Further Opportunities
Investment
North American Free Trade Agreement - Chapter 11
Report on NAFTA Chapter 11 Multi-stakeholder Consultations
May 28, 2003
Montreal, Canada
Introduction
Almost a decade ago, Canada, Mexico and the United States signed the North American Free Trade Agreement (NAFTA), which includes, among other elements, provisions for the protection of investment through substantive obligations for Parties and recourse for NAFTA investors to an impartial dispute settlement mechanism. These rules are contained in Chapter 11 of the NAFTA.
Since the entry into force of the agreement in 1994, final awards have been rendered in nine investor-state arbitrations under the auspices of Chapter 111 . As NAFTA will begin its second decade next year, various groups of stakeholders are assessing the performance of the agreement and reflecting on its benefits and challenges.
In July 2001, the Free Trade Commission (FTC), which is comprised
of the NAFTA Parties' cabinet-level trade representatives, issued
binding notes of interpretation relating to public access to documents
and the minimum standard of treatment provision, while directing
officials to continue to review the operation and implementation
of the investment chapter and make recommendations where appropriate. The
NAFTA Investment Experts Group (IEG), a group of government officials
from the three NAFTA Parties, is conducting the review mandated
by the FTC.
The IEG mandate was restated during the FTC meeting in Puerto Vallarta,
in May 2002. The IEG has been meeting regularly to review the operation
of Chapter 11. With the support of the NAFTA deputies and a sub-ministerial
group the IEG decided to seek stakeholder views on Chapter 11 to
assist and inform its work in developing recommendations for the
FTC. In order for all members of the NAFTA IEG to hear the views
of various groups of stakeholders on Chapter 11, Canada hosted a
trilateral, multi-stakeholder consultation in Montreal on May 28,
2003. This daylong meeting constituted an important milestone in
the fulfilment of the IEG's mandate.
Modalities for Consultations
The May 28 stakeholder consultations were comprised of two plenary sessions, one each on procedural and substantive issues. Following words of welcome by the NAFTA IEG head delegates, a lead discussant helped introduce each session with a short presentation of issues encountered in NAFTA arbitrations to date. Professor Alejandro Posadas, of the Centro de Investigación y Docencia Económica (CIDE), introduced the session on procedural issues, and Professor Don McRae, from the University of Ottawa, gave a brief overview of the substantive obligations of Chapter 11. The consultations were conducted in a "town hall" fashion. This report presents the major themes regarding procedural and substantive issues that were discussed during the course of the day's consultation.
Procedural Issues
Discussions on procedural issues raised various aspects of the investor-state dispute settlement mechanism. Although some stakeholders see great value in the de-politicised nature of investor-state arbitration, other stakeholders would rather see states play a more active role in resolving investment disputes diplomatically. Some stakeholders expressed concerns about the appropriateness of the method of selecting arbitrators in ensuring impartiality as compared to standing tribunals. Generally, however, discussions on procedural issues and concerns among stakeholders were focused on four themes: efficiency and due process, transparency, amicus briefs, and an appeal/review mechanism.
Ensuring efficiency and due process in Chapter 11 arbitration
Stakeholders raised several concerns and suggestions relating to the issue of due process. Members of the business community expressed concern that arbitrations under Chapter 11 were too expensive. In response, it was pointed out that legal fees account for the bulk of arbitration-related expenses. Representatives of the business and legal communities also expressed concern over the length of time required for the completion of Chapter 11 arbitrations in comparison with dispute resolution in other fora, such as the WTO and private commercial arbitration.
Stakeholders disagreed over how to address concerns about the length of arbitral proceedings. Suggestions to address these concerns included agreeing to procedural timetables and the establishment of expedited procedures for deciding admissibility and jurisdictional issues. Some participants warned against setting rigid time lines, since Chapter 11 cases often involve complex and fact-specific issues of a public nature. Deadlines could make it difficult to assemble necessary evidence, thereby undermining due process. In this respect, Chapter 11 arbitrations were seen to be more analogous to complex commercial litigation rather than WTO dispute settlement cases.
