In 1997, Pittsburgh-based Railroad Development Corporation (RDC) signed contracts with the government of Guatemala to operate the country’s newly-privatized rails for 50 years. After initially reopening several defunct rail lines, RDC’s progress slowed. After a decade, the company had only completed one of the five phases required to restore the national rail system. The sluggish investment stemmed largely from the company’s sub-par financial performance.
In 2006, after months of negotiations with RDC failed to produce results, Guatemala’s executive branch declared one of RDC’s contracts to be lesivo—or injurious to the interests of the State. The concept of lesivo, the right of the executive branch to call out seemingly counterproductive government decisions and contracts, has existed in a half-dozen Latin American countries for decades. In Guatemala, which has had the lesivo provision on its books since 1928, a lesivo pronouncement initiates a legal process in which an administrative court weighs the executive branch’s claims against the defense presented by the contractor (i.e. RDC). The contractor has the right to appeal the resulting decision to the Supreme Court.
While participating in this domestic court process, RDC chose to also launch an investor-state attack against Guatemala through the International Centre for the Settlement of Investment Disputes (ICSID). RDC alleged that Guatemala had violated its commitments under the Central America Free Trade Agreement, marking the first investor-state case brought under CAFTA. The lesivo declaration was non-binding, meaning that RDC’s contracts remained intact and the company continued to earn revenue from the railroad while the domestic court process was underway. Even so, RDC claimed that the non-binding lesivo pronouncement itself violated CAFTA by tarnishing the company’s reputation among business contacts. On these grounds, RDC demanded $64 million in compensation from one of the hemisphere’s poorest countries.
In June 2012, the three lawyers comprising the ICSID tribunal issued their ruling on the case: Guatemala owes RDC $11.3 million (plus over $2 million in interest and court fees) for violating the company’s CAFTA-protected right to a “minimum standard of treatment.” How did Guatemala’s mere initiation of the lesivo legal process, in which RDC was fully participating, constitute a denial of a “minimum standard of treatment”? Rather than determining whether RDC had been afforded due process, the standard employed by most countries, the tribunal chose a far more expansive definition of the “minimum standard,” one that prohibits governments from taking any action toward a foreign investor that could be seen as “arbitrary,” or even “idiosyncratic.” The ICSID tribunal borrowed this sweeping interpretation not from any government, but from the opinions of yet another investor-state tribunal.
Proceeding with this inventive standard, the tribunal then inserted itself unabashedly into the complexities of Guatemala’s domestic contract law to argue that the lesivo declaration constituted a CAFTA violation. Going a step further, the tribunal opted to more categorically opine against lesivo as a general policy tool, warning that future usage in nearly any context could violate investor rights under CAFTA. In doing so, three unelected lawyers deemed it appropriate to unilaterally truncate a public policy employed by a half-dozen sovereign states.
This first investor-state ruling under CAFTA sets a worrisome precedent that threatens to curtail the policy space that governments throughout Central America need to fulfill their obligations to their citizens. In the case of Guatemala, taxpayers will now have to foot an $11.3 million penalty for a non-binding governmental declaration that a US company did not appreciate. And they still don’t have a functioning national railroad.