Les mesures de protection des investisseurs prévues au chapitre 11 de l’ALÉNA continuent de faire l’objet de vifs débats. Le Chapitre vise à créer un environnement sûr et prévisible, propice à la libre circulation des investissements en Amérique du Nord, ce qui, en retour, permet de réaliser des gains économiques substantiels. Les critiques prétendent toutefois que le chapitre 11 comporte de graves lacunes. L’une des lacunes les plus souvent évoquées est que le Chapitre favorise les intérêts des sociétés aux dépens des enjeux publics plus importants et qu’il mine la capacité des gou- vernements d’adopter des mesures légitimes pour protéger l’environnement et la santé publique. Dernièrement, les parties à l’ALÉNA ont publié une déclaration pour préciser le sens d’une disposition clé du Chapitre et elles étudient la possibilité d’ap- porter d’autres précisions ainsi que certaines réformes.
Il est donc pertinent à ce moment d’évaluer le bien-fondé des différentes allégations formulées contre le chapitre 11 et d’examiner les réactions stratégiques appropriées. Dans ce numéro, nous donnons la parole à deux des principaux com- mentateurs du chapitre 11 au Canada, Mme Julie Soloway et M. Chris Tollefson. Nous leur avons demandé de s’exprimer sur les critiques du Chapitre et de faire part de leurs réflexions sur la possibilité de clarifications ou de réformes.
Mme Soloway soutient que l’allégation voulant que le chapitre 11 ait miné la réglementation envi- ronnementale est grandement exagérée. Elle est d’avis que la jurisprudence aux termes du Chapitre ne reflète pas du tout les pires scénarios prévus par certains critiques du Chapitre. Elle affirme que le Chapitre n’a sapé aucun règlement environ- nemental légitime en vigueur, pas plus qu’il n’est susceptible de refroidir le désir des législateurs de réglementer dans l’intérêt public. Mme Soloway estime que les tribunaux ont rendu des décisions favorables aux investisseurs étrangers seulement dans les cas les plus flagrants de conduite injuste ou discriminatoire de la part d’un gouvernement.
Bien que Mme Soloway convienne de l’existence d’une certaine incohérence dans l’interprétation des dispositions légales de l’ALÉNA, comme celles con- cernant la norme minimale de traitement (article 1105) et l’expropriation (article 1110), elle soutient que les tribunaux ont appliqué le Chapitre de façon prudente et responsable, dans l’esprit des objectifs pour lesquels il a été créé. En fait, la cause Metalclad est le seul cas dans lequel un tribunal a rendu une décision confirmant l’expropriation aux termes du Chapitre.
Mme Soloway fait toutefois remarquer que le régime actuel du Chapitre est peut-être « mûr pour une réforme » sur le plan de la procédure. Souli- gnant l’écart croissant entre le processus prévu au chapitre 11 et la transparence accrue des processus de règlement des différends prévus dans d’autres accords commerciaux, elle laisse entendre que l’adoption d’un ensemble cohérent de règles pour régir la présentation de mémoires d’amicus pour- rait renforcer la perception de légitimité du proces- sus prévu au chapitre 11, en contribuant à une plus grande reconnaissance des différents enjeux publics dans ces instances. Elle précise toutefois qu’il faudrait veiller à ce que ces règles garantissent que la présentation de tels mémoires facilitent le processus plutôt que de le freiner en le rendant inutilement lourd pour les parties à un litige. Elle suggère de se pencher sur la possibilité de créer un organe d’appel permanent pour assurer une appli- cation plus cohérente des règles et se prémunir con- tre les décisions discutables de la part des tri- bunaux. En revanche, elle s’oppose à une plus grande clarification des dispositions de fond de l’ALÉNA pour le moment en faisant remarquer qu’une telle entreprise est loin d’être simple, car il serait difficile d’éliminer toute incertitude sans miner gravement la protection des investisseurs.
Compte tenu des négociations en cours de la Zone de libre-échange des Amériques et des autres accords à l’étude sur le commerce et les investisse- ments, M. Tollefson soutient, pour sa part, que le Canada doit intervenir fermement, tant dans le cadre de l’ALÉNA que dans d’autres instances, pour s’assurer que les droits des investisseurs ne com- promettent pas de façon injustifiée le droit des gou- vernements de réglementer dans l’intérêt public.
À l’instar de Mme Soloway, il soutient que la mise en œuvre de réformes de la procédure pour accroître la transparence du régime du chapitre 11 et faciliter la participation des citoyens s’impose. En revanche, il affirme, contrairement à Mme Soloway, que les craintes que le régime pourrait empêcher les légis- lateurs de promulguer des règlements légitimes et non discriminatoires pour protéger l’environ- nement ou la santé publique ne sont pas injustifiées. Il est d’avis que l’absence d’une disposition, ana- logue à l’article XX de l’Accord général sur les tarifs douaniers et le commerce, qui permettrait de façon explicite aux gouvernements parties à l’ALÉNA de justifier ces règlements lorsqu’ils sont contestés par des investisseurs, est une grave lacune du Chapitre.
M. Tollefson soutient par ailleurs que le pouvoir discrétionnaire que le Chapitre confère aux tri- bunaux est vague et trop général et qu’il mène par- fois à des interprétations légales boiteuses et inap- propriées en plus de permettre aux tribunaux de faire fi de témoignages et d’arguments légaux perti- nents en l’absence de toute supervision ou respon- sabilité judiciaire véritable. Il conclut en offrant une analyse détaillée de la décision controversée rendue dans la cause Metalclad qui, à son avis, illustre de façon non équivoque la nécessité d’apporter des pré- cisions au chapitre 11 tant sur le plan de la procédure que du fond.
The North American Free Trade Agree- ment (NAFTA) created an institu- tional environment which fosters economic integration between Canada, Mexico and the United States. Since NAFTA has come into force, there has been substantial growth in trilateral trade and investment among Canada, Mexico and the United States.1 The importance of both inward and outward Foreign Direct Invest- ment (FDI) for Canada is well known. FDI in Canada is responsible for 30 percent of all Cana- dian jobs and 75 percent of its manufacturing exports.2 More than one-half of Canadian out- ward FDI goes to the United States and the United States is Canada’s largest source of inward FDI. Increased investor protection is one reason that Canadian and US direct investments in Mexico have boomed, from an annual flow of US$5.7 bil- lion in 1994 to US$19.9 billion in 2001.3 In gen- eral, a more predictable environment for investors will lead to increased investment.4
NAFTA’s goals for integration, however, are relatively modest compared to many other regional trade agreements. The parties to NAFTA did not contemplate the creation of an EU-style arrangement that provides for political and social integration. Rather, the NAFTA attempts to provide for economic integration between the three countries while, at the same time, preserving political autonomy and deci- sion-making power in each country. Similarly, the NAFTA and its institutions were not designed to manage social welfare issues. As one commentator noted, “NAFTA was not designed with the intention to manage social welfare con- ditions. To the extent that the NAFTA has failed to address those conditions, this failure was built into its institutions.”5
The rules of NAFTA’s Chapter 11 ideally create a secure and predictable framework for the unen- cumbered flow of investment within North Amer- ica, which, in turn, allows for substantial eco- nomic gains. Simply put, Chapter 11 provides for certain obligations that define how a NAFTA gov- ernment must treat an investment or an investor from another NAFTA country (see Box 1). If any one of them adopts a “measure” which breaches an obligation contained in Chapter 11, that investor may initiate a dispute-settlement pro- ceeding directly against a NAFTA government.6
Despite the economic growth that these rules are designed to encourage, their desirability in the context of an integrated North American market- place is being seriously challenged, primarily because of the perceived effects that these rules are having, or could have, on public regulation. This paper evaluates the claim that Chapter 11 has undermined environmental regulation in North America and concludes that, for the most part, the concern has been overstated. To date, NAFTA Chapter 11 has not threatened the progress of envi- ronmental regulation in North America. This paper also concludes that certain changes to the NAFTA Chapter 11 process may be warranted, how- ever, to take account of some of the weaknesses of the current institutional architecture.
The rules found in Chapter 11 are by no means novel in international eco- nomic law. The key legal principles are largely grounded in customary international law, as codified in a myriad of existing Bilateral Investment Treaties (BITs). In this way, NAFTA is not a “radically new departure from prevailing practice with respect to investment protection.”8 There are over 2000 BITs currently in existence worldwide; Canada has no less than 21 Foreign Investment Protection Agreements (FIPAs — the equivalent of a BIT) currently in force.
BITs historically have been negotiated between developed and developing countries, and because of the inequality between the negotiating parties, many BITs were intrinsically asymmetrical.9 While, for example, US investors had significant foreign investment in Bangladesh, the same was not true for Bangladesh investors in the United States. Thus, traditionally, BITs were a function of an economic relationship characterized by an investor and a recipient of that investment where the negotiating power was almost always tilted in favour of the investor state. Moreover, BITs were generally based on developed country concerns regarding legal fairness and access to justice. Investor-state dispute settlement provisions were a feature of BITs because, once an investment was expropriated (whether for a legitimate public pur- pose or not) an investor generally had no stand- ing in the courts of the host country and would have to persuade its own government to pursue a claim, thereby removing the decision of whether to initiate a claim from the party whose interests are directly at stake and basing that decision on broader political considerations.10
The application of this model to two countries with highly developed, mixed economies (i.e. Canada-United States) is new, and has resulted in some unanticipated consequences. More specifi- cally, the nature of the disputes under NAFTA has differed from traditional challenges under BITs in terms of the type of measure challenged. The application of rules governing, for example, expropriation and the minimum standard of treatment have not generally been used to chal- lenge regulatory measures adopted by a devel- oped country with a comprehensive regulatory environment.
The United States sought to have a core set of principles imported from the BITs into the Canada-US Free Trade Agreement (FTA) and ulti- mately into NAFTA. Compliance with these rules required significant adjustments to Mexican for- eign investment rules. The United States was adamant that expropriation provisions be included in NAFTA in order to protect US investors in Mexico from the possibility of expro- priation of US-owned assets without compensa- tion or recourse to impartial dispute settlement. This was a reaction on the part of the United States to the fact that Latin American countries had historically included a “Calvo” clause in their constitutions. Named after a 19th century Argentine diplomat, these clauses limit foreign investors to domestic remedies in the case of a dispute.11 Other developing countries had also confiscated US-owned property in the past with- out compensation. It is interesting to note that the inclusion of these ‘boilerplate’ provisions did not draw special attention during the NAFTA negotiations. What the parties failed to antici- pate — or what was unknown at the time — were the implications of these provisions between countries with highly developed regulatory regimes.12
Even though significant changes were required by the NAFTA parties, they were seen as vital in securing the protection that NAFTA offered from unfettered parochial political interests (see Box 2). In the case of Canada, because of its size, Canada has “traditionally been at the forefront of countries ready, willing and able to undertake international commit- ments as the price of limiting the capacity of larger countries to impose arbitrary and unwanted restraints on Canadian trade, eco- nomic and other interests.”13
Empowering a private investor to directly chal- lenge a host government depoliticizes in princi- ple the dispute settlement process by removing it from the realm of state-to-state diplomatic rela- tions. Under Chapter 11, a foreign investor has the comfort of knowing that a dispute concern- ing a foreign investment would be heard and adjudicated based on legal rules rather than polit- ical negotiations over a variety of matters not related to the investment in question. It is not hard to see why an investor would feel more con- fident in making a substantial investment in the context of this framework.
However, as the Chapter 11 jurisprudence has begun to emerge, a number of shortcomings have been revealed, calling into question the ongoing viability of its rules in supporting and sustaining cross-border investment. Thus, while these rules do encourage investment and economic integra- tion, many have posed the question: at what cost? If, ultimately economic integration leads to a social disintegration, it is neither desirable nor sustainable.15
The concerns surrounding Chapter 11 take place as part of a broader set of concerns about the costs of globalization, that is, increased global economic integration, and increased environmental concern and activism on the part of non-governmental orga- nizations (NGOs). The pace at which economic integration has taken place, facilitated in part by trade liberalization arrangements, has led to wide- spread anxiety among citizens who fear the loss of control over the factors that govern their lives.16 This fear has fixated onto both the legal and procedural provisions of Chapter 11.
The first NAFTA Chapter 11 case to generate widespread controversy was the Ethyl case, where a US investor in Canada, Ethyl Corporation, chal- lenged a Canadian ban on the international trade of the fuel additive MMT, ostensibly imposed for the purpose of protecting public health. While the case was settled for around C$19 million and resulted in the federal government retracting the trade ban on MMT before a decision was reached by the Tribunal, the case became a lightning rod for widespread opposition to Chapter 11, sowing the seeds for controversy in later cases. The cri- tique centred around several issues:
First, and most likely foremost, the simple fact that a private investor could call into question a government’s measure ostensibly protecting the public’s health and welfare or the environment was objectionable to a wide range of civil society actors, who viewed this situation as a prime exam- ple of NAFTA favouring corporate interests over the broader public concerns.
Second, the legal obligations provided for in Chapter 11 came under attack from a substantive perspective. These rules were not viewed as neu- tral investment protection, rather they were viewed as inherently biased against environmen- tal, health or safety regulations. Most prominent among the substantive concerns were the expropriation provisions and the uncertainty sur- rounding the concept of regulatory expropriation. Absent a direct takeover of foreign-owned prop- erty, what lesser interference could amount to a compensable expropriation? Would it be enough for a government action merely to affect the ben- efits of a foreign investment, or did the effect have to be so severe as to render the investment inop- erable? And, even if a measure did put a foreign investor out of business, what if the measure addressed serious consumer or health concerns? Most critically, what would this mean for the future of environmental regulation in North America?
Not surprisingly, no immediate clear answers emerged. As the Chapter 11 jurisprudence began to develop, other concerns about the operation of invest- ment protection rules emerged from the NGO com- munity. NGOs have alleged that NAFTA panels’ broad interpretations of the national treatment obligation (Article 1102) and the minimum standard of treat- ment obligation (Article 1105) went far beyond the generally accepted interpretations of these concepts in international law.17 Critics argued that the uncer- tainty in how these rules would be interpreted would result in a “regulatory chill” whereby governments would cease to enact public health and safety mea- sures for fear of a NAFTA challenge.
A third major area of concern arose from the process under which challenges were brought and disputes were heard. The NAFTA Chapter 11 process is, for the most part, private and does not provide a formalized mechanism for public access.18 In this way, it is argued that NAFTA was deficient, given that such arbitrations involved the interpretation of issues which define the relation- ship of foreign investor rights to domestic public measures. By not providing an adequate frame- work for public participation, critics argue that Chapter 11 created a “democratic deficit.”
