Alicia Grace and others v. United Mexican States, ICSID Case No. UNCT/18/4, Award, August 19, 2024

Summary

Mexico has attained a favourable outcome in the arbitration case of Alicia Grace et al. v. United Mexican States, administered by ICSID under the UNCITRAL rules. The tribunal dismissed the case due to lack of jurisdiction and standing, unanimously holding that NAFTA’s 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.

Background of the dispute

The case involved 27 investors (U.S. nationals, corporations, and two dual Mexican–U.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’s 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’s 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’s Article 1105(1) on FET. They also claimed that Mexico’s 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’ 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’ home state.

Burden and standard of proof: The evaluation of evidence in cases involving allegations of corruption necessitates “compelling and particularized evidence.”

Commencing its analysis by reaffirming the principle of onus probandi actori incumbit (“the one who asserts must prove”), the tribunal noted that it “disposes of broad discretion in its appreciation of the evidence presented by the Parties” (para. 409). In this context, it was deemed unnecessary to adopt a specific standard based on existing case law, indicating that “investment tribunals tend to be more nuanced regardless of the label they use in their evaluation of evidence” (para. 411). The tribunal made specific reference to the Union Gas Fenosa v. Egypt award to rule that presenting “red flags” alone may not be sufficient to assess the preponderance of evidence. It also cited the Churchill Mining v. Indonesia award, stating that certain facts require more compelling evidence to tilt the balance of probabilities while putting additional emphasis on the adjudicator’s “conviction intime”. Drawing from this case, the tribunal emphasized that, in the context of investment arbitration—unlike in criminal proceedings—demonstrating 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, “the 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” (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).

Jurisdiction

Permanent residents qualifying as “nationals” under NAFTA

The tribunal noted that although both parties cited the VCLT for interpreting NAFTA, their distinct approaches, coupled with references to other treaties and previous rulings, were constrained by the VCLT’s 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’s 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—a matter deemed “controversial and delicate” by the tribunal (para. 463), which considered conflicting precedents from the Manuel Garcia Armas and Serafin Garcia Armas cases involving Venezuela. NAFTA itself did not provide guidance on dual nationals. Despite Mexico’s assertion that Articles 1116 and 1117 established that “an investor of a Party is allowed to submit claims for breaches of NAFTA obligations by another Party,”
the tribunal ruled that the “diversity of nationality rule” would be met by dual nationals (para. 469).

Dominant and effective nationality test as subsequent practice adopted by all three NAFTA parties

The tribunal explicitly stated that “the concurring statements submitted by the Non-Disputing Parties … 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” (para 473). It asserted that adopting the dominant and effective nationality test would address claimants’ concern that should Mexico’s 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’s inclusion of permanent residents, underscoring that this approach captures “factual realities beyond formal titles” (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’s 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 “the centre of gravity” of their business activities and their position “in the highest echelons of [the Mexican] government” (para. 489) to conclude that, due to that, it lacked jurisdiction over them.

Claims concerning reflective losses are excluded from the scope of NAFTA Article 1116

According to NAFTA Article 1116, the tribunal determined that only claims of direct state interference with investors’ protected rights would be accepted. Reflective losses associated with a local subsidiary’s 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 “these provisions establish different rules regulating an investor’s standing under NAFTA” (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’s language, the tribunal rejected the idea that “loss or damage” 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’ interpretation to be an integrated process (Article 31(3) VCLT), which draws upon the parties’ subsequent agreements (Article 31(3)(b) VCLT; i.e., the Non-Disputing Parties’ 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.

Conclusion

The tribunal’s position appears to adhere to the traditional approach to joint interpretative agreements, affirming that states are the “masters” 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, explicitly characterized such agreements as authentic interpretations that should be integrated into the interpretive process. Although the ILC’s conclusion in 2018 that joint interpretive agreements “are not necessarily legally binding” may have appeared to cast doubt on the significance of subsequent interpretative agreements, the role of “state authority” in treaty interpretation appears to be sufficiently entrenched.

Νote

The tribunal was composed of Diego P. Fernández Arroyo (president, Argentinian and Spanish national), Andrés Jana Linetzky (claimant’s appointee, Chilean and Portuguese national), and Gabriel Bottini (respondent’s appointee, Argentinian national)

Author

Vasiliki Dritsa is a PhD candidate in International Investment Law at the Geneva Graduate Institute and a research assistant at the University of Geneva.