[This article is authored by Chitransh Vijayvergia, a law graduate from NUALS, Kochi]
Keywords: Nationality, USMCA, NAFTA, International Investment Law.
After the United States-Mexico-Canada Agreement (“USMCA”) [i] entered into force on 1st July 2020 and the North American Free Trade Agreement (“NAFTA”) [ii] terminated, the discussions on the scope of the proposed changes and the intricacies of the investment dispute settlement have taken place. In this post, the author seeks to discuss one such change, i.e., the position of dual nationals, which has marked a shift from NAFTA to USMCA.
Substantial Difference in the Definition of an Investor
NAFTA did not expressly mention dual nationality in the definition of an investor. Article 1101 (1) of the treaty extended the application of the treaty to “(a) investors of another Party” and “(b) investments of investors of another Party in the territory of the Party”. Further, Article 1116 (1) stated that “an investor of a party may submit to arbitration under this Section a claim that another party has breached an obligation”. Thus, though the text of the treaty indicated “diversity of nationality” [iii], it did not mention how to determine such diversity. Due to the lack of any express provision regarding the fate of the claims of dual nationals, international arbitral tribunals formed under Chapter 11 (Investment) of the NAFTA reached inconsistent decisions.
On the other hand, Chapter 14 of the USMCA, which deals with "investment", has marked a substantial shift from the existing NAFTA with respect to the definition of "investor." Article 14.1 of the USMCA, which defines “investor of a party”, now has an express mention of dual citizens, which were absent from the NAFTA. It recognizes a dual citizen as an exclusive member of only one State and has expressly provided for the application of the dominant and effective nationality principle as well. However, it is pertinent to note here that the USMCA has used the terms "citizen" and "citizenship" instead of "national" and "nationality."
The use of these terms instead of ‘national’ can be understood as being inspired by the decision in Feldman v. Mexico [iv]. In Feldman, the tribunal held that to determine the dominant and effective nationality of a dual national, there must be dual citizenship which would create a legal bond between the individual and the state. The tribunal stated that “…in international adjudication or arbitration or other form of diplomatic protection, citizenship rather than the residence is considered to deliver, subject to specific rules, the relevant connection.” As the tribunal found the claimant to be a citizen of the US only, it did not apply the effective nationality test and allowed him to raise claims against Mexico.
However, when we take a look at the decision of investment tribunals on the issue of dual nationals ranging from the Case A/18 [v] of the Iran-US Claims Tribunal to the most recent one of Manuel Garcia and others v. Venezuela [vi] delivered under the UNCITRAL Rules, the operative term used has been "national." Further, Article 10.28 of the DR-CAFTA, to which the US is a party, which defines "investor of a party", includes the words “natural person who is a dual national shall be deemed to be exclusively a national of the State of his or her dominant and effective nationality”.
Thus, DR-CAFTA expressly mentions and codifies the application of the international law principle of the dominant and effective nationality to determine the nationality of the investor. Thus, the USMCA has marked a shift from the internationally recognized standard of usage of "nationality" as a determiner of exercise of jurisdiction rationale personae of arbitral tribunals.
Adjusted use of the Effective Nationality Principle
The USMCA has incorporated a modified version of the dominant and effective nationality principle propounded in the Nottebohm case [vii]. This principle of international law was developed in the context of proceedings between two States and restricted a State from extending its diplomatic protection to an individual without proving a genuine link. This genuine link could be the basis of his interests, his family ties, his participation in public life, the attachment shown by him to a given country and inculcated in his children, etc.
Over time, investment tribunals facing objection to the exercise of jurisdiction rationale personae over the claims of dual nationals have often relied on this principle. Thus, its applicability in international investment law is now widely recognized.
The jurisprudence on the exercise of jurisdiction rationale personae by arbitral tribunals from disputes arising out of NAFTA was primarily developed by cases pertaining to claims of corporate entities. Tribunals have held that NAFTA aims to protect foreign investors from the actions of the local government and not to provide extra privileges to the State’s own nationals [viii]. Further, Article 1105 of the NAFTA recognizes the application of international law to the resolution of disputes arising out of the treaty.
However, in Article 14.1 of the USMCA, the term used is "dominant and effective citizenship", which restricts the application of this principle of international law. It is well established now that nationality and citizenship are two different concepts and the scope of the former is much wider [ix]. The nationality of an individual is his link with the rights and obligations of the State under international law. On the other hand, citizenship is a term of municipal law, which denotes the exercise of civil and political rights by an individual in the territory of a State. Thus, the USMCA has taken a step backwards from the current approach of States as well as the arbitral tribunals, which have upheld the application of international law rather than municipal law in investment arbitration.