Central to the view that Chapter 11 was inap- propriate to arbitrate issues of public policy is the question of process transparency. While Ostry “only partly in jest” describes the word trans- parency “as the most opaque in the trade policy lexicon,” transparency, in particular, remains one of the key concerns among critics of a liberalized investment regime.19
In addition, critics argue that Chapter 11 does not provide for adequate participation in the arbitral process, for example, through the sub- mission of briefs or other relevant information to the panel as a “friend of the court” (amicus curiae). Critics view this as especially important as ad hoc arbitrators may not have “sufficiently broad expertise to adjudicate issues outside of tra- ditional trade law, with implications that tran- scend trade, entailing public policy analysis, and assessment of complex environmental and health issues.”20
Some people may argue that such concerns are overblown and that the jurisprudence is still in its infancy. In NAFTA’s eight-year history as of Sep- tember 2002, there have been some twenty-seven Chapter 11 complaints, only five of which have led to actual decisions. Other cases remain pending or have been settled or withdrawn.21 Yet, in response to the NAFTA critique outlined above, changes are being made as a result of intense political pressure being put on the NAFTA governments. On July 31, 2001, the NAFTA Commission, made up of the three signatory governments, issued an interpre- tive statement22 (see Box 3 on p. 11) as part of an ongoing clarification exercise, designed to “give future tribunals clearer and more specific under- standing of Chapter 11’s obligations, as originally intended by the drafters.”23 In this regard, the Canadian Minister of International Trade, Pierre Pettigrew, stated that the NAFTA Commission is “seeking to clarify some of the provisions…such as expropriation disciplines, to ensure they properly reflect the original intent of the NAFTA Parties in the dispute settlement process.”24 Ongoing consul- tations with expert groups (including representatives from NGOs) are currently underway to fur- ther the clarification process.
It is thus timely to evaluate (i) the veracity of the diverse claims against NAFTA Chapter 11, and (ii) the appropriate policy responses. In under- taking this exercise, we should ask: what is the problem we are trying to cure, and what is the best way to solve it? This means stepping back from reactionary or “worst case” scenarios, and taking a realistic look at the rulings of the cases to date, on the basis of their facts and rendered decisions.
The following section examines the five cases where a NAFTA Tribunal has issued a final determination. It also examines the Methanex case, where there has been an award on jurisdiction only. While many more cases have been filed and/or settled, the focus of this section is to try and identify patterns from actual decisions, in order to “set the record straight” and challenge some of the myths sur- rounding NAFTA.
In this regard, there is a vital distinction to be made between the arguments of a claimant and the decision of a Tribunal. Although there have been some sweep- ing and surprising challenges brought by certain investors, this does not mean that these challenges are valid. As an expert recently stated, “The media and some commentators often confuse what is alleged to have occurred and what will be found by a Tribunal.”25 For example, investors have lost more often on the issue of expropriation than they have won. In fact, to date there has been only one suc- cessful expropriation claim under Chapter 11.26
That said, it should surprise no one if claimants continue to push at the edges of international law in order to obtain compensation. What is impor- tant is that any analysis of possible NAFTA reform be based on actual decisions, rather than the claims of investors.
There are nevertheless limits to the value of ana- lyzing the jurisprudence because, under interna- tional law, Chapter 11 decisions do not establish precedents (stare decisis, in legal terms). A NAFTA arbitral tribunal’s ruling is not binding on subse- quent tribunals.27 In one recent case, a NAFTA arbi- tral tribunal declined to follow a prior ruling, not- ing that the previous case was not “… a persuasive precedent on this matter and [this Tribunal] will not be bound by it.”28 That said, panels will still consider the relevance of the decisions of past NAFTA and other trade tribunals.29 Thus, while not binding, the case law is an important element guiding all concerned parties.
In March 1997, Mr. Azinian and two other American nationals, who were shareholders of Desechos Sólidos de Naucalpan S.A. de C.V. (Des- ona), a Mexican corporation, filed a Chapter 11 Notice of Arbitration against the Mexican govern- ment seeking damages of US$14 million. In November 1993, Desona had entered into a con- cession contract with the City Council of the Municipality of Naucalpan, Mexico, for the col- lection of solid waste from the city. A few months later, the Municipality complained about a num- ber of irregularities in the implementation of the concession contract and in March 1994, it can- celled the contract for non-performance by Des- ona. Three levels of Mexican courts confirmed the legality of the contract’s annulment under Mexi- can law.
Azinian argued unsuccessfully before a Chapter 11 Tribunal that the actions taken by the Munici- pality had resulted in a violation of both the oblig- ation to provide the minimum standard of treat- ment under international law and the expropria- tion provisions of NAFTA.30 In rejecting the claim, the Tribunal noted that the claimants’ fundamen- tal complaint was that they were the victims of a breach of the concession contract. This was not by itself sufficient to support a claim under NAFTA. The Tribunal noted that NAFTA does not “allow investors to seek international arbitration for mere contractual breaches.”31 Rather, a successful claim under Chapter 11 must be grounded in the breach of a specific treaty obligation.
Analyzing the claim that the annulment of the contract resulted in an expropriation of Desona’s contractual rights (Article 1110), the Tribunal stated that because the Mexican courts found that the Municipality’s decision to “nullify the Con- cession Contract was consistent with the Mexican law governing the validity of public-service con- cessions, the question [was] whether the Mexican courts’ decisions themselves breached Mexico’s obligations under Chapter Eleven.”32 The claimants, however, had not alleged that the prior court rulings had violated any NAFTA provisions. Accordingly, if the Mexican courts found the con- tract to be invalid, and no objection was raised to those courts’ decisions, there was by definition no contract to be expropriated.33 The Tribunal stated as follows:
To put it another way, a foreign investor enti- tled in principle to protection under NAFTA may enter into contractual relations with a public authority, and may suffer a breach by that authority, and still not be in a position to state a claim under NAFTA. It is a fact of life everywhere that individuals may be dis- appointed in their dealings with public authorities, and disappointed yet again when national courts reject their complaints…
NAFTA was not intended to provide foreign investors with blanket protection from this kind of disappointment, and nothing in its terms so provides.34
The Tribunal also rejected the argument that the breach of the concession contract violated the minimum standard of treatment provision (Arti- cle 1105) and stated that “if there was no violation of Article 1110, there was none of Article 1105 either.”35 The meaning of this statement is not clear; however, the Tribunal may have intended to assert, as the S.D. Myers Tribunal would later do (see below), that a violation of another provision of Chapter 11 automatically results in a violation of the minimum standard of treatment provision.
This case illustrates that the Tribunal did not view itself as a “court of appeal” for an investor dis- appointed with the outcome of a domestic court ruling. Rather, the Tribunal showed a high degree of deference for the domestic process by refusing to substitute its ruling for that of a Mexican court. The Tribunal limited the scope of a claim for expropriation by stating that NAFTA was not intended to protect against disappointments in dealings with public authorities. In no way has this decision expanded any of NAFTA’s substantive provisions beyond the scope of those provisions in international law.
In September 1998, a US-based investor, Waste Management, filed a Notice of Arbitration against Mexico. The claim arose from a 15-year conces- sion contract granted by the state of Guerrero and the municipality of Acapulco to Acaverde, the Mexican subsidiary of Waste Management.
Under the concession, Acaverde was required to clean the streets, collect and dispose of all solid waste in the area, and build a solid-waste landfill. In return, Acaverde would receive monthly pay- ments from Acapulco. Waste Management con- tended that it provided the services agreed to for about two years, but it only received payment equivalent to five months of services rendered. Waste Management claimed that Acaverde’s con- cession rights were unlawfully transferred to a third party. Waste Management also claimed that the Mexican public authorities did not accord its investment (Acaverde) treatment in accordance with international law, including fair and equi- table treatment. In addition, the investor con- tended that the acts of the Mexican authorities constituted measures “tantamount to expropria- tion because the investor was deprived of the income from its investment; and because the Mexican authorities’ disregard of its rights effec- tively extinguished Acaverde’s viability as an enterprise.”
In June 2000, the Tribunal delivered an award, based not on these issues, but on a jurisdictional question raised by the government of Mexico. Under Article 1121 of Chapter 11, a complainant must abandon its right to initiate or continue other legal action in any other legal forum with respect to the issue before a NAFTA tribunal. This is done in the form of a written waiver submitted by the investor to the Tribunal, acknowledging that it is not pursuing the same claim concur- rently before any other court or tribunal. Mexico contended, and the Tribunal accepted, that the waiver submitted by the investor did not comply with Article 1121, since concurrent domestic legal action had been pursued in violation of the waiver agreement. Accordingly, the Tribunal found that it lacked jurisdiction to hear the case.
In March 1999, Pope & Talbot, Inc., a US investor, claimed that Canada’s allotment of export quotas under the United States-Canada Soft- wood Lumber Agreement (1996)36 (SLA) discrimi- nated against Pope & Talbot’s Canadian sub- sidiary, thereby violating the national treatment, minimum standard of treatment, performance requirements and expropriation provisions of Chapter 11.37 The SLA imposed quotas on duty-free softwood exports (export duties were charged above the quota limit) from the four major producing provinces in Canada (referred to as the “covered” provinces — British Columbia, Alberta, Ontario and Quebec).38 Pope & Talbot claimed damages of between US$85 and US$135 million.
Canada contended that since this issue con- cerned trade in goods, it did not fall within the scope of Chapter 11. Canada argued that the term “investment dispute” applied only to disputes about measures “primarily aimed at” investors of another party or investments of those investors. Canada also argued that if it is possible to catego- rize a measure as relating to trade in goods, the measure cannot be seen as relating to investors or investments, and the dispute over the measure cannot be considered an “investment dispute.” Softwood lumber is a “good”; therefore, the dispute relates to trade in a good and should have been brought under the NAFTA’s state-to-state dispute settlement provisions.
In a preliminary award, the Tribunal addressed the interrelationship between NAFTA’s Chapter 11 and Chapter 3 (trade in goods), stating “there is no provision to the express effect that investment and trade in goods are to be treated as wholly divorced from each other.”39 The Tribunal rejected the idea that a “measure aimed at trade in goods ipso facto cannot be addressed as well under Chapter 11.”40
Pope & Talbot claimed that the export quotas violated the national treatment obligation because they imposed different treatment on soft- wood lumber producers from the covered provinces, which had to pay a permit fee in order to export to the US, and exporters from the non- covered provinces, which did not.
The Tribunal rejected this argument and ruled that the measure, on its face, did not distinguish between foreign-owned and domestic compa- nies,41 and did not otherwise unduly undermine the investment liberalizing objectives of NAFTA.42 The Tribunal determined that Canada’s differen- tial treatment of lumber producers from covered and non-covered provinces, existing and new pro- ducers, holders of different levels of quotas under the Agreement, did not violate Canada’s obliga- tions under Chapter 11 in the absence of discrim- ination between similarly situated foreign and domestic investors. The Tribunal also found that, in establishing different categories of producers, Canada was not motivated by discriminatory pro- tectionist concerns.
Pope & Talbot also claimed that Canada breached its duty to treat investors in a fair and equitable manner (Article 1105) in its allocation of quotas. The Tribunal found that, under Chap- ter 11, foreign investors are entitled to the inter- national law minimum plus the fairness ele- ments.43 Based on this standard of analysis, the Tribunal found that actions of officials in the Softwood Lumber Division (SLD) of the Cana- dian Department of Foreign Affairs and Interna- tional Trade (DFAIT) violated the minimum stan- dard of treatment.44 After the Chapter 11 complaint was initiated, certain Canadian gov- ernment officials had insisted on a “verification review” of Pope & Talbot’s records in support of its export quota allocation in earlier years. Specifically, by ordering Pope & Talbot to trans- port all of its corporate and accounting records located at the company’s head office in Portland, Oregon to Canada, it violated the obligation to provide fair and equitable treatment under Chap- ter 11. In doing so, the Tribunal characterized the actions of the SLD as imperious, based on naked assertions of authority and designed to bludgeon the company into compliance.45
In this regard, it should be noted that verifica- tions are routinely conducted in international trade matters, and particularly in customs valua- tion, anti-dumping and countervailing duty cases, where they generally take place at the venue where the company’s records are located. Indeed, since a verification is essentially a form of “audit,” it would have made little sense to conduct such an exercise anywhere else. The SLD’s insistence that the company transfer several truckloads of records to Canada was not only highly unusual to anyone familiar with the administration of international trade laws and counter-productive to the goal of a verification review, it was also highly oppressive to the company. The Tribunal concluded that the investor was “being subjected to threats, denied its reasonable requests for pertinent information, required to incur unnecessary expenses and dis- ruption in meeting SLD’s requests for informa- tion, forced to expend legal fees and probably suf- fer a loss of reputation in government circles.”46 Taken together with the tenor of SLD’s communi- cations with the investor, and the less than forth- right reports to the Minister regarding the situa- tion between the investor and SLD, the Tribunal ruled that the verification episode amounted to a denial of fair and equitable treatment contrary to Article 1105.
The claimants also argued that, by reducing Pope & Talbot’s quota of lumber that could be exported to the US without paying a fee, Canada’s export control regime had deprived the invest- ment of its ordinary ability to sell its product to its traditional and natural market, constituting an expropriation. At the outset of its analysis of Arti- cle 1110, the Tribunal noted that the “investment’s access to the US market is a property interest sub- ject to protection.”47 It also noted that, contrary to Canada’s assertions, under certain circumstances regulation may indeed result in expropriation; a blanket exception for regulatory measures would create a gaping loophole in international protec- tions against expropriation.48 The Tribunal went even further, stating that an expropriation may include “non-discriminatory regulation that might be said to fall within the police powers.”49
The Tribunal, however, found that there had not been an expropriation of property in this particu- lar case. The ruling established that, in order to determine “whether a particular interference with business activities amounts to expropriation, the test is whether that interference is sufficiently restrictive to support a conclusion that the property had been ‘taken’ from its owner.”50 In Pope & Tal- bot’s case there was no such interference inasmuch as Pope & Talbot remained in control of its invest- ment, continued to direct the day-to-day opera- tions, was free of government interference with offi- cers and employees, and continued to export substantial quantities of softwood lumber to the US and to earn substantial profits on those sales.51
A second ruling dealing with damages and with the NAFTA Commission’s interpretive statement of Article 1105 (see Box 3), referred to above, was delivered on May 31, 2002.52 Canada had contended that, although the Tribunal had already ruled on the matter of Article 1105 in April 2001, the interpretive statement was bind- ing on the Tribunal and, therefore, it should reconsider its findings in light of it.
