Foreign Investor Protection Under NAFTA Chapter 11
Foreign Investor P rotection Under NAFTA Chapter11
C h apt er 1 1 o f t he Nort h A m eri can Free Trade A gre e m ent (NAFTA) affords
various protections to investors o f one sign atory n ation h a v i n g i nvestments i n t he
territory of another. Such foreign-invest or protections ex ist i n t he large m ajority of
modern bilateral i nvestment treaties, but NAFTA is different. NAFTA is apparently
the only i nstance where such protections , i ncluding a m e c h anism for resolving
investor-state disputes by binding arbitration, have been made available for use
against t he United S tates b y countries (Mex ico and Canada) t hat i nvest heavily in the
U.S. NAFTA, t hat i s, has created not only t h e l e g al possibility of investor claims
agai nst t he United S tates, but the actual occurrence of them as well.
Th e “ act ual occurrence” of several m ulti-million-dollar arbitration claims
against t he U.S. under C hapter 11 has s parked a lively d ebate as t o t h e p recise
content of t he substantive obligations it imposes on the NAFTA parties – and as t o
whet her t he cl aims of foreign i nvestors might chill enforcem ent o f l egitimate
go v e r n m e n t regu l at i o n i n t he publ i c i n t erest . W hi l e t h e U.S . h as won each of t h e
three finally decided arbitrations to date, one could argue that the hour is still early.
In response t o s uch concerns, t he Bi partisan Trade P romotion Authority Act o f 2002
instruct s U.S. negotiators of future trade agreem ents to ensure that foreign i nvestors
in this country receive “no greater substantive rights” than U.S . investors under U.S .
law. The Act does not apply t o NAFTA.
Part I o f t he report s ummariz es t he arbitration p rocedure u sed when an i nvestor
from one NAFTA party believes t hat another NAFTA party (or one of its political
subdivisions) h as breached an obligation unde r C hapter 11, and t he investor suffered
Part II ex amines one of the t wo most-debat ed Chapter 11 obligations imposed
on the parties: the “fair and equitable t reatment” of forei gn investors. An important
clarification o f t his p h r ase came i n 2001, when the Free Trade Commission
established under NAFTA declared that fa ir and equitable t reatment creates no free-
standing standard, but refers only t o ex i stin g customary internat ional law establishing
minimum s tandards of t reatment for aliens. However, customary international l aw
offers few clear principles.
P art III t reat s t he ot her w i d el y d ebat e d C h apter 1 1 p rovision, on indirect
ex propriation. A claim of indirect ex propr iation i s m ade when an i nvestor believes
that his/her i nvestment in another NAFTA country has b een so severely regu lated as
t o have been effect i v el y ex p ropri at ed. S u ch cl ai m s have l ong been recogn i z e d i n
international l aw; t he importance of NAFTA is that it has given rise to a s ignificant
n u m b e r o f t hem, incl uding, for the first time, s everal agai nst t he United S tates. A s
with fair and equitable t reatment, t he meaning of i ndirect ex propriation i s uncertain,
owing t o s carce precedent, though i t i s clear the impact must be substantial.
Fi nally, P art IV d escribes the ro u g h l y 2 0 claims filed s o far under NAFTA
Chapter 11, including the s ix against t he U.S.
In troduction ......................................................1
Bipartisan TradePromotionAuthorityAct ..........................4
I. NAFTAChapter11ArbitrationProcedure ............................5
BeforetheClaim is Filed ........................................5
TheFinal Award andAfterwards ..................................7
II. FairandEquitableTreatment ......................................9
III. In d i r e c t E x p r o p r i a t i o n ..........................................11
IV.Claims FiledUnderNAFTAChapter11 ............................14
Claims againsttheUnitedStates .................................15
Claims againstCanada .........................................17
Claims againstMexico .........................................19
Foreign Investor Protection
Under NAFTA Chapter 11
Beginning in 1962, over 1,800 bilateral i nvestment treaties h ave b een negotiated
throughout the world, t he large m aj ority after 1990.1 The United S tates itsel f i s a2
party t o 46, and s everal more are now, o r s oon will be , under n egotiation. The
purpose o f t hese agreements is to protect foreign i nvestment in the host country, and
– important here – t o p rovide a b inding arb itration m echanism for resolving disputes
between investor and host country. Almost al ways , U.S. b ilateral i nvestment treaties
have been with developing countries or emergi ng economies, which i nvested
minimally in the U.S. Thus, t here was little occa s i o n fo r forei gn-investor cl aims
Closely t racking t he foreign-investor protect i o n s i n the m odern bilateral
i n v estment treaties i s t he investment chapter – Chapter 11 – of t he trilateral N o r t h3
Am eri can F r e e Trade A greem ent (NAFTA). This report focuses on NAFTA
Chapter 1 1 b ecause since NAFTA to o k e f f e c t on J anuary 1, 1994, it has b een
apparently the only i nstance where an investor-state arbitration m echanism has been
made available for use against the United S tates b y countries (Mex ico, and especially
C a n a d a ) t h at i nvest heavily in the United S tates. NAFTA, t hat i s, has creat ed n o t
only t he legal possibility of foreign-investor cl aims agai nst t he United S tates, as the
bilateral i nvestment treaties do, but the actual occurrence of them as well.
The “act ual o ccurrence” of NAFTA C h apt er 1 1 cl ai m s agai nst t he U.S . h a s
sparked a vigo rous and m ultifaceted debate in th i s country. Is there any precise
content t o t he substantive obligations imposed on the s ignatory nations by Chapter
11? Are t here infringement o f s overeignty o r d elegation i ssues, as when N A F TA
arbi t rat i o n p anel s revi ew d eci si ons of U.S . court s ? 4 S hould p anel proceedings be
1 T he number e xceeds 2,000 if regi onal i nvestment t reaties a re included.
2 Four of the 46 t reaties have not ye t e ntered into force. F o r a d e scription of t he U.S.
bilate r a l i n ve s t ment t reaty progr am and a listing of t he treaties, go to
[ ht t p: / / www.st at e.gov/ e/ eb/ r l s / f s/ 22422.ht m] . See also K enneth J . V andevelde, The
Bilateral I nvestment Treaty Program of the United States , 21 Cornell Int’l L. J . 201 (1988).
3 H. Doc. No. 103-159, vol. 1, pp. 712 et seq.; 32 I.L.M. 289 (1993) (chs. 1-9), 32 I.L.M. 605
(1993) (chs. 10-22). T he Nor t h Ame rican Free T r ade Agr eement Impleme ntation Act,
enacted Dec. 8, 1993, is at 19 U.S.C. § 3301 et seq.
4 See, e.g., Curtis A. B r a d l e y, International De legations, t he Structural Constitution, and
Non-Self-Execution, 55 Stan. L. Rev. 1557 (2003); Patrick T a ngney, Th e N ew
required t o b e open t o t he public, gi v en their importance for larger public policy
issues in the respondent nation? Should p an el decisions be reviewable by domestic
courts? M ost s i gnificantly, might Chapter 1 1 claims by foreign i nvestors, and t he
prospect of large dam ages awards, chill the enforcem ent of l egitimate government
regulations enact ed in the public interest, s uch as t hose protecting t he environment? 5
Underlyi ng this last q u e s t i o n i s t he concern o f s ome t hat C hapter 11 may confer
greater righ ts on foreign i nvestors i n t his country than are available t o U.S. i nvestors
under domestic law. This concern i n connection with the ex propriation provisions
in the p roposed Multilateral Agreement o n Investment 6 reportedly hel ped s cuttle the
agreem ent , t h e n egot i at i n g t ex t o f w hi ch “ori gi nal l y i n corporat ed a com pensat i o n
requirement iden tical to that of NAFTA.”7
While the United S tates h as w o n e ach of the t hree finally deci ded NAFTA
Chapter 1 1 claims against it, some observers argu e t hat t he hour is still early and t hat
one or t wo o f t hose wi n s were i n easy cases. Ot h er vo i ces cont end t o t he cont rary
t h at such concerns are overbl o wn, and t h at grant i n g forei gn i nvest ors great er
protection t han i s available t o l ocals (if, i n fact, t hat i s t he case under NAFTA), and
a d ispute-resolution m echanism t o b ack it up, are j ustifiable as a quid p ro quo for
obtaining an accept a ble degree of protection abroad for U.S. investors. Nor, they
argu e, should t he United S tates give u p o n t he time-tested m echanism o f i nternational
arbi t rat i on, si m p l y because i t i s now on t h e recei vi ng end o f i nvest or cl ai m s .8
The C hapter 1 1 cl aims filed s o far have alleged violations of the following
substantive obligati o ns imposed on the U nited S tates, Canada, and Mex i co by that
Article 1102: Nati onal Treatment. Each NAFTA part y m ust “accord t o
i nvest ors o f anot her p art y t reat m ent no l ess favorabl e t h an t h at i t accords,
in like circumstances, t o its own i nvestors ....”
