The NAFTA chapter 11 expropriation debate through the eyes of a property theorist.

• Author: Poirier, Marc R.

1. INTRODUCTION II. BACKGROUND ON NAFTA CHAPTER 11 III. THE FUNDAMENTAL THEORETICAL DISTINCTION BETWEEN "DIRECT EXPROPRIATION" AND "INDIRECT EXPROPRIATION" OR "MEASURES TANTAMOUNT TO EXPROPRIATION IV. CONSEQUENCES OF THE DISTINCTION BETWEEN "EXPROPRIATION" AND "INDIRECT EXPROPRIATION" OR "MEASURES TANATAMOUNT TO EXPROPRIATION" FOR CONCEPTUALIZATION OF NAFTA ARTICLE 1110 ISSUES A. The Split Nomos Problem B. Problems of Territoriality C. Split Nomos and Territoriality Problems in the Context of Globalization V. CONSEQUENCES FOR INTERPRETATION AND RESTRUCTURING OF NAFTA CHAPTER 11 AND ARTICLE 1110 A. Substantive Norm for "Indirect Expropriation" and "Measures Tantamount to Expropriation" 1. A Vague Substantive Standard 2. The Role of National Variation, Given Vagueness in the Substantive Standard 3. Recent Statutory and FTA Modifications to the NAFTA Article 1110 Approach: Substantive Aspects B. The Dispute Resolution Mechanism for "Indirect Expropriation" and "Measures Tantamount to Expropriation" VI. CONCLUSION I. INTRODUCTION

   It has become clear that something is amiss with Chapter 11 of the North American Free Trade Agreement (NAFTA). (3) This Chapter provides protection for foreign investors through a series of substantive guarantees, backed up by an Investor State Dispute Mechanism (ISDM) that allows direct arbitration by a foreign investor against a state. (4) These guarantees--especially the guarantees of fair treatment under minimum international standards (5) and of compensation for indirect expropriation of property, (6) and to some extent the guarantee of national treatment (7)--are being invoked broadly to attack perfectly standard exercises of the police power that purport to protect public health, safety, welfare, and the environment. In one pending arbitration, Methanex v. United States, damages of close to $1 billion are being sought from the United States for lost market share because California has banned a gasoline additive that it believes imperils the water supply. (8) In Metalclad v. United Mexican States, an arbitration that concluded in 2000, a U.S. investor sought $90 million and was awarded $16 million because a Mexican city denied a building permit for a hazardous waste facility and a Mexican state declared the land an environmentally protected area. (9) The British Columbia Supreme Court subsequently narrowed the holding of the arbitration panel, but the award was not reversed altogether, (10) and the claim was settled in 2001 for the $16 million. (11) Indeed, in the first invocation of NAFTA Chapter 11, Ethyl Corp. v. Gov't of Canada, (12) Ethyl Corp., a U.S. corporation, challenged a Canadian ban on the import of MMT, a gasoline additive. Ethyl claimed $250 million U.S. for loss of sales and profits, injury to its Canadian subsidiary, the threat that other countries would follow Canada's lead thus further injuring the MMT market, and so on. This caused Canada to back off by rescinding its regulation and paying $13 million U.S. in damages to the foreign investor. Beyond these first few specific cases, some of the arbitral panels dealing with these and similar investor claims axe apparently adopting an approach to Chapter 11 that equates loss of significant value or even of potential market share with an automatic obligation to compensate.

   On another, equally problematic front, the Chapter 11 substantive provisions are enforced through a compulsory arbitration process. It can be invoked by a private investor without first resorting to a government-to-government negotiation, as has been usual in international claims for compensation due to expropriation. The arbitration proceedings and decisions often have been secret, without any obligatory participation by others affected by the rulings. They proceed under narrowly tailored rules modeled after those designed for commercial arbitration. They occur at a location chosen for the convenience of the parties somewhere within the territories of the NAFTA signatory states, but not necessarily in any geographical proximity to the locus of the environmental concerns. An opinion explaining the decision is not required. There is very limited judicial reconsideration of these arbitral awards and no single appellate body that might consolidate the holdings of individual arbitrations into a coherent whole.