At the beginning of its analysis, the Tribunal focused on answering the question of whether the NAFTA Free Trade Commission’s interpretation was in fact an interpretation or an amendment. Since the interpretation had been issued in July 2001, many commentators had considered whether future NAFTA tribunals would find that it was within their powers to question the nature of a Commission’s action. In the Tribunal’s view, it was within its power to consider this question and it could not simply “accept that whatever the Com- mission has stated to be an interpretation is one for the purposes of Article 1131(2).”53
Analyzing the history of Article 1105, the Tri- bunal determined that there was no reference to customary international law in any of the draft versions of Article 1105. According to the Tribunal, one cannot conceive that NAFTA negotiators would not have known that, “as it is made clear in Article 38 of the Statute of the ICJ [International Court of Justice], international law is a broader concept than customary international law, which is only one of its components.”54 In light of this, the Tribunal noted that if it were to determine whether the Commission’s action is an interpre- tation or an amendment, it would choose the lat- ter.55 The Tribunal, however, chose not to make such determination. After analyzing the question, the Tribunal decided to proceed assuming that the Commission’s action was an interpretation.
The next step was then to determine whether the Tribunal’s award of April 2001 was incompati- ble with the Interpretation.56 Such incompatibil- ity, in the Tribunal’s view, would exist only if it were determined that the “concept behind the fair- ness elements under customary international law is different from those elements under ordinary standards applied in NAFTA countries.”57 In order to rule on this matter, the Tribunal had to deter- mine the content of customary international law concerning the protection of foreign property. The Tribunal rejected Canada’s view that under customary international law a country would vio- late Chapter 11’s minimum standard of treatment provision only if the treatment accorded to investors amounted to gross misconduct, an out- rage, bad faith, wilful neglect of duty or to insuffi- ciency of governmental action so far short of inter- national standards that every reasonable and impartial person would readily recognize its insufficiency.58 According to the Tribunal, Canada’s argument was based on a view of cus- tomary international law standards from the 1920s. Since then, customary international law has evolved and the range of actions subject to international concern has broadened beyond “international delinquencies” to include the con- cept of fair and equitable treatment.59 Despite these findings, the Tribunal based its ruling on the fact that even if Canada’s proposed standard were adopted, there would still be a violation of Canada’s obligations as a result of the verification review. The Tribunal found that the conduct of the SLD in that episode was egregious and would shock and outrage every reasonable citizen of Canada.60
Some argue that the Tribunal’s interpretation of Article 1105 is inconsistent with the minimum standard of treatment in international law. How- ever, one can’t help but observe that interna- tional tribunals, like domestic Courts, do not much care for high-handed and objectionable conduct on the part of litigants that appear before them, and are understandably inclined to find a remedy where the conduct in question offends the basic principles of justice and fair play. To the extent that the Chapter 11 panels have raised the bar with respect to Article 1105,61 this is arguably a positive development.62
In May 2002, the Tribunal awarded Pope & Tal- bot US$461,500, a relatively small award consider- ing the original claim of US$508 million (or 0.0909 percent of the original damages claimed). Thus, only a fraction of the amount claimed was awarded. There is nothing in this case that illus- trates the erosion of public interest regulation at the expense of a foreign investor.
Metalclad, a California-based corporation, developed a hazardous waste disposal facility in the Mexican state of San Luis Potosi. All the required federal and state permits for the con- struction and operation of the site were issued to COTERIN, which was later bought by Metalclad, by August 1993, and construction of the facility began in May 1994.
In October 1994, however, local officials ordered that construction of the facility cease due to the absence of a municipal construction permit. The Mexican federal government then told Metalclad that such a permit was not required. Relying on this assertion, Metalclad resumed construction of the facility. Work on the new facility was completed in March 1995, but at this point local authorities opposed the opening of the facility on environmental grounds. Demonstrators, sponsored by the state and local governments, abruptly interrupted the cere- mony of inauguration of the landfill. After this episode, in an effort to ensure the opening of the site, Metalclad maintained constant dialogue with the federal government.
Negotiations between Metalclad and federal environmental authorities resulted in an agree- ment in which Metalclad agreed, inter alia, to make certain modifications to the site; take spec- ified conservation steps; recognize the participa- tion of a technical scientific committee and a cit- izen supervision committee; employ local manual labour; and make regular contributions to the social welfare of the municipality, including lim- ited free medical advice.
Despite the agreement, and in the absence of any evidence of inadequacy of performance by Metalclad, the municipality denied Metalclad’s construction permit in a process which was closed to Metalclad. The municipal government refused to permit operation of the plant on the grounds that local geology made it likely that the waste treated at the plant would contaminate local water supplies. In addition, after Metalclad had initiated a Chapter 11 arbitration proceeding, the governor of San Luis Potosi issued, in September 1997, an ecological decree declaring the area of the landfill to be a natural area for the protection of rare cacti. The decree foreclosed any hope of operation of the facility.
In its Statement of Claim, Metalclad sought compensation of US$43 million plus damages based on the assertion that the actions of the Mex- ican government violated the expropriation (Arti- cle 1110) and minimum standard of treatment (Article 1105) provisions of Chapter 11.
In its Article 1105 claim, Metalclad argued that the actions of the federal, state and municipal gov- ernments, including the lack of transparency of the requirements for authorization of the site, con- stituted a denial of fair and equitable treatment. The Tribunal accepted Metalclad’s argument and ruled that the Mexican government had indeed violated its obligations. A significant finding, which would also play an important role on the Tribunal’s finding of expropriation, was that the claimant was entitled to rely on the representation of the federal officials who stated that a municipal construction permit was not a requirement. According to the Tribunal, Mexico failed to provide “a transparent and predictable framework for Met- alclad’s planning and investments.”64 The absence of a clear rule concerning construction permit requirements in Mexico amounted, according to the Tribunal, to a “failure on the part of Mexico to ensure the transparency required by NAFTA.”65 Metalclad is the only NAFTA Chapter 11 case in which a Tribunal made a finding of expropriation. The Tribunal adopted a relatively expansive interpretation of expropriation, stating that
[E]xpropriation under NAFTA includes not only open, deliberate and acknowledged tak- ings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also incidental interfer- ence with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to- be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.66
The facts in this case made for an easy deter- mination that an expropriation had taken place. The Tribunal held that the inequitable treatment of Metalclad by local Mexican authorities — with the tolerance of the federal government — the vio- lation of representations made and the lack of basis in refusing a permit, which would bar the use of the landfill permanently, amounted to indirect expropriation.
In October 2000, Mexico filed a petition before the Supreme Court of British Columbia challeng- ing the Tribunal’s ruling. This appeal was brought in British Columbia because the hearings had been located in Vancouver.
As noted above, Chapter 11 of NAFTA does not provide for appeal or other forms of challenging a Tribunal award. Justice Tysoe of the British Colum- bia Supreme Court ruled, however, that Mexico’s claim should be analyzed under the British Colum- bia International Commercial Arbitration Act (BCI- CAA). Justice Tysoe noted that, under the BCICAA, the Court was not allowed to review points of law decided by the arbitral tribunal. The issue rather was “whether the Tribunal made decisions on mat- ters beyond the scope of the submission to arbi- tration by deciding upon matters outside Chapter 11.”67 In other words, the Court could set aside only the decisions of the NAFTA Tribunal which were beyond the scope of its jurisdiction.
Despite Justice Tysoe’s determination that the Court could not, under the BCICAA, review points of law, his analysis of the arbitral award essentially amounted to the same thing.
First, the Court determined that Chapter 11’s “fair and equitable treatment” requirement must be interpreted in accordance with international law. The Court found that the Tribunal erred in basing its decision on the lack of transparency in the Mexican domestic legal process for approving hazardous waste sites. Instead, the Court ruled that a lack of transparency is neither a violation of cus- tomary international law nor of Chapter 11. Accordingly, the Court determined that the Tri- bunal’s finding of such a violation, based on lack of transparency, was beyond the scope of the sub- mission to arbitration.68
In addition, the Court found that the Tribunal had also improperly issued a finding of expro- priation on the same mistaken basis. The finding of expropriation, however, was not totally set aside, since the Court considered that there was no error impugning the Tribunal’s finding that the state government’s Ecological Decree consti- tuted expropriation under Article 1110.69 In the end, the Court refused to set aside the Tribunal’s award in toto, determining only that the interest portion of the award be calculated from the date of the Ecological Decree, rather than from the day of the actions which had led to the finding of unfair treatment.70
In October 1998, S.D. Myers, an Ohio-based waste disposal company, which performed PCB (polychlorinated biphenyl) remediation71 activi- ties, claimed that Canada had breached its Chap- ter 11 obligations, thereby damaging S.D. Myers’ investment in Canada. S.D. Myers had no PCB remediation facilities in Canada and its invest- ment in Canada consisted essentially of obtaining PCBs for treatment by its US facility.
S.D. Myers’ main complaint was that Canada breached its obligations under Chapter 11 as a result of a 1995 Interim Order banning the export of PCB waste to the United States. The US border had, since 1980, been closed to the import of PCBs and PCB waste for disposal; but, in October 1995, S.D. Myers received special permission from the US Environmental Protection Agency to import PCBs and PCB waste from Canada for disposal. The permission was valid from November 15, 1995 to December 31, 1997. The Interim Order was in force from November 1995 to February 1997 (at which time Canada reopened its border by an amend- ment to the PCB Waste Export Regulations). According to S.D. Myers, Canada acted to protect its PCB treatment facility, Chem-Securities of Swan Hills, Alberta.
S.D. Myers presented four claims. First, it asserted that the measure discriminated against US waste disposal firms that sought to operate in Canada, by preventing them from exporting PCB contaminated waste for processing in the US.72 Sec- ond, S.D. Myers alleged that Canada had failed to accord treatment in accordance with the mini- mum standard of international law. Third, the claimant asserted that, by requiring it to dispose of PCB contaminated waste in Canada, the Interim Order imposed performance requirements (i.e., that PCB disposal operators accord preferential treatment to Canadian goods and services and achieve a given level of domestic content). Finally, S.D. Myers claimed that Canada had indirectly expropriated its investment.
The Tribunal accepted S.D. Myers’ claim that the ban on the export of PCBs favoured Canadian nationals over non-nationals, violating Chapter 11’s national treatment obligations (Article 1102). In fact, even before examining the specific allega- tions against Canada, in its analysis of the legisla- tive history of the PCB ban, the Tribunal concluded that the regulation was “intended primarily to pro- tect the Canadian PCB disposal industry from the US competition” and that “there was no legitimate environmental reason for introducing [it].”73
According to the Tribunal, the interpretation of “like circumstances” between foreign and domes- tic investors and investments, that give rise to the national treatment obligation, must take into account two important factors: first, the “general principles that emerge from the legal context of NAFTA, including both its concern with the envi- ronment and the need to avoid trade distortions that are not justified by environmental concerns,” second, “the circumstances that would justify gov- ernmental regulations that treat [foreign investors] differently in order to protect the pub- lic interest.”74 With this statement the Tribunal rec- ognized that environmental factors may provide a legitimate basis for finding circumstances to be “unlike.” The legal context for Article 1102 was determined to include the various provisions of NAFTA, its side agreement, the North American Agreement on Environmental Cooperation (NAAEC), and its principles.75 Emerging from this context are, according to the Tribunal, the follow- ing principles:
Accordingly, the Tribunal analyzed Canada’s environmental obligations and concerns and decided that the bilateral or multilateral treaties governing the disposal of hazardous waste did not justify favouring domestic suppliers over S.D. Myers. In addition, the Tribunal rejected Canada’s defence that the Order was designed to secure the economic strength of the Canadian industry in order to ensure Canada’s ability to process PCBs within its territory in the future (taking into con- sideration that the US could, at any time, close its border again).
The Tribunal agreed that ensuring the eco- nomic strength of the Canadian industry was a legitimate objective, but condemned Canada’s means of achieving it. It also applied a least- restrictive-means test to determine whether the specific measure chosen by Canada to achieve that objective was, despite its adverse impact on for- eign investors, consistent with NAFTA. The Tri- bunal found that there were several legitimate ways by which Canada could have achieved that goal, but imposing a ban on the export of PCB was not one of them.77 The Tribunal largely based its ruling on documentary and testimonial evidence that Canada’s policy was motivated by the inten- tion to protect and promote the market share of Canadian-owned enterprises.78
In comparing like circumstances, the Tribunal went beyond comparing the S.D. Myers invest- ment in Canada, which provided marketing ser- vices, to other Canadian-based providers of PCB marketing services.79 Instead, it applied the national treatment obligation to the full business line of S.D. Myers, including operations in the home and the host countries (the US and Canada, respectively).80
The Tribunal also accepted S.D. Myers’ claim that Canada had breached the minimum standard of treatment (Article 1105). The only reason the Tribunal presented for this finding was that on the facts of the case a “breach of Article 1102 essen- tially established a breach of Article 1105 as well.”81 On this point, Arbitrator Chiasson dissented, not- ing that the breach of another provision cannot establish a violation of Article 1105; a violation of this provision must be based on a demonstrated failure to meet the fair and equitable require- ments. The Tribunal, nevertheless, made some interesting remarks on the scope of Article 1105. According to the Tribunal:
[A] breach of Article 1105 occurs only when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unac- ceptable from the international perspective. That determination must be made in light of the high measure of deference that interna- tional law generally extends to the right of domestic authorities to regulate matters within their own borders.82
Regarding S.D. Myers’ claim of expropriation, the Tribunal noted that the “general body of prece- dent usually does not treat regulatory action as amounting to expropriation” and, therefore, regu- latory action is “unlikely to be the subject of a legitimate complaint under Article 1110 of NAFTA.”83 This statement, however, was weakened by the Tribunal’s note that it did not rule out the possibility of regulatory action giving rise to a legitimate action under that article. The Tribunal also noted that, when determining whether a mea- sure constitutes expropriation, a tribunal must look at the substance of a measure and not only at the form. In addition, tribunals “must look at the real interests involved and the purpose and effect of the government measure.”84
Under this analysis, the Tribunal noted that reg- ulations may be found to be expropriatory. To make such a determination, both the purpose and the effects of the measure must be analyzed. As for the purpose, the Tribunal ruled that the measure was designed with the objective of preventing S.D. Myers from carrying on its business. However, the effects of the measure were found not to be expro- priatory. According to the Tribunal, due to its tem- porality, the effect of the measure was only to delay an opportunity.
Another important finding of the S.D. Myers Tribunal was that the phrase “tantamount to expro- priation” in Article 1110 did not expand the mean- ing of expropriation in the NAFTA beyond cus- tomary international law.85
As well, the Tribunal did not support S.D. Myers’ claim that Canada had breached the article on per- formance requirements. Examining its wording, the majority of the Tribunal found that the Cana- dian government had imposed no such require- ments on S.D. Myers.
In February 2001, Canada filed an application before the Federal Court of Canada to set aside the Tribunal’s Partial Award. Canada based its applica- tion on the Commercial Arbitration Act,86 alleging that elements of the NAFTA Tribunal’s award exceeded the Tribunal’s jurisdiction and that the ruling conflicts with the public policy of Canada. As of November 2002, the Federal Court had not ren- dered its decision.
