NAFTAChapter11

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TRIUMVIRATE

Document of presentation of

NAFTAS Chapter 11

Montreal, May 25 to 30, 2008


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Chapter 11 is divided into two sections. Section A that focuses on investment,7

includes the principles that govern relations between an investor and the Partywhere the investment is carried out. Some of these principles include following:

1- Article 1102 grants the right to national treatment, that is, treatment that is

similar to that granted to local investors (no discrimination against foreigninvestors).

2- Article 1103 guarantees investors of a member country most-favoured-nationtreatment, that is, treatment that is no less than what is offered to investors ofany other Party or nonParty regarding establishment, acquisition, expansion,management, conduct, operation, and sale of an investment.

3- Article 1105 ensures a minimum standard of treatment towards investors of amember country (e.g., fair and equitable treatment with full protection andsecurity).

4- Article 1106 does not allow performance requirements, i.e., the imposition ofpractices/restrictions/standards/regulations as pre-conditions for establishment(e.g., obligation to purchase local manufacturing materials).

5- Article 1110 entitles investors to compensation when a governmentexpropriates directly (e.g., nationalization) or indirectly (e.g., prohibitiveregulation) or takes a measure tantamount to an expropriation.

Section B of Chapter 11, Settlement of Disputes between a Party and anInvestor of Another Party, establishes a mechanism for submitting a complaintfor arbitration in order to receive compensation from another Party when theinvestor feels he has suffered a damage following the adoption of regulatorymeasures that modify existing business operating conditions. These regulatory orlegislative changes must, however, be such that they can be considered as adirect or indirect expropriation or a measure tantamount to an expropriation.8

The violation (or breach) of articles 1110, 1105, 1102, 1106 and 1103 arebrought forward in 91%, 85%, 72%, 23% and 22% of the cases respectively9.

As provided for in article 1121, private investors from other NAFTA partiesmay submit directly to international arbitration, any such dispute with aNAFTA host state [] Therefore, NAFTA chapter 11 arbitration allowsprivate investors to remove their disputes from the national courts of

7 This section mainly covers Chapter 16 of NAFTA.8 St-Cyr, Richard, ALNA. Chapitre 11 sur les investissements, Infocom, Ministre dudveloppement conomique et rgional, gouvernement du Qubec, 2003, online:www.mderr.gouv.qc.ca/mdercontent/000021780000/upload/publications/pdf/Exportation/comex/ALENA_chapitre11.pdf9 Alexandroff, Alan S., 2006, Investor Protection in the NAFTA and Beyond. Private Interest andPublic Purpose, CD Howe Institute, p.194.


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NAFTA host states, and to submit such dispute to international arbitration,regardless of the previous exhaustion of domestic remedies.10

An investor alleging that a host state hasnt respected its obligations provided bysection A can bring its appeal to the arbitration mechanism of the InternationalCenter for Settlement of Investment disputes-ICSID of the World Bank or thoseof the United Nations Commission on International Trade Law (UNICITRAL)11.

Issues relating to Chapter 11

Firstly some are worried by the fact that NAFTA deals with relations betweenforeign investors and party states as purely commercial matters. Furthermore,Chapter 11s dispositions refer to international arbitration procedures which ruleon litigations concerning private interest only12.

However the decisions rendered by the Methanex Arbitral Tribunal and by theBritish Colombia Supreme Court in the MetalClad affair both affirm that thedisputes addressed by Chapter 11 are not limited to mere commercial litigations,they may also concern public interest matters. Olasolo believes that [t]hesedecisions show the necessity of profound reform in NAFTA chapter 11 foreigninvestor/host state arbitration.13 Such a reform, according to the author, shouldexplicitly recognize the fact that the relations between foreign investors andmember States addressed by Chapter 11 also concerns public interest matters.

In Sections A and B, the use of the expression measure tantamount has led tovery unexpected interpretations. The concerns of environmentalists areparticularly important on this issue:

Non-discriminatory measures aimed at protecting public welfare (e.g., publichealth, the environment, Public Order), are not considered expropriation,even if they cause economic damage to some firms. As this carve-out is notmade explicit in the text of Article 1110, it is not clear whether it exists. If itdoes not, then any tough environmental regulation will involve payingdamages to the affected businesses.14

Furthermore, Baughen identifies three factors used by the courts to interpretarticle 1110s reach:

