HEADLINE: Nafta's Powerful Little Secret;
Obscure Tribunals Settle Disputes, but Go Too Far, Critics Say
BYLINE: By ANTHONY DePALMA
BODY:
THEIR meetings are
secret. Their members are generally unknown. The decisions they reach need not
be fully disclosed. Yet the way a small group of international tribunals handles
disputes between investors and foreign governments has led to national laws
being revoked, justice systems questioned and environmental regulations
challenged. And it is all in the name of protecting the rights of foreign
investors under the North American Free Trade Agreement.
The corporations -- American, Canadian and Mexican alike -- that
directly invest in neighboring countries are thrilled that Nafta provides some
protection. But foes of the trade pact say some of their worst fears about
anonymous government have become reality. And as Western economies move toward
more free trade and globalization, environmentalists, consumer groups and
anti-trade organizations are increasingly worried about how the tribunals
influence the enforcement of laws. The groups are gearing up for a fight at the
Summit of the Americas next month in Quebec, where President Bush will be
pushing a vast new Free Trade Area of the Americas, which would provide for
similar tribunals.
Protesters will attack the sweeping
powers and broad impact of the tribunals, along with their very nature -- ad hoc
panels drawn from lists of academics and international lawyers almost unknown
outside their highly specialized fields.
"What we're
talking about here is secret government," said Joan Claybrook, president of
Public Citizen, a consumer watchdog group in Washington that has been critical
of Nafta and other trade agreements. Ms. Claybrook said the 16 Nafta cases that
have been filed so far in the United States, Canada and Mexico showed how
corporations were using Nafta not to defend trade but to challenge the
functioning of government. "This is not the way to do the public's business,"
she said.
The tribunals have been used in Nafta
disputes for only a few years, but the complaints they have handled have already
had many repercussions, including these:
* The Canadian
government lifted restrictions on manufacturing an ethanol-based gasoline
additive that it considered hazardous after an American manufacturer said that
the ban hurt its business.
* A tribunal ordered Mexico
to pay an American company $16.7 million after finding that local environmental
laws prohibiting a toxic-waste-processing plant that the company was building
were tantamount to expropriation.
* A Canadian-based
funeral company is asking the United States government for $725 million in
compensation after a Mississippi jury found the company guilty in 1995 of trying
to put a local funeral home out of business, and levied $500 million in damages.
The company contends that the jury sought to punish it because it is foreign. If
the tribunal awards compensation, critics say, all jury awards involving foreign
investors may be challenged.
* United Parcel Service,
the package-delivery company, has filed a complaint contending that the very
existence of the publicly financed Canadian postal system represents unfair
competition that conflicts with Canada's obligations under Nafta. Critics worry
that if the tribunal upholds the U.P.S. claim, government participation in any
service that competes with the private sector will be threatened.
IT is clear that investors have gained a shield far more
powerful than almost anyone had imagined when Nafta was written in the early
1990's. "There is no doubt that these measures represent an expansion of the
rights of private enterprises vis-a-vis government," said Prof. Andreas F.
Lowenfeld, an international trade expert at the New York University School of
Law. "The question is: Is that a good thing?"
The
international tribunals are authorized under a Nafta clause called Chapter 11, dealing with investments. Investors who believe they
have suffered a loss because of a breach in Nafta rules can bring a claim
against the government of the country where they made their investment. They can
have the complaint heard under one of two existing sets of rules -- one from the
United Nations, the other from an independent office of the World Bank.
These off-the-shelf mechanisms adopted by Nafta have
commonly been used to resolve private disputes between corporations, and are
thus intended to provide a great degree of confidentiality. Both critics and
proponents agree that the provisions run headlong into demands for openness and
accountability when public issues are involved.
"The
fact that the drafters of Nafta chose this secretive process to resolve these
disputes is further evidence that they weren't foreseeing matters of broad
social concern coming before these panels," said Martin Wagner, director of
international programs for the Earthjustice Legal Defense Fund, an environmental
group in San Francisco.
