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Investor Disputes under Chapter 11 of the North American Free Trade Agreement (NAFTA)

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MILLAR KREKLEWETZ LLP is a boutique Canadian law firm with lawyers who have significant expertise in customs and trade matters involving the North American Free Trade Agreement (NAFTA), including investor disputes arising under the dispute settlement provisions of Chapter 11 of the NAFTA.

The following is a short introduction to the dispute settlement provisions of Chapter 11 of the North American Free Trade Agreement (NAFTA).


Investor Disputes under Chapter 11 of
the North American Free Trade Agreement (NAFTA)

Overview of NAFTA and Chapter 11 Investor Dispute Settlement Provisions

Many readers will be aware that the North American Free Trade Agreement (NAFTA) involves the duty free trade in goods. Fewer will also realize that NAFTA contains detailed dispute resolution provisions, including those in Chapter 11 of the NAFTA (Chapter 11) for officiating disputes relating to cross-border investments.

Chapter 11 is one of the most controversial chapters in NAFTA, dealing with both the mutual obligations that each NAFTA party owes to foreign investors, and the rules for officiating the disputes that are going to arise from time to time. In this fashion, Chapter 11 enables private corporations in one NAFTA country with the right to sue, through an arbitration process, the national government of another NAFTA party where that governments actions negatively affect the first partys investment rights under NAFTA.

To date, corporate investors have used Chapter 11 to challenge a wide variety of governmental laws, policies, and position, including federal controlled substances regulations, the provision of public postal services, municipal contracts, tax policy, and most recently, an effort by the U.S. government to prevent the spread of mad cow disease.

The balance of this article outlines the provision in Chapter 11, and provides an overview of the NAFTA claims filed to date, with commentary on the same.

The NAFTA Chapter 11 Rules

Section A Investment

Section A of Chapter 11 grants special legal protections and new rights to corporations from one NAFTA country that do business in another NAFTA country, and sets out the rules for the treatment of investors and their investments by the governments of the three Parties.[1]

Key provisions include:

  • Article 1102, which requires a Party to treat investors from the other NAFTA territories (and their investments) as favourably as it treats its own investors;

  • Article 1103, which prohibits a Party from treating an investor or investment from a non-NAFTA country more favourably than an investor or investment from a NAFTA country; and

  • Article 1106, which prohibits the imposition and enforcement of a number of specified performance requirements in connection with the establishment, acquisition, expansion, management, conduct or operation of investments (such as rules requiring manufactured goods to contain a given level of domestic content, or restricting levels of certain percentage of goods or services for export purposes).

Section B Dispute Resolution

Section B of Chapter 11 sets out the dispute settlement procedures necessary to resolve complaints between investors and NAFTA party governments, and attempts to establish a mechanism for the settlement of investment disputes that assures equal treatment with the principle of international reciprocity and due process before an impartial tribunal.

Key points to consider are as follows.

First, it is important to recognize that not everyone may bring a claim for dispute settlement, and that the Chapter 11 mechanism is effectively limited to investors of a Party to NAFTA, and more specifically, a national or corporation of a NAFTA Party that seeks to make, is making or has made an investment, in another NAFTA country. Also important to note is that, generally speaking, investors may not bring NAFTA Claims against their own governments for harm to investments made in their own country.

Second, the initial process is governed by Article 1116(2), which requires that claims must be brought within three years of when the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor has incurred loss or damage. Note that Article 1118, indicates that parties should first attempt to settle a claim through consultation or negotiation, and that should this consultation or negotiation process fail, then disputing investor is required to file a notice of its intention to submit a claim to arbitration at least 90 days before the claim is submitted, provided that six months has elapsed since the event giving rise to the claim.

Third, the dispute resolution process is one of three types of arbitration, with the investor able to choose one of the following mechanisms: (1) where both the disputing Party and the Party of the investor are signatories to the World Banks International Center for the Settlement of Investment Disputes (ICSID) Convention, then the ICSID rules may be used;[2] (2) where the disputing Party or the Party of the investor is a party to the ICSID convention, ICSIDs so-called Additional Facility rules may be used, and (3) in any other case, the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules are required to be used. Note that Article 1130 requires that (unless the disputing parties agree otherwise) the arbitration occur in the territory of a Party that is a party to the 1958 New York Convention, selected in accordance with the rules of the arbitration forum. (Although not explicitly stated in Chapter 11, the arbitrations are generally closed to public participation, observation and input.)