10 Olasolo, Hector, op. cit., p.191.11 NAFTA Secretariat, 2004, Overview of the Dispute Settlement Provisions of the NorthAmerican Free Trade Agreement, online:www.nafta-sec-alena.org/DefaultSite/index_e.aspx?ArticleID=8.12 Olasolo, Hecor, op. cit.13Id., p.197.14 Cosbey, Aaron, op. cit., p.3
http://www.uncitral.org/index.htmlhttp://www.uncitral.org/index.html


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The first, and most important, is the economic impact of the governmentaction. The fact that a measure has an adverse effect on the economicvalue of an investment will be insufficient to show that there has been anindirect expropriation. The second is the extent to which the governmentaction interferes with distinct, reasonable, investment-backed expectations.Third is the character of the government action. [] [R]egulations generally

will not have sufficiently serious and adverse impact on an investment as toamount to an indirect or creeping expropriation.15

The author worries about the fact that Chapter 11 considers market access as aform of property. Once market access is treated a distinct category of property[] it becomes far easier to categorise regulatory interference as amounting toan expropriation16.

Moreover, there is notable lack of international consensus on what constitutes alegitimate measure to protect the environment, for example, and there is a similarlack of consensus on what constitutes a legitimate measure to protect

cultures.17

We must take into account that NAFTA is one of the mostenvironmentally sensitive agreements, notably its preamble and objectives.Furthermore, the North American Agreement on Environmental Cooperationcompletes NAFTA in regards to environmental issues18.

According to Mann and von Moltke from the International Institute for SustainableDevelopment:

The provisions have gone from being tools of last-resort protection from unfairtreatment to weapons of choice for preventing or attacking unfavourableregulations they have gone from shield to sword. 19

It refers to a critique expressed by the organization Public Citizen.

[I]nstead of providing investors with a shield against government seizure ofproperty, these investor protections are being wielded by investors as a swordto attack an array of regulatory policies and everyday government functions.20

The Parties had not expected the way that Chapter 11 would be interpreted,since its use has centered more on public standard than on cases ofexpropriation. In reaction to the unexpected interpretations made by the courts,and [r]esponding to a rash of press and mounting criticism of NAFTAs []

15 Baughen, Simon, op. cit., p.227.16Id., p.228.17 Dobell, Rod,A Social Charter for a North American Community, ISUMA, Vol. 1 N 1, 2000,online: www.isuma.net/v01n01/dobell1/dobell1_e.shtml.18 Baughen, Simon, op. cit.19 Cosbey, Aaron, op. cit., p.520Public Citizen, 2005, NAFTAs Threat to Sovereignty and Democracy : The Record of NAFTA

Chapter 11 Investor-State Cases 1994-2005, online :www.citizen.org/documents/Chapter%2011%20Report%20Final.pdf, p.79.


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investor-state process21, the NAFTA Free Trade Commission, made up of thetrade ministers of the three countries, drew up a Note of Interpretation of CertainProvisions of Chapter 1122

in order to clarify and restrict ambiguous or vague

interpretations (see the Note in Appendix I). The note has made possible theimmediate publication of arbitration decisions and the reception of third party

submissions by arbitration groups.Initially, the arbitration procedure established under Chapter 11 was supposed tobe distinguished by its greater neutrality, expertise, lower costs, greaterconfidentiality and more expeditious settlement of disputes.23

However,

according to Transnational Dispute Management, experience shows rather thatthe treatment of complaints is particularly slow and costly. While The WorldTrade Organization (WTO) tribunals on average reach a decision within 12 to 18months, the NAFTA investor-state dispute settlement mechanism takes aboutthree years, i.e., three times more, to reach a final decision.

As for the arbitration tribunal, its ad hoc nature has been the subject of muchcriticism. For a case to be heard, each Party must name an arbitrator and agreewith the other Party in naming a third member. Mann and von Moltke of the IISDargue that the court is often called upon to adjudicate on issues that fall outsidethe scope of commercial law and require knowledge of scientific and economicaspects of the environmental laws of the accused State. [They stress that]experts chosen for their experience in commercial law are lacking in theseareas.24

Many argue that the functioning of the investor-State arbitration mechanism isalso not transparent in that arguments presented in cases relating to Chapter 11can remain confidential even though the compensations paid out come frompublic funds and deal with issues of public interest.