   Whether it is due to the novel enforcement mechanism or to the novel interpretation of the boilerplate investor protections in the underlying agreement provisions, bona fide environmental regulatory restrictions and legitimate attempts to control natural resources within a state's territory are in jeopardy. If the broad reading of the substantive provisions is accurate, wherever foreign investors are adversely affected by a regulation, the regulation must be paid for. At some level of damages this potential liability will influence governmental decisions not to protect public health, safety, welfare, and the environment. (13) David Schneiderman, a Canadian critic of the process, writes that "takings rules have the potential for disrupting state regulation of the marketplace significantly." (14) He explains, "As third-party investors increasingly have standing to sue before domestic courts and international arbitration tribunals, unmediated by the foreign- policy goals of party states, states host to foreign investment will be forced to abandon social policy initiatives that impact negatively on investment interests." (15)

   The stakes are much larger than the few NAFTA Chapter 11 decisions handed down to date. The NAFTA Chapter 11 provisions, both substantive and procedural, are likely to provide the model for investor protection provisions in future multilateral trade agreements such as a Free Trade Agreement of the Americas (FTAA). (16) The early reaction by environmentalists worldwide to the Ethyl Corp. controversy helped to sink a proposed Multilateral Investment Agreement (MIA) being negotiated among the members of the Organization for Economic Cooperation and Development (OECD). (17) The Bipartisan Trade Promotion Authority Act of 2002 (Trade Act of 2002), (18) recently enacted by Congress, sets goals for future U.S. trade agreements that specifically address substantive and procedural issues raised by the NAFTA controversy. (19) Recently signed Free Trade Agreements (FTAs) between the United States and Singapore and between the United States and Chile contain investor protection provisions influenced by NAFTA Chapter 11 and shaped by the controversy surrounding them. (20)

   Developments under NAFTA Chapter 11 have unleashed a torrent of commentary. Much of it recognizes that proper interpretation of NAFTA Article 1110 calls for an appropriate balance between respect for the stability of property expectations and legitimate needs for environmental regulation. In other words, NAFTA Article 1110 is not to be understood as just a guarantee against direct, full-blown expropriations. It is functioning as a regulatory takings doctrine. That is, it promises Investors compensation in at least some circumstances for losses from regulation that "goes too far." (21) Investors are therefore entitled to compensation at least some of the time for their losses from regulation.

   Once this fact is acknowledged, commentators typically fall into one or more of several problematic discussions. What ought the rule of transnational regulatory takings be, for example? This is no more easily resolvable in the transnational context than it is in the domestic U.S. context, where vagueness seems endemic. (22) Another line of argument asks whether it is even necessary to have a separate treaty provision on regulatory takings. Another article of Chapter 11 already provides for national treatment, thus guaranteeing foreign investors access to whatever regulatory takings protection would be available in domestic courts for property owned by nationals. A third inquiry explores what role international law ought to play in shaping regulatory takings doctrine, given the different approaches to regulatory takings reflected in the domestic laws of various countries. Yet another conundrum is posed by the fact that the NAFTA signatories are three nations with federal systems, so that state and local regulation may cause liability to accrue to the federal government. (23)

   Pro-environmental commentators on Chapter 11 also attack the ISDM procedures for their lack of transparency. They are evidently designed for swift decision making and compensation, not with the needs of public dialogue and the slow building of precedent in mind. Advocates of environmental protection know they are shut out by the ISDM, and they know this is wrong. But they have not always connected the procedural flaws of the ISDM with the issues raised substantively by a broad view of the Article 1110 protection against expropriation.

   Another group of critics, whom I shall call pro-sovereignty commentators, argue that NAFTA Chapter 11 impermissibly infringes on the exercise of national sovereignty both by imposing substantive norms and by imposing legal mechanisms that differ from individual countries' own approaches to balancing property rights and bona fide police power regulation. (24) The environmentalist critics and pro-sovereignty critics overlap to some extent, but have somewhat different arguments and agendas.

   Sometimes looking at a problem from a new angle shines light on its structure. Thus, fine arts students are encouraged to look at a classic painting in a mirror or upside down as a way of seeing it afresh. This Article develops insights from an approach to regulatory takings that focuses on the dialogic nature of property rules and the police power, and applies them to NAFTA Chapter 11. The basic insight is that property rights and regulatory practices are interdependent, and that they are legitimately renegotiated from time to time. (25) Changes in science, knowledge, technology, custom...