Finally, and in terms of the governing law, Article 1131 provides that a Tribunal will decide the issues in dispute in accordance with NAFTA and the applicable rules of international law.

Awards & Enforcement

Awards made under the ICSID Additional Facility or UNCITRAL arbitration rules must be enforced under international conventions that relate to the enforcement of arbitral awards such as the 1958 New York Convention.

In international arbitration cases, it is not uncommon for parties to bring an application in the domestic courts to set aside arbitral awards.

In Canada, this may be done pursuant to the International Commercial Arbitration Act (ICAA), which allows for the setting aside of an arbitral award if the award dealt with a subject matter that was not contemplated by the terms of the submission to arbitration, or where the award conflicted with public policy.

However, domestic courts are very reticent to set aside international commercial arbitration awards. For example, in Mexico v. Karpa,[3] which involved an award under Chapter 11 against the Mexican government, the Ontario Court of Appeal agreed with the lower courts decision that arbitral awards should be accorded a high level of deference, and accordingly refused to set aside the award given by the Tribunal.

For final awards, Chapter 11 provides that a Tribunal is not permitted to order a Party to pay punitive damages or order a Party to change its rules, but may award monetary damages, restitution of property, and costs. Further, awards made by a tribunal are only binding on the disputing parties and in respect of the particular case.

Cases Filed Against NAFTA Governments

Total Cases

To date, there have been a total of 45 notices to commence arbitration filed by corporations and investors under NAFTAs Chapter 11 investor provisions, with a total of US $5 billion claimed.[4]

Of these 45 notices, only 13 have been against the Canadian government; the majority has been against Mexico, which has been the recipient of 18 notices of intent.

Number of Claims Withdrawn and Value of Awards

While the number of recent filings is alarming, there is good reason that the governments of NAFTA countries should not be so threatened by a Chapter 11 claim. Of the 45 notices of intent that have been filed, a total of 21 have been withdrawn. Further, of the 12 cases that have been concluded, only 5 have been won by investors (including one case which was settled).

In these 5 cases, investors have claimed a total of US $791 million, but only received a total of US $35.5 million. Canada, for example, has only paid out a total of US $18.4 million in three cases which were won by investors, while over US $900 million has been claimed.

Most recently, the Canadian Cattlemen for Fair Trade (CCFT) officially notified the U.S. government of their intention to file a NAFTA Chapter 11 claim against the U.S. for its May 2003 decision to halt imports of Canadian cattle. The notice was filed on August 12, 2004, and the CCFT is claiming losses as a result of the Canada-U.S. border closure to mad-cow disease in Alberta, of some $95 million. Since then, over 100 claims have been filed by the CCFT totaling over US $300 million. The basis for the claim appears to be the CCFTs allegation that the U.S. has breached its obligations towards investors under Article 1102(1), which requires the U.S. to provide treatment no less favourable to investors of another NAFTA Party than that which it provides to its own investors. In addition, they allege that the U.S. is providing treatment to investments that is arbitrary and intentionally discriminatory, and is acting contrary to the general international law principal of good faith.

While arbitration has not yet commenced, public interest in this case is very high, and the potential of the case to impact (and curtail) domestic policy in areas like public health protection and democratic governance is significant.

ENDNOTES

  1. Article 1101 indicates that Chapter applies to measures adopted or maintained by a NAFTA member relating to (a) investors of another Party; (b) investments of another Party in the territory of the Party; and (c) with respect to Articles 1106 and 1114, all investments in the territory of the Party.

  2. Note that as neither Canada nor Mexico is yet a member of the ICSID Convention, this option is presently unavailable.

  3. (2005) 74 O.R. (3d) 180 (C.A.).

  4. This figure excludes two disproportionately high claims. The total amount claimed by NAFTA investors, if these two claims are included, is US $28 billion.

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