With regards to the lack of transparency in the arbitration tribunals mechanismsand decisions, Mann and von Moltke believe that:

an institutionalized conflict resolution procedure that is open to the public andmedia will guarantee the availability of all relevant information pertinent tounderstanding the litigation (). That would ensure a better equilibriumbetween the rights of the public and those of investors. 25

21Id., p. 6.22 Signed 31 July 2001.23 Thomas W. Wlde, Why Cant NAFTA Chapter 11 be More Like the WTO?, TransnationalDispute Management, (2004) Vol. 1, no. 2, online: www.transnational-dispute-management.com/samples/freearticles/tv1-2-article39a.htm24 Denise Proulx, Des rgles de transparence doivent encadrer le chapitre 11 de lALENA , LeDevoir, 17 juin 2002. online : www.ledevoir.com/2002/06/17/3267.html25 Ibidem.


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McBride affirms that the interpretative note of 2001 allowed to respondsatisfactorily to the criticism concerning different arbitration procedures, notablybecause more information is available. However, some limited but significantexceptions subsist to the transparency rules instituted by this note.26 As a result,some remain sceptical as to its real impact. [U]nder the clarification it remains

possible that serious matters regarding the public interest will be adjudicatedbehind closed doors under NAFTA [...] as a practical matter, the clarification doeslittle to remedy the access problems.27

The huge amounts claimed by investors have raised eyebrows. In cases wherethe plaintiffs prevail, the majority of claims have been excessive compared to theawards given by the courts. For instance, claims in the 46 litigations in 12 yearsamounted to almost $30 billions. Six of these cases were resolved to theadvantage of the plaintiffs who received $45.2 million dollars (Appendix IIpresents a list of cases relating to Chapter 11). This leads certain critics to claimthat it is problematic that there is no filter to weed out frivolous or strategic

claims.

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Others believe that the amounts claimed are meant to intimidategovernments and clog the legal system29. Moreover, the cost a governmentmust assume throughout the arbitration procedure may prove to be quite high.For example, the United States had to pay up to 3 million dollars on one singlecase. 30

The various players

a) Federal Governments: The desire to include a chapter on investment, aninvestor-state dispute settlement mechanism and a compensation mechanism inmatters of expropriation in the Canada-United States Free Trade Agreement(CUSFTA) and then in NAFTA first originated from the United Statesgovernment. For its part, Canada wanted to have some oversight over foreigninvestments, especially in the cultural sector, but like the American government,also wanted to eliminate Mexicos Calvo doctrine, under which foreign investorscould only be protected by national laws and institutions. Reluctantly, theMexican government finally yielded to the inclusion of Chapter 11, since it wouldenable Mexico to be considered a secure place to invest.31

In 2000, the

Canadian government indicated its desire to no longer enter into any agreement

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McBride, Stephen, Reconfiguring Sovereignty : NAFTA Chapter 11 Dispute SettlementProcedures and the Issue of Public-Private Authority , (2006) 39 Revue canadienne de sciencepolitique755.27 Public Citizen, op. cit., p.728 Cosbey, Aaron, op. cit., p.729 Barlow, Maude et Clarke T., Global Showdown : How the new Activists are Fighting GlobalCorporate Rules, Toronto, Stoddard Publishing Co. Ltd., 2001.30 Public Citizen, op. cit., p.79.31 The governmental positions are taken from : Gagn, Gilbert, Le rglement des diffrends ,op. cit. p.300


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involving a dispute resolution mechanism similar to that in Chapter 11.32Moreover, a former Congressman, Abner Mikva, who has been a member of atribunal established under chapter 11 said that [i]f Congress had known thatthere was anything like this in NAFTA they would never have voted for it.33

Federated State Governments: The normal arbitration procedure of Chapter 11concerns federal governments and is therefore incumbent upon federalgovernments to defend the interests of federated governments. On twooccasions, however, federated State governments were brought before theChapter 11 tribunal. As a result, federated state governments are called upon totake a stand regarding Chapter 11, particularly when investments fall under their

jurisdiction.

b) Lobby Groups: In general, environmentalists and civil society movements donot support Chapter 11. Some want it abolished and others call for a

renegotiation or review. The following unions are among the organizations thathave denounced Chapter 11: Common Frontiers-Canada, Quebec Network onContinental Integration (QNCI), Mexican Action Network on Free Trade(MANFT), Public Citizen, and the Canadian Council.

c) Private companies: It is the large companies and their business groups rather than small and mid-size businesses that have spoken up regardingissues related to Chapter 11. These groups generally favour the protectivemeasures offered for DFI. The US Chamber of commerce, for example, statesthat The Chapter 11 provisions seek to obtain due process for American firmsabroad comparable to that which they receive in the U.S. 34

Some companies

believe the application of Chapter 11 is a disadvantage for them because theysee foreign investors benefiting from treatment and legal advantages that localbusinesses are not entitled to.