Comments on due process and procedural issues also addressed the requirement of exhaustion of local remedies. It was pointed out that the purpose of arbitration is to provide foreign investors alternatives to domestic court systems, in accordance with customary international law norms. Some participants argued, however, that a requirement to exhaust local remedies ought to be a pre-condition to arbitration. Other stakeholders viewed the exhaustion of local remedies as inappropriate to address the particular kinds of claims that are usually filed under Chapter 11, in which some of the allegations could not be addressed by domestic courts (e.g. claims relating to national treatment). Furthermore, some stakeholders viewed the requirement to exhaust local remedies as undermining the primary objective of investment protection rules, which would make Chapter 11 a de facto appeal mechanism for rulings of domestic courts.
Enhancing transparency in Chapter 11 arbitration
Another element of discussion in the session on procedural issues revolved around the need for greater transparency in Chapter 11 arbitration. The fact that the UPS and Methanex arbitration hearings are open to the public was identified by some participants as an example of progress in this area. Many stakeholders argued that Chapter 11 arbitration could provide for greater transparency, both with respect to documents and hearings. Some stakeholders stressed that while they see no harm in opening the arbitration process to the public, some procedures must allow for the protection of business confidential information. Some stakeholders suggested that domestic procedures could serve as helpful examples for how such objectives might be achieved. On the need to ensure access to information, some stakeholders suggested that the NAFTA Parties coordinate their efforts in making written information available to the public through, for example, a comprehensive registry of submissions to tribunals. Some stakeholders requested that a complete listing of documents filed by disputing parties in Chapter 11 arbitrations be made available to the public, even if not all such documents are made public. Some stakeholders raised the issue of the geographic location of arbitration proceedings. They argued that arbitration is often conducted too far from the location of the investment at issue in a dispute, which makes it difficult for potential stakeholders to monitor or participate in a case.
Submitting amicus briefs
Closely related to the discussions on transparency was the issue of amicus submissions. To date, tribunals in two Chapter 11 cases, UPS v. Canada and Methanex v. the United States of America, have determined that they have authority to accept amicus submissions. Several participants suggested that, should they be formally allowed, amicus submissions should meet certain criteria to ensure that they do not infringe upon the rights of the disputing parties or unduly delay the arbitration. In addition, some concerns were raised regarding the cost implications of accepting amicus submissions and who should be liable for such costs. Much of the debate relating to this issue centered on the question of whether investment disputes under Chapter 11 are public or private in nature. Certain stakeholders view disputes as being essentially private commercial matters. Other stakeholders view Chapter 11 investment disputes as inextricably linked to other issues of public policy. These stakeholders also expressed the view that governments do not always satisfactorily represent the public interest in Chapter 11 disputes. Overall, the spectrum of views on the nature of these arbitrations varied from concerns over the "privatisation of justice," to concerns over the politicization of dispute settlement under NAFTA.
Appeal or review mechanism for Chapter 11 awards
Another recurrent element of discussion was the issue of an appeal mechanism for NAFTA investor-state arbitration. Some stakeholders pointed out that, although Chapter 11 provisions state explicitly that arbitral awards are only binding on disputing parties (i.e., not future panels), a body of precedent is developing. According to some participants, this highlights the need to ensure consistency in the interpretation of Chapter 11 through an effective review or appeal process. Although it was noted that arbitral awards are usually meant to bring finality to disputes, stakeholders representing a wide-spectrum of views expressed the need for an appeal mechanism to ensure that erroneous decisions could be rectified. Many suggestions made by stakeholders favoured an approach closer to litigation in domestic courts.
Several participants raised the possibility that arbitral awards might be reviewed in domestic courts. They suggested that domestic court review would ensure that arbitral awards are not contrary to public policy. Others argued that bringing these disputes into domestic court systems would undermine due process and the authority of international arbitration. These comments underscored the fact that stakeholders disagree over whether expertise in domestic laws or international law is best suited to understand and resolve these disputes.
Substantive Issues
Discussion on substantive issues focused briefly on the scope of
the words "in like circumstances," which are found in the national
treatment and most-favoured nation treatment provisions of NAFTA
Chapter 11, and on the use of performance requirements. Most of
the discussion, however, focused on the minimum standard of treatment,
the scope of customary international law, and the expropriation
provision, in particular, how best to ensure a balance between investment
protection and governmental regulatory activity.