Article 1103: Most-Favo red-Nation T reatment. Each party m ust afford
investors o f another p a r t y, and thei r i nvestments, “t reatment no less
Internationalism: The Cession of Soverei gn Competences to Supranational Organizations,
5 Several of t he Chapter 11 c a s e s s u b mi t t ed to arbitration so f ar involve environmental
regulation. See section IV o f t his r eport. See generally Da vi d A. Ga n t z, Reconciling
Environmental Protection and Inves tor Rights Under Chapter 11 of NAFTA,31Envtl.L.
Rptr. 1064 6 ( 2001); J . M artin Wagner, International Investment, Expropriation, and
Environmental Protection , 29 Golden Gate U. L. Rev. 465 (1999).
6 Negotiated unde r t h e a u spices of the Organization f or Economic Cooperation a nd
7 Vicki Been and J oel C. Beauvais, T h e G l obal Fifth Amendment?: NAFTA’s I nvestment
Protections and the M isguided Quest for an I nt ernational “Regulatory Takings” Doctrine ,
8 See, e.g., Guillermo Aguilar Alvarez and William W. Park, The New Face of Investment
Arbitration: NAFTA Chapter 11, 28 Yale J . Int’l L. 365 (2003).
f a v o rabl e t han t hat i t accords, i n l i k e ci rcum s t ances” t o i nvest ors a n d
investments o f i nvestors o f any other p arty, o r o f a non-party.
Article 1104: Standard of Treatment. Each party m ust afford investors
of another P arty, and their i nvestments, “t he better of t h e treatment
required b y Articles 1102 and 1103.”
Article 1105(1): Minimum Standard of Treatment. “Each P art y s hal l
accord t o i nvest m ent s o f i nvest ors o f anot her Party t reat m ent i n accordance
with international l aw, i ncluding fair and equitable t reatment and full
protection and security.”
Article 1106: Perf orma nce Requirements. No party m ay impose
specified requirements o n t he inves tments o f i nvestors o f a party o r non-
party, incl u d ing “to ex port a gi ven l evel or percentage of goods or
servi ces” o r “t o achi eve a gi v en l evel o r p ercent age of dom est i c cont ent . ”
Article 1110: Exp ropriation and Comp ensation. “No P art y m ay
directly or in d i rectly nationalize or ex propriate an investment of an
investor of another P arty in its territory or take a m easure t a n tamount to
nationaliz ation o r ex p ropriation o f s uch an i nvestment ..., ex cept (a) for a
public purpose; (b) o n a non-discriminatory b asis; (c) in accordance with
due p r o c e s s o f l aw and Article 1105(1); and (d) o n p ayment of
These C hapter 11 obligations mirror t hose i n m any earlier (and l ate r ) b i l a t eral
Of the C hapter 11 provisions listed, Ar ticles 1105 and 1110 have garnered far
and away t he most attention. The ambiguity of key phrases in those p rovisions – “fair
and equitable t reatment” i n Article 1105, an d “indi r e c t l y ... ex propriate” i n Article
1110 – p lays into the fear of some, and the hope of others, t hat foreign investors i n
the U.S. m ay use C h a p t er 1 1 arbitration t o obtai n m ore favorable rulings than are
available under U.S. l aw to native i nvest ors. An illustration i s Glamis Gold Lt d., a
C a n adian company t hat recently filed a no tice o f i ntent t o s eek arbitration under
C h apter 11, based o n environmental hurdl es erect ed by C al i forni a t o a m i n i n g
proposal by its U.S . subsidiary. According t o a report, the company “acknowledges
t h at i t i s prepari n g t he C h apt er 1 1 com pl ai nt because i t i s easi er t han t r yi n g t o g e t
compensation t hrough t he U.S. courts.”9
Part I of t his report r ev i e ws the NAFTA arbitration procedure s et in motion
when an investor from a NAFTA sign atory c ountry files a Chapter 1 1 claim. Parts
II and III then summarize the debat e over t he two NAFTA Chapter 11 articles now
generating t he most heat: Article 1105(1), calling for “fair and equitable t reatment,”
and Article 1110, on ex propriation and compen sation. Fi nally, P art IV o ffers nutshell
summaries of the NAFTA cl aims filed s o far.
9 Inside U.S. T r ade, Aug. 8, 2003.
Note: N AFTA arbitral decisions (called “ awards”) cited i n t his
report can be found at websites operated b y t he U. S.
Department of State, [ http://www.state.gov/s/l/c3439.htm] ; t he
C anadi an government, [http://www.dfait-maeci.gc.ca/ t na-
nac/NAFTA-e.asp] ; o r a p r i v a t e a t t o r n e y
Bi par t i san Tr ade P r omoti on Author i t y Act
Though t his report homes i n on NAFTA, i t s hould not negl ect future trade
agreem ents entirel y. This brings up the Bipartisan Trade P romotion Authority Act
(TP A ), 10 enacted Augu st 6, 2002, which governs t he nego tiation o f U.S. free t rade
agreem ent s aft er t hat d at e. 11 Th e T P A set s out “pri nci p al t rade-agreem ent
negotiating objectives ” for the U.S . i n t h e area of foreign i nvestment. W hat i s
important here, s everal of these objectives direct l y r e s pond to cr iticisms leveled at
NAFTA C h apt er 1 1 over t he years, seeki n g to ensure t hat its perceived flaws are not
replicat ed in later t rade agreem ents. A prominent ex ample is the TPA instruction t hat
U.S . t rade n egot i at o rs ensure i n fut u re t rade agreem ent s “t hat forei gn i nvest ors i n t he
Uni t ed S t at es are not accorded great er subst ant i v e ri ght s wi t h respect t o i nvest m ent
protections than United S tates i nvestors i n t he United S tates ....”12 Thi s “no great er
ri gh t s ” g o a l w as i n cl uded l argel y t o addres s concerns that foreign i nvestors i n t his
country may (once t he na s c e n t case l aw develops further) receive more favorable
treatment for t heir NAFTA indirect -ex propriation claims than do Am ericans
investing h ere under domestic “regulatory t akings ” l aw.
W h i l e “no great er ri gh t s ” guards agai n st di vergence from U .S . l aw on t h e h i gh
side, other TPA provisions will work to minimize divergence i n either direction.
T h us, t he TPA i nstructs U.S. trade n egotiators to pursue s tandards for b o t h
ex propriation and fair and equitable t reatment that are “consistent with United S tates
legal principles and practice.”13 As t o fai r and equi t abl e t reat m ent , t he TP A d ecl ares
that U.S. legal principles i nclude “the principle o f due process.”
Other TPA provisions seeking t o ameliorat e percei ved d efect s i n C hapt er 11 call
for m echanisms in future trade agreem ents that eliminat e frivolous cl aims, enhance
opportunities for public input into the formulation of government positions, provide
for an appellate body, and create greater tran sparency (e.g., by making all h earings
10 Pub. Law No. 107-210, T itle XXI.
11 Being prospective only, the T PA does not direct the r e n e go t i a tion of a ny NAFT A
12 T PA § 2102(b)(3); 19 U.S.C. § 3802(b ) ( 3 ) . T he l egislative history makes abundantly
clear that this language does not apply t o procedural issues, s uch as exhaustion of r emedies
and access t o a ppellate procedures. H.R. Conf. Rep. 107-624, at 156 (2002).
13 T PA § 2102(b)(3)(D)-(E); 19 U.S.C . § 3802(b)(3)(D)-(E). See generally Ethan
Shenkman, Could Principles of Fifth Amendment Taki n g s Jurisprudence Be Helpful in
Analyzing Regulatory Expropriation Claims Under I nternational Law? , 11 N.Y.U. Envtl.
