribunal dismissed the bondholders\u2019 request for amicus curiae participation and access to evidence while accepting the non-disputing party briefs from Canada and the United States, which underscored the applicability of the dominant and effective nationality test for dual nationals under NAFTA and limited reflective loss claims under Article 1117 to enterprises based in different states than claimants\u2019 home state.<\/p>\n

Burden and standard of proof:<\/strong> The evaluation of evidence in cases involving allegations of corruption necessitates \u201ccompelling and particularized evidence.\u201d<\/p><\/blockquote>\n

Commencing its analysis by reaffirming the principle of onus probandi actori incumbit<\/em> (\u201cthe one who asserts must prove\u201d), the tribunal noted that it \u201cdisposes of broad discretion in its appreciation of the evidence presented by the Parties\u201d (para. 409). In this context, it was deemed unnecessary to adopt a specific standard based on existing case law, indicating that \u201cinvestment tribunals tend to be more nuanced regardless of the label they use in their evaluation of evidence\u201d (para. 411). The tribunal made specific reference to the Union Gas Fenosa v. Egypt<\/a><\/em> award to rule that presenting \u201cred flags\u201d alone may not be sufficient to assess the preponderance of evidence. It also cited the Churchill Mining v. Indonesia<\/a><\/em> award, stating that certain facts require more compelling evidence to tilt the balance of probabilities while putting additional emphasis on the adjudicator\u2019s \u201cconviction intime<\/em>\u201d. Drawing from this case, the tribunal emphasized that, in the context of investment arbitration\u2014unlike in criminal proceedings\u2014demonstrating criminal intent is not necessary, even though it may serve as a pertinent consideration. It further noted that regardless of the label chosen to describe the evaluation of evidence by the arbitrator, one must consider the gravity of the allegation and the rights at stake. Although the prohibition of corrupt practices may indeed represent a component of international public policy, the presumption of innocence is a widely upheld human right, with explicit provisions in various legal instruments. As such, \u201cthe Tribunal consider[ed] that the Party making such allegations ha[d] to present compelling and particularized evidence in order to discharge the burden of proof in relation to [these] allegations\u201d (para. 425). In light of the absence of such evidence in this case, the tribunal opted to decline jurisdiction over the aforementioned claims (para. 425).<\/p>\n

Jurisdiction<\/strong><\/h3>\n

Permanent residents qualifying as \u201cnationals\u201d under NAFTA<\/strong><\/h4>\n

The tribunal noted that although both parties cited the VCLT<\/span> for interpreting NAFTA, their distinct approaches, coupled with references to other treaties and previous rulings, were constrained by the VCLT\u2019s interpretative framework. It clarified that treaties stem from unique negotiations that reflect particular legal and political objectives and that relying on precedents necessitates a thorough contextual analysis in a decentralized system. In the case at hand, the tribunal proceeded by examining Mexico\u2019s jurisdictional challenge regarding a Mexican national and U.S. permanent resident, concluding, based on Article 201 NAFTA and the U.S. submission, that permanent residents should be regarded as nationals of their resident state, thus, classifying the claimant at hand as a dual U.S.-Mexican national. This finding prompted questions on whether dual nationals could invoke NAFTA to bring claims against their state of nationality\u2014a matter deemed \u201ccontroversial and delicate\u201d by the tribunal (para. 463), which considered conflicting precedents from the Manuel Garcia Armas<\/a><\/em> and Serafin Garcia Armas<\/a><\/em> cases involving Venezuela. NAFTA itself did not provide guidance on dual nationals. Despite Mexico\u2019s assertion that Articles 1116 and 1117 established that \u201can investor of a Party is allowed to submit claims for breaches of NAFTA obligations by another Party,\u201d
\nthe tribunal ruled that the \u201cdiversity of nationality rule\u201d would be met by dual nationals (para. 469).<\/p>\n

Dominant and effective nationality test as subsequent practice adopted by all three NAFTA parties<\/strong><\/h4>\n

