NAFTA Investor To State Cases - Setting the Record Straight

1. Introduction
2. NAFTA Chapter 11
3. Allegations
4. Cases:
   1. Ethyl Inc. vs Canada
   2. S.D. Myers Inc. vs Canada
5. References
6. Notes

Introduction

A quick search on the web for NAFTA, Chapter 11 and MAI reveals a vast amount of comment, most of it critical, on NAFTA's Chapter 11 and the investor to state (ITS) cases it has permitted. These cases seem to show unelected and often unpleasant corporations making elected governments back down, change their laws and even pay monetary compensation. When I first read about these issues my blood started to boil like that of the authors of the articles I was reading. I went to Google searched for 'NAFTA text' so that I could read the offending passages in NAFTA for myself (something which I had noted was never actually quoted in these articles. Having read Chapter 11 I started to have doubts and I decided further research was needed before I came to any firm conclusion. First I wrote to a couple of the websites which I had read but I received no reply. I then decided to try to find out more about the ITS cases. After a little effort I discovered a source for the text of the judgements in various of these cases (Appleton Associates NAFTA Cases and Cases List at ICSID - the ease with which I found them also undermines the frequently heard claim that the whole NAFTA dispute process is shrouded in secrecy). After reading these my doubts had grown further. In fact I felt that many of the claims being made were simply untrue, they were myths which now self-perpetuated on the semi-infinite grape-vine of the web (from looking at what was written about this it had swiftly become obvious that there were only a few real information sources and that most other articles were derived from them). My final conclusion was that while it is undoubtedly true that Chapter 11 does provide a new and unprecedented right of action against national governments to 'investors', this right is not nearly as wide, inequitable or without good reason as has been alleged.
Thus the purpose of this article is two-fold: First to provide justification for this conclusion; Second, to analyze the allegations that have been made. In establishing what Chapter 11 does and does not allow there are two stages: 1) Examining the NAFTA agreement itself 2) Examining and analyzing the case law that establishes how the text is turned into practical decisions.

NAFTA Chapter 11 (Complete text can be found on the docs page)

The focus of discussion regarding NAFTA is on Section 11: Investment. Given that the chapter is available either for perusal on the web or on the docs page I will only provide particularly salient extracts here.

• Articles 1101-1109 provide various rules about how a Party (i.e. USA, Canada or Mexico) must treat a foreign investor:
  • 1102 National Treatment - 'Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.' [1102:1] (note wherever you see investors you could also have 'investments of investors' - 1102:2 consists precisely of this substitution).
  • 1106 - not allowed to impose such things as domestic content provisions
  • 1109:1 - 'Each Party shall permit all transfers relating to an investment of an investor of another Party in the territory of the Party to be made freely and without delay. . . '
  • Various exceptions to the rules laid down throughout but particularly in Article 1108: Reservations and Exceptions. For more details consult the text.
• Article 1110: Expropriation and Compensation: '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 of such an investment ("expropriation"), except:
  1. for a public purpose;
  2. on a non-discriminatory basis;
  3. in accordance with due process of law and Article 1105(1); and
  4. on payment of compensation in accordance with paragraphs 2 through 6.'
  (NB: a Party needs to do ALL of these four)
  
• Section 1114: Environmental Measures -
  1. Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.
  2. The Parties recognize that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. Accordingly, a Party should not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such measures as an encouragement for the establishment, acquisition, expansion or retention in its territory of an investment of an investor. If a Party considers that another Party has offered such an encouragement, it may request consultations with the other Party and the two Parties shall consult with a view to avoiding any such encouragement.
• Dispute Settlement -
  • Basis for an action: 'An investor of a Party may submit to arbitration under this Section a claim that another Party has breached an obligation under:' Section A (= Articles 1101-14) 'and that the investor has incurred loss or damage by reason of, or arising out of, that breach.' Also can replace 'an investor of a Party' in above with 'An investor of a Party, on behalf of an enterprise of another Party that is a juridical person that the investor owns or controls directly or indirectly'
  • The following methods of arbitration are available [1120]:
    1. the ICSID Convention, provided that both the disputing Party and the Party of the investor are parties to the Convention;
    2. the Additional Facility Rules of ICSID, provided that either the disputing Party or the Party of the investor, but not both, is a party to the ICSID Convention; or
    3. the UNCITRAL Arbitration Rules.
  • 1123: Number of Arbitrators and Method of Appointment - 'Except in respect of a Tribunal established under Article 1126, and unless the disputing parties otherwise agree, the Tribunal shall comprise three arbitrators, one arbitrator appointed by each of the disputing parties and the third, who shall be the presiding arbitrator, appointed by agreement of the disputing parties.'
  • 1121: 'A disputing investor may submit a claim under Article 1117 to arbitration only if both the investor and the enterprise:' . . . 'b) waive their right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceedings with respect to the measure of the disputing Party that is alleged to be a breach referred to in Article 1117, except for proceedings for injunctive, declaratory or other extraordinary relief, not involving the payment of damages, before an administrative tribunal or court under the law of the disputing Party.'