These TPA provisions alread y h ave s haped t he investor-state dispute p rovisions
in the t wo free t rade agreem ents – with Chile and S ingapore – signed by the United
S t at es si nce i t s enact m ent . 14 These agreem ent s are l i k el y t o b e a m odel for t h e n ex t
generation o f foreign -investor provisions in U.S. free t rade agreements. (Now under
nego t i at i o n b y t he U . S . are t wo regi onal free t rade agreem ent s – C ent ral Am eri can
Free Trade Agreem ent and U.S . -S out h A f r i c a n C u st om s Uni on Free Trade
Agreem ent – and s everal bilateral free t rade agreem ents.) In light of the prototype
status of Chile and S ingapore, this report i ndicates the changes from NAFTA to those
agreements in footnotes throughout Parts I, II, and III. 15
Parenthetically, t he TPA does not legally apply t o bilateral i nvestment treaties,
which are approved b y S enate advise and consent rather t han t he bicameral passage
and p residential s ignature route o f free t rade agreements. Non e t h e l ess, one may
ex pect t h at as a p r a ct i cal m at t er, t h e T P A provisions governing foreign -investor
protections in free t rade agreements will be influential i n U.S. negotiation of future
bilateral i nvestment treaties as well.
I. NAFTA Chapter 1 1 Arbitration Procedure
Before the Claim is Filed
W h en an investor from a NAFTA party b e lieves t hat another NAFTA party (or
a political subdivision thereof) has b reach ed an obligation under t he Agreement, and
the i nvestor has s uffered l oss as a result, NAFTA instructs t hat t he investor should
attempt first to n e go t i a t e a res olution.16 Pursuit of negotiation i s not mandatory,
however – nor is resort to the courts under domestic law.17 NAFTA gi ves t he
investor the right to file a claim for arbitration against the allegedly offending nation
at any time,18 as long as the i nvestor delivers written notice of its intention t o file a
14 Implementing l egislation was signed by the President on September 3, 2003: P u b . L a w
No. 108-77 (Chile); Pub. Law No. 108-78 (Singa pore).
15 See generally J ohn D. Echeve rria, Changes i n t he Investor-State Litigation Process As a
Result of the Chile and Singapore Trade Agreements, f ound at
[ ht t p: / / www.ge or ge t own.edu/ ge l pi / paper s/ i nve st or st at e.pdf ] .
16 Article 1118.
17 An exception r ecently was recognized in the final award in The Loewen Group, Inc. v.
U n i t ed States ( 2003). When t he Chapter 11 claim is based on a judicial action of t h e
respondent, t he claimant first must exhaust opportunities f or appellate revi ew.
18 Articles 1116 (claim by an investor of a party on its own behalf), and 1117 (claim by an
investor of a party on behalf of an enterprise). T he principal d i fference between claims
brought under t he two articles i s t hat with Article 1116 claims , any damages r ecovered are
paid directly t o t h e i nvestor; with Article 1117 claims, damages recovered are paid to the
enterprise, not the i nvestor. T o date, most arbitration claims under NAFT A Chapter 11 have
been filed under Article 1117.
cl ai m at l eas t 90 days before filing19 and t he claim i s filed m ore t han s ix months after
the events giving rise t o t he cl aim.20
Nor n e ed t he investor obtain t he permission or participation of its own
government, a departure from t he customar y p r a c t i c e i n i nt ernat i onal l aw whereby
grievances of individuals against forei gn governme nts are asserted by their
governments o n t heir behalf. The investor, however, m ust waive its righ t t o a
p r o ceedi n g b efore any agency or court as t o t he m easure al l eged t o b e a N A F T A
breach, ex cept for proceedings seeking “ex traordinary relief” not involving monetary
damages (such as an injunction). 21
The claim must be filed against the party (i.e., the national government) even
if the allegedly offending conduct was by a political subdivision (state or local
government) o f t he party.
After the Claim i s Filed
Following the investor’s filing of a cl aim, the i nvestor and the respondent
nat i o n s e l ect the m embers of the arbitra tion t ribunal. (There is no permanent,
standing tribunal.) The panel generally comprises t hree arbitrators. 22 The disputants
al so sel ect a p l ace of arbi t rat i on. 23
Besides t he filings of the p arties, the t ribunal m ay recei v e input from ex p erts
appointed by it to report b ack on factual i ssues,24 and from NAFTA si gn at ori es o t h er
than the respondent on questions of NAFTA interpretation. 25 In addition, Chapter
19 Article 1119.
20 Article 1120. Another time constr a i n t e n s u r es t hat claims are not filed t oo late:an
investor may not make a claim if more than three years have passed from when t he investor
(or t he enterprise) f irst acquired, or shoul d h a ve f irst acquired, knowledge of t he alleged
breach and knowledge t hat t he investor (or enterprise) has i ncurred l oss or damage. Ar ticles
21 Article 1121(1)(b). Where an i nvestor makes a claim on behalf of an enterprise, both t he
investor and t he enterprise must waive t he ri ght t o l ocal proceedings . Article 1121(2)(b).
22 Ar ticle 1123. One arbitrator is appointed by each of the disputing parties, with the t hird,
presiding a r b i t r a t or chosen by agreement of s uch parties. If the disputing parties cannot
agree on t he presiding arbitrator, t hat person i s a ppointed by the Secretary-General of t he
W o r l d B a n k’ s In t e r n a t i o n a l C e n t r e f or the Settlemen t o f In ve s t o r Di s p u t e s ( c o mmo n l y c a l l e d
“ICSID”), r egardless of whether the i nvestor has elected to use t he ICSID or United Nations
Commiss ion on International T rade Law ( commonly called “ UNCITRAL”) arbitration rules.
Ar bitrators t ypically are drawn from t he ranks o f i nternational-law academics and
practitioners, and former government officials.
23 So far, the United States has been chosen as the place of arbitration f or all claims i n which
the United States i s a respondent.
24 Article 1133.
25 Ar ticle 1128. T his provision does no t author ize t he tribunal t o r eceive opinions by the
non-respondent Parties on t he application of NAFT A provisions to the f acts of t he case.
groups,26 but that they are without power to allow i nte r v e n t i o n a s a party. 27 In
response t o t he concerns of some observers as to the l ack of transparency in NAFTA
arbitral proceedings , t he Free Tra d e C ommission established under NAFTA
instruct ed arbitral panel s t o m a ke public al l documents submitted t o, or issued by,
them, su b j ect t o l imited redaction.28 However, there i s s till no obligation t o allow
publ i c access t o p anel proceedi n gs , unl ess bot h p art i es agree. 29
The arbitral tribunal m ust d ecide the i ssues “in accordance with [ NAFTA] and
appl i cabl e rul es o f i nt ern a t i o n a l l aw.”30 Am pl i fyi ng on “i n accordance wi t h
[NAFTA],” t he Agreem ent s tates t hat t he parties s hall interpret its provisions in light
of its objectives, i ncluding “facilitat[ ing] the cross-border m ov em ent of goods and
services” and “increas[ i ng] s u b s t antially investment opportunities i n t he territories
of the P arties.”31 Bu t t h e r e i s n o stare decisis as i n Am eri can l aw. 32 Previous
decisions of NAFTA tribunals are b inding only as b etween the d isputing p arties and
wi t h respect t o t h e p art i cul ar case, 33 though obviously a well-reasoned earlier
opinion may prove influential.
The Fi nal Aw a r d and After w ar ds
If the t ribunal d ecides for the i nvestor, i t m ay award only compensati o n
(compensat ory dam ages , i nteres t, and costs, but not punitive dam ages ) or res titution
26 The r ulings came i n Methane x C o r p. v. United States and United Parcel Service of
America v. Canada, and were limited t o proc eedings under t he UNCIT RAL a rbitration r ules.
In both cases, t he tribunals defer r ed to a l ater stage whether to actually accept t he amicus
27 See, e.g., United Parcel Service v. Canada Award on J urisdiction ( 2002). Both t he Chile
and Singapore agr eements authorize arbitral panels to accept and consider amicus briefs, but
are silent as to intervention.
28 The Free T rade Commi ssion consists of t h e t h r e e trade ministers of the NAFTA
signatorie s a n d is charged with, among other t hings, resolving questions of NAFT A
interpretation. Article 2001(1). T he Co mmissi on’s i nterpretations are binding on the
arbitration t ribunals. Article 1131(2).
The particular Commi ssion interpreta t i o n r eferred t o i n t he text was i ssued J uly 31,
29 Reflecting t he T PA mandate, t he transparency of investor-state arbitrations is extensively
addressed i n t he Chile and Singapore agr eements. A wide variety of documents related t o
the arb i t ration are to be made available t o t he public, and hearings are t o be open t o t he
public – with appropriate exceptions for confidential or privileged i nformation.
30 Article 1131(1).
31 Article 102.
32 Stare decisis is the l ong-established doctrine i n American law t hat once a court has laid
down a principle of l aw, i t will adhere to that pr i n c i p l e i n f uture cases, unless t here is
compelling r eason not to do so.