In October 2002, the Tribunal ruled that the damages incurred by S.D. Myers amounted to over C$6 million plus interest. These damages amount to approximately 30 percent of the damages sought by amount to S.D. Myers ($20 million).
On December 3, 1999, Methanex, a Canadian company with a US subsidiary, brought a Chapter 11 complaint against the United States, claiming that an Executive Order providing for the removal of a gasoline additive known as MTBE violates US obligations under Chapter 11. The impugned directive was based in large part on a study by the University of California which concluded that there are significant risks associated with MTBE, as it leaks into ground and surface water via leak- ing underground fuel tanks.87
Methanex claimed that the ban is not based on credible scientific evidence; and that the Univer- sity of California report is flawed in several aspects. In addition, the claimant alleges that the ban went far beyond what was necessary to protect any legitimate public interest, and that the gov- ernment failed to consider less restrictive alternative measures to mitigate the effects of gasoline releases into the environment. Methanex con- tends that the real problem to address is the leak- ing gasoline tanks.
Methanex does not manufacture MTBE, it pro- duces and markets methanol, the principal ingre- dient of MTBE. Methanex fears that the measures taken by California will effectively end its methanol sales in California. Thus, Methanex argues, the Cal- ifornia measure constitutes a substantial interfer- ence with and taking of Methanex’s US business and its investment in Methanex US, thus violating the expropriation provision of Chapter 11 (Article 1110).
Methanex has also claimed that the California measure violates the non-discrimination provi- sion of Article 1102, as the ban was the result of a lobbying effort by the US ethanol industry, specif- ically by Archer Daniels Midland, an ethanol pro- ducer. Methanex asserts that the discriminatory purpose can be seen on the face of the Executive Order, which not only banned MTBE, but also sought to establish an ethanol industry in Califor- nia. Moreover, the subsequent regulations that implemented the MTBE ban specifically name ethanol as the replacement product.
Methanex also has claimed that the manner in which the legislative measure was established con- stitutes a violation of Chapter 11’s minimum stan- dard of treatment provisions (Article 1105). According to the company, because of the US ethanol industry’s lobbying, the California mea- sures were arbitrary, unreasonable and not in good faith.
Between August and October of 2000, four envi- ronmental NGOs submitted petitions requesting the Tribunal’s permission to submit amicus curiae briefs, to make oral submissions and to have observer sta- tus at oral hearings. Methanex opposed any amicus participation on three grounds. First, the Tribunal had no jurisdiction to add a party to the proceedings without the agreement of the parties that already had standing. Second, Article 1128 (participation by a member-state) of NAFTA already ensured the pro- tection of the public interest, and if the petitioners were to appear as amici curiae, the parties to the dis- pute would have no opportunity to cross-examine the factual basis of their contentions. Third, were the petitioners allowed to participate, there would be a breach of the privacy and confidentiality of the arbi- tration process. Mexico also submitted a response to the amicus application, asserting that NAFTA did not provide for the involvement of persons other than the disputing parties and the other NAFTA signatory in matters related to the interpretation of Chapter 11.
The Tribunal analyzed separately each of the requests made by the NGOs. First, it declined the request to attend oral hearings of the arbitration, since Article 25(4) of the UNCITRAL Rules pro- vides that the oral hearings must be held in cam- era unless the parties agree otherwise. Second, it concluded that it had no power to accept the peti- tioners’ request to receive materials generated within the arbitration, since confidentiality was determined by the agreement of the parties to the dispute. Third, the Tribunal considered that allowing a third person to make an amicus writ- ten submission could fall within its procedural powers over the conduct of the arbitration, within the general scope of Article 15(1) of the UNCITRAL Arbitration Rules.88 This decision was based on the fact that there is no provision in Chapter 11 that expressly prohibits the accep- tance of amicus submissions. Although the Tri- bunal concluded that it had the power to accept such submissions, it decided not to issue an order for the participation of the amici in its Jan- uary decision.
In August 2002, the Tribunal issued a prelimi- nary award on jurisdiction, that is, whether it was entitled to hear the case in the first place.89 This ruling did not involve a consideration of any of the merits of the substantive claims before it, but nonetheless it did not seem to offer Methanex much encouragement.
The rules of Chapter 11 apply only to measures adopted or maintained by another Party relating to investors of another Party, or investments (e.g., subsidiaries) of investors of another Party. With- out establishing that a measure in question relates to either it or its investment, a foreign investor will not be able to pursue a claim under NAFTA.
In its award, the Tribunal ruled that there “was no legally significant connection between the measure [the ban on MTBE] and the investor or nature of the investment.”90 The fact that Methanex is a producer of only one component of the additive to MTBE, which was the subject of the California regulation, was viewed as too indirect a connection between the measure and the investor/investment. The scope of impact of the measure was viewed as too broad to be the subject of challenge. A measure that merely affects the investor does not automatically mean that they are necessarily “related.”
At the same time, the Tribunal ruled that to require that a measure be “primarily aimed at” a foreign investor would be too high a hurdle for a foreign investor to bring a claim under Chapter 11. The only avenue left open for Methanex to submit a claim would be to establish that the measures in question were intended to discriminate against it in favour of a domestic competitor. This would be sufficient for the Tribunal to rule that the case could proceed.
The central concern of NAFTA has been to what extent NAFTA has imposed substantive limits on the ability of governments to adopt bona fide regulatory and leg- islative measures taken for public welfare pur- poses. Do the decisions to date support the con- cern about these provisions, or have critics over- stated the risk?
This is a critical issue because it speaks to the ability of governments to regulate in the public interest. No part of Chapter 11, and especially not the article on expropriation, was intended to sub- vert the ability of governments to undertake legit- imate public welfare measures. However, given the potential for self-interested parties to use envi- ronmental or other measures for protectionist purposes or to transfer economic benefits for rea- sons not related to the common good, it is impor- tant that investors maintain the ability to protect themselves against the abuse of regulatory power. Having said that, there is a good argument that Chapter 11 does respect a state’s police powers; that is, the state’s right to protect the environment, consumers, public health, etc., and that the cases decided to date under Chapter 11 have not demon- strated a restriction on governments to act in the public interest.
Critics of NAFTA have argued that the very fact that compensation has been paid to foreign investors has resulted in “regulatory chill.”92 The meaning of the term « regulatory chill » is not clear. Does it mean that regulators are so fearful of a pos- sible Chapter 11 challenge that they cease to adopt any new regulations and that the entire environ- mental regulatory framework grinds to a halt? Or does it mean, rather, that regulators must be mind- ful of not violating certain obligations when devel- oping new regulations? Not only is the term regu- latory chill imprecise, but it is pejorative, thereby leading one to conclude that regulatory chill exists as a negative force on regulators without any analysis or even understanding what the term means. To the extent that regulators are required to take care in designing regulation so as not to unduly discriminate against foreign investors, etc., that will not necessarily diminish the quality, quantity or effectiveness of public regulation. Indeed, such constraints are entirely consistent with a range of similar existing constraints imposed on regulators by, for example, the Gov- ernment of Canada’s Regulatory Policy.93 It is hard to imagine that, based on the cases to date, regu- lators would be inhibited from proposing bona fide environmental regulation. The cases to date have only punished what tribunals considered to be outrageous behaviour on the part of government officials, and only three cases have resulted in awards in favour of the investor: Metalclad, S.D. Myers and Pope & Talbot. In each of these cases, the investor led significant evidence to the effect that the government had engaged in high-handed and capricious conduct to the detriment of the investor. In all three cases, the objectionable con- duct was found sufficient to trigger liability on the basis of the minimum standard of treatment (and in Metalclad, liability for expropriation as well).
In examining the cases, it is important to ask what environmental regulation or value is at stake. A close examination of the cases leads to the conclusion that the so-called “environmental cases” are not really environmental cases at all. In Metalclad, for example, a Mexican state governor used a sham environmental measure to prevent a hazardous waste-disposal site from opening, despite the fact that it had been built in compli- ance with all applicable legal requirements.
There was significant evidence pointing to the fact that the governor was using, or rather abusing, environmental regulation as a manipulative tool for self-serving and parochial interests. This type of capricious action on the part of a subnational government is exactly the type of behaviour that NAFTA was designed to constrain.
The panel fully addressed the evidence regard- ing the arbitrary nature of the alleged “environ- mental” measure in that case. Metalclad confirms that the mistreatment of foreign investors can take many forms, including the form of an environ- mental regulation. It does not support the proposi- tion that bona fide environmental regulation can form the basis of a compensation award.
Similarly, in S.D. Myers, there was much evi- dence presented that the Canadian measure responded to protectionist interests, rather than those of environmentalists. There was no valid environmental justification for closing the border to the export of PCB waste, but there was a valid eco- nomic reason for doing so: to eliminate the com- petition to less efficient Canadian businesses. Again, this type of capricious, discriminatory and high-handed behaviour is what NAFTA Chapter 11 sought to address.
And what about the precedential value of these cases? Has bona fide environmental regulation been threatened by Chapter 11? No. Rather, the cases demonstrate that discriminatory and unfairly protectionist measures are threatened by Chapter 11 — very threatened. Tribunals have not been afraid to “call it as they see it,” despite the fact that the measure in question concerns an ostensi- ble environmental, health or safety measure. In other words, “egregious conduct begs a remedy, and that Tribunals will be inclined to find a rem- edy where the conduct in question offends basic principles of justice and fair play.”94
As noted above, to date there has only been one finding of expropriation since the advent of NAFTA. Tribunals have not made findings of expropriation lightly — there must be a substan- tial deprivation for such a finding to be made. Tri- bunals have stated that the diminishment of prof- its is not sufficient for finding expropriation, rather, there must be a measure that, in effect, ren- ders an operating business inoperable, whatever form that measure may take. These cases have demonstrated that incidental interference with an investment is not sufficient to substantiate a claim, even where it has a negative financial impact on the investment. Rather, there must be unreasonable interference for a sustained period of time that results in a substantial and fundamen- tal deprivation of an investor’s property rights.95
The focus on the effect of NAFTA Chapter 11 on public regulation also obscures the fact that other important values are at stake. It is important to be mindful that the ability to regulate in the public interest is not the only value important to the functioning of a democratic society. As explored above, the principles contained in Chapter 11 are not new. Arguably, it is important to consider all of the values at stake, which includes the fair treat- ment of investors, that governments be account- able for their actions and that a government’s dis- cretionary powers not be abused.
Environment Canada has listed on its website all of the new federal environmental acts and reg- ulations enacted since NAFTA was passed in 1994, it is responsible for administering. Included are 46 new acts or regulations administered by Environ- ment Canada, eight new regulations under the Canadian Environmental Assessment Act and one regulation under the Fisheries Act. These include the Migratory Birds Convention Act (1994), the Alternative Fuels Act (1995), the Canada Marine Act (1998), the Mackenzie Valley Resource Management Act (1998) and the Oceans Act (1996).96 As the vol- ume of new legislative instruments continues to expand, we can presume that the environmental regulatory framework continues to function in Canada (as it does in Mexico and the United States), despite the alleged “chill” that Chapter 11 has caused.
The literature supporting the contention that regulatory chill does exist is largely anecdotal and has not been adequately substantiated. Those who assert that regulatory chill is inhibiting new envi- ronmental regulation should keep in mind that more work could be usefully done on researching the degree, if any, to which Chapter 11 may have created a regulatory chill at federal, provincial or state levels in Canada and the US.
Concerns about NAFTA have also extended to “‘deregulatory chill’ — a phenomenon potentially inimical to economic efficiency and growth.”97 Schwanen posits that governments have faced increased political difficulties with deregulation and privatization politically since NAFTA, since a government’s ability to unwind, or roll back, any deregulation or privatization initiative may be seen as compromised as a result of NAFTA.98
Johnson has explored this phenomenon most recently in the context of Canada’s public health- care system.99 While some Chapter 11 obligations are subject to reservations for the public health system,100 such as NAFTA Articles 1102, 1103, 1006 and 1107, other Chapter 11 provisions are not. The Chapter 11 provisions not subject to reservations are, most notably, the expropriation provisions (Article 1110) and the minimum standard of treat- ment provisions (Article 1105). While the status of measures subject to reservations is not totally clear, Johnson concludes that their potential inhibiting impact on government actions is “reduced substantially” by the reservations. On the other hand, however, with respect to those obliga- tions that are not subject to reservations, Johnson concludes that the expropriation provisions of NAFTA would have “a major impact if the public component of the system were expanded in any way that adversely affects the business of private firms.”101 Johnson similarly concludes that the minimum standard of treatment provisions may “affect any expansion of the public component of the system that is coupled with a denial of recourse to the courts by private firms.”102
While this may seem undesirable at first glance, Chapter 11 does not really impose oner- ous obligations on governments wishing to deregulate. In a sense, the effect of these provi- sions is really just to require governments to treat foreign investors fairly and reasonably. If, by virtue of a government’s decision to deregulate or privatize, a private firm makes an invest- ment to operate a business, that firm should be compensated in the event of a sudden reversal of policy. There is nothing in the expropriation provisions that prevents a government from tak- ing the regulatory action it desires, but rather it must compensate a firm for that if the action is tantamount to expropriation. Similarly, the minimum standard of treatment provisions do not prevent a government from adopting any regulation or policy, but rather, require that gov- ernment to treat firms with due process, e.g., a government could not deny a foreign investor access to the court system, as this would consti- tute a denial of justice.
Thus far this paper has mainly examined the impact of the substantive rules of Chapter 11 and resulting pressures for change. However, there is also considerable pressure for change in the area of Chapter 11 process and procedure. What has emerged from the various decisions is a rather uneven patchwork of rulings on the issues of trans- parency, openness, public participation and appellate review. These areas are probably most ripe for reform by NAFTA Parties.
Central among the pressures for change is the transparency of the Chapter 11 process. The lack of transparency of the panel process mandated by Chapter 11 is viewed by many as undesirable, since Chapter 11 does address issues of broad public con- cern. It is notable that none of the elements of a case is required to be made public, that is, there is no right of public access to the pleadings, the tran- scripts of the hearing or the reasons for judgment. This stands in contrast to current practice under other sections of NAFTA and the rules of the World Trade Organization (WTO). Rulings under NAFTA’s two other dispute-settlement mecha- nisms — Chapter 19 (for antidumping and coun- tervailing duty challenges) and Chapter 20 (for general state-to-state breaches of NAFTA) — as well as those under the WTO, are publicly available and accessible.
