On May 10, 2012, the Supreme Court of Canada denied the Government of Mexico's application for leave to appeal the Ontario Court of Appeal's decision in United Mexican States v. Cargill, Incorporated (Mexico v. Cargill). The Court of Appeal judgment affirmed a North American Free Trade Agreement (NAFTA) arbitration award of US$77-million in damages to American-based Cargill, Incorporated (Cargill) for investment losses resulting from Mexican tax and import duties affecting imports of high-fructose corn syrup (HFCS).
The award broadly characterized the definition of "investment" under NAFTA, which allowed Cargill to recover not only the losses it suffered as a direct investor in Mexico, but also losses incurred by Cargill's American operations that were inextricable parts of the Mexican investment. As the Mexico v. Cargill award provides reasoning supporting a broader scope for recoverable losses that was scrutinized and upheld by two levels of courts, this decision merits consideration by those considering an international investment law claim. This award may be of particular relevance to Canadian companies and companies doing business in Canada, as most Canadian foreign investment treaties have provisions that mirror or closely track the NAFTA investment rules giving rise to this decision.
Background
In 1993, Cargill began selling HFCS in Mexico as a low-cost sugar substitute. Cargill established a Mexican subsidiary (CdM) to facilitate its entry into the Mexican market. The company invested in developing an integrated supply chain whereby Cargill produced HFCS in the U.S. and sold it to CdM for resale to Mexican consumers.
In response to concerns by the Mexican sugar industry, the Mexican government introduced taxes and import duties (Mexican regulations) that significantly increased the price of HFCS. Cargill alleged that as a result of the Mexican regulations, it was forced to close several American HFCS production plants along with distribution facilities in the U.S. and Mexico.
NAFTA Chapter 11 Arbitration
In a 2007 arbitration, Cargill claimed the Mexican regulations violated the investment rules set out in Chapter 11 of NAFTA, which obligates NAFTA member states (Parties) not to discriminate against foreign investment by investors from other Parties. The tribunal agreed with Cargill. The tribunal's evaluation of the scope of damages arising from the violation is a key element of the decision and is worth noting.
Under NAFTA, an investor from another Party is entitled to submit an arbitration claim for an alleged breach of the investment rules in respect of the investor's "loss or damage by reason of, or arising out of" such breach. The tribunal noted that the definition of "investment" under NAFTA is "broad and inclusive". It examined Cargill's investment holistically, finding that Cargill's sales of HFCS to CdM for distribution and re-sale were so associated with the CdM investment as to be compensable under NAFTA. Ultimately, the tribunal awarded US$36.2-million for the direct "down-stream" losses incurred by CdM in Mexico and US$41.2-million for the "up-stream" losses incurred in the U.S. due to Cargill's inability to sell HFCS to CdM for resale in Mexico.
Judicial Review by the Ontario Courts
The award was issued under the International Centre for the Settlement of Investment Disputes Additional Facility Rules, and thus is not protected from appellate scrutiny by national courts. As Mexico and Cargill designated Toronto as the place of arbitration, the Ontario courts heard the appeals of the award.
On appeal to the Ontario Superior Court, Mexico claimed the tribunal had jurisdiction to award damages to Cargill in its capacity as an investor, but not as an exporter. Cargill responded that its supply chain was an inextricable component of its Mexican investment. The Court found that Mexico's appeal targeted the merits of the award rather than the tribunal's jurisdiction and was thus beyond the Court's scope for review of jurisdiction, which the Court ruled would be based on a standard of "reasonableness".
The Court of Appeal differed on the appropriate standard of review, holding that courts must identify and narrowly define true questions of jurisdiction, and where such questions exist, evaluate the tribunal's assumption of jurisdiction based on a standard of "correctness". Additionally, in assessing whether a tribunal exceeded its jurisdictional scope, a court must avoid reviewing the award's merits.
As a result, the Court of Appeal focused on whether the tribunal correctly assumed jurisdiction under NAFTA Chapter 11 to decide the scope of damages, and whether Chapter 11 or an agreement of the Parties imposed territorial limitations on damages. The Court ultimately held that the tribunal was correct in assuming jurisdiction to make determinations on the scope of damages and that Chapter 11 does not constrain the location of damages. It further held that despite Canadian and U.S. government interventions supporting limiting Chapter 11 damages to those incurred in the host Party, there was no clear agreement in NAFTA limiting the scope of damages.
Implications for Future International Investment Arbitration Proceedings
The reasoning in the Mexico v. Cargill award raises the notion that, depending on the circumstances, an investor-state arbitral tribunal may be open to awarding damages based on a broad range of investment losses that includes up-stream, cross-border investment damages. It is conceivable that a future tribunal – particularly one constituted under NAFTA or another investment treaty containing similar provisions – will pay particular attention to this award in light of the Ontario Court of Appeal review upholding the tribunal's jurisdictional finding on damages.
As this decision may have an impact on NAFTA and other investment treaty disputes, companies with cross-border investments are encouraged to educate themselves about applicable international investment treaty protections and the potential application of the decision to their up-stream, cross-border operations.
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