Author: Mauricio Lievana
For the fourth tender of round one, on December 2015, the Mexican Energy Ministry published the bidding guidelines for the exploration and extraction of hydrocarbons in Deep Water Blocks; changing the contract model, used in phase three, from a production sharing contract to a license contract.
The auction was divided in two different zones, (1) “Cinturón Plegado Perdido”, and (2) “Cuenca Salina”, the first one was divided in four blocks and the second one in six. A year later, on December 2016, the results of the bidding process were officially published and from the ten auctioned blocks, eight were awarded as follows:
| Cinturón Plegado Perdido | |
| Block | Awarded by |
| 1 | CHINA OFFSHORE OIL CORPORATION. |
| 2 | TOTAL; EXXONMOBIL EXPLORACIÓN Y PRODUCCIÓN MÉXICO. |
| 3 | CHEVRON; PEMEX; INPEX. |
| 4 | CHINA OFFSHORE OIL CORPORATON. |
| Cuenca Salina | |
| Block | Awarded by |
| 1 | STATOIL; BP; TOTAL. |
| 2 | NOT AWARDED. |
| 3 | STATOIL; BP; TOTAL. |
| 4 | PC CARIGALI; SIERRA OFFSHORE. |
| 5 | MURPHY; OPHIR; PC CARIGALI; SIERRA OFFSHORE. |
| 6 | NOT AWARDED. |
The deadline to sign the contracts between the awarded companies and CNH, is ninety days after the official publication of the results. So it is important to analyse the part of the contract that shall concern the investor in regards of access to arbitration if there is an administrative termination of the contract.
The license contract model, as we know it, is divided in thirty five different clauses, but for the purpose of this paper we are going to focus on clauses 23 and 26, in relation to an administrative termination.
Clause 23. Administrative and Contractual Termination.
Clause 23.1, establishes that the causes of an administrative termination of the contract are going to be the same established in article twenty of the Mexican Hydrocarbons Law.
If there is any indication or assumption that the investor is failing to comply any obligations that can result in an administrative termination, the CNH will give notice of this situation and will start an official investigation to determine if, indeed, there is a feasible cause of termination. The investigation process needs to last at least thirty days but no more than two years.
Once the investigation process is concluded, the CNH is bound to formally deliver a written notification of the investigation results to the investor, in order to allow him to argue whatever is best for his interests. The investor will have thirty days to deliver the suitable arguments to defend his interests and after that period, the CNH will give a final decision in the next ninety days.
Clause 26. Controversy Solutions and Applicable Law.
The controversy solutions and applicable law clause is not exactly as clear as one shall expect. First, it states that the obligations and compliance of the contract shall be bound and understood in accordance with the Mexican legislation, but it also states, in not a very broad way, that the investor will be entitled with all the existing rights established in any international treaty the Parties are part of.
On clauses 26.2, 26.4, and 26.5, the contract foresees three different controversy solutions:
- 26.2 – Conciliation.
o Any kind of dispute, with exception of an administrative termination, can be solved in this scheme.
- 26.4 – Claims before Local Federal Tribunals.
o Claims about Administrative termination can only be brought before Local Federal Tribunals.
- 26.5 Arbitration.
o Any kind of dispute, with exception of an administrative termination, can be brought before the International Court of Justice in The Hague.
From these hypotheses we conclude that if the CNH decides to terminate the contract due administrative reasons, access to arbitration is out of the options the investor can use to solve the dispute, he is bound by the contract to present the claim only before a domestic tribunal.
Taking the above into consideration, it is possible to assume that there could be a conflict between international and domestic law, because most of the international treaties that Mexico is part of, contemplate that access to arbitration is a right the investor is entitled to for the settlement of investment disputes that assures equal treatment among investors of the Parties in accordance with the principle of international reciprocity, and due process before an impartial tribunal with the purpose of providing the assurance of fairness and predictability that investors are looking for to engage in the market.
Under this context, is it feasible to argue that the denial of access to arbitration under specific circumstances could be a violation to the main investment protection provisions under international law?
Literature suggests that a claim is a matter of international investment arbitration when: ‘The claimant must satisfy the tribunal that its claim fall within the substantive protection of the Treaty, by constituting either a breach of one of the protected investors´ rights (…), or an expropriation of property(…)’ .
This can be interpreted as the fact that the mere assertion made by a claimant about the existence of a violation to the Treaty is not enough, the Tribunal needs to determine if it has jurisdiction or not, as it has been held by the International Court of Justice in the Case concerning Oil Platforms , which states as follows:
‘[The Court] must ascertain whether the violations of the Treaty (…) pleaded by Iran do or do not fall within the provisions of the Treaty and whether, as a consequence, the dispute is one which the Court has jurisdiction ratione materiae to entertain (…)’
As we can see, it is very important to identify which provision of the Treaty was violated because the approach that need to be taken when presenting a claim before an international Tribunal in order to satisfy its jurisdiction criteria will determine if the claim is going to be taken into consideration or not.
For example, if we take a look to the Azinian case[1], we can identify that the claim´s approach was not the most suitable for the case. The claimants argued that violations to articles 1105 (Minimum Standard of Treatment), and 1110 (Expropriation and Compensation) of NAFTA, were committed because the local government decided to withdraw their waste management licence due to some irregularities.
The main issue was that the licence withdrawal was indeed made on a legal basis and this action was also ratified by the local tribunals, so this was not a matter of international jurisdiction. In order to succeed with an international claim the most probable feasible option was to challenge the local Tribunals decision, and in this way the license withdrawal could be presented as an international conflict, probably by arguing that there was a lack of due process in the context of administrative proceedings, as happened with the Teco case[2].
In theory, the interaction between domestic law and international investment law is, at a certain level, not in conflict because the latter can protect the rights of the investors when an international principle is clearly violated by the host State. In Mexico, an international treaty can be considered below the Federal Constitution but above any federal legislation.
In conclusion, if the CNH decides to terminate the contract due to administrative matters, the investor could chose to follow the domestic path before the host State´s Tribunals and once he get a final decision, if he is not satisfied with it, he can present his claim before an international tribunal; or if he considers that the arbitration is banned by the Mexican law as a solution mechanism when an administrative termination exists, then he can go directly to an international Tribunal, arguing denial of justice and a breach in the FET provision of the treaty the Parties are part of, but this last option needs to be very well analysed because of the importance of the approach that need to be taken when presenting a claim before an international Tribunal in order to satisfy its jurisdiction criteria
[1] Robert Azinian, Kenneth Davitian, & Ellen Baca v. The United Mexican States, ICSID Case No. ARB (AF)/97/2
[2] TECO Guatemala Holdings, LLC v. Republic of Guatemala, ICSID Case No. ARB/10/23, Award, December 19,2013