Further Opportunities
Investment
Summary of NAFTA Chapter 11's Provisions
The establishment of a clear set of rules for conducting international business is one of the key reasons for the success of the NAFTA. Trade and investment rules provide a road map for the flow of trade and investment capital.
Canada has a vested interest in keeping the flow of trade and investment strong. The value of Canadian direct investment in the United States and Mexico, our partners in the North American Free Trade Agreement, has increased by 340 percent between 1990 and 2002, from $60 billion to $205 billion. In addition, in 2002 we benefited from $225 billion in American and Mexican direct investment in Canada. This, in turn, generates Canadian jobs and fosters growth of Canada's Gross Domestic Product.
NAFTA Chapter 11 is divided into 3 sections:
Section A - Investment obligations as agreed to by the NAFTA Parties.
(Articles 1101-1114) Section B - Procedures for the settlement of disputes between a Party and an Investor of another Party. (Articles 1115-1138) Section C - Definitions of certain terms found in NAFTA Chapter 11.
(Article 1139)
Section A of NAFTA Chapter 11 - Investment Obligations
Section A of NAFTA Chapter 11 outlines the various obligations agreed to by the NAFTA Parties with respect to treatment of investors and investments of the other NAFTA Parties in their territories. These obligations, which are subject to reservations or exceptions taken by the NAFTA Parties, include the following:
National Treatment (Article 1102) - Each NAFTA Party will treat investors and investments from other NAFTA Parties no less favourably that it treats its own investors and investments, in like circumstances, with respect to such matters as the establishment, acquisition, operation and sale of investments. Most-Favoured Nation Treatment (Article 1103) - A NAFTA Party may not treat an investor or investment from a non-NAFTA country more favourably than an investor or investment from a NAFTA country with respect to such matters as the establishment, acquisition, operation and sale of investments. Minimum Standard of Treatment (Article 1105) - This Article assures a minimum absolute standard of treatment of investments of NAFTA investors based on long-standing principles of customary international law. Performance Requirements (Article 1106) - This Article prohibits a NAFTA Party from imposing or enforcing certain performance requirements, such as export requirements and domestic content rules, in connection with the establishment, acquisition, expansion, management, conduct or operation of investments. It also prohibits using the specified performance requirements as conditions attached to advantages such as subsidies, including tax incentives. Senior Management and Boards of Directors (Article 1107) - NAFTA Parties are prohibited from imposing a nationality requirement on senior personnel employed by an enterprise that is an investment of an investor of another NAFTA Party. Transfers (Article 1109) - A NAFTA Party must permit an investor of another NAFTA Party to make transfers of funds related to its investments (such as profits, dividends, interest and royalty payments) freely and without delay. Expropriation (Article 1110) - A NAFTA Party cannot directly or indirectly nationalize or expropriate an investment of an investor of another NAFTA Party except: (i) for a public purpose; (ii) on a non-discriminatory basis; (iii) in accordance with due process of law; and (iv) on payment of compensation equivalent to fair market value. Environmental Measures (Article 1114) - The NAFTA Parties have the right to adopt and enforce environmental measures consistent with the chapter. NAFTA Parties also recognize that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. Accordingly, Parties should not waive or derogate from such environmental measures to attract investment.
Section B of NAFTA Chapter 11 - Settlement of Disputes between a Party and an Investor of Another Party
Section B of NAFTA Chapter 11 outlines the procedures for the settlement of a dispute between a Party to the NAFTA and an investor or investment of another Party within its territory. This investor-protection mechanism provides recourse for alleged breaches of the provisions of Section A of Chapter 11 by a Party that have resulted in loss or damage to the investment of an investor. Investors may also use the dispute settlement mechanism outlined in Section B of Chapter 11 to resolve certain disputes arising out of alleged breaches of NAFTA Article 1503(2) (State Enterprises) and Article 1502(3)(a) (Monopolies and State Enterprises).
The NAFTA stipulates that Chapter 11 proceedings shall be conducted in accordance with either the International Centre for Settlement of Investment Disputes Rules (ICSID) - 1966, the ICSID Additional Facility Rules - 1978 or the United Nations Commission on International Trade Law Rules (UNCITRAL) - 1966.
The first step in the Chapter 11 dispute settlement process is the serving of a Notice of Intent to Submit a Claim to Arbitration. Under Chapter 11, an investor must submit a Notice of Intent at least 90 days before the claim is to be formally served. In addition, an investor may not make a claim if more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor or its enterprise incurred loss or damage. Consultations are typically held between the investor and the NAFTA Party in question after the Notice of Intent is filed.
After the 90 day notice period, and provided that 6 months have elapsed from the date the measure giving rise to the claim went into effect, the investor may submit a Notice of Arbitration. The serving of a Notice of Arbitration formally launches the arbitration.
Investor-state arbitrations are heard by three-member tribunals. One arbitrator is named by each party to the dispute and the third by mutual agreement or, failing agreement, by the Secretary-General of ICSID.
In order for there to be a breach of Chapter 11, the measure in question must be found to contravene a specific obligation under Section A of the Chapter. Tribunal awards are based on monetary damages. Where warranted, a tribunal can award damages to an investor but cannot award punitive damages or require a NAFTA Party to amend the measure that gave rise to the dispute.
In the process of reaching their conclusions, Tribunals are required to decide the issues in dispute in accordance with the provisions of the Agreement, the applicable rules of international law, and all notes of interpretation issued by the NAFTA Commission.
Section C of NAFTA Chapter 11 - Definitions
Section C contains the definitions of the terms used in Chapter 11 including investment, investor of a Party and investment of an investor of a Party.
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