33 Article 1136.
of property. 34 Injunctive relief i s not available. Unlike W orld Trade Organization
dispute p anels, NAFTA arbitration t ri bunals cannot recommend that sign atories
change their l aws o r policies. A fortiori, t hey cannot compel such changes.
In the event of a compensation award based o n t he action o f a nation’s political
subdivisions , t he obligat i o n t o p ay nonetheless accrues t o t he national government
– which, after all, was t he respondent. It i s b eyond NAFTA’s concern whether the
respondent nation m ay or should s eek reim bursement from its political component;
that is solely a domestic matter. The United S tates has yet t o enact any such
reimbursement mechanism. By contrast, U .S. l aw does s peak to how inconsistency
with NAFTA aff e c t s t he validity of a s tate law. No stat e or l ocal law, says the
NAFTA implementing s tatute, m ay be decl ared invalid due to NAFTA inconsistency
– w het h er or not preceded by a NAFTA panel d ecl ari n g s uch i nconsi s t ency – ex cept
in an action brought by the United S tates t o decl are t he law i nvalid.35 S u ch act i ons
by the U.S. are to be used only as a last resort, when cooperative efforts fail.36
W h at if either claimant or respondent is unsatisfied with the t ribunal’s d ecision?
NAFTA creates no appellate body, 37 but the party can seek limited relief i n t he
courts, under either the C onvention o n t he Recogn ition and Enforcement o f Foreign
Arbitral Awards,38 or the arbitration statute of the place of arbitration. By ei t h er
avenue, t he grounds for review u sually are narrower t han with judicial a ppeals o f
actions by the complainant’s own govern ment. Under Article V of t he Convention,
a party nation m ay refuse recognition and enforcem ent of t he deci sion on proof to a
court t hat t he decision deals with a m atter beyond the s cope of the s ubmission to
arbitration, is contrary to the publi c p olicy o f t hat country, o r o ffends other Article
V p rovisions. Under t he Federal Arbitration Act, grounds for a district court t o s et
as ide t he arbitral deci sion incl ude that the arbitrat ors were m anifes tly partial or guilty
of misconduct, or “ex ceeded their powers.”39 Neither of these avenues for review
allows the court t o s econd-gu ess t he arbitral tribunal o n t he merits.
34 Ar ticle 1135. An award of r estitution of property must provi de that the r espondent nation
may pay monetary damages i n lieu of r estitution.
35 North Ame rican Free T r ade Agr eement Impleme ntation Act § 102(b)(2)-( 3); 19 U.S.C.
§ 3312(b)(2)-(3). See also Sanitary Dist. of Chicago v. United States, 266 U.S. 405, 425-26
(1925) (Attorney General may sue s tate to enj oin actions i n consistent with U.S. treaty
obligations; no statute is needed to authorize such suits).
36 North American Free T r ade Agr eement, Statement of Administrative Action 12, reprinted
in H. Doc. 103-159 vol. 1, at 450 (1993).
37 The T PA establishes as a principal negotiating obj ective of t he U.S. the creation of j ust
such an appellate body. 19 U.S.C. § 3802(b)(3)(G)(iv) . T he Chile and Singapore
agreements obliga t e t he parties t o “consider” within three years whether to establish a
bilateral appellate body.
38 21 UST 2517, T IAS 6997 (“New York Convention”). T his treaty e ntered into force f or
the United States on December 29, 1970.
39 9 U.S.C. § 10(a).
II. Fair and E quitable Treatment
NAFTA Article 1105, titled “minimum s tandard of treatment,” instructs i n its
m u ch-debat ed sect i o n 1 t hat :
Each P a r t y s hal l accord t o i nvest m ent s o f i nvest ors o f anot her
P art y t reat m ent i n accordance wi t h i n t ernat i onal l aw, i ncl udi ng
fair and equitable t reatment and full protection and security.
This standard dates back to negotiating efforts at m ultilateral i nvestment treaties after
W o rl d W ar II, and i s i ncl uded, wi t h som e vari at i on, i n t h e v ast m aj ori t y of recent
bilateral i nvestm e n t t r e a ties. A k ey purpos e i s t o guarantee the foreign investor a
minimum standard o f t r eatment not contingent on domestic law i n t he event t hat
national t reatment and m ost-favored-nation t reatment b y t h e h ost country are not
adequate. 40 But what constitutes “fair and equitable t reatment”? Notwithstanding
the ubiquity of the phras e, there i s little cas e l aw or other authoritative i nterpret ation.
W hat little ex ists is quite recent.41 S t at es one com m ent at or:
The concept o f fair and equitable t re a t m ent is not precisely
defined. It offers a general point of departure i n formulating an
argu ment that the foreign investor has not been well treated by
reas on of discriminat ory or other unfai r m eas ures being t aken
agai nst its interests. It is, t herefore, a concept t hat d epends on
t h e i nt erpret at i o n o f s peci fi c fact s for i t s cont ent . At m o st , i t can
be said that the concept connotes t h e p rinciple of non-
discrimination and proportionality in the t reatment o f foreign
Fo r NAFTA purposes, t he most important cl arification of t he fair and equitable
stan d a r d is that by the Free Trade Commission, issued J uly 31, 2001. This
clarification was issued in response t o “wh at [ t he NAFTA Parties] apparently feared43
was a growing p ropensity of arbitral tribunal t o i nterpret Article 1105 ex pansively, ”
which h ad resulted i n s everal govern ment-adver s e t ribunal awards under t he44
Article. Quoting t he relevant part in full –
40 See, e.g., United Nations Conference on T r a d e a nd Deve lopment, Fair and Equitable
Treatment 16 (1999).
41 See generally J . C. T homas, Reflections on Article 1105 of NAFTA,17ForeignInvestment
L.J . (ICSID) 21, 22 (2002) (Article 1105(1) is “the most hotly disputed of all Chapter Eleven
42 Peter Muchlinski, MULTI NATI ONAL ENTERP RI S ES AND THE LAW 625 (1995).
43 Al an C. Swan, NAFTA Article 1105: Regulatory Reform and the Search f or Good
Governance , paper delivered at Symposium on t he Emergi ng Law of Foreign Inve stme nt,
presented by t he D.C. Bar International Law Section, J an. 8, 2003 (on f ile with author).
44 See, e.g., S.D. M eyers Partial Award (2000).
1. Article 1105(1) prescribes the customary international l aw minimum s tandard
of treatment of aliens as the minimum s tandard of trea t m e n t to be afforded to
investments o f i nvest ors o f another P arty.45
2. The concepts of “fair and equitable t r e a t m e n t ” and “full p rotection and
security” do not require treatment in addition t o or beyond that which i s required
by the customary international l aw minimum s tandard of treatment of aliens.
3. A d et erm i n a t i o n t h a t t here has b een a b reach of anot her p rovi si on of t h e
NAFTA, o r o f a separate international agreement, does not establish t hat t here
has b een a b reach of Article 1105(1).
W i t h a s i n gl e ex c e p t i on, t h e C om m i ssi on docum ent h as been accept ed b y al l
Chapter 11 p an el s t o consider the i ssue as a proper “interpretation” of NAFTA,
binding on future NAFT A panel d ecisions. 46 The C ommission interpretation
resolves a l ongstanding debate as to whether “fair and equitable t reatment” equates
with the minimum s tandard of international l aw or rather stat es an independent, s el f-
contained s tandard. 47 Under NAFTA at any rate, it does t he former – and no more;
the t ribunal m ay n o t set out its own i diosyncratic standard. The Commission
interpretation also m eans of necessity that a customary international l aw minimum
standard of treatment of aliens act ually ex ists with regard to investments.48
At the s am e t ime, t he Commission interpretation gives no hint as to the
substantive content o f t he relevant custom ary i nt ernat i onal l aw t o whi ch i t refers. To
be sure, t he arbitral deci s i o n s r endere d under NAFTA Chapter 1 1 s hed a bit m ore
light, but not much. The decisions tell u s that (1) t he customary i nternational l aw
45 “Customary international l aw results from a general and consistent practice of s t a t es
followed by t hem from a sense of l e ga l obligation.” RESTATEM ENT (T HI RD) OF FOREI GN
RELATI ONS LAW § 102(2) (1986). It i s t o be c ontrasted w ith other s ources of international
law: international agr eements and “general principles common t o t he maj or l egal systems
of the world.” Id. See also Statute of t h e In t e r n a tional Court of J ustice art. 38, 59 Stat.
