International arbitration - ICSID jurisdiction under NAFTA - Bayview Irrigation District v. United Mexican States, ICSID Case No. ARB(AF)/05/1, award 19 June 2007.

• Author: Shapiro, Nick
• Position: International Centre for the Settlement of Investment Disputes

Chapter 11 of the North American Free Trade Agreement (NAFTA) protects investments and investors. (1) Under this chapter, citizen investors of the ratifying parties may seek redress for violations of NAFTA through international arbitration mechanisms. (2) In Bayview Irrigation District v. United Mexican States, (3) an International Centre for the Settlement of Investment Disputes (ICSID) tribunal considered whether NAFTA granted it jurisdiction over the claims brought by Bayview Irrigation District (Bayview). (4) The arbitral panel concluded that Bayview had not invested in Mexico under NAFTA's definition, and, therefore, the panel lacked jurisdiction to reach the merits of Bayview's claims against Mexico. (5)

In December 1992, Canada, Mexico, and the United States signed onto NAFTA. (6) Along with many other policy objectives animating from this agreement, there is a desire to create "clear and mutually advantageous rules governing ... trade" among the United States, Canada, and Mexico. (7) To this end, Chapter 11 of NAFTA sets forth standards for treatment of investments by nationals of a party state, including provisions for expropriation and compensation, as well as an arbitral mechanism for dispute resolution. (8)

Bayview, along with other named claimants, requested, by cover letter dated January 19, 2005, the institution of arbitration proceedings at ICSID pursuant to NAFTA against the United Mexican States (Mexico). (9) Applying Texas case law, Bayview argued that it obtained property rights in Mexican waters through a bilateral treaty between Mexico and the United States. (10) Bayview further alleged that measures taken by Mexico with regard to relevant rivers deprived Bayview of its rights under that treaty and gave rise to a claim under NAFTA. (11)

Upon the Secretary-General of ICSID's invitation, the parties constituted a three-member arbitral tribunal. (12) Prior to reaching the substantive issues, however, the tribunal preliminarily considered matter of jurisdiction. (13)

Chapter 11 creates obligations amongst party states to honor certain standards with regard to foreign investment made by nationals of another party state. (14) Article 1101 defines the scope of these substantive protections: article 1101(a) extends them to "investors of another Party," and article 1101(b) extends them to "investments of investors of another Party in the territory of the Party." (15) "Investment" is further defined by Article 1139 to include property interests acquired in party states. (16)

Article 1101(a) is silent with regard to where the "investors of another party" must have their investments to qualify for Chapter 11 protections. (17) The party states, however, unanimously interpret Chapter 11 as providing substantive protection to foreign investments made by nationals of party states; no protection is afforded citizens of party states investing within their own nations, even where other party states' actions might affect this investment. (18) Moreover, as the tribunal notes, a contrary interpretation would lead to the perverse result that NAFTA would provide better protection to foreign investors than is accorded domestic investors by domestic laws. (19)

In 1944 Mexico and the United States entered into a treaty that mandates an allotment of water to each party from the Rio Grande. (20) The treaty also provides a list of use priorities as a guide for water allotment policy and vests the International Border and Water Commission (IBWC) with the authority to enforce the treaty. (21) The seminal decision issued by a Texas court construing this treaty held that the treaty does not afford individual U.S. citizens riparian and appropriative rights over the water allocated to the United States by treaty. (22) Rather, the Texas legislature and courts retained authority to determine the amount of water afforded each irrigation district. (23)

The arbitral tribunal concluded that the party states included Chapter 11 in NAFTA to ensure that foreign investment--investment by citizens from one country in the economy of another country--would be accorded many of the same protections as domestic investment. (24) The tribunal reasoned that because the claimants' position would implicitly afford...