To some extent, the concerns with respect to transparency have been alleviated by the Free Trade Commission’s interpretation of July 2001 (see Box 3). Therefore, the issues with respect to transparency are not as pressing as they were prior to the interpretation. However, in March 2002, the Pope & Talbot Tribunal ruled on the investor’s request that the Tribunal urge Canada not to release protected documents. Canada was seeking to make public transcripts of the hear- ings under the Canadian Access to Information Act. The Tribunal noted that Procedural Order on Confidentiality No. 5 prohibited Canada from dis- closing transcripts of the hearings. In addition, the ruling noted that the UNCITRAL Rules require in camera hearings. The Tribunal rejected Canada’s claim that the notes of interpretation issued by the NAFTA Free Trade Commission on July 31, 2001 required such disclosure under the Access to Information Act. In the Tribunal’s view, the Commission’s Interpretation recognized the validity of Order No. 5 as binding on Canada. Accordingly, the Tribunal concluded that making the documents available violated not only Proce- dural Order on Confidentiality No. 5, but also NAFTA itself.104
In any event, the parties could go further in developing more precise rules which address the transparency of documents, pleadings, tran- scripts and hearings. This would bolster the legit- imacy of the NAFTA dispute settlement process. At the same time, however, it is important to maintain certain safety valves which protect the confidentiality of sensitive business informa- tion. The demand for openness must also be bal- anced with protection of confidential or privi- leged information.
There also have been ongoing calls for other institutional reforms to Chapter 11. Most signifi- cant has been the demand for participation in the Tribunal proceedings themselves, by becoming a party to the litigation itself, and through the sub- mission of amicus briefs and oral arguments.
NAFTA Article 1120 provides that whichever arbitral rules are chosen by the investor “shall gov- ern the arbitration except to the extent modified” by NAFTA Chapter 11. NAFTA Article 1131(1) also provides that a tribunal “shall decide the issues in dispute in accordance with [the NAFTA] and applicable rules of international law.” Accord- ingly, any tribunal asked to consider participation by a non-party in a given arbitration must look first to the designated arbitration rules and then to any applicable NAFTA provisions or “rules of international law” that may be relevant to the dis- pute if the parties are not able to come to an agreement on such participation. To date, both the Methanex and the UPS Tribunals have ruled that they have the power to accept amicus submissions, although both Tribunals have yet to actually for- mally allow specific submissions to be made.
Participation by interested parties raises a num- ber of complex issues.105 On the one hand, inter- ested parties may possess specialized knowledge on a particular issue and, given the public nature of these disputes, the participation of certain NGOs may enhance the perceived « legitimacy » of the process. On the other hand, however, just because a certain group claims to represent broad public interests, that is not necessarily so, and arguably it is a democratically-elected govern- ment that is best equipped to represent the public interest in Chapter 11 litigation. Moreover, the addition of parties to a dispute, or the requirement to read and reply to briefs submitted, can add sig- nificantly to the time and cost of the arbitration.
However, where there is a public interest value at stake, there is no compelling reason why interested parties should not be able to, at a minimum, submit briefs for a tribunal’s consideration. This was the opinion of the Methanex Tribunal, which recently stated:
There is an undoubtedly public interest in this arbitration. The substantive issues extend far beyond those raised by the usual transnational arbitration between private parties. This is not merely because one of the Disputing Parties is a State…The public inter- est in this arbitration arises from its subject matter, as powerfully suggested in the Peti- tions. There is also a broader argument, as suggested by the [United States] and Canada: The Chapter 11 arbitral process could benefit from being perceived as more open and transparent, or conversely be harmed if seen as unduly secretive.106
However, the Tribunal also recognized that:
There are other competing factors to consider: the acceptance of amicus submissions might add significantly to the overall cost of the arbi- tration and, as considered above, there is a pos- sible risk of imposing an extra burden on one or both of the Disputing Parties.107
However, attempts to make NGOs party to the actual dispute have not been successful. In Octo- ber 2001, the UPS Tribunal delivered an award deciding against the Canadian Union of Postal Workers’ and the Council of Canadians’ petitions for standing as parties to the Chapter 11 proceed- ings. The petitioners argued that they have a direct interest in the subject matter of this claim, and it would be contrary to the principles of fairness, equality and fundamental justice to deny them the opportunity to defend their interests in the pro- ceedings.
Analyzing the petitioners’ request for standing as parties, the Tribunal determined that Chapter 11 does not confer authority to add parties to the arbitration.108 As a tribunal has only the authority conferred on it by the agreement under which it is established, the Tribunal found that it had no power to add a third party to the proceedings. Furthermore, Article 15(1) of the UNCITRAL Rules, as a procedural provision, cannot grant the Tribunal any power to add further disputing parties to the arbitration.
Article 15(1) does, however, allow a tribunal to receive submissions offered by third parties (amici curiae) with the objective of assisting it in the arbitral process. In other words, acceptance of written submissions is only appropriate at the merits stage of an arbitration. Accordingly, the Tribunal denied the petitioners’ request to make submissions concerning the place of arbitration and the jurisdiction of the Tribunal. However, the Tribunal found that the requirement of equality and the parties’ right to present their case limit the Tribunal’s power to admit amicus submissions if these are unduly burdensome for the parties or unnecessarily complicate the Tribunal process.109
Referring to Article 24(5) of the UNCITRAL Rules, which provides that the hearings are to be held in camera unless the parties agree otherwise, the UPS Tribunal denied the petitioners’ requests to participate in the hearings without the consent of the parties.110 In July 2002, however, the UPS hear- ings were made completely open to the public.
It is clear that further development of the rules which govern NGO participation through the sub- mission of amicus briefs is required. There would be much to be gained from a consistent set of rules governing the submission of such briefs in an agreed-upon and predictable manner. For exam- ple, further work and analysis could usefully be done to define the circumstances in which it would be appropriate for such submissions to be made.111 However, it would be important that these rules limit any attempts by intervenors to widen the dispute between the parties. This is a real risk that has been recognized in the context of the WTO. It may be prudent to limit submissions to issues on which an intervenor possesses special- ized information, and only in the context of the merits of the case.112 In addition, one must be mindful of the time and cost that the submission of amicus briefs will impose on the parties to the dispute, as well as the arbitrators. Significant work would have to be undertaken to define the rules and procedures which would govern third-party participation and the effect such participation would have on the confidentiality of the arbitral process.
There is also pressure for clarification of the process relating to the appeal of tribunal awards. The possibility of a permanent appellate body, much like the WTO Appellate Body, should be explored in further detail. A permanent appellate body could provide a sense of consistency and per- manence currently lacking in the Chapter 11 process. The current patchwork of appeal processes, with different rules in different juris- dictions, has led to jurisdiction shopping and a sense of uneven application of the rules among different parties to an arbitration. This is poor pol- icy. It is submitted that a permanent appellate body could be useful in bolstering the perceived legitimacy of Chapter 11 as an ad hoc process. As well, in the event that a rogue tribunal did inter- pret the substantive provisions of Chapter 11 in such a way that did go significantly beyond inter- national law, the fear articulated by many NGOs, a permanent appellate body could rein in such excesses.
Despite the widespread calls for NAFTA clarification, legal clarifica- tion is not always something that can be pulled “off the shelf” as an answer to the uncer- tainty over a given legal issue. The common law tradition of judicial interpretation necessarily allows for an adjudicator to interpret the law in the context of specific facts. This section examines the challenges in clarifying the NAFTA, first by exam- ining the procedure for clarification, and second, by examining substantive issues inherent in clar- ifying legal rules, using the expropriation provi- sion as a case study.
Wilkie notes that treaties are “living documents that often have to respond to different constituen- cies in a number of jurisdictions with different concerns and policy priorities.”114 Nowhere is this more evident than in the context of the GATT/WTO, where ongoing clarification is part of how the GATT/WTO operates in practice.116 Before the establishment of the WTO, from time to time, GATT interpretations were made in short state- ments by the chairs of the contracting parties. Sometimes this was done on the basis of a “con- sensus view” of the contracting parties and some- times it was done simply on the basis of there being no objection from any contracting party. As for the status of such interpretive statements with regard to future disputes, Jackson suggests that it was, in the language of the Vienna Convention on the Law of Treaties, one of “practice…establishing agreement.”116
Under Article XXV of the GATT, legally binding interpretations may be made by representatives of contracting parties who may “meet from time to time for the purpose of giving effect to those pro- visions of this Agreement which involve joint action and, generally, with a view to facilitating the operation and furthering the objectives of the Agreement.” Whether this includes the power to interpret, especially in a case where only a major- ity of contracting parties agreed, remained an open question. Practice suggested that Article XXV did include such a power.
The creation of the WTO appears to have clari- fied matters. Article IX, paragraph 2 of the Mar- rakesh Agreement Establishing the World Trade Organization appears to provide for an official authorization of the creation of notes of interpre- tation. It states:
The Ministerial Conference and the General Council shall have the exclusive authority to adopt interpretations of this Agreement and of the Multilateral Trade Agreements. In the case of an interpretation of a Multilateral Trade Agreement in Annex 1, they shall exer- cise their authority on the basis of a recom- mendation by the Council overseeing the functioning of that Agreement. The decision to adopt an interpretation shall be taken by a three-fourths majority of the Members. This paragraph shall not be used in a man- ner that would undermine the amendment provisions in Article X.
The NAFTA Commission is in the process of an ongoing clarification exercise to “give future tri- bunals clearer and more specific understanding of Chapter 11’s obligations, as originally intended by the drafters.”117 It is currently examining different ways in which certain aspects of NAFTA can be clarified. On the current agenda is the possibility of clarifying the expropriation provisions of NAFTA and some institutional areas, such as the submission of amicus briefs.
This can be achieved by way of a formal amend- ment or a binding interpretive note issued by the NAFTA Commission. A formal amendment of the text of NAFTA118 is probably not a politically real- istic option, however, given the considerable polit- ical energy which would be required to conclude an amendment to a trade agreement.119 A more realistic approach is for the NAFTA Commission to issue an interpretive note.
The question that follows is what kind of inter- pretive note would resolve the perceived inade- quacies of Chapter 11? Pierre Pettigrew stated recently,120
We want the investor-state dispute settlement process to be more open and transparent, to make it work better. Indeed, Canada has already taken steps to make this process more transparent. The Department of For- eign Affairs and International Trade website contains all the publicly available docu- ments related to Chapter 11 arbitrations involving the Canadian government. We would like to make all documents public — while accepting certain limitations to pro- tect commercially confidential information — and to open the hearings to the public.
We are also seeking to clarify some of the pro- visions of NAFTA Chapter 11, such as expro- priation disciplines, to ensure they properly reflect the original intent of the NAFTA Par- ties in the dispute settlement process.
However, there are limits to what a clarification provision can achieve. Weiler notes there are two rea- sons why the ministers’ statement may not work:
First, it is an open question as to whether any of the ministers’ proposed changes can be considered to be mere “interpretations” of the NAFTA text, as opposed to outright amendments. Second, even if a particular tri- bunal determines that it must obey the min- isters’ “interpretation” under Article 1131(2), the changes may simply not have gone far enough to have the desired effects.121
A future tribunal may not necessarily follow the clarification to Chapter 11, if it finds that it has narrowed the scope of protection under that sec- tion. As noted above, the Tribunal in Pope & Talbot did not automatically accept that the interpreta- tion was a clarification rather than an amend- ment, although it eventually declined to make this determination. This underscores the point that clarifications, or interpretations, will not neces- sarily be accepted as such by a tribunal, poten- tially making them ineffective tools for reform.
In trying to define a regulatory expropriation, NAFTA negotiators attempted to include language in the text of NAFTA to distinguish legitimate reg- ulation from a taking (another term for expropri- ation) but, in the end, were unable to.123 As one negotiator stated, “if the US Supreme Court could not do it in over 150 years, it was unlikely that we were going to do it in a matter of weeks…”124
As a case study, the following section examines a number of options for an interpretive note for the clarifications of NAFTA’s expropriation provi- sions. This section demonstrates that such a note will not be easy to draft. In fact, significant risks are involved with such a clarification, not the least of which is undermining investor protection. This section reviews five of the options that were reviewed last year in a working group led by the Government of Ontario in order to determine what form (if any) such an interpretive note would take.125
Under the “Domestic Law” approach, the NAFTA Commission would mandate that tri- bunals reviewing a claim under Article 1110 must take into consideration the domestic law of expro- priation of the respondent party in their inter- pretation of NAFTA’s expropriation provisions.
Supporters of this approach argue that the domestic law of expropriation of all the parties is well established and would thus provide a greater framework of predictability to both investors and governments implementing new measures. It would also serve to impose a discipline on investors’ “reasonable expectations.” Tribunals would be able to presume that investors had taken the limits of domestic expropriation law into account prior to making their investment decisions.
A central issue with this approach, however, is that it undermines the rationale for including the rules regarding expropriation in NAFTA. One of the stated objectives of NAFTA is to “increase sub- stantially investment opportunities in the territo- ries of the parties.” Presumably, the drafters were of the view that domestic law alone was not suffi- cient to accomplish this goal. As noted above, an international standard for expropriation articu- lated in an international treaty provides investors some assurance with regard to their investment beyond that of a domestic legal regime.
Moreover, linking the international standard to the domestic law creates a risk that the expropria- tion provisions would cease to function properly to protect foreign investors. Even if a domestic law regime currently provides adequate protection for expropriation, governments could enact new laws with discriminatory expropriation standards.
The “Safe Harbour” approach would do just that: create a safe harbour for reasonable regulation by the state. An interpretive note providing it would state that any claim for expropriation shall not include reasonable interference by a party with the operation, enjoyment, management, mainte- nance, use or disposal of an investment of an investor. This approach would create an explicit exemption from compensating expropriation if the impugned measure was “reasonable.” This approach would justify certain regulatory actions taken by governments that do not constitute a complete deprivation of ownership interests and that are not taken to benefit the government.
The central issue with this approach is simply that it is too vague. It leaves considerable discretion in the hands of the Tribunals, as it does not define what would constitute a “reasonable interference.”
Moreover, this proposed interpretation does not differ substantially from the law on expropriation as it currently stands, which also does not require compensation for reasonable regulation by the state. The international law of expropriation rec- ognizes police powers, that is, the sphere in which a government may regulate without being required to compensate an investor.126 The legitimate or rea- sonable use of “police powers” by a government (e.g., measures which are supported by domestic regulatory processes) has not created a situation whereby governments are required to pay com- pensation awards under Chapter 11. What it does do is prevent the use of police powers to masquer- ade discriminatory regulation, that is, a disguised restriction on foreign investment. In this way, the Safe Harbour approach is superfluous and would not solve any problem that actually exists.
The “Large Safe Harbour” approach provides that safeguards against expropriation do not apply to such things as general policy measures, i.e. a change in the public interest rate; industrial pol- icy (excluding those measures whose aims are to protect domestic industry); environmental policy and consumer protection.
This approach would remove certain areas of government regulation completely from any potential expropriation claim, thereby creating a safe harbour for specifically agreed-upon mea- sures. The problem with this approach is that it essentially eviscerates the protection afforded by Article 1110, as any measure could be easily designed to fall within one of the enumerated cat- egories (e.g., industrial policy). Investors would have no recourse against discriminatory measures adopted by NAFTA governments within these specified categories. This approach is arguably one step short of removing “Expropriation” from the text of NAFTA altogether.