1055, 1060, 1976 U.N.Y.B. 1052, 1055 (identifyi ng “i nternational custom, as evidence of
a general practice accepted as l aw” as one of four sources of international l aw).
46 Article 1131(2) says that an “int e r pretati on” of NAFT A by the Commi ssion is binding.
T he panel in Pope & T albot, Inc. v. Canada, however, c oncluded t hat t he FT C d o c u ment
was not an interpretation, but rather an “amendment,” which, under Article 2202, must be
adopted by a different procedure t han was used by the Commi ssion. T his conclusion was
dictum, however, i n t hat t he tribunal explicitly found it had no need to rule on the matter.
Award in Respect of Dama ge s ( 2002).
47 See Rudolf Dolze r a n d M a r gr e te Stevens, BI L ATERAL INVESTM E NT T REATI E S 59-60
48 In the Chile and Singapore agr eements, t he provisions regarding “mi nimum s tandard of
treatment” are changed r elative t o NAFT A Ar ticle 1105(1) to reflect each component of the
Commi ssion interpretation. T hus, t he new agr eements make explicit that (1) t he mi nimum
standard of treatment is “in accordance with customa r y i nternational l aw”; (2) f air and
equitable t reatment does not require treatment b e yo n d what is required by customary
international l a w ; a n d ( 3 ) breach of another provi sion of the agr eement, or of a s eparate
international agr eement, does not establish a breach of mi nimum s tandard of treatment.
that is the t ouchstone for Article 1105(1) is the customary international l aw of today,
not that of long ago, reflecting among ot her t hings t he ex plosion i n b ilateral
investment treaties s ince the 1960s; (2) wh at is unfair and inequitable n eed not equate
with the outrageous or egregi ous, nor does i t require bad faith or malicious intent; (3)
what i s unfai r and i n equi t abl e d epends on t h e fact s o f each case; and (4) som et h i n g
m o re than illegality or lack of authority under t he domestic law o f t he par t y i s
required. W ith specific rega r d t o j u dicial actions of the respondent Party, the
deci s i o n s say t hat t he t est i s whet her, havi ng regard t o accept ed s t andards i n t he
admi n i s t ration of j ustice, the court’s deci sion was “cl early improper and
discreditable.”49 A d ecision that is in breach of muni cipal l aw and i s d iscriminatory
against t he foreign litigant amounts t o m anifest i njustice under i nternational l aw. All
three NAFTA sign at ories h av e u rged at various times t hat t he threshold for “fai r and
equitable” be set “high.”
The pauci ty of substantive content i n “fair and equitable” is an issue partly
because unl i k e t he i n t ernat i onal l aw of i ndi rect ex propri at i on, t h ere i s for “fai r and
e q u i table” no precise counterpart in Am erican law t o consult for gu idance. T h e
development o f t he indirect-ex p ropriation concept i n i n t ernational l aw may,
particularly under the TPA mandate for post-NAFTA agreements, take some cue
from U.S . regul at ory t aki n gs l aw. In cont rast , whi l e “fai r and equi t abl e” cl ear l y
o ffers a p arallel t o due process p rinciples i n t he U.S. (noted in the TPA ), i t m a y
i m p l i cat e a host o f o t h e r p ri n ci pl es as wel l . Nor i s due process l aw, o r at l east
substantive due process l aw, a model o f clarity.
III. Indirect Expropriation
In ternational l aw has l ong protected foreign-owned property not only from d irect
ex propriation (seiz ure o r formal appropriation), but from “indirect ex propriation” as50
well. In an i n d i rect -ex propriation claim, the property owner cl aims that mere
government regu lation o r o ther conduct, in the absence of seiz ure o r formal
appropriation, has h ad an adverse effect tantamount to ex propriating t he property –
notwithstanding that title to the property rem ai ns with the owner. No claim is made
that such conduct ex ceeds government po lice powers. The importance o f NAFTA
C h apt er 1 1 i s t ha t i t h as spawned a si gn i ficant number o f i ndirect-ex p ropriation
cl aims, i ncluding, for the first time, s everal agai nst t he United S tates.
The filing o f t hese indirect-ex p ropriation claims under C hapter 11 likely d raws
some impetus from t heir domestic-law first cousin: regulatory t akings claims under
49 See, e.g., T he Loewen Group v. United States Final Award, par. 133. Reflecting t he T PA
mandate, t he Chile and Si ngapore agr eements state t hat “fair and equitable t reatment
includes t he obligation not to deny j ustice i n crimi nal, civil, or admi nistrative adj udicatory
proceedings in accordance with the principle of due process embodied in the principal legal
systems of t he world ....”
50 See RESTATEM ENT (T HI RD) OF F OREI GN RELATI ONS LAW § 712, Comme nt g, and
Reporters’ Notes no. 6 ( 1986).
the Fifth Amendment’s Takings Clause.51 The t wo c o n cepts share a fundamental
prem i s e: t h at governm ent regu l a t i o n m ay i n som e cases so severel y affect t h e
e conomic use o f p rivate property as t o amount to something – “ex propriation” in
international l aw, “physical taking” o r “occupation” in U.S. law – that courts have
l ong agreed d e s e r v es com p ensat i on. Thi s equat i n g o f s evere regul at i o n w i t h
physical takings and oc c u p a t i o ns debuted in U.S. law i n a 1922 Supreme C ourt
decision,52 and h as been a s taple o f t he Court’s d ecisions since t he late 1970s. W ith
the arrival o f t he NAFTA indirect-ex p ropriation claims in the 1990s, t he equating of
the t wo is gaining wide attention i nternationally.
Let’s l ook at the NAFTA language addre ssing ex propriation, then consider the
questions it raises. Article 1110 states –
No Party m ay directly or indirectly nationalize or ex propriate an
investment of an investor of anot her P arty in its territory or take
a m e a s u r e t a n t a m ount to nati o n a l i z a t i o n o r e x p r o p r i a t i o n o f s u c h
an investment (“ex propriation”), ex cept:
(a) for a public purpose;
(b) o n a nondiscriminatory b asis;
(c) i n accordance wi t h due process o f l aw and A rt i cl e
(d) o n p aym ent of com p ensat i o n i n accordance wi t h paragraphs 2
through 6 . 53
The phras es “indirectly ... ex propriate” and “measure t antamount to ... ex propriation”
are not defined.54 NAFTA states only t hat arbitral tri bunals are t o resolve investor-
51 The T akings Cl ause of the Fifth Amendment, U.S. Constitution, states: [ N] or shall private
property be t aken for public use, without j ust compensation.” T he l aw of regulatory taki ngs
is the body of standards deve l o p e d by U.S. courts for determi ning when a r egulatory
interference with the use of private property i s so severe or i rrational as t o effect a “taki ng”
of that property, requiring j ust compensation under t he Clause. See generally Stephen L.
Kass, Re gulatory Takings De bate Reopened: Surpr ising, Potentially Significan t , Context
is NAFTA Chapter 11, N.Y. L. J . s ec. 2, September 11, 2000.
52 Pennsyl va nia Coal Co. v. Mahon, 260 U.S. 393 (1922).
53 “Paragraphs 2 t hrough 6" s pecify that compensation s hall be equal t o t he fair market value
of the expropriated i nvestment i mmediately b efore t he expropriation t ook place, shall not
reflect any change i n value due to the i ntended expropriation, and s hall include interest from
the date of expropriation t o t he date of payment.
54 Here, t he Chile and Singapore agr eements differ significantly from NAFTA. T he former
do offer a loose definition of i ndirect expropriation . That definition t racks almost verbatim
the prevailing r egulatory t akings test enunciated by t he U.S. Supreme Court i n t he leading
case of Penn Central T r ansp. Co. v. New York City, 438 U.S. 104 (1978). Presuma bly, this
close t racking i s due to the T PA’ s “no greater rights” and “consistent with United States
legal principles” mandates.
