In the Driver s Seat:Nafta s Chapter 11 As A Judicial Vehicle For The Expansion Of Investor Rights

• Author: Vincent L. Frakes
• Position: JD-MA candidate at American University Washington College of Law
• Pages: 11

Vincent L. Frakes is a third-year JD-MA candidate at American University Washington College of Law and American University, School of International Service. In 2001, he graduated with High Honors from the University of California, Santa Barbara with a double major in English and Political Science. He also successfully completed the UCSB College Honors Program. Mr. Frakes is a former assistant to the General Counsel of a House committee and is pursuing a career in international trade law and legislation.

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THE NORTH AMERICAN FREE TRADE Agreement (NAFTA) thrust the United States, Canada, and Mexico into a realm of new rules governing disputes between investors and governments of member countries. As outlined in Chapter 11 of the agreement, NAFTA's investor-to-state dispute resolution process allows private investors and companies to bring suit against member country governments in special tribunals to obtain monetary awards for government actions that violate their rights under the treaty. Originally intended to resolve such disputes while avoiding politicization and strained international relations, Chapter 11 instead provides investors with rights and protections unprecedented in a multilateral trade agreement. Understanding the stark differences that exist in the economic and political systems of each member country, NAFTA tribunals hearing disputes weigh the host country's regulatory and legal framework in making a judgment. However, the vague and uncertain nature of Chapter 11 language allows foreign investors to forum shop, increasing their rights by offering an additional adjudicative body that in many cases grants more leniency than domestic courts of member countries. Moreover, there is a visible trend of favoring foreign investors by NAFTA tribunals over host country governments, bringing to light questions of the jurisdictional authority of member states' domestic courts. This trend can be easily demonstrated through the decisions in three recent cases brought under NAFTA's Chapter 11: Metalclad Corp. v. Mexico, S.D. Myers, Inc. v. Canada, and Pope & Talbot, Inc. v. Gov. of Canada. Finally, the limited number of disputes that are heard by NAFTA tribunals are a testament to the inconsistency in applicability of Chapter 11 by these courts and leaves open the question of NAFTA's ability to protect foreign investment through its arbitration process.

The Investment Chapter

CHAPTER 11 OF NAFTA OFFERS several grounds on which foreign investors can bring claims against host member countries following satisfaction of jurisdictional requirements. The arbitration mechanisms and procedures under NAFTA represent a more sophisticated system than those provided under traditional bilateral investment treaties.¹ Section A of Chapter 11 establishes grounds for a claim in Articles 1102 (National Treatment), 1103 (MFN Treatment), 1104 (Standard of Treatment), 1105 (Minimum Standard of Treatment), and 1110 (Expropriation and Compensation). Moreover, Chapter 11 protects investors from "measures" taken by host governments, including laws, regulations, and policies that affect government's interaction with companies.²

While claims relating to national treatment and minimum standard of treatment present certain challenges, the expropriation provision of Article 1110 is the most contentious. As with most free trade agreements, expropriation exists when a party directly or indirectly nationalizes the investment of a foreign party, and the act does not fall under a stipulated exception.³ Differences in regulatory structures and practices in member countries contribute heavily to the large proportion of investorstate disputes involving expropriation. Chapter 11 grants a large amount of discretion to a NAFTA tribunal in determining the merits of a claim and the satisfaction of jurisdictional requirements. Under NAFTA, the requirements of a valid investor-state claim include modest criteria, which, once met, allow the tribunal to decide the case based on factors such as the ´ordinary meaning' of the treaty's text pursuant to Article 31 of the Vienna Convention on the Law of Treaties in relation to the facts at hand.⁴ Even though Chapter 11 has been praised by some as a model after which future trade agreements should form dispute resolution systems, ⁵ several cases typical of NAFTA jurisprudence demonstrate that the vague language of Chapter 11 has been applied inconsistently by the tribunals, resulting in expanded foreign investors' rights.