The Allegations

Consider the following example: the Canadian government passes a new regulation making some additive to petrol illegal (for some environmental reason - e.g. they think its toxic) and suppose further that the company, which we will call X, that is the main manufacturer of the additive is a US company. So the Canadian governments actions may cost company X some large sum of money in the form of lost revenue. If company X could start a claim against the Canadian government for compensation this would seem to be a disastrous situation for environmental regulation and very inequitable to boot - a case of pay-the-polluter. In fact many people (just search for Ethyl Case and NAFTA in Google) see this as more than just to do with environmental regulation but as undermining democracy in allowing 'unelected' investors (corporations or individuals) to challenge laws enacted by the 'elected' government (read 'the people'). Concrete examples of this viewpoint are Public Citizen's 'NAFTA Chapter 11 Investor-to-State Cases: Bankrupting Democracy' and Mary Bottari's article in the multinational monitor (both available on the docs page. It is worth reading at least Bottari's article as it summarizes much of the general argument. The example above relates to environmental regulation but in general it could be any kind of governmental regulation. The central allegation is: Investors (be they individuals or corporations) in a foreign country have a right to compensation if government regulation causes them a loss (no matter how justified the regulation may be). Below I present a list of sites and documents where this kind of allegation is made.

1. wtoaction.org - Various articles by Charles Greenfield about NAFTA's Chapter 11 and Investor to State Cases
2. Environmental News Network (Viewed on 30-Sep-2002). 'Written in the ambiguous, innocuous-sounding prose that makes clever attorneys rich, the chapter spells out terms under which investors (i.e., multinational corporations) can be compensated for losses incurred by expropriation — government action.'
3. Public Citizen - Multitude of articles here including 'Bankrupting Democracy' article cited above. The executive summary of that document contains the following statements:
   • 'However, the majority of the investor-to-state cases filed to date have had little to do with the seizure of property NAFTA supporters feared. Instead, the cases challenge environmental laws, regulations and government decisions at the national, state and local level:
     • The California-based Metalclad company successfully challenged the denial of a construction permit by a Mexican municipality for the building of a toxic waste facility;
     • Environmental and health bans of suspected toxins have been challenged, with one case already resulting in reversal of a Canadian government ban on the gasoline additive MMT;
     • Canada's implementation of two international environmental agreements has been successfully challenged, and Canada will soon be ordered to pay damages to U.S. investors in both cases;
     • Foreign corporations have taken two lawsuits they lost in U.S. domestic courts to be "reheard" in the NAFTA investor-to-state system, one challenging the concept of sovereign immunity regarding a contract dispute with the City of Boston and the other challenging the rules of civil procedure, the jury system and a damage award in a Mississippi state court contract case;
     • The American company, United Parcel Service (UPS), has filed a suit challenging the governmental provision of parcel and courier services by the Canadian postal service; and
     • A Canadian steel fabrication company challenged a federal "Buy America" law for highway construction projects in the U.S.
     This extraordinary attack on normal government activity such as operating a civil justice system through courts, denying a construction permit or establishing health and other public interest regulations has drawn growing criticism to NAFTA's Chapter 11 investment rules.'
   • 'Foreign Investors Granted Greater Rights than U.S. Corporations or U.S. Citizens: NAFTA's investment rules provide new rights and privileges for foreign investors that go significantly beyond the rights available to U.S. citizens or businesses in U.S. domestic law and provide a venue exclusively available to foreign investors to seek payment of U.S. taxpayer funds for alleged business losses.'
   • 'Foreign Investors Allowed to Evade Legal Liability? NAFTA's investor-to-state tribunals provide a way for foreign litigants to seek government compensation for damages ordered by U.S. courts. In one NAFTA case, a huge Canadian funeral conglomerate called the Loewen Group is using NAFTA's investor protections to, in effect, "reverse" a Mississippi jury s ruling in favor of a small funeral home operator who sued the conglomerate for breech of contract.'
   • 'State and Local Governments are Not Safe from NAFTA Tribunals Reach: Not only have federal laws, such as a U.S. "Buy America" procurement law, been challenged under NAFTA's Chapter 11, but a variety of measures taken by state, provincial and municipal governments have been challenged as well. In the toxic waste case, involving the U.S. Metalclad corporation, the decision of a Mexican municipality to demand a construction permit before a U.S. company could begin building a toxic waste facility was successfully challenged as NAFTA-illegal.'
4. Friends of the Earth Trade Case Study: Ethyl Corp and MMT - 'Under NAFTA, Ethyl Corp - a producer of MMT, a toxic fuel additive - was able to threaten the Canadian Government with prosecution after the Canadian Parliament voted to restrict the trade in MMT. The threat of prosecution and a possible compensation bill running to hundreds of millions of dollars effectively caused the Canadian Government to U-turn, a victory for corporate power and a loss for public health and the environment.'