Regr ettably, the Penn Central standard remains ill-defined. Moreover, t here is no
guarantee t hat arbitration panels convened under Chile/Singapore will look to U.S. case l aw
for guidance i n i nterpreting t he Penn Central -i nspired i ndirect-expropriation definition i n
those agr eements. As t he followi ng footnote mentions, t he standard is ultimately one o f
st at e d i s put es “i n accordance wi t h t h i s Agreem ent and a p pl i cabl e rul es o f
international l aw.”55
Also important is Article 1 1 10's broad definition of “investment”56 –the
threshold t erm defining what cannot be e x p ropriated without compensation. An
“i nvestment” m ay take the form of (1) an “enterprise” (defined t o m ean “any entity
constituted o r o rganized under applicable law, whether o r not for p rofit, and whether
privat e l y- owned o r governmentally-own ed, i ncluding any corporation, trust,
partnership, sole proprietorship, joint v enture or other asso ciation”57), (2) equity
securities and certain debt securities of an enterprise, (3) certain loans t o enterprises ,
(4) an i nteres t i n an enterprise t hat entitles t he owner t o s hare in its income or profits,
o r i n i t s assets on dissolution, (5) property, tangible or intangible, acquired i n t h e
ex pectation o r u sed for the purpose o f ec onomic benefit o r o ther business purposes,
or (6) i nteres ts arising from t he commitment of cap i t a l or other resources to
The question, yet again, i s whether NAFTA arb i tral panels will interpret t he
agreem ent i n rough conformity with U.S. law, in this cas e t hat on regulat ory t akings .
Or wi l l t h e p anel s h ead off i n s om e o t h er di rect i on, and i f s o, what ? If t hat n ew
direction i s m ore i nvestor-friendly t han U.S . l aw, might Article 1110 inhibit federal
and s tate regu lators seeking t o apply l egitimate environmental, public health and
safety, and land use restrictions? On t he other h and, only one arbitral decision under
Article 1110 thus far h as been in favor of the claimant (see Section IV).
Tribunal awar d s t o d ate h ave p rovided only minimal elaboration o n what
constitut e s an i ndirect ex propriation. One deci sion said that the concept i ncludes
“incidental i nterference with the u se of property which has t he effect of depriving t he
owner, in whole o r i n s ignificant p art, of t h e u s e or reasonabl y-t o -be-ex pect ed
economic benefit o f p ro p e rty. ”58 Another clarified that legitimate police-power
regu lation can constitute indirect ex propr iat i on, even if nondiscriminatory, though
customary i nternational l aw. Perhaps that is why t he Chile and Singapore drafters added a
provision clarifying t hat “[e]xcept i n r are circumstances, nondiscrimi nat ory regulatory
actions by a Party ... to protect legitimate public welfare obj ectives, such as public health,
safety, or t he envi ronment, do not constitute indirect expropriations.”
Finally, Chile/Singapore delete any mention of measures “tantamount to”
55 Article 1131(1). T he Chile and Singapore agr eements add t he word “customary,” s aying
that the concept of expropriation i n t he agreements ta kes its cue from “customary
international l aw.” One may well ask, of cou r s e , h o w t h e agr eements can set f orth two
definitions of indirect expropriation: customary i nternational l aw and t he Penn Central
standard in the previ ous footnote. Possibly t he agreements’ drafters believed t hat t he two
definitions are similar, or hoped t hat t hey will be in the f uture.
56 Article 1139.
57 Article 201(1).
58 Metalclad Corp. v. United M exi can States Award, par. 103 (2000), partially overturned
on jurisdictional grounds , 89 Brit. Col. L.R. 3d 359 (2001).
the deprivation m ust be “substantial.”59 “S ignificant” and “substantial,” of course,
have a wide range of possible m eanings .
A comparison o f Article 1110 tex t and U.S. regulatory t akings law s uggests
some areas of potential divergence, depending on how the s till-em byonic Article
1110 case l aw develops. First, a takings claim und e r U . S . law requires as a
prerequisite a h arm t o “property. ” Under t he terms of NAFTA Chapter 11, a claim
depends instead on harm to an “investment ,” broadly d efined in the C hapter (see
above) t o i nclude some interests not generally viewed as property i n U.S. l aw. 60 The
sign ificance of this tex t ual d ivergence may be minimized if tri bunals ultimately adopt
the U.S. position t hat C hapter 11's s ilence notwithstanding, t he cl aimant must have
a property right in the i nvestment in order for the claim to be cognizable.61
S econd, U.S . takings l aw firmly embraces the concept o f t he “relevant p arcel,”
under which a court m ust analyz e a regulat ory t aking claim by reference t o t he
plaintiff’s entire p roperty, and t he entire bundle o f rights h eld t herein. In s hort, a
court m ust l ook at not only what t he property owner lost, but what he/she still has.
NAFTA decisions have yet t o m ake any broad p ronouncements in this realm, though
some awards suggest that the right to sell in a speci fi c m ark e t m ay be considered
property s eparate from t he remainder o f p laintiff’s interests i n t he business. 62
Third, one component of the U.S. regulatory t akings test is the d egree t o which
t h e government has i nterfere d w i t h t h e “ r e a s onable i nvestment-backed ex pectations”
of t h e p ropert y o wne r . C ert ai n ci rcum st ances rout i n el y h ave b een vi ewed by U.S .
courts as undercutting t he reasonableness of s uch ex p ectations – for ex ample, the
claimant’s decision to enter voluntarily a hi ghl y regul at ed fi el d, or t o buy a p arcel of
land after a regulatory s cheme i s i n p lace. NAFTA tribunals, o n t he other h and, have
yet t o s peak e x t e n s i v e l y t o t he relevance o f t he reasonableness o f t he claimant’s
Though t he U. S . ex ecutive b ranch h as long debated i nternally the m eaning o f
“indirect ex propriation,” it has as yet not pur sued a formal clarification b y t he Free
Trade C ommission, as it did i n t he case o f Article 1105.
IV. C laims Filed U nder N AFTA Chapter 1 1
The following lists all claims filed under NAFTA Chapter 1 1 s ince its inception,
as reveal ed by t h e l eadi n g w eb si t es. The Ethyl C orporation cl ai m agai n st C anada
59 Pope & T albot v. United States Award, pars. 99, 102 (2000)
60 T he Chile and Si n ga p o r e free t rade agreements, by contrast, s pecify that an action by a
party cannot be an expropriation unless i t c onflicts with a “property r igh t or property
interest” i n an i nvestment.
61 See, e.g., Memorial on J urisdiction and Admi ssibility of Respondent Un i t e d States of
America, Methanex Corp. v. United States (filed Nov. 13, 2000).
62 See, e.g., Pope & T albot v. United States Award, par. 96 ( 2000).
was t he first t o b e filed, in 1997. Today, a total of about 20 claims have been filed,
with several notices of intent to file (not included h ere) pending.
Eigh t o f t he filed C hapter 11 claims have produced final arbitral decisions as to
fair and equitable t reatment, of which four found viol a t ions. 63 Fi ve of the filed
Chapter 1 1 claims have produced final arbitral decisions as to indirect or “tantamount
to” ex propriation claims, of which one (Metalclad ) found an ex propriation.
Claims against t he United States
There h ave b een t h ree fi n al di sposi t i ons of NAFTA C h apt er 1 1 cl ai m s agai nst
the United S tates , al l i n its favor. The three rulings cam e i n The L oewen Group,
Mondev International ,andADF Group.
produces methanol. M ethanol is a k ey co mponent of MTBE, a substance added t o
gasoline t o boost o ctane and meet federal o x ygenate req u i rements. Asserting t hat
MTBE was contaminating d rinking water s uppl i es i n C alifornia, the Governor
ordered a phase-ou t o f M T BE in gasoline s old t here by December 31, 2002. In
Methanex ’ NAFTA claim, filed i n 1999, cla ims that California’ s action v iolates
Articles 1102, 1105, and 1110 with regard to its indirectly owned U.S. companies,
which s el l m et h a nol for M TBE i n C alifornia. It contends that the s tate-recited
environmental concerns are a s ham – that the phase-out was m otivated largely b y a
desire to favor a M TBE competitor, et hanol, generally manufact ured from biomass
feedstocks (such as corn) produced in the United S tates. The claim seeks US$970
million, based on profits Methanex allegedly will lose if California’s ban takes effect .
In 2002, the arbitral tribunal o rdered Methanex to submit a f r e sh pleading
allegi ng fact s t h at m ore s peci fically relate California’s action t o M et hanex . This
order was prompted by NAFTA Article 1101, which requir e s t hat challenged
measures be those “relating t o” investors o f another P arty. M ethanex ’ new p leading
was filed November, 2002, and a hearing i s s cheduled for J une, 2004.
embarked upon a commercial real estate development i n Boston, through a
Massachusetts limited partnership it owned. Allegedly contrary to the partnership’s
agreem ent with the city, t he city refused t o allow i t t o ex ercise its option t o acquire
a critical parcel of land. The city’s motiv ation, according t o M ondev, was political:
the p arcel’s value b y 1988 was far high er than the p artnership would p ay under t he
formula i n its agreem ent with the city, and the city did not want the benefit to go to
a forei gn investor. Th e p a rt n ership ultimately lost in the Massachusetts Suprem e
63 Both the “eight” and t he “four” numbers include The Loewen Group, where the discussion
of fair and equitable t reatment was explicitly dicta.