This approach would establish a set of factors that a panel must consider when interpreting Chapter 11 on expropriation. One possible formu- lation of such an interpretive note would first establish whether an impugned measure passed a threshold test that would allow a tribunal hearing. For example, the interpretive note would state that a claimant must establish the following:
(i) The measure in question has or is likely to affect the value of the investment.
(ii)It is appropriate to adjudicate the matter under international law, i.e. there has been a breach thereof. Once this threshold is met, the tribunal would then consider the follow- ing factors to determine whether a measure constitutes an expropriation:
(iii)The measure in dispute is designed to deprive the investor of the value of the investment.
(iv)The measure has the effect of depriving the investor of economically beneficial or pro- ductive use of the investment.
(v) The measure is a bona fide general taxation, regulation or other action of the kind that is generally accepted within the police powers of states.
(vi)The investor adversely affected by the mea- sure had a reasonable expectation of non- interference by the party.
The advantage of having an initial threshold is that it functions to weed out frivolous and vexatious claims. However, Chapter 11 already contains a num- ber of safeguards to eliminate such claims. For exam- ple, Article 1116 states that an investor can only bring a claim if the party has breached an obligation and the investor “has incurred loss or damage by reason of, or arising out of, that breach.” As noted above, Article 1121 states that in order to bring a claim, an investor must waive its right to initiate or continue before any court any proceedings with respect to the measure that is alleged to be the breach.
After the threshold is established, this approach provides substantial guidance to an arbitral tri- bunal as to what constitutes a taking, reflecting principles that have been developed in domestic and international law. However, no guidance is offered as to whether or not the factors listed are dispositive nor is there any guidance as to how these factors relate to each other. It is also unclear whether tribunals will be able to look at other rel- evant factors or if these are the only legitimate fac- tors that can be considered.
More seriously, this approach introduces the requirement of intent on the part of the govern- ment adopting the measure. This would drasti- cally narrow the scope of Chapter 11 to include only those acts that are aimed at specific invest- ments. By requiring specific intent, such an inter- pretive note would actually provide foreign investors with less protection than domestic investors. Again, this would eviscerate the protec- tion in the NAFTA and potentially discourage for- eign investment.
This approach is similar to “Factors for Evalua- tion.” The main difference is that this type of inter- pretive note would provide principles to guide tri- bunals rather than enumerate factors that must be considered. In this way, tribunals could include any number of factors particular to the cases they are adjudicating, and could exclude factors that are not. A “Guidance to Panels” interpretive note could state that panels should only be guided by the following clarifications:
(i) NAFTA was not intended to create new forms of expropriation.
(ii)Expropriation is the taking of property rights by government for its own use or benefit or for the use or benefit of a third party.
(iii)Indirect expropriation and measures tanta- mount to expropriation are intended to cap- ture expropriation by other than direct means and are not intended to create new forms of expropriation.
(iv)Property rights may be restricted by govern- ment measures for a public purpose without compensation, even when there is a loss of property or diminution of value of property, for example, in order to enforce laws which require forfeiture for criminal activity; to raise revenue; or to protect health, safety, the environment or the public welfare.
(v) The purpose and effect of the measure must be judged in light of reasonable expectations of a property owner about the degree of gov- ernment regulation of that economic sector or activity.
(vi)There is a presumption that governments are regulating, and not expropriating, when they say they are regulating. But neither the gov- ernment’s intent nor its characterization of its measures is determinative. The onus is on the disputing investor to prove on a civil standard (not just a prima facie case) that the measure is an expropriation.
(vii)Other NAFTA provisions (such as Articles 1101, 1110 and , 1114, 1410, 1502 and 2103) do not create any presumption with respect to expropriation for any other gov- ernment measure.
The first and third points are simply an attempt to make clear that the phrase “tantamount to expro- priation” does not create a lex specialis (special law) that differs from the international law of expropria- tion. This would essentially support the conclusions of the Tribunals in Pope & Talbot and S.D. Myers.
The second point would make it explicit that, to constitute an expropriation, a measure must both deprive the investor of ownership rights and pass those benefits on to the government (or a third party). Requiring that the government or another third party benefit from the expropriation may narrow Article 1110 as a remedy, as such benefits will be difficult to prove practically. The effect of these first three points would appear to endorse the interpretations found in Pope & Talbot and S.D. Myers (as opposed to the findings of the Tribunal in Metalclad).
The fourth point is little more than a restate- ment of the “Safe Harbour” approach. As stated above, this type of statement is unnecessary and could lead to unintended consequences that severely undermine the underlying goals of NAFTA. This could effectively eliminate any concept of indirect expropriation from its scope. It would also represent quite a radical shift in the international law of expropriation and would deny the kind of protection that is necessary to encourage foreign investment.
The sixth and seventh points are two further examples of attempts to fix problems that do not exist. To my knowledge, there has been no case in which the investor has attempted to argue that the onus is not on it to demonstrate that, on the bal- ance of probabilities, the measure in question con- stitutes an expropriation, nor has a tribunal made such a ruling. Similarly, no attempt has been made to use the articles listed in the seventh point to create any type of presumption with respect to expropriation.
This suggested approach contains too much ambiguity and not enough clarity. For every inter- pretive question it answers, it seems to raise more questions. It addresses too many non-issues and suggests too many interpretive principles that have already been employed by the panels.
Looking forward, it is important to be mindful that arbitral tribunals have ruled in only five cases. As VanDuzer notes, “Most of the noise surrounding Chapter 11 has been generated by the arguments advanced by counsel for complaining parties, by interest groups who appear to feel threatened by review of the issues placed before arbitral tribunals, or by gov- ernments forced to defend questionable policy choices.”127 Simply put, none of the decisions to date has confirmed the worst case scenarios. To quote VanDuzer again, “while the broadly worded sub- stantive obligations of NAFTA stated in Chapter 11 may be capable of being applied in a manner that would impose significant constraints on sover- eignty, they have not been applied to do so. So far, only egregious state actions which were either arbi- trary, clearly unfair or overtly protectionist have been found to be contrary to obligations under Chapter 11.”128
It is premature for the Commission to adopt an interpretive note relating to any of the substantive provisions of NAFTA. Again, it is important to focus on what is actually broken before we attempt to fix it. For the most part, the substantive provi- sions of NAFTA have not been expanded beyond their meaning in international law. As well, mov- ing too early on reforming Chapter 11 seriously risks undermining the investor protection bene- fits it affords. A solid case for reform based on the jurisprudence to date needs to be established before substantive reform should be undertaken. This has not been done to date.
As demonstrated above, interpretive notes can be tricky. If they go too far, they become amend- ments, and absent being incorporated into NAFTA by way of the formal amending process, they risk being disregarded by tribunals.
In terms of Chapter 11’s substantive provisions, one of the current concerns regarding Article 1105 is that it is being used as a “catch-all” for arguments under Chapter 11. Article 1105 arguments were presented successfully by the claimants in Pope & Talbot, Metalclad and S.D. Myers. In each of these cases, government entities behaved in a discrimi- natory and unfair way toward the investor. How- ever, some concerns remain with respect to the interpretations to date, which has been dealt with for the time being by the NAFTA Commission’s interpretive statement. It is not likely that the NAFTA Parties will revisit the issue any time soon, although this may depend on how future tribunals take account of the interpretive statement.
Regarding Article 1102 (national treatment), some NGOs have argued that the term “like circum- stances” should be clarified in order to specify what types of operations will be compared to determine ‘no worse’ treatment.”129 There has been one ruling to date which has found a violation of Article 1102, S.D. Myers. As noted above, in comparing like cir- cumstances, one would think that the Tribunal would compare similar operations located in the host country.130 However, in this case, the Tribunal did go beyond comparing the investment in Canada of S.D. Myers, which provided marketing services to other Canadian-based providers of PCB marketing services. The Tribunal instead applied the national treatment obligation to the full business line of S.D. Myers, including operations in the home and the host countries (the US and Canada, respectively).131 However, a decision to reform Article 1102 on the basis of one ruling on this point is premature.
Regarding the prohibition against performance requirements in NAFTA Article 1106, some NGOs have argued that this provision risks becoming a “wide open back door for firms to litigate trade- related obligations in an investment agree- ment.”132 This argument is speculative, as not one Tribunal has found that a measure has violated NAFTA Article 1106 to date. In this instance, it is definitely too early to take any action.
Based on the interpretations adopted to date with respect to NAFTA’s expropriation provi- sions, there is no clearly established need for change. Two of the three tribunals have been rel- atively conservative in their approach. In Metal- clad, while the Tribunal adopted a more expan- sive interpretation of the expropriation provisions, the facts strongly supported a finding of expropriation.
It is vital to remain mindful of why Chapter 11 was included in the NAFTA. The parties felt it was important to encourage investment, particularly in Mexico. It would be wrong to obliterate the sub- stantive protections afforded by Chapter 11 based on the case law to date because of “early jitters.” Despite the lack of stare decisis in international law, the Tribunals do look to the judgments of previous tribunals for guidance. Eventually, trends will emerge, and carefully thought out action may be appropriate at a later date.
However, there is scope for reform in the process by which Chapter 11 cases are adjudicated. Reform in this area probably has the most scope for suc- cess, as it is important that the rules of the game are as fair as possible. In this vein, a more robust set of rules governing transparency and NGO par- ticipation would be useful. As well, the parties should seriously consider the possibility of a per- manent NAFTA appellate body as a way to provide consistency in the appeal process from tribunal decisions.
A permanent appellate body could also provide consistency, to some extent, in the application of the substantive rules of Chapter 11 in a much more effective manner than would clarification of NAFTA provisions by the FTC. An appellate body could rein in any possible future rulings by tri- bunals that interpreted the provisions of Chapter 11 in a way that went far beyond international law, thereby addressing the concerns that Chapter 11 decisions not impinge on the ability of govern- ments to regulate in the public interest.
The author is grateful to Armand de Mestral, Stephen Brereton and Daniel Schwanen for their insightful com- ments on earlier drafts of this paper. The author also wishes to thank Michelle Grando LL.M., University of Toronto, for her assistance in researching and drafting the case summaries.
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Methanex and United States of America. NAFTA/UNCITRAL Tri- bunal, Decision on Authority to Accept Amicus Submis- sions (January 15, 2002), online: NAFTALAW.ORG http://www.naftaclaims.com (date accessed: 11 June 2002).
México, Secretaría de Economía. Subsecretaría de normatividad y servicios a la industría y al comercio exterior. Dirección general de inversión extranjera. Inversión de Estados Unidos en México, December 2001a.
México, Secretaría de Economía. Subsecretaría de normatividad y servicios a la industría y al comercio exterior, Dirección general de inversión extranjera. Inversión de Canadá en México, December 2001b.
Molot, Maureen Appel. “NAFTA Chapter 11: An Evolving Regime.” In Whose Rights? The NAFTA Chapter 11 Debate, ed. Laura Ritchie Dawson. Ottawa: The Centre for Trade Policy and Law, 2002.
Ontario Ministry of Economic Development and Trade. Unpublished discussion paper prepared for a working group on NAFTA Chapter 11 on options for an interpre- tive note for Article 1110, March 1,2001.
Ostry, S. “China and the WTO : The Transparency Issues.” UCLA Journal of International Law and Foreign Affairs, Vol. 3, no. 1 (1998).
Pettigrew, Pierre, Minister for International Trade, « The impor- tance of Investment and Investment Rules to Canada. » Speech delivered to the House of Commons during a Motion on Investor-State Dispute Settlement, Tuesday, May 1, 2001. Available at http://www.dfait-maeci.gc.ca/tna-nac; http://www.dfait-maeci.gc.ca/tna-nac
Pope & Talbot, Inc. and The Government of Canada. NAFTA/UNCITRAL Tribunal, Award by the Tribunal on Preliminary Motion by Government of Canada (January 26, 2000), online: NAFTALAW.ORG http://www.nafta- claims.com (date accessed: 2 June 2002).
Pope & Talbot Inc. v. The Government of Canada Award on the Merits of Phase 2, April 10, 2001.
Pope & Talbot, Inc. and The Government of Canada. NAFTA/UNCITRAL Tribunal, Final Award on the Merits (April 20, 2001), online: NAFTALAW.ORG http://www.naftaclaims.com (date accessed: 4 January 2002).
Pope & Talbot, Inc. and The Government of Canada, NAFTA/UNCITRAL Tribunal, Interim Award on the Mer- its (26 June 2000), online: NAFTALAW.ORG http://www.naftaclaims.com (date accessed: 4 January 2002).
Pope & Talbot, Inc. and The Government of Canada. NAFTA/UNCITRAL Tribunal, Second Decision on Confi- dentiality (March 11, 2002), online: NAFTALAW.ORG http://www.naftaclaims.com (date accessed: 2 June 2002).
Pope & Talbot, Inc. and The Government of Canada, NAFTA/UNCITRAL Tribunal, Award on Damages (May 31, 2002), online: NAFTALAW.ORG http://www.nafta- claims.com (date accessed: 8 June 2002).
Price, Daniel M., “Chapter 11—Private Party vs. Government Investor-State Dispute Settlement: Frankenstein or Safety Valve?” Canada-United States Law Journal, Vol. 26 (2000): 107-114.
Ritchie Dawson, Laura, ed. Whose Rights? The NAFTA Chapter 11 Debate. Ottawa: The Centre for Trade Policy and Law, 2002.
Rodrik, D. Has Globalization Gone Too Far? Washington, DC: Institute for International Economics, 1997.
Schwanen, Daniel. “Commentary.” In Whose Rights? The NAFTA Chapter 11 Debate, ed. Laura Ritchie Dawson. Ottawa: The Centre for Trade Policy and Law, 2002.
S.D. Myers, Inc. and The Government of Canada. NAFTA/UNCI- TRAL Tribunal, Award on the Merits (November 13, 2000), online: NAFTALAW.ORG http://www.naftaclaims.com (date accessed: 4 January 2002).
Soloway, J. “Environmental Expropriation Under NAFTA Chapter 11 : The Phantom Menace.” In Linking Trade, Envi- ronment, and Social Cohesion : NAFTA Experiences, Global Challenges, ed. John J. Kirton and Virginia MacLaren. Aldershot, UK: Ashgate Press, 2002.
Soloway, J. and J. Broadhurst, “What’s in the Medicine Chest for Chapter 11’s Ills?” Canadian Business Law Journal, Vol. 36 (2002): 368-404.