Cases

• Ethyl Inc. vs. Canada
• S.D.Myers Inc. vs. Canada

Ethyl Inc. vs. Canada

The story as often told: Concerned about the health effects of a gasoline octane enhancer known as methylcyclopentadieny maganese tricarbonyle (MMT), Canada's federal government banned the sale of MMT in 1997. The only supplier of MMT in Canada was a subsidiary of U.S. based Ethyl Corporation, which commenced an arbitration proceeding under NAFTA's Chapter 11 alleging, among other things, that the MMT ban was "tantamount to an expropriation" of its Canadian subsidiary and demanding approxiamately $200 million in compensation. After the early stages of the arbitration process but before any final decision, the government of Canada suspended the MMT ban and agreed to pay Ethyl approximately $13 million to compensate it for legal fees and other inconveniences.

The actual facts: (numbers in [] refer to references.)

• Canada did not ban MMT, rather the relevant Act stated: 'No person shall engage in the interprovincial trade in or import for commercial purpose a controlled substance [MMT] except under an authorization referred to in section 5' [2:3]. This is a crucial distinction for it meant that the actual production and sale of MMT was not banned and if Ethyl Corp could have gone on selling MMT for addition to unleaded gasoline if it established a manufacturing facility in each Canadian province. Thus articles 1102, 1106 and 1110 formed the basis for Ethyl's case. Of course, it would never have been possible to have a plant in every province and thus the Act was a de facto ban but that is not the point, as it stood the Act was discriminatory.
• There was significant dispute as to true danger of MMT: 'Before Ethyl filed its arbitration demand, four Canadian provinces had challenged the MMT ban under Canadian law on the ground that there was no adequate scientific basis for that federal action. The domestic arbitration panel hearing that claim agreed, finding the MMT ban arbitrary.' [3] 'In Canada, several reviews of health effects and risk assessments by Health Canada have found no evidence of significant health effects associated specifically with exposure to manganese from exhaust emissions. MMT itself was not considered a "priority substance" . . . .
  There have been a number of government efforts to ban or control MMT in Canada, although Environment Canada did not use CEPA to control the substance (probably because Health Canada’s risk assessments had found insufficient evidence of health effects and Environment Canada was not able to demonstrate sufficient air pollution effects).' [4:(3.1.2)]