As the determination of citizenship is governed by municipal law, the approach of the USMCA can also be related to the decision of the ICSID tribunals in the cases of Champion Trading v. Egypt [x] and Soufraki v. UAE [xi]. In these cases, the ICSID tribunals relied on municipal law to determine the nationality of the dual national claimants. However, it is pertinent to note that the ICSID tribunals soon shifted from this position and upheld the usage of the text of the BIT [xii] or international law [xiii] in the determination of nationality.
The reason underlying this shift is that municipal laws of States are different from one another and consequently the law on grant and revocation of citizenship as well. Thus, using citizenship as a criterion to resolve disputes at an international level would lead to inconsistent decisions. Furthermore, the claimant may have effective nationality with the host-State, but if he does not acquire citizenship of that State, he may still file a claim against that State. This, in the author’s view, would be against the objective of IIAs in general, which aim to protect the rights of foreign investors in the territory of another contracting party and not the claims of the investors against their own state.
Points to Take Away
As investor-State arbitration is an international matter, reliance should be placed on "nationality", which is governed by international law, instead of "citizenship", which is governed by municipal law. In the future IIAs, the States should consider the inclusion of specific clauses dealing with the claims of dual "nationals" rather than "citizens." To overcome the issue of determination of the effective nationality of the claimant, the States should also consider adding an express clause like Article 10.28 of the DR-CAFTA, allowing the tribunals to employ the dominant and effective nationality principle to determine the nationality of the claimant.
Further, the States may also mention factors to be taken into consideration to determine the effective nationality of the claimant. These factors can range from habitual residence to personal attachment, to the centre of economic, social, and family life, and to the circumstances in which the second nationality was acquired [xiv]. This would ensure greater certainty in the application of the dominant effective nationality at an international level.
USMCA has marked a substantial shift from the existing position of dual nationals in NAFTA based investor-State arbitration in as much as it has removed the ambiguity of application of the effective nationality principle. However, future arbitration under the USMCA may still allow dual nationals to sue their home country on the ground that they do not have legal citizenship in the host state. This would run in contradiction to the principles evolved by the UNCITRAL arbitral tribunals in Ballantine v. The Dominican Republic [xv], Heemsen v. Venezuela [xvi] and Manuel Garcia and others v. Venezuela [xvii]. In these decisions, the tribunals effectively worked towards restricting the claims of dual nationals against the States of their own nationality. The tribunals upheld the application of the dominant and effective nationality principle in specific and international law rather than municipal law in general in investor-State arbitration. With the USMCA relying on terms like "citizen" and "citizenship", the arbitral tribunals would have to fall back on the domestic laws of the States to determine citizenship. Thus, in the author’s opinion, the USMCA has resurrected the debate over whether municipal or international law should be applied in the resolution of disputes before an international tribunal.
[i] United States-Mexico-Canada Agreement (adopted 30 November 2018, entered into force 1 July 2020) (USMCA).
[ii] North American Free Trade Agreement (Canada-Mexico-The United States of America) (entered into force 1 January 1994) (1993) 32 ILM 289 (NAFTA).
[iii] The Loewen Group Inc. and others v. United States of America (Award, 2003) ICSID Case No. ARB(AF)/98/3,  (Loewen).
[iv] Marvin Roy Feldman Karpa v. United Mexican States (Interim Decision on Preliminary Jurisdictional Issues, 2000) ICSID Case No. ARB(AF)/99/1.
[v] Iran-United States, Case No A/18 (1984) 5 Iran-USCTR 251.
[vi] Manuel García Armas and others v. Bolivarian Republic of Venezuela (Award on Jurisdiction, 2019) PCA Case No. 2016-08.
[vii] The Nottebohm Case (Liechtenstein v. Guatemala) (Judgment)  ICJ Rep 4, 23.
[viii] Loewen (n 5) .
[ix] Maximilian Koessler, “Subject,” “Citizen,” “National,” And “Permanent Allegiance”’ (1946) 56 Yale LJ 58.
[x] Champion Trading Company, Ameritrade International, Inc v. Arab Republic of Egypt (Decision on Jurisdiction, 2003) ICSID Case No. ARB/02/9.
[xi] Hussein Nuaman Soufraki v. The United Arab Emirates (Award, 2004) ICSID Case No. ARB/02/7.
[xii] Victor Pey Casado and President Allende Foundation v. Republic of Chile (Decision on Jurisdiction, 2002) ICSID Case No. ARB/98/2.
[xiii] Eudoro Armando Olguín v. Republic of Paraguay (Decision on Jurisdiction, 2000) ICSID Case No. ARB/98/5.
[xiv] Michael Ballantine and Lisa Ballantine v. The Dominican Republic (Final Award, 2019) PCA Case No. 2016-17 (Ballantine).
[xvi] Enrique Heemsen and Jorge Heemsen v. Venezuela (Decision on Jurisdiction, 2019) PCA Case No. 2017-18.
[xvii] Manuel Garcia and others v. Venezuela (Final Award, 2019) PCA Case No. 2016-17.