CUSTOMS

NAFTA’s Chapter 11

  As May came to a close, so too did a fierce debate in the Senate over H.R. 3009, a bill to grant Trade Promotion Authority to the president.  The Senate passed the TPA bill on May 23, 2002 .  It includes a drastic increase in the funds allocated for Trade Adjustment Assistance providing aid to U.S. workers displaced by foreign trade, as well as several other controversial provisions that were criticized by the administration as undermining the purpose of TPA.  One such amendment, the Dayton-Craig amendment, provides that the president may not negotiate any free trade agreement that amends existing United States antidumping or countervailing duty laws.  Opponents of this amendment claimed it gave the Senate too much power to review the content of free trade agreements negotiated by the president and that it was, therefore, inconsistent with the entire premise of TPA.

  Many other controversial amendments, some seen as designed to derail the broader package, were defeated and prevented from being the subject of debate as a result of procedural mechanisms in the Senate.  TPA now moves to conference committee where lawmakers from the House and Senate will attempt to reconcile the different versions of the bill that passed in each chamber.  TPA passed the House by only one vote.  The very different bill that emerged from the Senate could shift the balance of support in the House and make a compromise bill difficult to craft.  It is expected that it could take all summer before Congress is ready to approve a single bill that could be sent to President Bush for his signature.

  One amendment that was effectively defeated because it failed to achieve the 60 vote super majority required under Senate rules to prevent a filibuster would have made it harder for Mexican and Canadian investors in the United States to challenge domestic laws under the North American Free Trade Agreement’s Chapter 11 investor-state rules.  It is unclear whether the content of this amendment, introduced by Sen. John Kerry of Massachusetts and supported by the League of Conservation Voters as well as several coalitions of state and local governments, will resurface in the conference committee on the TPA, or in future legislative sessions. 

  The rights granted to investors under NAFTA’s Chapter 11 have increasingly drawn the ire of public interest groups in the United States .  Public Citizen and other organizations have decried the expansive nature of NAFTA Chapter 11 rights as undemocratic because they allow private corporations to challenge environmental laws, regulations and government decisions at the national, state and local level and can result in governments paying exorbitant amounts of compensation to private concerns for damages.  Moreover, opponents allege that all of this happens in virtual secrecy without public rights of intervention or the right of national courts to review decisions of the arbitral tribunals. 

  Supporters of Chapter 11 rights assert that NAFTA Chapter 11 is no different than the many bilateral investment treaties that the United States has entered into with other countries for decades.  The only difference, they point out, is that for the first time this investment agreement is between three developed countries that share many investors.  In other words, unlike some other bilateral investment treaties the U.S. has concluded to protect its investors in other, generally underdeveloped countries, NAFTA Chapter 11 is a two way street and claims are being generated from and against all parties.  Supporters say this equity in investors’ rights and the potential increase in claims because of the interrelationship between the Mexican, United States , and Canadian economies explain some of the uneasiness of citizens, but that it is merely a necessary mechanism to encourage free and fair investment.  Moreover, transparency in Chapter 11 proceedings has increased since July 31, 2001 when the Free Trade Commission, representing all of the NAFTA Parties declared transparency a goal and announced initiatives to increase public access to information on Chapter 11 proceedings. 

  So, what exactly does Chapter 11 of the NAFTA provide? 

  Chapter 11 provides for the arbitration of investment disputes between a NAFTA party and a private investor located in another NAFTA party.  The NAFTA parties have agreed, in Article 1122 of the Agreement, to submit to arbitration with all investors from other NAFTA parties.  Any individual or business that is a resident of a NAFTA country who has an investment in another NAFTA country may bring a claim against that other NAFTA country.  Chapter 11 lays out detailed procedural rules for bringing claims, and once the proceedings are commenced, they are governed by established rules of arbitration, such as ICSID or UNCITRAL.  The governing law in the arbitration is the NAFTA itself and international law.