S.D. Myers vs. Canada

S.D.Myers Inc (SDMI) was a company based in Tallmadge Ohio. Founded in 1965 it specialized in transformer oil testing, oil reclaiming, and rewinding, rebuilding, manufacturing transformers. In the early 1980s it had expanded its business to include PCB (polychlorinated biphenyl) remediation. In the early 1990s as the US market declined SDMI decided to expand into the Canadian market and created a subsidiary Myers Canada that obtained waste for treatment in the facility in the USA [6:15-16]. During 1970s PCBs were increasingly recognized as highly toxic substances and consequently their manufacture was prohibited and import and export severely restricted or banned (for greater detail see [6:17-20]). Nevertheless beginning in the early 1990s SDMI lobbied the EPA and the Canadian government to allow it to import PCBs from Canada into the USA for processing. This had the result that 'on October 26, 1995 the US EPA issued an enforcement discretion to SDMI, valid from November 15, 1995 to December 3 1, 1997, for the purpose of importing PCBs and PCB waste from Canada into the USA for disposal.' [6:21-22 (para 118)] Several points are to be emphasized at this point:
- SDMI was one of the foremost companies iin the USA, even the world, in processing PCBs
- There was only one company in Canada (Chhem-Security) suited to the task and it was located in Alberta
- Most of the Canadian sources of PCBs werre located in Ontario and Quebec closer to SDMI than Chem-Security
- These factors combined resulted in SDMI having a very significant cost advantage in processing while being at least the equal of any other option from an environmental viewpoint [6:20ff]
On Nov 20 Canadian Government issued an interim order banning the export of PCBs. On 26 February 1996 this became a final order and finally in February 1997 the ban was lifted. SDMI's claim for compensation rested upon this denial of access to the Canadian market for a period of 16 months citing in particular Article 1102 National Treatment [6:para 130-3] 1105 Minimum Standard of Treatment [6:para 134-6] 1106 Performance Requirments [6:para 137-41] 1110 Expropriation [6:para 142-3]. The following contains extracts from the conclusions of the Arbitration panel:

1. The Export Ban:
   • 'The Tribunal can only characterize CANADA’s motivation or intent fairly by examining the record of the evidence as a whole.
     The evidence establishes that CANADA’s policy was shaped to a very great extent by the desire and intent to protect and promote the market share of enterprises that would carry out the destruction of PCBs in Canada and that were owned by Canadian nationals. Other factors were considered, particularly at the bureaucratic level, but the protectionist intent of the lead minister in this matter was reflected in decision-making at every stage that led to the ban. Had that intent been absent, policy makers might have reached a conclusion in November 1995 that would have been consistent with the conclusion reached by CANADA when the ban was lifted in February 1997. CANADA’s view in 1997 was that the opening of the U.S. border should be welcomed in the interests of expediting the elimination of PCBs from the environment, provided that any risks associated with exporting PCB waste to the U.S. was minimised through proper regulations and safeguards.' [6:para 161-2]
   • Following paragraphs support this position by showing a) that prior to the US opening of the border Canadian officials considered that disposal in the US '..a technically and environmentally sound solution to the destruction of some of Canada’s PCBs.' [6:para 164-7] b) that there was a conscious desire to promote Canadian disposal for economic reasons (i.e. to promote the Canadian PCB disposal industry) [6:para 168ff]. In fact these sections make clear how environmental justifications were created for what were in reality politically motivated actions (e.g. para 186 which is particularly disturbing).
2. The Basel Convention: The main point to be clear on is that the convention did not ban absolutely any transborder disposal of toxic substances. The convention commits it participants
   • 'to ensure the availability of adequate disposal facilities, to the extent possible, within its own boundaries (Article 4(2)(b));'
   • 'ensure that the transboundary movement of hazardous wastes and other waste is reduced to the minimum consistent with the environmentally sound and efficient management of such wastes and is conducted in a manner which will protect human health and the environment against the adverse effects which may result from such movement (Article 4(2)(d)).' [6:para 211]
   • Article 11 expressly allows parties to enter into bilateral or multilateral agreements for the cross-border movement of waste, provided that these agreements do not undermine the Base1 Convention’s own insistence on environmentally sound management. So far as CANADA and the USA were concerned, Article 11 clearly permitted the continuation of the Transboundary Agreement with its emphasis on including cross-border movements as a means to be considered in achieving the most cost-effective and environmentally sound solution to hazardous waste management. [6: para 213]
   This was clearly acknowledged by the Canadian Government: ' "Export of PCB waste from CANADA to the U.S. is consistent with the CANADA-U.S.A. Agreement on the Transboundary Movement of Hazardous Waste. Furthermore, the Canadian position at the Third Conference of the parties to the Base1 Convention was to use facilities in other OECD countries where we could be sure that hazardous wastes would be managed in an environmentally sound manner for final disposal." '[6:para 182] (quoting Mr Hillborn a Canadian Environment Department Official 15-Nov-1995)

