Structure, legitimacy, and NAFTA's investment chapter.

• Author: Brower, Charles H., II

ABSTRACT

In this Article, Professor Brower examines the investment chapter of the North American Free Trade Agreement (NAFTA). He argues that the relevant treaty provisions lack a substantial measure of textual clarity. In addition, he argues that ad hoc tribunals based on the commercial arbitration model have generated incoherent doctrine and are relatively less accountable, transparent, and accessible than permanent tribunals. Furthermore, he argues that the NAFTA Parties and their courts so far appear to place a higher priority on the pursuit of narrow self-interest than on the principled administration of international governance. Collectively, these circumstances help to explain the frequency and intensity with which claimants, tribunals, and the NAFTA Parties refer to the perceived illegitimacy of investor-state arbitration under NAFTA. While superior proposals may emerge, Professor Brower suggests that mitigation of this legitimacy crisis may require the continuation of ad hoc arbitration, followed by review by a standing appellate body and supervised by an accountable, transparent Free Trade Commission.

TABLE OF CONTENTS I. INTRODUCTION II. PURPOSE, STRUCTURE, AND EARLY OPERATION OF CHAPTER 11 III. ELEMENTS OF LEGITIMACY A. Predictability B. Historical Practice and Shared Values IV. LEGITIMACY AND THE STRUCTURE OF NAFTA's INVESTMENT CHAPTER A. Legitimacy and Claimants: Villains or Scapegoats for Textual Indeterminacy? B. Legitimacy and Tribunals: Remedy or Complication? C. Legitimacy and the NAFTA Parties: Antidote or Toxin? D. Legitimacy and the Constitutional Dimension: Relationships Among Tribunals, Courts, and the Free Trade Commission V. LESSONS FOR THE FTAA AND OTHER MULTILATERAL INVESTMENT REGIMES VI. CONCLUSION I. INTRODUCTION

Debates about the investment chapter--Chapter 11--of the North American Free Trade Agreement (NAFTA) (1) have become common fare. (2) From these discussions, however, a surprising phenomenon has emerged--namely, the intensity and sincerity with which claimants, the NAFTA Parties, and tribunals accuse one another of illegitimate conduct in the course of arbitrating investment disputes. Left unresolved, such widespread and enduring perceptions bode ill for the future of investor-state arbitration under NAFTA and the extension of a similar investment regime to the entire Western hemisphere through an Agreement on the Free Trade Area of the Americas (FTAA). (3) To redress the troubling state of affairs, this Article initiates a discourse about the sources of perceived illegitimacy in Chapter 11 disputes, as well as the means for their mitigation in future investment regimes. Laying the foundation for this analysis, Part II reviews the purpose, structure, and early operation of NAFTA's investment chapter. Part III examines the nature of legitimacy and identifies the factors that support perceptions of legitimacy in international legal regimes. Building on Parts II and III, Part IV explains why NAFTA's investment chapter generates widespread accusations of illegitimate conduct by claimants, states parties, and arbitral tribunals. Finally, with an eye towards improving the performance of multilateral investment regimes, Part V assesses proposals for reform against the necessary criteria for generating perceptions of legitimacy, as well as advancing the more specific goals of investment regimes.

2. PURPOSE, STRUCTURE, AND EARLY OPERATION OF CHAPTER 11

   When ratifying NAFTA, Canada, Mexico and the United States undertook to "[ensure] a predictable commercial framework for business planning and investment," (4) "increase substantially investment opportunities in the[ir] territories," (5) and "create effective procedures for ... the resolution of disputes" (6)--all in a manner consistent with "environmental protection and conservation," (7) preservation of their "flexibility to safeguard the public welfare," (8) and promotion of "sustainable development." (9) Chapter 11 implements these objectives by establishing standards for treatment of investors and adopting procedures for resolving investor-state disputes. (10)