  Claims may be brought against a NAFTA party because the party at the national, state or local level has discriminated against either a foreign investor or investment.  Moreover, NAFTA Chapter 11 requires that each party accord the investors and investments of other parties the best treatment given to non-NAFTA investors and investments and that basic international investor rights be respected.  Chapter 11 prohibits a party from imposing performance requirements, such as requiring domestic content, minimum exports, or sales restrictions.  Finally, no party may, “directly or indirectly nationalize or expropriate an investment of an investor of another party in its territory or take a measure tantamount to nationalization or expropriation.” 

  This provision on expropriation, because of its broad language, has already been the subject of legal wrangling in the few cases that have been brought thus far under Chapter 11.  The parties have agreed that this phrase was not intended to expand customary international law, nevertheless, Chapter 11 protects more than absolute taking of private property by government entities.  Indeed, the defeated Kerry amendment sought to reign in Chapter 11 protections to make them more equivalent to those provided to U.S. citizens under the U.S. Constitution.  The U.S. Constitution does not protect against government actions that merely diminish property value.

  To date, there have been only 13 Chapter 11 cases brought.  Four each have been brought against Canada and the United States and five have been brought against Mexico .  Recently, in the case of Metalclad (USA) v. United Mexican States, Mexico was ordered to pay     $16.7 million in compensatory damages to Metalclad, a U.S. investor, because Mexico wrongfully refused to permit Metalclad’s subsidiary to open and operate a hazardous waste facility that Metalclad had built in La Pedrera, San Luis Potosí, despite the fact that the project was allegedly built in response to the invitation of certain Mexican officials and allegedly met all Mexican legal requirements.  The arbitral tribunal concluded that Mexico ’s actions were tantamount to expropriation.

  The NAFTA rules and the rules of the arbitration that took place in Vancouver , allowed Mexico to appeal the decision to a Canadian court.  The award was reviewed by the Supreme Court of British Columbia.  The court reduced somewhat the portion of the award that represented interest and costs, but generally upheld the decision of the tribunal because even though it employed an extremely broad definition of expropriation for the purpose of Article 1110 it was not patently unreasonable.

  Other NAFTA Chapter 11 cases include:  S.D. Myers, an Ohio processor of PCB waste brought a claim against Canada alleging that Canada’s ban on the export of PCBs violated NAFTA’s Chapter 11; Ethyl Corp, a Virginia company brought a claim against Canada alleging that a Canadian statute banning imports of the gasoline additive MMT for use in unleaded gasoline violated NAFTA’s Chapter 11; Methanex, a Canadian company brought a claim against the United States alleging that an executive order by Governor Gray Davis of California which prohibited the use of the fuel additive MTBE in gasoline violated NAFTA’s Chapter 11. 

  The Methanex case is notable because the arbitral tribunal ruled that it had the power to accept amicus, or friend of the court briefs.  Thus, briefs from environmental groups that were not parties to the case were accepted by the tribunal.  This decision could mean more open proceedings in future Chapter 11 cases and more opportunity for parties interested in investors’ rights and the rights of governments to participate in arbitrations.

  Although there are many exceptions to the restrictions and obligations of Parties under Chapter 11, NAFTA’s investor-state provisions grant very powerful rights to companies engaged in cross-border trade between and investment in the United States and Mexico .  Such companies should be aware of Chapter 11 rights in the event of any federal, state or local action in the United States , Mexico , or Canada that discriminates against or otherwise damages an investment.  Successfully obtaining an arbitral award against a NAFTA government is challenging, but can be expected to occur with greater frequency in the coming years.

Jason Waite is an attorney in the Washington , D.C. office of Alston & Bird LLP.  He specializes in international trade regulation and Customs law.  With over 600 lawyers in Atlanta , Charlotte , Research Triangle, New York , and Washington D.C. , Alston & Bird represents a broad range of clients in virtually every area of practice related to international business and trade.  Mr. Waite can be reached at jwaite@alston.com, and at (202) 756-3300.