Critics say the corporate
victories have spawned even bolder and broader challenges, each one further
undermining public policy. In a recent case that critics consider one of the
most worrisome, the Methanex Corporation of Vancouver, British Columbia, is
challenging California's decision to phase out the use of a gasoline additive
containing methanol, which Methanex makes. The state considers the additive,
MTBE, which was originally intended to reduce air pollution from motor vehicle
emissions, to be a health hazard when it enters the water supply. Santa Monica,
Calif., with 93,000 residents, had to shut down most of its municipal wells when
gasoline containing MTBE leached into the drinking water a few years ago.
METHANEX contends that MTBE poses absolutely no health
hazard and that the state's action would effectively destroy its market. "The
work that was done to make the decision to move forward with the ban wasn't
extensive enough to draw the conclusion that MTBE is hazardous," said Bradley W.
Boyd, director of investor relations at Methanex.
The
company recently amended the claim to include accusations that a decision by
Gov. Gray Davis of California to ban the additive might have been politically
motivated and linked to more than $200,000 in campaign contributions by the
Archer Daniels Midland Company, which makes a competing product. A spokesman for
the governor, Gabriel Sanchez, called the accusations "ludicrous."
Mr. Boyd said Methanex was not asking for the ban to be
lifted, but rather for Methanex to be compensated if it was prevented from doing
business in California because of the ban. The company wants $970 million in
compensation, which rankles many Californians.
"It's
the height of corporate moxie," said Michael Feinstein, an environmental
activist who is the mayor of Santa Monica. He said he was worried that a
precedent would be set if the MTBE phase-out was undermined. Even if the
tribunals have no power to overturn laws, he said, a decision in Methanex's
favor "would have a devastatingly chilling effect on all such future laws and
standards because of the belief that they would not stand up to challenge."
The United States government, named as a defendant in the
Methanex complaint, is also concerned that the case stretches Nafta beyond
recognition. In a statement to the tribunal, the government contends that
"Methanex's claim does not remotely resemble the type of grievance for which the
states parties to the Nafta created the investor-state dispute mechanism."
Mr. Wagner has asked the tribunal to consider breaking
with tradition and accepting written statements from third-party groups like the
Bluewater Network, a citizens' environmental organization. The three-person
tribunal hearing the complaint is unusual in that its members include former
Secretary of State Warren Christopher. The tribunal determined in January that
it had the right to accept written arguments, and said it would decide later
whether to do so in this case.
Mr. Wagner said he was
able to keep abreast of the proceedings by filing periodic Freedom of
Information requests that force the United States government, when named as a
defendant, to release the documents. Other advocates who obtain the filings this
way post some on a Web site -- www.naftaclaims.com. Canada also has a public
access information law, but Mexico does not.
Officials
who oversee the tribunals say that they understand concerns about the
less-than-public aspects of the panels' work but that anything that opens the
proceedings would undermine the promise of confidentiality that corporate
investors consider essential. That, they say, would undermine the primary
purpose of the arbitration mechanisms -- to help foster commercial development.
"The whole thing here was to have a mechanism to give
a base level of comfort to foreign investors," said Ko-Yung Tung, vice president
and general consul of the World Bank and secretary general of its International
Center for Settlement of Investment Disputes, which handles Nafta claims. He
said that forcing more disclosure could drive corporations away from the
established dispute-resolution process.
"If increased
foreign investment is the prime goal in this, then making public these
proceedings may be less important" than protecting investors, Mr. Tung said.
The center occupies a small suite of offices inside the
World Bank's modern headquarters in Washington. With seven lawyers and four
members of its support staff, it now oversees eight Nafta cases. There are also
29 other disputes on the center's docket that arise from some of the more than
1,400 bilateral treaties involving more than 130 nations that have signed an
international convention to abide by the World Bank's investment rules.
For 20 years after the center was created in 1966, it
established panels that heard on average no more than one case a year. Now,
officials said, about one case is filed every month.