32 Roch, Franois, Le chapitre 11 : bilan et perspectives , dans LALNA Le libre-changeen dfaut, ditions FIDES, p.325.33 Turk, Jeffrey, Compensation for Measure Tantamount to Expropriation under NAFTA: What itMeans and Why it Matters, 2005 (1) International Law and Management Review41, p.42.34 Online: www.uschamber.com/issues/letters/2002/020514hr3009.htm.


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Possible courses of action

Various courses of action and suggestions have been advanced. You may usethese suggestions or propose others, provided that they are related to thedebates and issues raised.

a) The procedures and verdicts of the dispute resolution process should be madepublic. In spite of the ministerial interpretation note, certain strategic informationcan remain confidential. It could be demanded that all arguments, documentspresented and the legal processes should be accessible to the public and themedia.

b) The creation of a Permanent North-American Trade and Investment Court.To ensure continuity in the granting of arbitration awards and to facilitate thesearch for judges, the establishment of a permanent tribunal could be proposed.

c) An appeal process for first instance awards should be implemented, similar tothe WTOs Dispute Settlement Understanding. The legal system that governsChapter 11 conflicts does not allow the appeal of decisions. As in the WTO, anappeal procedure could be instituted.

d) Every direct foreign investment could contain a detailed and publicizedenvironmental impact study and could guarantee sound environmentalmanagement. To ensure that environmental concerns are taken into account inreviewing complaints brought under Chapter 11, environmental impact studiescould be required prior to DFIs.

e) Limit the scope of the term measures tantamount to an expropriation. It couldbe proposed that governments agree that the term measures tantamount notrefer to any government standards when it is proven that the standard aims toensure the protection of the publics health or the environment, which are bothprotected by the preamble of the agreement and Article 1110.

f) Require foreign investors to first present their claim in front of national courts.In order to better protect public interests, one may suggest that foreign investorspresent their claims to host national courts of their investments. The exhaustionof national recourses would not be necessary.


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APPENDIX 1

Notes of Interpretation of Certain Chapter 11 Provisions(NAFTA Free Trade Commission, July 31, 2001)

Having reviewed the operation of proceedings conducted under Chapter Elevenof the North American Free Trade Agreement, the Free Trade Commissionhereby adopts the following interpretations of Chapter Eleven in order to clarifyand reaffirm the meaning of certain of its provisions:

1. Access to documentsa. Nothing in the NAFTA imposes a general duty of confidentiality on the

disputing parties to a Chapter Eleven arbitration, and, subject to theapplication of Article 1137(4), nothing in the NAFTA precludes the Partiesfrom providing public access to documents submitted to, or issued by, a

Chapter Eleven tribunal.b. In the application of the foregoing:i. In accordance with Article 1120(2), the NAFTA Parties agree that

nothing in the relevant arbitral rules imposes a general duty ofconfidentiality or precludes the Parties from providing public access todocuments submitted to, or issued by, Chapter Eleven tribunals, apartfrom the limited specific exceptions set forth expressly in those rules.

ii. Each Party agrees to make available to the public in a timely mannerall documents submitted to, or issued by, a Chapter Eleven tribunal,subject to redaction of:a. confidential business information;b. information which is privileged or otherwise protected from

disclosure under the Party's domestic law; andc. information which the Party must withhold pursuant to the relevant

arbitral rules, as applied.iii. The Parties reaffirm that disputing parties may disclose to other

persons in connection with the arbitral proceedings such unredacteddocuments as they consider necessary for the preparation of theircases, but they shall ensure that those persons protect the confidentialinformation in such documents.

iv. The Parties further reaffirm that the Governments of Canada, theUnited Mexican States and the United States of America may sharewith officials of their respective federal, state or provincial governmentsall relevant documents in the course of dispute settlement underChapter Eleven of NAFTA, including confidential information.

c. The Parties confirm that nothing in this interpretation shall be construed torequire any Party to furnish or allow access to information that it maywithhold in accordance with Articles 2102 or 2105.


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2. Minimum Standard of Treatment in Accordance with International Lawa. Article 1105(1) prescribes the customary international law minimum

standard of treatment of aliens as the minimum standard of treatment tobe afforded to investments of investors of another Party.

b. The concepts of "fair and equitable treatment" and "full protection and

security" do not require treatment in addition to or beyond that which isrequired by the customary international law minimum standard oftreatment of aliens.

c. A determination that there has been a breach of another provision of theNAFTA, or of a separate international agreement, does not establish thatthere has been a breach of Article 1105(1).