Expansion of Investors' Rights under Chapter 11 - Case Studies

NAFTA TRIBUNALS HAVE HEARD a variety of cases involving disputes between investors and member states since the agreement's inception in 1993. The most interesting arbitral matters involve expropriation (Article 1110), as investors fight measures taken by host governments of countries where they do business, but often include important disputes over other provisions of the agreement Page 50 as well. Three NAFTA decisions, Metalclad Corp. v. Mexico (Metalclad), S.D. Myers, Inc. v. Canada (Myers), and Pope & Talbot, Inc. v. Gov. of Canada (Pope & Talbot), involving claims arising under Article 1110 are representative of the expansion in investors' rights by allowing companies to forum shop for a domestic court or international tribunal that issues the most favorable decision to the investor. Analysis of these three cases demonstrates the disturbing trend toward increased investors' rights under the NAFTA arbitration system that circumvents domestic courts in favor of investor friendly tribunals applying international law.

Metalclad v Mexico

The dispute between Metalclad, a U.S. corporation, and Mexico is one of the most noted examples of the issue of the legal rights afforded international investors under Chapter 11 of NAFTA.⁶ In 1993, Metalclad purchased a Mexican waste management company, COTERIN, to build a hazardous waste landfill, which was completed in March 1995,⁷ but never opened.⁸ In its plea to the arbitral tribunal, Metalclad cited violations of two NAFTA provisions: (1) fair and equitable treatment under Article 1105 and (2) prohibition against direct or indirect expropriation without compensation under Article 1110.⁹ After a three-year long arbitration, the tribunal decided in favor of Metalclad on both counts of the claim and ordered Mexico to pay the corporation $16.7 million in damages.¹⁰

Reassuring investors and building trust and respect for its legal framework is a key challenge to any nation seeking to participate in the global competition for investment.¹¹ Given the lack of transparency in the legal system and weak rule of law in Mexico, investors often fear harmful government intervention, especially in relation to expropriation without compensation. Rulings by domestic courts in all three NAFTA countries have traditionally been unfavorable to investors.¹² Such treatment makes sense because domestic regulatory and procedural restrictions may provide a difficult environment for a foreign investor to prevail.¹³ Increased access to arbitral panels in Mexico through NAFTA (which Metalclad utilized) grants investors the ability to forum shop and choose arbitration over domestic courts, promising more favorable treatment and outcomes.¹⁴

The Metalclad decision represents a potential threat to the jurisdictional authority of domestic courts of NAFTA member countries because of its successful use of international tribunals. Even though the case involved Mexican law, the tribunal's rationale may have undermined judicial systems of NAFTA member countries by rendering a decision inconsistent with those issued by domestic courts on similar issues of law.¹⁵ Consequently, an effectual new type of forum shopping could emerge where lawful and legitimate domestic courts are passed over in favor of NAFTA tribunals that are much more preferable by investors because of their likelihood to grant awards not viable in domestic judicial systems of member countries. More worrisome is the potential for tribunals under Chapter 11 to brush aside carefully considered state and local governmental action aimed at regulating industry in favor of economic gain. Metalclad provides an example where local action and an attempt at regulating investor conduct was tempered by a tribunal decision, signaling the superiority for investors of NAFTA arbitration decisions in member countries.

S D. Myers v. Canada

S.D. Myers, Inc., a U.S. company that was at one time engaged in PCB remediation,¹⁶ experienced the slowing of its business in the United States, and consequently moved its executive operations to Canada, where only one true industry competitor existed.¹⁷ In March 1989, Canada signed the Basel Convention, pledging to manage hazardous waste (such as PCBs) in an environmentally sound manner.¹⁸ After intense lobbying efforts on behalf of both sides, the Canadian Minister of the Environment signed an Interim Order that effectively banned the exportation of PCBs from Canada,¹⁹ adversely affecting Myers and its business interests.

Myers's claim against Canada noted a violation of four provisions of NAFTA. First, Myers argued a national treatment...