   For example, Section A of Chapter 11 defines the scope and content of investment disciplines accepted by the NAFTA Parties. With respect to scope, the disciplines of Section A apply to "measures adopted or maintained by a [NAFTA] Party relating to" the investors of another NAFTA Party, as well as the investments of investors of another NAFTA Party located in the territory of the host state. (11) Substantively, Section A permits direct expropriation, indirect expropriation, and measures "tantamount to ... expropriation" of investments only for a public purpose, on a nondiscriminatory basis, in accordance with due process of law and the minimum standard of treatment under Chapter 11, and upon prompt payment of fair market value--plus interest--in freely-transferable funds. (12) In addition, Section A prohibits certain performance requirements, including requirements to export a given level or percentage of goods or services, or to achieve a given level or percentage of domestic content. (13) Furthermore, Section A requires the NAFTA Parties to treat each others' investors in accordance with the relative standards of national treatment and most-favored-nation (MFN) treatment. (14) Finally, Section A establishes a minimum standard of treatment, which mandates treatment in accordance with international law, including fair and equitable treatment. (15)

   Unlike the World Trade Organization's (WTO) disciplines on trade in goods, Chapter 11 does not, except with respect to performance requirements, (16) incorporate general exceptions for measures necessary to protect public morals; necessary to protect human, animal or plant life, or health; or relating to the conservation of natural resources. (17) Nevertheless, two provisions of Chapter 11 recognize that the NAFTA Parties may undertake public health "functions" and may adopt, maintain, or enforce measures they consider "appropriate" to ensure that investments proceed "in a manner sensitive to environmental concerns"--all provided that the functions and measures remain consistent with their obligations under NAFTA's investment chapter. (18) Although these provisions evidently have some effect on the NAFTA Parties' rights and obligations, (19) their ambiguous text leaves their relationship to investment disciplines largely unresolved. (20)

   In order to secure the rights and obligations just described, Section B of Chapter 11 "establishes a mechanism for the settlement of investment disputes that assures both equal treatment among investors of the Parties in accordance with the principle of international reciprocity and due process before an impartial tribunal." (21) To this end, Section B memorializes the NAFTA Parties' standing consent to investor-state arbitration. (22) Their consent represents a permanent offer, (23) which investors may accept by submitting disputes to: (1) arbitration under the ICSID Convention, if the investor's home state and the disputing NAFTA Party are both states parties to that convention; (24) (2) the Additional Facility Rules of ICSID, if either the investor's home state or the disputing NAFTA Party is a state party to the ICSID Convention; or (3) the UNCITRAL Arbitration Rules. (25) As a condition precedent to the submission of claims, however, investors must execute their own written consents to arbitration. Investors must also waive their right to initiate or continue any other dispute resolution proceedings with respect to the allegedly offending measure, except for certain proceedings for extraordinary relief not involving the payment of damages. (26) Investors who initiate claims on behalf of owned or controlled enterprises located in another NAFTA Party must also submit waivers executed by those enterprises. (27) Article 1122(2) recognizes that, when taken together, the treaty-based consent of NAFTA Parties and the submission of claims by investors satisfy the requirements for written arbitration agreements under the ICSID Convention, the New York Convention, (28) and the Inter-American Convention. (29)

   Once submitted to arbitration, the institutional rules selected by the investor govern the proceedings, except as modified by Section B of Chapter 11. (30) Section B modifies the arbitration rules, inter alia, by creating a limited right of audience for non-disputing NAFTA Parties and identifying the proper law for Chapter 11 disputes. Thus, Articles 1127 and 1129 entitle non-disputing NAFTA Parties to receive copies of all pleadings, evidence, and written arguments. (31) Article 1128 also grants non-disputing NAFTA Parties the right to make submissions to Chapter 11 tribunals regarding the interpretation of NAFTA. (32) Article 1131(1) requires tribunals to render decisions in accordance with NAFTA and other "applicable rules of international law." (33) Tribunals must also apply interpretations of NAFTA made by the Free Trade Commission--the three NAFTA Parties acting in concert through cabinet-level representatives. (34)

   With respect to the binding effect, judicial supervision, and enforcement of Chapter 11 awards, Article 1136 establishes three relevant principles. First, awards "have no binding force except between the disputing parties and in respect of the particular case." (35) Second, prevailing parties may not seek enforcement of awards rendered under the Additional Facility or UNCITRAL Rules until either (1) three months have passed without the losing party having initiated a proceeding to revise, set aside, or annul the award, or (2) a court has dismissed or allowed such a proceeding and there is no further appeal. (36) This provision evidently gives the losing parties an opportunity to seek revision or annulment of Chapter 11 awards by municipal courts at the seat of arbitration. (37) Third, investors may, as appropriate, seek enforcement of awards under the ICSID...