References

1. NAFTA Cases Page at Appleton Law
2. Arbitration Panel's Jurisdiction Ruling in Ethyl Case [24/06/1998]- On the Appleton Law website (this is a large document ~ 1.29 MB)
3. NAFTA'S Chapter 11: Regulatory Takings Revisited - Article by Stephen Kass in the Newsletter of the North American Institute [? Nov-2001]
4. Methylcyclopentadienyl Manganese Tricarbonyl (MMT) Case Study - Detailed look at Canadian regulatory actions about MMT including information on health risks
5. NAFTA Chapter 11 Investor-to-State Cases: Bankrupting Democracy (on site version) [Public Citizen September 2001]
6. Myers Final Merit Award [Arbitration panel 13-Nov-2000] - On Appleton Website

Notes

1. The following is a brief email correspondence:
   • [27/04/02]
     Dear Ms Bottari,
     I read with interest your article'NAFTA's Investor ''Rights'': A Corporate Dream, A Citizen Nightmare' on the corpwatch website (orginally in the Multinational Monitor). I am particularly interested in the case of the Ethyl corporation. NAFTA chapter 11 section 14 in relating to enviromental legislation states:
     1. Nothing in this Chapter [e.g. rules on compensation for expropriation] shall be construed to prevent a Party [e.g. Canada] from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.
     Thus Ethyl corp. could not have had an action simply on the basis of a ban of MMT for enviromental reasons. And in fact they did not. The basis for their case were Articles 1102, 1106 and 1110 and related to discriminatory treatment in that the Canadian govt had not prohibited the use of MTT per se but simply its import and interprovincial trade. Hence should Ethyl corp have had a manufacturing facility in each Canadian province it could have gone on manufacturing MMT and adding it to petrol quite happily. It is of course true that the Canadian Act de facto banned MMT but this is not the point. A Canadian ban on MMT or the addition of MMT to petrol would have been permitted, a ban on the importation of MMT would have been clearly discrimatory and therefore was not permitted. Thus I cannot see how the Ethyl case can be used as an example of NAFTA undermining the ability of countries to pursue their enviromental concerns.
   • [Mary Bottari Replies 30/04/02]
     Thank you for contacting Public Citizen. The "environmental protection" paragraph in ch 11 is circular and meaningless. As far as I can see, it has never been taken seriously by any NAFTA panel in looking at any of the numerous environmental disputes. The import of the Ethyl case is the first major NAFTA threat immediately made the govt back down. They did it again with SD Myers and again with Phillip Morris and heaven knows how many threats have been lodged in secret because this info is not publicly available. Phillip Morris is now threatening a new suit against a Canadian tobacco labelling law, it will be interesting to see if that one disappears as well.
     For a more in depth discussion of the Ethyl case and the many other nafta cases, see our report on the public citizen web page at http://www.citizen.org/trade/nafta/CH__11/
   • [I reply 30/04/02]
     Dear Ms Bottari,
     I thank you for your swift reply. However I do feel neither your reply nor the document 'NAFTA Chapter 11 Investor-to-State Cases: Bankrupting Democracy' (hereafter referred to as BD) address the issues I raised in relation to the Ethyl case. In fact I feel BD misrepresents the case in exactly the way I was pointing out. For example we have the subtitle Pay the Polluter (p. 9) when more accurately the intent of the result was 'pay the discriminated against'. The fact is that the Canadian government's ban was discriminatory (although it is of course clear that its intent was enviromental). Finally it is unclear to me what questions of enviromental nature were actually involved in the case as fought since it was never suggested that it would have been illegal if Canada had simply banned (or strongly regulated) MMT rather than restricting its import and transport.
     There is a similar level of, let us say, selective reading in the case of S.D. Myers (wher I have read the final judgement). Examples:
     Investor Rights did not trump enviromental regulations. The tribunal did consider carefully the relation of the Basel convention with respect to this case. They felt that disposal in the US was in line with Basel accords allowing as it did a method as safe if not safer as disposal in Canada. And it does seem to me their view on this matter was entirely reasonable from all points of view (enviromental included).
     Don't bother me with the law: from what I could understand of the case though theoretically illegal to import PCB's into the US a) there was a special understanding on hazardous waste disposal from 1990 and b) the EPA had given an official go ahead to SD Myers making quite clear that this case had a practial exemption in that the EPA would not take any action.
     
     It seems to me that the main consequence of NAFTA has not been to prevent enviromental regulation but rather to make lawmakers more attentive to the exact method of implementation.

Mail any comments or corrections to comments@thefactz.org
Created: 27-Sep-2002
Last Updated: 07-Oct-2002
Copyright 2002 R Pollock