THE FACTS ABOUT INVESTOR-STATE ARBITRATION AND TPA’S SENSIBLE REFORMS

 

In the ongoing Congressional debate about Trade Promotion Authority (TPA) for the United States, many misleading and inaccurate claims are being made in opposition to investor-state provisions.  This paper aims to set the record straight.

There are Two Principal Reasons Why Investor-State Arbitration is Needed. 

First, it levels the playing field for the United States. 

• Many developing countries lack transparent and fair judicial systems that are necessary to ensure due process in the event of a dispute. 
• To remedy this problem, TPA directs U.S. negotiators to negotiate investor-state arbitration provisions that are consistent with U.S. law and practice.

Second, without the assurance of transparency and fair treatment, the mutual benefits of foreign investment will likely be lost to both the United States and developing countries. 

• From a U.S. perspective, overseas investments by U.S. companies provide critical support for U.S. exports.  Over the last 25 years up to three quarters of all U.S. exports have been made by companies with overseas investments.
• Developing countries need foreign investment for their economic growth and they understand that a neutral, rule of law based system that guarantees a fair hearing about arbitrary or discriminatory government actions is a key factor in attracting that investment.

These two interrelated needs have been fulfilled for many decades by international arbitration proceedings and are now common throughout the world.  Because the North American Free Trade Agreement (NAFTA) was designed to be comprehensive, NAFTA incorporated investor-state provisions in Chapter 11.

 

Investor-state provisions are a triumph for according the individual person dignity and status under the law.  Decades ago, foreign investors had to depend on governments to fight for their claims, but in the post-war period, international agreements depoliticized this process by allowing investors to pursue their own claims in a neutral, rule of law based system.

           

 

Investor-State Arbitration Provisions Are Not “End-runs” Around Democracy and the Constitution. 

 

These provisions only allow investors to get a fair hearing on a claim about an unfair, arbitrary or discriminatory action by a foreign government.  If the international tribunal finds foul play, it can direct the host government to compensate the investor. The investor-state provisions are only about the provision of compensation when warranted.  Governments cannot be directed to undo an expropriation or confiscation. 

 

The recent criticisms that NAFTA Chapter 11 investor-state arbitration provisions are “trading away democracy” and an “end-run around the Constitution” are simply erroneous.  Governments retain the sovereign right to expropriate an investment or constrain it through environmental, health, safety or any other regulation.  All NAFTA asks is consistent with U.S. law and practice--when a government expropriates property or when a government acts in arbitrary, discriminatory or bad faith manner, then the Government should compensate the investor for its losses. 

 

Critics of investor-state arbitration ignore the fact that this is basic U.S. law and choose instead to misrepresent the facts in NAFTA cases.  A fair reading of these cases reveal clearly that the NAFTA investor-state provisions are not end runs around democracy and the Constitution and do not prevent a Party from adopting, maintaining or enforcing bona fide environment, health or safety laws.

 

 

• The Loewen case, which has not yet been decided, was not an “end-run” around the Mississippi courts; the Canadian investor (the Loewen Group) wanted to use the U.S. court system , but was prevented from doing so.  The Loewen Group lost a $2.5 million civil suit, to which a Mississippi jury added $500 million in damages.  The Loewen Group wanted to appeal the decision, but could not post a highly unusual $625 million bond without bankrupting the company. 

 

Ø       Then Governor of Mississippi Kirk Fordice wrote in October, 1998 to the NAFTA Dispute Resolution Tribunal that the Mississippi trial “was tainted by xenophobic rhetoric that may have resulted in a violation of Loewen’s due process rights”. 

Ø       Governor Fordice went on to express his concern that the failure of the Mississippi Supreme Court to reduce the appeal bond requirement as “expressly permitted by Mississippi Law…may have effectively denied Loewen a meaningful opportunity to            have reviewed in the Courts of our state the legal issues raised concerning the fairness and lawfulness of the trial”.

 

• The Ethyl case about a Canadian import ban on a gasoline additive was never decided by a NAFTA investor-state panel.  The Canadian Government settled the case after a Canadian court found that the parallel domestic ban within Canada violated Canadian law.  The Canadian Government also admitted that it lacked scientific evidence showing the harm of the gas additive in question.  These facts indicate clearly there is no basis to use the Ethyl case to demonstrate that the NAFTA investor-state provisions permit a corporation to overturn a Members environmental laws.

 

Ø       In explaining its decision to the settle the case, the Canadian Government stated:  “Current scientific information fails to demonstrate that MMT impairs the proper functioning of automotive on-board diagnostic systems…and there is no new scientific evidence to modify the conclusions drawn by Health Canada in 1994 that MMT poses no health risk”. 

 

• In the Metalclad case, an American waste management company built a much needed hazardous waste disposal facility in Mexico.  Mexican federal government officials approved the project and assured Metalclad that it had received all the necessary permits.  Local Mexican government officials prevented the new facility from opening by denying a municipal construction permit.  Metalclad was not given notice of, or an opportunity to participate in, the town council meeting in which the decision was made to deny the permit.  Three days before leaving office, the local Governor issued an Ecological Decree, which declared the site a Natural Area for the protection of rare cactus.

 

Ø       The NAFTA investor-state arbitration panel found that the actions of the town council and Governor to be arbitrary and constituted an expropriation of Metalclad’s facility.  Metalclad was awarded $16 million.

Ø       On appeal, the Supreme Court of British Columbia upheld the panel’s judgment on narrower grounds.  Mexico agreed to compensate Metalclad.

Ø       To this day, the facility remains inoperative and Mexicans continue to dispose of hazardous waste by dumping it in rivers and stream.

