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ISDS Case Study: RDC v. Guatemala: CAFTA Investor-State Ruling: Tribunal Ignores CAFTA Annex, Cites Another Tribunal to Rule against Guatemala

By Public Citizen's Global Trade Watch

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The June 29, 2012 investor-state ruling on the merits in the Central America Free Trade Agreement (CAFTA) Railroad Development Corporation (RDC) v. Republic of Guatemala case confirmed that an Annex initially included in CAFTA and now proposed for the Trans-Pacific Partnership (TPP) is insufficient to foreclose tribunals from generating expansive interpretations of the Minimum Standard of Treatment (MST) language used in FTA investment chapters and proposed for TPP.

The tribunal explicitly rejected arguments raised by Guatemala, the United States, El Salvador and Honduras that under Customary International Law (CIL), the tribunal must base its MST analysis on actual state practice. Instead, the tribunal relied on a definition issued by a tribunal in the North American Free Trade Agreement (NAFTA) Waste Management II award to find against Guatemala. The $11.3 million judgment in favor of RDC also ordered compound interest to be paid dating back to the government action RDC challenged. Thus, Guatemala must pay at least $2 million in interest in addition to the over $11 million penalty. Guatemala was also ordered to pay nearly $200,000 for RDC’s tribunal fees from the jurisdictional phase, in addition to its own tribunal fees.

The Office of the U.S. Trade Representative (USTR) has long claimed that the MST language in past U.S. Free Trade Agreements (FTA), now proposed for the TPP, does not expose countries to  Investor-State Dispute Resolution (ISDR) liability except in instances of denials of justice as that  term has long been understood under customary international law (CIL). That is to say denial of due process in administrative or court proceedings, or denial of police protection. To bolster this argument, USTR notes an Annex included in U.S. FTAs since CAFTA – now proposed for inclusion in TPP. It contains circular language describing the MST standard as rooted in CIL understandings of the relevant terms. USTR argues that this annex remedied the problem of runaway ISDR tribunals generating fanciful notions of investor expectations and imagining new MST obligations for governments. On this basis, USTR argues that there is no need for further definition or limitation of the MST standard, nor exceptions to FTA investment chapter obligations.