The tribunal explicitly stated that \u201cthe concurring statements submitted by the Non-Disputing Parties \u2026 alongside the positions of Mexico regarding dual nationals are to be understood as subsequent practice for the purposes of Article 31(3)(b) of the VCLT, [especially concerning] the application of the dominant and effective nationality test to matters of dual nationality not expressly governed by the Treaty\u201d (para 473). It asserted that adopting the dominant and effective nationality test would address claimants\u2019 concern that should Mexico\u2019s primary interpretation (i.e., that such claims are categorically prohibited) be upheld, dual nationals would be deprived of any right to bring claims under NAFTA against their state of nationality. It also found a supplementary justification for applying this test in NAFTA\u2019s inclusion of permanent residents, underscoring that this approach captures \u201cfactual realities beyond formal titles\u201d (para. 476), where actual circumstances should take precedence over formal classifications. Ultimately, the tribunal dismissed the U.S. position that this test could not apply to permanent residents, emphasizing that NAFTA\u2019s clear intent was to treat permanent residents as equivalent to nationals, rendering such distinction baseless. Precisely, when examining the dominant and effective nationality of two of the claimants, it considered \u201cthe centre of gravity\u201d of their business activities and their position \u201cin the highest echelons of [the Mexican] government\u201d (para. 489) to conclude that, due to that, it lacked jurisdiction over them.<\/p>\n

Claims concerning reflective losses are excluded from the scope of NAFTA Article 1116<\/strong><\/h4>\n

According to NAFTA Article 1116, the tribunal determined that only claims of direct state interference with investors\u2019 protected rights would be accepted. Reflective losses associated with a local subsidiary\u2019s rights should be addressed pursuant to Article 1117, which regulates claims submitted on behalf of an enterprise. This interpretation aligned with the subsequent practice of the three NAFTA parties, confirming that \u201cthese provisions establish different rules regulating an investor’s standing under NAFTA\u201d (para. 532). The tribunal additionally observed that Article 1135(2) reinforces this distinction by requiring that compensation under Article 1117 be paid to the enterprise, not the investor. Upon reviewing the treaty\u2019s language, the tribunal rejected the idea that \u201closs or damage\u201d in Articles 1116 and 1117 referred to the same harm, as having two provisions with identical legal implications would be illogical. Therefore, by considering the provisions\u2019 interpretation to be an integrated process (Article 31(3) VCLT), which draws upon the parties\u2019 subsequent agreements (Article 31(3)(b) VCLT; i.e., the Non-Disputing Parties\u2019 Submissions) and supplementary means (Article 32 VCLT; i.e., Statement of Administrative Action submitted to the U.S. Congress on the implementation of NAFTA) in order to confirm the meaning of the terms employed, the tribunal concluded that the provisions differ in scope and application. As a result, the claimants were found not to meet the requirements under both provisions, as they (i) lacked standing under Article 1116 to claim for reflective losses on behalf of the Mexican entities and (ii) failed to establish ownership or control of the entities under Article 1117. Consequently, they were ordered by the tribunal to pay 75% of the arbitration costs.<\/p>\n

Conclusion<\/strong><\/h3>\n

The tribunal\u2019s position appears to adhere to the traditional approach to joint interpretative agreements, affirming that states are the \u201cmasters\u201d of their treaties (para. 539). The VCLT, in Article 31, codified the centrality of the treaty text and subsequent agreements in interpretive processes, yet it stopped short of explicitly granting conclusive weight or hierarchical supremacy to subsequent agreements. The UN International Law Commission (ILC), in the 1960s<\/a>, explicitly characterized such agreements as authentic interpretations that should be integrated into the interpretive process. Although the ILC’s conclusion in 2018<\/a> that joint interpretive agreements \u201care not necessarily legally binding\u201d may have appeared to cast doubt on the significance of subsequent interpretative agreements, the role of \u201cstate authority\u201d in treaty interpretation appears to be sufficiently entrenched.<\/p>\n

\u039dote<\/em><\/h3>\n

The tribunal was composed of Diego P. Ferna\u0301ndez Arroyo (president, Argentinian and Spanish national), Andre\u0301s Jana Linetzky (claimant\u2019s appointee, Chilean and Portuguese national), and Gabriel Bottini (respondent\u2019s appointee, Argentinian national)<\/p>\n

Author<\/em><\/h3>\n

Vasiliki Dritsa is a PhD candidate in International Investment Law at the Geneva Graduate Institute and a research assistant at the University of Geneva.<\/p>\n