Non-discriminatory treatment of investors
One concern was raised with respect to the interpretation of the words "in like circumstances" in the national treatment and the most-favoured-nation treatment provisions. Although some stakeholders view these words as allowing enough flexibility for tribunals to make appropriate comparisons among investors or investments, other stakeholders would like to see this concept clarified to allow explicitly for certain discrimination based on nationality. Divergent views were also expressed regarding performance requirements. Some stakeholders view performance requirements as a tool of development that should not be the subject of dispute settlement or of substantive obligations. This view was strongly opposed by other stakeholders, who support the performance requirements disciplines in Chapter 11 and dislike their exemptions for government grants and subsidies.
Minimum standard of treatment and the scope of customary international law
The Interpretative Notes issued by the FTC in July 2001 clarified that the minimum standard of treatment of Article 1105 refers to the standard of treatment of investors required by customary international law. The Chapter 11 minimum standard of treatment provision and the 2001 clarification by the NAFTA Parties were the subject of various interventions, several of which addressed perceived uncertainties surrounding the concept of customary international law. Some stakeholders expressed concern over the analysis of this provision by Chapter 11 tribunals to date and a perceived lowering of treatment standards through the 2001 interpretative notes.
Since many stakeholders viewed this provision as providing a floor for the treatment of investors, whether domestic or foreign, concerns remained over what the customary international law minimum standard of treatment required of governments. Some stakeholder representatives were concerned about the scope of this standard and expressed the wish that the FTC further clarify it. Others, however, citing the extensive jurisprudence on this question, did not agree that the concept of customary international law is especially ambiguous. One recommendation put forward by stakeholders to help address the perceived uncertainty as to the scope and meaning of the minimum standard of treatment obligation included retaining expert witnesses in Chapter 11 arbitrations to help guide tribunal members in their analysis of this provision. Several participants agreed that the minimum standard of treatment concept is evolutionary, however, and warned that efforts to clarify it could end up limiting its scope and rendering the standard useless over time.
Ensuring a balanced coverage for the scope of the expropriation provision
Stakeholder representatives raised several issues relating to the scope and coverage of the expropriation provision. The central focus of the discussion on expropriation was on what constitutes a compensable versus a non-compensable regulatory action. Some stakeholders suggested that clarifying the meaning of indirect expropriation might not suffice. They proposed fully excluding most regulatory actions from coverage under the expropriation obligations. Some stakeholders felt, for example, that zoning decisions, which are usually made at the municipal level, should never result in a finding of expropriation. Although some stakeholders were of the view that the expropriation provision should only cover direct expropriations, the same group of stakeholders had stronger concerns relating to the coverage of intangible investments and pre-establishment commitments. At the other end of the spectrum, some stakeholders pointed to the fact that the NAFTA Parties have different approaches and coverage of property rights in their domestic laws, and that the intent of the NAFTA was to ensure a high level of protection.
Other issues raised by stakeholders
While some stakeholders view the current procedures of Chapter 11 dispute settlement as providing a de-politicised legal recourse for investors, other stakeholders argue that disputes arising under Chapter 11 have a crosscutting character, with linkages to other areas of law and public policy such as the environment, labour, and health matters. While some stakeholders would like investment protection rules to be coupled with obligations undertaken by investors, others noted that foreign investments and investors are, just like domestic investment and investors, subject to a wide range of domestic or local laws and regulations.
Next Steps
In summing up the day's discussion, the IEG leads took note of the constructive contributions made by participants and undertook to reflect on these contributions in their work over the coming months.
Participants were invited to provide further input on the work of the NAFTA Parties with respect to Chapter 11 via the consultations link on the Canadian Department of Foreign Affairs and International Trade web site.
Each government will continue its own process of domestic consultations
on these issues in the lead up to the NAFTA meetings later this
year.
1. Two of those were versus the Government of Canada, three versus the Government of the United States and four versus the Government of Mexico.
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