Arbitration under NAFTA Chapter 11: past, present, and future.

• Author: Staff, Marcia J.

1. INTRODUCTION

   This Article explains the background of the North American Free Trade Agreement (1) (NAFTA) by centering on its dispute resolution provisions and outline the provisions of Chapter 11 of NAFTA (Chapter 11), perhaps the most innovative and certainly the most controversial part of the entire agreement. (2) On its effective date of January 1, 1994, (3) NAFTA created the world's largest international free trade zone. (4) The phase-out of trade barriers has produced dramatic increases in trade between the NAFTA parties: the United States of America (United States), the Government of Canada (Canada), and the United Mexican States (Mexico), collectively the signatory states. (5) However, as one might expect, the increase in trade has also increased disputes related to trade and to the provisions of NAFTA itself. (6) To understand Chapter 11 and the controversy surrounding its arbitral decisions, namely their perceived attack on sovereignty and their perceived requirement of confidentiality, this Article provides an overview of the published Chapter 11 cases and a critical analysis of these cases. Additionally, this Article reviews the Notes of Interpretation of Certain Chapter 11 Provisions (Notes of Interpretation) adopted by the NAFTA Free Trade Commission (7) on July 31, 2001. (8) Finally, this Article examines current proposals and prospects for changing the application of Chapter 11 by discussing the impact of NAFTA on future trade negotiations and international treaties, especially the proposed Free Trade Area of the Americas (FTAA) (9)

2. BACKGROUND OF NAFTA

   1. NAFTA Generally

      A thorough discussion of NAFTA is beyond the scope of this Article. Briefly, NAFTA is a cooperative economic intergovernmental organization (IGO) designed to eliminate trade barriers without establishing an external tariff in common among the three member states. (10) It is one of many IGOs creating a free trade area. (11) NAFTA began as the U.S.-Canada Free Trade Agreement (CFTA) (12) Shortly thereafter, the United States initiated discussions with Mexico to create a U.S.-Mexico trade agreement. (13) Canada joined the process, and the negotiations yielded NAFTA (14) Although CFTA was a model for NAFTA, NAFTA addresses additional issues. (15) NAFTA's purposes include: eliminating trade barriers, promoting fair competition, increasing investment opportunities, providing protection for intellectual property rights, creating procedures for implementing and enforcing NAFTA, and establishing a forum for further enhancement and expansion of the benefits provided by NAFTA. (16)

   2. Dispute Resolution Under NAFTA

      NAFTA establishes three new dispute resolution mechanisms: NAFTA Chapter 20 (Chapter 20) applies to disputes between signatory states; (17) NAFTA Chapter 19 (Chapter 19) applies to disputes between the signatory states relating to investigations of anti-dumping and countervailing duty (AD/CVD) investigations; (18) and Chapter 11 applies to disputes between signatory states and investors from another signatory state (foreign investors). (19) Although NAFTA does not create a private right of action, (20) it encourages alternative dispute resolution methods and the study of the methods' effectiveness to resolve private international disputes. (21)

      1. Disputes Under NAFTA Chapter 20

         Chapter 20 provides a mechanism for resolving disputes concerning the interpretation and application of NAFTA and alleged violations of NAFTA by signatory states. (22) The Free Trade Commission is charged with resolving disputes under Chapter 20. (23) Disputing signatory states are first required to seek resolution through cooperation and consultation. (24) Should this fail, a five-member arbitral panel may ultimately resolve the dispute. (25) After reviewing the dispute, the arbitral panel shall issue a report recommending a solution. (26) The disputing signatory states are free to implement the solution. (27) If the disputing signatory states cannot reach an agreement, Chapter 20 allows the wronged signatory state to retaliate by suspending benefits. (28)

      2. Disputes Under NAFTA Chapter 19

         Chapter 19 provides a mechanism for the resolution of trade disputes specifically related to AD/CVD investigations. (29) This Chapter allows a signatory state to request a binational review of (1) another signatory state's AD/CVD legislation or (2) another signatory state's judicial or administrative AD/CVD decisions. (30) With respect to panel review of signatory state AD/CVD decisions, the panel decision is binding. (31) During review of signatory state AD/CVD decisions, the panel uses the same standard of review as the signatory state. (32)