International Court of Justice, Statute of the International Court of Justice, ICJ Basic Documents, retrieved at: http://www.icj-cij.org/icjwww/ibasicdocuments/ibasictext/ ibasicstatute.htm; http://www.icj-cij.org/icjwww/ ibasicdocuments/ibasictext/ibasicstatute.htm
Thomas, J.C. “The Experience of NAFTA Chapter 11 Tribunals to Date: A Practitioner’s Perspective.” In Whose Rights? The NAFTA Chapter 11 Debate, ed. Laura Ritchie Dawson. Ottawa: The Centre for Trade Policy and Law, 2002.
Tollefson, Chris. “Games Without Frontiers: Investor Claims and Citizen Submissions Under the NAFTA Regime.” The Yale Journal of International Law, Vol. 27, no. 1 (2002): 142-191.
United Mexican States v. Metalclad, 2001 BCSC 664 at para. 67 (2001).
United Parcel Service of America Inc. and Government of Canada. NAFTA/UNCITRAL Tribunal, Decision of the Tribunal on Petition for Intervention and Participation as Amici Curiae (October 17, 2001), online: NAFTALAW.ORG http://www.naftaclaims.com (date accessed: 11 June 2002).
VanDuzer, J.A., “NAFTA Chapter 11 to Date : The Progress of a Work in Progress.” In Whose Rights? The NAFTA Chapter 11 Debate, ed. Laura Ritchie Dawson. Ottawa: The Centre for Trade Policy and Law, 2002.
Weiler, T. “NAFTA Investment Arbitration and the Growth of International Economic Law.” Business Law International (2002), pp. 158-183.
Wilkie, Christopher. “The Origins of NAFTA’s Investment Pro- visions: Economic and Policy Considerations.” In Whose Rights? The NAFTA Chapter 11 Debate, ed. Laura Ritchie Dawson. Ottawa: The Centre for Trade Policy and Law, 2002.
Wortley, B.A. Expropriation in International Law. Cambridge, UK: Cambridge University Press, 1959.
In a provocative and timely piece, Julie Soloway contends that the furor that has come to surround NAFTA’s most controversial provision is largely unjustified. In her view, the Chapter 11 jurisprudence to date supports the conclusion that the Chapter does nothing to undermine or constrain the right of NAFTA gov- ernments to enact measures to protect public health and the environment. She claims that in every case in which a NAFTA government has been held liable under the Chapter, tribunals have quite appropriately sought “to punish outrageous behav- iour on the part of governmental officials.” Nor, in her view, is there reason to believe that the Chap- ter has contributed to a regulatory chill that might stifle or fetter domestic policy development. It is thus premature, in her view, to be seriously con- templating ways to fix Chapter 11. So far, she asserts, the Chapter is working much as it was intended; reforming the Chapter, as the NAFTA governments presently seem to be inclined to do, would do more harm than good.
Three elements of Soloway’s analysis deserve closer scrutiny: her contention that Chapter 11 has had no demonstrable chilling effect on regulatory activity; her contention that, in any event, regu- lators have no legitimate reason to be concerned about the impact of the Chapter on their activities; and, finally, her contention that the Chapter 11 jurisprudence is entirely consistent with the con- clusion that the Chapter poses no real threat to legitimate, non-discriminatory environmental protection measures. In my view, a careful look at the architecture of, and jurisprudence under, the Chapter suggests conclusions quite different from those that she has reached. In particular, I will argue that the discretion the Chapter reposes in tribunals is ill-defined and overbroad; a discretion that has already led in several cases to highly ques- tionable interpretive results. To illustrate this phenomenon I will consider in some detail the Tri- bunal decision in Metalclad. Finally, I will con- tend that as momentum for reforming the Chap- ter builds, Canada must redouble its efforts to ensure that investor rights do not unnecessarily compromise domestic policy autonomy, whether under the NAFTA or future trade and investment agreements.
Soloway is right that the rhetoric of some of the Chapter’s critics has at times been hyperbolic. To some extent, however, this rhetoric is explicable by the pervasive secrecy surrounding the process; a secrecy that is strik- ingly at odds with the way that many citizens have come to expect government, let alone judicial or quasi-judicial decision makers, should operate.1 In this regard, it is encouraging that she supports reforms aimed at making the process more trans- parent and open to citizen participation.
Negative perceptions about the Chapter have also been fostered by the high level of uncertainty surrounding the legal meaning of the Chapter and its implications for domestic policy making and administration.2 The discretion conferred on NAFTA tribunals to interpret the extraordinarily broad language of the Chapter is breathtaking both in its scope and the degree to which it is insulated from appellate or judicial review. Unlike domestic courts, Chapter 11 tribunals are not bound by the doctrine of precedent. This means that, in effect, such tribunals not only apply but also regularly make law. Moreover, also unlike courts and other international dispute resolution bodies, they are not subject to appellate review for errors of law or fact. Finally, tribunals are not even bound by official interpretive statements offered by the NAFTA Free Trade Commission as to the meaning of the Chapter’s provisions.3
Despite the clouds of uncertainty surrounding the Chapter and the evident incentives it provides to litigate the propriety of public policy decisions, Soloway insists that “it is hard to imagine” that the Chapter might inhibit regulators from enacting legitimate, non-discriminatory environmental laws or regulations. In support of this claim, she points out that since NAFTA came into force, the Govern- ment of Canada has passed several dozen new envi- ronmental laws and regulations, asserting that the environmental regulatory framework “continues to function” in all three of the NAFTA countries.
However, drawing conclusions about the Chap- ter’s impact on, or irrelevance to, the appetite of gov- ernments to engage in policy innovation based on the volume, as opposed to the content, of regulatory measures is hazardous. Were one to systematically tackle the challenge of discerning the Chapter’s impact on environmental regulation, one would need to look far beyond the regulatory docket of Environment Canada. Exploration of this question would necessitate a rather sweeping analysis of decision and policy making authority across a wide spectrum of agencies and departments vested with environment-related responsibilities in such areas as public health, resource management, consumer protection and land use planning. Such an analysis would, of course, need to examine not only federal institutions, but also provincial and local decision- makers whose actions can also trigger Chapter 11 liabilities.
Once the myriad of government bodies to be examined were identified, one would then be faced with the equally challenging prospect of establish- ing with any certitude why governments might forgo particular policy options. Given the tremen- dous difficulties involved in such an analysis, I would submit that simply because the reality of such a regulatory chill has yet to be definitively estab- lished does not mean that we should assume that it does not exist.
Soloway also dismisses the argument that gov- ernments’ predilection to “deregulate” is also being adversely affected by the existence of Chap- ter 11. In this regard Schwanen contends the Chap- ter makes privatization and deregulatory initia- tives less attractive for governments.4 He argues that in contemplating such initiatives govern- ments are mindful of the potentially costly com- pensation requirements that will be triggered should such an initiative subsequently falter and they are forced back onto the scene to pick up the pieces. Soloway’s response to this concern is essen- tially a normative one: that we should not worry about this result because it is one that achieves fairness for firms whose investments may be adversely affected by such a policy change.
This rejoinder seems to concede Schwanen’s key assertion: that when deregulating or privatiz- ing, governments must factor into the equation the cost of policy reversals. It follows that such a costing may well tilt the balance against policy innovation. But the rejoinder also misses an even more salient point. Under Canadian law, property rights are not presumed to trump government’s right to regulate in the public interest. This basic principle was reaffirmed in 1982 when Parliament decided not to enshrine property rights in the Constitution. This does not mean that govern- ments routinely ignore the claims of investors or businesses for compensation. What it does mean is that governments reserve to themselves the right to determine the nature and amount of compensation that should be provided, having regard to not only investor fairness but also broader public interest considerations. Chapter 11 takes this determination out of the hands of government, vesting it with tribunals that are under no obliga- tion, and are poorly positioned, to take these pub- lic interest considerations into account.
Whether a regulatory (or deregula- tory) chill actually exists is one thing: whether regulators have legitimate cause for concern is another. Soloway is firmly of the view that they do not. She claims that the Chapter 11 jurisprudence suggests tribunals have carefully balanced the public and private rights that are invariably implicated in such cases and arrived at the right results. I will offer a less san- guine assessment of the jurisprudence shortly.
Before doing so, however, it is important to be mindful of a key architectural feature of Chapter 11, not mentioned by Soloway, that is highly rele- vant to the question at hand. Unlike the GATT, Chapter 11 does not contain a generally applica- ble provision that prescribes how competing pub- lic and private interests are to be balanced when they come into conflict in cases of this kind. Under the GATT, this balancing function is performed by Article XX (General Exceptions). This provision allows a state to justify a measure that would oth- erwise be inconsistent with its GATT obligations on the basis that it is “necessary to protect human, animal or plant life or health.” As such, Article XX provides the WTO with a vehicle to balance the goal of trade liberalization against domestically defined policy preferences in the realms of envi- ronment and health.5
There is no comparable balancing provision in Chapter 11. The closest analogue is Article 1114, which states: “Nothing in this Chapter shall be con- strued to prevent a Party from adopting, main- taining or enforcing any measure otherwise con- sistent with this Chapter that it considers appropriate to ensure investment activity in its territory is undertaken in a manner sensitive to environmental concerns” [emphasis added]. The permissive nature of this language — in particu- lar the caveat that such environmental measures must be “otherwise consistent with this Chapter” — has prompted many trade experts to discount Article 1114 as merely aspirational and of no legal consequence.6 To date while several governments have invoked Article 1114 as a defence against Chapter 11 claims (most notably in the Metalclad case, as will be discussed later), for the most part tribunals have chosen not to directly respond to such arguments.
Some civil society critics contend that the absence of a GATT-like justification provision, combined with the permissive language of Article 1114, means that NAFTA governments cannot defend against an investor claim on the basis that its actions were moti- vated by bona fide health or environmental con- cerns. I do not share the view that the architecture of NAFTA compels this conclusion. Such an outcome would do serious violence to the preambular lan- guage in NAFTA and its environmental side agree- ment that affirm that environmental protection and economic development can and should be mutually supportive. Nonetheless, it is highly uncertain whether in any given case legitimate, non-discrimi- natory environmental or public health measures will survive a Chapter 11 challenge.
If one turns from Chapter 11’s architecture to its jurisprudence, I would argue that NAFTA govern- ments should be even more worried about the implications of the Chapter. Foremost among these is the extent to which the Chapter vests in tribunals the discretion to interpret its provisions in anomalous and inappropriate ways, and to ignore relevant legal arguments and evidence without meaningful appellate scrutiny.
When Chapter 11 came into force it was gener- ally believed that tribunals would interpret its pro- visions in a manner consistent with customary international law. To the surprise of many, recent rulings suggest that tribunals are interpreting its disciplines much more broadly. This phenome- non is illustrated by rulings in relation to Article 1105 (fair and equitable treatment) and Article 1110 (expropriation).
Within international law, the notion that a state owes a duty of fair and equitable treatment has to date generally been considered to provide foreign interests with a reasonable expectation that they will not suffer egregious abuses of state power. In Metalclad, however, the Tribunal said that Article 1105 went much further. In its view, the Article not only protected against egregious excesses but also imposed an affirmative “transparency” obligation on host states to relieve investors of all legal uncer- tainties that might adversely affect their invest- ments. In reaching this extraordinary conclusion, the Tribunal imported into Chapter 11 “trans- parency” obligations articulated in distinct provi- sions in Chapter 18 of the NAFTA (on publication, notification and administration of laws), without offering any authority that “transparency had become part of customary international law.”7
On judicial review, the Tribunal’s decision to transplant transparency obligations that were nei- ther part of international law nor found in Chap- ter 11 was definitively overturned.8 According to the review court, the Tribunal’s decision in this regard was not only legally wrong but so seriously wrong as to deprive the Tribunal of jurisdiction. On the heels of this review, the NAFTA Parties — through the Free Trade Commission — sought to confirm the approach taken on review by issuing an interpretive statement aimed at precluding future tribunals from reading the Article as creat- ing state obligations beyond those found in inter- national customary law.9 Despite this interpretive statement, however, in a subsequent decision a tri- bunal has sought to resurrect the approach to Arti- cle 1105 discredited by the review court in Metal- clad, positing that it is not bound to “accept… whatever the Commission has stated to be an inter- pretation” if, in its wisdom, it deems the interpre- tation to amend the Chapter.10
Tribunals have exhibited a similar willingness to embark on interpretive adventures in relation to the Chapter’s expropriation provisions. Under customary international law and under the domes- tic law of the NAFTA Parties, it has generally been accepted that governments are entitled to take reg- ulatory action that adversely affects the value of a property as long as they are acting in good faith. Thus, non-discriminatory local bylaws, taxation measures and environmental laws that reduce a property’s value are not normally considered to create a right to compensation unless such mea- sures render the property entirely devoid of value.11 The standard rationale for this result is that to do otherwise would make it impossible for govern- ments to carry out their legitimate functions and derogate seriously from domestic sovereignty.12
In Metalclad and Pope & Talbot, however, tri- bunals took a radically different approach. According to these tribunals, the principle that governments are entitled to enact non-discrimi- natory regulation aimed at protecting the public interest without incurring an obligation to com- pensate affected property owners has no applica- tion to claims under Chapter 11. Indeed, in Metal- clad the Tribunal insisted, without offering jurisprudential authority, that an obligation to compensate under Article 1105 arises whenever an investor suffers “a covert or incidental interfer- ence with use of property which has the effect of depriving the owner in whole or in significant part, of the use or reasonably-to-be-expected eco- nomic benefit of property,”13 regardless of whether the measure complained of benefits the host state. As I have noted elsewhere, what is most striking about this formulation is that it purports not only to protect investors against measures in the nature of expropriation, but also against any measures that interfere with property rights, regardless of the stated or actual purpose of such measures. This interpretation of the scope of the Article has, not unexpectedly, generated significant controversy and is vulnerable to serious challenge in terms of its legal soundness and its ramifications for the fis- cal capacity, political appetite and legal ability of governments to regulate in the public interest.14
The Court charged with reviewing the decision in Metalclad was clearly mindful of the radical implications of the Tribunal’s interpretation of the scope and nature of Article 1110. It observed that the Tribunal’s definition of expropriation was “exceedingly broad” and concluded that it would easily embrace “a legitimate rezoning of property by a municipality or other zoning authority.”15 Despite this, however, the Court concluded that it lacked jurisdiction to overrule the Tribunal’s pur- ported definition as the legal correctness of this definition was a question of law and, as such, was immune from judicial review.
In these and other respects, the picture that emerges from the Chapter 11 jurisprudence should rightly cause the Parties to be concerned, quite apart from how that jurisprudence has been received in civil society. In discharging their func- tion, tribunals seem remarkably ready to push the interpretive envelope, offering decisions that go well beyond established norms of customary inter- national law. Moreover, in the one instance where such a decision has come under judicial scrutiny, the reviewing court adopted a largely deferential attitude on the basis that such decisions should not be reviewed for their correctness in law; a posture that is in keeping with established norms sur- rounding private international arbitration. Finally, to the extent that the parties seek to clarify the applicable law through use of interpretive statements, there is reason to believe that their efforts may well be thwarted by the Tribunals’ power to characterize such clarifications as non- binding amendments to the Chapter.