 

·      The issue in the Methanex case is not whether California can protect its environment; of course it can.  But in doing so, California has to act in a manner consistent with well established U.S. principles of due process, fairness and non-discrimination.  It is too early to jump to any conclusions about the Methanex case since the proceeding is still in its early stages.

 

·         In the S.D. Myers case, a NAFTA investor-state panel did not find that a bona fide environmental measure was inconsistent with NAFTA Chapter 11. The panel found that the Canadian government enacted the law for the express purpose of reserving environmental services work for Canadian companies and their workers and, therefore, did not serve legitimate environmental purposes in a fair and non-discriminatory manner.

 

Ø       S.D. Myers, a U.S. company, was a leading provider of PCB waste remediation in the United States, operating an EPA-approved facility in Ohio. 

Ø       In 1986, the United States and Canada entered into a Transboundry Agreement which recognized that the cross-border movement of hazardous wastes could result in the more efficient handling and disposal of such materials.  In 1988, the Canadian government banned PCBs and required their removal. 

Ø       In 1989, S.D. Myers established a Canadian subsidiary to assist Canadian companies in preparing their PCBs for safe shipment to its Ohio treatment facility.  S.D. Myers’ prices in Canada were substantially less expensive than its largest Canadian competitor.

Ø       In 1995, after extensive lobbying by S.D. Myers Canadian competitors, the Canadian government banned the export of PCB waste to the United States even though such exports were permitted under the Transboundry Agreement.  Canada’s Environmental Minister stated that the ban was put in place to help ensure that the destruction of PCBs was “done in Canada by Canadians”. 

Ø       The ban destroyed the S.D. Myers Canadian operation.  The NAFTA panel found that S.D. Myers had been denied process and had been discriminated against; the panel has not yet ruled on the level of damages owed to S.D. Myers.  This a good example of how panel’s will not generally deem regulatory actions an expropriation.

 

Foreigners Don’t Get More Rights Than U.S. Investors. 

By their nature, investor-state provisions apply ONLY to foreign investors.  The purpose of such provisions is to ensure that at least a minimum internationally accepted standard for justice is available. 

• If the investment occurs in a developing country with a weak legal system, then the foreign investor can gain greater rights to seek redress than a local investor will have.  Of course, a developing country can upgrade the rights of its own citizens up to the level in international law, and many developing countries are in the process of trying to do so.  However, establishing a transparent and fair legal system takes years, and investor-state arbitration provisions are necessary while this process is underway. 

 

• When a country already has strong Constitutional protections for citizens who are investors, then the special protections being given to foreign investors will not be greater than those enjoyed by domestic investors.  That is the situation in the United States.  Domestic investors here are protected under the U.S. Constitution from having private property taken without due process and just compensation.  These protections are just as strong as those in NAFTA Chapter 11.

 

Ø       Indeed, the Loewen case is about a foreign investor in the United States that may have been denied equal rights with U.S. investors.  Governor Fordice highlighted this problem when he expressed his concern that “Loewen’s status as a Canadian based company may have deprived it of fundamental rights that would otherwise be guaranteed to the citizens of our state”.

 

Excluding Environment, Health and Safety Laws from Investor-State Arbitration Will Discriminate Against U.S. Foreign Investors and Give Foreign Investors in the United State an Unfair International Advantage. 

 

• Since there are no such exclusions under U.S. law, an investor-state exclusion will still permit foreign investors in the United States to challenge U.S. environmental, health and safety laws in federal and state courts.

 

• U.S. companies will not be able to challenge foreign environmental laws that are arbitrary, capricious or discriminatory because many developing countries lack the transparent and fair judicial systems that are necessary for a fair trial.

 

The Senate TPA Bill Calls for Important Reforms Based Our Eight Years of Experience in Implementing the Investor-State Provisions in NAFTA Chapter 11.

 

• Last year, the three NAFTA governments acted to clarify some of the provisions.  For example, the governments declared that the terms “fair and equitable treatment” and “full protection and security” in NAFTA Article 1105 do not require treatment in addition to or beyond that which is required by customary international law. 
• Also last year, the U.S. House of Representatives wrote explicit new guidelines for the negotiating investor-state arbitration provisions in new trade agreements. When the Finance Committee marked up H.R. 3005, it added several additional provisions to ensure that foreign investors cannot use investor-state arbitration proceedings to challenge bona-fide environmental, health and safety laws.
• The Senate Finance Committee bill makes clear that investor-provisions in U.S. trade agreements are to be based on U.S. law and practice.  The bill specifically directs U.S. negotiators--

 

Ø       To ensure that investor-state provisions in U.S. trade agreements are to be based on U.S. law and practice. 

Ø       To ensure that U.S. investors in the United States are not accorded lesser rights than foreign investors in the United States.

Ø       To secure for U.S. investors abroad a level of rights comparable to that available under U.S. legal principles and practice, and in particular to establish standards for expropriation consistent with U.S. legal principles and practice.

Ø       To seek standards for “fair and equitable treatment” consistent with U.S. legal principles and practice.

Ø       The Senate Finance Committee bill also addresses some of the unexpected problems that have arisen in the implementation of Chapter 11.  Specifically, the bill directs U.S. negotiators--

Ø       To secure a mechanism to eliminate frivolous claims.

Ø       To enhance opportunities for public input into the formulation of government positions.

Ø       To establish a single appellate body to review decisions and provide coherence.

Ø       To ensure transparency by making public the submissions, findings, and decisions; by opening hearings to the public; and by establishing a mechanism for the acceptance of amicus curiae briefs.

 

February 21, 2002