      3. Private Commercial Disputes Under NAFTA

         NAFTA does not create a private right of action, (33) however, it promotes alternative dispute resolution (ADR) methods and mandates the study of the methods' effectiveness to resolve private international disputes. (34) ADR methods offer many advantages over litigation when resolving international investor disputes. Although American businesses embrace litigation to resolve disputes, many other cultures view litigation as a personal failure. (35) International investors using arbitration may not have to worry about some of the factors that can plague them in international litigation, including: choice of law, forum non conveniens, home country bias, foreign judicial procedures, or foreign rules of evidence. (36)

         NAFTA mandates that the signatory states create an Advisory Committee on Private Commercial Disputes (Advisory Committee) to study the effectiveness of arbitration and other ADR methods to resolve private international commercial disputes. (37) The Advisory Committee (38) was charged with:

         1.2.1 compilation, examination, and assessment of existing means for the settlement of private international commercial disputes;

         1.2.2 identification of sectors and types of businesses that would particularly benefit from the use of alternative dispute resolution (ADR);

         1.2.3 promotion of the use of arbitration and other procedures for the resolution of private international commercial disputes in the NAFTA region, including ways to increase private sector awareness of the benefits of using ADR;

         1.2.4 facilitation of the use of arbitration and other procedures in the NAFTA region, including the use of model ADR and other contractual clauses;

         1.2.5 opportunities for expanded cooperation between institutions with an interest or involvement in ADR in the NAFTA region; and

         1.2.6 issues relating to the enforcement of arbitration agreements and awards, and other litigation issues related to ADR. (39)

         The Advisory Committee issued its initial report in November 1996, concluding that "[e]ach NAFTA country has laws and procedures in place to support the use of arbitration, including the recognition and enforcement of arbitral awards, at both the federal and state/provincial levels. No new legislation is recommended at the present time." (40) The Advisory Committee observed a growing interest in ADR methods other than arbitration, noting that "[t]he availability, uses and effectiveness of mediation, conciliation and other forms of ADR are being explored further by the [Advisory] Committee." (41) The Advisory Committee included a brochure of the ADR methods available to parties contracting in the NAFTA region and suggested model clauses to include in private contracts. (42) The Advisory Committee further established subcommittees to study various aspects of ADR in the signatory states. (43)

      4. Investor-State Disputes Under Chapter 11--A Controversial Past

         Chapter 11 permits foreign investors to invoke binding international arbitration against another signatory state that violates the investment provisions of NAFTA. (44) Although other countries have attempted to secure similar protections under the Organisation for Economic Co-operation and Development (OECD), (45) currently NAFTA is the only international agreement that provides these protections. (46) Section A of Chapter 11 (section A), designed to deter "illegal takings of U.S. and Canadian businesses by the Mexican government," (47) protects the rights of foreign investors from governmental action by signatory states. Specifically, foreign investors are protected from signatory states' measures. (48) Section A affords four basic protections to foreign investors: parity with investors in the signatory state; (49) freedom from performance requirements; (50)free investment-related funds transfers; (51) and expropriation only in accordance with the international law. (52)

         Section B of Chapter 11 (section B) establishes a procedure for binding international arbitration between a signatory state and a foreign investor. (53) The adoption of section B "represents the first time Mexico has entered into an international agreement providing for investor-state arbitration." (54)

         Under other multilateral trade regimes, including GATT, companies that suffer damages due to the actions of a foreign government have no right of private action against the host state; their only remedy is to persuade their home state to pursue a trade complaint on their behalf. Where this remedy is unavailable or inadequate (which is almost invariably the case), the investor's only option is to pursue its complaint under the sometimes inhospitable judicial system of the host country. (55) Section B allows foreign investors to use international arbitration to resolve a dispute when a foreign investor alleges that foreign investors' investment56 has been damaged by a signatory state's violation of section A. (57) The foreign investor has three years from when the foreign investor acquires knowledge of the alleged section A violation to notify the signatory state of the foreign investor's intent to submit a claim. (58) Before filing a claim, the foreign investor and signatory state (the disputing parties) are required to attempt settlement. (59) If the disputing parties...