Mondev filed its NAFTA claim i n 1999, asserting t hat due to the actions of the
city, its redevelopment agency, and t he Massachusetts high court, the United S tates
had v iolated Articles 1102, 1105, and 1110. It sought US$50 million. In 2002, the
arbitration p anel rejected all o f M ondev’s claims, o n t he grounds of NAFTA’s non-
retroactivity (the critical events occurred p rior to NAFTA’s taking effect in 1994) and
t h e fact t h at any fai l u re of t h e M assachuset t s court s t o deci de t h e rem ai ni ng breach
of cont ract and t ort cl ai m s i n accordance wi t h Massachu s e t t s l aw d i d not offend
3. TheLoewenGroup,Inc.v.UnitedStates. A s uit was filed i n a Mississippi
state court against The Loewen Group, a C anadian funeral h o m e operator. The
plaintiff was a l ocal businessman and com petitor o f Loewen, whose claim involved
various contract disputes with the company.. The s tate jury verdict against Loewen
was for $500 million, including $400 million punitive damages, and the t rial judge
entered j udgment on the v erdict. S ubsequently, b o t h t he trial court and the
Mississippi Supreme C ourt refused to reduce t he $625 million bond required under
st at e l aw t o obt ai n a st ay of ex ecut i o n p endi ng appeal . Accordi n g t o Loewen , t h i s
forced it to abandon its appeal of the j udgment and t o s ettle an $8 million case for
Lo ewen’s claim, filed 1998, alleged violations of Articles 1102, 1105, and 1110
based o n t h e l a r g e v erdi ct , t he t ri al court ’s refusal t o vacat e i t , and t he refusal t o64
reduce t he bond amount. It sought US$725 million. Lo ewen argu ed that the
verdict was the p roduct o f a trial “infect ed by repeated appeals t o t h e j u r y’ s anti-
C anadi an, raci al , and cl ass b i ases.”
O n J u n e 2 6 , 2003, the arbitral panel d ismissed Loewen’s claims for l ack of
jurisdiction. Loewen had, since t he filing of its NAFTA cl aim, filed for bankruptcy
reorganiz ation and emerged as a U.S. corporation. NAFTA, however, cannot be
invoked b etween an investor and its own n ational governmen t . In addition, where
a claim is based o n j udicial action, as here, t here must be final action b y t he Party’s
judici al system . Loewen, however, had failed t o petition t he U.S. Suprem e C ourt.
Finally, t he panel reached the m erits, t hough t he jurisdictional dismissal m ade
it unnecessary. It b randed t he state-court trial “a miscarriage o f j ustice ...” and s aid
that “[ t] he total award ... appears t o b e grossly d isproportionate to the d amages
suffered ....” These f a cts, i t d eclared in dict a, violated fair and equitable t reatment
under Article 1105.
4. ADFGroup,Inc.v.UnitedStates. ADF Group, a C a n a d i a n corporation t hat
designs and erect s s tructural s t eel , claimed dam ages for alleged i njuries from t he
federal S urface Transport at i o n Assi st ance Act o f 1 9 82. The Act and regul at i ons
require that federally funded s tate high way p rojects u se only domestically produced
64 T his was t he first claim against t he United States f iled under Chapter 11. Loewen Gr oup
was defended i nitially by the Department of J ustice, eventually by the Department of J ustice
and Department of State j ointly. All subsequently filed NAFTA Chapter 11 claims against
the United States are or were defended s olely by t he Department of State.
steel. ADF asserted violations of Articles 1102, 1103, 1105, and 1106, and s ought
On J anuary 9, 2003, the arbitral panel d ismissed all of ADF’s claims. Because
the domestic content requirement constituted procurement, it concluded, the company
was ex empt from Articles 1102, 1103, an d 1106 pursuant t o Article 1108. Nor h ad
an Article 1105 violation b een shown.
5. Canfor Corp.v.UnitedStates. Canfor Corp. i s a Canadian forest products
company and the l argest ex porter of s oftwood to the U.S. All of its softwood lumber
destined for t he U.S. is purchased by Canfor W ood Produc t s , i ts wholly owned
subsidiary in the U.S. C anfor C o r p . as s ert s l osses allegedly s uffered as a result of
certain U.S. antidumping, countervailing duty, and m aterial i njury d eterminations on
softwood lumber. As a result of those det erminations, its U.S. subsidiary is required
to pay i ncreased duties o n s oftwood lumber products ex ported t o t he U.S.
C anfor’s cl ai m assert s t hat t he U.S . , t hrough t h e s e d et erm i n at i ons, b reached
Article s 1102, 1103, 1105, and 1110. Canfor claims damages o f not less than
6. Kenex, Ltd. v. United S tates. Kenex i s a Canadian company t hat, on its own and
through a U.S. subsidiary, s ells in the U.S. p roducts made from t he cannabis p lant
(including whole h emp grain and d erivatives such as hemp oil). T he cannabis p lant,
however, contains THC, a controlled s ubstance under t he U.S. Controlled S ubstances
Act when i n a form that can enter t he human body. (It is the p sychoactive i ngredient
in marijuana.) Under its “Zero THC Policy,” t he U.S . D r u g E nforcem ent
Administration b locked the s ale o f Kenex ’ p roducts in the U.S.
Kenex asserts v iolations of Articles 1102 through 1105, and s eeks d amages of
Claims against Canada
cont am i n at ed wast e. 66 The company, on its own and through its Canadian affiliate,
h a d p u r chase o rders t o t reat P C B wast e from C anadi an hol ders of such wast e,
including schools, universities, hospitals, a n d electric u tilities. Canada, however,
adopted a t emporary b an between November 1995 and February 1997 on the ex port
of PCB waste, forcing S.D. Meyers’ customers to have their waste handled at high er
prices by a C anadian competitor. (In J une, 1997, months after C anada lifted t he
ex port b an, a U.S. court ruled that EPA l acked authority under t he Tox i c S ubstances
65 See generally Brian T . Hodges, Note, Where t he Grass i s Always Greener: Foreign
Investor Actions Against Environmental Regulati o n s U n d e r NAFTA’s Chapter 11, S .D.
Myers, Inc. v. Canada, 14 Geo. Int’l. Envtl. L. Rev. 367 (2001).
66 PCB s tands for “ polyc hlorinated biphenyls.”
Control Act for its general rule allowing import of P CB waste i nto t he U.S.67 As a
result, the court voided t he ru l e . S ince then, import of private PCB was te into the
U.S. has, for t he most part, b een unlawful as a matter o f U.S. law.)
S.D. Meyers argued that the C anadian ban treat ed its Canadian affiliate
differently than Canadian investors. It s claim, under Articles 1102, 1105, 1106, and
In the i nitial liability phase of the pro ceedings , t he NAFTA tribunal fou n d in
2000 that the C an a d i a n b an breached Articles 1102 and 1105, since C anada h ad
cl o s ed its border t o protect the m arket s hare of Canadian competitors from U.S . -
based competition. The b an did not breach Article 1110, however , s ince it only
delayed S .D.Meyers’ entry i nto t he Canadian market by 1 8 m onths. In 2002, the
tribunal i ssued a d amages award against Ca nada, requiring it to pay S .D. M eyers
CAN$6.0 5 m i l lion p lus i nterest for discrimination against the company. Because
Canada voluntarily withdrew the ex port b an in 1997 before the NAFTA claim was
filed, the award will have no effect on ex isting l aw.
In 2001, Canada applied t o a Canadian court t o s et asid e t he tribunal’s liability
award o n t he ground that elements of the ruling ex ceeded the t ribunal’s j urisdiction
and were contrary to the public policy of C anada. This action i s s till pending.
2. Ethyl C orp. v. Canada . Canada banned i nter provincial and international s ale
of MMT, a gasol i n e o ct ane enhancer suspect ed of adverse h eal t h effect s. The onl y
MMT supplier i n C anada was a s ubsidiary of U.S.-based Ethyl C orp., which i n 1997
filed under C hapter 11 allegi ng that th e b an violated Articles 1102, 1106, and 1110.