THE center's primary responsibility is to appoint the arbitrators to
the panels, choosing from a list of internationally recognized experts who are
paid $1,500 a day for their work. The center is bound by strict confidentiality
rules, and only investors can say whether documents should be made public.
"It's unfair to call this a closed or secret process,"
said Antonio R. Parra, deputy secretary general of the International Center.
"While it's clearly not on all fours with a court proceeding, I don't think it
is something that is shrouded in secrecy."
Under the
center's rules, proceedings can be made public if both the investor and the
involved government agree. But the Nafta proceedings are never opened to the
public, nor have third parties until now been allowed to submit briefs.
Corporations want the proceedings to remain closed.
"The majority of claimants in these cases are not large multinational
corporations but small- to medium-sized companies," said Clyde C. Pearce, a
California lawyer who represented one such company, the Metalclad Corporation,
in a complaint against Mexico over the construction of a toxic-waste-processing
site. Mr. Pearce said the obligation of responding to briefs submitted by third
parties could overwhelm corporate lawyers, who are already outmatched by the
governments they are bringing the claims against.
"If
others want to weigh in on these cases, they have access to their governments
and should use that route to get their views across, not the tribunals," he
said.
The other set of rules governing Nafta tribunals
was devised by the United Nations Commission on International Trade Law, based
in Vienna. "Arbitration is really private justice," said Jernej Sekolec, its
secretary. Mr. Sekolec says the commission's rules for handling disputes are
routinely written into commercial contracts between investors and, increasingly,
agreements that let private investors bring complaints against a foreign
government.
But he said the commission itself never
became involved in a dispute in any way, not even to select the arbitrators.
"Our overall mission is to streamline and facilitate negotiations and
conclusions of contracts," he said.
Typically, the
parties in a dispute each name one tribunal member and agree jointly to a third.
Each panel is unique, and critics say this lack of continuity makes it hard to
establish clear legal precedent.
That is especially
important because a tribunal decision technically cannot be appealed. It can be
submitted to a local court for review, to ensure that there was no corruption or
gross misinterpretation of the rules. Mexico has recently filed such a review in
the case won by Metalclad. Another appeal was filed recently by the Canadian
government in a case won by S. D. Myers Inc., an Ohio waste-disposal company
that said it was hurt by a Canadian law banning the export of PCB's.
Barry Appleton, a Canadian trade lawyer involved in
several claims before Nafta tribunals, said critics were so driven by their
opposition to globalization that they were overstating the power of the
tribunals, which he contends are nothing more than dispute-resolution panels
with no power to overturn any laws. "What they're doing," he said of the
critics, "is scaremongering."
Mr. Appleton said the
arbitration panels were meant to provide a nonpolitical alternative to resolving
disputes in court. But he said controversy had arisen because the drafters of
Nafta appeared to assume that the investor-protection provisions would be used
by Canadian and American investors to protect their investments in Mexico from
outright expropriation.
"The Canadian and American
governments thought this was not going to apply to them," Mr. Appleton said,
"and now they're disappointed."
THE lack of a
traditional appeal process, transparency and legally binding precedent, along
with the wide scope of what can be challenged under the free-trade investment
rules, have made many people wary in all three nations, including government
officials. Pierre Pettigrew, Canada's minister of international trade, has
written to his counterparts in the United States and Mexico to begin a process
of what he calls "clarifying" the limits of Nafta's investment protections and
perhaps amending the agreement before negotiations begin in earnest on the Free
Trade Area of the Americas.
Activists planning to go to
the Summit of the Americas in Quebec said they would protest the idea of
adopting similar tribunals in a hemispheric free-trade pact. "This is an example
of the excessive powers enjoyed by corporations under Nafta that should not be
expanded," said the Alliance for Responsible Trade, in a critique of the United
States position on the proposed trade pact.