Soloway seems to concede that the legal analy- sis offered by Chapter 11 tribunals has been at times shaky and that the jurisprudence on the whole is a “rather uneven patchwork.”16 However, she argues that if one takes “a realistic look” at the facts of the cases to date, the Tribunals have, with- out exception, arrived at the correct result. Even as measured against this generous standard, I would argue that the jurisprudence to date does not pass muster. A careful analysis of the Tri- bunal’s decision in Metalclad strongly reinforces this impression.
Soloway characterizes Metalclad as a case in which the American investor was sub- jected to “high-handed and capricious” treatment by local authorities that insisted it secure a municipal construction permit before opening a hazardous waste landfill site. She also contends that the investor’s rights were violated by a “sham envi- ronmental measure” promulgated by the state gov- ernment aimed at preventing the site from open- ing, “despite the fact that it had been built in accordance with all applicable legal require- ments.”17 I will argue that the actual facts of the case are much more complex, interesting and, ulti- mately, troubling than Soloway has contended.
Soloway’s depiction of the case appears to be based on the rather sparse set of facts recited in the Tribunal’s decision. Indeed, much of the academic commentary on this and other Chapter 11 cases has been rather perfunctory and anecdotal.18 If one takes a closer look at the evidence that was before the Tribunal, particularly evidence sub- mitted by the Government of Mexico but not addressed in the Tribunal’s decision, a strikingly different picture of the Metalclad story begins to emerge.19
The dispute in this case centred on a proposal to build a hazardous waste disposal landfill in La Pedrera, a remote community in the municipality of Guadalcazar, located in the state of San Luis Potosi. The municipality is sparsely populated, impoverished and largely desert-like.
At all material times, the operation in question was owned by a Mexican company known as COTERIN. The saga commences in 1990, when COTERIN received federal approval to operate a hazardous waste transfer station in Guadalcazar. Contrary to the terms of this permit, it soon became apparent that COTERIN was illegally stor- ing untreated hazardous waste in barrels that were left outside and exposed to the elements. Subse- quent investigations by federal authorities and the Mexican Commission on Human Rights revealed that over 20,000 tonnes of waste (some 55,000 bar- rels) were being stored in this manner, giving rise to serious concerns about groundwater contami- nation. Just 18 months after the facility opened, the federal government therefore ordered COTERIN to cease operations and formally sealed the station’s entrance.
Over the next two years, COTERIN applied on two occasions to the municipality for permission to turn the transfer station into a hazardous waste landfill site. Local officials denied these applica- tions, citing community opposition and the com- pany’s refusal to clean up the illegally stored waste.
In 1993, the owners of COTERIN were intro- duced to senior management of Metalclad by Humberto Rodarte Ramon (Rodarte), who was then a senior advisor to the head of Mexico’s fed- eral environmental authority.20 COTERIN and Metalclad subsequently negotiated a deal under which Metalclad obtained an option to purchase COTERIN once either local approval for the land- fill had been received or a definitive judgment from the Mexican courts that such an approval was unnecessary had been secured. Upon completion of the deal, Rodarte stood to receive a commission from the vendor.21 In September 1993, even though neither of these conditions had been met, Metal- clad exercised its option to purchase COTERIN, supposedly on the faith of representations made by Mexican officials, including Rodarte, that local approvals were unnecessary.22
During 1994 and 1995, COTERIN proceeded with construction of the landfill facility, even though it had not secured a local construction per- mit. A protracted battle between the municipality and COTERIN ensued. In June and again in Octo- ber of 1994, the local government issued stop-work orders, which were apparently ignored.23 While COTERIN managed to secure various federal and state approvals for the project, the local govern- ment continued to refuse to give its approval to the project on the basis of environmental concerns and COTERIN’s refusal to address existing pollu- tion issues.
In March 1995, with construction now com- pleted, Metalclad sought to “inaugurate” the site, even though it was still subject to the federal clo- sure order issued in 1991.24 It was at this juncture that the demonstration by locals referred to by Soloway took place. When this closure order was lifted in early 1996, the municipality secured an injunction preventing the facility from receiving further waste until the site was remediated.25 Met- alclad also went to court to challenge the munici- pality’s right to reject its permit application. When this challenge was dismissed as having been filed in the wrong court, Metalclad commenced proceedings under Chapter 11.
While the arbitration of this claim was under- way, the state governor issued an ecological decree (the “Decree”) that covered an area of almost 190,000 hectares, including the 814- hectare area on which the landfill was located (only 5 percent of which was to be utilized by landfill operations).26 The Decree was based on scientific research that had been underway in the region dating back to the 1950s. This research suggested that the region possessed some of the highest concentrations of cactus species in the world, including several endemic and threatened species. The Decree explicitly preserved existing permits and allowed new businesses to be estab- lished as along as sustainability of the cacti, and compliance with all applicable laws and regula- tions, was ensured.
In holding that the course of events prior to the Decree constituted a violation of Metalclad’s rights under Chapter 11, the Tribunal made two key legal findings: (1) that the federal government had assured Metalclad local approvals were unnec- essary and (2) that under Mexican law, no such approvals were indeed necessary.
The only direct evidence from Mexican offi- cials that Metalclad had been given such assur- ances were written statements by Rodarte who, by the time of the arbitration, had resigned from government and was working for a Metalclad subsidiary.27 Rodarte’s version of events was vig- orously disputed by oral testimony given by Mexican officials at the hearing. They con- tended that at no time had Metalclad been advised that local approvals were unnecessary.28 When Mexican government lawyers sought to cross-examine Rodarte on his written state- ments, they were told he was under criminal investigation for corruption and had exercised his right not to give evidence.29
The Tribunal also heard considerable evidence with respect to whether, under Mexican law, local governments had a constitutional right to refuse to grant construction permits based on environ- mental considerations.30 In support of its con- tention that local governments possessed this jurisdiction, the Mexican government filed two legal opinions: one by the Institute of Legal Research of the Autonomous University of Mex- ico, and a second prepared by two former justices of the Mexican Supreme Court and a senior Mex- ican legal scholar. The lead author of the report relied on by Metalclad was a University of Ari- zona law school graduate enrolled in a Master of Laws program at a Mexican university. The Tri- bunal also heard evidence that Metalclad had been informed in 1993 by its own Mexican lawyers that a municipal permit “may be needed for construction.”31
The Tribunal’s ruling with respect to the Decree also raises troubling questions about the manner in which it discharged its adjudicative and fact-finding functions. In determining that the Decree constituted an unlawful expropria- tion, the Tribunal concluded that the Decree “had the effect of barring forever the operation of the landfill.” This conclusion flies directly in the face of the express language of the Decree, which pre- served existing permits and authorizations and allowed for the establishment of new businesses as long as such enterprises did not compromise protection of the cactus species. Moreover, in its reasons the Tribunal completely ignored the Mexican government’s attempt to justify the Decree by relying on Article 1114 which, as described earlier, purports to protect the right of host states to adopt any measure that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.
Based on the Metalclad decision, the NAFTA architecture and the virtually unfettered and unreviewable discretion Chapter 11 vests in tribunals, I must respect- fully disagree with Soloway’s suggestion that it is “hard to imagine” that Canadian regulators “might be inhibited from proposing bona fide environ- mental regulation” based on concerns about the Chapter’s implications. On the contrary, it seems difficult to imagine that they would not.
Some might argue that we should write off decisions such as Metalclad as unfortunate train wrecks on the rails to a more integrated, sustain- able and prosperous North America. However, whether ill-defined and open-ended investor pro- tections move us towards this goal remains very much an empirically questionable premise.32 In the face of this uncertainty, we must also be very mindful of the democratic price of erecting and maintaining such sweeping protections. In the case of an unreformed Chapter 11 this price includes vesting in essentially unaccountable tri- bunals the authority to constitute themselves as courts of appeal with powers to adjudicate key domestic legal issues. This is precisely what occurred in Metalclad when the Tribunal decided, as a matter of domestic Mexican law, that munic- ipal governments have no right to insist that for- eign investors address local environmental and public health concerns, even though this conclu- sion was strenuously disputed by the Mexican government.
Soloway argues that despite widespread calls to clarify Chapter 11 and rein in the broad discretion it vests in tribunals, the Canadian government should sit back and wait for a “solid case for reform” to be made. I would argue that the case for reform is already compelling and growing stronger. With the Free Trade Area of the Ameri- cas negotiations underway and various new bilat- eral trade and investment treaties in the works, Canada has a significant stake in developing pro- posals aimed at ensuring that rules aimed at pro- moting trade and investment flows do not unnec- essarily compromise domestic policy autonomy.
A highly relevant and useful contribution to this debate has recently been offered by Professor Michael Trebilcock.33 Trebilcock argues for what he characterizes as a “relatively conservative view of the case for the harmonization or convergence of domestic regulatory policies”; an analysis that suggests we should view with considerable caution trade-related disciplines that go beyond the tradi- tionally recognized duty not to discriminate (as reflected in the national-treatment and most- favoured-nation-treatment concepts).34 To do oth- erwise, he contends, creates the potential that trade rules will undermine “regulatory diversity,” a concept that in his view is synonymous with pro- viding broad protection for “domestic political sovereignty, distinctive policy preferences, and competitive and accountable governments.”35 He proceeds to argue that Chapter 11 imperils regula- tory diversity by conferring on foreign investors far more than the right to complain about dis- criminatory state action. Indeed, as he points out, Article 1110 stands the national-treatment disci- pline “on its head” by requiring host countries to treat foreign investors “more favourably than they are required to treat domestic producers whose investments may also be impaired by a change in regulatory policy.”36
The imperative of focusing on options to reform Chapter 11 is also strongly suggested by recent developments south of our border. An American trade journal has recently reported that the Bush administration is developing new standards for future trade and investment agreements that elab- orate, based on principles drawn from US domes- tic law, in what circumstances foreign investors should be compensated for government regula- tory action.37 According to Inside U.S. Trade, these proposed expropriation standards are designed to achieve consistency with the objectives of the recently enacted federal trade promotion legisla- tion, in particular its stipulation that foreign investor protections not exceed the rights of domestic investors under the US Constitution.38 The Bush administration is reportedly investigat- ing options for incorporating these new princi- ples into the NAFTA.
Given the apparent momentum of the current American push to clarify Chapter 11 and the firm- ness of its commitment not to replicate it in future agreements, Canada can hardly sit on the side- lines of the growing debate about reforming the Chapter and, more broadly, rethinking the whole issue of investor rights. Equally, it would be short- sighted and inconsistent for Canada now to take the position that the provision “doesn’t need fix- ing.” In fact, for some time now, our trade minis- ter has in effect been saying the opposite. Almost two years ago, long before the current American reform initiatives, Minister Pettigrew stated that Canada would not sign any new free trade deal — including the FTAA — that contains investor pro- tections modelled on the language of Chapter 11.39 Now is not the time for Canada to abandon either the cause of fixing Chapter 11 or the critical goal of achieving a better balance between investor rights and the domestic policy preferences.
The author wishes to acknowledge Nathaniel Amann- Blake, Andrew Newcombe, Cathie Parker and Jamie Woods for their helpful comments on earlier versions of this article.
“Administration Proposes Higher Thresholds for Investor Suits.” Inside U.S. Trade, Vol. 20, no. 39, September 27, 2002.
Appleton, Barry. Navigating NAFTA: A Concise User’s Guide to the North American Free Trade Agreement. Toronto: Carswell Publishing, 1994.
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United Mexican States v. Metalclad, 2001 BCSC 664, May 2, 2001.
Pour diffusion immédiate – Le Jeudi 6 mars 2003
Montréal – L’Institut de recherche en politiques publiques est heureux de publier aujourd’hui « NAFTA’s Chapter 11: Investor Protection, Integration and the Public Interest», qui comprend une étude de Julie Soloway, spécialiste du droit commercial international, et les commentaires critiques de Chris Tollefson, professeur de droit à l’Université Victoria.
Les deux experts s’accordent pour dire que l’heure est venue d’apporter des modifications au processus d’arbitrage entre États et investisseurs du chapitre 11 de l’ALENA, dont la transparence et l’accessibilité restent insuffisantes. Ils diffèrent toutefois d’avis sur la nécessité de clarifier la nature et l’étendue de la protection accordée aux investisseurs dans ce chapitre.
Le chapitre 11 de l’ALENA impose aux gouvernements certaines obligations envers les investissements ou investisseurs des autres pays signataires. Tout manquement à ces obligations habilite l’investisseur lésé à engager directement une procédure de résolution des conflits à l’encontre du gouvernement fautif. Selon Mme Soloway, il y aurait lieu de modifier cette disposition : « On gagnerait en effet à définir un ensemble de règles plus strictes en matière de transparence et de participation des ONG. De même, les parties devraient sérieusement envisager la création d’une juridiction d’appel permanente qui viendrait uniformiser le processus d’appel des décisions des tribunaux. »
Il serait toutefois prématuré de reconsidérer les fortes protections dont jouissent les investisseurs, affirme l’auteure, qui conclut que la jurisprudence du chapitre 11 n’a jusqu’ici aucunement amoindri ou restreint le droit des gouvernements signataires de prendre des mesures d’intérêt public dans des domaines comme la santé ou l’environnement. Rien n’indique que ce chapitre ait empêché un gouvernement de légiférer en matière de protection de l’environnement ou de santé publique.
S’il convient avec Julie Soloway du besoin de réformer le processus d’arbitrage, Chris Tollefson soutient qu’il est au contraire impératif de clarifier la nature et l’étendue des droits consentis aux investisseurs : « Le pouvoir discrétionnaire des tribunaux, trop vaste et mal défini, a déjà donné lieu dans plusieurs cas à des interprétations très discutables. » Le Canada, croit-il, doit redoubler d’effort pour assurer un meilleur équilibre entre les droits des investisseurs et ses propres priorités politiques, qu’elles soient liées à l’ALENA ou à d’éventuels accords commerciaux et financiers.
« NAFTA’s Chapter 11: Investor Protection, Integration and the Public Interest » est le plus récent cahier Choix publié par l’IRPP dans sa série « Options du Canada en Amérique du Nord ». Il est maintenant disponible en format Adobe (.pdf) sur le site de l’Institut (www.irpp.org). Vous trouverez le résumé ci-joint.
Julie Soloway est une associée au cabinet Davies Ward Phillips & Vineberg LLP, où elle fait partie du groupe de droit de la concurrence et du commerce international. Chris Tollefson enseigne à la faculté de droit de l’Université de Victoria et est directeur exécutif du UVic Environmental Law Centre.
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