Ultimately Canada suspended t he ban and agreed to pay Ethyl about $13 million t o
compensate it for l egal fees and o ther in conveniences. P ossibly contrib u t i n g t o
Canada’s willingn ess t o s ettle was t he success o f a challenge t o t he MMT ban filed
by four Canadian provinces with a domestic arbitration p anel, which found the b an
Softwood Lu mber Agreement. Pope & Talbot, an Oregon-b a s ed company, filed a
claim i n 1998 asserting t hat s u c h p a r t icipation v iolated Articles 1102, 1103, 1105,
1106, and 1110 by allocating certain fee-free ex port p ermits under t he Agreement i n
a way that placed t h e s awmills of its Canadian subsidiary at a competitive
disadvantage i n ex porting l umber t o t he U.S. Pope & Tal bot initially sought damages
totaling over $507 million.
In 2000, the t ribunal i ssued a p artial d ecisi on dismissing the i nvestor’s claims
under Articles 1106 and 1110. In 2001, a s econd arbitral decision rejected the Article
regarding t he treatment of the s ubsi d iary in the verification review process, the
tribun a l held in 2002 that Canada had b reached Article 1105 and awarded
US$461,566 in damages and interest.
67 Sierra Club v. EPA, 118 F.3d 1324 (9th Cir. 1997).
which UPS alleges i s a letter m ail m onopoly, engages i n anti-competitive p ractices
by using its postal m onopoly i nfrastructure t o reduce t he costs o f d elivering its non-
monopoly p ar c e l services. UPS alleges v iolations of Articles 1102 and 1105, and
seeks $160 million i n d amages.
In 2002, the t ribunal rejected the Article 1105 claim, on t h e g r o und that there
is no customary i nternational l aw prohibitin g or regulating anti-competitive behavior.
Claims against M exico
1. Metalclad C orp. v. United Mexican S t a t es. In the early 1990s, M ex ico
issued federal p ermits for a Mex i can company t o construct a hazardous waste facility
in the state of San Luis P otosi. Assertedly in reliance on r ep res e n t at ions that al l
necessary permits had been granted, U.S.-bas ed Metalclad C orp. ex erci sed its option
t o b u y t h e M ex ican company and its permits. Thereafter, both t he stat e an d
munici pality object ed to the facility, citing environmental concerns and community
opposition, with the result t hat t he facility, t hough completed, was never opened.
In 1997, Metalclad filed a claim against Mex i co, s eeking $90 million. It alleged
that Mex i co, by p erm i t ting or t olerating t he actions of its stat e and munici pality
blocking the hazardous waste facility, violated Articles 1105 and 1110. In 2000, the
NAFTA pan e l agreed with both claims, awarding t he company $16.685 million. 68
Mexico challenged the arbitral award i n t he British C olumbia (Canada) S uprem e
Court, the first o ccasion on which a court has consi d ered a NAFTA C h apt er 1 1
award. 69 (A Br i t i sh Columbia court was dictated by the d isputants’ choice of
Vancouver as t he place of arbitration.) Canada and t he Province o f Que bec were
allowed t o i n t e r v e n e . In 2001, the court s et aside t he arbitral panel’s finding of a
v i o l a tion under Article 1105, but affirm ed the ex p ropriation found under Articl e
1110.70 Afterward, the p arties s ettled for an am ount slightly smaller t han t he original
arbi t ral award.
68 See Stephen L. K ass and J ean M. McCarroll, The M etalclad Deci sion Under NAFTA’s
Chapter 11, N.Y. L. J ., Oct. 27, 2000, p. 3 ( arguing t hat i n light of Metalclad, t he authors’
previous optimism t hat Chapter 11 claims w ould not chill envi ron mental enforcement i n
NAFT A countries ma y have been premature).
Recently, an arbitral tribunal r endered a similar decision against M exico i n a cla i m
arising under t he b i l a teral i nvestment t reaty between Mexico and Spain. In T ecnicas
Medioambientales T ECMED S.A. v. Mexico , Case No. ARB ( AF)/00/2 ( May 29, 2003), t he
tribunal f ound that a M exican agency’s failure to r e n e w a toxic waste plant’s license was
not based on public health concerns, but rather on opposition from l ocal residents.
Accordingl y, it held that the fair and equitable t reatment and “tantamount to expropriation”
guarantees in the t reaty had been vi olated, and awarded t he Spanish i nvestor $5.5 million.
69 See generally Chris T ollefson, Metalclad v. United M e x i can States Revisited: Judicial
Oversight of NAFTA’s Chapter Eleven Investor-State Claim Process, 11 M inn. J . of Global
70 United M exican States v. Metalclad Corp., 89 Brit. Col. L.R. 3d 359 (2001), a va ilable a t
[ h t t p : / / www.wor l dba nk.or g/ i c s i d/ c a s e s ] .
investo r s h e l d t he concession for wastewater collection and disposal in a Mex ican
city. The company d efaulted o n certain obligations under t he concession agreement,
which t he city terminat ed.
The U.S. i nvestors, allegi ng violations of Articles 1105 and 1110, claimed $14
million. The NAFTA panel rejected the claim in 1999, ruling t hat t he city’s alleged
breach of its concession agreement d id not state a claim for e x p r o p r i a t i on under
Article 1110. “[ A] foreign i nvestor ... ,” it said, “may enter into contractual relations
with a public authority, and may s uffer a breach of that authority, and still not be in
a position t o s tate a claim under NAFTA.” And, under t he circumstances of the case,
if there was no violation o f Article 1110, there was none of Article 1105 either.
This was t he first C hapter 11 arbitral decision on the m erits.
national o wned all t he stock o f a Mex i can corporation (CEMSA). He alleges t hat
Mex i co’s refusal t o rebate e x port ex cis e t ax es to the corporation, as provided b y
Mex i can law, was i ntended t o force the c orporation out of business a n d t h u s w as
“tantamount to ex propriation” under Ar ticle 1110. The asserted motive was to shut
down t he company’ s c i g a r e t te ex porting business and to gi ve the p roducers a
monopoly on ex ports. He also claims a violation of Article 1102.
In 2002, the t ribunal rejected the Article 1110 claim, but upheld that under
Article 1102 and awarded damages.
4. Waste M anagem ent, I nc. v. United M exican States . In 1998, USA W aste
Services, Inc. (now W aste M anagement) filed a claim under Articles 1105 and 1110.
T h e claim was t hat a Mex i can stat e and munici pality had granted a 15-year
concessi on t o US A W ast e’s Mex i c a n subsi d i ary for publ i c wast e m anagem ent
services, but failed t o comply with paym ent and other duties i n t he agreement d espite
full p e rfo rm an ce by the subsidiary. It also asserted that a Mex ican bank that had
issued an unconditional guarantee f o r t he paym ent arbitrarily refused t o honor its
guarantee. USA W aste cl aims damages of $60 million.
a U.S. i nsurance company, claims that Mex i co violated Articles 1102, 1105, 1110,
and 1405 by facilitating t he purchase o f d eb entures d enominated in Mex i can pesos
and owned by Mex i can investors, but n o t facilitating t he purchas e of debentures
deno m i n a t e d i n U.S. dollars and o wned by Fi reman’s Fund. Bo th series of
debentures were issued by the s ame M ex i can fi nanci al s ervi ces corporat i o n
GAMI Inve s t m e nts, In c. a U.S. corporation, contends that in 2001, Mex i can
autho rities i ssued a decree for t he stat ed purpose of revitalizing t he Mex i can sugar
industry. GAMI alleges t hat pursuan t t o t hat d ecree, Mex i can authorities
ex propriat e d s u gar mills owned by s ubsidiaries of a M ex ican company i n which
GAMI claims to hold a 14 % i n t e r est. GAMI asserts v iolations of Articles 1102,
7. International Thunderbird Gam i ng Corp. v. United Mexican States. The
corporation, a C anadian company, o wns and operates g a m i n g and entertainment
facilities. It seeks dam ages for alleged i njuries resulting fro m t he regulation and
closure of its gaming facility by the M ex ican government, citing Articles 1102, 1103,
Mex i co ex propri at ed b eachfront propert y b el ongi n g t o h i m . He al l eges v i o l at i ons of
Articles 1102, 1103, 1105 and 1110.
9. Adam s v. United M exican States. U.S. citizens purch as ed lots and built
vacation homes in a resort t hey b elieved b el onged t o t h e M ex i can governm ent .
Mex i can courts later hel d t h a t t h e lots had been unlawfully ex propriated by t he
Mex i can governm ent and o rdered t h em ret u rned t o t h ei r o r i gi nal o wners. The
American investors claim that the j udici al decree violates Articles 1102, 1105, and