Critics
also object to President Bush's campaign to gain approval of a so-called
"fast-track authority," which expired after Nafta was passed in 1993. Mr. Bush
has said he needs it to present the hemispheric trade pact to Congress for a
vote without possibility of amendment. The critics contend that the scope of
Nafta's investment-protection chapter was not well understood because the
fast-track process denied Congress the chance to evaluate the agreement
thoroughly.
The clash between investor rights and
public policy is expected to grow more intense, even within the agencies
entrusted with keeping aspects of the cases secret.
"The demand for a more transparent process will cause tension with the
more traditional concept of confidentiality -- it's inevitable," said Margrete
L. Stevens, senior counsel of the International Center for Settlement of
Investment Disputes. She said she believed that there was room to adjust, to
open the process in keeping with such expectations throughout the world today --
but only, she said, if "the parties have come under pressure in their own
countries to do this."
URL:
http://www.nytimes.com
GRAPHIC: Photos:
Allowing Nafta jurisdiction over a case affecting his city's water supply would
set a bad precedent, asserts Mayor Michael Feinstein of Santa Monica, Calif.
(Kim Kulish/Saba for The New York Times); At the International Center for
Settlement of Investment Disputes, part of the World Bank in Washington, Nafta
filings are stamped and filed. (Photographs by Paul Hosefros/The New York
Times)(pg. 1); Antonio R. Parra, right, deputy secretary general of the
International Center for Settlement of Investment Disputes, leads a discussion
of a trade case under consideration.; Margrete L. Stevens, the International
Center's senior counsel, says the dispute process could be more open.
(Photographs by Paul Hosefros/The New York Times)(pg. 13) Chart: "Powers That
Be"When the North American Free Trade Agreement was drafted in the early 1990's,
it included three options -- one not yet of any use -- for resolving investment
disputes: INTERNATIONAL CENTER FOR SETTLEMENT OF INVESTMENT DISPUTESStarted by
the World Bank in 1966. A claim would be submitted to the center, which would
establish a three-member tribunal from its standing list of 350 arbitrators.
This option is not yet available, though, for Nafta disputes. That is because
the United States has agreed to it, but Mexico and Canada have not and both
sides in a dispute must do so. But it is important because it is the basis for
the next option. I.C.S.I.D. ADDITIONAL FACILITYSimilar to the above but with one
important difference. Only one participant in a dispute must have agreed to
participate. Therefore any complaint involving the United States can be heard
under these rules, but not a complaint involving both Canada and Mexico. UNITED
NATIONS COMMISSION ON INTERNATIONAL TRADE LAWEstablished by the United Nations
in 1966 to foster international investment. This is the only option available in
all disputes, including those involving Canada and Mexico. There is no
administrative oversight. Tribunals are selected by participants or by other
arrangement.(pg. 13) Chart: "A Cross-Border Dispute, Step by Step"Metalclad,
based in California, used an arbitration provision of Nafta to handle a dispute
over an investment it made in a central Mexican state. 1991 -- Metalclad, an
est-ablished American waste-handler, opens dozens of waste-manage-ment sites
around Mexico. 1992 -- The company receives approval from the Mexican government
to build a plant that can handle 360,000 tons of hazardous waste a year at an
existing landfill it bought in San Luis Potosi, in central Mexico. Metalclad is
told that it needs approval only from Mexico City, not local officials. 1995 --
After roughly $20 million is spent, the plant is complete. Local residents
protest, and their governor blocks the opening, saying the project acks local
approval. 1996 -- The company notifies Mexico that it will file a claim under a
Nafta disputesettlement process. 1997 -- A threeperson tribunal is set up to
hear the complaint. Mexico tries to keep some documents and details secret. 1998
-- Mexico and Metalclad ask the tribunal for additional time to prepare their
cases. 1999 -- Official hearings are held in Washington. 2000 -- The tribunal
orders the Mexican government to pay Metalclad $16.7 million, calling the denial
"tantamount to expropriation." 2001 -- Mexico asks for the tribunal's ruling to
be reviewed by a court in Canada, as a neutral third party. The outcome is
uncertain.(pg. 13)
Document 101 of 112. 