Closing Provision

The adoption by the Free Trade Commission of this or any future interpretationshall not be construed as indicating an absence of agreement among the NAFTA

Parties about other matters of interpretation of the Agreement.Done in triplicate at Washington, D.C., on the 31st day of July, 2001, in theEnglish, French and Spanish languages, each text being equally authentic..

For the Government of the United States of America

Robert B. ZoellickUnited States Trade Representative

For the Government of the United Mexican States

Luis Ernesto Derbez BautistaSecretary of Economy

For the Government of Canada

Pierre S. PettigrewMinister for International Trade


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APPENDIX 2


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REFERENCES

Alexandroff, Alan S., 2006, Investor Protection in the NAFTA and Beyond.Private Interest and Public Purpose, CD Howe Institute.

Baughen, Simon, Expropriation and environmental regulation : the lessons ofNAFTA chapter 11, (2006) 18 Journal of Environmental Law207.

Brunelle, Dorval et Deblock, Christian (dir.), LALNA : le libre-change endfaut, 2004, Montral, ditions Fides, 460 pages.

Cosbey, Aaron, NAFTAs Chapter 11 and the Environment, IISD, CECs JointPublic Advisory Committee (briefing paper), Ottawa, June 17-18, 2002, p.1

Dobell, Rod,A Social Charter for a North American Community, ISUMA, Vol. 1N 1, 2000, online: www.isuma.net/v01n01/dobell1/dobell1_e.shtml.

Mann, Howard, Private Rights, Public Problems: A guide to NAFTA'scontroversial chapter on investor rights, International Institute for SustainableDevelopment, 2001, 110 pages.

McBride, Stephen, Reconfiguring Sovereignty : NAFTA Chapter 11 DisputeSettlement Procedures and the Issue of Public-Private Authority , (2006) 39Revue canadienne de science politique755.

NAFTA Secretariat, 2004, Overview of the Dispute Settlement Provisions of theNorth American Free Trade Agreement, online: www.nafta-sec-alena.org/DefaultSite/index_e.aspx?ArticleID=8.

OECD, 2006, Trends and Recent Development in Foreign Direct Investment,International Investment Perspectives, online:www.oecd.org/dataoecd/54/58/37010986.pdf.

Olasolo, Hector, Have Public Interests Been Forgotten in NAFTA Chapter 11Foreign Investor/Host State Arbitration? Some Conclusions from the Judgment ofthe Supreme Court of British Columbia on the Case of Mexico v. Metalclad,(2002) 8 Law and Business Review of the Americas189.

Pastor, Robert A., Toward a North American Community: Lessons from the OldWorld for the New, Washington, D.C., Institute for International Economics,2001.

Public Citizen, 2005, NAFTAs Threat to Sovereignty and Democracy : TheRecord of NAFTA Chapter 11 Investor-State Cases 1994-2005, online :www.citizen.org/documents/Chapter%2011%20Report%20Final.pdf.


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Public Citizen, 2001, NAFTA Chapter 11 Investor-to-State Cases: BankruptingDemocracy.

Proulx, Denise Runion demain des ministres de l'Environnement - Des rglesde transparence doivent encadrer le chapitre 11 de l'ALENA , Le Devoir, 17 juin

2002.Sinclair, Scott, NAFTAs Chapter 11 Investor-State Dispute, Canadian Center forPolicy Alternative, Online : policyalternatives.ca/documents/National_Office_Pubs/2007/NAFTA_Dispute_Table_March2007.pdf.

St-Cyr, Richard, ALNA, Chapitre 11 sur les investissements , Infocom,Ministre du dveloppement conomique et rgional, gouvernement du Qubec,Oct. 2003.

Turk, Jeffrey, Compensation for Measure Tantamount to Expropriation under

NAFTA: What it Means and Why it Matters, 2005 (1) International Law andManagement Review41.

Wlde, Thomas W., Why Cant NAFTA Chapter 11 be More Like the WTO?,Transnational Dispute Management, (May 2004) Vol 1, no.2.

RECOMMENDED WEB SITES

www.nafta-sec-alena.org

www.dfait-maeci.gc.ca/nafta-alena/chap11-en.asp

www.state.gov/s/l/c3439.htm

www.sre.gob.mx

www.mineco.gob.gt/mineco/tlc/index_tlc_mx.htm

www.carleton.ca/ctpl/ch11papers/hartdymond.htm

www.clm.com/pubs/pub-990359_1.html

www.citizen.org/trade/nafta/CH__11/index.cfm

www.iisd.org/

ambiental.uaslp.mx/docs/LMNC-AP020314.pdf

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